Fidus Investment Corp (FDUS) 2021 Q2 法說會逐字稿

Good day and thank you for standing by. Welcome to the Fidus Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to Jody Burfening. Please go ahead.

Thank you, Christie, and good morning, everyone, and thank you for joining us this morning for Fidus Investment Corporation's Second Quarter 2021 Earnings Conference Call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer.

Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's website at fdus.com.

I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, cash flow of the Fidus Investment Corporation.

Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, August 6, 2021, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay.

Actual results may differ materially as a result of risks, uncertainties and other factors, including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission. Fidus undertakes no obligation to update or revise any of these forward-looking statements.

With that, I would now like to turn the call over to Ed. Good morning, Ed.

Good morning, Jody, and good morning, everyone. Welcome to our second quarter 2021 earnings conference call. I hope all of you, your family, friends and coworkers are staying healthy and well.

I'm going to open today's call with a review of our second quarter performance and portfolio at quarter end and then share with you our views on deal activity in the lower middle market for the second half of the year. Shelby will cover the second quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions.

Overall, we are very pleased with our results and portfolio performance for the second quarter. Adjusted net investment income grew year-over-year and net asset value per share reached a record level. Originations and repayments were at high levels, in line with our expectations for a busy quarter from a deal flow perspective.

We continue to focus on carefully selecting high-quality companies in the lower middle market that are reasonably insulated from economic stresses associated with the pandemic, companies that possess really resilient business models that generate strong levels of cash flow to service debt and positive long-term outlook.

Our portfolio remains well structured, positioned to produce both high levels of recurring income and the potential for equity upside in support of our capital preservation and income goals.

Adjusted net investment income, which we define as net investment income, excluding any capital gain incentive fee attributable to realized or unrealized gains and losses, grew 15% versus last year to $10.4 million or $0.42 per share. At quarter end, net asset value had reached a record $429.4 million or $17.57 per share, reflecting both solid operating performance and underlying portfolio value -- fair value appreciation.

Fidus paid a quarterly dividend of $0.31 per share and a supplemental cash dividend of $0.08 per share on June 28, 2021, to stockholders of record as of June 14. As a reminder, the Board has devised a formula to calculate the supplemental dividend each quarter, under which 50% of the surplus in adjusted NII over the base dividend from the prior quarter is distributed to shareholders.

For the third quarter, I am pleased to report that we are increasing the base dividend to $0.32 per share, and the surplus is $0.06 per share. In addition, we will pay a special dividend in Q3 of $0.04 per share. Therefore, on August 2, 2021, the Board of Directors declared a base quarterly dividend of $0.32 per share, a supplemental quarterly cash dividend of $0.06 per share and a special dividend of $0.04 per share. The dividends will be payable on September 28, 2021, to stockholders of record as of September 14, 2021.

Following a busy first quarter, deal flow activity remained at high levels during the second quarter, driven by both M&A transaction and refinancing opportunities. In contrast to the first quarter, however, originations outpaced repayments.

In terms of originations, we invested $104.2 million in debt and equity securities of which $96 million or nearly all of the total was invested in first lien debt. Investments in new portfolio companies consisted of $18 million in first lien debt and common equity in 2KDirect, Inc., a leading omnichannel digital advertising platform for small and midsized businesses; $7 million in first lien debt and common equity in Aeronix, Inc., a supplier of data transfer, signal analysis, communications products and related engineering services primarily to the defense industry; $25.5 million in first lien debt and common equity in ISI PSG Holdings, LLC, doing business as incentive solutions, a provider of online rewards, travel incentives and gift card reward programs.

We subsequently sold a $13.5 million participating interest in the first lien debt. $6.5 million in first lien debt in common equity in Level Education Group, LLC, a leading provider of online continuing education for mental health and nursing professionals; $12 million in first lien debt in UPG Company, LLC, an original design and contract manufacturer of complex assemblies with roots as a manufacturer of precision injection molded plastics. And finally, $11 million in first lien debt in Winona Foods, Inc., a leading provider of natural and processed cheese products, sauces and plant-based alternatives.

These investments are indicative of our present focus on companies that have not been meaningfully impacted by the pandemic and possess revenue streams that are recurring in nature.

In terms of repayments and realizations, we received proceeds totaling $93 million, with the vast majority from second lien debt investments. In terms of exits, we received payment in full of $15 million, including a prepayment penalty on our second lien debt in The Kyjen Company. We received payment in full of $8 million in our second lien debt in Medsurant Holdings, LLC. We received payment in full of $12 million on our second lien debt in Virginia Tile Company, LLC. We received payment in full of $7.8 million on our second lien debt in Steward Holding LLC. We received payment in full of $4.7 million on our first lien debt in Palmetto Moon, LLC. We received payment in full of $22.5 million on our second lien debt in AVC Investors, LLC. And we exited our equity investment in Wheel Pros, Inc., a realized gain of approximately $2.1 million.

Subsequent to quarter end, Hilco Technologies was sold. We took to control Hilco in the second quarter and exchanged a $10.3 million debt investment for an equity investment in a new holding company. In conjunction with the sale, subsequent to quarter end, we received payment in full on our residual debt and converted equity investment and realized a net loss of approximately $1.1 million of our original equity investment in the company.

We received payment in full of $11.4 million on our second lien debt in CRS Solutions Holdings, LLC. We received payment in full of $20 million on our second lien debt in Worldwide Express Operations, LLC and realized a gain of $3 million on a portion of our equity investment. In conjunction with the sale of Worldwide Express, we invested $1.5 million in common equity, of which $0.8 million was rolled over from our original common equity investment and funded a $20 million second lien term loan commitment.

With originations coming in above repayments and exits and the fair value of the portfolio, appreciating relative to the first quarter, the fair market value of our portfolio as of June 30, 2021, was $743.5 million, equal to 110.8% of cost. We ended the second quarter with 72 active portfolio companies and 4 companies that have sold their underlying operations.

In terms of portfolio construction, our continued focus on investing in first lien debt, combined with a heavy weighting of second lien debt exits, has altered the mix since the beginning of the year. First lien debt investments have increased on an absolute basis and as a percent of total portfolio. And at quarter end, first lien debt accounted for 38.3% of the portfolio on a fair value basis compared to 25.2% as of December 31, 2020.

In contrast, second lien debt has decreased on an absolute basis and a percent of total portfolio and accounted for 28% of the portfolio on a fair market basis compared to 44.7% as of December 30. Subordinated debt accounted for 13.4% and equity investments accounted for 20.3% of the portfolio on a fair value basis. Our portfolio remains well structured for current economic conditions, with debt investments generating high levels of current and recurring income and equity investments providing us with a reasonable margin of safety, along with the opportunity to enhance returns.

Moving to portfolio performance. Overall, our portfolio continues to perform well and risk remains at comfortable levels. As of June 30, we did not have any companies on nonaccrual. Last quarter, I mentioned that some of our portfolio companies were dealing with operational challenges, including supply chain constraints and higher input costs. Although the challenges haven't abated since then, management at these companies are rising to the challenge, making adjustments as necessary in pricing and/or productivity, and their overall demand remains favorable.

To help us assess the overall health and stability and performance of our investment portfolio, we track several quality measures on a quarterly basis. First, we track the portfolio's weighted average investment rating based on our internal system. Under our methodology, a rating of 1 is outperformed and a rating of 5 is an expected loss. June 30, the weighted average investment ratio for the portfolio was 2 on a fair value basis.

Another metric we track is the credit performance of our portfolio, which is measured by our portfolio companies' combined ratio of total net debt through Fidus' debt investments to total EBITDA. For the second quarter, this ratio was 4.2x, excluding equity only and ARR deals.

The third measure we track is the combined ratio of our portfolio companies' total EBITDA to total cash interest expense, which is indicative of the cushion our portfolio companies have in aggregate to meet their debt service obligations to us. For the second quarter, this metric was 3.2x, excluding equity only and ARR deals.

M&A activity picked up at the beginning of the fourth quarter of last year and has remained at healthy levels to date, resulting in high levels of originations and repayments. Although net originations rebounded in the second quarter, we are currently not invested in our -- not fully invested in our debt portfolio after several consecutive quarters of unusually high levels of debt repayments. We have been in this situation before and have a proven track record of redeploying proceeds into new debt investments that provide us with high levels of current and recurring investment income without either sacrificing our underwriting standards or deviating from our philosophy of managing the business for the long term.

We therefore intend to adhere to our strategy of carefully conducting in high-quality companies with defensive characteristics and positive long-term outlook, prioritizing companies that have not been materially impacted by the pandemic and that possess resilient business models and strong cash flow profiles. As we move into the second half of the year, we still see very healthy to robust conditions for deals in the lower middle market from both M&A activity and refinancings, where we can leverage our relationships and experience.

This favorable environment supports our goal of growing our debt portfolio in the coming quarters. It also supports a positive outlook for equity realizations. Combination of our investment strategy and underwriting principles support our goals of capital preservation and generating attractive risk-adjusted returns.

Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?

Thank you, Ed, and good morning, everyone. I'll review our second quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter Q1 2021.

Total investment income was $21.8 million for the 3 months ended June 30, a $1.5 million decrease from Q1, primarily due to a $1.2 million decrease in interest income and a $1 million decrease in fee income, offset by a $0.7 million increase in dividend income. Due to the Hilco restructuring and exchange of debt for equity, approximately $0.6 million of interest income was converted into dividend income.

Yields were relatively stable in Q2 at 12.2% versus 12.3% in Q1. However, as Ed mentioned, yielding assets are lower than historical levels given the unusually high level of repayments over the last several quarters. We had one counting nuance in Q2 that I wanted to highlight regarding secured borrowings. As Ed mentioned, subsequent to the initial closing, we syndicated $13.5 million of our unit tranche loans and incentive solutions to a first out lender.

Given our continuing involvement in the loan, the $13.5 million that was assigned does not meet the GAAP accounting criteria for sales accounting treatment, rather the $13.5 million is a secured borrowing, which simply means that it remains a security on our balance sheet, included in total assets, with an offsetting liability, a secured borrowing on the balance sheet.

Similarly, the interest on the $13.5 million portion of the loan is included in both interest income and interest expense. Given the total assets, including secured borrowings, the adviser granted a waiver to exclude the $13.5 million of secured borrowings from the base management fee, waiving approximately $29,000 of fees in Q2 so as not to penalize shareholders for the accounting treatment.

Total expenses, including income tax provision, were $15.4 million for the second quarter, approximately $3.1 million higher than the prior quarter primarily due to a $3.8 million increase in the capital gains incentive fee accrual. In Q2, we accrued $3.9 million of capital gains incentive fees given meaningful appreciation in the fair value of the portfolio. And interest and financing expenses decreased in Q2 by $0.6 million primarily due to the redemption of bonds in Q1. Note the capital gains incentive fee is accrued for GAAP purposes, but not currently payable.

As of March 31, the weighted average interest rate on our outstanding debt was 4.2%, excluding secured borrowings. And we had $360.1 million of debt outstanding, comprised of $139.3 million of SBA debentures, $207.3 million of unsecured notes and $13.5 million of secured borrowings. Our debt-to-equity ratio as of June 30 was 0.8x or 0.5x statutory leverage, excluding exempt SBA debentures.

Net investment income or NII for the 3 months ended June 30 was $0.26 per share versus $0.45 per share in Q1. Adjusted NII, which excludes any capital gains, incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments, was $0.42 per share in Q2 versus $0.46 per share in Q1. For the 3 months ended June 30, we recognized approximately $2.2 million of net realized gains, primarily from the sale of our equity investment in Wheel Pros.

Turning now to portfolio statistics as of June 30. Our total investment portfolio had fair value of $743.5 million. Our average portfolio company investment on a cost basis was $9.3 million at the end of the second quarter, which excludes investments in 4 portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 85.5% of our portfolio companies, with an average fully diluted equity ownership of 7.4%.

Weighted average effective yield on debt investments was 12.2% as of June 30. The weighted average yield is computed using the effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on nonaccrual, if any.

Now I'd like to briefly discuss our available liquidity. As of June 30, our liquidity and capital resources included cash of $54.2 million, $13.5 million of available SBA debentures and $100 million of availability on our line of credit, resulting in total liquidity of approximately $167.7 million. Taking into account subsequent events, we currently have approximately $203.2 million of liquidity. In Q3, we plan to use excess cash in our second SBIC fund to pay down at least $40 million of outstanding SBA debentures.

Now I will turn the call back to Ed for concluding comments. Ed?

Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at Fidus for their dedication and hard work and our shareholders for their continued support. I will now turn the call over to Christie for Q&A. Christie?

(Operator Instructions) And your first question is from Ryan Lynch of KBW.

Really nice quarter, guys. The first question I had, though, was regarding, you guys had about $18 million of what looks like unrealized gains in your equity portfolio. Can you just talk about what were the drivers behind those? What were the investments? Was it concentrated in the fuel? Was it was spread across many and what's going on with those companies?

Sure. Great question, Ryan. I think, to be honest, it was a pretty broad-based appreciation, if you will. About 2/3 of our companies in our portfolio had EBITDA growth on an LTM basis this quarter. In fact, it was, I think, for the whole portfolio, 7%. So that's just one LTM growth from Q1 to Q2. So it was driven largely -- we do have to calibrate some, but it was really driven largely by the performance of the portfolio. Clearly, there are some names in there that have larger moves than others, but I would say it was a wholesale improvement in performance for the portfolio is how I would think about it. I hope that's helpful.

Yes, yes. That's definitely helpful. Kind of on that point, you guys have had a ton of success in your equity portfolio and that equity co-investment strategy has been hugely successful. One of the, I guess, the good problems to have, though, is that portfolio has grown to 20% of your overall portfolio, which is the highest, I believe, it's ever been in your history. What is your outlook for potentially exiting some of these equity investments? Obviously, M&A is picking up in the market and there's a lot of activity. So we think the outlook would be good. I don't know how much of these equity investments you actually control the outcome of when they exit.

And so any outlook or any commentary on what is the potential from a high level of exiting those equity investments? And also on that, would you guys ever consider -- I think, in the past, I think in February of 2020, you've all completed the sale of a portion of about 50% of about 40% equity investment. Would you guys consider doing that if some of these equity investments don't kind of exit kind of in normal fashion?

Sure. Great question. A lot of discussion around this, obviously, as you might imagine, amongst the management team as well as the Board, quite frankly. I think it's -- I think you mentioned, it's a nice problem to have. We like our equity portfolio, overall. We got a lot of, obviously, high-performing companies, but I'll just -- also just quality companies that we have investments in.

And so as I look at the market today, I think it's a very healthy one from an M&A perspective, and it probably only gets even more active here in the fourth quarter. So we do have an expectation for additional realizations, and quite frankly, on both the debt and the equity side of things, primarily driven by M&A. And so I think the outlook for realizing some of the portfolio is very positive from that perspective and we would expect that to continue. And we have a lot of companies that are pretty right, if you will, for M&A or some type of transaction.

So I view the outlook from a natural perspective to be very good. When I look at the companies we control, we control a couple of companies today. And so -- and then we have impacts on some other investments where maybe the sponsor is not in total control of the situation, or it would be a negotiation, if you will, amongst ourselves and other shareholders. And the good news is in those situations, the companies are in a good position to have a transaction to the extent we wanted to.

Having said that, I think we also like those investments. So there's a good balance you got to strike, and I wouldn't say we're looking to go sell those investments right now because there's a good outlook. But at the same time -- so as I think about things, yes, we're a little long in equity today just on a percentage basis. What I would also tell you is the -- we think the portfolio overall is a very healthy and good portfolio. So there's a balance. You got to strike there because I don't want to sell too early or create transactions that aren't advisable.

So -- but we -- and then the last question you asked was will we consider selling a portfolio of equity investments like we did 1.5 years ago. And I'd say, look, anything is on the table, for sure. I would never take that option off the table. But it's not something that we're working on right now. But it's clearly an option on the table down the road if we think that's the right answer at that point. So hopefully, that's helpful. A little long-winded, but that's all we have from our perspective, but yes, it's where we are.

Yes. No, that's helpful. And obviously, the business you're in today is obviously due to the incredible success that portfolio has had. So I mean a great win for shareholders. Just one last one, if I can. We talked to a lot of BDCs over the last several days. A lot of them are focused on more kind of the upper or core middle market. And so I wanted to get your opinion on, where is the competition? Where does it stand from a competitive standpoint in the lower middle market as far as competition, as far as terms and structures as we figure today as kind of the market seems to be very robust?

Sure, sure. Well, starting with the deal terms and structures, I mean, they continue to be the same for us. We go to market as a solution provider. Obviously, first lien debt is -- it has been for, really 3 or 4 years, a big priority of ours, and it's where we've been having some great success in the market. So structures are primarily there. Having said that, we still are making second lien and sub-debt investments for the right situations for the superlative opportunities that we see.

So I think that's how we're approaching it. From a competition standpoint, it's competitive out there, right? It's -- I would say it's more competitive than 3 years ago or 5 years ago, not crazy more competitive, but more competitive. I think the good news is leverage really hasn't gotten any more aggressive, though, than those time periods. And so leverage is very much at pre-COVID levels, if you will.

And so interest is about that, but we have seen pockets of kind of extra aggressiveness, if you will, from certain participants that -- in the market that are more AUM players, if you will, and doing things that are unnatural. I don't think that's the norm, but we've seen it for sure. So it is aggressive out there.

But in the lower middle market, the terms are very the same. We still have covenants. So these aren't covenant-light deals. And the overall structures have not changed. Though, obviously, we're getting pushed from a variety of angles in a competitive environment like this. Hopefully, that's helpful, but it's a robust market from all angles, right, or active or healthy market, if you will.

Your next question is from Matt Tjaden of Raymond James.

Appreciate you taking my questions. First one for me, it looks like your November 2024 notes can be redeemed in November of this year. For modeling purposes, any color you can give about plans for the capital structure in the remainder of 2021?

Sure. Shelby, do you want to take that?

Sure. I would say, as I mentioned in my remarks, we do have some repayments that have occurred in our second SBIC fund. And so in terms of kind of redeeming debt, we're probably going to redeem some SBA debt here in the third quarter. We'll opportunistically consider opportunities for redeeming our baby bonds. It's not something that's something that we have to do, given that we have a fair amount of time left before maturity, but we'll certainly consider opportunities as they present themselves. And we're also focused on getting a little more reinvested in the second half of this year, using up our liquidity and having some portion of callable bonds and our capital stack is kind of key to the long-term strategy.

Got it. Appreciate that. Second one for me on fee income. I know it can be rather volatile quarter-to-quarter. But maybe in 2022 as activity moderates, would you expect 2022 fee income to be below 2021 levels?

Matt, I don't know that I would project that. I would say we are -- as we are here today in the market and have been for a while, we're an originator of first lien loans. And to the extent that we stay in that category, if you will, which we believe we will, there's no change in strategy from our perspective that we would expect originations to continue to be healthy in 2022. And thus, there'd be some fee income with that. We also think there'll be some prepayments.

But as you heard today, I think one of the 6 investments we had, had prepayment penalties, so not all of them have them. I mean they all have them, but they expire usually after a couple or 3 years. So but I would expect at least whether we match the same level of fees in 2022 versus 2021, I don't know. But I don't expect it to be dramatically lower at this point at all. I wouldn't -- I don't foresee that.

Your next question is from Bryce Rowe of Hovde Group.

Let's see here. So Ed, you talked about -- you highlighted the second lien repayments and you've consistently highlighted the focus on first lien over the last few years. I'm curious, the second lien repayment, is that kind of just a function of just natural course of company activity and -- or is that something that you all have kind of focused on trying to kind of push companies to repay those second lien investments so that you can rotate into a more first lien heavy debt portfolio?

Sure. Great question. Interestingly, it's really normal course. And to be honest, in certain of situations, those weren't investments that we wanted to lose, quite frankly. They were very good investments. But they had reached -- I'd say, 4 of the 6 repayments materialize due to just being able to access much lower cost of capital, i.e., bank debt just due to their leverage profile. So they had performed very well and delevered and took advantage of the market opportunities ahead of them.

So it's -- and the other 2, quite frankly, were acquisitions where the whole capital structures were kind of rejiggered, if you will, or reconstructed, and we just weren't part of that solution. So it was more a normal course. We aren't looking to force our way out of investments. But right now, we don't -- well, I mean, we obviously had to get active with regard to Hilco, but those are more one-off situations, not a normal course trying to push second lien investments out because we're still making second lien investments today. It's just -- we're doing it on a very, I'd say, opportunistic basis at the moment.

Okay. And then next question, maybe for Shelby. I appreciate the heads-up on the $40 million of SBA paydowns. You guys have been able to draw newer SBA debentures here recently. Should we expect that trend to continue in terms of SBA debentures funding some of the new originations here in the near future?

The short answer is yes. Certainly, the SBA has been a very good partner to Fidus over the years. And we have ample opportunity to continue to grow our third SBIC fund. But it's really just going to be a function of what we have in the pipeline and does it meet SBA eligibility criteria. So if it does, we would look to invest it out to the SBA. And if it doesn't, we've got opportunities to invest from the parent BDC.

Your next question is from Mickey Schleien of Ladenburg.

Just a couple of questions from me. Ed, the weighted average effective yield on the portfolio has been nicely steady at around 12% despite the higher first lien allocation at cost, which, as you've noted, I think, has more than doubled. What's been the approach you've been using in choosing first lien investments, which has allowed you to maintain that portfolio yield?

Sure. Great question. And I think it's -- we've obviously touched on our first lien approach, which includes dollar one first lien investments, but it also includes first out last out structures where we partner with other financing providers to lower the cost of capital, quite frankly, for the borrower. And so in those cases where we are maintaining yields but investing in senior debt that maybe is priced lower, we are using a first out last out structure, which we've talked about before.

And that, I'd say, that is one of the ways that we've been able to maintain our yields. Obviously, we're still making second lien investments and sub-debt investments that keep yields up as well. But that's probably the driver that I would highlight for you, but it's nothing different than what we've been doing over the last several years. It's just a larger percentage of the overall financing transactions that we're getting involved with.

And in those deals, are you selling the first out pieces generally to commercial banking relationships? And how many turns of leverage do you usually sell to them?

Sure. It is. We have a network of commercial banking relationships that we work with. And so we've created a network there. And then in terms of the leverage, it really varies deal by deal. I mean there are times when maybe it's 4.5x leverage financing and the bank will take 2.5 or 3 turns. And there are times when they only take 1 turn and we'll take the other 2 or 3 turns, whatever. So it really is deal by deal, and we put it together in conjunction with the bank that we end up working with. So it's fluid from that perspective. There's not a fixed formula.

Yes, I understand. And in those transactions, Ed, is there a language in your documents that effectively give you a call option on whatever you sold to them in the event the borrower violates covenants or has other trouble that gives you control over the deal?

Sure. So generally speaking, I'd say the answer to that is yes. I mean every document is a little different as well, as you know. But generally speaking, the answer to that is yes.

Okay. And my last question. When you look at the vintage of the portfolio, how much remaining call protection would you say you have on your debt investments?

Mickey, that's a tough one. I don't know that I can answer that with any accuracy. The -- I would say we -- as I sit here today, we've got a fair bit of call protection, and that has to do with the fact that we've, quite frankly, exited a fair number of debt investments over the last 24 months, and obviously, have a fair number of new portfolio companies in the portfolio as well. So typically, when you -- if that's the case, we would have pretty good or healthy call protection on those newer deals, if you will. So I can't answer any more accurately than that. Hopefully, that's helpful, but that's what I would say.

Just maybe as a last follow-up, do you usually structure sort of a [3-2-1] call protection sliding scale? Or is that too aggressive in this kind of market?

It's either a 2-year or a 3-year. Those are the -- and it just depends. Is it a second lien investment? Is it first lien? Is it bigger in first lien, those kinds of things. But it's 2 to 3 years.

Your next question is from Sarkis Sherbetchyan of B. Riley.

First question just kind of circles around the leverage levels. I guess just remind us where you plan to take the business from a regulatory leverage perspective.

Sure. I think as we've talked about it, Sarkis, I think we have said 1:1, we're obviously very comfortable with it. As you know, you can lever your SBIC funds which are subsidiaries, 2:1. So -- and we were an SBIC fund only when we went through the Great Recession, in 2:1 leverage, and we obviously went through that without any problem. So we're very comfortable with higher leverage.

What we've said is we're -- 1:1 is a good number, especially given the complexion of the -- our portfolio, which was weighted more towards junior debt. As you know, the portfolio is changing or the complexion of the portfolio is changing, just more first lien originations and the exit of some of the second lien investments just from -- in natural course, should I say.

So what I would say is we continue to think 1:1 is a very good number, but we also would be comfortable increasing that if we needed to or if it makes sense. But it's just good, just given the complexion of the portfolio and -- but again, we like that number. But we can go up a little bit or, obviously, we're much lower than 1:1 at the moment, and we're comfortable with that as well. So hopefully, that's helpful, but that's how we've kind of thought about it, is very comfortable around the 1:1. But we have increased flexibility today due to the complexion of the portfolio changing.

Yes, that's exactly right. I mean it just seems like with the shift more and more towards first lien, it seems like your portfolio is fairly underlevered and can support more leverage. That's exactly what I was getting to. And I guess in that light, kind of given the current environment, maybe if you can speak to the current pipeline and then potentially put a number on that. And then just kind of frame your expectations for balancing originations versus repayments, clearly trying to understand when we get to that comfortable level of achieving that leverage.

Sure, sure. So I think it's -- you got to start with the market. The market has been very active, really, since Q4 of last year, I'd say, robust last year, this year, healthy levels. But I'd also say it's expected to remain healthy to robust the rest of the year. So I think that's the industry backdrop, I would say.

So from an originations perspective, and I've mentioned this, first lien investments is the primary focus. We're opportunistically making second lien investments and sub-debt investments as well. We think Q3 will be busy from an originations perspective. We made 1 new investment in Worldwide Express, as I mentioned in our prepared remarks. We've also made several add-on, I think, material add-on investments to portfolio companies where we were supporting acquisitions.

And in addition, what I'd say is it's busy today. So we are active and we're working on several opportunities. But obviously, it's too early to tell what closes and what doesn't and what not. But it's busy right now.

So in terms of repayments, as I mentioned, at our subsequent events section, we announced the full debt realization of the 3 investments: Hilco, Worldwide Express and CRS. Worldwide, we reinvested in those companies -- or in that company. And at this point, what I'd say is we have visibility in the 2 transactions that we think will also result in the repayment of debt investments as well as the realization of equity investments. They haven't closed yet, so you never know. But -- so it's going to continue to be an active quarter from a repayments perspective.

So, overall, what I would say is we expect originations to maintain pace with repayments. But at the same time, I'll tell you, it's too early to tell just given we don't know what's going to close and what's not going to close. But that's what we would say today. So hopefully, that's helpful. But it's a busy time and expect that what we're hearing is M&A bankers are as busy as they can be today. And so we're expecting a busy fall.

Yes. Yes, certainly helpful. And just one more for me. If you can maybe speak to the current pricing environment real time. Just kind of help us think about how the new origination yields are behaving. Is it -- to your standard, is it -- are you losing some, or are you gaining some? Any color there would be helpful.

Sure, sure. I mean back to the previous conversation, competition is real out there. For the right credits, will we reduce price a little bit? Just -- the answer is yes. But having said that, we've always been and will continue to be focused on risk-adjusted returns. And so that's going to drive our decision-making. But yields are 12% to 12.2% for us on the debt portfolio. If it were to move, I would say, it probably moved down a little bit just due to the yield environment and competition. I don't expect any major swings there, but that's kind of the -- where we are today and from a competitive standpoint. So until yields start to move forward, I would expect that there may be some very modest drifting down. Does that makes sense?

Yes, that's all for me.

We have no further questions at this time. I will turn the floor back over to Ed Ross for any additional or closing remarks.

Thank you, Christie, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our third quarter call in early November. Have a great day, and have a great weekend.

Thank you. This does conclude today's conference call. You may now disconnect.