Fidus Investment Corp. 10-Q Summary (Period Ended June 30, 2018)
Business Context and Reporting Period
Fidus Investment Corporation (Fidus) is an externally managed, closed-end, non-diversified business development company (BDC) and regulated investment company (RIC). The company provides customized debt and equity financing to lower middle-market U.S. companies. This report covers the quarterly period ended June 30, 2018, and the six months ended June 30, 2018. As of July 30, 2018, the company had 24,463,119 shares of common stock outstanding.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Investment Income | $36.3 million | $33.5 million |
| Net Investment Income | $16.3 million | $16.8 million |
| Net Increase in Net Assets from Operations | $22.7 million | $19.5 million |
| Net Asset Value (NAV) per Share | $16.20 | $15.87 |
| Total Investments (Fair Value) | $646.2 million | $596.3 million |
| Cash and Cash Equivalents | $24.0 million | $50.8 million |
| Total Debt Outstanding | $271.5 million | $242.8 million |
| Weighted Average Yield on Debt | 12.7% | 13.0% |
Material Changes vs. Prior Period
- Investment Income: Total investment income increased by 8.5% ($2.8 million) compared to the prior year period, driven primarily by a $3.8 million increase in interest income due to higher average debt balances. This was partially offset by a 50.3% decrease in dividend income.
- Expenses: Total expenses increased by 19.8% ($3.3 million). The increase was attributed to higher interest and financing expenses ($1.1 million increase) due to increased borrowings and rates, a higher base management fee ($0.8 million increase), and a significant increase in the capital gains incentive fee ($0.7 million increase).
- Realized Gains/Losses: The company recorded a net realized loss of $7.9 million for the six months ended June 30, 2018, compared to a net realized gain of $6.1 million in the prior year. Significant losses were recognized on the exits of Six Month Smiles Holdings, Inc. and Inflexxion, Inc.
- Unrealized Appreciation: Net unrealized appreciation on investments increased by $16.0 million, contributing to the overall net increase in net assets.
- Debt Structure: The company issued $50.0 million in Public Notes (5.875% due 2023) and $27.0 million in SBA debentures, while repaying $43.8 million of SBA debentures.
Guidance, Outlook, and Risks
Management Commentary: Management believes current cash resources, the Credit Facility, and anticipated cash flows will provide adequate capital for operations and distributions for at least the next 12 months. The company continues to fund investment activities through a combination of debt and equity capital. Stockholders recently approved the ability to sell common stock below NAV for one year.
Risks and Contingencies:
- Non-Accrual Status: As of June 30, 2018, three portfolio companies were on non-accrual status (Cavallo Bus Lines Holdings, Inflexxion, and Restaurant Finance Co), representing $4.0 million in fair value.
- Leverage: Recent legislation may allow the company to increase leverage capacity by reducing the asset coverage ratio requirement from 200% to 150%, subject to stockholder or independent director approval.
- Market Risk: The company is subject to interest rate risk. While most debt investments are fixed-rate, the Credit Facility bears interest at variable rates (LIBOR + spread).
- Valuation: Substantially all portfolio investments are valued using Level 3 inputs (unobservable), requiring significant judgment by the Board of Directors.
Key Facts for Investor Verification
- Dividend Coverage: Verify the sustainability of the $0.39 per share quarterly dividend given the decline in net investment income and the reliance on unrealized appreciation to fund total distributions.
- Realized Losses: Review the specific details of the realized losses on Six Month Smiles Holdings and Inflexxion to understand the impact on future portfolio quality.
- Debt Maturities: Confirm the repayment schedule for SBA debentures, with significant maturities occurring in 2022 ($44.8 million) and 2025 ($44.7 million).
- Stock Repurchase Program: Note that the company repurchased 44,821 shares for $0.6 million during the period, with approximately $4.4 million remaining under the program.
- Non-Accrual Portfolio: Monitor the status of the three non-accrual investments, which represent a significant portion of the cost basis ($16.8 million) relative to their fair value ($4.0 million).