Fidus Investment Corporation (NASDAQ: FDUS) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 2, 2023. Fidus is an externally managed business development company (BDC) and regulated investment company (RIC) providing debt and equity financing to U.S. lower middle-market businesses. Unless noted, amounts are in U.S. dollars.
Financial and portfolio highlights
| Metric | FY 2022 / Dec. 31, 2022 | Prior comparable period |
|---|---|---|
| Total investment income | $94.1 million | $90.4 million in 2021 |
| Net investment income (NII) | $46.5 million; $1.90 per share | $25.1 million; $1.03 per share in 2021 |
| Net increase in net assets from operations | $35.8 million; $1.46 per share | $116.1 million; $4.75 per share in 2021 |
| Net realized gains on investments, before tax | $65.6 million | $55.8 million in 2021 |
| Net change in unrealized appreciation (depreciation) | $(65.7) million | $41.5 million appreciation in 2021 |
| Portfolio fair value | $860.3 million across 78 companies | $719.1 million across 78 companies in 2021 |
| Net assets / NAV per share | $480.3 million / $19.43 | $487.8 million / $19.96 in 2021 |
| Cash and cash equivalents | $62.4 million | $169.4 million at year-end 2021 |
| Debt-investment weighted average yield | 13.8% | 12.3% at year-end 2021 |
| Annual total return | 7.3% based on NAV; 17.7% based on market value | 28.3% and 53.9%, respectively, in 2021 |
Investment income rose 4.1%, and NII increased substantially as higher interest income and lower expenses more than offset declines in PIK interest, dividends and fee income. However, operating results fell as unrealized investment depreciation replaced the prior year’s unrealized appreciation. The portfolio’s net unrealized appreciation declined to $31.6 million from $97.3 million a year earlier.
Investment purchases were $333.8 million, versus $346.7 million in 2021; sales and repayments were $194.0 million, versus $472.8 million. At year-end, first-lien debt represented 53.0% of portfolio fair value, second-lien debt 21.3%, subordinated debt 11.8%, and equity and warrants 13.9%. Variable-rate debt was 70.6% of debt investments by fair value. Information technology services was the largest industry exposure at 33.3% of portfolio fair value.
Cash flow and liquidity: Cash decreased by $107.1 million during 2022. Cash used for operating activities was $105.5 million, reflecting investment funding of $333.8 million partly offset by $194.0 million of investment proceeds and repayments. Financing activity included $76.0 million of SBA debenture proceeds, $30.0 million of SBA repayments, $5.8 million of net ATM equity proceeds and $49.1 million of dividends paid. Management stated that cash, the credit facility, SBA debentures and expected portfolio cash flows should provide adequate resources for at least the next 12 months.
Debt and leverage: Year-end principal debt included $153.0 million of SBA debentures, $250.0 million of unsecured notes and $16.9 million of secured borrowings; there were no outstanding credit-facility borrowings against a $100.0 million commitment. Weighted average stated interest on total debt was 4.037%. Reported asset coverage was 280.0%. The 2026 notes bear interest at 4.75% and 3.50%; the credit facility was extended to August 2027 and converted from LIBOR to SOFR.
Material changes, outlook and risks
- Credit quality: Non-accrual debt investments increased to four portfolio companies from one, with $10.3 million fair value and $27.2 million cost at year-end. The share of fair value rated 3 increased to 8.6% from 4.4%; ratings 4 and 5 together represented 0.3% of fair value. The weighted average fair-value rating moved to 2.0 from 1.9.
- Distributions: The company declared $2.00 per share for 2022, including $1.19 in dividends and $0.81 in capital-gains distributions. It elected to treat $40.8 million of retained long-term gains as a deemed distribution and paid $8.6 million of related tax. On February 15, 2023, the Board declared a $0.41 regular, $0.15 supplemental and $0.10 special dividend per share, payable March 29, 2023.
- Capital and portfolio activity after year-end: The company sold 114,904 shares through its ATM program for approximately $2.4 million net proceeds through February 28, 2023. It also announced investments totaling $40.2 million in three portfolio companies between February 23 and March 1, 2023, and issued $4.0 million in additional SBA debentures in February.
- Management commentary and risks: Fidus cited inflation, rising interest rates, supply-chain and labor disruption, market volatility, geopolitical uncertainty and recession risk. It said it was monitoring portfolio companies closely, with increased oversight of credits in vulnerable industries. Floating-rate assets may benefit from higher rates, but rising rates can pressure borrowers and valuations; higher funding costs, defaults, illiquid holdings and non-cash PIK income are additional risks.
- Other matters: Most investments are illiquid Level 3 holdings valued using unobservable assumptions; the auditor identified their valuation as a critical audit matter. The auditor gave an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting. The filing reports no material legal proceedings.
Important facts for investors to verify
- Review the four non-accrual credits, including the zero-fair-value positions, and the drivers of the $65.7 million unrealized depreciation.
- Assess the assumptions underlying Level 3 valuations, especially discount rates, EBITDA or revenue multiples, and expected cash flows; compare subsequent realizations with reported fair values.
- Reconcile the stated $62.4 million cash balance, unused $100.0 million credit facility and SBA borrowing availability with portfolio commitments, planned investments and upcoming debt maturities.
- Check dividend coverage against NII and taxable income, including the effect of deemed distributions, PIK income and any future return of capital.
- Monitor concentration in information technology services, the increase in lower-rated investments, and portfolio-company ability to service floating-rate debt.
- Review potential share dilution: the ATM program had up to $44.1 million remaining at year-end, and stockholders had authorized below-NAV issuance subject to stated limits and timing.