Fidus Investment Corp. 10-Q Summary (Period Ended September 30, 2019)
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 September 30, 2019, and the nine months ended on that date. As of the period end, Fidus held investments in 62 active portfolio companies.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 |
|---|---|---|
| Total Investment Income | $19.2 million | $57.6 million |
| Net Investment Income | $7.4 million | $26.6 million |
| Net Increase in Net Assets from Operations | $13.9 million | $28.5 million |
| Net Asset Value (NAV) per Share | $16.47 | $16.47 |
| Total Investments (Fair Value) | $729.4 million | $729.4 million |
| Cash and Cash Equivalents | $17.5 million | $17.5 million |
| Total Debt Outstanding | $343.0 million | $343.0 million |
| Weighted Average Debt Yield | 12.3% | 12.3% |
Material Changes vs. Prior Period
- Investment Income: For the nine months ended September 30, 2019, total investment income increased by 6.2% ($3.4 million) compared to the same period in 2018. This was driven by a 73.3% increase in payment-in-kind (PIK) interest income and a 27.3% increase in fee income, partially offset by a slight decrease in cash interest income.
- Expenses: Total expenses increased by 2.5% ($0.7 million) year-over-year for the nine-month period. Interest and financing expenses rose by 34.3% due to higher average borrowings and interest rates. However, the capital gains incentive fee decreased significantly by 86.3% due to lower net gains on investments.
- Portfolio Composition: The portfolio grew from $643.0 million at year-end 2018 to $729.4 million. Second lien debt remains the largest asset class at 51.7% of the portfolio. The company invested $175.5 million in new investments and received $98.8 million in proceeds from sales and repayments during the nine-month period.
- Realized Gains: The company reported a net realized gain of $8.8 million for the nine months ended September 30, 2019, a significant improvement from a net realized loss of $15.2 million in the same period in 2018.
Guidance, Outlook, and Risks
Management Commentary: Management believes current cash resources, access to SBA-guaranteed debentures, and the Credit Facility provide adequate capital for operations and distributions for at least the next 12 months. The company continues to focus on generating current income from debt investments and capital appreciation from equity.
Recent Developments:
- On October 16, 2019, the company closed a public offering of $55.0 million in 5.375% notes due 2024 (with an additional $8.25 million option exercise), raising approximately $61.0 million in net proceeds.
- On October 29, 2019, the Board declared a regular quarterly dividend of $0.39 per share and a special dividend of $0.04 per share.
Risks and Contingencies:
- Leverage: The Board approved a reduction in the minimum asset coverage ratio from 200% to 150%, effective April 29, 2020, allowing for increased leverage capacity.
- LIBOR Transition: Approximately 23.3% of the debt portfolio is linked to LIBOR. The potential discontinuation of LIBOR after 2021 poses uncertainty regarding future interest rate calculations.
- Non-Accrual: As of September 30, 2019, two portfolio companies (US GreenFiber, LLC and Oaktree Medical Centre, P.C.) had debt investments on non-accrual status, representing $9.1 million in fair value.
Investor Verification Checklist
- Debt Maturity Profile: Verify the schedule of debt maturities, noting that $116.5 million is due in 2023 (Credit Facility and 2023 Notes) and the remainder extends to 2029.
- Asset Coverage Ratio: Confirm the company's compliance with the 200% asset coverage requirement (or the upcoming 150% requirement) given the $343 million in total debt against $754.7 million in total assets.
- Non-Accrual Status: Review the specific details and valuation adjustments for the $9.1 million in non-accrual investments to assess potential credit losses.
- Dividend Sustainability: Assess whether the declared dividends ($0.43 per share total for Q4) are fully covered by the reported net investment income and taxable income.
- Recent Debt Issuance: Review the terms and covenants of the new November 2024 Notes issued in October 2019.