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 solutions to lower middle-market U.S. companies. This Form 10-Q covers the quarterly period ended June 30, 2019.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Total Investment Income | $38.4 million | $36.3 million |
| Net Investment Income | $19.2 million | $16.5 million |
| Net Increase in Net Assets from Operations | $14.6 million | $22.7 million |
| Net Asset Value (NAV) per Share | $16.29 | $16.20 |
| Cash and Cash Equivalents | $21.9 million | $24.0 million |
| Total Debt Outstanding | $319.8 million | $277.5 million |
| Weighted Average Debt Yield | 12.4% | 12.6% |
Material Changes vs. Prior Period
- Investment Income: Total investment income increased by $2.1 million (5.6%) compared to the prior year period. This was driven by a $2.6 million increase in payment-in-kind (PIK) interest income and a $0.5 million increase in fee income, partially offset by a $1.3 million decrease in cash interest income.
- Expenses: Total expenses decreased by $0.7 million (3.5%). Interest and financing expenses increased by $1.8 million due to higher average borrowings and interest rates. However, this was offset by a $2.2 million decrease in the capital gains incentive fee and a $0.6 million decrease in the income incentive fee.
- Portfolio Activity: The company invested $128.5 million in new debt and equity investments and received $75.3 million in proceeds from sales and repayments. The portfolio fair value increased to $697.3 million from $643.0 million at year-end 2018.
- Realized Gains/Losses: The company recorded a net realized loss of $1.7 million for the six months ended June 30, 2019, compared to a net realized loss of $7.9 million in the prior year period. Significant losses in the current period were attributed to the exit of K2 Industrial Services, Inc.
- Unrealized Appreciation/Depreciation: The portfolio experienced a net unrealized depreciation of $2.5 million for the six months ended June 30, 2019, contrasting with a net unrealized appreciation of $16.0 million in the prior year period.
Guidance, Outlook, and Risks
- Dividends: The Board declared a regular quarterly dividend of $0.39 per share on July 29, 2019, payable September 20, 2019. The company maintains a dividend reinvestment plan (DRIP).
- Liquidity and Capital Resources: As of June 30, 2019, the company had $21.9 million in cash and $70.5 million of unutilized commitment under its Credit Facility. The company believes it has adequate capital resources for the next 12 months.
- Debt Structure: The company amended its Credit Facility in April 2019, increasing commitments to $100 million and extending the maturity to April 2023. It also issued $69 million in 6.000% Notes due 2024 in February 2019.
- 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.
- Risks: Key risks include credit risk from portfolio companies, liquidity risk due to the illiquid nature of private investments, and interest rate risk. The company had two portfolio companies on non-accrual status as of June 30, 2019 (Oaktree Medical Centre and US GreenFiber).
Investor Verification Checklist
- Non-Accrual Status: Verify the status and potential recovery value of the two portfolio companies on non-accrual status (Oaktree Medical Centre and US GreenFiber), which represented $6.2 million in fair value.
- PIK Income Sustainability: Assess the collectability of the significant increase in payment-in-kind (PIK) interest income, which rose to $5.6 million for the six-month period.
- Debt Maturities: Review the schedule of debt maturities, noting that SBA debentures mature between 2022 and 2028, and the Credit Facility matures in 2023.
- Valuation Methodology: Confirm the company's reliance on Level 3 inputs for fair value measurements, as the entire portfolio consists of privately held companies without readily available market prices.
- Incentive Fee Reversals: Note the reversal of the capital gains incentive fee ($0.9 million for the six months), which reduced expenses but reflects a decline in net unrealized appreciation.