Fidus Investment Corp. 10-Q Summary (Period Ended September 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 September 30, 2018, and the nine months ended on that date. As of the period end, Fidus held active investments in 65 portfolio companies.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 | As of Sep 30, 2018 |
|---|---|---|---|
| Total Investment Income | $17.9 million | $54.2 million | N/A |
| Net Investment Income | $7.5 million | $23.8 million | N/A |
| Net Increase in Net Assets from Operations | $14.8 million | $37.5 million | N/A |
| Net Asset Value (NAV) per Share | N/A | N/A | $16.41 |
| Total Investments (Fair Value) | N/A | N/A | $668.5 million |
| Total Debt (Net of Deferred Costs) | N/A | N/A | $295.0 million |
| Cash and Cash Equivalents | N/A | N/A | $38.1 million |
| Weighted Average Yield on Debt | N/A | N/A | 12.6% |
Material Changes vs. Prior Period
- Investment Income: For the nine months ended September 30, 2018, total investment income increased by 5.2% ($2.7 million) compared to the prior year period, driven primarily by a $4.7 million increase in interest income due to higher average debt balances. This was partially offset by decreases in fee income and dividend income.
- Expenses: Total expenses increased by 19.0% ($4.8 million) for the nine-month period. The increase was primarily due to higher interest and financing expenses ($1.8 million) and a significant rise in the capital gains incentive fee ($1.7 million) resulting from increased net gains on investments.
- Net Investment Income: Despite higher total investment income, net investment income decreased by 8.4% ($2.2 million) for the nine-month period due to the larger increase in operating expenses.
- Realized Gains/Losses: The company reported a net realized loss of $15.2 million for the nine months ended September 30, 2018, compared to a net realized gain of $12.4 million in the prior year period. Significant losses were attributed to exits of Cavallo Bus Lines Holdings, LLC and Six Month Smiles Holdings, Inc.
- Unrealized Appreciation: Net unrealized appreciation on investments increased significantly to $30.2 million for the nine-month period, compared to depreciation of $5.1 million in the prior year, largely driven by fair value adjustments to equity investments.
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.
Subsequent Events: Following the period end, the company exited several debt investments (Toledo Molding & Die, Midwest Transit Equipment, Thermoforming Technology Group) and made new investments in Rohrer Corporation and Alzheimer's Research and Treatment Center, LLC. The Board also declared a regular quarterly dividend of $0.39 and a special dividend of $0.04 per share.
Risks and Contingencies:
- Non-Accrual Status: As of September 30, 2018, two portfolio companies (K2 Industrial Services, Inc. and Restaurant Finance Co, LLC) were on non-accrual status with a combined fair value of $9.1 million.
- Leverage: The company utilizes leverage through SBA debentures, Public Notes, and a Credit Facility. Recent legislation may allow the company to increase its leverage capacity if approved by stockholders or independent directors.
- Market Risk: The company is subject to interest rate risk, credit risk, and liquidity risk inherent in investing in lower middle-market companies.
Investor Verification Checklist
- Verify the impact of the $15.2 million net realized loss on the company's ability to maintain its dividend payout ratio.
- Review the specific details of the two portfolio companies on non-accrual status (K2 Industrial Services and Restaurant Finance Co) to assess potential credit losses.
- Confirm the status of the $10.4 million in unfunded commitments to portfolio companies.
- Monitor the company's leverage ratio and compliance with the 200% asset coverage requirement (or potential 150% under new legislation).
- Assess the sustainability of the dividend given the decrease in net investment income despite the increase in total investment income.