FIDUS INVESTMENT Corp quarterly report, Q2 FY2012

Fidus Investment Corp. 10-Q Summary (Period Ended June 30, 2012)

Business Context and Reporting Period

Fidus Investment Corporation (Fidus) is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC) and a Small Business Investment Company (SBIC). The company provides customized debt and equity financing to lower middle-market U.S. companies. This report covers the quarterly period ended June 30, 2012. As of this date, Fidus held investments in 27 portfolio companies with a total fair value of $234.1 million.

Key Financial Metrics

Metric Six Months Ended June 30, 2012 Six Months Ended June 30, 2011
Total Investment Income $15.2 million $10.1 million
Net Investment Income $7.0 million $5.5 million
Net Increase in Net Assets from Operations $7.7 million $7.9 million
Net Asset Value (NAV) per Share $15.02 $14.75
Total Assets $267.5 million $248.6 million
Total Liabilities $125.9 million $108.2 million
Net Assets $141.6 million $129.4 million
Cash and Cash Equivalents $27.6 million $39.1 million
SBA Debentures Outstanding $121.3 million $104.0 million
Dividends Paid per Share $0.70 n/a

Material Changes vs. Prior Period

  • Revenue Growth: Total investment income increased by 50.5% ($5.1 million) compared to the prior year period, driven primarily by a $5.0 million increase in interest and fee income due to higher average levels of outstanding debt investments.
  • Expense Increase: Total expenses rose 78.4% to $8.2 million. This increase was attributed to higher base management fees, a $1.9 million increase in incentive fees (which were waived in the prior year period), and increased administrative and professional fees associated with public company operations.
  • Portfolio Expansion: The portfolio grew from 23 companies to 27 companies. Investments increased by $29.3 million in fair value, with $33.4 million deployed in new and existing investments during the six-month period.
  • Realized Losses: Unlike the prior year period which included a $7.9 million realized loss, the current period reported zero realized losses on investments.
  • Leverage: SBA debentures increased by $17.3 million to $121.3 million, reflecting the company's utilization of its SBIC license to fund portfolio growth.

Outlook, Risks, and Management Commentary

  • Liquidity: Management believes current cash ($27.6 million), available SBA leverage ($28.8 million remaining capacity), and operating cash flows are sufficient to meet needs for the next 12 months.
  • Dividend Policy: To maintain Regulated Investment Company (RIC) status, the company intends to distribute at least 90% of net ordinary income. A quarterly dividend of $0.38 per share was declared on July 31, 2012, payable in September 2012.
  • Valuation Risks: The company values all portfolio investments at fair value using Level 3 inputs (unobservable). Management notes that due to the lack of a ready market, fair value estimates may differ significantly from actual exit values.
  • Leverage Risks: As a BDC, the company is subject to a 200% asset coverage ratio. While SBA debentures are excluded from this test via SEC exemptive relief, a significant decline in asset values could impact the ability to borrow or make distributions.
  • Recent Activity: Subsequent to the reporting period, the company issued an additional $5.5 million in SBA debentures and purchased $7.5 million in subordinated notes and warrants of S.B. Restaurant Co.

Investor Verification Checklist

  • Portfolio Concentration: Verify the impact of the single portfolio company representing 12.8% of the total portfolio fair value.
  • PIK Income: Review the portion of investment income recorded as Paid-In-Kind (PIK) interest ($2.3 million for the six months) to assess cash flow quality versus accrual income.
  • Valuation Methodology: Confirm the assumptions used in Level 3 fair value measurements, specifically the weighted average cost of capital and EBITDA multiples applied to debt and equity holdings.
  • Asset Coverage: Monitor the company's compliance with the 200% asset coverage ratio required for BDCs, excluding SBA debentures.
  • Dividend Sustainability: Assess whether net investment income is sufficient to cover the declared dividend rate of $0.38 per share on a quarterly basis.