Fidus Investment (FDUS) 1 Mar 242023 Q4 Earnings call transcript

Good morning, and welcome to the Fidus Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jody Burfening. Please go ahead.

Thank you, Drew, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's fourth quarter 2023 earnings conference call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer.

a company's yesterday quarterly issued details with Corporation the of financial Investment press afternoon release the Fidus results. fdus.com. the A is copy website of available release at company's on the of Investor Relations the press page

Fidus safe cash I'd also like today Corporation. call. regarding beliefs, call Investment the your will today's potential, flows contain information on results conference including future harbor statements goals, the included regarding attention forward-looking The disclosure to to of customary and call forward-looking operating statements, strategies,

Although of XXXX, based of projections are management time may are estimates, on the any reasonable guarantees at information of believes these replay. today, statements telephonic no assumptions and accurate webcast longer future not these as performance. Time-sensitive X, be March statements or

as uncertainties any or the in Commission. and differ of not Fidus result obligation but including, undertakes may Securities and update forward-looking factors filings to, results the revise set risks, limited no Exchange of with these the Actual materially statements. factors other company's forth a to

With the Good call that, over to turn like Ed. Ed. morning, to would now I

with your fourth completed good and everyone. quarter share Good our a and I'll of take remarks, with quarter quarter On our today's quarter morning, conference at Jody, Welcome then prepared liquidity to call, you start Shelby After the fourth XXXX. to review questions. fourth our XXXX have our we morning, and portfolio be financial outlook our will earnings cover for performance position. results and our we'll call. happy end,

active possess flow outlook. and serving which long-term companies both benefits selectively quarter robust of fourth strategy Fidus positive models has in the generating resilient of that environment, less middle strong and in reflects and lower cash the market, investing a strong business to Our performance remained reasonably our

origination a the value million originations repayments of deal during net and typical totaled for year and realizations $XXX.X push basis. $XXX.X portfolio with the totaled the to we and off fair from has grew activity, million year-end a patience total paid on $XX.X million, million, Our and proceeds $XXX.X

XX% Adjusted income QX in compared last increased net million investment to to year. million $XX.X $XX.X

for and average $X.XX. As average growth increase, adjusted weighted income share income was into yields. year-over-year balances average during higher debt the reflecting completed per basis the share XX.X% Taking each XXXX, year, from resulting the interest investment higher the both drove count to raises higher equity quarter in case $X.XX from on a net we increased this account

share. totaling share, a $X.XX paid $X.XX We per including per dividends dividend base of

dividends we consisting per the share special of distributed $X.XX share share, and of share per base shareholders a $X.XX covered of comfortably For per per year, supplemental to dividends. NII Adjusted of of dividends $X.XX share. total regular of dividends per $X.XX $X.XX

per XXXX of cash in with a $X.XX X a we dividend to As bring the distributed our special RIC each which reminder, quarters. level, of requirements roughly dividend for of satisfy base the spillover and line is target equivalent income to quarter share our

$X.XX stockholders dividend to the March from will March base adjusted dividend which $X.XX the Board For the be a XXX% the share, $X.XX supplemental of of of declared of quarter, XXXX, payable XX, XXXX. over of XX, and NII prior base to on record surplus of as of dividend Directors dividends share a equal first consisting per totaling quarter the per XXXX, share, per of and

value per share, compared asset end as meaningful or XX, per XXXX. of share million, increase or $XXX.X million was $XX.XX $XXX.X as September quarter a Net at to $XX.XX

million in equity added a in $XXX.X Originations high always, of us level companies $X.X as investments in investing, consisting totaled portfolio safety. to our high-quality margin cash our million and generate give structuring levels equity. grew we excess cushion $XXX.X that to an service quarter, of million, of flow the During debt debt of and with

X accounted lien $XX.X invested of companies, XX% which million originations invested companies, million were $XXX.X about or approximately in for all the M&A portfolio X/X portfolio First to M&A add-ons total added debt additions to investments We portfolio. of the new was of in or $XX.X through was portfolio almost existing support of in which remaining financing driven. transactions. the of The million

repayments $XX.X the our million to in million net from of and Proceeds portfolio realized strategic primarily equity exits sale due debt proceeds investments, million. received $XXX.X of the the realizations fourth $XX.X M&A reflecting and of totaled received quarter, in million for We some from repayments, pruning of on resulting gains $XX.X and activity, part.

million on debt or $XXX.X fair XX% a basis quarter total portfolio end. was the at Our of investments portfolio value of

First of We equity fair portfolio equal lien portfolio quarter the our fair portfolio portion now of investments the of stood portfolio, debt active companies. XX%. value continue to at cost. ended largest million, total the at the million, value of of to XX account at $XXX.X with fourth end for $XXX.X quarter XXX.X% Including the the

million in of $XX.X portfolio debt lien and a new proceeds in $XX equity and approximately had invested X in we equity we repayment debt and gain a and realized company million. companies, end, $X.X quarter net generating first to million realization Subsequent X of

credit portfolio remains solid. a our quality perspective Overall, from

growth the XX, of unchanged fair value vast and profitability, quarter. total supported The majority portfolio portfolio companies approximately by Nonaccruals had resilient on operating our represented December the capture X% to As sustained business we nonaccrual, opportunities X basis. on continue from companies third of of a models.

have a is on course, their reasons few no that for condition experiencing of is weighing variety operations. that a that difficulties do, We there of companies market one are

ahead, Looking are our to successes well build on we positioned XXXX. in

speaks fair million equity $XXX.X of financial M&A market. sponsors $XXX investment us selective, criteria. that subdued despite middle This levels enable investments of nearly companies our and meet our million, with portfolio remain high-quality to to lower relationships activity we knowledge in the value together, XXXX, During in investing experience, that, our on a and industry performance expanded by highly basis to debt our

from portfolio, a and increase XX.X% assist and an adjusted widened and our $XX.X year-over-year building million. spreads, enhanced of NII healthy portfolio power By earnings with we generating high-performing assets to the of our income-producing

strategy realizable year. investments gains net for $XX.X well Our the million continue equity in in co-investing to for us, of approximately work producing

Finally, to -- to and maintaining portfolio, of distributing generate our healthy in to we XXX% rigorous deliver underwriting losses, for an continue gains demonstrating overall our excess to while thanks our ability our of earnings value standards. shareholders,

long-term While selecting preserving for net we in remain managing to successes risk-adjusted for of are our asset and business shareholders. we returns positioned long build underwriting value to our on of over our the term, growing generating capital XXXX, to committed disciplines to and attractive our time, goals investments the

on results. Shelby? and to the operating details our financial provide turn I'll Now call to over Shelby some

will providing and review in fourth comparative comments I'll on versus Ed, everyone. the position. morning, QX XXXX. note, quarter be with and you, quarter Thank close good Please liquidity results our more I prior commentary detail our

Total $X.X investment interest a million increase a income increase to and December due including higher was to fee $XX.X activity; of income income increase income, million in interest from XX, million investment a levels cash. for due in QX, on $X.X $X.X excess primarily PIK; million X months increase the ended in million a $X.X

of in higher on driven in partially income increase by offset repayment X investments. in was new balances yielding and investment yield the outstanding, The by decrease average an debt increase debt investments a debt interest

higher tax increase annual related a driven fees in a accrual. $X income $X.X $XX.X including increase than million capital the and primarily in QX, professional were excise to fee million the $X.X accrual, million in increase expenses, Total taxes income million the provision, by quarter, $X.X for a tax fourth million gains

million comprised debt of the We and $XX.X SBA quarter outstanding of of with $XXX.X of million million ended debentures, secured of borrowings. $XXX $XXX unsecured notes million

as debt of or leverage, XX, Our was weighted X.X% on as December X.Xx December ratio XXXX. debt-to-equity SBA was outstanding XX The of X.Xx, debentures. excluding our rate interest average statutory exempt

or tax $X.XX reversals to was and in or share share attributable versus which per X versus XX share per for fee Net excise ended months in NII, any income, incentive NII, gains, was a QX. investments, December accruals accrual on unrealized in investment capital $X.XX $X.XX per gains and QX. losses which share $X.XX excludes the realized QX, $X.XX Adjusted includes per

the in ComplyXXX, on Aeronix, Road by exit months Techniks offset Grid debt and Industries. recognized the in net $XX.X December related sale our to of approximately the XX, X Power losses ended gains of of Services and investment KX Safety Components, investment investments realized equity in realized For we million our equity

XXXX, XXXX. mentioned, in in versus share dividends As paid total dividends we of per Ed $X.XX in cash cash $X

now Turning portfolio to statistics.

As fair $XXX.X portfolio of December had investment XX, our value million. a total of

excludes cost was is basis of portfolio million, that which in company on $XX.X operations and Our sold one company winding down. its process in portfolio investments the a average investment

discount as of for yield using of but debt fully X%. weighted XX.X% of our effective is loan portfolio including on investments accretion average investments yield nonaccrual, original with versus The was debt investments XX.X% equity cost, equity approximately at have rates diluted at on XX.X% an average issue Weighted ownership September origination excluding and We in December the average if investments any. XX. fees, computed interest of companies,

approximately shares average available at million. $XX.XX, we discuss of an ATM like $XX.X our our to raising liquidity. briefly QX, proceeds X approximately I'd In under Now issued net million of share program price

and line liquidity liquidity approximately XX, million million. As million availability credit, total our of resources and of resulting $XXX of December capital of in cash included $XXX.X our $XXX.X of on

second $XX debentures million Subsequent SBIC our SBA repaid remaining the to year-end, we of outstanding Fund. in

SBA for million SBIC a approval, a submitted with debentures. have We $XXX will license the of license, subject fourth SBA to us to to SBA access additional application new which, provide

the for turn Ed will to back I concluding call Now comments.

Shelby. Thanks,

Fidus dedication continued and our I'd at and to team of for As Board thank shareholders their always, hard for support. and like Directors work the their our

for call now will over the turn Drew Drew? Q&A. to I

first Robert Instructions] with question Raymond James. from Dodd [Operator comes The

couple A on another good congratulations really And questions. quarter. of

-- during any remarks. you that? on your the give opening the of you Ed, On strategic portfolio Could more us pruning color mentioned

Or you reasons that? that sounds equity. decent any was recaps it of to you it can with drove decided like do I comfortable that to mean, different it? the you give us a requesting chunk color prune weren't that people on you Was

that -- Robert, and was was on. very mean, that in one well I it Sure. was investment There was pruning we equity equity could did argue was investment an you nature, -- that strategic

or I think we like made Xx that. our money something

and ahead exit and than and So to to in, opportunity go chose frankly. risk saw stay quite the opportunity, we we had greater an

a we was with. huge, meaning weren't comfortable really, about that couple were higher of they talk of But to that was but They investments. levels -- debt risk were what were ones kind than

to so QX. both of to strategic we exit able were decision in kind -- And in it accomplish the investments. to those And we work made cases,

more was one did make So than oriented we it decision. debt that but investment equity was equity, there

it, it. Got got

is clearly it said reason performing fine. seems wouldn't And you so I situation, problem, broad-based lighting handful the there On aren't. companies the you of credit vast a be major that maybe -- anyway. no single obviously, that No mean, portfolio for there's up

Are market or issues those company? that? deterioration you comfortable managed how us aren't the more something labor problems idiosyncratic give and signs maybe ] being those or massive of anything? on are showing you are that is the it like [ Or of color Could

was what They that generally I which the but in have and go. for Sure. a are of quarters. those really idiosyncratic-type both we've cases, are equity a groups. both through there got few to supported improving, And ways companies kind are are been going And situations referencing non-accruals, private by

primarily. really So referencing, we're that's what

expectation. but other type past. about our nonaccrual, in rest the can of we a always very the portfolio. the that's we managing underperforming, one-off in not of There's way of for again, we the good that it, for terms companies chance feel that businesses keep kind our have In clearly hope another we that and And are reasons

question Bryce comes next Riley. from with Rowe The B.

commentary fourth trying the And the on appreciate kind with structure. and license. of capital Maybe re-up license start a around Shelby, #X I'll SBA to

additional so you that on looks relative How you of cash, license lot kind and where sheet cash -- trying with you just through today? that You're the of balance in sitting to pipeline of how that front access capital to to of work a and how you. see the the about balance that timing do of about fourth maybe sheet kind think think

Sure. Great question, Bryce.

X-month that As the I so. we think window applied as for, or about think SBIC that we in Fund some a time. terms it know, takes of of about And you kind

So that's our expectation is. what

that still the hope obviously, in Our But mode. that utilizing application able we'll is start to we're be in XXXX, license.

going -- our expect, did obviously, from the II. Fund shaping very regard cash, other is perspective, debentures things the we we a But piece active we March. With is is the assume in in be actually to of quarter, to it be to primarily quarter prepay investment go puzzle this but as up

in numerous our exhibit investment also portfolio currently continues say well. I are we activity acquisition-type the execution And phase of so phase, And execution as to final diligence would and opportunities.

pretty shaping quarter. investment to be up a it's So new active

And up think the calendar actually then a -- $XX meaning shape one realization, the that rest from be lighter we We've almost the But to repayment the to quarter. a obviously probably it's perspective, of sizable it appear is had going quarter. very robust doesn't million.

that At time. moment, more investments And aren't do have at the companies investments probably we evaluating very We also They as a strategic few QX aware of. we're aren't same the view that those they ones the alternatives. are realizations. large

a the over go that actually investments forward next to new to today will cash on as we here the think bit weeks. the of we balance move So fair X we here X have sheet

your continue M&A market. the picking M&A that trend guess, experiencing, of based I we've continue the to peers you're period? Okay. that Are of it from beyond up this and Does at That's kind in just to Ed, beyond, third helpful. you're middle hearing point? many March quarter heard in lower does going we And what see activity on that seeing second, this

question, a Bryce. It's good really

broader I what reasons like, It's we to little fragmented, of deals. we market, the mean, in. us like it, there's number the market of of a really it's think activity lower unclear. in middle I gives chance interested more choose terms we which the in a are kind of look, one than

uptick some some But here normal below a In in But there deal I'd January, QX had activity obviously an bit In robust well we flow activity and situations. QX. little levels of pretty still well. say are in been has XXXX, levels. as below high-quality

expectations levels last a market long is more it's the how unclear above is think I reasonable on and -- how at that sustainable expectation continued of M&A But for is. year. activity

that's hope. our so And

for, planning that, we're there's what that's guarantee so no obviously. of And but

it new me, of It like structure out most investments pricing for were Got I debt those first looks it. one All looked in them. a, right. lien. guess, Ed. last fourth perspective, to from Last the the activity quarter up straight like No

flow the in might I Or those kind the the investments. kind but I read that relative investments? what kind be of just we've seen Anything last to way of of wrong of more terms over is into schedule of read to structuring what debt of in there, quarter that's years that? the of couple happened

know, business a start the this nothing and I strategic. Sure. No, with, case, we it the figure out what's towards investments. It's quality more to just then more underlying of you opportunity think, try dollar one the as just mix type in what is. was And

we only The the if investment, a to right? thing And yield on say, if focused are I quality, we're we will. sacrifice so willing find quality little you very right would

it. to trying into both And of businesses in, invest But so do figure a bit out high-quality I'd then there's of can how go making. say that starts and those the it with little we find decision we very to

that's hopefully, so helpful. And

with question comes Ladenburg. next The from Mickey Schleien

quarter in seeing sounds due which of activity certainly what we're the line refinancings, with it fourth to some in repayment the is was like Ed, broadly.

to see your I'd the how much get So more prepayment in you take portfolio. on like risk

a great It's question, Sure. Mickey.

I seen terms think repayments just trying lot price. haven't a get repayments, in that lower a of we of to are

them of In then by us, were fact, companies situation to them from nature perspective. the chose large acquisition, debt us and equity were X just very that in was X that at of we X strategic a and for I and repayments exit look a

to competition little of have over if little Having come years. we're XX that down I we so than I think our investments. about of currently piece face its the taken puzzle so we has environment of expect here more would And -- bit. So in where months. the that, a said an out, last of increased lot debt show XXXX, the I That's a bit that's it. how -- haven't Yields just a in how think you will, seen couple our last -- getting I

I of up capital because regulatory exactly wanted follow III on I'm license. to million. Fund on has $XXX what's fourth I just not clear the going already understand. on SBIC

commitments a does debt what to III? Fund IV? And why made the So necessitate has that SBA Fund

to do want Shelby, Sure. take you one? that

Sure.

about just talk -- So II. let's start let Fund me

And where really SBA million and was the $XX repaid a I we up of we debentures, would so trapped made situation with just avoid that that comment to end cash.

excess SBIC And so subsequent that we of license fair given amount and, quite cash. some of repayments in XXXX, our the a had second a XXXX in event frankly, had

that whether cash BDC best equity on in of fourth or to Fund that further contribute using fully of investments the And to we it by SBA. once million. basis, the SBIC so way Any the can license cash go-forward it's new $XX to completes down repayments redeploy fund, the just be making capital a II. out utilize was wind That approved a some repay to

that per So repayment, that SBIC us III for $XXX that fully SBIC and fully license been that leaves Fund really with borrowed meaning -- invested with one III. Fund we cap deployed, million has license

necessitated the another get that ahead go So SBIC and need license. to

shortly SBIC SBA submitted would capital new of of at December. can will that be in we -- into start My first fourth so half. deploying of on the Ed license application XXXX, to market given XXXX. environment. definitely think as that the be end of If alternatives mentioned, And debentures not, we we hopefully, that like So other hope because attractive in kind thereafter rates that this

attractive. I agree No. rates the that are

Xx. of to is III only than limited equity Fund to debt So Xx rather

No. It's Xx.

is fully have the So the The $XXX Xx. deployed. million Xx we

Okay. your the and debt-to-equity allocation over unitranche first has increased lien to And number? target how impacted time

target X:X our GAAP with leverage sticking of kind we're moment, the from At Mickey. perspective. question, a Great

the to be above that. if, we go X:X. okay target are would from generally, time time, But We

think have funds drop-downs But more this SBIC being really just think X:X makes kind conservative the of X:X. strategy And it Clearly, with a as -- juncture. feel ability. know, We leverage. from hasn't and you it, and how so more we to I are more comfortable we perspective about focus. changed sense higher thinking are levered And at us the our as about just very

that have lien to is on still the something your you have and that's And mind? else allocation Ed, debt? subordinated about a economy second you it does reflect Or some concern meaningful and

No.

leverage I to less think to kind of think we well. we market operate in leverage. a use perform We prefer don't to than need

-- it's does overall. see market a recession it change past, a what it's of we portfolio like this of so more But leverage and don't or And that in we or -- not than reflection at kind just less little how a bit just It's of have to concerns in kind we've need the operated you. point. the

The Zwick with question Instructions] next from comes Erik Group. [Operator Hovde

Wanted a PIK first like looks to was with income. QX. on question in just start the down it It quarter-over-quarter

X So positive income with a some to had it's that then maybe moved quarter-over-quarter? wondering that pay? Or cash or a been if returned just of what kind company PIK development before, maybe

Sure. Great question.

I said. was exactly primary just think what there you driver the

strategic obviously our of pruning during that a to worked so. had the and credit, we're third company we moved exit quarter. PIK successful And in situations One doing to that was try to

biggest -- driver. not the other drivers in there. there that's are I'm So sure big I don't

one. main the that's think I

the in there? upper pipeline lower middle middle turning become terms upmarket, market the And focus relative market Got your has more heard maybe Have months intense. We've just from you're change kind middle to it. other X seeing you a little market, today. That market of BDCs that XX competition ago. bit in makes leverage seeing covenants of spread, and opportunities a to operate kind noticed further what or of that Curious you're and sense. then the

-- were ago, a are far months think months banks, that environment. do being different just of about lenders frankly, not There -- lot XX a was were ago, it's XX there I think a folks I mean, the on of private quite relative to sidelines. number that were from there

I retracted, have think banks people, other most That market. certain that situation has than are And the in changed.

of increased level there competition ago. XX And is from an months so

And pick is to think it if structure. it's XX that out, lien last I seeing number, right whether I on for one if were dollar And are first it's structure us, spreads. it's a spreads, a what first you probably And investment out depends a basis in or points.

as now, people But worried the side. an level year resiliency next. a just both of think the generally in M&A well speaking, the I the an there lending economy, folks given very ago competition because are think from perspective of on the about is very, were I as side increase more what's And acquisition, equity

more see are kind transacting of are that. with folks economy of the in comfortable think the I interested and resilience

just you've know that are last thinking about the Got rate investments a it. then sensitivity. got interest fixed. And portion one, of I debt

kind short when market than the So figure curve to I the of be the exactly down, but going interest rates is still to the seems out more that's kind of up. trying go think that, rate, of shape likely or future

just would of sensitivity So me wondering that potential the kind remind if point like each could cut, how you maybe to basis impact XX for earnings earnings.

do it? you do me you take to Shelby, want Or this one? to Either... do want

or Why interest thing, calibrations XX-K And a point, I increases in the rates. various decreases -- more do sensitivity of don't where have kind shot disclosed you off we see chart for based other then underlying we in you a would of our details, take have can some do Erik, it?

So create in $X Erik, quarter. a call our reduction probably These estimates. would taking in no a points the just incentive XX Reduction a of, fees. it, shot. are assuming NII, The in movements million basis

XX $X.X $X would to XXX million. it would points, basis be So that you basis and double million, points be

So And that that's there's I the would think hopefully helpful a well. as table be helpful. how in I sensitivity -- XX-K hopefully, do that's

because And we on of add, that not entirely have investments. a thing the Yes. do debt our just variety would only floors Erik, some is it's I linear

to curve, I nature. ask shock make those color, things sensitivity of there's of more you've that to out got And I'll check That's then to as if and the would a great No. we gradual, because just and or terms assumptions too. analysis, table. twists some know the in like

the appreciate commentary. I So

for like closing question-and-answer the session. conference Edward back to any turn would Ross concludes to This over comments. I our

morning. forward to Thank with Have first you, and quarter and in Drew, joining look call great this early speaking for weekend. you, us a our on thank a everyone, We great you day May.

The today's attending for now has presentation. concluded. conference Thank you

You may disconnect. now