Fidus Investment Corporation Price & Performance (FDUS)

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Actual results may differ materially as a result of risk uncertainties and other factors, including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission. Binitus undertakes no obligation to update or revise any of these forward looking statements. With that, I would now like to turn the call over to Ed Good morning, Ed. Good morning, Jody. Good morning, everyone. Welcome to our fourth quarter twenty twenty four earnings conference call.

On today's call, I'll start with a review of our fourth quarter performance. In our portfolio at quarter end. And then share with you our outlook Shelby will cover the fourth quarter financial results and our liquidity position, After we have completed our prepared remarks, we'll be happy to take your questions. As expected, the fourth quarter was active for both in investments and repayments and realizations perspective. Although deal flow remained at a reasonable but not robust levels during the quarter, as it did all year our sponsor relationships investment experience and industry knowledge in the fragmented lower middle market differentiate Fidus. As a result, we continue to find opportunities to selectively invest in high quality companies with durable and defensible business models. That generate recurring revenue and cash flow and have strong prospects for growth. Grew our portfolio by 14 percent $1,100,000,000 on a fair value basis as of December 31, 2024, versus year end 2023, adhering to our underwriting disciplines and our strategy of co investing in the equity of a large majority of our portfolio companies which gives us the potential for enhanced returns. From our perspective, our strategy is clearly working. Overall, our portfolio is healthy, Our debt portfolio continues to perform well with sound credit quality and our equity portfolio, which is quite strong and promising, continues to deliver net realized gains.

Adjusted net investment income for the quarter was $18,400,000 compared to $18,800,000 last year. As our portfolio has grown over the past year, debt investments under management have increased While yields have declined, due in large part to a decline in SOFR. Including higher average share count from ATM issuances earlier in the year, adjusted NII on a per share basis was $0.54 per share compared to $0.65 per share for the same period last year. Net asset value was $655,700,000 or $19.33 per share at quarter end. In the fourth quarter, dividends totaled $0.61 per share consisting of a base dividend of $0.43 per share and a supplemental dividend of $0.18 per share. For the first quarter of twenty twenty five, the Board of Directors declared a total dividend of $0.54 per share. Which consists of a base dividend of $0.43 per share and a supplemental dividend of $0.11 per share equal to 100% of the surplus in adjusted NII over the base dividend from the prior quarter. Which will be payable on 03/27/2025 to stockholders of record as of 03/20/2025. [indiscernible] Originations totaled $120,300,000 for the fourth quarter including $43,900,000 and five new portfolio companies. Remaining $76,400,000 primarily facilitating add on acquisitions.

Net investments totaled $115,500,000 nearly all of which were in first lien security. We co invested in the equity of the five Newport for a total of $3,800,000 Proceeds from repayments and realizations totaled $122,800,000 for the fourth quarter including the exit of four portfolio companies, one of which have been evaluating strategic alternatives. Subsequent to the quarter end, we invested $50,700,000 in first lien debt and common In addition, two of our portfolio companies completed strategic reviews and were sold. In connection with the sale transactions, we realized a $3,200,000 gain on the distribution of our preferred equity investment in HealthViews and an $8,200,000 gain on the distribution of our equity investment in MedShurant Holdings LLC. With originations equivalent to repayments this quarter, our portfolio of debt and equity investments on a fair value basis as of 12/31/2024 was $1,100,000,000 unchanged from 09/30/2024 and equal to 101.4% of cost. Our debt portfolio totaled $944,500,000 76% of which consisted of first lien investments and our equity portfolio was $146,000,000 or 13.4% of the total portfolio at quarter end. We ended the quarter with 87 active portfolio companies a net addition of two from the third quarter. Our portfolio overall has remained sound from a credit quality per even as we have grown the debt portfolio by 13% on a fair value basis.

Non accruals on a fair value basis for the fourth quarter stayed under 1% of the portfolio and were 4.1% of the total portfolio on a cost basis. With an active portfolio, we do of course always have some companies that are [indiscernible] or exceeding expectations and others that are underperforming. This quarter, for instance, we added Quantum IR Tech and wrote down its fair value to zero. This reflects the risk associated with a series of company specific and very negative events. Particularly given our position in the cap structure as holders of a last out first lien loan. Portfolio. By maintaining a well diversified portfolio, and structuring it to hold both debt and equity investment, we are able to sustain its overall health over the long term. This illustrates the benefits of both our strategy and our long term approach to managing the business. In summary, in 2024, we continued a five year period of extremely high activity at Fidus from both a new investment and realization perspective and of building a portfolio with strong resiliency characteristics and with the opportunity for enhanced returns from capital gains. Looking back over the past five years, we are proud to report a 7.5% compound annual growth rate in the investment portfolio from $766,900,000 to $1,100,000,000 First lien debt investments represent 76% of our debt portfolio on a fair value basis versus 16.8% in 2019.

Net asset value per share has grown from six per share at year end 2019 to $19.33 per share as of twelvethirty onetwenty twenty four. Over the past five years, we have generated $2.00 $8,000,000 in net realized capital gains from equity investments or said differently, $155,000,000 in net realized gains across the total portfolio. Taking into account any losses on debt and equity investments. For 2025, we intend to continue to find ways to build our portfolio in a methodical and disciplined way. Independent of the strength of the overall M and A market. We know the year will bring us both opportunity and inevitable headwind. We also know that our investment strategy is working. Sustaining a healthy portfolio that combines a debt portfolio that generates high levels of current and recurring income with an equity portfolio that can enhance returns. We remain committed to this strategy and our long term goals of generating attractive risk adjusted returns for our shareholders and growing our net asset value over time. Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?

Thank you, Ed, and good morning, everyone. I'll review our fourth quarter results in more detail and close with comments on our liquidity position.

Please note, I will be providing comparative commentary versus prior quarter Q3 twenty twenty four. Total investment income was $37,500,000 for the three months ended December 31. A $900,000 decrease from Q3, primarily driven by a one a $1,300,000 decrease in dividend income from equity investments offset by a $300,000 increase in fee income Total expenses including income tax provision were $18,800,000 for the fourth quarter. A $1,800,000 higher than Q3 driven primarily by a $1,200,000 increase in income tax provision related to the annual excise tax accrual in Q4. A $800,000 negative variance in capital gains fee accrual, a $300,000 increase in interest expense due to higher average debt balances outstanding on the line of credit, and a $200,000 increase in G and A expenses offset by a 0.6 Net investment income or NII for the three months ended versus $0.64 per share in Q3. Adjusted NII, which excludes any capital gains and incentive fee accruals, are attributable to realized and unrealized gains and losses on investments was $0.54 per share in Q4 versus $0.61 in Q3.

For the three months ended December 31, we recognized approximately $500,000 of net realized losses related to a realized loss on the exit of our residual equity investments in BurgerFi International. We ended the quarter with $483,700,000 of debt outstanding comprised of $175,000,000 of SBA debentures, $250,000,000 of unsecured notes, dollars 45,000,000 outstanding on the line of credit, and 13,700,000.0 of secured borrowings. Our net debt to equity ratio as of December 31 was 0.7 times.

Our statutory leverage excluding exempt SBA debentures was 0.5 times. The weighted average interest rate on our outstanding debt was 4.6% as of December 31. Turning now to portfolio statistics. As of December 31, total investment portfolio had a fair value of $1,100,000,000 Our average portfolio company investment on a cost basis was $12,400,000 dollars which excludes investments in four portfolio companies that sold their operations or in the process of line down. [indiscernible] have equity investments in approximately 85.7% of our portfolio companies with an average fully diluted equity ownership of 3.5%. [indiscernible] Weighted average effective yield on debt investments was 13.3% as of December 31, versus 13.8% at the end of Q3. The weighted average yield is computed using effective interest rates for debt investments at cost including the accretion of original issue discount and loan origination fees, but excluding investments on non accrual, if any. Now I'd like to briefly discuss our available liquidity. As of December 31, our liquidity and capital resources included cash, of $57,200,000 $95,000,000 of availability on our line of credit, and $23,500,000 of available SBA debentures. Resulting in total liquidity of approximately $175,700,000 Taking into account our subsequent events, we have approximately $129,100,000 of liquidity.

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

Thanks, Shelby. As always, I'd like to thank our team the Board of Directors that fight us for their dedication and hard work. And our shareholders their continued support. I will now turn the call over to Michael for Q and A. Michael?

We will now begin the question and answer session. The first question comes from Mickey Schleien with Ladenburg. Please go ahead.

Yes, good morning Ed and Shelby.

Ed, LSEG reported that middle market loan spreads finally stabilized in the fourth quarter and I'm assuming the same as true of the lower middle market. How do you see spreads evolving this year And do you think there's any scope for them to actually widen as perceived risks increase Great question, Mickey. My expectation or stable over the last call it, three to six months. I don't see them get a lot more aggressive Clearly, I think there will be some opportunities of to invest at maybe higher rates where there's perceived risk and maybe those risks are more perceived than actual, those types of things. So there may be an opportunity there, but I think our kind of working thoughts are that yields are probably here for a little while, just based on a fair bit of capital out there and there is an interest in trying to keep portfolios the same size or grow them. So that's probably the thought process that we have.

Thanks for that. And I wanted to ask about Quantum. I realize you probably cannot say a whole lot, but I see that they're being sued by a bank Is that bank does that bank hold the first out piece and do you have a call on the first out piece that you might exercise take control of the situation and maybe recoup some value?

It's a great question, Mickey. I think what I would say and just is the the company is a provider of software based thermal infrared data collection and predictive analytics to industrial process companies. And experienced a series of very specific, very negative events that have impacted obviously, our valuation I think we do have a call. We generally do. I can't guarantee that. We're We are very active in this situation. What I would say is we have all hands on deck in an effort to improve the outlook of our investment. And And lastly, what I'd say is the current risk profile of our investments are reflected in the value of our debt and equity investments. We are but we're very active here and and I think I'll just leave it at that Mickey.

Okay. A couple of more sort of housekeeping questions. I'm a little confused about the Health Use and MedShurn distributions. Are those going to be booked as income or as realized gains? And have those distributions already been accrued into the value of those investments?

Sure. It's a great question. Shelby, you want to take that one? Please?

Sure. Those are going to be booked as return of capital and realized gains and the Q4 value the have been reflected in the fair value. The only distinction there and why we're calling it [indiscernible] [indiscernible] while we still legally own the security and the company winds down, it will continue to stay on our schedule of investments. But effectively, the company was sold and we're recognizing a realized gain here in Q1.

Okay. Thanks for that Shelby. And lastly, Ed, your balance sheet is not very highly levered compared to most BDCs. Can you update us on where your target balance sheet leverage is in the current market environment?

Sure. Great question. What we've said for quite a while, Mickey, is we're probably one to one leverage is the target leverage.

We obviously are comfortable where we are as well and feel like we can perform at these levels. But as we move forward, I think I think debt will probably be a majority of our growth capital, but at the same time, we do have an ATM program that is in place and I think we'll probably use that from time to time when we see that we're growing. Last quarter, we didn't see a lot of growth. And we did not use the ATM program. So hopefully that gives you a sense of how we'll do things as we move forward. But I think it's a balanced approach is the way we like to talk about it and think about it. But clearly, we have some room to add debt to the balance sheet for growth purposes and and that will be part of the equation for sure.

I understand. That's it for me this morning. Thanks for taking my questions.

Absolutely. Good talking to you, Maggie. Likewise.

The next question comes from Sean Paul Adams with Raymond James. Please go ahead. Hey, guys. Good morning.

Good morning.

You guys You guys talked a little bit about last quarter about pockets of softness when you in regards to like consumer discretionary purchases and how that would relate to manufacturing and industrial companies? And if you fast forward a little bit into the quarter, we're now at a point where we're looking at potential impacts for tariffs and import goods, what are your general thoughts when you're looking over the specific exposures within your portfolio? Over the next couple of quarters?

Great question. Obviously, the is a lot there. I think from a pockets of softness just going back to last quarter and fourth quarter, Clearly, broadly speaking, there are areas in the consumer market that are softer right The manufacturing industrial market has been softer as I think we talked about last quarter. But overall, it was a solid economic quarter. It was a solid quarter for our portfolio companies. I think we had 38 of our with regard to our debt investments, 38 of our portfolio 24 had declines Overall, we had kind of a 2% growth and that's LTM quarter over quarter. So it's a healthy healthy level of growth. So the portfolio is performing quite well from an operating and financial perspective. Obviously, the last month or so is created some uncertainties that a lot of folks weren't expecting. But and then you add tariffs and you add any if you have exposure to government contracts, what does that mean? And we have taken a look at our portfolio Do we have some exposure where companies could be impacted at margin level, if you will. Costs going up, how you're going to deal with them. The answer to that is yes.

But what I would say is it's not significant. It's nothing where we have alarm bells going off and we're highly concerned about it. Our expectation is if costs go up, most of our portfolio companies have pricing power and they will use that either in surcharges or actual price increases. [indiscernible] overall, we don't expect any huge changes in terms of portfolio [indiscernible] And I think it's our portfolio is very well positioned to weather the storm.

Got it. Perfect. Thank you. And in regards to I guess, adding additional portfolios sorry, additional companies to the portfolio, have you guys changed any methodology in the specific sectors that you're looking to add over the next 4.25.

For our core lower middle market. And that's a very reasonable level. There's a fair bit of cushion with that level. Interest coverage is high for the portfolio. We intend on trying to maintain both of those characteristics and probably most importantly is our enterprise value cushion. So our loan to values I think this quarter were 41% So almost 60% equity in the capital structures that we're currently invested in. That same thought process is kind of what we intend to employ as we we move forward. Hopefully that's helpful. Got it. Very helpful. Thank you. I appreciate it.

Absolutely. Good talking to you.

Seeing no additional questions, this concludes our question and answer session. I would like turn the conference back over to Ed Ross for any additional closing remarks.

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

The conference has now concluded. You may now disconnect. [indiscernible]