Fidus Investment (US:FDUS)2022-11-04 21:29Financial Data and Key Metrics Changes - The portfolio generated a 27% increase in adjusted net investment income (NII), reaching $12.7 million or $0.51 per share, compared to the previous year [8][10] - Net realized gains amounted to $40 million or $1.64 per share from monetizing a significant portion of the equity portfolio [8] - The net asset value (NAV) was $474.4 million or $19.41 per share at quarter end, with a modest increase to $19.84 per share after adjusting for early dividend declaration [10][12] Business Line Data and Key Metrics Changes - Total investment income for the quarter was $25 million, a $3.8 million increase from the previous quarter, driven by higher interest income and fee income [36] - Debt investments reached $747.3 million, reflecting a successful strategy in building the debt portfolio [26] - The weighted average effective yield on debt investments increased to 12.9% from 11.9% in the previous quarter [40] Market Data and Key Metrics Changes - The fair value of the total investment portfolio reached $856.9 million, with a record level equal to 103.6% of cost [26][39] - Approximately 72% of the debt portfolio has variable rates with interest rate floors, indicating a strategic positioning in the current interest rate environment [40] Company Strategy and Development Direction - The company continues to focus on redeploying proceeds from equity realizations into income-producing assets, adhering to a strategy of investing in high-quality companies [9][34] - The Board has approved a dividend policy for 2023 that includes a base dividend, supplemental dividend, and a special cash dividend, aiming to restore the pre-COVID base dividend to $0.39 per share [17][16] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about opportunities to grow the debt portfolio despite a slowing deal activity in the lower middle market [34] - The majority of portfolio companies are performing reasonably well, although some are facing challenges due to inflation and supply chain issues [29][48] Other Important Information - The company plans to make a deemed distribution for 2022, with the amount depending on final results, to maintain a certain level of spillover income [18][61] - The company has a liquidity position of approximately $167.4 million, which includes cash and available credit [41] Q&A Session Summary Question: What might an optimized spillover level look like? - Management indicated a long-term goal to maintain a spillover level close to two to three quarters worth of dividends [43][44] Question: What metrics led to some level of depreciation in the debt portfolio? - Management noted that over 90% of portfolio companies are performing well, but some are experiencing stress due to supply chain issues and inflation [46][48] Question: How has the underwriting process changed in the current environment? - Management stated that while the environment is tougher, they are still finding good investment opportunities and are being cautious in their approach [54] Question: What are the current interest coverage levels on the portfolio? - Interest coverage levels have improved, with an average EBITDA to interest coverage calculation at 3.4 times, indicating a strong position [63][64] Question: How has the market environment changed for equity realizations? - Management noted a significant reduction in M&A activity compared to the previous year, but opportunities still exist in the fragmented lower middle market [68][71] Question: Are there more opportunities in second liens due to market dislocation? - Management confirmed they are still looking for high-quality junior debt opportunities but have not seen significant interest in second liens recently [75][76]