Fidus Investment (FDUS) Update: Credit Issues & NAV Decline

The following is from the FDUS Deep Dive that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).


For Q2 2019, Fidus Investment (FDUS) reported just above its worst-case projections only covering 88% of its dividend due to lower interest and fee income as shown in the following table. The lower interest income and NAV per share were due to its non-accrual investment in Oaktree Medical Centre (discussed later).

Edward Ross, Chairman and CEO: “With M&A activity picking up in the quarter, we continued to selectively build our portfolio of debt and equity investments in high quality lower middle market companies. Of the $48 million in originations we closed this quarter, $42.9 million was invested in new portfolio companies. However, the impact of a non-accrual investment weighed on adjusted net investment income for the quarter. We wrote-off this investment as we continue to proactively manage the portfolio. Our portfolio remains healthy overall and we continue to see opportunities to monetize several of our mature equity investments.”

On July 29, 2019, the Board declared a regular quarterly dividend of $0.39 per share payable on September 20, 2019, to stockholders of record as of September 6, 2019. I will reassess dividend coverage in the updated Deep Dive report.

During Q2 2019, NAV per share declined by 1.6% or $0.26 (from $16.55 to $16.29) due to its non-accrual investment in Oaktree Medical Centre being completely written off resulting in almost $11 million in unrealized losses or $0.45 per share. Management discussed Oaktree on the previous call:

“On Oaktree real quickly, business has been in the portfolio for a while. It’s a pain management business and also a toxicology testing business. The company has experienced some stress over the years, due primarily to a drop in reimbursement rate risk for several services, but incrementally and more recently, by certain unexpected exogenous events and so, company has been making some sound progress here recently. But the unexpected events that have taken place with regard to this investment has required us to be very active in this situation and obviously the valuation reflects the current risk profile of those investments.”

As of June 30, 2019, FDUS had debt investments in two portfolio companies on non-accrual status, which had an aggregate cost and fair value of $29.5 million and $6.2 million, respectively. However, Oaktree has been completely written down and will result in realized losses of $13.4 million or $0.55 per share in Q3 2019.

Edward Ross, Chairman and CEO: “Through diligent investment selection and an emphasis on quality over quantity, we remain focused on capital preservation and generating attractive risk adjusted returns, and on our primary goals of growing net asset value over time and delivering stable dividends to our shareholders.”

On July 19, 2019, FDUS exited its debt investment in Pinnergy, Ltd. and received payment in full of $4.0 million on our second lien debt. On July 31, 2019, FDUS invested $21.5 million in an additional subordinated debt investment in Allied 100 Group, Inc., an existing portfolio company. As of June 30, 2019, the company has estimated spillover income or taxable income in excess of distributions of $0.67 per share (previously $0.73 per share) and management is expecting additional realizations in 2019:

From previous call: “We do see an opportunity for some realizations this year. It doesn’t mean it’s going to be very near term, but there are more than a couple of situations of being worked on and we’re hopeful that some of the equity is realized. It is a strategic focus of ours. We recognize as we sit here today, it’s a nice problem to having, given the equity portfolio is performing very well, but monetizing it or to the extent we have the ability to, it makes a lot of sense in certain situations. And so we plan to do what we can to help monetize some of the investments.”

As of June 30, 2019, FDUS had $22 million in cash and cash equivalents and $71 million of unused capacity under its senior secured revolving credit facility and $25 million of unfunded SBA commitments. As mentioned in the previous report, on April 17, 2019, FDUS announced that had received its third SBIC license to borrow up to $175 million in additional SBA debentures for a maximum of $350 million excluded from debt for purposes of BDC asset coverage requirements. On April 24, 2019, the company amended its Credit Facility increasing the total commitments from $90 million to $100 million, extended from June 16, 2019 to April 24, 2023, and the pricing was reduced from LIBOR plus 3.50% to LIBOR plus 3.00%. The amendment also includes an expansion of the accordion feature to $250 million.

From previous call: “Since our last earnings call, we have achieved a significant milestone with the receipt of our third SBIC license, which gives us access of up to $175 million in long term debt capital and we have also completed an amendment to our senior credit facility, which increases the commitment from $90 million to $100 million, expands the accordion feature to $250 million and extends the maturity date to April 2023.”

On February 8, 2019, FDUS closed its offering of $60 million of 6.00% notes due 2024, and subsequently, the underwriters exercised their option to purchase an additional $9 million listed on the NASDAQ under the trading symbol “FDUSZ” and included in the BDC Google Sheets along with “FDUSL”.

From previous call: “We completed a public debt offering of $69 million in aggregate principal of 6% notes due 2024, raising net proceeds of approximately $66.5 million, including the exercise of the over allotment option. As of March 31, our liquidity and capital resources included cash of $26.2 million and $90 million of availability on our line of credit, resulting in total liquidity of $116.2 million.”

This information was previously made available to subscribers of Premium BDC Reports, along with:

  • FDUS target prices and buying points
  • FDUS risk profile, potential credit issues, and overall rankings
  • FDUS dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.