Fidus Investment Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the FIDA's second quarter 2020 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker for today, Jody Burfening. You may begin.

Jody Burfening Thank you, Wanda, and good morning, everyone. Thank you for joining us for FIDUS Investment Corporation's Second Quarter 2020 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. Bydus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the investor relations page of the company's website at scus.com. I'd like to remind everyone that today's call is being recorded. A replay is available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived webcast replay will be available on the investor relations page of the company's website following the conclusion of this conference call. I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of FIDUS Investment Corporation. While the management believes these statements are reasonable based on estimates, assumptions, projections, as of today, August 7, 2020, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties, and other factors included, but not limited to the factors set forth in the company's filings with its Securities and Exchange Commission. by this 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, and good morning, everyone. Welcome to our second quarter 2020 earnings call. I hope all of you and your loved ones are doing well. Given that the pandemic continues to create uncertainties around the timing, pace, Thank you for joining us. We'll be happy to take your questions. When we held our first quarter earnings call 90 days ago, we did not know how long or how deep a COVID-19 induced pause in economic activity would last, nor what the path of an economic recovery would look like. Our portfolio companies have prepared plans to ensure business continuity and to manage through supply and demand challenges. We had structured our portfolio to handle severe economic stresses, and we believed that our investing strategy and our underwriting discipline would help us weather the storm. Nevertheless, we knew the portfolio contained elevated levels of risk and we proceeded with a great deal of caution, working closely with the senior management teams and sponsors of our portfolio companies. I'm pleased to report our portfolio companies haven't been thrown a curveball, are for the most part holding their own. Since last May, the overall risk levels of the portfolio have improved. From a liquidity perspective, our portfolio companies are doing better than expected and are currently well positioned for the remainder of the year. They are paying their interest without stretching their cash flows, and their resilient business models and capital structures are providing them with bulwarks against the storm. Overall, our portfolio companies are finding their way through the crisis, adjusting their business operations, conserving cash, cutting costs, and maintaining spending discipline, even as their circumstances may differ due to the patchwork of rules and regulations and the varying degrees of economic activity. After shelter-in-place restrictions were lifted, some of these companies reopened to find a less competitive environment. Others reopened to find softened demand. These latter companies are working hard to find their way back to pre-pandemic levels of business. A few of our portfolio companies have identified pockets of opportunity because of the pandemic, while others are using this period of reduced activity to focus on improving business efficiencies and profitability. In addition, in terms of non-accruals, we ended the second quarter in an improved position relative to last quarter, When, as you may recall, we had proactively placed two portfolio companies on non-accrual, even though they ultimately made their interest payments. Since then, our initial concerns about those two companies, Eblen's and Virginia Tile Company, have not been realized, and we have removed them from non-accrual status. Debt Investments and Accent Food Services remain on non-accrual, and Mirage Trailers remains on PIC non-accrual. As a result, we ended the quarter with non-accruals in aggregate of $21.4 million, 2.9% of our portfolio on a fair value basis. With the exception of one non-accrual, our assessment of portfolio risk across the board based on the company operations and valuations has improved materially since last quarter. At that time, our view was that a little more than 80% of the portfolio on a fair value basis was in the low to medium risk range. Today, our view is that about 88% of the portfolio is in the low to medium risk range, and about 68% is in the low risk category. Given the stability of our portfolio, even in the face of tough economic conditions, we reported adjusted net investment income, which we define as net investment income excluding any capital gains incentive fee attributable to realized and unrealized gains and losses of $9 million, or 37 cents per share, compared to $8.4 million, or 34 cents per share, for the same period last year, and $8.5 million, or 35 cents per share, for the first quarter of 2020. After writing down the fair value of our portfolio last quarter by approximately 5.7% in response to elevated risk in the economy, our net asset value held steady and we ended with the second quarter with a net asset value of $15.39 per share compared to $15.37 per share as of March 31st, 2020. On June 26th, and the Board of Directors. During the quarter, we invested $16.9 million in debt and equity securities. Nearly all of which was for two new portfolio companies. These were $12.5 million in subordinated debt and common equity in ECM Industries, LLC, a global manufacturer and supplier of electrical products through a wide range of premium brands, and $2.5 million in first lien debt in iProtech, LLC, a provider of end-to-end e-discovery and information governance software, to top law firms, corporations, and specialty service providers. Both of these deals were in our pipeline before the pandemic hit the US. The remaining $1.9 million was for add-on investments in four portfolio companies. Although we hit the pause button on deal activity during the second quarter, out of an abundance of caution, we have since reopened channels and are carefully evaluating select opportunities. We intend to take a conservative approach to origination with a view towards protecting our capital and our balance sheets. In terms of repayments and realizations, we received proceeds of $2.5 million from 13 portfolio companies and recognized $0.2 million in net realized gains. Subsequent to quarter end, we received payment in full of $7.3 million on first lien debt, including a prepayment penalty in connection with the exit of Who Knew It, LLC. And we exited our debt and equity investments in Microbiology Research Associates, Inc. We received payment in full of $9 million on our subordinated debt investment. We exited our common equity investment for a realized gain of approximately $1.4 million. Turning to our portfolio construction and metrics, the fair market value of our investment portfolio as of June 30th, 2020 was $732.6 million, equal to 98.2% of cost. We ended the quarter with 64 active portfolio companies and three companies that have sold their underlying operations. On a fair value basis, the breakdown of the portfolio by investment type as of June 30th was as follows. First lien debt, 19.1%. Second lien debt, 50%. And subordinated debt, 20.7%. And equity investments, 10.2%. We believe our portfolio is well structured with strong equity cushions to withstand negative events like the pandemic. From an industry perspective, our portfolio of high quality, lower middle market companies remains well diversified. with oil and gas related businesses accounting for 4.3% and a little more than 3% in retail unchanged from last quarter. The portfolio companies that serve retail and leisure in markets are currently performing despite the fact that they were shut down 90 days ago. We do not have any direct exposure to the restaurant or hospitality sectors other than one equity investment with a fair value of less than $300,000. Overall, our strategy of selectively investing in companies with defensive characteristics, resilient business models that can withstand economic stresses and generate strong free cash flows, and that possess strong long-term outlooks continues to work for us. We believe that our portfolio companies will be able to navigate uncharted territory in their long-term outlooks remain positive. At the same time, our priorities for managing the business during the extraordinary challenging time has not changed. We are staying the course, continuing to operate with an abundance of caution, focused on maintaining liquidity in order to support our portfolio companies as needed, protecting our balance sheet, and preserving capital in the long-term interests of our shareholders. Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?