Fidus Investment Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the 5th and 3rd Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the 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 today, Ms. Joey Berkman. Thank you. Please go ahead.

Thank you, Jimmy, and good morning, everyone, and thank you for joining us for FIDUS Investment Corporation's third quarter 2020 earnings conference call. With me this morning are Ed Ross, FIDUS Investment Corporation's chairman and chief executive officer, and Shelby Sherrod, chief financial officer. FIDUS 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 sbus.com. I'd like to remind everyone today that this call is being recorded. A replay of today's call can be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived website 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 by this investment corporation. Local management believes these statements are reasonable based on estimates, assumptions, and projections as of today, October 30, 2020. These statements are not guaranteed for 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, including but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission. BIDIS 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, Jodi, and good morning, everyone. Welcome to our third quarter 2020 earnings conference call. I hope all of you, your families, friends, and coworkers are staying healthy and well. Since our first quarter earnings call, when the shelter-in-place orders related to the pandemic began to weigh on our portfolio company's business operations, I have focused my prepared remarks on the state of our portfolio. As uncertainties associated with the pandemic and the economy are still with us, on this morning's call, I'm going to once again open with a status report on our portfolio. I'll also share you my assessment of M&A trends in the lower middle market and deal activity levels as we move into the home stretch of 2020. Shelby will cover the third quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. Since the pandemic hit us in the United States towards the end of the first quarter, management teams at our portfolio companies have done a great job overall of adapting their businesses to the new normal, executing plans to ensure business continuity, flexing the current demand dynamics, and focusing on what they can control. Some of them are focusing on enhancing business operations, while others are taking advantage of competitive openings to accelerate growth plans. Although we are not out of the woods yet, our portfolio companies continue to hold their own. I'm pleased to report that the overall health of the portfolio continues to improve. Our assessment of portfolio risk based on company operations and valuations has steadily abated since the first quarter. when we considered a little more than 80 percent of the portfolio to be in the low to medium risk range, to the second quarter when our view was that about 88 percent of the portfolio was in the low to medium risk range and about 65 percent in the low risk category. Now our view is that 93 percent is in the low to medium risk range with roughly 70 percent in the low risk category. We do still have the debt investment in Accent Food Service on non-accrual, and we wrote down the fair value of this investment by about two-thirds to $5.3 million during the quarter. This portfolio company has been hard hit by the adverse effects of the pandemic. Mirage Trailers is back on accrual status. As a result, we ended the quarter with a non-accrual balance of less than 1% of our portfolio on a fair value basis. This represents an improvement from the end of the first quarter when we had three portfolio companies on non-accrual and one on PIC non-accrual equal to 6.7 percent of the portfolio on a fair value basis. In spite of the write-down of Accent Foods, NAV increased $13.4 million to $389.6 million or $15.94 per share at the end of the third quarter. a 3.6 percent increase from $376.2 million, or $15.39 per share, at the end of the second quarter. As improved performance and outlooks of some of our portfolio companies merited appreciation in the valuations of our debt and equity investments. As you can see, our strategy of selectively investing in companies with defensive characteristics is working for us. Companies with resilient business models that can withstand economic stresses and generate strong free cash flows that operate in industries we know well and that possess positive long-term outlooks. In terms of our portfolio construction and metrics, the fair market value of our investment portfolio as of September 30, 2020, was $715.4 million, equal to 99.9 percent of cost. We ended the quarter with 63 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 September 30th was as follows. First lien debt, 18.3%. Second lien debt, 49.2%. And subordinated debt, 20.1%. And equity investments, 12.4%. We continue to believe our portfolio is well-structured with strong equity cushions to handle severe economic stresses. Turning to our results for the quarter, we reported adjusted net investment income, which we define as net investment income excluding any capital gain incentive fee attributable to realized and unrealized gains and losses of $9.7 million, or 40 cents per share. compared to $8.7 million or 35 cents per share for the same period last year. On September 25th, 2020, FIDUS paid a regular quarterly dividend of 30 cents per share to stockholders of record as of September 11th. On October 26th, 2020, the Board of Directors declared a regular quarterly dividend of 30 cents per share And I'm pleased to report the Board also declared a supplemental cash dividend of 4 cents per share, extending FIDUS's record of paying special dividends to eight consecutive years. Both the regular quarterly dividend and the supplemental cash dividend will be payable on December 18th, 2020, to stockholders of record as of December 4th. In terms of repayments and realizations, we received proceeds of $33.8 million and recognized $1.3 million in net realized gains. In terms of exits, we received payment in full of $7.3 million, including prepayment penalty on first lien debt in Hunuit, LLC. 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 and realized a gain of approximately $1.4 million on our equity investment. And we received payment in full of $10.6 million, including a prepayment penalty on second lien debt and SpendMen LLC. Subsequent to quarter end, we exited Pew Lubricants LLC, receiving payment in full of $26.6 million including a prepayment penalty on our second lien debt investment and realized a gain of approximately $.5 million on the sale of our equity investment. We invested $6 million in second lien debt and $1.5 million in equity in a leading regional distributor of pool equipment and supplies. The debt investment was a partial funding of a $12 million note commitment. After hitting the pause button on deal activity during the second quarter out of an abundance of caution, we began evaluating opportunities again last July while adhering to our strict underlying disciplines. There is fertile ground for M&A in the lower middle market among companies which have not been meaningfully impacted by the pandemic, and we are seeing a fair number of high-quality businesses in the market today. Based on the improving health of our portfolio and the strength of our balance sheet, we're well positioned to participate in this busy season of deal activity. This supports our view that we are staying on the path of continued improvement in the health of our portfolio. While having a fairly robust pipeline is encouraging as we head toward the end of the year, we are nevertheless continuing to operate with an abundance of caution in managing the business for the long term. focused on generating attractive risk-adjusted returns and preserving capital in the interests of our shareholders. Now, I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?

Thank you, Ed, and good morning, everyone. I'll review our third quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter, Q2 2020. Total investment income was $21.1 million for the three months ended September 30, 2020, a $0.7 million increase from Q2 due to a $0.2 million increase in fee income and a $0.5 million increase in dividend income, primarily due to net tax true-ups for prior year distributions as on the 2019 K-1, several portfolio companies reported higher distributions of earnings and profits versus prior estimates of return of capital. PIC income, as a percentage of interest income, was approximately 6.2% for the three months ended September 30th. Total expenses, including income tax provision, were $14.2 million for the third quarter, approximately $3 million higher than the prior quarter, primarily due to the capital gains incentive fee accrual related to unrealized depreciation in the fair value in Q3. A $.7 million increase in income incentive fee was offset by a $.7 million decrease in G&A expenses in Q3. In Q2, we elected to waive 20% of the income incentive fee. The one-time fee waiver was approximately $.4 million. Excluding the accrued capital gains incentive fee, total expenses in Q3 were $11.4 million in line with Q2. As a reminder, expenses will be higher in the fourth quarter as we will incur annual estimated excise tax expense. As of September 30th, the weighted average interest rate on our outstanding debt was 4.6%. We had 352.3 million of debt outstanding comprised of 147 million of SBA debentures, 182.3 million of public notes, and 23 million outstanding on the line of credit. Our debt to equity ratio was 0.9 times or 0.5 times statutory leverage excluding exempt SBA debentures. In Q3, the net gain on investments was driven by 12.7 million of unrealized depreciation and approximately 1.3 million of realized gains from the exit of our equity investment in Merant and microbiology research associates. Net investment income or NII for the three months ended September 30th was 28 cents per share versus 38 cents per share in Q2. Adjusted NAI, which excludes any capital gains and tenancy accruals or reversals attributable to realized and unrealized gains and losses on investments, was 40 cents per share in Q3 versus 37 cents per share in Q2. Now turning to portfolio statistics. As of September 30th, our total investment portfolio had a fair value of $715.4 million. Our average portfolio company on a cost basis was $11.3 million at the end of the third quarter. which excludes investments in three portfolio companies that sold their operations or are in the process of winding down. We have equity investments in approximately 89.4% of our portfolio companies with a weighted average fully diluted equity ownership of 6%. Weighted average effective yield on debt investments was 12.1% as of September 30th. The weighted average yield is computed using the 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 September 30th, our liquidity and capital resources included cash of 24.7 million, 77 million of availability on our line of credit, resulting in total liquidity of approximately 101.7 million. Taking into account subsequent events, we have total liquidity of approximately 121.6 million. We also have access to 161.5 million of additional SBA debentures under our third SBIC license, subject to SBA regulatory requirements and approval. Now I will turn the call back to Ed for concluding comments. Ed?

Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at FIDUS for their dedication and hard work. and our shareholders for their continued support. I will now turn the call over to Jimmy for Q&A. Jimmy?

Thank you. As a reminder, to ask your question, you will need to press star then 1 on your touchtone telephone. To withdraw your question from the queue, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Bryce Rowe with Nation Security. Your line is now open.

Thanks. Good morning, Ed and Shelby. Good morning, Bryce. First, I just wanted to talk about the distributions and future distributions. We talked about this last quarter, and it continues to be a first-class problem to have that you're over-earning the 30-cent dividend level from a regular dividend perspective, and then you're apparently going into the end of the year with more than a dollar per share of spillover income having already hit your distribution requirements for this year. So just curious how you and the Board are kind of thinking about distributions at this point, and is there any creative thought process in terms of getting credit for the amount of spillover that you're carrying at this point?

Great question, Bryce. And as you can imagine, there was a lot of discussion on this topic at the board meeting this week. You know, and I think, you know, all of us, and you would agree, there's still a lot of uncertainty in the world today, especially when you add the saucy election to the mix. And that's, from our perspective, making quick decisions does not seem like the right thing to do at the moment. We are thrilled with the performance and our overall outlook, quite frankly, of FIDUS. We are also thrilled to be making a supplemental distribution, which is in direct correlation to our performance. Nevertheless, as we sit here today, we think operating with a fair bit of caution is the overall right approach until uncertainty in the world and the U.S. abates a bit more. However, we are planning to look closely at our dividend distributions next quarter as well, which would include looking closely at the base dividend and or making incremental supplemental dividends or considering it at least. Hopefully that's helpful. We do like, from a spillover perspective, I think just given the world today, we like having a healthy spillover position. We think that's a positive for shareholders. I think we like our position today, but we're trying to continue to operate with a fair bit of caution. Shelby, did you add anything to that?

No, I think that sums it up pretty well. We are actively monitoring the spillover position and talking about the dividend policy on a quarterly basis.

Got it. Okay. And then maybe one follow-up that's unrelated. Just, you know, Ed, obviously you paused your origination activity, you know, with the emergence of COVID and the pipeline has been reopened, so to speak. Maybe you could talk about at least the deals that you're evaluating right now. How does pricing compare on those deals you're evaluating to, you know, kind of the current yield within the portfolio right now?

Sure, sure. Great question. And, you know, I think it's probably worth just touching on the market and originations as well, just because they all kind of go hand in hand. I think the market, from our perspective, took three or four months off completely, and we've talked about that on this call, I think, last quarter. Um, you know, things started to pick up in, um, in July. Uh, and quite frankly, we started to look at some, uh, some opportunity there. Um, you know, I will tell you, we proposed on some deals that ultimately would have been Q3 deals and we, we, we were not the winners. Uh, there were others that were more aggressive than us, uh, to your pricing point. Um, you know, having said that, I will tell you, you know, in August, it was very, very busy. Um, And post-Labor Day, you know, it was expected to get busier, and it did. So deal flow has been very strong. And I would say pricing is a little above where, you know, things were pre-COVID. So that's still the same as 90 days ago. But, you know, at the same time, there's a fair bit of competition out there. So, you know, good news is we are – We're very busy, though we're still operating with an abundance of caution. We feel good about it. There's a lot of companies out there that have weathered this storm well or actually just not been meaningfully impacted by them, and we're seeing a fair bit of those in the market today. Great. Thank you, Ed.

I'll jump out and let somebody else ask some questions. Appreciate it. All right. Nice talking to you, Bryce. You too, Ed. Thanks.

Thank you. Our next question comes from Robert Dahl with Raymond James. Your line is now open.

Morning. At the risk of just repeating Bryce's questions, I'm going to do pretty much that. On the dividend front, what, obviously, I mean, I think you illustrated back in Q1, right? Eight of nine, eight of 10 COVID scenarios, you could cover a 30 cent base. And as you said, there's still a ton of uncertainty and things going on right now. So what, when Shelby, you mentioned, you know, it's always under consideration, and Ed, you talked about supplementals. What's been the consideration given to keeping the base, say, where it is, but having a formulaic supplemental which has been quite popular with some other BDCs periodically. So even if COVID and the general economic situation does deteriorate materially again, that base that you illustrated was coverable even in some pretty onerous situations just stays there. But having a formulaic rather than just kind of leaving it up to the board every quarter, What's the thought process? Has that been considered? Is that something that could get more weight than maybe just taking up the base given things are still very uncertain right now? Sure, sure.

Great question. I would tell you that that is on the table as an option and was discussed this quarter and discussed pretty seriously. I think, you know, back to the comments, it's just we're in a funny world today, you know, and there's still with the election and everything else, there's just, you know, there's just uncertainty that we think it makes sense to obviously distribute some incremental earnings because we're performing well. And next quarter, and I tried to signal this in our prepared remarks, that we are considering a variety of things, and all those are on the table. It could be a formula. It could be just putting some incremental distributions on a quarterly basis for a year or so, or it could be looking at the base dividend. And so, we like this decision this quarter, just given where we are. in the world. But, you know, all of those are going to be on the table again, you know, when we report for fourth quarter and, or even prior to that, I guess we'll announce the dividend in February. So that will, they will all be discussion topics for us. So hopefully that's helpful. We're excited that we have, we can talk about this and that's the thought process. You know, having said that, look, there's a lot of uncertainty out there and we're, we're trying to, behave in a very responsible manner that we think is the right thing for shareholders at the moment.

I appreciate that, Kyle. And if I can, the second one also, basically a follow-up to that. On the deals that you're now seeing in the market, you say, you know, activity is up materially since Labor Day. Is there a change in either the type of deals that you are seeing coming or the type of deals, and by that I mean, you know, industry leverage, however, you know, that, that kind of, um, those kinds of metrics, uh, uh, the type of deals that you're more seriously willing to consider and how has that evolved from where say, say it would have been in, you know, this time last year before COVID.

Sure. Great, great question. I, um, you know, I'd say that there's two buckets that we're, we're seeing today. We are seeing some, you know, call it, uh, larger lower middle market businesses where you know very high quality high quality recurring revenue bases and those those are the ones where we're considering you know more of second lien or junior debt investments feel great about the equity cushions and obviously their performance even in a covert environment so thankfully there's a there's a there's a number of those And, you know, I would say the other ones that we're seeing quite a bit of are, you know, some more Unitrox-type investments. Fit the same thing, recurring revenue businesses, but maybe a little smaller. And in those cases, we are focused more on first lien investments. But that is similar to a year ago, probably different than three or four years ago, where we were doing more just junior capital investments. still doing senior debt three or four years ago, but it's much more of a focus today. We're finding good success providing those solutions, and our clients are welcoming those solutions as well. So, I would say a large majority of what we will be doing for the foreseeable future, you know, will most likely be more first lien or unit tranche investments. And so hopefully, that's helpful. But that's kind of how we're approaching the market today.

It is very, very much I mean, you know, kind of follow up to that as well. I mean, you mentioned, you know, you bid on some deals, essentially for Q3 closes, but got beat out with by by aggressive pricing. Is that environment that pricing environment continuing to be I would presume it is, given what's gone on everywhere else in the lending markets. And if that's the case, I mean, is that pricing in the range that you're willing to meet going forward? Or are you holding the line on pricing and risking being essentially not closing deals? Not necessarily a bad thing, but because the market is more aggressive than you're willing to go. Can you give us any color there? Sure.

Great question. You know, what I would say is the market was, in certain instances, I wouldn't say the market. There were a couple lenders out there that were more aggressive than we were willing to be in the July-August time period. I would say we are meeting the market today, and the market, you know, as I mentioned, I think, you know, when I was answering Bryce's question, I think the pricing is you know, in line or a little above where it was pre-COVID. So we're still getting enhanced pricing to a small degree today. We're willing to go there for the right assets, but the right assets is the key point. And I will tell you back to you, we are very busy right now. There's a lot going on. And we would expect, quite frankly, at this point, and don't hold me to this, that you know, our originations would outpace our repayments this quarter. So we're busy at the moment executing, hopefully, the close, but executing a number of deals.

I really appreciate that, Colin. One more if I can, and I know you don't like to touch on individual portfolio companies, but Accent Foods, obviously, I mean, we know what it does, right? I mean, it's food at businesses for break rooms and things like that, and there's a lot of people not in the office right now. So it was a troubled asset pre COVID. And then people working from home obviously doesn't help. Um, can you give us anything you can say on on the prospects for that business given it had its its issues before and then it seems vulnerable, obviously, to COVID? Is that I mean, you know, it's, you know, what can what can you tell us about the prospects for you know, a recovery on, on that business?

Yeah. Great question. Here's what I would say. I'd say, you know, any company that operates in this industry and you hit this, but I'm going to say it, it has been impacted by the shelter in place and quite frankly, the work from home directives. And so that's, The fact of the matter. Management's doing a very nice job to a great job of navigating the ship and positioning the business for the future. Having said that, the valuation and the valuation decline reflects the increased risk profile of our investments as we sit here today. And I think that probably sums it up pretty good. Okay.

I appreciate that. Thank you.

Yep. Nice talking to you, Robert.

Thank you. Our next question comes from Chris Katowski with Oppenheimer. Your line is now open.

Yeah, good morning and thank you. I heard loud and clear what you said about the need to be cautious, but I'm just curious. I mean, to the extent that there are supplemental distributions or returns of capital because you're out-earning, I know that in an accounting sense it's not fungible, but in capital is fungible. And I guess I'm just wondering, does it ever make sense to consider those supplemental distributions in the form of share repurchases rather than dividends? Because just somehow at, you know, your stock is trading at 62% of NAV and it's just at some point the the economics of returning capital via share buyback versus cash dividends, it just gets very, very compelling.

Sure. Great question, Chris. You know, as I think you're aware, we have a $5 million share repurchase program in place that was reaffirmed this week. We are mindful that the value of our investment portfolio may not always be reflected in our stock price. And for that reason, we continue to look for ways to enhance shareholder value. And in fact, we did buy back shares in March at the beginning of the pandemic. So we have done that and we've done it other times as well. But Having said all that, when evaluating buying back stock, I think it's also worth highlighting that we need to look at the whole picture. In today's world, liquidity is a half-to-half in my mind. We've got to look at our capitalization, our covenants, our leverage ratios, and you want to have access to the capital markets, which we believe we have, and maintain those. So all those things make sense. you know, are part of the equation as we look at share repurchases. But clearly we've done it in the past, and it's something that we talk about as well. So hopefully that's helpful. Yeah.

Again, I mean, I wasn't talking about, you know, incremental capital that you wouldn't distribute anyway. It's just I was thinking, you know, consider the form.

Sure, sure.

Great bang for the buck for this.

All right, that's it for me. Thank you. Okay, good talking to you, Chris.

Thank you. Our next question comes from Mickey Schlein with Lattenburg. Your line is now open.

Good morning, Ed and Shelby. A lot of good questions have already been asked, but I did want to circle back to the market environment, Ed, and I appreciate your comment that you're hopeful to have net portfolio growth this quarter. My question is, you know, we're starting to see a trend with respect to the third quarter across BDCs where repayments are fairly elevated as they were with you. My sense is that, you know, we're sort of living in a world of haves and have-nots, and you mentioned that in your comments so far, where, you know, good performers have access to capital. There's tons of capital out there chasing, you know, good deals, including you. Um, so, so, you know, prepayment risk is, is meaningful, but at the same time, you know, underwriting is hard apart from maybe the software sector. And, and I'm trying to reconcile, you know, how those two things meet, uh, in terms of your ability to grow the portfolio, you know, this coming quarter or, or going into next year.

Sure. Sure. I think, I guess I'd start with, I think your comments are all correct. I think, um, High-quality assets are in high demand. If they're mature, sponsors are looking to recycle capital, for lack of a better word, or create some realizations. And so I think that's all real. And we are aware, for instance, that there's two portfolio companies that we have that you know, are in the middle of sale processes and don't know if they'll come to fruition or not, but there's a decent chance they do. And so I think they'll continue to be repayments and realizations, including incremental ones this quarter would be my guess. Having said that, you know, as I have mentioned earlier, is I think deal flow is very strong. And we are, you know, seeing a fair number of businesses that we're highly interested in. And, you know, this is, so we're, you know, we're busy on the new investment side, to say the least, and excited about that. And so I think, you know, we'll be able to continue to invest from our perspective in this environment. I do think diligence processes are taking longer. You know, that's one reason for, you know, some, you know, nothing happening in the third quarter. But also, you know, we got beat on some things because we were more aggressive on pricing, and that didn't win the day. But today, you know, there's, as I sit here today, there's a fair bit of activity. And, you know, and that's obviously welcome from our perspective because there's a lot of high-quality activity today.

To add in the lower middle market where you have portfolio companies that may be owned by a family, a sole proprietor, or a small group, I got to believe those folks are sitting here today thinking about next week's election and the potential for tax rates to change starting next year, depending on the outcome of the election. Do you think that that's catalyzing deal flow into the fourth quarter? that potentially would have otherwise taken longer? I'm talking about stuff that's already in the pipeline. Obviously, you can't start a process now, but essentially what I'm asking is the prospect of a higher capital gains tax rate in the future going to push some deal flow into this quarter.

Sure. I think that's part of the equation, to answer it in a very short manner. I think it's very much part of the equation. You know, I think it will extend over into Q1 as well, but to probably a little bit less of a degree. But, yes, that's part of the equation for sure.

I appreciate that. Ed, was there any trend at Mirage Trailer that we should be aware of that, you know, may be something you're seeing in other portfolio companies that allow you to put that back on full accrual?

I guess the two points I'd make is the company was impacted in a meaningful way by shelter-in-place orders. That definitely hurt the business for a while. Having said that, we are seeing in a lot of portfolio companies And in the manufacturing sector, you know, a lot of companies that are coming back, you know, to pretty reasonable levels of activity. And so it fits in that mold of businesses weathering the storm nicely. And that's what I would say from that perspective. But when you have a company, which we had, you know, a handful that were effectively shut down due to orders, you You know, that impacts things for a while, and getting back up and running takes some time, and it really depends on in-market demand and other things, and you've got to figure out what you have. And I think we've had a fair bit of time to figure out what we have in our portfolio, as well as, you know, Mirage fits in that category as well.

And on the flip side, Ed, you put Evelyn's back on accrual previously, but its valuation declined. Is there something there, you know, that we should also understand or think about in terms of general trends as we look into the next quarter and going into the first half of next year?

I mean, we have three retailers. All three of them were shut down, and I'm including our gym operator in that three number. You know, all three of them were shut down completely. All three are now back up and running. And, you know, what I would say is that, you know, they're weathering the storm to the best of their ability, but the risk profile of that situation is reflected in the valuation. And so it's, you know, everyone's come back at varying degrees of probability to varying degrees of success, right? And so I just would say the risk profile is reflected in the valuation. It's back up and running, but there are risks, and that's what's highlighted.

And the valuation, is that just a sort of trailing 12-month phenomenon, or was there something specific there we should know about?

I don't think there's anything specific you should know about it. When we're doing valuations, we look at everything. We pay attention to forward-looking. We pay attention to LTM and current quarters. We're looking at the whole picture, trying to do the best we can, and we're obviously using third parties as well. That's the... The combination of all those things is how the board gets there, you know, from a valuation perspective.

Okay. Just a couple more, if I may. What accounted for the dividend or what drove the dividend from fiber materials? And is that sort of a non-recurring item or, you know, is the company maturing and, you know, we can expect more, you know, dividends in the near future from them?

Sure. Shelby, you want to take that?

Sure, I'd probably kind of characterize that more as one time. And again, that had more to do with tax true-ups once we received the 2019 K-1s here in 2020 and we filed our tax return. As it turned out, that was a distribution of earnings and profits and so therefore income, so we just had to reclass it as it was previously characterized as a return of capital. But I would not kind of assume that going forward in part just because we also exited.

I understand. Thanks, Shelby. And my last question, which I sort of ask, I think, most quarters, can you just give us a sense of where your average borrower EBITDA is today and the portfolio's average debt to EBITDA?

Sure. So I'm trying to get the page here. So from an EBITDA perspective, the mean EBITDA is $17.8 million, and the median is $10.6 million. And what was your other question? I'm sorry. Leverage is 4.2 times this quarter. So there's an improvement. What we saw in the overall portfolio is growth in EBITDA, mid-single-digit growth, and that's LTM from 630 to LTM at 930. And so we saw some improvement there, and obviously there's cash flow associated with that as well.

That's great. Those are all my questions. I appreciate your patience and your time. Thank you.

Thank you. Good talking to you, Mickey.

Likewise.

Thank you. And as a reminder, to ask a question, you will need to press star then one on your touch-tone telephone. To withdraw your question from the queue, please press the pound key. Our next question comes from Mike Smith with B. Reilly Securities. Your line is now open.

Hey, everyone. Thanks for taking my questions. Most have been answered, but just a question on the unrealized appreciation. I'm just wondering how much of that was driven by spread tightening and, you know, equity market comps compared to actual, you know, underlying company operating performance. And then as a follow-up to that, is there any idea of what percentage of unrealized losses you've recovered so far from 1Q? Thank you.

Sure. So, I'll give a little bit higher level answer on the valuation piece. I think a majority of the valuation improvements came from improvements in performance. I would also say that spread tightening was part of the equation as well. So, that's how I think about it. Shelby, I don't know Do you want to augment my answer there?

No, I think that's right. It's due to all of the above, but there was a fair amount of just underlying polio performance and or, you know, future expectations that was part of the equation, so it wasn't really all due to calibration by any means.

And the other question, Mike? Thank you. The other question you had?

The other question was... you know, any idea what percentage of the unrealized loss you've recovered so far from 1Q? I'm just wondering how much more upside, you know, there could be here.

Unrealized loss. It's a tough question to answer. I think overall, I mean, this quarter, absent Accent, so Accent has been a drag for us, obviously, over the last several quarters. But this quarter alone, we had almost $25 million of appreciation loss if you excluded Accent. I think the business is performing nicely overall. I think NAV dropped about $20 million lower than this, or I guess it was closer to $15 million in Q1. We're making some progress back towards a higher NAV number, and that's driven by portfolio performance and whatnot. But having said that, Accent has been a drag on that whole equation.

Yeah, and just to add to that, in Q1, the debt portfolio was about 95.4% fair value as a percentage of cost. It's about 94% now, but again, Accent, just given its larger size, kind of impacts those numbers.

That's very helpful. Thank you for taking my questions, and congrats on a strong quarter. Thank you, Mike. Appreciate it.

Thank you. And our next question comes from Bryce Rowe with Nation Securities. Your line is now open.

Hey, guys. Sorry to belabor the call here. Just a couple follow-ups. Number one, Ed, you talked about two companies currently in a potential sale process. Do those two include the subsequent event That was included in the queue, or are they excluding that pew looper can exit?

Excluding. They're incremental to the pew. Okay.

And then second question, maybe for you, Shelby. It looks like you prepaid some of the higher cost SBA debentures here this quarter. I'm curious if, you know, as you evaluate, newer deals in the pipeline. I know that it's been harder to find SBA eligible deals over the recent past. I'm just curious if some of the activity in the pipeline would be SBIC eligible.

So Bryce, you're correct. We did prepay about $9.5 million of the ventures at our second SBIC fund, just given some excess cash we were sitting on. and the timing was good to get that done before the September 1st window. We do have some cash at the SBICs now, but to your point, I would expect us to be able to deploy that here in Q4 through investment activity. And then as we kind of look forward, I would expect us to start ramping up the third SBIC fund, and then as we get repayments from the second fund, maybe we use those to start winding that fund down over a long period of time. But we should have some SBIC activity in the fourth quarter.

Okay, that's great. Great to hear. Thanks, Bryce. Thank you.

Thank you. And our next question comes from Mickey Schlein with Leidenberg. Your line is now open.

Yeah, Shelby, just a follow-up on the excise tax accrual that you mentioned. How should we think about the excise tax on net capital gains for this fiscal year, given you know, how many moving pieces there are, the differences between tax and GAAP.

Sure. To be honest, that's going to be a tough one for you guys to model. And quite frankly, you know, we're given estimates on a quarterly basis, but particularly from a realizations point of view, anything that happens in the fourth quarter will obviously impact taxable income projections. So for modeling purposes, probably what I would suggest is just kind of taking a look at our spillover position today. and just kind of assuming excise tax, given that our spillover position, we're kind of going into the rest of the year a little bit higher than in the past. I would expect us to have higher excise tax than we have in the past, so probably to the tune of four or five cents. And again, that's barring, you know, any material realizations one way or the other in Q4.

Okay, that's helpful. Thank you for that.

Thank you, and our next question comes from, pardon my interruption. If you'd like to ask a question, please press star then one on your touch-tone telephone. To withdraw your question from the queue, please press the pound key. We'll take a moment to see if there are any further questions in the queue. I'm showing no further questions in the queue at this time. I'd like to turn the call back to Ed Ross, CEO, for any closing remarks.

Thank you, Jimmy, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our fourth quarter call in late February 2021. Have a great day and a great weekend.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.