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spk03: Ladies and gentlemen, thank you for standing by and welcome to the FIDUS Q4 2022 Earnings Conference Call. I would now like to turn the call over to Jody Berfanin, LHA Investor Relations. Please go ahead.
spk01: Thank you, Mandeep, and good morning, everyone. And thank you for joining us for FIDUS Investment Corporation's fourth quarter 2022 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. Vitus 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 FDUS.com. 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 Vitus Investment Corporation. Although management believes these statements are reasonable based on expectations as of today, March 3, 2023, 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 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. FIDUS 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.
spk09: Good morning, Jody, and good morning, everyone. Welcome to our fourth quarter 2022 earnings conference call. On today's call, I'll start with a review of our fourth quarter performance and our portfolio at quarter end, and then discuss our views on market conditions in the lower middle market in 2023. Shelby will cover the fourth quarter financial results in our liquidity position. After we have completed our prepared remarks, we'd be happy to take your questions. There's no question that the credit environment was tougher in the fourth quarter than a year ago, as deal activity continued to slow down. Nevertheless, from an originations perspective, we had a healthy quarter, once again demonstrating our industry expertise, strong relationships with deal sponsors, and ability to provide customized and flexible financing solutions that differentiate us in the lower middle market. At the same time, we kept our focus on quality over quantity, finding opportunities to selectively invest in high-quality companies that operate in industries we know well, generate cash flow to service debt, and possess resilient business models and positive long-term outlooks. 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, was $12.6 million, or 51 cents per share, compared to $12 million, or 49 cents per share, last year. Interest income grew due to both a larger investment portfolio and higher debt yields, resulting in an increase in adjusted NII year over year. For the fourth quarter, we paid dividends totaling 61 cents per share and ended the year with net asset value of $480.3 million or $19.43 per share. As mentioned on last quarter's call, our dividend policy for 2023 approved by the board included a base dividend restored to 39 cents per share, a supplemental dividend, and a special cash dividend of 10 cents per quarter. The supplemental dividend will continue to be based on our formula of applying 100% of the excess adjusted NII over the prior quarter's base dividend. We're distributing a special cash dividend of 10 cents per share to bring our spillover income in line with our target level over the course of the year. As a result, all else being equal, that asset value will drop by 10 cents per quarter each quarter in 2023. Recently, the Board increased the base dividend for the second consecutive quarter to 41 cents per share in recognition of the improved earnings power of the portfolio. In addition to the higher base dividend for the first quarter of 2023, The Board of Directors has declared a supplemental dividend of 15 cents per share and a special cash dividend of 10 cents per share for a total cash dividend of 66 cents per share. First quarter dividends will be payable on March 29th, 2023 to stockholders of record as of March 22nd, 2023. In terms of originations for the quarter, we invested $65.9 million, adding to our portfolio of debt securities that generate recurring interest income while continuing to invest in equity securities, which provide us with a margin of safety and the opportunity to generate incremental profits. Debt investments in Q4 were fairly evenly spread among first lien, second lien, and subordinated debt. Nearly two-thirds, or $41.8 million, of the total amount of originations was invested in four new portfolio companies. In addition, we continue to support our existing portfolio companies with add-on investments. In terms of repayments and realizations in the fourth quarter, we received proceeds totaling $65.7 million, including $56 million of first lien debt repayment. Repayments were essentially equal to originations for the quarter, and the fair value of the portfolio at quarter end was $860.3 million, equal to 103.8% of cost. We ended the fourth quarter with 76 active portfolio companies and two companies that have sold their underlying operations. Subsequent to year-end, we invested $40.2 million in debt and equity securities and three new portfolio companies. Over the course of 2022, the total portfolio mix on a fair value basis continued to shift in favor of debt investments on an absolute basis and as a percent of the total, reflecting our success in redeploying the proceeds from equity monetizations. Debt investments increased from $549.8 million, or 77% of the total as of December 31st, 2021, to $740.5 million, or 86% of the total as of December 31st, 2022. First lien debt as a percentage of debt investments was approximately 62% at year end. Equity investments as a percentage of the total portfolio on a cost basis was 7.3% within the boundary of our target allocation of 10%. From a credit quality perspective, overall our portfolio is in pretty good shape. The issues our portfolio companies are contending with, higher labor and energy costs, material cost inflation, and supply chain challenges are not new, and the playbooks they have developed are enabling them to perform reasonably well. There are exceptions, of course, as you would expect for a portfolio of our size, but even those situations are manageable from our perspective, especially given the structure of our portfolio. During the quarter, we placed one additional company on non-accrual. As of December 31st, non-accruals as a percentage of the total portfolio on a fair value basis was approximately 1.2%. Looking back on 2022, what stands out is our success in building our debt portfolio after experiencing high levels of repayments and realizations in 2021 and late 2020. During that period of exceptionally robust M&A and investment activity, our portfolio structure, combining debt investments that produce recurring income and equity investments that can generate incremental capital gains, has served us well. We have monetized $195 million of equity investments since the beginning of 2020. In 2022, we enlarged our debt portfolio on a cost basis by $210.3 million, or 38%. We have also increased the size of our variable rate debt portfolio on a fair value basis by 39%. from $376 million as of December 31st, 2021 to $522.9 million as of December 31st, 2022. As a result, we entered 2023 with approximately 71% of the debt portfolio comprised of floating rate debt. At the same time, the yields on our debt investments expanded 190 basis points over the last nine months, to 13.8% as of December 31st, 2022, reflecting higher rates and the benefits of our balance sheet in a widening spread environment. Combination of putting equity proceeds to work, investing in income-producing assets, and higher yields has significantly enhanced the earnings power of our portfolio. As a result, we believe our portfolio remains positioned to generate adjusted NII well in excess of base dividends and to grow net asset value over the long term. Even though deal activity is currently slower than it was a year ago, we continue to find attractive investment opportunities. 2023, regardless of macroeconomic conditions, whether we have a recession or a soft landing, Our experience of investing through past cycles and strict underwriting standards position us to further build the portfolio and drive adjusted NII growth. As we continue to grow our portfolio, we will stay focused on our long-term goals of preserving capital and generating attractive risk-adjusted returns for our shareholders. Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?
spk02: 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 the prior quarter, Q3 2022. Total investment income was $27.5 million for the three months ended December 31st. A $2.5 million increase from Q3, primarily due to a $2.8 million increase in interest income, including PIC, and a $0.5 million increase in interest income on excess cash partially offset by a $0.4 million decrease in fee income and a $0.4 million decrease in dividend income. The increase in interest income was driven by an increase in average debt investment balances outstanding, as well as an increase in the yield on our debt investments, given increase in interest rates on variable rate loans. Total expenses, including income tax provision, were $15 million for the fourth quarter, $2.7 million higher than Q3, driven primarily by a $1.4 million increase in income taxes related to the annual excise tax accrual, a $.6 million increase in professional fees related to the ATM program and timing of 2022 audit and tax compliance billings, a $.4 million increase in the capital gains fee accrual, and a $0.2 million increase in interest expense related to incremental SBA debentures outstanding. We ended the quarter with $419.9 million of debt outstanding comprised of $153 million of SBA debentures, $250 million of unsecured notes, and $16.9 million of secured borrowings. Our debt-to-equity ratio as of December 31st was 0.9 times or 0.6 times statutory leverage excluding exempt SBA debentures. The weighted average interest rate on our outstanding debt was 4% as of December 31st, 2022. Net investment income, or NII, for the three months ended December 31st was $0.51 per share versus $0.52 per share in Q3. Adjusted NII, which excludes any capital gains, incentive accruals, or reversals attributable to realized and unrealized gains and losses on investments, was $0.51 per share in Q4 in line with Q3. For the three months into December 31st, we recognized approximately 0.4 million of net realized gains related to the sale of our equity investments in Midwest Transit Equipment and Ohio Medical Corporation, offset by partial losses on the exit of our debt investments in Ziva and former investment in Hilco Plastics Holdings. As Ed mentioned, in 2022, we paid total cash dividends of $2 per share. In addition, we declared a deemed distribution of $1.65 per share for shareholders of record as of December 31, 2022. When a company designates a deemed distribution instead of a cash distribution paid to common stockholders, the company pays U.S. federal income tax at corporate rates, currently 21%, on the retained net long-term capital gains on behalf of common stockholders. In turn, common stockholders are deemed to have received a capital gain dividend and are deemed to have paid the tax that is actually paid by the company as a result common stockholders receive a tax credit that they can use to offset their US federal income tax on the deemed distribution or for other purposes including claiming a refund as appropriate common stockholders also increase their adjusted tax bases in their shares of the company by the amount of the deemed distribution net of the US federal income taxes paid by the company and deemed paid by the stockholder. The tax effect is the same as if the capital gains had been distributed to the company's common stockholders in cash, who then elected to reinvest their proceeds net of the tax paid by the company, i.e. 79% of the amount received after the 21% tax is applied. The total 2022 deemed distribution was approximately 40.8 million. After taxes of 8.6 million, we retained approximately 32.2 million of liquidity, which can be used to reinvest in new debt and equity securities. Turning now to portfolio statistics as of December 31st, our total investment portfolio had fair value of 860.3 million. Our average portfolio company investment on a cost basis was 10.9 million, which excludes investments in two portfolio companies that sold their operations during the process of winding down. We have equity investments in approximately 74.4% of our portfolio companies with an average fully diluted equity ownership of 4%. Weighted average effective yield on debt investments was 13.8% as of December versus 12.9% at September 30th. 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 31st, our liquidity and capital resources included cash of $62.4 million, $17 million of available SBA debentures, and $100 million of availability on our line of credit. resulting in total liquidity of approximately 179.3 million. Taking into account our subsequent events, we have approximately 141.6 million of liquidity remaining. Now I will turn the call back to Ed for concluding comments.
spk09: 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 Mandeep. for Q&A. Mandeep?
spk03: The floor is now open for your questions. To ask your questions this time, please press star 1 on your telephone keypad. At any point, if you'd like to withdraw from the queue, please press star 1 again. We will now take a moment to render our roster. Our first question comes from the line of Bryce Rowe from B. Riley. Please proceed.
spk04: Thanks a lot. Good morning.
spk09: Good morning, Bryce.
spk04: Maybe I'll start, Ed, just around pipeline and kind of market dynamic at this point. It looks like you've already had a fairly active first quarter through the beginning of March. and was hoping you might be able to kind of give us some visibility into what the pipeline looks like and what you're thinking about from an origination perspective for 23. Sure.
spk09: Yeah, as you know, it's been interesting. I think Q4 was maybe a low point just in terms of activity in the industry. And quite frankly, January started that way as well. You know, we've seen a little bit of an uptick just in activity levels, obviously, and we also have made, you know, three meaningful investments in new portfolio companies, mostly first lien investments, almost all, along with equity co-investments. What I would say is, you know, we are busy, you know, and so it's activity is at reasonable levels. It's clearly not 2021, which was extremely robust. But the lower middle market continues to, you know, afford us, you know, real opportunities to invest. And we are staying focused on, you know, high free cash flow and more defensive growth companies. And so we feel good about growth here in 2021. As you can tell, we've had no repayments yet. At the moment, we currently expect one debt and equity realization, so the sale of one of our portfolio companies, but don't see a lot of other activity here in the real near term. So it should be a quarter where we grow the portfolio, and our hope and expectation is to probably continue to grow the portfolio in Q2 as well.
spk04: Okay. That's helpful, Ed. And, you know, as we think about kind of balance sheet leverage, obviously you've been able to build back up some net balance sheet leverage. You know, is there kind of a near-term target in terms of, you know, how you're progressing to that target? And, you know, I just want to get a feel for, you know, how to model that out, if you wouldn't mind.
spk09: Sure. Well, as you know, we've been, what I would say, under leverage for quite a while. We had a lot of cash on the balance sheet throughout 2022. And we are starting to get to a point where, you know, we'll be using the line of credit. You know, though I did mention that, you know, we will have a repayment as well. So from a leverage perspective, we have very good liquidity position, and Shelby went over that. From a leverage perspective, you know, our general target is one-to-one. Having said that, we're very comfortable at .75 all the way up to, you know, 1.25 times. So, you know, I think 110 is a good number, and I think one-to-one would be the target for us on a long-term basis.
spk04: Great. I appreciate it. I'll jump back in queue. Good quarter. Thanks.
spk09: Thank you. Thanks, Bryce. Good talking to you.
spk03: Our next question comes from the line of Robert Dodd from Raymond James. Please proceed.
spk08: Hi. Good morning. Congratulations on the quarter. First, I have to keep in mind, if I can, it looks – Shelby, can you tell us how much accelerated amortization was done in interest income this quarter? It looks – pretty healthy, like maybe 2.5 million, which obviously isn't the normal run rate. Is that about right?
spk02: I might have to look into that and get back to you. You're talking about accelerated amortization on repayments?
spk08: Yes. I mean, well, let me ask you a different one. The interest income line was obviously extremely strong, though the portfolio didn't – didn't move much quarter to quarter. So, I mean, obviously there's rates, et cetera, but it does look to me like there was some, um, uh, one time income for lack of a better term though, accelerated amortization happens every quarter, but you know, was there an, a new, an unusual contribution from anything in interest income this quarter?
spk02: Not that's coming to mind. I'll take a closer look at that and get back to you, but that's not coming to mind as being a primary driver in terms of the increase quarter over quarter. We really do have a significant increase in just the underlying rates going from 12.9% to 13.8%, so I think I would probably attribute that as a bigger driver.
spk08: Got it. Thank you.
spk09: The only thing I'd say is maybe timing of investments. We had some late in Q3 and then a few in Q4 as well. So that'd be the only other thing I can think of. I'm unaware of anything that's kind of one-off, if you will.
spk08: Got it. Got it. Thank you. On the journey prepared remarks, you mentioned that there are obviously, given the size of portfolio, there are some portfolio companies that are having some incremental problems, but you said that those are all manageable so far. Just some more color on that, because when you say manageable, is that that the sponsors have put more money in already, or is it that the companies so far have all been managing the more difficult environment just organically, internally, with cost-cutting or other initiatives?
spk09: Sure. I think it's a great question. What we're seeing from portfolio companies, I mean, first off, I think the quality of our portfolio is very high. We feel very good about its ability to withstand kind of the uncertainties of today. But what we are seeing is portfolio companies doing all of the above, raising prices, cutting costs, and doing what they need to perform. And some are doing it better than others, and that's reality. And so you look at our portfolio, we have some write-downs, but we feel good about the portfolio overall and the portfolio company's ability to manage those situations. Hopefully that's helpful.
spk08: Yeah, yeah, yeah, yeah, it is. And then just on the overall – environment. You gave a lot of color already. I mean, you've seen that there's been spread widening somewhat in the marketplace. Have you seen that start to turn yet in terms of your, you know, the activity levels are down. There's still a lot of capital. So is competition starting to squeeze spreads a little from the highs that they may have reached in Q4 maybe?
spk09: I don't know if I've seen it, you know, really tighten yet. But I will say there still is real competition out there. I think the level of competition, you know, vis-a-vis a year ago or 18 months ago is quite different. People are being, you know, less aggressive. And, you know, we all know there's more uncertainty today than there was 18 months ago. And you know, that's reflected in the pricing, the structures, quite frankly, the leverage that, you know, everyone's putting on different transactions and different portfolio companies. So, you know, but there is real competition to the point, you know, I think we have lost a couple deals over the last 30 days that, you know, we wanted to win and someone came in at a lower number, but Everyone's being, what I would say, pretty rational. I could see it tightening a little bit from here, but I don't see people getting overly aggressive at this point in time.
spk08: Got it. Thank you.
spk02: Robert, just circling back to your original question, in Q4, the accelerated OID, if you will, from repayments was only about $216,000.
spk03: Our next question comes from the line of Brian Lynch from KEW. Please proceed.
spk06: Hey, good morning. Good morning, Brian. First question I had, just following up on kind of that previous dialogue regarding competition, you know, certainly I understand that there's always, you know, competition out there. I would just be curious, there's been a big pullback in competition in, kind of the upper middle market with banks and CLOs retreating. I would just love to hear, has the level, again, you mentioned there's still competition, you know, in the markets you guys play. Has that competition pulled back significantly over the last couple quarters? Has, in some markets, capital's gotten a little more tighter, or is it been pretty consistent?
spk09: No, no, it's pulled back dramatically from call it 12 months ago. And, you know, we compete with a variety of entities, if you will. So clearly BDCs, the BDCs that have liquidity, you know, are still active. And so there's competition there. Finance companies, you know, more CLO financed, if you will, which are a major player in our market, they have become much less aggressive. I think they're, you know, a couple of the one CLO issuances aren't exactly flying off the shelves these days. And so liquidity is probably tighter. I think portfolio management is more of a focus. And so when they are playing, they're playing in a smaller way, generally speaking, you know, that group. And we've seen a pretty big pullback from banks as well. So, no, the level of competition is definitely different and less, you know, relative to a year ago. Having said all that, there's still participants that are, you know, active, and there's still competition on deals, to say the least.
spk06: Okay. Yes. That's helpful clarification. The last couple of years, you guys have had some significant realized gains in your portfolio, which is, you know, not unexpected given where interest rates were, given the amount of capital flowing around the system. You know, I see in the fourth quarter, which one quarter doesn't make a trend by any stretch, I understand that, but realized gains, you know, sort of, you know, kind of dropped off. What is your expectation for realized gains, and just the ability of companies to transact in 2023, which is, I think, going to be one of the main drivers, you know, that you could exit some of these positions. What do you think that that looks like, given where rates are today and kind of, you know, people not really wanting to refinance and do M&A to the same extent that we've seen in the past?
spk09: Sure, sure. It's a great question. From our perspective, the level of activity in 2021 was extremely robust. Obviously, we did well there. We did well late in 2020. And then also, 2022 was a great year for us from a realized capital gain perspective. This year, I would expect incremental gains. I mean, we have a... pretty mature equity portfolio. And so, you know, more than a few companies that are ripe for realization. You know, having said that, you know, there are quite a – and we don't control these situations, as you well know. And so a lot of private equity groups have been taking a wait-and-see approach and seeing, you know, what is the – you know, what's the best time to transact? And, you know, will financing markets improve, for instance? maybe create higher valuations. And so there's, you know, it's unclear exactly what level this year realizations or equity realizations will, you know, will take place. But, you know, we think it'll continue just at a more modest pace at the end of the day. Our expectation is to have one realization, you know, here in March, you know, if that deal closes, which there's a good chance of it closing. So But again, the number will be lower is our expectation, and that's in line with just overall market activity.
spk06: And then just one last question kind of regarding realizations, equity co-investments. I would assume the answer to this first part is yes, but have you seen purchase price multiples contract for new M&A deals getting done? And then kind of a subset to that question is, if purchase price multiples are tracked, it would seem like a fairly decent time to be investing equity. If that's the case, are you guys pushing harder than normal course to get equity stakes in the companies that you guys are investing in? I saw you guys made several equity co-investments in your fourth quarter, but is that more of a concerted effort for you all or is it just kind of your normal course as far as your guys' desire to get equity in these businesses?
spk09: Great question. You know, from a purchase price perspective, clearly, you know, multiples have probably come down a little bit. You know, the type of activity that we're seeing today or a large majority of it, are really high-quality businesses, high free cash flow businesses that are less impacted and less susceptible to a weakening economy. And that's where we're seeing a majority of the activity. That's where a majority of our interest is, as you well know. And in those cases, multiples are probably down a little bit, but they haven't dropped in a huge way by any stretch of the imagination. Having said all that, we think right now is a great time to invest. And so we are looking to continue to make equity co-investments. If you look at the three new transactions that we financed here in Q1 or in subsequent events, all three of those have equity co-investments. So yes, we are continuing to stick with our strategy, invest in the debt, and most of the time the equity of our portfolio companies and highly interested in continuing that approach. So I think it's a great time to invest. You've got to be careful, you know, from a debt perspective. If you think about leverage levels are lower, pricing's better, structures are good, you know, as good as you're going to find. So it's a great time to invest from our perspective.
spk06: Okay. That makes sense. I appreciate the time today.
spk09: Absolutely. Good talking to you, Ryan.
spk03: Our next question comes from the line of Mickey Schlein from Lattenburg. Please proceed.
spk07: Yes, good morning, Ed and Shelby. Hi. I wanted to ask you about some of your second liens. I'm looking at Quest and Suited Connector and particularly Vertex market. 54% of cost. You know, these are really distressed valuations. I know there's a risk-off mentality in terms of second lien, which perhaps provides you with an opportunity. But, you know, how large are your second lien companies and how levered are they? And what sort of cash interest coverage ratios do they have?
spk09: Sure. It's a great question. You know, I love our second lien and our mezzanine you know, portfolios into kind of one category. And, you know, it represents a real piece of our portfolio. First Lane's the majority. You know, those are, you know, in most cases, those are pretty large companies. I mean, you mentioned Quest. Quest is a extremely large company out of the ordinary from our perspective. So its cash interest coverage is fine today. You know, so the companies, for the most part, are larger companies. But there's a couple that have, you know, been impacted by the issues in today's world. One of them, you know, has been meaningfully impacted by supply chain issues. And it's a larger company, but, you know, at this point in time, over levered. The other thing I would say, and all the names that you mentioned are companies where there are sponsors involved, and from our perspective, they're supportive sponsors, and the expectation, one has put some capital in, and we would expect in another case for another sponsor to put capital in another company. Again, these are situations where we believe in the long-term prospects of the business, but they have been impacted in one way, shape, or form by the current environment. And in all those cases, we have financial sponsors that at the moment we expect them to continue to be supportive given these are companies with good long-term prospects. But they've been impacted, you know, for sure.
spk07: Okay, I understand. The question was more of a secondary market issue.
spk09: The secondary market got hit very, very hard in the fourth quarter in particular, and it's more of an issue with regard to that as opposed to operations. It's not operating perfectly, but it's not bad either.
spk07: I hope that's helpful. Yeah, that is helpful. Thanks. And just one other question on the balance sheet. You mentioned cash on the balance sheet, which is still quite elevated, even net of the payment for the tax liability that you made in January. I'm just curious, is that cash or is a good portion of it, you know, quote unquote trapped in the SBICs or why so much cash on this balance sheet at this time?
spk02: So the short answer is we do not have any cash that is truly trapped at the SBIC funds. We do have cash there, but we have the ability to dividend that up to the BDC at the moment. And so really kind of cash on the balance sheet at year end is just a function of kind of the flood of repayments that we've had kind of in the past and trying to put that capital back to work. We've made decent progress here in 2022. Certainly in the first quarter, kind of between the combination of the deemed distribution tax as well as the investments that we've already announced in sub-events, I would anticipate us largely utilizing any residual cash we have left on the balance sheet and getting that put back to work. So it's really just a function of timing of how long did it take to redeploy cash from repayments. But all of it is accessible for reinvestment.
spk07: With that in mind, Shelby, you had about $6 million of common share equity issuance in the fourth quarter, which obviously increased the cash balance. Do you anticipate continuing to raise common equity or just fund net investment growth from repayments and debt liabilities?
spk02: We do have an ATM program in place. It's authorized to go raise up to 50 million. Granted, it would take us some time to do, you know, kind of that level of volume given our average trading volume, but we will continue to leave the ATM program up and running as an incremental source of liquidity throughout 2023. As I mentioned, I think we'll largely deploy existing cash, and so the ATM program is a great way to continue to provide liquidity as well as tapping into incremental SBA debentures. And then, as always, we have our line of credit, currently $100 million available.
spk07: I understand. Those are all my questions this morning. I appreciate your time. Thank you.
spk09: Thank you, Mickey. Good talking to you.
spk03: Our final question comes from a line of Eric Zwick from Hoth Group. Please proceed.
spk05: Good morning. Most of my questions have been addressed, but I guess just one or two remaining here. One, just looking at the weighted average interest coverage for your portfolio at 3.8 times, it looks like it's been relatively consistent over the last 12 months or so. Relative to some of your peers who have seen that come down quite a bit, so I wondered if you could just kind of talk to the resiliency of some of your companies and their ability to continue to grow EBITDA in the face of higher interest coverage in the current environment.
spk09: Sure. I think the, you know, one of the key points is our average leverage, I think, is less than most of our peers' leverages at four times. And that's excluding just a couple of extremely large companies and kind of out of the ordinary companies that we have in our portfolio. So, you know, we feel like, and the other thing is we've obviously added some you know, pretty low leverage situations that have very high interest coverage. And then lastly, the calculation you're referencing is an LTM calculation. So when you look at the first two quarters of last year, you know, interest levels were much lower. They really started to rise in July. And so it's not the LTM numbers have not really come into the equation yet. So we would expect for interest coverage to come down some. But again, given the leverage levels that I just referenced at four times, we think that absent any significant operating issues, we think our portfolio is very well positioned as we sit here today to cover interest and other cash needs, if you will. So I think the leverage point is the key one, which really helps.
spk05: Thanks, Ed. I appreciate the color there. And then just last one for me, looking at the industry mix of the portfolio. You've got the retail at 3.9% and obviously the kind of trajectory and outcome for the economy is still out for kind of debate. We'll see where that goes, but I think there's some better things we do into recession, you know, could be a consumer led one and retail could be impacted. So I wonder if you could just provide a little detail into the types of companies you have in there in terms of the market segments, they address whether it's higher end or middle market and then how to, you know, how that could potentially be impacted if we do go into a recession.
spk09: Sure. Are you talking about retail in general or overall?
spk05: Retail, I guess just what makes up that 3.9% of that segment. I'm looking at slide 18.
spk09: Sure. So 3.9 is probably on a cost basis. You know, there's two companies that really fall in that category. You know, unfortunately, one of them is, you know, is a company called Eblen. It's been our portfolio since 2011, and it focuses on kind of the low-income consumer up in the Northeast. It's been hit by, you know, three or four things, some vendor issues. Obviously, the COVID period was difficult. And then, quite frankly, you know, Higher gas prices and then just overall inflation where we believe folks are spending money on necessities as opposed to discretionary items. All those issues have impacted that company today. Our investment securities in that company are written down actually to zero at this point. And so that is reflected on our balance sheet, and it's a company that's continuing to encounter a pretty tough, difficult operating environment from our perspective. You know, the other company is a company called EcoThrift. It's more of a, you know, in the thrift space, well-diversified and performing very well. It's growing in today's market. and generating a high level of cash. So that company is performing quite well. So I think it's a tale of two cities there. But, you know, overall we feel good about the portfolio. But, you know, you did hit on a point that I think is very real today, that certain segments of the, you know, the – The economy are tougher than others, and you hit on one of the tougher ones.
spk05: I appreciate the detail. Thanks for taking my questions today.
spk09: Absolutely. Good talking to you, Eric.
spk03: I would now like to turn the call over to Edward Roth for closing remarks.
spk09: Thank you, Mandeep, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our first quarter call in early May 2023. Have a great day and a great weekend.
spk03: Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.
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