Ed McGregor - IR Edward Ross - CEO Shelby Sherard - CFO.

Robert Dodd - Raymond James Ryan Lynch - Keefe, Bruyette & Woods, Inc..

Good day, ladies and gentlemen, and welcome to Fidus Investment Corporation Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be provided at that time. [Operator instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference Ed McGregor of LHA.

Sir?.

Thank you, James, and good morning, everyone. Thanking you for joining us for Fidus Investment Corporation's third quarter 2017 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.

Fidus Investment Corporation issued a press release yesterday afternoon, with details of the Company's quarterly financial results. A copy of the press release is available in the Investor Relations page of the Company's website at fdus.com. I'd like to remind everyone that today's call is being recorded.

A replay of today's call will be 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 at fdus.com 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 in the earnings release.

The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of Fidus Investment Corporation.

Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, November 3, 2017, 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 the risks, uncertainties, and other factors including, but not limited to the factors set forth in the Company's filings with the SEC. Fidus undertakes no obligation to update or revise any of these forward-looking statements. With that, I would like to turn the call over to Ed Ross.

Ed?.

As previously disclosed, we exited our investment in Anatrace Product LLC, and received payment in full of $6.5 million on our debt investment. We received $3 million on our equity investment in EbLens related to the sale of the company resulting in a realized gain of $2.2 million.

Additionally, in Q3, we received payment in full of $21.2 million on our debt investments and received $4 million from the sale of our equity investments in Lightning Diversion Systems LLC, resulting in a realized gain of $4 million.

We received payment in full of $16.7 million on our debt investments in Rohr [ph] Corporation; we received payment in full of $7.3 million on our debt investments in FAR Research, Inc., and we received partial payment of $6.3 million on our debt investments in SES Investors LLC doing business of SES Foam.

As reported in our third quarter press release, subsequent to quarter end we exited our debt and equity investment in Brook & Whittle Limited. We received payment in full on our subordinated notes, and sold our equity for a realized gain of approximately $1 million.

The fair market value of our investment portfolio at September 30, 2017 was approximately $560.9 million equal to approximately 104% of cost. We ended the quarter with debt and equity investments in 58 active portfolio companies.

The breakdown on a fair value basis between the debt and equity remains fairly stable with 83% in debt and 17% in equity investments providing us with high levels of current and recurring income from our debt investments and continued opportunity to realize capital gains from our equity related investments.

In terms of portfolio performance, we tracked several quality measures on a quarterly basis to help us monitor the overall stability, quality and performance of our investment portfolio. In the third quarter, these metrics remained strong and in line with prior periods.

First, we track the portfolio's weighted average investment rating, based on our internal system. Under our methodology a rating of 1 is outperform, and a rating of 5 is an expected loss. As of September 30, the weighted average investment rating for the portfolio was 2 on a fair value basis in line with prior periods.

Another metric, we track is the credit performance of the portfolio, which is measured by our portfolio company's combined ratio of total net debt to Fidus' debt investments to total EBITDA. For the third quarter this ratio was 3.6 times compared to 3.1 times for the same quarter last year.

The third measure we track is the combined ratio of our portfolio company's total EBITDA to total cash interest expense which is indicative of the cushion our portfolio companies have in aggregate to meet their debt service obligations to us. In the third quarter, this metric was 3.7 times compared to 3.8 times for the same quarter last year.

The soundness of these metrics reflects our philosophy of maintaining significant cushions to our borrower’s enterprise value in support of our capital preservations and income goals. As of September 30, one of our investments Restaurant Finance Co, LLC remains on non-accrual status.

As we look to the final quarter of 2017, we see a relatively healthy market environment for us at this point supported by an economy that is currently exhibiting stability and slow growth. M&A fundamentals continue to be sound; competitions remain robust in all the debt markets, in particular in the broader markets.

And overall activity remains healthy including some deals that hopefully will fall our way towards the end of the quarter. As we evaluate investment opportunities, we will continue to adhere to our underwriting disciplines investing in companies that have meaningful defensive characteristics, high free cash flow and positive long-term outlooks.

As always, we rely on our time tested core strengths including our relationships, our industry knowledge and our ability to offer flexible capital solutions.

We continue to invest and manage the business for the long-term with the goal of growing in a deliberate manner and further diversifying our investment portfolio while maintaining an acute focus on generating attractive risk adjusted returns and capital preservation.

Now I'll turn the call over to Shelby to provide some details on our financial 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, 2017.

Q3 results exceeded our expectations with new investments slightly outpacing repayments and higher than anticipated fee and dividend income. Total investment income was $18 million for the three months ended September 30, 2017, a $0.7 million increase over Q2 2017.

Interest income increased by $1.1 million, primarily related to more assets under management which was offset by $0.2 million decrease in fee income and a $0.2 million decrease in dividend income as compared to second quarter. Total expenses including income tax provision were $8.8 million for the third quarter, versus $8.3 million in Q2.

A $0.5 million increase primarily related to accrued capital gains fees. Interest expense increased by $0.1 million, base management and income incentive fees increase by a total of roughly $0.2 million and accrued capital gains incentive fees increase by $0.4 million, while G&A expenses decreased by $0.2 million.

Interest expense includes the interest paid on Fidus' SBA debentures and line of credit as well as any commitment fees. As of September 30, 2017, the weighted average interest rate on our outstanding debt was 3.6% versus 3.7% in Q2. As of September 30, we had $216.3 million of debt outstanding.

The third quarter is generally a lighter quarter for routine G&A expenses. In the fourth quarter we will incur annual excise tax expense. Net investment income or NII for the three months ended September 30, 2017 was $9.2 million or $0.38 per share versus $0.39 per share in Q2, 2017. Adjusted NII was $0.40 per share in Q3 in line with Q2.

Adjusted NII is defined as net investment income excluding any capital gains incentive fees expense or reversal attributable to realized and unrealized gains and losses on investments.

A reconciliation of NII to adjusted NII can be found on our earnings press release that was issued yesterday afternoon and is also posted on the Investor Relations page of our website.

For the three months ended September 30, 2017 Fidus had $6.3 million of net realized gains primarily related to the exit of our equity investment in EbLens and Lightning Diversion Systems. Our net asset value at September 30, 2017 was $15.97 per share which reflects payment of the $0.39 per share regular dividend in September.

Turning now to portfolio statistics. As of September 30th, our total investment portfolio had a fair value of $560.9 million. Consistent with our debt oriented investment strategy our portfolio on a cost basis was comprised of approximately 83% subordinated debt, 6% senior secured loans and 11% equity securities.

Our average portfolio company investment on a cost basis was $9.3 million at the end of the third quarter, which excludes five investments in portfolio companies that [Indiscernible] operations are in the process of winding down.

We have equity investment in approximately 87.3% of our portfolio companies with an average fully diluted equity ownership of 6.8%. Weighted average effective yield on debt investments was 13.3% as of September 30.

The weighted average yield is computed using the effective interest rates for debt investment at costs including the accretion of original issue discounts and loan origination fees, but excluding investments on non-accrual, if any. Now, I'd like to briefly discuss our available liquidity.

As we discussed on our last earnings call, in Q3 we use excess cash at Fidus Mezzanine Capital or FMC our first SBIC fund to pay down approximately $17 million of SBA debentures with interest rates ranging from 5.3% to 6.4% and maturity dates ranging from September of 2018 to March 2019.

As of September 30, our liquidity and capital resources included cash of $46.9 million, unfunded SBA commitments of $42 million and $50 million of availability on our line of credit resulting in total liquidity of $138.9 million. Approximately $25.9 million of cash was held in FMC, which is in the process of landing down.

Now I will turn the call back to Ed for concluding comments.

Ed?.

Thanks, Shelby. As always, I would like to thank our team and our Board of Directors at Fidus for their dedication and hard work and our shareholders for their continued support. I will now turn the call back to James for Q&A..

Thank you. [Operator Instructions] Our first question comes from Robert Dodd with Raymond James. Your line is open..

Hi guys.

I’ll do the easy ones first, I think on the NII and the excise tax which obviously does negatively impact NII based on your spill over at the end of, estimated spillover at the end of the Q3 you had 4% excise tax I presume you're looking at about 400, if nothing else changes in Q4 which is - about 480,000 in excise tax in Q4 which would obviously lower NII in the ballpark?.

It's actually going to be I'd say probably little bit lower than that in part just because we're going to get a [re-front] [ph] from our 2016 returns so I think of it in terms of kind of maybe $0.01 per share..

Okay, got it. Thank you.

Then just in general obviously early repayment activity total exits in early repayments were very high in Q3 and that's very, very hard to predict, tend to happen late - it didn't look like [Indiscernible] haven't so far in Q4, but can you give us any color what you think of the environment and obviously it's pretty competitive out there in terms of being able to refinance.

So, what do you think of the environment in terms of how that high level that's been going on for a while, may continue or what could trigger it to moderate obviously, it can be volatile quarter-to-quarter, but it's been pretty elevated?.

Sure, well good morning Robert. It's a great question. I did want to clarify one thing if I heard you correctly, we did - we have had one realization this quarter already and that would be Brook & Whittle, so that's one repayment as of at this point in time. What I would say is the M&A market in my mind continues to be quite healthy.

It's not overly robust and I think it's in absolute number of deals I think it's down a little bit relative to 2016 and 2015, but it's still a healthy market when you think about it from the fundamentals of stability in the economy, the outlook is for continued stability at least the near-term outlook, there's plenty of equity capital, there's plenty of debt capital and so it's you're thinking about selling a company then you probably going to do it in this market.

So that's a positive from our perspective. What we're doing - and competition is robust, and so we are continuing to execute in the manner we have in the past. We're trying to be as patient and then when we find the right deals we're trying to go after those and execute them.

So, our investment amounts on a quarterly basis are going to continue to vary. So, when I look at originations as I sit here today, we are very busy today, both with portfolio companies as well as new investment opportunities.

It's unclear how much activity will ultimately come from that activity but or how much investment activity will come out of it but we're hopeful that the second half of the quarter will have some real investment activity.

We do expect some additional repayments, but if I were a betting man I would think this quarter just based on what I see today this could change very easily. We would have more investment activity on the new investment side than we would from a repayments perspective. But it continues to be what I'd say a healthy and active market.

Hopefully that's helpful..

Yeah, that is helpful.

In terms of the - you are seeing opportunities et cetera and the fact that nothing's closed so far which is an actually unusual I mean things tend to happen late in the quarter but could you - what are you seeing on - it's kind of two different parts I'll ask them separately, what are you seeing on terms when I see your net debt-to-EBITDA went up to 3.6 versus 3.1 a year ago, but a lot of things have moved that but obviously your cash interest coverage was basically flat, right.

So, everything looks very robust on one side, there's a little increase on the other, is that mix, is that new investments that are being done at slightly higher attachment points, which could be a size thing, could be an industry thing? Can you give us any color on that?.

Sure. It's going to be general statements, Robert.

But what I would say is we have strategically we're still doing the smaller EBITDA portfolio company investments, but we are trying to increase the number of what I would say larger EBITDA business at least within our strike zone which is again $3 million to $20 million and so, we try - we have strategically at least internally tried to focus on some larger companies meaning greater than 10 in EBITDA and we’ve had some success, and usually with that comes some higher leverage and attachment points.

And then we did support one company that we have - it's a larger investment with some acquisition capital, they used more debt than they did equity and as a result, the leverage went up there as well.

So, we've - hopefully that gives you some color but that that's what’s going on, it’s really a mix issue but some of it’s a strategic initiative that we're at least internally that we're exercising..

Understood, understood, thank you.

And then the other question on potential implications for timing of are you hearing anything in the market regarding tax reform or anything like that about whether people may sit on their hands wait and see what happens maybe close late this year, if something does happen, if not wait until next year, is that having any effect in the market right now?.

So, to be sure I would say no, I think what we are seeing right now is decisions made by companies probably late this summer to put themselves up for sale. And those M&A processes are kind of come into fruition in hopefully by year-end.

I do think there is clearly hope that the tax reform is helpful to those sellers, but I don't think it's impacting the margin in a material way at this point..

I appreciate it. And good quarter. That's all..

Thank you. Good talking to you Robert..

Thank you. [Operator Instructions] We do have a question coming in from Ryan Lynch with KBW. Your line is open..

Good morning. Thank you for taking my questions..

Good morning, Ryan..

Good morning.

When I look at your historical leverage you guys run at, if I look at kind of the 2015 to 2016 range you guys are running at a much higher level around 0.8 times debt to equity, now over the last twelve months, you guys are running at around 0.5 to 0.6 and within that time period there are a couple of equity raises that lower that debt to equity, so just on a go forward basis what is your target equity - debt to equity range you guys think is kind of optimal to run to the BDC?.

Great question, Ryan. What I would say is we're just from a comport perspective, we're comfortable going one-to-one because of the large majority of our debt is SBIC which is treated as equity for regulatory purposes, but I would say that's not the target. The target is more in 0.7 to 0.8 range long-term.

We have made some obviously equity raises and that was done for a variety of reasons but to help facilitate the particular just t the transition out of FMC one as we pay that down and move to other financing sources including hopefully FMC three. So, [Indiscernible] SBIC fund. So, I would say 0.7 to 0.8 would be a target for us..

So, one thing I would add and Ed alluded to it is we are in the process of winding down FMC. And so, what that practically means is as we get repayments in that SBIC fund, unfortunately I’m sitting idle cash for some period of time up to six months.

And so as I mentioned I'm currently sitting on about $26 million of idle cash at FMC, some of which I could upstream to the holding company but the majority of which I'll need to use to repay down debentures by the end of February of next year. Little [Indiscernible] in terms of cash management..

That makes sense.

One other things that we had always heard is that one of the benefits of being in the lower middle market is you are investing in smaller companies can inherently, not always, but can inherently have some additional risks versus larger companies but the benefits of that are there is lower leverage on these companies, typically higher coupons, better terms and not covenant light structures.

With the competition that we're seeing definitely in the middle market and certainly the upper middle market, we have heard that covenant light packages are getting pressed further and further down to lower and lower EBITDA levels.

Are you guys seeing any increase in deal flow with covenant light packages or other terms you don't like maybe kind of ridiculous EBITDA add-backs or anything like that?.

Great question, Ryan. What I would say as a true covenant light package, we only have one portfolio company that has that. It was a company that we had grown with since 2007, so we stayed invested in it, now very, very large EBITDA outside of our typical range.

In terms of the bigger companies that we are pursuing within our target range, ones that maybe are going for very high valuations, call it over 10 times EBITDA because of the growth outlooks and the corporate cash flow characteristics.

In those cases, you do see just tougher terms, but we still - it's not covenant light and we still have covenants, it’s just people are pushing you on covenants a little bit in terms of how deep and before they actually have event of default, that kind of thing.

But that's on the larger very highly valued situations where people are pushing the envelope for the most part. That's how I see it..

Okay, that makes sense. That's all for me. Thank you for taking my questions..

Great. Good talking to you, Ryan..

Thank you. We do have a follow-up from Robert Dodd. Your line is open..

Thanks. Yeah, just basically following up in relation to Ryan's question.

How much total is left in the first SBIC, is the September 20, the last pool that's in that one that will eventually obviously there is a 14.75 million for February and then there is couple others, is that September 20, so where is the cut off in this, I am looking on the queue on page 29, right there is a - if you could tell us where the cut-off is for the first one and that gives us an idea how much left [Indiscernible] to do within that one versus the others?.

So, if I understand your question, we currently have about $108.3 million of debentures outstanding in the first bond that we will need to pay down, so we have fully borrowed our capacity and we are just now in the wind down mode of paying down that 108 as we receive repayment.

And on the second bond, we have the capacity to borrow an additional $42 million..

Okay, got it. Thank you..

Thank you. I am showing no further question in queue. So, I will turn the conference back over to Mr. Ross..

Thank you, James, and thank you everyone for joining us this morning. We look forward to speaking with you on our fourth quarter call in early March of 2018. Have a great day and a great weekend..

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day..