Earnings Call Transcript - FDUS Q4 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to the Fidus Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jody Burfening. Please go ahead.

Jody Burfening, Speaker

Thank you, Gigi, and good morning, everyone. And thank you for joining us for Fidus Investment Corporation's fourth quarter 2021 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 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 Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, March 4, 2022, these statements are not guarantees of future performance. Time sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors 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.

Ed Ross, CEO

Good morning, Jody, and good morning, everyone. Welcome to our fourth quarter 2021 earnings conference call. I'm going to open today's call with a review of our fourth quarter performance and our portfolio at quarter-end, discuss the positive outlook behind the Board's dividend decisions and then offer you an update of our views on deal activity in the lower middle market in the year ahead. Shelby will cover the fourth quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. Although the last quarter of the year is typically a busy time for us, the fourth quarter of 2021 was exceptionally busy, extending the trend of elevated velocity of M&A and refinancing activity to five consecutive quarters. As you may recall from last quarter's call, we were underinvested at the start of the fourth quarter and we expected to grow the portfolio by the end of the year. Although at the same time, some portfolio companies were evaluating strategic alternatives, what we didn't expect was that a couple of deals would come together quickly toward the end of the quarter. As a result, repayments were once again at very high levels, including a sizable level of equity realizations, and ultimately exceeded originations. Amidst this flurry of activity, we continue to execute our proven investment strategy of carefully selecting investments in high-quality, lower middle market businesses that possess resilient business models that generate excess levels of cash flow to service debt, and then have positive long-term outlooks, leveraging the breadth and depth of our relationships with deal sponsors, our industry knowledge and our differentiated perspective on financing solutions. Our portfolio performed extremely well during the fourth quarter. 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 million, or $0.49 per share compared to $10.7 million, or $0.44 per share last year. Net asset value grew to $487.8 million, or $19.96 per share, driven by a combination of strong operating performance and underlying portfolio value appreciation and was boosted by net realized gains of $42.1 million, or $1.72 per share, including $20.4 million from the sale of Mesa Line Services, LLC. Fidus paid a base quarterly dividend of $0.32 per share, a supplemental cash dividend of $0.04 per share and a special dividend of $0.05 per share for a total dividend of $0.41 per share for the fourth quarter. For the first quarter, the Board of Directors, recognizing our extremely strong performances throughout the year in the exceptionally highest level of net unrealized gains, increased the base dividend from $0.32 per share to $0.36 per share, a 12.5% increase and revised the formula to calculate the supplemental dividend each quarter, distributing a greater share of surplus income generated by our portfolio to our stockholders. Previously, the supplemental dividend was equal to 50% of the surplus in adjusted NII over the base dividend from the prior quarter. Under the revised formula, the supplemental dividend is now equal to 100% of the surplus. With the first quarter dividend, the surplus is $0.17 per share, or $0.49 per share of adjusted NII, less the fourth quarter base dividend of $0.32 per share for a total dividend of $0.53 per share this quarter. Base dividend of $0.36 per share and a supplemental dividend of $0.17 per share will be payable on March 25, 2022, to stockholders of record as of March 11. In terms of originations, we invested $101.2 million in debt and equity securities, of which $72.1 million or nearly three quarters of the total was invested in first lien debt and $25.8 million was invested in second lien debt. In terms of new portfolio companies, we invested $79 million in six of them, consisting of $18.5 million in first lien debt, revolving loans, common equity and warrants in Acendre Midco, Inc., a market-leading provider of cloud-based talent management software solutions. $8.5 million in first lien debt, subordinated debt, and common equity in Auto CRM LLC, doing business as Dealer Holdings, a leading SaaS-based provider of customer communication software to the auto repair market, $13 million in first lien debt in Green Cubes Technology, LLC, doing business as Green Cubes, a leading provider of lithium power systems for motive, mobile, and stationary power in the industrial automation, material handling, and telecom markets. $5.7 million in first lien debt in Mobilewalla, Inc., a leading provider of consumer intelligence solutions; $16.5 million in first lien debt in Netbase Solutions, Inc., doing business as Netbase Quid, a global leader in artificial intelligence-powered consumer and market intelligence; $16.8 million in second lien debt and common equity in Suited Connector LLC, a leading marketing technology platform for digital customer acquisition across most consumer verticals, including financial services, home services, and insurance. These new investments reflect our continued focus on companies that are relatively insulated from the adverse effects of the pandemic, including supply chain disruptions and margin compression due to rising material rate and labor costs. In terms of repayments and realizations in the fourth quarter, we received proceeds totaling $153.7 million, with nearly two thirds of the total from second lien and subordinated debt investments. We also successfully monetized equity investments in seven portfolio companies realizing $42.1 million of gains in Q4, having spent the time and effort on optimizing outcomes. From my perspective, this reflects well on the team's portfolio management skills and further differentiates Fidus in the market. We're patient. We're focused on the long-term and we deliver strong results for our shareholders. In terms of sales and exits, we received payment in full of $7.1 million, including a prepayment penalty on our subordinated debt in Tranzonic Companies. We received payment in full of $12.1 million, including a prepayment penalty on our second lien debt in Pool & Electrical Products. In addition, we received proceeds of $10 million and a realized gain of $9.1 million on our equity investment in Pool & Electrical Products related to the sale of the business. We received payment in full of $11.2 million on our second lien debt in B&B Roadway and Security Solutions. In addition, we received a distribution of $0.7 million and a realized gain of $0.2 million on our equity investment related to the sale of the business. We received payment in full of $30 million on our existing subordinated debt investments, enrolled $10 million into a new subordinated debt investment in BCM One Group. In addition, we received proceeds of $3.3 million and realized a gain of $2.5 million on the exit of our equity investments from the sale of our equity. We received proceeds of $7.5 million and realized a gain of $6.4 million related to the exit of our equity investment in Revenue Management Solutions. We received proceeds of 2.3 million and realized the gain of 1.8 million related to the exit of our equity investment in Alzheimer's Research and Treatment Center. We received payment in full of $13 million, including a prepayment penalty on our first lien debt investments in Specialized Elevator Services Holdings. In addition, we received proceeds of $2.3 million and realized a gain of $1.3 million related to the exit of our equity investment. We received payment in full of $13.9 million on our subordinated debt investment in UVM. In addition to these sales and exit, we closed deals on two Control investments during the quarter and I wanted to take a moment to share with you some details about them. First, Green Fiber. As you might recall, Fidus assumed control of Green Fiber in late 2019 after several difficult operating events. Throughout our ownership period, our team worked side by side with an outstanding management team. And ultimately, we facilitated a strategic transaction that merged Green Fiber with another company to create Applegate Green Fiber Intermediate, the leader in the cellulose insulation arena under new private equity sponsorship. As part of this transaction, the assets of US Green Fiber were sold and we received a new $9.6 million subordinated loan and $12.8 million of equity in Applegate Green Fiber Intermediate in consideration for 81% of second lien debt investment in US Green Fiber. As the former company winds down, any residual proceeds will go to pay down the remaining $5.2 million of US Green Fiber debt on our books. The fair value of the residual debt and equity investments in US Green Fiber is marked at zero. And we have placed this debt investment on non-accrual status. We believe this transaction positions our investments for positive outlooks while lowering our risk. Second, Mesa Line Services. As you might recall, we assumed control of Mesa Line Services in the second quarter of 2021 after several self-inflicted company events occurred. Following the ownership transition, we invested meaningful capital to shore up the company's financial position, while working hard to improve the overall operations of the business and positioning the company to be sold to a strategic buyer. As a result of our approach and portfolio management skills, the company was sold and we received payment in full of $26.5 million, including a prepayment penalty on our subordinated debt investments. In addition, we received $21.6 million distribution and realized a net gain of $20.4 million on our equity investments, reflecting the value we created. I'm very proud of the work our teams put into these control investments and the outcomes of each of them, showcasing our capabilities which are differentiated in this industry. For the repayments and realizations for the fourth quarter in perspective, over the course of 2021, we received $472.8 million from a diverse set of deals and exited 11 portfolio companies. Subsequent to the end of the quarter, we invested a total of $62.6 million in four new portfolio companies. These were; we invested $10.8 million in first lien debt and common equity of a leading provider of alternative out-of-home advertising across the convenient store and gas station, retail, truckside, and transit markets, among others. We invested $22.4 million in first lien debt and common equity of Micronics Filtration Holdings, Inc., doing business as Micronics Engineered Filtration Group, Inc., a global provider of aftermarket and OEM filtration equipment and consumables for use in mining, chemical, wastewater, and various other industrial end markets. We invested $15 million in second lien debt of Quest Software US Holdings, Inc., a global cybersecurity data intelligence, and IT operations management software provider, and we invested $14.4 million in subordinated debt, preferred equity and common equity of CIH Intermediate, LLC, a technology-based risk management firm that provides education and customized price risk management services to businesses affected by volatility in agriculture markets. We also received $13 million in repayments consisting of the following. We received payment in full of $6.7 million on our second lien debt investments in Mirage Trailers. We received a distribution on our equity investment in Frontline Food Services, LLC, formerly known as Accent Food Services, resulting in a realized gain of approximately $200,000. And we received a distribution on our equity investment in SpendMend LLC, resulting in a realized gain of approximately $6.1 million. The fair value of the portfolio at quarter end was $719.1 million equal to 115.7% of costs, reflecting the underlying performances of the portfolio of companies and appreciation in the fair value of the portfolio, offset by repayments and realizations. We ended the fourth quarter with 70 active portfolio companies and eight companies that have sold their underlying operations. While we had high levels of repayments and originations during the quarter, overall, the portfolio remains well structured to produce recurring income, and through our equity investments to provide us not only with incremental profits, but also a reasonable margin of safety. Our portfolio continues to perform well and remains well positioned from a risk perspective with the current business environment. Over the course of 2021, our investments in first lien debt nearly doubled on a fair value basis while repayments were concentrated in second lien and subordinated debt investments. As a result, first lien debt grew to approximately 65% of our debt portfolio as of December 31. In terms of the total portfolio mix on a fair value basis, debt investments comprised about 77% of the total and equity investments accounted for the remaining 23%. Looking back on 2021, it's been a period of high velocity from a deal activity perspective, and we set records in terms of originations, repayments, and net asset value. Over the past five quarters with repayments of $573.5 million exceeding originations of $450.6 million, we have seen a rotation of a large majority of our debt portfolio into new portfolio companies without sacrificing yield. While also being equal, we would have preferred to have ended the year in a net origination position. The high level of repayments is a testament to the overall health of our portfolio and to the strength and resiliency of our portfolio companies, especially in light of the pandemic, which made them attractive candidates for M&A transactions, and from a credit perspective for refinancings and recapitalizations. Looking ahead to 2022, we expect another busy year with strong deal flow, although in all likelihood, not at the velocity levels of 2021. The outlook for M&A and refinancings in the lower middle market remains strong, and some companies are planning to initiate strategic alternatives in the coming months. As a result, in 2022, we're positioned to both grow the portfolio and monetize some of our equity investments, while staying focused on our long-term goal of generating attractive risk-adjusted returns and delivering value for our stockholders. Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?

Shelby Sherard, CFO

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 2021. Total investment income was $24.1 million for the three months ended December 31, a $2.9 million increase from Q3 primarily due to a $1.9 million increase in fee income, a $0.8 million increase in dividend income and a $0.1 million increase in interest income. The increase in fee income was driven by a one-time $1.3 million management fee related to the successful exit of our investments in Mesa Line Services. Total expenses, including income tax provision, were $21.7 million for the fourth quarter, approximately $5.5 million higher than the prior quarter primarily due to a $4.9 million increase in the capital gains incentive fee accrual. Excluding the accrued capital gains incentive fees, total expenses in Q4 were $12.1 million, a $0.6 million increase versus Q3 due to the annual excise tax accrual which was $0.5 million in Q4 and a $0.2 million increase in income incentive fees. Note: the capital gains incentive fee is accrued for GAAP purposes, however, is only payable to the extent cumulative realized gains exceed realized losses and unrealized appreciation. As of December 31, 2021, we had accrued capital gains fees on the balance sheet of $29.2 million, of which $6.1 million is payable. Turning to our capitalization. In October, we successfully issued $125 million of unsecured notes at 3.5% interest rate. The net proceeds and available cash were used to pay down the outstanding balance on the line of credit of $40 million at closing and to fully redeem $82.3 million of public notes due in 2024 with interest rates ranging from 5.375% to 6%. Given the notice requirements, the bond redemptions occurred on November 2, so we had one month of incremental interest expense on the public notes in Q4. In conjunction with the bond redemptions, we realized a loss on extinguishment of debt in Q4 of $1.6 million related to the unamortized deferred financing costs on the redeemed bonds. Taking into account the debt financing, the weighted average interest rate on our outstanding debt was 3.7% as of December 31, 2021. We ended the quarter with $374.6 million of debt outstanding, comprised of $107 million of SBA debentures, $250 million of unsecured notes, and $17.6 million of secured borrowings. Our debt to equity ratio as of December 31 was 0.8x or 0.6x statutory leverage excluding exempt SBA debentures. Net investment income, or NII, for the three months ended December 31 was $0.10 per share versus $0.21 per share in Q3. Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments, was $0.49 per share in Q4 versus $0.40 per share in Q3. For the three months ended December 31, we recognized approximately $42.1 million of net realized gains, primarily from our equity investments in Mesa Line Services, Pool & Electrical Products, Revenue Management Solutions, BCM One, Alzheimer's Research and Treatment Center, and Specialized Elevator Services. Turning now to portfolio statistics. As of December 31, our total investment portfolio had a fair value of $719.1 million. Our average portfolio investment on a cost basis was $8.8 million at the end of the fourth quarter, which excludes investments in eight portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 82.1% of our portfolio companies with an average fully diluted equity ownership of 4.7%. Weighted average effective yield on debt investments was 12.3% as of December 31. 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 December 31, our liquidity and capital resources included cash of $169.4 million, $1.5 million of available SBA debentures, and $100 million of availability on our line of credit, resulting in total liquidity of approximately $270.9 million. Subsequent to year-end, we paid down $20 million of SBA debentures in our second SBIC fund and borrowed an incremental $31.5 million of SBA debentures in our third SBIC fund. Taking into account subsequent events, which includes incremental SBIC debt availability, we currently have approximately $267.3 million of liquidity, which includes $31.5 million of available SBA debentures. Now I'll turn the call back to Ed for concluding comments. Ed?

Ed Ross, CEO

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 Gigi for Q&A. Gigi?

Operator, Operator

Our first question comes from the line of Robert Dodd from Raymond James. Your line is now open.

Robert Dodd, Analyst

Good morning, and congratulations on a good quarter. Good is obviously understating that. A couple of questions. First, on Mesa. I mean, thank you for the color on that. And I mean, you mentioned early in your prepared remarks some deals that came together really fast. I wonder if that was one of them. Because if I look back, I mean, you took it over in Q2. In Q3, it was marked below cost and the equity was marked at zero. And then obviously, you just had a large positive equity realization on that. So can you give us any more color on just, like how fast that deal came together? And was it unanticipated to happen this early in the process or anything like that? Because obviously, the gain versus the mark in Q3 is pretty startling in a good way?

Ed Ross, CEO

Sure. Yeah, in a good way, I think - great question, Robert. Look, we took over Mesa understanding the business well, and understanding it was a great franchise, if you will. But it obviously also had some issues that we had to manage and deal with. And we did that throughout our investment. What I would say is our intent was not to hold the business as an owner for the long-term, if you will. We always had the intention of kind of shoring things up. And then we felt like we knew it was a great franchise, and that we could kind of ride the ship and liquidate our investments. The company performed relatively well through that period, post our acquisition though it did need some support from a capital perspective and liquidity perspective. And ultimately, we were having some one-off conversations from a sale perspective, and one of those came together very quickly. And I'd say, I don't know, probably two and a half months start to finish. But given the complexity of the situation, we did not think it could move that quickly. But it did. And it ended up coming together at the very end of December. So that's kind of the synopsis of it.

Robert Dodd, Analyst

I appreciate that. Thank you for that additional color there. I mean, on not just Mesa, but everything, is any of the gain in Q4, is it shielded from the previous losses? Not that you have a lot of those. Or being held down in the blocker or anything like that, or is all this going to flow to investment company taxable income? And if that's the case, a separate question but related, what's your spillover or undistributed taxable income estimate for the end of the year?

Ed Ross, CEO

Sure. So why don't I let Shelby jump in on that one. It's probably more in her domain. Shelby?

Shelby Sherard, CFO

Sure, that’s a great question. For tax purposes at the RIC, we had carry forward losses from 2020 of about $25 million. While some gains we realized in 2021 were in the blocker, some of the larger ones were not. So, to your point, Robert, we have approximately $19.9 million of gains in our spillover. We will need to include this in the spillover calculation and it will ultimately be distributed. By the end of the year, we estimated a spillover of $1.56, which included the $19.9 million of gains recognized in 2021 at the RIC.

Robert Dodd, Analyst

Okay. Thank you for that level of color. On that basis, it's a great question around problem to have. But the new dividend policy, base dividend is $1.24. If you distribute all the surplus this year, spillover wouldn't grow. But you'd still be bumping up against the edge of how much spillover the IRS or general ledger keep. You can move declaration things around and things like that. So I guess the point is that the Board obviously already increased the dividend, the change of policy. Is there anything else in discussion to manage that, because I don't think you want to squeeze yourself into making dividend decisions based on what the IRS tells you to do?

Shelby Sherard, CFO

Sure. Let me just start with our estimated spillover of $1.56 at the end of 2021. Kind of with our new increase in the base dividend and supplemental dividend policy, we will chip away at that and make a pretty big dent. But to your point, we will likely need to declare our fourth quarter dividend earlier in advance of filing our tax return on October 15 in order to fully satisfy and distribute the $1.56. And then looking forward to 2023, we'll just have to kind of continue to monitor activity in 2022. And as you've kind of noted, any incremental gains will impact spillover that we have at year-end 2022 and then that will obviously impact dividend decisions that we need to think about in 2023.

Robert Dodd, Analyst

Got it. Thank you. One more, if I can. I'm monopolizing everything. But just on the environment, I know you said 2022 probably down versus 2021 in terms of origination stock, not surprising given how active it was. But you've already done 62 million I think in what is a seasonally slow quarter typically. Last year, you did $63 million in the first quarter. So it sounds like activity is still very elevated right now. Is that the feeling that you think it's going to slow down through the rest of the year, or is that just conservative assessment?

Ed Ross, CEO

Sure. Let me touch on the market briefly before answering your question. Q4 was very strong in terms of overall market activity. M&A was active, with premiums being paid for good businesses that were not significantly affected by COVID and other challenges. There is a considerable amount of capital available pursuing these good businesses from both lending and equity perspectives. Currently, activity levels are still relatively healthy, but I don’t expect them to match last year’s levels. At this moment, the market, in terms of deal flow, is recovering somewhat. It takes time to establish pipelines at various M&A firms and other companies. However, it remains active, and we expect the year to be busy unless major events derail the economy or slow things significantly. Right now, the M&A and lending environment looks healthy. Company performance is generally good, particularly for those less affected by inflation and related issues. We are monitoring the situation closely, as it is an interesting environment with many moving parts. We are focusing on businesses that are less vulnerable to the current conditions, and also exploring some opportunistic investments where we have asset support and intellectual property. Overall, while the market is active, it is not as strong as last year, but it is a positive sign for our continued portfolio growth.

Robert Dodd, Analyst

Thank you for that color. And again, congratulations on a really good quarter, and particularly for US Green Fiber and Mesa that you had to take control of and generated very good outcomes.

Ed Ross, CEO

Thanks, Robert. It's good talking to you.

Operator, Operator

Thank you. Our next question comes from the line of Ryan Lynch from KBW. Your line is now open.

Ryan Lynch, Analyst

Hi. Good morning. Thanks for taking my questions. And I will just echo Robert's comments on a really nice quarter and really nice 2021 all around. One thing I was just wondering if you could help out with, you guys have this whole level of equity proceeds received in the quarter, whether it's through scaled equity investment or like in the case of Mesa, a distribution received that we're trying to get a sense of kind of the total level of equity investments or distributions that came due in the fourth quarter.

Ed Ross, CEO

Shelby, do you have that information? If not, I’ll move on.

Shelby Sherard, CFO

I might get back to you offline, Ryan, on that detail, if that's all right.

Ryan Lynch, Analyst

Yes, that'd be great. We can follow up with that. And then the other question I had was, right now we're sitting on $170 million of cash and with $17 million on your facility, so you got a pretty strong sort of net liquid cash position. It's kind of a two-part question. As you guys look to deploy that capital, as you have that great realization throughout the year that you've gotten this place from really great gains in your portfolio. But have you considered putting that cash in any sort of like temporary high quality, lower yielding investments that have liquidity? Number one. Or do you plan on using it just in cash? And then number two, have you thought about basically expanding the size of yield versus the portfolio company size, if you guys are looking to put capital into, which would be slightly larger deals than you're doing now, in order to put that capital to work, or you guys just continue kind of the same process you guys have always done with the same investment strategy that you've done in the past?

Ed Ross, CEO

Sure. Great question, Ryan. Let me first discuss originations and interim payments for this quarter. Our main focus remains on capital preservation and generating attractive risk-adjusted returns. Currently, this means that most of our investments are in first lien positions, typically in recurring revenue models. We are also continuing to pursue what I consider opportunistic second lien and subordinated debt investments for exceptional situations in companies. So far this year, we have made four new investments and anticipate further origination activity this quarter. Additionally, we expect some of our existing portfolio companies to make acquisitions, and we're hopeful for modest increases in our exposure to those companies. From a repayment perspective, we announced the sale of Mirage and the repayment of our debt there. Our equity investment has been slower, and we have yet to receive the equity proceeds. We do expect a small gain, but we do not have a specific number at this point. We also had two other equity realizations: a small gain from the former Accent Food Services and a $6 million gain concerning SpendMend. While we've seen some realizations, much of it has been in equity. We do not anticipate any additional meaningful realization activity at this time, although we have a full month left and could be surprised, as we were last time with a couple of transactions closing sooner than expected. In summary, we expect repayments to be lighter this quarter compared to the past five quarters, which is beneficial for growing the portfolio and utilizing some available cash. Secondly, I'd say, just given the velocity over the last five quarters, our portfolio is pretty young. And so again, I expect repayments to occur. Some of them are, quite frankly, things, which I mentioned here, but they're not huge numbers. My belief system is repayments will be lower over the foreseeable future and that we should continue to be able to grow the portfolio in a meaningful way here as we move forward. So getting to your two questions I'd say, we're not looking to just deploy the cash into other lower yielding investments at this point. We believe that we can actually utilize the cash for investment over the next, call it, 6 to 12 months. We do think it's going to be an active year and again lower repayments. Only time will tell, as we all know, and we do get surprised from time to time, but that's kind of what we see. So we're staying focused on the basics of our business and what we like to do. And then in terms of expanding the size of the deals, from time to time, yes. Where we are looking to do that would be a first lien loan, that maybe we would create a follow structure; first-out, last-out structure, but maybe we'll do a $1 structure where, yes, it would impact yields a little bit. But overall, that would have us deploying a little bit more capital. And so that's the only thing that we're doing a little bit of, but I don't think that will be to the degree that it greatly impacts our business model. So hopefully, that's helpful. It was a little long-winded, but I wanted to give you some context.

Ryan Lynch, Analyst

Yes, that's helpful. That's good context. And I think I would agree with your overall sentiment. I know you guys don't want to stray too far from your core and your original strategy, which is obviously you put out some fantastic long-term results. So I would agree with all that. I appreciate the time today. Those are all my questions. And again, congrats on the really nice quarter.

Ed Ross, CEO

Thanks, Ryan. Good talking to you. We'll follow up.

Operator, Operator

Thank you. Our next question comes from the line of Bryce Rowe from Hovde. Your line is now open.

Bryce Rowe, Analyst

Thanks. Good morning, Ed and Shelby.

Ed Ross, CEO

Good morning, Bryce. How are you?

Bryce Rowe, Analyst

I'm good. Ed, I wanted to ask about the deals here in the fourth quarter. I think historically, you have done more, or at least recent past, you've done more of the last out type structure, only saw one of the deals here in the fourth quarter that followed that type of last-out structure. It sounds like based on your answer to Ryan that that was that purposeful, so to speak. And maybe we start to see less of that type of structure or something else kind of just idiosyncratic with the deal flow in the fourth quarter.

Ed Ross, CEO

Yes, I don't think it was very intentional. We evaluate each transaction on its own merits, considering many factors. The most important is the quality of the business. Then we determine the appropriate structure—whether it's a first lien investment or a second lien investment for us. If we favor the company and the situation, we seek ways to engage. Sometimes we aim to provide a loan that adds the necessary value to secure the business while allowing us to manage the investment appropriately. Each deal is unique. However, as I mentioned to Ryan, one method to allocate a bit more capital at attractive yields, especially with the cash we have on hand, is to consider some unitranche investments that are $1 instead of how we might have structured in the past. Many factors influence this decision, such as the urgency of the transaction versus the time we have to partner on it. It's difficult to generalize. Nonetheless, we remain focused on the quality of the assets we invest in, and I believe first lien investments will continue to make up the majority of our activities.

Bryce Rowe, Analyst

Absolutely. Yes, it does. I kind of figured it might be like that, but just thought I would ask. I want to ask about the right side of the balance sheet. It's kind of nice to see continued draw downs of the SBA debentures. It feels like you're starting to find more places for SBIC eligible investments. Can you talk to that a little bit? And then, Shelby, I wanted to ask you if we're going to see a loss on the prepayment here of the SBA debentures that you paid down in the first quarter, if you could help quantify that, that would be helpful?

Ed Ross, CEO

So to answer your first question, yes, we are a little bit of just luck, if you will, though, what deals qualify for the SBA is obviously a critical component of whether we're using those facilities. When they do qualify, we generally try to utilize or at least partially utilize at a minimum the SBA program and the dollars. And that has worked well for us in the past. We think it will continue to work well for us going forward. And so we have had a number of transactions that qualify. And thus we're utilizing the program. So I think you should expect that we'll continue to do that as the transactions are evaluated. And if they do qualify, then we're going to continue to use that program. Obviously, the financing is attractive but also it served us well over the years. And we want to continue to be a good partner with the SBA as well.

Shelby Sherard, CFO

As it relates to the $20 million debt repayment, Bryce, you're correct. We will have a slight realized loss on extinguishment of that debt for the unamortized cost. It's probably going to be in the order of $200,000 to $300,000.

Bryce Rowe, Analyst

Okay. And I assume, Shelby, that you were able to kind of get in to the March pooling with the SBA debentures you pulled down in February. What was the rate that you've kind of locked in?

Shelby Sherard, CFO

I don't know that I've seen the rate published yet. But the rate from the September pooling was particularly low, it was 1.3%. So I would imagine it will be slightly higher than that. But I don't know that I've seen the published rate available yet.

Bryce Rowe, Analyst

Okay. That's it for me. I appreciate the time. And really congratulations on the quarter. It's nice to see. Thanks.

Ed Ross, CEO

Thanks, Bryce. Good talking to you.

Operator, Operator

Thank you. Our next question comes from the line of Sarkis Sherbetchyan from B. Riley Securities. Your line is now open.

Sarkis Sherbetchyan, Analyst

Good morning, Ed and Shelby, and thank you for taking my questions here.

Ed Ross, CEO

Good morning.

Sarkis Sherbetchyan, Analyst

I wanted to highlight the information in the press release regarding variable rate securities, which accounted for about 68% of the debt portfolio. This is an increase from approximately 56% in the previous quarter and up from around 37% in the last fourth quarter. I would like to understand if this indicates a strategic change in our mix in light of expected rate movements, or what the reasoning behind this shift might be.

Ed Ross, CEO

I think from my perspective, it correlates directly with the fact that a large majority of the investments that we've been making and structuring have been first lien investments over the last three years. And all of those are structured as variable rate loans and typically with LIBOR floors. And then I think we made the comment, but it's almost amazing, but we've had a fair number of second lien and subordinated debt investment repayments over the last 12 months. And so the dollar amount greatly reduced, if you will, the dollar amount of our second lien and our junior debt investments went down probably by half, probably reduced by 50%. So I think the combination of most of the new investments or variable rate investments, and we've had a lot of fixed rate investments repaid. That's how we ended up in this position of a large majority of our debt investments being in a variable rate category at this point. Hopefully, that's helpful.

Sarkis Sherbetchyan, Analyst

Yes, that's helpful. Thank you for that. And I guess a follow-up to that. If you can maybe remind us how you're thinking about target leverage levels for the BDC, given that second liens and junior, that mix is basically flushed dramatically lower? Any updates there? And then how should we be thinking about that?

Ed Ross, CEO

Absolutely, that's a great question. As we've mentioned previously, our target leverage is 1 to 1 in terms of GAAP. We are open to higher leverage if circumstances warrant it. For example, our SBIC funds operate at a 2 to 1 leverage ratio, and we successfully navigated the Great Recession at that level without any problems. Therefore, we are quite comfortable with higher leverage points. However, we do have a significant amount of cash available for investment, which will comprise the majority of our investment dollars. As we mentioned earlier, we plan to utilize new SBIC debentures for qualifying investments. Beyond that, we will primarily rely on cash. Moving towards a target leverage of 1 to 1 is definitely a goal for us over the medium term, potentially by the end of the year, but we will assess that as we progress. We feel very positive about the 1 to 1 target, and while we could consider higher levels, that is not our primary aim. There has been no change in that perspective since our last discussion.

Sarkis Sherbetchyan, Analyst

Understood. One final question if I can ask about. For the variable component of the loans that you have in the portfolio, what would you say would be the weighted average LIBOR floor?

Ed Ross, CEO

A large majority of them have a 1% floor, but there is one without a floor and a couple that I think are 50 basis points. I'm not sure what the weighted average is since I've never done that calculation myself, but I would estimate it to be around 90 basis points.

Sarkis Sherbetchyan, Analyst

Got it. Thank you for the color.

Ed Ross, CEO

Sure. Good talking to you, Sarkis.

Operator, Operator

Thank you. Our next question comes from the line of Mickey Schleien from Ladenburg. Your line is now open.

Mickey Schleien, Analyst

Good morning, Ed and Shelby. Hope you're well.

Ed Ross, CEO

Good morning, Mickey.

Mickey Schleien, Analyst

Ed, just at a high level, following up on the interest rate question, interest rates may be a lot higher by the end of this year than they are right now. How do you feel about your borrowers' abilities to service their debt when you think about their trends in their revenues and their margins?

Ed Ross, CEO

Sure, great question, Mickey. What we've observed is that a significant portion of the companies in our portfolio has worked hard to adapt to the new normal and are discovering ways to thrive. This has meant that many of these companies have had to raise prices to counteract cost increases. As we consider potential interest rate hikes, it's encouraging to note that most companies have successfully adjusted to these changes, though some are still catching up. Fortunately, very few companies in our portfolio lack the ability to raise prices, and most possess significant pricing power, which is crucial. In many industries, competition means that the challenges faced by our portfolio companies are also faced by their rivals, which is not necessarily a negative aspect, particularly in these times. Additionally, our investment structuring and underwriting focus on ensuring there’s ample enterprise value cushion for our loans, typically maintaining an equity range of 40% to 60%. This provides a substantial buffer for our loans. We also assess the liquidity positions of our companies, ensuring they maintain strong liquidity. Furthermore, we evaluate their robust capital structures that can endure today's widespread challenges. Given the current low interest rates and our portfolio's cash interest coverage being at 3x, which is considerably high compared to levels prior to the Great Recession, we have a solid cushion at both the portfolio and company levels to navigate any potential interest rate increases. In summary, we feel very comfortable with the overall quality of our portfolio and its capacity to manage anticipated rate hikes. I hope that’s helpful.

Mickey Schleien, Analyst

Yes, that is helpful. Thank you for that explanation, Ed. Considering idiosyncratic risks, do you have any portfolio companies facing exceptional risks due to the situation in Ukraine? I'm thinking about a company that relies on imports they can no longer access, or that exports goods they can no longer send, or perhaps there's just a significant risk associated with energy prices.

Ed Ross, CEO

Sure. Sitting here today, I don't think we do. I'm unaware of any situations where we are highly concerned. It's often better to be lucky than good. We considered a company that had a large number of their employees in Ukraine, but we did not pursue that transaction over the summer. We knew there were some tensions, but that wasn’t the main factor in our decision; it just wasn’t a situation we were comfortable with. At this point, I'm probably glad that didn't happen for many reasons, including the war. Right now, I'm not aware of any companies that are significantly impacted by the war at the moment.

Mickey Schleien, Analyst

I understand. So, Ed, we can't have a Fidus earnings call without asking about Pfanstiehl, which is now 8% of the portfolio. It's sort of a gift that keeps on giving. And I did notice a dividend payment in the fourth quarter. I know you can't give us specifics, but can we expect continued sort of annual dividends from Pfanstiehl, assuming you continue to own it? And it's obviously doing extremely well, but to have anything in the portfolio that concentrated includes its own risks. Are you thinking about potentially monetizing at least part of that position to reduce the investment risk in the portfolio?

Ed Ross, CEO

Great question. And just to reiterate kind of what the company is. It's a manufacturer of high purity sugars, carbohydrates for injectable drugs or biologic drugs, many that are used in the oncology arena. The company also participates in the vaccine arena. The company has been for a long time and continues to perform very well. And so the positives are definitely outweighing any potential negatives with regard to COVID-19 outbreak. And the valuation reflects the risk profile and the outlook of the investment. With regard to incremental distributions, the company is positioned to continue to make distributions is what I would say. We have nothing to do with that decision making. And so it's hard for me to answer it other than to say that the company is in a position to continue to make distributions as it moves forward. Obviously, it's always subject to change. But as I sit here today, it's in a very good position. And then in terms of monetizing this investment or any other equity investments, we're always evaluating what's the right time to try to create a transaction or, in most cases, sponsors are in control of our portfolio companies, and we're pretty aligned with them with regard to that same type of decision making. Is this a good time to exit? And do they have a general desire to create realized gains over time? And the answer is yes. And we do as well. And so I feel like there's strong alignment with a large, large majority of our portfolio companies. And in the cases where they're not funded, sponsors always trying to generate gains when the time is right. We obviously evaluate situations and try to determine if it's a good time to either lighten up or try to attain liquidity. And so that's an ongoing battle, but at the same time, we don't want to rush anything. And we're never going to be perfect here. But we're clearly not trying to leave tons of money on the table either, right? So it's a balancing act that's impossible to get perfect. But we're continuing to evaluate things on a constant basis and do the best we can.

Mickey Schleien, Analyst

Yes, it is. And notwithstanding your answer, congratulations on a very, very good quarter. We certainly appreciate the efforts that your management team has undertaken this year. That's it for me.

Ed Ross, CEO

Thank you, Mickey. I appreciate it very much. Good talking to you.

Operator, Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Ed Ross, CEO, for closing remarks.

Ed Ross, CEO

Thank you, Gigi. Thank you everyone for joining us this morning. We look forward to speaking with you on our first quarter call in early May 2022. Have a great day and a great weekend.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.