Earnings Call Transcript - FDUS Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Fidus Second Quarter 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to, Jody Burfening. Please go ahead.

Operator, Operator

Thank you, Christie, and good morning everyone and thank you for joining us this morning for Fidus Investment Corporation's second 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 would 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, cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, August 06, 2021, 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 second quarter 2021 earnings conference call. I hope all of you, your families, friends and coworkers are staying healthy and well. I am going to open today’s call with a review of our second quarter performance and portfolio at quarter end, and then share with you our views on deal activity in the lower middle market with the second half of the year. Shelby will cover the second quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. Overall, we are very pleased with our results and portfolio performance for the second quarter. Adjusted net investment income grew year-over-year and net asset value per share reached a record level. Originations and repayments were at high levels in line with our expectations for a busy quarter, from a deal flow perspective. We continue to focus on carefully selecting high-quality companies in the lower middle market that are reasonably insulated from economic stresses associated with the pandemic. Companies that possess resilient business models that generate strong levels of cash flow to service debt and a positive long-term outlook. Our portfolio remains well-structured, positioned to produce high levels of recurring income and the potential for equity upside in support of our capital preservation and income goals. Adjusted net investment income, which we define as net investment income, excluding any capital gain, incentive fee attributable to realized or unrealized gains and losses, grew 15% versus last year to $10.4 million or $0.42 per share. At the end of the quarter, the net asset value reached a record $429.4 million or $17.57 per share, reflecting strong operating performance and the underlying portfolio's fair value appreciation. Fidus paid a quarterly dividend of $0.31 per share, along with a supplemental cash dividend of $0.08 per share on June 28, 2021, to stockholders of record as of June 14. The board has established a formula to calculate the supplemental dividend each quarter, where 50% of the surplus and adjusted net investment income over the base dividend from the previous quarter is distributed to shareholders. For the third quarter, we are pleased to announce that we are increasing the base dividend to $0.32 per share, with a surplus of $0.06 per share. Additionally, we will issue a special dividend in Q3 of $0.04 per share. Therefore, on August 2, 2021, the board declared a base quarterly dividend of $0.32 per share, a supplemental quarterly cash dividend of $0.06 per share, and a special dividend of $0.04 per share. These dividends will be paid on September 28, 2021, to stockholders of record as of September 14, 2021. After a busy first quarter, deal flow activity remained high during the second quarter, driven by M&A transactions and refinancing opportunities. In contrast to the first quarter, originations exceeded repayments. In terms of originations, we invested $104.2 million in debt and equity securities of which $96 million, or nearly all of the total, was invested in first lien debt. Investments in new portfolio companies consisted of $18 million in first lien debt and common equity in 2KDirect, Inc., a leading omni-channel digital advertising platform for small and mid-sized businesses. $7 million in first lien debt and common equity in Aeronix Inc., a supplier of data transfer, signal analysis, communications products, and related engineering services primarily to the defense industry. $25.5 million in first lien debt and common equity in ISI PSG Holdings, LLC, doing business as incentive solutions, a provider of online rewards, travel incentives, and gift card reward programs. We subsequently sold a $13.5 million participating interest in the first lien debt. We also invested $6.5 million in first lien debt and common equity in Level Education Group, LLC, a leading provider of online continuing education for mental health and nursing professionals. $12 million in first lien debt in UPG Company, LLC, an original design and contract manufacturer of complex assemblies with roots as a manufacturer of precision injection molded plastics. And finally, $11 million in first lien debt in Winona Foods, Inc., a leading provider of natural and processed cheese products, sauces, and plant-based alternatives. These investments are indicative of our present focus on companies that have not been materially impacted by the pandemic and possess revenue streams that are recurring in nature. In terms of repayments and realizations, we received proceeds totaling $93 million, with the vast majority from second lien debt investments. In terms of access, we received payment in full of $15 million, including a pre-payment penalty on our second lien debt in cash income. We also received payment in full of $8 million in our second lien debt in Medsurant Holdings, LLC. We received payment in full of $12 million on our second lien debt in Virginia Tile Company, LLC. We received payment in full of $7.8 million on our second lien debt in Steward Holding LLC. We received payment in full of $4.7 million on our first lien debt in Palmetto Moon, LLC. We received payment in full of $22.5 million on our second lien debt in AVC Investors, LLC. And we exited our equity investment in Wheel Pros, Inc., realizing a gain of approximately $2.1 million. Subsequent to the quarter end, Hilco Technologies was sold. We took control of Hilco in the second quarter and exchanged a $10.3 million debt investment for an equity investment in a new holding company. In conjunction with the sale subsequent to quarter end, we received payment in full on our residual debt and converted equity investment, realizing a net loss of approximately $1.1 million on our original equity investment in the company. We received payment in full of $11.4 million on our second lien debt in CRS Solutions Holdings, LLC. We received payment in full of $20 million on our second lien debt in Worldwide Express Operations, LLC and realized a gain of $3 million on a portion of our equity investment. In conjunction with the sale of Worldwide Express, we invested $1.5 million in common equity of which $0.8 million was rolled over from our original common equity investment and funded a $20 million second lien term loan commitment. With originations coming in above repayments and exits in the fair value of the portfolio appreciating relative to the first quarter, the fair market value of our portfolio as of June 30, 2021 was $743.5 million, equal to 110.8% of costs. We ended the second quarter with 72 active portfolio companies and four companies that have sold their underlying operations. In terms of portfolio construction, our continued focus on investing in first lien debt combined with a heavy weighting of second lien debt exits has altered the mix since the beginning of the year. First lien debt investments have increased on an absolute basis and as a percent of total portfolio. At quarter end, first lien debt accounted for 38.3% of the portfolio on a fair value basis, compared to 25.2% as of December 31, 2020. In contrast, second lien debt has decreased on an absolute basis and as a percent of total portfolio and accounted for 28% of the portfolio on a fair market basis compared to 44.7% as of December 31. Subordinated debt accounted for 13.4% and equity investments accounted for 20.3% of the portfolio on a fair value basis. Our portfolio remains well-structured for current economic conditions with debt investments generating high levels of current and recurring income and equity investments providing us with a reasonable margin of safety, along with the opportunity to enhance returns. Moving to portfolio performance, overall, our portfolio continues to perform well and risk remains at a comfortable level. As of June 30, we did not have any companies on non-accrual. Last quarter, I mentioned that some of our portfolio companies were dealing with operational challenges, including supply chain constraints and higher input costs. Although the challenges haven’t abated since then, management at these companies are rising to the challenge, making adjustments as necessary in pricing and or productivity, and their overall demand remains favorable. To help us assess the overall health and stability and performance of our investment portfolio, we track several quality measures on a quarterly basis. We track the portfolio's weighted average investment rating based on our internal system under our methodology where a rating of one is outperformed and a rating of five is unexpected loss. As of June 30, the weighted average investment ratio for the portfolio is two on a fair value basis. Another metric we track is the credit performance of our portfolio, which is measured by our portfolio companies combined ratio: total net debt through Fidus debt investments to total EBITDA. For the second quarter, this ratio was 4.2 times, excluding equity only and ARR deals. The third measure we track is the combined ratio of our portfolio companies: 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. For the second quarter, this metric was 3.2 times, excluding equity only and ARR deals. M&A activity picked up at the beginning of the fourth quarter of last year, and it's remained at healthy levels today, resulting in high levels of origination and repayments. Although net originations rebounded in the second quarter, we are currently not fully invested in our debt portfolio after several consecutive quarters of unusually high levels of debt repayments. We have been in this situation before and have a proven track record of redeploying proceeds into new debt investments that provide us with high levels of current and recurring investment income without either sacrificing our underwriting standards or deviating from our philosophy of managing the business for the long term. We therefore intend to adhere to our strategy of carefully investing in high-quality companies with defensive characteristics, positive long-term outlook, prioritizing companies that have not been materially impacted by the pandemic and possess resilient business models and strong cash flow profiles. As we move into the second half of the year, we still see very healthy to robust conditions for deals in the lower middle market from both M&A activity and refinancings where we can leverage our relationships and experience. This favorable environment supports our goal of growing our debt portfolio in the coming quarters. It also supports a positive outlook for equity realizations. The combination of our investment strategy and underwriting principles support our goals of capital preservation and generating attractive risk-adjusted returns. 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 second 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 Q1 2021. Total investment income was $21.8 million for the three months ended June 30, a $1.5 million decrease from Q1 primarily due to a $1.2 million decrease in interest income and a $1 million decrease in fee income offset by a $0.7 million increase in dividend income. Due to the Hilco restructuring and exchange of debt for equity, approximately $0.6 million of interest income was converted into dividend income. Yields were relatively stable in Q2 at 12.2% versus 12.3% in Q1. However, as Ed mentioned, yielding assets are lower than historical levels given the unusually high level of repayments over the last several quarters. We had one accounting nuance in Q2 that I wanted to highlight regarding secured borrowings. As Ed mentioned, subsequent to the initial closing, we syndicated $13.5 million of our unitranche loan and incentive solutions to a first out lender. Given our continuing involvement in the loan, the $13.5 million that was assigned does not meet the GAAP accounting criteria for sales accounting treatment; rather, the $13.5 million is a secured borrowing, which simply means that it remains a security on our balance sheet included in total assets with an offsetting liability, a secured borrowing on the balance sheet. Similarly, the interest on the $13.5 million portion of the loan is included in both interest income and interest expense. Given the total assets include secured borrowings, the advisor granted a waiver to exclude the $13.5 million of secured borrowings from the base management fee, waiving approximately $29,000 fees in Q2, so as not to penalize shareholders for the accounting treatment. Total expenses, including income tax provision, were $15.4 million for the second quarter, approximately $3.1 million higher than the prior quarter, primarily due to a $3.8 million increase in the capital gains incentive fee. In Q2, we accrued $3.9 million of capital gains incentive fees given meaningful appreciation in the fair value of the portfolio. Interest and financing expenses decreased in Q2 by $0.6 million primarily due to the redemption of bonds in Q1. Note, the capital gains incentive fee is accrued for GAAP purposes, but not currently payable. As of March 31, the weighted average interest rate on our outstanding debt was 4.2%, excluding secured borrowings, and we had $360.1 million of debt outstanding comprised of $139.3 million of SBA debentures, $207.3 million of unsecured notes, and $13.5 million of secured borrowings. Our debt-to-equity ratio as of June 30 was 0.8 times or 0.5 times statutory leverage excluding exempt SBA debentures. Net investment income for the three months ended June 30 was $0.26 per share versus $0.45 per share in Q1. Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments, was $0.42 per share in Q2 versus $0.46 per share in Q1. For the three months ended June 30, we recognized approximately $2.2 million of net realized gains primarily from the sale of our equity investment in Wheel Pros. Turning now to portfolio statistics as of June 30, our total investment portfolio had a fair value of $743.5 million. Our average portfolio company investment on a cost basis was $9.3 million at the end of the second quarter, which excludes investments in four portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 85.5% of our portfolio companies with an average fully diluted equity ownership of 7.4%. The weighted average effective yield on debt investments was 12.2% as of June 30. The weighted average yield is computed using the effective interest rates for debt investments at costs, 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 June 30, our liquidity and capital resources included cash at $54.2 million, $13.5 million of available SBA debentures and $100 million of availability on our line of credit, resulting in total liquidity of approximately $167.7 million. Taking into account subsequent events, we currently have approximately $203.2 million of liquidity. In Q3, we plan to use excess cash in our second SBIC fund to pay down at least $40 million of outstanding SBA debentures. Now I will 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 Christie for Q&A. Christie?

Operator, Operator

Your first question comes from the line of Ryan Lynch with KBW.

Ryan Lynch, Analyst

Hey, good morning. Thanks for taking my questions, really nice quarter guys. The first question I had though was regarding, you guys had about $18 million that looks like unrealized gains in your equity portfolio. Can you just talk about, what were the drivers behind those? What were the investments concentrated in, was it not spread across many and what went on in those companies?

Ed Ross, CEO

Sure. Great question, Ryan. I think to be honest, it was a pretty broad-based appreciation if you will. About two thirds of our companies in our portfolio had EBITDA growth on an LTM basis this quarter. In fact, it was, I think for the whole portfolio 7%. So that's just one LTM growth from Q1 to Q2. So it was driven largely, we do have to calibrate some, but it was really driven largely by the performance of the portfolio. Clearly there are some names in there that had larger moves than others, but I would say it was a wholesale improvement in performance for the portfolio, is how I would think about it. We don’t tell.

Ryan Lynch, Analyst

Yeah. That's definitely helpful. Kind of on that point, you guys have had a ton of success in your equity portfolio and that equity co-investment strategy has been hugely successful. One of the, I guess the good problems to have though is that portfolio has grown to 20%, of your overall portfolio, which is the highest I believe it's ever done in your debt history. What is your outlook for potentially exiting some of these equity investments? Obviously, M&A is picking up in the market and there's a lot of activity, so the outlook would be good. I don't know how much of the equity investments you actually control the outcome of when they exit. So any outlook or any comments there, and what is the potential from a high level of equity in those equity investments and also on that, would you guys ever consider, I think in the past, in February of 2020, you completed the sale of a portion of about 50% of about 40% equity investment. Would you guys consider doing that if somebody’s equity investments don't kind of exit in a normal fashion?

Ed Ross, CEO

Sure. Great question. A lot of discussion around this, obviously, as you might imagine, it’s amongst the management team as well as the board, quite frankly. Yeah, I think it's just as, I think you mentioned it's a nice problem to have, we like our equity portfolio overall, got a lot of obviously high-performing companies, but I'll just also just quality companies that we have investments. And so, as I look at the market today, I think it's a very healthy one from an M&A perspective, and you'll probably only get even more active here in the fourth quarter. So we do have an expectation for additional realizations and quite frankly, on both the debt and the equity side of things, primarily driven by M&A. I think the outlook for realizing some of the portfolio is very positive from that perspective. We would expect that to continue and we are a lot of companies that are pretty ripe for M&A or some type of transaction. So I view the outlook from a natural perspective to be very good. When I look at the companies we control, we control a couple of companies today and we have impact on some other investments where maybe the sponsors are not in total control of the situation or if it would be a negotiation, if you will, amongst ourselves and other shareholders. And the good news is in those situations, the companies are in a good position to have a transaction, to the extent we want it to. Having said that I think we also like those investments, so there’s a balance you got to strike. I wouldn’t say we’re looking to go sell those investments right now because there’s a good outlook. But at the same time, as I think about things, it’s for a little long inequity today, just on a percentage basis, but I would also tell you is that we think the portfolio overall is a very healthy and good portfolio. So there’s a balance you got to strike there because I don’t want to sell too early or to create transactions that aren’t advisable. And then the last question you asked was where we consider selling a portfolio of equity investments like we did year and a half ago. I will tell you, look, anything's on the table for sure. I would never take that option off the table, but it's not something that we're working on right now. But it is a, it's clearly an option on the table down the road if we think that's the right answer at that point. So hopefully that's helpful a little long-winded, but those nice problems to have from our perspective, but yeah, it's where we are.

Ryan Lynch, Analyst

Yeah, that's helpful. And obviously, the position we're in today is obviously due to the incredible success in that portfolios had. So it's been a great win for shareholders. Just one last one if I can. We talked about a lot of BDCs over the last several days, a lot of them are focused on more kind of the upper or core middle market. And so I wanted to get your opinion on where is the competition? Where is it? And from the competitive standpoint, in the lower middle market, as far as competition, as far as yield terms and structures, as you sit here today as kind of the market and to do their robots.

Ed Ross, CEO

Sure, sure. Well, starting with the deal terms and structures, I mean, they continue to be the same for us. We go to market as a solution provider. Obviously, first lien debt has been for really three to four years, a big priority of ours. And it's where we've been having some great success in the market. So structures are primarily there having said that we still are making second lien and sub-debt investments for the right situations for the superlative opportunities that we see. So I think that’s how we’re approaching it. From a competition standpoint, it's competitive out there? I would say it's more competitive than three years ago or five years ago, not crazy, more competitive, but more competitive. I think the good news is leverage really hasn't gotten any more aggressive than those time periods. And so leverage is very much at pre-COVID levels if you will. Interest is about that, but we have seen pockets of kind of extra aggressiveness, if you will from certain participants that in the market that are more AUM players and doing things that are unnatural. I don't think that's the norm, but we've seen it for sure. So it is aggressive out there, but in the lower middle market, the terms are very, does the same. We still have covenants, so these aren't good covenant light deals. The overall structures have not changed though. Obviously we're getting pushed from a variety of angles in a competitive environment like this. So hopefully that's helpful, but it's a robust market from all angles or active or healthy market, if you will.

Ryan Lynch, Analyst

Yeah. That's helpful. I really appreciate your time today. Those are all my questions and really nice quarter.

Ed Ross, CEO

Thanks, Ryan. Nice talking with you.

Operator, Operator

Thank you. Your next question is from Matt Tjaden of Raymond James.

Matt Tjaden, Analyst

Hey, Ed and Shelby. Good morning, and appreciate you taking my questions. First one, for me, it looks like your November 2024 notes can be redeemed. In November of this year, for modeling purposes any color you can give about plans for the capital structure in the remainder of 2021.

Ed Ross, CEO

Sure. Shelby, you want to take that?

Shelby Sherard, CFO

Sure. I would say as I mentioned in my remarks we do have some repayments that have occurred in our second SBIC fund. And so in terms of kind of redeeming debt, we're probably going to redeem some SBA debt here in the third quarter. We'll opportunistically consider opportunities for redeeming our baby bonds. It's not something that's it’s something that we have to do, given that we have a fair amount of time left before maturity, but we'll certainly consider opportunities as they present themselves. And we're also focused on getting a little more reinvested in the second half of this year and using up our liquidity and having some portion of callable bonds in our capital stack is key to the long-term strategy.

Matt Tjaden, Analyst

Got it. Appreciate that. Second one for me on fee income note, can be rather volatile quarter to quarter, but maybe in 2022 as activity moderates, would you expect 2022 fee income to be below 2021 levels?

Ed Ross, CEO

Matt, I cannot make a specific projection on that. Currently, we are engaged in the market, focusing on originator or first lien loans. If we remain in that category, which we believe we will, our strategy remains unchanged, and we expect originations to continue to be healthy in 2022, leading to some income. We anticipate there will be some repayments as well, but as mentioned today, one of our six investments has repayment penalties. While all of them have such penalties, they typically expire after two to three years. Therefore, I'm not sure if we will match the same fee levels in 2022 as in 2021, but I don’t anticipate a dramatic drop at this stage. I do not foresee that happening.

Matt Tjaden, Analyst

Got it. That's it for me. I appreciate the time this morning.

Ed Ross, CEO

Nice talking with you, Matt. Thank you.

Operator, Operator

Thank you. Your next question is from Bryce Rowe of Hovde Group.

Bryce Rowe, Analyst

Thanks. Hi Ed and Shelby, how are you?

Ed Ross, CEO

Good. Hope you are.

Bryce Rowe, Analyst

I am, appreciate it. Let's see here. So Ed you talked about, you highlighted the second lien repayments and you've consistently highlighted the focus on first lien over the last few years. I'm curious that the second lien repayments is that, is that kind of just a function of just natural course of company activity and or is that something that you all have kind of focused on trying to kind of push companies to repay those second lien investments so that you can rotate into a more first lien, heavy debt portfolio?

Ed Ross, CEO

Sure. Great question. Interestingly it is really normal course to be honest in certain of those situations, those weren't investments that we wanted to lose quite frankly. They were very good investments, but they had reached. I'd say four of the six repayments materialized due to just being able to access much lower cost of capital, i.e. bank debt just due to their leverage profile. So they had performed very well and delevered and took advantage of the market opportunities ahead of them. And the other two, quite frankly were acquisitions where the whole capital structures were kind of rejiggered if you will, or reconstructed. And we just weren't part of that solution. So it was a more normal course.

Bryce Rowe, Analyst

Okay. And then next question, maybe for Shelby. I appreciate the heads up on the $40 million of SBA pay downs, you guys have been able to draw newer SBA debentures here recently. Should we expect that trend to continue in terms of SBA debentures funding some of the new originations here in the near future?

Shelby Sherard, CFO

The short answer is yes. Certainly the SBA has been a very good partner to fight us over the years and we have ample opportunity to continue to grow our third SBIC fund. But it's really just going to be a function of what do we have in the pipeline and does it need SBA eligibility criteria? So if it does, we would look to invest it out of the SBA and if it doesn't, we've got opportunities to invest from the parent BDC.

Bryce Rowe, Analyst

Okay. That's it for me. Appreciate your time.

Ed Ross, CEO

Thank you, Bryce. Nice talking with you.

Operator, Operator

Thank you. Your next question is from Mickey Schleien of Ladenburg.

Mickey Schleien, Analyst

Good morning, Ed and Shelby. Just a couple of questions from me. Ed, the weighted average effective yield on the portfolio has been nicely steady at around 12% despite the higher first lien allocation at costs, which as you've noted, I think has more than doubled. What's been the approach you've been using in choosing first lien investments, which has allowed you to maintain that portfolio yield.

Ed Ross, CEO

Sure. Great question. I think we've obviously touched on our first lien approach, which includes $1.1 million in first lien investments, but it also includes first out last out structures where we partner with other financing providers to lower the cost of capital, quite frankly, for the borrower. So in those cases, we are maintaining yields, but investing in senior debt that maybe it's priced lower, we are using a first out last out structure which we've talked about before. And I'd say that is one of the ways that we've been able to maintain our yields. Obviously we're still making second lien investments and sub-debt investments that keeps yields up as well. But that's probably the driver that I would highlight for you, but it's nothing different than what we've been doing over the last several years, there's just a larger percentage of the overall financing transactions that we're getting involved with.

Mickey Schleien, Analyst

And in those deals, are you selling the first out pieces generally to commercial banking relationships and how many turns of leverage do you usually sell to them?

Ed Ross, CEO

Sure. We have a network of commercial banking relationships that we work with and so we've created a network there and then in terms of the leverage, it really varies deal by deal. I mean there are times when maybe it's a four, four and a half times leverage financing and the bank will take two and a half or three turns and there are times when they only take one turn and we'll take the other two or three turns, whatever. So it really is deal by deal, and we put it together in conjunction with the bank that we’ve ended up working with. So it's fluid from that perspective. It’s not a fixed formula.

Mickey Schleien, Analyst

Yeah. I understand. And in those transactions Ed, is there language in your documents that effectively give you a call option on whatever you've sold to them in the event, the borrower violates covenants or has other trouble that gives you control over the deal?

Ed Ross, CEO

Sure. So generally speaking, I'd say the answer to that is yes. I mean, every document is different as well as you know but generally speaking the answer to that is yes.

Mickey Schleien, Analyst

Okay. And my last question, when you look at the vintage of the portfolio, how much remaining call protection would you say you have on your debt investments?

Ed Ross, CEO

That's a tough one. I don't know that I can answer that with any accuracy. I would say we, as I sit here today, we've got a fair bit of call protection, and that has to do with the fact that we've quite frankly exited a fair number of debt investments over the last 24 months. And obviously have a fair number of new portfolio companies in the portfolio as well. So typically when you are in that case we would have pretty good or healthy call protection on those newer deals, if you will. So I can't answer it any more accurately than that.

Mickey Schleien, Analyst

Ed, just maybe as a last follow-up, do you usually structure sort of a three, two, one call protection sliding scale or is that too aggressive in this kind of market?

Ed Ross, CEO

It's either a two year or three year. Those are the and it just depends in a second lien investment is first lien bigger and first lien, or those kinds of things, but it's two to three years.

Mickey Schleien, Analyst

That's it for me. Just congratulations on a good quarter and I hope you guys have a good weekend. Thank you.

Ed Ross, CEO

Thanks, Mickey. Nice talking with you. Hope you have a good weekend as well.

Operator, Operator

Thank you. Your next question is from Sarkis Sherbetchyan of B. Riley.

Sarkis Sherbetchyan, Analyst

Good morning, Ed and Shelby. How are you guys?

Ed Ross, CEO

Good. How are you, Sarkis?

Sarkis Sherbetchyan, Analyst

Yeah. Good. Thanks. First question, just kind of circles around the leverage levels, I guess just remind us where you plan to take the business from a regulatory leverage perspective.

Ed Ross, CEO

Sure. As we've discussed previously, we're quite comfortable with one-to-one leverage. When it comes to our SBIC funds, they can leverage two-to-one. We only operated as an SBIC fund during the great recession with two-to-one leverage, and we came through that without any issues. Therefore, we feel confident with higher leverage. We've stated that one-to-one is a solid figure, particularly because our portfolio is currently more focused on junior debt. However, the portfolio's structure is evolving due to an increase in first lien originations and the natural reduction of some second lien investments. I would emphasize that while we believe one-to-one remains a strong target, we are also open to adjustments if necessary. Right now, we're below one-to-one, and we're comfortable at this level as well. I hope that provides clarity on our position regarding leverage, as we're very comfortable around one-to-one but have increased flexibility due to changes in the portfolio.

Sarkis Sherbetchyan, Analyst

Yeah, that's exactly right. I mean, it just seems like with the shift more and more towards first lien, it seems like your portfolio's fairly under-levered and can support more leverage. That's exactly what I was getting to. And I guess in that light, kind of given the current environment, maybe if you can speak to the current pipeline and then potentially put a number on that, and then just kind of frame your expectations for balancing originations versus repayments, clearly trying to understand when we get to that comfortable lever level of achieving that leverage.

Ed Ross, CEO

Sure, sure. So I think you got to start with the market, the market has been very active. It's really, since Q4 of last year, I would say robust last year, this year healthy levels, but I'd also say it's expected to remain healthy to robust the rest of the year. So I think that's the industry backdrop, I would say. So from an originations perspective, and I've mentioned this first lien investments is a primary focus. We're opportunistically making second lien investments and sub debt investments as well. We think Q3 will be busy from an originations perspective, we made one new investment in Worldwide Express, as I mentioned in our prepared remarks. We've also made several add-on, I'd say material add-on investments to portfolio companies where we were supporting acquisitions. And then in addition, and what I'd say, it's busy today, so we are active and we're working on several opportunities, but obviously it's too early to tell what closes and what doesn't and whatnot. But it's busy right now. So in terms of repayments and as I mentioned in our subsequent events section, we announced the full debt realization of three investments. Hilco, Worldwide Express and CRS Worldwide. We reinvested in those companies or in that company. And at this point, what I'd say is we’ve visibility into two transactions that we think will also result in the repayment of debt investments as well as the realization of equity investments. They haven't closed yet, so you never know, but it’s going to continue to be an active quarter from a repayments perspective. So overall what I would say is we expect originations to maintain pace with repayments. But at the same time, I'm going to tell you, it's too early to tell, just given, we don't know what's going to close and what's not going to close. But that’s what we would say today. So hopefully that's helpful, but it's a busy time and expected what we're hearing is M&A bankers are as busy as they can be today. And so we're expecting a busy fall.

Sarkis Sherbetchyan, Analyst

Yeah, certainly helpful. And just one more for me, if you can maybe speak to the current pricing environment real time, just kind of help us think about how the new origination yields are behaving. Is it to your standard? Are you losing some? Are you gaining some? Any color there would be helpful.

Ed Ross, CEO

Sure, sure. I mean, back to the previous conversation, competition is real out there for the right credits while we reduce price. So a little bit just the answer is yes, but having said that we've always been and will continue to be focused on risk-adjusted returns. And so that's going to drive our decision-making, but yields are 12% to 12.2% for us on the debt portfolio. If they were to move, I would say it probably moved down a little bit just due to the yield environment and competition. I don't expect any major swings there, but that's kind of the, where we are today from a competitive standpoint. So until still yields start to move forward, I would expect that there may be some very modest drifting down, that makes sense.

Sarkis Sherbetchyan, Analyst

Yeah. That's all for me. Thank you.

Ed Ross, CEO

Okay. Thanks, Sarkis. Nice talking with you.

Operator, Operator

Thank you. We have no further questions at this time. I will turn the floor back over to Ed Ross for any additional or closing remarks.

Ed Ross, CEO

Thank you, Christie. And thank you everyone for joining us this morning. We look forward to speaking with you on our third quarter call in early November. Have a great day and have a great weekend.

Operator, Operator

Thank you. This does conclude today's conference call. You may now disconnect.