Fidus Investment Corporation (FDUS) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Fidus Investment Corporation Fourth 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 given at that time. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jody Burfening. Ma’am, you may begin.

Thank you, Takita and good morning everyone and thank you for joining us for Fidus Investment Corporation’s fourth quarter and full year 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 on the Investor Relations page of the company’s website at fdus.com. I would 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 following the conclusion of this call. I would also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information included in its release and on the conference call. 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, March 2, 2018, 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 those housekeeping matters out of the way, I would now like to turn the call over to Ed Ross. Good morning, Ed?

Good morning and thank you, Jody and good morning everyone. Welcome to our fourth quarter and full year 2017 earnings call. I will start our call by highlighting our results for the fourth quarter and full year, followed by comments about our fourth quarter investment activity and the performance of our investment portfolio and then offer views about 2018. Shelby will go into more detail about our fourth quarter financial results and liquidity position. After that, we will open the call for questions. As announced in February, Fidus completed a public offering of unsecured notes that raised total net proceeds of $48.1 million for the company. In line with our approach of managing the business for the long-term, the offering strengthens and diversifies our balance sheet and provides incremental capital to be used to make investments. Looking back at 2017, our sixth full year as a public company, it was a very good year on several levels. Our new investments of $214.7 million were well ahead of realizations. Our investment portfolio performed very well producing a 27% increase in our net investment income, while our adjusted net investment income, which we defined as net investment income, excluding any capital gains incentive fee attributable to realized and unrealized gains and losses, rose 21%. Even though, we fell modestly short of covering our dividend in 2017, we realized net capital gains of $15.8 million for the year. As of December 31, 2017, our net asset value was $393.3 million or $16.05 per share, an increase of 2% from $15.76 per share at the end of the prior year. I am pleased to say that this represents our third consecutive annual gain in our per share net asset value. For our fourth quarter our net investment income was $7.7 million and our adjusted net investment income was $8.6 million. Also we realized net capital gains of roughly $5 million in the period. On December 27, 2017, Fidus paid a special dividend of $0.04 per share and a regular quarterly dividend our $0.39 per share. For all of 2017, we paid a total of $1.60 per share in dividends consisting of regular dividends of $1.56 per share and a special dividend of $0.04 per share. At December 31, estimated spill over income or taxable income in excess of distributions was $10.4 million or $0.43 per share. For the first quarter of 2018, the Board of Directors has declared a regular quarterly dividend of $0.39 per share which is payable on March 31, 2018, to stockholders of record on March 9, 2018. In the fourth quarter of 2017, we invested $59.1 million in debt and equity securities, continuing the pace of investments of the past three quarters as M&A activity has remained at a healthy level. Of the $59.1 million we invested during the fourth quarter, $48.9 million was channeled to four new portfolio company investments. These investments were consistent with our strategy of focusing on companies that have positive long-term outlooks, defensive market positions, operate in industries we know well and generate excess free cash flow for debt service and funding growth. Let me briefly recap each of the new portfolio company investments. We invested $2.5 million in second lien debt and common equity of Consolidated Infrastructure Group Holdings LP, a premier provider of infrastructure services and solutions, $21.5 million in subordinated debt and common equity of Gurobi Optimization LLC, a leading provider – a leading commercial provider of optimization software for use in prescriptive analytics applications. $15.3 million in second lien debt and common equity of The Kyjen Company, LLC doing business as Outward Hound, a manufacturer and distributor of innovative dog and cat toys, games, gear, collars and feeders. And $9.6 million in second lien debt and common equity and made a commitment for up to $4 million of additional second lien debt of Mesa Line Services, LLC, a leading provider of outsourced electrical utility infrastructure services in the Southwest United States. From a repayments and realizations perspective, we had a somewhat less active fourth quarter, proceeds totaled $31 million including we exited our debt and equity investments in Brook & Whittle Limited. We received payment in full on our second lien and subordinated debt and realized a gain of approximately $1 million on our equity investments. We realized a loss of approximately $2.4 million on our equity investments in FDS Avionics Corp., we subsequently made an approximate $750,000 investment along with certain co-investors and management given us a controlling interest. We exited our debt and equity investments in Malabar International. We received payment in full on our subordinated debt and realized a gain of approximately $6.8 million on our equity investment and we received $1.5 million partial repayment on our debt investment in SES Investors LLC. Regarding our investment activity thus far in 2018, we are off to a good start. As reported in our fourth quarter press release subsequent to quarter end on January 3, 2018, we invested $19.5 million in subordinated debt and common equity of AVC Investors LLC, doing business as Auveco, a provider of fasteners and autobody hardware to the automotive aftermarket and general industrial markets. On January 5, 2018, we exited our debt investment in United Biologics LLC. We received payment in full of $8.9 million on our second lien debt. On January 8, 2018, we invested $11 million in second lien debt and common equity of SpendMend LLC, a leading provider of spend visibility and audit recovery services to the healthcare industry. On January 25, 2018, we exited our debt investment in Comprehensive Logistics Co., Inc. We received payment in full of $16.4 million on our subordinated debt and received approximately $25 million in prepayment fees. And on February 27, 2018, we invested $10.5 million in second lien debt and common equity of B&B Roadway and Security Solutions, LLC, a leading manufacturer of traffic control and perimeter security solutions. The fair market value of our investment portfolio at December 31, 2017 was approximately $596.3 million equal to approximately 103% of costs. We ended the year with debt and equity investments in 60 active portfolio companies plus three portfolio companies that have sold their underlying operations. The breakdown on a fair value basis between debt and equity remain 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 the 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 fourth quarter, these metrics remain strong and in line with prior periods. First, we tracked the portfolio’s weighted average investment rating based on our internal system. Under our methodology, a rating of 1 is outperformed and a rating of 5 is an expected loss. As of December 31, weighted average investment rating for the portfolio was 1.9 on a fair value basis in line with prior periods. Another method we track is the credit performance of the portfolio, which is measured by our portfolio companies’ combined ratio of total net debt through Fidus’ debt investments to total EBITDA. For the fourth quarter, this ratio was 3.7 times compared to 3.3 times for the same quarter last year. 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. In the fourth quarter, this metric was 3.7 times compared to 3.5 times for the same quarter last year. The soundness of these metrics reflects our philosophy of maintaining significant cushions to our borrowers’ enterprise value in support of our capital preservation and income goals. As of December 31, two of our investments having an aggregate cost and fair value of $18.7 million and $7.1 million respectively were on non-accrual status. Restaurant Finance Company remains on non-accrual and their situation remains fluid. Also, we have added Six Month Smiles Holdings, Inc., a dental products company that is undergoing a process to upgrade its technology and product offerings to address changing market conditions. Turning to current market conditions, we are feeling pretty good about 2018 at this point. The economy is expected to enjoy another year of steady growth and M&A activity looks to keep pace with the healthy level seen throughout 2017. While there are some third-party market commentators who expect the Tax Cuts and Jobs Act will negatively impact highly leveraged mezzanine and subordinated debt issuers, we have reviewed our portfolio and don’t expect it to be impacted by the new tax laws in a meaningful way. So, against the backdrop of a healthy market environment, we will stay the course in terms of our game plan for 2018 sticking with the strategies that have served us well and produced a strong track record since we have been public. We will continue to emphasize quality over quantity and capital preservation as we seek attractive risk-adjusted return to collectively grow our portfolio by focusing on companies that operate in industries we know well, generate strong free cash flow and have positive long-term outlooks. In closing, I like to commend our entire team for the solid and steady record of growth and profitability they have produced over the past 6 years since our IPO, a track record we can be very proud of within our industry. Our strategy generates income in a variety of ways including fee income, investment income, dividend income and capital gains, which as a whole has provided us with a differentiated level of stable income and NAV growth over time. As we stated in the past, our portfolio was structured to provide high levels of current income from our debt investments and potential capital gains from our equity related investments. So we expect it would be business as usual for us in 2018 and that’s a good thing. Now, I will turn the call to Shelby to provide some details on our financial and operating results. Shelby?

Thank you, Ed and good morning everyone. I will 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, 2017. Total investment income was $17.1 million for the three months ended December 31, 2017, $0.9 million decrease from Q3 2017. Interest and fees [ph] income decreased by $0.6 million related both to one, investment timing as the majority of our new investments took place late in the quarter in December and two, placing Six Months on non-accrual status in Q4. Fee income decreased by $0.1 million related to a decrease in prepayment fees, partially offset by an increase in origination fees. Dividend income in Q4 was $0.2 million versus $0.4 million in Q3, a decrease of $0.2 million primarily related to tax cuts and true-ups recorded in Q4 upon the receipt of 2016 K-1s for two portfolio companies. Total expenses, including income tax provision were $9.4 million for the fourth quarter, approximately $0.6 million higher than the prior quarter due to an increase in accrued capital gains, incentive fees and excise tax accrued in Q4. Interest expense decreased by $0.1 million, G&A expenses increased by $0.3 million, base management and income incentive fees decreased by a total of roughly $0.1 million and accrued capital gains incentive fees increased by $0.3 million. In addition, we accrued $0.2 million of excise tax expense in Q4. Interest expense includes the interest paid on Fidus’ SBA debentures and line of credit as well as any commitment on unused line fee. As of December 31, 2017, the weighted average interest rate on our outstanding debt was 3.6%. As of December 31, we had $242.8 million of debt outstanding. Net investment income or NII for the three months ended December 31, 2017, was $7.7 million or $0.31 per share versus $0.38 per share in Q3. Adjusted NII was $0.35 per share in Q4 versus $0.40 per share in Q3. Adjusted NII is defined as net investment income excluding any capital gains incentive fee expense or reversal attributable to realized and unrealized gains and losses on investments. A reconciliation of NII to adjusted NII can be found in 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 December 31, 2017, Fidus had $5 million of net realized gains, primarily related to $6.8 million realized gain from the exit of our equity investment in Malabar International and $1 million realized gain from the exit of our equity investments in Brook & Whittle Limited, offset by a $2.4 million realized loss from the write-off of our equity investments in FDS Avionics Corp. and $0.6 million in tax expense related to realized gains on equity investments held in taxable subsidiary. Our net asset value at December 31, 2017 was $16.05 per share, which reflects payment of the $0.39 per share regular dividend and $0.04 per share special dividend in December. Turning now to portfolio statistics, as of December 31, our total investment portfolio had fair value of $596.3 million. In our yearend SEC filings, we provided a more detailed disclosure of our debt investments identifying first lien, second lien and subordinated investments as approximately 76% of our debt investments on a cost basis of first or second lien. Consistent with our debt oriented investment strategy, our portfolio on a cost basis was comprised of approximately 6% first lien debt, 62% second lien debt, 22% senior secured loans and 10% equity security. Our average portfolio company on a cost basis was $9.6 million at the end of the fourth quarter, which includes three investments in portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 87.3% of our portfolio companies with an average fully diluted equity ownership of 7.7%. Weighted average effective yield on debt investments was 13.3% as of December 31. The weighted average yield is computed using the effective interest rates for debt investments at costs, including the accretion of original issue discounts and loan origination fees, but excluding investments on non-accrual, if any. Now, I would like to briefly discuss our available liquidity. As of December 31, our liquidity and capital resources included cash of $41.6 million, unfunded SBA commitments of $27 million and $38.5 million of availability on our line of credit resulting in total liquidity of $107.1 million. On February 2, we successfully completed our first public debt offering of approximately $43.5 million in aggregate principal of 5.875% notes due 2023 raising net proceeds of approximately $41.8 million. With the additional $6.5 million of debt issued from the overallotment completed on February 22, we raised total net proceeds of $48.1 million. As we have previously discussed, we are in the process of winding down our first SBIC fund, Fidus Mezzanine Capital or FMC, which was initially launched in 2007. As we receive repayments of investments in FMC, we will pay down additional SBA debentures in advance of scheduled maturity dates. At the end of February, we have prepaid $43.8 million of debentures, which had an average interest rate of 4.9% higher than our weighted average cost of debt at year end of 3.6%. As a result, we have $64.5 million of remaining debentures at FMC with maturity dates ranging from September 2020 to March 2025. In Q1, we will incur approximately $115,000 of incremental non-cash interest expense from the acceleration of unamortized fees related to the FMC debt prepayment. Subsequent to quarter end, we invested in three new portfolio companies and received debt repayments from two portfolio companies. Taking into account subsequent events including net investment activity, our debt offerings as well as paying down our line of credit, prepaying SBA debentures and drawing $16.5 million of SBA debentures on our second SBIC funds, we currently have total liquidity of $95 million which includes cash of $34.5 million, unfunded SBA commitments of $10.5 million at our second SBIC funds and $50 million of availability on our line of credit. 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 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 back over to Takita for Q&A. Takita?

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

Hi, guys. Things seem to be going pretty well. So couple of housekeeping questions. First, did I hear you right when you said Comprehensive Logistics you had a $5 million prepayment penalty and that will be income in the first quarter?

No, it’s $500,000.

Okay, okay. I was going to say $5 million seems excessive.

Check my statement, but I think that’s what it was.

Yes, okay. On Six Month Smiles, was there any contribution in the fourth quarter, was there a non-accrual for the whole quarter, just to clarify?

It was on non-accrual for the whole quarter.

Okay, got it. Then just – and then another one, on the dividend income, Shelby, you mentioned that there was some true-up so effectively some reversals, can you give us some more maybe quantitative color on that obviously the lower numbers, the lowest dividend income in 10 quarters, but again, can you tell us kind of what the underlying number was and then the true-up adjustment was?

The true-up adjustment was about $176,000.

Okay, got it. And then Ed, can you give us an update on obviously, your stock has obviously been weak, you have a buyback, you have had for a while, it hasn’t been used in the past, I don’t think [indiscernible] in the past, can you give us some recap of kind of the status of that? And has there been any discussion of maybe converting that to an automated or algorithmic plan so that it doesn’t get blacked out during periods ahead of earnings, etcetera?

Sure, sure. I guess for the whole audience, as most of you are aware, we have a $5 million share repurchase program in place that was reaffirmed at our third quarter 2017 board meeting. This topic was also further discussed extensively in our board meeting this week. We are mindful that the value of our investment portfolio may not always be properly reflected in our stock price. For that reason, we remained open to considering ways to enhance shareholder value, including buying back stock. When evaluating buying back stock, I think it’s worth highlighting that we are very cognizant of the full Fidus picture, including as we mentioned on many of our calls, we remained focused on performing well over the long-term for our shareholders. So, using capital to buyback stock has to be evaluated in the context of that goal as well. And then we also keep an eye on our liquidity and overall capitalization, our bank agreements, our leverage ratio to make sure that we are being prudent from all past activity equation, so lot of discussion around the topic. We do not have an automated program in place as we sit here today and we have been in blackout since mid December, I believe and so that’s where the share repurchase program stands at this point.

Got it. I appreciate it. And then just one last one I have got, obviously, high level of activity, I think in Q4 and then a pretty strong beginning to Q1 as well, was the Q1 activity was that spillover from Q4 or just a continued strong kind of pipeline and what I am going to add is do you think any of that has kind of eaten demand from maybe the back end of Q1 or maybe even Q2 or is it just kind of a steady issue guys?

Sure. I will answer one question specifically and then I will try to just talk about the market here for a second. I think we did closed two investments that you could argue were spillover investments in January. So, they were in the first half of January. So, we did have “a little bit of spillover investment if you will.” I think from a overall market perspective, obviously the M&A market was pretty healthy in the second half of last year and really throughout 2017. What we are seeing today is a very similar thing. I will tell you the deal flow drops a little bit in January and it did for us. But at the same time with lighter deal flow we still we are seeing at least some interesting opportunities to consider. So we are busy as we sit here today continuing to evaluate and hopefully execute on some investments, deal flow has picked up a little bit and it’s our understanding that M&A firms are very busy with pretty large backlog. So our view of the market is that it is going to continue to be at least healthy or operated at healthy levels. Having said that, I think we are going to be very patient for the right opportunities. For that reason I do think that our investment phase will continue to vary quarter-to-quarter. Competition is something we obviously have to navigate and we have to navigate for a long time. We have lost a few deals over the past 12 months to 18 months to some secured lending funds that are creeping up the capital structure and being pretty aggressive. But we are still finding our ways to compete. So from an origination perspective, what I would say is the timing of new investments, it’s impossible to predict. We are busy as I mentioned earlier evaluating and executing several opportunities. And we are working hard with portfolio of companies as well continuing to support several of those companies that are more acquisitive. From the repayments perspective which is a big part of the equation as you know Rob, repayments are just started to predict especially since the large majority of them are M&A related. We do have several companies in our portfolio evaluating strategic alternatives including executing sale processes. And we are aware of one portfolio something that is planning to refinance our debt with cheaper bank debt. So repayments will continue to be vibrant in the near-term and in 2018 is what our belief system is. So overall what I would say from – I would get new investments without a number of repayments and realizations to a modest degree and that’s in Q1, but that’s a guess obviously, lot of things still need to happen. Looking into the future is much more difficult, but again M&A shops are pretty good, so we are up we are hopeful it will be an active 2018.

Yes, it was really helpful color. Thanks. That’s was it for my questions.

Alright. Thanks. Good speaking with you Robert.

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

Yes. Good morning, I wonder with Six Months Smiles going on non-accrual, I wonder if you can characterize what happened there a little bit, I mean is it economically sensitive, I can’t imagine it’s economic sensitivity must be some kind of idiosyncratic issue and can you – what could you tell us about the nature of your collateral and prospects for recovery?

Sure. I am going to be pretty high level because as I always am, we obviously have confidentiality agreements in place and I need to respect those. But since Six Months Smiles is a dental products businesses, its principal products are a substitute for braces and used in – at least in certain circumstances. The company completed a project recently moving its operations to 100% digital, which should help the company in the long-term. I would say that the last 24 months have not gone according to plan or goals. So we are pretty active in this situation and what I would say is the decline in the value reflects that the increase in the overall risk profile of our investments.

Okay. And then just in general I would say, you alluded it too in the prepared comments, but I guess net investment or the investment income, interest income was a little weaker than we are thinking and I guess United [ph] looks like if you would look at it in a year-over-year context, their investments are up 14%, but the net investment – even the gross investment income was slightly down and it seems like a lot of your investments did come late in the quarter and I am trying to stress out I guess how much of an impact that had and how we should think about the implications of that for 1Q run rate?

I think you kind of hit the nail on the head. I think obviously SMS we did put on non-accrual and that was for the whole quarter. So that impacted interest income a little bit. And then I think timing did – timing of new investments was very back end weighted for the fourth quarter. And so I – that did impact investment income as well. And then I think Robert alluded to dividend income was down a little bit for the year and also in the fourth quarter. And so I think it’s just a combination of the events is what I would say.

Okay, alright, Ed that’s it for me. Thank you.

It’s good talking to you Chris.

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

Good morning. First question was SBIC I winding down in the prepayment or repayment I guess of about $44 million of debentures in the first quarter, I know you guys issued about $50 million of notes to kind of replace those. I just was curious longer term, pleased to look at your liability structure maybe a year from now, can you just talk about how you guys see the composition of liability structure as the SBIC I starts to – continues to wind down, do you guys see yourself going drawing down more on SBIC II, issuing more notes, drawing down more credit facilities, just any sort of color you can provide on kind of the longer term outlook of the debt liability structure?

Sure, great question Ryan. I think first off, from a liquidity standpoint we have a fair bit of cash. We usually try to use cash to either see SBIC funds or to make investments. So that would be the first off. And then clearly have our revolvers unfunded and then we have some remaining debentures that we can draw on the SBIC II I guess. And so we – and that’s something we would obviously do as well. When I look forward, down the road we clearly have enjoyed being part of the SBA program. We have been a meaningful participate – participant in it for a long time and our hope would be to continue to utilize that program. So we have applied for a third SBIC license or Green Light letter. And so subject to SBA approval, we would hope to continue to enjoy working with the SBA and that would be part of the capital structure as well. We have other avenues that we can obviously raise incremental debt whether it’s bank debt or unsecured debt, but that is not in the plans at the moment. But that’s clearly something that we could do.

Okay, that’s definitely helpful. And then maybe following-up a little bit on Robert’s question about the dividend income, there was a little bit of adjustment this quarter that reduced sort of a little bit, but if I look at from a longer term standpoint, $3.7 million of dividend income in 2016, $1.9 million in 2017 and then in the most recent quarter about $200,000, so dividend income has clearly been trending lower over the last several years, I know it’s difficult to predict, but I would just ask can you provide any color on kind of your outlook for dividend income maybe in 2018 to the best your ability knowing that it’s lumpy and very difficult to predict?

Sure. I will take first shot at it and then I think Shelby can jump in. What I would say is on a quarter-in, quarter-out basis I think the quarterly dividends are in a number similar to the fourth quarter and obviously when you have repayments, those numbers can change as well. But what has happened obviously also in 2017, but to a much larger degree in 2016 we had some companies performing very well that chose to distribute dividends. And whether it was financed or not we had several of those events if you will. And so our hope is, I mean our equity portfolio is very well positioned, our hope is we will continue to have some of those events as we move forward. But those are as you know impossible to predict. So I think Q4 is probably a decent run rate for day-in, day-out type of dividends that we receive. And then obviously the rest is more episodic, but how do you think about it?

I would agree with that Ed. As you mentioned, it’s hard to predict, but in the grand scheme of thins, I would expect our dividend income in 2018 to be less than it has been historically impart due to some of the exits that we had and just given that historically we had a fair number of dividend recaps that created some big pops.

Okay, yes, that’s fair. And then just one last one, you guys had some – some nice unrealized gains in the portfolio this quarter, I was just wondering was any bit of the gains – unrealized gains in your equity portfolio are driven by just changed in tax reform, I know we have had at least one other BDC talk about the tax reform passing actually ahead of favorable impact of the valuations, some of the equity companies, so did that affect the increase in valuations of your equity companies or researchers overall fundamental strength?

I think it was fundamental strength. I think due to a negligible degree would you include the tax reform as driving the portfolio appreciation. So I think that would be negligible is what I would say. Do you agree with that Shelby?

I agree.

Okay. Thank you. Thank you for taking my questions. That’s all for me.

Alright, great. Good talking to you Ryan.

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

Good morning Ed and Shelby. Wanted to start by asking or actually to ask you to expand on your comment about the impact of the tax law change, I think in your prepared remarks you said you didn’t think it would have a meaningful impact on your companies, can you give us some more background on that assessment?

Sure. Good morning Mickey, absolutely. The – and so we have analyzed the potential impact of tax reform on each of our portfolio of companies, obviously these are analyses and we are still trying to get information from portfolio of companies to hone the analysis. But in summary, we currently believe this is not a meaningful – not meaningful to our existing portfolio and the positives actually could out-weight the negatives. As we stated earlier, our average leverage is only 3.7x, which is much less than the average credits on or BDC and also positions us well to on an average basis not to have meaningful impact from the tax law changes. When analyzed on a more granular basis, our analysis suggested they are less than 25% of our companies would potentially be impacted in negative way. However, across the board the impact appears not meaningful to the existing cash flows of those portfolio of companies or to the overall credit quality of our portfolio of companies. The potential negatives would largely be offset by the lower tax rate. So in short, we believe it’s really not an issue for our portfolio of companies, but we are paying very close attention to it.

Okay. That’s helpful. Thank you. My next question in regards to the valuation of the debt portfolio, if you look at the marks for the years they sort of trended down every quarter and for the year, they fell about 280 basis points. I appreciate your comments in the prepared remarks and your average rating for the quarter was unchanged versus the third quarter. But I would like some – if you could expand a bit on what large trends have impacted the valuation in debt portfolio given that 2017 was a relatively good year for the economy?

Sure. Great question, what I would say Mickey is that overall our portfolio has been growing and it’s called a – they have been in a slow growth mode, so growth from a revenue and from an EBITDA perspective. But within a portfolio as you would imagine with 60 companies, you have some that are exceeding expectations and some that are underperforming. And that is what we would expect and that’s why we – underwrites meaningful and very large reductions in revenue and profitability when we are underwriting our loans. Having said that, we obviously have a couple companies now on non-accrual and both of those companies have represented meaningful impact to our – to I guess or depreciation if you will, so those would be the two primary contributors, I know there are others that are moving around. But that’s what we would expect. I think again overall we feel very good about the portfolio. And I don’t think that – and you suggested this, but I don’t think any of the marks are really driven by the economy these are more company-specific issues. And obviously we have got more than a couple of companies there that have had their ups and downs for a variety of reasons, whether it’s self inflicted or competition inflicted, but that’s how I would characterize it at a higher level. Hopefully, that’s helpful, but that’s how I think about it.

That is helpful. And if I may a couple of more questions, can you give us a sense of your appetite to maybe monetize Pinnergy. I mean, you have done really well post restructuring of that investment and obviously you probably have interest in rotating that into yield? And my last question is related to the decline in quarter-to-quarter, the weighted average yield, what drove that?

Sure, sure. With regard to Pinnergy, obviously it’s an energy services company, but a very strong performing one and it weathered the cycle. Obviously, we did take a hit there during that period, but it has come very strongly and is performing at a high level. I would say we do. We are not the majority owner of that company. So, we are not in control of the timing of the exit. We are a meaningful owner in the company and obviously exiting that investment would make a lot of sense in the next call it 12 months or so and that would be our hope, but obviously we are not in control of that situation. So, we will have to see how that plays out, but that would be a goal should I say. With regard to yields, the yield in the portfolio has been relatively stable for the past 3 or 4 years. This past quarter, the yields were lower on new investments and we were more just above 11.5% on average and the repayments quite frankly were much higher. We actually were in the 14s on the repayment. So, I think that’s the primary driver for the 30 basis point decline in yields quarter-over-quarter. If that trend were to continue and I am not suggesting it will, but we are trying to really focus on very high-quality investments as you might imagine and sometimes that requires you being more in 11s than the 13s. And so I think we feel like our yields are pretty stable. We could see a little bit of a decline from where we are today for sure. If you think about yields for the whole year, our yields in 2017 on new investments were a little over 12% and on the repayment side of things, they were more in the upper 12s and so that would lead to a little bit of a degradation in yields, but not a huge one and so that’s how we think about it on a go forward basis.

And on that point on, I would add is Ed did mentioned we did receive a repayment here in January from Comprehensive Logistics and unfortunately for us, it was one of our higher yielding assets that’s coming back in Q1.

That’s helpful. And Shelby, could you just repeat what you said about the non-cash expense comment for 1Q?

Sure. We are going to have about $115,000 of expense hit the P&L. It’s going to be in the form of incremental financing interest expense line just due to the acceleration of fees related to the prepayments of the FMC debentures, so unamortized fees get accelerated with that repayment.

Okay. That’s the SBA debentures, correct.

Correct, correct.

Okay, that’s it for me. Thank you.

Thank you, Mickey. Good talking to you.

Thank you. Ladies and gentlemen, this concludes today’s question-and-answer session. I would like to turn the conference back over to Ed Ross for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes today’s program. You may now disconnect. Everyone have a great day.