Fidus Investment Corporation (FDUS) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fidus Investment Corporation's Fourth Quarter 2018 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 follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Jody Burfening. Ma'am, you may begin.

Thank you, Lauren, and good morning, everyone. And thank you for joining us for Fidus Investment Corporation's fourth quarter 2018 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'd like to remind everyone that today's call is being recorded. A replay of today's call will be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived webcast replay will be available in the Investor Relations page of the company's website fdus.com following the conclusion of this conference call. I'd also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information included 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 flow of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, March 1, 2019, 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 and uncertainties and other factors, including but not limited to the factors set forth in the company's filings with the SEC. Fidus undertakes no obligation to update or revise any of these forward-looking statements. With that, I would now like to turn the call over to Ed. Good morning, Ed.

Good morning, Jody. And thank you and good morning everyone. I'll start today's call with a high-level perspective on our fourth quarter results, and then I'll cover the performance of our investment portfolio, and conclude with comments regarding our view of the market and activity levels in early 2019. Shelby will go into more detail about the fourth quarter financial results and our liquidity. Once we have completed our prepared remarks, we'd be happy to take your questions. The fourth quarter was as expected very busy from our originations and realizations perspective. Continued execution of our investment strategy of selectively investing in high quality companies that generate excess cash flow for debt service and have positive long-term outlooks served us well. Solid execution was matched by a solid adherence to our underwriting discipline, focused on capital preservation and generating attractive risk adjusted returns from our debt and equity investments, quality over quantity and the long-term over the short-term. In short, we have tunnel vision when it comes to our primary goal of delivering stable dividends and growing net asset value per share over time for the benefit of our shareholders. Our operating results for the fourth quarter were strong. Diversified portfolio generated a 29.2% increase year-over-year in adjusted net investment income to $11.2 million or $0.46 per share reflecting continued growth in recurring interest and fee income with an additional boost in dividend income from equity investments. For the full-year, adjusted net investment income was $37.7 million or $1.54 per share versus $35.7 million or $1.52 per share for fiscal year 2017. As a reminder, we define adjusted net investment income as net investment income excluding any capital gains incentive fees attributable to realized or unrealized gains and losses. As of December 31, our net asset value or NAV was $403 million or $16.47 per share, 2.5% higher than the net asset value as of December 31, 2017, and representing the fourth consecutive year of NAV growth. On December 21, 2018, Fidus paid a regular quarterly dividend of $0.39 per share and a special cash dividend of $0.04 per share. At December 31, estimated spillover income or taxable income in excess of distributions was $17.3 million or $0.71 per share. On January 31, the Board of Directors has declared a regular quarterly dividend of $0.39 per share which will be payable on March 22, 2019, to stockholders of record as of March 8, 2019. From an originations perspective, the fourth quarter was active. As expected, there was a push to close deals before the end of the year. We invested $67.7 million in debt and equity securities $30 million was channeled to three new portfolio companies. In addition, we made add-on investments in several companies that successfully completed strategic acquisitions. Diversity of these investments encompassing first lien debt, second lien debt and subordinated debt reflects our ability to offer customized financing solutions, while remaining focused on generating attractive risk adjusted returns. We also invested in the common equity in two of the three new portfolio companies creating the opportunity for us to enhance returns for our shareholders. Let me briefly recap each of our new portfolio company investments. We invested $7.5 million in first lien debt and common equity in Alzheimer's Research and Treatment Center, a leading clinical trial site services provider. They focus on trials targeting the treatment and prevention of Alzheimer's disease. $7.5 million in subordinated debt and common equity in Palisade Company, a leading provider of risk modeling and decision analysis software; and $15 million in second lien debt in Argo Turboserve Corporation, a leading provider of parts management and the outsourced logistics services to the aerospace and industrial markets. As I mentioned on prior earnings calls, we expected to see a fairly robust level of realizations as the year came to a close as several portfolio companies were evaluating strategic alternatives are going through sales processes. And that is in fact what happened. Proceeds from repayments and realizations for the fourth quarter amounted to $96.2 million representing a little more than half of the total for the year and came from payment in full of $10 million on our second lien debt investment in Toledo Molding & Die, payments totaling $24.3 million including prepayment fees related to the exit of our debt and equity investments in Thermoforming Technology Group, payment in full of $12.6 million including prepayment fees on our subordinated debt investment in Midwest Transit Equipment, a payment of $4.7 million related to the exit of our equity investment in Far Research, payment in full of $9.1 million including prepayment fees on our subordinated debt investment in Revenue Management Solutions, payments totaling $10.9 million including prepayment fees related to the exit of our second lien debt and equity investments in SimplyWell, payment of $8.1 million related to the exit of our equity investments in Apex Microtechnology, payments totaling $5.1 million related to the exit of our subordinated debt and equity investments in Caldwell & Gregory, payment of $2.5 million on our second lien debt investment in Restaurant Finance, and payment in full of $7.7 million on our second lien debt investments in Plymouth Rock. As a result of exiting the equity investments mentioned above, we generated realized gains from four companies totaling $11.7 million, partially offset by a $6.8 million loss on our second lien debt investment in Restaurant Finance. While the fourth quarter was very busy from an originations and realizations perspective, that activity level was stretched into the first quarter of 2019, helped in part by some holdovers from the fourth quarter and in part by acquisitions completed by some portfolio companies. Subsequent to year-end, we closed investments totaling $56.9 million and received repayments amounting to $50.3 million. In terms of new deals, we invested $17 million in BCM One Group Holdings, Inc. in the form of subordinated debt, preferred equity, and common equity, and made $11 million additional commitment in the subordinated debt tranche. BCM One Holdings is a provider of Managed Technology Solutions and Services. $18.4 million in subordinated debt and common equity of BCC Group Holdings, Inc., a leading provider of software and data solutions designed to enhance direct mail processing, and $10.5 million in first lien debt and common equity of Diversified Search, LLC, a leading multi-practice retained executive search firm. And in terms of repayments, we exited our debt investments in Gurobi Optimization, LLC, and received payment in full of $20.4 million on our subordinated debt, which included a prepayment penalty. We exited our debt investment in Fiber Materials, Inc. and received payment in full of $4 million on our second lien debt, and we exited our debt investment in Tile Redi, LLC, and received payment in full of $10.2 million on our first lien debt. In addition, K2 Industrial Services, Inc. was sold in late January. As you may recall, we placed K2 on non-accrual status during the third quarter and as of September 30, 2018, the fair value of our debt investments totaled approximately $6.9 million. Asserting our creditor rights, we took control of the company, identified a strategic buyer, and successfully sold the business. We have received a total of $13.4 million in cash proceeds representing payment in full of two of our debt investments and including prepayment fees and past due interest. We hope to receive residual proceeds which we believe will cover our remaining debt investment at which point our original debt investment will be fully realized. As part of the sales transaction, we recognized a loss of approximately $1.3 million on our equity investment. Turning to our portfolio construction and metrics, the fair market value of our investment portfolio as of December 31, 2018, totaled $643 million equal to 107.4% of cost. The breakdown on a fair value basis between debt and equity was 81.3% in debt and 18.7% in equity investments. We ended the quarter with 60 active portfolio companies and three portfolio companies that have sold their underlying operations. As of December 31, 2018, we had debt investments in two portfolio companies on non-accrual status. In addition to K2 Industrial Services, which I just mentioned, and we substantially exited, in January, we placed U.S. GreenFiber on non-accrual during the quarter. This investment represents 1.2% of our portfolio on a fair market value basis. We're extremely active with regard to this situation. Moving to portfolio performance, we track correct several quality measures on a quarterly basis to help us monitor the overall quality, stability, and performance of our investment portfolio. In the fourth quarter, these metrics remain solid. First, we track the portfolio's weighted average investment rating based on our internal system. Under our methodology, a rating of one is outperform and a rating of five is an expected loss. As of December 31st, the weighted average investment ratio for the portfolio was two on the fair value basis in line with prior periods. Another metric we track is the credit performance of the portfolio which is measured by our portfolio companies combined ratio of total net debt through Fidus' debt investments to total EBITDA. For the fourth quarter, this ratio is 4.5 times compared to 3.7 times for the same quarter last year and largely reflects the average leverage of deals we invested in over the past 12 months. The third measure we track is the combined ratio of our portfolio of 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 fourth quarter, this metric was 3.6 times compared to 3.7 times for the same quarter last year. We believe the soundness of these metrics reflect our debt structuring philosophy of maintaining significant cushions to our borrowers enterprise value in support of our capital preservation and income goals. Looking back on 2018, I'm pleased with the health of our investment portfolio at the end of the year. Through deliberate and proactive portfolio management, we have flushed out some riskier investments and successfully exited a couple underperforming situations. While we realized losses on some debt investments in 2018; we also strengthened the quality of our overall portfolio. At the same time, we invested a fair amount of capital in new investments. As a result, our portfolio remains well-positioned to generate high levels of current and recurring income from debt investments and through our equity portfolio ability to provide us with a reasonable margin of safety along with the opportunity to enhance returns. As we look forward, the lower middle market where we operate remains active and highly competitive. M&A transactions continue to drive the majority of the deals we evaluate. In this environment, our strong relationships with deal sponsors, our industry expertise, and our ability to provide customized and flexible financing solutions continues to differentiate us in the marketplace. From a macro economic perspective, we're mindful of the likelihood that we are late in the economic cycle and growth may slowdown in the not too distant future. Nevertheless, our underwriting discipline with regard to new investments enables us to navigate any choppy waters that may lie ahead. We will stay focused on investing in companies that have defensive characteristics and positive long-term outlooks that operate in industries we know well and that generate excess free cash flow for debt service and growth. At the same time, we will avoid investments in companies operating in more cyclical industries that are subject to sharp profitability swings. As a result, we remain well-positioned for the future. In addition, our recent debt offering which brought us about $66.5 million in net proceeds positions us well from a capital perspective. Our goal remains to selectively grow our portfolio in a cautious and deliberate manner while maintaining an acute focus on capital preservation in generating risk adjusted returns. Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?

Thank you, Ed, and good morning everyone. I'll review our 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 2018. Total investment income was $22.2 million for the three months ended December 31, 2018, a $4.3 million increase from Q3 2018. Interest and PIK income increased by $0.2 million, fee income increased by $1.5 million primarily due to various prepayment fees totaling $1.1 million, and a $0.3 million increase in structuring and advisory fees in Q4. Dividend income in Q4 was $3 million, a $2.7 million increase versus Q3 primarily due to a $2.5 million dividend from our equity investment and synergy. Total expenses including income tax provision were $11.3 million for the fourth quarter approximately $0.9 million higher than the prior quarter. Base management and income incentive fees increased by $0.5 million, total G&A expenses increased by $0.1 million, accrued excise taxes increased by $0.9 million while accrued capital gains incentive fees decreased by $1.3 million. Interest expense was $0.6 million higher in Q4 including a $0.1 million of non-cash accelerated amortization expenses related to the repayment of $23.5 million of SBA debentures. Interest expense includes interest as well as any commitment and unused line fees. As of December 31, 2018, the weighted average interest rate on our outstanding debt was 4.1%. As of December 31, we had $277.5 million of debt outstanding comprised of $191 million of SBA debentures, $50 million of public notes, and $36.5 million outstanding on our line of credit. Our debt to equity ratio was 0.7 times or 0.2 time statutory leverage excluding exempts SBA debentures. Net investment income or NII for the three months ended December 31, 2018, was $10.9 million or $0.45 per share versus $0.31 per share in Q3. Adjusted NII was $0.46 per share in Q4 versus $0.37 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, 2018, Fidus had $4.9 million of net realized gains primarily related to the exit of our equity investments in FAR Research, Apex Microtechnology, Caldwell & Gregory, and Thermoforming Technology Group offset by a partial write-off of our debt investment in Restaurant Finance Co. Our net asset value as of December 31, 2018, was $16.47 per share which reflects the payment of a $0.39 per share regular dividend and a $0.04 per share special dividend in December. Turning now to portfolio specifics as of December 31. Our total portfolio had a fair value of $643 million consistent with our debt oriented investment strategy, our portfolio on a cost basis was comprised of approximately 9% first lien debt, 63% second lien debt, 18% subordinated debt, and 10% equity securities. Our average portfolio company investment on a cost basis was $10 million at the end of the fourth quarter which excludes investments in three portfolio companies that have sold their operations during the process of winding down. We have equity investments in approximately 94% of our portfolio companies with an average fully diluted equity ownership of 6%. Weighted average effective yield on debt investment was 12.6% as of December 31. The weighted average yield is computed using the effective interest rate 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. In Q4, we upsized our line of credit facility to $90 million and repaid $23.5 million of SBA debentures and our first SBIC fund FMC which is in the process of winding down. As of December 31, our liquidity and capital resources included cash of $42 million and $53.5 million of availability on our line of credit, resulting in total liquidity of $95.5 million. In February, we completed a public debt offering of $69 million in aggregate principal of 6% notes due 2024 raising net proceeds of approximately $66.5 million including the exercise of the overallotment. Since the beginning of the year, in addition to completing a debt offering, we paid down $19.8 million of SBA debt and had a number of subsequent events resulting in current liquidity of approximately $125.4 million comprised of $35.4 million in cash and $90 million of availability on our line of credit. Now I'll turn the call back to Ed for concluding comments. Ed?

Thank you, Shelby. As always I'd like to thank our team and our Board of Directors at Fidus for their dedication and hard work and our shareholders for their continued support. I will now turn the call back over to Lauren for Q&A. Lauren?

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

Hi, just one housekeeping one first if I can. Shelby, I may have missed it, if you gave it, can you tell us how much accelerated OID that was in the interest income line rather than the fee income line in the fourth quarter?

You know what -- let me -- why don't you ask your other question, let me just look at some reference and I'll get right back to.

Perfect. Then the repayment environment, I mean obviously you have high doesn't really do isn't the right word, lot of repayments in Q4 and then obviously that has continued in Q1 in fact I mean it's pushing 20% of your portfolio kind of repaid in the last two quarters including Q1. I mean what's the level and it's very difficult to predict but is the environment conducive to repayments remaining highly elevated going forward? Or can you give us kind of any color on what you expect, what's plausible on that front compared to the really elevated levels we've seen recently?

Sure, Robert it's a great question. I think what drove the large majority of our repayments in Q4 was M&A transactions. We did have a couple situations where the debt was just refinanced for sure but a large majority of the repayments and realizations was M&A driven. I would say here in Q1 that's a -- it's been a little bit different. We had a company that was performing too well, if you will, and had a large repayment there and then we have proactively and K2 would be one of them really push for the realization or repayment of several loans here over the last three to four months in certain situations. And so it's been a combination of M&A activity and quite frankly proactive portfolio management. What I would say is we're going to continue to have a healthy level of M&A but we don't have the same level or the same number of companies in our portfolio today that are pursuing strategic alternatives like they were last fall. So I think it's a little different scenario on a look forward basis. I'm sure that will change at some point but we don't anticipate the same level of repayments over the next call it three to four months that we've had in the past.

Got it, got it. And I mean in your prepared remarks, you talked about that you've strengthened the quality of the portfolio by these proactive measures? I mean without, not trying that completely back you into a corner. But of course I’m. Are you done with that portfolio rotation today or are you continuing to seek to strengthen the quality of the portfolio by proactive measures with assets that you have on the books right now?

Yes, you are backing me into a corner but I would say look we're not done, we're never done is the way I would answer that. We're always looking for ways to optimize our portfolio and if we think situations are risky and they could get riskier then we move to do that. But you're not always in a position to do it at the same time. And so I'd say we're opportunistic on that basis and we obviously have had some success in moving some underperforming situations out of the portfolio but we're never done. I think it's something we're always looking at and always trying to accomplish. But I think we -- at the same time, we feel very good about the health of our overall portfolio --

Got it.

As we sit here today. And we -- a lot of the purposeful moves have been what if there is a recession or if we have a slowdown, it's unclear when that may or may not happen. It will eventually but we are -- we have been for a couple of years really working hard to position the portfolio for that kind of an event. And so we can withstand that. So again we feel good about the portfolio. But it's been a valuation.

Got it. Got it, I really appreciate that color. Okay one more if I can. If we look at your equity book north of $50 million in unrealized appreciation of course that's concentrated in two assets, really in two assets like Pinnergy and Pfanstiehl. So can you give us an update anything that's going on with those two assets that have obviously been very successful on from the value of your equity piece there and Pinnergy actually generated income as well. So can you give us any update on those two?

Nothing material other than they continue to perform very well on our operating and financial basis, we're always evaluating the opportunity to monetize our investments but we're also looking out in the future and say is now the right time or should we wait. So that's part of the equation but I don't have an update any more than the companies continue to perform very well and we are as you would expect always looking for ways to monetize our more mature equity investments and so we'll continue to do that with regard to both names but that's part of the only update I can give you.

Okay, thank you.

So Robert, back to your question, in Q4, we had about $800,000 of OID, if you will. But 245 was from the acceleration of closing fees related to debt investments that were repaid and the remainder was related to a warrant that was issued against the Midwest Transit Equipment debt that got repaid in Q4.

Got it. Thank you.

Thank you, Robert. Good, talking to you.

Thank you. Our next question comes from Paul Johnson with KBW. Your line is open.

Good morning guys. Thanks for taking my question. I was wondering if you guys could talk about the book value resilience, I guess that you had in the quarter given your net appreciation that you had last quarter? And then maybe also what you saw in the lower middle market space during that time of volatility? And then also I guess interesting conjunction with that, if you could describe your quarterly valuation process that would also be helpful. Thanks.

Sure absolutely. I'll let Shelby take the valuation process. I'll jump in on the book value. I think what I would say is the valuation process what we found was that the companies in our portfolio on average were in a slow growth mode in growing both revenues and EBITDA. So a majority of the companies were growing on both of those facets which is obviously helpful from a valuation perspective. And so the underlying performance of our portfolio was strong throughout the year and continued to be very good in the Q4 time period. And so that is what's reflected in the book value appreciation. Other things obviously K2 that we mentioned in our prepared remarks was a nice write-up at the end of the quarter. And so that was also a positive to the overall portfolio. But what I'd say is generally speaking the portfolio companies and their underlying performance were as probably as strong as they've been in a while in Q4. And so that's what's driving the stability of the portfolio -- of the book value. And also if you look at NII was, we exceeded the dividend by $0.06 or so. And that also drove some of the appreciation. Shelby?

So in terms of our quarterly valuation process, we do internal valuations on 100% of our securities every quarter. And I would probably highlight that the team that does the valuation team from the senior deal team members that's the same team that did the origination, so it's cradle to grave in terms of their touch on the investment assets. And then we also have used Lincoln to do a third-party valuation. In Q4, Lincoln looked at 16 of our portfolio companies which represented about 36% of our investments at fair value. And I would say that's pretty typical of what we do every quarter. And Lincoln will review all of our investments at least once per year. The Board does have them look at riskier investments more frequently sometimes as every quarter. And we'll take a look at some of our larger investments and potentially value them more than once per year. After we complete our internal valuations and we have Lincoln's recommendations, we present all of that information to our Audit Committee which consists of all of the independent members of the Board. Audit Committee which has a very lengthy probably usually three to five hour conversation as it relates to discussing all the portfolio companies, the valuations, and business update. They'll make any potential recommendations and changes that will incorporate into the financial statements and then ultimately the final recommended fair values are presented to the full board for review and approval and inclusion in the financial statements.

Okay. Thanks for the detail, that's very helpful.

Absolutely. Good talking to you, Paul.

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

Yes, good morning. I wonder if maybe I missed it but could you give us an update on accessing more SBA financings?

Great question, good morning, Chris. We are continuing to work through the process, is our understanding obviously the government shutdown in January and part of February was I think slowed things down just a little bit but we are hopeful and we're continuing to work through the process is what I would say.

Okay. And remind us you had a Greenlight letter or that had not yet been issued?

No, that has been issued.

That has been, okay.

We should be towards the tail end of the process. We're just not 100% at the finish line yet but we're definitely making continued progress.

Okay. And then just since there -- rare when you have a new non-accrual -- always I'm curious and GreenFiber is listed as a building products company and I'm wondering is the issue there is obviously with rates rising, housing stocks were under pressure last year and then there's concern about I guess housing and building, is there do you see stress in the sector or is it a more idiosyncratic issue?

Yes, it's more a company-specific issue; it's not a -- not an industry issue. The company manufactures and sells cellulose insulation which competes against traditional insulation as many character, many attractive characteristics relative to the competition including being a Green product, company called consolidated several plants a few years ago and the execution of that was four. And then more recently paper prices or certain types of paper prices recycled paper hurt the company but actually that's subsided. But last year was a tough year as more, a couple of negative events could it a plant fire and also the death of the company's CFO which was ahead amongst other things. So that's the situation reflects the risk of our investments as of the end of the year. We're very active in this situation but yes, it was a tough 2018, it wasn't really an industry issue, it's more just company specific stuff.

Okay. And otherwise in general, it still sounds like you are overall constructive and on the outlook for how are things going at your portfolio companies generally, I guess is the question.

Sure, sure. No, it's a great question and obviously it's top of mind subject for us. I think as I was just discussing with regard to the valuations in our NAV, I mean what we saw in Q4 as we looked at the portfolio and obviously we're continuing to look at it, there was pretty good growth on the revenue side of things and also from an EBITDA perspective and so at the moment, we aren't seeing any real pockets of uncertainty. I mean there's issues out there you got to pay attention to, tariffs increasing, certain input costs and things like that and we're obviously being very careful with regard to consumer investments, healthcare services, reimbursement rate risk is something we're paying attention to and really trying to stay away from things like that. But when I look at the underlying portfolio that we have today, I think we feel very good about its overall health and also just its trajectory at the moment. So it feels like it's in a very solid place at the moment.

Okay, great. That's it for me. Thank you.

Thank you. Good talking to you, Chris.

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

Yes, good morning everyone. I wanted to follow-up on the valuation question. Could you help us understand how credit spreads impact valuation? And could that potentially provide a tailwind for NAV in the current quarter?

Well I'd say, does it impact our valuation, it does it's an input that goes into and when comps go down does it impact our equity valuations. We do take that into account with regard to those and then also on the debt side but to a much lesser degree than the whipsaw that we saw in the more liquid markets in December. We then with a private debt investment and with cushions of call it 50% from an equity cushion perspective, we didn't see that kind of volatility in our marks. And so I don't think you would see a material uptick from an NAV perspective. I think could there be modest jumps, the answer to that is yes. But I wouldn't look for a material uptick, is what I would say, Mickey.

Okay. If I heard Shelby correctly, the dividend -- the large dividend in the quarter was from Pinnergy, is that sustainable or was that some sort of a true-up perhaps due to taxes or something else?

No, I mean the company is in a very -- it's performing very well on a very unlevered position. So there's not a lot of debt on the books and so there's more of an opportunistic dividend that we don't control this company. But the board decided to make. So I would what I would say is it is sustainable. Could you do more? Then the answer is yes. But I also wouldn't say that's not something that we are expecting to repeat. And we're not in control of it, so I can't say ever. But definitely it's not a quarterly type of dividend. I would not think of it in that manner. But I do feel good about the prospects of the business and it's very unlevered. So there's an opportunity to do more dividends but we're not in control of it -- of that aspect.

I understand. Turning to K2, what is the principal amount of the new debt in the company and presumably that's going to be back on approval; is that right?

That is correct. It's actually not in the company. The company was sold. So it's a side entity where we have residual proceeds that are expected to come from a variety of sources without getting into too much detail. But it's $2.5 million that are still left behind and our current expectation would be that that would be repaid in full over the call it medium term it's probably a 24 month type of situation. But we feel good about the prospects there. There's risk that those residual proceeds don't come back as you might expect but I think we feel good about those prospects.

Okay. And just a couple of sort of modeling questions. It looks like exits for the fourth quarter were backend weighted; is that a correct assumption?

I'd probably say, it's just really spread throughout the quarter but we didn't have done a lot of it.

We had quite a bit preview. At the time of our call, we had some in October for sure but I'd say it was spread across the quarter in general is what I would say.

All right. And just looking at the SBA, I appreciate your comments on the Greenlight letter. On the flip side, when do you expect to repay Fund One's remaining debentures?

So we have about $21 million left since we made the last payment in February and that'll be truly dependent on when we get repayment of the underlying investments. It's possible, we could finish repaying that this year but it will just really depend on various sales processes and what really closes between now and September 1.

Okay. So $20 million were repaid this month and that leaves $21 million for the future; is that right?

That's right.

Okay. And last -- my last question. I apologize maybe you've already announced it. Do you have a target leverage number that you've announced?

No. Mickey, I think what we've talked about in the past is 0.7 to 0.8 is something that for the long -- long haul we've been very comfortable operating with. With the new legislation quite frankly we have a lot of SBIC debt; we're comfortable going higher up to one. I don't see us going over one, even with SBA debt, we're comfortable going up there but we're also fine. Our target is more in 0.7 to 0.9 range, I would say.

Okay, I appreciate it. Those are all my questions this morning. Thank you for your time.

Thank you. Appreciate it. Good talking to you, Mickey.

Our next question is a follow-up from Robert Dodd with Raymond James. Your line is reopened.

Hi, just a detailed question on K2, on the mark-up that occurred in the fourth quarter obviously was a controlled investment at the end of the quarter. But it wasn't at the beginning. So where did that mark-up it was what $4.8 million unrealized appreciation to get it towards where it was exited. Did that -- was that embedded in the non-control line or in the control line on the unrealized appreciation?

The controlled line.

Oh, yes, K2 was a controlled investment in Q4.

So it would be embedded in that line, right.

Okay, got it. Thank you.

Thank you, Robert. Good talking to you.

Thank you. [Operator Instructions]. And I'm not showing any further questions at this time. I would now like to turn the call back over to Ed Ross, CEO, for any further remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.