Fidus Investment Corporation (FDUS) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Fidus Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Jody Burfening. You may begin.

Thank you, Tuanda, and good morning, everyone. Thank you for joining us for Fidus Investment Corporation's second quarter 2020 earnings conference call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer. Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's website at fdus.com. I'd like to remind everyone that today’s call is being recorded. A replay is 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 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 flows of Fidus Investment Corporation. Although, management believes these statements are reasonable based on estimates, assumptions, projections as of today August 7, 2020, 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.

Good morning, Jody and good morning, everyone. Welcome to our second quarter 2020 earnings call. I hope all of you and your loved ones are doing well. Given that the pandemic continues to create uncertainties around the timing, pace and strength of an economic recovery, like last quarter's call I'm going to focus my remarks today on discussing the credit quality of our portfolio and the impacts both positive and negative of the pandemic on the financial performance and outlooks of our portfolio companies. 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. When we held our first quarter earnings call 90 days ago, we did not know how long or how deep a COVID-19 induced pause and economic activity would last nor what the path of an economic recovery would look like. Our portfolio companies had prepared plans to ensure business continuity and to manage through supply and demand challenges. We had structured our portfolio to handle severe economic stresses, and we believe that our investing strategy and our underwriting discipline would help us weather the storm. Nevertheless, we knew the portfolio contained elevated levels of risk, and we proceeded with a great deal of caution, working closely with the senior management teams and sponsors of our portfolio companies. I'm pleased to report our portfolio companies having been thrown a curve ball are for the most part holding their own. Since last May, the overall risk levels of the portfolio have improved. From a liquidity perspective, our portfolio companies are doing better than expected and are currently well-positioned for the remainder of the year. They were paying their interests without stretching their cash flows and their resilient business models and capital structures are providing them with bulwarks against the storm. Overall, our portfolio companies are finding their way through the crisis, adjusting their business operations, conserving cash, cutting costs, and maintaining spending discipline even as their circumstances may differ due to the patchwork of rules and regulations and to varying degrees of economic activity. After shelter-in-place restrictions were lifted, some of these companies reopened to find a less competitive environment. Others reopened to find softened demand. These latter companies are working hard to find their way back to pre-pandemic levels of business. A few of our portfolio companies have identified pockets of opportunity because of the pandemic while others are using this period of reduced activity to focus on improving business efficiencies and profitability. In addition, in terms of non-accruals, we ended the second quarter in an improved position relative to last quarter when as you may recall, we had proactively placed two portfolio companies on non-accrual, even though they ultimately made their interest payments. Since then, our initial concerns about those two companies EbLens and Virginia Tile Company have not been realized, and we have removed them from non-accrual status. Debt investments in Accent Food Services remain on non-accrual and Mirage Trailers remains on PIK non-accrual. As a result, we ended the quarter with non-accruals in aggregate of $21.4 million, 2.9% of our portfolio on a fair value basis. With the exception of one non-accrual, our assessment of portfolio risk across the board, based on the company, operations and valuations has improved materially since last quarter. At that time, our view was that a little more than 80% of the portfolio on a fair value basis was in the low-to-medium risk range. Today, our view is that about 88% of the portfolio is in the low-to-medium risk range, and about 68% is in the low risk category. Given the stability of our portfolio, even in the face of tough economic conditions, we reported adjusted net investment income, which we define as net investment income excluding any capital gains incentive fee attributable to realized and unrealized gains and losses of $9 million or $0.37 per share, compared to $8.4 million or $0.34 per share for the same period last year, and $8.5 million, or $0.35 per share for the first quarter of 2020. After writing down the fair value of our portfolio last quarter by approximately 5.7% in response to elevated risk in the economy, our net asset value held steady and we ended with the second quarter with a net asset value of $15.39 per share, compared to $15.37 per share as of March 31 2020. On June 26, 2020 Fidus paid a regular quarterly dividend of $0.30 per share to stockholders of record as of June 12. On August 3, 2020, the Board of Directors declared a regular quarterly dividend of $0.30 per share, which is payable on September 25, 2020 to stockholders of record as of September 11, 2020. During the quarter we invested $16.9 million in debt and equity securities, nearly all of which was for two new portfolio companies. These were $12.5 million in subordinated debt and common equity in ECM Industries, LLC, a global manufacturer and supplier of electrical products through a wide range of premium brands, and $2.5 million in first lien debt in Ipro Tech, LLC, a provider of end-to-end eDiscovery and information governance software to top law firms corporations and specialty service providers. Both of these deals were in our pipeline before the pandemic hit the U.S. The remaining $1.9 million was for add-on investments in four portfolio companies. Although, we hit the pause button on deal activity during the second quarter, out of an abundance of caution, we have since reopened channels and are carefully evaluating select opportunities. We intend to take a conservative approach to origination with a view towards protecting our capital and our balance sheets. In terms of repayments and realizations, we receive proceeds of $2.5 million from 13 portfolio companies and recognized $0.2 million in net realized gains. Subsequent to quarter-end, we received payment in full of $7.3 million on first lien debt, including a prepayment penalty in connection with the exit of Hoonuit, LLC. And we exited our debt and equity investments in Microbiology Research Associates, Inc. We received payment in full of $9 million on our subordinated debt investment. We exited our common equity investment for a realized gain of approximately $1.4 million. Turning to our portfolio construction and metrics, the fair market value of our investment portfolio as of June 30, 2020 was $732.6 million equal to 98.2% of cost. We ended the quarter with 64 active portfolio company and three companies that have sold their underlying operations. On a fair value basis, the breakdown of the portfolio by investment type as of June 30 was as follows; first lien debt 19.1%, second lien debt 50%, and subordinated debt 20.7%, and equity investments 10.2%. We believe our portfolio is well structured with strong equity cushions to withstand negative events like the pandemic. From an industry perspective, our portfolio of high quality lower middle market companies remains well diversified with oil and gas related businesses accounting for 4.3% and a little more than 3% in retail, unchanged from last quarter. The portfolio companies that serve retail and leisure in markets are currently performing despite the fact that they were shut down 90 days ago. We do not have any direct exposure to the restaurants or hospitality sectors other than one equity investment with a fair value of less than $300,000. Overall, our strategy of selectively investing in companies with defensive characteristics, resilient business models that can withstand economic stresses and generate strong free cash flows and that possess strong long-term outlook continues to work for us. We believe that our portfolio companies will be able to navigate uncharted territory and their long-term outlooks remain positive. At the same time, our priorities for managing the business during the extraordinary challenging time has not changed. We are staying the course continuing to operate with an abundance of caution, focused on maintaining liquidity in order to support our portfolio of companies as needed, protecting our balance sheet and preserving capital in the long-term interests of our shareholders. Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?

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, 2020. Total investment income was $20.4 million for the three months ended June 30, 2020 $0.4 million increase from Q1 due to a 1.4 million increase in interest income, with approximately $0.6 million of the increase relating to returning to non-accruals, EbLens and Virginia Tile back to accrual status. Fee income from investment activity decreased by $1 million, FIC income as a percentage of interest income was approximately 5.9% for both the three and six months ended June 30. Total expenses including income tax provision were $11.1 million for the second quarter, approximately $8.6 million higher than the prior quarter, primarily due to the reversal of the capital gains incentive fee related to write-downs and fair value in Q1. In Q2, we elected to waive 20% of the income incentive fee the one-time fee waiver was approximately $0.4 million excluding the accrued capital gains incentive fees and income incentive fee waiver. Total expenses in Q2 were $11.4 million in line with Q1. As of June 30, the weighted average interest rate on our outstanding debt was 4.5%. We had $381.8 million of debt outstanding, comprised of $156.5 million of SBA debentures $182.3 million of public notes and $43 million outstanding on the line of credit. Our debt to equity ratio was one-times or 0.6 times statutory leverage excluding exempt SBA debentures. In Q2, the net loss on investments was driven by $1.5 million of unrealized depreciation offset by approximately $0.2 million realized gains. Net investment income, or NII for the three months ended June 30, 2020 was $0.38 per share, versus $0.71 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 $0.37 per share in Q2, versus $0.35 per share in Q1. Now turning to portfolio statistics as of June 30, our total investment portfolio had a fair value of $732.6 million. Our average portfolio company on a cost basis was $11.6 million at the end of the second quarter, which excludes investments in three portfolio companies that sold their operations during the process of winding down. We have equity investments and approximately 89.6% of our portfolio of companies with a weighted average fully diluted equity ownership of 4.7%. Weighted average effective yield on debt investments was 12% as of June 30. The weighted average yield is computed using the effective interest rates for debt investments at cost including the accretion of original issue, discount and loan origination fees, but excluding investments on nonaccrual if any. Now I'd like to briefly discuss our available liquidity. As of June 30, our liquidity and capital resources included cash of $19.3 million, $57 million of availability on our line of credit, resulting in total liquidity of approximately $76.4 million. Taking into account subsequent events, we have total liquidity of approximately $94.9 million. We also have access to $161.5 million of additional SBA debentures under a third SBIC license, subject to SBA regulatory requirements and approval. Now I'll turn the call back to Ed for concluding comments. Ed?

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 our operator Tuanda for Q&A. Tuanda?

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

Congratulations on a really good quarter. One quick question maybe - several questions, but one quick one for Shelby. Was there - in the second quarter was there 600,000 of catch up income related to the two non-accruals coming back up. Did you recognize the Q1 income in Q2 as well as the Q2 income, or was that just the 0.6 you mentioned was that just then coming back on accrual? Was there any catch-up there?

So, I'd tell you of that 0.6 that I mentioned was in Q2, about 100,000 was catch-up from Q1. The rest was all related to Q2.

Another housekeeping whether more sort of housekeeping one - from Microbiology Associates which you exited after the quarter-end, at the end of the quarter the equity was marked down about 100,000. But then you had a realized gain of $1.4 million after the quarter that's obviously significantly in excess of the mark. So should we read anything into that about how conservatively you're marking the equity positions right now? Or was that just a really fortuitous event post-quarter-end?

The MRA was unique situation, quite frankly we were unaware of the - that the transaction was going on. I think it happened quite quickly, and it was a strategic transaction, meaning a strategic buyer. This company was benefiting from COVID actually, and I think someone saw that and ultimately it ended up being a very nice outcome from a debt and an equity perspective for everyone quite frankly. So it's kind of a one-off and just the company that was benefiting and I think has a very good long-term outlook and someone saw that and wanted to participate.

Yes, it is. Thank you. And then kind of just a more general question about pipeline. Ed, you said you've kind of reopened channels. Now, one of the things you mentioned in your prepared remarks as well was that some companies have come out of this and seen a reduced competitive environment et cetera maybe and some have seen low-end demand. So all of what you're where you reopen channels. Would we expect that to be more add-on type acquisitions of your quite successful companies? You know, looking to buy out weaker competitors potentially or is it more of the platform type obviously, ECM was a platform acquisition, but that was done in the pipeline before COVID. So kind of what are you more willing to look at right now? I mentioned the due diligence difference on add-on versus a new platform. There is some different dynamics there?

It's a great question, Robert. You know, I'll just touch on the market for a second because I think it's instructive to your - actually your question. And that is that - over the first two months or so of the pandemic, two and a half months, we had hit the pause button. I think the world had hit the pause button other than maybe a couple add-ons that were in process and that were completed. And then in June, we started to see a variety of folks looking at add-on type of acquisitions, you didn't see a lot of M&A activity. But what I would say is over the last four weeks or so, we're continuing to see add-on activity for portfolio companies, whether our portfolio companies or sponsors, but we're also starting to see auction activity. And so things are starting to pick up. I do think that creates some interesting due-diligence hurdles potentially. There are some types of businesses that you can maybe get more comfortable with through Zoom and a lot of hard work and probably working with a sponsor that you know, but then there are others think about manufacturing companies where you really want to see the plants, you really want to see the people and the operations and understand their strategic advantages. And that gets a little more difficult. You may have to get in the car and go on a long ride, you know, but we're willing to do that as well. So we are entertaining both at this point in time, but what I would say to you is, we are continuing to operate with an abundance of caution. And while at the same time, we've kind of picked our head up and we're looking for interesting opportunities, but we're not in a rush. We're going to be very patient. And we're going to obviously preserve capital and do the right things for our shareholders.

Our next question comes from Bryce Rowe with National Securities. Your line is open.

I wanted to ask about the about the dividend actually Ed and relative to where NII is so. So obviously $0.37 here in the quarter and I guess there is some potential for revenue to drop off with some level of prepayment activity. But your sense of credit is certainly better than it was last quarter. So you've got a bit of a - I guess of a Class A problem here with NII well above the dividend, and then plenty of spillover income sitting on the balance sheet. So I'm just curious how you think about the dividend level here going forward, do you think about maybe base dividend plus supplemental structure to account for any variability? Just wondering how you're thinking about it?

Sure. That's a great question. And quite frankly there is a discussion this week obviously at the board meeting. You know, what I would say is, we continue at this point in time to believe it's in the long-term interest and best long-term interest of our shareholders to operate with an abundance of caution. And that includes our dividend distribution policy. We've always operated the business with a conservative mindset. We're very focused on maintaining a strong balance sheet. And we're also equally as focused on maintaining a very strong liquidity position to enable support of our portfolio companies and also obviously, drive shareholder value. And I'll just mention the portfolio because you brought it up. We believe it's a high quality portfolio, it's pretty resilient. And it's going to serve our shareholders well over the long-term. It's been constructed with an eye towards investing in companies that we believe have very defensive characteristics that possess long-term cash flow abilities and then obviously have strong outlooks over the long term as well. So we feel like we're very well positioned today. We do recognize from a dividend perspective, we may need to think about some things in the future. We do what we like the idea of waiting a little longer and finding a place have a little bit greater visibility. And then I would also say depending on how things go, we may need to make special distributions in order to meet some RIC spillover distribution requirements over the medium term. But quite frankly, we need to probably play a couple of more innings first to figure out the whole equation. So hopefully that's helpful. We're thrilled to be in a position where we can actually start having this conversation. But we want to be patient and wait on it.

Excellent. That's a good answer in one that I would have expected from you. So the other question I have, or maybe other topic, you mentioned auction activity starting to pick up, you clearly have a portfolio with still a healthy amount of equity in it, that go alongside your debt investments. And it sounds like it good - almost 70% of your portfolio is in that lower risk category. So, I would assume that at least some of your companies are garnering some level of attention if auction processes are starting to flare back up again. So just curious what you know what the outlook might be for prepayments or some of the some of the companies within your portfolio, funding that option block?

Sure, it’s a great question Bryce, and I think you hit the nail on the head. I do think we have, at this point we've had two repayments. One was a full sale as we discussed, the other one was a division of a company was sold and she generated cash to where they could pay-off all their debt, including ours, and they did so it was the first lien investment. And that was the - debt investment. And we do have a company that is in the middle of an auction process right now. And I think there's a decent chance that that comes to fruition here sometime in the third quarter, but you never know, especially in today's world. So yes, repayment activity is picking up a little bit and I think I would expect incremental activity in Q4. And so, I would expect an analysis but this probably this quarter repayments will exceed new investments. And that's our current expectation. But at the same time, we're working hard to, you know, find some interesting opportunities that we are comfortable with, obviously putting new dollars out and getting, risk adjusted returns that work well for the shareholders. So there's a, there's a balance here, we're trying to strike, but you're right, there is some repayment activity that I think will happen the rest of the year.

Our next question comes from the line of Ryan Lynch with KBW. Your line is open.

Thanks for taking my questions. First one I just wanted to discuss, you gave some, I think pretty positive commentary at least directionally about how your portfolio is trending several investments have come off non-accrual. I think you mentioned as a percentage of your portfolio, the medium to low risk bucket has increased, you know, from the prior quarter. So that's all positive commentary. So, I was curious, why do we not see that that positive commentary those positive actions reflected in the valuation and any potential gains of unrealized gains in your portfolio this quarter, you guys actually wrote the overall, had some portfolio of unrealized losses in this quarter after following a big drop in q1 as most BBC did, but why did we see any sort of our covering those portfolio valuations in the second quarter?

Sure. Great question, Ryan. You know, we have - I think if you look at the stats, if - our depreciation came primarily from one asset and that is one non-accrual, and that Accent is a franchise business, a very good business. And but having said that we're, you know, a second lien lender in it, we're not getting paid. And quite frankly, the company has been impacted by the shelter-in-place orders and also, it's, geographic locations in particular, as big as locations in Texas. And so, that's a large majority of the - well that that represented, I guess over $9 million of depreciation this quarter. If you were to exclude Accent, the total portfolio appreciated $8.1 million, debt portfolio appreciated by a couple million bucks, and our equity portfolio appreciated by almost $6 million. So I would, Accent unfortunately is the reason for that but what I would say absent Accent the portfolio did appreciate very nicely and quite frankly is holding its own in a very, an admirable way if you will and something we’re pleased with.

So Accent had a disproportionate impact versus the rest of the portfolio. You mentioned that the two previous investments coming off non-accrual status which is very positive. See that occurring on no new loans, right, as to non-accrual. Can you just talk about though, what level or how many modifications or amendments were made to portfolio companies this quarter and how those, you know, if there have been any, how those conversations then?

Sure, great question. I guess I'll start with a couple things. One is, we only have what I would consider two covenant light deals, in our portfolio. And so, when we do a new transaction, we obviously are underwriting whether it's 15%, 25%, 30%, whatever it is sometimes it’s give some cushions, obviously, because that's appropriate to our borrowers. But the intent is if things do change dramatically, we want to be back at the table. And so, we only have two where we don't really have covenants like that. And so, we would expect in times like this to have a fair number of conversations. I would also say we also had a fair number of conversations and amendments from PPP loans or the CARES Act. And so, those were when people access those programs, they had to talk to us about doing so. And so it's, we're very active and involved in conversations and have a seat at the table and the portfolio is designed to do that. So what I would say at the end, we executed, probably four amendments that were really were COVID driven amendments this quarter. We had sponsors, and I'll give you I guess, a couple of examples. One is a company that has been impacted by the aerospace industry and the reduction in activity there. We are asset secured there, in a second lien loan company wanted a little cushion. They need a lot but we obviously work with the company to do that. And another case, we already had - we were in a amendment discussion with a company and obviously COVID happened and didn't help things. And the sponsor and us came to an agreement where they put in $2.5 million and we gave the company, some covenant relief for the next 12 months and so, those were the types of conversations that we're having. I would expect to have similar conversations this quarter. But as I look forward, I don't see any huge headwinds or huge concerns. It doesn't mean we're not all over every situation because we are, but we feel very good about the outlook of the portfolio and working through these types of situations. Is that helpful?

Yes, that's very helpful color and detail. Just one more from me as the deal pipeline starts to pick back up a little bit from obviously, extremely low levels. Are you guys viewing risk any differently or the willingness to take on risk any differently or any sort of shift in strategy at all? As we look at, the U.S. potentially, recovering from an economic standpoint. There's one thought that you can move into some more riskier industries, if the terms and the structures are extremely favorable, or the other kind of side of it, it is just really stick to really, high, high quality companies that don't have as much COVID impact. But obviously, pay up for those and the terms and structure? So has there been any shift in your strategy, kind of since the environment is so different today and through the end of the year versus where we were a year ago?

Sure, so let me let me talk a little bit just about our strategy for a second. And as I think you're very aware - what we focus on is situations where there's a need of $20 million to $150 million of debt capital. I'd say our $20 million to $100 million is really more of a sweet spot for us. When we are evaluating companies and opportunities, we first focus on the quality of the company, how defensive it is, its ability to generate cash and outlook. Then we focus on structuring and we've always provided first lien securities quite frankly, but a preponderance of what we've - our portfolio has ended its second lien and subordinated debt. What I would say is over the past year, we have found, that our clients are very interested in a lot of our first lien solutions, including first out, last out solutions. In fact investments - over the last call it 12 months have been close to 70% first lien investments, when I think about the last 12 months. So first lien securities, I would say an environment like this make a ton of sense. And it's something that we've been doing all along, but I would say to a much greater degree over the past 18 to 24 months. Having said that, we're going to continue to provide second lien and sub-debt financing solutions, but we're going to do that obviously on a very, careful basis as we always have. So, I hope that's helpful. I think we're looking at mostly, companies that are weathering the COVID storm quite well, but there are others that are still great businesses and quite resilient that - they will also evaluate if those situations make sense. But it's all about capital preservation and attractive risk adjusted returns from our perspective.

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

Just a follow-up on the last question, you said you did executed four amendments in the quarter, but we didn't see amendment fees necessarily pick up? So is - getting that situation additional security or what?

They weren't we didn’t - I don't have them in front of me, Chris. But what I would say to you is we did receive some amendment fees.

Yes, okay.

They weren't, outsized or crazy. And so and in some cases, and Shelby can answer this, some they are, tacked on to the end of a loan and paid then. So there's a variety of things that could be impacting that. But I would say, if we gave covenant relief, and a sponsor did not put any money in, there's going to be an amendment fee of some sort. And in almost all cases, there's a little bit of a work fee, but we're not looking - it is a, let's get our pound of flesh. We're looking at it as we do want to get paid for the risks that we're taking. But at the same time, we're trying to work constructively with our partners, if you will and if they're providing something which we're requiring in almost all cases, then obviously we need to obviously look at it, with that in mind. So, I think there is definitely - there is amendment fee income in the P&L, it's just not huge.

Okay.

Yes so Chris what I would just add is of the fee line item on the income statement, actual amendment fees were roughly about $170,000 which is pretty much in line with Q1.

Okay. And just out of curiosity, if you can say on the two loans that you've returned to a accrual status, was that as a result of the actions that the sponsor took, or was it just the economy kind of at least reopening a bit and that that gave you more comfort that they could service the debt?

Sure in both cases, the companies were greatly impacted by, by shelter in place directives. And in both cases, the sponsors asked not to pay us and actually thought not to pay us. And we're obviously willing to work with folks. But we wanted to get paid it was in our contract and the companies had the liquidity to do so that ultimately did take place. What I would say in both cases is the, one was fully shutdown. The other one had one division that was shutdown due to shelter in place directors. But what I would say is, both companies are performing quite well post opening. And, I'd say over the last eight to 10 weeks, it's been encouraging at a minimum liquidity is strong. And so, we feel very good about the long-term outlooks sponsors have not had to put money in them. So they're performing much better than we all feared, including the sponsors at that point in time. I mean, if you go back 90 days ago or 120 days ago, it was a little scary and you didn't have a lot of visibility. And today, we do have much more visibility. It's not perfect, as we all know. But companies are operating generating cash and we feel good about their outlooks.

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

Good morning Ed and Shelby. Hope all as well on either end. Just a couple of questions from me. How contingent you believe the performance of your borrowers will be from continued federal support, perhaps such as the extension of the PPP program or maybe other programs, which I imagine had some impact on the second quarter results, which were clearly better than we expected it?

Sure. Great question, Mickey. I'd say two things. One is the PPP program was helpful to some of our portfolio companies. And so that is a positive. Quite frankly looking at it today don't see really a material need for incremental support as we sit here today, at least in our portfolio. And that's as a whole, but that's generally what I think. When I look at things like a stimulus, I think that's healthy for the overall economy and probably helpful to retailers in particular. And so I think that would be positive if there was a stimulus. But as I look at our portfolio companies today, including the retailers they are holding their own. And I don't think it's a requirement for them to continue to perform well, but I think it would enhance their performance at the end of the day.

Well, that's certainly welcome news. Ed there was movement in your internal rating system. And frankly, I'm just trying to get a handle on credit just like you, I mean - I know its early innings. It's difficult to have much of a crystal ball, but you had some credits move up into the one category, you get some credits move down into the three. Could you describe either which of those investments were moving or at least semantically what was causing those changes from Q1 to Q2?

That's a tough one. We are not looking at it. I think I'll just talk general picture with you. I don't think we are continuing to operate. And I think what you saw was actually overall a fair bit of stability in that piece of the puzzle if you will. And companies that were impacted, you know, a lot of companies were impacted in April and May, but are performing great today. We still have them probably in the three category. So we didn't make moves just because the run rate is now getting to a point where they were before COVID or they're very close to that. And obviously, as a debt investor, we're pleased with that and expect it to continue, but and then, if something moves towards the one it was because, we thought there was a likelihood of repayment in the near term or just extremely positive performance. And I don't know if I mentioned this, but we've had seven or eight companies that are benefiting from the pandemic and in some cases in huge ways, and so I think that's part of it as well. But overall, I think there is a lot of stability when you look at that those charts, and I think we feel very good about that. But quite frankly, as I look forward to there, I think it'll get better from here as opposed to worse.

That's it.

Yes, Mickey what I would add is just looking at the names, one of the more material dollar movements from rating two to one was related to the one transaction as kind of mentioned was likely to transact here in Q3, still TBD. But kind of having that line of sight made us more comfortable that there was a near term realization.

Okay, that's helpful.

And that company is also performing very well in this environment.

Right. And in terms of trends, Ed what are you seeing in portfolio EBITDA maybe you could give us a sense of where the average borrower EBITDA stands and debt-to-EBITDA just so we have some sense of the portfolio's risk?

Sure. So the mean EBITDA is about 11. We have some couple larger portfolio companies that have the average being more than the mid-teens, but the main EBITDA is $11.3 million. And what was your other question, I'm sorry.

Leveraged debt-to-EBITDA?

Leverage is 4.7 times this quarter. So in line with last quarter.

Okay, that's helpful.

In the interest coverage, cash interest coverage was 3.7 times.

Okay. And my last question maybe for Shelby, if I'm reading the queue correctly, you amended the credit facility, but it doesn't look like the amendment allows you to use the 150% regulatory asset coverage ratio. I mean the language frankly is difficult. Am I reading that correctly?

You are, but the one thing I would highlight is that the test is based on a regulatory basis and so from a regulatory basis, given the SBA debentures we have we're at 0.6 times leverage and so we have ample room, and so we just haven't pushed on getting that amended.

Okay, so but in terms of the pricing, there was no meaningful change rate or commitment fees or anything like that?

No change in interest pricing, No we did have to pay a modest amendment fee, but there was no other change in pricing.

Our next question comes from the line of Tim Hayes with B. Riley. Your line is open.

This is actually Mike Smith on for Tim. Just one question for me. Can you provide a little bit more color on the competitive landscape of any vendor steps away or back into the market and how to yields on new investments you're making look compared to pre-COVID?

Sure, great question Mike. From a competitive landscape, I think it's a little bit of a mixed bag. I think there are some providers that have obviously slowed down their originations or kept them at a halt if you will, and are really focused on their portfolio and on de-leveraging those types of things. A lot of those are more CLO type funded players, but it also could be just folks that have mature funds and are just trying to navigate through the portfolio. So, there is less competition. Having said that, I would also tell you, there are lenders out there that have capital and are looking to deploy it in companies that are - have not been impacted by COVID in a material way, and to the extent they may even be trying to take market share type of thing. So, it's a bit of a mixed bag. I think there is fewer players, but there is still some aggressive players out there. And I think there is a flight to quality in the market. And that's what we're seeing. And that seems to make a lot of sense to me. From a yield perspective, I do think, that's a moving target right now. Interestingly, I'd say if you want to talk about it 8 week ago, you would have said 150 to 250 basis point increase for - and a lower leverage point for most investments. I think that's moderated a little bit. And again, I'm talking about companies that haven't been impacted by COVID in a material way. And so I'd say anywhere from 50 to 150 basis points is more than norm that is being talked about today. I do think leverage has come down some and that makes a ton of sense. But the idea of 250 or 500 basis point increases is not what's going on in the market today.

Thank you. I'm not showing any further questions in the queue. I would now like to turn the call back over to Mr. Ed Ross for closing remarks.

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

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.