"Fidus Investment Corporation (NASDAQ: FDUS) invests debt and equity capital primarily in lower middle market companies based in the United States. We invest in a wide range of industries where we have expertise, and look to partner with business owners, management teams, and transaction sponsors seeking long term capital for change of control, recapitalizations, acquisitions, and growth oriented transactions. We have a team of highly experienced investment professionals and pride ourselves on investing with a partnership-oriented approach and utilizing our flexible investment mandate to deliver custom-tailored financing solutions designed to meet the specific needs of our portfolio companies".

Posts for Fidus Investment Corporation

FDS Avionics Corp: Company Sold

Increasingly Business Development Companies are “turning around” their own under-performing portfolio companies. This drastically changes the profile of an investment – usually both increasing the capital put at risk and extending the holding period. Furthermore the ultimate prospective return changes as equity stakes taken from a turn-around can range widely in value over time. With that in mind, the BDC Credit Reporter is very interested in chronicling every instance of a BDC seeking to tackle a distressed asset. In this case, Fidus Investment (FDUS) took charge of FDS Avionics in 2014, investing $7.2mn of subordinated debt and equity.

By 2017, the company was in trouble and FDUS booked a ($2.4mn) realized loss and invested another $750,000 “along with certain co-investors and management, giving us a controlling interest”. In 2019 FDUS – on a conference call – explained its approach: “This is an aerospace parts company, it’s primarily electronics. It serves the general aviation, the commercial and the military end markets, so there’s some diversity there. It’s been lumpy historically. And it also was in need of a product refresh whereby customers really wanted to wait for certain new products versus buying some of the legacy products. We continue to believe in, I’d say, the value proposition of the business. And as such, we made a control equity investment probably 20 months ago now.”

Through IVQ 2020, FDUS exposure at cost was $8.4mn in first and second lien debt, preferred and common. At one point FMV had dropped as low as $4.0mn. Now we learn the following: ” On February 12, 2021, we [FDUS] exited our debt and equity investments in FDS Avionics Corp. (dba Flight Display Systems).  Flight Display Systems was acquired and combined with Calculex Inc. and Argon Corporation under a new holding company, Spectra A&D Holdings (“Spectra”). We received payment in full of $5.1 million on our second lien and revolving debt. We sold our preferred and a portion of our common equity investments for a realized gain of approximately $1.0 million. In conjunction with the transaction, we invested $8.0 million in first lien debt and $4.1 million in preferred equity, of which $2.0 million was rolled over from our original common equity investment in Flight Display Systems”.

So FDUS is clawing back $1.0mn of the ($2.7mn) lost in 2017 but has actually increased its exposure by one third. The BDC will be accruing income on the loan (terms not yet revealed) and -possibly – on the preferred (unlikely). For a time consuming investment that was fraught with problems this is a successful interim resolution, but far from the final word. We may be years away from a final tally.

We are upgrading the company – now Spectra A&D Holdings – to CCR 3 from CCR 4 and we will periodically revisit how the new owners are performing.

Accent Food Services LLC: Restructured

This is the third article we’ve written about Accent Food Services, LLC. We started out in September 2020, basing ourselves on what Fidus Investment (FDUS) was willing to tell us about the vending machine company’s troubles. Even then, we were bracing for the worst: “We know too little – even the identity of the first lien lender and its payment status – so we can’t estimate whether Accent will pull out of this valuation dive or not. Given the second lien status, though, a complete write-off is possible.” 

Roll forward to the most recent FDUS reporting for IVQ 2020 and we learn that “In Q4, we realized a loss of $36.1 million on Accent Food Services. That’s 100% of the total cost of the funds FDUS advanced to the company. Just before Accent began to deteriorate – IIIQ 2019 – FDUS had the investment valued at $35mn. The BDC was receiving about $3.5mn in annual investment income before Accent went on non accrual late in 2019. As recently as September 2020, FDUS still valued its debt at $5mn.

Not unreasonably, a BDC analyst asked for a recap of what went wrong at Accent and to his credit, the CEO of FDUS gave a fulsome answer, albeit after the horse has left the barn. We are re-publishing the full discussion from the February 26, 2021 FDUS conference call:

What I would say, look, Accent was on nonaccrual prior to COVID-19. Having said that, it had a positive outlook and had real market presence. I mean revenues were growing. It just — it needed to clean up its act, which is actually now done, and COVID created the opportunity for the company to do that and get their cost structure in line and whatnot.

But — so the — what happened was the shelter-in-place orders, and in particular, the work-from-home orders greatly impacted the business, right? The most of any company in our portfolio, no question. So our one nonaccrual got hit the hardest.

Secondly, I’ll go — say the senior debt providers and, quite frankly, the equity group were not helpful to put it mildly. And the senior group played loan-to-own ball and — as opposed to work together, which most people do. And so given the status of the company at the second half of the year, which were very different, quite frankly, than the projections we were getting throughout the COVID period, we chose not to double down, and basically, take a controlling stake in the company. We have that opportunity. And it would have required a very large equity investment. And so it’s very unfortunate all around, but that’s how it played out.

And the company has a solid medium-term outlook and a good management team. And so we supported the company with actually a small equity investment in the new restructured company. So that’s the situation. It’s very unfortunate. But we didn’t have — other than owning the company and writing a very big equity check, we didn’t have the cards given the — given COVID. And that’s what happened“.

There’s a lot to unpack there, including the reminder that BDCs like FDUS have the ability to walk away or “double down” (the very language underlining the uncertainty involved). Generally speaking, it’s hard for a second lien lender to control a situation like this one and the large amount already invested might actually have been a deterrent to putting even more money to work. We find it amusing that FDUS invested $2mn in the newly restructured/owned company but – maybe – that will provide some partly offsetting return one day.

Otherwise, though, this was a major loss for the BDC, far and away the biggest write-off taken in a difficult year and a reminder of how vulnerable junior debt capital can be, especially in the lower middle market. (BTW, FDUS also booked multiple realized gains in 2020, leaving the BDC with a net realized loss of just ($1mn) for the year.

In terms of our ratings, we are upgrading Accent Food Services from CCR 5 to CCR 3. Even though the amount FDUS has invested is now small – barely material by our standards – we’ll continue to update the company’s progress to the best of our ability.

Accent Food Services LLC : IIIQ 2020 Update

Fidus Investment (FDUS), the only BDC with exposure to Accent Food Services LLC, has just reported IIIQ 2020 results. (See the IIQ 2020 update here). Accent is the only non performing company in the BDC’s portfolio and was the subject of very direct questions from analysts about what’s happening at the business. The BDC’s CEO artfully avoided providing any hard details. Nonetheless, we know that FDUS reduced its valuation sharply to $5.3mn from $16.1mn. That’s a worrisome sign and that the junior capital provided by the BDC might be at risk to an almost complete loss.

We are maintaining the BDC Credit Reporter’s CCR 5 rating and the loss outlook is for a Severe or Full Write-Off.

Accent Food Services: IIQ 2020 Update

We’ve learned a little more – sufficient to put pen to paper for an update – regarding Accent Food Services. This vending machine company has been on non accrual since IVQ 2019, and performance appears to be deteriorating. Everything we know comes from Fidus Investment (FDUS), the only BDC lender to the Texas-based company and which recently published its IIQ 2020 valuation and commented briefly on an ensuing conference call. The BDC has written down its second lien and equity stake – with a cost of $35.3mn to $16.1mn. Two quarters ago when the debt first became non performing, the FMV was twice as high. In the most recent quarter the FMV dropped ($9.6)mn.

As to what is happening or not happening at the company, details are scarce. We know that management is implementing operational improvements, a process that began before the pandemic. We imagine business conditions – with so many companies closed or working at part capacity – has only compounded Accent’s problems. This is what FDUS said: “And quite frankly, the company has been impacted by the shelter-in-place orders and also its geographic locations, in particular, its biggest locations in Texas“.

We know too little – even the identity of the first lien lender and its payment status – so we can’t estimate whether Accent will pull out of this valuation dive or not. Given the second lien status, though, a complete write-off is possible. That’s why lenders like FDUS get paid a 10.0% yield: to take those junior capital risks. This is a material position for the BDC, representing over 5% of the entire portfolio at cost and about 4% of its pre-default investment income. It’s too early to tell, though, if this is going to be a significant credit setback or just a bump along the way. FDUS speaks highly of the business and the management but that’s no guarantee that all will end well.

Accent, which FDUS added to its books in 2016, has been underperforming since IIQ 2017 and was rated CCR 3 until – as mentioned – it went on non accrual at the end of 2019. We are retaining our rating of CCR 5 and an outlook of Significant Loss until we hear otherwise.

US Green Fiber, LLC: Restructured

On November 1, 2019 Fidus Investment (FDUS) reported IIIQ 2019 results and updated the status of portfolio company GreenFiber, LLC. We learned that “in early September, we took control of the company via a recapitalization transaction, investing $2.8 million, primarily in second lien debt, alongside the previous control investor and a new investor. This recapitalization is intended to provide the company with sufficient liquidity to execute its strategic plan“.

In response to questioning from an analyst FDUS gave some additional color: “It was… in the works for quite a while. We were in a situation where … the private equity group did not have a lot of capital left in the fund that they invested out of, and we worked through this over a period of time. It took longer than it should have, unfortunately, but that’s what happened.They did invest a small dollar amount in this, so they’re still involved with the company. But we did invest the majority of the capital and did take control of the business on a go-forward basis.And you’re right, the company has had numerous, and I’m not going to get into them just exogenous events, if you will, that impacted the performance. Having said that, it’s a niche leader. It has real presence in its marketplace, and it’s a company that we think has some staying power. And that’s why we invested in it. And our hope is that there are better times ahead, but it remains a fluid situation. And obviously, we’ve kept it on nonaccrual. It did pay our cash portion of our interest this quarter, but we’ve kept it on nonaccrual for obvious reasons. And so our hope is that we see good improvement here over time“.

At the end of the quarter, the existing FDUS second lien loan of $14.9mn was still discounted at (69%); while its $0.6mn in equity is – understandably – marked to zero. The new debt added in the period – also second lien – which adds up to $4.6mn – is carried at par, Both loans are on non accrual even though – as FDUS mentioned above – interest was actually paid in the period. (On paper, $1.4mn of investment income annually is non accruing).

FDUS has been invested in the company since 2014, but matters only began to go sideways from the IIIQ of 2018 when we added the name to our under-performing list. Non accrual occurred one quarter later and now we have a full restructuring and FDUS taking control. This is not unusual either for the BDC or companies in this segment of the market. However, we have insufficient information to determine whether FDUS is doing the age old “throwing of good money after bad” or potentially rescuing a worthy business and all the capital invested to date and more.

Oaktree Medical Centre: Files Chapter 7

As anticipated Oaktree Medical Centre filed for Chapter 7 liquidation, According to an AP news report, the filing occurred on September 23, 2019. That almost completes an unfortunate credit story that we’ve written about previously – punctuated by claims of massive fraud by the company brought by the DOJ – and which resulted in Fidus Investment (FDUS) having to write to zero its $13.4mn investment. The BDC may book the realized loss in the third quarter results or at year end, but with all the investment reserved and no income forthcoming, this one’s over.

Obviously for FDUS not a satisfying conclusion and which deserves some future discussion by investors and analysts as to whether there were warning signs of the fraud that due diligence or ongoing monitoring could have caught. Most likely the BDC’s managers would just like to forget this investment was ever made but there’s plenty to learn from a discussion of process and procedures even after the fact.

SES Investors: Acquires Manufacturing Plant

We had been worried about spray foam producer SES Investors (aka SES Foam) for the last several quarters. Back in the IIQ of 2018, its only BDC lender – Fidus Investment (FDUS) – had written down its second lien debt by (32%) and small equity stake to zero. Recent valuation trends, though, have been favorable and $1mn was repaid late in 2018.

Now we hear the company has just acquired “a state-of-the-art manufacturing plant in Spring, Texas, USA”. Of course, we can’t say if that’s a positive or a negative, knowing nothing of the nitty gritty financial details. Common sense, though, suggests this demonstrates the company is doing well given the “tremendous growth we have achieved over these last few years”, as mentioned in the press release.

This is a small investment even for a smaller sized BDC like FDUS, with only $3.7mn remaining of exposure (outstandings used to be $12.5mn) but is notable because chances look good that SES investors might be one of a minority of BDC under-performing companies that shortly makes its way back to the performing ranks. At June 30, 2019, we rated the company CCR 3 (Watch List) due to the 9% discount on the second lien debt and the (26%) discount on the equity stake. Maybe we’ll even see a modest increase in the value of the SES stock held ?

Oaktree Medical Centre: Business Closing

On August 9, Oaktree Medical Centre – which does business as Pain Management Associatesconfirmed all its locations will be closed and 380 employees laid off in a process to be completed by the end of August. That provides confirmation – if any was needed – that lenders , including Fidus Investment (FDUS), will not be getting any proceeds from their exposure to the chain, accused of multiple frauds by the Justice Department. See our prior article dated August 5.

Oaktree Medical Centre: Full Write-Down

With BDC earnings season, we learned a little more about the troubles of Oaktree Medical Centre, a pain management chain, which was sued by the Department of Justice back in March 2019 and was raided by the FBI as far back as October 2018. The only BDC lender with exposure is Fidus Management (FDUS), which carried its debt at par or above through September 2018. At the end of the IQ 2019, some of the debt was on PIK non accrual and written down (8%)-(22%). Now, with the IIQ results, FDUS has thrown in the towel, placed all the debt -$13.4mn at cost – on non accrual and written down the value to zero. Looking at the public record, the chances of any eventual recovery is slim if the fraud the company’s principals are accused of is proved, and even if not. As often in these situations, and with the benefit of hindsight, FDUS seems to have been slow to reflect in its valuation the scale of the threat to recovery. At the end of March, even as the IRS accused the company of massive fraud, some of the debt was barely discounted. Another reminder – if one was needed – that BDC investors need independent the BDC Credit Reporter’s independent assessment.