Fidus Investment Corporation: A 6.00% Baby Bond IPO From This BDC

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About: Fidus Investment (FDUS), FDUSZ, Includes: FDUSL
by: Arbitrage Trader
Summary

Overview of Fidus Investment Corporation's new baby bond - FDUSZ.

Brief overview of the company.

Comparison with the sector.

Comparison with all the fixed-rate term securities that pay a fixed rate distribution and have less than 10 years to maturity.

Comparison with the other securities issued by BDCs.

Introduction

In this article, we want to present a new baby bond issued by Fidus Investment Corporation (NASDAQ:FDUS).

Our goal is purely to inform you about the product while refraining from giving an investment recommendation. Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.

The New Issue

Before we submerge into our brief analysis, here is a link to the 497 Filing by Fidus Investment Corporation - the prospectus (Source: SEC.gov).

For a total of 2.4M notes issued, the total gross proceeds to the company are $60M. You can find some relevant information about the new baby bond in the table below:

Source: Author's spreadsheet

Fidus Investment Corporation 6.00% Notes due 2024 (FDUSZ) pay a fixed interest at a rate of 6.00%. The new issue has no Standard & Poor's rating but is expected to be rated “A-” by Egan-Jones Ratings Company. FDUSZ is callable as of 02/15/2021 and is maturing on 02/15/2024. The new issue is currently trading at its par value and has a 5.94% Yield-to-Call and 5.97% Yield-to-Maturity. The interest paid by this baby bond is not eligible for the preferential 15% to 20% tax rate. This results in the "qualified equivalent" YTC and YTM sitting around 4.95% and 4.98%, respectively.

Here is the product's YTC curve:

Source: Author's spreadsheet

The Company

Fidus Investment Corporation is an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or “BDC,” under the Investment Company Act of 1940. This status provides our company with certain structural advantages, including public liquidity and an advantageous tax structure.

Our objective is to generate current income from our debt investments and capital appreciation from our equity-related investments. We were formed to continue and expand the business of Fidus Mezzanine Capital, L.P., a fund formed in February 2007 that is licensed by the U.S. Small Business Administration (“SBA”) as a small business investment company (“SBIC”).

Fidus Investment Corporation is managed by Fidus Investment Advisors, LLC, and corporate governance is provided by our independent board of directors. Senior management of our investment advisor has an average of more than 25 years of experience and the senior investment team has worked together for a large majority of the past 15 years. The Fidus Investment team has extensive experience providing private debt and equity financing solutions to lower middle market businesses and a strong track record of helping companies reach their potential.

Fidus Investment Corporation is headquartered in Evanston, IL, and has offices in New York, NY, and Charlotte, NC.

Source: Company's website - About Us

While the text above provides us with a stepping stone in terms of information about the fund, it means nothing if we do not look at some numbers:

Source: Cefdata.com

Capital Structure

Below you can see a snapshot of Fidus Investment Corporation's capital structure as of its Quarterly Report in September 2018. You can also see how the capital structure evolved historically.

Source: Morningstar.com | Company's Balance Sheet

The Fidus Investment Corp Family

There is one more outstanding baby bond issued by the company: Fidus Investment Corporation 5.875% Notes due 2023 (NASDAQ: FDUSL):

Source: Author's spreadsheet

FDUSL also pays a fixed interest, at a rate of 5.875%, and is callable as of 02/01/2021, maturing on 02/01/2023. Currently, it is trading close to its par value at a price of $25.14, which results in a 5.80% Yield-to-Worst (equal to its Yield-to-Call).

By having very similar characteristics, and the newly issued one trading a little lower, despite the year longer maturity, with a Yield-to-Worst of 5.95%, it is the better choice from the two.

Sector Comparison

The image below contains all baby bonds that pay a fixed interest rate, with a par value of $25, in the 'Asset Management' sector (according to Finviz.com).

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author's database

  • By Yield-to-Call and Yield-to-Maturity

Source: Author's database

If we take a closer look at the main group:

Source: Author's database

Fixed-Rated Term Securities

The next chart contains all preferred stocks and baby bonds that trade on the national exchanges, pay fixed distribution, and have less than 10 years to maturity with a positive YTC.

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author's database

  • By Yield-to-Call and Yield-to-Maturity

Source: Author's database

Again, take a closer look:

Source: Author's database

Business Development Companies

The chart below contains all baby bonds and preferred stocks issued by BDCs by their YTC and YTM:

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author's database

  • By Yield-to-Call and Yield-to-Maturity

Source: Author's database

For a better idea, the main group:

Source: Author's database

Asset Coverage Ratio

As a BDC, under the 1940 Act generally we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200.0% (i.e., the amount of debt may not exceed 50.0% of the value of our assets). However, legislation that took effect in 2018 has modified the 1940 Act by allowing a BDC to increase the maximum amount of leverage it may incur from an asset coverage ratio of 200.0% to an asset coverage ratio of 150.0%, if certain requirements are met. Under the legislation, we are allowed to increase our leverage capacity if stockholders representing at least a majority of the votes cast, when quorum is met, approve a proposal to do so. If we receive stockholder approval, we would be allowed to increase our leverage capacity on the first day after such approval. Alternatively, the legislation allows the “required majority” of our independent directors, as defined in Section 57(O) of the 1940 Act, to approve an increase in our leverage capacity, and such approval would become effective after one year. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage.

Source: 497 Filing by Fidus Investment Corporation

Use of Proceeds

The Company intends to use the net proceeds from the offering to repay outstanding indebtedness under its credit facility. However, the Company may re-borrow under its credit facility and use such borrowings to invest in lower middle-market companies in accordance with its investment objective and strategies and for working capital and general corporate purposes. After giving effect to the offering and the use of the net proceeds therefrom to repay outstanding indebtedness under its credit facility (and assuming no exercise of the over-allotment option), the Company will have under its credit facility $17.2 million of indebtedness outstanding and $72.8 million available to be drawn.

Source: 497AD Filing by Fidus Investment Corporation

Conclusion

This is an informational article about the new baby bond FDUSZ. With these articles, we want to pay attention to all new preferred stocks and baby bonds, and they are a good guide to what to expect from your income portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.