FDUS: Why We Bought This 10.4% – Yielding BDC

The Business Development Company Fidus Investment Corp (FDUS) delivered a strong Q2, in line with its excellent track record. It trades at a 10.4% dividend yield. Despite an equity-overweight portfolio its NAV has held up much better than the sector average. Given its income tailwinds as well as a large spillover we wouldn’t be surprised by an additional dividend sometime later this year (whether through a base increase or a special). We continue to hold FDUS in our High Income Portfolio. 

Quarter Update

The NAV fell about half a percent which is among the best of BDCs that have reported so far. 

FDUS delivered a total return of around +1.5% over the quarter – on the higher end of BDCs that had reported up to its announcement.

Income Dynamics

The company continues to rotate its equity securities into secured loan / income-producing assets. The portfolio allocation chart below shows that the proportion of secured loans has been growing at the expense of equity. 

The company’s allocation to equity by cost is only 8%, however it has ballooned to 17.3% due to unrealized gains. 

The company has been realizing those gains steadily and allocating the capital into income-generating securities. 

Although FDUS has a below-average level of floating-rate investments at 58% (vs. 91% sector average) it has no floating-rate liabilities (vs. 41% sector average). The result is a wash with its income beta to short-term rates in line with the sector average. Net income should continue to rise with rising short-term rates, all else equal. 3-month Libor is already 0.58% above its Q2-end level and will continue to rise further. 

Portfolio Quality

This quarter FDUS placed two holdings on non-accrual with the fair-value of about 1% of its portfolio. This was the second quarterly rise and bears watching. The current level of non-accruals is in line with the sector median.  

Internal portfolio quality ratings worsened slightly (i.e. blue bars in the right-hand chart rose). This is not out of line with the trend in the sector. 

Overall, FDUS remains an attractive holding given its very strong and consistent historic performance as well as its diversification potential in a BDC portfolio.


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