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Fidus Investment Corporation (NASDAQ:FDUS)
Q3 2019 Earnings Call
Nov 1, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fidus Third Quarter 2019 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]

I would now like to hand the conference over to your speaker today, Jody Burfening. Please go ahead ma'am.

Jody Burfening -- Investor Relations

Thank you, Josh. And good morning everyone, and thank you for joining us for Fidus Investment Corporation's Third Quarter 2019 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 today that this call is being recorded. A replay of today's call can 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 on the Investor Relations page of the company's website following the conclusion of this conference call.

And 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 and projections as of today November 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, 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'd like to now turn the call over to Ed. Good morning, Ed.

Edward H. Ross -- Chief Executive Officer

Good morning, Jody, and good morning everyone. Welcome to our third quarter 2019 earnings conference call. I'll open today's call with a high level commentary on our quarterly results and then I'll cover our investment portfolio performance and conclude with comments regarding our view of the market and activity levels as we move into the final quarter of 2019. Shelby will go into more detail about the third quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions.

From my perspective during the third quarter, we executed well on our strategy of building a well-diversified portfolio of debt and equity investments in lower-middle market businesses that we believe will perform well over the long term, generate high levels of current and recurring investment income, and offer us the opportunity to boost returns through the monetization of equity investments.

In addition, we continued to execute well against our primary goals of delivering stable dividends and growing net asset value per share. 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 was $8.7 million, or $0.35 per share for the quarter, compared to $8.9 million or $0.37 per share for the same period last year. As of September 30, 2019, our net asset value or NAV was $402.8 million or $16.47 per share. On September 20, 2019, Fidus paid a regular quarterly dividend of $0.39 per share. Estimated spillover income or taxable income in excess of distributions was $16.9 million or $0.69 per share. Earlier this week, the Board of Directors declared a regular quarterly dividend of $0.39 per share and also declared a special dividend of $0.04 per share, both of which will be payable on December 20, 2019 to stockholders of record as of December 6, 2019.

Q4 dividends bringing total distributions this year to $1.60 per share, and represent the seventh consecutive year of paying a special dividend. In terms of originations, we invested a total of $47 million in debt and equity securities during the quarter. In contrast to the second quarter, third quarter originations were weighted toward add-on investments to eight existing portfolio companies, which amounted to roughly $36.3 million of the $47 million. Substantially, all of these add-on investments supported M&A activity by our portfolio companies. The largest of these was a $21.5 million subordinated debt investment in Allied 100. The remaining amount was invested in a new portfolio company Bandon Fitness Inc., the largest franchisee of Anytime Fitness gyms in the United States with club locations across 11 states.

We invested $10.8 million in first-lien debt and common equity. Subsequent to quarter end, we invested in another new portfolio company, Haematologic Technologies Inc., a leading provider of biologic products and GMP compliant assay development and testing services to the biopharmaceutical industry. We invested $6 million in first-lien debt in common equity. As expected, we generated some capital gains during the quarter. In terms of repayments and realizations, we received proceeds totaling $23.5 million of which $12.7 million came from the monetization of equity positions in three portfolio companies that were sold to new private equity owners. In connection with these exits, we recorded gains totaling $10.7 million. In each case, we generated over 3 times our initial investment, demonstrating the strength of our investment strategy. Just after the quarter-end on October 1, we exited our debt and equity investments in Simplex Manufacturing Co. We received payment in full of our $4.1 million on our subordinated debt investment and sold our warrant investments for $4.1 million. Realizing a gain of approximately $2.9 million. Including our exit in Simplex manufacturing, we received proceeds from the sale of equity positions totaling $16.8 million in realized gains totaling $36 million since the end of the second quarter.

Turning to our portfolio construction and metrics, the fair value of our investment portfolio as of September 30, 2019, reached $729.4 million, equal to 105.5% of cost. On a fair value basis, the breakdown of the portfolio by investment-type as of September 30 was as follows. First lien debt 11%, second lien debt 52%, subordinated debt 20% and equity 17%.

We ended the quarter with 62 active portfolio companies and four companies that have sold their underlying operations. This mix of investment types reflects the positioning of our portfolio to provide us with a high level of current and recurring income from debt investments, along with the opportunity for incremental returns from our equity investments.

As of September 30, 2019, we had a debt investments in two portfolio companies on non-accrual status. US GreenFiber and Oaktree Medical Centre, equal to 1.2% of our portfolio on a fair value basis. With respect to the US GreenFiber, in early September, we took control of the company via 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.

Moving to our portfolio performance, we track several quality measures on a quarterly basis to help us monitor the overall quality, stability and performance of our investment portfolio. First, we track the portfolio's weighted average investment rating based on our internal system. Under our methodology, a rating of 1 is outperform and a rating of 5 is an expected loss. At September 30, the weighted average investment ratio for the portfolio is 1.9 on a 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 company's combined ratio, total net debt through Fidus's debt investments to total EBITDA. For the third quarter this ratio is 4.7 times, compared to 4.6 times for the second quarter.

The third measure we track is the combined ratio of our portfolio company's 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 third quarter, this metric was 3.3 times, compared to 3.8 for the second quarter. We believe the soundness of these metrics reflect our debt structuring philosophy of maintaining significant cushions to our borrower's enterprise value in support of our capital preservation and income goals.

In closing, as we look toward the end of 2019, we believe business conditions in our targeted lower-middle market remains solid, providing us with opportunities to selectively grow our portfolio in a cautious and deliberate manner, while leveraging our experience and relationships. Our investment strategy and underwriting principles ensure that we remain focused on investing in high quality companies that possess defensible market positions and less cyclical business models that generate excess cash flow for debt service and growth and that have positive long-term outlooks. At the same time, we remain focused on rotating mature equity investments into income producing assets. Overall, our portfolio is in good shape and well positioned to provide us with current and recurring investment income even with the potential for a softening economic conditions on the horizon. In addition, our equity portfolio continues to show promise. Through solid execution, we intend to continue to manage the business for the long term with an emphasis on capital preservation and generating attractive risk-adjusted returns.

Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?

Shelby E. Sherard -- Chief Financial Officer, Chief Compliance Officer & Secretary

Thank you, Ed and good morning everyone. I'll review our third 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, Q2 2019. Total investment income was $19.2 million for the three months ended September 30, 2019, a $1.1 million increase from Q2 2019.

Interest and PIK income increased by $1.6 million, primarily due to incremental assets under management. Fee income increased by $0.2 million in Q3, which was more than offset by $0.7 million decrease in dividend income related to an episodic dividend from our equity investment in Pinnergy declared in Q2. Total expenses, including income tax provision, were $11.8 million for the third quarter, approximately $3.4 million higher than the prior quarter primarily due to an increase in incentive fees. Capital gains incentive fees increased $2.6 million and income incentive fees increased by $0.9 million both primarily related to overall appreciation of the portfolio in Q3 versus the writedown and new non-accrual status of our investments in Oaktree Medical Centre in Q2.

Interest expense increased by $0.4 million and base management fees increased by $0.2 million, which were offset by a $0.5 million decrease in G&A expenses in Q3, as Q3 typically has the lowest G&A expenses. In the fourth quarter, we will incur annual estimated excise tax expense. Interest expense includes cash interest, amortization of deferred financing costs, as well as any commitment and unused line fees, as of September 30, 2019, the weighted average interest rate on our outstanding debt was 4.6%. As of September 30, we had $343 million of debt outstanding, comprised of $157.5 million of SBA debentures, $119 million of public notes, and $66.5 million outstanding on the line of credit. In Q3, we repaid the remaining $21.3 million SBA debentures for our first SBIC funds and surrendered our SBIC license.

Our debt-to-equity ratio was 0.85 times, or 0.46 times statutory leverage excluding exempt SBA debentures. Net investment income, or NII, for the three months ended September 30 was $7.4 million or $0.30 per share versus $0.39 per share in Q2. Adjusted NII was $0.35 per share in Q3 versus $0.34 per share in Q2. 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 September 30, 2019, Fidus had approximately $10.6 million of net realized gains primarily related to the exit of three of our equity investments as I discussed. We incurred $0.2 million of realized losses on extinguishment of debt related to the repayment of SBA debentures and associated accelerated amortization expense.

Our net asset value as of September 30, 2019, was $16.47 per share versus $16.29 per share in Q2, an $0.18 per share increase, highlighting the overall health of the portfolio and benefits of our equity strategy.

Turning now to portfolio statistics as of September 30, our total investment portfolio had a fair value of $729.4 million, consistent with our debt-oriented investment strategy, our portfolio on a cost basis was comprised of approximately 13% first lien debt, 57% second lien debt, 21% subordinated debt, and 9% equity securities.

Our average portfolio company investment on a cost basis was $11.1 million at the end of the third quarter, which excludes investments in four portfolio companies that sold their operations during the process of winding down. We have equity investments in approximately 92% of our portfolio companies with weighted average fully diluted equity ownership of 6%. Weighted average effective yield on debt investments was 12.3% as of September 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 non-accrual if any.

Now I'd like to briefly discuss our available liquidity. As of September 30, our liquidity and capital resources included cash of $17.5 million, and $33.5 million and $6 million of availability on our line of credit and FMC 3 [Phonetic] debentures respectively, resulting in total liquidity of approximately $57 million. Subject to SBA regulatory requirements at approval, we have access to $167.5 million of additional SBA debentures under our third SBIC license.

We are pleased to report that in October, we completed a public debt offering at attractive pricing. We issued $63.3 million in aggregate principal of 5.375% notes due 2024 raising net proceeds of approximately $61 million including the exercise of the over-allotment option, which was used to pay down the line of credit. Taking into account subsequent events, including the net proceeds from the debt offering and repayment of the line of credit, we currently have $120.2 million of liquidity.

Now I will turn the call back to Ed for concluding comments. Ed?

Edward H. Ross -- Chief Executive Officer

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 Josh for Q&A. Josh?

Questions and Answers:

Operator

[Operator Instructions]

Our first question comes from Robert Dodd with Raymond James. You may proceed with your question.

Robert Dodd -- Raymond James -- Analyst

Hi, just some questions on your comments about the potential softening economic conditions on the horizon and then most of the activity in the quarter was follow-ons to credits, obviously you know really well already rather than the new ones that you have to do due diligence on. I mean is there any connection between the two? Has there been a shift that we should expect on a forward basis to maybe more follow-ones in the near term because you know them better and the economy is a little uncertain versus newer credits where there's implicitly more risk?

Edward H. Ross -- Chief Executive Officer

Sure. Great question, Robert. From an economic conditions perspective, obviously we've been thinking about it for three, four years quite frankly, you have the economic cycle is long, and two -- what we have seen in our portfolio is slower growth, but it's still in a growth mode. And so with that, just -- there is an appropriate level of caution as we enter a new investments, and in particular, obviously companies that have more cyclicality inherent in their business models are ones that were generally staying away from. In terms of the fact we only had one new investment, we had a couple of push out, we've had a deal recently that didn't qualify -- we won the deal and we're doing diligence, and we kind of backed away. So we are being obviously very prudent with the capital base in being careful as we move forward, but I do think deal flow is quite good right now, but I'll tell you quality is hit or miss, and we are being very careful as we move forward and what we're not doing is chasing deals, even good deals from a price perspective, we're trying to be very prudent. And so I think that's what that reflects.

Robert Dodd -- Raymond James -- Analyst

Got it. I appreciate that. And then just a really hard question as always, repayments. I mean, ex the realized gains, the repayments on debt investments in the quarter were quite low and they were relatively low last quarter as well. I mean, is there anything thematic going on that things are getting harder for people to refi so the cycle is stretching a little bit or is it just the normal -- you know, hey, it's impossible to call quarter to quarter.

Operator

One moment please. Please standby.

Edward H. Ross -- Chief Executive Officer

Hello?

Robert Dodd -- Raymond James -- Analyst

Could you hear?

Edward H. Ross -- Chief Executive Officer

Hey Robert. We didn't do anything, but it sure went dead quickly. So I'm not sure would happened. I apologize about that.

Robert Dodd -- Raymond James -- Analyst

Yeah, no problem. Did you cut off before I asked the...

Edward H. Ross -- Chief Executive Officer

Asked about repayments, I don't know if I heard the end of the question though. So why don't you recite [Speech Overlap].

Robert Dodd -- Raymond James -- Analyst

Yeah, I was just -- around that repayment number, and ex the gains, the debt repayments in the quarter were quite low and they were last quarter as well, relative to some recent quarters. I mean, is there anything thematic going on there or is that just the randomness of repayments?

Edward H. Ross -- Chief Executive Officer

I think it's the randomness of repayments. What I will tell you is for a large majority of our deals both on the front end of the business, meaning originations and repayments, they are M&A related. And so it's somewhat episodic from that perspective. Yes, when we have companies that are -- pay down a bunch of our debt and deleverage to where they can -- the portfolio companies can access a much lower cost of debt capital. That happens from time to time, but in this case, it's just not a lot of M&A activity where we had debt investments. So that's what I would say, from that perspective.

Robert Dodd -- Raymond James -- Analyst

Got it. Thank you. And then just on GreenFiber, I mean, obviously you took control of it this quarter. It's been a bit of a problem asset for a few quarters, so was there anything the precipitated the action this quarter, and in terms of that made taking control attractive or was that just a timing thing as well?

Edward H. Ross -- Chief Executive Officer

I don't know if it was the timing thing. It was to be honest in the works for quite a while. We were in a situation where the quite frankly 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 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. Our hope is that better times ahead, but it remains a fluid situation and obviously we've kept it on non-accrual. It did pay our cash portion of our interest this quarter but we've kept it on non-accrual for obvious reasons. And so our hope is that we see good improvement here over time.

Robert Dodd -- Raymond James -- Analyst

Got it. Okay. I appreciate it. Those are all my questions. Thank you.

Edward H. Ross -- Chief Executive Officer

Great, thank you, Robert. Good talking to you.

Operator

Thank you. Our next question comes from Ryan Lynch with KBW. You may proceed with your question.

Ryan Lynch -- KBW -- Analyst

Hey, good morning and thanks for taking my questions. First one, when you mentioned your EBITDA to cash ratio while still at a healthy level of 3.3 times this quarter, it had a pretty meaningful drop from 3.8 times last quarter. Can you just talk about what drove that change?

Edward H. Ross -- Chief Executive Officer

Sure. Very good question, Ryan. It is multiple things and I'm probably not going to go into all of them, but what I'd say is the biggest changes that Pinnergy is no longer part of the equation. So this is an average right and -- of our portfolio. It's almost like treating the portfolio as one company if you will, and Pinnergy that has a larger EBITDA than average by multiples. And a very nominal interest expense left the equation. And that's the biggest thing. I think I also would say over the last several -- over the last year, we've done more senior debt and unitranche investing. And in those cases, obviously there is more cash pay. There is no PIK in those investments. And so I think there's a myriad of things here that've taken place. But the biggest one is Pinnergy.

Shelby E. Sherard -- Chief Financial Officer, Chief Compliance Officer & Secretary

And that's because Pinnergy debt's paid in Q3.

Edward H. Ross -- Chief Executive Officer

That's right.

Ryan Lynch -- KBW -- Analyst

Okay. That makes sense actually in Pinnergy. One kind of longer-term question, if I just look at the equity as a percentage of fair value of your portfolio, over the last several years, it has grown from kind of the 10% or 11% range in 2015 to all the way to 17%, 18%-ish. This quarter dropped down about 16%. I would assume that there has been no change in your investment philosophy that you guys try to take some equity positions in every debt deal that you guys do. The growth of that equity portfolio over time, is there anything changing over the last several years as far as equity investments just now taking a longer time to be able to exit those positions or what's really accounting for the growth of that portfolio in relation to maybe the timing or ability to exit those?

Edward H. Ross -- Chief Executive Officer

Sure, great question. With 60 companies, or close to 55 call it, that where we have equity investments, every situation is obviously a little different. So it's hard to generalize, I will tell you. Obviously, our two largest equity investments today have performed extraordinarily well. And I will say in both cases there, they are not owned by financial sponsors. And we do not control those exits. And so those are companies that're performing very well, but it takes a collective group to engineer those exits on those. And then the rest is our -- and it kind of leads into a little bit of the conversation we had with Robert regarding repayments, a lot of the time, not always but long stretch, but a lot of the time, we see our debt investments through the maturity or through the exit of the equity as well. And that does take longer in some cases in the lower-middle market, and I think our debt terms over the last. So I think the length of time where our equity investments are out outstanding is just a little bit longer in this market than you might find in the the broader markets. That's the only thing I can think of.

But I do -- at the same time, we're pleased that we've had four exits here recently. We do have several companies that are evaluating strategic alternatives as we sit here today. But it's too early to tell if those transactions will take place. We went four for four in the last four months or so, which is great, but who knows what happens here going forward.

Ryan Lynch -- KBW -- Analyst

Sure. And yeah, I certainly recognize that that part of the growth of that bucket is due to the success of those equity investments and increase in fair value. So it's certainly been a good driver of value for shareholders. Just one last one, maybe Shelby, you mentioned an excise tax in the fourth quarter. I believe, last year it was just around $700,000. Do you know -- do you have any sort of estimate for what you're expecting in the fourth quarter for the excise tax?

Shelby E. Sherard -- Chief Financial Officer, Chief Compliance Officer & Secretary

I would expect it to be -- call it around $350,000 give or take.

Ryan Lynch -- KBW -- Analyst

Okay. All right, thank you. Those are all my questions. I appreciate the time today.

Edward H. Ross -- Chief Executive Officer

Sure. Thank you, Ryan. Good talking to you.

Operator

Thank you. Our next question comes from Mickey Schleien with Ladenburg. You may proceed with your question.

Mickey Schleien -- Ladenburg -- Analyst

Good morning, Ed and Shelby.

Edward H. Ross -- Chief Executive Officer

Good morning.

Mickey Schleien -- Ladenburg -- Analyst

I wanted to start with a top-down question. So when we look at the performance of larger companies -- much larger companies that you're investing in, we're seeing consistent sort of deterioration in their fundamentals and that's showing up in metrics like downgrades of leveraged loans and declines in revenue growth and margins. On the other hand, I think as you've pointed out, the middle market continues to plug along and do fairly well. So I'm interested in understanding what you think is causing that divergence.

Edward H. Ross -- Chief Executive Officer

That's a tough question, Mickey. What we are seeing -- and it's across the Board. I mean we really -- I mean do you see pockets of whether a company that -- manufacturing company has some exposure to tariffs? At the end of the day, do we see a little bit of that? Yes, but nothing that's overly alarming that's usually hitting margins more than anything. Do we see a little bit of a slowdown in certain regions, if you will, on the building product side? I'd say yes, but it's nominal. So we are -- I mean what we're seeing is continued slow growth in all the different pockets. I do think it's slowed down. I do think earlier in the year, there was a kind of a slowdown on the industrial side of things. And we also have seen that our logistic, we have a large logistics investment company that does a lot of third-party LTL, as well as overnight. And that company is a good company, it continues to grow whereas the industry obviously slowed and actually backed up a little bit earlier in the year. But that company for us is continuing to grow. So I don't know that I can -- I'm trying to just go through it here a little bit with you, but I think what we're seeing is high quality businesses that add a lot of value to their the sectors and to their customers, are continuing to thrive in this environment in the lower-middle market and finding ways to perform, though I do think growth has slowed a little bit, definitely from last year and clearly there is a little bit of a slowdown earlier in the year, but it's pretty stable at the moment.

Mickey Schleien -- Ladenburg -- Analyst

If I can follow up, Ed, presumably the middle market and lower-middle market companies ultimately are related to the larger companies. They may be selling to those larger companies, for example. In your experience, is there a point where we do see it trickle down and more of an impact, or could it be that the companies that you're targeting and many of the other BDCs are targeting, generally are focused on US business and relatively speaking, US business is doing better than international, and large companies have more exposure international.

Edward H. Ross -- Chief Executive Officer

I think that's a very good point. Mickey, I do think we are focused on US companies really 100% today. I mean clearly, some of those companies have international business. But I think that is a extremely good point. I think the other thing, one of the tenets of our investment strategy and we talk about it is invest in companies that have more recurring revenues and recurring cash flows in nature. And so I think that also helps, companies that are -- either have a lot of aftermarket content if you're more on the manufacturing side or software names, if you think about it, subscription names, things like that, which is something we focused a lot on here recently. I think part of our performance from a portfolio company perspective is the types of companies that we're investing in. I think that's the other piece of the puzzle.

Mickey Schleien -- Ladenburg -- Analyst

Okay, that's helpful. Just a couple of more sort of housekeeping questions. I noticed that you reported unrealized depreciation on your debt investments of about $2.5 million. And I just want to confirm that that was a function of the impact of declining interest rates on your fixed rate investments, or was it something else like perhaps accruals for prepayment fees?

Edward H. Ross -- Chief Executive Officer

I don't think we did -- I may have to get back to you on that. I don't think we had debt overall that backed up. We clearly had a couple of names that backed up a little bit and those are more individual situations where they're just more levered today and type of thing than they were last quarter. But -- and Shelby's looking some information, but I don't think we had -- on the debt side, actually we had appreciation, as we think about it.

Mickey Schleien -- Ladenburg -- Analyst

Right, that was my question. You had appreciation and I just wanted to understand if that's just a function of movements in interest rates or something else, but we can talk about that offline. Lastly...

Edward H. Ross -- Chief Executive Officer

It's not movement in interest rates. I think it's just performance of those companies.

Mickey Schleien -- Ladenburg -- Analyst

And lastly I think previously you've talked about a target leverage ratio, this would be total leverage of 0.7 to 0.9. So you're sort of in that range now. Is that still your target? And do you have a target regulatory leverage ratio that you can share with us?

Edward H. Ross -- Chief Executive Officer

I don't think we have a specific target regulatory. I think we like the position that a big piece of our debt is SBIC debt that's treated as equity for regulatory purposes. We don't really target a number of there given we're so far away from any regulatory concerns. I would say on the GAAP leverage, if you will, we are more 0.7:1 is how we're thinking about it from a target perspective, or 0.8:1. And so that's where we are at the moment from a target perspective. So we have a little bit of room to run, but it's not...

Mickey Schleien -- Ladenburg -- Analyst

Yeah. That's it for me this morning. Thanks for your time. I appreciate it.

Edward H. Ross -- Chief Executive Officer

Thank you, Mickey. Appreciate it.

Operator

Thank you. Our next question comes from Chris Kotowski with Oppenheimer. You may proceed with your question.

Chris Kotowski -- Oppenheimer -- Analyst

Yeah, good morning. You mentioned that you paid down and surrendered your first SBIC license, and I was wondering, was that a prerequisite for getting the new licenses finalized and can you update us in general on where you stand in your process with the SBA?

Edward H. Ross -- Chief Executive Officer

Sure. No, it was not a prerequisite. And to be honest, what happens if you don't pay it down, you only can pay back debentures twice a year. Once is at the end of August, and the other one is at the end of February. And so the other time period. And so we obviously took advantage of that. We didn't want to -- because if you have repayments in the interim, the cash just sits there until you can repay that capital. So it's a good time to get a rebate, and it was not a prerequisite to the third license. We received the third license in the Q1 I think. So we have that, it's up and running and -- but it was not a prerequisite, no.

Chris Kotowski -- Oppenheimer -- Analyst

Okay, but you haven't been drawing on the third license. Is there more to do there?

Shelby E. Sherard -- Chief Financial Officer, Chief Compliance Officer & Secretary

No, we have drawn on the third license. We have $7.5 million of SBA debentures outstanding on the third license.

Chris Kotowski -- Oppenheimer -- Analyst

Okay.

Edward H. Ross -- Chief Executive Officer

We're in the very early stages of building that out.

Chris Kotowski -- Oppenheimer -- Analyst

Okay. And then given the notes offering, I assume the immediate use of proceeds is to pay down the credit line and then -- but, and I guess -- as we're modeling out the next couple of quarters and if we're assuming some asset growth, just what should we expect on the funding side of the equation? Should we expect most of the incremental funding to come from the SBA debentures or should we expect that just to draw down on the credit line from here?

Edward H. Ross -- Chief Executive Officer

I think a majority of it will probably end up being a drawdown on the line of credit, it would be my guess. But clearly, we are looking for opportunities, and quite frankly assets that qualify for the SBA program. And when they do qualify, then we will obviously use that capital, but I would think a majority of it will be line of credit. So maybe two-thirds, or kind of thought process.

Chris Kotowski -- Oppenheimer -- Analyst

All right. That's it from me. Thank you.

Edward H. Ross -- Chief Executive Officer

Thank you, Chris. Good talking to you.

Operator

Thank you. Our next question comes from Tim Hayes with B. Riley FBR. You may proceed with your question.

Tim Hayes -- B. Riley FBR -- Analyst

Hey, good morning, guys. Thanks for taking my questions. My first one, just a follow-up on Chris's question there on the SBA debentures. What's the cost of drawdowns today and how does that compare to your blended cost from across the three facilities?

Shelby E. Sherard -- Chief Financial Officer, Chief Compliance Officer & Secretary

So clearly, the SBIC debt is definitely more attractive in terms of the cost of capital. So it's around, I think it was around -- our weighted average cost of capital on our existing SBA debt is about 3.3% versus 4.6% on an overall basis. And then also keeping in mind we just did another baby bond, so we might see the 4.6% tick up to about 4.7% next quarter.

Tim Hayes -- B. Riley FBR -- Analyst

Okay. And then I wanted to just circle back on the question about equity position exits, specifically as it relates to Pinnergy and Pfanstiehl. Understand now might not be the right time and that isn't necessarily in your control to exit these positions, but had you had any more conversations with new third-parties, whether it be companies interested in M&A or investors potentially maybe looking to take down some of your equity, just wondering if these conversations have progressed or if you've gotten any new ones and are actively working toward that?

Edward H. Ross -- Chief Executive Officer

Yeah, I think the way I'd answer that is we are -- I mean I think the two names are different if you think about it. I mean, Pinnergy, obviously in the oil field and services performing very well, but it's a tougher time in that industry. The sector is in bit of a malaise as you well know. And so working on that is we've got to be patient. It is how I would think about it. Pfanstiehl, yes, there are discussions that we are having on a variety of fronts, but there is no telling exactly where that ends up. So we are working actively on the equity portfolio and looking for ways to monetize it where possible, but it's sometimes easier said than done. But we're working hard at it and hopeful that we can make some progress on the overall portfolio in the medium term, if you will.

Tim Hayes -- B. Riley FBR -- Analyst

Okay, makes sense. And I guess in that vein, just thinking about the dividend, interest income was up a good amount this quarter. You got a full quarter's worth of impact from last quarter's growth and then it looks like a good amount of investment activity this quarter was in the first half of the quarter. And then you mentioned you rotated out of some of the smaller equity positions, and I know you still have a good amount of wood to chop there, but adjusted NII still came in well below the dividend. And I understand fee and dividend income can be lumpy as well, but just wondering what your confidence level is on your ability to eventually earn the dividend with adjusted NII and if there is any view internally on a potential time frame?

Edward H. Ross -- Chief Executive Officer

Sure, great question. Tim, I think there are two things we need to do to get back to covering comfortably. One is we need to grow the portfolio a little bit and we are working to do that, but we're doing that in a very deliberate manner if you will, in a cautious manner. So we're not in a rush and -- but we do think there'll be opportunity over the next four or five months to get the portfolio to a level that we're happy with. And the second piece of the puzzle is rotating some of these equity investments into debt investments, or income producing assets. And so that is a harder equation to solve. And it's one that it's multifaceted. In many cases, we're not in control of it. As I mentioned earlier, I do think we have several companies that are evaluating strategic alternatives right now. So we're hopeful some good events take place. But that is something we do not control at all. And then, we're doing what we can as well in different situations to try to monetize some equity investments because it's critical, but I think it's a tougher piece to -- of the puzzle to solve and it's one we're not going to move toward in a irrational manner. We're going to -- we're focused on the long term and long-term performance and we want to do it in a very deliberate manner and so, that's a tougher one to answer. We're doing the best we can. I can't answer that one [Indecipherable] specific manner.

Tim Hayes -- B. Riley FBR -- Analyst

Understood. Just good get your thoughts around that. Sorry, Shelby, go ahead.

Shelby E. Sherard -- Chief Financial Officer, Chief Compliance Officer & Secretary

I'd just say, in the meantime, we do have a very healthy amount of spillover income in terms of $0.69 per share.

Tim Hayes -- B. Riley FBR -- Analyst

Right, got it, thanks...

Edward H. Ross -- Chief Executive Officer

Very good point. Just where we are -- obviously have a fair bit of comfort of where we sit here today.

Tim Hayes -- B. Riley FBR -- Analyst

Got it. I appreciate the comments around that. And then just turn it back to your comments about maybe expecting softening economic conditions. You've been going more first lien over the past several quarters, I know you mentioned some of the steps you're doing to I guess approach that type of environment, but would you say that going more first lien reflects you guys getting more defensive? And on the other hand as many of your other lower-middle-market lending peers focus on first lien debt, does that create opportunities for your second lien strategy?

Edward H. Ross -- Chief Executive Officer

Sure. I'll take the last one first. I think it does. We are continuing to see second lien investment opportunities. Earlier in the year, we had a fair number of new deployments, very high quality situations that we were pleased with. I think the quality over quantity mantra is definitely there, it has been there for a long time for us and so that's what you'll see as we move forward, but we are clearly still looking for a second lien investments. But it's more episodic. And then, first lien is -- we are finding nice opportunities either in a first lien $1 or situation where were the last-out, we originate to paper and we bring in someone to play a first-out piece of the transaction and we are seeing a fair number those opportunities in the marketplace today. And obviously -- and that's what you're seeing, it's -- we're having good success there. So I think we're looking for both. But it's more episodic on what deals come in that quarter.

Tim Hayes -- B. Riley FBR -- Analyst

Okay, got it. And then just one more for me, around this. When you say you're expecting or preparing for softening economic condition, is there an internal view that there will be a big inflection in 2020? I know you also mentioned you've been kind of preparing for this for several years now. But if that's the case, what would your outlook for M&A and exit event be in that type of environment?

Edward H. Ross -- Chief Executive Officer

Sure, great question. I think it's -- obviously we were concerned about a slowdown, a slowdown has occurred I think. Obviously the Fed is being pretty aggressive and out in front of it. And it's helping a little bit. And the US continues to chug along relative to the global economy that's slowing down a little bit more. Our hope is that it's a softer landing and we don't have anything that's really -- that really hurts the credit world, if you will.

We've been careful and we just didn't want to take chances to that we're aggressive and we're depending on a soft landing type of things. So we've been very careful for a long time. So the types of businesses I mentioned earlier, these more recurring revenue businesses, think software or companies that are aftermarket on the manufacturing side. So that's how we've been trying to play it. We're not seeing -- as I mentioned earlier, we're not seeing any real problems from industry segments are overall just performance. So we feel good about that. How do I think the M&A world -- right now deal flow is good. As I mentioned earlier, quality has been hit or miss, and we are very much staying on the quality -- the high end of the quality spectrum, if you will. I do think, as we move toward an election, I think M&A could slow down a little bit, but the economy right now and what we're seeing is it's pretty vibrant from a M&A activity or M&A opportunity perspective, and we're obviously hoping to participate in some of those opportunities, but I think -- what I'm seeing right now is, I think the election could be a period of time where things do slow down as we get closer to it.

Tim Hayes -- B. Riley FBR -- Analyst

Okay, thanks for the comments there. I appreciate it.

Edward H. Ross -- Chief Executive Officer

Thank you. Appreciate it, Tim.

Operator

Thank you. Our next question comes from Bryce Rowe with National Securities. You may proceed with your question.

Bryce Rowe -- National Securities -- Analyst

Great, thanks, good morning.

Edward H. Ross -- Chief Executive Officer

Good morning, Bryce.

Bryce Rowe -- National Securities -- Analyst

I just wanted to just go a little deeper on the monetization topic. Obviously a strategic priority that you executed on here this past quarter. I was curious, looking at the equity portfolio and some of the -- I guess the write-ups on a handful of your equity investments from second quarter to third quarter, does that reflect maybe the ongoing process fees that you mentioned in terms of those particular companies exploring strategic options?

Edward H. Ross -- Chief Executive Officer

In the -- in one or two situations, the answer to that would be yes, where we have some knowledge of a process. And again it's -- these M&A processes as you well know, it's really hard to tell if the deals are going to happen or not, but there is some numbers that are being thrown out and a couple of situations that are positive relative to where we entered those investments for sure from a multiple perspective, and those we have reflected that in our valuation to a certain extent. So there is some of that. I wouldn't say overall that's what's happened, but there are a couple of names where that's the situation.

Bryce Rowe -- National Securities -- Analyst

Okay, that's great. I think all the other topics I wanted to cover were recovered. So I appreciate the time. Thanks.

Edward H. Ross -- Chief Executive Officer

Thank you, Bryce. Good talking to you.

Operator

[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.

Edward H. Ross -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Jody Burfening -- Investor Relations

Edward H. Ross -- Chief Executive Officer

Shelby E. Sherard -- Chief Financial Officer, Chief Compliance Officer & Secretary

Robert Dodd -- Raymond James -- Analyst

Ryan Lynch -- KBW -- Analyst

Mickey Schleien -- Ladenburg -- Analyst

Chris Kotowski -- Oppenheimer -- Analyst

Tim Hayes -- B. Riley FBR -- Analyst

Bryce Rowe -- National Securities -- Analyst

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