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Fidus Investment Corporation (NASDAQ:FDUS)
Q2 2020 Earnings Call
Aug 7, 2020, 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 Second Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker for today, Jody Burfening. You may begin.

Jody Burfening -- Investor Relations, LHA

Thank you, Twanda, and good morning, everyone. Thank you for joining us for Fidus Investment Corporation 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 financial -- 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.

Edward H. Ross -- Chairman & Chief Executive Officer

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 in economic activity would last nor what the path of an economic recovery would look like. Our portfolio companies have 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 have 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 are paying their interest without stretching their cash flows and their resilient business models and capital structures are providing them with wall works 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 a -- due to the patchwork of rules and regulations and the varying degrees of economic activity.

After shelter-in-place restrictions were lifted, some of these companies' reopen defined a less competitive environment, others' reopen defined 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 opportunities 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 and 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 6th or on June 26, 2020, Fidus paid the regular quarterly dividend of $0.30 per share to stockholders of record as of June 12th. 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 opportunity. We intend to take a conservative approach to origination with a view toward protecting our capital and our balance sheet. In terms of repayments and realizations, we received 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 companies 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 30th 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 remained -- 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 end markets are currently performing despise 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 or long-term outlooks 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 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?

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

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, a $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 two non-accruals, EbLens and Virginia Tile, back to accrual status.

Fee income from investment activity decreased by $1 million. PIK income as a percent of interest income was approximately 5.9% for both the three and six months ended June 30th. 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 and incentive fee related to write downs in 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 30th, 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 1 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 of 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 30th. 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 in approximately 89.6% of our portfolio companies, with a weighted average fully diluted equity ownership of 4.7%. Weighted average effective yield on debt investments was 12% as of June 30th. 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 would like to briefly discuss our available liquidity. As of June 30th, 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 our third SBIC license subject to SBA regulatory requirements and approval.

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

Edward H. Ross -- Chairman & 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 our operator, Twanda, for Q&A. Twanda?

Questions and Answers:

Operator

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

Robert Dodd -- Raymond James -- Analyst

Hi, and congratulations on a really good quarter. One quick question, maybe -- several questions, but one quick one for Shelby. The -- does it -- was there -- in the second quarter was there $600,000 of catch-up income related to the two non-accruals coming back up i.e. did you -- you recognized the Q1 income in Q2, as well as the Q2 income or was that just -- the $0.6 million, you mentioned, was that just them coming back on accrual? Was there any catch-up there?

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

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

Robert Dodd -- Raymond James -- Analyst

Got it. Another housekeeping one there more to a sort of housekeeping. For 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-end. So 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?

Edward H. Ross -- Chairman & Chief Executive Officer

Hey, Robert. How you doing?

Robert Dodd -- Raymond James -- Analyst

Hey.

Edward H. Ross -- Chairman & Chief Executive Officer

The MRA was because of the unique situation -- quite frankly, we were unaware of the -- that the transaction was going on, I think it happened quite quickly. 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, it's just -- it's a company that was benefiting and I think has a very good long-term outlook and someone saw that and wanted to participate. I hope that I answered...

Robert Dodd -- Raymond James -- Analyst

Okay, got it. Yeah, it is. Thank you. And then, kind of just a more general question about pipeline, and 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, etc. meeting -- and some have seen lower end demand. So also, what your -- the way you're reopening channels, would we expect that to be more add-on type acquisitions of your quite successful companies, 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 an add-on versus a new platform, there's some different dynamics there.

Edward H. Ross -- Chairman & Chief Executive Officer

Sure. It's a great question, Robert. I also just -- I'll just touch on the market for a second, because I think it's instructive to 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 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 our portfolio companies, whether our portfolio companies or our sponsors, but we're also starting to see auction activity.

And so, things are starting to pick up, I do think that it 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, 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 try to obviously preserve capital and do the right things for our shareholders.

Robert Dodd -- Raymond James -- Analyst

Got it. I appreciate that color. Hope everybody stays healthy. Thank you, Ed and Shelby.

Edward H. Ross -- Chairman & Chief Executive Officer

Thank you, Robert. We'll catch up.

Operator

Thank you. Our next question comes from the line of Bryce Rowe with National Securities. Your line is open.

Bryce Rowe -- National Securities Corporation -- Analyst

Thanks a bunch. Good morning, Ed and Shelby.

Edward H. Ross -- Chairman & Chief Executive Officer

Good morning, Bryce.

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

Morning.

Bryce Rowe -- National Securities Corporation -- Analyst

I wanted to ask about the dividend actually and relative to where NII is? 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 a base dividend plus supplemental structure to account for any variability? Just wondering, how you're thinking about it.

Edward H. Ross -- Chairman & Chief Executive Officer

Sure. It's a great question. And quite frankly is the discussion this week obviously at the Board meeting. What I would say is, we continue at this point in time to believe it's in the long-term interest -- in 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 -- I'll mention the portfolio because you brought it up. We believe it's in -- 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 toward investing in companies that we believe have very defensive characteristics, that possess long-term cash flow abilities and then, -- and obviously has strong outlooks of 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 of 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 rate spillover distribution requirements over the medium term. But quite frankly, we need to probably play a couple innings -- 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 -- that we can actually start having this conversation, but we want to be patient and wait on it.

Bryce Rowe -- National Securities Corporation -- Analyst

Excellent. That's a good answer, and one that I would have expected from you. So the other question I have, or maybe other topic, you mentioned auction activity is 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 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 the outlook might be for prepayments or some of the companies within your portfolio finding that auction block,

Edward H. Ross -- Chairman & Chief Executive Officer

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 obviously, it generated cash to where they can pay off all their debt including ours, and they did so, it was their first lien investment and that was the Hoonuit debt investment. And we do have a company that is in the middle of an auction process right now and I think there is 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 -- and I would expect, I know you didn't ask this, but in probably this quarter, repayments will exceed new investments and that's our current expectation, but at the same time we're working hard to 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 is a balance here we're trying to strike. But you're right, there is some repayment activity that I think will happen in the rest of the year.

Bryce Rowe -- National Securities Corporation -- Analyst

Excellent. All right, thank you for the answers. Good talking to you.

Edward H. Ross -- Chairman & Chief Executive Officer

Yeah, good talking to you. Thanks, Bryce.

Bryce Rowe -- National Securities Corporation -- Analyst

Yeah.

Operator

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

Ryan Lynch -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hey. Good morning, Ed. Good morning, Shelby. Thanks for taking my questions.

Edward H. Ross -- Chairman & Chief Executive Officer

Good Morning, Ryan.

Ryan Lynch -- Keefe, Bruyette & Woods, Inc. -- Analyst

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, your portfolio that the medium-to-low risk bucket has increased from the prior quarters. So that's all positive commentary. So I was curious, why did we not see that positive commentary and those positive actions reflected in the evaluation and any potential gains of unrealized gains in your portfolio this quarter? You guys actually put the overall -- had some portfolio unrealized losses in this quarter after following a big drop in Q1 as most BDCs there, but why didn't we see any sort of recovery in those portfolio evaluations in the second quarter?

Edward H. Ross -- Chairman & Chief Executive Officer

Sure. Great question, Ryan. We have -- I think if you look at the stats, if you -- our depreciation came primarily from one asset and that is Accent, our one non-accrual. And that Accent is a franchise business, a very good business and -- but having said that, we are 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 its geographic locations in particular, it's biggest locations in Texas. And so, that's a large majority of the -- well, that represented eight point -- or I guess over $9 million of depreciation this quarter. If you were to exclude Accent, the total portfolio appreciated $8.1 million. Our debt portfolio appreciated by a couple of 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.

Ryan Lynch -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, got you. So Accent's 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 to see that occurring, no new loans raised 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 -- if there have been any, how are those conversations then?

Edward H. Ross -- Chairman & Chief Executive Officer

Sure. Great question. I guess, I'll start with a couple of things. One is, we only have, what I would consider, two covenant-lite deals in our portfolio. And so, we -- when we do a new transaction, we obviously are underwriting to whether it's 15%, 25%, 30%, whatever it is. So we 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 fair number of conversation and amendments from PPP loans or the CARES Act.

And so, that is sort of when people access those programs, they had to talk to us about doing so, and so it's a -- we are 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 have assets secured there in the second lien loan. The company wanted a little cushion, they need a lot, but we obviously work with the company to do that.

And in another case, we already had in a -- 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, that is the types of conversations that we're having. I would expect to have similar conversations this quarter, but as I look forward, I do not 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?

Ryan Lynch -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah, 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 is one thought that you can move into some more riskier industry if the terms and the structures are extremely favorable or the other kind of side of 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 your 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?

Edward H. Ross -- Chairman & Chief Executive Officer

Sure. So let me talk a little bit just about our strategy for a second. You know what, and as I think you're very aware, we -- what we focus on is situations where there is 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 the companies and opportunities, we first focus on the quality of the company, how defensive it is, it's ability to generate cash and an 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 that 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, in 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 we'll also evaluate if those situations makes sense. But it's all about capital preservation and attractive risk-adjusted returns from our perspective.

Ryan Lynch -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah, thanks. That is helpful. I appreciate the time today.

Edward H. Ross -- Chairman & Chief Executive Officer

Thank you, Ryan. Good talking to you.

Operator

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

Chris Kotowski -- Oppenheimer & Co. -- Analyst

Yeah. Good morning. Thank you. 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 the give-get in that situation additional security or what?

Edward H. Ross -- Chairman & Chief Executive Officer

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.

Chris Kotowski -- Oppenheimer & Co. -- Analyst

Yeah, OK.

Edward H. Ross -- Chairman & Chief Executive Officer

They weren't outsized or crazy. And so, they were -- and in some cases and Shelby can answer this. In some cases, they are tacked onto the end of a loan and paid then. So there is a variety of things that could be impacting that, but I would say, if we gave covenant relief and if sponsors did not put any money in, there is going to be an amendment fee of some sort. And in almost all cases there is a little bit of a work fee, but we're not looking at it as 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 are providing something which we're requiring in almost all cases, then obviously, we need to obviously look at it with that in mind. So...

Chris Kotowski -- Oppenheimer & Co. -- Analyst

Okay.

Edward H. Ross -- Chairman & Chief Executive Officer

I think there is definitely an imperious amendment fee income in the P&L. It's just not huge.

Chris Kotowski -- Oppenheimer & Co. -- Analyst

Okay. And...

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

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

Chris Kotowski -- Oppenheimer & Co. -- Analyst

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

Edward H. Ross -- Chairman & Chief Executive Officer

Sure. In both cases, the companies were greatly impacted 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 are obviously willing to work with folks, but we wanted to get paid, it was in our contract and the company has had the liquidity to do so. So that ultimately did take place. What I would say in both cases, as the -- one was fully shut down, the other one had one division that was shut down due to shelter-in-place directives. 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.

Chris Kotowski -- Oppenheimer & Co. -- Analyst

Okay, all right, thank you. That's it from me.

Edward H. Ross -- Chairman & Chief Executive Officer

All right, thanks, Chris. Good talking to you.

Operator

Thank you. Our next question comes from the line of Mickey Schleien with Ladenburg. Your line is open.

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

Good morning, Ed and Shelby, hope all is well on your 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?

Edward H. Ross -- Chairman & Chief Executive Officer

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. I, quite frankly, looking at today, don't see really a material need for incremental support as we sit here today at least in our portfolio. The -- 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 a 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. But...

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

Well, that's certainly welcomed 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 it's early innings, it's difficult to have much of a crystal ball, but you had some credits move up into the one category, you had some credits move down into the three. Could you describe either which of those investments were moving or at least thematically, what was causing those changes from Q1 to Q2?

Edward H. Ross -- Chairman & Chief Executive Officer

That's a tough one because I'm not looking at it. I think I'll just talk general picture with you. I don't think we -- 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. A lot of companies were impacted in April and May, but are performing great today. We still have them probably in the three category. And so, we didn't make moves just because the run rate is now getting to a point where they were before COVID or they are very close to that and obviously, as a debt investor, we're pleased with that and expect it to continue. But -- so -- and then, if something moved toward 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 heard 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 we -- 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 there, I think it will get better from here as opposed to worse.

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

That's...

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

Yeah, Mickey, what I would add is just -- I'm looking at the names. One of the more material dollar movements from ratings at 2 to a 1 was related to the one transaction Ed kind of mentioned was likely to transact here in Q3 is still TBD but kind of having that line of sight made us more comfortable that there was a near-term realization.

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

Okay, that's helpful.

Edward H. Ross -- Chairman & Chief Executive Officer

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

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

Right. And in terms of trends, Ed, what are you seeing in portfolio EBITDA or 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?

Edward H. Ross -- Chairman & Chief Executive Officer

Sure. So the mean EBITDA is about 11. We have some couple of larger portfolio companies that have the average being more in the mid-teens. But the mean EBITDA is $11.3 million and what was your other question? I'm sorry.

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

Leverage debt to EBITDA.

Edward H. Ross -- Chairman & Chief Executive Officer

Leverage was 4.7 times this quarter, so in line with last quarter.

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

Okay, that's helpful.

Edward H. Ross -- Chairman & Chief Executive Officer

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

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

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

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

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.

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

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

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

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

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

Okay. That's -- those are all my questions this morning. I appreciate your time and hope everyone there stays safe and healthy. Thank you.

Edward H. Ross -- Chairman & Chief Executive Officer

Thank you, Mickey. Good talking to you and hope your family is doing well also.

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

Thank you.

Operator

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

Michael Smith -- B. Riley FBR, Inc. -- Analyst

Hey, everyone. This is actually Mike Smith on for Tim. Just one question from me, can you provide a little bit more color on the competitive landscape, have any lenders stepped away or back into the market? And how do yields on your investments you're making look, compared to pre-COVID?

Edward H. Ross -- Chairman & Chief Executive Officer

Sure. Great question, Mike. The -- 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 deleveraging, those types of things. So more -- a lot of those were more CLO-type funded players, but it also, it 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 that 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's fewer players, but there are 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, eight weeks 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 the 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.

Michael Smith -- B. Riley FBR, Inc. -- Analyst

That's helpful. Thank you for taking my question.

Edward H. Ross -- Chairman & Chief Executive Officer

Sure. Thank you. Thanks, Mike.

Operator

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

Edward H. Ross -- Chairman & Chief Executive Officer

Thank you, Twanda, 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.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Jody Burfening -- Investor Relations, LHA

Edward H. Ross -- Chairman & Chief Executive Officer

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

Robert Dodd -- Raymond James -- Analyst

Bryce Rowe -- National Securities Corporation -- Analyst

Ryan Lynch -- Keefe, Bruyette & Woods, Inc. -- Analyst

Chris Kotowski -- Oppenheimer & Co. -- Analyst

Mickey M. Schleien -- Ladenburg Thalmann Financial Services Inc -- Analyst

Michael Smith -- B. Riley FBR, Inc. -- Analyst

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