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Fidus Investment Corporation (NASDAQ:FDUS)
Q3 2020 Earnings Call
Oct 30, 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 Third Quarter 2020 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] Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Jody Burfening. Thank you. Please go ahead.

Jody Burfening -- Investor Relations

Thank you, Jimmy, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's third 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 press release is available on the Investor Relations page of the Company's website at fdus.com.

I'd like to remind everyone today's 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.

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 and projections as of today, October 30, 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 of the Board and Chief Executive Officer

Good morning, Jody, and good morning, everyone. Welcome to our third quarter 2020 earnings conference call. I hope all of you, your families, friends and co-workers are staying healthy and well.

Since our first quarter earnings call, when the shelter-in-place orders related to the pandemic began to weigh on our portfolio companies' business operations, I have focused my prepared remarks on the state of our portfolio. As uncertainties associated with the pandemic and the economy are still with us, on this morning's call, I'm going to once again open with a status report on our portfolio. I'll also share you my assessment of M&A trends in the lower-middle market and deal activity levels as we move into the home stretch of 2020. Shelby will cover the third quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions.

Since the pandemic hit us in the United States toward the end of the first quarter, management teams at our portfolio companies have done a great job overall of adapting their businesses to the new normal, executing plans to ensure business continuity, flexing the current demand dynamics, and focusing on what they can control. Some of them are focusing on enhancing business operations, while others are taking advantage of competitive openings to accelerate growth plans. Although we are not out of the woods yet, our portfolio companies continue to hold their own.

I'm pleased to report that the overall health of the portfolio continues to improve. Our assessment of portfolio risk, based on company operations and valuations, has steadily abated since the first quarter when we considered a little more than 80% of the portfolio to be in the low-to-medium risk range to the second quarter, when our view was that about 88% of the portfolio is in the low-to-medium risk range and about 65% in the low-risk category. Now our view is that 93% is in the low-to-medium risk range with roughly 70% in the low-risk category.

We do still have the debt investment in Accent Food Services on non-accrual and we wrote down the fair value of this investment by about two-thirds to $5.3 million during the quarter. This portfolio company has been hard hit by the adverse effects of the pandemic. Mirage Trailers is back on accrual status. As a result, we ended the quarter with a non-accrual balance of less than 1% of our portfolio on a fair value basis. This represents an improvement from the end of the first quarter when we had three portfolio companies on non-accrual and one on PIK non-accrual equal to 6.7% of the portfolio on a fair value basis.

In spite of the writedown of Accent Foods, NAV increased $13.4 million to $389.6 million or $15.94 per share at the end of the third quarter, a 3.6% increase from $376.2 million or $15.39 per share at the end of the second quarter, as improved performance and outlook for some of our portfolio companies merited appreciation in the valuations of our debt and equity investments.

As you can see, our strategy of selectively investing in companies with defensive characteristics is working for us. Companies with resilient business models that can withstand economic stresses and generate strong free cash flows that operate in industries we know well and they possess positive long-term outlooks.

In terms of our portfolio construction and metrics, the fair market value of our investment portfolio as of September 30, 2020 was $715.4 million, equal to 99.9% of cost. We ended the quarter with 63 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 September 30 was as follows: first-lien debt 18.3%; second-lien debt 49.2%; and subordinated debt 20.1%; and equity investments 12.4%. We continue to believe our portfolio is well structured with strong equity cushions to handle severe economic stresses.

Turning to our results for the quarter. We reported 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, of $9.7 million or $0.40 per share, compared to $8.7 million or $0.35 per share for the same period last year.

On September 25, 2020, Fidus paid a regular quarterly dividend of $0.30 per share to stockholders of record as of September 11. On October 26, 2020, the Board of Directors declared a regular quarterly dividend of $0.30 per share, and I'm pleased to report the Board also declared a supplemental cash dividend of $0.04 per share, extending Fidus' record of paying special dividends to eight consecutive years. Both the regular quarterly dividend and the supplemental cash dividend will be payable on December 18, 2020 to stockholders of record as of December 4.

In terms of repayments and realizations, we received proceeds of $33.8 million and recognized $1.3 million in net realized gains. In terms of exits, we received payment in full of $7.3 million, including pre-payment penalty on first-lien debt and Hoonuit, LLC. 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 and realized a gain of approximately $1.4 million on our equity investment. And we received payment in full of $10.6 million, including a pre-payment penalty, on second-lien debt in SpendMend LLC.

Subsequent to quarter end, we exited Pugh Lubricants, LLC receiving payment in full of $26.6 million, including a pre-payment penalty on our second-lien debt investment and realized a gain of approximately $0.5 million on the sale of our equity investment. We invested $6 million in second-lien debt and $1.5 million in equity in a leading regional distributor of pool equipment and supplies. The debt investment was a partial funding of a $12 million note commitment.

After hitting the pause button on deal activity during the second quarter out of an abundance of caution, we began evaluating opportunities again last July, while adhering to our strict underwriting disciplines. There is fertile ground for M&A in the lower middle market among companies which have not been meaningfully impacted by the pandemic, and we are seeing a fair number of high-quality businesses in the market today.

Based on the improving health of our portfolio and the strength of our balance sheet, we're well positioned to participate in this busy season of deal activity. This supports our view that we are staying on the path of continued improvement in the health of our portfolio. While having a fairly robust pipeline is encouraging as we head toward the end of the year, we are nevertheless continuing to operate with an abundance of caution and managing the business for the long term, focused on generating attractive risk-adjusted returns and preserving capital in the interest 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 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 2020.

Total investment income was $21.1 million for the three months ended September 30, 2020, a $0.7 million increase from Q2, due to a $0.2 million increase in fee income and a $0.5 million increase in dividend income. Primarily due to net tax true-ups for prior-year distributions as on the 2019 K-1, several portfolio companies reported higher distributions of earnings and profits versus prior estimates of return of capital.

PIK income as a percentage of interest income was approximately 6.2% for the three months ended September 30. Total expenses, including income tax provision, were $14.2 million for the third quarter, approximately $3 million higher than the prior quarter, primarily due to the capital gains incentive fee accrual related to unrealized appreciation in the fair value in Q3. A $0.7 million increase in income incentive fee was offset by a $0.7 million decrease in G&A expenses in Q3. 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 fee, total expenses in Q3 were $11.4 million, in line with Q2. As a reminder, expenses will be higher in the fourth quarter as we will incur annual estimated excise tax expense.

As of September 30, the weighted average interest rate on our outstanding debt was 4.6%. We had $352.3 million of debt outstanding, comprised of $147 million of SBA debentures, $182.3 million of public notes and $23 million outstanding on the line of credit. Our debt-to-equity ratio was 0.9 times or 0.5 times statutory leverage, excluding exempt SBA debentures. In Q3, the net gain on investments was driven by $12.7 million of unrealized depreciation and approximately $1.3 million of realized gains from the exit of our equity investment in Mirage [Phonetic] and Microbiology Research Associates.

Net investment income or NII for the three months ended September 30 was $0.28 per share versus $0.38 per share in Q2. Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments, was $0.40 per share in Q3 versus $0.37 per share in Q2.

Now turning to portfolio statistics. As of September 30, our total investment portfolio had a fair value of $715.4 million. Our average portfolio company on a cost basis was $11.3 million at the end of the third quarter, which excludes investments in three portfolio companies that sold their operations or in the process of winding down. We have equity investments in approximately 89.4% of our portfolio companies with a weighted average fully diluted equity ownership of 6%.

Weighted average effective yield on debt investments was 12.1% 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 $24.7 million, $77 million of availability on our line of credit, resulting in total liquidity of approximately $101.7 million. Taking into account subsequent events, we had total liquidity of approximately $121.6 million. We also have access to $161.5 million of additional SBA debentures under our third SBIC license, subject to SBA regulatory requirements and approvals.

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

Edward H. Ross -- Chairman of the Board and 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 Jimmy for Q&A. Jimmy?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Bryce Rowe with National Securities. Your line is now open.

Bryce Rowe -- National Securities -- Analyst

Thanks. Good morning, Ed and Shelby.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Good morning, Bryce.

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

Good morning.

Bryce Rowe -- National Securities -- Analyst

Firstly, I just wanted to talk about the distributions and future distributions. We talked about this last quarter and it continues to be a first-class problem to have that you're over-earning the $0.30 dividend level on -- from a regular dividend perspective, and then you're apparently going into the end of the year with more than $1 per share of spillover income having already hit your distribution requirements for this year. So, just curious how you're -- how you and the Board are kind of thinking about distributions at this point? And is there a creative thought process in terms of getting credit for the amount of spillover that you're carrying at this point?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure. Great question, Bryce. And as you can imagine, there is a lot of discussion on this topic at the Board meeting this week. And as I think, all of us and you would agree, there is still a lot of uncertainty in the world today, especially when you add the saucy election to the mix. And thus, from our perspective, making quick decisions does not seem like the right thing to do at the moment.

We are thrilled with the performance in our overall outlook, quite frankly, of Fidus. We are also thrilled to be making a supplemental distribution, which is in direct correlation to our performance. Nevertheless, as we sit here today, we think operating with a fair bit of caution is the overall right approach, until uncertainty in the world and the US abates a bit more. However, we are planning to look closely at our dividend distributions next quarter as well, which would include looking closely at the base dividend and/or making incremental supplemental dividends or considering that at least. So hopefully that's helpful.

We do like -- from a spillover perspective, I think just given the world today, we like having a healthy spillover position. We think that's a positive for shareholders and -- but -- I think we like our position today, but we're trying to continue to operate with a fair bit of caution. Shelby, would you add anything to that?

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

No, I think that sums it up pretty well. I mean, we are actively monitoring the spillover position and talking about the dividend policy on a quarterly basis.

Bryce Rowe -- National Securities -- Analyst

Got it. Okay. And then maybe one follow-up that's unrelated. Just, Ed, obviously, you paused your origination activity with the emergence of COVID and the pipeline has been reopened so to speak. Maybe you could talk about at least the deals that you're evaluating right now. How does pricing compare on those deals you're evaluating to kind of the current yield within the portfolio right now?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure, sure. Great question. And I think it's probably worth just touching on the market and in originations as well, just because they all kind of go hand in hand. I think the market, from our perspective, took three months or four months off completely and we've talked about that on this call, I think last quarter. Things started to pick up in July. And quite frankly, we started to look at some opportunity there.

I will tell you we proposed on some deals that ultimately would have been Q3 deals and we were not the winners, there were others that were more aggressive than us, to your pricing point. Having said that, I would tell you, in August, it was very, very busy and post Labor Day, it was expected to get busier and it did. So deal flow has been very strong. And I would say, pricing is a little above where things were pre-COVID, so that's still the same as 90 days ago. But at the same time, there is a fair bit of competition out there.

So we're -- good news is we are very busy and we're still operating with an abundance of caution. And we are -- so we feel good about it. There's a lot of companies out there that have weathered the storm well. We're actually just not been meaningfully impacted by them and we're seeing a fair bit of those in the market today.

Bryce Rowe -- National Securities -- Analyst

Great. Thank you. I'll jump out and let somebody else ask some questions. I appreciate it.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

All right. Nice talking to you, Bryce.

Bryce Rowe -- National Securities -- Analyst

Thanks.

Operator

Thank you. Our next question comes from Robert Dodd with Raymond James. Your line is now open.

Robert Dodd -- Raymond James -- Analyst

Morning. At the risk of just repeating Bryce's questions, I'm going to do pretty much that. On the dividend front, what -- obviously, I mean, the -- I think you illustrated back in Q1, right, eight of nine -- eight of 10 COVID scenarios you could cover at $0.30 base. And as you said, there's still a ton of uncertainty and things going on right now. So what -- when, Shelby, you mentioned it's always under consideration and, Ed, you talked about supplementals, what's been the consideration given to keeping the base, say, where it is? But having a formulaic supplemental, which has been quite popular with some other BDCs periodically so that if COVID and the general economic situation does deteriorate material again, that base that you illustrated was coverable, even in some pretty onerous situations just stays there and -- but having a formulaic rather than just kind of leading up to the Board every quarter. What's the thought process? Has that been considered? Is that something that could get more weight than may be just taking up the base given things are still very uncertain right now?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure, sure. Great question. We -- I would tell you that, that is on the table as an option and once discussed this quarter and discussed pretty seriously. I think back to the comments, it's just we're in a funny world today and there is still with the election and everything else, there's just uncertainty that we think it makes sense to obviously distribute some incremental earnings because we were performing well. And in next quarter, and I tried to signal this in our prepared remarks, that we are considering a variety of things, and all of those are on the table.

It could be a formula, it could be just putting some incremental distributions on a quarterly basis for a year or so, or it could be looking at the base dividend. And so we like this decision this quarter, just given where we are in the world, but all of those are going to be on the table again when we report fourth quarter and -- or even prior to that. I guess we'll announce a dividend in February. So, that -- they all will be discussion topics for us. So, [Speech Overlap] more excited that we can talk about this, and that's the thought process. Having said that, look, there is a lot of uncertainty out there and we're trying to behave in a very responsible manner that we think it's the right thing for shareholders at the moment.

Robert Dodd -- Raymond James -- Analyst

I appreciate that color. And if I can, the second one also basically a follow-up to that. On the deals that you're now seeing in the market, and you said your activity is up materially since Labor Day, is there a change in either type of deals that you are seeing coming or the type of deals -- by that I mean industry, leverage, however you -- that kind of -- those kind of metrics. The type of deals that you're more seriously willing to consider and how has that evolved from where, say, it would have been in this time last year before COVID, if you will?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure. Great question. I mean, I'd say, there's two buckets that we're seeing today. We are seeing some, call it, larger lower middle-market businesses were very high-quality recurring revenue bases and those are the ones were we're considering more second-lien or junior debt investments, feel great about the equity cushions and obviously their performance even in a COVID environment. So, thankfully, there is a number of those.

And I would say the other ones that we're seeing quite a bit of are some more unitranche type investments, fit the same thing, recurring revenue businesses, but maybe a little smaller. And in those cases, we are focused more on first-lien investments and -- but that is similar to a year ago, probably, different than three or four years ago where we were doing more just junior capital. They're still doing senior debt three or four years ago, but it's much more of a focus today. We're finding good success providing those solutions and our clients are welcoming those solutions as well. So I would say the large majority of what we will be doing for the foreseeable future will most likely be more first-lien or unitranche investments. And so, hopefully that's helpful. But that's kind of how we're approaching the market today.

Robert Dodd -- Raymond James -- Analyst

It is very much. I mean, kind of a follow-up to that as well. I mean, you mentioned you bid on some deals essentially for Q3 closes, but got bid out with -- by aggressive pricing. Is that environment -- that pricing environment continuing to be aggressive? I would presume it is, given what's gone on everywhere else in the lending markets. And if that's the case, I mean, is that pricing in the range that you're willing to meet going forward? Or are you holding the line on pricing and risking being essentially not closing deals? Not necessarily a bad thing, but because the market is more aggressive than you're willing to go. Can you give us any color there?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure. Great question. What I would say is, the market was, in certain instances, I wouldn't say the market, there were a couple of lenders out there that were more aggressive than we were willing to be in the July August time period. I would say we're meeting the market today. And the market, as I mentioned, I think when I was answering Bryce's question, I think the pricing is in line or a little above where where it was pre-COVID. So we're still getting enhanced pricing to a small degree today. We're willing to go there for the right assets. The right assets is the key point. And I will tell you that we are very busy right now, there is a lot going on, and we would expect, quite frankly, at this point you [Phonetic] don't hold me to this, that our originations would outpace our repayments this quarter. So we're busy at the moment executing hopefully in the close, but executing a number of deals.

Robert Dodd -- Raymond James -- Analyst

I really appreciate that color. One more if I can. And I know you don't like to touch on individual portfolio companies, but Accent Foods, obviously, it -- I mean we know what it does, I mean, its food businesses, the break-rooms and things like that, and there's not a lot of people not in the office right now. So it was a troubled asset pre-COVID and then people working from home obviously doesn't help. Can you give us anything you can say on the prospects for that business, given it had its issues before and then it seems vulnerable, obviously, to COVID? Is -- I mean, what can you tell us about the prospects for recovery on that business?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Yeah. Great question. Here's what I would say. I'd say any company that operates in this industry, and you hit this, but I'm going to say, has been impacted by the shelter-in-place and, quite frankly, the work-from-home directives. And so that's the fact of the matter. Management is doing a very nice job to a great job of navigating this shift and positioning the business for the future. Having said that, the valuation decline reflects the increased risk profile of our investments as we sit here today. And I think that's -- I think that probably sums it up pretty good.

Robert Dodd -- Raymond James -- Analyst

Okay. I appreciate that. Thank you.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Yeah. Nice talking to you, Robert.

Operator

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

Chris Kotowski -- Oppenheimer & Co. -- Analyst

Yeah. Good morning, and thank you. Just going -- I heard loud and clear what you said about the need to be cautious, but I'm just curious. I mean to the extent that there are supplemental distributions or returns of capital because you are out-earning. I know that in an accounting sense, it's not fungible, but in capital it's fungible. And I guess I'm just wondering, does it ever make sense to consider those supplemental distributions in the form of share repurchases rather than dividends? Because just somehow at your stock is trading at 62% of NAV, and it's just at some point be the economics of returning capital via share buyback versus cash dividends just gets very, very compelling.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure. Great question, Chris. We -- as I think you're aware, we have a $5 million share repurchase program in place that was reaffirmed this week. We are mindful that the value of our investment portfolio may not always be reflected in our stock price. And for that reason, we continue to look for ways to enhance shareholder value. And in fact, we did buy back shares in March at the beginning of the pandemic. So, we have done that and we've done that other times as well.

Having said all that, I think when evaluating buying back stock, I think it's also worth highlighting that we need to look at the whole picture. In today's world, liquidity is a have-to-have in my mind. We got to look at our capitalization, our covenants, our leverage ratios and you want to have access to the capital markets, which we believe we have, but -- and maintain those. So all those things make our part of the equation, as we look at share repurchases. But clearly, we've done it in the past and it's something that we talk about as well. So hopefully that's helpful. But...

Chris Kotowski -- Oppenheimer & Co. -- Analyst

Yeah. Again, I mean, I wasn't talking about incremental capital that even distribute anyway, just I was thinking of consider the form...

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure, sure. I understand clearly.

Chris Kotowski -- Oppenheimer & Co. -- Analyst

[Indecipherable] All right. That's it from me. Thank you.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Okay. Good talking you, Chris.

Operator

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

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

Yeah. Good morning, Ed and Shelby. A lot of good questions have already been asked, but I did want to circle back to the market environment, Ed. And I appreciate your comment that you're hopeful to have net portfolio growth this quarter. My question is, we're starting to see a trend with respect to the third quarter across BDCs, where repayments are fairly elevated as they were with you. My sense is that we're sort of living in a world of haves and have nots, and you mentioned that in your comments so far, where good performers have access to capital, there is tons of capital out there chasing good deals, including you. So pre-payment risk is meaningful, but at the same time underwriting is hard apart from maybe the software sector. And I'm trying to reconcile how those two things meet in terms of your ability to grow the portfolio this coming quarter or going into next year.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure, sure. I think, I guess, I'd start with, I think, your comments are all correct. I think high-quality assets are in high demand. If they're mature, people --sponsors are looking to recycle capital, for lack of a better word, or create some realizations. And so I think that's all real. And we do are aware, for instance, that there is two portfolio companies that we have, that are in the middle of sale processes and don't know if they'll come to fruition or not, but there is a decent chance they do.

And so, I think they will continue to be repayments and realizations, including incremental wins this quarter would be my guess. Having said that, as I have mentioned earlier, is I think deal flow is very strong, and we are seeing a fair number of businesses that were highly interested in. And this is -- so we're busy on the new investment side to say the least and excited about that. And so I think we'll be able to continue to invest from our perspective in this environment. I do think diligence processes are taking longer. That's one reason for some -- nothing happening in the third quarter, but also we got beat on some things because we were more aggressive on pricing and that didn't win the day.

But today, there is -- as I sit here today, there is a fair bit of activity, and that's obviously welcomed from our perspective because there's a lot of high-quality activity.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

Ed, in the lower middle-market, where you have portfolio companies that may be owned by a family of sole proprietor or a small group, I got to believe those folks are sitting here today thinking about next week's election and the potential for tax rates to change starting next year depending on the outcome of the election. Do you think that, that's capitalizing deal flow into the fourth quarter that potentially would have otherwise taken longer? I'm talking about stuff that's already in the pipeline. Obviously, you can't sort of process now, but essentially what I'm asking is the prospect of a higher capital gains tax rate in the future going to push some deal flow into this quarter?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure. I think that's part of the equation to answer it in a very short manner. I think it's very much a part of the equation. I think it will extend over into Q1 as well, but to probably a little bit less of the degree. So, but, yes, that's part of the equation for sure.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

I appreciate that. Ed, was there any trend at Mirage Trailers that we should be aware of that may be something you're seeing on other portfolio companies that allow you to put that back on full accrual?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Nothing. I mean, I guess, the two points I'd make is the company was impacted in a meaningful way by shelter-in-place orders. And so that definitely hurt the business for a while. Having said that, we are seeing in a lot of portfolio companies and in the manufacturing sector, a lot of companies that are coming back to pretty, pretty reasonable levels of activity. And so it fits in that mode of the businesses weathering the storm nicely, and that's what I would say from that perspective. But when you have a company, which we had a handful, that were effectively shut down due to orders, that impacts things for a while and get back up and run and take some time. And it really depends on end-market demand and other things, and you got to figure out what you have. And I think we've had a fair bit of time to figure out what we have in our portfolio as well as Mirage fits in that category as well.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

And on the flip side, Ed, you put EbLens back on accrual previously, but its valuation declined. Is there something there that we should also understand or think about in terms of general trends as we look into the next quarter and going into the first half of next year?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

I don't -- I mean we have three retailers. All three of them were shut down and I'm including our gym operator in that three -- in that three number. All three of them were shut down completely. The -- all three are now back up and running. And what I would say is that they're weathering the storm to the best of their ability, but the risk profile of that situation is reflected in the valuation. And so it's -- everyone's come back at varying degrees of -- to varying degrees of success, right? And so, I just would say that the risk profile that's reflected in the valuation is back up and running, but they're risks and that's what's highlighted.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

And the valuation is that just a sort of trailing 12-month phenomenon or was there something specific there that we should know about?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

I don't think there's anything specific as you know about it. We look at -- when we were doing valuations, we look at everything that we have -- we pay attention to forward-looking, we pay attention to LTM and current -- our current quarters and, obviously -- so we're looking at the whole picture trying to do the best we can, and we're obviously using third parties as well. And so that's -- the combination of all those things is how the Board gets there from a valuation perspective.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

Okay. Just a couple more if I may. What accounted for the dividend or what drove the dividend from Fiber Materials? And is that sort of a non-recurring item or is the company maturing? And we can expect more dividends in the near future from them?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure. Shelby, do you want to take that?

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

Sure. I'd probably kind of characterize that more as one-time. And again, that had more to do with tax true-ups once we received the 2019 K-1s here in 2020 and we filed our tax return. As it turned out, that was a distribution of earnings and profits, and so therefore income. So we just had to reclass it as it was previously characterized as a return of capital. But I would not kind of assume that going forward, in part just because we also exited.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

I understand. Thanks, Shelby. And my last question, which I sort of ask I think most quarters. Can you just give us a sense of where your average borrower EBITDA is today and the portfolio's average debt-to-EBITDA?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure. So, trying to get the page here. So the -- from an EBITDA perspective, the mean EBITDA is $17.8 million and the median is $10.6 million. And what was your other question? I'm sorry.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

Portfolio leverage.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Leverage is 4.2 times this quarter. So there is an improvement. What we saw on the overall portfolio is growth in EBITDA, mid-single-digit growth, and that's LTM from 6/30 to LTM at 9/30. And so we saw some improvement there and obviously there's cash flow associated with that as well.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

That's great. Those are all my questions. I appreciate your patience and your time. Thank you.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Thank you. Goood talking to you, Mickey.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

Likewise.

Operator

Tthank you. [Operator Instructions] Our next question comes from Mike Smyth with B. Riley Securities. Your line is now now open.

Mike Smyth -- B. Riley Securities -- Analyst

Hey, everyone. Thanks for taking my questions. Most have been answered, but just a question on the unrealized appreciation. I'm just wondering how much of that was driven by spread tightening and equity market comps compared to actual underlying company operating performance? And then as a follow-up to that, is there any idea of what percentage of unrealized losses you've recovered so far from 1Q? Thank you.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Sure. So, I'll give a little bit higher level answer on the valuation piece. I think a majority of the valuation improvements came from improvements and performance. I would also say that spread tightening was part of the equation as well. So that's how I think about it. Shelby, I don't know if you want to augment my answer there.

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

No. I think that's right. It's due to all of the above, but there was a fair amount of just underlying portfolio performance and/or future expectations that was part of the equation. So it wasn't really all due to calibration by any means.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

And the other question, Mike...

Mike Smyth -- B. Riley Securities -- Analyst

Got you. Thank you.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

The other question you have?

Mike Smyth -- B. Riley Securities -- Analyst

The other question was, any idea of what percentage of the unrealized loss you've recovered so far from 1Q? I'm just wondering how much more upside there could be here.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Unrealized loss, it's -- yeah, it's a tough question to answer. I think, overall, the -- I mean, this quarter, absent Accent, so Accent has been a drag for us, obviously, over the last several quarters. But this quarter alone, we had almost $25 million of appreciation if you exclud Accent. So, we've -- I think the business is performing nicely overall. And I think NAV dropped about $20 million lower than this or I guess it's more closer to $15 million in Q1. So we are making some progress back toward a higher NAV number, and that's driven by portfolio performance and whatnot. We haven't said that Accent has been a drag other -- on that whole equation.

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

Yeah. And just to add to that, in Q1, the debt portfolio was about 95.4% fair value as a percentage of cost. It's about 94% now. But again, Accent, just given its larger size, kind of impacts those numbers.

Mike Smyth -- B. Riley Securities -- Analyst

That's very helpful. Thank you for taking my questions, and congrats on a strong quarter.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Thank you, Mike. Appreciate it.

Operator

Thank you. And our next question comes from Bryce Rowe with Nation [Phonetic] Securities. Your line is now open.

Bryce Rowe -- National Securities -- Analyst

Hey, guys. Sorry to belabor the call here. Just a couple of follow-ups. Number one, Ed, you talked about two companies currently in a potential sale process. Do those two include the subsequent event that was included in the Q or they excluding that Pugh Lubricants exit?

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Excluding. They're incremental to the Pugh.

Bryce Rowe -- National Securities -- Analyst

Okay. And then second question maybe for you, Shelby. It looked like you prepaid some of the higher cost SBA debentures here this quarter. I'm curious if -- as you evaluate newer deals in the pipeline, I know that it's been harder to find SBA eligible deals over the recent past. Just curious if some of the activity in the pipeline would be SBIC eligible?

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

So, Bryce, you're correct. And we did prepay about $9.5 million of debentures at our second SBIC fund, just given some excess cash we were sitting on. And the timing was good to get that done before the September 1st window. We do have some cash at the SBICs now. But to your point, I would expect us to be able to deploy that here in Q4 through investment activity. And then as we kind of look forward, I would expect us to start ramping up the third SBIC fund. And then as we get repayments from the second fund, maybe we use those to start winding that fund down over a long period of time.

Bryce Rowe -- National Securities -- Analyst

Okay. Thank you.

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

But we should have some SBIC activity in the fourth quarter.

Bryce Rowe -- National Securities -- Analyst

Okay. That's great. Great to hear.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Thanks, Bryce.

Bryce Rowe -- National Securities -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Mickey Schleien with Ladenburg. Your line is now open.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

Yeah. Shelby, just a follow-up on the excise tax accruals that you've mentioned. How should we think about the excise tax on net capital gains for this fiscal year, given how many moving pieces there are, the differences between tax and GAAP?

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

Sure. To be honest, that's going to be a tough one for you guys to model, and quite frankly, we're giving estimates on a quarterly basis. But particularly from a realizations point of view, anything that happens in the fourth quarter will obviously impact taxable income projections. So for modeling purposes, probably, what I would suggest is just kind of taking a look at our spillover position today and just kind of assuming excise tax. Given that our spillover position, we're kind of going into the rest of the year a little bit higher than in the past, I would expect us to have higher excise tax than we have in the past. So probably to the tune of $0.04 or $0.05. And again that's barring any material realizations one way or the other in Q4.

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

Okay. That's helpful. Thank you for that.

Operator

Thank you. And our next question comes -- pardon my interruption. [Operator Instructions] I'm showing no further questions in the queue at this time. I'd like to turn the call back to Ed Ross, CEO, for any closing remarks.

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

Thank you, Jimmy, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our fourth quarter call in late February 2021. Have a great day and a great weekend.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Jody Burfening -- Investor Relations

Edward H. Ross -- Chairman of the Board and Chief Executive Officer

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

Bryce Rowe -- National Securities -- Analyst

Robert Dodd -- Raymond James -- Analyst

Chris Kotowski -- Oppenheimer & Co. -- Analyst

Mickey Schleien -- Ladenburg Thalmann & Co. Inc. -- Analyst

Mike Smyth -- B. Riley Securities -- Analyst

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