Fidus Investment Corporation (FDUS) Q2 2021 Earnings Call Transcript

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Fidus Investment Corporation (FDUS 1.04%)
Q2 2021 Earnings Call
Aug 6, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Fidus Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to Jody Burfening. Please go ahead.

Jody Burfening -- Managing Director/Principal

Thank you, Christy, and good morning, everyone, and thank you for joining us this morning for Fidus Investment Corporation's Second Quarter 2021 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. Finance -- Fidus Investment Corporation issued a press release yesterday afternoon with the details of the Company's quarterly financial results. The copy of the press release is available on the Investor Relations page of the Company's website at fdus.com.

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, cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable, based on estimates, assumptions and projections as of today, August 6, 2021, 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 -- Chief Executive Officer

Good morning, Jody, and good morning everyone. Welcome to our second quarter 2021 earnings conference call. I hope all of you, your family, friends and co-workers are staying healthy and well. I'm going to open today's call with a review of our second quarter performance and portfolio at quarter end, and then share with you our views on deal activity in the lower-middle market for the second half of the year. 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.

Overall, we are very pleased with our results and portfolio performance for the second quarter. Adjusted net investment income grew year-over-year and net asset value per share reached a record level. Originations and repayments were at high levels, in line with our expectations for a busy quarter from a deal flow perspective. We continue to focus on carefully selecting high quality companies in the lower-middle market that are reasonably insulated from economic stresses associated with the pandemic. Companies that possess really resilient business models that generate strong levels of cash flow to service debt and positive long-term outlooks. Our portfolio remains well structured, positioned to produce both high levels of recurring income and the potential for equity upside in support of our capital preservation and income goals.

Adjusted net investment income, which we define as net investment income excluding any capital gains incentive fee attributable to realized or unrealized gains and losses grew 15% versus last year to $10.4 million or $0.42 per share. At quarter end, net asset value had reached a record $429.4 million or $17.57 per share, reflecting both solid operating performance and underlying portfolio value -- fair value appreciation. Fidus paid a quarterly dividend of $0.31 per share and a supplemental cash dividend of $0.08 per share on June 28, 2021 to stockholders of record as of June 14. As a reminder, the Board has devised a formula to calculate the supplemental dividend each quarter, under which 50% of the surplus in adjusted NII over the base dividend from the prior quarters is distributed to shareholders.

For the third quarter, I am pleased to report that we are increasing the base dividend to $0.32 per share in the surplus is $0.06 per share. In addition, we will pay a special dividend in Q3 of $0.04 per share. Therefore on August 2, 2021, the Board of Directors declared a base quarterly dividend of $0.32 per share, a supplemental quarterly cash dividend of $0.06 per share and a special dividend of $0.04 per share. The dividends will be payable on September 28, 2021 to stockholders of record as of September 14, 2021.

Following a busy first quarter, deal flow activity remained at high levels during the second quarter driven by both M&A transaction and refinancing opportunity. In contrast to the first quarter, however, originations outpaced repayments. In terms of originations, we invested $104.2 million in debt and equity securities of which $96 million or nearly all of the total was invested in first lien debt. Investments in new portfolio companies consisted of $18 million in first lien debt and common equity in 2KDirect, Inc., a leading omnichannel digital advertising platform for small and mid-sized businesses. $7 million in first lien debt and common equity in Aeronix Inc., a supplier of data transfer, signal analysis, communications products and related engineering services, primarily to the defense industry. $25.5 million in first lien debt and common equity in ISI PSG Holdings, LLC, doing business as incentive solutions, a provider of online rewards, travel incentives and gift card reward programs. We subsequently sold a $13.5 million participating interest in the first lien debt. $6.5 million in first lien debt and common equity in Level Education Group, LLC, a leading provider of online continuing education for mental health and nursing professionals. $12 million in first lien debt in UPG Company, LLC, an original design and contract manufacturer of complex assemblies with roots as a manufacturer of precision injection molded plastics. And finally, $11 million in first lien debt in Winona Foods, Inc., a leading provider of natural and process cheese products, sauces and plant-based alternatives.

These investments are indicative of our present focus on companies that have not been meaningfully impacted by the pandemic and possess revenue streams that are recurring in nature. In terms of repayments and realizations, we received proceeds totaling $93 million with the vast majority from second lien debt investments. In terms of excess, we received payment in full of $15 million, including a prepayment penalty on our second lien debt in The Kyjen Company. We received payment in full of $8 million in our second lien debt in Medsurant Holdings, LLC. We received payment in full of $12 million on our second lien debt in Virginia Tile Company, LLC. We received payment in full of $7.8 million on our second lien debt in Steward Holding LLC. We received payment in full of $4.7 million on our first lien debt in Palmetto Moon, LLC. We received payment in full of $22.5 million on our second lien debt in AVC Investors, LLC. And we have exited our equity investment in Wheel Pros, Inc., a realized gain of approximately $2.1 million.

Subsequent to quarter-end, Hilco Technologies was sold. We took control of Hilco in the second quarter and exchanged a $10.3 million debt investment for an equity investment in a new holding company. In conjunction with the sale, subsequent to quarter end, we received payment in full on our residual debt and converted equity investment and realized a net loss of approximately $1.1 million of our original equity investment in the company. We received payment in full of $11.4 million on our second lien debt in CRS Solutions Holdings, LLC. We received payment in full of $20 million on our second lien debt in Worldwide Express Operations, LLC, and realized a gain of $3 million on a pro -- on a portion of our equity investment. In conjunction with the sale of Worldwide Express, we invested $1.5 million in common equity, of which $0.8 million was rolled over from our original common equity investment and funded a $20 million second lien term loan commitment.

With originations coming in above repayments in excess and the fair value of the portfolio appreciated relative to the first quarter, the fair market value of our portfolio as of June 30, 2021 was $743.5 million equal to 110.8% of cost. We ended the second quarter with 72 active portfolio companies and four companies that have sold their underlying operations. In terms of portfolio construction, our continued focus on investing in first lien debt combined with a heavy weighting of second lien debt exits has altered the mix since the beginning of the year. First lien debt investments have increased on an absolute basis and as a percent of total portfolio. And at quarter end, first lien debt accounted for 38.3% of the portfolio on a fair value basis compared to 25.2% as of December 31, 2020.

In contrast, second lien debt has decreased on an absolute basis in a percent of total portfolio and accounted for 28% of the portfolio on a fair market basis compared to 44.7% as of December 30th. Subordinated debt accounted for 13.4% and equity investments accounted for 20.3% of the portfolio on a fair value basis. Our portfolio remains well structured for current economic conditions with debt investments, generating high levels of current and recurring income and equity investments, providing us with a reasonable margin of safety, along with the opportunity to enhance returns.

Moving to portfolio performance. Overall, our portfolio continues to perform well and risk remains at comfortable levels. As of June 30th, we did not have any companies on non-accrual. Last quarter, I mentioned that some of our portfolio companies were dealing with operational challenges, including supply chain constraints and higher input costs. Although the challenges haven't abated since then, management at these companies are rising to the challenge making adjustments as necessary in pricing and/or productivity and their overall demand remains favorable.

To help us assess the overall health and stability and performance of our investment portfolio, we tracked several quality measures on a quarterly basis. First, we tracked the portfolio's weighted average investment rating based on our internal system. Under our methodology, a rating of 1 is outperformed and a rating of 5 is an expected loss. June 30th, the weighted average investment ratio for the portfolio was 2 on a fair value basis. Another metric we track is the credit performance of our portfolio, which is measured by our portfolio company's combined ratio of total net debt through Fidus' debt investments to total EBITDA. For the second quarter, this ratio was 4.2 times, excluding equity-only and ARR deals.

The third measure we track is the combined ratio of our portfolio company's total EBITDA to total cash interest expense which is indicative of the cushion, our portfolio companies have in aggregate to meet their debt service obligations to us. For the second quarter, this metric was 3.2 times, excluding equity-only and ARR deals.

M&A activity picked up at the beginning of the fourth quarter of last year and has remained at healthy levels today, resulting in high levels of originations and repayments. Although net originations rebounded in the second quarter, we are currently not invested in our -- not fully invested in our debt portfolio after several consecutive quarters of unusually high levels of debt repayments. We have been in this situation before and have a proven track record of redeploying proceeds into new debt investments that provide us with high levels of current and recurring investment income without either sacrificing our underwriting standards or deviating from our philosophy of managing the business for the long term. We, therefore, intend to adhere to our strategy of carefully investing in high-quality companies with defensive characteristics and positive long-term outlooks prioritizing companies that have not been materially impacted by the pandemic and that possess resilient business models and strong cash flow profiles.

As we move into the second half for the year, we still see very healthy to robust conditions for deals in the lower-middle market from both M&A activity and refinancings where we can leverage our relationships and experience. This favorable environment supports our goal of growing our debt portfolio in the coming quarters. It also supports a positive outlook for equity realizations. Combination of our investment strategy and underwriting principles support our goals of capital preservation and generating attractive risk-adjusted returns.

Now, I'll turn the call over to Shelby to provide some details on our financials and operating result. Shelby?

Shelby E. Sherard -- Chief Financial Officer, Chief Compliance Officer, and 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 2021.

Total investment income was $21.8 million for the three months ended June 30th, a $1.5 million decrease from Q1, primarily due to a $1.2 million decrease in interest income, and a $1 million decrease in fee income offset by a $0.7 million increase in dividend income. Due to the Hilco restructuring and exchange of debt for equity, approximately $0.6 million of interest income was converted into dividend income. Yields were relatively stable in Q2 at 12.2% versus 12.3% in Q1. However, as Ed mentioned, yielding assets are lower than historical levels, given the unusually high level of repayments over the last several quarters.

We had one counting nuance in Q2 that I wanted to highlight regarding secured borrowings. As Ed mentioned, subsequent to the initial closing, we syndicated $13.5 million of our unitranche loans and incentive solutions to a first-out lender. Given our continuing involvement in the loan, the $13.5 million that was assigned, does not meet the GAAP accounting criteria for sale accounting treatment. Rather the $13.5 million is a secured borrowing, which simply means that it remains a security on our balance sheet included in total assets, with an offsetting liability, a secured borrowing on the balance sheet.

Similarly, the interest on the $13.5 million portion of the loan is included in both interest income and interest expense. Given the total assets including secured borrowings, the advisor granted a waiver to exclude the $13.5 million of secured borrowings from the base management fee, waiving approximately $29,000 of fees in Q2 so as not to penalized shareholders for the accounting treatment.

Total expenses, including income tax provision, were $15.4 million for the second quarter, approximately $3.1 million higher than the prior quarter primarily due to a $3.8 million increase in the capital gains incentive fee accrual. In Q2, we accrued $3.9 million of capital gains incentive fees given meaningful appreciation in the fair value of the portfolio. And interest and financing expenses decreased in Q2 by $0.6 million primarily due to the redemption of bonds in Q1. Note the capital gains incentive fee is accrued for GAAP purposes but not currently payable.

As of March 31st, the weighted average interest rate on our outstanding debt was 4.2% excluding secured borrowings, and we had $360.1 million of debt outstanding, comprised of $139.3 million of SBA debentures, $207.3 million of unsecured notes, and $13.5 million of secured borrowings. Our debt-to-equity ratio as of June 30th was 0.8 times or 0.5 times statutory leverage excluding exempt SBA debentures. Net investment income or NII for the three months ended June 30th was $0.26 per share versus $0.45 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 $0.42 per share in Q2 versus $0.46 per share in Q1. For the three months ended June 30th, we recognized approximately $2.2 million of net realized gains primarily from the sale of our equity investment in Wheel Pros.

Turning now to portfolio statistics as of June 30th. Our total investment portfolio had fair value of $743.5 million. Our average portfolio company investment on a cost basis was $9.3 million at the end of the second quarter, which excludes investments in four portfolio companies that sold their operations that are in the process of winding down. We have equity investments in approximately 85.5% of our portfolio company with an average fully diluted equity ownership of 7.4%. Weighted average effective yield on debt investments was 12.2% 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'd like to briefly discuss our available liquidity. As of June 30th, our liquidity and capital resources included cash of $54.2 million, $13.5 million of available SBA debentures, and $100 million of availability on our line of credit, resulting in total liquidity of approximately $167.7 million. Taking into account subsequent events, we currently have approximately $203.2 million of liquidity. In Q3, we plan to use excess cash in our second SBIC fund to pay down at least $40 million of outstanding SBA debentures.

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

Edward H. Ross -- Chief Executive Officer

Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at Fidus for their dedication and hard work and our shareholders for their continued support.

I will now turn the call over to Kristy for Q&A. Kristy?

Questions and Answers:

Operator

Thank you. The floor is now open for questions. [Operator Instructions] And your first question is from Ryan Lynch of KBW.

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

Hey, good morning. Thanks for taking my questions. Really nice quarter guys. The first question I had though with regarding, you guys had about $18 million that looks like unrealized gains in your equity portfolio. Can you just talk about what were the drivers behind those, what were the investments in the country in or wasn't the spread across many and what's going on with companies?

Edward H. Ross -- Chief Executive Officer

Sure. Great question. Ryan. I think to be honest, it was a pretty broad-based appreciation, if you will, about two-thirds of our companies in our portfolio had EBITDA growth on an LTM basis this quarter, in fact, it was I think for the whole portfolio of 7%. So that's just one LTM growth from Q1 to Q2. So it was driven largely. We do have to calibrate some but it was really driven largely by the performance of the portfolio. Clearly, there are some names in there that has larger moves than others, but I would say it was a wholesale improvement in performance for the portfolio is how I would think about it because we don't sell full bid yet.

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

Yeah, yeah definitely helpful. Kind of on that point, you guys have had a ton of success in your equity portfolio, net equity co-investment strategies spent have been hugely successful. One of the, I guess the good problem to have though is that portfolio has grown to 20% of your overall portfolio, which is the highest I believe is that, was that in your digest really. What is your outlook for potentially actually in some of these equity investments? The M&A is picking up in the market, the market is, there's a lot of activity. So we think the outlook would be good. I don't know how much of these equity investments you actually control the outcome of when they exit. And so any outlook or any commentary and what is the potential from a high level of exiting those equity investments? And also on that, would you guys ever consider, I think in the past that they can February of 2020 you've all completed the sale of a portion of about 50% of about 40 equity investments. Would you guys consider doing that if some of these equity investments don't kind of exit kind of in a normal fashion?

Edward H. Ross -- Chief Executive Officer

Sure, great question. A lot of discussion around this, obviously as you might imagine that among the management team as well as the Board, quite frankly. Yeah, I think it's just as I think you mentioned, it's a, it's a nice problem to have. We like our equity portfolio overall. We've got a lot obviously high performing companies that all just also just quality company that we have investments. And so as I look at the market today, I think it's a, it's a very healthy one from an M&A perspective and probably only gets even more active here in the 4th quarter. So we do have an expectation for additional realizations and quite frankly on both the debt and the equity side of things, primarily driven by M&A. And so I think the outlook for realizing some of the portfolio is very positive from that perspective. And we would expect that to continue and we have a lot of companies that are pretty right if you will for M&A or some type of transaction. So I view the outlook from a natural perspective to be very good.

When I look at the companies we control, we control a couple of companies today May. And so, and then we have impact on some other investments where maybe the sponsor is not in total control of the situation or if it would be a negotiation, if you will, among ourselves and other shareholders. And the good news is in those situations the companies are in a good position to have a transaction to the extent we wanted to. Having said that, I think we also like those investments. So there is balance, you got to strike. And I wouldn't say we're looking to go sell those investments right now because there is a, there is a good outlook. But at the same time, so as I think about things, yes, we're a little long in equity today, just on a percentage basis, but I would also tell you is there, we think the portfolio overall is a very healthy and good portfolio. So there is a balance, you got to strike there because I don't want to sell too early or just create transactions that aren't advisable. So but we -- and then the last question you asked was where we consider selling a portfolio of equity investments like we did a year and a half ago. Yeah, I'd say, look anything's on the table for sure. I would never take that option off the table. But it's not something that we're working on right now, but it is clearly an option on the table down the road if we think that's the right answer at that point. So hopefully that's helpful, a little long-winded but -- perhaps from our perspective, but yeah, it's where we are.

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

Yeah, no, that's helpful. And obviously, the position you're in today is obviously due to the incredible success our portfolios have, so I mean, it's been a great win for shareholders. Just one last one if I can. We talked of a lot of BDCs over the last several days, a lot of them were focused on more kind of the upper core middle market. And so I wanted to get your -- you all's opinion on where is the competition, where does it stand from a competitive standpoint in the lower-middle market as far as competition, as far as terms and structures as we sit here today as kind of those in the market aim to be there real fast?

Edward H. Ross -- Chief Executive Officer

Sure, sure. Well, starting with the deal terms and structures. I mean, they continue to be the same for us, where we go to market as a solution provider. Obviously, first lien debt is and has been for really three or four years, a big priority of ours and it's where we've been having some great success in the market. So structures are primarily there. Having said that, we still are making second lien and sub-debt investments for the right situations for the superlative opportunities that we see. So I think that that's how we're approaching it.

From a competition standpoint, it's competitive out there, right? It's -- and I would say it's more competitive than three years ago or five years ago. Not crazy, more competitive, but more competitive. I think the good news is leverage really hasn't gotten any more aggressive though, than those time periods and so leverage is very much at pre-COVID levels, if you will. So -- and interest is about that but we have seen pockets of kind of extra aggressiveness, if you will, from certain participants that -- in the market that are more AUM players, if you will, and doing things that are unnatural. And I don't think that's the norm, but we've seen it for sure. So it is aggressive out there, but in the lower-middle market, the terms are very -- they're the same. We still have covenants. So these are -- your covenant-light deals and the overall structure is that it has not changed, though, obviously we're getting pushed from a variety of angles in a competitive environment like this. Hopefully, that's helpful, but it...

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

Yeah.

Edward H. Ross -- Chief Executive Officer

It's a robust market from all angles, right? Or a active, a very healthy market, if you will.

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

Yeah. That's helpful. I really appreciate your time today. Those are all my questions and really in this quarter.

Edward H. Ross -- Chief Executive Officer

Thanks, Ryan. Nice talking with you.

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

You too.

Operator

Thank you. Our next question is from Matthew Tjaden of Raymond James.

Matthew Tjaden -- Raymond James -- Analyst

Hey, Ed and Shelby. Good morning. And appreciate you taking my questions. First one for me, it looks like your November 2024 notes can be redeemed in November of this year. For modeling purposes, any color you can give about plans for the capital structure in the remainder of 2021?

Edward H. Ross -- Chief Executive Officer

Sure. Hey, Shelby, you want to take that?

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

Sure. I would say, as I mentioned in my remarks, we do have some repayments that have occurred in our second SBIC fund. And so in terms of kind of redeeming debt. We're probably going to redeem some SBA debt here in the 3rd quarter, we'll opportunistically consider opportunities for redeeming our baby bond, that's not something that's -- something that we have to do, given that we have a fair amount of time left before maturity. But we'll certainly consider opportunities as they present themselves. And we're also focused on getting a little more reinvested in the second half of this year, using up our liquidity and having some portion of callable bonds in our capital stack is kind of key to the long-term strategy.

Matthew Tjaden -- Raymond James -- Analyst

Got it. Appreciate that. Second one for me on fee income. Now, it can be rather volatile quarter to quarter, but maybe in 2022 as activity moderates, would you expect 2022 fee income to be below 2021 levels.

Edward H. Ross -- Chief Executive Officer

You know Matt, I don't know that I would project that I would say we are -- as we are here today in the market and have been for a while -- we're originator, our first lien loans in. To the extent that we stay in that category, if you will, which we believe we will. There is no change in strategy. From our perspective, that we would expect originations to continue to be healthy in 2022 and thus there'd be some fee income, with that, we also think there'll be some prepayments. But as you heard today, I think one of the six investments we had, had prepayment penalties, so not all of them have them. I mean, they all have them, but they expire usually after a couple of three years. So, but I would expect at least whether we match the same level of fees in 2022 versus 2021. I don't know, but I don't expect it to be dramatically lower at this point at all, I don't foresee that.

Matthew Tjaden -- Raymond James -- Analyst

Got it. That's it from me. I appreciate the time this morning.

Edward H. Ross -- Chief Executive Officer

Nice talking with you, Matt. Thank you.

Operator

Thank you. Your next question is from Bryce Rowe of Hovde Group.

Bryce Rowe -- Hovde Group -- Analyst

Thanks. Hi, Ed and Shelby, how are you?

Edward H. Ross -- Chief Executive Officer

Good, hope you are.

Bryce Rowe -- Hovde Group -- Analyst

I am. I appreciate it. Let's see here. So, Ed, you talked about, you highlighted the second lien repayments and you've consistently highlighted the focus on one the first lien over the last few years. And I'm curious. The second lien repayments. Is that kind of just a function of just natural course of company activity and -- or is that something that you all have kind of focused on trying to kind of push companies to repay the second lien investments so that you can rotate into a more first lien heavy debt portfolio?

Edward H. Ross -- Chief Executive Officer

Sure, great question. Interestingly, it's really normal of course and to be honest in certain of those situations, those weren't investments that we want to lose quite frankly there are very good investments, but they had reached, I'd say, four of the six repayments materialize due to just being able to access much lower cost of the capital, i.e., bank debt just due to their leverage profile. So they had performed very well and delevered and took advantage of the market opportunities ahead of them. So it's -- in the other two quite frankly where acquisitions, where the whole capital structures were we're kind of rejiggered, if you will, or reconstructed and we just weren't part of those but that solutions. So it was a more normal course. We aren't looking to force our way out of investments. But right now we don't. Well, I mean we obviously had to get active though. With regard to Hilco but and those are more one-off situations, not a normal course trying to push second lien investments out because we're still making second lien investments today, it's just, yeah, we're doing a very -- I'd say opportunistic basis at the moment.

Bryce Rowe -- Hovde Group -- Analyst

Okay and then next question maybe for Shelby. I appreciate the heads up on the $40 million of SBA pay-downs, you guys have been able to draw SB -- newer SBA debentures here recently, should we expect that trend to continue in terms of SBA debentures funding some of the -- some of the new originations here in the near future.

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

The short answer is yes. Certainly, the SBA has been a very good partner to Fidus over the years and we have ample opportunity to continue to grow our third SBIC fund, but it's really just going to be a function of what we have in the pipeline, and does it meet SBA eligibility criteria. So if it does, we would look to invest it out of the SBA and if it doesn't, we've got opportunities to invest from the parent BDCs.

Bryce Rowe -- Hovde Group -- Analyst

Okay, that's it from me. I appreciate you all's time.

Edward H. Ross -- Chief Executive Officer

Thank you, Bryce. Nice talking with you thank you.

Bryce Rowe -- Hovde Group -- Analyst

Yes, same here.

Operator

Your next question is from Mickey Schleien of Ladenburg.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Good morning, Ed and Shelby. Just a couple of questions from me at the weighted average effective yield on the portfolio has been nicely steady at around 12%, despite the higher first lien allocation at cost which as you've noted, I think, has more than doubled, what's been the approach you've been using in choosing first lien investments which has allowed you to maintain that portfolio yield.

Edward H. Ross -- Chief Executive Officer

Sure, great question. I think it's, we've obviously touched on our first lien approach, which includes dollar one, first lien investments, but it also includes first-out, last-out structures where we partner with other financing providers to lower the cost of capital quite frankly for the borrower and so in those cases where we are maintaining yields but investing in senior debt that may be as price lower, we are using a first-out, last-out structure, which we talked about before and that I'd say that is one of the ways that we've been able to maintain our yields. Obviously, we're still making second lien investments and sub-debt investments that keep yields up as well, but that's probably the driver that I would highlight for you, but it's nothing different than what we've been doing over the last several years, it's just a larger percentage of the overall financing transactions that were getting involved with.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

And in those deals, are you selling the first out pieces generally two commercial banking relationships and how many turns of leverage to you usually sell to them.

Edward H. Ross -- Chief Executive Officer

Sure. It is we have a network of commercial banking relationships that we work with. And so we've created a network there. And then in terms of the leverage. It really varies deal by deal. I mean there are times when maybe it's a 4.5 times leverage financing and the bank will take 2.5 or 3 turns. And there are times when they only take 1 turn and we'll take the other 2 or 3 turns, whatever. So it's, it really is deal by deal and we put it together in conjunction with the bank that we will end up working with. So it's fluid from that perspective. There's not a fixed formula.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Yeah, I understand. And in those transactions, Ed, is there language in your documents that effectively give you a call option on whatever you sold to them in the event the borrower violates covenants or has other trouble that it gives you control over the deal.

Edward H. Ross -- Chief Executive Officer

Sure. So, generally speaking, I'd say the answer to that is yes. I mean every documents' total different is well, as you know, but generally speaking, the answer to that is yes.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Okay. And my last question, when you look at the vintage of the portfolio, how much remaining call protection would you say you have, on your debt investments?

Edward H. Ross -- Chief Executive Officer

Mickey, that's a tough one. I don't know that I can answer that with any accuracy. The -- I would say we -- as I sit here today, we've got a fair bit of call protection and that has to do with the fact that we've, quite frankly, exited a fair number of debt investments over the last 24 months and obviously have a fair number of new portfolio companies in the portfolio as well. So typically when you -- if that's the case, we would have pretty good or healthy call protection on those newer deals, if you will. So I can't answer it anymore accurately than that.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Okay.

Edward H. Ross -- Chief Executive Officer

So hope it's helpful, but that's what I would say.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

And just maybe as a last follow-up. Do you yearly structure sort of a three, two, one call protection sliding scale or is that too aggressive in this kind of market?

Edward H. Ross -- Chief Executive Officer

It's either a two-year or a three-year? Those are the -- and it just depends, is this a second lien investment, is it first lien, bigger in first lien or -- those kind of things.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Okay.

Edward H. Ross -- Chief Executive Officer

It's two to three years.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

That's it for me, and just congratulations on a good quarter. And I hope you guys have a good weekend. Thank you.

Edward H. Ross -- Chief Executive Officer

Thanks, Mickey. Nice talking with you. Hope you have a good weekend as well.

Operator

Thank you. Your next question is from Sarkis Sherbetchyan of B. Riley.

Sarkis Sherbetchyan -- B. Riley Financial -- Analyst

Good morning, Ed and Shelby. How are you guys?

Edward H. Ross -- Chief Executive Officer

Good. How are you, Sarkis?

Sarkis Sherbetchyan -- B. Riley Financial -- Analyst

Yeah. Good. Thanks. First question, just kind of circles around the leverage levels, I guess just remind us where you plan to take the business from a regulatory leverage perspective.

Edward H. Ross -- Chief Executive Officer

Sure. I think as we've talked about it in the past, Sarkis, I think we have said one-to-one, we're obviously very comfortable with it. As you can lever your SBIC funds which are subsidiary 2 to 1. So -- and we were an SBIC fund only when we went through the great session -- recession at 2 to 1 leverage. And we obviously went through that without any problems. So we're very comfortable with higher leverage. What we've said is we're -- 1 to 1 is a good number, especially given the complexion of our portfolio, which was weighted more toward junior debt. As you know that the portfolio is changing or the complexion of the portfolio is changing, just to more first lien originations and the exit of some of the second lien investments just from -- just as in natural course, should I say?

So what I would say is we continue to do think one-to-one is a very good number, but we also would be comfortable increasing that if we needed to or if it makes sense. But it's good just given the complexion of the portfolio. But I think -- we like that number but we can go up a little bit or obviously we're much lower than one-to-one at the moment and we're comfortable with that as well. So hopefully that's helpful, but that's how we've kind of thought about it, as very comfortable around the one-to-one. But we have increased flexibility today due to the complexion of the portfolio changing.

Sarkis Sherbetchyan -- B. Riley Financial -- Analyst

Yeah, that's exactly right. I mean, it just seems like with the shift more and more toward first lien, it seems like your portfolio is fairly under-levered and can support more leverage. That's exactly what I was getting to. And I guess in that light, kind of given the current environment, maybe if you can speak to the current pipeline and then potentially put a number on that and then just kind of frame your expectations for balancing originations versus repayments, clearly trying to understand when we get to that comfortable level of achieving that leverage.

Edward H. Ross -- Chief Executive Officer

Sure, sure. So I think it's -- you got to start with the market. The market has been very active. It's really since Q4 of last year I'd say, robust last year, this year healthy levels. But I'd also say it's expected to remain healthy to robust the rest of the year. So I think that's the industry backdrop, I would say. So from an originations perspective, and I've mentioned this, first lien investments is a primary focus. We're opportunistically making second lien investments in sub-debt investments as well. We think Q3 will be busy from an originations perspective. We make one new investment in Worldwide Express, as I mentioned in our prepared remarks. We've also made several add-on -- I'd say, material add-on investments to portfolio companies where we were supporting acquisitions.

And then in addition, then what I'd say is it's busy today, so we are active and we're working on several opportunities, but obviously it's too early to tell what closes and what doesn't and whatnot. But it's busy right now. So in terms of repayments and as I mentioned in our subsequent Events section, we announced the full debt realization of three investments. Hilco, Worldwide Express, and CRS Worldwide. We reinvested in those companies or in that company. And at this point, what I'd say is, we have visibility into two transactions that we think will also result in the repayment of debt investments as well as the realization of equity investments. They haven't closed yet, so you never know, but so it's going to continue to be an active quarter from a repayments perspective.

So, overall, what I would say is we expect originations to maintain pace with repayments. But at the same time, I'm going to -- I'll tell you, it's too early to tell, just given we don't know what's going to close and what's not going to close. But that's what we would say today. So hopefully that's helpful, but it's a busy time and expected what we're hearing is M&A bankers are as busy as they can be today. So we're expecting a busy fall.

Sarkis Sherbetchyan -- B. Riley Financial -- Analyst

Yeah. Yeah, certainly helpful. And just one more for me, if you can maybe speak to the current pricing environment real time, just kind of help us think about how the near origination yields are behaving. Is it to your standard, is it -- are you losing some, are you gaining some any color there would be helpful?

Edward H. Ross -- Chief Executive Officer

Sure, sure. I mean, back to the previous conversation, competition is real out there. For the right credits will we reduce price a little bit? Just -- the answer is, yes. But having said that, we've always been and we'll continue to be focused on risk-adjusted returns, and so that's going to drive our decision-making. But yields are 12% to 12.2% for us on the debt portfolio. If they were to move, I would say it probably move down a little bit just due to yield environment and competition. I don't expect any major swings there, but that's kind of the -- where we are today and from a competitive standpoint. So until yields start to move forward, I would expect that there may be some very modest drifting down, if that makes sense.

Sarkis Sherbetchyan -- B. Riley Financial -- Analyst

Yeah. That's all for me. Thank you.

Edward H. Ross -- Chief Executive Officer

Okay. Thanks, Sarkis. Nice talking with you.

Operator

Thank you. We have no further questions at this time. I will turn the floor back over to Ed Ross for any additional or closing remarks

Edward H. Ross -- Chief Executive Officer

Thank you, Christie, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our third quarter call in early November. Have a great day and have a great weekend.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Jody Burfening -- Managing Director/Principal

Edward H. Ross -- Chief Executive Officer

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

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

Matthew Tjaden -- Raymond James -- Analyst

Bryce Rowe -- Hovde Group -- Analyst

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Sarkis Sherbetchyan -- B. Riley Financial -- Analyst

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