Stellus Capital Investment Corp (SCM) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to the Stellus Capital Investment Corporation's Conference Call to report second quarter financial results. At this time, all participants have been placed on a listen-only mode. The call will be opened for question-and-answer session following the speaker's remarks. This conference is being recorded today, Friday, August 7, 2015.

It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Thank you, Jim. Good morning, everyone and thank you for joining the call. Welcome to our conference call covering the quarter ended June 30, 2015. Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements, as well as an overview of our financial information.

Thank you Rob. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Stellus Capital Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone number and pin provided in our press release announcing this call.

I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these projections.

We will not update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the Stellus Capital Investment Corporation link or call us at 713-292-5400.

At this time, I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd.

Thank you, Todd. I'll review our second quarter by covering three years, first earnings, second portfolio growth, and third portfolio quality.

With respect to earnings, in the second quarter we earned $0.34 per share, fully covering our dividend. The $0.34 came from net investment income of $0.32 per share and realized gains of $0.02 per share, which was from OID accretion on one position.

Under portfolio growth, our investments for the quarter were $39 million, which more than covered the larger than normal payoffs, totaling $36 million. The originations were made in a diversified way. The largest addition was approximately $12 million and the average new position was $8 million, and one of the new investments was funded with additional SBIC debentures.

We've been repositioning over time the portfolio to be more secured versus second liens and less unsecured. This repositioning is also resulting in more floating rate loans. To illustrate our secured portfolio increase from 62% at March 31 to 69% at June 30 and our floating rate portfolio increase from 60% to 68% quarter-over-quarter. Further, the positions added during the quarter were over 80% secured loans, over 80% floating rate loans, and a weighted average yield was approximately 11.5%.

Turning to portfolio quality, the overall risk rate of the portfolio is stable at about a 2 rating. We have only non-one accrual loan, which is less than 3% of the portfolio at fair value. We continue to have a diversified portfolio from an industry standpoint, as you know, and as reported last quarter, we have less than 1% invested directly in the oil and gas sector and that loan is well secured.

Looking forward to the third quarter, which we're now in, we have funded $12.5 million through yesterday and have received one payoff of $7.6 million. We are expecting to receive some additional payoffs during the balance of the year and in the third quarter the range could be as much as $12 million to $39 million in terms of payoffs. We do have an active pipeline as we head in the second quarter and new transactions could exceed or cover the payoffs. And we'll have to see how the quarter shakes out to determine what the net impact is. So meaningful payoffs could occur. Meaningful new fundings could occur as well.

So with that I'll turn it over to Todd to cover the financial results.

Thanks, Rob. Our total investment income for the quarter was $8.7 million, most of which was interest income. Operating expenses totaled $4.7 million for the quarter and consisted of base management fees of $1.4 million, incentive fees of $1 million, fees and expenses related to our borrowings of $1.5 million, including commitment and other loan fees, administrative expenses of $300,000 and other expenses of $500,000.

Net investment income for the quarter was $4 million or $0.32 per share. And realized gains were $300,000 or $0.02 per share. Net increase in net assets from operations totaled $4 million or $0.32 per share. As of June 30, 2015, our portfolio included approximately 26% first lien debt, 43% second lien debt, 27% mezzanine debt, and 4% equity investments at fair value. Our debt portfolio consisted of 68% floating rate loans and 32% fixed rate loans. Our average portfolio company investment was approximately $9.3 million, and our largest portfolio company investment was approximately $22.6 million, both at fair value.

Additional information regarding the composition of our portfolio is included in the MD&A section of our 10-Q that was filed this morning. With respect to liquidity, at June 30, 2015, we had $0107 million outstanding under the credit facility. As of August 6, 2015, we had $108.3 million outstanding under the facility. Our unsecured bonds have a carrying value of $25 million that mature on April 30, 2019.

And lastly, we had $26 million of SBA guaranteed debentures outstanding as of August 6, 2015. Since June 30, 2015, the following portfolio activity occurred. On July 8, 2015 we received full repayment on our second lien term loan of [Telluar] Corporation at PAR plus 1% prepayment premium, resulting in total proceeds of $7.6 million. And on August 6, 2015 we made a $12.5 million investment in the first lien term loan of Catapult [Loaning] LLC.

And with that, I'll turn the call back over to Rob.

Okay. Thank you, Todd. And Jim, you may begin the question and answer session please.

(Operator Instructions) And we'll take our first question from Andrew [Try] from BDC Income Fund.

Yes, hi. Good morning and thank you for taking my questions. The first one I had on the prepay is I know last quarter you guys had said sort of the max impact of the OID accretion from that would be about $1 million that they all -- if they all came through in the quarter. Just wondering if you had that number handy for sort of the prepays that you have some visibility into and the back half of the year.

Yes, and one thing that's helpful, thank you for the question, Andrew. That estimate for the second quarter, which we were -- didn't come in at, so some of the payoffs that we expected that had higher accretion did not pay out. With respect to this quarter, the one loan that's paid off so far is believe roughly $150,000 of income, $75,000 or so from OID accretion, and 75% from a prepayment fee.

One of the loans that could pay off in the quarter, I'd say is maybe $200,000 or $300,000 but it's probably the less likely of the group that we have. So I don't have the exact number but we know we'll have $150,000, $200,000 at this point. So there will be some further accretion, but I don't think it would certainly be anything like that magnitude of what we thought we might have in this second quarter.

Sure, no thank you. That's certainly helpful color. And just looking what we're seeing post quarter end here. It seems to me that sort of investors have preference to move up in the capital structure. Meaning most of the spread widening that we're seeing is coming either on the unsecured side of the market or in second lien. And just wondering if that's kind of consistent with the deals you're looking at in the lower middle market, and if you're perhaps seeing some opportunity for more second lien or mezz financing that you think on a relative value basis may be more attractive given that it seems like there's been risk off preference among investors.

So with respect, as I mentioned in my prepared remarks, we have been moving more to a secured basis and less unsecured. In fact, the two larger payouts we had in the second quarter were loans that date back to our IPO which were unsecured. So that's part of the movement. But as I mentioned, most of the new loans we're making are more in the secured category.

So with respect to the distinction between second lien and first or first unitranche, we are looking at second liens. Quite a bit of the activity that we have in the quarter of this third quarter would be more second lien and a couple are unitranche first liens.

So with respect to mezzanine capital, we -- it's still not quite as interesting. There's the risk aspect but also I think pricing we're not seeing the differential to make it as attractive. So Andrew, if that changed, if the pricing on unsecured mezz was higher, we would certainly relook at that area. But I think the trend you're seeing on will continue in terms of more secured than less.

Moving on, we'll take our next question from Ryan Lynch, KBW.

You mentioned your one investment in the oil and gas industry has actually been performing pretty well so far. Being that you guys are located in the Houston area, I would presume you guys have some pretty good relationships with some energy companies. Just wanted to get your thoughts on potentially expanding that energy portfolio given the disruption we've seen in the energy markets recently.

Good morning, Ryan. Thank you. So with respect to future investing in the oil and gas space, I believe I said on the first quarter call that we thought the opportunities would be toward the latter end of 2015 versus the beginning of 2015. With the commodity price shift down again on oil in particular, our view has probably shifted out another quarter or so in terms of opportunities.

We are seeing them. We've been seeing them all year. We think it's still early. I think where we'd invest would be more likely on the upstream side than the services side, but we're looking at both. We're cautious, but over time we think that you'll see more exposure in our portfolio in that way. But maybe one thing that might be helpful and what we're looking at for this quarter, not are oil and gas loans, at least that we'd expect to close.

Okay. And then I just wanted to talk about your guys' voluntary management fee waiver that you've done in the past. You guys waived some fees back in the third quarter of 2014. Now, this quarter the dividend was earned through NOI earnings plus realized gains, but it was not earned in the previous two quarters by that same metric.

So just wanted to get your thoughts again around how you guys are thinking about any potential voluntary management fee waivers in the future.

Yes, so with respect to the historical waivers, it might be worth noting that although we didn't cover the dividend in the fourth quarter of last year, we did for the year. So the waiver that we took in the third quarter covered the fourth quarter. It was a timing issue. So now, if you move forward to this year, so we've covered it fully in 2014. If you move forward to 2015, and I think I've said this in the past, we believe that good corporate finance principals are to earn the dividend you pay out. And we'd like to look at that over time because there are different ways to cover your dividend, including realized gains and NII.

So we're look at it over time, but one of the tools that we do have and we've used it in the past is to waive our incentive fee to make sure we've covered it. So not making a commitment to do it this quarter we're in or the next quarter, but over time it's certainly one of the tools we've used and we'd likely use in the future.

Okay. That's fair. And then just one last one. We haven't heard or read any new news out on [Bender]. Would you be willing to provide any updates on what's going on with that company?

So no news there and just kind of consistent with what I said last quarter that we're moving through the bankruptcy process and we're optimistic we'll be able to resolve or have the case be completed between now and the end of the year or early next year.

So no new news about Bender but continue to work through it.

Thanks for answering my questions.

Moving on, we'll take our next question from Bryce Rowe from Robert W Baird.

Rob, I think I caught that the weighted average yield on the new investments was in the mid 11% range here for the second quarter. With that in mind, do you see some opportunity here over coming quarters to show some overall portfolio yield expansion? I think there was some level of expansion last year in 2014 and we've kind of worked slightly the other way as we've gotten into 2015.

I don't think we're expecting, Bryce, to see the overall portfolio yield change materially or by any one quarter or not. I'd say pricing in the market is stable. So I don't think we would expect to see material change in the yields in the near term, but that could change as we get into 2015. But our best estimate at this point is in the range that we're currently operating at a portfolio level.

Okay, that's helpful. And then maybe a follow-up to Ryan's question about the fee waivers, and maybe speaking more broadly. So with your stack now at a pretty significant discount to book value and earnings at a level that are kind of around the dividend, certainly not exceeding to any real level. Have you given any thought to perhaps an absolute permanent change in the management fee structure to see how that might affect the stock valuation and I guess perceived sustainability of the business model? Thanks.

So we've not given any immediate thought to the topic and this is a reason why. We don't believe that the fundamentals of the business are reflected in the current stock price. Secondly, the management fee structure, which is of course sits our Board of Directors, we think is fair and market based. And that we think it's appropriate to look at earnings over time and not just on a quarterly basis.

And as you may recall that we have paid a dividend since inception that approximately 9% on our $15 stock price that was the IPO price. And that has been done through earnings and where we didn't have earnings, we waived our fees.

Okay. Thank you.

(Operator Instructions) We'll take our next question from Robert Dodd of Raymond James.

Hi, guys. Just to clarify on (inaudible) was $75,000 roughly, right, 75,000 OID accretion and that will be, as was the case this quarter, below the line as a realized gain. I mean obviously it counts as -- it's earnings and it (inaudible) dividends at that. That number won't be in NII but would be in realized earnings. The 75,000 prepayment fee would be in the topline, to clarify.

Robert, this is Todd. So actually that $75,000 will be above the line and the reason is because it emanated from an upfront fee. So had we had --

Rather than a purchase discount.

Exactly.

Just -- and then somewhat longer term, talking about Q3 and you could have a lot of prepayments and then you've got an active pipeline. Could you give us any color how -- what your expectations are for the remainder of the year obviously pipeline take in general a little while to build, so what are you starting to see from deals that may happen later in the year, is that -- how's that shaping up?

That's a good way to think about it and maybe I became too quarterly focused. So I just have rough approximation for us would be although some meaningful payoffs in this quarter that could occur again, we don't have as much visibility into the fourth quarter maybe indicating not as likely, so I think we took the second half of the year in total and thought of it in terms of repayments and originations maybe a base case would be we would cover repayments through originations over the two quarters.

We will be disappointed if we weren't able to grow the portfolio beyond that through our SBIC leverage. So, in other words, think of the portfolio at June 30th being $324 million are weighted -- and that's pretty fully invested through regular way BDC capital, so our weighted growth above that as I've mentioned before would be through our SBIC debentures and I think I said on the first quarterly call that we have the potential to grow it up to around 370. So, base case I think would be that we would cover our repayments with originations and that beyond that hopefully we will grow the portfolio in total through more SBIC lending.

And at this time it appears there are no further questions. I turn it back over to our speakers for any additional or closing remarks.

Thank you very much. Thank you everyone for joining the call and thank you Todd Huskinson. We'll look forward to being in touch with you on our next earnings call in November. Take care, bye-bye.

Thank you. That will conclude today's conference. We thank you everyone for their participation.