Stellus Capital Investment Corp (SCM) 2015 Q4 法說會逐字稿

Good morning, ladies 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 financial results for the fourth fiscal quarter and year ended December 31, 2015.

(Operator Instructions)

The conference is being recorded today, Friday, March 4, 2016. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of the Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Thank you, Deanna. Good morning, everyone and thank you for joining the call. Welcome to our conference call covering the year ended December 31, 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 would 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 would 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. 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 public company link or call us at 713-292-5400. At this time, I would like to turn the call back over to our Chief Executive Officer, Rob Ladd.

Thank you, Todd. Before discussing the fourth quarter, I would like to provide a recap of the year of 2015.

I'm pleased to report that for the third consecutive year, our 2015 earnings covered our dividends of $1.36 per share. We have now paid dividends of $4.44 per share since our IPO in November of 2012.

Further, the investment portfolio grew by approximately $33 million at fair value. This growth was achieved from new fundings of approximately $138 million, which more than covered substantial payoffs and repayments of approximately $98 million.

On today's call, I will cover the following topics, first portfolio growth; second, asset quality; three, earnings capacity; and four, looking forward to 2016. With respect to portfolio growth, we ended 2015 with an investment portfolio at fair value of $349 million. This is an increase of approximately $26 million from September 30.

This growth was funded by fully utilizing are SBIC debentures which now stands at $65 million. This growth was through five new investments and four follow-on investments in existing portfolio companies totaling $53 million of fundings.

Of the new investments, the average size was approximately $9 million and the largest was approximately $11 million. During the quarter we received two payouts at par at $19 million.

With respect to asset quality, our overall risk rating is at approximately 2 or on plan. This is materially unchanged from the prior quarter. And, as a reminder, most of our portfolio companies have private-equity sponsorship.

As we have grown, we've been able to maintain good diversification in our investment portfolio by all measures, the size of investments, industry sectors and geography. The average size of investments is approximately $9 million and the largest investment is approximately $21 million at fair value. We have investments in 22 industry sectors and our portfolio companies are geographically dispersed.

I would also add that our plan to migrate to more secured lending continues. Secured debt is now 79% of the loan portfolio versus 58% at the end of 2014. And consistent with this change our floating rate portfolio, subject to LIBOR floors, is now 75% of the loan portfolio versus 56% a year ago.

With respect to earnings capacity, for the fourth quarter of 2015, we had net investment income and realized gains in the investment portfolio which covered our dividend. In the quarter, our investment advisor waived a portion of the incentive fee, enabling us to earn the dividend for the entire year. For the year of 2016, it is always difficult to predict the future, but I would like to make the two points as we go forward in the current calendar year.

We are nearly fully invested, having completely drawn the current tranche of our SBIC debentures, so we would not expect meaningful portfolio growth. We do have an active pipeline and expect to be able to replace payoffs with new investments, although this typically has a time lag. We do know of one possible payoff in the first or second quarter of approximately $8 million, and, as you know from the past, it is hard to predict, but that is a possibility.

And then second, with respect to our stock price, we don't believe the current trading price is reflective of the Company's fundamentals the NAV per share or the earnings capacity. So, to this end, our Board of Directors has authorized a share repurchase program for us to repurchase up to 2 million shares of our common stock. And the variables that we will use in consideration of its usage are first, leverage on liquidity; second, the share price; and three, investment alternatives.

With that, I will turn it over to Todd to cover the financial results.

Thanks, Rob. Our total investment income for the year was $35.2 million most of which was interest income. Operating expenses, net of the incentive-fee waiver, totaled $18.6 million for the year and consisted of base-management fees of $5.8 million, incentive fees of $3.3 million, net of $646,000 of fees waived by the advisor. Fees and the expenses related to our borrowings of $6.2 million, including commitment and other loan fees; administrative expenses of $1 million; and other expenses of $2.3 million.

Net investment income for the year was $16.5 million or $1.33 per share. Net investment income and realized gains combined was $17 million or $1.36 per share. Net increase and net assets from operations totaled $7.7 million or $0.61 per share.

During the fourth quarter, we recorded unrealized losses totaling $6 million, $4 million of which was due primarily to widening market spreads and $2 million of which was due in the aggregate to markdowns on three investments. As of December 31, 2015, our portfolio included approximately 38% of first-lien debt, 38% second-lien debt, 20% mezzanine debt and 4% equity investments at fair value.

Our debt portfolio consisted of 75% floating-rate investments, subject to interest rate floors and 25% fixed-rate investments. Additional information regarding the composition of our portfolio is included in the MD&A section of our 10-K; it was filed yesterday evening.

With respect to liquidity, at December 31, 2015, and March 3, 2016, we had $109.5 million outstanding under our credit facility. Our unsecured bonds have a carrying value of $25 million and mature on April 30, 2019. We had $65 million of SBA-guaranteed debentures outstanding as of March 3, 2016. Our cash balance, at December 31, 2015, was $10.9 million.

The following changes in the portfolio have occurred since year-end. On January 26, 2016, we made a $3.8 million follow-on investment and the second-lien loan of Stratose Intermediate Holdings II, LLC. We also invested an additional $300,000 in the equity of the Company. On January 27, we made a $600,000 investment in the first-lien loan at Vision Media Management and Fulfillment, LLC. With that I will turn the call back over to Rob.

Okay, thank you, Todd. And Deanna, we may begin the question-and-answer session now.

First, we will hear from Robert Dodd with Raymond James.

Hi, guys. On the buyback side, obviously a substantial 2 million shares of buybacks, a very, very large number. So from that perspective, you listed liquidity and leverage being the first consideration, which I think is appropriate. What's kind of your comfort level in terms of where that becomes a trigger? Is your leverage level right now on target, above target? Would you be buying back stock here or would you want to direct repayments to maybe shrinking leverage a little bit first? Can you give us a little bit more color on how that's going to play out?

Sure, Robert. Good morning to you. With respect to the share buyback, I would say that, an liquidity and leverage, that we would certainly not want to be more levered than we are today. So this program could be, say, taking a payoff and reducing some leverage and buying back shares. So I would say that's why that's the first tenet of the program.

So, and I would say with respect to share price, and this is ultimately the purview of our Board of Directors, but the share price that we saw over the previous 60 to 90 days would have been an indicative price; it would have made sense. So, without giving the price that we would consider it, think of it at the low point that we looked at, that would've made sense had we had a program in place then.

Got it. Very helpful. On the SBA side, you've got $65 million in debentures and this kind of ties in with the buyback question, in a sense, because obviously, your license, in principal, allows you to go to $150 million but you would have to put more equity down in the SBIC to access to access that. Is this -- it sounds like you are basically not going to consider that right now. That might be the third-tier consideration and use of capital behind liquidity leverage and SBA. Is that fair that SBA is pretty much maxed out of what you are willing to put equity in it at right now?

Yes. So as I said, the third tenet would have been alternative investments. One would be either regular way investing, or by contributing further capital to the SBI subsidiary and then using debentures from there. So that would be another thing we would look at.

So I think it is ultimately a matter of share price. If we think the share price is more reasonable, we may look at using repayments to further capitalize the SBI subsidiary.

Got it, got it. Thank --

I think it is all a function, Robert, of what we think the share price is relative to fair value.

Got it, I appreciate that. And then, the last one if I can. Can you give us a status update on Binder and Binder? It's been about a year, obviously, from the bankruptcy filing. Is there any new news there?

Yes. It's actually been a little more than a year that it has been in bankruptcy. And it is being actively worked, but realistically, I think it is going to take a couple, two to three more months, to be completed, but has not emerged yet.

Perfect, thank you.

We will take our next question from Allison Taylor with Oppenheimer.

Hi, good morning guys. So my question was also around capital liquidity and the buyback. So, for my purposes, asked and answered.

Okay great, thank you Allison.

Thank you.

We will hear next from Bryce Rowe with Baird.

Great, thanks, good morning.

Hey, good morning, Bryce.

Rob, I was going to ask, and you, too, Todd, maybe help spell out the SBA debentures. Todd, how much of the debentures do you expect to pull here in March? Am I correct in thinking that it is about $40 million?

That is close. I'm not sure offhand how much is going to pool. But you're right, the remainder of them, will pool in March. I think we had about $25 million that had pooled before. So there will be a large chunk that will pool in March. We added an active use of the debentures over the last two quarters, so we will get the exact number for you, Bryce, and update it here.

Okay, that's helpful. And then, I wanted to also ask about the comment you made on writedowns for the quarter. You said $4 million was market related and the remaining $2 million tied to three investments, one of which looked to be Binder & Binder. Maybe comment on the other two and what you are seeing from a credit-quality perspective and, generally, within those two investments.

Sure. That sounds good. That is right, Bryce. So of the $2 million, about $900,000 of it was on Binder. And the other two positions, one was Securus, which had a quote that dropped surreptitiously and we looked at that in addition to some other factors with respect to devaluation, so that was written down a bit on a specific-name basis. And then Glori Energy was down slightly; it is a very small position, but we wrote that down a little bit as well.

Is the Glori writedown, is that oil-price driven? And just generally, with the oil prices down or is there something more specific there?

Yes, no, that is right. And you know on that particular one, it just has to do with the performance of their the wells and primarily of oil and gas prices.

Yes, that's really driven by oil prices.

Yes, okay. And I just wanted to clarify. You said that the share repurchase plan is 2 million shares and not $2 million?

That is correct. So that is the overall program. The amount that we execute under that will again be driven by the variables I mentioned.

Right, great, thank you. Appreciate it.

Bryce, by the way the amount of debentures that we will pool is $39 million.

$39 million, okay. Thanks, Todd.

Sure, thank you.

At this time, I show that we have no further questions.

Okay, very good. Thank you, everyone, for joining the call and we will be back with you in early May to cover the first quarter. Take care.

That does conclude today's conference. We thank you for your participation.