Stellus Capital Investment Corp (SCM) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. At this time, I'd like to welcome everyone to Stellus Capital Investment Corporation's conference call to report financial results for its first-quarter 2016.

(Operator Instructions)

This conference is being recorded today, Friday, May 6, 2016. 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, and good morning, everyone. Thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2016. 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. We completed the first quarter with an investment portfolio of $353 million, a $3.5 million increase from year-end. There were no payoffs during the quarter, although we had some amortization. We are essentially now fully invested and our SBA debentures are fully funded.

An update in terms of the current activity in the portfolio. We may have payoffs during the second quarter from approximately $10 million to $20 million in the aggregate. With respect to earnings, our earnings per share of $0.33 fell just short of our normal aggregate quarterly dividend of $0.34 per share. Regarding portfolio quality, our portfolio of 40 companies has an overall risk rating of approximately two or on plan, which is consistent with the prior quarters.

I do want to report the weighted average overall leverage of the operating companies in the portfolio is approximately in the mid-4% and the weighted average EBITDA of the operating companies in the portfolio is in the low to mid-$30 million range. Theses two factors have been relatively consistent for the prior 12 months.

Regarding our loan to Binder & Binder, the bankruptcy case is proceeding, albeit slower than we would like. The DIP loan was reduced by $2.5 million from principal repayments during the second quarter, which now brings the loan balance to $2 million. We have not purchased any shares under our previously announced share repurchase program. And with that, I'll turn over to Todd to cover the financial results.

Thanks, Rob. Our total investment income for the quarter was $9.5 million, substantially all of which was interest income. Operating expenses totaled $5.4 million for the quarter, and consisted of base management fees of $1.5 million, incentive fees of $1 million, fees and expenses related to our borrowings of $1.9 million including commitment and other loan fees, administrative expenses of $300,000, and other expenses of $700,000.

Net investment income for the quarter was $4.1 million, or $0.33 per share. Net increase in net assets for operations totaled $2.5 million, or $0.20 per share, which includes net unrealized losses on the portfolio of approximately $1.7 million. As of March 31, 2016 our portfolio included approximately 37% first lien debt, 39% second lien debt, 20% mezzanine debt and 4% equity investments at fair value.

Our debt portfolio consisted of 76% floating investments subject to interest rate floors and 24% are fixed rate investments. The average size of our portfolio company investments was $8.8 million, and our largest portfolio company investment was approximately $21.7 million at fair value. The weighted average yield on all of our debt investments as of March 31, 2016, was approximately 10.6%. Additional information regarding the composition of our portfolio is included in the MD&A section of our quarterly report on Form 10-Q that was filed yesterday evening.

With respect to liquidity, at March 31, 2016, and May 5, 2016, we had $109.5 million outstanding under our credit facility. Our unsecured bonds have a carrying value of approximately $25 million, and will mature on April 30, 2019. Finally, we have fully drawn our $65 million of available SBA guaranteed debentures which remain outstanding as of May 5, 2016. Since March 31, 2016, we've received approximately $2.6 million of principal repayments on our first lien debt or in possession loan to Binder & Binder. And with that, I'll turn the call back over to Rob.

Okay. Thank you, Todd. We may begin the question-and-answer session, please.

Thank you.

(Operator Instructions)

We'll take our first question from Robert Dodd with Raymond James.

Hello, guys. On the Binder & Binder partial DIP repayment, about half of it, and you mentioned it's going slow. Can you give us any more color on how much -- and I realize this gets asked every quarter, how much longer you think this process is going to go? I realize that's pretty hard to predict.

Good morning, Robert. So the case is proceeding. There are matters in front of the court currently and we would expect during the quarter, this second quarter, there will likely be some further resolution of the case.

So I had said on previous calls we thought that it would be wrapped up in this quarter, so it may be, but it's not been concluded yet. So it could -- again, this is really just speaking with respect to a confirmation of a plan and its ultimate consummation.

I'd say there will be more news during the quarter that we're in. Probably not materially extended. We'd like to have seen it a little bit farther along as of today than where we are.

Okay. Great. Thank you. On the repayment front, obviously very -- I was expecting a little bit more in Q1.

It's very volatile. You gave some indications that we might see some more in Q2. What's your confidence level on that?

Because as you say, you're basically pretty fully invested at this point, and so the only capital within the BDC you have to deploy and stay active or use to buy back shares comes when you have a repayment. Obviously, that activity's been pretty low, so any confidence level on what that's going to do?

Yes. With respect to repayments?

Yes.

Of the repayments, and we try to each quarter on this call advise everyone of what we have a good insight into. As you know, some happen and some don't and something may pop up that we're not aware of. We try to report on what we're aware of at the time.

As of this date, we have one situation that we believe is very likely to be refinanced, which would be the low end of the roughly $10 million level. And then the upper limit is because we're aware of one other situation that may pay off toward the end of the quarter. Both would have call premium associated with them because they're relatively new loans.

So in terms of assuming that we have, say, an example, a $10 million reduction, as I said on the previous call, last call, we would certainly consider using some proceeds to repurchase shares. Fortunately, our stock price has moved up meaningfully since the last call and since the first quarter -- actual quarter, and so we're at a much higher level than we were then. But as I said on the last call, that if we did repurchase shares, we would take some amount of proceeds from payoffs to reduce leverage and also to buy back shares.

So the same plan would be in place going forward. So we now have -- one, we have the Binder $2.5 million reduction on the DIP which is -- was not fully expected. So we have that in terms of cash and then we may have some other payoffs.

So that's certainly an opportunity for us, depending on the -- how the stock is trading. But again, we want to be careful here with respect to leverage. So payoffs allow us to do that.

With respect to replacing the payoffs with new investments, as you know, we are active in the marketplace. We do have an institutional fund that co-invests with SCIC, so we are active in that business. Historically, what we found is within a month or two of a payoff we have been able to replace those payoffs with new loans or new investments.

And probably 2015 was a very good example of that, meaningful amount of payoffs and all were replaced and in fact, we grew the portfolio. So I would be optimistic that assuming that we're not buying back shares at an attractive price, then we will over time, be able to replace the payoffs with new investments.

Got it. Thank you. I appreciate the color.

Thank you.

(Operator Instructions)

We'll move on to Chris Kotowski with Oppenheimer & Company.

I wondered if you could give us your thoughts on funding a new -- and what process do you have to go through to get additional SBA funding and how you would manage that?

Yes, good morning, Chris. So the original license that we have provides for equity capital of up to $75 million, of which our current subsidiary has $32.5 million of equity, so there is ability to grow that entity and then of course, using debentures to make it larger from there. So that's an option for us.

But we need to be careful with respect to our current leverage at the regular way BDC if you will. So yes, we could grow the entity in a greater amount but we'd also want to do that and respect the leverage position that we have.

But is that a goal to expand the funding for the SBA?

No, I'd say it's not a near-term goal. We'll have to look at what payoffs we receive during the year and we have had discussions previously about it and can we look at -- the other way that of course we could grow it would be by issuing new equity. But given our stock price, we have no intention of doing that.

Okay. All right. That's it for me. Thank you.

Thank you.

(Operator Instructions)

We'll move on to Alex Gates with Clayton Partners.

Hello, guys. Actually all my questions have been answered, so thanks very much.

Thank you, Alex, for joining the call.

(Operator Instructions)

Gentlemen, it looks like we have no further questions at this time.

Okay. Thank you very much and thank everyone for your support and we'll look forward to speaking with you in early August. Goodbye.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation.