Stellus Capital Investment Corp (SCM) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellus Capital Investment Corporation's Conference Call to report Financial Results for its Third Quarter 2016. At this time, all participants have been placed in a listen-only mode. The call will be open for a question-and-answer session following the speakers' remarks. This conference is being recorded today, Friday, November 4, 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, Ann. Good morning everyone and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30, 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 a 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. At the outset, I'm glad to report a very positive quarter. During the third quarter, our net investment income exceeded dividends paid by $0.03 per share and our NAV increased by $0.45 per share bringing net asset value to $13.57 and we were able to substantially replace loan repayments with new investments.

I'll now provide an update on our portfolio and our outlook for the fourth quarter. With respect to portfolio, our investment portfolio of $353 million includes investments in 43 companies, which is up slightly from June 30. We made three new investments and four follow-on investments totaling approximately $19.5 million at cost during the quarter. The new investments are secured loans all backed by private equity sponsors.

We received three payoffs amounting to $21 million, one of which produced over $300,000 of call protection income. Asset quality remained stable with the overall risk rate for the portfolio at 2, are on plan. Our overall weighted-average yield on the debt portfolio is just over 11%, which beginning this quarter, excludes loans on non-accrual. This is a similar percentage that we would have had in the previous quarter.

We have only one non-accrual loan which is valued at $722,000. This is a loan to Binder & Binder, which did emerge from bankruptcy in October. I would want to note a small item, but is a realized loss. We sold the one investment we had in the mining industry, specifically coal. We sold that in September, although we experienced approximately $900,000 loss, the return over the life of the investment was quite positive.

Now looking to the fourth quarter, we've already had two new fundings totaling approximately $16 million, which has more than offset a payoff of $11 million. For the balance of the quarter we know of the potential of one repayment of approximately $10 million which we would hope to replace during the quarter as we've done throughout the year.

With that, I'll turn it over to Todd to cover additional financial information related to the quarter.

Thanks Rob. With respect to operating results for the nine months ended September 30, 2016 we've earned $1.01 per share including a one-time charge for offering cost related to our shelf registration statement, which is expired. This brings us to within $0.01 of covering the dividend year-to-date.

Our total investment income for the quarter was $10.2 million, of which $9.8 million was interest income and $400,000 was other income primarily from prepayment fees. Operating expenses totaled $5.6 million for the quarter and consisted of base management fees of $1.6 million; incentive fees of $1.1 million; fees and expenses related to our borrowings of $2 million, including commitment and other loan fees; administrative expenses of $200,000; and expenses of $700,000.

Net investment income for the quarter was $4.6 million and the net increase in net assets from operations totaled $9.9 million, which includes net unrealized gains on the portfolio of $6.2 million for the quarter. As of September 30, 2016, our portfolio included approximately 32% of first lien debt, 43% second lien debt, 20% mezzanine debt and 5% of equity investments at fair value. Our debt portfolio consisted of 76% floating rate investments, subject to interest rate floors and 24% fixed rate investments.

The average size of our portfolio company investments was $8.2 million and our largest portfolio company investment was approximately $22.6 million, all at fair value. 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 September 30, 2016 and November 02, 2016, we had $107.5 million and $100.3 million outstanding under the credit facility respectively. Our unsecured bonds have a carrying value of $25 million and will mature on April 30, 2019.

In addition, we've fully drawn our $65 million of available SBA guaranteed debentures which remain outstanding as of November 02, 2016. Finally, we had $8.6 million and $2.6 million of cash as of September 30, 2016 and November 02, 2016 respectively.

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

Thank you, Todd. And Ann, you may begin the question-and-answer session please.

(Operator Instructions) Leslie Vandegrift, Raymond James.

Hi guys, it's actually Robert. On Binder & Binder, since as you've said, they emerged from bankruptcy in October. Can you give us any color on exactly what the bankruptcy plan or the post-bankruptcy plan is and how that could impact your position there?

Yes. So the plan was consummated in the month of October and we're receiving a stream of payments that will begin at the end of January of 2017 that are $50,000 a month, and then beginning January 31, 2018 they increased to $100,000 a month. But the total amount that we're contractually to receive is a total of $1 million.

So in terms of the plan there, as you'll recall there is first lien bank debt that's ahead of this claim, if you will, which is also being paid out, but these are the terms that we received, coming out of bankruptcy. In terms of the residual after the banks are paid off in full or if they're paid off in full, we and the other unsecured creditors are entitled to the residual, which we think is probably a very low amount or unlikely not at this point. So the amount that we're looking for is the payment amount or payment scheme that I just described.

Got it. Thank you. On one other portfolio company, which I unfortunately don't know very much about at all, SPM Capital, so this is obviously is healthcare and pharma in the schedule of investments and obviously pharma issues came up yesterday on the genetic front. Does that have any exposure to that kind of issue?

So, I'm sorry did you in healthcare, what is specifically in healthcare you're looking at?

The SPM capital loan so you have -- does that have any exposure to the generic pharmaceuticals?

It does not. It's tied to eye care.

Just then conceptually, obviously is as from Todd's comments obviously within $0.01 of coverage for the dividend year-to-date, could you give us just a little -- obviously you've discussed waving the fees before, you're within $0.01 currently so that wouldn't necessarily be very much, but can you give any more color on your commitment to that dividend, both obviously for the rest of this year and how you're viewing it heading into next year?

last earnings call, that our investment advisor had informed our Board of Directors that for this year, that it would waive any incentive fees necessary to earn the dividend. So that commitment continues through the rest of the year in this quarter. And as a result, hopefully that will give you comfort that likely have good earnings for the quarter, but to the extent we didn't or didn't fully cover it for the year, that that waiver modification, which now is over $3 million is in effect.

So you would think the earnings are well covered for the fourth quarter with that. So that commitment of course continues for this year. With respect to next year, we would say, our advisor would like to say that it was very likely to continue and think at this point, we'll have more to talk about in the near future with respect to that, but we'll now have completed four years, four full years of earning the dividend.

And to the extent needed, which turned out to be not that much in this year, past year's declining amount, the waiver has been modest. But we've had that, we've done it for four years and we would expect that to continue and we'll have more to talk about in the New Year.

Okay, appreciate it. Thank you guys and excellent quarter.

Bryce Rowe, Baird.

Rob and Todd, just curious the unrealized appreciation in the quarter was quite strong and it was nice to see the book value per share rose quarter-over-quarter. Based on my perception, it looks like the appreciation was relatively broad-based throughout the portfolio, or at least in a handful of portfolio companies. So is that a function of better fundamental trend within those particular portfolio companies or was it more market-driven broad-based better -- tighter pricing, tighter conditions out there.

Bryce, this is Todd. So you're right. The vast majority of that uplift was market-based, spreads tightening on the loan portfolio. And so think of it like of the $6 million, $5 million of it was related to -- I'd say broadly market movements. However, the equity adjustments were up as well in part in that $5 million. And for the most part, those were multiples expanding, but there were also -- those models are based on company performance and multiples. So that's what I would say, it's mostly market forces, but there is some element of company improved performance as well.

Okay. And then just a second question, for the fourth quarter here, good to see that prepayment income come into the third quarter, have you received any hear in the fourth quarter with the repayment you've already received?

Yes. So with respect to the fourth quarter, I think there was modest income related to the one payoff, given the duration that we've had that loan outstanding. So I would assume very modest in this quarter so far. The one possible payoff that has not occurred would have some good call protection, but again, it speculative at this point, whether it occurs or not.

I like to, Bryce, talk about those. So to at least what you know what is possible perhaps more conservatively that it's something we need to replace if it pays off, but that opportunity would have some income if it paid off.

Great, thanks Rob, Todd.

(Operator Instructions)

Okay, good. Well hearing no other questions, thank you everyone for being on. Thank you for your support and we look forward to speaking with you in the New Year. Take care.

This does conclude today's conference. We thank you for your participation. You may now disconnect.