Stellus Capital Investment Corp (SCM) 2017 Q1 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 Stellus Capital Investment Corporation's Conference Call to report financial results for its first quarter 2017. (Operator Instructions) This conference is being recorded today, Friday, May 5, 2017. 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.

Okay. Thank you, Lauren. Good morning, everyone, and thank you for joining the call. Welcome to our conference call, covering the first quarter of fiscal year 2017. 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 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. And 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.

So my remarks this morning are organized as follows: First, I'll speak to our earnings; second, asset quality; third, investment activity; and lastly, capital management. With respect to earnings, our net investment income for the first quarter was $0.33 per share or within approximately $100,000 of the dividends paid out. Net asset value did increase during the quarter to $13.84 per share as of March 31, up from $13.69 per share at year-end.

With respect to asset quality, just a reminder about our portfolio characteristics. We have 46 portfolio companies, 44 of which have private equity sponsorship. These companies are across 23 industries with the largest exposure at 14%. Our largest investment is $23 million at fair value and the average investment is just under $8 million. The weighted average yield is 11.3%, which is up from a little over 11% at year-end. The weighted average EBITDA of our portfolio company is approximately $27 million and the leverage quotient is in the low 4x. Approximately, 70% of our loans are floating rate and all but 5 of our loans are now through their LIBOR floor. 87% of our portfolio is rated a 1 or 2, meaning at/or ahead of plan. And no loans are on nonaccrual status. The one loan for Glori of approximately $1 million was moved from a loan to an owned asset during the first quarter.

Now moving to investment activity. We had an active first quarter with 3 new and 2 follow-on investments totaling $23.3 million. All of the new portfolio companies are backed by private equity firms with whom we've had a 10-plus year experience of investing. During the quarter, there were 3 loan repayments of $29.4 million and we sold one loan for $8.4 million. Turning to the second quarter, the quarter we're in, we're aware of $22 million in potential repayments, $5 million of which was received this week. And in terms of new investments for Q2, we have prospects for new fundings of $10 million to $30 million. And then lastly, with respect to capital management, as previously reported and I'm pleased to report, that in April we were able to issue a little over 3.1 million shares of new equity, priced at $14.10 per share, which resulted in net proceeds to the company of $43.3 million. We expect to use $37 million of the funds to fully capitalize our SBIC subsidiary, which you may recall has a $75 million total license. The balance of the $75 million has already been contributed. In the meantime, the proceeds from the offering were used initially to reduce our bank credit facility. And with that, I'll open it up for questions. Thank you.

(Operator Instructions) Our first question comes from Robert Dodd with Raymond James.

Total investments are 23. Repayments finance to the portfolio compressed in the quarter a bit more than I expected. And then your color for Q2 looks like, I mean, the midpoint on potential new fundings would, again, be roughly in line with what you think you might see in repayments. So you could see a flat portfolio. What's the outlook in terms of early-stage pipeline for portfolio growth this year or do you think it's just going to be a low activity year?

Yes. Thank you, Robert. So first with respect to the second quarter. I think your assessment is right that we may grow the investment portfolio, but again the rough numbers is we'll probably be able to replace the repayments that come in. We're, I'd say, quite busy and our outlook for the balance of the year is we expect to grow the investment portfolio and meaningfully utilize the additional capital that we have. So we would expect it not to be a flat year.

Got it. And then -- just how much of that fell out of -- -- would you expect to maybe be SBIC eligible and to go into that newly, fully capitalized fund versus the accountable balance sheet? Well, [it doesn't balance] but you know what I mean.

Sure. Historically, as much as 50% of the activity we've seen has been SBIC eligible. I'd say it's picked up even more so in the last 6 months. As an example, the 2 potential fundings for this quarter are both SBIC eligible. So I would say our expectations is certainly more than half of what we're going to be doing this year will be for that account. And it's an important aspect of the business because we would very much like to move into the SBIC debentures, while the proxy for the interest rate which is treasuries remains low. So I think we have a real incentive to more fully utilize the SBIC capital and its debentures given the current interest rate environment. And again, as you know, there is always a -- going to have to look at it as things come in and don't want to miss too many opportunities that wouldn't qualify. So -- but we'll be disciplined about it and, again, this was a big part of the offering to be able to really fully capitalize the subsidiary. So can I just say at least half and likely more than half as we grow the portfolio this year.

Great. I appreciate that. And then just one more if I can. On the weighted average yield, I'm going from memory here, I think it ticked up a tiny little bit, but what's the outlook -- what are you seeing just kind of in market pricing right now in coupons and obviously in fees, et cetera, et cetera, on the kinds of deals you're looking at?

Yes. So the yield quarter-over-quarter picked up about 27 basis points. And that was really attributable to the new investments that were made in the quarter versus the yields on the loans that paid off. I'd say we're seeing good pricing overall. I know one topic in the marketplace is competition and covenant structures and capitalizations. And we're still seeing well-capitalized companies and proper covenant structures. And as evidenced by the first quarter fundings, we're not seeing compression in pricing. But in any event, I certainly don't think that our yield, average yield, will go up from here. And we've operated at this level for a good while. So I think the band would probably be between 10.5 and 11.5 overall yield. But it's likely to stay in then -- right where we are.

Our next question comes from Paul Johnson with KBW.

Actually, Rob asked most of my questions. So it sounds like you mostly covered what I was kind of thinking about asking. But I guess, kind of speaking to your portfolio yield and I know you guys mentioned that you don't expect it to go up, but I did see that it looked like more of your first lien stuff is repaid in the quarter and your mezz investments went up a little bit. Is that sort of a trend that we could expect to see in the future? Or is -- do you still think you'd expect to have more senior-oriented investments?

Yes. Thank you, Paul. It's a good question. Our overall portfolio goal would be to have the secured aspect of what we're doing, be up to say 80%. So think of the composition as being 80% first and second lien, 15% unsecured mezz and 5% that cost at least equity coinvest. So that can vary quite a bit. But I'd say, I certainly wouldn't expect -- I'd expect the secured portfolio to be at least 70% of the total and over time come closer to 80%. So we're trying to be more secured, more floating rate, which is a derivative of the secured-type lending. So wouldn't view as this trending to much more unsecured we'd -- where we'll do unsecured mezz is where -- it's a well-capitalized business with a substantial sponsor that we have real confidence in. And we do in, I'd say, all of them, but maybe ones where we've had a greater history with. So I'd say we expect this to be more secured than not.

We'll go next to Troy Ward with Ares Management.

Great. Just following up a little bit more on Robert's line of questioning on the SBIC. You talked about the new asset eligibility. Can you speak to the repayments -- potential repayment you see in Q2? Are those SBIC related? And also, if you're dropping the $37.5 million down, that'll obviously, allow you to access additional debentures. That would all need to be invested plus repayments before you draw on the debentures. Is that correct? And what is the current pricing on the debentures?

Okay. So Troy, let me break them down. So the -- just a sec. In terms of the repayments in the quarter, my recollection is none are in the SBIC entity. With respect to -- and I'll double check that, with respect to the pricing of the debentures, we think of it including all in fees that are paid as approximately 4%. The actual yield on the debentures is in the 3s, but when you include all the fees over the 10-year period we think of it as 4% pricing, which wouldn't have materially changed yet because it's geared off the 10-year treasury. So this is why we think it's advantageous to the extent we can get that capital deployed. And I'm sorry, the second part of your question, I apologize, I just missed it.

Yes, no worries. I was just trying to get a feel for when will you be able to start drawing debentures, because I agree, I think the quicker you can get the debenture, get those locked in, the better. How much capital do you need to deploy in the SBIC before you start pulling down debentures?

Yes. So the program with the SBIC as I understand it is, we can actually request debentures as we put equity down there based on having a clear portfolio projection that's shows the need for them. And so I think what you'd see us do though is put equity capital down, invest it and then request it. But there is a time delay from the request to the actual funding, roughly within 60 days. But I'd say all of this is relatively short term. So as we invest the capital on SBIC entities, we will be requesting the debentures.

Great. That's what I wanted to clarify is you can put the equity down there but you don't have to grow the SBIC outstanding portfolio by $37.5 million before you can request debentures. You can request debentures prior, correct?

That's right, Troy. As an example, if let's say, we in the quarter funded $20 million of new SBIC loans and put the equity capital down. We can then request the debentures at that point. We need -- don't need to put the full $37 million.

Our next question from Chris Kotowski with Oppenheimer.

I normally wouldn't ask this kind of question, but it just struck me as an extraordinary morning. At one point, your stock was down more than 10% and the volumes pretty high. And I mean, I understand that there is pressure on portfolio, volumes and the pressures earnings and I get that, but is there any other news about one of your borrowers or your credit facility or anything else where I'm not drawing the dots that would have accounted for that kind of violent reaction in your stock?

Yes. Chris, we're not aware of anything. And in fact I believe our stock was traded at $14.40 something a couple of days ago. So there is no new information that hasn't been provided in the Q, any material information. One thing that we have seen is that in some of the holdings of the stock that if the stock, as you know, the stock drops a certain amount and people just automatically start selling. I'm looking now, it looks like we're down maybe $0.50 and at one point, we're down $1 or something. So it's recovering. But anyway I think it's fine.

Okay. But there is no adverse development by -- at any borrower, where there is public news out or anything like that?

Not to my knowledge.

Our next question comes from Bryce Rowe with Baird.

Just curious for the repayments that you've seen thus far into the second quarter. Any guidance you could give us in terms of accelerated income associated with those or prepayment associated with those?

Yes. Yes, the -- we do expect to have some meaningful income associated with that and maybe one way to calibrate it will be more than the first quarter.

Okay. And first quarter was around $400,000. Is that right?

That's correct.

That concludes today's question-and-answer session. I'd like to turn the conference back to Robert Ladd for any additional or closing remarks.

Okay. Thank you, everyone, again, for your support, and we'll look forward to speaking with you in a few months. And thanks, again.

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