Stellus Capital Investment Corp (SCM) 2021 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 the Stellus Capital Investment Corporation First Quarter 2021 Results Conference call. (Operator Instructions) This conference is being recorded today, Friday, May 7, 2021.

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.

Yes. Thank you, Katie, and good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2021. 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 Public Investors 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'm pleased to report a solid quarter in which net asset value and asset quality were stable. We covered our dividend and notably had significant originations. We continue to see an increase in investment opportunities, and as a result have funded $93 million on a cost basis during the quarter and then $19 million since quarter end. Since year-end through today, our portfolio has increased by $69 million, net of payoffs to $727 million on a cost basis.

We'll begin by discussing our operating results followed by a review of the portfolio, which will include asset quality, and then an outlook, Todd will cover our operating results first.

Thank you, Rob. For the quarter ended March 31, 2021, we covered our dividends of $0.25 per share with GAAP net investment income of $0.26 per share. Core net investment income was $0.28 per share, which excludes the capital gains incentive fees and income tax expense. Net asset value per share was unchanged at $14.03. In January 2021, we completed an institutional bond offering of $100 million of notes due in March 30, 2026, at a fixed rate of 4.875%. We used the proceeds to redeem our $48.9 million of notes due in 2022 and the remainder to pay down our bank credit facility. Finally, we've continued to commit and fund equity capital to our second SBIC subsidiary, which allows us to draw low-cost 10-year debentures on a 2:1 basis.

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

Okay. Yes. Thank you, Todd. I'd like to cover the following areas. Just a reminder about the life-to-date review and then portfolio asset quality and outlook. So since our IPO in November of 2012, we've invested approximately $1.7 billion in over 135 companies and received approximately $1 billion of repayments, while maintaining stable asset quality. We paid over $164 million of dividends to our investors, which represents $11.16 per share to an investor in our IPO back in November of 2012.

Now turning to the portfolio. We ended the quarter with an investment portfolio at fair value of $714.5 million. This is across 70 portfolio companies, and this is up from $653 million across 66 companies at year-end. During the first quarter, we invested $93.4 million in 7 new and 8 existing portfolio companies and received $33.6 million of repayments, which again resulted in a growth of about $60 million for the quarter.

Our portfolio continues to be weighted towards secured lending at floating rates. At March 31, 95% of loans were secured and 93% were at floating rates, as now 86% of the loan portfolio is first lien or unitranche.

We continue to remain good diversification across the portfolio. Our average investment per company is $10.2 million, and the largest investment is $21.6 million, both at fair value. And 65 of the 70 portfolio companies are backed by a private equity firm. Overall, our asset quality is stable at a 2 on our investment rating system or on plan. 17% of our portfolio is rated a 1 or ahead of plan, and about 8% of the portfolio is marked at an investment category of 3 or below, which is below plan. And finally, in total, we have 4 loans on nonaccrual, which comprised 1.8% of fair value of the loan portfolio.

Now turning to outlook. Beginning in the fourth quarter, we began to -- of last year, we began to see a significant increase in our actual pipeline. And as mentioned previously, since quarter end, we funded another $19 million at cost for 2 -- in 2 companies. We have received one repayment since quarter end of $14 million. And probably maybe more importantly, we've identified potential fundings of approximately $75 million that we could very well fund by the end of this quarter we're in. And we're not aware of any substantial repayments in the next 60 -- 30 to 60 days.

And with that, I'll open up for questions. Thank you. And Kate, you may begin the Q&A session, please.

(Operator Instructions) Our first question will come from Christopher Nolan with Ladenburg Thalmann.

What are you guys are thinking about using this excess cash for in the second quarter? Are you just keeping it for potential investments? Or should we expect paydowns in the facility?

Yes. So Chris, most of the cash that we had at quarter end is in the SBIC licenses, 1 and 2. And so one, in the case of the first license from payoffs that will be reinvested in the case of the second license from debentures that we've drawn. So we would expect, I think, likely all of that to be invested by June 30.

Got you. And Grupo Hima, if I'm correct, you have 2 investments with them on nonaccrual, a new first-lien investment as well as a second-lien investment, which has been nonaccrual for a long time. What is your outlook for Grupo? I know it's been a problem child for a while?

Yes. So this is a Puerto Rican hospital system, I think you know that. And so obviously, troubled situation, has been for a good while. We put the loan -- the first-lien loan on nonaccrual in the first quarter. And as you said, the second lien has been on nonaccrual for some time. We have the second lien marked at 0, and I believe the first lien is less than $0.50.

So probably it will be resolved in the next 12 months or so, but fortunately, it's a very small position relative to the total portfolio.

Our next question comes from Robert Dodd with Raymond James.

On -- another nonaccrual question, the -- I can't remember the name, it's Commercial Lighting Company that appears to be a new nonaccrual. Is that kind of legacy COVID issues kind of finally flowing through to necessitate a nonaccrual? Could you give us any color on -- or is it a new event at that company? Any color you can give us on that would be appreciated.

Sure, sure. And as you know, we typically, for these private companies for privacy reasons, don't say a lot. But I'd say it's COVID related, a little bit of challenges with it over time. It's a structural issue about the nonaccrual. But if it's helpful, we think that ultimately, we should do fine there. It's a well-sponsored company.

Just has the sponsor put in additional capital over the last 12 months?

The sponsor has done all the right things there, yes.

Okay. Got it. Perfect. Just on -- obviously, seeing a lot of activity and an incremental -- considerably more potentially closing in the remainder of this quarter. What -- since kind of Q4, with all this activity, have you -- what have you seen on the terms front for those? And maybe what do terms look like in the very early stage companies, early stage in terms of early stage in your pipeline that you're looking at today versus things that you looked at maybe in Q4 and have closed already?

Yes. So I'd say, Robert, characteristics can be very similar, so don't think it's changed materially since the fourth quarter. So arguably, it was some pent-up demand after -- in the second and third quarters were relatively slow for everyone. So I think it's a continuation of what we saw in the fourth quarter. And again, as you heard earlier, so pretty robust second quarter expected for us. So I think the good news is that the underwriting and selectivity that we've always had is the same. And so on average, these companies have 45% to 50% equity checks below us. So in terms of the overall capital structure and the leverage quotient serve the same as we've always done in the -- typically in the low 4x kind of kind of an average leverage.

The one difference, though, and I mentioned this on our last call, is we're finding more SBIC qualifying opportunities, which is very helpful because of our second license. And as a result, the EBITDA of the businesses would typically be a little bit less, so perhaps in the high single digits, $10 million to $12 million versus an average that might be more like $15 million in non-SBIC qualified. So -- but all have covenants, all are properly structured, all the transactions that we've been closing have private equity sponsorship with firms that we know well.

So I think that's the good news, just a continuation of our normal business and a lot of very interesting activity. And these are typically businesses that we expect quite a bit of growth from, which is helpful in 2 ways. One, in that they, therefore, would -- if the company meets their plan, they'll likely delever in both absolute and relative terms over the first couple of years. So a nice turnover of capital.

And then in turn, would make their equity co-investments valuable. So again, I think the only good news. I mean the good news is that very active, more SBIC than not and using our lower cost capital base as a result.

Our next question comes from Ryan Lynch with KBW.

The first one I had was if I kind of -- I'm glad you kind of mentioned some of your performance longer term because if I look back at kind of your portfolio construction over the last several years, it's changed pretty dramatically. At one point, a few years ago you guys were running with almost 30% first-lien debt investment and now it's closer to 80%. And you had a portfolio yield in the 11% to 12% range and now that's 8.3%. So you've seen a much, I would say, a pretty significant derisking of the portfolio as far as where you are in the capital structure as well as the portfolio yield standpoint.

So I'm just curious as we start to come out of COVID and the economy starts to recover, should we expect any sort of tilt back into the portfolio from a risk standpoint to move to reduce the first lien exposure to try to increase the portfolio yield at all? Or is this sort of the new normal of how you guys want to operate the BDC?

Yes. Thank you, Ryan. That's a really good question. And I think the statistics you indicated there go back quite a ways. So maybe close to our inception, so when first lien would have been much lower. So I think it's really the latter that this is the -- this is our investing philosophy and style today and not expecting to change it materially.

Okay. And then last that I remember, on my note kind of talking with you about the leverage. You kind of talked about running regulatory leverage closer to 1:1 as kind of a target and maybe total leverage of upwards to 2:1 potentially. I'm just wondering, is that where you guys are thinking post-COVID? Or any sort of update you could just give on where you guys see operating from a leverage standpoint kind of post-COVID, both from a regulatory standpoint or a total standpoint however you guys are thinking about it?

Sure, Ryan. Those are still good numbers. So 1:1 on a regulatory test and 2:1 on a GAAP test, which includes the SBIC debentures. So don't expect that to change materially. There's a good argument that on the -- on perhaps both fronts because of the nature of the first-lien portfolio that we could operate at a little bit higher leverage. So you may see us have that creep up -- could be 1.1 or so on the regulatory side, but not materially higher.

That concludes today's Q&A. I would now like to turn the call back over to Mr. Ladd for closing remarks.

Okay. Great. Well, thank you, everyone, for being on the call. Thank you very much for your support of the company, and we look forward to speaking with you again in early August when we report the second quarter results. Thanks again.

This concludes today's call. Thank you for your participation. You may now disconnect.