Stellus Capital Investment Corp (SCM) 2025 Q2 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 Stella's Capital Investment Corporation's conference call to report financial results for its second fiscal quarter ended June 30, 2025.

(Operator Instructions) As a reminder, this conference is being recorded today, August 7, 2025. It is now my pleasure to turn the floor over to Mr. Robert Ladd, Chief Executive Officer of Stella's Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Yeah, thank you, Ali. Good morning, everyone, and thank you for joining our call. Welcome to our conference call covering the quarter end of June 30, 2025. 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 turn 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 any 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.

Now I'll cover operating results for the quarter, but I would like to start with our life-to-date activity. Since our IPO in November 2012, we've invested approximately $2.7 billion in over 210 companies and received approximately $1.7 billion of repayments while maintaining stable asset quality.

We've paid $306 million of dividends to our investors, which represents $17.35 per share to an investor in our IPO in November 2012, which was offered at $15 per share.

Turning now to the quarterly operating results in the second quarter, we generated $0.34 per share of GAAP net investment income and core net investment income is $0.35 per share, which excludes estimated excise taxes.

Net asset value per share decreased $0.04 during the quarter due to the reduction spillover income. During the quarter, we issued approximately 300,000 shares for $3.9 million of proceeds under our ATM program. Year-to-date we've issued approximately 900,000 shares, $13.2 million and all issuances were above net asset value.

Turning to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $985.9 million across 112 portfolio companies, slightly down from $991 million across 110 companies as of March 31, 2025.

During the second quarter, we invested $15.4 million in three new portfolio companies and had $7.4 million in other investment activity a par. We also received two full repayments totalling $21.7 million.01 equity realization totalling $500,000 which resulted in a realized gain of $200,000 and we received $10.4 million of other repayments all on par.

On June 30, 98% of our loans were secured and 91% were priced at floating rates. The average loan for a company is $9.2 million and the largest overall investment is $21.2 million both at fair value. All but one of our portfolio companies are backed by a private equity firm.

Overall, our asset quality is slightly better than planned. At fair value, 84% of our portfolio is rated a one or a two or on or ahead of plan and 16% of the portfolio is marked at an investment category of three or below, meaning not meeting plan or expectations. We did not add any new loans to our non-accrual list during the quarter.

We did not add any new loans to our nonaccrual list during the quarter. Currently, we have loans to five portfolio companies on nonaccrual, which comprised 6.8% of the total cost and 3.8% of the fair value of the total loan portfolio, respectively, which represents a decrease from the prior quarter.

With respect to capital, as a reminder, we've received a greenlight letter from the Small Business Administration for Stellus Capital SBIC III. This is an important step in the process, and we, therefore, expect to receive a license, although it's not guaranteed.

In general, as our existing debentures are repaid, we intend to draw new leverage under the SBIC III license to continue funding qualifying portfolio company investments, and with that I'll turn it back over to Rob to discuss the overall outlook.

Okay. Thank you, Todd. As we look ahead of the third quarter of 2025, I'll cover portfolio growth, equity realizations and dividends. Investment activity has picked up meaningfully over the past 30 days or so. We expect the second half of the year to be busy as evidenced by the $26 million of new fundings since June 30.

Our portfolio now stands at approximately $1 billion with 113 companies, now our largest number. And based on new fundings and repayments, we should end the quarter at about the same level. With M&A activity picking up, we expect to see more equity realizations over the next five months.

Our best estimate today is $12 million of proceeds and approximately $10 million of gains. Finally, regarding dividends, we declared the dividend for the third quarter of $0.40 per share payable monthly.

We expect the fourth quarter to also be payable at this $0.40 per share rate for the quarter, again, payable monthly, of course, subject to Board approval. And with that, we'll open up for questions. And Ali, you may begin the question-and-answer session, please.

(Operator Instructions) Christopher Nolan, Landenburg Thalmann.

Hey guys.

Good morning, Chris.

The EPS is not covering the dividend for the last few quarters. Two questions. How much spillover is there left over? And what's the strategy in terms of increasing your leverage to cover the dividend?

Yeah, Todd, why don't you cover this spill over and then I'll cover the question about leverage.

Okay. Yeah, sounds good, Rob. So, good morning, Chris with respect to spillover, so this year, we have just under $45 million of spillover that we are working off through the dividend. And then going into next year, for next year's amount, we expect it to be about $38 million, and we'll continue to kind of reduce it from there. So that's what we're working on with respect to the dividend.

And then, Chris, relative to use of leverage. So we're currently running at about 0.9times on a regulatory test and total leverage for GAAP of about 1.7times. Our target leverage, we've stated for a good while is about one to one on the regulatory test. So, we don't intend to change that in the near term. So, we have the capacity to move leverage up through the use of our bank facility.

We expect that we have the capital base to really take the portfolio what is currently about $1 billion, up $50 million to $75 million higher over time. Is that helpful?

Yes, it is. And just as a quick follow up for the SBIC III lights, how much of your deal flow is eligible for the SBIC and how quickly do you think you can fill that?

Yes, interestingly, historically, roughly half of what we look at qualifies, so it's a meaningful part of our of our deal flow and an important aspect of the company.

So you can wrap that up pretty quick order, I'd imagine.

Yes, so this is helpful for us, and you know we anticipate we'll be able to get it approved as Todd indicated.

Great, that's it for me thank you.

Okay, thanks Chris.

Eric Zwick, Lucid Capital Markets.

Good morning, Eric.

Hey, good morning, this is [Justin] I'm for Eric today. Rob, just going off your comments, obviously good momentum to start the quarter with some sizable new investments, just curious how the pipeline's looking for the remainder of the year and where you're seeing opportunities, whether that's new or add on investments.

Yes. So again, as I indicated, quite a pickup in M&A activity. It looked like it started to happen after July 4. The -- I guess, the noise around the tariffs has quieted some, although there's more in the news in the last couple of days. But I think that certainly, private equity firms with whom we work exclusively are much more active in the marketplace looking at opportunities.

So, things have picked up meaningfully. So again, we would expect, and our pipeline runs typically, I'd say, 10 opportunities at a time that are very actionable, and we see five to seven new opportunities a week. So, we're very busy, but also very selective. So, I do think we've got the ability to continue to grow here. And as indicated, we have the capital to grow as well.

As part of that, though, of course, we would expect repayments to speed up, which have been slower this year. But we think, notwithstanding the repayments expected, we'll be able to grow the portfolio between now and the end of the calendar year.

Okay. That's great. And then just a follow-up on credit quality. I know you guys can't disclose much given the private aspect of all your portfolio companies. But any insight into any potential resolutions or progress that's being made with the current nonaccrual list?

Yeah, the -- and thanks for noting the privacy aspect continue to work through them. I'll have private equity firms associated with them, backing them, so we'll need more time, but fortunately this quarter, Todd noted we had no new non-accruals.

So, I think they'll all take more time, but I think generally in a good spot and where necessary, we'll get more involved in the situation to make sure the company continues, but our experience has been good private equity firms that we deal with typically put money and new money in a couple of times to support their businesses. So these are ones working through that system, if you will.

Okay, great, that's all for me because I thanks for taking my questions.

Yeah, thank you, Justin.

Robert Dodd, Raymond James.

Hi guys.

Good morning, Robert.

On good morning how you doing? On the potential equity realizations, that I think you mentioned, maybe $12 million in proceeds, $10 million in gains in the second half of the year. What's the level of confidence on that because I mean it does, if the market activity is picked up, but --

Who knows, like, I mean, how high is the confidence level on realizing them this year? I mean, if they don't get realized this year, then it just happens later, but, what, what's kind of how -- how's you’re feeling on the certainty of those things actually happening this year.

Sure. Sure, Robert. Yes, it's a great question. So when we indicate and forecast, again, things can change. Those are businesses that are in the market being marketed, some further along than others, but all are being actively marketed by a banker or by a company.

So we would -- and all are well-performing businesses. So we think the likelihood would be high.

And sometimes things don't happen. But -- and also, there could be things that we're not aware of, especially if we're just in an equity-only position, don't have the debt instrument anymore. But we say fairly high, again, based on active marketing by the companies.

Got it. Got it. And then if I can go to the -- not so much the nonaccrual side, but the 15% of the portfolio is rated three or lower, i.e., not meeting plan. I mean if we exclude the nonaccruals because those have obviously already are having their issues currently, what -- how much of the remainder of that are you seriously nervous about versus -- yes, it's not meeting plan, but we're not that worried kind of thing?

Given its category of being a three, by definition, it means that we expect to receive all of our principal and all of the associated income to be a four, it would be we don't expect to receive the income and five to be we don't expect the income or all of the principal. So our current thinking is, by definition, we expect to receive all principal and income. That would be the best way to characterize it, I think, Robert.

Okay, I appreciate that. And then if I can, one more just on that -- just kind of -- like you said, and your kind of partly addressed it, activity picked up after July 4, and meaningfully over the last 30 days. I mean, on the time frame because obviously some businesses take longer to do diligence than others. What, you said -- you expect to still grow the portfolio by year end?

But how much uncertainty is in that given the pipeline and kind of, the timing of where we are with four months left in the year and these processes ramping up now and I'm not talking about the echo, it's just been kind of the pipeline?

Sure, sure. So the pipeline, as indicated earlier, is quite robust. So a number of opportunities that are in what we would describe as a 75% or higher probability. So a lot in that bucket. And then a lot of things that we're looking at that given that we're here in August, all of which have a good chance if they move forward, and we're selected to certainly close by the fourth quarter.

So again, it's hard to predict these things on both ends. We have found that repayments sometimes happen more quickly than new fundings, but we expect we'll have both and can grow the portfolio the balance of the year.

Thank you.

Yeah, thank you, Robert.

Thank you. As we currently have no further questions on the lines at this time, I would like to hand the call back over to Mr. Ladd for any closing remarks.

Okay, thank you very much and thank you everyone for being on the call today and your support of our company, and we look forward to providing the update on our third quarter results, which will be in early November. Take care.

Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your lines at this time and have a wonderful day, and we thank you for your participation.