Q4 2019 Earnings Call

At this time, all participants have been placed Oh listen only met the coal will be open for question answer session. Following the speakers remarks.

This conference is being recorded today Tuesday March 3rd 2020. It is now my pleasure to turn the call. It over to Mr. Whopper Lad, Chief Executive Officer of Stellus Capital Investment Corporation Mr. Ladd you may begin your conference.

Thank you so Matt good morning, everyone and thank you for joining the call.

Welcome to our conference call covering the quarter and your ended December 31st 2019.

Joining me. This morning, just talk Huskinson, our Chief Financial Officer, who 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 rebroadcast of this call any form is strictly prohibited.

Audio replay of the call will be available by using the telephone number.

I did a 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, we ask that you refer to our most recent filing with the FCC important factors that could cause actual results to mature the differ materially from these projections.

Out of date are forward looking statements unless required by law.

Hi, Jane copies of our latest Dusty see filings. Please visit our website at Www Dot Stellus capital Dot com under the public investors like.

Calls at 713 to nine to five 400.

This time I'd like to turn the call back over to our Chief Executive Officer, Bob Let.

Thank you John will begin by discussing our operating results followed by a review of the portfolio, including asset quality and then the outlook Tom will cover our operating results first.

Thank you Rob.

Fiscal year 2019, we more than covered the dividend of $1.36 per share with realized incomes $2.30 per share, which included $19.6 million net realized gains or a dollar seven per share.

Core net investment income was $1.32 per share.

GAAP net investment income was $1.23 per share as a reminder to core investment net investment income calculation has gone gap.

Excludes the capital gains incentive fee accrual at excise taxes.

Net asset value increased $45.8 million from 224.8 million to 270.6 million due primarily to our equity offering in March 2019.

On a per share basis net asset value increased 14.9 to 14 14, due primarily to net gains of 22 cents per share.

Finally, our dollarsthirty six per share of dividends paid in 2019, approximately 60% more characterized as long term capital gains and therefore taxable to our investors at the applicable long term capital advance rate.

Turning to the fourth quarter, we covered our distributions of 34 cents per share through realized income of 38 cents per share which included realized gains a two cents per share.

GAAP net investment income was 36 cents per share impacted by the reversal of a billion dollars a previously recorded capital gains incentive fee accrual.

Core net investment income was 32 cents per share.

As a reminder, excludes the impact of capital gains incentive see an excise tax.

Net asset value decreased 26% 26 cents per share during the quarter from 40 40 to 14 14, due primarily to unrealized depreciation our debt portfolio and with that I'll turn it back up as well okay. Thank you Todd.

I'd like to cover the following areas a life to date review portfolio and asset quality and then turning to outlook.

So really this is a seven full years like today review so since our IPO in November 2012, we've invested approximately $1.3 billion in 117 companies at a received approximately 820 million of repayments well maintaining stable asset quality.

Today, we have paid over 141 million of dividends to our investors, which represents $10 per share to an investor from our IPO in November 2012, which was at $15. This year.

Now turning to portfolio and asset quality, we ended the year within investment portfolio at fair value.

Approximately 629 million across 63 portfolio companies, which is up from a problem approximately 505 million across 57 companies at December 30, Onest 2018.

During 2019, we invested 251 million 17, new and 12 existing portfolio companies and received approximately 128 million every payments. So total net portfolio growth.

Actually a 124 million for the year.

Our portfolio continues to be weighted toward secured lending at floating rates at December 31st 96% of our loans were secured.

And 93% were priced at floating rates.

This move is coincide with greater first lien and unit tranche lending [laughter], we continue to make good diversification the largest industry sector at 50% the total.

Average investment per company is 10 million and the largest investment is 21 million.

Both measured at fair value.

59 of the 63 portfolio companies are backed by private equity funds.

Overall, our asset quality is stable at a to honor investment rating system or on plan.

11% of our portfolio is related to one or ahead of plan and 11% of the portfolio is marked an investment categories of three or below.

In total we have two loans on non accrual, which comprised to just under 1% of fair value.

Portfolio.

Now turning to outlets are part of our strategy has been to invest in the equity of our portfolio companies in a modest way in order to generate realized gains sufficient to offset losses over time.

As our business has matured over the last seven years, we've begun to see somewhat regular realized gains from the portfolio.

During 2019, we generated 19.6 million of that realize gains.

And since year end, we've had 1.3 million unrealized gain.

Also since year end, we've funded 35 million at par in two new portfolio companies and we received 12 and a half million in full repayment of one investment which brings the portfolio to approximately 650 million.

We've extended like identified likely fundings of approximately 13 million by quarter end and repayments of 15 million. So we'll likely in the quarter about where we are today.

Beyond this quarter I'd like to comment on some headwinds in the business.

First as you know, but we've had a falling LIBOR rate from which most of our long surprised that 90 day rate was 195 basis points at December 31st yesterday was about 1.24%.

We do have plus LIBOR floors, which on average heard about 1% and recently, we have been structuring loans with floors higher than that level.

Second as we rotating the portfolio animal first lane and Unitranche lending our yield has decreased this should result in a lower risk profile, though.

And third we've seen a limited impact from sourcing from China, So far.

Certainly the longer term impact in the portfolio.

Corona virus or cold at night team is something we're studying very carefully.

Finally on a positive note. In addition to the 1.3 million realized gain that was received in January.

We're expecting an additional 4 million a realized gains for the year.

And would that will open up for questions. Samantha you may begin the question and answer session.

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That's for just a moment hello, everyone and opportunity to signal for questions.

Like in that so I wanted you would like to ask a question Oh first question will come from Robert Dodd Raymond James.

Hi, guys I'm not going on on the the up the China sourcing supply chain. I mean can you you gave a little color there on seen limited impact so far it's always Bailey could you tell us how or why you want to talk since it may be evaluating that.

I'm not just like talking to the company's but but evaluating house in the secondary impacts could be all anything with.

Yes, good one Robert.

So.

As we said we were studying it carefully and talking with the companies we certainly have.

Less than a dozen companies that have some.

Correct supply or demand exposure to China, although so far do the terror process has been very limited impact.

And then question so our bigger question, though would be.

If this becomes more pervasive and starts to impact.

As an impact on the U.S. economy and travel and.

And the way one operates in business could have more of an impact.

We've identified a couple of companies that actually would benefit from the virus. So.

Situation in the states, but.

We hope it doesn't come to that so so again still evaluating Robert but I'd say that.

You know if it continues and certainly as more of an impact on the way business is done in the states it could be impactful but.

I would think as a general matter most of our exposure by design of course is based in the United States <unk>.

Got it thank you for that.

The libel.

Small issue.

That's just caught theirs.

He said most useful is one that you've been can you give us a little bit more color on what consensus you portfolio actually enhance falls.

And then you know one and when you say you destruction in house laws.

How much higher if you've been able to get pretty competitive market.

Sure so with respect to the existing floors.

Many are higher than 1%.

That's an average number and I'd say very few less than five would have no floors and it will who may be double check that was talking so so most every loan we have as a floor.

And then we do have still some fixed rate loans, although it's by design has become a smaller.

Smaller percentage just as we've gone to more secured.

In terms of the market today, so so I'd say going back to labor day, or so we started.

Structuring LIBOR floors generally it 150, and some higher Ed 175.

And so.

And Weve tried to be disciplined also about the spread too which is relevant.

So weve reached the point, we would say in terms of absolute return.

That these are important.

Parts of structuring deals that there's a.

At a rate below which you know we wouldn't go.

So I think if you thought about our recent investing and likely investing during this year the floors will be.

The higher.

Certainly on yield were looking for what is the all in return for alone.

Oh God I I appreciate that and that's I cant lumber on all the markdowns in the in the fourth quarter. It looks like protect America. Instead of anything you can tell us about the driver that minutes I think a home security company, we've seen other home security companies not your portfolio, but elsewhere.

In the marketplace occasionally have had issues.

Yes, yes, I mean, it's just something structurally changing in that market, that's that's creating incremental problems.

Yes, so again as you know, we we don't really comment about specific companies in the portfolio for privacy reasons, but wouldn't say as a general matter that the security monitoring business. There has been a technological change overtime and it certainly impacted incumbent type businesses.

That's the most I should say at this point.

Okay I appreciate it thank you.

Yeah. Thank you Robert.

Thank you. Our next question will come from Christopher Christopher Nolan with Ladenburg Thalmann.

Hey, guys going on where do you see where are you thinking about leverage given you know libraries going down so where should we expect leveraged to start to drift up too.

Yes, so it's a and this would be Chris as it relates to the our company itself not portfolio companies.

Yes.

Yes, so I would think of it is in our targeted leverage on the regulatory.

Calculation would be at one to one which were not at today, but certainly achieving to get to one to one and then when you include our debentures certainly to leverage will be higher.

So that's the targeted number at this point.

Great and Rob.

What are you is the.

Corona virus, the expectation of a slowing economy and all the factors is that changing how you are looking to expose the industry exposure for Stellus are you looking to favor certain sectors less than others, that's not affect your thinking.

Yes, so one thing I might mention is that we if you go back a couple of years one the tariff discussion was active we purposely did not invest in a couple very interesting companies that we thought would be impacted by the tariff. So we've been mindful of.

Scott since that point Oh.

Monitoring and limiting exposure or in China, but of course, a number of business. The United States are ultimately affected because at the supply chain that may not be their business, but someone they do business with.

So as a general matter Weve tried to be certainly cautious.

In this area.

And then as we think about investing now that we had an opportunity. This last week that we've reviewed and does it fit we thought nicely and.

Even if there was a.

Larger impact on the U.S. economy that it would have.

Very little impact.

On such business. So, it's certainly informing our investing at this point.

And so I think it certainly would be a little bit more cautious and thinking through how is that business impacted if it becomes more pervasive.

Great. That's it for me thank you.

Yes. Thank you.

Thank you I wouldn't question will come from Ryan Lynch with K did KBW.

Good morning warning Ah.

Hey.

Wanted to follow up on the other question regarding your leverage so does the what did what regulatory leverage it's kind of a target you guys had for for a bit ever since really the two to one leverage was approved and so I'm just wondering though in this environment, where LIBOR has clearly significantly changed from.

Where are you initially set that leverage target, which which obviously puts pressure on your portfolio yields operate earning its I'm just curious.

Why why is there, but I guess no change to to your regulatory leverage target. He and also I know you guys don't provide kind of a total or gap leverage target, which would include Oh I see a espeed adventures, but as you can just lie bore you know has has been heavy tend to wrong.

Traction in the fed cut today, you know there's going to continue that way.

Do you plan on added on more total leverage or what do you have to be I see debentures versus you know and still maintain you know kind of or the same regulatory leverage.

Yes, Thank you right.

So as a general matter on total leverage I would think of it more in the two to one relationship. A this would include the FDIC debentures and so one very positive aspect of our funding base is it under our second license, which as you know was obtained this past summer.

Sure.

The.

The new debentures or are very likely to be lower than the first tranche or the first hundred 50 that cost. We think is roughly in the low three percentage and the.

And maybe fall and the whereas the first tranche was in the high threes.

So if you think about you know an ideal source of funding for us today is to.

Begins to fully utilize the second license debentures. So so this could cause leverage to get higher after that mechanism.

As it relates to regular way leverage your regulatory leverage up we'll certainly look at taking the target above one to one.

I'd say that we would be mindful about state of the economy.

And Oh, we would.

So that's probably the principal concern and then and they typically the regulatory leverage is more governed by your bank facility.

Where.

Typically for the speech ready for most every one of the industry, where the covenant for your bank facility would be lower than the two to one regulatory cap. So any change I think above that one to one target would be done.

Closely with our Bank group was very supportive and increased our facility from 180 to 220 this past year.

So hand in hand with them, we could consider a higher targeted leverage.

Okay, Yeah that makes sense certainly year your outlook on top of U.S. economy is.

Going to fair as well as trying to lease up some cushion even your credit facility Oh leverage Oh.

Totally makes sense.

I didn't have one question on the Corona viruses Wow, So oh.

You did that this is ever evolving.

Okay. It's a very fluid situation is probably difficult to understand the impacts your portfolio companies today, and if that may be completely different you know what a week or two depending on how this thing spread so could you give me some insight is through the process and stats that you guys are taking it to monitor your portfolio.

Ladies and how they're before because the data you know that that they're gonna be reported to you from a financial standpoint. It is gonna be on a lag there's not really going to show probably to the real impact that we're having sort of in real time. So could you just fights inside of the process and stuff that you're taking into kind of actively manage and understand what's happening in your.

Portfolio companies.

Closer to two real time perspective.

Sure sure and this would be a good ideas of background about our portfolio monitoring generally so so our investment teams are in constant contact with portfolio companies. Both medicine the teams in the owners.

This would be a continuous process throughout each quarter and then certainly at the end of each quarter. We have a full debrief about how the portfolio companies are doing so think of investment teams constantly be contact with portfolio company management and their own.

As it relates to specific question, we've been reaching out to the portfolio companies, who we think could be impacted and receiving starting to receive data back everyone's evaluating I think real time.

So I think certainly by the time, we have our first quarter call in early may well have much better information to share with you.

So so again I think it's real time, yeah, we have constant dialogue with portfolio companies. So both obtaining an understanding information will be a well will not be a challenge.

Okay, Yeah I understood. Those are all my questions I appreciate the time today.

Okay. Thank you Ryan.

Thank you at this time I'm not showing any further questions in the queue I'd like to turn the call back over to you Mr Lab for closing remarks.

Yes, and one thing I might just add before we close out is Robert's question about LIBOR floors. So so just squeeze.

We finalize that while we've been talking so just to have our floating rate exposure. We just have to that do not have a LIBOR floors. So that's actually all day.

Anyway, I think that sit on our and we thank everyone for their support for our company just finishing our seventh year and we'll look forward to speaking with with everyone in early may.

Thank you.

[noise] <unk>. This concludes todays call. Thank you for your participation you may now disconnect.

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