Q1 2020 Earnings Call
You were currently on hold for the Stellus Capital Investment Corporation first quarter Twentytwenty results Conference call.
At this time, where somebody today's audience and plan to be underway shortly.
We appreciate your patience and please remain on the line.
[music].
Good morning, ladies and gentlemen, and thank you for standing by.
At this time I would like to welcome everyone should the Stellus capital Investment Corporation first quarter Twentytwenty results.
At this time, all participants have been placed on I listen only mode.
The call will be open for question and answer session. Following the speakers remarks.
This conference is being recorded today Tuesday may 12 Twentytwenty.
It is now my pleasure to turn the call over to Mr., Robert Mad <unk>, Chief Executive Officer of Stellus Capital Investment Corporation Mr. glad you may begin your conference.
Thank you Valerie and good morning, everyone. Thank you for joining the call welcome drug conference call covering the quarter ended March 31st 2020.
Joining me as usual. This morning is talking about is concerned our chief financial Officer, who will cover important information about forward looking statements as well as an overview of our financial information.
Sure.
Thank you all.
I'd like to remind everyone today's call is being recorded.
Note that this calls the property Stellus capital investment Corporation and that any unauthorized rebroadcast of this call warm is strictly prohibited.
Audio replay the call would be available by using the telephone number and pin pad provided.
Press release announcing this call I'd also like to call your attention to the customary safe Harbor disclosure I press release regarding forward looking information.
This conference call me also.
Forward looking statements and projections, we ask that you referred for most recent filings with the FCC four important factors that could cause actual results to differ materially from these projections.
A lot update forward looking statements unless required by law.
Jane copies of our latest FCC Barlage. Please visit our website www dot Stellus capital Dot com.
Some of the public investors like call. It 713 to nine to five four zeros Europe.
But the satellite to call the turned back up to a clock during the call back over to our Chief Executive Officer problem.
Thank you Josh.
As we all know were unprecedented times I'm glad to report however that our team has been working remotely since March 16th.
Without interruption to our operations and all of our employees are helping shape.
Well, we're prepared to continue to work in this manner as long as necessary.
Since the onset of because the 19 pandemic, we've been a regular contact with all of our portfolio companies and older sponsors.
It's just the current and expected impact of the pandemic only business is a new industries in which they operate.
Overall, the portfolios stable and all borrowers on a cool major scheduled principal and interest payments for the first quarter.
I'll discuss the portfolio, including asset quality in more detail shortly but first Todd will cover our operating results for the first quarter.
Thank you all.
In the first quarter well more than covered the dividend of 34 cents per share with worldwide has been cobble 39 cents for sure which included a $1.3 million realized gains or seven cents for sure.
Core net investment income excluding the impact of capital gains incentive you reversal excise tax was 29 cents per share a GAAP net investment income was 32 cents for sure.
Net investment income includes the accrual of $1.3 billion, an incentive fees or seven cents per share, which are not able to the badger due to the arbitration as a 12 quarter Chester, resulting from the unrealized losses recorded during the quarter.
Net asset value decreased 45.7 billion or $22.59 per share. Some 276, that's your in 70.6 million to 224.9 billion due primarily to unrealized losses on our portfolio for the quarter, resulting primarily from increased uncertainty caused quite a covert 19 pandemic. In addition.
And to approximately 17.2 billion to portfolio company specific depreciation.
As a reminder, we did generate approximately $20 million of realized gains during 2019.
We recently announced they were moving our dividend payment timing for monthly to quarterly beginning with the second quarter dividends.
The willingness to have visibility into the income for the quarter as well as our capital position and to better match the dividend this cash income.
What else the second quarter dividends in early July.
With that I'll turn back what would your goal.
Okay. Thank you Todd.
I'd like to cover the falling areas portfolio asset quality and then outlook.
As I mentioned earlier, we've been a regular contact with our portfolio companies in sponsors addressing their liquidity position expected covenant compliance the health of their workforce and customers.
And the current and expected impacted the pandemic on their operations in industries.
We have taken this information into account for asset quality risk rating evaluation work for the quarter.
We did see an increase in revolver and delayed draw term loan funding request more portfolio companies initially which have since subsided.
Since March 1st responded a 17.2 million of sub two clubs, while maintaining sufficient liquidity for the remaining unfunded commitments.
We've not made any new investments in Newport solar companies since mid March.
In the near term plan to focus on our existing portfolio confidence.
As of yesterday on remaining unfunded commitments or 22.7 million and we have cash and revolver capacity of 27 million.
Excluding cash in debenture availability at RSP, obviously subject subsidiary.
Overall, our asset quality is stable it true on our investment rating system more quote on play on unquote.
92% of our portfolio is worried that it you're better off point.
8% of the portfolios marketing investment grade category three or below.
In total we have five loans on non accrual, which comprised 2.4% of fair value of the toll on portfolio.
During the first quarter, we invested 61.5 million in three new and 11 existing portfolio companies all of which would first lien and received 31.8 million per member acquisition repayments, resulting in net fundings of 29.7 million.
However that portfolio growth it was more than offset with the unrealized losses across the portfolio previously mentioned by Todd.
As a result, we ended the quarter when investment portfolio at fair value of 609.5 million across 65 portfolio companies.
This was down from 628.9 million 12 31.
19 in terms of loan portfolio I do want to remind everyone that all but one of our loans house have LIBOR floors, which on average are approximately 1.1%.
We continue to make good dipper, making good diversification with the largest industry sector at 15% of the total.
The average investment for a company is approximately 9.4 million you know largest investment is 20.5 million boes measured at fair value.
And finally 61 of the 65 portfolio companies are backed by private equity firms.
Now turning to.
As we look forward upon refocus as previously stated it's the focus on maintaining liquidity and continue to closely monitor and support our portfolio companies.
Given the current environment looks like the portfolio to go materially in the near term.
At least until the uncertainty associated with total with my team has passed.
Well, we do not expecting the nurse near term repayments.
I would expect groupings picked up in the second half of the year.
With respect to portfolio valuation credit spreads generally tighten approximately 40% since quarter end.
Of course should this trend continued through June our portfolio valuation could recoup a portion of the unrealized loss from the quarter.
With that we'll open it up for questions and salaried, maybe getting the question answer session. Please.
Thank you.
If he would like to ask a question. Please signal by pressing star one on your telephone keypad.
A few using a speakerphone. Please make sure. They are your mute function is turned off to let you sit on to reach our equipment.
Again press Star one to ask a question.
Well plus or just a moment to let everyone an opportunity to signal so question.
I will move to our first question from Christopher Nolan of Ladenburg Thalmann. Please go ahead.
Hi, guys.
Yeah, Good morning, Chris.
Well given everything that's going on.
Good leverage will Wanna get going.
Tory leverage ratios for.
<unk> increased.
Your progresses.
You know, Chris we would.
Optimistic that valuation adjustment that occurred in the first quarter would not increase from here.
And as a result.
Leverage where we are.
Which is a little over one times would be about where we get adopted certainly could move a little bit more or less but.
We'll target as we have in the past to try to keep leverage at one to one.
Okay and then.
Correct your comments up there.
Non accruals and second quarter to date.
Oh, one long was placed on nonaccrual effective April 1st and they've been marks payment, but we put it on non accrual and that was included in the total so five companies in total and again roughly 2.4% fair value.
Dr. then I guess the final question would be.
Given everything that's going on with U.S.P. or you know leasing program, so forth and as I recall you have two licenses.
Are they giving any flexibility good bdcs, especially quality onesix Dallas to get an additional license for the additional lending capacity.
So our relationship with USPI has been Great News you pointed out we obtained the second license in August of last year.
So.
The there's all the things that we would need to do there being helpful. Too. So we're oh, we have plenty of room to grow the second license.
Currently just 11 million up debentures had been drawn and there's not a million.
That could be drawn but so so we're in good shape and lot of room to grow the second license before we would certainly consider a third.
Okay, great that's it for me be well.
Yes, Thank you Chris.
Thank you.
Do you find that your question has been answered you name it moves yourself from the Q by pressing star too.
Well take our next question from Bryce Rowe of National Securities. Please go ahead.
Thanks, Good morning, Robin Todd.
Good morning brothers.
All right so I.
Wanted to has to ask about a couple of things here Robbie maybe comment about.
Expectation for repayments, possibly picking up in the second half.
Of this year.
Just just wondering.
Are you seeing something or hearing something from <unk>.
Portfolio companies that indicate that might be happening or they are the expectation that conditions will improve in the second half the year and the natural pace of.
Repayment activity like might pick up from what it is right now.
Yes. So this is.
On the assumption based on we had a few portfolio companies that were in the market to be sold by the second quarter two old depend on their kids.
And so companies that are performing well still continue to perform well that.
Could be candidates for.
Sale still this year, but we certainly need to several more positive calling that than we currently have so.
It's principally brides based on that expectation that at some point well performing companies that may have been sold may end up being sold by the end of year certainly could come from some refinancings, but also we don't do not have a specific nothing specific at this point just projecting up there'll be something close.
Sure the maybe quite say normalcy as we get to the second half would be.
That makes sense okay.
The question is about the credit facility, obviously, there's commentary in the the Q the press release about.
Ongoing negotiations with the that the agent on that credit facility [noise], you ended the quarter or maybe $10 million shy.
What is currently available.
So curious again, you're looking to upsize it and maybe maybe you could could describe.
Hello, how those negotiations or kind of playing out at this point in light of kind of the that that the environment because that environment right now.
Sure So as a general matter that our bank group has been very supportive.
To the history of the company and certainly the needs times. So we're disciplined principally focused on extending the revolving period from this fall out to next year.
So again things are going well there have been supported them.
So we still have to accomplish that but.
Don't expect any difficulties and being able to do that.
Okay.
[music].
And then one last question you mentioned that the majority of your companies are.
Sponsored back was wondering you know the support that that the sponsors are.
Giving two portfolio companies now.
If you had some that are you know in more need Oh I.
I guess immediate liquidity versus the may not be but I'm, just wanting to get a feel for how your interaction.
There's private equity sponsors has them and what what they've kind of indicated in terms of they're supporting these these these are the company's when you do.
Yeah.
So of course this is so a lot of our investment philosophy or strategy is to be backing companies that have serious and owners with so both intellectual and slows.
Capital.
Intellectual capital and real capital to support company. So.
So we found that Ah overtime.
Well the private equity firms that will docking do such do do that and they're much support your companies. We're seeing that currently where you may find a situation where.
You know sponsor is economically out of the money materially or perhaps the since then on older fund it may be more difficult but.
Most of our companies are certainly being well supported by other sponsors but also indicate that most of our companies have good liquidity positions, both in terms of cash or unused capacity.
Whether be revolver with us or a revolver with though.
Another lender that's part of the group so we've seen good support there and.
Probably the best metric I can share as to what we said in the in the prepared remarks that.
Paul.
All companies that were on accrual in the first quarter major payments and Doug. We're we're expecting to continue to see that through the second quarter.
And so overall.
To answer your question specifically good support from the private equity firms who are very capable.
And you know are smart and they've been through difficult times like we have.
Through before and then are doing certain things such as things that we're doing which is maintaining liquidity.
Focused on the operations of the business.
That's great. Thank you. Thank you Rob I'm appreciate the answers.
Yeah. Thank you bye.
Thank you for moved our next question from Paul Johnson of KBW. Please go ahead.
[noise] Hey, guys. Good morning, Thanks for taking my questions.
Had another question of a credit facility.
She is about 10 million remaining capacity there.
Yes, I mean, it all of that currently available to be drawn by the company or any sort of ball restrictions.
Mr things sort of available either.
Yeah, Yeah, good morning, Paul.
So.
Yes as of quarter end that was the case of 10 million to capacity all that could be drawn a currently as of yesterday that facility at 15 million of availability and all that could be gone.
They were really we're well we're comfortably in compliance with all of our covenants with the bank and have as well as the borrowing base.
Okay [noise].
And how much.
The cash that was available as a 31 30 side.
How much of that is also available for your views or how much.
It's actually.
Yeah, I see subsidiary or something like that.
Yes, so I think touch it correctly, but I want to say roughly.
35 million 15 of debt cash at 331, it's in the FDIC subsidiaries, So think Detroit dog.
Yes for a 14 million false.
Okay [noise].
Okay. Thanks for that and then next question is this kind of all the portfolio.
I would just asked yeah, I think you touched on it a little bit, but you know maybe kind of asking up during the height of the crisis and asked me this forward.
No what it's been a process for evaluating younger portfolio companies and steps that are being taking to sustain these companies that also ask Indian beds or if any of that have you been asked for and it's one of them unless you know how those conversations.
Oh God, if you happen to make them.
Okay. So is it said in the prepared remarks, we've been in constant contact with all the portfolio companies or their private equity owner of sponsors throughout the.
Period of.
Starting that go in March this would be not unusual anyway, we would typically have touched base and have contacted portfolio companies and well see a monthly basis, so more active than normal.
In terms of gathering data and thinking through issues.
We've had a very few requests for amendments we have.
We've had a request as someone might be looking to apply for a P.T. long that would require.
An amendment to the documents to allow the financing.
But other than the out no material requests and I think the only one well we've got a payment.
Issue would be the one that we put on non accrual and.
They pulled that was did make their marched payment, but we could it on the other cool in April so very few kind of.
<unk> Covenant financial Covenant or.
Certainly pay my request changes so that virtually not.
Just the.
Just one that that I've mentioned and a.
I'd them, one or two others, but very modest amount.
Okay. Thanks for that and then my last question.
Yeah, I would just ask I think it sounds a lot like you're basically focusing on the existing portfolio. At this timing is your current borrowers I'm probably not evaluating.
Too many new opportunities it is that fair to say.
That's correct.
It takes that those are all my questions today.
Okay. Thank you.
[noise]. Thank you I'm almost our next question from Matt cadence of Raymond James. Please go ahead.
Hi, everyone Morgan and hope all as well so first question on the dividend.
Can you can you tell us to do you expect to declare a level of cash dividends for Twoq you.
So good morning that we probably best to wait until two weeks.
The press release and previously that we're going to evaluate that after the first I'm sorry. After the second quarter results. So you should expect more to come.
Come from Us in.
Early to mid July so we would certainly like to be paying a cash dividend for the second quarter.
But so probably best to stick with what we said previously that we'll have more to say in early July.
Okay, Great. That's helpful and then I guess.
Kind of along those lines to if you can can you just give us an idea of what framework will be used in setting it specifically as it relates to levels of spillover income would be of interest.
Yes, so so I think as we've said previously the we'll be looking at the actual income received for the quarter.
Get we're optimistic based on.
Liquidity in portfolio companies and knowledge that we have good.
Most of those payments if not all will be made suddenly the first priority. The second would be just certainly evaluating the our overall capital position at the time and.
And is there further concern about the cold with my team situation. So we should take that into account so be somewhat forward looking as well.
And then with respect to the spillover income, it's approximately 18 million remaining from 2019 and so we'll certainly our plan would be that that would eventually be paid out this year.
Certainly have the option would have the option to have some of that be in stock versus cash but.
Our goal to pay as much as we cannot be income that we really look at it is <unk>.
The income we generate this year that would be what we planned to be paying out this year.
And then that you do a go a long way toward covering.
The spill over.
That's helpful. Thanks all.
Okay. Thank you Matt.
Thank you.
We'll move to our next question from Harold Mandela Private Investor. Please go ahead.
Oh, I again, Robert glad to I'm sure. How did your was called when new joined the company you did not anticipate 20 or 20 disaster I wouldn't have so anyway.
I think you've answered most of the like my questions are the Big question is what would you say the Nike free EZ pass off right now.
You're right in that portfolio that you have out after that and sponsors or you're not.
First I didn't nonperforming or gone performing assets.
Good morning, Sir the so with respect and they'd be when we reported the results in March of two and they'd be is $11.55 a share.
Then in terms of nonperforming assets we.
Currently we measure them is approximately 2.4% of the total on fair value the five individual position so.
So that that's what we reported as of March 31st and we want addition on April 1st.
Okay, and and again, our you're the different than those in question as far as her.
Second quarter.
So with respect to Didnt second quarter, we'll have more to say in July after we get through the quarter. So unfortunately can't be specific about what it will be until the second quarter, but we certainly will talk more about it in July.
Listen thank you for Berkshire hang in there okay. Thanks, again, yes, yes.
Thank you so much.
Thank you.
Our next question from David near Jackie of confluence investment management. Please go ahead.
Good morning, what they'd be for giving me a little time that to talk this morning.
One of the things, but I think that I've observed in my conversations with the management team over the years is that you guys are very straight shooters and we'll always discuss things that have been publicly disclosed and you still very close to that that design plan I appreciate that I think all investors more straight.
It is for their management teams.
That said you know we are in the environment I think if you look across the BDC industry.
The loses presumed to be terrible unless told otherwise and if the news is announced is good. It's still considered if you look at the valuations are not be very good.
And against that backdrop.
The decision to.
Really not.
Let's just move away.
Yes.
We're not giving us really anything concrete with regard to your dividend.
I think that can easily be interpreted that you've got a lot of problems that you might not have and you know Franco waiting until July.
It's just too long.
So I would just you know is a common would suggest to you that you've been pretty hard about trying to get some dividends is out sooner.
Because it'd be very helpful.
Ah if the news isn't good you need to bring it down for whatever reason that might be getting the news out there to what it actually is gonna be <unk> better than what people are presented it to be you know your stock right now is that.
Got it huge discount to its the massive diving a little bit of clarity on its an earnings call. It would would go a long way.
And against that backdrop, I think I guess or what else to say that you know.
Between the quarters, if you have meaningful news to report with regard to credit facility.
Amendments pay downs portfolio quality to the extent that she can provide that between your filings is an 8-K or other means press releases.
That would be very helpful. So I'm not sure if he does it sort of thought into that are wondering what your with your comments Pepe.
Yeah, Dave Good morning, Thank you for Johnny and thank you for the <unk>.
The questions and ideas so.
So we're just in terms of interim reporting its we have something that's material. We certainly would report that during the quarter.
So.
The we'll do that for sure.
I mean, I guess I would say that in all the conversations that I I have with with a different BDC losers.
I totally get.
At least the month of information because you guys out there with regard to updates and what's not suggest that whatever managers is doing is wrong disclosing more than they should.
It's that they have a tendency to provide more information.
Throughput press releases or their presentation with regard to what nothing happening.
Yeah, I had a material bar.
Right now might be a two high.
It would be helpful. I think you're getting a solution that includes things that may not be considered material, but just some updates on what might be happening the way the to the playing field on this call is that.
You know you being cautious and careful if the capital which we appreciate.
But you're not really kind of driving a whole lot of.
Clarity with regard to.
But you know what was actually happening or cash flow Kim <unk> is a quality variances in the high enough to support a cash dividend.
What are the planes that you might have to do are you going after those equity below the massive my argument is that you're just because they stuck out if all those things are likely to happen or a possibility would be helpful. If he could provide updates I'll, let before July because until then.
You know investors are going to presume that you're not pay a dividend unless you're gonna go live with.
That's the case then.
Well it is itself I think there's a lot better just to get the news out there or whatever it might be rather than have investors kind of part a handicap what it that's gonna be.
So I understand and I understand there the request would be to provide more information we can sort of.
It's duly noted thinking.
Well thank you.
Thank you.
Our next question from Kevin shifts of Oppenheimer and company. Please go ahead.
Hi, good morning called you're doing well. Thank you for taking my question.
My question to change as much in the so Paulo.
Good morning, all my questions just it seems to be true ups or sort of a charitable Buck feature in the basin said did see calculation. So I see that this quarter's business sympathies about to serve so going forward I would assume that a subsequent incentive fees will be expenses added to that deferred down say unsold, maybe 20% cumulative utterance allow for that though.
It's become currently table overtime, but I did want to see if no caused a reversal opiates deferred based incentive fees in subsequent quarters. It's similar to that takes a couple things say apart from a deferred interest income reversals.
Sure.
Go ahead, sorry about.
Yeah, Kevin. Thank you my first question.
Yeah, I would say that that that's correct any at this point you know the way the way that works is that no. We calculate an incentive to under another four knows I made the investment management agreement and.
And it at a clue it if theres a calculate the calculations suggest to accrue it and minutes limited by the 12 quarter Chess and you know again as you pointed out this quarters.
Having said that he was limited by that add to the extent something in the future happens as you we calculate the 12 quarter test each quarter that would result in a recruitment of does any of those incentive fees. Then you know they wouldn't payable at that time, but at this point, they're just they're deferred subject to that so things that would occur.
Her that it could occur.
That would cause that to happen would be you know.
Unrealized gains.
More previously don't realize gains that are that were not previously I realize that's the primary yeah mover on that 12 corporate trust.
Okay excellent. Thank you so much that has often been today.
Thank you.
Thank you.
It appears there no further questions at this time I like to turn it back to the presenters for any additional or closing remarks.
Okay. Thank you and thanks, everyone for being on and thank you for your support Oh.
Of our company and I'm, just trying times, but we're working hard to [noise].
Oh for for all of our benefits. So thanks again for the support we look forward and speaking with everyone. In August says we report the second quarter and get we'll have more to talk about certainly by July with respect to the second quarter dividend.
Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
[noise] and.
[noise].
[noise] Ana.