Q2 2020 Stellus Capital Investment Corp Earnings Call
Good morning, ladies and gentlemen, and thank you first anybody at this time I would like to welcome everyone to Stellus capital investment Corporation's second quarter 2020 results. At this time, all participants had been placed on a listen only mode. The call we'll be opening for a quick question and answer session falling the speakers remarks this call.
First is being recorded today Friday July 31st in 2020 is now my pleasure to turn call over to Mr., Robert Lad, Chief Executive Officer, Stellus Capital Investment Corporation. Please go ahead Sir.
Okay. Thank you very much good morning, everyone and thank you for joining the call welcome to our conference call covering the quarter ended June 32020.
Joining me this morning as Todd how is concerned 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 in any form is strictly prohibited.
Audio replay of the call will be available by using the telephone number and Penn 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 filings with the FCC for important factors that could cause actual results to differ materially from these projections.
People not to beat our forward looking statements unless required by law.
To obtain copies of our latest FCC filings. Please visit our website at Www Dot Stellus capital Dot com under the public investors link.
Our call Us at 713 to nine to five 400 at this time I'd like to turn the call back over to our Chief Executive Officer problem.
Thank you Todd Oh, the impact of the global pandemic remains I'm glad to report that our teams remain healthy insane and its continue to work remotely without interruption to our operations.
Since the onset of be covert 19 pandemic, we've been a regular contact with all of our portfolio companies and order sponsors to assess the current and expected impacted the pandemic on their businesses and the industries in which they operate.
Overall, the portfolio stable and all borrowers on accrual made their scheduled principal and interest payments for the second quarter.
I will discuss the portfolio, including asset quality more detail shortly but first talk will cover our operating results for the first score.
Yeah.
Thank you Rob.
On June Thirtyth, we declared a dividend of 25 cents per share, which was covered by net investment income of 28 cents per share for the quarter.
Core net investment income, which excludes the impact of excise taxes was 29 cents for sure.
We believe a dividend is a sizable better match our income for the time being given our rotation to more senior and unitranche loans in the falling vibrant right, which is likely to remain low for sometime.
Effectively all floating rates our portfolio have LIBOR floors, which are approximately 1.2% on average as a reminder, we announced in April we would shift from monthly to quarterly distributions to have as or better visibility into the income for the quarter.
Our capital position into better matched the dividends with cash income.
Net asset value increased by $35 million or $1.79 cents per chair to 260 million or $13 in 34 cents per share due primarily to unrealized gains resulting from the tightening of market spreads.
With that I'll turn it back over to Rob.
Okay. Thank you Todd.
I'd like to cover the following year is now first liquidity, then portfolio and asset quality and fund the outlook.
With respect to the portfolio as I mentioned earlier, we remain in regular contact with our portfolio companies and sponsors.
Dressing that liquidity position expected covenant compliance the health of their workforce and customers tend to current and expected impacted dependent make on their operations and industries.
I'm pleased to report that our portfolio companies operations are stable and managing well in their current environment.
In the early part of the quarter, we did see an increase in revolver and delayed draw term loan funding request from global portfolio companies, which has since subsided and many have repaid.
During the quarter, we funded 6.6 million of such loans and the secret payments on these investments of 6.8 million over the same period.
As of today, our remaining unfunded commitments are 30.7 million and we have cash and revolver capacity of 48 million, excluding cash in debenture availability interest the I see subsidiaries.
Our next or overall asset quality is stable at a two out of a five a rating on our investment rating system or quote on plan, if you will unquote.
91% of our portfolio is related to 2.2 or better. We're on plan. That's 9% gets marked at a category of three or below.
In total we have loans to five portfolio companies on nonaccrual status, which comprise 1.8% of fair value of the total loan portfolio.
And no loans have been added to nonaccrual status since April 1st.
We ended the quarter with an investment portfolio at fair value of 640.7 million and 65 portfolio companies, which is up from 609.5 million at March 31st.
Primarily to the unrealized gains.
Earlier.
During the second quarter, we did not make any investments in the portfolio companies. However, we are now beginning to see interesting opportunities.
And since quarter end, we've made one investment a new portfolio company totaling 7.1 million with one additional new investment and follow on of approximately 10 million that's likely over the next week or so.
These companies are FDIC qualifying and therefore being funded with FBR capital.
We continue to make good diversification with the largest intercity sector at 15%. The total that fair valued at June 30.
The average investment per company is 9.9 million and the largest investment is 21.4 million.
Both at fair value and finally 60 out of the 65 portfolio companies are backed by a private equity firm.
With respect to outlook.
As we look forward our focus is to of course first to continue to closely monitor in support of portfolio companies.
Second to maintain liquidity and three of the third to evaluate new investment opportunities to prudently grow our portfolio.
We're starting to see a pickup in refinancings and repayments, although modest at this time.
We expect this activity will likely increase by the fourth quarter.
Finally, we're very glad to report that given the stabilization of asset quality.
Capital base and liquidity.
Anthony today is declared a regular dividend of 25 cents per share.
The third quarter of course this would be early.
With that open it up for questions and thank you Travis we may begin the are you may begin the question and answer session. Please.
Thank you Sir if he would like to ask a question we signaled by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question well part just for a moment ago, everyone an opportunity to signal for questions.
[laughter].
[noise]. Our first question comes from Ryan Lynch with KBW.
Hey, good morning, Thanks for taking thanks for taking my question.
The first one is because you guys.
Hi, good extended revolving credit facility I was curious because it looked like the revolving date was always tended to that March.
2021, with a final maturity in October 2020 wine.
But you have a final maturity being you know just a little over a year away and no longer period you know.
Six months, so you know.
Seven or eight months away now I was just curious that I felt like a shorter time period.
Than we've seen other bdcs typically going to expand the revolver periods. So can you just talk about.
You know that much more challenging environment and I started environment may, but but just was there a push back or for you know from the bank lending groups are not extending you know that got revolver to a longer more pushed out date.
Yeah, Ryan. So this is Rob I'll cover that no not at all a very good support from our.
Banking group I think as you'll recall that that amendment. We worked on in April and then closed in May during the made more of the height of depend dynamic.
And so I think as it does this group the thought was let's get through this yeah. The second quarter is and then we'll re address a longer term extension, which were in the process of doing.
Oh.
Okay.
And then I think you want to make sure I jockey these numbers right and they get some numbers out on that cash availability, but you had 23 million of cash and 45 million of capacity on your credit facility as of June 30, yes.
Can you provide the numbers of how much of that cash was.
Remained to be SP, I see as well as up to 45 billion available credit facility capacity.
How much it back and he was fully available.
Access to you all today.
So with respect to ER and Todd you correct me, if I'm mistaken there, but it's a catch up to 30, that's not in U.S.P. I see entities as approximately 3 million.
And in terms of the 45 million it could be borrowed a would be roughly a 30, let's say 36, 37 or 38 million that could be bar without.
Increasing the borrowing base from any loans and therefore, if we made any loans under the revolvers, we would be fully available. So we viewed as fully available, but it could be drawn down to.
Yeah, I think it was to 22 of the 230 without any additional borrowing a universal assets contributed.
Yeah, that's right okay.
Okay.
And then.
You know this quarter you know looks like you guys are our stock between your hurdle rates from an incentive they see standpoint.
You know given your kind of outlook as far as capital deployment is it reasonable to expect <unk> that you guys will be operating [laughter].
Well, what help or any of your guys incentive the hurdle rates, but that's the seeable future.
It's a tough wander to cover that please.
Sure Ryan.
Yes, I think with you know with a hurdle, where a set today and you know when and why more where it is as well as I mentioned earlier the rotation to more senior senior debt. So the yield isn't isn't that lower for those two reasons. That's right I think I think for now you know will be operating at the lower end of the incentive fee range, you know that could change or something.
But over time to the extent, we further deploying primarily FDIC debentures from our second SP I see license once you're at a in a really low rate right now so that that would help some in terms of a I've just getting over the hurdle, but but that's correct in terms of where we feel like will operate for us at the time being.
Okay that just one last one if I could just kind of generally on the market. You mentioned you guys are starting to see subs, so more and more opportunities come through I expect some some more refinancings can you talk about you know from from your opinion, what's secret I'd take before we start seeing since the board deal activity.
Obviously, there is a great uncertainty about the you know that the economy going forward and when things will start to really reopen and others difficult stocks discussions a you know as far as pricing in the market stayed both on interest rates and purchase price multiples. So just just what do you think needs to happen before we start.
Seen some some some increased deal activity.
Our opinion.
Your run such as a general matter that and just just to address current investing and then longer term. It say in the current environment. We continue to be cautious for for the reasons that we all know.
And it continued to be very selective on these investing.
So if you see is making the new investment, we certainly think that it endures. So even if the pandemic all soon jurors for some period of time. So that's the approach we're taking and then separately because of you know maintaining good liquidity, you'll see those investments principally coming out of our FDIC capital, where we have.
Capacity.
In terms of of longer term or pricing, maybe we are seeing you know roughly 50 to 100 basis points higher pricing that we might have seen six months ago or so [noise].
It depends certainly on the credits and the leverage.
But I think there's a fair amount of private capital available, which certainly in the credit world as well as in private equity World and so we are seeing some loosening up.
Principally starting with the add on acquisitions. We're a company is already you know and bought private equity firms already invested and they haven't had on one or two acquisitions that they might have been looking at pre told it.
So that's what we're seeing first but we're starting to see more activity generally.
I think values and held up pretty well overall and then of course, if you're involved in an industry sector. That's.
Then directly impacted by Kogas, that's quite a different story.
Mhm.
Okay.
Understood I appreciate the time today.
Yeah. Thank you Ryan very much.
If you find that your question has been answered you may remove yourself from requeue by pressing star too.
Our next question comes from Bryce Rowe National Securities.
Yeah, I think right good morning, Robin Todd Thanks for taking the question.
I wanted you to ask obviously you saw some very substantial NAV expansion here in the quarter.
And just going through the portfolio.
It looks like.
A good chunk of the debt investments were more tire I assume because.
Chris credit spreads having tightening in the in the quarter and then you you've seen some valuation expansion within some of the equity investments too so.
I was I was hoping you might be able to to to speak to the equity side of things what you're seeing from a valuation perspective that gave you a little more little bit more comfort to mark the equity investments higher, especially in the <unk>.
In this environment, it's still still uncertain.
Yeah, Hi, Todd if you would address it thank you.
Sure be happy to Rob So a good morning, Bryce I'm, sorry on the equity side of things. It really is a bit of a mixed bag or either because of you know in some cases the market Comparables. You know we're we're you know slightly were higher than they were in March at March 31st and in other cases, we had companies where.
For their EBITDA.
Was a bit higher than it wasn't that time too. So we so I would say there's nothing you know individually pointing to a particular position that was up somewhere down certainly so just on average that's what it is so I wouldn't say, there's an overall necessary trend that was kind of you know more idiosyncratic cannot between across the portfolio. There from one of those two reasons.
Okay. If you could maybe just to add to that drives the it of course you know there are companies that are performing well in this environment and that would certainly be reflected in those company specific market [laughter]. Okay. That's that's helpful. And then yeah I, obviously you all have.
I had good success and generating realized gains over over the past several years.
On on many of your act equity investment and I think you know when you entered into 2020, there were prospects for you know some of that some of that active activity to continue. The pandemic has you know is as it put those but there is on hold and I think he talked about that no.
Over the last couple of calls so I'm curious if some of those process he have.
Re candle to a certain extent.
And you know what your outlook is for you know for for that type of exit to exit activity over you know over the coming quarters, and you know and if you. If you could speak to that relative to your comment about you know refinancing in repayment activity, possibly taking up in.
In the second half of this year and into next year.
Yes, so so we're not seeing the.
The pickup in actual sales as much as we are and refinancings.
Activity, so you're right price we.
I want to say three companies in the first quarter, we thought might be sold by the summer.
All three of those possibilities on hold.
So more of what we're seeing as is.
Sponsors owners of business is focusing on.
The the opportunity to reduce the cost of their financing with the company is performing well, but not quite where they're ready to sell the company. So we.
We're not expecting it any realized gains materialize gains this year.
With that could change, but for the moment, it's more in this area of refinancings.
Okay, that's great Rob.
Yeah, I wanted to add to more two more questions. If that's okay. I'm sure you. All you all talked about pricing being 50 to 100 basis points higher here you know as that the decoded environment has evolved.
And it it looks like Youre weighted average yield on on the debt side of things is just over 8%. So as we think about new new investments coming.
Online or potentially coming online or investment getting refinanced. He do you think that you know that that weighted average portfolio yield kind of holds here or is there still room to move lower as you you know as you're adding first lien annual unit tranche type investment.
Yes, so I would say that I think a base case would certainly be that we would hold here. So so the influences will be one loans refinancing are paying off debt are higher yield so that will be a negative impact I think the new investing you'll see us be pretty close the.
Holding to this level and hopefully slightly above.
So so I think this is a good base case or at this point in terms of to go forward yield again, the pressure would be refinancings of higher yielding but we think this is a good base case for now.
Okay. That's great and then the last question, it's just on kind of capital structure.
Obviously, you've got a balance sheet leverage was on the was on the higher side heading into two coded.
And so I'm just curious if you're you know if your thought process. It has changed in terms of the level of balance sheet leverage you're you're comfortable with you know understanding that you know the S. The age of ventures are.
Excluded from that from that you know statutory calculation.
Just just maybe if you could comment on you overall balance sheet leverage and then comment on the the mix of of your debt capital, whether you would prefer to maybe or extend the you know the maturity or refinance the.
The current.
The current unsecured notes you had out outstanding if and if you would prefer to kind of mix shift the on the debt capital mix tend to be you know more unsecured slashed baby bonds away from the at the credit facility. Thanks.
Yes, so with respect to leverage overall, we're comfortable with a one to one leverage quotient for regulatory purposes.
And then and the reason for that is although the gap leverage is higher as we've noted before that when the dsps. She debentures. The first payment due is not until the spring of 2025, and it's a modest amount so.
So we're comfortable with focusing on the regulatory leverage.
Of approximately one times.
In terms of the mix and I think I mentioned this last time, we one of our goals for the balance of the year would be to raised some more unsecured debt.
Which could be used to refinance the current bonds and certainly that perhaps reduce reliance on our bank facility and.
Essentially also to four for capital reasons that RSP I see two license so.
So our goal this year would like to raise more fixed income financing or or and therefore unsecured.
I'm not required a where we are today, but that's one of the things that we're looking to do.
And if it's helpful. Weve tried to be patient with respect to the rate and so you know that then if he gets you guys have seen or permanent seem to have been some bond offerings in the eights and 7% rate ranges and.
Because we don't need to do it currently we felt we would be patient and perhaps get to a lower.
Coupon level so that's the.
Plan for the rest of the year and we're watching the market accordingly.
Alright. Thank you for your for your answers appreciate the time I think a day yeah. Thank you Chris I appreciate it.
Our next question comes from Christopher Nolan Ladenburg Thalmann.
Good morning.
I'm good I'm, just curious if I'm not sure factory outlet, which is non accrual.
What's going on there because I saw your cost basis went down but also your fair value marks one down and.
I get a little color on the credit.
Sure as you know, we don't talk specifically about companies for privacy reasons, but this is a business that's involved in the furniture.
Retailing aspect in the central and southeast part of the United States and certainly been impacted initially by what happened to cope with and so this is just a reflection of our current view.
If it's helpful. The businesses picked up does.
So as we've gone further along since that cobot really hit initially, but that's the reason.
Okay, Great and then.
Unfunded commitments I see the 27 million and they've been going down through the year. The can is the strategy to whittle that balance down.
In the second half of your thoughts there.
Yes, just and then just to be to be clear the.
The amount that currently as of today is approximately 30 million.
This is because some of the revolver so and it was more like 22 million at March 31st this is because some of the revolvers have repaid payback.
So its certainly our approach to manage that number.
Oh that 30 million, approximately 12 or delayed draw term loans, which may or may not fund.
And then I would also say Chris that we we would expect that it's unlikely more than half of that 30 million would fund overtime, so more to come but.
So so we think it's a very manageable number but.
Directly answer your question and it's certainly number would like to reduce overtime and when we have that opportunity Oh.
We've been doing so.
And then I guess finally, just a general strategy I know every one of them BDC Lantus Harbin migrating to first lien credits over the last couple of years.
But given the change and the landscape in a lot.
Uh huh.
And given that private equity firms are probably going to look to tap any sort of lenders to their portfolio company.
You know is is the risk adjusted returns on second lien actually starting to look better than first lien I'm just trying to get your perspective on it.
Yes, so it's it's not often we'd see a second lien opportunity and the principal reason is.
If you're pointing out that private equity firms.
And other owners.
It really moved to what I'd call, a one stop shopping where they'd like to do all the debt in one tranche and makes it simple it for them.
So so I think that that trend. We expect would continue now if you if there's an opportunity for a second lien financing and we thought it was attractively priced and and then very well capitalized send a stable business, we certainly would consider it but but.
Very very little activity, Chris in that area today.
Okay. Thanks, Rob.
Yes. Thank you.
Our next question comes from Robert Dodd Raymond James.
Hi, guys, [laughter] wanting them and congrats on quarter, but yes, several questions some of them might get a little down in the weeks, but on the dividend Ron.
[laughter] can you give them.
And you have in mind that how much.
How much space after the declaration of [laughter] quite a different how much remaining spillover you have to distribute this year and what that deadline is for that.
Yes, so so the remaining.
Oh spillover will express it in the sense per share.
Would be 42 cents.
Would you be broke that up would be.
This would be in addition to what were we declared today.
The a regular dividend of 25, and a potentially a special dividend of 17.
And that for tax reasons would need to be declared by September the 15th.
Correct.
When I look at.
Yeah, it's kind of pull into two funds questions on the volt <unk> can you.
Give us.
Kind of the definition of the interest coverage.
Covenant in the Volvo, because obviously I mean, you have in compliance well, you're comparing with everything right now, but if it.
If yields compressed et cetera can you give us the definition of what that is and does it apply just within the mobile <unk> total corporate interest coverage.
Yes, Todd would you like to cover them.
Sure Yeah, I know, it's a good morning, Robert So the covenant today is 1.7 times and that will move back to two times at 12 31, and as you mentioned, we're you know we're comfortably ahead of that now and so.
So I would you say its total its total.
Interest income.
And then a and then we'll go down you know and also it that's over the revolver interest.
But the bulk or interest for the bank facility.
Got it okay. So you got a pretty big cushion that [laughter], yes, so all.
Then the all the.
Yeah. So when you when you take into account the spillover that that still has to be distributed this year the timing it as well and the amount of liquidity you have I mean.
I put you on spot when would you expect to like based on everything today, obviously to be declaring any of components of your dividend.
The main in dividends is here in in stock or would you like now expect to be able to the clad all of those cash.
We would expect to declare them all in cash.
Got it caught it.
That I mean, one of one of your Yep Yep Yep.
So the I'm, hoping you competitive mouse with you know about that that'd be financing repayment activity coming back in in.
Not by Q4, yeah, those discussions that of on the way already or is that just kind of an assessment of you know obviously you know spread. So you know that that 50 to 100 widen out, but that's a little tighter than they went back and you know three months ago. So is that is that actual discussion.
So or is it just kind of as a sense of where things I think given given.
Relative complexion and spreads over the last three months.
And Robert I'm, sorry, just a question with respect to or yield overall, you know I'm talking about when when you talked about me financing and repayment activity within the portfolio I'm in the latter part of this yeah.
Yeah, there's obviously that would be a considerable potential considerable sourcing liquidity on top of the liquidity already path.
Ah yes, so this would be based on.
Actual discussions that were happening or that are occurring.
And then in the near term over funding is they at least so far or more SP I see.
Assets versus the regular way, let's see I see assets.
So it creates more liquidity for reinvesting, whereas at the parent it would be more liquidity generally so, but we expect we're seeing it on both fronts.
Okay got it and then what one last one if I can just on the dividend again, I mean basically.
All the dividend payments so far this year, obviously have come out.
I see spill over from last year, which means youre currently like either headed into two next year with a.
Substantial spell out the balance.
It has there been any consideration.
What's the strategy that or are you are you happy to continue running those there's very large relative spill over balances or would you prefer to motivate that down or not but if if if you brought up particular paid on that how would you go about it.
Yeah. So.
So far I'm not sure if we if we lost Rob there.
Ahead, but I would say Oh, yeah, no I would I would say you know at this point I think we're happy to carry the school over balance and if you think about where it is likely to be for next year. Our forecast would show you would be maybe a little over $20 million. A book income you know taxable income maybe you know maybe a little bit less than that.
No different than that I would say, but but roughly that amount and so I think at this point you know until we have better visibility going forward, we probably carry that and and and we really haven't made any kind of decisions in terms of UBS of you know a paying it out over time with special dividends or.
Ah you know or special down at the end of the year I think our normal dividends for next year, assuming earning stay the same with roughly covered that spillover [laughter].
<unk> I appreciate it thank you guys.
Okay. Thank you Robert.
No no further questions in the Q.
Okay very good. Thank you everyone for your participation today and your support and we look forward to speaking with you again.
In early November.
Thank you ladies and gentlemen, this concludes todays teleconference. You may now disconnect.