Q3 2020 Stellus Capital Investment Corp Earnings Call
Excuse me everyone. Thank you for your pension Fund Holdings. Please continue to hold today's conference will begin at approximately one to two minutes again. Thank you for your patience in holding please continue to hold today's conference will begin approximately one to two minutes.
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Good morning, ladies and gentlemen, and thank you for standing by.
At this time I would like to welcome welcome everyone to Stellus Capital Investment Corporation third quarter 2020 results Conference call.
At this time, all participants have been placed and they listen only mode.
The call will be open for question and answer session. Following the speakers remarks.
This conference is being recorded today Friday October Thirtyth 2020.
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 now begin your conference.
Okay. Thank you Ryan and good morning, everyone. Thank you for joining the call welcome to our conference call covering the quarter ended September Thirtyth 2020.
Joining me. This morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward looking statements and then later 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.
A replay of the call will be available by using the telephone number and 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 FCC 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 FCC filings. Please visit our website at www Dot Stellus capital Dot com.
The public investors link or call us at 713 to nine to five 400.
This time I'd like to turn the call back over to our Chief Executive Officer, Rob let.
Okay. Thank you Todd.
At the outset, I'd, just say, having now gone through two plus quarters of some of the impact can cope with 19 I'm glad to report our portfolio is stable and.
Oh borrowers on a cruel have made their scheduled principal and interest payments for the third quarter.
I will discuss the portfolio, including asset quality quality in more detail shortly as well as and outlook and then.
Also dividend dividend status, but first Todd.
<unk> operating results for the quarter.
Thank you Rob Rob.
From an operation standpoint, we generated net investment income of 27 cents per share, which more than covered our regular third quarter distribution of 25 cents per share.
Core net investment income foods taxes for the third quarter was 29 cents per share.
In addition valuation on our portfolio increased by approximately 2.1 million or 11 cents per share. This along with realized gains of one cents per share resulted in total earnings for the quarter of 39 cents per share.
Normally we would have declared a single quarterly distribution of 25 cents per share, which would have resulted in a 14 cents per share increasing net asset value for the quarter from $13.34 to $13.48.
However to complete the distribution of spillover income from 2019 in a timely manner consistent with maintaining our qualification for taxation as a regulated investment company answer.
And to eliminate our liability for corporate level U.S. Federal income tax we were required to declare an additional 31 cents per share of distributions by September 15th.
As a result, net asset value declined to $13.17 per share at the end of the quarter I'd.
I'd like to note that these distributions constitute all remaining distributions for the year. So our fourth quarter net asset value will be further reduced by distributions paid in the fourth quarter.
With that I'll turn it back over to Rob.
Okay. Thank you very much Doug.
I'd like to now cover the following areas of our portfolio and asset quality.
Entity and outlook for the balance of the quarter and then discuss dividends.
So with respect to portfolio and asset quality again I'm pleased to report that most for portfolio companies operations are stable and managing well in the current environment.
Overall, our asset quality is stable at a two out of our five from one to five so investment rating system more effectively on plan.
90% of our portfolio is rated at two or better or on plan or better.
And therefore, 10% as the portfolio is rated at three or below which is below plan.
Non accrual loans comprise only Wanna now for some a fair value of the total loan portfolio.
No loans have been added to non accrual status since April 1st.
We continue to make good diversification with the largest industry sector at 18% of the total at fair value.
September Thirtyth the average investment per company is about 9.4 million.
Our largest investment is 21.6 million both numbers at fair value.
And 62 of the 66 portfolio companies are backed by private equity firm.
We are seeing interesting opportunities as the world has gotten a little bit clear and were beginning to invest selectively.
During the third quarter, we made investments in two new and three existing portfolio companies, which totaled about $19 million.
We also received repayments of 40 million, including four full repayments in a number of partial.
Payments suburbs, which will involve or repayments.
As a result, we ended the quarter with an investment portfolio at fair value of 622.4 million in 66 portfolio companies down from 641 million at June Thirtyth.
From a capital management standpoint are working closely with our bank group, we extended the revolving period of our 230 million dollar Bank facility from March 22, I'm, Sorry March 2021.
All the way to September 2024, with a final maturity of September 18th 2020 fives.
Additionally, we amended certain covenants and conditions and other facility, including an increase in the maximum allowable leverage to 1.5 to one.
As of today, our remaining unfunded commitments are approximately $31 million.
And we have cash and revolver capacity of approximately 63 million and this excludes cash in debenture availability in our S. C subsidiaries.
Yes, the I see subsidiary level.
We have invested in capacity for new investments some cash in and joint ventures.
That are approximately 40 million. So so very good liquidity overall and a meaningful capacity to make new investments.
For the balance of the fourth quarter, we estimate that will help.
New investments at least equal to the amount of repayments and equity realizations, we think that number is.
As much as 30 million.
And if it's helpful. We think that these repayments and realizations if they occur.
Her would have a positive impact on any be overdone.
Over the marks at September Thirtyth.
I'd like to conclude this morning's call by covering dividends as a reminder, we declared a regular dividend in September for the fourth quarter of 25 cents per share and especial dividend of six cents per share both payable at the end of December.
This brings total declared dividends in 2020.
Of $1.15 per share.
And brings life to date declared dividends of $10.91 per share.
Subject to approval by our board, we expect to be back to you regarding the first quarter dividend of 2021 2021 by mid January.
Which will return us to our normal timing for declaring dividends in other words it the first in the first month of the quarter.
And with that I'll open it up for questions. Thank you.
Ryan you May open up the Q and a session.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment I can for any questions that is star one now.
We will take our first question today and that is from Bryce Rowe with National Securities. Please go ahead with your question.
Great. Good morning, and thank you. Thank you for taking the questions here, Rob and Todd.
Maybe maybe first I can start on the.
On the liquidity profile, Todd maybe maybe just curious how much cash is sitting in the in the S. T. I see right now and was what I was wondering if you, possibly anticipate drawing debentures to fund some of this potential activity here in the fourth.
For the quarter.
Sure. Thank you Bryce so we have a lovely 25 million today, a cash in SP I see one you know we have to two licenses and so there's a lot of cash in SP I see one.
That you know we would expect to use two to recycle into new investments and then with S.B. I see two we've got the ability to draw.
Debentures, there in SP I see two as well and so I think the way to think about it is we have a good pipeline is Rob you had mentioned this is a this fall and we have a lives but of interesting opportunities a number of which recipe I see qualifying and so so I think we would use a combination both of the of the cash that's an FDIC.
One.
As well as as drawing debentures and FDIC to to fund those that activity.
That's great gradient, so and then when they wanted to get maybe Rob we've talked about this in the past but.
Maybe get your updated thoughts around rounded ticket yeah, you obviously.
Had the good fortune to amend and extend the credit facility here.
Here in the in the most recent quarter and and the one that is one of the amendment I guess included.
The requirement by that bank group to to have the two.
2022 baby bonds redeemed by March of 2022 ahead of their.
They're their maturity later later in the year of 2022, so I'm just kind of curious how you're thinking about the potential redemption of those bonds I know, we're still a good year away from your plus away from from needing to do that but but but potentially that the market is open.
To some type of activity that would allow you to redeem and then and maybe upsize to to to create more of a capital structure that down there, it's more heavily weighted towards that towards that unsecured type type of debt. Thanks.
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Sure Brian So yes. So soon as a reminder, we have $49 million of unsecured notes that mature in September 22.
So there's 18 months left in two years left but 18 months left and pursuant to the bank requirement and.
And so as I said earlier in the year one of our goals in the second half of 2020 would be to possibly having.
I have a new fixed income offering so we've we've been patient and as you know a number of companies raised unsecured notes it.
Our coupons and you could do today, so Fortunately that's paid off so far.
We haven't quite gotten there, but we're getting closer and so I would think over the next 90 days or so we'll certainly be looking at it because we have the time and we have meaningful liquidity is.
As indicated earlier, we have roughly 63 million of liquidity.
Including our on use because our remaining facility on her buying.
Credit agreement that you know we want to be patient about this so.
So it may be that this moves into 2021 is an event, but we'll certainly take care of this in advance of the March 20 to date.
Through a combination of new offering and certainly meaningful liquidity, we've developed don't expect any difficulty in being able to do that.
Great. That's all I had for now thank you.
Okay. Thanks, very much for us.
You're welcome.
Thank you we'll move on to our next question and that is from Christopher Nolan with Ladenburg Thalmann. Please go ahead with your question.
Hey, guys, Hey, you money Rob I.
Notice that on a fair value basis, the portfolio sort of increasingly favoring first lien debt lower second lien debt is that's a trend that we should see continuing going forward or is it just sort of opportunistic.
Yeah. Thank you Chris. So this has been a rotation that we've now been working on over the last two to two and a half years. So so you should expect it to continue.
Be unlikely we participate in any mezzanine financing.
We are looking at some.
Second liens and where we think we have the right capital structure and the owner and.
So so but you should expect the vast majority of our investing at this point, we'll be first lien unit tranche debt.
And then hopefully we always try to.
Purchase a small piece of equity at the same time, so that's kind of comprise most of the portfolio going forward right.
Great and then my follow up question, it's actually for Todd I'm. The interest income was slightly up quarter over quarter, but the portfolio investment volumes were down in the yields seem to be flat.
What was driving the I would think the interest income have gone down with all that but stayed relatively steady I'm just trying to see why.
Yeah, you know, Chris I don't know that there is a specific reason other than a than fee income you know so we had we had a number of pay offs in the quarter as Rob mentioned and.
And had you know some additional fee income so and some of that fee income as it is included you know up then up in the interest income line item as well so that's that's likely what's driving it.
Okay. That's it for me thanks, guys.
Yeah. Thank you Chris.
[laughter].
Yes, Thank you well move on to our next question and that is from Robert Dodd with Raymond James. Please go ahead with your question.
Hi, guys and congratulations on the quarter first.
First maybe maybe that Coughlin question people based on where you stand today on estimated spillover kind of going into 2021.
Can you give us any color on on obviously your your your dividend.
A 2020 <unk> taxes was essentially driven by you know having does it should be it's Phil so whats the minimum.
Distribution requirement the Twentytwenty one as spill over it stands today and you can is is that consistent with the only see the comment based dividend no walks.
What discussions it's been hot as to how how you want to handle that.
Yeah. Thank you Robert So so I guess one of the things I'll tell you in the groups that we've learned is that it's difficult to predict spill over income until dog till the end of the year of course, and so you know I think what I can tell you is it is there are still I would expect there still to be meaningful spillover or spill over income from 2019.
Some 2020 2021.
You know maybe not quite as much as as the current year, but I still think I guess, what I would say is it's it's still meaningful.
Still meaningful income spilled over to up to 21 I'm not sure if the current dividends at a normal dividends with covered or there would need to be something special I just don't know.
Okay. That's that's that's that to your point it is hard to predict a you know unless you get a nice.
So, let's not only on the market, but obviously, you're talking about that that activity.
What do you see them into.
In terms of if he can you know quality of deals terms pricing problem.
And then what industries are making up more of.
That's most people from cool because the the incoming not necessarily once you've considered but you know what can you give us any color about between different industries that are coming up.
To the terms vary considerably by by industry type et cetera, any color would be really really helpful.
Sure. Robert So is it said earlier that you were seeing a number of interesting opportunities you know we've always been very selective in our investing and continue probably even more selective than ever but what we found our.
Those businesses that are really business the business continued to do well and as a result, most of our portfolio continues to do well.
And then there are the companies that were seeing part of this slow we're seeing are those that are doing very well during COVID-19.
Related to social media and other aspects of it and technology and applications. So.
So I'd say that.
That's a great deal of activity that's helpful on our our pipelines over 10 companies that we're looking at today and you know in various stages of diligence. So it's a business that have done well throughout the cold period are expected to do well knowing that covert the cobot pandemic impact is.
Not over.
And then.
You know very active private equity world and you know we operate in the lower middle market.
Oh, which would have you know the average EBITDA, probably between 10 and 20 million.
In terms of the quality of the transactions that are the ones that were looking out for our excellent in terms of the capital structures and as you've seen over the last few years Weve.
The minimum equity check and.
Company would be at least 40% of the capitalization and more typically 50%. So the capitalization structures continue to be good strong.
We only are involved in transactions that have meaningful covenants.
I'd say pricing.
Good.
Increase and certainly during the summer months, and then but we're getting pretty close now for an attractive opportunity really to close the pre cobas levels. It could be some slight margin improvement but the.
Closer to pre covered levels than not.
So we're encouraged and you know this would be reflected in the.
Nations economy, generally and so many industries and industry sectors are doing relatively well in this more difficult times. So.
So this and this would be I'd say lastly, this is a meaningful change from July.
It's in the summer months as the world is becoming clear to people.
It was people are looking at add on acquisitions and.
Something that already looked at pre covert and.
And investors were certainly cautious and today, we're in a much more robust environment I think also to be fair that there is some.
Additional interest between now and 12 31 for tax reasons. So we're seeing some businesses that are likely to be sold and closed by the end of the year or people can least lock in what they think is the capital gains tax rate, so that's increasing activity as well.
I I appreciate that color I kind of want to try to parse out of those 10 I mean.
Yeah, depending on the election result, which hopefully will know next week could could some and you know if it goes one way capital gains taxes might or might.
Why don't change it because the other way that could be a change. So is some of that pipeline contingent on an election result, or do you just think once once.
The process has been started people are just more likely to go through it.
Oh is that that's a mistake of volatility all depending what happens next week.
Yes, so I'd say, one it's not the majority of the transactions, but but I'd say that I would I would expect they would close and regardless of the outcome of the election.
Got it I appreciate it thank you and congratulations on the quarter.
Thank you Robert.
Thank you we'll move on to our next question then that is from Ryan Lynch with KBW. Please go ahead with your question.
Hey, good morning, Thanks for taking my questions are kind of wanted to follow up and somebody somewhere Robert's questions regarding the.
That's the kind of the pipeline that you guys are seeing I.
I know you mentioned, you're you're starting to see a big increase in opportunities but.
Uh huh.
Can you clarify or opportunities in the pipeline that you guys are seeing just a a big increase from what you were seeing this summer.
<unk> you know had very little deal activity or are you starting to see a pipeline in opportunities in the market return to what we saw kind of treat code.
You know Ryan its a good question I would say pre coke and again, you what's hard to tease out a little bit might be the desire to get something closed at the end of the year. So I think that's skewing a little bit but.
But you know there are a number of businesses and sectors in the country is doing well and and.
But equity firms are acquisitive.
You know some would be adding to an existing platform. So so I'd say certainly our pipeline is.
It's about as good as it's been in some time. This could also be either you know the impact of somewhat of a pent up demand or are people that had not been investing you know since the March to September August time frame. So so I think you've got some of that that's skewing. It. So maybe the best way to say it is you know approaching much more.
Normalcy.
Sure we were pretty good in terms of activity.
Okay.
Got it and then.
From an investment philosophy standpoint.
Yes.
Do you guys expect to change the way you guys are looking at adding new deals whether its specific industry specific credits where are you guys going back to the capital structure given that we're still kind of in that pick up in the middle of a downturn.
So hopefully that will be over sooner rather than later will be coming out and the investment philosophy, you know something they should be or could it be different you know before you go into a cycle or when you're kind of a cycles elongating maybe speed.
Doing more defensive higher in the capital structure taker backing, but Dan you know in the bottom of the cycle or potentially coming out of the cycle you can't get more aggressive more secondly, more cyclical industries you guys anticipate you know shifting your focus at all you know to.
They kind of go with that philosophy or is it just too early you know when the downturn kits or do anything like that.
Mhm.
Well I'd say a few things. So you know were selected as we've ever been and so so I'd say, we're more selective than even normal just given the overall.
Situation, the country's them and uncertainty.
But having said that through that even more.
Refined lens, we're funding a number of interesting opportunities with good good private equity firms who.
You know a good owners of these businesses.
Another thing I'd say is that our underwriting philosophy has been really since the beginning going back almost 20 years is that.
As a group pretty stalls.
Is that we are trying to underwrite any company for that there is a recession.
Maybe not the first quarter, but certainly within the next within the first 18 months or so or two years. So we're underwriting to companies is we have a recession and how did they perform historically if somebody didnt exist in a previous recession have their sector perform and and at the sector Didnt exist how to what's a proxy for that sector.
A recession. So so that's the ones. We're looking at these companies from the start.
And then I would say you know occasionally we'll look at something that cyclical and thinking we're you know at the trending up from there, but we we really try to avoid those type of businesses.
And so I would just say this if we were looking at something that was tied to a cycle and its industry. The leverage would be low from the start [laughter] regardless of the time, we were that are [noise].
So again I'm very selective.
But it's it's helpful. We are seeing really nice interesting companies good owners good management teams.
A track record to the code Red you know one thing we'll be cautious about is you know how much of this is just really good performance in this business as you know tied directly to Copel get and therefore whats the effect. After cogut is so it's.
The effect is much less so.
So having that lens on at the same time.
Okay, Yeah makes sense.
Those are all my questions I appreciate the time today.
Yeah. Thank you Ryan.
Thank you at this time there are no further questions I will now turn the conference back over to Mr. Lad for any closing remarks.
Okay. Thank you. Thank you everyone for your support and listening in today and we look forward to speaking with you in the spring and again, we expect to be back to you in January with more news about the dividends for next year.
Thank you ladies and gentlemen. This concludes today's conference all participants may now disconnect.
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