Q1 2021 Stellus Capital Investment Corp Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by at this time I would like to welcome everyone to the <unk> capital Investment Corp, first quarter 2021 results conference call.

At this time, all participants have been placed on a listen only mode.

The call will be opened for a question and answer session. Following the Speakers' remarks.

This conference is being recorded today Friday may 7th 2021. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Astellas Capital Investment Corp. Mr. Ladd you may begin your conference.

Yeah. Thank you Katie and good morning, everyone and thank you for joining the call.

Welcome to our conference call covering the corn at quarter ended March 31 2021.

Joining me. This morning is Todd House concerned of our Chief Financial Officer, who will cover important information about forward looking statements as well as an overview of our financial information.

Thank you Rob I'd like to remind everyone that today's call is being recorded. Please note that this call is the property Astellas capital investment Corporation and that any unauthorized broadcast of this call in any form of strictly prohibited.

Audio replay of the call will be available by using the telephone number and pin provided in our press release announcing this call I'd also like to 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 referred to of our most recent filing with the SEC for important.

Factors that could cause actual results to differ materially from these projections.

We will not update our forward looking statements unless required by law to obtain copies of our latest SEC filings. Please visit our website at www Dot Astellas capital Dot com under the public investors like.

The call Us at 71329 to 5400 at this time I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd.

Thank you Todd I'm pleased to report a solid quarter in which net asset value of an asset quality was stable.

Covered our dividend and notably had significant originations.

To see an increase in investment opportunities and as a result of it funded $93 million on the cost basis during the quarter and the $19 million since quarter end.

Since year end true today, our portfolio has increased by 69 million net of payoffs just 727 million on a cost basis.

We'll begin by discussing our operating results followed by a review of the portfolio, which will include asset quality and then an outlook that Todd will cover our operating results first.

Thank you Rob.

For the quarter ended March 31, 2021 we covered our dividends of 25 per share with GAAP net investment income of 26 cents per share core net investment income was 28 cents per share, which excludes the capital gains incentive fees and income tax expense.

Net asset value per share was unchanged at $14 <unk>.

In January of 2021 we completed the institutional bond offering of $100 million of notes due in March 32026% of fixed rate of 4.8 75 per cent.

We used the proceeds to redeem our $48 $9 million of notes due in 2022 and the remainder of the pay down our bank credit facility.

Finally, we've continued to commit and find the equity capital to our second Spic's subsidiary, which allows us to draw of low cost of 10 year debentures on of two to one basis.

With that I'll turn it back over to Rob.

Okay Yeah.

Thank you Todd I'd like to cover the following areas of just a reminder, about the life to date review and then portfolio asset quality and outlook.

So since our IPO in November of 2012, we've invested approximately $1 $7 billion and over 135 companies and received approximately $1 billion of repayments, while maintaining stable asset quality.

We paid over 164 million of dividends to our investors, which represents $11.16 per share to an investor in our IPO back in November of 2012.

Now turning to the portfolio.

We ended the quarter was the investment portfolio at fair value of $714 5 million. This is across 70 portfolio of companies and this is up from 653 billion across 66 companies at year end.

During the first quarter, we invested $93 4 million in seven new and eight existing portfolio of companies and received $33 6 million of repayments, which again resulted in net growth of about 60 million for the quarter.

Our portfolio continues to be weighted towards secured lending at floating rates.

At March 31st 95% of loans were secured of 93 per cent where at floating rates.

It is now 86 per cent of the loan portfolio is first lien or unit tranche.

We continue to make good diversification across the portfolio. Our average investment per company is $10 2 million and the largest investment is $21 6 million of both the fair value.

And 65 of the 70 portfolio of companies are backed by a private equity firm.

Overall, our asset quality is stable at the two on our investment rating system or on plan.

17% of of portfolio is rated of one or ahead of plan.

About eight per cent of the portfolios marching the investment category of three or below which is below plan.

And finally in total we have four loans on non accrual, which comprise one eight per cent of fair value of the loan portfolio.

Now turning to outlook beginning of the fourth quarter, we began to <unk> of last year, we began to see a significant increase in our actual pipeline.

And as mentioned previously since quarter end, we funded another 19 million of cost.

For two in two companies.

We have received one repayment since quarter end of $14 million.

And probably maybe more importantly, we've identified potential fundings of approximately 75 million.

Our debt, we could very well fund by the end of this quarter. We're in now.

We're not aware of any substantial repayments in the next 60 of 30 to 60 days.

With that I'll open up for questions. Thank you and Katy you may begin the Q&A session. Please.

Thank you Sir if you would 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 again. Please press star one to ask a question, we'll pause for just a moment to allow everyone the opportunity the signal for questions.

Yeah.

Thank you our first question will come from Christopher Nolan with Lindbergh Thalmann.

Hey, guys.

Yeah, Good morning, Chris Hey, Chris hub.

What are you guys are thinking about using the excess cash for in the second quarter, you just keeping it for potential investments or should we expect paydowns. So of all of the facility.

Yes, so Chris the most of the cash that.

We had a quarter end is in the S. P. I C licenses, one and two and so one as in the case of the first license from payoffs that will be reinvested.

In the case of the second license from debentures that withdrawn.

So we would expect.

I think likely all of that to be invested by June 30.

Gotcha.

And Grupo Hemo from correct.

Two investment with them on non accrual of new first lien investment as well as the second lien investment, which has been non accrual for long time.

What is your outlook for Grupo and its been the problem child for awhile.

Yes. So so this is the Puerto Rican hospital system, I think I think you know that and.

So obviously the troubled situation has been for a good while we put the loan the first lien loan on non accrual.

And the in the first quarter.

And and as you said the second liens, but on non accrual for some time, we have the second lien marked at zero and I believe the first lien is less than 50 cents. So probably will be resolved in the next 12 months or so but unfortunately.

Unfortunately, it's a very small position relative to the total portfolio.

Gotcha, that's it for me thanks, guys.

Yeah. Thank you Chris.

Thank you. Our next question comes from Robert Dodd with Raymond James.

Yeah, Good morning, Robert I got the.

Good morning, all.

And other non accrual question the high court.

But remember the name of its commercial lighting company.

It appears to be non cool is is that kind of.

Legacy COVID-19 issues kind of finally flowing through to necessitate a non accrual could you give us any any color at all.

Or is it a new event of that company any color you can give us all of that would be appreciated sure sure sure as you know we typically.

For these private companies for privacy reasons don't don't say, a lot, but I'd say plus COVID-19 related it now a little bit of challenges with it over time, it's a structural issue about the non accrual.

But if it's helpful. We think that the.

Ultimately, we should do fine there is.

So well sponsored.

Well sponsored company.

I'm just too.

Has the sponsor.

Put in additional capital of a lot the last 12 months.

The the sponsors done all of the right things there, yes, okay got it perfect. Thank you.

Just then on kind of itchy thing a lot of activity and.

And the incremental potential.

Sebree more the potentially closing of.

The remainder of this this quarter work sheets kind of Q4 with all of this activity have you what have you seen on the films from.

For those and maybe what the terms look like in in the very early stage companies early stage in terms of other states in our pipeline that youre looking at.

Today versus things that you looked at maybe in Q4 and have closed already.

Mhm.

Yes, so I'd say Robert characteristics to be very similar so I don't think it's changed materially since the fourth quarter. So arguably was some pent up demand after the.

The second and third quarters, where we.

The relatively slow for everyone.

So I think it's a continuation of what we saw in the fourth quarter and again as you as you heard earlier or earlier, so pretty robust second quarter expected force.

So I think the good news is that the.

The underwriting and selectivity that we've always had is the same.

And so on average these companies have a 45 to 50 or 50% equity checks blows. So in terms of the overall capital structure.

And the leverage quotients or the.

At the same as we've always done in the.

Typically in the low four times I'm kind of an average leverage.

The one one difference, though and I mentioned this on our last call is were finding more spic's qualifying opportunities, which is very helpful. Because of our second license.

And as a result, the EBITDA of the businesses would typically be a little bit less so you know perhaps in the high single digits 10 million now.

So the $12 million.

Versus an average it might be more like 15 million of non S. The IC qualified.

So, but all have covenants all of properly structured.

All of the transactions that we've been closing have private equity sponsorship with firms that we know well.

So I think that's the good news just the continuation of our normal business and and a lot of very interesting activity.

And these are typically.

Businesses that we expect quite of bit of growth from.

Which is helpful in two ways one in debt they.

Therefore would if the company meets their plan Bill likely delever in both absolute and relative terms over the first couple of years.

So a nice turnover of capital.

And that in turn would make their equity co investments valuable. So again I think the only good news I mean, the good news is that very active more SP I see the knot.

And using our lower cost of capital base as a result.

Got it thank you.

Yeah, Yeah. Thank you Robert.

Thank you. Our next question comes from Brian Lynch with <unk>.

Okay.

Hey, good morning, Thanks for taking my questions good morning.

The first one I had was.

If I kind of I'm glad you kind of mentioned some of your performance longer term because you know if I look back.

And kind of your portfolio construction over the last several years.

It's true it's.

It's changed pretty dramatically you know at one point a few years ago, you guys were running with <unk>.

You know, 30% first lien debt investment in and now it's closer day to 80 per se.

And you had a portfolio yield.

The 12% range and now that's you know eight 3% so you've seen day, a much I would say.

They are a pretty significant derisking of the portfolio as far as where you wanted the capital structure as well as.

The portfolio yield standpoint, the so I'm just curious.

As we start to come out of COVID-19 and the and the the.

Of the economy starts to recover.

Should we expect any sort of tilt back into the portfolio from them from a risk standpoint to move you know to reduce the first lien exposure to to try to increase the portfolio yield at all or is this sort of the the new normal of of how you guys.

One of the operate the D C.

Mhm, yeah. Thank you Ron that that's a really good question and I think the.

Statistics, you you indicated.

Indicated there go go back quite a ways.

So maybe close to our inception seven one personally would have been much lower.

So I think it's probably the ladder the.

This is the this is our investment philosophy and style are today and not expecting to change it materially.

Okay, and then last that I remember and.

The minor kind of talking with you about the web rage, you kind of talked about Ronnie regulatory leverage.

The closer to one to one as kind of a target of.

And maybe total leverage.

Of upwards debt to two to one potentially I'm. Just wondering is that where you guys were thinking post COVID-19 or any sort of update you can just give on where you see operating from a from a leverage standpoint kind of post close of COVID-19, both from a regulatory standpoint or total standpoint. However, you guys are thinking about it.

Sure Ryan those those are still good numbers. So one to one on the regulatory test and to the one on a GAAP test, which includes the S. P. I C debentures.

So don't expect that to change materially.

There's a good argument that on the.

Perhaps both fronts because of the nature of the first lien portfolio that we could operate at a little bit higher leverage. So you may see us have that creep up you know it could be 1.1 or so on the on.

On the regulatory side, but but not materially higher.

Okay.

Understood.

Thats all from me I appreciate the time good day. Thanks, Yes. Thank you very much Ron.

Thank you that concludes today's Q&A I would now like to turn the call back over to Mr. Ladd for closing remarks.

Okay, great well. Thank you. Thank you everyone for being on the call. Thank you very much for your support of the company and we look forward to speaking with you again in early August when we report the second quarter results. Thanks again.

Okay.

This concludes today's call. Thank you for your participation you may now disconnect.

Yeah.

Okay.

Yeah.

Okay.

[music].

Yeah.

Yeah.

Okay.

Okay.

[music].

Net.

Sure.

[music].

Okay.

Okay.

Uh huh.

And one of them.

Yes.

[music].

Okay.

The power.

Yes.

[music].