Q1 2022 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 just tell US capital Investment Corporation first quarter 2022 results conference call. At this time, all participants have been placed on a listen only mode. The call we'd be open for question and answer session. Following the Speakers' remarks today's conference.

It's being recorded Tuesday May 12, 2022. It is now my pleasure to turn the call over to Mr. Robin Lowe Chief Executive Officer of stellar Skip It investment Corporation. Mr. <unk> you may begin your conference.

Okay. Thank you Kyle and good morning, everyone and thank you for joining the call and welcome to our conference call covering the quarter ended March 31 2022.

Joining me. This morning is Todd Huskers sit our chief financial Officer.

He 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.

Note that this call is the property Astellas Capitol investment Corp, any unauthorized broadcast of this call in any form is 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 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 SEC for important factors that could cause actual results to differ materially from those 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.

Call Us at 71329 to 5400.

At this time I'd like to call the turn back the call turn the call back over to our Chief Executive Officer, Rob Ladd.

Thank you Todd.

I'm pleased to report solid results in the first quarter in which we grew our investment portfolio maintained at net asset value.

The dividend and generated $3 5 million of realized gains.

We will continue to see many interesting opportunities and as a result, it funded $75 million cost basis during the first quarter.

Our portfolio at fair value increased by 65 million ending the quarter at 854 million on a cost basis.

We will begin by discussing our operating results followed by a review of the portfolio, including asset quality, our dividend strategy and then the outlook.

I will now cover our operating results.

Thank you Rob.

For the quarter ended March 31, 2022, we covered our regular dividends of 28 cents per share with core net investment income of 29 cents per share GAAP net investment income was 28 cents per share which includes income tax expense related to our spillover income.

We generated net realized gains of three and a half a million dollars related to the realization of an equity investment.

Our portfolio valuation, excluding unrealized gain reversals related to our realized gains was effectively unchanged declining $1 $3 million quarter over quarter.

We continue to recycle capital in our first SP I see license and deploy the low cost adventures. Our second license to date, we've committed the full $87 $5 million of equity to S. P I see too.

Funded $70 million.

We have drawn down $140 million of the $175 million in ventures that will be available when the equity is fully funded.

Now I'll turn it back over to Robyn.

Okay. Thank you Todd.

I'd like to cover the following areas now a life to date review of portfolio and asset quality review, our dividend strategy and outlook.

So life to date review since our IPO in November 2012, we have invested approximately $2 $1 billion over 160 companies and have received approximately $1 3 billion of repayments.

While maintaining stable asset quality.

We have paid over 186 million of dividends for our investors, which represents $12 22 per share to an investor in our IPO in November of 2012.

Now turning to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of 838 million across 78 portfolio companies.

This was up 700 from $773 million across 73 companies at December 31, 2021.

During the quarter first quarter, we invested $74 5 million in six new and seven existing portfolio companies.

We received just $10 million.

Growth at cost of $68 8 million for the quarter.

Overall, our asset quality is stable at 2.3 on our investment rating system or effectively unplanned.

86% of our portfolio is rated two or higher meaning at or above plan.

14% of the portfolio is marked at an investment category of three or below.

In total we have three loans on nonaccrual, which comprise a 0.7% of fair value of the total loan portfolio.

Now turning to dividends.

In addition to our regular dividend of 28 cents per share in the aggregate for the second quarter. Our board declared an additional dividend for that quarter of six cents per share in the aggregate or to pay per month.

As we discussed last quarter. This additional revenues based on the significant realized gains we are generating.

$23 7 million before tax in 'twenty, 'twenty, one or $1 22.

The dollars 22 per share.

And then $3 5 million in Q1 and expected additional realized gains in Q2.

In fact, we have generated net realized gains of 2.8 million since quarter end.

Looking forward of course subject to board approval.

We expect to continue this combined 34 cent dividend each quarter for the foreseeable future.

Which I know represents at least based on yesterdays stock price of $13.09, an annualized yield of 10, 4%.

Now turning to outlook I'd like to note a few things.

First relative to interest rates the forward curve for 90 day, LIBOR, which remains our principal bench mark rate for this year.

Flex in excess of 3% by early next year.

This is approximately 2% higher than the LIBOR rate that most of our loans were priced at March 31st.

This 97% of our loan portfolio is floating.

And only 34% of our funded liabilities or at a floating rate.

We should be a significant beneficiary of this phenomenon.

In any event. It's library holds at current level, our portfolio yield should reprice at about eight 2% versus.

Versus 8%.

That it was at eight at $3 31.

No inflation rising labor costs supply chain constraints are countries of course facing many headwinds which have been well publicized.

And which will likely lead to a slowdown in our economy.

Our portfolio is well positioned for this eventuality.

Over 97% of our loan portfolio companies are backed by private equity firm.

The average contributed and rollover equity in our companies is approximately 50%.

Meaning that our debt is 50% of the capital structure.

The owners below as have the other 50%.

And 84% of the loan portfolio is first lien unit tranche and all loans have covenants.

No equity gains.

Notwithstanding a slowdown in the economy, we expect the equity gains we've been receiving and will continue as private equity firms find opportunities to achieve realizations.

As noted earlier, we had $6 3 million of equity gains so far this year.

And just finally turned to new investments and repayments.

We funded 29 million since quarter end and have one repayment for $14 million.

Since quarter end.

We have the potential to increase the portfolio. Additionally, by $20 million to $30 million over the balance of the quarter.

I would note that we are expecting repayments to be slower this year at least based on the first four months of the year so far.

And with that I'll open it up for questions. Thank you and Kyle you may begin the Q&A session. Please.

Thank you, ladies and gentlemen, if you would like to ask a question. Please see note by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure your mute function Houston, often you'll seen that to reach our equipment.

Again press Star one to ask a question.

We think all first question from Paul Johnson with K B W.

Yeah.

Yeah. Good morning, guys. Thanks for taking my questions today.

Good morning first question is good morning, My first question.

Is just on the pace of deployment I. It sounds like you have some net deployment quarter to date and I believe your regulatory leverage including the SBA debt is a little around one times or 1.1 or so.

Gross leverage is much higher.

Hoping to get maybe a little bit of color of how you guys.

Consider that while you're making deployments into the quarter that factors into the.

Potentially pulling back on.

New originations or any sort of insight you might have into realizations within the portfolio that helps.

Okay sure sure Paul would be glad to so you're right the target leverage from a regulatory standpoint is is one or a little bit over one to one.

On a.

Buying GAAP basis, it's roughly two two to one.

Which this which includes the Sps and debentures, it's our plan to fully deploy the debentures. This year again based on activity.

And so you could see the portfolio in total.

Approach 900 million from roughly $8 50 today.

It would be our expectation to fully deploy those debentures silver.

So the leverage would tick up but it would come from.

From SP I see leverage not.

Not bank leverage.

But again ultimately the goal is to be low to two time.

And again given the portfolio is also principally first lien unit tranche, where we're quite comfortable with that and as you know the spi see debentures or.

10 year interest only debentures. So as an example, those that we took out recently in April .

We will not be due until April of 2032.

Got it yeah, I know those are very beneficial.

Sources of funding and that's very good color on that I appreciate that.

My last question is just on just a slight drop quarter over quarter and interest income just wondering if anything in particular that drove that.

Great, obviously being higher I think non accruals dropped a little bit is there anything higher yielding that paid off during the quarter.

And those are all my questions. Thanks.

Yeah sure sure Paul I'd say that the delta between the first quarter of this year versus the fourth quarter of last year's was just driven by a much fewer repayments so at very low fee acceleration.

In the first quarter versus the fourth quarter of last year and again, it's likely you with.

Lower repayments that that May continue at least for another quarter or so.

So that's the explanation and in terms of the yield so we're still holding as you see we reported a.

That yield of.

8%.

The way, we have average LIBOR floors of 1.12%.

And at March 31, when most of our loans reprice.

LIBOR was just under 1% now it's about 1.4% so through the floors. Many of the floors. So if that holds as I say you should see an uptick.

With the repricing of June 30, but that won't flow through until the third quarter.

As the laundry price on say June 30, and then get the impact in the third quarter of this year.

Appreciate it thank you very much.

Okay. Thank you.

Thank you we'll take our next question from Christopher Nolan with Ladenburg Thalmann.

Hey, good morning, guys.

Hey, Rob.

I know you mentioned you expect slowing prepayments in the quarter.

What are your assumptions in terms of asset quality given the rise in interest rate.

The incrementally higher.

Interest spread on your portfolio of companies.

So we don't expect the rising interest rate environment to have a material impact on asset quality.

And so again as I said earlier, if you take the forward curve and LIBOR goes from what had been 1% of it.

March 31 to say, 3% at <unk>.

In January or March of the year now.

We don't think that's material.

What would be material would be 500 basis point increase so we don't expect that to impact asset quality.

But but again Theres no question given the headwinds that we've all been talking about and I mentioned earlier.

That this will have an impact on the economy and will impact a number of companies, but as I said.

Think we're well positioned to to weather it.

But I don't I don't think that the near term interest rate forecast is sufficient to have a material impact.

Great and then I guess as a follow up what are your pork excuse me your private equity partners doing the positioning on the shelves for.

The changing interest rate environment.

I'm, sorry, the changing interest rate environment.

Yeah, the Florida economy, and the rising interest rates or the private equity partners actually doing anything that you might notice that.

To position themselves for the changing environment sure sure.

Well, so a few thoughts one.

You know the good news is that almost all of our companies are owned by private equity firms. So you know very smart investment professionals in all cycles, and certainly we're preparing and thinking through the headwinds ahead. So I think that that would be normal and it's why we <unk>.

The strategy overall.

We've seen a little bit of a slowdown in activity.

In the first quarter.

But there's a substantial dry powder in and private equity firms. So we do expect they'll continue to be acquisitions occurring throughout the year.

But you would think that again with these headwinds that.

There'll be even more selectivity and perhaps you'll see lower multiples paid for companies.

But.

We're still waiting to observe that but but again I'd say the most important point about your question Chris just the.

The.

Oh, it's very positive for our portfolio to have such smart able investors back into their companies.

Great. Thank you.

Thank you.

We take our next question from Robert Dodd with Raymond James Your line is open.

Hi, Robert.

Good morning.

The the expectations for lower.

Prepayments, although repayments to persist is that primarily a function of Oh, you know what youre, what Youll hear me.

I'm from the companies or is it that you know in this kind of about the market environment.

<unk>.

You don't necessarily see a lot of.

Repayments and a lot of M&A activity.

It kind of relates to the market normalizing in the second half maybe would you expect them to ramp up or is it just do you expect it to be low or yeah, just because of what you have to pull there.

Okay.

Yes, Robert So it's a really good question. So allow me to elaborate on what I've said earlier, so I'm basing it just at this point on what were observed.

But at the same time history would tell us there.

We're running lower much lower than normal on repayments. They were they were unusually high in the third and fourth quarters of last year.

And are now unusually low in the first and second quarters of this year.

So in the reversion to the mean, we should we should see some pick up in the third and fourth quarters.

But but there's only one that we're aware of currently and so I just wanted to make sure everyone had a sense of that.

Could very well pick up but it's not as obvious at this point.

I appreciate that.

I called it out.

Maybe related right I mean, you've had.

Guidance.

6 million this year since.

A disproportionate number of repayments are usually driven by M&A.

Which may tie to it.

Hey, Lee payments a low hum.

Equity gains all right.

Should should we.

Yeah.

What's the is there a connection what what are your thoughts on that front.

Yes. So then in contrast, so because we know we have a number of equity co invest positions, where the loan has previously been repaid.

I'm really flagging more we're flagging more that those could start to come to fruition.

So even though the repayments may slower slowing.

We have a number of equity co investments that do not have debt associated with this point and that they are reaching the point, where those companies will be sold so that would be the distinction.

I I I I appreciate that thank you and one more if I can obviously on that.

The rate sensitivity.

What is your the they feel so far that you have on pricing in your market I mean, obviously your you know at the end of the market your bandwidth.

SBA eligible asset successfully.

Bumping up against the BSL market that much but I mean, what are you seeing on on pricing discussions and do you think.

So you're going to have a.

But basically its going to have an influence on that or do you think that's not.

Can it be a huge factor impacting the spread on on your first sure.

Sure.

The first point is you're right, we do not compete with her.

Or are tied at all to the BSL market.

And so are our pricing continue its competitive but our pricing continues to hold where it is currently and have not seen any issues there.

You can make an argument if.

LIBOR, then becomes three and.

And your spread is six and the rate is nine could you see some impact on the spread but so far we've not seen that but but LIBOR moving up it's just started to happen above one.

Most pretty much the market floor right now has been a LIBOR floor one.

And so now we're at 140 or so.

But but so far no impact on what we're able to to charge, it's very competitive, but but the pricing has held stable.

Got it thank you.

Yeah. Thank you Robert.

And that concludes today's question and answer session and I'd like to turn it back to Mr. <unk> for any additional or closing remarks.

Okay. Thank you everyone for of course, your support and for being on the call today.

We look forward to speaking again with you will likely report in late July early August for the second quarter.

Thanks again.

Yeah.

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

Yeah.

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