Q2 2022 Stellus Capital Investment Corp Earnings Call

Quarter over quarter.

We had $3 6 million of realized gains during the quarter, which were offset by a realized loss from the disposition of our investment in haemus first lien loan, resulting in a net realized loss of $353000 during the quarter.

Also during the quarter, we increased the size of our bank facility by $15 million to $265 million.

We continue to recycle capital in our first Spic's license and deploy to low cost debentures and our second license.

As a reminder, the all in cost of all of our debentures is currently three 1%.

To date, we funded $78 million of our $87 $5 million of equity commitments to the spic's too and have drawn $150 million of the $175 million of debentures that will be available when the equity is fully funded.

Now I'd like to cover the following areas like today to review portfolio and asset quality and finally, our dividends.

Since our IPO in November 2012, we've invested approximately $2 2 billion and over 168 companies and received approximately $1 3 billion of repayments, while maintaining stable asset quality.

We've paid over $194 million of dividends to our investors, which represents a $12 67 per share to an investor in our IPO in November 2012.

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We ended the quarter with an investment portfolio at fair value of $852 million across 83 portfolio companies up from $838 million across 78 companies at March 31.

During the second quarter, we invested $49 $5 million seven new in 2014 existing portfolio companies and received $34 million of repayments for net portfolio growth at cost of $19 $7 million during the quarter.

Yeah.

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

81% of our portfolio is rated two or higher meaning at or above plan.

Thus, 19% of the portfolio is marked at an investment category of three or below.

In total we have four loans on nonaccrual, which comprise two 8% of fair value of the total loan portfolio.

This is up from three loans on non accrual at March 31, which comprised 7% of fair value.

Turning to dividends now in addition to our regular dividend of <unk> 28 per share in the aggregate for the third quarter. Our board declared an additional dividend for the third quarter of 2022 of <unk> per share in the aggregate.

<unk> per share paid per month.

As we discussed last quarter. This additional dividend is based on the significant realized gains were generated $23 7 million in 2021 to $1 22 per share $3 5 million in Q1 and expected additional realized gains over the next several quarters.

Looking forward subject to board approval, we expect to continue this combined 34 dividend each quarter for the foreseeable future, which represents based on yesterdays stock price of $13 47, a share and.

On annualized yield yield of 10, 1%.

That I will turn the call back over to Rob to discuss the outlook. Okay. Thank you Tod now turning to outlook I'd like to note the following.

Relative to interest rates.

Word curve for LIBOR, which remains our principal benchmark rate reflects a rate in excess of 3% by early next year.

The majority of our portfolio repriced at the beginning of the third quarter and as a result, the portfolio now yields about eight 8% up from 8% at the beginning of the second quarter.

Since 97% of our loan portfolio is floating and only 34% of our funded liabilities are at a floating rate we will be a significant beneficiary of this phenomenon.

We expect at this point the earnings in the third quarter should cover our regular dividend and if interest rates continue to rise income should be higher in the fourth quarter.

Now speaking to the economy, certainly our country continues to face headwinds, which have slowed led to a slowdown in the economy in the U S.

To date, though the impact on our portfolio has been limited.

As I mentioned last quarter, our portfolio is well positioned.

Over 95% of our loan portfolio are backed by companies.

But equity firms and 92% of the loan portfolio is first lien unit tranche.

The companies are well capitalized typically 50% equity below is when they are underwritten and all loans have covenants.

The comment about equity gains so notwithstanding a slowdown in the economy, we expect the equity <unk> been receiving will continue as private equity firms find opportunities to achieve realizations.

As noted earlier, we had we've had $3 1 million of net realized gains through June 30.

And have generated an additional $175 million gain since quarter end.

And then in terms of outlook on fundings.

We funded $32 million since quarter end and if it had two repayments for about $10 million.

<unk> in net portfolio growth of $21 9 million in the third quarter.

We believe we have the potential to increase the portfolio by 20% to $30 million more over the balance of the quarter.

I will note that repayments have been slower this year than what we received in the past and this of course has resulted in less fee acceleration.

With that I will open it up for questions. Thank you Carolyn and youll be able to begin the Q&A session. Please.

Yes.

Thank you.

We 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 Donna.

Your signal to reach our Quitman. Once again, please press star one to ask a question we will take our first question from the line Christopher Nolan. Your line is open now. Please go ahead.

Hey, guys.

New machining technologies can you give a little detail on that please.

In terms of the company's status or.

Yes, no do newly non accrual.

Yes, Chris as you know, we don't typically talk about private companies in the United States for reasons of their business themselves.

But this is a new non accrual.

Is backed by a substantial private equity firm in and we're working through it but we did put it on non accrual as of April one.

Okay.

Dissipate any sort of resolution within 2022.

Well again, we don't like to talk about the status of the companies individually, but we do think that there is certainly working on the problem and.

Theres some possible resolutions certainly within the next three to six months more to come.

And the loan has been marked in the mid eighties.

Okay, and I guess as a more general question Rob is.

As we're entering this period of.

Rising interest rates slowing economic growth.

What are your anticipation in terms of.

Asset quality for the portfolio in coming quarters.

Yes, Chris I would say that.

Certainly this last quarter or last two quarters.

Would be indicative of what we'd expect.

So we are seeing inflationary pressures.

Labor cost pressures and some of the companies.

So far it's been more company specific and kind of a broad impact on the portfolio.

We did see an increase in the risk rate three category, but we also have greater increase in the risk rate one category for the quarter.

So we are seeing very good performance from a number of portfolio companies and then the overall risk rate is basically right on top of where it was in the first quarter.

So again, we'll likely have problems over time, but.

As I mentioned in my remarks, given the capital structure as we start out with.

The strong ownership of the private equity firms behind the businesses.

The first lien nature of our lending.

We expect to weather this quite well great.

Alright, Thanks Robert.

Thank you.

Thank you we'll take the next question from the line Brian Lee. Your line is open now. Please go ahead.

Hey, good afternoon.

First question I had was.

You characterized the decline and now in the portfolio write downs. This quarter is largely driven by wider spreads which makes sense. I was just wondering if I could get a little more clarity around that obviously.

Your investment in new met machining.

A bit of a write down due to credit so wasn't exclusively related to spreads there were some credit so is there.

Rough breakdown you can provide.

Kind of how much of the write downs this quarter were related to primarily from wider spreads reversing specific credit markdowns.

Yes, I'll turn that over to Todd Yeah. So Ryan I would say I need to look up the actual split between the two which I can I can.

Oh here we go thank you.

Yes, so so other debt movements, if you look at the total.

The equity position has actually moved up so it kind of went against the overall change and then as you noted we had a write down in <unk>.

So I'll just go through the numbers. If you look at the total silver offered you can calculate went down and we marked it down by $1 million and $5.

The the equity movements were up about $1 million and then we had.

Other debt movements were down $4 three.

$3 million or coincidentally, the total net unrealized losses also for three so the majority of it was across the portfolio and not every position, but was related to the spreads which were somewhat offset by rising rates.

So the underlying cash flows over the loans.

We are increasing and the spreads would increase the discount rates, which would have an offsetting effect. So.

Hope that gives you some context for.

What the movement was comprised of.

That's helpful.

And then you mentioned, obviously you and most other bdcs are going to be big beneficiaries.

Rising interest rates, probably not that much of an impact flowed through in the second quarter, but it looks like third quarter youre going to see kind of the full impact of that and thats only going to probably accelerate throughout the year.

You guys are in kind of a unique position where this quarter.

Youre pre incentive fee operating earnings were below your incentive fee hurdle rate and so theirs.

Just a little bit of a buffer call it $1.

Five or so.

To work through.

To illustrate to incentive fee before earnings can get above that hurdle and start moving higher.

Have you guys looked at sort of a timeframe holding all else equal portfolio growth have you looked at the sort of a timeframe just based on the forward LIBOR sofa curve.

Potentially when your earnings generation at Dallas can reach above that upper end of that incentive hurdle rate and earnings could then be more fluctuating or potentially actually start to receive some of that benefit from from rising rates.

Yes, Ryan and Thats, a good point, so our estimate as I said earlier in my remarks that we believe we will get.

We will get through the hurdles, we're right on top of the hurdle rate through the third quarter.

So we don't expect so we expect to certainly meet the dividend, but not have much in excess because we'll be through the hurdle rate, but in the fourth quarter as I said if rates continue to rise to where they are expected we should be more than through the hurdle rate and then earnings flowing through will come through in the fourth quarter.

Okay.

Helpful. That's all for me I appreciate the time today.

Yes. Thank you thank you rod.

It appears there's no further question at this time thank you.

Okay very good. Thank you everyone for being on this morning, and your support of the company and we will we will be back to report the third quarter earnings in late October early November .

Thanks again.

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