Q1 2025 Stellus Capital Investment Corp Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellus Capital Investment Corporations Conference call to report financial results for its first fiscal quarter ended March 31, 2025.
Speaker Change: This conference is being recorded today, May 13th, 2025. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellis Capital Investment Corporation. Mr. Ladd, you may begin your conference.
Speaker Change: Joining me as usual. This morning is Todd House can set our chief Financial Officer, who will cover important information about forward looking statements as well as that over to you our financial information and portfolio.
Todd House: Thank you Rob.
Speaker Change: I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of <unk> capital investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited.
Speaker Change: Audio replay of the call will be available by using the telephone number and patent provided in our press release announcing this call.
Speaker Change: I'd also like to call your attention to the customary safe Harbor disclosure in our press release regarding forward looking information.
Speaker Change: 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 these projections.
Speaker Change: We will not update any forward looking statements unless required by law.
Speaker Change: Copies of our latest SEC filings. Please visit our website at Www Dot stylus capital Dot com under the public investors link or call us at 700 329 to 5400.
Speaker Change: Now I'd like to cover our operating results for the quarter, but starting first with life to date activity.
Speaker Change: Since our IPO in November 2012, we have invested approximately $2 $7 billion in over 200 companies and received approximately $1 $7 billion of repayments, while maintaining stable asset quality.
Speaker Change: We have paid $295 million of dividends to our investors, which represents $17 nine per share to an investor in our IPO in November 2012, which was offered at $15 per share.
Turning to operating results in the first quarter, we generated 35 per share of GAAP net investment income and core net investment income of 37 cents per share, which excludes estimated excise taxes.
Speaker Change: Net asset value per share decreased 21 cents during the quarter due primarily to company specific write downs in our loan portfolio and a reduction of spillover income.
Speaker Change: Our ATM program was active during the quarter, we issued 660 656085 shares for $9 $3 million.
Speaker Change: At an average gross price of $14 11, all issuances were above net asset value.
Speaker Change: Turning to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of 999, $991 $1 million across 110 portfolio companies up from $953 5 million across 105 companies as of December 31, 2024.
Speaker Change: During the first quarter, we invested $46 7 million in seven new portfolio companies and had $8 7 million and other investment activity at par.
Speaker Change: We also received one full repayment totaling $8 $5 million and received $6 5 million of other repayments at par.
Speaker Change: At March 31, 98% of our loans were secured and 91% were priced at floating rates. The average loan per company is $9 $4 million and the largest overall investment is $21 nine both at fair value.
Speaker Change: All but one of our portfolio companies are backed by a private equity firm.
Speaker Change: Overall, our asset quality is slightly better than planned at fair value, 52% of our portfolio is rated two or on or ahead of plan.
Speaker Change: And 21% of the portfolio is marked at an investment category of three or below meaning not meeting plan. Our expectations. Currently we have loans to five portfolio companies on nonaccrual, which comprise six 7% of the total costs and 4% of fair value of the total loan portfolio, respectively, which represents a decrease from the prior quarter.
Speaker Change: Okay.
Speaker Change: Turning to capital.
Speaker Change: On April one 2025, we issued $75 million in aggregate principal amount of seven 5% notes due April one 2030, we used the proceeds to repay the bank facility.
Speaker Change: On April 24th 2025, we received a green light letter from the small business administration for Astellas capital Spic's III.
Speaker Change: This is an important step in the process and we therefore expect to receive a license although it's not guaranteed.
Speaker Change: In general as our existing debentures or repaid we intend to draw new leverage under the Spic's three license to continue funding qualifying portfolio company investments and with that I'll turn it back over to Rob to discuss the overall outlook.
Speaker Change: Thank you Todd as.
Rob: As we look ahead to this the second quarter of 2025, I'll cover portfolio growth equity realizations and dividends.
Rob: We expect to end the quarter of 2022nd quarter of 2025 of the portfolio, which approximates where we are today at about $985 million.
Rob: We expect new loan originations to be offset by loan repayments for the remainder of the second quarter.
Speaker Change: As Todd noted earlier, we had a good first quarter for equity issuance under our ATM program given our current capitalization.
Speaker Change: We certainly have the ability to grow the portfolio to over $1 billion.
Speaker Change: For our equity co investment portfolio, which is $83 million at fair value, we have the potential for more than $10 billion of equity gains by year end.
Speaker Change: And finally regarding dividends, we declared the dividend for the second quarter of this year at a rate of <unk> 40 per share for the quarter payable monthly and we expect the third quarter to also be payable at <unk> 40 per share of course subject to board approval.
Jenny: With that I'll open it up for questions. Jenny you may begin the Q&A session. Please.
Speaker Change: Thank you very much at this time, we are conducting a question and answer session. If you would like to ask a question. Please press star one on your side and key patent now a confirmation tone will indicate that your line is and Nicky you May Press star two if you would like to remove your question Nicky so anyone using speaker equipment.
Speaker Change: It may be necessary to pick up your handset before you for stickies. Please wait a moment mostly poll for questions.
Speaker Change: Thank you. Your first question is coming from Erik Zwick of Lucid capital market. Eric Your line is live.
Speaker Change: Thank you good morning, Robyn Todd wanted to start with a question.
Speaker Change: Okay.
Speaker Change: Wanted to start with a question just in terms of kind.
Speaker Change: Kind of maybe the yield and timing on the first quarter originations and just trying to get a sense of.
Speaker Change: How much impact there wasn't the first quarter to interest income and whether there might be some additional.
Speaker Change: Impact for the full quarter effect.
Speaker Change: Yes, so so a couple of things.
Speaker Change: The average portfolio in the first quarter was higher than the fourth and that will continue on for the full second quarter. So there should be some pickup there in terms of yield in dollars.
Speaker Change: And then Todd is reminding me there in the first quarter, we had lighter other income than in the fourth quarter and so to be determined what that number will be for the second quarter, but we should pick up some earnings in actual dollars as a result of the higher portfolio Q2 over Q1.
Speaker Change: Excellent that's helpful and just given the strength of the originations Q1and I did hear some commentary that you thought in <unk> originations and repayments will be balanced, but I'm just curious kind of what the if you could provide any color in terms of what the pipeline looks like today.
Speaker Change: You know relative to maybe three months ago, and where youre seeing opportunities, whether there're certain industries or certain types of lending opportunities new versus versus add on.
Speaker Change: Just a little kind of color there would be great.
Speaker Change: Yeah No. Good question in fact, I'm glad you mentioned the add ons. So as you can see from our results. We continue to have some interesting add ons.
Speaker Change: Existing portfolio companies, which is very helpful. Because we're already in the credit we understand the company. So we think those will continue.
Speaker Change: In terms of pipeline today versus three months ago slower no question I think this has affected the industry and maybe the economy overall that the tariff activity has caused some slowness in this country in particular around M&A.
Speaker Change: Domestic that will be picking up now that there is greater clarity.
Speaker Change: So a little bit slower than we were we.
Speaker Change: We do have interesting opportunities that we expect to close this quarter and next.
Speaker Change: But just being a little bit conservative we know some payoffs too so you can't quite predict the timing.
Speaker Change: So that's why I indicated I think will be flat on average for this quarter.
Speaker Change: Got it and you mentioned potential for some pickup in interest income.
Speaker Change: The adjusted NII This quarter was a little bit shy of the dividend and it sounds like you like to maintain that at least through the third quarter at the 40% level.
Speaker Change:
Speaker Change: And remind me if I'm incorrect here, but I do believe that the spillover amount is probably equal to about four quarters or so of the regular dividend. So.
Speaker Change: Just curious about your thoughts on the trajectory of NII to cover the regular dividend going forward I know, you're kind of aiming to get the portfolio to it to at least $1 billion or so, but just your expectations for closing that gap.
Speaker Change: Sure. So let me take it first and then Todd Todd should add to this so that we are running at a level of NII less than the dividend and as you pointed out we entered the year Todd I think about $45 million of spillover income, which were starting to reduce we think as we get through the end of this year will be.
Speaker Change: In a good spot for next year.
But but I think it's just based on current yields and so in the level of sofa.
Speaker Change: Will will be less than that 40.
Speaker Change: Throughout the balance of the year from NII.
Speaker Change: But just as a reminder, as I indicated in my remarks, and this has happened to us in the past we do have some interesting equity co investments that we think we will start to kick in and this would cause us to be in excess of the dividend in terms of realized earnings for the year.
Speaker Change: We're entering a phase to also look at that but from a pure NII basis that we would be short.
Speaker Change: Okay. Thanks, I think you mentioned it was about $10 million or so in terms of what you can see for potential realized gains by the end of the year.
Speaker Change: Yes in fact in excess of $10 million.
Speaker Change: Okay great.
Speaker Change: And just one last one for me and I'll step aside excuse me.
Speaker Change: Just curious a little bit about trade education acquisition, it looks like that was on non accrual.
Speaker Change: From about the middle of last year. It looks like that may have been restructured into simpler trading, but just curious if you could provide any commentary in terms of what transpired and your expectations going forward.
Speaker Change: Yes, so we don't like to talk about private businesses.
Speaker Change: In this country, but at the same time, we will say that the business was restructured as you indicated in the first quarter and was recapitalized, we think and are in the satisfactory way and expected to perform well from here.
Speaker Change: Okay and does that have an equity sponsor and did they contribute any additional capital as part of the restructuring.
Speaker Change: Yes. They did it did have an equity sponsor and they did contribute capital meaningfully.
Speaker Change:
Speaker Change: But it reached the pointed this recapitalization no further capital was available and so we have to.
Speaker Change: Together restructured it in a new new form if you will.
Speaker Change: Great. Thanks for taking my questions today.
Speaker Change: Yes, Thank you Eric.
Speaker Change: Thank you very much and your next question is coming from Christopher Nolan of Ladenburg Thalmann. Christopher Your line is open.
Christopher Nolan: Hey, guys.
Speaker Change: Hey, good morning, Chris.
Christopher Nolan: Rob.
Christopher Nolan: Thank you for your comments.
Speaker Change: Given given the markets the pricing in rate cuts by the fed.
Christopher Nolan: Later in 2025 left home in Texas.
Christopher Nolan: Forward markets pricing in three rate cuts what was the logic behind issuing the fixed rate debt.
Christopher Nolan: Yeah.
Yes, So we had a couple a couple of things Chris.
Christopher Nolan: We have bonds that are maturing in March of 'twenty six and so this was a.
Christopher Nolan: Heart part of these proceeds we would expect will retire some of those bonds. So something we needed to do from a fixed rate basis and also it's helpful to have some unsecured debt in the capital stack to supplement our floating rate liabilities.
Christopher Nolan: No.
Christopher Nolan: Hard to know the right timing for these things end up but that was our.
Christopher Nolan: That was the time when we took and also to be Frank we wanted to avoid what might've been more uncertainty as the year.
Christopher Nolan: Draws on.
Christopher Nolan: Alright.
Christopher Nolan: And then I saw on the quarter to date, you guys issued roughly 300000 shares.
Christopher Nolan: Common shares with this under the ATM and where are these accretive.
Christopher Nolan: Yes, they were all under the ATM and all were issued above NAV and therefore.
Christopher Nolan: So should we expect that you guys are going to be the ATM a bit harder as opportunity presents itself.
Christopher Nolan: It would really be a function of how our stock prices trading we want these to be accretive or certainly not dilutive to NAV. So I think that will drive it more with market.
Speaker Change: What are market prices.
Speaker Change: But we certainly will be considering issuances throughout the year.
Speaker Change: Margaret and final Clark <unk>.
Speaker Change: Conditions excuse me market conditions supporting it.
Speaker Change: And then final question I've been covering you guys long enough to know that.
Speaker Change: When the outlook start to improving for the market in general you guys can do put in a little bit more second lien loans.
Speaker Change: Take it that you guys are have no contemplation of that at the moment right.
Speaker Change: That's right in fact.
Christopher Nolan: Chris I'm glad you raised that we haven't had any new second lien loans and a number of years and do not expect to.
Speaker Change:
Speaker Change: Could but it would be unlikely or are motive investing is really become very much a first lien unit tranche.
Speaker Change: Our secured lending with.
Speaker Change: With equity co invests sure, but it's more of a defensive posture.
Speaker Change: Given the uncertainty the broader environment is that a fair way to look at it.
Speaker Change: I think that's right, but we really I'd say four to five years ago moved to this mode where.
Speaker Change: And also was really where unit tranche lending became popular also for our private equity clients, who are looking for a one stop financing so one lean and ideally one lender and so the second lien and junior capital became less of a demand, but we also made that.
Speaker Change: Decision for risk management.
Speaker Change: We thought that the risk return profile was much more attractive to be in the first lien unit tranche.
Speaker Change: Great and final question, given the third SBA Green light letter, assuming that you get the approval and you lever up that SBA vehicle that would basically deceptively I would say increase your the impact of a lower interest rate environment on your earnings is that correct.
Speaker Change: Yes.
Speaker Change: And in a positive way, yes, so the.
Speaker Change: So two things as a as a reminder, the SBA debentures issued under the SBA Agency. If you will are priced at the 10 year Treasury rate plus a market premium, which historically has been 50 to 80 basis points more but that approximates the 10 year treasury.
Speaker Change: So this if you look at our capital stack the potential for Spic's debentures is 350 million were like 309, right now because we've already paid back some but the full amount that we could have outstanding is $3 50, So think of our capital of $1 billion $3 50 can be at lower rates than.
Speaker Change: We would otherwise borrow.
Speaker Change: On a fixed rate basis and on a floating rate basis.
Speaker Change: So this would be a complement to the question I got earlier about.
Speaker Change: Issuing those unsecured notes that are at 7% in a quarter. So these nodes you know based on the current <unk>.
Speaker Change: <unk> rate of 10.
Speaker Change: Be less than less.
Speaker Change: Less than 5%. So this is very advantageous for us from a funding mix.
Speaker Change: Going forward.
Speaker Change: Great. Thank you.
Speaker Change: Okay. Thank you Chris.
Speaker Change: Thank you very much and your next question is coming from Robert Dodd of Raymond James Robert Your line is open.
Speaker Change: Hi, guys good morning, Bob.
Speaker Change: Good morning, soon as sort of a follow up on Erik's question on the pipeline.
Speaker Change: I mean, it makes sense I E could you characterize where it was sudden now like now versus say March 31st how much of the fall in in pipeline and maybe the expectation of a flat portfolio. This quarter is due to the disruption.
Speaker Change: Separation day.
Speaker Change: And if there is how much how much of that for them because it is related to that do you think is like permanently gone versus just delayed maybe into the back half Lady led or any any color that.
Robert Ladd: Yes, so good question Robert.
Speaker Change: I would think of it this way for M&A.
Speaker Change: Our business was being marketed for sale.
Robert Ladd: And.
Robert Ladd: And the seller thought it was a good time.
Robert Ladd: And with clarity now around tariffs for both buyers and sellers than we would expect.
Robert Ladd: Almost all if not all of that activity to come back. So this would be at what we would describe as a temporary disruption.
Robert Ladd: So we would expect it to come back.
Robert Ladd: Got it got it. Thank you that's all.
Speaker Change: Coupon when you kind of got ahead of us.
Robert Ladd: Uh huh.
Speaker Change: You can hear that ringing that's.
Robert Ladd: I have in mind on my phone I apologize.
Speaker Change: Oh no worries.
Robert Ladd: Yeah.
Robert Ladd: On the bonds.
Robert Ladd: Bonds.
Robert Ladd: What would you.
Robert Ladd: Do you think the one you've done this I mean, what you shouldn't that sufficient that you don't need to do more head all the.
Robert Ladd: The maturity next year and you got good timing on that by the way you're doing it.
Robert Ladd: <unk>.
Robert Ladd: Or do you think you'd need to do more only unsecured fixed rate ahead of the mature you know you kind of you kind of done there in combination with obviously the Spi.
Robert Ladd: And the board have evolved.
Robert Ladd: Yes, so we will need to issue more unsecured debt.
Robert Ladd: For the bonds mature the new the older bonds mature and the magnitude of that are still being determined.
Robert Ladd: Think of it this way the issuance that closed on April one of $75 million, we would've wanted to at least $25 million to be used for growth and potentially more.
Robert Ladd: So so which would mean that we will definitely need to issue more bonds before we before we get to I'd say before we get to the end of the year.
Robert Ladd: Got it so more to come but I would not be it would not be a $100 million.
Robert Ladd: Okay got it thank you.
Robert Ladd: And that.
Robert Ladd: Okay.
Robert Ladd: Okay. Thank you so much well we appear to have reached the end of our question and answer session I will now hand back over to Robert for closing comments.
Robert Ladd: Okay very good thanks, everyone for joining us. Thank you for your support of <unk>.
Robert Ladd: Our public company and we look forward to give you another update as we get to early August to cover the second quarter.
Robert Ladd: Thanks again.
Robert Ladd: Thank you so much for a bit that does conclude today's conference. You may disconnect. Your phone lines at this time and have a wonderful day, we thank you for your participation.