Q1 2026 Stellus Capital Investment Corp Earnings Call

May 12, 2026

Operator: Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellus Capital Investment Corporation's conference call to report financial results for its Q1 ended 31 March 2026. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. This conference is being recorded today, 12 May 2026. 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 begin your conference.

Speaker #2: At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

Speaker #2: This conference is being recorded today, May 12, 2026. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation.

Speaker #2: Mr. Ladd, you may begin your conference. Okay. Thank you, Holly. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter-ended March 31, 2026.

Robert T. Ladd: Okay. Thank you, Holly. Good morning, everyone, thank you for joining the call. Welcome to our conference call covering the quarter ended 31 March 2026. We have 6 topics to cover this morning. First, the financial results for the quarter, portfolio and asset quality, outlook update, opportunities with RidgePost Capital, our share buyback program, and future growth in the portfolio. Joining me this morning is W. Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements as well as an overview of our financial information.

Robert Ladd: Okay. Thank you, Holly. Good morning, everyone, thank you for joining the call. Welcome to our conference call covering the quarter ended 31 March 2026. We have 6 topics to cover this morning. First, the financial results for the quarter, portfolio and asset quality, outlook update, opportunities with RidgePost Capital, our share buyback program, and future growth in the portfolio. Joining me this morning is W. Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements as well as an overview of our financial information.

Speaker #2: We have six topics to cover this morning. First, the financial results for the quarter. Portfolio and asset quality. Outlook update. Opportunities with Ridge Post Capital.

Speaker #2: Our share buyback program. And future growth in the portfolio. Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements, as well as an overview of our financial information.

Speaker #3: Thank you, Rob. I'd like to remind everyone that today's call is being recorded. Please note that the call is a property of Stellus Capital Investment Corporation and that any unauthorized broadcast of this call and any form is strictly prohibited.

W. Todd Huskinson: Thank you, Rob. I'd like to remind everyone that today's call is being recorded. Please note that the call is the property of Stellus Capital Investment Corporation, and that 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 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 SEC for important factors that could cause actual results to differ materially from these projections. We will not update forward-looking statements unless required by law.

Speaker #3: 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.

Speaker #3: 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 #3: We will not update forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the Public Investors link or call us at 713-292-5400.

W. Todd Huskinson: To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the Public Investors link, or call us at 713-292-5400. Now I'll cover our operating results for the quarter, but would like to start with our life to date activity. Since our IPO in November 2012, we've invested approximately $2.8 billion in over 225 companies and received approximately $1.8 billion of repayments while maintaining stable asset quality. We've paid $339 million of dividends to our investors, which represents $18.49 per share to an investor in our IPO in November 2012.

Speaker #3: Now I'll cover our operating results in the for the quarter. But would like to start with our life to date activity. Since our IPO in November 2012, we've invested approximately $2.8 billion in over 225 companies, and received approximately $1.8 billion of repayments, while maintaining stable asset quality.

Speaker #3: We've paid $339 million of dividends to our investors, which represents $18.49 per share to an investor in our IPO in November 2012. In the first quarter, we generated $26 per share of GAAP net investment income and core net investment income was $27 per share, which excludes estimated excise taxes.

W. Todd Huskinson: In Q1, we generated $0.26 per share of GAAP net investment income, and core net investment income was $0.27 per share, which excludes estimated excise taxes. During the quarter, we also realized gains of $750,000 on 1 equity position, which resulted in total realized income for the quarter of $0.29 per share. Net asset value decreased $0.28 per share during the quarter from 2 components. The 1st was $0.08 per share of dividend payments that exceeded earnings, which was necessary to continue to pay out the spillover balance from 2025. The 2nd was a net realized and unrealized loss of $0.20 per share related primarily to 2 debt investments.

Speaker #3: During the quarter, we also realized gains of $750,000 on one equity position, which resulted in total realized income for the quarter of $29 per share.

Speaker #3: Net asset value decreased $0.28 per share during the quarter from two components. The first was $0.08 per share of dividend payments that exceeded earnings, which was necessary to continue to pay out the spillover balance from 2025.

Speaker #3: The second was a net realized and unrealized loss of $0.20 per share related primarily to two debt investments. We ended the quarter with an investment portfolio at fair value of $990 million across 116 portfolio companies, a billion across 115 portfolio companies as of December 31, 2025.

W. Todd Huskinson: We ended the quarter with an investment portfolio at fair value of $990 million across 116 portfolio companies, a decrease from $1.01 billion across 115 portfolio companies as of 31 December 2025. During the first quarter, we invested $18 million in 3 new portfolio companies and had $9 million in other investment activity at par. We also received 3 full repayments totaling $35 million, 1 equity realization, which resulted in a realized gain of $750,000, and received $6.6 million of other repayments. At 31 March, 99% of our loans were secured, and 92% were priced at floating rates.

Speaker #3: During the first quarter, we invested $18 million in three new portfolio companies, and had $9 million in other investment activity at par. We also received three full repayments totaling $35 million: one equity realization, which resulted in a realized gain of $750,000, and received $6.6 million of other repayments.

Speaker #3: In March 31, 99% of our loans were secured in 92% were priced at floating rates. The average loan per company is $9 million in the largest overall investment is $18.5 million both at fair value.

W. Todd Huskinson: The average loan per company is $9 million, and the largest overall investment is $18.5 million, both at fair value. Substantially, all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 81% of our portfolio is rated a 1, a 2, or on or ahead of plan, and 19% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. We added 1 new loan to our non-accrual list during the quarter. Currently, we have 6 loans to 6 portfolio companies on non-accrual, which comprise 9.2% of the total cost and 5.2% of the fair value of the total investment portfolio, respectively, which represents a slight increase from the prior quarter.

Speaker #3: Substantially all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 81% of our portfolio is rated a 1 or a 2, or on or ahead of plan, and 19% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations.

Speaker #3: We added one new loan to our non-accrual list during the quarter. Currently, we have six loans to six portfolio companies on non-accrual, which comprise $9.2% of the total cost and $5.2% of the fair value of the total investment portfolio, respectively.

Speaker #3: Which represents a slight increase from the prior quarter. We recognize that the level of non-accrual loans is higher than we would like. We're focused on reducing the number of dollar magnitude of these loans.

W. Todd Huskinson: We recognize that the level of non-accrual loans is higher than we would like. We're focused on reducing the number and dollar magnitude of these loans. We're actively working each position and are making progress in exiting the positions or bringing them back onto an accrual status. There's been much speculation about the impact of artificial intelligence on the large-scale SaaS software industry. As we mentioned on our last call, Stellus does not have exposure to the large-scale SaaS software sector. We do have portfolio companies in the software and information they provide, in many cases deal with proprietary data. We believe AI will enable these and many of our portfolio companies across a variety of industry sectors to improve the speed information. Each of these companies is rated on our risk rating system as either a 1 or 2, meaning on plan or ahead of plan.

Speaker #3: We're actively working each position and are making progress in exiting the positions or bringing them back onto an accrual status. There's been much speculation about the impact of artificial intelligence on the large-scale SaaS software industry.

Speaker #3: As we mentioned on our last call, Stellus does not have exposure to the large-scale SaaS software sector. We do have portfolio companies in the software and information they provide, and in many cases deal with proprietary data.

Speaker #3: We believe AI will enable these and many of our portfolio companies across a variety of industry sectors to improve the speed information. Each of these companies is rated on our risk rating system as either a 1 or 2, meaning on plan or ahead of plan.

Speaker #3: And now I'd like to turn the call back over to Rob to cover a number of other topics.

W. Todd Huskinson: Now I'd like to turn the call back over to Rob to cover a number of other topics.

Speaker #2: Thank you, Todd. As we look ahead to the second quarter of 2026, I'll cover four topics. The outlook for Q2, our advisors' plans to join the Ridge Post Capital's platform, our $20 million share buyback program, and opportunities for growth.

Robert T. Ladd: Thank you, Todd. As we look ahead to Q2 2026, I'll cover four topics: the outlook for Q2, our advisors' plans to join the Ridgepost Capital's platform, our $20 million share buyback program, and opportunities for growth. First, with respect to outlook. As of today, our portfolio is approximately $970 million across 117 portfolio. The balance of the quarter, we would expect repayments to equal new fundings, thus ending the quarter approximately where we are today. We expect realizations throughout the year. At this point, we estimate $9 million for the balance of the year, with approximately $6 million of this in realized gains. Regarding dividends, in April, we declared the dividends for Q2 of this year of $0.34 per share in the aggregate, payable monthly.

Robert Ladd: Thank you, Todd. As we look ahead to Q2 2026, I'll cover four topics: the outlook for Q2, our advisors' plans to join the Ridgepost Capital's platform, our $20 million share buyback program, and opportunities for growth. First, with respect to outlook. As of today, our portfolio is approximately $970 million across 117 portfolio. The balance of the quarter, we would expect repayments to equal new fundings, thus ending the quarter approximately where we are today. We expect realizations throughout the year. At this point, we estimate $9 million for the balance of the year, with approximately $6 million of this in realized gains. Regarding dividends, in April, we declared the dividends for Q2 of this year of $0.34 per share in the aggregate, payable monthly.

Speaker #2: First, with respect to outlook, as today as of today, our portfolio is approximately $970 million across 117 portfolio companies. The balance of the quarter we would expect repayments to equal new fundings, thus ending the quarter approximately where we are today.

Speaker #2: We expect to realizations throughout the year. At this point, we estimate $9 million for the balance of the year, with approximately $6 million of this in realized gains.

Speaker #2: Regarding dividends, in April we declared the dividends for the second quarter of this year of $34 per share in the aggregate payable monthly. Looking forward, we are making progress in reducing the amount of spillover income and we expect that over time our dividend will approximate our net investment income plus realized gains.

Robert T. Ladd: Looking forward, we are making progress in reducing the amount of spillover income, and we expect that over time, our dividend will approximate our net investment income plus realized gains. At this point, that would be at a lower level than the current dividend. Now turning to RidgePost. We look forward to our external advisor, Stellus Capital Management, joining the RidgePost Capital platform this summer. We've been impressed with RidgePost Capital's organization. They have excellent leadership, and we should benefit from meaningful new investment opportunities working with them, particularly through their lower middle market private equity fund to fund strategy known as RCP Advisors. RCP has relationships with over 200 private equity firms, and with their focus on the lower middle market, many of these sponsors are candidates for us to provide financing for their portfolio companies.

Robert Ladd: Looking forward, we are making progress in reducing the amount of spillover income, and we expect that over time, our dividend will approximate our net investment income plus realized gains. At this point, that would be at a lower level than the current dividend. Now turning to RidgePost. We look forward to our external advisor, Stellus Capital Management, joining the RidgePost Capital platform this summer. We've been impressed with RidgePost Capital's organization. They have excellent leadership, and we should benefit from meaningful new investment opportunities working with them, particularly through their lower middle market private equity fund to fund strategy known as RCP Advisors. RCP has relationships with over 200 private equity firms, and with their focus on the lower middle market, many of these sponsors are candidates for us to provide financing for their portfolio companies.

Speaker #2: At this point, that would be at a lower level than the current dividend. Now turning to Ridge Post, we look forward to our external advisor, Stellus Capital Management, joining the Ridge Post Capital platform this summer.

Speaker #2: We've been impressed with Ridge Post Capital's organization, they have excellent leadership, and we should benefit from meaningful new investment opportunities working with them, particularly through their lower middle market private equity funded fund strategy known as RCP advisors.

Speaker #2: RCP has relationships with over 200 private equity firms and with their focus on the lower middle market, many of these sponsors are candidates for us to provide financing for their portfolio companies.

Speaker #2: We think this could provide hundreds of millions of dollars of new lending possibilities across the entire Stellus platform each year. Now turning to the share repurchase program, we recently announced a common stock repurchase program of up to $20 million.

Robert T. Ladd: We think this could provide hundreds of millions of dollars of new lending possibilities across the entire Stellus platform each year. Now turning to the share repurchase program. We recently announced a common stock repurchase program of up to $20 million. This decision reflects the current trading level of our shares, which are approximately at 25% discount to net asset value. Historically, our stock has traded at or above NAV for many years. At the current price levels, we believe repurchasing shares represents a good opportunity to generate value for our shareholders. Now opportunities for growth. I'd like to conclude our remarks by outlining the opportunity to grow our portfolio. We project that we have the capacity to increase our investment portfolio by $75 to $100 million from here. This opportunity comes from two sources.

Robert Ladd: We think this could provide hundreds of millions of dollars of new lending possibilities across the entire Stellus platform each year. Now turning to the share repurchase program. We recently announced a common stock repurchase program of up to $20 million. This decision reflects the current trading level of our shares, which are approximately at 25% discount to net asset value. Historically, our stock has traded at or above NAV for many years. At the current price levels, we believe repurchasing shares represents a good opportunity to generate value for our shareholders. Now opportunities for growth. I'd like to conclude our remarks by outlining the opportunity to grow our portfolio. We project that we have the capacity to increase our investment portfolio by $75 to $100 million from here. This opportunity comes from two sources.

Speaker #2: This decision reflects the current trading level of our shares, which are approximately at 25% discount to net asset value. Historically, our stock has traded at or above NAV for many years.

Speaker #2: At the current price levels, we believe repurchasing shares represents a good opportunity to generate value for our shareholders. And now opportunities for growth. I'd like to conclude our remarks by outlining the opportunity to grow our portfolio.

Speaker #2: We project that we have the capacity to increase our investment portfolio by 75 to 100 million dollars from here. This opportunity comes from two sources.

Speaker #2: The first is from the third SBIC license, which we're optimistic will be re-awarded this summer. And the second is from recycling equity gains and non-accrual loans that have been resolved.

Robert T. Ladd: The first is from a third SBIC license, which we're optimistic will be reawarded this summer. The second is from recycling equity gains and non-accrual loans that have been resolved. As a reminder, a dollar of an equity position or a non-accrual loan that turns to cash can be reinvested into a new loan close to $3 through our leverage facilities. In closing, let me thank everyone for your continued support, and we'll now turn to the Q&A session.

Robert Ladd: The first is from a third SBIC license, which we're optimistic will be reawarded this summer. The second is from recycling https://editor.inflexiontranscribe.com/static/media/icon-play.39003f0a4baacd961cc853b952165cc5.svgequity gains and non-accrual loans that have been resolved. As a reminder, a dollar of an equity position or a non-accrual loan that turns to cash can be reinvested into a new loan close to $3 through our leverage facilities. In closing, let me thank everyone for your continued support, and we'll now turn to the Q&A session.

Speaker #2: As a reminder, a dollar of an equity position or a non-accrual loan that turns to cash can be reinvested into a new loan of close to $3.

Speaker #2: Through our leverage facilities. In closing, let me thank everyone for your continued support, and we'll now turn to the Q&A session.

Speaker #3: At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad.

Operator: Your first question for today is from Erik Zwick with Lucid Capital.

Speaker #3: A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.

Speaker #3: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions.

Speaker #3: Your first question for today is from Eric Swick with Lucid Capital.

Operator: Your first question for today is from Erik Zwick with Lucid Capital.

Speaker #4: Good morning, Eric.

Robert T. Ladd: Good morning, Erik.

Robert Ladd: Good morning, Erik.

Speaker #5: Hey, good morning, Rob and Todd. I wanted to start just to make sure I understood some of the commentary there and the prepared remarks.

Erik Zwick: Hey, good morning, Rob and Todd. wanted to start just to make sure I understood some of the commentary there in the prepared remarks. With relation to the expectation for kind of dividends to be in line with NII plus realized gains, did I understand that you kind of mentioned that the way it was lined up currently that NII plus realized gains would be kind of lower than the current dividend level? Just trying to figure out, are you expecting to be able to, you know, grow NII over time or potentially, you know, think about resetting the dividend level as well? Just trying to kind of hone in on that a little bit.

Speaker #5: With relation to the expectation for kind of dividends to be in line with NII plus realized gains, did I understand that you kind of mentioned that the way it was lined up currently, the NII plus realized gains would be kind of lower than the current dividend level?

Speaker #5: So, just trying to figure out, are you expecting to be able to grow NII over time, or potentially thinking about resetting the dividend level as well?

Speaker #5: Just trying to kind of hone in on that a little bit.

Robert T. Ladd: Sure, sure. I'd say that although we'd like to grow the NII per share from here, we think we're probably at a level that we'll be at for a while. Our expectation is that the dividend will be coming down associated with that.

Robert Ladd: Sure, sure. I'd say that although we'd like to grow the NII per share from here, we think we're probably at a level that we'll be at for a while. Our expectation is that the dividend will be coming down associated with that.

Speaker #4: Sure. Sure. So I'd say that although we'd like to grow the NII per share from here, we think we're probably at a level that will be at for a while.

Speaker #4: So our expectation is that the dividend will be coming down associated with that.

Speaker #5: Got it. Okay. That's helpful. That's what I thought I heard. And then just with regard to share repurchases, I know you talked about it last quarter as well in terms of being attractive given where the stock is trading today, but correct me if I'm wrong.

Erik Zwick: Got it. Okay, that's helpful. That's what I thought I heard. Just with regard to, you know, share repurchases, I know you talked about it last quarter as well in terms of being attractive given where the stock is trading today. Correct me if I'm wrong, I don't think you repurchased anything in Q1. Was anything that kept you out of the market, potentially the pending acquisition of the advisor by Ridgepost or anything else?

Speaker #5: I don't think you repurchased anything in one queue, so it's anything that kept you out of the market potentially the pending acquisition of the advisor by Ridge Post or anything else?

Speaker #4: Yeah. No, no. Good question. Good point. So we did not repurchase any shares after the previous quarter end, but a reminder when issuing a K, we have a short period from the issuance of the K to the end of the quarter.

Robert T. Ladd: No, no. Good question. Good point. We did not repurchase any shares after the previous quarter end. A reminder, when issuing a K, we have a short period from the issuance of the K to the end of the quarter. There's just limited periods we can be repurchasing. We will have a much longer window this quarter, it was strictly tied to the timing of that, and nothing else.

Robert Ladd: No, no. Good question. Good point. We did not repurchase any shares after the previous quarter end. A reminder, when issuing a K, we have a short period from the issuance of the K to the end of the quarter. There's just limited periods we can be repurchasing. We will have a much longer window this quarter, it was strictly tied to the timing of that, and nothing else.

Speaker #4: So there's just limited periods we can be repurchasing. We will have a much longer window this quarter. And it was strictly tied to the timing of that and nothing else.

Speaker #5: Gotcha. Okay. Understood. Thank you. And last one for me, wondering if you can just talk about the pipeline a little bit, and I know you expect it to grow in the back half of the year.

Erik Zwick: Gotcha. Okay. Understood. Thank you. Last one for me. Wondering if you can just talk about, you know, the pipeline a little bit. I know you expect it to grow in the back half of the year, you know, post to the Ridgepost tie-up. Curious from a spread perspective, if you can talk about, you know, where you're seeing spreads in the pipeline today relative to 90 days ago and also kind of compared to the, you know, current existing portfolio yield.

Speaker #5: Post to the Ridge Post tie-up. And curious from a spread perspective, if you can talk about where you're seeing spreads in the pipeline today relative to 90 days ago and also kind of compared to the current existing portfolio yield.

Speaker #4: Yes. So, relative to spreads, as private credit has been disrupted a little bit, we are seeing some, I'd say, steadiness in spreads.

Robert T. Ladd: Yes. Relative to spreads, as the private credit has been disrupted a little bit, we are seeing some, I'd say, steadiness in spreads. We've not seen the same widening that the upper market has seen, but I think we've certainly seen stabilization. I'd say our average deal we're looking at today is, you know, approximately a 5% spread over SOFR. It could be higher, but it's stabilized, but not meaningfully wider yet.

Robert Ladd: Yes. Relative to spreads, as the private credit has been disrupted a little bit, we are seeing some, I'd say, steadiness in spreads. We've not seen the same widening that the upper market has seen, but I think we've certainly seen stabilization. I'd say our average deal we're looking at today is, you know, approximately a 5% spread over SOFR. It could be higher, but it's stabilized, but not meaningfully wider yet.

Speaker #4: We've not seen the same widening that the upper market is seeing. But I think we've certainly seen stabilization. And so I'd say our average deal we're looking at today is approximately a 5% spread over sofer.

Speaker #4: Could be higher. But it's stabilized. But not meaningfully wider yet.

Speaker #5: Okay. Good to hear that it's at least stabilized and hopefully some widening going forward. So great. Well, that's all for me today. Thank you so much.

Erik Zwick: Okay. Good to hear that it's at least stabilized and hopefully some widening going forward. Grateful. That's all for me today. Thank you so much.

Speaker #4: Okay. Many thanks, Eric.

Robert T. Ladd: Okay. Many thanks, Erik.

Robert Ladd: Okay. Many thanks, Erik.

Speaker #3: Your next question is from Christopher Nolan with Ladenburg Thalmann.

Operator: Your next question is from Christopher Nolan with Ladenburg Thalmann.

Speaker #6: Hey, guys. I guess for Todd, Todd does the I know your leverage your regulatory leverage ratios are low. But when including the SBA, it's somewhat higher.

Christopher Nolan: Hey, guys. I guess for Todd. Todd, I know your leverage, your regulatory leverage ratios are low, but when including the SBA, you know, it is somewhat higher. Does the SBA in any way restrict what your regulatory leverage ratios could be?

Speaker #6: Does the SBA in any way restrict what your regulatory leverage ratios could be?

Speaker #4: No. No. It's the SBA leverage is excluded from regulatory leverage. So it's a two-to-one regulatory leverage. And our regulatory leverage is around one times.

W. Todd Huskinson: No. No. The SBA leverage is excluded from regulatory leverage. It's a 2 to 1 regulatory leverage. Our regulatory leverage is, you know, around 1 time, and then it's 2 times with the SBA debentures. A little bit less than 2 times now, you know, because we've paid off a number of debentures.

Speaker #4: And then it's two times with the SBA to ventures. A little bit less than two times now. Because we've paid off a number of the ventures.

Speaker #6: Okay. So you're unsecured notes and so forth doesn't put any sort of restrictions on your total leverage, just on your regulatory leverage, correct?

Christopher Nolan: Okay. Your unsecured notes and so forth doesn't put any sort of restrictions on your total leverage. It's on your regulatory leverage, correct?

Speaker #4: Correct. Yep. That's right.

W. Todd Huskinson: Correct. Yeah, that's right.

Speaker #6: Okay. So just.

Christopher Nolan: Okay.

W. Todd Huskinson: Yeah. The notes and the credit facility are part of regulatory leverage. The debentures are in addition to that as total leverage.

Speaker #4: Notes. And the credit facility are part of regulatory leverage, and then the deventures are in addition to that as total leverage.

Speaker #6: Got it. And so we can see your regulatory leverage ratios are impressively low. So we can just see that you guys have a fair amount of balance sheet flexibility.

Christopher Nolan: Got it. We can see, you know, your regulatory leverage ratios are impressively low, so we can just see that you guys have a fair amount of balance sheet flexibility from that. Is that a fair interpretation?

Speaker #6: From that, is that a fair interpretation?

Robert T. Ladd: It-it-

Robert Ladd: It-it-

Speaker #4: I think that's correct. That's correct.

W. Todd Huskinson: That's it. That's correct.

Robert T. Ladd: Yeah. Yeah.

Robert Ladd: Yeah. Yeah.

W. Todd Huskinson: That's correct.

Speaker #5: Yeah, I think that's correct. It's, of course, limited by the borrowing base, but that's right. We have a lot of running around with respect to that.

Robert T. Ladd: Yeah, I think that's correct. It's of course limited by borrowing base, but that's right. We have a lot of, you know, a lot of running room with respect to that.

Robert Ladd: Yeah, I think that's correct. It's of course limited by borrowing base, but that's right. We have a lot of, you know, a lot of running room with respect to that.

Speaker #6: Okay. And then I guess you mentioned in your comments that you didn't have much software exposure. But in your industry list, is it buried into another industry like high-tech industries?

Christopher Nolan: Okay. I guess you mentioned in your comments that you didn't have much software exposure. In your industry list, is it buried into another industry like high-tech industries?

Speaker #4: Yeah. It's in a couple. It would be in several. It could be in high-tech. It could be in the industry it serves because, as I mentioned, those software products are very industry-specific.

W. Todd Huskinson: Yeah, it would be in several. It could be in high tech, it could be in the industry it serves because as I mentioned, those software products are very industry-specific. It could be like a service as well that might be industry-specific, and those might be in different industry categories.

Speaker #4: And it could be like a service as well, that might be industry-specific. And those might be in different industry categories.

Speaker #6: And we see with other BDCs where they've had to take down unrealized depreciation on software positions. Have you guys experienced that as well?

Christopher Nolan: We see with other BDCs where they've had to take down, you know, unrealized depreciation on software positions. Have you guys experienced that as well?

W. Todd Huskinson: We have not.

Speaker #4: We have not. Those physicians are marked approximately where they were last quarter end. And are basically marked close to par. Yeah.

W. Todd Huskinson: We have not.

Robert T. Ladd: Those positions are marked approximately where they were at last quarter end and are basically marked close to par. Yeah.

Robert Ladd: Those positions are marked approximately where they were at last quarter end and are basically marked close to par. Yeah.

Speaker #5: Yeah. They're all good, solid-performing loans. I mentioned they're either a one or a two on our risk rating scale. So all doing fine.

W. Todd Huskinson: Yeah. They're all, you know, good, solid performing loans. I mentioned they're either a 1 or a 2 on our risk rating scale. All doing fine.

Speaker #6: Okay. Thank you.

Christopher Nolan: Okay. Thank you.

Speaker #4: Yeah. Thank you, Chris.

W. Todd Huskinson: Yeah. Thank you, Chris.

Robert T. Ladd: Thanks, Chris.

Robert Ladd: Thanks, Chris.

Speaker #3: Your next question for today is from Robert Dodd with Raymond James.

Operator: Your next question for today is from Robert Dodd with Raymond James.

Speaker #4: Good morning, Robert.

W. Todd Huskinson: Good morning, Robert.

Speaker #7: Morning. Just sticking with that sofa. Well, not really sofa. The marks. On the queries, so there's 22 cents in NAV attrition primarily marked downs in debt investments.

Robert Dodd: Morning. Just sticking with that software, well, not really software, the marks. On the quarter, you said there was $0.22 in NAV attrition, primarily markdowns in debt investments. Can you give us any idea how much of that was spread versus you just mark-to-market versus actual, company-specific elements?

Speaker #7: Can you give us any how much of that was spread versus you just marked to market versus actual company-specific elements?

Speaker #4: Yeah, so I would say, Robert, most of that is coming from kind of net company movements. We had, and most of those markdowns were on two specific positions.

W. Todd Huskinson: Yeah. I would say, Robert, most of that is coming from kind of debt company movements. We had, you know, most of those markdowns were on two specific positions. You know, we did have certainly some spread markdowns in terms of just the models, but the majority of that was coming from two equity positions.

Speaker #4: So we did have certainly some spread markdowns in terms of just the models. But the majority of that was coming from two equity positions.

Speaker #4: And we also had a little bit of right equity as well. Two debt positions. I'm sorry. That are wiped out on the equity as well.

Robert Dodd: Got it. Got it.

W. Todd Huskinson: We also had a little bit of write-down equity as well. I mean, two debt positions.

Robert Dodd: Yeah

W. Todd Huskinson: I'm sorry, that is write-down on the equity as well.

Speaker #7: Got it. Got it. Thank you. Going back to the earlier question on spreads—and you said that you've seen some stability—there can sometimes, obviously, be a lag between how the smaller end of the market, so to speak, responds to spread movements versus the upper end of the market.

Robert Dodd: Got it. Got it. Thank you. Going back to the Erik's question on spreads, you've seen some stability. Sometimes obviously can be a lag between how the smaller end of the market, so to speak, responds to spread movements versus the upper end of the market, to your point. Do you think the spread stability, rather than expansion you're seeing right now is more a function of just things lagging what's going on in the upper market? Or do you think that it's just that the competitive environment in your end of the market has just not moved and you just don't expect those spreads to widen materially or at all?

Speaker #7: And to your point, so do you think the spread stability, rather than expansion you're seeing right now, is more a function of just things lagging what's going on in the upper market?

Speaker #7: Or do you think that it's just that the competitive environment in your end of the market has just not moved? And you just don't expect those spreads to widen materially or at all?

Speaker #4: Yeah, Robert. So, I would say that it's driven by the latter—that it's still a competitive space that we're in. And we're seeing things getting done in the high 4s up to the mid to high 5s.

Robert T. Ladd: Yeah, Robert. I would say that it's driven by the latter, that, still a competitive space that we're in. I think we're seeing things getting done in the high fours up to the mid to high fives. I'd say it's a competitive nature. Things are slower in terms of deal flow. I think as you see deal flow pick up, there's certainly the opportunity to have the spreads also widen some. So far, I think it's not a lag. I think it's just the competitive nature of where we are.

Robert Ladd: Yeah, Robert. I would say that it's driven by the latter, that, still a competitive space that we're in. I think we're seeing things getting done in the high fours up to the mid to high fives. I'd say it's a competitive nature. Things are slower in terms of deal flow. I think as you see deal flow pick up, there's certainly the opportunity to have the spreads also widen some. So far, I think it's not a lag. I think it's just the competitive nature of where we are.

Speaker #4: So I'd say it's a competitive nature. It's things are slower in terms of deal flow. I think as you see deal flow pick up, there's certainly the opportunity to have the spreads also widen some.

Speaker #4: But so far, I think it's not a lag. I think it's just the competitive nature of where we are.

Robert Dodd: Appreciate that. Thank you. Just one more. On the non-accruals, and you addressed this, that like they are a little elevated. You've got some, you know, you want to work that down, rotate those into, you know, either back onto accrual or into income-producing assets. I mean, any color you can give on I mean, you mentioned, you know, you're making some progress. I mean, how. It's a slow process. I wouldn't say fast. I don't mean fast. What kind of timeline do you think that could go noticeably lower than where it is currently in terms of the non-accrual and non-income-producing debt capital assets?

Speaker #7: I appreciate that. Thank you. And then just one more. On the no, of course. And you addressed this. They are a little elevated. You've got some you want to work that down.

Speaker #7: Rotate those into either back onto accrual or into income-producing assets. I mean, any color you can give on I mean, I think you mentioned your making some progress.

Speaker #7: I mean, how. It's a slow process. I wouldn't say fast. I don't mean fast. But what kind of timeline do you think that could go noticeably lower than where it is currently?

Speaker #7: In terms of the non-accrual and non-income-producing debt capital assets?

Speaker #4: Yeah. So we had we discussed this on the last call. And I think I would say the same thing. I think we're I think not going to be immediate.

Robert T. Ladd: Yes. We had discussed this on the last call, I think I would say the same thing. I think we're, you know, I think not going to be immediate. I would be thinking toward the end of the year, this year. These are, you know, generally 12 to 24 month resolution, so to speak. Just we wanted to make sure that we haven't, you know, we're very focused on it, but I think it's going to take, you know, some more time. We are seeing some progress in some.

Robert Ladd: Yes. We had discussed this on the last call, I think I would say the same thing. I think we're, you know, I think not going to be immediate. I would be thinking toward the end of the year, this year. These are, you know, generally 12 to 24 month resolution, so to speak. Just we wanted to make sure that we haven't, you know, we're very focused on it, but I think it's going to take, you know, some more time. We are seeing some progress in some.

Speaker #4: I would be thinking toward the end of the year, this year, and then these are generally 12- to 24-month resolutions, so to speak. But just, we wanted to make sure that we haven't—we're very focused on it.

Speaker #4: But I think it's going to take some more time. But we are seeing some progress and some and the other thing that you've noted, and I've mentioned in my remarks, is that as we get some of these equity realizations in and we have some larger positions this is a great opportunity to recycle.

Robert T. Ladd: The other thing that you've noted, and I mentioned in my remarks, is that as we get some of these equity realizations in, and we have some larger positions, you know, this is a great opportunity to recycle, put what are non-earning assets. They could appreciate, but non-current earning assets to put leverage on them and grow the portfolio again. We think we'll start to see that come to fruition toward the end of this year. Those two things combined, think of it more toward the end of this year into first of next year, but not immediately.

Robert Ladd: The other thing that you've noted, and I mentioned in my remarks, is that as we get some of these equity realizations in, and we have some larger positions, you know, this is a great opportunity to recycle, put what are non-earning assets. They could appreciate, but non-current earning assets to put leverage on them and grow the portfolio again. We think we'll start to see that come to fruition toward the end of this year. Those two things combined, think of it more toward the end of this year into first of next year, but not immediately.

Speaker #4: What are non-earning assets? They could appreciate, but they're non-current earning assets. To put leverage on them and grow the portfolio again. So we think we'll start to see that come to fruition toward the end of this year.

Speaker #4: So those two things combined. Think of it more toward the end of this year into first of next year, but not immediately.

Speaker #7: Got it. Got it. Thank you.

Robert Dodd: Got it. Got it. Thank you.

Speaker #4: Yeah. Thank you, Robert.

Robert T. Ladd: Yeah. Thank you, Robert.

Robert Ladd: Yeah. Thank you, Robert.

Speaker #3: Your next question is from Paul Johnson with KBW.

David Brown: Your next question is from Paul Johnson with KBW.

Operator: Your next question is from Paul Johnson with KBW.

Speaker #4: Good morning, Paul.

W. Todd Huskinson: Good morning, Paul.

Speaker #7: Yeah, good afternoon, guys. Thanks for taking my questions. Just a little bit more on the non-accruals. As Robert said, those are elevated. I think they're probably as high as they've ever been for Stellus.

Paul Johnson: Yeah. Good afternoon, guys. Thanks for taking my questions. Just a little bit more on the non-accruals. As Robert said, those are elevated. I think they're probably as high as they've ever been for Stellus. I'm, you know, just curious, you know, what, I guess, has been kind of the weakness there? I mean, has it just been kind of a challenging vintage, or has there been something maybe more specific in terms of kind of what's driven, you know, the more recent, I guess, increase in non-accruals?

Speaker #7: I'm just curious. I guess, has been kind of the weakness there? I mean, has it just been kind of a challenging vintage or has there been something maybe more specific in terms of kind of what's driven the more recent, I guess, increase in non-accruals?

Speaker #4: Yeah. So good question, Paul. I'd say they're all company-specific, not driven by any kind of a macro trend or an underwriting trend that we all of our businesses, when we underwrite them, there are a few key characteristics: one, they have a substantial equity partner behind it, a private equity firm.

Robert T. Ladd: Good question, Paul. I’d say they’re all company specific, not driven by any kind of a macro trend or an underwriting trend that we You know, all of our businesses, when we underwrite them, there are a few key characteristics. 1, they have a substantial equity partner behind it, a private equity firm. 2, the equity component to the company is at least, or typically at least 50% of the capital structure. Each has serious covenants, traditionally a fixed charge coverage and a leverage test. When we go into it, we’re not expecting problems, but we certainly underwrite, if we went through a recession, how would this company do? We ended up having not a recession, but again, company-specific issues that have made some of them challenging.

Robert Ladd: Good question, Paul. I’d say they’re all company specific, not driven by any kind of a macro trend or an underwriting trend that we You know, all of our businesses, when we underwrite them, there are a few key characteristics. 1, they have a substantial equity partner behind it, a private equity firm. 2, the equity component to the company is at least, or typically at least 50% of the capital structure. Each has serious covenants, traditionally a fixed charge coverage and a leverage test. When we go into it, we’re not expecting problems, but we certainly underwrite, if we went through a recession, how would this company do? We ended up having not a recession, but again, company-specific issues that have made some of them challenging.

Speaker #4: Two, the is at least they're typically at least 50% of the capital structure. And each has serious covenants, traditionally a fixed charge coverage and a leverage test.

Speaker #4: So when we go into it, we're not expecting problems, but we certainly underwrite if we went through a recession, how would this company do?

Speaker #4: But we ended up having not a recession, but again, company-specific issues that have made some of them challenging. Also, it's worth noting that because there's a private equity sponsor behind substantially all of these, it is typical that a private equity firm will put in capital at least twice to solve problems.

Robert T. Ladd: It's worth noting that because there's a private equity sponsor beyond substantially all of these, it is typical that a private equity firm will put in capital at least twice to solve problems. If that's helpful to say that if we have something on non-accrual, the sponsor owner has supported this over time and just gotten to the point where they're not able to support it anymore. Again, company specific, nothing we could tie down to anything that would be a overall trend. Part of it too is, you know, we've also had in the past, we've not had things come off non-accrual or be resolved, and we're having some slowness in that activity. That's why I noted that we're working it and, you know, working it hard to get that to reduce over time.

Robert Ladd: It's worth noting that because there's a private equity sponsor beyond substantially all of these, it is typical that a private equity firm will put in capital at least twice to solve problems. If that's helpful to say that if we have something on non-accrual, the sponsor owner has supported this over time and just gotten to the point where they're not able to support it anymore. Again, company specific, nothing we could tie down to anything that would be a overall trend. Part of it too is, you know, we've also had in the past, we've not had things come off non-accrual or be resolved, and we're having some slowness in that activity. That's why I noted that we're working it and, you know, working it hard to get that to reduce over time.

Speaker #4: So if that's helpful to say that if we have something on non-accrual, the sponsor-owner has supported this over time. And just gotten to the point where they're not able to support it anymore.

Speaker #4: So again, company-specific, nothing we could tie down to anything that would be an overall trend. Part of it, too, is we've also had in the past, we might have things come off non-accrual or be resolved.

Speaker #4: And we're having some slowness in that activity. And that's why I noted the that we're working it. And working it hard to get that to reduce over time.

Speaker #4: So, I think it's—we haven't been able to take as many off as we've added. But anyway, thanks for the question. And that's where we are.

Robert T. Ladd: I think it's we haven't been able to take as many off as we've added. Anyway, thanks for the question, and that's where we are.

Robert Ladd: I think it's we haven't been able to take as many off as we've added. Anyway, thanks for the question, and that's where we are.

Speaker #7: Got it. Okay. Appreciate that. And then I mean, it sounds if I'm not mistaken, you're one to two-rated names roughly around 19% of the portfolio.

Paul Johnson: Got it. Okay. Appreciate that. I mean, it sounds like, if I'm not mistaken, your, you know, one to two rated names, roughly around 19% of the portfolio, I believe last quarter. I don't think there's too much change quarter over quarter in terms of like the internal watch list of, you know, with the new addition here to non-accrual, I believe that may have already been captured within, you know, your internal watch list. Is that safe to say that, you know, any of the, you know, addition here to the non-accrual is not necessarily a surprise and is, you know, was more or less kind of within the bucket of, you know, underperforming rated names and that's relatively unchanged quarter over quarter?

Speaker #7: I believe last quarter, I don't think there's too much change quarter over quarter. In terms of the internal watch list, with the new addition here to non-accrual, I believe that may have already been captured within your internal watch list.

Speaker #7: Is that safe to say that any of the addition here to the non-accrual is not necessarily a surprise and is more or less kind of within the bucket of underperforming rated names?

Speaker #7: And that's relatively unchanged quarter over quarter?

Robert T. Ladd: That's right, Paul. Again, I think so it's 19% that is risk grade 3 or below. You're right, that number didn't change.

Robert Ladd: That's right, Paul. Again, I think so it's 19% that is risk grade 3 or below. You're right, that number didn't change.

Speaker #4: That's right, Paul. And again, I think so it's 19% that is risk grade three or below. And you're right, that number didn't change.

Speaker #7: My mistake.

Paul Johnson: My mistake.

Speaker #4: And no, no, no worries. And that the one that did move to non-accrual was already a risk grade three before.

Robert T. Ladd: No, no worries. That the one that did move to non-accrual was already a risk grade 3 before.

Robert Ladd: No, no worries. That the one that did move to non-accrual was already a risk grade 3 before.

Speaker #7: Got it. Okay. Thanks. That's all for me.

Paul Johnson: Got it. Okay. Thanks. That's all for me.

Speaker #4: Yeah. Thanks so much, Paul.

Robert T. Ladd: Yeah. Thanks so much, Paul.

Robert Ladd: Yeah. Thanks so much, Paul.

Speaker #3: We have reached the end of the question-and-answer session, and I will now turn the call over to Robert Ladd for closing remarks.

Operator: We have reached the end of the question and answer session, and I will now turn the call over to Robert Ladd for closing remarks.

Speaker #4: Okay. Thanks again, Holly. Thanks for your help. And thanks, everyone, for participating. Your support over many years of our company. And we look forward to giving you an update again in early August relative to the second quarter.

Robert T. Ladd: Okay, thanks again, Holly. Thanks for your help, and thanks everyone for participating, your support over many years of our company. We look forward to giving you an update again in early August relative to Q2. Thank you.

Robert Ladd: Okay, thanks again, Holly. Thanks for your help, and thanks everyone for participating, your support over many years of our company. We look forward to giving you an update again in early August relative to Q2. Thank you.

Speaker #4: Thank you.

Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.