Group 1 - Stellus Capital Investment Corp (NYSE: SCM) currently offers a monthly dividend that results in an annual yield significantly higher than what is typically available to income investors [1]

wsf-s / Shutterstock.com · wsf-s / Shutterstock.com Quick Read FS KKR Capital (FSK) yields 26.5% after a 44% stock collapse, with net investment income falling from $937M to $701M and non-accrual loans at 2.9% of fair value. Stellus Capital (SCM) cut its monthly dividend 15% in January 2026 after posting a $21.8M net loss in Q4 2025 and trades at 0.67x book value. Trinity Capital (TRIN) yields 13.7% with growing net investment income of $199M in 2025 versus $164.8M in 2024, rising NAV per share, and onl ...

Stellus ended the fourth quarter with an investment portfolio at fair value of $1.01 billion across 115 portfolio companies, unchanged from September 30, 2025. During the quarter, the company invested $34.1 million in four new portfolio companies and had $18 million in other investment activity at par. It also received four full repayments totaling $37.9 million , five equity realizations totaling $7 million , and $9.1 million of other repayments at par.On the capital side, Huskinson said that on December 3 ...

Now I will cover our operating results for the fourth quarter and year. I would like to start with our life-to-date activity. Since our IPO in November 2012, we have invested approximately $2.8 billion in over 220 companies and received approximately $1.8 billion of repayments, while maintaining stable asset quality. We have paid $333 million in dividends to our investors, which represents $18.27 per share to an investor in our IPO in November 2012, which was offered at $15 per share. In the fourth quarter, ...

Financial Data and Key Metrics Changes - For the fourth quarter, the company generated $0.29 per share of GAAP net investment income, with Core Net Investment Income also at $0.29 per share, excluding excise taxes [5] - Total realized income for the quarter was $0.48 per share, which included realized gains of $5.5 million on five equity positions [5] - Net asset value per share decreased by $0.23 during the quarter, attributed to $0.11 per share in dividend payments exceeding earnings and net realized losses of $0.12 per share primarily from two debt investments [5] Business Line Data and Key Metrics Changes - The investment portfolio at fair value remained stable at $1.01 billion across 115 portfolio companies [6] - During the fourth quarter, the company invested $34.1 million in four new portfolio companies and received repayments totaling $37.9 million [6] - 99% of loans were secured, with 92% priced at floating rates, and the average loan per company was $8.8 million [7] Market Data and Key Metrics Changes - The company has investments in 24 separate industry sectors, with approximately 10% in high-tech industries [8] - The portfolio includes a small number of loans to software companies related to the SaaS space, comprising 6.8% of the loan portfolio [9] Company Strategy and Development Direction - The company announced a $20 million share buyback program, reflecting the current trading level of shares at approximately a 30% discount to net asset value [16] - The external manager, Stellus Capital Management, is set to join Ridgepost Capital, which is expected to open up new investment opportunities for the company [14][15] - The company focuses on direct, originated, senior secured loans to lower middle market private equity-backed companies, differentiating itself from larger private credit managers [18] Management's Comments on Operating Environment and Future Outlook - The company expects to maintain its portfolio size at approximately $996 million, with continued equity realizations of about $2 million in Q1 2026 [12] - Management expressed confidence in the private credit sector, highlighting the significant amount of dry powder available in lower middle market private equity firms [21] - The company anticipates a gradual resolution of non-accrual assets over the next 12-18 months, with a focus on restructuring and monetizing positions [60] Other Important Information - The company has paid $333 million in dividends since its IPO, representing $18.27 per share to investors [4] - The weighted average risk rate across the portfolio is approximately 2, indicating investments performing on plan [18] Q&A Session Summary Question: Will there be any change in the leverage targets for SCM? - Management confirmed that there will not be a change in the targeted leverage for SCM, which is approximately 1:1 on the regulatory test [27] Question: What is the remaining capacity in the SBA? - Management indicated that there is significant new capacity in the SBA, with $65 million of new debentures available for growth [29] Question: Can you provide details on the non-accrual investments? - Management stated that the non-accrual companies are working with others to secure additional capital during challenging periods [30] Question: What is the exposure to higher energy prices? - Management confirmed no direct exposure to the oil and gas industry and emphasized a focus on avoiding commodity price risk [52] Question: What is the expected timeline for resolution of non-accrual assets? - Management anticipates a gradual resolution over the next 12-18 months, with some assets being restructured [60] Question: Will spreads widen sustainably in the next year or two? - Management noted that public loan indices have widened, and while private markets have not yet reflected this, the conditions for widening spreads are present [62]

Financial Data and Key Metrics Changes - For the fourth quarter, the company generated $0.29 per share of GAAP net investment income, with Core Net Investment Income also at $0.29 per share, excluding excise taxes [5] - The net asset value per share decreased by $0.23 during the quarter, attributed to $0.11 per share in dividend payments exceeding earnings and net realized losses of $0.12 per share primarily from two debt investments [5][6] - The company has invested approximately $2.8 billion in over 220 companies since its IPO, with $1.8 billion in repayments and $333 million in dividends paid to investors [4] Business Line Data and Key Metrics Changes - The investment portfolio at fair value remained stable at $1.01 billion across 115 portfolio companies [6] - During the fourth quarter, the company invested $34.1 million in four new portfolio companies and received repayments totaling $37.9 million [6][8] - 99% of loans were secured, with 92% priced at floating rates, and the average loan per company was $8.8 million [7] Market Data and Key Metrics Changes - The company has approximately 10% of its investments in high-tech industries, with a focus on industry-specific tech-enabled solutions rather than large-scale SaaS software [8][9] - The company has loans to five portfolio companies on non-accrual, comprising 7.5% of the total cost and 4.1% of the fair value of the total investment portfolio [8] Company Strategy and Development Direction - The company announced a $20 million share buyback program, reflecting its current trading level at approximately a 30% discount to net asset value [16] - The external manager, Stellus Capital Management, is set to join Ridgepost Capital, which is expected to enhance investment opportunities for the company [14][15] - The company focuses on direct, originated, senior secured loans to lower middle-market private equity-backed companies, differentiating itself from larger private credit managers [18][19] Management's Comments on Operating Environment and Future Outlook - The company expects to maintain its portfolio size at approximately $996 million, with continued equity realizations of about $2 million in Q1 2026 [12] - Management expressed confidence in the stability of asset quality and the potential for improved pricing in the private credit sector [39][62] - The company anticipates a gradual resolution of non-accrual assets over the next 12-18 months [60] Other Important Information - The company has a weighted average risk rate of approximately two, indicating investments performing on plan [18] - The company has a long history of equity co-investments alongside debt investments, generating approximately $98 million of net realized gains to date [20] Q&A Session Summary Question: Will there be any change in the leverage targets for SCM? - Management confirmed that there will not be a change in the targeted leverage for SCM, which is approximately 1:1 on the regulatory test and approximately 2:1 including SBIC debentures [27] Question: What is the remaining capacity in the SBA? - Management indicated that there is significant new capacity in the SBA, with $65 million of new debentures available for future growth [29] Question: Can you provide details on the non-accrual investments? - Management stated that the non-accrual companies are working with others to secure additional capital during challenging periods [30] Question: What is the exposure to higher energy prices? - Management confirmed no direct exposure to the oil and gas industry and emphasized a focus on avoiding commodity price risk [52] Question: What is the expected timeline for resolution of non-accrual assets? - Management anticipates a gradual resolution over the next 12-18 months, with some assets potentially coming off non-accrual [60]

Financial Data and Key Metrics Changes - In Q4 2025, the company generated $0.29 per share of GAAP net investment income, with Core Net Investment Income also at $0.29 per share, excluding excise taxes [5] - Total realized income for the quarter was $0.48 per share, which included gains of $5.5 million on 5 equity positions [5] - Net asset value per share decreased by $0.23 during the quarter, attributed to $0.11 per share in dividend payments exceeding earnings and net realized losses of $0.12 per share primarily from two debt investments [5][6] Business Line Data and Key Metrics Changes - The investment portfolio at fair value remained stable at $1.01 billion across 115 portfolio companies [6] - During Q4, the company invested $34.1 million in four new portfolio companies and received repayments totaling $37.9 million [6][8] - 99% of loans were secured, with 92% priced at floating rates, and the average loan per company was $8.8 million [7] Market Data and Key Metrics Changes - The company has investments in 24 separate industry sectors, with approximately 10% in high-tech industries [9] - The portfolio includes a small number of loans to software companies related to the SaaS space, comprising 6.8% of the loan portfolio [10] Company Strategy and Development Direction - The company announced a $20 million share buyback program, reflecting its shares trading at approximately a 30% discount to net asset value [18] - The external manager, Stellus Capital Management, is set to join Ridgepost Capital, which is expected to enhance investment opportunities for the company [15][17] - The company focuses on direct, originated, senior secured loans to lower middle market private equity-backed companies, differentiating itself from larger private credit managers [20] Management's Comments on Operating Environment and Future Outlook - The company expects to maintain its portfolio size at approximately $996 million, with continued equity realizations of about $2 million in Q1 2026 [13] - Management emphasized the importance of strong underwriting and being selective about opportunities in the current economic environment [38] - The company anticipates a gradual resolution of non-accrual loans over the next 12-18 months [59] Other Important Information - The company has paid $333 million in dividends since its IPO, representing $18.27 per share to initial investors [4] - The company has a weighted average risk rate of approximately 2, indicating investments performing on plan [20] Q&A Session Summary Question: Will there be any change in the leverage targets for SCM? - Management confirmed that there will not be a change in the targeted leverage for SCM, which is approximately 1:1 on the regulatory test and approximately 2:1 including SBIC debentures [28] Question: What is the remaining capacity in the SBA? - Management indicated that there is significant new capacity in the SBA, with $65 million of new debentures available for growth [29] Question: Can you provide details on the non-accrual investments? - Management stated that the companies in non-accrual are working with others to secure additional capital during challenging periods [30] Question: What is the exposure to higher energy prices? - Management confirmed no direct exposure to the oil and gas industry and stated that any impact would be more related to consumer spending rather than direct company exposure [52] Question: What is the expected timeline for resolution of non-accrual assets? - Management expects a gradual resolution over the next 12-18 months, with some companies coming off non-accrual [59]

Industry Overview - Business development companies (BDCs) are currently facing challenges related to deteriorating portfolio quality and limited growth potential [1] - Stellus Capital Investment (SCM) is particularly vulnerable to the same headwinds affecting its peer BDCs [1] Investment Strategy - A hybrid investment strategy combining classic dividend growth stocks with BDCs, REITs, and Closed-End Funds can enhance investment income while achieving total returns comparable to traditional index funds like the S&P [1]

Core Insights - Stellus Capital Investment Corporation reported solid operating results for the fourth fiscal quarter and year ended December 31, 2025, with U.S. GAAP net and core investment income of $0.29 per share and net realized income of $0.48 per share [1] - The company funded $52 million in investments and received $54 million in repayments during the quarter, resulting in a total portfolio valued at $1.01 billion [1] - Since inception, investors have received a total of $333 million in distributions, equating to $18.27 per share [1] Financial Highlights - For the three months ended December 31, 2025, net investment income was $8.40 million ($0.29 per share), compared to $9.64 million ($0.35 per share) for the same period in 2024 [1] - Core net investment income for the same period was $8.53 million ($0.29 per share) versus $10.15 million ($0.37 per share) in 2024 [1] - Total realized income for the quarter was $13.82 million ($0.48 per share), down from $15.57 million ($0.57 per share) in the previous year [1] Portfolio Activity - As of December 31, 2025, investments at fair value totaled $1,007.6 million, up from $953.5 million a year earlier [1] - The company had 115 portfolio company investments, with 100 being debt investments [1] - The weighted average yield of debt and other income-producing investments was 9.3%, down from 10.3% in 2024 [1] Liquidity and Capital Resources - The company had an outstanding balance of $236.6 million under its credit facility as of December 31, 2025, compared to $175.4 million in 2024 [1] - The credit facility allows for borrowings up to $335 million, with an accordion feature for potential expansion [1] Recent Developments - The company declared a regular monthly dividend of $0.40 per share for both the three months ended December 31, 2025, and 2024 [1] - Stellus Capital Management entered into a definitive agreement with P10 Intermediate Holdings, LLC, for acquisition, which will result in a change of control of Stellus Capital Management [2] - The board authorized a stock repurchase program for up to $20 million of its common stock, aimed at addressing market volatility and potential undervaluation [2]

Investment Advisory and Management - The Investment Advisory Agreement will continue annually if approved by the Board and a majority of independent directors, with the latest approval on January 7, 2026[140]. - Stellus Capital Management is entitled to indemnification for damages arising from its services, limited by the 1940 Act[139]. - The Board concluded that the investment management fee rates and terms are reasonable and in the best interests of stockholders[145]. - Stellus Capital Management provides administrative services, including financial recordkeeping and tax return preparation, under the Administration Agreement[146]. - The Administration Agreement was last approved on January 7, 2026, and can be terminated by either party with 60 days' notice[147]. - The advisory fee structure reflects economies of scale as the company grows, benefiting stockholders[141]. - The license agreement allows the company to use the "Stellus Capital" name as long as Stellus Capital Management remains the investment adviser[149]. Investment and Asset Management - The company may invest up to 100% of its assets in privately negotiated transactions, potentially being deemed an "underwriter" under the Securities Act[154]. - Qualifying assets must represent at least 70% of the company's total assets, with specific categories defined under the 1940 Act[155]. - The company must provide significant managerial assistance to portfolio companies to count portfolio securities as qualifying assets for the 70% test[158]. - Temporary investments may include cash, cash equivalents, U.S. government securities, and high-quality debt investments maturing in one year or less, ensuring 70% of assets are qualifying or temporary investments[159]. - The company can issue multiple classes of indebtedness and one class of stock senior to common stock if asset coverage is at least 150% immediately after issuance[164]. - The company is prohibited from issuing common stock below net asset value per share unless approved by the Board and stockholders[165]. Tax Compliance and Distribution Requirements - To qualify as a RIC, the company must derive at least 90% of gross income from specific sources, including dividends and interest[183]. - The company must distribute at least 90% of its investment company taxable income to avoid U.S. federal income tax[179]. - A nondeductible 4% U.S. federal excise tax applies on certain undistributed income unless specific distribution requirements are met[181]. - The company must maintain compliance with the Sarbanes-Oxley Act, including certifying the accuracy of financial statements by the principal executive and financial officers[182]. - The company is required to adopt and implement written policies to prevent violations of federal securities laws and designate a Chief Compliance Officer[177]. Proxy Voting and Fund Management - Stellus Capital Management is responsible for proxy voting, ensuring votes are made in the best interest of stockholders[169]. - The company is authorized to borrow funds and sell assets to meet the Annual Distribution Requirement and eliminate U.S. federal income and excise tax liabilities, but may face limitations due to the illiquid nature of its portfolio[187]. - The company operates two SBIC subsidiaries, which are partially relied upon for cash distributions to meet the Annual Distribution Requirement, but may face restrictions from the SBA that could affect tax treatment as a RIC[188]. - At the end of each quarter, at least 50% of the company's assets must consist of cash, U.S. government securities, and other securities, with no more than 25% invested in any one issuer[189]. Regulatory and Financial Considerations - The company has received exemptive relief from the SEC, allowing it to exclude SBA-guaranteed debentures from the definition of senior securities, enabling it to borrow up to $325.0 million more[203]. - As of December 31, 2025, the SBIC I subsidiary had $75.0 million in regulatory capital and $124.0 million in SBA-guaranteed debentures outstanding, while the SBIC II subsidiary had $87.5 million in regulatory capital and $175.0 million in SBA-guaranteed debentures[202]. - The company may face challenges in maintaining its RIC tax treatment if its SBIC subsidiaries cannot obtain necessary waivers from the SBA[188]. - The maximum leverage available to a family of two or more SBIC funds under common control is $350.0 million, subject to SBA approval[202]. - The company must monitor its transactions to mitigate the effects of complex U.S. federal income tax provisions that could affect its RIC status[191]. Interest Rate Impact and Management - 91.6% of the loans in the company's portfolio bore interest at floating rates as of December 31, 2025, with these rates typically indexed to SOFR[551]. - The Federal Reserve raised interest rates to a target range of 5.25% - 5.50% in July 2023, the highest since January 2001, impacting the company's financial market risks[551]. - As of December 31, 2024, the weighted average interest rate floor on floating rate loans was 1.42% and 1.46%[553]. - The annual impact on net income from a 200 basis points increase in interest rates would result in a net interest income of $12.3 million[553]. - A 150 basis points increase in interest rates would yield a net interest income of $9.3 million[553]. - A 100 basis points increase would lead to a net interest income of $6.1 million[553]. - A 50 basis points increase would result in a net interest income of $3.1 million[553]. - A decrease of 50 basis points would lead to a net interest loss of $3.1 million[553]. - The three-month SOFR rate was 365 basis points as of December 31, 2025[554]. - The company did not engage in interest rate hedging activities for the years ended December 31, 2025 and 2024[555]. - The company may use standard hedging instruments to mitigate interest rate fluctuations, but this may limit benefits from lower interest rates[555]. - The company acknowledges that actual results may differ materially from simulated outcomes due to various factors[555].