Stellus Capital Investment (SCM) - 2022 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported core net investment income of $0.29 per share and GAAP net investment income of $0.28 per share for Q1 2022, covering the regular dividend of $0.28 per share [10] - The investment portfolio at fair value increased by $65 million, ending the quarter at $854 million on a cost basis [7] - The company generated net realized gains of $3.5 million during the quarter [11] Business Line Data and Key Metrics Changes - The company invested $74.5 million in 6 new and 7 existing portfolio companies during the first quarter [15] - The asset quality rating remained stable at 2.03, with 86% of the portfolio rated at 2 or higher [15] Market Data and Key Metrics Changes - The forward curve for 90-day LIBOR is expected to exceed 3% by early next year, which is approximately 2% higher than the LIBOR rate at March 31 [18] - The company noted that 97% of its loan portfolio is floating, which positions it to benefit from rising interest rates [18] Company Strategy and Development Direction - The company plans to fully deploy the SBIC debentures this year, potentially increasing the portfolio to approximately $900 million [26] - The company expects to maintain a combined dividend of $0.34 per share for the foreseeable future, representing an annualized yield of 10.4% based on the stock price [17] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence that the rising interest rate environment will not materially impact asset quality, expecting only significant increases (e.g., 500 basis points) to have a material effect [33] - The company anticipates slower repayments this year but expects a potential pickup in the third and fourth quarters based on historical trends [42] Other Important Information - The company has paid over $186 million in dividends since its IPO in November 2012, representing $12.22 per share to an investor from the IPO [13] - The company has committed the full $87.5 million of equity to SBIC II and has funded $70 million [11] Q&A Session Summary Question: On the pace of deployment and regulatory leverage - Management indicated that the target leverage from a regulatory standpoint is around 1:1, with a combined GAAP basis of roughly 2:1, and plans to fully deploy debentures this year [26] Question: On the drop in interest income - The decrease in interest income was attributed to fewer repayments and minimal fee acceleration in Q1 compared to Q4 of the previous year [29] Question: On asset quality and rising interest rates - Management does not expect rising interest rates to materially impact asset quality, noting that a significant increase would be required to have an effect [33] Question: On private equity partners' strategies - Private equity partners are expected to remain selective in acquisitions due to economic headwinds, but there is still substantial dry powder available for investments [37] Question: On expectations for lower repayments - Management noted that repayments are currently lower than normal but may increase in the latter half of the year based on historical patterns [42]