Stellus Capital Investment (SCM) - 2020 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The net asset value per share increased by $0.86 during the fourth quarter, rising from $13.17 to $14.03, attributed to the early declaration of the fourth quarter dividend and net appreciation on the investment portfolio [12] - The company reported a net realized loss of $7.7 million, primarily related to one investment, offset by unrealized gains of $19.6 million during the quarter [13] - The company’s liquidity and capital position improved significantly, with an increase in the bank facility by $10 million to $230 million and an institutional bond offering of $100 million completed in January 2021 [14][15] Business Line Data and Key Metrics Changes - The investment portfolio at fair value was $653 million across 66 portfolio companies, up from $629 million across 63 companies a year ago [20] - The company invested $152 million in 10 new and 20 existing portfolio companies during 2020, receiving $129 million in repayments, resulting in a net portfolio growth at cost of about $23 million for the year [20] Market Data and Key Metrics Changes - The company maintained a diversified portfolio, with the largest industry sector accounting for 17% of the total, and 97% of loans were secured while 93% were priced at floating rates [21][22] - The asset quality remained stable, with a rating of 2.0 on the investment rating system, and only 1% of the total loan portfolio was marked as non-accrual [23] Company Strategy and Development Direction - The company’s strategy includes investing in the equity of portfolio companies modestly to generate realized gains sufficient to offset losses over time [24] - The company aims to grow its portfolio to approximately $800 million by the end of the year, with a focus on SBIC financings [42] Management's Comments on Operating Environment and Future Outlook - Management noted an increase in investment opportunities, with $158 million invested on a cost basis in the first quarter of 2021 [9] - The investment philosophy remains unchanged, focusing on companies that can survive economic downturns, with a preference for businesses with low maintenance capital expenditures [57] Other Important Information - The company has reduced unfunded commitments from $37.5 million at the beginning of the year to $24.2 million [15] - The company continues to commit equity capital to its second SBIC subsidiary, allowing for low-cost debentures [16] Q&A Session Summary Question: Status of a previously non-accrual loan - Management confirmed that a preferred equity position has been written up and the loan amount has gone back on accrual [31][32] Question: Future debt offerings and leverage ratios - Management indicated that while the bond offering was attractive, the current mix of fixed and floating rate liabilities is deemed appropriate, with potential for modest additional bond offerings if yields decrease [33][35] Question: Pipeline of investment opportunities - Management stated that the pipeline is consistent, with expectations for continued opportunities and a significant portion of new investments qualifying for SBIC financing [39][40] Question: Quality of deals and leverage trends - Management noted that most deals are first lien unitranche, with leverage ratios remaining stable and covenants in place [45][47] Question: Breakdown of unrealized gains - Management provided a breakdown indicating that approximately $10 million of unrealized gains were due to reversals of previous losses, with the remainder primarily from equity portfolio gains [52][54] Question: Changes in investment philosophy post-COVID - Management confirmed that the investment philosophy has not changed, focusing on companies that can withstand downturns, while noting an increase in SBIC-qualifying investments [57][60]