Stellus Capital Investment (SCM) - 2024 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In Q4 2024, the company generated GAAP net investment income of $0.35 per share and core net investment income of$0.37 per share, excluding estimated excise taxes [8] - Net asset value per share decreased by $0.09 during the quarter due to net unrealized depreciation on the investment portfolio and reduction of spillover income, offset by net realized gains primarily related to one equity investment [9] - The investment portfolio at fair value increased to$953.5 million across 105 portfolio companies, up from $908.7 million across 99 companies as of September 30, 2024 [10] Business Line Data and Key Metrics Changes - The company invested$76.5 million in nine new and portfolio companies during Q4 2024 and had $33 million in other investment activity, all at par [10] - Three full repayments totaling$46.9 million and $15.6 million of other repayments were received, both at par [11] - 98$9.5 million [11][12] Market Data and Key Metrics Changes - The company’s portfolio includes loans to seven portfolio companies on nonaccrual, comprising 5.4% of the fair value of the total loan portfolio [13] - 24% of the portfolio is rated a one or ahead of plan, while 21% is marked category three or below plan, indicating some companies are not meeting expectations [13] Company Strategy and Development Direction - The company aims to maintain a portfolio of $1 billion, having funded an additional$47 million in the first quarter of 2025 [14] - The equity co-invest business includes investments across 92 companies with a cost basis of $59 million, with expectations of meaningful uplift over time [16] - The company declared a dividend of$0.40 per share for Q1 2025, expected to continue into the second quarter and throughout the year based on spillover earnings [17] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding leverage levels and potential credit risks due to uncertainties created by government actions [24][25] - The company anticipates that the first quarter EPS will likely not fully cover the dividend, but spillover earnings from previous years will help [29][30] - Management noted a decrease in investment yields due to tightening spreads and some additional non-accruals, but overall asset quality remains on plan [34] Other Important Information - The company had $45 million of spillover at the end of Q4 2024, which will support dividends in 2025 [52] - The company is in the process of obtaining a third SBA lending license after prepaying a debenture payment of approximately$16 million [38] Q&A Session Summary Question: Thoughts on potential tariff impacts and credit quality changes - Management is operating at lower leverage levels than usual and is cautious about the uncertainty created by government actions [24][25] Question: Will first quarter EPS cover the dividend? - EPS is expected to be close but probably not fully cover the dividend, with substantial earnings from the past helping to cover it [29][30] Question: What drove the decrease in investment yields? - Decrease in spreads from sixes to fives and some impact from additional non-accruals were noted [34] Question: Thoughts on increasing leverage - Management is targeting a one-to-one leverage ratio but remains cautious about increasing leverage in the current environment [36] Question: Will the company re-up for more SBA lending capacity? - Yes, the company is moving forward with obtaining a third license for SBA lending [38] Question: Analysis of portfolio exposure to tariffs - Management estimates that up to 10% of the portfolio could be impacted by tariffs, but it is not expected to be material at this time [57][58] Question: Any additional markup from realized gains this quarter? - There was a few million dollars in additional markup from one equity position that continued to grow [60]