Stellus Capital Investment (SCM) - 2025 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For the first quarter ended March 31, 2025, the company generated GAAP net investment income of $0.35 per share and core net investment income of $0.37 per share, which excludes estimated excise taxes [6] - Net asset value per share decreased by $0.21 during the quarter primarily due to company-specific write-downs in the loan portfolio and a reduction of spillover income [6] - The company issued 656,085 shares for $9.3 million at an average gross price of $14.11, all above net asset value [6] Business Line Data and Key Metrics Changes - The investment portfolio at fair value increased to $991.1 million across 110 portfolio companies, up from $953.5 million across 105 companies as of December 31, 2024 [7] - During the first quarter, the company invested $46.7 million in seven new portfolio companies and had $8.7 million in other investment activity at par [7] - 90% of the loans were secured, and 91% were priced at floating rates, with an average loan per company of $9.4 million [7][9] Market Data and Key Metrics Changes - The company noted that 52% of the portfolio is rated two or on or ahead of plan, while 21% is marked at an investment category of three or below, indicating some loans are not meeting expectations [9] - Currently, loans to five portfolio companies are on non-accrual status, comprising 6.7% of the total cost and 4% of the fair value of the total loan portfolio, representing a decrease from the prior quarter [9] Company Strategy and Development Direction - The company plans to draw new leverage under the SBIC III license to continue funding qualifying portfolio company investments [10] - The company aims to grow the portfolio to over $1 billion, with expectations for more than $10 million in equity gains by year-end [12] Management's Comments on Operating Environment and Future Outlook - Management indicated that the average portfolio in the first quarter was higher than in the fourth quarter, which is expected to continue into the second quarter, leading to a potential increase in yield [16] - The management expressed optimism about the return of M&A activity, which was temporarily disrupted due to tariff-related uncertainties [20][51] - The company expects to maintain the dividend at $0.40 per share for the second and third quarters, subject to Board approval [12][24] Other Important Information - The company has paid $295 million in dividends since its IPO, representing $17.9 per share to an investor in the IPO [6] - The company received a green light letter from the Small Business Administration for Stellus Capital SBIC III, which is a significant step in the licensing process [10] Q&A Session Summary Question: Impact of first quarter originations on interest income - Management noted that the average portfolio in the first quarter was higher than the fourth, which should lead to a pickup in yield in dollars [16] Question: Pipeline status and lending opportunities - Management indicated that the pipeline is slower compared to three months ago, but they expect interesting opportunities to close in the upcoming quarters [20] Question: Trajectory of net investment income (NII) to cover dividends - Management acknowledged that NII is currently less than the dividend but expects to be in a good position by the end of the year due to potential equity co-investments [24] Question: Trade education acquisition restructuring - Management confirmed that the business was restructured and recapitalized satisfactorily, expecting it to perform well going forward [29] Question: Logic behind issuing fixed-rate debt - Management explained that the issuance was necessary to retire maturing bonds and to have some unsecured debt in the capital stack [36] Question: Future issuance of common shares under the ATM program - Management stated that future issuances would depend on market conditions and stock price trading [40] Question: Second lien loans strategy - Management confirmed that they do not expect to issue new second lien loans, focusing instead on first lien unitranche secured lending [42] Question: Impact of SBA green light on earnings in a lower interest rate environment - Management confirmed that the potential for SBIC debentures would allow for borrowing at lower rates, positively impacting earnings [44]