Stellus Capital Investment (US:SCM)2025-05-13 17:02Financial 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 [5] - The 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 [5] - The company has paid $295 million in dividends to investors since its IPO, representing $17.9 per share to an investor in the IPO [5] 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 [6] - 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 [6] - The average loan per company is $9.4 million, with the largest overall investment at $21.9 million, both at fair value [6] Market Data and Key Metrics Changes - 90% of the company's loans were secured, and 91% were priced at floating rates as of March 31, 2025 [6] - 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 [7] Company Strategy and Development Direction - The company plans to draw new leverage under the SBIC III license to continue funding qualifying portfolio company investments [8] - The company aims to grow its portfolio to over $1 billion, with potential for more than $10 million in equity gains by year-end [10] - The company has shifted its investment strategy to focus on first lien unitranche secured lending with equity co-investments, moving away from second lien loans due to risk management considerations [38] Management's Comments on Operating Environment and Future Outlook - The management noted that the pipeline for new loan originations is slower compared to three months ago, affected by tariff activity and overall economic conditions [17] - The management expressed optimism about picking up activity as clarity improves in the market, indicating that the current slowdown is temporary [46] - The company expects to maintain the dividend at $0.40 per share for the second and third quarters, although net investment income is currently running below this level [19][21] Other Important Information - The company issued $75 million in aggregate principal amount of 7.25% notes due April 1, 2030, using the proceeds to repay the bank facility [8] - The company has received a green light letter from the Small Business Administration for Stellus Capital SBIC III, which is a significant step in the licensing process [8] Q&A Session Summary Question: Impact of first quarter originations on interest income - The average portfolio in the first quarter was higher than in the fourth quarter, which is expected to result in a pickup in yield in dollars for the second quarter [13][14] Question: Pipeline status and opportunities - The pipeline is slower than three months ago, but there are still interesting opportunities expected to close in the current and next quarter [17][18] Question: Trajectory of net investment income to cover dividends - The company is currently running at a level of net investment income less than the dividend, but expects to be in a good position by the end of the year [21][22] Question: Trade education acquisition restructuring - The business was restructured and recapitalized satisfactorily, with expectations for improved performance going forward [25][26] Question: Logic behind issuing fixed-rate debt - The issuance was necessary to retire maturing bonds and to have some unsecured debt in the capital stack [32][33] Question: Future issuance of common shares - The company will consider issuing shares based on market conditions to ensure accretive outcomes [36] Question: Second lien loans strategy - The company does not expect to issue new second lien loans, focusing instead on first lien unitranche secured lending [38] Question: Impact of SBA green light letter on earnings - The potential for SBIC debentures could allow for lower rates than current borrowing, positively impacting earnings [40][41]