Stellus Capital Investment (SCM) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In Q2 2023, the company reported GAAP net investment income of $0.49 per share, exceeding the dividend of $0.40 per share [3][23] - Net asset value increased by $27.5 million, primarily due to equity issuance and earnings exceeding dividends, despite net unrealized losses of $6.3 million on the investment portfolio [4][18] - The company raised $32.4 million from issuing 2.3 million shares under the ATM program, bringing total equity raised in 2023 to $40.7 million [20] Business Line Data and Key Metrics Changes - The investment portfolio at fair value increased to $882 million across 93 portfolio companies, up from $877.5 million across 88 companies at the end of Q1 2023 [42] - The company invested $37 million in five new and ten existing portfolio companies during the quarter, resulting in net portfolio growth of approximately $10 million at cost [42] Market Data and Key Metrics Changes - 99% of the company's loans were secured, and 97% were priced at floating rates, benefiting from the current interest rate environment [22][23] - The average loan per company is $10.4 million, with the largest investment at $19 million [22] Company Strategy and Development Direction - The company aims to grow its portfolio to over $930 million by the end of the year, leveraging additional equity raised [9] - The strategy includes investing modestly in the equity of portfolio companies to generate realized gains that offset losses over time [8] Management's Comments on Operating Environment and Future Outlook - Management noted that the higher interest rate environment has positively impacted earnings, allowing the company to cover its dividend [23] - The company expects increased deal flow and repayments in the coming quarters, indicating a more active market environment [34] Other Important Information - The company has maintained stable asset quality, with an investment rating system score of approximately 1.9, and 25% of the portfolio rated at one or ahead of plan [7] - Total assets under management across the Stellus platform amount to $2.9 billion, allowing for larger transactions and diversified portfolios [44] Q&A Session Summary Question: Impact of higher interest rates on non-accruals - Management acknowledged that the increase in non-accruals is related to the higher interest rate environment affecting fewer home sales [25][26] Question: Non-recurring items in earnings - Management confirmed there were no material non-recurring items in the earnings for the quarter [27] Question: Increase in PIK income - Management indicated that PIK income is modest and not expected to be a significant part of the portfolio [33] Question: Activity in the M&A market - Management noted an uptick in activity over the summer, with expectations for more deal flow and repayments going forward [34] Question: Size of the investment pipeline - Management described the pipeline as very active and diversified across various industries, with a capacity to reach approximately $950 million [37] Question: Response of sponsors to challenges - Management reported that sponsors have been proactive and supportive, often providing additional equity in challenging situations [53] Question: Leverage targets - Management reiterated a target leverage of 1:1 on the regulatory test and slightly over 2:1 including SBIC debentures, reflecting a strategic approach rather than opportunistic moves [63]