Stellus Capital Investment Corporation

Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to the Stellis Capital Investment Corporation first quarter 2020 results. At this time, all participants have been placed on a listen-only mode. The call will be open for question and answer session following the speaker's remarks. This conference is being recorded today, Tuesday, May 12, 2020. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellis Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Thank you, Valerie, and good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2020. Joining me as usual this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements. as well as an overview of our financial information.

Thank you, Rob. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Stellis Capital Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone number and pen pad provided in our press release announcing this call. Robert Thomsen Ladd and at the Public Investors Link or call us at 713-292-5400. At this time, I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd.

Thank you, Todd. As we all know, we're in unprecedented times. I'm glad to report, however, that our team has been working remotely since March 16th without interruption to our operations and all of our employees are healthy and safe. We're prepared to continue to work in this manner as long as necessary. Since the onset of the COVID-19 pandemic, we've been in regular contact with all of our portfolio companies and other sponsors to assess the current and expected impact of the pandemic on their businesses and the industries in which they operate. Overall, the portfolio is stable and all borrowers on accrual made their scheduled principal and interest payments for the first quarter. I'll discuss the portfolio, including asset quality, in more detail shortly, but first, Todd, we'll cover our operating results for the first quarter.

Thank you, Ash. In the first quarter, we more than covered the dividend at $0.34 per share, with realized income of $0.39 per share, which included a $1.3 million of realized gains, or $0.07 per share. Core net investment income, excluding the impact of capital gains, insensitivity, reversal, and excise tax, was $0.29 per share, and Gap Net Investment Income was $0.32 per share. Net investment income includes the accrual of $1.3 million of incentive fees, or $0.07 per share, which are not payable to the manager due to the limitation of the 12-quarter test resulting from the unrealized losses recorded during the quarter. Net asset value decreased $45.7 million, or $22.59 per share, from $270.6 million to $224.9 million. Robert Thomsen Ladd We're doing this to have visibility into the income for the quarter, as well as our capital position, and to better match the dividend with cash income. We will announce the second quarter dividend in early July. With that, I'll turn it back over to Rob.

Okay. Thank you, Todd. I'd like to cover the following areas, portfolio, asset quality, and then outlook. As I mentioned earlier, we've been in regular contact with our portfolio companies and sponsors addressing their liquidity positions Robert Thomsen Ladd Since March 1st, we funded $17.2 million of such requests while maintaining sufficient liquidity for the remaining unfunded commitments. We've not made any new investments in new portfolio companies since mid-March and in the near term plan to focus on our existing portfolio companies. As of yesterday, the remaining unfunded commitments are $22.7 million and we have cash and revolver capacity of $27 million. Excluding cash into venture availability at our SBIC subsidiaries. Overall, our asset quality is stable at two on our investment rating system, or quote, on plan, unquote. 92% of our portfolio is rated at two or better, or on plan, and 8% of the portfolio is marked in investment category of three or below. In total, we have five loans on non-accrual, which comprise 2.4% of fair value of the total loan portfolio. During the first quarter, we invested $61.5 million in three new and 11 existing portfolio companies, all of which were first lien, and received $31.8 million from amortization and repayments, resulting in net fundings of $29.7 million. However, that portfolio growth was more than offset with the unrealized losses across the portfolio previously mentioned by Todd. As a result, we ended the quarter with an investment portfolio at fair value of $609.5 million, across 65 portfolio companies. This is down from $628.9 million at 1231.19. In terms of the loan portfolio, I do want to remind everyone that all but one of our loans have LIBOR floors, which on average are approximately 1.1%. We continue to maintain good diversification with the largest industry sector at 15% of the total. The average investment per company is approximately $9.4 million, and our largest investment is $20.5 million, both measured at fair value. And finally, 61 of the 65 portfolio companies are backed by a private equity firm. Now turning to outlook. As we look forward, our primary focus, as previously stated, is to focus on maintaining liquidity and continuing to closely monitor and support our portfolio companies. Given the current environment, we do not expect the portfolio to grow materially in the near term, at least until the uncertainty associated with COVID-19 has passed. While we do not expect any near-term repayments, we would expect repayments to pick up in the second half of the year. With respect to portfolio valuation, credit spreads generally have tightened approximately 40% since quarter end. And of course, should this trend continue through June, Our portfolio valuation could recoup a portion of the unrealized loss from the quarter. With that, we'll open it up for questions, and Valerie may begin the question and answer session, please.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow you to signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll move to our first question from Christopher Nolan of Leidenberg Thalmann. Please go ahead.

Hey, guys.

Good morning, Chris.

Rob, given everything that's going on, where do you think leverage will wind up going, regulatory leverage ratios for SCM will increase in the

You know, Chris, we're optimistic that the valuation adjustment that occurred in the first quarter would not increase from here. And as a result, leverage where we are, which is a little over one times, would be about where we'd end up. It certainly can move a little bit more or less, but will target, as we have in the past, to try to keep leverage at one-to-one.

Okay. And then, am I correct from your comments that there are no additional non-accruals in the second quarter to date?

One loan was placed on non-accrual effective April 1st. They made their March payment, but we put it on non-accrual, and that was included in the total. So five companies in total, and again, roughly 2.4% of fair value.

Gotcha. And then I guess the final question would be, given everything that's going on with the SBA and all these new programs and so forth, and as I recall, you have two licenses. Are they giving any flexibility to BDCs, especially quality ones like Stellis, to get an additional license or get additional lending capacity?

So our relationship with the SBA has been great. And as you pointed out, we obtained a second license in August of last year. And so... and there's all the things that we would need to do. They're being helpful to us. So we have plenty of room to grow the second license. Currently just 11 million of the ventures have been drawn and there's 9 million that could be drawn. So we're in good shape and a lot of room to grow with the second license before we would certainly consider a third.

Okay, great. That's it for me. Be well.

Yes. Thank you, Chris.

Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing star 2. We'll take our next question from Bryce, Rural National Security. Please go ahead.

Thanks. Good morning, Rob and Todd.

Good morning, Bryce.

Good morning. I wanted to ask about a couple things here. Rob, you made the comment about The expectation for repayments possibly picking up in the second half of this year. Just wondering, are you seeing something or hearing something from portfolio companies that indicate that might be happening, or is there the expectation that conditions will improve in the second half of the year in the natural pace of Robert Thomsen Ladd

We certainly need to have a more positive climate than we currently have. So it's principally based on that expectation that at some point, well-performing companies that may have been sold may end up being sold by the end of the year. So it could come from some refinancings. But also, we do not have a specific, nothing specific at this point, just projecting out there'll be something closer to maybe quasi-normalcy as we get to the second half of the year.

That makes sense. Okay. Next question is about the credit facility. Obviously, there's commentary in the queue or the press release about ongoing negotiations with the agent on that credit facility. You ended the quarter maybe $10 million shy of what is currently available. So curious, are you looking to upsize it? And maybe you could describe how those negotiations are kind of playing out at this point in light of kind of the environment, the COVID environment right now.

Sure. So the general matter that our bank group has been very supportive through the history of the company and certainly in these times, So we're at this point principally focused on extending the revolving period from this fall out to next year. So again, things are going well. They've been supported, and so we still have to accomplish that, but don't expect any difficulties in being able to do that.

Okay. And then one last question. You mentioned that The majority of your companies are sponsor-backed. I was wondering the support that the sponsors are giving to portfolio companies now, if you have some that are in more need of, I guess, immediate liquidity versus those that may not be. But I just wanted to get a feel for how your interaction is What those private equity sponsors have done and what they've kind of indicated in terms of supporting these companies where they need to be.

So of course this is a lot of our investment philosophy or strategy is to be backing companies that have serious owners with both intellectual as well as Robert Thomsen Ladd Robert Thomsen Ladd, William Todd Huskinson, Vince Gwon Robert Thomsen Ladd, William Todd Huskinson, Thank you. We'll move to our next question from Paul Johnson of KBW. Please go ahead.

Hey, guys. Good morning. Thanks for taking my questions. I had another question on the credit facility. As you mentioned, I think there's about $10 million remaining for capacity there. I'm curious, I mean, is all of that currently available to be drawn by the company, or are there any sort of borrowing restrictions that restrict any sort of availability there?

Yeah, good morning, Paul. So as a quarter end, that was the case of $10 million of capacity. All that could be drawn. Currently, as of yesterday, the facility had $15 million of availability, and all that could be drawn. We're well and comfortably in compliance with all of our covenants with the bank and as well as the bond base.

Okay. and how much of the cash that was available as a pre-31 to $35 million, how much of that is also available for your use or how much is actually an SBIC subsidiary or something like that?

Yes, so I think Todd should correct me, but I want to say roughly of the $35,015,000 of that cash at 331 is in the SBIC subsidiaries. I think that's right, Todd? Yes, $14,000,000.

Okay. Okay, thanks for that. And then the next question is kind of on the portfolio side. Robert Thomsen Ladd and also ask in the event if and in the event have you been asked for any sort of amendments and how those conversations go on if you have been willing to make them.

Okay. So as I said in the prepared remarks, we've been in constant contact with all the portfolio companies or their private equity owner sponsors throughout the period of Robert Thomsen Ladd We've had requests as someone might be looking to apply for a PPP loan that would require an amendment to the documents to allow the financing. But other than that, the no material requests, and I think the only one where we've had a payment issue would be the one that we put on non-accrual and April that did make their March payment, but we put it on April. So very few kind of true covenant financial covenant or certainly payment request changes. So virtually not. Just one that I mentioned and might have been one or two others, but very modest amount.

Okay, thanks for that. And my last question, you know, I would just ask, I think it sounds a lot like you're, you know, basically focusing on the existing portfolio at this time and your current borrowers and probably not evaluating too many new opportunities. Is that fair to say? That's correct.

Thanks, Matt. Those are all my questions today. Okay, thank you.

Thank you. And we'll move to our next question from Matt Jaden of Raymond James. Please go ahead.

Hi, everyone. Morning and hope all is well. So first question on the dividend. Can you tell us if you expect to declare a level of cash dividend for 2Q? So good morning, Matt. We're probably best to wait until, as we've said in the press release and previously, that we're going to evaluate that after the second quarter results. So you should expect more to come from us in early to mid-July. So we would certainly like to be paying a cash dividend for the second quarter, but it's probably best to stick with what we said previously, that we'll have more to say in early July.

Okay, great. That's helpful.

And then I guess kind of along those lines too, if you can, can you just give us an idea of what framework will be used in setting it specifically as it relates to levels of spillover income would be of interest?

Yes. So I think as we've said previously, we'll be looking at the actual income received for the quarter. And again, we're optimistic based on Robert Thomsen Ladd, William Todd Huskinson, Vince Gwon Robert Thomsen Ladd, William Todd Huskinson, Vince Gwon Robert Thomsen Ladd, William Todd Huskinson, Vince Gwon Thank you.

We'll move to our next question from Harold Mandel, private investor. Please go ahead.

Again, Robert Ladd, I'm sure eight years ago when you joined the company, you did not anticipate a 2020 disaster like we've had. So anyway, Robert Thomsen, William Todd Huskinson, Vince Gwon

Good morning, sir. So with respect to NAB, when we reported the results in March, the NAB is $11.55 a share. And in terms of non-performing assets, we currently measure them as approximately 2.4% of the total on fair value. There are five individual positions. So that's what we reported as of March 31st, and with one addition on April 1st.

Okay, and again, the dividend is in question as far as the second quarter?

So with respect to the dividend of the second quarter, we'll have more to say in July after we get through the quarter, so unfortunately we can't be specific about what it will be for the second quarter, but we certainly will talk more about it in July.

Thank you very much. Hang in there.

Thanks again. Thank you so much.

Thank you. We'll move to our next question from David Miyazaki of Confluence Investment Management. Please go ahead.

Good morning. Thank you for giving me a little time to talk this morning. One of the things that I think that I've observed in my conversations with your management team over the years is that you guys are very straight shooters. and we'll always discuss things that have been publicly disclosed and we stick very close to that design plan and I appreciate that. I think all investors want straight shooters from their management teams. That said, we are in an environment, I think if you look across the B2C industry, that the news is presumed to be terrible unless told otherwise and If the news is announced as good, it's still considered, if you look at the valuations, to not be very good. And against that backdrop, your decision to really not just move away, you're not giving us really anything concrete with regard to your dividend. And I think that can easily be interpreted that you've got a lot of problems that you might not have. And frankly, waiting until July is just too long. So I would just, as a comment, would suggest to you that you think pretty hard about trying to get some dividend news out sooner because it would be very helpful. If the news isn't good and you need to bring it down for whatever reason it might be, getting the news out there to what it actually is is going to be a lot better than what people are presuming it to be. You know, your stock right now is at a huge discount to its been massive value. And a little bit of clarity on some earnings quality would go a long way. And again, to that backup, I guess I would also say that, you know, between the quarters, if you have meaningful needs to report with regard to credit facility amendments, pay bounds, portfolio quality, to the extent that you can provide that between your filings in an 8K or other means, press releases, that would be very helpful. So I'm not sure if you guys have put any thought into that, but I'm wondering what your comments might be.

Yeah, Dave, good morning, and thank you for joining, and thank you for the questions and ideas. So just in terms of interim reporting, if we have something that's material, we certainly would report that during the quarter. So we'll do that for sure.

I mean, I guess I would say that in all the conversations that I have with the different DEC managers, I tend to get the least amount of information from you guys with regard to updates. And that's not to suggest that what other managers are doing is wrong and disclosing more than they should. It's that they have a tendency to provide more information through press releases or their presentations with regard to what might be happening. The material bar right now might be too high It would be helpful, I think, to get information that includes things that may not be considered material, but just some updates on what might be happening. The way that you have framed things on this call is that you're being cautious and careful with the capital, which we appreciate, but you're not really kind of providing a whole lot of clarity with regard to what will actually happen with the real cash flow. Can you is a quality winning season be high enough to support a cash dividend? What are the plans that you might have to do? Are you going to have to raise equity below that asset value? Are you going to distribute stock out? If all those things are likely to happen or a possibility, it would be helpful if you could provide updates on that before July. Because until then, investors are going to presume that you're not paying the dividend and that you're going to dilute them. And if that's the case, then Thank you. Thank you. Thank you.

We'll move to our next question from Kevin Tripp of Oppenheimer and Company. Please go ahead.

Hi, good morning. Hope you're doing well, and thank you for taking my question. My question pertains to the cumulative total return look-back feature in the base incentive fee calculation. So I see that this quarter's base incentive fees are now deferred. So going forward, I would assume that subsequent incentive fees will be expensed and added to that deferred balance, say, until the 20% cumulative returns allow for that balance to become currently payable over time. But I did want to see, is there anything that would cause a reversal of these deferred base incentive fees in subsequent quarters, similar to that, say, for capital gains, say, apart from deferred interest income reversals? Sure.

Sure. Kevin, thank you for your question. I would say that that's correct. At this point, the way it works is that we calculate an incentive under the formulas in the investment management agreement and accrue it if the calculation suggests to accrue it and then it's limited by the 12-quarter test and as you pointed out, this quarter's Robert Thomsen Ladd Thank you. Thank you. It appears there are no further questions at this time. I'd like to turn it back to the presenters for any additional or closing remarks.

Okay, thank you and thanks everyone for being on and thank you for your support of our company and in trying times, but we're working hard for all of our benefits. So thanks again for the support. We look forward to speaking with everyone in August as we report the second quarter. And again, we'll have more to talk about certainly by July with respect to the second quarter dividend. Thank you.

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