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 Stylist Capital Investment Corporation year-end 2020 results conference call. At this time, all participants have been placed on a listen-only mode. The call will be open for a question-and-answer session following the speaker's remarks. Please note this conference is being recorded today, Friday, March 5, 2021. 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, Holly. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter and year-end of December 31st, 2020. Joining me this morning is Todd Hutchinson, our Chief Financial Officer. We'll cover important information about forward-looking statements and then also cover an overview of our financial information. Thank you, Ron. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Stelz 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 a telephone number and pen provided in our press release announcing this call. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections. We ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these projections. We will not update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelliscapital.com under the Public Investors link or call us at 713-292-5400. This time I'd like to turn the call back over to our Chief Executive Officer, Rob Lamb. Thank you, Tom. The past year has certainly been a challenging one for everyone. We're thankful that the members of our firm have remained healthy and that we've been able to operate remotely without interruption. Our portfolio has performed well throughout the unprecedented pandemic, and we've been able to significantly improve our liquidity and available capital position. In addition, our net asset value has risen back about $14 per share. For 2021, we've seen an increase in investment opportunities, and as a result, have funded $58 million on a cost basis thus far in the first quarter. Since year-end, our portfolio has increased by $43 million net of payouts. We'll begin by discussing our operating results, followed by a review of the portfolio, including asset quality and then the outlook. And Todd will cover our operating results now. Thank you, Rob. For fiscal year 2020, we covered our dividend from $14.14 to $14.03. Turning to the fourth quarter, our distributions of $0.25 per share, which were declared in the third quarter, were covered through net investment income of $0.26 per share and core net investment income of $0.28 per share. Net asset value per share increased $0.86 during the quarter from $13.17 to $14.03 due to the early declaration of the fourth quarter dividend and net appreciation on our investment portfolio. We recorded a net realized loss of $7.7 million, primarily related to one investment which was offset by unrealized gains during the quarter of $19.6 million due primarily to the reversal of previously recorded unrealized losses on the debt portfolio and unrealized gains in our equity portfolio. Over the last nine months, we've taken a number of steps to improve our liquidity and capital position. During 2020, we increased our bank facility by $10 million to $230 million, amended the covenants to increase our maximum regulatory leverage to one and a half times net asset value, and extended the maturity to September of 2025. In January 2021, we completed an institutional bond offering of $100 million of notes due in March of 2026 at a fixed rate of 4.875%. We used the proceeds to redeem our $48.9 million of notes in 2022, the remainder to pay down our bank facility. We actively worked during the year to decrease our unfunded commitments from $37.5 million at the beginning of the year to $24.2 million today. Finally, we've continued to commit and fund equity capital to our second SBIC subsidiary, which allows us to draw low-cost 10-year debentures on a two-to-one basis. With that, I'll turn it back over to Rob. Thank you, Todd. I'd now like to cover the following areas. A life-to-date review, portfolio asset quality, and then turn to outlook. Relative to life to date, so since our IPO in November 2012, we've invested approximately $1.7 billion in over 130 companies and received approximately $983 million in repayments while maintaining stable asset quality. Life to date, we've paid over $161 million of dividends to our investors, which represents $11 per share to an investor in our IPO, again, at November of 2012. Relative to our portfolio and asset quality, we ended the year with an investment portfolio at fair value of $653 million across 66 portfolio companies. This is up $629 million across 63 companies back a year ago in December 31st of 2019. During 2020, we invested $152 million in 10 new and 20 existing portfolio companies and received $129 million of repayments. So our net portfolio growth at cost was about $23 million for the year. Our portfolio companies continue to be weighted towards secured lending at floating rates. Therefore, December 31st, 97% of our loans were secured and 93% were priced at floating rates. This move has coincided with greater first-landing and entrenched lending. We continue to maintain good diversification with the largest industry sector at 17% of the total. Our average investment per company is about $10 million, and our largest investment is $21.6 million, both numbers measured at fair value. And of the 66 portfolio companies, 62 are backed by private equity firms. Overall, our asset quality is stable at a 2.0 on our investment rating system or on plan. 13% of our portfolio is rated a 1, our headed plan, and approximately 11% of the portfolio is marked at an investment grade of 3 or below. And then relative to non-accruals, we have three loans on non-accrual which comprise 1% of fair value of the total loan portfolio. Now turning to outlook. So as I've said in the past, part of our strategy has been to invest in the equity of our portfolio companies in a modest way. but unable to generate realized gains sufficient to offset losses over time. As our business has matured over the last seven to eight years, we began to see somewhat regular realized gains from our portfolio. During 2019, we generated 19.6 million of net realized gains, and those gains were helpful in offsetting approximately $10 billion of realized losses during 2020. Like today, we've generated net realized gains of 8.4 million. Beginning in the fourth quarter, we begin to see a significant increase in our actionable pipeline. As I mentioned previously, since year end, we've funded $58 million in costs in four new portfolio companies and received one repayment of $14.8 million. We've identified likely fundings of approximately $28 million for the balance of this quarter, so therefore in the month of March, and are aware of approximately $25 million of potential repayments over the next 30 to 60 days. With that, I'll open it up for questions. Thank you. Holly, you may begin the Q&A session, please.

Thank you so much. Ladies and gentlemen, 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 your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. And our first question today will come from Christopher Nolan with Landenberg Thalmann.