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 Sellis Capital Investment Corporation Second Quarter 2021 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. This conference is being recorded today, Tuesday, August 3, 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, Shelby, and good morning, everyone. Thank you for joining the call. Welcome to our conference call covering the quarter ended June 30, 2021. Joining me this morning, as usual, Todd Huskinson, our Chief Financial Officer, 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 Sellers 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. Robert Thomsen Ladd, William Todd Huskinson, Vince Gwon 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, Bob Ladd.

Okay. Thank you, Todd. I'm pleased to report another solid quarter in which our net asset value and asset quality were stable. We covered our dividend and had significant originations. As a result of our dividend coverage, our board approved an increase in our regular dividend to 27 cents a share from 25 per quarter, and also declared 3 cents of supplemental dividends. We've continued to see an increase in investment opportunities, and as a result, we funded $92 million on a cost basis during the second quarter. Since year end, we've originated 185 million new investments, and our portfolio has increased about 127 million, like our year-to-date net of payoffs, which now brings us to 785 million on a cost basis. We'll begin this morning by discussing our operating results, followed by a review of the portfolio, including asset quality and the outlook. And Todd will now cover our operating results.

Thank you, Rob. For the quarter into June 30, 2021, we covered our dividends of $0.25 per share with GAAP net investment income of $0.28 per share. Core net investment income was $0.30 per share, which excludes the capital gains incentive fees and income tax expense. During the quarter, the portfolio valuation increased slightly, which when coupled with the excess dividend coverage led to net asset value per share increasing to $14.07 per share from $14.03 per share. We continue to recycle capital in our first SBIC license and deploy the low-cost debentures in our second license. The all-in rate on the $60 million of debentures which have pooled so far is 2.7%. To date, we've committed the full $87.5 million of equity to SBIC II and have funded $60 million of that commitment. With that, I'll turn it back over to Rob.

Thank you, Todd. I'll now cover the following areas, the life-to-date review, Portfolio Asset Quality, and then Outlook. Since our IPO in November of 2012, we've now invested in approximately $1.8 billion over 139 companies and have received approximately $1 billion of repayments while maintaining stable asset quality throughout 2020. We've now paid over $169 million of dividends to our investors, which represents $11.41 per share to an investor in our IPO dating back to November of 2012. Next, turn to portfolio and asset quality. As mentioned earlier, we ended the quarter with an investment portfolio at fair value of $782 million. This is across 76 portfolio companies, and this is up from $653 million across 66 companies just at 1231.20. During the second quarter, we invested 91.5 million in seven new and eight existing portfolio companies and received 24.8 million of repayments for net portfolio growth at cost of 66.7 million for the quarter. We continue to maintain good diversification by industry sector, and there are 60 portfolio companies where we have debt and or equity positions and that's an average investment of about 12.7 million at fair value per company. 71 of the 76 portfolio companies are backed by a private equity firm and overall our asset quality is stable at a 1.9 on our investment rating system or slightly better than planned. 19% of our portfolio is rated a one or ahead of plan and 11% of the portfolio is marked in an investment category of three or below, which is below plan. In total, we have four loans on non-recrual, which comprise 1.1% of fair value of the total loan portfolio. Now, turning to outlook, beginning in the fourth quarter of last year, we began to see a significant increase in our actionable pipeline. Since quarter end, we have funded $11 million in costs in one new portfolio company and received one repayment of $2 million. For the balance of the quarter, we expect some growth in the portfolio. I will note repayments are picking up. These potential repayments could also result in equity gains, which for the balance of the year could be as much as $10 to $15 million. With that, I'll open it up for questions. And thank you, Shelby. Please start the question and answer period.

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 your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a few moments to allow everyone an opportunity to signal for questions. We'll take our first question from Bryce Rowe with Havity Group.

Thanks. Good morning. Hi, Rob and Todd. I guess good afternoon.

Good morning, Bryce.

Wanted to just ask about the last comment you just made, Rob. You mentioned you expect some level of growth in the portfolio for the balance of the quarter. Does that contemplate the repayment activity that you just mentioned?

It does. It does, but That's why I wanted to qualify it that whereas we've seen through COVID and really through the first six months of the year, less repayments than normal, we now have this ability that that will pick up. But we'd still expect to have the portfolio increase somewhat in the quarter and certainly over the balance of the year.

Okay. Okay. That's helpful. And then maybe a couple more for me. In terms of pricing, wanted to get a sense for what you're seeing on kind of new originations in terms of pricing relative to the current portfolio yield. And I guess I've kind of seen in other companies some level of stability in terms of spreads and pricing, but wanted to get a sense for whether you're seeing that as well.

Yes, I'd say that our overall portfolio yield on the debt side is in the low 8%. We would expect that to continue, and, of course, that's a combination of the coupon and the amortization of the upfront fees. So seeing that in the portfolio, you know, probably, you know, on unit tranches slightly less, but I'd say overall should be able to hold at about the 8% level. Okay. Okay.

Okay, and then last one for me. It looks like you all, even subsequent to quarter end, drew more on the SBA or drew more SBA to ventures. Any sense for kind of the pace of SBA draws, you know, whether it be over the next six months or beyond, just trying to get a sense for, you know, when you feel you might kind of max out the current capacity there?

Yes, so I would say there's, you know, base case is we would substantially all the remaining debentures by the end of the year or as perhaps late as the first quarter of next year. So as I mentioned on our previous calls, we've seen an uptick in loan opportunities that qualify for the debentures. So our plan is, I'd say, certainly by first quarter of next year to see them be substantially drawn. Excellent.

That's good. Good detail. Appreciate you all taking the questions. Good talking to you.

Thank you. Thank you, Bryce, very much.

Thanks, Bryce.

We'll take our next question from Christopher Nolan with Lindenberg Thalman.

Hey, guys. Rob, the $0.27 dividend, should we consider that the new base dividend going forward?

Yes. And, of course, the dividend is always subject to the board's approval, but we consider that the new baseline for the regular dividend.

Great. And then, Todd, what is the spillover income?

Yeah. So, Chris, we have $21 million, almost exactly $21 million of spillover income in

from last year into this year.

So the total is about $1.08 per share on the current share.

And I guess just in general, can you articulate some comments about what you're seeing in terms of terms and conditions for deals that you're seeing? Is the pricing any tighter, but you're holding firm on the terms and conditions or any sort of color on that would be helpful.

Sure, sure. You know, I'd say that in terms of structures of the credits, they're really what we've always done. So they have financial covenants. The equity capitalization of the companies is, you know, roughly 40% to 50%. So in leverage quotient is, you know, probably, you know, in threes up to the mid-fours. So I'd say that structures are very similar to the way they've always been for us. Pricing is probably a little bit less. And of course, as you know, we've really rotated substantially the portfolio to first lane slash unit launch. And so again, I think you're seeing a little bit of pricing pressure, but we've been disciplined about it. And certainly on the credit side, very disciplined and no changes there. And Of course, as you know, we always like to be able to participate in the equity of the companies by buying a modest piece of equity alongside the owners, and that's turned out to be a good strategy for everyone.

Great. Nice, Cora. Thank you.

Yeah. Thank you, Chris.

We'll take our next question from Matt Jodden with Raymond James.

Hey, guys. Appreciate the time. First question for me on the supplemental. I know, obviously, up to the board. But any high-level color you can give us on whether or not we should anticipate that three-set supplemental to be more of a kind of recurring programmatic figure or just solely one time?

Yes. So, thank you, Matt. I'd say the supplemental would be more quarter by quarter in reviewing with the board. So, more to come on that. should note that in terms of the dividends for the year, and this is a follow-up to Chris's question on the spillover. So as you may recall, that we need to have declared the dividends for the year to take care of the spillover by September 15th. So you will see in this quarter we're in, as we did last year, by September 15th, we'll have declared all of the year's dividends. which will take care of the spillover. And so you could see something in addition happen then, but let's see when we get to that point. So the good news is spillover will be covered, but that will also decrease NAV for the quarter because you're declaring in the quarter the full balance of the year dividends and they're actually paid in the fourth quarter.

Got it. Second one for me, kind of a two-part report. on repayments picking up. Any color you've received from sponsors on kind of what's driving a higher expectation of repayments later in the year? And related to that, with repayments picking up, how should we expect other income for the remainder of the year?

Yeah, so I'd say that the repayment activity, I think, is more a function. It's almost like there was a pent-up demand in terms of M&A activity post-COVID, which has, I think, certainly fueled our pipeline. And then as a result, repayments or sales of businesses had been slowed down because of COVID, and that now is picking up as well. So I think it's a natural evolution. You know, we're expecting you could see some activity on new fundings in the fourth quarter as people anticipate potentially a higher rate and Robert Thomsen Ladd. The last question I think you had, Matt, is just income impact potentially from these. So because the loans have been out for a good while, there's really not any call protection left. You should see some modest OID accretion. The bigger impact would be, as I mentioned at the outset, the equity gains associated with the equity co-invest.

That's really helpful. I appreciate the time.

Yes, thank you, Matt.

We'll take our next question from Ryan Lynch with KBW. Good morning, Ryan.

Hey, good morning. I just have one question. You know, if I look at where you guys are today in your incentive fee hurdle, you guys are, you know, in the most recent quarter just at the bottom end of that hurdle range. So you guys are generating... you know, a pre-operating incentive, the ROE between that 8% and 10% range, which equates to, you know, an operating ROE, you know, post-intensity of just 8%. And since you're just at the bottom of the range today, there's a lot of work that would need to occur to actually get above that, you know, the upper end of that range to actually grow operating EPS, you Thank you so much for joining us.

So I'd say that we certainly would like to continue to grow operating EPS for the benefit of our shareholders. At the same time, you know, given the risk profile of the portfolio, which is, you know, a lower risk profile than we've had historically, that's probably the more important aspect. So we'd start with credit risk and what that translates into earnings. So I think we'd love to grow it, but we're also comfortable with the ROE we're currently generating. And then, but to add that we do have, you know, short of rates increasing, which would come through to our portfolio eventually, assuming that's not likely to happen in the near term. And we have LIBOR floors as a reminder, on average of about 1.2%. So take a pretty meaningful change in LIBOR to change the revenue side. But we do have the benefit of the additional SBIC debentures to fund additional growth. And as Todd noted earlier, those we've drawn so far on average in the second license are 2.7%, including the fees, so all in cost. We'll have another 40 that we'll pool in mid-September, we think, at a comparable or lower cost. So this could help us, Ryan, just in terms of the operating EPS income. Some more to come, and that's just a function of additional fundings that we would have.

Okay, understood. That's all I have today. I appreciate the time.

Okay, thank you.

That concludes today's question and answer session. Speakers, at this time, I will turn the conference back over to you for any additional or closing remarks.

Okay. Well, thank you, everyone, for being on the call. Thank you for your support, and we'll look forward to speaking with you again in early November.

This concludes today's call. Thank you for your participation. You may now disconnect.