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spk00: Good morning, ladies and gentlemen, and thank you for your standing by. At this time, I would like to welcome everyone to Stellar's Capital Investment Corporation's conference call to report financial results for its second fiscal quarter ended June 30, 2022. This conference is being recorded today, August 4, 2022. It is my pleasure to turn the call over to Mr. Robert Ladd. Chief Executive Officer of Stylist Capital Investment Corporation. Mr. Lang, please, you may begin your call. Thank you.
spk03: Yeah, thank you, Carolyn. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter end of June 30, 2022. Joining me 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.
spk02: 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 PIN 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 and 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. At this time, I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd. Thank you, Todd.
spk03: I'm pleased to report our results in the second quarter, in which we grew our investment portfolio to $852 million, more than covered our regular dividend, maintained asset quality, and upsized our bank facility to $265 million. We're benefiting from the rising interest rate environment as the yield on our loan portfolio has now risen approximately 80 basis points from the end of the first quarter. We continue to see many interesting opportunities, and as a result, have funded $49.5 million on a cost basis during the second quarter and another $32 million since quarter end. Todd will begin by discussing our operating results, followed by a review of the portfolio, including asset quality and our dividend strategy, and then I will cover the outlook.
spk02: Thank you, Rob. For the quarter ended June 30th, 2022, we covered our regular dividends of 28 cents a share with core net investment income of 29 cents per share. Gap net investment income was 32 cents per share, which includes income tax expense related to our spillover income, and this quarter included a $1 million reversal of the capital gains incentive fee accrual. Primarily as a result of widening credit spreads during the quarter, our portfolio valuation declined $4.3 million quarter over quarter. We had $3.6 million of realized gains during the quarter, which are offset by a realized loss from the disposition of our investment in HEMA's first lien loan, resulting in a net realized loss of $353,000 during the quarter. Also during the quarter, we increased the size of our bank facility by $15 million to $265 million. We continue to recycle capital in our first SBIC license and deploy the low-cost debentures in our second license. As a reminder, the all-in cost of all of our debentures is currently 3.1%. To date, we've funded $78 million of our $87.5 million of equity commitments to the SBIC II and have drawn $150 million of the $175 million of the ventures that will be available when the equity is fully funded. Now, I'd like to cover the following areas, a life-to-date review, portfolio and asset quality, and finally, our dividends. Since our IPO in November 2012, we've invested approximately $2.2 billion in over 168 companies and received approximately $1.3 billion of repayments while maintaining stable asset quality. We've paid over $194 million of dividends to our investors, which represents $12.67 per share to an investor in our IPO in November 2012. We ended the quarter with an investment portfolio at fair value of $852 million across 83 portfolio companies, up from $838 million across 78 companies at March 31st. During the second quarter, we invested $49.5 million in seven new and 14 existing portfolio companies and received $30.4 million of repayments for net portfolio growth at cost of $19.7 million during the quarter. Overall, our asset quality is stable at a 2 on our investment rating system, or on plan. 81% of our portfolio is rated a 2 or higher, meaning at or above plan. Thus, 19% of the portfolio is marked at an investment category of 3 or below. In total, we have four loans on non-accrual, which comprise 2.8% of fair value of the total loan portfolio. This is up from three loans on non-accrual at March 31st, which comprised 0.7% of fair value. Turning to dividends now, in addition to our regular dividend of $0.28 per share in the aggregate for the third quarter, our board declared an additional dividend for the third quarter of 2022 of $0.06 per share in the aggregate, or $0.02 per share paid per month. As we discussed last quarter, this additional dividend is based on the significant realized gains we are generating, $23.7 million in 2021, or $1.22 per share, $3.5 million in Q1, and expected additional realized gains over the next several quarters. Looking forward, subject to Board approval, we expect to continue this combined $0.34 dividend each quarter for the foreseeable future, which represents, based on yesterday's stock price of $13.47 a share, an annualized yield of 10.1%. And with that, I'll turn the call back over to Rob to discuss the outlook.
spk03: Okay. Thank you, Todd. Now, turning to outlook, I'd like to note the following. Relative to interest rates, The forward curve for LIBOR, which remains our principal benchmark rate, reflects a rate in excess of 3% by early next year. The majority of our portfolio repriced at the beginning of the third quarter, and as a result, the portfolio now yields about 8.8%, up from 8% at the beginning of the second quarter. Since 97% of our loan portfolio is floating and only 34% of our funded liabilities are at a floating rate, we will be a significant beneficiary of this phenomenon. We expect at this point that earnings in the third quarter should cover our regular dividend, and if interest rates continue to rise, income should be higher in the fourth quarter. Now, speaking to the economy, certainly our country continues to face headwinds which have led to a slowdown in the economy in the U.S. To date, though, the impact on our portfolio has been limited. As I mentioned last quarter, our portfolio is well-positioned. Over 95% of our loan portfolio are backed by companies of private equity firms, and 92% of the loan portfolio is firstly in Unitranche. The companies are well capitalized, typically 50% equity below us when they're underwritten, and all loans have covenants. A comment about equity gains. So notwithstanding a slowdown in the economy, we expect the equity gains we've been receiving will continue as private equity firms find opportunities to achieve realizations. As noted earlier, we've had 3.1 million of net realized gains through June 30 and have generated an additional 1.75 million gain since quarter end. And then in terms of outlook on fundings, We funded $32 million since quarter end and had two repayments for about $10 million, resulting in net portfolio growth of $21.9 million in the third quarter. We believe we have the potential to increase the portfolio by $20 to $30 million more over the balance of the quarter. I will note that repayments have been slower this year than what we received in the past, and this, of course, has resulted in less fee acceleration. With that, I'll open it up for questions. Thank you, Caroline. You'll be able to begin the Q&A session, please.
spk00: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off. To allow your signal to reach our equipment, once again, please press star 1 to ask a question. We will take our first question from the line Christopher Nolan. The line is open now. Please go ahead.
spk04: Hey, guys. NewMet Machining Technologies. Can you give a little detail on that, please?
spk03: In terms of the company's status or?
spk04: Yeah. No, it's newly non-accrual.
spk03: Yeah, and Chris, as you know, we don't typically talk about private companies in the United States for reasons of their business themselves, but this is a new non-accrual. It is backed by a substantial private equity firm, and we're working through it, but we did put it on non-accrual as of April 1st.
spk04: Okay. Do you anticipate any sort of resolution within 2022? No.
spk03: Well, again, we don't like to talk about the status of companies individually, but we do think that they're certainly working on the problem, and there's some possible resolutions, certainly within the next three or six months, more to come. And the loan has been marked in the mid-'80s.
spk04: Okay. And I guess as a more general question, Rob, is, you know, as we're entering this period of rising interest rates, slowing economic growth, What are your anticipation in terms of asset quality for the portfolio in coming quarters?
spk03: Yes, Chris. I'd say that certainly this last quarter or last two quarters would be indicative of what we'd expect. So we are seeing inflationary pressures, labor cost pressures in some of the companies. But so far, it's been more company-specific than kind of a broad impact on the portfolio. We did see an increase in the risk rate three category, but we also saw a greater increase in the risk rate one category for the quarter. So we are seeing very good performance from a number of portfolio companies, and then the overall risk rate is basically right on top of where it was in the first quarter. So again, we'll likely have problems over time, but as I mentioned in my remarks, given the capital structures we start out with, the strong ownership of the private equity firms behind the businesses, the first-lane nature of our lending, we expect to weather this quite well.
spk04: Great. Thanks, Rob.
spk03: Thank you.
spk00: Thank you. We will take the next question from the line. Brian Lee, the line is open now. Please go ahead.
spk01: Hey, good afternoon. First question I had was, you know, you characterize the decline in NAV and the portfolio right down those quarters largely driven by wider spreads, which makes sense. I was wondering if I could get a little more clarity around that. Obviously, your investment in new met machining had a bit of a write-down due to credit, so it wasn't exclusively related to spreads. There were some credits. So is there a rough breakdown you can provide of kind of how much of the write-downs this quarter were related to primarily from wider spreads versus specific credit markdowns?
spk02: Yes, I'll turn that over to Todd. Yeah, so Ryan, I would say I need to look up the actual split between the two, which I can come back. Oh, here we go. Thank you, Ryan. Yeah, so other debt movements, if you look at the total, the equity positions actually moved up, so it kind of went against the overall change. And then, as you noted, we had a write-down in Bromford. So I'll just go through the numbers. If you look at the total... So Bromford, you can calculate, went down, and we marked it down by $1.5 million. The equity movements were up about $1 million, and then we had other debt movements were down $4.3 million. So coincidentally, the total net unrealized loss is also $4.3. So the majority of it was across the portfolio, and not every position, but it was related to the spreads, which were somewhat offset by rising rates so the underlying cash flows of the loans were increasing, and the spreads would increase the discount rate, which would have an offsetting effect. But hopefully that gives you some context for what the movement was comprised of.
spk01: Yeah, that's helpful. And then you mentioned, obviously, you and most other BBCs are going to be big beneficiaries of rising interest rates. Probably not that much of an impact flowed through in the second quarter, but it looks like third quarter you're going to see kind of a full impact for that, and that's only going to probably accelerate throughout the year. You guys are in kind of a unique position where this quarter your pre-incentive fee operating earnings were below your incentive fee hurdle rate, and so there's this little bit of a buffer, call it a million and a half or so that you have to work through that's going to go straight to incentive fee before earnings can get above that hurdle and start moving higher. Have you guys looked at sort of a timeframe holding all else equal portfolio growth? Have you looked at any sort of a timeframe just based on the forward LIBOR or SOFR curve of potentially when your earnings generation at Stellis can reach above that upper end of that incentive hurdle rate and earnings could then be more fluctuating or potentially actually start to receive some of that benefit from rising rates.
spk03: Yes, Ryan, and that's a good point. So our estimate, as I said earlier in my remarks, that we believe we'll get through the hurdle or right on top of the hurdle rate through the third quarter. So we don't expect to certainly meet the dividend but not have much in excess because we'll be through the hurdle rate. But in the fourth quarter, as I said, if rates continue to rise to where they're expected, we should be more than through the hurdle rate, and then earnings flowing through will come through in the fourth quarter.
spk01: Okay. That's helpful. That's all for me. I appreciate the time today.
spk03: Yeah, thank you. Thank you, Ron.
spk00: It appears there's no further question at this time. Thank you.
spk03: Okay, very good. Thank you, everyone, for being on this morning and your support of the company. And we'll be back to report the third quarter earnings in late October, early November.
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