Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellus Capital Investment Corporation's Conference Call to report financial results for its first fiscal quarter ended March 31, 2025. This conference is being recorded today, May 13, 2025. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Okay. Thank you, Jenny. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2025. 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 and portfolio.

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 Stellus 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 any forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the Public Investors link or call us at (713) 292-5400. Now I'd like to cover our operating results for the quarter, but start first with life-to-date activity. Since our IPO in November 2012, we have invested approximately $2.7 billion in over 200 companies and received approximately $1.7 billion of repayments while maintaining stable asset quality. We have paid $295 million of dividends to our investors, which represents $17.09 per share to an investor in our IPO in November 2012, which was offered at $15 per share. Turning to operating results. In the first quarter, we generated $0.35 per share of GAAP net investment income and core net investment income of $0.37 per share, which excludes estimated excise taxes. Net asset value per share decreased $0.21 during the quarter due primarily to company-specific write-downs in our loan portfolio and a reduction of spillover income. Our ATM program was active during the quarter, and we issued 656,085 shares for $9.3 million at an average gross price of $14.11. All issuances were above net asset value. Turning to portfolio and asset quality. We ended the quarter with an investment portfolio at fair value of $991.1 million across 110 portfolio companies, up from $953.5 million across 105 companies as of December 31, 2024. During the first quarter, we invested $46.7 million in seven new portfolio companies and had $8.7 million in other investment activity at par. We also received one full repayment totaling $8.5 million and received $6.5 million of other repayments both at par. At March 31, 98% of our loans were secured and 91% were priced at floating rates. The average loan per company is $9.4 million and the largest overall investment is $21.9 million both at fair value. All but one of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 52% of our portfolio is rated 2 or on or ahead of plan, and 21% of the portfolio is marked in an investment category of 3 or below, meaning not meeting plan or expectations. Currently, we have loans to five portfolio companies on non-accrual, which comprise 6.7% of the total cost and 4% of fair value of the total loan portfolio, respectively, which represents a decrease from the prior quarter. Turning to capital. On April 1, 2025, we issued $75 million in aggregate principal amount of 7.25% notes due April 1, 2030. We used the proceeds to repay the bank facility. On April 24, 2025, we received a green light letter from the Small Business Administration for Stellus Capital SBIC III. This is an important step in the process, and we therefore expect to receive a license, although it's not guaranteed. In general, as our existing debentures are repaid, we intend to draw new leverage under the SBIC III license to continue funding qualifying portfolio company investments. And with that, I'll turn it back over to Rob to discuss the overall outlook.

Thank you, Todd. As we look ahead to the second quarter of 2025, I'll cover portfolio growth, equity realizations, and dividends. We expect to end the second quarter of 2025 with a portfolio, which approximates where we are today at about $985 million. We expect new loan originations to be offset by loan repayments for the remainder of the second quarter. As Todd noted earlier, we had a good first quarter for equity issuance under our ATM program. Given our current capitalization, we certainly have the ability to grow the portfolio to over $1 billion. For our equity co-investment portfolio, which is $83 million at fair value, we have the potential for more than $10 million of equity gains by year-end. And finally, regarding dividends, we declared the dividend for the second quarter of this year at a rate of $0.40 per share for the quarter payable monthly, and we expect the third quarter to also be payable at $0.40 per share, of course, subject to Board approval. And with that, I'll open it up for questions. Jenny, you may begin the Q&A session, please.

Your first question is coming from Eric Zwick of Lucid Capital Markets.

Just in terms of kind of maybe the yield and timing on the first-quarter originations and just trying to get a sense of how much impact there was in the first quarter to interest income and whether there might be some additional impact for the full quarter effect?

So a couple of things. The average portfolio in the first quarter was higher than the fourth, and that will continue on for the full second quarter. So there should be some pickup there in terms of yield in dollars. And then Todd is reminding me that in the first quarter, we had lighter other income than in the fourth quarter. And so it remains to be determined what that number will be for the second quarter. But we should pick up some earnings in actual dollars as a result of the higher portfolio in Q2 over Q1.

Excellent. That's helpful. And just given the strength of the originations in 1Q, and I did hear some commentary that you thought in 2Q originations and repayments would be balanced. But I'm just curious if you could provide any color in terms of what the pipeline looks like today relative to maybe three months ago and where you're seeing opportunities, whether there are certain industries or certain types of lending opportunities, new versus add-on? Just a little kind of color there would be great.

Yeah, no, good question. In fact, I'm glad you mentioned the add-ons. So as you can see from our results, we continue to have interesting add-ons for existing portfolio companies, which is very helpful because we're already in the credit, and we understand the company. So we think those will continue. In terms of pipeline today versus three months ago, it's slower, no question. I think this has affected the industry and maybe the economy overall that the tariff activity has caused some slowness in this country, in particular around M&A. We're optimistic that will be picking up now that there is greater clarity. So it's a little bit slower than we were, but we do have interesting opportunities that we expect to close this quarter and next. But just being a little bit conservative, we know of some payoffs too, so you can't quite predict the timing. And so that's why I indicated I think we'll be flat on average for this quarter.

Got it. And you mentioned the potential for some pickup in interest income, and the adjusted NII this quarter was a little bit shy of the dividend. And it sounds like you'd like to maintain that at least in the third quarter at the $0.40 level. Remind me if I'm incorrect here, but I do believe that the spillover amount is probably equal to about four quarters or so of the regular dividend. So just curious about your thoughts on the trajectory of NII to cover the regular dividend going forward. I know you're aiming to get the portfolio to at least $1 billion or so, but just your expectations for closing that gap?

Sure. Let me take it first and then Todd should add to this. So we are running at a level of NII that is less than the dividend. And as you point out, we entered the year with about $45 million of spillover income, which we're starting to reduce. We think as we get to the end of this year, we'll be in a good spot for next year. But I think it's just based on current yields, and the level of SOFR will be less than that $0.40 throughout the balance of the year from NII. But just as a reminder, as I indicated in my remarks, and this has happened to us in the past, we do have some interesting equity co-investments that we think will start to take in, and this would cause us to exceed the dividend in terms of realized earnings for the year. So we're entering a phase to also look at that. But from a pure NII basis, we would be short.

I think you mentioned there's about $10 million or so in terms of what you can see for potential realized gains by the end of the year?

Yes. In fact, in excess of $10 million.

In excess. Okay, great. And just one last one for me, and I'll step aside. Just curious a little bit about Trade Education acquisition. It looks like that was a non-accrual from about the middle of last year. It looks like that may have been restructured into simpler trading, but just curious if you could provide any commentary in terms of what transpired in your expectations going forward?

Yes. So we don't like to talk about private businesses in this country. But at the same time, we'll say that the business was restructured as you indicated in the first quarter and was recapitalized. We think it performed well from here.

Okay. And did that have an equity sponsor? And did they contribute any additional capital as part of the restructure?

Yes, they did. It did have an equity sponsor, and they contributed capital meaningfully. But it reached the point at this recapitalization that no further capital was available. And so we've restructured it in a new form, if you will.

And your next question is coming from Christopher Nolan of Ladenburg Thalmann. Christopher, your line is live.

Given the market is pricing in rate cuts by the Fed later in 2025, last time I checked was the forward markets pricing in three rate cuts. What was the logic behind issuing the fixed rate debt?

Yes. So we had a couple of things, Chris. We have bonds that are maturing in March of ‘26. And so this was part of these proceeds we would expect will retire some of those bonds. So it's something we needed to do from a fixed-rate basis. And also it's helpful to have some unsecured debt in the capital stack to supplement our floating rate liabilities. Hard to know the right timing for these things, but that was the timing we took and, also to be frank, wanted to avoid what might have been more uncertainty as the year draws on.

And then I saw that quarter to date, you guys issued roughly 300,000 shares, common shares. Were these under the ATM, and were these accretive?

Yes, they were all under the ATM and all were issued above NAV.

So should we expect that you guys are going to be hitting the ATM a bit harder as opportunities present themselves?

It would really be a function of how our stock price is trading. We want these to be accretive or certainly not dilutive to NAV. So I think that will drive it more—what our market price is. We certainly will be considering issuances throughout the year.

Okay. Final question. I've been covering you guys long enough to know that when the outlook starts improving for the market in general, you guys tend to put in a little bit more second lien loans. I take it that you guys have no contemplation of that at the moment, right?

That's right. In fact, Chris, I'm glad you raised that. We haven't had any new second lien loans in a number of years and do not expect to. You could, but it would be unlikely. Our mode of investing has really become very much first lien unitranche secured lending with equity co-investments.

Sure. But it's more of a defensive posture, just given the uncertainty of the broader environment. Is that a fair way to look at it?

I think that's right. But I would say four to five years ago, we moved to this mode where, and also was really where unitranche lending became popular for our private equity clients who are looking for a one-stop financing. So one lien and ideally one lender. And so the second lien and junior capital became less in demand, but we also made that decision for risk management. We thought that the risk-return profile was much more attractive to be in the first lien unitranche.

Great. And then final question, given the third SBA green light letter, assuming that you get the approval and you leverage up that SBA vehicle, that would basically, I would say, increase the impact of a lower interest rate environment on your earnings. Is that correct?

Yes. And in a positive way. Yes. So two things. As a reminder, the SBA debentures issued under the SBA agency, if you will, are priced at the ten-year Treasury rate plus a market premium, which historically has been 50 to 80 basis points more, but approximates the ten-year Treasury. So this, if you look at our capital stack, the potential for SBIC debentures is $350 million. We're like $309 million right now because we've already paid back some. But the full amount that we could have outstanding is $350 million. So think of our capital of $1 billion—$350 million can be at lower rates than we would otherwise borrow both on a fixed-rate basis and on a floating-rate basis. So this would be a complement to the question I got earlier about issuing those unsecured notes that are at 7.25%. So these notes, based on the current Treasury rate of 10%, should be less than 5%. So this is very advantageous for us from a funding mix going forward.

Your next question is coming from Robert Dodd of Raymond James. Robert, your line is live.

Sort of follow-up on Eric's question. On the pipeline, I mean, it makes sense, right? Could you characterize where it was sitting out, like now versus, say, March 31? How much of the falloff in pipeline and maybe the expectation of a flat portfolio this quarter is due to the disruption about Liberation Day? And if there is a how much of that fall off is related to that? Do you think it's like permanently gone versus just delayed maybe into the back half, maybe later? Any color there?

Yes. It's a good question, Robert. I would think of it this way for M&A. If a business was being marketed for sale, and the seller thought it was a good time, and with clarity now around tariffs for both buyers and sellers, then we would expect almost all, if not all that activity to come back. So this would be what we would describe as a temporary disruption. So we would expect it to come back.

On to your point, I mean, you got ahead of on the bonds. Do you think the one you've done, the acquisition, you have sufficient that you don't need to do more ahead of the maturity you've got next year? And you've got good timing on that, by the way, doing it ahead of Liberation Day. Or do you think you need to do more on the unsecured fixed rate ahead of the maturity? You've kind done there in combination with obviously the SBIC and the broader revolver.

Yes. So we will need to issue more unsecured debt before the bonds mature, the older bonds mature. And the magnitude of that is still being determined. I would think of it this way: the issuance that closed on April 1 of $75 million, we would have wanted at least $25 million to be used for growth and potentially more. So which would mean that we'll definitely need to issue more bonds before we get to, I'd say before we get to the end of the year. So more to come, but it would not be $100 million.

Well, we appear to have reached the end of our question and answer session. I will now hand back over to Robert Ladd for closing comments.

Okay. Very good. Thanks, everyone, for joining us. Thank you for your support of our public company. And we look forward to giving you another update as we get to early August to cover the second quarter. Thanks again.

Thank you so much, Robert. That does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.