Earnings Call Transcript - SCM Q3 2025

Operator, Operator

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 third fiscal quarter ended September 30, 2025. As a note, this conference is being recorded today, November 12, 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.

Robert Ladd, CEO

Okay. Thank you, Ali, and good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30, 2025. Joining me as usual this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements and will start us off with a review of our financial information.

Todd Huskinson, CFO

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'll cover our operating results for the quarter. I would like to start with our life-to-date activity. Since our IPO in November 2012, we've invested approximately $2.8 billion in over 215 companies and received approximately $1.8 billion of repayments, while maintaining stable asset quality. We've paid $318 million of dividends to our investors, which represents $17.75 per share to an investor in our IPO in November 2012, which was offered at $15 per share. In the third quarter, we generated $0.32 per share of GAAP net investment income, realized income of $0.42 per share, and core net investment income was $0.34 per share, which excludes estimated excise taxes. Net asset value per share decreased $0.16 during the quarter, which had two components. The first was $0.08 per share of dividend payments that exceeded earnings, which was necessary for us to continue to pay out the spillover balance from 2024. The second component was net unrealized losses of $0.08 per share related primarily to two debt investments. During the quarter, we had a realized gain of $2.8 million on an equity position. The realization had no impact on net asset value because it had already been recorded as an unrealized gain, which was reversed in the third quarter. Finally, during the quarter, we issued approximately 531,000 shares for $7.4 million of proceeds under our ATM program. Year-to-date, we've issued approximately 1.5 million shares for $20.6 million. All issuances were above net asset value. So turning now to portfolio and asset quality. We ended the quarter with an investment portfolio at fair value of $1.01 billion across 115 portfolio companies, up from $985.9 million across 112 companies as of June 30, 2025. During the third quarter, we invested $51.3 million in five new portfolio companies and had $12.5 million in other investment activity at par. We also received three repayments totaling $29.8 million; one equity realization totaling $2.8 million, which resulted in a realized gain of $2.8 million and received $6.4 million of other repayments, both at par. At September 30, 98% of our loans were secured and 90% were priced at floating rates. The average loan per company is $9.2 million and the largest overall investment is $22 million, both at fair value. 99% of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 82% of our portfolio is rated a 1 or 2 or on or ahead of plan, and 18% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. We did not add any new loans to our nonaccrual list during the quarter. And currently, we have loans to five portfolio companies on nonaccrual, which comprise 6.7% of the total cost and 3.7% of the fair value of the total loan portfolio, respectively, which represents a slight decrease from the prior quarter. Turning to capital, during the quarter, we amended and extended our revolving credit facility, which reduced the spread over the 30-day SOFR rate from 2.6% to 2.25% and extended the maturity date by two years to September 2030. We also upsized the total committed amount from $315 million to $335 million.

Operator, Operator

Apologies, ladies and gentlemen, we have momentarily lost our speaker line.

Robert Ladd, CEO

Okay, everyone still there, Ali.

Operator, Operator

Yes, sir. Glad to have you back.

Robert Ladd, CEO

Okay. Sorry for the technical difficulties. I think I would suggest why don't we start from the beginning and let you know where we stop.

Operator, Operator

Sir, the last I heard, I believe it was during your financial report for the year.

Todd Huskinson, CFO

Which was kind of lengthy probably.

Robert Ladd, CEO

So I apologize for this. Why don't we plan to go back and restart with the operating results? Todd, please go ahead.

Todd Huskinson, CFO

Okay, sure. In the third quarter, we generated $0.32 per share of GAAP net investment income, realized income of $0.42 per share, and core net investment income was $0.34 per share, which excludes estimated excise taxes. Net asset value per share decreased $0.16 during the quarter, which had two components. The first was $0.08 per share of dividend payments that exceeded earnings, which was necessary for us to continue to pay out the spillover balance from 2024. The second component was net unrealized losses of $0.08 per share related primarily to two debt investments. During the quarter, we had a realized gain of $2.8 million on an equity position. The realization had no impact on net asset value because it had already been recorded as an unrealized gain, which was reversed in the third quarter. During the quarter, we issued approximately 500,000 shares for $7.4 million of proceeds under our ATM program. Year-to-date, we've issued approximately 1.5 million shares for $20.6 million, all of which were issued above net asset value. We ended the quarter with an investment portfolio at fair value of slightly over $1 billion across 115 portfolio companies, up from $985.9 million across 112 companies as of June 30, 2025. During the third quarter, we invested $51.3 million in five new portfolio companies and had $12.5 million in other investment activity at par. We also received three full repayments totaling $29.8 million, the equity realization I mentioned previously for $2.8 million, which, as I mentioned earlier, was a $2.8 million realized gain and also received $6.4 million of other repayments, both at par. At September 30, 98% of our loans were secured and 90% were priced at floating rates. The average loan per company is $9.2 million and the largest overall investment is $22 million, both at fair value. 99% of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 82% of our portfolio is rated a 1 or 2 or on or ahead of plan and 18% of the portfolio is marked in an investment category of 3 or below, meaning not meeting plan or expectations. We did not add any new loans to our nonaccrual list during the quarter. Currently, we have loans to five portfolio companies on nonaccrual, which comprise 6.7% of the total cost and 3.7% of the fair value of the total loan portfolio, respectively, which represents a slight decrease from the prior quarter. Turning now to capital activity. During the quarter, we amended and extended our revolving credit facility, which reduced the spread over the 30-day SOFR rate from 2.6% to 2.25% and extended the maturity date by two years to September 2030. We also upsized the total committed amount from $315 million to $335 million.

Robert Ladd, CEO

Okay. Thank you, Todd. As we look ahead to the fourth quarter of 2025, I'll cover portfolio growth, equity realizations, and dividends. As Todd noted earlier, we now have an investment portfolio in excess of $1 billion across 115 companies. We continue to be very active. And although we expect meaningful payoffs in Q4, we'll likely have a portfolio in excess of $1 billion at year-end. For equity realizations, we expect $5 million for Q4 and possibly another $5 million in Q1 of '26. Estimated gains associated with these realizations are $3.8 million in Q4 and $3.3 million for Q1. And with respect to dividends, we declared, as you know, a $0.40 dividend for Q4. And so with that, you've probably heard some of this twice. So thank you for bearing with us. But at this point, Ali, let's open it up for questions.

Operator, Operator

Our first question is coming from Erik Zwick with Lucid Capital.

Erik Zwick, Analyst

I didn't have the benefit of hearing the full presentation two times. Could you just repeat the expectation for equity realizations in fourth quarter and first quarter? I missed that, couldn't type fast enough.

Robert Ladd, CEO

Yes. No worries, Erik. Yes. So projecting $5 million of realizations in Q4, of which we've already received $1.1 million and a similar number of $5 million for Q1 of '26. And if those come to pass, the expected gains would be $3.8 million for Q4 and $3.3 million for Q1 of next year.

Erik Zwick, Analyst

Perfect. And just you had a very active quarter in terms of new originations and a nice healthy mix between new and add-on. And I know last quarter, you mentioned that you really started to see a pickup in kind of the pipelines and new activity. So just curious today, as you look at the pipeline, how it looks in terms of mix between new and add-on opportunities? And if you could maybe add some comments, too, just in terms of what you're seeing in terms of rate and structure as well.

Robert Ladd, CEO

Yes, I'd be happy to. We've had a number of follow-on opportunities, and I appreciate you pointing that out. I expect we will see a consistent mix going forward. As you may know, we have several delayed draw term loans in our portfolio that remain undrawn, which typically drive our follow-on funding. We anticipate that both new investments and follow-ons will remain active this quarter, and activity has significantly increased since the 4th of July. Therefore, we believe both will continue to occur, but the majority of our funding will still be for new investments. Regarding our rating structure, we have not observed any significant changes across our investments concerning capital structures. Typically, our equity investment is at least 50% of the acquisition cost, so our debt usually constitutes 50% or less, with current ratios more likely skewed towards 40% debt and 60% equity. Leverage ratios are currently around 4x EBITDA or lower, which indicates strong structures. We maintain important covenants on all our loans, although we are experiencing some tightening in spreads in what is a competitive market. While we face competition, we remain actively engaged, and there has been a reduction in spreads—down from around 6 over SOFR last year to 5 over SOFR now, and even slightly under 5 recently. This trend is consistent across the industry. We have a substantial amount of capital available to invest and continue to actively secure equity co-investments in many of our loans, which has proven beneficial for us.

Erik Zwick, Analyst

That's very helpful. And just last one for me. We continue to see some mixed signs and maybe some mixed expectations for the economic trajectory as well. As you look through your portfolio, and you noted, I think it's 82% of the portfolio is 1 or 2, so on or ahead of schedule. Just are you seeing any increasing weakness or even signs of concern in any segments or industries of your portfolio at this point?

Robert Ladd, CEO

We're really not experiencing any trends related to credit issues, which are mainly tied to specific companies. Fortunately, most of the companies are performing well.

Operator, Operator

Our next question comes from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan, Analyst

Todd, on the new facility, was there any change in the advance rate? What I'm really interested in is whether or not the banks are getting increasingly concerned in terms of the private credit environment?

Todd Huskinson, CFO

No, there’s no change in the structure of the credit facility regarding advance rates. In fact, we have established relationships with these banks and have even had additional banks join this facility as it currently stands. Overall, we are pleased with the bank group and their response to the changes, so there’s no change at all. We didn’t perceive any issues.

Christopher Nolan, Analyst

Great. And what is the current status on the third SBA license, please?

Todd Huskinson, CFO

As we mentioned in our last quarter's report, we have received a greenlight letter and are currently waiting for the issuance of the third license. While we don't have a specific timeline for when that will happen, we expect it to be relatively soon. However, there are no new updates on this matter.

Christopher Nolan, Analyst

And how much capacity would that add, levered?

Todd Huskinson, CFO

Today, we have $295 million in debentures outstanding, and the maximum for the total funds family is $350 million. This means we could add a little over $50 million, depending on those loans qualifying for SBIC capital, which would provide us with additional capital. We also need to finance that license with some equity from the parent, which we plan to do through payoffs of the existing debentures and other sources.

Robert Ladd, CEO

But I think in summary, $50 million more of capacity.

Todd Huskinson, CFO

Yes, that's right.

Christopher Nolan, Analyst

Okay. And then final question. As I recall, about half of your deal origination is SBIC compliant. Is that correct?

Todd Huskinson, CFO

That's correct.

Operator, Operator

Thank you. As we have no further questions on the lines at this time, I would like to turn it back over to management for any closing remarks they may have. I apologize, sir, we've had a late question come in, I do apologize, from Robert Dodd with Raymond James.

Robert Dodd, Analyst

In your prepared remarks, I mean, you mentioned potential for significant repayments in Q4. I mean, is that going to generate like any one-time income, accelerated prepayment fees, et cetera? That's one. But could you also tell us, I mean, like what's the driver? Obviously, some of the equity realizations. Is it repricings? Can you give us an idea of like what's the underpinning for significant repayments in Q4?

Robert Ladd, CEO

Sure. I would say it's mostly sales of businesses. There may be instances where refinancing occurs, but it generally aligns with bank pricing. Overall, I think it's primarily driven by sales of companies.

Robert Dodd, Analyst

Got it. And then on the spread environment, I mean, yes, I mean, it's kind of across the market. What do you think within your segment, which obviously are smaller, relatively smaller companies, what's the primary driver here? I mean I've heard that it's not necessarily the large players coming down market, but there's new capital formation as well. I mean what do you think is the overall driver pushing down the spreads you said now, in some cases, below 500? And do you think they ever go back?

Robert Ladd, CEO

Yes, that's a great question. The market is certainly competitive, and some credit providers are lending at lower rates, which is driving this situation. Will the rates rise again? It's likely. As you know, we've been in business for over 20 years and have experienced several cycles, so we know it can shift the other way. The good news is that there's a lot of strong capital in the system, both from private equity firms we support and in private credit, indicating a healthy financial environment. However, the situation can change.

Operator, Operator

I am going to be very cautious here and see if we have any further questions come into queue. Okay. Gentlemen, it appears we have no further questions at this time. So I'll hand it back to management for closing remarks.

Robert Ladd, CEO

Okay. Very good. Well, thanks, everyone, for joining us. Thank you for the support of our company, and we look forward to giving you an update in the spring. I believe it will be in early March, we're reporting the results of the fourth quarter and the 10-K as well. Many thanks.

Operator, Operator

Thank you. Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.