Stellus Capital Investment Corporation
Q1 2017 Earnings Call Transcript

Published: 4 Aug 2017

[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 Second Quarter 2017. At this time, all participants have been placed on a listen-only mode. The call will be opened for a question-and-answer session following the speakers’ remarks. This conference is being recorded, today, Friday, August 4, 2017. 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:]

Thank you and good morning, everyone. Thank you for joining the call. Welcome to our conference call covering the second quarter of fiscal year 2017. Joining me this morning is Todd Huskinson, Chief Financial Officer, who will cover important information of our forward-looking statements, so as well as an overview of our financial information.

[Todd Huskinson:]

Thank you, Rob. I would like to remind everyone today 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 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 financial 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.stelluscapital.com under the Stellus Capital Investment Corporation link or call us at 713-292-5400. At this time, I would like to turn the call back over to our Chief Executive Officer, Rob Ladd.

[Robert Ladd:]

Thank you, Todd. So our remarks, it organizes as follows this morning

[Todd Huskinson:]

Thank you, Rob. With respect to earnings net investment income for the second quarter was $0.32 per share or is an approximately $380,000 of the distributions with which we paid out. Those distributions increased this quarter, due to the additional shares raised in our April offering. The net asset value remained constant at $13.84, similar to March 31. And as a reminder, again we pay distributions in a quarter of 3.1 million more shares than we did in the first quarter. Regarding capital management, as previously reported in April, we issued 3.1 million shares of new equity at $14.10 per share, resulting in net proceeds to the company of $43.1 million. These proceeds were used initially to reduce our bank credit facility, which currently has an outstanding balance of $51.5 million. And on July 25, the company contributed $20.5 million to our SBIC subsidiary, bringing total regulatory capital contributed to $58.5 million which subject to SBA approval, will us to obtain additional debenture commitments of $52 million. Those are all my remarks for earnings and capital management.

[Robert Ladd:]

Okay. Thank you, Todd. And with that, we will open up for questions.

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question from Robert Dodd with Raymond James.

[Leslie Vandegrift:]

Hey, guys. This is actually Leslie, this morning. Sorry about that. Thank you for taking my questions.

[Robert Ladd:]

Good morning.

[Leslie Vandegrift:]

Good morning. So quick question on repayments. Obviously, you’ve seen a few already this quarter. And it was a good quarter for that as well in the second. So you gave $11 million to $31 million guidance. Do you see that just in the third quarter? Or do you see fourth quarter 2017 remaining high and waiting to have in until 2018?

[Robert Ladd:]

Yes, Leslie. So we don’t have any prospects for repayments in the fourth quarter, at least that are substantial. But history would tell you based on how the year is gone overall, we will likely see more in the fourth quarter. So again we should have or could have some additional repayments.

[Leslie Vandegrift:]

Okay. And then on the three lends that you mentioned, are the only ones that aren’t above LIBOR floors. How much of the portfolio is that on the three lends today? Are they on the smaller lends or are they some larger lends?

[Robert Ladd:]

No, they are small percentage of the total.

[Leslie Vandegrift:]

Okay. And last question on capital investment, obviously, on the equity, do you see anything mark down there is still doing well. I don’t know, if you guys had an update from the company on outlook for the next 12 months, on how they’re doing and what you guys see as – again, just prospects for the equity from that company.

[Robert Ladd:]

Yes, Leslie. I’m not sure, which companies is that?

[Leslie Vandegrift:]

Scopus.

[Robert Ladd:]

Scopus. So as you know, we don’t comment specific private companies for obvious reasons. But so far we should leave it at that. And it’s a – this point in a good earnings assets for us.

[Leslie Vandegrift:]

Sorry about that. Well, thank you for answering my questions this morning.

[Robert Ladd:]

Okay. Thank you, Leslie.

[Operator:]

And we go next to Chris Kotowski with Oppenheimer and Company.

[Chris Kotowski:]

Yes. I want to just ask about the right hand side of the balance sheet. As you noted in your comments, you use the proceeds mainly to pay down the credit facility. Just as you look at your forward pipeline of likely fundings. Should we expect that to go primarily against the SBA or a mix of LIBOR 2 or what should we expect?

[Robert Ladd:]

Yes, Chris. So in historically, roughly half of what we’ve looked at as a firm has been SBIC conforming doesn’t necessarily mean that’s we close half of the deals in that way. But we’re optimistic, we’re seeing a very interesting flow that way and in fact of the potential fundings for the balance of this quarter. I think all that one are SBIC conforming. So I think history will tells us it’s probably more like a 50-50 split, if you will in terms of the growth. But certainly our capacity to grow is greater to be SBIC debentures. There’s a pretty good chance this quarter, we will fully capitalize the SBIC subsidiaries, so up to $75 million of equity capital and the current debentures drawn are just $65 million, so roughly, $85 million of additional capacity there. So I would say, it will come from both, but in terms of ability to grow meaningfully more will come more of the SBIC side for which we’re seeing interesting opportunities.

[Chris Kotowski:]

Okay. And remind me of the split floating rate – I was interested in your comment about that all but three of your loans are through the floors now. And I guess, if you can help us think about your sensitivity to rising rates or you’re potential for benefit from rising rates say from the next hike or two as compared to the two last ones. Is a fair way to quantify to how much greater the impact might be? And then I guess as a follow-up to that is, if with the SBA, if you’re likely – if you’re able to put on more fixed rate liabilities does will you be funding floating rate assets with those?

[Robert Ladd:]

Yes. So Chris – so if you think so, we cover the change in LIBOR in the queue solid, Todd had address that, I would think of it this way. So we’re substantially all-in-all the 70% that our floating consider them substantially floating. We’ve seen a meaningful rise in the 90-day LIBOR under which most of our loans have revised and so now it’s around 131 I believe. So it could go higher, but I think to have a meaningful impact on the profitability, it would have to be like 100 basis points movement. But we’ll – Todd will give little bit more color about that.

[Todd Huskinson:]

Sure. Chris, so if you had – if you had 100 basis points movement up in LIBOR and just reprised our launch with perspective that, it would generated an additional $490,000 of income. So we would because of most material our portfolio your capture most of that on the way down, if you went down 100 basis points in LIBOR now impact P&L by about $150,000. So LIBOR floor will kick back in that case.

[Chris Kotowski:]

That’s helpful. What period is that?

[Todd Huskinson:]

That’s for one – that’s for the coming months – full year.

[Robert Ladd:]

Full year. And one of other comment in terms of sensitivity on that Chris, the loans typically reprise every 90 days. So even though you could have a movement up during the quarter and then stock reprice on the calendar quarter, so even though you have a movement up during the quarter, you need to wait to have the repricing say which is it most 90 days out. So I think that’s the – that’s the miss impactful, but it takes some meaningful change up to generate meaningful P&L. With respect to the use of the SBA debenture. So this is one of the things that we’ve been keen about the interestingly as you – I’m sure watch the 5, 10, 30-year treasury the relevant treasury rate for the SBA actually, I see the debentures as the 10-year and it’s relatively flat and as short-term rates of increased that great of longer-term rates have been flat. So we think there’s an opportunity here to take down those fixed rate instruments over the next three-year or so. That we think are relatively low rates. And we would expect that be bulk of the lending will continue to be floating rate. So as you shape up the balance sheet as you’re saying, imagine us having a more meaningful fixed rate position on the liability side and at a relatively low rate and matched off with mostly floating rate assets, which is an example would have been the entirety of the assets put on the books in the second quarter.

[Chris Kotowski:]

Okay. That’s good, thanks that’s it for me.

[Robert Ladd:]

Great. Thank you.

[Operator:]

We go next to Ryan Lynch with KBW.

[Ryan Lynch:]

Good morning. Thank you for taking my questions. But first one just has to do with investing new funded in the third quarter resolute industrial LLC, that’s a pretty large investment relative to the size your portfolio looks like you funded maybe $25 million with a little over equity and then as well such term – delay term loan. So it could even grow larger. So given the size of that investment relative to your portfolio size – can you just provide us background of what you saw on investment. Why the decision was to invest in that company given any kind of chunkiness in your portfolio?

[Robert Ladd:]

Yes, Ryan. So maybe just to summarize it that the capital plan there is that the exposure will be reduced in the near-term, so it was opportunity we closed with another party and the intent is to bring down the exposure shortly after close with an asset based lender. So you’ll see our exposures get more in line with their typical size.

[Ryan Lynch:]

Okay. When you do something like – go ahead.

[Robert Ladd:]

I would expect that happen by the end of this quarter. The logic behind it was interesting company opportunity and it backing able to move quickly and being flexible, not waiting for the asset base lender. We are able to when the opportunity getting close, very good sponsor and then knowing that, we had in place soon after close reduction in size.

[Ryan Lynch:]

Okay. And then just kind of a higher level question. Can you just comment on the competitive environment certainly in the – there’s certainly seems some competition in at the middle-market, certainly upper middle-market. Can you just talk about how the competition is in the lower middle-market where you guys predominantly play this quarter versus all six months ago is it improving – is that getting worse of it, stabilizing?

[Robert Ladd:]

Yes. I would say, that overall it’s probably similar. If you went back six, nine, 12 months ago and I measure that based on what we’re closing in the second quarter and the third quarter. We did see some slowness and for a while which appears to change a little bit. But I’d also say in what we did find in from a competitive standpoint, the larger the EBITDA business, the more we saw the larger players and ourselves come down market, if you will a little bit. And we’re pricing things lower than we would. So I would say overall though that our part of the middle-market, we still think it’s a robust area and best evidence I think of the pre-deals we closed that the yield on them was roughly at the same yield as relative we paid-off. So overall, it’s a relatively, it’s a competitive market but we’re finding interesting opportunities to close.

[Ryan Lynch:]

Are you seeing on – I know your mentioned that yields are saying the same. What about in terms of leverage or maybe more importantly, are you seen any more pressure on covenant life structures or an increase in EBITDA adjustments or EBITDA add backs?

[Robert Ladd:]

Yes. So the same phenomenon, I mentioned about some of the larger lenders coming down market little bit would have been incorporated covenant likes, greater leverage, multiples and then we were at the custom to or comfortable with. So as we done on the past, we persisted that. But we are seeing the larger lenders being more flexible in terms of terms. So we’ve been able to hold to good covenants, good covenant levels and leverage multiples overall. And again, best evidence is that transactions that were closing or not just similar to our overall leverage ratio which are in the four times.

[Ryan Lynch:]

Okay. That’s helpful for me. Thank you for taking my questions.

[Robert Ladd:]

Yes, great. Thank you, Ryan.

[Operator:]

And now I’ll conclude our question-and-answer session. At that time, I’d like to call back over Mr. Ladd for any additional or closing remarks.

[Robert Ladd:]

Yes. Please, Todd.

[Todd Huskinson:]

So Chris, I just want to correct one thing, I’ve said before on the number with respect to 1% increase or decrease in LIBOR that’s for quarter not for a year.

[Robert Ladd:]

Okay, good. Any follow-up question for that. Okay, good. Thank you, everyone and thank you for your support and we look forward to speaking with you in November, when we cover the third quarter. Bye-bye.

[Operator:]

That does conclude today’s conference. We thank you for your participation. You may now disconnect.