Stellus Capital Investment Corp(SCM)Q1 2026 法說會逐字稿

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 03/31/2026. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please signal the operator. This conference is being recorded today, 05/12/2026. It is now my pleasure to turn the call over to Mr. Robert T. Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Okay. Thank you, Holly. Morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2026. We have six topics to cover this morning. First, the financial results for the quarter; portfolio and asset quality; outlook update; opportunities with RidgePost Capital; our share buyback program; and future growth in the portfolio. 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.

Thank you, Robert. I would like to remind everyone that today's call is being recorded. Please note that the 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 would 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 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 will cover our operating results for the quarter but would like to start with our life-to-date activity. Since our IPO in November 2012, we have invested approximately $2.8 billion in over 250 companies and received approximately $1.8 billion of repayments while maintaining stable asset quality. We have paid $339 million of dividends to our shareholders, which represents $18.49 per share to an investor in our IPO in November 2012. In the first quarter, we generated $0.26 per share of GAAP net investment income, and core net investment income was $0.27 per share, which excludes estimated excise taxes. During the quarter, we also realized gains of $750 thousand on one equity position, which resulted in total realized income for the quarter of $0.29 per share. Net asset value decreased $0.28 per share during the quarter from two components. The first was $0.08 per share of dividend payments that exceeded earnings which was necessary to continue to pay out the spillover balance from 2025. The second was a net realized and unrealized loss of $0.20 per share related primarily to two debt investments. We ended the quarter with an investment portfolio at fair value of $990 million across 116 portfolio companies, a decrease from $1.01 billion across 115 portfolio companies as of 12/31/2025. During the first quarter, we invested $18 million in three new portfolio companies and had $9 million in other investment activity, at par. We also received three full repayments totaling $35 million, one equity realization, which resulted in a realized gain of $750 thousand, and received $6.6 million of other repayments. As of March 31, 99% of our loans were senior secured, and 92% were priced at floating rates. The average loan per company is $9 million and the largest overall investment is $18.5 million, both at fair value. Substantially all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 81% of our portfolio is rated a 1 or 2, on or ahead of plan. Nineteen percent of the portfolio is marked in an investment category of 3 or below, meaning not meeting plan or expectations. We added one new loan to our non-accrual list during the quarter. Currently, we have six loans to six portfolio companies on non-accrual which comprise 9.2% of the total cost and 5.2% of the fair value of the total investment portfolio, respectively. This represents a slight increase from the prior quarter. We recognize that the level of non-accrual loans is higher than we would like. We are focused on reducing the number and dollar magnitude of these loans. We are actively working each position and are making progress in exiting the positions or bringing them back onto an accrual status. There has been much speculation about the impact of artificial intelligence on the large-scale SaaS software industry. As we mentioned on our last call, Stellus does not have exposure to the large-scale SaaS software sector. We do have portfolio companies in software and information technology that provide industry-specific software, and in many cases deal with proprietary data. We believe AI will enable many of our portfolio companies across a variety of industry sectors to improve the speed of information. Each of these companies is rated on our risk rating system as either a 1 or 2, meaning on plan or ahead of plan. And now I would like to turn the call back over to Robert to cover a number of other topics.

Thank you, Todd. As we look ahead to 2026, I will cover four topics: the outlook, our adviser's plans to join the RidgePost Capital platform, Q2, our $20 million share buyback program, and opportunities for growth. First, with respect to outlook, as of today our portfolio is approximately $970 million across 117 portfolio companies. For the balance of the quarter, we would expect repayments to equal new fundings, thus ending the quarter approximately where we are today. We expect equity realizations throughout the year; at this point, we estimate $9 million for the balance of the year, with approximately $6 million of this in realized gain. Regarding dividends, in April we declared the dividend for the second quarter of this year of $0.34 per share in the aggregate, payable monthly. Looking forward, we are making progress in reducing the amount of spillover income and we expect that over time our dividend will approximate our net investment income plus realized gains. At this point, that would be at a lower level than the current dividend. Now turning to RidgePost. We look forward to our external adviser, Stellus Capital Management, joining the RidgePost Capital platform this summer. We have been impressed with RidgePost Capital's organization. They have excellent leadership, and we should benefit from meaningful new investment opportunities working with them, particularly through their lower middle market fund-of-funds strategy known as RCP Advisors. RCP has relationships with over 200 private equity firms and, with their focus on the lower middle market, many of these sponsors are candidates for us to provide financing for their portfolio companies. We think this could provide hundreds of millions of dollars of new lending possibilities across the entire Stellus platform each year. Now turning to the share repurchase program. We recently announced a common stock repurchase program of up to $20 million. This decision reflects the current trading level of our shares, which are approximately a 25% discount to net asset value. Historically, our stock has traded at or above NAV for many years. At the current price levels, we believe repurchasing shares represents a good opportunity to generate value for our shareholders. And now opportunities for growth. I would like to conclude our remarks by outlining the opportunity to grow our portfolio. We project that we have the capacity to increase our investment portfolio by $75 million to $100 million from here. This opportunity comes from two sources. The first is from the third SBIC license, which we are optimistic will be awarded this summer. The second is from recycling equity gains and non-accrual loans that have been resolved. As a reminder, a dollar of an equity position or a non-accrual loan that turns to cash can be reinvested into a new loan close to $3 through our leverage facilities. In closing, let me thank everyone for your continued support and we will now turn to the Q&A session.

At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, while we poll for questions. Your first question for today is from Eric Zwick with Lucid Capital.

Good morning, Eric.

Hey, good morning, Robert and Todd. Wanted to start just to make sure I understood some of the commentary in the prepared remarks. With relation to the expectation for dividends to be in line with net investment income plus realized gains: did I understand that you mentioned that, as currently lined up, our NII plus realized gains would be lower than the current dividend level? So just trying to figure out, are you expecting to be able to grow NII over time or potentially think about resetting the dividend level as well? Just trying to hone in on that a little bit.

Sure. So I would say that although we would like to grow NII per share from here, we think we are probably at a level that we will be at for a while. So our expectation is that the dividend will be coming down, associated with that.

Got it. Okay, that is helpful. And then just with regard to share repurchases, I know you talked about it last quarter as well in terms of being attractive given where the stock is trading today. But correct me if I am wrong: I do not think you repurchased anything in 1Q, so was there anything that kept you out of the market, potentially the pending acquisition of the adviser by RidgePost or anything else?

No. Good question. Good point. So we did not repurchase any shares after the previous quarter end. But a reminder, when issuing an 8-K, we have a short period from the issuance of the 8-K to the end of the quarter. So there are just limited periods we can be repurchasing. We will have a much longer window this quarter and it was strictly tied to the timing of that and nothing else.

Gotcha. Okay. Understood. Thank you. And last one for me: wondering if you can just talk about the pipeline a little bit. I know you expect it to grow in the back half of the year post the RidgePost tie-up. And curious from a spread perspective, if you can talk about where you are seeing spreads in the pipeline today relative to 90 days ago and also kind of compared to the current existing portfolio yield.

Yes. So relative to spreads, as private credit has been disrupted a little bit, we are seeing some steadiness in spreads. We have not seen the same widening that the upper market is seeing. I think we have certainly seen stabilization. Our average deal we are looking at today is approximately a 5.5% spread over SOFR. It could be higher, but it is stabilized, not meaningfully wider yet.

Okay. Good to hear that it is at least stabilized and hopefully some widening going forward. Great. That is all for me today. Thank you so much.

Okay. Many thanks, Eric.

Your next question is from Christopher Nolan with Ladenburg Thalmann.

Hey guys. I guess for Todd: I know your regulatory leverage ratios are low, but when including the SBA, it is somewhat higher. Does the SBA in any way restrict what your regulatory leverage ratios could be?

No. The SBA leverage is excluded from regulatory leverage. So regulatory leverage is 2:1. Our regulatory leverage is around 1x on our non-SBA basis, and then it is about 2x when you include the SBA debentures. It is a little bit less than 2x now because we have paid off a number of debentures.

Okay. So your unsecured notes and so forth do not put any sort of restrictions on your total leverage; it is on your regulatory leverage, correct?

Correct. Priscilla and the credit facility are part of regulatory leverage, and then the SBA debentures are in addition to that as total leverage.

Got it. And so we can see your regulatory leverage ratios are impressively low, so we can just see that you guys have a fair amount of balance sheet flexibility from that. Is that a fair interpretation?

That is correct. It is, of course, limited by the borrowing base, but that is right. We have a lot of running room with respect to that.

Okay. And then I guess you mentioned in your comments that you did not have much software exposure. But in your industry list, is it buried into another industry like high-tech industries?

Yeah. It is in a couple of categories. It could be in high-tech. It could be in the industry it serves because, as I mentioned, those software products are very industry-specific and could be treated as the industry they serve. Those might be in different industry categories.

And we see with other BDCs where they have taken down unrealized depreciation on software positions. Have you guys experienced that as well?

We have not. Those positions are marked approximately where they were last quarter end and are basically marked close to par. They are all good, solid performing loans. As I mentioned, they are either a 1 or a 2 on our risk rating scale, so all doing fine.

Yeah. Thank you, Christopher.

Your next question for today is from Robert Dodd with Raymond James. Good morning.

Just sticking with that: on the marks and the quality, so there is $0.22 in NAV attrition, primarily markdowns in debt investments. Can you give us any idea how much of that was spread-related as you just mark to market versus actual company-specific elements?

Yes. Robert, most of that is coming from net company movements. Most of those markdowns were on two specific positions. We did have some spread markdowns in terms of model adjustments, but the majority of that was coming from two debt positions. We also had a little bit of equity impact as well; two debt positions were essentially wiped out, and there were equity impacts related to those.

Got it. On going back to Eric's question on spreads, you said that you have seen some stability. There is sometimes a lag between how the smaller end of the market responds to spread movements versus the upper end of the market. Do you think the spreads' stability rather than expansion you are seeing right now is more a function of things lagging what is going on in the upper market, or do you think the competitive environment in your end of the market has not moved and you do not expect those spreads to widen materially?

Robert, I would say it is driven by the latter: it is a competitive space that we are in. We are seeing deals in the high fours up to the mid-to-high fives. It is a competitive environment and deal flow is slower. I think as deal flow picks up there is certainly opportunity for spreads to widen, but so far I think it is not a lag; it is the competitive nature of where we are.

Appreciate that. Thank you. And then one more: on the non-accruals, you addressed that they are a little elevated and you want to work that down. You mentioned progress. What kind of timeline do you think that could go noticeably lower than where it is currently, in terms of non-accrual and non-income-producing debt capital assets?

We discussed this on the last call and I would say the same thing: I do not think they are going to be immediate. I would be thinking toward the end of the year. Generally resolutions are in the 12-to-24-month range. We are very focused on it and are seeing progress in some positions. Also, as we get equity realizations in and we have larger positions resolved, that is a great opportunity to recycle non-earning assets and apply leverage to grow the portfolio again. We think we will start to see that come to fruition toward the end of this year and into the start of next year, but not immediately.

Got it. Got it. Thank you.

Thank you, Robert.

Your next question is from Paul Johnson with KBW.

Good morning, Paul.

Yeah. Good afternoon, guys. Thanks for taking my questions. Just a little bit more on the non-accruals: as Robert said, those are elevated. I think they are probably as high as they have ever been for Stellus. I am just curious what has been the weakness there: is it just been a challenging vintage or has there been something more specific in terms of what has driven the more recent increase in non-accruals?

Good question, Paul. I would say they are all company-specific, not driven by any macro trend or underwriting trend that we are aware of. When we underwrite a deal we look for a few key characteristics: one, a substantial equity partner behind it (a private equity firm); two, the equity component to the company is typically at least 50% of the capital structure; and each has serious covenants, traditionally a fixed-charge coverage and a leverage test. We underwrite assuming stress scenarios. What we have had is company-specific issues in a few names that made them challenging. Also, because there is usually a private equity sponsor for these companies, it is typical that the sponsor will put in capital to solve problems. If we have something on non-accrual, the sponsor often has supported it over time and just reached a point where they were not able to support it anymore. Part of it is also that we have had slowness in resolving non-accruals recently, so we have not been able to take as many off as we have added. We are working hard to reduce that over time.

Got it. And then, I think roughly 19% of the portfolio is risk grade 3 or below, and that number did not change quarter over quarter. In terms of the internal watch list with the new addition to non-accrual, would that have already been captured within your internal watch list? Is it safe to say that any addition to non-accrual is not necessarily a surprise and was more or less already within the bucket of underperforming rated names?

That is right, Paul. The 19% is the percentage that is risk grade 3 or below and that number did not change materially. The one that moved to non-accrual was already a risk grade 3 before it moved.

Got it. Okay, that is all for me.

Thanks so much, Paul.

We have reached the end of the question-and-answer session, and I will now turn the call over to Robert T. Ladd for closing remarks.

Okay. Thanks again, Holly. Thanks for your help, and thanks, everyone, for participating and for your support over many years of our company. We look forward to giving you an update again in early August relative to the second quarter. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.