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Date
Thursday, August 7, 2025 at 3 p.m. ET
Call participants
Chief Executive Officer — Robert Ladd
Chief Financial Officer — Todd Huskinson
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Takeaways
GAAP net investment income-- $0.34 per share of GAAP net investment income, with core net investment income at $0.35 per share after excluding estimated excise taxes.
Net asset value per share-- Net asset value per share decreased by $0.04, attributed to a reduction in spillover income.
ATM program share issuance-- 300,000 shares issued for $3.9 million in proceeds, with all issuances priced above net asset value.
Portfolio size and composition-- $905.9 million investment portfolio at fair value across 112 portfolio companies, down from $991 million and 110 companies as of March 31, 2025.
New investments-- $15.4 million invested in three new portfolio companies, plus $7.4 million in other par investment activity.
Repayments and realizations-- $21.7 million in full loan repayments, one equity realization totaling $500,000 resulting in a $200,000 gain, and $10.4 million in other repayments at par.
Portfolio security-- 98% of loans were secured and 91% of loans were floating rate.
Asset quality distribution-- 84% of portfolio at fair value rated one or two (on or ahead of plan), and 16% of the portfolio was rated three or below (not meeting plan or expectations) at fair value.
Nonaccruals-- No new additions to the nonaccrual list during the quarter; both the percentage of portfolio cost and fair value on nonaccrual are down from the prior quarter.
Spillover income-- CFO Huskinson reported "just under $45 million of spillover we are working off due to the dividend" for 2025, with about $38 million of spillover expected next year.
Leverage-- Regulatory test leverage is about 0.9 times; GAAP leverage stands at about 1.7 times; management's target leverage remains near 1.0 times regulatory and is unchanged.
SBIC III license process-- Stellus Capital Investment Corporation has received a green light letter from the Small Business Administration for SBIC III, with management expecting a license, though noting it is not guaranteed.
Dividend declaration-- Board declared a Q3 2025 dividend of $0.40 per share, payable monthly, and expects a similar payout of $0.40 per share in Q4 2025, subject to board approval.
Summary
Stellus Capital Investment Corporation (SCM 0.69%) reported lower portfolio fair value and net asset value per share, while highlighting continued portfolio activity and a stable dividend outlook. Management noted a pickup in investment and M&A activity, with $26 million in new fundings since June 30, 2025. The portfolio now stands at approximately $1 billion with 113 companies. Over the next five months, management expects $12 million in equity realization proceeds and approximately $10 million in gains, with management citing "fairly high" confidence due to active marketing of those businesses. Pipeline activity remains described as "quite robust," with high-probability opportunities expected to support portfolio growth through year-end despite ongoing repayments.
CEO Ladd stated, "we have the capital base to really take the portfolio, which is currently about a billion, up $50 million to $75 million higher over time." As of fiscal Q2 2025 (period ended June 30, 2025), the portfolio stood at approximately $1 billion.
Roughly half of new deal flow historically has qualified for SBIC eligibility, according to management.
All but one portfolio company are backed by private equity sponsors.
Management clarified that as of fiscal Q2 2025, a rating of three for 16% of the portfolio means the principal and income are still expected to be received, according to the company's internal risk scoring definition.
Industry glossary
SBIC: Small Business Investment Company, a private investment firm licensed and regulated by the U.S. Small Business Administration, offering access to low-cost leverage for eligible portfolio investments.
Spillover income: Undistributed earnings exceeding dividend payments, available to support future dividend declarations under tax regulations for regulated investment companies.
Nonaccrual: Classification for a loan where interest is no longer accrued due to concerns about the borrower's ability to pay, signaling increased credit risk.
Full Conference Call Transcript
Robert Ladd: Yes. Thank you, Ali. Good morning, everyone, and thank you for joining our call. Welcome to our conference call covering the quarter ended 06/30/2025. 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.
Operator: Thank you, Rob. I'd like to remind everyone that today's call is being recorded.
Todd Huskinson: 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 turn 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 www.stelluscapital.com under the public investors link or call us at (713) 292-5400. Now I'll cover 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 $2.7 billion in over 210 companies and received approximately $1.7 billion of repayments, maintaining stable asset quality. We've paid $306 million of dividends to our investors, which represents $17.35 per share to an investor in our IPO in November 2012, which was offered at $15 per share. Turning now to the quarterly operating results.
In the second quarter, we generated $0.34 per share of GAAP net investment income, and core net investment income was $0.35 per share, which excludes estimated excise taxes. Net asset value per share decreased $0.04 during the quarter due to the reduction in spillover income. During the quarter, we issued approximately 300,000 shares for $3.9 million of proceeds under our ATM program. Year to date, we've issued approximately 900,000 shares for $13.2 million, and 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 $905.9 million across 112 portfolio companies, slightly down from $991 million across 110 companies as of 03/31/2025.
During the second quarter, we invested $15.4 million in three new portfolio companies and had $7.4 million in other investment activity at par. We also received two full repayments totaling $21.7 million and one equity realization totaling $500,000, which resulted in a realized gain of $200,000. We received $10.4 million of other repayments, all on par. At June 30, 98% of our loans were secured, and 91% were priced at floating rates. The average loan per company is $9.2 million, and the largest overall investment is $21.2 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, 84% of our portfolio is rated a one or a two, on or ahead of plan, and 16% of the portfolio is marked in an investment category of three 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 accrual, which comprise 6.8% of the total cost and 3.8% of the fair value of the total loan portfolio, respectively, which represents a decrease from the prior quarter. With respect to capital, as a reminder, we've 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.
Robert Ladd: Okay. Thank you, Todd. As we look ahead to 2025, I'll cover portfolio growth, equity realizations, and dividends. Investment activity has picked up meaningfully over the past thirty days or so. We expect the second half of the year to be busy, as evidenced by the $26 million of new funding since June 30. Our portfolio now stands at approximately $1 billion with 113 companies, now our largest number. And based on new fundings and repayments, we should end the quarter at about the same level. With M&A activity picking up, we expect to see more equity realizations over the next five months. Our best estimate today is $12 million of proceeds and approximately $10 million of gains.
Finally, regarding dividends, we declared the dividend for the third quarter of $0.40 per share payable monthly. We expect the fourth quarter to also be payable at this $0.40 per share rate for the quarter, again, payable monthly, of course, subject to board approval. And with that, we'll open it up for questions. And, Ali, you may begin the question and answer session, please.
Operator: Thank you. Ladies and gentlemen, at this time, we will begin our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. And you may press star 2 if you would like to remove your question from the queue. Before pressing the star keys. One moment, please. Thank you. Our first question is coming from Christopher Nolan with Ladenburg Thalmann. Your line is live.
Christopher Nolan: Hey, guys. Good morning, Chris. The dip in the EPS is not covering the dividend for the last few quarters. Two questions. How much spillover is there left over?
Robert Ladd: And
Christopher Nolan: what is the strategy in terms of increasing your leverage to cover the dividend?
Robert Ladd: Yeah. Todd, why don't you cover the spillover, and then I'll cover the question about leverage.
Todd Huskinson: Okay. Yeah. Sounds good, Rob. So good morning, Chris. So with respect to spillover, this year, we have just under $45 million of spillover we are working off due to the dividend. And then, going into next year, for next year's amount, we expect it to be about $38 million. And we'll continue to reduce it from there. So that's what we're working on with respect to the dividend.
Robert Ladd: And then
Christopher Nolan: Chris, relative to the use of leverage, we are currently running at about 0.9 on a regulatory test. And total leverage for GAAP is about 1.7 times. Our target leverage, we've stated for a good while, is about one on the regulatory test. So we do not intend to change that in the near term. We have the capacity to move leverage up through the use of our bank facility. We expect that we have the capital base to really take the portfolio, which is currently about a billion, up $50 million to $75 million higher over time. Is that helpful?
Christopher Nolan: Yes. It is. And just as a quick follow-up, for the SBIC III license, how much of your deal flow is eligible for the SBIC? And how quickly do you think you can fill that?
Robert Ladd: Yeah. So interestingly, historically, roughly half of what we look at qualifies. So it's a meaningful part of our deal flow and an important aspect of the company.
Christopher Nolan: So you can wrap that up in pretty quick order, I'd imagine.
Robert Ladd: Yeah. So this is helpful for us. And yeah, we anticipate we'll be able to get it approved as Todd indicated.
Christopher Nolan: Great. That's it for me. Thank you.
Robert Ladd: Okay. Many thanks, Chris.
Operator: Thank you. Our next question is coming from Eric Zwick with Lucid Capital Markets. Your line is live.
Robert Ladd: Good morning, Eric.
Eric Zwick: Hey. Good morning. This is Justin on for Eric today. Rob, just going off your comments, you know, obviously, good momentum to start the quarter with some sizable new investments. Just curious how the pipeline is looking for the remainder of the year and where you're seeing opportunities, whether that's new or add-on investments?
Robert Ladd: Yes. So again, as I indicated, quite a pickup in M&A activity. It looked like it started to happen after July 4. The noise around the tariffs has quieted some, although there's more in the news the last couple of days. But I think that certainly private equity firms with whom we work exclusively are much more active in the marketplace, looking at opportunities. So things have picked up meaningfully. Typically, we would expect and our pipeline runs, I'd say, 10 opportunities at a time that are very actionable. We see five to seven new opportunities a week. So we are very busy, but also very selective.
I do think we've got the ability to continue to grow here and, as indicated, have the capital to grow as well. As part of that, though, of course, we would expect repayments to speed up, which have been slower this year. But we think notwithstanding the repayments expected, we'll be able to grow the portfolio between now and the end of the year.
Eric Zwick: Okay. That's great. And then, you know, just a follow-up on credit quality. I know you guys can't disclose much, given the private aspect of all your portfolio companies. But any insight into any potential resolutions or progress that's being made with the current nonaccrual list?
Robert Ladd: Yeah. And thanks for noting the privacy aspect. We continue to work through them. All have private equity firms associated with them backing them. So we'll need more time. But, fortunately, this quarter, Todd noted, we had no new nonaccruals. I think they'll all take more time, but generally in a good spot. And where necessary, we'll get more involved in the situation to make sure the company continues. But our experience has been good private equity firms who we deal with typically put new money in a couple of times to support their businesses. So these are ones working through that system, if you will.
Eric Zwick: Okay. Great. That's all for me today. Thanks for taking my questions.
Robert Ladd: Yeah. Thank you, Justin.
Operator: Thank you. Our next question is coming from Robert Dodd with Raymond James.
Robert Dodd: Hi, guys. Good morning, Robert.
Robert Ladd: Good morning. How are you doing?
Robert Dodd: On the potential equity realizations that I think you mentioned, maybe $12 million in proceeds, $10 million in gains in the second half of the year. The level of confidence on that? Because, I mean, it does, you know, if the market activity's picked up, but who knows? Like, I mean, how high is the confidence level on realizing them this year? I mean, you know, if they don't get realized this year, then it just happens later. But, you know, what's kind of how's your feeling on the certainty of those things actually happening this year?
Robert Ladd: Sure. Sure, Robert. Yes. That's a great question. So when we indicate and forecast, again, things can change. Those are businesses that are in the market being marketed by a banker or by a company. So we would and all are well-performing businesses. So we think the likelihood would be high. And sometimes things don't happen, but and also there could be things that we're not aware of, especially if we're just in an equity-only position, don't have the debt instrument anymore. But we'd say fairly high, again, based on active marketing by the companies.
Robert Dodd: Not so much the nonaccrual side, but the 15% of the portfolio is rated three or lower, i.e., not meeting plan. I mean, we exclude the nonaccruals because those have obviously already, you know, are having their issues currently. How much of the remainder of that are you seriously nervous about versus, yeah, it's not meeting plan, but we're not that much worried, kind of thing?
Robert Ladd: You know, given its category of being a three, by definition, it means that we expect to receive all of our principal and all of the associated income. And five to be we don't expect the income or all of the principal. So our current thinking is, by definition, we expect to receive all principal and income. That'd be the best way to characterize it, I think, Robert.
Robert Dodd: Okay. Appreciate that. And then if I can, one more. Just on that, just kind of you know and like you said, and you've kind of partly addressed it. You know, activity picked up after thirty days. I mean, the time frame, because obviously some businesses take you said you expect to still grow by year-end. But how much uncertainty is in that given the pipeline and kind of you know, the timing of where we are with four months left in the year and these processes around up now. And I'm not talking about the equity. I just think kind of the pipeline.
Robert Ladd: Sure. Sure. So the pipeline, as indicated earlier, is quite robust. So a number of opportunities that are what we would describe as a 75% or higher probability. So a lot in that bucket. And then a lot of things that we're looking at that given that we're here in August, all of which have a good chance if they move forward and were selected to certainly close by the fourth quarter. Again, it's hard to predict these things on both ends. We have found that repayments sometimes happen more quickly than new fundings. But we expect we'll have both and can grow the portfolio the balance of the year.
Robert Dodd: Thank you.
Robert Ladd: Yeah. Thank you, Robert.
Operator: Thank you. As we currently have no further questions on the lines at this time, I would like to hand the call back over to Mr. Ladd for any closing remarks.
Robert Ladd: Okay. Thank you very much, and thank everyone for being on the call today and your support of our company. We look forward to providing the update on our third quarter results, which will be in early November. Take care.
Operator: Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.