Stellus Capital’s Earnings Call: Growth Amid Challenges

Stellus Capital Investment ((SCM)) has held its Q1 earnings call. Read on for the main highlights of the call.

Stellus Capital Investment’s recent earnings call conveyed a mixed sentiment, highlighting both positive developments and ongoing challenges. The company reported robust investment activity and portfolio growth, yet faced hurdles such as a decrease in net asset value per share, non-accrual loans, and difficulties in covering dividends with net investment income. While asset management remains strong with potential equity gains, economic conditions and specific company issues present a cautious outlook.

Investment Activity and Portfolio Growth

Stellus Capital demonstrated significant investment activity in the first quarter, investing $46.7 million across seven new portfolio companies. This increased the investment portfolio at fair value from $953.5 million to $991.1 million, now spanning 110 companies. This growth underscores the company’s commitment to expanding its investment reach and enhancing its portfolio.

Equity Co-Investment Portfolio Potential

The company has an equity co-investment portfolio valued at $83 million, with a promising potential for more than $10 million in equity gains by the end of the year. This potential highlights Stellus Capital’s strategic focus on maximizing returns through equity investments.

Positive Asset Quality and Loan Security

Stellus Capital reported strong asset quality, with 98% of loans secured and 91% priced at floating rates. The overall asset quality improved slightly, with a reduction in non-accrual loans from the previous quarter, reflecting effective risk management practices.

Successful Equity Issuance

The company’s ATM program was notably active, issuing 656,085 shares for $9.3 million at an average gross price of $14.11, all above net asset value. This successful equity issuance demonstrates investor confidence and provides additional capital for strategic initiatives.

Net Asset Value Per Share Decrease

Despite positive developments, the net asset value per share decreased by $0.21 during the quarter. This decline was attributed to company-specific write-downs in the loan portfolio and a reduction in spillover income, indicating areas needing attention.

Non-Accrual Loans

Currently, loans to five portfolio companies are on non-accrual, comprising 6.7% of the total cost and 4% of the fair value of the total loan portfolio. This situation highlights ongoing challenges in managing credit risk within the portfolio.

Interest Income and Dividend Coverage

The adjusted net investment income fell below the dividend payout, with expectations to remain below for the rest of the year due to current yield levels and the level of SOFR. This shortfall poses a challenge for maintaining dividend coverage.

Reduced Pipeline Activity

The pipeline for new opportunities has slowed compared to three months ago, primarily due to market disruptions linked to tariff activities affecting M&A. This reduction indicates a more cautious approach to new investments in the current economic climate.

Forward-Looking Guidance

Looking ahead, Stellus Capital expects its portfolio size to stabilize around $985 million by the end of the second quarter of 2025, with new loan originations balancing repayments. The company plans to maintain a dividend of $0.40 per share for the second and third quarters, subject to Board approval. Additionally, Stellus Capital anticipates leveraging its SBIC III license for continued portfolio investments and has issued $75 million in notes to strategically manage its capital structure.

In summary, Stellus Capital’s earnings call reflects a balanced view of growth opportunities and challenges. While investment activity and asset quality show promise, the company faces hurdles in dividend coverage and non-accrual loans. Forward-looking guidance suggests a stable portfolio size and strategic capital management, positioning Stellus Capital for cautious optimism in the coming quarters.