Stellus Capital Investment Corporation (NYSE:SCM) Q1 2026 Earnings Call Transcript

Stellus Capital Investment Corporation (NYSE:SCM) Q1 2026 Earnings Call Transcript May 12, 2026

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 first fiscal quarter ended March 31, 2026. [Operator Instructions] This conference is being recorded today, May 12, 2026. 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: Okay. Thank you, Holly. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2026. We have 6 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.

W. Huskinson: Thank you, Rob. I’d 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’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 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 in the — for the quarter, but 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 225 companies and received approximately $1.8 billion of repayments while maintaining stable asset quality. We’ve paid $339 million of dividends to our investors, 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 $750,000 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 2 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 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 December 31, 2025. During the first quarter, we invested $18 million in 3 new portfolio companies and had $9 million in other investment activity at par.

We also received 3 full repayments totaling $35 million, one equity realization, which resulted in a realized gain of $750,000 and received $6.6 million of other repayments. On March 31, 99% of our loans were 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 a 2 or on or ahead of plan and 19% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. We added one new loan to our nonaccrual list during the quarter.

Currently, we have 6 loans — loans to 6 portfolio companies on nonaccrual, which comprised 9.2% of the total cost and 5.2% of the fair value of the total investment portfolio, respectively, which represents a slight increase from the prior quarter. We recognize that the level of nonaccrual loans is higher than we would like. We’re focused on reducing the number of — and dollar magnitude of these loans. We’re actively working each position and are making progress in exiting the positions or bringing them back onto an accrual status. There’s 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 the [indiscernible] software and information they provide in many cases deal with proprietary data. We believe AI will enable these and many of our portfolio companies across a variety of industry sectors to improve the speed and 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’d like to turn the call back over to Rob to cover a number of other topics.

Robert Ladd: Thank you, Todd. As we look ahead to the second quarter of 2026, I’ll cover 4 topics: the outlook for Q2, our advisers’ plans to join the Ridgepost Capital’s platform, 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. The balance of the quarter, we would expect repayments to equal new fundings, thus ending the quarter approximately where we are today. We expect to [ continue ] 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 gains. 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’ve 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 private equity fund-to-fund 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’d 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 2 sources. The first is from a third SBIC license, which we’re optimistic will be rewarded this summer. And the second is from recycling equity gains and nonaccrual loan that have been resolved. As a reminder, $1 of an equity position or a nonaccrual loan, that turns to cash can be reinvested into a new loan of close to $3 through our leverage facilities. In closing, let me thank everyone for your continued support, and we’ll now turn to the Q&A session.

Q&A Session

Operator: [Operator Instructions] Your first question for today is from Erik Zwick with Lucid Capital.

Erik Zwick: I wanted to start just to make sure I understood some of the commentary there in the prepared remarks. With relation to the expectation for kind of dividends to be in line with NII plus realized gains, did I understand that you kind of mentioned that the way it was lined up currently, the NII plus realized gains would be kind of 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 kind of hone in on that a little bit.

Robert Ladd: Sure, sure. So I’d say that although we’d like to grow the NII per share from here, we think we’re probably at a level that we’ll be at for a while. So our expectation is that the dividend will be coming down associated with that.

Erik Zwick: Got it. Okay. That’s helpful. That’s what I thought I heard. 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’m wrong, I don’t think you repurchased anything in 1Q. So was — anything that kept you out of the market, potentially the pending acquisition of the adviser by Ridgepost or anything else?

Robert Ladd: Yes. No, no, good question. Good point. So we did not repurchase any shares after the previous quarter end. But a reminder, when issuing a K, we have a short period from the issuance of the K to the end of the quarter. So there’s 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.

Erik Zwick: Got you. Okay. Understood. 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’re seeing spreads in the pipeline today relative to 90 days ago and also kind of compared to the current existing portfolio yield?

Robert Ladd: Yes. So relative to spreads, so as the private credit has been disrupted a little bit, we are seeing some, I’d say, steadiness in spreads. We’ve not seen the same widening that the upper market has seen, but I think we’ve certainly seen stabilization. And so I’d say our average deal we’re looking at today is approximately a 5% spread over SOFR, could be higher, but it’s stabilized, but not meaningfully wider yet.

Erik Zwick: Okay. Good to hear that it’s at least stabilized and hopefully some widening going forward.

Operator: Your next question is from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan: I guess for Todd, Todd, does the — I know your leverage — your regulatory leverage ratios are low. But when including the SBA, it’s somewhat higher. Does the SBA in any way restrict what your regulatory leverage ratios could be?

W. Huskinson: No. No, the SBA leverage is excluded from regulatory leverage. So it’s a 2:1 regulatory leverage and our regulatory leverage is around 1x and then it’s 2x with the SBA debentures, a little bit less than 2x now because we’ve paid off a number of debentures.

Christopher Nolan: Okay. So your unsecured notes and so forth doesn’t put any sort of restrictions on your total leverage just on your regulatory leverage, correct?

W. Huskinson: Correct. Yes, that’s right. [ The notes ] in the credit facility are part of regulatory leverage and then the debentures are in addition to that as total leverage.

Christopher Nolan: 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?

W. Huskinson: That’s correct. Yes, I think that’s correct. It’s, of course, limited by borrowing base, but that’s right. We have a lot of running room with respect to that.

Christopher Nolan: Okay. And then I guess your — you mentioned in your comments that you didn’t have much software exposure. But in your industry list, is it buried into another industry like high-tech industries?

W. Huskinson: Yes, it’s in a — it would be in several. 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 it could be like a service as well that might be industry-specific, and those might be in different industry categories.

Christopher Nolan: And we’ve seen with other BDCs where they’ve had to take down unrealized depreciation on software positions. Have you guys experienced that as well?

Robert Ladd: We have not. Those positions are marked approximately where they were at last quarter end and are basically marked close to par.

W. Huskinson: Yes, they’re all good solid performing loans. I mentioned, they’re either a 1 or 2 on our risk grading scale, so all doing fine.

Operator: Your next question for today is from Robert Dodd with Raymond James.

Robert Dodd: Just sticking with that software — well, not only software, the marks. On the quarter, you said there was $0.22 in NAV attrition, primarily markdowns and debt investments. Can you give us any idea how much of that was spread as you just mark-to-market versus actual company-specific elements?

W. Huskinson: Yes. So I would say, Robert, most of that is coming from kind of net company movements. We had — and most of those markdowns were on 2 specific positions. So we did have certainly some spread markdowns in terms of just the models, but the majority of that was coming from 2 equity positions. And we also had a little bit of write equity as well — 2 debt positions, I’m sorry, that are write-down on the equity as well.

Robert Dodd: Got it. Got it. On — going back to the Erik’s question on spreads, and you said that you’ve seen some stability. There sometimes, obviously, can be a lag between how the smaller end of the market, so to speak, responds to spread movements versus the upper end of the market and to your point. So do you think the spread stability rather than expansion you’re seeing right now is more a function of just things lagging what’s going on in the upper market? Or do you think it’s just that the competitive environment in your end of the market has just not moved and you just don’t expect those spreads to widen materially at all?

Robert Ladd: Yes, Robert. So I would say that it’s driven by the latter that it’s still a competitive space that we’re in. And I think we’re seeing things getting done in the high 4s up to the mid-to-high 5s. So I’d say it’s a competitive nature. It’s — things are slower in terms of deal flow. I think as you see deal flow pick up, there’s certainly the opportunity to have the spreads also widen some. But so far, I think it’s not a lag. I think it’s just the competitive nature of where we are.

Robert Dodd: I appreciate that. And then just one more on the nonaccruals, and you addressed this, like they are a little elevated. You’ve got some — you want to work that down, rotate those into — either back on to accrual or into income-producing assets. I mean any color you can give on — I mean, I think you mentioned you’re making some progress. I mean, how — it’s a slow process. When I say fast, I don’t mean fast. But what kind of timeline do you think that could go noticeably lower than where it is currently in terms of the nonaccrual and nonincome-producing debt capital assets?

Robert Ladd: Yes. So we had — we discussed this on the last call. And I think I would say the same thing. I think we’re — I think, it’s not going to be immediate. I would be thinking toward the end of the year this year, and then these are generally in 12- to 24-month resolution, so to speak. But just we wanted to make sure that we haven’t — we’re very focused on it. But I think it’s going to take some more time, but we are seeing some progress in some. And the other thing that you’ve noted, and I mentioned in my remarks is that as we get some of these equity realizations in and we have some larger positions, this is a great opportunity to recycle what are non-earning assets, they could appreciate, but noncurrent earning assets to put leverage on them and grow the portfolio again.

So we think we’ll start to see that come to fruition towards the end of this year. So those 2 things combined, think of it more towards the end of this year into the first of next year, but not immediately.

Operator: Your next question is from Paul Johnson with KBW.

Paul Johnson: Just a little bit more on the nonaccruals. As Robert said, those are elevated. I think they’re probably as high as they’ve ever been for Stellus. I’m just curious, what, I guess, has been kind of the weakness there? I mean, has it just been kind of a challenging vintage? Or has there been something maybe more specific in terms of kind of what’s driven the more recent, I guess, increase in nonaccruals?

Robert Ladd: Yes. So good question, Paul. I’d say they’re all company-specific, not driven by any kind of a macro trend or an underwriting trend that we — all of our businesses when we underwrite them, there are a few key characteristics. One, they have a substantial equity partner behind in a private equity firm. Two, the equity component to the company is at least — or typically at least 50% of the capital structure and each has serious covenants, traditionally a fixed charge coverage and a leverage test. So when we go into it, we’re not expecting problems, but we certainly underwrite if we went through a recession, how would company do. But we ended up having not a recession, but again, company-specific issues that have made some of them challenging.

Also, it’s worth noting that because there’s a private equity sponsor behind substantially all of these, it is typical that a private equity firm will put in capital at least twice to solve problems. So if that’s helpful to say that if we have something on nonaccrual, the sponsor owner has supported this over time and just gotten to the point where they’re not able to support it anymore. So again, company specific, nothing we could tie down to anything that would be an overall trend. Part of it, too, is we’ve also had — in the past, we might have things come off nonaccrual or be resolved, and we’re having some slowness in that activity, and that’s why I noted that we’re working it and working it hard to get that to reduce over time. So I think it’s — we haven’t been able to take as many off as we’ve added.

But anyway, thanks for the question, and that’s where we are.

Paul Johnson: Got it. Okay. Appreciate that. And then, I mean, it sounds, if I’m not mistaken, your 1 to 2 rated names roughly around 19% of the portfolio, I believe, last quarter. So I don’t think there’s too much change quarter-over-quarter in terms of like the internal watch list with the new addition here to nonaccrual, I believe that may have already been captured within your internal watch list. Is that safe to say that any of the addition here to nonaccrual is not necessarily a surprise and is — was more or less kind of within the bucket of underperforming rated names and that’s relatively unchanged quarter-over-quarter?

Robert Ladd: That’s right, Paul. And again, I think — so it’s 19% that is risk grade 3 or below. And you’re right, that number didn’t change. And…

Paul Johnson: My mistake.

Robert Ladd: No, no worries. And that the one that did move to nonaccrual was already a risk grade 3 before.

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

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

Operator: This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.