Robert T. Ladd – Chairman and Chief Executive Officer and President W. Todd Huskinson – Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary.

Ryan Lynch – Keefe, Bruyette & Woods Fin O'Shea – Raymond James & Associates, Inc..

Operator:.

It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, please go-ahead sir..

Okay. Thank you. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30, 2014. 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, Rob. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Stellus Capital Investment Corporation and 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 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’d like to turn the call back over to our Chief Executive Officer, Bob Ladd..

Thank you, Todd. While our origination activity during the quarter was modest, subsequent to quarter end, we’ve invested approximately $30 million in new investments, $13 million of which were funded to the issuance of SBA-guaranteed debentures.

Our pipeline is solid and the SBA debenture program will continue to be an important component of our growth forward. During the quarter, we made $6.9 million of investments in one new portfolio company and two existing portfolio companies.

During the same period, the company received $1.2 million from repayments and sales of investments, of which $0.5 million represents amortization on existing loans. This activity brought our portfolio up to $284 million at September 30 from $281 million at June 30. At this point, I would like to share some information about our investment portfolio.

As of September 30, 2014, we had 28 portfolio companies with total investment of approximately $284 million. The debt portfolio makes up substantially all of the total. The weighted average yield on the debt portfolio was approximately 11%, up from good 10.9% at June 30.

From a risk rating perspective, our weighted average rating is slightly above 2%, which means performing is expected on a 1 to 5 scale. 24 of our investments are rated to 2, two are rated to 3, and one is rated to 4.

We had one loan on non-accrual status during the second quarter, which represents approximately 3% of our loan portfolio at fair value and 25 of the 28 companies are backed by a traditional private equity sponsor.

As of September 30, 2014, our advisor Stellus Capital Management, while under no obligation to do so, collected to formally waive $1.4 million of incentive fees, which enable the company to cover its regular dividend for the first three quarters.

This waiver was made in sole-discretion of our advisor and does not imply that our advisor will waive fees in any future period. We’ve note since inception, our advisors waived a total of $2.4 million of incentive fees.

As we stated over a year-ago, we remain focused on meeting our goals, which include; first, generating sufficient income to cover our dividends; second, maintaining high asset quality; and third, selectively growing the portfolio in a diversified manner. With that, I'll turn over to Todd to cover the financial results..

Thanks, Rob. Our total investment income for the quarter was $7.8 million, most of which was interest income.

Operating expenses net of the incentive fee waiver totaled $2.6 million for the quarter and consisted a base management fees of $1.3 million, fees and expenses related to our borrowings of $1.4 million including commitment and other loan fees, administrative expenses of $300,000, and other expenses of $600,000, incentive fees were a benefit of $1 million due to the wavier of the $1.4 million incentive fee.

Net investment income for the quarter was $5.3 million or $0.42 a share, a $0.11 per share which was due to the fee wavier. Net increase in net assets from operations totaled $2.1 million or $0.17 per share.

At the end of the quarter, we recorded a change in net unrealized loss on a portfolio negative $2.9 million, the majority of which was the result of market spreads widening significantly during the last two weeks of the quarter.

As of September 30, 2014, our portfolio included approximately 18% first lien debt, 36% second lien debt, 43% mezzanine debt, and 3% equity investments at fair value. Our debt portfolio consisted of 47% fixed rate loans and 53% floating rate investments.

Our average portfolio of company investment was approximately $10.3 million, and our largest portfolio of company investment was approximately $22.3 million above the cost. Additional information regarding the composition of our portfolio is included in the MD&A section of our 10-Q that was filed last night.

With respect to liquidity at September 30, 2014 we had $90 million outstanding under our credit facility. As of November 3, 2014 we had a $102 million outstanding under the facility. Our unsecured bonds have the carrying value of $25 million that mature on April 30, 2019.

Lastly, we had $13 million of SBA-guaranteed debentures outstanding as of November 3, 2014.

At September 30, we made three new investments totaling $28.1 million at par and one follow-on investment of $2.6 million at par, which brings the investment portfolio to approximately $314.8 million at estimated fair value and the average investment per company to $10.2 million as of November 3, 2014.

On October 3, 2014 we invested $2.5 million in the unsecured debt of Skopos Financial LLC and we invested an additional $67,000 in the equity of the company. On October 21, 2014 we invested $7.5 million in the first lien debt of Hollander Sleep Products, LLC and $250,000 in the common stock of Dream II Holdings, LLC.

On October 22, we invested $15.6 million in the first lien debt and get committed $1.75 million in the unfunded revolver of Huf Worldwide LLC and invested $500,000 in the preferred stock of Huf Holdings LLC.

And filing on October 23, we invested $4 million in the second lien debt and $250,000 in the common and preferred stock of Zemax Software Holdings, LLC. And with that, I’ll turn the call back over to Rob..

Thank you, Todd. And we’ll begin the question-and-answer period now. Thank you. .

Thank you, sir. (Operator Instructions) We’ll go first to Ryan Lynch at KBW. .

Good morning and thank you for taking my questions. The first one, can you just give us a little bit of insight on the thought process of the fee wavier in the quarter? And going forward, do you all look solely at net operating earnings or do you guys also include realized and unrealized portfolio movements in that decision to waive fees..

Yes, Ryan. So, overall in terms of the incentive fee waiver, we made a decision at September 30 to go ahead and waive what we’ve indicated before we would look at over a period of time. So that was done in the third quarter.

In terms of looking at either realized gains or perhaps realized losses, the way we’ve indicated previously we would also look at taking into account realized gains. We’re probably less focused about realized, unrealized losses. We certainly would take into account realized loss.

And with respect to the calculation of the incentive fee, it includes the impact on realized gains. So we’re not taking any incentive fees on realized gains at this point..

Okay.

And then assuming that your equity base is so health constant or maybe gross marginally to the ATM program, what are your plans in terms of capital deployment and portfolio growth, and how do you planned on funding that growth?.

So assuming that our equity capital base stay at about where it is, we do have room for further growth through the SBIC debenture program.

And we currently have the ability to draw up to $16 million of what is roughly 65 million of capacity and subject to work we’re doing with the SBA, we are likely to have the ability to draw up the whole $65 million of debentures.

So again with assuming a relatively flat equity capital base, our growth beyond here where we are pretty fully invested would come through the SBA debenture program..

So is that $65 million is that on top of the $13 million that you’ve already drawn currently?.

No, that would be included in the $65 million..

That’s included in the $65 million, all right.

And then, talking about leverage levels going forward, how do you guys kind of view leverage levels and where do you guys kind of feel comfortable running? Do you guys look at on a total debt to equity basis or do you guys more view it on a regulatory debt to equity basis excluding the SBIC debentures?.

I think we look at it in two ways, so clearly mindful of the regulatory calculation so we would think of that is being, as I think I said before in the $0.7 million to $0.8 million range.

And then if you include the SBIC debentures, which are not included in our calculation, we exempt it to release we would think of being in the 1 to 1 ratio approximately..

Okay, great.

And then one last one, that is – out of $31 million you guys invested quarter-to-date in Q4, can you just give us some color on the yields of those investments? And also do you seen any widening out of spreads in the fourth quarter basically from – we’ve seen some widening of spreads in kind of the liquid mortgage, have you seen that trickle down into your kind of core middle market?.

Yes. So I’d say in terms of the pricing that we’re seeing in the marketplace, it’s a general matter. We haven’t seen much change, either less pricing or more pricing. You are certainly right in terms of the public markets. There has been a widening really since June 30.

There has been a little bit of tapering in the public market since September 30, but it’s about where it was in September 30. So hasn’t had a material impact on our business which as you know is less effective by what the public markets are doing.

And with the respect to the portfolio that’s been added since quarter end, I’d say the average yield is a little bit less than our portfolio average in total but is an example if you included those I think it might bring our average yield from a 11% to 10.9%. .

Okay..

And I would say that bulk of what we’ve done, in fact all of the new deals with the new originations were secured credits and there is no unsecured exposure in the newly originated..

Just to add to that point, are you guys focusing more on more secured credit in your portfolio or is that just kind of the push for the market and those are kind of the best risk adjusted returns out there right now or you guys actually focusing on that area of the market more?.

Yeah, I’d say that it’s certainly more where the market is. So mezzanine is less part of the market and but I’d say ultimately we look at it in terms of what we think the right risk award balance is and it seems to be more interesting in the secured market..

All right, thanks. That’s all from me guys..

Yes. Thank you, Ryan..

(Operator Instructions) And we’ll go next Fin O'Shea at Raymond James.

Sir?.

Hi guys, thank you. That actually covered a lot of my questions.

Can you give any more color on the unrealized depreciation line or perhaps which investment been moved to behind planned?.

Sure, Fin. So the way to think about that unrealized loss at this quarter is effectively all of it was related to the change in market spreads which is a mechanism that we know one of the components of our valuation methodology.

So the last two weeks of the quarter, the market spreads really widened out significantly and they continue to – now after the quarter and then kind of tightened up to be back roughly where it was at the end of the quarter.

So, of that $2.9 million loss that you see, $3.9 million of it was related to the mark down of the loans, because of the widening of the spreads and when it come to binder in a second which is one on-accrual loan.

And then our equity positions actually were marked up by a $1 million on unrealized basis, mostly due to increased performance of the companies. So the net of those two is the $2.9 million, binder was written down slightly just a $200,000 and it’s just on the normal process of us looking it the methodology for valuing a loan.

So there really wasn’t a degradation in the position of just changing some scenarios in terms of what may happened with that position. .

So, I might just add to Todd said so. As we look at our portfolio each quarter, there was no degradation in the quality of the asset, this was strictly tied to the public market spread movement..

No, that’s helpful and thank you.

On Binder forgive me if I forgot and basically given the nature of their businesses to the issues relate to anything regulatory to say or is it just a natural decline in what they are doing?.

We are careful not to talk too much about any one portfolio company privately held businesses in United States, but I would just say as a general matter that sector has been impacted originally been impacted from a regulatory standpoint not in the business itself, but rather in the way it’s so handle.

So, I would say this is more of a company specific activity..

Okay, thank you.

And just one more on looking at the subsequent events and in Huf Holdings it looks like that sort of a complete one stop type financing if I am wrong? Is that something you traditionally will do or is that something specific for this investment?.

Yes, so that you are right about that in terms of the one stop financing and that is something that we would do – we look at it in total of the credit exposure we are taking. So and those we thought unit trench situations. There could be lower risk if you look at the entire capital that’s been provided some of its bank type financing.

So it is an area which non bank type financing so it is an area we make us interesting and of course it does has impacted our ability to more secure type financing..

Okay guys. Thank you very much. I appreciate it.

Okay, thank you, Fin..

Moving on, we’ll go next to Chris Kotowski of Oppenheimer. .

Yeah, I was just curious.

Your total level of investments had kind of been flat ever since the end of last year and then all of the sudden we see $28 million of investments since the third quarter and I am wondering does that reflect just the normal lumpiness or does it reflect the fact that you got the SBIC and are able to do that or that there is a wave of activity or what should we read into the fact that there seems be a whole lot more activity in the third quarter, than before is there any fair thing for us to read into that forward..

Sure. So good question, so we wouldn’t read anything into the third quarter or now really the fourth quarter in terms of closings. I would say that it is a can be a little bit of lumpy business overtime and that some transactions and samples that we thought might have closed in the third quarter so you can have some slippage.

I do think that one of the things you raised Chris is that, we are pretty fully invested or had happened during the year. If you look at our equity capital base and then for us to grow further, much further beyond where we are is really to the SBA debenture program which has been kicked off basically midyear.

So this will enable us even though our equity capital bases, pretty fully levered that we will at the SBI, SBIC subsidiary level able to then grow and so that’s now in full portion and we are optimistic we’ll have full access to the leverage here as we complete our activities with the SBI.

So, and also good questions as we go forward, we can have much more active for quarters and others, but I think its more user these private negotiated transactions take time and some can be delayed and usually not on our part but it’s the acquisition of a company and perhaps for financing net in that acquisition has been delayed for some reasons.

So, Canada is the normal nature of our business and we’re very active in the market place and I do think you’re right then. Remembering to the loans that fit for the SBIC subsidiary after meeting certain towers, historically 30% to 40% of what we’ve been doing does fit find.

So as we find opportunities that fit in the SBIC subsidiary will be able to growth the portfolio in that way. .

Okay and I guess just, you are trading right around NAV-NAV but obviously it’s been a kind of tough here for BDC’s and if we go through like 2015 and BDC’s continues it trade below NAV, I mean if you wanted to fund the SBIC beyond the $65 million what would be your approach to putting equity in there? Could you run down other investments or is the only way to funded with under with another equity race?.

We would have some room to fund subsidiary but I think we will look at, as we check perhaps to capitalize it further it would required more equity capitalization at the parented the BDC level. .

Okay. All right, that’s all from me. Thank you. .

Thank you. .

(Operator Instructions) And gentlemen, it appears I have no further questions at this time. I would like to turn the conference back over to you for any additional or concluding remarks..

Okay. Well, again thank you for joining the call and your support of our company and we look forward to reporting our results after the end of the year. Thank you very much. Bye bye. .

Ladies and gentlemen, once again, that does conclude today’s conference and once again I would like to thank everyone for joining us. Thank you for calling..