Robert Ladd - Chairman President and CEO Todd Huskinson - CFO, Chief Compliance Officer, Treasurer and Secretary.

Robert Dodd - Raymond James & Associates, Inc. Greg Mason - Keefe, Bruyette & Woods, Inc..

Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to the Stellus Capital Investment Corporation's Conference Call to report their Fourth Quarter Financial Results.

At this time, all participants have been placed in a listen-only mode and the call will be opened for question-and-answer session following the speaker's remarks. This conference is being recorded today, Tuesday, March 10, 2015. 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..

Thank you, Greg. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the year ended December 31, 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. As we've recently completed our second full year operation, I would like to summarize the following results for 2014. We covered our regular dividends through net investment income and realized gains, which continues to represent a 9% yield on the ideal price of $15 per share.

We paid a special dividend of $0.065 per share in January related to realized gains generated in the year 2013. We grew the investment portfolio by 16% to $326 million at par value at year end in a diversified manner by size and industry sector. We strengthened our capital base in four ways. First, raise long term unsecured debt of $25.0 million.

Second, received approval for our SBIC license which was initially capitalized at $32.5 million of equity and will have access to $65 million of SBIC long-term debentures. Third, we extended the maturity of our bank credit facility by approximately two years and we are able to reduce the marginal cost of borrowing.

And last, we initiated an at the market equity issuance program, which raised approximately $5 million of equity proceeds at an average gross price of about $14.48 per share. As we reported from the beginning of the formation of our company, we strive to maintain good diversification in our portfolio.

To this end, our average position size is still approximately $10 million, our largest industry sectors under 15% of the total portfolio. Further in the sector in which we have a long history, oil and gas, we have less than 1% exposure.

The dislocation that is occurring in the oil and gas market should present opportunities for us and our exposure to this sector oil and gas will likely increase over the next 12 to 24 months. Regarding portfolio quality, our weighted average risk rate is too on plan.

Over 90% of the companies are backed by a private equity sponsor and we have one loan on non-accrual which represents about 2% of assets. Looking forward to the year of 2015, our investment pipeline is active and we have funded two new and two follow-on investments since year end.

We have experienced one pay-off year-to-date and we'll likely experience more this year. But as of today, our investment portfolio is risen slightly to now $330 million at par value.

Subject to receiving commitment from the SBA for the second tier leverage, we have a total of $48.75 million of additional borrowing capacity that will allow us to grow the portfolio this year without raising additional equity. And with that, I'll turn it over to Todd to cover the financial results..

Thank you, Rob. Our total investment income for the year was $32.3 million, most of which was interest income.

Operating expenses, net of the incentive fee waiver totaled $15.8 million for the year and consisted a base management fees of $5.2 million, incentive fees of $1.7 million, net of $1.4 million of fees waived by the manager, fees and expenses related to our borrowings of $5.3 million including commitment and other loan fees, administrative expenses of $1.2 million and other expenses of $2.4 million.

Net investment income for the year was $16.5 million or $1.34 per share. Net investment income and realized gains combined was $17 million or $1.38 per share. Net increase in net assets from operations totaled $10.2 million or $0.82 per share.

As of December 31 2014, our portfolio included approximately 24% first lien debt, 32% second lien debt, 41% mezzanine debt, and 3% equity investments at fair value. Our debt portfolio consisted of 44% fixed rate loans and 56% floating rate investments.

Our average portfolio of company investment was approximately $9.9 million, and our largest portfolio of company investment was approximately $22.9 million both at fair value. Additional information regarding the composition of our portfolio is included in the MD&A section of our 10-K that was filed yesterday evening.

With respect to liquidity at December 31 2014, we had $106.5 million outstanding under our credit facility. As of March 4, 2015 we had $108 million outstanding under the facility. Our unsecured bonds have a carrying value of $25 million that mature on April 30, 2019.

Lastly, we had $16.3 million of SBA-guaranteed debentures outstanding as of March 4, 2015.

This December 31, 2014 we made two new investments totaling $16 million, two follow-on investments totaling $4.7 million and received one repayment of $16.9 million, which brings the investment portfolio to approximately $330 million at par and the average investment per company to $10 million as of March 4, 2015.

The following changes in the portfolio occurred since year end. The $7.5 million unfunded commitment to Empirix, Inc. expired on February 1, 2015. On February 6, 2015, we made a $5 million investment in the second lien term loan of GK Holdings, Inc.

On February 12, we received full repayment on the unsecured term loan of the Studer Group, LLC at par resulting in total proceeds of $16.9 million. On February 19, we made a $10 million investment in the second lien term loan of NetMotion Wireless, Inc. We also invested $1 million in the company's equity.

On March 4, 2015, we made an additional $200,000 equity investment in Skopos Financial Group, LLC. And finally on March 4, we invested $4.5 million in the debtor-in-possession financing of Binder & Binder. And with that, I’ll turn the call back over to Rob..

Okay, great. You may begin the question-and-answer session please..

[Operator Instructions] Our first question comes from [Leslie Vanderwerf] [ph] with Raymond James..

Hi guys, it's actually Robert.

Can you walk us through, obviously Binder & Binder is the stress credit, can you walk us through the process of, A, the decision to obviously to put more money with the debt, and what would you expect the timeline and potential range of resolutions for that to be?.

Robert, good morning, this is Rob, and Todd and I will try both to answer this question.

So, with respect to the logic providing the debt financing, in this case which is unusual, usually the bank, the senior banks would provide a debt financing but we found it advantageous both for structural reasons with respect to our position, as well as the attractiveness of the yield and that its just a [primary one] [ph] to provide such a facility.

So I think its two-fold, but I think, we thought it was, a help for what could happen relative to the outcome of our more junior position. The yield on the debt facilities as you probably notice, it has a 10% interest rate and has fees so the yield is meaningful.

In terms of the outcome and the duration, the company filed for bankruptcy in December of 2014, and we probably shouldn't project the duration of the bankruptcy, but we do believe that the bankruptcy proceeding is helpful in terms of resolving the underlying company situation and realizing full value with respect to the assets.

But it certainly will be going on during this year 2015. In terms of the range of outcomes, with respect to our position, there is certainly a possibility that we could recover all of our debt, and certainly a possibility we could recover none of our debt, I'm talking about the original loan not the debt financing.

But we believe there is a reason low case that will have a meaningful recovery. Ultimately that will be the - it will depend on the outcome of the underlying assets of the company is the realized over time. But it will take some time for them to be realized.

So may be in summary the due long that was made is modest in size but has an attractive yield and was helpful to us vis-à-vis lenders ahead of us and we believe there is an abundance of collateral with respect to covering the deadlock..

Okay, thank you. Just moving away from that, on the SBA side of your business where I think it about the schedule investments but are you seeing any kind of meaningful delta in pricing that you can get in that segment versus the broader non-SBIC eligible type of borrowers at this point of the cycle..

Yes, Robert. So given the size restrictions for a loan to qualify for the SBIC subsidiary, that we would see generally the pricing to be higher than for those who do not qualify.

So, I'd say this pricing is slightly better and we think the structures are probably similar because of the way we lend money, there meaningful covenants and collateral packages where they structured. So I'd say it's reasonable to think that yields could be slightly higher in those instances.

Sometimes when we’re providing the financing, it could be in the form of unit tranche loan, so the stated coupon may not be 11%, but the risk adjusted return is quite interesting because of the unit tranche..

Thank you. Just one last if I can, on the energy side obviously you have very low exposure rate right now, you indicated it might probably go up as you take advantage of some opportunities.

When you look at that, what's lack – a better way to put, again a time frame issue, so obviously on the E&P side, there are hedges et cetera that roll off on the services business side, I'm not talking about your portfolio, I'm talking just in general, it takes a little while energy price reductions to flow through to cash flow.

So, in terms of where you see - how long do you think the opportunity will exist that you're kind of seeing now versus the may be a deterioration in the actual performance of the - the potential businesses particularly on the energy services side.

I mean is a bit of a lag between energy price declines and those guys actually realizing how bad things may be look..

Yes, so as an overall matter versus primarily now it driven by the commodity price for oil, gas is relatively low for sometime natural gas.

So, probably the consensus about the oil is that it will be relatively low for this year, production in United States which is driving this will not likely decline until the first quarter or sometime in next year. So we would look at this as a couple of year issue.

If you look just at the commodity price, again hard to predict the price but trying to describe the consensus for you. Again if you look at the companies, we're affected by that.

Those on the E&P side many are hedged certainly those that have debt are typically hedged as is the one company that we lend money to, but of course as you point out those hedges will start rolling off over time.

But we are probably more bullish on being involved in the E&P area because we can look at the assets in the ground reserves and for a conservative price fuel. So that would be our preference in terms of where we would be lending through the cycle.

With respect to the services area, they are going to be impacted more quickly and we do have a concern that whether your properties are comprised mostly of oil or mostly of natural gas, that the service providers will all be forced to reduce their cost, their prices and margins will be compressed. So that’s happening currently.

The one thing I'd say is the overall observation in the world we live in today things happened more quickly than they use to if you go back to the oil prices in the 80s, things happened more rapidly there, headcount reductions come more quickly, CapEx budgets are coming more quickly.

So, will be our expectation that this will happen more rapidly this time around and perhaps will be more dramatic in the near term but perhaps will have come out of it sooner than previous cycles have.

So our approach to investing would be cautious, we think its still early, we would have our priority with respect to E&P businesses, we think services businesses will continue to be impacted but - by the way there are number of high quality companies in both throughout the United States and its probably a little bit early.

And so we probably be more active is to get for the second half of this year than the first half of this year..

Thank you. Great color, thanks a lot guys..

[Operator Instructions] Next from KBW, we'll hear from Greg Mason..

Great, good morning, gentlemen. First to follow-up on the question on the SBIC, how is the pipeline looking in terms of fitting into the SBIC's and that's really the mechanism for portfolio growth going forward..

Yes Greg, thank you. So historically we found that the loans the companies were looking at is roughly 30% to 50% fit within the SBA. Our more recent experience is more or like 50%. So again one out of two loans that we're looking at investing in would qualify for the SBIC subsidiary.

I'd say the only qualifier to that Greg is that, we're limited as a percentage of the equity amount. So roughly $10 million of - with our current equity capital in the SBIC would fit, so we may have a loan for $15 million that's SBIC eligible but we'd only be able to fit roughly $10 million in it.

But with that qualifier, it's both looking back last year and looking for this year its roughly about 50-50 between SBIC and non-SBIC..

That's great. And then the follow-up on the Binder & Binder, with the public bankruptcy document, it look like the senior vendor went into liquidate but the judge said that, they would only get $15 million of their $26 million of senior loan back if that happened.

Obviously that's not a good sign for the sub debt, I guess one of our concerns is that the $7 million fair value on that sub debt, so if may be you could just give us a little more comfort around the value, that fair value obviously the debt should be totally fine, but just a little more comfort given that's $0.50 of book value potentially at risk there or so, more color would be great there..

Sure, I’ll turn it over to Todd to talk about the process..

So our valuation process with respect to vendor is looking at a scenario basis, and we have two scenarios in there, one is kind of - yes so, there are two scenarios, and one of them is a kind of runoff of the business returning cash flow. And then the other is - as a potential that would be capital downside scenario there.

So, our analysis based on the knowledge of the company and the assets at the company and our assumptions on costs and run-off went us to our valuation, which has been through a number of levels of review both year end than the [products] [ph] as well..

Okay, great, I appreciate that.

And then your last, on the ATM program looks like none was issued this quarter, just your thoughts on the parameters, I don't know if there is specific or just general guidance of parameters for using the ATM program?.

Yeah, so that's - first you're correct, we did not utilize during the fourth quarter. In terms of its utilization this year our shelf has been updated. And so we’ll - we do have the opportunity to issue shares under the ATM during 2015.

We're still thinking through that with the Board of Directors at what price would make sense and certainly today's price is lower than we like it to be. So, we haven’t made a decision on at what price we would execute.

We have analyzed the power of the SBIC subsidiary, maybe one thing to comment on Greg is that, as you recall the license allows for up to 75 million of equity capital again which can levered two times, we so far capitalized the subsidiary with 32.5 million of equity.

And if we raise additional capital, as an example even in today's price, it would be accretive to earnings. So, that's one thing that we are looking at as it may make sense to issue shares at a price below NAV, given the nice accretion that would come by further capitalizing the SBIC subsidiary.

We've not fully utilized the debentures that are currently available but we likely will invest those in the near future. So, that's a scenario where it could make sense to issue stock at a lower price than NAV..

Great. Appreciate the comments. Thank you, guys..

Thank you very much..

[Operator Instructions] And it looks like we have no further questions from the audience at this time. I'll turn things back to management for any additional or closing remarks..

Okay. Thank you very much and thanks everyone for joining. And we'll look forward to having you on our next call in about 90 days. Take care..

Once again that does conclude today's conference. Thanks for your participation..