Robert Ladd - CEO Todd Huskinson - CFO.

Ryan Lynch - KBW Robert Dodd - Raymond James.

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 First Quarter Financial Results. At this time, all participants have been placed on a listen-only mode.

The call will be opened for question-and-answer session following the speaker's remarks. This conference is being recorded today, Friday, May 8, 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..

Okay, good morning, thank you. Good morning, everyone and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2015.

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, Rob Ladd..

Thank you, Todd. In reviewing the first quarter I would like to address three topics; the first is portfolio growth, the second is portfolio quality, and the third is earnings, our earnings. With respect to growth, in the first quarter we are able to grow the portfolio slightly to $322 million while observing a $17 million pay-off.

We're expecting to continue to grow the portfolio this year to the use of SBIC debentures, we have access to approximately $49 million of debentures for growth which would enable us overtime to increase the investment portfolio to approximately $370 million without raising additional equity capital - of course this will take overtime.

We did price $16.25 million of debentures in March and in all on rate of approximately 3%. The second topic, portfolio quality; the overall quality of the portfolio improved in the first quarter to upgrades on six companies. This is the natural evolution that is expected as our portfolio and underlying business grow and deliver.

With these upgrades, we are expecting in turn some of this loans to pay-off within the second quarter as our debt can be refinanced through the companies we sold. There would be some additional income and gains associated with these pay-offs when they occur.

With respect to earnings; for the first quarter we earned net investment income of $0.31 per share, with very modest other income and realized gains. Although this was $0.03 less than our ordinary dividends of $0.34 per share, we think it is appropriate to look at this coverage over a longer period time than 90 days.

One area that we have not highlighted before is our portfolio and equity co-investments. This portfolio which at our IPO date was zero has now grown to approximately $11 million of fair value across 14 companies.

Our historical experience would indicate that when the underlying businesses are sold, we will have additional earnings to be paid at dividends or potentially to offset any realized losses. With that I'll turn it over to Todd to cover the financial results..

Thanks, Rob. Our total investment income for the quarter was $8.7 million, most of which was interest income.

Operating expenses totaled $4.9 million for the year and consisted a base management fees of $1.4 million, incentive fees of $1 million, fees and expenses related to our borrowings of $1.5 million, including commitment and other loan fees, administrative expenses of $300,000 and other expenses of $700,000.

Net investment income for the quarter was $3.8 million or $0.31 a share. Net increase in net assets from operations totaled $5.4 million or $0.43 per share. As of March 31, 2015, our portfolio included approximately 26% first lien debt, 36% second lien debt, 35% of mezzanine debt, and 3% of equity investments at fair value.

Our debt portfolio consisted of 40% fixed rate loans and 60% floating rate investments. Our average portfolio of company investment was approximately $9.8 million, and our largest portfolio of company investment was approximately $23.1 million, both at fair value.

Additional information regarding the composition of our portfolio is included in the MD&A section of our 10-Q that was filed yesterday evening. With respect to liquidity at March 31, 2015, we had $110.3 million outstanding under our credit facility. As of May 4, 2015, we had $108.5 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 May 4, 2015. Since March 31, 2015, there is no new investments or repayments. And with that, I'll turn the call back over to Rob..

Yes, thank you, Todd. A we'll now go to the question-and-answer session..

[Operator Instructions] And we'll go first to Ryan Lynch with KBW..

Good morning, you guys had some nice portfolio appreciation in the quarter, was that just driven by those six companies you mentioned in your opening comments that add upgraded kind of credit quality or was the portfolio appreciation kind of more broadly based out of the portfolio?.

Yes, the portfolio appreciation was mostly related to spread improvement in the marketplace, so not related to specific company performance, there were few of the upgrades that made a difference but for the most part it was spread movement for the portfolio.

And on the equity tail investments, there was multiple expansion as well on the market side and that led to a little bit of increase in the portfolio as well..

Okay.

You also mentioned that there is no portfolio activity quarter to date; can you maybe just provide some comments here, on the deal flow you guys are expecting for the remainder of the quarter?.

Yes, we wouldn't - Ryan, I wouldn't comment on anything specifically that would close, we do have an active pipeline. I did mention that we are expecting some pay-offs, so - but we would expect to see some payouts from the quarter and you will see some new funding's in the quarter..

Okay.

And then, maybe lastly, can you just give us an update on bender and bender, maybe an update on how the underlying business is performing? And then also how the bankruptcy process is coming along?.

Yes, I'd say it's a general matter the bankruptcy process is proceeding, we should expect that the case will go on throughout the calendar year. The company appears to be generating positive cash flow, there are significant cost of the bankruptcy and comes the restructuring charges, professional fees etcetera that are being paid.

So, but as a general matter the case load appears to be holding up and general progress is being made. I think ultimately the way to think about it is only to get through this calendar year in the bankruptcy process and at that point we'll have a clear idea of how the loans will be repaid..

Okay, thanks. That's all for me..

Thank you..

And we'll go next to Robert Dodd with Raymond James. Please go ahead..

Hi guys, just on that balance between deal flow and repayments.

I mean with potentially six pay-offs in the quarter, I mean, give us a little bit color on all those - is that entire refinancing activity or is that M&A driven, I mean what are the drivers behind what's going on there? And then you mentioned, then obviously the deal flow question is I mean, can you handicap in anyway what the probability is that the portfolio shrinks in Q2 versus as flat versus up slightly?.

Sure. So with respect to the quarter, and I didn't mean to imply all the upgrades we necessarily pay off but within that group we're expecting some. So there are four potential payouts that we're aware off, and the magnitude is range of $20 million to $40 million or so, and it can't be specific because they haven't happened.

There are - within that mix there are some refinancing's and I believe there is one sale, one M&A activity. So again I would just view this as natural evolution, some of the companies might have been outstanding for a few years and others might be shorter that were delivered in the natural course of things and are being refinanced.

Truth of the pipeline of closings, again, pretty active pipeline. And Robert, hard to predict at this point where we'll end the quarter - so the best number I can give you is where we are which is flat from March 31.

And from there we could be down at quarter end at June 30 in terms of the invested portfolio, we could be flat and we'll know more as the quarter proceeds, I would say as you know in this business, the pay offs, you can't predict and people can always predict the new loans, so little bit of a lumpy way we operate in terms of payouts but we would say over the year we certainly expect to grow the investment portfolio..

Okay.

On just kind of extending that a little bit, by the time that some of those old relatively speaking loans, so when it comes to discussing maybe some, other fee income and things like that between payment fees or accelerated amortization or things like that - would it be fair to say that should be relatively modest if these things are bit older in their cycle, a lot of that would have run through already and it be a modest benefit from those sources?.

Yes, Rob that's a good question, good point. So I would say that because the loans that may pay-off are little bit older so I think less is call premium and more is the pickup from accreted cost to par value..

Alright, go it..

The number is - that they all happen would be close to $1 million..

Right, I got it, great. Thank you.

And then on the kind of the spread on, in terms of activity people say you are seeing, I mean - what's the mix between since your primary source of capital without these payouts would be the SBIC, what the mix of deals that you are seeing opportunities that you're seeing that are SBIC eligible versus not?.

Yes, approximately half of what we're seeing can qualify for SBIC leverage, and - so I think of it in that range, of course not everything that we're looking at closes on those proportion but we're seeing good deal flow there with respect to the SBIC and you're right, that's our ability to grow without raising additional equity.

So we're seeing the deal flow close to half in terms of the pipeline that looks good to us..

Perfect, thank you..

Thank you..

[Operator Instructions] We'll go next to Chris Kotesky [ph] with Oppenheimer and Company..

Yes, you referenced the capacity to go to $370 million of investments with the current capacity and equity in SBIC.

Is that a goal and is that something you anticipate that you could achieve in this calendar year or is that just an observation about the capacity that you have on the balance sheet?.

Yes Chris, I would say it's more of an indication of capacity and just to make sure that's fully understood because of the remaining debentures that we're qualified for. Whether we're able to grow to that level this year we don't know but we certainly bring overtime, we could get to that level. And again, it's more to highlight what t capacity is..

Okay.

And then I guess I mean there have been the last couple of quarters we've - you haven't covered the dividend out of net investment income and at what point, how many quarters in a row of not covering it would it take to say that the better part of balance is to reduce the payout to match what you've been earning?.

Yes, and as you're question about reducing the dividend, so - of course that's a matter for the Board of Directors to determine, it sure to which would have included the calendar year of 2014 and then calendar year of 2013, we waived our incentive fee such that the dividend could be covered for 2013 contractually in 2014 voluntarily, so I think we would look at that first before we would consider a dividend, it's our financial objective to cover the dividends from earnings.

The reason we didn't look at the incentive fee in the first quarter because we think it's something that should be looked at overtime, that's offset previously and not over just one quarter..

Chris, did you have anything further?.

No, that's it for me. Thank you..

Okay, great. Thank you..

And with no other questions in queue, I'd like to turn the call over to Mr. Ladd for any additional or closing remarks..

That's it from our end. Thank you everyone for joining the call and we look forward to speaking with you in about 90 days. Thanks very much..

Again, that will conclude today's conference. Thank you all for your participation..