Robert Ladd - CEO Todd Huskinson - CFO.

Robert Dodd - Raymond James Allison Taylor - Oppenheimer Bryce Rowe - Baird.

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 Fourth Fiscal Quarter and Year Ended December 31, 2015. [Operator Instructions] The conference is being recorded today, Friday, March 4, 2016.

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, Diana. Good morning, everyone and thank you for joining the call. Welcome to our conference call covering the year-ended December 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 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 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 public company 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. Before discussing the fourth quarter I'd like to provide a recap of the year of 2015. I'm pleased to report that for the third consecutive year, our 2015 earnings covered our dividends of $1.36 per share. We have now paid dividends of $4.44 per share since our IPO in November of 2012.

Further, the investment portfolio grew by approximately $33 million at fair value; this growth was achieved from new fundings of approximately $138 million which more than covered substantial pay-offs and repayments of approximately $98 million. On today's call, I'll cover the following topics.

First, portfolio growth; second, asset quality; three, earnings capacity; and four, looking forward to 2016. With respect to portfolio growth, we ended 2015 with an investment portfolio at fair value of $349 million; this was an increase of approximately $26 million from September 30.

This growth was funded by fully utilizing our SBIC debentures which now stand at $65 million. This growth was through five new investments and four follow investments and existing portfolio of the company is totaling $53 million of funding.

Of the new investments, the average size was approximately $9 million and the largest was approximately $11 million. During the quarter we received two payouts at par at $19 million. With respect to asset quality, our overall risk rating is at approximately two around plan; this is materially unchanged from the prior quarter.

And as a reminder, most of our portfolio companies have private equity sponsorship. As we have grown, we've been able to maintain good diversification in our investment portfolio by all measures, size of investments, industry sectors and geography.

The average size of investment is approximately $9 million and the largest investment is approximately $21 million at fair value. We have investments in 22 industry sectors and our portfolio of companies are geographically dispersed.

I'd also add that our plan to migrate to more secure lending continues, secured debt is now 79% of the loan portfolio versus 58% at the end of 2014. And consistent with this change are floating rate portfolio subject to LIBOR floors is now 75% of the loan portfolio versus 56% a year ago.

With respect to earnings capacity, for the fourth quarter of 2015 we had net investment income and realized gains of the investment portfolio which covered our dividend. In the quarter our investment advisor waived a portion of the incentive fee enabling us to earn the dividend for the entire year.

For the year of 2016, it's always difficult to predict the future but I'd like to make the two points as we go forward in the current calendar year. We're nearly fully invested having completely drawn the current tranche of our SBIC debentures, so we would not expect meaningful portfolio growth.

We do have an active pipeline and expect to be able to replace payoffs with new investments although this typically has a time lag. We do know one possible payout in the first to second quarter approximately $8 million and as you know from the past, it's hard to predict but that is a possibility.

And then second, with respect to our stock price, we don't believe the current trading prices are reflective of the company's fundamentals, either the NAV per share or the earnings capacity. Stellus Centre of Board of Directors has authorized the share repurchase program for us to repurchase upto $2 million shares of our common stock.

And the variables that we're using consideration of its usage are first leverage on liquidity, second to share price and three investment alternatives. And with that I'll turn it over to Todd to cover the financial results..

Thanks, Rob. Our total investment income for the year was $35.2 million, most of which was interest income.

Operating expenses, net of the incentive fee waiver totaled $18.6 million for the year and consisted of base management fees of $5.8 million, incentive fees of $3.3 million, net of $646,000 of fees waived by the advisor, fees and expenses related to our borrowings of $6.2 million, including commitment and other loan fees, administrative expenses of $1 million and other expenses of $2.3 million.

Net investment income for the year was $16.5 million or $1.33 per share. Net investment income and realized gains combined was $17 million or $1.36 per share. Net increase in net assets from operations totaled $7.7 million or $0.61 per share.

During the fourth quarter, we recorded unrealized losses totaling $6 million, $4 million of which was due primarily to widening market spreads and $2 million of which was due in the aggregate to markdowns on pre-investments.

As of December 31, 2015, our portfolio included approximately 38% of first lien debt, 38% second lien debt, 20% mezzanine debt and 4% equity investments at fair value. Our debt portfolio consisted of 75% floating rate investments subject to interest rate floors, and 25% fixed rate investments.

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, 2015, and March 3, 2016, we had $109.5 million outstanding under our credit facility.

Our unsecured bonds have a carrying value of $25 million and mature on April 30, 2019. We had $65 million of SBA guaranteed debentures outstanding as of March 3, 2016, and our cash balance at December 31, 2015 was 7.9 [ph]. The following changes in the portfolio have occurred since year-end.

On January 26, 2016, we made a $3.8 million follow-on investment in the second lien of Stratose Intermediate Holdings II, LLC. We also invested an additional $300,000 in the equity of the company. And on January 27th we made a $600,000 investment in the first lien loan at Vision Media Management and Fulfilment, LLC.

With that, I'll turn the call back over to Rob..

Okay. Thank you, Todd. And Diana, we may begin the question-and-answer session now..

[Operator Instructions] First, we hear from Robert Dodd with Raymond James..

Hi, guys. On the buyback side, obviously a substantial 2 million share of buybacks, a very large number.

So I mean from that perspective, given you listed liquidity and leverage being the first consideration which I think is appropriate, what's kind of your comfort level in terms of where that becomes a trigger? Is your leverage level right now on target, above target, would you be buying back shares, hypothetically buying stocks here or would you want to direct repayments to maybe shrinking leverage a little bit first? I mean, can you give us a little bit more color on how that's going to play out?.

Yes, sure Robert. Good morning to you..

Good morning..

So with respect to the share buyback, I would say that in liquidity and leverage that we would not want to be more levered than we are today. So this program could be say taking a payoff and reducing some leverage and buying back shares. So I would say that's why that's the first tenant of the program.

So, and I would say with the respect to share price and this is ultimately the per view of our board of directors but the share price that we saw over the previous 60 to 90 days would have been an indicative price that would have made sense.

So without giving the price that we would consider it, think of it at the low point that we looked at, that would have made sense had we had a program in place then..

Got it, got it. Very helpful. On the SBA side, I kind of mean you've got $65 million on debentures and it kind of ties in with the buyback question in a sense, because obviously your license were in principle as you go to 150 but you'd have to put more equity down in the SPIC to access that.

I mean it sounds like you're basically not going to consider that right now and that might be that third tier consideration or use the capital behind liquidity leverage and SBA.

Is that fair that SBA's pretty much maxed out or what you're willing to put equity in it at right now?.

Yes. So, as I said the third tenant would have been alternate investments. One would be either regular way investing or by contributing further capital to the SPI subsidiary and then using the metrics from there. So that would be another thing we would look at. So I think it's ultimately matter of share price.

If we think the share price is more reasonable, we may look at using repayments to further capitalize the SBI subsidiary. .

Got it..

But it's all -- I think its all function Robert of, of what we think the share price is relative to fair value..

Got it, I appreciate that. And then last one if I can, can you give us a status update on Binder & Binder, it's about a year obviously from the bankruptcy filing.

Is there any new news there?.

So it's actually been a little more than a year that it's been in bankruptcy, and its being actively worked, but realistically I think it's going to take a couple, two to three more months to be completed, but it has not emerged yet..

Perfect. Thank you..

We'll take our next question from Allison Taylor with Oppenheimer..

Hi, good morning guys. So my question was also around capital liquidity and the buyback. So for my purposes, asked and answered..

Okay, great. Thank you, Allison..

Thank you..

[Operator Instruction] We'll hear next from Bryce Rowe with Baird..

Thanks. Good morning..

Good morning, Bryce..

Rob, I was going to ask, and you too Todd. Maybe you help sell out the SBA debentures.

Todd, how much of the debentures do you expect to pull in March? Am I correct in thinking that it's about $40 million?.

That's close. There'll be, I'm not sure off hand how much it's going to pull, but you're right the remainder of them we'll pull in March, and I think we had about $25 million that had pulled before. So there'll be a large chunk that we'll pull in March. We have an active use of the debentures over the last two quarters.

So we'll get the exact number for you, Bryce and update it here..

Okay, it's helpful. And then I just wanted to also ask about the comment you made on write downs for the quarter. The $12 million was kind of market related and the remaining $2 million tied to three investments, one of which was to be Binder & Binder.

Maybe comment on the other two and what you're seeing from a credit quality perspective and just really within those two investments..

Sure. No, that's sounds good. That's right Bryce. Of the $2 million, about $900,000 of it was on Binder, and the other two positions, one was Securus which has, we don't have a quote that drops surreptitiously and we looked at that in addition to some other factors with respect to devaluation. So that was written down a bit on a specific name basis.

And then Glory Energy was down slightly, it's a very small position but we wrote that down a little bit as well..

It is the Glory write down, is that oil price driven, and just generally with the oil prices down, or is there something more specific there?.

That's right, and on that particular one it does kind of have to do with the performance of their wells and then primarily oil and gas prices..

Yes, that's really driven by oil prices..

Yes, okay.

And I just wanted to clarify you said the share repurchase line is 2 million shares and not $2 million?.

That's correct. So that's the overall program of the amount that we execute under that will again be driven by the variables I mentioned..

Great. Thank you. I appreciate it..

Bryce, by the way the amount of debentures that we'll pull is $39 million, so you're close..

$39 million, okay. Thanks guys..

Sure, thank you..

At this I show that we have no further questions. .

Okay, very good. Thank you everyone for joining the call and we'll be back with you in early May to cover the first quarter. Take care..

That does conclude today's conference. We thank you for your participation..