Rob Ladd - CEO Todd Huskinson - CFO.

Robert Dodd - Raymond James Bryce Rowe - Baird.

Good day, 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 Third Quarter 2016. At this time, all participants have been placed in a listen-only mode.

The call will be opened for a question-and-answer session following the speakers' remarks. This conference is being recorded, today, Friday, November 04, 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, Ann. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30, 2016. 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 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. At the outset, I am glad to report a very positive quarter. During the third quarter our net investment income exceeded dividends paid by $0.03 per share and our net NAV increased by $0.45 per share bringing net asset value to $13.57 and we were able to substantially replace loan repayments with new investments.

I'll now provide an update on our portfolio and outlook for the fourth quarter. With respect to portfolio, our investment portfolio of $353 million includes investments in 43 companies, which is up slightly from June 30. We made three new investments and four follow-on investments totaling approximately $19.5 million at cost during the quarter.

The new investments are secured loans, all backed by private equity sponsors. We received three payoffs amounting to $21 million, one of which produced over $300,000 of call protection income. Asset quality remained stable with the overall risk rate for the portfolio at two around plan.

Our overall weighted average yield on the debt portfolio is just over 11% which beginning this quarter, excludes loans on nonaccrual. This is a similar percentage that we would've had in the previous quarter. We have only one nonaccrual loan, which is valued at $722,000. This is a loan to Binder & Binder which did emerge from bankruptcy in October.

I would want to note a small item, but it is a realized loss. We sold the one investment we had in the mining industry, specifically coal. We sold that in September. And although we experienced approximately $900,000 loss, the return over the life of the investment was quite positive.

Now looking to the fourth quarter, we've already had two new fundings totaling approximately $16 million, which was more than offset a payoff of $11 million. For the balance of the quarter we know of the potential of one repayment of approximately $10 million which we hope to replace during the quarter as we've done throughout the year.

With that, I'll turn it over to Todd to cover additional financial information related to the quarter..

Thanks Rob. With respect to operating results for the nine months ended September 30, 2016 we've earned $1.01 per share including a one-time charge for offering costs related to our shelf registration statement, which is expired. This brings us to within $0.01 of covering the dividend year-to-date.

Our total investment income for the quarter was $10.2 million of which $9.8 million was interest income and $400,000 was other income primarily from prepayment fees.

Operating expenses totaled $5.6 million for the quarter and consisted of base management fees of $1.6 million, incentive fees of $1.1 million, fees and expenses related to our borrowings of $2 million including commitment and other loan fees, administrative expenses of $200,000 and expenses of $700,000.

Net investment income for the quarter was $4.6 million and the net increase in net assets from operations totaled $9.9 million, which includes net unrealized gains on the portfolio $6.2 million for the quarter.

As of September 30, 2016, our portfolio included approximately 32% of first lien debt, 43% second lien debt, 20% mezzanine debt and 5% of equity investments at fair value. Our debt portfolio consisted of 76% floating rate investments, subject to interest rate floors and 24% fixed rate investments.

The average size of our portfolio company investments was $8.2 million and our largest portfolio of company investment was approximately $22.6 million fair value. Additional information regarding the composition of our portfolio is included in the MD&A section of our quarterly report on Form 10-Q that was filed yesterday evening.

With respect to liquidity, at September 30, 2016 and November 02, 2016, we had $107.5 million and $100.3 million outstanding under the credit facility respectively. Our unsecured bonds have a carrying value of $25 million and will mature on April 30, 2019.

In addition we've fully drawn our $65 million of available SBA guaranteed debentures which remain outstanding as of November 02, 2016. Finally we had $8.6 million and $2.6 million of cash as of September 30, 2016 and November 02, 2016 respectively. And with that, I'll turn the call back over to Rob..

Thank you, Todd. And Ann you may begin the question-and-answer session please..

[Operator Instructions] We'll take our first question from Leslie Vandegrift from Raymond James..

Hi guys. It's actually Robert.

On Binder & Binder as you said announced bankruptcy in October, can you give us any color on exactly what the bankruptcy or the post bankruptcy plan is and how that result could impact your position there?.

Yes, so the plan was consummated in the month of October and we're receiving a stream of payments that will begin at the end of January of 2017 that are $50,000 a month and then beginning January 31 of 2018 they increased to $100,000 a month but the total amount that we're contractually to receive is a total of $1 million.

So in terms of the plan there as you recall there is first bank -- first lien bank debt that ahead of this claim if you will, which is also being paid out, but these were the times that we received that come out of bankruptcy.

In terms of the residual after the banks are paid off in full -- if they're paid off in full, we and the other unsecured creditors are entitled to the residual, which we think is probably a very low amount or unlikely not this one is the amount that we're looking for is the payment amount or payment scheme that I just described..

Got it. Thank you. On one other portfolio company, which I'm have actually done not very much bad at all SPM Capital, this is obviously a healthcare Pharma in the scheduled investments and obviously Pharma issues came up yesterday on the genetic front.

Does that have any exposure to that kind of issue?.

So, I'm sorry did you in healthcare, what is specifically in healthcare you're looking at?.

The SPM capital loan, does that have any exposure to generic pharmaceuticals?.

It does not, it's tied to eye care?.

Okay. Got it. Okay. Thank you.

Just then conceptually obviously there are some top comments obviously within $0.01 of coverage for the dividend year to date, could you give us just a little -- obviously you've discussed waving the fees before, you're within $0.01 currently, so when that start very much, but can you give any more color on your commitment to that dividend, both obviously for the rest of this year and how you're viewing it heading into next year?.

Yes Robert. So with respect to this year, I should reiterate what I said in the last earnings call, that our investment advisor had informed our Board of Directors that for this year, that it would waive any incentive fees necessary to earn the dividend.

So that commitment continues through the rest of the year in this quarter and as a result hopefully that will give you comfort that likely have good earnings for the quarter, but to the extent we didn't or didn't fully cover for the year, that that waiver modification, which now is over $3 million is in effect.

So you would think the earnings are well covered for the fourth quarter for that. So that commitment of course continues for this year.

With respect to next year, we would say, our advisor would like to say that it's very likely to continue and think of this point, we'll have more to talk about in the near future with respect to that, but we'll now have completed four years, four full years of earning the dividend and to the extent needed, which turned out to be not that much in this year, past year's declining amount, the waiver has been modest.

But we've had that, we've done it for four years and we would expect that to continue and we'll have more to want to talk about in the New Year..

Okay. Appreciate it. Thank you guys and excellent quarter..

Thank you..

We'll go next to Bryce Rowe with Baird..

Thanks. Good morning..

Good morning, Bryce..

Rob and Todd, just curious the unrealized appreciation in the quarter was quite strong and it was nice to see the book value per share rose quarter-over-quarter, based on my perception, it looks like the appreciation was relatively broad-based throughout the portfolio or at least in a handful of portfolio companies.

So is that a function of better fundamental trend within those particular portfolio companies or was it more market-driven broad based that are tighter pricing conditions out there..

Bryce, this is Todd. So you're right. The vast majority of that uplift was your market-based, spreads tightening on the loan portfolio and so think of it like of the $6 million five of it was related to I would say broadly market movements.

However, the equity adjustments were up as well and in that $5 million and for the most part those were multiples expanding, but there were also -- those models are based on company performance and multiples. So that's what I would it's mostly market forces, but there is some element of company improved performance as well..

Okay.

And then just a second question for the fourth quarter here, good to see the prepayment income come into the third quarter have you received any here in the fourth quarter with the repayment you've already received?.

So with respect to the fourth quarter I think there was modest income related to the one payoff given the duration that we've had that loan outstanding. So I would assume very modest in this quarter so far.

The one possible payoff that has not occurred would have some good call protection, but again it speculative at this point whether it occurs or not. I like to Bryce talk about those.

So you know to at least what you know what is possible perhaps more conservatively that it's something we need to replace if it pays off, but that the opportunity would have some income if it paid off..

Great. Thanks Rob..

Thank you..

[Operator Instructions].

Okay. Good. Well hearing no other questions, thank you everyone for being on. Thank you for our support and we look forward to speaking with you in the New Year. Take care..

This does conclude today's conference. We thank you for your participation. You may now disconnect..