Rob Ladd - CEO Todd Huskinson - CFO.

Ryan Lynch - KBW Robert Dodd - Raymond James Chris Kotowski - Oppenheimer.

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 Fourth Quarter 2016 and Fiscal Year 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, March 10, 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, Eric. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the year ended December 31, 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. My remarks will be structured as follows. Our first likely date review, second, a review of the year 2016, third, a review of the fourth quarter and fourth, a look to the future of 2017.

As we have just completed our fourth full year of operations, I am pleased to report that our IPO investors have now earned dividends of $5.91 per share through February of this year. Further, these dividends have been covered by earnings of the company.

Also, since our interception of late 2012, we’ve originated $547 million of new investments across 59 companies. Turning now to 2016, for the year of 2016 I am pleased to report that our earnings of $1.39 per share comfortably covered our annual dividend of $1.36 per share making 2016 the best year for NII in our company’s history.

This was due in part to the full use of our SBIC debentures. We were able to continue to reinvest our payoff with fundings making $66.5 million of new investments at par and ending the year with a portfolio balance of approximately $367 million again at par.

These payoffs including amortization payments provided proceeds of $56 million and generated approximately $1.25 million of income related to prepayments or $0.10 per share. Finally for 2016 our NAV increased by $0.50 year-over-year to $13.69 per share.

Now turning to the fourth quarter, we’re essentially fully invested earning an average of 11% on our loan portfolio and taking in a good fee income. We did receive proceeds of $16.8 million form payoffs including amortization payment from the quarter which will more than replace by new fundings of $28.7 million at par value.

As the quality at year end was stable with our weighted average risk rated about two which is on plan, we’ve been able to maintain good diversification in our investment portfolio by size industry and geography.

Our main investment size is 8.1 million of fair value, we run 21 industry sectors the largest is 16% and the companies are principally spread throughout the United States.

All but two of our 45 portfolio companies have private equity sponsors behind them, and finally the weighted average leverage portion of our portfolio is in the low 4s and the weighted average EBITDA of the portfolio of companies is approximately $31million. Now looking forward to the year of 2017. Our outlook is positive, allow me to describe why.

We’ve entered an interest rate environment in which fixed-rate assets are likely to depreciate and floating-rate assets are likely to appreciate. For example, 90 day LIBOR which is the base rate for most of our loans is now at 112 basis points up approximately 50 basis points from a year ago.

Our loan portfolio is currently over 70% floating rate and all that five of our floating rate loans are now through their LIBOR floors. The second point I’d make is most of our lending supports private equity sponsors when acquiring platform businesses.

We believe that these are high quality, private equity firms who have good track records and who we believe properly capitalize the companies. The private equity firms have capital and are deploying it. Third point is the U.S. economy by many metrics appears strong and well positioned for measured growth.

The proposed changes to the tax code are positive for near term growth although maybe inflationary longer term. Fourth point, although we are always worried about the next economic downturn we don’t see any evidence of a recession in the near term.

From our 45 portfolio company view, where we’ve seen underperformance it is company specific and now broad based. And finally, we are likely entering a new phase in our portfolio in which equity co-invest from three to four years ago may now start to be realized. To this end we are aware of five companies that maybe sold within the next 12 months.

Also looking forward, we are likely to continue to see loan repayments which we’ll need to replace, this is of course a business – we’re in to make new loans through our robust origination platform and as a reminder, we’ve originated over $500 million of new investments since interception in 2012.

With that, I’d like to turn the call over to Todd for one additional discussion item..

Thank you Rob. In October 2016, Binder & Binder emerged from bankruptcy and as a result, the company reclassified its previously recorded unrealized loss on investment to a realized loss. This reclassification had no impact on net asset value during the fourth quarter.

And with that Eric, we’ve completed our prepared comments, so we’ll open it up for question and answer..

Thank you. [Operator Instructions] And we'll take our first question from Ryan Lynch with KBW..

Good morning, thanks for taking my questions. .

Good morning, Ryan..

Good morning. The first one within the BDC, when I looked at your balance sheet, you guys looked, capital looks pretty constrained and I don’t expect very much capital or limited capital to pour into new investments without increasing leverage and you guys are at pretty high levels right now.

So, kind of a broader question, how are you guys able to keep your deal team active and stay active with the private equity sponsors and deal phone in the market with limited capital within the BDC, are you guys able to you, what are you guys be able to do under platform, the broader Stellus platform to allow you guys to [stay active] in the market?.

Yes, sure Ryan. So as we’ve reported in the past, we also serve as advisor or manager for a private institutional fund which has an identical strategy to the BDC. And that be a cause had substantial available capital.

So that has enabled us to be active in the market place and again as you are pointing out that as I’ve said in the past we’ve had pretty good success within30 to 60 days of pay off in the BDC to replace it to that pipeline. So that’s how we’ve been able to do it and would expect to be able to continue to do that for the foreseeable future..

Okay and then can you just give a little commentary on the market, obviously if you look at the stock market, it’s just been on fire basically since the election and certainly sentiment is certainly very high about growth prospects to the U.S.

economy which is moving the stock market up however, I think when you look at it, there has not been a ton of data points that have really changed and I guess the economy is being improved a little bit but there’s still lot uncertainties about what the administration is going to do going forward, although at least the public equity investors are certainly excited about it.

Can you talk about what you guys are hearing or seeing from sentiment from either existing portfolio of companies or private equity sponsors about how they feel about 2017 or you guys hearing that there is going to be more activity for M&A opportunities or growth opportunities what is the kind of outlook from that point?.

Sure, so it’s a good question because that’s a lot of our businesses is financing the acquisitions of new companies by private equity fronts. So I’d say it’s a general matter, those funds have raised meaningful levels of capital in private equity funds and would appear to continue to do so.

So I think the availability of capital is robust, and what of course is happening is and is there expectations from the public markets tend to flow to the private markets in sellers expectation of value has appreciated.

So what we are seeing is that companies are purchase prices are going up, somebody has expressed is a multi-body EBITDA and what we are finding is that those acquisitions are typically, there’s a greater level of equity being contributed and the leverage relationships are not very different than they have been historically.

So what it could mean for the future is that equity returns for our equity co-invest book could be somewhat muted, but these private equity firms have very good track records of creating value to platform vehicles and increasing EBITDA meaningfully.

So we are optimistic with respect to that to the private equity world and again we operate in the lower middle market and our sense is the sponsors who have been very helpful to us are quite active..

Okay.

And then when you guys think about growth for the future, how to see you guys from a balance sheet perspective are pretty capital constrained because of the debt limitations, now you stock price is straying right around book value, it’s been up above book value recently has strayed down a little bit, but it’s been right around that book value level.

How are you guys thinking about growing your capital base in particular with potentially issuing new equity capital.

I mean, I know you guys issued a proxy today, asking for approval to issue shares below now, so as you guys stock price kind of balances around never is been up above and recently if you guys [Indiscernible] about coming to the equity markets what are you guys thinking about what – you guys need to see in order for you guys to issue new equity and you guys are asking for ability to issue equity blown at asset values, is that something you guys would do?.

Okay, yes thank you Ryan. So first, we currently do not have such approval. So if we received approval this summer up until that time when we would not be able to issue below NAV and historically have not as a company.

If we were able to obtain that approval we would be very cautious about it and again my best evidence of history or other futures history and when we had an ATM program in place, a couple of years ago we were very cautious about issuing and I don’t believe any of that issuances were less than NAV even though they could have been.

Now, the opportunity there for us is that we still have room in our SBI fee license for 42.5 million of equity. The current equity capitalization is 32.5 and the licenses grew up to 75 million. So we have a real need for equity capital and our capital that would be quite accretive to our shareholders.

So that would be the primary focus of an equity offering in the future of being mindful of issuing it at a proper price for our shareholders and also knowing that we have a really positive use for it that not many people have. So that’s how we would approach the equity markets this year carefully, and, but we have a real need for the capital..

Okay. Yes. That’s good to hear because, I mean, anytime, [Indiscernible] looking to issue equity capital.

I think one, you have to have good proceeds of use for it, that's probably one of the most important things, but just as important is I think, at least from an investor standpoint is that that net asset values are at very critical level and issuing below net asset value, I know certainly send the negative signal to the market? And then, if I can just one last question, Glori Energy productions looks like that was placed on non-accrual, pretty small energy investment post quarter end and in Q1 that was converted to equity.

Can you just give any outlook on that investment, obviously mean that, it’s got a different capital structure now which is probably I would assume less lever to which may benefited in the future if oil prices do recover, but just any general thoughts on that investment?.

Sure. We glad to. So, the par value of the investment is about a 1.6 million, the carrying value now is little over 800,000, so few things.

First of all, through interest in fees over the life of that loan which is made in March of 2014 are actual cost basis in the position is about were its mark, so not only through paydowns but then actually in any kind of fees. So, as an original investment in oil and gas area probably did okay.

More importantly, from here we have, we foreclose on the equity effective February 1st, effectively operating properties that are East Texas long-lived oil properties.

And we are optimistic that through working on the properties in the wells that we’ll be able to increase production and it's our expectation that the assets will be sold during 2017, we would say, at least for what there on the books for and possibly higher. We've already through some work been able to increase production about a third.

So, view that as likely not here at the end of 2017..

Okay. That's all for me. Thanks for answering my questions..

Thank you, Ryan..

The next question is from Robert Dodd with Raymond James..

Hi, guys and congratulations on the quarter in the year. On just kind of going to the SBIC in the capital, obviously, you’re little constrained, but you do have capacity down in the FDIC – SBIC, if you put more equity down there.

Obviously, you had some repayments, one the components [Indiscernible] obviously issuing repayment proceeds and downstream that the SBIC and then double level that or making investments in a [more at parent], so what – which is obviously what you’ve decided to do.

Is this a timing thing, does, because obviously like you say you continually have kind of opportunities given your private credit fund and is it more focus of importance of relatively rapidly putting the capital back to work or what’s the dynamic between the decision of maybe down streaming repayments to capitalize the SBIC versus reinvesting with double leverage their versus reinvesting at the parent?.

Thank you, Robert. So, we’ve of course looked at that over time and what’s historically happen is about the time we do that we have something very interesting that comes up in investing. But we will be disciplined. And this is of course is, the promise of your question is, of course that we’re not issuing new equity for the year.

So under that case, we’ll continue to look at possibly further capitalizing the SBIC entity. We have as you’ll see in the subsequent events since year end, we continue to have some nice repayments, two of which were in the SBIC entity..

Right..

So we do have some available cash yet to reinvest. We have a couple of opportunities that may very well soak up that cash within the next 30 days. So, we would then refocus on your point specifically..

Okay..

Yes..

Yes. I appreciate that. That’s understood, yes, sometimes repayments happen, right. And I appreciate that color and obviously you’re in a better position to raise equity potentially this year.

But anyway, secondly, I hate to ask this in a way, so you over dividend this year with fee waiver, right? But just to be clarify hypothetically and in a rising rate environment you should be in a pretty good position to run a dividend again without a fee waiver, so take this all with a pinch of salt, if you go a lot of repayments or something impaired the earnings power, I just want to get some clarity again if you would kind of restate what's the position on if necessary, not expecting it to be so.

But if necessary what position would you take on fees versus earning the dividend, just the clarity?.

Sure. Glad to provide the clarity.

So, as we've done since inception in late 2012 we believe that the dividends paid out should be earned by the company, and so we would -- one of the mechanisms that we have to do that is our incentive fee, and so we would -- our plan is over time that we would earn the dividend and if it's required that we modify that incentive fee, we would so do..

Okay. Appreciated and congratulations. Good quarter..

Yes. Thanks so much, Robert. Thanks for your support..

And the next question is from Chris Kotowski with Oppenheimer..

Hi. Just as a follow-up to Robert’s question.

Just in the subsequent events section of the 33 million or so in prepayments, how much was down at the SBA?.

Roughly 22..

Okay, so most of it..

I’m sorry, I misspoke. I think it’s roughly 20..

Roughly 20..

Yes. Sorry..

Okay. And I guess -- wonder if you could walk us through the math again on how much capacity there – you went a little fast.

How much capacity you still have at the SBA? How much of an equity down payment you would have to make to be able to draw that?.

Yes. So just as a refresher, so under our license we currently have $32.5 million of equity capital in the subsidiary. And as of the end of 2015 we had drawn all the available debentures, in other word, 65 million against that. So that's been in place since the end of 2015. So therefore we have up to $42.5 million of additional capacity for equity.

And then once the equity is in, we then would have the ability to draw against that 85 million of debentures. And then the actual timing of this is obviously, potentially not putting $42.5 million down the first day, but you do need to put down equity before you can draw debentures.

And there's a minimum amount, Chris, we understand that to put down, so as an example, I don’t think we put million down and draw 2 million debentures, but think of it maybe in terms and Todd, perhaps you provide guidance, I think of in terms of you put down 10 million and then is that kind of a minimum amount that we could draw once invested 20.....

Okay..

So I think with absent of equity raise this year it would be more of a step function..

Okay.

And none of that requires any additional approval or licenses or anything, that's just funding the license that you have, right?.

That’s correct, but I would be fair. I mean, I think the SBA is always has the discretion to make sure they we’re operating properly as a manager and we believe we have been..

Yes. That’s right, Chris. When you have equity in [SB], I see subsidiaries then you have to make application for leverage for commitment of the SBI -- SBA will review that commitment, application and they have the ability to not approve it of course, but I mean, it a normal part of the operation of the SBA..

Yes. But I guess just as a….

Like that, what I was to going to add, so what Todd has described it will be true of all SBICs..

All SBIC, that’s right..

Right. And just given the attractiveness of the SBIC funding, I guess why wouldn't that be the absolute could be top priority for any prepayments you get out of the rest of the firm..

So, it is a high priority and again it’s probably managing and shared with the Robert over the time, how you do that in smart way and provide good current earnings for our shareholders at the same time..

Okay. All right. That’s it from me. Thank you..

Thank you, Chris..

We have a follow-up question from Ryan Lynch with KBW..

Hey, guys. I just had a follow-up, since we’re talking the SBIC and potential funding that without any new additional equity capital.

I mean, with your leverage today at 0.82 times regulatory leverage you guys could obviously grow the SBIC facility and net debt in there substantially and it’s not going to affect your regulatory leverage at all, but from a total debt to equity standpoint, you guys were at about 1.2 times roughly.

Is there any sort of limitation that you guys look at from a total gap debt to equity standpoint? Or you guys don't want to move above? Or do you guys more just focus on the regulatory debt to equity?.

Ryan, we definitely look at both and principal reason is for overall safety of the company. So it is of course relevant to look at both. Because of the nature of the underlined debentures which have a 10-year interest-only duration, not duration, but maturity, so likely duration.

We view that as [Indiscernible] equity in terms of just safety, so which would give us reason to be more levered. But I would say probably upper limit would be something like 1.5 to 1, so certainly more than we are today. I think the last time I’m model that was like 1.4, but say the upper limit to 1.5.

Or another way to say it, we’re not intending for this to a two times levered company..

Sure. But you still see a significant capacity about the 1.2 times again. Okay. Thank you..

Yes. And again, I really key off the long term nature of the notes..

Sure. Thanks..

Thank you..

And with no questions remaining in queue, I’ll turn the call back to Mr. Ladd for any additional remarks..

Okay. Thank you very much for everyone that joined. And thank you for your support of our company. And we look forward to speaking you again with you in May as we cover the first quarter report, our first quarter earnings. Thanks very much..

This concludes today's call. Thank you for your participation. You may now disconnect..