Rob Ladd – Chief Executive Officer Todd Huskinson – Chief Financial Officer.

Robert Dodd – Raymond James Paul Johnson – KBW Chris Kotowski – Oppenheimer. Bryce Rowe – Robert W. 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 First Quarter 2017. At this time, all participants have been placed on 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, May 5, 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..

Okay. Thank you, Lauren. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the year first quarter of fiscal year 2017. I would 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 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 Web site at www.stelluscapital.com, under the Stellus Capital Investment Corporation link or call us at 713-292-5400. So, my remarks this morning are organized as follows, first, I will speak to our earnings; second, asset quality; third, investment activity; and lastly, capital management.

With respect to earnings net investment income for the first quarter was $0.33 per share or within approximately 100,000 of the dividends paid out, net asset value did increase during the quarter to $13.84 per share as of March 31, up $13.69 per share at year-end.

With respect to asset quality, just a reminder about our portfolio characteristics, we have 46 portfolio companies, 44 of which have private equities sponsorship. These companies are across 23 industries with the largest exposure at 14%. Our largest investment is $23 million at fair value and the average investment is just under $8 million.

The weighted average yield is 11.3%, which is up from a little over 11% at year-and. The weighted average EBITDA of our portfolio companies is approximately $27 million and the leverage quotient is in the low four times. Approximately 70% of our loans are floating rate, and albeit five of our loans are now through their LIBOR floor.

87% of our portfolio is rated one or two, meaning, at or ahead of plan. Again, no loans are on non-accrual status; the one loan for glory of approximately a million dollars was moved from a loan to an owned-asset during the first quarter.

Now, moving to investment activity, we had an active first quarter with three new into foreign investments, totaling $23.3 million. All of the new portfolio companies are backed by private equity firms with whom we've had a 10 plus year experience of investing.

During the quarter, there were three loan repayments of $29.4 million and we sold one loan for $8.4 million.

Turning to the second quarter, the quarter we're in, we're $22 million in potential repayments, $5 million of which was received this week, and in terms of new investments for Q2, we have [indiscernible] for new fundings [ph] of $10 million to $30 million.

And then, lastly with respect to capital management, so as previously reported and I'm pleased to report that in April we were able to issue a little over $3.1 million shares of new equity, price of $14.10 per share, which resulted in net proceeds of the company of $43.3 million.

We expect to use $37 million of the funds to fully capitalize our SBIC subsidiary, which you may recall has a $75 million total license; the balance of 75 has already been contributed. In the meantime, the proceeds from the offering were used initially to reduce our bank credit facility. And with that, I will open it up for questions. Thank you..

Thank you. [Operator Instruction] Our first question comes from Robert Dodd with Raymond James..

Hi guys. Total investments [indiscernible] portfolio compressed in the quarter bit more than I expected, and then [indiscernible] Q2 looks like -- I mean, the midpoint on potential new fundings would again be roughly in line with what you think you might see in repayment. So we could see a flat portfolio.

What's the outlook in terms of early stage pipeline for portfolio growth this year, or do you think it's just going to be a low activity?.

Yes, thank you, Robert. So with respect to the second quarter, I think your assessment is right that we may grow the investment portfolio, but again, the rough numbers is we're probably able to replace the repayments that come in.

We are I'd say quite busy, and our outlook for the balance of the year is we expect to grow the investment portfolio, and meaningfully utilize the additional capital that we have. So, we would expect it not to be a flat year..

All right, got it.

And just how much of that would you expect to maybe be SBIC-eligible and to go into that newly fully capitalized fund versus the kind of a balance sheet, well, [indiscernible] you know what I mean?.

Sure, sure. Historically, as much as 50% of the activity we've seen has been SBIC-eligible. I'd say it's picked up even more so in the last six months. As an example, the two potential fundings for this quarter are both SBIC-eligible.

So I would say, our expectation is certainly more than half of what we're going to be doing this year, will be for that account. And it's an important aspect of the business, because we would very much like to move into the SBIC debentures, while the proxy for the interest rate, which is treasury remains low.

So I think we have a real incentive to more fully utilize the SBIC capital and its debentures, given the current interest rate environment. And again, as you know, there's always going to look at it as things come in and don't want to miss too many opportunities that wouldn't qualify. So -- but we will be disciplined about it.

And again this is a big part of the offering to be able to really fully capitalize the subsidiary. So can I say at least half and likely more than half as we grow the portfolio this year..

Okay, great. I appreciate that.

And then just one more if I can, on the weighted average yield [indiscernible] I think it picked up a tiny little bit, but what's the outlook -- what are you seeing just kind of in market pricing right now in coupons and all these fees et cetera, et cetera, all in all the kinds of deals you are looking at?.

Yes. So the yield quarter-over-quarter picked up about 27 basis points and that was nearly attributable to the new investments that we have made in the quarter versus the yields on the loans that paid off. I would say we are seeing good pricing overall. I know one topic in the marketplace is competition and covenant structures and capitalization.

And we are still seeing well capitalized companies and proper covenant structures. And as evidenced by the first quarter fundings, we are not seeing compression in pricing. But in any event, I certainly don't think that our yield -- average yield will go up from here.

And we've operated at this level for a good while, so I think the band would probably be between 10.5 and 11.5 overall yield. But it's likely to stay in the -- I think right where we are..

Okay, good. Thank you..

Thank you, Robert..

Our next question comes from Paul Johnson with KBW..

Hey, good morning guys. Actually Rob asked most of my questions, so it sounds like you mostly covered what I was kind of thinking about asking, but I guess kind of speaking to your portfolio yield and I know you guys mentioned that you don't expect it to go up.

But I did see that it looked more of your [indiscernible] were paid in the quarter and your mezz investments went up a little bit, is that sort of a trend that we would expect to see in the future, or do you still think you would expect to have more senior oriented investment?.

Yes, thank you, Paul. It's a good question. Our overall portfolio goal would be to have the secured aspect of what we are doing up to say 80%. So think composition as being 80%, first. And secondly, 15% on secured mezz and 5% it cost at least equity co-invest. So that can vary quite.

But I would say certainly wouldn't expect -- I would expect the secured portfolio to be at least 70% of the total. And over time, come closer to 80%. So we are trying to be more secured, more floating rate which is a derivative of the secured type lending.

So, [indiscernible] much more unsecured; we won't do unsecured mezz as we are well capitalized business with a substantial sponsor that we have real confidence in and do in let's say all of them, but maybe one. So we have had greater history. So I would say we expect us to be more secured than not..

Okay. That's the only question I have..

Okay. Thank you..

We will go next to Troy [indiscernible] Management..

Great. Thank you. Just following a little bit more on Robert's line of question on the SBIC, you talked about the new asset eligibility. Can you speak to the repayment -- potential repayment you see in Q2? Are those SBIC related? And also, if you are dropping 37.5 million down, it will obviously allow you to access additional debentures.

That would all need to be invested plus repayment before you draw on the debentures, is that correct? And what is the current pricing on the debentures? Thanks..

Okay. So, Troy, let me break them down. So the -- so in terms of the repayments in the quarter, my recollection is non and SBIC entity. With respect to -- I'll double that, with respect to the pricing the debentures, we think of we're including all-in fees that are paid is approximately 4%.

The actual yield on the debentures is in the 3s, but when you include all the fees over the 10-year period, we think of it as 4% pricing which wouldn't have necessarily changed yet because it's geared off the 10-year treasury. So this is why we think it's advantageous to the extent we can get that capital deployed.

And then with -- I am sorry, the second part of your question, I apologize, I just missed it..

Yes. No worries. I was just trying to get a feel for when will you be able to start drawing debentures? Because I agree I think the quicker you can get to debentures and get those locked in the better.

How much capital do you need to deploy in the SBIC before you start pulling down debentures?.

Yes. So the program of the SBIC is as I understand it is we can actually request debenture as we put equity down there based on having a clear portfolio projection that shows the need for them. And so I think what would you see though put equity capital down, invest in it, and then request it.

But, there is a time delay from the request to the actual funding roughly we think 60 days. But I would say all this is relatively short term. So as we invest the capital in SBIC entities will be requesting the debentures..

Great. That's I wanted to clarify is you can put the equity down there, but you don't have to grow the SBIC outstanding portfolio by 37.5 million before you can request debentures.

You can request debentures prior, correct?.

Yes. That's right, Troy. As an example let's say we in the quarter funded 20 million of new SBIC loans and put the equity capital down. We can then request the debentures at that point. We don't need to put the full 37 down..

Perfect. Great. That's what I thought was a clear positive and just wanted to clarify. Thanks guys..

Yes. No, no -- thank you very much..

Our next question comes from Chris Kotowski with Oppenheimer..

Yes, hi, good morning. I normally wouldn't ask this kind of question but it just stuck me as an extraordinary morning at one point you stock was down more 10% and the volume is pretty high. And I mean I understand that there is pressure on portfolio volumes and pressures, earnings and I get that.

But is there any other news about one of your borrowers or your credit facility or anything else [indiscernible] that would have accounted for that kind of violent reaction in your stock?.

Yes, Chris. We are not aware of anything. And in fact I believe our stock was trading at 14.40 something a couple of days ago. So, there's no new information that has been provided in the Q, any material information.

One thing that we have seen that in some of the holdings of the stock that -- as you know the stock drops to certain amount and then people just automatically start selling and looking now looks like we were down maybe $0.50 and one point we were down a dollar or something. So it's recovered, but [indiscernible]..

Okay.

But there is no adverse development at any borrower where there is public news out or anything like that?.

Not to my knowledge..

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

Our next question comes from Bryce Rowe with Baird..

Thanks. Good morning, Rob..

Good morning, Bryce..

I am just curious for the repayments that you have seen thus far into the second quarter, any guidance you could give us in terms of accelerated income associated with those or prepayment associated with those?.

Yes, we do expect to have some meaningful income associated with that. And maybe one way to calibrate it, it will be more than the first quarter..

Okay.

And first quarter was around $400,000, is that right?.

Yes, correct..

Okay. That was my only question. Thank you, Rob..

Okay. Thank you, Bryce..

That concludes today's question-and-answer session. I would like to turn the conference back to Robert Ladd for any additional or closing remarks..

Okay. Thank you everyone again for your support, and we look forward to speaking with you in a few months. And thanks again..

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