Stellus Capital's Q1 2025 Earnings Call: Navigating Contradictions in Tariffs, Dividends, and Debt Strategy

Impact of tariff uncertainty on pipeline, dividend coverage expectations, pipeline activity and delay expectations, use of unsecured fixed-rate debt, expectations for equity co-investment gains are the key contradictions discussed in Stellus Capital Investment's latest 2025Q1 earnings call.



Portfolio Growth and Investment Activity:
- Stellus Capital Investment Corporation ended Q1 2025 with an investment portfolio at fair value of $991.1 million across 110 portfolio companies, up from $953.5 million across 105 companies as of December 31, 2024.
- The company invested $46.7 million in seven new portfolio companies and had $8.7 million in other investment activity at par during the first quarter.
- The growth in the portfolio was driven by strategic investments in new companies and add-ons to existing portfolio companies, despite some temporary disruptions caused by tariff activity.

Interest Income and Dividend Strategy:
- Stellus Capital generated $0.35 per share of GAAP net investment income and core net investment income of $0.37 per share in Q1 2025.
- The company declared dividends for the second and third quarters of 2025 at a rate of $0.40 per share, payable monthly.
- While the adjusted NII was below the dividend, Stellus Capital expects to cover it with realized equity gains by the end of the year, supported by its equity co-investment portfolio.

Capital Structure and Financing:
- On April 1, 2025, Stellus Capital issued $75 million in aggregate principal amount of 7.25% notes due April 1, 2030, using the proceeds to repay the bank facility.
- The company received a green light letter from the Small Business Administration for Stellus Capital SBIC III, aiming to receive a license and lever up the SBA vehicle for funding qualifying portfolio company investments.
- These strategic financing decisions were made to diversify the capital stack and reduce borrowing costs.

Asset Quality and Portfolio Composition:
- As of March 31, 2025, 98% of Stellus Capital's loans were secured, and 91% were priced at floating rates.
- The company has loans to five portfolio companies on non-accrual, which comprise 6.7% of the total cost and 4% of fair value of the total loan portfolio.
- The increase in non-accrual loans was due to specific company write-downs, but the overall asset quality remains slightly better than planned.