Stellus Capital's $75 Million Bet: A Strategic Debt Restructuring

In the ever-evolving landscape of finance, Stellus Capital Investment Corporation (SCM) has made a bold move that could reshape its debt structure and financial strategy. On March 25, 2025, SCM announced the pricing of $75 million in 7.25% notes due 2030, a strategic maneuver that aims to optimize its financial leverage and provide certainty in an uncertain economic climate.



The issuance of these notes represents a significant portion of SCM's outstanding credit facility debt, approximately 31.7% of the $236.4 million in indebtedness as of March 24, 2025. This move effectively converts a portion of SCM's variable-rate credit facility debt into longer-term, fixed-rate financing. The notes will mature on April 1, 2030, and bear interest at a rate of 7.25% per year, payable semi-annually. This fixed-rate financing provides SCM with certainty on its cost of funds through 2030, which can be particularly valuable for matching fixed-rate loans in its portfolio.

The company intends to use the net proceeds from this offering to repay a portion of the amount outstanding under its credit facility. However, SCM may re-borrow under its credit facility and use such borrowings to invest in lower middle-market companies in accordance with its investment objective and strategies and for working capital and general corporate purposes. This debt restructuring does not initially change SCM's overall leverage position but modifies the composition between variable-rate credit facility debt and fixed-rate notes. As of December 31, 2024, SCM's total long-term debt was $214.5 million, representing 65.3% of its total debt. The issuance of the notes will increase the proportion of fixed-rate debt in SCM's capital structure, potentially optimizing its interest expense and maturity ladder. The weighted average interest rate on SCM's debt as of 2024 was 6.75%, and the addition of the 7.25% notes will slightly increase this average rate. However, the fixed-rate nature of the notes provides SCM with protection against potential interest rate increases in the future.

In summary, the issuance of the $75 million in 7.25% notes due 2030 by SCM impacts its overall debt structure by increasing the proportion of fixed-rate debt, providing certainty on its cost of funds, and optimizing its interest expense and maturity ladder. This strategic move aligns with SCM's investment objective of maximizing total return to its stockholders in the form of current income and capital appreciation. The successful pricing of this offering demonstrates market access and investor confidence in SCM's credit profile, even as the notes represent a significant portion of the company's market value. For BDC investors focused on dividend sustainability, such liability management directly impacts the spread between portfolio yields and funding costs.