Stellus Capital's Q2 2025 Earnings Call: Navigating Contradictions in M&A Trends, Dividend Coverage, and Credit Quality

Pipeline activity and M&A trends, dividend coverage and financial strategy, leverage strategy and growth plan, portfolio credit quality and nonaccrual status, and interest rate environment and SOFR impact are the key contradictions discussed in Stellus Capital Investment Corporation's latest 2025Q2 earnings call.



Dividend Coverage and Leveraging Strategy:
- Stellus Capital reported that their earnings per share (EPS) are not covering the dividend in recent quarters.
- The company has approximately $45 million of spillover to cover through dividends, with $38 million expected for the next year.
- To address this, Stellus plans to maintain its target leverage of 1x on the regulatory test, using its bank facility to increase portfolio capacity by $50 million to $75 million.

Investment Activity and Deal Flow:
- Stellus Capital experienced a pickup in investment activity, with $26 million in new fundings since June 30.
- The company plans to leverage its SBIC III license to fund qualifying portfolio company investments as existing debentures are repaid.
- Stellus anticipates having about half of its deal flow eligible for the SBIC III license, which can be quickly ramped up.

Equity Realizations and Gains:
- Stellus Capital expects $12 million in equity realization proceeds and approximately $10 million in gains during the second half of the year.
- These expectations are based on businesses actively being marketed and well-performing, though timing and completion are subject to market conditions.

Credit Quality and Nonaccrual Loans:
- At the end of the quarter, 98% of Stellus Capital's loans were secured, and 91% were priced at floating rates.
- The company has loans to 5 portfolio companies on nonaccrual, which comprised 6.8% of the total cost and 3.8% of the fair value of the total loan portfolio.
- Stellus does not anticipate any new nonaccruals in the near term, and private equity firms backing these companies are expected to continue supporting them.