Stellus Capital Investment Corp Stock

Good morning, 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 second fiscal quarter ended June 30, 2026. This conference is being recorded today, August 11, 2026. 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, Jenny, and good morning, everyone. Thank you for joining the call. Welcome to our conference call covering the quarter ended June 30, 2026. We have 6 topics to cover this morning. First, the financial results for the second quarter, portfolio and asset quality, the outlook for Q3 and beyond, an update on our adviser joining Ridgepost Capital, our $20 million share buyback program and opportunities for growth.

Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements. Todd, I'll turn it over to you.

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 any 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 Public Investors link or call us at (713) 292-5400.

Now I'll cover our operating results for the quarter, but I would like to start with our life-to-date activity. Since our IPO in November of 2012, we've invested approximately $2.9 billion in more than 225 portfolio companies while navigating multiple market and credit cycles.

Over this time, we've received approximately $1.9 billion of repayments while maintaining disciplined credit performance. We believe our track record, our underwriting process and deep sponsor relationships provide us with meaningful competitive advantages, reflecting more than 20 years of working together as an investment team and nearly 14 years of operating as a public BDC.

Our focus remains on preserving capital while generating attractive risk-adjusted returns for our shareholders. And we think our long-term credit performance as well as our 14-year track record of return on equity demonstrates the effectiveness of our underwriting process and our portfolio management approach. To that point, we've generated a life-to-date return on equity of 9.5%, which includes all realized and unrealized gains and losses across the portfolio to date. We've also paid $349 million of dividends to our investors since our IPO, representing $18.83 per share over this period.

Now turning to operating results. In the second quarter, we generated $0.26 per share of GAAP net investment income and core net investment income, which excludes estimated excise taxes, was also $0.26 per share. Overall, for the quarter, net asset value increased by $0.26 per share or 2% sequentially driven by 3 primary factors. First, net realized and unrealized gains contributed $0.30 per share, primarily driven by write-ups related to company-specific performance. Second, our share repurchase program was accretive to NAV, adding approximately $0.05 per share. And finally, dividend payments exceeded earnings by $0.08 per share as we continue distributing the remaining spillover income from 2025. I'd like to note that these figures are in line with the preliminary results we previously reported.

With respect to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $968 million across 116 portfolio companies, a decrease from $990 million across 116 portfolio companies as of March 31, 2026. During the second quarter, we invested a total of $18 million, of which $8.7 million was in 3 new portfolio companies and $9.3 million for add-ons to existing portfolio companies. We also received 5 full repayments totaling $38.7 million, $500,000 from equity realization, which resulted in a realized loss of $200,000 and received $10 million of other repayments at par.

At June 30, 100% of our loans were secured and 92% were priced at floating rates. The average loan per company is $8.9 million and the largest overall investment is $26 million, both at fair value. For the 98 companies that comprise our loan portfolio, the weighted average EBITDA level was $15.6 million at quarter end, and the weighted average normalized leverage quotient was 4.2x for the performing loans. Substantially all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly below plan. At fair value, 74% of our portfolio is rated at 1 or 2 or on or ahead of plan and 26% of the loan portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations.

We removed one loan from nonaccrual status during the quarter and did not add any new loans. Currently, we have loans to 5 portfolio companies on nonaccrual, which comprise 8.5% of the total cost and 5.4% of the fair value of the total investment portfolio, respectively, which represent a decrease from the prior quarter at cost and a slight increase at fair value. While the level of nonaccruals and risk grade 3 loans remains higher than we would like, reducing both that number of these investments and exposure to them remains a key priority. We're actively working each position and continue to make progress either exiting these investments or returning them to accrual status.

Now I'd like to turn the call back over to Rob to cover a number of additional topics.

Okay. Thank you, Todd. As we look ahead to the third quarter of 2026, I'll cover 4 topics: the outlook for the quarter and beyond, an update on our adviser joining Ridgepost Capital, our $20 million share buyback program and again, opportunities for growth. In terms of outlook, as of today, our portfolio is approximately $960 million across 117 portfolio companies. For the balance of the quarter, we expect repayments to slightly outpace again new fundings, thus ending the quarter slightly down from where we are today; however, we have seen a meaningful improvement in the origination pipeline across the Stellus platform since beginning the quarter.

While market conditions remain fluid and the timing around future deal closings is never certain, we're hopeful gross origination activity is set to increase toward the end of the year, which should have positive implications on net portfolio growth for the company over the next several quarters. As mentioned on previous calls, we have been reducing the amount of spillover income and have expected that over time, our dividend would approximate our net investment income. We have now reached that point, and we have set our dividend to $0.25 per quarter per share for the third quarter. To that point, based on the current trajectory of NII as well as our outlook for short-term rates and spreads, we expect to be well positioned to earn our $0.25 quarterly dividend or more moving forward.

Next about Ridgepost. On June 22, our external adviser, Stellus Capital Management officially joined the Ridgepost Capital platform. As a reminder, Ridgepost Capital is a leading alternative investment manager in the middle and lower middle market, currently managing more than $50 billion of AUM across private equity, private credit and venture. We're very pleased with how the transition is going and early integration is well underway. We're coordinating in many areas, including investment origination and management, investor relations, fundraising and operations.

Since joining Ridgepost Capital, one of the most promising opportunities has been the ability to leverage the firm's broader sponsor relationships, specifically Ridgepost Capital lower middle market private equity fund-to-funds business, which is RCP Advisors. RCP has been investing in the lower middle market GPs for 25 years, and the team has relationships with more than 200 lower middle market private equity firms. This aligns well with our direct lending strategy, which is exclusively to private equity -- lower middle market private equity-backed companies and believe our business is set to benefit from this meaningfully over time. We've been collaborating with the RCP's team to identify financing opportunities with these sponsor relationships.

While still early, we believe the long-term opportunity could represent significant incremental originations annually across the Stellus platform. And importantly, this incremental deployment opportunity is additive to the strong origination pipeline we've been building over 20 years. Now to share repurchases. Regarding capital allocation, we continue to view share repurchases as an attractive use of capital today, specifically as our stock continues to trade at a significant discount to NAV. Repurchasing shares is immediately accretive to net asset value and earnings per share, creating value for our shareholders. On March 3 of this year, our Board of Directors approved a common stock repurchase program of up to $20 million.

I'm pleased to share that since that date, we have repurchased 467,000 shares for approximately $4 million. Given our outlook for the business as well as the remaining future authorization, we continue to view buybacks as accretive and efficient way to improve the return to our shareholders. And now for opportunities for growth. We're pleased to announce that we received approval from the SBA for a third SBIC license. With this new license, we expect to meaningfully increase the size of our investment portfolio. The license will allow us to contribute up to $125 million of equity and access up to $250 million of long-term, low-cost SBA guaranteed debentures. In addition, the SBA recently increased the maximum amount of debentures that a family of funds may have outstanding from $350 million to $475 million, providing us with additional long-term financing capacity as we continue to grow the platform.

We believe these developments and changes will ultimately result in the ability to expand the investment portfolio by up to $100 million over time or 10% of the current portfolio at fair value today. And before opening the line for questions, I'd like to conclude with a few final remarks. First, we have aligned our $0.25 per share quarterly dividend with the current trajectory of NII.

Second, while we still have work to do with several underperforming investments, we're actively managing these positions and remain focused on continuing to improve overall portfolio quality. Third, the origination backdrop is improving, and we're seeing encouraging signs across our pipeline as sponsor activity begins to accelerate. Taken together, we believe these factors position Stellus to create meaningful long-term value for shareholders while continuing to generate attractive income through the cycles. And Jenny, with that, we'd now be happy to open up for questions.

[Operator Instructions] Our first question is coming from Erik Zwick of Lucid Capital Markets.

I wanted to start with a follow-up on your commentary regarding the pipeline and the outlook for the back half of the year improving. I'm curious what's driving that optimism? Is it the partnership with Ridgepost and broadening the funnel and potentially improved market activity, a combination of those or maybe some other factors. Wondering if you could comment there.

Yes, sure. Well Erik, so I'd say one thing it's generally true that the deal activity tends to be somewhat seasonal. And therefore, second half of the year is typically busier than the first and the fourth quarter is typically the busiest of the four quarters. So I think that's part of it. I think a little bit slower activity earlier in the year. And I think things have just generally picked up for us. We are seeing pricing in that regard relatively stable. So as an example, if we were less disciplined on pricing, we'd probably be closing more deals, but we've tried to be disciplined on pricing, of course.

And then in terms of the RCP Advisors and Ridgepost combination, still early there -- early days there, but we think this will take a few quarters or so, but we're starting to see some commonality of opportunities to sponsors looking at a transaction and it turns out that the sponsor is part of the RCP portfolio, if you will. So that's starting. But at this point, it is coming more from our existing origination capabilities.

I appreciate the color there. Just looking at the income statement, the other income line was a little bit lower this quarter or in the second quarter relative to the past 3 or 4. Curious if there was anything kind of noteworthy or specific in the most recent quarter and whether you would expect the 2Q rate to be a good go-forward rate or return to the more historical level there?

Yes, Todd, I'll turn that over to you.

Yes, I would say there's nothing particularly unusual. I mean one thing is that we didn't carry quite as much cash as we historically have, and so our sweep income is not as high. So that's probably the primary difference. It kind of moves up and down, but I'd say that's probably the only thing that's unique for this quarter.

Got it. And then last one for me. Just on the unrealized appreciation in the quarter. What drove the positive marks in the portfolio?

Yes. So right. Related to 2 of the positions that we're kind of working. So one of them was a sale of a unit, a division. And so that improved the mark there. And the other one was in restructuring and taking out another lender at a low price and a low value of the other lenders. It increased enterprise value for both those businesses and resulted in kind of uplifts for both of those.

So I'd say that was probably half of it. And the other half of it is simply a reversal for the realized loss that we had on one of our positions, which, as you know, Erik, kind of we have a realized loss if we've marked it and typically, we've marked it in roughly the same amount that the realized loss is. And so it's a reversal that shows up as a unrealized gain.

And our next question is coming from Christopher Nolan of Ladenburg Thalmann.

The hookup with Ridgepost, do you anticipate you're just going to have a much larger pipeline of deals that you're going to be reviewing?

Chris, I think that's definitely right over time. And I would say that it starts with where we've been calling on someone for a while, maybe doing business with them and Ridgepost is already an LP in their funds. So this is very helpful. The next would be in situations where RCP is an LP in a fund, and we don't have a previous relationship with them, and this will take time, but a nice warm introduction from RCP to that private equity firm.

So that's how it will progress from here, but we definitely think this will make a real difference as time passes. And again, we've already had good interaction with the RCP team. And again, a long time, 20-plus year history of investing in this market on the PE side. So they also have great insight into the quality of these private equity firms having invested with them or observing them for over 2 decades.

And also, the nonaccruals have been elevated for some time. If and when those come down, is the anticipation to keep the leverage ratios at the current levels or to -- if the nonaccruals come down and stay down to increase leverage going forward? What are the thoughts around that?

Yes. So I think that we're operating less than 1:1 leverage. Our target leverage is 1:1 on a regulatory basis and 2:1 or so on a GAAP basis. So I think you certainly could see our leverage increase. As the third license, SBIC license gets up and running, that will be helpful. Of course, that will be total GAAP leverage, which again, we view as safe, it's long dated. And so I think you will see leverage increase. And I think, too, it's -- your question is a good reminder that if you think about our portfolio today, we have roughly $50 million of nonaccruing assets at fair value and roughly $90 million of equity co-invests at fair value, neither of which have a return to them.

Now the equity portfolio is appreciating and we get a return from it over time. But imagine being able to recycle what is in total $140 million into earning assets. Some will be equity, new equity co-invest, but others will be performing loans. So this should help with earnings capacity. This will take time as they get recycled. And then back to your original question is that we would expect leverage to get closer to 1:1 and 2:1 on a GAAP basis than it is today.

And our next question is coming from Robert Dodd of Raymond James.

Just going back to RCP for a second, if I can, Rob. In the relationships and the preliminary discussions you've had with them and the PE funds kind of that they have relationships, are there any niches where they have -- the funds maybe have particularly strong industry expertise where you haven't historically been a significant participant. I mean, is that one of the ways as well because obviously, you can expand the pipeline, but can it expand kind of like industry and sector diversification as well?

That's a really interesting point. So I would say in the lower middle market, what we found is that many of the firms cover a variety of areas. Some are more specialized. As an example, industrial services would be a category. Some would be on technology, so, or digital marketing. But I think our history of investing really kind of transcends all industries, except for the 2 that we've not been active in at all, which is real estate and the pure oil and gas industry. So I think what we found is, one, we have kind of touched probably most every industry sector. Two, I would say, and haven't studied it carefully, but they would, therefore -- and their portfolio of experience is 200-plus funds would cover a variety. So I think together, we'll have touched everything. But it could certainly provide access to some areas where we don't have as much exposure to or that would be new and that we would find attractive. So I think it's a really good illuminating point that not only should it be in volume, but it could be interesting in terms of industry sector given the breadth of where they operate.

Yes. On the remaining nonaccruals, I mean, can you give us any I mean, like how -- do you think those nonaccruals can come back to performing? I mean, are the primary factors operational that can be fixed over time? Or are there other issues where it may need a material restructuring and the sponsor may have to approve that? Or is it just operational improvements to get them back or something is needed in order to deal with those remaining assets?

Yes. Yes. So on the nonperforming situations, the -- trying to think through all but one of them -- let me say this, most of them, we and the other lenders now control them. So we're no longer relying upon a private equity firm to do something. And so we're now working with the management and the other lenders with the management teams to affect, one, we've probably already done a restructuring; and two, how to improve the business operationally. In some cases, we have to provide a little bit more capital. And so from here, it's a matter of getting the company in a position for an exit. If it's helpful, we would be glad to convert that fair value today into cash and reinvest it.

So we're not trying to achieve 2x our money from here, but rather position the companies where they can be sold for -- and so all do as well as possible and you're working closely with the management teams. So I think it's that category. We're basically at that point where we don't have any obstacles. They've been restructured. We've with the lenders taken -- restructured the capital stack, providing capital if needed, and we try to be very limited in that way, but also try to be smart in that way, too. So that's the status of the nonaccruals.

Well, we appear to have reached the end of our question-and-answer session. I will now hand back over to Mr. Ladd for any closing comments.

Okay. Thank you, Jenny, very much, and we thank everyone for joining the call and for the support from our shareholders. And we look forward to giving you a further update as we review the third quarter in early November. Thank you very much.

Thank you, everybody. This does conclude today's conference, and you may disconnect your phone lines at this time. We thank you for your participation.

Good morning, 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 fiscal quarter ended March 31, 2026. [Operator Instructions] This conference is being recorded today, May 12, 2026.

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, Holly. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2026. We have 6 topics to cover this morning. First, the financial results for the quarter, portfolio and asset quality, outlook update, opportunities with Ridgepost Capital, our share buyback program, and future growth in the portfolio.

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 the 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 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 Public Investors link or call us at (713) 292-5400.

Now I'll cover our operating results in the -- for the quarter, but I would like to start with our life-to-date activity. Since our IPO in November 2012, we've invested approximately $2.8 billion in over 225 companies and received approximately $1.8 billion of repayments while maintaining stable asset quality. We've paid $339 million of dividends to our investors, which represents $18.49 per share to an investor in our IPO in November 2012.

In the first quarter, we generated $0.26 per share of GAAP net investment income and core net investment income was $0.27 per share, which excludes estimated excise taxes. During the quarter, we also realized gains of $750,000 on one equity position, which resulted in total realized income for the quarter of $0.29 per share. Net asset value decreased $0.28 per share during the quarter from 2 components. The first was $0.08 per share of dividend payments that exceeded earnings, which was necessary to continue to pay out the spillover balance from 2025. The second was a net realized and unrealized loss of $0.20 per share related primarily to debt investments.

We ended the quarter with an investment portfolio at fair value of $990 million across 116 portfolio companies, a decrease from $1.01 billion across 115 portfolio companies as of December 31, 2025. During the first quarter, we invested $18 million in 3 new portfolio companies and had $9 million in other investment activity at par. We also received 3 full repayments totaling $35 million, one equity realization, which resulted in a realized gain of $750,000 and received $6.6 million of other repayments.

On March 31, 99% of our loans were secured and 92% were priced at floating rates. The average loan per company is $9 million and the largest overall investment is $18.5 million, both at fair value. Substantially, all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 81% of our portfolio is rated a 1 or a 2 or on or ahead of plan and 19% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations.

We added one new loan to our nonaccrual list during the quarter. Currently, we have 6 loans -- loans to 6 portfolio companies on nonaccrual, which comprised 9.2% of the total cost and 5.2% of the fair value of the total investment portfolio, respectively, which represents a slight increase from the prior quarter. We recognize that the level of nonaccrual loans is higher than we would like. We're focused on reducing the number of -- and dollar magnitude of these loans. We're actively working each position and are making progress in exiting the positions or bringing them back onto an accrual status.

There's been much speculation about the impact of artificial intelligence on the large-scale SaaS software industry. As we mentioned on our last call, Stellus does not have exposure to the large-scale SaaS software sector. We do have portfolio companies in the [indiscernible] software and information they provide in many cases deal with proprietary data. We believe AI will enable these and many of our portfolio companies across a variety of industry sectors to improve the speed and information. Each of these companies is rated on our risk rating system as either a 1 or 2, meaning on plan or ahead of plan.

And now I'd like to turn the call back over to Rob to cover a number of other topics.

Thank you, Todd. As we look ahead to the second quarter of 2026, I'll cover 4 topics: the outlook for Q2, our advisers' plans to join the Ridgepost Capital's platform, our $20 million share buyback program and opportunities for growth.

First, with respect to outlook. As of today, our portfolio is approximately $970 million across 117 portfolio. The balance of the quarter, we would expect repayments to equal new fundings, thus ending the quarter approximately where we are today. We expect to [ continue ] realizations throughout the year. At this point, we estimate $9 million for the balance of the year with approximately $6 million of this in realized gains.

Regarding dividends, in April, we declared the dividend for the second quarter of this year of $0.34 per share in the aggregate payable monthly. Looking forward, we are making progress in reducing the amount of spillover income, and we expect that over time, our dividend will approximate our net investment income plus realized gains. At this point, that would be at a lower level than the current dividend.

Now turning to Ridgepost. We look forward to our external adviser, Stellus Capital Management, joining the Ridgepost Capital platform this summer. We've been impressed with Ridgepost Capital's organization. They have excellent leadership, and we should benefit from meaningful new investment opportunities working with them, particularly through their lower middle market private equity fund-to-fund strategy known as RCP Advisors.

RCP has relationships with over 200 private equity firms and with their focus on the lower middle market, many of these sponsors are candidates for us to provide financing for their portfolio companies. We think this could provide hundreds of millions of dollars of new lending possibilities across the entire Stellus platform each year.

Now turning to the share repurchase program. We recently announced a common stock repurchase program of up to $20 million. This decision reflects the current trading level of our shares, which are approximately a 25% discount to net asset value. Historically, our stock has traded at or above NAV for many years. At the current price levels, we believe repurchasing shares represents a good opportunity to generate value for our shareholders.

And now opportunities for growth. I'd like to conclude our remarks by outlining the opportunity to grow our portfolio. We project that we have the capacity to increase our investment portfolio by $75 million to $100 million from here. This opportunity comes from 2 sources. The first is from a third SBIC license, which we're optimistic will be rewarded this summer. And the second is from recycling equity gains and nonaccrual loan that have been resolved. As a reminder, $1 of an equity position or a nonaccrual loan, that turns to cash can be reinvested into a new loan of close to $3 through our leverage facilities.

In closing, let me thank everyone for your continued support, and we'll now turn to the Q&A session.

[Operator Instructions] Your first question for today is from Erik Zwick with Lucid Capital.

I wanted to start just to make sure I understood some of the commentary there in the prepared remarks. With relation to the expectation for kind of dividends to be in line with NII plus realized gains, did I understand that you kind of mentioned that the way it was lined up currently, the NII plus realized gains would be kind of lower than the current dividend level. So just trying to figure out, are you expecting to be able to grow NII over time or potentially think about resetting the dividend level as well? Just trying to kind of hone in on that a little bit.

Sure, sure. So I'd say that although we'd like to grow the NII per share from here, we think we're probably at a level that we'll be at for a while. So our expectation is that the dividend will be coming down associated with that.

Got it. Okay. That's helpful. That's what I thought I heard. And then just with regard to share repurchases, I know you talked about it last quarter as well in terms of being attractive given where the stock is trading today. But correct me if I'm wrong, I don't think you repurchased anything in 1Q. So was -- anything that kept you out of the market, potentially the pending acquisition of the adviser by Ridgepost or anything else?

Yes. No, no, good question. Good point. So we did not repurchase any shares after the previous quarter end. But a reminder, when issuing a K, we have a short period from the issuance of the K to the end of the quarter. So there's just limited periods we can be repurchasing. We will have a much longer window this quarter, and it was strictly tied to the timing of that and nothing else.

Got you. Okay. Understood. And last one for me. Wondering if you can just talk about the pipeline a little bit. I know you expect it to grow in the back half of the year post the Ridgepost tie-up and curious from a spread perspective, if you can talk about where you're seeing spreads in the pipeline today relative to 90 days ago and also kind of compared to the current existing portfolio yield?

Yes. So relative to spreads, so as the private credit has been disrupted a little bit, we are seeing some, I'd say, steadiness in spreads. We've not seen the same widening that the upper market has seen, but I think we've certainly seen stabilization. And so I'd say our average deal we're looking at today is approximately a 5% spread over SOFR, could be higher, but it's stabilized, but not meaningfully wider yet.

Okay. Good to hear that it's at least stabilized and hopefully some widening going forward.

Your next question is from Christopher Nolan with Ladenburg Thalmann.

I guess for Todd, Todd, does the -- I know your leverage -- your regulatory leverage ratios are low. But when including the SBA, it's somewhat higher. Does the SBA in any way restrict what your regulatory leverage ratios could be?

No. No, the SBA leverage is excluded from regulatory leverage. So it's a 2:1 regulatory leverage and our regulatory leverage is around 1x and then it's 2x with the SBA debentures, a little bit less than 2x now because we've paid off a number of debentures.

Okay. So your unsecured notes and so forth doesn't put any sort of restrictions on your total leverage just on your regulatory leverage, correct?

Correct. Yes, that's right. [ The notes ] in the credit facility are part of regulatory leverage and then the debentures are in addition to that as total leverage.

Got it. And so we can see your regulatory leverage ratios are impressively low, so we can just see that you guys have a fair amount of balance sheet flexibility from that. Is that a fair interpretation?

That's correct. Yes, I think that's correct. It's, of course, limited by borrowing base, but that's right. We have a lot of running room with respect to that.

Okay. And then I guess your -- you mentioned in your comments that you didn't have much software exposure. But in your industry list, is it buried into another industry like high-tech industries?

Yes, it's in a -- it would be in several. It could be in high tech, it could be in the industry it serves because, as I mentioned, those software products are very industry-specific and it could be like a service as well that might be industry-specific, and those might be in different industry categories.

And we've seen with other BDCs where they've had to take down unrealized depreciation on software positions. Have you guys experienced that as well?

We have not. Those positions are marked approximately where they were at last quarter end and are basically marked close to par.

Yes, they're all good solid performing loans. I mentioned, they're either a 1 or 2 on our risk grading scale, so all doing fine.

Your next question for today is from Robert Dodd with Raymond James.

Just sticking with that software -- well, not only software, the marks. On the quarter, you said there was $0.22 in NAV attrition, primarily markdowns and debt investments. Can you give us any idea how much of that was spread as you just mark-to-market versus actual company-specific elements?

Yes. So I would say, Robert, most of that is coming from kind of net company movements. We had -- and most of those markdowns were on 2 specific positions. So we did have certainly some spread markdowns in terms of just the models, but the majority of that was coming from 2 equity positions. And we also had a little bit of write equity as well -- 2 debt positions, I'm sorry, that are write-down on the equity as well.

Got it. Got it. On -- going back to the Erik's question on spreads, and you said that you've seen some stability. There sometimes, obviously, can be a lag between how the smaller end of the market, so to speak, responds to spread movements versus the upper end of the market and to your point. So do you think the spread stability rather than expansion you're seeing right now is more a function of just things lagging what's going on in the upper market? Or do you think it's just that the competitive environment in your end of the market has just not moved and you just don't expect those spreads to widen materially at all?

Yes, Robert. So I would say that it's driven by the latter that it's still a competitive space that we're in. And I think we're seeing things getting done in the high 4s up to the mid-to-high 5s. So I'd say it's a competitive nature. It's -- things are slower in terms of deal flow. I think as you see deal flow pick up, there's certainly the opportunity to have the spreads also widen some. But so far, I think it's not a lag. I think it's just the competitive nature of where we are.

I appreciate that. And then just one more on the nonaccruals, and you addressed this, like they are a little elevated. You've got some -- you want to work that down, rotate those into -- either back on to accrual or into income-producing assets. I mean any color you can give on -- I mean, I think you mentioned you're making some progress. I mean, how -- it's a slow process. When I say fast, I don't mean fast. But what kind of timeline do you think that could go noticeably lower than where it is currently in terms of the nonaccrual and nonincome-producing debt capital assets?

Yes. So we had -- we discussed this on the last call. And I think I would say the same thing. I think we're -- I think, it's not going to be immediate. I would be thinking toward the end of the year this year, and then these are generally in 12- to 24-month resolution, so to speak. But just we wanted to make sure that we haven't -- we're very focused on it. But I think it's going to take some more time, but we are seeing some progress in some.

And the other thing that you've noted, and I mentioned in my remarks is that as we get some of these equity realizations in and we have some larger positions, this is a great opportunity to recycle what are non-earning assets, they could appreciate, but noncurrent earning assets to put leverage on them and grow the portfolio again. So we think we'll start to see that come to fruition towards the end of this year. So those 2 things combined, think of it more towards the end of this year into the first of next year, but not immediately.

Your next question is from Paul Johnson with KBW.

Just a little bit more on the nonaccruals. As Robert said, those are elevated. I think they're probably as high as they've ever been for Stellus. I'm just curious, what, I guess, has been kind of the weakness there? I mean, has it just been kind of a challenging vintage? Or has there been something maybe more specific in terms of kind of what's driven the more recent, I guess, increase in nonaccruals?

Yes. So good question, Paul. I'd say they're all company-specific, not driven by any kind of a macro trend or an underwriting trend that we -- all of our businesses when we underwrite them, there are a few key characteristics. One, they have a substantial equity partner behind in a private equity firm. Two, the equity component to the company is at least -- or typically at least 50% of the capital structure and each has serious covenants, traditionally a fixed charge coverage and a leverage test. So when we go into it, we're not expecting problems, but we certainly underwrite if we went through a recession, how would company do. But we ended up having not a recession, but again, company-specific issues that have made some of them challenging.

Also, it's worth noting that because there's a private equity sponsor behind substantially all of these, it is typical that a private equity firm will put in capital at least twice to solve problems. So if that's helpful to say that if we have something on nonaccrual, the sponsor owner has supported this over time and just gotten to the point where they're not able to support it anymore. So again, company specific, nothing we could tie down to anything that would be an overall trend.

Part of it, too, is we've also had -- in the past, we might have things come off nonaccrual or be resolved, and we're having some slowness in that activity, and that's why I noted that we're working it and working it hard to get that to reduce over time. So I think it's -- we haven't been able to take as many off as we've added. But anyway, thanks for the question, and that's where we are.

Got it. Okay. Appreciate that. And then, I mean, it sounds, if I'm not mistaken, your 1 to 2 rated names roughly around 19% of the portfolio, I believe, last quarter. So I don't think there's too much change quarter-over-quarter in terms of like the internal watch list with the new addition here to nonaccrual, I believe that may have already been captured within your internal watch list. Is that safe to say that any of the addition here to nonaccrual is not necessarily a surprise and is -- was more or less kind of within the bucket of underperforming rated names and that's relatively unchanged quarter-over-quarter?

That's right, Paul. And again, I think -- so it's 19% that is risk grade 3 or below. And you're right, that number didn't change. And...

My mistake.

No, no worries. And that the one that did move to nonaccrual was already a risk grade 3 before.

We have reached the end of the question-and-answer session. And I will now turn the call over to Robert Ladd for closing remarks.

Okay. Thanks again. Holly, thanks for your help, and thanks, everyone, for participating, your support over many years of our company, and we look forward to giving you an update again in early August relative to the second quarter. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good morning, 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 fiscal quarter ended December 31, 2025. A question-and-answer session will follow the formal presentation. [Operator Instructions] This conference is being recorded today, March 12, 2026.

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. Thank you, Paul. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter and year ended December 31, 2025. This morning's call will be longer and more in depth than previous calls we have 5 topics to cover. First, the financial results for the fourth quarter and year ended December 31, 2025, asset quality, including commentary regarding software exposure, outlook for the first and second quarters of 2026, our share buyback program recently announced and our investment adviser joining forces with Rigepost capital. 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 numbers 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 any 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 Public Investors link or call us at (713) 292-5400.

Now I'll cover our operating results for the fourth quarter and year, but I would like to start with our life-to-date activity. Since our IPO in November 2012, we've invested approximately $2.8 billion in over 220 companies and received approximately $1.8 billion of repayments, while maintaining stable asset quality. We've paid $333 million in dividends to our investors, which represents $18.27 per share to an investor in our IPO in November 2012, which was offered at $15 per share. In the fourth quarter, we generated $0.29 per share of GAAP net investment income and core net investment income was $0.29 per share also, which excludes excise taxes.

During the quarter, we also gain we also realized gains of $5.5 million on 5 equity positions, which resulted in total realized income for the quarter of $0.48 per share. Net asset value per share decreased $0.23 during the quarter from 2 components. The first was $0.11 per share of dividend payments that exceeded earnings, which was necessary to continue to pay out spillover income balance from 2024. The second was net realized losses of $0.12 per share related primarily to 2 debt investments. On the capital front, on December 31, we repaid the remaining $50 million of the $100 million of 2026 notes prior to their March 2026 maturity. Turning to portfolio and asset quality. We ended the quarter with an investment portfolio at fair value of $1.01 billion across 115 portfolio companies, unchanged from $1.01 billion across 115 portfolio companies as of September 30, 2025.

During the fourth quarter, we invested $34.1 million in 4 new portfolio companies and had $18 million in other investment activity at par. We also received 4 full repayments totaling $37.9 million, Five equity realizations totaling $7 million, which resulted in a realized gain of $5.5 million and received $9.1 million of other repayments, both at par. At December 31, 99% of our loans were secured and 92% were priced at floating rates. The average loan per company is $8.8 million, and the largest overall investment is $19.2 million, both at fair value.

Substantially all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 81% of our portfolio is rated a 1 or 2 or on or ahead of plan. and 19% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. We added 1 new loan to our nonaccrual list and removed another from the nonaccrual list during the quarter. Currently, we have loans to 5 portfolio companies on nonaccrual, which comprised 7.5% of the total cost and 4.1% of the fair value of the total investment portfolio, respectively, which represents a slight increase from the prior quarter. We're always focused on diversification, including by industry sector. We have investments in 24 separate industry sectors.

And with that, we have approximately 10% in high-tech industries. Over the last months, there have been a lot there's been a lot of press about the impact of artificial intelligence on large-scale SaaS software industry, which has resulted in concern around investment firms exposure, both private equity and private credit to the sector. Let me first say, Stellas does not have exposure to the large-scale SaaS software sector. Rather, we have a small number of loans to software companies that are related to the SaaS space but are better characterized as industry-specific tech-enabled solutions.

This group consists of 5 companies out of 100 portfolio companies with debt investments and comprises 6.8% of the loan portfolio the largest position is 1.8%, both at fair value. Each 1 of these companies provides integral products and services that are embedded in the businesses that they serve. They are using AI to enhance the software and information they provide and, in many cases, are dealing with proprietary data. A common theme for these software businesses is that they are using AI to enhance their value proposition rather than a customer being able to do this all internally with AI.

In summary, we believe AI will enable these in many of our portfolio companies across a variety of industry sectors to improve the speed and quality of information, and we do not believe that AI will supplant the need for what our portfolio companies provide. Let me add. Each of these companies is owned by a substantial private equity sponsor is well capitalized with material equity below us, has modest leverage and EBITDA that is stable to increasing. The risk rate of these companies is either a 1 or 2, meaning on or ahead of plan. We will continue to monitor these companies closely as we do with all of our portfolio companies. Importantly, looking forward, we would be surprised if AI had a material negative impact on the recovery of our loans to these companies.

And now I'd like to turn the call back over to Rob to cover the outlook and a few additional topics.

Okay. Thank you, Todd. As we look ahead to the first quarter of 2026, I'll cover 4 topics: first, the outlook for Q1 and Q2. The recent announcement concerning our advisers' plans to join Rigepost's Capital platform a $20 million share buyback program and our view on the private credit sector overall. So outlook for Q1 and Q2. Today, our portfolio is approximately $996 million across 115 portfolio companies. With the turbulence that we've all been observing, M&A activity has slowed some after a very robust fourth quarter for us. Therefore, we expect to end the first quarter of 2026 with a portfolio at the current level or slightly less. .

We expect continued equity realizations in Q1 of approximately $2 million, resulting in a $1 million realized gain. Regarding dividends. In January, we declared the dividends for the first quarter of 2026 of $0.34 per share in the aggregate payable monthly. We expect to keep the dividend at this level of $0.34 for the second quarter, which will be declared in early April, of course, subject to Board approval just looking at our stock price today that's a little under $9 a share. The second quarter dividend is a 15% annualized yield.

Now turning to Ridge Post. On February 5, we announced that our external manager, Stellus Capital Management agreed to be purchased by Ridge Post Capital, formerly known as P10. Ridge Post is a leading private capital solutions provider that similarly serves the lower middle market. Stellus will continue to be managed by its current partners who will retain control of its day-to-day operations, including investment decisions and investment committee processes. We like to say there will be no changes on how we operate. Todd Huskinson will continue to be Stellus Capital Investment Corporation CFO, and I will continue to serve as the company's Chairman and CEO.

Now turning back to Ridge Post. Ridge post Capital, which has more than $43 billion in assets under management, invest across private equity, private credit and venture capital and access constrained strategies with a focus on the middle and lower middle market. We believe that our adviser joining the Ridge Post Capital platform is a very positive development for a number of reasons. The most important of which is the anticipated investment opportunities that Ridge post Capital open up for Stellus Capital Investment Corporation and our affiliates. Ridge Post's largest strategy is a lower middle market private equity firm specializing in North American small buyouts through primary, secondary and co-investment vehicles known as RCP Advisors, which is based in Chicago.

RCP advisers has invested with more than 250 lower middle market private equity firms and is typically the largest or 1 of the largest LPs and the PE funds in which they invest. As you will recall, all of our lending is to companies owned by lower middle market private equity firms. As part of Bridgepost Capital, we expect to see a material increase in investment opportunities coming from those PE relationships, many of which we do not currently have. Given the nearly identical size profile of the RCP sponsor relationships and our sponsor relationships, we think we have a meaningful opportunity to increase the top of our funnel for new origination opportunities.

We are excited by this new growth opportunity, and we believe it will benefit all shareholders. This transaction with Ridge Post Capital is expected to close in mid-2026, subject to BDC pore and BDC shareholder approvals and other customary closing conditions. Let me add, some of our shareholders have asked, are you selling Stellus Capital Investment Corporation, our public company, take our SCM to Ridge post capital, we are not. Stellus Capital Investment Corporation will remain publicly traded, our leadership will remain the same, as I mentioned earlier, and our independent board members will also remain in place.

Our shareholders will continue to own Stellus Capital Investment Corporation, SCM symbol stock. Now turning to share repurchase. Our Board of Directors recently approved a stock repurchase program of up to $20 million. This decision reflects the current trading level of our shares, which are approximately a 30% discount to recently reported a net asset value. Historically, our stock has traded at or above NAV for many years.

At the current price levels, we believe repurchasing shares represents a compelling opportunity to generate meaningful value for our shareholders. This authorization will remain in place for at least 1 year. And finally, I'm going to turn to private credit today. Given the significant press coverage of perceived stress in private credit, we thought this would be a good time to share our view of private credit overall. I'll first cover our strategy versus larger managers; second, a reminder of our history in private credit and finally, the importance of private credit for the U.S. economy. Stellus Capital focuses on direct originated senior secured loans to lower middle market private equity-backed companies rather than participating in large, broadly shared loans are nationally syndicated credits.

This represents a fundamental difference between the Stellas platform, including Stellus Capital Investment Corporation and many of the larger private credit managers and larger BDCs. Larger managers are lending to all types of companies many without deep-pocketed private equity owners and some of complex capital structures or off-balance sheet vehicles. And now a reminder of our history. First, we're 1 of the longest tenured active private credit managers with a history of investing that is 22 years across 400 companies and $10 billion of deployment.

The Stellas management team has an investing history that has been resilient across multiple macroeconomic cycles, including the global financial crisis of 2008, 2009, and COVID-19, the global pandemic and periods of other market volatility, such as the international tariff disruption of 2025. Second, our asset quality across the portfolio has remained stable over time with a weighted average risk rate of approximately 2%, which corresponds to investments performing on plan. All of our loans and financial covenants and all but 1 of our portfolio companies are backed by a private equity sponsor and all have substantial equity below us at the time the loans are made.

Third, all of our investment vehicles, starting with our public company have the same investment mandate, all lend to the same businesses. We have no competing strategies or distractions. All of our work is focused on doing well for our shareholders and investors. And lastly, fourth, we have a long history of equity co-investments alongside our debt investments. This is where we buy a small piece of equity in the companies we lend money to, usually 5% of the total portfolio at cost the equity co-investments have resulted in substantial equity gains.

For Stellus Capital Investment Corporation, this has generated approximately $98 million of net realized gains life to date with an historical return on equity co-investments of greater than 2.5x. And now I'll turn to the private credit sector more broadly. We believe there is a lot of opportunity for growth in the private credit space, especially in our market, the lower middle market. In our market, there is a tremendous amount of dry powder in lower middle market private equity firms who are our client base, if you will, when they buy private businesses, we are there to finance the purchases.

The best data we have would indicate there is approximately 10x the dry powder to invest by lower middle market private equity versus the amount of dry powder and lower middle market private credit providers, we will be there to provide the financing. Finally, for private credit overall, the need for this capital is very large. Why? Private credit in our country fills the large gap that commercial banks cannot provide. The reason for this is commercial banks are typically levered 10 to 11 times and are mostly lending out retail and commercial deposits.

As a result, the risk profile is very tight, and they are highly regulated to safeguard these deposits. Private credit providers are not highly levered typically 1 to 2x, and we are not investing bank deposits. We're investing equity capital, coupled with modest institutional leverage. I will say both banks and private credit providers are focused on protecting their capital basis. Private credit though has the flexibility to provide more leverage, earn higher returns and can participate in the equity upside of our portfolio companies. Together, private credit and commercial banks are the growth engine of our U.S. economy. So the takeaway for our shareholders is we have a long history of investing in private credit. We think there's a lot of opportunity to invest going forward in the lower middle market where we've always been and also to provide strong return strong returns for our shareholders.

And with that, I recognize today's call was longer than normal. We hope that it was helpful to better understand our business and the industry we operate in. And with that, Paul, please open up the line for Q&A.

[Operator Instructions] The first question today is coming from Christopher Nolan from Latin Dauman.

Thanks for the detail, Rob. Given the change in the ownership of the external manager, will there be and a share repurchase initiative Will there be any change in the leverage targets for SCM?

Thank you. No, good question. There will not be a change in our targeted leverage for the for SEM, which as you'll recall, is approximately 1:1 on the regulatory test and approximately 2:1, including SBIC debentures.

Okay. And then turning to SBA for a second. What's the remaining capacity in SBA? And should we be looking at that to be a growth engine for you guys in the first half of the year?

Yes. So we ultimately, we have quite a bit of new capacity that we'll have in the SBA. We as you may have noted in Todd's remarks in our press release, that we paid down $39 million of debentures on March 1 and under our first license, which brings the total of $65 million so that would be 1 example. We have $65 million of new debentures that we'll be able to take out plus more when we obtain our third license. So it's a good question. A lot of growth from here given that we've repaid $65 million of debentures so far.

Great. And final question for I noticed that you've done some subsequent investments to Venbrook and EH Real Estate Services both of which are nonaccrual. Can you give a little detail on what's going on with those guys?

Yes. Yes. So of course, we don't talk much about the detailed individual companies, but these are companies that have been working with others to provide additional capital to see them through kind of a rough spot. The EH Partners is a realtor business based in the Midwest and Benbok is an insurance company insurance agency. But these are small advances to further the company's operations during a little bit of a slow period. .

The next question will be from Brian McKenna from Citizens.

So just a bigger picture fundraising question for you guys as it relates to the broader Stellus platform, what are you hearing from some of your institutional investors in terms of having some incremental exposure to the lower middle markets and moving some capital away from the large cap managers in the upper middle markets and I'm curious, we'll see how the environment plays out from here. But given maybe the dynamic there, could we actually see a scenario where fundraising at Stellus starts to accelerate over the next year or so?

Yes, thank you for the question. So we've definitely seen for the overall Stellus platform and increasing interest in the lower middle market where we operate. is coming from large institutional investors that have noticed in some of their larger managers, some overlap in different credits and found our type of investing interesting. So we've definitely seen an uptick in that area, and this will be, of course, across the Stellas platform. .

Yes. Okay. Got it. That's helpful. And then, Rob, you've clearly done a great job managing the business throughout a number of cycles and operating environments over the past 20 years or so I think you have a great perspective as well. And so while each cycle and period of dislocation is always a little bit different. History always rim. So what past experiences can you lean on today to make sure you're prudently managing your business in the current environment?

Yes. So I'd say historically, it's important in times like this to not be over levered which we're not. And I would add that the private credit industry is not. So modest leverage is helpful in these times. Certainly, we're very focused on strong underwriting throughout periods. And you may have heard us say before that when we look at a new company, we're thinking we're going to have a recession within the first 18 to 24 months, whether we are as another matter, but we underwrite to that.

So we'll continue that diligent underwriting, expecting if this company got into trouble or there was a cycle economic cycle down, how would it behave or how does the sector behave. So I think strong underwriting will continue for us. And then I'd say we'll be very selective about opportunities. My guess is, too, that you may see some improved pricing in our sector. In other words, spreads may widen a little bit to the benefit of our shareholders.

But I'd say throughout our investing period, this goes back 20-plus years. What we have found in our part of the market, again, the lower middle market is that we've always had large equity checks below us. We've always had financial covenants and therefore, well-capitalized businesses from the start. So again, I think it's the same that we've been doing historically. But we'll be very focused and cautious if we think things are turning we think there's a lot of noise in the system today that is less about the quality of the portfolios and private credit.

The next question will be from Justin Marca from Lucid Capital.

On for Eric today. I just want to talk a little bit more about the Ridge post transaction. It sounds like a good fit for your investment strategy. When do you expect to see the full benefits of increased deal flow and opportunities should the deal go through in mid-2026.

Justin, thank you for joining. So again, as you pointed out, that subject to the various approvals, this transaction would close in the summer of this year, we've had initial conversations with the RCP subsidiary, if you will, Ridge Post, and we think there's a great opportunity there. So our hope and plan would be that we get to this summer and we'll hit the ground running. And I think that collectively, we think there's lots of opportunity to open up. So I would say that not to be overly optimistic, but I would imagine this will kick in, in the second half of 2026.

Okay. All right. That's great. And then looking at pick income, kind of been a significant increase year-over-year. Are these portfolio companies prioritizing growth? Or are there operational issues? And what kind of strategies can you implement to get borrowers back to cash pay?

Yes. So although our PIK income has increased, we're still at the low end of our competitor set. So when you see pick income from us, we don't go into a new loan. And by the way, we understand in the upper market, the lenders will go into a new credit with some PIK income. So we do not at the outset, everyone all the loans are cash pay. So if you see PIK income with us, it would mean that the company needs some relief from a cash flow perspective.

And typically when we have some PIK aspect to the income it means that the private equity owner is contributing new capital. So this, we think, is a good trade for both parties. So it turns then that for that pick to come down, it will be that those companies that need a relief have improved their performance or we've exited the investment. In other words, the company has been sold or refinanced. So anyway, that's the nature of our PIK income not something that's planned on the front end.

Okay. And then last 1 for me. Just on the new base distribution, still kind of above the 4Q NII run rate, what sort of levers can you guys pull to get earnings back to or above the new distribution? Or is there a potential to rightsize the distribution rate later on this year?

Yes. So we're striving to improve the NII. So I would say that SOFR stays where it is, which perhaps will for a while, this will be helpful to us. The new leverage that we would received under 1/3 license from the SBA. We'll get the portfolio back up. Again, as I mentioned, quite a bit of increased portfolio that will result from our third license getting recapitalized. So this would be helpful as well. And again, we always strive to receive the best returns on the loans we're making.

And so we'll continue to work on that, but it would be a combination of things. In any event, though, we do have a fair amount of spillover from last year. And so as a result, we'll have this level of dividend at least that I said through the second quarter. and we'll reevaluate I have more to talk about it this summer as the as we get our hope we get into our third license with the SBA.

And the next question will be from Robert Dodd from Raymond James.

A lot of my questions have been answered, and I appreciate the color you gave at the beginning on how much exposure you've got to software or AI risk asset that Kind of feels like so last month at this point. On something, what would you say your exposure is to in the portfolio to higher energy prices. Obviously, I mean, oil is up, could go meaningfully higher potentially. We don't have a lot of direct oil and gas production exposure, obviously, but there is feed through to other areas in the economy if oil prices do continue to revise or spike again, et cetera. So could you give us any color on what the exposure is in the portfolio to that kind of issue?

Yes, Robert. So first, as you indicated, we have no direct exposure to the oil and gas industry. I would say that we also, as a matter of underwriting, have a handful of principal tenants, 1 of which is to not have commodity price risk exposure. So this would transcend direct oil and gas exposure. So I think that the larger impact would be just the impact on the consumer. If this started to cause consumer stress that we do have some businesses that are exposed to the consumer spending, but I'd say not a material amount. .

So don't expect any material impact, certainly directly with companies, it would end up being more of just is it caused some change in the overall economy which my personal opinion, I would not expect, not to get into the Warner run, but I would expect this will probably moderate over time. But again, don't expect it maybe in summary, just don't expect to have a material impact on the portfolio.

Got it. On kind of on the more stressed assets in the arc you have, do you have right now a kind of expectation Yes. about like the time frame for resolution of some of those? Because obviously, to that point right now, there's a decent slug of the portfolio that's not income producing and maybe could be again at some point in the future. But what's the kind of time line there?

Robert. The this would certainly course range by individual companies. So we'll get into that specifically. But I would say that we're having some that are coming off nonaccrual and we did 1 in the fourth quarter, they came off nonaccrual. So I think you'll see a gradual change over the next 12 to 18 months with regard to the portfolio. I would say that if something is nonaccrual, it's being or has been restructured and that we as a lender group and then typically, the owner is they're not able to pay interest, we're looking for exits to monetize the position, reinvest that capital and then have earnings on it again.

So but I think naturally, it's typically a year to 18-month process as you go some may take longer, some may take shorter. So I can't cover specifics, but a gradual resolution, I would say, throughout 2026 and into 2027.

Got it. If I can 1 more kind of just a general question. I mean you mentioned you might see improved pricing. Obviously, the marketplace has been extremely competitive over, call it, the last 24 months with spreads coming down. And there's some early signs maybe that's going to move. I mean what's your I would say confidence, but really it's a crystal ball question. What's your confidence that spreads will, in fact, widen sustainably over the next year or 2 versus do you think the near-term indications on that. Is that just a short-term phenomenon? And I realize there's a really tough question, but any thoughts there would be appreciated.

Sure, sure. So first, in terms of so the public, if you will, the loan indices have widened materially over the last 60 days but we have not seen that in the private market that we operate in yet. This will be driven, I'd say, by more than 1 factor. One would be capital flows appears to be less capital coming to the industry, the sector currently.

The next would be perceived risk and discipline by the underwriters. So unfortunately, I can't predict whether it will occur but certainly has the ingredients of what we're observing to cause spreads certainly not to get tighter and potentially to widen. But again, public markets are reflecting it. have not seen it yet in the private area where we operate. But certainly, the ingredients for it are there.

There were no other questions at this time. I would now like to hand the call back to Robert Ladd for closing remarks.

Okay. Thank you, Paul, very much, and thanks, everyone, for joining the call. Thank you for your support, and we sure look forward to speaking with you again in early May as we report the first quarter.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Good morning, 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 third fiscal quarter ended September 30, 2025. [Operator Instructions] As a note, this conference is being recorded today, November 12, 2025. 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, Ali, and good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30, 2025. Joining me as usual this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements and will start us off with a review 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 any 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 Public Investors link or call us at (713) 292-5400. Now I'll cover our operating results for the quarter. I would like to start with our life-to-date activity.

Since our IPO in November 2012, we've invested approximately $2.8 billion in over 215 companies and received approximately $1.8 billion of repayments, while maintaining stable asset quality. We've paid $318 million of dividends to our investors, which represents $17.75 per share to an investor in our IPO in November 2012, which was offered at $15 per share.

In the third quarter, we generated $0.32 per share of GAAP net investment income, realized income of $0.42 per share and core net investment income was $0.34 per share, which excludes estimated excise taxes. Net asset value per share decreased $0.16 during the quarter, which had 2 components. The first was $0.08 per share of dividend payments that exceeded earnings, which is necessary for us to continue to pay out the spillover balance from 2024.

The second component was net unrealized losses of $0.08 per share related primarily to 2 debt investments. During the quarter, we had a realized gain of $2.8 million on an equity position. The realization had no impact on net asset value because it had already been recorded as an unrealized gain, which was reversed in the third quarter.

Finally, during the quarter, we issued approximately 531,000 shares for $7.4 million of proceeds under our ATM program. Year-to-date, we've issued approximately 1.5 million shares for $20.6 million. All issuances were above net asset value.

So turning now to portfolio and asset quality. We ended the quarter with an investment portfolio at fair value of $1.01 billion across 115 portfolio companies, up from $985.9 million across 112 companies as of June 30, 2025. During the third quarter, we invested $51.3 million in 5 new portfolio companies and had $12.5 million in other investment activity at par. We also received 3 repayments totaling $29.8 million; 1 equity realization totaling $2.8 million, which resulted in a realized gain of $2.8 million and received $6.4 million of other repayments, both at par.

At September 30, 98% of our loans were secured and 90% were priced at floating rates. The average loan per company is $9.2 million and the largest overall investment is $22 million, both at fair value. 99% of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 82% of our portfolio is rated a 1 or 2 or on or ahead of plan, and 18% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. We did not add any new loans to our nonaccrual list during the quarter. And currently, we have loans to 5 portfolio companies on nonaccrual, which comprise 6.7% of the total cost and 3.7% of the fair value of the total loan portfolio, respectively, which represents a slight decrease from the prior quarter.

Turning to capital. During the quarter, we amended and extended our revolving credit facility, which reduced the spread over the 30-day SOFR rate from 2.6% to 2.25% and extended the maturity date by 2 years to September 2030. We also upsized the total committed amount from...

[Technical Difficulty]

Apologies, ladies and gentlemen, we have momentarily lost our speaker line. [Operator Instructions]

Okay, everyone still there, Ali.

Yes, sir. Glad to have you back.

Okay. Sorry for the technical difficulties. I think I would suggest why don't we start from the beginning and let you know where we stop.

Sir, the last I heard, I believe it was during your financial report for the year.

Which was kind of lengthy probably.

So I'm going to suggest, I apologize for this. Why don't we plan to go back, we'll start -- restart with operating results. Okay. Todd, please, if you will.

Okay, sure. In the third quarter, we generated $0.32 per share of GAAP net investment income, realized income of $0.42 per share and core net investment income was $0.34 per share, which excludes estimated excise taxes. Net asset value per share decreased $0.16 during the quarter, which had 2 components. The first was $0.08 per share of dividend payments that exceeded earnings, which was necessary for us to continue to pay out the spillover balance from 2024.

The second component was net unrealized losses of $0.08 per share related primarily to 2 debt investments. During the quarter, we had a realized gain of $2.8 million on an equity position. The realization had no impact on net asset value because it had already been recorded as an unrealized gain, which was reversed in the third quarter.

During the quarter, we issued approximately 500,000 shares for $7.4 million of proceeds under our ATM program. Year-to-date, we've issued approximately 1.5 million shares for $20.6 million, all of which were issued above net asset value. We ended the quarter with an investment portfolio at fair value of slightly over $1 billion across 115 portfolio companies, up from $985.9 million across 112 companies as of June 30, 2025.

During the third quarter, we invested $51.3 million in 5 new portfolio companies and had $12.5 million in other investment activity at par. We also received 3 full repayments totaling $29.8 million, the equity realization I mentioned previously for $2.8 million, which, as I mentioned earlier, was a $2.8 million realized gain and also received $6.4 million of other repayments, both at par.

At September 30, 98% of our loans were secured around and 90% were priced at floating rates. The average loan per company is $9.2 million and the largest overall investment is $22 million, both at fair value. 99% of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned.

At fair value, 82% of our portfolio is rated a 1 or 2 or on or ahead of plan and 18% of the portfolio is marked in an investment category of 3 or below, meaning not meeting plan or expectations. We did not add any new loans to our nonaccrual list during the quarter. Currently, we have loans to 5 portfolio companies on nonaccrual, which comprise 6.7% of the total cost and 3.7% of the fair value of the total loan portfolio, respectively, which represents a slight decrease from the prior quarter.

Turning now to capital activity. During the quarter, we amended and extended our revolving credit facility, which reduced the spread over the 30-day SOFR rate from 2.6% to 2.25% and extended the maturity date by 2 years to September 2030. We also upsized the total committed amount from $315 million to $335 million. On September 25, we issued an additional $50 million of the 7.25% 2030 notes at a premium yielding 6.94%, bringing the total 2030 notes issued to $125 million. We'll use the proceeds to repay the 2026 notes prior to their maturity.

And with that, I'll turn it back over to Rob to discuss the overall outlook.

Okay. Thank you, Todd. As we look ahead to the fourth quarter of 2025, I'll cover portfolio growth, equity realizations and dividends. As Todd noted earlier, we now have an investment portfolio in excess of $1 billion across 115 companies. We continue to be very active. And although we expect meaningful payoffs in Q4, we'll likely have a portfolio in excess of $1 billion at year-end. For equity realizations, we expect $5 million for Q4 and possibly another $5 million in Q1 of '26. Estimated gains associated with these realizations are $3.8 million in Q4 and $3.3 million for Q1. And with respect to dividends, we declared, as you know, a $0.40 dividend for Q4.

And so with that, you've probably heard some of this twice. So thank you for bearing with us. But at this point, Ali, let's open it up for questions.

[Operator Instructions] Our first question is coming from Erik Zwick with Lucid Capital.

I didn't have the benefit of hearing the full presentation 2 times. Could you just repeat the expectation for equity realizations in fourth quarter and first quarter? I missed that, couldn't type fast enough.

Yes. No worries, Erik. Yes. So projecting $5 million of realizations in Q4, of which we've already received $1.1 million and a similar number of $5 million for Q1 of '26. And if those come to pass, the expected gains would be $3.8 million for Q4 and $3.3 million for Q1 of next year.

Perfect. And just you had a very active quarter in terms of new originations and a nice healthy mix between new and add-on. And I know last quarter, you mentioned that you really started to see a pickup in kind of the pipelines and new activity. So just curious today, as you look at the pipeline, how it looks in terms of mix between new and add-on opportunities? And if you could maybe add some comments, too, just in terms of what you're seeing in terms of rate and structure as well.

Yes, I'd be glad to. So with respect to -- and we have had quite a few follow-ons, glad you've noted that. I'd say that probably continue to see the same mix, as you may know or have identified that we have quite a few delayed draw term loans in the portfolio that are undrawn. So those are the -- typically the things that are funding that are follow-ons. So we would expect the pace of both to continue very active this quarter and really, it's picked up meaningfully since 4th of July overall for the year.

So I think that we expect both to occur. But certainly, the majority of the fundings will be on new investments. Relative to rating structure, so we've not seen any change, and this would really be for the entirety of our investing in terms of meaningful capital structures. So typical equity check is at least 50% of the acquisition. Therefore, our debt is typically 50% or less, more likely in today's case, 40% debt, 60% equity. Leverage quotients are running at 4x EBITDA or less.

So those structures all are really strong. We continue to have important covenants across all of our loans. But we are seeing some tightness in spreads. It's a competitive market. Again, we have competition, but we're very active. So seeing some reduction in spreads. As you know, from a year ago, 6 over SOFR or so and now 5 over SOFR and starting to creep down just a little bit under 5. But that's -- we're seeing that throughout the industry. I think you guys are observing that in other companies. But a meaningful amount of capital to invest, very active. We -- fortunately, we continue to obtain equity co-invest in many of the loans we make. And as you could tell from my earlier remarks, those continue to pay off for us.

That's very helpful. And just last one for me. We continue to see some mixed signs and maybe some mixed expectations for the economic trajectory as well. As you look through your portfolio, and you noted, I think it's 82% of the portfolio is 1 or 2, so on or ahead of schedule. Just are you seeing any increasing weakness or even signs of concern in any segments or industries of your portfolio at this point?

We're really not. So the -- any credit issues we have had are really based on company-specific issues. So don't see a trend in that way. And -- so more company specific. And fortunately, most of the companies are doing well.

[Operator Instructions] Our next question is coming from Christopher Nolan with Ladenburg Thalmann.

Todd, on the new facility, was there any change in the advance rate? What I'm really interested in is whether or not the banks are getting increasingly concerned in terms of the private credit environment?

No, no, not at all. No, they were -- there's no change in the structure of the credit facility in terms of advance rates. And in fact, we have other relationships with these -- with the banks and other things and had some additional banks come into this facility as it is. And so no -- we really were pleased with the bank group and their response to the changes. So no change at all. We didn't sense any issues.

Great. And what is the current status on the third SBA license, please?

So as we reported last quarter, we received a greenlight letter and are kind of in the spot where we're waiting for the third license to be issued, which we don't know exactly when it happens, but we would expect it relatively soon. So we can -- we don't have any new news on it, though.

And how much capacity would that add, levered?

Well, so today, we have $295 million of debentures outstanding and the total funds family is -- the maximum is $350 million of debentures. So think of it as another $50 million or so, a little over $50 million, which, of course, is dependent upon those loans qualifying for SBIC capital. But it would add additional capital to us. We also have to fund that license with some equity from the parent, which we would do through payoffs of the existing debentures and other sources.

But I think in summary, $50 million more of capacity.

Yes, that's right.

Okay. And then final question. As I recall, about half of your deal origination is SBIC compliant. Is that correct?

That's correct.

Thank you. As we have no further questions on the lines at this time, I would like to turn it back over to management for any closing remarks they may have. I apologize, sir, we've had a late question come in, I do apologize, from Robert Dodd with Raymond James.

In your prepared remarks, I mean, you mentioned potential for significant repayments in Q4. I mean is that going to generate like any onetime income, accelerated prepayment fees, et cetera, et cetera, that's one. But could you also tell us, I mean, like what's the driver? Obviously, some of the equity realizations. Is it repricings? Can you give us an idea of like what's the underpinning for significant repayments in Q4.

Sure. It's -- I'd say, mostly sales of businesses. And then it could be a case where someone is refinancing, but getting down to like bank pricing where it fits for a bank. But I think it's mostly sales of companies.

Got it. And then on the spread environment, I mean, yes, I mean, it's kind of across the market. What do you think within your segment, which obviously are smaller, relatively smaller companies [ than the ] upper market. What's the primary driver here? I mean I've heard that it's not necessarily the large players coming down market, but there's new capital formation as well. I mean what do you think is the overall driver pushing down the spreads you said now, in some cases, below 500. And do you think -- do you think they ever go back?

Yes. So great question. So certainly a competitive market and some credit providers are willing to lend at lower rates. So I think that drives it. Will it go back up? It likely will. We've seen -- as you know, we've been in business for over 20 years. We've seen a number of cycles, and you can see it go the other way. But the good news is that a lot of good capital in the system, both at the private equity firms who we're supporting and in private credit. So a healthy financial system around private credit, but they can certainly go the other way.

I am going to be very cautious here and see if we have any further questions come into queue. Okay. Gentlemen, it appears we have no further questions at this time. So I'll hand it back to management for closing remarks.

Okay. Very good. Well, thanks, everyone, for joining us. Thank you for the support of our company, and we look forward to give you an update in the spring, I believe it will be in early March, we're reporting the results of the fourth quarter and the 10-K as well. Many thanks.

Thank you. Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.