What Stellus Capital Investment (SCM) Said on Its Q3 Earnings Call

Key Points

• Net asset value fell 3%, or $0.40 per share, as $0.48 per share in realized and unrealized losses—largely company-specific write-downs—more than offset the benefit of share repurchases.
• Stellus reported GAAP net investment income of $0.25 per share and core income of $0.26. Management said it expects to earn and cover its $0.25 quarterly dividend with net investment income.
• Credit quality remains a concern: 22% of the portfolio was rated below plan, and six companies were on non-accrual. Management is prioritizing reductions in non-accrual exposure, while improved deal flow and expanded SBIC financing could support future portfolio growth.

Stellus Capital Investment NYSE: SCM reported a decline in net asset value in the third quarter as company-specific write-downs weighed on its portfolio, while management said it expects net investment income to support its quarterly dividend.

The investment company generated $0.25 per share in net investment income under generally accepted accounting principles for the quarter ended September 30, Chief Financial Officer Todd Huskinson said on the November 10 earnings call. Core net investment income, which excludes estimated excise taxes, was $0.26 per share.

Net asset value fell $0.40 per share, or 3%, during the quarter. Realized and unrealized losses reduced net asset value by $0.48 per share, primarily because of write-downs tied to individual company performance. Share repurchases added approximately $0.08 per share, Huskinson said.

Credit Quality and Portfolio Activity

Stellus ended September with a portfolio valued at $966 million across 119 companies, compared with $968 million across 116 companies at the end of June. It invested $37.8 million during the third quarter and received $18.8 million from three full repayments, along with $11.5 million of other repayments at par.

At fair value, 78% of the portfolio was rated on or ahead of plan, while 22% was rated as not meeting plan or expectations. The company added one loan to non-accrual status during the quarter, bringing the total to loans to six portfolio companies. Those loans represented 9.6% of the portfolio at cost and 5.4% at fair value.

Huskinson said non-accruals remained above historical averages and that reducing both the number of affected investments and Stellus’ exposure to them was a priority. He said the company expects non-accruals to return to a more moderate level over time.

Asked about the quarter’s depreciation, Huskinson said several positions were written down, most of them already on non-accrual. Another position was marked down by $4.5 million in the third quarter and paid off at a loss in the fourth quarter. Chief Executive Officer Robert Ladd said the borrower had been marketed for sale by its sponsor and ultimately sold at a discount.

When asked how much depreciation might be recoverable, Ladd said current valuations were management’s best estimate. He said the equity portfolio was more likely to appreciate, while the debt portfolio was properly marked based on available information.

Dividend and Share Repurchases

Ladd said Stellus expects to be “well-positioned to earn” its $0.25 quarterly dividend going forward, citing the trajectory of net investment income, a recent increase in SOFR and management’s outlook for short-term rates and spreads. He also said the company had reduced its spillover income, so the dividend is now covered by net investment income.

Under a $20 million share repurchase program approved in the spring, Stellus had bought 767,880 shares for $6.6 million during 2026 through the date of the call. Ladd described repurchases at a discount to net asset value as attractive but said the company would balance further purchases against liquidity, leverage and its equity base.

He said Stellus would continue investing in new opportunities while considering additional buybacks.

Outlook and Growth Financing

As of the call, the portfolio stood at approximately $951 million across 120 companies. Ladd said new fundings were likely to replace repayments for the balance of the fourth quarter, leaving the portfolio roughly at its current size. He added that the origination pipeline across the Stellus platform had improved since the beginning of the quarter.

The company had grown the portfolio under its third Small Business Investment Company license to $23 million and expected three additional deals to add approximately $25 million by year-end. Ladd said the license permits up to $125 million in equity contributions and access to as much as $250 million in long-term, SBA-guaranteed debentures.

Combined with an increase in the SBA’s debenture limit for a family of funds, those developments could allow Stellus to expand its investment portfolio by up to $100 million over time, Ladd said. He identified recycling capital into the third SBIC vehicle as the mechanism for that potential growth.

Ladd also said one repayment expected over the following two to three months could include an equity gain. He saw no other near-term opportunities in view but said he was optimistic about additional equity realizations in 2027.

About Stellus Capital Investment (NYSE:SCM)

Stellus Capital Investment Corporation NYSE: SCM is a business development company that invests in privately owned, middle-market companies. The company seeks to generate income and, to a lesser extent, capital appreciation by providing financing to businesses that may have limited access to traditional sources of capital. Stellus primarily invests in senior secured loans and other debt investments, while also making select subordinated debt and equity investments. Its portfolio companies operate across a range of industries, and the company generally focuses on established businesses with experienced management teams and the potential for stable cash flow.

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