Stellus Capital: Files Form N-2
Stellus Capital Investment Corporation (SCM) has filed a preliminary N-2 Prospectus with the SEC in preparation for raising up to $200mn in public securities.
“We may offer, from time to time in one or more offerings, up to $200,000,000 of our common stock, preferred stock, subscription rights, debt securities or warrants to purchase common stock, preferred stock or debt securities, which we refer to, collectively, as the “securities.” Our securities may be offered at prices and on terms to be disclosed in one or more supplements to this prospectus. You should read this prospectus and the applicable prospectus supplement carefully before you invest in our securities.”
The BDC Reporter reviewed the document and assesses whether a secondary stock offering or publicly traded Notes or Convertible Debt might be in the offing.
YES AND YES
BDCs often make these expensive filings (although this N-2 consisted almost entirely of SCM’s September 2016 financial filings, and a rehash of Risk Factors from the 10-K).
We reviewed (scanned would be a more appropriate description) for any “Recent Developments”, but there were none.
SCM reports IVQ 2016 results in a couple of weeks, but the filing could go “live” before shareholders are updated.
We know there must very good technical reasons why a public company is allowed to raise new capital using data that is 5 months old and just before an update, but we can’t help feeling shareholders get the short end of the stick in that situation.
In any case, SCM may wait till the year end results are announced, or may do nothing.
Nevertheless, all the signs are SCM will be raising some sort of capital.
The BDC’s stock price is at $13.98, slightly above its NAV at $13.57 at September 2016.
As the chart shows that’s the highest level reached since November 2014.
If the BDC prices an equity offering at $13.60, the current annual distribution of $1.36 represents a nice round 10% yield.
That’s a sweet spot for public investors in the BDC space right now.
NEED THE MONEY
Certainly, a quick look into the dark past of last September shows that the Company is fully leveraged by most standards, and new equity capital would be appropriate.
On an absolute basis, debt to equity was at 1.14 to 1.00.
Like so many BDCs, SCM has an SEC waiver that allows its SBIC debt not to be counted when regulatory leverage is considered.
Without that pesky SBIC debt, Debt To Equity is 0.76 to 1.00, and even that is beginning to push against the BDC’s self imposed limits.
We have every reason to believe investors should be favorable to a new offering.
We refer you to our reference to the distribution and yield.
Also notable is that SCM saw its NAV increase last quarter and is higher than the level at year end 2015.
Moreover, the track record since the initial IPO is encouraging: SCM went public at $15.00 in 2012 and has paid the same unchanged distribution ever since, first quarterly and then monthly.
NOT ALWAYS SO
However, that’s not to say SCM had a trouble free existence as a public company.
Credit concerns bedeviled the BDC through 2016 and in February 2016 you could have bought an out of favor SCM for as little as $7.63 a share.
However, as of September 2016 much of that had been resolved one way or another.
The BDC Credit Reporter reviewed the 43 companies in the portfolio.
We cast a wide net when looking for existing or potential trouble spots.
In the case of SCM we identified 5 Watch List names.
However, when you drill down to the detail the amounts at risk are very modest.
MOVING ON UP…
As we write this, SCM’s stock price is moving up.
Maybe that’s a normal increase or it could be the underwriters juicing up the stock price (as they are allowed to do by buying shares) in preparation for the announcement.
SCM may also be preparing-given its relatively popular status in the markets right now-to refinance its existing publicly traded Notes.
The Notes trade under the ticker SCQ, yield 6.5% and mature in 2019.
However, the Notes have been redeemable on short notice since 2016.
Can the BDC refinance at a rate sufficiently lower to take advantage of the still generous debt markets ?
A 6.0% handle for 5 years is not impossible and would save about $750,000 in interest expense over that period, before transaction costs.
Or, SCM could expand its Baby Bonds with a new issue. (Adding on to the existing Notes-as some have done-seems unlikely given the short period involved).
VIEWS YOU CAN USE
SCM has filed a new Prospectus allowing for up to $200,000,000 of capital to be raised.
The BDC Reporter believes both an equity offering at a price of $13.60 or so and a new Baby Bond Note offering targeting a 6.0% yield over 5 years are likely.
We will check back to see what happened-if anything-in the near term.