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Stellus Capital: To Issue New Unsecured Notes

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NEWS

On January 11, 2021 Stellus Capital Investment Corporation (“SCM”) filed a preliminary prospectus relating to the proposed issuance of a new series of unsecured notes.

The amount and pricing is not yet given, but the maturity of the new debt is 2026.

The debt will be institutionally placed.

The prospectus indicates any proceeds will be used to repay the existing Baby Bond with the ticker SCA which has a face value of $48.9mn.

SCA was scheduled to mature 9/15/2022 and is already in the early redemption period.

Also included in the filing is an update about a portfolio company repayment and equity gain as well as up to date balances on the BDC’s Revolver and SBIC debentures.

The prospectus is attached.


ANALYSIS

Impact

This is a preliminary draft of the prospectus but enough information is available to ascertain the impact on the existing Baby Bond.

Furthermore, we will compare the IIIQ 2020 loan balances against the latest numbers and discuss the repaid portfolio company and its impact on the BDC.

Out Of Here

SCM has only one public Baby Bond outstanding in SCA, which bears a 5.75% yield and was to mature in 20 months from now.

SCA was trading at $25.25 before the filing and has dropped slightly subsequently.

IIIQ 2020 Snapshot

In addition, SCM has secured debt and SBIC debentures outstanding for total debt as of September 30, 2020 of $391mn.

Cash amounted to $39mn.

The BDC’s net assets in the same period amounted to $257mn.

Leverage

The net debt to equity on a GAAP basis was 1.37x.

However on a regulatory basis the leverage is 0.75x.

Following the new debt issuance, debt to equity is likely to remain unchanged or increase, depending on how much debt SCM raises.

Savings Plan

If the BDC is able to raise new debt at (1.0%) below the current 5.75% rate, the annual savings will be about $500K per annum.

As of the IIIQ 2020 – and annualizing the number – total interest expense was $15.4mn.

Latest

The prospectus indicates that the balance of SBIC debentures was $177mn as of January 8, 2021.

That’s substantially above the IIIQ 2020 balance of $158.1mn.

The revolver balance has reached $171mn in 2021, down from $184mn. 

Pay-Off

In the IVQ 2020, SCM reported receiving full repayment on the first lien term loan of C.A.R.S Protection Plus, Inc. for total proceeds of $7.4 million.

The BDC also received $0.4 million in full realization on the equity of the company, resulting in a $0.3 million gain.

The company was a performing portfolio company on the books since 2015 and whose first lien debt was priced at LIBOR + 850 bps.

The debt was repaid and the equity gain booked because the company was recently sold to Spectrum Automotive.

Minimal

Overall, the available information suggests SCM’s portfolio size may have increased slightly in IVQ 2020, with a greater proportion of assets in the SBIC subsidiary.

The C.A.R.S. repayment should not have much of an impact on income as the BDC had already assumed the higher value for the equity.


VIEWS

Coming To Pass

We’ve been fretting in the BDC Fixed Income Market Recap about the avalanche of public Baby Bond repayments headed this way, as more and more BDCs tap the capital markets.

SCM – like Capital Southwest (CSWC); Ares Capital (ARCC); Gladstone Capital (GLAD) and others – is being funded for new unsecured debt by institutional investors.

We now have 5 public Baby Bonds on the docket to be redeemed in full or in part in the weeks ahead.

See the BDC Fixed Income Table for the ever evolving details, and the weekly discussion in the BDC Fixed Income Market Recap. 

Positive

Of course, for SCM common stock shareholders this development is a positive as the BDC will be able to reduce its debt service thanks to this refinancing.

A Bridge Further ?

It remains to be seen, though, whether SCM will raise more than the $50mn necessary to repay SCA.

If SCM does so, it would suggest the BDC is intent on further portfolio growth.

Thanks to the manner in which SBIC debentures are not counted as debt, SCM has plenty of room within the BDC regulations to “leverage up”.

Investors will have to decide for themselves whether GAAP leverage of 1.37X is sufficient or not.

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