Stellus to recapitalise its small business loan subsidiary

The Texas-based firm’s net asset value rose to $13.84 per share in Q1, up from $13.69 per share at the end of 2016.

Stellus Investment Capital Corporation plans to capitalise its small business investment company with proceeds from equity sales last month, the company said on Friday’s first-quarter earnings call.

Robert Ladd, chief investment officer at the business development company, said that the firm issued 3.1 million shares at $14.10 per share in April, resulting in net proceeds of $43.3 million.

The firm plans to use $37 million of that total to fully capitalise its subsidiary Stellus SBIC, which is licensed to provide government-guaranteed loans to small businesses. As of 31 March, the subsidiary had $38 million in capital, according to a filing with the US Securities and Exchange Commission.

Ladd said the firm will have “a real incentive to more fully utilise the SBIC capital and its debentures, given the current interest rate environment” this year. He added that more than half of the firm’s investment activity this year will likely be SBIC-eligible.

Some of those new equity proceeds were also needed to pay off part of the firm’s bank credit facility, he added. SunTrust bank and other lenders provided the facility in 2012, the SEC filing shows. And as of 31 March, the facility’s outstanding debt totaled $102.5 million.

During the three months prior to the equity issuance, Stellus raised its net asset value during the first quarter to $13.84 per share, up from $13.69 per share at the end of the year, earnings results show. The firm’s net investment income was $4.14 million over the quarter, slightly up from $4.09 million in Q4. 

Stellus is bullish on the US lower mid-market, Josh Davis and Dean D’Angelo, founding partners and co-heads of private debt, told Private Debt Investor in December. They added that the types of deals they see in that space are more attractive than those in the upper mid-market or in the broadly syndicated loan market, due to the retreat of banks and syndicated lenders.

As of 31 March, the BDC’s portfolio totaled 44 companies, with an average EBITDA of $27 million, and average leverage ratio of 4x, earnings results show. The firm had a total of $93.32 million in senior secured first lien loans, $159 million in second lien, and $77.11 million in unsecured debt. Stellus is also raising two new pooled investment vehicles, Stellus Credit Fund II and Stellus Credit VCOC Fund II, according to separate SEC filings. Credit Fund II has raised a total of $5.5 million across two feeder funds, while VCOC Fund II has raised a total of $172.78 million.