Robert Ladd – Chief Executive Officer Todd Huskinson – Chief Financial Officer

Robert Dodd – Raymond James Arthur Winston – Pilot Advisors Bryce Rowe – Robert W. Baird

Good morning ladies and gentlemen and thank you for standing by. At this time, I would like to welcome everyone to the Stellus Capital Investment Corporation’s conference call to report first quarter 2013 financial results. At this time, all participants have been placed in a listen-only mode. The call will be open for a question and answer session following the speakers’ remarks. This conference is being recorded today, Friday, May 10, 2013. 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.

Good morning everyone and thank you for joining the call. Welcome to our conference call covering the three months ending March 31, 2013. 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 the call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and the 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 financial 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 our 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 Stellus Capital Investment Corporation link, or call us at 713-292-5400. At this time, I’d like to turn the call back over to our Chief Executive Officer, Rob Ladd.

Thank you, Todd. We were pleased to have completed our first full quarter of operations in which we generated solid net investment income and recorded a realized gain of $900,000. In addition as previously reported, we declared a $0.34 per share dividend for the first quarter of 2013, which equates to a 9% annualized return based on our initial public offering price of $15 per share. During the quarter, we continued to grow and further diversify our investment portfolio. We funded four new investments in the first quarter which totaled about $31 million, slightly ahead of the repayments received of $25 million during the same period. These four investments averaged about $8 million per company, which has reduced our average investment per company to about 10.7 million at March 31 versus 13 million at year-end and $18 million on average at the IPO date. At this point, I’d like to share some information about our investment portfolio. As of March 31, we have 19 portfolio companies with total investments of approximately $204 million. The debt portfolio makes up almost all of the total with 1.7 million in equity investments. The weighted average yield on the debt portfolio was approximately 12% at quarter end. All of the investments are graded at 2, which means performing as expected on our 1 to 5 scale. We have no non-accruing loans and 17 of the 19 companies are backed by a traditional private equity sponsor. As we mentioned on our last call, we are focused on meeting our strategic goals which include, first, generating sufficient income to cover our quarterly dividend $0.34 per share; second, maintaining high asset quality; and third, selectively growing the portfolio in a diversified manner. Since March 31, we have made four new investments totaling about $41 million. Also since quarter-end, two investments totaling $22.5 million were repaid, which brings the investment portfolio to about 222 million at fair value currently, up from about 204 million at quarter end. With that, I’ll turn it over to Todd to cover the financial results.

Thanks Rob. Our total investment income for the period was $6.4 million, most of which was interest income. Operating expenses totaled 2.8 million for the period and consisted of base management fees of about $900,000, incentive fees of 700,000, fees and expenses related to our credit facilities of 566,000 including interest and amortization of deferred financings, administrative expenses of $200,000, and other expenses of about $400,000. Net investment income was 3.7 million or $0.31 per share; however, that includes accrued incentive fees of $367,000 related to the realized and unrealized gains which are both reported below the line. While GAAP requires these fees to be recorded above the line, we think it’s important to consider net investment income excluding these accruals in order to better match the expense with the revenue that they are related to. Net investment including these fees was $4.1 million or $0.34 per share, which is also the amount of the dividend that we declared and paid in the first quarter. We expect to distribute realized capital gains net of capital gain incentive fees and any realized losses after December 31, 2013. As Rob noted, we had $25 million of repayments including amortization, and we added $31.2 million of new investments during the first quarter. These new investments were a $9.8 million investment in the second lien loan of Source HOV, which is a leading business and knowledge process outsourcing firm; a $9.8 million investment in the first lien loan of Varel International, which is an independent global manufacturer of drill bits of the oil and gas and mining industries; an $8.7 million investment in Grupo Hima, which operates the largest network of tertiary care hospitals in Puerto Rico and is a leading provider of ancillary healthcare services. This investment consisted of a $4.9 million of a first lien loan and $3.8 million of the second lien loan. A $2.9 million investment in the second lien loan of Transaction Network Service, which provides secure mission critical connectivity and gateway services enabling customers to exchange data and complete transactions. We had one repayment during the period which was a $25 million unsecured loan to Woodstream, which provides a range of branded consumer products for the garden, homecare, pest control, and pet care markets. We continue to hold a $10 million loan to Woodstream. As of March 31, 2013, our portfolio included approximately 29% first lien debt, 27% second lien debt, 43% mezzanine debt, and 1% equity investments at fair value. Our debt portfolio consisted of 48% fixed rate and 52% floating rate investments. Our average portfolio company investment was approximately $10.7 million and our largest portfolio company investment was approximately $21 million. Additional information regarding the composition of our portfolio is included in the MD&A section of our 10-Q that was filed yesterday. With respect to liquidity, at March 31, 2013 we had $35 million borrowed under our $115 million credit facility and today we have $53 million borrowed under that facility. The increase in borrowings was used to fund our new investments. With that, I’ll turn the call back over to Rob.

Yes, and Diana, would you now please begin the Q&A session?

Certainly. [Operator instructions] We’ll hear first from Robert Dodd from Raymond James. Robert Dodd – Raymond James: Hi guys, congratulations. A couple of questions obviously on kind of the market. You saw a bit—you know, your portfolio yield compressed a little bit, and we’ve been seeing a lot of that, obviously, with competition. Can give us some kind of—was it driven by competition in your markets and increasing competition in your markets, or was it driven by the choice of opportunities that you chose to close?

Yes, good morning Robert. So yes, the yield has come down a little bit. I think when you look at the composition of the portfolio we’re building, we’ve moved a little bit more to the secured category than the unsecured category. When we started at the IPO, we had roughly 55% of the portfolio in unsecured mezz, and as of March 31 that number is about 43%. So I think that we’ve migrated more to the secured category, a little bit lower yields. We’ve also been participating in what we think are interesting transactions, larger companies, and so that has probably driven the yield down a little bit. Competition-wise, we’ve had a slower quarter with respect to just direct origination as the M&A market, as you’ve probably heard, has been slower here year-to-date. But as that picks up again, we would expect that we’ll be booking some higher yielding assets that we think risk-adjusted make sense. Robert Dodd – Raymond James: Great, thanks. On that – you know, we’re always going to fish – any color on where your backlog stands right now in terms of opportunities? Obviously you closed a pretty good chunk relatively early in the quarter, and then also along with the backlog, any indications from any of your other portfolio companies that they are going to be early payors in terms of early prepayments in the back half of the quarter?

Yes, so we did have a payoff in the first quarter a little bit earlier than we expected. We are expecting at least one of our other portfolio companies to pay off this year, and as I’ve said from the outset, in our portfolio we are expecting payoffs. But we think we have interesting demand and we’re active in the marketplace, and we should be able to replace those that pay off. But only one of the loans do we have a specific idea would pay off this year. Robert Dodd – Raymond James: This year, or this quarter?

This year. It would likely be in the third quarter. Robert Dodd – Raymond James: Okay, got it. Thank you. To follow on that with perhaps Todd – I mean, your disclosure in your release is very helpful in terms of the prepayment premiums, you know, on Securus it looks like a 3-point prepayment premium looks about 300K. On Source HOV, you disclose a 1% prepayment premium, which would be about 100. Looking at the balance sheet, it looks like there’s probably another 200 in accelerated amortization to go with that as well. So is that right, or am I barking up the wrong tree there?

No, the 200,000 is—we had $120,000 of just some other miscellaneous fees on transactions, and then about 80,000 of amortization. So we didn’t have any accelerated amortization there. Where you might see the reflection of that is in our valuation and the increase in portfolio valuation, our models, because of the tightening in the market that you guys just discussed, indicate that the loans have floated up a bit. In a couple of those cases, ones that we know are going to prepay – and you mentioned Securus – that we’ll mark up to the prepayment penalty if we know it’s going to prepay after the reporting period. So it’s a little bit of a combination. Robert Dodd – Raymond James: Yeah, I’m talking about the disclosure for the second quarter rather than the first quarter, and if I look at Source HOV it’s a 10 million premium, amortized cost is 9.8, which means you’ve had 200,000 of pre-amortization to be taken. Wouldn’t that run through the P&L in the second quarter when the prepayment actually happens, as the release says, on April 30?

No, the prepayment penalty that you’ll see there, that will happen in the second quarter. End of the second quarter is when it actually prepays.

And to be specific, Robert, so with respect to Source HOV, we purchased that at 101, paid off at 103—I’m Securus, rather so there is 2 points there; and then at Source HOV, we purchased that at 98, it will pay off at 101, so there is 3 points there. Robert Dodd – Raymond James: Okay, got it.

And some of that, Robert, may show up below the line. Robert Dodd – Raymond James: Right – yeah, yeah. It could be the gain, obviously.

Yeah, depending on what the characterization of what that debt OID was, it was depending on when we got into the loan. Robert Dodd – Raymond James: Right, right. Understood. Okay, I’ll hop back in the queue with a couple of the other questions I had. Thanks.

We’ll take our next question from Arthur Winston with Pilot Advisors. Arthur Winston – Pilot Advisors: Thank you. I have two questions. The amortization and, I guess, also the paybacks are bigger than I would have hypothesized. Of the existing portfolio, what should be a guesstimate of the annualized amortization without paybacks?

Yeah, so just normal amortization is going to be over the life of the loan, and so it depends on when we got into the loan. The loans that we purchased in our initial portfolio, we’d had them for two years or so before, and so if you figure that they have roughly a five-year life, anything related to those would be longer. Now, we purchased all those at par, so there really isn’t any amortization associated with those. On the positions that we have gotten into since the initial portfolio, if you assume that those are a five-year life and on average we might have for the ones we have OID, maybe that’s 2% over a five-year life, it’s that amortization on a weighted average basis over five years.

And excuse me, Arthur, and you’re also speaking about the actual principal amortization? Arthur Winston – Pilot Advisors: Well, I was dividing into two things. In dollars, forgetting these percentages, what might be a range of just amortization on the existing portfolio besides principal payback?

Well we had 80,000—well, amortization, you’re talking about principal paydowns? Arthur Winston – Pilot Advisors: Yes.

Yeah, we have very little of that. So we had 200,000 of our total payoffs. We had 25.2 million of paydowns, 25 of that was on one loan and 200,000 was amortization across the portfolio. So that’s probably— Arthur Winston – Pilot Advisors: I see, and that’s a good proxy of what could happen in the future in terms of the non-principal repayment?

Yeah, I think that’s correct. The only thing is that the number of the loans could be subject to a cash flow sweep that would be tested annually, so you might see some additional amortization, perhaps, in the first quarter of next year. But we wouldn’t expect it to be material relative to the position. Arthur Winston – Pilot Advisors: Good. My other question is what has the board suggested as the appropriate financial leverage for this business when everything gets going? In other words, how much debt should we have so that we can find the appropriate investments, you know, a year or two from now?

Sure, sure. So we think of leverage in terms of—of course, there is the statutory limitation of 1 to 1. We think the upper bounds for us would probably be about 0.7 to 1, and we’ll probably operate between 0.5 to 1 and 0.6 to 1. Arthur Winston – Pilot Advisors: Okay, okay. That’s good. Just wanted to say, if you could just—your (inaudible) are great and the information that comes out in the 10-Q is great. If you could just expand a little bit the investor relations segment on your website, it might be helpful if you’d just take a look at that. That was just a comment, not a question.

Okay.

Thank you, Art.

Yeah, noted. Thank you.

We’ll take our next question from Bryce Rowe with Robert W. Baird. Bryce Rowe – Robert W. Baird: Thanks, good morning. Todd, I just wanted to be clear – could you repeat the fees that you guys—that were part of the interest income or investment income in the quarter, and then what the amortization of the origination fees was?

Sure. So the fees, we had $200,000 of fees and OID accretion for the quarter, so 120 of it was just kind of miscellaneous fees on loans in the portfolio, not upfront fees or—like, we’ve got administrative fees and so forth on some of the loans where we’re the agent. And then we had $80,000 of OID accretion during the quarter, so that’s the 200,000 there. Now the 200,000 we were talking about before with Art was $200,000 of principal amortization that we received on several of the loans during the quarter. Bryce Rowe – Robert W. Baird: Right, got it. Okay. And the maybe you could guys could—obviously recognize that the Source HOV was a new investment for the first quarter. Just maybe some thoughts around that debt having already prepaid or anticipated prepayments.

Yeah, so the Source HOV is a company that we had financed. It’s one of the predecessor businesses that formed Source HOV, so as we looked at it as an opportunity to invest in, we actually purchased that position versus a direct origination. And at the time we looked at it, we started looking at it last fall. We thought it was interesting, did more research because it had combined with another business, and so we ended up buying it into not expecting it to pay off for some time – the maturity was out a good ways. And then somewhat unexpectedly, it was refinanced and we were paid out. Bryce Rowe – Robert W. Baird: Okay, that’s helpful. Thank you. And then just last question – Todd, could you provide any update on the SBA licensing process? I see the language in the Q, it doesn’t look like it’s changed much, but just wanted to hear it from the horse’s mouth.

Yeah, you know like it was last time, Bryce, we really can’t comment on that from the SBA standpoint. I would just tell you that the process is moving along. Bryce Rowe – Robert W. Baird: Okay, thank you. Appreciate it.

Once again, that is star, one if you would like to ask a question. I show that we have no further questions at this time. As a final reminder, that is star, one if you would like to ask a question. Mr. Ladd, I show we have no further questions.

Okay, Diana. Hearing none, we’ll conclude the call. We want to thank everyone for joining us, and we look forward to speaking with you in about 90 days.

This does conclude today’s conference. We thank you for your participation. You may now disconnect.