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

Troy Ward - Stifel Nicolaus Robert Dodd - Raymond James Bryce Rowe - Robert 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 Second Quarter Financial Results. At this time, all participants have been placed on listen-only mode. This call will be opened for a question-and-answer session following the speakers’ remarks. This conference is being recorded today, Wednesday, August 7, 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.

Thank you, Matt. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the second quarter. 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 this 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 the call. I’d also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking 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 are pleased to have completed our second quarter of operations for 2013 and look which we increased both the size of the portfolio and net investment income. In addition, as previously reported, we declared a $0.34 per share dividend for the second quarter of 2013, which equates to a 9% annualized returns based on our initial public offering price of $15 per share. We also received a green light letter from the SBA and since quarter end we have increased the size of our credit facility. During the quarter we continue to grow and further diversify our investment portfolio. We funded eight new investments in the second quarter of approximately $81 million and received repayments of approximately $24 million, which included $1.3 million of amortization during the same period. At this point, I’d like to share some information about our investment portfolio. As of June 30, 2013, we had 25 portfolio companies with total investment of approximately $262 million, which is up from 19 portfolio companies with total investments of approximately $204 million at March 31, 2013. 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 11.7% at quarter end, which is down from 12% at March 31st. From a risk rating perspective, 22 of our investments are rated 2, which means performing is expected on a 1 to 5 scale, two investments are rated at 1, which is ahead of plan, and one is rated at 3 which is behind plan. We have no non-accruing loans and 23 of the 25 companies are backed by traditional private equity sponsor. We remain focused on meeting our goals which I have reported previously which include, first, generating sufficient income to cover our quarterly dividend, second, maintaining high asset quality, and third, selectively growing the portfolio in a diversified manner. This June 30th quarter end we have made one new investment of $14.8 million and received one repayment of $15 million, which leaves the investment portfolio basically unchanged at approximately $262 millions. With that, I’ll turn it over to Todd to cover the financial results.

Thanks, Rob. Our total investment income for the period was $7.3 million most of which was interest income. Operating expenses totaled $3.3 million for the period, consisted of base management fees of $1 million, incentive fees of $0.9 million, seasonal expenses related to our credit facilities of $0.7 million, which include interest and amortization of deferred financing costs, administrative expenses of $0.2 million and other expenses of $0.5 million. Net investment income was $4 million or $0.32 per share. However, that includes an accrual for incentive fees of $100,000 related to realized and unrealized gains, which were both reported below the line. Our GAAP requires these fees to be reported above the line, we think it is important to consider net investment income, excluding those accruals in order to better match the expense with the revenue that they related to. Net investment income including these fees was $4.1 million or $0.34 a share, which is also the amount of the dividend we declared we paid in the second quarter. For the six months ended June 30, 2013, net investment income was $7.7 million or $0.64 per share based on weighted average common shares of 12,042,117 at June 30, 2013, an $8.1 million or 68% -- $0.68 a share on an adjusted basis. As Rob noted, during the quarter we had $23.8 million of repayments, which included $1.3 million of amortization and we added approximately $81 million of new investments during the first quarter. The new investments were $16.7 million investment in the second lien loan of Atkins Nutritionals, a leading weight management brand in the U.S., a $12.8 million investment in the first lien loan of ConvergeOne, an independent integrator of voice communications and collaborations solutions, a $12.2 million investment in the Senior Secured loan of Colford Capital, a specialty finance holding company focused on asset based lending. A $10 million investment in the last-out first lien loan of ProPetro Services, a private oil field services company that provides a broad range of drilling and production-related services to oil and natural gas exploration and production companies, a $7.9 million investment in the second lien loan of Telecommunications Management, an operator of cable systems in small and mid-sized communities in the Midwest. A $7.4 million investment in the second lien loan of Tellular, which provides machine-to-machine monitoring solutions that enable data connectivity over cellular and satellite networks to track, monitor and manage remote assets, a $6.9 million investment in the second lien loan of Livingston International, North America's largest non-asset based customs broker, and finally, a $6.9 million investment in the second lien loan of Securus Technologies, an independent provider of inmate telecommunications in North America. We also had two repayments during the period which were full repayment on our second lien loan to Securus Technologies, at a par plus 3% prepayment premium resulting in total proceeds of $12.4 million and a full repayment on our second lien term loan to SourceHOV at par plus 1% prepayment premium resulting in total proceeds of $10.1 million. As of June 30, 2013, our portfolio included approximately 31% first lien debt, 30% second lien debt, 38% mezzanine debt and 1% equity investments at fair value. Our debt portfolio consisted of 45% fixed rate and 55% floating rate investments. Our average portfolio company investment was approximately $10.5 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 June 30, 2013, we had $91 million borrowed under our credit facility and today we have $87 million borrowed under the facility. On July 30, 2013 we exercise the portion of the equity on the facility and increased the committed amount from $115 million to $135 million. The remainder of the accordion feature up to $150 million remains in place. And with that, I’ll turn the call back over to Rob.

Thank you, Todd. And Matt, you may now begin the Q&A session?

(Operator Instructions) Looks like we’ll be taking our first question from Troy Ward. Please go ahead. Troy Ward - Stifel Nicolaus: Great. Thanks for taking my question. Just really quickly, it’s in the theme in the BDC sector for sure this quarter, as well as previous ones, which portfolio yields coming in. As we look at your new deals in the quarter, my math, it’s about 10.5% and the weighted average coupon excluding those deals and looking at the reminder of the portfolio it’s probably between 11.7 close to 12. How should we view the overall yields in the portfolio going forward?

I think Troy your Matt is about right. We showed new deals added to be in around 10.25 yields that the overall -- that’s noted previously overall portfolio to the 11, mid 11. So one thing that I reported on previously, we have been speaking to diversify the size of our investments. And in so doing, we’re taking on -- and maybe increasing the secured component of the portfolio. And in so doing, we have seen some compression in terms of yield. So publishing to speculate about the future other than just to say that suddenly seen from compression spreads generally and our direct origination business we’re getting, interesting overall yields. But I wouldn’t expect that the yield in the portfolio would change materially in the near term. Troy Ward - Stifel Nicolaus: And you talk about diversifying the portfolio, can you talk about kind of what is the average EBITDA size in your portfolio maybe today and do you see that. How do you view that kind of in your overall plan going forward?

Yeah. So, firmly as of June 30th, the weighted average trailing 12-month EBITDA is about $41 million, which I would say is a little bit higher than we normally operate. We generally look at businesses that have EBITDAs that range between $5 million and $50 million and probably the average is close to the 20 to 25. So this is part of the effort in getting right sizes in terms of investment size, and more secured in terms of looking at larger EBITDA businesses. So as an example or to project forward that would likely overtime become smaller business. And you would expect over time the yields with the increased. But that -- I'd say that’s out of two quarter for sure. Troy Ward - Stifel Nicolaus: And what percentage of the deals in your portfolio now, were you the lead agent in and which ones were you maybe were brought in as part of a club?

Sure. Yeah. I should tell you roughly 50, 50 and historically our business has been much higher than that. And again this is part of this effort to fit portfolio rebalance. We would say overtime, we would expect to be the lead participant or agent or partnering, certainly more a majority of the asset. Troy Ward - Stifel Nicolaus: One more and I’ll hop back in the queue. Just as you see the environment today, again we talked a lot about with different themes about pressure and coupons in such that’s pretty well carried out. What about other pressure you’re seeing in the environment today, whether it’d be on our origination fees or kind of how the structures is falling out with regard to covenants and things like that. Were you seeing any interesting big changes in the environment?

Yeah. So, I think few things. As you look at the larger companies that have access to more public capital and maybe a larger supplied capital, you’ll see leverage being a little bit higher, you’ll see covenants begin less originator in number. But I think in our traditional market which on the direct origination side which are businesses that have less excess to capital, selling of the public markets, that we haven’t seen a meaningful change in the covenant packages that you can achieve. In terms of pricing, again generally they underwent some compression, but we respect to upfront fees. That’s held pretty constant in probably range between 1.5 and 2.5 upfront, and that’s remained pretty constant especially in the kind of lower middle market, where we operate. Troy Ward - Stifel Nicolaus: Great. Thanks, guys.

Thank you.

All right. We’ll take our next question from [Chris Kowalski]. Please go ahead.

Good morning. The question I had was if you can elaborate a little bit more on -- let's assume that you get the SBIC license. Will you be kind of running the two businesses kind of side by side in separately that is the current portfolio, you keep growing with leverage facilities and the loans in the SBA. Are there going to be smaller or higher coupon?

Yeah, Chris, we would probably view it all as one business and…

Okay.

Yeah. And I think over time, we found that roughly 30% or so of the businesses we’ve been involved in would fit the SBIC classification for site. So when we find companies like that in the future, they would be funded out of at least in whole if not in part by the SBIC entity but it’s effectively a dropdown entity. So we see it running as one business. I would say over time it would probably just be their classification. The difference of the business is qualified by virtue of the net income and as network test, some fit some don’t, but we would run it all as one business.

Okay. So they’re not necessarily different size business with different coupons different loan size as in…

Yeah. So, yeah, they would be typically smaller just by meeting the tests under the SBA regulations. So they would be smaller and the pricing would likely be higher. But again we found over time that our business, they don’t qualify that size, we can certainly get interesting pricing as well.

Okay. And then on the income statement, the $630,000 of other income, was that a prepayment penalty or is that up in interest income?

Chris, no those -- that included prepayment penalties on the two loans that prepaid this quarter and…

Okay.

…miscellaneous fees there as well but the majority of it was on those two prepayments.

Okay. And you would view this quarter or do you view that $630,000 as being sort of abnormally high, I assume?

Yeah. Hard to predict when we get prepayments and so I think it’s -- we may get them in the future or we may not. So it’s hard to know. I don’t know if necessarily abnormally high but I would expect we wouldn’t have that every quarter.

Okay. I guess that’s it for me. Thank you.

Thank you Chris.

Thank you, Chris.

And we’ll take our next question from Robert Dodd. Please go ahead sir. Robert Dodd - Raymond James: Hi guys. I’m just a little late. I don’t know if Robert you gave any expected, I don’t know, (inaudible) timeline on which they get the (inaudible), so when you’d be able to tap the (inaudible)?

Sure, Robert. So we’re not speculating at this point when we would receive approval for the license.

Okay. And on or just kind of the overall market in terms of obviously you don’t want deal June-July and we know that they tend to be backend loaded and often be closure summer, but what are you seeing in terms of early indications of, I mean, backlogs build or anything like that but the post-summer build or even into the fourth quarter. I mean, are you seeing an increase in activity, obviously Q2 was very strong, but what’s the future looks like right now?

Yeah. So we have seen an increase in our direct origination business and maybe in particular the M&A market which is, as you’ve noted before, as it was slower in the first half of the year. So we haven’t seen a pick up in that in terms of the number of meetings that we’re having primarily sponsors. So we do see a pickup and probably more on our direct origination side. So we’re not projecting the future but we’re seeing the pickup for sure in the latter half of the year.

Okay. Great. And then last you mentioned you wouldn’t expect the yield, excuse me -- as a portfolio to shift much from where it is right now. Is that an indicator that you’d be balancing you’ve gone through that to get more security a set back is complete in terms of mix of, obviously, it will grow but are you relatively comfortable with how much for second lien exactly you’ve got in the portfolio at these levels or are you still looking to shift the proportion too?

Yeah. I think that we’re comfortable with the current level. Again we would find to be more opportunistic at this point about what we saw as interesting opportunities always balancing the return with the risk profile the company itself. So again these larger businesses that are in the security is secured versus unsecured may have a lower coupon but likely have a lower risk. So we’ll continue to look at them opportunistically. In terms of the comment I made about the material change, so probably we’d say we wouldn’t expected to materially go higher, could come down a little bit more in terms of the average yield, but wouldn’t expect to be material that way either.

Okay. Got. Thank you.

Okay. We’ll take our next question from Bryce Rowe. Please go ahead.

Thanks. Good morning. I just had a follow up on some of the SBIC or SDA questions. Rob, I’m wondering what the kind of the percentage of your investments now would or would have fitted into the SB -- or into a potential SBIC? Robert Baird: Thanks. Good morning. I just had a follow up on some of the SBIC or SDA questions. Rob, I’m wondering what the kind of the percentage of your investments now would or would have fitted into the SB -- or into a potential SBIC?

So, as I said, historically when we look back over time, it was roughly 30% or so and I don’t know Bryce the exact percentage of today’s portfolio. But I would probably -- if I had to estimate it would be 20% or so.

Okay. And then I guess second topic, lot of discussion here about back half of ‘13 investment activity from an origination perspective. On the flipside, what are you hearing from some of your portfolio companies or what’s your sense or potential for increased repayment or refinance activity? I know it’s hard to project when that could happen, but is it your sense that that we’ll see accelerated activity there as well?

So as we sit here today, we don’t know of any repayments say for the balance of the year. We, on our previous call, I was asked about repayments and we knew of one and it did pay off as expected on August 1st. So no known repayments at this point, but I think Bryce based on history we’ll have them. So, again no known at this point.

Okay. That’s all I had. Thank you.

And at this time, we have no further questions.

Okay. Now, on that I guess hearing unless there are any other further questions, we’ll…

At this time, we have no questions queued up.

Okay. Okay. We’ll bring the call to close. So we thank everyone for joining and we’ll look forward to updating you this fall as we complete the third quarter. Thank you.