Stellus Capital Investment Corporation – Third Quarter 2026 Results - STELLUS CAPITAL INVESTMENT CORP

Financial Performance:

• Generated GAAP net investment income of $0.25 per share and core net investment income of $0.26 per share.
• Net Asset Value (NAV) decreased 3% ($0.40 per share) due to $0.48 per share in realized/unrealized losses offset by $0.08 per share accretion from share repurchases.
• Investment portfolio fair value stood at $966 million across 119 portfolio companies (down from $968 million and 116 companies in Q2).
• Q3 activity included $37.8 million in new investments ($29.7M for 4 new companies, $1.4M add-ons) and $130.3 million in total repayments ($18.8M full, $111.5M other).
• Average loan size per company is $8.8 million; largest investment fair value is $24.3 million.
• Weighted average EBITDA for the loan portfolio (99 companies) is $15.9 million; weighted average normalized leverage is 4.2x.
• Equity co-investments generated $98 million in realized gains to date, largely offsetting loan losses.
• Dividend coverage is secured by net investment income, reducing reliance on spillover income.

Guidance and Future Outlook:

• Q4 portfolio size expected to remain stable around current levels ($951 million fair value) as new fundings replace repayments.
• Origination pipeline shows improvement across the Stellis platform.
• Expectations to sustain the $0.25 quarterly dividend moving forward, supported by rising SOFR and short-term rate spreads.
• Management projects potential portfolio expansion of up to $100 million (approx. 10% growth) over time via the third SBIC license.
• Near-term outlook for 2027 includes anticipated realization of equity gains from portfolio repayments.

Business Segments and Product Lines:

• Portfolio composition: 100% secured loans, 93% floating rate, with backing from private equity sponsors.
• Third SBIC license portfolio has grown to $23 million; three additional deals expected to fund, increasing portfolio by ~$25 million by year-end.
• SBIC structure allows up to $125 million equity contribution and access to $250 million in SBA-guaranteed debentures.
• Management highlighted a strategic shift away from broadly syndicated loans with high leverage/no covenants toward lower-middle-market deals with >50% equity cushions.
• Equity co-investments constitute ~10% of fair value portfolio and are viewed as a capital recycling mechanism (leveraged 2:1 in SBIC vehicle).

Market and Competitive Landscape:

• Stellis differentiates from broader syndicated loan markets by holding ~65% of loans as lead lender with full financial covenants and control.
• SBA regulations increased the family-of-funds debenture limit from $350 million to $475 million, enhancing Stellis's long-term financing capacity.
• Management cites a 22-year history of navigating cycles including the 2008 crisis, COVID-19, and 2025 tariff disruptions.

Risks and Challenges:

• Weighted average risk grade is slightly below plan; 22% of portfolio rated 3 or below (not meeting expectations).
• Non-accrual status increased slightly to six companies (9.6% of cost, 5.4% of fair value), higher than historical averages.
• Realized and unrealized losses driven by specific company performance, including write-downs on non-accrual assets.
• One position valued at fair value in Q3 was sold post-quarter end at a discount, realizing a $4.5 million loss in Q4.
• NAV volatility remains a factor due to quarterly revaluation of portfolio assets based on current facts and circumstances.

Management Commentary and Tone:

• Tone is cautious yet resilient, acknowledging current credit challenges while emphasizing a long-term track record of resolving distressed assets.
• Management expressed confidence in the ability to reduce non-accruals over time to historical levels.
• Emphasis placed on disciplined credit, equity cushions, and the value of covenants in protecting shareholder interests.
• Confidence expressed in the attractiveness of share repurchases given the discount to NAV, balanced against liquidity needs.

Analyst Questions and Answers:

• Share Repurchases vs. Investing: Management confirmed repurchases are attractive due to the discount to NAV but will be balanced against maintaining liquidity and leverage targets.
• Equity Gain Realization: One equity gain expected within 2-3 months; optimistic for more in 2027 as capital is recycled.
• Unrealized Depreciation Drivers: Losses primarily driven by write-downs on 4-5 names on the non-accrual list and one specific deal sold at a discount post-quarter.
• SBIC Expansion: The potential $100 million portfolio increase is primarily driven by leveraging the third SBIC license (2:1 leverage).
• Recovery Expectations: Management stated current valuations represent the best estimate for recoveries, with potential upside more likely in the equity portfolio than the debt portfolio.
• NAV Volatility: Explained that 3% quarterly movement is relatively normal for precise valuation processes given dynamic market information.

Other Key Points:

• Share repurchase program: $20 million authority approved; $6.6 million spent repurchasing 767,880 shares in 2026 so far.
• SBA debenture limit increase provides additional capacity to grow the platform without proportionally increasing equity risk.
• Management reaffirmed commitment to resolving non-accrual positions using years of restructuring expertise.
• The company has paid $356 million in dividends since IPO (19.08 per share) and achieved a 9.2% lifetime return on equity.