Stellus Capital Investment Corporation (SCM) Earnings

Management highlights

- Long-Term Track Record Highlights * Since its November 2012 IPO, Stellis has invested ~$2.9 billion across more than 225 portfolio companies through multiple market cycles, and received ~$1.9 billion in total repayments. * Life-to-date return on equity is 9.5% (including all realized and unrealized gains/losses), and the firm has paid $349 million in total dividends ($18.83 per share) to date. * The investment team has over 20 years of collective experience and 14 years operating as a public BDC, with core strengths in disciplined underwriting and deep sponsor relationships. - Portfolio and Asset Quality Update * 100% of the portfolio's loans are secured, and 92% are floating-rate; the average loan size per company (fair value) is $8.9 million, and the largest single investment is $26 million (fair value). * 74% of the portfolio (fair value) is rated 1 or 2 (on or ahead of plan), while 26% is rated 3 or below (not meeting plan expectations), putting overall asset quality slightly below internal targets. * Non-accrual loans total 5 portfolio companies, representing 8.5% of total portfolio cost and 5.4% of total portfolio fair value: this is a decrease in non-accrual share at cost and a slight increase at fair value from the prior quarter. * Almost all portfolio companies are backed by private equity sponsors; performing loans have a weighted average normalized leverage of 4.2x EBITDA. - Strategic Updates * Stellis Capital Management, the firm's external advisor, completed its transition to the Ridge Post Capital alternative investment platform in June 2026; integration is proceeding smoothly, with early collaboration across origination, portfolio management, IR, and operations. * The firm gained access to Ridge Post's RCP Advisors business, which has 25 years of lower middle market experience and existing relationships with more than 200 lower middle market private equity GPs, aligned with Stellis' direct lending strategy. * The company received SBA approval for a third SBIC license: this allows up to $125 million in equity contributions and access to $250 million in low-cost, long-term SBA-guaranteed debentures. A recent SBA rule change increased the maximum aggregate outstanding debentures for a fund family from $350 million to $475 million, adding further growth capacity. * The board approved a $20 million common share repurchase program in March 2026; as of the call, the firm has repurchased 467,000 shares for ~$4 million, with remaining authorization still available.

Guidance

- Net portfolio size is expected to end Q3 FY2026 slightly lower than the current $960 million (117 companies), as repayments are projected to slightly outpace new fundings in the near term. * Gross origination activity is expected to increase toward the end of 2026, which is expected to drive net portfolio growth over subsequent quarters, as the origination pipeline has improved notably since the start of Q3. * The Q3 FY2026 dividend has been set to $0.25 per share, aligning dividend payouts with the current projected trajectory of net investment income (NII). Management expects the firm will be well-positioned to earn at least the $0.25 quarterly dividend moving forward, based on current NII trends, short-term rate outlooks, and spread levels. * Over time, the third SBIC license and increased SBA debenture capacity is expected to allow the investment portfolio to expand by up to $100 million, equal to ~10% of the current portfolio's fair value.

Segment performance

Stellis Capital Investment Corporation is a public business development company (BDC) focused on direct lending to lower middle market private equity-backed companies. It operates a single investment segment: its direct lending investment portfolio. At the end of Q2 FY2026, the portfolio had a total fair value of $968 million across 116 portfolio companies, down from $990 million (116 companies) at the end of Q1 FY2026. During the quarter, total new investments were $18 million: $8.7 million deployed to 3 new portfolio companies, and $9.3 million as add-on capital to existing holdings. Total repayments and realizations for the quarter were $49.2 million, including 5 full repayments totaling $38.7 million, $500,000 from one equity realization, and $10 million in additional par-value repayments. GAAP net investment income and core net investment income (adjusted for excise taxes) both came in at $0.26 per share for the quarter. Net asset value (NAV) increased 2% sequentially by $0.26 per share, driven by $0.30 per share in net realized and unrealized gains, $0.05 per share in accretion from the company's share repurchase program, offset by an $0.08 per share drag from dividend payments exceeding quarterly earnings.

Risks & headwinds

- Overall portfolio asset quality is slightly below internal plan, with 26% of the loan portfolio (fair value) rated 3 or below, meaning it is not meeting performance expectations. * Non-accrual loans remain elevated at 8.5% of total portfolio cost and 5.4% of total portfolio fair value, a level management describes as higher than target; active portfolio management is focused on reducing this exposure. * Market conditions remain volatile, and the timing of future deal closings is inherently uncertain, even with an improving origination pipeline. * The benefits of the partnership with Ridge Post Capital are expected to accrue gradually over multiple quarters, and it is too early to confirm full realization of projected origination gains.

Analyst Q&A

• Q: What is driving management’s optimism for improved origination activity in the second half of 2026? Is it the Ridge Post partnership, broader market improvement, or other factors?

  A: Most of the current improvement comes from existing origination channels, plus normal seasonal patterns that typically make the second half (especially Q4) busier than the first half. Early deal flow from the Ridge Post/RCP relationship has just started, and its full contribution will take several quarters to materialize. Pricing has remained stable, and management continues to maintain disciplined pricing standards for new investments.

• Q: If elevated non-accrual levels decline over time, will management increase leverage toward target levels, or keep leverage at current levels?

  A: Stellis is currently operating below its 1:1 regulatory leverage target and 2:1 GAAP leverage target. As non-accrual assets are resolved and recycled into performing earning assets, and as the new SBIC license is deployed, management expects leverage will increase toward these target levels. Recycling the ~$140 million currently held in non-accrual and non-earning equity co-investment into new performing assets will also meaningfully improve the firm’s long-term earnings capacity.

• Q: Can the Ridge Post partnership expand sector diversification for Stellis’ portfolio, in addition to growing the overall deal pipeline?

  A: RCP’s network of 200+ lower middle market PE funds covers a broad range of sectors, including specialized areas like industrial services, technology, and digital marketing. Stellis already invests across almost all sectors except real estate and pure-play oil and gas, so the partnership is unlikely to add entirely new sectors, but it will provide access to more opportunities in sectors where Stellis has limited existing exposure, adding beneficial diversification.

• Q: What is the status of the 5 remaining non-accrual positions, and what is the path to resolving them?

  A: All but one of the non-accrual positions are already controlled by Stellis and other lenders, rather than the original PE sponsor. Most have already completed restructuring, and management is now working with existing management teams to improve operations, position the companies for sale, and convert the current fair value of the positions to cash for reinvestment, rather than targeting outsized returns from the existing holdings. Most structural obstacles to resolution have already been addressed.