STELLUS CAPITAL INVESTMENT CORPORATION Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, related to the current COVID-19 pandemic and otherwise, including statements as to:
• our future operating results;
• our business prospects and the prospects of our portfolio companies;
• the effect of investments that we expect to make;
• our contractual arrangements and relationships with third parties;
• actual and potential conflicts of interest with
("Stellus Capital " or the "Advisor);
• the dependence of our future success on the general economy and its effect on
the industries in which we invest;
• the ability of our portfolio companies to achieve their objectives;
• the use of borrowed money to finance a portion of our investments;
• the adequacy of our financing sources and working capital;
• the timing of cash flows, if any, from the operations of our portfolio
companies;
• the ability of
monitor and administer our investments;
• the ability of
professionals;
• our ability to maintain our qualification as a RIC and as a BDC; and
• the effect of future changes in laws or regulations (including the
interpretation of these laws and regulations by regulatory authorities) and
conditions in our operating areas, particularly with respect to business development companies or RICs. Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words "may," "might," "will," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "anticipate," "predict," "potential," "plan" or similar words. We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law orSecurities and Exchange Commission ("SEC") rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with theSEC , including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Overview
We were organized as a
We are an externally managed, non-diversified, closed-end investment company
that has elected to be regulated as a business development company ("BDC") under
the Investment Company Act of 1940 Act, as amended (the "1940 Act"). Our
investment activities are managed by our investment adviser, Stellus Capital .
57
As a BDC, we are required to comply with certain regulatory requirements. For
instance, as a BDC, we may not acquire any assets other than "qualifying assets"
specified in the 1940 Act unless, at the time the acquisition is made, at least
70% of our total assets are qualifying assets. Qualifying assets include
investments in "eligible portfolio companies." Under the relevant SEC rules, the
term "eligible portfolio company" includes all private operating companies,
operating companies whose securities are not listed on a national securities
exchange, and certain public operating companies that have listed their
securities on a national securities exchange and have a market capitalization of
less than $250 million , in each case organized and with their principal of
business in the United States .
We have elected to be treated for U.S. federal income tax purposes as a
regulated investment company ("RIC") under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). To maintain our qualification as a RIC,
we must, among other things, meet certain source-of-income and asset
diversification requirements. As of September 30, 2020 , we were in compliance
with the RIC requirements. As a RIC, we generally will not have to pay
corporate-level U.S. federal income taxes on any income we distribute to our
stockholders.
Prior to June 28, 2018 , we were only allowed to employ leverage to the extent
that our asset coverage, as defined in the 1940 Act, was equal to at least 200%
after giving effect to such leverage. On March 23, 2018 , the Small Business
Credit Availability Act (the "SBCAA") was signed into law, which included
various changes to regulations under the federal securities laws that impact
BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their
asset coverage requirement to 150% from 200% under certain circumstances.
On April 4, 2018 , our board of directors (the "Board"), including a "required
majority" (as such term is defined in Section 57(o) of the Investment Company
Act of 1940, as amended (the "1940 Act")) of the Board, approved the application
of the modified asset coverage requirements set forth in Section 61(a)(2) of the
1940 Act. The Board also approved the submission of a proposal to stockholders
to approve the application of the modified asset coverage requirements set forth
in Section 61(a)(2) of the 1940 Act, which was approved by stockholders at our
2018 annual meeting of stockholders. As a result, the asset coverage ratio
applicable to us was decreased from 200% to 150%, effective June 28, 2018 . As of
September 30, 2020 , our asset coverage ratio was 209%. The amount of leverage
that we employ at any time depends on our assessment of the market and other
factors at the time of any proposed borrowing.
COVID -19 Developments
On March 11, 2020 , the World Health Organization declared COVID-19 a pandemic
and recommended containment and mitigation measures worldwide. As of the three
and nine months ended September 30, 2020 , and subsequent to September 30, 2020 ,
the COVID-19 pandemic has had a significant impact on the U.S. and global
economy. Each portfolio company has been assessed on an individual basis to
identify the impact of the COVID-19 pandemic on the valuation of our investments
in such company. We believe that any such COVID-19 pandemic impacts have been
reflected in the valuation of our investments.
The global impact of the outbreak continues to evolve, and many countries have
reacted by instituting quarantines, prohibitions on travel and the closure of
offices, businesses, schools, retail stores and other public venues. Businesses
are also implementing similar precautionary measures. Such measures, as well as
the general uncertainty surrounding the dangers and impact of the COVID-19
pandemic, have created significant disruption in supply chains and economic
activity. While several countries, as well as certain states in the United
States , have begun to lift public health restrictions with the view to reopening
their economies, recurring COVID-19 outbreaks have led to the re-introduction of
such restrictions in certain states in the United States and globally and could
continue to lead to the re-introduction of such restrictions elsewhere.
Additionally, the absence of viable treatment options or a vaccine could lead
people to continue to self-isolate and not participate in the economy at
pre-pandemic levels for a prolonged period. Even after the COVID-19 pandemic
subsides, the U.S. economy and most other major global economies may continue to
experience a recession, and we anticipate our business and operations could be
materially adversely affected by a prolonged recession in the United States
and
other major markets.
The impact of COVID-19 has led to significant volatility and declines in the
global public equity markets and it is uncertain how long this volatility will
continue. As COVID-19 continues to spread, the potential impacts, including a
global, regional or other economic recession, remain uncertain and difficult to
assess. The extent of the impact of the COVID-19 pandemic on the financial
performance of our current and future investments will depend on future
developments, including the duration and spread of the virus, related advisories
and restrictions, and the health of the financial markets and economy, all of
which are highly uncertain and cannot be predicted. To the extent our portfolio
companies are adversely impacted by the effects of the COVID-19 pandemic, it may
have a material adverse impact on our future net investment income, the fair
value of our portfolio investments and our financial condition.
58
Economic outlook
Since March 2020 , the COVID-19 pandemic has severely impacted global economic
activity and caused significant volatility in financial markets. The global
impact of the outbreak has been rapidly evolving and many countries, including
the United States , have reacted by instituting quarantines, mandating business
and school closures and restricting travel. Such actions created and continue to
create disruption in global supply chains and are adversely impacting several
industries. While several countries, as well as certain states in the United
States , have begun to lift public health restrictions with the view to reopening
their economies, recurring COVID-19 outbreaks have led to the re-introduction of
such restrictions in certain states in the United States and globally and could
continue to lead to the re-introduction of such restrictions elsewhere. The
outbreak could have a continued adverse impact on economic and market conditions
and trigger a period of global economic slowdown. The COVID-19 pandemic presents
material uncertainty and risks with respect to the underlying value of our
portfolio companies and with respect to our business, financial condition,
results of operations, and cash flows, such as the potential negative impact to
financing arrangements, increased costs of operations, changes in law and/or
regulation, and uncertainty regarding government and regulatory policy.
Operations
All partners and employees ofStellus Capital have been operating remotely sinceMarch 16, 2020 without disruption to its operations and are prepared to continue working remotely as long as is necessary for the health and safety of all personnel. Our COVID-19 response
Since the onset of the COVID-19 pandemic, we have been in regular contact with all of our portfolio companies and/or their sponsors to assess among other things their ability to function in the new environment. Discussions have addressed the portfolio companies' liquidity position, expected covenant compliance, and the health of their workforce and customers.
Financial impact All borrowers on accrual paid their principal, interest, and fees due during the third quarter endedSeptember 30, 2020 . We will continue to closely monitor the financial condition of our portfolio companies as part of our efforts to mitigate the impact of the COVID-19 pandemic. Historical information may be relatively less significant.
Portfolio Composition and Investment Activity
Portfolio Composition
We originate and invest primarily in privately-held middle-market companies (typically those with$5.0 million to$50.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often times with a corresponding equity investment. As ofSeptember 30, 2020 , we had$622.4 million (at fair value) invested in 66 portfolio companies. As ofSeptember 30, 2020 , our portfolio included approximately 80% of first lien debt, 10% of second lien debt, 3% of unsecured debt and 7% of equity investments at fair value. The composition of our investments at cost and fair value as ofSeptember 30, 2020 was as follows: Cost Fair Value Senior Secured - First Lien(1)$ 506,767,192 $ 494,697,192 Senior Secured - Second Lien 83,778,390 61,416,385 Unsecured Debt 22,354,859 21,174,768 Equity 34,352,593 45,150,000 Total Investments$ 647,253,034 $ 622,438,345 (1) Includes unitranche investments, which account for 13.4% of our portfolio at fair value. Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans and our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the "last-out" tranche. 59
As ofDecember 31, 2019 , we had$628.9 million (at fair value) invested in 63 portfolio companies. As ofDecember 31, 2019 , our portfolio included approximately 72% of first lien debt, 18% of second lien debt, 4% of unsecured debt and 6% of equity investments at fair value. The composition of our investments at cost and fair value as ofDecember 31, 2019 was as follows: Cost Fair Value Senior Secured - First Lien(1)$ 461,107,595 $ 455,169,878 Senior Secured - Second Lien 130,600,172 111,961,013 Unsecured Debt 22,279,519 22,137,186 Equity 28,720,538 39,680,000 Total Investments$ 642,707,824 $ 628,948,077 (1) Includes unitranche investments, which account for 14.4% of our portfolio atDecember 31, 2019 at fair value. Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans and our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest
in the "last-out" tranche.
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements. As ofSeptember 30, 2020 andDecember 31, 2019 , we had unfunded commitments of$30.7 million and$37.5 million , respectively, to provide debt financing for 18 and 17 portfolio companies, respectively. As ofSeptember 30, 2020 , we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise. 60
The following is a summary of geographical concentration of our investment
portfolio as of
% of Total
Investments at
Cost Fair Value Fair Value
Texas $ 141,175,253 $ 120,690,888 19.39 %
California 83,985,296 86,578,018 13.91 %
Illinois 59,960,280 61,221,074 9.84 %
Arizona 52,305,675 53,484,274 8.59 %
New Jersey 38,832,086 39,095,292 6.28 %
Ohio 36,193,246 37,802,257 6.07 %
Canada 21,288,231 21,433,220 3.44 %
New York 19,740,226 20,387,154 3.28 %
Wisconsin 19,354,393 19,634,736 3.15 %
United Kingdom 20,148,449 19,315,000 3.10 %
Tennessee 20,043,934 18,747,963 3.01 %
Indiana 17,775,164 18,040,536 2.90 %
Pennsylvania 17,446,803 17,686,213 2.84 %
South Carolina 15,934,306 17,542,490 2.82 %
Maryland 17,003,162 16,935,844 2.72 %
Florida 12,884,606 12,847,500 2.06 %
Missouri 9,977,819 10,765,000 1.73 %
Virginia 7,590,689 7,590,689 1.22 %
Washington, D.C. 6,904,971 6,904,971 1.11 %
Georgia 685,000 6,260,000 1.01 %
North Carolina 4,974,680 2,925,000 0.47 %
Puerto Rico 8,613,244 2,589,639 0.42 %
Arkansas 13,082,221 2,060,587 0.33 %
Massachusetts 1,317,406 1,290,000 0.21 %
Utah 35,894 610,000 0.10 %
$ 647,253,034 $ 622,438,345 100.00 %
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The following is a summary of geographical concentration of our investment
portfolio as of
% of Total
Investments
Cost Fair Value at Fair Value
Texas $ 134,451,527 $ 120,672,985 19.19 %
California 79,090,474 78,136,331 12.42 %
Arizona 52,390,949 53,274,526 8.47 %
New Jersey 52,548,769 51,637,750 8.21 %
Ohio 48,502,609 50,092,839 7.96 %
Illinois 41,869,947 44,406,252 7.06 %
Canada 21,201,137 21,217,811 3.37 %
New York 19,922,689 20,584,020 3.27 %
United Kingdom 20,116,695 20,116,695 3.20 %
Wisconsin 19,207,770 19,466,054 3.10 %
South Carolina 19,935,337 19,366,716 3.08 %
Tennessee 19,854,956 19,260,076 3.06 %
Pennsylvania 17,408,508 17,566,213 2.79 %
Maryland 17,103,044 17,325,000 2.75 %
Indiana 14,064,012 13,997,251 2.23 %
Florida 13,663,116 13,820,256 2.20 %
Colorado 10,867,843 12,444,250 1.98 %
Arkansas 14,920,694 11,989,446 1.91 %
Missouri 10,078,235 10,428,223 1.66 %
Georgia 575,000 5,250,000 0.83 %
North Carolina 4,961,969 4,375,000 0.70 %
Puerto Rico 8,613,244 3,490,383 0.55 %
Utah 41,894 30,000 0.00 %
Massachusetts 1,317,406 - - %
$ 642,707,824 $ 628,948,077 100.00 %
62
The following is a summary of industry concentration of our investment portfolio
as of September 30, 2020 :
% of Total
Investments
Cost Fair Value at Fair Value
Services: Business $ 102,543,010 $ 109,620,906 17.61 %
Healthcare & Pharmaceuticals 88,192,837 84,102,357 13.51 %
Aerospace & Defense 53,599,867 52,953,169 8.51 %
Beverage, Food, & Tobacco 41,509,474 42,257,867 6.79 %
Media: Broadcasting & Subscription 32,220,215 34,198,444 5.49 %
Consumer Goods: Durable 41,304,990 26,333,087 4.23 %
Education 26,502,460 24,485,058 3.93 %
Media: Advertising, Printing & Publishing 22,117,233 21,453,101 3.45 %
High Tech Industries 21,288,231 21,433,220 3.44 %
Capital Equipment 20,024,561 20,583,404 3.31 %
Finance 18,016,762 19,035,000 3.06 %
Transportation & Logistics 18,327,194 18,571,035 2.98 %
Retail 15,934,306 17,542,490 2.82 %
Automotive 17,205,990 17,537,463 2.82 %
Metals & Mining 17,003,162 16,935,844 2.72 %
Containers, Packaging, & Glass 14,478,077 14,684,736 2.36 %
Environmental Industries 15,677,131 13,800,096 2.22 %
Energy: Oil & Gas 12,655,159 12,452,183 2.00 %
Consumer goods: non-durable 13,259,838 11,490,000 1.85 %
Services: Consumer 26,204,553 10,841,385 1.74 %
Construction & Building 10,436,197 10,580,000 1.70 %
Utilities: Oil & Gas 9,879,974 9,850,000 1.58 %
Chemicals, Plastics, & Rubber 6,599,021 6,887,500 1.11 %
Software 2,272,792 4,700,000 0.76 %
Hotel, Gaming, & Leisure - 110,000 0.02 %
$ 647,253,034 $ 622,438,345 100.00 %
63
The following is a summary of industry concentration of our investment portfolio
as of December 31, 2019 :
% of Total
Investments
Cost Fair Value at Fair Value
Healthcare & Pharmaceuticals $ 98,307,360 $ 94,000,860 14.95 %
Services: Business 56,354,433 62,410,845 9.92 %
Aerospace & Defense 44,970,957 46,547,324 7.40 %
Consumer Goods: Durable 47,933,468 44,158,660 7.02 %
Beverage, Food, & Tobacco 42,131,354 42,592,966 6.77 %
Media: Broadcasting & Subscription 32,353,301 33,218,991 5.28 %
Finance 27,776,880 29,562,500 4.70 %
Education 26,594,771 25,661,125 4.08 %
Media: Advertising, Printing & Publishing 22,425,972 21,965,124 3.49 %
High Tech Industries 21,201,137 21,217,811 3.37 %
Capital Equipment 20,093,379 20,237,066 3.22 %
Retail 19,935,337 19,366,716 3.08 %
Metals & Mining 17,103,044 17,325,000 2.75 %
Transportation & Logistics 17,173,599 17,226,294 2.74 %
Automotive 17,151,902 17,221,213 2.74 %
Software 15,807,191 15,516,250 2.47 %
Containers, Packaging, & Glass 14,306,286 14,564,570 2.32 %
Environmental Industries 15,256,675 14,410,327 2.29 %
Energy: Oil & Gas 12,624,269 13,582,102 2.16 %
Services: Consumer 26,075,606 13,345,105 2.12 %
Chemicals, Plastics, & Rubber 11,880,825 11,857,228 1.89 %
Consumer goods: non-durable 14,973,711 11,770,000 1.87 %
Construction & Building 10,408,323 10,750,000 1.71 %
Utilities: Oil & Gas 9,868,044 9,900,000 1.57 %
Hotel, Gaming, & Leisure - 540,000 0.09 %
$ 642,707,824 $ 628,948,077 100.00 %
At September 30, 2020 , our average portfolio company investment at amortized
cost and fair value was approximately $9.8 million and $9.4 million ,
respectively, and our largest portfolio company investment at amortized cost and
fair value was $21.5 million and $21.6 million , respectively. At December 31,
2019 , our average portfolio company investment at amortized cost and fair value
was approximately $10.2 million and $10.0 million , respectively, and our largest
portfolio company investment at amortized cost and fair value was approximately
$21.6 million and $21.3 million , respectively.
At September 30, 2020 , 92% of our debt investments bore interest based on
floating rates (subject to interest rate floors), such as LIBOR, and 8% bore
interest at fixed rates. At December 31, 2019 , 93% of our debt investments bore
interest based on floating rates (subject to interest rate floors), such as
LIBOR, and 7% bore interest at fixed rates.
The weighted average yield on all of our debt investments as of September 30,
2020 and December 31, 2019 was 8.1% and 9.2%, respectively. The weighted average
yield was computed using the effective interest rates for all of our debt
investments, including accretion of original issue discount and the impact of
our loans on non-accrual status (as discussed below). The weighted average yield
of our debt investments is not the same as a return on investment for our
stockholder, but, rather relates to a portion of our investment portfolio and is
calculated before the payment of all of our and our subsidiaries' fees and
expenses.
As of
Investment Activity During the nine months endedSeptember 30, 2020 , we made an aggregate of$87.2 million (net of fees) of investments in five new portfolio companies and 19 existing portfolio companies. During the nine months endedSeptember 30, 2020 , we received an aggregate of$82.4 million in proceeds from repayments of our investments. 64 Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital required by middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make. For example, during the nine months endedSeptember 30, 2020 , the uncertainty and economic ramifications of the rapid spread of COVID-19 led to a general slowing of investment activity in theU.S. lower middle market. As a result, we did not make any investments in new portfolio companies fromMarch 13, 2020 untilJuly 17, 2020 . Since then, the transition activity has increased and we have invested$14.6 million (net of fees) in two new portfolio companies. See Note 12 to the Consolidated Financial Statements for information on investments made subsequent to quarter end. Asset Quality In addition to various risk management and monitoring tools,Stellus Capital uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our investment portfolio. This investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment category:
• Investment Category 1 is used for investments that are performing above
expectations, and whose risks remain favorable compared to the expected risk at
the time of the original investment.
• Investment Category 2 is used for investments that are performing within
expectations and whose risks remain neutral compared to the expected risk at
the time of the original investment. All new loans are initially rated 2.
• Investment Category 3 is used for investments that are performing below
expectations and that require closer monitoring, but where no loss of return or
principal is expected. Portfolio companies with a rating of 3 may be out of
compliance with financial covenants.
• Investment Category 4 is used for investments that are performing substantially
below expectations and whose risks have increased substantially since the
original investment. These investments are often in work out. Investments with
a rating of 4 are those for which some loss of return but no loss of principal
is expected.
• Investment Category 5 is used for investments that are performing substantially
below expectations and whose risks have increased substantially since the
original investment. These investments are almost always in work out.
Investments with a rating of 5 are those for which some loss of return and
principal is expected.
As of September 30, 2020 As of December 31, 2019
(dollars in millions) (dollars in millions)
Number of Number of
% of Total Portfolio % of Total PortfolioInvestment Category Fair Value Portfolio Companies(1)
Fair Value Portfolio Companies(1) 1$ 78.3 13 % 13$ 70.4 11 % 11 2 481.1 77 % 40 492.2 78 % 41 3 50.5 8 % 7 49.3 8 % 7 4 2.6 0 % 1 12.0 2 % 1 5 9.9 2 % 6 5.0 1 % 4 Total$ 622.4 100 % 67$ 628.9 100 % 64
(1)One portfolio company appears in two categories as of both periods
We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As ofSeptember 30, 2020 , we had loans to 5 portfolio companies that were on non-accrual status that represented approximately 6.8% of our loan portfolio at cost and 1.6% at fair value. As ofDecember 31, 2019 , we had loans to two portfolio companies that were on non-accrual status that represented approximately 3.6% of our loan portfolio at cost and 0.9% at fair value. As ofSeptember 30, 2020 andDecember 31, 2019 ,$6.7 million and$3.8 million of income from investments on non-accrual has not been accrued, respectively. 65 Results of Operations An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.
Comparison of the Three Months and Nine Months Ended
Revenues We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at primarily floating rates. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK interest. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the total dollar amount of interest and any dividend income that we earn will increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.
The following shows the breakdown of investment income for the three and nine
months ended
Three months ended Nine months ended
September 30, September 30,
(dollars in millions) (dollars in millions)
2020 2019 2020 2019
Interest income(1) $ 13.7 $ 14.8 $ 41.6 $ 42.0
PIK interest - 0.3 0.6 0.3Miscellaneous fees(1) 0.3 0.4 0.9
1.2 Total$ 14.0 $ 15.5 $ 43.1 $ 43.5
(1) For the three and nine months ended
million and
early repayments, amendments to specific loan positions, and the recognition
of previously reserved income from a prior period. For the three and nine
months ended
respectively, of non-recurring income related to early repayments, amendments
to specific loan positions, and the recognition of previously reserved income
from a prior period.
Expenses
Our primary operating expenses include the payment of fees to Stellus Capital
under the investment advisory agreement, our allocable portion of overhead
expenses under the administration agreement and other operating costs described
below. We bear all other out-of-pocket costs and expenses of our operations and
transactions, which may include:
• organization and offering;
• calculating our net asset value (including the cost and expenses of any
independent valuation firm);
66
• fees and expenses payable to third parties, including agents, consultants or
other advisors, in monitoring financial and legal affairs for us and in
monitoring our investments and performing due diligence on our prospective
portfolio companies or otherwise relating to, or associated with, evaluating
and making investments;
• interest payable on debt, if any, incurred to finance our investments and
expenses related to unsuccessful portfolio acquisition efforts;
• base management and incentive fees;
• administration fees and expenses, if any, payable under the administration
agreement (including our allocable portion of
performing its obligations under the administration agreement, including rent
and the allocable portion of the cost of our Chief Compliance Officer and Chief
Financial Officer and their respective staff);
• transfer agent, dividend paying agent and custodial fees and expenses;
•
• all costs of registration and listing our securities on any securities
exchange;
•
• independent directors' fees and expenses;
• costs of preparing and filing reports or other documents required by the
other regulators;
• costs of distributing any reports, proxy statements or other notices to
stockholders, including printing costs;
• costs and fees associated with any fidelity bond, directors and officers/errors
and omissions liability insurance, and any other insurance premiums;
• direct costs and expenses of administration, including printing, mailing, long
distance telephone, copying, secretarial and other staff, independent auditors
and outside legal costs;
• proxy voting expenses; and
• all other expenses incurred by us or
administering our business.
The following shows the breakdown of operating expenses for the three and nine
months ended
Three months ended Nine months ended
September 30, September 30,
(dollars in millions) (dollars in millions)
2020 2019 2020 2019
Operating Expenses
Management fees $ 2.8 $ 2.5 $ 8.3 $ 7.0
Valuation Fees 0.1 0.1 0.2 0.2Administrative services expenses 0.4 0.4
1.3 1.3 Income incentive fees 0.5 1.6 2.0 4.3 Capital gain incentive fees - 0.5 (0.9 ) 1.8 Professional fees 0.2 0.2 0.8 0.9 Directors' fees 0.1 0.1 0.3 0.3 Insurance expense 0.1 0.1 0.3 0.3 Interest expense and other fees 3.9 3.8 12.2 10.8 Income tax expense 0.4 0.3 0.9 0.7 Other general and administrative 0.2 0.1
0.7 0.4 Total Operating Expenses$ 8.7 $ 9.7 $ 26.1 $ 28.0
The decrease in operating expenses for the three months endedSeptember 30, 2020 over the three months endedSeptember 30, 2019 was due to 1) lower income incentive fees, as a result of pre-incentive fee net investment income being partially through the hurdle rate, mainly due to lower LIBOR rates over the period; and 2) no capital gains incentive fees as a result of unrealized depreciation on certain loan positions due to company specific factors. 67
The increase in operating expenses for the nine months endedSeptember 30, 2020 over the nine months endedSeptember 30, 2019 was due to 1) higher interest expense as a result of higher debt balance, offset by lower LIBOR rates over the period, 2) higher management fees due to larger portfolio size; offset by lower income incentive fees, as a result of pre-incentive fee net investment income being lower than the hurdle rate, mainly due to lower LIBOR rates over the
period. Net Investment Income For the three months endedSeptember 30, 2020 , net investment income was$5.3 million , or$0.27 per common share (based on 19,486,030 weighted-average common shares outstanding atSeptember 30, 2020 ). For the three months endedSeptember 30, 2019 , net investment income was$5.8 million , or$0.31 per common share (based on 18,905,959 weighted-average common shares outstanding atSeptember 30, 2019 ). For the nine months endedSeptember 30, 2020 , net investment income was$17.0 million , or$0.87 per common share (based on 19,466,647 weighted-average common shares outstanding atSeptember 30, 2020 ). For the nine months endedSeptember 30, 2019 , net investment income was$15.5 million , or$0.86 per common share (based on 18,056,271 weighted-average common shares outstanding atSeptember 30, 2019 ). Net Realized Gains and Losses
We measure realized gains or losses by the difference between the net proceeds from the repayment, sale or disposition and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.
Repayments and sales of investments and amortization of other certain
investments for the three months ended
Repayments and sales of investments and amortization of other certain
investments for the three months ended
Repayments and sales of investments and amortization of other certain investments for the nine months endedSeptember 30, 2020 totaled$82.4 million , and net realized gains (losses) totaled($2.4) million , primarily attributable to a loss on conversion of debt from a specific investment.
Repayments and sales of investments and amortization of other certain
investments for the nine months ended
Net Change in Unrealized Appreciation (depreciation) of Investments
Net change in unrealized appreciation (depreciation) primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized.
Net change in unrealized appreciation (depreciation) on investments and cash equivalents for the three months endedSeptember 30, 2020 and 2019 totaled$2.1 million and($3.5) million , respectively.
Net change in unrealized appreciation (depreciation) on investments and cash
equivalents for the nine months ended
The change in appreciation for the three months ended
The net change in depreciation for the nine months ended
The change in unrealized appreciation for the three and nine months endedSeptember 30, 2019 was due primarily to company-specific performance and the accounting reversal relating to a certain realized gain in the portfolio offset by appreciation resulting from the general tightening of credit spreads. 68
Provision for Taxes on Unrealized Appreciation on Investments
We have direct wholly owned subsidiaries that have elected to be taxable entities (the "Taxable Subsidiaries"). The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are "pass through" entities forU.S. federal income tax purposes and continue to comply with the "source income" requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us forU.S. federal income tax purposes and may generateU.S. federal income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. TheU.S. federal income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months endedSeptember 30, 2020 and 2019, we recognized a benefit (provision) forU.S. federal income tax on unrealized investments of$(92.8) thousand and$4.2 thousand , respectively, for the Taxable Subsidiaries. For the nine months endedSeptember 30, 2020 and 2019, we recognized a provision forU.S. federal income tax on unrealized investments of$(122.7) thousand and$(35.7) thousand , respectively. As ofSeptember 30, 2020 andDecember 31, 2019 , there was a deferred tax liability of$257.4 thousand and$134.7 thousand on the Consolidated Statement of Assets and Liabilities, respectively.
Net Increase in Net Assets Resulting from Operations
For the three months ended
For the three months ended
For the nine months ended
For the nine months ended
The decrease in the amount of increase to net assets resulting from operations for the nine months endedSeptember 30, 2020 over the prior period was primarily due to lower realized gains in the current period.
Financial condition, liquidity and capital resources
Cash Flows from Operating and Financing Activities
Our operating activities provided net cash of$12.4 million for the nine months endedSeptember 30, 2020 , primarily in connection with the repayment of portfolio investments, some of which was offset by purchase and origination of new portfolio investments. Our financing activities for the nine months endedSeptember 30, 2020 provided cash of$10.1 million due to net borrowings under our Credit Facility (as defined below). See Note 4 to the Consolidated Financial Statements for further discussion. Our operating activities used net cash of$53.5 million for the nine months endedSeptember 30, 2019 , primarily in connection with the purchase and origination of new portfolio investments, some of which was offset by the sales and repayments on our investments. Our financing activities for the nine months endedSeptember 30, 2019 provided cash of$59.1 million due to a secondary offering during the year and borrowings under our Credit Facility. See Note 4 to the Consolidated Financial Statements for further discussion on equity transactions.
Liquidity and Capital Resources
Our liquidity and capital resources are derived from the Credit Facility, the
2022 Notes (as defined below), SBA-guaranteed debentures and cash flows from
operations, including investment sales and repayments, and income earned. Our
primary use of funds from operations includes investments in portfolio companies
and other operating expenses we incur, as well as the payment of dividends to
the holders of our common stock. We used, and expect to continue to use, these
capital resources as well as proceeds from turnover within our portfolio and
from public and private offerings of securities to finance our investment
activities.
69
Although we expect to fund the growth of our investment portfolio through the
net proceeds from future public and private equity offerings and issuances of
senior securities or future borrowings to the extent permitted by the 1940 Act,
our plans to raise capital may not be successful. In this regard, if our common
stock trades at a price below our then-current net asset value per share, we may
be limited in our ability to raise equity capital given that we cannot sell our
common stock at a price below net asset value per share unless our stockholders
approve such a sale and our Board of directors makes certain determinations in
connection therewith. A proposal, approved by our stockholders at our 2020
annual stockholders meeting, authorizes us to sell up to 25% of our outstanding
common shares at a price equal to or below the then current net asset value per
share in one or more offerings. This authorization will expire on June 25, 2021 ,
the one-year anniversary of our 2020 annual stockholders meeting. We would need
similar future approval from our stockholders to issue shares below the then
current net asset value per share any time after the expiration of the current
approval. In addition, we intend to distribute between 90% and 100% of our
taxable income to our stockholders in order to satisfy the requirements
applicable to RICs under Subchapter M of the Code. Consequently, we may not have
the funds or the ability to fund new investments, to make additional investments
in our portfolio companies, to fund our unfunded commitments to portfolio
companies or to repay borrowings. In addition, the illiquidity of our portfolio
investments may make it difficult for us to sell these investments when desired
and, if we are required to sell these investments, we may realize significantly
less than their recorded value.
Also, as a BDC, we generally are required to meet a coverage ratio of total
assets, less liabilities and indebtedness not represented by senior securities,
over the aggregate amount of the senior securities, which include all of our
borrowings and any outstanding preferred stock, of at least 150% effective
June 28, 2018 (at least 200% prior to June 28, 2018 ). This requirement limits
the amount that we may borrow. We have received exemptive relief from the SEC to
permit us to exclude the debt of Stellus Capital SBIC, LP ("SBIC subsidiary")
and Stellus Capital SBIC II, LP ("SBIC II subsidiary") (together, "the SBIC
subsidiaries") guaranteed by the Small Business Administration ("SBA") from the
definition of senior securities in the asset coverage test under the 1940 Act.
We were in compliance with the asset coverage ratios at all times. As of
September 30, 2020 and December 31, 2019 , our asset coverage ratio was 209% and
229%, respectively. The amount of leverage that we employ will depend on our
assessment of market conditions and other factors at the time of any proposed
borrowing, such as the maturity, covenant package and rate structure of the
proposed borrowings, our ability to raise funds through the issuance of shares
of our common stock and the risks of such borrowings within the context of our
investment outlook. Ultimately, we only intend to use leverage if the expected
returns from borrowing to make investments will exceed the cost of such
borrowing. As of September 30, 2020 and December 31, 2019 , we had cash and cash
equivalents of $38.6 million and $16.1 million , respectively.
Credit Facility
On October 11, 2017 , we entered a senior secured revolving credit agreement,
dated as of October 10, 2017 , as amended on March 28, 2018 , August 2, 2018 ,
September 13, 2019 , December 27, 2019 , May 15, 2020 , and September 18, 2020 with
ZB, N.A. , dba Amegy Bank and various other lenders (the "Credit Facility").
70
The key changes from the
Prior to amendment As amended
Maturity Date October 10, 2021 September 18, 2025
Commitment termination date March 10, 2021 September 18, 2024
LIBOR floor None 0.25%
Prime rate floor None 3.00%
Asset coverage ratio Minimum of 1.75 to 1.00 Minimum of 1.67 to 1.00
(maximum leverage of (maximum leverage of 1.5x)
1.33x)
Refinancing of 2022 Notes Not required Required by March 15, 2022
The Credit Facility, as amended, provides for borrowings up to a maximum of$230.0 million on a committed basis with an accordion feature that allows us to increase the aggregate commitments up to$280.0 million , subject to new or existing lenders agreeing to participate in the increase and other customary conditions. Borrowings under the Credit Facility bear interest, subject to our election, on a per annum basis equal to (i) LIBOR plus 2.50% (or 2.75% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) with a 0.25% LIBOR floor, or (ii) 1.50% (or 1.75% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the Prime Rate, Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. We pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable quarterly in arrears. The commitment to fund the revolver expires onSeptember 18, 2024 , after which we may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, onSeptember 18, 2025 . Our obligations to the lenders are secured by a first priority security interest in our portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least$10,000,000 , including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.0, (iii) maintaining a minimum shareholder's equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00.
As of
As ofSeptember 30, 2020 andDecember 31, 2019 , the outstanding balance under the Credit Facility was$187.0 million and$161.6 million , respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair values of the Credit Facility is determined in accordance with Accounting Standards Codification ("ASC") 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. We incurred costs of$4.0 million in connection with the Credit Facility, of which$1.7 million relate to theSeptember 18, 2020 amendment, which are being amortized over the life of the facility. As ofSeptember 30, 2020 andDecember 31, 2019 ,$2.4 million and$1.0 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on our consolidated statement of assets and liabilities as a deduction from the debt liability. 71
Interest is paid quarterly in arrears. The following table summarizes the
interest expense and amortized loan fees on the Credit Facility for the three
and nine months ended
For the three months ended For the nine months ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
Interest expense $ 1.3 $ 1.3 $ 4.7 $ 3.5
Loan fee amortization 0.2 0.1 0.5 0.4
Commitment fees on unused portion - 0.1 0.1 0.3
Total interest and financing expenses $ 1.5 $ 1.5 $ 5.3 $
4.2
Weighted average interest rate 2.8 % 4.9 % 3.3 % 5.0 %
Effective interest rate(1) 3.4 % 5.7 % 3.8 % 6.1 %
Average debt outstanding $ 181.1 $ 106.5 $ 187.2 $ 91.9
Cash paid for interest and unused fees $ 1.3 $ 1.4 $ 5.0 $
3.6
(1) Includes the impact of loan fee amortization, including agency fees and
unused fees.
SBA-Guaranteed Debentures
Due to the SBIC subsidiaries' status as licensed SBICs, we have the ability to
issue debentures guaranteed by the SBA at favorable interest rates. Under the
regulations applicable to SBIC funds, a single licensee can have outstanding
debentures guaranteed by the SBA subject to a regulatory leverage limit, up to
two times the amount of regulatory capital. As of both September 30, 2020 and
December 31, 2019 , the SBIC subsidiary had $75.0 million in regulatory capital,
as such term is defined by the SBA, and $150.0 million of SBA-guaranteed
debentures outstanding.
As of both September 30, 2020 and December 31, 2019 , the SBIC II subsidiary had
$20.0 million in regulatory capital and $11.0 million of SBA-guaranteed
debentures outstanding. See Note 10 to the Consolidated Financial Statements for
further detail on the SBA-guaranteed debentures outstanding.
On August 12, 2014 , we obtained exemptive relief from the SEC to permit us to
exclude the debt of the SBIC subsidiaries guaranteed by the SBA from our asset
coverage test under the 1940 Act. The exemptive relief provides us with
increased flexibility under the asset coverage test by permitting us to borrow
up to $325.0 million more than we would otherwise be able to absent the receipt
of this exemptive relief.
On a stand-alone basis, the SBIC subsidiaries held $246.8 million and $240.1
million in assets at September 30, 2020 and December 31, 2019 , respectively,
which accounted for approximately 37.2% and 37.0% of our total consolidated
assets at September 30, 2020 and December 31, 2019 , respectively.
Debentures guaranteed by the SBA have fixed interest rates that equal prevailing
10-year Treasury Note rates plus a market spread and have a maturity of ten
years with interest payable semi-annually. The principal amount of the
debentures is not required to be paid before maturity but may be pre-paid at any
time with no prepayment penalty. SBA-guaranteed debentures drawn before
October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00%
commitment fee and a 2.425% issuance discount, which are amortized over the life
of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after
October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00%
commitment fee and a 2.435% issuance discount, which are amortized over the life
of the SBA-guaranteed debentures. Once pooled, which occurs in March and
September each year, the SBA-guaranteed debentures bear interest at a fixed rate
that is set to the current 10-year Treasury Note Rate plus a spread at each
pooling date.
As of September 30, 2020 and December 31, 2019 , the carrying amount of the
SBA-guaranteed debentures approximated their fair value. The fair values of the
SBA-guaranteed debentures are determined in accordance with ASC 820, which
defines fair value in terms of the price that would be paid to transfer a
liability in an orderly transaction between market participants at the
measurement date under current market conditions. The fair value of the
SBA-guaranteed debentures are estimated based upon market interest rates for our
own borrowings or entities with similar credit risk, adjusted for nonperformance
risk, if any. At September 30, 2020 and December 31, 2019 the SBA-guaranteed
debentures would be deemed to be Level 3 as defined in Note 6 to the
Consolidated Financial Statements).
72
As ofSeptember 30, 2020 , we have incurred$5.6 million in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries received their licenses, which were recorded as prepaid loan fees. As ofSeptember 30, 2020 andDecember 31, 2019 ,$2.9 million and$3.5 million of prepaid financing costs had yet to be amortized, respectively. These prepaid financing costs are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability. The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three and nine months endedSeptember 30, 2020 and 2019 (in millions): For the three months ended For the nine months ended September 30, September 30, September 30, September 30, 2020 2019 2020 2019 Interest expense $ 1.3 $ 1.3 $ 4.0 $ 3.8 Debenture fee amortization 0.2 0.1 0.5 0.5
Total interest and financing expenses $ 1.5 $ 1.4 $ 4.5 $ 4.3 Weighted average interest rate 3.3 % 3.4
% 3.3 % 3.4 % Effective interest rate(1) 3.8 % 3.8 % 3.8 % 3.8 % Average debt outstanding$ 161.0 $ 150.0 $ 161.0 $ 150.0 Cash paid for interest $ 2.7 $ 2.6 $ 5.3 $ 5.0
(1) Includes the impact of loan fee amortization.
Notes Offering OnAugust 21, 2017 , we issued$42.5 million in aggregate principal amount of 5.75% fixed-rate notes dueSeptember 15, 2022 (the "2022 Notes"). OnSeptember 8, 2017 , we issued an additional$6.4 million in aggregate principal amount of the 2022 Notes pursuant to a full exercise of the underwriters' overallotment option. The 2022 Notes will mature onSeptember 15, 2022 and may be redeemed in whole or in part at any time or from time to time at our option at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest is payable quarterly. We used all the net proceeds from this offering to fully redeem notes issued in a prior public offering and a portion of the amount outstanding under the Original Facility. As ofSeptember 30, 2020 andDecember 31, 2019 , the aggregate carrying amount of the 2022 Notes was approximately$48.9 million for both periods and the fair value of the 2022 Notes was approximately$48.1 million and$49.7 million , respectively. The 2022 Notes are listed onNew York Stock Exchange under the trading symbol "SCA". The fair value of the 2022 Notes is based on the closing price of the security, which is a Level 2 input under ASC 820 due to sufficient trading volume. In connection with the issuance and maintenance of the 2022 Notes, we have incurred$1.7 million of fees which are being amortized over the term of the 2022 Notes, of which$0.7 million and$0.9 million remains to be amortized as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. These financing costs are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability. 73
The following table summarizes the interest expense and deferred financing costs on the 2022 Notes for the three and nine months endedSeptember 30, 2020 and 2019 (dollars in millions): For the three months ended For the nine months ended September 30, September 30, September 30, September 30, 2020 2019 2020 2019 Interest expense $ 0.7 $ 0.7 $ 2.1 $ 2.1 Deferred financing costs 0.1 0.1 0.3 0.3
Total interest and financing expenses $ 0.8 $ 0.8 $ 2.4 $
2.4
Weighted average interest rate 5.7 % 5.7 % 5.7 % 5.8 %
Effective interest rate(1) 6.4 % 6.4 % 6.4 % 6.5 %
Average debt outstanding $ 48.9 $ 48.9 $ 48.9 $ 48.9
Cash paid for interest $ 0.7 $ 0.7 $ 2.1 $ 2.1
(1) Includes the impact of loan fee amortization, including agency fees.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As ofSeptember 30, 2020 andDecember 31, 2019 , our off-balance sheet arrangements consisted of$30.7 million and$37.5 million , respectively, of unfunded commitments to provide debt financing to 18 and 17 of our portfolio companies, respectively. As ofSeptember 30, 2020 , we had sufficient liquidity to fund such unfunded commitments (through cash on hand and available borrowings under the Credit Facility) should the need arise.
Regulated Investment Company Status and Dividends
We have elected to be treated as a RIC under Subchapter M of the Code. So long as we maintain our qualification as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders as dividends on a timely basis. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Distributions declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
To qualify for RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we maintain our qualification as a RIC, we must also satisfy certain distribution requirements each calendar year in order to avoid aU.S. federal excise tax on our undistributed earnings of a RIC. As ofDecember 31, 2019 , the Company had$21,444,320 of undistributed taxable income that was carried forward toward distributions to be paid in 2020. We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders. 74
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in the Credit Facility. We cannot assure stockholders that they will receive any distributions or distributions at a particular level. In accordance with certain applicableU.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (the "IRS"), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash, except as described below. Recently, in recognition of the need for enhanced liquidity during the current period of economic disruption, theIRS has temporarily reduced the minimum required aggregate amount of cash that shareholders may receive in such a distribution from 20% down to 10% percent of the aggregate declared distribution. This temporary modification is effective solely with respect to distributions declared on or afterApril 1, 2020 , and on or before December
31, 2020. If these and certain other requirements are met, forU.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with theseU.S. Treasury regulations or private letter rulings. However, we continue to monitor the Company's liquidity position and the overall economy and will continue to assess whether it would be in the best interests of the Company and its shareholders to take advantage of theIRS rulings.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements contained herein for a description of recent accounting pronouncements, if any, including the expected dates of adoption and the anticipated impact on the financial statements.
Critical Accounting Policies
See Note 1 to the Consolidated Financial Statements contained herein for a description of critical accounting policies.
Subsequent Events Investment Portfolio
On
Unfunded Commitments As ofOctober 29, 2020 , we had unfunded commitments of$30.9 million , including unfunded delayed draw term loan commitments of$12.1 million . As ofOctober 29, 2020 , we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded loan commitments should the need arise. Credit Facility The outstanding balance under the Credit Facility as ofOctober 29, 2020 was$166.5 million . 75 SBA-guaranteed Debentures
The total consolidated balance of SBA-guaranteed debentures outstanding as of
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