$3.27
$12.86
bear $3.27
base $8.07
bull $12.86
margin of safety $4.75
market price* $7.06
Stellus Capital Investment Corporation is an externally managed business development company that lends to smaller U.S. private companies, mostly through first-lien floating-rate loans, with some second-lien loans and small equity stakes. At June 30, 2026 the portfolio was worth $968 million, funded by $367 million of shareholder capital (net asset value $12.80 a share on 28.7 million shares) and about $602 million of borrowings: $260 million of SBA-guaranteed debentures, a $219 million bank credit facility and $125 million of 7.25% notes due 2030. Because borrowing is the raw material of a lender, we value its earnings after interest and do not subtract the borrowings a second time; instead, the future cost of that funding is built directly into each case. How we measured earnings. We count the cash the lending business earns: net investment income, less interest the borrowers paid by adding to their loans (paid-in-kind interest) and discount accretion, both of which are non-cash, plus actual realized gains and losses on investments, since lost principal is the real cost of staying in this business. There is no stock compensation. On this basis earnings per share were $0.33 (2016, after energy-loan losses), $1.51 (2017), $1.62 (2018), $2.26 (2019, lifted by equity sales), $0.55 (2020), $2.01 (2021, lifted by equity sales), $1.57 (2022), $0.49 (2023), $0.89 (2024) and $1.14 (2025). The ten-year median is about $1.33, but that figure describes a business with lower funding costs and more income per share than today's. What has changed. The first half of 2026 confirms a lower level, two quarters running: net investment income was $0.52 a share against $0.69 a year earlier, and total investment income fell 10% as floating loan rates came down (the portfolio yield had already dropped from 10.3% to 9.3% during 2025), the portfolio shrank by about $40 million, and five borrowers were on non-accrual at year-end. On a cash basis the business is now earning about $0.78 a share a year before credit losses, versus $1.09 in 2025. Realized losses were another $6.5 million in the half, and paid-in-kind interest has risen to about $6.8 million a year (roughly 0.8% of the 9.3% portfolio yield), a sign some borrowers are short of cash. Distributions were reduced to $0.68 a share for the half, from $0.80. Growth check. Owner earnings rose 29% in 2025, but only because realized losses swung to a small gain. Our base case starts at $0.66 a share, 42% below 2025's $1.14, because the lower run-rate is already visible in two quarters of results. We credit no growth in any case: the lender has recycled $130 to $150 million of repayments into new loans each year for over a decade, which keeps the book running, but portfolio growth, wider spreads and new strategies are not in the bag. The funding cliff. The biggest change from our previous view is how we treat the SBA debentures. $260 million of them were locked in years ago at very low fixed rates, mostly 1.3% to 3.8% including SBA charges, and they mature on a fixed schedule: $85 million in 2028-2029, $11 million in 2030, $89 million in 2031, $50 million in 2032 and $25 million in 2033-2034. When they mature, the money must be replaced at today's rates; the company's own most recent SBA borrowing (August 2023) cost 5.96% and its 2030 notes cost 7.25%. Our previous analysis implicitly assumed this cheap funding lasted forever. Replacing it at about 5.75% raises annual interest by about $6.5 million, or $0.23 a share, phased in from 2028 to 2034. That is a dated, contractual fact, so it applies in every case. Base case, $8.07 a share. Cash earnings of $0.78 a share, less credit losses of 0.33% of the portfolio a year ($0.11 a share, between the ten-year realized record of about 0.23% and the heavier 0.63% of 2020 to mid-2026), gives $0.66. Paid-in-kind interest is left out until collected, which is why we use the lower loss rate rather than the recent one; counting both would charge the same weak loans twice. Earnings step down to about $0.60 by 2029, $0.55 by 2031 and $0.44 from 2034 as the debentures reprice, and then continue at that level: the business is a permanent-capital lender whose loan book has been recycled continuously since 2012. The $0.66 to $0.44 of yearly earnings, discounted at 6%, is worth $8.07 a share after all borrowings; the lenders' $602 million is paid through the interest already deducted, so nothing further is subtracted. Bear case, $3.27 a share. The loans already identified as weak go bad: at year-end $41.7 million of loans were rated substantially below expectations and non-accruals were 7.5% of cost, and 2023 and 2024 saw realized losses of $30.2 million and $15.7 million. We assume $15 million of realized losses in each of the next two years (earnings about $0.25 a share), losses then running at the 2020-2026 rate of 0.63% a year, a smaller earning portfolio, and the SBA funding replaced at 7.25% (the cost of the company's latest unsecured notes) because further SBA leverage is not available. Earnings fall to about $0.33 by 2031 and $0.15 from 2034. The borrowings stay serviceable in this case (earnings remain positive after interest and asset coverage stays well above the 150% legal minimum), but with debt of about 1.6 times equity, what is left for shareholders after the lenders is worth only $3.27 a share. Bull case, $12.86 a share. The company's own levers work: borrowers paying in kind pay in full, adding about $0.24 a share, credit losses return to the ten-year rate of 0.23%, and the maturing debentures are replaced at 5.5% through a new SBA license (a third SBA subsidiary is already formed). Earnings start near $0.94 and settle around $0.73 once all debentures have repriced. That is worth $12.86 a share after all borrowings; even this case lands only near net asset value, because management fees and the higher cost of replacement funding absorb most of the spread. Change since our previous view. We previously valued the shares at $7.00, $14.20 and $17.50. The first-half 2026 results, which were not available to us before, show earnings about 30% below the level we had used, and we now charge for the repricing of the low-rate SBA debt instead of treating it as permanent. Offsetting these, we use a lower long-run credit-loss charge in the base case, credit paid-in-kind collections in the bull case, and replaced the previous bear case's unexplained 4% yearly erosion with specific loss and funding assumptions. Margin-of-safety price, $4.75. This is a leveraged lender whose earnings are falling, whose credit quality is under visible strain and whose cheapest funding is running off, so the margin-of-safety price sits about 41% below the base case. From that price the bear case implies a loss, while the base case implies well over 20% a year if the gap closes within a few years, with distributions on top. What would make this wrong. If short-term interest rates rise again, floating-rate loans earn more and all three cases rise; if they fall further, earnings fall below our base. Non-accrual loans returning to full payment, or a new SBA license at low cost, would push toward the bull case. A repeat of 2023-level losses, or paid-in-kind interest that is never collected, would push toward the bear case. The 2026 figures come from the half-year report's financial data; the full quarterly narrative was not available to us.