Stellus Capital Investment Corp 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are subject to financial market risks, including changes in interest rates. U.S. and global capital markets and credit markets have experienced a higher level of stress due to the COVID-19 pandemic, which has resulted in an increase in the level of volatility across such markets. The U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. In a prolonged low interest rate environment, including a reduction of LIBOR to zero, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results. For both years ended December 31, 2020 and 2019, 93% of the loans in our portfolio bore interest at floating rates. These floating rate loans typically bear interest in reference to LIBOR, which are indexed to 30-day or 90-day LIBOR rates, subject to an interest rate floor. As of December 31, 2020 and 2019, the weighted average interest rate floor on our floating rate loans was 1.21% and 1.13%, respectively. Assuming that the Statement of Assets and Liabilities as of December 31, 2020 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, the following table shows the annual impact on net income of changes in interest rates: ​ ​ ​ ($ in millions) ​ Change in Basis Points ​ ​ Interest Income ​ ​ Interest Expense ​ ​ Net Interest Income (1) ​ Up 200 basis points ​ ​ ​ $ 11.4 ​ ​ ​ ​ $ (3.5 ) ​ ​ ​ ​ $ 7.9 ​ ​ Up 150 basis points ​ ​ ​ ​ 7.6 ​ ​ ​ ​ ​ (2.6 ) ​ ​ ​ ​ ​ 5.0 ​ ​ Up 100 basis points ​ ​ ​ ​ 2.9 ​ ​ ​ ​ ​ (1.7 ) ​ ​ ​ ​ ​ 1.2 ​ ​ Up 50 basis points ​ ​ ​ ​ 0.5 ​ ​ ​ ​ ​ (0.9 ) ​ ​ ​ ​ ​ (0.4 ) ​ ​ Down 25 basis points ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ (1) Excludes the impact of incentive fees based on pre-incentive fee net investment income. See Note 2 for more information on the incentive fee. ​ Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. For the years ended December 31, 2020 and 2019, we did not engage in hedging activities. 94 TABLE OF CONTENTS ​ ​