Q2 2020 Great Elm Capital Corp Earnings Call

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Thank you fate and good morning, everyone.

Thank you for joining US great on capital Corp, Second quarter earnings Conference call. As a reminder, this webcast is being recorded on Monday August 10 2020.

If you'd like to be added to our distribution list you can email investor Relations agreed on cap Dotcom, where you can sign up for alerts directly on our website www dot great M.C.C. dotcom.

The slide presentation accompanying this morning's conference call and webcast can be found on our website under financial information quarterly results.

On the website you can also find a copy of our earnings release form 10-Q, and a link to the webcast.

I'd like to call your attention to the customary safe Harbor statement regarding forward looking information.

Also please note that nothing in today's call constitute an offer to shell or solicitation of offers to purchase our securities.

Today's conference call include forward looking statements and projections and we ask that you refer to grade on capital courts filings with the FCC for important factors that could cause actual results to differ materially from these projections.

Great capital Corp. does not undertake to update its forward looking statements unless required by law.

14 copies of the FCC filings. Please visit great on capital courts Web site under financial information, that's easy filings or visit the Fccs web site.

Hosting the call. This morning, as Peter read Great on capital courts, President and Chief Executive Officer, I will now turn the call over to Peter.

Thank you Adam good morning, and thank you for joining us today.

I'm joined this morning by our COO, Adam Kleinman portfolio manager, Adam <unk>, and our CFO carried Davis.

Where relevant in our prepared remarks, we'll point you to the corresponding slide number and deducted Adam referenced which is available on our website as well through the webcast.

Please turn to slide three to discuss GE Ccs portfolio repositioning.

For the avoidance of doubt, we remain intently focused on maximizing shareholder value through our monthly distributions potential special distributions and by increasing the book value of our shares.

During the quarter ended June Thirtyth 2020, we began repositioning the portfolio, including taking actions to create liquidity that had the effect of depressing net investment income or and I.

Specifically is the impact of cobot 19 increased volatility in the leveraged credit secondary markets.

Proactively monetize investments in anticipation of more attractive redeployment opportunities.

Toward the end the quarter ended June 30, 2020, and following quarter end, we redeployed a majority of our cash into new cash generative investment opportunities that diversify our holdings.

As we continue to diversify our holdings, we intend to wait investments in specialty finance businesses like prestige capital Sundance LLC. Its performance has exceeded internal expectations more significantly in our future portfolio.

Nevertheless, and <unk> for the quarter was approximately 0.9 billion or nine cents per share as compared to.

2.7 million or 26 cents per share of during the prior quarter.

Quarter over quarter reduction in and I was driven by the monetization of certain income generating investments as we continued to meaningfully grow our cash balance and the loss of cash noncash income from investments like PFS Holdings Corp, and David on radio Inc., both placed on nonaccrual status during the prior quarter.

Please turn to slide four for a reconciliation of the quarter over quarter change in our total investment income.

As I noted the reduction of investment income during the quarter was driven by multiple factors.

<unk> sales of commercial barge line full house resorts and soon after group throughout both the prior quarter and the quarter ended June 30, 2020 reduced our investment income, while increasing our cash balance to redeploy as opportunities arise.

Second our investments in PFS Holdings, and David Dodd Legacy full circle investment were placed on non accrual at the end of the quarter ended March 31 2020.

Please turn to slide five to review new investments we've made since the quarter ended March 31 2020.

Recent leverage credit secondary market volatility has increased the number of potential investments in our pipeline.

We continued to see high yielding investments across a broad range of sourcing channels as we redeploy the capital that we've raised over the past few months.

New primarily cash income generating investments we've dealt with purchase helped increase the average current yield on the portfolio and diversify our holdings.

Throughout this past quarter in subsequent to quarter end, we actively deployed approximately 25.5 million available cash into eight new investment at a weighted average current yield of 12.7% in.

In dollars the current yield on these investments is greater than $3.9 million, which is quite meaningful to our income profile.

On slide seven.

We provide some background on our acquisition of an investment in prestige capital finance.

On February eight 2019, GCC acquired 80% of the outstanding equity interest of prestige for approximately $7.5 million.

GCC acquired its interest from founder Harvey Kaminski, facilitating his retirement and the transition of the business.

To longtime executives Alan Elias off Stuart Rosenthal continued to manage the business today.

Importantly, Elias often rosenthal on the remaining 20% a prestigious equity fostering a significant alignment of interest between management and GE Si Si.

Procedures, a leading provider of spot factoring services, providing clients with an opportunity to sell individual accounts receivable for an upfront payment.

Prestige purchases the accounts receivable of creditworthy companies from its clients.

Typically advances, 75%, 85% of the receivable to decline upfront and remit the rest with the client less prestigious STI upon payment of the receivable.

Prestigious clients are generally unable to access traditional bank financing to meet their capital needs, but as noted have accounts receivable from creditworthy companies.

The combination of clients capital needs and receivables from credit worthy Counterparties allows for speech can consistently underwrite profitable business, well, taking limited corporate credit risk.

Consequently over more than 30 years in business and through greater than $6 billion of transactions factor prestige has a track record of strong credit underwriting minimal losses.

Please turn to slide eight.

One of the reasons, we're intently focused on the specialty finance basis, you did the potential profitability of niche specialty finance businesses like for stage.

Prestigious a highly profitable company in 2019, the company's pretax income was approximately $2.8 million on average book equity of $3.1 million.

First half of 2020 prestigious pre tax income was approximately 1.5 million on average book equity of 3.3 million.

The company's growing profitability and new business pipeline continue to exceed our internal expectations.

Further GE Si Si earns a high rate of return on its investment per stage spot. Despite not acquiring prestige until February 2019, G. SIFI received 1.6 million and distributions from per stage throughout 2019, representing an approximate 24% annualized yield on its net investment.

Through the first half was 2020 GE Si Si received 0.9 million in distributions also representing an approximate 24% annualized yield on its investment.

GE Ccs balance sheet enables prestige to increase the size of the transactions. It can pursue which may further enhance its growth.

In addition, our investment in prestige may create overflow opportunities that would allow G. SIFI to participate in certain a prestigious lodging factoring transactions correctly.

The rate of return on an under line credit quality of these transactions may be higher than our more traditional leveraged credit investments.

Unlike investment sourced in the secondary market.

These transactions would be proprietary to GE Si Si and you need to our portfolio.

Please turn to slide nine for additional detail on our specialty finance focus.

Positive trends our investment in prestige continues to exhibit lead us to explore complimentary opportunities in other niche areas of specialty finance.

Focused on acquiring controlling interest in a number of subcategories of specialty finance, including factoring asset based lending equipment leasing hard money real estate lending and trade claim acquisition.

In addition, we believe that owning controlling interest in businesses and the above disciplines may create proprietary overflow investment opportunities.

As an investor and niche specialty finance businesses, who can help our partners grill by creatively structuring transactions and utilizing our liquid balance sheet.

Please turn to slide 11 for a high level description of G. SIFI.

GCC isn't externally managed total return focus BDC with a liquid balance sheet.

G SIFI seeks to generate both current income in capital appreciation from its portfolio of investments comprised primarily of secured loans secured bond and specialty finance investments.

As of June 32020.

He said he had total assets of approximately 258 million a portfolio fair value of 146.3 million and a net asset value of 53.2 million equating to $5 in 10 cents per share.

The weighted average current yield on our debt holdings was approximately 10.2%.

Importantly, roughly 24% of GE Si Si shares are held by employees and affiliates of great on capital management, Inc. GE Ccs investment manager, creating a very clear alignment of interest between management and our shareholders.

Let's turn to slide 12 for an overview.

The majority of our third and fourth quarter 2020 distributions will be paid shares of our common stock in order to best capitalize on potential opportunities. We believe it is prudent to preserve as much capital as possible and further strengthen our balance sheet.

Over the trailing 12 months GE Ccs paid one dollar and five cents in total distributions consisting of an 8.3 sent monthly based distribution and they.

He five cents special distribution.

Based on June Thirtyth, and Avi in closing market price total distributions equate to an annual distribution yield of 20.5% and 24.6% respectively.

During the quarter, we deployed capital at a weighted average price at 92% of par and we monetized investments at a weighted average price at 98% of par.

Slide 13 breaks down the portfolio in detail.

The portfolio contains 37 investments 29 of which our debt and eight of which are equity.

29 debt investments account for 121 million of fair value and the equity investments accounted for approximately 25 million a fair value.

A weighted average current yield on our debt investments at 10.2%, while the weighted average current yield of our income generating equity investments in prestige input Crestwood equity partners, it's approximately 18.8%.

Certainly intend to grow the equity portion of our portfolio as we target income generating especially finance investments to expand and diversify our holdings.

Please turn to slide 14 to break down the quarter and portfolio by asset and interest rate type.

Approximately 83% of the fair value of the portfolio is comprised of debt investments with the balance in equity investments of the 121 million of debt holdings, roughly $76 million invested in floating rate debt with a weighted average current yield of 8.2%.

Roughly 45 million has invested in fixed rate debt with a weighted average current yield of 13.6%.

On slide 15 break down the portfolio by industry wireless telecommunications services comprised of our investments in Avanti is still the largest industry waiting. Nevertheless, we continue to maintain a diversified portfolio of investments.

Indicated by the 22 different industries represented.

Furthermore, as we grow our investments in the specialty finance space and diversify our holdings, we expect that industry waiting to increase and concentration the decrease in other industries.

Turning to slide 16, well get a more granular picture of GE Ccs investment activity quarter over quarter, you can see we've been able to find compelling debt investment opportunities at prices below par in each of the last five quarters with this past quarter's weighted average price if any debt investments at a recent low.

This past quarter, we were able to deploy capital at a weighted average price at 92% of par and monetize investment that 98% of car.

Certain investment prices rose from their March 2020 laws, we chose to monetize a portion of our investment portfolio, increasing our cash balance in reducing net investment income as I noted earlier, we view this as an early stage and the repositioning of our portfolio into more creative specialty finance acquisitions that complement our robust book of corporate.

Credit investments.

We invested capital at a 12.2% average current yield the highest in sometime importantly, we raised more than twice as much capital is we deployed during the quarter shoring up cash on our balance sheet and improving our liquidity profile.

We monetize 37.5 million of investments at a weighted average current yield of only 6.5%.

Going forward in addition to specialty finance acquisitions, we're focusing our efforts on higher quality leverage credit investment opportunities that appear to be overly impacted by recent market volatility.

Let's turn to slide 18.

To review financial highlights from the quarter earnings per share with 34 cents in the second quarter and <unk> per share came in at nine cents as I noted earlier on the call net realized gains were also nine cents as we repurchased a portion of our outstanding indebtedness below par, creating a gain on our income statement in improving our asset coverage ratio.

Net unrealized gains were 16 cents as volatility somewhat subsided and be leveraged credit secondary markets and fair values rose net asset value or an A.B. was $5.10 per share at period end, a small increase quarter over quarter.

Please turn to slide 19 for a financial overview of the portfolio.

At period end total assets were 258 million total fair values investments was 146.3 million and our five dollar and 10 cents per share and Avi equated to an aggregate and they'd be a 53.2 billion.

Total debt outstanding was approximately 119.5 million and was comprised entirely of our unsecured baby bonds.

Our outstanding debt balance decreased quarter over quarter, as we repurchase baby bonds at a significant discount to par reducing both interest expense in our future obligations.

Cash was 31 million at period end meaningful increase since the prior period as we monetized investments and improved our liquidity profile.

Turning to slide 20, let's discuss the quarterly operating results.

Total investment income of 4.8 million 47 cents per share compared to 6.4 million or 64 cents per share during the prior quarter.

Net operating expenses of 3.9 million or 38 cents per share compared to 3.8 million or 38 cents per share during the prior quarter.

And I have 0.9 million or nine cents per share is a significant departure from the prior periods 2.7 million or 26 cents per share as we began our transition to a more diversified portfolio of accretive cash income generating investments.

Turning to slide 22.

Lets discuss GE capital activity.

We're excited about our investment pipeline, particularly the opportunities, we see and specialty finance.

As a result on July 13, 2020 filed a form and two registration statement with the FCC to conduct and Nontransferable rights offering.

Separately, we are subject to a minimum asset coverage ratio of 150%.

For the proposal that was approved at our 2018 annual stockholders meeting.

As of June 32020 of our asset coverage ratio was approximately 144.5% up from 141.1% last quarter. As a result of continuing to report and asset coverage ratio below the minimum asset coverage ratio will be subject to certain limitations on our ability to incur additional debt issue preferred stock may.

Cash distributions on junior securities or repurchase junior securities in each case.

Coordinates with the investment company after of 1940 as amended and the indentures governing our outstanding notes until such time, because we are above the minimum asset coverage ratio.

Please turn to slide 23.

As previously announced in May 2020, our board declared monthly distributions through the month ending September Thirtyth 2000, 28.3 cents per share such distribution and she'll be paid in cash weren't shares of our common stock at the election of shareholders. Although the total amount of cash to be distributed to all shareholders will be limited to approximately.

10% of the total distributions paid to all shareholders.

Remainder of the distributions will be paid in the form of shares of our common stock in August 2020, Our board set monthly distributions of 8.3 cents per share for the fourth quarter of 2020 through the month ending December 31st 2020 distributions will be paid in cash or shares of our common stock at the election of shareholders.

Although the total amount of cash to be distributed to all shareholders will be limited to approximately 10% of the total distributions to be paid to all shareholders again, the remainder of the distributions will be paid in the form of shares of our common stock.

Finally, please turn to slide 25 for GE Si Si summary.

During the past quarter, we began repositioning the portfolio in creating liquidity toward the end of the quarter and following quarter end, we redeployed cash into new cash generative investment opportunities that diversify our holdings and increase investment into the continue to believe that the investments and niche specialty finance businesses are very creative uses of capital.

And we are focusing efforts on sourcing and acquiring these investments.

The significant cash balance in those secured credit facility, our balance sheet is flexible and liquid.

Thank you for joining us this morning.

We continued to be confident and the upside potential in the portfolio and we're diligently sourcing and reviewing new investment ideas. We believed that we formed a significant alignment of interests with you our shareholders. Thank you again for the support and confidence that you placed in us with that we will turn the call over to the operator to open for questions.

Thank you Sir.

Ladies and gentlemen, if you have a question at this time. Please press Star then to number one key on your Touchtone telephone. If your question has been answered one which can be more yourself from the Q. Please press the pound key again Dot star one on your telephone keypad.

There are no Chris I'm, not showing any questions at this time I wouldn't I would like to turn the conference Snacking Mr. Adam Yes.

Thank you again for joining us. This morning, we look forward to continued dialogue and please let us know if we can be helpful with anything follow up.

Ladies and gentlemen. This concludes today's conference. Thank you for participation and have a wonderful. Okay. You may now disconnect.

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