Q3 2020 Great Elm Capital Corp Earnings Call
Ladies and gentlemen, this is the operator today's conference call is scheduled to begin momentarily until that time your lines will they can be placed on music hold thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the Great Capital Corporation third quarter 2020 financial results Conference call.
At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to.
I hand, the conference over to your representative of the company. Please go ahead.
Thank you and good morning, everyone. Thank you for joining us for great L. Bdcs third quarter earnings Conference call.
If you would like to be added to our distribution unless you can email investor Relations agreed on capital excuse me, great Helmkamp dotcom or you can sign up for lunch directly on our website at great Elm CCGT.
In addition to our comments for today's call will be utilizing investor presentation as a company.
We will not be referring directly to the slides our comments today will generally follow the form and structure of the presentation. The slide presentation accompanying this morning's call can be found on our website under financial information quarterly results.
On the web site you can also find a copy of our earnings release form 10-Q, and a link to the webcast.
I would now like to call your attention to the customary safe Harbor statement regarding forward looking information also please note that nothing in today's call constitutes an offer to sell or solicitation of offers to purchase our securities.
Today's conference call includes forward looking statements and projections and we ask that you refer to greet Elm capital Corp's filings with the FCC for important factors that could cause actual results to differ materially from these projections.
We don't capital Corp. does not undertake to update its forward looking statements unless required by law.
To obtain copies of actually see filings. Please visit great on capital Corp's website under financial information FCC filings and visit the Fccs website.
Hosting this call. This morning, it's Peter Reid, Great on capital Corp's, President and Chief Executive Officer. As a reminder, this webcast is being recorded on Monday November nine 2012.
With that I'd now like to turn the call over to Peter. Please go ahead Pete.
Thank you Adam good morning, and thank you for joining us today.
On todays call, we have our COO, Adam Kleinman in our CFO Cary Davis.
I'll begin with an overview of Gray dome capital Corp's investment performance during the quarter discuss the results and improving financial status of our company. Following the recently completed rights offering.
Carey will discuss our capital position in greater detail and then I'll return for closing remarks.
We're very pleased to report third quarter that exceeded our expectations in terms of profitability. The overall performance of our portfolio and our ability to recapitalize the company through a rights offering.
This leaves us with the ability to take advantage of investment opportunities, particularly in specialty finance.
We grew NAV per share continued to pay out a regular dividend and believe that the company is well positioned to continue returning capital to our shareholders in an effective manner.
I'll begin today's call with a basic overview of grade on capital Corp, and outline our strategy and milestones to date.
G SIFI isn't externally manage total return focus BDC we.
We seek to generate both current income and capital appreciation from our portfolio of investments comprised primarily of secured loans secured bonds, especially finance investments.
Our quarter ended September Thirtyth, 2020 improved considerably quarter over quarter.
In several instances, we will outline where the financial standing of the company is as of September Thirtyth 2020, but I'll also discuss certain metrics on a pro forma basis in relation to our completed rights offering which closed on October Onest 2020.
As of September 32020.
GE Si Si had total assets of approximately 265 million a portfolio fair value of approximately $170 million and a net asset value of 60.5 million equating to $5.53 per share.
All of these totals represent a considerable improvement over the June 32020 period, demonstrating a favorable trend following the onset of the COVID-19 pandemic on our portfolio companies.
The weighted average current yield on our debt holdings was approximately 10.1%.
Importantly, roughly 43.6% of GE Si Si shares are held by employees and affiliates of great Elm capital management, Inc. GCC investment manager, creating a very clear alignment of interest between management and our shareholders.
Moving to the highlights for the third quarter Gray Dome capital Corp, achieved solid anti largely due to better than expected performance from our factoring business prestige capital.
Our <unk> per share of 18 cents is strong evidence that the portfolio repositioning we referenced last quarter is proceeding as expected if not better.
In our last call, we outlined a shift in strategy centered around a general repositioning of the portfolio, including taking actions to create liquidity that had the effect of depressing net investment income or and I.
Specifically, if the impact of COVID-19 increased volatility in the leveraged credit secondary markets, we proactively monetize investments in anticipation more attractive redeployment opportunities.
Through 2020, we have monetized over 85.4 million of our portfolio, while redeploying a majority of our capital into new cash generative investment opportunities to diversify our holdings.
It's we continued our evaluation of the current market. We're also aware of the need for liquidity in order to grow and I and an abbey pursuant to our operating goals.
Our capital adequacy at quarter end improved considerably with an asset coverage ratio of 150.9% compared to 144.5% in the prior quarter.
Throughout our history, we've sought to increase liquidity in a manner that is most advantageous to our shareholders, including where appropriate fixed rate debt.
As we evaluated our needs going forward, our board of directors determined that a non transferable rights offerings would further strengthen GE ccs balance sheet and allow our BDC to take advantage of being nimble in a period of market dislocation.
We are keenly aware of the challenges to raising capital below and 80, and we structured this rights offering in a manner that we felt both reflected our alignment of interest as well as benefited loyal shareholders great on capital Corp.
[noise] restructured this equity raise as a rights offering to permit existing stockholders to subscribe for their pro rata rights and avoid dilution we.
We set the price per share mechanics for the offering at a level that we believe would minimize dilution to stockholders based on the then current trading price of our shares while seeking to ensure a successful offering and lastly, we set a non transferability of the rights to ensure that only current stockholders at the time were able to take part in the rights offerings, thereby mitigating.
The concern that a non stockholder would benefit from an offering at a discount from nab or market price.
The results of the rights offering achieved our objectives raising gross proceeds of 31.7 billion and raising our asset coverage ratio to 176.5% on a pro forma basis more.
More importantly, it left GE Si Si with a stronger capital position in which to take advantage of certain investment opportunities.
Throughout the quarter, we've seen a sharp uptick in our pipeline of potential investments our criteria remains strict and that we're not seeking end market concentration and are utilizing a number of sourcing channels as we redeploy the capital that we have raised over the past few months.
New primarily cash income generating investments, we purchased helped increase the average current yield on the portfolio and diversify our holdings.
Throughout this past quarter and subsequent to quarter end, we actively deployed approximately 34.2 million available cash into eight new investments at a weighted average current yield of 12.3%.
Going forward, we do intend to wait investments in specialty finance businesses like prestige capital Finance LLC. Please performance has exceeded internal expectations.
Last quarter, we highlighted this business and I'll briefly outline the background.
Prestige is a new Jersey based company that for over 34 years has been a provider of spot factoring services growing into a leader throughout the market with more than 30 years in business and to a greater than $6 billion of transactions factored prestige has a track record of strong credit underwriting with minimal losses.
GE Si Si acquired 80% of the outstanding equity interest of prestige for approximately 7.5 million in 2019.
The original owner was retiring and the business. This transition to two talented executives and partial owners that we're actively seeking new growth opportunities.
In 2019, the company's pretax income was approximately $2.8 million on average book equity of 3.1 million.
Through the first nine months of 2020 prestigious pre tax income was approximately 3.9 million on average book equity of 3.6 million.
The company is 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 in per stage.
Fight not acquiring prestige until February 2019, G. SIFI received $1.6 million in distributions from per stage throughout 2019, representing an approximate 24% annualized yield on its net investment.
Through the first nine months of 2020 G. SIFI received 1.8 million in distributions, representing an approximate 32% annualized yield on its investment.
And it's been an ideal relationship to date GE Ccs balance sheet enables prestige increase the size of the transaction, but can pursue and our investment in prestige may create opportunities that would allow GE si si to participate in certain a prestigious larger factoring transactions directly.
This would be potentially higher rates of return and potentially superior underlying credit quality than more traditional leverage credit investments.
Unlike investment sourced in the secondary market or as part of a syndicate. These transactions would be proprietary to GCC and unique to our portfolio.
As we discussed with the market in August we believed that the return and benefits from per stage truly was indicative of the strategic direction of GE Si Si yeah.
We are continuing to focus on sourcing transactions in sectors that can serve as the de facto wheel and spoke model such as factoring asset based lending equipment leasing hard money real estate lending and trade claim acquisition.
Our <unk> lending evaluation process running stringent, but we are aware of that benefit that can arise from financial entities such as this in other words building a network that kind of create lending opportunities down the line.
We feel that this is a more unique manner building, our BDC versus the wholesale approach. It's a hyper focused element that we believe helps us provide a solid foundation from which to deploy our capital.
With that I'd like to turn it over to carry to briefly discuss our portfolio performance for the quarter.
Thank you Pete.
I'll provide a basic overview of the great <unk>.
Portfolio and investment activity during the period I.
At September 30 portfolio contains 42 investment 34 of which are that eight of which are.
The 34 debt investments accounted for $136 million or approximately 80% of fair value and the eight equity investments accounted for approximately $33 million at fair value.
The weighted average current yield on our debt.
Debt investments, but 10.1%, while the weighted average current yield of our income generating equity investment in prestige and Houston based Crestwood equity partners is approximately 17.2%.
Certainly intend to grow the equity portion of our portfolio and target income generating specialty financing documents and expand and diversify our holdings.
I'll go $136 million of that holding roughly $81 million was conducted in floating rate debt with the weighted average current yield of 7.7%.
Roughly $55 million is invested in fixed rate debt with a weighted average current yield of 13.8%.
Our portfolio is currently heavily weighted on the wireless telecommunication services business due to our largest holding of hockey however.
However, as we grow our investments in the specialty financing and further diversify our holdings, we expect the portfolio to generally be less concentrated with some additional focus on the specialty finance sector. We began to see evidence of this ship route 2020 going into Q3 at Christie's group performance.
Our investment performance was solid during the third quarter, we've been able to successfully fight a compelling debt investment opportunities at prices below par and took the last backward, but this past quarter is weighted average price of new debt investments at a recent levels.
This past quarter, we were able to deploy capital at a weighted average price of 91% of par and monetize investments at a weighted average price of 97% of par.
During the quarter, we invested capital at a 12.3% average current yield which continues an upward trend throughout the year.
This is the highest and best of yield we have seen in sometime.
In the second quarter, we monetized a considerable portion of capital raising more than twice as much capital that we deployed during that quarter.
During the third quarter, we were able to continue the process of repositioning this capital was $34.2 million of new investments compared to $18.5 million monetize warm.
More importantly, we saw improved turnaround in the weighted average current yield of investments monetized in the second quarter, it was 6.5%, but improved to 9.6%.
The third quarter.
Moving to financial highlights I'll go through these quickly but invite all of you to review our press release accompanying presentation and of course, our SEC filings.
Right for share was 72 cents in the third quarter up from 34 cents in the prior quarter.
Eni per share came in at 18 cents up from nine cents from prior quarter.
Net asset value or NAV was $5.53 per share at period end compared to $5.10 per share at the prior quarter.
Following our rights offering our pro forma NAV per share was $4, an 18 cents, which reflects the increased share count along with the net capital.
At September Thirtyth total assets grew to approximately $265 million compared to $258 million from the prior quarter.
Total fair value of investments grew to $169.5 million up from $146.3 million in the prior quarter.
A loud a cradle to $60.5 million up from $53.2 million in the prior quarter.
Total debt outstanding was approximately 180.7 million in what comprised entirely of our unsecured baby bonds.
On Oh indefinitely.
Increased quarter over quarter, as we repurchased baby bonds at a significant discount to par, reducing both interest expense and our future obligation.
Cash was $12.6 million at period, a decline over the prior quarter, but not unexpected as we deployed considerably more capital than in prior periods.
With that I'll turn it back to Peter for closing remarks.
Thanks, Kerry before I conclude we wanted to discuss our dividend for nearly four years, Great home Capital Corp has paid a regular monthly dividend of 8.3 cents per share in.
August 2020, our board sent monthly distributions of 8.3 cents per share for the fourth quarter 2020 through the month ending December 31 2020 the.
The distributions have or 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 total distributions to be paid to all shareholders. The remainder of the distributions will be paid in the form of shares of our common stock.
Now today, along with our earnings release, we also issued updated dividend information for shareholders for the first quarter of 2021.
Our board declared a change to a quarterly dividend distribution all in cash of 10 cents per share.
We made the decision based on both the capital needs of the company, but also to provide shareholders with a fourx increase in their cash dividend.
On an annualized basis is currently represents a 9.6% yield on an a b based on an a b of 90.8 million or $4, an 18 cents per share after giving effect to the rights offering and a 15.4% yield on Fridays closing price of $2.60 per share.
We feel very comfortable with our current financial position as we evaluated our capital position and performance. We also balance investment opportunities in the current market along with our ability to provide flexibility to grow the dividend in the future.
To conclude our core business is and always has been to deliver consistent and attractive investment returns in the form of distributions and abbvie increases after the repositioning of our portfolio in the second quarter, we began a trajectory in the right direction delivering on both of those schools.
We took great care in determining the strategy for enhancing capital and feel that the rights offering. We concluded ultimately succeeded and positioning great on capital Corp, appropriately, while doing so without unnecessary detriment to shareholders.
Overall, we feel good about where our portfolio sits in the current market environment heading into 2021 more importantly, we feel that we have the capacity to allow the company to grow and take advantage.
Take advantage of opportunities presented to us with that we will turn the call over to the operator for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby well, we compiled acuity roster.
Your first question comes from the line of Josh Horowitz with Palm Global.
Hi, Peter Thank you.
Good morning, Josh.
Good morning, I agree that the reconfiguration of the dividend. This is the right move so your baby.
So.
Backdrop to that you could you give us a better sense of what the company's investment capacity is sure growth given the rights offering and the.
The reconfiguration there of the of the dividend.
Sure Good question so.
You know a bit over 30 days after the receipt of proceeds from the rights offering we had been deploying those but still have proceeds to deploy.
I do think that the increase in equity capital.
Creates leverage capacity to the extent that were successful in deploying these proceeds down the road. So I think that this rights offering both gave us liquidity to execute on a pipeline that we believe is attractive and to the extent that we do that and had incremental pipeline opportunities there'd be income.
Mental debt capacity beyond that.
That would be a prudent way to fill out the right side of our balance sheet and continue to execute on attractive opportunities should those be present at that time.
Thank you.
As a reminder to ask a question you won't need to press star one on your telephone to withdraw your question press. The pound key. Our next question comes from the line of Mickey Schleien with Ladenburg.
Oh, yes, good morning, everyone Peter.
Peter I want to ask about the receivable investments you've made it pretty teach what is the nature of those investments in other words are you investing in pools of receivables are those single receivables or are you, making some sort of balance sheet investments in prestige.
Very good question or or questions Mickey so.
What we are doing in those are we are participating in particular transactions factoring transactions with prestige those transactions are with distinct clients in those clients can have a whole host of underlying account debtors and that's really the credit risk that prestige.
Just taking in the three transactions that we participated in those happen to be unusual and or large transactions with single account debtors and those account debtors were very high quality credit risks. So CBS on two of them in a government agency on the third.
So we were participating in the economics of those transactions with receiving fixed 13% rate and believe that we are taking very low fundamental credit risk.
And Peter what sort of duration do those assets typically have.
Excellent question I would say you know an expectation of up to a year given the nature of these we've already been paid off on those it's possible that we refund under certain of those transactions, depending upon the underlying client funding needs.
Okay, and just to make sure I understand your you would be at the top of the capital stack at that creditor rights given that you finance too they are.
Yeah, I think a better way to think about it is we purchased we participated in a transaction that buys the receivables from the underlying account better so in two of those examples.
CBS and in one of them is a government agency.
So that's the does the credit risk that we're taking and then also would have to the extent. There's a deficiency may have a claim back to the underlying client depending upon the deal, but we believe the credit risk that we're taking is very high quality because of who those account debtors are.
Okay, and the dividend from prestige climbed pretty meaningfully quarter to quarter and you're right. We are are we on that investment is now.
At levels that you know.
We would like to see more frequently.
Almost anywhere.
Question is is there some sort of timing issue in terms of the distribution was there a catch up or can we legitimately expect this sort of dividends on a consistent basis.
Very good question, so believe it or not we'd less capital in the business so prestigious only distributed out.
A portion of the income that is generated in the quarter. So there was no timing.
There's no timing benefit we didn't happen to get to dividends that fell into one quarter that that is a legitimate representation of a portion of the earnings that prestige had in the quarter. So it's the company's been hugely profitable this year were thrilled with it.
I don't know it to be determined whether or not we can take this quarter and annualize. It. We do think that prestige is likely to be performing meaningfully better than we thought when we.
When we underwrote the transaction.
And that's been pretty consistently true I think that it it's the nature of just how good this quarter was again, they only distributed a portion of what they made to us about half. So while our dividend received was really good the underlying earnings where you get better.
I don't know that we can plan I'm, just annualizing that quarter of earnings at prestige, but we're really thrilled with that trajectory and are looking to expand upon that.
And Peter to what extent is that performance being driven by the pandemic in other words I mean, it's the factoring business.
It almost feels like perhaps counter cyclical and is benefiting from the headwinds in the economy and we don't know what next year is going to look like but is that a fair statement.
I think in their particular case theres been enough marketplace dislocation as a result of the pandemic that their ability to respond very quickly to clients, who can't access bank capital in short order, but have credit worthy Aaas is been a huge asset of theirs and and we and our share.
Holders have been the beneficiary of that so I don't know that it you can say one for one its definitely counter cyclical but their ability to be nimble has been a huge asset in an uncertain time and we expect that part to continue you that makes sense and is their balance sheet to the extent you can tell us is it highly levered I mean.
When you see are always of 25, and 50% do start to wonder about how fragile the balance sheet is.
It we don't consider it highly leveraged they do employ leverage we we disclose prestigious results I think are balance sheet annually in connection with our audit.
One of the things to think about it its prestigious funding call. It and most factors I think are spot factors a funding call. It 75 to 85 cents upfront and the remainder is a.
Is effectively a payable owed to the customer that's a non interest bearing payable so that factors in that provides a natural I'll call it non financial leverage.
But it is a really attractive model and we feel like it is appropriately leveraged and they have lots of availability and lots of room underneath their covenants.
I understand switching gears up Peter.
Information move onto is very scarce you normally give us an update I don't think.
I think in your prepared comments Columbus was.
Brief discussion of onto it can you give us some sort of financial update on how the company is doing.
I can provide it in generalities I understand that it's difficult to get to but the company continues to grow revenue and EBITDA and Unlevered free cash flow and we are pleased with that progress.
We expect them to continue upon that trajectory and are hopeful that the continuation of that trajectory leads to a.
A good result for our investment in the company and ultimately a successful exit for our investment in the company.
Okay.
Cpk, California Pizza I think is expected to emerge from bankruptcy can you give us a sense of what your investment in CPQ will look like post bankruptcy.
Sure. So we participated in a debtor in possession facility.
That will flip to an exit term loan upon exit which as you mentioned is scheduled to happen soon on account of our first lien investment we will get back a piece of debt as well as a piece of equity our class that first lien class War Holmes said, you know a huge.
We already have the equity in the company and then our second lead position will receive a small amount of cash and a small equity interest in the in the company.
Okay.
And I noticed.
Interesting blip your best Western positions now valued at twice your costs, but it's still a non accrual which is.
Unusual circumstance can you just explain how that can be and what the prospects for that company.
Sure. So that's.
A legacy investment from when we took over.
Luling lodging there was a hotel in Texas that was the collateral that loan was performing poorly when we merged with full circle, we foreclosed upon the loan.
And so.
Sold that.
And that reduced the cost in the position.
We are owed quite a bit more than the stated principal amount based upon accrued interest and fees et cetera.
We have a borrower who is we believe has substantial financial assets.
But has declined to perform under his personal guarantee we have seen him in court. We've won a judgment and we are continuing to try to pursue.
The personal guarantee from someone who we believe has a lot of assets, but has been sort of constitutionally opposed to paying and we're pursuing our remedies through the courts.
Alright, so difficult.
And just a couple more and I appreciate your patience.
Are there any new themes, you're hearing too in terms of portfolio management now that we know there's going to be a new president and he's going to have different policies in the previous administration I'm thinking of things such as health care or maybe alternative energy is that impacting how you're selecting credit.
At the moment, it's not meaningfully impacting how we're selecting credit but it's it's.
It's something that we will be observing closely as it may create both challenges and opportunities generally speaking we are trying to have a more diversified portfolio going forward.
But for a bigger investment in the specialty finance space, we think that we've got opportunities to create more procedure like transactions that have been.
Financially very rewarding and where we think we're not taking.
A ton of underlying credit risks and so we'd like to be we'd like to have more of those so I think that that will be a bigger piece of our portfolio going forward.
Generally speaking I, we aim to have a more diversified portfolio.
Okay. My last question is just can you update us on the status of your taxable income.
We are still completing that analysis at the moment. So I don't have a great answer for that but I'm happy to follow up offline when we have it all.
Alright, Thats fine Thats. It for me. Thank you for your time and your patience.
Thanks, Mike.
Thank you with that I'd like to send it back to management for closing remarks.
Thank you again for joining us. This morning, we look forward to continued dialogue and please please let us know if we can be helpful with anything and follow up.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect presenters. Please remain online.
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