Q4 2020 Great Elm Capital Corp Earnings Call
Ladies and gentlemen, and thank you for standing by and welcome to the Great Elm Capital Corp, fourth quarter 2020 financial results call. At this time all participants are in a listen only mode. After the speaker 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 tele.
The phone please be advised that today's conference may be recorded share do you require any further assistance. Please press star zero and I would now like to hand, the conference over to a representative of the company. Please go ahead.
Thank you and good morning, everyone and thank you for joining us today.
For Great Elm Capital Corp, 's fourth quarter earnings Conference call.
If you would like to be added to our distribution list you can email investor relations of great Elm camps Dot Com and you can sign up for alerts directly on our website www dot great Elm DC Dot com.
And additions to our comments for today's call will be utilizing the investor presentation of it.
And we will not be directly referring to the slides of comments today, the generally follow the for them and structure of the presentation.
The slide presentation accompanying this morning's call and webcast can be found on our website under financial information quarterly results.
On the website and you can also expand the copy of this presentation and our earnings release form 10-K, and the link to the webcast.
I would like to call your attention to the customary safe Harbor language regarding forward looking information and so please note that mapping and today's call constitute and all sorts of sellers solicitation of offers to purchase our securities. Today's conference call includes forward looking statements and projections. We ask that you were sort of the great Elm Capital Corp, 's filings with the SEC for important factors that could cause actual result.
And differ materially from these projections.
Great Elm Capital Corp, does not undertake to update its forward looking statements unless required by law to obtain copies of the SEC filings. Please visit the great Elm capital Corp's website, and the financial information and SEC filings the.
The team's website.
Hosting the call. This morning is Peter the Great Elm Capital Corp, 's, President and Chief Executive Officer.
Reminded this webcast is being recorded Tuesday March 16, 2021, and with that I'd now like to turn the call over to Peter. Please go ahead.
Thank you Adam good morning, and thank you for joining us today on.
On today's call, we have our COO, Adam Kleinman, and our CFO Karen Davis.
I will begin with an overview of J E T. Six investment performance during the quarter discuss the challenges that we faced and the impact on the period and explain where we are subsequent to year end.
Carey will then discuss our capital position and greater detail.
And then I'll return for closing remarks.
Overall, despite the uncertainty of the pandemic on the economy credit market and general and specifically on our portfolio of companies. We were pleased to exit 2020 and the solid financial position and with dry powder to continue the progress made and repositioning our portfolio.
G E. C. C is an externally managed total return focus be D C and seek to generate both current income and capital appreciation from its portfolio of investments comprised primarily of the secured loans secured bonds and specialty finance investments.
The business currently has total assets of $283 3 million with $79 6 million of net asset value for $3 46 per share and pay a quarterly dividend of 10 cents per share.
Weighted average current yield on our debt holdings was approximately 11, 7%.
Directors of G. E C C employees of G E C N and officers and directors and Pcm's parent, including investment funds managed by directors of GEC and its parent on approximately $42 five per cent G. E C. Six outstanding shares.
As we discussed during our second quarter, 2020 Conference call, our management team and board made the determination to reposition our portfolio, which we believe was necessary in order to better strength and G. E. C. C is the ability to compete and the market.
Ted success, and our specialty finance business prestige capital.
It's impossible to conduct a thorough and our analysis of our operations date without first discussing the rights offering that the company completed in October 2020.
Throughout our history, we have sought to increase liquidity and 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 of non transferable rights offering would further strength in GEC sees balance sheet and allow G. E. C. C to take advantage of being nimble and a period of market dislocation.
We received aggregate gross proceeds of $31 $7 million strengthened our ability to grow the BDC significantly our asset coverage ratio of at yearend was 167 five per cent. We're in an excellent position to pursue new investment opportunities at compelling values on a risk adjusted return basis.
NII for the quarter ended December 31, 'twenty, and 'twenty was approximately $1 $6 million or seven cents per share as compared to NII of $1 $9 million or <unk> 18 per share for the quarter ended September 30th 2020 and.
And I I was impacted by slower than anticipated deployment of capital. Following the completion of the company's the rights offering repayments and higher than anticipated legal expenses.
The biggest impact on our fourth quarter.
With further depreciation on certain legacy portfolio of companies offset by strong performance from our more recent.
Loans and securities as we have continued to reposition the portfolio.
This included David done radio Luling lodging and Tru Asia, Although we saw encouraging financial results from Tru subsequent to year end.
As many of you know a long time legacy investment of Great Elm as the Vantage Communications group, which is the U K based satellite operator, selling wholesale satellite broadband and satellite connectivity services.
And our cost basis of Banca is the largest individual company investment that we hold.
Prior to quarter, and Avanti had uncertainty around the maturity of its first lien debt.
Subsequent to year and the company did refinance and extend this facility while also securing a number of new business wins.
Due to this uncertainty at December 31st we reported higher than expected unrealized depreciation for the physician and the fourth quarter and served and negatively impact investment income for the quarter.
The impact of this depreciation and served overshadow strong performance and recent investments such as Crestwood, apt and and tens or expect.
We expect over time to exit legacy positions and paper of more strategic deployments of our capital.
The goal is to work to build our portfolio coming out of this restructuring and a gradual and impactful manner that better represent the strategic direction of great Elm.
So that and wanted to discuss our capital deployment during the fourth quarter.
While the pace of new investments with not as robust as we would've liked early in the fourth quarter, we're seeing and excellent pipeline of opportunities and the early part of 2021.
We close the transaction during the quarter with a company called lenders funding and are participating and one of their factoring participations. This transaction has performed exceptionally well to date and we intend to do to do more business with lenders funding and the future.
Our criteria remains strict and that we want to avoid and market concentration and are utilizing a number of sourcing channels as we redeploy the capital that we've raised over the past few months.
Again, our focus has been on specialty finance.
Partially because of the favorable returns and the opportunities generated from our investment and prestige capital and generally a higher amount of demand in that sector more specifically our time has been concentrated in the following subsectors asset based lenders equipment leasing companies factoring businesses and merchant cash advance for.
Riders.
Prestige is the New Jersey based company and for over 30 for years, it's been a provider of spot factoring services growing into a leader throughout the market with more than 30 years and business and true through greater than $6 billion of transaction sector prestige has the track record of strong credit underwriting with minimal losses.
And 2019, the company's pre tax income was approximately $2 $8 million and 2020 prestigious pretax income increased to approximately $4 million on a preliminary unaudited basis.
The company's growing profitability and new business pipeline continues to exceed our internal expectations and.
And it's been an ideal relationship to date G. E. C. Six balance sheet enables prestige to increase the size of transactions that can pursue and our investment and prestige may create opportunities that would allow GEC feed of participate and certain of prestigious larger factoring transactions directly.
This would be and potentially higher rates of return and stronger underlying credit quality than more traditional leverage credit investments and we completed three of these investments in 2020 at a rate of 13% per annum.
Unlike investments sourced and the secondary market or as part of the syndicate. These transactions would be proprietary to G. E C C and unique to our portfolio, we expect to close more of these in 2020 one.
With that I would like to turn it over to Carey to discuss our portfolio performance for the quarter.
Thanks, Pete and all.
To provide the basic overview of the great Elm BDC portfolio and close with investment activity during the period artists.
Our December 31st portfolio of <unk>, 41 investments 31 of which are debt and kind of which of your equity the <unk>.
31 day investments account for $108 million or approximately 71 per cent of the fair value and Penn equity investments account for approximately $44 million of fair value of the portfolio.
The weighted average current yield on our debt investments was 11, 7%, while the weighted average current yield of our income generating equity investment from prestige and Crestwood equity partners is approximately 15, 2%.
And we intend to grow the yield generating equity portion of our portfolio is the target income generating specialty finance investments to expand and diversify our holding.
We increased our equity investments from last quarter and it's important to note that three of the 10 equity investments totaling approximately $27 4 million of fair value at December 31, our income generating equity investment.
Of the $108 million of debt holdings, roughly $59 million of invested in floating rate debt with the weighted average current yield of $9 four per cent Russ.
Roughly $50 million invested and fixed rate debt with the weighted average current yield of $14 seven per cent.
Our portfolio is currently heavily weighted in the wireless telecommunications service business due to our largest holding avanti. However, as we grow our investments and the specialty finance day and further diversify our holding and we expect the portfolio to generally be less concentrated with the additional focus and the specialty finance sector.
As Peter noted earlier, we saw higher than normal number of prepayments during the period and exited 12 position.
We've been able to successfully find compelling investment opportunities at prices below par and each of the last six quarters with this past quarter's weighted average price of new debt investments at a recent low this past quarter, we were able to deploy capital at a weighted average price of 92% of par and monetize investments at 100% of par.
In the fourth quarter, we monetize the considerable portion of capital and nearly $44 million.
We continue the process of repositioning of capital with $35 $3 million of new investments and more.
More importantly, we continued to see stability and a weighted average current yield which was 11, 7% at the end of the fourth quarter.
Moving to financial highlights I'll go through the quickly, but and by all of you to review our press release accompanying presentation and of course, our SEC filing.
Total weighted average shares outstanding an increase of $22 2 million for the quarter from $10 7 million and the prior quarter.
Net loss per share was <unk> 43 cents per share and the corner compared to net income of 17 cents per share and the prior quarter largely due to the increase the unrealized depreciation and Peter noted earlier.
NII per share came in at seven cents compared to 18 cents and the prior quarter.
Net asset value or NAV was $3 46 per share at the end of the period, which reflects the increased shares outstanding following our rights offering and stock distribution.
At December 31, total assets grew to approximately $283 million compared to $265 million and the prior quarter.
Total fair value of investments was $151 $7 million compared to $169 $5 million for the prior quarter and Nab equated to $79 $6 million up from $60 $5 million for the prior quarter.
Total debt outstanding was approximately $118 $7 million and was comprised entirely of our unsecured baby bonds.
Our outstanding debt balance of decreased quarter over quarter throughout the year as the repurchase baby bonds at a significant discount to par, reducing both interest expense and our future obligations.
Currently we are looking at various options given the favorable refinancing market surrounding bdcs in general, while always thinking areas in which to improve the spread between our yield and our cost of capital.
Cash was $52 $6 million at the end of the period of significant increase over the prior quarter.
And with that I'll turn it back to Pete for closing remarks.
Thanks Kerry.
I'd like to close with our dividend and capital deployment, and then discuss the positive and impactful change and GE ACC and general weed.
We declared a tense and cash distribution to shareholders of record on March 15, 2021, with a payable date of March 31 and 2021.
Also announced this morning that we will be paying a 10 cent per share cash distribution to shareholders for the quarter ending June 32021.
This represents and indicated yield of 11, 5% on NAV at year end, and an 11.0% yield on our common stock price as of Friday's close.
Moreover, we feel this position of the company favorably work and examine the dividend on a quarter by quarter basis with the potential for increasing as conditions warrant.
We've made considerable progress since our announcement of the restructuring of our portfolio in the second quarter, we had difficult and challenging decisions to make during the period of economic uncertainty and we made them.
Throughout the process and strengthened our balance sheet have conducted a sizeable turnover and our portfolio and a short amount of time and a favorable yield and now have the leverage and capacity to grow.
Finally, as an externally managed BDC, great Elm capital management or GE ECM is responsible for the day to day investment decisions impacting the BBC and we're pleased to have added two new members to our investment committee from Imperial capital asset management, Jason Reef and Matt Kaplan, Jason has been executive co chairman of great.
The group's board of directors since February of 'twenty, and 'twenty and it's the co founder Chairman and Chief Executive Officer of Imperial capital asset management.
Matt joined the ICANN and 2020 after spending for years at Citadel from 2015 to 2019, investing and special situations and event driven credit and equities.
This is the significant development for the BDC. Our goal has been to both strengthen and broaden gcm's reach and financial acumen and <unk>.
And with ICANN for several periods now share the same philosophy about investment opportunities and credit markets. We are very pleased to have the benefit of Jason and mass expertise and look forward to working closely for the benefit of all shareholders and the future.
With that we will turn the call over to the operator to open for questions.
Thank you as a reminder to ask a question you will need to press star one on your Touchtone telephone and again Thats Star one on your Touchtone telephone to ask a question to withdraw your question press the pound key.
The standby, while we compile the Q&A roster.
And again Thats Star one on your Touchtone telephone to ask the question.
Our first question comes from the line.
Matt Stewart of NAS capital.
Your line is open.
Thank you Hi, Peter how are you.
I'm doing well net how are you.
Great its interesting ive kind of following along with the repositioning.
The question I have just I was curious what else you can tell us.
About how youre going about the search for more businesses like prestige, obviously that was the big win.
If you could find a few more like that that would be great I assume theyre pretty niche businesses with that type of return probably hard to find and also a lot of people wouldn't really want to sell it.
So I'm just curious is there anything else you can tell us about that process or what.
<unk>.
You know what you're finding is the search for a more specialty finance businesses.
Sure.
So and that I think that's the great question.
I think there's a lot of fruit and what you've just said, they're definitely tend to be niche businesses. Each kind of sub niche has its own dynamics that being said.
Getting the first one done prestige is probably the hardest part and I think the quality of the relationship that we built there has led to warm introductions with other people that they know.
And so we've had a and awful lot of conversations with a variety of different companies that fit a similar profile they arent all and factoring but.
What we're looking for is a team that's been together for quite some time has a really good credit underwriting history.
Has the very profitable niche business and then ideally on top of that.
Like prestige is able to benefit from and institutional sized balance sheet for those few instances of year, where they have and very interesting transaction opportunity, but the size of that opportunity is bigger than they would stomach on their own.
So that's that's the bit of the profile, we have a lot of conversations ongoing it was disappointing did not get more done in the quarter.
We did close the participation of opportunity with the group called lenders funding.
And we're very pleased with that and believe that we will have more of those transactions.
In the coming quarters.
That's kind of as good I think that could give the BDC of really nice focus if you're able to.
Execute on this repositioning and I wish you luck.
And thanks I appreciate it okay take care.
Thank you again to ask a question. Please press star one on your Touchtone telephone and again Thats Star one on your Touchtone telephone to ask a question.
And at this time I'd like to turn the call back over to management for closing remarks.
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 and follow up.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Great.
[music].
Yeah.
Great.
And.
[music].
Yeah.
[music] and.
Great.
And.
And.
And.
[music].