Q2 2021 Great Elm Capital Corp Earnings Call

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Good morning, and ladies and gentlemen, and welcome to the Great Elm Capital Corp, Second quarter 2021 financial results Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.

If you have a question and please press the star and then the number 1 key on your Touchtone telephone if anyone's share require assistance during the conference. Please press Star then zero on your telephone and.

As a reminder, this conference call is being recorded I wouldn't like to turn the conference over to a representative of the company.

Thank you and good morning, everyone and thank you for joining us for Great Elm Capital Corp, second quarter earnings conference call, if you'd like to be added to our distribution list you can email investor relations at Great Elm Caf Dot Com, where you can sign up for alerts directly on our website at great Elm C C Dot com.

In addition to our comments for today's call, we will be utilizing and investor presentation and accompanying them all.

We will not be referring directly to the slides our comments today will generally follow the form and structure of the presentation.

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

On the webcast on the website you can also find a copy of this presentation or press 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 great Elm Capital Corp, 's filings with the SEC for important factors that could cause actual results to differ materially from these projections great.

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

To obtain copies and SEC filings. Please visit great Elm capital Corp's website under financial information and SEC filings or visit the SEC's website.

Hosting the call. This morning is Peter Reed, Great Elm Capital Corp, 's, President and Chief Executive Officer.

As a reminder, this webcast is being reported on Tuesday August <unk> 2021.

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 today's call, we have our COO, Adam Kleinman, our CFO Karri Davis, and our portfolio manager Matt Kaplan.

As is our usual practice I will begin with an overview of GEC fees and investment performance during the quarter, Matt will discuss our portfolio Cary will discuss our capital position and greater detail and then I'll return for closing remarks.

This was a solid quarter for great Elm as we successfully deployed nearly $50 million of capital and over 25 investments at a weighted average yield of 9.3%.

True NII, despite the higher than anticipated number of redemptions and grew our investment portfolio to $209.4 million at fair market value and <unk>.

8% increase from $193.6 million at the end of March.

A robust pipeline of investment opportunities in part due to our ownership position in and relationship with prestige capital makes us very confident going into the back half of 2021.

We continue to actively pursue additional opportunities and the specialty finance space.

As previously discussed and May we entered into a $25 million credit facility with city National Bank and in June we issued $57.5 million of 5 and 7 and 8 unsecured notes maturing in 2026 day.

To note offering provided us with an incremental $24 million following the redemption of our 6.5% notes due in 2022.

Overall, we were able to increase our liquidity and a lower cost of capital and extend our maturities as well as increase the weighted average yield on our debt investments from the prior quarter to approximately $11.1 per cent.

Finally, our asset coverage ratio was 156, 2% at the end of the quarter.

And we feel like things are moving in the right direction.

Let me take a quick moment to provide an overview of our financial position.

Quarter, and GCC had total assets and $397.8 million with $91.7 million of net asset value or $3.90 per share in terms of NAV.

Is a slight increase from the $3.89 per share.

Reported at March 31, and 2021.

And we pay a regular quarterly cash dividend of <unk> 10.

Which represents a yield of 10, 3% on June 30 and <unk>.

NII for the quarter was approximately $2.1 million or <unk> 90 per share as compared to NII of $1.5 million or <unk> <unk> per share for the quarter ended March 31 and 2021.

The improvement and NII with largely due to a strong quarter of deployments, leading to a 17% increase and average invested assets.

While a bond who remains our largest position. It is now a significantly lower percentage of the portfolio at fair value as compared to the same period and the prior year.

So we are getting to a point, where it <unk> impact on our overall book is lessening.

We have now deployed over $108 million and new investments and the first half of 2021 working towards building and increasingly diversified investment portfolio as we seek to rotate the portfolio into what we believe to be higher quality credits.

Our investment and and relationship with our factoring business prestige capital continues to help drive new business activity.

Q2, 2021, and subsequent to quarter and we actively deployed approximately $53.6 million of available cash and get new investments at a weighted average current yield of 9.6%.

The management of prestige has done excellent exceptional job of sourcing new investment opportunities for the business and for great Elm as we have continued to provide capital to prestige to allow it to pursue larger transactions.

This has allowed us to deploy capital and debt proprietary investments greater spreads during a tightening margin environment. It's been an excellent relationship and we're very pleased with the results thus far and 2021.

At this point I'd like to turn the call to Matt to discuss our portfolio performance for the quarter.

Thanks Pete.

Echo that we have deployed capital and to solid investments further diversifying the portfolio and have increased the portfolio's average yield.

Our June 30 portfolio contained 42 debt investments and a leg.

And equity investments excluding specs if.

If you compare this with the prior quarter from March 31st portfolio contains 33 debt investments and equity investments.

Debt investments account for $156 million.

Or approximately 74% of fair value as compared to $136 million or approximately 70% of fair value and March we are pleased with this growth and even more so that we have decreased issuer concentrations, while increasing the weighted average current yield on our debt and investments to 11.1.

And as compared to 10, 9% at the end of March.

From the $156 million of debt holdings, roughly $68 million is invested in floating rate debt with a weighted average current yield of 9.7%.

Roughly $88 million and invested in fixed rate debt with a weighted average current yield of 12, 2%.

We have 3 income generating equity investments totaling approximately $24 million or 12, 1% of our overall invested capital at fair value and other equity investments totaling approximately $19 million or 8.9%.

We also hold stack instruments totaling under $10 million accounting for approximately 4.6% of fair value.

The weighted average current yield of our 3 income generating equity investments and prestige.

<unk> energy partners and Crestwood equity partners is approximately $14.1 per cent.

If you examine our portfolio by sector GCC has invested and 24 separate industries.

Portfolio is currently heavily weighted and the wireless telecommunications services business due to our largest holding avanti. However.

However, as we noted last call and Pete cited earlier as our portfolio has grown this year of on T. As a percentage of portfolio fair value has lessened.

As we seek to grow our investments and the specialty finance space to further diversify our holdings, we expect the portfolio to generally be less concentrated.

We have been able to successfully find compelling debt investment opportunities.

At prices below par to each of the last 7 quarters.

Past quarter.

<unk> deployed capital at a weighted average price of 98 per cent of par.

And the second quarter, approximately $36 million from investments from monetize and approximately $50 million of capital was deployed into new investments with higher weighted average yields.

With that I'll turn the call to Carrie to go through our financial highlights.

Thanks, Matt I'll go through the financial highlights quickly, but invite all of you to review our press release accompanying presentation and of course, our SEC filings.

Total weighted average shares outstanding increased to $23.5 million from $23.4 million and the prior quarter and $10.2 million and the prior year period. The main reason for the share increase from the prior year period with the rights offering that we completed in October 2020.

GEC reported earnings of 11 cents per share and the second quarter compared to 53 per share in the prior quarter. So NII per share increased to 9 from 6 cents over the same period, the net realized and unrealized gains on the current quarter were more modest and in the previous quarter, resulting and the lower EPS.

Net asset value or NAV increased to $3.90 per share at June 32021, compared to $3.89 per share as of March 31, and $3.46 per share at December 31, 2020 and.

This is largely due to unrealized gains during the period.

<unk> fair value of investments as of June 30, It was $209.4 million compared to 193.6 million and the prior quarter and $151.7 million at December 31 net.

Net assets were $91.7 million, a slight increase from the 91.5 million and the prior quarter.

I would like to take a few moments to discuss our capital position and the recent baby bond transaction.

Recently completed an underwritten public offering of $57.5 million 5 and 7.8 unsecured notes due June 2026, including the full exercise of the underwriters over allotment option.

These are publicly traded bonds under the symbol G E.

Oh.

Following this transaction, we redeemed our 6 and a half notes due 2022 on July 23 of this year is from.

Presented approximately $33 million and aggregate principle amount, resulting in incremental liquidity of approximately $24 million.

In summary, we now have 3 publicly traded issues of unsecured notes.

6 and a half note.

Do you and 2024 trading under the ticker TEP and <unk>.

And 3 quarter percent notes due in 2025 trading under the ticker T SEC and and.

And the new guidance on eighth note due in 2026 trading under the ticker G. T O. Our total debt outstanding was approximately $138.4 million following the redemption and it's comprised entirely of these unsecured being bought.

In addition, we have an undrawn and $25 million revolving credit facility with city National Bank.

We are pleased to have ample capital and runway to grow our business with our nearest maturity now being 3 years away.

Moreover, we continue to evaluate ways to lower our cost of capital.

And finally as Peter noted earlier as of June 32021, our cash balance was approximately $29.1 million comprised of $59.8 million of cash that's $30.

$7 million reserve for the July 23rd redemption of our unsecured notes.

2022, and is exclusive of any holdings and U S Treasury bills.

With that I'll turn it back to Pete for closing remarks.

Thanks, Carrie and Matt we will open it up for questions shortly but I'd like to close with our dividend and capital deployment and then we would be happy to take your questions.

We will again be paying a <unk> <unk> per share cash distribution to shareholders for the quarter ending September 32021, Tim.

As I mentioned earlier this represents and indicated deal that 10, 3% and.

At quarter end, and a 12, 2% yield on our common stock price as of the close on July 30th.

We expect to announce the company's record and payable date shortly.

We view the second quarter is a good turning point for the remainder of the year.

We are slowly, but surely cycling through older legacy investments that have created challenges and are doing so through the deployment of capital and the businesses and sectors that our entire investment team wants to be and at increasingly favorable yields in summary, great Downs overall investment portfolio continues to perform at a high level and <unk>.

And to deliver on our long term goals with that we will turn the call over to the operator to open for questions.

Ladies and gentlemen, if you have a question at this time. Please press the star and then the number 1 key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

The first question is from the line of Joshua Horowitz with Palm Global.

Thank you for taking my question thanks, everybody.

Could you provide additional outlook on the deal pipeline post Covid and just give us a better sense also of how.

Your balance and prepayments versus originations.

Hey, Josh Thanks for the question happy to do so.

I, probably bifurcate it a little bit into.

Our kind of cash flowing.

Physicians as well as our specialty finance investments.

Many of which and the specialty finance side are ultimately going to companies, where the credit support is linked to the quality of their assets as opposed to their cash flows.

And as you probably know we've been putting a big emphasis on putting more capital and did the specialty finance space and we have our pipeline there has been as good as it has been and quite some time.

And as good as it's ever been so we think that the higher yields and ample credit protection and the form of.

Collateral is an attractive combination to be deploying into unfortunately on the.

On the pay off of redemption side, a lot of those we don't get notice on until close to the last minute. So.

That always creates a little bit of lumpiness in the balance of our portfolio and as we mentioned, we had a little bit more and this quarter than we had planned on but if we can keep up the deployment pace into attractive opportunities, we're pretty confident that the portfolio will continue to grow and that should drive our income higher.

Okay.

Thanks for that I appreciate it.

Sure.

Again to ask Great questions. Please press Star then the number 1 on your telephone keypad.

Okay. Your next question is from the line of Richard Galli.

Yeah.

Sure.

Hi, <expletive>.

Just to.

And my understanding that the warranty.

It was written down and another 26 cents.

Could you go into more detail on what is actually going on now in Nevada.

Appreciate that.

Sure.

Ill give you what we can we are limited by confidentiality agreements with the company into how much detail. We can provide but I'll give you the best that we can at the moment.

Throughout the course and of the year.

The fair value on the second lien position has had some volatility and do it and the primary reason for that has been.

A link to Avanti has won a significant amount of new business and when it won that business that drove.

And that drove the second lien price up.

Some of that new business has taken longer than the company thought or we thought.

And to roll through into the P&L. So.

And that has driven the lower at the moment we.

We do expect debt.

The vast majority all of that business will ultimately.

Show up and the P&L and will be meaningful.

Driver of performance and Avanti.

At the moment delays that neither the company, nor we had anticipated during the quarter.

Resulted in.

It resulted in a lower valuation, we do expect that to reverse over time.

Okay. Thank you.

Sure.

We went and I'd like to turn the call back 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. Thank you for your participation you may all disconnect.

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