Q4 2021 Great Elm Capital Corp Earnings Call

March 4, 2022

Thank you for standing by and welcome to the Great Elm capital fourth quarter 2021 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone as a reminder, today's program may be recorded.

I would now like to introduce your host for todays program, Adam Yates Managing director. Please go ahead.

Thank you and good morning, everyone. Thank you for joining us for Great Elm capital Corp's fourth quarter earnings Conference call.

We'd like to be added to our distribution list you can email investor relations at great Elm cap Dot com or you can sign up for alerts directly on our website www dot great Elm <unk> Dot com.

I'd like to note the slide presentation posted on our website accompanying today's call.

We will not be directly referring to slides in the presentation, but our comments will generally follow its form and structure.

A slide presentation can be found on our website under financial information quarterly results.

On our website you can also find our earnings release and SEC filings.

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

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

As a reminder, this webcast is being recorded on Friday March four 2022.

Hosting the call. This morning is Matt Kaplan, Great Elm Capital Corp, New Chief Executive Officer, I will now turn the call over to Matt.

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

I'd like to start by thanking Peter Reed Mike.

And rubble horsey for the years of dedicated service at GE ECC Im excited to be speaking with GE <unk> newly appointed CEO and look forward to the opportunities ahead.

On today's call, we have our chief compliance officer, Adam Kleinman, CFO Cary, David and Mike Kelly President of Great Elm specialty finance.

There is quite a bit to unpack. So I will begin by highlighting some of the key factors that define gcc's fourth quarter as well as our path forward today.

First I would like to address the impact of <unk> and other legacy non cash generating asset Pat on our portfolio, which were the main contributors to an approximately 25% decline in net asset value in the fourth quarter, leading us to report a NAV of $16 63 per <unk>.

Third this morning this.

This is certainly unfortunate and has led to sweeping changes within the organization along with the opportunity to reboot GE ECC.

And in addition to announcing the CEO transition. This morning, we also announced new board leadership, and a proposed $50 million rights offering in which great Elm group and other large shareholders have indicated their intent to fully exercise their subscription rate and oversubscribed.

New leadership and fresh capital are instrumental in our plan to reset GEC.

In connection with the GE ECC reboot, great Elm capital management Gcc's manager has indicated a currently intend to wait all accrued incentive fees as of March 31 2022.

Provided that <unk> shareholders approved a reset of the incentive fee total return hurdle under GE Acc's investment management agreement at the next annual shareholder meeting.

As of December 31, 2021, there was approximately $4 $9 million of accrued incentive fees held on <unk> balance sheet.

If the waiver were obtained and new incentive hurdles were approved by <unk> stockholders. The waiver would reverse these $4 9 million of previously recorded expenses, which we expect will be reflected in the quarter ending March 31, 2022, resulting in a corresponding amount of additional income and increase.

And the net asset value of $1 eight per share in the first quarter of 2022 subject to any offsetting additional expenses or losses.

Taking a step back.

Palio manager of GEC since October 2020, I've been focused on reducing position concentrations upgrading portfolio quality and increasing the allocation to cash income generating investments.

In 2020, we also began to focus on growing our specialty finance platform and related investments our goal to increase the allocation to these types of investments so that they comprise approximately half of our portfolio over time.

We believe investments in specialty finance companies and related participation opportunities can generate attractive returns with less risk than leverage credit mark.

As a permanent capital vehicle GE FCC is able to prudently allocate.

A portion of it assets and to these type of investments.

In addition to the isolated benefit individuals specialty finance investments, which are proprietary to <unk>. We believe there are significant origination and operational synergies to be gained from owning a majority interest in multiple specialty finance company.

I am excited to have industry veteran Mike Keller as a partner leading our efforts here.

In the last six months, we have acquired majority equity interest in our specialty finance participant capital provider and an ABL platform as well as <unk> entered into an agreement for a joint venture to co invest with an established equipment finance business I'll, let Mike speak more on our strategy and why we believe specialty finance business.

The attractive investment class.

Per se additional capital will be required to accomplish our objectives in this space.

These changes and access to capital.

<unk> to reboot on strong footing with a clear strategy and a <unk>.

Strong support from our board and large shareholders.

Before turning it over to Mike to provide an overview of our specialty finance strategy I would like to summarize our key strategic objectives.

One.

Increased gcc's allocation to specialty finance to constitute half of the portfolio through direct investments in specialty finance companies as well as in participations to maintain a high quality diversified portfolio focused on performing cash yielding investments.

And Kurt.

Increase our scale by raising equity and debt capital for the target asset coverage ratio of approximately 165%.

I'd like to hand, the call over to Mike.

Our specialty finance strategy and also provides his background in the industry.

Thanks, Matt and Hello, everyone I'm thrilled to be here and would like to start by introducing myself and provide some insight as to how we view specialty similarly, we.

We believe that what we're building is a unique specialty finance platform within GE EPC.

I think my background is a perfect fit for Greenhill I have 30, plus years of experience in financial services I have significant experience and secured lending asset based lending and mezzanine and equity investments.

Specifically I have built origination underwriting portfolio management and restructuring and workout platforms with this I have also repositioned platforms that have underperformed or needed to refocus on different markets.

Over the years I've held senior leadership positions at both multibillion dollar financial institutions and direct lending credit funds.

We're deploying capital and specialty finance companies that are helping us create a continue blending.

These investments will provide <unk> shareholders exposure to a unique investment products that we think can outperform liquid credit markets through various economic cycles.

Given our focus on asset coverage disciplined management and systems, we believe that our specialty finance businesses can generate attractive risk adjusted returns and perform well in any type of market.

How do we define specialty finance well specialty finance can be defined in many ways.

We define specialty finance lending to small and medium sized businesses secured by collateral on their balance sheets, including accounts receivable inventory equipment and real estate for example.

Specialty finance companies or any type of lending platform that focuses on lending secured by one or more of these types of collateral. We believe building only numerous specialty finance companies across the continuum of blending will expand our ability to offer one stop shop solutions for our customers.

Specialty finance companies phase two major challenges turnover of clients and the access to capital we believe under the Greyhound specialty finance umbrella.

These issues can be mitigated and improved the company's competitive advantage.

Small to medium sized businesses by their nature are either growing or shrinking.

Therefore, specialty finance companies must continually finding new clients or existing clients outgrow the platform get acquired or shrink.

This is where the continuum of lending comes in.

By offering multiple credit solutions across the lending continuum, we expect to be able to hold onto customers for a longer period of time. This ability is buttressed by our capacity to offer a one stop shop solutions.

We believe that multiple specialty finance companies operating on the great on special refinance umbrella will generate natural referral sources, which combined with access to GEC. Some balance sheet can help to create a competitive advantage for our family of businesses.

As you know, we recently closed on a transaction with Sterling commercial credit our middle market ABL lender.

We use this as a pivotal acquisition <unk> ECC as it gives us an ABL monitoring underwriting and origination platform.

It also allows us to take advantage of opportunities created by market dislocation and economic cycles.

Or more in ABL platform expands our continuum of lending footprint as we are in position to capitalize on company's graduating from a factoring program and moving towards an ABL platform.

We recently further expanded our specialty refinance footprint by entering into an agreement for a joint venture with Utica lease call, which provides customized equipment loan and lease options for businesses of all sizes throughout the continental United States.

Along with Sterling commercial proceeds capital, our existing factoring subsidiary and lenders funding, which provides participant funding to other specialty finance lenders, we will be able to offer one stop shop solutions for the clients of our specialty finance subsidiaries.

I'll now turn the call over to Terry to review our financial results.

Thanks, Mike.

All of our financial highlights and invite all of you to review our press release accompanying presentation, and our SEC filings for greater detail.

During the quarter GEC generated net investment income of $7 1 million.

One 6 million in the prior quarter and $1 6 million in the fourth quarter of 2020.

Investments in Avanti Communications group, one and a half.

Lien term loan in second lien notes have been placed on non accrual and current quarter NII increased $5 2 million and net reversal of previously accrued incentive fees, primarily associated with our investments in the secured debt of the donkey.

Without this incentive fee reversal of the current quarter NII would have been $1 $9 million.

Net assets as of December 31 were $74 $6 million down from $99 4 million at September 30, and $79 $6 million as of year end 2020.

The current quarter decrease was largely the result of the reduction in fair value of our Avanti investments specifically as of December 31, 2021, the fair value of our investments in Avanti was approximately $8 1 million or three 8% of portfolio at fair value.

$32 1 million or 13% on September 30 of 2021.

Details for the quarter over quarter change in NAV can be found on slide eight of the investor presentation.

As of December 31, 2021, SEC asset coverage ratio was approximately 151, 1% compared to 163, 8% as of September 30.

Our asset coverage ratio was impacted by the decline in net assets for the quarter, partially offset by the repayment of $10 million outstanding on the revolver as of September 32021.

On January 27, 2022, we announced that our board of directors approved a six for one reverse stock split of our outstanding common stock on February 28, the reverse stock split went effective.

As a result every six shares of our issued and outstanding common stock were converted into one share of issued and outstanding common stock.

So pharma our fully diluted share count is $4 5 million and our NAV per share at $16, 60% down from $22 17 per share as the prior quarter end and 2074 per share as of year end 2020.

Given the split has gone effective I'm going to walk through the rest of the detail on a split adjusted basis.

Total weighted average shares outstanding during the most recent quarter increased $2 $4 5 million from $4 million in the prior quarter and $3 7 million in the quarter ended December 31 2020 the.

Greece in share count from prior periods is driven primarily by our specialty finance acquisition of lenders funding, which was funded in part by the issuance of GEC common shares at NAV.

Shares issued in our specialty finance acquisitions help to increase Dept capital B preserve GEC cash and better align specialty finance management teams with ECP.

GAC reported net loss of $4 95 per share in the fourth quarter compared to a net loss.

<unk> 79 per share in the prior quarter.

NII per share was <unk>.

$1 58, compared to 39 in the prior quarter as noted earlier the reversal of incentive fee expenses was the primary reason for the significant sequential increase.

We have three publicly traded issues of unsecured notes.

The six 5% notes due in 2024 trading under the ticker GEC.

The $6, 75% notes due in 2025 trading under the ticker GEC and.

And the $5, 875% notes during 2026th trading under the ticker G ECT.

Our total debt outstanding was approximately $145 9 million as compared to $155 9 million on September 30th.

During the quarter, we paid down previously outstanding $10 million drawn on our revolving credit facility due in 2024 and $25 million line is fully undrawn.

As of December 31, 2021, our cash balance was approximately $9 $1 million exclusive of holdings in the United States Treasury Bill.

I will turn the call back over to Matt to review the portfolio.

Thanks, Carrie Carrie I'd like to start out by highlighting that we are presenting our portfolio a bit differently today, but have included the same tables and charts that have been reported previously to help avoid any confusion.

Turning to slide 10, we show what we call our income generating portfolio. This includes only investments, which carry cash coupons or pay cash dividends and excludes all non accrual and noncash paying equity or debt investments over.

Over the past two years, we have transitioned our portfolio to become a diversified book performing transparently cash interest paying investments with stable yield profile.

As of December 31, approximately 88% of our portfolio or $188 million of investments or income generally across 41 position.

You can see on this page are lumpy over the course of 2020 and 2021, we have increased <unk> dollars invested in income generating investments, while reducing this portion of the portfolio concentration with minimal decline in current yields despite a lower rate environment environment Slide 11 further shows our.

<unk> diversification efforts as GE ECC income generating portfolio.

Invested across 20 separate industry specialty finance, because our largest industry weighting today at 26% of our income generating portfolio and 22% of total investments. Our plan is to continue to grow our specialty finance portfolio ultimately, creating a relatively balanced portfolio of specialty finance.

Credit investments.

In the fourth quarter, approximately $34 million of capital was deployed in $34 million of investments will monetize we deployed capital at a current yield of approximately eight 2%, while we monetized investments at a weighted average current yield of seven 4%.

The current yield on our deployed capital understatement, our expected returns as approximately one third of the deployment was into ultra midstream preferred now kinetic holdings at a six 2% current yield. However, this does not include a significant make whole on the non call preferred which if repaid based on managed.

Guidance last month.

Our results in a low double digit IRR.

Also please note we monetize the majority of our stock holdings and our legacy non accrual position Davidson radio was resolved in the quarter through a bankruptcy process in which we received over $3 million of cash.

Going forward you should expect the trend of us reducing exposure to non income generating equity and credit positions to continue.

Payment of capital into cash yielding asset.

I want to highlight how our team has been successful in transitioning the portfolio away from nonperforming legacy concentrated investments and into proprietary higher yielding more diversified investments most notably in specialty finance.

The acquisition of prestige capital Finance in 2019 lenders funding in 2021 and Sterling commercial credit.

<unk> formation of the Utica joint venture in 2022 accretive a continuum of lending solutions that <unk> can offer its small business client and the client.

We've partnered with specialty finance companies via a number of different investment types, including majority equity interest.

Secured debt.

Our net debt and participation co investments and existing transactions, we continue to grow our specialty finance portfolio as of <unk>.

Move to bring investment opportunities to our shareholders shareholders as of December 31, 2021 specialty finance investments have grown to comprise almost 22% of the <unk> portfolio portfolio as discussed earlier. We believe these unique investments can offer greater potential returns on invested capital and traditional led.

<unk> credit markets and are largely uncorrelated to the broader syndicated leveraged credit market clinical.

Building on our success with prestige and the subsequent overflow and participation opportunities that relationship has created for US last quarter, we announced the acquisition of a majority interest in lenders funding. There's funding lenders funding provides participants financing and risk sharing specifically four factors in asset based lenders lenders.

The acquisition of lenders funding has increased our visibility into the broader specialty finance market and has provided additional proprietary overflow opportunities for <unk> has been a terrific complement to prestige and another important building block in our specialty finance portfolio portfolio.

Building on that foundation in February we purchased a majority interest in Sterling commercial credit for $7 5 million, including $2 6 million and GBC shares issued at NAV.

Sterling provides short term asset based loans to working capital solutions to small businesses with annual sales typically between $3 million and $10 million.

CEO Edwin small vice President Karen small and their team will continue to manage the business as they have done successfully for many years. Many years in connection with the acquisition, we provided sterling with subordinated debt to fund growth initiatives.

In February February we also entered into a joint venture agreement with the Utica lease co co invest and proprietary equipment financing transactions sourced by Utica founded.

Founded in 2005, Utica provides customized equipment loan and lease options for businesses of all sizes throughout the continental United States nicely with unique knowledge of equipment values and creative structuring Utica specializing in helping credit challenged companies unlock the equity in their equipment.

<unk> management team has over 100 years of combined experience in lending financial services and equipment finance assignments.

We continue to seek out new specialty finance partners add to our ecosystem of direct lending.

In summary, we continued to strengthen and diversify our portfolio.

<unk> capital is a high yielding cash paying investments.

We're excited about the foundation, we are building for our specialty finance platform and optimistic about the future of our portfolio as we make significant improvements to both.

Before wrapping up my prepared remarks, I'd like to review our distributions.

Our board of directors has authorized two upcoming quarterly distributions on.

On November 5th.

<unk> per share quarterly distribution for the quarter ending March 31, 2022, 66 pro forma for the reverse split.

This distribution will be paid on March 32022 to stockholders of record as of March 15th 2022.

Today, we announced that our board of directors has approved a <unk> 45 per share distribution for the quarter ending June 32022.

A 10, 8% dividend yield on our pro forma NAV of $16 63 per share.

The record and payment date for the second quarter distributions are expected to be set.

Second quarter second quarter.

As I previously noted <unk> manager intends to waive all accrued incentive fees subject to shareholder approval of a reset of the incentive fee total return hurdle at the next annual shareholders' meeting.

As of December 31, 2021, there was approximately $4 9 million.

$1 eight per share of accrued incentive fees held on <unk> balance sheet.

Such a waiver granted and the shareholder vote is obtained would result in a corresponding increase in income and increase in net asset value in the first quarter of 2022 subject to any offsetting additional expenses or losses.

With that we will turn the call over to the operator to open for questions operator, operator.

Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchstone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.

While we compile our Q.

Yeah.

As a reminder, if you have a question at this time. Please press Star then one.

Yeah.

Our first question comes from the line of Brian <unk> from Greenwich investment Your question. Please.

Good morning, Hi, Matt.

Welcome to the CEO chair.

Two questions for you first can you expect.

The current proposed rights offering will look similar to the prior rights offering that occurred.

2000 22020.

Thank you very much Brian .

So what I can say right now is we filed the registration today and working through the SEC process limited our ability to make additional comments.

Except for what is in contained in there right now the pricing pricing.

Mechanism.

Still to be determined however, it is contemplated to be a percentage of net asset value.

As most recently filed prior to that.

Effective time of the rights offering.

Okay.

I think that answered.

And then the second question I have with the new reduced dividends and even adding back the contemplated beaver.

The reversal of $1 $8, it looks like you'll still need about it about it.

And plus 1% almost 11% plus Roe.

Top quartile bdcs or excuse me excuse me.

Do you think you'll be able to do this.

Without taking et cetera risk.

I mean, especially since by your own admission on a call that used to have to be constantly sourcing new borrowers.

Specialty finance segments.

Okay.

Sure. That's a great question. So I think looking at the specialty finance part of the portfolio.

And based on the market today, and what we're seeing we're targeting mid teens returns on our subordinated debt and participations, there and for our direct equity investments in the specialty finance companies.

<unk> returns on equity in excess of that and.

The key part to the second item of customers moving around.

<unk> of lending that we are building allows us to keep those customers within our family of specialty finance.

Companies, which is part of the origination.

Origination and operational synergies that we expect to realize over time realize over time.

Got it.

Alright.

One more if I may.

Sean.

What sort of ability do you guys have to retain capital.

Given that there is in the business.

Substantial at.

At least capital loss.

And then also in the vein of the vein of having over distributed.

Dividends prior is there any room to obtain anything just kind of buildup.

Good evening.

<unk>.

Income and capital are treated differently.

Our ability to retain we are required to distribute 90% of our income.

To maintain our status as a Ric however from capital appreciation, we have as you alluded to.

Capital losses, which.

Disclosure in the 10-K that discusses this where we are.

Have the ability to retain capital.

Tax efficient manner.

Will allow us to rebuild NAV overtime overtime.

Is it fair to say that.

Going to be the plan go forward, especially as it makes some some equity investments in smaller companies that write the idea would be that those.

That is perfect.

Apple appreciation depreciation.

Yes that is definitely the goal overtime.

Great.

It's all for me, thanks, very much and best of luck.

<unk>.

Thank you very much very much.

Thank you. Our next question comes from the line of Travis O'neil private Investor Your question. Please.

Hi, This is Colin as Tony actually not true.

I have a question.

The long term holder as I'm sure. Many people can we get some.

Insight into what transpired in the fourth quarter to cause the significant degradation in the value of Avanti from what we had been told before was going on with Avanti.

We are limited to what we can stay under the terms of our non disclosure agreement with the company. However, what I can say is that due to uncertainties surrounding <unk> financial condition and ongoing liquidity challenges.

As of December 31, we did place one five lien loan in the second lien notes on non accrual.

And to the to the.

Hum.

That is what we are able to say at this point in time at this point in time.

That's not very sufficient to patients.

Sure.

Yes.

Our hands are tied.

Terms of the non disclosure agreement, we are happy to answer a question when we're able to provide more information as appropriate as appropriate.

In the past I guess it hasn't been.

You haven't been able to do that because this came as a complete surprise to many of US who have been following us for years.

And I don't know what kind of non disclosed you signed it was such an advantage to cause you to it.

Write down that's been so much that you can.

Can talk about what's going on in the industry and what's happened with the most significant.

<unk> investment.

Okay.

Again, we are limited in what we can say about that and when we are able to provide more information.

We're happy to answer questions as appropriate.

Okay.

Sure.

Hi.

Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to Matt Kaplan for any further remarks.

Thank you again for joining us this morning, I'm excited for the opportunity to reboot. The ECC and we look forward to continued dialogue and please let us know if we can be helpful. With anything can follow up can follow up.

Thank you ladies and gentlemen for your participation today's conference. This does conclude the program you may now disconnect good day.

[music].

You recorded I would now like to introduce your host for todays program, Adam Yates Managing director. Please go ahead.

Thank you and good morning, everyone. Thank you for joining us for Great Elm capital Corp's fourth quarter earnings Conference call.

If you'd like to be added to our distribution list you can email investor relations at great Elm cap Dot com or you can sign up for alerts directly on our website www dot great album Cc Dot com.

I'd like to note the slide presentation posted on our website accompanying today's call we.

We will not be directly referring to slides in the presentation, but our comments will generally follow its form and structure.

The slide presentation can be found on our website under financial information quarterly results.

On our website you can also find our earnings release and SEC filings.

I would 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.

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

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

As a reminder, this webcast is being recorded on Friday March four 2022.

Hosting the call. This morning is Matt Kaplan, Great Elm capital Corp's, New Chief Executive Officer, I will now turn the call over to Matt.

Thank you Adam good morning, and thank you for joining us today I would like to start by thanking Peter Reed like Stella and rubble horsey for the years of dedicated service at GE ECC I am excited to be speaking with <unk> newly appointed CEO and look forward to the opportunities ahead.

On today's call, we have our chief compliance officer, Adam Kleinman, CFO Cary, David and Mike Kelly President of Great Specialty finance.

There is quite a bit to unpack. So I will begin by highlighting some of the key factors that define gcc's fourth quarter as well as our path forward today.

First I would like to address the impact of <unk> and other legacy noncash generating assets had all of our portfolio, which were the main contributors to an approximately 25% decline in net asset value in the fourth quarter, leading us to report a NAV of $16 63 per <unk>.

This morning this.

This is certainly unfortunate and has led to sweeping changes within the organization along with the opportunity to reboot GE ECC.

New leadership and fresh capital are instrumental in our plan to reset GCC.

In connection with the GE ECC reboot, great Elm capital management Gcc's manager has indicated a currently intends to waive all accrued incentive fees as of March 31 2022.

Provided that <unk> shareholders approved a reset of the incentive fee total return hurdle under GE Acc's investment management agreement at the next annual shareholder meeting.

As of December 31, 2021, there was approximately $4 $9 million of accrued incentive fees held on <unk> balance sheet.

The waiver were obtained and new incentive hurdles were approved by <unk> stockholders. The waiver would reverse these $4 9 million of previously recorded expenses, which we expect will be reflected in the quarter ending March 31, 2022, resulting in a corresponding amount of additional income and increase in.

The net asset value of $1 80 per share in the first quarter of 2022 subject to any offsetting additional expenses or lost.

A step back.

Portfolio manager of <unk> since October 2020, I've been focused on reducing position concentrations upgrading portfolio quality and increasing the allocation to cash income generating investments.

We believe investments in specialty finance companies and related participation opportunities can generate attractive returns with less risk than leverage credit mark.

As a permanent capital vehicle GE FCC is able to prudently allocate.

A portion of it assets and to these type of investments.

In addition to the isolated benefit of individuals specialty finance investments, which are proprietary to <unk>. We believe there are significant origination and operational synergies to be gained from owning a majority interest in multiple specialty finance company.

I am excited to have industry veteran Mike Keller as a partner leading our efforts here.

I'll, let Mike speak more on our strategy and why we believe specialty finance as an attractive investment class.

So to say additional capital will be required to accomplish our objectives in this space.

I believe these changes and access to capital will allow GE ECC to reboot on strong footing with a clear strategy and a strong support from our board and large shareholders.

Before turning it over to Mike to provide an overview of our specialty finance strategy I would like to summarize our key strategic objectives as one <unk>.

Increased <unk> allocation to specialty finance to constitute half of the portfolio through direct investments in specialty finance companies as well as in participations.

To maintain a high quality diversified portfolio focused on performing cash yielding investments.

And third increase our scale by raising equity and debt capital with a target asset coverage ratio of approximately 165%.

I'd like to hand, the call over to Mike to review, our specialty finance strategy and also provides his background in the industry.

Thanks, Matt and Hello, everyone I'm thrilled to be here and would like to start by introducing myself and provide some insight as to how we view specialty minerals. We believe that what we're building is a unique specialty finance platform within GE EPC.

My background is a perfect fit for great aisle I have 30, plus years of experience in financial services I have significant experience and secured lending asset based lending and mezzanine and equity investments.

Over the years I've held senior leadership positions at both multibillion dollar financial institutions and direct lending credit funds.

We are deploying capital in specialty finance companies that are helping us create a continuum of lending.

These investments will provide <unk> shareholders exposure to a unique investment product that we think can outperform liquid credit markets through various economic cycles.

How do we define specialty finance well specialty finance can be defined in many ways.

We define specialty finance lending to small and medium size businesses secured by collateral on their balance sheets, including accounts receivable inventory equipment and real estate for example.

Specialty finance companies or any type of lending platform that focuses on lending secured by one or more of these types of collateral we believe building or only numerous specialty finance companies across the continuum of blending will expand our ability to offer one stop shop solutions for our customers.

Specialty finance companies faced two major challenges turnover of clients and access to capital we believe under the Greyhound special refinance umbrella.

These issues can be mitigated and improve the company's competitive advantage.

Small to medium sized businesses by their nature are either growing or shrinking.

Therefore, specialty finance companies must continually finding new clients or existing clients outgrow the platform get acquired or shrink.

This is where the continuum of lending comes in.

By offering multiple credit solutions across the continuum, we expect to be able to hold onto customers for a longer period of time. This ability is buttressed by our capacity to offer one stop shop solutions.

We believe that multiple specialty finance companies operating on the great on specialty finance umbrella will generate natural referral sources, which combined with access to <unk> balance sheet can help to create a competitive advantage for our family of businesses.

As you know, we recently closed on a transaction with Sterling commercial credit our middle market ABL lender.

View this as a pivotal acquisition for GCC as it gives us an ABL monitoring underwriting and origination platform.

It also allows us to take advantage of opportunities created by market dislocation and economic cycles.

Are there more an ABL platform expands our continuum of lending footprint as we are in position to capitalize on company's graduating from a factoring program and moving towards an ABL platform.

We recently further expanded our selection refinance footprint by entering into an agreement for a joint venture with Utica lease call, which provides customized equipment loan and lease options for businesses of all sizes throughout the continental United States.

Along with Sterling commercial proceeds capital, our existing factoring subsidiary and lenders funding, which provides participant funding into other specialty finance lenders, we will be able to offer one stop shop solutions for the clients of our specialty <unk> subsidiaries.

I'll now turn the call over to Terry to review our financial results.

Thanks, Mike.

All of our financial highlights and invite all of you to review our press release accompanying presentation and SEC filings for greater detail.

During the quarter GEC generated net investment income of $7 1 million.

One 6 million in the prior quarter and $1 6 million in the fourth quarter of 2020.

Investments in Avanti Communications group, one and a half lien term loan and secondly had been placed on non accrual and current quarter NII include $5 $2 million and net reversal of previously accrued incentive fees, primarily associated with our investments in the secured debt of the body.

Without this incentive fee reversal of the current quarter NII would have been $1 $9 million.

Net assets as of December 31 were $74 $6 million down from $99 4 million at September 30, and $79 6 million as of year end 2020.

Care to $32 1 million or 13% on September 30 of 2021.

Details for the quarter over quarter change in NAV can be found on slide eight of the investor presentation.

Yeah.

As of December 31, 2021, J SEC asset coverage ratio was approximately 151, 1% compared to 163, 8% as of September 30.

Our asset coverage ratio was impacted by the decline in net assets for the quarter, partially offset by the repayment of $10 million outstanding on the revolver as of September 32021.

On January 27, 2022, we announced that our board of directors approved a fix for one reverse stock split of our outstanding common stock on February 28, the reverse stock split one effect yet.

As a result every six shares of our issued and outstanding common stock were converted into one share of issued and outstanding common stock.

Pro forma our fully diluted share count is $4 5 million and our NAV per share at $16 62 down from $22 17 per share as the prior quarter end and 2074 per share as of year end 2020.

Given the split has gone effective I'm going to walk through the rest of the detail on a split adjusted basis.

Total weighted average shares outstanding during the most recent quarter increased to $4 5 million from $4 million in the prior quarter and $3 7 million in the quarter ended December 31 2020.

The increase in share count from prior periods is driven primarily by our specialty finance acquisition of lenders funding, which was funded in part by the issuance of GEC common shares at NAV.

Shares issued in our specialty finance acquisitions help to increase Dept capital base preserve GEC cash and better aligns specialty finance management teams with GE.

GAC reported net loss of $4 95 per share in the fourth quarter compared to a net loss of 79 per share in the prior quarter.

NII per share was <unk>.

$1 58, compared to 39% in the prior quarter as noted earlier the reversal of the incentive fee expenses was the primary reason for the significant sequential increase.

We have three publicly traded issues of unsecured notes.

The six 5% notes due in 2024 trading under the ticker GEC.

The 675% notes due in 2025 trading under the ticker GE ACC and.

And the $5, 875% notes due in 2026 trading under the ticker G ECT.

Our total debt outstanding was approximately $145 9 million as compared to $155 9 million on September 30.

During the quarter, we paid down previously outstanding $10 million drawn on our revolving credit facility due in 2024 and the $25 million line is fully undrawn.

As of December 31, 2021, our cash balance was approximately $9 $1 million exclusive of holdings in the United States Treasury.

I will turn the call back over to Matt to review the portfolio.

If you turn to slide 10, we show what we call our income generating portfolio.

This includes only investments, which carry cash coupons or pay cash dividends and excludes all non accrual and noncash paying equity or debt investments.

Over the past two years, we have transitioned our portfolio.

A diversified book performing transparently cash interest paying investments with stable yield profile.

As of December 31, approximately 88% of our portfolio or $188 million of investments where income generally across 41 position.

<unk> diversification efforts as GE ecc's income generating portfolio.

Invested across 20 separate industry specialty finance, because our largest industry weighting today at 26% of our income generating portfolio and 22% of total investment. Our plan is to continue to grow our specialty finance portfolio ultimately, creating a relatively balanced portfolio of specialty finance.

Credit investments.

In the fourth quarter, approximately $34 million of capital was deployed in $34 million in investments or monetize we deployed capital at a current yield of approximately eight 2%, while we monetized investments at a weighted average current yield of seven 4%.

The current yield on our deployed capital understatement, our expected returns as approximately one third of the deployment was into ultra midstream preferred now kinetic holding at a six 2% current yield. However, this does not include a significant make whole on the non call preferred which if repaid based on managed.

Guidance last month.

Our results in a low double digit by IRR.

Going forward you should expect the trend of us reducing exposure to non income generating equity and credit positions to continue with the <unk>.

Payment of capital into cash yielding asset.

I want to highlight how our team has been successful in transitioning the portfolio away from nonperforming performed legacy concentrated investments and into proprietary higher yielding more diversified investments most notably in specialty finance.

The acquisition of prestige capital finance through 2019 lenders funding in 2021 and Sterling commercial credit.

Formation of the Utica joint venture in 2022 accretive a continuum of lending solutions that <unk> can offer to small business clients and with clients.

We've partnered with specialty finance companies, a number of different investment types, including majority equity interest.

Secured debt or debt subordinate debt and participation co investment with an existing transactions.

We continue to grow our specialty finance portfolio as a means to bring investment opportunities to our shareholders shareholders. As of December 31, 2021 specialty finance investments have grown to comprise almost 22% of the <unk> portfolio a portfolio as discussed earlier, we believe these unique investments can offer.

Greater potential returns on invested capital and traditional leverage credit markets and are largely uncorrelated to the broader syndicated leveraged credit market critical.

Building on our success with prestige and the subsequent overflow and participation opportunities with that relationship has created for US last quarter, we announced the acquisition of a majority interest in lenders funding. There's funding lenders funding provides participant financing and risk sharing specifically four factors and asset based lenders.

Building on that foundation in February we purchased a majority interest in Sterling commercial credit for $7 5 million.

Including $2 6 million and GBC shares issued at NAV.

Sterling provides short term asset based loans and working capital solutions to small businesses with annual sales typically between $3 million and $10 million.

CEO Edwin small vice President Karen small and their team will continue to manage the business. They have done successfully for many years. Many years in connection with the acquisition, we provided sterling with subordinated debt to fund growth initiatives initiatives.

In February February we also entered into a joint venture agreement with the Utica lease co invest and proprietary equipment financing transactions sourced by Utica dry Utica founded in 2005, Utica provides customized equipment loan and lease options for businesses of all sizes throughout the continental United States.

With unique knowledge of equipment values and creative structuring Utica specializing in helping credit challenged companies unlock the equity in their equipment.

<unk> management team has over 100 years of combined experience in lending financial services and equipment finance assignments.

We continue to seek out new specialty finance partners to add to our ecosystem of direct lending the restaurant in summary, we continued to strengthen and diversify our portfolio by deploying capital into high yielding cash paying investments.

Excited about the foundation, we are building for our specialty finance platform and optimistic about the future of our portfolio as we make significant improvements to both.

Before wrapping up my prepared remarks, I'd like to review our distributions.

Our board of directors has authorized two upcoming quarterly distributions on November 5th we announced a <unk> 10 per share quarterly distribution for the quarter ending March 31 2022.

66 pro forma for the reverse split to reverse.

This distribution will be paid on March 32022.

Stockholders of record as of March 15th 2022.

Today, we announced that our board of directors has approved a <unk> 45 per share distributions for the quarter ending June 32022.

A 10, 8% dividend yield on our pro forma NAV of $16 63 per share.

Record and payment date for the second quarter distributions are expected to be set.

Second quarter second quarter.

As of December 31, 2021, there was approximately $4 9 million.

$1 eight per share of accrued incentive fees held on <unk> balance sheet and balanced such a waiver with granted and the shareholder vote is obtained would result in a corresponding increase in income and increase in net asset value in the first quarter of 2022 subject to any offsetting additional expenses or losses.

Youre welcome.

With that we will turn the call over to the operator to open for questions operator, operator.

Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on you touched on telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.

While we compile RQ.

Yeah.

As a reminder, if you have a question at this time. Please press Star then one.

Our first question comes from the line of Brian from Greenwich Investment Your question. Please.

Yeah.

Good morning.

Welcome to the CEO Chair I have two questions for you first do you expect that the current proposed rights offering will look similar to the prior rights offerings that occurred.

20% of 2020.

Thank you very much Brian .

So what I can say right now is we filed the registration today and working through the SEC process.

A limited our ability to make additional comments.

Except for what is in contained in there right now the pricing pricing.

And the mechanism is.

Still to be determined however.

It is contemplated to be a percentage.

Net asset value.

As most recently filed prior to that.

Effective time of the rights offering.

Okay.

I think that answered.

And then the second question I have with the new reduced dividends and even adding back the contemplated.

The reversal of the $1 $8 it looks like you'll still need about it about it.

And plus 1% almost 11 plus Ro Ro.

Top quartile bdcs or excuse me.

Do you think you'll be able to do this.

Without taking excessive risk.

I mean, especially since by your own admission on a call that used to have to be constantly sourcing new borrowers.

Specialty finance segments.

Okay.

Sure. That's a great question. So I think looking at the specialty finance part of the portfolio.

<unk> returns on equity in excess of that and.

And.

The key part to the second item of customers moving around.

<unk> of lending that we are building allows us to keep those customers within our family of specialty finance companies.

Companies, which is part of the.

Origination and operational synergies that we expect to realize over time realize over time.

Got it.

Alright.

One more if I may.

Sean.

What sort of ability do you guys have to retain capital.

Given that the given the data.

Substantial at.

At least capital loss.

And then also in the vein of having over distributed.

Dividends prior it is there any room to obtain anything just kind of buildup.

Good evening.

<unk>.

Income and capital are treated differently.

Our ability to retain we are required to distribute 90% of our income.

No.

To maintain our status as a Ric however from capital appreciation, we have as you alluded to.

Capital losses, which there's disclosure in the 10-K that discusses this where we have the ability to retain capital.

In a tax efficient manner.

Will allow us to rebuild NAV overtime overtime.

Is it fair to say that.

Going to be the plan go forward, especially as it makes some some equity investments in smaller companies that write the idea would be that those.

That is from a source of.

Capital appreciation depreciation.

Yes that is definitely the goal over time.

Great.

That's all for me, thanks, very much and best of.

On Whatsapp.

Thank you very much very much.

Thank you. Our next question comes from the line of Travis O'neill private Investor Your question. Please.

Hi, This is Tom I actually know Travis.

I have a question.

There is a long term holder as I'm sure many people.

Can we get some.

Sight into what transpired in the fourth quarter to cause the significant degradation in the value of Avanti from what we had been told before was going on with Avanti.

Lean notes on non accrual.

Tim.

To the.

I mean.

That is what we are able to say at this point in time.

Yeah.

That's not very sufficient to patients.

Sure.

Yes.

Our hands are tied to the terms of the non disclosure agreement. We are happy to answer your question when we're able to provide more information as appropriate as appropriate.

Well in.

In the past I guess it hasnt been.

You haven't been able to do that because.

This came as a complete surprise to many of US who have been following this for years.

And I don't know what kind of non disclosure you signed it was such an advantage to cause you to write down the investment. So much that you can talk about what's going on in the industry and what's happened with the.

Most significant investment.

Okay.

Again.

And what we can say about that and when we are able to provide more information.

Happy to answer questions as appropriate.

Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to Matt Kaplan for any further remarks.

Thank you again for joining us this morning, I'm excited for the opportunity to reboot GEC and we look forward to continued dialogue and please let us know if we can be helpful with anything in follow up can follow up.

Thank you ladies and gentlemen for your participation today's conference. This does conclude the program you may now disconnect good day.

Q4 2021 Great Elm Capital Corp Earnings Call

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