Q1 2022 Great Elm Capital Corp Earnings Call

Good day, ladies and gentlemen, and thank you for standing by welcome to the Great Elm Capital Corp, first quarter 2022 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 the session you will need to press Star then one.

One on your telephone keypad.

If you require any further assistance. Please press Star then zero at this time I would like to turn the conference over to Mr. Garrett Edson of ICR, Sir please begin.

Good morning, Thank you everyone for joining us for Great Elm capital Corp's first quarter 2022 earnings conference call.

I'd like to be added to our distribution list you can email investor relations at Great Elm cap Com, where you can sign up for alerts directly on our website www dot greet M. D C dot com I'd like to note that slide presentation posted on our website accompanying today's call.

The 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'd like to call your attention to the customary safe Harbor statement regarding forward looking information also please note that nothing in today's call constitutes an offer to sell or solicitation of offers to purchase our securities today's copper.

This 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 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.

<unk> SEC filings or visit the SEC's website hosting the call. This morning, Matt Kaplan, Great Elm capital Corp's, Chief Executive Officer, I will now turn the call over to Matt.

Good morning, and thank you for joining us today on.

On today's call I'll walk through some first quarter highlights and our CFO , Karen Davis will take us through some of our financials for the quarter.

We will then open up for Q&A, and Adam Kleinman, our Chief compliance Officer, and Mike Keller President of Great Elm specialty finance will join us to ask your question.

Over the past two months as CEO I have taken certain actions to seek to ensure our legacy issues are largely behind us.

To position the company for future success.

Looking at our first quarter.

Saw net asset value once again declined from the prior quarter as we worked through remaining legacy items.

So.

Excluding the reversal of past incentive fees was below what we expect our portfolio can achieve over time.

Despite these legacy headwinds I am excited about our strategy.

Support from our refreshed board of directors and a clean portfolio.

We also believe that our pending rights offering is successfully completed we will provide the capital needed to support our growth.

This quarter, the waiver of past incentive fees benefited NII.

Going forward, we intend to grow our operational NII by executing on our strategy.

On our last call in March.

I'll start with beginning to transform GE ECC I called out three core objectives that were aligned with our new strategy.

The first was to increase <unk> allocation for specialty finance.

Constitute half of the portfolio through direct investments in specialty finance companies as well as in participation.

Secondly to maintain a high quality diversified portfolio focused on performing and cash yielding investments.

Finally to increase our scale by raising equity and debt capital.

To that end I am pleased to report that our team has been executing the strategy, we set forth and is making progress.

On that final capital raising point and before diving into the quarter.

I would like to highlight that this morning, we filed an amended registration statement for a one for one rights offering at $12 50 per share.

The $57 $5 million, assuming 100% participation.

Great group and certain affiliates have indicated that they intend to exercise their subscription rates and oversubscribed and the rights offering if.

If completed we intend to use the proceeds from the offering to pursue a robust pipeline in <unk>.

Moving to other strategic items in the first quarter, we refresh the board with the appointment of Chad Perry, Matthew Dropkin and Richard Cohen.

With two non independent directors declining to be compensated by GE ECC. Our board continues to take its shareholder friendly actions.

I also was successful in negotiating with the board a great Elm group to waive past incentive fees as part of the reset.

As a result, we were able to reverse and additional $4 9 million previously accrued incentive fees in the first quarter, which benefited NII and NAV bio for $1 per share.

In terms of our legacy portfolio, we continued to monetize legacy re org equity positions such as true Taj and CDK and also saw a further write down of the Avanti investments at.

At March 31.

The fair value of our investments in the <unk> related securities are now below $1 million.

Driven largely by <unk> recent debt restructuring.

Crucially, we ended the first quarter of 2022 with only 2% of our assets for approximately 5% of map comprised of legacy assets entering the second quarter cash generating investments now comprise 98% of our portfolio.

Furthering our strategy to increase our investments in specialty finance and related opportunities in February we acquired Sterling commercial credits.

Leading asset based specialty finance lender that provide short term asset based loans and working capital solutions to small businesses with annual sales typically between three and $10 million.

During the quarter, we deployed $22 million into specialty finance related investments or 80% of total dollars deployed in the period.

As a result, approximately one third of our assets at the end of March and now composed of specialty finance related investments up from 22% at year end 2021 <unk>.

Enabling us to make significant progress on one of our key objectives.

On the specialty finance front I think it is very important for investors to understand that our investments in the equities of specialty finance companies, including Sterling prestige lenders funding are not just passive private equity investments. These are strategic income generating investments and business.

We are focused on growing to create a proprietary sourcing engine purpose spoke credit investments within GE ECC.

Combined these specialty finance companies offer a unique one stop shop credit solutions to American small businesses.

Over the past two months I have begun to dive into these businesses with industry veteran Mike Keller.

We are laser focused on driving best practices and operational improvement across the platform.

We are implementing various initiatives to streamline and optimize and monitor these businesses across the various kpis.

While still early days as I've only been at the helm for a couple of months.

We're in the process of building out our long term target to drive value, we will look to grow the loan portfolios of these businesses.

Expand net interest margins improve.

Improve funding flexibility and cost of capital.

<unk> book value and increase returns on equity.

Turning back to some of the financial numbers.

For the first quarter of 2022.

It was approximately $6 million or.

$1 31 per share.

Which is inclusive of the $4 9 million reversal of previously accrued incentive fees excluding.

Excluding the reversal NII would have been about $1 1 million or 24 per share.

Our goal in the quarters ahead is to grow our portfolio and our investment income to cover our quarterly distribution on a regular basis.

As of March 31, our asset coverage ratio stood at 147, 5%.

Which is just below the 150% threshold.

We are able to successfully complete our announced rights offering net proceeds would positively impact our asset coverage ratio.

While the macro environment remains challenging and we're not done transforming GE FEC. We are encouraged by the progress we have made we.

We have brought together a strong team to help our transformation and remain confident in our team's ability to address any challenges head on.

With that I'd like to hand, the call over to Carey to discuss our first quarter 2022 performance and add further color on our repositioned portfolio.

Thanks, Matt I'll go over our financial highlights and invite all of you to review our press release.

Presentation, and our SEC filings for greater detail.

<unk> noted the first quarter 2012, with an important first step to reposition.

And reshaping our portfolio and say diversified book with a stable.

No.

During the first quarter GEC generated NII of $6.

$1 $5 million in the prior year quarter, and $7 1 million in the fourth quarter of 2021 quarter NII was positively impacted by $4 9 million dollar waiver approval for all accrued incentive fee, while the fourth quarter of 2021 was positively impacted by a $5 2 million dollar with ourselves.

Net assets as of March 30, <unk> were $69.

<unk> gone from $74 $6 million at December 31st on $91 5 million as of March 31, 2021.

The decrease was largely the result of the reduction of fair value of our bonds.

It was driven by advisers.

<unk> process.

Our NAV per share as of March 31, 2020, with $14 four down from $16 <unk> per share as of the prior quarter and two.

<unk> 23 per.

Per share as of March 31st 2021.

Adjusted for a reverse stock split in February 2020.

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

As of March 31, 2012.

Coverage ratio was approximately 147, 5% compared to 151, 1% as of December 31, 2021, our asset coverage ratio was impacted by the decline in fair value of second quarter.

We reported a net loss of $1 12 per share in the first quarter compared to a net loss of $4 95 per share in the prior quarter.

NII per share was $1 31.

Compared to a $1 with Google on the prior quarter.

All per share amounts are based on weighted average shares and have been adjusted for the 601 with a stock split that became effective on February four 2020.

As of March 31st our total.

Approximately $145 $9 million comparable with 2021, and our $25 million line of credit remains fully undrawn.

As of March 31, 2022, our cash balance of approximately $5 million exclusive of coatings and U S tax rate, though.

Yes.

Our board of directors has authorized two upcoming quarterly just simple form.

Obviously, we announced that our board of directors with a 45 per share distribution for the quarter ending June 32020.

With second quarter distribution will be payable on June 30 to stockholders of record as of June 2000, Alright.

Our board of Directors has also approved a <unk> 45 per share cash distribution for the quarter ending September 32020 to annualize the distribution equates to a 12, 6% dividend yield on our closing market price on May nine 2022 of $14 29 per share and a 12% to Danielle <unk>.

Study start 2020 to lap a $15 per share.

Record and payment date for the distribution are expected to be set in the third quarter pursuant to its already granted by our board of directors.

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

Thanks Kerry.

If you turn to slide nine show our income generating portfolio.

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

As I noted on our last call we have been focused on transitioning our portfolio to become a diversified book performing cash paying investments with stable yield profile.

What I would like to point out here is that as I mentioned earlier, 98% of our portfolio of income generating today.

It is a significant improvement from 88%, just one quarter ago and less than 65% a year ago.

Moving on to Slide 14, you can see of the approximately $145 million of debt investments, 42% are invested in floating rate instruments with a weighted average current yield of 10% and approximately 58% are invested in fixed rate instruments with a weighted average current yield of around $10.

5%.

It is important to note that for our fixed rate debt portfolio. The weighted average maturity is only two and a half years. So while our floating rate mix may be lower than other bdcs. We believe the relatively short duration of our fixed rate portfolio should afford GE ECC the ability to benefit from a rising rate environment.

Flipping back to slides 10, and 11 I would like to highlight our diversification has gcc's income generating portfolio is invested across 18 separate industries.

<unk> finance investments, our largest industry and now comprise 34% of total investments up from 22% the prior quarter largely driven by our acquisition of Sterling.

We expect further growth from our specialty finance portfolio as these unique investments can offer greater potential returns on invested capital.

Traditional leverage credit and are largely uncorrelated to the broader syndicated leveraged credit markets.

Similarly, we are progressing in creating a relatively balanced portfolio of specialty finance and credit investments.

As we noted on our prior call. We are in the midst of creating a continuum of lending platform that GE SCC can offer a small business clients and.

And lenders funding Sterling in prestige are notable examples of the groundwork we laid to re grow our portfolio and generate attractive risk adjusted returns in any economic cycle.

We've partnered with specialty finance companies can be a number of different investment types, including majority equity interest secured debt subordinated debt and participations and existing transactions.

By offering multiple credit solutions across the lending continuum, we expect to utilize our one stop shop solutions and hold onto customers for a longer period of time.

For example.

We are currently working on a deal that was sourced through a close relationship with management, which if completed.

We'll incorporate both an ABL and secured term loan financing component for a sub $100 million revenue U S business.

Sterling would provide the ABL solution for this company and be in a position to actively monitor financial performance through its robust servicing capabilities. The secured loan portion of the transaction may fit in our lenders funding business or be directly held by GE ECC or possibly held by both.

This holistic financing solution for our client illustrates how our continuum of lending and deep industry relationships and drive proprietary originations of cash generating investments for GE ECC and our various plants.

In summary, we continue to strengthen and diversify our portfolio by deploying capital into higher yielding cash paying investments were.

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

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

Operator.

Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.

If your question has been answered or you wish to remove yourself from the queue simply press the pound key.

Again, if you have a question or comment at this time. Please press Star then one on your telephone keypad.

Please hold while we compile the Q&A roster.

Our first question or comment comes from the line of Brian <unk> from Greenwich. Your line is open.

Good morning.

A quick question on dividend coverage absent the reversal of <unk>.

The accrued incentive fee this quarter net investment income would've fallen well short of the dividend.

And looking at.

The two quarter trend between fourth quarter of 'twenty, one in first quarter 'twenty two.

You would you would need to do.

Pretty big reversal.

NII to cover even the 45 cents that's been declared.

For the next two quarters.

Yes.

Can you speak to that.

Dividend coverage looks.

To be pretty far away.

Okay.

Thanks for the question Brian .

Yeah.

Dividend coverage for the year.

It is important to note that the reversal of the.

Incentive fee does benefit our NII and is therefore, something that we will have to distribute so we believe that.

For the year our NII.

I will cover our dividend or approximately cover our dividend.

And then going forward over the year, we will grow NII operationally as we reposition the portfolio into higher yielding assets.

As I noted on the call we monetized two.

Material amount of legacy <unk> positions.

Physicians, including true Taj.

CDK and our spec positions.

The equity is there and we are working to redeploy those proceeds in the quarter. So there is some timing lag.

<unk> is to have that amount ramp over the year and as we get the rights offering proceeds in.

Further allocate the specialty finance, we believe we can generate additional yield from the portfolio.

Got it.

The expense reversal.

The required component of NII, because I mean, I think there was several quarters where.

And I have been over distributed I mean, do you not have the ability to retain any of that.

I mean, essentially it seems like we're getting back.

Money from the manager that had been.

Paid out over the course of several quarters.

Already.

So just to make sure I understand your question are you asking if this year with the NII reversal will be required to distribute that amount of income.

Yes.

Not a not exactly but.

It's a question I would find the answer to interesting I'm, just saying that.

In prior quarters, where NII has been over distributed.

Right now.

Now, we're getting back to $4 9 million.

I mean, it's all.

Like are you required to.

Are you required to over distribute essential.

What it boils down to.

Okay.

Gotcha so we.

Sorry.

Sensitive fevers reversal benefits, our NII and as a.

Registered investment company, we are required to distribute 90% of our.

Income over the course of the year.

If we distribute less than 98 and change percent then we're subject to the excise tax so that amount of reversal is going to have to be distributed. So operationally. We are I would say I would agree with this year on an operational basis, we're over distributing but from.

Investment company standpoint, where.

We're going to be distributing what we need to maintain our status as a <unk>.

Correct.

Okay.

Thank you.

Good.

Just following up on that.

There is no way to credit that $4 9 million against prior over distribution. It's all is at all.

Whatever occurs in the current year and you kind of can go back and adjust or anything like that for.

Capital essentially.

I think that's a technical question.

Before turning it over to Terry I would like to.

Happy to answer additional questions.

Offline.

Gary can you speak to that.

Hi.

So the calculations have.

Sort of.

A lot of factors that go into them.

We calculate our <unk>.

Requirement here on a standalone basis, but we of course every year, we'll assess that there is any opportunity for us to take credit for.

Any book tax differences in prior years that might wash out in the current year.

I think probably a more involved question.

We could talk about offline.

But we also have not completed our filing for the current year as disclosed in our most recent 10-K.

Okay. That's great. That's all for me thanks for taking the questions.

Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.

I'm showing no additional questions in the queue at this time I would like to turn the conference back over to Mr. Matt Kaplan for any closing remarks.

Thank you again for joining us today.

Excited about the progress we have made thus far to transform <unk> and we look forward to continued investor dialogue. Please.

Please let us know if we can help with any follow up thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.

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