Q2 2022 Great Elm Capital Corp Earnings Call

August 4, 2022

Greetings and welcome to the Great Elm Capital Corp, second quarter 2022 financial results Conference call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference call. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host got it that's been a representative of the company.

Thank you you.

You may begin sir.

Morning, and thank you everyone for joining us for Great Elm Capital Corp, second quarter 2022 earnings Conference call.

He would like to be added to our distribution list you can email investor relations at great Elm capped dot com or you can sign up for alerts directly on our website www dot <unk> dot com I'd like to note that a slide presentation posted on our website accompanying today's call 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.

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 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 statements great Elm capital Corp does not undertake to update its forward looking statements unless required by law.

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

During the call. This morning is Matt Catholic Great Elm Capital Corp's, Chief Executive Officer, I will now turn the call over to Matt.

Thank you Gary Good morning, and thank you for joining us today on today's call I'll walk through some second quarter highlights and our CFO Cary Davis will take us through some of our financials for the quarter.

We'll then open up for Q&A, and Adam climate, our Chief compliance Officer, and Mike Keller President of Great Elm specialty finance.

Join us to answer questions.

Overall, we continue to make progress on the priorities, we laid out after the March quarter supporting our revamped strategy to improve our NII and NAV over time and maximize shareholder value.

In June we completed a rights offering that strengthened our balance sheet enhanced our asset coverage ratio and provided us with increased liquidity.

We were pleased to complete the rights offering in a very challenging environment.

All the rights offering led to some per share NAV dilution, we are taking a measured approach to navigating through market volatility, while maintaining our strategy to grow our specialty finance platforms. We are being disciplined with respect to deploying capital and have taken advantage of some dislocation we are seeing in the secondary markets to opera.

<unk> invest in securities that meet our cash yield and total return thresholds.

We began to see signs of produce liquidity in credit markets through June and July and have been prudently utilizing our rights offering proceeds to deploy capital in the market.

Widening spreads in June impacted portfolio marks and while spreads have since rebounded in July and further into the start of August we are still poised to take advantage of continued market volatility.

From the closing of the rights offering on June 13th through that.

End of July we deployed approximately $25 million and 15 debt investments had a weighted average price below 90 current yield over 10% and yield to maturity over 12, 5% excluding $5 million.

Cash surrogates.

We benefit from a flexible strategy, which allows <unk> to take advantage of dislocations in different segments of the investment landscape and have been leaning into the secondary market as a provider of liquidity.

To that end, our specialty finance mix as a percentage of the portfolio dipped a bit in the quarter as we raise capital or deployments will initially flow into corporate credit and our specialty finance mix should be expected to dip temporarily over the long term, we still see tremendous opportunity and expanding our platform and.

We expect to build a balanced portfolio of corporate and specialty finance investments overtime.

For the June 2022 quarter or NII of $1 2 million was slightly above NII in the March quarter, excluding the reversal of previously accrued incentive fees in the prior quarter.

While our NII increased slightly from the March quarter was impacted by higher average cash balances held over the quarter as we decided to maintain excess liquidity.

Furthermore, our deployment timing was skewed with over 75% of our secondary debt purchases weighted into the back half of the second quarter. We are taking a patient approach to deploying our cash and expect further short term market dislocations will present, GE ECC with attractive investment opportunities.

Considering this strategy, we do look for the cash drag experienced in the second quarter to continue through the third quarter as we focus on thoughtfully deploying capital into opportunities with the best income generation and long term value creation potential for our shareholders.

I would also like to note that entering the third quarter cash generating investments comprise 98% of our portfolio as we made progress in diversifying and reshaping our holdings.

As of June 32022, 29% of our cash generating assets, our specialty finance related investments down modestly from 34% at the end of March but still up from 22% at year end 2021.

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 June 30, our rights offering helped push our asset coverage ratio up to 166, 9% versus 147, 5% for the March quarter.

As we continue to prudently navigate through the current volatility we remain excited by the opportunities in front of us.

Im very confident in the team and believe we can continue to build on the foundation, we put in place during the first half of 2022.

With that I'd like to hand, the call over to Carey to discuss our second quarter 2022 performance.

Thanks, Matt I'll go over our financial highlights we invite all of you to review our press release accompanying presentation and SEC filings for greater detail.

Matt noted, we continue to evolve the company and our portfolio during the second quarter with more stable yield profile that featured cash generating assets and specialty finance platform.

During the second quarter GEC generated NII of $1 2 million versus $2 1 million in the prior year quarter and 6 million in the first quarter of 2022.

Please note that the first quarter NII was positively impacted by a $4 9 million dollar waiver previously accrued incentive fees and would have been $1 1 million, excluding the way it back.

Our net assets as of June 30 of 2022 were $97 6 million up from $69 3 million at March 31, 2022, and $91 7 million as of June 32021.

The increase was driven by a rights offering in June which added $37 $5 million in gross proceeds.

Our NAV per share was $12.84 as of June 32022 versus <unk> six at March 31st 2020 to $22 40 as of June 32021.

Quarter end NAV per share was impacted by the approximate 3 million shares issued in the rights offering in June .

For the quarter over quarter change in NAV can be found on slide seven of the investor presentation.

As of June 32020, Teen Cec's asset coverage ratio was approximately 166, 9% compared to 147, 5% as of March 31st 2022.

<unk> reported a net loss of 87 cents per share in the second quarter compared to a net loss of $1 12 per share in the prior quarter.

NII per share with 23% compared to $1 31 in the prior quarter, which included the impact of the incentive fee waiver.

All per share amounts are based on weighted average shares and have been adjusted for the fix for one reverse split that became effective on February 28 2022.

As of June 30th our total debt outstanding was approximately $145 9 million comparable with the March 31 2022 outstanding.

$25 million line of credit remains fully undrawn.

As of June 32022, our cash and money market securities totaled approximately $34 $1 million.

Our board of directors has authorized two upcoming quarterly cash distributions, we previously announced that our board of directors has approved a <unk> 45 per share cash distribution for the quarter ending September 32020 to the third quarter cash distributions will be payable on September 32022 to stockholders of record as of September 15, 2020.

Our board of Directors has also approved a <unk> 45 per share cash distribution for the quarter ending December 31 2022.

While we did not cover the distribution with NII in the second quarter. We did enter 2022 with undistributed income and had an unusual onetime benefit in the first quarter from the reversal of incentive fees.

As mentioned earlier, the cash drag experienced in the June quarter will likely continue through the third quarter.

Now if you turn to slide 10 of our Investor presentation. We show our income generating portfolio. This includes only investments, which carry cash coupons or pay cash dividends and excludes all noncash paying investment.

As I have noted we continue to evolve our portfolio into a diversified book performing cash paying investments with stable yield profile.

I'd like to highlight that 98% of our portfolio is now income generating.

In addition, gcc's income generating portfolio continues to diversify with exposure across 19 separate industries through 48 investments up from 41 at the end of the year, resulting in lower average position sizes.

Looking to slide 12.

There are certain items that optically skew our deployment yield lower AD monetization yields higher which is now our medium or long term goal.

For example, our monetization yields are largely elevated due to mandatory repayments on higher coupon debt that was redeemed or paid down in the quarter.

Our deployment yields appear suppressed considering revolver draws and investments and short term cash surrogates post rights offering to earn higher yields on cash.

Moving on to slide 14.

You can see that of our $153 million of debt investments.

33% are invested in floating rate instruments with a weighted average current yield of 10%.

Proximately, 67% are invested in fixed rate instruments with a weighted average current yield of 10, 4%. It is important to note that our fixed rate debt portfolio has a weighted average maturity of approximately three years. So while our floating rate mix may be lower than other bdcs. We believe the relatively short duration of our fixed rate portfolio allows GEC.

<unk> to benefit from the current rising rate environment.

As we have discussed we are developing a continuum of lending that <unk> can offer small business clients.

We leave a good amount of the groundwork in the first half of the year to re grow our portfolio and generate attractive risk adjusted returns in any economic cycle with.

We've partnered with specialty finance companies to be a number of different investment types, including majority equity interest secured debt subordinated debt and participation co investments 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.

Our pipeline in specialty finance and corporate credit is growing and we are conducting diligence on many proprietary source deal that have attractive mid teens returns. However, we will remain disciplined in this environment and not only when the risk reward scenario as appropriate.

In summary, we continue to make progress and in the back half of the year, we intend to focus on executing our three pronged approach to one focus on cash yielding investments, particularly in specialty finance to improve our NII and NAV over time and three maximize shareholder value.

We continue to believe we are headed in the right direction and are confident in our ability to execute on our strategy with that we will turn the call over to the operator for questions operator.

Okay.

Thank you very much.

At this time, we will be conducting a question and answer session.

If you'd like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while they pause for questions.

Ladies and gentlemen to ask a question. Please press star followed by one on you touched on for now.

Yes.

As a reminder to participants who wish to ask a question. Please press star followed by one on your thoughts for now.

Okay.

Thank you very much ladies and gentlemen, we reached the end of the question and answer session and I would like to turn the call back to Matt Kaplan for his closing remarks.

Over to you Sir.

Well. Thank you all for joining us today I am excited about the progress we have made thus far to transform GEC. We look forward to continued investor dialogue. Please let us know if we can help with any follow up thank you.

Thank you very much ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

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Greetings and welcome to the great.

Capital Corp, second quarter 2020 financial results Conference call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference call. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Garrett Edson are representative of the company.

Thank you.

You may begin Sir good morning, and thank you everyone for joining us for Great Elm Capital Corp. 's second quarter 2022 earnings conference call, if you'd like to be added to our distribution list you can email investor relations at great Elm capped dot com or you can sign up for alerts directly on our website www dot <unk> dot com I would like to note the slide presentation.

<unk> posted on our website accompanying today's call 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 solicit.

<unk> of offers to purchase our Securities Today's conference call includes forward looking statements 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 statements 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 web site hosting the call. This morning is Matt Kaplan, Great Elm capital Corp's, Chief Executive Officer, I will now turn the call over to Matt.

Thank you Gary Good morning, and thank you for joining us today on today's call I'll walk through some second quarter highlights and our CFO Karri Davies, who will take us through some of our financials for the quarter.

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

Overall, we continue to make progress on the priorities, we laid out after the March quarter supporting our revamped strategy to improve our NII and NAV over time and maximize shareholder value.

In June we completed a rights offering that strengthened our balance sheet enhance our asset coverage ratio and provided us with increased liquidity.

We were pleased to complete the rights offering in a very challenging environment.

While the rights offering led to some per share NAV dilution, we are taking a measured approach to navigating through market volatility, while maintaining our strategy to grow our specialty finance platforms.

We are being disciplined with respect to deploying capital and have taken advantage of some dislocation we are seeing in the secondary markets to opportunistically invest in securities that meet our cash yield and total return thresholds.

Widening spreads in June impacted portfolio marks and while spreads have since rebounded in July and further into the start of August we're still poised to take advantage of continued market volatility.

From the closing of the rights offering on June 13th through the end of July we deployed approximately $25 million and 15 bad investments at a weighted average price below 90% current yield over 10% yield to maturity over 12, 5%, excluding $5 million cash surrogates.

We benefit from a flexible strategy, which allows <unk> to take advantage of dislocations in different segment of the investment landscape and have been leaning into the secondary market as a provider of liquidity.

We expect to build a balanced portfolio of corporate and specialty finance investments over time.

For the June 2022 quarter or NII of $1 2 million was slightly above NII in the March quarter, excluding the reversal of previously accrued incentive fees in the prior quarter.

While our NII increased slightly from the March quarter was impacted by higher average cash balances held over the quarter as we decided to maintain excess liquidity.

Furthermore, our deployment timing was skewed with over 75% of our secondary debt purchases weighted into the back half of the second quarter. We are.

Taking a patient approach to deploying our cash and expect further short term market dislocations will present, GE ECC with attractive investment opportunities.

During this strategy, we do look for the cash drag experienced in the second quarter to continue through the third quarter as we focus on thoughtfully deploying capital into opportunities with the best income generation and long term value creation potential for our shareholders.

I would also like to note that entering the third quarter cash generating investments comprise 98% of our portfolio as we made progress in diversifying and reshaping our holdings.

As of June 32022, 29% of our cash generating assets, our specialty finance related investments down modestly from 34% at the end of March but still up from 22% at year end 2021.

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 June 30, our rights offering helped push our asset coverage ratio up to 166, 9% versus 147, 5% for the March quarter.

As we continue to prudently navigate through the current volatility we remain excited by the opportunities in front of us.

Feel very confident in the team and believe we can continue to build on the foundation, we put in place during the first half of 2022.

With that I'd like to hand, the call over to Carrie to discuss our second quarter 2022 performance.

Thanks, Matt I'll go over our financial highlights, but we invite all of you to review our press release accompanying presentation and SEC filings for greater detail.

As Matt noted, we continue to evolve the company and our portfolio during the second quarter with more stable yield profile that featured cash generating assets and specialty finance platform.

During the second quarter GEC generated NII of $1 2 million versus $2 1 million in the prior year quarter and $6 million in the first quarter of 2022. Please.

Please note that the first quarter NII was positively impacted by a $4 9 million dollar wafer previously accrued incentive fees and would have been $1 1 million, excluding the way back.

Our net assets as of June 32022 were $97 6 million.

Up from $69 3 million at March 31, 2022, and $91 7 million as of June 32021 the.

The increase was driven by a rights offering in June which added $37 $5 million in gross proceeds.

Our NAV per share was $12 84.

At June 32022 versus <unk> six at March 31, 2022, and 2040 as of June 32021.

Quarter end NAV per share was impacted by the approximate 3 million shares issued in the rights offering in June .

For the quarter over quarter change in NAV can be found on slide seven of the investor presentation.

As of June 32020, P&C Ecp's asset coverage ratio was approximately 166, 9% compared to 147, 5% as of March 31st 2022.

GEC reported net loss of 87 cents per share in the second quarter compared to a net loss of $1 12 per share in the prior quarter.

NII per share with 23.

<unk> to $1 31 in the prior quarter, which included the impact of the incentive fee waiver.

All per share amounts are based on weighted average shares and have been adjusted for the <unk> for one reverse split that became effective on February 28 2022.

As of June 30, our total debt outstanding was approximately $145 9 million comparable with the March 31 2022 outstanding.

Our $25 million line of credit remains fully undrawn.

As of June 32022, our cash and money market securities totaled approximately $34 million.

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

We announced that our board of directors has approved a $45 per share cash distribution for the quarter ending September 32020 to the third quarter cash distribution will be payable on September 32022 to stockholders of record as of September 15, 2022.

Our board of Directors has also approved a <unk> 45 per share cash distribution for the quarter ending December 31 2022.

The distribution equate to a 14% dividend yield on our June 32022, NAV of $12 84 per share.

The record and payment dates for the distributions are expected to be set in the fourth quarter pursuant to authority granted by our board of directors.

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

Thanks, Carey before diving into the portfolio I'd like to speak to the distribution.

Further building distributable income for the year.

As I mentioned earlier, the cash drag experienced in the June quarter will likely continue through the third quarter.

Going forward, we intend to grow NII by deploying cash into new investment as we seek to position <unk> to cover the quarterly distributions on a regular basis.

I have noted we continue to evolve our portfolio into a diversified book performing cash paying investments with stable yield profile.

I would like to highlight that 98% of our portfolio is now income generating this.

This compares to 88% at the start of the year and less than 65% a year ago.

Looking to slide 12.

There are certain items that optically skew our deployment yield lower AD monetization yields higher which is now our medium or long term goal.

For example, our monetization yields are largely elevated due to mandatory repayments on higher coupon debt that was redeemed or paid down in the quarter.

Our deployment yields appear suppressed considering revolver draws and investments and short term cash surrogates post rights offering to earn higher yields than on cash.

Moving on to slide 14.

You can see that of our $153 million of debt investments.

33% are invested in floating rate instruments with a weighted average current yield of 10%.

To benefit from the current rising rate environment.

As we have discussed we are developing a continuum of lending that <unk> can offer small business clients.

A good amount of the groundwork and the first half of the year to re grow our portfolio and generate attractive risk adjusted returns in any economic cycle.

We've partnered with specialty finance companies, a number of different investment types, including majority equity interest secured debt subordinated debt and participation co investments and existing transaction.

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.

Our pipeline in specialty finance and corporate credit is growing and we are conducting diligence on many proprietary source deal that have attractive mid teens returns. However, we will remain disciplined in this environment and that only when the risk reward scenario as appropriate.

We continue to believe we are headed in the right direction and are confident in our ability to execute on our strategy with that we will turn the call over to the operator for questions operator.

Okay.

Thank you very much.

At this time, we will be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please widely pause for questions.

Ladies and gentlemen to ask a question. Please press star followed by one on that touched on for now.

Yes.

A reminder to participants if you wish to ask a question. Please press star followed by one on your thoughts for now.

Okay.

Thank you very much ladies and gentlemen, we reached the end of the question and answer session and I would like to turn the call back to Matt Kaplan for his closing remarks.

Over to you Sir.

Thank you very much ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

Q2 2022 Great Elm Capital Corp Earnings Call

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