Q3 2022 Great Elm Capital Corp Earnings Call

Greetings and welcome to the Great Elm Capital Corp, third quarter 2022 financial results.

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

And their session will follow the formal presentation.

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Please note this conference is being recorded.

Now I'll turn the conference over to your host Garrett Edson are representatives of the company you may begin.

Good morning, and thank you everyone for joining us for Great Elm capital Corp's third quarter 2022 earnings Conference call.

Like to be added to our distribution list you can email investor relations at Great Elm cap dotcom.

Sign up for alerts directly on our website www dot great Elm DC Dot com.

I'd like to note the 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 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.

Cell or 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 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 hosting the call. This morning is Matt Kaplan, Great Elm capital Corp's, Chief Executive Officer, who will be joined by Terry Davies J E. T C. CFO , Adam Kleinman President of Great Elm Capital management, and my killer President of Great Elm specialty finance.

I'll turn the call over to G. E C. C C E O S Catlin.

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

Our third quarter results are a testament to the revamped portfolio strategy.

Executing on throughout the year.

On the asset side fair value across the portfolio slightly increased in the quarter, which we believe was better than many of our peers our strategy to diversify the portfolio and when rates were low spreads tight position ourselves in the higher coupons short duration fixed rate securities benefited G E C C.

As it enabled us to better withstand the rapid rise in interest rates.

In the third quarter, we advantageously deployed approximately $40 million into new investments at average yields in excess of 12%.

With 60% of those deployments take floating rate investment.

Approximately $30 million of assets, we're monetizing it in the quarter at average yields below 10%, but 90% of those assets are comprised of fixed rate debt.

As a result, nearly half of our debt investment portfolio at quarter end consisted of floating rate debt up from one third just one quarter ago.

Average yield on our credit portfolio also increased to 11, 6% from 10, 3% at June 30th going forward, you should expect us to focus more time and capital on investments that benefit from rising rates as opposed to fixed rate investments.

At the same time.

NII of $1 1 billion of 14th per share well below our expectations.

Largely due to cost and expenses related to certain legacy investments.

Formation of Great Elm health care, finance, which collectively impacted NII by approximately 9%.

In addition, we estimate NII was impacted by approximately 3% from the continued cash drag resulting from our measured deployment of capital noted on our prior call.

Lastly, our specialty finance platforms did not perform as anticipated given our low in originations over the summer and some temporary disruption from management changes.

We expect the elevated expenses to abate in the fourth quarter and along with an increase in deployment should result in a corresponding increase in NII.

As I alluded to earlier, great elements, adding to its specialty finance business by launching a health care finance platform that provides capital solutions to health care businesses across the country in the quarter, we identified a senior management team led by industry veteran Michael <unk> to lead the specialized secured Len.

Being a vertical with support from our existing ABL platform Sterling commercial credits.

Mike has built two health care lending platforms over the past two decades and I'm extremely excited to welcome him into the great on family.

We are in the process of identifying assets and potential finance partners as well as building out the operations for the health care initiative supported by our experienced team at Sterling.

You remain measured with respect to deploying capital in the current market environment and are very focused on finding and bathroom with limited risk of permanent capital impairment and durable returns.

In the near term our goal is to grow our portfolio and our investment income to cover our quarterly distribution on a regular basis and we believe youll begin to see progress towards that and I I go in the fourth quarter.

As we continue to navigate through the current environment, we remain excited for our future prospects and the opportunities that the market volatility has started to provide both the secondary credit and private ABL market.

I remain very confident in the team and we are making steady progress building on the foundation, we put in place.

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

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 critical care.

As Matt noted, we continue to reposition the portfolio during the quarter with a higher yield profile.

And floating rate debt as a percentage of our holdings to take advantage of rising rates.

During the third quarter GEC generated NII of $1 1 million versus one 6 million in the prior year quarter and $1 2 million in the.

Second quarter of 2022.

Our net assets as of September 30th 2022 were $95 5 million compared to $97 6 million at June 30 of 2022, and $99 4 million as of September 30th 2021.

Our NAV per share was 12 56 as of September 32020 to purchase 12 84 at June 30th 2022, and $22 17 as of September 30th 2021.

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

As of September 30 of 2022 G. SEC asset coverage ratio was approximately 165, 5% compared to 166, 9% as of June 30.

Yeah.

D C reported net increase in operations of 18 cents per share in the third quarter compared to a net loss of 47 cents per share in the prior quarter NII per share was 14 cents compared to 23 cents in the prior quarter.

As of September 30th our total debt outstanding was approximately $145 9 million comparable what they gained 30 at 2022 quarter Act.

Our $25 million line of credit remains fully undrawn.

As of September 30th our cash and money market securities totaled approximately $21 $3 million.

Our board of directors adopt to rise to 45 cents per share cash distribution for the quarter ending December 31st 2022.

The fourth quarter cash distribution will be payable on December 30, <unk> 2020 to stockholders of record as of December 15, 2022.

Annualized distribution equates to a 14, 3% annualized dividend yield on our September 30 of 2020 to Nap of 12 56 per share.

I'll turn the call back over to Matt to it in the portfolio.

Thanks Kerry.

Hey, I'm going to focus on providing some color on how our portfolio construction strategy has evolved.

At the start of the year, we saw limited opportunities through floating rate secured debt and play defense and certain higher yielding bonds and preferred securities.

Some of which have been called and refinanced over the past few months in spite of capital market disruption.

Three examples of this are the hottest preferred cleaver Brooks bonds and natural resource partners.

All of which were fixed rate investments that were called or received redemption notices and three Q.

In addition, we took the opportunity during the credit rally in the third quarter to Pare back a couple of fixed rate bond positions be purchased late in the second quarter micro strategy and fortress infrastructure with nice short term game. We redeployed. These proceeds in the third quarter at 12% plus yield largely into floating rate.

Instrument.

We selectively took advantage of the credit market rally in the middle of the third quarter and making sales. We also remain prudent in our deployment of capital during the rally we pumped the brakes on secondary market deployment and closed two direct club deal at mid teens yields in August and September .

We've discussed on our recent calls our goal to develop a continuum of lending that G. E. C. C can offer small business clients and an important part of that continuum is building out our specialty finance platform.

During the third quarter, we had a few disruptions, including a leadership change and summer seasonality impacting originations, which ultimately led to lower distributions from our specialty finance company.

We expect some of this disruption will continue into the fourth quarter, but key hires made in the third quarter are already hard at work building the pipelines and setting the stage for our platforms to execute on growth initiatives, including our new specialty secured lending vertical focused on health care.

Before closing out I would note that as we expected the cash drag from the June quarter continued throughout the third quarter and we did not cover the distribution with NII going forward, we intend to grow NII by deploying cash into new investments as we seek to position G. E. C. C to covered quarterly distributions on a regular basis.

We do expect to see the cash drag continue to some extent due to fourth quarter, but it should be less impactful than in the third quarter as we find opportunities to selectively deploy capital to generate solid risk adjusted returns.

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

Thank you.

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Who joined our question and execute.

Yeah.

Alright, it looks like we do not have any questions at the time, So I will turn the call back over to Pedro.

Where it goes wrong right.

Thank you again for joining US today, we continue to make solid progress in our efforts to transform J E. T. C. We look forward to continued investor dialogue. Please let us know if we can help with any follow up thank you.

And this concludes today's conference and you may disconnect your lines at this time.

Thank you for your participation.

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Yes.

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