Q2 2024 Great Elm Capital Corp Earnings Call
Greetings and welcome to Great Elm Cptl Corp. 2nd Quarter 2024 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.
Operator: 2021 financial results call. At this time, all participants are in a listening mode.
Operator: At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, as a reminder, this conference is being recorded.
Operator: A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on the telephone keypad. As a reminder, this conference has been recorded.
Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Garrett Edson: It is now my pleasure to introduce you to Garrett Edson, a representative of the company.
It is now my pleasure to introduce you to Garrett Edson, a representative of the company. Thank you. You may begin.
Garrett Edson: Thank you. You may begin.
Matt Kaplan: Good afternoon. Thank you, everyone, for joining us for Great Elm Cptl Core 2nd Core 2024 earnings conference call. If you would like to be added to our distribution list, you can email investor relations at greatelmcaptl.com, or you can sign up for alerts directly on our website, www.greatelmcc.com. I'd like to know the slide presentation posted on our website accompanying today's call. The slide presentation can be found on our website under Events and Presentations. On our website, you can also find our earnings release and SEC filings.
Speaker Change: Good afternoon. Thank you, everyone, for joining us for Great Elm Capital Corp's second quarter 2024 earnings conference call. If you would like to be added to our distribution list, you can email investorrelations at greatelmcap.com or you can sign up for alerts directly on our website, www.greatelmcc.com.
Speaker Change: I'd like to note the slide presentation posted on our website accompanying today's call. The slide presentation can be found on our website under Events and Presentations. On our website, you can also find our earnings release and SEC filings.
Matt Kaplan: 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. Today's conference call includes forward-looking statements, and we've asked that you refer to Great Elm Cptl Core's filings with the SEC for important factors that could cause actual results to use if or materially from these statements. Great Elm Cptl Core does not undertake to update its forward-looking statements unless required by law.
Matt Kaplan: To obtain copies of SEC filings, please visit Great Elm Cptl Core's website under Financials, SEC Filings, or visit the SEC's website.
Matt Kaplan: Closing the call this afternoon is Matt Kaplan. Great Elm Cptl Core's chief executive officer, who will be joined by chief financial officer Carrie Davis, chief compliance officer Adam Kleinman, and Mike Keller, president of Great Elm Specialty Finance.
Speaker Change: Hosting the call this afternoon is Matt Kaplan, Great Elm Cptl Corp's Chief Executive Officer, who will be joined by Chief Financial Officer Keri Davis, Chief Compliance Officer Adam Kleiman, and Mike Keller, President of Great Elm Specialty Finance. I will now turn the call over to GECC's CEO , Matt Kaplan.
Matt Kaplan: I will now turn the call over to GECC's CEO, Matt Kaplan.
Matt Kaplan: Thanks, Garrett.
Matt Kaplan: Good afternoon, and thank you all for joining us today. We had a solid second quarter as we continue to advance our long-term growth strategy, as demonstrated by our portfolio enhancement initiatives and notable financing activities completed to date. In June, we successfully raised $12 million in equity at net asset value from Prosper Peak Holdings and SPB, supported by a $3 million investment in Great Elm Group in the SPB. This capital raised followed the structure established by the $24 million equity raise at net asset value in February, which was also supported by a $6 million investment in Great Elm Group.
Matt Kaplan: We had a solid second quarter as we continued to advance our long-term growth strategy, as demonstrated by our portfolio enhancement initiatives and notable financing activities completed to date. In June, we successfully raised $12 million in equity at net asset value from Prosper Peak Holdings and SPV, supported by a $3 million investment from Great Elm Group in the SPV. This capital raise followed the structure established by the $24 million equity raise at net asset value in February, which was also supported by a $6 million investment from Great Elm Group.
Matt Kaplan: Thanks Garrett, good afternoon, and thank you all for joining us today.
Speaker Change: In June, we successfully raised $12 million in equity at net asset value from Prosper Peak Holdings and SPV, supported by a $3 million investment from Great Elm Group in the SPV.
Speaker Change: This capital raise followed the structure established by the $24 million equity raise at net asset value in February, which was also supported by a $6 million investment from Grey Dawn Group.
Matt Kaplan: In July, we issued an additional $22 million of GECC I notes through a registered direct offering to an institutional investor. This supplemental debt financing was a tack on to our GECC I offering in April, during which we issued $34.5 million of five-year notes, which were syndicated favorably at a more than 50 basis points spread to treasury improvement as compared to our August 2023 note offering. We believe this financing rate improvement was driven by our strong earnings, fresh equity capital, and the EGN Jones rating upgrade to triple B flat from triple B minus since our August offering.
Matt Kaplan: We believe this financing rate improvement was driven by our strong earnings, fresh equity capital, and the Egan Jones Rating Upgrade to BBB-flat from BBB-minus since our August update. Of this $9.4 million, $8.1 million is attributable to a portfolio company which emerged from bankruptcy in July, and we received a significant majority of our recovery in now current pay secured take-back debt, leaving our pro forma non-accruals at $1.3 million of fair value.
Matt Kaplan: Overall, we are pleased to have secured over $90 million of fresh capital this year, bolstering our liquidity and further strengthening our financial position, enabling us to execute on our investment pipeline at greater scale. The successful execution of these non-diluted equity raises and debt issuances underscores the enduring strength of our platform as a result of the strategic repositioning efforts implemented over the past two years. We continue to actively pursue investment opportunities that offer attractive, risk-adjusted returns for our shareholders. We are particularly excited about our expansion into COO products, as previously outlined in our last earnings call.
Speaker Change: The successful execution of these non-dilutive equity raises and debt issuances underscores the enduring strength of our platform as a result of the strategic repositioning efforts implemented over the past two years.
Speaker Change: We are particularly excited about our expansion into CLO products as previously outlined in our last earnings call. In April, we created a JV to hold investments in CLOs and related warehouse entities.
Matt Kaplan: In April, we created a JV to hold investments in COOs in related warehouse entities. Notably, the JV is beginning to receive distributions from a COO investments, with its first sizable distribution in July. We expect the COO JV will be a source of increasing income as we further invest in that portfolio moving forward. Over time, we anticipate potential returns ranging from the mid-teens to low 20% from our COO investment portfolio. By incorporating structured financial vehicles into our portfolio, we gain exposure to instruments that have historically demonstrated strong ROEs across various economic levels, exemplify our commitment to building a resilient and diverse investment portfolio.
Matt Kaplan: Turning to our second quarter performance, we ended the quarter with NAB of $12.6 cents per share on June 30, compared to $12.57 cents as of March 31. The reduction was primarily due to liquid level three investments on Namakruo in two portfolio companies, which adversely affected NAB by approximately 40 cents per share in the quarter. We believe the bulk of the impacts to NAB from these portfolio companies has been realized, positioning us to recapture NAB moving ahead. Namakruo does a quarter until $9.4 million for approximately 3% of portfolio fair value. Of this $9.4 million, $8.1 million was attributable to a portfolio company which emerged from bankruptcy in July, and we received a significant majority of our recovery in now-current pay secured take-back debt, leaving our pro-form on Namakruo's at $1.3 million of fair value.
Speaker Change: Turning to our second quarter performance, we ended the quarter with NAV of $12.06 per share on June 30 compared to $12.57 as of March 31.
Speaker Change: The reduction was primarily due to a liquid level three investments on non-accrual in two portfolio companies, which adversely affected NAD by approximately 40 cents per share in the quarter.
Speaker Change: Of this $9.4 million, $8.1 million is attributable to a portfolio company which emerged from bankruptcy in July and we received a significant majority of our recovery in now current pay secured take-back debt, leaving our pro forma non-accruals at $1.3 million of fair value.
Matt Kaplan: Otherwise, we believe our portfolio remains solid, and we continue to actively monitor our investments for any incremental stress. In the second quarter, we generate a 32 cents of NII per share. Sequentially, our NII per share declines due to cash drag related to the GECC I offer in April and our June equity offering, as well as the residual impacts from the Namakruo positions, and from the timing of cash flows from certain investments such as the PLRJB. As distributions from our CLO-focused JDB denser materialize, combined with income from our strategic capital deployments, we expect NII in the second half of the year to surpass that of the first half.
Matt Kaplan: In the second quarter, we generated $0.32 of NAI per share. However, sequentially, our NAI per share declined due to cash drag related to the GECCI offering in April and our June equity offering, as well as the residual impact from the non-approved positions and from the timing of cash flows from certain investments, such as the CLOJB. As distributions from our CLO Focus JD begin to materialize, combined with income from our strategic capital deployments, we expect NII in the second half of the year to surpass that of the first half.
Speaker Change: Sequentially, our NII per share declined due to cash drag related to the GECCI offering in April and our June equity offering, as well as the residual impact from the non-approved positions and from the timing of cash flows from certain investments such as the CLOJP.
Speaker Change: As distributions from our CLO-focused JD begin to materialize, combined with income from our strategic capital deployments, we expect NII in the second half of the year to surpass that of the first half.
Matt Kaplan: As such, we believe we remain well positioned to more than cover our dividend and continue growing the portfolio. Before turning the call over to Keri to review our financials in greater detail, I would like to address our upcoming baby bond maturity in 2025, as we are actively assessing various options to refinance these bonds. Furthermore, we are constantly evaluating the capital markets and have initiatives in place to take advantage of potential transactions to refinance this maturity.
Matt Kaplan: As such, we believe we remain well-positioned to more than cover our dividend and continue growing the portfolio. Overall, we delivered another solid quarter of results while advancing our strategic initiatives, enhancing both our capital structure and operational efficiency, and positioning ourselves well for sustainable long-term growth.
Speaker Change: Overall, we delivered another solid quarter of results while advancing our strategic initiatives, enhancing both our capital structure and operational efficiency, and positioning ourselves well for sustainable long-term growth.
Matt Kaplan: Before turning the call over to Kerry to review our financials in greater detail, I would like to address our upcoming baby bond maturity in 2025, as we are actively assessing various options to refinance these bonds. Further, we are constantly evaluating the capital markets and have initiatives in place to take advantage of potential transactions to refinance this maturity. We expect to refinance these bonds by the end of 2024 and remain focused on optimizing our costs of capital.
Speaker Change: Before turning the call over to Keri to review our financials in greater detail, I would like to address our upcoming baby bond maturity in 2025, as we are actively assessing various options to refinance these bonds.
Speaker Change: Further, we are constantly evaluating the capital markets and have initiatives in place to take advantage of potential transactions to refinance this maturity.
Keri Davis: With that, I would like to hand the call over to Kerry Davis to discuss our second quarter 2024 performance.
Keri Davis: Thanks, Matt. I'll go over our financial highlights now, but we invite all of you to review our press release accompanying presentation and FCC filing for greater detail. During the second quarter, GECC generated NII of $3.1 million or $0.32 cents per share as compared to $3.2 million or $0.37 cents per share in the first quarter of 2024.
Keri: Thanks, Matt. I'll go over our financial highlights now, but we invite all of you to review our press release, accompanying presentation, and SEC filing for greater detail.
Speaker Change: During the second quarter, GECC generated NII of $3.1 million, or $0.32 per share, as compared to $3.2 million, or $0.37 per share, in the first quarter of 2024.
Keri Davis: The sequential decline is largely attributed to cash drag and the increased share count from our June equity issuance set NAV in addition to the timing of distributions from firm positions, particularly our COO investments. Our net assets as of June 30th, 2024, rose to $126 million compared to $119 million at March 31st, 2024.
Speaker Change: The sequential decline is largely attributed to cash drag and the increased share count from our June equity issuance at NAV, in addition to the timing of distributions from certain positions, particularly our CLO investments.
Speaker Change: Our net assets as of June 30, 2024, rose to $126 million compared to $119 million at March 31, 2024. Our NAV per share was $12.06 as of June 30, versus $12.57 as of March 31, with the decline once again primarily attributable to the write-down of certain investments highlighted by Matt.
Keri Davis: Our nav per share was $12.06 as of June 30th, 1st, 1257 as of March 31st, with the decline once again, primarily attributable to the write down of certain investments highlighted by Matt. Detail for the quarter of a quarter change in NAV can be found on slide 9 of the investor presentation. As of June 30th, GECC's asset coverage ratio was 171 percent compared to 180 percent as of March 31st. Proforma for the July bond issuance, the asset coverage ratio would be approximately 163 percent. As of June 30th, total debt outstanding was approximately $178 million, and our $25 million revolver remains undrawn.
Keri Davis: Detail for the quarter over quarter change in NAV can be found on slide 9 of the investor presentation. As of June 30th, GECC's asset coverage ratio was 171% compared to 180% as of March 31st. Pro forma for the July bond issuance, the asset coverage ratio would be approximately 163%. As of June 30, total debt outstanding was approximately $178 million, and our $25 million revolver remains undrawn. Cash and Money Market Securities totaled approximately $3 million.
Speaker Change: Detail for the quarter-over-quarter change in NAV can be found on slide nine of the investor presentation.
Speaker Change: As of June 30th, GECC's asset coverage ratio was 171% compared to 180% as of March 31st. Pro forma for the July bond issuance, the asset coverage ratio would be approximately 163%.
Speaker Change: As of June 30th, total debt outstanding was approximately $178 million, and our $25 million revolver remains undrawn.
Keri Davis: Cash and money market securities totaled approximately $3 million.
Keri Davis: Proforma for the July bond issuance total debt outstanding was approximately $200 million.
Keri Davis: Pro Forma for the July bond issuance totaled to outstanding was approximately $200 million. Our Board of Directors authorized a $0.35 per share cash distribution for the quarter ending September 30, 2024. The third quarter cash distribution will be payable on September 30, 2024 to stockholders of record as of September 16.
Keri Davis: Our Board of Directors authorized a 35 cent per share cash distribution for the quarter ending September 30th, 2024. The third quarter cash distribution will be payable on September 30th, 2024, to stockholders of record as of September 16th. The distribution equates to an 11.6 percent annualized dividend yield on our June 30 NAV of $12.06 per share.
Speaker Change: The distribution equates to an 11.6% annualized dividend yield on our June 30 NAB of $12.06 per share. And with that, I'll turn the call back over to Matt.
Matt Kaplan: And with that, I'll turn the call back over to Matt.
Matt Kaplan: Thanks, Kerry. Our investment portfolio continues to get stronger as we focus, ultimately increasing its exposure to secured debt. To that end and notably, our CLO investments provide us a solid look through to the broadly syndicated first-learn loan market with attractive financing sources and strong institutional counterparts. This gives us additional confidence in sourcing and deploying capital into these investments.
Matt Kaplan: This gives us additional confidence in sourcing and deploying capital into these investments.
Matt Kaplan: Consider last year, our portfolio consisted of 44 percent first-learn loans and no CLO exposure. Fast forward to the second quarter of 2024, first-learn loans and CLOs make up 60 percent of our portfolio. As our joint venture continues growing, we expect to provide additional insight into our underlying portfolio in the quarters ahead. Notably, our portfolio's yield profiles stood steady at over 13 percent at quarter end. Despite the lingering effects from the non-accrual investments, we are pleased with the portfolio's composition and return profile, which will further be strengthened as we receive distributions from our CLO and JV investments, amongst other newly initiated positions.
Matt Kaplan: Consider last year, our portfolio consisted of 44% first lien loans and no CLO exposure. Fast forward to the second quarter of 2024, first lien loans and CLOs make up 60% of our portfolio.
Keri Davis: As our joint venture continues growing, we expect to provide additional insight into our underlying portfolio in the quarters ahead.
Matt Kaplan: Notably, our portfolio's yield profile stood steady at over 13% at quarter end. As always, we prioritize credit quality and seek investments with minimal risk of permanent capital loss. By adhering to this strategy, we are well-equipped to continue growing Great Elm Cptl Corp and delivering attractive risk-adjusted returns for our shareholders. We remain excited for the future of GECC, and with that, I would like to turn the call over to Mike Keller to provide an update on Specialty Finance. Thanks, Matt.
Matt Kaplan: Notably, our portfolio's yield profile stood steady at over 13% at quarter end.
Mike Keller: Despite the lingering effects from the non-accrual investments, we are pleased with the portfolio's composition and return profile, which will further be strengthened as we receive distributions from our CLOJV investments amongst other newly initiated positions.
Matt Kaplan: Given the ongoing volatility in the macro-environment, with uncertainty surrounding the timing of rate cuts and a turbulent election year, we are maintaining a disciplined approach to capital deployment. We are directing our investments towards opportunities that are primed to perform across various economic cycles. As always, we prioritize credit quality and seek investments with minimal risk of permanent capital loss. By adhering to this strategy, we are well equipped to continue growing Great Elm Capital Court and delivering attractive risk-adjusted returns for our shareholders.
Mike Keller: Given the ongoing volatility in the macro environment with uncertainty surrounding the timing of rate cuts and a turbulent election year, we are maintaining a disciplined approach to capital deployment.
Mike Keller: We are directing our investments towards opportunities that are primed to perform across various economic cycles.
Mike Keller: As always, we prioritize credit quality and seek investments with minimal risk of permanent capital loss. By adhering to this strategy, we are well-equipped to continue growing Great Elm Capital Corp. and delivering attractive risk-adjusted returns for our shareholders.
Michael Keller: You remain excited for the future of GECC, and with that, I would like to turn the call over to Mike Keller to provide an update on Specialty by now.
Michael Keller: Moreover, the pipelines remain robust thus far in the third quarter, and we continue to be laser focused on closing new deals and streamlining operations, touching on our platform company. We're excited for Sterling's prospects as the progress made over the last six months has positioned the business to further convert its pipeline into earning assets over the coming month. Thanks, Mike. In closing, GECC had a solid second quarter and a strong first half of the year.
Michael Keller: We remain excited for the future of GECC and with that I would like to turn the call over to Mike Keller to provide an update on specialty finance.
Michael Keller: Thanks, Matt. Despite a sluggish start to 2024 for New Deal Originations across all our specialty finance platforms, GESF saw improved performance in two of its three platform companies in the second quarter. Moreover, the pipelines were main robust thus far in the third quarter, and we continue to be laser focused on closing new deals and streamlining operations.
Mike: Thanks, Matt.
Speaker Change: Despite a sluggish start to 2024 for New Deal originations across all our specialty finance platforms, GESF saw improved performance in two of its three platform companies in the second quarter.
Michael Keller: Touching on our platform companies, while Prestige started the first quarter with lower invoice financing volumes, a notable pick up in the second quarter led to increased net income sequentially. At Sterling, deals closed in the first half of the year generated positive momentum for the company, improving earnings both sequentially and year over year. We are excited for Sterling's prospects as the progress made over the last six months has positioned the business to further convert its pipeline into earning assets over the coming months.
Michael Keller: We're excited for Sterling's prospects as the progress made over the last six months has positioned the business to further convert its pipeline into earning assets over the coming months.
Michael Keller: Lastly, although deal volume, Great Elm Healthcare Finance has continued to lag projections, we remain focused on implementing strategic refinements to reposition the platform for future success. Overall, although the year begins slowly, we experience some sequential improvement in the second quarter and are optimistic that our efforts to drive further growth and profitability will pay off.
Speaker Change: Lastly, although deal volume at Great Elm Healthcare Finance has continued to lag projections, we remain focused on implementing strategic refinements to reposition the platform for future success.
Speaker Change: Overall, although the year began slowly, we experienced some sequential improvement in the second quarter and are optimistic that our efforts to drive further growth and profitability will pay off.
Michael Keller: Thanks, Mike.
Matt Kaplan: In closing, GECC had a solid second quarter and strong first half of the year. The strategic and capital raising initiatives implemented so far this year reflect our commitment to enhancing and expanding our platforms and portfolio. Looking ahead, we believe we are well positioned to grow MII and more than cover the dividends for the remainder of the year.
Mike: Thanks, Mike.
Michael Keller: The strategic and capital raising initiatives implemented so far this year reflect our commitment to enhancing and expanding our platforms and portfolio. Looking ahead, we believe we are well positioned to grow NII and more than cover the dividend for the remainder of the year. With that, I'd like to turn the call over to the operator for questions. Operator? We will now be conducting a question and answer session. If you would like to ask,
Michael Keller: In closing, GECC had a solid second quarter and strong first half of the year.
Michael Keller: The strategic and capital-raising initiatives implemented so far this year reflect our commitment to enhancing and expanding our platforms and portfolio.
Matt Kaplan: What's that?
Matt Kaplan: I'd like to turn the call over to the operator for questions.
Operator: Operator? Thank you.
Michael Keller: With that, I'd like to turn the call over to the operator for questions. Operator?
Operator: We will now 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 a 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 we poll for questions. A reminder to all the participants that you may press star one to ask a question.
Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. A reminder to all the participants that you may press star 1 to ask a question. There are no questions at this time. I would like to turn the floor back over to Matt Kaplan for closing comments. Thank you all again for your support.
Matt Kaplan: Thank you.
Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.
Operator: You may press star 2 if you would like to remove a question from the queue.
Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Operator: There are no questions at this time.
Matt Kaplan: I would like to turn the floor back over to Matt Kaplan for closing comments. Thank you all again for joining us today. We are pleased with another quarter of solid performance as we continue to execute on our growth strategy. We look forward to continuing the investor dialogue. Please let us know if we can help with any follow-up questions that you may have. Thank you.
Matt Kaplan: Thank you all again for joining us today. We are pleased with another quarter of solid performance as we continue to execute on our growth strategy. We look forward to continuing the investor dialogue. Please let us know if we can help with any follow-up questions that you may have.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Thank you.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.