Q3 2025 Great Elm Capital Corp Earnings Call
Speaker #3: Good day . And welcome to the Great Elm . Third quarter 2020 financial results conference call . All participants will be in listen only mode .
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Speaker #3: To withdraw your question , please press star . Then two . Please note this event is being recorded . I would now like to turn the conference over to Adam Yates , Managing Director .
Speaker #3: Please go ahead .
Speaker #4: Hello and thank you , everyone for joining us for Great Elm Capital Corp third Quarter 2020 Earnings Conference Call . If you would like to be added to our distribution list , you can email Investor Relations at Great Elm Capital Corp .
Speaker #4: Or you can sign up for alerts directly on our website . WW Great Elm Capital Corp . The slide presentation accompanying today's conference call and webcast can be found on our website under events and Presentations on our website .
Speaker #4: 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 .
Speaker #4: Also , please note that nothing in today's call constitutes an offer to sell or a solicitation of offers to purchase . Our securities .
Speaker #4: Today's conference call includes forward looking statements , and we ask that you refer to Great Elm Capital Corp filings with the SEC for important factors that could cause actual results to differ materially from these statements .
Speaker #4: 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 website under financials , SEC filings or visit the SEC's website .
Speaker #4: Hosting the call today is Matt Caplan , Great Elm Capital Corp chief Executive officer , who will be joined by Chief Financial Officer Keri Davis Chief Compliance Officer and General Counsel Adam Kleinman and Michael Keller , president of specialty Finance .
Speaker #4: I will now turn the call over to GE CEO Matt Caplan .
Speaker #5: Thanks , Adam , and thank you all for joining us today . After a very strong first half of 2025 , we had a solid start to the third quarter and were on pace to meet and potentially exceed our internal income generation targets for three Q in August and through the first half of September , we raised significant equity at NAB , doubled the size of our revolver , reduced the revolvers interest rate by 50 basis points , and successfully refinanced our highest cost debt 100 basis points lower .
Speaker #5: These transactions leave us with ample deployable cash and capacity to invest in income generating opportunities in the coming quarters , leaving us in a position of strength to capitalize on attractive , risk adjusted investment opportunities and further our long term growth strategy .
Speaker #5: In contrast to our positive start to the quarter , our results are colored by first brands , which traded down sharply in the back half of September before filing for bankruptcy at the end of the quarter .
Speaker #5: Gek has held exposure to First Brands through syndicated loans since 2020 , with a portfolio allocation of over 5% to first brands since 2023 .
Speaker #5: As noted in our recent 10-K , First Brands was paying cash income to Gek and we received our last regularly scheduled full cash quarterly interest payment at the end of July this year .
Speaker #5: As outlined in our October 7th press release , our direct exposure to first brands adversely impacted Nav by approximately $16.5 million in the third quarter .
Speaker #5: In addition , we put the loan on Non-accrual , which adversely impacts our income generation . On the other side of the spectrum , I want to highlight a success we had in the quarter with Nespak .
Speaker #5: In 2022 , we funded a secured loan with warrants to nice pack , a wet wipes producer . The company was acquired this past quarter , generating an approximately 38% IRR to geek over the three year holding period .
Speaker #5: Over the last few years , we have found certain select and unique income generating opportunities to deploy capital into with strong upside convexity like nice pack , as well as some of our insurance and core .
Speaker #5: We've related investments . I am confident tremendous sourcing engine is intact and I remain excited about the future of Gek . We entered the fourth quarter with leverage in line with our target and ample liquidity with over $25 million of cash to deploy .
Speaker #5: In addition , we expect to begin harvesting Non-yielding assets in excess of $20 million to prudently deploy into cash generating investments . As we enter this final quarter of 2025 on a strong foundation .
Speaker #5: Our board of directors has approved a 37 cent dividend for the fourth quarter of 2025 . Furthermore , the board has approved a $10 million share repurchase program .
Speaker #5: I am confident that with our strong capital position , our focus on risk management and further portfolio diversification , we can rebuild income and Nav from the third quarter to deliver strong returns to shareholders .
Speaker #5: Before diving into the numbers , I want to further touch on first brands in retrospect , our exposure to First brands was too large .
Speaker #5: We are fortunate to have a strong balance sheet and ample liquidity , and will be focused on driving further portfolio diversification and reducing our average position sizing as we deploy capital .
Speaker #5: Now turning to our third quarter numbers . Our NII was $0.20 per share . The decrease from the second quarter was largely due to the anticipated decline in distributions from our CLO , JV , which totaled $1.5 million in the third quarter , down from $4.3 million in the second quarter .
Speaker #5: Also , NII was impacted from elevated interest expense associated with the refinancing of our high cost GSE notes , where we wrote off approximately $1 million of deferred offering costs and had double interest expense for most of September .
Speaker #5: In addition , our preference shares . In an insurance related investment did not pay a dividend this quarter as we expected after paying $2.1 million in the second quarter .
Speaker #5: In the fourth quarter to date , we have received $4.3 million of distributions from our CLO , JV . But do not expect a distribution on our insurance related preference shares until potentially two Q of 2026 .
Speaker #5: I would like to note that even with all of the moving parts in our numbers , we reported NII of $0.40 per share in the first quarter , $0.51 in the second quarter , and now $0.20 in the third quarter , which totals $1.11 .
Speaker #5: And compares to our dollar $0.11 per share of regular quarterly distributions in the first three quarters of this year . As we look into the fourth quarter and our modeling today , we expect NII to significantly rebound from the third quarter based on increased CLO distributions , normalized interest expense and income generated from our capital deployments .
Speaker #5: It's worth noting that our share count has increased over the past year . As a result of our capital raising programs , which have successfully led to Gek issuing shares in transactions that did not dilute Nav like past rights offerings .
Speaker #5: These transactions have been a huge positive to scaling our platform . However , they have led to short term cash drag impacts and have modestly offset our absolute NII growth on a trailing 12 month basis .
Speaker #5: Moving on to portfolio performance . Our Nav per share declined to $10.01 from $12.10 . As outlined on slide nine , the decrease in Nav was primarily driven by unrealized losses associated with First Brands and to a lesser extent , an unrealized decline in the fair value of our investment in CW .
Speaker #5: Opportunity to LP . As the underlying core . We've common stock declined approximately 16% in the quarter . Looking ahead , we have ample liquidity and are actively working to further diversify our portfolio across senior secured investments that we believe are well positioned to perform amid evolving market conditions .
Speaker #5: With a solid foundation and disciplined investment approach . We remain confident in our ability to generate sustainable returns and deliver increasing value to our shareholders .
Speaker #5: With that , I'd like to turn the call over to Keri Davis to discuss our third quarter 2025 performance .
Speaker #6: 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 filings for greater detail .
Speaker #6: During the third quarter , GSC generated NII of $2.4 million , or $0.20 per share , as compared to $5.9 million , or $0.51 per share , in the second quarter of 2025 .
Speaker #6: The decrease in NII was primarily driven by the lack of a distribution from an insurance related investment in lower income from our JV .
Speaker #6: Our net assets as of September 30th , 2025 were 140 million , consistent with 140 million as of June 30th . Our Nav per share was $10 one cents .
Speaker #6: As of September 30th , versus $12.10 as of June 30th . The decrease in net asset value was primarily driven by losses on First brands .
Speaker #6: As noted , detail for the quarter over quarter change in Nav per share can be found on slide nine of the Investor presentation .
Speaker #6: As of September 30th , GSX asset coverage ratio was 168.2% compared to 169.5% as of June 30th . As of September 30th , total debt outstanding was approximately $205 million , and we had nothing outstanding on our $50 million revolver , cash , and money market securities totaled approximately $25 million , and we had $50 million of availability under our revolver .
Speaker #6: Our board of directors authorized a $0.37 per share . Cash distribution for the fourth quarter , which will be payable on December 31st .
Speaker #6: Stockholders of record as of December 15th from distributable earnings . The distribution equates to a 14.8% annualized dividend yield on our September 30th net asset value .
Speaker #6: I'll turn the call back over to Matt .
Speaker #5: Thanks , Kerry . We continue to enhance our portfolio's strength by maintaining a focus on secured debt positions . Our corporate portfolio is comprised of over $220 million of investments and first lien loans comprised two thirds of the Corporate's portfolio as of September 30th .
Speaker #5: As we deploy capital , we are focused on increasing our allocation to first lien senior secured investments . This demonstrates our commitment to enhancing portfolio quality while maintaining a focus on secured income generating assets .
Speaker #5: Before moving on to more portfolio detail , I think it is important to highlight our Non-yielding other equity mix as outlined on slide 17 .
Speaker #5: The bulk of this is attributable to CW opportunity to LP . The vehicle we discussed last quarter that initially held a preferred investment in coal .
Speaker #5: We've which converted into common equity in connection with the IPO . While there is no more income from the coupon on the preferred to distribute going forward , reducing our gross portfolio yield , this investment is a meaningful positive to our shareholders .
Speaker #5: In the third quarter , we began to receive capital distributions as the vehicle took steps to generate liquidity for its investors . We received $2.9 million of capital distributions in the quarter , almost half of our original $6 million investment .
Speaker #5: And the Post-distribution value was $14.8 million as of September 30th . In October , we received an incremental $2.8 million , bringing our life to date income and capital distributions to $6.1 million , or 102% of our original investment in CW .
Speaker #5: Opportunity to . Importantly , as we receive distributions from CW opportunity to and monetize other non-yielding equity investments in the coming months , we will rotate this capital into cash income generative investments and further diversify our portfolio .
Speaker #5: As of September 30th , our nonaccrual positions included investments in First Brands , Del Monte and Maverick Gaming , representing 1.5% of portfolio fair value .
Speaker #5: Aside from our Nonaccrual investments , our corporate portfolio has performed well on the whole and we saw solid performance in specialty finance . Importantly , we have no exposure to non-prime consumer finance issuers or tricolour .
Speaker #5: In addition , we have limited exposure to software and have been monitoring portfolio investments for signs of disruption from AI . There are many widespread concerns about businesses at risk from AI disruption .
Speaker #5: We believe caution is appropriate but needs to be addressed on a case by case basis . To date , we have otherwise seen minimal direct impact of tariffs on our portfolio .
Speaker #5: Our portfolio maintains broad diversification with a predominantly domestic focus and minimal exposure to China . We continue to monitor the changing landscape and also work to evaluate the second and third order effects on tariffs and shifting trade dynamics with our defensive portfolio structure , we believe we are well positioned to navigate the ongoing tariff uncertainty .
Speaker #5: As we look ahead , we are focused on deploying capital into high quality , income generating investments . We are taking a measured approach to .
Speaker #5: New originations , prioritizing credit fundamentals and downside protection , along with increased portfolio diversification . With $25 million of deployable cash , monetization of our Non-yielding equity investments , and $50 million of revolver availability .
Speaker #5: We have significant dry powder and financial flexibility to capitalize on opportunities . We remain excited for the future of GSE , and with that , I would like to turn the call over to Mike Keller to provide an update on specialty finance .
Speaker #7: Thanks , Matt . Great Elm Specialty Finance had a very strong third quarter and increased its distribution to geek to approximately 450,000 from 120,000 last quarter .
Speaker #7: We continue to execute on GSF's strategic transformation by simplifying our business model and securing favorable financing arrangements, successfully repositioning the platform for future growth and improving profitability.
Speaker #7: In April , we completed the rebranding of Sterling as Great Elm Commercial Finance , which now offers traditional asset based lending solutions to a broad range of industries .
Speaker #7: In July , GSF upsized its back leverage facility by more than 20% . We continue to work with lenders to scale this platform as our deal pipeline remains robust .
Speaker #7: As part of our strategic changes made earlier this year , we are pleased to report that Great Elm Healthcare Finance is now better positioned for profitability and generated strong distributable income in the third quarter .
Speaker #7: Prestige , our invoice financing business , had a phenomenal quarter . As a reminder , prestige provides spot invoice financing solutions and has exhibited high Rois over the course of the year .
Speaker #7: But can be lumpy quarter to quarter . In summary , these initiatives have streamlined our operations and better aligned our platform with long term growth objectives .
Speaker #7: We're seeing the benefits of our strategic repositioning . Take hold , and we remain confident in our ability to generate improved , sustainable returns .
Speaker #7: Going forward .
Speaker #5: Thanks , Mike . In closing , we had a challenging end to the third quarter . However , we remain well capitalized and are focused on protecting Nav and generating NII .
Speaker #5: We are excited to close out 2025 with a strong balance sheet and ample liquidity . As we look to execute on our growth and optimization initiatives .
Speaker #5: We believe we remain well positioned to rebuild our Nav over time and to deliver attractive , risk adjusted returns for our shareholders . With that , I'll turn the call over to the operator for questions .
Speaker #5: Operator .
Speaker #8: We will now begin the question and answer session . To ask a question , you may press star , then one on your telephone keypad .
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Speaker #3: At this time we will pause momentarily to assemble our roster . Our first question comes from Eric Zweig with Lucid Capital Markets . Please go ahead .
Speaker #9: Good morning . I wanted to start with a question on core Weave and the capital distributions . You've started to receive . Curious if you could provide any kind of color expectation into the cadence and timing of any future distributions ?
Speaker #9: If there's been something kind of formal announced , or if you just kind of received them periodically .
Speaker #5: Good morning Eric . Thanks for the time . I think we provided the color on the capital distribution in the September period , as well as October .
Speaker #5: I think importantly , we've received distributions that cover all of our cost basis in the investment and everything from here on out is going to be generating additional capital for geek to invest in income going forward .
Speaker #5: We'll provide the market and update next quarter when we report on where we've been seeing the distributions . But again , that vehicle has been making returns of capital .
Speaker #5: And we're fortunate to be able to be in a position to redeploy that into income generating opportunities going forward . Here .
Speaker #9: And then you kind of combine those distributions with your expectations to harvest . I think you mentioned 20 million of of kind of capital from Non-yielding assets is those 20 million separate from any future expected distributions from core ?
Speaker #9: We've and yeah , maybe kind of answer that question first would be great . Thanks .
Speaker #5: Sure . I think if the 20 million or over 20 million includes core , we've and a couple other non-yielding assets that we've identified that we believe will be able to harvest over the coming months here into 2026 , early 26 .
Speaker #9: Great . And then just , you know , kind of taking that to the next step , you know , you've got this kind of capital coming .
Speaker #9: You've got a liquidity in your revolver . Can you just talk maybe about the opportunities that you're seeing in your pipeline today , how you evaluate them from kind of a risk adjusted perspective and just the size of the pipeline relative to maybe , you know , three months ago ?
Speaker #5: Yeah , I'd say spreads in the public markets are tight right now . We're not reaching for yield . We're very focused on secured and income generating opportunities .
Speaker #5: Investing at the top of the capital structure. We continue to work on various private credit transactions and are expanding the funnel. You know, we are also working to get more granular in the portfolio and diversify.
Speaker #5: You know , there's one private credit transaction that we're working to close on this week that is , you know , a teams type return profile and comes with with warrants .
Speaker #5: I highlighted nice pack , which was a tremendous success in the quarter , which had a warrant package as well . So , you know , as we as we look to rebuild Ninov , we're focused on trying to find those interesting opportunities and invest at the top of the capital structure .
Speaker #5: And find certain situations that provide some upside convexity going forward .
Speaker #9: Thanks . And if I can squeeze one more in and then I'll jump back in the Q my understanding most Clos make their distributions toward the beginning of the quarter .
Speaker #9: So the 4.3 million that you mentioned that you received so far in four . Q is that likely to be pretty close to the full number for for Q or is there anything else you're expecting to receive later in the quarter ?
Speaker #5: I would say you should use that number for the quarter .
Speaker #9: Great . Thanks for taking my questions .
Speaker #5: Thank you . Eric .
Speaker #3: This concludes our question and answer session . I would like to turn the conference back over to Matthew Kaplan for any closing remarks .
Speaker #5: Thank you again for joining us today . We look forward to the continued investor dialogue . And please let us know if we can help with any follow up questions that you may have .
Speaker #5: Thank you again .