Great Elm Capital Corp.
Q2 2021 Earnings Call Transcript

Published: 3 Aug 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Great Elm Capital Corp. Second Quarter 2021 Financial Results Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to a representative of the Company.

[Adam Prior:]

Thank you, and good morning, everyone. Thank you for joining us for Great Elm Capital Corp.’s second quarter earnings conference call. If you would like to be added to our distribution list, you can e-mail [e-mail], or you can sign up for alerts directly on our website at www.greatelmcc.com. In addition to our comments for today’s call, we will be utilizing an investor presentation as an accompaniment. While we will not be referring directly to the slides, our comments today will generally follow the form and structure of the presentation. The slide presentation accompanying this morning’s conference call and webcast can be found on our website under Financial Information, Quarterly Results. On the website, you can also find a copy of this presentation, our press release, Form 10-Q and a link to the webcast.

[Peter Reed:]

Thank you, Adam. Good morning, and thank you for joining us today. On today’s call, we have our COO, Adam Kleinman; our CFO, Keri Davis; and our Portfolio Manager, Matt Kaplan. As is our usual practice, I will begin with an overview of GECC’s investment performance during the quarter. Matt will discuss our portfolio, Keri will discuss our capital position in greater detail, and then I’ll return for closing remarks. This was a solid quarter for Great Elm as we successfully deployed nearly $50 million of capital and over 25 investments at a weighted average yield of 9.3%, grew NII despite a higher-than-anticipated number of redemptions and grew our investment portfolio to $209.4 million of fair market value, an 8% increase from $193.6 million at the end of March. A robust pipeline of investment opportunities, in part due to our ownership position in and relationship with Prestige Capital, which is very confident going into the back half of 2021. We continue to actively pursue additional opportunities in the specialty finance space. As previously discussed, in May, we entered into a $25 million credit facility with City National Bank. And in June, we issued $57.5 million of 5.875% unsecured notes maturing in 2026. The note offering provided us with an incremental $24 million following the redemption of our 6.5% notes due in 2022. Overall, we were able to increase our liquidity at a lower cost of capital and extend our maturities as well as increase the weighted average yield on our debt investments from the prior quarter to approximately 11.1%. Finally, our asset coverage ratio was 166.2% at the end of the quarter. We certainly feel like things are moving in the right direction.

[Matt Kaplan:]

Thanks, Pete. I would echo that we have deployed capital into solid investments, further diversifying the portfolio and have increased the portfolio’s average yield. Our June 30 portfolio contained 42 debt investments and 11 equity investments, excluding SPACs. If you compare this with the prior quarter, our March 31 portfolio contained 33 debt investments and 10 equity investments. The debt investments account for $156 million or approximately 74% of fair value as compared to $136 million or approximately 70% of fair value in March. We are pleased with this growth and even more so that we have decreased issuer concentrations while increasing the weighted average current yield on our debt investments to 11.1% as compared to 10.9% at the end of March. Of the $156 million of debt holdings, roughly $68 million is invested in floating rate debt with a weighted average current yield of 9.7%. Roughly $88 million is invested in fixed rate debt with a weighted average current yield of 12.2%.

[Keri Davis:]

Thanks, Matt. I’ll go through the financial highlights quickly, but invite all of you to review our press release, accompanying presentation and of course, our SEC filings. Total weighted average shares outstanding increased to $23.5 million from $23.4 million in the prior quarter and $10.2 million in the prior year period. The main reason for the share increase from the prior year period was the rights offering that we completed in October 2020. GECC reported earnings of $0.11 per share in the second quarter compared to $0.53 per share in the prior quarter. Though NII per share increased to $0.09 from $0.06 over the same period, the net realized and unrealized gains in the current quarter were more modest than in the previous quarter, resulting in the lower EPS. Net asset value, or NAV, increased to $3.90 per share at June 30, 2021, compared to $3.89 per share as of March 31 and $3.46 per share at December 31, 2020, which was largely due to unrealized gains during the period. Total fair value of investments as of June 30 was $209.4 million compared to $193.6 million in the prior quarter and $151.7 million at December 31. Net assets were $91.7 million, a slight increase from the $91.5 million in the prior quarter.

[Peter Reed:]

Thanks, Keri, and Matt. We will open it up for questions shortly, but I’d like to close with our dividend and capital deployment, and then we would be happy to take your questions. We will again be paying a $0.10 per share cash distribution to shareholders for the quarter ending September 30, 2021. As I mentioned earlier, this represents an indicated yield of 10.3% on NAV at quarter-end and a 12.2% yield on our common stock price as of the close on July 30. We expect to announce the company’s record and payable dates shortly. We view the second quarter as a good turning point for the remainder of the year. We are slowly but surely cycling through older legacy investments that have created challenges and are doing so through the deployment of capital in the businesses and sectors that our entire investment team wants to be in at increasingly favorable yields. In summary, Great Elm’s overall investment portfolio continues to perform at a high level and continue to deliver on our long-term goals.

[Operator:]

Your first question is from the line of Joshua Horowitz with Palm Global.

[Joshua Horowitz:]

Could you provide additional outlook on the deal pipeline post-COVID and just give us a better sense also of how you’re balancing prepayments versus originations?

[Peter Reed:]

Josh, thanks for the question. Happy to do so. I probably bifurcated a little bit into our kind of cash flow positions as well as our specialty finance investments, many of which in the specialty finance side are ultimately going to companies, where the credit support is linked to the quality of their assets as opposed to their cash flows. And as you probably know, we’ve been putting a big emphasis on putting more capital into the specialty finance space, and we have -- our pipeline there has been as good as it has been in quite some time, as good as it’s ever been. So we think that the higher yields and ample credit protection in the form of collateral is an attractive combination to be deploying into. Unfortunately, on the payoff or redemption side, a lot of those we don’t get notice on until close to the last minute. So that always creates a little bit of lumpiness in the balance of our portfolio. And as we mentioned, we had a little bit more in this quarter than we had planned on. But if we can keep up the deployment pace into attractive opportunities, we’re pretty confident that the portfolio will continue to grow, and that should drive our income higher.

[Operator:]

Your next question is from the line of Richard Galley .

[Unidentified Analyst:]

Just -- it’s my understanding that Avanti was written down another $0.26. Could you go into more detail of what is actually going on now in Avanti, I would appreciate that?

[Peter Reed:]

Sure. I’ll give you what we can. We are limited by confidentiality agreements with the company and to how much detail we can provide. But I’ll give you the best that we can at the moment. Throughout the course of the year, the fair value on the second lien position has had some volatility into it. And the primary reason for that has been linked to Avanti has won a significant amount of new business and won that business that drove the second lien price up. Some of that new business has taken longer than the company thought or we thought to roll through into the P&L. So that has driven the mark lower at the moment. We do expect that the vast majority to all of that business will ultimately show up in the P&L and will be a meaningful driver of performance at Avanti. But at the moment, delays that neither the company nor we had anticipated during the quarter resulted in a lower valuation. We do expect that to reverse over time.

[Operator:]

We would now like to turn the call back to management for closing remarks.

[Peter Reed:]

Thank you again for joining us this morning. We look forward to continued dialogue, and please let us know if we can be helpful with anything in follow-up.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may all disconnect.