Great Elm Capital Corp. (GECC) Q4 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Great Elm Capital Corp. Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I will now like to hand the call over to Mr. Adam Yates. You may begin.

Thank you, Amanda and good morning everyone. Thank you all for joining us for Great Elm Capital Corp.'s fourth quarter 2018 earnings conference call. As a reminder, this webcast is being recorded on Wednesday, March 13th, 2019. If you'd like to be added to our distribution list, you can email investorrelations@greatelmcap.com or you can sign up for alerts directly on our website. The slide presentation accompanying this morning's conference call and webcast can be found on Great Elm Capital Corp.'s website www.greatelmcc.com under Financial Information, Quarterly Results. On the website you can also find a copy of our earnings release, Form 10-K, and the link to the webcast. 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 sell or a solicitation of offers to purchase our securities. Today's conference call includes forward-looking statements and projections 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 projections. Great Elm Capital Corp. does not undertake to update its forward-looking statements unless required by law. To obtain copies of the SEC filings please visit Great Elm Capital Corp.'s website under Financial Information, SEC filings or by visiting the SEC's website. Hosting the call this morning is Peter Reed, Great Elm Capital Corp.'s President and Chief Executive Officer. I will now turn the call over to Peter.

Thank you, Adam. Good morning and thank you everyone for joining us today. I'm joined this morning by our President and COO, Adam Kleinman; Portfolio Manager, Adam Yates; and SEC Reporting Manager, Keri Davis. Where relevant, in our prepared remarks, we will point you to the corresponding slide number in the deck that Adam referenced which is available on our website as well as through the webcast. Please turn to Slide 3 for an overview of GECC. GECC is an externally managed special situations-focused BDC. GECC seeks to generate both current income and capital appreciation from its portfolio of investments comprised of secured loans and bonds sourced in the secondary market as well as in originated transactions. As of December 31st, 2018, GECC had total assets of approximately $281.6 million, a portfolio fair value of $184.2 million, and a net asset value of $110.1 million equating to $10.34 per share. The weighted average current yield on our debt holdings is approximately 12%. GECC placed an $0.083 per share base monthly distribution that equates to approximately $1 per share on an annual basis. Importantly, greater than 20% of GECC's shares are held between Great Elm Capital Group Inc., Great Elm Capital Management Inc.'s employees, and GECC's Board of Directors creating a very clear alignment of interest between management and you, our shareholders. Let's turn to Slide 4 to go over a few highlights and recent achievements. I'm proud to report that GECC's net investment income has covered its declared distributions every quarter since inception in 2016. In total in 2018, GECC paid $1.24 in distributions. Based upon December 31st NAV and closing market price that equates to an annual distribution yield of 12% and almost 16% respectively. During the quarter, we deployed capital at a weighted average price of 92% of par and we monetized investments at a weighted average price of 99% of par. Additionally, GECC intends to employ leverage prudently and opportunistically. Slide 6 is an especially important slide for our team. This slide lists each and every fully realized investment in the GECC portfolio since inception. After almost two and a half years into our management of GECC, we now have a pool of more than 30 realized investments to analyze totaling approximately $188 million of capital deployed. While not all of these investments were successful, the overwhelming majority have been. In aggregate, the IRR of all realized positions since we began managing GECC is over 22%. While these investments have sometimes exhibited significant price volatility, we believe that the aggregate realized returns are quite compelling. On Slide 7, we break out the realized performance of the legacy Full Circle investments. To-date, we have monetized 73% of the Full Circle portfolio that the market clearly had viewed as challenged. We've realized an IRR of 18.2% and a total return of approximately 1.09 times on these investments. Turning to Slide 9, I'd like to review the individual investments we realized in full during both the fourth quarter of 2018 and the first quarter of 2019 to-date. Many of you are probably familiar with California Pizza Kitchen, a popular casual dining restaurant chain and provider of prepared foods. CPK has a secured loan with a LIBOR plus 600 basis point coupon that matures in 2022. We purchased $2 million par value of the loan at circa $0.98 on the $1 in the third quarter of 2018. CPK had been outperforming peers, generating relatively substantial free cash flow. While we liked and still like this loan, it happened to be one of the lower-yielding investments in our portfolio. Consequently, after receiving a few months of accrued interest, we sold the position in order to fund a more attractive investment, resulting in a modest IRR of 6.7% and a cash-on-cash return of approximately 1.02 times our initial investment. On slide 10, we highlight GEO Specialty Chemicals. GEO is a leading developer and manufacturer of specialty and performance chemicals. In the third quarter of 2017, we're able to source almost $11 million par value of a first lien revolver and term loan combined facility at a discount to par, when one of the lenders in the small syndicate group wanted to exit the deal. The loans were scheduled to mature in 2019 and the underlying business was performing very well. We believe that once the company hit a near term milestone, the loans would be refinanced prior to maturity. As a result, GEO refinanced both the revolver and the term loan at par in January and GECC was able to realize an IRR of 13.8% and a cash-on-cash return of 1.14 times over a short duration. On slide 11 we review our International Wire Group investment. ITWG is the largest independent bare copper wire and copper wire products manufacturer in the United States. Throughout 2017 and 2018, GECC purchased $17.5 million of ITWG's 10.75% secured notes of 2021 in the secondary market at an average price of approximately $0.93 on the $1. This position has historically exhibited price volatility and the fourth quarter of 2018 was no exception. It began in the quarter and marked at $0.9875 on the $1 and closed at $0.89 on the $1, despite the company reporting solid earnings in November. On March 8, the company announced that it had entered into a definitive merger agreement to be acquired consistent with GECC's original investment thesis. GECC sold the entirety of its investment at a price of approximately $1.02 on the $1 days ago, resulting in an IRR of approximately 18.6% and a cash-on-cash return of 1.24 times on one of our largest positions. On slide 12 we detail our Sungard investment. Sungard provides custom enterprise cloud and technology services. Our Sungard investment was comprised of two pari passu secured term loans. The first carries a LIBOR plus 700 basis point coupon and matures in 2021, while the second carries a LIBOR plus 1,000 basis point coupon and matures in 2022. We bought greater than $16 million par value of the combined position at a weighted average price of approximately 95% of par throughout 2017 and 2018. We believe that certain of Sungard's business lines were worth more than the sum of the company's secured debt. During the fourth quarter, however, we became slightly concerned about the recent trends in the company's financial results. Post quarter-end we became less confident in the company's liquidity profile and we chose to exit the position. We realized gains over the fourth quarter of 2018 and the first quarter of 2019, resulting in an IRR of 6.7% and a cash-on-cash return of 1.05 times. On slide 13, let's go over one part of GECC's TRU Taj investment. TRU Taj, a subsidiary of Toys"R"Us, is a leading global retailer of toys and juvenile products. TRU Taj is focused predominantly in Asia where the performance and growth of stores has far exceeded that of the United States. TRU Taj had a secured debtor in possession note that carried a LIBOR plus 1,100 basis point coupon and matured in January of this year. GECC purchased a little more than $6 million par value of this note in the secondary market at approximately 104% of par in 2018. The company's growing business and a bankruptcy process that appeared to be nearing conclusion led us to believe these notes would be refinanced upon emergence. The notes were indeed repaid in full at maturity in January resulted in a modest 6% IRR for GECC and a 1.03 times cash-on-cash return. Slide 14 is an interesting one for us. Viasat is one of the world's leading providers of high-speed satellite broadband services. Avanti Communications had an approximate $2 million of Viasat receivable on its books that it chose to factor. GECC stepped in to purchase the receivable at 85% of face value in October 2018. Receivables of this nature tend to have very short durations. This receivable matured in the first quarter of 2019. And a little more than one month from our acquisition the receivable is repaid in full, representing an IRR to GECC of more than 538% and a cash-on-cash return of 1.18 times. For obvious reasons, we seek to factor more short-term receivables with creditworthy counterparties. On slide 16, we highlight a few high-level characteristics of the portfolio. The weighted average current yield on our debt holdings, which comprise almost 97% of the fair value of the portfolio and are entirely secured, is approximately 12%. To put that metric into perspective the high-yield bond and leverage loan markets are currently yielding circa 6% to 7% on average. Our team is frequently uncovering overlooked and under-followed middle market loans and bonds in the secondary markets at a discount to par. The weighted average price of the debt investments in our portfolio is approximately 88% of par, providing for significant potential capital appreciation. Also, as we monetized legacy positions that we inherited from Full Circle Capital Corp. in connection with our formation and we redeployed proceeds into new and existing Great Elm investments, the portfolio better represents our investing style and approach. As of December 31, roughly 82% of the portfolio was comprised of investments that are representative of the manner in which we intend to invest going forward. Slide 17 describes additional portfolio characteristics. The portfolio contains 30 investments, 26 of which are secured debt and four are equity. The 26 debt investments account for $178 million of fair value and the four equity investments account for approximately $6.2 million of fair value. Of our total debt holdings, roughly 58% are floating-rate instruments and 42% accrue at fixed rates. Please turn to slide 18 to review our capital activity during the fourth quarter. We deployed almost $35 million into one new investment and nine existing investments at a weighted average price of 92% of par and a weighted average current yield of greater than 11%. We monetized in part or in full 19 investments at a weighted average dollar price of 99% of par and a weighted average current yield also of greater than 11%. Turning to slide 19. Of the roughly $35 million of capital deployed during the fourth quarter, almost $15 million we would characterize as investments purchased. We purchased investments in one new and three existing portfolio companies during the quarter. The new investment was an approximately $2 million Viasat receivable that Avanti chose to factor. We were able to purchase the receivable for $0.85 on the dollar and the receivable was repaid in full the following month. We also purchased $3 million face value of Commercial Barge Line's secured term loan of 2020 at approximately $0.73 on the dollar. The loan carries a LIBOR plus 875 basis point coupon. We purchased $8 million face value of Finastra's, formerly known as Misys and Almonde secured term loan of 2025 in the secondary market at a price of approximately $0.93 on the dollar. This loan carries a LIBOR plus 725 basis point coupon. Lastly, we purchased roughly $5.8 million face value of PFS Holdings Corp.'s or Phillips Pet Food and Supplies', secured term loan of 2021 in the secondary market at a price of approximately $0.60 on the dollar. This investment offers greater potential for principal appreciation and carries a lower coupon of LIBOR plus 350 basis points. Please turn to slide 20 to break down the quarter-end portfolio by asset and interest rate type. Approximately 96.6% of the fair value of the portfolio is invested in secured debt with the balance in equity investments. That's roughly $178 million of debt and $6.2 million of equity. Of the $178 million of debt holdings, roughly $103.2 million is invested in floating-rate debt with a weighted average current yield of 11.7%. Roughly $74.8 million is invested in fixed-rate debt with a weighted average current yield of 12.4%. On slide 21, we highlight how the composition of the portfolio is changing over time. Today, the portfolio has no unsecured debt, as we continue to source and purchase attractive secured opportunities. Turning to slide 22, I'd like to note that floating-rate debt is encompassing growing percentage of our portfolio quarter after quarter. Specifically, our team has been focused on the leverage loan opportunities they're uncovering in the secondary market and those tend to offer LIBOR-based interest rates. Recently, we have found that the leverage loan market's opacity has spread greater opportunity than that which we found in the more transparent high-yield bond market. As such, it wouldn't surprise me to see the above trend continue. On slide 23, we break down the portfolio by industry. Wireless Telecommunications Services and Building, Cleaning and Maintenance Services comprised of Avanti and PE Facility Solutions respectively are still the largest industry weightings. We continue to maintain a diversified portfolio of investments as indicated by the 18 different industries represented. There are a few points to note on slide 24. First, despite volatility in the secondary markets, temporarily depressing the fair value of certain of our larger holdings in the fourth quarter, the long-term trend in portfolio growth is clear. In the little more than two years since we formed GECC, we have managed to grow the fair value of investments by greater than 19%. As such in the ordinary course of business, we have deployed more capital than we have monetized from existing investments. In the fourth quarter, however, refinancing opportunities in the capital market and monetization opportunities in the secondary market together outweighed the $34.8 million of capital deployed into the previously discussed investments. Please turn to slide 25 to take a historical look at GECC's portfolio rotation. During each of the past nine quarters since inception, we have monetized higher dollar priced investments and deployed capital into lower dollar priced investments contributing to GECC's total return. Most recently in the fourth quarter, we deployed capital at a weighted average price of approximately 92% of par and we realized investments at a weighted average price of approximately 99% of par. Again substantially all of the capital deployed was invested in secured debt. Turning to slide 26. We get a more granular picture of what GECC's investment activity looks like quarter-over-quarter. We've been able to find interesting debt investment opportunities at lower average prices in the most recent two quarters than we have historically. Note the $0.89 weighted average price of new debt investments in the third quarter of 2018 and the $0.92 price highlighted earlier in the most recent quarter. This past quarter we were also able to invest capital at an 11.2% average current yield toward the higher end of our historical range. Monetization activity has been very consistent with the average price of realized investments circa par quarter-after-quarter. Please turn to slide 27 for an update on Avanti. When we formed GECC, Avanti was a company with a greater than $1 billion network struggling to monetize the capacity of that network. As Avanti encountered financial difficulty, we worked with other key creditors to improve the company through deleveraging its balance sheet; launching its biggest satellite yet; and identifying and recruiting new board members who brought stability and strategic insight to the company. These improvements paved the way to hire Kyle Whitehill as the new CEO in April of 2018. Since Kyle's start, he has dramatically overhauled sales and marketing, resulting in large contract wins, which have led to rapidly growing recurring core bandwidth revenue. Despite all of this progress, our Avanti investments are marked $55 million lower than when we formed GECC. Based upon the trajectory that we observed in Avanti's business, we expect the following in 2019; continued rapid revenue growth coupled with a significant reduction in operating expenses, culminating in a rate of EBITDA growth exceeding the rate of revenue growth. On this trajectory, we expect that Avanti will have visibility into generating positive unleveraged free cash flow. On slides 29 and 30, we list all of our activities since quarter end. I'll point you to the specifics of the Tru Taj restructuring; our successful monetization of our large International Wire Group investment, and perhaps most notably our purchase of 80% of the equity interest in Prestige Capital Corporation for aggregate cash consideration of approximately $7.4 million. Please turn to slide 31 for a more detailed description of GECC's investment in Prestige Capital Corporation. Headquartered in Fort Lee, New Jersey, PCC specializes in factoring for early stage and smaller businesses. To put our acquisition in context, in 2017, PCC generated revenue of approximately $6.4 million and adjusted net income of $2 million. Management currently expects that the audited 2018 results will be equal to or higher than the comparable 2017 figures. The management team having worked together for almost two decades will maintain a 20% minority stake in the business. Looking forward, GECC believes that its PCC investment will be among the highest yielding investments in its portfolio. Not only will GECC receive dividends from its equity in PCC, but GECC also intends to participate directly in factoring transactions that PCC originates for an anticipated low to mid-teens annual yield. Finally, GECC may provide asset based loans to successful PCC clients who graduate to less expensive ABL financing from more expensive factor financing. Let's turn to slide 33 to review financial highlights from the quarter. Earnings per share was negative $1.18 in the fourth quarter. This was driven by unrealized losses per share of $1.46, which I'll describe in greater detail in a few moments. NII per share came in at just over $0.25, once again covering our $0.25 quarterly base distribution. In total, we paid or declared distributions of approximately $0.49 during the quarter. Net asset value or NAV was $10.34 per share at period-end. Turning to slide 34. For the first quarter in some time, the sum of monetization activity outweighs the sum of capital deployed. At period-end, total assets was $281.6 million, total fair value of investments was $184.2 million and our $10.34 per share NAV equated to an aggregate NAV of $110.1 million. The quarter-over-quarter reduction in NAV was driven by secondary market volatility that to-date has meaningfully reversed course. Total debt outstanding was unchanged at $79 million comprised of our two baby bonds tickers GECCL and GECCM. Cash and money market investments was $7.7 million at period-end. Slide 35 details select financial performance during the quarter. Total investment income was approximately $6.9 million or $0.65 per share. Net expenses were approximately $4.2 million or $0.40 per share. NII was approximately $2.7 million or $0.25 per share. Net realized gains were approximately $394,000 or $0.04 per share. Net unrealized depreciation of investments is $15.6 million or $1.46 per share. On slide 36, we provide a bit more detail on the drivers of our fourth quarter unrealized losses. The unrealized losses we experienced in the quarter were largely the result of Avanti's share price volatility and high-yield spreads widening, temporarily depressing valuations. Avanti's share price declined by more than 52% in the fourth quarter on seemingly no negative news from the company. The fair value of Avanti's secured notes was reduced largely due to high-yield bond spreads widening, reducing high-yield bond prices. Together the two new Avanti investments accounted for a little more than $9 million of this quarter's unrealized losses. Importantly, thus far in the first quarter of 2019 Avanti's share price has partially recovered and high-yield spreads have tightened significantly, partially reversing the unrealized losses. Turning to slide 37. Let's discuss the quarterly operating results. Total investment income of $6.9 million or $0.65 per share, compares to third quarter's $6.2 million or $0.58 per share. Net operating expenses of $4.2 million or $0.38 per share was higher than the third quarter's $3.5 million or $0.33 per share. NII of $2.7 million or $0.25 per share was marginally higher than the third quarter's equivalent figures. Turning to slide 39. Let's discuss GECC's distribution policy and declared distributions to date. GECC continues to pay an $0.083 per share monthly base distribution that sums to $1 per share per year. In December, we announced a special distribution of $0.24 per share, bringing 2018's total distributions to $1.24 per share. The total distributions represented a 12% dividend yield on the December 31, 2018, NAV and an approximate 15.7% distribution yield on the year-end market value. Slide 40 shows GECC's full distribution history and overlays what the annual distribution yield was as a percentage of the market price. In total, GECC has declared and set greater than 30 consecutive monthly base distributions. GECC's substantial special distributions, when combined with our monthly base distributions, have driven annual distribution yields well north of 10% in each full year since inception. Slide 41 illustrates our historical distribution coverage. Again, I feel it's important to emphasize that NII has covered the base distribution every quarter since inception. Finally, please turn to slide 43 for a GECC summary. Our board has already set the second quarter of 2019 distributions at $0.083 per share per month. Also importantly, GECC insiders own greater than 20% of GECC's outstanding shares fostering a true alignment of interest between insiders and other shareholders. Furthering that alignment of interest to-date GECC has repurchased approximately 17% of its initial share count. The weighted average current yield on our portfolio of secured loans and bonds is approximately 12% and the IRR on our growing pool of realized investments is a substantial 22.5%. Thank you all for joining us this morning. We continue to be excited about the upside potential in the portfolio as well as with the progress we have made monetizing legacy positions. We believe that we've created a significant alignment of interest with you our shareholders. Thank you again for the support and confidence that you've placed in us. With that, we will turn the call over to the operator to open for questions.

Thank you [Operator Instructions] Our first question comes from the line of Scott Buck of B. Riley FBR. Your line is open.

Good morning, guys. I was hoping you could expand a little bit on the new investment opportunities, just the environment in general in terms of the number of good opportunities you're seeing in the market versus historical levels and maybe what the competitive environment is like in looking at those deals? Thanks.

Hi, Scott. Thanks and good question. So I'd probably subset our opportunity set into originated loans the syndicated loan market and the high-yield bond market. For originated loans in particular, we continue to view the market as very competitive generally. The syndicated loan and high-yield bond market both in the fourth quarter of the year as well as the beginning of this year from our vantage point we're offering up more compelling opportunities than was the market for originated transactions. And so that's where we have been deploying capital. I'd say that generally speaking, the markets have become a little bit less attractive as we have passed through a big chunk of the first quarter. But we're still finding a pretty compelling opportunity set of under-followed and potentially misunderstood opportunities particularly in the leverage loan market.

Great. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Nat Stewart of N.A.S. Capital. Your line is open.

Hey, guys. Thanks for taking my question.

Sure. Thanks. Good morning, Nat.

Good morning. Yeah. I was very intrigued by the Prestige transaction that looks very interesting. It looks like you got equity at a great price relative to the earnings. Particularly, my question is related to the participation and factoring. I kind of wanted to see if you guys could talk a little bit about the magnitude of that opportunity. Could this be a substantial platform for you guys? And also, if you thought, they're kind of teaming up with you guys or being acquired by you would be able to accelerate their own growth. Perhaps, you guys are able to finance them a little better than what they have in the past or something like that?

Thanks, all good questions. So the first on the participation, while we certainly aspire to be doing that in a meaningful way given what we think are a, attractive returns and b, limited sort of fundamental credit risk those are going to be episodic opportunities. Prestige is primarily participating larger transactions where it doesn't want to hold the whole amount for sort of portfolio risk management. And while we maintain, a very active dialogue with the team there, I'm not expecting that we in the near-term will be deploying a lot of capital into those opportunities although it certainly would be a pleasant surprise, if that were to change. So it's really sort of dependent upon their -- what happens -- the nature of the deals working through their pipeline. On the second part, it's still early days, but we do think that there are some benefits from having an institutional investor with deeper capital pockets to the team. But as to whether that leads to a more rapid rate of portfolio growth, I think it's too early to say. But we think that there's merit in thinking that that could cause or help to cause portfolio growth. Q – Nat Stewart: Okay. Yes I had -- that's good. I had kind of one more kind of comment/question. It looks to me like you guys have put together a really solid track record with your own strategy that to me looks really compelling. And it's kind of been as you know a bit overshadowed with mark-to-market losses in Avanti and this quarter-end you had kind of a difficult mark-to-market. I've looked into the Avanti independently, looked at the collateral values. I mean, I think the story with Kyle, I spoke with him is really compelling what they're doing there. I'm just kind of thinking about the big picture. I know you guys can't really comment on this too much or maybe not at all you can tell me, but I kind of just look at their positioning and it seems like they're just -- what Kyle's objective if I was going to kind of get in his head is, he wants to reposition this, prove the earnings and get the power and probably position the company for sale within some reasonable length of time. Is there anything -- does that seem reasonable to you? Or is there any kind of comment you can make on that? I'm just not sure. A – Peter Reed: Sure. So I agree with much of what you said. As you can imagine, we're pretty limited in what we can say, but there is historic, strategic interest in the company that if you did a Google search you can find. And so -- and as for what's in Kyle's head, I can't say for sure other than I do know he's laser-focused on improving the operating results and we're very pleased with what we've seen so far. And as you can tell from our presentation, we have high expectations for what's coming down the road in 2019 and beyond. I think that improved operating results can only serve to enhance Avanti's attractiveness to a potential strategic acquirer. And so I think it's entirely feasible that interest might pick up in the future in particular as Kyle and the team are generating really impressive financial results. Q – Nat Stewart: Yes. And just one final comment. It just to me looks like compared to those somewhat ridiculous end-of-year marks, it almost looks like your securities are like a curled spring. So I just kind of look forward to seeing how that plays out. And thanks for the time. A – Peter Reed: You and we both. Thank you.

Thank you. Our next question comes from the line of Lee Crocket, a private investor. Your line is open. Q – Unidentified Analysts: Thank you. Peter, GECC has borrowed a couple of times in the -- what you referred to as the baby bond market. I assume that market was pretty soft at the end of 2018. Has that market opened up back to you? And if so, do you plan of going back to that market? And what impact does that have on your returns on equity? A – Peter Reed: Sure. Hi Lee. Thanks for the question. We do have a N-2 registration statement on file with the SEC staff and so we are interested in re-approaching the baby bond market. And I do think that speaking here today that is a -- that has a much higher probability of a transaction that we would like than if we were having this conversation in December or January. At the moment, we think, we have an attractive pipeline of investments that could be funded with the proceeds of one of those offerings. We will be updating our resale registration statement with the -- with our recent results. And if that statement goes effective in a timely fashion and the markets are still open and we still have an interesting pipeline of investments to fund, I would imagine that we would seek to do another transaction.

Okay. And can I get a question on Avanti. The comments on your slides seem to indicate that liquidity is not an issue at Avanti. The second lien notes are picking and the first lien notes I assume you have -- the Company has plenty of liquidity to carry that until the operating numbers look stronger. Is that a fair statement, or can you comment on that?

I think we believe and the Company believes it's got sufficient liquidity to execute on its business plan.

Thank you.

Thank you. And our next question comes from the line of Tim Chatard of Quantum Capital. Your line is open.

Hi. I've got a couple of questions on Prestige, if that's okay?

Sure. Good morning, Tim.

Good morning. How did the liabilities work in the business?

Sure. So, the liabilities in that business typically are two-fold. One is most of the factoring businesses that we're familiar with utilize a secured line of credit to help fund the receivables that they're purchasing from their clients. That frequently is a pretty attractive low cost capital -- low cost of capital, especially as compared to the high unleveraged returns that businesses like Prestige are generating from their factoring clients. And then a second source of liability, if you're looking at the balance sheet, is most factoring businesses with which we're familiar, at least on a spot factoring basis, are typically funding, I'll call 70% of the receivable is paid in cash and the remainder is paid when the receivable is collected from the account debtor. So, between that residual liability as well as their line of credit that typically would represent the bulk of the liability structure for a factoring business like Prestige.

And can you help me understand what industries you're dealing with? What's the typical client for the type of business they're doing?

Sure. So, the industry for Prestige, and I can't speak to all factors, but I can certainly speak to Prestige. The industry exposure is pretty diversified on purpose. But a decent profile of a Prestige client is a rapidly growing business frequently where the rapid growth is accompanied with challenged profitability. And so, it's tough for banks to underwrite for NAV alone, but that credit challenge is offset by receivables from high quality very creditworthy customers. So, in an effort to get cash to fuel the growth of their businesses, Prestige is providing capital where really the bulk of your credit support you're deriving from the very creditworthy, very large counterparties. Does that make sense?

Yeah. Rapidly growing businesses, I've been struggling to like -- I mean is that a food company? Is it a drug company? Is that a trucking company? Is that a...?

Well, all of the above. I think portfolio -- as part of portfolio risk management, I think Prestige is pretty focused to not have large industry concentration. I expect that you could find factoring businesses where that's not the case, but part of the attraction of Prestige to us is the focus on risk management, the team has in place for 20 years. So, it's a pretty diversified pool of industries and all of the above that you described would potentially be in there.

Okay. And the transaction itself, how did it come to you?

This was a transaction process run by Janney Montgomery Scott who we're familiar with. And in our baby bonds Janney's helped us with both of those.

Okay. Thank you.

Welcome.

Thank you. And at this time, I'm showing no further questions. I'd like to turn the conference back over to Mr. Adam Yates for the closing remarks.

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. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.