Great Elm Capital Corp. (GECC) Q2 2021 Earnings Report, Transcript and Summary

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

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 investorrelations@greatelmcap.com, 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. 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 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 SEC filings, please visit Great Elm Capital Corp.’s website under Financial Information, SEC filings or visit the SEC’s website. Hosting the call this morning is Peter Reed, Great Elm Capital Corp.’s President and Chief Executive Officer. As a reminder, this webcast is being recorded on Tuesday, August 3, 2021. With that, I’d now like to turn the call over to Peter. Please go ahead, Pete.

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% [ph] 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. Let me take a quick moment to provide an overview of our financial position. At quarter-end, GECC had total assets of $397.8 million with $91.7 million of net asset value or $3.90 per share. In terms of NAV, this is a slight increase from the $3.89 per share reported at March 31, 2021. We pay a regular quarterly cash dividend of $0.10, which represents a yield of 10.3% on June 30 NAV. NII for the quarter was approximately $2.1 million or $0.09 per share as compared to NII of $1.5 million or $0.06 per share for the quarter ending March 31, 2021. The improvement in NII was largely due to a strong quarter of deployments leading to a 17% increase in average invested assets. While Avanti remains our largest position, it is now a significantly lower percentage of the portfolio at fair value as compared to the same period in the prior year. So we are getting to a point where Avanti’s impact on our overall book is lessening. We have now deployed over $108 million in new investments in the first half of 2021 working towards building an increasingly diversified investment portfolio, as we seek to rotate the portfolio into what we believe to be higher quality credits. Our investment in and relationship with our factoring business, Prestige Capital continues to help drive new business activity. Throughout Q2 2021 and subsequent to quarter-end, we actively deployed approximately $53.6 million of available cash into new investments at a weighted average current yield of 9.6%. The management of Prestige has done an exceptional job of sourcing new investment opportunities for the business and for Great Elm as we have continued to provide capital to Prestige to allow it to pursue larger transactions. This has allowed us to deploy capital into proprietary investments at greater spreads during a tightening margin environment. It’s been an excellent relationship, and we are very pleased with the results thus far in 2021. At this point, I’d like to turn the call to Matt to discuss our portfolio performance for the quarter.

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%. We have 3 income-generating equity investments totaling approximately $24 million or 12.1% of our overall invested capital at fair value and other equity investments totaling approximately $19 million or 8.9%. We also hold SPAC instruments totaling under $10 million, accounting for approximately 4.6% of fair value. The weighted average current yield of our 3 income-generating equity investments in Prestige, Blueknight Energy Partners and Crestwood Equity Partners is approximately 14.1%. If you examine our portfolio by sector, GECC has invested in 24 separate industries. Our portfolio is currently heavily weighted in the wireless telecommunications services business due to our largest holding Avanti. However, as we noted last call, and Pete cited earlier, as our portfolio has grown this year, Avanti as a percentage of portfolio fair value has lessened. As we seek to grow our investments in the specialty finance space and further diversify our holdings, we expect the portfolio to generally be less concentrated. We have been able to successfully find compelling debt investment opportunities at prices below par in each of the last 7 quarters. This past quarter, we were able to deploy capital at a weighted average price of 98% of par. In the second quarter, approximately $36 million of investments were monetized, and approximately $50 million of capital was deployed into new investments with higher weighted average yields. With that, I’ll turn the call to Keri to go through our financial highlights.

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. I would like to take a few moments to discuss our capital position in the recent baby bond transaction. We recently completed an underwritten public offering of $57.5 million, 5.875% [ph] from unsecured notes due June 2026, including the full exercise of the underwriters’ overallotment option. These are publicly traded bonds under the symbol GECCO. Following this transaction, we redeemed our 6.5% notes due 2022 on July 23 of this year. This represented approximately $30.3 million in aggregate principal amount resulting in incremental liquidity of approximately $24 million. In summary, we now have 3 publicly traded issues of unsecured notes. The 6.5% notes due in 2024 trading under the ticker GECCN, the 6.75% notes due in 2025 trading under the ticker GECCM and the new 5.875% note due in 2026 trading under the ticker GECCO. Our total debt outstanding was approximately $138.4 million following the redemption and is comprised entirely of these unsecured baby bonds. In addition, we have an undrawn $25 million revolving credit facility with City National Bank. We are pleased to have ample capital and runway to grow our business with our nearest maturity now being 3 years away. Moreover, we continue to evaluate ways to lower our cost of capital. And finally, as Peter noted earlier, as of June 30, 2021, our cash balance was approximately $29.1 million, comprised of $59.8 million of cash less $30.7 million reserved for the July 23 redemption of our unsecured notes due 2022 and is exclusive of any holdings in U.S. Treasury build. With that, I’ll turn it back to Pete for closing remarks.

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. With that, we will turn the call over to the operator to open for questions.

[Operator Instructions] Your first question is from the line of Joshua Horowitz with Palm Global.

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?

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.

Your next question is from the line of Richard Galley [ph].

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?

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.

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

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