Great Elm Capital Corp. (GECC) Q3 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Great Elm Capital Corp. Third Quarter 2021 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your representative from the company, Mr. Adam Prior. You may begin.

Thank you, and good morning, everyone. Thank you for joining us for Great Elm Capital Corp.'s Third Quarter Earnings Conference Call. If you would like to be added to our distribution list, you can e-mail investor relations at greatelmcap.com, or you can sign up for alerts directly on our website at 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 directly referring to the slides, our comments today will generally follow the form and structure of the presentation. The slide presentation accompanying this morning's 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 earnings release, Form 10-Q and a link to the webcast as well. I'd like to call your attention to the customary safe harbor language 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 those projections. Great Elm Capital Corp. does not undertake to update its forward-looking statements unless required by law. To obtain copies of SEC's filings, please visit Great Elm Capital Corp.'s website under Financial Information, SEC Filings or visit the SEC's website. As a reminder, this webcast is being recorded on Friday, November 5, 2021. Hosting the call this morning is Peter Reed, Great Elm Capital Corp.'s President and Chief Executive Officer. 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. I would like to start out by highlighting our acquisition of a majority interest in Lenders Funding near the end of the quarter. We are excited to partner with its founder, Bob Zadek as well as Harvey Friedman and Jean Madden who have built the business with a long-term track record, profitable growth and a strong underwriting culture. We look forward to supporting Lenders Funding's future growth, which I will touch on in more detail later. Also, as is our usual practice, I will now provide an overview of GECC's investment performance during the quarter, then Matt will discuss our portfolio, Keri will discuss our financial highlights in greater detail, and I'll return for closing remarks. Our third quarter showed progress in many regards as we deployed $71.1 million into over 26 investments with a weighted average yield of 10% and grew our investment portfolio to $246.7 million, an increase of nearly 18% from the second quarter. Our investments in the quarter spanned a variety of industries with a focus on specialty finance. We improved the weighted average yield on our debt investments to 11.3% from 11.1% in the prior quarter and continued to deploy capital into a higher number of income-generating equity investments. Throughout the year, we've successfully increased liquidity while lowering our overall cost of capital and strengthened our financial position through the extension of maturities. Finally, our asset coverage ratio was 163.8% at the end of the quarter. Let me take a quick moment to provide an overview of our financial position. At quarter end, GECC had total assets of $415.2 million with $99.4 million of net asset value or $3.70 per share. We paid a regular quarterly cash dividend of $0.10 per share, which represents a yield of 10.8% on September 30 NAV. NII for the quarter was approximately $1.6 million or $0.07 per share as compared to NII of $2.1 million or $0.09 per share for the quarter ended June 30, 2021. Our NII this period was impacted due to certain onetime items primarily related to legal fees incurred in connection with the legacy Full Circle investment, which resulted in a reduction to NII of approximately $0.02 per share. As we have discussed in prior quarters, we are growing the portfolio and getting to an inflection point where legacy investments are no longer as impactful as they may have done in the past. To put this in context, our largest industry in terms of percentage of the overall book at fair value is specialty finance. This is the first time in our tenure where the largest percentage of the portfolio is weighted to investments, which were not part of the portfolio at the time of the Full Circle merger. We have now deployed over $179 million in new investments in the first 9 months of 2021, with an increasingly diversified investment mix as we seek to rotate the portfolio into what we believe to be higher-quality credits primarily comprised of secured loans, bonds, preferred equity and investments in specialty finance businesses, uncorrelated to the corporate credit portfolio. This is partially driven by our ownership position in a relationship with Prestige Capital, a spot factoring business that provides liquidity to its clients by purchasing their receivables from creditworthy counterparties at a discount to face value. Prestige has over 30 years of experience in the factoring business with approximately $6 billion in aggregate transactions factored during that time. Since our acquisition of a majority interest in Prestige, its performance has been excellent as Prestige in many cases, taking comparatively little credit risk for returns that are frequently more attractive than those that can be found in the syndicated credit market. As we have discussed previously, our goal as managers has been to support the team at Prestige and to continue to allow them to pursue larger transactions due to the strength of our balance sheet. We are constantly analyzing the most effective methods to grow our specialty finance platform further, given the results produced to date. Our overall goal is to create an ecosystem where we can provide solutions to small businesses at varying stages in their development. Our team continues to explore a number of acquisition opportunities in the specialty finance space, many of which we were introduced to by the management teams at Prestige and Lenders Funding. To that end, we were very pleased to acquire majority interest in Lenders Funding during the quarter. Under the direction of the company's principles, Lenders Funding provides participant financing and risk sharing, specifically for factors and asset-based lenders. The acquisition of Lenders Funding increases our visibility into the broader specialty finance market due to it having over 20 years of experience, providing capital to lenders in the specialty finance space as well as it provides proprietary overflow opportunities for GECC. It is a perfect complement to Prestige and another important step in our specialty finance strategy at GECC. In connection with this acquisition, GECC also issued approximately 3.4 million shares to Lenders Funding at net asset value. At this point, I'd like to turn the call to Matt to discuss our portfolio performance for the quarter.

Thanks, Pete. I will take a moment to describe the composition of our portfolio at quarter end. The overall theme is a growing and diversified book with a stable yield profile over the course of the year. Our September 30 portfolio contains 46 debt investments and 13 equity investments, excluding SPAC. If you compare this with the prior quarter, our June 30 portfolio contained 42 debt investments and 11 equity investments. The debt investments account for $186 million or approximately 75% of the portfolio's fair value at quarter end compared to $156 million or approximately 74% of the portfolio's fair value at June 30. We are pleased with this growth and even more so that we have decreased issuer concentration while increasing the weighted average current yield on our debt investments to 11.3% at quarter end as compared to 11.1% at June 30, and 10.9% at the end of March. Of the approximately $186 million of debt investments, roughly $72 million is invested in floating rate instruments with a weighted average current yield of 9.1%. Roughly $114 million is invested in fixed rate instruments with a weighted average current yield of 12.7%. We added 2 income-generating equity investments in the quarter, Lenders Funding and Equitrans preferred and now hold 5 income-generating equity investments totaling approximately $35 million or 14% of our overall invested capital at fair value. The weighted average yield for 5 income-generating equity investments in Prestige, Lenders, Blueknight, Equitrans and Crestwood is approximately 13%. We also held other equity investments, excluding SPACs, totaling approximately $17 million or 7% of fair value as well as SPAC instruments totaling approximately $9 million, accounting for approximately 4% of fair value. If you examine our portfolio by sector, GECC is invested across 25 separate industries. As Pete noted earlier, specialty finance is now our largest sector, representing nearly 20% of investments at fair value. As our portfolio has grown this year, the wireless telecommunications services business and our largest holding Avanti has declined as an overall percentage of portfolio of fair value. As we seek to grow our investments in the specialty finance space and further diversify our holdings, we expect the portfolio to continue to be less concentrating. We have been able to successfully find compelling debt investment opportunities at prices at or below par in each of the last 8 quarters. This past quarter, we were able to deploy capital at a weighted average price of 99% of par. In the third quarter, approximately $30 million of investments were monetized, and approximately $71 million of capital was deployed into investments with higher weighted average yields. With that, I'll turn the call to Keri to go through our financial highlights. Keri?

Thank you, 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 shares outstanding as of September 30 were 26.9 million, up from 23.5 million as of prior quarter end, with the increase attributable to equity issued in connection with our acquisition of Lenders Funding. GECC reported a net loss of $0.13 per share during the third quarter compared to net income of $0.11 per share in the prior quarter. NII per share was $0.07 compared to $0.09 in the prior quarter. As Pete noted earlier, onetime items primarily related to legal fees incurred in connection with the legacy Full Circle investment, which resulted in a reduction to NII of approximately $0.02 per share in the quarter ended September 30, 2021. Moving on to the balance sheet. Net asset value or NAV was $3.70 per share at September 30 compared to $3.90 per share at June 30 and $3.46 per share at December 31, 2020, which was largely driven by unrealized losses in certain legacy investments. Total fair value of investments as of September 30 was $246.7 million compared to $209.4 million at June 30 and $151.7 million at December 31, 2020. Net assets were $99.4 million, an 8.4% increase from $91.7 million in the prior quarter. We 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% notes due in 2026, trading under the ticker GECCO. Our total debt outstanding was approximately $151.7 million, including these unsecured baby bonds and $10 million drawn on our revolving credit facility. We have the ability to draw up to an additional $15 million on the revolving credit facility. We are pleased to have ample capital and runway to grow our business with the nearest maturity being over 2 years away. Moreover, we continue to evaluate ways to lower our cost of capital. Finally, at September 30, our cash balance was approximately $20.6 million, exclusive of holdings in U.S. treasury bills. And 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 cash distribution to shareholders for the quarter ending March 31, 2022. As I mentioned earlier, this represents an indicated yield of 10.8% on NAV at quarter end and 11.4% yield on our common stock price as of the close on November 1. The record and payable dates for this distribution will be set by the company pursuant to authority granted by the Board and announced in the ordinary course. In summary, we continue to strengthen our portfolio by deploying higher amounts of capital at higher yields. But what is most exciting is the foundation of what we are building as a specialty finance-focused lender as evidenced by our acquisition of a majority interest in Lenders Funding, along with the continued success of Prestige. With that, we will turn the call over to the operator to open for questions.

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 teleconference. We thank you. You may now disconnect at this time.