Great Elm Capital Corp. (GECC) Q3 2025 Earnings Report, Transcript and Summary

Good day, and welcome to the Great Elm Capital Corp. Third Quarter 2020 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Adam Yates, Managing Director. Please go ahead.

Hello, and thank you, everyone, for joining us for Great Elm Capital Corp's Third Quarter 2025 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, www.greatelmcc.com. The slide presentation accompanying today's conference call and webcast can be found on our website under Events and Presentations. On our website, 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. 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 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 statements. 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.'s website under Financials, SEC filings or visit the SEC's website. Hosting the call today is Matt Kaplan, Great Elm Capital Corp.'s Chief Executive Officer, who will be joined by Chief Financial Officer, Keri Davis; Chief Compliance Officer and General Counsel, Adam Kleinman; and Mike Keller, President of Great Elm Specialty Finance. I will now turn the call over to GECC's CEO, Matt Kaplan.

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 we're on pace to meet and potentially exceed our internal income generation targets for 3Q. In August, and through the first half of September, we raised significant equity at NAV, doubled the size of our revolver, reduced the revolver's interest rate by 50 basis points and successfully refinanced our highest cost 100 basis points lower. 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. In contrast to a 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. GECC has held exposure to First Brands through syndicated loans since 2020 with a portfolio allocation of over 5% to First Brands since 2023, as noted in our recent 10-K. First Brands was paying cash income to GECC and we received our last regularly scheduled full cash quarterly interest payment at the end of July this year. As outlined in our October 7 press release, our direct exposure to First Brands adversely impacted NAV by approximately $16.5 million in the third quarter. In addition, we put loans on nonaccrual, which adversely impacts our income generation. On the other side of the spectrum, I want to highlight the tremendous success we had in the quarter with Nice-Pak. In 2022, we funded a secured loan with warrants to Nice-Pak, a wet wipes producer. The company was acquired this past quarter, generating an approximately 38% IRR to GECC over the 3-year holding period. 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-Pak as well as some of our insurance and CoreWeave related investments. I am confident that our strong sourcing engine is intact, and I remain excited about the future of GECC. We entered the fourth quarter with leverage in line with our target and ample liquidity with over $25 million of cash to deploy. In addition, we expect to begin harvesting nonyielding 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, our Board of Directors has approved a $0.37 dividend for the fourth quarter of 2025. Furthermore, the Board has approved a $10 million share repurchase program. I'm 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. Before diving into the numbers, I want to further touch on First Brands. In retrospect, our exposure to First Brands was too large. 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. 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. Also, NII was impacted from elevated interest expense associated with the refinancing of our high-cost GECCZ notes, where we wrote off approximately $1 million of deferred offering costs and had double interest expense for most of September. 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. 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 2Q of 2026. 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 and compares to $1.11 per share of regular quarterly distributions in the first 3 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. 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 GECC issuing shares and transactions that did not dilute NAV like past rights offerings. 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. Moving on to portfolio performance. Our NAV per share declined to $10.01 from $12.10 as outlined on Slide 9. 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 Opportunity 2 LP as the underlying CoreWeave 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. 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. With that, I'd like to turn the call over to Keri Davis to discuss our third quarter 2025 performance.

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. During the third quarter, GECC 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. The decrease in NII was primarily driven by the lack of the distribution from an insurance-related investment and lower income from our CLO JV. Our net assets as of September 30, 2025, were $140 million, consistent with $140 million as of June 30. Our NAV per share was $10.01 as of September 30 versus $12.10 as of June 30. The decrease in net asset value was primarily driven by losses on First Brands as noted. Details for the quarter-over-quarter change in NAV per share can be found on Slide 9 of the investor presentation. As of September 30, GECC's asset coverage ratio was 168.2% compared to 169.5% as of June 30. As of September 30, 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 have $50 million of availability under our revolver. Our Board of Directors authorized a $0.37 per share cash distribution for the fourth quarter, which will be payable on December 31 to stockholders of record as of December 15, from distributable earnings. The distribution equates to a 14.8% annualized dividend yield on our September 30 net asset value. I'll turn the call back over to Matt.

Thanks, Keri. We continue to enhance our portfolio 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 2/3 of the corporate's portfolio as of September 30. 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. Before moving on to more portfolio detail, I think it is important to highlight our nonyielding other equity mix as outlined on Slide 17. The bulk of this is attributable to CW Opportunity 2 LP the vehicle we discussed last quarter that initially held a preferred investment in CoreWeave, 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. 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, and the post distribution value was $14.8 million as of September 30. 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 Opportunity 2. Importantly, as we receive distributions from CW Opportunity 2 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. As of September 30, our nonaccrual positions included investments in First Brands, Del Monte and Maverick Gaming, representing 1.5% of portfolio fair value. 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 nonprime consumer finance issuers or tricolor. 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. 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. 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. As we look ahead, we are focused on deploying capital into high-quality income-generating investments. We are taking a measured approach to 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, we have significant dry powder and financial flexibility to capitalize on opportunities. We remain excited for the future of GECC and with that, I would like to turn the call over to Mike Keller to provide an update on Specialty Finance.

Thanks, Matt. Great Elm Specialty Finance had a very strong third quarter and increased its distribution to GECC to approximately $450,000 from $120,000 last quarter. We continue to execute on GESF's strategic transformation by simplifying our business model and securing favorable financing arrangements, successfully repositioning the platform for future growth and improved profitability. 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. In July, GECF 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. 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. Prestige, our invoice financing business had a phenomenal quarter. As a reminder, Prestige provides spot invoice financing solutions and has exhibited high ROEs over the course of the year but can be lumpy quarter-over-quarter. In summary, these initiatives have streamlined our operations and better aligned our platform with long-term growth objectives. We're seeing the benefits of our strategic repositioning take hold, and we remain confident in our ability to generate improved sustainable returns going forward.

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. 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. 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. Operator?

[Operator Instructions] Our first question comes from Erik Zwick with Lucid Capital Markets.

I wanted to start with a question on CoreWeave 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 if there's been something kind of formal announced? Or if you just kind of perceive them periodically?

I think we provided the color on the capital distribution in the September period as well as October. I think importantly, we've received distributions that cover all of our cost basis and the investment and everything from here on out is going to be generating additional capital for GECC to invest in income going forward, we'll provide the market an update next quarter when we report on where we've been seeing the distributions. But again, that vehicle has been making returns of capital, and we're fortunate to be able to be in a position to redeploy that income-generating opportunities going forward here.

And then you kind of combine those distributions with your expectations to harvest. I think you mentioned kind of $20 million of kind of capital from nonyielding assets. Is those $20 million separate from any future expected distributions from CoreWeave? And yes, maybe kind of answer that question first, would be great.

Sure. I think the $20 million or over $20 million includes CoreWeave and a couple of other non-yielding assets that we've identified that we believe we'll be able to harvest over the coming months here into 2026, early '26.

Great. And then just kind of taking that to the next step, you've got this kind of capital coming, you've got 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 kind of 3 months ago?

Yes. 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, investing at the top of the capital structure. We continue to work on various private credit transactions and are expanding the funnel, also working to get more granular in the portfolio and diversify. There's one private credit transaction that we're working to close on this week. That is a teens-type return profile and comes with warrants. I highlighted Nice-Pak, which was a tremendous success in the quarter, which had a warrant package as well. So as we look to rebuild NII and NAV, we're focused on trying to find those interesting opportunities and that's at the top of the capital structure and find certain situations that provides some upside complexity going forward.

And if I can squeeze one more in, and then I'll jump back in the queue. My understanding, most CLOs make their distributions towards the beginning of the quarter. So the $4.3 million that you mentioned that you received so far in 4Q. Is that likely to be pretty close to the full number for 4Q? Or is there anything else you're expecting to receive later in the quarter?

I would say you should use that number for the quarter.

This concludes our question-and-answer session. I would like to turn the conference back over to Matt Kaplan for any closing remarks.

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. Thank you again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.