Great Elm Capital Corp. - 8.125 (GECCH) Q1 2021 Earnings Report, Transcript and Summary

Greetings. Thank you for standing by, and welcome to the Great Elm Capital Corp. First Quarter 2021 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to representative of the company. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us for Great Elm Capital Corp.'s first quarter Earnings conference call. If you would like to be added to our distribution list, you can e-mail investor relations@greatelmcap.com, where you can sign up for alerts directly on our website at www.greatelmcc.com. In addition to our comments for today's call, we'll be utilizing an investor presentation as an accompaniment. While we will not be directly referring to this slide, 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 earnings release, Form 10 Q and a link to this webcast. I would 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 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 SEC filings, please visit Great Elm Capital Corp's website under financial information, SEC filings or visit the SEC's website. Hosting this 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 Friday, May 7, 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 Matt Kaplan, a portfolio manager and member of our Investment Committee. 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. To begin, while we experienced a slower-than-anticipated deployment of new capital early in the first quarter that depressed NII to a degree, we ended the period in an excellent position. And we're able to deploy for $3.9 million in new investments, excluding SPACs in the quarter at a weighted average current yield of approximately 9.9%. In addition, we ended the period with our strongest asset coverage ratio and debt-to-equity ratio since the beginning of the pandemic. Finally, we also announced the signing of a $25 million revolving credit facility yesterday that will allow Great Elm to be more fully invested in yielding assets and take advantage of the specialty finance overflow opportunities we are seeing as part of our ownership position in Prestige Capital. To begin with a quick outline, at quarter-end, GECC had a portfolio of investments with a fair market value of $193.6 million, cash of $26.6 million and $91.5 million of net asset value or $3.89 per share. In terms of NAV, this is a sizable increase from the $3.46 per share reported on December 31, 2020. This is largely due to higher realized and unrealized gains on investments, which we'll detail shortly. NII for the quarter was approximately $1.5 million or $0.06 per share as compared to NII of $1.6 million or $0.07 per share for the quarter ended December 31, 2020. NII was depressed as we entered the quarter with a high cash balance and legal expenses remain elevated. While I'll let Matt go into greater detail on our portfolio review, there were a couple of notable developments that we expect will favorably impact NII in the coming quarters. We exited a legacy position in Boardriders during the quarter and will no longer incur related legal fees after April. These fees have served as a drag on NII over the past 2 quarters. Second, it's important to understand the impact of timing during the period. We considerably increased our deployment of capital in February and March. To quantify of the $43.9 million deployed for GECC during the quarter, over 75% was deployed after January, and we have seen this momentum continue into the second quarter. We continue to work towards building an increasingly diversified investment portfolio and are utilizing a number of sourcing channels as we invest. In the first quarter, we also continued to benefit from our investment in Prestige Capital. In past calls, we have provided background on Prestige and its 34-year history as a factoring business. Today, I want to provide a little insight on how this relationship works and provides GECC with proprietary opportunities to leverage its balance sheet to achieve attractive IRRs over time. GECC's balance sheet enables Prestige to increase the size of the transactions that can pursue, and our investment in Prestige may create opportunities that would allow GECC to participate in certain of Prestige's larger factoring transactions directly. In the past, Prestige may have been unable to pursue these larger transactions due to capital constraints. However, following our investment in 2019, it became apparent that Prestige merely needed additional capital to pursue these opportunities. In 2020, we completed 3 participations in Prestige investments, which we believe have a stronger credit quality than typical leverage investments at a rate of 13% per annum. Our goal now is to continue to working with the management at Prestige to help them pursue larger transactions. To that end, we were very pleased to enter into a $25 million revolving credit facility with City National Bank with an interest rate on borrowings at LIBOR plus 3.5% and a 3-year maturity. This facility allows us to more efficiently manage our liquidity, take advantage of overflow opportunities at Prestige and make other investments with a favorable cost of capital. As I discussed last call, we recently added 2 new members to our investment committee from Imperial Capital Asset Management; Jason Reese and Matt Kaplan. Both Jason and Matt were instrumental in closing the recent credit facility, and we've benefited from their expertise throughout our investment selection process. To that end, I'd like to turn the call over to Matt to discuss our portfolio performance for the quarter.

Thanks, Pete. There are some moving parts this period, including the initiation of a SPAC-based cash management strategy early in the quarter. Our March 31 portfolio comprised of 33 debt investments, 3 income-generating equity investments and 7 other equity investments, excluding SPACs. The debt investments account for $135 million or approximately 70% of portfolio fair value. The weighted average current yield on our debt investments is 10.9%. Of the $135 million of debt holdings, roughly $69 million is invested in floating rate debt with a weighted average current yield of 9.3%. Roughly $66 million is invested in fixed rate debt with a weighted average current yield of 12.7%. Away from our debt holdings, we have 3 yielding equity investments accounting for $30 million or approximately 16% of portfolio fair value and other equity investments totaling $18 million or approximately 9% of fair value. We also have holdings in SPAC instruments of $10 million, accounting for approximately 5% 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 13.5%. Our portfolio is currently heavily weighted in the wireless telecommunications services industry into our largest holding Avanti. However, as we grow our investments in the specialty finance space and further diversify our holdings, we expect the portfolio to generally be less concentrated with additional focus in the specialty finance sector. In the first quarter, we monetized approximately $28 million of investments and deployed $58 million into new investments with our portfolio yield remaining stable. 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 96% of par and monetized investments at 89% to par. Excluding our exit of Boardriders, which was a drag on NII due to associated legal fees, we monetized investments at a weighted average price of 97% par this past quarter. Before I turn it over to Keri for a review of financial highlights, I wanted to take a few moments to discuss our recently implemented approach of utilizing SPAC investments as a hybrid cash management tool for Great Elm. In short, we are focused on deploying our capital to take advantage of the risk mitigation dynamics that are inherent in the SPAC structure with an avenue to create upside for our capital as we seek new opportunities to deploy into higher-yielding instruments. We entered the quarter with $53 million of cash, and as our deployment into yielding investments ramped up, we also decided to leverage our relationships to invest a portion of our cash into a broad portfolio of SPACs in their IPOs. We believe GECC will be able to earn a better than cash return on the underlying SPAC shares while retaining upside for warrants. At March 31, $10 million was invested in 125 SPAC securities or approximately 5% of invested capital, which are all publicly traded securities listed on the NASDAQ or NYSE. To be clear, the allocation to SPACs is a form of cash management that we believe has minimal permanent impairment of capital risk with potential upside. With that, I'll turn the call to Keri to go through our financial highlights. Keri?

Thanks, Matt. I'll go through these pretty quickly, but invite all of you to review our press release, accompanying presentation in the course or SEC filings. Total weighted average shares outstanding increased to 23.4 million from 22.2 million in the prior quarter and 10.1 million in the prior period year. The main reason for the share increase from prior year was the rights offering completed by the company in October 2020. GECC reported net increase from operations of $0.53 per share in the first quarter compared to a net loss of $0.43 in the prior quarter, which was largely due to net unrealized depreciation over the current quarter. NII per share came in at $0.06 compared to $0.07 in the prior quarter. Net asset value or NAV increased slightly significantly to $3.89 per share as of March 31 from $3.46 per share at December 31, 2020, which was largely due to those unrealized gains. Total fair value of investments as of March 31 was $193.6 million compared to $151.7 million in the prior quarter, and net assets were $91.5 million, up from $79.6 million in the prior quarter. Total debt outstanding was approximately $118.7 million and was comprised entirely of our unsecured baby bonds. We continue to evaluate ways to lower our cost of capital, as exemplified by our new revolving credit facility with CNB. Cash was $26.6 million at period end. And with that, I'll turn it back to Pete for closing remarks.

Thanks, Keri and Matt. I'd like to close with information regarding our distribution, and then we would be happy to take your questions. In March, we announced that our Board authorized a $0.10 per share cash distribution to shareholders for the quarter ended June 30, 2021. As I mentioned earlier, this represents an indicated yield of 10.3% on NAV at year-end and an 11.9% yield on our common stock price as of the close on April 30. We expect to announce the record and payable dates for this distribution shortly. Our Board of Directors also authorized a $0.10 per share cash distribution for the quarter ending September 30, 2021. The record in payment dates for the distribution are expected to be set by GECC in the third quarter pursuant to authority granted by its Board of Directors. Over the last year, we have proactively made decisions that we feel we'll position GECC for greater financial success in the current market environment. We're exiting the period with what we believe to be an increasingly high-quality portfolio and the new revolving credit facility with CNB provides additional flexibility for future growth. What is equally important is that we have cultivated a relationship with Prestige, which has helped us deploy that capital into attractive proprietary investments. With that, we will turn the call over to the operator to open for questions.

[Operator Instructions] And you have a question from the line of Alan Denzer.

Yes. Question about the viability of the Avanti business going forward. Please give us a little more color on what the potential for recovery is in that business set?

Alan, thank you for your question. This past quarter was an important one for Avanti to refinance its first lien debt and also one significant amount of new business in the form of contracts with new customers that we believe will drive future revenue and cash flow. So we continue to be optimistic about the trajectory of Avanti's business and what that means for our investment.

[Operator Instructions] At this time, I'd like to turn back over to the speakers for the -- to the management team for any further comments.

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 call. Thank you for your participating. You may now disconnect.