Great Elm Capital Q2 2024 Earnings Call Transcript

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August 1, 2024

There are 5 speakers on the call.

Operator

Greetings and welcome to GreatM Capital Corp Second Quarter 2024 Financial Results Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to Garrett Edson, a representative of the company.

Operator

Thank you. You may begin. Good afternoon, and

Speaker 1

thank you everyone for joining us for Great Elm Capital Corp. 2nd quarter 2024 earnings conference call. If you would like to be added to our distribution list, you can email investorrelationsgreatelmcap.com or you can sign up for alerts directly on our website, www. Greatelmcc.com. I'd like to note the slide presentation posted on our website accompanying today's call.

Speaker 1

The slide presentation can be found on our website under Events and Presentations. On our website, you can also find our earnings release and SEC filings. I like to call your attention to 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 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.

Speaker 1

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 Financials, SEC filings or visit the SEC's website. Hosting the call this afternoon is Matt Kaplan, Great Elm Capital Corp's Chief Executive Officer, who will be joined by Chief Financial Officer, Kerry Davis Chief Compliance Officer, Adam Clyman and Mike Keller, President of Great Elm Specialty Finance. I will now turn the call over to GECC's CEO, Matt Kaplan.

Speaker 2

Thanks, Garrett. Good afternoon and thank you all for joining us today. We had a solid second quarter as we continue to advance our long term growth strategy as demonstrated by our portfolio enhancement initiatives and notable financing activities completed to date. In June, we successfully raised $12,000,000 in equity at net asset value from Prosper Peak Holdings and SPV supported by a $3,000,000 investment from Great Elm Group in the SPB. This capital raise followed the structure established by the $24,000,000 equity raise at net asset value in February, which was also supported by a $6,000,000 investment from Gradon Group.

Speaker 2

In July, we issued an additional $22,000,000 of GECCI notes through a registered direct offering to an institutional investor. This supplemental debt financing was a tack on to our GECCI offering in April during which we issued $34,500,000 of 5 year notes, which were syndicated favorably at a more than 50 basis points spread to treasury improvement as compared to our August 2023 note offering. We believe this financing rate improvement was driven by our strong earnings, fresh equity capital and the Egan Jones rating upgrade to BBB Flat from BBB Minus since our August offering. Overall, we are pleased to have secured over $90,000,000 of fresh capital this year, bolstering our liquidity and further strengthening our financial position, enabling us to execute on our investment pipeline at greater scale. The successful execution of these non dilutive equity raises and the debt issuances underscores the enduring strength of our platform as a result of the strategic repositioning efforts implemented over the past 2 years.

Speaker 2

We continue to actively pursue investment opportunities that offer attractive risk adjusted returns for our shareholders. We are particularly excited about our expansion into CLO products as previously outlined in our last earnings call. In April, we created a JV to hold investments in CLOs and related warehouse entity. Notably, the JV is beginning to receive distributions from its CLO investments with its first sizable distribution in July. We expect the CLO JV will be a source of increasing income as we further invest in that portfolio moving forward.

Speaker 2

Over time, we anticipate potential returns ranging from the mid teens to low 20 percent from our CLO investment portfolio. By incorporating structured financial vehicles into our portfolio, we gain exposure to instruments that have historically demonstrated strong ROEs across various economic cycles, exemplifying our commitment to building a resilient and diverse investment portfolio. Turning to our 2nd quarter performance, we ended the quarter with NAV of $12.06 per share on June 30, compared to $12.57 as of March 31. The reduction was primarily due to a liquid level 3 investments on non accrual in 2 portfolio companies, which adversely affected NAV by approximately $0.40 per share in the quarter. We believe the bulk of the impacts to NAV from these portfolio companies has been realized positioning us to recapture NAV moving ahead.

Speaker 2

Non accruals as of quarter end totaled $9,400,000 or approximately 3% of portfolio fair value. Of this $9,400,000 $8,100,000 is attributable to a portfolio company which emerged from bankruptcy in July and we received a significant majority of our recovery in now current pay secured take back debt leaving our pro form a non accruals at $1,300,000 of fair value. Otherwise, we believe our portfolio remains solid and we continue to actively monitor our investments for any incremental stress. In the Q2, we generated $0.32 of NII per share. Sequentially, our NII per share declined due to cash drag related to the GECCI offering in April and our June equity offering as well as the residual impact from the non accrual positions and from the timing of cash flows from certain investments such as the CLO JV.

Speaker 2

As distributions from our CLO focused JV begin to materialize, combined with income from our strategic capital deployments, we expect NII in the second half of the year to surpass that of the first half. As such, we believe we remain well positioned to more than cover our dividend and continue growing the portfolio. Overall, we delivered another solid quarter of results while advancing our strategic initiatives, enhancing both our capital structure and operational efficiency and positioning ourselves well for sustainable long term growth. Before turning the call over to Carey to review our financials in greater detail, I would like to address our upcoming baby bond maturity in 2025, as we are actively assessing various options to refinance these bonds. Further, we are constantly evaluating the capital markets and have initiatives in place to take advantage of potential transactions to refinance this maturity.

Speaker 2

We expect to refinance these bonds by the end of 2024 and remain focused on optimizing our cost of capital. With that, I'd like to hand the call over to Cary Davis to discuss our Q2 2024 performance.

Speaker 3

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 Q2, GECC generated NII of $3,100,000 or $0.32 per share as compared to $3,200,000 or $0.37 per share in the Q1 of 2024. The sequential decline is largely attributed to cash drag and the increased share count from our June equity issuance at NAV, in addition to the timing of distributions from certain positions, particularly our CLO investments. Our net assets as of June 30, 2024 rose to 100 $26,000,000 compared to $119,000,000 at March 31, 2024.

Speaker 3

Our NAV per share was $12.06 as of June 30 versus $12.57 as of March 31, with the decline once again primarily attributable to the write down of certain investments highlighted by Matt. Detail for the quarter over quarter change in NAV can be found on Slide 9 of the investor presentation. As of June 30, GECC's asset coverage ratio was 171% compared to 180% as of March 31. Pro form a for the July bond issuance, the asset coverage ratio would be approximately 163%. As of June 30, total debt outstanding was approximately $178,000,000 and our $25,000,000 revolver remains undrawn.

Speaker 3

Cash and money market securities totaled approximately $3,000,000 Pro form a for the July bond issuance, total debt outstanding was approximately $200,000,000 Our Board of Directors authorized a $0.35 per share cash distribution for the quarter ending September 30, 2024. The Q3 cash distribution will be payable on September 30, 2024 to stockholders of record as of September 16. The distribution equates to an 11.6 percent annualized dividend yield on our June 30 NAV of $12.06 per share. And with that, I'll turn the call back over to Matt.

Speaker 2

Thanks, Carey. Our investment portfolio continues to get stronger as we focus our lending increasing its exposure to secured debt. To that end and notably, our CLO investments provide us a solid look through to the broadly syndicated 1st lien loan market with attractive financing sources and strong institutional counterparts. This gives us additional confidence in sourcing and deploying capital into these investments. Consider last year, our portfolio consisted of 44 percent 1st lien loans and no CLO exposure.

Speaker 2

Fast forward to the Q2 of 2024, 1st lien loans and CLOs make up 60% of our portfolio. As our joint venture continues growing, we expect to provide additional insight into our underlying portfolio in the quarters ahead. Notably, our portfolio's yield profile stood steady at over 13% at quarter end. Despite the lingering effects from the non accrual investments, we are pleased with the portfolio's composition and return profile, which will further be strengthened as we receive distributions from our CLO and JV investments amongst other newly initiated positions. Given the ongoing volatility in the macro environment with uncertainty surrounding the timing of rate cuts and a turbulent election year, we are maintaining a disciplined approach to capital deployment.

Speaker 2

We are directing our investments towards opportunities that are primed to perform across various economic cycles. As always, we prioritize credit quality and seek investments with minimal risk of permanent capital loss. By adhering to this strategy, we are well equipped to continue growing Great Elm Capital Corp. And delivering attractive risk adjusted returns for our shareholders. We remain excited for the future of GECC.

Speaker 2

And with that, I would like to turn the call over to Mike Keller to provide an update on Specialty Finance.

Speaker 4

Thanks, Matt. Despite a sluggish start to 2024 for new deal originations across all our specialty finance platforms, GESF saw improved performance in 2 of its 3 platform companies in the 2nd quarter. Moreover, the pipelines remain robust thus far in the Q3 and we continue to be laser focused on closing new deals and streamlining operations. Touching on our platform companies. While Prestige started the Q1 with lower invoice financing volumes, a notable pickup in the 2nd quarter led to increased net income sequentially.

Speaker 4

At Sterling, deals closed in the first half of the year generated positive momentum for the company, improving earnings both sequentially and year over year. Are excited for Sterling's prospects as the progress made over the last 6 months has positioned the business to further convert its pipeline into earning assets over the coming months. Lastly, although deal volume at Great Elm Healthcare Finance has continued to lag projections, we remain focused on implementing strategic refinements to reposition the platform for future success. Overall, although the year began slowly, we experienced some sequential improvement in the Q2 and are optimistic that our efforts to drive further growth and profitability will pay off.

Speaker 2

Thanks, Mike. In closing, GECC had a solid second quarter and strong first half of the year. The strategic and capital raising initiatives implemented so far this year reflect our commitment to enhancing and expanding our platforms and portfolio. Looking ahead, we believe we are well positioned to grow NII and more than cover the dividend for the remainder of the year. With that, I'd like to turn the call over to the operator for questions.

Speaker 2

Operator?

Operator

Thank you. We will now be conducting a question and answer session. There are no questions at this time. I would like to turn the floor back over to Matt Kaplan for closing comments.

Speaker 2

Thank you all again for joining us today. We are pleased with another quarter of solid performance as we continue to execute on our growth strategy. We look forward to continuing the investor dialogue. Please let us know if we can help with any follow-up questions that you may have.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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