Great Elm Capital Corp.

Good morning, ladies and gentlemen. Welcome to the great Elm Capital Corp. second quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. I would now like to turn the conference over to your host, Mr. Adam Yates.

Thank you, Faith, and good morning, everyone. Keri Davis, Jason Reese, Matthew Dov Kaplan, Adam Michael Kleinman On the website, you can also find a copy of our earnings release, Form 10-Q, and a link to the webcast. I'd 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 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 the 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. I will now turn the call over to Peter.

Thank you, Adam. Good morning and thank you for joining us today. I'm joined this morning by our COO, Adam Kleinman, Portfolio Manager, Adam Yates, and our CFO, Keri Davis. Where relevant in our prepared remarks, we will point you to the corresponding slide number in the deck that Adam referenced, which is available on our website as well as through the webcast. Please turn to slide three to discuss GECC's portfolio repositioning. For the avoidance of doubt, we remain intently focused on maximizing shareholder value through our monthly distributions, potential special distributions, and by increasing the book value of our shares. During the quarter ended June 30th, 2020, we began repositioning the portfolio, including taking actions to create liquidity that had the effect of depressing net investment income, or NII. specifically, as the impact of COVID-19 increased volatility in the leveraged credit secondary markets, we proactively monetized investments in anticipation of more attractive redeployment opportunities. Toward the end of the quarter ended June 30, 2020 and following quarter end, we redeployed a majority of our cash into new cash generative investment opportunities that diversify our holdings. As we continue to diversify our holdings, We intend to weight investments in specialty finance businesses like Prestige Capital Finance, LLC, whose performance has exceeded internal expectations more significantly in our future portfolio. Nevertheless, NII for the quarter was approximately $0.9 million, or $0.09 per share, as compared to NII of $2.7 million, or $0.26 per share during the prior quarter. The quarter-over-quarter reduction in NAI was driven by the monetization of certain income-generating investments as we continued to meaningfully grow our cash balance and the loss of cash and non-cash income from investments like PFS Holdings Corp. and Davidson Radio, Inc., both placed on non-accrual status during the prior quarter. Please turn to slide four for a reconciliation of the quarter-over-quarter change in our total investment income. As I noted, the reduction of investment income during the quarter was driven by multiple factors. First, sales of Commercial Barge Line, Full House Resorts, and Sinastra Group throughout both the prior quarter and the quarter ended June 30, 2020, reduced our investment income while increasing our cash balance to redeploy as opportunities arise. Second, our investments in PFS Holdings and Davidson, a legacy full circle investment, were placed on non-accrual at the end of the quarter ended March 31, 2020. Please turn to slide five to review new investments we've made since the quarter ended March 31, 2020. Recent leverage credit secondary market volatility has increased the number of potential investments in our pipeline. We continue to seek high-yielding investments across a broad range of sourcing channels as we redeploy the capital that we've raised over the past few months. New primarily cash income generating investments we've purchased help increase the average current yield on the portfolio and Diversifier Holdings. Throughout this past quarter and subsequent to quarter end, we actively deployed approximately 25.5 million of available cash into eight new investments at a weighted average current yield of 12.7%. In dollars, the current yield on these investments is greater than $3.9 million, which is quite meaningful to our income profile. On slide seven, we provide some background on our acquisition of an investment in Prestige Capital Finance. On February 8, 2019, GECC acquired 80% of the outstanding equity interest of Prestige for approximately $7.5 million. GECC acquired its interest from founder Harvey Kaminsky, facilitating his retirement and a transition of the business to longtime executives Alan Eliasoff and Stuart Rosenthal, who continue to manage the business today. Importantly, Eliasoff and Rosenthal own the remaining Prestige is a leading provider of spot factoring services, providing clients with an opportunity to sell individual accounts receivable for an upfront payment. Prestige purchases the accounts receivable of creditworthy companies from its clients. typically advances 75% to 85% of the receivable to the client up front and remits the rest to the client less prestigious fee upon payment of the receivable. Prestigious clients are generally unable to access traditional bank financing to meet their capital needs, but, as noted, have accounts receivable from creditworthy companies. The combination of clients' capital needs and receivables from creditworthy counterparties allows prestige to consistently underwrite profitable business while taking limited corporate credit risk. Consequently, over more than 30 years in business and through greater than $6 billion of transactions factored, Prestige has a track record of strong credit underwriting with minimal losses. Please turn to slide eight. One of the reasons we're intently focused on the specialty finance space is due to the potential profitability of niche specialty finance businesses like Prestige. Prestige is a highly profitable company. In 2019, the company's pre-tax income was approximately $2.8 million on average book equity of $3.1 million. Through the first half of 2020, Prestige's pre-tax income was approximately $1.5 million on average book equity of $3.3 million. The company's growing profitability and new business pipeline continue to exceed our internal expectations. GECC earns a high rate of return on its investment in Prestige. Despite not acquiring Prestige until February 2019, GECC received $1.6 million in distributions from Prestige throughout 2019, representing an approximate 24% annualized yield on its net investment. Through the first half of 2020, GECC received $0.9 million in distributions, also representing an approximate 24% annualized yield on its investments. Keri Davis, Jason Reese, Matthew Dov Kaplan, Adam Michael Kleinman Unlike investments sourced in the secondary market, these transactions would be proprietary to GECC and unique to our portfolio. Please turn to slide nine for additional detail on our specialty finance focus. The positive trends our investment in Prestige continues to exhibit lead us to explore complementary opportunities in other niche areas of specialty finance. We're focused on acquiring controlling interest in a number of subcategories of specialty finance, including Factoring, asset-based lending, equipment leasing, hard money real estate lending, and trade claim acquisition. In addition, we believe that owning controlling interest in businesses in the above disciplines may create proprietary overflow investment opportunities. As an investor in niche specialty finance businesses, we can help our partners grow by creatively structuring transactions and utilizing our liquid balance sheet. Please turn to slide 11 for a high-level description of GECC. GECC is an externally managed total return-focused BDC with a liquid balance sheet. GECC seeks to generate both current income and capital appreciation from its portfolio of investments comprised primarily of secured loans, secured bonds, and specialty finance investments. As of June 30, 2020, GECC had total assets of approximately $258 million a portfolio fair value of $146.3 million and a net asset value of $53.2 million, equating to $5.10 per share. The weighted average current yield on our debt holdings was approximately 10.2%. Importantly, roughly 24% of GECC shares are held by employees and affiliates of Great Elm Capital Management, Inc., GECC's investment manager, creating a very clear alignment of interest between management and our shareholders. Let's turn to slide 12 for an overview. The majority of our third and fourth quarter 2020 distributions will be paid in shares of our common stock. In order to best capitalize on potential opportunities, we believe it is prudent to preserve as much capital as possible and further strengthen our balance sheet. Over the trailing 12 months, GECC has paid $1.05 in total distributions, consisting of an 8.3 cent monthly base distribution and a Based on June 30th NAB and closing market price, the total distributions equate to an annual distribution yield of 20.5% and 24.6% respectively. During the quarter, we deployed capital at a weighted average price of 92% of par and we monetized investments at a weighted average price of 98% of par. Slide 13 breaks down the portfolio in detail. The portfolio contains 37 investments, 29 of which are debt and 8 of which are equity. The 29 debt investments account for $121 million of fair value and the 8 equity investments account for approximately $25 million of fair value. The weighted average current yield on our debt investments is 10.2%, while the weighted average current yield of our income-generating equity investments in Prestige and Crestwood Equity Partners is approximately 18.8%. We certainly intend to grow the equity portion of our portfolio as we target income generating, especially finance investments to expand and diversify our holdings. Please turn to slide 14 to break down the quarter end portfolio by asset and interest rate type. Approximately 83% of the fair value of the portfolio is comprised of debt investments with the balance in equity investments. Of the 121 million of debt holdings, roughly 76 million is invested in floating rate debt with a weighted average current yield of 8.2%. Roughly $45 million is invested in fixed rate debt with a weighted average current yield of 13.6%. On slide 15, we break down the portfolio by industry. Wireless telecommunication services comprised of our investments in Avanti is still the largest industry waiting. Nevertheless, we continue to maintain a diversified portfolio of investments as indicated by the 22 different industries represented. Furthermore, as we grow our investments in this specially financed space and diversify our holdings, we expect that industry weighting to increase and concentration to decrease in other industries. Turning to slide 16, we get a more granular picture of GECC's investment activity quarter over quarter. As you can see, we've been able to find compelling debt investment opportunities at prices below par in each of the last five quarters, with this past quarter's weighted average price of new debt investments at a recent low. Keri Davis, Matthew Dov Kaplan, Adam Michael Kleinman Keri Davis, Adam Michael Kleinman that appear to be overly impacted by recent market volatility. Let's turn to slide 18 to review financial highlights from the quarter. Earnings per share were $0.34 in the second quarter. NII per share came in at $0.09, as I noted earlier in the call. Net realized gains were also $0.09 as we repurchased a portion of our outstanding indebtedness below par, creating a gain on our income statement and improving our asset coverage ratio. Net unrealized gains were $0.16 as volatility somewhat subsided and the leveraged credit secondary markets and fair values rose. Net asset value or NAB was $5.10 per share at period end, a small increase quarter over quarter. Please turn to slide 19 for a financial overview of the portfolio. At period end, total assets were $258 million. Total fair value of investments was $146.3 million. and our $5.10 per share NAV equated to an aggregate NAV of $53.2 million. Total debt outstanding was approximately $119.5 million and was comprised entirely of our unsecured baby bonds. Our outstanding debt balance decreased quarter over quarter as we repurchased baby bonds at a significant discount to par, reducing both interest expense and our future obligations. Cash was $31 million at period end, a meaningful increase since the prior period as we monetized investments and improved our liquidity profile. Turning to slide 20, let's discuss the quarterly operating results.