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spk00: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Great Elm Capital Corporation First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone keypad. If you require any further assistance, please press star then 0. At this time, I would like to turn the conference over to Mr. Garrett Edson of ICR. Sir, please begin.
spk01: Good morning, and thank you, everyone, for joining us for Great Elm Capital Corp's first quarter 2022 earnings conference call. If you'd like to be added to our distribution list, you can email investorrelations at greatelmcap.com, or you can sign up for alerts directly on our website, www.greatelmcc.com. I'd like to note that Slide presentation posted on our website accompanying today's call. Slide presentation can be found on our website under financial information quarterly results. On our website, you can also find our earnings release and SEC filings. 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 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 Matt Kaplan, Great Elm Capital Corp's Chief Executive Officer. I will now turn the call over to Matt.
spk03: Good morning, and thank you for joining us today. On today's call, I'll walk through some first quarter highlights, and our CFO, Carrie Davis, will take us through some of our financials for the quarter. We'll then open up for Q&A, and Adam Kleinman, our Chief Compliance Officer, and Mike Keller, President of Great Elm Specialty Finance, will join us to answer questions. Over the past two months as CEO, I have taken certain actions to seek to ensure our legacy issues are largely behind us and to position the company for future success. Looking at our first quarter, we saw net asset value once again decline from the prior quarter as we worked through remaining legacy items. Also, NII, excluding the reversal of past incentive fees, was below what we expect our portfolio can achieve over time. Despite these legacy headwinds, I am excited about our strategy, with support from a refreshed board of directors and a clean portfolio. We also believe that our pending rights offering, if successfully completed, will provide the capital needed to support our growth. This quarter, the waiver of past incentive fees benefited NII. Going forward, we intend to grow our operational NII by executing on our strategy. On our last call in March, in concert with beginning to transform GECC, I called out three core objectives that were aligned with our new strategy. The first was to increase GECC's allocation to specialty finance to constitute half of the portfolio through direct investments in specialty finance companies as well as in participation. Secondly, to maintain a high quality diversified portfolio focused on performing and cash yielding investments. Finally, to increase our scale by raising equity and debt capital. To that end, I am pleased to report that our team has been executing the strategy we set forth and is making progress. On that final capital raising point and before diving into the quarter, I would like to highlight that this morning we filed an amended registration statement for a one-for-one rights offering at $12.50 per share or up to $57.5 million assuming 100% participation. Great Elm Group and certain affiliates have indicated that they intend to exercise their subscription rights and oversubscribe in the rights offering. If completed, We intend to use the proceeds from the offering to pursue a robust pipeline and grow GECC. Moving to other strategic items, in the first quarter, we refreshed the board with the appointment of Chad Perry, Matthew Drapkin, and Richard Cohen. With two non-independent directors declining to be compensated by GECC, our board continues to take shareholder-friendly actions. I also was successful in negotiating with the board of Great Elm Group to waive past incentive fees as part of the reset. As a result, we were able to reverse an additional $4.9 million of previously accrued incentive fees in the first quarter, which benefited NII and NAV by over a dollar per share. In terms of our legacy portfolio, we continued to monetize legacy reorg equity positions, such as True Taj and CPK, and also saw a further write down of the Avanti investment. At March 31st, the fair value of our investments in Avanti related securities are now below $1 million, driven largely by Avanti's recent debt restructuring. Crucially, we ended the first quarter of 2022 with only 2% of our assets or approximately 5% of NAV comprised of legacy assets. Entering the second quarter, cash generating investments now comprise 98% of our portfolio. Furthering our strategy to increase our investments in specialty finance and related opportunities, in February, we acquired Sterling Commercial Credit, a leading asset-based specialty finance lender that provides short-term, asset-based loans, and working capital solutions to small businesses with annual sales typically between $3 and $10 million. During the quarter, we deployed $22 million into specialty finance-related investments for 80% of total dollars deployed in the period. As a result, approximately one-third of our assets at the end of March are now composed of specialty finance-related investments, up from 22% at year-end 2021. enabling us to make significant progress on one of our key objectives. On the specialty finance front, I think it is very important for investors to understand that our investments in the equities of specialty finance companies, including Sterling, Prestige, and Lenders Funding, are not just passive private equity investments. These are strategic income-generating investments in businesses we are focused on growing to create a proprietary sourcing engine for bespoke credit investments within GECC. Combined, these specialty finance companies offer a unique one-stop shop of credit solutions to American small businesses. Over the past two months, I have begun to dive into these businesses with industry veteran Mike Keller. We are laser focused on driving best practices and operational improvement across the platforms. We are implementing various initiatives to streamline, optimize, and monitor these businesses across various KPIs. While still early days, as I've only been at the helm for a couple months, we are in the process of building out our long-term targets. To drive value, we will look to grow the loan portfolios of these businesses, expand net interest margins, improve funding flexibility and cost of capital, grow book value, and increase returns on equity. Turning back to some of the financial numbers, for the first quarter of 2022, NII was approximately $6 million or $1.31 per share, which is inclusive of the $4.9 million reversal of previously accrued incentive fees. Excluding the reversal, NII would have been about $1.1 million or 24 cents per share. Our goal in the quarters ahead is to grow our portfolio and our investment income to cover our quarterly distribution on a regular basis. As of March 31st, our asset coverage ratio stood at 147.5%, which is just below the 150% threshold. If we are able to successfully complete our announced rights offering, the net proceeds would positively impact our asset coverage ratio. While the macro environment remains challenging and we're not done transforming GECC, we are encouraged by the progress we have made. We have brought together a strong team to helm our transformation and remain confident in our team's ability to address any challenges head on. With that, I'd like to hand the call over to Carrie to discuss our first quarter 2022 performance and add further color on our repositioned portfolio.
spk04: Thanks, Matt. I'll go over our financial highlights, but invite all of you to review our press release, accompanying presentation, and SEC filings for greater detail. As Matt noted, the first quarter 2022 was an important first step to repositioning GECC and reshaping our portfolio into a diversified book with a stable yield profile. During the first quarter, GECC generated NII of $6 million versus $1.5 million in the prior year quarter, and $7.1 million in the fourth quarter of 2021. Current quarter NII was positively impacted by a $4.9 million waiver of previously accrued incentive fees, while the fourth quarter of 2021 was positively impacted by a $5.2 million reversal of such fees. Net assets as of March 31st were $69.3 million, down from $74.6 million at December 31st and $91.5 million as of March 31st, 2021. The decrease was largely the result of the reduction of share value of our Avanti investments, which was driven by Avanti's recent debt restructuring process. Our NAV per share as of March 31st, 2022 was $15.06, down from $16.63 per share as of the prior quarter end and $23.36 per share as of March 31st, 2021, as adjusted for our reverse stock split in February 2022. Detail for the quarter over quarter change in net asset value can be found on slide eight of the investor presentation. As of March 31st, 2022, GECC's asset coverage ratio was approximately 147.5% compared to 151.1% as of December 31st, 2021. Our asset coverage ratio was impacted by the decline in fair values for the quarter. GECC reported a net loss of $1.12 per share in the first quarter compared to the net loss of $4.95 per share in the prior quarter. NII per share was $1.31 compared to $1.58 in the prior quarter. All per share amounts are based on weighted average shares and have been adjusted for the 6-for-1 reverse stock split that became effective on February 28, 2022. As of March 31st, our total debt outstanding was approximately $145.9 million, comparable with December 31st, 2021, and our $25 million line of credit remains fully undrawn. As of March 31st, 2022, our cash balance was approximately $8.5 million, exclusive upholding the U.S. Treasury code. Our Board of Directors has authorized two upcoming quarterly distributions. We previously announced that our Board of Directors has approved a 45 cent per share distribution for the quarter ending June 30th, 2022. The second quarter distribution will be payable on June 30th to stockholders of record as of June 23rd. Our Board of Directors has also approved a 45 cent per share cash distribution for the quarter ending September 30th, 2022. Annualized, the distribution equates to a 12.6% dividend yield on our closing market price on May 9, 2022 of $14.29 per share and a 12% dividend yield on March 31, 2022 NAV of $15.06 per share. The record and payment dates for the distribution are expected to be set in the third quarter pursuant to authority granted by our Board of Directors. I'll turn the call back over to Matt to review the portfolio.
spk03: Thanks, Kerry. If you turn to slide nine, show our income generating portfolio. This includes only investments which carry cash coupons or pay cash dividends and excludes all non-accrual and non-cash paying equity or debt investments. As I noted on our last call, we have been focused on transitioning our portfolio to become a diversified book of performing cash paying investments with stable yield profiles. What I would like to point out here is that, as I mentioned earlier, 98% of our portfolio is income generating today. This is a significant improvement from 88% just one quarter ago and less than 65% a year ago. Moving on to slide 14, you can see of the approximately $145 million of debt investments, 42% are invested in floating rate instruments with a weighted average current yield of 10%, and approximately 58% are invested in fixed rate instruments with a weighted average current yield of around 10.5%. It is important to note that for our fixed rate debt portfolio, the weighted average maturity is only 2.5 years. So while our floating rate mix may be lower than other BDCs, we believe the relatively short duration of our fixed rate portfolio should afford GECC the ability to benefit from a rising rate environment. Flipping back to slides 10 and 11, I'd like to highlight our diversification as GECC's income generating portfolio is invested across 18 separate industries. Specialty finance investments are our largest industry and now comprise 34% of total investments, up from 22% the prior quarter, largely driven by our acquisition of Sterling. We expect further growth from our specialty finance portfolio as these unique investments can offer greater potential returns on invested capital than traditional leveraged credit and are largely uncorrelated to the broader syndicated leveraged credit markets. Ultimately, we are progressing in creating a relatively balanced portfolio of specialty finance and credit investments. As we noted on our prior call, we are in the midst of creating a continuum of lending platform that GECC can offer its small business clients And Lenders Funding, Sterling, and Prestige are notable examples of the groundwork we laid to regrow our portfolio and generate attractive risk-adjusted returns in any economic cycle. We've partnered with specialty finance companies via a number of different investment types, including majority equity interest, secured debt, subordinated debt, and participation in existing transactions. By offering multiple credit solutions across the lending continuum, we expect to utilize our one-stop shop solutions and hold on to customers for a longer period of time. For example, we are currently working on a deal that will source through a close relationship of management which, if completed, will incorporate both an ABL and secured term loan financing component for a sub $100 million revenue US business. Sterling would provide the ABL solution for this company and be in a position to actively monitor financial performance through its robust servicing capabilities. The secured loan portion of the transaction may fit in our lender's funding business or be directly held by GECC or possibly held by both. This holistic financing solution for our client illustrates how our continuum of lending and deep industry relationships can drive proprietary originations of cash-generating investments for GECC and our various platforms. In summary, we continue to strengthen and diversify our portfolio by deploying capital into higher yielding cash paying investments. We are excited about the foundation we are building as a specialty finance platform and optimistic about the future of our portfolio as we make significant improvements to both. With that, we will turn the call over to the operator for questions. Operator?
spk00: Ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star then 1 on your telephone keypad. Please hold while we compile the Q&A roster. Our first question or comment comes from the line of Brian Alexis from Greenwich, your line is open.
spk02: Good morning. Just a quick question on dividend coverage. Absent the reversal of the accrued incentives this quarter, net investment income would have fallen well short of the dividend. And, you know, looking at, you know, kind of the two-quarter trend between fourth quarter of 21 and first quarter of 22, you would need a pretty big reversal in NII to cover even the 45 cents that's been declared for the next two quarters. Can you speak to that? Because dividend coverage looks to be pretty far away.
spk03: Thanks for the question, Brian. On dividend coverage, for the year, You know, it is important to note that the reversal of the incentive fee does benefit our NII and is therefore something that we will have to distribute. So we believe that for the year, our NII will cover our dividend or approximately cover our dividend. And then going forward over the year, we will grow NII operationally as we reposition the portfolio into higher yielding assets. As I noted on the call, we monetized two material amount of legacy reorg positions, including True Taj, CPK, and our SPAC positions, equities there. And we are working to redeploy those proceeds in the quarter. So there is some timing lag, but our goal is to have that amount ramp over the year. And as we get the rights offering proceeds in, further allocate to specialty finance, we believe we can generate additional yield from the portfolio.
spk02: Got it. The expense reversal, I mean, is that like a required component of NII? Because, I mean, I think there was several quarters where NII had been over distributed. I mean, do you not have the ability to retain any of that? I mean, essentially, it seems like we're getting back you know, money from the manager that had been, you know, paid out over the course of several quarters already.
spk03: So just to make sure I understand your question, are you asking if this year with the NII reversal we will be required to distribute that amount of income?
spk02: Not exactly, but, you know, I mean, that's a, That's a question I would find the answer to interesting. I'm just saying that in prior quarters where NII has been over-distributed, right, and now we're getting back to 4.9 million, you know, I mean, it's almost like are you required to over-distribute essentially? That's what it boils down to.
spk03: Gotcha. So we, the NIA, sorry, the incentive fee reversal benefits are NII. And as a registered investment company, we are required to distribute 90% of our income over the course of the year. Um, you know, if we distribute less than 98 and change percent, then we're subject to the excise tax. So that amount of reversal, is going to have to be distributed. So operationally, we are, I would say, I would agree with this year on an operational basis, we're over-distributing. But from an investment company standpoint, we're going to be distributing what we need to to maintain our status as a RIC.
spk02: I see. Just following up on that, there is no way to credit that 4.9 million against prior over distribution. Is it all just whatever occurs in the current year and you kind of can't go back and adjust or anything like that for payments out of capital essentially?
spk03: I think that's a technical question that before turning it over to Carrie, I would like to be happy to answer additional questions offline and Let's see, Carrie, can you speak to that?
spk04: Hi. Yeah, so the tax calculations have a lot of factors that go into them. We calculate our tax requirement each year on a standalone basis, but we, of course, every year will assess if there's any opportunity for us to take credit for any book tax differences in prior years that might wash out in a current year. I think it's probably a more involved question that we could talk about offline. But we also have not completed our tax filing for the current year as disclosed in our most recent 10-K.
spk02: Okay. That's great. That's all from me. Thanks for taking the questions.
spk00: Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. I'm sure no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Matt Kaplan for any closing remarks.
spk03: Thank you again for joining us today. I'm excited about the progress we have made thus far to transform GDCC, and we look forward to continued investor dialogue. Please let us know if we can help with any follow-up. Thank you.
spk00: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
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