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spk00: Greetings and welcome to the Great Elm Capital Corp Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Our question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson, a representative of the company. Thank you. You may begin, sir.
spk01: Good morning, and thank you, everyone, for joining us for Great Elm Capital Corp's second quarter 2022 earnings conference call. If you would 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 the slide presentation posted on our website accompanying today's call. The 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 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 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 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. Thank you, Garrett.
spk02: Good morning, and thank you for joining us today. On today's call, I'll walk through some second 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 Grey Elm Specialty Finance, will join us to answer questions. Overall, we continue to make progress on the priorities we laid out after the March quarter, supporting our revamped strategy to improve our NII and NAV over time and maximize shareholder value. In June, We completed a rights offering that strengthened our balance sheet, enhanced our asset coverage ratio, and provided us with increased liquidity. We were pleased to complete the rights offering in a very challenging environment. While the rights offering led to some per share NAV dilution, we are taking a measured approach to navigating through market volatility while maintaining our strategy to grow our specialty finance platforms. We are being disciplined with respect to deploying capital and have taken advantage of some dislocation we are seeing in the secondary markets to opportunistically invest in securities that meet our cash yield and total return thresholds. We began to see signs of reduced liquidity in credit markets through June and July, and have been prudently utilizing our rights offering proceeds to deploy capital in the market. Widening spreads in June impacted portfolio marks, and while spreads have since rebounded in July and further into the start of August, we are still poised to take advantage of continued market volatility. From the closing of the rice offering on June 13th through the end of July, we deployed approximately $25 million in 15 debt investments at a weighted average price below 90, current yield over 10%, and yield to maturity over 12.5%, excluding $5 million invested in cash surrogates. We benefit from a flexible strategy which allows GECC to take advantage of dislocations in different segments of the investment landscape and have been leaning into the secondary market as a provider of liquidity. To that end, our specialty finance mix as a percentage of the portfolio dipped a bit in the quarter. As we raise capital, our deployments will initially flow into corporate credit and our specialty finance mix should be expected to dip temporarily. Over the long term, we still see tremendous opportunity in expanding our platform and expect to build a balanced portfolio of corporate and specialty finance investments over time. For the June 2022 quarter, our NII of $1.2 million was slightly above NII in the March quarter, excluding the reversal of previously accrued incentive fees in the prior quarter. While our NII increased slightly from the March quarter, it was impacted by higher average cash balances held over the quarter as we decided to maintain excess liquidity. Furthermore, our deployment timing was skewed, with over 75% of our secondary debt purchases weighted into the back half of the second quarter. We are taking a patient approach to deploying our cash and expect further short-term market dislocations will present GECC with attractive investment opportunities. Considering this strategy, we do look for the cash drag experienced in the second quarter to continue through the third quarter, as we focus on thoughtfully deploying capital into opportunities with the best income generation and long-term value creation potential for our shareholders. I would also like to note that entering the third quarter, cash-generating investments comprised 98% of our portfolio, as we made progress in diversifying and reshaping our holdings. As of June 30, 2022, 29% of our cash-generating assets are specialty finance-related investments down modestly from 34% at the end of March, but still up from 22% at year end 2021. 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 June 30th, our rights offering helped push our asset coverage ratio up to 166.9% versus 147.5% for the March quarter. As we continue to prudently navigate through the current volatility, we remain excited by the opportunities in front of us. I feel very confident in the team and believe we can continue to build on the foundation we put in place during the first half of 2022. With that, I'd like to hand the call over to Carrie to discuss our second quarter 2022 performance.
spk03: Thanks, Matt. I'll go over our financial highlights, but we invite all of you to review our press release, accompanying presentation, and SEC filings for greater detail. As Matt noted, we continue to evolve the company and our portfolio during the second quarter with more stable yield profile that features cash generating assets and specialty finance platforms. During the second quarter, GECC generated NII of $1.2 million versus $2.1 million in the prior year quarter and $6 million in the first quarter of 2022. Please note that the first quarter NII was positively impacted by a $4.9 million waiver, previously accrued incentive fees, and would have been 1.1 million excluding the waiver. Our net assets as of June 30th, 2022 were $97.6 million up from 69.3 million at March 31st, 2022 and 91.7 million as of June 30th, 2021. The increase was driven by our rights offering in June which added $37.5 million in gross proceeds. Our NAV for share was $12.84 as of June 30th, 2022 versus 1506 as of March 31st, 2022, and 2340 as of June 30th, 2021. Quarter end NAV per share was impacted by the approximate 3 million shares issued in the rights offering in June. Detail for the quarter over quarter change in NAV can be found on slide seven of the investor presentation. As of June 30th, 2022, GECC's asset coverage ratio was approximately 166.9% compared to 147.5% as of March 31st, 2022. GECC reported net loss of 87 cents per share in the second quarter compared to a net loss of $1.12 per share in the prior quarter. NII per share was 23 cents compared to $1.31 in the prior quarter, which included the impact of the incentive fee waiver. All per share amounts are based on weighted average shares and have been adjusted for the six for one reverse split that became effective on February 28th, 2022. As of June 30, our total debt outstanding was approximately $145.9 million, comparable with the March 31, 2022 outstanding. Our $25 million line of credit remains fully undrawn. As of June 30, 2022, our cash and money market securities totaled approximately $34.1 million. Our Board of Directors has authorized two upcoming quarterly cash distributions. We previously announced that our Board of Directors has approved a 45 cent per share cash distribution for the quarter ending September 30th, 2022. The third quarter cash distribution will be payable on September 30th, 2022 to stockholders of record as of September 15th, 2022. Our Board of Directors has also approved a 45 cent per share cash distribution for the quarter ending December 31st, 2022. Annualized, the distribution equates to a 14% dividend yield on our June 30, 2022 NAV of $1,284 per share. The record and payment dates for the distribution are expected to be set in the fourth quarter pursuant to authority granted by our Board of Directors. I'll turn the call back over to Matt to review the portfolio.
spk02: Thanks, Carrie. Before diving into the portfolio, I'd like to speak to the distribution. While we did not cover the distribution with NII in the second quarter, we did enter 2022 with undistributed income and had an unusual one-time benefit in the first quarter from the reversal of incentive fees, further building distributable income for the year. As mentioned earlier, the cash drag experience in the June quarter will likely continue through the third quarter. Going forward, we intend to grow NII by deploying cash into new investments as we seek to position GECC to cover the quarterly distribution on a regular basis. Now, if you turn to slide 10 of our investor presentation, we show our income generating portfolio. This includes only investments which carry cash coupons or pay cash dividends and excludes all non-cash paying investments. As I've noted, we continue to evolve our portfolio into a diversified book of performing cash paying investments with stable yield profiles. I would like to highlight that 98% of our portfolio is now income generating. This compares to 88% at the start of the year and less than 65% a year ago. In addition, GECC's income generating portfolio continues to diversify with exposure across 19 separate industries through 48 investments, up from 41 at the end of the year, resulting in lower average position sizes. Looking to slide 12, there are certain items that optically skew our deployment yields lower and monetization yields higher, which is not our medium or long-term goal. For example, our monetization yields are largely elevated due to mandatory repayments on higher coupon debt that was redeemed or paid down in the quarter. Our deployment yields appear suppressed considering revolver draws and investments in short-term cash surrogates post-rights offering to earn higher yields than on cash. Moving on to slide 14, you can see that of our 153 million of debt investments, 33% are invested in floating rate instruments with a weighted average current yield of 10%, Approximately 67% are invested in fixed rate instruments with a weighted average current yield of 10.4%. It's important to note that our fixed rate debt portfolio has a weighted average maturity of approximately three years. So while our floating rate mix may be lower than other BDCs, we believe the relatively short duration of our fixed rate portfolio allows GECC to benefit from the current rising rate environment. As we have discussed, we are developing a continuum of lending that GECC can offer small business clients. We laid a good amount of the groundwork in the first half of the year 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 interests, secured debt, subordinated debt, and participation co-investments 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. Our pipeline in specialty finance and corporate credit is growing, and we are conducting diligence on many proprietarily sourced deals that have attractive mid-teens returns. However, we will remain disciplined in this environment and act only when the risk-reward scenario is appropriate. In summary, We continue to make progress, and in the back half of the year, we intend to focus on executing our three-pronged approach to one, focus on cash-yielding investments, particularly in specialty finance, two, improve our NII and NAV over time, and three, maximize shareholder value. We continue to believe we are headed in the right direction and are confident in our ability to execute on our strategy. With that, we will turn the call over to the operator for questions. Operator?
spk00: Thank you very much, sir. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Ladies and gentlemen, to ask a question, please press star followed by one on your touchstone phone now. Reminder to participants, if you wish to ask a question, please press star followed by one on your touchstone phone now. Thank you very much. Ladies and gentlemen, we've reached the end of the question and answer session, and I'd like to turn the call back to Matt Kaplan for his closing remarks. Over to you, sir.
spk02: Well, thank you all for joining us today. I am excited about the progress we have made thus far to transform GECC. We look forward to continued investor dialogue. Please let us know if we can help with any follow-up. Thank you.
spk00: Thank you very much. Ladies and gentlemen, this concludes today's conference.
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