Great Elm Capital Corp.

Greetings and welcome to the Great Elm Capital Corp First Quarter 2025 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. Should anyone require operator assistance during the conference, 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, Peter Skusa, a representative of the company. Thank you. You may begin.

Hello, and thank you everyone for joining us for Great Elm Capital Corp's first quarter 2025 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 the slide presentation posted on our website accompanying today's call. 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'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 we ask that you refer to Great Elm Capital Corp's filings with the SEC for important factors that could cause actual results that differ materially from these statements. Great Elm Capital Corp does not undertake updates, 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 today is Matt Kaplan, Great Elm Capital Corp's Chief Executive Officer. He'll be joined by Chief Financial Officer, Kerry Davis, Chief Compliance Officer and General Counsel, Adam Kleinman, and Mike Keller, President of Great Elm Specialty Finance. We'll now turn the call over to GECC's CEO, Matt Kaplan.

Thanks, Peter. And thank you all for joining us today. We are pleased to start 2025 with a record-setting quarter, achieving the highest total investment income in the company's history at $12.5 million. Notably, the first quarter was also our highest ever cash income quarter, a testament to the strategic portfolio enhancements undertaken over the past few years. This 37% increase in TII from last quarter and more than 40% year-over-year growth was driven by the success of our CLOJV as well as from income generated by new investments in the quarter. NII per share doubled to $0.40 per share from $0.20 in the prior quarter, largely attributable to the increase in total investment income and the ramping contributions from investments. Our NII more than covered the increased first quarter distribution of $0.37 per share, a 5.7% increase from the prior quarter's $0.35 per share distribution. This marks our commitment to delivering growing income to shareholders, supported by solid underlying portfolio performance. As we move through the second quarter, we are well positioned to further execute on our long-term growth strategy and navigate the dynamic macro environment. Based on current expectations, we anticipate that second quarter NII will exceed first quarter levels. As we discussed on our last call, we anticipated an increase in cash distributions from the CLOJV this quarter. That CLO distribution patterns are typically uneven in their early stages. For example, we received $3.8 million of cash distributions from the CLOJV in the first quarter of 2025 as compared to half a million dollars in the fourth quarter of 2024 which was a step down from the $3.2 million in the third quarter of 2024. Additionally, in the second quarter to date, we have received $4.3 million of cash distributions from the JV. We do expect these fluctuations will dampen over time as we fund additional CLO investments and continue to leverage our increased scale. For these reasons, and considering our ongoing capital raising and deployment initiatives, we'd like to reiterate that it is best to review GECC on a four-quarter basis, opposed to benchmarking the company quarter to quarter. Moving on to our portfolio's performance, while our NII generation was strong, we did see a modest step down in NAV per share as outlined on slide eight, driven by unrealized losses on portfolio investments. We began to see volatility in the market's pickup in the middle of the quarter, which led to markdowns on positions at quarter end. Specifically, our CLO-JV equity and our investments in CW Opportunity 2 LP, a vehicle which was created to hold convertible preferred equity in CoreWeave and AI Hyperscaler, which went public at the end of March. We remain confident in these investments and our portfolio and expect these unrealized losses to reverse over time as market conditions stabilize. Additionally, we recently filed prospectus supplement for a $100 million at-the-market equity program to issue shares at NAV or better. We believe this new tool will provide us with additional capital flexibility as we seek to continue scaling the ECC. We remain well-positioned to cover our dividend over the course of 2025, and our portfolio is set up to weather the uncertain macroenvironment. With our strength and foundation, we remain confident in our ability to generate sustainable returns and deliver increasing value to our shareholders in the years ahead. With that, I'd like to hand the call over to Carrie Davis to discuss our first quarter 2025 performance.

Thanks, Matt. I'll do 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 first quarter, GECC generated NII of $4.6 million, or 40 cents per share, as compared to $2.1 million, or 20 cents per share, in the fourth quarter of 2024. The increase in NII was primarily driven by the receipt of distributions from the CLOJV, as well as income from other new investments. Our net assets as of March 31st, 2025, were $132 million, as compared to $136 million as of December 31st. Our NAV per share was $11.46 as of March 31st versus $11.79 as of December 31st. Details for the quarter-over-quarter change in NAV can be found on slide 8 of the investor presentation. As of March 31st, GECC's asset coverage ratio was 163.8% compared to 169.7% as of December 31st. As of March 31st, total debt outstanding was approximately $207 million, and we had $12 million outstanding on our $25 million revolver. Cash totaled approximately $1.3 million. Our Board of Directors authorized a $0.37 per share cash distribution for the second quarter, which will be payable on June 30th to stockholders of record as of June 16th. The distribution equates to a 12.9% annualized dividend yield on our March 31st net asset value. I'll turn the call back over to Matt.

Thanks, Carrie. In the quarter, we continued to enhance our portfolio strength by steadily increasing our secure debt positions. Our CLO joint venture remains a significant contributor to this strategy, and we expect it to remain an important source of income for GECC as we continue to expand the vertical. targeting high teams to 20% returns over time. We have grown our corporate portfolio to nearly $250 million of investments, and first lien loans comprise 71% of the corporate portfolio as of March 31st. This demonstrates our commitment to enhancing portfolio quality while maintaining a focus on secured income-generating assets. Alongside new investments, our CLOJV helped drive us to record total investment income this quarter. This joint venture expands our exposure to a diverse portfolio of broadly syndicated first lien loans and continues to be a key contributor to our early success, with approximately $48 million deployed through March 31st. As a reminder, we hold the majority of our CLO exposure a bit differently than other BDCs or closed-end funds that many may be familiar with. These other entities typically hold their investments directly, which allows the income to be recognized utilizing the effective yield methodology, while GECC only recognizes income when the CLO JV makes distributions. This leads to a more uneven nature to our income reporting. While we may hold some minority CLO positions directly on our balance sheet, the JV affords us the ability to have exposure to majority interest in CLOs, which we believe can provide enhanced economics. we are comfortable with this quarter-to-quarter income oscillation, which we expect will dampen over time. Further, outside of some markdowns we discussed, our investment portfolio is performing well, and as of March 31st, we have zero positions on non-accrual. Notably, the single issuer that we had on non-accrual at year-end was restructured in February into three debt instruments, which will begin generating income in 2026, demonstrating our hands-on approach to working with our portfolio companies. While it's still too early to assess the overall impact of tariffs on our portfolio, our initial analysis suggests limited direct exposure. Our portfolio maintains broad diversification with a predominantly domestic focus and minimal exposure to China. With our defensive portfolio structure, we believe we are well positioned to navigate the ongoing tariff uncertainty. In this volatile environment, we continue to take a measured approach to capital deployment. As always, We prioritize credit quality and seek investments with minimal risk of permanent capital loss, directing capital toward opportunities that are primed to perform across various economic cycles. This balanced approach, combined with our strengthened platform and diversified portfolio, positions us well to continue growing Great Elm Capital Corp. and delivering attractive, risk-adjusted returns for our shareholders. We remain excited for the future of GECC, and with that, I would like to turn the call over to Mike Keller to provide an update on specialty finance.

Thanks, Matt. The start of 2025 has been transformative for Great Elm Specialty Finance. In January, we combined the corporate and healthcare ABL portfolios and replaced our existing asset-backed lender with a new facility led by CIBC. which is now in active syndication to increase the facility commitment as our business ramps. In March, after repositioning the legacy Great Elm Healthcare Finance business to focus solely on healthcare real estate financing opportunities, we closed on a leverage facility to support the real estate assets held within that platform. In April, we completed the rebranding of Sterling as Great Elm Commercial Finance. which today offers traditional ABL products to a wide range of industries, including healthcare. Also, GESF exited its last equipment leaseholding at a gain, further simplifying the business. These actions have streamlined our operations and better aligned our platform with growth objectives. While income from GESF was similar to the prior quarter, we are confident that these changes will translate into increasing returns over the remainder of the year.

Thanks, Mike. In closing, we are pleased with our first quarter results and remain well positioned to grow NII in the second quarter and cover our dividend in 2025. With that, I'll turn the call over to the operator for questions. Operator?

Thank you. We will now 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. The first question is from Mikey Schlein from Ladenburg-Fellman. Please go ahead.

Yes, good morning, everyone. Matt, how do you see the portfolio and the funds NAV performing with both the broadly syndicated loan market and private credit spreads widening in April? So that's a great question, Mickey. Thanks. So I think overall you can see in the first quarter we saw some modest markdowns In our portfolio, you can see we had $0.38 of net unrealized gain loss, of which about $0.30 of that is actually attributable to two positions that we noted, the CLOJV and also our investment in Chlorweave. Away from that, the rest of the portfolio was performed pretty helpfully, and we actually started to see some mark, you know, the volatility pick up in, call it late February, early March. In April, really, if you look at kind of the CLO market, by the end of last week, we're kind of getting close to being back to where we ended March, interestingly enough, and spread. You know, kind of depends on where we remain to be seen. For this indicated loan market, you can pull up as, you know, move down a little bit from 331 to 431. So obviously, on a whole, on a diversified portfolio, you know, you can read between the lines there. But, you know, I think overall the portfolio is pretty healthy and we had minimal NAV impact. Those, you know, are, you know, all unrealized. Over time, as market conditions stabilize, we would expect a lot of that to largely reverse. One of the positives of our CLO positions is they're relatively young. So actually, when you look at CLOs in choppy markets like this, kind of this best CLO vintages are the ones that were issued just prior to significant bouts of market volatility due to the long-term financing structure of them. You look at the 2007-08 vintages of CLOs, or you look to the 2019 vintages for COVID, all very, very strong performance over the life cycle. So I think we're well set up there. And then, you know, on CoreWeave, you can just look at that. It's a publicly traded stock now. And we are invested in a vehicle that has a convertible preferred. So you can kind of think about it at 331. You know, if the stock had closed around $48 a share, we would have had a roughly flat mark quarter on quarter. You can see that at 331, the stock did close at 37 or 38 level and around the end of March there. So, you know, we took a hit on that, but, you know, look at the, you know, it's been a volatile name. We have a lot of faith in the company over time and stock, I think was over 50 as of yesterday's close. Thanks for that, Matt. You just mentioned that the CLO market is sort of stabilized. The JV holds a warehouse facility with Apex credit. What is the JV earning on that warehouse? And now that the market's stabilized, when do you expect that CLO to price? So that CLO actually closed early. at the end of last month already. And we were able to get the execution on that done with commitments that were made in kind of early March. So it was a very successful outcome to be able to get that one taken care of.

I'm sorry, when did you say it priced?

It closed April. April. And so it usually takes a quarter or two for CLOs to provide their initial distribution. Would that be the case for this investment? For that specific one, yes. I think we would expect our first distribution from that underlying investment in the underlying CLO JV to come in October of 2025. Okay, so relative to... Yeah, so as I kind of laid out, you know, on the CLOs and to our whole business, you know, we have kind of, we'll have a little bit of fluctuation in the way our earnings are done because the CLOJV will be distributing dividends, right? That's how we record our income from that. So, you know, In the first quarter, we got about $3.8 million from the CELO JV. This far quarter to date, $4.3 million. So I think we're well-positioned to grow NAI and cover the $0.37 dividend margin. you know, next quarter. And, you know, as I mentioned, we kind of have to look and evaluate our business over a 12-month period rather than quarter to quarter. And I expect, you know, our full-year NII will, you know, improve and cover as it looks to relatively 24 to be higher and we'll cover the dividend. I understand. And one more question, if I might. You borrowed on your credit facility, and I'm curious whether that facility requires mark-to-market accounting, just thinking in terms of all the volatility we're seeing in the markets. Sure. So the facility has a borrowing base, which feeds into fair value and investments. that are comprised of the borrowing base, but we have significant borrowing capacity, multiples of what the actual commitment is, more than 3x that commitment level, you know, using recent marks. So, I have no concerns there. And then the covenants are laid out in the queue. It's, I think, minimum net asset value of $65 million. 35 ish million of nav and then, uh, 150%. Uh, ACR. So, you know, kind of just the standard, uh, BDC, uh, ACR covenant there. Uh, you know, I think we drew on the revolver. If you look, we raised equity at the very end of the fourth quarter, which, uh, led to an increase in share count. And we rolled over the quarter with, you know, uh, the year end with $8.5 million of cash. So that was just as we deployed and we raised $13.3 million in the fourth quarter, modestly drawing on our revolver to optimize our portfolio and yield helped. Also, as I said, our income this quarter was driven by new deployments. as well as the CLOJD. So we are looking to continue to grow, diversify, and scale GECC. I appreciate that. That's it for me this morning. Thank you for taking my questions.

Thank you, Mickey.

The next question is from Eric Zwick from Lucid Capital Markets. Please go ahead.

Thanks. Good morning all. I wanted to start first with a question. I'm curious if you could provide a little Maybe color into the timing of the new deployments and the monetizations you had in the quarter, you know, based on the incoming yields being significantly higher than the outgoing yields, seems like there should be some benefit to the overall portfolio. So curious how much of that was actually reflected in the first quarter and if there may be some benefit in the 2Q as well.

I think it was, we had a good question.

I think it was a little barbelled. We had excess cash and some commitments that we had to close on in the January timeframe, but then kind of February was more of a whoa. And then in March, I would say we were able to take advantage of a little bit of the market volatility that started to pick up with some deployments.

And we hope to see some additional flow-through effect into 2Q.

As I said, I think we're looking to see 2Q NII increase sequentially from 1Q.

Got it. Thanks for the commentary there, Matt. And maybe just kind of continuing along that thought process in terms of forward yield, could you maybe just quantify what the pipeline looks like today in terms of magnitude, the size, as well as what you're seeing for yields in the pipeline today?

Sure, I think we're looking at a few private credit kind of direct lending opportunities as always. We had a couple that have been put on pause until we figure out the tariff situation. Tariffs are kind of leading to some uncertainty out there. However, there is other activity going on in the space in lending. We're starting, we have seen some M&A or refinancing opportunities, companies looking for capital. So the pipeline actually remains a little stronger, I'd say, than it was probably three to four months ago on the direct lending side. And then, you know, we are the broadly syndicated tradable loan space is providing certain pockets of opportunity here and there. There are some babies that get thrown out with the bathwater due to industry sometimes, and our team continues to look at underwriting those. We maintain relationships with many management teams and sponsors that allow us to work to create a pipeline of names in the syndicated market that maybe aren't interesting when they come as a new issue, but we follow them and track them, and that pipeline is looking Interesting, you know, we need to maintain a cautious approach to that. And we have certain assets in our portfolio that are in the broadly syndicated loan space that are, you know, very, very high quality, kind of I would quasi call it a cash surrogate bucket that when we want to take advantage of certain opportunistic trading levels and names that we know and companies that we know, we can go harvest some of our very, you know, assets. cash surrogate low-yielding investments to rotate into that. But it's opportunistic and not a large percentage of what we do, but helps generate some kind of alpha over time.

And then I appreciate the comments you gave and the prepared remarks regarding kind of limited exposure, direct exposure to tariffs. So I'm curious if you've looked at your portfolio in terms of exposure to government contracts, just given some of the Doge cuts and cutbacks and federal spending and things of that nature.

We have. We were looking at an investment that we thought that we had historically been involved in the situation. It was refinanced. And then, you know, the, this is not in our portfolio anymore, but, you know, due to the government contract nature of it, we've even, it's, you know, traded off. We've decided not to take it, you know, to get re-involved. But, you know, I think on the tariff side, the question is, you know, that a lot of people are asking what's the direct exposure. And I think we're working to think through the second and third order effects of the dynamic of tariffs and also other government initiatives. I think the bigger question that everyone's trying to understand is, you know, what's the duration of this uncertainty and how will that lead to economic changes? You know, and to that end, we've been re-underwriting our existing investments and focusing on thinking through, you know, that lens on new investments on, you know, if there is a recession, how severe could it be? You know, what's the company's defensive position? So we are considering that, you know, in all of our current portfolio investments as we do our routine portfolio reviews as well as new underwriting.

Great. And one last one for me, and I'll step aside. So just looking at the industry breakdown of the corporate portfolio, about 10% is categorized as consumer. You could maybe say another 2% if you include casinos and gaming. There are concerns in the market regarding the lower end consumer and especially if we get another inflation from the tariffs. So just curious if you could kind of characterize your portfolio in terms of what segment of consumers they're targeting and what potential kind of impacts or mitigations might need to be made there.

Our largest exposure in the consumer space would be in companies that have exposure to private label products and manufacturing. So, you know, to the extent there is weakness in the consumer, that's kind of, they should benefit from any trade down effect from the premium brands into the private label. So I think our consumer and another one of our consumer Services businesses, our larger exposure is, you can look on the Schedule of Investments is CSE ServiceWorks, which is laundromats. So, you know, generally very recession-resilient businesses. So I think our consumer is actually more defensive than just if you think about the kind of a – regular white label brand of what is a consumer product. It's more tied to the benefit from any trade-down effects.

That's helpful.

Thanks for taking all my questions today. Yeah, Eric.

As a reminder, to ask a question, please press star 1. Next question is from Mitchell Penn from Oppenheimer and Company. Please go ahead.

Thanks. Hey, Matt. Quick question on the CLO.

What's your expected ROE on that investment?

We are targeting, call it high teams to 20% returns over IRRs on our dollars in.

And is that before fees? Do you take any fees out at the joint venture level?

There's no, like, GECC, I think that that's just the income that GECC, the TII, you know, return that we expect to receive from the JV. There's no, the JV does not charge a management fee or anything like that specifically.

And if we just look at Q1,

You had $3.8 million in dividends.

And then what was the loss relative to the CLO?

Yeah, I think it was approximately $2 million. It was, I want to say, less than a 5% hit to NAV. So if you kind of look at the other publicly traded CLO closed-end funds, I think they've kind of some of them have provided ranges, I guess, for their first quarter, but you can look at their NAVs are down anywhere from, call it, I want to say, you know, it's a big range from like 6% to 14%. I think our CLOs are younger, longer, reinvestment period, you know, less volatility, cleaner portfolios, et cetera.

Yeah, we did. We actually tracked those and the first quarter ROEs were negative for everyone. So when you took the cash flow minus the marks, they were all down.

So they charge, you know, they have a fee structure on there. So I think when we look at the JV, right, the JV is just, if we look at it actually on the quarter. Got it. Even with the markdown, with the income we generated, it was positive to GBCC.

Got it. Got it. Okay. Thanks. That's all for me. Yeah, you got it. Thanks, Mitchell.

There are no further questions at this time. I would like to turn the floor back over to Matt Kaplan for closing comments.

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

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