Great Elm Capital Corporation (NASDAQ:GECC) Q2 2022 Earnings Conference Call August 4, 2022 11:00 AM ET
Company Participants
Garrett Edson – Investor Relations
Matt Kaplan – Chief Executive Officer
Keri Davis – Chief Financial Officer
Conference Call Participants
Operator
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. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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.
Garrett Edson
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 e-mail investorrelations@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 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 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 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 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 Matt Kaplan, Great Elm Capital Corp’s Chief Executive Officer. I will now turn the call over to Matt.
Matt Kaplan
Thank you, Garrett. Good morning and thank you for joining us today. On today’s call, I’ll walk through some second quarter highlights and our CFO, Keri 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.
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 been 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 rights offering on June 13 through the end of July, we deployed approximately $25 million in 15 bet investments at a weighted average price of below $90 current yield over 10% and yield to maturity over 12.5%, excluding $5 million invested in cash surrogate.
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 dislocation 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 comprise 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 30, 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 Keri to discuss our second quarter 2022 performance.
Keri Davis
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 platform.
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 30, 2022 were $97.6 million, up from $69.3 million at March 31, 2022 and $91.7 million as of June 30, 2021. The increase was driven by our rights offering in June, which added $37.5 million in gross proceeds.
Our NAV per share was $12.84 as of June 30, 2022 versus $15.06 as of March 31, 2022 and $23.40 as of June 30, 2021. Quarter end NAV per share was impacted by the approximate three million shares issued in the rights offering in June. Details for the quarter-over-quarter change in NAV can be found on Slide 7 of the investor presentation.
As of June 30, 2022 GECC’s asset coverage ratio was approximately 166.9% compared to 147.5% as of March 31, 2022. GECC reported a net loss of $0.87 per share in the second quarter, compared to a net loss of $1.12 per share in the prior quarter. NII per share was $0.23, 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 6-for-1 reverse split that became effective on February 28, 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 distribution. We previously announced that our Board of Directors has approved a $0.45 per share cash distribution for the quarter ending September 30, 2022. The third quarter cash distribution will be payable on September 30, 2022 to stockholders of record as of September 15, 2022.
Our Board of Directors has also approved a $0.45 per share cash distribution for the quarter ending December 31, 2022. Annualized the distribution equates to a 14% dividend yield on our June 30, 2022 NAV of $12.84 per share. The record in 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.
Matt Kaplan
Thanks, Keri. 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 experienced 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 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% the 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 yield 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 re-grow 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 co-investments in existing transactions.
By offering multiple credit solutions across the lending of 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 not 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?
Question-and-Answer Session
Operator
Matt Kaplan
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. Thank you.
Operator
Thank you very much sir. Ladies and gentlemen this concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
Be the first to comment