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Edited Transcript of GECC.OQ earnings conference call or presentation 24-Mar-20 2:00pm GMT

Q4 2019 Great Elm Capital Corp Earnings Call

BOSTON Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Great Elm Capital Corp earnings conference call or presentation Tuesday, March 24, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam W. Yates

Great Elm Capital Management, Inc. - Portfolio Manager

* Peter Andrew Reed

Great Elm Capital Corporation - Chairman, President & CEO

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Great Elm Capital Corp. Fourth Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Adam Yates. Thank you. Please go ahead, sir.

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Adam W. Yates, Great Elm Capital Management, Inc. - Portfolio Manager [2]

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Thank you, Gigi, and good morning, everyone. Thank you for joining us for Great Elm Capital Corp.'s Fourth Quarter and Year-End 2019 Earnings Conference Call. As a reminder, this webcast is being recorded on Tuesday, March 24, 2020. If you'd 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.

The slide presentation accompanying this morning's conference call and webcast can be found on our website under Financial Information, Quarterly Results. On the website, you can also find a copy of our earnings release, Form 10-K 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 the 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.

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Peter Andrew Reed, Great Elm Capital Corporation - Chairman, President & CEO [3]

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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 3 for an overview of GECC. GECC is an externally managed total return-focused BDC with a strong 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 December 31, 2020, GECC had total assets of approximately $291 million, a portfolio value of $197.6 million and a net asset value of $86.9 million, equating to $8.63 per share. The weighted average current yield on our debt holdings was approximately 10.8%. GECC pays an $0.083 per share base monthly distribution that may, in part, be paid in common shares of GECC. This equates to approximately $1 of value per share on an annual basis. Importantly, greater than 20% of GECC's shares are held by employees and affiliates of Great Elm Capital Management, Inc., GECC's investment manager, creating very clear alignment of interest between management and our shareholders.

Let's turn to Slide 4 to go over a few highlights and recent achievements. As we previously announced, a portion of our second quarter 2020 distributions will be paid in shares of our common stock. These are unprecedented times filled with unprecedented opportunities. In order to best capitalize on these opportunities, we believe it is prudent to preserve as much capital as possible and strengthen our already healthy balance sheet. Our existing portfolio investments continue to generate sufficient net investment income to cover our base distribution as they have every quarter since inception. Over the trailing 12 months, GECC has paid $1.05 in total distributions, consisting of an $0.083 monthly base distribution and a $0.05 special distribution. Based upon December 31 NAV and closing market price, the total distributions equate to an annual distribution yield of 12.1% and 13.4%, respectively. (inaudible) capital at a weighted average price of 97% of par, and we monetized investments at a weighted average price of par.

On Slide 6, we highlight a few high-level characteristics of the portfolio. The weighted average current yield on our secured debt holdings, which comprise approximately 88% of the fair value of the portfolio, is approximately 10.8%. The weighted average price of the debt investments in our portfolio is approximately 87% of par, providing for significant potential capital appreciation. Moreover, as we have monetized legacy Full Circle positions and redeployed the proceeds into new and existing Great Elm investments, the portfolio continued to better reflect our investing style and approach. As of December 31, roughly 93% of the portfolio was comprised of investments that are representative of the diversified manner in which we intend to invest going forward.

Slide 7 describes additional portfolio characteristics. The portfolio contains 35 investments, 28 of which are secured debt and 7 of which are equity. The 28 debt investments account for $174.1 million of fair value, and the 7 equity investments account for approximately $23.6 million of fair value. Of our total debt holdings, roughly 73% are floating rate instruments and 27% accrue at fixed rates.

Slide 8 details our capital deployment during the quarter. We purchased 2 new investments and added to 2 existing investments during the quarter, deploying approximately $12 million. The new investments were: $2 million of Viasat receivables and $10 million of Crown Subsea Communications secured revolver commitment. Additions to our existing investments included $4.7 million of Tensar Corp.'s secured term loan and $5.8 million of ASP Chromoflo's secured term loan.

Please turn to Slide 9 to break down the quarter-end portfolio by asset and interest rate type. Approximately 88% of the fair value of the portfolio is invested in secured debt, with the balance in equity investments. That's roughly $174.1 million of debt and $23.6 million of equity. Of the $174.1 million of debt holdings, roughly $126.6 million is invested in floating rate debt with a weighted average current yield of 10.3%. Roughly $47.5 million is invested in fixed rate debt with a weighted average current yield of 12.4%.

On Slide 10, we highlight how the composition of the portfolio has changed over time. Today, the portfolio has no unsecured debt as we continue to source and purchase attractive secured opportunities that generate sufficient income to cover our base distribution. In addition, a fair portion of our equity holdings are generating substantial income for the portfolio. Specifically, Prestige Capital Finance, the specialty finance business we acquired in February 2019, generated approximately $1.6 million of income in our less than 11 months of ownership through year-end, making it our highest income-generating investment per dollar deployed.

Turning to Slide 11. Let's review the composition of our debt holdings by interest rate type. Our team has been focusing on floating rate leverage loan opportunities that are uncovering in the secondary market. Recently, we have found greater opportunity in the leveraged loan market than in the more transparent high-yield bond market. As both loan and bond prices dislocate in the secondary market, we're evaluating all opportunities to increase shareholder value.

On Slide 12, we break down the portfolio by industry. Wireless telecommunications services, comprised of our investments in Avanti, is still the largest industry weighting. Nevertheless, we continue to maintain a diversified portfolio of investments as indicated by the 21 different industries represented.

Please turn to Slide 13 to take a historical look at GECC's portfolio rotation. During each of the past 13 quarters since inception, we have monetized higher dollar-priced investments and deployed capital into lower dollar-priced investments, contributing to GECC's total return. Most recently, in the fourth quarter of 2019, we deployed capital at a weighted average price of approximately 97% of par, and we realized investments at a weighted average price of par. With volatility increasing in the leverage credit market, we firmly believe that investing capital at lower dollar prices provide a natural margin and safety for our portfolio.

Turning to Slide 14. 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 past 5 quarters. This past quarter, we've invested capital at a 9.0% average current yield, slightly lower than our recent average if LIBOR compresses. Importantly, if the duration to maturity for certain of our investments shrink, the yield and maturity might increase while the current yield might not best reflect the total return potential we seek. Currently, we're focusing our efforts on higher-quality, lower dollar-priced investment opportunities that appear to be unnecessarily punished by aggressive sellers.

On Slide 16, we note what is front and center on the minds of investors. The first quarter of 2020 has been characterized by remarkable volatility in the leveraged credit markets, driven in part by the impacts of the global coronavirus outbreak and violent swings in commodity prices. We believe we must take every opportunity to bolster liquidity in order to successfully navigate current market volatility and to be in a position to capitalize on what may prove to be very attractive investment opportunities if and when they materialize. In order to best position GECC, we're shoring up cash by trimming higher dollar-priced investments and paying a portion of our second quarter 2020 base distributions in common stock. Importantly, our strong balance sheet has no secured debt, and we do not rely on a credit facility to purchase investments.

On Slides 17 and 18, we detail our activity since quarter end. In particular, I would note that the $4.4 million of Perforce Software secured revolving loan we purchased at 92% of par and the $2 million of Viasat receivables purchased at 90% of par. We sold all $15.9 million of Commercial Barge Line secured term loan at approximately 34% of par as the company's ongoing restructuring would have resulted in a significant amount of non-income-producing equity that we did not believe was the best fit for GECC.

Let's turn to Slide 20 to review financial highlights from the quarter. Net loss per share was $0.16 in the fourth quarter. NII per share came in at $0.25, covering our $0.25 quarterly base distribution once again. We experienced insignificant net realized gains. Net unrealized losses were $0.41, primarily the result of fluctuations in the fair value of certain of our investments. Net asset value or NAV was $8.63 per share at period end.

Please turn to Slide 21 for a financial overview of the portfolio. At period end, total assets were $291 million. Total fair value of investments was $197.6 million and our $8.63 per share NAV equated to an aggregate NAV of $86.9 million. Total debt outstanding was unchanged at $124 million and was comprised entirely of our unsecured baby bonds. Cash and money market investments were a healthy $15.6 million at period end.

Turning to Slide 22. Let's discuss the quarterly operating results. Total investment income of $7 million or $0.70 per share compares to $6.9 million or $0.65 during the same period in the prior year. Net operating expenses of $4.3 million or $0.42 per share were slightly higher than the $4.2 million or $0.40 per share in the fourth quarter of 2018, primarily the result of increased interest expense associated with our most recent baby bond, GECCN. NII of $2.5 million or $0.25 per share was comparable on a per share basis to the fourth quarter of 2018, $2.7 million or $0.25 per share, as we repurchased shares during 2019.

Turning to Slide 24. Let's discuss GECC's distribution policy and declared distributions to date. GECC continues to pay a $0.083 per share monthly base distribution that sums to $1 per share per year. In December, we announced a special distribution of $0.05 per share, bringing the 12-month total distribution to $1.05 per share. The past 12 months' total distributions represented 12.1% dividend yield on the December 31, 2019, NAV and an approximate 13.4% dividend yield on the quarter end market value. In March, our Board set our second quarter distribution amount of $0.083 per share per month. Beginning with the distribution for April, distributions will be paid in cash or shares of our common stock at the election of shareholders, although the total amount of cash to be distributed to all shareholders will be limited to approximately 20% of the total distributions to be paid to all shareholders. The remainder of the distributions will be paid in the form of shares of our common stock. We made this adjustment in order to maximize our liquidity and further strengthen our balance sheet in this volatile investment environment to the benefit of all shareholders.

Slide 25 shows GECC's full distribution history and overlays what the annual distribution yield was as a percentage of the market price. GECC's special distribution in each of the past 3 years, when combined with the monthly base distributions, have driven annual distribution yields well north of 10% in each full year since inception.

Slide 26 illustrates our historical distribution coverage. Again, it's important to emphasize that NII has covered the base distribution every quarter since inception in 2016.

Finally, please turn to Slide 28 for a GECC summary. Our Board has set the second quarter 2020 distribution rate at $0.083 per share per month. Also, greater than 20% of GECC's shares are held by employees and affiliates of Great Elm Capital Management, Inc., GECC's investment manager, fostering a true alignment of interest between management and other shareholders. Furthering that alignment of interest to date, GECC has repurchased approximately 22% of its initial share count. The weighted average current yields on our diversified portfolio of secured loans and bonds is approximately 10.8%. With a significant portion of our assets in cash and equivalents, no secured borrowings and a healthy asset coverage ratio, GECC is [insuring] these uncertain times from a position of strength.

Thank you for joining us this morning. We continue to be excited about the upside potential in the portfolio as well as with the many investment opportunities that market's volatility is created. We believe that we have formed a significant alignment of interest with you, our shareholders. Thank you again for the support and confidence that you've placed in us.

With that, we will turn the call over to the operator to open for questions.

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Operator [4]

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(Operator Instructions) At this time, I'm showing no questions. I would like to turn the call back over to Adam Yates for closing remarks.

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Adam W. Yates, Great Elm Capital Management, Inc. - Portfolio Manager [5]

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Thank you, again, for joining us this morning. We look forward to continued dialogue, and please let us know if we can be helpful with anything in follow-up. Have a great day.

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Operator [6]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.