Good morning ladies and gentlemen, welcome to the Great Elm Capital Corp Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to turn the conference over to your host Mr. Adam Yates. .
Thank you, Sadie and good morning everyone. Thank you for joining us for Great Elm Capital Corp.’s second quarter earnings conference call. As a reminder, this webcast is being recorded on Monday, August 10, 2020.
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. 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-Q, and a link to the webcast. 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 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..
Thank you Adam. Good morning and thank you for joining us today. I am 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 to discuss GECC’s portfolio repositioning.
For the avoidance of doubt we remain intently focused on maximizing shareholder value through our monthly distributions, potential special distributions, and by increasing the book value of our shares.
During the quarter ended June 30, 2020 we began repositioning the portfolio, including taking actions to create liquidity that had the effect of depressing net investment income or NII.
Specifically with the impact of COVID-19 increased volatility in the leveraged credit secondary markets we proactively monetize investments in anticipation of more attractive redeployment opportunities.
Toward the end of the quarter ended June 30, 2020 and following quarter end we redeployed a majority of our cash into new cash generative investment opportunities that diversify our holdings.
As we continue to diversify our holdings we intend to [weight] [ph] investments in specialty finance businesses like Prestige Capital Finance LLC, whose performance has exceeded internal expectations more significantly in our future portfolio.
Nevertheless, NII for the quarter was approximately 0.9 million or $0.09 per share, as compared to NII of 2.7 million or $0.26 per share during the prior quarter.
The quarter-over-quarter reduction in NII was driven by the monetization of certain income generating investments as we continued to meaningfully grow our cash balance and the loss of cash and non-cash income from investments like PFS Holdings Corp. and Davidzon Radio, Inc. both placed on nonaccrual status during the prior quarter.
Please turn to Slide 4 for a reconciliation of the quarter-over-quarter change in our total investment income. As I noted, the reduction of investment income during the quarter was driven by multiple factors.
First, sales of Commercial Barge Line, Full House Resorts, and Finastra Group throughout both the prior quarter and the quarter ended June 30, 2020 reduced our investment income while increasing our cash balance to redeploy as opportunities arise.
Second, our investments in PFS Holdings and Davidzon, a legacy full circle investment were placed on nonaccrual at the end of the quarter ended March 31, 2020. Please turn to Slide 5 to review new investments we've made since the quarter ended March 31, 2020.
Recent leveraged credit secondary market volatility has increased the number of potential investments in our pipeline. We continue to seek high yielding investments across a broad range of sourcing channels as we redeploy the capital that we've raised over the past few months.
New primarily cash income generating investments we've helped -- we've purchased helped increase the average current yield on the portfolio and diversify our holdings.
Throughout this past quarter and subsequent to quarter end we actively deployed approximately 25.5 million of available cash into eight new investments at a weighted average current yield of 12.7%. In dollars the current yield on these investments is greater than $3.9 million, which is quite meaningful to our income profile.
On Slide 7, we provide some background on our acquisition of an investment in Prestige Capital Finance. On February 8, 2019 GECC acquired 80% of the outstanding equity interest of Prestige for approximately $7.5 million.
GECC acquired its interest from founder Harvey Kaminsky facilitating his retirement and a transition of the business to longtime executives Alan Eliasof and Stuart Rosenthal who continue to manage the business today.
Importantly, Eliasof and Rosenthal own the remaining 20% of Prestige’s equity, fostering a significant alignment of interests between management and GECC. Prestige is a leading provider of stock factoring services, providing clients with an opportunity to sell individual accounts receivable for an upfront payment.
Prestige purchases the accounts receivable of credit worthy companies from its clients. It typically advances 75% to 85% of the receivable to the client upfront and remits the rest to the client less Prestige’s fee upon payment of the receivable.
Prestige’s clients are generally unable to access traditional bank financing to meet their capital needs but as noted have accounts receivable from creditworthy companies.
The combination of clients’ capital needs and receivables from creditworthy counterparties allows Prestige to consistently underwrite profitable business while taking limited corporate credit risk.
Consequently over more than 30 years in business and through greater than $6 billion of transactions factored, Prestige has a track record of strong credit underwriting with minimal losses.
Please turn to Slide 8, one of the reasons we're intently focused on the specialty finance space is due to the potential profitability of niche specialty finance businesses like Prestige. Prestige is a highly profitable company. In 2019, the company’s pretax income was approximately $2.8 million on average book equity of $3.1 million.
Through the first half of 2020, Prestige’s pretax income was approximately $1.5 million on average book equity of $3.3million. The company’s growing profitability and new business pipeline continue to exceed our internal expectations. Further, GECC earns a high rate of return on its investment in Prestige.
Despite not acquiring Prestige until February 2019, GECC received $1.6 million in distributions from Prestige throughout 2019, representing an approximate 24% annualized yield on its net investment. Through the first half of 2020, GECC received $0.9 million in distributions, also representing an approximate 24% annualized yield on its investment.
GECC’s balance sheet enables Prestige to increase the size of the transactions it can pursue, which may further enhance its growth. In addition, our investment in Prestige may create “overflow” opportunities that would allow GECC to participate in certain of Prestige’s larger factoring transactions directly.
The rates of return on and underlying credit quality of these transactions may be higher than our more traditional leveraged credit investments. Unlike investments sourced in the secondary market these transactions would be proprietary to GECC and unique to our portfolio. Please turn to Slide 9 for additional detail on our specialty finance focus.
The positive trends, our investment in Prestige continues to exhibit lead us to explore complementary opportunities in other niche areas of specialty finance.
We're focused on acquiring controlling interest in a number of subcategories, especially finance, including factoring, asset based lending, equipment leasing, hard money real estate lending, and trade claim acquisition.
In addition, we believe that owning controlling interests in businesses in the above disciplines may create proprietary “overflow” investment opportunities. As an investor in niche specialty finance businesses, we can help our partners grow by creatively structuring transactions and utilizing our liquid balance sheet.
Please turn to Slide 11 for a high level description of GECC. GECC is an externally managed, total return focused BDC with a liquid 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 June 30, 2020 GECC had total assets of approximately 258 million of portfolio of fair value of 146.3 million and a net asset value of 53.2 million, equating to $5.10 per share. The weighted average current yield on our debt holdings was approximately 10.2%.
Importantly, roughly 24% of GECC shares are held by employees and affiliates of Great Elm Capital Management, Inc GECC’s investment manager, creating a very clear alignment of interests between management and our shareholders. Let's turn to Slide 12 for an overview.
The majority of our third and fourth quarter 2020 distributions will be paid in shares of our common stock. In order to best capitalize on potential opportunities we believe it is prudent to preserve as much capital as possible and further strengthen our balance sheet.
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 on June 30th NAV and closing market price, the total distributions equate to an annual distribution yield of 20.5% and 24.6% respectively.
During the quarter, we deployed capital at a weighted average price of 92% of par, and we monetized investments at a weighted average price of 98% of par. Slide 13 breaks down the portfolio in detail. The portfolio contains 37 investments, 29 of which are debt and 8 of which are equity.
The 29 debt investments account for 121 million of fair value and the eight equity investments account for approximately 25 million of fair value.
The weighted average current yield on our debt investments is 10.2%, while the weighted average current yield of our income generating equity investments in Prestige and Crestwood Equity Partners is approximately 18.8%.
We certainly intend to grow the equity portion of our portfolio as we target income generating specialty finance investments to expand and diversify our holdings. Please turn to Slide 14 to break down the quarter end portfolio by asset and interest rate type.
Approximately 83% of the fair value of the portfolio is comprised of debt investments with the balance in equity investments. Of the 121 million of debt holdings, roughly 76 million is invested in floating rate debt with a weighted average current yield of 8.2%.
Roughly 45 million is invested in fixed rate debt, with a weighted average current yield of 13.6%. On Slide 15, 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 22 different industries represented. Furthermore, as we grow our investments in the specialty finance space and diversify our holdings, we expect that industry weighting to increase and concentration to decrease in other industries.
Turning to Slide 16, 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 last five quarters with this past quarter's weighted average price of new debt investments at a recent low.
This past quarter we are able to deploy capital at a weighted average price of 92% of par and monetize investments at 98% of par. As certain investment prices rose from their March 2020 lows we chose to monetize a portion of our investment portfolio, increasing our cash balance and reducing net investment income.
As I noted earlier, we view this as an early stage in the repositioning of our portfolio into more creative specialty finance acquisitions that complement our robust book of corporate credit investments. We invested capital at 12.2% average current yield, the highest in some time.
Importantly, we raised more than twice as much capital as we deployed during the quarter, shoring up cash on our balance sheet and improving our liquidity profile. We monetized 37.5 million of investments at a weighted average current yield of only 6.5%.
Going forward in addition to the specialty finance acquisitions we're focusing our efforts on higher quality leverage credit investment opportunities that appear to be overly impacted by recent market volatility. Let's turn to Slide 18 to review financial highlights from the quarter. Earnings per share was $0.34 in the second quarter.
NII per share came in at $0.09 as I noted earlier in the call. Net realized gains were also $0.09 as we repurchased a portion of our outstanding indebtedness below par, creating a gain on our income statement and improving our asset coverage ratio.
Net unrealized gains were $0.16 as volatility somewhat subsided and the leveraged credit secondary markets and fair values rose. Net asset value or NAV was $5.10 per share at period end, a small increase quarter-over-quarter. Please turn to Slide 19 for a financial overview of the portfolio.
At period end total assets were 258 million, total fair value of investments was 146.3 million, and our $5.10 per share NAV equated to an aggregate NAV of 53.2 million. Total debt outstanding was approximately 119.5 million and was comprised entirely of our unsecured baby bonds.
Our outstanding debt balance decreased quarter-over-quarter as we repurchased baby bonds at a significant discount to par, reducing both interest expense and our future obligations. Cash was 31 million at period end, a meaningful increase since the prior period as we monetize investments and improved our liquidity profile.
Turning to Slide 20, let's discuss the quarterly operating results. Total investment income of 4.8 million or $0.47 per share compared to 6.4 million or $0.64 per share during the prior quarter. Net operating expenses of 3.9 million or $0.38 per share, compared to 3.8 million or $0.38 per share during the prior quarter.
NII of 0.9 million or $0.09 per share is a significant departure from the prior periods 2.7 million or $0.26 per share as we began our transition to a more diversified portfolio of accretive cash income generating investments. Turning to Slide 22, let's discuss GECC’s capital activity.
We're excited about our investment pipeline, particularly the opportunities we see in specialty finance. As a result on July 13, 2020 we filed a Form N-2 Registration Statement with the SEC to conduct a nontransferable rights offering.
Separately we are subject to a minimum asset coverage ratio of 150% per the proposal that was approved at our 2018 Annual Stockholders’ Meeting. As of June 30, 2020 our asset coverage ratio was approximately 144.5%, up from 141.1% last quarter.
As a result of continuing to report an asset coverage ratio below the minimum asset coverage ratio, we will be subject to certain limitations on our ability to incur additional debt, issue preferred stock, make cash distributions on junior securities or repurchase junior securities, in each case, in accordance with the Investment Company Act of 1940, as amended, and the indentures governing our outstanding notes, until such time we are above the minimum asset coverage ratio.
Please turn to Slide 23, as previously announced, in May 2020, our Board declared monthly distributions through the month ending September 30, 2020 of $0.083 per share.
Such distributions shall be paid in cash or in 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 10% of the total distributions paid to all shareholders.
The remainder of the distributions will be paid in the form of shares of our common stock. In August 2020 our Board set monthly distributions of $0.083 per share for the fourth quarter of 2020, through the month ending December 31, 2020.
The 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 10% of the total distributions to be paid to all shareholders.
Again the remainder of the distributions will be paid in the form of shares of our common stock. \ Finally, please turn to Slide 25 for a GECC summary. During the past quarter, we began repositioning the portfolio and creating liquidity.
Towards the end of the quarter and following quarter-end, we redeployed cash into new cash generative investment opportunities that diversify our holdings and increase investment income.
We continue to believe that the investments in niche specialty finance businesses are very accretive uses of capital, and we're focusing efforts on sourcing and acquiring these investments. With a significant cash balance in those secured credit facility, our balance sheet is flexible and liquid. Thank you for joining us this morning.
We continue to be confident in the upside potential in the portfolio and we're diligently sourcing and reviewing new investment ideas. 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 placed in us.
With that, we'll turn the call over to the operator to open for questions..
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..
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect..