Thank you for standing by, and welcome to the Great Elm Capital Fourth Quarter 2021 Financial Results Conference Call. At this time all participants are in a listen-only mode, after the speakers presentation there’ll be a question-and-answer session, [Operator Instructions]. As a reminder, today's program may be recorded.

I would now like to introduce your host for today's program, Adam Yates, Managing Director. Please go ahead..

Thank you and good morning, everyone. Thank you for joining us for Great Elm Capital Corp.'s fourth quarter 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 the slide presentation posted on our website accompanying today's call. We will not be directly referring to slides in the presentation, but our comments will generally follow its form and structure. 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 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 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 SEC filings, please visit Great Elm Capital Corp.'s website under Financial Information, SEC filings or visit the SEC's website. As a reminder, this webcast is being recorded on Friday, March 4, 2022.

Hosting the call this morning is Matt Kaplan, Great Elm Capital Corp's new Chief Executive Officer. I will now turn the call over to Matt..

one, increase GECC's allocation to specialty finance to constitute half of the portfolio through direct investments in specialty finance companies as well as in participations; two, maintain a high-quality, diversified portfolio focused on performing and cash yielding investments; and three, increase our scale by raising equity and debt capital with a target asset coverage ratio of approximately 165%.

With that, I'd like to hand the call over to Mike to review our specialty finance strategy and also provide his background in the industry..

turnover of clients and access to capital. We believe under the Great Elm specialty finance umbrella, these issues can be mitigated and improve the company's competitive advantage. Small- to medium-sized businesses, by their nature, are either growing or shrinking.

Therefore, specialty finance companies must continually find new clients as existing clients outgrow the platform, get acquired or shrink. This is where the continuum of lending comes in. By offering multiple credit solutions across the lending continuum, we expect to be able to hold on to customers for a longer period of time.

This ability is buttressed by our capacity to offer one-stop-shop solutions.

We believe that multiple specialty finance companies operating under the Great Elm specialty finance umbrella, will generate natural referral sources, which, combined with access to GECC's balance sheet, can help to create a competitive advantage for our family of businesses.

As you know, we recently closed on a transaction with Sterling Commercial Credit, a middle-market ABL lender. We view this as a pivotal acquisition for GECC as it gives us an ABL monitoring, underwriting and origination platform. It also allows us to take advantage of opportunities created by market dislocation and economic cycles.

Furthermore, an ABL platform expands our continuum of lending footprint as we are in a position to capitalize on companies graduating from a factoring program and moving towards an ABL platform.

We recently further expanded our specialty finance footprint by entering into an agreement for a joint venture with Utica LeaseCo, which provides customized equipment loan and lease options for businesses of all sizes throughout the Continental United States.

Along with Sterling Commercial, Prestige Capital, our existing factoring subsidiary, and Lenders Funding, which provides participant funding to other specialty finance lenders, we will be able to offer one-stop-shop solutions for the clients of our specialty finance subsidiaries. I'll now turn the call over to Keri to review our financial results..

the 6.5% notes due in 2024 trading under the ticker GECCN, the 6.75% notes due in 2025 trading under the ticker GECCM, and the 5.875% notes due in 2026 trading under the ticker GECCO. Our total debt outstanding was approximately $145.9 million as compared to $155.9 million on September 30.

During the quarter, we paid down previously outstanding $10 million drawn on our revolving credit facility due in 2024, and the $25 million line is fully undrawn. As of December 31, 2021, our cash balance was approximately $9.1 million, exclusive of holdings in the United States treasury bills.

I'll turn the call back over to Matt to review the portfolio..

Thanks, Keri. I'd like to start out by highlighting that we are presenting our portfolio a bit differently today but have included the same tables and charts that have been reported previously to help avoid any confusion. If you turn to Slide 10, we show what we call our income-generating portfolio.

This includes only investments which carry cash coupons or pay cash dividends and excludes all nonaccrual and noncash-paying equity or debt investments. Over the past two years, we have transitioned our portfolio to become a diversified book of performing, transparent, cash interest-paying investments with stable yield profiles.

As of December 31, approximately 88% of our portfolio or $188 million of investments were income-generating across 41 positions.

As you can see on this page alone, over the course of 2020 and 2021, we have increased GECC's dollars invested in income-generating investments while reducing this portion of the portfolio's concentration with minimal decline in current yield despite a lower rate environment.

Slide 11 further shows our increased diversification efforts as GECC's income-generating portfolio is invested across 20 separate industries. Specialty finance is our largest industry weighting today at 26% of our income-generating portfolio and 22% of total investments.

Our plan is to continue to grow our specialty finance portfolio, ultimately creating a relatively balanced portfolio of specialty finance and credit investments. In the fourth quarter, approximately $34 million of capital was deployed and $34 million of investments were monetized.

We deployed capital at a current yield of approximately 8.2%, while we monetized investments at a weighted average current yield of 7.4%. The current yield on our deployed capital under statements are expected returns as approximately one-third of the deployment was into Altus Midstream preferred, now Kinetic Holdings, at a 6.2% current yield.

However, this does not include a significant make-whole on the non-call preferred, which if repaid based on management's guidance last month would result in a low double-digit IRR.

Also, please note we monetized the majority of our stock holdings and a legacy non-accrual position Davidson Radio was resolved in the quarter through a bankruptcy process in which we received over $3 million of cash.

Going forward, you should expect the trend is reducing exposure to non-income-generating equity and credit positions to continue with deployment of capital into cash-yielding assets.

I want to highlight how our team has been successful in transitioning the portfolio away from non-performing, legacy, concentrated investments and into proprietary higher-yielding, more diversified investments, most notably in specialty finance.

The acquisitions of Prestige Capital Finance in 2019, Lenders Funding in 2021 and Sterling Commercial Credit and formation of the Utica joint venture in 2022 have created a continuum of lending solutions that GECC can offer its small business clients.

We partnered with specialty finance companies via a number of different investment types, including majority equity interest, secured debt, subordinate debt and participation co-investments in existing transactions. We continue to grow our specialty finance portfolio as a means to bring investment opportunities to our shareholders.

As of December 31, 2021, our specialty finance investments have grown to comprise almost 22% of the GECC portfolio. As discussed earlier, we believe these unique investments can offer greater potential returns on invested capital than traditional leverage credit markets and are largely uncorrelated to the broader syndicated leverage credit markets.

Building on our success with Prestige and the subsequent overflow and participation opportunities that relationship has created for us, last quarter, we announced the acquisition of a majority interest in Lenders Funding. Lenders Funding provides participant financing and risk sharing specifically for factors and asset-based lenders.

The acquisition of Lenders Funding has increased our visibility into the broader specialty finance market and has provided additional proprietary overflow opportunities for GECC. It has been a terrific complement to Prestige and another important building block in our specialty finance portfolio.

Building on that foundation, in February, we purchased a majority interest in Sterling Commercial Credit for $7.5 million, including $2.6 million in GECC shares issued at NAV. Sterling provides short-term, asset-based loans to working capital solutions to small businesses with annual sales typically between $3 million and $10 million.

CEO Edwin Small, Vice President Karen Small and their team will continue to manage the business as they have done successfully for many years. In connection with the acquisition, we provided Sterling with subordinated debt to fund growth initiatives.

In February, we also entered into a joint venture agreement with Utica LeaseCo to co-invest proprietary equipment financing transactions sourced by Utica. Founded in 2005, Utica provides customized equipment loan and lease options for businesses of all sizes throughout the Continental United States.

With unique knowledge of equipment values and creative structuring, Utica specializes in helping credit-challenged companies unlock the equity in their equipment. Utica's management team has over 100 years of combined experience in lending, financial services and equipment finance.

We continue to seek out new specialty finance partners to add to our ecosystem of direct lending. In summary, we continue to strengthen and diversify our portfolio by deploying capital into high-yielding, cash-paying investments.

We're excited about the foundation we are building for our specialty finance platform and optimistic about the future of our portfolio as we make significant improvements to both. Before wrapping up my prepared remarks, I'd like to review our distribution. Our Board of Directors has authorized 2 upcoming quarterly distributions.

On November 5, we announced a $0.10 per share quarterly distribution for the quarter ending March 31, 2022, or $0.60 pro forma for the reverse split. This distribution will be paid on March 30, 2022, to stockholders of record as of March 15, 2022.

Today, we announced that our Board of Directors has approved a $0.45 per share distribution for the quarter ending June 30, 2022, a 10.8% dividend yield on our pro forma NAV of $16.63 per share. The record and payment dates for the second quarter distribution are expected to be set in the second quarter.

As I previously noted, GECC's manager intends to waive all accrued incentive fees, subject to shareholder approval of a reset of the incentive fee total return hurdle at the next Annual Shareholders Meeting. As of December 31, 2021, there was approximately $4.9 million or $1.08 per share of accrued incentive fees held on GECC's balance sheet.

Such a waiver, if granted and the shareholder vote is obtained, would result in a corresponding increase in income and increase in net asset value in the first quarter of 2022, subject to any offsetting additional expenses or losses. With that, we will turn the call over to the operator to open for questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Brian from Greenwich Investment. Your question please..

Good morning [indiscernible 0:25:12] welcome to the CEO chair. I have two questions for you.

First, do you expect that the current proposed rights offering will look similar to the prior rights offering that occurred at the end of 2020?.

Thank you very much Brian. So what I can say right now is we filed the registration today and working through the SEC process, limited our ability to make additional comments except for what is in contained in there. Right now, the pricing of -- and the mechanism is still to be determined.

However, it is contemplated to be a percentage of net asset value as most recently filed prior to the effective time of the rights offering..

Okay. No, I think that answers. Then the second question I have, with the new reduced dividends and even adding back the contemplated fee reversal of $1.08, it looks like they'll still need about a 10-plus percent, almost 11-plus, ROE with what top-quartile BDCs are executing.

Do you think you'll be able to do this without taking excessive risk? And then -- I mean, especially since your own admission on the call that you have to be constantly sourcing new borrowers in the specialty finance segment..

Sure. That's a great question.

So I think looking at the specialty finance part of the portfolio, we -- and based on the market today and what we're seeing, we're targeting mid-teens returns on our subordinated debt and participations there and for our direct equity investments in the specialty finance companies that are gaining returns on the equity in excess of that.

And the key part to the second item of customers moving around is this continuum of lending that we are building allows us to keep those customers within our family of specialty finance companies, which is part of the origination and operational synergies that we expect to realize over time..

Got it. All right. I got one more, if I may..

Sure..

What sort of ability do you guys have to retain capital given that the substantial lease capital loss? And then also in the vein of having over-distributed dividends prior, is there any room to obtain anything to just kind of buildup NAV?.

We -- income and capital are treated differently in our ability to retain. We are required to distribute 90% of our income to maintain our status as a Rick.

However, from capital appreciation we have, as you alluded to, capital losses, which -- there's disclosure in the 10-K that discusses this, where we are -- have the ability to retain capital in a tax-efficient manner that will allow us to rebuild NAV over time..

Is it fair to say that that's going to be the plan go-forward? I mean, especially if you make some equity investments in the smaller companies, right, the idea would be that those that roof capital appreciation?.

Yes. That is definitely the goal over time..

Great. That's all for me. Thanks very much and best of luck to you..

Thank you very much..

Our next question comes from the line of Travis O'Neil [ph] private investor. Your question please..

This is Tom O'Neil, actually, not Travis. I have a question.

As a long-term holder, as I'm sure many people are, can we get some insight into what transpired in the fourth quarter to cause this significant degradation in the value of Avanti from what we had been told before was going on with Avanti?.

We are limited to what we can say under the terms of our nondisclosure agreement with the company. However, what I can say is that due to uncertainty surrounding Avanti's financial condition and ongoing liquidity challenges as of December 31, we did place a 1.5 lien loan and the second lien notes on non-accrual.

And to the -- that is what we are able to say at this point in time..

That's not very sufficient..

Yes. Our hands are tied due to terms of the nondisclosure agreement. We are happy to answer questions when we're able to provide more information as appropriate..

Well, in the past, I guess it hasn't been, you have been able to do that because this came as a complete surprise to many of us who have been following this for years.

And I don't know what kind of non-disclosure you signed that was such an advantage to cause you to have to write down the investment so much that you can't talk about what's going on in the industry and what's happened to your most significant investment..

Again, we are limited in what we can say about that. And when we are able to provide more information, we're happy to answer questions as appropriate..

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Matt Kaplan for any further remarks..

Thank you again for joining us this morning. I'm excited for the opportunity to reboot GECC, and we look forward to continued dialogue. Please let us know if we can be helpful if anything to follow up..

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..