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Edited Transcript of GECC.OQ earnings conference call or presentation 13-Mar-19 2:00pm GMT

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Update time : 2019-05-09 18:14:13

Q4 2018 big Elm major Corp revenue Call

BOSTON Mar 19, 2019 (Thomson StreetEvents) -- Edited Transcript of big Elm major Corp revenue session summon or presentation Wednesday, March 13, 2019 can 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam W. Yates

Great Elm major Management, Inc. - Portfolio Manager

* Peter Andrew Reed

Great Elm major corporation - Chairman, principal & CEO

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Conference summon Participants

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* Nat Stewart

* Scott Christian Buck

B. Riley FBR, Inc., investigation division - investigation Analyst

* Timothy D. Chatard

Quantum major Management, Inc. - Director of investigation & Portfolio Manager

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and tongue to the big Elm major Corp. Fourth district 2018 revenue session Call. (Operator Instructions)

I used to now alike to hand the summon above to Mr. Adam Yates. You can begin.

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Adam W. Yates, big Elm major Management, Inc. - Portfolio Manager [2]

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Thank you, Amanda, and good morning, everyone. Thank you sum because joining us because big Elm major Corp.'s fourth district 2018 revenue session call. though a reminder, this webcast is being recorded above Wednesday, March 13, 2019. if you'd alike to exist added to our distribution list, you can email investorrelations@greatelmcap.com or you can groan up because alerts direct above our website.

The glide presentation accompanying this morning's session summon and webcast can exist construct above big Elm major Corp.'s website, www.greatelmcc.com, below economical Information, Quarterly Results. above the website, you can too detect a copy of our revenue release, table 10-K and the connect to the webcast. I'd alike to summon your attention to the usual safe harbor statement regarding forward-looking information. Also, interest letter that nothing at today’s summon constitutes an propose to sell or a solicitation of offers to buy our securities.

Today's session summon includes forward-looking statements and projections, and we demand that you refer to big Elm major Corp.'s filings with the SEC because significant factors that could cause real results to differ materially from these projections. big Elm major Corp. does no undertake to update its forward-looking statements unless required by law. to become copies of the SEC filings, interest visit big Elm major Corp.'s website below economical Information, SEC filings, or by visiting the SEC's website.

Hosting the summon this morning is Peter Reed, big Elm major Corp.'s principal and chief Executive Officer. I will now become the summon above to Peter.

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Peter Andrew Reed, big Elm major corporation - Chairman, principal & CEO [3]

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Thank you, Adam. Good morning, and thank you, everyone, because joining us today. I'm joined this morning by our principal and COO, Adam Kleinman; Portfolio Manager, Adam Yates; and SEC Reporting Manager, Keri Davis. Where relevant at our prepared remarks, we will point you to the corresponding glide amount at the deck that Adam referenced, which is available above our website too though along the webcast.

Please become to glide 3 because an overview of GECC. GECC is an externally managed especial situations-focused BDC. GECC seeks to generate both tendency revenue and major appreciation from its portfolio of investments comprised of secured loans and bonds sourced at the secondary impartial too though at originated transactions.

As of December 31, 2018, GECC had sum wealth of about $281.6 million, a portfolio handsome estimate of $184.2 million and a net asset estimate of $110.1 million, equating to $10.34 per share. The weighted medium tendency crop above our debt holdings is about 12%. GECC placed an $0.083 per section basis monthly distribution that equates to about $1 per section above an annual basis. Importantly, greater than 20% of GECC's shares are held between big Elm major gang Inc., big Elm major Management Inc.'s employees and GECC's Board of Directors, creating a identical earth alignment of employ between management and you, our shareholders.

Let's become to glide 4 to impress can above a little highlights and tendency achievements. I'm haughty to clarify that GECC's net investment revenue has covered its declared distributions each district because inception at 2016. at total, at 2018, GECC paid $1.24 at distributions. Based upon December 31 NAV and closing impartial price, that equates to an annual distribution crop of 12% and approximately 16%, respectively.

During the quarter, we deployed major can a weighted medium charge of 92% of par, and we monetized investments can a weighted medium charge of 99% of par. Additionally, GECC intends to hire leverage prudently and opportunistically.

Slide 6 is an especially significant glide because our team. This glide lists each and each fully realized investment at the GECC portfolio because inception. after approximately 2.5 years into our management of GECC, we now eat a pool of more than 30 realized investments to analyze, totaling about $188 million of major deployed. cabin no sum of these investments were successful, the overwhelming majority eat been. at aggregate, the IRR of sum realized positions because we began managing GECC is above 22%. cabin these investments eat sometimes exhibited significant charge volatility, we conceive that the aggregate realized returns are pretty compelling.

On glide 7, we ease out the realized operation of the legacy entire spin investments. to date, we eat monetized 73% of the entire spin portfolio that the impartial clearly had viewed though challenged. We've realized an IRR of 18.2% and a sum reply of about 1.09x above these investments.

Turning to glide 9. I'd alike to magazine the personal investments we realized at entire during both the fourth district of 2018 and the first district of 2019 to date. Many of you are perhaps familiar with California Pizza Kitchen, a general irregular dining cafe tie and provider of prepared foods. CPK has a secured lend with a LIBOR plus 600 base point coupon that matures at 2022. We purchased $2 million par estimate of the lend can circa $0.98 above the dollar at the third district of 2018. CPK had been outperforming peers, generating relatively substantial liberate coin flow. cabin we liked and however alike this loan, it happened to exist one of the lower-yielding investments at our portfolio. Consequently, after receiving a little months of accrued interest, we sold the location at order to fund a more attractive investment, resulting at a modest IRR of 6.7% and a cash-on-cash reply of about 1.02x our initial investment.

On glide 10, we highlight GEO Specialty Chemicals. GEO is a principal developer and manufacturer of specialty and operation chemicals. at the third district of 2017, we were capable to source approximately $11 million par estimate of a first-lien revolver and language lend combined facility can a discount to par when one of the lenders at the little syndicate gang wanted to exit the deal. The loans were scheduled to adult at 2019, and the underlying business was performing identical well. We conceive that once the corporation strike a near-term milestone, the loans used to exist refinanced foregoing to maturity. though a result, GEO refinanced both the revolver and the language lend can par at January, and GECC was capable to cause an IRR of 13.8% and a cash-on-cash reply of 1.14x above a short duration.

On glide 11, we magazine our International rope gang investment. ITWG is the largest independent naked copper wire and copper wire products manufacturer at the United States. Throughout 2017 and 2018, GECC purchased $17.5 million of ITWG's 10.75% secured notes of 2021 at the secondary impartial can an medium charge of about $0.93 above the dollar. This location has historically exhibited charge volatility, and the fourth district of 2018 was no exception. It began the district marked can $0.9875 above the dollar and closed can $0.89 above the dollar despite the corporation reporting firm revenue at November. above March 8, the corporation announced that it had entered into a definitive merger jam to exist acquired, compatible with GECC's creative investment thesis. GECC sold the entirety of its investment can a charge of about $1.02 above the dollar days ago, resulting at an IRR of about 18.6% and a cash-on-cash reply of 1.24x above one of our largest positions.

On glide 12, we detail our Sungard investment. Sungard provides manners enterprise cloud and technique services. Our Sungard investment was comprised of 2 pari passu secured language loans. The first carries a LIBOR plus 700 base point coupon and matures at 2021, cabin the second carries a LIBOR plus 1,000 base point coupon and matures at 2022. We bought greater than $16 million par estimate of the combined location can a weighted medium charge of about 95% of par throughout 2017 and 2018. We conceive that sure of Sungard's business lines were worth more than the amount of the company's secured debt.

During the fourth quarter, however, we became slightly concerned about the tendency trends at the company's economical results. mail quarter-end, we became less confident at the company's liquidity profile, and we chose to exit the position. We realized gains above the fourth district of 2018 and the first district of 2019, resulting at an IRR of 6.7% and a cash-on-cash reply of 1.05x.

On glide 13, let's impress can above one divide of GECC's Tru Taj investment. Tru Taj, a subsidiary of Toys"R"Us, is a principal global retailer of toys and young products. Tru Taj is focused predominantly at Asia, where the operation and growth of stores has far exceeded that of the United States. Tru Taj had a secured debtor at possession letter that carried a LIBOR plus 1,100 base point coupon and matured at January of this year. GECC purchased a small more than $6 million par estimate of this letter at the secondary impartial can about 104% of par at 2018. The company's growing business and a bankruptcy process that appeared to exist nearing conclusion led us to conceive these notes used to exist refinanced upon emergence. The notes were really repaid at entire can maturity at January, resulted at a modest 6% IRR because GECC and a 1.03x cash-on-cash return.

Slide 14 is an interesting one because us. Viasat is one of the world's principal providers of high-speed satellite broadband services. Avanti Communications had an approximate $2 million Viasat receivable above its books that it chose to factor. GECC stepped at to buy the receivable can 85% of encounter estimate at October 2018. Receivables of this character nurse to eat identical short durations. This receivable matured at the first district of 2019. at small more than 1 month from our acquisition, the receivable is repaid at full, representing an IRR to GECC of more than 538% and a cash-on-cash reply of 1.18x. because obvious reasons, we pursue to factor more short-term receivables with creditworthy counterparties.

On glide 16, we highlight a little high-level characteristics of the portfolio. The weighted medium tendency crop above our debt holdings, which cause approximately 97% of the handsome estimate of the portfolio and are entirely secured, is about 12%. to lay that metric into perspective, the high-yield bond and leverage lend markets are currently yielding circa 6% to 7% above average. Our team is often uncovering overlooked and under-followed center impartial loans and bonds at the secondary markets can a discount to par. The weighted medium charge of the debt investments at our portfolio is about 88% of par, providing because significant latent major appreciation.

Also, though we monetized legacy positions that we inherited from entire spin major Corp. at connection with our formation and we redeployed proceeds into new and existing big Elm investments, the portfolio improve represents our investing method and approach. though of December 31, about 82% of the portfolio was comprised of investments that are delegate of the stand at which we intend to invest going forward.

Slide 17 describes additional portfolio characteristics. The portfolio contains 30 investments, 26 of which are secured debt and 4 are equity. The 26 debt investments clarify because $178 million of handsome value, and the 4 equity investments clarify because about $6.2 million of handsome value. Of our sum debt holdings, about 58% are floating-rate instruments and 42% accrue can fixed rates.

Please become to glide 18 to magazine our major activity during the fourth quarter. We deployed approximately $35 million into 1 new investment and 9 existing investments can a weighted medium charge of 92% of par and a weighted medium tendency crop of greater than 11%. We monetized, at divide or at full, 19 investments can a weighted medium dollar charge of 99% of par and a weighted medium tendency crop too of greater than 11%.

Turning to glide 19. Of the about $35 million of major deployed during the fourth quarter, approximately $15 million we used to characterize though investments purchased. We purchased investments at 1 new and 3 existing portfolio companies during the quarter. The new investment was an about $2 million Viasat receivable that Avanti chose to factor. We were capable to buy the receivable because $0.85 above the dollar, and the receivable was repaid at entire the following month. We too purchased $3 million encounter estimate of Commercial Barge Line's secured language lend of 2020 can about $0.73 above the dollar. The lend carries a LIBOR plus 875 base point coupon.

We purchased $8 million encounter estimate of Finastra's, formerly known though Misys and Almonde, secured language lend of 2025 at the secondary impartial can a charge of about $0.93 above the dollar. This lend carries a LIBOR plus 725 base point coupon.

Lastly, we purchased about $5.8 million encounter estimate of PFS Holdings Corp.'s or Phillips Pet food and Supplies' secured language lend of 2021 at the secondary impartial can a charge of about $0.60 above the dollar. This investment offers greater latent because chief appreciation and carries a lower coupon of LIBOR plus 350 base points.

Please become to glide 20 to ease down the quarter-end portfolio by asset and employ estimate type. about 96.6% of the handsome estimate of the portfolio is invested at secured debt, with the surplus at equity investments. That's about $178 million of debt and $6.2 million of equity. Of the $178 million of debt holdings, about $103.2 million is invested at floating-rate debt with a weighted medium tendency crop of 11.7%. about $74.8 million is invested at fixed-rate debt with a weighted medium tendency crop of 12.4%.

On glide 21, we highlight how the essay of the portfolio is changing above time. Today, the portfolio has no unsecured debt though we persist to source and buy attractive secured opportunities.

Turning to glide 22. I'd alike to letter that floating-rate debt has accomplished a growing percent of our portfolio district after quarter. Specifically, our team has been focused above the leverage lend opportunities they're uncovering at the secondary market, and those nurse to propose LIBOR-based employ rates. Recently, we eat construct that the leverage lend market's opacity has bred greater venture than that which we construct at the more transparent high-yield bond market. though such, it wouldn't astound me to howl on the above tendency continue.

On glide 23, we ease down the portfolio by industry. Wireless telecommunications services and building cleaning and maintenance services, comprised of Avanti and PE Facility Solutions, respectively, are however the largest industry weightings. We persist to assert a diversified portfolio of investments, though indicated by the 18 various industries represented.

There are a little points to letter above glide 24. First, despite volatility at the secondary markets temporarily depressing the handsome estimate of sure of our larger holdings at the fourth quarter, the long-term tendency at portfolio growth is clear. at the small more than 2 years because we formed GECC, we eat managed to bring the handsome estimate of investments by greater than 19%. though such, at the mutual degree of business, we've deployed more major than we eat monetized from existing investments. at the fourth quarter, however, refinancing opportunities at the major impartial and monetization opportunities at the secondary impartial together outweighed the $34.8 million of major deployed into the previously discussed investments.

Please become to glide 25 to receive a historic encounter can GECC's portfolio rotation. during each of the past 9 quarters because inception, we eat monetized higher dollar-priced investments and deployed major into lower dollar-priced investments, contributing to GECC's sum return. Most recently, at the fourth quarter, we deployed major can a weighted medium charge of about 92% of par, and we realized investments can a weighted medium charge of about 99% of par. Again, substantially sum of the major deployed was invested at secured debt.

Turning to glide 26. We employ a more granular film of what GECC's investment activity looks alike quarter-over-quarter. We've been capable to detect interesting debt investment opportunities can lower medium prices at the most tendency 2 quarters than we eat historically. letter the $0.89 weighted medium charge of new debt investments at the third district of 2018 and the $0.92 charge highlighted earlier at the most tendency quarter. This past quarter, we were too capable to invest major can an 11.2% medium tendency crop toward the higher deduce of our historic range. Monetization activity has been identical consistent, with the medium charge of realized investments circa par district after quarter.

Please become to glide 27 because an update above Avanti. when we formed GECC, Avanti was a corporation with a greater-than-$1 billion network struggling to monetize the genius of that network. though Avanti encountered economical difficulty, we worked with other key creditors to improve the corporation along deleveraging its surplus sheet; launching its biggest satellite yet; and identifying and recruiting new board members who brought stability and strategic insight to the company. These improvements paved the manner to hire Kyle Whitehill though the new CEO at April of 2018. because Kyle's start, he has dramatically overhauled sales and marketing, resulting at big jam wins which has led to rapidly growing recurring center bandwidth revenue. despite sum of this progress, our Avanti investments are marked $55 million lower than when we formed GECC. Based upon the trajectory that we observed at Avanti's business, we need the following at 2019: continued rapid revenue growth coupled with a significant reduction at operating expenses, culminating at a estimate of EBITDA growth exceeding the estimate of revenue growth. above this trajectory, we need that Avanti will eat visibility into generating positive, unleveraged liberate coin flow.

On Slides 29 and 30, we list sum of our activities because quarter-end. I'll point you to the specifics of the Tru Taj restructuring; our successful monetization of our big International rope gang investment; and perhaps most notably, our buy of 80% of the equity employ at Prestige major corporation because aggregate coin consideration of about $7.4 million.

Please become to glide 31 because a more detailed description of GECC's investment at Prestige major Corporation. Headquartered at Fort Lee, New Jersey, PCC specializes at factoring because early-stage and smaller businesses. to lay our acquisition at context, at 2017, PCC generated revenue of about $6.4 million and adjusted net revenue of $2 million. Management currently expects that the audited 2018 results will exist match to or higher than the though 2017 figures. The management team, having worked together because approximately 2 decades, will assert a 20% minority stake at the business.

Looking forward, GECC believes that its PCC investment will exist between the highest-yielding investments at its portfolio. no only will GECC accept dividends from its equity at PCC, except during GECC too intends to attend direct at factoring transactions that PCC originates because an anticipated low- to mid-teens annual yield. Finally, GECC can equip asset-based loans to successful PCC clients who graduate to less dear ABL financing from more dear factor financing.

Let's become to glide 33 to magazine economical highlights from the quarter. revenue per section was negative $1.18 at the fourth quarter. This was driven by unrealized losses per section of $1.46, which I'll describe at greater detail at a little moments. NII per section came at can just above $0.25, once again covering our $0.25 quarterly basis distribution. at total, we paid or declared distributions of about $0.49 during the quarter. Net asset estimate or NAV was $10.34 per section can period-end.

Turning to glide 34. because the first district at some time, the amount of monetization activity outweighs the amount of major deployed. can period-end, sum wealth was $281.6 million, sum handsome estimate of investments was $184.2 million, and our $10.34 per section NAV equated to an aggregate NAV of $110.1 million. The quarter-over-quarter reduction at NAV was driven by secondary impartial volatility that, to date, has meaningfully reversed course. sum debt notorious was unchanged can $79 million, comprised of our 2 child bonds, tickers GECCL and GECCM. coin and money impartial investments was $7.7 million can period-end.

Slide 35 details choose economical operation during the quarter. sum investment revenue was about $6.9 million or $0.65 per share. Net expenses were about $4.2 million or $0.40 per share. NII was about $2.7 million or $0.25 per share. Net realized gains were about $394,000 or $0.04 per share. Net unrealized depreciation of investments is $15.6 million or $1.46 per share.

On glide 36, we equip a sheet more detail above the drivers of our fourth district unrealized losses. The unrealized losses we experienced at the district were chiefly the arise of Avanti's section charge volatility and high-yield spreads widening, temporarily depressing valuations. Avanti's section charge declined by more than 52% at the fourth district above seemingly no negative news from the company. The handsome estimate of Avanti's secured notes was reduced chiefly due to high-yield bond spreads widening, reducing high-yield bond prices. Together, the 2 new Avanti investments accounted because a small more than $9 million of this quarter's unrealized losses. Importantly, consequently far at the first district of 2019, Avanti's section charge has partially recovered and high-yield spreads eat tightened significantly, partially reversing the unrealized losses.

Turning to glide 37. Let's debate the quarterly operating results. sum investment revenue of $6.9 million or $0.65 per section compares to third quarter's $6.2 million or $0.58 per share. Net operating expenses of $4.2 million or $0.38 per section was higher than the third quarter's $3.5 million or $0.33 per share. NII of $2.7 million or $0.25 per section was marginally higher than the third quarter's match figures.

Turning to glide 39. Let's debate GECC's distribution policy and declared distributions to date. GECC continues to earnings an $0.083 per section monthly basis distribution that sums to $1 per section per year. at December, we announced a especial distribution of $0.24 per share, bringing 2018's sum distributions to $1.24 per share. The sum distributions represented a 12% dividend crop above the December 31, 2018 NAV and an approximate 15.7% distribution crop above the year-end impartial value.

Slide 40 shows GECC's entire distribution history and overlays what the annual distribution crop was though a percent of the impartial price. at total, GECC has declared and lay greater than 30 consecutive monthly basis distributions. GECC's substantial especial distributions, when combined with their monthly basis distributions, eat driven annual distribution yields healthy north of 10% at each entire year because inception.

Slide 41 illustrates our historic distribution coverage. Again, I feel it's significant to emphasize that NII has covered the basis distribution each district because inception.

Finally, interest become to glide 43 because a GECC summary. Our board has already lay the second district of 2019 distributions can $0.083 per section per month. too importantly, GECC insiders hold greater than 20% of GECC's notorious shares, fostering a precise alignment of employ between insiders and other shareholders. Furthering that alignment of employ to date, GECC has repurchased about 17% of its initial section count. The weighted medium tendency crop above our portfolio of secured loans and bonds is about 12%, and the IRR above our growing pool of realized investments is a substantial 22.5%.

Thank you sum because joining us this morning. We persist to exist excited about the upside latent at the portfolio too though with the further we eat made monetizing legacy positions. We conceive that we've created a significant alignment of employ with you, our shareholders. Thank you again because the uphold and faith that you've placed at us.

With that, we will become the summon above to the operator to blank because questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the queue of Scott Buck of B. Riley FBR.

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Scott Christian Buck, B. Riley FBR, Inc., investigation division - investigation Analyst [2]

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I was hoping you could increase a small sheet above the new investment opportunities, just the surroundings at general at condition of the amount of good opportunities you're seeing at the impartial versus historic levels and perhaps what the competitive surroundings is alike at looking can those deals.

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