Great Elm Capital Corp (GECC) Q2 2024 Earnings Call Highlights: Navigating Challenges and ...

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Wed, Oct 9, 2024, 1:54 PM 4 min read

Net Investment Income (NII): $3.1 million or $0.32 per share for Q2 2024, compared to $3.2 million or $0.37 per share in Q1 2024.
Net Asset Value (NAV) per Share: $12.06 as of June 30, 2024, down from $12.57 as of March 31, 2024.
Total Debt Outstanding: Approximately $178 million as of June 30, 2024; pro forma for July bond issuance, approximately $200 million.
Asset Coverage Ratio: 171% as of June 30, 2024, compared to 180% as of March 31, 2024; pro forma for July bond issuance, approximately 163%.
Cash and Money Market Securities: Approximately $3 million as of June 30, 2024.
Cash Distribution: $0.35 per share for the quarter ending September 30, 2024, equating to an 11.6% annualized dividend yield on June 30 NAV.
Nonaccruals: Totaled $9.4 million or approximately 3% of portfolio fair value as of quarter end.
Portfolio Yield Profile: Over 13% at quarter end.
Equity and Debt Financing: Raised over $90 million of fresh capital in 2024, including $12 million in equity in June and $22 million in GECC notes in July.

Warning! GuruFocus has detected 6 Warning Signs with GECC.

Release Date: August 01, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

Great Elm Capital Corp (NASDAQ:GECC) successfully raised $12 million in equity at net asset value, enhancing its liquidity and financial position.
The company issued an additional $22 million of GECC notes, improving its financing rate due to strong earnings and a rating upgrade.
GECC's expansion into CLO products is expected to yield potential returns ranging from the mid-teens to low 20%, contributing to a resilient and diverse investment portfolio.
The company's asset coverage ratio remains strong, with a pro forma ratio of approximately 163% after the July bond issuance.
GECC declared a $0.35 per share cash distribution for the third quarter, equating to an 11.6% annualized dividend yield, indicating a commitment to shareholder returns.

Negative Points

Net Asset Value (NAV) per share decreased from $12.57 to $12.06 due to write-downs of certain investments, impacting shareholder value.
Nonaccruals totaled $9.4 million, with a significant portion related to a portfolio company emerging from bankruptcy, indicating potential portfolio risk.
Net Investment Income (NII) per share declined sequentially due to cash drag and increased share count from equity issuance.
The company's asset coverage ratio decreased from 180% to 171%, reflecting increased leverage.
Great Elm Healthcare Finance's deal volume continued to lag projections, indicating challenges in achieving expected growth.

Q & A Highlights

Q: Can you provide more details on the recent capital raise and its impact on Great Elm Capital Corp's financial position? A: Matt Kaplan, CEO, explained that in June, GECC raised $12 million in equity at net asset value, supported by a $3 million investment from Great Elm Group. This followed a $24 million equity raise in February. Additionally, in July, GECC issued $22 million of notes through a registered direct offering. These efforts have secured over $90 million of fresh capital this year, bolstering liquidity and strengthening the financial position to execute on the investment pipeline at a greater scale.

Q: How is the CLO joint venture performing, and what are the expected returns? A: Matt Kaplan, CEO, noted that the CLO joint venture has started receiving distributions, with the first sizable distribution in July. The CLO JV is expected to be a source of increasing income, with potential returns ranging from the mid-teens to low 20% over time. This expansion into CLO products is part of GECC's strategy to build a resilient and diverse investment portfolio.

Q: What were the main factors affecting the NAV per share in the second quarter? A: Keri Davis, CFO, stated that the NAV per share decreased from $12.57 to $12.06 primarily due to write-downs of certain Level 3 investments on nonaccrual status in two portfolio companies, which adversely affected NAV by approximately $0.4 per share. However, the bulk of the impact is believed to have been realized, positioning GECC to recapture NAV.

Q: What is the current status of nonaccruals in the portfolio? A: Matt Kaplan, CEO, reported that nonaccruals totaled $9.4 million or approximately 3% of portfolio fair value as of quarter-end. Of this, $8.1 million was attributable to a portfolio company that emerged from bankruptcy in July, with a significant recovery received. The pro forma non-accruals now stand at $1.3 million of fair value.

Q: How is Great Elm Specialty Finance performing, and what are the expectations for the future? A: Michael Keller, President of Great Elm Specialty Finance, mentioned that despite a slow start to 2024, two of the three platform companies showed improved performance in the second quarter. The pipelines remain robust, and there is optimism for further growth and profitability in the coming months.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.

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