Great Elm Capital - Earnings Call - Q2 2025

Executive Summary

• Record total investment income of $14.3M and NII of $5.9M ($0.51/share), with cash income comprising over 90% of TII; NAV rose to $12.10 (+$0.64 QoQ), driven by unrealized gains on a CoreWeave-related investment and NII exceeding the distribution by 38%.
• EPS of $1.02 materially beat Wall Street consensus of $0.43; TII of $14.28M exceeded the $13.26M consensus. Management guided an expected Q3 NII step-down due to uneven CLO JV cash flows, while reiterating full-year coverage of the dividend.
• CLO JV distributions increased to $4.3M (from $3.8M in Q1), and weighted average current yield on the debt portfolio rose to 12.5%; asset coverage ratio improved to 169.5%.
• Liquidity improved post-quarter with revolver capacity doubled to $50M (up to $90M under certain conditions) and pricing cut to SOFR+2.50% from SOFR+3.00%—a cost-of-capital tailwind and funding flexibility catalyst.

What Went Well and What Went Wrong

What Went Well

• Record TII and NII with over 90% cash income; NII exceeded the quarterly distribution by 38% (adding ~$0.14/share to NAV).
• CLO JV momentum: $4.3M cash distributions (vs. $3.8M in Q1) and expanding platform; management targets high teens to ~20% returns over time.
• CoreWeave-related investment contributed meaningfully to NAV via unrealized gains; management highlighted strong post-IPO performance and directional correlation to publicly-traded equity.

Quotes:

• “Record total investment income and NII that exceeded our recently increased quarterly distribution… NAV also improved meaningfully… unrealized gains on our CoreWeave related investment” — CEO Matt Kaplan.
• “We anticipate third quarter NII per share to step down… nevertheless… well positioned to cover our base distributions for the full year” — CEO Matt Kaplan.

What Went Wrong

• Non-accruals: Two Maverick Gaming debt investments moved to non-accrual in Q2; subsequent to quarter-end, Del Monte first-lien debt moved to non-accrual amid bankruptcy filing.
• Income cadence volatility: JV structure recognizes income only on cash distribution, leading to quarter-to-quarter undulation; management expects dampening over time as scale grows.
• Specialty finance ABL growth temporarily constrained by delay in upsizing back leverage facility due to industry-wide caution following April tariff announcements (resolved in July with >20% increase in borrowing capacity).

Transcript

Speaker 0

Meetings. Welcome to the Great Elm Capital Corp. second quarter 2025 financial results. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, then zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Peter Skisel, a representative of the company. Please go ahead.

Speaker 4

Hello, and thank you everyone for joining us for Great Elm Capital Corp.'s second quarter 2025 earnings conference call. If you'd like to be added to our distribution list, you can email [email protected] 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. The slide presentation can be found on our website under Events and Presentations. On our website, you can also find our earnings release and SEC filings. 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 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 statements. Great Elm Capital Corp. does not undertake to update forward-looking statements unless required by law. To obtain copies of the SEC filings, please visit Great Elm Capital Corp.'s website under Financials, SEC Filings, or visit the SEC's website. Hosting the call today is Matt Kaplan, Great Elm Capital Corp.'s Chief Executive Officer. We'll be joined by Chief Financial Officer, Keri Davis, Chief Compliance Officer and General Counsel, Adam Klyman, and Mike Keller, President of Great Elm Specialty Finance. I'll now turn the call over to GECC CEO, Matt Kaplan.

Speaker 3

Thanks, Peter, and thank you all for joining us today. We had a tremendous quarter, delivering the highest total investment income in the company's history at $14.3 million, and NAV growing over $0.60 per share from the prior quarter to $12.10 per share as of June 30th. The second quarter of 2025 was GECC's highest ever cash-generative quarter, with cash TII comprising approximately 90% of our total investment income. A 14% increase in TII from last quarter, as well as TII growth of nearly 50% year over year, was primarily driven by the success of our growing CLO platform, as well as income from other cash-generating investments in the quarter. All of this is a continued testament to the strategic portfolio enhancements we've undertaken over the past few years to upgrade portfolio quality and focus on cash income generation.

In addition, net investment income once again exceeded our quarterly distribution and was up approximately 29% sequentially. NII per share was $0.51 compared to $0.40 in the prior quarter. NII growth was largely attributable to a timely cash distribution on preference shares of an insurance-related investment, as well as $4.3 million of cash distributions from our CLO JV, up from $3.8 million last quarter. We remain committed to delivering growing income to shareholders over the long term, supported by solid underlying portfolio performance. Moving through the second half of the year, we anticipate third quarter NII per share to step down similarly to what we experienced in the fourth quarter of 2024. This is driven by the uneven cadence of cash flows from our growing CLO platform at these still early stages, as we have touched on before.

Nevertheless, we anticipate fourth quarter NII will rebound significantly from the third quarter, and we remain confident that we are well positioned to cover our base distributions for the full year as we continue to execute on our long-term growth strategy. As previously discussed, we expect quarterly fluctuations in income to dampen over time as we fund additional CLO investments and continue to leverage our increased scale. As we scale the platform and deploy capital into additional investments, both in CLOs and across our strategies more broadly, we continue to believe that it makes more sense to evaluate GECC on an annual basis as opposed to benchmarking our performance quarter to quarter. On that note, if you look at our trailing 12-month performance, GECC has demonstrated continued momentum in both top-line and bottom-line results.

Total investment income for the trailing 12-month period increased by 29%, and net investment income grew even more meaningfully over the same period, rising by 32% in each case compared to the same period one year ago. This growth underscores the enhanced income-producing capability of our portfolio, driven by strong asset performance and disciplined capital deployment. It's worth noting that our share count has also increased over the past year as a result of our capital raising programs, which have successfully led to GECC issuing shares at NAV, a premium to market. These capital raises have led to short-term cash drag impacts and have modestly offset our absolute NII growth, resulting in a relatively flat NII per share on a trailing 12-month basis.

Nevertheless, our trailing 12-month NII of $1.50 per share demonstrates our earnings power through this rapid growth, with NII more than covering the base dividends paid over the same period, reinforcing our commitment to sustainable shareholder returns backed by solid income generation. As we look into the second half of 2025, we believe we are well positioned for full-year 2025 NII per share to exceed 2024 levels, supported by our diversified portfolio of cash-generating investments and more than covered our recently increased distribution rate of $1.48 per share on an annualized basis. Moving on to portfolio performance, alongside strong NII generation, we also meaningfully improved our NAV per share as outlined on slide eight.

This increase in NAV was primarily driven by unrealized gains on our investment in CW Opportunity 2 LP, a vehicle created to hold convertible preferred equity in CoreWeave, an AI hyperscaler that IPO'd earlier this year and has seen strong post-IPO equity performance. In addition, our NII outpaced our quarterly distribution by approximately 38%, leading to a NAV benefit in the quarter of approximately $0.14. Looking ahead, we believe our portfolio, underpinned by a diversified book of senior secured investments, is increasingly well positioned to weather the dynamic macro environment. With our strengthened foundation, we remain confident in our ability to generate sustainable returns and deliver increasing value to our shareholders. With that, I'd like to hand the call over to Keri Davis to discuss our second quarter 2025 performance.

Speaker 2

Thanks, Matt. I'll go over our financial highlights now, but we invite all of you to review our press release, accompanying presentation, and SEC filings for greater detail. During the second quarter, GECC generated NII of $5.9 million, or $0.51 per share, as compared to $4.6 million, or $0.40 per share in the first quarter of 2025. The increase in NII was primarily driven by the receipt of distributions from an insurance-related investment and higher income from our CLO JV. Our net assets as of June 30, 2025, were $140 million, as compared to $132 million as of March 31. Our NAV per share was $12.10 as of June 30 versus $11.46 as of March 31. The increase in net asset value was primarily driven by unrealized gains on our investment in our CoreWeave related investment in CW Opportunity 2, as well as from our NII exceeding the quarterly distribution.

Details for the quarter over quarter change in NAV can be found on slide eight of the investor presentation. As of June 30, GECC's asset coverage ratio was 169.5% as compared to 163.8% as of March 31. As of June 30, total debt outstanding was approximately $201 million, and we had $6 million outstanding on our $25 million revolver. Cash and money market securities totaled approximately $4 million, and we had $19 million of availability under our revolver. Our board of directors authorized a $0.37 per share cash distribution for the third quarter, which will be payable on September 30 to our stockholders of record as of September 15. The distribution equates to a 12.2% annualized dividend yield on our June 30 net asset value. I'll turn the call back over to Matt.

Speaker 3

Thanks, Keri. We continue to enhance our portfolio strength by maintaining a focus on secured debt positions. Our growing CLO platform remains a significant contributor to this strategy as we continue to prudently expand the vertical, targeting high teens to 20% returns over time. We have grown our corporate portfolio to nearly $240 million of investments, and first lien loans comprise two-thirds of the corporate portfolio as of June 30. This demonstrates our commitment to enhancing portfolio quality while maintaining a focus on secured income-generating assets. Before moving on to more portfolio detail, I think it's important to highlight why our non-yielding other equity mix, as outlined on slide 11, increased in the quarter. This is almost entirely attributable to the IPO of CoreWeave I mentioned earlier.

The underlying preferred equity investment held by CW Opportunity 2 LP converted into common equity in connection with the IPO, and there will be no more income from the coupon on the preferred to distribute going forward. While this optically reduces our gross portfolio yield, it is meaningfully positive for our shareholders as GECC's IRR from the May 2024 funding through June 30 on CW Opportunity 2 is nearly 200%. I would also like to take a few minutes to address some potential uncertainties around our exposure in CoreWeave through our investment in CW Opportunity 2. Our investment is in a private fund, and as disclosed in our filings since the inception of our investment, it has been carried on our balance sheet at net asset value as reported to us by the general partner.

While the private fund does not charge a management fee to GECC, there are various other expenses and fees typical with these types of vehicles, and post-IPO, the valuations have not been one-to-one with the move in CoreWeave stock. Nevertheless, it is safe to say the value of CW Opportunity 2 is very directionally correlated with the CoreWeave publicly traded equity, which has exhibited some significant volatility since IPO. That said, as noted above, this investment has been overwhelmingly positive for GECC and reflects our ability to source and structure unique opportunities in transformative sectors. Moving back to the portfolio, notably our CLO JV, alongside other recent investments, helped drive our record total investment income in the quarter.

The CLO JV expands our exposure to a diverse portfolio of broadly syndicated first lien loans and continues to be a key contributor to our recent success, with approximately $52 million deployed through June 30. Additionally, we have deployed $6 million into a new CLO investment directly on our balance sheet. This investment is held outside the JV, highlighting diversification both in the underlying asset class and in the top-tier managers with whom we partner. A reminder that we hold the majority of our CLO exposure a bit differently than other public BDCs or closed-end funds. Other companies typically hold their CLO investments directly, which allows the income to be recognized utilizing the effective yield methodology, while GECC recognizes income from investments held in the CLO JV only when the CLO JV makes distributions and cash is actually received.

This potentially leads to a more uneven nature to our income reporting. While we may hold certain minority CLO positions directly on our balance sheet, the JV affords us the ability to have exposure to majority interests in CLOs, which we believe can provide enhanced economics. We are comfortable with this quarter-to-quarter income undulation, which, as I noted previously, we expect will dampen over time as we continue to scale. Further, our investment portfolio is generally stable in the quarter, although we did place our two debt investments in Maverick Gaming on non-accrual in the period. Subsequent to quarter-end, we placed our first out senior secured debt investment in Del Monte on non-accrual as the storied packaged food producer initiated a bankruptcy filing in July. As of June 30, the Maverick Gaming and Del Monte investments comprise less than 3% of portfolio fair value.

I would note these are senior secured first lien investments, and we do expect a portion of them to begin accruing income again in the second half of 2025. We continue to actively monitor these investments and believe the vast majority of the portfolio is well positioned in the current environment. To date, we have otherwise seen minimal direct impact of tariffs on our portfolio. Our portfolio maintains broad diversification with a predominantly domestic focus and minimal exposure to China. We continue to monitor the changing landscape and also work to evaluate the second and third order effects of tariffs and shifting trade dynamics. While tariffs may not directly impact the business, they may have knock-on supply-side effects that can be negative or positive. Our team continues to be focused on thinking through that lens when reviewing existing investments as well as underwriting new opportunities.

With our defensive portfolio structure, we believe we are well positioned to navigate the ongoing tariff uncertainty. In this dynamic macro environment, we continue to take a measured approach to capital deployment. As always, we prioritize credit quality and seek investments with minimal risk of permanent capital loss, directing capital toward opportunities that are primed to perform across various economic cycles. This balanced approach, combined with our strengthened platform and diversified portfolio, positions us well to continue growing Great Elm Capital Corp. and delivering attractive risk-adjusted returns for our shareholders. We remain excited for the future of GECC, and with that, I'd like to turn the call over to Mike Keller to provide an update on Specialty Finance.

Speaker 1

Thanks, Matt. Great Elm Specialty Finance continued to execute on its strategic transformation this quarter. By simplifying our business model and securing favorable financing arrangements, we've successfully repositioned the platform for future growth and improved profitability. In April, we completed the rebranding of Sterling as Great Elm Commercial Finance, which now offers traditional asset-based lending solutions to a broad range of industries, including healthcare. In addition, Great Elm Specialty Finance exited its final equipment leaseholding at a gain, further streamlining the business and enhancing focus. We have also completed several transactions and secured additional financing, which enabled us to pay down over $5 million in Great Elm Specialty Finance subordinated debt in the second quarter.

As part of our strategic changes made earlier this year, we are pleased to report that Great Elm Healthcare Finance is now better positioned for profitability and is expected to grow its income and distributions to Great Elm Specialty Finance as we move through 2025. For Great Elm Commercial Finance, growth this quarter was temporarily constrained due to a delay in the upsizing of our back leverage facility. The syndication process was impacted by industry-wide caution following the April tariff announcements. However, syndication activity resumed in July, resulting in a more than 20% increase in Great Elm Commercial Finance's borrowing capacity. In summary, these initiatives have streamlined our operations and better aligned our platform with long-term growth objectives. We're seeing the benefits of our strategic repositioning take hold, and we remain confident in our ability to generate improved sustainable returns going forward.

Speaker 3

Thanks, Mike. In closing, we had a phenomenal second quarter, growing NII and net asset value. We are excited for the second half of the year as we look to execute on our growth and optimization initiatives. We believe we remain well positioned to cover our dividend in 2025, continuing to deliver attractive risk-adjusted returns for our shareholders. With that, I'll turn the call over to the operator for questions. Operator?

Speaker 0

Thank you, Sir. Ladies and gentlemen, we will now begin the question and answer session. At this time, if you would like to ask a question, please press star, then one on your telephone keypad. A confirmation tone will indicate your question. Again, if you'd like to ask a question, star, and then the first question that we have comes from Erik Zwick of Lucid Capital Markets. Please go ahead.

Speaker 4

Thanks. Good morning, everyone.

Speaker 3

Good morning, Erik.

Speaker 4

I wanted to start just to make sure I kind of understood the impact with the, you referenced the dividend on the preference shares and the insurance-related investment. Are you able to quantify the amount of that dividend in the most recent quarter, and is it right to think about that? It sounds like potentially that was a one-time event in that magnitude, or is that something that's going to be ongoing?

Speaker 3

Good question. The event will be an annual event, so it'll be ongoing, but we just will receive it about once per year. I believe the benefit to NII is approximately $1.6 million net after all things are said and done, $1.7 million.

Speaker 4

Okay, great. That's helpful. Thanks, Matt. I appreciate all of the detail on the CoreWeave investment and just curious in terms of, you know, to the degree that you kind of have some insight and where you're able to share from the managing partner for that investment's perspective. What is their intention in terms of holding it versus potentially realizing some gain? Is there an expected timeframe on that LP? Just curious if you can shed any light there. That would be helpful.

Speaker 3

It is up to the GP to decide when and how to provide liquidity. I would note that currently the underlying shares are subject to a lockup, which should expire this quarter. We have a good relationship and dialogue with the GP on many other matters as well. As of this point in time, I can't really provide any color. It's kind of up to them. The options today are limited. All things being equal, this has been a fantastic investment for GECC, and we'll provide an update to you all and the rest of the investing community when we have something more concrete to say.

Speaker 4

Excellent. No, I appreciate the color there. You're right, it's been a great investment. You guys do deserve congratulations for spotting that investment and moving forward with it. That's great. As I think about your closing comments, Matt, you mentioned being fairly positive about growth opportunities going forward. As you assess the market, I'm curious if you could just weigh, maybe from your perspective, the relative attractiveness of investing in additional corporate debt, kind of middle market portfolio versus CLO equity opportunities, and maybe anything else that's on your radar today where we could see growth in the portfolio going forward.

Speaker 3

Great question. Over the course of the quarter, the corporate debt secondary market has definitely strengthened significantly, and we're seeing some repricings begin to creep back into the market. We have shifted some focus more to some of the more private side transactions that we partner with some blue chips on. We actually closed on a transaction last week, a private transaction, and we hope to close on another one next week as well. These are not huge, but every little bit helps here. I think we're finding that, with some of the uncertainty, there are lots of businesses out there that are good businesses that are not in the syndicated market and on the little smaller side that we can still get yield premium on relative to the syndicated market that's coming back. That is where we have shifted our focus today.

Speaker 4

Thanks. Maybe just switching gears a little bit, with regard to the investment in Maverick Gaming, I know that had been marked down in previous quarters, but now moved to non-accrual in the most recent quarter. Anything kind of different that changed in your thinking around that investment or what prompted the move to non-accrual?

Speaker 3

We have an active dialogue with many of our, almost all of our portfolio companies and management teams, right? We've been having an active dialogue with the company, and it became clear to us that that situation was not improving in the quarter, and they actually have filed for bankruptcy. In connection with the preparation for the bankruptcy filing, we believed it was prudent to put the position on non-accrual.

Speaker 4

Makes sense. I just want to make sure I interpreted or heard one of your comments right. I think you're talking about both Maverick Gaming and Del Monte on non-accrual now, but said you expect maybe a portion to return to accrual in the second half of 2025. Was that related to just one of those or potentially positive developments in both? I just wanted to make sure I interpreted that correctly.

Speaker 3

That is largely tied to the DIP funding and the fact that when we fund the DIP, a portion of our pre-petition debt gets rolled up into the DIP as well, and then that starts to accrue interest during the pendency of the bankruptcy case.

Speaker 4

Got it. Okay, great. That's all I have today. I appreciate you taking all my questions this morning.

Speaker 3

You got it.

Speaker 0

Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. We'll pause a moment to see if we have any further questions. At this stage, there are no further questions on the conference call. I would now like to hand the call back to Matt Kaplan for any closing remarks. Please go ahead, Sir.

Speaker 3

Thank you again for joining us today. We are pleased with another quarter of solid performance as we continue to execute on our long-term growth strategy, and we look forward to continued investor dialogue. Please let us know if we can help with any follow-up questions that you may have. Thank you.

Speaker 0

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.