Greetings. Welcome to the Great Elm Capital Corp third quarter 2026 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to Adam Yates, Managing Director at Great Elm Capital Corp. Thank you, Adam. You may begin.
Hello, and thank you for joining us for Great Elm Capital Corp's third quarter 2026 earnings conference call. If you would like to be added to our distribution list, you can email investorrelations@greatelmcap.com or sign up for alerts directly on our website, www.greatelmcc.com. The slide presentation accompanying today's conference call and webcast can be found on our website under Events and Presentation. 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 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 its forward-looking statements unless required by law. To obtain copies of our SEC filings, please visit Great Elm Capital Corp's website under Financials, SEC Filings, or visit the SEC website. Hosting the call today is Jason Reese, Great Elm Capital Corp's Chairman of the Board and CEO. He will be joined by Chris Croteau, Chief Investment Officer, Chief Financial Officer Keri Davis, Chief Compliance Officer and General Counsel Adam Kleinman, and Mike Keller, President of Great Elm Specialty Finance. I will now turn the call over to GECC's Chairman and CEO, Jason Reese.
Thank you, Adam, and thank you everyone for joining us today. As we discussed last quarter, our priorities at GECC are protecting and growing NAV, generating sustainable net investment income, and maintaining a disciplined approach to capital allocation and portfolio management. While third quarter results fell short of our expectations, particularly with respect to NAV performance, we continue to make progress on several key initiatives. We strengthened the quality of our credit portfolio, expanded our pipeline of differentiated private investment opportunities, and further optimized our balance sheet. We believe these efforts position GECC to deliver more consistent earnings and improve long-term shareholder returns. During the quarter, net investment income was $0.17 per share compared to $0.32 per share in the prior quarter. This decline primarily reflects a $2 million dividend from an insurance-related investment in the second quarter that did not recur in the third quarter.
The reinstatement of incentive fee accruals following the conclusion of prior fee waivers also contributed to the decline in NII. While third quarter NII did not fully cover our quarterly distribution, our board declared a fourth quarter dividend of $0.25 per share. We remain focused on generating durable investment income and building a consistent earnings profile through disciplined capital deployment and the continued expansion of our private investment pipeline and specialty finance platform. We believe these initiatives, together with our strong liquidity position, provide a foundation for improving earnings performance over time. NAV declined by approximately 7% during the quarter to $7.40 per share, primarily reflecting realized and unrealized investment losses, including a $3.3 million reduction in the fair value of our CLO JV investment. We are disappointed with this performance and recognize that stabilizing NAV and rebuilding shareholder value must remain central priorities.
We continue to work closely with our CLO partners to evaluate performance, address areas of weakness, and identify opportunities to maximize the value of these investments. While our CLO investments have experienced meaningful valuation pressure, they provide exposure to a substantial portfolio of diversified first lien loans. Our CLO JV currently holds a majority ownership position in three CLOs, with exposure to approximately $1.1 billion of first lien loans, and has generated approximately $25 million of cumulative distributions since inception. These CLO investments remain a core part of our strategy. Importantly, the underlying credit quality of our portfolio remains strong. With credit spreads tight and valuations elevated across much of the broadly syndicated market, we continue to prioritize disciplined underwriting and measured capital deployment, rather than pursuing incremental yield at the expense of credit quality.
At the same time, our deep institutional relationships and proprietary sourcing capabilities are providing access to differentiated investment opportunities across private credit and select equity investments. We believe these opportunities offer the potential to generate attractive current income while also contributing to NAV appreciation over time. During the quarter, we deployed approximately $20 million across 10 distinct investments, including three private transactions totaling nearly $9 million. We also significantly expanded our private investment pipeline, which we expect to become an increasingly important component of the GECC portfolio. Our CoreWeave-related equity investment illustrates the value of our unique sourcing capabilities. During the quarter, we received approximately $800,000 in distributions from this investment, bringing cumulative distributions to approximately $10.3 million compared to our original $6 million investment. Although this investment remains subject to market volatility, we believe it offers meaningful potential for additional upside.
Turning to Great Elm Specialty Finance, we continue to see positive momentum across the platform. Great Elm Commercial Finance and Great Elm Healthcare Finance are focused on expanding their lending pipelines, while Prestige provides differentiated exposure to the spot factoring market. Cash distributions received from Great Elm Specialty Finance increased by more than tenfold compared to the prior quarter, reflecting improved cash generation across the platform. We view specialty finance as an integral part of our strategy to expand directly originated investments, diversify our source of income, and build a more consistent and durable earnings base over time. We also made meaningful progress strengthening our balance sheet and reducing our cost of capital. Year to date, we have reduced total debt outstanding by nearly $40 million, including the redemption of $6.5 million of our 8.5% GECCI Notes during the third quarter.
These actions reduce our interest expense and leave us with no scheduled debt maturities until 2029. On September 30th, we had approximately $50 million of liquidity, consisting of $6 million in cash and money market investments and $44 million of available capacity under our revolving credit facility. We also maintain a significant portfolio of liquid investments, providing additional flexibility. The combination of lower leverage, ample liquidity, and a manageable debt maturity profile allow us to deploy capital selectively while preserving our ability to act on attractive investment opportunities. We also continue to repurchase GECC shares at a substantial discount to NAV under our $10 million stock repurchase program. Year to date, through October 30th, we repurchased approximately 350,000 shares at an average purchase price of approximately $4.96 per share, representing a discount of approximately 33% to our September 30th NAV of $7.40 per share.
We believe repurchasing shares at these levels represents an attractive use of capital. These repurchases are accretive to NAV per share and directly increase shareholder value. We will continue to evaluate repurchases alongside new investment opportunities as part of our disciplined approach to capital allocation. Looking ahead, we are optimistic about the opportunities across broadly syndicated credit, private investments, and specialty finance. We believe our deep institutional relationships, growing pipeline of differentiated investments, and strong liquidity position provide a solid foundation for generating sustainable income and supporting NAV stability. I'll now turn the call over to Keri Davis to review our financial results in greater detail.
Thanks, Jason. I'll go over our financial highlights now, but we invite all of you to review our earnings release, accompanying presentation, and SEC filings for additional detail. Total investment income for the third quarter was $8.7 million compared to $10.9 million in the second quarter. Prior quarter income included a $2 million dividend received from our investment in insurance-related preference shares, which did not recur in the current quarter. Net investment income for the third quarter was $2.4 million, or $0.17 per share, compared to $4.5 million, or $0.32 per share, in the second quarter. The sequential decline in NII reflects lower total investment income and the reinstatement of incentive fee accruals, which were waived in the prior quarter.
Net assets were $102.7 million, or $7.40 per share, as of September 30th, compared to $110.4 million, or $7.95 per share, as of June 30th. The decrease in NAV was primarily driven by $6.6 million of net realized and unrealized investment losses during the quarter, including a $3.3 million reduction in the fair value of our CLO Formation JV investment. Additional details are provided in the NAV bridge on slide 11 of our investor presentation. Our balance sheet remains strong and liquid. Our asset coverage was 166.3% as of September 30th, compared to 166.4% at the end of the prior quarter, while our debt-to-equity ratio remained stable at 1.51x . Total debt outstanding at quarter end was approximately $154.9 million, down from $166.4 million at June 30th and $194.4 million at year-end 2025.
We held approximately $6 million of cash and money market investments, along with $44 million of availability under our revolving credit facility, providing significant flexibility to pursue attractive investment opportunities. Finally, our board of directors declared a quarterly distribution of $0.25 per share, payable on December 31, 2026, to stockholders of record as of December 15. This distribution represents an annual yield of approximately 13.5% based on our September 30 NAV of $7.40 per share. I'll now hand it over to the operator for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Mickey Schleien with Clear Street. Please proceed with your question.
Yes, good morning, everyone. Excuse me. I'd like to start off by asking about NII. Excluding the insurance-related dividend in the previous quarter and the incentive fee waivers in the previous quarter, it looks like third quarter NII appears more representative of your portfolio's earnings power. How should we think about a sustainable quarterly NII run rate, particularly relative to the $0.25 per share dividend?
Mickey, it's Jason. Thank you for your question. You're right, $0.17 is more sustainable, but probably a lower end than the $0.32. That insurance investment pays once-a-year dividends, so that's going to be variable. We also think we're probably at the low point. I think we've been very conservative. I think you see the liquidity we have. I think it'd be fair to say our liquidity is even greater. We've been seeing this market disruption coming, and so we've been pretty passive about putting our excess capital to work. So, our goal would be that that $0.17 would be a low point, and hopefully we will build it back depending on, obviously, market conditions there. The $0.25, we think is a sustainable dividend going forward, is the expectation. But obviously, part of that, the NAV decrease also is the fact that we earned $0.08 below that dividend.
Understand.
Does that address your question?
Yes. In terms of the CLO JV, you noted the markdown in fair value during the quarter. Can you help us understand the principal drivers of that markdown? I am well aware that the spreads in the BSL market are very tight, but is there anything else going on that drove down that fair value?
If you look at our CLO JVs, one of the underlying CLOs had some significant triple C exposure, which that has been marked down. The real driver of those values is the discount rate that the third-party valuation experts use. Based on where the market is, they have been looking, using significantly different discount rates. So, that is part of what is driving there. We are working with our partners there to make sure we address this and address it going forward. We like the exposure. We like it going forward, the significant cash flows to come. Part of it is, in a market like today's, how do you value a CLO discounted cash flow analysis?
Understand. Beyond your non-accrual investments, are you seeing deterioration among other borrowers that are still performing? When you look at the forward interest rate curve, which anticipates several more rate hikes, at the tail end of your borrowers, how concerned are you about their ability to service their debt if the forward curve were to be correct?
We are very comfortable with our existing borrowers and that forward curve. We're obviously very aware of that. We have any companies that we've been worried about that issue, assuming two or three or four more hikes, I don't know if any of us can really predict what will happen, but in that case, we've trimmed or sold those positions to get out of where we thought those issues would be there. We're well-positioned with cash to take advantage of things, assuming spreads widen out again or there's more disruption in the market, there's opportunities to buy things cheaper.
Actually, my next question was about spreads. I noticed a nice increase in your debt portfolio yield. What kind of yields and spreads are you seeing on new originations relative to the existing portfolio?
I think we're in a really weird spot. It's an interesting day to have an earnings call with the election and everything else going on. We're seeing better opportunities to put money to work in higher quality people. We think there's less capital chasing deals now than there was four, five, or six months ago. We think we're seeing better opportunities. We're pretty excited about the fact that we took the summer, the second and third quarters, to trim positions to have cash available to take those opportunities.
Also, if you look at our portfolio, all of our debt, other than our revolvers, is fixed rate, and the majority of our investments are floating. Assuming no credit issues, our earnings spread should widen as rates go up. We should be earning higher on our assets, and our liabilities stay fixed. That's a positive move for us as long as we don't have credit issues.
I understand. But in terms of taking advantage of these opportunities, your balance sheet leverage is 1.5x. If we look at debt to equity, which, if I'm not mistaken, that's your target.
Yes, it is.
So how would you take advantage of Are you talking about portfolio rotation to take advantage of these better terms, or overall how are you looking at [crosstalk] I am sorry?
We have cash coming in. Cash runs off the CLO JV every quarter, right? So that shrinks, more cash comes in there. We are getting cash distributions out of specialty credit. So we are generating cash, and there will be some portfolio rotation. We definitely have a portfolio of lower-yielding, higher-quality assets that we have held that we would look to rotate out of those assets into things that will perform and have significantly better returns over time. It does not make a lot of sense for us to hold cash when we have leverage that we are paying 8%+ debt on.
We're looking We keep a portfolio that we feel are similar to cash surrogates, things that we don't think there's a lot of risk in them going down, but their returns aren't great, but they're a lot better than money market funds, where we can rotate out of those things into better-performing assets when we're comfortable with that.
I understand. My last question, I appreciate your patience.
No, happy to answer.
Yeah, when we're looking at allocation of capital between new investments and repurchasing shares, given the confidence you have in the portfolio, it would seem like it's almost a no-brainer that buying back your stock is going to generate the best return on investment that you can probably find. I do see that you continue to repurchase shares in the fourth quarter. Is it reasonable to assume that you're going to continue to do that with these sorts of discounts to NAV?
That would be a reasonable assumption if our discounts stay at these levels. We are going to do what is in the best interest of shareholders. I think we have proven that. We have proven that by waiving three-quarters of investment incentive fees that we did not need to waive. We are going to allocate capital where is the best place. You saw we bought back $6.5 million of our highest-cost debt. At that time, we thought that was the best allocation.
Our stock was not trading at the same NAV discount that it is now. That was debt that, on a GAAP basis, cost us like nine and an eight, even though the coupon is 8.5% because of the cost of issuance and so on that goes through. We thought that was a great, a guaranteed nine and an eight return with zero risk is better than a lot of things in the market at that point in time. And right now, it is 66% or trading at 66% of our NAV. Buying back some stock is the best thing for the shareholders.
I would definitely agree with that, and I think the shareholders would be disappointed if you did not buy back stock at these prices. In terms of sustainability of the dividend, there is a lot of moving pieces on your balance sheet, but it is hard for me to triangulate you covering the dividend next year at $0.25 per share. That is my own opinion. Can you remind us, where do you stand on an undistributed, on a spillover taxable income basis to help support that dividend?
I do not think we disclose a specific number, but we have a significant spillover, and that is part of the reason that we would pay $0.25 in the fourth quarter without knowing whether we will cover it or not. Yes, we have spillover. We definitely need, between now and next September, to meet some of those spillover needs.
Understand. Those are all my questions this morning. I thank you for your time.
My pleasure. If you have follow-ups, happy to get the team on a phone call with you.
Okay. Appreciate it.
Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Erik Zwick with Lucid Capital Markets. Please proceed with your question.
Thanks. Good morning. I think I've got a few left. A lot of mine were kicked off in that last exchange. Let me first start with Jason. You sounded fairly optimistic about the momentum in the pipeline for new loans, particularly with regard to the private loans. Can you update us just on where the pipeline stands today in dollar terms versus maybe 90 days ago, and what that mix looks like between private loans, maybe syndicated loans, CLO opportunities?
I think our pipeline is probably as great as it has been for private loans right now, and it's a lot of our focus. We are seeing better risk-adjusted returns in private credit as opposed to the broadly syndicated credit. There's still more dollars, I think, chasing broadly syndicated than there is private credit. We're seeing more and more opportunities, much more than 90 days ago. So that's a lot of our focus. If you look at our credit portfolio, away from CLOs and away from specialty finance, which is about 68% or 70% of our portfolio. We're constantly evaluating broadly syndicated versus private, and I think we have a slide that shifts over time. Right now, we're definitely much more focused on private credit opportunities because we think that's where the opportunity is.
I don't think we're currently looking at any CLO opportunities, just because that market is very tight. New CLOs that are getting done, the returns on equity are not compelling to us. So that's not our priority at this moment. I can't tell you that that won't shift 90 or 180 days from now, but that's where we are today. I hope that answers the question.
Yeah, that's definitely helpful. Thank you. I just maybe want to As I look at the press release, there's a quote in there about navigating a challenging credit environment. So just how do you balance that versus this building private loan pipeline? Have you kind of changed or adjusted or tightened the way that you're underwriting credits, the industries you look at, documentation, things of that nature? How do you make sure with this growing pipeline that the opportunities that you're selecting will meet those kind of risk-adjusted return hurdles that you're targeting?
It's absolutely all those things that you just talked about. We're getting better spreads, staying way high in the cap structure as credit, getting better documentation than things were before. I mean, it's just with everything that's happened in private credit, there are less dollars competing right now. So we're seeing the shift. I don't think all the borrowers are there yet, but the lenders are, and the borrowers are coming towards the lender side. So that's why I think we see things progressing positively for lenders more in private credit right now than we do in the broadly syndicated space [crosstalk]
[inaudible]
We're seeing more opportunities to participate with some of our bigger brethren on deals where they're less eager to hold 100% of deals on their own balance sheets and want people to participate with.
Then last one for me, you noted the increased distribution from Great Elm Specialty Finance in the most recent quarter. Is that contribution expected to be consistent or continue to grow going forward, or some variability expected over the next quarter or two?
There's always going to be some variability, but if you look specifically at our the spot factoring business, that business constantly has a level of, I'll call it seasonality, but it's not really seasonality, but variability. Most of the receivables they buy go away in 60 to 90 days, so they're constantly refilling their portfolio. Their balance sheet shrunk significantly from the beginning of the year to the end of the second quarter, but now has grown back. Their balance sheet roughly halved and now has doubled again to back to the size. That's a fixed cost business with a lot. As you add dollars to your portfolio, the margins increase dramatically. So that's part of the swing that you saw there. We were hopeful if that continues to grow, but there's always some variability in their portfolio.
I appreciate the color there. That's all for me. Thank you so much.
Great. Thank you, Erik. I'm happy to set up a call if you'd like to follow up too.
We have reached the end of the question-and-answer session. I would like to turn the floor back over to Jason Reese for closing comments.
Thank you again for joining us today. While we recognize that our financial performance has fallen short of expectations, we remain confident in the underlying quality of our credit portfolio and the strategic direction of GECC. We are focused on improving NAV stability, generating more consistent earnings, and strengthening long-term shareholder returns. Our growing pipeline of differentiated private investments, expanding specialty finance platform, and improved balance sheet provide a solid foundation for making progress towards these objectives. We will continue to prioritize disciplined underwriting and proactive portfolio management as we work to deliver more consistent performance for our shareholders. We appreciate your continued support and we look forward to updating you on our progress. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.