Business Context and Reporting Period
Company: Great Elm Capital Corp. (GECC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2020
Business Model: GECC is an externally managed, non-diversified closed-end management investment company registered as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It seeks to generate current income and capital appreciation primarily through debt and equity investments in middle-market companies.
Key Financial Metrics
| Metric | Amount (in thousands) | Per Share |
|---|---|---|
| Total Investment Income (9 months) | $17,148 | $1.66 |
| Net Investment Income (9 months) | $5,501 | $0.53 |
| Net Realized Gain (Loss) (9 months) | $(10,523) | $(1.02) |
| Net Unrealized Appreciation (Depreciation) (9 months) | $(17,301) | $(1.68) |
| Net Increase (Decrease) in Net Assets from Operations (9 months) | $(22,323) | $(2.17) |
| Total Assets (as of Sept 30, 2020) | $264,505 | - |
| Total Liabilities (as of Sept 30, 2020) | $204,041 | - |
| Net Assets (as of Sept 30, 2020) | $60,464 | $5.53 NAV |
| Cash and Cash Equivalents | $12,570 | - |
| Outstanding Debt (Principal) | $118,726 | - |
| Asset Coverage Ratio | 150.9% | - |
Material Changes vs. Prior Period
- Net Asset Value (NAV) Decline: NAV per share decreased from $8.63 at December 31, 2019, to $5.53 at September 30, 2020. This represents a total return based on NAV of -25.03% for the nine-month period.
- Investment Income: Total investment income decreased to $17.1 million for the nine months ended Sept 30, 2020, compared to $20.0 million in the prior year period. This was driven by exits from high-income positions (e.g., PE Facility Solutions, SESAC) and a decrease in LIBOR rates affecting floating-rate debt.
- Realized Losses: The company recognized net realized losses of $10.5 million, primarily due to the sales of Commercial Barge Line Company ($9.8 million loss) and Full House Resorts, Inc. ($1.3 million loss).
- Unrealized Depreciation: Net unrealized depreciation of $17.3 million was recorded, largely driven by valuation decreases in Avanti Communications Group, Boardriders, Inc., and California Pizza Kitchen (CPK) due to the economic impact of the COVID-19 pandemic.
- Expenses: Total expenses remained relatively flat at $11.6 million compared to the prior year, with decreases in management and incentive fees offset by an increase in interest expense due to new note issuances in 2019.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 Impact: Management highlights significant uncertainty regarding the duration and economic impact of the pandemic. Several portfolio companies (e.g., CPK, which filed for bankruptcy in July 2020) have been placed on non-accrual status. Management expects potential further declines in fair value and reduced investment income.
- Interest Rate Risk: Approximately $142.4 million of the debt portfolio bears interest at variable rates based on LIBOR. A prolonged reduction in LIBOR could reduce gross investment income if not offset by higher spreads or lower expenses.
- Capital Raise: On October 1, 2020, the company completed a non-transferable rights offering, selling approximately 10.8 million shares for gross proceeds of $31.7 million.
- Distributions: The Board set distributions for the quarter ending March 31, 2021, at $0.10 per share, payable in cash from net investment income.
- Legal Proceedings: The company is involved in ongoing litigation, including a lawsuit regarding Speedwell Holdings and a bankruptcy proceeding involving Dr. Willis Pumphrey. A settlement of $201,000 was paid in September 2020 regarding the ITT Educational Services bankruptcy.
Investor Verification Checklist
- Non-Accrual Status: Verify the specific portfolio companies currently on non-accrual status (e.g., CPK, Davidzon Radio, PFS Holdings) and the likelihood of recovery.
- Asset Coverage Ratio: Confirm the company maintains the required 150% asset coverage ratio under the Investment Company Act, currently at 150.9%.
- Debt Maturities: Review the maturity schedule of the $118.7 million in outstanding notes (GECCL, GECCM, GECCN) and the company's ability to refinance or repay.
- Level 3 Valuations: Scrutinize the fair value assumptions for Level 3 assets (approx. $128.8 million), which rely on unobservable inputs and management judgment.
- Capital Loss Carryforwards: Note the $45.1 million in capital loss carryforwards available to offset future taxable gains, which may impact future distribution requirements.