Business Context and Reporting Period
Company: Great Elm Capital Corp. (GECC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2019
Business Model: GECC is an externally managed, non-diversified closed-end management investment company registered as a Business Development Company (BDC). It seeks to generate current income and capital appreciation primarily through debt and equity investments in middle-market companies and small businesses. The company is managed by Great Elm Capital Management, Inc. (GECM).
Key Financial Metrics
| Metric | Six Months Ended June 30, 2019 | Three Months Ended June 30, 2019 |
|---|---|---|
| Total Investment Income | $13.0 million | $6.7 million |
| Net Investment Income | $5.8 million | $3.0 million |
| Net Realized Gain | $1.0 million | $0.4 million |
| Net Unrealized Depreciation | ($3.1 million) | ($7.8 million) |
| Net Increase in Net Assets from Operations | $3.7 million | ($4.4 million) |
| Total Expenses | $7.2 million | $3.7 million |
| Net Asset Value (NAV) per Share | $10.30 (End of Period) | $10.30 (End of Period) |
| Total Portfolio Investments (Fair Value) | $329.1 million | $329.1 million |
| Cash and Cash Equivalents | $2.5 million | $2.5 million |
| Weighted Average Interest Rate (Portfolio) | 9.61% | 9.61% |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased to $13.0 million for the six months ended June 30, 2019, compared to $14.7 million in the prior year period. This was primarily due to the April 2018 restructuring of the Avanti Communications Group plc investment, where third lien notes were converted to non-income producing equity. This was partially offset by portfolio growth.
- Expense Fluctuation: Total expenses increased to $7.2 million (six months 2019) from $4.7 million (six months 2018). The prior year period included a one-time reversal of $2.6 million in incentive fees related to the Avanti restructuring, which artificially lowered 2018 expenses. Excluding this reversal, expenses were relatively stable.
- Unrealized Depreciation: The company recognized net unrealized depreciation of $3.1 million for the six months ended June 30, 2019, compared to $12.5 million in the prior year. Significant depreciation was recognized on Avanti bonds/equity ($3.6 million) and Commercial Barge Line Company ($1.4 million), partially offset by appreciation in Finastra Group Holdings and other assets.
- Debt Issuance: In June 2019, the company issued $42.5 million in aggregate principal amount of 6.50% Notes due 2024 (GECCN Notes), increasing total outstanding debt.
Guidance, Outlook, and Risks
- Distributions: The Board declared monthly distributions for the third quarter of 2019 at an annual rate of approximately 9.7% of the June 30, 2019 NAV, equating to $0.083 per month. All distributions are from net investment income.
- Stock Repurchases: The company completed its $5.0 million stock buyback program authorized in March 2019, purchasing 589,719 shares at a weighted average price of $8.45 per share during the six months ended June 30, 2019.
- Recent Portfolio Activity: Subsequent to June 30, 2019, the company completed the sale of its majority-owned subsidiary, PE Facility Solutions, LLC, for $23.75 million. Additional investments were made in California Pizza Kitchen, Shearer's Foods, and Mitchell International.
- Market Risk: Approximately 74% of the debt portfolio ($128.8 million) bears variable interest rates based on LIBOR. A 1% increase in LIBOR would increase net investment income by approximately $1.97 million, while a 1% decrease would reduce it by $1.43 million.
- Legal Proceedings: The company is involved in ongoing litigation, including a lawsuit by Intrepid Investments, LLC regarding a portfolio company (Speedwell Holdings) and a claim by a Chapter 7 trustee in the ITT Educational Services bankruptcy. Management intends to vigorously defend these matters.
Investor Verification Checklist
- Avanti Restructuring Impact: Verify the ongoing valuation and income potential of the Avanti Communications Group equity position, which replaced significant interest-bearing debt.
- Debt Maturity Profile: Review the maturity schedule of the three tranches of senior notes (GECCL, GECCM, GECCN) totaling $121.5 million to assess refinancing risks.
- Level 3 Valuations: Scrutinize the fair value assumptions for Level 3 assets ($152.4 million), which rely on unobservable inputs and independent appraisals.
- Unfunded Commitments: Confirm the company's liquidity position relative to $20.2 million in unfunded loan commitments to portfolio companies.
- PEFS Sale Proceeds: Monitor the realization of proceeds from the sale of PE Facility Solutions, LLC, completed in July 2019, and its impact on future cash flows.