Business Context and Reporting Period
Company: Great Elm Capital Corp. (GECC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2021
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 through debt and income-generating equity investments in middle-market companies.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2021 | Three Months Ended June 30, 2021 |
|---|---|---|
| Total Investment Income | $11.53 million | $6.23 million |
| Net Investment Income | $3.61 million | $2.10 million |
| Net Realized Gain (Loss) | ($5.64 million) | ($2.37 million) |
| Net Change in Unrealized Appreciation | $17.07 million | $2.75 million |
| Net Increase in Net Assets from Operations | $15.03 million | $2.49 million |
| Total Expenses | $7.92 million | $4.13 million |
| Net Asset Value (NAV) per Share | $3.90 (End of Period) | N/A |
| Cash and Cash Equivalents | $59.76 million | N/A |
| Total Debt Outstanding | $168.73 million | N/A |
| Asset Coverage Ratio | 166.2% | N/A |
Material Changes vs. Prior Period
- Investment Income: Total investment income increased to $11.53 million for the six months ended June 30, 2021, compared to $11.20 million in the prior year period. Interest income decreased slightly due to exits from high-yielding positions and lower LIBOR rates, but was offset by increased dividend income from preferred equity investments.
- Expenses: Total expenses rose to $7.92 million (six months 2021) from $7.63 million (six months 2020). This increase was primarily driven by higher management and incentive fees due to the growth in portfolio fair value.
- Realized Gains/Losses: The company reported a net realized loss of $5.64 million for the six months ended June 30, 2021, compared to a loss of $10.38 million in the prior year. Significant losses were driven by the paydown of the OPS Acquisitions Limited loan and the sale of Boardriders, Inc. debt, partially offset by gains on Crestwood Equity Partners and Subcom, LLC.
- Unrealized Appreciation: Net unrealized appreciation was $17.07 million for the six months ended June 30, 2021, a significant improvement from the $23.21 million depreciation recorded in the same period in 2020. This was largely due to the relief of previously recognized unrealized losses on OPS and CPK investments.
- Portfolio Growth: The investment portfolio (excluding short-term investments) grew from $151.65 million at December 31, 2020, to $209.43 million at June 30, 2021.
Guidance, Outlook, and Risks
- Dividend Distribution: The Board authorized a distribution of $0.10 per share for the quarter ending December 31, 2021.
- Capital Markets Activity: On June 23, 2021, GECC issued $50.0 million of 5.875% Notes due 2026 (GECCO Notes). On July 9, 2021, an additional $7.5 million was sold via over-allotment. On July 23, 2021, the company redeemed all outstanding 6.50% Notes due 2022 (GECCL Notes).
- Liquidity: As of June 30, 2021, the company held $59.76 million in cash and cash equivalents and had $24.6 million in unfunded loan commitments. A $25 million revolving credit facility with City National Bank was established in May 2021, with no borrowings outstanding as of period end.
- Risks and Contingencies:
- COVID-19: The pandemic continues to pose risks to portfolio company operations, potentially leading to financial distress, defaults, or restructuring. The company notes that the full impact remains uncertain.
- Interest Rate Risk: Approximately $100.4 million of debt investments bear variable rates based on LIBOR. A prolonged reduction in interest rates could decrease gross investment income.
- Legal Proceedings: GECC is involved in litigation regarding a portfolio investment (Speedwell Holdings) and a counterclaim from a personal guarantor (Dr. Pumphrey) seeking $2 million to $6 million in damages. The company intends to defend these matters vigorously.
Investor Verification Checklist
- Debt Redemption: Verify the successful redemption of the GECCL Notes (due 2022) in July 2021 and the impact on future interest expense.
- Portfolio Valuation: Review the significant unrealized appreciation ($17.07 million) driven by the reversal of losses on specific positions (OPS, CPK) to understand the sustainability of NAV growth.
- Realized Losses: Investigate the specific terms of the OPS Acquisitions Limited paydown that resulted in a $4.1 million realized loss.
- Legal Exposure: Monitor the status of the Dr. Pumphrey counterclaim and the Speedwell Holdings litigation for potential financial impact.
- Asset Coverage: Confirm the asset coverage ratio remains above the 150% minimum required by the Investment Company Act (currently 166.2%).