GECC

Business Context and Reporting Period

Company: Great Elm Capital Corp. (GECC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2017
Business Model: GECC is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC). It seeks to generate current income and capital appreciation primarily through debt investments in middle-market companies, including senior secured and unsecured notes, loans, and mezzanine debt. The company intends to qualify as a Regulated Investment Company (RIC) for U.S. federal income tax purposes.

Key Financial Metrics

Note: All dollar amounts in thousands unless otherwise noted. Total Investment Income includes significant Payment-in-Kind (PIK) income of $3,114 for the quarter and $4,256 for the six months.

Material Changes vs. Prior Period

• Portfolio Valuation: The investment portfolio decreased from $154,677 at December 31, 2016, to $205,571 at June 30, 2017, driven by new acquisitions of $97,247 offset by repayments/sales of $116,328 and net unrealized depreciation of $10,021.
• Unrealized Losses: Significant unrealized depreciation occurred, primarily driven by the Avanti Communications Group plc position, which saw a decrease in fair value of $7,315 over the six-month period. Total net unrealized depreciation on investments was $(10,021) for the six months.
• Realized Gains: The company recorded net realized gains of $3,361 for the six months, largely due to the disposition of investments in JN Medical ($1,007 gain) and Everi Payments ($1,134 gain).
• Share Count: Shares outstanding decreased from 12,790,880 to 11,568,555 due to the company's stock buyback program and tender offer, resulting in accretion to NAV.
• Expense Ratios: The ratio of total expenses to average net assets (after waiver) was 7.27% (annualized) for the six months ended June 30, 2017.

Guidance, Outlook, and Risks

• Distributions: The Board declared monthly distributions for the third quarter of 2017 at an annual rate of approximately 7.50% of NAV ($0.083 per share per month).
• Stock Buyback Program: The company has a program to repurchase shares up to $50,000 (increased from $15,000) when trading below 90% of NAV. As of June 30, 2017, approximately $10,000,132 remained available under the program.
• Recent Acquisitions: In July and August 2017, the company purchased $5.0 million of Tru Taj, LLC bonds and an additional $5.0 million of the Commercial Barge Line Company loan.
• Interest Rate Risk: Approximately 48% of the debt portfolio ($63,783) is at variable rates based on LIBOR. A 1% increase in LIBOR would increase net investment income by approximately $687, while a 1% decrease would reduce it by $264.
• Legal Proceedings: The company is involved in settlement discussions regarding shareholder actions related to the Full Circle merger. A settlement agreement in principle has been reached, pending court approval.
• Valuation Risk: A significant portion of the portfolio (Level 3 assets) is valued using unobservable inputs, introducing subjectivity and potential volatility in reported fair values.

Investor Verification Checklist

• PIK Income Sustainability: Verify the cash collection status of the $4,256 in PIK income included in total investment income, as this does not represent immediate cash flow.
• Avanti Communications Exposure: Review the specific credit metrics and restructuring status of Avanti Communications, which accounted for the majority of the period's unrealized depreciation.
• Debt Covenants: Confirm continued compliance with the 2:1 asset coverage ratio requirement under the Investment Company Act, currently standing at 6:1.
• Expense Waivers: Monitor the final calculation of the administration fee waiver cap for the fiscal year ending November 4, 2017, which could impact future expense ratios.
• Buyback Execution: Track the utilization of the remaining $10 million buyback authorization to assess management's view on share price relative to NAV.