Great Elm Capital Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Great Elm Capital Corp. is an externally managed business development company (BDC) investing primarily in middle-market debt and income-producing equity, including specialty finance. Unless noted, dollar figures below are in millions.
Financial performance and portfolio
| Metric | Q1 2024 | Q1 2023 / prior period |
|---|---|---|
| Total investment income | $8.9 | $8.4 |
| Net investment income | $3.2; $0.37 per share | $2.8; $0.37 per share |
| Realized investment gains | $2.4 | $1.8 |
| Change in unrealized investment value | $(6.0) | $3.5 |
| Net change in assets from operations | $(0.5); $(0.05) per share | $8.2; $1.07 per share |
| Net asset value (NAV) per share | $12.57 | $12.99 at Dec. 31, 2023 |
| Total investments at fair value | $271.2 | $241.4 at Dec. 31, 2023 |
Investment income rose 6% year over year, principally due to portfolio growth and higher rates. Debt investments had an average coupon of 12.6% on approximately $218.0 million of principal, excluding non-accrual investments, versus 11.8% on $204.2 million a year earlier. Total expenses were $5.7 million, up from $5.5 million; advisory and administration fees rose, while interest expense was nearly flat at $2.8 million. The filing reports an annualized total-expense-to-average-net-assets ratio of 18.51% for Q1 2024.
The portfolio comprised $213.2 million of debt and $49.6 million of equity and other investments, plus $8.3 million in short-term investments. The weighted-average yield on outstanding debt securities was 12.84%, compared with 13.77% at year-end 2023. The largest industry exposure was specialty finance at $44.6 million (17.0% of portfolio fair value).
Cash flow, liquidity and debt
Cash used in operating activities was $25.4 million, reflecting investment purchases and cash-flow adjustments. The company acquired $64.6 million of investments and reported $29.3 million of dispositions for portfolio activity; cash-flow disclosures separately show $56.9 million of investment purchases and $27.5 million of sales and principal-payment proceeds. Financing activities provided $24.8 million, including $23.8 million net proceeds from common-stock issuance and $5.0 million of revolver borrowings, partly offset by $4.1 million of distributions paid.
At March 31, cash and cash equivalents were $0.3 million and money market investments were $8.3 million. Net assets were $118.8 million. Notes had $143.1 million aggregate principal outstanding, and the secured revolver had $5.0 million outstanding. The company reported asset coverage of approximately 180.2%, above the 150% statutory minimum, and stated it was in covenant compliance. Contractual principal obligations included $45.6 million of notes due in January 2025, $57.5 million due in June 2026, $40.0 million due in 2028, and the $5.0 million revolver due in 2027.
Material changes, outlook and risks
- Q1 unrealized depreciation of $6.0 million contrasted with unrealized appreciation of $3.5 million in Q1 2023. Notable Q1 marks included Research Now Group, down $3.9 million amid weaker demand and restructuring discussions; GESF, down $1.6 million amid weaker-than-planned originations; and PFS Holdings, down $0.9 million amid poor performance.
- Common shares outstanding increased from 7.60 million to 9.45 million after a February private placement of 1,850,424 shares to Great Elm Strategic Partnership I, an entity 25% owned by Great Elm Group, at $12.97 per share, approximately the then-current NAV. Net proceeds were $23.8 million.
- Management said it believed liquidity was sufficient for obligations for at least the next 12 months and foreseeable future. The Board declared a $0.35-per-share cash distribution for the quarter ending June 30, 2024, from distributable earnings.
- After quarter-end, the company repaid the $5.0 million revolver balance and issued $34.5 million principal of 8.50% notes due 2029, including the fully exercised over-allotment. It also entered a joint venture to invest in CLO entities and related warehouse facilities.
- Approximately $164.4 million of debt principal was variable-rate at quarter-end. The company estimated that a 1 percentage-point reference-rate change would alter net investment income by approximately $1.5 million, assuming no other changes and no floating-rate company borrowings.
- Fair value estimates involve uncertainty: $154.4 million of investments were Level 3 at quarter-end. Certain investments were on non-accrual, including Research Now and New Wilkie Energy. Management reported no material risk-factor changes. A previously disclosed lawsuit involving Speedwell Holdings remains in pre-trial discovery; the filing does not quantify a loss estimate.
Most important facts for investors to verify
- Whether the Research Now restructuring and the performance of PFS and GESF lead to further markdowns, non-accruals or reduced cash receipts.
- The company’s refinancing and repayment plan for the $45.6 million GECCM notes due in January 2025, including the effect of the post-quarter 2029 notes issuance.
- Whether distributable earnings and cash collections support the declared $0.35 quarterly distribution, particularly given the difference between accrued income and cash received.
- Portfolio fair-value assumptions and Level 3 marks, as well as asset-coverage and lender-covenant headroom.
- Performance and governance implications of the related-party share placement and the new CLO joint venture.