Great Elm Capital Corp. — FY2023 Form 10-K
Reporting period: Year ended December 31, 2023; filed February 29, 2024. Great Elm is an externally managed business development company (BDC) and regulated investment company (RIC) investing in middle-market debt, income-generating equity and specialty finance businesses. This is an annual report, not a standalone fourth-quarter earnings release.
Financial performance and position
| Metric | FY2023 / Dec. 31, 2023 | FY2022 / Dec. 31, 2022 |
|---|---|---|
| Total investment income | $35.8 million | $24.4 million |
| Net investment income (after excise tax) | $12.5 million; $1.65 per share | $10.5 million; $1.67 per share |
| Net realized investment loss | $4.7 million | $126.0 million |
| Net unrealized appreciation | $17.5 million | $100.0 million |
| Net increase (decrease) from operations | $25.3 million; $3.33 per share | $(15.6) million; $(2.49) per share |
| Net assets / NAV per share | $98.7 million / $12.99 | $84.8 million / $11.16 |
| Investment portfolio, excluding short-term investments | $230.6 million fair value | $225.0 million fair value |
| Cash and cash equivalents | $1.0 million; plus $10.8 million in money-market investments | $0.6 million; plus $76.1 million in short-term investments |
| Net cash from operating activities | $25.7 million | $(41.8) million |
| Debt outstanding | $143.1 million principal; $140.2 million carrying value | $155.9 million principal, including $10.0 million revolver; $153.2 million carrying value |
| Asset coverage ratio | 169.0% | 154.4% |
- Investment income rose 47%, mainly from portfolio growth and higher interest rates. Interest income increased to $28.9 million; dividends declined to $3.5 million from $4.4 million. FY2023 income included $2.6 million of non-cash PIK income.
- Net investment income increased in dollars, but declined slightly per share. Net expenses were $23.0 million versus $13.7 million in 2022; the comparison is affected by a $4.9 million incentive-fee waiver in 2022. Interest expense was $11.7 million, up from $10.7 million.
- Improved operations reflected $17.5 million of unrealized appreciation and a much smaller realized loss than in 2022, when the Avanti Communications restructuring drove substantial realized losses. FY2023 realized losses included Lenders Funding and Avanti Communications; gains included the GESF contribution and a partial sale of American Coastal Insurance.
- Net operating cash flow improved to positive $25.7 million. Financing cash flow was negative $25.3 million, including distributions and debt refinancing activity.
Material changes and portfolio
- On September 1, 2023, Great Elm contributed specialty-finance holdings and other assets to Great Elm Specialty Finance (GESF) for equity and subordinated debt. A strategic investor acquired approximately 12.5% of GESF. GECC retained an 87.5% equity interest; its GESF investments had a reported fair value of $46.2 million at year-end.
- Portfolio acquisitions were $226.1 million and dispositions/paydowns were $235.6 million during 2023. The reported weighted-average yield on debt at year-end was 13.77%; this includes non-accrual investments at zero yield in the calculation.
- Specialty finance remained the largest industry exposure at $52.3 million, or 22.7% of portfolio fair value excluding short-term investments. Other notable concentrations included chemicals (11.7%), consumer products (8.8%), transportation equipment manufacturing (7.5%) and insurance (7.0%).
- About $142.7 million of investments were Level 3 at year-end, relying on significant unobservable valuation inputs. Deloitte identified valuation of these investments as a critical audit matter; the auditor issued an unqualified opinion on the financial statements.
Debt, liquidity, distributions and outlook
- GECC issued $40 million of 8.75% notes due 2028 and redeemed its $42.8 million GECCN notes due 2024 in September 2023. Year-end notes outstanding were $45.6 million of 6.75% notes due 2025, $57.5 million of 5.875% notes due 2026, and $40.0 million of 8.75% notes due 2028.
- The $25 million secured revolving facility had no year-end balance and matures May 5, 2027. Its November 2023 amendment reduced the SOFR spread to 3.00% from 3.50%. The facility is subject to borrowing-base and financial covenants. The notes are unsecured and effectively junior to secured debt.
- Management stated that available liquidity should be sufficient for obligations over the next 12 months and foreseeable future. GECC reported $8.9 million of unfunded portfolio commitments and said available cash and liquid assets were sufficient to meet them.
- Distributions declared declined to $1.50 per share for 2023 from $1.95 in 2022. The Board set a $0.35-per-share cash distribution for the quarter ending March 31, 2024. The filing provides no earnings or NAV guidance.
- After year-end, on February 8, 2024, GECC issued 1,850,424 shares to Great Elm Strategic Partnership I for $24 million at $12.97 per share, stated to equal NAV per share as of February 7, 2024. GEG owns 25% of the purchaser; GECM is a GEG subsidiary.
- At December 31, 2023, shares closed at $10.65 against NAV of $12.99, a 18.0% discount using those year-end values. The common stock generally traded below NAV during the two years shown.
Risks, contingencies and unusual items
- Key risks include concentrated holdings, portfolio-company defaults and restructurings, illiquid and subjective Level 3 valuations, exposure to specialty-finance operations, interest-rate and refinancing risk, and leverage. At year-end the asset-coverage cushion above the 150% statutory minimum was 19 percentage points.
- Rising rates may increase investment income, but can also raise borrower stress and funding costs. GECC estimated that a 1-percentage-point reference-rate increase would increase annual net investment income by approximately $1.5 million, assuming no other portfolio changes and no floating-rate company borrowings.
- Non-cash PIK and discount accretion can increase accounting and taxable income without immediate cash receipts, potentially complicating distributions and RIC compliance. GECC reported $193.5 million in federal tax capital-loss carryforwards at year-end, including $40.8 million subject to annual Section 382 limits.
- A lawsuit naming GECC as a defendant remains in pre-trial discovery after the court partially granted and partially denied defendants’ motion to dismiss in June 2023. The filing does not provide a clear estimate of potential loss.
- GECC reported effective disclosure controls and internal control over financial reporting. It was not aware of a cybersecurity incident since the start of 2023 that had materially affected, or was reasonably likely to materially affect, the company.
Important facts for investors to verify
- Review the detailed portfolio schedule, non-accrual status, borrower performance and valuation assumptions—particularly the significant Level 3 positions and the GESF investment.
- Assess cash income versus accrued PIK income, and whether recurring net investment income supports the current distribution after expenses and debt service.
- Check refinancing plans and terms for the 2025 and 2026 notes, covenant headroom, asset coverage and the cost and availability of the revolving facility.
- Evaluate the effect of the February 2024 related-party private placement on share count, NAV per share, control and alignment of interests.
- Follow the Intrepid litigation and any developments affecting contingent exposure; the filing does not quantify a probable loss.