Business Context and Reporting Period
Company: Great Elm Capital Corp. (GECC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2021
Business Overview: 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, including specialty finance businesses.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 |
|---|---|---|
| Total Investment Income | $7.37 million | $18.90 million |
| Net Investment Income | $1.57 million | $5.18 million |
| Net Realized Gain (Loss) | $1.66 million | ($3.98 million) |
| Net Change in Unrealized Appreciation (Depreciation) | ($6.36 million) | $10.71 million |
| Net Increase (Decrease) in Net Assets from Operations | ($3.13 million) | $11.90 million |
| Total Expenses | $5.80 million | $13.72 million |
| Cash and Cash Equivalents | $20.61 million (as of Sep 30, 2021) | |
| Net Assets | $99.43 million (as of Sep 30, 2021) | |
| Net Asset Value (NAV) per Share | $3.70 (as of Sep 30, 2021) | |
| Asset Coverage Ratio | 163.8% (as of Sep 30, 2021) |
Material Changes vs. Prior Period
- Investment Income: Total investment income increased to $7.37 million for the quarter (from $5.95 million in Q3 2020) and $18.90 million for the nine-month period (from $17.15 million in 2020). This growth was driven by an increase in interest-earning assets and redeployment of capital, offsetting lower LIBOR rates and exits from high-yielding positions in the prior year.
- Expenses: Total expenses rose to $5.80 million for the quarter (from $4.02 million in Q3 2020) and $13.72 million for the nine-month period (from $11.65 million in 2020). Increases were primarily due to higher management fees (driven by increased portfolio fair value), professional services (including one-time legal fees), and interest expense.
- Realized Gains/Losses: The company reported a net realized gain of $1.66 million for the quarter, contrasting with a net realized loss of $0.14 million in Q3 2020. For the nine months, a net realized loss of $3.98 million was recorded, compared to a loss of $10.52 million in the prior year period. The nine-month loss was driven by paydowns and sales of investments in OPS, Boardriders, and CPK.
- Unrealized Appreciation/Depreciation: Net unrealized depreciation of $6.36 million occurred in the quarter, reversing a net appreciation of $5.91 million in Q3 2020. For the nine months, net unrealized appreciation was $10.71 million, a significant improvement over the $17.30 million depreciation in the prior year. This was largely due to the reversal of previously recognized unrealized losses upon the sale or paydown of specific investments.
- Portfolio Size: The investment portfolio (excluding short-term investments) grew to $246.74 million at fair value as of September 30, 2021, from $151.65 million at December 31, 2020.
Guidance, Outlook, Risks, and Unusual Items
- Dividend Distribution: The Board authorized a distribution of $0.10 per share for the quarter ending March 31, 2022.
- Capital Markets Activity: In June and July 2021, the company issued $57.5 million in aggregate principal amount of 5.875% Notes due 2026 (GECCO Notes). In July 2021, it redeemed all outstanding 6.50% Notes due 2022 (GECCL Notes). A new $25 million revolving credit facility with City National Bank was established in May 2021, with $10 million drawn as of period end.
- COVID-19 Impact: Management notes that the full impact of the pandemic on portfolio companies remains uncertain. While operations have transitioned to remote models, prolonged disruptions could lead to financial distress, defaults, or restructuring among portfolio companies, potentially reducing investment income and fair values.
- Interest Rate Risk: Approximately $103.9 million of the debt portfolio bears interest at variable rates based on LIBOR. A prolonged reduction in interest rates could decrease gross investment income if not offset by higher spreads or reduced expenses.
- Unusual Items: Professional services expenses included approximately $0.2 million in one-time legal fees for compliance matters and claims. Certain due from portfolio company balances were determined uncollectible and expensed in the quarter.
Investor Verification Checklist
- Asset Coverage Ratio: Verify the 163.8% ratio remains above the 150% minimum required by the Investment Company Act, especially given the recent amendment to the revolving credit facility covenant.
- Unfunded Commitments: Confirm the company's ability to fund the $31.3 million in unfunded loan commitments using current cash ($20.6 million) and the available revolver capacity.
- Level 3 Valuations: Review the significant unobservable inputs (discount rates, earnings multiples) used to value the $161.8 million in Level 3 assets, which represent a substantial portion of the portfolio.
- PIK Income: Assess the quality of income, noting that $1.7 million of the quarterly interest income was non-cash Payment-in-Kind (PIK).
- Legal Proceedings: Monitor the status of the Intrepid Investments, LLC v. London Bay Capital lawsuit and the Full Circle related litigation involving Dr. Pumphrey.