Business Context and Reporting Period
Company: Great Elm Capital Corp. (GECC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2019
Business Model: GECC is an externally managed, non-diversified closed-end management investment company registered as a Business Development Company (BDC). It seeks to generate current income and capital appreciation primarily through debt investments (senior secured/unsecured notes, loans) in middle-market companies, with occasional equity investments. The company is managed by Great Elm Capital Management, Inc. (GECM).
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total Investment Income | $6.31 million | $7.50 million |
| Net Investment Income | $2.78 million | $3.87 million |
| Net Realized Gain | $0.61 million | $0.32 million |
| Net Change in Unrealized Appreciation | $4.68 million | $(8.22 million) |
| Net Increase in Net Assets from Operations | $8.07 million | $(4.04 million) |
| Total Expenses | $3.53 million | $3.63 million |
| Net Asset Value (NAV) per Share | $10.89 | $11.79 |
| Portfolio Weighted Average Interest Rate | 11.28% | 11.05% |
| Outstanding Debt (Notes Payable) | $79.03 million | $73.36 million (avg) |
| Cash and Cash Equivalents | $3.41 million | $6.03 million |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by approximately 16% year-over-year. This was primarily driven by the April 2018 restructuring of the Avanti Communications Group plc investment, where third lien notes were converted to equity, eliminating $2.0 million in interest income that was present in Q1 2018.
- Unrealized Appreciation Surge: The company recorded a net increase in unrealized appreciation of $4.68 million in Q1 2019, a significant turnaround from the $8.22 million depreciation in Q1 2018. Key drivers included a $3.1 million unrealized gain on the Avanti investment and a $1.0 million gain from the restructuring of Tru Taj, LLC.
- Expense Composition: While total expenses remained relatively flat, interest expense increased to $1.45 million (from $1.28 million) due to the issuance of $43.0 million in 6.75% notes in early 2018. Incentive fees decreased to $0.70 million (from $0.97 million) due to lower pre-incentive fee net investment income.
- Portfolio Activity: The company acquired $54.8 million in new investments and disposed of $59.9 million. The portfolio weighted average interest rate increased to 11.28%.
Guidance, Outlook, and Risks
- Distributions: The Board declared monthly distributions for Q1 2019 at an annual rate of approximately 9.1% of NAV ($0.083 per month), funded entirely by net investment income. Q2 2019 distributions were declared at the same rate.
- Stock Buyback: In March 2019, the company initiated a $5.0 million stock repurchase program. During Q1, it repurchased 192,000 shares at an average price of $8.27. Additional repurchases of 116,883 shares occurred in April 2019.
- Recent Developments:
- PE Facility Solutions (PEFS) Sale: On May 10, 2019, GECC entered an agreement to sell substantially all assets of its controlled subsidiary, PEFS, for $23.75 million. The deal is expected to close in Q2 or Q3 2019.
- Portfolio Transactions: In April 2019, GECC sold Michael Baker International bonds and purchased SESAC Holdco II loans.
- Risks and Contingencies:
- Legal Proceedings: GECC is a defendant in Intrepid Investments, LLC v. London Bay Capital (Delaware Court of Chancery) and a counterclaim by Dr. Willis Pumphrey seeking $2-6 million in damages. The company intends to vigorously defend these claims.
- Interest Rate Sensitivity: Approximately 70% of the debt portfolio ($105.9 million) is variable-rate (LIBOR-based). A 1% increase in LIBOR would increase net investment income by approximately $1.69 million.
- Valuation Uncertainty: A significant portion of the portfolio (Level 3 assets) relies on unobservable inputs and board-approved valuations, which may differ from realized values.
Investor Verification Checklist
- PEFS Transaction Closure: Verify the closing status and final proceeds of the $23.75 million asset sale of PE Facility Solutions, LLC.
- Avanti Valuation Stability: Monitor the valuation of the Avanti Communications Group investment, which contributed significantly ($3.1 million) to unrealized gains in Q1 2019.
- Legal Exposure: Track developments in the Intrepid Investments and Pumphrey lawsuits to assess potential financial impact.
- Debt Maturity Profile: Review the upcoming maturity dates for the $32.6 million GECCL Notes (2022) and $46.4 million GECCM Notes (2025) and refinancing plans.
- Unfunded Commitments: Confirm the company's ability to fund the $19.0 million in unfunded loan commitments with current liquidity ($3.4 million cash + $20.6 million money market fund).