Business Context and Reporting Period
Company: Great Elm Capital Corp. (GECC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 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 (senior secured and unsecured notes, loans) in middle-market companies. The company intends to be taxed as a Regulated Investment Company (RIC).
Key Financial Metrics
| Metric | Amount (in thousands) | Per Share |
|---|---|---|
| Total Investment Income | $7,315 | $0.58 |
| Net Investment Income | $4,094 | $0.32 |
| Net Realized Gains | $1,980 | $0.16 |
| Net Unrealized Depreciation | $(2,695) | $(0.21) |
| Net Increase in Net Assets from Operations | $3,379 | $0.27 |
| Total Expenses (Net) | $3,221 | $0.26 |
| Cash and Cash Equivalents | $66,763 | N/A |
| Total Investments at Fair Value | $152,234 | N/A |
| Notes Payable (8.25% due 2020) | $33,646 | N/A |
| Net Asset Value (NAV) per Share | N/A | $13.59 |
Note: Total investment income includes $1,142 in Payment-in-Kind (PIK) income. Net expenses include $1,616 in advisory fees (management and incentive) and $631 in interest expense.
Material Changes and Portfolio Activity
- Portfolio Composition: As of March 31, 2017, the portfolio consisted of 98.3% debt instruments ($149.6 million) and 1.7% equity investments ($2.6 million). The weighted average interest rate on debt securities was 9.87%.
- Investment Activity: The company acquired $75.9 million in new investments and repaid/sold $78.8 million in investments during the quarter.
- Realized Gains: Net realized gains of $1.98 million were driven primarily by the disposition of the JN Medical investment ($1.007 million gain), along with sales of Trilogy International bonds ($281k) and Everi Payments bonds ($354k).
- Unrealized Losses: Net unrealized depreciation of $2.695 million was recorded. Significant unrealized losses were noted in Avanti Communications Group plc (depreciation of $3.192 million during the quarter) and OPS Acquisitions Limited (depreciation of $1.591 million).
- Stock Repurchases: Under its buyback program, the company repurchased 245,729 shares during the quarter at a weighted average price of $11.35 per share.
Guidance, Outlook, and Risks
- Distributions: The Board declared monthly distributions for the third quarter of 2017 at $0.083 per share (annualized rate of approximately 7.37% of NAV).
- Stock Buyback Program: The company has a program to repurchase shares up to $15 million (increased by an additional $35 million) when trading below 90% of NAV. A self-tender offer expired in May 2017, resulting in the purchase of 869,565 shares at $11.50 per share.
- Subsequent Events: In April and May 2017, the company sold its positions in Chester Downs & Marina LLC and Everi Payments, Inc., realizing additional gains of approximately $0.3 million and $0.6 million, respectively.
- Market Risk: The portfolio is exposed to interest rate risk. Approximately 46% of the debt portfolio ($70.1 million) is at variable rates based on LIBOR. A 1% increase in LIBOR would increase net investment income by approximately $706,000.
- Legal Proceedings: The company is involved in settlement discussions regarding shareholder actions related to the merger with Full Circle Capital Corporation. A settlement agreement in principle was reached, pending court approval.
Investor Verification Checklist
- PIK Income Impact: Verify the cash flow implications of the $1.142 million PIK income included in total investment income, as this is non-cash revenue.
- Concentration Risk: Review the exposure to Avanti Communications Group plc, which represents a significant portion of the portfolio and contributed heavily to unrealized depreciation.
- Debt Covenants: Confirm continued compliance with the 2:1 asset coverage ratio required by the Investment Company Act for the $33.6 million in outstanding notes (current ratio is 6:1).
- Valuation Methodology: Note that a significant portion of the portfolio (Level 3 assets) is valued using unobservable inputs determined by the Board, introducing subjectivity to the reported fair value.
- Expense Ratios: Monitor the ratio of total expenses to average net assets (7.63% annualized), which is elevated due to the incentive fee structure and interest costs.