Business Context and Reporting Period
Company: Great Elm Capital Corp. (GECC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 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 and equity investments in middle-market companies and small businesses. The company is managed by Great Elm Capital Management, Inc. (GECM).
Key Financial Metrics
| Metric | Amount (in thousands) | Per Share (Basic/Diluted) |
|---|---|---|
| Total Investment Income (9 Months) | $20,026 | $1.94 |
| Net Investment Income (9 Months) | $8,398 | $0.81 |
| Net Realized Gain (9 Months) | $1,269 | $0.12 |
| Net Unrealized Depreciation (9 Months) | $(15,623) | $(1.51) |
| Net Increase (Decrease) in Net Assets from Operations | $(5,956) | $(0.58) |
| Total Expenses (9 Months) | $11,628 | $1.13 |
| Cash and Cash Equivalents (Sept 30, 2019) | $3,370 | - |
| Total Debt Outstanding (Sept 30, 2019) | $124,029 | - |
| Net Asset Value (NAV) per Share (Sept 30, 2019) | - | $9.09 |
Material Changes vs. Prior Period
- Investment Income: Total investment income for the nine months ended September 30, 2019, was $20.0 million, a decrease from $20.8 million in the prior year period. This decline was primarily due to the April 2018 restructuring of the Avanti Communications Group plc investment, where third lien notes were converted to non-income producing equity. Conversely, dividend income increased significantly due to the acquisition of Prestige Capital Finance, LLC in February 2019.
- Expenses: Total expenses increased to $11.6 million from $8.2 million year-over-year. The increase was driven primarily by higher interest expense ($5.3 million vs. $4.2 million) resulting from the issuance of new notes (GECCM and GECCN) and an increase in incentive fees ($2.1 million vs. a reversal of $0.6 million in the prior year).
- Unrealized Depreciation: The company recognized a net unrealized depreciation of $15.6 million for the nine months ended September 30, 2019, compared to $11.2 million in the prior year. Significant contributors to this depreciation included investments in Avanti Communications Group plc ($7.7 million), Commercial Barge Line Company ($3.7 million), and PFS Holdings Corp. ($1.9 million).
- Portfolio Composition: The portfolio fair value increased to $290.9 million from $262.3 million at the end of 2018. The weighted average interest rate on the portfolio decreased to 9.09% from 10.32% at the end of 2018.
Guidance, Outlook, and Risks
- Distributions: The Board declared monthly distributions for the first quarter of 2020 at an annual rate of approximately 11.0% of the September 30, 2019 NAV, equating to $0.083 per month. All distributions are from net investment income.
- Capital Activities: The company completed a $5.0 million stock buyback program during the nine months ended September 30, 2019, purchasing 589,719 shares at a weighted average price of $8.45.
- Debt Issuance: In June and July 2019, the company issued $45.0 million in aggregate principal amount of 6.50% notes due 2024 (GECCN Notes).
- Legal Proceedings: GECC is a defendant in Intrepid Investments, LLC v. London Bay Capital regarding a portfolio investment (Speedwell Holdings). The company intends to vigorously defend the matter. Additionally, the company received a judgment in its favor in September 2019 regarding a lawsuit against Dr. Willis Pumphrey.
- Market Risk: The company is subject to interest rate risk. Approximately $121.1 million of its debt portfolio bears variable rates based on LIBOR. A 1% increase in LIBOR would increase net investment income by approximately $1.4 million, while a 1% decrease would reduce it by the same amount.
Investor Verification Checklist
- Avanti Restructuring Impact: Verify the ongoing valuation and income potential of the Avanti Communications Group plc equity position, which replaced a significant income-producing debt instrument.
- Unrealized Depreciation Drivers: Review the specific valuation methodologies and recovery assumptions for the three largest unrealized depreciation items: Avanti, Commercial Barge, and PFS Holdings.
- Debt Service Coverage: Assess the company's ability to service its increased debt load ($124 million outstanding) given the decline in net investment income and the presence of significant non-cash PIK income.
- Legal Exposure: Monitor the status of the Intrepid Investments litigation and any potential financial impact from the PEAKS Trust bankruptcy proceedings.
- Portfolio Turnover: Note the high portfolio turnover rate of 72% for the nine-month period and evaluate the sustainability of the current investment pipeline.