8-K: Great Elm Capital Corp. Announces Second Quarter 2024 Financial Results, Raises Additional Capital

Great Elm Capital Corp. reported a net investment income of $3.1 million for the second quarter of 2024, alongside raising significant capital and experiencing a decrease in net asset value due to write-downs on illiquid assets.

Summary

• Great Elm Capital Corp. (GECC) announced its financial results for the second quarter ended June 30, 2024.
• The company's net investment income (NII) was $3.1 million, or $0.32 per share, compared to $3.2 million, or $0.37 per share, in the previous quarter.
• Net assets decreased to $126.0 million, or $12.06 per share, from $118.8 million, or $12.57 per share, in the prior quarter, primarily due to write-downs on illiquid assets.
• GECC raised $12 million in equity in June 2024 and issued $34.5 million of 8.50% notes due 2029 in April 2024, followed by an additional $22 million of the same notes in July 2024.
• The company's asset coverage ratio was 171.0% as of June 30, 2024, down from 180.2% as of March 31, 2024.
• A quarterly dividend of $0.35 per share was approved for the third quarter of 2024, representing a 13.0% annualized yield based on the July 31, 2024 closing market price.
• Total investments at fair value were $297.7 million as of June 30, 2024, with 63.8% in corporate credit and 14.7% in dividend paying equity investments.
• The weighted average current yield on the debt portfolio was 13.1% as of June 30, 2024.
• The company deployed $108.9 million into 25 investments and monetized 35 investments for $72.4 million during the quarter.
• Total investment income for the quarter was $9.5 million, or $1.00 per share, while net expenses were $6.5 million, or $0.68 per share.
• Net realized and unrealized losses for the quarter were approximately $4.4 million, or $0.46 per share.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to the decrease in NAV and NII, offset by successful capital raising and a strong dividend yield. The write-downs on illiquid assets are a concern, but management's commentary suggests they believe the worst is over.

Positives

• GECC successfully raised over $90 million in capital year-to-date, strengthening its balance sheet.
• The company's investments in CLOs are beginning to generate income, with the first distribution received in July.
• The company maintains a strong dividend yield of 13.0% based on the July 31, 2024 closing market price.
• The weighted average current yield on the debt portfolio is a strong 13.1%.
• The company deployed $108.9 million into 25 investments during the quarter.

Negatives

• Net asset value per share decreased from $12.57 to $12.06 due to write-downs on illiquid assets.
• Net investment income per share decreased from $0.37 to $0.32 compared to the previous quarter.
• The asset coverage ratio decreased from 180.2% to 171.0% compared to the previous quarter.
• The company experienced net realized and unrealized losses of approximately $4.4 million for the quarter.

Risks

• The company's net asset value was negatively impacted by write-downs on illiquid assets.
• The company's asset coverage ratio has decreased compared to the previous quarter.
• The company is exposed to risks associated with credit markets, rising interest rates, and inflationary pressures.
• The performance of GECC's portfolio and investment manager could impact future results.

Future Outlook

The company believes the bulk of the negative impact on NAV from illiquid assets has been realized and expects CLO investments to boost NII in the second half of the year. They remain well-positioned to grow their platform and cover their dividend.

Management Comments

• We are pleased to have raised an additional $34 million of fresh capital in June and July, bringing our total 2024 capital raising activities to over $90 million year-to-date, said Matt Kaplan, GECCs Chief Executive Officer.
• These capital raises further strengthen our balance sheet and position us well to expand our investment portfolio.
• While there was some residual negative effect on NAV in the quarter, as the same illiquid portfolio company investments placed on non-accrual from the previous quarter experienced further write-downs, we believe the bulk of the impact has now been realized.
• Our investments in CLOs are also beginning to bear fruit, with our first distribution received in July, enabling us to capitalize on strong yields and boost NII in the second half of the year.
• We remain well-positioned to grow our platform and cover our dividend.

Industry Context

This announcement reflects the challenges and opportunities faced by business development companies (BDCs) in the current economic environment, including the need to manage illiquid assets and raise capital while maintaining attractive dividend yields. The focus on CLO investments is a common strategy for BDCs seeking to enhance returns.

Comparison to Industry Standards

• Compared to other BDCs, GECC's asset coverage ratio of 171.0% is within the typical range, but the decrease from 180.2% in the previous quarter is notable.
• The 13.1% weighted average current yield on the debt portfolio is competitive within the BDC sector, where yields are generally higher than traditional fixed income investments.
• The write-downs on illiquid assets are not uncommon in the BDC space, particularly in the current economic climate, and other BDCs such as Ares Capital Corporation (ARCC) and Main Street Capital (MAIN) have also reported similar challenges in their portfolios.
• GECC's focus on CLO investments is similar to strategies employed by other BDCs to enhance returns, but the success of these investments can vary based on market conditions and the specific CLO structures.

Related Party Transactions

• Great Elm Group, Inc. invested $3 million in Prosper Peak Holdings, LLC, which in turn invested $12 million in GECC.

Stakeholder Impact

• Shareholders will receive a quarterly dividend of $0.35 per share.
• Shareholders experienced a decrease in net asset value per share.
• The company's capital raising activities should strengthen its balance sheet and support future growth.

Next Steps

• The company will hold a conference call and webcast to discuss the results on August 1, 2024.
• The company will pay a quarterly cash distribution of $0.35 per share on September 30, 2024.

Key Dates

Keywords

Business Development Company, BDC, Net Investment Income, NII, Net Asset Value, NAV, Dividend, Debt Investments, Equity Investments, Capital Raise, Asset Coverage Ratio, CLO, Illiquid Assets