10-K: Great Elm Capital Corp. Reports 2025 Net Asset Decline Amid Portfolio Revaluations

Great Elm Capital Corp.'s 2025 annual report reveals a significant net asset decrease driven by unrealized depreciation and realized losses, despite growth in investment income.

Summary

• Net assets decreased by $23.167 million in 2025, ending the year at $112.946 million, down from $136.113 million in 2024.
• Net asset value per share declined to $8.07 at December 31, 2025, from $11.79 at December 31, 2024.
• Total investment income increased to $49.988 million in 2025, up from $39.323 million in 2024, primarily due to higher dividend income from CLO Formation JV, LLC.
• Total expenses rose to $32.090 million in 2025 from $26.522 million in 2024, mainly due to increased interest expense and advisory fees.
• The company recorded a net realized loss of $5.507 million in 2025, a reversal from a net realized gain of $1.871 million in 2024.
• Net change in unrealized depreciation on investments was substantial at $43.601 million in 2025, compared to $10.771 million in 2024.
• The asset coverage ratio stood at 158.1% as of December 31, 2025, meeting the minimum 150% requirement for BDCs.
• The company issued $57.5 million in 7.75% Notes due 2030 (GECCG Notes) and repurchased $18.5 million of 5.875% Notes due 2026 (GECCO Notes) in 2025.
• The revolving line of credit with City National Bank was increased to $50 million, with an option to increase to $90 million, and the maturity extended to May 5, 2027, or May 31, 2026 if GECCO Notes are not refinanced.
• GECM waived all accrued and unpaid incentive fees through March 31, 2026, amounting to approximately $2.3 million as of December 31, 2025.
• The portfolio is concentrated in Structured Finance (16.05%), Specialty Finance (12.90%), and Technology (10.58%) as of December 31, 2025.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this filing negatively due to the substantial decline in net assets and NAV per share, coupled with significant unrealized depreciation and a shift to net realized losses. While investment income grew, the overall financial performance indicates considerable headwinds and portfolio challenges.

Positives

• Total investment income increased by over 27% to $49.988 million in 2025, driven by higher dividend income from CLO Formation JV, LLC.
• The company successfully issued $57.5 million in 7.75% Notes due 2030, demonstrating continued access to debt capital markets.
• The revolving credit facility with City National Bank was expanded from $25 million to $50 million, with a potential increase to $90 million, enhancing liquidity options.
• GECM waived approximately $2.3 million in accrued incentive fees through March 31, 2026, which is expected to increase net income in Q1 2026.
• The company maintained an asset coverage ratio of 158.1% as of December 31, 2025, above the 150% regulatory minimum for BDCs.

Negatives

• Net assets decreased significantly by $23.167 million, from $136.113 million in 2024 to $112.946 million in 2025.
• Net asset value per share declined substantially to $8.07 at December 31, 2025, from $11.79 at December 31, 2024.
• The company experienced a net realized loss of $5.507 million in 2025, compared to a net realized gain of $1.871 million in 2024.
• Net change in unrealized depreciation on investments was $43.601 million in 2025, a significant increase from $10.771 million in 2024.
• Specific portfolio investments, including First Brands, CLO JV, Del Monte Foods Corp., Flexsys Holdings, and Dynata, LLC, experienced significant fair value decreases due to alleged fraudulent activity, bankruptcy filings, and weaker industry outlooks.
• Total expenses increased to $32.090 million in 2025, up from $26.522 million in 2024, primarily due to higher interest expense and advisory fees.
• The common stock traded at a discount to NAV for most of 2025, ranging from an 8.2% discount to a 24.0% discount in Q2 2025.

Risks

• Competition for investment opportunities, potentially leading to holding a larger percentage of assets in liquid securities with lower yields.
• Concentration of the portfolio in a limited number of companies and industries, increasing susceptibility to significant loss if a single investment fails or an industry experiences a downturn.
• Exposure to distressed lending risks, including potential loss of principal or requirement to accept collateral with reduced value in reorganization or liquidation proceedings.
• Potential for collateral securing loans to decrease in value, be difficult to sell, or be subject to subordination to claims of other creditors.
• Risks associated with covenant-lite loans, which may hinder the ability to reprice credit risk or restructure problematic loans.
• Interest rate fluctuations, particularly rising rates, could increase funding costs and reduce net investment income, or falling rates could lead to refinancing at lower yields.
• Inability to realize gains from equity investments, which may not appreciate in value or may decline.
• Risks associated with investments in foreign securities, including exchange control regulations, political instability, and foreign taxes.
• Dependence on the investment adviser (GECM) to attract and retain qualified personnel in a competitive environment.
• Inability to raise additional equity capital or access debt financing due to unfavorable market conditions or failure to maintain asset coverage ratios.
• Economic recessions or downturns could impair portfolio companies and harm operating results, increasing nonperforming assets and decreasing portfolio value.
• Potential for global economic, political, and market conditions (e.g., tariffs, geopolitical tensions, inflation) to adversely affect business and investments.
• Risks associated with potential acquisitions of other funds or portfolios, including diversion of management attention, integration challenges, and overvaluation.
• Failure to maintain BDC status, which would reduce operating flexibility and increase regulatory burden.
• Difficulty paying required distributions if income is recognized before cash is received (e.g., PIK interest, OID), potentially jeopardizing RIC status.
• Incentive fee structure may encourage GECM to pursue riskier investments or use leverage when it may not be optimal for stockholders.
• The failure in cybersecurity systems, including those of third-party service providers, could disrupt business, lead to financial losses, and regulatory penalties.
• Technological developments in artificial intelligence could disrupt markets, increase competition, and introduce new legal and regulatory risks and compliance costs.
• Significant potential conflicts of interest due to GECM's management of other entities and its compensation structure.
• Volatility in common stock price due to market factors, regulatory changes, or perceived changes in portfolio value.
• Dilution of existing stockholders' ownership if new shares are issued below NAV.
• Risk of common stock trading at a discount from NAV, which is common for closed-end investment companies.
• Incurring additional indebtedness magnifies potential for loss and increases risk for common stockholders.

Future Outlook

The Board has set a distribution for the quarter ending March 31, 2026, at $0.30 per share, payable in cash. GECM has waived all accrued and unpaid incentive fees through March 31, 2026, which is expected to result in a corresponding increase of approximately $2.3 million in net income for that period. The company also plans to redeem $20 million of GECCO Notes on March 31, 2026.

Management Comments

• GECM's investment team believes that understanding industry trends is an important element of investment success.
• GECM believes investments in specialty finance companies along the continuum of lending provide attractive risk adjusted returns that are expected to be largely uncorrelated to the liquid credit markets.
• GECM believes that ownership interests in multiple specialty finance companies will create a natural competitive advantage for each business and generate both revenue and cost synergies across companies.
• We believe we have sufficient liquidity available to meet our short-term and long-term obligations for at least the next 12 months and for the foreseeable future thereafter.

Industry Context

StockSavvy.ai notes that Great Elm Capital Corp.'s strategy of focusing on secured and senior secured debt instruments of middle-market companies, alongside income-generating equity investments in specialty finance businesses and CLOs, positions it in a segment often underserved by traditional lenders. The increase in dividend income from the CLO JV highlights the potential for structured finance investments to generate recurring cash flows, a trend many BDCs are exploring for yield enhancement. However, the significant unrealized depreciation in the portfolio, particularly in industries like chemicals and food & staples, reflects broader macroeconomic pressures and company-specific challenges that can impact even secured debt, underscoring the inherent risks in middle-market and distressed lending environments. The company's increased reliance on PIK income, while boosting reported investment income, also aligns with a trend seen in more challenging credit markets where borrowers seek payment flexibility.

Comparison to Industry Standards

• The company's NAV per share decline of 31.55% in 2025 (from $11.79 to $8.07) is significantly worse than the S&P 500 Index's performance, which generally saw positive returns in 2025, indicating underperformance relative to broad market benchmarks.
• The total return based on market value of -24.98% for 2025 is a stark contrast to the positive returns typically expected from a diversified portfolio in a stable market, and likely underperforms many BDC peers that managed to navigate market volatility more effectively.
• The increase in PIK income to 6.5% of total investment income in 2025, while lower than 7.7% in 2024, suggests a continued exposure to non-cash income, which can be higher than the industry average for BDCs focusing on more distressed or illiquid assets, potentially signaling higher credit risk in parts of the portfolio compared to BDCs with more liquid, cash-paying investments.
• The company's common stock trading at a discount to NAV (e.g., 17.5% to 24.0% discount in Q2-Q4 2025) is a common characteristic of closed-end investment companies and BDCs, but the magnitude of the discount and the sustained period below NAV could be more pronounced than some higher-performing or more liquid BDC peers.

Corporate Governance

Legal Proceedings

• The company is a defendant in the lawsuit 'Intrepid Investments, LLC v. London Bay Capital,' filed on March 5, 2016, in the Delaware Court of Chancery. The plaintiff alleges aiding and abetting, breaches of fiduciary duty, and tortious interference related to a portfolio investment (Speedwell Holdings). Pre-trial discovery is ongoing after a partial denial of the motion to dismiss in June 2023.

Related Party Transactions

• Great Elm Capital Management, LLC (GECM), a subsidiary of Great Elm Group, Inc. (GEG), serves as the company's investment adviser and administrator, receiving base management fees and incentive fees.
• GEG, the parent company of GECM, holds approximately 9.7% of the company's outstanding common stock.
• Certain executive officers and directors of the company also serve as officers, directors, or principals of GECM-affiliated entities, including Imperial Capital Asset Management, LLC (ICAM).
• The company has a license agreement with GEG for the use of the 'Great Elm Capital Corp.' name and logo.
• The company paid approximately $113 in brokerage commissions to Imperial Capital, LLC, an affiliated person of ICAM, from Q4 2021 through December 31, 2025, representing nearly 100% of aggregate brokerage commissions during the most recent fiscal year.
• In 2025, Poor Richard, LLC, an affiliate of Booker Smith, purchased 1,290,000 shares of common stock for $14.3 million in a private placement.
• In 2024, Summit Grove Partners, LLC (SGP) and Prosper Peak Holdings, LLC (PPH), both 25% owned by GEG, purchased common stock for $13.0 million and $11.8 million, respectively.
• The company engaged in investment transactions with wholly-owned subsidiaries of Great Elm Specialty Finance, LLC (GESF), including purchases and sales of loan participations and delayed draw term loans in 2024 and 2025.

Stakeholder Impact

• Shareholders: Experienced a significant decline in NAV per share and total return, indicating a decrease in investment value. Potential for further dilution from future equity offerings. Distributions are subject to company performance and asset coverage tests.
• Noteholders: Impacted by the issuance of new notes (GECCG Notes) and the redemption of existing notes (GECCM, GECCZ, GECCO Notes), affecting their investment maturity and interest income. Unsecured notes are effectively subordinated to secured debt.
• Employees (GECM personnel): GECM's incentive fees are tied to company performance, and the waiver of accrued fees impacts their compensation, though it benefits the company's net income.
• Portfolio Companies: Subject to the company's investment and monitoring activities, and their financial health directly impacts the company's performance. Some experienced significant financial distress (e.g., First Brands, Del Monte, Dynata).
• Lenders (City National Bank): The revolving credit facility provides financing, and compliance with covenants is crucial for continued access to funds.

Next Steps

• Pay a distribution of $0.30 per share for the quarter ending March 31, 2026, to stockholders of record as of March 16, 2026.
• Recognize the reversal of approximately $2.3 million in accrued incentive fees during the period ending March 31, 2026, due to GECM's waiver.
• Redeem $20 million aggregate principal amount of the GECCO Notes on March 31, 2026.
• The Investment Management Agreement is renewed through September 26, 2026, subject to annual approval.

Key Dates

Recommendation

The company experienced a significant decline in NAV and net assets in 2025, driven by substantial unrealized depreciation and realized losses in its investment portfolio. While investment income increased and management took steps like waiving incentive fees and expanding credit facilities, the underlying portfolio challenges and the stock trading at a discount to NAV suggest continued volatility. The concentration in certain industries and the inherent risks of middle-market and distressed lending warrant caution. A 'hold' recommendation is appropriate as the company navigates these challenges, with investors advised to monitor the effectiveness of management's strategies to improve portfolio performance and address valuation concerns.

Keywords

Business Development Company, BDC, SEC Filing, 10-K, Great Elm Capital Corp., GECC, Investment Management, Specialty Finance, CLO, Collateralized Loan Obligations, Middle Market Lending, Debt Investments, Equity Investments, Net Asset Value, Unrealized Depreciation, Interest Rates, Corporate Governance, Risk Factors, Financial Performance, Capital Structure, Asset Coverage Ratio, Dividend Policy, Cybersecurity, Artificial Intelligence Risk