10-Q: Great Elm Capital Navigates Market Shifts in Q3 2025

Great Elm Capital Corp. reports mixed Q3 2025 results, with increased investment income offset by significant unrealized depreciation on certain investments and higher interest expenses.

Summary

• Net investment income for the three months ended September 30, 2025, was $2,433 thousand, a decrease from $4,072 thousand in the corresponding period of 2024.
• Net investment income for the nine months ended September 30, 2025, increased to $12,913 thousand from $10,323 thousand in the same period of 2024.
• Total investment income for the three months ended September 30, 2025, decreased to $10,642 thousand from $11,727 thousand in the corresponding period of 2024.
• Total investment income for the nine months ended September 30, 2025, increased to $37,414 thousand from $30,184 thousand in the same period of 2024.
• Net unrealized depreciation for the three months ended September 30, 2025, was $(30,601) thousand, significantly higher than $(821) thousand in the corresponding period of 2024.
• Net realized gain for the three months ended September 30, 2025, was $6,156 thousand, up from $226 thousand in the corresponding period of 2024, primarily due to gains on the Nice-Pak Products, Inc. merger and CW Opportunity 2, LP distributions.
• The total investment portfolio at fair value increased to $413,804 thousand as of September 30, 2025, from $332,710 thousand as of December 31, 2024.
• Short-term investments significantly increased to $88,698 thousand (21.43% of the portfolio) as of September 30, 2025, from $8,448 thousand (2.54%) as of December 31, 2024.
• The asset coverage ratio was approximately 168.2% as of September 30, 2025, exceeding the 150% regulatory minimum.
• Issued $50.0 million of 7.75% notes due 2030 (GECCG Notes) in September 2025 and an additional $7.5 million in October 2025.
• Redeemed $40.0 million of 8.75% notes due 2028 (GECCZ Notes) on September 30, 2025.
• The revolving credit facility commitment was increased to $50 million (with potential to increase to $90 million) and its maturity was extended to May 5, 2027 (or May 31, 2026, if the 5.875% notes due 2026 are not refinanced).
• The Board of Directors authorized a new share repurchase program of up to $10 million of outstanding common shares.
• Net asset value per share decreased to $10.01 as of September 30, 2025, from $11.79 as of December 31, 2024.
• Distributions declared for the third and fourth quarters of 2025 were $0.37 per share.

Sentiment

Score: 4

Explanation: While the company showed growth in total investment income and net investment income over the nine-month period, the significant net unrealized depreciation in Q3 2025, primarily due to a portfolio company bankruptcy, and the decline in NAV per share indicate notable challenges. The capital raises and share repurchase program are positive, but the immediate quarter's performance and valuation impacts are concerning.

Positives

• Net investment income for the nine months ended September 30, 2025, increased to $12,913 thousand from $10,323 thousand in the prior year.
• Total investment income for the nine months ended September 30, 2025, increased to $37,414 thousand from $30,184 thousand in the prior year.
• Net realized gain for the three months ended September 30, 2025, was $6,156 thousand, a significant increase from $226 thousand in the corresponding prior year period, driven by $4.3 million in gains on the Nice-Pak Products, Inc. merger and $1.9 million in gains from CW Opportunity 2, LP distributions.
• The total investment portfolio fair value grew to $413,804 thousand as of September 30, 2025, from $332,710 thousand as of December 31, 2024.
• Short-term investments significantly increased to $88,698 thousand, enhancing liquidity.
• The asset coverage ratio of 168.2% exceeds the 150% regulatory minimum, indicating a healthy leverage position.
• Successfully issued $50.0 million of new 7.75% notes due 2030 in September 2025, with an additional $7.5 million issued post-quarter.
• The revolving credit facility commitment was increased to $50 million (with potential to $90 million), improving borrowing capacity.
• The Board authorized a new $10 million share repurchase program, signaling confidence and potential for shareholder value return.
• Dividend income for the nine months ended September 30, 2025, increased to $11,908 thousand from $5,927 thousand in the prior year, largely due to distributions from Trouvaille Re Ltd. ($2.1 million) and CLO JV ($8.6 million).

Negatives

• Net investment income for the three months ended September 30, 2025, decreased to $2,433 thousand from $4,072 thousand in the corresponding prior year period.
• Total investment income for the three months ended September 30, 2025, decreased to $10,642 thousand from $11,727 thousand in the corresponding prior year period.
• Experienced significant net unrealized depreciation of $(30,601) thousand for the three months ended September 30, 2025, primarily due to a $16.3 million depreciation on First Brands, Inc. investments (due to a bankruptcy filing), $4.1 million on CW Opportunity, and $3.2 million on CLO JV.
• Net asset value per share decreased to $10.01 as of September 30, 2025, from $11.79 as of December 31, 2024.
• Interest income decreased for the three months ended September 30, 2025, due to a lower average coupon rate (10.8% vs. 12.3%) and a decreased debt investment portfolio size ($224.1 million vs. $241.2 million).
• Dividend income decreased for the three months ended September 30, 2025, due to fewer dividend-paying preferred stock holdings and reduced distributions from CLO JV ($1.5 million vs. $3.0 million).
• Interest expense increased for the three months ended September 30, 2025, to $5,485 thousand from $4,210 thousand in the prior year, due to new note issuance and redemption activity, resulting in double accrued interest for September and the expensing of approximately $0.9 million in deferred offering costs.
• Professional services costs increased for both the three and nine months ended September 30, 2025, due to general rate increases and additional services related to portfolio growth and certain one-time costs.
• No incentive fee was accrued for the three months ended September 30, 2025, due to decreased investment income and increased hurdles resulting from capital raises during the period.

Risks

• Future business, operations, operating results, or prospects of the company or its portfolio companies are subject to various uncertainties.
• A protracted decline in the liquidity of credit markets could materially impact the business.
• Fluctuations in interest rates could adversely affect the business, potentially increasing operating expenses or decreasing investment income.
• Changes in laws or regulations governing operations or the operations of portfolio companies could have a negative impact.
• Contractual arrangements and relationships with third parties carry inherent risks.
• The general economy, including recessionary trends, and its impact on the industries in which the company invests, pose significant challenges.
• The financial condition of and ability of current and prospective portfolio companies to achieve their objectives is a key risk factor.
• Serious disruptions and catastrophic events could negatively affect operations and investments.
• The valuation of investments, particularly those without a liquid trading market, involves inherent uncertainty and subjectivity, and actual realized values may differ materially.
• The company's ability to maintain its qualification as a regulated investment company (RIC) and a business development company (BDC) is crucial for its tax status and operations.
• Investments in First Brands, Inc. experienced approximately $16.3 million in unrealized depreciation due to a recent bankruptcy filing, with the outcomes remaining uncertain.
• The company is a defendant in a lawsuit, Intrepid Investments, LLC v. London Bay Capital, alleging aiding and abetting, breaches of fiduciary duty, and tortious interference, with pre-trial discovery ongoing.
• The revolving credit facility's maturity date is subject to an earlier trigger (May 31, 2026) if the 5.875% notes due 2026 are not refinanced, posing a refinancing risk.

Future Outlook

The company believes it has sufficient liquidity to meet its short-term and long-term obligations for at least the next 12 months and for the foreseeable future. A prolonged increase in interest rates is expected to increase gross investment income and could result in an increase in net investment income, provided it is not offset by a corresponding decrease in investment spreads or an increase in operating expenses. The company may utilize hedging instruments in the future to manage interest rate fluctuations. It intends to maintain its qualification as a Regulated Investment Company (RIC) for U.S. federal income tax purposes and will direct investment of net proceeds to comply with RIC requirements. The company also plans to maintain its common stock listing on Nasdaq.

Management Comments

• 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.
• Our board set the distribution for the quarter ending December 31, 2025, at a rate of $0.37 per share.
• The Company's Board of Directors authorized a new share repurchase program, whereby the Company may repurchase up to an aggregate of $10 million of its outstanding common shares.

Industry Context

The company operates as a Business Development Company (BDC), focusing on secured and senior secured debt instruments of middle-market companies, typically with enterprise values between $100 million and $2 billion. It also strategically invests in income-generating equity in specialty finance companies and collateralized loan obligation (CLO) securities. The current filing reflects the impact of fluctuating interest rates, a common factor for BDCs, where rising rates can benefit floating-rate debt portfolios but also increase borrowing costs. The significant unrealized depreciation linked to a portfolio company's bankruptcy highlights the inherent credit risks in middle-market lending. The increase in short-term investments suggests a strategic move to enhance liquidity or position for future investment opportunities in the prevailing market conditions.

Comparison to Industry Standards

• The company's asset coverage ratio of 168.2% as of September 30, 2025, is above the 150% regulatory minimum for BDCs, indicating a compliant and relatively strong leverage position compared to industry regulatory standards.
• The company's investment in CLO subordinated notes (CLO equity) is a common strategy employed by BDCs and other credit funds seeking higher yields, though it typically involves higher risk compared to more senior CLO tranches.
• The focus on middle-market companies is a standard practice for BDCs, which aim to provide financing solutions to businesses that may not have access to traditional bank lending or public debt markets.
• The company's portfolio includes investments across diverse industries such as Structured Finance, Technology, Specialty Finance, and Chemicals, which is typical for a diversified BDC seeking to mitigate sector-specific risks, although the concentration in certain sectors like Structured Finance (12.64%) and Technology (9.44%) is notable.

Corporate Governance

Legal Proceedings

• The company is named as a defendant in a lawsuit filed on March 5, 2016, captioned Intrepid Investments, LLC v. London Bay Capital, pending in the Delaware Court of Chancery.
• The plaintiff, a member of Speedwell Holdings (a portfolio investment), asserts claims of aiding and abetting, breaches of fiduciary duty, and tortious interference against the company.
• In June 2023, the Court granted in part and denied in part defendants' motion to dismiss.
• The parties are currently involved in pre-trial discovery on the surviving claims.

Related Party Transactions

• Great Elm Capital Management, LLC (GECM), a subsidiary of Great Elm Group, Inc. (GEG), serves as the external investment manager and administrator, receiving base management fees and incentive fees.
• The company's President and Chief Executive Officer is also a portfolio manager and president of GECM.
• The company's Chief Compliance Officer is also the chief compliance officer and general counsel of GECM and president of GEG.
• The company's Chief Financial Officer is also the chief financial officer of GEG.
• Poor Richard, LLC, an affiliate of Booker Smith, purchased 1,290,000 shares of common stock for $14.3 million on August 27, 2025, in a private placement.
• Summit Grove Partners, LLC (SGP), owned 25% by GEG, purchased 1,094,527 shares of common stock on December 11, 2024.
• Prosper Peak Holdings, LLC (PPH), owned 25% by GEG, purchased 997,506 shares of common stock on June 21, 2024.
• Great Elm Strategic Partnership I, LLC (GESP), owned 25% by GEG, purchased 1,850,424 shares of common stock on February 8, 2024.
• The CLO Formation JV, LLC (CLO JV) was formed with contributed investments, and a strategic investor purchased approximately 12.5% of the equity interests and subordinated indebtedness in Great Elm Specialty Finance, LLC (GESF).

Stakeholder Impact

• Shareholders are impacted by the decrease in Net Asset Value (NAV) per share, but may benefit from the newly authorized share repurchase program and consistent quarterly distributions.
• Creditors and noteholders are affected by the issuance of new notes and redemption of others, as well as the increased revolving credit facility, with the company maintaining an asset coverage ratio above regulatory minimums.
• Portfolio companies are directly impacted by the company's investment activities, including new fundings and ongoing monitoring, with the bankruptcy of First Brands, Inc. representing a negative event for that specific company.
• Management and Great Elm Capital Management, LLC (GECM) receive management and incentive fees, which are tied to asset value and performance, and are responsible for the company's operational and investment strategy.

Next Steps

• Monitor the outcome of the First Brands, Inc. bankruptcy filing and its impact on the investment portfolio.
• Observe the effectiveness of the new $10 million share repurchase program in influencing share price and shareholder value.
• Track the refinancing of the 5.875% notes due 2026 to avoid the earlier maturity trigger on the revolving credit facility.
• Continue to evaluate the performance and distributions from the CLO Formation JV, LLC and Great Elm Specialty Finance, LLC.
• Monitor the ongoing legal proceedings in Intrepid Investments, LLC v. London Bay Capital.

Key Dates

Recommendation

The company presents a mixed financial performance. While there is growth in investment income over the nine-month period and strategic initiatives such as capital raises and a share repurchase program, the significant net unrealized depreciation in Q3 2025, primarily due to a portfolio company bankruptcy, and the decline in NAV per share are notable concerns. The increased liquidity and strong asset coverage ratio provide some stability, but the uncertainty surrounding certain investments warrants a cautious approach. Investors should hold to monitor the resolution of the distressed assets and the impact of the new capital initiatives.

Keywords

Business Development Company, BDC, Investment Management, Financial Reporting, Portfolio Investments, Debt Investments, Equity Investments, CLO, Specialty Finance, Interest Rates, Unrealized Depreciation, Realized Gains, Notes Payable, Revolving Credit Facility, Share Repurchase, Corporate Governance, Risk Management, Middle Market Lending