Great Elm Capital Corp. Announces Second Quarter 2024 Financial Results

Rhea-AI Summary

Great Elm Capital Corp. (NASDAQ: GECC) announced its Q2 2024 financial results. Key highlights include:

• Raised $12 million of equity at NAV in June
• Issued $34.5 million of 8.50% notes due 2029 in April
• Net investment income of $3.1 million ($0.32 per share)
• Net assets of $126.0 million ($12.06 per share)
• Asset coverage ratio of 171.0%
• Approved quarterly dividend of $0.35 per share

GECC raised an additional $34 million in June and July, bringing total 2024 capital raising to over $90 million. The company's investments in CLOs are beginning to yield returns, with the first distribution received in July. Management remains focused on growing the platform and covering the dividend.

Positive

• Raised $12 million of equity at NAV, strengthening the balance sheet
• Issued $34.5 million of 8.50% notes due 2029, improving liquidity
• Net investment income of $3.1 million for Q2 2024
• Approved quarterly dividend of $0.35 per share, yielding 13.0% annualized
• Total 2024 capital raising activities exceeded $90 million year-to-date
• CLO investments beginning to generate returns, with first distribution received in July

Negative

• Net assets per share decreased from $12.57 to $12.06 quarter-over-quarter
• NAV adversely impacted by $0.39 per share due to write-downs on illiquid assets
• Asset coverage ratio declined from 180.2% to 171.0% quarter-over-quarter
• Net investment income per share decreased from $0.37 to $0.32 quarter-over-quarter

Insights

Financial Analyst

Great Elm Capital Corp.'s Q2 2024 results present a mixed picture. While the company has successfully raised significant capital, there are concerns about its financial performance and asset quality.

The $12 million equity raise at Net Asset Value and the issuance of $56.5 million in 8.50% notes due 2029 demonstrate the company's ability to access capital markets. This additional liquidity provides GECC with increased flexibility to expand its investment portfolio.

However, the company's financial metrics show some worrying trends:

• Net Investment Income (NII) decreased from $0.37 per share in Q1 2024 to $0.32 per share in Q2 2024, a 13.5% decline.
• Net Asset Value (NAV) per share dropped from $12.57 to $12.06, primarily due to write-downs on illiquid assets.
• The asset coverage ratio decreased from 180.2% to 171.0%, indicating increased leverage.

The continued write-downs on illiquid assets are particularly concerning, as they suggest ongoing challenges in the company's investment portfolio. While management claims that the bulk of the impact has been realized, investors should monitor this situation closely in future quarters.

On a positive note, the company's investments in CLOs are starting to generate returns, with the first distribution received in July. This could potentially boost NII in the second half of the year.

The declared dividend of $0.35 per share represents a high yield of 13.0% based on the current stock price. However, with NII at $0.32 per share, the dividend doesn't appear to be fully covered by earnings, which could be unsustainable in the long term if NII doesn't improve.

In conclusion, while GECC has strengthened its balance sheet through capital raises, the ongoing asset quality issues and declining NII warrant caution. Investors should closely monitor the company's ability to deploy the new capital effectively and improve its financial performance in the coming quarters.

Investment Portfolio Manager

GECC's Q2 2024 results reveal some interesting shifts in their investment strategy and portfolio composition. The company's total investments stood at $297.7 million as of June 30, 2024, with a diversified mix of assets:

• 63.8% in corporate credit debt investments
• 15.0% in Great Elm Specialty Finance
• 14.7% in dividend-paying equity investments, including CLO JV
• 6.4% in other equity investments

The weighted average current yield on the debt portfolio is 13.1%, which is attractive in the current market environment. The high proportion of floating rate instruments (69%) in the debt portfolio is a positive feature, providing some protection against interest rate fluctuations.

During Q2, GECC deployed $108.9 million into 25 new investments at a weighted average yield of 11.6%. Simultaneously, they monetized 35 investments for $72.4 million at a 11.3% yield. This active portfolio management demonstrates the company's efforts to optimize returns and manage risk.

However, the continued write-downs on illiquid assets are a red flag. These write-downs have negatively impacted the NAV and suggest potential issues with investment selection or valuation processes. The company needs to address these concerns to regain investor confidence.

The investment in CLOs is starting to bear fruit, with the first distribution received in July. This could be a positive development for future NII, but it's important to note that CLO investments can be complex and carry their own set of risks.

Looking ahead, GECC's ability to effectively deploy the newly raised capital will be crucial. The company should focus on high-quality, yield-generating investments while carefully managing credit risk. The current economic environment presents both opportunities and challenges for BDCs like GECC and prudent investment selection will be key to future performance.

Risk Management Specialist

From a risk management perspective, GECC's Q2 2024 results raise several red flags that warrant careful consideration:

1. Asset Quality Deterioration: The continued write-downs on illiquid assets, following similar write-downs in the previous quarter, indicate persistent issues with asset quality. This trend suggests potential flaws in the company's investment selection process or risk assessment methodologies.

2. Leverage Increase: The asset coverage ratio has declined from 180.2% to 171.0%. While still above the regulatory minimum, this increase in leverage amplifies the company's risk profile, especially in a potentially volatile economic environment.

3. Dividend Coverage: With NII per share ($0.32) falling below the declared dividend ($0.35), there's a risk of dividend unsustainability if this trend continues. This could lead to future dividend cuts or a return of capital to shareholders, which is generally unfavorable.

4. Concentration Risk: The investment in Great Elm Specialty Finance represents 15% of the portfolio. This concentration increases vulnerability to adverse events affecting this specific investment.

5. CLO Investments: While CLO investments are starting to generate returns, they are complex structures that can be sensitive to economic downturns. The company needs to carefully manage the risks associated with these investments.

6. Interest Rate Sensitivity: With 69% of debt investments in floating rate instruments, any potential decrease in interest rates could negatively impact the portfolio yield.

To mitigate these risks, GECC should focus on:

• Improving due diligence and investment selection processes to avoid further write-downs
• Carefully managing leverage to maintain a comfortable buffer above regulatory requirements
• Aligning the dividend policy with sustainable NII levels
• Diversifying the portfolio to reduce concentration risk
• Enhancing risk management practices for complex investments like CLOs

The recent capital raises provide GECC with an opportunity to address these risk factors. However, execution will be critical in the coming quarters to restore investor confidence and improve the company's risk profile.

Company to Host Conference Call and Webcast at 5:00 PM ET Today

PALM BEACH GARDENS, Fla., Aug. 01, 2024 (GLOBE NEWSWIRE) -- Great Elm Capital Corp. (“we,” “our,” the “Company” or “GECC”) (NASDAQ: GECC), a business development company, today announced its financial results for the second quarter ended June 30, 2024.      

Second Quarter and Other Recent Highlights:

• In June 2024, the Company raised $12 million of equity at Net Asset Value from Prosper Peak Holdings, LLC (“PPH”), supported by a $3 million investment by Great Elm Group, Inc. (“GEG”) in PPH.
• In April 2024, the Company issued $34.5 million of 8.50% notes due 2029 (the “GECCI Notes”) to further bolster liquidity and provide balance sheet flexibility.
  • In July, the Company issued $22 million of additional GECCI Notes in a registered direct offering to an institutional investor.
• Net investment income (“NII”) for the quarter ended June 30, 2024 was $3.1 million, or $0.32 per share, as compared to $3.2 million, or $0.37 per share, for the quarter ended March 31, 2024.
• Net assets were $126.0 million, or $12.06 per share, on June 30, 2024, as compared to $118.8 million, or $12.57 per share, on March 31, 2024.
  • NAV adversely impacted by approximately $0.39 per share in the quarter from additional write-downs on investments in illiquid assets that were also written down in the prior quarter.
• GECC’s asset coverage ratio was 171.0% as of June 30, 2024, as compared to 180.2% as of March 31, 2024 and 161.5% as of June 30, 2023.
• The Board of Directors approved a quarterly dividend of $0.35 per share for the third quarter of 2024, equating to a 13.0% annualized yield on the Company’s closing market price on July 31, 2024 of $10.73.                     

Management Commentary  
“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. These capital raises further strengthen our balance sheet and position us well to expand our investment portfolio,” said Matt Kaplan, GECC’s Chief Executive Officer. “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.”

Financial Highlights – Per Share Data

	Q2/2023		Q3/2023		Q4/2023		Q1/2024		Q2/2024
Earnings Per Share (“EPS”)	$0.68		$1.02		$0.55		($0.05)		($0.14)
Net Investment Income (“NII”) Per Share	$0.44		$0.40		$0.43		$0.37		$0.32
Pre-Incentive Net Investment Income Per Share	$0.56		$0.50		$0.54		$0.46		$0.40
Net Realized and Unrealized Gains / (Losses) Per Share	$0.24		$0.62		$0.12		($0.42)		($0.46)
Net Asset Value Per Share at Period End	$12.21		$12.88		$12.99		$12.57		$12.06
Distributions Paid / Declared Per Share	$0.35		$0.35		$0.45		$0.35		$0.35

Portfolio and Investment Activity

As of June 30, 2024, GECC held total investments of $297.7 million at fair value, as follows:

• 49 debt investments in corporate credit, totaling approximately $190.0 million and representing 63.8% of the fair market value of the Company’s total investments. Secured debt investments comprised a substantial majority of the fair market value of the Company’s debt investments.
• An investment in Great Elm Specialty Finance comprised of 1 debt investment totaling approximately $29.7 million and 1 equity investment totaling approximately $15.0 million, representing 10.0% and 5.0%, respectively, of the fair market value of the Company’s total investments.
• 4 dividend paying equity investments, including our CLO JV investment, totaling approximately $43.7 million, representing 14.7% of the fair market value of the Company’s total investments.
• Other equity investments, totaling approximately $19.2 million, representing 6.4% of the fair market value of the Company’s total investments.  

As of June 30, 2024, the weighted average current yield on the Company’s debt portfolio was 13.1%. Floating rate instruments comprised approximately 69% of the fair market value of debt investments (comparable to last quarter) and the Company’s fixed rate debt investments had a weighted average maturity of 2.1 years.

During the quarter ended June 30, 2024, we deployed approximately $108.9 million into 25 investments⁽¹⁾ at a weighted average current yield of 11.6%.

During the quarter ended June 30, 2024, we monetized, in part or in full, 35 investments for approximately $72.4 million⁽²⁾, at a weighted average current yield of 11.3%. Monetizations include $10.9 million of mandatory debt paydowns and redemptions at a weighted average current yield of 9.2%.      

Financial Review
Total investment income for the quarter ended June 30, 2024 was $9.5 million, or $1.00 per share. Net expenses for the quarter ended June 30, 2024 were approximately $6.5 million, or $0.68 per share.

Net realized and unrealized losses for the quarter ended June 30, 2024 were approximately $4.4 million, or $0.46 per share.

Liquidity and Capital Resources
As of June 30, 2024, cash and money market securities totaled approximately $3.0 million.

As of June 30, 2024, total debt outstanding (par value) was $177.6 million, comprised of 6.75% senior notes due January 2025 (NASDAQ: GECCM), 5.875% senior notes due June 2026 (NASDAQ: GECCO), 8.75% senior notes due September 2028 (NASDAQ: GECCZ) and 8.50% notes due April 2029 (NASDAQ: GECCI).

Distributions
The Company’s Board of Directors has approved a quarterly cash distribution of $0.35 per share for the quarter ending September 30, 2024. The third quarter distribution will be payable on September 30, 2024 to stockholders of record as of September 16, 2024.

The distribution equates to a 13.0% annualized dividend yield on the Company’s closing market price on July 31, 2024 of $10.73 and an 11.6% annualized dividend yield on the Company’s June 30, 2024 NAV of $12.06 per share.

Conference Call and Webcast
GECC will discuss these results in a conference call today at 5:00 p.m. ET.                        

Conference Call Details
Date/Time:	Thursday, August 1, 2024 – 5:00 p.m. ET
Participant Dial-In Numbers:
(United States):	877-407-0789
(International):	201-689-8562

To access the call, please dial-in approximately five minutes before the start time and, when asked, provide the operator with passcode “GECC”. An accompanying slide presentation will be available in pdf format via the “Events and Presentations” section of Great Elm Capital Corp.’s website here after the issuance of the earnings release.

Webcast

The call and presentation will also be simultaneously webcast over the internet via the “Events and Presentations” section of GECC’s website or by clicking on the webcast link here.

About Great Elm Capital Corp.

GECC is an externally managed business development company that seeks to generate current income and capital appreciation by investing in debt and income generating equity securities, including investments in specialty finance businesses. http://www.greatelmcc.com

Cautionary Statement Regarding Forward-Looking Statements
Statements in this communication that are not historical facts are “forward-looking” statements within the meaning of the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as “expect,” “anticipate,” “should,” “will,” “estimate,” “designed,” “seek,” “continue,” “upside,” “potential” and similar expressions. All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results expressed in the statements. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are: conditions in the credit markets, rising interest rates, inflationary pressure, the price of GECC common stock and the performance of GECC’s portfolio and investment manager. Information concerning these and other factors can be found in GECC’s Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission. GECC assumes no obligation to, and expressly disclaims any duty to, update any forward-looking statements contained in this communication or to conform prior statements to actual results or revised expectations except as required by law. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof.

This press release does not constitute an offer of any securities for sale.

Endnotes:
⁽¹⁾ This includes new deals, additional fundings (inclusive of those on revolving credit facilities), refinancings and capitalized PIK income. Amounts included herein do not include investments in short-term securities, including United States Treasury Bills.
⁽²⁾ This includes scheduled principal payments, prepayments, sales and repayments (inclusive of those on revolving credit facilities). Amounts included herein do not include investments in short-term securities, including United States Treasury Bills.

Media & Investor Contact:
Investor Relations        
investorrelations@greatelmcap.com

GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (unaudited)
Dollar amounts in thousands (except per share amounts)

		June 30, 2024				December 31, 2023
Assets
Investments
Non-affiliated, non-controlled investments, at fair value (amortized cost of $228,477 and $179,626, respectively)		$	224,798			$	183,335
Non-affiliated, non-controlled short-term investments, at fair value (amortized cost of $20,432 and $10,807, respectively)			20,430				10,807
Affiliated investments, at fair value (amortized cost of $12,378 and $13,423, respectively)			-				1,067
Controlled investments, at fair value (amortized cost of $75,452 and $46,300, respectively)			72,853				46,210
Total investments			318,081				241,419
Cash and cash equivalents			2,575				953
Receivable for investments sold			390				840
Interest receivable			3,594				2,105
Dividends receivable			1,309				1,001
Due from portfolio company			1				37
Deferred financing costs			286				335
Prepaid expenses and other assets			283				135
Total assets		$	326,519			$	246,825
Liabilities
Notes payable (including unamortized discount of $3,808 and $2,896, respectively)		$	173,765			$	140,214
Payable for investments purchased			22,755				3,327
Interest payable			66				32
Accrued incentive fees payable			1,576				1,431
Distributions payable			-				760
Due to affiliates			1,362				1,195
Accrued expenses and other liabilities			986				1,127
Total liabilities		$	200,510			$	148,086
Commitments and contingencies		$	-			$	-
Net Assets
Common stock, par value $0.01 per share (100,000,000 shares authorized, 10,449,888 shares issued and outstanding and 7,601,958 shares issued and outstanding, respectively)		$	104			$	76
Additional paid-in capital			319,438				283,795
Accumulated losses			(193,533	)			(185,132	)
Total net assets		$	126,009			$	98,739
Total liabilities and net assets		$	326,519			$	246,825
Net asset value per share		$	12.06			$	12.99

GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Dollar amounts in thousands (except per share amounts)

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2024				2023				2024				2023
Investment Income:
Interest income from:
Non-affiliated, non-controlled investments		$	5,968			$	5,836			$	11,955			$	11,312
Non-affiliated, non-controlled investments (PIK)			811				590				1,441				1,039
Affiliated investments			31				32				64				62
Controlled investments			953				623				1,884				1,065
Controlled investments (PIK)			-				-				-				233
Total interest income			7,763				7,081				15,344				13,711
Dividend income from:
Non-affiliated, non-controlled investments			1,045				327				1,431				645
Controlled investments			525				700				910				1,316
Total dividend income			1,570				1,027				2,341				1,961
Other commitment fees from non-affiliated, non-controlled investments			175				802				700				1,604
Other income from:
Non-affiliated, non-controlled investments			40				67				72				111
Total other income			40				67				72				111
Total investment income		$	9,548			$	8,977			$	18,457			$	17,387
Expenses:
Management fees		$	1,068			$	884			$	2,008			$	1,753
Incentive fees			764				842				1,562				1,552
Administration fees			396				341				781				636
Custody fees			36				21				72				43
Directors’ fees			54				53				108				105
Professional services			413				434				801				970
Interest expense			3,473				2,769				6,280				5,590
Other expenses			286				265				589				503
Total expenses		$	6,490			$	5,609			$	12,201			$	11,152
Net investment income before taxes		$	3,058			$	3,368			$	6,256			$	6,235
Excise tax		$	-			$	-			$	5			$	28
Net investment income		$	3,058			$	3,368			$	6,251			$	6,207
Net realized and unrealized gains (losses):
Net realized gain (loss) on investment transactions from:
Non-affiliated, non-controlled investments		$	155			$	542			$	2,511			$	2,387
Affiliated investments			(625	)			-				(625	)			-
Total net realized gain (loss)			(470	)			542				1,886				2,387
Net change in unrealized appreciation (depreciation) on investment transactions from:
Non-affiliated, non-controlled investments			(3,856	)			3,054				(7,389	)			5,835
Affiliated investments			827				(11	)			(23	)			152
Controlled investments			(885	)			(1,751	)			(2,509	)			(1,219	)
Total net change in unrealized appreciation (depreciation)			(3,914	)			1,292				(9,921	)			4,768
Net realized and unrealized gains (losses)		$	(4,384	)		$	1,834			$	(8,035	)		$	7,155
Net increase (decrease) in net assets resulting from operations		$	(1,326	)		$	5,202			$	(1,784	)		$	13,362
Net investment income per share (basic and diluted):		$	0.32			$	0.44			$	0.69			$	0.82
Earnings per share (basic and diluted):		$	(0.14	)		$	0.68			$	(0.20	)		$	1.76
Weighted average shares outstanding (basic and diluted):			9,551,037				7,601,958				9,105,190				7,601,958

FAQ

What was Great Elm Capital Corp's (GECC) net investment income for Q2 2024?

Great Elm Capital Corp's net investment income for Q2 2024 was $3.1 million, or $0.32 per share.

How much capital did GECC raise in Q2 2024?

GECC raised $12 million of equity at Net Asset Value in June 2024 and issued $34.5 million of 8.50% notes due 2029 in April 2024.

What is the quarterly dividend announced by GECC for Q3 2024?

GECC announced a quarterly dividend of $0.35 per share for the third quarter of 2024, equating to a 13.0% annualized yield based on the July 31, 2024 closing price.

What was GECC's net asset value per share as of June 30, 2024?

GECC's net asset value per share was $12.06 as of June 30, 2024, compared to $12.57 on March 31, 2024.