GREAT ELM CAPITAL CORP. Overview
We are a BDC that seeks to generate both current income and capital appreciation through debt and equity investments. Our investment focus is on debt obligations of middle-market companies which are traded in the institutional credit markets. We invest primarily in the debt of middle-market companies as well as small businesses, generally in the form of senior secured and unsecured notes, as well as senior secured loans, junior loans and mezzanine debt. We will from time to time make investments in preferred equity, control equity investments in specialty finance businesses and equity investments as part of restructuring credits. OnSeptember 27, 2016 , we andGreat Elm Capital Management, Inc. ("GECM"), our external investment manager, entered into an investment management agreement (the "Investment Management Agreement") and an administration agreement (the "Administration Agreement"), and we began to accrue obligations to GECM under those agreements. The Investment Management Agreement renews for successive annual periods, subject to requisite Board and/or stockholder approvals. We have elected to be treated as aRegulated Investment Company ("RIC") forU.S. federal income tax purposes. As a RIC, we will not be taxed on our income to the extent that we distribute such income each year and satisfy other applicable income tax requirements. To qualify as a RIC, we must, among other things, meet source-of-income and asset diversification requirements and annually distribute to our stockholders generally at least 90% of our investment company taxable income on a timely basis. If we qualify as a RIC, we generally will not have to pay corporate level taxes on any income that we distribute to our stockholders.
Investments
Our level of investment activity can and does vary substantially from period to period depending on many factors, including, among others, the amount of debt and equity capital available from other sources to middle-market companies, the level of merger and acquisition activity, pricing in the high yield and leveraged loan credit markets, our expectations of future investment opportunities, the general economic environment as well as the competitive environment for the types of investments we make. As a BDC, our investments and the composition of our portfolio are required to comply with regulatory requirements.
Revenues
We generate revenue primarily from interest on the debt investments that we
hold. We may also generate revenue from dividends on the equity investments that
we hold, capital gains on the disposition of investments, and lease, fee, and
other income. Our investments in fixed income instruments generally have an
expected maturity of three to five years, although we have no lower or upper
constraint on maturity. Our debt investments generally pay interest quarterly or
semi-annually. Payments of principal of our debt investments may be amortized
over the stated term of the investment, deferred for several years or due
entirely at maturity. In some cases, our debt investments and preferred stock
investments may defer payments of cash interest or dividends or payment-in-kind
("PIK"). In addition, we may generate revenue in the form of prepayment fees,
commitment, origination, due diligence fees, end-of-term or exit fees, fees for
providing significant managerial assistance, consulting fees and other
investment-related income.
Expenses
Our primary operating expenses include the payment of a base management fee,
administration fees (including the allocable portion of overhead under the
Administration Agreement), and, depending on our operating results, an incentive
fee. The base management fee and incentive fee remunerates GECM for work in
identifying, evaluating, negotiating, closing and monitoring our
investments. The Administration Agreement provides for reimbursement of costs
and expenses incurred for office space rental, office equipment and utilities
allocable to us under the Administration Agreement, as well as certain costs and
expenses incurred relating to non-investment advisory, administrative or
operating services provided by GECM or its affiliates to us. We also bear all
other costs and expenses of our operations and transactions. In addition, our
expenses include interest on our outstanding indebtedness.
2
--------------------------------------------------------------------------------Critical Accounting Policies
Valuation of Portfolio Investments
We value our portfolio investments at fair value based upon the principles and
methods of valuation set forth in policies adopted by our board of directors
(our "Board"). Fair value is defined as the price that would be received to sell
an asset in an orderly transaction between market participants at the
measurement date. Market participants are buyers and sellers in the principal
(or most advantageous) market for the asset that (1) are independent of us; (2)
are knowledgeable, having a reasonable understanding about the asset based on
all available information (including information that might be obtained through
due diligence efforts that are usual and customary); (3) are able to transact
for the asset; and (4) are willing to transact for the asset (that is, they are
motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such
market quotations unless the quotations are deemed not to represent fair
value. Debt and equity securities for which market quotations are not readily
available or for which market quotations are deemed not to represent fair value,
are valued at fair value using a valuation process consistent with our
Board-approved policy.
Our Board approves in good faith the valuation of our portfolio as of the end of
each quarter. Due to the inherent uncertainty and subjectivity of determining
the fair value of investments that do not have a readily available market value,
the fair value of our investments may differ significantly from the values that
would have been used had a readily available market value existed for such
investments and may differ materially from the values that we may ultimately
realize. In addition, changes in the market environment and other events may
impact the market quotations used to value some of our investments.
Those investments for which market quotations are not readily available or for
which market quotations are deemed not to represent fair value are valued
utilizing a market approach, an income approach, or both approaches, as
appropriate. The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets or
liabilities (including a business). The income approach uses valuation
techniques to convert future amounts (for example, cash flows or earnings) to a
single present amount (discounted). The measurement is based on the value
indicated by current market expectations about those future amounts. In
following these approaches, the types of factors that we may take into account
in determining the fair value of our investments include, as relevant and among
other factors: available current market data, including relevant and applicable
market trading and transaction comparables; applicable market yields and
multiples, security covenants, call protection provisions, information rights
and the nature and realizable value of any collateral, the portfolio company's
ability to make payments, its earnings and discounted cash flows, the markets in
which the portfolio company does business, comparisons of financial ratios of
peer companies that are public, and merger and acquisition comparables; and
enterprise values.
We prefer the use of observable inputs and minimize the use of unobservable
inputs in our valuation process. Inputs refer broadly to the assumptions that
market participants would use in pricing an asset. Observable inputs are inputs
that reflect the assumptions market participants would use in pricing an asset
developed based on market data obtained from sources independent of
us. Unobservable inputs are inputs that reflect our assumptions about the
assumptions market participants would use in pricing an asset developed based on
the best information available in the circumstances.
Both observable and unobservable inputs are subject to some level of uncertainty
and assumptions used bear the risk of change in the future. We utilize the best
information available to us, including the factors listed above, in preparing
the fair valuations. In determining the fair value of any individual investment,
we may use multiple inputs or utilize more than one approach to calculate the
fair value to assess the sensitivity to change and determine a reasonable range
of fair value. In addition, our valuation procedures include an assessment of
the current valuation as compared to the previous valuation for each investment
and where differences are material understanding the primary drivers of those
changes, incorporating updates to our current valuation inputs and approaches as
appropriate.
3
--------------------------------------------------------------------------------
Revenue Recognition
Interest and dividend income, including PIK income, is recorded on an accrual
basis. Origination, structuring, closing, commitment and other upfront fees,
including original issue discounts ("OID"), earned with respect to capital
commitments are generally amortized or accreted into interest income over the
life of the respective debt investment, as are end-of-term or exit fees
receivable upon repayment of a debt investment if such fees are fixed in
nature. Other fees, including certain amendment fees, prepayment fees and
commitment fees on broken deals, and end-of-term or exit fees that have a
contingency feature or are variable in nature are recognized as
earned. Prepayment fees and similar income due upon the early repayment of a
loan or debt security are recognized when earned and are included in interest
income.
We may purchase debt investments at a discount to their face value. Discounts on
the acquisition of corporate debt instruments are generally amortized using the
effective-interest or constant-yield method, unless there are material questions
as to collectability.
We assess the outstanding accrued income receivables for collectability at least
quarterly, or more frequently if there is an event that indicates the underlying
portfolio company may not be able to make the expect payments. If it is
determined that amounts are not likely to be paid we may establish a reserve
against or reverse the income and put the investment on non-accrual status.
Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation)
We measure realized gains or losses by the difference between the net proceeds
from the repayment or sale of an investment and the amortized cost basis of the
investment, without regard to unrealized appreciation or depreciation previously
recognized. Realized gains and losses are computed using the specific
identification method.
Net change in unrealized appreciation or depreciation reflects the net change in
portfolio investment fair values and portfolio investment cost bases during the
reporting period, including the reversal of previously recorded unrealized
appreciation or depreciation when gains or losses are realized.
4
--------------------------------------------------------------------------------Portfolio and Investment Activity
The following is a summary of our investment activity for the years ended
Weighted Average Yield
(in thousands) Acquisitions(1) Dispositions(2) End of Period(3)
Quarter ended March 31, 2018 $ 63,220 $ (29,069 ) 14.80 %
Quarter ended June 30, 2018 37,927 (27,729 ) 11.10 %
Quarter ended September 30, 2018 38,969 (37,991 ) 11.60 %
Quarter ended December 31, 2018 34,849 (40,028 ) 12.00 %
For the year ended December 31, 2018 174,965 (134,817 )
Quarter ended March 31, 2019 54,846 (59,869 ) 11.30 %
Quarter ended June 30, 2019 62,238 (37,802 ) 11.40 %
Quarter ended September 30, 2019 45,873 (44,531 ) 11.00 %
Quarter ended December 31, 2019 14,800 (9,616 ) 10.80 %
For the year ended December 31, 2019 177,757 (151,818 )
Quarter ended March 31, 2020 31,882 (29,420 ) 10.00 %
Quarter ended June 30, 2020 15,913 (37,497 ) 10.18 %
Quarter ended September 30, 2020 34,495 (18,037 ) 10.07 %
For the Nine Months Ended
September 30, 2020 $ 82,290 $ (84,954 )
(1) Includes new investments, additional fundings (inclusive of those on
revolving credit facilities), refinancings and capitalized PIK
income. Investments in short-term securities, including
and money market mutual funds, were excluded.
(2) Includes scheduled principal payments, prepayments, sales, and repayments
(inclusive of those on revolving credit facilities). Investments in
short-term securities, including
funds, were excluded.
(3) Weighted average yield is based upon the stated coupon rate and fair value of
outstanding debt securities at the measurement date. Debt securities on
non-accrual status are included in the calculation and are treated as having
0% as their applicable interest rate for purposes of this calculation, unless
such debt securities are valued at zero.
Portfolio Reconciliation
The following is a reconciliation of the investment portfolio for the nine
months ended
For the Nine Months For the Year
Ended September 30, Ended
(in thousands) 2020 December 31, 2019
Beginning Investment Portfolio, at fair value $ 197,615 $ 184,186
Portfolio Investments acquired(1) 82,290
177,757
Amortization of premium and accretion of discount, net 3,583
5,982
Portfolio Investments repaid or sold(2) (84,954 ) (151,818 ) Net change in unrealized appreciation (depreciation) on investments (17,298 ) (19,792 ) Net realized gain (loss) on investments (11,750 )
1,300
Ending Investment Portfolio, at fair value $ 169,486 $
197,615
(1) Includes new investments, additional fundings (inclusive of those on
revolving credit facilities), refinancings, and capitalized PIK income.
(2) Includes scheduled principal payments, prepayments, sales, and repayments
(inclusive of those on revolving credit facilities).
5
--------------------------------------------------------------------------------
Portfolio Classification
The following table shows the fair value of our portfolio of investments by
industry as of
September 30, 2020
Investments at Percentage of Investments at Percentage of
Industry Fair Value Fair Value Fair Value Fair Value
Wireless Telecommunications 23.21 % $ 40,578 20.53 %
Services $ 39,334
Specialty Finance 19,423 11.46 % 7,726 3.91 %
Internet Media 18,157 10.71 % 15,923 8.06 %
Construction Materials 16,220 9.57 % 7,792 3.94 %
Manufacturing
Oil & Gas 12,710 7.50 % - - %
Retail 9,472 5.59 % 13,470 6.82 %
Food & Staples 8,189 4.83 % 20,975 10.61 %
Restaurants 7,907 4.67 % 11,972 6.06 %
Software Services 6,583 3.88 % 25,456 12.88 %
Radio Broadcasting 5,393 3.18 % 7,795 3.94 %
Apparel & Textile Products 5,062 2.99 % 8,744 4.42 %
Chemicals 4,550 2.67 % 6,917 3.50 %
Industrial 3,120 1.84 % 4,200 2.13 %
Transportation Equipment 2,904 1.71 % - - %
Manufacturing
Hotel Operator 2,894 1.71 % 3,361 1.70 %
Technology 2,776 1.64 % - - %
Metals & Mining 2,078 1.23 % - - %
Communications Equipment 2,006 1.18 % - - %
Real Estate Services 500 0.30 % 2,065 1.04 %
Consumer Finance 343 0.20 % 1,050 0.53 %
Building Cleaning and 162 0.10 % 819 0.41 %
Maintenance Services
Maritime Security Services 30 0.02 % 30 0.02 %
Gaming, Lodging & - - % 12,127 6.14 %
Restaurants
Water Transport - - % 8,001 4.05 %
Consulting - - % (458 ) (0.23 )%
Telecommunications Services (327 ) (0.19 )% (928 ) (0.47 )%
Total $ 169,486 100.00 % $ 197,615 99.99 %
Results of Operations
This "-Results of Operations" discussion should be read in conjunction with the discussion of ("COVID-19") under "-Recent Developments-COVID 19".
Investment Income
For the Three Months Ended September 30 , For
the Nine Months Ended
2020 2019 2020 2019
In Thousands Per Share(1) In Thousands Per Share(2) In Thousands Per Share(1) In Thousands Per Share(2)Total Investment Income $ 5,951 $ 0.56 $
7,002 $ 0.70 $ 17,148 $ 1.66 $ 20,026 $ 1.94
Interest income 4,375 0.41 6,200 0.62 14,546 1.41 17,584 1.71
Dividend income 1,281 0.12 676 0.07 2,164 0.21 1,687 0.16
Other income 295 0.03 126 0.01 438 0.04 755 0.07
(1) The per share amounts are based on a weighted average of 10,660,894 and
10,307,771 outstanding common shares for the three and nine months ended
(2) The per share amounts are based on a weighted average of 10,062,682 and
10,312,561 outstanding common shares for the three and nine months ended
September 30, 2019 , respectively. 6
-------------------------------------------------------------------------------- Investment income consists of interest income, including net amortization of premium and accretion of discount on loans and debt securities, dividend income and other income, which primarily consists of amendment fees, commitment fees and funding fees on loans. For the three and nine months endedSeptember 30, 2020 , interest income includes non-cash PIK income of$1.3 million and$3.8 million , respectively. For the three and nine months endedSeptember 30, 2019 , interest income includes non-cash PIK income of$1.2 million and$3.6 million , respectively. Interest income decreased for the three and nine months endedSeptember 30, 2020 as compared to the corresponding periods in the prior year due to exits from certain high income-generating positions, such asPE Facility Solutions, LLC ("PEFS"), andSESAC Holdco II LLC ("SESAC") in the third quarter of 2019 andCommercial Barge Line Company ("Commercial Barge") in the first quarter of 2020, as well as general downward trends in the London Interbank Offered Rate ("LIBOR"), the primary base rate referenced in our floating rate debt investments. In addition, during the nine months endedSeptember 30, 2020 , several investments, includingDavidzon Radio, Inc. ,PFS Holdings Corp. ("PFS") andCalifornia Pizza Kitchen ("CPK") 2nd lien loan, were put on nonaccrual status resulting in lower interest income for the current period than if interest payments had continued per the terms of each respective loan. Investments are expected to remain on non-accrual status absent an indication that interest payments will resume in the future. Dividend income has increased for the three and nine months endedSeptember 30, 2020 as a result of increased dividend payments from our investment inPrestige Capital Finance, LLC . The decrease in other income for the nine months endedSeptember 30, 2020 as compared to the corresponding period in the prior year is primarily attributable to commitment and funding fees earned on ourMay 2019 investment in Avanti's 1.5 lien senior secured notes. As discussed under "-Recent Developments", the full impact of COVID-19 on each of our portfolio companies is not known at this time. Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies may experience financial distress and may be unable to make future interest payments or dividend distributions resulting in decreased income to the Company. In addition, the three and nine months endedSeptember 30, 2020 saw significant decreases in LIBOR, the primary base rate referenced in our floating rate debt investments. If interest rates stay depressed or continue to decrease further and we are otherwise unable to offset these reductions by investing in other debt instruments with higher interest rates we will see further decreases in our investment income. Expenses For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 In Thousands Per Share(1) In Thousands Per Share(2) In Thousands Per Share(1) In Thousands Per Share(2) Total Expenses$ 4,018 $ 0.38 $ 4,383 $ 0.44$ 11,647 $ 1.13$ 11,628 $ 1.13 Management fees 609 0.06 759 0.08 1,898 0.18 2,207 0.21 Incentive fees 482 0.05 654 0.06 810 0.08 2,099 0.20
Total advisory and management fees
$ 1,413 $ 0.14 $ 2,708 $ 0.26$ 4,306 $ 0.42 Administration fees 152 0.01 282 0.03 547 0.05 734 0.07 Directors' fees 49 0.00 51 0.01 151 0.01 150 0.01 Interest expense 2,225 0.21 2,308 0.23 6,920 0.67 5,333 0.52 Professional services 287 0.03 243 0.02 794 0.08 711 0.07 Custody fees 20 0.00 15 0.00 59 0.01 45 0.00 Other 194 0.02 71 0.01 468 0.05 349 0.03
(1) The per share amounts are based on a weighted average of 10,660,894 and
10,307,771 outstanding common shares for the three and nine months ended
(2) The per share amounts are based on a weighted average of 10,062,682 and
10,312,561 outstanding common shares for the three and nine months ended
September 30, 2019 , respectively. 7
-------------------------------------------------------------------------------- Expenses are largely comprised of advisory fees and administration fees paid to GECM and interest expense on our outstanding notes payable. See "-Liquidity and Capital Resources." Advisory fees include management fees and incentive fees calculated in accordance with the Investment Management Agreement, and administration fees include direct costs reimbursable to GECM under the Administration Agreement and fees paid for sub-administration services. Overall expenses for the three months endedSeptember 30, 2020 decreased as compared to the three months endedSeptember 30, 2019 primarily due to decreases in incentive fees and management fees. For the nine months endedSeptember 30, 2020 overall expenses were consistent with the nine months endedSeptember 30, 2019 , with decreases in management and incentive fees offset by increases in interest expense. The increase in interest expense for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 is due to the issuance of$45.0 million in aggregate principal amount of 6.50% notes due 2024 (the "GECCN Notes") in June andJuly 2019 which resulted in a weighted average outstanding debt balance of$119.1 million and$121.8 million for the three and nine months endedSeptember 30, 2020 , respectively, as compared to$123.9 million and$96.2 million for the three and nine months endedSeptember 30, 2019 , respectively. The decrease in incentive fees for the three and nine months endedSeptember 30, 2020 as compared to the corresponding periods in the prior year is the result of decreases in pre-incentive fee net investment income as a result of the decreased investment income discussed under "-Investment Income" above and the increase in interest expense. In addition, incentive fees for the nine months endedSeptember 30, 2020 included a reversal of approximately$0.4 million in incentive fees accrued in prior periods. This reversal was primarily attributable to the sale of Commercial Barge inFebruary 2020 , for which the resulting proceeds did not fully cover the accreted cost of the investment. Excluding the impact of the reversal, incentive fees would have been approximately$0.6 million for the three months endedMarch 31, 2020 . Realized Gains (Losses) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 In Thousands Per Share(1)
In Thousands Per Share(2) In Thousands Per Share(1)
In Thousands Per Share(2) Net Realized Gain (Loss) $ (142 )$ (0.02 ) $ 251$ 0.02 $ (10,523 ) $ (1.02 ) $ 1,269 $ 0.12 Gross realized gain 361 0.03 252 0.03 2,248 0.22 2,096 0.20 Gross realized loss (503 ) (0.05 ) (1 ) (0.00 ) (12,771 ) (1.24 ) (827 ) (0.08 )
(1) The per share amounts are based on a weighted average of 10,660,894 and
10,307,771 outstanding common shares for the three and nine months ended
(2) The per share amounts are based on a weighted average of 10,062,682 and
10,312,561 outstanding common shares for the three and nine months ended
During the three months endedSeptember 30, 2020 , net realized losses were primarily driven by the realized losses of approximately$0.3 million on theAPTIM Corp. 1st lien bond ("APTIM") during the quarter. Realized gains for the three months endedSeptember 30, 2020 includes approximately$0.1 million in realized gain on repurchases of debt below par. During the nine months endedSeptember 30, 2020 , net realized losses on investments were primarily driven by the sales ofCommercial Barge and Full House Resorts, Inc. ("Full House") during the period, for which we recognized realized losses of$9.8 million and$1.3 million , respectively. Realized gains for the nine months endedSeptember 30, 2020 includes approximately$1.2 million in realized gain on repurchases of debt below par. During the three months endedSeptember 30, 2019 , net realized gains were primarily driven by realized gains of approximately$0.2 million on the partial repayment of our investment in PEFS first lien secured loan B and approximately$0.1 million on the sale of our investment inSESAC second lien secured loan. During the nine months endedSeptember 30, 2019 , net realized gains were largely driven by the sales of our investments inInternational Wire Group, Inc. ("International Wire") andMichael Baker International, LLC secured bonds which resulted in realized gains of approximately$1.1 million and$0.4 million , respectively. These realized gains were partially offset by gross realized losses for the nine months endedSeptember 30, 2019 which were primarily comprised of the realized loss of approximately$0.8 million on the sale of our investment inSungard Availability Services Capital, Inc. secured loan. 8 --------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) on Investments
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 2020 2019
In Thousands Per Share(1) In Thousands Per Share(2) In Thousands Per Share(1)
In Thousands Per Share(2) Net unrealized appreciation/ (depreciation) $ 5,913 $ 0.56$ (12,516 ) $ (1.24 ) $ (17,301 ) $ (1.68 ) $ (15,623 ) $ (1.51 ) Unrealized appreciation 8,940 0.84 974 0.10 12,036 1.17 3,871 0.38 Unrealized depreciation (3,027 ) (0.28 ) (13,490 ) (1.34 ) (29,337 ) (2.85 ) (19,494 ) (1.89 )
(1) The per share amounts are based on a weighted average of 10,660,894 and
10,307,771 outstanding common shares for the three and nine months ended
(2) The per share amounts are based on a weighted average of 10,062,682 and
10,312,561 outstanding common shares for the three and nine months ended
During the three months endedSeptember 30, 2020 , we recognized unrealized appreciation of approximately$2.0 million on our investment inPrestige Capital Finance, LLC common equity and approximately$1.1 million on our investment in APTIM 1st lien bond. We recognized unrealized depreciation of approximately$1.2 million on our position inBoardriders, Inc. During the nine months endedSeptember 30, 2020 , net unrealized depreciation was largely driven by decreases in portfolio company valuations as compared to the prior year end. Most notably, we recognized unrealized depreciation of approximately$4.8 million on our investment inAvanti Communications Group, plc ("Avanti") 2nd lien secured bond, approximately$3.6 million on our investment inBoardriders, Inc. 1st lien loan and approximately$5.2 million and$3.3 million on our investment in CPK 1st lien loan and 2nd lien loan, respectively.
Unrealized appreciation for the nine months ended
For each of the three and nine months endedSeptember 30, 2019 , the net unrealized depreciation was largely driven by decreases in the valuation of portfolio investments, increases in our cost basis due to accretion of discount on loans and debt securities and the exit of investments which had unrealized appreciation in prior periods. Net unrealized depreciation for the nine months endedSeptember 30, 2019 included unrealized depreciation of$7.7 million ,$3.7 million and$1.9 million on our investments in Avanti debt and equity, Commercial Barge and PFS, respectively. For the three months endedSeptember 30, 2019 , net unrealized depreciation included unrealized depreciation of$4.1 million ,$2.5 million and$2.3 million on our investments in Avanti debt and equity,Tru Taj, LLC ("Tru Taj") common equity and Commercial Barge, respectively. The unrealized depreciation on our investments in Commercial Barge and PFS includes decreases in the fair value of each investment and increases in our cost basis as a result of the accretion of OID. For the nine months endedSeptember 30, 2019 , unrealized depreciation was partially offset by unrealized appreciation of$0.5 million and$0.3 million on our investments inFinastra Group Holdings, Ltd. andResearch Now Group, Inc. revolver, respectively, as a result of increases in fair value and unrealized appreciation of$1.0 million and$0.4 million on our investments in International Wire andSESAC , respectively, as a result of realization events during the period. As discussed under "-Recent Developments", we cannot predict the duration of the COVID-19 pandemic and the resulting impact to our individual portfolio companies or the broader market. It is likely that any recovery may be slow and/or volatile. The current unrealized depreciation on our portfolio may not be reversed in the short-term or at all and we may see further declines in fair value before the pandemic is over. 9 --------------------------------------------------------------------------------
Liquidity and Capital Resources
This "-Liquidity and Capital Resources" discussion should be read in conjunction with the discussion of COVID-19 under "-Recent Developments-COVID 19".
At
AtSeptember 30, 2020 , we had investments in 34 debt instruments across 25 companies, totaling approximately$136.1 million at fair value and eight equity investments in seven companies, totaling approximately$33.4 million at fair value. In the normal course of business, we may enter into investment agreements under which we commit to make an investment in a portfolio company at some future date or over a specified period of time. As ofSeptember 30, 2020 , we had approximately$46.2 million in unfunded loan commitments, subject to our approval in certain instances, to provide debt financing to certain of our portfolio companies. We had sufficient cash and other liquid assets on ourSeptember 30, 2020 balance sheet to satisfy the unfunded commitments. For the nine months endedSeptember 30, 2020 , net cash provided by operating activities was approximately$17.2 million , reflecting the purchases and repayments of investments offset by net investment income, including non-cash income related to accretion of discount and PIK income and proceeds from sales of investments and principal payments received. Net cash provided by purchases and proceeds from sales of investments was approximately$8.3 million , reflecting payments for additional investments of$75.1 million , offset by proceeds from principal repayments and sales of$83.4 million . Such amounts include draws and repayments on revolving credit facilities.
For the nine months ended
Contractual Obligations
A summary of our significant contractual payment obligations as ofSeptember 30, 2020 is as follows: Less than More than (in thousands) Total 1 year 1-3 years 3-5 years 5 years
Contractual Obligations GECCL Notes$ 30,293 $ -$ 30,293 $ - $ - GECCM Notes 45,610 - - 45,610 - GECCN Notes 42,823 - - 42,823 - Total$ 118,726 $ -$ 30,293 $ 88,433 $ - We have certain contracts under which we have material future commitments. Under the Investment Management Agreement, GECM provides investment advisory services to us. For providing these services, we pay GECM a fee, consisting of two components: (1) a base management fee based on the average value of our total assets and (2) an incentive fee based on our performance. We are also party to the Administration Agreement with GECM. Under the Administration Agreement, GECM furnishes us with, or otherwise arranges for the provision of, office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record keeping services at such office facilities and other such services as our administrator. If any of the contractual obligations discussed above are terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement and our Administration Agreement. Any new investment management agreement would also be subject to approval by our stockholders. Both the Investment Management Agreement and the Administration Agreement may be terminated by either party without penalty upon no fewer than 60 days' written notice to the other. 10
--------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices, as of and for the three months endedSeptember 30, 2020 . Notes Payable
On
The GECCL Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCL Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCL Notes onJanuary 31 ,April 30 ,July 31 andOctober 31 of each year. The GECCL Notes will mature onSeptember 18, 2022 and can be called on, or after,September 18, 2019 . Holders of the GECCL Notes do not have the option to have the GECCL Notes repaid prior to the stated maturity date. The GECCL Notes were issued in minimum denominations of$25 and integral multiples of$25 in excess thereof. OnJanuary 11, 2018 , we sold$43.0 million in aggregate principal amount of 6.75% notes due 2025 (the "GECCM Notes" and, together with the GECCL Notes and GECCM Notes, the "Notes"). OnJanuary 19, 2018 andFebruary 9, 2018 , we sold an additional$1.9 million and$1.5 million , respectively, of the GECCM Notes upon partial exercise of the underwriters' over-allotment option. The aggregate principal balance of the GECCM Notes outstanding as ofSeptember 30, 2020 is$45.6 million . The GECCM Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCM Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCM Notes onMarch 31 ,June 30 ,September 30 andDecember 31 of each year. The GECCM Notes will mature onJanuary 31, 2025 and can be called on, or after,January 31, 2021 . Holders of the GECCM Notes do not have the option to have the GECCM Notes repaid prior to the stated maturity date. The GECCM Notes were issued in minimum denominations of$25 and integral multiples of$25 in excess thereof. OnJune 18, 2019 , we sold$42.5 million in aggregate principal amount of the GECCN Notes, which included$2.5 million of GECCN Notes sold in connection with the partial exercise of the underwriters' over-allotment option. OnJuly 5, 2019 , we sold an additional$2.5 million of the GECCN Notes upon another partial exercise of the underwriters' over-allotment option. The aggregate principal balance of the GECCN Notes outstanding as ofSeptember 30, 2020 is$42.8 million . The GECCN Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCN Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCN Notes onMarch 31 ,June 30 ,September 30 andDecember 31 of each year beginningSeptember 30, 2019 . The GECCN Notes will mature onJune 30, 2024 and can be called on, or after,June 30, 2021 . Holders of the GECCN Notes do not have the option to have the GECCN Notes repaid prior to the stated maturity date. The GECCN Notes were issued in minimum denominations of$25 and integral multiples of$25 in excess thereof. We may repurchase the Notes in accordance with the Investment Company Act and the rules promulgated thereunder. During the nine months endedSeptember 30, 2020 , we repurchased$2.3 million in principal amount of the GECCL Notes$0.8 million in principal amount of the GECCM Notes and$2.2 million in principal amount of the GECCN Notes.
As of
11
--------------------------------------------------------------------------------Recent Developments
OnOctober 1, 2020 , we announced the final results of our non-transferable rights offering, which entitled holders of rights to purchase one new share of common stock for each right held at a subscription price of$2.95 per share. In total, we sold 10,761,950 shares of our common stock for aggregate gross proceeds of approximately$31.7 million . Our Board set distributions for the quarter endingMarch 31, 2021 at a rate of$0.10 per quarter. All of the distribution is from net investment income. The schedule of distribution payment will be established by GECC pursuant to authority granted by our Board. The distribution will be paid in cash.
In
• we purchased 43,993 preferred shares in Blueknight Energy Partners L.P.
("Blueknight") for approximately
• we purchased
LLC ("
• we sold
approximately 103% of par value.
• we purchased
unsecured bonds at approximately 90% of par value.
•
par value.
• we purchased
par value.
• we purchased
100% of par value.
• we sold
of par value.
• we purchased
approximately 1% of par value.
• we purchased
at approximately 81% of par value.
In
• we purchased 30,000 preferred shares in Blueknight for approximately
million.
COVID-19
The global outbreak of the COVID-19 has disrupted economic markets and the
economic impact, duration and spread of the COVID-19 virus is uncertain at this
time. The operational and financial performance of some of the portfolio
companies in which we make investments has been and may further be significantly
impacted by COVID-19, which may in turn impact the valuation of our investments,
results of our operations and cash flows.
Our investment manager prioritizes the health and safety of employees and in
early March 2020 , GECM moved to a remote-working model for all employees. In
addition, the officers of GECC have maintained regular communications with key
service providers, including the fund administration, legal and accounting
professionals, noting that those firms have similarly moved to remote-working
models to the extent possible. Our employees and key service providers have been
able to effectively transition to working remotely while maintaining a
consistent level of capabilities and service, however, we will continue to
monitor and make adjustments as necessary.
While we have been carefully monitoring the COVID-19 pandemic and its impact on
our business and the business of our portfolio companies, we have continued to
fund our existing debt commitments. In addition, we have continued to make, and
expect to continue to make, new investments.
12
--------------------------------------------------------------------------------
We cannot predict the full impact of the COVID-19 pandemic, including its
duration in the United States and worldwide and the magnitude of the economic
impact of the outbreak, including with respect to the travel restrictions,
business closures and other quarantine measures imposed on service providers and
other individuals by various local, state, and federal governmental authorities,
as well as non-U.S. governmental authorities. As such, we are unable to predict
the duration of any business and supply-chain disruptions, the extent to which
the COVID-19 pandemic will negatively affect our portfolio companies' operating
results or the impact that such disruptions may have on our results of
operations and financial condition. Our portfolio is diversified across multiple
industries and the direct and indirect impacts of the COVID-19 pandemic will be
dependent on the specific circumstances for each portfolio company. For example,
companies that derive revenues through in-person interactions with customers,
such as restaurants and retail stores, have been and may be subject to reduced
capacity or shutdowns based on local government advisories and regulations. For
example, CPK filed for bankruptcy in July 2020 . Other companies may be better
able to adapt to the changing environment by moving their workforce to a
remote-working model and leveraging technology solutions to interact with
customers.
Depending on the duration and extent of the disruption to the operations of our
portfolio companies, we expect that certain portfolio companies may experience
financial distress and possibly default on their financial obligations to us and
their other capital providers. We also expect that some of our portfolio
companies may significantly curtail business operations, furlough or lay off
employees and terminate service providers, and defer capital expenditures if
subjected to prolonged and severe financial distress, which would likely impair
their business on a permanent basis. These developments would likely result in a
decrease in the value of our investment in any such portfolio company.
The COVID-19 pandemic and the related disruption and financial distress
experienced by our portfolio companies may have material adverse effects on our
investment income, particularly our interest income, received from our
investments. In connection with the adverse effects of the COVID-19 pandemic, we
may need to restructure our investments in some of our portfolio companies,
which could result in reduced interest payments, an increase in the amount of
PIK interest we receive, or result in permanent write-downs on our investments.
We have had a significant reduction in our net asset value as of September 30,
2020 as compared to our net asset value as of December 31, 2019 . The decrease in
net asset value as of September 30, 2020 was largely the result of decreases in
the fair value of some of our portfolio company investments primarily due to the
immediate adverse economic effects of the COVID-19 pandemic and the continuing
uncertainty surrounding its long-term impact, as well as the re-pricing of
credit risk in the broadly syndicated credit market.
We are also subject to financial risks, including changes in market interest
rates. As of September 30, 2020 , approximately $142.4 million in principal
amount of our debt investments bore interest at variable rates, which are
generally based on LIBOR, and many of which are subject to certain floors. In
connection with the COVID-19 pandemic, the U.S. Federal Reserve and other
central banks have reduced certain interest rates and LIBOR has decreased. A
prolonged reduction in interest rates will reduce our gross investment income
and could result in a decrease in our net investment income if such decreases in
LIBOR are not offset by a corresponding increase in the spread over LIBOR that
we earn on any portfolio investments or a decrease in our operating expenses.
See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for an
analysis of the impact of hypothetical base rate changes in interest rates.
We will continue to monitor the rapidly evolving situation relating to the
COVID-19 pandemic and guidance from U.S. and international authorities,
including federal, state and local public health authorities and may take
additional actions based on their recommendations. In these circumstances, there
may be developments outside our control requiring us to adjust our plan of
operation. As such, given the dynamic nature of this situation, we cannot
reasonably estimate the impacts of COVID-19 on our financial condition, results
of operations or cash flows in the future. To the extent our portfolio companies
are adversely impacted by the effects of the COVID-19 pandemic, it may have a
material adverse impact on our future net investment income, the fair value of
our portfolio investments, its financial condition and the results of operations
and financial condition of our portfolio companies.
13--------------------------------------------------------------------------------
© Edgar Online, source
