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 and GECM entered into the Investment Management Agreement and the Administration Agreement, and, upon closing the Merger, we began to accrue obligations to our external investment manager 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 a 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. See "Regulation as a Business Development Company" and "Material Federal Income Tax Matters."
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 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.
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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.
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. 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.
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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.
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 expected 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.
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--------------------------------------------------------------------------------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 %
Quarter ended December 31, 2020 19,070 (27,039 ) 11.72 %
For the year ended December 31, 2020 101,360 (111,993 )
(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 years endedDecember 31, 2020 , 2019 and 2018. Investments in short-term securities, includingU.S. Treasury Bills and money market mutual funds, are excluded from the table below. For the Year Ended December 31, (in thousands) 2020 2019 2018
Beginning Investment Portfolio, at fair value
Portfolio Investments acquired(1) 101,360 177,757
174,965
Amortization of premium and accretion of
discount, net 4,999 5,982
3,485
Portfolio Investments repaid or sold(2) (111,993 ) (151,818
) (134,817 )
Net change in unrealized appreciation
(depreciation) on investments (29,356 ) (19,792
) (26,752 )
Net realized gain (loss) on investments (10,977 ) 1,300
2,435
Ending Investment Portfolio, at fair value
$ 184,186
(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).
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Portfolio Classification
The following table shows the fair value of our portfolio of investments by
industry as of
December 31, 2020
Investments at Percentage of Investments at Percentage of
Industry Fair Value Fair Value Fair Value Fair Value
Wireless Telecommunications 19.30 % 20.53 %
Services $ 29,270 $ 40,578
Oil & Gas 20,290 13.38 % - - %
Internet Media 18,736 12.35 % 15,923 8.06 %
Specialty Finance 15,760 10.39 % 7,726 3.91 %
Restaurants 10,470 6.91 % 11,972 6.06 %
Construction Materials 6.38 % 3.94 %
Manufacturing 9,676 7,792
Food & Staples 8,694 5.73 % 20,975 10.61 %
Retail 6,145 4.05 % 13,470 6.82 %
Apparel & Textile Products 5,154 3.40 % 8,744 4.42 %
Software Services 4,896 3.23 % 25,456 12.88 %
Industrial 4,642 3.06 % 4,200 2.13 %
Metals & Mining 3,996 2.65 % - - %
Radio Broadcasting 3,763 2.48 % 7,795 3.94 %
Transportation Equipment 1.95 % - %
Manufacturing 2,948 -
Casinos & Gaming 2,820 1.86 % - - %
Wholesale-Apparel, Piece 1.82 % - %
Goods & Notions 2,762 -
Hotel Operator 1,203 0.79 % 3,361 1.70 %
Technology 202 0.13 % - - %
Real Estate Services 200 0.13 % 2,065 1.04 %
Building Cleaning and 0.11 % 0.41 %
Maintenance Services 162 819
Maritime Security Services 19 0.01 % 30 0.02 %
Consumer Finance - - % 1,050 0.53 %
Gaming, Lodging & Restaurants - - % 12,127 6.14 %
Water Transport - - % 8,001 4.05 %
Chemicals - - % 6,917 3.50 %
Consulting - - % (458 ) (0.23 )%
Telecommunications Services (160 ) (0.11 )% (928 ) (0.47 )%
Total $ 151,648 100.00 % $ 197,615 99.99 %
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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 Year Ended December 31,
2020 2019
In Thousands Per Share(1) In Thousands Per Share(1)Total Investment Income$ 22,897 $ 1.71$ 27,038 $ 2.64 Interest income 19,210 1.44 24,198 2.36 Dividend income 3,107 0.23 2,070 0.20 Other income 580 0.04 770 0.08
(1) The per share amounts are based on a weighted average of 13,309,463
outstanding common shares for the year ended
average of 10,249,578 outstanding common shares for the year ended December
31, 2019.
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 years ended years endedDecember 31, 2020 , 2019 and 2018, income includes non-cash PIK income of$5.7 million ,$5.4 million and$8.2 million , respectively. The decrease in interest income for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 is primarily 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 year endedDecember 31, 2020 , several investments, includingDavidzon Radio, Inc. ("Davidzon"),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. Both PFS and CPK had workouts in the quarter endedDecember 31, 2020 which resulted in us receiving new debt and equity positions which are not on non-accrual status as ofDecember 31, 2020 . Dividend income for the year endedDecember 31, 2020 includes$2.2 million earned from our investment in Prestige Capital Finance, LLC ("Prestige") and$0.9 million earned from our investment in Crestwood as compared to$1.6 million earned from our investment in Prestige and$0.5 million earned from cash balances invested in short-term investments for the year endedDecember 31, 2019 . The decrease in other income for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 is primarily attributable to commitment and funding fees earned on ourMay 2019 investment in Avanti's 1.5 lien senior secured notes. As discussed under "-Recent Developments", the full impact of COVID-19 on each of our portfolio companies is not known at this time. Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies may experience financial distress and may be unable to make future interest payments or dividend distributions resulting in decreased income to the Company. In addition, the year endedDecember 31, 2020 saw significant decreases in LIBOR, the primary base rate referenced in our floating rate debt investments. If interest rates stay depressed or continue to decrease further and we are otherwise unable to offset these reductions by investing in other debt instruments with higher interest rates we will see further decreases in our investment income. 57 -------------------------------------------------------------------------------- Expenses For the Year Ended December 31, 2020 2019 In Thousands Per Share(1) In Thousands Per Share(1) Total Expenses$ 15,731 $ 1.18$ 15,892 $ 1.55 Management fees 2,511 0.19 2,953 0.29 Incentive fees 1,020 0.08 2,735 0.26 Total advisory and management fees $ 3,531 $ 0.27$ 5,688 $ 0.55 Administration fees 729 0.05 987 0.10 Directors' fees 198 0.01 200 0.02 Interest expense 9,126 0.69 7,636 0.75 Professional services 1,441 0.11 833 0.08 Custody fees 51 - 57 0.01 Other 655 0.05 491 0.05 Income Tax Expense Excise Tax Expense 17 - 209 0.02
(1) The per share amounts are based on a weighted average of 13,309,463
outstanding common shares for the year ended
average of 10,249,578 outstanding common shares for the year ended December
31, 2019.
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 year endedDecember 31, 2020 were consistent with the year endedDecember 31, 2019 , with decreases in management and incentive fees offset by increases in interest expense and professional services fees. Interest expense for the year endedDecember 31, 2020 increased as compared to the year endedDecember 31, 2019 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$121.0 million for the year endedDecember 31, 2020 , as compared to$103.2 million for the year endedDecember 31, 2019 . Fees for professional services increased for the year endedDecember 31, 2020 due to one-time costs, including approximately$0.7 million in legal fees for compliance matters and claims related to certain investments, that are not expected to recur in future periods. Also, other expenses increased by approximately$0.1 million for the year endedDecember 31, 2020 as compared to the prior year due to additional transfer agency costs incurred in connection with stock distributions during the year. The decrease in incentive fees for the year endedDecember 31, 2020 as compared to the corresponding periods in the prior year is primarily the result of decreases in pre-incentive fee net investment income due to the decreased investment income discussed under "-Investment Income" above and the increase in expenses noted above. In addition, incentive fees for the year endedDecember 31, 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. Management fees also decreased for the year endedDecember 31, 2020 as compared to the prior year due to decreases in management fee assets during the year. 58 --------------------------------------------------------------------------------
Realized Gains (Losses)
For the Year Ended December 31,
2020 2019
In Thousands Per Share(1) In Thousands Per Share(1)
Net Realized Gain (Loss) $ (9,749 ) $ (0.73 ) $ 1,300 $ 0.13
Gross realized gain 4,255 0.32 2,130 0.21
Gross realized loss (14,004 ) (1.05 ) (830 ) (0.08 )
(1) The per share amounts are based on a weighted average of 13,309,463
outstanding common shares for the year ended
average of 10,249,578 outstanding common shares for the year ended
During the year endedDecember 31, 2020 , net realized losses on investments were primarily driven by the sales of Commercial Barge, The Finance Company ("TFC"), and Full House Resorts, Inc. ("Full House") during the period, for which we recognized realized losses of$9.8 million ,$1.4 million , and$1.3 million , respectively. These losses were partially offset by realized gains on the early repayment of investments, including$1.9 million on our investments inTensar 's first and second lien loans,$0.4 million on investment in the Duff & Phelps revolver, and$0.3 million on our investment inASP Chromaflo Technologies Corp.'s second lien loan. Realized gains for the year endedDecember 31, 2020 also includes approximately$1.2 million in realized gain on repurchases of debt below par. During the year endedDecember 31, 2019 , we recognized gross realized gains on the sale of our investments inInternational Wire Group, Inc. ("International Wire") andMichael Baker International, LLC secured bonds of$1.1 million and$0.4 million , respectively. In addition, we recognized approximately$0.4 million in realized gain due to the acceleration of discount in connection with paydowns. During the year endedDecember 31, 2019 , gross realized losses were primarily related to the realized loss of$0.8 million on the sale of our investment inSungard Availability Services Capital, Inc. secured loan.
Unrealized Appreciation (Depreciation) on Investments
For the Year Ended December 31,
2020 2019
In Thousands Per Share(1) In Thousands Per Share(1)
Net unrealized appreciation/
(depreciation) $ (29,356 ) $ (2.20 ) $ (19,784 ) $ (1.93 )
Unrealized appreciation 21,363 1.61 4,629 0.45
Unrealized depreciation (50,719 ) (3.81 ) (24,413 ) (2.38 )
(1) The per share amounts are based on a weighted average of 13,309,463
outstanding common shares for the year ended
average of 10,249,578 outstanding common shares for the year ended December
31, 2019.
For the year endedDecember 31, 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$16.1 million on our investment in Avanti 2nd lien secured bond, approximately$8.0 million on our investments in CPK, which went through a restructuring in November, and$4.1 million on our investment in Davidzon. During the year endedDecember 31, 2020 , unrealized appreciation was primarily due to the sales of Commercial Barge in February and TFC in November, for which we relieved approximately$6.3 million and$1.2 million , respectively, of unrealized losses on the positions as ofDecember 31, 2019 . In addition, we had unrealized appreciation due to increases in fair value of investments, including$3.2 million on investment in Crestwood,$2.4 million on our investment in Prestige, and$1.1 million on our investment inAPTIM Corp. 59 -------------------------------------------------------------------------------- For the year endedDecember 31, 2019 , net unrealized depreciation was primarily driven by our investments in Avanti, Commercial Barge,Tru Taj and PFS, for which we recognized unrealized depreciation of$7.9 million ,$4.7 million ,$4.2 million and$2.1 million , respectively. The net unrealized depreciation for Avanti andTru Taj are primarily driven by decreases in the fair value of the investment while net unrealized depreciation for Commercial Barge reflects both a decrease in the fair value of the investment and increase in the cost basis of the investment as a result of the accretion of discount. During the year endedDecember 31, 2019 , we recognized unrealized appreciation of$1.0 million and$0.4 million as result of the sale of our investments in International Wire andSESAC , respectively. In addition, we recognized unrealized appreciation of$0.7 million ,$0.6 million and$0.5 million as a result of increased fair value of our investments inFinastra Holdings Group, Ltd. ,Subcom, LLC , andMitchell International, Inc. , respectively. In the table above, the presentation of gross unrealized appreciation and depreciation amounts for the year endedDecember 31, 2019 has been updated consistent with the current year presentation which groups the funded and unfunded portion of revolvers together. Please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 for a discussion of fiscal year 2018. 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.
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".
AtDecember 31, 2020 , we had approximately$52.6 million of cash and cash equivalents and$0.6 million of restricted cash. AtDecember 31, 2020 , we had investments in 31 debt instruments across 27 companies, totaling approximately$108.1 million at fair value and ten equity investments in nine companies, totaling approximately$43.5 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 ofDecember 31, 2020 , we had approximately$37.8 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 ourDecember 31, 2020 balance sheet to satisfy the unfunded commitments. For the year endedDecember 31, 2020 , net cash provided by operating activities was approximately$27.4 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$19.5 million , reflecting payments for additional investments of$92.5 million , offset by proceeds from principal repayments and sales of$112.0 million . Such amounts include draws and repayments on revolving credit facilities.
For the year ended
For the year endedDecember 31, 2020 , cash provided by financing activities was$21.2 million , which consisted of$31.7 million in proceeds from issuance of common stock which were offset by$1.5 million in offering costs,$5.0 million in distributions to investors, and$4.1 million in repurchases of our debt. 60 -------------------------------------------------------------------------------- For the year endedDecember 31, 2019 , cash provided by financing activities was$24.9 million , consisting of$42.7 million in proceeds from the issuance of the GECCN Notes offering (discussed under "-Notes Payable" below), partially offset by$12.8 million in distributions to investors and$5.0 million in repurchases of the Company's common stock through our stock buyback program.
Contractual Obligations
A summary of our significant contractual payment obligations as ofDecember 31, 2020 is as follows: Less than More than (in thousands) Total 1 year 1-3 years 3-5 years 5 years
Contractual Obligations GECCL Notes$ 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.
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 year ended
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. 61
-------------------------------------------------------------------------------- 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 ofDecember 31, 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 ofDecember 31, 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 year endedDecember 31, 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
Recent Developments
Our Board set distributions for the quarter endingJune 30, 2021 at a rate of$0.10 per share. All of the distribution is from distributable earnings. 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 sold
("CPK") second lien exit term loan at approximately 93% of par value.
• we purchased
unsecured bonds at approximately 92% of par value.
• we sold 26,500 shares of Crestwood Equity Partners LP Class A Preferred
Equity Units for approximately
• we purchased
approximately 99% of par value.
• we sold $2.0 million in par value of APTIM Corp. first lien bonds at
approximately 85% of par value.
62
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• we purchased
Limited second lien bonds at approximately 93% of par value.
• we purchased
lien bonds at approximately 89% of par value.
• we received a payment of approximately
warrants that had previously been written off.
• we purchased approximately
Company ("SPAC") initial public offerings across 21 companies.
In
• we purchased
1.125 lien term loan at 100% of par value.
• we purchased
lien term loan at approximately 97% of par value.
• we purchased
unsecured bonds at approximately 97% of par value.
•
of par value.
•
loan B was redeemed at 100% of par value.
• we received a distribution of approximately $0.1 million from our
investment in PE Facility Solutions, LLC common equity.
• we purchased
first lien term loan at 100% of par value.
• we purchased approximately
across 63 companies.
• we sold one SPAC position for approximately $0.2 million .
In
• we purchased
at approximately 79% of par value.
• we sold
par value.
• we sold 23,500 shares of Crestwood Class A Preferred Equity Units for
approximately
• we purchased approximately
across 43 companies.
• we sold approximately
COVID-19
The global outbreak of the COVID-19 pandemic 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.
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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.
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 December 31,
2020 as compared to our net asset value as of December 31, 2019 . The decrease in
net asset value as of December 31, 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 December 31, 2020 , approximately $105.0 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.
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We will continue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and guidance fromU.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, their financial condition and the results of operations and financial condition of our portfolio companies.
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