Great Elm Capital Corp. (NASDAQ:GECCO): Diversified BDC Delivering Consistent Returns

Published on September 24, 2024 | Ticker: GECCO

Great Elm Capital Corp. (NASDAQ:GECCO) is a diversified business development company (BDC) that has demonstrated its ability to generate consistent returns for shareholders. With a focus on secured debt and income-generating equity investments, including specialty finance businesses, GECCO has built a well-diversified portfolio that has weathered market volatility.

Financial Performance

In the latest quarter, GECCO reported net investment income (NII) of $3.1 million, or $0.32 per share. While this represented a sequential decline from the prior quarter's $3.2 million, or $0.37 per share, the company attributed the drop to temporary factors such as cash drag from recent capital raises and the timing of distributions from certain investments, particularly its new CLO-focused joint venture.

For the full year 2023, GECCO generated annual net income of $25.3 million on revenues of $30.2 million, translating to earnings per share of $2.79. The company's operating cash flow for the year was $25.7 million, with free cash flow also reaching $25.7 million. These robust financial metrics demonstrate GECCO's ability to consistently deliver returns to shareholders.

GECCO's net asset value (NAV) per share stood at $12.06 as of June 30, 2024, down from $12.57 at the end of the prior quarter. Management attributed the decline primarily to write-downs on a couple of illiquid Level 3 investments that had gone on non-accrual status. However, the company noted that the bulk of the impact from these positions has now been realized, positioning GECCO for potential NAV recapture moving forward.

Portfolio Diversification

One of the key highlights of the quarter was GECCO's continued progress in diversifying and strengthening its investment portfolio. The company has been actively shifting its mix towards more secured debt, with first lien loans and CLOs now comprising 60% of the portfolio, up from 44% a year ago. This strategic repositioning has helped bolster the portfolio's yield profile, which stood at over 13% at quarter-end.

GECCO's expansion into the CLO market is particularly noteworthy. In April, the company formed a joint venture to invest in CLOs and related warehouse facilities. The JV has already begun generating distributions, and management expects returns from this segment to range from the mid-teens to low 20% over time. By incorporating structured finance products into its portfolio, GECCO has gained exposure to an asset class that has historically demonstrated strong returns across economic cycles.

Capital Raising Activities

The company's capital raising activities during the quarter further strengthened its financial position. In June, GECCO raised $12 million in equity at NAV from Prosper Peak Holdings, a special purpose vehicle that included a $3 million investment from parent company Great Elm Group. This followed a $24 million equity raise in February, also at NAV, that included a $6 million investment from Great Elm Group.

Additionally, in July, the company issued an additional $22 million of its GECCI notes through a registered direct offering to an institutional investor. This supplemental debt financing was a tack-on to GECCO's GECCI offering in April, during which it issued $34.5 million of five-year notes at a spread to treasury that was more than 50 basis points tighter than its previous note offering in August 2023. Management attributed this improved financing rate to the company's strong earnings, fresh equity capital, and a recent credit rating upgrade from Egan-Jones.

Future Outlook

Looking ahead, GECCO remains focused on prudent capital deployment, prioritizing credit quality and seeking investments that can perform well across various economic environments. The company's specialty finance subsidiary, Great Elm Specialty Finance (GESF), also saw sequential improvement in the second quarter, with two of its three platform companies delivering stronger results.

While the year began slowly for GESF's new deal originations, the pipeline has strengthened in the third quarter, and management remains optimistic about the platform's prospects for the remainder of 2024 and beyond.

Conclusion

Overall, GECCO's solid second-quarter performance, strategic initiatives, and strengthened financial position position the company well for sustainable, long-term growth. The company's diversified portfolio, focus on secured debt, and expansion into the attractive CLO market provide a strong foundation for continued value creation for shareholders.

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