Great Elm Corporation: IQ 2017 Earnings
Great Elm Corporation (GECC) – successor to Full Circle Capital – announced IQ 2017 earnings, and released its 10-Q, both of which the BDC Reporter reviewed over the week-end.
From an earnings standpoint alone, GECC did very well in the quarter, with Net Investment Income Per Share at $0.32 (or $1.32 annualized) versus a recently announced dividend policy of paying $1.0 a year or $0.0833 a month. (In fact, we wonder why the External Manager reneged on its earlier promise to pay out $0.09 a month). Any sustained difference between what is paid out and what is earned will probably pop up in a Special Distribution this year or next. However, Taxable Income (on which distributions are supposed to be based) could be different than the GAAP earnings reported. That’s BDC investing: nothing is straightforward.
Even more encouraging for the newest, tiny BDC with the unusual business model of investing in the secondary market alone was the progress made in turning over its portfolio during the period and since going public last year. Page 4 of the 10-Q shows that $42mn was disposed of in a few weeks in 2016 and another $79mn in the IQ of 2017. In Recent Developments on page 9, we learn another $16mn has been “harvested” in this quarter to date. At least one of the troubled Full Circle portfolio companies has been sold off and a number of other key assets including -in April – the BDC’s only non-performing loan: Everi Payments.
Of course, with the Investment Advisor’s stated strategy of investing in higher yielding but publicly traded debt of middle market companies -$76mn of which was added in the IQ 2017 – we don’t know if this is a matter from going from the frying pan to the frying pan. The average yield of the portfolio -nominally 94% in senior investments – is a very high 12.63%. Moreover, much of the quarter’s capital went to existing portfolio companies (6 of 8 investments made) at a rate of 12.29%.
RETURNING TO OLD THEMES
However, the BDC Reporter’s principal concern remains the very un-BDC-like concentration in one investment: Avanti Communications.We’ve been writing about this subject for many months, including a post as early as August of last year, and an update just a few weeks ago. Avanti’s $68mn of debt (and a tiny equity stake) represents nearly 40% of GECC’s assets. As the 10-Q shows, the two, recently restructured, “senior debt” pieces which GECC owns account for 28% of the BDC’s equity, even at fair value. Finally, Avanti accounts for 30% of total investment income as far as we can tell. Yet, the satellite company remains a questionable credit, written down again this quarter both by GECC ($3.2mn) and another BDC lender.
BIG PIK ?
GECC’s 10-Q is not clear about the subject saying coyly only “Security pays, or has the option to pay, all or a portion of its interest in kind” but from our reading of the footnotes and from what we’ve learned in the past, most-if not all-the interest income being earned on the two Avanti tranches is in the form of Pay-In-Kind. Here is a description from the prior quarter’s financial statements:
“On January 27, 2017, Avanti announced the completion of its previously announced refinancing, with the settlement of its (1) consent solicitation topermit, among other things, the incurrence of up to $132,500 in super senior indebtedness (the “PIK Toggle Notes”) and the payment of PIK intereston the Existing Notes in lieu of cash for certain future interest payments due on the Existing Notes, (2) the New Money Offer and (3) offer toholders participating in the New Money Offer to exchange a portion of their Existing Notes for additional PIK Toggle Notes. Holders who elected tobackstop the New Money Offer also received their pro rata share of additional common equity issued by Avanti in an aggregate amount equal to9.09% of Avanti’s total outstanding shares. Through completion of the consent solicitation and the New Money Offer, Avanti received $80,000 ofnew cash funding, with an additional $50,000 of funding available on a delayed draw basis, and will have the ability to defer up to $112,000 of futureinterest payments through April 2018. The Company took part in the refinancing, exchanging $22,900 of Existing Notes for new PIK Toggle Notesand purchasing an additional $9,200 of PIK Toggle Notes for $8,900 of funded cash. The Company continues to hold $47,200 of the Existing Notes.”