NEWS

On March 19, 2020 Great Elm Corporation (GECC) reported IVQ 2019 results.

See the press release attached.

The BDC announced set monthly distributions for the IQ 2020 of $0.83 ($0.25 for quarter), unchanged from prior period.

However, GECC added the following about the form in which the dividend would be paid:

The distributions will be paid in cash or shares of our common stock at the election of shareholders, although the total amount of cash to be distributed to all shareholders will be limited to approximately 20% of the total distributions to be paid to all shareholders; the remainder of the distributions (approximately 80%) will be paid in the form of shares of our common stock

ANALYSIS

Number One

GECC is the first BDC to announce a non-cash distribution in the current environment.

The payment of the distributions in non-cash form occurred in multiple instances during the Great Recession and afterwards.

The last BDC to use this form of payout was Saratoga Investment (SAR) in 2015.

Preservation

While not explicitly stated in the press release, paying the dividend in this form is aimed at preserving liquidity.

The BDC has 10.62mn shares outstanding.

Given a $1.0 a share annual distribution, the dividend “liability” is $10.6mn.

Given that a maximum of 20% of the payout will be in cash, that indicates GECC will retain – on a pro forma basis – $8.5mn in the BDC that would otherwise be paid out.

The principal beneficiary of the additional income retained in the BDC will be the debt holders and the external manager.

Both should benefit from higher income to pay interest and compensation costs.

At 12/31/2019 GECC had $120mn of unsecured debt outstanding, in three separate Baby Bonds.

Total interest expense is $7.6mn a year.

The total costs for running the BDC (including external manager compensation) came to $8.3mn in 2019.

Looking at the 2019 10-K, we see that $5.4mn of income was in PIK form on Net Investment Income of $10.9mn.

Net out the PIK, and non-cash NII was only $5.5mn.

Not Done Lightly

Given the level of costs necessary to manage the BDC – all which are presumably paid in cash – the $8.5mn being saved by not paying 80% of the dividend in cash is critical.

Even after this savings, the margin between cash income and cash expenses + cash dividend – on a pro forma basis – is modest: 119%.

VIEWS

Not Stellar

GECC is one of the smallest BDCs and has been a perennial under-performer even before the corona crisis.

As the BDC NAV Change Table shows, NAV Per Share has dropped (30%) over the past two years.

Prototype ?

The actions taken regarding the dividend may not be representative of what most of its peers might do in the future.

Nonetheless, the decision to pay the quarterly distribution 80% in stock could be imitated by other players in the future.

Although unpopular with taxpayers, the option taken does allow the BDC to meet its regulatory distribution requirements and boost liquidity.

Winners/Losers

Bond holders, who will see cash income retained in the business, should cheer.

Common stock shareholders, who will end up earning more shares than ever before – and paying taxes thereon – will be less delighted.