Great Elm Capital (NASDAQ:GEC) is selling a new baby bond. Pricing for the issue has not yet been announced.
GEC is a business development company and they currently have 2 baby bond issues outstanding. The GECCL issue has a coupon of 6.5% and is trading around $24.88 while the GECCM issue has a coupon of 6.75% and is trading around $25.04.
We have no idea who is buying baby bonds from this company at this very low coupons. We think they should be priced above 9%.
While we can’t tear the balance sheet apart like we would like to but it should be enough to know that 33% of their investments are to 1 company–Avanti Communications in the UK. They have invested $83 million in the company and they have marked the investment down numerous times to the point where fair value is now $43 million. Previously GEC had lent to Avanti with a 1st lien, 2nd lien and even a 3rd lien–what is a 3rd lien worth?–our guess is truly very little. In fact last spring GEC converted the 3rd lien to common equity.
Avanti Communications pays PIK (Payment in kind) interest–more money down the rat hole.
Additionally the company voted to lower their required asset coverage ration from 200% to 150%.
These items alone should scare investors off–but obviously it doesn’t as proven by the previous baby bond offering.
Please do deep due diligence prior to purchasing any of these shares.