Junky BDC Great Elm Selling New Baby Bond Issue

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.

The prospectus for the new issue of baby bonds can be found here.

8 thoughts on “Junky BDC Great Elm Selling New Baby Bond Issue”

  1. You are being too kind, Tim. This is crap pretending to be a security. Ladenberg Thalmann & Egan-Jones backing it. Truly the Rodney Dangerfield of the investment world, and deservedly so. Not that I didn’t love Rodney. BBB no less. Why it’s right up there with PNC and Northern Trust.

    But serious: the only people who would buy this are either developmentally delayed of have their accounts on a discretionary basis with a very unethical advisor.

    They might pull it. It would be a good and healthy thing if they did. But then PT Barnum was pretty much right. They might sell it.

    1. Hi Bob-in-DE–yes I am being too kind–there is history on this one, but I would need an hour to write on it all.

      I have been shocked at the coupons there are getting away with–I think the retail investor is buying without any due diligence.

      1. The reduction in asset coverage from 200% to 150% is going to bite some of these BDCs in the butt the next time we enter a recession. The 200% coverage ratio was there for a reason.

  2. GECC baby bonds are better than presented. The market already assumes Avanti is worthless. The headline asset coverage on the bonds is 2.54x. After removing the value of Avanti, asset coverage drops to 2.03x or about $170 million of assets against $84 million in liabilities. The portfolio has rotated nearly entirely out of the prior risky assets of Full Circle Capital — in fact 23 of these legacy positions were monetized comprising 23 positions at 109% of NAV, a great outcome. New investments in the last 5 quarters were $238 million and $154 million were monetized (all at par or better on average), so the current portfolio is very “fresh,” with non-accruals under 2% (outside of Avanti). NAV/share was up in the last quarter. Once you assume Avanti is worthless, which the stock and bond market already did, the 2x coverage still means 50% of the portfolio across 23 companies would have to be worthless and still the bonds are covered 1:1. No BDC has ever gone bankrupt and GECC is not remotely close to this situation.

    1. Thanks for your input Larry. Stating that no BDC has ever gone bankrupt is likely not a good metric–the vast majority of BDC’s have only been around for 10-15 years. These could be fine investments for someone–although not for me–I need more history and ‘time’ at these types of coupons to be a buy.

  3. Many (most?) of the BDCs are run by the finance equivalent of drunken sailors. Great deal of reckless behavior. The external manager and compensation system encourages bad behavior. Reminds me of the 50s and 60s with the oil drilling schemes.

    I will take all manner of risks in pursuit of return but I won’t invest in companies where management isn’t trustworthy. Most BDCs are in that category in my view.

    1. Bob, being a skeptic curmudgeon who isnt so rich that I have to buy uncomfortable issues just to find my money a home, I agree with you…My basic rules are no BDCs, Mreits, or Shippers. I just wont even go there… A personal preference not an indictment.
      Been kind of a miny flurry but I am about where I want to be…For 2 years I stayed almost entirely in way above par, past call, should have but didnt get called issues. This allowed be to stay in strong safe issues and avoid any of the beat downs that occured in the newer issues that were low yielding. Now I have been able to rotate a big portion of my money into call protected, below par, safe issues, all while increasing my base yield again. Also in the spirit of Tim, have a decent chunk in term dated or long term trust debt issues that will be reaching their 30 year run in the next 7 to 8 years. So they have in essence become default term dated issues that are uncallable.

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