Great Elm Capital Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview We are a BDC that seeks to generate both current income and capital appreciation through debt and income generating equity investments. We invest in the debt of middle-market companies in the form of senior secured and unsecured notes as well as senior secured loans, junior loans and mezzanine debt. We also make investments in preferred equity, investments in debt and equity securities of specialty finance businesses and other equity investments. On September 27, 2016, we and Great Elm Capital Management, Inc. (“GECM”), our external investment manager, entered into an investment management agreement (the “Investment Management Agreement”) and an administration agreement (the “Administration Agreement”), and we began to accrue obligations to GECM under those agreements. The Investment Management Agreement renews for successive annual periods, subject to requisite Board and/or stockholder approvals. We have elected to be treated as a Regulated Investment Company (“RIC”) for U.S. federal income tax purposes. As a RIC, we will not be taxed on our income to the extent that we distribute such income each year and satisfy other applicable income tax requirements. To qualify as a RIC, we must, among other things, meet source-of-income and asset diversification requirements and annually distribute to our stockholders generally at least 90% of our investment company taxable income on a timely basis. If we qualify as a RIC, we generally will not have to pay corporate level taxes on any income that we distribute to our stockholders. Investments Our level of investment activity can and does vary substantially from period to period depending on many factors, including, among others, the amount of debt and equity capital available from other sources to middle-market companies, the level of merger and acquisition activity, pricing in the high yield and leveraged loan credit markets, opportunities in the specialty finance sector, our expectations of future investment opportunities, the general economic environment as well as the competitive environment for the types of investments we make. As a BDC, our investments and the composition of our portfolio are required to comply with regulatory requirements. Revenues We generate revenue primarily from interest on the debt investments that we hold, dividends on the equity investments that we hold, capital gains on the disposition of investments, and lease, fee, and other income. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Our debt investments generally pay interest quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or payment-in-kind (“PIK”). In addition, we may generate revenue in the form of prepayment fees, commitment, origination, due diligence fees, end-of-term or exit fees, fees for providing significant managerial assistance, consulting fees and other investment-related income. 2 Expenses Our primary operating expenses include the payment of a base management fee, administration fees (including the allocable portion of overhead under the Administration Agreement), and, depending on our operating results, an incentive fee. The base management fee and incentive fee remunerates GECM for work in identifying, evaluating, negotiating, closing and monitoring our investments. The Administration Agreement provides for reimbursement of costs and expenses incurred for office space rental, office equipment and utilities allocable to us under the Administration Agreement, as well as certain costs and expenses incurred relating to non-investment advisory, administrative or operating services provided by GECM or its affiliates to us. We also bear all other costs and expenses of our operations and transactions. In addition, our expenses include interest on our outstanding indebtedness. Critical Accounting Policies Valuation of Portfolio Investments We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our board of directors (our “Board”). Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (1) are independent of us; (2) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary); (3) are able to transact for the asset; and (4) are willing to transact for the asset (that is, they are motivated but not forced or otherwise compelled to do so). Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, are valued at fair value using a valuation process consistent with our Board-approved policy. Our Board approves in good faith the valuation of our portfolio as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may impact the market quotations used to value some of our investments. Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables; applicable market yields and multiples, security covenants, call protection provisions, information rights and the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, and merger and acquisition comparables; and enterprise values. We prefer the use of observable inputs and minimize the use of unobservable inputs in our valuation process. Inputs refer broadly to the assumptions that market participants would use in pricing an asset. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset developed based on the best information available in the circumstances. 3 Both observable and unobservable inputs are subject to some level of uncertainty and assumptions used bear the risk of change in the future. We utilize the best information available to us , including the factors listed above, in preparing the fair valuations . In determining the fair value of any individual investment, we may use multiple inputs or utilize more than one approach to calculate the fair value to assess the sensitivity to change and determine a reasonable range of fair value . In addition, our valuation procedures include an assessment of the current valuation as compared to the previous valuation for each investment and where differences are material understanding the primary drivers of those changes, incorporating updates to our current valuation inputs and approaches as appropriate. Revenue Recognition Interest and dividend income, including PIK income, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees, including original issue discounts (“OID”), earned with respect to capital commitments are generally amortized or accreted into interest income over the life of the respective debt investment, as are end-of-term or exit fees receivable upon repayment of a debt investment if such fees are fixed in nature. Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, and end-of-term or exit fees that have a contingency feature or are variable in nature are recognized as earned. Prepayment fees and similar income due upon the early repayment of a loan or debt security are recognized when earned and are included in interest income. We may purchase debt investments at a discount to their face value. Discounts on the acquisition of corporate debt instruments are generally amortized using the effective-interest or constant-yield method unless there are material questions as to collectability. We assess the outstanding accrued income receivables for collectability at least quarterly, or more frequently if there is an event that indicates the underlying portfolio company may not be able to make the expected payments. If it is determined that amounts are not likely to be paid we may establish a reserve against or reverse the income and put the investment on non-accrual status. Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation) We measure realized gains or losses by the difference between the net proceeds from the repayment or sale of an investment and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the specific identification method. Net change in unrealized appreciation or depreciation reflects the net change in portfolio investment fair values and portfolio investment cost bases during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. 4 Portfolio and Investment Activity The following is a summary of our investment activity for the year ended December 31, 2020 and the three months ended March 31, 2021: (in thousands) Acquisitions (1) Dispositions (2) Weighted Average Yield End of Period (3) Quarter ended March 31, 2020 $ 31,882 $ (29,420 ) 10.00 % Quarter ended June 30, 2020 15,913 (37,497 ) 10.18 % Quarter ended September 30, 2020 34,495 (18,037 ) 10.07 % Quarter ended December 31, 2020 19,070 (27,039 ) 11.72 % For the year ended December 31, 2020 101,360 (111,993 ) Quarter ended March 31, 2021 58,429 (28,268 ) 10.91 % For the three months ended March 31, 2021 $ 58,429 $ (28,268 ) (1) Includes new investments, additional fundings (inclusive of those on revolving credit facilities), refinancings and capitalized PIK income. Investments in short-term securities, including U.S. Treasury Bills and money market mutual funds, were excluded. (2) Includes scheduled principal payments, prepayments, sales, and repayments (inclusive of those on revolving credit facilities). Investments in short-term securities, including U.S. Treasury Bills and money market mutual funds, were excluded. (3) Weighted average yield is based upon the stated coupon rate and fair value of outstanding debt securities at the measurement date. Debt securities on non-accrual status are included in the calculation and are treated as having 0% as their applicable interest rate for purposes of this calculation, unless such debt securities are valued at zero. Portfolio Reconciliation The following is a reconciliation of the investment portfolio for the three months ended March 31, 2021 and the year ended December 31, 2020. Investments in short-term securities, including U.S. Treasury Bills and money market mutual funds, are excluded from the table below. (in thousands) For the Three Months Ended March 31, 2021 For the Year Ended December 31, 2020 Beginning Investment Portfolio, at fair value $ 151,648 $ 197,615 Portfolio Investments acquired (1) 58,429 101,360 Amortization of premium and accretion of discount, net 773 4,999 Portfolio Investments repaid or sold (2) (28,268 ) (111,993 ) Net change in unrealized appreciation (depreciation) on investments 14,324 (29,356 ) Net realized gain (loss) on investments (3,275 ) (10,977 ) Ending Investment Portfolio, at fair value $ 193,631 $ 151,648 5 (1) Includes new investments, additional fundings (inclusive of those on revolving credit facilities), refinancings, and capitalized PIK income. (2) Includes scheduled principal payments, prepayments, sales, and repayments (inclusive of those on revolving credit facilities). Portfolio Classification The following table shows the fair value of our portfolio of investments by industry as of March 31, 2021 and December 31, 2020 (in thousands): March 31, 2021 December 31, 2020 Industry Investments at Fair Value Percentage of Fair Value Investments at Fair Value Percentage of Fair Value Wireless Telecommunications Services $ 38,178 19.72 % $ 29,270 19.30 % Oil & Gas 25,084 12.95 % 20,290 13.38 % Restaurants 18,906 9.76 % 10,470 6.91 % Internet Media 18,727 9.67 % 18,736 12.35 % Specialty Finance 12,250 6.33 % 15,760 10.39 % Special Purpose Acquisition Company 10,014 5.17 % - - % Construction Materials Manufacturing 9,699 5.01 % 9,676 6.38 % Retail 8,204 4.24 % 6,145 4.05 % Metals & Mining 7,094 3.66 % 3,996 2.65 % Food & Staples 6,441 3.33 % 8,694 5.73 % Media & Entertainment 6,311 3.26 % - - % Transportation Equipment Manufacturing 5,880 3.04 % 2,948 1.95 % Software Services 4,995 2.58 % 4,896 3.23 % Casinos & Gaming 4,762 2.46 % 2,820 1.86 % Radio Broadcasting 4,125 2.13 % 3,763 2.48 % Motor Vehicle Parts and Accessories 2,865 1.48 % - - % Wholesale-Apparel, Piece Goods & Notions 2,801 1.45 % 2,762 1.82 % Industrial 2,557 1.32 % 4,642 3.06 % Consumer Services 2,393 1.23 % - - % Chemicals 1,469 0.76 % - - % Hotel Operator 437 0.22 % 1,203 0.79 % Technology 413 0.21 % 202 0.13 % Maritime Security Services 32 0.02 % 19 0.01 % Telecommunications Services (6 ) - % (160 ) (0.11 )% Apparel & Textile Products - - % 5,154 3.40 % Real Estate Services - - % 200 0.13 % Building Cleaning and Maintenance Services - - % 162 0.11 % Total $ 193,631 100.00 % $ 151,648 100.00 % 6 Results of Operations This “—Results of Operations” discussion should be read in conjunction with the discussion of (“COVID-19”) under “—Recent Developments—COVID 19”. Investment Income For the Three Months Ended March 31, 2021 2020 In Thousands Per Share (1) In Thousands Per Share (2) Total Investment Income $ 5,295 $ 0.23 $ 6,429 $ 0.64 Interest income 4,179 0.19 5,987 0.59 Dividend income 801 0.03 403 0.04 Other income 315 0.01 39 0.00 (1) The per share amounts are based on a weighted average of 23,401,837 outstanding common shares for the three months ended March 31, 2021. (2) The per share amounts are based on a weighted average of 10,062,682 outstanding common shares for the three months ended March 31, 2020. Investment income consists of interest income, including net amortization of premium and accretion of discount on loans and debt securities, dividend income and other income, which primarily consists of amendment fees, commitment fees and funding fees on loans. For the three months ended March 31, 2021 and 2020, interest income includes non-cash PIK income of $1.5 million and $1.2 million, respectively. Interest income decreased for the three months ended March 31, 2021 as compared to the corresponding period in the prior year due to exits from certain high yielding positions, including Commercial Barge Line Company (“Commercial Barge”) 1 st lien secured loan and the restructuring of our investment in PFS Holdings Corp. (“PFS”) 1 st lien secured loan due 2021, for which we recognized $0.4 million and $0.6 million, respectively, in accretion income during the three months ended March 31, 2020. In addition, interest rates on our floating rate investments have decreased over the past year as the LIBOR base rates have experienced declines. These decreases have been partially offset by increases in the total outstanding principal of our debt investments as of March 31, 2021 as compared to March 31, 2020. Dividend income for the three months ended March 31, 2021 increased as compared to the corresponding period in the prior year due to investments made in dividend-yielding preferred equities during the 2020 fiscal year, resulting in an additional $0.5 million in dividend income for the three months ended March 31, 2021. The increase in other income for the three months ended March 31, 2021 as compared to the corresponding period in the prior year is primarily attributable to PIK commitment and funding fees earned on our February 2021 investment in Avanti Communications Group, plc (“Avanti”) 1.125 lien senior secured notes. As discussed under “—Recent Developments”, the full impact of COVID-19 on each of our portfolio companies is not known at this time. Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies may experience financial distress and may be unable to make future interest payments or dividend distributions resulting in decreased income to the Company. If interest rates stay depressed or continue to decrease further and we are otherwise unable to offset these reductions by investing in other debt instruments with higher interest rates, we will see further decrease in our investment income. 7 Expenses For the Three Months Ended March 31, 2021 2020 In Thousands Per Share (1) In Thousands Per Share (2) Total Expenses $ 3,791 $ 0.16 $ 3,777 $ 0.38 Management fees 660 0.03 698 0.07 Incentive fees 108 - 100 0.01 Total advisory and management fees $ 768 $ 0.03 $ 798 $ 0.08 Administration fees 156 0.01 204 0.02 Directors’ fees 55 - 51 0.01 Interest expense 2,198 0.09 2,305 0.23 Professional services 425 0.02 257 0.03 Custody fees 13 - 20 0.00 Other 176 0.01 142 0.01 (1) The per share amounts are based on a weighted average of 23,401,837 outstanding common shares for the three months ended March 31, 2021. (2) The per share amounts are based on a weighted average of 10,062,682 outstanding common shares for the three months ended March 31, 2020. Expenses are largely comprised of advisory fees and administration fees paid to GECM and interest expense on our outstanding notes payable. See “—Liquidity and Capital Resources.” Advisory fees include management fees and incentive fees calculated in accordance with the Investment Management Agreement, and administration fees include direct costs reimbursable to GECM under the Administration Agreement and fees paid for sub-administration services. Total expenses for the three months ended March 31, 2021 were generally consistent with total expenses the three months ended March 31, 2020. Administration fees decreased in the current period as compared to the corresponding period in the prior year as a result of changes in certain service providers and ongoing efficiency efforts at the management company. Fees for professional services increased in the current period as compared to the corresponding period in the prior year due to certain one-time costs, including approximately $0.2 million in legal fees for compliance matters and claims related to certain investments, that are not expected to recur in future periods. The decrease in interest expense for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 is due to the bond repurchases during the 2020 fiscal year, which resulted in a weighted average outstanding debt balance of $118.7 million for the three months ended March 31, 2021, as compared to $124.0 million for the three months ended March 31, 2020. Realized Gains (Losses) For the Three Months Ended March 31, 2021 2020 In Thousands Per Share (1) In Thousands Per Share (2) Net Realized Gain (Loss) $ (3,275 ) $ (0.14 ) $ (11,313 ) $ (1.12 ) Gross realized gain 919 0.04 402 0.04 Gross realized loss (4,194 ) (0.18 ) (11,715 ) (1.16 ) 8 (1) The per share amounts are based on a weighted average of 23,401,837 outstanding common shares for the three months ended March 31, 2021. (2) The per share amounts are based on a weighted average of 10,062,682 outstanding common shares for the three months ended March 31, 2020. During the three months ended March 31, 2021, net realized losses were primarily driven by the sale of our investment in Boardriders, Inc. (“Boardriders”) 1 st lien secured loan for which we recognized a realized loss of $3.0 million. This realized loss was partially offset by realized gains of $0.3 million on proceeds received from our former investment in PR Wireless, Inc., $0.2 million on the early paydown of our investments in First Brands, Inc. 1st lien secured loan, $0.1 million in proceeds received from our investment in PE Facility Solutions, LLC common equity. During the three months ended March 31, 2020, net realized losses on investments were primarily driven by the sales of Commercial Barge and Full House Resorts, Inc. (“Full House”) during the quarter, for which we recognized realized losses of $9.8 million and $1.3 million, respectively. Realized gains for the three months ended March 31, 2020 includes approximately $0.1 in realized gain on repurchases of debt below par. Unrealized Appreciation (Depreciation) on Investments For the Three Months Ended March 31, 2021 2020 In Thousands Per Share (1) In Thousands Per Share (2) Net unrealized appreciation/ (depreciation) $ 14,317 $ 0.61 $ (24,877 ) $ (2.47 ) Unrealized appreciation 18,032 0.77 6,979 0.69 Unrealized depreciation (3,715 ) (0.16 ) (31,856 ) (3.16 ) (1) The per share amounts are based on a weighted average of 23,401,837 outstanding common shares for the three months ended March 31, 2021. (2) The per share amounts are based on a weighted average of 10,062,682 outstanding common shares for the three months ended March 31, 2020. During the three months ended March 31, 2021, net unrealized appreciation was largely driven by increases in the fair value of our investments in Avanti’s 2 nd lien secured bond and Tru Taj (UK) Asia Limited (“Tru Taj”) common equity and Crestwood Equity Partners LP preferred equity which had net unrealized appreciation of $4.3 million, $2.8 million and $2.4 million respectively. In addition, the sale of our investment in Boardriders 1 st lien secured loan resulted in the reversal approximately $3.5 million of unrealized depreciation previously recognized in prior periods . Unrealized depreciation for the three months ended March 31, 2021 was primarily due to a decrease in the fair value of our investment in PFS Holdings Corp. common equity for which we recognized $2.2 million in unrealized depreciation. During the three months ended March 31, 2020, net unrealized depreciation was largely driven by decreases in portfolio company valuations as compared to the prior year end. Most notably, we recognized unrealized depreciation of approximately $4.0 million on our investment in Avanti’s 2 nd lien secured bond, approximately $3.6 million on our investment in Tru Taj common equity and approximately $3.4 million and $2.6 million on our investment in California Pizza Kitchen, Inc. (“CPK”) 1 st lien loan and 2 nd lien loan, respectively. The Avanti, Tru Taj and CPK investments are all level 3 investments for which the valuations include unobservable inputs such as discount rates and comparable company multiples which have experienced decreases as of March 31, 2020 as compared to December 31, 2019 due to general market volatility, including the impact of the COVID-19 pandemic during the three months ended March 31, 2020. Additionally, we recognized unrealized losses of $2.3 million and $2.7 million on our investments in Finastra Group Holdings, Ltd. and ASP Chromaflo Technologies Corp., both of which were valued at March 31, 2020 based on active market prices. Unrealized appreciation for the three months ended March 31, 2020 was primarily due to the sale of Commercial Barge in February 2020, for which we realized approximately $6.3 million of previously unrealized losses. In the table above, the presentation of gross unrealized appreciation and depreciation amounts for the three months ended March 31, 2020 has been updated consistent with the current year presentation which groups the funded and unfunded portion of revolvers together. 9 As discussed under “—Recent Developments”, we cannot predict the duration of the COVID-19 pandemic and the resulting impact to our individual portfolio companies or the broader market. It is likely that any recovery may be slow and/or volatile. The current unrealized depreciation on our portfolio may not be reversed in the short-term or at all and we may see further declines in fair value before the pandemic is over. Liquidity and Capital Resources This “—Liquidity and Capital Resources” discussion should be read in conjunction with the discussion of COVID-19 under “—Recent Developments—COVID 19”. At March 31, 2021, we had approximately $26.6 million of cash and cash equivalents. At March 31, 2021, we had investments in 33 debt instruments across 29 companies, totaling approximately $135.5 million at fair value and 135 equity investments in 116 companies, totaling approximately $58.1 million at fair value. In the normal course of business, we may enter into investment agreements under which we commit to make an investment in a portfolio company at some future date or over a specified period of time. As of March 31, 2021, we had approximately $31.4 million in unfunded loan commitments, subject to our approval in certain instances, to provide debt financing to certain of our portfolio companies. We had sufficient cash and other liquid assets on our March 31, 2021 balance sheet to satisfy the unfunded commitments. For the three months ended March 31, 2021, net cash used for operating activities was approximately $24.1 million, reflecting the purchases and repayments of investments offset by net investment income, including non-cash income related to accretion of discount and PIK income and proceeds from sales of investments and principal payments received. Net cash used by purchases and proceeds from sales of investments was approximately $23.2 million, reflecting payments for additional investments of $45.4 million, offset by proceeds from principal repayments and sales of $22.2 million. Such amounts include draws and repayments on revolving credit facilities. For the three months ended March 31, 2021, net cash used for financing activities was $2.5 million related to distributions to investors. Contractual Obligations A summary of our significant contractual payment obligations as of March 31, 2021 is as follows: (in thousands) Total Less than 1 year 1-3 years 3-5 years More than 5 years Contractual Obligations GECCL Notes $ 30,293 $ - $ 30,293 $ - $ - GECCM Notes 45,610 - - 45,610 - GECCN Notes 42,823 - - 42,823 - Total $ 118,726 $ - $ 30,293 $ 88,433 $ - We have certain contracts under which we have material future commitments. Under the Investment Management Agreement, GECM provides investment advisory services to us. For providing these services, we pay GECM a fee, consisting of two components: (1) a base management fee based on the average value of our total assets and (2) an incentive fee based on our performance. We are also party to the Administration Agreement with GECM. Under the Administration Agreement, GECM furnishes us with, or otherwise arranges for the provision of, office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record keeping services at such office facilities and other such services as our administrator. 10 If any of the contractual obligations discussed above are terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement and our Administration Agreement. Any new investment management agreement would also be subject to approval by our stockholders. Both the Investment Management Agreement and the Administration Agreement may be terminated by either party without penalty upon no fewer than 60 days’ written notice to the other. Off-Balance Sheet Arrangements There were no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices, as of and for the three months ended March 31, 2021. Notes Payable On September 13, 2017, we sold $28.4 million in aggregate principal amount of 6.50% notes due 2022 (the "GECCL Notes"). On September 29, 2017, we sold an additional $4.3 million of the GECCL Notes upon full exercise of the underwriters’ over-allotment option. The aggregate principal balance of the GECCL Notes outstanding as of March 31, 2021 is $30.3 million. The GECCL Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCL Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCL Notes on January 31, April 30, July 31 and October 31 of each year. The GECCL Notes will mature on September 18, 2022 and can be called on, or after, September 18, 2019. Holders of the GECCL Notes do not have the option to have the GECCL Notes repaid prior to the stated maturity date. The GECCL Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof. On January 11, 2018, we sold $43.0 million in aggregate principal amount of 6.75% notes due 2025 (the “GECCM Notes” and, together with the GECCL Notes and GECCM Notes, the “Notes”). On January 19, 2018 and February 9, 2018, we sold an additional $1.9 million and $1.5 million, respectively, of the GECCM Notes upon partial exercise of the underwriters’ over-allotment option. The aggregate principal balance of the GECCM Notes outstanding as of March 31, 2021 is $45.6 million. The GECCM Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCM Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCM Notes on March 31, June 30, September 30 and December 31 of each year. The GECCM Notes will mature on January 31, 2025 and can be called on, or after, January 31, 2021. Holders of the GECCM Notes do not have the option to have the GECCM Notes repaid prior to the stated maturity date. The GECCM Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof. On June 18, 2019, we sold $42.5 million in aggregate principal amount of the GECCN Notes, which included $2.5 million of GECCN Notes sold in connection with the partial exercise of the underwriters’ over-allotment option. On July 5, 2019, we sold an additional $2.5 million of the GECCN Notes upon another partial exercise of the underwriters’ over-allotment option. The aggregate principal balance of the GECCN Notes outstanding as of March 31, 2021 is $42.8 million. The GECCN Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCN Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCN Notes on March 31, June 30, September 30 and December 31 of each year beginning September 30, 2019. The GECCN Notes will mature on June 30, 2024 and can be called on, or after, June 30, 2021. Holders of the GECCN Notes do not have the option to have the GECCN Notes repaid prior to the stated maturity date. The GECCN Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof. 11 We may repurchase the Notes in accordance with the Investment Company Act of 1940 and the rules promulgated thereunder. As of March 31, 2021, our asset coverage ratio was approximately 177.1%. We are subject to a minimum asset coverage ratio of 150%. Recent Developments Our Board authorized the distribution for the quarter ending September 30, 2021 at $0.10 per share, with the record and payment dates to be set by the officers of GECC pursuant to authority granted by our Board. On May 5, 2021, the Company entered into a Loan, Guarantee and Security Agreement (the “Loan Agreement”) with City National Bank (“CNB”). The Loan Agreement provides for a senior secured revolving line of credit of up to $25 million (subject to a borrowing base as defined in the Loan Agreement). The Company may request to increase the revolving line in an aggregate amount not to exceed $25 million, which increase is subject to the sole discretion of CNB. The maturity date of the revolving line is the earlier of (i) May 5, 2024 and (ii) May 15, 2022 if the Company’s 6.50% notes due 2022 are not refinanced on or prior to such date. Borrowings under the revolving line bear interest at a rate equal to (i) the London Inter-bank Offered Rate plus 3.50%, (ii) a base rate plus 2.00% or (iii) a combination thereof, as determined by the Company. Borrowings under the revolving line are secured by a first priority security interest in substantially all of the Company’s assets, subject to certain specified exceptions. The Company has made customary representations and warranties and is required to comply with various affirmative and negative covenants, reporting requirements and other customary requirements for similar loan agreements. In addition, the Loan Agreement contains financial covenants requiring (i) net assets of not less than $65 million, (ii) asset coverage equal to or greater than 160% and (iii) bank asset coverage equal to or greater than 300%, in each case tested as of the last day of each fiscal quarter of the Company. Borrowings are also subject to the leverage restrictions contained in the Investment Company Act of 1940, as amended. In April 2021: • we purchased $3.0 million in par value of Viasat, Inc. receivable at 90% of par value. • we sold $3.0 million in par value of PetroChoice Holdings, Inc. first lien secured loan at approximately 97% of par value. • we sold 99,506 shares of Crestwood Equity Partners, LP class A preferred equity units for approximately $0.9 million. • we sold 100,000 shares of TRU (UK) Asia Limited common equity for approximately $1.0 million. • we sold 25,716 share of California Pizza Kitchen, Inc. common equity for approximately $0.8 million. • our $10.0 million Subcom, LLC 1 st lien secured revolver commitment was retired. • we sold approximately $0.3 million of SPAC positions across 20 companies. In May 2021: • we purchased $3.0 million in par value of W&T Offshore, Inc. second lien secured bond at approximately 89% of par value. • we purchased $1.0 million in par value of Cleaver-Brooks, Inc. secured bond at 100% of par value. • we sold approximately $0.04 million of SPAC positions across five companies. 12 COVID-19 The global outbreak of the COVID-19 pandemic has disrupted economic markets and the economic impact, duration and spread of the COVID-19 virus is uncertain at this time. The operational and financial performance of some of the portfolio companies in which we make investments has been and may further be significantly impacted by COVID-19, which may in turn impact the valuation of our investments, results of our operations and cash flows. Our investment manager prioritizes the health and safety of employees and in early March 2020, GECM moved to a remote-working model for all employees. In addition, the officers of GECC have maintained regular communications with key service providers, including the fund administration, legal and accounting professionals, noting that those firms have similarly moved to remote-working models to the extent possible. Our employees and key service providers have been able to effectively transition to working remotely while maintaining a consistent level of capabilities and service, however, we will continue to monitor and make adjustments as necessary. While we have been carefully monitoring the COVID-19 pandemic and its impact on our business and the business of our portfolio companies, we have continued to fund our existing debt commitments. In addition, we have continued to make, and expect to continue to make, new investments. We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide and the magnitude of the economic impact of the outbreak, including with respect to the travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our portfolio companies’ operating results or the impact that such disruptions may have on our results of operations and financial condition. Our portfolio is diversified across multiple industries and the direct and indirect impacts of the COVID-19 pandemic will be dependent on the specific circumstances for each portfolio company. For example, companies that derive revenues through in-person interactions with customers, such as restaurants and retail stores, have been and may be subject to reduced capacity or shutdowns based on local government advisories and regulations. For example, CPK filed for bankruptcy in July 2020. Other companies may be better able to adapt to the changing environment by moving their workforce to a remote-working model and leveraging technology solutions to interact with customers. Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies may experience financial distress and possibly default on their financial obligations to us and their other capital providers. We also expect that some of our portfolio companies may significantly curtail business operations, furlough or lay off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis. These developments would likely result in a decrease in the value of our investment in any such portfolio company. The COVID-19 pandemic and the related disruption and financial distress experienced by our portfolio companies may have material adverse effects on our investment income, particularly our interest income, received from our investments. In connection with the adverse effects of the COVID-19 pandemic, we may need to restructure our investments in some of our portfolio companies, which could result in reduced interest payments, an increase in the amount of PIK interest we receive, or result in permanent write-downs on our investments. We will continue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and guidance from U.S. and international authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. To the extent our portfolio companies are adversely impacted by the effects of the COVID-19 pandemic, it may have a material adverse impact on our future net investment income, the fair value of our portfolio investments, their financial condition and the results of operations and financial condition of our portfolio companies. 13 We are also subject to financial risks, including changes in market interest rates. As of March 31, 2021, approximately $107.8 million in principal amount of our debt investments bore interest at variable rates, which are generally based on LIBOR, and many of which are subject to certain floors. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments or a decrease in our operating expenses. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for an analysis of the impact of hypothetical base rate changes in interest rates.