Full Circle Capital (FULL) IPOed on August 31 of 2010 and its NAV has fallen ever since, which has - logically - held back share price appreciation. FULL's quarterly net investment income has covered the dividend in only one of the five quarters it has issued an earnings release. And that is a very bad thing. It outweighs FULL's positive attributes like having a portfolio that is heavy in senior secured loans; a portfolio with a weighted average yield that is a little higher than BDC average; and an income flow that is 100% cash. It has had only one dividend increase since its IPO while other recent IPOs have much better short term records (like FDUS, MCC, NMFC, PFLT, TCRD and SUNS). As a result, it sells at close to a 12% yield and at a small discount to its NAV. The non-cap weighted average yield for my 29 member BDC coverage universe has an average yield of 8.93% and at a 10% premium to its average NAV.
In this article, I will examine the Q4-12 earnings release looking at the important metrics; show the relative valuations of the BDC sector in two spreadsheets; and share my conclusions as to whether FULL is worthy, at the current price, of belonging in your portfolio.
FULL reports NII of $0.2177/share compared to a dividend of $0.231/quarter
What They Earned: Full Circle Capital Corporation reported for calendar Q4-12 [its fiscal Q2] Net Investment Income of $1.466 million [$0.2177/share]. Total Investment Income was $3.100 million [$0.4604/share]. TII was comprised of $2.574 million of interest and dividend income from portfolio investments (which included no PIK interest) and $0.453 million in 'other' income [from structuring fees and other sources]. The Net Increase in Net Assets Resulting from Operations was - $0.428 million [- $0.0636/share] - with the loss being due to Realized losses of $3.186 million. FULL's net asset value per share was $8.03 compared to $8.51 last quarter. A secondary offering on 11-27-12 at a price of $7.90 had the effect of lowering NAV along with the earnings loss.
The Annualized ratio of gross operating expenses to average net assets [for the x months ending 12-31-12] was 11.44%. The Annualized ratio of net operating expenses to average net assets was 11.44%. The Annualized ratio of net investment income to average net assets was 10.26%.
|Total Investment Income||2,398,665||2,388,960||2,481,143||2,773,303||3,099,599|
|Net Investment Income||1,098,640||1,118,574||1,071,947||1,238,245||1,466,650|
|Net Asset Value||8.92||8.84||8.59||8.51||8.03|
More on the Realized Loss: On December 19, 2012, Ygnition Networks was sold to Access Media 3 and to New Media West. In exchange for its secured interest in the Ygnition assets, FULL received: an equity interest in New Media West, valued at $3.60 million, a $5.80 million five year note due from New Media West bearing interest at 9%, and cash of $0.40 million. At December 19, 2012, immediately prior to these transactions, FULL had $13.00 million of debt outstanding to Ygnition, held at approximately $12.05 million. As a result of the transaction, FULL recognized a loss of $2.25 million, comprised of a realized loss of $3.20 million on the disposition of the Ygnition debt and the reversal of a previously unrealized loss of $0.95 million.
What They Own: At Dec 31, 2012, FULL's portfolio (excluding U.S. Treasury bills and money market funds) included debt investments in 21 portfolio companies [debt in 18 and equity in 9]. The average portfolio company debt investment at Dec 31, 2012 was $4.0 million. The weighted average interest rate on the loan portfolio was 12.55%. At fair value, 88% [$68.2 million] of portfolio investments were first lien loans, 4% [$4.3 million] were second lien loans and 8% [$7.8 million] were equity investments [LLCs and warrants]. Approximately 84% of the debt investment portfolio, at fair value, bore interest at floating rates.
Originations: During Q4-12 FULL originated a $3.9 million new loan facility and additional funding to existing borrowers, excluding regular borrowing under revolvers, of $1.6 million.
What They Owe: With Long-term debt ['line of credit'] of $16.623 million [with an interest rate of LIBOR + 5.50% - the highest rate I have noticed]; $3.404 million of 8% senior unsecured notes [total $20.027 million] and shares outstanding of 7.569 million, the long term Debt/share was $2.6459 and the Debt/NAV ratio was 32.95%. [FULL had a 'debt to broker' of $22.000 million partially offset by $2.250 million of deposits with broker. This was not included in my debt stats, but the debt to the broker - which may be for the T Bills - is an ongoing quarter after quarter. Including this atypical debt with other long term debt results in a debt/share of $5.5525 and a Debt/NAV ratio of 69.15%.]
Portfolio Quality Metrics: Loans to "portfolio companies performing below expectations" was 17.32% of portfolio loans. The loan-to-value ratio on FULL's loans was 59% [each $59 of loan value outstanding is secured by $100 of collateral value] at Dec 31, 2012. There was no mention of non-accruals in the 10-Q or earnings release.
- FULL has a current dividend of $0.2310/share
- Total Investment Income $3.100 million [divided by 6.733 million average shares = $0.4604/share]
- Base Management Fee = - $0.345 million [- $0.0512/share]
- Incentive Fees = - $0.365 million [- $0.0542/share]
- Interest Expenses = - $0.439 million [- $0.0652/share]
- Total Investment Expenses = - $1.634 million [- $0.2427/share]
- Net Investment Income = $1.466 million [$0.2177/share]
- Realized gain (loss) on investments = - $3.186 million [- $0.4732/share]
- Unrealized gain (loss) on investments = $1.293 million [$0.1920/share]
- Net Increase in Net Assets Resulting from Operations = - $0.428 million [- $0.0636/share]
- Investments at fair value = $99.619 million [of which $30 million was in US Treasury bills]
- Cash = $ 0.304 million
Performance and valuation spreadsheets
BDC Stats 02-28
Yields are calculated using the Q4-12 dividend. KED's 'DNOI's is being used for its EPS projection. A covered dividend will have a ratio under 100%.
|Share Price||----- 2013 -----||Q3-12||Price||Q4-12||Price||YTD Percent Change|
|Am Cap Strat||ACAS||12.02||13.98||0.00||1.10||12.71||0.00||17.39||0.80||17.84||0.78||16.31||16.31|
|With the 10 Treasury at 1.88% and the sector average yield [on Q4-12 Divs] at 8.31% - the spread is 643 basis points.|
|The cap weighted ETF BDCS is up 4.54% year to date - with dividends it is up 6.41%.|
|Weeding out non-dividend paying ACAS and SAR - the adjusted sector average yield [on Q4-12 Divs] was 8.93%.|
|Weeding out ACAS and SAR on div/EPS - that adjusted metric would be 95.50%.|
BDC Earnings Growth & P/E Ratios 02-28
Fiscal and calendar years are not always in sync. BDCs that began fiscal 2013 on or before calendar Q3-12 include AINV, FULL, GAIN, GBDC, GLAD, MCC, PSEC, PFLT, and PNNT. The 'range' metric is the high estimate minus the low estimate, with that result dividend by the consensus estimate - and serves as one of several measurements for assessing risk.
|Earnings / Share||Earn. Growth||P/E Ratios||13 EPS Range|
With a P/E of 9.65 based on its consensus 2013 EPS projection, FULL sells at a discount to the BDC sector average of 10.98. But earnings that are growing should sell at higher P/Es than earnings that are stagnant or shrinking. So I believe that the discount is merited. Add to that the fact that FULL has investments in non-granular 21 portfolio companies, and I have a desire for an even greater discount before I am tempted by FULL.
The trend of a falling NAV/share scares me. I want to be highly compensated when I am scared. With a dividend higher than NAV, the dividend does not currently look safe. A dividend cut to its current NII/share level would make the dividend $0.22/share/quarter - and that would make the current yield 11.25%. That is an attractive yield.
With a debt/NAV of 32.95%, FULL can leverage up and grow its portfolio without issuing more shares. So there is the potential to grow net investment income per share. A growing NII would be just the cure for FULL's problems. But other BDCs had an active Q4-12 in originations, while FULL's portfolio growth was anemic. FULL has the potential for a turnaround, but it is not turning yet.
I want to own BDCs with a growing NAV and growing dividends - and that is not what FULL offers. I want a dividend that is covered by NII/share - and that is not what FULL offers. I want the added safety of a granular portfolio - and that is not what FULL offers. So my suggestion is to pass on buying FULL and wait for evidence of the turnaround which it has the potential to make.