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Full Circle Capital (NASDAQ:FULL)

Q3 2013 Earnings Call

May 10, 2013 10:00 am ET

Executives

Stephanie Prince

John Edward Stuart - Chairman, Chief Executive Officer and President

William E. Vastardis - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Operator

Welcome to the Full Circle Capital Third Quarter of Fiscal 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, May 10, 2013. I would now like to turn the conference over to Stephanie Prince. Please go ahead, ma'am.

Stephanie Prince

Thank you, Regina, and good morning, everyone. This is Stephanie Prince from LHA. Thank you for joining us for Full Circle Corp.'s Third Quarter Fiscal 2013 Earnings Conference Call for the quarter ended March 31, 2013. With me this morning is John Stuart, Full Circle's Chairman and Chief Executive Officer; and Bill Vastardis, Chief Financial Officer. If you'd like to be added to the company's distribution list, please send an email to info@fccapital.com. Alternatively, you can sign up under the Investor Relations tab on the company's website. The slide presentation accompanying this morning's conference call can also be found on Full Circle's website under the Investor Relations tab at www.fccapital.com.

Before I turn the call over to John Stuart, I'd like to call your attention to the customary Safe Harbor statement regarding forward-looking information. Today's conference call includes forward-looking statements and projections, and we ask that you refer to Full Circle's most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. Full Circle does not undertake to update its forward-looking statement unless required by law. To obtain copies of the latest SEC filings, please visit Full Circle's website under the Investor Relations tab.

I'd now like to turn the call over to John Stuart, CEO of Full Circle Capital. John?

John Edward Stuart

Thank you, Stephanie. Starting with Slide 3, for those of you who are new to Full Circle, we focus primarily on investing in senior secured loans and stretch senior secured loans to small and lower middle market companies. Stretch senior secured loans are also referred to as unitranche loans, which combine characteristics of traditional first-lien senior secured loans with second lien, or to lesser extent, subordinated loans. This structure gives us greater control and security in the primary collateral of the borrower. For our borrowers, it offers efficient, one-stop flexible debt solutions, allowing us to compete with more traditional lenders.

Our investments typically range in size from $3 million to $10 million. And since our inception -- since inception of our predecessor entities in 2005, we have executed more than $290 million in secured loans to 56 smaller and lower middle market companies.

As part of this call, we want to highlight some of the strategic considerations we have been pursuing as part of our overall long-term plan and objective to increase our net investment income and returns to our stockholders. These strategic considerations include increasing our portfolio and optimizing our capital structure. As an example, we have added personnel at the investment adviser to enhance origination and monitoring capabilities in order to support a larger and more diversified portfolio of investments, the result of which has been an increase in deal flow and an enhanced origination pipeline with the infrastructure to support it. I'll comment on the second strategic consideration, optimizing the balance sheet, in particular the debt side, later in our prepared remarks.

Now turning to Slide 4, we provide details of our third quarter results. Our net asset value was $8 per share at March 31. We generated net investment income of $1.3 million, or $0.18 per share. If one were to include a full quarter of interest income from the 2 originations that closed in the last few days of the third quarter, plus the one that closed subsequent to the quarter end, our quarterly net investment income run rate, if you do the math, would be higher by $0.02 or $0.03. We believe that this is more indicative of our improving earnings power and is closer to our goal of covering distributions from net investment income on a long-term sustainable basis. Keep in mind that there will always be some volatility, depending on the timing and frequency of payoffs and originations.

On May 3, the Board of Directors declared the monthly distributions for the first quarter of fiscal 2014 at $0.077 per share, maintaining our quarterly distribution rate of $0.231 per share, which equates to an annualized rate of $0.924 per share. Our annualized distribution equals a 12% yield based on the May 8 closing price of $7.72 per share. The record date and payment dates for the next 3 monthly distributions are detailed on Slide 4, as well as in the earnings release we issued last night, which is available on our website, if you did not receive it.

Slide 5 details the portfolio activities during the third quarter and subsequent to quarter end. During the third quarter, we originated $14.4 million of new loan facilities. We originated a new investment in Modular Process Control, a 30-year-old professional engineering services firm focused on energy efficiency solutions for industrial companies. The company maintains a contractual backlog of business to primarily Fortune 500 industrial clients. We funded $5.5 million in a $6 million facility consisting of a senior revolving line of credit and a senior term loan that both bear interest at 15%. Proceeds were used for debt refinancing, to fund growth projects and for working capital.

We also invested $4.4 million in Pristine Environments, which provides facilities maintenance and cleaning services to large commercial and government clients nationwide. The facility consists of a senior revolving line of credit and a senior term loan, both bearing interest at 12.7%. Proceeds of the facilities were used to partially fund an acquisition and for working capital. These are the 2 investments I mentioned earlier that closed at the very end of the quarter.

Lastly, as I mentioned on our last call, soon after the second quarter ended, we received full payoff from The Selling Source, resulting from the amortization of their senior secured loan at par value of $2 million plus interest and fees. Concurrently, we invested $4 million in a new senior secured term loan to Selling Source bearing interest at 12.5%, proceeds of which were used to partially refinance junior debt capital.

In total, we received repayments of $2.6 million during the third quarter from the full payoff at par from both Selling Source and our loan to European evaluators.

Subsequent to the quarter -- to the end of the third quarter, we closed a facility with a new borrower, Takoda Resources, a provider of seismic data acquisition services in Canada. The $1.7 million senior secured term loan has an interest rate of 16%. Takoda will use the proceeds to partially fund an acquisition and for working capital.

Slide 6 details the metrics of our investment portfolio, which remain broadly consistent with prior periods. At March 31, our portfolio totaled $88 million, the largest level in our history. This represents an increase of 33% from March 31 last year and 13% from the second quarter. We now have debt investments in 19 portfolio companies compared to 14 at this time last year. The average size of our investments is $4.3 million compared to $4.7 million in the 2012 third quarter. This is due to our focus on increasing the granularity of our portfolio, as well as from principal amortization repayment activity at individual positions. The weighted average interest rate in the fourth -- in -- for the March quarter was 12.7%, which is more reflective of the current rate environment, given the growth of the portfolio over the last year. We have no loans on non-accrual status.

First-lien secured loans accounted for 89% of the portfolio in the third quarter, with flowing rate loans now making up 86% of the portfolio. Both of these metrics continue to be among the top tier in the BDC universe.

Our loan-to-value ratio is 54% at the quarter end, within our targeted range, and we have received 100% of our interest income in cash, unlike many of our peers. Our pipeline of qualified credit opportunities, as I said earlier, remains robust, reflecting a favorable environment for refinancing. And we are seeing increased activity from smaller private equity sponsors, all evidence of ongoing demand for our debt financing solutions.

At the beginning of my prepared remarks, I talked about our strategic considerations, growing the portfolio and optimizing our capital structure, which leads to increasing returns. Since we raised equity capital late last year, we have been actively pursuing avenues to increase the size of and lower the cost of our debt funding sources in order to drive incremental net investment income. An example of this is the registration statement we filed last week for up to $25 million of senior notes. As we have previously mentioned to you, we have also been working on refinancing our senior leverage line. This quarter, we made progress towards reaching what we believe will be a favorable outcome. The end result of all this activity, we believe, will be a larger investment portfolio, a lower cost of capital and increasing returns to stockholders.

I'd like to pass the call over to Bill for a discussion of our financial performance in the third quarter.

William E. Vastardis

Thanks, John. Please turn to Slide 7, which provides an overview of the third quarter financial highlights. Net investment income was $1.3 million, or $0.18 per share, compared with $1.5 million, or $0.22 per share, in the second quarter. Net unrealized gains in the third quarter were $0.2 million, or $0.02 per share. As a result, we recorded a net increase in net assets resulting from operations of approximately $1.5 million, or $0.20 per share.

The weighted average share count in the third quarter was 7.6 million shares compared to 6.7 million weighted average shares in the second quarter, a 13% increase. Net asset value per share was $8 on March 31 compared to $8.03 on December 31.

Please turn to Slide 8, which highlights the important balance sheet items. On March 31, our total assets were approximately $108 million. This includes total investments of $103.1 million at fair value. Excluding our U.S. T-bill position of $15 million, our investment portfolio totaled $88.1 million. Total liabilities were approximately $47.4 million. Liabilities included a payable of $15 million for the U.S. T-bill position, $3.4 million outstanding in senior unsecured notes and an outstanding balance of $22.8 million on our $35 million revolving line of credit.

I will now turn the call back over to John. John?

John Edward Stuart

Thanks, Bill. We'd now like to open the call up for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we do now have a question from the line of Ross Rubin [ph] with Family Office.

Unknown Analyst

Can we talk about what you're seeing in your underlying companies? How strong is the economy for them? How are they doing? You guys obviously have great visibility into a lot of businesses and I'm always interested in what's happening.

John Edward Stuart

I think we've seen things have been pretty stable, though in some industries, we've seen some fairly robust performance, for instance, in the aerospace industry -- underlying aerospace industry. We've seen good demand and good growth there. But generally, Ross, it's been fairly stable, reflecting sort of where we are on a nationwide level. So we haven't really seen anything, any softness. In certain cases, we've seen some -- an uptick in demand at some of our borrowers and citing one particular in the aerospace side that comes to mind just off of that question.

Unknown Analyst

Can you -- do you get equity or still get equity at all the investments you make or most investments you make?

John Edward Stuart

Yes, about half of our positions have warrants or outright equity and/or some of them actually have success fees that might be related to growth and equity value of the business, which will be recognized at net termination date. Yes, we do and we continue to do that. We continue to get that in our deals. And, for instance, MPC, the deal that closed last -- in the last quarter that we have a warrant position in, you'll see that on the balance sheet.

Unknown Analyst

Right. I'm kind of operating on the assumption of how you're model is, is that ultimately you'll have some equity gains that will offset the inevitable loan that doesn't work out the way you'd like it to work out.

John Edward Stuart

True. That -- obviously, we look at the equity positions. We don't know when they'll be monetized, and, obviously, they're not contractual in terms of contractual return like the -- like our loan positions are. But we look for the equity to provide return that could, as one way to look at it, is to offset any loan losses. That's a very good way to look at it.

Operator

[Operator Instructions] There are no further questions at this time. I will turn the conference back over to Mr. Stuart.

John Edward Stuart

Once again, thank you very much for attending the call. And we're excited about the future. As we always do, we look forward to updating you on the progress that we hope to make over the next quarter. And we will -- please don't hesitate to contact any of us with any questions. And we look forward to getting back to you in 90 days. Okay, thank you.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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