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Full Circle Capital (NASDAQ:FULL)

F1Q 2014 Earnings Conference Call

November 8, 2013 10:00 AM ET

Executives

Stephanie R. Prince – Vice President-Investor Relations

John E. Stuart – Co-Chief Executive Officer and Chairman

Gregg J. Felton – Co-Chief Executive Officer and President

Michael J. Sell – Chief Financial Officer, Treasurer and Secretary

Analysts

Andrew Kerai – National Securities

Operator

Welcome to the Full Circle Capital Quarter One Fiscal 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a Q&A session (Operator Instructions). As a reminder, this conference is being recorded today, Friday, November 8, 2013.

I would now like to turn the conference over to Stephanie Prince. Please go ahead, ma’am.

Stephanie R. Prince

Thank you, Brent, and good morning, everyone. This is Stephanie Prince from LHA. Thank you for joining us for Full Circle Capital Corp.’s First Quarter Fiscal 2014 Earnings Conference Call for the quarter ended September 30, 2013.

With me this morning is John Stuart, Full Circle’s Chairman and Co-Chief Executive Officer; Gregg Felton, Full Circle’s recently appointed President and Co-Chief Executive Officer and Michael Sell, Full Circle’s 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, Co-CEO of Full Circle Capital. John?

John E. Stuart

Thank you, Stephanie and thank you to everyone for joining us on the call this morning. We have a number of items to discuss today as we have continued to implement elements of the strategic initiatives we put in place during the past fiscal year that are designed to benefit returns in coming quarters.

While we are disappointed in the results for the quarter which we will discuss in greater detail a bit further into the call, we have continued to advance our efforts to obtain lower cost efficient debt capital and optimize our capital structure, continue the growth of our investment portfolio and most significantly we have made an important addition to our team with the appointment of Gregg Felton has President and Co-Chief Executive Officer. Later in this call Gregg will speak to you about the opportunities easy is available of Full Circle in the credit markets and have they fit with our strategies.

On Slide 3 familiar to many of you provides a summary of our investment strategy. Turning to Slide 4 we provide details of our first quarter results. Our net asset value was $7.48 per share at September, down from $8.01 at June 30. $0.37 of this decline was from fair value adjustments or unrealized losses. $0.09 was from realized loss and $0.07 was from distribution and excess of net investment income. It is important to mention that will NAV decline due to fair value adjustment we do not have any loans are non-accrual basis and it is our goal to recapture much of these fair value adjustments when the loans pay off or mature.

Additionally, over the past year we have had higher level of equity investment which while they may represent the potential for upside realization can also be volatile and valuation and based on quarterly performance. Also these equity investments don’t provide significant income to the fund. We generated net investment income of $1.2 million or $0.16 per share in the quarter.

Net decrease and net assets from operations was $2.3 million or $0.30 per share. Despite higher investment levels net investment income was lower – due to lower fee income in the quarter and higher than anticipated interest expenses related to the need to maintain liquidity on our line of credit because of anticipated repayments that carried over into the second quarter.

On November 7, our Board of Directors declare the monthly distributions for stockholders of record that January 31, February 28, and March 31, 2014. AT $6.07 per share, $0.01 per month lower than previous declared amount. This provides a quarterly distribution of $20.01 per share and annualize distribution rate of $80.04 per share. At these levels our annualize distribution at place to a 10.1% yield based on the November 7, closing price of $7.99 per share.

The record dates and payments dates for the next three monthly distributions are detailed on Slide 4 as well as on the earnings release we issued last night, which is available on our website if you did not receive it. Please not that the previous declared monthly distributions for stockholders of record it October 31, November 29, and December 31 remain at $7.07 per share.

We believe this declared rate of distribution represents the near-term earnings potential of the company and that this level is achievable with that returning capital through over distribution. We certainly expect the implementation of the lower cost of debt capital and the higher level of investment to generate incremental net investment income. Furthermore by harvesting some equity positions and redeploying proceeds of those positions into yield oriented investments over time we could further improve upon our net investment income.

Slide 5 details of portfolio activities during the first quarter. As we mentioned on the last call until receive the proceeds of the note offering in late June we did not have much funding capacity for new investments. As we needed to maintain some liquidity for unfunded commitments, accordingly we picked up our origination activity over the summer.

During the quarter we funded $10 million in new origination to three borrowers. In August, the Company funded $5 million of a $9 million senior secured credit facility to Infinite Aegis Group, a Colorado based provider of revenue cycle management services to healthcare service providers including larger hospital systems and doctor clinics.

Infinite Aegis also owns and operates urgent care and occupational care centers. The four-year senior secured credit facility bears interest at 1 month LIBOR plus 12%. Of this $9 million facility, $4 million was funded by another vendor. On September 04, the company funded $1.5 million of a $5 million senior secured credit facility to Franklin Place Shops, a manager and owner of commercial real estate assets in Northwest Ohio.

The senior secured credit facility bears interest at 12% and has a final maturity of March 3, 2014 of the $5 million facility with $3.5 million was funded by other vendors. And at the end of the quarter on September 30, Full Circle closed a $3.25 million term-loan in revolving line of credit to CPX, Inc. a manufacturer of custom injection molded products for the appliance industry. The $2 million ABL revolver is priced at LIBOR plus 14% and the term-loan is priced at LIBOR plus 14.5%.

Slide 6, shows activity subsequent to quarter end to-date. In October, Full Circle funded the purchase of a $5 million position in a senior secured loan facility to [indiscernible], a global manufacturer and distributor of office supplies. The loan currently caries a floating rate of 10.75%, also since the end of the quarter Full Circle received $13.7 million in repayment and realizations.

Slide 7, details the metrics of our investment portfolio which remain broadly consistent with prior periods. At September 30, our portfolio totaled $94.6 million, the highest level since we’ve been public. These represents an increase of 25% from September 30 last year. At quarter end we had debt investments in 22 portfolio companies compared to 17 year-ago.

The average size of our debt investment is $4 million. We continue to focus on increasing the granularity of our portfolio, and look to deploy available capital in accordance with our investment philosophy. The weighted average interest range in the first quarter was 12.75% down slightly from fiscal year end. As mentioned earlier we have no loans on non-accruals status. First lien secured loans accounted for 92% of the portfolio in the quarter with floating 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 61% at the quarter end within our targeted range and we continue to receive 100% of earnings just income in cash unlike many of our peers. Slide 8, summarizes the key initiatives we undertook to provide, optimal and efficient capital base. In early June, we refinanced our existing revolving line of credit with new $33.5 million facility from Santander Bank.

Slide 9, is the key strategic initiatives the new line of credit represent significant improvement over a cost of debt capital over the company’s previous revolving facility. Importantly this past week Santander amended the credit facility providing the increase in commitments underlying from $32.5 million to $45 million.

This is particularly important to us as it will allow us to further reduce our cost of debt as we increase utilization of the line and it gives as access to our modeled leverage levels should we grow our equity base in the future. Immediately following the closing of the new senior evolving line of credit, in late June we completed $21 million offering of seven-year notes which are at fixed rates at 8.25%. This provides important balance sheet stability by diversifying our sources of debt capital significantly expanding the average maturity of our debt, as well as increasing our profile in public capital markets.

As we stated on the prior call the true benefits of these arrangements will be realized as we drop capital in the line of credit. As amounts outstanding under line increase we decrease our overall blended debt funding cost thereby increasing net interest margin and ultimately net investment income.

With the liquidity provided but the note offering and the recent repayments, we are working through our new transaction pipeline and are encouragement by greater activity and have approximately $15 million of new investment capacity. These developments are significant and important to our story and to the build out of our strategies for growth and greater return. However, a key component of any successful enterprise is having the right people and the right leadership, we are particularly pleased to have Greg Felton joined us, as we known that Greg will be instrumental to our future success.

On Slide 10 detail, Side 10 details Greg’s professional experience. I would like to let Greg speak in his experience he’s had, how he sees the opportunities available to Full Circle in our target markets.

Gregg J. Felton

Thanks John I’m delighted to be here at Full Circle Capital and enthusiastic about our platform and the business opportunities ahead of us. For those of you who don’t know me I’ve sent my entire career investing in credit markets, most recently as Chief Investment Officer of Goldman Sachs’ Liberty Harbor business which managed approximately $6 billion of alternative credit contacts for Goldman’s clients.

Throughout my career, I’ve invested in all levels of the corporate capital structure, including first lien, second lien and mezzanine lending. And I have substantial experience creating value through corporate reorganizations both in and out of court. I’ve also invested in both public and private credit markets and I’m particularly excited about the long-term opportunities available in the private credit markets.

With new regulations pushing banks and other regulated institutions out of the middle markets, there’s a significant opportunity for investors to earn attractive returns filling the board of capital. I personally believe that the BDC models are terrific way of investors to access them in the market lending opportunity, since the investments we make are attractively priced, but often in liquid requiring a longer-term investment vehicle. That’s why I spend much of 2012 developing a business plan for Goldman Sachs is BDC, which was successfully launched as a non-listed BDC in April this year with $600 million of capital.

Given the outlook for modest domestic growth combined with rising intermediate term interest rates, I can think of few fixed income investment opportunities is attractive is only high coupon floating-rate loans. John has built a strong platform at Full Circle and I expect to be able to help broaden the universe of investment opportunities available to our firm within the middle markets.

For example, I know that John mentioned on the last earnings call that the firm would be looking across deals in additional of direct origination. In prior to joining Full Circle I was able to facilitate one such opportunity with SLT, it’s a company that I know well having previously been part of the lending group and notwithstanding the fact that it’s a much larger issuer with $170 million facility size. The pricing of ten and three quarter percent in floating-rate form is very attractive for personally involved collateralized investment.

With a broader origination strategy I have a little doubt that we can further accelerate the development of an attractive investment portfolio and I’m excited to get started. I would like to now pass the call over to Mike Sell for a discussion of our financial performance in the third quarter.

Michael J. Sell

Thanks, Greg. Now please turn to Slide 11, which provides an overview of the first quarter financial highlights. For the first fiscal quarter 2014 net investment income was $1.2 million, or $0.16 per share, compared with $1.4 million, or $0.18 per share, in the fourth quarter of 2013. Net change in unrealized losses was $2.8 million or $0.37 per share, primarily related to fair value write-downs on our secondly owned Blackstrap broadcasting in our senior secured loans to modular process controls in MDU Communications. Realized losses were $0.7 million or $0.09 per share, primarily related to the purchase price adjustments on the liquidation of our prior loan to ignition.

Overall, we’ve recorded a net decrease and net assets resulting from operations of $2.2 million or $0.30 per share compared to a net increase and net assets resulting from operations of $1.9 million or $0.24 per share in the fourth quarter of fiscal 2013. The weighted average share count in the first quarter was 7.6 million shares, unchanged from the fourth quarter. Net asset value per share was $7.48 on September 30.

Please turn to Slide 12, which highlights several important balance sheet items. On September 30, our total assets were approximately $116 million, which includes $50 million in short-term treasury bills; our investment portfolio at September 30 was $94.6 million fair value. Total liabilities were approximately $59.8 million, which includes $21.9 million outstanding on our revolving line of credit, as well as $21.1 million outstanding on our 8.25% notes issued in June. At September 30, we added $10.6 million unused on our line of credit with Sovereign Bank, which was amended on November 6 to $45 million, for another $12.5 million of availability.

I will now turn the call back over to John.

John E. Stuart

Thank you, Greg. Now Mike. Sweet like to open up the call for any questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Andrew Kerai with National Securities. Please go ahead with your question. And Andrew make sure that your line is in unmute.

Andrew Kerai – National Securities

Sorry about that. Good morning guys and thank you for taking my questions. So the first question I had looking at your fee income it was down a little bit in Q1. I was certainly continues just why because the case I given that origination activity was actually up if you look sequentially in the quarter?

John E. Stuart

Yeah, Andrew, that’s a good question. This is a prior quarter we actually had some fee income related to a breakup fee that are potential borrower paid us to get out a term sheet we signed with them. We are very pleased to get it was an excess of $200,000. It was a very good return on capital, that’s why the fee income was higher in the prior quarter, there was no fee income related to the investment in Franklin Place Shops, that was due to – there is no structuring fee related to that transaction during the quarter, but primarily the decline is related to fee income that we – extraordinary fee income that we had in the June quarter.

Andrew Kerai – National Securities

Got it, okay. Thank you that make sense. Thank you for that color last quarter as well John. And also just kind of looking at your pipeline, here kind of as the year comes to a close, you have had about $14 million or so of repayment that have already come in kind of in the October month, I mean can you just maybe kind of talk about what’s your origination activities kind of throughout the remainder of the calendar year and if you think you know, if you still think it’s reasonable to maybe assume, it means little bit of net portfolio growth here kind of despite the sort of elevated level of pay downs that you’re seeing kind of coming so far in Q4?

Michael J. Sell

Right. You did see that actually $13 million, $14 million of realizations subsequent to quarter end in which $5 million we have already put back out again with the sales transaction.

Andrew Kerai – National Securities

Sure.

Michael J. Sell

I said on the call, we have about $15 million of funding capacity; that represents roughly three, four transactions. Obviously we are working on some transactions right now. We see a couple of that and hopefully closing before year end.

Every time somebody asked me these questions, I said, either all of them are going to close, some of them or none of them, but we are confident that some of them are closed before year end. That’s basically as much as I can say; and furthermore, having Greg here that hopefully opens up a further set of opportunities.

Andrew Kerai – National Securities

Certainly. So you guys are thinking maybe some additional [indiscernible] they could hopefully kind of expand that pipeline for you guys as well.

Gregg J. Felton

It’s exactly right. It is Gregg, I say as the consequence of broadening the universe of investment opportunities that we’ll be looking at. We absolutely believe that there is going to be a bigger step of deals from which we can choose and it’s our expectation that the broadening pipeline will lead to transactions in the near term. Of course, it’s always hard to define when those opportunities may come to fruition in close, but absolutely the pipeline will grow.

Andrew Kerai – National Securities

Great, great, thank you. And then just my last question is, if you can look at sort of the underperforming foreign private investments, looks like your ranking profile kind of moved run a little bit, you had some move ups in the two categories, you had some in the five in this quarter as well. I guess can you maybe just comment on sort of the risk profile of your portfolio and if you think that sort of change relative to what kind of relative to the update we had at the end of your fiscal 2013?

Michael J. Sell

Yeah, this is Mike. And one thing I think, we saw a significant write-down on Blackstrap which is what moved that into the five range, maybe regarding the twos we had a couple of M&A prepayments, some of which we had fee income associated with, so we moved those into the two buckets. Overall, I don’t the risk profile of the portfolio has changed significantly; it was just a matter of what was going on at that point in time.

Andrew Kerai – National Securities

Okay, great. Thanks for the color guys. I appreciate it.

Michael J. Sell

Thank you.

John E. Stuart

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. Please proceed with your presentation on any closing remarks.

John E. Stuart

Okay, thank you. Thanks everybody for joining us today. We look forward to updating on our progress in the next fiscal quarter in mid February. As we always say, we are available any questions either on the call or after the call or at anytime. Please do not hesitate to reach out to Greg, me and Mike whenever at your convenience. Thank you very much for your time and everybody have a good weekend.

Operator

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

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