Full Circle Capital Is Too Cheap To Ignore

| About: Great Elm (GECC)


Full Circle Capital is a BDC which closed Monday at $2.28 for a 43% discount from NAV of $4.00 per share and an 18% dividend yield.

FULL has relatively low leverage with total assets of $145.8 million and debt of $54.7 million.

The company has energy investments with a fair value of $6.5 million or 28 cents per share - even if they went to zero, NAV would still be $3.72.

FULL's low leverage gives it the flexibility to buy back stock (which it has been doing).

It should trade up once its energy write-offs are behind it.

Full Circle Capital (FULL) is a business development company (BDC) which went public in 2010. It is, thus, one of the post-crash BDCs with no legacy assets generated before the 2008-09 panic. FULL closed Monday at $2.28. It pays monthly dividends of 3.5 cents per share for an annual dividend amount of 42 cents and a dividend yield of 18.4%.

As reported in its most recent conference call, FULL's net asset value (NAV) as of the end of the last reporting period (September 30, 2015) was $4.00 a share. This means that it is trading at a 43% discount to NAV, making it one of the most heavily discounted BDCs. With total assets of $145.8 million and liabilities of $54.7 million, FULL has relatively low leverage (debt is 38% of assets) in comparison with many other BDCs and with the statutory limit on debt (50% of total assets).

FULL went public in 2010 at $10.13 per share. It has sold many shares at prices well above the current level. As recently as last spring, it raised $39 million through a rights offering, selling shares at $3.50 per share. There are obviously many disappointed investors and the stock now has very little analyst coverage.

Energy Assets - FULL's problem in recent quarters has been its energy loans. FULL has two energy positions in the oil and gas services sector with an original cost of $15.2 million. In the last quarter, FULL wrote these positions down from $9.0 million to $6.2 million. At this point, a full write-off to zero would reduce NAV by 28 cents per share. A full write-off may not be necessary because the positions are predominantly first lien loans so that there should be some realization of asset value. But even assuming a full write-off of all energy loans, NAV would still be $3.72 per share or well above the current share price. The recent energy write-offs have negatively impacted both earnings and NAV, but it appears that the write-offs may be coming to an end - if only because the amount of fair value now attributed to the energy assets has become so low.

The Advantages of Low Leverage - FULL has relatively low leverage and is nowhere near the 50% loan to total asset value statutory limit on BDC leverage. Thus, FULL's assets could lose $36.4 million in value before they reached a level at which liabilities would constitute 50% of total asset value. Alternatively, FULL could theoretically borrow more than an additional $40 million and use it to make loans and acquire assets, and it would still be in compliance with the statutory leverage limit. At a time like this, low leverage is an important advantage. FULL can buy back its own stock without tripping over the statutory leverage limit and, in fact, in and shortly after the latest reporting period, FULL did make substantial share repurchases in the $3.15 per share price range.

The Loan Portfolio - FULL has been fairly conservative with its investments. Its portfolio consists of 82% first lien loans and 72% of its loans are floating rate so that exposure to interest rate increases is limited. Its loan portfolio is diversified among industries and the exposure to the oil and gas sector is a relatively small percentage of the portfolio on a fair value basis. It is always possible that further write-offs will occur but, as noted above, the potential for additional write-offs in the energy area is limited.

Conclusion - FULL is attractive at the current price. It may not be able to sustain the 42-cent annual dividend indefinitely but - even with a substantially reduced dividend, FULL could still have a very attractive yield. FULL will be able to add to NAV per share by buying back shares at the current depressed price level. FULL's relatively low leverage will give it valuable flexibility at a very difficult time for the BDC industry. There may be opportunities to pick up assets at very attractive prices and, thus, having "room" under the statutory leverage limit to expand is very, very valuable.

I consider FULL a buy here and will be initiating a position. I believe that a BDC investor should - in the current depressed market - diversify and not overload on any one position. I will suggest some other names to acquire in the coming weeks. FULL should be part of a BDC portfolio, but by no means should it be the only component.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FULL over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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