Full Circle Capital' (FULL) F2Q 2016 Earnings Conference Call February 17, 2016 8:30 AM ET
Garrett Edson - ICR
Gregg Felton - President and CEO
Michael Sell - CFO
John Stuart - Chairman
Good day and welcome to the Full Circle Capital Corporation Second Quarter Fiscal 2016 Earnings Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Garrett Edson at ICR. Please go ahead, sir.
Thank you, Orlando and good afternoon everyone. Thank you for joining us for Full Circle Capital Corp’s second quarter fiscal 2016 earnings conference call for the quarter ended December 31, 2015. If you’d like to be added to the company’s distribution list, please send an e-mail to email@example.com. Alternatively, you can sign up under the Investor Relations tab on the company’s website. A slide presentation accompanying this mornings’ 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 management, 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.
Hosting the call this morning are Gregg Felton, Full Circle Capital’s President and Chief Executive Officer; Michael Sell, Chief Financial Officer; and John Stuart, Chairman. Due to the nature of this strategic review process, the company will only be delivering prepared remarks and will not be able answer questions at this time.
With that, I’d now like to turn the call over to Mr. Gregg Felton. Gregg?
Thank you, Garrett. Good afternoon and welcome everyone to this mornings’ call. Let me start with some brief market and portfolio commentary. During the second fiscal quarter of 2016, concerns about slower economic growth and continued commodities weakness contributed to widening credit spreads and increased volatility in the credit markets.
With that market backdrop, we maintained our view that the balance of risk versus reward of investible opportunities was not particularly favorable. We therefore limited our originations and we retained excess liquidity. At the same time we received nearly $14 million of repayments in the quarter through realizations from three of our portfolio investments.
Stepping back and look at the markets more generally, public equity market conditions for BDCs have been challenging for an extended period of time. Similar to many other BDCs, our common stock has been trading at a significant discount to its net asset value, and as a result has limited our ability to grow and reap the benefits of increased scale including the ability to commit to larger hold size enhanced liquidity for our shareholders and substantially increase operating leverage.
We believe that these market conditions may persist for some time, therefore with the release of our earnings; we made an important announcement regarding the steps we have taken to address the current difficult market conditions. In particular, we announced that our Board of Directors formed a special committee composed solely of independent directors including Mark Biderman, Edward Cohen and Tom Ortwein in November of 2015 to consider various strategic alternatives that might be available to us.
The special committee is authorized to consider, negotiate and potentially implement all strategic alternatives reasonably available to us, including but not limited to the acquisition or disposition of assets and the sale or merger of the company. The special committee has engaged Houlihan Lokey Capital as its financial advisor.
In order to maximize the types of potential strategic alternatives that are available to us and were to enhance the stockholder benefits, we have opted to retain the cash proceeds received by the us in connection with loan repayments and asset sales, and have otherwise limited the our origination activities. However, because our investment income has declined and is expected to continue to decline in the current and subsequent quarters as a result of this change in investment strategy and reduction of investments, our Board of Directors has decided to suspend the declaration of any future distributions to our stockholders beyond the previously declared distribution of $0.035 per share to stockholders of record on March 31, 2016 and payable on April 15, 2016.
As we noted on the last call, during the second quarter we repurchased over 290,000 shares of our common stock at a weighted average price of $3.16 per share. Unfortunately, despite the difficult market for BDCs and the decline in our share price, we have been unable to continue to repurchase shares over the past couple of months, at what we believe our very attractive price is, given the strategic process that’s been underway.
Turning to our financial results for the second fiscal quarter, we recorded net investment income per share of $0.11, which includes the waiver of a portion of our investment advisory fees, our net asset value was $3.76 per share as of December 31, with a reduction primarily due to write-downs of our investments in Ads Direct Media, ProGrade Ammo Group and US Oilfield. Ads Direct and background Images were both placed on non-accrual in the quarter.
We continue to work hard to optimize our portfolio’s performance despite the current market volatility. As presented on slides 5 and 6, our funding activity over the past few months has been limited, as we’ve made one unfunded revolver commitment and subsequent to the quarter end, we restructured our investment in US Shale Solutions.
Due to the net repayments from investments, we have $49 million of excess liquidity with excess cash on the balance sheet and nothing drawn on our bank line. We believe that this is not only an appropriately defensive position in today’s credit environment, but is also likely to lead to increased strategic options through this special committee’s review.
From a realization perspective, at the end of October, we sold our equity interest in West World Media for total proceeds of 2.2 million and we also received repayment of approximately $0.5 million on our senior secured revolving loan with TransAmerican Asset Servicing Group. In November we received the repayment of $11.1 million from our largest position which was the senior secured note with Good Technology Corporation.
Subsequent to quarter end, we have continued to harvest cash with repayments from Solex and Catsmo of $4.1 million and near-term proceeds expected from the unwinding of the total return swap related to Granite Ridge Energy which is being sold or has been sold to Calpine.
Slide 7 details the metrics of our investment portfolio as of December 31. Our portfolio contained 28 discreet debt investments as compared with 27 a year ago, and we continue to hold predominantly first lien investment, which represented 81% of our portfolio as of December 31.
At December 31, our portfolio totaled $123 million down from a 142 million in our first fiscal quarter of 2016 and down year-over-year from a 129 million due to the realizations in the quarter as well as the write-offs that we’ve taken.
The average size of our debt investments is $3.9 million and the weighted average interest rate at December 31 was 9.3%. However, this average interest rate includes the effect of non-accruals at a rate of zero and the so the weighted average interest rate of our performing debt investments was approximately 11.3%.
I’d now like to pass the call over to Mark Sell, our CFO for a more detailed discussion of our financial performance in the second quarter. Mike.
Thanks Gregg. Please turn to slide 8 which provides an overview of the second quarter financial highlights. For the second quarter of fiscal 2016, investment income was $4.8 million, a decrease of 2% compared to $4.9 million in the second quarter of fiscal 2015. Net investment income was $2.4 million comparable with the prior year quarter.
On a per share basis, net investment income was $0.11 versus $0.19 in the prior year period, with per share amounts based on approximately 22.5 million weighted average shares outstanding in the second quarter of fiscal 2016, compared to 11.9 million for the prior year period.
Net unrealized gains in the quarter were $3 million comprised of $2.1 million of net unrealized appreciation of equity investments, $2.8 million of net unrealized appreciation on debt investment, and $1.9 million of unrealized depreciation on an open swap contract. Realized losses were $8.8 million.
We reported a decrease in net assets resulting from operations of $3.4 million or $0.15 per share. Net asset value was $3.76 per share at December 31, compared to $4 per share at September 30, 2015.
With the decrease primarily resulting from the write-offs of our investments in Takoda Resources and New Media West; the write-off of our warrant and good; and the three positions that we took mark-to-market losses on previously as Gregg mentioned.
Slide 9 illustrates the composition of the portfolio; in the second quarter 77% of our loans carried a floating rate. As we’ve noted, a benefit of our portfolio consisting a majority of floating rate loans that are rising in a straight environment, we would expect the benefit of our portfolio net investment income.
Please turn to slide 10, which highlights important balance sheet items. On December 31, our total assets were approximately $134.6 million. At the end of the quarter, the investment portfolio of fair value totaled approximately $122.8 million reflecting the net impact of repayments, the open swap liability, net unrealized losses and realized gains that occurred during the fiscal second quarter.
Total liabilities were approximately $50.2 million; this included approximately $33.6 million outstanding on our 8.25 notes. I will not turn the call back over to Gregg.
Thanks Mike. In conclusion, in the face of a difficult environment for credit and BDCs in particular, we believe that a defensive approach is the most appropriate way to navigate through current market conditions and optimize shareholder value.
We’ve already taken significant steps to reduce our balance sheet investments and overall portfolio risk. We believe that or liquid balance sheet is highly likely to enhance our strategic options and optimize shareholder value, as a result of the current Board Special Committee process.
I want to at this point remind everyone that we in management are significant shareholders, including purchases made in the past year, and we remain highly focused on improving the share price. We believe the actions announced today will help achieve that result.
As we expect most questions from attendees on this call would focus on issues surrounding the strategic review process, we have decided not to take questions, as we are not in a position to provide additional commentary at this point. However, we do expect to be in communication with stockholders as the process unfolds and results of the review are available through additional public disclosure.
Until then we thank you for attending the call today, and we look forward to speaking with you at our next quarterly call or hopefully even sooner. Thank you.
Ladies and gentlemen that does conclude our conference for today. We thank you for your participation.
[No question-and-answer session for this event].
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