Full Circle Capital's (FULL) CEO Gregg Felton on Proposed Merger with Great Elm Capital Corporation (Transcript)

| About: Great Elm (GECC)

Full Circle Capital Corporation (FULL)

Proposed Merger with Great Elm Capital Corporation

June 24, 2016 08:00 AM ET

Executives

Gregg Felton - President & CEO

Michael Sell - CFO

Peter Reed - Partner at MAST Capital, and Incoming CEO of Great Elm Capital Corp.

Analysts

Mickey Schleien - Ladenburg Thalmann

Paul Misleh - Fortis Capital Management

Presentation

Operator

Good day and welcome to the Full Circle Merger Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. [Rory Remora] Investor Relations. Please go ahead, ma'am.

Unidentified Company Representative

Thank you, operator and good morning everyone. Thank you for joining us for Full Circle Capital Corp’s call, announcing its merge with Great Elm Capital Corporation. The slide presentation accompanying this morning’s conference call can also be found on Full Circle’s Web site 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 statements 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 Web site under the Investor Relations tab.

Hosting the call this morning are Gregg Felton, Full Circle’s President and Chief Executive Officer; Michael Sell, Chief Financial Officer; and Peter Reed, a partner at MAST Capital and incoming CEO of Great Elm Capital Corp.

And with that, I’d now like to turn the call over to Mr. Gregg Felton. Gregg?

Gregg Felton

Thank you, [Rory] and good morning and welcome everyone. Thank you to everyone for joining our call today. We have posted a presentation surrounding this morning's release which can be found on the Investor relation section of our Web site at www.fccapital.com. And we invite you to refer to this presentation as our remarks will be closely tracking the presentation.

This morning Full Circle announced that it has entered into a merger with Great Elm Capital Corp. The company formed by Great Elm Capital Group also known as GEC and formally known as Unwired Planet, as well as funds managed by MAST Capital Management. The merger is the culmination of the strategic alternatives process commenced by the Board more than seven months ago. It is an exciting new beginning for Full Circle and our stockholders. The Full Circle Board as unanimously approved the merger and we believe this deal was the significant win for stockholders and we urge their support of the transaction.

Let me take you through some of the key highlights of this transaction which of you have the presentation open you can also follow starting on Slide 4. The merger is expected to close in the middle-to-late second half of calendar 2016. The combined company which would be called Great Elm Capital Corp. will have in excess of $190 million in net asset value. The combined size is more than double Full Circle’s current net asset value and will include of over 55 billion of investible cash. The transaction values Full Circle at 100% of net asset value and at the completion of the merger Full Circle’s stockholders will receive a special cash distribution of approximately $0.22 per share.

Upon closing the combined entity Great Elm Capital will concentrate its efforts on middle market credit strategies with a particular focus on opportunities experiencing price dislocation, as well as special situations and event-driven opportunities. We believe this is a differentiated investment strategy from that of a traditional BDC. The approach will leverage MAST’s long history of investing in middle market credit instruments, to deliver yield and capital appreciation to investors. The combined Great Elm will target an initial distribution yield of 9% of NAV and notably the external manager will be very much aligned with all stockholders to an expected 15% ownership stake in the new BDC. Great Elm Capital Corp. would apply the list of NASDAQ under the symbol GECC.

On Slide 6, we take you through the transaction in more detail. Upon closing Full Circle’s stockholders will own approximately 38% of the combined company. Funds managed by MAST will own approximately 47% and the external manager GEC will own approximately 15% as I previously mentioned. Quite simply with Great Elm we believe we are offering stockholders a renewed and greater opportunity to achieve yield and capital appreciation. As noted on Slide 8 the much larger combined BDC will have the ability to invest in larger credit opportunities that should create a more distinct portfolio, which is expected to provide better risk adjusted returns and a more sustainable distribution coverage.

In addition the mostly fixed operating expenses can be spread out over a larger asset base hopefully providing for increased net investment income overtime, which will satisfy a key long-term objective of our company. To that end as we move to Slide 9 we want our stockholders to be assured that Great Elm will be firmly aligned with their interest which is why the new investment management agreement are enhanced from the existing Full Circle agreements. The management fee for Great Elm will be 1.5% as compared with 1.75% management fee currently at Full Circle. And while the associating capital gains to you will remain the same if Great Elm does not achieve a 7% total return on beginning that assets on a rolling 12 quarter basis both of those fees will be deferred.

Beyond the new stockholder [pending alignments] with respect to external investment manager, Great Elm is further implementing additional protections for stockholders to help safeguard their investments. As represented on Slide 10, the new BDC will have an authorized $15 million 10b5-1 share repurchase program in place which will be traded when shares trade below 19% of NAV subject to Great Elms’ liquidity, credit facility and other considerations. GEC’s stake will be locked up for one year from the issue date and as long as both GEC and MAST own at least 35% of the BDC they will both weigh in the same proportion as other stockholders on several important matters, including amendments to the new investment management agreement, the BDC’s Certificate of Incorporation and selling additional shares below net asset value.

To conclude, we believe the Board did a commendable job, securing this transaction. The new BDC will have the benefit of a much stronger capital position, it will value Full Circle’s portfolio at 100% of net asset value, and it will provide what we anticipate to be a sustainable and meaningful distribution yield that firmly aligns management with stockholder’s interests. Now I would like to turn the call over to Mike, who’ll briefly discuss the strategy of new Great Elm.

Michael Sell

Thanks Gregg. This is an exciting day for Full Circle, MAST Capital and Great Elm Capital Group, as we prepare to enter into a new era. Slide 12 is the high-level look into the Great Elm BDC, some aspects of this strategy we will recognize, such as focusing on the traditional U.S. middle market and doing significant due-diligence and credit documents to ensure Great Elm is making the appropriate investment decisions. Great Elm also plans on investing in a core portfolio of senior secured first-lien and second-lien debt instruments and plans to continue to grow and develop the portfolio overtime, based on the risk return opportunities available across the credit markets. While those aspects of BDC investing are familiar, investment strategy that Great Elm will pursue will focus much more on the high yield credit market to take advantage of market dislocation, special situations and event-driven opportunities. We do not believe there are any other public BDCs currently pursuing this comprehensive strategy.

By focusing a portion of the portfolio on the secondary high yield market, as represented on Slide 13, we believe that the current universe of opportunities further increases our ability to generate meaningful risk adjusted returns for our investors. While we’ve have not seen the market with this level of dislocations since the financial crisis of 2008. We believe that there should be significant opportunities to purchase very attractive securities at discounts to par. While it is one thing to identify an opportunity, it is critical that how the manager with a depth of experience and knowledge to take advantage of these dislocations and invest in the securities that will generate appropriate risk adjusted returns to stockholders, it’s an approach that MAST has taken over the past 14 years, and with that I’ll turn the call over to Pete, who will introduce you to the MAST team, that will be leading the Great Elm Capital Corp.

Peter Reed

Thank you, Mike and thank you to everyone for attending this morning’s call. The insider MAST team is excited for this opportunity and to begin generating value for all stockholders. Let me take a few minutes to discuss our approach and the attributes of our experience investing across credit instruments. MAST is an investment advisor founded in 2002 in Boston that focuses on investing in and originating leveraged middle market credit opportunities. I joined MAST in 2004 and have over 14 years of credit investing and finance experience. We had approximately $1 billion in assets under management as of March 31, 2016.

During our 14 year history, we have invested in over $17 billion into all types of credit investments, have structured 24 custom financings and been actively involved in a group of restructurings. We navigated the 2008 financial crisis successfully and our experience of investing in that environment gives us a solid base from which to executive Great Elm’s BDC strategy. We’ve also since that time continued to invest effectively on both a primary and secondary basis generating returns that overtime beat the benchmarks that we target for our investors.

As the new external manger, we’ll be using the same approach to investing that has made MAST successful and we will continue to use our fundamental research capabilities and the in-house legal expertise to identify opportunities where our view is differentiated from the market. Our analysts will focus on specific industries where they are experts, in both qualitative and quantitative diligence, with all investment ideas thoroughly reviewed by our leadership team. Focus will be to capitalize on value opportunities within the middle market credit spectrum to generate a sustainable net investment income through distributions as well as capital appreciation. First and foremost, we’ll always remain focused on preservation of capital, while working to pursue the best risk adjusted returns that meet the rigorous investment standards that we set for ourselves 14 years ago.

Let me provide some additional insight on GEC’s participation in this transaction. As we note on Slide 17, BDC is reinventing itself by exiting its legacy patent licensing business, towards an alternative asset manager with the core leverage financing investment platform under the Great Elm Capital brand. This transaction dovetails well with this approach and secures the first step in that strategic initiative. We appreciate your support of this transaction and we look forward to putting our credit investment strategies to work for the mutual benefit of all stockholders.

I’ll now turn the call back to Gregg for closing comments.

Gregg Felton

Thanks Pete. In closing we’re very pleased to be able to bring this merger to our stockholders today. The transaction is a significant transformation of Full Circle as it more than doubles our asset base, puts the new combined company in a position to grow its net investment income stream, and it places our assets in the hand of a deeply experienced credit investing team at MAST. Our stockholders will receive immediate value in the form of the special cash distribution and are expected to once again be receiving regular distributions from Great Elm. All in we believe that we and our Board are fully supportive of the merger and we strongly advocate the stockholders to vote their approval at the upcoming special meeting.

I'd like to now open up the call for questions. Operator, can you queue that up?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take our first question from Mickey Schleien with Ladenburg.

Mickey Schleien

Gregg, I'm not exactly sure who to direct questions to so I will let you figure that out. But my first question is will the new external manager be wholly owned by Great Elm Capital Inc. and how many employees will that have?

Gregg Felton

I'm going to let Pete, if you don’t mind Pete, why don’t you answer that first question.

Peter Reed

The answer to the first question is yes we are a -- manager will be 100% owned by Great Elm Capital Group Inc. and there are 13 team members.

Mickey Schleien

And will the BDC be able to co-invest with other MAST funds?

Gregg Felton

Pete you got to take that as well.

Peter Reed

We will be relying on the MAST neutral exception to may be a further closing and maybe exempted release from the SEC.

Mickey Schleien

Okay. And of the 13 folks at the external manager, are any of them direct -- completely involved with origination or what I'm really asking is, what is the origination strategy for the new BDC in terms of deal flow?

Peter Reed

We view this as a natural extension of the origination that we've done over the last 14 years at MAST. And that origination is done a little bit differently than others. So that it is done on an opportunistic basis typically with companies or situations where we have multi-years of experience and that company has a discreet capital need. So, it's a little bit different than others but it will be a continuation of that strategy that we've been following for the last 14 years.

Mickey Schleien

And has that strategy involved private equity sponsors or these are direct relationships of MAST?

Peter Reed

All of the above.

Mickey Schleien

All of the above. The deck indicates that MAST has invested 17 billion since ’02, I was hoping you could give us a little bit more background on the performance of the funds, notwithstanding the fact that I assume they are private. But -- and could you include default and recovery rates if possible?

Gregg Felton

Yes Mickey exactly that’s thedetail as you might imagine for the purpose of this call. There will be information in the proxy materials that will allow you to get incremental information as it relates to background of MAST and so forth. But there is not further detail we can go into on this call.

Mickey Schleien

Okay. Last question Gregg I'm trying to just get a sense of the size of the company that MAST has been dealing with. Can you tell us the average EBITDA at least of the target market that MAST has been involved with?

Gregg Felton

No, we can't really get into that level of detail but obviously you are going to have a whole list of information available in the proxy materials that will provide more content and perspective on the pro forma situation.

Mickey Schleien

So, when do you expect to file the proxy?

Michael Sell

We are currently working on drafting the proxy materials as you can imagine it's a -- there are multiple parties involved, we are going to aim to get that on file as soon as we clear comments with the SEC to the jury if they have any and are looking to accelerate that process.

Mickey Schleien

So, Mike you are talking about weeks, if not months right?

Michael Sell

I think the goal would be weeks and at the outside to get somewhat technical here, the SEC has the option of up to 30 days to review a document, to provide comments and then 30 days to review their responses to those comments, so you could see a period that lasts into these “a month time period”.

Gregg Felton

We don’t control the planning at this point, yes.

Operator

And we will take our next question from Paul Misleh with Fortis Capital Management.

Paul Misleh

Peter these are for you. GEC, does GEC the public listed company continue to exist after this transaction is completed?

Peter Reed

Yes.

Paul Misleh

Okay. And then so what does GEC get, think Peter are you investing and stand for $30 million from the sale of the patents into this new whatever it's going to be called the combined company?

Peter Reed

Paul GEC will be making the $30 million from its cash on hand.

Paul Misleh

Okay.

Peter Reed

And of most the details will be coming shortly in an 8-K.

Paul Misleh

Okay. But then so just is the 30 million is going into the combined entity and then GEC also own essentially the asset, is GEC buying the asset manager or they are buying 15% of [indiscernible]?

Gregg Felton

Let me take that question, it should be outlined in the slide deck if you have that open but GEC is contributing $30 million of cash in exchange for equity in the newly formed BDC Great Elm Capital Corp. so that $30 million if cash is going in and they are receiving an exchange for that in equity interest in the form of stock in the combined company.

Paul Misleh

Okay. But can you just outline how that utilizes I know that there is a play on GEC now has been the utilization to NOL so how is that utilizing the NOLs?

Gregg Felton

Well I think that’s probably best addressed when GEC makes its own announcement and has an investor day forum but I am happy to discuss that with you in depth later.

Paul Misleh

Okay. All right well the market is going to open here and no one is going to understand that and I am a bit nervous about what that means for us, but I guess that’s okay? Okay, thanks guys.

Operator

[Operator Instructions] And we have no further questions and I would now like to turn the conference back over to Gregg Felton for any additional or closing remarks.

Gregg Felton

Okay, thank you operator. In closing we thank you all for attending the call this morning on short notice, and we look forward to providing further updates as warranted until then please don’t hesitate to reach out to John, Mike or myself at any time. And we are happy to answer any questions that we are able to answer, prior to of course the filing of the proxy is really done, there will be a lot more information forthcoming in public filings that will be available to you all. Thank you.

Operator

And this concludes today's conference. Thank for your participation you may now disconnect.