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Executives

Stephani Prince - Vice President of New York Office

John Edward Stuart - Chairman, Chief Executive Officer and President

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

Analysts

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Full Circle Capital (FULL) Q1 2013 Earnings Call November 9, 2012 10:00 AM ET

Operator

Welcome to the Full Circle Capital Corporation First Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, November 9, 2012. I would now like to turn the conference over to Stephanie Prince. Please go ahead.

Stephani Prince

Thank you, Sarah, and good morning, everyone. This is Stephani Prince from LHA. Thank you for joining us for Full Circle Capital Corp.'s First Quarter Fiscal 2013 Earnings Conference Call for the quarter ended September 30, 2012. 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 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 would cause actual results to differ materially from these projections.

Full Circle does not undertake to update its forward-looking statements 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, Stephani. Per our custom, I'd like to start with a brief review of our strategy for those of you who are new to Full Circle. Please turn to Slide 3 on the presentation accompanying this webcast.

Full Circle Capital Corporation was formed to continue and expand the secured lending business that we started in 2005. Since that time, we have executed more than $270 million in senior secured loans to 53 smaller and lower middle market companies.

Our investment typically range in size from $3 million to $10 million. We focus primarily on senior secured loans and stretch senior secured loans, also referred to as unitranche loans, which combine characteristics of traditional first lien senior secured loans with second lien or to a lesser extent, subordinated loans. Generally, this type of loan provides a higher interest rate and greater equity participation than traditional first lien senior secured loans. This is illustrated by our portfolio's current approximate 13% yield. This structure, which provides us with greater control and security in the primary collateral of the borrower, is a key component of our strategy to deliver efficient, one-stop flexible debt solutions to borrowers.

The one-lender efficiencies allow us to effectively compete against more traditional lenders and other capital providers in this highly fragmented end of the debt market. Additionally, many of our loan positions include warrants to purchase equity, success fees or other equity-like enhancements which we may recognize over time. Approximately 1/2 of our portfolio investments include these features.

On Slide 4, we provide details of our first quarter results. Our net asset value was $8.51 per share at September 30. In the first quarter, Full Circle reported net investment income of $1.2 million or $0.20 per share. Net investment income per share was up 18% from the previous quarter ended June 30, reflecting the effect of higher average portfolio assets during the quarter.

On November 5, the Board of Directors declared the monthly distributions for the third quarter of fiscal 2013 at $0.077 per share. This maintains our quarterly distribution rate of $0.231 per share and our annualized rate of $0.924 per share. This equates to an 11.2% annualized distribution yield based on the November 7 closing price of $8.28.

As a reminder, as a BDC, we are required to distribute between 90% and 100% of our distributable income over the course of the year. 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, and the same information is posted on our website.

As we have previously discussed, the board determines our distribution policy from a full year viewpoint, taking into account the outlook for portfolio growth and smoothing out the quarterly unevenness of origination activity and fee income. As we approach full deployment of our capital at current liquidity levels, we expect net investment income to more closely parallel the distribution going forward.

While we discussed some of these items on our last earnings call 8 weeks ago, Slide 5 details the portfolio activities during the first quarter and subsequent to quarter end.

During the first quarter, we funded $3 million of a $3.25 million credit facility at Global Energy Efficiency Holdings. This facility included a $1 million senior secured term loan and a $2.25 million senior secured revolving credit facility. Both instruments bear interest at LIBOR plus 12.25%. Global Energy provides energy efficient products, installation and maintenance services to small and medium-sized businesses. The company also receives a significant amount, a majority of its revenue directly from major utilities as part of energy saving incentive programs. The facility is collateralized by accounts receivable and inventory.

Subsequent to year end, we increased the Global Energy revolver size by $1 million to support the company's growth requirements as fourth quarter sales under contract have exceeded initial expectations during our underwriting period.

During the quarter, we advanced $600,000 in additional term debt to iMedix, an existing borrower. This capital, combined with additional equity investment by the company's private equity sponsor, was used to fund additional growth through acquisitions.

We also extended the loan maturity of 2 loans. The Ygnition Networks' loan was extended to now mature at year end. This was done to allow the company time to complete the sale of certain of its assets, which are under letter of intent with the buyer. Although depending on final outcomes, we may likely maintain the level of investment with the buyer.

We extended the maturity of the loan to Attention Transit Advertising to May 1, 2013, as part of its efforts to finalize a long-term contract that we feel will create additional enterprise value to the borrower.

As mentioned on the last call, this past August, Equisearch emerged from bankruptcy under our control in conjunction with the mezzanine investor beneath us and under its new name, TransAmericanAsset Servicing Group. We installed new management to support the company as it continues to work off its accounts receivable and contract backlog. This investment is back on accrual and earning interest for us. ProGrade continues to make progress on rounding out its component sourcing and we are supportive of management's continued execution of its business plan.

Last week, we announced the extension of our leverage facility through December 31, 2013, for 14 months. As we said on the fourth quarter conference call, we are actively engaged with financing sources as we seek to lower our cost of borrowing while best matching any facility with our investment strategy. In the meantime, we continue to enjoy a very good relation with First Capital, our leverage provider since 2006.

With respect to our origination pipeline, we are seeing a lot of good quality deal flow as borrowers like our flexible unitranche lending solutions. Many of these opportunities are showing good asset colateralization with attractive debt to cash flow levels.

As we compete in the smaller and more fragmented sector of the debt market, we have not seen much of the recent yield compression experienced by the larger and broader loan market. However, as we are close to being fully invested at current liquidity levels, excluding any future payoffs or realizations, we have room for approximately 2 more investments. Accordingly, we remain very selective with regard to new investments.

Slide 6 details the metrics of our investment portfolio, which remain largely consistent with prior periods. At September 30, our portfolio was $75.5 million compared to $72.3 million at June 30. We now have debt investments in 17 portfolio companies. The weighted average interest rate at September 30 was 12.84%. Our loan-to-value ratio remained at 62% at quarter end. And unlike many of other peers, we currently receive 100% of our interest income in cash.

First lien senior secured loans continue to represent 93% of the portfolio. Floating rate loans are also 93% of the portfolio, a percentage that has been increasing steadily from 81% a year ago. Both of these metrics are among the top tier of the BDC universe.

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

William E. Vastardis

Thanks, John. Please turn to Slide 7. Slide 7 provides an overview of the first quarter financial highlights. Total investment income was $2.8 million, approximately $300,000 above the fourth quarter level. This includes $2.6 million in interest income for the first quarter compared to the $2.4 million in the fourth quarter. Fee income, which is included in investment income totaled $160,000 for the quarter.

In the first quarter, we generated fee income from origination activity and other sources. Net investment income was $1.2 million or $0.20 per share in the first quarter compared to $1.1 million or $0.17 per share in the fourth quarter. This represents approximately 18% growth in per share net investment income, primarily due to the higher level of portfolio investment and greater fee income in the first quarter versus the fourth quarter.

We recorded an $0.08 per share change in unrealized gains during the first quarter, offset by a $0.13 per share realized loss. The realized loss was a direct result of EquiSearch's emergence from bankruptcy whereby we recognized a revised loss on the original debt instrument, which was offset by the value attributed to our interest in TransAmerican.

This resulted in a net increase in net assets resulting from operations of approximately $900,000 or $0.14 per share. The net asset value per share was $8.51 on September 30, after factoring in our first quarter distributions of $0.23.

Please turn to Slide 8, which highlights the important balance sheet items. At September 30, our total assets were approximately $106 million. This includes total investments of $100.5 million at fair value. Excluding our U.S. Treasury Bill position of $25 million, our investment portfolio totaled $75.5 million.

Total liabilities were approximately $53 million. Liabilities included a payable of $25 million for the U.S. Treasury bill position, our $3.4 million in senior unsecured notes and an outstanding balance of $23.1 million on our $35 million revolving line of credit.

I'll now turn the call back over to John. John?

John Edward Stuart

We are pleased by the results this quarter as our continued portfolio growth resulted in a meaningful increase in net investment income. We look forward to reporting back to you on the results of our efforts to continue this progress.

We'd now like to open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Bob Martin [ph].

Unknown Analyst

Do you release your debt-to-EBITDA stats for your portfolio companies and also there are interest coverage ratios?

John Edward Stuart

Bob, no. We do not. We haven't used that as a metric. We really just use the loan-to-value ratio. But we do not disclose that or tally that up as a -- on an aggregate basis.

Unknown Analyst

My next thing is a comment more than a question and I'd like your response to that. You all got a heck of safe portfolio based on senior loans. Retail investors have a difficult time quantifying risk. They also see that your dividend is not covered by NII. So you give them one picture on risk in terms of what you own, a second and different picture on risk due to the lack of NII coverage. What is your response?

John Edward Stuart

As we've said in the call, we set the distribution rate into -- based on the view of where we believe the NII is going. And as I've said in past calls, we -- as you add loan assets, yielding assets to the portfolio, you should result obviously in increased net spreads and increased net investment income, which was actually seen in the last quarter-over-quarter results. So that's basically the best way I'd answer that question, Bob.

Operator

Your next question comes from Mickey Schleien from Ladenburg.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

My first question is, were there any fees to extend the line of credit? And so how much?

John Edward Stuart

It was minor, it's about $100,000 recognized over the remaining term. On the $35 million line that's pretty small.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Yes, no, that is good. Now in terms of the line, how should we think about eventually your ability to expand the line? I mean, this is the major limitation on your company's ability to grow. In your discussions with various banks, are they amenable to a larger line given your asset base?

John Edward Stuart

Yes. That is part of the equation, is to get a larger line, as well as a one -- a line with lower borrowing costs as well. And that borrowing cost can be in the form of, not only interest but lower fees and other factors that affect the cost of the line. But yes, that is the idea, is to get access to larger amounts of leverage over time. That's correct, Mickey.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Okay. Any potential for you to continue to expand your origination team?

John Edward Stuart

We've been -- we look at that continually. I will tell you that our deal flow has picked up substantially over the last quarter or so. I don't know if that's a function of the environment or a function of -- I'd like to say it's more a function of our results of our efforts. But we do look from time to time as we grow to expand our origination team. In fact, earlier this year, we added to our staff an investment professional who would fund us from Jefferies who is, while not necessarily part of our origination team, supports the origination team in loan underwriting and execution. So the answer is yes. As we grow, we will be adding personnel to match that.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Okay. A couple of housekeeping questions, John. It looks like the maturity on the UF PathLabs' loan was accelerated. Can you comment on that?

John Edward Stuart

It was extended.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

It was extended?

John Edward Stuart

Yes. We advanced them $1 million more. We increased the facility from $2.5 million to $3.5 million. That should be 2014. That's not correct. It should be 2014. That's a good catch.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Okay. So the schedule in the Q should be 2014?

John Edward Stuart

I believe so. I don't have the number in front of me, but we extended them loan maturity.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Previously, yes.

John Edward Stuart

Previously in the prior one.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Okay. I'll follow up with you on that offline. I just want to also confirm that everything is on accrual at this point?

John Edward Stuart

Yes. As we said, TransAmerican came back on accrual in the quarter.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And lastly, you were breaking up a little bit at the beginning of the call, when you were discussing your activity in the quarter. There was some comments about a buyer and I couldn't hear that. I hope you can refresh those comments. What were you alluding to?

John Edward Stuart

Oh, I don't know why that would have been breaking up. I think everybody in the room here heard it.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

No, no, I couldn't hear it.

John Edward Stuart

What I'm saying is it's a communication problem. I was talking about Ygnition saying that they were under a letter of intent with the buyer and that's why we extended the facility. I think that's what you're referring to. And I also said that it's likely that we'll maintain the level of investment with that buyer going forward.

Operator

At this time, there are no further questions. Presenters, please proceed with your presentation or any closing remarks.

John Edward Stuart

Well, we want to thank everybody for joining the call today. In closing, we started the new fiscal year on a very strong note. We have a number of opportunities before us. And as I said earlier, we look forward to discussing them with you on the next earnings call. In the interim, please don't hesitate to call us, reach out to us, should have any additional questions. Thank you once again, and speak to you soon.

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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