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Nicholas Marshi
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Nicholas Marshi is the Chief Investment Officer of Southland Capital Management (SCM). The Company is a Registered Investment Adviser in Santa Monica, California. SCM's principal expertise is in the area of publicly traded leveraged finance to U.S. private companies, including the Business... More
My company:
Southland Capital Management, LLC
My blog:
BDC Reporter
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  • BDC NEWS: Full Circle Re-Inventing Itself

    We wrote this article a few minutes ago for Southland Capital Management's "BDC Reporter". Seeking Alpha readers may be interested in our take on the latest news from this small, but ambitious, BDC.

    BDC REPORTER: You've got to give the folks over at Full Circle Capital (NASDAQ:FULL) credit: they're nothing if not ambitious. In the BDC landscape, Full Circle is the 98 pound weakling, with total investment assets of only $100mn. By contrast, Ares Capital (NASDAQ:ARCC) has on balance sheet assets of $8.2 billion: 82x higher. Moreover, from a credit perspective, the pint sized BDC has not covered itself in glory in a short history as a public company, with losses equal to 13% of all capital raised. We wrote a profile of Full Circle on Seeking Alpha back in 2012, shortly after the Company came to market. We wondered then if the business model which the Company had adopted would work over the long term. Full Circle was focused on making asset-based senior loans to small companies.

    Anyway, flash forward two years, and Full Circle is in the midst of re-inventing itself. It began a few months ago with the addition of co-CEO Gregg Felton who was brought in from Goldman Sachs (you've got to be impressed with those credentials-we are). Then there was the famous investment in a publicly traded pot-related company: Advanced Cannabis Solutions. Now, we have the addition of two new heavyweights from the world of health care financing, including the former CEO and founder of Gemino Healthcare Finance. Gemino is now a portfolio investment of Solar Senior Capital (NASDAQ:SUNS), and one of the reasons that BDC is doing well.


    Frankly, when Full Circle's stock began to ping pong back and forth with news and rumors associated with the Advanced Cannabis Solutions investment, we lost interest. We can take regular, garden variety volatility in a BDC stock, but FULL was extremely sensitive. For example, the stock rose from a low of $7.01 in January of this year to reach $9.19 by March 20th, a 31% increase in less than 3 months. Then the stock dropped in a few days by 19% to reach $7.47, before bouncing around in a 50 cent range ever since.

    We had a decent position when all this drama began and took advantage of the high price to sell most towards the top. We bought again when the stock dropped so sharply in March , but sold shortly after when we recognized that we had no idea what was causing the huge swings in price, except for after-the-fact updates on the pot investment posted on Seeking Alpha.


    However, after the last Conference Call and with the news of the new Health Care financing initiative, we are again intrigued by what Full Circle is attempting to build from a very low base. The Company is clearly rethinking it's target market for investments. Thankfully, the existing portfolio has been running off at a rapid clip, which frees up some assets and the Company has raised additional equity this year and increased it's Revolver and long term debt capital.


    Will Full Circle be able to successfully build itself up into a BDC powerhouse ? Many of the ingredients are there, but it is early days. Unfortunately, the stock, although nearly a fifth off it's highest high, is not cheap at $7.60, which is above Net Asset Value. The most recent Net Investment Income Per Share was just $0.15, and the Company pays a monthly dividend of $0.067 , or $0.804 annually. As you can see, the dividend is not covered by earnings, which is a red flag to some. In this case, that may be less important as Full Circle a year from now may look very different than at March 31 2014.

    NIBBLE ?

    We don't know if Full Circle 2.0 will be more successful than the company which came to market two years ago, but it's a fascinating experiment. We are a touch more confident that the Company will be able to assemble a portfolio of decent yielding, lower risk loans with the coming on board of the two new healthcare experts. SCM may invest a little if the price is right while waiting for answers to the longer term question about Full Circle's strategy and viability.

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

    Tags: FULL, Sector: BDC
    May 20 9:51 AM | Link | Comment!
  • BREAKING NEWS: Why Full Circle's Stock Is Dropping Like A Stone

    BDC REPORTER: Asset-based senior lender BDC Full Circle Financial (NASDAQ:FULL) is down -12.6% from it's recent 52 week high, and -6% on the day. The reason appears to be the bankruptcy of the Company's portfolio investment in MDU Communications (NYSE:USA). FULL has 3 loans to the troubled multi-dwelling unit satellite provider, with a total cost of $6.7mn.

    We've come to this subject only in the last hour or so, but did dig up this 8-K release, dated October 9th. This shows that Full Circle and another lender foreclosed on the stock of the business, as per the loan agreement, and immediately sold the assets to a third party: Access Media 3, a larger, better financed competitor. We read in the MDU parent 10-Q for the quarter ended March 31, 2013 that they had been selling assets to Access Media 3 in the preceding months, so this makes sense.

    This has been a long standing relationship for Full Circle (back to 2006 !), and this failure was no great surprise. The borrower's parent 10-Q leads with the prediction that liquidity was projected to run out. The parent had hoped to merge with another player but that deal has taken too long to come to fruition and Full Circle has acted to protect it's interests.

    Full Circle,in it's recent 10-K, valued the MDU loan at pretty close to full value. FULL was certainly aware of the likelihood of default at the time of the filing and may already have been in contact with the ultimate buyer of the assets (Access Media 3). This suggests Full Circle has been able to get repaid in full from the foreclosure and asset sale. The only loss will be relatively high paying assets. We quote from the filing to support our contention that FULL may be not incurring any material loss in this drama:

    Simultaneously, the Lenders, acting as attorney and agent-in-fact on behalf of Parent and with control of the voting rights over Subsidiary, executed a Written Consent of Sole Stockholder in Lieu of Meeting directing Subsidiary to enter into and consummate the transaction to sell substantially all of its assets to Access Media 3, Inc. ("AM3") pursuant to the previously disclosed September 4, 2013 Asset Purchase Agreement, with such purchase price proceeds being directed to the Lenders to satisfy the outstanding balance under the Loan Agreement.

    MARKET PRICE: The market seems to have been spooked initially, with 5x the usual volume trading and the stock price dropping like a stone. Cooler heads (or Google searchers like us) have prevailed,though, and the price is moving up.

    We bought more stock for our Funds, even as the price turned. Talk about fast moving...

    Written at 1:05 p.m. EST on the BDC Reporter ( and copied here for our Seeking Alpha readers.

    Disclosure: I am long FULL.

    Oct 11 1:13 PM | Link | 1 Comment
  • Fifth Street Finance Diversifies Into Niche Sectors. Good News ?

    BDC REPORTER: Mid-sized Business Development Company ("BDC") Fifth Street Finance (NASDAQ:FSC) has a problem: finding appropriate assets to add to their investment portfolio. As a BDC, the Company's capacity to leverage itself up is limited, which means Fifth Street must book loans with sufficient yield to pay operating expenses, management fees and provide a return to shareholders sufficient to attract capital (currently a 9%-10% return).

    To date, Fifth Street has typically focused lending on the traditional hunting ground of Business Development Companies: financing private-equity buy-outs and recapitalizations. This has been a successful endeavor, and the size of the Company's total portfolio has risen substantially over the years since FSC went public in 2008.

    THE PERILS OF SUCCESS: However, that very success has created new challenges for the BDC. As portfolio size has increased, so has the size of average loans booked (currently $22mn) . As loan sizes have increased, so has competition on price and terms from the highly liquid, syndicated loan market. Fifth Street has booked a very large number of loans, but has also faced substantial repayments, making net portfolio growth difficult, despite the fact that the BDC has ample capital available. Furthermore, loan yields are under pressure in every category: first lien senior, second lien senior, mezzanine and one-stop. At June 30 2013, the reported average yield on the loan portfolio was 11.4%, and the cash component 10.2%. New loans are being booked at below 10.0% on a cash basis, and could head lower. Three years ago, the gross yield was 14.6% and the cash yield 12.6%.

    FIFTH STREET'S RESPONSE: Thankfully, the Company has not responded by simply climbing up the risk ladder to maintain profitability. (In any case, it's unclear that there are loans to be made to any borrower at the yields achieved a few years ago, and with sufficient volume to make it worthwhile). Instead, Fifth Street has enlarged the scope of it's lending activities to include sectors not covered before. That involves not only entering specialized lending areas as we'll discuss, but also changing the typical maturity of the loans, and the type of collateral involved.

    AIRCRAFT,VENTURE INVESTING AND HEALTHCARE: In a short period of time, Fifth Street has announced initiatives to enter three new specialty lending disciplines. The nominal subject of this post is aircraft leasing. Fifth Street has hired an industry veteran, provided capital for some starter deals and is building up a team of aircraft leasing specialists.

    In addition, a few days ago, Fifth Streetannounced hiring another industry hotshot, and a full team of professionals, to get involved in the "venture lending" business. Venture lending consists of making debt and equity investments in venture-capital backed early stage or mid-stage technology companies. (There are already two BDCs which specialize in venture lending: Hercules Technology (NYSE:HTGC) and Horizon Technology Finance(NASDAQ:HRZN)).

    Back in June, Fifth Street made anotherstrategic move by acquiring Healthcare Finance Group. Here is a quote from the press release:

    An asset-based and cash flow term loan lending specialist, HFG has long-standing expertise in the healthcare industry. Since inception, HFG has financed in excess of $21 billion in receivables. HFG's sophisticated and highly scalable operating platform includes an internally-developed technology system that facilitates daily credit monitoring and insight into customer performance. The proprietary system is highly adaptable, with additional capabilities that can be leveraged as the platform continues to expand.

    Fifth Street hit the ground running in this last case, investing $114mn in the healthcare company.

    GOOD NEWS OR BAD NEWS: Are Fifth Street's diversification initiatives going to be good news for the Company's shareholders ? The jury is still out. We don't know much about the economics of these new sectors and their potential contribution to the bottom line. It's not even certain that the average yield in these specialized areas will be higher than the traditional buy-out lending. FSC would probably argue risk-adjusted returns will be superior. Both health care and aircraft leasing provide Fifth Street will substantial collateral, which should limit losses in a recession or downturn. Venture lending, despite the obvious risks, has been a relatively safe place to invest for Hercules Technology thanks to the large amounts of capital committed by the venture capital groups which own the underlying borrowers. Furthermore, there is the prospect of equity gains, which Fifth Street has had little to point to in the buy-out world, where it is almost exclusively a "lender only".

    We are encouraged that Fifth Street has gone and bought outside talent, rather than enter these highly specialized niche sectors with their existing loan personnel. It's more expensive this way, but the prospects of making disastrous early loans (as occurred to Fifth Street itself when it first came public) is lower.

    WAIT AND SEE: Nonetheless, we won't have a full sense of the risks and the opportunities involved for many quarters, even if these specialized segments begin to contribute to earnings. Sadly, the wisdom of Fifth Street's diversification will only be clear when the economy takes a leg down, and we see how the portfolio holds up.

    TECHNICAL ISSUES: BDC regulatory limitations (only 30% of assets can be invested in these "outside the box" initiatives) may limit the amount of diversification Fifth Street can undertake. There may be ways around the rules, but we'd guess that no more than 1/3rd of assets will invested in the three areas discussed above and others that may follow (real estate ?).

    BIGGER PICTURE: Fifth Street's moves are part of a larger migration by the upper middle market focused BDCs from their historic role as buy-out lenders. For example, months ago, Apollo Investment (NASDAQ:AINV) also announced it's entry into the aircraft leasing arena. Ares Capital (NASDAQ:ARCC) is venturing into Venture Lending, with yet another Silicon Valley focused team. American Capital (NASDAQ:ACAS) is getting into infrastructure lending.Prospect Capital (NASDAQ:PSEC) is getting into commercial real estate, and many other arenas besides.

    GLASS HALF FULL: For investors, if the BDC parents can successfully navigate the credit environment of these new areas, the long term implications of this historic shift in business mix are positive. Diversification, whether by sector, borrower, type of collateral, length of loan life etc., is important, and allows a BDC to navigate over the long term. Furthermore, with more niche segments generating income, BDCs will be less affected by the pricing pressures in the highly liquid, syndicated loan market where the voracious appetite of Collateralized Loan vehicles has been driving loan spreads down to ridiculously low levels. We're encouraged that the BDC model remains flexible enough to allow BDCs to take these steps, without getting away too much from the low risk model (low leverage, diversification, U.S. focus) that Congress envisaged when the BDC format was launched in 1980.

    Disclosure: I am long FSC, ACAS, AINV, HRZN.

    Aug 22 10:44 AM | Link | Comment!
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