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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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  • Saratoga Investments: Second SBIC License Both An Opportunity And A Problem

    The SBIC continues to give "Green Lights" left right and center to Business Development Companies and private investment groups. Today, we hear that Saratoga Investment (NYSE:SAR) -which already had one license to borrow long and cheap from the SBIC-has received the initial OK for another. (Typically, if you already have a license, chances are you'll be getting the money for the second, so this is pretty much in the bag).


    For Saratoga, this is a useful step forward in the micro-BDC's announced strategy. The Company is in the process of re-making itself as a lower middle market lender. Getting access to more cheap capital is important as Saratoga's onboard Collateralized Loan Obligation will be going away before long. The CLO has been a major source of management fee and investment income (15%-20%) so waving good-bye to all that will be painful. (The re-investment period ends next year). The access to the SBIC is a critical component of Saratoga's long term plans as spelled out in comments made by management on a recent Conference Call:

    "Our primarily focus remains on maximizing the potential 20% plus returns on the equity invested in our SBIC and utilizing the two to one leverage that it provides. This is the optimal means to increase our assets under management and net investment income yields, enabling us to increase returns to shareholders and achieve growth in our net assets and stock values".


    No wonder then that management has been broadening it's capital base, both with the original SBIC license (worth up to $150mn in 10 year debentures) and with a $40mn unsecured "Baby Bond". Now, Saratoga can look to the day when the Company will be able to boast up to $225mn in SBIC borrowings, plus the baby bonds, or as much as $275mn in long term debt. We're not even counting access to the under-utilized (because expensive) Revolver with Madison Capital.

    That could theoretically take Saratoga from $240mn in assets currently to around $400mn ($380mn if we assume the CLO eventually winds down, and we continue to exclude any Madison borrowings). Earnings should be headed higher thanks to all this firepower. The Analyst Consensus has Saratoga's earnings increasing 16% in FY 2016, way above the sector.


    Investors have been awakening to the growth prospects at Saratoga-a stock that most have forgotten given it's size and very slow recovery from almost going belly up in the Great Recession. As this chart shows, SAR has (modestly) out-performed BDCS (which we use as the sector proxy) since the mid-December 2014 low point. Still, the Company trades at a huge discount to NAV.


    The key question which has not been fully answered by management is where the equity contribution necessary to fully fund the SBIC licenses (even the first license has not been fully utilized) will be coming from. The Company does not have the cash on it's balance sheet. With the stock price so low, raising new equity capital has been off the table. (That's why SAR turned to the "baby bonds" market). Borrowing under the Madison facility is theoretically possible but does not represent good balance sheet management. Saratoga would be borrowing on a shorter term debt facility, fraught with covenants, to fund long term equity capital that will be tied up for a decade.

    The Company has been using earnings as a source of capital-keeping distributions below recurring earnings level, but with the need to distribute BDC required levels, that has it's limitations. In fact, distributions will be going up. Likewise a newly announced Dividend Re-Investment Plan might raise some (dilutive) new equity, but won't make a material difference.

    The Company has received shareholder approval to sell new shares at no less than 85% of the latest Net Asset Value. That would be at $19.3 or above, a 21% premium to today's price. Barring a huge surge in the stock price, sourcing the equity therefrom seems unlikely in the short term.


    However 3% SBIC money for ten years is too good for managers and investors to pass up, so we're sure a solution will be found. Our favorite solution-which we offer up gratis-is for Saratoga to sell it's CLO investment (which is performing well) and use the net proceeds ($20mn) as a first step. That might impact recurring earnings in the short run, but would be consistent with Saratoga's longer term ambitions.


    The Company has a shelf filing ready. Maybe the Company is considering a Preferred offering, similar to what Gladstone Investment has done. We are just guessing.


    Until Saratoga resolves what the future balance sheet will look like-and whether it makes sense to be both a lower middle market lender and a CLO manager with a vehicle stuffed with upper middle market loans-there will be considerable uncertainty surrounding the stock. We assume management has a "secret plan" to resolve this issue given that the second SBIC license was applied for. We look forward both expectantly and anxiously to finding out how this turns out.

    First published: BDC Reporter-April 6, 2015

    Tags: SAR, BDC Sector
    Apr 06 11:35 AM | Link | 2 Comments
  • 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
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