Great Elm Capital Corp. 7.75% Notes Due 2030 (GECCG) Q4 2014 Earnings Report, Transcript and Summary

Good morning and welcome to the Full Circle Fourth Quarter Fiscal 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded September 16, 2014. At this time, I would now like to turn the conference over to Stephanie Prince of LHA. Please go ahead.

Thank you, [Shea], and good morning, everyone. This is Stephanie Prince. Thank you for joining us for Full Circle Capital Corp.'s fourth quarter fiscal 2014 earnings conference call for the quarter and fiscal year ended June 30, 2014. With me this morning is John Stuart, Full Circle's Chairman and Co-Chief Executive Officer; Gregg Felton, President and Co-Chief Executive Officer; and Michael Sell, Chief Financial Officer. If you'd like to be added to the company's distribution list, please send an e-mail 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 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. I'd now like to turn the call over to John Stuart, Chairman and co-CEO of Full Circle Capital. John?

Thank you, Stephanie. Good morning and welcome everyone to today’s call. I will begin our discussion with an overview of our strategy, recent developments and results for the fourth quarter. Gregg will then review the portfolio activity and current portfolio composition, as well as provide a view on Full Circle's forward opportunities. Finally, Mike will give a detailed discussion of the quarter's results. On Slide 3, accompanying the webcast, we provide an overview of our investment strategy. Over the course of fiscal 2014 and continuing into fiscal 2015, we have implemented and continue to implement a plan designed to broaden our platform to include a greater breadth of investment opportunities that are available within our overall credit parameters. Over the year we have made important additions to our senior management. Gregg joined us in the second fiscal quarter of 2014 as well as additions to our broader investment team by adding senior professionals to address industry verticals in healthcare and real estate finance. The impact of these actions has been evident in the significant portfolio growth during fiscal 2014 in which we executed $92 million of investments, including $44 million of new and follow-on portfolio investments funded in the fourth quarter alone. While our focus has remained on lower middle market direct origination, in fiscal 2014 we focused on an expanded approach to our investment program designed to further capitalize on market inefficiencies. New investments included select primary and secondary market purchases of syndicated loan facilities as well as participations alongside other lenders in club deals through our direct origination efforts. Over the past year, we have continued to access the capital markets to strengthen and diversify our capital base. We raised equity capital in what we believe to be a very efficient manner through three offerings during the year and one smaller offering in the current quarter. With respect to our debt funding capability we completed a follow-on offering of our publicly traded notes in July and mostly recently announced just yesterday amended our senior revolving line of credit which will enable us to more efficiently finance a larger universe of investment opportunities. While we have a few issues to work through relating to certain legacy positions, the initiatives we put into place in fiscal 2014 have resulted in larger and more diversified portfolio supported by a growing capital base which provides a stronger foundation from which to build. Turning to Slide 4, we provide summary details about our fourth quarter results. During the quarter, we recorded net investment income of $1.5 million or $0.15 per share, up slightly from $1.4 million in the prior sequential quarter. While the investment portfolio grew from $90 million to $125 million in the quarter, much of the new investment activity was funded in the last month of the period and therefore investment income in the quarter did not track growth in portfolio assets. We reported a net decrease in net assets from operations of $7.5 million or $0.73 per share, primarily related to fair value adjustment to certain positions in the portfolio, the major relate to our equity positions that have had significant volatility over the year. More specifically we experienced an unrealized loss on our warrant position in Advanced Cannabis Solutions and a negative fair value adjustment to our carrying value of our equity investment in New Media West. You should note that all per share numbers reflect the higher share count related to the equity offerings that we completed in the fourth quarter. Our net asset value was $6.38 per share at June 30, down from $7.20 per share at March 31, primarily for the reasons just mentioned. We have two investments on nonaccrual and we’re working expeditiously to resolve each position. The first is Blackstrap Broadcasting which was placed on nonaccrual status in the fourth quarter. We believe we are close to a solution that will result in a favourable restructuring of the credit, we hope to have news on this fairly soon. ProGrade Ammo Group was placed on non-accrual in July after we declined to extend additional credit to the company. We are working to achieve our recovery through either the outright sales of business or through the liquidation of the assets we hold as collateral. Since June 30, we have collected approximately $600,000 through realization of accounts receivable from the position. We are very much focused on getting both of these positions back on interest accrual or alternatively collecting cash proceeds from collateral liquidation which would allow us to redeploy those proceeds into income earning assets. On September 8, our Board of Directors declared the monthly distributions for the second fiscal quarter of 2015. Stockholders of record on October 31, November 28 and December 31 2014 will receive distribution payments of $0.067 in the middle of each following month. These provide a quarterly distribution of $0.20 per share or an annualized distribution rate of $0.80 per share. This equates to an 11.2% distribution yield based on the September 12 closing price of $7.20 per share. The record dates and payment dates for these three monthly distributions are detailed here on Slide 4 as well as on the first page of the earnings release we issued last night. All this information is also available on our website. Finally, we announced that starting with the first quarter of fiscal 2015, the September 30 quarter, the current quarter, the investment advisor will on a quarterly basis reimburse Full Circle Capital for annual operating expenses that exceed 1.5% of net assets for fiscal 2015 and 1.75% of net assets for 2016 and subsequent years. More specifically, we expect a portion of our future returns to come from lowering our expense ratio by spreading our relatively fixed operating expenses over a larger base of assets. This agreement is designed to accelerate the benefits that we expect our stockholders will receive as we scale our assets and business over time. Please note that we define operating expense as operating expense before interest and total advisory fees. I will now turn the call over to Gregg for a discussion of the portfolio and our forward opportunities.

Thanks, John. I am pleased to report the increased origination activity in the second half of fiscal 2014 which resulted from expanding our avenues of asset production. Our broader approach to sourcing is evident from the transactions that we closed since the beginning of last quarter, which I will touch on just in a moment. We also believe that our expanded investment team will allow us to increase the pace of production as we’ve only just begun recently to build a more robust pipeline of investment opportunities in the healthcare and real estate verticals. As presented on Slide 5, we funded $44 million of investments in the June quarter. Of this amount, $35 million represented five new portfolio investments and the balance represented additional fundings to existing borrowers. Subsequent to the June quarter end, we committed an additional $14 million to three new borrowers of which $10.5 million has been funded to date. As you can see on Slides 5 through 7, our recent portfolio investments were across a broad range of sectors, including financial services, broadcasting, wireless communications, healthcare, real estate management as well as oil and gas. We are pleased with the diversity of opportunity we are finding across industries and we continue to see a diversity of opportunity in our pipeline. With the exception of RCS Capital, which we believe to be a particularly well priced second lien facility, each of these new investments is a first lien senior secured facility. With respect to realization activities, payouts have been somewhat muted after a spike in repayments in the second and third quarters of the year which totaled $32 million. That said, we did just recently receive one full realization after quarter end as U.S. Path Labs repaid in full the outstanding amount to -- under its credit facility. That repayment resulted in proceeds of $3.6 million including interest and fees. Slide 8 details the metrics of our investment portfolio which continued to remain broadly consistent with prior periods, while at a significantly higher level of investment. As of June 30, our portfolio totaled $125.2 million, up substantially from the $90.1 million last quarter and up even more from $75.9 million at the end of the second fiscal quarter. At quarter end, we held debt investments in 26 portfolio companies, up from 21 borrowers in the prior quarter. We continue to be focused on increasing the diversification of our portfolio as we deploy available capital in accordance with our investment philosophy. The average size of our debt investments is $4.3 million and the weighted average interest rate in the fourth quarter was 11.27%. While this interest rate is lower than prior quarters, remember that it does include the effective positions on non-accrual as of June 30. First lien senior secured loans accounted for 88% of the portfolio in the quarter with floating rate loans representing 82% of the portfolio. Our loan to value ratio was 60% at quarter end. I am pleased with the progress with me since I joined Full Circle last November. We have been successfully building the pipeline of attractive investment opportunities and have expanded the investment team with some terrific hires. While increased origination has been a key focus, we have been similarly focused on strengthening our balance sheet. Our funding capacity was significantly enhanced with the completion of three equity offerings this past year as well as an additional offering in July after fiscal year end. Given our small size, we have sought to raise money in a cost efficient manner and in amounts appropriate for our size. In addition to raising equity, we have expanded and strengthened our sources of debt capital. We recently amended our senior revolving credit facility to increase its maximum size to $60 million and to allow for greater eligibility of loan assets. With this additional flexibility we can now finance a broader set of credit opportunities we are pursuing with our expanded investment team. In addition to increasing our loan facility in July, we also executed a $12.7 million follow-on offering of our publicly traded notes. This issuance further enhances our balance sheet by extending the average remaining term of our debt and providing additional availability under our senior credit facility. While John and I are disappointed with the challenges of certain of our legacy portfolio positions, we are pleased with the recent portfolio growth and believe that our balance sheet is well positioned for significant incremental growth. With portfolio growth, we expect our stockholders to benefit from increased diversification as well as additional operating efficiencies. Since these operating efficiencies would not be fully realized without significant growth to our capital base, Full Circle advisors has agreed to accelerate these benefits by limiting operating expenses to a level more consistent with larger BDC industry peers. I’d now like to pass the call over to Mike for a discussion of our financial performance in the fourth quarter.

Slide 9 which provides an overview of the fourth quarter financial highlights. For the fourth quarter of fiscal 2014, net investment income was $1.5 million or $0.15 per share compared to $1.4 million or $0.18 per share in the fourth quarter of last year. Net realized and unrealized losses were $9 million or $0.88 per share. Unrealized losses on investments were $9 million or $0.88 per share. Including the unrealized losses, we recorded a net decrease in net assets resulting from operations of $7.5 million or $0.73 per share. Per share results are based on weighted average shares outstanding in the fourth quarter of 10.3 million shares, a 35% increase compared to the 7.6 million shares in the same period last year. This increase reflects the three common equity offerings that Full Circle completed in January, February and June of 2014. Net asset value per share was $6.38 at June 30, compared to $7.20 on March 31, 2014, primarily reflecting the unrealized losses experienced during the period. Slide 10 digs a little deeper into the composition of the portfolio, highlighting the predominantly floating rate nature of our portfolio. 82% of our portfolio of loans have a floating rate. We believe this positions us well for any rise in interest rates. 88% of our portfolio continues to be invested in senior secured loans. Please turn to Slide 11 which highlights the important balance sheet items. On June 30, our total assets were approximately $156 million, which includes $25 million in short-term treasury bills. At the end of the quarter, the investment portfolio at fair value totaled $125.2 million, well above the $90.1 million at March 31 reflecting the increased investment activity that John and Gregg spoke about. Total liabilities were approximately $83.3 million. This includes $21.1 million outstanding on our 8.25% notes that were issued last June and $8.4 million in outstanding borrowings on our newly expanded $60 million line of credit. We expect to fund future investments from that availability, as Gregg mentioned in his remarks. I will now turn the call back over to John and Gregg.

Okay. We’d now like to open the call up for questions. Operator?

(Operator Instructions) And we do have a question from Mickey Schleien with Ladenburg.

Yes, good morning gentlemen. Four questions, actually. Could you give us an update on the status of FC Capital investment partners? Given that we are in the middle of September, any guidance on additional sales or exits, besides US Path Labs? When do you expect to file your 10-K? And what are the prospects for a stock offering? Because according to my figures, if you fund your investments with the credit line, you're going to get close, probably, to target leverage. That's it from me. Thank you.

In terms of payoffs, Mickey, let’s hit that one, that’s probably an easier one. It’s John speaking. US Path Labs is the recent – most recent transaction to pay off. As you remember, last year we had a significant amount of payoffs happened. With the portfolio growth, we expect that the amount of payoffs based on percentage of portfolio not to be a significant as those loans and assets season and usually there is a lag between – when we have obviously protections against early repayment, so therefore there is usually a lag between repayment and – to fund the assets we put on the books and those assets are repaid. So we expect – certainly for this year, that payoff activity to be below that of last year. Other than that, we’re as up to date as anything with the disclosure on US Path Labs payoff just a couple of weeks ago. Mike, do you want to talk about the 10-K?

Mickey, this is Mike. We are currently in a process of wrapping up the 10-K process. As you know, we are a non-accelerated filer, so we have until of end of the month to get our 10-K on record with the SEC. As we previously disclosed, Rothstein Kass merged with KPMG right at our year end. So they are working through some bells and whistles on their side to get everything tidied up but we anticipate filing in the near term.

With respect to FCIP – this is Gregg. We have looked to use that vehicle when we have investment opportunities as we mentioned are either outsized or don’t fit the profile of what Full Circle can pursue. We definitely have a pipeline of deals that might fit that profile. That being said, we certainly don’t feel comfortable providing any material guidance as it relates to our usage of FCIP but it’s there as – it’s an opportunity for us to provide an incremental source of capital for deals that can be accretive to Full Circle Capital Corporation, FCCC. The question as it relates to equity offering, as we mentioned in the commentary, we’ve really been trying to think about equity offerings as it relates to our pipeline of activity, and we hope you agree we have been somewhat opportunistic as it relates to issuing equity to support the pipeline. You are right to say that our pipeline is growing nicely and for sure the increased availability under our credit facility and the expanded nature of the credit facility are helpful to supporting additional availability for the assets that we are pursuing but we will certainly look at equity to the extent that’s sensible in the context of our pipeline, that we have deals that we can pursue that, that make sense and are accretive to our portfolio.

(Operator Instructions) And at this time there are no further questions. I would like to turn the conference back over to John Stuart.

Okay. Thank you. In closing, we always thank everybody for attending the call and we look forward to speaking with you on our first quarter earnings call which is coming up in mid November. Until then please feel free to reach out to any of the three of us, Mike, Gregg and myself, should you have any questions or comments on the matters discussed on today’s call. We look forward to speaking to you in November. Thanks.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines at this time.