Description

Full Circle Capital Corporation (NASDAQ: FULL)

Full Circle Capital is a BDC that trades at a 22% discount to NAV, paying a monthly fully supported dividend of 3.5c for a total yield of 11.6%.  Activists are taking notice of the discount and the BDC space could soon gain more attention due to legislative reform.  Here is a chance to participate in a "Management reset" of the book alongside some seasoned debt investors that have put up significant personal money alongside shareholders, as well as reputational capital.  Downside is protected by both the book and platform value.

Business Description

Full Circle Capital Corporation (NASDAQ:  FULL) is a publicly traded Business Development Company (BDC) formed in April 2010 under the 1940 Act. The Company primarily provides first lien senior secured loans and stretch senior secured loan solutions to middle market companies in a diverse range of industries.  FULL is structured as an externally managed non-diversified closed-end management investment company.

Valuation

Last price (June 15^th 2015): $3.62

Shares outstanding: 23.2m

Market Cap: $83.6m

Net Asset Value (NAV) on March 31, 2015: $4.43

Discount to NAV: 22.3%

Monthly/Annual dividend: $0.035/$0.42

Yield:  11.6%

Trading data

Average Volume: 171k/day ($615k/day)

52 wk high: $8.35

52 wk low: $3.46

Background

FULL went public in September of 2010 at $9.00 per share.  A lack of scale, collection of bad loans that had to be written down, management changes, a cut in the distribution, dilutive equity offerings, and an ensuing lack of confidence have forced shares down to all-time lows of $3.50-$3.60 today.

FULL’s investment criteria/strategy is listed as follows:

 • Investments generally range in size from $3mm - $10mm.

 • Lend to companies with both cash flow for debt service and underlying assets as collateral.

 • Source investments through direct origination platform focused on middle market and through purchases in the broader secondary market.

Since 2005 the Company has executed over $450m in senior secured loans to 84 companies.

FULL muddled along after its IPO commencing monthly distributions in Aug of 2011.  During this time, the Company paid out a monthly distribution of $0.077c per share.

Over the next years, trouble in the loan book would start to arise, and the Company paid dividends that were not covered by net interest income.

Financing History post IPO – investors have lost each time

In 2014, FULL sold equity on two separate occasions to raise assets.

January 14, 2014

Sold 1,650,000 shares of common stock at $7.13 per share for gross proceeds of approximately $11.8 million.

February 27, 2014

Sold 630,000 shares of common stock at $7.81 per share in a direct registered offering to certain institutional investors for total gross proceeds of $4.9 million.

**FULL first cut its monthly distribution from $0.077 to $0.067 in Feb of 2014.**

June 19, 2014

Sold 1,351,352 shares of common stock at $7.40 per share in a direct registered offering to certain investors for total gross proceeds of $10.0 million.

What Happened?

FULL’s problems have stemmed from two main issues: (1) Being a subscale platform and (2) Legacy loans that needed to be written down.

While (1) may still be true to some extent, we think that the recent rights offering in Feb (more on this later) gives FULL the capital they need to get up to scale.    We think that (2) has finally been fully addressed as CEO Gregg Felton is done with the “reset” that needed to happen here to clean up the book.  Only six names represent 84pct of legacy post IPO credit losses.

On Nov 7, 2013, FULL brought in Gregg Felton as President and Co-CEO.  Felton appears to have had a solid track record at Goldman Sachs where he was a Partner and Managing Director and the Founder and Chief Investment Officer of Liberty Harbor, Goldman Sachs Asset Management’s credit alternatives platform.  Prior to that he was  a senior principal at Amaranth.    When he joined FULL, he should have taken immediate steps to write down the legacy loans that were troubled.  Instead, the Company went through a series of capital raises in 2014 before ultimately doing a full on “reset” via a rights offering in Feb of 2015.

Feb 10^th2015 Conference Call – Felton discusses “reset”

“Consistent with our communications over the past few quarters, we have been carefully working to reset our portfolio and better position the business to generate enhanced risk-adjusted returns in an effort to create sustainable stockholder value going forward. While this has taken substantial time and patience, we have made many difficult decisions regarding our challenged investments and continue to work toward either restructuring or exiting these positions. For example, TransAmerican Asset Servicing Group and Takoda Resources were put on nonaccrual this past quarter, and we are working expeditiously to resolve these positions. We are also moving forward with the sale or liquidation of ProGrade Ammo Group. Through the work we've put in on resolving these assets, we now have significantly more visibility with these investments, and as a result, we have been able to further fine-tune our marks during the fiscal second quarter.

Overall, for the second quarter, due to our larger investment portfolio, we were able to achieve net investment income per share of $0.19, nearly covering our current distribution rate of $0.20 per quarter as declared through March. However, as a result of these -- of several factors including both the widening risk premium in credit markets as well as some of the legacy portfolio issues referenced earlier, we took several write-downs in the quarter, reducing our net asset value to $5.48 per share as of December 31. Approximately 58% of this quarter's write-downs were attributable to legacy assets, 27% to equity write-downs, and the balance to lower credit valuations, partially driven by credit spread widening during the quarter.”

Rights Offering

In February of 2015 FULL announced a dilutive rights offering that doubled the Company’s shares outstanding.  Management marketing the offering as effectively a fresh start for the business, reassuring investors that all of the problem loans in the book had been resolved or written down to their appropriate values.  NAV had been “scrubbed”.

The Company offered non-transferable rights to stockholders of record on March 6, 2015, which expired on March30, 2015.

Rights entitled holders to subscribe up to 11,949,034sharesofcommonstock at a subscription price of $3.50 per share.

Total proceeds after expenses were $37.9m

11,205,921 shares were issued as a result of the offering

Full Circle Advisors, the Management Company led by CEO Greg Felton, committed to $5m of the offering.  In addition, Felton appears to have oversubscribed in the rights offering  where he purchased 445,050 shares at $3.50 each bringing his total direct ownership to 667,101 shares.

As a further inducement to shareholders, upon completion of the rights offering, for the periods commencing on April 1, 2015 and ending on June 30, 2015 and commencing on July 1, 2015 and ending on June 30, 2016, Full Circle Advisors agreed to waive the portion of the base management fees and incentive fees that Full Circle Advisors would otherwise be entitled to receive pursuant to their Investment Advisory Agreement to the extent required in order for Full Circle Capital to earn net investment income sufficient to support the distribution to common shareholders on the relevant record date for each monthly distribution as then declared by the board of directors.

In addition, as part of the rights offering, an institutional investor committed to purchase approximately 214,000 shares in open market transactions over a seven-day period following the expiration date of the rights offering. Subsequent to the seven-day period, on April 13, 2015, such investor acquired 80,475 shares, the remainder of its initial commitment of approximately 214,000 shares, in a private placement at $3.50 per share directly from the Company.

With the rights offering completed, FULL ended the quarter with approximately $70 million in investment capacity from which it made $13.7 million in new investments in the month of April.

Meeting with FULL Management

We met with FULL’s CEO and CFO in February just after the Rights Offering was announced.  We found them to be straight shooters whose interests seemed aligned with Shareholders.  CEO Gregg Felton took us through several aspects of the loan book and shared his strategy and vision for disciplined underwriting.  Felton believes that FULL post right offering finally approaches scale and is excited by both the deal pipeline and origination platform that they have in place.  While it is hard to imagine how FULL could have lost so much money in the past by lending on a senior secured basis, Felton seemed quite confident that history would not repeat on his watch. 

Good Technologies Investment

All of FULL’s investments are disclosed in its public filings, so there are no secrets or surprises.  However, this does not mean that some investments may have additional upside than simply a coupon and eventual repayment.  FULL Management told us about an investment in mobile device management technology firm Good Technology (“Good”), a pre-IPO Company that came with an equal amount of warrants.  We looked into this name further.  On their Nov 11, 2014 Conference Call, Management stated “I'd like to highlight one of the larger investments that we closed during the quarter. Good Technology is one of the leading players in the mobile device management sector, which is focused on ensuring information security for corporate clients. We purchased $20 million of an $80 million first lien financing for this company, including $10 million that we placed with FCIP investors. While the stated coupon is only 5%, our all-in return is expected to be in the high teens as this financing has a 115% redemption price at its 3-year maturity.  Moreover, we received 4-year warrants to acquire equity in the company, which is expected to go public by March of 2016.”

FULL filings show that it has the following investment in Good:

    Good Technology Corporation

Good is a leading secure mobility platform for enterprises and governments worldwide. Its platform enables secure access to applications and data across devices and operating systems and delivers comprehensive mobile lifecycle management capabilities to build, deploy, manage and support these applications.  According to SEC filings, Good had $214m in revenue in 2014 and over 6,000 customers.  The Company has been estimated to grow at least 20% in 2015.  We will use $250m in sales as an estimate of 2015 sales.

Good said it expected to try to raise up to $100 million when it first filed its public plans last May (2014) but hasn't said anything about how much it might seek in an IPO in its filings since then.  It has raised more than $200 million in financing since it was founded in 1996. Oak Investment Partners is its biggest shareholder with a 21.5 percent stake, followed by Draper Fisher Jurvetsonwith 11.2 percent. Other investors who own more than 5 percent of the company are Lazard Technology Partners (7.2 percent), Meritech Capital Partners (6.2 percent) and Saints Rustic Canyon (6.0 percent).

Link to Good’s most recent SEC filings: http://www.sec.gov/Archives/edgar/data/1089196/000119312515079062/d520327ds1a.htm

FULL CFO Michael Sell told us that FULL’s warrants in GOOD ratchet down to the lower of $1b or the value at which Good comes public.  Thus, FULL may be able to harvest a significant gain from its Warrants in Good.  The table below illustrates various valuations for Good based on multiples of projected 2016 sales. 

 On a per share basis this could increase NAV by $0.20 to $0.40 in reasonable upside scenarios.  On a $3.60 stock this isn’t a game changer but represents a small upside that likely isn’t being priced into the shares.

Management

Since FULL is heavily dependent on its CEO and execution, here is more on Felton:

CEO Biography

Gregg J. Felton is our Chief Executive Officer and President and is primarily responsible for overall investment strategies and portfolio management. Mr. Felton is also a Managing Member and Chief Investment Officer of Full Circle Advisors and a Managing Member of Full Circle Service Company. Mr. Felton joined Full Circle Capital in November, 2013. Prior to joining Full Circle Capital, from 2006 to 2013, Mr. Felton was a Partner and Managing Director of Goldman Sachs and the Founder and Chief Investment Officer of Liberty Harbor, Goldman Sachs Asset Management’s credit alternatives platform. He oversaw various investment vehicles, including hedge funds, mutual funds and institutional managed accounts and facilitated the launch of Goldman Sachs’ business development company, Goldman Sachs BDC. From 2009 to 2010, Mr. Felton was Head of Credit for Goldman Sachs Asset Management, overseeing approximately $60 billion in assets. Prior to joining Goldman Sachs, Mr. Felton was a senior portfolio manager at Amaranth Advisors, a multi-strategy hedge fund located in Greenwich, Connecticut. He led Amaranth’s global corporate credit investment team from 2000 to 2006. Prior thereto, Mr. Felton was a Vice President at Chase Manhattan Bank, where he served as a portfolio manager and senior analyst for Chase’s Special Situations Fund. Mr. Felton began his career in the High Yield Finance Department of Chase’s Global Investment Bank. In 2013, Mr. Felton partnered with an investment management firm to form Altus Power America, an investment vehicle that focuses on solar power generation assets. In addition, Mr. Felton serves as a Director of Rye Country Day School. Mr. Felton’s broad experience managing investment vehicles and funds provides the Board of Directors with industry expertise and a valuable perspective on a variety of credit transactions. Education—B.A. Tufts University, 1992; J.D. Georgetown University Law Center, 1996; M.B.A. Georgetown University School of Business, 1996.

Other Factors that set the stage for upside in BDCs

1.       Legislation could pass that would make it possible for BDCs to exceed their current 2-1 leverage ratio.

2.       Legislation could pass that would make it possible for RICs to own more than 3% of another RIC.

3.       Regs could pass that would eliminate the double counting of fees for funds that invest in BDCs.  Today, a mutual fund must include the BDC manager’s expenses when reporting the expenses for her mutual fund.  This inflates the expense ratio unfairly and makes the investments appear unattractive.

4.       IBDCX gaining traction with retail distribution (Full Circle Advisors’ BCD Mutual Fund) increases visibility into the space.

5.       Phil Falcone and Phil Goldstein (see below) are both seasoned activists that could be putting BDCs into play (Falcone working on MCGC takeover).

 Bulldog Investors (Phil Goldstein) File 13-D on FULL

 Bulldog filed a 13-D on FULL on Jun 4^th and Jun 5^th reporting an ownership stake of 5.69%

 Here are some of Bulldog’s most recent purchases (date / shares / price per share):

04/07/15                           65,725                  3.5000

04/07/15                           966,906               3.5000

05/06/15                           11,300                  3.4931

05/07/15                           12,543                  3.5000

05/11/15                           5,310                    3.5000

05/12/15                           11,821                  3.5000

05/13/15                           2,927                    3.5000

05/14/15                           16,669                  3.4998

05/21/15                           3,200                    3.5000

05/26/15                           40,909                  3.5300

05/27/15                           50,000                  3.5194

05/28/15                           50,000                  3.5093

06/01/15                           14,000                  3.5176

06/03/15                           7,997                    3.5200

Comps

Top Holders                                    (Shares / percentage / value / date last reported)

Full Circle Advisors                         1.38m                   5.9          5m          Mar 31, 2015

Goldman Sachs                                1.38m                   5.9          5m          Mar-31-2015

Bulldog                                             699,782               5.7          5m           June-4-2015

Felton J.D., Gregg J.                         667,101               2.87       2.4m         Apr-16-2015

Highbrace Capital, LLC                  197,525               0.85       0.7m         Apr-16-2015

Nantahala                                       149,055               0.64       0.5m         Mar-31-2015

Potential Activist Target

FULL is a good activist target for a few reasons:

 1.       NAV protects downside; monthly dividends should ensure marginal return in downside scenarios.

 2.       Management has something to prove, but you can use the poor track record of the Company to put them on notice that investors will not tolerate any more years of losses.  The Company needs to either find good investments or return capital to shareholders.

 3.       The deep discount to NAV gives the activist a platform to pressure Management to close the gap.

 4.       Opportunity to “piggyback” on existing activist (Bulldog) with strong reputation.

Mini Model (2 year holding period)

Year 1

Starting NAV: $4.43

Earnings: $0.46c

Dividends: $0.42c

Ending NAV: $4.47

Year 2

Starting NAV: $4.47

Earnings: $0.53c

Dividends: $0.42c

Ending NAV: $4.58

Exit

Addendum: Portfolio Info (Source: Company Presentations)

Catalyst

BDC sector gains more attention and the deep discount to NAV narrows due to (1) series of profitable quarters and adequately covered distributions builds (2) regulatory changes mentioned in the write-up (3) activist shareholder activity / consolidation  (4) inability to capture adequate yield in other asset classes makes this a 8% yield stock (would trade up to $5.25 from $3.60)