Welcome to the Full Circle Capital Fourth Quarter Fiscal 2013 and Year-end Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, September 13, 2013. I'd now like to turn the conference over to Stephanie Prince. Please go ahead, ma'am.

Thank you, Brent, and good morning, everyone. This is Stephanie Prince from LHA. Thank you for joining us for Full Circle Capital Corp's fourth quarter and year-end fiscal 2013 earnings conference call for the quarter and year ended June 30, 2013. With me this morning is John Stuart, Full Circle's Chairman and Chief Executive Officer; and Bill Vastardis, Full Circle's current Chief Financial Officer; and Mike Sell, who will be succeeding Bill as CFO on September 30. 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 John Stuart, 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 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, CEO of Full Circle Capital. John?

Since our last quarterly earnings call this past May, we are pleased to report to you that we have made substantial progress in or completed a series of important strategic initiatives that are designed to allow for continued growth and diversification in our portfolio, lower our marginal cost of debt and lead to growth in net investment income and increase returns to stockholders. These actions are listed on Slide 3 accompanying the webcast. In early June, we refinanced our existing revolving line of credit with a new $32.5 million facility from Sovereign Bank. The new line of credit represents a significant improvement in our cost of debt capital over the company's previous revolving credit facility, which bore interest at LIBOR plus 5.5% per annum. Borrowings under the new facility bear interest based on a tiered rate structure, depending on utilization, ranging from LIBOR plus 3.25% to 4% per annum, or from Sovereign's prime rate plus 1.25% to 2% per annum. The determination of this is based on Full Circle's election at the time of borrowing. Immediately following the closing of the new senior revolving line of credit, in late June, we completed a $21 million offering of 7-year notes with a stated interest rate of 8.25%. Proceeds of the note issuance were used to pay down amounts outstanding under the line of credit. Accordingly, new investments will be funded by drawing up on the line. The 2 facilities came together in the same month and provide very strong complementary attributes. The notes are fixed rate at 8.25% over their 7-year non-amortizing term. This provides important balance sheet stability by diversifying our sources of debt capital, significantly extending the average maturity of our debt as well as increasing our profile in the public capital markets. The notes also complement the line…

Thank you, John. I would like to begin my comments by congratulating Mike Sell on his appointment as CFO, Treasurer and Secretary effective September 30. Mike has worked closely with John Stuart and me for the past several years in various finance and accounting roles at both Full Circle and Vastardis Fund Services, my fund administration firm. As we said in the earnings press release, Vastardis Fund Services will continue to act as Full Circle Capital Sub-Administrator and I will also continue to serve Full Circle as the Assistant Secretary and the Assistant Treasurer. We're all confident that Mike's background, experience, and deep knowledge has prepared him well for his expanded role, and I look forward to continuing to work with everyone at Full Circle. Now please turn to Slide 11, which provides an overview of the fourth quarter and the 12 months financial highlights. For the fourth quarter, net investment income was $1.4 million or $0.18 per share, compared with $1.3 million or $0.18 per share in the third quarter of 2013. Net unrealized gains were $0.5 million or $0.06 per share, compared with $200,000 or $0.02 per share in the third quarter. As a result, we recorded a net increase in net assets resulting from operations of $1.9 million or $0.24 per share, compared to $1.5 million or $0.20 per share in the third quarter. This is an increase of 25.2%, compared to a net increase in net assets from operations of $1.5 million or $0.20 per share for the third quarter. The weighted average share count in the fourth quarter was 7.6 million shares, even with the third quarter. Net asset value per share was $8.01 on June 30. For the 12 months of fiscal 2013, net investment income was $5.4 million or $0.70 -- $0.77 per…

Thanks, Bill. We would now like to open up the call for any questions.

[Operator Instructions] Our first question is from Andrew Carey [ph] with National Securities [ph].

And just had a question about the category 4 loans you guys had in your portfolio. So if you take a look that's down pretty significantly in the quarter. I mean, can we just interpret that as being some of that legacy portfolio kind of rotating out and being replaced by the newer loans?

Well, and in fact, it's some of the loans have moved out and weren't necessarily newer loans. They -- there were loans that moved from category 4 up to category 3 quarter-over-quarter.

Sequentially quarter-over-quarter based on their improvement of performance. Obviously, some companies improve, some companies don't improve, but we -- overtime, we hope to see those numbers more import [ph] to 3. Just for everybody to understand, our rating scale is a little bit different than the broader BDC universe. 3s, when we underwrite a transaction, we put them down as a 3, and if they are adhering to the underwriting standards that we put in place and expectations, when we initially underwrote the deal, they remain at 3. And so we -- you'll see ours as mostly they should be mostly 3s overtime, and you'll see -- I think you'll see some 2s, but rarely 1s, because the fixed return profile of our strategy.

And just, I mean, I guess in terms of how to look at that going forward, I mean, its legacy portfolio kind of continues to move out of the portfolio. I guess, we can kind of the margin, expect to see that number 4 kind of continue to trend down over time, would that be the kind of the -- will it be the correct way to look at it?

That's what we endeavor to do. That's correct.

Got it. That's helpful. And then, I guess also in terms of, if you look at your pipeline kind of within that lower middle market, I mean, you saw roughly a 20 basis points increase sequentially in the yield. I mean, are you guys kind of seeing on the margin better deal structures or kind of reflecting higher loan demand, or is that, I mean, I guess, if you could you just kind of comment on the pipeline that you are seeing for both the leverage and a yield standpoint.

Yes, I mean, the -- even though the average yield moved about 30 basis points quarter-over-quarter and sequential quarter, it -- because we're small, 1 or 2 loans coming in or out of portfolio can affect that. But generally, we're underwriting positions in the 12s, like you can see it on the list on the story of investments. I think we have not seen any real difference in standards of risk in the portfolio of what we're underwriting in our pipeline right now. We have seen some more competition from local and small regional banks, which we hadn't seen before. We've seen that this summer. There is something that -- the phenomena that we actually heard earlier this week at a BDC conference we were at in Washington and some people are echoing that as well. However, we still are nimble enough and the strategy is tailored enough to borrowers that we can effectively compete against that. Okay. Go ahead.

And then, I guess, in terms of, kind of looking at how you guys sort of, I mean, I guess, this from a high level kind of expect, and when you originate kind of a newer investment, I mean, just from a -- kind of a total IRR point of view, if you look at the cash interest versus the equity participation as well as some of the success fees and things like that. I mean, what would be, I guess, kind of going forward, your ideal mix of the different components for generating that total return over time?

The vast return of it obviously is going to be from interest income, and we like most lenders, we charge couple of points upfront and that gets recognized over time as well. But in about half of our deals, we have success fees or warrants. We're seeing a lot more success fees, because they're just easier to document than warrants. And we talked about this on previous calls, that the cost to put in a warrant and deal with equity documents on smaller loans is just -- it's prohibitively expensive. It's not prohibitively expensive, but it's a hurdle. So we have a lot more success fees and we'll have warrants and that we -- obviously, success fees are recognized at the end of the day. They're not like PIK, where you recognize them towards on a recurring basis. So in terms of the vast majority of return obviously coming from interest income, and in terms of success fee and warrants, it's not so much what we factor into our required IRRs, it's what we can negotiate. Really the hurdles that we set out for ourselves are returns based on the interest income. That's really the hurdle that we have to get over. We use that to get over our returns hurdle. Again, I did mention PIK versus success fees. We like success fees greater, but much better than PIK, and as of today, we have 0 PIK in the portfolio.

Our next question comes from the line of Mickey Schleien with Ladenburg.

John, I wanted to ask you about going back to the pipeline in the backlog, given the new structure of the balance sheet and the liquidity that you have, are you -- and you mentioned the slowdown in the summer, can you give us a sense of the scope of the pipeline in the backlog and sort of the pace of originations we might be able to expect on a go forward basis?

And we are -- we have, as I said, we have about $12 million to $15 million right now of borrowing of capacity, which is really 2, 3 deals, 2 or 3 transactions. We clearly feel that, that is achievable in the near term, in the next quarter or so. To get that money out, we have to manage our liquidity with our pipeline and the worst thing in the world was, if we had $50 million of capacity to fund tomorrow and we were capacity liquidity funding constraint. So it's a balancing act that we do, but we certainly feel comfortable that we have based on our pipeline today the ability to fill it up barring any significant payoffs.

Okay. I want also to ask you about interest expense. There's a lot of moving parts.

Yes.

In the numbers given the refinancing of the balance sheet and between cash and non-cash charges. Can you give us a sense on a run rate basis what to expect for interest expense going forward?

Yes. That's a very good question. I'm glad you brought that up, because there is a lot of movement as you said, and we certainly think that's worth discussing. I think it's appropriate that we let Mike Sell answer this, because it's what he does.

As John mentioned, the utilization of our line of credit is going to impact the cost of our debt capital over time due to the differentiation and rate between the notes themselves and the line of credit. and then there's the additional factor of, we have grid pricing on the line of credit, which based on utilization move that rate up and down over time as well. Roughly, our expectation, if we're utilizing approximately $45 million of debt capital against our $60 million equity base would be somewhere between 5.5% to 6% of cash on cash interest expense. Now as we grow the portfolio beyond that, that will obviously come down due to utilization of the line of credit, which has a lower interest expense component.

Okay, that's very helpful. Just a couple of last questions, MDUs marked at what looks like distressed levels -- I'm sorry TransAmerican has marked at, what looks like distressed levels. Can you talk about that and also the MDU acquisition was canceled and I'd like to understand what the outlook there is.

Okay, Mike, why don't you talk about TransAm for a minute.

Yes. TransAmerican is a deal that and this is a portfolio position that we've known for quite a while. They have an extended revenue cycle. And as we've worked through the rebuilding of their business, we've gotten our hands on what that looks like in a slimmed down version of their business. We've seen collections come in later in the cycle, we use to view this as say, a 6 to 9-month collection time horizon, now it will be more of a 9-month collection horizon. We're looking at the top end of that range. The interesting thing here is that they've got more of a backlog and a forward-looking revenue potential than I think we've seen in the past, at least since we've taken over the business and put our management team in place. But in terms of the near-term collections, we're still working off of what we initially took over from the business and we're able to bring in on Day 1. So what we're really looking at here is the potential for this to define itself over the coming months in terms of what the long-term cash on cash return is going to be here. Given that there is a little more uncertainty there than there was on Day 1 due to the extended collection cycle. I think there was a mark down on the position over the quarter and then that's appropriate.

Okay. And MDU, it was going to be taken out and the acquirer was taken out itself. So that was tabled what -- and I think the loans are coming due soon. What's the outlook there?

You're talking about the multi-band deal?

Yes, yes.

Well, they -- I guess a couple of weeks ago, they entered into an asset purchase agreement for substantially all of their assets with the company called AM3. So that basically is where most of their assets are being purchased in a first transaction then the second set is under LOI to be purchased by the same buyer. So they have lined up an alternative transaction that they're looking to as it means to that they've signed up and they're looking to take us out, to pay us off.

[Operator Instructions] Our next question comes from the line of Casey Alexander with Gilford Securities, Inc.

I wanted to take sort of the other side of that liquidity question. When I walk through your portfolio, I count up to 43% or around $39 million is coming due in the next year, so that's going to require some significant replacement capacity in order to keep your net investment income up to snuff. Sort of what's your plan for that, last year, you originated $22 million, in order to get some portfolio growth, you're going to have to go over $40 million, we are taking some bigger bites out of some of these club deals or how do you plan on replacing some of that the portfolio maturity and that does even count early payoffs?

Yes. Now this is -- Casey, it's actually a question to Mickey's asked a lot over the timeframe that we've been public. Number one, the prior year, we did about $45 million of originations. The $20 million that we highlighted in the prepared remarks, the $22 million that we highlighted in the prepared remarks when we're a capacity -- funding constrained basically. So we basically feel that we can definitely replace those that which is coming due that is either paid off or in certain cases, we may elect to stay in the credit and renew the credit and extend the term. And remember, we only -- we mostly lend money on a 3 or 4-year basis. So even on that, you're going to have somewhere between 25% and 33% of your portfolio facing maturity over the next year on --assuming the static portfolio. Again, as I said, we oftentimes seek to stay in the credit. Remember a lot of these companies are going through -- need growth capital. And therefore, it's pretty likely that they may want to stay in. Further to that, you mentioned something about club deals. You will notice that we have been doing -- we have been participating a lot of deals out, out to other lenders alongside of us. Infinite Aegis for example, Coast Plating was another one.

Yes. That's what I meant, if I'm mischaracterizing them as club deals, I apologize.

No, that's how you should characterize them, and one of the things that we will seek -- we are seeking to do is, do more transactions with other BDCs, one because it leverages everybody's origination platform and allows us to do larger deals and get the benefit of doing larger deals that would be too big for us from concentration, but due to our concentration limits. So yes, that is part of the strategy to grow that even further, the origination.

Our next question is a follow-up from the line of Andrew Carey [ph] with National Securities [ph].

Yes. Just had a quick follow-up question, what is roughly the weighted average floor rate on your variable loan portfolio?

Weighted average floor, we don't have -- we have very limited floors, meaning that they are mostly referenced off of LIBOR with no floor.

I believe there is only 2 portfolio instrument currently that have floor rates embedded in them.

Got it. So we can interpret, basically in more or less kind of a straight line interest income appreciation as rates move up, sort of in a rising rate environment more or less?

Yes, I think that's what we were trying to convey in the slides and the presentation.

Right. Okay, just wanted to check.

Okay.

And there are no further questions at this time. Please proceed with your presentation or any closing remarks.

Okay. Well, I want to thank you for attending the call today. We certainly enjoy it when there is good back and forth dialogue and good questions, because it gets -- helps to get the story out and emphasize some of the things that we need to emphasize and answer your questions. Given that this was our year-end June 30 call, our 10 -- our reporting on our 10-Q is only 45 days away, or 2 months away, 60 days away. So we will be back out to you in short timeframe to talk about the September 30 quarter and progress made to that. Okay, we look forward to speaking with you then, and as always, we're available for any call -- calls to discuss anything further from this earnings call. Call either myself or Mike or Bill with any questions.

I also wanted to add, this is Bill Vastardis. It's been pleasure being on these calls over the past 3 years and I look forward to the continued success of Full Circle Capital and I'll say goodbye to everyone for now.

Okay, thank you, and we'll stay in touch, 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.