Debt Financing with a Thin Equity Capital Structure June 20, 2014 Presented by Opus Connect Moderator: Britt Terrell, Backbone Capital Advisors Panelists: David Ellis, GemCap Solutions Stewart Kim, PGP Capital JR Matthews, Tregaron Capital John Stuart, Full Circle Capital Sponsored by: 1
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(818) 508-8462 www.backbonecap.com Backbone Capital Advisors is a full-service professional financing arranger, providing traditional and non-traditional capital sourcing, with complete execution, for middle market businesses that require debt financing and other capital solutions. Maximum Financing at Optimum Terms We work closely with each borrower and sponsor to procure maximum financing at optimum terms, while assisting, advising and driving each step of the process from inception to funding. Corporate Financings We accommodate transactions for leveraged acquisitions, leveraged recapitalizations, financing for growth and shareholder liquidity and refinancing existing debt. Transaction Types We have expertise in all types of debt, including assetbased, senior cash flow, 2nd lien, mezzanine, unitranche, and other solutions across the capital structure of the borrower. Who We Work With We support private equity firms, independent sponsors, professionals and direct operating companies to achieve all outsourced financing solutions. Established Relationships We have strong relationships with more than 200 banks, finance companies, and debt and private equity funds in all areas of financing, including special situations for more challenging capital sourcing. Local to Global We have access to both domestic and international lenders for large and small deals, with average deals ranging from $5 million to $50 million. And, we can easily accommodate deals outside this range. Professional Execution We combine service, flexibility and extensive knowledge of the marketplace to ensure that our clients needs are met with the highest level of expertise. Britt Terrell Founder & Managing Director Backbone Capital was established in 2011 by Britt Terrell, a 25-year veteran in the middle market corporate finance industry. Britt has been underwriting, structuring, closing and managing credit portfolios since the mid-80s, with a focus on middle market acquisitions and corporate debt restructuring over the last decade. He has worked on both the borrower and lender sides, working mainly in the middle market debt financing arena with transactions ranging from $10 million to $ 50 million. In 2001, Britt joined the Wells Fargo Foothill Los Angeles headquarters to manage its Underwriting Department, representing approximately $1 billion in commitments. In 2002, Britt joined the Gores Group in Los Angeles to arrange and manage all acquisition debt financings and recapitalizations for its Private Equity Fund. During his 9 year tenure at Gores, Britt led and closed approximately $2 billion in debt financing. Britt is a member of the Association for Corporate Growth (ACG), Turnaround Management Association, Opus Connect and All Cities Group, and has participated in multiple discussion panels at the Commercial Finance Association (CFA) conferences. He holds a BA Degree in Business Economics from University of California, Santa Barbara, with an emphasis in Accounting. 4
Target Market GemCap: Asset Based Lender specializing in underserved niche market GemCap was launched June 2008 to fill the underserved niche within the asset-based lending community for senior commercial loans ranging between $0.5 million and $ 10 million. Target clients are lower middle market companies whose working capital needs are no longer being met by their local banks. 12-24 month typical loan duration. Collateral typically includes receivables, equipment and inventory; occasionally includes intellectual property and real estate. Inventory & equipment loans based on percentage of asset liquidation value; receivables competitive with market. Personal and validity guarantees are common. 6
Niche Market Typical Clients include: Import / Export Small Business Owners Rapid Growth Companies Start-Ups Inventory Greater Than Receivables Bridge Loans Low Cashflow; No Cashflow 7
David Ellis Co-President David Ellis is Co-President and a co-founder of GemCap. As a leading expert in the liquidation and asset appraisal industries, Mr. Ellis applies his experience and connections throughout all facets of GemCap. Through 2006, David Ellis served as President of Buxbaum Group and compiled 20 years of experience in the liquidation business. He completed 13 years of experience with Buxbaum Group, having joined the company in 1988, and following a three-year hiatus in 1991, rejoined the company during 1994. Under Mr. Ellis s direction, Buxbaum Group grew from a five person liquidation firm to a diverse international company with over 1,000 employees. Areas of focus were asset disposition, asset appraisal, asset-based lending, turnaround management, and distressed equity. During his 1991-1994 hiatus from Buxbaum Group, Mr. Ellis served as a member of H.J. Heinz Corporation's consulting team. At Heinz, Mr. Ellis implemented the structure and operational procedures for a global food segment's acquisition program and their marketing, production, and distribution functions. David Ellis has served on the board of directors for Talon International (TALN) since 2010. David is active with the Young President s Organization (YPO), Turnaround Management Association, and Commercial Finance Association. Mr. Ellis received a 1984 Bachelor of Arts degree from Texas A&M University. David Ellis 24955 Pacific Coast Highway, Suite A202 Malibu, California 90265 T: 310.593.9074 E: dellis@gemcapsolutions.com 8
PGP Summary Executive Summary Headquarters: Snapshot of Firm Established: 2003 Products: Los Angeles M&A Advisory Private Placements Fairness Opinions Founder / Managing Partner Bio Stewart Kim: Over 25 years of experience in the financial services industry with the last 15 years spent as CEO of PGP (investment banking) and Pacific Gemini Partners (asset management); former M&A banker at Merrill Lynch & Co. from 1988-1995 Target Niches: Key Industries: Strategic Investors: Latest Transaction: Ethnic-owned Businesses Cross-border Asia Media Technology Financial Services Consumer East West Bank CashCall, Inc. Placement agent for Creative Artists Agency Ventures LP $20m fund closing (March 2014) Current Mandates M&A advisory for major Asia-based smartphone game developer. Potential JV in U.S. with leading media company Sale of privately-held business services company Equity private placement for leading distributed database software provider Debt private placement to finance acquisition by publicly-traded mobile solutions provider. Fairness opinion requested as well Equity private placement for leading audio ondemand platform provider looking to raise equity Company Website: http://www.pgpcapital.com Equity private placement for leading global producer of all-natural, zero-calorie sweetener alternative to stevia 9
Selected Transactions Executive Summary & Golden Bear International, Inc. & has acquired Has merged with have formed a $440,000,000 Joint Venture We acted as advisor to EarthLink, Inc. in negotiating this joint venture have entered into a strategic relationship and formed Nicklaus Companies, LLC We acted as exclusive financial advisor to Golden Bear International, Inc. We acted as financial advisor to MultiCultural Radio Broadcasting, Inc. in both negotiating the acquisition and obtaining financing for the transaction We acted as exclusive M&A advisor to Nimble Commerce Inc., a portfolio company of SK Telecom, the largest wireless network operator in Korea, in originating and negotiating this transaction Has merged with Recapitalization We acted as exclusive financial advisor to Broadway Financial Corporation and assisted with arranging the private placement as well as negotiating terms of the recapitalization with the U.S Treasury and other security holders $12,025,000 Common Stock We acted as financial advisor to Saehan Bancorp and assisted with arranging the placement We acted as M&A advisor to Salient Stills, Inc. in consummating this transaction $40,000,000 Debt Facility We acted as financial advisor to CashCall, Inc. and arranged this facility 10
About Tregaron Investing out of a $65 million fund closed in 2011, Tregaron Capital is a Palo Alto-based private equity firm that specializes in investing in small to mid-sized companies with annual EBITDA of $1 to $5 million. We focus on providing capital for growth and owner liquidity, as well as strategic support to achieve the next level of success. Tregaron is designed to provide senior attention to each opportunity and portfolio company. Our senior partners bring substantial skills, experience, and energy to each situation, enabling fast and confident decision making and meaningful support in building the business. Industries of Interest Technology-Enabled Business Services Nutraceuticals Information Services Commercial Landscape Maintenance For-Profit-Education Environmental Services Control Equity Mezzanine Debt Transaction Types 11
JR Matthews JR has been performing successful buyouts for nearly 20 years, as both an executive and an investor. While still in his twenties, he led the buy-out and served as CEO of his family s wholesale, retail and real estate companies. Over 10 years, he grew the companies to over $80 million in revenue and 300 employees and successfully exited through a strategic sale. As an investor, JR has focused on special situation and growth opportunities. Before founding Tregaron, he invested actively as both a venture capital and private equity investor focusing on growth and special situation opportunities. Matthews received a BSE in Electrical Engineering from Duke University with Phi Beta Kappa, summa cum laude honors and Distinction and an MBA from Harvard Business School. He is on the Board of Visitors of The Pratt School of Engineering at Duke University and is a past Board Member of Leadership Public Schools a charter school network serving diverse students in Richmond, Oakland, Hayward, and San Jose. 12
Full Circle Capital Overview Full Circle Capital Corporation Profile Publicly traded business development company; ticker: NASDAQ GM FULL Closing price on June 18, 2014: $7.96 per share Shares Outstanding: 11.4 million; $88.1 million equity market capitalization Annualized Distribution Yield: 10.4% (based on monthly distribution rate of $0.067 cents per share) Investment Strategy Primarily provide first lien senior secured loans and stretch senior secured loan solutions to lower middle market companies in a diverse range of industries Lend to companies with both cash flow for debt service and underlying assets as collateral Source investments through direct origination platform focused on lower middle market and through purchases in secondary market Investment / Loan Profile Loan sizes: $3 million to $10 million or more Focus on companies with $2 million to $10 million of EBITDA Term and Revolving Line of Credit facilities Use of funds: growth capital, acquisitions, refinancings, recapitalizations Since Inception in 2005 Executed over $350 million in senior secured loans to 67 smaller and lower middle market companies 13
Full Circle Capital Team John E. Stuart Co-Chief Executive Officer, Chairman Full Circle Advisors, LLC: Managing Member Full Circle Funding, LP: Managing Partner Prudential Securities: Managing Director (Investment Banking) Oppenheimer & Co. Inc.: Vice President (Investment Banking) Titan Outdoor Holdings, Inc.: Co-Founder, President 25+ years of experience Gregg J. Felton Co-Chief Executive Officer, President Full Circle Advisors, LLC: Managing Member and Chief Investment Officer Goldman Sachs: Partner, Managing Director, Head of Global Credit - GSAM Goldman Sachs Liberty Harbor: Founder, Chief Investment Officer Amaranth Advisors: Senior Portfolio Manager, Head of Global Corporate Credit 20+ years of experience 914-220-6250 jstuart@fccapital.com 914-220-6280 gfelton@fccapital.com Patrick Stone Associate Origination Officer 914-220-6282 pstone@fccapital.com Michael Gervais Managing Director Healthcare Strategies 914-220-6285 mgervais@fccapital.com Brian Neilinger Managing Director Real Estate Strategies 914-220-6292 bneilinger@fccapital.com 14
Senior and Stretch Senior Secured Lending Provides borrowers with a more efficient and desirable solution than a senior bank line combined with a separate second lien or mezzanine loan obtained from another source Stretch senior loans advance more against borrower s assets and cash flow and stay within Full Circle s preferred 2:1 (40% to 60% LTV) collateral coverage parameters Benefits to Borrower One-stop financing solution Speed and certainty to close Flexible terms and structures Traditional Loan Structure LTV Stretch Senior Loan Structure LTV 35% 15% 20% 30% 40% to 60% 10% - 20% 30% Benefits Higher Advance on Assets and Cash Flow Single Set of Documents (No Intercreditor Agreement Necessary) Ability to Close in Compressed Timeframe The above illustrations are based upon management s experience and current market conditions. Be advised that these illustrations do not represent the capital structure of any particular borrower, and figures included therein could change significantly as a result of future market conditions. 15
Overview This panel is focused on higher yielding debt/equity investments in the lower middle market These companies tend to have more storied profiles and/or thinner equity capital structures In the more operationally challenged and undercapitalized companies, Asset Based Lending is the main financing source, or dilutive equity structures 16
Acquisition Financing Independent Sponsor: Supporting the Independent, Pledge Fund (backed by HNW) sponsor. This usually translates into: i. Seller structure (seller note, contingent earnout, rollover equity, etc ) ii. lower cash equity invested by buyer Is this a Capital Structure that lenders can get comfortable with, and how? Minimum Equity cash investment (%) required? In exchange for less cash invested by buyer, what does your fund look for in terms of structure, collateral, yield, etc 17
Acquisition Financing Opco buyer With operating company (no sponsor) as the buyer acquiring target, using implied rollover equity of buyer with less new cash equity. Is this a Capital Structure a lender/investor can get comfortable with? Minimum Equity cash investment (%) required? In exchange for less cash invested by buyer, what does your fund look for in terms of structure, yield Equity Warrants or co-invest, when does your firm get them & approximately what %? When does bigger minority equity (Preferred) structure begin, and into control equity? 18
Investment Banking in lower Middle Market Raising Equity Buy-Out vs. Growth Capital Management/Ownership Stay or Go? Size Minimums Shift Ever Downward Investors - Private Equity Fund - Family Office / Multi-Family Office - Entrepreneur / Seasoned Executive - Competitor Sourcing - Traditional Bankers - Alternatives 19
How does your firm compete in a competitive financing process? What are the key elements of a deal structure you are looking for? 20
What are some examples of thinly capitalized deals you recently closed? 21
What are some of the nuances in the inefficient lower end (EBITDA <$4M)? Seemingly less competitive? Quality of information, Diligence requirements Management, internal controls Etc 22
As an investment banker in a sell-side scenario, when you get bids from more thinly capitalized prospect buyers: What are you looking for? What are your concerns? How do you get comfortable when down-selecting bidders? 23
Summary Financings are able to get done under lower middle market and challenging circumstances, but it s not cheap and there are controls, restrictions and lender remedies Structures can be demanding and can be equityoriented, but appropriate balance of risk/reward, especially in lower middle market finance with thinner capital structures 24
Q&A with the Panel Please submit your questions via Q&A to All Panelists 25
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