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Full Circle Capital: Avanti Communications and Mast Capital – A Complex Tale

August 4, 2016: As we were undertaking our daily trawl through the hundreds of news stories, filings and presentations  which we do for the BDC Credit Reporter (looking for any change in credit performance in companies that Business Development Companies have invested in), we bumped into an FT Alphaville update on Avanti Communications.

WE WORRY ABOUT AVANTI

This was doubly interesting. First, the UK satellite company is on our Worry List (one notch worse than a Watch List) because Avanti has an avowed cash crunch and not much time left to either raise new capital or be sold. Two BDCs have exposure: Hercules Capital and TCP Capital (TCPC. Back on July 14th,  the BDC Credit Reporter “alerted” readers to the looming need for $50mn at Avanti by the fall.

CONTRIBUTION

Even more intriguing, and noted in a BDC Activist article on July 31st, Great Elm Capital-which proposes to swallow up deeply troubled BDC Full Circle Capital (FULL) and become a BDC itself-also has an interest in what happens at Avanti Communications. That’s because one of it’s constituent owners- Mast Capital Management– proposes to contribute its loan portfolio to the proposed new BDC, and most of those assets are in the form of loans to-guess who ? : Avanti Communications.

DOUBTS. WE HAVE A FEW

When the BDC Activist read the initial filing and the subsequent proxy, we were a little taken aback that assets being contributed to a new entity should be in a borrower in such a period of transition, and whose value in a few weeks may be significantly different. (That’s even before we begin digging into the back story of the very few other loans being contributed by Mast to the new entity).

SO DOES A SHAREHOLDER

More importantly, one of FULL’s  major shareholders also had reservations about the Avanti valuation-amongst other issues-and publicly called on the Board of the BDC to jettison the proposed “merger” with Great Elm and proceed to liquidate FULL’s own portfolio and return the proceeds to shareholders.

Here is what that shareholder-Sims Capital Management-had to say about the Avanti aspect of the deal just a few days ago:

“MAST proposes to transfer $56MM of securities issued by Avanti Communications (Avanti).   Avanti’s debt is rated as “highly speculative”.  We also note that Avanti’s debt is denominated in US Dollars, though Avanti’s business is headquartered in and substantially focused on Great Britain, whose currency has been battered since the Brexit vote.

The Board should revisit whether speculative Avanti securities are investment-worthy.  Further, given the very illiquid market for the securities, does the Board have the tools to value them accurately?  A small error, magnified across $56MM in securities, can cause FULL shareholders to incur a major loss.  The Board should affirm the value at the board level; a decision of that magnitude cannot be outsourced.
If the MAST assets proposed to be transferred to the Survivor are unduly risky or inappropriately valued, then FULL shareholders are severely and negatively impacted.”
UP TO DATE
That brings us to today’s article in the FT. Much of the article is taken up with an update on the aborted offer by a rival satellite operator (and also a UK listed public company) to acquire Avanti Communications. That has come to naught for the moment, but Avanti apparently is in negotiations with two other potential buyers, and may yet have good news to report in the near future. That’s where the BDC Credit Reporter leaves off for the moment.
THE BDC ACTIVIST HAS MORE QUESTIONS
However, the BDC Activist couldn’t help noticing that the FT article claimed Mast Capital Management (and/or funds affiliated with them) “is a substantial bondholder” in Avanti AND owns 10% of the equity of the satellite operator. This raises all kinds of interesting questions:
Are the “substantial” amount of bonds owned by Mast those which they propose to contribute to the new BDC ?
Is there not a conflict of interest in both being a substantial equity shareholder in one Mast vehicle and a substantial bondholder in another vehicle (the new BDC) ?
Why have Full  Circle and Mast Capital Management not highlighted to the former’s shareholders the risks inherent in absorbing $56mn of Avanti bonds and the conflicts of interest between the satellite operator’s shareholder and creditor status, just at a time when those issues might make a big difference.
VALUATION SMALL PRINT
Finally, we’re going to re-read the Proxy to confirm that the proposed merger of Full circle and Mast assets does not include a revaluation at close, but the value being used is the price of those bonds as of May or June when the merger into Great Elm was announced. That would mean-if we’re remembering correctly-that the Avanti debt might be contributed at a price way in excess of what it might be in a few weeks.  That’s good for Mast, but not for Full Circle shareholders.  Of course i) we could be wrong; ii) Avanti could pull off a sale and the value of the debt could rise, iii) the Board of Full Circle could take some action.
CONCLUSION
Admittedly, the BDC Activist has more questions than answers. There will be greater clarity in the weeks ahead as the final version of the very, very long merger agreement between Full circle and Mast assets to form Great Elm is filed and as the fate of Avanti Communications gets decided. We will be keeping an eye out for Full Circle’s shareholders and report back.