MCG Capital Corporation (MCGC)

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MCG Capital (MCGC)

Q4 2012 Results Earnings Call

March 5, 2013 10:00 a.m. ET


Hagen Seville - President and CEO

Keith Kennedy - CFO

Tod Reichert - General Counsel and Chief Compliance Officer


Troy Ward - KBW

Rick Fearon - Accretive Capital

Steve Seperson - Compass Point



Good morning ladies and gentlemen and welcome to the MCG Capital fourth quarter fiscal year 2012 results conference call. [Operator instructions.] Mr. Hagen Saville, president and chief executive officer, will now begin the conference. Please go ahead.

Hagen Saville

Thank you, operator. Good morning everyone. Welcome to the Q4 2012 earnings call for MCGC Capital Corporation. I’m here with our chief financial officer, Keith Kennedy, and Tod Reichert, our general counsel and chief compliance officer. Tod, will you take us through the Safe Harbor statement?

Tod Reichert

Sure. Thanks, Hagen. Good morning everyone. Before we begin, we would like to remind you that various statements that we may make during this morning’s call will include forward-looking statements as defined under applicable securities laws. Management’s assumptions, expectations, and opinions reflected in those statements are subject to risks and uncertainties that may cause actual results and our performance to differ materially from any future results, performance or achievements discussed in or implied by such forward-looking statements and the company can give no assurance that they will prove to be correct. Those risks and uncertainties are described in the company's earnings release and in its filings with the Securities and Exchange Commission.

With that, I will turn the call back over to our CEO, Hagen Saville.

Hagen Saville

Thank you, Tod. We canceled our Q3 earnings call as Hurricane Sandy came ashore, so it has been seven months since we last spoke in this format to discuss the repositioning of MCG. I’ll take this opportunity to speak in detail about our accomplishments during the last year, and our three-year operating plan. Keith will then take us through the specifics of the Q4 and full year 2012 financial results, and following his remarks, we will open the line for questions.

Before we begin, I’d like to thank Rick Neu for his service as CEO and B. Millner and Hugh Ewing for their service on the board. B. has worked with the company since it was established as an independent entity in 1998, and Hugh was a member of the board for five years. Hugh and B. provided wise counsel during and after the financial crisis. Their contributions helped guide us through that difficult period and the planning associated with our efforts during the last year.

Rick has now returned to his role as chairman of the company after gaining a deep understanding of the company’s professional complement, its operations, and assets from his time as CEO. This added insight confirms the tight integration of management and the board regarding the business plan and the scorecard for management going forward.

2012 effectively marks the end of a 15-month process we undertook to reengineer the company to reduce risk and create a platform with a more predictable earnings and dividend stream, and to position the company for the future with embedded operating leverage and the capacity for growth and earnings. There is no question that we have made significant progress in laying the groundwork for 2013 and beyond.

During 2012, we successfully achieved a series of objectives. First, we continued to monetize control and standalone equity investments as well as debt investments with significant minority equity ownership positions, thus eliminating associated last dollar valuation risk and time consuming oversight responsibilities.

Second, we’ve become more granular through the sale or repayment of a handful of our largest investments, including the repayment of NDSSI shortly after year-end, a $33 million debt and equity monetization. We’ve instituted a new policy eliminating underwriting and hold positions to $25 million and $15 million respectively, which will create added granularity over time.

Third, through sale or repayment of $412 million of assets during 2012, we have substantially proven the book value of the company. Fourth, we have repaid or significantly reduced credit facilities containing covenant packages and borrowing bases which have, over time, proven to be inappropriate for financing small business loans.

Fifth, our fully loaded cost base has been reduced to enable us to operate at 2.3% of total assets, including incentive compensation, which is earnings dependent, and we’ve meaningfully simplified our back office operations in accordance with the requirements necessary to manage the portfolio comprised primarily of loan assets.

Sixth, during Q4, we closed on an unsecured revolving credit facility which will enable full utilization of our balance sheet for maximum earnings power on the current capital base. Finally, we recently earned a green light letter from the SBA for a second SBIC license, an important milestone in returning the company to earnings growth.

With regard to capital management, during 2012 we repurchased 6.2 million shares of stock at an average price of $4.40 per share and 18% weighted average discount to NAV, and we paid $0.58 through five dividend payments, all of which will be classified for tax purposes as a return of capital.

While much was accomplished during 2012, we were unsuccessful in efforts to exit the investment in Broadview Networks and through a restructuring, we were permanently diluted, limiting any prospects for meaningful recovery. Additionally, our earning assets were below budget for much of the year, as a result of slow origination pacing due in part to the restructuring of the company, higher than expected prepayment of several loans, and selective asset acquisition.

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