MCGC

MCG Capital Corporation (MCGC)

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MCG Capital Corporation (MCGC)

Q2 2010 Earnings Call Transcript

August 5, 2010 9:00 am ET

Executives

Steve Tunney – President and CEO

Tod Reichert – SVP and Corporate Secretary

Steve Bacica – CFO

Analysts

Jonathan [ph] – Stifel Nicolaus

Vernon Plack – BB&T Capital Markets

Sanjay Sakhrani – KBW

Mike Turner – Compass Point

Rick Fearon – Accretive Capital Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to your MCG Capital second quarter 2010 earnings investor call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions) As a reminder, today’s conference call is being recorded. I would now like to introduce your host for today's conference call, MCG Capital's Co-Founder and Chief Executive Officer, Steve Tunney; and Steve Bacica, Chief Financial Officer. You may begin your conference.

Steve Tunney

Good morning, everyone. Before we get started, I would like to have Tod Reichert, our Chief Compliance Officer, provide the necessary Safe Harbor disclosures. Tod?

Tod Reichert

Thanks, Steve. 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/or 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.

Also during this call, management will be referring to a non-GAAP financial measure, DNOI. This measure is not prepared in accordance with US Generally Accepted Accounting Principles. You can find a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measures and other related information in MCG's second quarter 2010 earnings release and in the Investor Relations section of our website at www.mcgcapital.com under the heading Financial Information, Non-GAAP Financial Measures.

With that, I'll turn the call over to our President and CEO, Steve Tunney.

Steve Tunney

Thank you, Tod. And again, welcome, everyone. Hopefully by now, you’ve had a chance to review our earnings release, which was issued today. We are pleased that our net operating income and distributable net operating income results were in line with expectation s, and as a result, we will be paying a dividend of $0.12 per share based on second quarter’s results.

During the quarter, we have remained disciplined and focused on our strategy of monetizing low yielding investments, originating new investments, and reducing our leverage. In that regard, we originated new investments totaling $50.4 million during the quarter, successfully monetized our equity and debt investment in JetBroadband Holdings, LLC subsequent to quarter-end, resulting in an expected cash proceeds to MCG in connection with the exit of this investment of approximately $50 million after transaction expenses.

We also successfully monetized our equity investment in B&H Education, resulting in cash proceeds to MCG of $5.4 million. We’ve repurchased $8 million of our outstanding CLO debt securities at 55% of par, resulting in a $3.5 million gain. We also paid down $14.6 million of outstanding borrowings and increased our asset coverage ratio to 224% as of quarter-end and 226% as of July 30, 2010.

As I mentioned on our last call, we have increased the pace of our origination activity and we expect this level of origination volume to continue in the near term. We plan to deploy principally uni-tranched and junior capital investments in our SBIC and senior debt assets in our CLO facility. So far, during 2010, originations (inaudible) totaled and aggregated about $110.4 million, with $72.5 million in senior loans, $34.9 million in sub-debt loans, and $3 million in equity investments. The portfolio grew slightly from $991 million to $998 million as compared to last quarter, as our originations were offset by investment pay-downs and valuation adjustments.

Our primary focus is on the enhancement of long-term stockholder value, which we believe can be best accomplished by closing the gap between our stock price and our net asset value. And so increasing our operating income to support the growth of dividends, we firmly believe that we can accomplish this without existing new sources of incremental equity of debt capital.

As of July 30, 2010, we had approximately $240 million of origination capacity to fund new investment into opportunities, including unrestricted cash in excess of estimated operating requirements, debt servicing requirements, and upcoming dividend distributions. We also expect to generate additional capacity through the continued monetization of equity investments and expand the debt capital available to our core SBIC subsidiary.

With respect to our portfolio, we were disappointed to have an unrealized loss of $13 million or 1.3% of our fair value. The decrease of $11.6 million in the fair value of our investment of Broadview was attributable principally to an adjustment to our estimate of the fair value of this investment, which is based on, among other things, M&A comparables, private market transactions, public company comparables, discounted cash flow analysis, and an independent third-party valuation.

The $8.6 million mark we incurred on Jet Plastica this quarter was related to operating performance and a reduction in valuation multiples. Although recent economic data has largely shown that the recovery is slowing and that growth will remain weak for some time, we hope to see improved operating performance and valuation multiples that will allow our portfolio values to increase. However, as I have stated before, we will not be immune to additional marks, as we expect the recovery to affect some of our portfolio companies at a different rate than the economy as a whole.

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