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MCG Capital Corp. (MCGC)

Q3 2010 Earnings Call

November 2, 2010; 11:00 am ET


Steven Tunney - President, Chief Executive Officer, Director

Steve Bacica - Chief Financial Officer & Executive Vice President

Tod Reichert - Senior Vice President & Chief Compliance Officer, Corporate Secretary


Greg Mason - Stifel Nicolaus

Vernon Plack – BB&T Capital Markets

Steven Fox - Keefe, Bruyette & Woods

Mike Turner - Compass Point

Rick Fearon – Accretive Capital



Good day, ladies and gentlemen, and welcome to your MCG Capital Q3 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 Co-Founder, President and Chief Executive Officer, Steven Tunney; and Steve Bacica, Chief Financial Officer. You may begin.

Steve Tunney

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

Tod Reichert

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 U.S. accepted Generally Accepted Accounting Principles. You can find a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measures and the other related information in MCG's third quarter 2010 earnings release and in the Investor Relations section of our website at 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 third quarter earnings release, which was issued today. Overall, we are pleased that our third quarter net operating income and distributable net operating income results were inline with our expectations, and as a result, we will be paying a dividend of $0.14 per share for the quarter.

During the quarter, we remained disciplined and focused on our articulated strategy of originating new investments, monetizing low yielding assets and reducing our leverage. In that regard, we originated new investments totaling $69 million during the quarter. We also successfully monetized our equity and debt investment in JetBroadband Holdings, LLC resulting in 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 MCI Holdings, LLC resulting in cash proceeds to MCG of $12.5 million. We also reduced outstanding borrowings by $25 million and we increased our asset coverage ratio to 233% as of September 30th, 2010.

As I mentioned on our last call, we’ve 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 into our SBIC and senior debt assets in our CLO facility. So far, during 2010, originations and advances have totaled in an aggregate of $160.2 million, with $114.1 million in senior loans, $41.6 million in sub-debt loans, and $4.5 million in equity investments. During the quarter, our portfolio decrease from $997.6 million to $924.3 million as our originations were offset by $133.2 of monetizations, paydowns and portfolio company sales and $9.8 million of net valuation adjustments.

Given the unusually large volume of payoffs during the third quarter, we except that growth in our DNOI and NOI per share will flatten somewhat in the fourth quarter before resuming growth in the first quarter 2011. We do anticipate that our go forward paydowns will be more inline with historical levels than those we experienced in the third quarter.

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 through increasing our operating income to support the growth of dividends. Since, reinstating our dividend in April of 2010 we have grown our dividend from $0.11 for the first quarter of 2010 to $0.14 for the third quarter of 2010. We firmly believe that we can continue to increase our operating income without accessing new sources of incremental equity or debt capital by deploying our restricted cash balances and accessing incremental debt capacity in our CLO and our SBIC.

As of September 30th, 2010, we had over $200 million of origination capacity, to fund new investment opportunities. We also expect to generate additional capacity, through the continued strategic monetization of equity investments and expansion of debt capital available to us through our SBIC subsidiary. With respect to our portfolio, we had net investment losses of $9.8 million or 1.1% of our fair value. The $11.2 million mark, we incurred on Active Brand and the $8.6 million mark on Jet Plastica this quarter were related to continued core operating performance at these companies and a reduction in valuation multiples.

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