MCGC

MCG Capital Corporation (MCGC)

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MCG Capital Corporation (MCGC)

Q1 2008 Earnings Call

May 8, 2008 10:00 am ET

Executives

Steven F. Tunney - President and CEO

Samuel Rubenstein - General Counsel; Executive VP; Chief Compliance Officer

Michael McDonnell - CFO and COO

Analysts

Troy Ward - Stifel Nicolaus

Carl Drake - SunTrust Robinson Humphries

John Stillmar - FBR Capital Markets

Henry Coffey - Ferris, Baker, Watts, Inc.

Brian Hogan - Piper Jaffray

Elliot Burke - Ironside Capital

Daniel Furtado - Jefferies & Company

Presentation

Operator

Welcome everyone to the MCG Capital Corporations first quarter 2008 earnings conference call. (Operator Instructions) With us today is CEO, Steve Tunney.

Steven Tunney

First, before we get started, I would like to have Sam Rubenstein, our General Counsel, provide us with the Safe Harbor disclosures.

Samuel Rubenstein

Today’s call is being recorded and webcast live through our website at www.mcgcapital.com. A replay of the call will be available on our website, and an audio replay will be available for one week. The replay information is available in our press release announcing this call, and it is posted on our website. This recording is the property of MCG Capital Corporation, and cannot be used or reproduced without the prior written consent of MCG.

Before beginning this morning, we would like to remind you that statements made during the course of this presentation that are not purely historical are forward-looking statements regarding MCGs or managements intentions, estimates, projections, assumption, beliefs, expectations and strategies for the future. All such forward-looking statements are intended to be included under the Safe Harbor protection available under applicable security loss.

Because these statements deal with future events, they are subject to various risks and uncertainties, and actual outcomes and results may differ materially from those projected in the forward-looking statements. Important factors that could cause results to differ materially from the forward-looking statements are discussed in our filings with the SEC.

These documents can be accessed through the Investor Relations section of our website. We do not undertake to update our forward-looking statements. This presentation contains non-GAAP measures including distributable net operating income. The company has provided a reconciliation of these measures in its first quarter 2008 press release, available at www.mcgcapital.com.

Steven Tunney

Hopefully by now you have had a chance to review our first quarter earnings report which was issued last evening. As we foreshadowed during our last earnings call origination activity has been largely put on hold until we complete the execution of several capitalization initiatives during the first half of 2008 While we have completed both an equity rights offering, and a renewal of the liquidity back-stock on our $250 million SunTrust warehouse, we still need to complete the renewal of our unsecured revolver facility and a new term warehouse facility before we begin to reinvigorate our origination activities in earnest.

Putting the origination activity on hold had the impact of reducing our fee income to about a penny per share during the quarter. Historically, in a more normal economic climate, our quarterly fee income has been $0.04-$0.12 per share per quarter. For the quarter, revenue was $43 million, a 7% increase over Q1 of 2007. Net operating income was 7%, or $21.3 million, or $0.31 per share, while DNOI was flat at $23 million, or $0.34 per share. During the quarter, we had earnings of $0.04 per share versus $0.50 per share last year.

The principal reason for the decline in earnings per share from the prior year is that we had net investment losses of $18.6 million this quarter, versus net investment gains of $10.8 million during the first quarter last year. While we believe our portfolio companies are performing well in what is widely recognized as weak economic conditions, we did experience a decline in earnings-per-share due to valuation multiple compression, some individual portfolio company under-performance, and the implementation of SFAS 157.

As disclosed in our press release, we have revised our dividend guidance .For 2008 MCG currently estimates the dividends will be at least $1.25 per share. As part of this decision, our board of directors has declared a second quarter dividend of $0.27 per share, with a record date of June 30, and a payable date of July 30, 2008.

We have reduced our dividend, and modified our guidance, principally due to our first quarter performance and the challenging market conditions which have compressed our valuation multiples and are impacting the timing of investing (inaudible). Additionally it is argued that we will no longer be able to recognize any further dividend income with our preferred equity investment in Broadview Networks, Inc.

It is important to note that Broadview continues to perform in accordance with our expectations; however, due to its current valuation, we believe that the ability to continue accruing dividends in future periods will be limited, unless the earnings of Broadview or multiples of telecommunications companies change favorably in the near term. Further still, the completion of Broadview’s IPO would result in conversion of our preferred securities non-yielding common stock.

As we have said many times before, it is our goal that our dividends be covered on an annual basis 100% from earnings-per-share. With our first quarter income only $0.04 per share, and Broadview historically providing about $0.12 per share of quarterly earnings, we felt it necessary and prudent to modify our dividend accordingly. We did not want to put the company in the position of having to sell portfolio companies with excellent return prospects during an unfavorable buyers market in order to meet the demands of sustaining the dividend at $0.44 per share.

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