MCG Capital Corporation Q2 2008 Earnings Call Transcript

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MCG Capital Corporation (MCGC)

Q2 2008 Earnings Call Transcript

August 7, 2008 10:00 am ET

Executives

Steve Tunney – Co-Founder, President and CEO

Tod Reichert – Chief Compliance Officer, SVP and Corporate Secretary

Michael McDonnell – CFO and COO

Analysts

Troy Ward – Stifel Nicolaus

Bob Jordan – SARG Management [ph]

John Stilmar – FBR Capital Markets

Mark Cooper – Wells Capital

Jim Stone – PSK Advisors

Robert Nam [ph] – Ironsides [ph]

David Rothchild – Raymond James

Rick Sherman – Oppenheimer

Rick Firon [ph] – Advertise Capital Partners [ph]

Presentation

Operator

Good day and welcome everyone to the MCG Capital Corporation second quarter 2008 earnings conference call. Today's call is being recorded. With us today is MCG Capital's Co-Founder, President and Chief Executive Officer, Mr. Steve Tunney and Chief Operating Officer and Chief Financial Officer, Mr. Mike McDonnell.

At this time, I would like to turn the call over to Mr. Steve Tunney. Please go ahead, sir.

Steve Tunney

Good morning everyone. First, 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. Today's call is being recorded and webcast live through our Web site at www.mcgcapital.com. A replay of the call will be available on our Web site and an audio replay will be available through August 22, 2008. The replay information is included in our press release announcing this call and it's posted in the investor relations section of our Web site. This recording is the property of MCG Capital Corporation and cannot be used or reproduced without the prior consent of MCG.

Before we begin this morning, we would like to remind you that various remarks that we may make during this morning's call regarding MCG's future expectations, plans, and prospects constitute forward-looking statements for purposes of the safe harbor protection under applicable securities laws.

These forward looking statements involve 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.

The risks and uncertainties include but are not limited to expectations regarding our results of operations; general and administrative expenses; our ability to strengthen our capital base; the carrying value of investments in our portfolio; the performance of our portfolio companies; our ability to recover unrealized losses; our ability to access alternative debt markets and additional capital; our ability to monetize assets and the related timing of such monetizations; our asset originations; the timing and sufficiency of cash for future operations; our ability to increase our asset coverage ratio; general economic factors; regulatory matters; and other factors outlined in MCG's annual and quarterly reports which are on file with the Securities and Exchange Commission.

In addition, any forward-looking statements represent our views only as of today and should not be relied representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Now during this call, we will be referring to non-GAAP financial measures including distributable net operating income also referred to as DNOI. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in MCG's second quarter 2008 earnings release and in the investor relations section of our Web site at www.mcgcapital.com under the heading non-GAAP financial measures.

I now introduce you to Steve Tunney, our CEO and President.

Steve Tunney

Thank you, Tod, and again, I welcome everyone. Hopefully, by now, you've had a chance to review our second quarter earnings report which was issued last evening. Obviously, we are not pleased with the results and the results were unexpected. Therefore, this morning we'll also announce several steps we are taking to ensure the strength of our capital base and to right size our operation relative to the current operating climate.

First, let me review the second quarter. For the quarter, we lost $0.96 per share with net valuation write-downs of $82 million. The valuation write-downs were concentrated in two portfolio companies.

We recorded a $32 million unrealized loss on Cleartel Communications as we've written off the balance of our investment. Cleartel has continued to miss our expectations and accordingly, we do not believe that we will receive any recovery on our investment.

Additionally, we have taken a $32 million unrealized loss on Jet Plastica Investors LLC, a bulk cutlery manufacturer which is a control investment of MCG. This unrealized loss is a result of a performance miss tied primarily to an unprecedented increase in their raw materials costs which was caused by the recent run up in the price of oil. While this valuation decrease is disappointing, we are optimistic that over time it can be recovered as it is our expectation that Jet Plastica will eventually be able to recoup this raw material cost increase and improve its results.

For the quarter, revenue was $31.1 million, a 38% decrease from Q2 2007. Net operating income decreased 54% to $13 million or $0.18 per share while DNOI was down 51% to $14.8 million or $0.20 per share.

These amounts were in line with our expectations for this quarter. The decrease from 2007 levels is primarily attributable to our no longer recognizing dividend income on our Broadview investment, a decrease in fee income due to lower originations, and exceptionally high levels of fee and dividend income in the 2007 quarter related to an asset sale that occurred last year.

As we mentioned in last quarter's call, we are no longer accruing income on our Broadview investment because the company is fully valued at our current carrying value. We don't anticipate recognizing any additional dividend income at this time.

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