MCG Capital Corporation Reports First Quarter 2008 Results
ARLINGTON, Va., May 7 /PRNewswire-FirstCall/ -- MCG Capital Corporation (NASDAQ:MCGC) announced today its results for the quarter ended March 31, 2008. MCG will host an investment community conference call at 10:00 a.m. Eastern Time, on Thursday, May 8, 2008.
Highlights Revenue $40.1 $43.0 +7%
(a) In accordance with SFAS 128-Earnings per Share, or SFAS 128, the Dividend Declaration
Record date: June 30, 2008
Conference Call: Thursday, May 8, 2008 at 10:00 a.m. Eastern Time MCG Capital Corporation (in thousands, except per share amounts) March 31, December 31, Note: Certain prior period information has been reclassified to conform to current year presentation MCG Capital Corporation Three Months Ended Operating expenses Net operating income before investment gains Net income $2,498 $30,454 (b) In accordance with SFAS 128-Earnings per Share, or SFAS 128, the Note: Certain prior period information has been reclassified to conform to current year presentation Portfolio Activity The fair value of our investment portfolio totaled $1.512 billion at March 31, 2008 as compared to $1.545 billion at December 31, 2007. During the first quarter of 2008, we originated investments of $7.9 million in three portfolio companies (some of which were new customers and some of which were existing customers) and made advances of $29.3 million to existing portfolio companies. The originations of $7.9 million included $1.6 million of senior debt, $0.3 million of secured subordinated debt, and $6.0 million of preferred equity. The significant origination activity included: -- $6.0 million in preferred equity, to TNR Entertainment Corp., the -- $1.6 million in senior debt, to Florida Tower Partners II, LLC, a
-- $11.2 million in senior debt repaid by Communicom Broadcasting, LLC. -- $12.6 million in secured subordinated debt repaid by Micro Dental -- $10.7 million in senior debt through the syndication of our senior debt
Three Months Ended March 31, 2008 Total Sleep National Product Business Crystal Media MTP Holding, Communi- LLC cations Control 588 36 (588) 36 JetBroadband Working Mother RadioPharmacy CWP/RMK Home Non- Acquisition Corp. Furnishings affiliate - (2,470) - (2,470) PremierGarage Home GMC Television Home Interiors & Home Non- Gifts, Inc. Furnishings affiliate - (1,044) - (1,044) Flexsol Packaging Chemicals/ Non- Corp. Plastics affiliate - (909) - (909) Jet Plastica Plastic Teleguam Holdings, Communi- Non- LLC cations affiliate - (708) - (708) Golden Knight Diversified CEI Holdings Non- Inc. Cosmetics affiliate - (540) - (540) Marietta Intran Media, LLC Other Media Control - (496) - (496) Orbitel Holdings, Other 115 (1,878) - (1,763) Total $200 $(18,713) $(85) $(18,598) Broadview Investment
Our investment in Broadview entitles us to total preferred claims of approximately $274.9 million, prior to any claims by common shareholders. We are also entitled to accumulating dividends on our preferred stock investment, which accumulate and compound quarterly at an annual rate of 12% on $274.9 million but are not payable in cash on a current basis. Because accumulating dividends are typically not part of taxable income until they are received in cash, it is possible that our GAAP earnings may exceed our taxable earnings by a significant amount until such time as this investment is liquidated. In November 2007, Broadview filed a registration statement on Form S-1 to register shares for an initial public offering, or IPO, of equity securities. In the event that Broadview is successful with their IPO, we will be required to convert our yielding preferred stock, which represents an ownership interest of approximately 46% on an as-if converted basis, into non-yielding common stock. In connection with an IPO by Broadview, we may sell a portion of our investment in Broadview, which could result in a significant liquidity event for us. Our ability to recognize income from our preferred stock investment in Broadview in future periods will be dependent on the performance and value of Broadview. Broadview continues to perform in accordance with our expectations; however, we currently do not expect to accrue any further dividends on our Broadview investment which will materially reduce our revenue and earnings in future periods. Cleartel Investment Cleartel Communications, Inc., or Cleartel, one of our control investments, is a CLEC serving primarily residential customers. Since the first quarter of 2007, this investment has been, and will continue to be, on non-accrual status for the foreseeable future. We advanced an additional $4.1 million to Cleartel in order to support their operations during the first quarter of 2008. As of March 31, 2008, our investment in Cleartel is composed of subordinated debt with a fair value of $29.3 million, preferred stock with a fair value of zero and 100% of the common stock of Cleartel with a fair value of zero. At March 31, 2008, Cleartel represented approximately 1.9% of the fair value of our investments compared to 1.6% of the fair value of our investments at December 31, 2007. Valuation MCG's board of directors is responsible for determining the fair value of our portfolio investments on a quarterly basis. As part of our process for determining the fair value of our portfolio investments, we retain independent valuation firms to perform independent valuations on certain of our portfolio companies and review certain of our fair value determinations. These independent valuations and reviews are considered by our board of directors in their determinations of fair value of our portfolio companies. We intend to continue to engage these independent valuation firms to conduct independent valuations and reviews of valuations for certain investments in our portfolio. Our general practice is to obtain an independent valuation or review of valuation once per year for each portfolio investment that has a fair value in excess of $5.0 million. Over the last four quarters, independent valuation firms performed independent valuations or reviews of valuations for 47 portfolio companies, representing $1,242.1 million or 82% of the fair value of our total portfolio investments and $410.5 million or 80% of the fair value of our equity portfolio investments. Fair Value Measurements We adopted Statement of Financial Accounting Standards No. 157-Fair Value Measurements for our financial assets on January 1, 2008. This adoption resulted in a change in estimate in valuing most of the debt we have issued to non-control portfolio companies. In the first quarter of 2008, the impact of this change in estimate totaled a $3.8 million net unrealized loss. Current Market Conditions The debt and equity capital markets in the United States have had a significant impact from the write-offs in the financial services sector relating to subprime mortgages and the re-pricing of credit risk in the broadly syndicated market, among other things. These events, along with the deterioration of the housing market, have led to worsening general economic conditions, which have had an impact on the broader financial and credit markets and have reduced the availability of debt and equity capital for the market as a whole and financial firms in particular. The Company and other commercial finance companies have historically utilized the collateralized loan obligation, or CLO, market to finance some of their investment activities. Due to the current dislocation of the CLO market, which we believe may continue for an extended period of time, we and other companies in the commercial finance sector will have to access alternative debt markets in order to grow. The debt capital that will be available will most likely be at a higher cost, and terms and conditions may be less favorable. This has resulted and will continue to result in significant slowing of our origination activity during 2008. In the event that the United States economy enters into an extended downturn or a recession, it is possible that the results of some of the middle market companies similar to those in which we invest could experience deterioration which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. While we are not seeing signs of an overall deterioration in the operating results of our portfolio companies at this time, there can be no assurance that the performance of certain of our portfolio companies will not be affected adversely by economic conditions, which could have a negative impact on our future results. Liquidity and Capital Resources As of March 31, 2008, our cash and cash equivalents totaled $12.0 million and our borrowings totaled $720.3 million. Of the $720.3 million in outstanding borrowings, $157.4 million matures within one year. Of this amount, $101.4 million was outstanding under our 2006-2 warehouse facility with Merrill Lynch Capital Corporation as described more fully below and $56.0 million was outstanding under our Revolving Unsecured Credit Facility as also described more fully below. Currently, we also have the ability to borrow up to $130 million under the small business investment company, or SBIC, program, of which $20.0 million has been approved and the remainder of which is expected to become available to us subject to compliance with the Small Business Administration's customary procedures. During April 2008, we completed a rights offering which resulted in the issuance of 9,500,000 shares of common stock. We received approximately $58 million of net cash proceeds as a result of this transaction -- see Recent Developments. On May 1, 2008, SunTrust Bank provided the annual renewal of its liquidity facility that supports our $250 million Commercial Loan Funding Trust facility, as required annually -- see Recent Developments. In addition, we are continuing to work on a variety of initiatives with our debt facilities to support both our ongoing operations and growth. We have executed a term sheet with an existing lender for a new revolving warehouse facility and are in discussions with a new lender for a new revolving warehouse facility. We currently estimate that these facilities, if obtained, will provide approximately an aggregate $350 million of additional borrowing capacity which would be utilized to support future growth. There can be no assurance that either of these transactions will be consummated or that we will be able to obtain additional borrowing capacity. As of March 31, 2008, $101.4 million was outstanding under our 2006-2 warehouse facility with Merrill Lynch Capital Corporation. This facility was previously scheduled to expire on February 29, 2008, and was originally intended to be repaid with proceeds from a placement of debt in the CLO market. Due to the severe dislocation which has occurred in the CLO market, we determined that a CLO transaction is not possible in the near term. On February 12, 2008, this facility was amended to extend the maturity until August 31, 2008. Under the terms of the amendment, we are required to reduce the amount outstanding under this facility to not more than $82.5 million at April 21, 2008, not more than $55.0 million at May 31, 2008, and not more than $27.5 million outstanding at July 21, 2008, with the balance due on August 31, 2008. As of May 7, 2008, the actual amount outstanding under this facility is $60.7 million. We have met, and intend to continue to meet, our repayment obligations under this facility by moving the assets in this facility to other existing facilities -- see also discussion of our revolving unsecured facility below. Our revolving unsecured credit facility provides for aggregate borrowings of up to $130 million, subject to certain requirements including but not limited to maintaining certain levels of performing assets which are not pledged as collateral to other debt facilities. The amount outstanding under this facility as of May 7, 2008 is $68.0 million. This facility has a 364-day term which matures on June 4, 2008. We currently have a signed term sheet and are working actively with our existing lenders and certain potential new lenders on the renewal of this facility until June 2009. While we are confident at this time that we will be able to renew this facility, there can be no assurance that we will be able to renew this facility. In the event that we are unable to renew this facility at a reasonable size our liquidity will be reduced significantly. In addition to our initiatives with respect to our borrowing facilities, we are working on a variety of initiatives to enhance our overall liquidity through the sale of certain debt and equity investments including potentially a portion of our investment in Broadview, our largest investment, in connection with its planned initial public offering in 2008. The completion of some or all of these initiatives is expected to provide us with liquidity to be utilized throughout 2008 and potentially beyond. While we believe that some or all of these initiatives can be completed, there can be no assurance that we will be successful with any of these initiatives. In addition, we expect our origination activity to be significantly slower during the remainder of 2008, until we are able to complete some or all of these initiatives. In the event that we are unsuccessful with these initiatives, our ability to originate new investments and continue quarterly distributions at current levels could be impacted. Dividend Guidance For 2008, MCG currently estimates that dividends will be at least $1.25 per share. This estimate takes into consideration our expectations for the performance of our business and estimates of distributable net operating income, capital gains, net income and taxable income for 2008. Recent Developments On March 28, 2008, MCG issued to its stockholders of record transferable rights to subscribe for up to 9,500,000 shares of its common stock. Stockholders received one right for every seven outstanding shares of common stock owned on the Record Date. The rights offering expired on April 18, 2008. At the time of expiration, the rights offering, which was oversubscribed by 67%, resulted in the issuance of 9.5 million shares of MCG common stock. Net proceeds after payment of dealer-manager fees and before other offering-related expenses were approximately $58 million and will be used for origination of loans to and investments in primarily middle market companies, repayment of indebtedness, working capital, and other general corporate purposes. The subscription price for the rights offering was $6.36, or 88% of the volume-weighted average of the sales prices, or VWAP, of MCG's common stock on the Nasdaq Global Select market on the five trading days ending on the expiration date. The VWAP was $7.23. As a result of the issuance of shares at a price below our net asset value per common share, or NAV, our NAV was reduced by approximately $0.80 per share upon the close of this transaction. In April 2008, MCG's Board of Directors approved the issuance of 545,100 shares of restricted stock to our employees pursuant to the MCG Capital Corporation 2006 Employee Restricted Stock Plan. Of these restricted shares, 395,100 shares will generally be expensed over four years and 150,000 will be expensed over three years pursuant to an employment agreement. In April 2008, MCG increased its commitment to Solutions Capital I, a wholly-owned SBIC subsidiary, which increased the borrowing capacity from $100 million to $130 million that can be used to provide debt and equity capital to qualifying small businesses. On May 1, 2008, SunTrust Bank provided the annual renewal of its liquidity facility that supports MCG's $250 million committed secured warehouse credit facility. This warehouse financing facility is funded through Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by SunTrust Robinson Humphrey, Inc. The warehouse financing facility operates like a revolving credit facility that primarily is secured by the assets of MCG Commercial Loan Funding Trust. The warehouse facility maturity is November 2010, with annual liquidity renewals each year. In connection with this renewal, the interest rates for Class A and Class B advances have increased to the commercial paper rate plus 1.50% and 2.50%, respectively. The Class A and Class B advances previously bore interest at the commercial paper rate plus 0.75% and 1.50%, respectively. The facility commitment fee has increased to 0.30% from 0.20% previously. In addition, we paid a facility renewal fee of $750,000, or 0.30%. Selected Financial Data 2007 2007 2007 2007 2008 Reconciliation of distributable Net operating income before ( c ) DNOI is net operating income before investment gains and losses and Selected Financial Data 2007 2007 2007 2007 2008 Selected period end Other statistics (e) The impact due to the timing of the LIBOR resets is included in the Selected Financial Data 2007 2007 2007 2007 2008 IR 1 percentage of total New investments by Exits and repayments by Exits and repayments by (g) MCG uses an investment rating system to characterize and monitor our Selected Financial Data 2007 2007 2007 2007 2008 Composition of Percentage of About MCG Capital Corporation
Forward-looking Statements: This press release contains forward-looking statements (i.e., statements that are not historical fact) describing the Company's future plans and objectives. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements including, without limitation, the risks, uncertainties and other factors we identify from time to time in our filings with the Securities and Exchange Commission, including our Form 10-Ks, Form 10-Qs and Form 8-Ks. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions also could be incorrect. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this press release should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this press release. We undertake no obligation to update such statements to reflect subsequent events. First Call Analyst:
CONTACT: Susan R. Camp of MCG Capital Corporation, +1-703-562-7110, Web site: http://www.mcgcapital.com/
2008-05-07 20:12:19 0355928 PRNEWSWIRE
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