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MCG Capital Corporation (NASDAQ:MCGC)

Q2 2013 Earnings Call

July 30, 2013 10:00 AM ET


Hagen Saville – President and CEO

Tod Reichert – General Counsel, Chief Compliance Officer, Corporate Secretary and EVP

Keith Kennedy – CFO, EVP and Managing Director


Greg Mason – KBW


Good day ladies and gentlemen and welcome to the MCG Capital Q2 2013 Earnings Investor Conference 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 this conference call is being recorded.

I would now like to introduce your host for today’s conference Hagen Saville, Chief Executive Officer. Sir you may begin.

Hagen Saville

Thank you. Good morning and welcome to the Q2 2013 earnings call for MCG Capital Corporation. I’m here with Keith Kennedy, our Chief financial Officer; and Tod Reichert, our General Counsel and Chief Compliance Officer. Before we begin I will ask Tod to take us through the Safe Harbor statement. Tod?

Tod Reichert

Thanks Hagen. Good morning everyone. Before we begin, we’d like to remind you that various statements that we may make during this morning’s call will include forward-looking statements 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.

With that, I’ll turn the call over to our CEO, Hagen Saville.

Hagen Saville

Thanks Tod. This morning we reported Q2 results of $0.11 per share and operating income and $0.12 per share in net income with the net income figure slightly above our budget for the quarter. During the quarter, we had gross origination of $71 million including $58 million to four new issuers.

Current yield on the portfolio is 12.5% higher than last quarter. Primarily the results of continuing repayment of lower yielding syndicated loans funded through our CLO. Credit quality remained stable and portfolio evaluation for the quarter was also stable.

In quarter end, we had approximately $97 million of cash available for new investments. As we have further analyzed our business model and refined our operating platform. We believe it that our fully deployed earnings power is about $0.14 per quarter or $0.56 per annum excluding the effect of any new non-earning assets.

Our application process for second SBIC license continues to progress. In the event that we are approved for second license. We estimate that deployment of this incremental $75 million of capital would increase our annualized earnings run rate by about $0.08. We are also hopeful that Congress will approve an expansion of the family of funds limit increasing the SBIC debentures available to a single issuer from $225 million to $350 million.

The incremental $125 million of capital would create another meaningful leg up in the earnings power available to MCG. There appears to be significant bipartisan support for this increase in each of Congress in both BDC and public policy analyst, handicap passage of this legislation.

As you consider the capacity of our operating platform in recognizing that origination levels having flow on a quarterly basis. It is useful to review the activity during the last four quarters, which I believe is a reasonable proxy for our ability to deploy capital.

During the last 12 months, we achieved gross originations of $231 million including $195 million to 13 new issuers. Also pleased to report, that among those 13 new issuers are seven new sponsor relationships with firms we believe to be very strong and active players serving the lower-middle market.

I believe this level of activity illustrates our ability to achieve operating through internal management model as new capital becomes available to MCG. As we mentioned during the Q4 2012 earnings call, we anticipate a final restructuring charge associated with a realignment of our business over the last two years and have expect to incur that charge of $0.01 per share in Q3.

Finally on July 26th, the board declared the dividend of $12.05 per share the holders of record as of August 9 and payable on August 30th, 2013. I’ll now ask Keith to outline the specific results for the quarter.

Keith Kennedy

Thank you, Hagen. Good morning everyone. I plan to speak about our second quarter results for the period ended June 30, 2013. You may also find our Q2 2013 investor presentation on our website . By clicking on Investor Relations and then Investor Presentation.

The slide deck includes the key metrics and other highlights that I’m going to mention on the call today. Highlights for the second quarter are as follows; we generated net operating income or NOI at $7.6 million or $0.11 per share and net income of $8.6 million or $0.12 per share. Our net asset value per share remained unchanged at $5.18. We paid $12.50 per share or $8.9 million in dividends on May 31, 2013.

At June 30, 2013 our portfolio at fair value was $456 million sequentially up $47 million. We funded $70.9 million of originations in advances including $68.3 million of senior secured loans to four new portfolio companies and two existing borrowers. We’ve received $24.1 million in monetization other payments including $15.4 million in debt and equity pay offs.

At June 30, 2013 approximately 70% of our investments at fair value have been originated since January 1, 2010. Excluding interest expense our total operating cost was $3 million or approximately 0.5% of total assets of $580 million. For the quarter, our average borrowing cost were 4.4%. Loans on non-accrual at fair value remained under 20 basis points of our total loan portfolio.

We paid down $28.1 million in debt reducing our borrowing under our 2006-1 Trust from $83 million to $54.9 million as of June 30, 2013. In July 2013, we further reduced our CLO borrowings by $25.8 million thus reducing our borrowings from $54.9 million to $29.1 million. We did not purchase any shares during the quarter and with that, I’ll turn it back to Hagen.

Hagen Saville

Thank you, Keith. This concludes our prepared remarks and we will now open the line for questions. Operator?

Question-And-Answer Session


(Operator Instructions) our first question comes from Greg Mason of KBW. Your line is now open.

Greg Mason – KBW

Very good morning gentlemen. Thanks for taking my questions. For your four new portfolio companies that you originated. Could you talk about them a little bit and I’m most interested in, are these syndicated deals or club deals or deals where you’re the sole agent and lender. Can you just talk your sourcing currently in the market?

Hagen Saville

Yes, these are all whole loan originations, where we are single investor lender in our core market. There was a consumer products company, a healthcare company and education company in advance to an existing borrower of Colocation Company and then a deal to a software company.

Greg Mason – KBW

Okay great and looking through your presentation here it looks like, kind of they’re all around the 9.5% to 10% type of coupon range. Can you talk about, how does that changed any with some of the call interest rate concerns in June, is the market changing any from that type of rate and what do you expect having the second half from a yield perspective?

Hagen Saville

I think, Greg we expect our overall yield to remain stable. It could go down a little, but I think the fact that we originated four senior loans in Q2. The net two investments we’ve got lined up that we expect to close in Q3 or subordinated debt investments. So I wouldn’t draw any conclusions from the fact that we originated senior loans in Q2.

I think the rate is commensurate with our assessment of the risk profile of the companies. As I mentioned in my remarks, we are doing business with handful of new sponsor customers that we feel very strongly about and we’d like the deal flow we are seeing and every quarter, the flow comes and goes. We are right now our portfolio is comprised of about 63% senior loans and the balance in sub debts. So we have the ability to shift around the origination mix to hit our targets.

Greg Mason – KBW

Okay, great and then one last question and I’ll hop back in the queue. On slide six, you showed the net gains and losses and in there it says, Virtual Radiologic was down again this quarter. I know it had a pretty meaningful markdown last quarter as well. I think if my math is correctly, it’s close to like 60% to 70% of par. Can you talk about it that investment and potential risk of non-accrual there?

Hagen Saville

VRAD went through recapitalization event and I believe it was the end of Q1 and the company provides imaging services nationwide and really at its heart provides an essential service. So our basic fundamental assessment of the situation is that the loan will recover value overtime. There is new management in place, there’s a new Board of Directors and as I said, the company provides services nationwide.

So we feel okay about it and I think our view is that, the value will be restored and that I can’t predict exactly, when we will see accretion in that asset but we feel okay with it. The valuation process we are using is for that asset is really just a bit ask of what we see in the marketplace, but really the very few trades in that loan and I think the important feature of that situation is that, as far as we know there are very few trades and that all of the senior lenders are just standing pat and with I think, they probably share the view that we have, that overtime the loan will recover in value.

Greg Mason – KBW

Great, I appreciate it.


(Operator Instructions) our next question is a follow-up from Greg Mason of KBW. Your line is now open.

Greg Mason – KBW

All right, great. Thanks guys. With the securitization almost gone, you’ve obviously you’ve got the SBIC. You’re working on the second license. You’ve got the working capital credit facility from BoA. Do you have plans for any other additional leverage beyond put the second SBIC license and the working capital line from BoA?

Hagen Saville

We are certainly analyzing credit facilities that are available to companies like ours. As you know, during this recent period of low interest rates, there is been a lot of issuance of senior notes and I mostly view that, for a company like ours that works with smaller issuers. It is important to access credit facilities that have long tenors and are generally flexible as compared to more complex credit facilities.

And so we are certainly analyzing what the market has to offer. We meet with bankers regularly and evaluate what’s available to us. We are not heading into a closing on a new credit facility, but we are certainly cognizant of what’s out there.

Greg Mason – KBW

Okay. So you’re looking at, I mean do you have a desire for more leverage in the model beyond say, what you can get with just the SBIC licenses? Do you think you need more?

Hagen Saville

I just in my prepared remarks. I laid out, what I believe to be their earnings power. The company based on the existing capital and then I walk you up on the potential earnings power attributable to a second license and then perhaps expansion the SBIC program and I think that’s pretty attractive, on our book equity capital base of $368 million to the extent that we were able to at some point in the future access $350 million of capital available from the SBA, that would take our leverage back up to approach one-to-one that’s obviously excluded from the BDC asset coverage test because we have exemptive relief and we will just have to see what the market holds.

Greg Mason – KBW

Okay, great and then one last question. I did see that RadioPharmacy had a small write down this quarter, that’s been a great company for you. Can you talk about what’s going on there, is that potentially on the block for repayment, since that’s a pretty large coupon on your preferred equity you have there?

Hagen Saville

That is a good preferred coupon and with that mark that we took this quarter, is simply a result of the math that we go through that were no change in the valuation metrics and the performance of the company is stable. So I wouldn’t draw any conclusions about that RadioPharmacy serves tertiary markets and so it’s protected.

There is a fair amount of change occurring in the nuclear pharmacy industry. Some headwinds but some also, some pretty interesting developments as well. Obviously we’ve been very vocal about our plans to exit the control investments that we have and this is really the last one and so, we will exit that investments at, when we deem the time right.

We could certainly go and refinance our debt, if we wanted to right now, but we control the entire capital structure. It’s a stable business and we are just continuing to manage the company.

Greg Mason – KBW

All right, great. Thank you.

Hagen Saville

Thank you.


(Operator Instructions) at this time I’m not showing any further questions. I would like to turn the call back to management for any closing comments.

Hagen Saville

Thank you very much and we will see you next quarter. Thank you, good bye.


Ladies and gentlemen. Thank you participating in today’s conference. This concludes today’s program. You may all disconnect.

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