MCG Capital Corporation Q1 2008 Earnings Call Transcript

May.27.08 | About: MCG Capital (MCGC)

MCG Capital Corporation (NASDAQ: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

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.

The debt markets continue to be very challenging in this environment. The massive write-offs that have been taken by Wall Street are flowing into the broader market creating a diminished lending capacity and tougher terms than those that have been historically available.

Despite these difficult times, we were very pleased about completing the renewal of our liquidity facility with SunTrust early in the second quarter, and we continue to value our partnership with SunTrust. The next critical item for us is the renewal of our unsecured revolving facility which we expect to complete in the next few weeks; although in this market we cannot be assured of what level this facility will be renewed.

Further, we are working on two new term warehouses that aggregate $350 million of additional capacity that we are hopeful will be completed in the near term. These facilities, together with $130 million which will be available to us through our SBIC, will provide us the debt capacity enabling us to restart origination activities.

We are obviously disappointed in our first quarter results, but view the performance as a temporary setback which can be recovered as market conditions improve. We believe that once we complete our other capitalization initiatives, we will be well positioned to exploit the current market opportunities. With that I will turn the call over to our COO and CFO Mike McDonald for a financial overview of the quarter. Following Mike’s presentation we will be pleased to answer any questions you have about our performance.

Michael McDonnell

For those of you who are following along on the webcast, we have a set of slides that we have posted to our website and I would encourage you to follow along as I go through some of the financial highlights if you are able to do so. For the quarter, starting at Slide 3, our revenue, while it was up year-over-year, was a bit soft and that is do to fees, as Steve mentioned, the lack of origination activity during the first quarter. Our fees, which typically aggregate $0.04 - $0.12 per quarter, were $0.01; and that has put pressure on the revenue line and further as we look ahead based on our current view of future inability to accrue dividends on our Broadview investment. We do expect to see further softness on the revenue line.

Our net operating income was $21.3 million, and net income was $2.5 million. That (inaudible) is related to about $18.5 million of net losses that we did record during the quarter, and I will talk a little bit more specifically about that a few slides back. Included in that $18.5 million is about $3.8 million related to SFAS 157 implementation. The last comment I would make on this slide is that we actually had a decrease in our portfolio of the quarter of $32.7 million, and that is a result of slow origination since they aggregate at about $38 million. We had repayments of about $52 million, and I would comment that repayments have also slowed a bit in the environment. And then the (inaudible) of $18 million get you to the net decrease of $32.7 million for the quarter.

We have a few very key events subsequent to March 31st. We have been very busy on a number of our capital-raising initiatives and the first item, which we reported publicly very recently, is that SunTrust has provided the annual renewal of its liquidity facility that supports our commercial loan funding trust. This is a $250 million secured warehouse facility. That has been renewed through April 30, 2009, and it has an alternate maturity date of November of 2010. We did increase the pricing on both the A and B notes on that facility from CP 150 and CP 250.from CP 75 and CP 150. I would comment that SunTrust has become a real leader in the BDC space and continues to be a great partner for us.

The Rights offering, which we completed during April of 2008, was over-subscribed by 67% and resulted in net proceeds to the company of about $58 million. We were obviously disappointed in our stocks performance during that process, and as a result of that transaction our NAV was reduced by about $0.80 per share upon close of the transaction.

We did increase subsequent to March 31st our commitment to Solutions Capital; this is our SBIC strategic facility for us. We increased the capacity fro $100 million to $130 million, and that is a facility that can be used to finance both debt and equity investments and qualifying small businesses and we have requested what is called “exempted relief” from the SEC whereby, if granted, any borrowings in this facility would not count against our statutory leverage limitations. That is a key facility for us in terms of growth.

Some selected balance sheet items: I am looking at Slide No. 5. We had total investments at the end of March of $1.512 billion. A key point to make in regard to this slide is our debt to equity ratio at the end of March was .89 to 1.0. That does not reflect the Rights offering which was completed in April. The increase to equity on a proforma basis takes that number in April to about .83 to 1.0 and if you assume temporary repayment of borrowings with the proceeds it takes you down to about .76 to 1.0. So we currently sit at a much lower debt to equity position than where we were at the end of March. Just to reiterate on the net asset value per share, of the $12.36 there was downward pressure on that as a result of the Rights offering in April.

On Slide No. 6 we have some selected operating data. A couple of things to point out here in terms of run rates that would hopefully be helpful in running your models. Salary and benefits did increase between the fourth quarter and the first quarter by about $0.25 million, and that is solely due to reductions during the fourth quarter in some of our incentive compensation accruals. I would view the $6.2 million in the first quarter as a logical run-rate from here forward.

And then on the G&A, that is running higher than we had expected by a little bit. It was $3.5 million for the quarter, and that is largely due to the lower origination activity which results in some costs that we would ordinarily be able to pass through that we are unable to when we are not originating as much.

The last comment that I would make on this slide, is that as a result of the Rights offering, because it is akin to a stock dividend, and includes a bonus element, GAAP requires that we recap our share count retroactively back to the beginning of time, which creates a $0.00 to $0.03 per share change in each quarter as previously presented as a result of the Rights offering. It is similar to a stock dividend, where you have to recap for all periods presented.

On Slide No. 7, just a little bit about SFAS 157. Obviously this is something that has gotten a lot of attention in the marketplace. We did adopt this pronouncement effective January 1. We now deploy a bond yield analysis to our non-control debt investments. The implementation of this pronouncement resulted in about a $3.8 million unrealized loss during the first quarter, so the impact on us was fairly nominal relative to the implementation of this new standard.

On Slide No. 8, just a summary of revenue. Just to highlight the year is that our advisory fees and other income $600,000 per quarter, or $0.01 per share, significantly lower than what we have seen in other quarters, and that is directly related to the low origination activity that occurred during the quarter.

Looking at EPS and how that breaks down on Slide No. 9; our net operating income was $0.31, that is down from last quarter due in part to the compensation accrual reduction that we made in the fourth quarter that did not recur in the first quarter. And it is also due to the lower fees. You can see in the footnotes that we had about $0.07 in fees in the fourth quarter, versus only $0.01 in the first quarter of 2008.

And then we also had net unrealized losses for the quarter that took the NOI from $0.31 netting down to $0.04. I think as you look forward, the $0.31 is just a spread-income number and doesn’t have much in the way of fees in it, and we will obviously have downward pressure if we are unable to accrue any further Broadview dividends. That was about a $0.12 number included in that $0.31.

Gain loss summary, Slide No. 10 summarizes. For the quarter, as Steve mentioned, some of the unrealized net losses were due to a bit of softening in some of the results, but it is also due to just contraction in some of the multiples that we are seeing in the marketplace which ripples into valuation.

I think that overall the comment that I would make is that the portfolio is holding up reasonably well in this environment. The Total Sweep Holdings and National Product Services, two of the investments where we book unrealized gains during the quarter are both investments where at one point in the evolution we actually had portions of our debt investments in those companies on non-accrual status. They have now been rehabilitated to where they are on full accrual status and we are actually recognizing some unrealized gains on those investments.

The largest unrealized loss that we took during the quarter was on JetBroadband Holdings, that is a cable company, and we have seen some softening in the cable multiples during the course of the quarter which is what really drove that mark.

ROE on Slide No. 11, obviously the down-drift there is unrealized losses to the quarter. 7.17% for the trailing twelve months and we obviously have work to do on that metric.

Moving ahead to Slide No. 13, limited amount of origination activity during the quarter as I mentioned previously, $38 million in originations and advances; $52 million of pay-downs and the slide shows you what instruments that activity came from.

Moving to Slide No. 14, I would say in terms of where we have landed in the portfolio mix we continue to be about a third, a third, a third. We did have a slight reduction, a little over a point in our senior debt in excess now of slightly under 30% and directionally that is logical for us and we feel pretty good about the mix of securities that we sit with as of March 31st.

From an industry perspective on Slide No. 15, we continue to be over weighted in communications. We are about 20%. As we stated previously, it is our goal to be no higher than 15% in any one industry. We are very focused on reducing that concentration and with that at that point we will feel like our diversification efforts are complete.

Slide No. 16, just a couple of comments on our investment ratings. We did have a bit of down-drift from category one to category three as there were two investments that we moved out of category one and into category three, and there was one investment that we moved up from category three into category one. The comment that I would make here is that the category three, which is where we expect full return of the principal and interest, but we are monitoring the customer a little more closely, sitting at 14.5% of the portfolio in this current environment is something that we feel is extremely manageable and there is nothing that is really in here that is keeping us awake at night.

On the non-accrual front, we did have a slight increase in the percentage from 6.5% to 7.1%, that is purely a function of having put in some additional advances to a couple of investments that are on non-accrual status during the quarter. We also had a slight reduction in the size of our debt portfolio during the quarter/ that reduces the denominator in that calculation. Overall we did not have any new investments that migrated into the non-accrual status during the quarter, and we did not have any investments that are on non-accrual status that moved out during the quarter.

In summary, the performance for the quarter: we have DNOI per share of $0.34; NOI of $0.31; and EPS of $0.04 per share. Our net investment losses were approximately $18.6 million which includes the $3.8 million unrealized loss related to SFAS 157 implementation. As I mentioned previously, we completed a Rights offering in April which resulted in net proceeds of approximately $58 million. SunTrust has renewed their liquidity backdrop that supports our $250 million revolving credit facility through April 30th of 2009. And we paid a Q1 2008 dividend of $0.44 per share and declared a Q2 dividend of $0.27 per share.

Our current dividend guidance is for 2008. We currently estimate that dividends will be at least $1.25 a share. This estimate takes into consideration our expectations for the performance of the business, and estimates of distributable net operating income, capital gains net income, and taxable income for 2008. The actual tax (inaudible) attributes for our 2008 dividends will be determined after the end of the year and be reported to shareholders on a Form 1099.

With that, we will open it up for Q & A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Troy Ward - Stifel Nicolaus.

Troy Ward - Stifel Nicolaus

Can you provide some color on the valuation methodology used in the new SFAS framework with regard to the non-control investments? Where there is not an existing market, what methodology did you use to get to your marks?

Michael McDonnell

It is an art, not a science. On our non-control investments, SFAS 157 is very exit-based, so what you are required to do is take all the data points that you can and calculate where your best estimate is that you can actually exit that investment at a given point and time. So the model that we developed is basically an intrinsic model, it looks at a variety of factors. It looks at things like levels of leverage, the coupon, and it looks at other parameters, channel ratings and the like that we have on these securities. It looks at where we started on all of those metrics. It looks at where the investment currently sits, and the company’s performance, and it determines an estimate of if we liquidated the investment as of March 31st, where exactly do we estimate we would be able to exit that investment, be it at par or below.

I think that one other key data point, or a few key data points that we looked at was that we have actually syndicated a handful of senior debt positions over the last several months, and all of those have exited at par. We operate in a market, because it is the smaller end of the middle market, it is a lot more static, it is not as volatile as some of the larger markets that are probably syndicated markets, and that is a big reason why you don’t see as much volatility in our spreads, which also ripples into the SFAS 157 analysis.

Troy Ward - Stifel Nicolaus

And we have spoken with some other management teams that have indicated that at least on the larger BDC peer group there was a coming of the minds and some new groups got together and discussed this. Were you part of that?

Michael McDonnell

I guess the only comment I would make on that is that we certainly view other BDCs as peers; we certainly speak with them from time-to-time on a variety of different issues that impact the industry. I wouldn’t necessarily point to SFAS 157 as an exception to that.

Troy Ward - Stifel Nicolaus

Following up on your comments on the methodology, would you consider the leverage ratio in the investment to be an important driver in the valuation methodology?

Michael McDonnell

Absolutely.

Troy Ward - Stifel Nicolaus

Your LIBOR impact, what was the impact in Q1 on the portfolio yields, and what impact might that have going forward?

Michael McDonnell

LIBOR obviously decreased the overall interest rate. The comment that I would make on LIBOR is that there are lag times that we have in terms of when our instruments reset relative to LIBOR actually falling, and we put this in our press release. During the first quarter we actually had a .88% impact or increase spread to LIBOR that was directly related to the timing lag between LIBOR dropping as it did and the time that we actually reset the underlying LIBOR rates in our portfolio.

Steven Tunney

But, on that same vein, from a cost perspective, we had an excess spread that we paid of .79%, so the net impact of the reset was nominal.

Operator

Your next question comes from Carl Drake - SunTrust, Robinson Humphrey.

Carl Drake - SunTrust, Robinson Humphrey

Will there be any recouping of the lag effect on LIBOR in the quarter going forward? We are looking at sort of a permanent impact on the margin?

Michael McDonnell

I think that is fair, LIBOR lands where it lands, but I would say overall in the margin that we are pretty well hedged. When you look at our mix of assets versus liabilities there is not a lot of exposure there.

Steven Tunney

You are impacted on the net basis because your yield and debt assets are a bit larger than your borrowing, so there is an extra couple hundred million dollars. So as that leaks through in the second quarter and out, that nominal spread of the .04% will have a little spill-over effect but the other thing is, from here we also have LIBOR floors in about a third of our investments, so that as additional rate decreases come about, that will help increase margins because there is no floor concept on the debt side as well.

Carl Drake - SunTrust Robinson Humphrey

Maybe you could touch on what happened from the valuation perspective on Broadview, given the IPO, you probably have a better sense of valuation, perhaps market tests, etc. It looked to me like you needed about a 9x multiple on EBIDTA to realize your pick claim. Maybe you could touch on a little bit about what changed in the valuation, if it was multiple compression? It didn’t seem like it was performance related to where you couldn’t recognize the pick income going forward.

Michael McDonnell

Your 9x number I am not going to comment on, other than to say that we look at multiples on a trailing, a forward basis, we look at EBIDTA multiples and we also look at free cash flow multiples, which are all very important data inputs for the data valuation, so it is not just one spot.

But, the other thing is, if you look at the total investment, first and foremost we are very happy and pleased with the results of Broadview and it’s moving along according to plan. I would say versus a quarter or two ago, there has been a delay in the expected timing of the IPO, but we do still feel that we will get this thing done in the second half of this year. I think that the IPO market is still open for this type of investment. But we basically got to the point where as we looked forward, we have made the judgment that we wanted to alert the street that it is our estimate as we look forward that we will not be able to accrue future dividends based on our expectations of value and the underlying performance of Broadview. So we wanted to alert the market that there is going to be an impact, and plan accordingly.

The other thing is, as you go public, you go from yielding securities to non-yielding securities, so absent the first thing, which could change given the underlying environment, the second thing, the IPO is going to put you in that same spot, where you are not going to be able to accrue dividend income on Broadview. Between those two data sets we felt it necessary to highlight that for our investors.

Carl Drake - SunTrust Robinson Humphrey

I think you also mentioned you might sell a portion of your Broadview investments?

Michael McDonnell

We can’t really comment in detail on Broadview as to where the sales (inaudible). It is our expectation that the offering, if it occurs, would be predominantly a secondary offering. Therein lies our belief that we will get a realization, and a meaningful realization, but I don’t think we can comment specifically on how that is all going to shake out right now.

Carl Drake - SunTrust Robinson Humphrey

In terms of the liquidity outlook, there is discussion about a couple of facilities, $350 million in facilities that you are fairly far down the road on I assume, and it looks like you have a term sheet on the (inaudible) for next month that you expect to renew in the next few weeks. I guess the next question is, does it rely on that $350 million facility, or the two facilities comprising that, or do you have availability on some of the other facilities assuming you get the renewal in a few weeks, where you will be in good shape.

Michael McDonnell

I think that the critical path is the renewal of the unsecured facility. We do have term sheets on that, and we are working to get that done in the very near term. The other facilities are not dependent in any way on the renewal of the unsecured facility. They are independent track. I would say on those two other facilities, everybody knows what we are doing, that we are in discussions with, so it is not like we are working down the path with one or the other, it’s both, and one deal is further ahead than the other. So it is most likely that you will see a sequential announcement with respect to the $350 million that we are working with, because one deal is much further ahead than the other.

Carl Drake - SunTrust Robinson Humphrey

Let’s say that doesn’t happen that you get the renewal that you have the term sheet on. Do you have availability under the SunTrust and the SBIC facilities for the Merrill amortization?

Michael McDonnell

We are currently sitting at about $60 million in outstanding (inaudible) and the requirement at this point is to be no higher than $87 million, so we are tracking comfortably below where we need to be. I think that the way to think about it is, the revolver is something that we use ongoing, the other facilities that Steve was speaking about are really in the interest of growth.

Operator

Your first question comes from John Stillmar - FBR Capital Markets.

John Stillmar - FBR Capital Markets

I hate to go back to calls previous question with Broadview, but just from a clarification point, is there any impairment to your investment in Broadview, or I am just curious, a multiple contraction would force you to stop accruing the dividend, but yet there is no impairment on the security, or at least it appears that way. Can you help me reconcile those two things?

Michael McDonnell

Yes; there is no impairment. I think impairment is the last word on the list that I would make of words describing Broadview. Broadview is an investment where we could probably put $80 million of cash invested in Broadview, and our current carrying value is $1.97. The comment on dividend accrual is, or the lack of the ability to continue to accrue the dividend, is a forward-looking statement. It is a statement that is talking about the second quarter and beyond. And as we look at our projections with respect to how we feel value will be determined in the next subsequent quarter, we are alerting the market that we believe that quarter we will not be accruing the income much beyond where we sit today. Further, if we complete the IPO, the accruing of dividends would cease because we have to convert to non-yielding common stock to affect that transaction.

John Stillmar - FBR Capital Markets

Is it an implication of the enterprise value of Broadview? And therefore, what it is on your books for, $197 million, you still feel like you will be able to capture that enterprise value, correct?

Michael McDonnell

Yes, because if we had the view that there was pending impairment, we would have reflected that view on valuations at 03/31.

John Stillmar - FBR Capital Markets

So you feel comfortable about the value being able to recoup the $1.97, but not so much about the future value accruing beyond that.

And finally, with regard to the warehouse lines themselves. Is there a timing in which we could start thinking about when to look for milestones to gauge, when we should start looking for press releases, I know it is a guessing game on everybody’s part.

Michael McDonnell

It is. I would say the timing is the next few weeks on the unsecured revolver that is our best guess. On the others it is very much in the near term, near is near.

Steven Tunney

Beyond that we can’t really give you specific dates.

Michael McDonnell

We don’t have a closing date scheduled. And, as I mentioned before, one of the warehouse facilities should close in advance of the other. It wouldn’t be an indication that the other one fell off and won’t happen just because we would only be announcing one. There is a sequential process to the warehouses that we are looking at.

John Stillmar - FBR Capital Markets

Given that you have been very active in approaching financial institutions for credit lines, both on a renewal basis as well as forming new relationships, can you give us a description of what the bank lending market is to you, in general, and has that changed in the past few weeks? Have you seen an improvement in banks willingness and desires to lend, and what does that say about the asset or the leverage of the BDC, or is there something there that has changed or improved that we should be thinking about?

Michael McDonnell

I would say that the environment is extremely tough from an overall credit perspective for a lot of folks, particularly companies in the financial services industry. I have not seen a lot of movement in the last few weeks. I think it has been pretty static. It was tough two weeks ago, it is tough now. I think that just like in any other market, particularly a difficult one, existing relationships are easier than new relationships. But overall, we are in a tough cycle, being at a one-on-one leverage maximum with an investment grade rating is extremely helpful, but we are in a tough credit cycle, make no mistake about it.

Steve Tunney

The only thing I would add to that is the issue, the feedback is not MCG specific, and it is as much their problem, them contending with their own liquidity issues. When you think about the level of write-offs that have been taken, and then put your typical leverage that is on a bank, for every dollar of write-off above the level of equity capital that they have raised relative to those write-offs, that sufficiency has to be multiplied by 10-14 depending on the player, and that is how much they have to shrink their balance sheet. That is creating a very difficult market environment because a lot of people are focused on their own liquidity issues as opposed to establishing new relationships.

Operator

Your next question comes from Henry Coffey - Ferris, Baker Watts, Inc.

Henry Coffey - Ferris, Baker Watts, Inc.

I am putting focus back on this dividend issue. It seems that the take-away from your comments is that the realizable value going forward is going to be $197 or maybe less. And that the accrual of future value is being stopped because future value beyond the $197 is not going to be realized. Is that logical?

Michael McDonnell

Not quite, I would say that we view the $197 million as our best estimate of fair value at March 31, and therefore our best estimate of full recoverable value. We see that as fully recoverable based on fair value at that date. And that the cessation of accruing dividends going forward is more a forward-looking statement indicative of the fact that we don’t necessarily see our fair value increasing in future periods.

Henry Coffey - Ferris. Baker Watts, Inc.

That was helpful to get there. That you have $197 million worth of value and future accruals would just add to that and compound the problem When you look to a dividend reduction decision, how much of that was tied to that specific decision and how much was tied to other developments?

Michael McDonnell

I would direct you to my opening remarks. We want our dividend to be covered 100% by EPS.

Henry Coffey - Ferris, Baker Watts, Inc.

It should be by taxable income, right?

Michael McDonnell

No, because that is a further complication, you are talking about a statutory requirement, and I am talking about a business model. We want to be at 100% EPS coverage, so number one, the current market conditions are creating an environment that impacts the timing of exits, and the valuation of exits. Number two, if you look at just the first quarter, we paid a dividend of $0.44 but only earned $0.04 on an EPS perspective. So in my minds eye, I have a $0.40 hole that I need to fix to meet with my requirement to be at 100% EPS for the full calendar year 2008.

And then the other factor is that looking forward, with our view on Broadview not accruing additional dividends that accounted for approximately $0.12 per quarter, or $0.36 for the remainder of the year. Between that $0.36 for Broadview and $0.40 for a whole, you have a $0.76 change in your expectations that directly impacted where we landed from a dividend perspective.

Henry Coffey - Ferris, Baker Watts, Inc.

How much of this was discussed during the marketing of your Rights offering?

Michael McDonnell

None. Our only comment about the dividend was the reference about the last time that we updated guidance.

Henry Coffey - Ferris, Baker Watts, Inc.

Then the issue on Broadview was also kind of a latter decision?

Michael McConnell

Correct.

Henry Coffey - Ferris, Baker Watts, Inc.

The slides you were referring to on your presentation seemed very helpful. Where can we get access to those?

Michael McConnell

On the investor relations homepage there should be a link to events.

Operator

Your next question comes from Brian Hogan- Piper Jaffray.

Brian Hogan - Piper Jaffray

I saw that you put an additional $4.1 million into Cleartel. How much have you put into Cleartel to date?

Michael McConnell

That number is somewhere in the zip code of $125 million, give or take.

Brian Hogan - Piper Jaffray

When do you expect Cleartel to support its own operations?

Michael McConnell

I would say that our expectations around Cleartel have been reduced. I think that we have alerted the market that we don’t see that that is coming back on an accrual for the foreseeable future. We are working very hard and diligently to try and limit our additional exposure to Cleartel by having to continually provide capital to it. I think that the capital that we provided in the first quarter was accounted for in our assessment evaluation at $12.31 as we did the value, we sort of projected forward valuation and the required capital that would be funded in the future and we had accounted for that in our valuations, as of December 31st and March 31st.

Brian Hogan - Piper Jaffrey

The SBA, I saw that you had $21 million approved of your $130 capacity. When you would expect the remaining $130 to be approved?

Michael McDonnell

It is approved as you submit paperwork to ask for it, and it is a situation where you look forward to your utilization and you pay a commitment fee, and it starts the clock on when it has to be used by. So you only file the paperwork and get specific commitments as you look toward fundings.

And I would say that would gear up more in earnest once we complete the remaining two pieces of the capitalization rework with respect to our renewal of our unsecured, and obtaining additional warehouse. And then you will see us relying on the SBIC. I think we view that as a key component of our growth over the near term as it is pretty cost-advantage priced. It has a margin of a ten year T bill plus 275, and its ten year bullet money. So we are going to want to use that as soon as we identify and acquire assets that meet the requirements of being able to be dropped into the SBIC.

Brian Hogan - Piper Jaffray

Is it safe to say that the $20 million that is approved has already been put to use?

Michael McDonnell

No, you can’t draw that conclusion. You make a commitment, and it covers a longer period of time.

Brian Hogan - Piper Jaffray

Obviously you were constrained by capital, and this past quarter. Outside of that, how do you see the business environment?

Michael McDonnell

I think that if we can get the capital issues solved, I think it is an excellent market environment to be deploying assets. We think there is tremendous opportunity out there, and we will be fully engaged in the near term as we complete these other facilities.

Brian Hogan - Piper Jaffray

What is going on in the pricing environment in competition?

Michael McDonnell

I think competition has abated quite a bit. Anybody that relied on CLOs for funding is our of business, and a lot of larger money center banks are not providing capital because they are dealing with their own issues. Instead of us having to do outbound calls, there are inbound calls. It is a pretty inverted competitive environment. From a pricing perspective we think that we can deploy capital on a very accretive basis. I think that you will see us as we re-emerge into the market we are going to be focused on cash-paying debt-yielding securities. And because we think there is a lot of opportunity in the debt market, some very attractive yields.

Brian Hogan - Piper Jaffray

And the quality of those incoming calls, you say it is high, or how would you characterize that?

Michael McDonnell

I would say it is high.

Operator

Your next question comes from Elliot Burke - Ironside.

Elliot Burke - Ironside Capital

Did you mention a $350 million number, was it for two facilities?

Michael McDonnell

That is the sizing of the two facilities that we are working on.

Elliot Burke - Ironside Capital

Assuming you close that, how much dry powder would you have for new investments, etc?

Michael McDonnell

Once we close on those, we would slip back to the governor would be the one-on-one leverage requirement.

And to give you some color on that, we were at .89 to 1.0 at the end of the quarter as I mentioned when we were going through our slides. We did close on the Rights offering that brought investors $58 million of capital subsequent to the end of the quarter. And with the growth facilities you have the ability to leverage that one-to-one so that gives you a proxy for what we are going to have to deploy.

Elliot Burke - Ironside Capital

The stock is obviously getting killed today; can I encourage you, as a shareholder, to think about when you do have these lines in place, and you have some capital availability that you will at repurchasing shares if the shares are anywhere close to where you are now. It would seem to me that you really can’t make an investment that is as attractive as buying your own shares at a 50% discount to book value. Could you talk about that a little bit?

Michael McDonnell

We appreciate that insight, and it is something that you can think about and look at. I think inherently as a business development company what is very difficult is in a one-to-one leverage environment you are constantly needing to raise equity capital to grow, and when you are buying back your shares, at some point in the future, you are going to have to turn around and go back the other way.

Steven Tunney

What I would probably add to that is at this level of availability it wouldn’t be that much in the way of value of accretion when you look at the resources that we have. But we will certainly take it under advisement.

Elliot Burke - Ironside Capital

What was the last point, about value accretion? If you are retiring shares at a 50% discount it would seem to be enormously accretive.

Michael McDonnell

It would be accretive on an individual share basis, but I would have to run the math to see how much it would move the needle, given the amount of dry powder that we would have to have to do something like that.

Steven Tunney

There is another key component I think, that as we think about the tactical considerations of having to get the debt facilities renewed, but the strategic consideration is getting ourselves back to book value. And how you get back to book value is, I think, pertinent in the market, being back in the game and demonstrating the franchise value of the firm. Because if it just going to be a business that is not originating assets, you have to question where you are going to end up from a relative evaluation to NAV. Historically, we have traded at a premium to NAV so that is sort of the objective that we are trying to get back to, and you get there by the franchise, which is putting on assets.

Elliot Burke - Ironside Capital

When your shares are at a 50% discount, shareholders can get a pretty attractive return with no growth at all. If they could ever just get back to book value they would be pretty happy.

Michael McDonnell

That is the objective, because at that point you get back in the mode where you can do equity raises on a very cost-effective basis and then sort of drive the engine again. You can be rest assured that we will examine all strategies, all ideas that meet the principle objective which is to get our stock back to book value.

Elliot Burke - Ironside Capital

I think that one of the reasons that the stock is down so much is that you cut your dividend. I understand the Broadview issues to a certain extent drive that, but at the same time this is an income stock, people buy it for the dividend, when you cut the dividend 50% you are going to have the stock fall as well. And if you want an explanation for why your stock is getting killed and why the valuation is at 50% book value I don’t think you have to look much further than that.

Michael McDonnell

I would say that I think that at these levels the yields are still at mid-teens, and historically that would be at the high end of the range, so over time, at this stock price, the dividend makes sense to me. At the end of the day, the business model is 100% of coverage of the dividend through EPS., so I think that doing anything other than that in this environment doesn’t make a lot of sense. I think it is also our view that instead of trading on a dividend yield right now, I think that the entire universe of stock is trading on a discount to book value. I think that the principle drivers to that discount in this environment are the liquidity issues of the company. So once we take off and complete some of these activities, some of the overhang should be lifted and we should hopefully get some improvement.

Elliot Burke - Ironside Capital

I have one more point. When you came in to see us, in (inaudible) with the Rights offering, you expressed some dissatisfaction with where the stock was, and the common stock was a lot higher than it is now. You have the ability to sell shares wherever you want to now after the annual meeting. Can I get at least a commitment from you that you wouldn’t sell shares around here, under any circumstances, going forward?

Michael McDonnell

I would say on that, that we as a BEC need to be in the equity capital markets in order to be able to grow.

Steven Tunney

And here is what I would say, I am extremely disappointed with where the stock sits, so I would be hard pressed, but our sale of stock is something that is controlled by our board of directors, and our board of directors is controlled by independent directors, and you can rest assured that the independent directors and the board as a whole is going to do what is in the best interest of our shareholders over the long term.

Elliot Burke - Ironside Capital

I am trying to think that with where the stock is now, at 50% of book value that the answer to that question is pretty much “yes”. And I am a little disappointed that you waffled around that.

Michael McDonnell

I hope you can appreciate that we have to land where we land.

Operator

Your next question comes from Daniel Furtado - Jefferies.

Daniel Furtado - Jefferies & Company

What percent of the companies in your portfolio now have $18 million or less tangible net worth?

Michael McDonnell

I will have to add that to the next call. I don’t have that. I will say that the SBIC matches up with our investing activities. For example, Broadview has less than $18 million in tangible net worth.

Daniel Furtado - Jefferies & Company

On this three pillars line, what is the advance rate? Is at 100%, or does it step down according to asset type?

Michael McDonnell

The advance rate on the three pillars facility is, we have two different traunches, one of them you can go up to 70%, depending on the mix of assets, and then there is another traunch where you can get up to an additional 10%. So the maximum advance rate that you can get under that facility, and there are a number of other governors, such as diversity and weighted average rating and that sort of thing, the maximum is 80%.

Operator

Your next question comes from Troy Ward - Stifel Nicolaus.

Troy Ward - Stifel Nicolaus

A quick follow-up on Cleartel. Steve, you mentioned that your valuation at December 31 included the knowledge that you would be putting in a small amount of additional investment in the first quarter. Is that correct?

Steve Tunney

Correct.

Troy Ward - Stifel Nicolaus

And when you did your valuation this quarter, the obvious question is did your valuation suspect that they can be at least cash-flow neutral, or do they need continued infusion?

Steve Tunney

I think there is still a modest assessment of additional funding for Cleartel. That has been fully accounted for at 1231 and 331.

Operator

Your next question comes from Carl Drake - SunTrust Robinson.

Carl Drake - SunTrust Robinson Humphries

A quick follow-up on the fee income. The $0.01 cent this quarter versus the range of $0.04 to $0.12. Given you guidance on significantly reduced origination activity, is $0.01 a run rate that we should model going forward, or is something that we might see some recovery in that number maybe in the latter half of this year?

Michael McDonnell

The $0.04 to $0.12 is in the historical range when we have been originating more, and I think as we are not originating much the $0.01 is sort of where we end up. You hit it on the head, in order to increase that we need to get the origination engine going again, which is going to be at the earliest toward the back half of 2008.

Operator

That concludes our question-and-answer session.

Steve Tunney

Thank you all for your participation and we look forward to a call next quarter and hopefully a sunnier climate when that call is going on. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!