MCG Capital: Squeaking By?

Finally, MCG Capital (MCGC), the beleaguered Business Development Company, which recently cut its dividend (a big no-no in any industry, but especially with a BDC), has announced the outcome of its efforts to renew its $130mn Unsecured Revolving Line of Credit.

Here is the full text of MCGC's press release on the subject:

MCG Capital Corporation (Nasdaq: MCGC - News; the "Company") announced today that it entered into an agreement effective May 30, 2008 for a one-year unsecured revolving line of credit facility (the "Facility") with a committed amount of $70 million. The Facility may be expanded through new or additional commitments up to $150 million during the Facility's term. The Facility generally bears interest at a rate equal to LIBOR plus 2.75% and has a commitment fee of 25 basis points per annum on undrawn amounts.

The Company will use the Facility for origination of loans to and investments in primarily middle market companies, repayment of indebtedness, working capital, and other general corporate purposes. On May 30, 2008, there was $8 million outstanding under the Facility. In conjunction with the closing of the Facility, the Company paid off and terminated its unsecured revolving credit facility with Bayerische Hypo-Und Vereinsbank, AG, New York Branch.

SunTrust Robinson Humphrey, Inc. acted as Arranger for the Facility. The lending institutions that committed to the Facility are SunTrust Bank, Chevy Chase Bank, F.S.B., Sovereign Bank, and BMO Capital Markets Inc.

In addition, the Company announced today that it reduced the outstanding balance under the MCG Commercial Loan Trust 2006-2 warehouse credit facility with Merrill Lynch Capital Corp. from $61 million as of May 7, 2008 to $23 million as of May 30, 2008. The remaining outstanding balance is due August 31, 2008

Comment: We had predicted in our prior post that MCGC might not be able to renew its Unsecured Revolver or would do so at reduced commitment levels. In fact, both turned out to be true. The prior $130mn Revolver was canceled, but existing lender SunTrust (as well as a couple of other participant banks) committed the financing for a new $70mn line of credit (nominally expandable to $150mn). MCGC's former lead lender Bayerische Hypo-Und Vereinsbank dropped out. As we also predicted, pricing went up to LIBOR + 2.75%, which is reasonable for an unsecured loan with some dodgy credits.

Debt Outstanding?: The question mark here is how much availability exists under the new Revolver. The press release says the prior Revolver was paid off, but also says outstandings under the new line is only $8mn. What happened to the $68mn outstanding on the old Revolver as of a few weeks ago ? Was it paid down by the Rights Offering or was that already subsumed in the balance or did MCGC sell some assets (Broadview participation)? Or were there normal repayments on the $1.5bn portfolio ? Unclear.

Status of Warehouse Lines: We also don't know what is happening with the new warehouse facilities which management mentioned in a tight lipped fashion during the latest Conference Call.  These are expected to allow MCGC to sell new assets into a securitization facility, similar to what was anticipated would have been the case with the Merrill Lynch Commercial Loan Trust. Speaking of the devil, the press release confirms that MCGC is in the terminal phase of paying that Merrill Lynch facility down with three months to go. With only $23mn to pay off, and apparent availability under the Unsecured Revolver, the Merrill Lynch facility will be paid off with no problem. Frankly we were never that worried.

We're less certain about the prospective warehouse facilities. This may have less to do with MCGC than with the still problematic market for commercial loan CLOs. There's no point setting up a warehouse if you can't find a permanent home for the assets. We're not close enough to Wall Street here in California to know if that market is coming back (certainly Merrill Lynch didn't think so).

MCGC's Short Term Priorities: We're presuming MCGC is going to focus on Broadview's IPO to get that monkey off its back, and finding deals for its SBIC subsidiary. Judging from the Conference Call, we'll be seeing MCGC focus on SBIC acceptable cash income traditional senior and subordinated loans in the months ahead.  Still, asset growth will be anemic in the months ahead, as even a maxed out SBIC line only adds 6% or so to total assets.

What Next?:  We'll be waiting for more details on MCGC's financings (but most of the news is in) and greater clarity on the fate of Broadview and Cleartel (still sucking down cash).  We still need more information about the credit quality of some of its other loans.

Still, we do note that MCGC is beginning to shed itself of some of the negative traits that caused us to drop our Buy rating on the stock several months ago.

First, the Company is no longer accruing 12 cents a share a quarter (!) to Net Investment Income on Broadview, which is reducing the high proportion of non-cash income being recognized by the Company. 

Second, the Company (as mentioned above) is promising to focus on cash income investments rather than PIK preferred.  Third, management is making an effort to reduce its 20% concentration in the Telecom sector to 15% (see the IQ 2008) Conference Call.  Fourth, with the Rights Offering and new Unsecured Revolver and the Merrill Lynch warehouse line all but paid off, MCGC has dodged the liquidity crisis which has been bedeviling the Company for months.

This is a just a breather because the Unsecured Revolver renews is just one year. We are impressed, though, that SunTrust has stepped up to help MCGC. Maybe it's a "too big to fail" reasoning, but we'd like to believe that the new lead bank (and the agent on the Three Pillars CP facility) of the Unsecured Revolver has looked into the abyss of MCGC's unpledged investment portfolio and seen some redeeming value. We don't have enough information to pull the trigger on the new, slimmed down MCGC, but we'll be watching carefully what happens in the weeks ahead.

Disclosure: Author holds a long position in MCGC

Comments

[Blindsided]

Thanks! Glad to read you are following MCGC and willing to publish your analysis please keep it up. Wall Street has run away as is typical of those (bleep).

If you like specialty financial stocks that now trade at call option price levels that no one follows any longer take a look at CHC and MMAB. Hint with CHC: Stephen M. Ross ( Half owner of the Miami Dolphins) is the money in this "alternative asset management" company. Bot the farm on this value/yield trap trifecta.

[jjason]

Thanks for the article. I am long MCGC too. At this time, would you add more shares to your portfolio?

[PortfolioGuy]

Not too many people write about MCGC. I wrote up an analysis of the company 5 months ago for my clients since several of them were interested in investing in MCGC. I told them at $12 the company was a sell. The main reason for the call was a result of the research I did related to the 20% position in the teleco's. Personally I am not as bullish on the company as you are, but I also wouldn't go short here, so I guess you could say I'm neutral on the stock now. It is encouraging and rather suprising they got the deal they did on the line.

[NicholasMarshi]

To answer Jjason: No, I wouldn't add more shares to my Long position in MCGC. As I alluded to in the article, I actually turned negative on MCGC months ago before the stock price dropped. I sold out of my main portfolio (which is all BDC stocks). However, I failed to sell the Long MCGC position I had in another account. By the time I realized what I hadn't done, the stock price had dropped and I didn't want to realize a major loss. I'm hopeful over time that MCGC will find its way back: probably by achieving the ever more unlikely Broadview IPO, turning around Cleartel (and selling it ideally) and staunching any further bad debt issues with its Control portfolio. If MCGC also successfully invests its SBIC monies and raises a warehouse line for a CLO we might see some earnings growth. However, there are too many uncertainties at the moment to even consider "doubling up" despite the huge nominal dividend yield at the current price level. This might be a 2-3 year hold before MCGC deals with all its problems and success is by no means certain. So I wouldn't say I'm bullish. I'm just stuck and hopeful. Of course, if I start to feel that bankruptcy is a real option I'd sell for whatever I could get but that seems less likely now than it did just a few days ago before the Revolver rejigging.

[jjason]

Nicholis, Thanks for your reply. I am holding onto my shares too.

[Cargan]

Nicholas: Thanks so much for following and writing about this issue. We have been long for some time and have a similar read of the filings. I was wondering if Einhorn's book would effectively cast a shadow over all BDCs (the accounting for which seems by its nature very hard to peg). We take comfort in the depth of the management team and await hopefully for the gears to begin turning again.

[LOUSIEGS]

The moment MCG monetize sits 300 M value in Broadview we've got a $9.50 share price. It's becoming that simple. I also agree, the obtaining of a credit facility was crucial and is now done. So, it's Broadview, Broadview, Broadview.

[User 241905]

MCGC has alot to answer for.... especially to its' shareholders... why? when 1) the company is not performing and 2) the stocks are not performing: yet, they are still making a profit, and yes, they are still driving their Mercs around, there's a problem..

[User 241905]

MCGC has alot to answer for.... especially to its' shareholders... why? when 1) the company is not performing and 2) the stocks are not performing: yet, they are still making a profit, and yes, they are still driving their Mercs around, there's a problem..

[TheDoc]

Guys,
although MCGC's shares have not done too well, they will spike again. similar to abk... be careful.. if my expectations are correct, they will hit back around 10, but will fizzle out slowly again..
any thought?