Nicholas Marshi

CapitalSource: Tremendous Opportunity or Value Trap?

Appreciate the attempt to make sense of the moving parts at CSE. We are long on the stock as well, and have not given up hope despite the dire stock price swoon.

MCG Capital: Squeaking By?

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.

MCG Capital: On the Knife's Edge

Yes, it is Broadview and not Broadcom. I realized that after draft 3 and tried to change the name wherever it occurred. Clearly I did not edit carefully enough. Sorry


On May 12 04:27 PM joe_no_say wrote:

> It's Broadview, not Broadcom.

CapitalSource: Don't Mind the Gap

Well I did say that if CSE didn't buy TONE it would have the option of making another transaction on more favorable terms. It's clear from today's announcement of the proposed acquisition of the Fremont General assets that's just what's happened. On the Conference Call today at least 2 analysts said as much. This looks good for CSE.

Business Development Companies Raising Capital in a Recession

With the passage of nearly two months, our prediction that substantial new equity raising by BDCs was about to occur has been proven correct. Allied Capital (ALD) and Gladstone Capital (GLAD) led the way in January. Now several more BDCs have announced equity raisings. Most notably, American Capital Strategies (ACAS) and Prospect Capital (PSEC) have announced substantial stock issuance at prices above NAV, which seemed impossible only weeks ago.

More interesting is that several other BDCs have announced rights offerings to raise capital from existing investors. As the companies stock price trade below NAV, this is the only allowable way to raise equity in this environment. To date, Ares Capital (ARCC), MCG capital (MCGC) and Gladstone Investment (GAIN) have announced "transferable rights offerings" to shareholders.

One could see these moves, especially for MCG Capital, as more defensive than offensive-building up a balance sheet being eroded by questionable investments. Gladstone likewise did mention that the new capital would help with diversification by expanding total assets. Overall, though, most of these capital raisings reflect managements belief that lending and investment opportunities in the months ahead will be unprecedented and the more "dry powder" available the better the returns to shareholders. Barring a melt down in the economy-also of unprecedented proportions-we agree that this is a good time to generate liquidity. With most of the money center banks preoccupied, CLOs in deep freeze and hedge funds in panic mode the supply of capital will drop and those remaining providers will be able to command better terms. Even buying existing loans in the secondary marketplace may result in oversized returns thanks to the rush for the doors underway, even in the middle market.

The bad news is that even with new equity being raised in the BDC industry (about one third of the universe of BDC companies has raised new money or announced their intention to do so in 2008 to date), the bottom has not yet been found as we so optimistically predicted back in January.

CapitalSource: Don't Mind the Gap

The TONE acquisition has not been blow up per se. The Board has effectively given the CEO the right to negotiate a better deal or walk away. In the big picture this is very good news. CSE initially contracted to buy TONE in a totally different economic environment. The intervening months have given management the opportunity to due diligence the other bank at length and to determine if the Florida real estate and other holdings are a glitch or a time bomb. If it's thew latter CSE will be able to walk away and undertake a purchase of another institution at a later date on much more favorable terms (banks might be going cheap in the years ahead). Or, with a price/terms adjustment, TONE might still be acquired. Either way the shareholders should benefit.

I don't want to sound too optimistic because CSE has its own problems. In the case of the TONE acquisition,though, CSE is sitting pretty.