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Nicholas Marshi
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Nicholas Marshi is the Chief Investment Officer of Southland Capital Management (SCM). The Company is a Registered Investment Adviser in Santa Monica, California. SCM's principal expertise is in the area of publicly traded leveraged finance to U.S. private companies, including the Business... More
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BDC Reporter
  • MCG Capital Wins One And Loses One 3 comments
    May 26, 2010 1:18 PM | about stocks: MCGC
      The shareholders have spoken. MCG Capital (ticker: MCGC) managed to keep Western Investment from adding its representative to the Board, but did not get authority to sell shares below Net Asset Value (“NAV”). Here’s a link to an article in the Washington Business Journal: click here.

    Here at the BDC Reporter we’re musing about what the outcome of the shareholder votes might mean for MCGC. We don’t know if Western Investment is going away after this rebuff, so there’s not much to say there.

    The inability to raise equity until the stock price reaches NAV could see the Company making even more effort to increase its dividend to attract yield hungry investors. Experience has shown that dividend paying Business Development Companies (“BDC”) tend to trade higher than those which are harbouring the funds for internal use (usually debt pay-off). Still, with the stock trading at $5.4 after the recent market swoon and the latest NAV at  $8.16, the Company has a big gap to make-up.

    Another possibility is that an investment group or another BDC might take a run at a friendly or unfriendly “approach” to MCGC, promising access to capital and the chance to grow.   With MCGC trading at a 34% discount to NAV even though dividends are being resumed;  the existence of a significant NOL (which makes future Realized Gains potentially tax free) and the threat of Western Investment around the corner might cause MCGC’s Board and management to consider “strategic alternatives”. We emphasize,though, that we’re just speculating.

    Or, MCGC might just do nothing and continue to hit singles and doubles and wait for better days. The wind can change very quickly in this market, and at its 52 week height a few weeks ago MCGC traded at $6.98. That’s almost a stone’s throw to NAV.

    Of course, if the Company does manage to get the stock price over NAV there’s no guarantee that the market will be receptive to a MCGC equity offering. The Company’s prior strategy of buying large equity stakes in many of its portfolio companies was a disaster and almost bankrupted the Company (as Western Investment pointed out to no avail).  Now MCGC is talking about being patient and selling off portfolio companies when the opportunity arrives and recycling any funds into high yielding mezzanine investments.  More emphasis is being placed  on lending to smaller sized companies due to the use of SBIC funds, which is not the Company’s traditional bailiwick. A few quarters of increasing earnings might do the trick, Ironically,though, an improving balance sheet might see NAV grow and make getting the stock price above NAV even more challenging. That’s why they pay senior management the big bucks and we don’t begrudge MCGC’s top brass their generous compensation and stock awards (just approved by shareholders).



    Disclosure: No Position MCGC
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Comments (3)
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  • Tack
    , contributor
    Comments (14568) | Send Message
     
    It would seem to me that MCGC shareholders have shot themselves in the foot. They think they're preventing dilution, I suppose, but NAV has nothing to do with the rate of return that might be attained with newly invested funds, so I'm not sure that applies. And, to stifle growth at precisely the moment that so many assets exist that are undervalued seems equally questionable.

     

    Maybe, somebody can make the "austerity case," but it eludes me.
    26 May 2010, 07:06 PM Reply Like
  • Nicholas Marshi
    , contributor
    Comments (376) | Send Message
     
    Author’s reply » Agree that shareholders should have voted for sale of equity below NAV. However, management could have made the restrictions more attractive to deal with the lack of faith. Maybe it was a vote for a take it slow approach, but the law of unintended consequences always applies.
    26 May 2010, 07:20 PM Reply Like
  • Tack
    , contributor
    Comments (14568) | Send Message
     
    Thanks.

     

    Anytime shareholders think they can run companies better than management, there's a problem. Either they should stand aside, or they should get management in which they have confidence. Running companies by "democracy" is always a bad idea.

     

    Regarding MCGC, or any other BDC, for that matter, we are presently in the "mother of all lending environments" for astute BDC's: 1) their borrowing rates are low, if they have good metrics, 2) small-business lending from conventional sources has dried up, so BDC's can command superb spreads and/or equity kickers, 3) asset values are depressed for equity plays, and 4) the economy is just starting to recover.

     

    It's hard to imagine the BDC lending environment ever getting any more attractive than it is at present. This is precisely the time to have and to employ cash.
    26 May 2010, 08:20 PM Reply Like
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