MCG Capital Corporation (Nasdaq: MCGC) (“MCG” or the “Company”) announced today its financial results for the quarter ended June 30, 2011. MCG will host an investment community conference call today, August 4, 2011 at 10:30 a.m. (Eastern Time). Slides and financial information to be reviewed during the investor conference call will be available on MCG’s website at http://www.mcgcapital.com prior to the call.

HIGHLIGHTS

-- Distributable net operating income, or DNOI, for the quarter ended June 30, 2011 was $11.6 million, or $0.15 per share. DNOI refers to net operating income adjusted for amortization of employee restricted stock awards.

-- Net operating income for the quarter ended June 30, 2011 was $11.2 million, or $0.15 per share.

-- Net loss for the quarter ended June 30, 2011 was $10.2 million, or $0.13 per share.

-- Net investment loss for the quarter ended June 30, 2011 was $21.4 million, which included a $24.8 million reduction in the fair value of Broadview Networks Holdings, Inc., or Broadview, resulting from a change in the methodology used to value this portfolio company from a projected forward EBITDA and new owner cash flow basis to a trailing EBITDA basis.

-- During the quarter ended June 30, 2011, MCG had $107.8 million of advances and originations, including $52.5 million in investments to five new portfolio companies. Payoffs and portfolio monetization activities totaled $178.2 million during the quarter.

-- MCG’s ratio of total assets to total borrowings and other senior securities was 232% as of June 30, 2011.

DIVIDEND DECLARATION

MCG also announced today that its board of directors declared a dividend of $0.17 per share. The dividend is payable as follows:
Record date: September 14, 2011
Payable date: October 14, 2011
 

OVERVIEW

Today, MCG reported a second quarter 2011 net loss of $10.2 million, or $0.13 per basic and diluted share, which represented a $9.5 million, or $0.12 per share, decrease from the net loss of $0.8 million, or $0.01 per share, reported for the comparable period in 2010. The incremental net loss resulted primarily from an $8.5 million increase in MCG’s net investment loss before income tax provision and a $3.5 million reduction in gain on extinguishment of debt, partially offset by a $3.0 million reduction in operating expense.

MCG’s revenue for the second quarter of 2011 was $21.2 million, which represented a $0.6 million, or 2.6%, decrease from the comparable period in 2010. This decrease was composed of a $1.0 million decrease in interest and dividend income, partially offset by a $0.4 million increase in advisory fees and other income. MCG reported DNOI of $11.6 million, or $0.15 per share, which represented a $1.7 million, or $0.02 per share, increase over the second quarter of 2010. Net operating income during the second quarter of 2011 was $11.2 million, which represents a $2.4 million, or 27.0%, increase over the comparable period in 2010.

"During the quarter, the velocity of payoffs by our portfolio companies outpaced our origination activity, which resulted in a $0.02 reduction in our NOI on a sequential basis. However, in future months, we expect that the impact of payoffs will decline and we expect to redeploy such payoffs into income-earning investments. We believe that these actions, combined with our cost-cutting corporate restructuring should increase our NOI sufficiently to cover our dividend over the next few quarters. We expect to maintain a $0.17 quarterly dividend through the remainder of 2011, to reflect our expectation that our net operating income and PIK and dividend collections will exceed our dividend level for all of 2011," said Steven Tunney, President and CEO. "Once again, we had a disappointing result relating to our investment in Broadview. This quarter, Broadview withdrew a tender offer for its $300 million senior secured bonds due to uncertain market conditions. Due to this uncertainty, we changed our methodology for valuing Broadview from a projected forward EBITDA and new owner cash flow basis to a trailing EBITDA basis and reduced our investment value accordingly. While another Broadview mark is certainly disappointing, we believe that this methodology change will bring some stability to our valuation on a go-forward basis."

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2011, MCG had $65.8 million cash and cash equivalents and $135.7 million of cash in securitization and restricted accounts, which could be deployed for suitable new investment opportunities. However, because the reinvestment period for principal collections for the Company’s Commercial Loan Trust 2006-1 facility (“MCG 2006-1”) expired on July 20, 2011, MCG must begin to repay this facility beginning on October 20, 2011 with all principal collections of collateral in that facility. At that time, MCG must use at least $55.9 million of securitized cash in that facility (representing previous principal collections) to repay a portion of the MCG 2006-1 facility. Subsequent to June 30, 2011, approximately $13.1 million was transferred from securitization cash to cash and cash equivalents from the periodic distributions allowed through the MCG 2006-1 and MCG Commercial Loan Funding Trust ("MCG CLFT") facilities. Also subsequent to June 30, 2011, MCG transferred additional assets of $13.3 million to the MCG 2006-1 facility and $10.0 million to the MCG CLFT facility for which the Company received cash from the securitization cash accounts.

As of June 30, 2011, MCG had $511.2 million of borrowings (the majority of which was composed of $427.5 million of collateralized non-recourse borrowings). As of June 30, 2011, MCG had $124.0 million of borrowing capacity across all facilities, including $6 million of funded borrowing capacity available, subject to the approval of the United States Small Business Administration, or SBA, that is exempt from the statutory asset coverage ratio requirements. As of June 30, 2011, the total borrowing potential under the United States Small Business Administration, or SBA, license with Solutions Capital I, L.P. was $150.0 million. To access the entire $150.0 million borrowing potential, MCG would have to fund $25.4 million, in addition to the $49.6 million that it had funded through June 30, 2011. As of August 1, 2011, across all facilities the borrowing capacity available is $114.4 million which would require an additional $66.5 million cash and collateral contribution into the facilities.

As a business development company, MCG is required to meet an asset coverage ratio of total net assets to total borrowings and other senior securities of at least 200% in order to borrow under new or existing borrowing facilities or to distribute dividends to its stockholders. MCG’s asset coverage ratio was 232% as of June 30, 2011.

CORPORATE RESTRUCTURING

MCG is restructuring its business to simplify the organizational structure, refine operations and reduce annual operating expenses. On August 1, 2011, the Company’s board of directors approved a plan to reduce its workforce by 42%, including 22 current employees and 5 recent terminations. After effecting the plan, the Company’s headcount will be 36 employees. The Company believes this plan, which includes a cost reduction initiative, reflects the focus of its new asset origination orientation on high-yielding debt securities, aligns the size of the organization to its asset base and establishes an efficient framework that is scalable with its assets. The workforce reduction focuses primarily on sizing the organization at a level appropriate for the Company’s expected near-term objectives. Affected employees are eligible to receive severance pay, continuation of benefits and, for employees who have been awarded restricted stock, additional lapsing of restrictions associated with restricted stock awards.

MCG estimates that the aggregate charges associated with the plan will be approximately $4.3 million to $4.5 million, all of which will be incurred during the remainder of fiscal 2011. These estimated costs reflect severance pay and related obligations. MCG will account for these costs in accordance with ASC 420-10—Exit or Disposal Cost Obligations. MCG expects these actions, when combined with the closure of one of the Company’s facilities and other planned reductions in the general and administrative expense will result in approximately $6.75 million to $7.25 million of expected savings through December 31, 2012, or approximately $1.1 million to $1.3 million per quarter.

PORTFOLIO ACTIVITY

The fair value of MCG’s investment portfolio totaled $849.1 million as of June 30, 2011, as compared to $1,009.7 million as of December 31, 2010. During the second quarter of 2011, MCG had $107.8 million of originations and advances, including $52.5 million of originations to five new portfolio companies, $51.5 million of originations and advances to 15 existing portfolio companies under revolving and line of credit facilities, and $3.8 million of paid-in-kind, or PIK, advances. The $52.5 million of originations to new portfolio companies were all senior debt investments. The $51.5 million of originations and advances to existing portfolio companies included $45.5 million of investments in senior debt securities, $1.7 million in unsecured subordinated debt in one portfolio company and a total of $4.3 million of preferred equity in three portfolio companies. Gross payments, reductions and sales of securities during the second quarter of 2011 of $178.2 million were composed of $92.9 million of senior debt, $45.9 million of secured subordinated debt, $0.2 million in unsecured subordinated debt, $37.3 million of preferred equity and $1.9 million of common equity.

During the three months ended June 30, 2011, MCG reported net investment losses before income tax provision of $21.4 million, which are detailed below:
    Three months ended June 30, 2011

(in thousands)
Industry Type   Realized Gain/(Loss)  

Unrealized (Depreciation)/ Appreciation
  Reversal of Unrealized Depreciation/ (Appreciation)   Net (Loss)/ Gain
Portfolio Company            
Broadview Networks Holdings, Inc. Communications Control $ $ (24,829 ) $ $ (24,829 )
Intran Media, LLC Other Media Control (3,758 ) (3,758 )
PremierGarage Holdings, LLC Home Furnishings Control (2,141 ) (2,141 )
VOX Communications Group Holdings, LLC Broadcasting Non-Affiliate (7,688 ) 5,645 (2,043 )
Jet Plastica Investors, LLC Plastic Products Control (1,274 ) (1,274 )
Restaurant Technologies, Inc. Food Services Non-Affiliate 1,527 (1,842 ) (315 )
Provo Craft & Novelty, Inc. Leisure Activities Non-Affiliate (1,152 ) 1,151 (1 )
Active Brands International, Inc. Consumer Products Non-Affiliate (12,052 ) 12,053 1
GMC Television Broadcasting, LLC Broadcasting Control (1,000 ) 11 1,000 11
Avenue Broadband LLC Cable Control 11,917 (11,895 ) 22
Jenzabar, Inc. Technology Non-Affiliate 1,531 1,531
Coastal Sunbelt Real Estate, Inc. Real Estate Investments Non-Affiliate 2,186 2,186
GSDM Holdings, LLC Healthcare Non-Affiliate 2,479 2,479
RadioPharmacy Investors, LLC Healthcare Control 2,727 2,727
NPS Holding Group, LLC Business Services Control 3,855 3,855
Other (< $1 million net gain (loss))   (58 )     (353 )     512       101  
Total $ (8,506 )   $ (19,566 )   $ 6,624     $ (21,448 )
 

A summary of the reasons for significant changes in realized and unrealized (loss) and gain on investments and changes in unrealized appreciation and depreciation on investments for the three months ended June 30, 2011, are summarized below:
  • During the quarter ended June 30, 2011, MCG recorded a $24.8 million decrease in the fair value of its investment in Broadview, the Company’s single largest portfolio investment. Late in the quarter ending June 30, 2011, Broadview withdrew its tender offer for $300 million of its 11 3/ 8% Senior Secured Notes, due on August 31, 2012, following Broadview’s review of market conditions. Due to these uncertain market conditions, the Company changed the methodology by which it values Broadview to a trailing EBITDA basis as opposed to its prior methodology under which the Company valued its investment on a projected forward EBITDA basis and new owner cash flows.
  • MCG also recorded unrealized depreciation on its investments in PremierGarage Holdings, LLC and Intran Media, LLC to reflect the Company’s portion of the estimated liquidation value of these portfolio companies.
  • MCG also recorded unrealized depreciation on its investment in Jet Plastica Investors, LLC to reflect an incremental investment in this portfolio company during the quarter ended June 30, 2011, that the Company subsequently wrote down to zero.
  • MCG received payments of $4.1 million in satisfaction of its $11.8 million debt investment in VOX Communications Group Holdings, LLC and wrote off the remaining investment in that portfolio company. As a result of that transaction, the Company reversed $5.6 million of previously unrealized depreciation and realized a $7.7 million loss.
  • MCG wrote off its remaining subordinated debt investment in Active Brands International, Inc., resulting in the reversal of $12.1 million of previously unrealized depreciation and the realization of a $12.1 million loss.
  • MCG sold its investment in Avenue Broadband LLC, resulting in the reversal of $11.9 million of previously unrealized appreciation and the realization of an $11.9 million gain.

The remaining unrealized depreciation and appreciation shown in the above table resulted predominantly from a change in the performance of certain of the Company’s portfolio companies and the multiples used to value certain of its investments.

Conference Call (Live Call)

 
  Date and time  

Thursday, August 4, 2011at 10:30 a.m. Eastern Time
Dial-in Number (No Conference ID required)

(877) 878-2269 domestic(847) 829-0062 international
  Webcast  

http://investor.mcgcapital.com

Replay (Available through August 18, 2011)

Call Replay (Conference ID for replay is #87864142)

(855) 859-2056 domestic(404) 537-3406 international
  Web Replay  

http://investor.mcgcapital.com
 
MCG Capital Corporation
Consolidated Balance Sheets
   
June 30, December 31,

(in thousands, except per share amounts)
2011 2010

 

(unaudited)
Assets
Cash and cash equivalents $ 65,847 $ 44,970
Cash, securitization accounts 93,582 42,245
Cash, restricted 42,154 29,383
Investments at fair value
Non-affiliate investments (cost of $588,143 and $684,785, respectively) 604,202 646,116
Affiliate investments (cost of $43,442 and $43,721, respectively) 54,110 53,300
Control investments (cost of $460,507 and $517,167, respectively)   190,789       310,289  
Total investments (cost of $1,092,092 and $1,245,673, respectively) 849,101 1,009,705
Interest receivable 2,248 5,453
Other assets   13,124       13,521  
Total assets $ 1,066,056     $ 1,145,277  
Liabilities
Borrowings (maturing within one year of $0 and $18,858, respectively) $ 511,210 $ 546,882
Interest payable 2,620 2,291
Dividends payable 13,101 10,735
Other liabilities   5,092       7,353  
Total liabilities   532,023       567,261  
Stockholders’ equity
Preferred stock, par value $0.01, authorized 1 share, none issued and outstanding
Common stock, par value $0.01, authorized 200,000 shares on June 30, 2011 and December 31, 2010, 77,046 issued and outstanding on June 30, 2011 and 76,662 issued and outstanding on December 31, 2010 770 767
Paid-in capital 1,008,553 1,008,823
Distributions in excess of earnings
Paid-in capital (166,029 ) (166,029 )
Other (66,012 ) (28,555 )
Net unrealized depreciation on investments   (243,249 )     (236,990 )
Total stockholders’ equity   534,033       578,016  
Total liabilities and stockholders’ equity $ 1,066,056     $ 1,145,277  
Net asset value per common share at end of period $ 6.93 $ 7.54
 
MCG Capital Corporation
Consolidated Statements of Operations
   
Three months ended Six months ended
June 30,   June 30,

(in thousands, except per share amounts)
  2011   2010   2011   2010
Revenue    
Interest and dividend income
Non-affiliate investments (less than 5% owned) $ 16,221 $ 15,079 $ 33,779 $ 29,925
Affiliate investments (5% to 25% owned) 1,775 783 2,918 1,765
Control investments (more than 25% owned)   2,192       5,291       6,927       11,074  
Total interest and dividend income   20,188       21,153       43,624       42,764  
Advisory fees and other income
Non-affiliate investments (less than 5% owned) 420 443 927 465
Control investments (more than 25% owned)   600       172       960       285  
Total advisory fees and other income   1,020       615       1,887       750  
Total revenue   21,208       21,768       45,511       43,514  
Operating expense
Interest expense 3,945 4,383 7,818 8,856
Employee compensation
Salaries and benefits 2,908 3,742 6,884 8,538
Amortization of employee restricted stock awards   406       1,123       1,030       2,350  
Total employee compensation 3,314 4,865 7,914 10,888
General and administrative expense   2,711       3,670       5,538       6,481  
Total operating expense   9,970       12,918       21,270       26,225  
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision   11,238       8,850       24,241       17,289  
Net realized (loss) gain on investments
Non-affiliate investments (less than 5% owned) (19,652 ) 2,722 (47,569 ) 455
Affiliate investments (5% to 25% owned) 1 (916 )
Control investments (more than 25% owned)   11,145       (1,979 )     12,352       (1,979 )
Total net realized (loss) gain on investments   (8,506 )     743       (36,133 )     (1,524 )
Net unrealized depreciation on investments
Non-affiliate investments (less than 5% owned) 23,195 2,569 54,728 7,299
Affiliate investments (5% to 25% owned) (358 ) 278 1,089 1,478
Control investments (more than 25% owned) (36,561 ) (16,832 ) (62,840 ) (22,946 )
Derivative and other fair value adjustments   782       276       764       363  
Total net unrealized depreciation on investments   (12,942 )     (13,709 )     (6,259 )     (13,806 )
Net investment loss before income tax provision (21,448 ) (12,966 ) (42,392 ) (15,330 )
Gain (loss) on extinguishment of debt before income tax provision 3,490 (863 ) 3,432
Income tax provision   8       124       19       186  
Net (loss) earnings $ (10,218 )   $ (750 )   $ (19,033 )   $ 5,205  
(Loss) earnings per basic and diluted common share $ (0.13 ) $ (0.01 ) $ (0.25 ) $ 0.07
Cash distributions declared per common share $ 0.17 $ 0.11 $ 0.32 $ 0.11
Weighted-average common shares outstanding—basic and diluted 76,343 75,392 76,056 76,424
 
MCG Capital Corporation
Consolidated Statements of Cash Flows
 
Six months ended
June 30,

(in thousands)
2011   2010
Cash flows from operating activities  
Net (loss) income $ (19,033 ) $ 5,205
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
Investments in portfolio companies (180,294 ) (80,614 )
Principal collections related to investment repayments or sales 277,299 57,970
Decrease (increase) in interest receivable, accrued payment-in-kind interest and dividends 24,108 (4,911 )
Amortization of restricted stock awards
Employee 1,030 2,350
Non-employee director 28 40
Decrease (increase) in cash—securitization accounts from interest collections (2,503 ) 1,575
Increase in restricted cash—escrow accounts (7,518 )
Depreciation and amortization 1,765 2,088
Decrease in other assets 449 439
Decrease in other liabilities (1,745 ) (4,339 )
Realized loss on investments 36,133 1,524
Net change in unrealized depreciation on investments 6,259 13,806
Loss (gain) on extinguishment of debt   863       (3,432 )
Net cash provided by (used in) operating activities   136,841       (8,299 )
 
Cash flows from financing activities
Payments on borrowings (41,535 ) (34,138 )
Proceeds from borrowings 5,000 14,000
Decrease (increase) in cash in restricted and securitization accounts
Securitization accounts for repayment of principal on debt (48,834 ) 16,121
Restricted cash (5,253 ) 4,065
Payment of financing costs (1,700 ) (1,729 )
Distributions paid (22,317 )
Common stock withheld to pay taxes applicable to the vesting of restricted stock (1,314 )
Net forfeitures of restricted common stock   (11 )     (9 )
Net cash used in financing activities   (115,964 )     (1,690 )
Net increase (decrease) in cash and cash equivalents 20,877 (9,989 )
Cash and cash equivalents
Beginning balance   44,970       54,187  
Ending balance $ 65,847     $ 44,198  
Supplemental disclosure of cash flow information
Interest paid $ 6,290 $ 7,589
Income taxes paid 312 200
Paid-in-kind interest collected 18,044 4,818
Dividend income collected 12,053 956
 
Selected Financial Data
Quarterly Operating Information
         
2010 2010 2010 2011 2011
(in thousands, except per share amounts)   Q2   Q3   Q4   Q1   Q2
Revenue
Interest and dividend income
Interest income $ 19,089 $ 19,519 $ 18,459 $ 20,158 $ 17,153
Dividend income 1,494 1,561 2,984 2,497 2,116
Loan fee income     570       810       432       781       919  
Total interest and dividend income 21,153 21,890 21,875 23,436 20,188
Advisory fees and other income     615       681       1,609       867       1,020  
Total revenue     21,768       22,571       23,484       24,303       21,208  
Operating expense
Interest expense 4,383 4,326 3,709 3,873 3,945
Salaries and benefits 3,742 3,527 4,210 3,976 2,908
Amortization of employee restricted stock awards 1,123 1,013 979 624 406
General and administrative     3,670       2,305       2,710       2,827       2,711  
Total operating expense     12,918       11,171       11,608       11,300       9,970  
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) 8,850 11,400 11,876 13,003 11,238
Net investment loss before income tax provision (benefit) (12,966 ) (9,800 ) (29,689 ) (20,944 ) (21,448 )
Gain (loss) on extinguishment of debt before income tax provision (benefit) 3,490 (449 ) (863 )
Income tax provision (benefit)     124       1,680       (65 )     11       8  
Net loss   $ (750 )   $ (529 )   $ (17,748 )   $ (8,815 )   $ (10,218 )
Reconciliation of DNOI to net operating income
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) $ 8,850 $ 11,400 $ 11,876 $ 13,003 $ 11,238
Amortization of employee restricted stock awards     1,123       1,013       979       624       406  
DNOI (a)   $ 9,973     $ 12,413     $ 12,855     $ 13,627     $ 11,644  
DNOI per share-weighted average common shares—basic and diluted (a) $ 0.13 $ 0.16 $ 0.17 $ 0.18 $ 0.15
Per common share statistics
Weighted-average common shares outstanding—basic and diluted 75,392 75,486 75,648 75,765 76,343
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) per common share—basic and diluted $ 0.12 $ 0.15 $ 0.16 $ 0.17 $ 0.15
Earnings (loss) per common share—basic and diluted $ (0.01 ) $ (0.01 ) $ (0.23 ) $ (0.12 ) $ (0.13 )
Net asset value per common share—period end $ 8.03 $ 7.92 $ 7.54 $ 7.23 $ 6.93
Dividends declared per common share (b) $ 0.11 $ 0.12 $ 0.14 $ 0.15 $ 0.17

_____________
 
(a)   DNOI represents net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit), as determined in accordance with U.S. generally accepted accounting principles, or GAAP, adjusted for amortization of employee restricted stock awards. MCG views DNOI and the related per share measures as useful and appropriate supplements to net operating income, net income (loss), earnings (loss) per share and cash flows from operating activities. These measures serve as an additional measure of MCG’s operating performance exclusive of employee restricted stock amortization, which represents an expense of the Company but does not require settlement in cash. DNOI does include PIK interest and dividend income which are generally not payable in cash on a regular basis, but rather at investment maturity or when declared. DNOI should not be considered as an alternative to net operating income, net income (loss), earnings (loss) per share and cash flows from operating activities (each computed in accordance with GAAP). Instead, DNOI should be reviewed in connection with net operating income, net income (loss), earnings (loss) per share and cash flows from operating activities in MCG’s consolidated financial statements, to help analyze how MCG’s business is performing.
 
(b) On August 1, 2011, MCG’s board of directors declared a dividend of $0.17 per share payable on October 14, 2011 to shareholders of record as of September 14, 2011.
 
Selected Financial Data
Key Quarterly Statistics
         
2010 2010 2010 2011 2011
(dollars in thousands)   Q2   Q3   Q4   Q1   Q2
Average quarterly loan portfolio at fair value $ 686,746 $ 670,726 $ 663,443 $ 756,842 $ 697,016
Average quarterly total investment portfolio - fair value 989,782 954,231 948,504 1,003,581 886,047
Average quarterly total assets 1,162,988 1,153,995 1,111,728 1,131,291 1,083,614
Average quarterly stockholders' equity 620,079 606,933 600,816 574,024 544,602
Return on average total assets (trailing 12 months)
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) 3.01% 3.26% 3.53% 3.96% 4.24%
Net income (loss) 0.93% 0.53% (1.14)% (2.44)% (3.33)%
Return on average equity (trailing 12 months)
Net operating income before net investment (loss) gain, gain (loss) on extinguishment of debt and income tax provision (benefit) 5.77% 6.21% 6.64% 7.51% 8.17%
Net income (loss) 1.79% 1.02% (2.14)% (4.64)% (6.41)%
Yield on average loan portfolio at fair value
Average LIBOR (90-Day) 0.43% 0.39% 0.29% 0.31% 0.26%
Spread to average LIBOR on average yielding loan portfolio at fair value (a)     11.89%     12.45%     11.49%     10.98%     10.68%
12.32% 12.84% 11.78% 11.29% 10.94%
Impact of fee accelerations of unearned fees on paid/restructured loans 0.05% 0.20% 0.02% 0.24% 0.24%
Impact of non-accrual loans     (0.89)%     (1.02)%     (0.50)%     (0.31)%     (0.78)%
Total yield on average loan portfolio at fair value     11.48%     12.02%     11.30%     11.22%     10.40%
Cost of funds
Average LIBOR 0.43% 0.39% 0.29% 0.31% 0.26%
Spread to average LIBOR excluding amortization of deferred debt issuance costs (a) 2.31% 2.31% 2.16% 2.08% 2.28%
Impact of amortization of deferred debt issuance costs     0.57%     0.50%     0.46%     0.45%     0.44%
Total cost of funds     3.31%     3.20%     2.91%     2.84%     2.98%
Net portfolio yield margin 6.70% 7.20% 7.49% 7.80% 7.25%
Selected period-end balance sheet statistics
Total investment portfolio at fair value $ 997,590 $ 924,253 $ 1,009,705 $ 954,349 $ 849,101
Total assets 1,170,463 1,136,665 1,145,277 1,105,150 1,066,056
Borrowings 534,278 508,899 546,882 527,343 511,210
Total equity 614,855 606,078 578,016 557,093 534,033
Cash, securitization and restricted accounts 108,612 124,545 71,628 92,503 135,736
Debt to equity 86.89% 83.97% 94.61% 94.66% 95.73%
Debt, net of cash, securitization and restricted accounts to equity 69.23% 63.42% 82.22% 78.06% 70.31%
Other statistics (at period end)
BDC asset coverage ratio 224% 233% 231% 233% 232%
Number of portfolio companies 59 62 71 67 64
Number of employees 65 66 66 63 63
Loans on non-accrual as a percentage of total debt investments
Fair Value 4.69% 4.35% 3.43% 4.43% 5.25%
Cost 15.12% 18.33% 15.87% 13.93% 13.15%

_____________
 
(a)   The impact due to the timing of the LIBOR resets and floors is included in the spread to average LIBOR. The impact to the yield on average loan portfolio at fair value due to the timing of LIBOR resets and floors for Q2 2010, Q3 2010, Q4 2010, Q1 2011 and Q2 2011 was approximately 0.73%, 1.25%, 1.34%, 1.34% and 1.39%, respectively. The impact to the cost of funds due to the timing of LIBOR resets for Q2 2010, Q3 2010, Q4 2010, Q1 2011 and Q2 2011 was approximately (0.01)%, 0.05%, 0.05%, (0.3)% and 0.4%, respectively.
 
Selected Financial Data
Quarterly Investment Risk and Changes in Portfolio Composition
         
2010 2010 2010 2011 2011
(dollars in thousands)   Q2   Q3   Q4   Q1   Q2
Investment rating: (a)
IR 1 total investments at fair value (b) $ 555,745 $ 451,743 $ 330,605 $ 319,588 $ 307,744
IR 2 total investments at fair value 194,690 242,579 370,694 336,050 293,927
IR 3 total investments at fair value 204,892 195,342 173,447 187,610 184,531
IR 4 total investments at fair value 1,988 6,796 112,811 94,293 2,994
IR 5 total investments at fair value 40,275 27,793 22,148 16,808 59,905
 
IR 1 percentage of total portfolio 55.7 % 48.9 % 32.7 % 33.5 % 33.0 %
IR 2 percentage of total portfolio 19.5 % 26.3 % 36.7 % 35.2 % 37.9 %
IR 3 percentage of total portfolio 20.6 % 21.1 % 17.2 % 19.6 % 21.7 %
IR 4 percentage of total portfolio 0.2 % 0.7 % 11.2 % 9.9 % 0.3 %
IR 5 percentage of total portfolio 4.0 % 3.0 % 2.2 % 1.8 % 7.1 %
 
Originations and advances, including PIK, by security type:
Senior secured debt $ 34,596 $ 46,692 $ 145,440 $ 61,918 $ 99,022
Subordinated debt—Secured 4,001 17,986 9,116 30,143 560
Subordinated debt—Unsecured 10,178 2,855 75 57 1,757
Preferred equity 1,636 1,561 4,751 2,801 6,416
Common/common equivalents equity     1             716       184        
Total   $ 50,412     $ 69,094     $ 160,098     $ 95,103     $ 107,755  
Exits and repayments by security type:
Senior secured debt $ 9,517 $ 21,315 $ 24,770 $ 73,186 $ 92,834
Subordinated debt—Secured 11,880 51,177 2,749 37,568 45,926
Subordinated debt—Unsecured 31,618 228
Preferred equity 8,844 16,579 2,410 18,224 37,306
Common/common equivalents equity     55       12,531       12,774       245       1,879  
Total   $ 30,296     $ 133,220     $ 42,703     $ 129,223     $ 178,173  
Exits and repayments by transaction type:
Scheduled principal amortization $ 16,933 $ 6,277 $ 12,186 $ 4,907 $ 11,896
Principal prepayments and loan sales 50 85,129 14,037 100,068 114,828
Payment of payment-in-kind interest and dividends 5,369 13,851 3,164 9,963 20,134
Sale of equity investments     7,944       27,963       13,316       14,285       31,315  
Total   $ 30,296     $ 133,220     $ 42,703     $ 129,223     $ 178,173  
 

(a)
  MCG uses an investment rating system to characterize and monitor its expected level of returns on each investment in MCG’s portfolio. MCG uses the following 1 to 5 investment rating scale:
         

Investment
 

Rating
1 Capital gain expected or realized
2 Full return of principal and interest or dividend expected with customer performing in accordance with plan
3 Full return of principal and interest or dividend expected but customer requires closer monitoring
4 Some loss of interest or dividend expected but still expecting an overall positive internal rate of return on the investment
5 Loss of interest or dividend and some loss of principal investment expected which would result in an overall negative internal rate of return on the investment
 
(b)   As of June 30, 2010, September 30, 2010, December 31, 2010, March 31, 2011 and June 30, 2011, approximately, $205 million, $117 million, $112 million, $119 million and $117 million, respectively, of MCG’s investments with an investment rating of “1” represented loans to companies in which MCG also held equity.
Selected Financial Data
Portfolio Composition by Type
         
2010 2010 2010 2011 2011
(dollars in thousands)   Q2   Q3   Q4   Q1   Q2
Composition of investments at period end, fair value
Senior secured debt $ 419,398 $ 437,709 $ 555,667 $ 547,280 $ 535,320
Subordinated debt
Secured 237,226 187,918 190,309 177,628 132,830
Unsecured     40,848     12,241     12,321     12,588     14,353
Total debt investments     697,472     637,868     758,297     737,496     682,503
Preferred equity 248,983 244,864 218,690 183,735 133,350
Common/common equivalents equity     51,135     41,521     32,718     33,118     33,248
Total equity investments     300,118     286,385     251,408     216,853     166,598
Total investments   $ 997,590   $ 924,253   $ 1,009,705   $ 954,349   $ 849,101
 
Percentage of investments at period end, fair value
Senior secured debt 42.0% 47.4% 55.0% 57.4% 63.0%
Subordinated debt
Secured 23.8% 20.3% 18.9% 18.6% 15.7%
Unsecured     4.1%     1.3%     1.2%     1.3%     1.7%
Total debt investments     69.9%     69.0%     75.1%     77.3%     80.4%
Preferred equity 25.0% 26.5% 21.7% 19.2% 15.7%
Common/common equivalents equity     5.1%     4.5%     3.2%     3.5%     3.9%
Total equity investments     30.1%     31.0%     24.9%     22.7%     19.6%
Total investments     100.0%     100.0%     100.0%     100.0%     100.0%
 

IMPORTANT INFORMATION ABOUT NON-GAAP REFERENCES

References by MCG Capital Corporation to distributable net operating income, or DNOI, refer to net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit), as determined in accordance with GAAP adjusted for amortization of employee restricted stock awards.

The Company’s management uses DNOI and the related per share measures as useful and appropriate supplements to net operating income, net income (loss), earnings (loss) per share and cash flows from operating activities. These measures serve as an additional measure of MCG’s operating performance exclusive of employee restricted stock amortization, which represents an expense of the Company but does not require settlement in cash. DNOI does include PIK interest and dividend income that generally are not payable in cash on a regular basis, but rather at investment maturity or when declared.

The Company believes that providing non-GAAP DNOI and DNOI per share affords investors a view of results that may be more easily compared to peer companies and enables investors to consider the Company’s results on both a GAAP and non-GAAP basis in periods when the Company is undertaking non-recurring activities. DNOI should not be considered as an alternative to, as an indicator of the Company’s operating performance, or as a substitute for net operating income, net (loss) income, earnings (loss) per share and cash flows from operating activities (each computed in accordance with GAAP). Instead, DNOI should be reviewed in connection with net operating income, net (loss) income, earnings (loss) per share and cash flows from operating activities in MCG’s consolidated financial statements, to help analyze how MCG’s business is performing because the items excluded from the non-GAAP measures often have a material impact on the Company’s results of operations. Therefore, management uses, and investors should use, non-GAAP measures only in conjunction with its reported GAAP results.

ABOUT MCG CAPITAL CORPORATION

MCG Capital Corporation is a solutions-focused commercial finance company providing capital and advisory services to middle market companies throughout the United States. MCG’s investment objective is to achieve current income and capital gains. Portfolio companies generally use capital provided by MCG to finance acquisitions, recapitalizations, buyouts, organic growth and working capital.

Forward-looking Statements:

Statements in this press release regarding management’s future expectations, beliefs, intentions, goals, strategies, plans or prospects, including statements relating to: MCG’s results of operations, including revenues, net operating income, distributable net operating income, net investment losses and general and administrative expenses and the factors that may affect such results; the performance of current or former MCG portfolio companies; the cause of net investment losses; the belief that the valuation methodology change with regard to Broadview Network Holdings will bring stability to the valuation of that company on a go-forward basis; management’s expectations that the impact of payoffs will decline, such payoffs will be redeployed in income-earning investments and, when combined with the cost-cutting corporate restructuring, should increase NOI sufficiently to cover the Company’s dividend over the next few quarters; maintaining the Company’s quarterly dividend at $0.17 per share through the remainder of 2011, reflecting the expectation that net operating income and PIK and dividend collections will exceed the dividend level for all of 2011, when there can be no assurance that the Company will meet such targets and will pay a dividend at that level; the belief that the Company’s restructuring plan reflects the focus of its new asset origination orientation on high-yielding debt securities, aligns the size of the Company’s organization to its asset base and establishes an efficient framework that is scalable with its assets; the estimated savings from the Company’s restructuring and general economic factors may constitute forward-looking statements for purposes of the safe harbor protection under applicable securities laws. Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “estimate,” “expect,” “intend,” “is planned,” “may,” “should,” “will,” “will enable,” “would be expected,” “look forward,” “may provide,” “would” or similar terms, variations of such terms or the negative of those terms. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including those risks, uncertainties and factors referred to in MCG’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 filed with the Securities and Exchange Commission under the section “Risk Factors,” as well as other documents that may be filed by MCG from time to time with the Securities and Exchange Commission. As a result of such risks, uncertainties and factors, actual results may differ materially from any future results, performance or achievements discussed in or implied by the forward-looking statements contained herein. MCG is providing the information in this press release as of this date and assumes no obligations to update the information included in this press release or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Copyright Business Wire 2010

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