MCG Capital Corporation (Nasdaq: MCGC) (“MCG” or the “Company”) announced today its financial results for the quarter ended September 30, 2011. MCG will host an investment community conference call today, November 3, 2011 at 10:00 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 September 30, 2011 was $6.7 million, or $0.09 per share. DNOI refers to net operating income adjusted for amortization of employee restricted stock awards.
  • Net operating income for the quarter ended September 30, 2011 was $6.0 million, or $0.08 per share.
  • Net loss for the quarter ended September 30, 2011 was $25.1 million, or $0.33 per share.
  • Net investment loss for the quarter ended September 30, 2011 was $31.1 million, which included a $24.7 million reduction in the fair value of Broadview Networks Holdings, Inc., or Broadview, primarily reflecting, among other factors, continuing challenges in the bond market, a recent downgrade of Broadview’s corporate credit rating, delays by Broadview in refinancing its debt, as well as the near-term maturities of Broadview’s debt facilities.
  • During the quarter ended September 30, 2011, MCG funded $67.6 million of advances and originations, including $47.6 million to four new portfolio companies. Payoffs and portfolio monetization activities totaled $61.5 million during the quarter.
  • MCG’s ratio of total assets to total borrowings and other senior securities was 230% as of September 30, 2011.

DISTRIBUTION

On October 31, 2011, the MCG board of directors declared a distribution of $0.17 per share. The distribution is payable as follows:

Record date: December 15, 2011 Payable date: January 13, 2012

If MCG determined the tax attributes of its 2011 distributions as of September 30, 2011, 26% would be from ordinary income and 74% would be a return of capital. However, actual determinations of the tax attributes of MCG’s distributions, including determinations of return of capital, are made annually as of the end of its fiscal year based upon its taxable income and distributions paid for the full year and will be reported to each stockholder on a Form 1099.

OVERVIEW

Today, MCG reported a third quarter 2011 net loss of $25.1 million, or $0.33 per basic and diluted share, which represented a $24.6 million, or $0.32 per share, incremental net loss from the $0.5 million, or $0.01 per share, reported for the comparable period in 2010. The incremental net loss resulted primarily from a $21.3 million increase in MCG’s net investment loss before income tax provision and a $5.4 million decrease in MCG’s operating income, partially offset by a $1.7 million decrease in MCG’s income tax provision and a $0.5 million decrease in loss on extinguishment of debt before income tax provision.

MCG’s revenue for the third quarter of 2011 was $20.7 million, which represented a $1.9 million, or 8.2%, decrease from the comparable period in 2010. This decrease was composed of a $2.1 million decrease in interest and dividend income, partially offset by a $0.2 million increase in advisory fees and other income. MCG reported DNOI of $6.7 million, or $0.09 per share, which represented a $5.7 million, or $0.07 per share, decrease over the third quarter of 2010. Net operating income during the third quarter of 2011 was $6.0 million, which represents a $5.4 million, or 47.8%, decrease from the comparable period in 2010.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2011, MCG had $54.0 million cash and cash equivalents and $116.4 million of cash in securitization and restricted accounts, a portion of which could be deployed for suitable new investment opportunities. 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 used $80.2 million of securitized cash on October 20, 2011 to repay a portion of this debt.

As of September 30, 2011, MCG had $490.0 million of total borrowings (the majority of which was composed of $406.3 million of collateralized non-recourse borrowings) and had $135.6 million in the aggregate of borrowing capacity across all facilities, including $41.4 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. The $135.6 million of borrowing capacity available under all borrowing facilities would require an additional $53.0 million cash and collateral contribution into certain of 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 make distributions to its stockholders. MCG’s asset coverage ratio was 230% as of September 30, 2011.

CORPORATE RESTRUCTURING AND OTHER ORGANIZATIONAL CHANGES

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 resignations. As of September 30, 2011, the Company’s headcount was 39 employees which it expects to decline to 37 employees after the corporate restructuring is completed. The Company believes this plan, which includes a cost reduction initiative, reflects its focus on originating high-yielding debt securities to the extent funds are available, aligns the size of the organization to its asset base and establishes an efficient framework that is scalable with its assets. The workforce reduction sizes the organization at a level appropriate for the Company’s expected near-term objectives. Affected employees received severance pay, continuation of benefits and, for employees who had been awarded restricted stock, additional lapsing of restrictions associated with restricted stock awards.

During the nine-months ended September 30, 2011, MCG incurred $4.2 million of restructuring expenses, which are reported as a separate line item on its Consolidated Statements of Operations. The Company expects it will incur approximately $115,000 to $120,000 of additional restructuring charges during the remainder of 2011. During 2012 and 2013, MCG expects to record restructuring charges of $65,000 and $14,000, respectively, which represent the accretion costs of severance benefits. The Company expects these actions, when combined with the closure of one of its offices and other planned reductions in its general and administrative expense will result in approximately $6.7 million to $7.0 million of expected savings through the five quarters ending December 31, 2012.

As previously announced, Richard W. Neu, Chairman of the MCG Board, was elected as Chief Executive Officer on October 31, 2011, succeeding Steven F. Tunney, Sr. who resigned in order to pursue other interests. During the three months ending December 31, 2011, MCG expects to recognize approximately $2.5 million of severance and other expenses associated with Mr. Tunney’s resignation.

PORTFOLIO ACTIVITY

The fair value of MCG’s investment portfolio totaled $824.2 million as of September 30, 2011, as compared to $1,009.7 million as of December 31, 2010. During the third quarter of 2011, MCG funded $67.6 million of originations and advances, including $47.6 million of originations to four new portfolio companies, $16.2 million of originations and advances to seven existing portfolio companies under revolving and line of credit facilities, and $3.8 million of paid-in-kind, or PIK, advances. The $47.6 million of originations to new portfolio companies included $47.3 million of investments in senior debt securities and $0.3 million in common equity. The $16.2 million of originations and advances to existing portfolio companies included $14.2 million of investments in senior debt securities and $2.0 million in preferred equity in one portfolio company. Gross payments, reductions and sales of securities during the third quarter of 2011 of $61.5 million were composed of $58.3 million of senior debt, $2.6 million of secured subordinated debt, $0.5 million of preferred equity and $0.1 million of common equity.

During the three months ended September 30, 2011, MCG reported net investment losses before income tax provision of $31.1 million, which are detailed below:
   

Three months ended September 30, 2011

(in thousands)
     

Reversal of
 

Unrealized

Unrealized

Net

Realized

(Depreciation)/

Depreciation/

(Loss)/

Portfolio Company
 

Industry
 

Type
 

Gain/(Loss)
 

Appreciation
 

(Appreciation)
 

Gain
Broadview Networks Holdings, Inc. Communications Control $ $ (24,697 ) $ $ (24,697 )
Jet Plastica Investors, LLC Plastic Products Control (5,637 ) (5,637 )
Intran Media, LLC Other Media Control (1,959 ) (1,959 )
Total Sleep Holdings, Inc. Healthcare Control (38,081 ) 38,054 (27 )
Stratford School Holdings, Inc. Education Affiliate 2,217 2,217
GSDM Holdings, LLC Healthcare Non-Affiliate 1,857 1,857
NDSSI Holdings, LLC Electronics Non-Affiliate 1,277 1,277
Other (< $1 million net gain (loss))   254       (3,685 )     (652 )     (4,083 )
Total $ (37,827 )   $ (30,627 )   $ 37,402     $ (31,052 )
 

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 September 30, 2011, are summarized below:
  • MCG recorded $24.7 million of unrealized depreciation on its Broadview investment primarily reflecting, among other factors, continuing challenges in the bond market, a recent downgrade of Broadview’s corporate credit rating, delays by Broadview in refinancing its debt, as well as the near-term maturities of Broadview’s debt facilities. As of June 30, 2011, Broadview had $17.1 million of borrowings outstanding under its revolving credit facility, which becomes payable on February 23, 2012. In addition, as of June 30, 2011, Broadview had $301.4 million of outstanding senior secured notes, which will mature on September 1, 2012. The fair value of Broadview, which MCG used as the foundation for determining the fair value of its investment in Broadview, is consistent with an independent third-party valuation. If Broadview is unable to refinance these debt facilities by their respective maturity dates, the value of MCG’s portfolio investment in Broadview could decline by up to the remaining fair value as of September 30, 2011, and MCG may be required to recognize additional unrealized depreciation on this investment.
  • MCG recorded $5.6 million of unrealized depreciation on its investment in Jet Plastica Investors, LLC, to reflect a decrease in that company’s operating performance and the multiple that MCG used to value the company.
  • MCG also wrote off its remaining investment in Total Sleep Holdings, Inc. during the quarter ended September 30, 2011, which resulted in the reversal of $38.1 million of previously unrealized depreciation and the realization of a $38.1 million loss.

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, November 3, 2011

at 10:00 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 November 17, 2011) Call Replay (Conference ID for replay is #24220286 ) (855) 859-2056 domestic

(404) 537-3406 international
    Web Replay    

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

(in thousands, except per share amounts)
  2011       2010  
(unaudited)
Assets
Cash and cash equivalents $ 53,956 $ 44,970
Cash, securitization accounts 99,416 42,245
Cash, restricted 16,982 29,383
Investments at fair value
Non-affiliate investments (cost of $593,285 and $684,785, respectively) 606,710 646,116
Affiliate investments (cost of $42,497 and $43,721, respectively) 55,107 53,300
Control investments (cost of $424,461 and $517,167, respectively)   162,356       310,289  
Total investments (cost of $1,060,243 and $1,245,673, respectively) 824,173 1,009,705
Interest receivable 3,182 5,453
Other assets   11,381       13,521  
Total assets $ 1,009,090     $ 1,145,277  
Liabilities
Borrowings (maturing within one year of $80,173 and $18,858, respectively) $ 490,019 $ 546,882
Interest payable 1,578 2,291
Dividends payable 13,101 10,735
Other liabilities   7,911       7,353  
Total liabilities   512,609       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 September 30, 2011 and December 31, 2010, 77,035 issued and outstanding on September 30, 2011 and 76,662 issued and outstanding on December 31, 2010 770 767
Paid-in capital 1,009,211 1,008,823
Distributions in excess of earnings
Paid-in capital (166,029 ) (166,029 )
Other (110,997 ) (28,555 )
Net unrealized depreciation on investments   (236,474 )     (236,990 )
Total stockholders’ equity   496,481       578,016  
Total liabilities and stockholders’ equity $ 1,009,090     $ 1,145,277  
Net asset value per common share at end of period $ 6.44 $ 7.54
 
   
MCG Capital Corporation
Consolidated Statements of Operations
(unaudited)
 
Three months ended Nine months ended
September 30,   September 30,
(in thousands, except per share amounts)     2011       2010       2011       2010  
Revenue    
Interest and dividend income
Non-affiliate investments (less than 5% owned) $ 16,540 $ 16,198 $ 50,319 $ 46,123
Affiliate investments (5% to 25% owned) 1,215 792 4,133 2,557
Control investments (more than 25% owned)   2,025       4,900       8,952       15,974  
Total interest and dividend income   19,780       21,890       63,404       64,654  
Advisory fees and other income
Non-affiliate investments (less than 5% owned) 885 260 1,812 725
Control investments (more than 25% owned)   45       421       1,005       706  
Total advisory fees and other income   930       681       2,817       1,431  
Total revenue   20,710       22,571       66,221       66,085  
Operating expense
Interest expense 3,960 4,326 11,778 13,182
Employee compensation
Salaries and benefits 2,683 3,527 9,567 12,065
Amortization of employee restricted stock awards   348       1,013       1,378       3,363  
Total employee compensation 3,031 4,540 10,945 15,428
General and administrative expense 3,657 2,305 9,130 8,785
Restructuring expense   4,109             4,174       1  
Total operating expense   14,757       11,171       36,027       37,396  
Net operating income before net investment loss, (loss) gain on extinguishment of debt and income tax provision   5,953       11,400       30,194       28,689  
Net realized (loss) gain on investments
Non-affiliate investments (less than 5% owned) 281 7,383 (47,288 ) 7,837
Affiliate investments (5% to 25% owned) (1 ) (917 )
Control investments (more than 25% owned)   (38,107 )     (3,911 )     (25,755 )     (5,889 )
Total net realized (loss) gain on investments   (37,827 )     3,472       (73,960 )     1,948  
Net unrealized appreciation (depreciation) on investments
Non-affiliate investments (less than 5% owned) (2,634 ) (6,854 ) 52,094 445
Affiliate investments (5% to 25% owned) 1,942 573 3,031 2,051
Control investments (more than 25% owned) 7,613 (6,890 ) (55,227 ) (29,836 )
Derivative and other fair value adjustments   (146 )     (101 )     618       262  
Total net unrealized appreciation (depreciation) on investments   6,775       (13,272 )     516       (27,078 )
Net investment loss before income tax provision (31,052 ) (9,800 ) (73,444 ) (25,130 )
(Loss) gain on extinguishment of debt before income tax provision (449 ) (863 ) 2,983
Income tax provision   10       1,680       29       1,866  
Net (loss) earnings $ (25,109 )   $ (529 )   $ (44,142 )   $ 4,676  
(Loss) earnings per basic and diluted common share $ (0.33 ) $ (0.01 ) $ (0.58 ) $ 0.06
Cash distributions declared per common share $ 0.17 $ 0.12 $ 0.49 $ 0.23
Weighted-average common shares outstanding—basic and diluted 76,404 75,486 76,173 76,469
 
 
MCG Capital Corporation
Consolidated Statements of Cash Flows
(unaudited)
 
Nine months ended
September 30,
(in thousands)     2011       2010  
Cash flows from operating activities  
Net (loss) income $ (44,142 ) $ 4,676
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Investments in portfolio companies (243,966 ) (142,491 )
Principal collections related to investment repayments or sales 336,172 177,340
Decrease in interest receivable, accrued payment-in-kind interest and dividends 21,453 3,166
Amortization of restricted stock awards
Employee 1,809 3,363
Non-employee director 46 58
Decrease in cash—securitization accounts from interest collections 1,515 3,191
Increase in restricted cash—escrow accounts (3,648 )
Depreciation and amortization 2,936 3,073
Decrease in other assets 1,021 446
Increase (decrease) in other liabilities 428 (4,564 )
Realized loss (gain) on investments 73,960 (1,948 )
Net change in unrealized (appreciation) depreciation on investments (516 ) 27,078
Loss (gain) on extinguishment of debt   863       (2,983 )
Net cash provided by operating activities   147,931       70,405  
 
Cash flows from financing activities
Payments on borrowings (62,726 ) (73,466 )
Proceeds from borrowings 5,000 27,500
Decrease (increase) in cash in restricted and securitization accounts
Securitization accounts for repayment of principal on debt (58,686 ) (9,553 )
Restricted cash 16,049 12,190
Payment of financing costs (1,700 ) (2,056 )
Distributions paid (35,418 ) (8,421 )
Common stock withheld to pay taxes applicable to the vesting of restricted stock (1,453 ) (86 )
Net forfeitures of restricted common stock   (11 )     (15 )
Net cash used in financing activities   (138,945 )     (53,907 )
Net increase in cash and cash equivalents 8,986 16,498
Cash and cash equivalents
Beginning balance   44,970       54,187  
Ending balance $ 53,956     $ 70,685  
Supplemental disclosure of cash flow information
Interest paid $ 10,397 $ 11,341
Income taxes paid 297 1,469
Paid-in-kind interest collected 20,410 17,522
Dividend income collected 12,355 2,103
 
 
SELECTED FINANCIAL DATA
QUARTERLY OPERATING INFORMATION
 
2010 2010 2011 2011 2011
(in thousands, except per share amounts) Q3 Q4 Q1 Q2 Q3
Revenue
Interest and dividend income
Interest income $ 19,519 $ 18,459 $ 20,158 $ 17,153 $ 17,128
Dividend income 1,561 2,984 2,497 2,116 1,227
Loan fee income   810     432     781     919     1,425  
Total interest and dividend income 21,890 21,875 23,436 20,188 19,780
Advisory fees and other income   681     1,609     867     1,020     930  
Total revenue   22,571     23,484     24,303     21,208     20,710  
Operating expense
Interest expense 4,326 3,709 3,873 3,945 3,960
Salaries and benefits 3,527 4,210 3,976 2,908 2,683
Amortization of employee restricted stock awards 1,013 979 624 406 348
General and administrative 2,305 2,710 2,827 2,646 3,657
Restructuring expense (b)               65     4,109  
Total operating expense   11,171     11,608     11,300     9,970     14,757  
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) 11,400 11,876 13,003 11,238 5,953
Net investment loss before income tax provision (benefit) (9,800 ) (29,689 ) (20,944 ) (21,448 ) (31,052 )

Gain (loss) on extinguishment of debt before income tax provision (benefit)
(449 ) (863 )
Income tax provision (benefit)   1,680     (65 )   11     8     10  
Net loss $ (529 ) $ (17,748 ) $ (8,815 ) $ (10,218 ) $ (25,109 )
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) $ 11,400 $ 11,876 $ 13,003 $ 11,238 $ 5,953
Amortization of employee restricted stock awards (b)   1,013     979     624     406     779  
DNOI (a) (b) $ 12,413   $ 12,855   $ 13,627   $ 11,644   $ 6,732  
DNOI per share-weighted average common shares—basic and diluted (a) $ 0.16 $ 0.17 $ 0.18 $ 0.15 $ 0.09
Per common share statistics
Weighted-average common shares outstanding—basic and diluted 75,486 75,648 75,765 76,343 76,404
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) per common share—basic and diluted $ 0.15 $ 0.16 $ 0.17 $ 0.15 $ 0.08
Earnings (loss) per common share—basic and diluted $ (0.01 ) $ (0.23 ) $ (0.12 ) $ (0.13 ) $ (0.33 )
Net asset value per common share—period end $ 7.92 $ 7.54 $ 7.23 $ 6.93 $ 6.44
Distributions declared per common share (c) $ 0.12 $ 0.14 $ 0.15 $ 0.17 $ 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)

Results for Q3 2011, include $431 of amortization of employee restricted stock awards associated with MCG’s corporate restructuring.

(c)

On October 31, 2011, MCG’s board of directors declared a distribution of $0.17 per share payable on January 13, 2012 to shareholders of record as of December 15, 2011.
 
 
SELECTED FINANCIAL DATA
KEY QUARTERLY STATISTICS
 
2010 2010 2011 2011 2011
(dollars in thousands) Q3 Q4 Q1 Q2 Q3
Average quarterly loan portfolio at fair value $ 670,726 $ 663,443 $ 756,842 $ 697,016 $ 676,038
Average quarterly total investment portfolio - fair value 954,231 948,504 1,003,581 886,047 846,905
Average quarterly total assets 1,153,995 1,111,728 1,131,291 1,083,614 1,043,239
Average quarterly stockholders' equity 606,933 600,816 574,024 544,602 529,989
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) 3.26 % 3.53 % 3.96 % 4.24 % 3.85 %
Net income (loss) 0.53 % (1.14 )% (2.44 )% (3.33 )% (5.67 )%
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) 6.21 % 6.64 % 7.51 % 8.17 % 7.48 %
Net income (loss) 1.02 % (2.14 )% (4.64 )% (6.41 )% (11.01 )%
Yield on average loan portfolio at fair value
Average LIBOR (90-Day) 0.39 % 0.29 % 0.31 % 0.26 % 0.30 %
Spread to average LIBOR on average yielding loan portfolio at fair value (a)   12.45 %   11.49 %   10.98 %   10.68 %   10.43 %
  12.84 % 11.78 % 11.29 % 10.94 % 10.73 %
Impact of fee accelerations of unearned fees on paid/restructured loans 0.20 % 0.02 % 0.24 % 0.24 % 0.98 %
Impact of non-accrual loans   (1.02 )%   (0.50 )%   (0.31 )%   (0.78 )%   (0.82 )%
Total yield on average loan portfolio at fair value   12.02 %   11.30 %   11.22 %   10.40 %   10.89 %
Cost of funds
Average LIBOR 0.39 % 0.29 % 0.31 % 0.26 % 0.30 %
Spread to average LIBOR excluding amortization of deferred debt issuance costs (a) 2.31 % 2.16 % 2.08 % 2.28 % 2.35 %
Impact of amortization of deferred debt issuance costs   0.50 %   0.46 %   0.45 %   0.44 %   0.46 %
Total cost of funds   3.20 %   2.91 %   2.84 %   2.98 %   3.11 %
Net portfolio yield margin 7.20 % 7.49 % 7.80 % 7.80 % 7.31 %
Selected period-end balance sheet statistics
Total investment portfolio at fair value $ 924,253 $ 1,009,705 $ 954,349 $ 849,101 $ 824,173
Total assets 1,136,665 1,145,277 1,105,150 1,066,056 1,009,090
Borrowings 508,899 546,882 527,343 511,210 490,019
Total equity 606,078 578,016 557,093 534,033 496,481
Cash, securitization and restricted accounts 124,545 71,628 92,503 135,736 116,398
Debt to equity 83.97 % 94.61 % 94.66 % 95.73 % 98.70 %
Debt, net of cash, securitization and restricted accounts to equity 63.42 % 82.22 % 78.06 % 70.31 % 75.25 %
Other statistics (at period end)
BDC asset coverage ratio 233 % 231 % 233 % 232 % 230 %
Number of portfolio companies 62 71 67 64 62
Number of employees 66 66 63 63 39
Loans on non-accrual as a percentage of total debt investments
Fair Value 4.35 % 3.43 % 4.43 % 5.25 % 4.44 %
Cost 18.33 % 15.87 % 13.93 % 13.15 % 11.85 %
_____________

(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 Q3 2010, Q4 2010, Q1 2011, Q2 2011 and Q3 2011 was approximately 1.25%, 1.34%, 1.34%, 1.39% and 1.49%, respectively. The impact to the cost of funds due to the timing of LIBOR resets for Q3 2010, Q4 2010, Q1 2011, Q2 2011 and Q3 2011 was approximately 0.05%, 0.05%, (0.3)%, 0.4%, and (0.03)% respectively.
 
 
SELECTED FINANCIAL DATA
QUARTERLY INVESTMENT RISK AND CHANGES IN PORTFOLIO COMPOSITION
 
2010 2010 2011 2011 2011
(dollars in thousands) Q3 Q4 Q1 Q2 Q3
Investment rating: (a)
IR 1 total investments at fair value (b) $ 451,743 $ 330,605 $ 319,588 $ 307,744 $ 315,725
IR 2 total investments at fair value 242,579 370,694 336,050 293,927 298,957
IR 3 total investments at fair value 195,342 173,447 187,610 184,531 173,391
IR 4 total investments at fair value 6,796 112,811 94,293 2,994 2,535
IR 5 total investments at fair value 27,793 22,148 16,808 59,905 33,565
 
IR 1 percentage of total portfolio 48.9 % 32.7 % 33.5 % 36.2 % 38.3 %
IR 2 percentage of total portfolio 26.3 % 36.7 % 35.2 % 34.6 % 36.3 %
IR 3 percentage of total portfolio 21.1 % 17.2 % 19.6 % 21.7 % 21.0 %
IR 4 percentage of total portfolio 0.7 % 11.2 % 9.9 % 0.3 % 0.3 %
IR 5 percentage of total portfolio 3.0 % 2.2 % 1.8 % 7.1 % 4.1 %
 
Originations and advances, including PIK, by security type:
Senior secured debt $ 46,692 $ 145,440 $ 61,918 $ 99,022 $ 63,360
Subordinated debt—Secured 17,986 9,116 30,143 560 665
Subordinated debt—Unsecured 2,855 75 57 1,757 70
Preferred equity 1,561 4,751 2,801 6,416 3,227
Common/common equivalents equity       716     184         325  
Total $ 69,094   $ 160,098   $ 95,103   $ 107,755   $ 67,647  
Exits and repayments by security type:
Senior secured debt $ 21,315 $ 24,770 $ 73,186 $ 92,834 $ 58,355
Subordinated debt—Secured 51,177 2,749 37,568 45,926 2,692
Subordinated debt—Unsecured 31,618 228 (86 )
Preferred equity 16,579 2,410 18,224 37,306 515
Common/common equivalents equity   12,531     12,774     245     1,879     65  
Total $ 133,220   $ 42,703   $ 129,223   $ 178,173   $ 61,541  
Exits and repayments by transaction type:
Scheduled principal amortization $ 6,277 $ 12,186 $ 4,907 $ 11,896 $ 21,961
Principal prepayments and loan sales 85,129 14,037 100,068 114,828 36,921
Payment of payment-in-kind interest and dividends 13,851 3,164 9,963 20,134 2,380
Sale of equity investments   27,963     13,316     14,285     31,315     279  
Total $ 133,220   $ 42,703   $ 129,223   $ 178,173   $ 61,541  
 

(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 September 30, 2010, December 31, 2010, March 31, 2011, June 30, 2011 and September 30, 2011, approximately $117 million, $112 million, $119 million, $117 million and $118 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 2011 2011 2011
(dollars in thousands) Q3 Q4 Q1 Q2 Q3
Composition of investments at period end, fair value
Senior secured debt $ 437,709 $ 555,667 $ 547,280 $ 535,320 $ 535,247
Subordinated debt
Secured 187,918 190,309 177,628 132,830 124,203
Unsecured   12,241     12,321     12,588     14,353     14,411  
Total debt investments   637,868     758,297     737,496     682,503     673,861  
Preferred equity 244,864 218,690 183,735 133,350 116,310
Common/common equivalents equity   41,521     32,718     33,118     33,248     34,002  
Total equity investments   286,385     251,408     216,853     166,598     150,312  
Total investments $ 924,253   $ 1,009,705   $ 954,349   $ 849,101   $ 824,173  
 
Percentage of investments at period end, fair value
Senior secured debt 47.4 % 55.0 % 57.4 % 63.0 % 64.9 %
Subordinated debt
Secured 20.3 % 18.9 % 18.6 % 15.7 % 15.1 %
Unsecured   1.3 %   1.2 %   1.3 %   1.7 %   1.8 %
Total debt investments   69.0 %   75.1 %   77.3 %   80.4 %   81.8 %
Preferred equity 26.5 % 21.7 % 19.2 % 15.7 % 14.1 %
Common/common equivalents equity   4.5 %   3.2 %   3.5 %   3.9 %   4.1 %
Total equity investments   31.0 %   24.9 %   22.7 %   19.6 %   18.2 %
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 tax attributes of 2011 distributions; the belief that the Company’s restructuring plan reflects its focus on originating high-yielding debt securities to the extent funds are available, 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 June 30, 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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