MCG Capital's CEO Discusses Q2 2012 Results - Earnings Call Transcript

MCG Capital Corporation (MCGC)

Q2 2012 Earnings Call

July 31, 2012 9:00 a.m. ET

Executives

Richard Neu - Chief Executive Officer

Hagen Saville - President and Chief Operating Officer

Keith Kennedy - Chief Financial Officer, Executive Vice President and Managing Director

Tod Reichert - General Counsel, Chief Compliance Officer, Corporate Secretary and Senior Vice President

Analysts

Greg Mason - Stifel Nicolaus

Mike Turner - Compass Point Research

Richard Fearon - Accretive Capital

Presentation

Operator

Good day ladies and gentlemen and welcome to the MCG Capital Q2 2012 Earnings Investor Call. At this time all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder today's conference is being recorded for replay purposes. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Rich Neu, Chief Executive Officer. Sir, you may begin.

Richard Neu

Thank you, operator, and welcome to the call. I am here with Hagen Saville, MCG’s President and Chief Operating Officer, and Keith Kennedy, MCG’s Chief Financial Officer. Before we get started I will ask Tod Reichert, MCG’s General Counsel, to highlight our forward-looking disclosures. Tod?

Tod Reichert

Thanks, Rich. Good morning everyone and thanks for joining the call. Before we begin we would like to remind you that various statements that we may make during this morning’s call will include forward-looking statements as defined under applicable securities laws. Management’s assumptions, expectations and opinions reflected in those statements are subject to risks and uncertainties that may cause actual results and our performance to differ materially from any future results, performance or achievements discussed in or implied by such forward-looking statements and the company can give no assurance that they will prove to be correct. Those risks and uncertainties are described in the company's earnings release and in its filings with the Securities and Exchange Commission.

With that I will turn the call back over to our CEO, Rich Neu.

Richard Neu

Thanks, Tod. In the context of executing our strategic plan, the second quarter was an excellent quarter for MCG, and puts us well on our path to our previously stated objective of returning to our roots as a strong middle market lender. Absence the previously announced charge relative to Broadview Networks Holdings, portfolio performance from a valuation standpoint was generally in line with our expectations. Net operating income adjusted for cost associated with our transition plan was $0.11, which was consistent with our internal forecast.

Our liquidity position enabled us to return capital to our stockholders in the form of a $0.14 dividend on July 13, 2012, to shareholders of record on June 13, 2012. Additionally, we used approximately $12 million of our excess capital position, to repurchase approximately $2.7 million shares of our common stock. Similar to last quarter, the two areas that were outside of our internal forecast were originations, which came in below our target for the quarter, and debt payoffs, which exceeded our internal forecast.

As a result, we are carrying a total cash position at June 30 of just under $300 million, which is well above our previous second quarter target. This level of un-invested cash together with the current pace of originations will create some earnings pressure as we enter 2013. Subject to the pace and yields of new investments as we redeploy our excess liquidity, we now anticipate a 2013 earnings level of $0.45 to $0.55, down from our previous 2013 target range of $0.50 to $0.60 per share.

As Hagen and I communicated last November, the primary goal of our strategic plan was to create a company with less credit and leverage risk, yet one as of sustainable and predictable level of NOI and dividend generation. I am pleased to say that in our view, our transformation is substantially complete. Our equity investment position has been substantially reduced and our overall credit profile has been substantially improved. Our leverage risk profile has been substantially reduced and our infrastructure has been right sized to a smaller and simpler operating profile.

The final phase of our transformation, which I will ask Hagen to comment on, is validation of our internal managed BDC business model and the underlying portfolio of management and leverage assumptions that we have previously set out for you. I will turn it over to Hagen now, thank you.

Hagen Saville

Thank you, Rich, and good morning everyone. I would like to give some additional context to Rich’s remarks and provide some thoughts about the state of our business. As Rich mentioned, we have demonstrable progress in the execution of our business plan. Our equity portfolio is steadily being reduced and our loan book is becoming more granular, as a results our risk profile has been reduced. Furthermore, our cost reduction initiatives combined with our internally managed [status], will enable us to operate very efficiently with incremental asset growth being accretive.

Generally, I am very pleased with where we sit, halfway through 2012, as a transition year for MCG. During the quarter, our investment portfolio declined from $666 million to $453 million including the sale of three meaningful equity investments where we also own loans. Orbitel Holdings, $34.8 million, Garden State, $32.4 million, and Stratford School, $27.6 million, as well as repayment of several standalone loan assets. We made one new loan during the quarter, an $8 million subordinated debt investment in a healthcare company.

The remaining portfolio continues to meet our expectations with a majority of our names experiencing favorable sequential operating trends and improved credit metrics. Given the significant repayments on the quarter, we have experienced an imbalance between ordinary course origination and payoff activity. As a result, today our balance sheet is roughly only two-third employed. This imbalance is attributable to, one, the robust loan repayment and asset sale activity during the quarter. Two, weak market conditions; and three, the MCG reorganization, which is now essentially complete.

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