MCG Capital Corporation Reports Fourth Quarter 2012 and Annual Results and Distribution of $0.125 Pe
Mar 5th 2013 11:06AM
Updated Mar 5th 2013 11:10AM
MCG Capital Corporation Reports Fourth Quarter 2012 and Annual Results and Distribution of $0.125 Per Share
ARLINGTON, Va.--(BUSINESS WIRE)-- MCG Capital Corporation (NAS: MCGC) ("MCG," "we," "our," "us" or the "Company") announced today its financial results for the fourth quarter and year ended December 31, 2012. We will host an investment community call today, March 5, 2013, 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.
- Net operating income, or NOI, was $5.1 million, or $0.07 per share, for the fourth quarter. NOI for the full year was $18.8 million, or $0.25 per share;
- Net income was $6.4 million, or $0.09 per share, for the fourth quarter. Net income for the full year was $5.0 million, or $0.07 per share;
- In the fourth quarter, we incurred transition costs of $2.1 million, or $0.03 per share, including $1.6 million, or $0.02 per share, included in operating expenses and $0.5 million, or $0.01 per share, of realized losses. For the year, we incurred transition costs of $9.3 million, or $0.13 per share, including $8.8 million, or $0.12 per share, included in operating expenses and $0.5 million, or $0.01 per share, of realized losses.
- During the fourth quarter, we funded $113.9 million of advances and originations, including $79.2 million to five new portfolio companies. For the full year, we funded $162.0 million of advances and originations, including $115.3 million to eight new portfolio companies;
- During the fourth quarter, we monetized $0.6 million of our equity investments and $80.3 million of our debt portfolio. For the full year, we monetized $65.0 million of our equity investments and $347.2 million of our debt portfolio;
- At December 31, 2012, we had $121.1 million of cash on-hand to make new investments using unrestricted cash and restricted cash from our SBIC. In addition, we had $24.3 million in securitization accounts and other restricted cash accounts; and
- Under our stock repurchase program, we repurchased and retired 1,062,160 shares of our common stock during the fourth quarter at a total cost of $4.8 million or an average of $4.48 per share. For the full year, we repurchased and retired 6,182,046 shares at a total cost of $27.2 million, or an average purchase price of $4.40 per share.
On March 1, 2013, the MCG board of directors declared a distribution of $0.125 per share. The distribution is payable as follows:
Record date: March 15, 2013
Payable date: March 29, 2013
As of the end of each fiscal year, we determine the tax attributes of our distributions, including return of capital, based upon our taxable income and distributions paid for the full year, which we report to each stockholder on a Form 1099. Based on the tax attributes of the distributions that we declared for 2012, 100% were a return of capital.
SIGNIFICANT DEVELOPMENTS IN 2012
- Control Investments — We exited, monetized or restructured five control investments, including Broadview Networks Holdings, Inc., or Broadview, Jet Plastica Investors, NPS Holding Group, Orbitel Holdings and Intran Media, thereby reducing our control investments to an aggregate of $33.9 million in the debt securities of two companies and $16.1 million in the equity securities of one company.
- Originations and Advances — We made $162.0 million in originations and advances to new and existing portfolio companies, principally in the form of loans (94.4% or $152.9 million), including ten new investments. We invested the remaining $9.1 million principally in minority equity investments, as well as follow-on investments and paid-in-kind, or PIK, dividends on existing investments.
- Equity Monetizations and Realizations — We received $65.0 million in proceeds from the sale of equity investments, principally the sale of securities in each of Orbitel Holdings, LLC, Stratford School Holdings, Inc., GSDM Holdings, LLC and Jenzabar, Inc. For the twelve months ended December 31, 2012, we reduced our equity investments from 15% to less than 10% of the fair value of our total investment portfolio.
- Loan Monetizations — We received $347.2 million in loan payoffs and amortization payments.
- Dividends — We declared 57.5 cents per share in dividends and paid $56.0 million in total dividends.
- Open-Market Purchases of Our Stock — We repurchased 6,182,046 shares of our common stock at a weighted average purchase price of $4.40 per share. We acquired these shares from sellers in open market transactions. We retire these shares upon settlement, thereby reducing the number of shares issued and outstanding.
- Board and Management Changes — Effective November 1, 2012, B. Hagen Saville became our CEO, succeeding Richard W. Neu, who remains Chairman of the Company's Board of Directors. From November 2011 to October 2012, Mr. Saville served as the Company's President and Chief Operating Officer, before which he was Executive Vice President of Business Development from March 1998 to October 2011. In addition, effective December 31, 2012, MCG reduced the size of its board of directors from seven members to five.
- Operational Realignment — We incurred costs associated with our transition plan of $9.3 million, or $0.13 per share, that includes $8.8 million, or $0.12 per share, of transition costs included in operating expenses and $0.5 million, or $0.01 per share, of realized losses associated with the write-off of fixed assets. Transition costs include $2.3 million in accelerated deferred financing fees that we recorded as interest expense, $1.4 million in retention and inducement payments that we recorded as salaries and benefits, $0.3 million in amortization expenses associated with the elimination of positions that we recorded as amortization of employee restricted stock awards and $4.8 million in severance, moving expenses and IT systems conversion costs that we recorded as general and administrative expenses. As of December 31, 2012, we had 18 full-time employees and three part-time employees.
- New Liquidity Facility — In November 2012, we entered into a two-year $20 million unsecured revolving credit facility with Bank of America, N.A. The facility provides short-term liquidity to finance working capital and for other general corporate purposes.
- Reduced Reliance on Leverage — We reduced our outstanding debt by $182 million principally by reducing our borrowings under our MCG Commercial Loan Trust 2006-1, or 2006-1 Trust, and repaying and terminating our SunTrust Warehouse facility and our Series 2007-A Private Placement Notes. For the twelve months ended December 31, 2012, we reduced our debt-to-equity leverage profile from 1:1 to 0.7:1.
- Reduction in Loans on Non-Accrual — As of December 31, 2011 and 2012, loans on non-accrual, at fair value, declined from $19.3 million, or 3.1% of our total loan portfolio, to $0.6 million, or 0.1% of our total loan portfolio, principally resulting from the sale of NPS Holding Group and the wind-down of Jet Plastica Investors. For the same comparative periods, loans on non-accrual at cost, declined from $83.2 million, or 11.9% of our total loan portfolio, to $16.8 million, or 3.7% of our total loan portfolio.
During 2012, we substantially completed our operational and financial transition to return the Company to its roots as a middle market lender. As part of the transition, we accomplished several important strategic initiatives, which included exiting a majority of our control investments, deploying capital in the form of loans, limiting equity investments to minority investments, reducing leverage risk in terms of our debt to equity ratio and simplifying our operations.
Using unrestricted cash and restricted cash from our SBIC, we ended fiscal year 2012 with $121 million of cash on-hand to make new investments. Less than 10% of our investment portfolio, at fair value, matures in 2013 and approximately half of those maturities will be used to pay down our 2006-1 Trust.
Assuming continued stability in the market, actionable opportunities that meet our underwriting standards, portfolio granularity requirements and no material repayments beyond scheduled maturities, we anticipate that we will substantially deploy our cash on-hand in 2013.
We intend to make our investments through our SBICs, Solutions Capital and, if a license is granted by the United States Small Business Administration, or SBA, Solutions Capital II, L.P., a corner-stone of our funding strategy. As of December 31, 2012, our investment in Solutions Capital includes approximately $48 million of cash, $188 million of investments at fair value, $150 million of debt and $86 million of equity.
In September 2012, we submitted documentation to the SBA in support of a potential SBIC license for Solutions Capital II, L.P. In February 2013, we received a letter from the SBA inviting us to file a formal license application, which we are in the process of preparing for submission. There is no assurance that the SBA will grant the additional license in any specified time period or at all. Currently, a second SBIC license would grant us the ability to borrow up to an additional $75 million from the SBA, or two times the amount of statutory equity capital we invest in Solutions Capital II, L.P. If approved and based on available capital, we intend to fund the entire $37.5 million using unrestricted cash.
We believe that our reorganized infrastructure has resulted in a smaller and simpler, yet leverageable operating profile. Excluding potential leverage from a second SBIC license or other potentially accretive opportunities, we anticipate that our cost to borrow will remain materially unchanged at approximately 4.5%.
Under the $35 million stock repurchase program authorized by our board of directors in January 2012, we continue to repurchase shares of our common stock in open market transactions, including through block purchases, depending on prevailing market conditions and other factors. As of February 28, 2013, we have repurchased and retired 6,460,881 common shares at a weighted average purchase price of $4.40 per share.
ACCESS TO CAPITAL AND LIQUIDITY
At December 31, 2012, we had $73.6 million of cash and cash equivalents available for general corporate purposes, as well as $47.5 million of cash in restricted accounts related to our SBIC that we could use to fund new investments in the SBIC and $6.8 million of restricted cash held in escrow. In addition, we had $17.0 million of cash in securitization accounts, that may only be used to make interest and principal payments on our securitized borrowings or distributions to the Company in accordance with the indenture agreement.
At December 31, 2012, cash in securitization accounts included $13.1 million in the principal collections account of our 2006-1 Trust. In January 2013, we used $15.0 million of securitized cash, including $1.9 million collected in January 2013, to repay a portion of the outstanding borrowings of our 2006-1 Trust. The reinvestment period for this facility ended on July 20, 2011 and all subsequent principal collections received have been, and will be, used to repay the securitized debt. At December 31, 2012, the outstanding borrowings under the 2006-1 Trust were $98.1 million.
At December 31, 2012, $150.0 million of SBA borrowings were outstanding, the maximum available under our current SBIC license.
|Date and time||Tuesday, March 5, 2013
at 10:00 a.m. Eastern Time
(No Conference ID required)
|(877) 312-8798 domestic
(253) 237-1193 international
(Conference ID for replay is #16834724)
|(855) 859-2056 domestic
(404) 537-3406 international
RESULTS OF OPERATIONS
The following table summarizes the components of our net income (loss) for the twelve months ended December 31, 2012 and 2011:
(dollars in thousands)
|Interest and dividend income|
|Total interest and dividend income||57,699||82,208||(24,509||)||(29.8||)|
|Advisory fees and other income||3,294||3,488||(194||)||(5.6||)|
|Salaries and benefits||10,956||11,998||(1,042||)||(8.7||)|
|Amortization of employee restricted stock||2,076||2,081||(5||)||(0.2||)|
|Total employee compensation||13,032||14,079||(1,047||)||(7.4||)|
|General and administrative expense||13,983||14,036||(53||)||(0.4||)|
|Total operating expense||42,187||48,038||(5,851||)||(12.2||)|
|Net operating income before net investment gain (loss), loss on extinguishment of debt and income tax provision||18,806||37,658||(18,852||)||(50.1||)|
|Net investment loss before income tax provision||(13,299||)||(129,873||)||116,574||(89.8||)|
|(Loss) gain on extinguishment of debt before income tax provision||(174||)||(863||)||689||(79.8||)|
|Income tax provision||335||37||298||NM|
|Net income (loss)||$||4,998||$||(93,115||)||$||98,113||NM|
Total revenue includes interest and dividend income, loan fees, advisory fees and other income. The following sections describe the reasons for the variances in each major component of our revenue during the twelve months ended December 31, 2012 from the twelve months ended December 31, 2011.
The level of interest income that we earn depends upon the level of interest-bearing investments outstanding during the period, as well as the weighted-average yield on these investments. During the twelve months ended December 31, 2012, the total yield on our average debt portfolio at fair value was 11.3% compared to 10.7% during the twelve months ended December 31, 2011. The weighted-average yield varies each period because of changes in the composition of our portfolio of debt investments, changes in stated interest rates, accelerations of unearned fees on paid-off/restructured loans and the balance of loans on non-accrual status for which we are not accruing interest.
The following table shows the various components of the total yield on our average debt portfolio at fair value for the twelve months ended December 31, 2012 and 2011:
|Average 90-day LIBOR||0.4||%||0.3||%|
|Spread to average LIBOR on average loan portfolio||10.9||10.7|
|Impact of fee accelerations of unearned fees on paid/restructured loans||0.4||0.3|
|Impact of non-accrual loans||(0.4||)||(0.6||)|
|Total yield on average loan portfolio||11.3||%||10.7||%|
During the twelve months ended December 31, 2012, interest income was $50.8 million, compared to $71.1 million during the twelve months ended December 31, 2011, which represented a $20.4 million, or 28.6%, decrease. This decrease reflected (i) a $23.4 million decrease resulting from a 31.6% decrease in our average loan balance, (ii) a $1.3 million decrease resulting from loans that were on non-accrual status during the twelve months ended December 31, 2012 but that had been accruing interest during the twelve months ended December 31, 2011 and (iii) a $0.4 million decrease due to interest rate floors. These decreases were partially offset by a $4.1 million increase in interest income resulting from a 0.4% increase in our net spread to LIBOR and a $0.7 million increase in interest income related to the increase in LIBOR.
Interest income includes certain amounts that we have not received in cash, such as PIK interest. PIK interest represents contractually deferred interest that is added to the principal balance of the loan and compounded if not paid on a current basis. Borrowers may in some instances be required to prepay PIK because of certain contractual provisions or they may choose to prepay; however, more typically, PIK is paid at the end of the loan term. The following table shows the PIK-related activity for the twelve months ended December 31, 2012 and 2011, at cost:
|Beginning PIK loan balance||$||15,653||$||30,923|
|PIK interest earned during the period||5,253||7,794|
|Interest receivable converted to PIK||—||590|
|Payments received from PIK loans||(8,996||)||(21,600||)|
|PIK converted from (to) other securities||3,143||(877||)|
|Ending PIK loan balance||$||9,043||$||15,653|
As of December 31, 2012 and 2011, we were not accruing interest on $0.4 million and $8.9 million, respectively, of the ending PIK loan balance, at cost. During the twelve months ended December 31, 2012, the payments received on PIK loans, included $2.9 million from Jet Plastica Investors, LLC, $1.8 million from GSDM Holdings Corp. and $1.3 million from Coastal Sunbelt Holding, Inc. The payments received from PIK loans during the twelve months ended December 31, 2011, included $8.2 million and $4.7 million of PIK collected in conjunction with the respective sales of our investments in Restaurant Technologies, Inc. and Avenue Broadband LLC, as well as $1.7 million collected in conjunction with the partial repayment of our investment in Sagamore Hill Broadcasting, LLC.
We accrete dividends on equity investments with stated dividend rates as they are earned, to the extent that we believe the dividends will be paid ultimately and the associated portfolio company has sufficient value to support the accretion. We recognize dividends on our other equity investments when we receive the dividend payment. Our dividend income varies from period to period because of changes in the size and composition of our equity investments, the yield from the investments in our equity portfolio and the ability of the portfolio companies to declare and pay dividends. During the twelve months ended December 31, 2012 and 2011, we recognized dividend income of $3.7 million and $7.3 million, respectively. In addition, during the twelve months ended December 31, 2012 and 2011, we received payments on accrued dividends of $8.5 million and $13.5 million, respectively. Broadview restructured during 2012, which resulted in our controlling interest in the company, held through our ownership in the company's preferred stock, converting to a minority common stock investment. As a result, our $159.6 million cost basis in our preferred stock investment, including $65.9 million of accrued dividends, converted into the cost basis of the newly issued common stock. As of December 31, 2012, the balance of accrued dividends was $9.4 million.
ADVISORY FEES AND OTHER INCOME
Advisory fees and other income primarily include fees related to prepayment, advisory and management services, equity structuring, syndication, bank interest and other income. Generally, advisory fees and other income relate to specific transactions or services and, therefore, may vary from period to period depending on the level and types of services provided. During the twelve months ended December 31, 2012, we earned $3.3 million of advisory fees and other income, which represented a $0.2 million, or 5.6%, decrease from the twelve months ended December 31, 2011. This decrease included a decrease of $2.3 million in advisory fees due to our lower investment activity in 2012 compared to 2011, offset by an increase in prepayment premiums of $2.1 million related to eight investment repayments in 2012.
TOTAL OPERATING EXPENSES
Total operating expenses include interest, employee compensation and general and administrative expenses. The reasons for these variances are discussed in more detail below.
During the twelve months ended December 31, 2012, we incurred $15.1 million of interest expense, which represented a $0.5 million, or 3.4%, decrease from the same period in 2011. During these respective periods, our average cost to borrow increased from 3.1% to 4.6%, principally due to the repayment of securitized debt of our 2006-1 Trust (which carries interest rates ranging from L+0.33% to L+2.25%), additional borrowings under the SBIC debenture program (which carries a weighted average fixed rate of 4.33%) and an increase in the amortization of deferred financing costs (from $3.0 million to $5.6 million).
During the twelve months ended December 31, 2012, our averaging borrowings declined to approximately $324 million from an average of approximately $501 million for the same period in 2011, which accounted for a $5.2 million reduction in our interest expense. This decrease in interest expense was offset by an increase of $2.6 million related to increased amortization of debt issuance costs, $1.6 million attributable to the spread to LIBOR increasing from approximately 2.1% to 2.5% and $0.5 million due to an increase in the average LIBOR rate from 0.3% to 0.4%.
We recognized $5.6 million in deferred financing costs during the twelve months ended December 31, 2012, up $2.6 million from the same period in 2011. The increase in 2012 is attributable to $2.3 million in accelerated deferred financing fees related to the termination of our SunTrust Warehouse financing facility and $0.3 million of accelerated deferred financing fees related to prepayments of collateral in our 2006-1 Trust.
Employee compensation expense includes base salaries and benefits, variable annual incentive compensation and amortization of employee stock awards. During the twelve months ended December 31, 2012, our employee compensation expense was $13.0 million, which represented a $1.0 million, or 7.4%, decrease from the same period in 2011. Our salaries and benefits decreased by $1.0 million, or 8.7%, due to a $3.8 million decrease in salaries and benefits primarily resulting from reductions in our workforce that occurred as part of our corporate restructuring and operational realignment that began in August 2011 and is now substantially complete. As of December 31, 2012, we had 21 employees compared to 63 employees as of June 30, 2011. The decrease in salaries and benefits was offset by an increase in incentive compensation of $2.8 million primarily resulting from incentive and inducement bonuses for 2012.
During each of the twelve months ended December 31, 2012 and 2011, we recognized $2.1 million of compensation expense related to employee restricted stock awards. The amortization of restricted stock awards during the twelve months ended December 31, 2012 included accelerated amortization of $0.3 million of awards to employees whose employment was terminated in during 2012.
GENERAL AND ADMINISTRATIVE
During the twelve months ended December 31, 2012, we incurred $13.3 million of net investment losses before income tax provision, compared to $129.9 million during the same period in 2011. These amounts represent the total of net realized gains and losses, net unrealized (depreciation) appreciation, and reversals of unrealized (appreciation) depreciation. We reverse unrealized (appreciation) depreciation at the time that we realize the gain or loss. The following table summarizes our realized and unrealized (loss) and gain on investments and changes in our unrealized appreciation and depreciation on investments for the twelve months ended December 31, 2012:
|Year ended December 31, 2012|
|Broadview Networks Holdings, Inc.||Communications||Control||$||—||$||(9,789||)||$||—||$||(9,789||)|
|Advanced Sleep Concepts, Inc.||Home Furnishings||Affiliate||—||(6,046||)||—||(6,046||)|
|Orbitel Holdings, LLC||Cable||Control||
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