MCG Capital Corporation Reports First Quarter 2013 Resultsand Distribution of $0.125 Per Share
As outlined in further detail in this earnings release and in our Quarterly Report on Form 10-Q, for the quarter ended March 31, 2013, the following highlights occurred during the three months ended March 31, 2013:
Net operating income, or NOI, was $8.0 million, or $0.11 per share;
Net income was $7.8 million, or $0.11 per share;
We funded $15.9 million of advances and originations, including $13.0 million to a new portfolio company;
We monetized $81.7 million of our debt portfolio;
At March 31, 2013, we had $148.6 million of cash on-hand to make new investments using unrestricted cash and restricted cash from our SBIC. In addition, we had $40.6 million in securitization accounts and other restricted cash accounts; and
Under our stock repurchase program, we repurchased and retired 504,639 shares of our common stock at a total cost of $2.3 million, or a weighted average purchase price of $4.50 per share.
On April 26, 2013, the MCG board of directors declared a distribution of $0.125 per share. The distribution is payable as follows:
Record date: May 10, 2013
Payable date: May 31, 2013
If we determined the tax attributes of our 2013 distributions as of March 31, 2013, 49% would be from ordinary income and 51% would be a return of capital. However, actual determinations of the tax attributes of our distributions, including determinations of return of capital, are made annually as of the end of the fiscal year based upon our taxable income and distributions paid for the full year. Therefore, a determination as to the tax attributes of the distributions made on a quarterly basis may not be representative of the actual tax attributes for a full year. We intend to update shareholders quarterly with an estimated percentage of our distributions that resulted from taxable ordinary income. The actual tax characteristics of distributions to shareholders will be reported to shareholders annually on a Form 1099-DIV.
Originations and Advances — We made $15.9 million in originations and advances to new and existing portfolio companies, principally in the form of loans (94% or $15.0 million), including one new portfolio company.
Loan Monetizations — We received $81.7 million in loan payoffs and amortization payments: five borrowers repaid $71.3 million in principal at or above par and we received $10.4 million in loan amortization and paid-in-kind interest, or PIK, payments.
Loans on Non-Accrual — Loans on non-accrual, at cost (under 4% of the total loan portfolio) and fair value (under 20 basis points of the total loan portfolio) remained stable in the first quarter of 2013.
Equity Monetizations and Realizations — We received $3.5 million in proceeds from equity securities, principally from the sale of our investment in NDSSI Holdings, LLC.
Second SBIC License Update — In February 2013, we received a letter from the SBA inviting us to file a formal license application, which we submitted to the SBA in March 2013.
Open-Market Purchases of Our Stock — We repurchased 504,639 shares of our common stock at a total cost of $2.3 million, or a weighted average purchase price of $4.50 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.
Operating Costs — Excluding interest expense, our total operating costs were 0.5% of $607 million in total assets (equal to an annualized rate of approximately 2% of total assets).
Reduced Leverage — From December 31, 2012 to March 31, 2013, we reduced our outstanding borrowings under our MCG Commercial Loan Trust, or 2006-1 Trust, by $15.1 million, reducing our borrowings under our 2006-1 Trust from $98.1 million to $83.0 million as of March 31, 2013. In April 2013, we further reduced our borrowings under our 2006-1 Trust by $28.1 million from $83.0 million to $54.9 million.
Since January 1, 2010, we monetized over $950 million of our investment portfolio. At March 31, 2013, approximately 64% of our investments, at fair value, had been originated since January 1, 2010. Though we have seen an acceleration of monetizations, we continue to believe that monetizations of older vintage investments or investments that exceed our target hold size of $15 million are long-term positive events for MCG and for our investors. However, these monetizations, especially when unplanned, result in short-term pressure to redeploy such capital.
Throughout the remainder of 2013, we anticipate that we will monetize approximately $30 million to $50 million of investments. In addition, we expect to use part of the proceeds from these monetizations to reduce the borrowings in our 2006-1 Trust to approximately $20 million to $30 million. We expect to originate new loans and equity co-investments sufficient to end the year with total investments of $500 million to $530 million (calculated at fair value).
At March 31, 2013, using unrestricted cash and restricted cash from our SBIC, we had $148.6 million of cash on-hand to make new investments. Assuming continued stability in the market, actionable opportunities that meet our underwriting standards, portfolio granularity requirements and no material repayments beyond maturities that we are aware of as of March 31, 2013, we anticipate that we will substantially deploy our cash on-hand in 2013.
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 March 31, 2013, we have repurchased and retired an aggregate of 6,686,685 common shares at a weighted average purchase price of $4.40 per share.
ACCESS TO CAPITAL AND LIQUIDITY
At March 31, 2013, we had $98.9 million of cash and cash equivalents available for general corporate purposes, as well as $49.7 million of cash in restricted accounts related to our SBIC that we may use to fund new investments in the SBIC and $7.5 million of restricted cash held in escrow. In addition, we had $33.1 million of cash in securitization accounts, that may only be used to make interest and principal payments on our securitized borrowings or distributions to MCG in accordance with the indenture agreement of the 2006-1 Trust.
At March 31, 2013, cash in securitization accounts included $29.9 million in the principal collections account of our 2006-1 Trust. In April 2013, we used $30.5 million of securitized cash, including $0.6 million collected in April 2013, to repay borrowings of our 2006-1 Trust, a pro rata portion of which we received for the principal we own. 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 March 31, 2013, the outstanding borrowings under the 2006-1 Trust were $83.0 million.
At March 31, 2013, $150.0 million of United States Small Business Administration, or SBA, borrowings were outstanding, the maximum available under our current SBIC license.
At March 31, 2013, we had full access to our $20.0 million unsecured revolving credit facility with Bank of America, N.A.
Date and time
Tuesday, April 30, 2013 at 10:00 a.m. Eastern Time
(877) 312-8798 domestic
(253) 237-1193 international
May 14, 2013)
(855) 859-2056 domestic
(404) 537-3406 international
RESULTS OF OPERATIONS
The following section compares our results of operations for the three months ended March 31, 2013 to the three months ended March 31, 2012.
COMPARISON OF THE THREE MONTHS ENDED March 31, 2013 AND 2012
The following table summarizes the components of our net income for the three months ended March 31, 2013 and 2012:
Three months ended March 31,
(dollars in thousands)
Interest and dividend income
Total interest and dividend income
Advisory fees and other income
Salaries and benefits
Amortization of employee restricted stock
Total employee compensation
General and administrative expense
Total operating expense
Net operating income before net investment loss, loss on extinguishment of debt and income tax provision
Net investment loss before income tax provision
Loss on extinguishment of debt before income tax provision
Income tax provision
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 three months ended March 31, 2013 from the three months ended March 31, 2012.
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 three months ended March 31, 2013, the total yield on our average debt portfolio at fair value was 12.1% compared to 10.9% during the three months ended March 31, 2012. The weighted-average yield varies each period because of changes in the composition of our portfolio of debt investments, changes in stated interest rates, fee 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 three months ended March 31, 2013 and 2012:
Three months ended March 31,
Average 90-day LIBOR
Spread to average LIBOR on average loan portfolio
Impact of fee accelerations of unearned fees on paid/restructured loans
Impact of non-accrual loans
Total yield on average loan portfolio
During the three months ended March 31, 2013, interest income was $11.1 million, compared to $15.6 million during the three months ended March 31, 2012, which represented a $4.5 million, or 28.9%, decrease. This decrease reflected a $5.6 million decrease resulting from a 33.7% decrease in our average loan balance, a decrease of $0.4 million due to interest rate floors, a $0.3 million decrease in interest income related to the decrease in LIBOR and a $0.2 million decrease resulting from the net impact of loans that had been on non-accrual status during the three months ended March 31, 2013 that were accruing interest during the three months ended March 31, 2012. These decreases were partially offset by a $2.1 million increase in interest income resulting from a 1.2% increase in our net spread to 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 three months ended March 31, 2013 and 2012, at cost:
Three months ended March 31,
Beginning PIK loan balance
PIK interest earned during the period
Payments received from PIK loans
Ending PIK loan balance
As of March 31, 2013 all of our PIK loans were accruing interest and, as of March 31, 2012, we were not accruing interest on $8.9 million of the PIK loans, at cost, shown in the preceding table. During the three months ended March 31, 2013, the payments received from PIK loans included $1.0 million collected in conjunction with the partial repayment of our investment in Education Management, Inc., as well as $0.8 million collected in conjunction with the repayment in full of our investment in NDSSI Holdings, 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 three months ended March 31, 2013 and 2012, we recognized dividend income of $0.9 million and $1.1 million, respectively. In addition, during the three months ended March 31, 2013 and 2012, we received payments on accrued dividends of $0.2 million and $3.5 million, respectively. As of March 31, 2013, the balance of accrued dividends was $9.9 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 three months ended March 31, 2013, we earned $0.5 million of advisory fees and other income, which represented a $0.2 million, or 78.7%, increase from the three months ended March 31, 2012. This increase resulted from an increase in prepayment fees related to loan prepayments in the first quarter of 2013.
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 three months ended March 31, 2013, we incurred $2.4 million of interest expense, which represented a $2.8 million, or 54.2%, decrease from the same period in 2012. During these respective periods, our average cost to borrow decreased from 5.0% to 4.0%, principally due to a decrease in the amortization of deferred financing costs (from $2.5 million to $0.3 million) offset by the repayment of securitized debt of our 2006-1 Trust (which carries interest rates ranging from L+0.33% to L+2.25%) and additional borrowings under the SBIC debenture program (which carries a weighted average fixed rate of 4.33%).
During the three months ended March 31, 2013, our averaging borrowings declined to approximately $235.6 million from an average of approximately $419.6 million for the same period in 2012, which accounted for a $1.6 million reduction in our interest expense. In addition, interest expense decreased by $2.1 million related to decreased amortization of debt issuance costs and $0.2 million due to a decrease in the average LIBOR rate from 0.52% to 0.29%. These decreases were offset by $1.1 million attributable to the spread to LIBOR increasing from approximately 2.08% to 3.17%.
We recognized $0.3 million in deferred financing costs during the three months ended March 31, 2013, down $2.1 million from the same period in 2012. The decrease is primarily attributable to $1.5 million in accelerated deferred financing fees related to the termination of our SunTrust Warehouse financing facility in the first quarter of 2012.
Employee compensation expense includes base salaries and benefits, variable annual incentive compensation and amortization of employee stock awards. During the three months ended March 31, 2013, our employee compensation expense was $1.8 million, which represented a $2.6 million, or 59.1%, decrease from the same period in March 31, 2012. Our salaries and benefits decreased by $2.5 million, or 63.7%, due to a $1.7 million decrease in incentive compensation and a $0.8 million decrease in salaries and benefits primarily resulting from our operational realignment, which is now substantially complete. As of March 31, 2013, we had 20 employees compared to 33 employees as of March 31, 2012.
GENERAL AND ADMINISTRATIVE
During the three months ended March 31, 2013, general and administrative expense was $1.0 million, which represented a $2.9 million, or 73.8%, decrease compared to the same period in 2012. In the first quarter of 2012, general and administrative expense included $1.1 million in severance costs and $0.3 million of legal expenses related to investment monetizations. In addition, general and administrative expense decreased $0.5 million due to reduced occupancy costs for our new corporate office space.
NET INVESTMENT LOSS BEFORE INCOME TAX PROVISION
During the three months ended March 31, 2013, we incurred $0.2 million of net investment losses before income tax provision, compared to $2.5 million during the same period in 2012. These amounts represent the total of net realized gains and losses, net unrealized appreciation (depreciation), 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 gain and (loss) on investments and changes in our unrealized appreciation and depreciation on investments for the three months ended March 31, 2013:
Three months ended March 31, 2013
Virtual Radiologic Corporation
Miles Media Group, LLC
Advanced Sleep Concepts, Inc.
Other (< $1 million net gain (loss))