MCG Capital (MCGC) – Part 1 - Introduction

MCGC Capital Corporation (MCGC), a Business Development Company (BDC) provides debt financing to small as well as mid-capitalization companies. They are required to invest at least 70% of their total assets in private or thinly traded public companies. The company has elected to be treated as a Regulated Investment Company (RIC) as of January 2002 and is thus exempted from paying corporate taxes on any income they distribute to their stockholders as dividends. To qualify as an RIC, it is required to distribute at least 90% (98% to avoid a 4% excise tax) of the taxable income and also continue to qualify as a BDC. There are also certain other miscellaneous restrictions.

BDC Primer:

BDC’s stimulate public capital to private businesses in an efficient manner. They are structured like a closed end mutual fund, the variation being instead of investing in public companies, the fund invests in private enterprises. As with closed end mutual funds, the Net Asset Value (NAV) is an important measure of valuation for these companies. The unknown for BDC’s is the level of difficulty in asset valuation, as they are not generally traded.

BDCs are very risky as it invests in high-yielding sub-ordinate and mezzanine debt. Further, the investments are on small-cap enterprises that by its very nature are risky. These risks are somewhat mitigated by the following factors:
  • Regulations limit leverage to be 1:1, and
  • BDC’s provide a way to gain exposure to small-caps along with high dividend yield.
Correlation to small caps and high-yield debt make BDC investments more risky in a recession.

Financing Options for Small Private Businesses Primer:

There are three types of financing options for small enterprises:
  • Senior debt (Bank Loan) – least expensive, but needs collateral.
  • Mezannine/Sub-Ordinated Debt – more expensive with interest rates in the range of 10-14%. No collateral is required per se, but is usually secured through warrants on the equity in the company. With warrants, a put-option is usually executed where there is an agreement for the company to buy back the warrants at a pre-arranged price based on the valuation of the company. With warrants, investors (usually funds) try to realize an internal rate of return in the 20-25% range. Recommended for relatively high-growth businesses with established revenues and are on a path to positive operating income. In priority of payment, this type of debt falls right in the middle – before equity but after senior debt. It can act as an equity cushion that supports the senior bank debt.
  • Equity – most expensive. Ownership in one’s company is diluted and can potentially lose control as the financers could seek board representation, etc. Recommended for high-growth high investment risk business – operating cash flow may not be substantial.
MCG Capital is active in all three of these financing categories. They have focused on optimizing asset mix for risk and returns, as shown in the following table:



















Year20032004200520062007
Senior Debt71.970.449.53132.6
Secured Sub-debt14.7163039.334.2
Unsecured Sub-debt005.62.02.5
Equity13.413.414.927.730.7


The following table indicates the portfolio diversification achieved by the company over the years:






















Year20032004200520062007
Media54.4%42.1%25.9%20.8%19.9%
Communications27.5%21.7%25.7%28.5%21.5%
Information Services9.4%10.9%6.9%3.8%2.9%
Technology5.6%7.2%6.0%2.9%3.0%
Diversified / Other1 3.1%18.1%35.5%44.0%52.7%


MCG Capital’s business is dependent on acquiring capital efficiently and then allocating it so as to enhance NAV and interest income. The total borrowings and minimum rental obligations together stands at $761.9M and the total of all investments at fair value are about $1.56B as of EOY 2007. That makes the ratio of debt-to-equity very close to the regulatory requirement of 1:1.

Related Posts:

1. MCG Capital (MCGC) - Part 1 - Introduction.
2. MCG Capital (MCGC) - Part 2 - Business Issues.
3. MCG Capital (MCGC) - Part 3 - Outlook.

No comments :

Labels

401k ( 15 ) Abad Turtle Beach ( 1 ) Abrams Capital Management ( 5 ) Acoustic Electric Guitars ( 1 ) Acoustic Guitars ( 1 ) ACT ( 1 ) Activist ( 4 ) Address Change ( 2 ) Advanced Placement ( 4 ) air asia ( 2 ) airlines ( 2 ) Akre Capital Management ( 18 ) Alex Roepers ( 5 ) AP ( 4 ) apartments ( 2 ) Appaloosa ( 15 ) ARIUS ( 1 ) Arlington Value Capital ( 3 ) Atlantic Investment Management ( 5 ) Ayemenem ( 1 ) Bangalore ( 3 ) Bangkok ( 2 ) Bannerghatta National Park ( 1 ) barbuda ( 2 ) Battery Park ( 1 ) Baupost ( 2 ) Baupost Group ( 17 ) bay area ( 2 ) BDCs ( 3 ) Benjamin Graham ( 2 ) Benjamin Graham Model ( 2 ) Berijam Lake ( 2 ) Berkshire Hathaway ( 30 ) best sites ( 9 ) Bill & Melinda Gates Foundation ( 14 ) Bill Ackman ( 19 ) Bill Gates ( 15 ) Blue Ridge Capital ( 14 ) Blum Capital Partners ( 12 ) books ( 4 ) Boone Pickens ( 2 ) BP Capital Management ( 2 ) Brave Warrior ( 3 ) Brave Warrior Advisors ( 12 ) british honduras ( 2 ) Bruce Berkowitz ( 19 ) Bruce Fund ( 13 ) Camcorders ( 3 ) canada ( 4 ) cancun ( 3 ) CANROYs ( 7 ) Cantillon ( 12 ) carl icahn ( 9 ) Carl Ichan ( 8 ) casino ( 3 ) Casio ( 2 ) CBRE ( 2 ) CEF ( 2 ) Charles Akre ( 15 ) Charlie Munger ( 14 ) Chase Coleman ( 14 ) Chou Associates ( 19 ) Christmas gifts ( 7 ) Christopher H. Browne ( 7 ) Chuck Akre ( 13 ) Cisco ( 2 ) Class Action Settlements ( 2 ) CLEP ( 1 ) Coatue Management ( 14 ) Cochin ( 2 ) coin collecting ( 266 ) collectibles ( 266 ) Consumer Product Reviews ( 29 ) cook islands ( 2 ) coonoor ( 2 ) Covered Calls ( 2 ) credai ( 4 ) Daily Journal ( 14 ) Dalal Street ( 8 ) Dan Loeb ( 10 ) DAT ( 1 ) David Abrams ( 5 ) David Einhorn ( 22 ) David Swensen ( 17 ) David Tepper ( 15 ) David Winters ( 15 ) DCF ( 2 ) Digital Piano ( 3 ) Dinakar Singh ( 14 ) Donald Yacktman ( 10 ) dry bulk shipping ( 2 ) Duquesne ( 19 ) Education ( 37 ) Edward Lampert ( 15 ) Egerton Capital ( 14 ) Egypt ( 3 ) Elementary Education ( 10 ) Elementary School Textbooks ( 5 ) eReaders ( 2 ) Eric Mindich ( 13 ) ESL Investments ( 10 ) ESPP ( 6 ) ETF ( 2 ) ETN ( 2 ) Eton Park ( 13 ) Everyday Musings ( 58 ) Exam Prep ( 7 ) Exiting the rat race - how to? ( 19 ) EXPLORE ( 1 ) Fair Value Estimates ( 4 ) Fairfax Financial ( 4 ) Fairfax Financial Holdings ( 14 ) Fairholme ( 19 ) Fairpointe ( 14 ) Family Office ( 5 ) FD Laddering ( 1 ) Financial Independence ( 93 ) Fisher Asset Management ( 10 ) Flash Camcorders ( 3 ) flat ( 4 ) flats ( 2 ) Flip ( 3 ) Francis Chou ( 19 ) free ( 17 ) frugal ( 3 ) Frugal Living ( 34 ) Fund Holdings ( 775 ) futures ( 2 ) FVE ( 2 ) gambling ( 3 ) garmin ( 2 ) Genting ( 2 ) george soros ( 21 ) giveaway ( 15 ) Glenn Greenberg ( 16 ) Glenview Capital ( 10 ) GMAT ( 1 ) Google ( 2 ) Gotham Asset Management ( 7 ) gps ( 5 ) GRE ( 1 ) Greenlight Capital ( 22 ) Guitars ( 3 ) Half Marathon ( 2 ) Hawaii ( 2 ) Hedge Funds ( 794 ) HELOC ( 1 ) High School Education ( 7 ) High School Textbooks ( 6 ) HOA ( 3 ) hobby ( 17 ) holiday shopping ( 7 ) Holidays ( 3 ) Holyland ( 11 ) Home Improvement ( 2 ) home ownership ( 5 ) Homes ( 18 ) Homeschool ( 18 ) Houses ( 2 ) Housing ( 3 ) Hykon ( 2 ) Ian Cumming ( 15 ) Icahn Enterprises ( 6 ) india real estate ( 5 ) Infinuvo ( 6 ) Insurance ( 2 ) invesco ( 17 ) investing strategies ( 2 ) Investment Portfolio ( 94 ) Investment Research ( 10 ) Investments ( 7 ) iRobot ( 5 ) Irving Kahn ( 10 ) israel ( 5 ) Jason Maynard ( 10 ) Jefferies ( 2 ) Jeffrey Bruce ( 14 ) Jeffrey Ubben ( 12 ) Jerusalem ( 2 ) Jim Chanos ( 14 ) Joel Greenblatt ( 7 ) John Armitage ( 14 ) John Griffin ( 14 ) John Paulson ( 17 ) Joho Capital ( 15 ) Jordan ( 3 ) Joseph Steinberg ( 9 ) Julian Robertson ( 4 ) Kahn Brothers ( 10 ) Kakkanad ( 4 ) Kanyakumari ( 2 ) Kawai ( 2 ) Ken Fisher ( 10 ) kerala real estate ( 5 ) Kids ( 49 ) Kids Yamaha ( 3 ) Kindle ( 2 ) kochi ( 8 ) Kodaikanal ( 2 ) Korg ( 2 ) Kraft ( 2 ) Kuala Lumpur ( 2 ) KWA ( 2 ) Kynikos ( 14 ) laptop ( 5 ) Larry Robbins ( 10 ) Las Vegas ( 2 ) Leon Cooperman ( 15 ) Leucadia ( 2 ) Leucadia National ( 13 ) Lone Pine Capital ( 9 ) long ( 6 ) long call ( 2 ) long puts ( 3 ) Lou Simpson ( 15 ) LSAT ( 1 ) Mahabalipuram ( 2 ) Malaysia ( 3 ) Marathon ( 2 ) Mark McGoldrick ( 10 ) Markel ( 14 ) Mason Hawkins ( 4 ) MCAT ( 1 ) Melinda Gates ( 8 ) memorabilia ( 266 ) MFP Investors ( 14 ) Michael Dell ( 16 ) Michael Price ( 14 ) Middle School Education ( 4 ) Middle School Textbooks ( 3 ) Mini Notebook ( 3 ) MODUS ( 1 ) Mohnish Pabrai ( 21 ) mortgage ( 2 ) Mount Kellett ( 10 ) MSD Capital ( 16 ) Music ( 6 ) Mutual Funds ( 5 ) mysore ( 2 ) Nelson Peltz ( 9 ) Netbook ( 4 ) Notebook ( 3 ) numismatics ( 266 ) O-Duster ( 1 ) Oahu ( 2 ) offers ( 2 ) Ole Andreas Halvorsen ( 10 ) Omega Advisors ( 15 ) online tax ( 4 ) ooty ( 2 ) Options ( 4 ) Pabrai Fund ( 17 ) passive income ( 7 ) pattaya ( 2 ) Paulson & Company ( 7 ) Paulson and Company ( 9 ) PEG ( 2 ) Pershing Square ( 19 ) Phil Fisher ( 5 ) philately ( 283 ) Philippe Laffont ( 14 ) Piano ( 9 ) PLAN Test ( 1 ) portfolio ( 4 ) Prem Watsa ( 17 ) product reviews ( 13 ) Property Taxes ( 2 ) PSAT ( 1 ) R2I ( 24 ) R2I Finances ( 3 ) R2I Housing ( 5 ) Raising Kids ( 41 ) Rat Race ( 15 ) RBS Partners ( 13 ) reading ( 5 ) real estate ( 6 ) Reducing Expenses ( 2 ) REIT ( 3 ) Retirement Portfolio ( 9 ) Reviews ( 81 ) Richard C. Blum ( 12 ) Robert Bruce ( 14 ) Robert Karr ( 15 ) Robotic Vacuum ( 4 ) Roland ( 2 ) Roomba ( 10 ) schooling ( 2 ) Sears ( 10 ) seeking alpha ( 2 ) Services - Reviews ( 33 ) Seth Klarman ( 19 ) Shipping ( 5 ) Shopping ( 3 ) short ( 5 ) short calls ( 2 ) short put ( 2 ) short puts ( 2 ) short selling ( 8 ) Ski ( 5 ) Sled ( 4 ) Solar Stocks ( 13 ) Soros Fund Management ( 14 ) Southeastern Asset Management ( 4 ) Southwest ( 2 ) spin-offs ( 2 ) SQ Advisors ( 15 ) stamp collecting ( 283 ) Stanley Druckenmiller ( 19 ) Statue of Liberty ( 2 ) Stephen Mandel ( 9 ) Stock Analysis ( 84 ) Stock Investments ( 4 ) Stock Portfolio Updates ( 6 ) stocks ( 3 ) summer ( 2 ) tax ( 6 ) TaxAct ( 3 ) TaxCut ( 1 ) Teacher's Editions ( 5 ) Technology ( 4 ) Test Prep ( 11 ) Thailand ( 3 ) Thekkady ( 2 ) theme park ( 2 ) Third Point ( 10 ) Thomas Gayner ( 14 ) Thyra Zerhusen ( 14 ) Tiger Cub ( 31 ) Tiger Global ( 15 ) Tiger Management ( 12 ) Time Square ( 2 ) TOEFL ( 1 ) TPG-Axon ( 14 ) Travel ( 278 ) Travel Reviews ( 82 ) Trian Fund Holdings ( 9 ) trip report ( 21 ) TurboTax ( 3 ) Tweedy Browne ( 10 ) Vacations ( 28 ) value investing ( 12 ) ValueAct ( 5 ) ValueAct Holdings ( 6 ) Vancouver ( 2 ) Video ( 3 ) Viking Global ( 10 ) Wallace Weitz ( 10 ) Warren Buffett ( 30 ) Wayanad ( 4 ) Weitz Investment Management ( 9 ) wilbur ross ( 17 ) William Von Mueffling ( 12 ) Wintergreen Advisors ( 15 ) Yacktman Asset Management ( 10 ) Yale Endowment ( 17 ) Yale University ( 7 ) Yamaha ( 7 ) YDP ( 1 ) YPG ( 1 )