MCG Capital receives $18.7 million loan repayment

On July 6, 2009, MCG Capital Corporation (MCGC), a solutions-focused commercial finance company, announced the receipt of $18.7 million first lien investment from Cervalis LLC. The loan was scheduled to mature in March 2012, but prepaid at par and $0.4 million above its fair value on March 31, 2009.

We think the advance receipt of the loan, which was given to Cervalis LLC in March 2007, will support MCGC’s cash position at this point in time and partly support its current business strategies to address the changes in the capital markets. MCGC’s overall business plan targets monetization of assets, redeployment of non-yielding equity investments into high-yielding cash-paying debt investments, improvement of its BDC asset coverage ratio and deleveraging its balance sheet.

During the second quarter of 2008, MCGC announced restructuring plans for its business. As per the plan, the company reduced its workforce by 30% as of February 2009. Along with some other initiatives, the company expects to realize approximately $12.0 – $14.0 million of savings through December 31, 2009.

Also, in order to preserve capital the company suspended its dividend payment and intends to pay the statutory minimum dividend for 2009. We think the company is right in focusing on preserving liquidity through these initiatives.

MCGC currently trades at 3.7x the consensus forward estimate, a 45% discount to the median of the peer group (TAXI, PCAP, HTGC, GLAD, ALD and ACAS).

We think, given the current disruptions in the CLO markets, the company may not be able to raise significant proceeds from the placement of debt in the CLO market. This liquidity crunch may affect the origination activities in the near future. As such, we maintain our Hold recommendation on the shares.
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