October 4, 2011: A couple of weeks ago, the Small Business Investment Corporation “(SBIC”) rejected Horizon Technology Finance’s (ticker: HRZN) to borrow long term capital from Uncle Sam. We covered the subject in an earlier post. Now, it’s the turn of MCGC Capital (ticker: MCGC) to be told no. [Some background to BDC newbies: the SBIC has been doling out licenses to a number of Business Develiopment Companies to establish investment subsidiaries financed one third by equity capital and two-thirds debt from the SBIC. Not just any debt: ten year securities which are interest only to repayment day and bear a very low rate of interest because of a tie to the famous 10 year Treasury rate. This access to capital has been a boon to BDCs seeking to raise debt capital, and has brought a flood of lending capacity into the lower middle market at just the right time following the Great Recession. Judged by the anumber of licenses granted and monies provided, this has been a very successful program, but it’s early days yet. The SBIC may be beginning to worry that they’ve been overly generous in recent years. Read on).
Unlike Horizon, which was seeking to get their hands on government money for the first time, MCGC Capital already has an SBIC license, with $150mn of debt capacity. The Company wanted approval for a second license and another $75mn in borrowing capacity from the SBIC, a route which a number of BDCs have been down before them. As the language in the 8-K filing indicates, the SBIC’s rejection has to do with the recent restructuring (i.e. shrinkage) of MCGC’s business. MCGC can re-apply in 6 months. Nonetheless, this is a blow to the Company because of its timing. Starting in June, MCGC’s balance sheet has begun to scale down as loans financed through a Collateralized Loan Obligation (“CLO”) facility are repaid. MCGC looked to the SBIC to add some stable long term capital to minimize the erosion of its asset base.
Here is the text of the announcement:
“On September 30, 2011, MCG Capital Corporation, a Delaware corporation (“MCG” or the “Company”), withdrew its application for a second license from the Small Business Administration (“SBA”) to operate an additional subsidiary as a small business investment company (“SBIC”).
In December 2004, MCG formed a wholly owned subsidiary, Solutions Capital I, L.P., which obtained a license from the SBA to operate as an SBIC under the Small Business Investment Act of 1958, as amended. In January 2011, the SBA increased the borrowing potential under the license for Solutions Capital I, L.P. from $130.0 million to $150.0 million. The maximum amount of outstanding leverage available to single-license SBICs is $150.0 million, whereas the maximum amount of outstanding leverage available to SBICs with multiple licenses is $225.0 million on an aggregate basis.
In March 2011, MCG formed another wholly owned subsidiary, Solutions Capital II, L.P., and, in May 2011, the Company submitted a license application to the SBA to obtain an SBIC license for Solutions Capital II, L.P. After discussions with the SBA, the Company elected to withdraw its application for a second license until such time as the SBA has an opportunity to evaluate, among other things, the organizational impact of MCG’s recent restructuring. The SBA has indicated that MCG may petition the SBA for permission to refile its application for a second license within six months.”
WE ARE LONG HRZN. NO POSITION MCGC.
