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MVC Capital: Initiates Modified Dutch Auction

BDCs:
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On July 21, 2017 MVC Capital (MVC) announced its intention to launch a “modified Dutch auction” tender offer for its common stock . Here are the details and the BDC Reporter’s off the cuff analysis (including the possible impact on the BDC’s Baby Bond Note Holders)  and our own investment disclosure:

NEWS

MVC proposes to allocate up to $15.0mn of its capital to repurchase its common shares from the public at a price between $10.00 and $11.00.

Based on shares tendered, MVC will be buying back between 6.0%-6.6% of total shares outstanding.

The process is as follows:

A shareholder seeking to sell makes an offer to be bought out at a price between $10.0 and $11.0.

Once the tender is over, MVC designates the lowest share price and acquires up to the stated $15.0mn amount.

All shares accepted in the Tender Offer will be purchased at the same price even if tendered at a lower price.

“The Tender Offer is not contingent upon any minimum number of shares being tendered”.

The Board neither recommends to tender or not.

Further tenders may be initiated in the future.

The press release stated the liquidity for the repurchase was derived from the recent proceeds from the sale of U.S. Gas & Electric, which the BDC Reporter has covered extensively.


ANALYSIS

At April 30, 2017 MVC had 22,556,412 shares outstanding.

The Net Asset Value Per Share was $12.45.

By purchasing its shares at a discount to NAV MVC’s book value per share should increase, as would earnings per share.

We calculated back on July 6, when the sale of USGE was completed, that between loans repaid and the cash portion of the deal, MVC would receive in short order about $61mn in cash.

About a quarter of the funds appear to be earmarked to the Dutch Auction.

Unclear is what MVC’s Investment Advisor is proposing to do with the rest of the cash proceeds and whether the cash distribution some observers anticipated will occur.

At the close on July 20, 2017 MVC was trading at $9.99.


VIEWS

We are a little surprised at the BDC’s approach. A modified Dutch Auction – whose goal is to have the BDC pay the lowest price within a range – has never been mentioned previously.

MVC could have just undertaken a normal buy-back program, which would also have boosted NAV per share.

Debt Pay-Off ?

Still unclear if the USGE proceeds might be used for paying off the expensive Baby Bond Notes with the ticker MVCB, which has seemed like a likely course of action.

Moreover, allocating a quarter or more of the cash to the reverse Dutch Auction decreases capital available to build up and diversify MVC’s investment portfolio.

The Investment Advisor has repeatedly insisted is being transformed into a more traditional  BDC.

Still, buying back as many as 1,363,636 shares will reduce the BDC’s annual dividend pay-outs by nearly three-quarters of a million dollars.

Priced Up

The market seems happy about the news, with the stock price up in early trading to $10.21.

Of course, for the Company that’s a Bad Thing as it sets a higher floor on the stock to be tendered and reduces the number of shares to be bought back marginally.

From the BDC Reporter’s this is another example of how MVC’s Investment Advisor spends more of their time on financial engineering than on the building up of a normally functioning BDC.


FULL DISCLOSURE

We have no position in MVC’s common stock and no opinion as whether to Buy, Hold or Sell.

However, we do have a position in MVCB. The use of cash capital to buy back shares is a negative from a Note Holder’s perspective, reducing total assets while keeping liabilities unchanged.

We will revisit our view on whether to Buy, Sell or Hold MVCB when we receive greater clarity about how all the $61mn in USGE proceeds will be used.

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