On September 21, 2017 MVC Capital (MVC) filed its Definitive Proxy. The BDC Reporter reviewed the document, and a proposal by a major shareholder and analyzed the likely impact on the BDC and its shareholders. We discuss how this might play out for MVC shareholders and Baby Bond holders, and our own investment strategy.
The Proxy indicates the annual meeting of shareholders will occur October 31, 2017.
There are 3 issues on which shareholders are being asked to vote.
Two are routine matters – by BDC standards – which are the (re)election of the BDC’s 7 Board members and the ratifying of Grant Thornton as the independent accountant.
A third proposal- submitted by a shareholder called Metage Capital, which owns directly and through swaps 3.4% of all shares outstanding in MVC- proposes that the BDC make no new investments until the stock price is at leas within 10% of book value.
Metage’s proposal would require – if approved – that any excess funds generated by MVC be paid back to shareholders until that price/NAV bogey was met.
The dissident shareholder argues that MVC’s stock price performance has been poor, quoting MVC’s own Five Year Cumulative Return chart through October 31, 2016 which shows the fund under-performing against two major stock market indices. (see page 18).
Here is the full resolution by Metage Capital:
“BE IT RESOLVED, that the shareholders of MVC Capital, Inc. (the “Company”), request that the Board of Directors (the “Board”) direct The Tokarz Group Advisers LLC (“TTG Advisers”)
to cease making any new investments, other than investments required to maintain the value of companies in the Company’s existing portfolio, for as long as the discount between the closing
price per share of common stock, $0.01 par value, of the Company (each a “Share”) on the New York Stock Exchange and the last reported net asset value (“NAV”) per Share on the Company’s
Form 10-Q or Form 10-K filed with the Securities and Exchange Commission (“SEC”) exceeds 10%. For as long as this remains the case, the Board shall direct TTG Advisers to return any
capital in excess of the Company’s normal working capital requirements to shareholders in the most tax-efficient manner.”
The Board of Directors, and a majority of the independent directors, have recommended a vote against the Metage Capital proposal. (See pages 19-20).
The Proxy points to the current Investment Adviser having both increased NAV since taking control in 2003 and more recently having increased NAV by selling USG&E and undertaking a stock buy-back.
As a result, the discount between the stock price has narrowed between October 2016 and October 2017 from 30% to 22%.
The Proxy goes on to argue that if the proposal was adopted MVC’s transition to being more of a lender than an equity investor would be impeded. Furthermore, operations would become limited and may reduce income.
On the more routine subjects, the entire slate of 5 “Independent” and 2 “Interested” Directors is up for a shareholder vote. Most of the directors have been with the BDC for as long as 14 years.
Unlike most BDCs, one of the “Independent” Directors owns/controls a substantial shareholding in the BDC: Phillip Goldstein of Bulldog Investors, LLC with a 3.9% stake.
Another “Independent” Director Robert Knapp, who runs Ironsides Partners has a 1.75% shareholding in MVC.
(CEO Michael Tokarz has a 4.4% ownership).
There are several major other shareholders of MVC with greater than a 5% stake including Wynnefield Partners Small Cap Value Fund, Leon Cooperman (based on records from February 2017 !), Royce & Associates and West Family Investments. (See Exhibit A).
As to the re-appointment of Grant Thornton – who replaced Ernst & Young when the firm declined to continue as MVC’s independent accountant – the Proxy shows audit costs were greatly reduced in FY 2017. Here are the costs spelt out:
The aggregate fees billed for professional services rendered by Grant Thornton LLP for the audit of the Fund’s annual financial statements and review of financial statements in the
Form 10-Q’s for the fiscal years ended October 31, 2016 and October 31, 2015 were $767,100 and $1,018,500, respectively.
The aggregate fees billed by Grant Thornton LLP for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements for
the fiscal years ended October 31, 2016 and October 31, 2015 were $15,750 and $0, respectively.
The aggregate fees billed by Grant Thornton LLP for services rendered with respect to tax compliance, tax advice and tax planning for the fiscal years ended October 31, 2016 and
October 31, 2015 were $22,162 and $23,970, respectively.
All Other Fees:
The aggregate fees billed by Grant Thornton LLP for any other products or services for the fiscal years ended October 31, 2016 and October 31, 2015 were $0 and $0, respectively.
The two “routine” proposals include the same cast of Director re-appointees as we’ve seen in recent years.
MVC – unlike most other BDCS have more “Independent” Directors than “Interested” ones. However the CEO holds the position of Chairman.
The shareholding of MVC is one of the most concentrated in the BDC sector with 8 individuals/firms controlling 45% of all shares outstanding (including Metage Capital).
We would assume that the result of the vote on the Metage Capital proposal will be largely decided by how these groups vote.
From what we already know, and just by looking down Exhibit A, at least a quarter of the major shareholdings are likely to vote against Metage Capital.
Given the various links between the BDC’s insiders the block of “friendly” votes is probably even higher.
After a couple of years of seeing “BDC Activism” in full retreat – a subject which the BDC Reporter has been a frequent commentator about as long time readers will know – it’s surprising to see the Metage Capital proposal in the Proxy.
Non Starter ?
However, regardless of the merits of the Metage Capital arguments – which we’ll discuss in a minute – we seriously doubt that the majority of votes required will be attained.
As with most BDCs, this is a closely held fund where the insiders hold sway, and whose interests may not align with those of non-insiders such as Metage Capital or ordinary shareholders.
We Know Little
We’ve noted previously that transparency at MVC is very limited. The BDC does not hold quarterly Conference Calls; has a large number of foreign company holdings about which there is very little public information; gets involved in unusual and complex transactions like the one underway at Equus Total Return Fund
which appears to be more of a matter of “financial engineering” and still remains, several years after promising to shift its business model to becoming a “normal” BDC lender very heavily invested in illiquid equity investments.
Likewise, as the BDC Reporter has also mentioned before, the Investment Advisor remains very tight lipped about its plans months after the successful – if long delayed – “sale” of its USG&E subsidiary. Even that transaction was only partly paid for in cash, with the bulk of the proceeds received in terms of junior debt and equity positions in the buyer. Moreover, management has not laid out any clear plan as to what happens next with the $118mn in cash sitting on the balance sheet,besides announcing and completing a tender offer at a $15mn cost (nearly 30% of which was taken up by Phillip Goldstein’s Bulldog Investors selling a portion of their shares).
On This We Agree With Metage
From the BDC Reporter’s perspective, MVC – which is neither a very good lender or a very good equity investor and whose income often does not cover its expenses – has hardly been a success over whatever period one chooses to look, including the last few months.
(On the other hand, the Investment Advisor continues to draw more than adequate compensation from the BDC, which has just been magnified by the USG&E transaction).
Not The Way To Skin This Cat
Nonetheless, the Metage Capital proposal – which effectively would require MVC to liquidate itself over time – does not make business sense either.
The BDC would essentially be out of business where new loans would be concerned, and would probably lose its key Cincinnati-based lending personnel.
The Investment Advisor would see compensation drop and would likely lose interest in resolving the multitude of very illiquid equity investments on two continents.
Most likely the Investment Advisor would stop providing any fee waivers, leaving MVC in an even greater earnings deficit.
Ulterior Motive ?
Perhaps the Metage Capital proposal is not meant to be taken at face value but a shot across the bows by a major shareholder seeking more stock buy-backs from the pile of cash which the BDC has accumulated.
Maybe the $250mn “shelf filing” will be used to repurchase more shares from insiders or shareholders generally; and/or refinance its Baby Bonds ?
We will watch and see what the results are for this spasm of “BDC activism” at Halloween, when shareholders vote.
However, we wouldn’t be surprised if MVC did not play some of those cards kept so closely to the insiders vest before then to nip this mini-rebellion in the bud.
BDC INVESTOR: INVESTMENT STRATEGY
We have no position in MVC’s common stock.
The BDC is not even on our Long Term Income strategy Watch List due to our concerns about the BDC’s business model ; operating losses; poor credit underwriting and below-average corporate transparency.
Nor is MVC on the Watch List for our Special Situations strategy either.
It’s ironic because we look for Special Situations where there is uncertainty about key factors that could materially affect the future stock price.
That’s certainly the case where MVC is concerned. However, with so much unknown as to the Investment Advisor’s plans, portfolio performance, conflicts of interest etc. we are more on the outside looking in that we can abide.
There is a good chance – as we’ve suggested above – that the BDC will announce some sort of major capital markets move in the days and weeks ahead.
That might push up the price as markets remain enamored with buy-backs.
However, with the stock price already so high, we’re going to pass on even a short term speculative share purchase.
We have been surprised – as expressed in earlier articles – that MVC has not refinanced or repaid its Baby Bond with the ticker MVCB.
Our readers who follow our Fixed Income Table will know that we’ve rated the likelihood of MVCB being repaid in 2017 as only MEDIUM.
We’re increasing the likelihood to HIGH given the new “shelf filing”, even though the most likely first step by MVC is to buy back more stock.
MVCB goes ex-dividend on September 28, 2017, and will pay out a $0.453125 regular dividend.
The Baby Bond is trading at $25.54.
If MVCB does gets redeemed, there is a risk the price will drop to par plus the modicum of interest that might accrue before the issue gets called.
To be safe, rather than sorry, we sold our entire position in MVCB in our Fund for $25.5194.
As we’ve warned previously, our track record in guessing these surprise redemptions is about 50/50, so we encourage any MVCB Note Holders considering emulating our actions to remember that and our “more conservative than most” approach to investing.
MVC may very well decide to stick with its existing Baby Bond and only buy-back some stock. Or do nothing at all. Or x number of possible actions.
“Getting ahead of the market” is no easy task. However, we rationalize that if we are wrong, we may yet be able to repurchase MVCB at a lower price in the future.
Update To Fixed Income Table
We have updated the BDC Reporter’s Fixed Income Table with our latest projection. Moreover, we’ve removed Harvest Capital’s Baby Bond with the ticker HCAPL from the current list, now that its redemption has occurred and been confirmed by our broker at MS Howells.
Also updated – by hand no less – are the closing prices for the remaining 35 public BDC Fixed Income issues.
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