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MVC Capital: Dissident Shareholder Makes Its Case

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On September 29, 2017 Metage Capital – a shareholder in MVC Capital (MVC) – issued a press release regarding its proposal in the BDC’s Proxy Statement, which shareholders will get an opportunity to vote on shortly. The BDC Reporter – which first reviewed the MVC Proxy and the challenge by Metage back on September 26, 2017 – has reviewed the latest communique, and provides a brief analysis of the arguments made and offers up our views and investment approach. 


NEWS

The press release contained several reasons why MVC’s shareholders should vote for the Metage proposal, and against maintaining the status quo at the BDC, in refutation of counter arguments made in the Proxy by the Investment Advisor.  These include:

  1. MVC said to have underperformed both since the new management team took over and in the past 5 years. The press release says that by comparison with the Russell 2000 MVC has under-performed on a Total Return basis since 2003 and has “lost money” in the past 5 years even as the index went up 94.1%.
  2. Metage is unhappy with the discount of MVC’s stock price to its NAV. The BDC’s managers had pointed in the Proxy to the recent stock buy-back and a recent narrowing of the discount versus the 2016 numbers which Metage initially used in the Proxy. Now up to date, the dissident complained that the discount at July 31, 2017 was still 22.4% and “has widened since”. Moreover, the press release both points out that the percentage of shares repurchased was modest and also heavily subscribed to by shareholders. Metage says this only proves shareholders are not confident in the Investment Advisor’s commitment to narrowing the gap.
  3. “The Board cannot agree on what to recommend. The proxy statement made clear that there is not unanimity amongst Independent Directors for recommending to MVC Shareholders how to vote on our shareholder proposal.”
  4. “Independent Directors have already voted with their feet. Independent Directors have sold 26.5% of the shares they owned since the 2016 definitive proxy statement, both in the market and as a significant proportion of the recent tender.(3) If they had confidence in the Company’s stated strategy, why would the Independent Directors be willing to sell at such significant discounts?”

Stop Before They Invest Again

Metage points out to shareholders that MVC has more than  $100mn on its balance sheet, and presumes that the BDC will begin to re-invest those proceeds into “deeply illiquid assets”, including new loans. Metage argues that shareholders never got a say in the BDC’s stated policy of the past couple of years of focusing investing principally on loan investments. Instead – the argument goes – the capital and any future liquidity – should be returned to shareholders.

A phone number and email of Tom Sharp at Metage (which is based in the UK) is made available.

A web search shows Tom Sharp is an Investment Manager at the firm.


ANALYSIS

Hard To Argue

There is little doubt that MVC has not performed very well over any medium or long term period you choose, regardless of which index is used as a point of comparison. Here is the long term stock price chart and the 5 year chart.  Since 2014, MVC has lost one-third of its market capitalization.

The stock has dropped back in recent days, and the discount to book is (25%).

That Was Then. This Is Now.

However, the 1 Year Chart shows MVC up by about 20%, buoyed by that sale of its largest investment – USGE .( See this BDC Reporter article – out of many – for an update . For everything we’ve written about MVC, click here).

Furthermore, the BDC’s embattled Investment Advisor will point to a long history of paying a (modest) distribution through thick and thin, as this list shows.

Division

Metage appears to be correct that not all Directors have voted against their proposal, but the backstory is not available as to who voted – or didn’t.

Moreover, as we pointed out in our earlier reporting, directors who are also shareholders sold considerable shares in the stock buy-back.

All Quiet

There has been very little new investment activity reported at MVC since the closing of the USGE deal. As far as we know, the BDC continues to have $100mn plus in cash and has not yet booked any new loans or investments, except for small advances to portfolio entities.


VIEWS

Here’s an extract of the BDC Reporter’s views as expressed in our earlier article:

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.
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.
Etc, etc.
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.
No Change
Neither our views of MVC’s under-performance, nor our skepticism about the Metage proposal, has changed. The press release only confirms our suspicion that the dissident may be looking for a much more substantial share buy-back.
Using up all the cash on the balance sheet would allow MVC to repurchase about 40% of all shares outstanding- an effective part liquidation of the BDC.
We’re unlikely to see anything on that scale, but another Modified Dutch Auction might be in the cards.
Do Nothing Is A Strategy
Or, the Investment Advisor could just wait out the dissident – and the shareholder vote – and continue business as usual if shareholders balk at the stringent terms associated with the Metage proposal.
Uncertain
The market appears uncertain about what will happen. The stock price has come down, but remains in a very tight range between $9.99 and $10.28 in the past month.
The BDC Reporter cannot call the outcome of this  vote.
We’re going to have to limit ourselves to seeing how this contest plays out and reporting back as developments occur.

BDC INVESTOR: INVESTMENT STRATEGY

Common Stock

As our disclosure shows, we have no position in MVC’s common stock. As we’ve pointed out before, MVC does not even figure as a prospect on our Long Term Income strategy, the rock solid distribution notwithstanding.

The current uncertainties only reinforces our view that to stay away is the best approach. 

What you don’t own can’t hurt you. (To coin a phrase).

However, we are adding MVC to our Special Situation list.

There’s a possibility that the Investment Advisor – in an effort to keep control of the BDC’s business and not be bound by the terms of the Metage proposal – might take some action that is “shareholder friendly”, which could boost the stock price.

Just what that might be remains unclear but that’s why we have it’s called a “Watch List.”

Baby Bond

Out an abundance of caution – and as we reported on September 26th to our Premium subscribers – we sold out of our large position in MVC’s Baby Bond with the ticker MVCB at a price of $25.5194.

As we mentioned at the time, the issue has since gone ex-dividend and trades at $25.18.

Typically in the past MVCB’s stock price has bounced back after an ex-dividend date but with the uncertainty about whether the Baby Bond will be redeemed, either from the cash or with a new Baby Bond issue, the price remains at par plus some accrued interest. 

We will continue to stay out of MVCB till the situation becomes clearer.

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