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MVC Capital: Files Annual Proxy

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NEWS

MVC Capital (MVC)  filed an Annual Proxy, with two items up for a shareholder vote, scheduled for October 30, 2018.

One is a routine approval of Grant Thornton as accountant for the BDC.

The second is the bulk approval of 8 directors to a new term of duty of 1 year.

One director – at the behest of an “activist” – has been added to the Board.

This is Scott Krase, a “founder” of  Oak Hill Advisors.

CEO Michael Tokarz remains Chairman of the Board.

The Board agreed in a November 2017 meeting to a temporary change in compensation for “independent” directors:

More recently, however, effective November 2017, the Board approved a 25% reduction in the compensation of each of the Independent Directors (calculated pursuant to the foregoing structure then reduced by 25%) until the Fund’s NAV discount is 10% or less.

The Proxy also contains an attachment showing 3 shareholders with ownership of 5% or higher.

We have attached both the 2018 and 2017 Proxies.


ANALYSIS

Then There Were Two

The number of resolutions has decreased by one, from three in 2017 to two this year.

In 2017, there was an additional proposal by Metage Capital directing the cessation of new investments until the discount of price to book narrowed to no greater than 10%.

The resolution was not approved by shareholders.

The other two proposals are essentially the same in 2018 as the year before.

New Face

The only exception – as mentioned above – is that “activist” investor West Family Investments has been permitted to add Mr Krase to the Board.

As a result, the Board size has been increased from 7 to 8 members, 6 of whom are “independent” under the stock exchange definition thereof.

Busy

The Board held 16 meetings in the year past, versus 6 in 2017.

Naming Names

The three 5% plus shareholders are Wynnefield Partners Small Cap Value, L.P. I (8.4%); Leon Cooperman (7.8%) and West Family Investments (6.4%).

Last year there were 4 major shareholders but Royce & Associates (5.6% in 2017) is no longer listed.

The other 3 shareholders own similar percentages in 2018 as in 2017.

In addition, “independent” directors Phillip Goldstein and Robert Knapp own 4.4% and 2.0% stakes respectively (3.9% and 1.8% in 2017).

Three officers of MVC listed in both Proxies own less than 7,000 shares (value under $70,000) between them. One officer owns no shares at all.


VIEWS

Too Many ?

The BDC Reporter questions if a small sized BDC struggling to be consistently profitable needs 8 directors at $70K-$90K a pop.

However, as shown,  since November 2017 Board members have agreed to a 25% discount to fees paid till the BDC trades 10% or less below book value.

That’s unlikely to happen any time soon, so that’s a real savings to the BDC and shareholders of around $20,000 a year, net of the new addition.

Value For Money

We have to admit this is a hard working group, with 16 meetings last year, with 90% attendance, far higher metrics than at most other public BDCs.

Concentration Of Powers

On the other hand, we’re not fans of having the CEO of the Advisor also serve as Chairman of the Board. To our minds, that’s a conflict of interest (insert fox and chicken coop analogy here).

It’s a common phenomenon in the BDC sector, but that does not make this concentration of authority right.

Insiders

We also have mixed feelings that a couple of the 6 “independent” Directors have outsized ownership positions in MVC (Phillip Goldstein and Robert Knapp).

Does that bring about alignment with “regular” shareholders or not ? We’re not sure.

Is it a case – to paraphrase George Orwell – of “all Investors being equal but some being more equal than others ?”

Action Required

Of course, the $64,000 question is what the directors of the BDC, as well as the large shareholders listed in the Proxy (including the famous Leon Cooperman), are going to do about the perennial discount of MVC’s stock price to book.

A stock buyback program of $15mn has been announced through 2019, but will that make a meaningful difference?

The BDC Reporter – in an earlier Premium article – is on the record as having severe doubts whether that kind of financial engineering (tried unsuccessfully  multiple times) will be sufficient to make a difference.

At time of writing, MVC’s stock price – despite the buyback announced – remains at a 23% discount to the latest reported book value.

Our Constructive Suggestion

What is needed is a determined attempt to sell off at whatever the real market price is of the BDC’s multiple (and mostly ailing and cash draining) equity investments.

That will give shareholders a truer picture of what MVC is really worth and provide the capital to allow management to complete the shift into yield bearing investments.

That’s a shift that’s been promised for many years but has gotten stuck long before completed, leaving MVC unprofitable on a consistent basis and facing periodic (and understandable) shareholder revolts.

Keeping Mum

Unfortunately, MVC rarely holds public discussions with shareholders and analysts to discuss these matters.

Unlike almost every other public BDC, MVC does not hold quarterly Conference Calls.

Our Recommendation

In the absence of any constructive alternatives we recommend an affirmative vote on both items in the Proxy.

Nonetheless,  the BDC continues to be – the election out of the blue of Mr Krase and the announced buyback programs notwithstanding – mostly “shareholder unfriendly”.

What To Do

We suggest shareholders keep a close eye on MVC’s SEC filings (and the pages of the BDC Reporter) to keep up with the twists and turns of corporate governance at this closely held BDC.

Nonetheless, with several major shareholders effectively “insiders”, regular holders of the stock will always be at a disadvantage, which is best taken into consideration when investing.

Looking Forward

We have no reason to believe corporate governance at MVC will improve in the year ahead, especially now that the “activist” shareholder has been placated with a Board seat and the promised stock buybacks.

Metage Capital – who sought and received a shareholder proposal last year – does not seem to have resumed its campaign to narrow the price to book discount.

Barring any new development, we expect the current state of corporate governance to continue.

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