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  • learningthebusinessagain learningthebusinessagain Apr 2, 2008 5:42 AM Flag

    MCGC - Things to do now

    There has been a lot of talk on a dividend cut on here.

    I am not sure that a cut in the annual dividend is needed. But I do think that the company's dividend strategy needs to be reconsidered.

    I believe that everyone would be better served if the quarterly dividend was reduced with any excess funds from operations paid in a special dividend at the end of the year. This was there is less pressure to meet the quarterly dividend payment and management can focus on the longer term business opportunities.

    Also, the best thing management can do now is to monetize the Broadcom investment. I think that the amount of PIK income is beginning to hurt MCGC and earnings quality. If Broadcom was monetized, MCGC's liquidity challenges (perceived or not) would disappear and management would have the flexibility to clean up the ClearTel situation. MCGC would be a smaller company and that could lead to a stock buyback program and/or the dividend being safe for 24 months.

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    • You are repeating yourself.

    • Going with your argument:

      We definitely need a downtick rule to keep longs from "gaming the system" when the market is inefficient. Puff PR and rumors are so often used to manipulate bubble stocks by provoking investor greed and euphoria with no basis in performance. A downtick rule would prevent this "inefficiency". No, we don't want any longs buying on upticks! We need to make them wait til the stock is selling off before they are allowed to buy. :)

    • Me's beginning to think I should dump this puppy. Bought it last year sometime, and have declined som 40% since ... and then there's this fiasco. Was, or am, in it for the divy; and now that even looks doubtful and dubious.
      Comments ???

    • We agree again. We can not fix Mr. Market. All that can be done are things to keep him away until he gets better.

      TMA is a great business model superbly executed with the exception of the balance sheet. The problem with the balance sheet was too large to be addressed with only the dividend. If they had gotten out in front of the train by issuing more PF equity, rights offering and reducing leverage the great niche franchise would still be in place or at least not owned by private equity.

      I would like to see the BDC use more PF leverage in the future. Although I would much rather have a rights offering than issue PF at the current rates.

      Another possibility is to put in place an aggressive dividend reinvestment program with a huge discount. I generally do not like the dilutive and confiscatory aspects. But, at this time it would be good for all holders.

    • Even more important than making Mr. Market happy, in the short term, is being 150% sure that you can't get mousetrapped in a margin call.

      Just ask TMA. They got caught standing up when the music stopped. Now, effectively, they are owned by a private investment firm.

    • We do agree. Management’s first duty is to lift the pressures causing MCGC to sell well below book. Allowing dividends to cause additional stress over the short term is penny wise and pound foolish.

      I like the JRT team a great deal. I believe the CEO is up to his allowable limit in holdings. Due in large part to his recent open market purchases. This maybe be his roughest lap around the track but certainly not the first.

      But, if we take $0.65 in relationship to the normal distributions it is more than 10%. They were holding capital rather than increasing the ‘regular’ dividend. Maybe they were trying to signal the health of the portfolio? They have certainly been working hard to ‘thicken the walls’ which has been 100% correct.

      It certainly does make sense to hold back a significant portion of the dividend and pay year end ‘specials’ in this case. But, remember this credit market lockup has gone longer and deeper than almost any one expected. When will it finally end? I have no idea although the reduction in the homes for sale is a big ray of hope.

      So would changing the distribution policy to hang onto cash longer be ‘permanent’ enough for manic depressive Mr. Market? Will the shorts jump on it and try to drive irrational fear as result?

      This is why I like the rights offering. It may distort the share price over the short term but there is no question about this capital. It is on the balance sheet.

      Out friend that doesn’t believe in the uptick rule loves it. He can arbitrage like crazy and cause wild swings which have nothing to do with the fundamental value of MCGC. But, this will not impact long term holders once completed. However, there are many individual investors whom do not understand ‘rights’. Mr. Short believes these individual investors should be fair game. I do not.

    • That is not so. When the markets are not working efficiently the lack of an up tick rule allows the short to game the system. Their place is as ‘smart money’ improving efficiency rather than gaming fear. This is especially true of financials which trade on trust.

      An easy to see public game was run by Greenlight Capital against ALD. All the stops were pulled out including Herb Greenberg shilling and bogus lawsuits which were summarily tossed out. I do mean tossed out.

      Equities like BDC with lots of small individuals are ready made targets for driving panic.
      This is why they are targeted so often.

      The whole rational for eliminating the uptick rule was that markets were so efficient it was not needed. Guess what! Mr. Market is sometimes very inefficient. Like right now.

      Your parity argument is illogical as it makes the markets even more inefficient. The capital market’s function is to maximize economic growth by efficiently allocating our savings or capital to the most productive investments. Investors should get rewarded for doing this better than the pack. There is no reason to reward people for gaming the system, distorting the system and profiting at the cost of every member of society.

    • We'r ein basic agreement.

      However, my point is that the regaular quarterly dividend should be reduced. This doesn't at all mean any BDC requirement would be violated because one can issue a special at year end, depending on the situation, needs and legal requirements at that time.

      You ever wonder why you see return of capital from many REITs on your 1099? Often, it's because they overpaid their quarterly dividends, based on the estimate of what annual taxable income would be, but didn't turn out that way. The way to avoid this problem is to make smaller quarterly dividends and make up any difference with a special.

      I read JRT's conference call, and the issue was brought up as to why they paid it. They actually paid 100% of their income, not just the required 90%. They said they didn't want to pay taxes on the retention.

      Maybe, you're right that they wish they had the cash now.

    • >The untick rule needs to come back.

      Nah. The uptick rule unfairly penalized bears so that they couldn't sell during strong downtrends, which is their best opportunity.

      If you are going to have an uptick rule to sell short, there should also be a downtick rule to buy long. How would you like that? No way to buy into a stock taking off on great earnings report?

      Though, having both uptick and downtick rules as described might stabilize the market and be a good thing. But you can't favor one side; it has to cut both ways.

    • All valid points, but there are regulatory constraints on dividends. I believe they must distribute 90% of taxable income.

      This is why JRT had to issue the special. I have very high regard for JRT management and they have been carefully husbanding their liquidity. But, after looking over the last 10k and change in cash balances I bet they wished they had the special back.

      I agree omitting the dividend with clear guidance to resumption would be the most logical approach. However, MREITs and BDC are not allowed to do this and retain their status.
      Perhaps the dividend could be cut and excise taxes paid on a material amount of liquidity. Much more transactionally efficient than rights offering.

      It is very clear to me that these investment platforms must have matched term financing rather than modeled duration. I was a big fan of TMA and was blind sided by the market sucking out their liquidity even as their credit performance remand astoundingly good and the spreads maintained / profitable. Yet, it seems management did nothing to guard against another run on the bank after multiple near death experiences. That is all on them to their shame.

      I am not sure what management could do to defend the share price right now. Although I certainly agree it is management’s responsibility to insure the share price is neither to high or to low.

      Mr. Market seems pretty hysterical and shorts are just waiting to help him over dose. So I am not sure what the reaction would be to a dividend cut. How another leg down might impact lenders? Hard to say if Mr. Market is pricing an all or nothing scenario or a dividend cut. I am not even sure Mr. Market knows what he is thinking.

      So I do not think management can do much about the share price until Mr. Market gets rational again. So best thing is to hunker down and do everything to preserve the huge value in the portfolio.

      If this takes rights offering and maybe even a dividend cut with clear guidance on resumption I would have no problem. Reducing leverage to the point where the boogieman doesn’t have a chance to jump out of the closet would make this an easy buy.

      I really do think we are in basic agreement.
      Fear driving fear into reality is not logical or rational. But, it is reality today.

      The untick rule needs to come back. Also, the Fed needs to stomp on and then take the banks back to get liquidity down into the trenches. We certainly do not want all the BDCs pinned down playing defense when we need them to get the credit markets functioning. It goes all the way down to a little guy like me. I love investing in BDCs but am waiting it out.

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