MCG Capital Corporation (Nasdaq: MCGC) (“MCG” or the “Company”) announced today its financial results for the quarter ended June 30, 2009. MCG will host an investment community conference call today, August 4, 2009 at 10:00 a.m. (Eastern Time). Slides and financial information to be reviewed during the investor conference call will be available on MCG’s website at http://www.mcgcapital.com prior to the call.

HIGHLIGHTS

• Distributable net operating income, or DNOI, for the quarter ended June 30, 2009 was $10.0 million, or $0.13 per share. DNOI refers to net operating income adjusted for amortization of employee restricted stock awards.
• Net operating income for the quarter ended June 30, 2009 was $8.2 million, or $0.11 per share.
• Net loss for the quarter ended June 30, 2009 was $5.9 million, or $0.08 per share.
• General and administrative expenses for the quarter ended June 30, 2009 included $2.3 million of one time, non-recurring expenses.
• Net investment loss for the quarter ended June 30, 2009 was $14.0 million, or $0.19 per share which represents approximately 1.3% of MCG’s most recently reported fair value.
• Since MCG began its monetization initiatives in July 2008, it cumulatively has completed a total of $198.3 million in investment monetizations, including 20 monetizations for $186.7 million, which were completed at 99.7% of their most recently reported fair value, and one distressed sale for $11.6 million, which was completed at 42.3% of its most recently reported fair value.
• MCG’s ratio of total assets to total borrowings and other senior securities was 206%, as of June 30, 2009, and rose to 209% as of July 29, 2009. MCG also had $34.0 million of unrestricted cash as of July 29, 2009.

OVERVIEW

Today, MCG reported a second quarter 2009 net loss of $5.9 million, or $0.08 per share, which represented a $63.6 million improvement over the net loss of $69.5 million, or $0.96 per share, reported for the comparable period in 2008. This improvement was attributable primarily to a $68.3 million reduction in the net investment loss recognized on the fair value of MCG’s investment portfolio, partially offset by a $4.8 million or 36.9%, decrease in net operating income.

MCG’s revenue for the second quarter of 2009 was $24.7 million, which represents a 20% decrease from the comparable period in 2008. MCG’s reported DNOI of $10.0 million, or $0.13 per share, was down from $14.8 million, or $0.20 per share, from the comparable period in 2008. Net operating income during the second quarter of 2009 decreased 37% to $8.2 million from the comparable period in 2008. The decreases in MCG’s revenues, net operating income and DNOI resulted primarily from a reduction in the average portfolio balance stemming from the Company’s monetization activities, a 190 basis point decrease in average LIBOR, an increase on loans placed on non-accrual status, as well as decreases in MCG’s loan originations and loan fees.

“While current economic conditions remain challenging, our successful monetization activities have allowed us to make significant strides toward improving our liquidity, preserving our capital and reducing our debt obligations,” said Steven F. Tunney, CEO and President. “We are pleased that during the second quarter we were able to monetize $41.8 million of portfolio investments and the negative marks on our investment portfolio have moderated. We are hopeful that our net asset value per share will remain stable for the balance of 2009 and improve along with the rest of the economy in 2010. Moving forward in 2009, we will remain focused on asset monetizations, balance sheet and portfolio management and enhancing shareholder value.”

During the quarter ended June 30, 2009, MCG successfully completed $41.8 million in monetizations, including four monetizations totaling $30.2 million, which were completed at 97.9% of their most recently reported fair values. MCG also completed a distressed sale of TNR Holdings Corp., or TNR, for $11.6 million, or 42.3% of its most recently reported fair value. MCG sold this asset in response to a steep decline in TNR’s forecasted revenues due to non-renewal of key customer contracts. Subsequent to quarter end, on July 29, 2009, MCG signed a definitive agreement to sell Coastal Sunbelt, LLC for approximately $15.5 million, or 99% of its previously reported fair value. MCG estimates after additional financing, it will receive approximately $15.3 million of cash proceeds from the transaction, which is expected to close in mid-August 2009. MCG will strive to continue monetizing assets opportunistically over the course of the next several quarters; however, the timing of such monetizations depends largely upon future market conditions. The Company is under no contractual or other obligation to monetize assets at specified times, levels or prices.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2009, MCG’s cash and cash equivalents totaled $18.8 million and it had $584.3 million of borrowings (the majority of which was composed of $494.4 million of collateralized non-recourse borrowings), including $10.7 million of borrowings that mature within one year stemming from monetizations in June 2009. During the three months ended June 30, 2009, MCG paid down $46.9 million of outstanding borrowings, including the $31.2 million final paydown of its unsecured revolving line of credit, and $15.7 million in paydowns of other borrowing facilities. As a BDC, MCG is required to meet an asset coverage ratio of total net assets to total borrowings and other senior securities of at least 200% in order to borrow under new or existing borrowing facilities or to distribute dividends to its shareholders. MCG’s asset coverage ratio increased to 206% as of June 30, 2009. By July 29, 2009, cash and cash equivalents totaled $34.0 million and the asset coverage ratio increased to 209%. During the second half of 2009 MCG intends to continue to deleverage its balance sheet and pay only the minimum statutory dividend, which may be as low as zero. In addition, MCG has $28.3 million of funded borrowing capacity available in its SBIC subsidiary that effectively is exempt from the asset coverage ratio requirements. MCG has elected to focus on its existing portfolio and is not yet deploying capital in new investment opportunities.

PORTFOLIO ACTIVITY

The fair value of MCG’s investment portfolio totaled $1.062 billion at June 30, 2009, as compared to $1.115 billion at March 31, 2009. During the second quarter of 2009, MCG originated a $0.4 million preferred equity investment in one existing portfolio company and made $9.6 million of advances, including $5.9 million of paid-in-kind, or PIK, advances and $3.7 million of advances to portfolio companies under revolving and line of credit facilities. Gross payments, reductions and sales of securities during the second quarter of 2009 of $49.8 million were composed of $28.9 million of senior debt, $11.2 million of secured subordinated debt, and $9.7 million of preferred equity.

During the three months ended June 30, 2009, MCG reported net investment losses before loss on extinguishment of debt and income tax benefit of $14.0 million, which are detailed below:

On April 20, 2009, TNR repaid in full its debt together with all accrued interest and MCG concurrently sold its equity interest in TNR for an aggregate $11.6 million in cash. During the quarter ended June 30, 2009, MCG reversed $36.9 million of previously unrealized depreciation and realized a $36.7 million loss on the transaction. During the quarter ended June 30, 2009, MCG recorded $10.4 million of unrealized depreciation on Total Sleep Holdings, Inc., primarily resulting from company performance. On April 17, 2009, MCG sold its investment in CEI Holdings, Inc. for $0.7 million, or at approximately 41.2% of its fair value at December 31, 2008, which resulted in a realized loss of $3.2 million and the reversal of $3.2 million of previously recorded unrealized depreciation. The remaining unrealized depreciation shown in the above table resulted predominantly from the performance of certain of the portfolio companies, and, to a lesser extent, the multiples that MCG used to estimate the fair value of the investments.

IMPORTANT INFORMATION ABOUT NON-GAAP REFERENCES

References by MCG Capital Corporation to distributable net operating income, or DNOI, refer to net operating income before investment gains and losses, gain (loss) on extinguishment of debt and income tax provision (benefit), as determined in accordance with U.S. generally accepted accounting principles, or GAAP, adjusted for amortization of employee restricted stock awards and impairment of goodwill.

The Company’s management uses DNOI and the related per share measures as useful and appropriate supplements to net operating income, net income, earnings per share and cash flows from operating activities. These measures serve as an additional measure of MCG’s operating performance exclusive of employee restricted stock amortization and impairment of goodwill, which represents expenses of the Company but do not require settlement in cash. DNOI does include paid-in-kind, or PIK, interest and dividend income which are generally not payable in cash on a regular basis but rather at investment maturity or when declared.

The Company believes that providing non-GAAP DNOI and DNOI per share affords investors a view of results that may be more easily compared to peer companies and enables investors to consider the Company’s results on both a GAAP and non-GAAP basis in periods when the Company is undertaking non-recurring activities. DNOI should not be considered as an alternative to, as an indicator of our operating performance, or as a substitute for net operating income, net income, earnings per share and cash flows from operating activities (each computed in accordance with GAAP). Instead, DNOI should be reviewed in connection with net operating income, net income, earnings per share and cash flows from operating activities in MCG’s consolidated financial statements, to help analyze how MCG’s business is performing because the items excluded from the non-GAAP measures often have a material impact on the Company’s results of operations. Therefore, management uses, and investors should use, non-GAAP measures only in conjunction with our reported GAAP results.

ABOUT MCG CAPITAL CORPORATION

MCG Capital Corporation is a solutions-focused commercial finance company providing capital and advisory services to middle market companies throughout the United States. MCG’s investment objective is to achieve current income and capital gains. Portfolio companies generally use capital provided by MCG to finance acquisitions, recapitalizations, buyouts, organic growth and working capital.

Forward-looking Statements:

Statements in this press release regarding management’s future expectations, beliefs, intentions, goals, strategies, plans or prospects, including statements relating to: MCG’s results of operations, including revenues, net operating income, distributable net operating income and general and administrative expenses and the factors that may affect such results; the Company’s current strategic direction, including deleveraging its balance sheet, building its cash position and preserving net asset value through opportunistically monetizing assets; the Company’s ability to enhance shareholder value; the impact of monetization activities on liquidity, capital preservation and debt reduction; the stability of the Company’s net asset value for the balance of 2009 and the improvement of the Company’s net asset value in 2010; the amount, timing and price (relative to fair value) of asset monetizations; the Company’s focus on its existing portfolio and decision to delay deploying capital in new investment opportunities; the cause of unrealized losses; the performance of MCG’s current and former portfolio companies; the Company’s intention to pay only the minimum statutory dividend during the second half of 2009; and general economic factors may constitute forward-looking statements for purposes of the safe harbor protection under applicable securities laws. Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “estimate,” “expect,” “intend,” “is planned,” “may,” “should,” “will,” “will enable,” “would be expected,” “look forward,” “may provide,” “would” or similar terms, variations of such terms or the negative of those terms. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including those risks, uncertainties and factors referred to in MCG’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed with the Securities and Exchange Commission under the section “Risk Factors,” as well as other documents that may be filed by MCG from time to time with the Securities and Exchange Commission. As a result of such risks, uncertainties and factors, actual results may differ materially from any future results, performance or achievements discussed in or implied by the forward-looking statements contained herein. MCG is providing the information in this press release as of this date and assumes no obligations to update the information included in this press release or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

MCG Capital Corporation
Marshall Murphy
703-562-7110
MMurphy@MCGCapital.com