Home Stocks Phil Falcone Letter to MCG Capital

Phil Falcone Letter to MCG Capital

June 15, 2015

Board of Directors

MCG Capital Corporation

1001 19th Street North, 10th Floor

Arlington, Virginia 22209

Attention: Richard W. Neu, Chairman of the Board

Ladies and Gentlemen:

Reference is made to the offer letter sent to you on behalf of HC2 Holdings, Inc. (“HC2”) on May 19, 2015 regarding a proposal (as subsequently modified in our June 2nd letter and June 3rd letter) (the “Proposal”) to acquire all of the outstanding shares of MCG Capital Corporation (“MCG”).

We feel compelled to address certain statements MCG made in its most recent investor presentation, so that there can be no doubt that the HC2 transaction is superior to the PennantPark transaction and does not expose MCG stockholders to unnecessary risks to realize that value. Specifically,

·Loss in Value to MCG if HC2 Transaction Does Not Close. Throughout your presentation, you generally note that MCG stockholders will bear the full cost of the loss in value if the HC2 transaction does not close, including the lost value that would have been received in the PennantPark transaction. However, this is a broad overstatement that fails to recognize that this same cost of loss is born by MCG stockholders if the PennantPark transaction does not close. And, given our belief that several significant MCG stockholders have indicated to us and to you that they support the Proposal, we believe failure to get approval for the PennantPark deal is a real risk that MCG faces.

·Failure to Close Due to Regulatory Issues. You state that the transaction may not close due to a prohibition by the SEC and that HC2 may be an investment company and thereby regulated by the Investment Advisors Act of 1940 (the “40 Act”). This is not the case: HC2 is not an investment company. Rather, it, like a number of its immediate peers listed on the various exchanges, is a diversified holding company engaged in various businesses primarily through the ownership and operation of majority owned subsidiaries (currently with six reportable operating companies). Any investment securities it owns constitute substantially less than the 40% threshold of its total assets required under the 1940 Act to constitute an investment company. Further, Harbinger Group, Inc. (NYSE: HRG), where I was previously Chairman and CEO, was built on the same principles and it is not an investment company. HC2 and its advisors have done extensive analysis and regularly monitors compliance with the various 1940 Act numerical tests applicable to investment companies and is confident that it is not an investment company. We are prepared to share all of our analysis with you and your advisors to alleviate any concerns you may have.

Finally, MCG has made its concerns public about my prior SEC settlement but has not come to me or my lawyers to understand and discuss them. We are prepared to be fully transparent and remain available to address any of your concerns when you are ready to discuss.

Notwithstanding our disagreement with the statements you have made about the risk of our ability to consummate an acquisition of MCG, we are hereby again modifying and augmenting our Proposal to further compensate MCG (and its stockholders) in the event a deal with HC2 is not consummated because HC2 cannot complete its registration statement or HC2 is permanently enjoined from acquiring MCG as a result of the provisions of my SEC settlement or issues arising under the Investment Advisors Act of 1940. If such situations were to occur HC2 will, in addition to reimbursing MCG in cash for the $7 million termination fee payable to PennantPark, issue $13.35 million of HC2 common stock to MCG. This amount is equal to the “loss” you indicate MCG stockholders will incur (excluding reimbursement for the $7 million breakup fee that we will pay separately in cash) if a transaction with HC2 does not close and MCG liquidates (see page 6 of your June 8 presentation, which indicates a loss of $.55 per share in the “expected case”).

·Failure to Obtain HC2 Shareholder Approval. We are prepared to provide voting commitments from HC2 stockholders at the time a definitive merger agreement is executed to fully eliminate this as a deal risk.

·Protection for HC2 Stock Price by More than 20% but Less than 30%. The 20% collar that HC2 proposes provides MCG stockholders protection that is well in excess of the approximately 1.7% of protection that MCG stockholders will receive from PennantPark if its shares trade below NAV. In addition, HC2’s offer is an 11.6% premium to the PennantPark transaction.

·Operating Covenants. HC2 has already committed not to pay any dividends prior to the consummation of the acquisition of MCG other than those required by the terms of its existing preferred stock instruments. HC2 has also committed not to modify its compensation practices or to commence or settle material claims or proceedings during the pendency of its transaction to acquire MCG. However, in the recent presentation, you take issue with the fact that, under the Proposal, HC2 would be permitted to issue stock and enter into new lines of business prior to closing any transaction with you. You know that HC2 is not seeking to operate MCG as an investment adviser – we are a publicly traded, diversified holding company and our mission is to make acquisitions and grow multiple business platforms. If we cannot continue to do what we do, we cannot continue to create value for our and your stockholders. Any action that HC2 takes as far as issuing stock or entering into new lines of business will be publicly disclosed. If, as a consequence, our stock price decreases, MCG stockholders will be protected by the floating exchange rate mechanism we have proposed.

Finally, we recognize that the you, the Board of MCG, could have resolved to simply liquidate the Company, but took it upon yourselves to run a strategic process in an effort to maximize value for your stockholders, and we commend you for that. I think that the proposal HC2 has presented to MCG will achieve that goal by valuing the company at a substantial premium to NAV while giving stockholders the ability to participate insubstantial future upside in the combined business.


Philip A. Falcone

Chairman, President and Chief Executive Officer

HC2 Holdings, Inc.