American Capital: Strengths, Weaknesses, Opportunities, Threats

A SWOT analysis -- a look at strengths, weaknesses, opportunities, and threats – is a good way to evaluate a company's business operations. American Capital (Nasdaq: ACAS  ) is a business development company that was hit hard by the financial crisis. It recently completed a debt restructuring, and the share price has more than doubled thus far in 2010. A SWOT check will help assess whether American Capital is back on the road to high yields.

Strengths:

  • Recent debt restructuring and a share offering have reduced leverage, paying down $1 billion. The new debt structure doesn't require principal repayments until December 2012.
  • As a result of the debt restructuring, American Capital was able to remove the "going concern" paragraph from its financial statements.
  • American Capital trades at a discount to book value, and management believes holdings have good potential for mark-ups.

Weaknesses:

  • Investors usually buy business development companies for their high yields. American Capital suspended its dividend in 2008, and it does not expect to reinstate a payout until at least 2011. Even then, any dividend will likely be paid largely in stock.
  • The new debt structure didn't come cheap. American Capital's $1 billion loan carries a nearly 9% fixed interest rate. About $300 million floats at LIBOR, plus 6.5% with an 8.5% minimum rate. Both rates drop by 1% when debt outstanding falls below $1 billion.

Opportunities:

  • A weak economy and tight credit markets mean less competition for deals in the middle-market companies American Capital serves.
  • Paying down high-interest debt is a built-in option for the high returns on cash that American Capital can generate from operations.

Threats:

  • Portfolio appreciation depends on an economic recovery. A double-dip recession could derail the company's turnaround.
  • The economic recovery needed to improve the portfolio value could drive interest rates higher, increasing the debt-service burden on the floating rate paper.

Investors looking at a business development company for income will be disappointed in American Capital. There's potential for net asset value and share price appreciation if a recovery gains strength. However, I'd like to see a bigger discount to NAV for the risk involved here. In the near term, no dividends are expected. And when payouts do fire up, they're likely to be largely in stock. A quick scan of the industry turned up a number of companies with similar business models and dividend yields greater than 10%.

Company

Dividend Yield

Prospect Capital

16.9%

Solar Capital (Nasdaq: SLRC  )

12.1%

Apollo Investment (Nasdaq: AINV  )

11.1%

PennantPark Investment

10.5%

Ares Capital

10.3%

Source: Yahoo! Finance.

These aren't recommendations, just examples of American Capital peers that offer the high yields typically expected from business development companies.

What parts of American Capital's SWOT need more detail? Weigh in with a comment below.

Related Foolishness:

Fool contributor Russ Krull does not have a position in any of the stocks. The Fool has a disclosure policy that never misses a dividend.


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