American Capital Ltd. Builds on Its Best Business

American Capital Ltd. closes another managed CLO, building on its best-performing unit: structured credit.

Jul 12, 2014 at 6:00AM

The oddball BDC, American Capital (NASDAQ:ACAS), is getting some respect for what it does well: investing in collateralized loan obligations.

The company calls this arm its "structured credit" division, and although it's small, it does have the best historical record within the company. Historical returns show an internal rate of return of 16% on its CLO equity investments.

An emerging asset manager
In the last two years, American Capital has served as a manager of four new CLOs from which it earns management fees in addition to the returns from retained equity interests.




ACAS CLO 2012-1

$351 million

0.42% management fee plus 20% incentive fee

ACAS CLO 2013-1

$402 million

0.50% management fee plus 20% incentive fee

ACAS CLO 2013-2

$401 million

0.42% management fee plus 20% incentive fee

ACAs CLO 2014-1

$619 million

0.50% management fee plus an unknown incentive fee

Notably, the latest CLO, which was announced on Wednesday, may not be the last in 2014. A search of Cayman Islands business and trust listings reveals a filing for ACAS CLO 2014-2.


Before getting too excited, though, it's worth mentioning that the Caymans search also shows a second planned CLO from 2007, one which never came to fruition.

And although the company generates substantial fee income for managing these CLOs, it comes with substantial risk. American Capital retained 21-70% of the equity interests in each CLO listed above. Poor performance from any given CLO will easily wipe out the benefit of management fee income.

For illustrative purposes, note that American Capital owned a $50 million stake of the riskiest tranche of its first 2013 CLO, which dwarfs the baseline annual management fee on $402 million in assets. On the other hand, the most recent marks for its 2007 CLO show relatively good performance, especially when one considers the fact that it was raised at the top of the last credit cycle.

American Capital's breadwinner
Structured credit has an outsized impact on American Capital's bottom line. At the end of last year, the company marked its structured credit investments at $276 million. But interest income tallied to a whopping $72 million.

To put that in perspective, structured credit made up 4.5% of the asset base, but 14.8% of the company's revenue.


The disparity is due to two factors. First, CLO equity returns, before defaults, easily venture into the midteens, exceeding the yields from any other asset class. Secondly, last year, American Capital Ltd. had substantial middle-market equity investments on the balance sheet which were generating very little income at all. American Capital parted with the bulk of those assets when it sold its equity interests to a new private equity fund in which it is a co-investor and the asset manager.

American Capital's next quarterly filing should show a "new" American Capital, devoid of most of its nonincome-producing equity investments, alongside a beefed up asset management business, which should get a higher mark next quarter on the back of recently raised funds and the improved performance of its public mortgage REITs. Good for American Capital.

The best dividend yields to buy now
High-dividend stocks, like well-run BDCs, trump their peers. Knowing this, our top analysts put together a free report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information