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By khrushchv
November 11, 2008

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Some thoughts on the quarterly results and conference call...

This is a big quarter in terms of changes at ACAS...a lot going on...hopefully breaking it into digestible pieces will help...

On one hand, the quarter looked pretty good...on a NOI basis $0.72 net of taxes and $0.98 w/o the taxes. The enormous GAAP loss was, and I feel like I'm repeating this phrase over and over again, non-cash write-downs in a portfolio that ACAS intends to hold to term. ACAS also closed on a ~$1B credit facility.

On the other hand, the third quarters volatility and "dislocations" are making life hard for ACAS: the write-downs are impairing ACAS's equity and therefore their leverage: this can be a bad deal since some of their debt covenants depend on these (can't recall precisely, but any time debt covenants get violated, you know it's a bad deal...it's also an issue for their status as a BDC).

Some strategic/business items:

1) ECAS: Picking up ECAS with all stock is a sweet deal for ACAS. ECAS appears cheap (in a p/b sense) and since ECAS has been generating volatility in ACAS's book, they will just hold it at BV...this one's a twofer for ACAS...cheap asset and reduced balance sheet volatility.

2) Killing the dividend. The BDC model really works against you in retaining capital...so, rather than burn the cash by paying you and me (and themselves) and perhaps trigger some debt covenants, management is doing the responsible thing here and cutting the dividend. As a note, it looks like they're trying to retain the cash generated from capital gains/portfolio exits and use that as their cushion. I like dividends too, but at this point, where else is ACAS going to get capital? They can't increase leverage, they can't sell stock (since it's below book value) and they can't retain (more than 10% of) NOI earnings unless they revoke the BDC status...it's a hard knocks life for BDCs in the current environment.

My knee-jerk reaction is that there is not a ton to be giddy about here...but then I remember that ACAS sells for a huge discount to their book value. Now, let's remember that this is a book that generated $0.72 per share, net of taxes, this quarter...at an annual rate of $2.88 per share...below $8 per share, you really have to believe that ACAS is headed down the toilet, not only as a BDC, but that they'll never write any more business, ever...to me that's crazy and I'm voting with my money...I bought some more shares this afternoon...