american capital ACAS W
September 28, 2009 - 1:34pm EST by
todd1123
2009 2010
Price: 3.20 EPS $0.35 $0.75
Shares Out. (in M): 284 P/E 9.1x 4.3x
Market Cap (in $M): 906 P/FCF NM NM
Net Debt (in $M): 3,709 EBIT 200 350
TEV ($): 4,615 TEV/EBIT 23.1x 13.2x

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Description

 

I am recommending a long equity position in American Capital (ACAS) at ~3.00 / share, which presents a compelling risk-reward proposition, with a total return potential of >100% over the next 3 - 6 months (based on probability tree matrix further below).  ACAS is (i) unloved (shareholder base temporarily in flux and short interest is still >15% of total outstanding shares creating a real element of surprise); (ii) mis-perceived (i.e. concerns around ongoing credit negotiations - currently in default on about half of its ~3.7Bln PF Sep net debt - is overdone and I believe will be resolved over the next couple weeks that will likely surprise "Mr. Market's" extremely pessimistic view - notable that bonds are trading well bid in the mid-80s vs the lows of 30 - 35 earlier this year w/ one of the tightest yields I've seen for a non-investment grade financial security suggesting the negotiations are coming to a head ... and also highlighting how the credit markets may be anticipating a near-term amendment, but equity has seemingly not reacted so far); (iii) mis-understood (i.e. generic Street view is that ACAS has a disproportionate mix of equity holdings and was overly aggressive on taking control positions at peak multiples - while this view is partially accurate, most of the "negativity" has already been factored into ACAS' current marked-down June 09 book value and more pragmatically, ACAS' underlying portfolio is showing real incremental improvements - more detailed discussion in the biz overview section below - YET Street has very muted future expectations and moreover, Street believes a run-down / liquidation scenario is a high probability scenario which I think is overly-punitive); and (iv) mis-valued (ACAS equity currently trades at around ~0.4x June 09 book value versus BDC comps including AINV, ARCC, PNNT at ~0.9x - note that this "June book value" has effectively marked the cost basis down to around ~59 cents versus initial "cost" which compares to other BDCs that have marks in the 65 - 85 cent range so arguably very punitive ... more notably, ACAS equity correspondingly trades at around 0.15x its "cost basis"). 

 

While ACAS pessimists will argue that the business is fundamentally flawed and over-exposed to control positions consummated at peak multiples at the peak of the credit cycle, I'd argue that most of the downside + negative sentiment is largely baked in at current valuations (i.e. book value has already largely taken a fine knife to the "equity-like" securities) and, moreover, I think there a couple mis-perceptions that have created overly-negative sentiment - discussed further below) and there are a couple notable near-term upside surprises (largely given how low the hurdle has been set at this point).  Longer-term, I do NOT think the business is broken and ultimately think an equivalent book multiple to its peers can be realized as management regains credibility and confidence (NOTE that this multiple expansion scenario is pure upside and I'm NOT docking on this in my FV of around $6 / share as highlighted in my Base Case below).

 

One often-overlooked call option to ACAS (which was ultimately the critical angle to the short thesis 12-mths back and largely came to fruition) is that outside of ACAS' core / private finance portfolio - i.e. >$7.9Bln of the $10.3Bln "cost basis" - the business sits on two high-octane (and I'd argue largely "free" given how negative the Street is on both of these items) call options that nobody appears to be is factoring in right now: (i) European finance division (cost basis of ~$1.3Bln and currently marked at ~$97mm - this is a very similar portfolio to ACAS' US corporate finance portfolio and ACAS is currently in negotiations w/ its creditors in a process that is being led by Miller Buckfire ... while I don't yet have an angle on how this process will turn out, my sense is that banks / creditors involved on the European side are more willing to "kick-the-can" down the road especially given the significant improvements in the European credit markets at large - as a result, the European call option could be perceived to be much more in-the-$ over the next couple mths and could be a significant source of upside value over the next couple qtrs if the global economy sees further improvements) and (ii) ACAS' structured products portfolio (cost basis of ~1Bln and currently written down to $174MM) could surprise to the upside given combination of CLO and CMBS holdings that have been quite reactive over the past 3 - 6 mths - while ACAS does not provide a great deal of information on these securities, the market has done a 180-degree about-face on these structured securities with ongoing / improved liquidity - witness Victoria Finance, a SIV that defaulted last year, sold ~$4.3Bln of CDO liabilities on Friday which highlights the increased volumes / price levels and appetite around these types of structured product portfolios. 

 

SUMMARY THESIS:

Overall, I view ACAS equity as a hyper call option on the credit markets (the past 3-mths in particular have seen significant upward moves in the credit markets which includes both large / liquid securities and I'm beginning to see real appetite for smaller / less-liquid securities) with multiple n-term catalysts (its worth noting that the BDC universe typically lags the more liquid / public universe by 3 - 6 months given the mix of Level 1 - 3 assets (but ultimately, given the tag lag, the September 2009 and December 2009 book value / marks should show incremental improvements versus the June 2009 low).  While there are n-term concerns and confusion around ACAS' ongoing credit negotiations (currently in default on approximately $2.25Bln of private / public bonds as well as its unsecured revolver), I think Mr. Market's sentiment / perception hurdle is very low at this stage and any compromise (I'm assuming a coupon bump up to 9 - 10%, additional security package and a more amendable amortization schedule) would be a significant positive surprise to equity holders (especially considering how negative the Street is at this stage).  What gives me more confidence around the (i) ongoing credit negotiations and (ii) n-term portfolio out-performance is both the recent traction mgmt has shown in paying down debt (two transactions announced in mid-Sep will likely result in >225MM of debt paydown and >35MM of gains vs the June 09 mark).  As a result, it's worth noting that the PF net debt balance as of September 2009 will likely be below $3.7Bln given cash balance improvements and recent asset sales (based on Q2 09 conference call disclosures and recent press releases). 

 

More notably, there are ~13 - 15 core (i.e. >40MM in size) positions w/in ACAS' portfolio (note the total portfolio is >270 companies so very widely diversified) that I believe are high quality, liquid (i.e. saleable over the next 3 - 6 months) and should yield an incremental gain from the June 09 mark (note these 15 positions comprise ~$2.5Bln of ACAS' "Cost" portfolio or ~25% of "Cost").  My sense is that management has educated its creditors on the inherent value of these core positions and that creditors are more amendable; in addition, my sense is that ACAS' NAV will show incremental improvements over the next 2 - 3 qtrs and NAV will likely finish the year at / above $10 - $12 / share (vs ~$7.42 / share currently) which implies an additional $700 - $1,250MM of equity value (driven by portfolio performance - upside potential to this estimate could come via European Capital renegotiations and possibly further liquidity / improvements in the structured product portfolio).

 

As referenced above and noted in more detail further below, viewing the portfolio from the bottom-up (80 / 20 rule), there are ~15 larger / liquid positions that I've done a decent amount of work on that comprise ~$2.5Bln of ACAS' ~$10.3Bln "Cost" portfolio (that I believe will result in gains from the June 2009 mark) that will provide greater confidence in the collateral.  Taking this logic one step further, its worth noting that PF for selling these 15 companies (noted above - a definite possibility over the next 3 - 6 months given how much information is readily available in these securities in particular), the PF net debt balance would be in the $1.25 - $1.5Bln range (this implies ACAS receives its full "cost basis" on these 15 companies which is a low probability BUT I'm noting it for optics sake given my views on the quality of these assets).  More notably, on the $1.25 - $1.5Bln of PF net debt (post the hypothetical sale of these securities), there would be approximately ~$7.5Bln of "cost" / value retailed in the ongoing portfolio (albeit - these would be more private / "mark-to-model" positions which is very similar to AINV / ARCC / PNNT portfolios).  Said a different way, for the equity to NOT be have any value, the recovery value on the hypothetical PF portfolio would have to be less than 18 cents on the $ ($1.33 mid-pt / $7.5Bln = ~18 cents).  Said a different way, for the equity to be worth $6 / share (Base Case), the recovery value on the remaining $7.5Bln of securities would have to be 40 cents on the $ (i.e. $1.7Bln of equity value / 285MM shares + $1.33Bln of net debt = ~$3Bln / $7.5 = 40 cents).  The pts above are simply being used there to highlight the possibility (which I think is exponentially increasing) of a virtuous cycle in ACAS (following what was arguably one of the worse / vicious cycles they went through over the past 6 - 12 months).  

 

 While I don't think ACAS deserves an equivalent multiple to its closest peers (~0.9x), the margin of safety is in applying ACAS' current Mr. Market multiple (0.4 - 0.6x) to its PF book value (which argues for a FV of around $5 - $7 / share or >100% above current price).  The upside case will be driven by potential multiple expansion to a level that mirrors BDC peers; if perception changes around ACAS and the market focuses more on the upside optionality of ACAS' book (i.e. most other BDCs do NOT have real embedded optionality from structured products nor European portfolio holdings - i.e. takes an asset focus vs liability focus as it did over the past 6 - 12 mths) and applies an equiv multiple of 0.9x to PF book value (or $10 / share or >200 - 300% upside) over the next 3 - 6 mths.

 

ACAS MIS-PERCEPTIONS:

While the BDC industry (ALD in particular) has received a fair amount of flack, three mis-perceptions have created significant margin-of-safety around ACAS and ultimately the hyper call option around fundamental operating performance that will likely be "less-bad-than-feared":

 

Mis-Perception #1 - credit negotiation uncertainty: my sense is that this will come to a head in the very n-term and will be viewed favorably as it will take off the table the solvency risk / liquidation concern - note that most of the Street uses a liquidation analysis to drive their price targets ... I believe this cloud of confusion once removed should result in a re-valuation as the perception around the biz (longer-term liabilities better matched w/ longer- assets) will improve.  On this first point, its worth noting that the public bonds ($548MM in size are well bid in the mid-80s - tightest yield for a non-IG rated financial security which perhaps reflects credit leading equity in information and the belief that things are "less-worse-than-feared" and that there might be a positive compromise out in the n-term)

 

Mis-Perception #2 - belief that ALD negotiation will be used as template for ACAS: the markets are generally looking at the recent ALD credit re-negotiation and using this as a possible template - BUT I think there is a high probability that the amendment will be less onerous for ACAS for the following reasons: (i) ACAS mgmt is arguably higher quality and portrays themselves in a position of relative strength vs ALD mgmt, (ii) ACAS is negotiating w/ three parties (banks, private institutions / largely insurance cos and public / largely hedge funds) as compared to ALD w/ 2 constituents which favors ACAS given a more fragmented lender base and more lopsided to "relationship" banks and institutions, (iii) recent ACAS events (sold two portfolio cos for >225MM for a >35MM gain as compared to the June 09 mark) will likely generate more goodwill and (iv) as the credit markets have shown further improvements, timing should be an incremental benefit to ACAS (esp as we consider lenders are probably more willing now to kick-the-can-down-the-road given how common this "kick-the-can" approach has been over the past 3 mths in particular)

 

Mis-Perception #3 - ACAS portfolio is more toxic than BDC peers: while there is a common belief around ACAS (some of which I'd fully admit was true 6 - 12 mths ago when the marks were closer to "cost") that they took greater risk via control positions at the peak of the market, I'd argue that (i) the ACAS portfolio has been written down much more aggressively than its peers (currently at around 59 cents of original cost as of June book value calc which compares to 65 - 85 on its closest peers) and (ii) given the more conservative marks, the ACAS portfolio has significantly more upside optionality over the next 3 - 9 mths (while the portfolio mix explains some of the disparity, I'd argue they have taken relatively conservative marks as of June 2009 on the whole).  More pragmatically, I've done a more thorough analysis on 15 of ACAS' larger (defined as >40MM) and liquid holdings and the conclusion is that there will very likely be a 5 - 10% increase in its NAV for the Sep 09 (compared to June) qtr which should result in >$1.50 - $3.00 / share of NAV improvement (based on approximately 285MM shares). 

 

SUMMARY CAP TABLE (JUNE 2009):

It's worth pointing out just how vicious the credit cycle has been on ACAS (probably easiest to tell the 1st part of the story through the NAV / share moves).  At YE 2007, the PF BV / share was around $26 / share.  At the end of 2008, it finished the year at around $12.50 / share.  As of June 2009, the BV / share currently sits at around $7.42 / share (or approximately 29% of peak).  Interestingly (and noted above), June 2009's BV is marked at around 59 cents (vs a total implied "Cost" of ~$10.3Bln).  Mr. Market is currently valuing the shares in the low $3 / share range which implies 0.15x of "Cost" basis.

 

The Cap table below effectively highlights four classes of debt securities: (i) ~$2.0Bln of securitizations (NOT in default and NOT in negotiations) - non-recourse and are over-collateralized at a ratio of around 1.27x, so the $2Bln of securitizations have a claim on around $2.5Bln of their investment book roughly split 50/50 against the senior/senior sub notes, (ii) ~$1.4Bln revolver (held by large relationship institutions), (iii) $548MM of public notes (mostly held by special situations hedge funds as well as insurance cos), (iv) $311MM of private notes (mostly held by insurance cos).  Two notable recent updates from the company: (i) cash balance as of the Q2 call in early August was around $300MM (up from $180 - $190MM as of June 09) and (ii) 2 recent portfolio sales (totaling around $220 - $250MM) were completed in September with the likely use of proceeds to be used for debt pay-down.  Given these two updates, its worth noting that the PF September 2009 NET debt balance is now around $3.7Bln.  While there is still a significant amount of wood to chop, my only point is that goodwill is likely being built by management and perception around the business making it through the cycle has arguably been incrementally improved. 

 

Securitizations             1,992

Private Notes              311
Public Notes                548
Unsecured Revolver    1,388

Total General Unsecured  Debt  =  $2,247 X 85 cents at market = $1.9Bln

 

Shares Out                  284

Share Price                  $3.20 / share

Market Cap                  $906

 

Cash(1)                       530

TEV                            4,615  

(1) Q2 call and asset sales

 

SUMMARY BIZ OVERVIEW:

The graph below summarizes ACAS' business mix.  As highlighted, based on the June 2009 mark, >35% of ACAS book is comprised of senior debt, ~35% subordinated debt and ~30% "equity-like" securities.  As compared to ALD, ACAS has a more attractive / balanced mix of senior loans and subordinated notes (ALD is much more heavily weighted to the junior securities).    

 

 

Original

Jun-09

Effective

% of

 

 

Cost

FV

Mark

Portfolio (2)

Snr Debt

 

$3,394

$2,150

63.3%

35.3%

Subordinated Debt

 

$2,816

$2,138

75.9%

35.1%

"Equity-Like" Securities(1)

 

$4,085

$1,810

44.3%

29.7%

TOTAL

 

$10,295

$6,098

59.2%

100.0%

(1) Includes preferreds, warrants and common equity in affiliate and non-affiliate portfolio cos

(2) Based on current June 2009 mark

 

 

 

 

 

 

There are effectively three levers of value to the ACAS portfolio (note that Levers 2 and 3 have effectively been written down to arguably "free call option" levels BUT that I think have real potential for n-term upside (note that this upside potential is margin-of-safety to the trade and will be pure upside if we're surprised). 

 

Lever 1 - Core / private portfolio: comprises >200 portfolio companies w/ an average investment size of ~$40MM.  Below, I've provided a summary snapshot of ~15 portfolio companies that are liquid (in many cases quoted / on-the-run) and I believe have significant near-term upside potential (versus June 2009 mark) if sold.  Note that most of the remaining positions w/in ACAS portfolio (i.e. those that are not quoted) are marked-to-model.  While the Street (during times of skepticism) likes to throw mud at this mark-to-model approach given the negative Level 3 taint, my view is that's its an equivalent valuation approach to the other BDCs performed quarterly (using a consistent approach) and affirmed by a 3rd party (the valuation exercise typically takes into consideration underlying portfolio performance, notable changes in mgmt outlook as well as comparable company trading levels and discount rates - overall, I agree w/ ACAS mgmt's assessment on their Q2 call which noted they lag both downturns and recoveries BUT ultimately see the flow-through on a 3 - 6 mth trailing basis - which suggests the flow-through will be seen in Q3 and Q4 marks)

 

We've gone through 15 of ACAS' larger positions (as well as handful that are more "on-the-run") and the takeaway is that there is that (i) the ACAS portfolio is NOT in dire straits, (ii) there is >$2Bln of realizable value over the next 3 - 6 months and (iii) there is real upside potential from these more liquid / on-the-run names in particular.  While I think these securities could be sold over the next 3 - 6 months, the ultimate pt is that the underlying collateral in the "quotable" portion of their portion is on pretty solid footing.  Factoring in the remaining >200 portfolio companies / structured products, etc that comprise the remaining ~7.8Bln of ACAS' "Cost", the hurdle rate is effectively a ~20 cent recovery (anything above that amt equates to equity upside).  As detailed further below, my view is that a 40 - 60 cent recovery (even in a liquidation scenario) is feasible and there would likely be strategic interest in portions (or all) of their portfolio from other BDCs / financial institutions (or $1.5Bln - $3Bln of value to the equity or $5.25 - $10.50 / share of value).  However, the biggest risk in a liquidation scenario is the time leakage (as it could take 1 - 3 years to fully liquidate the portfolio)

 

Category #1: Debt (mostly snr) that's liquid / sellable and would yield a gain from June 09 mark

  1. Orchard Brands ($366.1MM carried at $243.2MM) >> quoted at ~70 so ~30 - 35MM of upside
  2. Ranpak snr debt ($139.3MM carried at $99.2MM) >> quoted in the low 90s so ~30 - 40MM of upside
  3. Ford Motor Cos revolver ($107MM carried at $80MM on books) >> quoted in low 90s so ~17MM upside
  4. Inovis ($88MM carried at $82.6MM) >> solid biz and sellable
  5. National Processing Co ($52.8MM carried at $32.9MM) >> quoted at 79 so ~9MM upside
  6. TransFirst ($49.6MM carried at $30.3MM) >> quoted at 78 so ~8MM upside
  7. French Lick Snr Debt ($32MM carried at $18.3) >>quoted 65 - 70 so $2 - 3MM upside
  8. KIK 2nds ($21.5MM carried at $3.6MM) >> quoted >50 so ~$7.5 - 10MM upside
  9. Jacobson 1sts ($19MM carried at $11.7MM) >> quoted 85 - 90 so $4 - $6MM upside

TOTAL Category #1 (9 positions) = $850MM of Cost w/ >$125MM of embedded upside in n-term

 

Category #2: Control Positions in which I know / like the biz and believe there could be a liquid / n-term sale at a premium

  1. American General Agency (AGNC - publicly traded) - ACAS owns approx 5MM of 18.8MM total shares out ($150MM of value - up $40MM since June)
  2. Mirion Technologies (MION) S-1 filing is pending IPO listing >> solid biz >> $314MM of value on books (of which >$145MM in "equity")
  3. Rug Doctor (RDR Holdings) >> very solid / stable biz >> $385MM invested
  4. WIS Holdings >> solid biz >> $236MM of value (of which >130MM in equity like securities)
  5. Stadium Mgmt Group (SMG) >> good biz >> $228MM of value
  6. TestAmerica >> decent biz >> over $250MM invested

TOTAL Category #2 (6 positions) = around $1.6Bln of "Cost" w/ ability to either sell / re-capitalize or exit the respective position (w/ decent upside risk to meeting / exceeding current June 09 mark)

 

Levers 2 & 3 - European Capital and Structured Products: as noted above, these two levers can be viewed as pure option value and are margin-of-safety to the trade (key n-term events will be around credit re-negotiation as well as underlying US private portfolio performance).  In total, the cost basis of these two levers is >$2.2Bln as is currently being marked on the ACAS book at around $271MM (or approximately 12% of cost).  As noted further above, European Capital is currently going through a restructuring process and concurrently, ACAS is seeking out strategic alternatives as well with Citigroup - note that while the European vehicle also has a fair mix of "mark-to-model" small portfolio companies, the European credit markets have also rebounded quite handsomely (even more so than the US I'd argue) and there may be upside opportunities in the n-term.  Re: the structured product portfolio, this is mostly comprised of CLO and CMBS securities (while the 10q and 10k provides summary information, details are a bit lacking which makes it hard to value the 5 - 7 largest securities that drive the portfolio).  However, while the information is sparse, it's safe to say that there might be a $150 - $300MM mark-up in this portfolio given some of the recent / significant moves in the CLO and CMBS markets (more liquidity).

 

UPSIDE / DOWNSIDE:

 

UPSIDE (35% probability): assumes the credit negotiations successfully come to a conclusion over the next 1 - 2 months.  Applying a 0.8 - 1x multiple to PF book value (equivalent multiple to its closest peers), equates to a $10 - $12 / share FV (or approx 200% - 300% upside versus current $3 / share price).  This scenario assumes I'm directionally correct that the next 3 - 6 mths will see a $2.50 - $4.50 / share expansion in NAV from the current ~$7.50 / share mark as of June 2009

 

BASE (60% probability): assumes the credit negotiations successfully come to a conclusion over the next 1 - 2 months.  Assuming the naysayers are right (i.e. ACAS deserves a discounted multiple to peers that trade at around 0.9x - 1.0x book value), and applying a consistent current "Mr. Market" multiple at around 0.4x - 0.5x to PF book value, this equates to $5 - $7 / share of FV (or approx 65% - 135% upside).  Base Case assumes NO multiple expansion which I think is very unlikely (witness PNNT / AINV / ARCC - as perception changes, multiples for each of these BDCs has expanded to ~1.0x book value).  This scenario assumes I'm directionally correct that the next 3 - 6 mths will see a $2.50 - $4.50 / share expansion in NAV from the current ~$7.50 / share mark as of June 2009

 

DOWNSIDE (5% probability): assumes the credit negotiations fail (I view this as less than a 2.5% probability but for conservatism, I've assumed 5% in the matrix tree) and the company is forced to go through an orderly liquidation.  Given my views that there is >2Bln of "markable / quotable / sellable" securities, I believe the debt load can effectively be reduced to around 1.5Bln within the next 3 - 6 months (offsetting PF cost basis of the portfolio at that stage is around ~7.5Bln post these asset sales).  At which pt, the bet is a 1 - 3 year orderly liquidation bet.  The equity hurdle to be in-the-$ is effectively 20 cents ($1.5 / 7.5Bln).  My belief is that IF the liquidation scenario were to occur, you would see a handful of larger / strategic bids for the entire (or portions) of the biz (perhaps from BDC peers or financial institutions looking to expand into middle-market lending).  My liquidation scenario assumes 40 - 60 cent recovery on the remaining $7.5Bln which implies $3 - $4.5Bln recovery (equity receives everything above the PF debt balance of $1.5Bln).  The biggest risk w/ the downside scenario is timing.  Assuming the process takes 1 - 3 years and applying a 20% discount rate, the recovery falls to approximately $2.2 - $3.2Bln which implies an equity value of around $2.50 - $6.00 / share (decent margin-of-safety given current share price at ~$3 / share).  We can debate the merits of this Downside Case further but I think the critical difference to my view as compared to the Street's is that there is significant value that can be realized in the first 1 - 3 months (given 15 portfolio companies are quotable / liquid / saleable which drives between $2 - $2.5Bln of value).  Given how the private bonds have traded (mid-80s currently), I'd argue that creditors are getting much more comfortable w/ the underlying collateral and mimic the view above

 

CATALYSTS:

N-Term Completion of Credit Negotiations (2 - 6 weeks):  my sense is that it's closer to completion and should be on more favorable terms than ALD

 

N-term Portfolio Out-Performance (4 - 6 weeks): the Sep 2009 mark on portfolio will likely be significantly higher than "Mr. Market" fears / Street expectations (reports Nov 10th)

 

N-Term Positive Technicals (4 - 6 weeks): Consensus is that's its pretty much hated and heavily shorted; Still very much an orphan BDC at this pt

 

N-Term Asset Sales (2 - 6 months): could incrementally shift perception to the upside (as noted in the write-up above, there are ~$2.5Bln of securities that I believe are liquid / saleable over the next 3 - 12 months at a premium valuation to the June 2009 mark) as ACAS continues to pay down debt and take gains on the sales (versus June 09 mark / muted expectations)

 

M-Term Hyper Call Option (3 - 6 months): Leveraged caboose trade to credit continuing to rally (typically lags credit down and up moves by 3 - 6 months)

 

L-Term Embedded Margin-of-Safety: Mr. Market mark significant disct to Cost (~0.4x) and current "Mr. Mkt" value significant disct to "Cost" basis mark (~0.15x)

- Currently trading at ~0.4x book (of which book value has been marked down to ~59 cents)

L-Term Possibility of Regaining Confidence (3 - 12 months): Mgmt purchases more equity post any creditor re-negotiation in sign of support (and helps in re-gaining credibility / confidence ... right now, Street is acting like the equity is perhaps NOT the fulcrum security ... any incremental confidence around the equity being in the money, would create significant upside optionality)

 

RISKS:

 

N-term risk: Perception becomes reality in financials - I'll admit that perception / confidence have a significant impact on BDCs and financial institutions so should not be taken lightly.  As of right now, however, I think ACAS' position is NOT un-tenable and believe a comprise will be met re: the ongoing negotiations w/ creditors

 

N-term risk: Negotiations turn more aggressive / expensive (low likelihood in my view given the fact-pattern so far)

 

M-term risk: FCF of biz is inadequate to support (low likelihood as I think asset sales will provide adequate n-term liquidity to pay-down the debt load and service interest expense)

 

L-term risk: Orphan retail investor base; how does ACAS mgmt regain credibility? (longer-term concern)

Catalyst

 

N-Term Completion of Credit Negotiations (2 - 6 weeks):  my sense is that it's closer to completion and should be on more favorable terms than ALD

 

N-term Portfolio Out-Performance (4 - 6 weeks): the Sep 2009 mark on portfolio will likely be significantly higher than "Mr. Market" fears / Street expectations (reports Nov 10th)

 

N-Term Positive Technicals (4 - 6 weeks): Consensus is that's its pretty much hated and heavily shorted; Still very much an orphan BDC at this pt

 

N-Term Asset Sales (2 - 6 months): could incrementally shift perception to the upside (as noted in the write-up above, there are ~$2.5Bln of securities that I believe are liquid / saleable over the next 3 - 12 months at a premium valuation to the June 2009 mark) as ACAS continues to pay down debt and take gains on the sales (versus June 09 mark / muted expectations)

 

M-Term Hyper Call Option (3 - 6 months): Leveraged caboose trade to credit continuing to rally (typically lags credit down and up moves by 3 - 6 months)

 

L-Term Embedded Margin-of-Safety: Mr. Market mark significant disct to Cost (~0.4x) and current "Mr. Mkt" value significant disct to "Cost" basis mark (~0.15x)

- Currently trading at ~0.4x book (of which book value has been marked down to ~59 cents)

L-Term Possibility of Regaining Confidence (3 - 12 months): Mgmt purchases more equity post any creditor re-negotiation in sign of support (and helps in re-gaining credibility / confidence ... right now, Street is acting like the equity is perhaps NOT the fulcrum security ... any incremental confidence around the equity being in the money, would create significant upside optionality)

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    I am recommending a long equity position in American Capital (ACAS) at ~3.00 / share, which presents a compelling risk-reward proposition, with a total return potential of >100% over the next 3 - 6 months (based on probability tree matrix further below).  ACAS is (i) unloved (shareholder base temporarily in flux and short interest is still >15% of total outstanding shares creating a real element of surprise); (ii) mis-perceived (i.e. concerns around ongoing credit negotiations - currently in default on about half of its ~3.7Bln PF Sep net debt - is overdone and I believe will be resolved over the next couple weeks that will likely surprise "Mr. Market's" extremely pessimistic view - notable that bonds are trading well bid in the mid-80s vs the lows of 30 - 35 earlier this year w/ one of the tightest yields I've seen for a non-investment grade financial security suggesting the negotiations are coming to a head ... and also highlighting how the credit markets may be anticipating a near-term amendment, but equity has seemingly not reacted so far); (iii) mis-understood (i.e. generic Street view is that ACAS has a disproportionate mix of equity holdings and was overly aggressive on taking control positions at peak multiples - while this view is partially accurate, most of the "negativity" has already been factored into ACAS' current marked-down June 09 book value and more pragmatically, ACAS' underlying portfolio is showing real incremental improvements - more detailed discussion in the biz overview section below - YET Street has very muted future expectations and moreover, Street believes a run-down / liquidation scenario is a high probability scenario which I think is overly-punitive); and (iv) mis-valued (ACAS equity currently trades at around ~0.4x June 09 book value versus BDC comps including AINV, ARCC, PNNT at ~0.9x - note that this "June book value" has effectively marked the cost basis down to around ~59 cents versus initial "cost" which compares to other BDCs that have marks in the 65 - 85 cent range so arguably very punitive ... more notably, ACAS equity correspondingly trades at around 0.15x its "cost basis"). 

     

    While ACAS pessimists will argue that the business is fundamentally flawed and over-exposed to control positions consummated at peak multiples at the peak of the credit cycle, I'd argue that most of the downside + negative sentiment is largely baked in at current valuations (i.e. book value has already largely taken a fine knife to the "equity-like" securities) and, moreover, I think there a couple mis-perceptions that have created overly-negative sentiment - discussed further below) and there are a couple notable near-term upside surprises (largely given how low the hurdle has been set at this point).  Longer-term, I do NOT think the business is broken and ultimately think an equivalent book multiple to its peers can be realized as management regains credibility and confidence (NOTE that this multiple expansion scenario is pure upside and I'm NOT docking on this in my FV of around $6 / share as highlighted in my Base Case below).

     

    One often-overlooked call option to ACAS (which was ultimately the critical angle to the short thesis 12-mths back and largely came to fruition) is that outside of ACAS' core / private finance portfolio - i.e. >$7.9Bln of the $10.3Bln "cost basis" - the business sits on two high-octane (and I'd argue largely "free" given how negative the Street is on both of these items) call options that nobody appears to be is factoring in right now: (i) European finance division (cost basis of ~$1.3Bln and currently marked at ~$97mm - this is a very similar portfolio to ACAS' US corporate finance portfolio and ACAS is currently in negotiations w/ its creditors in a process that is being led by Miller Buckfire ... while I don't yet have an angle on how this process will turn out, my sense is that banks / creditors involved on the European side are more willing to "kick-the-can" down the road especially given the significant improvements in the European credit markets at large - as a result, the European call option could be perceived to be much more in-the-$ over the next couple mths and could be a significant source of upside value over the next couple qtrs if the global economy sees further improvements) and (ii) ACAS' structured products portfolio (cost basis of ~1Bln and currently written down to $174MM) could surprise to the upside given combination of CLO and CMBS holdings that have been quite reactive over the past 3 - 6 mths - while ACAS does not provide a great deal of information on these securities, the market has done a 180-degree about-face on these structured securities with ongoing / improved liquidity - witness Victoria Finance, a SIV that defaulted last year, sold ~$4.3Bln of CDO liabilities on Friday which highlights the increased volumes / price levels and appetite around these types of structured product portfolios. 

     

    SUMMARY THESIS:

    Overall, I view ACAS equity as a hyper call option on the credit markets (the past 3-mths in particular have seen significant upward moves in the credit markets which includes both large / liquid securities and I'm beginning to see real appetite for smaller / less-liquid securities) with multiple n-term catalysts (its worth noting that the BDC universe typically lags the more liquid / public universe by 3 - 6 months given the mix of Level 1 - 3 assets (but ultimately, given the tag lag, the September 2009 and December 2009 book value / marks should show incremental improvements versus the June 2009 low).  While there are n-term concerns and confusion around ACAS' ongoing credit negotiations (currently in default on approximately $2.25Bln of private / public bonds as well as its unsecured revolver), I think Mr. Market's sentiment / perception hurdle is very low at this stage and any compromise (I'm assuming a coupon bump up to 9 - 10%, additional security package and a more amendable amortization schedule) would be a significant positive surprise to equity holders (especially considering how negative the Street is at this stage).  What gives me more confidence around the (i) ongoing credit negotiations and (ii) n-term portfolio out-performance is both the recent traction mgmt has shown in paying down debt (two transactions announced in mid-Sep will likely result in >225MM of debt paydown and >35MM of gains vs the June 09 mark).  As a result, it's worth noting that the PF net debt balance as of September 2009 will likely be below $3.7Bln given cash balance improvements and recent asset sales (based on Q2 09 conference call disclosures and recent press releases). 

     

    More notably, there are ~13 - 15 core (i.e. >40MM in size) positions w/in ACAS' portfolio (note the total portfolio is >270 companies so very widely diversified) that I believe are high quality, liquid (i.e. saleable over the next 3 - 6 months) and should yield an incremental gain from the June 09 mark (note these 15 positions comprise ~$2.5Bln of ACAS' "Cost" portfolio or ~25% of "Cost").  My sense is that management has educated its creditors on the inherent value of these core positions and that creditors are more amendable; in addition, my sense is that ACAS' NAV will show incremental improvements over the next 2 - 3 qtrs and NAV will likely finish the year at / above $10 - $12 / share (vs ~$7.42 / share currently) which implies an additional $700 - $1,250MM of equity value (driven by portfolio performance - upside potential to this estimate could come via European Capital renegotiations and possibly further liquidity / improvements in the structured product portfolio).

     

    As referenced above and noted in more detail further below, viewing the portfolio from the bottom-up (80 / 20 rule), there are ~15 larger / liquid positions that I've done a decent amount of work on that comprise ~$2.5Bln of ACAS' ~$10.3Bln "Cost" portfolio (that I believe will result in gains from the June 2009 mark) that will provide greater confidence in the collateral.  Taking this logic one step further, its worth noting that PF for selling these 15 companies (noted above - a definite possibility over the next 3 - 6 months given how much information is readily available in these securities in particular), the PF net debt balance would be in the $1.25 - $1.5Bln range (this implies ACAS receives its full "cost basis" on these 15 companies which is a low probability BUT I'm noting it for optics sake given my views on the quality of these assets).  More notably, on the $1.25 - $1.5Bln of PF net debt (post the hypothetical sale of these securities), there would be approximately ~$7.5Bln of "cost" / value retailed in the ongoing portfolio (albeit - these would be more private / "mark-to-model" positions which is very similar to AINV / ARCC / PNNT portfolios).  Said a different way, for the equity to NOT be have any value, the recovery value on the hypothetical PF portfolio would have to be less than 18 cents on the $ ($1.33 mid-pt / $7.5Bln = ~18 cents).  Said a different way, for the equity to be worth $6 / share (Base Case), the recovery value on the remaining $7.5Bln of securities would have to be 40 cents on the $ (i.e. $1.7Bln of equity value / 285MM shares + $1.33Bln of net debt = ~$3Bln / $7.5 = 40 cents).  The pts above are simply being used there to highlight the possibility (which I think is exponentially increasing) of a virtuous cycle in ACAS (following what was arguably one of the worse / vicious cycles they went through over the past 6 - 12 months).  

     

     While I don't think ACAS deserves an equivalent multiple to its closest peers (~0.9x), the margin of safety is in applying ACAS' current Mr. Market multiple (0.4 - 0.6x) to its PF book value (which argues for a FV of around $5 - $7 / share or >100% above current price).  The upside case will be driven by potential multiple expansion to a level that mirrors BDC peers; if perception changes around ACAS and the market focuses more on the upside optionality of ACAS' book (i.e. most other BDCs do NOT have real embedded optionality from structured products nor European portfolio holdings - i.e. takes an asset focus vs liability focus as it did over the past 6 - 12 mths) and applies an equiv multiple of 0.9x to PF book value (or $10 / share or >200 - 300% upside) over the next 3 - 6 mths.

     

    ACAS MIS-PERCEPTIONS:

    While the BDC industry (ALD in particular) has received a fair amount of flack, three mis-perceptions have created significant margin-of-safety around ACAS and ultimately the hyper call option around fundamental operating performance that will likely be "less-bad-than-feared":

     

    Mis-Perception #1 - credit negotiation uncertainty: my sense is that this will come to a head in the very n-term and will be viewed favorably as it will take off the table the solvency risk / liquidation concern - note that most of the Street uses a liquidation analysis to drive their price targets ... I believe this cloud of confusion once removed should result in a re-valuation as the perception around the biz (longer-term liabilities better matched w/ longer- assets) will improve.  On this first point, its worth noting that the public bonds ($548MM in size are well bid in the mid-80s - tightest yield for a non-IG rated financial security which perhaps reflects credit leading equity in information and the belief that things are "less-worse-than-feared" and that there might be a positive compromise out in the n-term)

     

    Mis-Perception #2 - belief that ALD negotiation will be used as template for ACAS: the markets are generally looking at the recent ALD credit re-negotiation and using this as a possible template - BUT I think there is a high probability that the amendment will be less onerous for ACAS for the following reasons: (i) ACAS mgmt is arguably higher quality and portrays themselves in a position of relative strength vs ALD mgmt, (ii) ACAS is negotiating w/ three parties (banks, private institutions / largely insurance cos and public / largely hedge funds) as compared to ALD w/ 2 constituents which favors ACAS given a more fragmented lender base and more lopsided to "relationship" banks and institutions, (iii) recent ACAS events (sold two portfolio cos for >225MM for a >35MM gain as compared to the June 09 mark) will likely generate more goodwill and (iv) as the credit markets have shown further improvements, timing should be an incremental benefit to ACAS (esp as we consider lenders are probably more willing now to kick-the-can-down-the-road given how common this "kick-the-can" approach has been over the past 3 mths in particular)

     

    Mis-Perception #3 - ACAS portfolio is more toxic than BDC peers: while there is a common belief around ACAS (some of which I'd fully admit was true 6 - 12 mths ago when the marks were closer to "cost") that they took greater risk via control positions at the peak of the market, I'd argue that (i) the ACAS portfolio has been written down much more aggressively than its peers (currently at around 59 cents of original cost as of June book value calc which compares to 65 - 85 on its closest peers) and (ii) given the more conservative marks, the ACAS portfolio has significantly more upside optionality over the next 3 - 9 mths (while the portfolio mix explains some of the disparity, I'd argue they have taken relatively conservative marks as of June 2009 on the whole).  More pragmatically, I've done a more thorough analysis on 15 of ACAS' larger (defined as >40MM) and liquid holdings and the conclusion is that there will very likely be a 5 - 10% increase in its NAV for the Sep 09 (compared to June) qtr which should result in >$1.50 - $3.00 / share of NAV improvement (based on approximately 285MM shares). 

     

    SUMMARY CAP TABLE (JUNE 2009):

    It's worth pointing out just how vicious the credit cycle has been on ACAS (probably easiest to tell the 1st part of the story through the NAV / share moves).  At YE 2007, the PF BV / share was around $26 / share.  At the end of 2008, it finished the year at around $12.50 / share.  As of June 2009, the BV / share currently sits at around $7.42 / share (or approximately 29% of peak).  Interestingly (and noted above), June 2009's BV is marked at around 59 cents (vs a total implied "Cost" of ~$10.3Bln).  Mr. Market is currently valuing the shares in the low $3 / share range which implies 0.15x of "Cost" basis.

     

    The Cap table below effectively highlights four classes of debt securities: (i) ~$2.0Bln of securitizations (NOT in default and NOT in negotiations) - non-recourse and are over-collateralized at a ratio of around 1.27x, so the $2Bln of securitizations have a claim on around $2.5Bln of their investment book roughly split 50/50 against the senior/senior sub notes, (ii) ~$1.4Bln revolver (held by large relationship institutions), (iii) $548MM of public notes (mostly held by special situations hedge funds as well as insurance cos), (iv) $311MM of private notes (mostly held by insurance cos).  Two notable recent updates from the company: (i) cash balance as of the Q2 call in early August was around $300MM (up from $180 - $190MM as of June 09) and (ii) 2 recent portfolio sales (totaling around $220 - $250MM) were completed in September with the likely use of proceeds to be used for debt pay-down.  Given these two updates, its worth noting that the PF September 2009 NET debt balance is now around $3.7Bln.  While there is still a significant amount of wood to chop, my only point is that goodwill is likely being built by management and perception around the business making it through the cycle has arguably been incrementally improved. 

     

    Securitizations             1,992

    Private Notes              311
    Public Notes                548
    Unsecured Revolver    1,388

    Total General Unsecured  Debt  =  $2,247 X 85 cents at market = $1.9Bln

     

    Shares Out                  284

    Share Price                  $3.20 / share

    Market Cap                  $906

     

    Cash(1)                       530

    TEV                            4,615  

    (1) Q2 call and asset sales

     

    SUMMARY BIZ OVERVIEW:

    The graph below summarizes ACAS' business mix.  As highlighted, based on the June 2009 mark, >35% of ACAS book is comprised of senior debt, ~35% subordinated debt and ~30% "equity-like" securities.  As compared to ALD, ACAS has a more attractive / balanced mix of senior loans and subordinated notes (ALD is much more heavily weighted to the junior securities).    

     

     

    Original

    Jun-09

    Effective

    % of

     

     

    Cost

    FV

    Mark

    Portfolio (2)

    Snr Debt

     

    $3,394

    $2,150

    63.3%

    35.3%

    Subordinated Debt

     

    $2,816

    $2,138

    75.9%

    35.1%

    "Equity-Like" Securities(1)

     

    $4,085

    $1,810

    44.3%

    29.7%

    TOTAL

     

    $10,295

    $6,098

    59.2%

    100.0%

    (1) Includes preferreds, warrants and common equity in affiliate and non-affiliate portfolio cos

    (2) Based on current June 2009 mark

     

     

     

     

     

     

    There are effectively three levers of value to the ACAS portfolio (note that Levers 2 and 3 have effectively been written down to arguably "free call option" levels BUT that I think have real potential for n-term upside (note that this upside potential is margin-of-safety to the trade and will be pure upside if we're surprised). 

     

    Lever 1 - Core / private portfolio: comprises >200 portfolio companies w/ an average investment size of ~$40MM.  Below, I've provided a summary snapshot of ~15 portfolio companies that are liquid (in many cases quoted / on-the-run) and I believe have significant near-term upside potential (versus June 2009 mark) if sold.  Note that most of the remaining positions w/in ACAS portfolio (i.e. those that are not quoted) are marked-to-model.  While the Street (during times of skepticism) likes to throw mud at this mark-to-model approach given the negative Level 3 taint, my view is that's its an equivalent valuation approach to the other BDCs performed quarterly (using a consistent approach) and affirmed by a 3rd party (the valuation exercise typically takes into consideration underlying portfolio performance, notable changes in mgmt outlook as well as comparable company trading levels and discount rates - overall, I agree w/ ACAS mgmt's assessment on their Q2 call which noted they lag both downturns and recoveries BUT ultimately see the flow-through on a 3 - 6 mth trailing basis - which suggests the flow-through will be seen in Q3 and Q4 marks)

     

    We've gone through 15 of ACAS' larger positions (as well as handful that are more "on-the-run") and the takeaway is that there is that (i) the ACAS portfolio is NOT in dire straits, (ii) there is >$2Bln of realizable value over the next 3 - 6 months and (iii) there is real upside potential from these more liquid / on-the-run names in particular.  While I think these securities could be sold over the next 3 - 6 months, the ultimate pt is that the underlying collateral in the "quotable" portion of their portion is on pretty solid footing.  Factoring in the remaining >200 portfolio companies / structured products, etc that comprise the remaining ~7.8Bln of ACAS' "Cost", the hurdle rate is effectively a ~20 cent recovery (anything above that amt equates to equity upside).  As detailed further below, my view is that a 40 - 60 cent recovery (even in a liquidation scenario) is feasible and there would likely be strategic interest in portions (or all) of their portfolio from other BDCs / financial institutions (or $1.5Bln - $3Bln of value to the equity or $5.25 - $10.50 / share of value).  However, the biggest risk in a liquidation scenario is the time leakage (as it could take 1 - 3 years to fully liquidate the portfolio)

     

    Category #1: Debt (mostly snr) that's liquid / sellable and would yield a gain from June 09 mark

    1. Orchard Brands ($366.1MM carried at $243.2MM) >> quoted at ~70 so ~30 - 35MM of upside
    2. Ranpak snr debt ($139.3MM carried at $99.2MM) >> quoted in the low 90s so ~30 - 40MM of upside
    3. Ford Motor Cos revolver ($107MM carried at $80MM on books) >> quoted in low 90s so ~17MM upside
    4. Inovis ($88MM carried at $82.6MM) >> solid biz and sellable
    5. National Processing Co ($52.8MM carried at $32.9MM) >> quoted at 79 so ~9MM upside
    6. TransFirst ($49.6MM carried at $30.3MM) >> quoted at 78 so ~8MM upside
    7. French Lick Snr Debt ($32MM carried at $18.3) >>quoted 65 - 70 so $2 - 3MM upside
    8. KIK 2nds ($21.5MM carried at $3.6MM) >> quoted >50 so ~$7.5 - 10MM upside
    9. Jacobson 1sts ($19MM carried at $11.7MM) >> quoted 85 - 90 so $4 - $6MM upside

    TOTAL Category #1 (9 positions) = $850MM of Cost w/ >$125MM of embedded upside in n-term

     

    Category #2: Control Positions in which I know / like the biz and believe there could be a liquid / n-term sale at a premium

    1. American General Agency (AGNC - publicly traded) - ACAS owns approx 5MM of 18.8MM total shares out ($150MM of value - up $40MM since June)
    2. Mirion Technologies (MION) S-1 filing is pending IPO listing >> solid biz >> $314MM of value on books (of which >$145MM in "equity")
    3. Rug Doctor (RDR Holdings) >> very solid / stable biz >> $385MM invested
    4. WIS Holdings >> solid biz >> $236MM of value (of which >130MM in equity like securities)
    5. Stadium Mgmt Group (SMG) >> good biz >> $228MM of value
    6. TestAmerica >> decent biz >> over $250MM invested

    TOTAL Category #2 (6 positions) = around $1.6Bln of "Cost" w/ ability to either sell / re-capitalize or exit the respective position (w/ decent upside risk to meeting / exceeding current June 09 mark)

     

    Levers 2 & 3 - European Capital and Structured Products: as noted above, these two levers can be viewed as pure option value and are margin-of-safety to the trade (key n-term events will be around credit re-negotiation as well as underlying US private portfolio performance).  In total, the cost basis of these two levers is >$2.2Bln as is currently being marked on the ACAS book at around $271MM (or approximately 12% of cost).  As noted further above, European Capital is currently going through a restructuring process and concurrently, ACAS is seeking out strategic alternatives as well with Citigroup - note that while the European vehicle also has a fair mix of "mark-to-model" small portfolio companies, the European credit markets have also rebounded quite handsomely (even more so than the US I'd argue) and there may be upside opportunities in the n-term.  Re: the structured product portfolio, this is mostly comprised of CLO and CMBS securities (while the 10q and 10k provides summary information, details are a bit lacking which makes it hard to value the 5 - 7 largest securities that drive the portfolio).  However, while the information is sparse, it's safe to say that there might be a $150 - $300MM mark-up in this portfolio given some of the recent / significant moves in the CLO and CMBS markets (more liquidity).

     

    UPSIDE / DOWNSIDE:

     

    UPSIDE (35% probability): assumes the credit negotiations successfully come to a conclusion over the next 1 - 2 months.  Applying a 0.8 - 1x multiple to PF book value (equivalent multiple to its closest peers), equates to a $10 - $12 / share FV (or approx 200% - 300% upside versus current $3 / share price).  This scenario assumes I'm directionally correct that the next 3 - 6 mths will see a $2.50 - $4.50 / share expansion in NAV from the current ~$7.50 / share mark as of June 2009

     

    BASE (60% probability): assumes the credit negotiations successfully come to a conclusion over the next 1 - 2 months.  Assuming the naysayers are right (i.e. ACAS deserves a discounted multiple to peers that trade at around 0.9x - 1.0x book value), and applying a consistent current "Mr. Market" multiple at around 0.4x - 0.5x to PF book value, this equates to $5 - $7 / share of FV (or approx 65% - 135% upside).  Base Case assumes NO multiple expansion which I think is very unlikely (witness PNNT / AINV / ARCC - as perception changes, multiples for each of these BDCs has expanded to ~1.0x book value).  This scenario assumes I'm directionally correct that the next 3 - 6 mths will see a $2.50 - $4.50 / share expansion in NAV from the current ~$7.50 / share mark as of June 2009

     

    DOWNSIDE (5% probability): assumes the credit negotiations fail (I view this as less than a 2.5% probability but for conservatism, I've assumed 5% in the matrix tree) and the company is forced to go through an orderly liquidation.  Given my views that there is >2Bln of "markable / quotable / sellable" securities, I believe the debt load can effectively be reduced to around 1.5Bln within the next 3 - 6 months (offsetting PF cost basis of the portfolio at that stage is around ~7.5Bln post these asset sales).  At which pt, the bet is a 1 - 3 year orderly liquidation bet.  The equity hurdle to be in-the-$ is effectively 20 cents ($1.5 / 7.5Bln).  My belief is that IF the liquidation scenario were to occur, you would see a handful of larger / strategic bids for the entire (or portions) of the biz (perhaps from BDC peers or financial institutions looking to expand into middle-market lending).  My liquidation scenario assumes 40 - 60 cent recovery on the remaining $7.5Bln which implies $3 - $4.5Bln recovery (equity receives everything above the PF debt balance of $1.5Bln).  The biggest risk w/ the downside scenario is timing.  Assuming the process takes 1 - 3 years and applying a 20% discount rate, the recovery falls to approximately $2.2 - $3.2Bln which implies an equity value of around $2.50 - $6.00 / share (decent margin-of-safety given current share price at ~$3 / share).  We can debate the merits of this Downside Case further but I think the critical difference to my view as compared to the Street's is that there is significant value that can be realized in the first 1 - 3 months (given 15 portfolio companies are quotable / liquid / saleable which drives between $2 - $2.5Bln of value).  Given how the private bonds have traded (mid-80s currently), I'd argue that creditors are getting much more comfortable w/ the underlying collateral and mimic the view above

     

    CATALYSTS:

    N-Term Completion of Credit Negotiations (2 - 6 weeks):  my sense is that it's closer to completion and should be on more favorable terms than ALD

     

    N-term Portfolio Out-Performance (4 - 6 weeks): the Sep 2009 mark on portfolio will likely be significantly higher than "Mr. Market" fears / Street expectations (reports Nov 10th)

     

    N-Term Positive Technicals (4 - 6 weeks): Consensus is that's its pretty much hated and heavily shorted; Still very much an orphan BDC at this pt

     

    N-Term Asset Sales (2 - 6 months): could incrementally shift perception to the upside (as noted in the write-up above, there are ~$2.5Bln of securities that I believe are liquid / saleable over the next 3 - 12 months at a premium valuation to the June 2009 mark) as ACAS continues to pay down debt and take gains on the sales (versus June 09 mark / muted expectations)

     

    M-Term Hyper Call Option (3 - 6 months): Leveraged caboose trade to credit continuing to rally (typically lags credit down and up moves by 3 - 6 months)

     

    L-Term Embedded Margin-of-Safety: Mr. Market mark significant disct to Cost (~0.4x) and current "Mr. Mkt" value significant disct to "Cost" basis mark (~0.15x)

    - Currently trading at ~0.4x book (of which book value has been marked down to ~59 cents)

    L-Term Possibility of Regaining Confidence (3 - 12 months): Mgmt purchases more equity post any creditor re-negotiation in sign of support (and helps in re-gaining credibility / confidence ... right now, Street is acting like the equity is perhaps NOT the fulcrum security ... any incremental confidence around the equity being in the money, would create significant upside optionality)

     

    RISKS:

     

    N-term risk: Perception becomes reality in financials - I'll admit that perception / confidence have a significant impact on BDCs and financial institutions so should not be taken lightly.  As of right now, however, I think ACAS' position is NOT un-tenable and believe a comprise will be met re: the ongoing negotiations w/ creditors

     

    N-term risk: Negotiations turn more aggressive / expensive (low likelihood in my view given the fact-pattern so far)

     

    M-term risk: FCF of biz is inadequate to support (low likelihood as I think asset sales will provide adequate n-term liquidity to pay-down the debt load and service interest expense)

     

    L-term risk: Orphan retail investor base; how does ACAS mgmt regain credibility? (longer-term concern)

    Catalyst

     

    N-Term Completion of Credit Negotiations (2 - 6 weeks):  my sense is that it's closer to completion and should be on more favorable terms than ALD

     

    N-term Portfolio Out-Performance (4 - 6 weeks): the Sep 2009 mark on portfolio will likely be significantly higher than "Mr. Market" fears / Street expectations (reports Nov 10th)

     

    N-Term Positive Technicals (4 - 6 weeks): Consensus is that's its pretty much hated and heavily shorted; Still very much an orphan BDC at this pt

     

    N-Term Asset Sales (2 - 6 months): could incrementally shift perception to the upside (as noted in the write-up above, there are ~$2.5Bln of securities that I believe are liquid / saleable over the next 3 - 12 months at a premium valuation to the June 2009 mark) as ACAS continues to pay down debt and take gains on the sales (versus June 09 mark / muted expectations)

     

    M-Term Hyper Call Option (3 - 6 months): Leveraged caboose trade to credit continuing to rally (typically lags credit down and up moves by 3 - 6 months)

     

    L-Term Embedded Margin-of-Safety: Mr. Market mark significant disct to Cost (~0.4x) and current "Mr. Mkt" value significant disct to "Cost" basis mark (~0.15x)

    - Currently trading at ~0.4x book (of which book value has been marked down to ~59 cents)

    L-Term Possibility of Regaining Confidence (3 - 12 months): Mgmt purchases more equity post any creditor re-negotiation in sign of support (and helps in re-gaining credibility / confidence ... right now, Street is acting like the equity is perhaps NOT the fulcrum security ... any incremental confidence around the equity being in the money, would create significant upside optionality)

    Messages


    Subjectdefault probability
    Entry09/28/2009 03:54 PM
    Membertyler939

    Thanks for a detailed writeup.  I've got a couple of questions:

    How did you get to a 2.5% (or 5% after safety factor) probability for the credit negotiations failing?  Of the sell side reports I've seen, Stifel, pointing to the fact that only one group of creditors accelerated, seems to think there's about a 30% chance of Chapter 11, and the others are more pessimistic.

    How much time can the company buy with a negotiated deal with creditors?  What I'm really driving at is whether the can will be kicked far enough down the road to give ACAS time to do orderly sales of enough of their portfolio to pay down debt.


    Subjectsignificance of Imperial Supplies sale?
    Entry10/14/2009 10:38 AM
    Membertyler939

    todd, do you think there's any significance to today's sale of Imperial Supplies.  I know it's too small a portion of ACASs portfolio to be meaningful by iteslef, and we don't know what Grainger paid, but does this say anything about ACAS's strategy (e.g., does it show they're actively working to sell assets to pay down the debt coming due in the next 12 months)?


    SubjectRE: RE: significance of Imperial Supplies sale?
    Entry10/14/2009 12:54 PM
    Membertyler939

    Sorry to ask what may be a silly question, but, when you say you've been doing more work on ECAS, that was just a typo, and you meant ACAS, right?

    Also, when you say that the book markups are the tail to the trade, do you mean that your primary thesis is a successful outcome to the credit negotiations, with book value markups adding marginally to the upside?


    Subjectdebt modification fees
    Entry10/21/2009 05:02 PM
    Membertyler939

    Regarding misperception #2, ALD paid a fee of 17% of the defaulted debt held by the lenders with which it renegotiated.   How much, if anything, do you expect ACAS to have to pay upfront to get its lenders to amend?  And, if you do expect an up-front payment, do you think the holders of the October 2012 notes will get any of that (unlike ALD, where the public debtholders did not amend, here the public debt is in default)?

    To follow up on an earlier comment I made, I did find an analyst who is far more bullish than the street on the debt negotiations, Matthew Howlett at Fox-Pitt.


    SubjectALD / ARCC
    Entry10/26/2009 10:14 AM
    Memberpokey351

    Any thoughts on the ALD / ARCC deal as it relates to ACAS.  It seems as if someone could acquire ACAS and lower their cost of capital as well...

    Also, it looks like ACAS is reporting on November 3rd.

    thanks Todd


    SubjectRE: RE: ALD / ARCC
    Entry10/26/2009 10:26 AM
    Memberpokey351

    thanks for the prompt response - i agree with your analysis


    Subjectworkout and operating results
    Entry11/03/2009 09:58 PM
    Membertyler939

    Great call on the workout, todd1123.  Of course, I believed you all along.  8)

    No question they got a better deal than ALD did when you consider the fees involved.  Assuming the agreement in principle is approved, what do you think of the interest rate they're paying (L+9.5%, declining as the balance is paid down) and the security interest supporting the reworked loan?  Does that leave ACAS with room to operate going forward?

    I didn't see any major surprises in the operating results (OK, secretly I'd hoped for a writeup of ECAS, but I wasn't really expecting that).  It looks like earnings and book value came out pretty much where the street was expecting them, and they seemed to indicate that they're on plan with asset sales.  Do you have any thoughts there?


    SubjectNet Operating Loss Carryback Extension
    Entry11/06/2009 01:00 PM
    Membertyler939

    Todd, of the ACAS portfolio companies you've looked at, do you know offhand whether any of them are likely to benefit materially from the extension of the NOL carryback provision that was just signed into law?  ACAS, as a BDC, won't benefit directly, but the tax law change might free up some liquidity at some of the companies in its portfolio.


    SubjectRE: Net Operating Loss Carryback Extension
    Entry11/06/2009 04:22 PM
    Membertyler939

    Just in case anyone reading this is not familiar with the NOL rules, before today, most companies could use losses from an active business (called net operating losses, or NOLs) in a current period to offset taxable income from the previous two years (thus getting a refund) or to offset taxable income earned in any of the next 20 years (reducing future tax bills).  The change just signed into law lets businesses deduct net operating losses incurred in 2008 and 2009 (but not both) against income earned going back five years.  Thus a company that paid taxes for the years 2003 through 2006 (which it didn't already offset with NOLs from a later period) and incurred NOLs in 2008 and 2009 would be able to obtain a refund.

    This is especially important for cash-strapped companies, because it brings cash in immediately.  Note that any NOLs from 2008 and 2009 carried back to 2003 through 2006 will not then be available to offsett future earnings.


    SubjectPrepack Solicitation
    Entry11/27/2009 02:37 PM
    Membertyler939

    The company just (Nov 27 pm) filed an 8-K saying that they will solicit consents to a prepackaged bankruptcy plan along with the debt exchange, and that the lenders of their revolver have agreed to support that plan as part of a Lock Up Agreement.  They also said that "American Capital and the Consenting Creditors have agreed in the Lock Up Agreement, among other things, to support the Exchange Transaction, Plan and reorganization as previously disclosed in the restructuring proposal."  I know their first press release on the creditor forebearance mentioned the possibility of a bankruptcy filing, but I don't remember anything in which the company said that they definitely planned to file if the exchange is not sufficiently subscribed.

    I'm trying to dig up more information, and I'll be back to give my thoughts on this development over the weekend, but todd, if you have any comments on what this means for the prospects of the exchange succeeding or how a bankruptcy proceeding would change the valuation of the company's assets or the expected recovery on the stock and bonds, I'd love to hear them.


    SubjectRE: RE: Prepack Solicitation
    Entry12/01/2009 10:12 PM
    Membertyler939

    I don't know that I have any thoughts, honestly, since I can't dig up much detail.  I'm still long, so I wouldn't say I'm negative at all, but I have started biting my nails again since I started investing in distressed companies.  I actually like the dual approach if the terms of the prepack are the same as the terms of the exchange.  

    I agree, it's unlikely the remaining banks will hold out.  I'm always worried about exchange offers with high percentages required, though, in the age of CDS's.  I haven't found anything on the holders of the private notes, can you tell us why you're estimating 12-15 institutions hold the debt?  Also, have you heard of any holders of the private debt, or large holders of the public bonds, discussing their views of the deal ACAS negotiated with the banks (I have not).

    Finally, operationally, have your thoughts changed at all since your 11/3 writeup, especially regarding near-term asset sales?

    I wish I could add more to the discussion, but, outside thinking that ACAS did well in general in their workout terms and agreeing that there's a lot of potential for write-ups either on their model or on sales, I don't have much to say.  I am, as always, grateful for your well-thought out responses.

     


    SubjectRE: acas - update
    Entry01/07/2010 11:50 AM
    Membertyler939

    Thanks.  Any comments on the negative VIC writeup?


    SubjectRE: RE: RE: acas - update (psec / arcc / ald)
    Entry01/21/2010 08:18 AM
    Membertodd1123

    Prob saw already, but interesting developments around Prospect Capital proposing a counter-bid to ALD (at around ~5.00 or 0.7x book value) ... 8k from PSEC pasted below from yesterday

    Notable as it should support a downside valuation of >5.50 / share on current Sep 09 ACAS book value of ~7.80 (... on my n-term PF book value of >10 equates to >7.00 / share)

    _____________________________

    Prospect Capital Corporation Delivers Letter to Allied Capital Corporation

    NEW YORK - (Market Wire) - January 20, 2010 - Prospect Capital Corporation (NASDAQ: PSEC, "Prospect") announced today that it has delivered a letter to the Board of Directors of Allied Capital Corporation ("Allied") in connection with its offer to acquire Allied. Set forth below is the full text of the letter:

    January 20, 2010

    Board of Directors
    c/o John M. Scheurer
    Chief Executive Officer and President
    Allied Capital Corporation
    1919 Pennsylvania Avenue N.W.
    Washington, DC 20006

    Ladies and Gentlemen:

              We were disappointed by your summary rejection of our offer to acquire Allied at a significant premium to the implied value offered to Allied's shareholders by Ares Corporation. The cavalier manner in which you have dealt with our bona fide offer is a continuation of your stonewalling over the last nine months in the face of our numerous expressions of serious interest in acquiring Allied.

              We do not think it would be productive at this time to respond to each and every point made in the Form 8-K filed by Allied yesterday. However, the Form 8-K misleadingly fails to disclose several material facts-made clear in our offer-that directly refute your stated reasons for rejecting our offer out of hand.

     

     

    Superior Current Value. Contrary to your assertion that we are offering only a "small premium" to the Ares merger, our offer provides significantly superior current value for Allied shareholders. More specifically, based on an after-market trading price of $12.93 per share of Prospect common stock on January 19, 2010, Prospect's offer represents a value of $4.98 per share of Allied common stock, which is an approximately 10% premium to the $4.53 value per Allied share implied by an exchange ratio of 0.325 of a share of Ares common stock in the Ares merger (based on a $13.94 after-market trading price of Ares common stock price on January 19, 2010).

     

     

    Superior Dividend Payments. You have asserted without any support that Prospect's offer presents "significant risks" relating to the combined company's ability to maintain dividend payments. In fact, Ares cut its dividend in 2009 by 17% while Prospect has increased its dividend in each of the 21 quarters since its 2004 initial public offering. Prospect pays a $0.40875 per share dividend, compared to $0.35 per share for Ares.

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    Based on our proposed exchange ratio of 0.385 of a share of Prospect common stock for each share of Allied common stock, our offer would provide Allied shareholders with a dividend of $0.157 per share of Allied common stock as compared with a dividend of $0.114 per share of Allied common stock under the Ares merger.

     

     

     

    Superior Access to Additional Debt and Equity Capital. Contrary to your professed concern that Prospect's offer poses "significant risks" concerning future access to the capital markets, we believe that based on Prospect's track record, a Prospect/Allied combination would provide Allied shareholders with superior access to debt and equity capital markets. Prospect has successfully completed 13 equity offerings since 2004, including ten offerings aggregating more than $350 million since the inception of the credit dislocation in mid-2007 and six equity offerings aggregating more than $200 million during 2009. Unlike Ares, Prospect increased both its credit facility size and its number of lenders over the last year.

     

     

    Superior Leverage Profile. In addition, your Form 8-K fails to acknowledge the point made in our offer that Prospect currently has a debt/equity ratio of less than 0.1x, which, pro forma for the proposed Prospect/Allied combination, would provide significant de-leveraging for Allied shareholders. Ares, by comparison, has a debt/equity ratio of approximately 0.7x, which Prospect believes makes an Ares/Allied combination riskier for Allied's shareholders. Further, Prospect enjoys investment grade ratings with Standard and Poor's and Moody's for Prospect's corporate rating and credit facility rating, respectively, which we believe Allied's lenders and shareholders would view positively.

              As you know, we have relied solely on Allied's public documents in making the offer, which is conditioned on access to due diligence information. To the extent that you can provide us, which your agreement with Ares allows you to do, with information that demonstrates that a higher valuation of Allied is justified, we would be prepared to discuss an increase in the consideration to be paid in our offer.

              In this context, your criticism of our offer based on our need to conduct customary due diligence is at best disingenuous. After all, it is within your own control to provide us access to the information you have already provided to Ares. We are confident that we could complete our due diligence review expeditiously.

              In light of all of the foregoing, we believe your contention that our offer does not constitute a "Superior Proposal" under the Ares merger is both unfounded and contrary to the interests of Allied's shareholders.

              We remain convinced that our offer represents a compelling strategic combination that we believe would generate superior value for Allied shareholders in comparison to the Ares merger. We remain hopeful that Allied's Board of Directors will see the value of our offer and act in the best interests of Allied's shareholders. We urge you to immediately discharge your fiduciary duties and to reconsider your refusal to provide Prospect with access to due diligence that could result in even higher value to Allied's shareholders.

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         We look forward to hearing from you.

     

     

     

     

     

     

     

     

     

    Very truly yours,

     

     

     

     

     

     

     

     

     

     

     

    Prospect Capital Corporation

     

     

     

     

     

     

     

     

     

     

     

    By:
    Name:

     

    /s/ M. Grier Eliasek

     

    M. Grier Eliasek

     

     

     

     

    Title:

     

    President and COO

     

     

     

     

     

     

    cc:

     

    Gary Swidler, BofA Merrill Lynch

     

     

    Ian Simmonds, BofA Merrill Lynch

    ABOUT PROSPECT CAPITAL CORPORATION

    Prospect Capital Corporation (www.prospectstreet.com) is a closed-end investment company that lends to and invests in private and microcap public businesses. Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments.

    We have elected to be treated as a business development company under the Investment Company Act of 1940 ("1940 Act"). We are required to comply with a series of regulatory requirements under the 1940 Act as well as applicable NASDAQ, federal and state rules and regulations. We have elected to be treated as a regulated investment company under the Internal Revenue Code of 1986. Failure to comply with any of the laws and regulations that apply to us could have an adverse effect on us and our shareholders.

    Forward-Looking Statements

    This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, whose safe harbor for forward-looking statements does not apply to business development companies. Such forward-looking statements may relate to us and/or our industry and address matters that involve risks and uncertainties. Forward-looking statements reflect our current views and assumptions with respect to future events, operations, business plans, business and investment strategies and portfolio management, the performance of our investments and our investment management business and the economy. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs, and our assumptions. Words such as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projected," "projections," "plans," "seeks," "anticipates," "anticipated," "should," "could," "may," "will," "designed to," "foreseeable future," "believe," "believes," "currently anticipates," "currently believes" and "scheduled" and variations of these

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    words and similar expressions are intended to identify forward-looking statements. Our actual results or outcomes may differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

     

     

    our future operating results;

     

     

     

     

     

     

    our business prospects and the prospects of our portfolio companies;

     

     

     

     

     

     

    the impact of investments that we expect to make;

     

     

     

     

     

     

    our contractual arrangements and relationships with third parties;

     

     

     

     

     

     

    the dependence of our future success on the general economy and its impact on the industries in which we invest;

     

     

     

     

     

     

    the ability of our portfolio companies to achieve their objectives;

     

     

     

     

     

     

    difficulty in obtaining financing or raising capital, especially in the current credit and equity environment;

     

     

     

     

     

     

    the level and volatility of prevailing interest rates and credit spreads, magnified by the current turmoil in the credit markets;

     

     

     

     

     

     

    adverse developments in the availability of desirable loan and investment opportunities whether they are due to competition, regulation or otherwise;

     

     

     

     

     

     

    a compression of the yield on our investments and the cost of our liabilities, as well as the level of leverage available to us;

     

     

     

     

     

     

    our regulatory structure and tax treatment, including our ability to operate as a business development company and a regulated investment company;

     

     

     

     

     

     

    the adequacy of our cash resources and working capital;

     

     

     

     

     

     

    the timing of cash flows, if any, from the operations of our portfolio companies;

     

     

     

     

     

     

    the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments,

     

     

     

     

     

     

    authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board, the Securities and Exchange Commission, Internal Revenue Service, the NASDAQ, and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business;

     

     

     

     

     

     

    our ability to manage future growth;

     

     

     

     

     

     

    our dependence on Prospect Capital Management's key management personnel;

     

     

     

     

     

     

    the highly competitive market for investment opportunities in which we operate;

     

     

     

     

     

     

    uncertainty as to the value of our portfolio investments;

     

     

     

     

     

     

    additional risks to which senior securities, including debt, expose us;

     

     

     

     

     

     

    changes in interest rates;

     

     

     

     

     

     

    our need to raise additional capital to grow because of the requirement that we distribute most of our income;

     

     

     

     

     

     

    the lack of liquidity in our investments;

     

     

     

     

     

     

    fluctuations in our quarterly results;

     

     

     

     

     

     

    fluctuations in our net asset value;

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    potential conflicts of interest and their impact on investment returns;

     

     

     

     

     

     

    our incentive fee's impact on the types of investments made by Prospect Capital Management;

     

     

     

     

     

     

    changes in laws or regulations;

     

     

     

     

     

     

    risks relating to our operation as a business development company;

     

     

     

     

     

     

    risks relating to our investments and securities

     

     

     

     

     

     

    the integration of Patriot or other businesses we acquire or new business ventures we may start;

     

     

     

     

     

     

    uncertainty as to whether Allied will enter into and consummate the proposed transaction with Prospect on the terms set forth in our offer; and

     

     

     

     

     

     

    the risks, uncertainties and other factors we identify in "Risk Factors" and elsewhere in our filings with the SEC.

    Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this press release should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in "Risk Factors" and elsewhere in our filings with the SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of such filings.

    Additional Information about the Proposed Transaction and Where to Find It:

    This press release is not a proxy statement or a solicitation of proxies and does not constitute an offer to sell or a solicitation of an offer to buy any securities. This press release relates to a business combination transaction with Allied proposed by Prospect, which may become the subject of a registration statement filed with the Securities and Exchange Commission (the "SEC"). This material is not a substitute for the prospectus/proxy statement Prospect would file with the SEC regarding the proposed transaction if such a negotiated transaction with Allied is reached or for any other document which Prospect may file with the SEC and send to Allied or Prospect shareholders in connection with the proposed transaction. INVESTORS AND SECURITY HOLDERS OF ALLIED AND PROSPECT ARE URGED TO READ ANY SUCH DOCUMENTS FILED WITH THE SEC CAREFULLY IN THEIR ENTIRETY IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. Such documents would be available free of charge through the web site maintained by the SEC at www.sec.gov or by directing a request to the contact listed below.

    Prospect and its directors, executive officers and other persons may be deemed to be participants in any solicitation of shareholders in connection with the proposed transaction. Information about Prospect's directors and executive officers is available in Prospect's proxy statement for its 2009 annual meeting of shareholders, which was filed with the SEC on October 16, 2009. Other

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    SubjectThe stock has been all over the map lately
    Entry02/01/2010 01:16 PM
    Membertyler939

    Any insight into what is going on?


    SubjectUpdate?
    Entry02/23/2010 07:39 PM
    Memberele2996

    I would like to hear your further thoughts on the company.

    Thanks


    SubjectRE: RE: Update?
    Entry02/27/2010 10:01 PM
    Memberele2996

    Thank you.

    I own this also. I hope that we are correct.


    SubjectACAS - post Paulson raise
    Entry04/19/2010 10:31 AM
    Membercreditguy

    Todd, any new thoughts on how you expect this story to play out in terms of upcoming catalysts etc.?  Paulson raise looks good -- also hearing other private equity firms are marking up their private equity portfolios on the order of 30% which should bode well for ACAS' likely 1Q reported NAV.  That plus continuing recovery in leveraged loan/high yield market -- middle market seems to be catching a new bid recently given that's the only place distressed accounts can find low dollar priced loans.  What's your current thinking on the name in terms of a current target price and current thoughts on upcoming catalysts?


    SubjectRE: RE: ACAS - post Paulson raise
    Entry04/19/2010 01:29 PM
    Membercreditguy

    I am probably a little lower than your  base case as a short term target.  ST target is $7 to $8.  25% increase to NAV vs. year end seems a little aggressive to me but possible for the recently ended quarter.  Longer tem I think it's certainly posssible.  I wonder what occasioned the desire to raise equity here - my inference would be that their ability to reach a deal with the noteholders hinged on an equity raise.  I agree with you Street is still way too negative on the name.  There is close to a 0% chance in my opinion that this Company files given equity raise, the fact that bonds are trading around 102,  the fact that the bid for middle market loans is dramatically improving as are middle market private equity values etc etc.  The stock is still trading at a large discount to NAV and more importantly there is a high liklihoood NAV is headed higher -- perhaps substantially higher.  I am surprised stock is not up more today -- largely retraced its gains.  Only thing I can guess is equity market is focused on the price of the raise ~$5.  That is irrelevant -- what is more relevant is this allows them to shore up balance sheet perhaps paving the way for a less costly restruturing or refinancing which will prove much more valuable to shareholders than the currently high cost of equity.  I am a buyer here as I think the stock should be up a lot more.  Any additional thoughts?  Thanks again.


    SubjectACAS - recut out of court deal?
    Entry04/23/2010 09:15 PM
    Membercreditguy

    Todd, one theory I've heard expressed on the rationale behind the ACAS Paulson raise is that they did it to enhance their ability to get the out of court deal done perhaps with an eye towards refinancing the capital structure on terms significantly better than the proposal publicly outlined.  In today's market that deal is clearly a "non-market" deal (i.e. way too onerous) and ACAS could probably get a better deal if they could take out the holdouts.  Also, with the Paulson raise, sale of Mirion, retained equity from non paying a dividend, asset sales of on the run bank debt like Carestream, Kik, and Ford Motor etc. they can make substantial progress to getting back into compliance with their required debt equity thresholds.  My thought is you are likely to see ACAS delever, be left with a restructured debt deal less onerous than contemplated by most,   I think there's also a chance they'll be positioned to reinstitute a dividend sooner than later.  I also think you will see them write up their private equity and CLO equity values significantly in Q1.  Finally, as asset values recover I think you will see the Company begin to sell their equity positions and redeploy the proceeds into sub debt improving the earnings yield of the portfolio.  I think the story is looking better and better and that there will be an inflection point in sentiment post earnings.  I am beginning to think this is a $8-$10 stock in the next 6 months implying 50% upside from here.

    Any new thoughts or color on the name?  Am I too bullish?  I must confess I still am of the view that they have a pretty crappy portfolio and management team but to me the above considerations I've outlined trump those factors. 


    SubjectRE: ACAS earnings and proposed restructuring
    Entry05/04/2010 09:45 PM
    Membercreditguy
    How close to book do you think the stock can trade until they resume a dividend?  How far off do you see the resumption of a dividend being?  MCGC which is another BDC just announced the resumption of a dividend in today's earnings release and is still trading at about .75x book.  Even post dividend do you think ACAS can move appreciably higher than .75x book given the MCGC comparison? 
    That said, I think book is likely to move higher in coming quarters. 
    Any sense on how conservatively ECAS is valued?
    Todd, what are your current thoughts?

    SubjectRE: RE:ACAS earnings and proposed restructuring
    Entry05/06/2010 01:44 PM
    Membernha855
    Care to update us now that the call has happened and the stock is off 10+% today? thanks

    SubjectEuropean debt and roiled markets
    Entry05/07/2010 11:19 AM
    Membertyler939
    todd1123, do you have a view on how the uncertainty in European sovereign debt, and the jitteriness in the markets over the last few days, might impact ACAS, either through ECAS or otherwise?

    SubjectTodd, any updates?
    Entry05/17/2010 12:50 PM
    Membertyler939
    We never heard your thoughts from the call.  Any incremental information one way or the other?

    SubjectFailed tender
    Entry06/03/2010 09:51 AM
    Membernha855
    Any updated thoughts on what the likely failed tender will mean for ACAS? Do you think a prepack can be done based on the current voting results?

    SubjectRE: Failed tender
    Entry06/03/2010 01:12 PM
    MemberSiren81
    Surprised stock is down 14%+ today just on stifel downgrade (all info was out yesterday). I still think this gets done and even if it doesn't stock would seem to have little downside at these levels. Would love your thoughts todd...

    SubjectRE: RE: Failed tender
    Entry06/03/2010 01:24 PM
    Membernha855
    Any idea what the bondholders are holding out for? Seems to me that getting secured paper yielding 11% with a good set of prepayment requirements and covenants is a good deal for them. Thoughts?

    SubjectRE: RE: RE: RE: Failed tender
    Entry06/03/2010 02:21 PM
    Membernha855
    What is the motivation for management to give an incremental $50+mm to the bondholders in order to avoid bankruptcy? It certainly seems to me that the tender document implies that a prepack can be done with agreement from the bank lenders and a cramdown of the bondholders and the private placement holders. Also, how do you get to 90% of the $406mm in private placement note holders agreeing? I counted only about $305mm being tendered into the exchange or approx 75%. Thanks
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