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April 23, 2010
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http://www.peopleandpicks.com/blog/morganuci/3041476/American-Capital-Ltd-Whats-wrong/
At that time, it had dropped to under 59 cents/share. That was also the bottom of the market, but we didn't know that at the time. Soon thereafter, ACAS was over $4, but then it slowly drifted downwards again to the low $2 range, and didn't definitively start moving up again until January of this year. This week it has cross the $6 mark, 10x what it was when I wrote about it 13 months ago, so I thought it was time for an update. A lot has happened in that time, but the main events have been:
* The ECAS purchase didn't turn out as they expected. They had expected to buy it at below NAV (the trading price), then incorporate its assets into ACAS's, which would bring up ACAS's NAV. But they ran into legal problems doing this, and ECAS is still kept on ACAS's books impaired because of its own debt situation. Should ECAS's debt be resolved, it would add to ACAS's NAV.
* NAV at the end of last quarter was $8.29, with "realizable NAV" (what mgt thinks they could sell the assets for in time) of around $10. Including the dilution from the stock offering, but not any asset appreciation since the end of last quarter, it would be $7.74. Historically, before the financial crisis, ACAS traded around 1.3x NAV.
* The situation with the unsecured creditors has still not been cured. They have been in a lock-up agreement since around November, and several times they have extended the termination date of the agreement in order to continue negotiations. This has been interpreted either as a good thing (they're still talking, must be close to an agreement) or a bad thing (at least one creditor is holding out, won't settle). In the mean time, ACAS is paying higher default interest, which probably is helping to keep the creditors happy. The most recent extension was for another 2 months.
* ACAS shareholders voted again to allow the company to sell up to 20% of stock below NAV, which is normally not allowed for a business development company (BDC). The company has not done so until now (more on that below).
* ACAS paid its required dividend last September. Shareholders could elect whether to receive cash, stock, or a mix, and the results of that vote was that the company paid 18.5 cents in cash and 0.275 shares per share held, based on the average trading price of $3.2199 in the days prior to the declaration of the dividend.
* The recent catalyst for the rise in the stock was the announcement that ACAS was exercising its ability to sell stock below NAV, in a direct offering at $5.06 (~5% below the trading price at the time of the announcement) of 58.3 million shares, raising $295M dollars. What may have particularly caught investors' attention is that Paulson & Co is buying 43.7 million of those shares, for a 13% stake in the company, making the hedge fund the company's largest single investor. "There has been fear around the debt restructuring and this deal solidifies the hopes around the restructuring being done," analyst Greg Mason of Stifel Nicolaus said. Paulson, of course, is now famous for "The Greatest Trade Ever" (http://www.amazon.com/Greatest-Trade-Ever-Behind-Scenes/dp/0385529910/ref=sr_1_1?ie=UTF8&s=books&qid=1272071972&sr=1-1), and now his link to the SEC's lawsuit against Goldman Sachs. Investors are assuming that he knows more than the public does about ACAS's situation to be making such a large investment in the company.
Had you bought the stock in the low 60-cent range, you've have received a dividend of almost 30% back in cash, and you'd have 1.275 shares for every share you bought, now selling for $6.11, or about 12.5x your purchase price.
ACAS reports on May 4th after the market close.