Zacks_Analysts' Blog : AmCap's Rating Outlook Upped - Analyst Blog

Rating outlook on American Capital Ltd. (ACAS) has been upped to “Stable” from “Negative” by Standard & Poor's this Wednesday. The company's long-term counterparty credit rating is set at “B-“ by S&P. The company could achieve a substantial reduction in debt in 2010.

It undertook debt restructuring initiatives in June this year and also during and after the third quarter of 2010. These actions have led to an improvement in its leverage and prompted the rating agency to raise its rating outlook on the company.

Recent Initiatives

In November, American Capital issued a notice to the holders of its secured debt due in 2013 for prepaying $107 million of the debt on November 29, 2010 on a voluntary basis, reducing the outstanding amount under this secured debt to less than $1.0 billion. This results in a drop in interest rates to the lowest levels on the remaining debt.

In June 2010, American Capital issued this secured debt, due in December 2013, while refinancing the company’s $2.4 billion of outstanding unsecured debt at that time. However, in the third quarter of 2010, the company prepaid $200 million of the secured debt. This debt payment helps the company in reducing its debt by $3.0 billion from its peak experienced at the end of the second quarter of 2007.

Third Quarter Results

American Capital whose competitors include companies such as Ares Capital Corporation (ARCC), Fortress Investment Group LLC (FIG) and MCG Capital Corporation (MCGC) reported third quarter 2010 operating income of 17 cents per share, a penny ahead of the Zacks Consensus Estimate of 16 cents. Results were helped by a drop in operating expenses, though partially offset by a decline in interest and dividend income in the reported quarter.

American Capital’s asset coverage ratio increased to 230% from 206% in the prior quarter. The company repaid $407 million in debt during the reported quarter, which included $200 million of secured debt maturing in 2013.

Our Take

American Capital’s successful restructuring of $2.4 billion of debt in June has provided it with a sufficient operating flexibility and prevented it from filing for bankruptcy, which management was apprehensive about. The recent initiatives to reduce debt further helps in improving its leverage. It also continues to de-risk its balance sheet through a number of efforts. However, we think that limited accessibility to capital and increased funding costs have weakened the company’s strategic position in its sector.

American Capital currently retains its Zacks #3 Rank, which translates to a short-term (1−3 months) ‘Hold’ rating.