Zacks_Analysts' Blog : ACAS Invests In Loan Financing - Analyst Blog

Yesterday, American Capital Ltd. (ACAS) announced its plan to invest $15 million in order to support BMO Capital Markets' syndication of $100 million Second Lien Term Loan financing. The loan financing will aid Teachers' Private Capital to purchase the majority stake of Flexera Software, Inc.

Flexera Software provides Application Usage Management and Installation software, which helps businesses to observe license compliance and tactically manage application usage.

ACAS is a publicly traded private equity firm and global asset manager. It directly and through its asset management business, initiates, underwrites and manages investments in middle market private equity, leveraged finance, real estate and structured products.

ACAS has the capability to provide flexible financing solutions ranging from a variety of senior debt and uni-tranche to mezzanine and equity co-investments. Further, ACAS provides multi-currency funding with underwriting platform globally, facilitating growth of portfolio companies. Such benefits provided by ACAS urge private equity clients to consider it as an investment partner, which in turn, helps in the growth of the company.

In August, ACAS announced that it supported the merger of Survey Sampling International and Opinionology Inc. through mezzanine financing. The company provided $50 million of Senior Subordinated Note financing for the deal.

Earnings Recap

ACAS’s second-quarter 2011 operating income of 20 cents per share was in line with the Zacks Consensus Estimate. However, the results outpaced the prior-year quarter’s earnings of 9 cents per share. The favorable outcome was backed by the drop in operating expenses, though it was partially offset by the decline in interest and dividend income in the reported quarter.

ACAS’s asset coverage ratio increased to 376% from 336% in the prior quarter. Moreover, the company repaid an additional $100 million in debt, strengthening its balance sheet.

ACAS’s successful restructuring of debt provided it with sufficient operating flexibility. Besides, the company also continues to derisk its balance sheet through a number of initiatives including debt repayment. However, we believe that the limited accessibility to capital and increased funding costs have weakened the company’s strategic position in its sector. Nevertheless, the improvement in credit quality of the portfolio and the restructuring initiatives are expected to be prolific in the near future.

American Capital currently retains a Zacks #3 rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we are maintaining our long-term “Neutral” recommendation on the stock. The major competitor of ACAS, Ares Capital Corporation (ARCC) also retains a Zacks #3 rank.