ACAS - American Capital

[thepupil]

For those unwilling to invest alongside egregiously compensated, arguably sleazy people, for those who only traffic in eating sardines and do not delve into the world of trading sardines, for those unwilling to be Bernanked down the quality curve, you need not read on.

 

With all this talk of Malone, and Buffett, and Watsa, I am compelled to diversify the board's concentration in high quality low fee successful capital allocators (since we all know diversification is the only way to reduce risk : ) ) and bring to the fore the wonderful world of business development companies, where long term value creation and pay for performance are foreign concepts.

 

American Capital is a Bethesda based BDC similar in structure and composition to the ever so infamous Einhorn short Allied Capital (which also hailed from DC area). Like Allied, American spent the 2000's issuing equity and debt an investing in all kinds of deliciously low quality assets. It spent 2008 getting obliterated and watching its book value and price/book plummet. It has since deleveraged and  recovered from prices below $2 and now trades at $15.50, a 20% discount to stated NAV of $19.54/share and a 12% discount to my calculation of option adjusted NAV/share. The net asset value consists of a glorious hodge podge of pre-crisis legacy investments carried at what are surely aggressive if not downright Allied Capital esque marks. American is unable to do the usual BDC equity issuance funded dividend dance or recycle much capital into too many opportunities because it cannot raise equity below NAV.

 

Why I like it:

 

1. Low leverage on favorable terms: ~800 milly  o' liabilites, 6+ billy o' assets, 20% of assets are low risk: cash and monetizable NOLs, also some capital loss tax assets marked at 0, ACAS portfolio companies won't pay cash taxes for a while. Though as a BDC i guess they wouldn't pay taxes on investment gains anyways

2. discount to BDC peers

3. Continued cash deployment into share repurchases below stated net asset value

4. embedded mREIT recovery trade. 14% of NAV is American Capital Asset Management. In addition to being what is surely a mediocre PE firm, ACAM manages AGNC and MTGE for a juicy fee of over 1% of equity. As long as AGNC and MTGE don't blow up in the next phase of the carry trade unwind, this is a very attractive fee stream and would justify ACAM's mark

5. embedded European recovery trade. 14% of assets are in a wholly owned portfolio of European companies which is marked at a 20% discount since publicly traded portfolios of European private companies trade at a discount. this creates a nice "double discount", which amplifies the accretion of share repos

6. Diversity of crappy assets consisting of 100s of mediocre companies. One bankruptcy probably won't kill you.

7. Reflexivity/Positive feedback loop. As NAV and Price/NAV go up, ACAS gets closer to turning on the equity issuance machine and deploying new capital. if Price/NAV gets above 1, equity issuance becomes more accretive. The combination of growth in NAV/share and rerating to 1 or 1+ X NAV can create  very nice returns over the next few years. In the meantime, ample cash is being plowed into share repos in order to reduce shares outstanding even after accounting for incredibly egregious compensation, so you get paid to wait (via share repo) and you know ACAS will issue equity and crystallize/derisk NAV once the re-rating occurs. these guys exist to empire build and grow their fees. don't think for a second they are repurchasing shares to grow shareholder value. they are doing so to be able to issue equity again.  Also, the market (and by the market i mean retail shareholders who buy these types of things)  probably won't fully adjust NAV for the impending options dilution, so re-rating to the growing GAAP NAV of $19.5/share could be more titillating than to my "option adjusted NAV"

 

So in summary

1. hold your nose and buy; justify the purchase with an overly simple spreadsheet that regurgitates the 10Q and lays out some downside scenarios. maybe even peruse some sloppily formatted and slimy promotional powerpoints the company put together

2. watch as ACAS marks up its assets, sells a few for above stated NAV and regains credibility and re-rates

3. flip to retail, preferably a widow or orphan

4. watch as ACAS becomes too levered takes too much risks and blows up again

5. repeat step 1-4, make sure step 4 does not happen before step 3.

 

Just remember, don't open the can; those are trading sardines, not for eating!!!

 

hope you all enjoyed. I mean for this to be somewhat entertaining and sarcastic, but I do think that buying a low leverage cash rich portfolio of shitty assets that is rapidly reducing shares outstanding will be a successful trade. I've had some success in the past by buying low quality  retail yield products undergoing transition and flipping them at higher prices. this falls into that category. I think the discount needs to be bigger to say this has a  big margin of safety, but with 20% of assets low risk and no debt issues, i see no reason for the music to stop suddenly.

 

So as Chuck Prince would so prudently advise, GET UP AND DANCE.

 

And yes, this post, along with the threads about leveraging high quality stocks, will surely mark a top.

American_Capital.xlsx

[usdtor05]

This made my day....thank you

[ItsAValueTrap]

I learned the hard way that integrity matters.

 

Sometimes management will do crazy things and shareholders will see their money vanish.  For example, I got burned on QXM/XING where the CEO ran off with the operating business and the cash.

There are non-Chinese companies that decide to fake their cash (e.g. Refco, Satyam, etc.).  Cash being the easiest thing to audit.

 

So I don't think I will ever invest in shady people.  Ever.  Sometimes they end up doing something that's really messed up.  Take Bernie Madoff for example.  He is a smart guy who made a lot of money legally (it was sleazy but market making isn't considered illegal) and didn't need to run a Ponzi scheme.  But he did it anyways.

[CorpRaider]

Funny post pupil!  I've been mulling this one over lately but haven't pulled the trigger largely due to some of the issues you reference.  I was actually planning to private message olmstead about it to see if he wanted to knock it around.  He seems in the know and open to some of the interesting REIT and other specialty vehicle opportunities. 

 

I am sort of grappling with what to make of the buybacks of the stock.  It seems to be largely (if not totally) out of character for a BDC, which as you note are usually managed only to grow assets under management for the management companies (of course most, if not all investment vehicles could probably be charged on this score).  The buybacks under NAV seem….rational and maybe….highly ethical from a SH perspective?!?!?  They could probably divert that cash from the buybacks to pay a divvy (or rather a distribution) and easily attract some retail/yield hungry money and get the price to book up in two shakes, but they're buying back tons of stock….if they do that for a year or two and then get the multiple up….

 

P.S. one of the smaller hediges was talking their book on this one at one of the conferences a few months back.  You probably caught it, but if not, it might be worth a google or two.

[thepupil]

Did some googling and saw that Pine River pitched it which I didn't know about. Nice joke about "small" hedge fund. Actually sourced this from seeking alpha. Wrt making sense of the buyback, I think part of it is to hide just how much executives are making/ going to make in options comp. if they didn't buy back shares the full dilutive effect of all those options would be even more apparent. There are like 50mm options outstanding with a weighted average strike around 8. I also think you'll continue to see ACAS report a small loss like they did in Q3 so that ITM options do not need to be included in diluted shares outstanding (since more shares would make Negstive EPS less negative, they are considered antidilutive, even though those options being exercised would reduce NAV /share).

 

As those vest those are going to be worth $400mm at today's prices!!! Management is going to get even more wealthy just for bringing back the company that they drove to near death back to life.

 

So in my opinion management is reducing share count to make offset some of that ridiculousness. They'll alos own a greater % of a low leverage company with some nice assets  the more theybbuy back today. Also when you read the conference calls they talk about being less levered, growing recurring streams of net income,monetizing tax asset, buying back shares, basically talking the talk and talking about a shift in strategy where more earnings come from dividend from subsidiaries rather than fair value changes.

 

No one can agree wi the compensation and I understand not participating here but I just think I'll make money owning this and that the risks are mitigated by the cash/ongoing buyback/some value realizations etc.

 

 

http://www.marketfolly.com/2013/10/steve-kuhns-american-capital.html

 

http://seekingalpha.com/article/1925811-american-capital-just-cant-resist-buying-cheap-stock

 

http://insiders.morningstar.com/trading/insider-activity.action?t=ACAS&region=usa&culture=en-US&ownerCountry=USA

 

http://insiders.morningstar.com/trading/executive-compensation.action?t=ACAS&region=usa&culture=en-US&ownerCountry=USA

 

 

[CorpRaider]

Hiya.  Earnings CC is today.  I will listen in and try to post observations here (if any).  I haven't purchased any shares.  I keep sort of comparing this to C and AIG for my "financials" basket and keep coming back to AIG.WT.  I just had to post this to bump SHLD for 30 seconds.

[thepupil]

Market clearly did not like the results too much. Story was "this is a collection of crappy and opaque assets with some cash, a tax asset, and a fee rich asset manager w/ mREIT risk that trades at a  nice discount and is buying back stock because slimy management is poised to get very rich". I think that is still the case.

 

They took a big writedown on ACAM (which looks pretty mismarked), they realized a fair portion of their book ($500MM+ in 4Q, which is  ~10% of investment assets) and then redeployed that. Some of that was redeployed back into existing portfolio companies, which i suspect is just a way to slowly bail out some of their more zombie like investments and bring those under full control and to profitability in order to monetize the tax asset. All the talk for future acquisitions is about wholly owned/controlled companies and greater transparency; we'll see. 

 

The best part of the call was when sell side started questioning them about the future of ACAM and a possible spinout. It was very clear that management had thought of this. They know that asset managers are commanding very high multiples (AAMC, NRF) and they own an asset manager marked at a very low multiple of high margin revenue and dividends. Given the insane amount of long term ITM options owned by management, i'd be surprised to see them pass up an opportunity to monetize in some way. But it'd probably be better for them long term to continue to build out ACAM and buy back stock before doing anything. Every dollar of ACAS value created means $50 million to managements pockets. I try not to let that bias the analysis too much but I think it's important to remember the incentives. They are also building out ACAM with a floating rate BDC (4Q IPO ticker ACSF) and an energy and infrastructure fund that they are funding with their own capital for now, but will surely put into some sort of high fee third party vehicle eventually.

 

Haven't had a chance to look at additional details in the numbers other than i noticed their credit book/private equity book was marked down a little more. That's where all the real low quality steamy stuff is.

 

http://seekingalpha.com/article/2011981-american-capital-management-discusses-q4-2013-results-earnings-call-transcript

 

Malon Wilkus - Founder, Chairman, Chief Executive Officer and Chairman of Executive Committee

 

Yes, about 65% of our assets are controlled companies. And the rule is that you have to have no more than 50% of your assets in where you have more than 10% ownership to qualify as a RIC under the tax code. And so I think that's what you're kind of talking about. And so, right now, it would be a -- it would be many billions of dollars of additional noncontrol assets that we would have to have on our balance sheet to qualify as a RIC.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

 

Okay. Great. And then maybe one other question is, as people kind of think of the mechanics, if there were a spinout to occur, is it possible that the tax loss carries with ACAS or ACAM the asset manager in a spinout scenario?

John R. Erickson - Chief Financial Officer, Principal Accounting Officer, President of Structured Finance, and Member of Investment Committee

 

Yes, I think that you -- that would be the scenario you would be looking for because the assets that would go into a RIC-BDC, you would want them to be dividend-paying. And so, having a tax loss in that vehicle wouldn't make sense, so you would want to have the tax loss be in the asset management vehicle.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

 

Okay. So, in effect, it is transferable or could be applied to the ACAM spinout, I guess, was just the question?

John R. Erickson - Chief Financial Officer, Principal Accounting Officer, President of Structured Finance, and Member of Investment Committee

 

No. I wouldn't say it that way. I would say that the better way to think of it would be that you would spin out the BDC and leave the asset manager at ACAS. And ACAS really transforms itself to ACAM

[CorpRaider]

That jibes with their earlier schpiel about that their peer group really should be Danaher and Roper because they hold control equity stakes in so many portfolio companies versus other bdcs which they assert mostly just hold the debt in the sponsored deals.  I couldn't make it through the call…

 

 

[Packer16]

I am reading Einhorn's book and started to dig into ACAS's marks talk about aggressive these guys take the cake.  These guys add a control premium to the market multiples that they apply to control positions they hold?  This is crazy.  There should be a discount because if they had to sell they probably could not get there multiple based fair value.  The current carrying value of the AM units is over 6.6% of AUM.  This is a crazy multiple for an average business at best in comparison to the likes of OAK and BAM which you can buy for much cheaper.  All you need is promotional management and you have a pretty good short.  With the comparison to historical pricing at a premium to aggressively marked book maybe you have that already.

 

Packer

[thepupil]

My eyes are wide open wrt the quality of the management and the book. The structure is very allied esque with The owned portfolio companies being like Business Loan Express, hence my remarks about sardine trading. I don't want to eat every sardine in the can; there are lots of zombie companies in there. These guys invested money at the top of the cycle and have not been positioned to recycle capital.

 

I disagree with you on ACAM being mismarked. It earns high fees on permanent locked in capital, pine river said it is worth more than 1B. If they isolate the asset manager it will trade higher than 800mm, particularly if they drop other assets into beings aged by ACAM. They charge their reits 1.25-1.5% and manage 9B+ of equity. That could easily support a $100mm/year divvy particularly when there are other assets that ACAM will manage to help pay the bills (bet they'll a raise a good amount of money through ACSF). An asset manager won't trade at a 12% dividend yield.

 

AAMC trades for a multiple of AUM, obviously extreme overvaluation, but it is illustrative of what kind of shit management can do by reshuffling the assets into an asset lite manager and high fee paying publicly listed permanent capital entities. I own BAM. Its asset manager is obscured by the trophy assets you have to purchases along with it. BAM has a reputation for investing alongside its clients and will never make the asset manager a pure play vehicle. American capital has neither the reputation nor the obligation, they will do what makes them rich and what will make the stock go up in the short term.

 

The portfolio level leverage is not present with ACAS as it was pre crisis and with allied. There is no forced reckoning with respect to the discovery of every asset value. As for its "historical multiple", it's pre crisis multiple was well above book, it's not 80% of boo or whatever and 20% of that is cash and the tax asset and a big piece of that is ACAM, where I'm comfy with the mark. They have been able to come up with a good amount of assets and sell them for their mark each year

 

I think they'll put the assets that are easily divisible into publicly traded third party capital entitities in them and then have the company slowly transform into an asset manager.

 

The thesis is somewhat dependent on greater fool theory in that you need demand  for those shitty yield products to stay there, by even if they can't grow AUM they are still taking in a decent amount of fees.

 

not the warrenn buffett school of partnering with good ethical people. But there are lots of ways for them to create value here and I think they will. I totally understand the aversion to this company though.

 

 

[thepupil]

just to quantify it a bit better, ACAS trades at 77% of NAV (not adjusting for the impending dilution over the next 5 years, the multiple is higher if you do this, the dilution will be gradual and its severity depends on the stock price)

 

The Assets are:

 

Investments Assets (All the fun stuff) : 84% , Non investment Assets (Cash, DTA): 16% 

 

I believe the Non Investment assets are worth their mark, so what is the market implied discount of the investment assets? 0.84X + 0.16 ( 1 ) = 0.77 Solving for X gets us to 72%. So you already are buying the fun stuff at 72% of its mark. Now there is the risk that the shit is worth 50% or 40%, but they've sold a fair portion every year (10% 4Q 2013).

 

European Capital's mark is at 85% of its estimate of NAV, so you get a little double discount working for you there (buying at 60% if you count the cash and DTA at 100%).

 

I think ACAM is worth its mark and i think the rest can be slowly recapitalized and work its way to recovery; they've already started this as i mentioned earlier where they reinvest into already owned companies (resurrecting the zombies, or perhaps just delaying the inevitable).

 

Alternatively assets can be shifted into publicly listed vehicles where others bear the downside risk and ACAM manages a fee. Read the prospectus of American Capital Senior Floating. Last fall they bought a bunch of senior rate floating loans, formed a vehicle for holding them, then jammed some CLO equity into vehicle because obvi CLO equity is great for something with "senior" in its same, then they had ACSF borrow against their assets to pay them back and then took ACSF public and got rid of all their risk; now they charge ACSF  0.8% of assets (not equity, so they get paid for borrowing, love it) and don't wear any of the risk.

 

As an ACAS shareholder, that's what i like to see, shifting of risk to others who will now pay a fee for the privilege of bearing it.

[Packer16]

How does 9% of AUM make sense when most of the other AA managers trade at 5 to 8% of AUM and these guys have an inferior product to OAK, BX, FIG and APO?  These managers trade at 2 to 4x revenues or @ 1.5% of AUM the value is only $300 to $600m.  If you pull out $100m for the AM unit you remove more than half of the CFO.  That is probably why they will not spin it off.  If they are only generating $93 million in cash (2013 CFO - $193m) above AM fees on the portfolio of $5 billion in assets there is something seriously wrong with these assets.  That is only a 2% cash yield!

 

As to the marks, I don't see the control premium in any other BDC filings.  It is a very aggressive position only used to overvalue the securities.  Does this premium exist?  The economic rationale for this is synergies of the buyer.  They have and average 17% control premium on controlled investments which is equal to 13% of the equity.  I would not be surprised to the see the SEC tell them this is no longer acceptable (Note: they have done this with goodwill impairment tests already). 

 

As for the buyback, I think they are buying back overvalued stock because the portfolio is becoming lower quality because the good companies (those can refi) are and the remaining are the one who cannot refi.  I think the comment about Roper and Danaher shows just how much these guys are in Lala land.  Come on.  You are comparing some of the best companies in the world in their niches to second-tier desperate companies that take ACAS funding as a last resort.  The deals they buy into have been shopped and could find financing no where else so they ended up with ACAS or another BDC.  I would not be surprised to see many of there good deals get refied out over the next few years and ACAS being left with the real toxic waste.  The MGC Conf call was instructive as the manager said most good deal are being refied because banks are will to lend to the BDCs best clients.  The loss trends are also no looking to good.  The best strategy at this stage of the cycle is to pay out distributions as the asset available for purchase are toxic.

 

So the end game is to shift the overvalued assets to the other publicly traded vehicle suckers.  This sounds worse than a mismarked portfolio if it actually happens.

 

Packer 

[thepupil]

ACAS manages $18.6B when you include their own assets, so you can easily get to about 4% of AUM (800/18600) assuming no growth in AUM and distribution of assets. They aren't going to spin the fee gatherer! They are going to keep it along with the tax asset and IPO/distribute the crap to retail.

 

They can dilute any mismarked crap with equity offerings and recycling of capital (i.e. IPO European Capital with a capital infusion of third party stuff and keep the existing fee structure (2% of assets). such a transaction would increase AUM, reduce risk to ACAS and close the gap between Price and NAV. I think such shenanigans are highly likely. They did turn over 20% of the book last year so its not like 100% of the aggressively marked crap is worthless.

 

You may ask yourself who would buy such a thing? Well people bought ACSF, European Capital used to be publicly traded, people own AGNC for that juicy carry and it charges a high fee, people will do anything for a little cash yield.

 

As for the 2% yield on the whole portfolio, their controlled companies don't distribute cash because many are on life support and are paying down debt and investing in capex. If ACAS owns a company that is very levered and using all cash to amortize ts debt, no cash flow will show up to ACAS. This is the "zombie" dynamic i reference. Any monetizations and recaps (investments back into companies already owned) change this by delevering them. The comparisons to Roper and Danaher are absolutely ludicrous! I agree. It's pure bullshit and spin. I hear your point about the portfolio becoming lower quality over time. You get left with the scraps over time. It's a risk.

 

"Sounds worse than a mismarked portfolio"

 

Do you mean from an ethical standpoint? Or an investment standpoint?

 

The upside obviously depends on extending and pretending and shifting risk to the sheep; it's not "right", but that doesn't mean that ACAS won't go up in price if/when it happens. The other part of the equation (the downside), is partially mitigated by the low leverage (how will they blow up?) the discount already priced in (even if ACAS is mismarking their book, they have to REAAAAALLY be mismarking it to permanently impair capital).

 

Let's say the controlled companies are marked at twice their worth, this would knock equity down to about $3.3B. So you'd be buying at 1.2X book instead of 0.77X. This isn't a bank where you have a few mismarkings and you lose everything. So if the tide goes out, i don't think i'll be swimming naked. I may have a speedo on and my gonads might be showing, but i won't be totally naked. If the tide doesn't go out, I think you can easily see prices 20-50% higher for the pure play AM with lots of permanent high fee paying capital; there is upside if they actually made some decent investments.

[Packer16]

My biggest concern is what you do not see.  These are smart guys who based upon their accounting appear to be aggressive.  We are at the end of credit cycle where the good investments in these types of companies are being refied out so they should be either distributing cash from the refis or keeping on the balance sheet for the next downturn.  I my opinion the time to buy these types of investments is after some of the investments have blown up and good companies have to go to them because they have no where to go.  Now in my opinion is not that time. 

 

Also my understanding AM fees for the largest entities are based upon equity not assets so if the asset underperform the equity in theory will not go up.  I just see some red flags and given the aggressive NAV and IM valuation and the complicated structure there are more ways for these guys to hose you then we can ever think of.  I think a key to firms with complicated capital structures is to trust the management because the financial info you are basing your decision on is heavily influenced by management's judgement.

 

Packer 

[thepupil]

fair enough. i can't disagree with your arguments. my original post made it clear i despise these guys.

 

The biggest component of ACAM is managing AGNC, so losing mREIT equity is what hurts that. I am not overly negative on those and think it will be fine, but they are levered fixed income vehicles so there is concentration risk there. it also represents upside, should AGNC get above book and they can once again turn on the equity issuance machine.

 

where we differ is i don't see a ton of risk given the current price. I can envision a scenario where i lose 50% (book marked down 30%, P/B going to 60%), i just see that scenario as highly unlikely and think the base case is more of the same (creation of investment vehicles to grow AUM, deleveraging of portfolio companies, slow monetization of tax asset, rerating to NAV, etc.)

 

We'll have to just wait and see.

[thepupil]

https://www.bamsec.com/filing/81747314000010/11?cik=817473

 

btw, they file separate financials for ACAM if you want to dig into it and see what it is worth vs ACAS's mark of $870MM.

 

Some remarks:

- they consolidated managed CLO's so the balance sheet looks funky, you have to peel those assets and liabilities out as the managed CLO's are not recourse

- You'll see gigantic stock comp bringing down operating income, the options issuance to employees has been somewhere between obscene and criminal, but that is not necessarily sustainable, I assume alot of that goes to AGNC's PM, but tough to tell, if 50MM of options comp is the run rate, I'll agree with you that ACAM is miskmarked because it'd be 30X earnings

- You can read about the joy that was the ACSF transaction where ACAS put in $170MM and some CLO equity marked at $24MM into ACAM to form that vehicle and got out $194MM in cash and now ACAM gets to om nom on the fee stream. Not saying it will happen but these guys created an $8B mREIT in a few years, ACSF could grow nicely.

- Also that ACSF related payback $200MM of cash at ACAS post 10-K, in addition to SPL which has yet to close but is ACAS's 4th or 5th largest investment and will be several 100MM of realization (http://host.madison.com/business/waunakee-s-scientific-protein-labs-to-be-acquired-by-chinese/article_b47c69c4-34b8-58d4-85ae-1750368bc87b.html).

- So, just to be a bit too repetitive, there are realizations and value creating events going on inside the guts of ACAS and ACAM. Their assets smell a lot like shit, these guys overpay themselves and the investment depends on offloading assets to unwary retail investors. There are lots of negatives. But it's not all negative.

 

Edit: I am unsure how the ACSF investment would be characterized on ACAS's 10-K. It if was part of the 870MM in ACAM, that too may help justify the 12/30 mark of ACAM. since they just converted that to cash and sent it back to mother ACAS.

 

 

 

ACAS/ACAM/ACSF:

On November 14, 2013 American Capital contributed investments in the equity tranches of CLOs (the “CLO Investment Contribution”) to ACAM with a fair value of $24,748 (unaudited), which were subsequently sold to ACSF for $24,748 (unaudited). Coterminous with the ACSF Contribution, ACSF entered into a $200,000 revolving credit facility with ACAM (the “ACAM Facility”). As of December 31, 2013, ACSF has drawn $194,748 (unaudited) on the ACAM Facility, substantially all of which has been used to finance the purchase of the investments. In addition to the CLO Investment Contribution, between October 15, 2013 and December 31, 2013 American Capital contributed $170,000 (unaudited) in cash to ACAM to fund ACSF draws on the ACAM Facility. In accordance with the principles of consolidation, amounts related to the ACAM Facility have been eliminated in consolidation.

 

On January 23, 2014, the Company utilized the proceeds it received from the repayment of the ACAM Facility to make a cash distribution to American Capital of $194,748. In connection with the ACSF IPO, an underwriting commission of $7,952 was incurred and paid by the Company. Subsequent to the ACSF IPO, the Company owns approximately 3% of the outstanding common stock of ACSF and, accordingly, will deconsolidate ACSF.

 

[thepupil]

EDIT: Stock up ~12% today

 

 

http://seekingalpha.com/pr/9413173-american-capital-announces-the-purchase-of-8_9-million-of-its-shares-and-suspends-share-repurchase-program

 

- In Q1, the company bought back 8.9M shares or 3.3% of the float at an average price of $15.38 each. Since Q3 of 2011, American Capital has bought back 101.6M shares or 29.4% of the float at an average price of $11.74, accretive to Dec. 31 NAV of $18.97 per share by $1.75.

 

- Suspended buybacks indefinitely as they are evaluating strategic alternatives and changing up the capital structure/organization/ etc.

 

So we have 12/31 equity of $5.13B - ($136MM cash used for share repurchases) =

 

$5B of equity +- Q1 net income

 

12/31 shares outstanding of 270MM -8.9MM = 261.3MM

 

Assuming they made $0 in Q1 (they could've lost money), NAV/share should be around $19.13 before adjusting for options related dilution.

 

Updated options dilution:

Shares outstanding: 261MM

Options: 54MM @ WAS of $9.13

Exercise all options @ 9.13 (+$493MM cash, + 54MM shares outstanding), repurchase @ market price of $14.30 (-772MM cash, -54MM shares) = $279MM hit to equity

 

So options adjustments bring down equity to around $18 per share; of course if the price goes up, then the dilution has more of an impact because the share repurchases are less effective. Furthermore, it is unrealistic to do all the dilution at once since not all options under the plan will be exercised and it will be done over a period of many years. But I just want to point out the impending dilution from all the options that management received for almost killing the company.

 

Bottom line, it is an unlevered (at the corporate level, the portfolio companies are levered), low quality company, with low quality management trading at around 75% of NAV w/ a variety of options to pursue in order to increase value/share.

[CorpRaider]

When the pupil types, the market listens.    :D

[thepupil]

Some decent liquidation/realization activity of recent:

 

ADF $33MM (total investment is marked at $22MM)

http://ir.americancapital.com/phoenix.zhtml?c=109982&p=irol-newsArticle&ID=1915099&highlight=

 

Specialty Brands sold for $155MM

http://www.americancapital.com/our-portfolio/specialty-brands-america-inc

 

ACAS's invesment is marked at $49MM. While I assume ACAS will not be receiving the full $155MM because they do not own 100%. I think it is fair to conclude they will at least get their mark in cash since this is under "control investments" and is majority owned.

 

With the aforementioned pending SPL acquisition (total holdings marked at $233MM, see below), the three add up to $233+$22+$49MM = $304MM (out of $5000 in investment assets) of fair value that we will receive clarity in terms of actual value over the next quarter or two. There is decent turnover in the book going on here. But we still need more to say with absolute confidence the book is not mismarked and the holdings are worth book.

 

If only 10% / year gets turned over, we don't know what exactly is going on with the other 90% until ACAS improves disclosure (which may happen with the the very likely Asset Management Co / Asset Co split about to take place.

 

http://www.jsonline.com/business/chinese-company-acquires-scientific-protein-laboratories-b99171800z1-237306291.html

 

[thepupil]

https://www.bamsec.com/filing/81747314000020?cik=817473

http://seekingalpha.com/article/2203643-american-capitals-acas-ceo-malon-wilkus-on-q1-2014-results-earnings-call-transcript

 

NAV at $19.30 per share. Lots to like and dislike on the call. Tons of cash coming in and about to come in but still waiting for more definitive stuff on the split between asset manager and investment assets.  They have hired GS to help them out with this.

 

To start with the ugly and obvious, this is still a bunch of crappy low quality assets, managed by people paying themselves very well pulling out every trick in the book to make themselves look better than they are. the latest of these is to buy on the run senior loans with spare cash which makes their loan book look better than it actually is by increasing the denominator (a lower % of the loan book is non performing because they are now including good stuff they just bought).

 

 

 

The most important development is continued progress on the transition from owner of crappy assets to manager of crappy assets, with the launch of a $1.1B lower middle market private equity fund that represents a significant monetization and derisking.

 

ACAS is contributing $200MM cash out of the $1.1B as well as their equity interest in 7 portfolio companies which have been valued at $640MM. They were marked at $711MM. So ACAS was indeed overstating the value of these companies, but I am satisfied with this transaction as it represents 14% of investment assets and a large % of the scary PE portfolio converted to cash. $711MM of book value in crappy companies becomes $640MM of cash, but then they are putting $200MM into the fund so the net result is $440MM of cash + 200/1100 (18%)  in their new PE fund, which they will manage.

 

Below are their 10 largest investment as of the last 10-K. Of the 8 operating companies, 5 of them have been monetized in 2014 via outright sale or into the PE fund. ACAS is making progress.

 

 

American Capital Asset Management

European Capital

CML Pharma

SPL              SOLD outright for cash

SMG            SOLD into PE fund

Tensar

Mirion          SOLD into PE fund

Affordable  SOLD into PE fund

Soil Safe

WRH            SOLD into PE fund but with a catch (PE fund has option to buy)

 

 

Q2 should see a flood of cash pour into ACAS as they will recieve $264MM from SPL and specialty brands + the aforementioned PE transaction

 

“This significant development in our asset management business expands our base of institutional investors and provides the opportunity to become their long-term asset management partner. ACE III increases ACAM’s earning assets under management by 7%, and it will earn fees and participate in investment gains. It also will generate liquidity of up to approximately $640 million.”

 

Turning to Slide 6. We received $66 million from realizations from operating companies, though it's worth noting that post quarter end, we received $264 million from the excellent exits of Scientific Protein Laboratories and Specialty Brands.

 

http://finance.yahoo.com/news/american-capital-launches-1-1-205500709.html

[thepupil]

http://seekingalpha.com/pr/10566675-american-capital-receives-158-million-from-tensar-exit-and-generates-a-12_6-percent-return-on-its-investment

 

Tensar (6th largest investment) sold for $158MM, on books for $168MM (received 94% of book value). The riskiest and murkiest assets continue to be monetized while externally managed AUM grows (they recently closed a $620MM CLO) and the book is reinvested in more senior performing things (they got a $750MM facility to invest in senior loans recently also).

 

At 79% of NAV a substantial portion of which is cash, senior loans, and a tax asset (low credit/operations risk), I continue to like this, though it seems like I'm the only one so these updates may be completely unnecessary.

 

 

American Capital Asset Management

European Capital

CML Pharma

SPL              SOLD outright for cash

SMG            SOLD into PE fund

Tensar        SOLD outright for cash

Mirion          SOLD into PE fund

Affordable  SOLD into PE fund

Soil Safe

WRH            SOLD into PE fund but with a catch (PE fund has option to buy)

 

 

 

https://www.bamsec.com/filing/81747314000020?cik=817473

http://seekingalpha.com/article/2203643-american-capitals-acas-ceo-malon-wilkus-on-q1-2014-results-earnings-call-transcript

 

NAV at $19.30 per share. Lots to like and dislike on the call. Tons of cash coming in and about to come in but still waiting for more definitive stuff on the split between asset manager and investment assets.  They have hired GS to help them out with this.

 

To start with the ugly and obvious, this is still a bunch of crappy low quality assets, managed by people paying themselves very well pulling out every trick in the book to make themselves look better than they are. the latest of these is to buy on the run senior loans with spare cash which makes their loan book look better than it actually is by increasing the denominator (a lower % of the loan book is non performing because they are now including good stuff they just bought).

 

 

 

The most important development is continued progress on the transition from owner of crappy assets to manager of crappy assets, with the launch of a $1.1B lower middle market private equity fund that represents a significant monetization and derisking.

 

ACAS is contributing $200MM cash out of the $1.1B as well as their equity interest in 7 portfolio companies which have been valued at $640MM. They were marked at $711MM. So ACAS was indeed overstating the value of these companies, but I am satisfied with this transaction as it represents 14% of investment assets and a large % of the scary PE portfolio converted to cash. $711MM of book value in crappy companies becomes $640MM of cash, but then they are putting $200MM into the fund so the net result is $440MM of cash + 200/1100 (18%)  in their new PE fund, which they will manage.

 

Below are their 10 largest investment as of the last 10-K. Of the 8 operating companies, 5 of them have been monetized in 2014 via outright sale or into the PE fund. ACAS is making progress.

 

 

American Capital Asset Management

European Capital

CML Pharma

SPL              SOLD outright for cash

SMG            SOLD into PE fund

Tensar

Mirion          SOLD into PE fund

Affordable  SOLD into PE fund

Soil Safe

WRH            SOLD into PE fund but with a catch (PE fund has option to buy)

 

 

Q2 should see a flood of cash pour into ACAS as they will recieve $264MM from SPL and specialty brands + the aforementioned PE transaction

 

“This significant development in our asset management business expands our base of institutional investors and provides the opportunity to become their long-term asset management partner. ACE III increases ACAM’s earning assets under management by 7%, and it will earn fees and participate in investment gains. It also will generate liquidity of up to approximately $640 million.”

 

Turning to Slide 6. We received $66 million from realizations from operating companies, though it's worth noting that post quarter end, we received $264 million from the excellent exits of Scientific Protein Laboratories and Specialty Brands.

 

http://finance.yahoo.com/news/american-capital-launches-1-1-205500709.html

[CorpRaider]

http://seekingalpha.com/article/2452805-acas-2014-mid-year-update

[thepupil]

http://seekingalpha.com/pr/11296575-american-capital-receives-138-million-from-sale-of-unwired-holdings-and-generates-a-16-percent-annual-return-on-its-investment-over-9-years

 

Yet another significant disposition, ACAS will be converting $82MM of scary gross legacy equity/debt investments into $138MM of cash, another 3.8% of the market cap.

Of the total proceeds, American Capital received $138 million in debt and equity proceeds, realizing a gain of $53 million from the transaction ($21 million net realized gain inception to date), subject to post-closing adjustments.

 

ACAS trades for 72% of last reported NAV and is set to give color on a separation of the asset manager in the next quarter. A very substantial portion of NAV is comprised of assets that have a very low risk of being substantially mismarked (cash, liquid senior floating rate loans, deferred tax asset) and ACAS is converting the murky/crappy/zombie portfolio to cash at a rapid rate.

 

On the other hand, the higher quality BDC's with management  teams that don't act like complete crooks (Golub, Ares) have come down a lot and are at slight discounts or at book, so that definitely hurts the immediate upside. The IPO of Fifth Street Asset Management (manager of a crappy BDC like ACAS) will help give some idea of valuation of potential ACAM spin/split.

 

 

 

[thepupil]

well here it is:

http://finance.yahoo.com/news/american-capital-announces-plans-split-210100310.html

 

ParasiteCo / HostCo Split as expected

[peter1234]

well here it is:

http://finance.yahoo.com/news/american-capital-announces-plans-split-210100310.html

 

ParasiteCo / HostCo Split as expected

Interesting...

Each of the new BDCs will enter into management agreements to be managed by American Capital, where all employees would reside.