ACAS - American Capital

[thepupil]

this has been an absolute dud so far in that the discount has remained ( and the starting discount was not quite big enough, looking back) , but fundamentally everything is going right. We have clarity on the split into ParasiteCo and HostCo and we have very material monetization news this morning.

 

big monetization /  further de-risking of the balance sheet with sale of ECAS's largest portfolio company. European Capital is carried on ACAS's balance sheet at $678MM as of Q3, an 11% discount to its NAV of $766MM.

 

http://www.thestreet.com/story/12969536/1/european-capital-completes-sale-of-farrow-ball-for-gbp-275-million.html?cm_ven=RSSFeed

 

The 138 million pound ($216MM gain) and 236 mm pound ($370MM) of proceeds represent big portions of ECAS's NAV. The proceeds are 54% of ECAS's carrying value.

 

At YE 2013 ECAS was carried at $841MM. Before this big sale, ECAS had paid out $265MM of dividends YTD. So $635MM ($265mm+$370MM) of $841MM (75%) has been realized in 2014, proving that a large part of ECAS was not mismarked.  Between Q3's $1.1B of realizations and this, that's $1.4B of cash realizations YTD. They started the year with about $4B of non-ACAM assets.

 

So far very large portions of the scary opaque levered zombie asset portfolio have been harvested. The proceeds are going into fresh senior loans and sponsor finance investments which are then being sold into CLO's (and substantially de-risked) or will go into the yield oriented BDC.

 

Going forward, the return on ACAS will depend on what kind of NAV multiple the crappy BDC's will get and what kind of P/E ACAM will get. In my opinion, you are very nicely covered at the current stock price (73% of pre-dilution NAV). The BDC's will probably get at least 80% with upside to 100% of NAV if BDC's re-rate and I'm comfortable with ACAM's valuation on the balance sheet.

 

European Capital received £236 million in equity proceeds (having previously received full repayment on the senior and mezzanine debt) and realised a gain of £138 million from the transaction, subject to closing adjustments.

 

Top 10 from earlier in the year

American Capital Asset Management

European Capital (75% of YE 2013 realized YTD)

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)

[thepupil]

American Capital buys back 2.4% of the float in Q2

 

    Having gotten back into the stock buyback game at the end of Q1, American Capital (NASDAQ:ACAS) announces 6.5M shares repurchased during Q2 at an average price of $14.32 each.

    Source: Press Release

    The stock closed lower by 0.95% during today's selloff. The closing price of $13.54 stands against March 31 book value per share of $20.12.

 

 

 

ACAS buying back stock again 2.4% of shares in the quarter. At 68% of gross NAV and 73% of fully diluted NAV, share repurchases are a good use of capital, particularly since they will split the company soon (supposed to happen in q4)

 

ACAS is @ $3.7B.

 

NAV is $5.4B split between

 

$4.2B, diversified array of crappy assets

$1.2B, American Capital Asset Management (the fee gatherer)

 

We can debate whether the discount is big enough or not. In my opinion it is, particularly given the positive shifts in the balance sheet to more transparent and liquid assets.

 

 

 

 

[snow pea]

thepupil, I just want to say thanks for the updates on this and your other 60c dollar type ideas.  It seems like they don't get a lot of replies (for my part I don't think I know enough to contribute and rarely post in general) but I at least find them interesting.

[thepupil]

No problem, thank you.

 

frankly this idea sucked and has only now become more interesting. Another 10 or 20% and then we'll really be talking.

 

My initial errors

 

A) thinking the market would not care about the options dilution

B) not buying at a big enough discount

C) relying on expensive comps, related to B, I thought the discount was decent because this was at 80% of NAV and comps were at 1.1X, the whole BDC sector has sold off

 

In terms of the event path and what would happen, when you look back at the thread, it was pretty easy to tell the direction they were going and I was correct there. But I was incorrect on duration. It's been way too long.

 

Now as the discount is bigger and a lot of the assets that were the scariest have been sold and the split is supposed to happen by the end of the year, maybe some others can benefit from my work and being way too early.

 

If not, so be it

 

EDIT:

 

In the 1.5 yrs since posting this has grown GAAP NAV / share from $19.54 to $20.12 and Diluted NAV from $17.76 to $18.71, so about 5% or so.

 

Realizations in 2014 were $2.7B and q1 2015 were $0.2B so $2.9B of the starting assets have been realized and turned over into fresh assets.

 

Pre-tax Diluted NOI per quarter has risen from 0.06 in Q1 2014 to 0.28 in q1 2015, so your NOI yield has gone from virtually nil to 8% as they have recycled capital.

 

Just want to point out that while the stock is down 10% or so, NAV has grown a little and earnings are creeping up as the zombie portfolio gets sold off and recycled into yield pig assets.

[Haasje]

I'm long too (now for a few months or so) I like this idea. Thnx for the updates Pupil.

[thepupil]

ACAS putting on an all out promotional full court press

 

- the "we hired three people, money will pour in" press release

 

http://finance.yahoo.com/news/american-capital-real-estate-finance-154700939.html

 

- the "we just got some chumps to buy our entire portfolio of CLO equity, oh and we're going to charge them for it" press release

 

  http://finance.yahoo.com/news/american-capital-raises-450-million-212200872.html

 

- the "we've levered up the book and are buying everything yieldy in sight and are kind of sort of almost earning an actual ROE without writing up a bunch of crap, oh and we are going to buy $300-$600MM of our stock below 85% of NAV" earnings release

 

  http://finance.yahoo.com/news/american-capital-reports-noi-income-205400592.html

 

 

They clearly want to exercise all those options and make some dough for themselves

 

[Okta]

I don't understand why ACAS is not targeted by an activist. There is a discount to NAV and self-serving management.

The steps would be easy:

• wind down/sell assets
  
• buy back shares at discount
  
• replace management and thereby cutting cost
  

 

[thepupil]

I don't understand why ACAS is not targeted by an activist. There is a discount to NAV and self-serving management.

The steps would be easy:

• wind down/sell assets
  
• buy back shares at discount
  
• replace management and thereby cutting cost
  

 

-I believe there are big built in change of control payments to manaegement that make it very expensive

 

- a large portion of NAV is American Capital Asset Management which depends on the continued existence of the entity; winding down would destroy value because that would be shutting down an asset manager that does $100mm of EBITDA. The premise of this thesis is that the discount applied to a high fee externally managed BDC and mREIT and other assets ACAM manages is less than the capitalized earnings of the external asset manager. Basically 1+1 = 3 (this is certainly the case elsewhere).

 

Now an activist could try to keep everything in place in terms of the management agreements, but I imagine it would be very difficult and disruptive, if not impossible.

[thepupil]

http://finance.yahoo.com/news/american-capital-raises-510-million-200500599.html

 

closed another CLO...So $510MM of loans on ACAS's book becomes $490MM of cash and $20MM of retained portion of the equity tranche, which will give them the firepower to buy back all that stock.

 

I love the economics of the CLO equity issuer / asset manager at a discount (which describes ACAS and Tetragon, 2 of my largest positions).

 

Buy $510MM of collateral, sell $490MM to 3rd party investors, charge those investors 50 bps + 20% after a hurdle, keep $20MM of 10X levered credit risk. Let's just say they make no incentive fee and just make the 50 bps on the $490MM which is like $2.5MM.

 

So once you have enough scale at the asset manager to account for expenses (the revenue from AGNC and MTGE pays for a big chunk of the overhead at ACAS so it's almost all incremental dough to asset manager), your $20MM of super high risk highly levered CLO equity investment is earning 2.5MM of management fee per year and is supposed to make 15%+ if things don't blow up.

 

But as an equity owner of ACAS you get 30% discount (of tetragon you get a 40-50% discount), so the look through on that is that you own a $20MM slice of CLO equity at a cost of $14MM, it's paying $2.5MM of management fee and supposed to deliver mid teens IRR on the $20MM (of course it could also blow up). The management fee revenue AND the discount greatly reduces the risk. I'm not sure how long your average CLO lasts (I think 7-10 yrs but they amortize so they aren't the full size the whole time) but let's say you get about 5 or 6 yrs of management fee out of her, then you get almost all your capital back since you paid a big discount and only had $14MM at risk (and that's without incentive fees).

 

The economics of CLO equity in which you get the management fee income strike me as much better than 3rd party CLO equity (which is just highly levered credit exposure); tetragon's presentations point this out. It effectively allows for a higher default / chargeoff rate if we think of CLO equity as basically a bank This is why it warmed my heart when ACAS sold all their 3rd party CLO equity to a fund that they will then manage. Turning shareholders of ACAS into owners of cash + management fees.

 

Everything ACAS has done over the past yr or so is all about de-risking the balance sheet and growing third party AUM. Are they good at managing that? Would I invest my money in one of their funds? No. But they don't have to be for this to work.

 

Every time ACAS issues a CLO, it transforms boring L+400 assets into 94% cash, 6% 10X levered high risk assets with management fee on top of that. They then take that cash to do it all over again and churn through the securitization machine.

 

It is titillating.

 

Now if they could just sell the last of those crappy, possibly optimistically marked owned companies (CML BioPharma, I'm looking at you), then we'd really be in business.

 

Thanks for reading my rant which offered no new info (since we knew about this CLO from 2Q earnings). I just feel like this shitty PE/credit portfolio caterpillar is metamorphosing into a high-fee-on permanent-capital-charging butterfly before our eyes.

[thepupil]

for those following (all 3 of you) i think short term calls on ACAS are pretty compelling.

 

We know they are supposed to file the spin-off details by 9/30 and we also know they typically update on share re-po's shortly after quarter end, and it's been quite clear they are hoovering in lots of shares.

 

I bought a good amount just now.

 

The market may or may not care, or perhaps the waiting of the last minute to file the spinoff details is a bad sign, but I see 2 distinct events that have potential to move stock in near term in between now and Oct 16 expiry and the options seem a good speculation.

 

EDIT: They bought back 3.6% of shares this Q. Not bad, but I expected a little more. No spin-off filing yet.

 

 

[thepupil]

https://www.bamsec.com/filing/119312515334090?cik=817473

 

spin-off filing is here

 

looks like the old 1.75% of assets (big chunk of equity) fee with 100% of income from 8-10% of NAV and 20% above that and 20% of realized capital gains

 

I believe this is the same as PNNT.

 

I have no earthly idea why the management agreement between ACAS (parasite ManagerCo) and ACAP (host AssetCo) is for only 2 years and can be terminated without penalty. That presents huge activism risk to ACAS. I know they'd entrench themselves better than that! There surely must be a mechanism (like super voting shares or something that gives more stability to ACAS).

 

Management Fees

Pursuant to the Management Agreement, ACAP will pay the ACAP Manager the base management fee and the incentive fee as set forth in the Management Agreement. ACAP will pay, or reimburse ACAP Manager, for all costs and expenses incurred on its behalf, other than compensation expenses of personnel of ACAP Manager who provide investment advisory services to ACAP pursuant to the Management Agreement, to the extent of such services provided to ACAP.

Base Management Fee. The amount of the base management fee is equal to 1.75% per annum of the average value of ACAP’s gross assets, including its restricted and unrestricted cash and cash equivalents and assets purchased with borrowed funds or for which exposure is obtained through derivative agreements, each as determined under U.S. GAAP at the end of each of the two most recently completed calendar quarters or if prior to completion of two quarters since the Spin-Off, at the distribution date and the first completed calendar quarter. The base management fee is payable quarterly in arrears, and the base management fee for any partial quarter will be prorated based on the number of days in such quarter.

 

AMERICAN CAPITAL, LTD. – Proxy Statement    37

Table of Contents

 

PROPOSAL 2: APPROVAL OF MANAGEMENT AGREEMENT WITH AMERICAN CAPITAL INCOME, LTD.

 

 

Incentive Fee. The incentive fee will be divided into two parts, one based on ACAP’s income and one based on ACAP’s capital gains. The two components are independent of each other such that one component may be payable even if the other is not. The incentive fees for any partial period will be appropriately prorated.

Incentive Fee Based on Income. Beginning with the calendar quarter that commences on the distribution date, the incentive fee based on income will be determined and paid quarterly in arrears at the end of each calendar quarter by reference to ACAP’s aggregate net investment income, as adjusted as described below, from the calendar quarter then ending and the eleven preceding calendar quarters (or if shorter, the number of quarters that have occurred since the distribution date). We refer to such period as the “Trailing Twelve Quarters.” ACAP Manager will be entitled to receive the incentive fee based on income if ACAP’s Ordinary Income (as defined below) exceeds a quarterly “hurdle rate” of 2.0% as described below. For this purpose, the hurdle is computed by reference to ACAP’s NAV and will not take into account changes in the market price of ACAP’s common stock. The hurdle amount for the incentive fee based on income will be determined on a quarterly basis, and will equal 2.0% multiplied by ACAP’s NAV at the beginning of each applicable calendar quarter comprising the relevant Trailing Twelve Quarters. The hurdle amount is calculated after making appropriate adjustments for subscriptions (which shall include all issuances by ACAP of shares of its common stock, including issuances pursuant to its dividend reinvestment plan, if any) and distributions that occurred during the relevant Trailing Twelve Quarters. For the portion of the incentive fee based on income, ACAP will pay ACAP Manager a quarterly incentive fee based on the amount by which (a) aggregate net investment income (“Ordinary Income”) in respect of the relevant Trailing Twelve Quarters exceeds (b) the hurdle amount for such Trailing Twelve Quarters. The amount of the excess of (a) over (b) described in this paragraph for such Trailing Twelve Quarters is referred to as the “Excess Income Amount.” For the avoidance of doubt, Ordinary Income is net of all fees and expenses, including the base management fee but excluding any incentive fee.

The incentive fee based on income for each quarter is determined as follows:

 

•

No incentive fee based on income is payable to ACAP Manager for any calendar quarter for which there is no Excess Income Amount determined with reference to the Trailing Twelve Quarterly period;

 

 

•

100% of the Ordinary Income, if any, that exceeds the hurdle amount, but is less than or equal to an amount, which we refer to as the “Catch-up Amount,” determined as the sum of 2.5% multiplied by ACAP’s NAV at the beginning of each applicable calendar quarter comprising the relevant Trailing Twelve Quarters is included in the calculation of the incentive fee based on income; and

 

 

•

20% of the Ordinary Income for the Trailing Twelve Quarterly period that exceeds the Catch-up Amount is included in the calculation of the incentive fee based on income.

 

The amount of the incentive fee based on income that will be paid to ACAP Manager for a particular quarter will equal the excess of the incentive fee so calculated minus the aggregate incentive fees based on income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters but not in excess of the Incentive Fee Cap (as defined below).

The incentive fee based on income that is paid to ACAP Manager for a particular quarter is subject to a cap (the “Incentive Fee Cap”). The Incentive Fee Cap for any quarter is an amount equal to (a) 20% of the Cumulative Net Return (as defined below) during the relevant Trailing Twelve Quarters minus (b) the aggregate incentive fees based on income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters.

“Cumulative Net Return” means (a) the Ordinary Income in respect of the relevant Trailing Twelve Quarters minus (b) any Net Capital Loss, if any, in respect of the relevant Trailing Twelve Quarters. If, in any quarter, the Incentive Fee Cap is zero or a negative value, ACAP Manager will receive no incentive fee based on income for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is a positive value but is less than the incentive fee based on income that is payable to ACAP Manager for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, ACAP Manager will receive an incentive fee based on income equal to the Incentive Fee Cap for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is equal to or greater than the incentive fee based on income that is payable to ACAP Manager for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, ACAP Manager will receive an incentive fee based on income equal to the incentive fee calculated as described above for such quarter without regard to the Incentive Fee Cap.

 

38    AMERICAN CAPITAL, LTD. – Proxy Statement

Table of Contents

 

PROPOSAL 2: APPROVAL OF MANAGEMENT AGREEMENT WITH AMERICAN CAPITAL INCOME, LTD.

 

 

“Net Capital Loss” in respect of a particular period means the difference, if positive, between (a) aggregate capital losses, whether realized or unrealized, in such period and (b) aggregate capital gains, whether realized or unrealized, in such period.

Incentive Fee Based on Capital Gains. ACAP Manager will also be entitled to a quarterly incentive fee based on capital gains, equal to (a) 20% of the difference, if positive, of the sum of ACAP’s aggregate realized capital gains as determined under U.S. GAAP, if any, computed net of ACAP’s aggregate realized capital losses, if any, and ACAP’s aggregate unrealized capital depreciation, for the calendar quarter then ending and the preceding nineteen calendar quarters, or, if shorter, the number of quarters that have occurred since the distribution date (such period is referred to as the Trailing Twenty Quarters) as described below minus (b) the aggregate amount of incentive fees based on capital gains previously paid to ACAP Manager over the Trailing Twenty Quarters. For the avoidance of doubt, unrealized capital gains are excluded from the calculation in clause (a) above. Realized capital gains, realized capital losses and unrealized capital depreciation will be determined by reference to and correspond to realized gains, realized losses and unrealized depreciation as determined under U.S. GAAP. However, in accordance with U.S. GAAP, ACAP will accrue, but not pay, a portion of the incentive fee based on capital gains with respect to net unrealized appreciation. In calculating the accrual for the incentive fee based on capital gains, ACAP will consider the cumulative aggregate unrealized capital appreciation in the calculation, since an incentive fee based on capital gains would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Management Agreement. This accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital appreciation or depreciation. If such amount is positive at the end of a period, then ACAP Manager will record a capital gains incentive fee equal to 20% of such amount, minus the aggregate amount of incentive fees based on capital gains paid in the trailing twenty quarters or since the Spin-Off and the incentive fee based on capital gains accrual as of the end of the prior period. If such amount is negative, the incentive fee based on capital gains accrual will be reduced to zero. There can be no assurance that such unrealized capital appreciation will be realized in the future.

Duration and Termination

The Management Agreement will have an initial term that expires two years after the Spin-Off. Unless terminated earlier, the Management Agreement will remain in effect from year-to-year thereafter if approved annually by ACAP’s Board of Directors or by the affirmative vote of the holders of a majority of ACAP’s outstanding voting securities, and, in either case, if also approved by a majority of ACAP’s Independent Directors. The Management Agreement will automatically terminate in the event of its assignment, as defined in the 1940 Act, by the ACAP Manager. The Management Agreement may also be terminated at any time, without the payment of any penalty, upon 60 days’ written notice, by (i) holders of a majority of ACAP’s outstanding voting securities, (ii) ACAP’s Board of Directors or (iii) the ACAP Manager.

 

They are seeking special permission to issue shares below NAV in order to deal with the whole stock option thing. It sounds really slimy (what doesn't with these guys?) but I think it actually makes sense.

 

This is important to understand: Thus, the issuance of shares below NAV per share in the tender offer would not likely result in any dilution above the level that will already occur as a result of the exercise of all outstanding in-the-money employee stock options.

 

After considerable deliberation, our Board of Directors has concluded that it may be in stockholders’ interest to reduce the number of shares that need to be sold into the market from option exercises by conducting a tender offer for outstanding employee options. The price for the tendered options is expected to be the then current market price for the Common Stock at the time of the tender from which the exercise price of tendered options would be deducted. The tendering option holder would receive the resulting net amount in cash sufficient to pay the income tax due from the option exercise with the balance of the value delivered in the form of shares of American Capital Common Stock. Generally, this would have the same effect as a net issue exercise described above. However, considering the current and recent trading price of our Common Stock, American Capital may have to issue shares in the tender offer at a price below NAV per share. Because of the 1940 Act restrictions on issuing shares below NAV per share, stockholder authority to do so in connection with the tender offer is being sought by this proposal.

 

[Picasso]

pupil,

 

Explain like I'm 5: whats the opportunity here? There's lots of orphaned yield/BDC/REIT/CEF's right now, why is this a good one?  I'm somewhat familiar with whats going on but am having trouble breaking it down to a simple thesis. 

[thepupil]

Some people like pizza with pepperoni (yieldy assets)

 

Some people like pizza with vegetables ( high fee charging asset managers with lots of permanent capital )

 

Not many people like pizza with pepperoni and vegetables (the two together)*

 

No one likes ordering pepperoni pizza (yieldy assets) and not getting pepperonis (no dividends since 2008)

 

Going forward those who like pepperoni will get their pepperoni and those who like veggie will get veggie.

 

 

And maybe it will trade higher than 58% of NAV*

 

Market Cap:                $3.3B

Pro-forma BDC equity: $4.1B

 

You are buying just the crappy BDC at 80% of NAV. And you get the manager. The manager made $76MM of pro-forma ENI (that's a scary phrase that ignores high stock comp) in the first 6 months of 2015. The manager can easily make $100MM / year steady state. They'll have $240MM of annualized management fee income and lots of their expenses will be reimbursed by ACAP.

 

 

There may be a lot of busted BDC's out there but there aren't a lot at 58% of NAV. I got the beta totally wrong here (when i started this was 80% of NAV and ARCC was 110%, now this is 58% and ARCC is 85%). But ACAS's balance sheet has only improved over that time and now is a lot of senior bank debt which is much more transparent.

 

 

*A major quibble is NAV includes their own assessment of the asset manager. I am comfortable with said assessment and actually think it's low, particularly given the management agreement they just signed

 

*I actually do like a good supreme slice but you asked for 5 year old

 

EDIT: Another fun way to look at it is to take the value of the assets and just start impairing the shit out of them and see what it takes for you to lose lots of dough (pizza dough?). When you are buying $5.1 for $3.3, you can afford to lose out big. You can say their portfolio of legacy shitty PE equity companies is worthless (-1.2B) that will get you to $3.9B, then you can say their CLO stuff is worthless (though they sold a lot of the riskiest recently) and chop off another $700M or so. Now you're at $3.2B. Then maybe you say the asset manager is worth 50% of the $1B mark because of all those issues. Now you're at $2.8B and oh no you're now down a whopping 15% from the price. In short, in order to really get permanently impaired here, you need everything to fall apart.

[Picasso]

So is the idea to buy this and sell the yield asset and get the asset manager at a massive discount? 

 

Do you think that over the long-term, ARCC can just outearn ACAS to justify paying 85% versus 58% of NAV.  Is there some structural difference to paying $58 versus $85 of this $100 bill?

[thepupil]

frankly i don't have a plan yet because i don't know where either will trade. I definitely prefer to be a parasite (asset manager) rather than a host (yieldco) but it all depends on what price

 

At this rate the yieldco will be at 50% of NAV and the asset manager will trade at 5X earnings!

 

ACAS has crappier asset quality than ARCC. It's really barbelled. they've migrated the proceeds of the companies they could sell into very boring bank debt, but then there's a $1.2B portfolio of equity that they haven't sold. That's a big swing factor. Thankfully you aren't really paying for it.

 

And to be clear you are paying about 80% of investment assets equity and 58% of NAV. NAV includes the asset manager market at their estimate and a deferred tax asset that will stay at the asset manager. The parasite won't pay taxes for a little while. The asset manager also owns some investment assets and will incubate new strategies, so it won't be totally "asset lite" to use the term du jour.

 

Read the spin-off filing in conjunction with the Q. I just skimmed through the filing now and there's nothing too unexpected (except there don't appear to be safeguards to keep the management agreement in place which if true is absurd) but I'm in eastern time zone and its bed time.

[Picasso]

Thanks.  The idea makes a lot of sense, you're probably getting the asset manager for free or close to it if the market prices the yieldco at an okay valuation.  So if the stock doesn't move tomorrow, is there something we might be missing?

 

Reminds me of the Sears rights offering from last year where the rights were priced  to let you buy into the notes or warrants for free as long as they traded close to the rest of the Sears capital structure.  In this case you just need the yieldco to trade in line with other BDC's?

 

Is there a BDC yieldco out there we can directly compare which doesnt include the asset manager?

[thepupil]

Thanks.  The idea makes a lot of sense, you're probably getting the asset manager for free or close to it if the market prices the yieldco at an okay valuation.  So if the stock doesn't move tomorrow, is there something we might be missing?

 

Reminds me of the Sears rights offering from last year where the rights were priced  to let you buy into the notes or warrants for free as long as they traded close to the rest of the Sears capital structure.  In this case you just need the yieldco to trade in line with other BDC's?

 

Is there a BDC yieldco out there we can directly compare which doesnt include the asset manager?

 

I believe every other BDC (that I know of at least) is externally managed (i.e. the asset manager is separate and the BDC pays fees to the asset manager). Every other BDC that trades at a discount in part trades at a discount because of the high fees. What I like about ACAS (and Tetragon) is that you own the fee payer and fee gatherer (tetragon is even more complex and hairy though)

 

What we might be missing is that we may be on the verge of a fucking credit crisis based on the action in BDC's, REITs, CEF's.

 

What we might be missing is that management are known to be slime balls and they may be slimier than is already expected/known. I actually think they've done everything they say they would do over the past 1.75 years since i've been following (albeit slowly) and kind of sort of act in the best interest of shareholders (because of all the options they got in the crisis they are weirdly aligned).

 

the equity portfolio (see packer's objections beginning of thread) is generously marked and there's now way to DD some of the smaller credits they own (not the stuff that is publicly traded but the little private company loans).

 

the asset manager is heavily reliant on AGNC and mREITs, though they are growing nicely outside of there and this transaction will diversify management fee revenue

 

it's a hairy piece of shit company. period the end.

 

[Picasso]

For what it's worth I thought that by the time Icahn puts out a Youtube video rambling about a crisis in junk bonds, we're probably not going to get a junk bond meltdown.  At least not soon.

 

In my opinion I think we're seeing the unusual effect of reversing several years of ZIRP (investors not used to change) and widening spreads on energy related junk debt.  It's filtering out to other areas a bit but I think it's mostly blowback from redemptions and worries about a credit crisis or whatever.  I've mentioned this to other before, but you sort of have to invest in yieldy assets that are hit when the Fed strings along investors with the rate roadmap.  Market has historically overreacted and you get to buy some spread product at less risky levels.  The Fed can only move around rates enough to keep credit conditions okay, rising or falling rates isn't always that correlated with credit conditions.  Probably too much "Fed is raising rates, this is bad for all yield assets" movement from asset managers.

 

But anyway I understand the idea now.  I'm tempted to put it on but if the stock doesn't move tomorrow, there is probably something non-obvious that I'm missing.  I've had this stock on my to do list for a while but never had the time to dig in relative to some other ideas...  But I feel the same way about some other yield plays the market couldn't give a crap about right now. 

 

 

[thepupil]

Picasso, I agree with your general market thoughts; a lot of these vehicles are acting like the Fed just hiked by 300 bps or the economy is already in a decent recession. 

 

One thing I wanted to point out that I have mentioned many times in the thread but not in our discussion last night is there is a lot of pending option dilution, so it actually trades at 65% of diluted NAV.

 

Now they are buying back 3%+ of share / quarter down at this valuation which is offsetting more and more of that. But I didn't want you to potentially buy thinking you were paying 58% when you are in reality (assuming no future repo's) paying 65%. Do your own DD and read a few K's and Q's just to get a feel for the assets. Some will undoubtedly give you a little pause. It's in the price, in my opinion but that's not the only interpretation.

 

 

[tytthus]

I have no earthly idea why the management agreement between ACAS (parasite ManagerCo) and ACAP (host AssetCo) is for only 2 years and can be terminated without penalty. That presents huge activism risk to ACAS. I know they'd entrench themselves better than that! There surely must be a mechanism (like super voting shares or something that gives more stability to ACAS).

 

i believe most or all externally managed BDCs have agreements that can be terminated.  composition of BoD seems to make it next to impossible for that to happen though.  add high retail ownership (i think?) adds to difficulty of activist meddling.  i'm of the opinion that there are several BDCs that deserve to get shaken up.

 

Bulldog investors pressured SVVC to make some shareholder friendly moves, not sure if they threatened to push for management agreement termination or not.

 

as far as internally managed BDCs, there are a few....HTGC, MAIN, TCAP, CSWC.  i'm probably forgetting a few.

[thepupil]

http://finance.yahoo.com/news/american-capital-closes-450-million-133000356.html

 

Closed the aforementioned CLO equity fund, which converts some of ACAS's riskiest assets into cash and increases externally managed fee paying AUM by 3%.

 

Earnings are tomorrow, along with guidance and 3-year projections on the split-up companies

 

http://ir.americancapital.com/phoenix.zhtml?c=109982&p=irol-newsArticle&ID=2092175

 

The Company also announced that in conjunction with its reporting of third quarter 2015 earnings, it plans to release forecasts of certain financial information and related assumptions for itself and for American Capital Income, Ltd., the proposed new business development company it has previously announced that it plans to spin-off to its shareholders through a special dividend.  The Company expects that the forecasted information will cover a three-year period.

 

[thepupil]

https://www.bamsec.com/filing/81747315000046?cik=817473

 

ACAS earnings out. Slight loss offset by major repurchases to grow NAV by a hair.

 

Here is the long awaited, all too optimistic and promotional 3 year projection for the split up companies.

 

So HostCo (also known as ACAP) will have $3.5B of equity. They project a 7% ROE after fees.

 

And ParasiteCo (the asset manager) will make $144MM of pre-tax income from managing assets along with a $470MM co-investment portfolio and $1.1B of equity. They won't pay taxes for 3-4 years under ACAS's rosy projections and probably more under more realistic assumptions.

 

Assuming they make no incentive fees, pre-tax income will  be $102MM. The year one projections look to make sense assuming their co-investment assets don't fall apart.

 

the projected equity of the two companies is $4.6B, compared to $5.3B today. I am assuming this accounts for lots of share repurchases in between now and the split.

 

So if we assume all ITM options are exercised there will be 289MM shares and $5.5B of equity. then if $600MM are purchased at $14.00 that gets rid of 43MM shares and knocks down equity to $4.9B...not sure where the missing $300MM went...will have to have a look after work. I think it could be the dividend at ACAP.

 

Edit: part of the decline in equity is the asset manager will no longer be valued as a separate line item on the balance sheet, obviously. Hadn't had my coffee.

 

EDIT: Also

 

It should be noted that the balance sheet forecast assumes that we will make approximately $465 million in additional share repurchases and we will tender for $20 million stock options before the spin-off occurs and that we will have approximately 245 million shares outstanding at that time. Using shares to pay a portion of the tender offer it is of course subject to shareholder approval and is one of the matters covered by the preliminary proxy statement.

 

So using 245 million shares.

 

We have                                                              Valuation Range

$3,300 of Host Co equity      ($13.46 / share)            70-90%              $9.4 - $12.11

$1,100 of Parasite Co equity  ($4.49 / share)

 

So using current price of $13.71 and the range of HostCo valuations ( I guess we can call it ACAP now), then we are paying    $1.6 -  $4.3 for the asset manager  ($392MM - $1B),

 

2.8X - 7.1X projected pre-tax earnings. now i think there is a chance that the earnings are too optimistic. Let's just say they make $100MM pre-tax (rather than $140MM). then you are paying 4 - 10X pre-tax.

 

Even if you are only willing to pay 70 cents on the dollar for ACAP (the BDC), you are paying 10X pre-tax my spitballed earnings which are 28% lower than year 1 management projections.

 

Very basic sensitivity thingamajig below, using projected equity and pre-tax income at  various multiples. I think 80% and 10X seems reasonable. It all depends on whether market will give ACAS credit for being less concentrated in terms of clients than, for example, FSAM, or whether the market will care that ACAP has improved the quality of its book and may deserve to trade between slimy BDC and the higher quality ones.

 

I'm very glad I've been doubling and tripling down recently and made this very big, but the initial purchase was not cheap enough and I was way too early here.

 

[sys]

thepupil, thanks for continuing to update this thread.

[thepupil]

I don't understand why ACAS is not targeted by an activist. There is a discount to NAV and self-serving management.

The steps would be easy:

• wind down/sell assets
  
• buy back shares at discount
  
• replace management and thereby cutting cost
  

 

Okta, you were right.

 

http://www.businesswire.com/news/home/20151116005412/en/Elliott-Announces-Stake-American-Capital

http://www.betteracas.com/

 

 

[Picasso]

http://fultonviewresearch.blogspot.com/

 

He or she isn't a fan of the way the assets are marked.