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American Capital, Ltd. Message Board

  • engie095 engie095 Feb 16, 2012 9:02 PM Flag

    What exactly is negative about the results that ACAS reported?

    I'm trying to get a handle on everything (as everyone else is it seems), and I'm having trouble understanding the downside to the news that it'll take a lot longer (say 3 years vs 1 year) to utilize the loss carryforwards.

    Without yet understanding the details, to me it looks like this:

    1. Before the earnings release it looked like ACAS would exhaust it's carryforwards in about 1 year. Perhaps then they would return to a RIC.

    2. After the earnings release it looks like ACAS won't exhaust it's carryforwards for 3-4 years. (the issue of whether unrealized losses can be counted isn't yet understood, right?)

    Wouldn't #2 be better? Even though it would mean ACAS stays a C.Corp rather than returning to RIC, wouldn't it mean a lot more money saved over the next several years?

    An analogy might be asking whether I want to not have to pay personal income tax for the next 1 year or the next 3 years. Obviously I would rather not have to pay taxes for 3 years. What makes the situation with ACAS different in a way that the 3-4 year burn-through timeline is less desirable than the 1-year timeline? Is it only that they won't be paying dividends, and instead using the "would be dividend" cash to reinvest?

    Or is it that the company is in a worse situation than previously thought, and the advantage of the increased carryforwards is outweighed by whatever negative situation ACAS is now revealed to be in?

    So many questions.

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    • Tech--

      You make a number of interesting points, but there are a number of areas where I hope that I can show you a few points that you are missing.

      First, as long as my dividends are untaxed, I can do a better job of share "buy-backs" than management can. In particular, my share buying can take advantage of the deepest price dips, whenever the market is open; and I can make purchases (or sales) so large that they materially affect MY portfolio. I can triple my ACAS stock position in an instant, and ACAS itself cannot possibly do that.

      In contrast, ACAS has calendar restrictions on when it can buy, and in what amounts, so that there is no appearance of market price manipulation or trading on non-public information.

      For example, a few months back, ACAS was buying roughly in the 8.25-8.50 range; while at the same time the market was giving individual investors a 7.50 price; and not too long after that, there was a 6-dollar buying opportunity that ACAS was unable to take advantage of.

      But I agree with you that management is in a better position than I am to decide how much of the existing debt to repay. And that is not something that I could do for them. So my focus is on dividends versus stock buybacks.

      Another point that you raised was trust in management. I do not distrust their intentions; and I like the fact that they try to be transparent about where they want to take the company--though they are certainly prone to switch their stated directions more than I like.

      However, they are certainly prone to mistakes and hubris. Just for example, ECAS; overpaying for equity pre-crash, and buying too much of it; the covenant triggers; and a misconception about how good a relationship they had with their banks (as I recall vividly from Malon's cc, just before events proved him wrong).

      As it happens, I am not missing out on a good opportunity, as ACAS remains one of my larger holdings, but not because I don't expect further mistakes. Instead, the PRIOR mistakes and PRIOR losses have now caused the assets to sell for a really attractive discount. And despite prior mistakes, the management isn't terrible.

      If ACAS were selling for its full NAV value today, I'd certainly sell a lot of what I have, and I would have to think long and hard about how much, if any, to retain.

      Fortunately, "buy" was an easy call at several prices below 7.50, not to mention when it sold for 58 cents, and "keep a lot" is still my guess for the present.

      Still, I would be a lot happier if management didn't lose sight of the fact that they SOLD the PUBLIC a particular product, with a specific mission statement, and now they are apparently considering switching the nature of the product, to one that the public DIDN'T buy originally, after the public has already given them the money to play with. The ACAS stock price will go higher, I think, if the market can TRUST management not to feel free to do things like that.

    • Nov:

      "I am in the same group as well. So, for me, having the company retaining dividends, rather than distributing them, as a way to "grow" is pointless."

      First, I want to say I have significant holdings of ACAS in tax protected, tax deferred, and taxable accounts.

      Your comment above is really just plain incorrect. You may prefer to be receiving cash now through a dividend payment, rather than the accruing benefits of additional debt pay down, and share repurchases which lower outstanding share count and increase book value (per share). However it is difficult to argue that you are somehow worse off, when clearly in the long run you will receive not only a larger dividend, but also you should see a substantially higher share price.

      ACAS is and has not been a dividend paying holding since '08. It is not right for everyone for this reason. In addition holding ACAS still requires patience and trust in management.

      ACAS doesn't meet your criteria, and it seems you don't believe in management. There are many other companies that would pay the dividend you are looking for. For that you have to give up the share price appreciation that is likely to happen with ACAS over the next couple of years. Longer term you also will be giving up a dividend that looks like it will start at $1/hr. and I think likely to grow reasonably quickly to $2.

      I appreciate your frustration, but realistically I don't see any way ACAS management could be performing better than they are.

      It seems safe to say that most shareholders are disappointed with the stock price at sub $9 today. I am hoping the current rally will continue and we will see a $10 - $12 price as this rally continues.

      There is tremendous hidden value in ACAS this is reflected in the rebound performance since bottoming in '09.

      Don't let your frustration take you out of a position that is a tremendous long term holding. Shareholders will be payed many times over for foregoing a dividend.

      By definition it has always been the case that in a Roth IRA a shareholder does not receive certain tax benefits, that doesn't mean you should not shelter your money this way.

      Best luck,

    • It would seem wise to use the write-downs to offset income and recover what would otherwise have been lost. As I understand it, there is no way for shareholders to use the write-off, thus the change to a taxable entity. The question is how the benefits of this will accrue to us as shareholders. The dividend history of ACAS pre-crash was quite strong; now it's zero. Unless the stock price climbs along with the profit and gains of the company, it's the stockholders who are coming up short. I tend to think the share price will not follow suit, at least in proportion.

      I have also not found any statements on when or if the company will return to a RIC or non-taxable profit distribution structure. If you own and hold this stock assuming future dividends, it would be nice to know what the plan is. If anyone is aware of a company statement on that, I'd like to get a reference to it.

    • My answers to your questions:

      1. I think PPS growth can and will outpace NAV growth, even with no dividend. Remember, share buybacks can also drive share price growth, and the market will start recognizing the value and between these forces I think the share price will "close-in" on NAV. The management program to purchase shares when price < NAV is scheduled for 2012 only; of course, they could continue, but they are not required to do so. Finally, the current discount to NAV is really large; if the gap exists but is less than 10%, I could see them changing course towards a dividend instead of share repurchase, or some blended choice.

      2. The risk of mark-to-market is no longer realistically one of default on debt covenants because they have so greatly reduced leverage; rather, it is a risk to share price because the marks can affect NAV. The rules that require them to book increases and decreases to NAV based on comps to other companies creates greater volatility in NAV than may actually be occurring in the 'real' portfolio companies. This may result, as it did in 3rd qtr 2011, in 'bad' quarters where the company has negative income and NAV declines which tends to spook the market and drive share price volatility. It also makes the investment some what more dependent on macro economic effects, such as greece, euro, recession, etc.

      3. I also think that management has done an excellent job positioning themselves and that is why I continue to be bullish on the shares.

    • feralcomprehension feralcomprehension Feb 19, 2012 10:12 AM Flag

      This is a great thread; one of the best in some time on this board. After reading it and the presentation transcript I think a couple things I haven't seen anyone else point out.

      1. The agony on this board wasn't due so much to the prospect of having to wait a couple more years for the shares to start paying a dividend, but rather *the sudden change* in message. We went from thinking that the divs would restart in Q4'12/Q1'13 to "three or four years to burn thru losses." A smart investor is unaffected by the actual event, but *is also keenly aware of sudden 'discrepancies' on the part of statements by management*. As well they should be- I seem to recall Enron unraveling pretty rapidly at the end; we're all more sensitive as a result. So it's not that the alternate reality was horrible, it was the surprise switch got people (me!) in a tizzy.

      2. "We are a long-term, patient investor." For months (years!) we and ACAS' management have been talking about what a great deal these shares are. "Long-term" in this context means years, not quarters, and since the current market environment is such that ACAS' best potential investment may well be ACAS would it surprise anyone to discover that management had put a little potentially negative spin on the accounting changes to delay share price appreciation? Brilliant, very crafty, and very much in keeping with the long-term vision. A simple head fake to allow them to keep picking up shares on the cheap *because they're convinced of the superiority of the investment.


    • Do you think they'll ever get PPS above NAV before reinstating dividends? If they're not paying a dividend, why would PPS growth ever outpace NAV growth? I think a reasonably good point has been made on this board that we shouldn't expect PPS > NAV until dividends are reinstated, but management is not going to do that until PPS < NAV. Catch-22, no?

      Since the debt covenants no longer have net worth requirements, what do you see being the risk from mark-to-market? The 1:1 requirement for BDCs?

      Yeah, they got hammered in 08/09, but understanding why things weren't as bad as they seemed (thank you Jaded Consumer) and the way that they positioned themselves with respect to their lenders impressed me enough that I trust their ability to manage things.

      Thanks for the excellent posts.

    • I agree with your post in so many ways, but disagree somewhat with the conclusions. ACAS has a pile of undervalued assets, many pre-crash, and they are selling them off and consistently realizing the current 'fair value' mark on these assets. This process requires patience in this economy, as they keep telling us :) However, with only about 1 billion left in senior debt, and 100 million dollar realizations like yesterday, it won't be too long before they could actually retire all the debt and still be left with a large pile of performing assets!

      The company is also recognizing the limited opportunities to invest "new money" - so they have chosen (rightly in my opinion) to use valuable liquidity as follows: 1. Retire high priced debt, 2. support EXISTING portfolio, so as to maintain/improve the existing asset values, 3. repurchase shares because they are trading at a SUBSTANTIAL discount. In addition, in a way that I must admit I never would have thought of, they are turning themselves into a huge fee machine by managing OPM (other people's money) with MTGE, etc. This income is much more reliable, and does not carry direct 'mark to market risk' to ACAS bottom line. These streams are just getting started, too. All of these uses of the money now are not going to 'grow' the company and indeed look at the balance sheet and you will see that they are steadily shrinking, but becoming more profitable with each step.

      Once the market begins to recognize that the NAV is real, and especially as NOI grows, the market price will close in on the NAV. Whether or not the company is a C-corp, RIC, BDC, limited partnership, LLC, etc., it will start delivering a nice dividend to shareholders. I think it all depends on your view of how well current management is doing on managing through the downturn - there is no question that they got caught with their pants down in 08. Now they are making the right moves to improve NOI and NAV, which in the end will count for everything.

    • Its_Not_My_Business_But Its_Not_My_Business_But Feb 17, 2012 2:26 PM Flag

      They can't talk outside of GAAP. These are the rules of how they are supposed to report it.

      Maybe they can actually realize/liquidate sufficient assets in the count to keep covering income .. maybe that's the plan.

      We'll just have to watch over the next quarters


    • Sorry about that. But what bothers me and I'm sure you too is why they couldn't explain the true amount that they can currently apply to offset taxes? They allowed this questioner in the CC to lead investors to believe that it realistically take 3 to 4 years to eliminate the TLC's. That's nuts! I hope they give better guidance on this issue on the next CC.

    • Its_Not_My_Business_But Its_Not_My_Business_But Feb 17, 2012 1:02 PM Flag

      >> NMB, is this what you confirmed with IR?

      Come on Len .. you cut me to the quick!



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