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American Capital, Ltd. Message Board

  • bjfcpainc bjfcpainc May 7, 2013 9:19 AM Flag

    Nonaccruals highest among major BDCs

    ACAS is back to old form with significant increase in nonaccruals as percent of portfolio year over year. It makes sense for ACAS to go even longer now in maintaining a no dividend policy. The clue is management is focused on share repurchase (a form of self-liquidation and a no growth strategy in the interim) at significant discount. I have to say that is a better interim strategy than their pre collapse strategy of a phonied up dividend level based upon juiced up financial structured assets that collapsed to zero value.

    Growth investors playing the discount to nav keep the stock value higher. The question is based upon the limits of noi ACAS will not offer investors a decent dividend yield for the risk of owning a BDC at these price levels to justify owning ACAS when/if it can convert back to BDC status. For now growth investors playing ACAS for growth rule the day and allow ACAS to buy in shares on the cheap. When the NOLs are all used up ACAS can settle out of the string of increasing quarter on quarter nonaccruals it will have to decide what it wants to be..... there is a possibility and I would expect if ACAS goes back to BDC status that its shares would be discounted in order for investors to attain an in-BDC sector yield closer to the market rates earned by BDC investors today. That would mean ACAS trying to get nearer to nav before conversion only to fall back after conversion as growth investors bail; income investors re-enter but demand an appropriate yield for the risk of ownership of a BDC.

    If you are in ACAS for growth you will have to consider leaving when/if ACAS gets as close to nav as is possible. Income investors may get in immediately only to be disappointed by the yield and get out because no matter how you slice and dice it ACAS is NOT best of breed in its investment choices as it relates to mezzanine and investors have been better served by ARCC, PSEC, and several other BDCs that continued to pay dividends through the entire collapse

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    • bjfc //

      Your point regarding valuation based upon NOI's alone is correct. Of course, when ACAS was a high dividend paying BDC, they blended both cap-gains and NOI's to distribute a reliable and competitive dividend for many years, which of course was the source of the cries that ACAS was using its 2nd's to pay the dividend, because those criers only pointed to NOI and not realization gains.

      I would agree that 'the market' wouldn't be so generous in valuations with ACAS in its current form and discount the reliability of the non-NOI components of a future dividend, thus keeping ACAS's PPS depressed.

      Thus, this is the basis of the conversations regarding restructuring.

      Certainly the loan-book of ACAS is capable of supporting a dividend return at a GT NAV price (see my previous analysis). So, the idea of breaking ACAS into 2 or 3 entities makes the most sense, each structured and eventually valued in their own space.

      ACAS-BDC (loan-only, dividend-paying BDC, externally managed by ACAM)
      ACAM (asset manager - possibly also dividend paying)
      ACAS-DHC (majority equity holding, control company focus, paying a small or no divi)
      ECAS (part of ACAS-DHC or re-PO'd)


    • So your scenario is that investors will be unwilling to pay fair value for the assets that ACAS has invested in equities (about 50% v debt) and further, ACAS will be unable or unwilling to redeploy those assets into interest bearing investments in order to increase dividend distributions to shareholders. In conclusion, investors will continue to turn a blind eye to value and the management is just plain stupid.

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