American Capital Reports Q3 Earnings & Split; Shares Surge
Following American Capital, Ltd.’s (ACAS) announced plan of splitting the company into three public-traded companies along with its third-quarter 2014 results, shares of the company jumped 9.82% in after-hours trade. The private equity firm and global asset manager reported net operating income per share of 18 cents, surpassing the Zacks Consensus Estimate by 2 cents. Moreover, results compared favorably with the prior-year quarter earnings of 8 cents.
Better-than-expected results were driven by higher revenues, partially offset by elevated expenses. Moreover, new investments and realization from portfolios were the positives.
Net operating income for the quarter more than doubled on a year-over-year basis to $51 million. Net earnings came in at $114 million or 41 cents per share, compared with net loss of $1 million or break-even earnings per share in the prior-year quarter.
Split in Detail
American Capital will split the businesses and spin off two business development companies (BDCs) – American Capital Growth and Income with $3 billion of equity and American Capital Income with $1 billion of equity. The company will transfer most of the investment assets to these companies and will itself continue mainly in the asset management business.
Further, American Capital came up with a cost reduction plan following the above-mentioned changes in its investment portfolio. The costs saving initiatives are expected to reduce costs annually by about $25 million, beginning in early 2015. Additionally, on adoption of a new program, the portfolio companies in which American Capital or its managed funds have invested will reimburse the company at an annual rate of $21 million by the end of 2015.
Moreover, following the split, at least $25 million of the company's current annual SG&A, which is for the benefit of funds, will be under management, and it is expected that the amount will be paid back to American Capital under management fee agreements.
Quarterly Results in Detail
Total operating revenue was $129 million in the quarter, up 22% from the prior-year quarter. The upsurge was primarily due to higher interest and dividend income, partially offset by lower fee income. Also, operating revenue surpassed the Zacks Consensus Estimate of $110 million.
Total interest and dividend income was $115 million, up 26% year over year. However, fee income decreased 7% year over year to $14 million.
Operating expenses surged 7% year over year to $63 million. The rise in expenses was primarily due to elevated salaries, benefits and stock-based compensation along with higher interest expenses, partially offset by decrease in general and administrative expenses.
American Capital’s asset coverage ratio decreased to 423% in the quarter from 785% in the prior-year quarter. The company made new investments of $1,443 million during the quarter while strengthening its balance sheet. Notably, $825 million was invested in Senior Floating Rate Loans and $618 million was invested in Sponsor Finance, Structured Products and American Capital Asset Management, LLC (:ACAM).
In Apr 2014, American Capital formed American Capital Equity III, LP (ACE III), the fifth company investing in private equity with $1.1 billion of assets and capital. In Sep 2014, American Capital received proceeds worth $540 million from the companies sold in the ACE III transaction. Notably, during the reported quarter, the company recorded a net realized gain of $62 million including $107 million of net realized gain on the redemption of partnership interest in ACE III, offset by realized loss worth $45 million associated with the fair value of the equity option at the closing date of the transaction.
Moreover, the company recorded $1,142 million of cash proceeds from the realization of portfolio investments. This includes dividend distribution worth $127 million from European Capital and proceeds worth $540 million from the ACE III transaction.
As of Sep 30, 2014, non-accrual loans were $172 million, representing 5.7% of total loans at fair value compared with $169 million and 11.3% as of Sep 30, 2013. Net asset value (NAV) per share came in at $20.54, up 5% or $1.00 per share from $19.54 as of Sep 30, 2013. The weighted average effective interest rate on the company’s debt investments as of Sep 30, 2014 was 6.8%, down from 10.8% at the end of the prior-year quarter.
In Conclusion
In spite of the volatile capital markets affecting valuations of the investment portfolio in the quarter, the overall underlying performance of American Capital’s portfolio companies continue to remain positive. Also, we are encouraged by the company’s continued efforts in balance sheet repositioning.
Moreover, the split will help American Capital to focus on its core asset management business and benefit its shareholders. Such a move will make the business transparent for the investors and make the company more competitive in the market.
Though the improved portfolio performance is expected to continue with the economic recovery, we believe the low interest rate environment and global cues might act as headwinds in the upcoming quarters.
Currently, American Capital carries a Zacks Rank #3 (Hold). Some better-ranked companies in the same sector include Fifth Street Senior Floating Rate Corp. (FSFR), Fifth Street Finance Corp. (FSC) and Alcentra Capital Corp. (ABDC). All these companies carry a Zacks Rank #2 (Buy).
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