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American Capital Buys Back Shares

Zacks Equity Research

On Wednesday, American Capital Ltd. (ACAS) announced the repurchase of its common stock worth $125.0 million in open market in the third quarter of 2012. The company repurchased a total of 11.4 million shares of its common stock at an average price of $10.99 per share. Number of shares repurchased represent 3.6% of the company's outstanding shares of common stock as of June 30, 2012.  

Since the initiation of the new program of capital deployment in September 2011, American Capital has repurchased 43.6 million shares of its common stock for $392.3 million, including the current buyback. The average purchase price came in at $9.00 per share.

As of June 2012, share repurchases improved the company's net asset value (NAV) per share by 65 cents, bringing the total to $16.62. However, in the absence of this share buyback activity, American Capital would have been required to earn an additional $207 million during the past four quarters since June 2011, to record the current level of NAV per share.

The company is progressing with its capital deployment policy based on the new program adopted. According to the plan, American Capital keeps aside a certain amount for either stock repurchases or dividend payments, on a quarterly basis. The quarterly amount depends on the company’s cumulative net cash from operating activities in the prior quarter and since the beginning of 2012.

Further, cash and cash equivalents in hand, cumulative repurchases or dividends, debt position, investment plans and operational issues are also the determining factors of the quarterly amount. Last but not the least, the current trading price of American Capital's common stock, its financial liquidity and the ongoing economic conditions are also taken into consideration.

As per the company’s plan, if the price of American Capital's common stock trade is at a discount to the net asset value of shares, the company will opt for share repurchase. On the other hand, if the price trades at a premium, the company will decide on dividend payments.

The authorization of the new share buyback program and resumption of dividend payments raise our hopes for an enhanced investor confidence in the company. During the last quarter, American Capital’s asset coverage ratio improved substantially to 661% from 552% in the prior quarter. The company also repaid securitized debt of $191 million and increased investments by $103 million while strengthening its balance sheet.

Moreover, last month, the company completed the refinancing of its total recourse debt. The secured debt was being refinanced by a new 4-year $600 million institutional term loan facility with a LIBOR floor of 1.25%. The proceeds along with repayment of the existing recourse debt will be utilized for general corporate purposes.

American Capital’s successful restructuring of debt furnished it with sufficient operating flexibility. In addition, the company continues to de-risk its balance sheet through a number of initiatives including repayment of debt. Owing to the strong demand along with the support of a wide range of debt investors, the new loan facility will be a positive for the company.

Moreover, these transactions augment the company’s capital position and reduce interest expenses. However, the unstable economy and interest rate fluctuations could limit profitability and deteriorate the company’s strategic position in this sector.

American Capital currently retains its Zacks #2 rank, which translates into a short-term Buy rating. However, one of its peers, Main Street Capital Corporation (MAIN), retains a Zacks #1 rank (a short-term ‘Strong Buy’ rating).

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