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American Capital's Value Vexes Investors Nicholas Yulico, TheStreet.com 9-04 The recent private equity boom propelled assets of all kinds to record valuations. In that environment, investment firm American Capital Strategies was a great stock to own. Now things have changed. The buyout boom is fizzling out. Asset values are depreciating because deals are being renegotiated and underwriting was too optimistic. Tougher credit markets are forcing deal volume to slow dramatically. Management has been telling investors recently that the stock is wildly cheap, at around $41, or 1.1 times book value, with a 9% dividend yield. But bears say the stock faces much more trouble. They believe the company's investment portfolio is set to be marked down in value in coming quarters, which will hurt book value and create losses. American Capital's impressive profit growth in recent years was fueled by its rapidly expanding asset base, which increased the amount of interest and dividend income the company received from its investments. This piece of the company's business represents about 75% to 80% of profits. The rest of the profits come from an asset management business. The investment portfolio totaled $11.5 billion of "fair value" at the end of June, according to the company's balance sheet. That was up 64% from a year earlier. This portfolio, however, is somewhat opaque. American Capital discloses its investment stakes -- which include various forms of debt and equity -- in each of its companies each quarter, but it never explains how the values are determined. The portfolio also includes commercial mortgage-backed securities and other collateralized debt securities. Assets are revalued every quarter, with the last mark-to-market coming at the end of June -- before the acceleration of the credit crunch that is hurting buyout deals. But there is no breakdown about these portfolio companies' profits or which multiples are being used for the values. Since most of American Capital's investments are in private companies, the entire portfolio's value is even harder to grasp. "We remain wary of the company's portfolio valuation (since there is no liquid market for its assets)," said Bank of America analyst Robert Lacoursiere in an early August research note, where he downgraded the stock from buy to neutral. Skeptics say the investment portfolio may be subject to large writedowns in coming quarters in light of the revaluation of assets worldwide. "American Capital aggressively collected assets during the market bubble and paid top dollar for CMBS, CLOs, leveraged loans for LBOs and equity investments in LBOs," says Brad Golding, managing director with Christofferson, Robb and Company, a bond firm that also manages a long/short equities fund. Golding's firm does not disclose its investment positions. The issue is particularly of note since American Capital's asset values ballooned each quarter. "Over the past 18 months, they further marked up these investments, taking over $850 million of unrealized gains into income," Golding says. "If they accurately mark their positions, they will not only see these gains evaporate but be forced to take further losses on investments. This will no doubt swing the company to a loss in the third quarter." For its part, American Capital says that its portfolio is evaluated on an ongoing basis by advisory firm Houlihan Lokey Howard & Zukin. Houlihan sits in on the company's portfolio valuation decisions but only provides official opinions on a quarter of the investment portfolio each quarter, says Malon Wilkus, the CEO of American Capital. The entire portfolio is reviewed by Houlihan on an annual basis. Wilkus says transaction multiples have not fallen for the buyout deals it looks at. For instance, he says the troubled buyout of Home Depot's supply unit, which stoked the market's concerns about debt financing, is a poor proxy for American Capital's portfolio since his firm focuses on middle-market companies. "What is happening with these large companies where suddenly a huge set of buyers has disappeared has not necessarily happened to the middle market, where frankly there are a thousand middle-market private firms that have still got plenty of capital to buy companies," Wilkus says. Nonetheless, he admits writedowns could be coming."There may very well be depreciation," Wilkus says. "We'll find out at the end of the quarter." Not everyone is so optimistic. "The entire book value is stale and is not based on anything other than Houlihan," which is paid by American Capital, says one hedge fund short-seller of the stock. At the end of the day, values may ultimately be driven by the performance of the underlying companies in which American Capital invests. As one of the most prolific originators of debt and equity finance over the past few years, American Capital may have very well made some poor investments. "We believe even with ACAS' due diligence, low closing ratio, and near average debt-to-EBITDA multiples, the sheer volume of asset origination increases the probability that some bad apples have slipped through the company's origination platform," said Jefferies analyst Richard Shane in a recent research note, in which he cut the stock from buy to neutral. PCAP Does Secondary Offering Nicholas Yulico, TheStreet.com 9-04 Patriot Capital Funding announced that it has entered into an agreement to sell 2,000,000 shares of common stock at $13.25 per share, raising approximately $26.5 million in gross proceeds. PCAP expects to use the net proceeds from this offering to repay indebtedness under its amended and restated securitization revolving credit facility. Amounts repaid under its amended and restated securitization revolving credit facility will remain available to fund future investments and for general corporate purposes. On 9-04 UBS Downgraded KFN from Neutral to Sell. On 9-05 AINV declared its second fiscal quarter 2008 dividend of $0.52/share, payable on September 27, 2007 to shareholders of record as of September 13, 2007. On 9-05 CSE announced a dividend of $0.60/share, payable on September 28, 2007 to shareholders of record on September 17, 2007. On 9-06 PSEC declared a dividend of $0.3925/share, payable on 9-28-07 to shareholders of 9-19-07. On 9-14 NGPC declared a dividend of $0.35/share to be paid on October 12, 2007 [making it a Q4 div and thus not showing up in the div rates above - which are based on Q3 dividends] to stockholders of September 28, 2007. The ex-dividend date is September 26, 2007. On 9-14 ALD declared an extra cash dividend of $0.07/share with a Record date of December 14, 2007 and payable on December 27, 2007. On 9-25 KCAP declared a dividend of $0.37/share payable on October 26, 2007 to shareholders of record as of October 10, 2007. On 9-19 MCGC announced that it raised approximately $43.5 million of gross proceeds in a public offering. MCG Capital sold a total of 3,000,000 shares of common stock [Shares outstanding were 62.53 million]. The offering price was $14.50 per share. MCG Capital has granted the underwriters an option for a period of 30 days to purchase up to an additional 450,000 shares of its common stock to cover over-allotments, if any. The offering is subject to customary closing conditions, and the shares are expected to be delivered on September 24, 2007. On 8-06 JMP Securities Downgraded CSE from Strong Buy to Market Outperform and BMO Capital Markets Downgraded KCAP from Outperform to Market Perform. On 8-08 Ferris Baker Watts Downgraded ALD from Buy to Neutral. On 8-07 Ferris Baker Watts Downgraded NGPC from Buy to Neutral. On 8-10 BMO Capital Markets Upgraded MIC from Underperform to Market Perform. On 8-15 Lehman Brothers Downgraded KFN from Overweight to Equal-weight and Friedman Billings Downgraded KFN from Outperform to Market Perform [and KFN sold $5 billion in residential mortgages at a $40 million loss a big losss for a company with only an $800 million market cap - the stock fell 31% on 8-15]. On 8-17 Ferris Baker Watts Upgraded ALD from Neutral to Buy. On 8-22 Jefferies & Co Downgraded ACAS from Buy to Hold. On 8-30 Sun Trust Rbsn Humphrey Downgraded ACAS from Buy to Neutral. On 8-09 ARCC declared a dividend of $0.42/share payable 9-28 to shareholders of 9-14-07. On 8-09 MIC declared a dividend of $0.605/share payable 9-11 to shareholders of 9-06-07. On 8-07 TICC declared a dividend of $0.36/share payable 9-28 to shareholders of 9-07-07. On 8-03 PCAP declared a dividend of $0.32/share payable 10-17 to shareholders of 9-14-07. On 8-02 HTGC declared a dividend of $0.30/share payable on 9-17 to shareholders of 8-16-07. On 8-02 KFN declared a dividend of $0.56/share payable on 8-30 to shareholders of 8-16-07. On 7-31 ACAS declared a dividend of $0.92/share payable on 10-01 to shareholders of 9-07-07. On 7-10 KED declared a dividend of $0.40/share payable on 7-26 to shareholders of 7-18-07. NOTE #1: This page is ment to be a supplement for those already getting monthly sector updates from another source. Data entry errors sporadically happen. There are other metrics not covered here that should not be ignored. |