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American Capital (NASDAQ:ACAS)

Q1 2013 Earnings Call

May 01, 2013 11:00 am ET

Executives

Pete Deoudes - Vice President of Investor Relations

Malon Wilkus - Founder, Chairman, Chief Executive Officer and Chairman of Executive Committee

John R. Erickson - Chief Financial Officer, Principal Accounting Officer and President of Structured Finance

Analysts

Richard B. Shane - JP Morgan Chase & Co, Research Division

John Hecht - Stephens Inc., Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Angelo Guarino

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Operator

Good morning, and welcome to the American Capital Q1 2013 Shareholder Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Pete Deoudes in Investor Relations. Mr. Deoudes, the floor is yours, sir.

Pete Deoudes

Thanks, Mike. Thanks, everyone, for joining American Capital's First Quarter 2013 Earnings Call. Before we begin the call, I'd like to review the Safe Harbor statement.

This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of American Capital. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in our periodic reports filed with the Securities and Exchange Commission. Copies are available on SEC's website at www.sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. An archive of this presentation will be available on our website, and the telephone recording can be accessed through 9 a.m. on May 16 by dialing (877) 344-7529. The replay passcode is 10027589.

To view the Q1 slide presentation that corresponds with this call, please turn to our website at americancapital.com and click on the Q1 2013 Earnings Presentation link in the upper right-hand corner of the homepage. Select the Webcast option for both slides and audio, or click on the link in the Conference Call section to view the streaming slide presentation during the call.

Participating on today's call are Malon Wilkus, Chairman and Chief Executive Officer; John Erickson, President, Structured Finance and Chief Financial Officer; Gordon O'Brien, President, Specialty Finance and Operations; Sam Flax, Executive Vice President and General Counsel; Rich Konzmann, Senior Vice President, Accounting and Reporting; and Tom McHale, Senior Vice President, Finance.

With that, I'll turn the call over to Malon.

Malon Wilkus

Thanks, Pete, and thanks, everyone, for joining us today. Our positive momentum from a strong 2012 continued into the first quarter of 2013. We had the highest level of earnings of the past 4 quarters.

Our -- as a result, our net asset value per share grew $1.20 to $19.04, increasing 27% annualized from year end. Our annual NAV per share growth over the past 3 years has been approximately 29%, so we are pleased to continue to deliver a high level of NAV per share growth.

We produced $0.21 or $68 million of NOI before income taxes per diluted share, and $1.09 or $346 million of net earnings per diluted share. We had $281 million of realizations from portfolio exits, and we committed $98 million to 2 new investments, which we believe will generate attractive returns for our shareholders.

We also repaid $113 million of securitized debt in the first quarter, and our debt-to-equity ratio remains at less than 0.1:1.

Additionally, our highly accretive stock repurchase and dividend program continues to be an important enhancement to shareholder value, and has been contributing to our net asset value per share.

We've repurchased 9 million shares for $128 million at an average price of $14.23 per share in the first quarter, producing $0.14 in accretion to net asset value per share. The per share impact is equivalent to $42 million of additional retained earnings.

Jumping for a moment, all the way to Slide 43, our operating revenue was down $47 million for -- or from Q4. That was driven by several items, the following 2 of which are nonrecurring: Q4 had $17 million more of non-regular dividends from portfolio companies, mostly due to dividend recaps completed prior to the turn of the year; and $11 million more of transaction fees due to the strong volume of new originations.

In addition, the net impact of reserving prior-period interest and dividend income resulting from new debt and preferred equity non-accruals relative to Q4 was a negative $11 million. Our decline in revenue is also the result of using proceeds from the realizations of interest and dividend income, producing investments to either repurchase stock or repay our securitized debt.

In addition, certain proceeds from the realizations of higher yielding mezzanine debt investments during Q1 were reinvested in lower yielding second-lien senior debt investments. These factors were partially offset by an increasing -- by an increase of $6 million in dividends from American Capital Asset Management. Therefore, revenues decreased by a net $47 million in the quarter. Of course, in quarters where we have stronger transaction volume or better non-accrual results, revenues may be higher than this quarter.

Turning to Slide 4, the value of our investments in our operating companies was relatively unchanged in Q1, totaling $2.3 billion. And we committed $27 million in the One Stop Buyout of 1 new operating company in the quarter.

In Q1, our portfolio companies experienced a moderate aggregate revenue increase and a modest adjusted EBITDA increase in the past 3 months year-over-year.

I would like to briefly review our $27 million One Stop Buyout of Service Experts on Slide 5. We committed $26.5 million to purchase Service Experts and provide additional capital. It is a leading provider of sales, installation, maintenance and repair of heating, ventilation, air conditioning and cooling system, HVAC, for the residential and light commercial markets. Headquartered in Richardson, Texas, it owns and operates 108 branch locations in the United States and Canada. American Capital's Special Situations Group originated this as a value-oriented opportunity. American Capital's operation teams will provide Service Experts with enhanced operational and marketing skills, lean management implementation and comprehensive business planning expertise.

With 2012 revenues of $385 million, we believe there is significant opportunity for operational improvement and upside potential.

Scott Boxer is its newly appointed President and CEO. Scott is an internationally recognized leader in the HVAC industry, with a 3-decade record of successful -- successfully leading businesses through transformations and growth initiatives. We had a decade-long tenure at -- he had a decade-long tenure at Lennox International, including being President of Service Experts from 2003 to 2010.

We're very pleased to have teamed up with Scott and are excited about the potential to increase shareholder value as a result of this American Capital One Stop Buyout addition to our operating companies.

And by the way, our Special Situations Group that is responsible for Service Experts has invested $887 million in 13 companies and has produced a 17% annual return since inception on a blend of senior debt, mezzanine debt and equity.

Moving to Slide 6, as you can see, that since inception, the $11.4 billion of investments we've made in our operating companies have produced a 12% annual return since inception on a blend of senior debt, mezzanine debt and equity. Perhaps more importantly, the $10.1 billion of operating company exits, 89% of our operating company investments, had produced a 15% annual return since inception and a 28% annual return since inception on the exits of just the equity portion of our investments.

Now let's review American Capital Asset Management, or ACAM, on Slides 7 and 8. It remains our largest portfolio company, valued at just over $1 billion as of quarter end. The return on our investment in ACAM has been extraordinary, and we continue to focus on growing our Asset Management business. In Q1, our 2 public mortgage REITs that we manage raised $2.4 billion of equity capital in total. In addition, we sponsored the issuance of a third CLO that issued $414 million of notes in the first quarter.

This increased our externally managed earning assets under management to $15 billion as of quarter end, a 20% increase from the end of 2012. This increase was the primary driver behind the $214 million of appreciation of ACAM for the quarter.

We continue to work to grow our existing funds under management and look forward to increasing the number of funds under management over time.

Turning to Slide 9, the value of our investments in our Sponsor Finance companies was relatively unchanged in Q1. And we've produced an 8% annual return since inception. We committed $59 million of debt investments in the quarter to 3 companies, including 2 new portfolio companies.

Our Sponsor Finance portfolio companies had a slight aggregate revenue decrease and a slight adjusted EBITDA increase in the past 3 months year-over-year. Our Sponsor Finance investment teams are actively pursuing attractive new unitranche, second lien and mezzanine investments.

Turning to credit on Slide 10. The fair value of our loans and non-accrual represents 3.8% of total investments at fair value. Non-accruals increased by $53 million at cost basis and $31 million at fair value. An increase in the cost basis and fair value of our non-accrual assets is not necessarily all negative.

For example, in this quarter, $21 million of the cost basis increase was because the underlying companies improved, and we recognized some of that, the PIK that was on non-accrual, thereby increasing the cost basis of the securities. In this case, we did not take the full amount of the security off of non-accrual because the fair value did not increase enough to allow us to do that.

Also, for example, this quarter, we sold Paradigm Precision which, since 2009, has been on non-accrual. We received $127 million resulting in 11% IRR for our debted position. But since our stated returns on the debt securities were above our 11% IRR, we had to keep a portion of them on non-accrual status.

Now moving to Slide 11. European Capital increased its NAV at a 13% annual -- annualized rate or EUR 23 million in the first quarter to EUR 728 million. Since inception, European Capital has produced a 4% annual return on its investments in senior debt, mezzanine debt and equity.

In the first quarter, European Capital portfolio companies had a slight aggregate revenue decrease and a slight adjusted EBITDA decrease in the past 3 months year-over-year. It had EUR 36 million of realizations and EUR 8 million of new commitments in the quarter.

Continuing with European Capital on Slide 12, the value of American Capital's debt and equity investment in European Capital increased to $919 million as of March 31 from $809 million as of the end of the year of 2012, a 14% increase.

Since inception, our investment in European Capital has produced a negative 4% annual return, and so we are working hard at enhancing that performance.

American Capital's investment in European Capital was valued at 85% of the European Capital's net asset value as of quarter end, up 75% -- up, I should say, from 75% at year end, as comparable companies' stock price to cash flow multiples traded up quarter-over-quarter.

Skipping now to Slide 14, and before opening the call up to questions, I'd like to summarize our potential growth opportunities. We have $1.5 billion of equity assets, exclusive of European Capital and American Capital Asset Management, which have the potential to grow at equity rates of return.

Additionally, we expect to continue to grow our asset manager by expanding existing funds and raising new funds. And we have the potential to experience appreciation on our equity investment in European Capital, particularly since we have it valued $142 million below its book value, and its book value itself does not include $105 million of bond yield discount on performing debt assets.

We remain committed to our stock repurchase and dividend program that has contributed to an increase in net asset value every quarter for the past 7 quarters. And lastly, we continue working to optimize our tax asset.

While we open it up for questions, we will turn to Slide 15 and show you the 40% annualized growth in our net asset value since the end of 2009.

And with that, Pete, let's open up the call for questions.

Pete Deoudes

Mike if you can please queue people up.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question we have comes from Rick Shane of JPMorgan.

Richard B. Shane - JP Morgan Chase & Co, Research Division

You commented that you paid down $113 million in the quarter of the notes on the securitized debt. By the numbers from the 10-K, that leaves about $65 million outstanding, a small portion due in 2013, and about $37 million due in 2014 or '15. I'm curious if there are any call provisions related to the remaining part? I realize it's pretty small. And then, the second question is that as you look forward to different structures for ACAS in the different entities, does fully paying off that securitized debt accelerate that process or is that incumbent to the process?

John R. Erickson

Yes, I think -- first of all, yes, there are call provisions in the structures. And you will see us call them, I think we've already called 1 or 2 of them when they get kind of in the late stages. So it's usually -- the calls really accelerate the payoff by maybe a quarter or 2 quarters. And so you could see us use the calls on the other ones, but it's really going to accelerate a quarter or 2. And I think with respect to the securitization structures, what we said is that was an encumbrance on any kind of change but not necessarily a driver of the timing of the change. I think some of things we've talked about in the past in terms of corporate structure we've indicated really take quite some time. And so this just gets one of the potential hurdles out of the way, but it's not a driver that says -- it's not a driver of the timing of those decisions.

Richard B. Shane - JP Morgan Chase & Co, Research Division

It's another box checked along the way.

Malon Wilkus

Exactly.

Operator

Next, we have John Hecht of Stephens.

John Hecht - Stephens Inc., Research Division

First question, Malon, you highlighted the $13 million reversal this quarter. I'm wondering, were there any other kind of onetime revenue items or true-ups in the quarter? And what's a good level of run rate fee income and interest income that we should be thinking about coming out of this quarter?

John R. Erickson

I think what we really want to point out is that there is not really a run rate concept here because really, there's so many pieces that move with respect to our income, right? So it's very difficult to project reversal of non-accruals or new items on non-accruals. And those do tend to be a quarter-to-quarter volatility or swing. Additionally, as you're well aware, just the originations volume that the fee income relates to it, right? So the fourth quarter was a good quarter for non-accrual reversals and for fee income, and the first quarter was not. And so that's what you're seeing in terms of the differences. And so I think it's probably easier to look at more like a 4-quarter average of our revenues or something like that because of those factors. Because we certainly expect to originate new assets in 2013 and have fee income, it's just hard to say what quarter it will be in. And then, as you can see with these non-accruals, that also will impact it. And it's hard to project over the next 3 quarters how many positive non-accrual events we're going to have versus how many negative.

John Hecht - Stephens Inc., Research Division

Okay, now I understand that concept.

John R. Erickson

And I think if you kind of pair this quarter back, it had very little fees and very little non-accruals. So if that's the way you want to think of run rate, that's another way to do it, right? So this quarter has very little of those positives, and so it's a pretty low -- what could be a low quarter.

John Hecht - Stephens Inc., Research Division

Okay. Second question is you did have one in non-accrual, I wondered if you could tell us what it was? Was it a company-specific issue or is there anything kind of more broad from an economic perspective we should be thinking about?

John R. Erickson

No, it was not just one, but we had $49 million of non-accruals that were related to weaker performance, and there are companies that have either or currently have some securities on non-accrual or previously been on non-accrual and the security is going back on non-accrual. And you've got to remember, we're not just a senior lender, we end up with some very junior securities. And so what you end up seeing on our non-accruals is if the enterprise value moves down $10 million or $20 million in our capital stack, we may put something on non-accrual. That's what we're trying to highlight like in the Paradigm example, which was we had a deep, deep debt stack in that company that had a lot of junior securities that were PIK-type securities, and we ended up getting a good IRR on that investment, not the kind of IRR that we've underwritten to. And therefore, over the past 2 years, you saw things like on Paradigm going on non-accrual, then, coming off towards the end of its life. But still, nevertheless, when Paradigm was sold and we collected the $127 million, we had some of those securities on non-accruals. So I would say that $49 million of the non-accruals were in 4 companies that saw some weaker performance but nothing that we would be alarmed by.

John Hecht - Stephens Inc., Research Division

Okay. The $13 million reversal, was that tied to one company or was that tied to the $49 million across several companies?

Malon Wilkus

That's primarily one company if you're looking on Slide 43 related to the prior period impact on the dividend non-accrual number.

John R. Erickson

But that's equity securities versus the debt securities.

Malon Wilkus

Right and then, on that same chart, you'll see there was a positive net impact of $17 million this quarter that changed the nonaccrual and debt investments. I'll also add that all the new companies on nonaccrual we've held in our portfolios prior to 2008.

Operator

Yes, sir, it comes from Mike Turner of Compass Point.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Just a question on ECAS. Any thoughts on potentially relisting that entity? I think my understanding is I know you've decreased the discount that it has held to NAV. But if I seem to remember correctly back when it was publicly traded, you had a control premium and it was actually held at a premium.

John R. Erickson

Well, one of the options, certainly, could be relisting European Capital, and we are -- we think there's a variety of opportunities in Europe, we -- both in the buyout and the mezzanine business. And so we continue to explore a variety of opportunities about building up our capabilities there and enhancing how we optimize our value there.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

What sort of a scenario that would precipitate that listing? Because it seems like comps are up substantially in the quarter, and their valuations are back above NAV. So it would seem like, externally, that conditions are ripe. Is there anything else you'd be looking for or is it more complicated than that?

Malon Wilkus

It might be helpful if Europe was out of a recession.

John R. Erickson

Look, I mean, as you know, I mean, we're constantly looking at the capital markets and looking to raise capital. Suffice it to say, I think you're exactly right. The prospects of raising capital in Europe today look brighter than they did last year or the year before. It's hard to project when, and as you know, a new IPO is more of a challenge than an existing listed trading vehicle. But one factor that you do need for a new IPO is to have the existing vehicles trading at relative premiums to their book value. That's certainly a helpful fact but not the only determining fact. But we are monitoring it, our capital markets team is always engaged, talking to advisors on all our capital markets activities. And that is one item we're focused on and thinking about.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

And then, as far as monetizing equity investments, I mean, we're hearing more and more recently that conditions are strong and there's -- for monetizing. And any changes to the strategy there? It seems like there's a lot more legacy assets on the books now. Would you need to see stronger operating performance before you'd potentially push on monetizing them? Or is that an ongoing process, color there would be helpful.

Malon Wilkus

Please remember that we have monetized about $6 million in the last 5 years or 4 years. And so not all of that was equity, of course. But we've -- we are constantly -- and we have been constantly selling companies into the marketplace.

John R. Erickson

I'll also say, we've gone into every year with a list of companies that are seasoned and we expect to sell in that current year. This year is no different, and I don't think there's any, really, difference in the trend. Over the last couple of years in terms of the kind of companies we expect to exit and the kind of levels.

Malon Wilkus

And in fact, frankly, it's been an outstanding time to monetize assets for a very long time. Today's environment is not particularly special in that case. And just to remind you, we did -- we had $281 million of realizations in this first quarter, and that puts it really very much kind of on average plane over the last -- since 2008. So we are very -- we think this is a very good environment to sell companies. We think the companies in this environment can get some of the highest multiples, really, historically. And so we're constantly evaluating our individual companies. But selling a company is, generally speaking, company specific. You want to determine the best time to sell a company, and that's why I mentioned that one of our statistics is that our companies that we have controlled and have done our buyouts, we've gotten a higher return on our exit of the equity than we have in the portfolio overall because we wait until the right time to sell the company and maximize the return on the equity. Do you have any other questions, Mike?

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Sorry, just one last quick one. On the infrastructure front, I know that just got kind of started at the end of last year, so it's really in its infancy. Any update there on when you might expect to see some traction on that front? Because it seems like it could be a good opportunity.

Malon Wilkus

We don't -- we're not in a position to comment any further on it than what we have in the past, which we've established it, we're working hard not only to originate assets but to look at the alternatives and -- of raising capital for that team to be managing externally. If you recall, we committed $200 million to its development and seed capital. And so we are in the process of evaluating opportunities to invest in.

Operator

[Operator Instructions] The next question we have comes from Troy Ward of KBW.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

John, in the past, you've spoken about the task of kind of a big task of getting all the control companies in the same reporting metrics. Can you -- have you finished that process? And if not, when do you expect to finish and can you just give us an update on what's going on with that?

John R. Erickson

When I say big task, that's not a 12-month task, it's a big task. I mean, there's a lot of challenges. I mean, just -- you couldn't believe some of the challenges and issues that come up. So it's just...

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Is that something you're still working on?

John R. Erickson

We are constantly working on improving our portfolio companies' reporting and operations, and so that's a constant process.

Malon Wilkus

And we do, indeed, want to get to the point where we could report our control companies on a segment-by-segment consolidated basis as a supplementary reporting to our current fair value reporting. So we're working on it very hard. For now what we are able to do is what you see on Slide 73, where we do show an aggregate static pool statistical set of reports.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Is the process to -- for your control companies to get on the same financial metrics to be able to present consolidating, is that necessary if you were to do some type of restructuring in the future?

Malon Wilkus

Well, certain of our -- of what we might consider for restructuring would, indeed, require that we be able to consolidate our control companies. But we think even if we stay in our current status as a taxable BDC because of -- our NOLs are not currently paying taxes. We think in this structure alone, we could enhance our reporting and by moving to the point where on a segment-by-segment basis, we could report our control companies on a consolidated basis.

Operator

Next, we have Angelo Guarino of DTI.

Angelo Guarino

Just answered one of my questions, the progress on the consolidation. Can you give us any kind of qualitative kind of assessment of where you are with that?

Malon Wilkus

Well, I think, John -- I think John gave you -- I believe John gave you the best kind of qualitative report on that. Every time that we discuss it, he starts to turn a little green. But it's just a -- it's a huge task. We have, just to remind you, we have 44 control companies at American Capital. We have 8 more in Europe. And these are not huge companies with generally using the big 4 and just essentially, just shy of being able to report on a public basis. These are middle-market companies that are focused on their business, and they're private companies. And so doing their financial reporting is a task that we need to help them come up to public reporting standards.

Angelo Guarino

Are you pushing out to them a -- I'm just getting a sense, are you saying, "Hey, look. We need you all to be on the same software so that we can consolidate," or is that part of this process and challenge or..?

Malon Wilkus

The first thing we did, if you recall, a year ago, our board did indeed direct us to go down this path. And the first thing we did was evaluate and then purchase a major software program at American Capital so that we could do consolidated reporting. And that's, that -- it alone is a big task to convert to such a new program and the -- a program that could allow for individual to small or middle-market companies to be able to feed into that system.

John R. Erickson

Let me give you one other example of just the complexity, which is if you take a private middle-market company, the CFO of that company is focused on EBITDA, that's the metric they care about, that's the metric their life revolves around. So trying to take them from EBITDA to GAAP net income, it's got a lot of complexities. There's -- a lot of the times where they only think about them once a year when they do the audit, and even then, they don't really even focus on them. So there's a lot of complexities with going from a middle-market company to then, really, the quality of a public company reporting.

Angelo Guarino

Okay, fair enough there. So you guys are working on it earnestly, and there's nothing that's saying -- you're not seeing anything that's going to say this is an impossible task, it's just -- it takes time and effort, basically, you're saying? The BLT, I understand -- the BLT, or do you think the BLTs will be paid off, possibly, before 2014? I mean, that was -- we're looking before at like a Q1 2014 number now and it looks like that might be accelerated.

John R. Erickson

We expected that, but then you also heard me today say that we have some call provisions that could accelerate it. And I think that if you look at how much they've paid down already, there's very little outstanding. So I think that there's -- it would be reasonable to assume that, that could get pulled all into '13.

Angelo Guarino

Okay. And now when we're talking about, theoretically, restructuring, do any of the NOL -- I know that NOLs are at risk for ownership change, and I know you guys are on top of that. But are any of the NOLs at risk for the restructuring, in other words, do some of the NOLs have color to them that they'll have to follow the pieces or are they at risk? Do you have to really use them before you do something?

Malon Wilkus

Well, first of all, I want to make it very clear, your speaking and your questions almost implies that we are, indeed, going to do something in the form of restructuring. And I want to make it very clear to everyone that, that's not a decision that's been made. All we have stated is that we've -- are exploring other structures that may optimize value. But...

John R. Erickson

Right. Well, as a part of that, we put a high value on the NOL. So anything we do, presumably, would be making sure that we can take advantage and utilize the NOLs.

Angelo Guarino

So there are potentially ways that might be attractive to restructure, but you might not be able to do them because they would actually put some of the NOLs or a portion of them risk?

Malon Wilkus

Yes, I think you could theoretically say that, that there would be transactions that could be attractive if it were not for the NOLs. And so we do value the NOLs and anything that we would consider, probably, the IRR of doing it to protect the NOL is the best IRR.

Angelo Guarino

Okay. And finally, on Page 43, there's a lot of onetime -- that's a great slide, by the way, it really explains what happened this quarter. But the top line, when it went from $66 million to $51 million on the interest income and debt investment, is there something, anything in there that's onetime? Or is that $51 million in that trend that we're seeing, something that is more consistent, I guess, you could say?

John R. Erickson

I think that as we said, we exited some high-yielding investments. And so that's a question of how fast we put on new debt investments and what the yield on them versus how much we are exiting in. And so you also keep in mind, not only did we sell some companies, but we also recapped some companies. And so we took advantage of the financing markets and get the portfolio company at lower cost of capital, one of the unfortunate things of it, which would be good for our equity securities, was that on our debt holdings, they went down. So to some extent, some of that return might -- you can think about it getting replaced in appreciation of the equity securities over time. So unfortunately, we converted some current income to some equity appreciation, potentially, down the road.

Malon Wilkus

And just think about that. If you -- if we did that refinancing at the portfolio company level and last year, we did $2.4 billion of refinancings, if 1 -- just call it $1 million of it or through that refinancing, we reduced the cost to that portfolio company by $1 million because of lower interest rates, that probably results in something in the order of $8 million of appreciation in the equity of the company, and if we owned 80% of the equity. So you get the picture that it is far more important to us to improve the equity value of companies that we control and own than it is for us to try to maintain a higher yielding debt asset. And so -- and one final thing, too, is that when looking at our interest income, you should also net it against the interest expense that we have, because some of the proceeds that we're receiving in our exits are being used to retire debt.

John R. Erickson

But it's also a good example why, for our company, you can't just weigh NOI and say that that's -- the most -- valuation metric is here. We're transferring value from NOI into much more value, less appreciation, right. So it's just -- that's the way our business works. We're much more equity-heavy than a lot of the other BDCs out there.

Operator

And our last question comes from the line of Jonathan Bock of Wells Fargo Securities.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Malon, John, one philosophical question, maybe, to start. As we look at debt-to-equity today at 0.1:1, thereabouts, do you believe that is an appropriate level of leverage today? And is it your view that you would like to stay around that level for the intermediate term?

John R. Erickson

Jonathan, for the debt-to-equity, the thing we look at is our pool of debt assets, right? So the conversation we just had -- our debt assets and yield on the debt assets are shrinking because in some cases, we've recapped some company and put it into equity. I think that reduces your leverage capacity. So the way that we now monitor and think about our leverage is based on our debt portfolio. So when you take our 10-Q and you want to look at our debt securities that are accruing, if you kind of add those up, that's the way to look at and think about our debt capacity. So given the equity nature of our portfolio, I don't think we're going to run at significantly higher levels of debt at this point in time. Now obviously, if we originate a granular pool of new debt assets that -- those assets will enhance our leverage ability versus refinancing companies and taking debt assets off the books and putting the value into the equity, that reduces our ability to lever.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Sure, John, and I appreciate the comments as it relates to debt portfolio, but of course, you could also tap unsecured markets. And so has there ever been a thought at issuing unsecured notes as you went -- as many other BDCs have done recently?

John R. Erickson

Yes, I did that in 2007. That was a lesson learned, I would not use the unsecured markets to really finance a pool of equity assets.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

And would you believe that if you did that to finance a buyout of stock, could that be an ROE-generating event?

John R. Erickson

Well, if you look at our cash flow and our track record in buying the stock, cash has not been a hindrance to buying the stock. I think we've talked to you about the 382 [Section 382] limitations, using kind of a measured approach in managing it kind of on a rolling 3-year basis, with the 382 limitation in mind. And so I think that our track record is building up, showing the market what we're going to do there and that cash has not been a limiter on the share buyback.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

That's a great point. And Malon, as we talked about the buildout of the Asset Management business, could you also, perhaps, just give us an update as to, really, maybe some of the mortgage options you're looking at. Certainly, the 2 mortgage REITs have done outstanding and have been a big generator of ACAS NAV. But are there other options in both the private, as well as maybe even the servicing route, that you're considering? Or maybe just give us a sense as to what might fit as part of another tool of the mortgage product that you offer through ACAM?

Malon Wilkus

Well, you mentioned several already. So those are obvious ones. And look, you can count on that we are working, on multiple fronts, to expand our assets under management. And we -- a number of those probably will never come to fruition and then, some of them will. And it's hard at this stage to predict which is which. But we are working hard at it. We're doing, I'd say, all of the obvious things that you would anticipate. We've had recent great success with our CLO business. We do, indeed, want to continue to expand the number of CLOs we have under management. And you all know about our work with Paul Hanrahan in the infrastructure fund. We, indeed, are working on many more things than that, but those are the ones that we're comfortable discussing.

John R. Erickson

Malon, you were touching, really, on residential mortgages, but I think commercial mortgages are now also, maybe, starting to look more attractive. So if you look at some of the commercial mortgage REITs out there, potentially, there could be opportunities in those spaces, as well, that we're obviously monitoring and following and considering.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Appreciate the color, and then, the last question -- actually, it's two, kind of, tied together. John, do you have an idea as to how many of the options that have not yet vested would likely vest in the current year?

John R. Erickson

We have to go do some work, I think you could probably digest it from the K, but I don't have that off the top of my head. We'd have to look at scheduling that out because you really...

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

And then, Malon and John together, I apologize. So let's say that there is a set amount of options that is also coming online as a result of the stock price appreciation. Obviously, a good thing. How do you view the buyback in relation to that options dilution? So will you make it a point to keep the buyback at a healthy pace well ahead of what comes online in the form of new shares?

Malon Wilkus

Look, we totally believe in the buyback program. And though we hate that our stock is trading where it is, we love to buy it where it is. And so it's been a very robust program, as you know. It is completely independent of employee compensation. Employee compensation is driven by the marketplace. We either compete with the market or we fail to attract, retain and motivate good employees. So that is -- the whole option program is entirely dependent on what the market demands in compensation levels.

John R. Erickson

Right. I mean, I would point out, we've been buying significantly more than the option exercises every quarter.

Malon Wilkus

Quite a bit substantially more. And as you know, we are limited to the extent of additional options to be granted because we have, as all other BDCs, we have the 20% of our shares under option limitation. And we are banging up against that 20% limit. That's not -- it's not been a problem with respect to compensation, but as shares or as options are being exercised, we will need at some point to get authority from our shareholders to grant new options to be able to, again, continue to be competitive in compensation levels.

Pete Deoudes

John, Page 105 of the K, we had $22 million of exercisable options as of the end of 2012 at various prices. And basically, you're going to have employees exercising based on their own personal needs. So you can take a look at that and determine what, if any, might get exercised in the remaining 3 quarters of the year.

Malon Wilkus

Very good. Is there any other remaining questions?

Operator

No, sir. It looks like we have completed the question-and-answer session. And I'd like to hand the conference back over to you Mr. Wilkus, for any closing remarks, sir.

Malon Wilkus

Thank you, Mike, I appreciate that. And thank you, everyone, for attending today. And we look forward to talking to you again next quarter. Until then, you all take care. Bye-bye now.

Operator

And we thank you, sir, and for the rest of management for your time. The conference is now concluded. An archive of this presentation will be available on ACAS's website, and a telephone recording of this call can be accessed through 9:00 a.m. May 16 by dialing (877) 344-7529, using the conference ID 10027589. Thank you for joining today's call. At this time, you may disconnect your lines. Thank you, and have a great day.

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