Second U.S. 'Bank-for-Businesses' Faces Bankruptcy

The struggle for CIT to remain out of bankruptcy, the largest bank specializing in financing of U.S. businesses, has grabbed a lot of headlines – since its failure would leave a devastating gap in access to financing for small and medium-sized U.S. companies. Now, another of the largest players in this niche is also in imminent danger of bankruptcy.

Reuters reported today that American Capital Ltd (ACAS), another specialist in financing businesses, just reported a 2nd quarter loss of $547 million, while acknowledging it remains in default on a $2.3 billion “credit agreement”. Meanwhile, its operating results produced less than half the revenues analysts had expected.

There are many implications to this potential bankruptcy, apart from illustrating (again) how reluctant the U.S. government remains to helping anyone outside the Wall Street crime syndicate.

To start with, the reason that these companies are certain to go into bankruptcy without government assistance is because a) the asset value of the businesses they are lending to are collapsing, and b) these companies are defaulting on their debt at a record rate. Even if these two can manage to stay afloat, it's obviously ludicrous to talk about a “U.S. economic recovery” when a vast swath of U.S. businesses can't even remain solvent, themselves.

American Capital has already eliminated 44% of its workforce. Thus, even if it stays in business, it's now incapable of servicing nearly as many businesses in the future as it has in the past. It should be obvious – even to the U.S. “experts” - that with a huge wave of corporate bankruptcies ahead (due to no available financing) that U.S. unemployment is going to continue to deteriorate. The fraudulent jobs reports published by the Bureau of Labor Statistics each month doesn't change that reality.

As I reported in a commentary yesterday (“Cash-for-clunkers is poor choice of stimulus”), the billions of consumer dollars which have been diverted from the broader U.S. retail sector, in order to prop-up U.S. automakers will set off another chain reaction of job losses. I have stated previously that the U.S. economy has lost somewhere in the neighbourhood of $2 TRILLION per year in spending-power. With such a tremendous strain on this sector, and with grossly excessive retail capacity, every additional blow to this sector has painful and immediate consequences.

Meanwhile, Wall Street's bankster-oligarchs are reducing their lending to both American consumers and American businesses – the exact opposite of what they promised when they got their $10 trillion in hand-outs/loans/guarantees (more than 90% of all U.S. bail-out/stimulus dollars). In another recent commentary (“New York AG Report: Wall Street stole bonuses from taxpayers”), I noted that the “profits” that Wall Street is reporting this year come almost exclusively from “trading” with the U.S. government (i.e. telling Tim-the-tax-cheat Geithner what to buy, and how much to pay for it).

The fact remains that with legions of U.S. “experts” continuing to predict a “U.S. economic recovery” (which supposedly started over a month ago), none of these “experts” are explaining how/where/why this “recovery” will take place. It isn't (and won't) come from the U.S. retail sector (70% of the U.S. economy) where bankruptcies and job losses can only accelerate.

It won't come from employment, where the same "experts" who are predicting a “recovery” acknowledge that U.S. unemployment will continue to get worse.

It won't come from the housing sector, where the best-case scenario from the “experts” is that this sector won't get worse. As I've pointed out in countless commentaries, the U.S. housing sector must continue to collapse for many years to come.

It won't come from the manufacturing sector, since most of that sector was dismantled and shipped to Asia years ago.

It certainly won't come from Wall Street, where the oligarchs are using every spare cent they have stolen from U.S. taxpayers to pay themselves “bonuses”.

As many commentators have said (including myself), CIT (and now American Capital) is much more important to the U.S. economy than a handful of Wall Street oligarchs – who could have been simply excised from the U.S. economy, and left to drown in their own financial problems. Unfortunately, Barack Obama and the rest of his regime are spending all their time making speeches about the pending “U.S. economic recovery” - rather than spending any time trying to clean up this “train-wreck”.

Disclosure: I hold no position in CIT, or American Capital

Comments

[Leftfield:]

Evil or stupid? That's the only choice I see for the leadership we have. I fear they have a plan to indebt Americans to the state-run system to continue to prop up failures and permanently enslave and impoverish the rest of us. Stupid doesn't describe this amazing level of theft from the productive.

Aug 05 02:58 PM

[whidbey:]

Deadly trend, and it means more pain for everyone.

Aug 05 03:18 PM

[effeff63:]

I don't see that the CARS program was designed to aid the manufacturers as much as to give a boost to dealers and get folks off their wallets. The side benefit of getting gas hogs off the road and replacing them with cleaner, more efficient cars has value. I hold ACAS shares as a spec play with a basis in the $7's...if they are cutting costs and tightening up their act, they should survive. They may be in violation of lender covenants, but those lenders surely don't want to force ACAS into bankruptcy.

Aug 05 03:27 PM

[Roger Knights:]

"Evil or stupid?"

Here's my (witty) variation: Dark or Dim?

Aug 05 07:31 PM

[cathie1:]

You are distorting the facts regarding ACAS "pending bankruptcy" to grind your political ax. Bankruptcy is not at all "certain," as you claim. Also, ACAS is not a "bank."

Your overall pessimistic view doesn't not allow for the natural healing forces of our vast and diverse economy to kick in...and they will, with or without government intervention. Be patient.

Aug 05 10:03 PM

[cathie1:]

ACAS is not "certain" to enter bankruptcy, and it is not a "bank."

Your overall pessimistic tone does not account for the natural cyclical healing processes of our vast and diverse global economy, which will occur with or without government intervention. Patience, grasshopper!

Aug 05 10:06 PM

[Michael Clark:]

The cure will come in about 2019. In fact, Cathie is correct: only Patience will work. Time to create a cancer; time to recover from a cancer.


On Aug 05 10:06 PM cathie1 wrote:

> ACAS is not "certain" to enter bankruptcy, and it is not a "bank."
>
>
> Your overall pessimistic tone does not account for the natural cyclical
> healing processes of our vast and diverse global economy, which will
> occur with or without government intervention. Patience, grasshopper!

Aug 06 03:37 AM

[Moishie:]

"...it's now incapable of servicing nearly as many businesses in the future as it has in the past..."

Upon recovery ACAS can rehire their old employees or hire new ones. There are many financial sector employees out of work. No doubt many (some?) are genuinely talented.

"...remains in default on a $2.3 billion “credit agreement"..."

ACAS is in violation of loan covenants requiring equity to debt coverage of 200%. The ratio is now 183%. All interest payments are being met. Using the term 'default' is unfortunate. Is it appropriate for unsecured debt which is current?

ACAS can immediately exit 'default' by agreeing to convert the unsecured debt to secured debt.

ACAS has behaved responsibly; suspending the dividend, selling portfolio companies at a profit, paying 90% of the recent dividend in stock, not caving to unsecured creditor demands. They aren't lying about the situation (well, they did lie about the dividend being secure, but other than that...).

Will it work out? I don't know. I'm putting my head in sand for the next two years when it comes to ACAS. By then Obama will have saved the world. Or not.

Aug 06 08:56 AM

[Old Trader:]

Agree that ACAS is not a bank; it is a BDC, a horse of entirely a different color, and its failure won't have anywhere the impact that a CIT bk would have.

Aug 06 09:23 AM

[Jeff Nielson:]

Claiming this is not a "bank" is simply semantics. If anything, the differences between the business model of American Capital and a traditional bank makes this company MORE vulnerable to bankruptcy - because a huge portion of its assets/collateral are SHARES it has taken from these companies which are now only worth a FRACTION of their former value.

At least a traditional banks would have its loans secured by these companies assets.

BTW, it was Reuters which chose to describe American Capital as being "in default" on its credit agreement.


On Aug 05 10:03 PM cathie1 wrote:

> You are distorting the facts regarding ACAS "pending bankruptcy"
> to grind your political ax. Bankruptcy is not at all "certain," as
> you claim. Also, ACAS is not a "bank."
>
> Your overall pessimistic view doesn't not allow for the natural healing
> forces of our vast and diverse economy to kick in...and they will,
> with or without government intervention. Be patient.

Aug 06 11:03 AM

[Old Trader:]

Jeff,

You've been hoisted on your own petard.

"because a huge portion of its assets/collateral are SHARES it has taken from these companies which are now only worth a FRACTION of their former value."

I've seen/read/heard nothing that would suggest that CIT's assets are comprised of shares in the companies they have a relationship with. You're comparing apples and oranges, here.



On Aug 06 11:03 AM Jeff Nielson wrote:

> Claiming this is not a "bank" is simply semantics. If anything, the
> differences between the business model of American Capital and a
> traditional bank makes this company MORE vulnerable to bankruptcy
> - because a huge portion of its assets/collateral are SHARES it has
> taken from these companies which are now only worth a FRACTION of
> their former value.
>
> At least a traditional banks would have its loans secured by these
> companies assets.
>
> BTW, it was Reuters which chose to describe American Capital as being
> "in default" on its credit agreement.

Aug 06 11:22 AM

[Jeff Nielson:]

The comparison is obvious: they both focus their businesses on lending to U.S. businesses and they both are teetering on bankruptcy.

I hardly think this amounts to comparing "apples and oranges" - ESPECIALLY when the theme of the commentary is that U.S. companies will be going bankrupt because they can't get financing.


On Aug 06 11:22 AM Old Trader wrote:

> Jeff,
>
> You've been hoisted on your own petard.
>
> "because a huge portion of its assets/collateral are SHARES it has
> taken from these companies which are now only worth a FRACTION of
> their former value."
>
> I've seen/read/heard nothing that would suggest that CIT's assets
> are comprised of shares in the companies they have a relationship
> with. You're comparing apples and oranges, here.
>

Aug 06 01:21 PM

[TeresaE:]

I've been watching the wholesale destruction of American small business (real estate exempt-until recently) for over six years.

It took me two years to really begin to add up all the different situations (most created, or at least legalized by the government) that were converging to create the perfect storm.

For a long time, I thought that "free trade," protectionism for unions, pharmaceuticals, WalMart & other mega-nationals, increased regulations and costs in the name of "safety," the repeal of Glass-Steagall, I really thought that all of this was just a comedy of errors and the rule of unintended consequences.

I don't think it is a comedy anymore, nor an error. Not anymore, and not for a long time.

The American working, dream chasing middle class is being systematically eradicated to benefit the multi-nationals, unions and the government and their special interests.

They keep us divided over non-Constitutional bullshit and have erased an entire strata of our society.

With the blessing of the non-working and the elite.

Small business USED to employ 70% of the non-government.

Small business USED to pay 50% of all payroll taxes, with the owners paying another huge chunk of the annual theft by Washington.

Not anymore, and not since 2005.

Yet, NO ONE noticed. And not ONE reporter has even tried to uncover the reasons for this historical change.

And, even as you drive by the empty (or emptying) buildings, offices, storefronts and factories, Americans REFUSE to see the truth.

Those small businesses were YOUR jobs, your KIDS future jobs, your CUSTOMERS and your customers' CUSTOMERS.

And they are gone, or dying on the vine.

Wake the f*ck up people. BOTH sides have done this to us.

WE continue to ASK for it.

And yet, we stand back surveying the current damage and do nothing.

For those of us that SEE what is happening, and SEE that nothing will stop this train from destroying this nation, we are in disbelief.

EVERY program coming out of Washington INTENTIONALLY picks winning & losing industries (and companies). Losers are the little guy, our backbone and greatness. Winners are the campaign contributors and radicals from both sides.

And Washington has NEVER managed anything well, to expect that these choices will fare any better is insanity at its finest.

Reading news stories and comments on the coming jobs killing health care, immigration and energy bills, it becomes obvious.

Both sides have so brainwashed their sheep that doom is imminent no matter what.

We are too divided, and hell let's face it, too shallow to do a damn thing to stop the destruction.

Thanks again Jeff for continuing to report the truth. Just wish more cared and were actually doing anything about it.

Aug 07 01:55 AM

[TeresaE:]

The CARS program is yet ONE more gift to the multi-national banks.

They now own assets that the driver has paid in both cash down payment AND government payment. And they are charging astronomical interest to boot.

Yet one more gift to the thieving bankers


On Aug 05 03:27 PM effeff63 wrote:

> I don't see that the CARS program was designed to aid the manufacturers
> as much as to give a boost to dealers and get folks off their wallets.
> The side benefit of getting gas hogs off the road and replacing them
> with cleaner, more efficient cars has value. I hold ACAS shares
> as a spec play with a basis in the $7's...if they are cutting costs
> and tightening up their act, they should survive. They may be in
> violation of lender covenants, but those lenders surely don't want
> to force ACAS into bankruptcy.

Aug 07 01:59 AM

[MudEngineer:]

Just came back to Louisiana from a trip to Phoenix, AZ. According to their newspapers, they now over 300 commercial foreclosures every month and rising. This of course will result in more job losses and also more home foreclosures which are already running at over 2000 new foreclosures each month!

My question is with this taking place and getting worse and option ARMS and liar loans coming up for much higher payments, why are banks like Capitol One and Wells Fargo continuing to go up day after day?


On Aug 06 01:21 PM Jeff Nielson wrote:

> The comparison is obvious: they both focus their businesses on lending
> to U.S. businesses and they both are teetering on bankruptcy.
>
> I hardly think this amounts to comparing "apples and oranges" - ESPECIALLY
> when the theme of the commentary is that U.S. companies will be going
> bankrupt because they can't get financing.

Aug 07 12:37 PM

[O-B-WON:]

Wow...

Your comment should be a must read for all Americans... maybe some of them would wake up and smell the rot that is coming their way...


On Aug 07 01:55 AM TeresaE wrote:

> I've been watching the wholesale destruction of American small business
> (real estate exempt-until recently) for over six years.
>
> It took me two years to really begin to add up all the different
> situations (most created, or at least legalized by the government)
> that were converging to create the perfect storm.
>
> For a long time, I thought that "free trade," protectionism for unions,
> pharmaceuticals, WalMart & other mega-nationals, increased regulations
> and costs in the name of "safety," the repeal of Glass-Steagall,
> I really thought that all of this was just a comedy of errors and
> the rule of unintended consequences.
>
> I don't think it is a comedy anymore, nor an error. Not anymore,
> and not for a long time.
>
> The American working, dream chasing middle class is being systematically
> eradicated to benefit the multi-nationals, unions and the government
> and their special interests.
>
> They keep us divided over non-Constitutional bullshit and have erased
> an entire strata of our society.
>
> With the blessing of the non-working and the elite.
>
> Small business USED to employ 70% of the non-government.
>
> Small business USED to pay 50% of all payroll taxes, with the owners
> paying another huge chunk of the annual theft by Washington.
>
> Not anymore, and not since 2005.
>
> Yet, NO ONE noticed. And not ONE reporter has even tried to uncover
> the reasons for this historical change.
>
> And, even as you drive by the empty (or emptying) buildings, offices,
> storefronts and factories, Americans REFUSE to see the truth.
>
> Those small businesses were YOUR jobs, your KIDS future jobs, your
> CUSTOMERS and your customers' CUSTOMERS.
>
> And they are gone, or dying on the vine.
>
> Wake the f*ck up people. BOTH sides have done this to us.
>
> WE continue to ASK for it.
>
> And yet, we stand back surveying the current damage and do nothing.
>
>
> For those of us that SEE what is happening, and SEE that nothing
> will stop this train from destroying this nation, we are in disbelief.
>
>
> EVERY program coming out of Washington INTENTIONALLY picks winning
> & losing industries (and companies). Losers are the little guy,
> our backbone and greatness. Winners are the campaign contributors
> and radicals from both sides.
>
> And Washington has NEVER managed anything well, to expect that these
> choices will fare any better is insanity at its finest.
>
> Reading news stories and comments on the coming jobs killing health
> care, immigration and energy bills, it becomes obvious.
>
> Both sides have so brainwashed their sheep that doom is imminent
> no matter what.
>
> We are too divided, and hell let's face it, too shallow to do a damn
> thing to stop the destruction.
>
> Thanks again Jeff for continuing to report the truth. Just wish more
> cared and were actually doing anything about it.

Aug 09 07:50 AM

[cgm:]

The author is either uninformed or wants his readers to be misinformed. ACAS is nowhere near bankruptcy. They are paying all their creditors both the principal and the interest that they owe and they have a current book value over 3 times the current stock price. They could easily pay all their debts by selling assets and still have a substantial sum left over, but they choose to be patient and only sell for full value. Their creditors have no interest in forcing ACAS into bankruptcy,as the creditors al all unsecured. They will dig themselves out of this in time.

Aug 10 07:21 PM

[Jonathan Ch...:]

I'm afraid that the truth lies somewhere between the author's position of a bank nearing bankruptcy, and CGM's that they are paying their bills and can pay off their debts by selling assets.

To make things clear, I have a position in ACAS, and like it long term - if it survives. However they will need to replace some of their outstanding debe in about a year. At that time they could file for bankruptcy, not because they are not current on their bills, bu because a balloon payment id due. Selling entire companies at this point is difficult, and if everyone knows you are a forced seller, you will not get anywhere near the book value or real enterprise value.

So be cautious, Since Aug 20, 2008 I have purchased the stock at 21.02, sold it at 23.32, bought it at 14.20, sold it at 14.29, bought it a week later at 8.21, and started buying more at 2.71. Sold part of my position today, and am up 30% from the first buy, including those lovely past dividends. I will buy it again when I feel more confident.. Profits can be made, but it will be difficult and depend on luck and timing. This is not a buy and hold stock!!

I did not want to sell - but the short term dangers, at times, overwhelm my interest in holding.

Aug 10 07:48 PM