S&P Downgrades American Capital

Standard and Poor’s Rating Services (S&P) recently downgraded American Capital’s (ACAS) long-term counterparty credit rating to "B-" from "BB-". The outlook is negative. S&P expressed concern about the rapid decline in the company’s realized earnings, debts and the deteriorating performance of its portfolio companies.

American Capital has been significantly hurt by the financial downturn. It reported a loss of $2.52 per share in the second quarter compared with a loss of 34 cents in the year-ago period. Realized loss per share was $1.41 in the quarter compared with a gain of 95 cents a year earlier. It also defaulted on $2.3 billion of debt repayments.

On an operating basis, American Capital earned 9 cents per share in the second quarter compared to the Zacks Consensus Estimate of 20 cents.

According to S&P, American Capital’s balance sheet will take time to recover after the severe impact. During this period, the company will also face difficulties in negotiating with lenders.

However, American Capital recently disclosed in a filing with the Securities Exchange Commission that it may offer up to $1.5 billion aggregate of common stock, preferred stock and debt in one or more offerings from time to time. Net proceeds will be used for general corporate purposes that include debt repayment, acquisitions and other general corporate purposes.

American Capital provides finance to small and mid-sized businesses and competes with companies such as MCG Capital Corp. (MCGC), CapitalSource Inc. (CSE) and Allied Capital Corp. (ALD). It has been severely hurt by the draining value of company portfolios in which it invests. However, the recent capital-bolstering initiatives coupled with other cost-containment measures should provide some relief to the company.

Comments

[Alan Young:]

None of these headwinds are new. The "default" was not failure to make a payment, but triggered by a decline in the value of their portfolio, which served as collateral, LAST YEAR. And the proposal to issue more stock and debt was something like 6 months ago, IIRC.

So why is S&P downgrading NOW?

Aug 25 01:49 PM

[cgm:]

I agree that there's no obvious news here. S&P is late to the ballgame. The creditors are all unsecured, so they have little leverage against a company whose managers plan to patiently sell only when they can get full value. Any settlement with lenders though would generate a lot of demand for the stock and probably drive the price up substantially.

Aug 25 02:09 PM

[cathie1:]

Agreed, this downgrade is a late tactical move on S&P's part.

However, along with an earlier downgrade by Fitch, it does impact ACAS' outstanding interest rate swap agreements, making it possible for certain counterparties to terminate the agreements and accelerate payment. Whether, and why, they would do that is another question.

ACAS did file a shelf registration to issue $1.5b of stock and/or debt just last week, as the article mentions. Most likely, this replaces an expiring registration. "Shelf registration is a registration of a new issue which can be prepared up to two years in advance, so that the issue can be offered quickly as soon as funds are needed or market conditions are favorable." --Wikipedia

The new ACAS registration is 415 pages long, and it contains material detailed information about the company's financial condition. It is available on the ACAS website under "SEC Filings."

Aug 26 11:05 AM

[maryanne:]

Thanks Cathie - specific document is N2 document, dated 8/19/09

Aug 29 07:22 PM