American Capital's Sale of Axygen Should Help Ailing Company

American Capital (ACAS) received proceeds of $400 million with the sale of its portfolio company Axygen BioScience Inc. − including its subsidiaries Axygen Inc. and Sorenson BioScience Inc. − to Corning Incorporated on Sep 15.

American Capital invested in the One Stop Buyout™ of Axygen Inc. in September 2006. It invested in debt and equity of the latter. American Capital's total inception to date realized gains on this investment were $36 million and its compounded annual rate of return, including interest and fees earned over the life of its investment was 22%.

The sale is vital for American Capital, which has entered into forbearance agreements with some of its lenders after receiving notices of acceleration on $393 million of privately placed notes. Earlier this week, American Capital said that it has realized a gain of $16 million from the sale of one of its portfolio companies on Aug. 14.

During August, the company reported second quarter operating earnings of 9 cents per share, compared to 71 cents in the year earlier quarter. The global financial meltdown has impacted American Capital’s ability to currently access the debt and equity markets. Merger and acquisition volumes continued to decline in the quarter.

The company continues to be below the 200% asset coverage ratio set forth in the Investment Company Act and, as a result, is generally restricted from issuing any new debt except to refinance existing debt.

Last month, American Capital was downgraded by Standard and Poor’s on concerns about a rapid decline in the company’s realized earnings, debts and the deteriorating performance of its portfolio companies.

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 depletion of the value of the company portfolios in which it invests.

However, the recent capital-bolstering initiatives undertaken by the company coupled with other cost-containment measures should provide some relief to the company.

Comments

[Stockmajor:]

I do now, and have, believed in ACAS. I think they have an awesome business model and fantastic management. And I've made very good returns from their stock since last March. I sold off my stock right after their last earnings report, but I'm keeping a close eye on them for future investment. If they avoid bankruptcy, they will eventually return to being one of the best BDCs running. If not, I would still look to invest in them post bankruptcy as I am certain that they would emerge from that process in a great position moving forward.

Remember, most of their creditors are unsecured and ACAS would not be forced to give them secured positions even in a BK. It would simply be a restructuring of debt.

This company rocks.

Sep 18 12:50 PM

[cgm:]

I agree with stockmajor, except I believe that all (not most) of the creditors are unsecured.

I doubt there will be a bankruptcy.

ACAs has been disciplined in selling only for full value. This has resulted in full value offers, rather than a lot of vultures trying to pick them clean of good assets for bad prices. If they can adhere to this policy, they should come out of this recession in fine shape.

I do think part of their problems have been the inflexible laws and regulations pertaining to BDCs and their accounting practices, that don't really take into account the kind of downturn the economy took over the past year or so.

Sep 18 01:01 PM