Davy Bui

Re-examining My American Capital Strategies Position

najdorf -- I pretty much agree with you on all points.

Hopefully, I won't ever try to develop a rationale to hold a company but rather, let the "facts on the ground" guide me to a good decision. Easier said than done but that's my goal.

I didn't spend much time trying to forecast how their companies are going to perform because, as you pointed out, it is a fruitless exercise. Non-performing loans stands at 8.2% of cost and as I've said before, I expect this number to go up. How high, who knows? Subjectively, I'm hoping it doesn't go past last downturn's 15%. I have spent more time going into management's ability & track record in managing these risks in previous posts:

enlightened-american.c.../

Re: share buybacks -- again, I agree. AmCap raised equity in March 2008, during the credit crisis, at a premium to book and are now in "steady-state mode." Book value at Q1 2008 was $28.16 and today they're selling under $23. Last week, they were around $15-16 per share. Hopefully, they bought back some shares or investors may have some unpleasant surprises in store.

Re-examining My American Capital Strategies Position

Thanks for the constructive comments guys.

Asterisk .*. -- I never said that share price had anything to do with debt/equity ratios. My point was that the market is pricing ACAS well below book, implying the book number is coming down. Either the market is wrong or we (longs) are wrong. If the market is right and book value is closer to current share price, then according to last quarter's debt numbers, AmCap's debt/equity would be at or above 1 and I'm not sure what happens at that point.

shudda, Thanks for the additional background. First, to be clear, I did not say that I expect the management to cut their dividend, only that, at near 20% yield, the market is possibly pricing one in. I think that is a reasonable statement.

My feeling is that management has a little more discretion re: the dividend than you give them credit for. For instance, they've already "de facto reduced" the dividend when they announced their new dividend policy of rolling over and paying long-term capital gains in the dividend (less 4% excise tax) rather than retaining the capital gains, paying a 35% tax and treating gains as deemed distributions. I call this a reduction because previously, they were able to grow the dividend without paying out these long-term cap gains so it suggests a weakness in growing their NOI. But if they needed cash, it seems to me that they could reinstate the deemed distribution policy but maybe I'm missing something. I am definitely not an expert in BDC/RIC regulations as evidenced by my questions regarding what happens if ACAS exceed 1:1 debt/equity. By my spreadsheet, AmCap hasn't paid over 90% of net realized earnings since 2004. I realize that isn't necessarily net taxable income but I don't have those numbers. If you have more insight into this aspect of the business, please share.