American Capital Strategies, Ltd. (ACAS)
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ACAS Forum Topics
- All Comments on ACAS
- General Discussion on ACAS
- Re-examining My American Capital Strategies Position [view article]
- Dividend Yields Soar [view article]
- Crazy Dividends [view article]
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- Review of Current Losing Positions: NZT, ACAS, SKM, GE [view article]
- Naked Shorted Stocks [view article]
- 10 Top Dividend Stocks of the S&P 500 [view article]
- Power Generation, Count Me In - Cramer's Lightning Round (7/11/08) [view article]
- American Capital Strategies Illustrates Private Equity Risks in Merisel Pull Out [view article]
- American Capital Strategies: Ride the Recovery [view article]
- Hershey's House of Pain - Cramer's Lightning Round (6/19/08) [view article]
loading ...Recent ACAS Articles
- Re-examining My American Capital Strategies Position
- Crazy Dividends
- Naked Shorted Stocks
- Dividend Yields Soar
- Review of Current Losing Positions: NZT, ACAS, SKM, GE
- American Capital Strategies: Ride the Recovery
- 10 Top Dividend Stocks of the S&P 500
- American Capital Strategies Illustrates Private Equity Risks in Merisel Pull Out
- Evaluating a Negative View on American Capital Strategies
- American Capital Strategies: Dividend Analysis
- Full List of Articles »
Re-examining My American Capital Strategies Position [view article]
najdorf...not sure I completely follow your train of thought regarding dilutive capital raising. Given the nature of BDCs the only way to grow NAV/book value is to raise capital in the market by selling additional shares as earnings need to be payed out in dividends. Assuming that this capital is invested wisely and that these investments/loans pay off then it is essentially a wash since there is an equivalent increase in earnings to offset the higher (total) dividend payouts. Furthermore, this is, in theory, beneficial to existing shareholders as it would increase the book value and, in turn, the market price value of ACAS shares actually giving shareholders a little in capital gains potential. The potential for dilution only occurs when capital is raised, total shares are increased and loans/investments fail to pay off. Potentially, this is where we are at. Granted, I think we all agree that specualting on where non-performing loan numbers are going is a fruitless exercise, but assuming these numbers increase significantly, then we as shareholders are left with a situation where management needs to pay a larger dividend (in terms of total cost) as share count goes up, but earnings either fall or flatten and what the market is pricing in at this point is not encouraging although here again, we can't know how much this has been exacerbated by the naked shorting. I would like to believe that we'll be okay even if 20% of loans go bust as that would still leave us with a book somewhere around 21-22 and as long as the dividend is covered out through 2009, but it may be wishful thinking on my part. ReplyRe-examining My American Capital Strategies Position [view article]
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. Reply
Re-examining My American Capital Strategies Position [view article]
A lot of questions here and a good debate. Guess there are some things we just don't know for sure and probably won't until after the fact. My compliments to all, however, on an intelligent analysis and productive give and take seeing as how most of the commentary you find on the web about any company is nothing more than pump and dump specualtion. Been reading Einhorn's book and haven't come across anything yet which could be pinned to ACAS unless there is outright fraud going on which is what he indirectly alleges with ALD. Ultimately, it seems to me that it's more a question of how well the investment team has managed risk as far as making bad loans that may not pay off as this is the most dilutive situation of all. It is, in essence, the equivalent of flushing money down the toilet which is exactly where I stand at present on my ACAS investment. ReplyRe-examining My American Capital Strategies Position [view article]
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. Reply
Re-examining My American Capital Strategies Position [view article]
I was also confused by Davy's point about the share price, but I think what he's saying is that the current share price could be an accurate estimation of future write-downs to book value, and if these writedowns come to pass the company would be over their legally-mandated leverage standard. If the share price is just an indication of speculative shorting and the book value stays where it is they should be fine.I appreciate the level of detail in this article compared to many others I've looked at lately. You actually read the report and provided good numbers with interpretation, when most people just make emotional reactions. My one objection is to:
"FAS 157 has already been implemented and there is no catalyst (other than the failure of companies to make debt payments) to force management to write positions down further."
This is true as far as it goes, but it doesn't go very far. The failure of companies to make debt payments has always been and will always be the #1 risk of a company like ACAS. The investability and profitability of the company depends almost entirely on their ability to manage this risk. If you're trying to develop a rationale to hold the company, you should spend 90% of your energy here rather than 1%. The accounting stuff and short-term fluctuations don't matter all that much as long as companies keep making the payments. The writedowns are in large part an attempt to assess the default risk - are they accurate? It's hard to say because we're talking about high-yield investments in small, illiquid, private companies. It's probably even harder to predict than the mortgage market, since no individual mortgageholder has a big impact on a bank's finances, but a few of their larger positions could significantly hurt ACAS by defaulting.
Also, on the share repurchase issue, you won't see this company buy back shares unless the price is below book value, because they are a capital-gatherer, not a capital-returner. Look at the increase in shares over the years. They have to pay out earnings rather than reinvest them, so in order to grow (and raise management's compensation) they need to sell new shares, like a mutual fund. However, this practice is only really valuable to the company if they can trick someone into paying over book value for the shares (since selling new shares at .9 book value is a lot like writing down assets). In the past they were able to get investors at a premium price based on the yield before any credit losses manifested - good luck to them in this market. If the share price goes too low they may be able to help out existing investors by buying back shares below their value, but woe to all concerned if this buyback is followed by writedowns and dilutive capital-raising. Reply
Re-examining My American Capital Strategies Position [view article]
Excellent backup from shuddacudda.....I got it. Follow up....so the only way to cut dividends and stay in compliance would be to realize losses to reduce statutory income. I.e., sell some "dogs" to raise cash, and at the same time reduce income to reduce the dividend requirement. Thus the company could retrench a bit, reduce leverage and or buy back shares. ReplyRe-examining My American Capital Strategies Position [view article]
Excellent article.A question for David Bui....why should the stock price have anything to do with the 50%/50% ratio of Debt:Equity. I realize debt can't be >50% of total capital. But this rule refers to the Debt and Equity that are on the books, not Debt and Equity market valuations, right?? The required ratio is based on the book equity and the book debt? Meaning stock price is irrelevant for this consideration....Thank... in advance.
Second, comment to shuddacudda....I think they have occasionally paid out >100% of earnings so they could still cut without dropping below 90% requirement. In fact, with the writedowns, they are running accounting losses, and could cut dividend for a while without breaching the 90%. I personally would not be put off by a dividend cut, but I realize most owners would. Reply
Re-examining My American Capital Strategies Position [view article]
spartanz: Of course the government will protect Wall Street at the expense of Main Street. All of the decision makers, from Paulson and Donaldson on down, are old Wall Street insiders. Fairness has nothing to do with it. ReplyRe-examining My American Capital Strategies Position [view article]
Two things you should know -- If you don't already.1. Management has little discretion to cut dividends.
2. Income from which dividends must be paid can be very different from GAAP earnings since unrealized gains and losses (among other things) are excluded.
Background--
BDCs (Business Development Company) such as ACAS and ALD are also RICs. RICs (Regulated Investment Company) are eligible under Regulation M of the Internal Revenue Service to pass capital gains, dividends, and interest earned on fund investments directly to its shareholders to be taxed at the personal level. The process, designed to avoid double taxation, is called the conduit theory. To qualify as a regulated investment company, the fund must meet such requirements as 90% minimum distribution of interest and dividends received on investments less expenses and 90% distribution of capital gain net income. To avoid a 4% excise tax, however, a regulated investment company must pay out 98% of its net investment income and capital gains. Shareholders must pay taxes even if they reinvest their distributions.
“Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses generally are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in-kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual payment-in-kind interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense.” From ALD 10-K.
Reply
Re-examining My American Capital Strategies Position [view article]
Thanks, Dave, for doing the heavy lifting on this. I like the dividend but without detailed reports like yours I wouldn't have enough confidence to stay with it. ReplyRe-examining My American Capital Strategies Position [view article]
If ACAS must pay out 90% of statutory earnings (not GAAP) in order to remain a BDC, what makes you think management has the option of cutting the dividend? -- Unless you are predicting a drop in statutory earnings? Reply_me_Al
Re-examining My American Capital Strategies Position [view article]
The recent government action against short selling really was very distressing. It's already an illegal activity, and the government action demonstrates clearly that they believe it's a problem.Why are they only willing to enforce the law for a handful of companies? Outrageous. Reply
Re-examining My American Capital Strategies Position [view article]
The naked short selling here was obvious. It has damaged many retirees portfolios who bought this for the dividend, but still do not wish to see the base eroded. I have written the SEC and my congress people on the damaged caused. The SEC still has not provided the rationale that only 19 companies can not be naked short. MMMH? Goldman and Einhorn can short ACAS, but Goldman can not be shorted. Does not seem quite fair. SEC is protecting a few Wall Street firms and is forgetting about main street.I have urged ACAS to address the SEC directly. Reply
pessimistic
optimist
Dividend Yields Soar [view article]
oh..in closing. XTO, CHK, PK, and LINE are all dropping like hot rocks. A few days and there should be a soft bottom.. maybe a small surge, maybe a better than average surge. Hurricans and oil?? Nat gas may work again sooner than later. On the cyclical side, NDN and DLTR are ramping a bit.. school is coming and the bigger retailers may have a time with pricing. Following teachers and students concerns. Give them a look.good day Reply
pessimistic
optimist
Dividend Yields Soar [view article]
Hanging in there on NAT. Sold off FRO for profit.. not relying on dividend alone and will pull the trigger again when it drops a few bucks. It will ramp up higher than last pull back...hence the pseudonym. Last in shipping will be SFL.. enough of the ocean shipping transports. Keeping T ,DD, NUE, KO and JNJ. MO and USB might be latest purchases then it's time to keep 5% on sidelines for awhile. Going to put ACAS on radar for a week then we will see. Reply