johnheiderscheit

What is American Capital Strategies Worth?

Here are the problems with buying ACAS now.

1) As the author notes a key (perhaps the key) competitive advantage for ACAS is cheap capital. Several sources of cheap capital are, at least temporarily, ieither off the table completely or at least much more expense. First, in the current environment stock offerings will be much less accretive. Second, asset securitizations on good terms may be more difficult. Since the credit market difficulties appeared in July securitizations have been few and far between. Third, bank debt is going to become more expensive.

So I view the current situation as a race between the increasing cost of capital for ACAS and ability to deploy capital on what will certainly be better terms.

2) The chart. Its beyond ugly. Why is today the bottom? Why not tomorrow or a year from now. Financials are in a bear market. The BDC portion of the financial space started declining in early 2007. A bear market typically last 12-24 months. So based on the technicals I suspect a bottom may not be in.

3) Credit quality has been good but not great in a wonderful economic environment. What will happen in a weak or even very weak environment. ACAS's investment classes in 1999-2002 performed very poorly. Essentially, ACAS outran these problems through tremendous balance sheet growth after 2003.

Taken all together, I don't think ACAS is yet a fat pitch.