Big Al45

American Capital Strategies: Management Credibility in Question

David

How much of the net income that ACAS intends to rollover into 2009 was generated in 2008? A BDC can postpone distribution of income for one year by paying a 4% excise tax. The 35% tax rate only applies to 2007 income that is carried forward into 2009.

Of course, management can eliminate the tax problem by dumping its worst non performing assets during the 4th Qtr and taking "realized depreciation" (i.e. actual tax losses) to offset the income earned during the first 3 quarters of 2008.

I'm not fond of ACAS' management, but its shares will probably not go to zero as long as its lenders don't pull their credit lines. Shareholders need to determine when ACAS' credit lines are up for renewal and whether ACAS is violating any convenants that would cause the lenders to revoke their credit lines.

PS. I hope Wilkus is also laying off people and eliminating executive bonuses to cut expenses

Bear Claws Are Out: Some Charts Show Deep Gashes

Except for ACAS, most of the stocks charted above were darlings of the momentum hedge funds. So their price declines will probably not stop until the hedge fund liquidation stops (in mid November)???

ACAS' decline is more troublesome because the hedge funds don't own it. (although it is a favorite naked short for them) The ACAS groupies must be losing faith in the stock.

American Capital Q2 2008 Earnings Update

Rocknbob has asked the right question. If the $1.24 per share "unrealized depreciation" reported in the recent quarter were to actually occur (and it probably won't), ACAS really lost .33 per share during the quarter.

The dividend appears to be safe through the 2nd Quarter of 2009, (rollover of 2008 earnings should be sufficient to pay 2 quarters in 2009) but I suspect they will have to reduce subsequent dividends, if the economy doesn't improve.

Personally, I will continue to buy the dips and sell the rips on this stock.

For full disclosure: I have no current position in ACAS.

Lehman Brothers Take-over: Implications for Financials

The so called "peer group" does not provide a meaningful comparison . Lehman has very little in common with monoline insurers, Business Development Companies, and regional banks that don't have significant off balance sheet exposure. Their asset mix (and risk exposure) is considerably different than that of investment banks like Lehman.

The comparators should be limited to other investment banks and the large money center banks (such as BAC, RY, DB, TD, UBS.)

Finding Value in the P/B Ratio

I need to correct my prior post. ACAS has booked $1.261 Billion (or $1,261 Million) in unrealized losses during the first 2Qtrs of 2008.

Finding Value in the P/B Ratio

In response to MichiganChet

My comment regarding the questionable valuation of ACAS investments was based upon analysis of the 2007 10K and is no longer correct.

I should have reviewed the 1Q 10Q wherein ACAS booked $997 Million in unrealized depreciation. The 2nd Quarter earnings announcement (released subsequent to my comment) booked an additional $264 Million in unrealized depreciation.

This means that ACAS may incur $1261 billion in realized losses over the life of these investments. No one knows what % of the unrealized losses will be realized ,or how many quarters these losses will be allocated to. But it would not be unreasable to assume that realized losses will amount to $150 Million per year for the 2009 to 2111 time period.

For 2008, the company is on target to make about $600 Million in net investment income and to pay shareholders $800 Million in dividends - a deficit of $200 Million.

So, my primary concern about ACAS is no longer improperly valued assests, but rather whether they can pay the current level of dividends after 2008. Obviously, the market has already priced in some decline in dividend payouts.

BTW I reaffirm the previous comment regarding out of control salary expenses. Salary expenses tripled (from $86M to to $254M) between 2005 and 2007 and Wilkus pulled down $24M in 2007. This is far more money than the CEO of any comparably sized regional bank would make. For reference, the CEO of Bank of America (which has about 140 times more assets than ACAS) made only $17M in 2007.

Finding Value in the P/B Ratio

The book value for money center and major regional banks can be unreliable for three major reasons:

1) Their investments can be worth far less than book value. If the investments are privately issued CDOs rated by a monoline insurer the real value is probably less than 50% of book (think Merril Lynch). Even if the investments consist of Fanny and Freddie paper, you can"t be sure what they are really worth.

2) The loans can be worth far less than book value. Theoretically, management has to disclose the amount of non performing loans, but you can't trust them to be honest here. It's common knowledge that a bank is in serious trouble when the ratio of non performing assets (i.e non performing loans plus OREO) to total loans exceeds 3 per cent - and managment will do almost anything to make sure they don't exceed that ratio.

3) The exposure to losses from off balance sheet arrangements - (i.e "conduits" or ABCP facilities) is not reflected on the balance sheet. The larger banks can billions of dollars worth of unrecognized exposure. You have to review the 10K to get even a hint of the bank's exposure here.


ACAS doesn't have these issues, but I don't think they can be trusted to value their investments honestly and they have lost control of their salary expenses. They are probably the last BDC (except maybe for ALD) I would own. If you have to own a BDC, ARCC, AINV, and GLAD are probably safer investments.

FYI I have no positions (long or short) in any of these companies.