Big Al45

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.