starkawa

Why the Muni Bond Market Is in Decline

My understanding is that the muni sector has a historically low default risk, especially when compared to corporate sector. As the market drags the general obligation muni down as well, it should prove to be a very good mid to long term buying opportunities as GO muni's default rate is almost close to zero.

I can absorb the default of a revenue-backed muni, but if we see GO muni defaulting, I would not want to imagine how the corporate bonds and stocks would be like.

American Capital Strategies: Management Credibility in Question

I am getting comfortable even with their NAV to be revised down
further 20-30% and their ability to amend the credit facility should the
covenant is breached (I believe it's ~$1.3B with Wachovia). However,
there is one more concern I have and was raised in the conference
call:

Missing dividend payable- If I'm correct, a company incurs a liability
when the board declares a dividend; so even though the record date of
Q308 dividend is in October, I still expect to see a dividend payable
line in its balance sheet dated 9/30/08. In the conference call when
being asked, they replied that GAAP doesn't require it, but the
analyst can do their on calculation and trade the stock themsevles;
I'm a bit concerned/confused why they choose such response.

This, not the dividend cut, for me posts more concern to their credibility. I look forward to hearing different thoughts on this and
appreciate your time.

American Capital Strategies: Management Credibility in Question

Thank you for a timely and in-depth analysis of your view; I really enjoy your post. I just listened to their conference calls and in my view long term, the stable/strong NOI, capital preservation through temporary cancellation of dividend, and managing the debt prudently all seem positive. However, I do have two questions/concerns that I'm hoping you would be kind to share your insights on:

1. I assume all mark-to-market multiples and bond yield analysis are done with data as of 9/30/08. As we all know the S&P as of 11/10/08 has been down over 20% since 9/30/08 and the bond yield has certainly reflected extreme lack of confidence (which they mentioned the week of Oct 10 served as wake-up call). Does that mean the NAV of the company (although hard to measure) can be roughly assumed at ~$19.54, a 20% discount of $24.43?

2. With assumed $19.54 NAV and 208.1 million outstanding shares, this put their net asset value at $4,066M; this will violate their covenant (MIN $4,500M) should the market stay flat till 12/31/2008. With a solid portfolio and healthy capital, how likely can American Capital overcome this $434M gap, even assuming in Q408 they'll break even in NAV? Good chances in further amending credit facilities by paying down more debt with their enhanced cash base?

Thank you very much for your time in advance.