andydee

Deep Value in American Capital Strategies

"There is, however, a wrinkle or two.

"The first one is that while IRS rules require BDCs to pay dividends, there's a temporary waiver in place (because so many BDCs and REITs have become too insolvent to pay cash dividends), which allows them to pay 90% of the dividend in stock. Newly-issued stock, that is."

Actually, the waiver, I believe, permitted an additional 10% more than the existing maximum of 80% of the dividend in newly issued stock.

"I cannot for the life of me figure out why anyone thinks that receiving a dividend in stock does them any good at all, since each shareholder still owns the same proportional value of the company's equity; other than some minor tax adjustments, it's a purely symbolic gesture."

"Symbolism" AND "retention of liquidity". It is my opinion that, absent issues with liquidity and lenders reluctant to let even a bit of the "Current Assets" to go back to share owners, Malon and company would prefer to pay dividends in cash. If management had a choice, that's what they would do, imo. I don't think the holders of the unsecured debt will let them.

"The company has made no commitment as to the use of stock vs. cash. An announcement is due June 15th."

No later than June 15th. We could hear about it sooner than that, but, imo, after "favorable" Q1 results are announced - and after a favorable vote on the (now prel..) proxy, scheduled for June 11.

www.sec.gov/Archives/e...



"The next wrinkle is potentially even more dilutive.

"A BDC can only thrive if it can raise capital. ACAS cannot get new loans due to the covenant violations of previous loans. It could issue new equity, but its bylaws require new shares to be sold at no less than book value; not possible, with current shares trading so much lower."

I agree with your notion that capital will permit a BDC to "thrive". It can grow without new capital, in a welcoming environment - which we don't have now. BDCs can grow by using "realizations" - principal and interest payments by the existing portfolio companies as well as the occasional sale of a "mature investment", be that equity or debt.

However, I think you may have overlooked something important. Take a look at the last (successful) proxy. It gives ACAS an opportunity to sell 42 million shares below NAV. Those shares are not shrunk by the prel proxy being circulated now. Check out the current proxy and the one issued earlier this year. The 42 million shares mentioned in the Jan proxy was 20% of the outstanding shares as of Jan 6th, 2009, THE record date for that proxy.

"The company has proposed a way out of this dilemma: a reverse stock split, to bring the share price back in line with the book value."

No. A reverse split can only protect them from de-listing which may very well be a condition imposed by the lenders, or by NASDAQ.



"if the company needs capital, issuing new shares after a reverse split would help the balance sheet."

"Help" in the sense that it provides capital to take advantage of outstanding bargains in this environment.

"Other than the writedown of assets last year, the company continues to make money; only about 2% of their loans to portfolio companies are non-performing. "

As pointed out earlier, that's 2% at "Fair Value". Much higher if considered at cost...


"But even without cash dividends, the stock is attractively valued. And if the markets continue to improve in general, they will be able to profitably exit more portfolio positions, thus raising capital for new investments."

Agreed.

"If market forces continue to put pressure on the portfolio, however, I don't think it will make much difference whether the stock is reverse-split or not; having a respectable stock price doesn't make an attractive investment when your business sucks."

They are in a lot of different businesses, one of the many attractions BDCs have. But, certainly if the global economy does not get out of the "funk" it is in, and soon, by the end of 2010 for sure, things won't be very good for ACAS.

Are you an optimist? I think all "longs" must be.

Otherwise, play the other side.

Is Pennantpark the Best Business Development Company Around?

NMB

You wrote...

"> The NOI's for the first FY quarter of 2009 (Q4-08), NOI was only
~$0.20 after one time charges. I would think the average NOI before OTC's will be $0.45/shr .. and maybe figure more OTC's thru the 1st 3 quarters of '09. So, the FY2009 NOI's will probably be in area of $1.30-$1.40 .. and thus maybe $1.20-$1.30 payable as div's by Sept 2010."

We might disagree a bit on what ACAS NOI will be over the next 2 or 3 quarters, (it dropped from 75 cents in Q3 to 41 cents in Q4, before one-time charges - and I expect that Q1 and possibly Q2 won't show a flattening out of the NOI decline, especially given the hike in interest rates), However, I subscribe to your larger point:

ACAS will distribute as much or more in dividends over the next 18 months than the share price at today's market opening. And therefore it is a "BUY" at these levels.


On Mar 27 12:14 PM not_my_business wrote:

> NMB wrote:
>
> "So far, ACAS has accumulated ~$0.90/shr in NOI's so far in FY2009
> that must be distributed to shareholders by Sept 2010 .. along with
> 90% of whatever they make in the 1st 3 calendar quarters of 2009,
> which will likely be a total of about $1.50/shr."
>
> I made a mistake here .. sorry.
>
> The NOI's for the first FY quarter of 2009 (Q4-08), NOI was only
> ~$0.20 after one time charges. I would think the average NOI before
> OTC's will be $0.45/shr .. and maybe figure more OTC's thru the 1st
> 3 quarters of '09. So, the FY2009 NOI's will probably be in area
> of $1.30-$1.40 .. and thus maybe $1.20-$1.30 payable as div's by
> Sept 2010.
>
> NMB

Is Pennantpark the Best Business Development Company Around?

drtrader,

I'd like the penultimate word on FASB 159 to be that of Malon Wilkus, in response to a question from someone I believe is also a regular poster, (in addition to NMB), on the ACAS Yahoo Board .
***********
"Angelo Guarino – PRI

"Can you talk a little bit about the 159 election and the arguments that the regulators are giving you in the feedback of why the bifurcated balance sheet valuation approach makes sense? and, if you get a window to re-elect, would your lenders be obligated to accept that accounting change?

"Malon Wilkus

"Under 159 the requirement is that you had a one-time election to revalue existing liabilities and that for us was on January 1, 2008 and unfortunately, we, but – not only American Capital, but I think many BDCs were struggling - trying to understand the implications of FAS 157 in valuing the asset side of the balance sheet. And up through January and February of 2008, through January and through parts of February, it was entirely uncertain from our auditors as how the FAS 157 would be implemented with respect to our third tier assets. And as a result, neither American Capital, nor any (of the) other (large) BDCs that had the end of the year financials, elected to implement FAS 159. Now (we) can’t apply FAS 159 – and therefore by the time we did understand the impact of FAS 157, it was too late and you couldn't go back and implement it.

(As far as the second part of your question is concerned), "You could, under 159, apply at any time you enter into a new loan agreement, but that really doesn’t help the situation in (our) case.

"So, now the ... SFAS 159 was implemented by FASB and it is questionable to what extent a regulator could have an impact on that.

"But it does seem pretty odd for us, because if we were able to retroactively implement 159, we would have $1.2 billion of additional book value."
**************

The last word will be mine. With $1.2B of additional book value ACAS share price would not be wallowing in the single digits...it would mean access to additional credit and phenomenal buying opportunities - the kind of opportunities, for example buying back their own debt -- sort of like what Michael Arougheti described ARCC did earlier this year...(from the last CC)

" As disclosed in the release this morning, we recently executed and are closing on multiple opportunistic debt repurchases of our on balance sheet CLO notes totaling $27 million at a total cost of $6.6 million. These 2009 transactions reduced our debt by a net $20.4 million and also created a distributed realized gain of $20.4 million or $0.21 per share.

"Importantly, these transactions increase the cushion under our asset coverage ratio by $40.8 million bringing the total cushion on a pro forma basis to $276 million for an adjusted net debt to equity ratio of .75 times using our 12/31/08 balance sheet. This calculation nets out to $48.6 million in cash not restricted for our dividend paid on January 2nd. "

So I guess I gave Mike A. the last word...


______________________...
On Mar 27 10:52 AM drtrader wrote:

> One more comment on the FASB 159 change. A lot, if not most, of
> their mez loans are variable. Libor + x. When they mark these to
> market, the reduction in the Libor component is reflected in their
> NAV. Marking their credit facility down to reflect the decrease
> in libor isn't terribly dishonest because quarter over quarter, it
> keeps their credit spread the same.
>
> Clearly it has that one-off effect of showing a big gain to NAV,
> but quarter over quarter its a better reflection of true NAV.

Is Pennantpark the Best Business Development Company Around?

My goodness, where to start?

Jan has a habit of designing criteria for evaluating BDCs that justifies his own investments. That's not the first time I have written that...Last year we had a sparring match on the ARCC Yahoo Board.

I'm not suggesting that PNNT is a "Bad Choice", merely that there are other BDCs that may have more to offer. One for example is ARCC, the site of Jan's post.

ARCC will pay share owners 42 cents in a few days - that's the quarterly dividend for Q4 '08. This for a comp[any with a share price hovering around $4.75 as I write this. Michael Arougetti (sp?), the CEO of ARCC, although loathe to pre-announce dividends, has indicated that he believes they will be able to sustain the dividend for at least one more quarter (check the Q4 transcript Q&As). Even if that is not true and ARCC has to drop back to a dividend that is based on NOI alone, share owners might reasonably expect dividends in the order of 30 cents a quarter going forward.

Now here is an interesting notion. ARCC has been able to navigate it way through the recent morass that has been our capital markets without resorting to any acts of prestidigitation.

PNNT on the other hand adopted SFAS 159 on October 1, 2008, giving them the right to "mark down the value of their outstanding loans "to market". Entirely legal and permissible, but it did add almost $2 to NAV, and perhaps avoided an issue with the banks that hold their credit facility - (haven't checked to determine is that is so, so pls don't take that as a fact). But here's a quote from their earnings release..."On December 31, 2008, the Company had $157.4 million in borrowings outstanding with a fair market value under GAAP of $109.9 million." So they owe $157M but can put it on their books at about $110M.

There are other points I could make, as well as other BDC choices. I own three at the moment, because I believe they have the greatest potential upside. ACAS, ARCC, and AINV.

I believe all of the BDCs will get relief from the rewrite of FASB 157, and so all will prosper...

I do want to make one comment on the preamble to your discussion of the BDCs. I believe you are incorrect about your assessment of whether WWII pulled us out of the Depression. Spending was important, but so was employment. Men were taken out of the factories and put into the services, women then took their place in the factories. It wasn't enough to build the planes and dump them into the oceans -

BTW BDCs are a product of the recession that occurred in the late 30's...check out the background to the Investment Act of 1940, the act which created the possibility for the BDCs...