Thursday, January 8, 2009

ACAS hitting bottom?

A recent aanonymous comment invited the Jaded Consumer to speculate whether ACAS had hit bottom. I've consistently claimed (and my ACAS purchase timing has -- haha -- backed this up) to have no idea at all how to time trades. I only want to own companies I would not fear being stuck in for years. ACAS was attractive both because of its internal diversification, but also its track record for providing consistent and growing returns. 2008 has been a bad year for the latter, especially if you actually exited (creating a loss), but I planned to be an ACAS owner for years, so I didn't really consider selling until I saw the dividend suspension and realized everyone would bail on the news and that no good news would hit for the rest of the year ... but I still didn't sell because my thesis hadn't really been changed or challenged. So on that question about ACAS hitting bottom ...

... you only live once. I'll bite.

If GM can get GMAC approved as a bank holding company to qualify for TARP, then perhaps ACAS' financing operations -- including some of its portfolio companies -- could be qualified similarly without blowing ACAS' status as a BDC, and thus the debt covenants that depend on BDC status (see the proxy statement linked therein). I don't know enough to speculate on the plausibility of this, because I don't know what requirements face bank holding companies and whether they can be assets of a tax-pass-through entity like ACAS (which is a BDC). But liquidity miracles like TARP availability aren't what management is depending on to right the ship. The fact that ACAS is taking steps to do things that will create liquidity to protect it as a going concern has folks shedding their fear of its collapse; the stock price has more than doubled in a week. Crossing the Rubicon into below-NAV (but above trading price) share issuance excites new buyers, perhaps, though it justifiably makes high-basis owners concerned about the dilution management would accept to acquire liquidity. I think the real question will be how absurd a deal will management have to find before it will be willing to invest such dilutive capital. If the deal is crazy enough (in a good way) then everybody wins -- everybody. But ho-hum deals just don't cut the mustard. Ho-hum deals murder high-basis buyers' returns, even if they're acceptable to folks who bought at $5 or $10. This is the $64,000 question. Well, more, maybe, depending what you've got tied up in ACAS.

Incidentally, anyone here around long enough to remember what happened to this initiative? Has ACAS ever actually IPO'd a portfolio company? Mind you, I don't see this particular year as inviting high-dollar IPOs, but it was interesting to notice. This might be a way for ACAS to end up owning non-controlling, minority stakes in publicly-traded growth companies as the economy turns about. This would enable ACAS to maintain diversity (it would not shuck old portfolio companies entirely) while improving liquidity (publicly-traded companies would offer a more immediate exit than an ACAS-financed buyout in which ACAS realizes a gain but ends up with illiquid debt obligations).

Mind you, IPOs not priced as bargains might not attract a lot of initial interest, and it's to ACAS' interest that portfolio companies sell dear. In that regard, an ACAS-financed buyout that leaves ACAS with high-yield debt in a performing growth company also leaves ACAS with diversity, and offers better security of a return than an equity holder. It just caps the upside to the rate on the note, which is kinda a drag for equity fiends like myself.

On the other hand, debt obligations can be manipulated into crazy returns, as ACAS has proven with AGNC, which cranks out over 20% yield while investing solely in government-backed mortage instruments. Maybe being stuck with debt isn't such a bad deal after all, eh? The downside is that while illiquid private debt is considered a scary asset, ACAS' NAV will be under pressure by bond yield analysis' impact on modeled asset values. As credit turns around, of course, ACAS' NAV will be set to bloom -- but this could take years, and it could get worse first. This is the down side of the long-term strategy: your short term can be very, very ugly.

However, I think the panic of October is over. I think we're in for a dull year of bad economic news, but I don't see us falling off another cliff in that time frame. I think the return of liquidity will mean a lot to financials, including ACAS' potential buyers. Performing companies will always be interesting to companies looking for merger opportunities, growth, or solid investments -- the only question will be, at current costs of capital what multiples can be placed on earnings or cash flow? Since ACAS regularly models for exits under worse conditions than ACAS made its entries, ACAS is in a pretty good position to do well on its portfolio exits. If not, the NOI has been pretty good and ACAS can wait to sell.

I'm patient. You?

1 comment:

Nivdung said...