Wednesday, January 7, 2009

On Raising Cash

Connected to the last entry here on ACAS is an interesting comment by rktoledo:
Why doesn't ACAS sell their AGNC shares for $150mil to obtain some quick liquidity. I would prefer this step first over a sub-NAV dilution. ACAS also mentions in the filing that they are in different stages of asset sales. Why not complete some of these asset sales by lowering the sales price.
Investments ACAS manages are generally (and AGNC and ECAS are the exceptions to the rule) not-publicly-traded entities that have no ready market. To sell one of these takes months of careful work: finding prospective buyers, informing everyone about the state of the company being sold, allowing buyers to conduct their own investigations ("due dilegence"), and so on. The pace isn't set by the price tag unless the price is the stumbling block. I'm willing to wager that in many cases the parties both have some rough idea what the right value is, but the time is consumed making sure the product being sold is as advertised.

Meanwhile, ACAS holds something like 7,500,000 shares of AGNC. These shares pay (apparently) over a dollar a quarter while the company retains some earnings (!). That means that ACAS is getting ... oh, let's say $8m/q as an AGNC investor (I don't know what the future dividends hold, whether they'll be relatively stable, or will continue to increase), for an annual receipt exceeding $30,000,000. The fact that ACAS could, in theory, dump the shares for $150,000,000 right now might not make a lot of sense, if ACAS (as the manager, and being particularly informed about the investments of AGNC) believes that performance is likely to do as well or better in the future. Moreover, ACAS' basis in AGNC is $20. Why is a sale close to $20 an example of good stewardship of assets? ACAS expects to realize a small fortune, I'd think, if its current returns are in the northward of 20%. With the returns being all cash, this is especially valuable. I think continuing to hold AGNC is a Good Thing™. On the other hand, what benefit does ACAS get from dumping AGNC? It doesn't get an increase in book value, as it's simply turning one liquid asset into another. All it would do is enable ACAS to pay down some debt that's a couple percent above LIBOR. Wouldn't you rather have ACAS getting the 20+% it can achieve on its managed funds?

Likewise, ACAS could dump ECAS for cash. Like AGNC, ECAS is creating cash. Unlike AGNC, ECAS is trading below book. I think ACAS' smart move is buying the rest of ECAS to avoid the book value drag of the low share price, as it is forced to value on the modeled basis rather than the trading price. Note that the modeled basis has the same kind of artificial depression built into it that ACAS' own portfolio does: in this tight market, the high-yield debt ACAS holds (and ECAS) is valued terribly harshly because credit is tight and the terms of the existing notes would not be available in the current market. On the other hand, ACAS (and ECAS) are being paid on these obligations, so their value is (to ACAS or ECAS) really based on the expected return through maturity, not current liquidation value. On that basis, ACAS could reasonably conclude that its long-term success is enhanced by keeping -- and building on -- these depressed assets.

Assuming there are firms without the patience to sit on depressed assets, ACAS would not harm shareholders by acquiring more, assuming the depression of the assets is greater than the dilution of the new issuance. That's a calculus we have to trust to management. If we don't trust management, we must vote them out or sell.

I for one have a certain amount of confidence in current management, and in its long-term horizon. Until I see below-NAV strike prices on insiders' options, I don't expect to have cause to re-evaluate this.

1 comment:

Anonymous said...

I've been following your analyis on ACAS. I have not seen any news on ACAS over the past few weeks; what do you think is leading the stock price to shoot up over 100% this year? Has it seen bottom?