Friday, February 6, 2009

ACAS Solicits Proxies Even Harder

I was informed by an ACAS investor (it was my fault, I explained what a good deal the company's shares were) that someone had called to solicit her proxy to vote at the upcoming special meeting. They really want a quorum, apparently.

As argued here, if you don't plan approving ACAS' move to issue shares below NAV to enable transactions like the previously-announced ECAS privatization, you should just sell your shares to someone who thinks ACAS' management should be entrusted to make the deals that presumably made ACAS a buy in the first place. Holding ACAS shares once you no longer trust management makes no sense.

From my perspective, I've already fallen 19 of 20 stories, what's the extra ten feet going to do to me? I haven't anything to lose but more money, right? [NOTE: This is a joke, not a safety tip!]

More seriously, though, the ECAS transaction -- though requiring issuance below NAV -- actually increases NAV due to the fact that ECAS' accounting treatment will change. Since ACAS' issues with its creditors are primarily caused by the effects of accounting principles, this kind of gaming of accounting pronciples seems entirely according to Hoyle. Moreover, since ACAS has a history of trading above NAV and ECAS has a history of trading consistently below NAV, the deal is good for shareholders of both ECAS and ACAS. Presumably, once the panic is past, ACAS will be valued with some rational relation to its NAV and/or its NOI, and those who enter at these levels will win.

This assumes that (a) management is authorized to enter the kinds of distress deals that will create NAV improvement as the market panic resolves, (b) ACAS isn't killed by creditor issues due to tangible asset threshold problems, and (c) the NOI ACAS has been enjoying doesn't evaporate, but is a real stream of ongoing income. If management isn't authorized to do things to protect ACAS' asset levels and is sold piecemeal in bankruptcy to meet creditors' immediate demands for principal repayment, shareholders will get zippo. If you plan holding, you need to authorize the deals that will prevent this and vote for the first proposition on the ballot.

Incidentally, the vote may create a trading opportunity: onlookers who don't consider the specific transactions underway will surely conclude that below-NAV issuance is dilutive (since they will assume the issuance is for cash rather than assets whose value will be different in ACAS' hands than on the street) and pronounce ACAS a sell. In other words, if you like ACAS at these prices, wait a little bit and they may get better still :-)

Also, the depression hasn't really kicked fully in: people are still losing jobs, and those lost jobs will impact public consumption in ways that ripple broadly through the economy. We could see improved prices in ACAS, BRK.B, and lots of other good, internally-diversified tickers with good long-term income. Considering the valuation the market is placing on AAPL, the world is apparently expecting bleak things in the near future.


Anonymous said...

I agree that you should vote yes on the proxy or sell. It seems to me that issuing the shares below NAV is the only real choice if you expect common share holders to have any equity once the financial crisis is resolved.

With talk going around about suspending mark to market,would suspending or eliminating Mark to Market effect managements action in regards to issuing the stock.

Imperator said...

I voted no.

I have no problem issuing shares for the ECAS acquisition. I do however have an issue with there being no limit on the number of shares they want to sell below NAV.

Also, I might suggest the topic of what will happen to ACAS shares if the regulations and rules regarding Mark to Market accounting are changed. Mark to Market is what is killing the shares, IMO; as the portfolio is performing decently considering macro conditions.

Jaded Consumer said...

If mark-to-market were actually happening, ACAS might not be in trouble. The problem is that there is no market for ACAS' assets -- that is the nature of illiquid businesses.

Instead of mark-to-market, ACAS suffers from modeled values, which during the present panic are based on the trading prices of distressed securities -- the prices paid to people panic-selling in the throes of margin calls. ACAS' investment horizon for its illiquid investments is not overnight. Demanding ACAS value holdings on the basis of what ACAS might get if its holdings were subject to sudden liquidation does not make a great deal of sense, considering that ACAS uses permanent capital multi-year credit facilities rather than demand notes for its funding.

As mentioned in this initial post on ACAS, ACAS has some investments that based on FAS-157 appear to be producing a return in excess of 70% per quarter. Of course ACAS hasn't got debt obligations producing in excess of 70% per quarter. This is an indicator of how inaccurately ACAS' performing debt holdings are being valued.

Fixing FAS-157 might be useful, but honestly it would also decrease confidence in ACAS' valuations of its assets, too. Part of the collapse of ACAS -- especially its below-NAV trading -- results from concern about the accuracy of asset valuation. Repeal of FAS-157 would do nothing to bolster that confidence.

Let's face it: a business that trades in illiquid investments has a valuation problem every day except the day it sells the asset. Since ACAS sells its assets in many cases on terms that leave it holding (illiquid) debt or minority equity stakes, ACAS is never free of the valuation problem.

That's why NOI is so important, and why I will be looking at NOI to assess the value of ACAS going forward. (Looking at ACAS' capital gains runs the risk that you credit as income part of the NAV that existed in the form of unrealized gains on the day you bought -- oops!)

Anonymous said...

Could you possibly point ACAS investors to where we could get specific information on what we have to do to get the tax benefits that ACAS announced. My understanding is that even in IRAs we can get some benefit, but I have no idea what to actually do. I think others might be in the same boat.

Jaded Consumer said...

re ACAS tax benefits:

Contact your brokerage firm. The forms detailing the taxes paid by ACAS to the federal government in connection with the 3Q2008 deemed dividend (which turned out to be applicable to tax year 2007, so I imagine you can file an amended return immediately and collect your overpayment without waiting for April 15) should be generated by the brokerage firm that holds the securities for you.

I'm afraid I'm up to my a__ in alligators until March and can't even think about my own tax credit until then, though I will surely post details once I've actually been through the dance.

Forms have already been sent out, though your brokerage firm may need prodding to get straight the forms associated with IRA-held shares. Mind you, I haven't sorted this all out myself due to my schedule. However, based on the press releases, I am willing to accept that shares held in brokerage accounts qualify. (And why not? You own them, and a tax was paid on your behalf, and in an IRA there surely wasn't one due!)