Monday, March 30, 2009

ACAS Completes ECAS Purchase

ECAS has gone private, into the hands of ACAS. This concludes a management-announced deal initiated last year. With the elimination of the ECAS below-NAV market discounts -- because there is no longer a market for ECAS shares, it being private -- and the retirement of over a million ACAS shares in the foreclosure of security posted for a company loan, ACAS' NAV will get a couple of automatic boosts even before the effect of improving comparables prices impacts ACAS' NAV.

I had been very concerned that the dramatic price action (into the toilet) of ACAS over the last quarter might have done something to the shareholders of ECAS and their willingness to consummate the deal. The fact this is done is good news indeed.

I more-than-doubled my position by adding shares at $1.80. My long term take on ACAS is that it continues to be able to more than service its debt, which means that it is not a candidate for being squashed by the sort of liquidity crisis I'd feared last year. The perspective offered by management on the last-quarter conference call in connection with the debt covenants is helpful in appreciating what the company faces in practice. ACAS' ability to benefit from cash generated by ACAS in Europe probaly improves with the ECAS transaction. (Since ECAS never trade above NAV in europe, it never became the vehicle management must have hopes for raising round after round of capital in Europe; thus, its loss as a public entity changes nothing for ACAS except its valuation methodology for ECAS assets.) The per-share price of AGNC, by contrast, has been volatile and seems to exceed last-published NAVs with a certain frequency; AGNC might be a vehicle through which to raise funds under management, and thus management fees.

On the other hand, the current market upswing is surely transitory; the problems facing the country are more significant than to be curable by media appearances or press conferences. As data continue to show suffering, prices in the markets will again reflect suffering. The future will be ugly and bloody, but ACAS will continue to be part of it -- and will continue for the benefit of shareholders to enter good deals on attractive companies.

Caveat emptor . . . .

7 comments:

Anonymous said...

I just bought 1000 shares at $1.94 cost basis, almost doubling my position. You have done an excellent job describing events affecting ACAS over the last 6 months and very much appreciate it.

Imperator said...

I vastly increased my position at 0.59, almost the very bottom.

Mark to Market rule changes could have the stock going much much higher (on a percentage basis). Now all I need is it to get to 13 so I can break even XD

Jaded Consumer said...

It's hard to imagine the rule with which mark-to-market would be replaced, since other measures would be likely to err on the side of overstatement.

My own view of ACAS is shaped by the fact its interest coverage is high enough that the company can suffer quite a bit more NOI loss and still service its debt; the fact that ACAS is still able to recycle returning principal into new deals and can do so in an environment filled with interesting opportunities; and the fact that ACAS' last-announced NAV was over $15 before ACAS retired over a million shares formerly owned by debtors on which ACAS foreclosed, and closed the ECAS deal -- both of which raised NAV.

In the long run, as Buffett has written, the markets are a weighing machine. Just now the scales are pinned by the thumb of panic, and trillions of dollars sit on the sidelines waiting for the sun to shone -- more money than has ever sat on the sidelines in the history of the markets. Eventually ACAS' price will swing to rationality, and probably past.

Anonymous said...

mark to market rules have been relaxed. now it is time to bet the farm?

clb said...

Mark to market has been suspended, is it now time to bet the farm?

Jaded Consumer said...

What I read about the "relaxed" rule is that it would cause valuation on the basis of the result of an "orderly" sale.
http://www.chron.com/disp/story.mpl/business/6355264.html

Think about this a sec. If ACAS hadn't already been valuing assets on the basis of the result of an orderly sale, the valuation would be $0 because they are illiquid. There is no market price for them. If you had one day to liquidate, you'd never get a sale because due diligence on the unique businesses with unknown-to-outsiders liabilities would never be capable of being priced. The only plausible fire sale would be to an already-interested co-owner, or a prior owner familiar with the business.

This might not be a big deal.

On the other hand, perhaps the "orderly sale" rule will allow ACAS to value assets on a basis that ignored obvious distress sales as comparables. If this is true, ACAS' NAV could rocket.

I will continue to buy on dips. The truth is, though, I have so much tied up in ACAS that it's hard to explain to myself that I need more.

I've been trying to improve my diversification. I have some half-finished pieces on internally-diversified companies that make diversification easier, but they are not ready to sign yet. The advance notice is that GE is a steal, BRK.B has been discounted on the basis of paper losses attributable to long-term options exercisable only far enough into the future that realized loss is improbable, and some little companies involved in business development in China are current candidates I like for diversification and value.

ACAS may be grossly mispriced, and I will keep an eye on it for more purchase, but with all the ACAS I've got you have to understand the idea of buying more is kinda rough :-)

But yes, I doubled (well, more than doubled) recently at $1.80, despite my existing exposure, because the price was so out of synch with apparent value.

Imperator said...

Reading through the latest 10-k, every credit line and their bond is in default or will be in default. These are all unsecured lines of credit. All of the defaults or potential defaults are due to covenant breaches, which came from the assets being marked down so much.

Since as Jaded pointed out, ACAS can easily service this debt, the problem is when the creditors try to accelerate the principle payments of the notes.

The change to mark-to-market accounting would re-value ACAS's assets (virtually all level-3) to mostly higher levels. This would eliminate the covenant breaches and put ACAS into a more solid position to de-lever.

I still think that buying back the outstanding bond would be a good strategy. Checking the quotes that I could find, the bond has been moved up substantially, there were even some prints in the 60s.