Tuesday, May 5, 2009

Latest ACAS Sale Closed 33% Above 4Q2008 Valuation

The recently-announced sale of Piper Aircraft turns out to offer good news beyond the mere fact ACAS still has valuable things to sell, and is able to close transactions. The first part of the next wave of insight Piper offers is that Piper represents a sale at a profit: ACAS realized $31 million on the deal. Making money is always good, right? This works against the thesis that ACAS faces a forced-sale environment. ACAS' internal rate of return of 19% is a nice return for ACAS' shareholders, and speaks well of ACAS' management of funds.

The second good news in the Piper transaction is much more important to current shareholders. After all, that prior gain was baked into the share price, right? All the current shareholders will get from a realization like a sale is a tax obligation. What current shareholders want to see -- shareholders who are looking at ACAS' below-NAV trading range and wondering whether that foreshadows more NAV collapse or portends terrific profits as prices rationalize -- is what Piper's sale means for ACAS' valuation of its assets. And here we have a red-letter day. When ACAS exited Piper -- both equity and debt -- it did so at a price 33% above the FAS-157 "fair value" of the Piper assets at the close of the 4Q2008 quarter.

The fact that ACAS-held debt is worth a lot more than FAS-157-compliant valuations suggest is something shareholders wanted to see confirmed, and this is certainly help in that direction.

Next up: ACAS' quarterly announcement for 1Q2009.

Let's see if the good news continues.

19 comments:

Elliott said...

Why, oh why didn't I buy more shares at $1.50. I was so close. He who hesitates is lost...

Jaded Consumer said...

Hey, don't worry.

The earnings announcement -- missing NOI estimates and turning in another quarterly NAV loss -- has created another swarm of short-selling (I assume).

You may see attractive prices again. Soon.

Elliott said...

As much as I want to see ACAS do well, I'd welcome another chance to average down. I could lower my average at the current price, but I'm just not feeling a lot of faith in the rally we've been experiencing. More hesitation perhaps, but I can't shake the feeling that there is some irrational exuberance out there.

Jaded Consumer said...

Especially in an environment in which stocks are coming off a bear rally, a newsless period will probably drive near-term ACAS prices down.

I am not buying right here -- I more-than-doubled my shares at $1.80 -- but I'd certainly think about buying more if it drifted back down a bit. We've seen what a little drift of good news can do to ACAS, so we know what's in store the next time something positive develops.

The ECAS sale in the works is thought to be worth several times ACAS' whole market cap. Improving debt comparables valuation will inflate ACAS' NAV when it materializes. Companies on non-accrual that survive to turn around will reinflate NOI.

There's more doldrums to survive, and with it more stock price malaise (with exciting spikes of volatility), but I think the long term of ACAS will be driven by the quality of its due diligence -- and I think that will turn out to prove to be of high quality.

Best of luck in timing your investment. I've never thought I could time worth a lick :-)

Elliott said...

Point taken on the timing. Imagine how upset I'll be at myself if a year from now I'm saying "Why, oh why didn't I buy at [insert today's closing price here]."

Jaded Consumer said...

I don't want to come off as pushing a buy. I just thought it worth pointing out that ACAS is very volatile, and has moved pretty drastically of late with changing views on both the market as a whole (<$0.60!) and optimism that ACAS might be on the mend (>$5!). Since I've not had great luck in timing, I wouldn't want to urge anyone into a quick buy based on fear of missing a deal.

If you are confident in the company, one way not to get it wrong is to buy in smaller increments -- some of which will be at better prices than others. The plan will assure you that, whatever you end up buying at, it doesn't reflect a failure in your psychic powers but is an inevitable consequence of attempting to mitigate the risk of getting slammed with high prices or missing upcoming deals. Thus, even if your average buy price doesn't change, your stress level and should move in a favorable direction.

After all, one of the main points of being a long-term investor is that you should be sleeping at night without stress over holdings you plan keeping for years. Right?

Anonymous said...

Jaded - what are your thoughts on the possiblity of reverse stock splits that were talked about in Q1earnings?

Jaded Consumer said...

Anonymous: do you like pumpkin pie?

I do. A good pumpkin pie when I'm hungry is a marked man, as good as gone, if nobody shows up to interrupt me.

The question you are asking is, do I want to eat the pie in 1/8 slices, or 1/4 slices? The answer is that if the pie sucks, I don't want any of it; and if it's one of the pies I bake or comes from an oven whose master knows his stuff, I will eat it in any size slice he cares to serve it.

So, what's the story behind the reverse stock split? Simple: there exist exchanges that will not keep stock listings that keep below a certain threshold price too long, there are mutual funds and other institutional investors with black-inked rules against owning shares below a certain price, etc. ACAS wants to be on the right side of that threshold for purposes of visibility, demand, and frankly beauty (stocks trading below $5 or $10 are apparently not thought by some to have the same cachet as stocks trading over; compare Apple, Google, Markel, and other triple-digit stocks to see what I mean ... these stocks have a certain air of authority because their ticker is printing several digits left of the decimal).

ACAS' management wants back into the respectability club to be able to chase opportunity. When I bought ACAS, it was entering the S&P 500, for example, and ACAS made a point of touting itself as the only firm of its kind in that list. Surely ACAS wants back in, and that means it needs market cap, which means it needs share demand, which means it needs to be off prospective buyers' "untouchable" list -- which means it needs to game its share price back above whatever threshold is required to do that.

In and of itself, though, the share split doesn't amount to a hill of beans. ACAS is just gaming third parties who use share price as an inclusion criterion.

If ACAS' object is $5, it could do that without the reverse-split if its news continues good (ie, sales above recently-reported FAS-157 value, improved valuations due to changes in comparables pricing, etc.). I don't really take a position on the reverse split likelihood, because (a) I'm not using price thresholds in my own thinking, making them personally irrelevant, and (b) I'm not sure which lists and inclusion criteria will really turn out to be material for ACAS demand, nor do I know what management is thinking -- which is really the factor on which the reverse-split (if any) will depend.

It's been a good run just recently for ACAS; the question is whether the news trends good, or whether protracted economic difficulty erodes NOI to the point ACAS has trouble meeting its obligations. I predict ACAS remains solvent, but a bad economy that hurts everybody will hurt ACAS' portfolio companies, too (except for the acyclical and countercyclical components, but I assume these are fairly modest in scale). The medium-term consequence of general economic malaise will presumably be stock price malaise, barring creative opportunity-seizure.

But then, ACAS' ability to identify and exploit opportunity in illiquid private companies is what drew me to ACAS in the first place ....

Imperator said...

Random thoughts on the earnings call:
This latest deal (piper jeffrey) seems to give credit to my thesis that ACAS's assets are undervalued. I'm upset that the FASB changes haven't affected the BDCs, so we still have some obstacles with the covenants. This gap between the equity/debt requirements in the covenants is about 1.8 Billion....

I'm concerned about the ECAS deal, as there seems to be some more dirty laundry surfacing with the deal.

The CRE CDO portfolio is obviously undervalued with a 12 Million dollar GAAP value against a 5 Million dollar annual cash flow, giving an estimated 88 on maturity.

The loan portfolio is starting to look bad. This is reflected in the share price IMO. Having Non-accrual and past due at 18% of face value loans is not a good sign. I will have to see this improve or stabilize to have confidence.

But Jaded, there is obviously a disconnect between the share price (3-4) and the NAV (10-14). What is causing this disconnect? Is it the default with the covenants? What will be needed to see the share price revert to NAV?

Anonymous said...

Based on rising non-accruals, a still stagnant economy, default interest and advisory fees, and the ECAS transaction finally taking full hold, how do you (Jaded) think that Q2 Net Operating Income will fare?

ACAS Q1 NOI was decent, but was slightly below analyst expectations. The continuation of portfolio depreciation (much of which was due to performance) was also a bummer (no ECAS writeups), and there was no help from the FASB either. Also looking at ALD which beat analyst's NOI forecast by 2 cents (but also had similar writedowns as well), how do you see / estimate the Q2 earnings?

Given that Piper sold for 33% more than Q4 valuation (and Corrpo was something like that also), I think that not all, but much of their portfolio has been written down to the bottom of the barrel. Since Q1 end there has been a market rally / recovery, better spreads (I assume), and a "slightly" improving economy that may lead to write ups in Q2... what do you think?

As with Imperator, why is ACAS still slumped? Is it the default with the covenants? What will be needed to see the share price revert to NAV? (BTW, I would appreciate ANYTHING you have to say about the covenant issues or NOI and anything on writeups or writedowns in Q2).

Anonymous said...

What was your take on the 1st quarter ER and CC?

Again Malon Wilkus said something about a possible Chapter 11 bankruptcy as a worst case scenario, "it is a very rare even for a bank to force a Chapter 11 when the company is current on all payments." BuT my question is, will ACAS be albe stay current on those payments? and like the post above, how will their 2nd quarter earnings be and can ACAS keep their net operating income flowing in?

Jaded Consumer said...

The bank's interest is in getting paid, not in making sure bankruptcy attorneys are getting paid. Thus, Wilkus has a point: while ACAS is making its (elevated) interest payments, there's little incentive for a bank to create a bankruptcy proceeding. Moreover, so long as ACAS has ample interest coverage, there might be doubt that a bankruptcy court would find ACAS actually bankrupt.

The next question is the doozie: will ACAS' NOI drop to the point that ACAS can't cover interest? ACAS has faced NOI drops, including drops from non-accrual on debt it holds for others. Since ACAS is in the business of re-lending money it borrows (cheaply) from banks, problems like ACAS paying more for debt and ACAS' debtors failing to repay ACAS are serious threats if they represent a growing trend.

I haven't been looking at ACAS' portfolio line-by-line to see where its write-offs have been, and where its non-accruals have been. It may take a closer look before someone can speak with any conviction on whether the concerns mentioned here are a growing trend or not. Even for those who would look closely, ACAS isn't famed for making it easy to tell what's happening inside particular portfolio companies.

I suspect most of the bet on ACAS comes down to conviction regarding ACAS' management's capacity to weather the storm. I simply don't think the opacity of the portfolio's contents lends it to valuation any more than is possible at Berkshire Hathaway (what's GEICO worth? Dairy Queen? Orange Julius?). At the end of the day, it's about how the recovery restores earnings to the companies that make the holding company's consolidated earnings shine -- or suck.

I've been a bit busy of late to cling on every word in the conference call. I'll have to hit it later and see what the tea leaves seem to say. Catch you then!

Anonymous said...

The company has $280 MM of debt maturing this year (ex defaults), i think. They also must pay $300 MM in dividends (up to 90% in stock), if NOI takes a hit, or the economy slumps, where is the company going to get this kind of $$$ from? Selling portfolio cos? They cant borrow more debt becuse of BDC rules. Their stock price is soooo low that an equity sale wouldn't mean anything. This seems bad to me...

BTW they only $80 MM in cash reserves,so this obviously will this mean more asset sales? What do you think the cash stock ratio will be? 90-10, 70-30? MAIN QUESTION: WHERE WILL/CAN ACAS RAISE CAPITAL???

Anonymous said...

Next up: ACAS' quarterly announcement for 1Q2009.

Let's see if the good news continues.


Well? No analysis of Q1? The silence is deafening

Jaded Consumer said...

The correlation between planned posts and actual posts isn't what I'd like, real life interfering with my schedule and all.

The question is whether selling assets like Piper well above recent "fair value" quotes means that ACAS' portfolio is much more valuable than FAS 157 would have us believe, or whether this is some kind of fluke. The next question is whether ACAS can maintain its interest coverage -- and this, in turn, depends on whether ACAS' debtors can make good on their payments.

I haven't had time to dig in, but I think spotting the questions is a good start. Anyone is free to post what they find, too :-)

Anonymous said...

could you comment on the recent runup in acas share price. wow!

Imperator said...

I attribute this recent run up to the announcement of the dividend, which does give some clarity. The dividend however is disappointing and confusing. As far as I can tell, the are only paying out 10% of the $1.07 a share dividend in cash. You can choose if you want cash or stock, and I assume those who elect to receive cash first will get it? I'm still a bit confused on the mechanism.

Anonymous said...

Early this morning the pre-market trading reached exactly $5.00 per share... Will this mean that ACAS could be put back on the institutions menu?

I also think that a loan covenant renegotiation will pump the stock up ALOT!

Lastly, a comment earlier - about ACAS principal repayment - how will this affect ACAS's cash position, or future dividends (which I think will not return in 100% cash form for a long time).

I was also just curious as to anyone's ideas on how much Miller Buckfire's advisory fees are? (not Miller Buckfire in particular, but what something like that "might" cost, in addition to the default interest)...

ACAS kept NOI solid at 31 cents (39 cents before executive comp.). I wonder how Q2 will play out... writeups, renegotiation, higher costs, ECAS, cash position, dividend/more shares, etc...

Very much appreciated...

Anonymous said...

Jaded, OMG!! ACAS is destroying!! Up 32% today (ex and loan renegotiation rumors)... please post ANYTHING - insight,ideas,opinions... you are a sage, wise investor and we are ALL dying to hear your take on ACAS now... I bought a ton at $21 and loaded up sub $2... currently buying all the shares I can get my hands on.... WHAT IS YOUR TAKE???