Wednesday, July 15, 2009

ACAS Raises More Cash

A recent comment asked for the Jaded Consumer's take on ACAS selling AGNC shares to Deutche Bank. Previously, not selling AGNC shares was defended here on the ground that if ACAS didn't need a one-time liquidity boost, and AGNC was producing a nice return for ACAS. Following the sale of 2.5 million shares to Deutche Bank, ACAS will retain 2.5 million of the 5.0 million it bought when AGNC was first capitalized. ACAS won't have entirely liquidated, but it will have sold some.

The first thing to ask is: what does ACAS get from the sale? No price was mentioned, but AGNC's basis in the shares was $20, the sale occurred at a time AGNC traded over $22, and the sale caused a price dip (the prior day's peak was over $23, but on the day the sale was announced it dipped below $22) that left the price above $21, so it's likely ACAS got at least its capital back out of the sale ($20). Given that two and a half million times $20 is $50m, it seems ACAS likely raised about $50m -- maybe a bit more if the private placement price was something close to market value instead of being discounted. Given ACAS' credit situation, it's quite possible selling AGNC to a major bank at a discount might be part of some larger transaction.

What does the sale mean?
  • Institutional interest exists, at least near the size of $50m chunks, for ACAS' funds management
  • ACAS can raise something like $50m again if it needs to (assuming AGNC's price keeps up) because ACAS has another 2.5m shares of AGNC -- and still keep receiving monthly managment fees in cash based on the whole of AGNC
  • Institutional appetite for millions of shares of AGNC can also support subsequent offerings of new AGNC shares, increasing ACAS' funds under management and elevating its monthly management fee cash receipts
Additional new shares' issuance would be good for AGNC's liquidity and maybe its trading volume, which could help ACAS either to acquire meaningful positions when AGNC trades below NAV or to liquidate positions when significantly above NAV. Maybe the next time a big buyer appears, ACAS can have AGNC print the shares. On the other hand, if ACAS really needs cash ....

In the meantime, what can ACAS do with the money? ACAS is looking at an upcoming debt retirement, and another $50m won't hurt. ACAS also has distressed opportunities to pursue, and to the extent ACAS has the cash, there's no reason ACAS shouldn't make good deals. Deals entered at current (depressed) multiples will be great to exit down the road when multiples are higher.

The fact that ACAS had a strong reason not to sell AGNC last year doesn't mean that selling to meet a liquidity need -- a debt maturity -- isn't a good idea now. ACAS makes more on dividends from AGNC than it makes on management fees (a reason others should be happy to own it), but the benefit of retiring debt in an economic environment like this -- while ACAS is in default of debt covenants and needs both to fix its debt-to-equity ratio and to eliminate debt overhead.

The AGNC sale is positive in that it demonstrates ACAS has valuable assets, and that there is genuine appetite by real buyers to pay cash for those assets. Because AGNC is an ACAS-managed fund, it is also a vote of confidence in ACAS' forward management. Both things are good to see from a large bank with strong incentives to do due diligence on $50m investments.


Anonymous said...

Of note, the 2.5MM shares sold weren't originally intended to be purchased, but when the initial ipo for agnc fell short, acas upped their basis 2x to 5.0MM shares.

this is a nice exit that was, most likely, envisioned from the early stage. hate to lose the divy, but the spreads by the agency reits are at all time highs, so timing of the sale is nice.

cash is king and acas has been able to generate it. with debt at all time lows, it is hard for me to see the m&a market on the sidelines in '10. theres too much ground to gain for healthy co's to acquire business at attractive multiples and with an extremely low cost of capital.

Jaded Consumer said...

While I understand that selling the private-placement block may have put ACAS in the position it expected to be in after the first round of investment, I think the high return of the investment makes it sort of a pity to lose. On the other hand, ACAS has other opportunities, some of which may be even better.

The grey center of the cloud is that ACAS needed to exit at all. The preferable case would be establishment of permanent income-producing investment portfolios. The remaining 2.5m shares offer that, and several cents per quarter in profit (though I need to re-calculate after both div increase and additional share issuance).

The fact the institutional demand for AGNC has materialized is a good thing for ACAS, though: it proves new investment is plausible, and that is definitely a bullish sign for ACAS.

ruffie said...

Yes a bullish sign, but the stock is still very low. Acas has low leverage, but agnc must be highly leveraged to get those returns. When the yield curve flattens out pressure will be on agnc? It happened to nly. So I see the sale of 2.5mil. as good for acas, but I'd like to have more agnc at this time.

Anonymous said...

good call on the $20 price. id take that deal as well...around book for a financial these days is a premium.