Tuesday, August 4, 2009

ACAS' Share-and-Cash Dividend

On August 7, 2009, stockholders of record as of the close of business June 22, 2009 will receive a dividend with a nominal value of $1.07. Depending on the shareholders' individual elections, they will receive either a distribution of cash and stock ($0.185 and 0.275 shares per share) or a distribution of stock (in which case, 0.332 shares distributed per share held). Investors holding the shares in a taxable account will be taxed in either case as if receiving $1.07.

What's the impact of this on shareholders? For the sake of simplicity, the Jaded Consumer will first look at the case of a stockholder whose shares are held in an IRA or other tax-deferred account. The $0.185 will be worth exactly 18.5¢ on August 7 when paid. The trick is to estimate the value of a shares received on August 7 is more, or less, than the $3.2199 price against which the division was calculated.

In one sense, the value difference is purely speculative: ACAS has hardly closed the same price two days in a row in months, and on day in which the shares were traded at all, they were certainly traded at more than one price. Who knows what the price will be August 7?

In another sense, ACAS' share price on August 7 is immaterial if ACAS' net asset value -- the value on which ACAS is earning shareholders their future returns -- is several times the share price. While the NAV will certainly decrease in the issuance of new shares just as it would decrease in the case of a stock split (a 0.332 share dividend looks an awful lot like a 1.332-for-1 stock split, save for its tax characteristics), the fact is that this is not a stock split: some shareholders are getting cash, at cash value, and not shares with an arguable value related to NAV. This means that stockholders who elected to receive only shares (that's about 40% of the outstanding shares) will end up holding shares that represent a greater fraction of ACAS' net assets than the stockholders who elected to get a partial payment in cash. Those folks effectively sold their stock split at $3.2199 per share.

Based on recent sales that suggest ACAS can realize more value than it is allowed to claim under FAS 157, I suspect that the long tern value of the shares is not only more closely related to asset values than to trading price, but that the value of the assets is also rather greater than reflected in ACAS' recent SEC filings.

I think the August 7 payment will be a good thing for those who elected not to be paid in cash.

(Those who hold shares in taxable accounts will have to figure out what their after-tax net is on receipt of the shares to estimate what their returns are, but if NAV is several times trading price, receiving shares remains the clearly superior choice for post-payment value.)


Anonymous said...

The Interest Coverage of 1.2x is the most alarming statistic of the whole presentation.

ACAS has just lost the only leverage they had with their lenders; pun intended.

It's now extreme survival mode. I remain long, but only because I have pot odds, not because of the hand I've been dealt.

Jaded Consumer said...

I need to listen to the presentation (sadly, I have to work and can't blog professionally!) to frame the numbers, but my first impression is that NOI's collapse to $0.09 is miserable. Last year, I explained how ACAS could earn $0.04 per quarter in just returns from AGNC -- and that was before the quarterly dividend was $1.50. I'm interested to hear how NOI got to this place, and whether it reflects weird things or just worsening business all around.

I would point out that ACAS' power to handle its debt problems isn't limited to its interest coverage: ACAS has been selling assets for cash, and can pay down debt (particularly the debt that's maturing soon).

ACAS' pink-slipping of over 40% of its workforce is an interesting statistic. If it's the folks who were doing the deals that haven't panned out, maybe the response should be "good riddance" -- but keeping good people for due diligence and oversight of investments is critical to ACAS' success going forward.

I will have to have a look at this over the weekend, to see what it looks like under a magnifying glass. Post-dividend NAV >$7 seems good, in light of ACAS' apparent ability to realize NAV or better on sales. NOI drop is not reassuring, though.

Imperator said...

Just a thought on the call..
2.3:1 debt to equity... ouch, really blew up this quarter.

The bond is trading near 70 (as compared to the sub 40 it was), so that is a positive sign.

Anonymous said...

i posted the interest coverage comment above....

acas has no chips to bargain with at this point. lip service on bond yield analysis doesn't suffice. credit quality has proven to be terrible. results on a go-forward are required.

middle market buyers understand this. self-induced forced liquidation is emminent. forced is a loose term, but we all understand that the remaining 1.9 billion of equity is not much cushion and bumps up in the future will be meaningless.

the academic/ accounting exercise of determing bond-yield analsis is no longer fun. its great coffee table banter for the BDC industry, but acas has proven they can't pick winners that pay back principal. 20% non-performing loans at cost is deadly. frnakly, its embarrasing. further, only +/- 1/3 of their portfolio has senior security, not indicating an enviable position.

acas "franchise value" = 0. banks are in driver seat now. expect a resolution to = "voluntarily forced" liquidation.

if i had a $20MM piece of the +$2 billion unsecured, i would only accepte a hyper-amortization on a secured basis and no relief on the rate. i would require a risk-premium in excess of the inherent troubles in the market.

NOI on a go-forward will be dismal. new investments will be non-existant.

acas will ultimately be a case study in financing long-term assets with short-term debt, while accepting mark-to-market valuation requirements. looking back, a recipe for disaster.

i cringe that i let myself buy into the idea that value remained when most of their deals are leftovers from the 2006-2007 vintage.

Closing comment: stock value should be based on "realizable value" that is based on an accelerated liquidation value, not from an "orderly liquidation" aproach.

if they owed me +$2 billion and i was supported by less than $2 billion of equity, i dont care about interest coverage, i care about my principal.

i am long my upcoming dividend, but not my principal. sold out my principal and will ride out my divy. my basis was $4, so i am lucky. but ive been tracking them for years. private equity is a great space to play in, but mimatched leverage durations ultimately kill the fun - for all stakeholders.

Good luck to all of us. at this point, an agreement w the lenders isn't really a plus, itll prove the inevitable....a garage sale.

Anonymous said...

A large part of the NOI drop was due to a reversal of PIK income previously accrued. One of the analysts on the call tried to probe into it further, and I'm not sure if he ever got a response.