Wednesday, September 16, 2009

ACAS' Axygen Exit Clarified

The good-looking Axygen described here was thrown into confusion by ACAS' recent email claiming that the sale "for about $400 million in cash" caused ACAS to receive $182 million in proceeds.

I'll post the link to ACAS' statement when it goes online, but my email claims that "The total inception to date gain and income, including dividend and fee income, from the equity invested by American Capital’s affiliated funds under management was $102 million, representing a 25% compounded annual rate of return." This suggests that while the investment was exited at $400,000,000, much of that price went not to ACAS but into accounts managed for third parties which also had funds invested in Axygen.

The upshot: The Axygen exit doesn't show ACAS can exit 120% above last-reported fair value; like the recent fair+4% sale, this shows ACAS again nets about fair value.

ACAS' sale of debt instruments yielding quarterly interest payments of $2.25m provides cash capable of paying down debt, or entering distressed situations with high rates of return eclipsing ACAS' cost of capital. I'm betting on the latter. $182m cash goes a long way these days. Since the rest of the $400m presumably is headed into ACAS-managed accounts, the $182m will go even further: ACAS will be able to invest it alongside funds under management, and will be in a position to get free "leverage" in this way while positioning itself and the beneficiaries of managed funds for the future.


Imperator said...

Another day of good news.

The pick up in M&A is a good for ACAS. Too bad this deal didn't end with ACAS getting 400 million in cash, which would be significant given the number of outstanding shares ~260million. Still this is a good deal for ACAS and gives it some much needed cash.

Pretty happy about the performance this week, especially since i'm short $2 puts.

Jaded Consumer said...

Assuming that excitement caused by the recent Axygen exit will cool when the market clues in that ACAS is getting $182m rather than $400m, I sold about 40% of my stake after-hours with the idea of repurchasing when the news (or market boredom) turned against ACAS in the next several weeks.

This does two things: (1) long-term loss reduces 2009 taxable income (I've held ACAS for a while now), (2) increase cash position by repurchasing at a lower level than current prices shares. I bought last at $1.80, when I more than doubled by position earlier this year. This move isn't intended to reduce my position, just improve my cash.

I don't often make trades, but my certainty that the news would turn against ACAS once people figured out what really happened in Axygen convinced me it was worth banking on.

Anonymous said...

What do you predict Q3 earnings will look like - NOI, NAV, unrealized depreciation (appreciation) , realized app / dep. What about the default on unsecured debt (rising interest rates, paydown of debt, etc.)?

Jaded Consumer said...

I haven't got a short-term prediction. I try to get it right over the long term, of course, but if I could time the market I'd be less interested in value and more interested in volatility.

Since ACAS must "count" as income the income of those of its portfolio companies which it has sufficient ownership, much of ACAS' SEC-reported NOI will turn on how an extremely diverse basket of businesses does over the trailing quarter. I believe the major drivers of this performance will be the general economy and the effectiveness of ACAS' operations assistance.

ACAS occasionally fires a dud -- remember that Internet company that became valueless when Google changed its AdSense revenue policy to favor content providers and eliminate middlemen? -- but on balance I believe ACAS' due diligence works in favor of selecting companies that will do well over time. It's the ten-year horizon I'm more worried about.

That said, I *did* rotate temporarily out of some of my ACAS holdings, with the expectation that sentiment will continue to work against share prices in the very-near term. What I don't know is whether good news on the NAV and NOI fronts is two quarters out, or three. As a long-term holder, I hope ACAS plows most of its realizations into shrewd purchases rather than merely shrinking business by decreasing debt. If ACAS' turnaround on a portfolio company is in the range of 15-30%, paying down debt less than 10% isn't the long-term smart move.

I continue to back current management in pursuing its previously-pleasantly-performing practice: investing in good businesses.

Anonymous said...

Here's my main question before I give my opinion...

Why was ACAS's NOI so low last quarter? (I know reversal of PIK income, but revenues are still getting slammed!)

I am worried that given ACAS's continued negotiations with creditors that their NOI may shrivel away to nothing... or hopefully not - negative. After ALD renegotiated their loan covenants, their interest rates went flying high and now they will be deleveraging for the next few years with their creditors to pay down debt - meanwhile missing the very unique and bountiful opportunities still available today...

I too have been in ACAS for the long haul (and have paid very very dearly for it) and I believe that last quarter was (or mostly likely was) the bottom of the barrel (ECAS was written down to like $97 MLN (I think) and portfolio investments were also written down huge as well).

Given the economy's stabilization, increased sentiment, and the stock markets huge rally, I think that there will be write ups next quarter - but again that will do nothing for ACAS's NOI unless portfolio quality increases...

I think that the stock flat lines until earnings... and then runs up 2-3 weeks before ER. But I'm not here to play just this quarter, I'm in for the long run. That's the only way I'll ever recover...

Just my opinion and ideas. Could you answer some of my questions Jaded??

Thanks and good luck!!

Jaded Consumer said...

Rotation complete. I mentioned rotating about 40% of my ACAS shares into cash in anticipation that the clarification of the Axygen exit news would lead to near-term disappointment, and my GTC buy order to restore these shares to my account has just filled.

ACAS is now officially green-lighted to resume upward movement :-)

ACAS won't enter into a debt-restructuring that makes it potentially a forced seller; it will keep lenders unsecured for that reason, precluding an ALD-style debt restructure (which was into secured status). ACAS management said before that banks were happy to restructure on the basis of secured status, and that ACAS wasn't biting.

The NOI question is the $64k question. I think it turns on the state of the economy: ACAS is so diversified that its holdings aren't all sector-bound, but must reflect demand for its companies' broad range goods and services. The fact that ACAS is leveraged means that ACAS' movement with relation to the broad economy is going to be magnified -- apparently in both directions.

So the question comes down to whether ACAS can keep itself in cash long enough to make it until the sun rises on the economy. Since the recession, ACAS has created over a billion in exits? I'm thinking ACAS may be OK on that score.

I'm just hoping ACAS has enough extra to capitalize on the long-term bargains that have to exist at current multiples and under current conditions of distress.