Wednesday, September 16, 2009

ACAS Closes Another Sale

UPDATE: This sale wasn't closed above fair value.

On the heels of closing the profitable sale of an unnamed portfolio company, ACAS has closed a truly big fish: the sale of Axygen for about $400m. The $400m sale is reportedly an all-cash deal. ACAS' interest in Axygen was recently given a FAS-157-compliant "fair value" of $182.6m. Although the Jaded Consumer had mentioned several exits well above "fair value", the sale earlier this week was made at a mere 4% above "fair value", which as mentioned wasn't much reassurance to purchasers who entered ACAS when its NAV was several times present levels.

Today's announcement underscores that ACAS' exits involve funds under management, and that ACAS has the ability to leverage funds that aren't its own to make deals happen.

Considering the size of ACAS' currently-maturing debts, the cash gives ACAS enormous flexibility in deciding whether its interests lie in paying off debt or in entering new opportunities. Based on ACAS' success in growing AGNC's value, I'm inclined to trust management's judgment in this regard.

Although some reports describe Corning as purchasing all the shares of Axygen, leaving open the possibility that ACAS still holds debt, I conclude from the announcements that ACAS' "exit" leaves it without a material position in Axygen. The payoff of $62.3m in 14.5% notes reduces quarterly interest payments by $2.25m, and the sale of preferred shares not listed as "non-income producing" in its last 10-Q seems to suggest that receipts may be in for further impact. Assuming ACAS found no better place to invest the funds, reducing ACAS' debt by the amount actually received by ACAS would have a $2.5m impact in the reduction of ACAS' quarterly expense based on the interest rates disclosed in the last 10-Q. However, since the last 10-Q the interest rates have likely increased in connection with ACAS' subsequent agreements with acceleration-declaring creditors. Thus, ACAS' interest expense would likely be effected even more positively than $2.5m per quarter if ACAS simply paid down interest.

However, I do not expect ACAS to simply pay down interest. ACAS' management has taken the position that it need not liquidate, and that it is free to refinance debt and to reinvest capital so long as it doesn't take on new debt that would drive its debt-to-equity ratio further out of compliance with the 1:1 limit imposed on BDCs. I therefore expect ACAS to look for steal-of-the-century opportunities involving high-quality companies whose owners have strong incentive to exit, and need cash. Distressed opportunities likely abound in the current environment, which provides both squashed valuation multiples and in many cases reduced EBITDA even before considering the potential distress of sellers. Value increases going forward on investments like this are easily creditable to be worth far more than 5.5% or so, and I support management's inclination to enter such deals -- especially when they provide adequate current cash flow.

No comments: