ACAS' recent press release was sparse on details, but described (a) realization of $16m gain and (b) receipt of $37m in proceeds when (c) it exited a portfolio company at 4% ($1.5m) above last quarter's FAS-157-compliant and SEC-reported fair value.
As a shareholder who became interested in ACAS when NAV was north of $30, it's not particularly heartening to hear about sales within 4% of a fair value that places NAV at less then $8. On the other hand, the fact is that ACAS needs cash to retire debt and to enter high-value distressed situation deals that will pay off in the long run. We need more of that 30% return on equity and less of the more modest returns.
So, what was the mystery portfolio company exited? The last quarterly report is some help. It's not Avalon Laboratories Holding Corp. (last valued at $34.8m); that one was carried far enough below cost ($64.4m) that its exit would not result in a realized gain. (Since the footnotes show its debt to be pledged as collateral, and not in default or non-income-producing, the nearly $40m face value of 11% and 18% notes are good to keep holding – $1,484,750 per quarter good, in fact.) Edline LLC (basis $20.8m, last valued at $35m; investment consisted of debt and membership warrants) is close, but after a first glance does not quite fit. We're looking for something with a last-quarter value of $35.5 so that after a $1.5m markup we see $37m gross sales price. We're looking for a basis of $21m (to produce $16m gain on a $37m exit). We're looking for a company for which ACAS held debt to be repaid, and warrants to sell.
ACAS had a $21.0m basis in the convertible preferred stock of FAMS Acquisition, but this wasn't the whole investment (ACAS earns $980,500 per quarter on $26.5m face falue of FAMS debt, so this isn't bad not to lose). ACAS held $21.0m face value of Zencon Holdings Corp. debt, but its basis was $20.8m and the whole investment wasn't quite the right size. Still, continuing to hold Zencon is worth just over $1.08m/quarter when you add in the senior debt (senior and sub are both pledged as collateral, but neither are listed as nonperforming or non-income-producing). Close to the $35.5m fair value mark is ACAS' subordinated debt holdings of Core Financial Holdings LLC (13.7% on $39.9m face, valued at $36.5m), but the whole Core Financial investment had a value over $60m and a basis that would lead to a realized loss in a sale at "fair value" (though with $1,366,575 per quarter in interest, I'd think holding until "fair value" is more attractive is worthwhile). The fact is that a $35.5m fair value doesn't appear in ACAS' roster of holdings on June 30, 2009. Neither does a $21.0m whole-investment basis.
I can't spot the mystery company right off, but it's got to be there somewhere. I'm inclined to think the real answer is Edline LLC, with the wiggle room coming from things like accumulated interest and fees. If anyone has another idea, please post it :-)
The Bottom Line:
ACAS can raise money exiting investments. Despite multiples contraction, ACAS can even make exits at a profit.
Not-yet-exited investments include some attractively-performing, regularly-paying debt holdings. Patiently waiting for the market to turn around isn't too hard to imagine when the paying debt is considered, assuming non-accruals don't bloom past their current 20%-of-face-value position. Yes, 20% of face makes me shiver, too. Presumably ACAS is taking a terrible fee from non-performing debtors – PIK notes with nasty terms, or the like. One hopes.
The prospect that ACAS might use cash to retire debt below face value is attractive, but ACAS may want to keep large investors happy with ACAS so that on expiration they become buyers of future rounds of debt. Not sure what ACAS' strategy is in this regard. Definitely good to see ACAS able to accomplish exits, though.
Based on ACAS' dividend-paying requirements, ACAS would not need to pay another dividend for over a year, and even then only if in 2009 it had a taxable net income. I'm wondering whether ACAS will deliberately enter some net-loss transactions in order to be able to stave off cash dividend payments while shares are so far below NAV.
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