Friday, October 16, 2009

ACAS Sells Again

ACAS, which recently sold Granger a portfolio company for an undisclosed amount, recently announced another sale, bringing its total number of exits past 20 in the fourth quarter of 2009 and helping ACAS reduce debt by $300m while increasing its liquidity.

The newest sale completes ACAS' exit from HomeAway by separating it from its remaining equity in the company, which first saw ACAS investment in November 2006. The transaction brings ACAS $15m in cash, of which $4m is profit. ACAS' total investment in HomeAway included the financing of add-on acquisitions and other expansion strategies; the total investment in HomeAway reached $120m, but ACAS had previously exited the entire remainder of the transaction. Over the life of the investment, ACAS realized $18m in gains.

Hopefully ACAS' exits enable it to continue freeing cash for investment in interesting opportunities; this market should be swimming with them. I for one will be reading the annual report with interest to see what's been added over the year. ACAS may be forced to pay down debt as it matures, but I'd rather not see ACAS pay down revolving lines when better returns await in the markets.


Anonymous said...

Just got the press release re. the Imperial Supplies disposition. There's something I don't understand - they said they received proceeds of $66 M and realized an accounting loss of $5 M, then they go on to say that the proceeds were 34% higher than the Q2 valuation. If this were the case wouldn't they be booking an accounting gain instead of a loss? Do you get this?

Anonymous said...

I agree with you that the best use of the funds would be investing at the low end of a business cycle - but I wouldn't mind if they could cure European Capital's default situation so they can write this up to full value. Don't know if this is possible.

Das Sport Optimator said...

Any idea how a compounded annual rate of return of 9% yields a $5 M loss in the fourth quarter? I just cannot figure that out.

Aside from that puzzler, however, the 34% increase in valuation ($16 M - no small sum) from the Q2 valuation is nice to see. Very nice. Can we please, please see an increase in book value this quarter?!

Anonymous said...

Jaded could you address these few questions, thanks...

Why is ACAS still trading at such a discount to book? In saying this, I recently saw the prices of two other BDC's ARCC and AINV - both paying dividends, both trading ABOVE book value... When is your prediction when ACAS can resume dividends, trade above book, etc.

What makes ACAS any different than ALD (who successfully renegotiated and hasn't seen any turnaround). ALD is frozen... not even moving just like ACAS (in terms of stock price).

ACAS has demonstrated its ability to raise capital by exiting companies as the economy has shown strenght... but obviously has been in default for over 12 months on debt and recently got debt waivers from bond holders. My question to you now is What is your longer term picture for ACAS -div, debt reneg, book value, appreciation, NAV AND how (in your opinion) will this differentiate from ALD's and AINV/ARCC who are both doing well... (sort of a huge topic)

I know there are many risks associated with ACAS, but risk, in its proper financial context, is synonomous with return--- sometimes large returns... therefore I see not nearly as much potenetial for AINV, but ACAS could be a 5x bagger still...(with risks too)

Q3 earnings should clear up some of my questions and should show some good numbers... in terms of write ups (hopefully)... pray for NOI though...

your opinion...???

Thanks jaded

Jaded Consumer said...

Anonymous & Das Sport Optimator:
The accounting loss and the positive rate of return are the result of exiting the investment in steps over time. The total return for the entire $120m investment is positive and has a positive rate of return (though let's not kid ourselves; ACAS didn't get into this to see 9% returns, so this is basically a failure), it's just this last exit that represents a realized loss even though it is also a sale above the last-quarter's "fair value".

ACAS' discount to book is surely a combination of the factors that have made people hate it for years (opacity, difficulty to understand specific businesses' situations, etc.) and the fact that (a) NAV has steadily eroded for over a year, (b) critics believe NAV is bogus and can't be realized despite ACAS' actual exit prices, and (c) ACAS is in default on debt obligations (despite that it's making its interest payments timely, its debt covenants related to asset values are all violated) so critics view ACAS as a forced liquidation situation in the making (despite that unsecured creditors lack the power to compel sales of portfolio companies).

I don't follow ALD, but its debt renegotiation was based on creditors becoming SECURED creditors -- a situation ACAS has been offered but has steadily refused. (listen to the last couple of conference calls) ALD may lack freedom to liquidate the collateral of creditors, or may require creditor consent because the investments are collateral. ACAS is freer, though it remains technically in default and must pay default-condition interest increases.

I fully expect ACAS to pay dividends only at the rates required by ACAS' governing laws, which at present require payment by the end of 3Q of amounts declared by the end of 2Q based on the taxable gains of the prior year. ACAS will retain as much as it can as long as possible in order to avoid paying interest on liquidity it could be using for investment. That's my prediction for the foreseeable future: one annual dividend at the legal minimum based on taxable gains from the prior year.

I have found AINV even more opaque than ACAS, so I can't really guess what is going right/wrong inside AINV. If you have insight, please share :-)

I expect NAV at ACAS to improve only as the economy as a whole improves, and as improved valuation multiples buoy the markets generally. FAS 157 will allow ACAS to increase debt valuations as companies improve their power to become current and to show excess ability to pay; equity valuation will likely continue to lag until there's a much larger deal volume and comparables' sales start looking like something other than forced sales.

At ACAS' current discount to NAV and with current pessimism about ACAS depressing values, I see ACAS as a worthwhile investment. I see many of ACAS' portfolio companies thriving as the market recovers, and some of ACAS' portfolio probably thrive because customers are driven toward their businesses by the market (there's a post here on recession-weathering ACAS holdings, for example). When ACAS' valuations drive asset values beyond covenant thresholds, ACAS' whole world will turn around: cost of debt will fall, default status will cease, liquidity will improve and so will margins. Until ACAS builds assets back to that level, things will look near-term grim.

I believe management has shown alliance with shareholder interests, willingness to prioritize long-term results over quarterly balance-sheet gaming, and shrewdness in identifying quality investments. I therefore trust management to claw the company back from the precipice to which it was driven by being leveraged during a major market panic.

In the meantime, NOI would be a very nice sign that management has gotten a handle on the overall business in the now-existing market. However, I expect the current economy and ACAS' default-rate debt obligations to pressure NOI for some time yet. I expect to be required to be patient.

Anonymous said...

Thanks Jaded,

Excellent Post...

Q3 to be released Nov. 3... I think...

We usually see a run up into ER but nothing so far. NOI is all I really care about - can ACAS still pay default interest, renegotiation costs, make up for revenue lost from portfolio exits (great for liquidity but will probably cost some revenue).

I'm long and strong! I WILL come back... (only if ACAS does though) :)

Anyway, Thanks again Jaded, very very much appreciated...