ACAS: Confusing News

The news that ACAS shareholders have approved issuing shares below NAV will no doubt result in share price depression as people banking on a return to NAV lose hope.

Are they right to bail?

Depends where you stand.

If you believe that management can't value investments, then you should bail regardless whether ACAS does or does not issue more shares. If you believe management does not warrant your confidence, invest elsewhere. Since the first quarter of 2009, when ACAS last entered one of these below-NAV issuance transactions, ACAS has done pretty well.

If ACAS wants to repeat that feat, I say let 'em.

Nicolas Marshi's apparent argument that funds raised in the issuance could be paid to lenders makes little immediate sense. Although ACAS' 4Q2009 results are not yet published, ACAS enjoyed $463m in realizations in 3Q2009 and ended that quarter with hundreds of millions in cash: "Unrestricted cash and cash equivalents totaled $445 million as of September 30, 2009 and approximately $500 million as of October 30, 2009." This cash trove was presumably intended to satisfy the expected cash pay-down of debt obligations under its already-developing agreement with creditors. Adding a couple hundred million in a defensive move against a future payment date makes little sense: if ACAS didn't meet internal guidelines for raising capital for pay-down, ACAS could always have an emergency fundraiser later.

If one credits management's competence, one likes to see management gain the freedom to make deals for shares. Meanwhile, there are genuine distress opportunities to be had, and ACAS has a division specializing in distress opportunity. A while back, ACAS was itself one of the distress opportunities. However, its 6.85% unsecured notes due in 2012 have gained value from "up to in the 60s" to $0.97 on the dollar.

I don't think ACAS' transaction is retiring its own debt, unless there's some illiquid debt not priced as quoted above. I suspect distressed opportunities.