Saturday, February 13, 2010

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.


Imperator said...

So they want to issue new shares at below NAV in order to make new investments. The new NAV of $8.29 is higher which is promising. But the shares are trading at $3.85 the night before the conference call. If management believes that the stock price will revert back to NAV, then that would be a 115% increase in the price of the stock. Do they think they can make better investments? Just something to consider. A great investment for ACAS to make would have been buying back the plublic bond at 60 cents, or even at a discount since it would accomplish the secondary goal of reducing the debt level. Hope for some good news about reversion to NAV tomorrow.

Jaded Consumer said...

Basically, the discount to NAV means that issuing shares is rational only to buy assets that are even more undervalued. Can ACAS find things like that? Well, ACAS does have a special situations group that focuses on this very kind of distress situation.

ACAS up now on the Q4 earnings announcement. Let's see if this sticks.