Tuesday, March 30, 2010

Cramer on BDCs

Although Cramer dismisses ACAS, which he previously criticized as opaque, as "way too risky for me" despite being well below NAV, he makes a bullish call on AINV (good dividend is safe, he says) despite commenting that "I wish I knew more of what they own" and "it has been too big of a run for me here." Of course, Cramer is also reported to say "don't buy AINV."

Given that Cramer doesn't know what either company owns, why does he analyze them differently? Cramer's analysis can't be explained simply by the dividend, because his point of view predates the companies' differing dividend policy. Both are opaque to the extent that one can't tell what individual portfolio companies are doing.

Although I own both – ACAS more than AINV, admittedly – I have more enthusiasm for ACAS because ACAS holds not just debt but equity, and has a chance at participating in the upside when a portfolio company really performs outstandingly well. AINV may have steady debt income, but the outsized equity returns aren't part of its apparent appeal.

The value of illiquid equities may not seem like much, but as portfolio companies succeed, equity provides a nice upside. ACAS' holdings in AGNC and MION are good examples. AGNC trades well above the $20 IPO price and pays a solid dividend; MION is expected to become publicly traded later in the year in a transaction that will repay all the debt owed ACAS and leave ACAS holding over 40% of the company's equity.

What does AINV offer other than – one hopes – the steady return of senior debt interest? Given what I've suffered after buying near $20, I'm not exactly sold on the security of that deal. The high-upside opportunity of ACAS (enhanced by its below-NAV share price) on the equity side of its investments offers me some consolation for the share price shock I've suffered.

I'd love to hear the details of Cramer's analysis, but there just doesn't seem to be any analysis on these companies. Is there any?


Anonymous said...

Hey Jaded.....there is some sell side research on ACAS but it is from mostly specialty finance analysts and not distressed situation analysts.

Any color on the news today? Or steady as she goes?

Jaded Consumer said...

Hadn't seen news, actually. Yahoo keeps claiming there's news but it always turns out to be a link to an old press release about the lock-up agreement that expires today.

If you care to link any analysis you have, I'm sure folks would appreciate it. I can't say I've seen much that was worthy of the name "analysis" unfortunately.

Without rehashing the posts with the tag Ticker:ACAS, I'll point out that the businesses ACAS has bought while things have been desperate and the businesses ACAS entered when it looked like things were going to get harsh seem like they are the kinds of opportunities that will help keep ACAS going through the rough patches. Assuming the MION transaction occurs as described, ACAS will end up with over a billion in cash -- nearly enough to pay off entirely the creditors that are giving it grief. Perhaps it's ACAS that is dragging the negotiations out, because delay favors its position ....

Who knows. While NAV increases and cash increases, ACAS' prospects look better and better. ACAS' program of giving out the smallest possible divided and paying it as late as possible is much better suited to the company's financial interest, and I approve. Much cheaper to delay dividends than to borrow cash.