Wednesday, April 28, 2010

ACAS: ECAS Making Good

Today after close of market, ACAS announced that its ECAS subsidiary received realizations of €131M in the course of the buyout of Spotless Group, in which ECAS was an equity holder and mezzanine lender. The receipts cause ECAS to realize a €14M equity gain, bringing ECAS' annualized return on its Spotless Group investment to 15% for debt investment and 21% for equity investment.

Although 15% and 21% are excellent annualized returns, they are absolutely ground-trembling in comparison to the hefty negative returns implied in ECAS' valuation since it began investing in Spotless Group in 2005. At the close of 2009, ACAS reported ECAS' "fair value" at $243M. At current exchange rates, the just-received €131M is about US$174M. Not to put too fine a point on it, but not all these numbers are likely correct. I suspect the weak link will prove to be the FAS-157 "fair value" of ECAS (discounted, as it is, by marketplace worries about ECAS' debt situation, which seems pretty good as its 2010 performance has raised cash with exit after exit).

Assuming that ECAS' assets are experiencing valuation improvement akin to ACAS' own, the return of ECAS to near-NAV "fair value" will have a dramatic impact on ACAS' NAV, and presumably also its share price.

Anyone care to speculate on ACAS' use of its hugening pile of cash? (Do you like the word hugening? Just made that up. Thank you very much.) I assume that since ACAS owns ECAS entirely, it reports debts and cash on a consolidated basis; the Spotless Group realization therefore should increase ACAS' cash position from the $835M at year-end to about $1.01B, not including either the $295M from its recent issuance or the $188M expected as the cash portion of its proceeds in the upcoming Mirion IPO, which would bring ACAS to about $1.5B in cash. Not including, you know, other exits ACAS might enjoy in the remaining 2/3 of 2010. ACAS could be protecting itself against the risk of future difficulty raising cash, so it can pay interest ... but in light of ACAS' 2x+ interest coverage, that seems a bit extreme. The initial payment due at the closing of its anticipated debt restructuring is less than $0.5B, so it's not as if ACAS is saving for a downpayment or at high risk of not making interest payments.

Something strategic is afoot. What is it?

If ACAS were to pay off all ECAS' debts, the valuation of ECAS would cease being a defaulted-debtor valuation (no debt means no debt covenant to blow), and ECAS value would soar from $243M to the $700M its assets had as fair value at year-end. But ECAS' assets are likely increasing similarly to ACAS'. The hundreds of millions in increased assets would definitely change ACAS' NAV, putting on a strong quarter of continued NAV increases and enhancing ACAS' appeaarance -- perhaps in the very same quarter in which ACAS restructures its overall debt to eliminate the parent company's default. ACAS could dramatically improve in NAV simply through clever financial engineering of the cure to its debt's technical default.

And with the overhanging debt default evaporating as a weight against valuation, ACAS would likely return toward near-NAV valuation. By the end of 2011, when ACAS is likely forced by prior-year income to issue a dividend again, ACAS' above-NAV valuation could become plausible again.

And then there are all those distressed opportunities ACAS could be chasing with the rest of that cash ....


its_not_my_business_but said...

>> I assume that since ACAS owns ECAS entirely, it reports debts and cash on a consolidated basis;

Nope. ECAS is on the book in their asset portfolio and thus is only on ACAS's books as ECAS NAV and ACAS's "fair value" of ECAS.


Anonymous said...

any sense of how you feel on shelf offering of 1.5 billion of securities acas announced?

Jaded Consumer said...

If ECAS' obligations aren't consolidated with ACAS' (like GEICO's obligations are consolidated with Berkshire Hathaway's) then the paydown ECAS debt, and the raising of several hundred million bucks in a private offering, suddenly make an extremely strong case for ECAS debt pay-down as a zero-risk repricing opportunity for ACAS. By having the "defaulted" ECAS debt extinguished, ACAS has a risk-free opportunity to re-value ECAS on the basis of non-default status, allowing an overnight tripling (or thereabouts) of ECAS' value. (I put it in quotes because most borrowers' defaults would involve nonperformance like late payments or short payments, whereas ECAS' "default" is a technical default related to debt covenants other than the promise to make timely payments of interest and principal.)

I had heard about the $295M issuance by ACAS, but not a $1.5B issuance. The the $295M issuance is likely sufficient to enable ECAS to refinance its covenant-breached debt with ACAS as its new lender (on terms that don't result in an immediate default), allowing ACAS to reprice ECAS and thus benefit by showing ECAS' interest payments on its own bottom line while re-inflating ECAS' "fair value" to around its NAV.

A $1.5B issuance might be calculated to push ACAS' net assets to the point it doesn't have a debt covenant breach, so it can go about business as usual and enjoy non-default rates of interest. If you've got some links to the $1.5B issuance, please post. A deal like that might improve ACAS' margins while allowing it to pursue deals (particularly in the area of distressed opportunities, I'd think) with a lot more freedom than it's previously had.

Jaded Consumer said...

Just re-read the comment on the $1.5B shelf offering.

I think ACAS sees itself leaving the land of below-NAV trading and raising above-NAV cash to chase distressed deals and so forth: the shelf offering is groundwork for any equity raising ACAS gets into a position to conduct.

There are a couple of reasons to believe ACAS would lose its NAV discount, but leaving those aside for a moment, FAS 157 has to impact sellers as well as buyers and make a fat wallet extraordinarily valuable in these times of tough credit for everyone but the super-solvent. The interest rate drop ACAS will see leaving default status is boggling. Fixing its books will help ACAS' bottom line and share price in more ways than one.