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 ....