Monday, April 19, 2010

ACAS Soars On ...?

This morning, ACAS announced a private offering. The terms were that institutional buyers would get ACAS shares for a few pennies above $5. The result was ACAS, which had traded above that number, going up.

In recap: ACAS says it will sell shares for $5.06, and the market quickly bids ACAS toward $6.05. Got that?

So, what's going on?

1) ACAS could be selling shares to pay debt. This belief would not explain ACAS' price action. It also makes no sense: why would ACAS, which has close to $1B in cash without diluting shareholders, dilute shareholdes all of a sudden for a relatively measly $295M? If ACAS were about paying down debt, ACAS would have been able to do that with the $800B or so on hand. Also, selling shares for $5.06 doesn't explain why the shares would go from $5.50 up. A transaction like this would be dilutive and scare people from holding.

2) ACAS has a deal to eliminate all its debt and needs the remaining $295M to in a hurry to pull it off. The only way this is a plausible answer is if the institutional buyers on the other side of the transaction are ACAS' creditors, and the private issuance transaction is part of a larger transaction to solve the debt issues that have been repeatedly prolonged. In this scenario, people are celebrating because the acceleration risk ends and ACAS goes back to business as usual. The celebration is that with the acceleration risk off the table, and the technical default over, nobody views ACAS as a defaulted borrower ready to fold – a scenario painted by others who weren't noticing how ACAS was stockpiling cash and continuing to buy portfolio companies and make add-on investment in existing companies. This makes sense because with the cloud of fear gone, ACAS can raise toward NAV, and even diluting that NAV with cheap shares would raise the price. Having big institutional lenders interested in ACAS' success bodes well for ACAS' future dealmaking. ACAS could also be getting beneficial interest rates, an agreement to accept shares in lieu of cash at a time cash is valued at a premium in the M&A world, new debt caps, the future ability to pay down and draw on new debt without worrying about the debt, and improvement in ACAS' debt-to-equity ratio (because ACAS just got more equity; this is true if ACAS isn't also coughing up a boatload of cash to the creditors ... on the other hand, maybe the creditors want to keep debt deployed in the hands of a paying debtor).

3) ACAS is seen as able to raise cash. This is silly, but might explain the price action: if the market (falsely) views ACAS as a defaulted (technically true) debtor unable to satisfy its obligations because it lacks cash (false, it has cash just not assets surpassing a value threshold in a debt covenant), the ability to raise hundreds of millions of dollars at will "proves" ACAS has access to investment funds, can survive whatever creditors demand, and will have the ability to patiently wait for sales opportunities for its existing portfolio. I don't like this as a justification for a price rise, but it might sell to nitwits on the street.

4) ACAS' existing cash is locked up due to the lock-up agreements that prevent banks from accelerating, but ACAS has an opportunity to buy valuable but illiquid business opportunities for 10¢ on the dollar if it can raise cash from someplace not tied up in the lock-up agreements; selling equity for 50¢ on the dollar means ACAS gets a 5:1 return, and the result of the transaction is accretive rather than dilutive as would apprear from the press release, and the market is so sophisticated in its analysis of ACAS that it's picked up on this subtlety and is already celebrating. This is actually my favorite. But, no. It depends on the market pricing ACAS on the basis of fire-sale-bought investments' anticipated returns. Although a deal like this is consistent with what management has said it's interested in doing, it doesn't explain the market action. The market has generally underestimated or failed to understand ACAS' investment ideas rather than getting out in front and celebrating them. A secret deal to make a return on an investment ... this would not explain pre-transaction celebration.

Although (4) is the most exciting, my gut says that (2) is probably our winner. Let's watch and see if the buyers turn out to be ACAS' creditors, after all.


its_not_my_business_but said...

I posted this on Yahoo's ACAS board, but I thought it fit well with your post. Thanks for a great article.



I'm really trying to mull over this and given their $800M cash position, it's hard for me to understand why they didn't wait.

Here's a little food for thought ..

The Debt/Equity was 1.8 at the end of 2009 .. with

$2.3B Equity and
$4.1B in Debt.

This additional $220M changes that to ..
$2.5B Equity
$4.1B Debt, with
~1.1B in cash.

So, one milestone to resume the dividend is to pay down the unsecured debt < $1.4B.

Let's assume they use $1B of that cash to paydown the debt. At the end of 2009, the unsecured debt was $2.36B. So item #1, using the $1B gets us down below $1.4B or to $1.36B.

Bingo! One down.

When you paydown Debt, Equity remains the same (because cash/debt offset each other already in Equity) ..

Post $1B paydown ..

Equity = $2.5B
Debt = $3.1B
D/E Ratio = 1.24

So, ACAS would be only $600M away from 1/1 .. or ~$1.75 NAV write-up based upon 340M shares.

Hey .. remember ECAS?

$700M NAV but on the books at $243? At the new 340M share count, that's $1.35/shr!.

So .. that would mean that ACAS is only $0.40/shr NAV appreciation away from being free to pay dividends.

This all does get ACAS pretty darn close.


Elliott said...

Thanks for your thoughts on the subject. I was pretty excited to see the price movement yesterday (and today) but could only sit and scratch my head after reading news of the $5 offering.

Jaded Consumer said...

I was puzzled too. Why sell shares in a NAV $8+ company for <$6? The only rational answer seems to be to buy something worth much more than $1 per dollar spent. Paying down debt just doesn't seem that attractive, unless there's an accounting game by which ACAS' assets are re-valued if the debt situation is different. The assets that are undervalued because they are in debt covenant default (ECAS) would be a place to start looking.

On the other hand, there's a press release today that a major buyer of the ACAS shares is a distressed asset buyer, which may mean that ACAS' management sold them on some distressed asset deal ACAS had in mind for the money. If that buyer just wanted a distressed asset, it could have been loading up on ACAS since it traded at $0.60 last year.

I think the commentators on this are out of their minds, though. ACAS should go up because of a dilutive transaction to pay down debt? That's the quality of the analysis I've seen. It doesn't begin to explain why share prices should go up.


its_not_my_business_but said...


>> I think the commentators on this are out of their minds, though. ACAS should go up because of a dilutive transaction to pay down debt?

It's a numbers game. Once ACAS gets:

debt/equity < 1
Unsecured Debt < $1.4B ..

They are free to be a real BDC again .. pay dividends, which is the life blood to get the stock back to trading at NAV.

Once above NAV, they can issue shares and raise more capital.

So, in the short term, it's priming the pump to get the regulatory and Exchange Transaction ratios and milestones in the right place.

The prospect of that happening is what is driving the stock closer and closer to NAV.


its_not_my_business_but said...

Don't forget Mirion either.

They just updated their IPO SEC filings on April 14th.

If the deal goes at $16/shr and the over subscription shares are taken .. ACAS will realize about $250M+ in cash proceeds and ~$0.30/shr write-up on NAV.

The uncertainly is being lifted and ACAS's price is slowing inching closer to NAV.


Jaded Consumer said...

I'd be happier about the price approaching NAV if that NAV weren't placed at risk of dilution.

ACAS' dividend payment as a BDC will turn on its profits, and ACAS has been posting losses it will be carrying forward to eliminate taxable income in the future. I think ACAS' management has to appreciate the value to ACAS as an organization to delay dividends as long as possible. I can't believe -- well, I certainly don't want to believe management is willing, anyway -- to issue shares below NAV simply to resume dividends.

Fixing the debt:equity ratio is nice, but with NAV heading up anyway, what's the rush? I suspect that the real issue is that the lock-up agreement gives ACAS forebearance from acceleration at the price of limitations on its use of proceeds of exits. The creditors probably have tied ACAS' hands in choosing whom to pay in what order, because since any of them have the power to accelerate, they would all want to prevent others from getting payment priority.

Before the lock-up agreement, ACAS was buying distressed companies and investing in its portfolio companies. I'm not sure what ACAS is doing now, but the answer seems to be stockpiling cash. Given ACAS' cost of cash (it's paying default rates on its loans), it's a sure bet ACAS is behaving this way only because it's being forced by the lock-up agreement.

The issuance below NAV has to be a scheme to develop funds that will now be subject to the prior lock-up agreement, which surely excepts funds raised by ACAS after the agreement provided it raises them without more debt (which it can't do because of its debt:equity ratio anyway). The question is: what transaction is so valuable that ACAS would issue shares below NAV rather than simply wait for NAV to recover (which it's been doing these last two quarters).

There seem to be two possibilities: (1) you mentioned the ECAS NAV discount, which might be eliminated if ACAS paid ECAS debt, which would cause a revaluation of ECAS because it would not be in violation of debt covenants and would be capable of being valued at NAV, adding a huge chunk to ACAS' NAV; (2) ACAS could want to make a distressed asset investment at a discount even greater than ACAS' NAV discount, but be barred from using the proceeds it's amassed from exits of investments made under borrowings subject to the lock-up agreement, thus motivated to raise cash with shares.

Either makes sense. I really can't believe ACAS is planning simply to pay down general ACAS debt for no purpose other than to game debt:equity ratios. If this were the plan, why would ACAS have amassed $835M rather than pay down its costliest unsecured debt and ceasing its default-rate interest payments?

We may learn more May 5 ...

Anonymous said...

Knowing what you know now, and what you don't know, would you be a buyer at current PPS? Just curious; not looking for investment advice of course.

Jaded Consumer said...

Would I be a buyer at a time ACAS is already my single-largest position?

That's a different question than whether I would establish a position for the first time in a more modest amount.

Since ACAS' increases have made it my #1 holding again (now, by far) I can't in good conscience increase my concentration when there are things like HAS and NFLX and AMZN to think about. (And AAPL!)

However, if I hadn't a position or had a modest position with a higher basis, the recent evidence ACAS can raise money and stave off creditor emergencies and so on would make me confident in the play to ride the stock from current rates at least to NAV, which is now increasing again.

Hope that helps!

its_not_my_business_but said...

Jaded .. a couple comments ..

>> to issue shares below NAV simply to resume dividends.

I didn't suggest that, but rather that being in the "position" to be a functioning, BDC again with it's ratios in order opens a lot of possibilities for ACAS. One for instance is taking on new debt, which is restricted (as well as the divs) when D/E>1.

>> I suspect that the real issue is that the lock-up agreement gives ACAS forebearance from acceleration at the price of limitations on its use of proceeds of exit

You've mentioned this a couple times. I am not aware of any limitations on ACAS at this point prior to the Exchange Transaction (ExTX)ratification. In fact, the ExTX specifically excludes all funds raised by ACAS from being attached to debt reduction for 48 months.

<$1.4B in debt, interest on the debt is down near the 8.5% range, the % of proceeds required for debt reduction goes down to 50% or 25%.

>> If this were the plan, why would ACAS have amassed $835M rather than pay down its costliest unsecured debt and ceasing its default-rate interest payments?

The fact that they can become current on some loans doesn't remove the fact that they are in default. This default doesn't disappear by them making substantial payments by the terms of their loans. To get out of there default state, they have to have new agreements. They HAVE to get the ExTX done to lift the weight off their corporate head. This cash will provide leverage to get creditors on board as they can negotiate an even larger down payment.

This has been a great discussion. I always look for and appreciate your posts on ACAS for their thoughtfulness and insights.