Saturday, May 15, 2010

ACAS: Getting Something For Nothing

At the end of last year, ACAS' equity investment in Roadrunner Transportation Systems Inc. had a FAS-157-compliant "fair value" of $0. Shares of the company are being priced from $14 to $16 in a New York Stock Exchange IPO described in a recent SEC filing (this update first provided to the Jaded Consumer by this poster). With a share count of 7,000, this doesn't amount to much for ACAS directly. However, ACAS-managed funds hold over a million shares. Turning $0 assets into hard cash has to be a worthwhile move for ACAS' fee-based asset management service business.

One wonders how many $0 assets on ACAS' books are actually top-tier exchange listings about to happen?

On the debt front, ACAS is slated to be paid $20.5million for subordinated notes which at the end of 2009 had a "fair value" of $17.5m. The 18.5% notes were current at that time. As long as the deal remains pending, ACAS will presumably continue to enjoy the 18.5% interest payable on the $20.2 face value of the notes.

The fact that $0 assets are near-IPO holdings and below-face notes turn out to be about to be repaid early makes one wonder what ACAS' portfolio holds that the street doesn't know and can't price into the shares.

In other news, ACAS' publicly-traded REIT AGNC is issuing 6m new shares at $25.75, with an additional possible 900,000 shares available to cover over-allotments. Given AGNC's end-of-quarter net assets of $22.91 per share, the sale is accretive to shareholder value: AGNC can do the same deals with the same leverage strategy, but bigger – and with more money per share for revenue generation. This is a big win, because it is not only accretive to book value, but grows AGNC by more than 50%. The transaction, which is expected to close May 19, 2010, will net AGNC approximately $147m. On ACAS' management fee of 1.25% of net assets annually, payable monthly, this means ACAS' fee income has gone up overnight by $153,000 per month in cash, or $1.8375 million per year. (Getting the exact number of shares over time requires looking at each quarterly report, because AGNC has instituted a DRIP and realizes above-book sales of newly-issued shares at each dividend payment. Last quarter, that new DRIP equity totaled $62m.) Making larger transactions on the same overhead makes good sense for ACAS, and improves the net it keeps of its gross fee income.

AGNC offers a quick overview of its business, showing how it obtains its interest rate spread and explaining how much leverage it uses to obtain its results. ACAS' ability to grow its managed funds with AGNC's issuance, DRIP, and subsequent offerings shows ACAS still has some managed-funds business capability. ACAS' 2.5m shares of AGNC ensure AGNC owners that ACAS is taking the owners' interest seriously, as well. Making a percentage from someone else's equity is great, but making huge ROE on your own equity is a thing of beauty.

Let's hope for more $0 that turns out to be valuable :)

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