There's been some fear and uncertainty about ACAS in connection with the debt restructuring and the lock-up agreement's extension to June 8. Allow me to explain why I think ACAS is turning into a screaming buy.
ACAS is Solvent
ACAS hasn't failed to make any payment due under any of its debt agreements. It makes principal and interest payments timely, even at the jacked-up interest rates with which it's been stuck since the breach of the net asset covenant during the market collapse in 2008. Nobody at ACAS is going unpaid, and none of the creditors are being stuck with a bounced check. Under these circumstances, ACAS is not insolvent. ACAS is a diligent debt payor.
ACAS is also creating huge cash piles with which to pay obligations as they come due, including the anticipated obligation to make substantial principal payments in connection with a planned debt restructuring agreement.
Restructuring Isn't Liquidation
A bankruptcy court presiding over a proceeding conducted under Chapter 7 of the United States Bankruptcy Code is basically a funeral director: it invites all the mourners, says a few words over the corpse, and lets everyone go home red-eyed and empty-handed. (By the time a company files Chapter 7, even the optimists have long since given up; there's not much left to chew on.) Chapter 7 is the end of a dying business, and is conducted to wipe the slate clean of claims for whomever is left alive. Chapter 7 is the debtor's winter.
Chapter 11 is Spring. Under Chapter 11, a business with a liquidity problem can get turned around under a reorganization plan that takes account of everybody's interests. The alternative is a feeding frenzy that causes every creditor to tear flesh from the debtor as fast as possible in order to avoid losing the race to the assets. Chapter 11 is about the orderly process of reorganizing debtors' affairs with an equal eye to all the interested parties. ACAS has a reorganization plan to which 100% of its $1.4B in unsecured creditors agree, and varying percentages of its bond holders agree. The agreement ACAS has obtained is very close to statutory thresholds that would require the Court to order the reorganization plan urged by ACAS. With a few percent more of certain debt classes, ACAS would be entitled to stuff its plan down the throats of uncooperative debtors over their most strenuous objections. And let's face it: while ACAS continues to make all its interest payments, ACAS is entitled to continue to conduct its business as debtor-in-possession despite the preferences of some unhappy creditors. (Mind you, I don't think the creditors are unhappy at all: I think they love getting paid default rates of interest and don't want to see the golden goose killed, so they are doing everything possible to delay the debt restructuring. ACAS is so solvent, and so full of cash, there's no risk that other creditors would get advantage by delay – so I think all the creditors have a pecuniary incentive to toss sand into the gears.)
While ACAS continues its business, it becomes more liquid because it keeps piling up more cash. (By the end of April, unrestricted cash stood at $1.2 billion. Not million but billion.) At some point, ACAS can simply ask the Court to approve the payoff of the unhappy creditors' principal (the uncooperative creditors' claims are based on a few hundred million in principal, well within ACAS' budget), which would free ACAS to agree to a restructuring with whomever is left. That is, if the Court doesn't first order the parties to perform the restructuring plan urged by ACAS.
Of course, there are Chapter 7 debtors (like KSRP Ltd., now pending in the Southern District of Texas) that pretend to be Chapter 11 debtors. KSRP Ltd. has reported to the Court that it has no income and has made no expenses in the last year because it's had no active operations, but it turns out that lots of immigrants with H1-B visas are telling the INS they are employed by KSRP. Since KSRP hasn't had income or expenses in over a year, it's clear the only reason KSRP is trying to avoid liquidation is to keep all these fraudulent visas from being discovered by the INS and causing lots of deportations to India. For the employment with KSRP to have been legitimate, the immigrants would have to be drawing income from KSRP; it's a sham intended to perpetrate an immigration fraud. This, of course, all came as a surprise to KSRP's creditors – you don't expect the principal of a firm to admit all this under oath. Usually they are better advised and know when to plead the Fifth. Ridiculous Chapter 11 filings like KSRP Ltd. get converted into Chapter 7 proceedings pretty quickly.
But ACAS is a real Chapter 11 story: it has plenty of power to pay the interest on its debt, and even a well of cash for paying down principal without interfering with ongoing operations. So long as a Chapter 11 debtor can make interest payments at the non-default rates of interest, the bankruptcy rules allow the debtor to continue operating his business as debt0r-in-possession. If ACAS were to stop paying interest above the non-default rates while in bankruptcy court, as the Rules apparently invite, ACAS' NOI would soar as its cost of funds plummeted back not only to single digits, but to levels not seen since 2008. ACAS' NOI is based in large part on the spread between its borrowing price and the interest it is paid by portfolio companies, so ACAS really wins if it is allowed to pay only non-default interest as the price of continuing its operations. Unless ACAS decided to pay default rates of interest simply to keep creditors happy, ACAS' NOI could multiply overnight simply by making a $1039 or so filing fee with the local bankruptcy court.
The question what happens in Chapter 11 is not "what" really, but "when" – ACAS has the power to pay creditors indefinitely, and despite the default interest, its business is apparently improving. It can either urge the Court to quickly approve its reorganization plan or it can enjoy the benefits of having creditors over a barrel to get a better deal and prolong the non-default-interest while doing business as usual. Creditors deprived of default-rate interest might suddenly decide the reorganization plan is attractive and sign on, but that's not essential to ACAS' financial success. Since no claims are being eliminated in the reorganization, and no creditor is becoming an equity owner, there's no impact on equity owners other than (a) the flight of institutions forbidden by their charters to hold equities under the jurisdiction of a bankruptcy court, and (b) the reorganization of ACAS debt to lower interest rates and the consequent increase in NOI as ACAS' cost of funds plummets out of the double-digit range.
Frankly, I can't tell why ACAS didn't file months ago.
Any big downward post-filing price move in ACAS shares is a buy: it's based not on rational appraisal of ACAS' likely long-term results, but on the fear caused by ignorance of Chapter 11 proceedings and terror of the stigma of bankruptcy courts. Also: imagine the post-bankruptcy pop when ACAS, free of any debt default, emerges with a low cost of funds to continue business as usual. Yes, a definite buy.
Even for the ACAS-overcommitted Jaded Consumer!