Tuesday, June 29, 2010

Fitch on ACAS

Fitch assigned ACAS a post-exchange Issuer Default Rating of B+.

However, the headline on this news was that since ACAS restructured its debt by coercion – that is, by threatening a bankruptcy filing – ACAS was getting a D (okay, "RD", but it reads the same).

Of course ACAS restructured its debt by threatening bankruptcy – otherwise, why would creditors have voluntarily ceased taking default-rate interest from ACAS? This coercive restructuring is why Fitch slaps ACAS' hand: ACAS didn't just pay up according to the schedule in the original debt agreements, but forced its creditors to renegotiate. This could bother you if you were looking to lend to ACAS, but the lowered cost of funds and decreased risk of the overhead of a bankruptcy filing is what equity investors are interested to see.

Fitch's comments about ACAS' potential difficulties raising funds are out of synch with the real world. ACAS has had no trouble raising cash for its managed funds. While ACAS trades 35% below NAV, there's no reason for management to be excited about diluting their own interest by issuing shares, but ACAS hasn't had trouble issuing shares when manageemnt thought it made sense (e.g., the accretive ECAS stock swap and the April issuance to Paulson). So long as ACAS' NOI recovers with the decreased interest rate and the decreased principal (paying interest on the $1b+ in cash it had on the books was making my eyes roll something awful), investors should see interest coverage improve, and with improved interest coverage comes assurance that ACAS will be able to pursue its business as usual while the portfolio has time to recover. Parts of the portfolio were entered specifically to take advantage of economic downturns, and other parts of the portfolio will be in a position to improve as the broader economy improves. These things take time, and improved NOI following improved costs of funds will make time easier to handle.

The headline – ACAS Gets A "D" From Fitch – obscures the substance of ACAS' situation following the debt exchange rather than illuminating it. Its authors get an "F".

For shareholders, the question is whether ACAS has improved its situation, and the "Ratings outlook: Stable" and the "B+" seem to be where their answer lies.


Anonymous said...

Hey Jaded, great work as always....was curious what you thought of this recent exit of ACAS. I cant break out the numbers myself but maybe you will have better luck?


Jaded Consumer said...

See this post on the exit.

Thanks for reading!

Anonymous said...

as always you are the relative sole up to date reporter on the acas current events...any take on the recent ECAS exit just made?