Friday, June 4, 2010

Stifel on ACAS

The Stifel "research" derided here as made without any evident basis has been updated, according to an email I got from someone watching a Java-based feed to which I can't post a link. Stifel apparently claims ACAS is likely to cave into bondholder demand for a bigger payoff in the exchange, reducing bankruptcy risk.

As envisioned, ACAS' exchange offer would pay down 39% of the company's outstanding unsecured debt, exchange remaining unsecured debt with newly-issued secured debt (at no change in principal value in the unpaid debt; this isn't forgiveness, it's a new debt agreement without the old net asset requirements, but providing secured lender status), and give the creditors a 2% "thank you for your cooperation" bonus on the exchanged principal value in immediate cash.

It sounds like some of the unsecured creditors want more than 2%, or they want 2% of more than just the debt that's exchanged, or something; but they want a bigger cash payoff.

Frankly, ACAS would do better in court. Creditors before a bankruptcy court are only entitled to what they contracted to be paid and not extra bonus payments. Conversion to secured status is surely consideration enough for the removed net asset covenant. If ACAS can reduce interest payments to non-default rates and continue as debtor-in-possession indefinitely, ACAS could outwait the bondholders until their debentures mature and not pay them a wooden nickel more than they bargained for prior to the 2008 liquidity panic drove the air from ACAS' NAV.

Why is it good news that management might cave into extortion like this? Extortion like this is why the United States has bankruptcy courts in the first place. This is exactly why ACAS should file. The 2% should be a reward for playing nice, not an invitation to commit a mugging. Call the law on the bastards!

I'm not sure who's more irrational, the public whom Stifel (correctly) thinks will panic on the news of a Chapter 11 filing, or Stifel for thinking that caving to extortion is good business (better than standing on principle to enforce one's rights in court, which though ugly can be effective). Shareholders want profit, not placation of stranger bondholders. Why should Stifel think placation is better business now than in 1939, or more likely to prevent further unreasonable demands?

When the irrationality-based post-filing panic hits, I'll be waiting at the bottom with my wallet and my margin account.

(If I were certain of the filing, I'd liquidate and wait to re-buy on collapse; however, I'm no short-term prophet and I don't want to miss the upside, so I'll sit through the punches that come while this plays out.)


Anonymous said...

how likely do you think ACAS is to get restructuring done outside of court? what do you think of this news? DOW JONES NEWSWIRES
American Capital Ltd. (ACAS) amended terms of its debt-exchange offers and extended the acceptance deadline by two weeks as the business-development company continues efforts to restructure its debt.
Shares rose recently 5.67% to $5.03. The stock has doubled this year.
The company said Wednesday night it has entered into a lock-up agreement in which holders of a combined 43% of $963 million of notes agreed to tender them in support of the offer. Meanwhile, the minimum support level needed for the deal to proceed has been cut to 51% from 85%. Just 6.8% had been tendered as of Wednesday's 5 p.m. EDT deadline.

Camilo said...

Why do you think the stock popped when so few bondholders appear to be cooperating?

Jaded Consumer said...

Honestly, guessing whether ACAS will appease unhappy bondholders by making a deal that satisfies them, or stuffs a tougher deal than they'll swallow down their throats in a Chapter 11 proceeding, is really above my pay grade.

All I know is that, confusion-based panic aside, the liquidation value of the company is close to twice what the shares traded at earlier this week. So, if the worst case is that the company ends up in front of a bankruptcy judge with the obligation to ensure that the worst thing that happens is an orderly liquidation, I expect buyers at current prices to make maybe 40% profit.

I DID read a note that said there was too much equity in the shares for a bankruptcy filing. This is illiterate hogwash. Bankruptcy filings aren't about equity, they're about solvency. You can be rich as Croesus, but if it's not in cash and you have a bill due in cash right now, you need bankruptcy court to avoid having the local Sheriff start selling off your stuff for pennies at auction. Bankruptcy is the shield against ACAS' creditors all declaring they will exercise the right to accelerate and be paid 100% of their amount due right now: bankruptcy halts forced sales in favor of orderly liquidation.

In short, bankruptcy protects the right of ACAS to keep doing business. Bankruptcy isn't to be feared, it's an important shield that keeps creditors from killing the company for a quick buck. In the case of a successful and going concern like ACAS, it's not a danger of destroying the business but an opportunity to preserve it.

Finally, I read that ACAS is changing the terms being offered to public bond holders, to protect their currently-existing rights against being called. If this materializes, then under the extended deadlines ACAS will both avoid bankruptcy and renegotiate its debt. Still, I don't see bankruptcy as harming ACAS as much as I see it creating a potential re-entry point for committed longs.

As a committed long, I kinda feel bummed that the "risk" of bankruptcy seems to have abated :P