Thursday, September 30, 2010

ACAS Chizles Debt

At the time ACAS refinanced its debt, ACAS was $300m away from repayment to the level it would enjoy a lower interest rate on its entire outstanding debt. ACAS announced at the last conference call an intention to pay down the debt to that extent by year-end.

According to the bird chirping in the Jaded Consumer's email box, ACAS' prepayments have reached $200m. Assuming that ACAS intends to realize the benefit of the debt interest reduction, management has some incentive to make the remaining payment toward the beginning of the last quarter so as to obtain the benefit of the lowered rate for the majority of the period. This would help demonstrate the impact of ACAS' lowered debt rates and the effect of ACAS' widened spread.

The other possibilities are interesting: ACAS desires to show it can make payments, but it wants to conceal the effect of spread widening in order to leave an unturned card in its hand as it deals with analysts who might be tempted to claim ACAS is out of room to maneuver. The Jaded Consumer has not previously noticed ACAS' management exercising such gamesmanship, and doubts this alternative. When times were bleak, ACAS' management expressly stated it would consider even such things as changing its corporate structure and tax treatment if needed to rescue the company. I don't expect detail about ACAS' business at the level of individual portfolio companies, but I sense that what we hear from management is straight dealing rather than ongoing gamesmanship. Another possibility is more likely: ACAS is keeping cash around for investment purposes, and consuming cash to make great deals. I like the idea, but the number of quality deals is likely finite. Look at ACAS' previous publication on the number of pitches required to find one to swing at.

ACAS' more likely reason to delay debt spend-down, if it is delayed, is to keep cash on hand as a buffer against risk (ACAS can't borrow any more under its debt agreements to address surprises; those lines of credit are now a one-way street to the lenders). Yes, ACAS would like to borrow up to its ears while the going is good, but ACAS has learned a harsh lesson about debt-to-equity ratios in the crazy world of FAS 157 and illiquid investments. ACAS is going to be more conservative going forward in choosing its financing options, and will be matching debt against borrowing so that as asset values decline, so too decline the values of liabilities.

The world has changed, and ACAS with it. The explosion from $0.58 to over $5 suggests some serious mis-valuation of ACAS, including some over-estimation of the business' risks. Shares' steep discount to NAV suggests that some of that risk over-estimation is still lingering with ACAS' observers. ACAS won't be in the dividend-stock business for over a year in light of its loss carryforwards regardless what it does, so ACAS' marketing machine is not geared to retail investors but institutions and deal participants.

Focusing on deals – that is, structuring the portfolio for future gains – is exactly what long-term shareholders need. ACAS has a discount that could easily be set to evaporate over the next couple of years, even as NAV increases due to multiple expansions in a more broadly normalizing market. ACAS' wholly-managed AGNC, for example, pays a fat dividend and trades at a premium to NAV. When life normalizes at ACAS, management's success in providing premium-worthy results can be expected to pay off.

The short term? Let's see if ACAS has enough cash rolling in to beat its debt pay-down timelines, and see how spread widening impacts NOI. Depending when ACAS pays down the debt, we may not see this until the results of the following quarter. This quarter, though, we'll see the results of the elimination of default-rate interest and the reduction in overhead associated with the debt refinancing program. Regardless what happens with the timing of the debt pay-down, it'll be a quarterly result to watch.

Saturday, September 18, 2010

Teotihucan's: Iced Tea Done Right

I met a friend and some business acquaintances for lunch at the Teotihucán Mexican Café.

Shortly after receiving an excellent salsa and a basket of nice, fresh chips, I was served the iced tea you see below:

Note that it comes with a lemon, a spoon that is an iced tea spoon, and a straw for those who, unlike me, don't discard them immediately.

The only downside was that on refill – and I note that refills were readily obtained the whole lunch – the servers tended to slowly pack the glass with ice so it became hard to stir sugar.

Great food with the tea, by the way.


China Stix Doesn't Get Iced Tea

I ducked into China Stix* for dinner for starving children and learned that thousands of years of expertise in making tea doesn't help some Chinese fast food vendors to deliver a decent experience to iced tea customers.

(1) Overbrewed and bitter.
(2) You don't get refills but have to chase them yourself, which means that if you're with children you're S.O.L.
(3) They will hear you and nod to you when you ask for a tea spoon, but after three tries with different employees you still won't get a spoon suited to stirring tea into the plastic glasses they dispense for cold drinks. You will eventually end up trying to stir your tea with a knife (see photo).
(4) You will run out of little rice-flour pancakes for your honest-to-goodness Chinese dish – like the mu shu dish you read about in the review – and when that happens, the staff will nod like when you asked for a tea spoon but will, in fact, completely ignore your pleas for help.
(5) You will leave unhappy.

It is literally more convenient to brew it yourself. Only approach if dehydrated and traveling far from home.
Grade: F.

* --> There's apparently a restaurant by this name in California, which apparently won some local awards and whose web site reflects no connection to the Houston fast-food joint. My advice to the proprietors: sue for impairment of your valuable trademark.

Thursday, September 16, 2010

Sex and Religion: Poor Analysis Criticized

The Jaded Consumer was surprised to read, in an article entitled "How Christians spoil sex", that "[p]assionate, toe-curling sex isn’t normally associated with Christianity or even spirituality in general."

This is hard to fathom. The association between God and passionate lovemaking is deeply ingrained in the social fabric – especially here in the United States. Especially here, you ask? Think about it. When viewers encounter films that don't show the sex act but want to imply it (not because viewers are Puritanical, but because the MPAA has no regulator and can kill any film before release simply by rating it inconsistently with the expectations of prospective target audiences, or of the expectations of theaters' regarding their target audiences), religious references abound. Exactly what do scriptwriters do to conjure the hot sex in your imagination? More often than the Jaded Consumer can count, the answer is the depiction of some bystander – whether amused, irritated, lonely, or whatever fits the mood of the film – reacting by facial expression to some muffled-through-a-wall dialogue that runs along the lines of: "Oh! Oh! Oh God! Oh, God! Oh God!"

And who is it that's so hot in the popular media? Bad boys are frequently depicted as hot, for sure: addictions, vices, dangerous jobs – "manly" men. But what of the women? What of the objects of men's desire, the characters in films who usually determine who wins the battle for the romantic plotlines?

At the outset, the Jaded Consumer acknowledges that there are sitcoms about women who can't find love in New York, and prove the diligence of their search through an endless line of mostly meaningless couplings, each of which enables another opportunity for a bedroom joke. The Jaded Consumer won't name manes here, but these shows aren't at heart about romantic love, but the relationships between the friends who share the experience that men are mostly dogs, then buy a bag of milkbones because it's what you need to attract dogs. Depicting this can be funny, granted, and the Jaded Consumer doesn't begrudge writers who make a legal living selling humor of this ilk to those who like it, but at the end of the day such shows aren't really about love, or passion, but self-identity and the control of one's life.

Shows that depict love show people lose control, and they celebrate it. When E.R.'s addicted bad boy Dr. Doug Ross (George Clooney) was shown really falling for a girl, it wasn't some whore who was simply taller or leggier or bustier than he'd previously met – bad boys are too jaded on TV to really get into bad girls except as property – but the warm-hearted and Catholic nurse Carol Hathaway (Juliana Margulies). Anyone recalling episodes involving the two recalls her chemistry on screen.

Why did they make Nurse Hathaway Catholic? Because good girls are sexier. Religious girls – and this is a comment not on the truth of the world, but on the social expectation played upon by scriptwriters – are harder to get and more valuable, and their reactions more honest and less jaded, and when they love they love. And real love is hot.

The heat of real love may explain the apparent volume of purportedly "amateur" videos on porn sites. Why would anyone want to see "amateurs" when professionals can show you how it's done? Easy: who believes the "passion" professionals and their vocalizations? People who want to see something more than a pretense of passion – and want to believe they are looking at something "hot" – want to look at something rare, hidden, private – real love. (The Jaded Consumer doesn't want to pretend to be an expert on adult video, and notes that the apparent scale of the industry suggests that lots of viewers are perfectly willing to settle for mechanical, plotless, unbelievable situations simply to view a coupling. However, there are people who want to believe, or need to believe in order to be interested. Hence the complex setups designed to persuade viewers that the performers in professional videos are actually amateurs sharing their genuine affections on camera.)

If people are more drawn into (seemingly) real emotions and (seemingly) plausible interpersonal situations, and people more highly value affection that is hard to earn, then the connection between religion and passion will continue to be inextricably linked as long as religion is connected in the social fabric to values, priorities, and virtue. The hero who gets what he wants in Act I, Scene 1 doesn't leave us with much to be interested in. We want a hero (or anti-hero) who proves his mettle by proving himself through tests that show he is attractive enough in his values and priorities that we want him to succeed in love and experience the blissful but blistering heat of real passion because he's proven he's man enough – vir is Latin for "man" – and by virtue of his mettle deserves the success we all want for ourselves.

The connection in viewers' minds between religion and passion isn't helped by Church sex scandals, which depicts church groupies like rockers' groupies, or financial scandals, which liken churches to banks. Let's not even discuss the child-seduction problem in churches. But stepping outside the failings of particular organized religions and looking at the individuals, there's no doubt that real passion – as opposed to loud pretense and practiced performance – is much more closely linked in the public conception to people's internal struggle to find value and to prioritize the competing demands on everyone's time ... a struggle inextricably intertwined with the struggle to live a practical life in keeping with one's values that requires the same balance as making a personal life function while keeping one's family fed.

This doesn't mean that values and religion are inextricably connected – religions have, after all, given us the sale of indulgences, mass murders of political opponents under the mask of holy war, shelter for sex criminals – but it observes that in America, religion and morals are connected in the media.  Religion is a quick signal to viewers of morality.  It may be inaccurate, but it's a shortcut and in an hour of television how many non-commercial minutes have you got?  So there you are.

In America, it seems, mainstream males don't at the end of the day value and hope to find whores, but mothers. And it's our desire for this that makes good women, reliable women – women with values – such objects of desire.

And that's why good women are so hot.

Thursday, September 9, 2010

ACAS: More Profitable Exits Hidden Within

American Capital Ltd. has a wholly-owned portfolio company, bought below book value in an all-stock transaction back when people thought ACAS was about to go down the drain, that specializes in the international markets. European Capital announced today having received £40 million (which is the same as €48 million for those watching at home – haha – okay, over $60 million cash) in prepayments of debt associated with a mezzanine transaction in which ECAS realized a blended return of 13.2%.

ECAS' realizations over the last 12 months now exceed €141 million (alright, $179 million). This, in a portfolio company that (despite having net assets with a "fair value" of $700 million) is listed on ACAS' SEC forms as having a "fair value" of $400 million. (see recent shareholder presentation) Assuming ECAS shares ACAS' objective of investing in exciting deals, the subsidiary would have been originating some exciting new opportunities – or stands on the brink of doing so. New deals with pricing based on post-crash market economics will have pricing more people can understand and trust, and the multiples contraction associated with the market collapse will make those deals extremely sweet as the markets recover. Owning ECAS at less than 60% of the value of its assets is also more mind-boggling when one considers how much of those assets are cash.

So ACAS has a few lessons to teach us: ACAS and its ECAS subsidiary are continuing to exit deals (and to do so at a gain), and the discounts built into ECAS (multiplied by the discount also present in ACAS) make some of these deals particularly exciting from a value standpoint. Panicked income investors who ran for the doors won't be back for maybe two years, if ACAS works hard to put off as long as possible its dividend-paying requirements, and that window will allow some nice fire-sale-priced purchase of a widely-diversified portfolio of companies that are generating a profit that should increase as ACAS' debt overhead drops and its spreads widen. The fact that ACAS gets to realize both leveraged debt return and capital appreciation as we come out of a depression will make shares bought at this level much more attractive down the road.

Since the prior owners – the income investors who used to own for the dividend – will remain on the sidelines for a few years, there could be a while before ACAS shows a NAV premium. However, the irrationality in the severe NAV discount should become evident over the next few quarters as ACAS – which won't face any tax expense or pass any to shareholders due to a combination of its BDC status and loss carryforwards from the depths of the crash – posts continuously-increasing NAV, NOI, ROI, and other metrics of interest to buyers. Oh, and pays down debt.

What's not to like? Cash rolling in, and the books cloud the fact from people reading the top paragraph. Exactly what I like to see: a deal, and a good reason the deal is widely missed.

An opportunity.

I'll be looking at volatility in ACAS as an opportunity to make bullish positions, but won't be trading the share's I've got. The road upward seems like it will continue for a long time – much longer than the horizon for dividends to resume.

Tuesday, September 7, 2010

ACAS: Another Exit (and More On Horizon)

Recently, a poster suggested that ACAS would have enough funds to make good on its intended debt pre-payment this year, a move that would reduce ACAS' interest rate on its entire outstanding debt and improve its spread on its entire portfolio – an already-announced NOI-enhancing move that, when taken, will have an impact greatly exceeding the size of the modest investment involved.

This week, we receive word that ACAS exited its investment in Innova-Extel Acquisition Holdings for $125 million in cash. The buyer, Hunting PLC, is an oil services company whose energy industry support solutions business has an obvious use for the harsh-environment printed circuit board technology and downhole logging tools, designed for the energy industry, that changed hands in the transaction.

The $125 million sale price isn't all going to ACAS – there are affiliates and managed funds and some senior management at Innova-Extel who will be getting a share. Assuming that the management share is slight, and that the managed funds share is the 30% ACAS transferred to a managed-funds portfolio a few years back, ACAS should be getting something a bit under $90 million in cash.

Considering that ACAS' price point to reduce its interest rate is $300 million, this transaction alone would get ACAS much of the way there if it hadn't already paid the principal back (a timing fact not yet public and not known to this author). Recovering $90 million in capital puts ACAS a long way toward pursuing its announced objectives of prepaying $310 million in debt to reduce portfolio interest (to generate a 12% return on capital) while originating high-quality new investments (using on-balance-sheet securitizations for new debt and targeting a 0.6:1 debt:equity ratio).

The progress toward management's announced objectives is underlined by ACAS' apparent preparedness to sell a major stake in its largest investment in its portfolio, while improving ACAS' liquidity for the non-exited investment: Mirion has filed a new set of IPO papers. The last time ACAS filed MION IPO papers, it pulled the plug on the deal because selling near the last-listed "fair value" wasn't rich enough (the price the street was then willing to pay was about $11, which yielded ACAS only a hair more than the last-listed "fair value" of the portion of MION owned by ACAS). The Mirion pitch (supplying the highly-regulated nuclear segment of the non-petroleum leg of the energy industry with high-tech compliance equipment and services) looks even better after the apparent lack of safety petroleum companies radiated during the BP disaster, and ACAS apparently hopes to cash in. I'm guessing ACAS tries for $14 a share, but IPOs are not a Jaded Consumer speciality and I don't claim any particular basis for this.

ACAS is clearly interested in doing deals and capable of moving on them. Ridding itself of the debt-refinancing concerns and the cloud of a potentially impending bankruptcy filing frees ACAS from a significant distraction. The ratings agencies' clouded view of ACAS – that it proved itself a bad risk based on the view that its lenders were coerced into taking the debt refinance – should give investors some more time to buy ACAS shares while people are still worried about its finances. After a few quarters of business as usual, those days may be gone.

Friday, September 3, 2010

Jobs Right on Flash Quality After All?

The "it plays Flash!" feature of non-Apple smartphones may not be all it's cracked up to be. When users find that Flash loads, they may find the experience to be as technology and telecom reporter Ryan Lawler describes it for for

And how was that experience?

"Shockingly bad."

The site links a video of a 1GHz Nexus One smartphone on a 25Mbps broadband connection, which should be ideal for showcasing just how wrong Steve Jobs was about the potential of Flash on low-power mobile devices. Instead, the Nexus One video showcases just how accurate his assessment of Adobe's product continues to be: the UI seems to support mis-clicks and links to the wrong content; the waits are significant even when trying to download content on a fast broadband connection; unexpected errors occur and advise trying to experience the pain later; and when you finally find a site that does not result in an error (in his case, a show episode on Fox), there is not even a small segment of smooth video.

Kevin Teufel's assessment:
"That's seconds per frame, not frame per second. . . . I don't know about you, but I could not watch a full episode like that."

The little flag that appears atop your "video" is not encouraging: this video not optimized for mobile. Well, wasn't that what Adobe promised? Provide content everywhere and experience the "full web"? The whole time the video demo is underway, it's crystal clear that the experience one gets isn't the "whole web".

Seeking content from MetaCafé yielded a Hulu video, but Hulu is blocked on Flash mobile devices. MetaCafé, which was more reliable than other sites in yielding working videos, also had a video from an action movie, and the subjective video experience was so bad (the combination of skipped frames and other factors) that the things that were supposed to look quick looked spliced-in, and things that were supposed to be slo-mo looked choppy.

I don't claim 3G video is great on iPhones, but the video above demos performance on a WiFi network attached to a 25Mbps broadband connection. It's not 3G, it's the best case for the Flash/Nexus One combo.


Thursday, September 2, 2010

AppleTV: No 1080p

The specs are here. The "TV Compatibility" section says "Compatible with high-definition TVs with HDMI and capable of 720p 60/50Hz".

So, to take advantage of your highest-def content, you need to bypass or work around the AppleTV in your media cabinet? Whose idea was that?

The fact that 1080p isn't widely streamed yet because it's big may explain it, but what about people whose interest in quality leads them to buy those BluRay discs Jobs says no-one will want? Has Jobs just decided that he wants to try to Betamax the physical media in favor of downloads?

If so, it could work – those discs are a nuisance to juggle in and out of players, and anyone with kids knows what happens when they get handled and scratched – especially as transmission speeds make transmission of full-scale content easier over time.

At some point, though AppleTV needs to support the resolution demanded at the high-end, or lose the business of folks who care about seeing the quality for which they bought those big flat screens. At the moment, though, Apple is aiming at the mass market and at the capability easily supported by its existing in-house chip supply.

Next year? New chips, new performance envelope.

The careful student of Apple spec sheets will notice that the device has no user-accessible storage. This isn't the AppleTV of yesteryear, that was basically cross between a Mac Mini and a Time Capsule that played shows on your TV; this is essentially a video-enabled Airport Express. Storage is as big as you like – on your computer, located somewhere else on your network, away from your TV, not cluttering your entertainment center. AppleTV isn't being obsoleted by file sizes; that's a hardware problem for you to work out with your PC vendor. AppleTV is not a stand-alone solution, it's glue in a chain of Apple products.

The lesson? Apple is not trying to build the Lisa any more (intended to be perfect, but ending up overpriced), it's trying to build for the mainstream. Apple has learned from the iPod and the iPhone that a volume business that aims where the demand is now is more valuable to Apple than aiming where the business will be in 10 years (*cough*Newton*cough*).

Apple is growing up – including with product positioning strategy. AppleTV is not a costly part for Apple to build and will involve modest investment in stock; Apple need not sell huge volume to make money on it. Apple is in a position to help Netflix get streamed content to your TV (a problem for Netflix I noticed when I wanted to stream flicks, and ended up watching on a laptop), and makes both your TV and your Netflix account more valuable. Apple is also able to offer ad-supported content from other sources.

Soon, you will be free of your cable bill: you will stream news and you will save the subscription cost in favor of renting the handful of shows you actually watch. That horrid DVR your cable company saddles you with will go back to the land of ugly products with lousy UIs, and your TV will act like an Apple product because Apple will provide the portal to everything you want to watch.

And all for $99.