American Capital's Pre-Split Value Per Share

Seeking Alpha posted my article ("American Capital Ltd.: What A Share Is Worth") outlining the company's post-dilution NAV in the event all outstanding options were exercised.  What's not yet clear is how the impending split effects the options.  If they're not repriced, then any options not exercised before the dividends are paid will be worth quite a lot less.  It'll be something to watch as the transaction unfolds.

American Capital: Profit From Hated Shares

In a new article at Seeking Alpha, I outline why American Capital Ltd.'s shares are in the crapper (compared to peers), what management plans to do about it, and what impact this will have on the company's resulting value.  Upshot: while ACAS remains hated, there's an opportunity.

The article is American Capital Ltd.: Loving The Hate.

ACAS' Discount and Aquisition Prospects

Over on at Seeking Alpha, the article Understanding American Capital's 4Q2012 Earnings Announcement has attracted an interesting comment by Not My Business. It suggests that ACAS' discount (relative to Net Asset Value per share ("NAV")) makes it attractive for an outsider like GE Capital to acquire. Buying ACAS below NAV would deploy capital at attractive returns, so why not?

The funds management contracts described in SEC filings by ACAS' managed funds MTGE and AGNC seem to make change in control a situation in which managed capital clients can depart with the managed funds. It'd be awful for American Capital Ltd. (ACAS' funds-management subsidiary) to lose all its funds management business overnight. The fact that ACAS' funds-management subsidiary is also ACAS' largest single holding (by "fair value") seems to act as a poison pill for ACAS: unfriendly takeover could destroy a significant and growing funds-management business that contributes both to NOI and to NAV.

So, maybe a buyer wants to buy a managed funds from ACAS, in the same spirit of the transactions years ago when ACAS sold a 30% stake of its whole portfolio to investors who wanted ACAS' management of funds. If someone like GE wanted to buy a portfolio from ACAS, ACAS would want to make good money on it rather than to sell it for a song. Would GE want to pay ACAS to manage funds for it? I haven't seriously considered this, but my first impression is that GE Capital has managers whose pride and confidence would work against pitching to their superiors – as their capital deployment idea – the idea of paying of third-party managers to do things they themselves theoretically do for their salaries.

If ACAS restructured so that it had a big externally managed bond fund – and that fund traded below NAV – then I can see institutions becoming interested in buying at a discount for a margin of safety. But this wouldn't be a purchase from ACAS' inventory, it'd be a purchase of shares of a company that's paying ACAS a management fee based on assets' "fair value". It would, in essence, be like an investment in MTGE or AGNC (which early in their lives both traded below NAV, too). 

ACAS would like to have institutions interested in its managed funds, of course. So restructuring to place investment holdings into an externally-managed, publicly-traded BDC seems an interesting way to attract institutional interest, and broaden demand for ACAS-managed funds.

If AGNC and MTGE offer any example, the new fund would likely trade at a NAV discount until its dividend is seen as reliable.  One way for ACAS to create this structure might be to raise new money in a new investment vehicle, then buy the assets from ACAS at "fair value" to get them off ACAS' books and onto the books of the new entity. ACAS could participate in the deal by supplying capital for the new entity just as it did with AGNC and MTGE (each of which ACAS since exited). Once the fund traded at a premium to NAV, ACAS could exit and deploy its returned capital elsewhere, while continuing to enjoy funds-management fees.

Some questions would be: will lenders require ACAS to guarantee debt? Will the new BDC get lending terms as good, without the additional safety of the funds-management business and the equity of the portfolio companies? Real roadblocks could kill the idea, even if it were of interest to shareholders.

But I don't see ACAS being bought out. I believe management wants to stay in the funds management business, and that the fallout of a buyout would wreck ACAS' value in a hostile takeover.  I much more credit the idea of ACAS restructuring to allow asset classes the market might value favorably to stand apart from the parts of ACAS that are historically not accorded much value (e.g., non-dividend-paying equity). The restructuring has some good precedent in the development of ACAS' funds-management business through AGNC and MTGE, and serves as a plausible model for future fundraising in an environment that prices ACAS' own shares below NAV.

On ACAS' 2012 Earnings

At Seeking Alpha, the latest Jaded Consumer article on American Capital is available: Understanding American Capital's 4Q2012 Earnings Announcement. (What's more, it's an Editors' Pick!)  Frequent commenter Not_My_Business returned to the theme that the company might unlock shareholder value through a restructuring that would spin off an interest-bearing-debt company, externally managed by ACAS, to pay dividends to shareholders (and create demand by dividend hounds). While I don't see this in the immediate future, the freedom to restructure in this fashion is exactly what I think keeps ACAS' debt:equity so low: it's interested in maintaining the freedom to do this (which secured creditors with an interest in the debt would veto).

One thing to like in spinning out some debt ACAS wants held for the long term is that ACAS can get a management fee for keeping funds from the permanent capital pool invested in suitably attractive debt instruments. ACAS can itself be a co-owner of this fund, making it like the pool ACAS sold years ago when it sold 30% of all its investments into a pool it managed – except that the pool is public, strangers can invest, and ACAS can raise money in it.

The problem I have with AINV isn't that it's an externally-managed fund, but that it combines high fees with willingness to issue equity below NAV. That's why I concluded Berkshire was a better use of capital. Berkshire has discipline, and AINV's management doesn't.

Assuming ACAS launches such a fund, it'd be interesting to see how it's valued by the market. The question is: if ACAS can syndicate debt from One Stop Buyouts into its public bond fund, will it fight as hard for deals that arms' length buyers would buy or will its managers settle for deals it can do this quarter? Without the constant pressure to get third parties to support ACAS' deals in the syndicated-debt market, what will ensure the deals have the metrics and prospects that will really perform for investors? Will we rely on ACAS doing deals more and more within specific spheres of expertise?  Will ACAS have some other method of keeping its managers demanding in their tastes for suitable risk-adjusted returns?

Can anyone remember the name of that search engine optimization company that ACAS invested in right before Google changed its algorithm and obliterated its business? We need to avoid more of that kind of boondoggle. ACAS needs a scheme to detect it early.  Investing in what you know is some protection – ask Berkshire – and the movement toward concentrating in areas of expertise like energy/infrastructure, and healthcare, may help ACAS in that direction. Does the plan go deeper?


UPDATE: Geosign collapsed weeks after ACAS' acquisition for $130 million plus affiliate money for a total of $160,000,000. Then, Bam! Google wised up to its business model – click arbitrage, selling Google advertising more expensively to Yahoo! – and killed it with algorithms that detected Geosign's violation of Google's Terms of Service. Rebellion Media Group, which apparently succeeded Moxy Media, which apparently received ACAS' part of Geosign's assets, was last listed with a fair value of $24.8 million. What a difference a few weeks makes. Remember Rule One.

ACAS Back At Bat

Following the Seeking Alpha article on Normalcy Returning to American Capital, the article American Capital: Back In The Business-Building Business outlines ACAS' post-refinancing use of its revolving credit to do deals in December. The article mentions these deals:
 American Capital Commits $212 Million In The One Stop Buyout® Of Cambridge Major Laboratories, Inc.
 American Capital's Portfolio Company Potpourri Group Acquires Cuddledown
 American Capital Invests in The Meadows to Support Add-on Acquisition of Remuda Ranch
 American Capital And Its Affiliates Invest $10.7 Million In Portfolio Company Halt Medical

And it didn't even cite all the deals.  In addition to the multiple deals cited above that closed in December, ACAS also closed this:
 American Capital's Portfolio Company Pan Am International Flight Academy Acquires Airline Career Academy

As a bonus, ACAS exited Lifoam Holdings for an 11% compounded annual return over the life of the investment. Interestingly, there wasn't much of a breakdown on that investment's components. The last quarterly report gave ACAS' Lifoam holdings as having a basis of $45.5 million (of which $30.3m was equity, the rest 14% mezzanine debt) and a fair value of $53.9 million. ACAS' realization – based on the press release – was $60 million. Some of the $71 million initial investment was no doubt sold years ago to managed funds which bought a non-control fractional stake in ACAS' holdings, reducing ACAS' basis in its remaining stake to the reported $45.5 million.

If December is any guide, ACAS is back in business.

Normalcy Returning to American Capital

Seeking Alpha just published a new Jaded Consumer article, Normalcy Returning to American Capital. Like the last Apple article, it is an Editor's Pick. Of 53 Jaded Consumer articles at Seeking Alpha, twelve have been designated Editor's Picks.

But to the article itself: the idea that American Capital is going under, to the destruction of investors' capital, looks fairly flimsy at this point. Yet, the NAV discount remains at about a third of the company's "fair value". In other words, when you buy $1.00 of stock, management invests a net of about $1.50 on your behalf.

Even reasonable returns start to look exciting when you multiply them like that. And the possibility that the NAV discount could narrow in the next several years as the loss carryforward is burned off and the incentive to avoid RIC status declines . . . well, after the runup from my post-crash purchase at $1.80, I'm still long.

More Growth at American Capital Ltd.

I've got a new article on ACAS up at Seeking Alpha. It looks at the last-announced quarter. I was honestly shocked that with my recent travels and ill health, someone hadn't beaten me to a SA story on ACAS' quarterly results. The fact that nobody bothered may suggest the stock remains underfollowed, which is itself an interesting observation.

I also have gotten a consistent patter of comments at SA, urging that management pay dividends instead of only repurchasing shares below NAV. I think this sort of reasoning has got to take center stage in its own article. But, later.

UPDATE: "More Growth at American Capital Ltd." was designated as a Seeking Alpha Editors' Pick – and so was "One Year of American Capital Mortgage Corp." This makes ten of fifty articles as Editor's Picks.

MTGE: One Year On

A year after its introduction, American Capital Mortgage Investment Corp. (MTGE articles here) proves ACAS can manage a mortgage fund. Investors in American Capital Agency Corp. (AGNC articles here) won't find this surprising.

The real story is at the manager, ACAS. More on ACAS soon.

ACAS Refinances!

Remember when I wrote that American Capital was going to want to refinance its bankruptcy-avoidance debt package to regain flexibility? Well, that deal appears imminent.

Read more at Seeking Alpha.

Seeking Alpha pays me more than Blogger (which pays clicks instead of impressions, and hasn't cut me a check literally in years), making the publication of financial analysis much more attractive.

Already, the Seeking Alpha article has attracted a critic who says share count is not shrinking, but due to insider selling is growing. Without going into the detailed history of issuance and buyback at ACAS, I'll simply post a chart for the relative period:

ACAS Shares Outstanding data by YCharts

To show how this works in more relevant terms, let's see it as a percentage:

ACAS Shares Outstanding data by YCharts

In less than a year, management has shrunk share count by over 5%. That means that every dime of earnings per share before the buybacks is worth 10.56¢ after the buybacks. And each buyback steepens the concentration. The last buyback of over 9m shares retired a higher percentage of ACAS' outstanding shares than the first >9m share repurchase.

Single-Ticker Portfolio Diversification

Earlier this year, I wrote an article at Seeking Alpha on Berkshire Hathaway as a busy man's substitute for portfolio diversification. I had previously written about Berkshire Hathaway as a superior alternative to Apollo Investment, which has since tanked:


In the spirit of the one-stock portfolio diversification article on Berkshire, I just published a one-stock portfolio diversification article on American Capital Ltd.

And in departure from investment into speculation, I wrote an article on Odyssey Marine (previously discussed on the blog, and further previously at Seeking Alpha). Seeking Alpha made the new Odyssey Marine article an "Editor's Pick", making it my fifth Ed's Pick in 44 articles. In it I explain that further dilution is in the works, and that its current wreck prospect will not give the company more cash per share than its current trading price. As an alternative for those insistent on a company using similar technology to work at the bottom of the sea, I advocate Oceaneering International as a substitute.

MTGE's New Offering Defers ~42¢/sh

At Seeking Alpha, I show how the at-NAV issuance of the new MTGE shares gives shareholders a tax benefit akin to indefinite deferral of 42¢ of income, without requiring a tax-deferred account. This is a single-instance case of the hidden deferral available when ACAS-managed mREITs issue shares following the earning of taxable income.

Since ACAS is now a taxable entity, this indefinite deferral amounts to about 15¢ per MTGE share of income tax it won't pay (or tax asset it won't consume). With 2m shares, this is a $300k one-time bonus. ACAS has done this already this year (I didn't do the math on the first secondary offering), and will surely do it again at its managed fund. Growth in ACAS' holdings of MTGE work to its advantage both by growing its management fees and by growing the fair value of its holdings of MTGE.

Enjoy the new article!

American Capital Update

Shortly after American Capital Ltd. announced its quarterly results, so too did American Capital Agency Corp.

The important figure for ACAS – the NAV growth to $15.71 – is discussed in the article Why American Capital Is Buying American Capital. That article rebuts a thin work at The Motley Fool, which pitches ACAS share buybacks as a waste of shareholder funds. Its evidence? ACAS "can't afford" a dividend. Uh, it can afford share buybacks. The only difference is that shareholders aren't taxed on the NAV increases caused by below-NAV share buybacks, whereas they would be taxed on dividends. Were share price above NAV, the same funds would be directed into dividends under the recently continued (through 2013) dividend/buyback policy first announced last year. News the Fool apparently missed.

At American Capital Agency, NAV grew even more than the dividend over the quarter. Share price was more volatile, but that's of more import to traders than to investors. The key for investors is that the dividend remains safe while management reinvests further earnings with the added boost of some hidden tax deferral.

Meanwhile, American Capital Mortgage Investment Corp. announced its 1Q2012 results. As with AGNC, MTGE grew NAV in an amount exceeding the dividend it paid (net of the dividend payment, so it's like getting the dividend and having them reinvest it for you, both). Article to follow :-)

Fool Lives Up To Its Name

The Motley Fool once more published that buying shares below NAV was bad for shareholders at American Capital Ltd. Unfortunately, it still hasn't managed to make an even slightly plausible case that management somehow is injuring shareholders through funds mismanagement, when it raises NAV per share by retiring shares at one third below NAV.

A Jaded Consumer rebuttal to the Fool's latest missive is called Why American Capital Is Buying American Capital.

Hidden Tax Deferral at AGNC, MTGE

Just published at Seeking Alpha, the newest article from the Jaded Consumer looks at the effect on your taxes of all those share issuances ACAS is conducting at its managed funds AGNC and MTGE.

In a word: it's good news.

ACAS launches new Preferred at AGNC

Thanks to more clever management at ACAS, AGNC now has a preferred issue. Recalling that ACAS' fee is based on funds under management, the managers are unconcerned whether equity is raised in common or preferred issues. The $150m preferred issue will yield ACAS another $156,250 per month in management fees atop those already paid by AGNC, plus fees on the equity reinvested from income made on the issue.

And as described at Seeking Alpha ("Understanding American Capital Agency's New Preferred Issue"), there will definitely be something to reinvest after paying the preferred shareholders their 8% on the $25/sh in equity in each stub of preferred.

Why Issuing Shares Isn't All Bad For Shareholders

I've seen one too many articles describing accretive share issuance as "dilution". I wrote an article at Seeking Alpha (which gets more page hits than I did when I wrote about it here in 2011) in order to explain the difference between issuance that dilutes shareholder value, and issuance that accretes shareholder value.

I hope they get it.

I also hope ACAS maintains its issuance discipline in its managed funds. It's been wonderful and I'd rather not see a good thing spoiled.

ECAS Results Bullish for ACAS

Just published at Seeking Alpha is a new article on What European Capital's Results Mean for American Capital. I argue there that the recent announcement of 2H2011 results for American Capital's wholly-owned fund European Capital – despite its lackluster headline numbers – is in fact extremely bullish for ACAS' shareholders.

I'm working on an article on "one stock portfolio diversification" and American Capital's global reach and NAV stewardship will be featured therein. I'll also quote Buffett and ask just how much portfolio diversification one investor really wants. It'll be a while in coming.

MTGE past 24

MTGE's meteoric rise – from trading at a NAV discount to trading both above its last-published NAV but also above the intended offering price filed with the SEC on February 23 (but thankfully subject to amendment) – has been stunning. The stock, which took a couple quarters of demonstrated performance to claw its way back to the IPO price of $20, just passed $24. It's been barely over half a year.

At the recently-announced dividend of 90¢ per quarter, the current price presents an annual dividend yield of about 15%, but 18% of the IPO price. Since the investment underlying each share has been growing quarterly, ACAS' ability to get MTGE to produce future income seems solid.

Understanding ACAS' 2011 Results

Confused by the tax asset impact of Q4? Wondering whether a dividend makes sense, and when we'd see it again?

All this and more on "Understanding American Capital's 2011 Results".

Therein, we see American Capital's real NAV improvement (that is, recognizing that the "tax asset" isn't an income-producing asset and wasn't really even new in 2011 as it resulted from crash-era loss carryforwards), revisit the share buyback, and think about the effect of taxes as ACAS changes between a RIC and a C-corp (and maybe back?). We also weigh the impact of AGNC and MTGE on ACAS' per-share results, and suggest that income investors wanting ACAS' management expertise look to MTGE and AGNC until the tax treatment of potential dividends becomes clear.

Enjoy!

Loving American Capital Before Valentine's Day

The new ACAS article is now live at Seeking Alpha.

Enjoy!