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American Capital Shareholders Terrified of Reverse Stock Split And/Or Bankruptcy

Bankruptcy has been on the table for American Capital, the troubled BDC, since it went into default in March. Another possible shareholder nightmare has been a reverse stock split.

The firm’s CEO Malon Wilkus today tried to quell investor fears about those possibilities on its Q1 earnings call, but judging by the company’s stock performance (it’s down 34.9% as I’m writing this), his best efforts weren’t good enough.

In tandem with the company’s dismal earnings news, the firm said it hired Miller Buckfire to advise its restructuring efforts and Citigroup to help it sell European Capital, the Europe arm of its business that American Capital absorbed last year. The European Capital sale may be in pieces if it can garner the best price, Wilkus said.

American Capital and Miller Buckfire continue negotiations with more than 30 banks, a handful of lenders and a large number of bondholders, to reach a consensus that may keep the company out of bankruptcy. Wilkus said an agreement could occur “as early as the next couple of months” or longer. He expressed near-certainty that an agreement would be met:

“We are really working hard to try to find a solution for all the creditors. The odds are extremely good that we will find that solution. There is it could end up otherwise, but that’s the last thing we want. They want their full value and that’s what we want to give them.”

To further stress that shareholders won’t lose their shirts, he said American Capital’s positive book value can protect shareholder value even if the company files for bankruptcy. The firm has $2.6 billion GAAP net worth, and Wilkus said he believes it is worth $1.9 billion more than that. He added that he hopes that will keep the company out of bankruptcy. “It would be very unusual for a company to seek protection under Chapter 11 if they are covering interest and have positive net worth. It is usually the case that you have one or the other or neither of those things.”

The reverse stock split option is clearly a touchy subject, as investors would be furious to see their shares halved. Yet Wilkus said the action remains an option, thanks to NASDAQ’a “arbitrary” one dollar minimum share price requirement. In March, American Capital’s share price dropped below one dollar after it announced it was in default. Since then it’s climbed to the four dollar range; at the time of writing the company is trading around $3.22. The company’s stock traded as high as $32 per share one year ago.