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Disastrous ACAS Earnings Won’t Help Lender Negotiations

American Capital reported its second quarter earnings today and they weren’t pretty. The business development corp. (BDC) lost $547 million in the quarter and provided no update on its default on $2.3 billion in credit. It has been in default for around five months, and continues negotiations with lenders over resolving the default.

I listened to its 90 minute earnings call with CEO Malon Wilkus—highlights below:

  • The debt negotiation is clearly the most important issue facing American Capital. Yet Wilkus remained tightlipped on several inquiries as to the progress of the talks, except to say they are “working really hard” to resolve the situation. As we’ve noted before, the include bankruptcy. The possibility of a reverse stock split is also on the table, even though Wilkus has of course said it’s not desirable. I suppose it’s the (slightly) lesser of two evils when the only other option is Chapter 11.
  • Wilkus’s tone regarding the talks is certainly less optimistic than the firm’s last earnings call: In May he predicted a solution in “the next couple of months,” and said “the odds are extremely good.”
  • The stock market and analysts seem to have lost a little faith, too. The Stifel Nicolaus team wrote: “In short, we believe that the significant deterioration in the assets witnessed in the quarter may very well spook the lenders and increase their willingness to take possession before the assets deteriorate further.” The firm’s stock (ACAS) has traded down around 15% today.
  • At one point during the Q&A, an analyst launched into a mini-pep talk for the firm. “I have complete confidence you will get out of this default,” he said. Later, he added, “What you’ve learned in the last two years is going to make you understand a lot better how to run your company and I’m looking forward to watching you run your company now that you’ve learned all those hard lessons.” Wilkus responded, “I think there is some truth to that.” Aww.
  • But seriously. There were plenty of other questions unrelated to the default. For example, European Capital, the overseas arm which American Capital purchased earlier this year, has been written down to $97 million, from its cost of $1.32bln. The business is also in default. Did American Capital know about the possibility of default when it bought the business? Wilkus said yes. American Capital has hired Citgroup to explore strategic alternatives for European Capital.
  • Regarding new investments: The firm hopes to begin making new investments in 2010. Will investors allow this? “That’s not their decision, that’s our decision,” CFO John Erickson said. He added that once the firm solves its default situation, it’ll be able to raise more capital.
  • But wait! Hasn’t American Capital laid off all of its origination professionals? Yes, it seems. The firm has eliminated basically all of its origination professionals and reduced its headcount by 43% since its “peak,” and reduced pay for remaining employees, Wilkus said.
  • There was some good news. For example, American Capital gained $120 million worth of liquidity last quarter thanks to exits of portfolio companies, including the $80 million sale of People Media to The past 12 months have seen $1 billion sales for the firm. American Capital is using the proceeds of those sales to pay down debt and reinvest in portfolio companies, Wilkus said. He insisted that the firm has not sold at distressed prices and turned away below-NAV offered. “We’re not at all pressed for liquidity,” he said.
  • Despite the massive NAV deterioration, American Capital’s view is that the economy is improving. “The economy is indeed improving and we remain optimistic,” Wilkus said. However he quickly identified that the middle market, where American Capital plays, has been slower to recover

The Argument Against American Capital As a BDC
Post Mortem: A Geographic Breakdown Of American Capital Layoffs
American Capital Shareholders Terrified of Reverse Stock Split And/Or Bankruptcy
Consolidation Among BDCs is “Necessary,” Ares Capital CEO Says
ACAS, Allied Hit With “Going Concern” Warnings After Posting Losses
Dark Times Part III: Why Allied and ACAS Won’t Go Private
Dark Times Part Two: Not Everyone is Drowning
Dark Times For Public PE, But Don’t Expect Any Take-Privates or Dividends