The Argument Against American Capital As a BDC

Is American Capital best served as a BDC? There are some indications that CEO Malon Wilkus could be leaning in a different direction. He’s discussed it at a number of investor meetings and regularly compared American Capital to Danaher Corporation (DHR), which is a C-corp.

American Capital would probably prefer to stay a BDC, as it has been for the last ten years. But if the environment stays this volatile, it could find shelter in a different structure. Out of all of the BDCs that are hurting right now, this option is really only open to American Capital. It’s the only one with enough control investments to make the switch and maintain the required 55% control investment minimum. American Capital has control stakes in around 50% of its investments. A simple sell-off of some loans could tip the scales.

The benefits of American Capital making the switch are as follows: As it is, BDCs must maintain a 1:1 debt to equity ratio, counting preferred equity on the debt site of that equation. Likewise, they have to mark to market. Those stipulations wouldn’t be a problem in an up market, but as American Capital’s stock price has shrunk, the firm has had trouble maintaining that ratio. Last week the firm laid off 110 individuals and closed two offices.

Furthermore, the firm could raise new equity. By current laws, BDCs cannot issue new stock at a below book value trading price; as a C-corp, the firm could do that to protect its balance sheet.
The biggest roadblock would be the accounting issue of consolidating American Capital’s balance sheet.

There’s one famous investment firm with the C-corp structure (aside from Danaher), and that’s Berkshire Hathaway. My source noted that Berkshire is verrrry careful that its non-control investments walk the 45% line without going over.

By the way: Regarding those layoffs, American Capital’s Web site has been updated to reflect, by one diligent person’s count, that six managing directors, eight principals and 15 VPs who were previously listed on the site are no longer there.