What’s Up With American Capital’s “Acceleration”?

American Capital’s private noteholders have “accelerated” on the firm, which means they basically demanded their money. The troubled lender/buyout firm has been in default of one of its credit lines since December. On its most recent quarterly update, the firm sounded less hopeful that it could reach an agreement with lenders than in the past.

Not reaching an agreement has dire consequences-the firm could go bankrupt or it could issue a reverse stock split.

But in addition to the acceleration notice, the firm announced its lenders had signed a forbearance agreement in which states the company will pay default interest on all of the notes back-dated to March 30, and pays the lenders a $22 million “make-whole” agreement. The agreement also states that the lenders cannot force the company into bankruptcy, nor will they sue the company to collect payment.

Analysts at Stifel Nicolaus expressed confusion over the combination of acceleration and forbearance agreement. Wrote Stifel Nicolaus Analyst Greg Mason: “Why would the lenders “accelerate” if they have also reached a forbearance agreement?”

The best hypothesis is that the acceleration (and the immediate forbearance) signals that the firm will likely eventually get a deal done with its lenders. Since only one group-the private noteholders-accelerated, it seems to indicate that the rest are working with the company to get their make-whole agreements and higher default interest payments.

It’s not entirely unlike the situation at fellow BDC Allied Capital, which earlier this month reached a debt restructuring agreement with its lenders. The firm’s debt priced at 13.75% with an estimated 15% up-front fee. American Capital’s new capital structure will likely look similar.

Not to mention, $82 million worth of the notes were scheduled to mature two days after the firm received the acceleration notices. Essentially the forbearance agreement bought American Capital some time.

So this looks like a positive development in what’s been a very rocky year for American Capital. Last week Standard & Poor’s lowered the long-term counterparty credit rating on American Capital to ‘B-‘ from ‘BB-‘, based on accelerated deterioration in the firm’s realized earnings and reported leverage in second-quarter 2009. In addition to being in default of $2.3 billion in financing, the firm’s second quarter earnings saw a $547 million loss.

American Capital’s credit troubles have been buoyed by a series of exits, including a recent filing to raise up to $100 million in an IPO of its radiation detection provider, Mirion Technologies. Meanwhile the firm itself filed to offer a mixed-shelf offering worth $1.5 billion for general corporate purposes, acquisitions and to repay debt within the next two years.