A possible spin-off, supported by a termination of the stock buyback program, and an SEC rule requiring an index change, have combined to price this BDC at a discount.
American Capital (ACAS)
from Adrian Day’s Global Analyst
American Capital (ACAS) announced it would suspend indefinitely its buy-back program amid an evaluation on restructuring the company. The form of restructuring was not made clear, but a spinout of an externally managed RIC-compliant business development company (BDC) which would then pay a dividend, with American Capital remaining an asset manager, is the most likely scenario.
Don’t spend your dividends yet; it could be one-to-two years before any restructuring is completed.
In a successful effort to narrow the gap to Net Asset Value and boost the stock price, ACAS instituted a massive stock-buyback program. From the third quarter of 2011 until the end of 2013, the company bought back over 29% of its shares at an average price of $11.74, significantly below the current stock price and below the NAV, currently $18.97. The reduction in share count was partially offset by the issuance of share options to employees, but there is no question the program has been very successful.
The company has now suspended the buy-back program in order to preserve capital for the restructuring. The likely result would be that shareholders would end up with a smaller BDC paying a dividend; and an asset manager with significant loss carryforwards to shield it from tax, trading at a discount to NAV.
The announcement of the eventual restructuring caused a two-dollar pop in the stock price, before it slipped again. Of more immediate impact on the company, and a negative, is the decision by S&P and Russell to remove BDCs from their indexes. The move is because of an idiotic SEC rule that requires fund managers to add any BDC management fees to their own fees when publishing their fee ratios. (Similar vehicles such as REITs are exempt from this rule.) S&P has already made the move, with Russell following by saying they would remove BDCs in June if the SEC did not change the rule before that.
So BDCs all fell sharply. The sell-off in ACAS has been overdone but that, combined with the positive development on a restructuring, gives us an opportunity to buy. At the current price, ACAS is trading at a 23% discount to NAV, with low leverage (13% debt to assets), and multiple opportunities for the NAV to increase, particularly from realizing value at its European unit.
Adrian Day, Adrian Day’s Global Analyst, www.adriandayglobalanalyst.com, 410-224-8885, April 19, 2014