This post is by WSJ.com: Private Equity Beat
from WSJ.com: Private Equity Beat
Click here to view on the original site: Original Post
American Capital Ltd. last night reported a big second quarter loss and said it remains in default on some $2.3 billion of debt. It also said it’s cut some 44% of its work force since March 31, 2008.
The business development company didn’t provide too many details on talks with its lenders in its statement. We’re live blogging the conference call, which starts at 11 a.m., to see what else we can learn.
11:03 a.m.: We are still waiting for things to get under way, and in the meantime are finding the saxophone-heavy hold music oddly peaceful.
11:04 a.m.: Here we go with the disclaimers.
11:06: Malon Wilkus is going through the slide show that accompanies the conference call. So far it is a repeat of information available in the press release that we’ve linked to above. You can view the slide show here.
11:10: “I can assure you that we are focused on resolving the defaults with each of our unsecured creditor groups,” Wilkus says.
11:11: The company has 7.2% non-accruing loans at fair value.
11:12: Wilkus is going through realizations in the second quarter, of which it had $125 million. Of that, $52 million came from the sale of portfolio company equity investments. It had $308 million in realized losses, of which $196 million came from the sale of Consolidated Bedding.
11:15: Wilkus says spreads in the middle market are still widening, in contrast to most other markets.
11:16: On the topic of the forthcoming dividend, it will increase total shares outstanding by about 30%.
11:18: The firm’s European Capital affiliate has $700 million net asset value, but is currently assigned a fair value of $97 million.
11:19: We expect economic growth to start happening in the second half, but we do believe that growth will be slow. American Capital remains focused on resolving its credit defaults, providing support to its portfolio companies, and improving its operating efficiencies.
11:20: The Q&A is starting. Can you share details on a resolution to the covenant breaches? Wilkus says, “We’re unsecured on all our credit facilities that we’re in default of. We really are not able to provide any more color…I can tell you that we are working hard on our effort to resolve our credit defaults.” This is less forthcoming than he was in the first quarter conference call, for sure.
11:24: Does it feel like Ebitda has bottomed? “We do feel the economy is improving, but we aren’t going to forecast whether or not our middle-market portfolio of companies are going to be improving or not with respect to their Ebitda in the next quarter or the quarter after. We are going to be particularly cautious about trying to make any forecast.” Without a doubt there was a decline in the middle-market in the second quarter in the middle market and in American Capital’s portfolio. However, if the economy is indeed improving it will flow to the middle market.
11:27: Wilkus has received a broad-ranging question about life, the universe and everything. Even though the firm has exceeded a 1-to-1 debt to equity ratio that limits it from making new investments, it is still able to make some new investments, Wilkus says. The firm is investing in its portfolio and believes it has enough liquidity to meet the needs of its portfolio, both in difficult situations and to grow. Once it resolves the credit default situation, it believes it will be in a position to raise new capital and start deploying it.
11:30: How about current headcount? “We’ve both reduced the organization almost in half and also cut compensation for the remaining employees substantially,” Wilkus says. They’ve eliminated origination capability. What remains is the ability to manage existing portfolio companies. “If we got back into a mode of reinvesting we certainly could do a modest amount of additional investing,” Wilkus says.
11:35: There is talk about securitizations; it doesn’t seem to have much impact on the firm’s bottom line.
11:38: Wilkus is getting pushed on the difference between his comments on debt now and in the past. He says again, “We feel like we are unable to comment on our negotiations.” In fact, American Capital seems to have developed a general aversion to giving forecasts…
11:41: Somebody reading this blog post has just left a very good question in the comments: could the lenders liquidate the firm?
11:43: Forgive us. They’re discussing excise taxes. Our eyes have glazed over.
11:45 There’s some discussion of how long the firm will be able to pay its dividend in 90% stock. American Capital says it wouldn’t be surprised if that gets extended into next year.
11:47: Part of the challenge of moving quickly to resolve its loan defaults is the number of lenders involved – some 100, if I heard that right…
11:50: There is a question on what happens if the company falls below one times Ebitda to interest expense. Does it breach additional loan covenants? “There isn’t some kind of piling on that occurs if you break other covenants,” Wilkus says.
11:53: Someone asks about the mix of senior debt, sub debt, et. You can find that here.
11:56: “We’ve had $1 billion of liquidity in the last 12 months,” Wilkus says. “Those are large numbers relative to our interest payments. They’re even large numbers relative to the amount of principal we have due this year. He thinks the creditors appreciate the high degree of liquidity from the portfolio and the quality of the portfolio. The firm could get more liquidity if it wanted to take discounts to fair value, but it doesn’t want to do that, and it doesn’t think its creditors want it to do that either.
11:58: As an example of not selling at bad prices, the firm points to People Media. This company was up for sale in the 4Q of last year, but got a bad offer thanks to the environment, which American Capital declined. It reengaged the next quarter and “exited with a very fine outcome.” Here’s our story on that sale.
12:05: We’re in hour two here…on the topic of a possible reverse stock split, “That’s not something we ever want to do. We just want to have the capability of doing it if it becomes appropriate. That mostly would be driven by our stock price and the rules with respect to Nasdaq.” This seems an appropriate point to give a stock price update: looks like it’s trading at right around $3, down around 17%.
12:08: An analyst says he doesn’t understand why the market is pricing the stock at $3, given that the liquidation value as of June 30 should be at around $10. It comes down to the debt default, Wilkus says. That gives the creditors certain rights. “This is not entirely in our control. It’s in part in the hands of our creditors, because they could exercise their rights if they chose to do so. We feel that we’re working in a co-operative manner with our creditors.” So, the analyst says, once you come out of default, what is my risk? Wilkus points to a number of other companies similar to American Capital that are also trading below their net asset values. He says that’s the world we’re living in at the moment.