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Analyst Blog

Yesterday, American Capital Ltd. has announced an investment of $10 million in order to support RBC Capital Markets Corp.’s syndication of $75 million Second Lien Term Loan financing. The loan financing will aid Permira Advisors LLC to acquire Renaissance Learning Inc.

Renaissance Learning provides school improvement and student assessment programs, which are technology based for K-12 schools. The company's programs are conducted in more than 70,000 schools across the U.S. These programs are designed to increase speed of learning, thereby improving students’ test scores.

American Capital is a publicly traded private equity firm and global asset manager. It directly and through its asset management business, initiates, underwrites and manages investments in middle market private equity, leveraged finance, real estate and structured products.

Last month, American Capital also announced its plan to invest $15 million to support BMO Capital Markets' syndication of $100 million Second Lien Term Loan financing, which helped Teachers' Private Capital to purchase majority of stake of Flexera Software Inc.

Moreover, in August, American Capital announced that it supported the merger of Survey Sampling International and Opinionology Inc. through mezzanine financing. The company provided $50 million of Senior Subordinated Note financing for the deal.

American Capital has the capability to provide flexible financing solutions ranging from a variety of senior debt and uni-tranche to mezzanine and equity co-investments. Further, the company provides multi-currency funding with underwriting platform globally and facilitating growth of portfolio companies. Such benefits provided by American Capital urge private equity clients to consider it as an investment partner, which in turn, helps in the growth of the company.

Earnings Recap

American Capital’s third-quarter 2011 operating income of 19 cents per share fell below the Zacks Consensus Estimate by a penny. However, the results outpaced the prior-year quarter’s earnings by 2 cents. The favorable outcome was due to a drop in operating expenses, partially offset by a decline in interest and dividend income.

American Capital’s asset coverage ratio decreased to 364% from 376% in the prior quarter. The company repaid securitization debt of $123 million, strengthening its balance sheet.

American Capital’s successful restructuring of debt provided it with sufficient operating flexibility and the company also continues to derisk its balance sheet through a number of initiatives including repayment of debt. However, we believe limited accessibility to capital and increased funding costs have weakened the company’s strategic position in its sector. Moreover, the improved credit quality of the portfolio is expected to continue along with the economic recovery.

American Capital currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining a long-term Neutral recommendation on the stock. The major competitor of American Capital, Ares Capital Corporation also retains a Zacks #3 Rank.

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