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On Tuesday, Fitch Ratings lifted its outlook on American Capital, Ltd. (ACAS - Analyst Report) to ‘Positive’ from ‘Stable’ as part of its review of six Business Development Companies (BDCs). The rating agency is impressed with American Capital’s first quarter 2012 performance.
American Capital’s steady earnings performance drove Fitch to provide a Positive Outlook.
Rationale Behind Upgrade
Fitch’s Positive outlook on American Capital reflects marked improvement in its core operating performance, lower non-accrual levels and reduced leverage. As of March 31, 2012, non-accrual loans were $178 million, representing 8.1% of total loans at fair value, down from $219 million of non-accrual loans.
The company also repaid securitized debt of $118 million and increased investments by $83 million, while strengthening its balance sheet in the quarter.
Over the coming quarters, Fitch anticipates American Capital’s leverage to remain below the peer-group average. Fitch further views that though the company has huge exposures to equity investments compared to its peers, half of those are related to the diverse portfolios of European Capital, Ltd. and American Capital, LLC.
Additionally, these portfolios are valued on the basis of management fees received from funds tied to the fixed capital. Therefore, investments in such portfolios reduce market risk.
Fitch also amended the recovery ratings for American Capital’s secured debt to 'RR1' from 'RR2'. Further, the debt and recovery ratings for unsecured debt have been raised to ‘B+/RR1' from 'B-/RR6', reflecting better creditors’ recovery prospects. Moreover, Fitch anticipates American Capital to repay remaining unsecured debt of $11 million when it will be due in August 2012.
Rating Action by Other Agencies
As of April 2012, American Capital received a ‘Stable’ outlook from Moody's Investors Service, the ratings arm of Moody's Corp. (MCO - Analyst Report). Moody’s affirmed the outlook based on the company’s strong asset coverage position following its debt restructuring initiatives.
Further, the rating affirmation reflects American Capital’s buoyancy during the crisis. Despite some of the regulatory uncertainties and intricate operating environment, the company maintained well-built liquidity profile, established earnings power and strong franchise.
Other BDCs under review by Fitch includes Apollo Investment Corporation (AINV - Snapshot Report), Ares Capital Corporation (ARCC - Snapshot Report), Fifth Street Finance Corp. (FSC - Snapshot Report), PennantPark Investment Corporation (PNNT - Snapshot Report) and Solar Capital Ltd. (SLRC - Snapshot Report). Fitch has reiterated the rating outlook for Apollo Investment at Negative, while the remaining BDCs were retained at Stable.
This rating upgradation will instill investors’ confidence on the stock, depicting creditworthiness of the company. Further, American Capital’s successful restructuring of debt provided it with sufficient operating flexibility. It also continues to derisk its balance sheet through a number of initiatives including repayment of debt. Moreover, the capital deployment by the company raises our hopes for an enhanced investor confidence.
Though the improved portfolio performance is expected to continue with economic recovery, we believe the lower top-line growth remains a headwind.
American Capital currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the stock.
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