American Capital Ltd.’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 per share. The favorable outcome was due to a drop in operating expenses, though partially offset by a decline in interest and dividend income in the reported quarter.
Net loss for the quarter was $464 million, or $1.34 per share, significantly down from net income of $149 million or 43 cents per share in the prior-year quarter.
Performance in Detail
Total interest and dividend income for the quarter were $117 million, down 6% from $125 million in the prior-year quarter. The weighted average effective interest rate on the company's private finance debt investments as of September 30, 2011 was 10.3%, down 20 basis points at the end of the previous quarter. Fee income was down 24% year over year to $13 million.
Total operating income was $130 million, down 8% from $142 million in the prior-year quarter, attributed to lower fee income and interest and dividend income. Operating income also lagged the Zacks Consensus Estimate of $144 million.
Operating expenses plummeted 22% year over year to $65 million in the quarter, attributable to a decline in interest expenses and general and administrative expenses, partly offset by higher salaries, benefits and stock-based compensation expenses. Net realized investment income was $33 million for the quarter compared with a loss of $68 million in the prior-year quarter.
As of September 30, 2011, non-accrual loans were $173 million, representing 6.6% of total loans at fair value, down from $255 million of non-accrual loans, indicating 9.0% of total loans at fair value as of June 30, 2011.
Net asset value (NAV) per share came in at $11.92, down 9% or $1.24 per share from NAV of $13.16 per share as of June 30, 2011. In spite of the considerable slump in the capital markets in the quarter, affecting valuations of investment portfolio, the overall underlying performance of the company’s portfolio companies continued to be positive. Management anticipates an improvement in the portfolio along with an economic recovery while expecting to post a growth in book value.
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.
Share Repurchase and Dividend Update
During the quarter, American Capital repurchased common stock worth $75 million from open market. Common stock of 9.1 million shares has been repurchased at an average price of $8.21 per share.
Since August, out of total 9.1 million shares, 4.9 million shares have been repurchased at an average price of $8.12 per share. Further, from September till date, 4.23 million shares have been repurchased at an average price of $8.31 per share.
Concurrently, American Capital foresees additional stock purchases or dividend payments by the end of December 2012 and announced the program for the same.
Based on certain factors, the new program has been adopted. To begin with the new program, American Capital has planned to keep aside certain amount either for stock repurchases or dividend payments, quarterly. The quarterly amount will depend upon the company’s net cash from operating activities in the prior quarter. Further, cash and cash equivalents in hand, debt position, investment plans and operational issues will also be the determining factors for the quarterly amount.
Last but not the least, the current trading price of American Capital's common stock, financial liquidity and ongoing economic conditions will also be considered.
According to the company’s plan, if the price of American Capital's common stock trade at a discount to the net asset value of shares, then the company will opt for share repurchase. On the flip side, if the price of American Capital's common stock trade at a premium to the net asset value of shares, then the company will opt for dividend payments.
The authorization of the new share buyback program and resumption of dividend payments raise our hopes for enhanced investor confidence.
Major competitors of American Capital, Fortress Investment Group LLC (FIG - Snapshot Report) and Ares Capital Corporation (ARCC - Snapshot Report) , are scheduled to release their earnings for the third quarter of 2011 on November 3 and November 8, respectively.
In October, American Capital has announced its plan to invest $15 million in order to support BMO Capital Markets' syndication of $100 million Second Lien Term Loan financing. The loan financing will aid Teachers' Private Capital to purchase the majority stake of Flexera Software Inc.
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 while boosting 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.
In August, American Capital announced that it had 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’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 its Zacks #2 Rank, which translates into a short-term (1−3 months) “Buy” rating.