American Capital Ltd.
) reported third quarter 2012 operating income of 22 cents per
share, lagging the Zacks Consensus Estimate by a penny. However,
the results compared favorably with the prior-year quarter's
earnings of 19 cents per share.
The favorable outcome was attributable to top-line growth,
followed by decreased operating expenses reflecting better
expense management. Moreover, new investments and reduction of
debt acted as positives. Yet, increase in non-accrual loans was a
negative for the quarter.
Net operating income for the quarter came in at $71 million, up
from $65 million reported in the prior-year quarter. Net earnings
were reported at $196 million, or 60 cents per share, against a
net loss of $464 million or $1.34 per share in the prior-year
Performance in Detail
Total operating income was $154 million in the quarter, up 18%
from $130 million in the prior-year quarter, due to higher
interest and dividend income. Additionally, operating income
surpassed the Zacks Consensus Estimate of $142 million.
In the quarter under review, total interest and dividend income
was $142 million, up 21% from $117 million in the prior-year
quarter. The weighted average effective interest rate on the
company's debt investments as of September 30, 2012, was 11.1%,
increasing 10 basis points from the end of the previous quarter.
Yet, fee income dipped 8% year over year to $12 million.
Operating expenses declined 2% year over year to $64 million. The
fall in expenses was a result of significant decline in interest
expenses, partially offset by elevated salaries, benefits and
stock-based compensation and higher general and administrative
As of September 30, 2012, non-accrual loans were $252 million,
representing 12.5% of total loans at fair value, up from $243
million of non-accrual loans, indicating 12.3% of total loans at
fair value, as of June 30, 2012.
Net asset value (NAV) per share came in at $17.39 in the quarter,
up 5% or 77 cents per share sequentially. In spite of the
volatile capital markets affecting valuations of investment
portfolio in the quarter, the overall underlying performance of
American Capital's portfolio companies continue to remain
positive. Management not only anticipates an improvement in the
portfolio along with an economic recovery, but also expects to
post an enhanced book value.
American Capital's asset coverage ratio improved substantially to
769% from 661% in the prior quarter. The company repaid
securitized debt of $150 million and increased investments by $6
million while strengthening its balance sheet. Moreover, the
company recorded $136 million of cash proceeds from realizations
of portfolio investments.
Share Repurchase and Dividend Update
During the third quarter of 2012, American Capital repurchased
11.4 million shares worth $125 million, at an average price of
$10.99 per share. Since the beginning of the new repurchase
program, adopted last year, the company repurchased 43.6 million
shares of common stock for $392 million at an average price of
$9.00 per share.
Developments During the Quarter
In August 2012, American Capital announced the completion of the
refinancing of its total recourse debt. The secured debt was
being refinanced by a new 4-year $600 million institutional
term-loan facility with a LIBOR floor of 1.25%.
American Capital also obtained a new 4-year $250 million senior
secured revolving credit facility. This credit facility included
a 3-year revolving period and has the option of expanding up to
The new term-loan facility was priced at LIBOR plus 4.25%, while
the revolving credit facility was priced at LIBOR plus 3.75%.
Further, the term loan facility has a first lien on some
non-securitized assets of American Capital, while revolving
credit facility has a first lien on some non-securitized loan
assets of the company.
Owing to the strong demand along with the support of a wide range
of debt investors, the new loan facility acted as a positive for
the company. Moreover, these transactions augmented the company's
capital position and reduced interest expenses.
American Capital's successful restructuring of debt empowered it
with sufficient operating flexibility. Moreover, the capital
deployment by the company raises our hopes for an enhanced
The company is also capable of providing flexible financing
solutions ranging from a variety of senior debt and uni-tranche
to mezzanine and equity co-investments. Further, American Capital
provides multi-currency funding with underwriting platform
globally, thereby boosting growth of its portfolio companies.
Such benefits provided by the company compel private equity
clients to consider it as an investment partner, which in turn,
helps it diversify.
Though the improved portfolio performance is expected to continue
with the economic recovery, we believe low interest rate
environment and global cues might act as headwinds in the
Shares of American Capital currently retain a Zacks #3 Rank,
which translates into a short-term (1−3 months) Hold rating.
Considering the fundamentals, we also maintain a 'Neutral'
recommendation on the stock.
Among American Capital's peers,
Ares Capital Corporation
) is expected to release its third quarter 2012 results on
November 5, 2012.
AMER CAP LTD (ACAS): Free Stock Analysis
ARES CAP CP (ARCC): Free Stock Analysis
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