American Capital Ltd.
) reported second-quarter 2013 operating income of 16 cents per
share, lagging the Zacks Consensus Estimate by 9 cents. Moreover,
the results compared unfavorably with the prior-year quarter's
earnings of 58 cents per share.
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Lower-than-expected results were attributable to lower top line,
followed by a rise in non-accrual loans. Further, the low
interest environment during the quarter was a negative. However,
new investments and reduction of debt acted as the positives.
Net operating income for the quarter came in at $49 million,
substantially down from $194 million reported in the prior-year
quarter. Net earnings were reported at $21 million, or 7 cents
per share, against $237 million or 71 cents per share in the
Performance in Detail
Total operating revenue was $130 million in the quarter, down 20%
from $163 million in the prior-year quarter, due to lower
interest and dividend income. Additionally, operating revenue was
below the Zacks Consensus Estimate of $139 million.
In the quarter under review, total interest and dividend income
was $118 million, down 22% year over year. The weighted average
effective interest rate on the company's debt investments as of
Jun 30, 2013, was 10.4%, decreasing 20 basis points from the end
of the prior quarter. However, fee income remained stable at $12
million compared with the prior-year quarter.
Operating expenses decreased 2% year over year to $65 million.
The decline in interest expenses was partially offset by elevated
salaries, benefits and stock-based compensation and higher
general and administrative expenses.
As of Jun 30, 2013, non-accrual loans were $245 million,
representing 14.2% of total loans at fair value, up from $208
million of non-accrual loans, indicating 11.3% of total loans at
fair value, as of Mar 31, 2013. The increase in non-accrual loans
were mainly driven by investments in three portfolio companies by
Net asset value (NAV) per share came in at $19.28 in the quarter,
up 1.0% or 24 cents per share sequentially. In spite of the
volatile capital markets affecting valuations of the investment
portfolio in the quarter, the overall underlying performance of
American Capital's portfolio companies continue to remain a
positive. Management not only anticipates an improvement in the
portfolio along with an economic recovery but also expects to
post a better book value.
American Capital's asset coverage ratio improved substantially to
1,009% from 956% in the prior quarter and 661% in the prior-year
quarter. The company repaid securitized debt of $49 million in
the quarter under review and increased investments by $50 million
while strengthening its balance sheet. Moreover, the company
recorded $150 million of cash proceeds from realizations of
portfolio investments during the quarter.
Share Repurchase Update
During second-quarter 2013, American Capital repurchased 9.1
million shares worth $125 million, at an average price of $13.77
per share. Since the beginning of the new repurchase program,
adopted in Sep 2011, the company repurchased 70.4 million shares
of common stock for $748 million at an average price of $10.63
American Capital's successful restructuring of debt in 2012
empowered it with sufficient operating flexibility. Moreover, the
capital deployment by the company is expected to renew investors'
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 the low interest rate
environment and global cues might act as headwinds in the
Shares of American Capital currently carry a Zacks Rank #4
(Sell). However, some companies in the same sector that are worth
KCAP Financial Inc.
Hercules Technology Growth Capital, Inc.
MCG Capital Corporation
). All the 3 companies carry a Zacks Rank #2 (Buy).