On Tuesday, Fitch Ratings lifted its outlook on
American Capital, Ltd.
) 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.
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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,
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 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
Ares Capital Corporation
Fifth Street Finance Corp.
PennantPark Investment Corporation
Solar Capital Ltd.
). 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.