We are reiterating our 'Neutral' recommendation on
American Capital Ltd.
(
ACAS
), following a detailed analysis of the company's fundamentals in
light of the current economic environment. Also, the
restructuring efforts by the company have contriabuted to this
stance.
In February 2012, American Capital announced the divesture of its
portfolio company Aptara Inc., following the buyout of another
portfolio company - CIBT Solutions Inc. - in January. In
addition, the company is focusing on reducing risks from its
balance sheet through a number of initiatives, such as repayment
and restructuring of debt. We expect these restructuring
initiatives to significantly improve its finncials over time.
Moreover, American Capital continues to see strong liquidity in
its investment portfolio and is aiming to maximize the
shareholders' value through organic growth besides originating
new and attractive investments. Further, the company looks
forward to utilize opportunities in Europe as the latter goes
through some difficulties, particularly in the capital markets
and with respect to sovereign debt. Also, new investment
opportunities in the U.S. are expected to emerge at tandem with
an economic recovery.
American Capital remains an attractive pick for yield-seeking
investors. Earlier in the first-quarter of 2012, the company
extended its stock repurchases or dividend payments program,
initiated in 2011, through December 2013. Moreover, Fitch Ratings
lifted its outlook on American Capital to 'Positive' from
'Stable' - as part of its review of six Business Development
Companies - based on the company's steady earnings. The extension
of the new share buyback program as well as the rating upgrade by
Fitch raised our hopes for an enhanced investor confidence in the
company.
On the flip side, we believe that American Capital's earnings
continue to be affected by the spread between the interest rate
on investments and the interest rate at which it has borrowed
funds. An increase or decrease in interest rates could reduce the
spread between the investment rate and the borrowing rate,
thereby adversely affecting the overall profitability.
Over the past years, the negative developments in the financial
markets throughout the world have significantly impacted American
Capital. The global financial crisis limited the company's access
to the debt as well as equity markets and resulted in
considerable depreciation of its investment portfolio and
overleveraging of balance sheet.
In the current macroeconomic environment, mergers and
acquisitions were reduced, which adversely affected American
Capital's ability to continue generating additional liquidity
through the sale of portfolio investments. The company also
witnessed several payment defaults on its financial obligations.
Although these situations are slowly easing off, we do not expect
stability in the near term.
American Capital currently retains its Zacks #2 Rank, which
translates into a short-term Buy rating. One of its peers,
KCAP Financial, Inc.
(
KCAP
) retains a Zacks #1 Rank (Strong Buy).
AMER CAP LTD (ACAS): Free Stock Analysis
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KCAP FINL INC (KCAP): Free Stock Analysis
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