There's Light at the End of American Capital's Tunnel

By Jordan

Like it? No, the market loved it.

American Capital Ltd.'s third-quarter report was met with joy from its shareholders, who sent its shares up more than 5% in after-market trading Wednesday. In all, it was a good quarter, full of developments that put it closer to the day it completes its long-awaited spinoff.

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Hey, it's making money!American Capital was always easy to criticize. It's always been asset-rich and income-poor in an industry that's all about income.

That's starting to change. Thanks to a portfolio boosted by $2.2 billion in senior floating-rate loans -- loans that pay regular cash interest -- it generated $108 million in pre-tax operating income this quarter, or $0.40 per share. As the company points out, that equates to a return on equity of about 8% per year.

Eight percent on equity isn't spectacular, but it's pretty good for a company that traded at a massive 37% discount to its net asset value before the earnings report.

There were, of course, some things that didn't go American Capital's way. Net operating income doesn't include capital gains or losses on the portfolio. Include those, and American Capital actually lost money to the tune of $0.14 per share. Weighing on its results were a few investments gone bad, plus an unrealized loss on the value of American Capital Asset Management, or ACAM.

Its recently re-enacted buyback plan helped paper over the decline. Share repurchases added $0.23 per share to net asset value this quarter, bringing NAV to $20.44 per share.

Speaking of the asset manager...ACAM's value dropped because of falling equity in American Capital Agency and American Capital Mortgage , mortgage REITs from which it earns management fees. Those two have begun buying back stock once again, reducing the equity on which ACAM earns management fees.

It seems likely that the mREITs, which have traded at 20%-plus discounts to NAV, will probably shrink before they grow. But where mREITs are simply out of favor, other strategies have proven to be bountiful asset-gatherers.

The company reported that it raised another $496 million CLO under management, in addition to a $448 million CLO equity fund after the quarter ended. Importantly, the CLO equity fund is buying $300 million of its assets from American Capital's balance sheet. It's a win-win -- more cash for the company and more fee-earning assets for the asset manager.

What the future holdsThe company is well on its way toward a spinoff that will separate American Capital Asset Management from American Capital Income (the new BDC that will retain most of the company's existing investment assets). The earnings release notes that the company received a private-letter ruling indicating that its spinoff would be tax-free -- an important development.

American Capital Ltd. CEO Malon Wilkus said the company intends to provide "financial forecasts and related assumptions for American Capital and American Capital Income, reflecting the spin-off and American Capital's continuing operation as an asset management company managing our existing funds under management and American Capital Income."

"Bring it on," says the collective American Capital shareholder base.

It was a good quarter. The income is there. The assets are there. Now all that's missing is the execution. American Capital, get this spinoff done.

The article There's Light at the End of American Capital's Tunnel originally appeared on

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