Thursday, June 03, 2010

American Capital (NASDAQ:ACAS): Concerns of Bankruptcy Filing Emerge, Downgrading To Sell - Stifel

Stifel is downgrading American Capital (NASDAQ:ACAS) to Sell from Hold due to their belief that the company will file bankruptcy based on disappointing bondholder vote numbers released yesterday. This could result in negative headline risk and increased risk that the terms of the transaction could become less favorable for equity shareholders.

Stifel's Take: ACAS released preliminary bondholder vote totals, which, in their view, were well below the required threshold to reach a restructuring agreement outside of bankruptcy. Firm believes the probability of bankruptcy has risen significantly, which could result in a $3-4 stock price as ACAS restructures its debt agreement in bankruptcy. While they believe the long-term value of ACAS post bankruptcy is still in the $5-$6 range, they believe the risks associated with navigating the bankruptcy process will likely pressure the stock’s valuation near term. In addition, given the large disagreement from public shareholders it is possible the terms of the debt could change in bankruptcy becoming less favorable for equity shareholders and potentially lower their long-term value estimate. As a result, Stifel believes the risk is meaningfully to the downside in the near term and we recommend investors Sell ACAS shares.

Event Summary: Yesterday, ACAS announced the initial bondholder vote on the restructuring of its debt and extended the solicitation period from June 1 to June 8. ACAS required bondholders to vote on two issues: 1) the restructuring of current bonds into the new debt structure (called the “Exchange Offer”); and 2) should the exchange offer be rejected would the bondholders agree to the same offer in bankruptcy court (called the “Standby Plan”).

The reason for the two votes is that the required vote for approval is significantly lower in bankruptcy than outside of bankruptcy.

In order to reach the agreement outside of bankruptcy the required vote is as follows:
1. 100% approval from the $1.4 billion of bank-owned debt.
2. 100% approval from the $400 million of private debt.
3. 85% approval from the $550 million of public debt.

Inside of bankruptcy the required approval vote is:
1. 66% approval from the $1.4 billion of bank-owned debt.
2. 66% approval from the $400 million of private debt.
3. 66% approval from the $550 million of public debt.

Based on the current public debt holder vote of only 7% approval with 77% of votes cast, there is no way the current plan will be approved outside of bankruptcy unless ACAS is able to get several large public bondholders to change their vote or ACAS agrees to change the terms of the agreement to make it more favorable to the bondholders, which would likely require another round of vote solicitations.

Notablecalls: Ouch, this looks like it will hurt ACAS today. The bondholders have little incentive to give anything to the equity holders & and was manifested by yesterday's late vote.

With Stifel calling for $3-4/share level, I think the stock will trade down towards $4.40-$4.50 today.

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