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American Capital earnings up ahead of BDC spin-out

Analysts rate the proposed BDC spin-out overweight, saying they see the potential restructuring unlocking significant shareholder value.

Earnings at American Capital (ACAS) grew to $108 million, or 40 cents net operating income per share, in the third quarter, a 67 percent rise on the same period last year, according to results for the three months to 30 September 2015.

Announcing its results for the three months to 30 September, the firm said net asset value (NAV) increased by 9 cents per share over the third quarter to $20.44. Overall NAV has grown 17 percent since the fourth quarter of 2009.

The Nasdaq-listed asset manager also issued a three-year forecast ahead of the formalisation of a long-anticipated spin-out of its business development (BDC) company, American Capital Income.

ACAS has received initial board approval for the plan and issued a Securities and Exchange Commission proxy statement. 

Discussing the earnings, management said they envisaged three strategies for the business – REITs, BDCs and private funds – in their goal to become a leader in alternative asset management.

In the public BDC side, upon approval, $6 billion will be split between American Capital Income ($5.7 billion) and American Capital Senior Floating ($274 million), as of 30 September.

ACAS also plans to double its private funds business to $8.8 billion by year three of its forecast. It currently has around $4.6 billion in private funds, with $3.2 billion in eight CLOs and a $448 million CLO equity fund. The firm also had $138 million in its European Capital Private Debt fund and $12 million in its UK SME Debt fund.

Analysts reacted well to the results and news of the spin-out. 

Analysts at Wells Fargo Securities Equity Research Department said: “There continue to be several paths to meaningful upside in this name [ACAS], including stock repurchase/liquidation, spin-out, and post spin-out M&A. While this name has been a value trap for some time, we believe that the catalyst for change is here as the recently released spin-out proxy came generally in line with expectations and continues to be supported by investors.”

Management has demonstrated its commitment to share buybacks with $135 million repurchased in the third quarter, they said. 

One area of concern within the plan, however, was a proposal which could ultimately be voted down, to grant management 8 percent of ACAS post-spinout, the analysts added.

However, they rated the BDC overweight “based on our belief that a potential restructuring could unlock significant shareholder value”.

ACAS had $1.5 billion worth of sponsor finance assets as of 30 September comprised of $1.25 billion in debt and $208 million in equity. Senior floating rate loans accounted for $2.2 billion in fair value.

The asset management division had $1.1 billion worth of debt but mainly equity investments. It also oversees $15 billion in third-party earning assets under management (AUM), which increased by $438 million net of realisations from the second quarter. In total, the group had $72 billion of third-party AUM and $21 billion of pro forma fee earning AUM, as of 30 September.