European Capital bullish on market woes

The listed debt and equity provider has reported strong quarterly results and increased its dividend expectations, arguing that its “one stop buyout” model gives it a crucial advantage in the current market.

European Capital, the UK-listed group that provides debt and equity for mid-market transactions, said its business model gave it a big advantage in the current climate, after reporting increased earnings in the second quarter and predicting a higher-than-expected dividend.

The group said it would pay out €0.13 per share or €1.9 million, after second quarter earnings jumped to €25.7 million ($34.7 million) – up from €2.3 million in the same period last year. This was a 30 percent increase on the previous quarter, and means the firm is now expecting its total dividend for 2007 to be 37 percent higher than predicted. Net ordinary income was also well up on the previous year, from €0.03 per share to €0.27 per share.

European Capital, an affiliate of US group American Capital, completed a successful flotation on the London Stock Exchange in May, despite market volatility. It sold 14.6 million shares at €9.84, generating proceeds of €144 million and valuing the business at more than €1 billion.  However its share price has suffered like many financial institutions in recent weeks, dipping below €8.

American Capital chief financial officer John Erickson said the firm was well placed to profit from the current credit market woes. “As interest rate spreads widen, our interest income and our spread income generally grows, which allows us to increase our net ordinary income and our dividends,” he said.

European Capital’s trademarked “one stop buyout” approach allows it to fund mid-market deals by providing equity, mezzanine or senior debt. Erickson said more expensive credit would hit valuation multiples, slowing growth in the equity portfolio, but increased income from lending would still allow it to generate “excellent returns”.

President Ira Wagner was equally bullish, saying the current credit and economic environment was “ideal for us to continue our growth,” since the group had a “much better capitalised balance sheet than many financial institutions.” While some rivals had debt to equity ratios as high as 4 to 1, European Capital’s was just 0.6 to 1, he said.

American Capital senior vice president Tom McHale added that the group as a whole was not exposed to the worst-affected areas of the credit markets. “We have no investments in sub prime residential mortgages.  Zero percent of our portfolio today is in CMBS investments.  Less than 0.5% of our portfolio assets are in CDOs.  We have few covenant-lite loans.  We are very well capitalised and have a portfolio that is performing in a market where opportunities have just become far more profitable.”

European Capital, which has recently opened local offices in Frankfurt and Madrid to boost dealflow on the continent, said it put €700 million to work in the quarter. Since its foundation two years ago, it has now invested €2.3 billion of capital, with its equity investments yielding an internal rate of return of 27 percent to date.

The group’s shares rebounded slightly this morning on news of the dividend, trading up 2.8 percent at €7.62 at 9:48 BST.