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American Capital Senior Floating: Liquidation Sale !

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NEWS/ANALYSIS/VIEWS

A few weeks ago when the BDC Reporter was reviewing American Capital Senior Floating‘s (ACSF) IVQ 2017 results, we spent a good deal of time speculating about the future of the smaller BDC – an orphan fund that Ares Capital (ARCC) picked up along with its much larger sister BDC American Capital and which tellingly, as we’ll see, was never renamed. This existential discussion was based on one enigmatic comment made by the Investment Advisor on the Conference Call. If you’d not attended the Call or read the transcript you’d never have known that ACSF was asking itself: “What are we doing here” ?

A Chorus Of Suggestions

We were not the only observers to notice there was an unusual tone to the self questioning at ACSF. A couple of analysts on the Conference Call asked if the BDC might get liquidated by order of the Board (effectively by fiat of ARCC). No direct answer was given – but we received the strong impression –  as we mention in the article – that the BDC’s insiders were not contemplating that action. Other analysts made other corporate governance suggestions which the Investment Advisor wisely did not respond to.

Here’s part of what we wrote:

Other alternatives were discussed by investors on the Conference Call, including selling stock at a modest discount to book (which would be difficult at the moment with a 16% discount in the price vs book).

Another investor suggested getting out of CLO investing due to the high volatility involved.

As you’d expect the Investment Advisor was patient but made clear that there was no serious consideration being given to liquidating the business; or doubling its size as one person suggested or dropping out of CLO investing.

The mystery remains as to what measures the Investment Advisor and the Board are considering to “scale” the BDC.

Choices

Later on we summed up as follows:

What we cannot ascertain is what actions the Investment Advisor might take to remedy the situation and boost its earnings under the guise of scaling the operation.

A sale to a third party is unlikely (but not impossible). A liquidation is very unlikely. A change in the business model also unlikely.

However, a sale of ACSF to ARCC would generate higher management fees and given the respective sizes of the two BDCs result in very few new shares being issued by the latter.

However, we’re just guessing. There are numerous ways to skin this cat.

Wrong Direction

We also worried that all this introspection by the Investment Advisor was prelude to a dividend cut.

Obviously – with the blinding light of hindsight – that was not the case.

On the other hand, an inability to “earn” the distribution might have been a factor.

We note that the IQ 2018 results show ACSF earning $0.22 per share in Net Investment Income versus a quarterly dividend liability of $0.29.

We can now see that we were right to read the tea leaves at ACSF but our powers of prognostication – or reading between the lines – were not working.

We know see that liquidating the BDC was the Investment Advisor’s goal – or has become so in the intervening weeks.

In an SEC filing on May 10, 2018 ACSF announced its intention to liquidate the portfolio – and the BDC – and return 97%-99% of book value to shareholders.

As of March 31, 2018 the book value per share was $13.11.

This is spelled out in a just published Proxy:

If the Plan is approved, the Company and the Adviser will undertake the following, among other things:

promptly winding up the Company’s affairs, collecting the Company’s assets and paying or providing for the Company’s liabilities (including contingent liabilities); 

selling all or substantially all of the Company’s assets, including any and all property of the Company at public or private sale; 

making one or more liquidating distributions to the Company’s stockholders after the Company sells all or substantially all of its assets, pays all of its known liabilities and provides for contingent liabilities; and 

dissolving the Company, all in accordance with the Plan.

Saying Goodbye

Here is the statement made by ACSF’s CEO in its earnings press release about this subject:

“As we have discussed with stockholders, the Company lacks scale and has limited opportunities for growth in earnings due to challenging conditions in the liquid credit market. ACSF also suffers from an inability to accretively raise additional equity capital to grow due to the stock trading at a significant discount to its net asset value,” said Kevin Braddish, President and Chief Executive Officer of ACSF. “Therefore, we have explored various strategic alternatives and concluded that a managed liquidation and distribution of the company’s net assets to stockholders provides the most attractive option to enhance stockholder value.”

The BDC will still pay three more previously announced monthly distributions through June 2018.

After that date, the issue is up in the air, but we’d guess that’s a No.

Cat Skinning Options

Apparently other options were considered (including a sale of the BDC).

The Proxy, though, suggests the Board preferred certainty of close over a potentially higher value from a sale:

After considering the various strategic alternatives, the Board determined that the estimated aggregate distribution to be received by the Company stockholders in connection with the sale of all or substantially all of the Company’s assets and a dissolution of the Company, pursuant to the Plan, would likely maximize stockholder value within a reasonable period of time and with greater certainty than if the Company were to pursue other strategic alternatives.

Aligned How ?

As often is the case where BDCs are concerned the interests of the insiders (the Board, the senior officers of the Investment Advisor and ARCC) differ from those of the shareholders.

By way of illustration, none of the officers of the Investment Advisor own any shares in ACSF, not even its designated Board representatives, as shown in the Proxy on page 6.

The so called 3  “independent” directors own only about 20,000 shares in aggregate.

Whether shareholders could have received more by a sale will not have affected the insiders in a material way.

The Uncomfortable Truth

We would guess, though, that the sale of the assets and the management agreement to a third party might have resulted in an overall price materially higher than achieved in a liquidation.

A BDC has value in two ways: the net value of assets and the fee earning capacity that another manager might be prepared to pay a premium for.

See how under-performing Triangle Capital (TCAP) was sold in two portions: the assets to Benefit Street and the management contract to Barings, LLC.

In this case ACSF has $130mn of permanent capital that will be returned to shareholders, rather than sold on to another manager for a higher price.

Not Bothered

Maybe ARCC – with many other fish to fry – did not want to spend the time on the dog and pony show involved for what is a small transaction in its universe.

Or, the asset manager – accustomed to being a buyer did not relish having its peers and rivals climbing all through one of its funds, even the runt of the litter.

Chances Are

Now shareholders will have to decide if to approve the liquidation.

We doubt that there will be any material opposition.

ACSF has only rarely traded near book value and if the Investment Advisor has lost enthusiasm for the BDC, why would shareholders feel differently ?

Perhaps some value has been left on the table, but shareholders are unlikely to demur sufficiently to alter ARCC’s decided course of action.


INVESTMENT DISCLOSURE

We purchased positions in ACSF common stock upon hearing the news at a price of $12.29.

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