ACAS investments of $11.5bn are all high-risk assets - reflecting the nature of its business. With this in mind it is worth noting that it has book equity of equity of $6.5bn and a similar Market Cap of $6.3bn - implying that the underlying assets are equal to their book value. This appears to be a reasonable position in normal conditions. However one needs to take a closer look at the investment portfolio and stress test it with some conservative devaluation/impairment rates.
Investment Mix Present Impairment Loss
Senior debt 3,577 5% 179
Sub debt 2,496 20% 499
Common equity 2,335 25% 584
Preferred equity 1,771 15% 266
CMBS securities 725 15% 109
CDO securities 265 25% 66
Equity warrants 334 25% 83
Totals 11,500 1,785
Note that this implies a write-down in asset value of $1.9bn which could occur over the next 12 months. However, given most of its assets are Level 3 and this is creating significant discomfort amongst investors (ie there is no market so the Company can determine the values at its own discretion based on their own internal models).
The Company has reduced its considerable liquidity challenges prior to the recent credit crunch by recently renegotiating a $1.815bn revolving credit facility with its banks (read unhappy banks!).
However, unfortunately ACAS has borrowed $2.45bn from a number of special purpose securitisation subsidiaries under the four ACAS Business Loan LLC Trusts. Under these consolidated subsidiaries, ACAS sells some of its assets to the vehicle which then slices-and-dices the assets into tranches and sells the highly-rated tranches to investors. HOWEVER ACAS retains the very high risk unrated tranches (read toxic waste). It is my view that this liability of $2.45bn is predominantly invested in $2.45bn of toxic waste which is benignly sitting on ASAC's balance sheet.
However, even though institutional investors have reduced holdings in ACAS retail investors remain blinded by the high yield and will continue to naively support this stock until there is a major writedown. This writedown will occur if and when ACAS mark their assets to market and not to model.
Expect to see the share price halve to $20 when it marks to market.
$30.25 (06/11/08)
