American Capital Q2 2008 Earnings Update

A brief rundown of American Capital's (ACAS) Q2 earnings report (all figures US$ unless noted):

• After last quarter’s negative cash figure (-$10M OCF), Q2 saw several encouraging developments on the cash flow statement. ACAS is once again cash flow positive, generating $141M OCF during the 1st 6 months. This is a 26% decline from last year but with the difficult environment we’re facing, that might be expected. Another possible positive sign is the decline in accrued PIK income in Q2 2008, down to 25% of net operating income — compare that to the 6 month ratio of 32% of NOI. However, collection of PIK income was markedly lower for the quarter and basically flat for the 6 months. So it is unclear to me whether this new trend is a result of better company performance, stronger collection of accrued PIK or possible restructuring in some portfolio companies. Parsing through the 10Q, I saw a handful of companies that seemed to have restructured their capital base and possibly, that could have led to the numbers we’re seeing.
• The company’s balance sheet held up better this quarter than in Q1. Net asset value [NAV] was marked down $264M, mainly due to devaluation in their private equity portfolio as comp multiples compress and lower cash flows. The debt-equity ratio is hovering around 0.8, leaving roughly $1.1B in debt capital available to the company. The company listed $455M of investments at face value as currently non-accruing and have marked these down to $116M fair value (26% of cost). These represent jumps of 28% and 45% from Q1 2008.
• As to be expected, the company’s earnings is suffering as the financial markets enter the 2nd year of this credit crisis. Excluding the unrealized depreciation, net operating income fell 24% to $0.71 per share, which was near the midpoint of previous guidance. The company’s asset management segment is losing money at -$12M operating income for the 1st 6 months of the year. Despite this, the company is still showing good liquidity with total realized earnings coming in at $0.95 per share, which covers 92% of Q2’s declared dividends. The realized earnings number was short of the $1.10 forecast but much of that miss has materialized in the current quarter.

Other items of note: