American Capital, Ltd. ( ACAS)

Q3 2011 Earnings Call

November 3, 2011 11:00 am ET

Executives

Pete Deoudes - Director of Equity Capital Markets

Malon Wilkus - Chairman and CEO

John Erickson - President, Structured Finance and CFO

Gordon O'Brien - President, Specialty Finance and Operations

Sam Flax - EVP and General Counsel

Rich Konzmann - SVP, Accounting and Reporting

Analysts

Rich Shane - JPMorgan

John Hecht - JMP Securities

Greg Mason - Stifel Nicolaus

Andrew Shanahan - Knighthead Capital

Jasper Burch - Macquarie

Peter Quigley - Renvyle Partners

Joel Houck - Wells Fargo

Presentation

Operator

At this time, I would like to welcome everyone to the American Capital shareholder Q3 2011 conference call. (Operator Instructions) I'd now like to turn the call over to Pete Deoudes to begin the conference.

Pete Deoudes

Thank you, everyone, for joining American Capital's third quarter 2011 earnings call. Before we begin the call, I'd like to review the Safe Harbor statement.

This conference call and corresponding slide presentation contain statements that to the extent that they are not resuscitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of American Capital. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in our periodic reports filed with the Securities & Exchange Commission. Copies are available on the SEC's website at www.sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law.

An archive of this presentation will be available on our website and the telephone recording can be accessed through November 16 by dialing 855-859-2056. The replay passcode is 16825455.

To view the Q3 slide presentation that corresponds with this call, please turn to our website at americancapital.com and click on the Q3 2011 earnings presentation link in the upper right-hand corner of the homepage. Select the webcast option for both slides and audio or click on the link in the conference call section to view the streaming slide presentation during the call.

Participating on today's call are Malon Wilkus, Chairman and CEO; John Erickson, President, Structured Finance and CFO; Gordon O'Brien, President, Specialty Finance and Operations; Sam Flax, Executive Vice President and General Counsel; Rich Konzmann, Senior Vice President, Accounting and Reporting.

With that, I'll turn the call over to Malon.

Malon Wilkus

Pete, thanks, and thanks everyone for joining us. This third quarter, I have to tell you, was a frustrating quarter for us, because we experienced very consistent net operating income, consistent with our last quarter. But as you'll see, we of course had depreciation which was driven predominantly by multiples and spreads in the industry as opposed to performance of our portfolio of companies.

So let's start at Slide 3. You can see the $0.19 net operating income per share, $65 million of total. We had a nice 10.3% effective yield on our debt assets. And just to remind folks, our cost of borrowing at American Capital on average is at 4.2%.

In addition, another element of the frustration is that we had a great quarter in terms of net realized earnings of $0.28, $98 million in total. A lot of that was driven by the $93 million realized gain that we experienced on the sale of Value Plastics, a very fine portfolio company, and I'm very pleased with those kind of results.

But as you can see, we had $1.34 in net loss, overall $464 million. That was driven by $562 million of unrealized depreciation, and that's primarily caused by depreciation at European Capital, two different Sponsor Finance loans, and at our asset management company, American Capital LLC. And I'll talk more about those in a minute. So our NAV is at $11.92. That's a 9% climb from the second quarter.

Moving to Slide 4 to talk about our $4 billion of value in our Private Finance portfolio, starting with our One Stop Buyouts, we had $100 million of net unrealized depreciation driven primarily by multiple reductions and offset by moderately positive aggregate adjusted EBITDA and sales growth.

So though we're experiencing in the last three months from a portfolio of companies, a nice growth. The fact of the matter is at the end of the quarter when the world was concerned with downgraded U.S. debt and with the sovereign debt problems in Europe that the world was struggling over, it caused values to drop and you can see the impact here on our One Stop Buyouts.

By the way, we are breaking out in our static pool analysis an additional data on our One Stop Buyouts, and you could see there in the back the presentation of $3 billion of aggregate total sales in our company and a total of $700 million of aggregate adjusted EBITDA. And we have about 48,000 employees in these companies.

Moving to our Sponsor Finance and Direct Investments, we had a $103 million of net unrealized depreciation due primarily to the material depreciation of two investments and actually the bulk of that in one. And I want to point out that it was just entirely company specific.

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