Business & Finance
Business and Finance
Business and Finance
Tue, June 29, 2010
Mon, June 28, 2010 Fitch Downgrades American Capital's IDR to 'RD' on Restructure; Assigns Post-Restructure IDR 'B+'
CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has downgraded American Capital, Ltd.'s (NASDAQ: ACAS) Issuer Default ('IDR') and senior unsecured debt ratings to 'RD' following ACAS' completed exchange of its unsecured public and private debt. Fitch views this development as a coercive debt exchange given the explicit bankruptcy threat had the exchange not been approved by bondholders.
The exchange offer is part of a comprehensive restructuring of ACAS' unsecured indebtedness and is intended to address non-compliance with certain financial covenants and defaults relating to unsecured debt.
A rating of 'RD' indicates an issuer has experienced an uncured payment default on a material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased business.
The debt exchange and restructure terms include issuance of new notes and loans totaling $1.3 billion, a pledge of substantially all of ACAS' assets as collateral, an up-front principal payment of just over $1 billion and subsequent amortization payments totaling $690 million and revision of financial covenants and various maturity dates to Dec. 31, 2013.
Based on the terms of the transaction and the evaluation of the prospects of ACAS post-restructure, Fitch assigns the following ratings to ACAS:
--IDR 'B+';
--Senior Secured debt 'BB/RR2';
--Senior Unsecured Debt 'B-'/RR6'.
The Rating Outlook is Stable.
A major rating factor is ACAS' limited access to capital markets and ability to raise equity capital. Currently, liquidity is largely generated via interest and dividend income, principal repayment of debt investments and sale of portfolio investments. The rating also implicitly reflects a potential need to sell portfolio assets to meet future debt amortization payments.
Furthermore, given the limited access to capital and higher funding costs, Fitch thinks ACAS' strategic position within the sector remains relatively weak at this point in time.
Asset coverage equaled 1.63 times (x) at March 31, 2010. Due to repayment and via the continued amortization of debt, the company will likely marginally satisfy the coverage requirement sometime this year unless asset values deteriorate. Fitch expects asset coverage will continue to benefit from the gradual amortization of overall debt. However, absent further equity issuance or a significant increase in portfolio's fair market value, the company's ability to issue incremental new debt will likely be fairly limited over the next year.
Furthermore, as a BDC, ACAS is not able to issue and sell common stock at a price below net asset value without prior approval of a majority of shareholders, or in connection with a rights offering to existing shareholders. Based on a pro forma net asset value including a recent equity issuance of almost $300 million, ACAS' stock price to net asset value ratio stood at 0.65x.
These restrictions curtail ACAS' ability to grow until these metrics expand significantly above their regulatory or associated floors. Additionally, portfolio asset quality remains weak and is worse than historical peaks. Persistent weakness or further deterioration in portfolio asset quality and asset values would generate negative rating momentum.
Fitch recognizes that ACAS does have some flexibility in generating cash required to meet future principal amortization requirements under the proposed restructure terms as $120 million is not due until Dec. 31, 2012. Fitch also believes the renegotiated covenants provide ACAS with sufficient operating flexibility, barring recognition of significant unrealized depreciation.
Based on a 'RR2' Recovery Rating (RR), notching of the senior secured debt rating remains above that of the IDR and continues to reflect Fitch's belief that collateral available to creditors, even on a stressed basis, provides superior recovery prospects given default.
Notching of the unsecured debt rating below the IDR and the Recovery Rating reflects subordination of unsecured debt to newly secured debt.
Fitch's rating actions today reflect the application of the following criteria, available at '[ www.fitchratings.com ]':
--'Coercive Debt Exchange Criteria' (March 3, 2009);
--'Master Global Financial Institutions Criteria' (Dec. 29, 2009);
--'Finance and Leasing Companies Criteria' (Dec. 30, 2009).
Additional information is available at [ www.fitchratings.com ].
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '[ WWW.FITCHRATINGS.COM ]'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
