Like other middle market lenders, American Capital experienced a slowdown in underwriting activity in the third quarter. The finance company (NASDAQ: ACAS) underwrote $691 million in new investments in the three months ended Sept. 30, compared with $976 million in the the second quarter, according to company presentations and public filings.
Minus $494 million in exits, net new investments totaled $197 million in the latest quarter, down from $382 million in the second quarter.
Among the company’s recent investments is a $170 million unitranche loan backing the buyout of Kele Inc. ACAS underwrites amounts up to $400 million, with holds of up to $150 million.
The following are highlights of select business lines under the ACAS umbrella:
Senior Floating Rate Loans Portfolio
This unit generated $223 million in new commitments during the quarter across 20 investments against $262 million of exits. There are 257 companies in the portfolio, with one listed on non-accrual status with a cost value of $8 million and a fair value of $3 million. This unit targets senior floating rate loans only via the primary and secondary markets. The overall portfolio totals $2.2 billion at fair value, as of Sept. 30. Less than 2.5% of this portfolio is exposed to the energy sector.
One Stop Buyouts Portfolio
This line, which underwrites products up and down the capital stack along with unitranche loans and equity investments, generated $5 million in new investments to existing portfolio companies in the third quarter against $7 million of exits. The portfolio totals $1.2 billion overall.
Sponsor Finance Portfolio
This sponsor-focused business line generated $214 million in third-quarter investments, adding five new companies to the portfolio. Those five deals accounted for $155 million in capital at an average interest rate of 9%, down from 9.2% across second-quarter bookings. Four existing companies absorbed $22 million of third-quarter commitments. The overall portfolio totals $1.5 billion at fair value. The group kicked off the fourth quarter with $138 million in commitments for October.
This group has $514 million in outstanding investments at fair value, mostly among CLO investments. In the third quarter, the group booked $147 million in new investments at an average yield of 16.6%, up from 16% among second-quarter bookings, which totaled $155 million.
Overall, non-accruals stood at 7.3% at the end of the third quarter, including non-accruals within the European Capital unit. Stripping out the European component, the non-accrual rate lowers to 4.1%. ACAS said it expects recovery rates of about 47.5%.
American Capital’s spin-off plan remains a work in progress.
The finance company is pursuing a revised proposal that calls for ACAS to spin off all debt and equity assets, excluding the ACAM unit (American Capital Asset Management), into a new BDC, American Capital Income: (ticker: ACAP).
After the spin-off, ACAS will operate primarily as an asset manager and no longer as a BDC. The ACAM unit has $1.1 billion in assets mainly concentrated among CLO and private equity investments.
The revised spin-off plan follows a 2014 proposal that was scrapped early this year. The initial plan called for ACAS to spin off two BDCs—one that would hold control assets, and the other non-control assets.
ACAS is trading at about a 30% discount to book value: $14.04 vs. $20.44. During the quarter, ACAS repurchased 9.7 million shares for $135 million, which helped lift NAV by $0.23 per share. ACAS remains committed to a previously announced share repurchase program, CFO John Erickson stated last week. If the share price remains at current levels, ACAS would expect to repurchase toward the high end of the $300–600 million range, Erickson said. — Kelly Thompson