News Column

Fitch: Recent ACAS Actions Point to Potential Future Strategic Shift

May 13, 2014

CHICAGO--(BUSINESS WIRE)-- American Capital Ltd.'s (ACAS) announced launch of a private equity fund to shift assets off of its balance sheet will have no immediate rating impact given ACAS's current rating of 'BB-', modest portfolio leverage, and the general shift towards less balance sheet intensive activity, according to Fitch Ratings. However, the shift could potentially translate into rating action longer-term depending on the ultimate strategy and structure, and importantly, where the rated debt resides.

ACAS's plan is the latest signal of expected change in the company's strategy and/or organizational structure over the medium-term. This follows the company's recent decisions to suspend its share repurchases and retain Goldman Sachs as a financial advisor.

Last week, ACAS announced that, along with a group of external investors, it had launched American Capital Equity III, LP (ACE III), a $1.1 billion private equity fund managed by an ACAS subsidiary and focused on investing in companies in the lower middle market. Prior to the closing, ACAS is expected to contribute to ACE III, approximately $640 million in fair value of its on-balance sheet control equity and equity-related investments in eight portfolio companies. ACAS and the investor group are also expected to contribute $445 million of additional capital to finance the purchase of new lower middle market control investments. This is ACAS' fifth fund or portfolio company invested in private equity.

Following the closing, ACAS' asset management affiliate, American Capital Asset Management, LLC (ACAM) will have grown its earning assets under management by 7%, to approximately $13 billion and an aggregate of $84 million of total assets under management. Fitch views the launch of ACE III and its recent suspension of its share repurchase program as signals of ACAS' strategic initiative to focus on raising third-party funds for fee income, as opposed to direct on-balance sheet investments. Generally speaking, Fitch views less balance sheet intensive activities favorably, although the stability and diversity of the fee sources needs to be considered.

During its first-quarter 2014 earnings call, ACAS also announced that it retained Goldman Sachs as a financial advisor to help the company evaluate the potential separation of its investment and asset management businesses in a legal, regulatory and tax-efficient manner. The company did not provide any further details on the timing of the potential separation, but Fitch expects it to likely occur sometime after third-quarter 2015 to allow ACAS to fully evaluate its medium-term cash and capital needs to make new investments and/or effect a change in its organizational structure.

Fitch affirmed ACAS' Long-term IDR, senior secured and senior unsecured debt ratings at 'BB-', 'BB+' and 'BB-', respectively, in conjunction with a broader industry review of seven business development companies (BDCs) on April 28, 2014. The affirmations reflected low leverage, improved operating performance since the recent crisis, access to the debt capital markets at reasonable terms, and experienced management team. As a C corporation, ACAS can retain earnings, which is also viewed positively. Rating constraints included ACAS' outsized equity exposure, which can generate material unrealized depreciation on its investment portfolio, large but improving levels of non-accruals and PIK, and its limited funding flexibility and dependence on a recovery in portfolio valuations and the company's stock price.

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings

Johann Juan, +1 312-368-3339

Director

Fitch Ratings, Inc.

70 W Madison Street

Chicago, IL 60602

or

Nathan Flanders, +1 212-908-0827

Managing Director

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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