American Capital: What a difference a day makes

June 4, 2010

Stifel Nicolaus analyst Greg Mason says American Capital now faces less risk of bankruptcy than it did just a day ago. And although he wouldn’t say it, the highly rated analyst himself may be the reason for the business development company’s apparent reversal of fortunes.

Mason, who has a four-stars on analyst rating service Starmine, said in a note Friday:  “We believe the meaningful negative reaction in the share price today (likely the result of a mention of a possible bankruptcy) will incent ACAS management to ‘give in’ to public bondholder demands.”

Mason was the only analyst on Thursday to predict a possible bankruptcy, triggering the “meaningful negative reaction” — a 14 percent drop in the BDC’s shares – although Moody’s also warned about the possibility of a bankruptcy today.

Mason told Reuters on Friday that he had learnt that the bondholders were demanding a “make-whole” payment, and the company will prefer that rather than going to the court.

American Capital, a publicly traded private equity firm and asset manager, is trying to restructure debt, but is having a hard time getting bondholders to sign on to an exchange offer. It needs approval from 85 percent of public note holders on terms for its proposed exchange offer to restructure. So far only 7 percent have agreed to do so.

Earlier this week, American Capital extended the exchange offer to June 8 from June 1. 

Mason interpreted the extension as a sign that the firm may file for bankruptcy, and told Reuters on Thursday he sees a 90 percent possibility of it filing for Chapter 11. 

The free-fall that followed his prediction may force ACAS management to agree to what bondholders want.

(Reporting by Anurag Kotoky)

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