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American Capital faces more trouble with S&P downgrade

S&P gave the business development company a negative outlook over its second quarter losses and the uncertain outcome of its negotiations with lenders.

American Capital suffered another setback recently when Standard & Poor’s cut its debt rating further into junk territory on concerns about its staggering second-quarter losses and inability to reach agreement with its lenders.

American Capital's outlook is negative based on the continued depreciation of the business development company’s portfolio, as well as the scant opportunities to exit investments, S&P said. It cut American Capital’s long-term counterparty credit rating to B- from BB- and indicated it could slash the rating further if the business continues to erode.

The company's shares slid from $2.93 at the opening bell Monday to about $2.74 by the close of trading. The shares have had a raucous ride over the 52-week period, ranging from 58 cents to $28.49.

“We believe that mending the firm’s balance sheet will take an extended period during which it will continue to face uncertainty in negotiations with lenders,” the ratings agency said. “The firm’s financial woes and uncertain future increase [American Capital’s] franchise risk and could lead key personnel to depart for healthier investment firms.”

American Capital reported a staggering $547 million net loss in the second quarter, including $308 million of net realised losses on portfolio investments, and a $409 million depreciation of its investment in European affiliate European Capital.

The losses were offset by some gains, including the sale of People Media to Match.com, which gave American a $15 million gain, a 30 percent annual return and $57 million in cash proceeds in July, the company said during an earnings call in August.

But it remains in default on $2.3 billion of unsecured credit arrangements, outstanding as of 30 June 2009. In past earnings calls, American Capital’s chief executive officer, Malon Wilkus, has said the company’s debt load – $4.3 billion of total outstanding debt – may force it into bankruptcy.

The company has been able to pay down some debt and reinvest back into its portfolio companies from the capital generated from its investments, Wilkus said. “People need to realise we produce a lot of liquidity off of our portfolio. We’re not feeling pressured for cash or liquidity,” he said.

However, American Capital is unable to take on any new debt for new investments, as it is in breach of leverage requirements that all business development companies must follow. While its investment activity remains frozen, the company’s portfolio generates capital that gives it some “cushion” against losses, S&P said. 

Much depends on the company’s negotiations with its lenders, which, if successful, would give American Capital more ability to shrink its portfolio and pay down debt, S&P said.

The company is negotiating with more than 100 lenders, which accounts for the slow process, Wilkus said during the earnings call. The company’s European affiliate, with which it merged earlier this year, is also in default and negotiating with lenders.

American Capital has slashed about 44 percent of its workforce since 31 March 2008 and cut compensation for remaining employees.