American Capital, a business development company that was once among the most active US middle market buyout investors, continued to take punishment in the economic downturn, sustaining a $547 million net loss in the second quarter.
The loss includes $308 million of net realised losses on portfolio investments, the company said in its earnings statement, and a $409 million depreciation of American Capital’s investment in its European affiliate, European Capital.
The losses were offset by some gains, including the exit of People Media to Match.com, which garnered the company a $15 million gain, a 30 percent annual return and $57 million in cash proceeds in July, according to John Erickson, American Capital’s chief financial officer.
“Our experience from the last recession leads us to believe that we will recover value in our portfolio companies as the economy strengthens,” Erickson said in the statement. The company has a “large and diverse portfolio”, and American Capital continues to generate liquidity, Erickson said. “That trend continued in July, as we sold over $100 million of investments at approximately their fair value. We believe the worst is behind us,” he said.
Still, American Capital remains in default on $2.3 billion of unsecured credit arrangements outstanding as of 30 June 2009. In past earnings calls, the company’s chief executive officer Malon Wilkus has said the company’s debt load may force it to seek Chapter 11 protection. The company has $4.3 billion of total outstanding debt.
American Capital continues to negotiate with about 100 lenders for the debt on which it has defaulted, Wilkus said during an earnings call Wednesday. “That is part of the daunting challenge of moving quickly in coming to resolution of our defaulted situation,” Wilkus said.
The company’s European affiliate, European Capital, with which the company merged earlier this year, is also in debt default, and America Capital is in negotiations with creditors of European Capital as well. The company has hired investment banks Miller Buckfire and Citi to explore alternatives for resolving the European Capital’s default situation.
Because of the default, American Capital is not able to acquire debt for new transactions. The company has been using liquidity generated from its portfolio companies to pay down debt and to re-invest back into the portfolio, Wilkus said. “We’ve had $1 billion of liquidity in the past 12 months,” he said. “People need to realise we produce a lot of liquidity off of our portfolio. We’re not feeling pressed for cash or liquidity.”
American Capital has slashed about 44 percent of its workforce since 31 March, 2008 and cut compensation for remaining employees, Wilkus said.
The company believes a turnaround is right around the corner, as the recession has hit bottom and the economy is starting to rebound, which will help drive up the value of its portfolio, Wilkus said.
“We believe the recession is ending and we expect economic growth to start occurring in the second half of 2009,” Wilkus said.