American Capital moves to preserve liquidity

Nasdaq-listed middle market private equity firm American Capital has amended the terms of its unsecured revolving credit facility, a preemptive move that analysts say is meant to avoid tripping a covenant that could jeopardise its access to capital.

The firm negotiated a decrease in its minimum tangible net worth covenant on its unsecured revolving credit facility to $4.5 billion (€3.1 billion) plus 40 percent of new equity issuances and debt conversions into equity made after the third quarter of 2008.

“They were running up against their net worth covenant, so they needed to amend it,” said Sean Jackson, an equity analyst at Avondale Partners who covers the stock.

“They were taking the precaution that they may end up having some more write-downs,” said another analyst who declined to be named, citing the firm’s tangible net worth at $5.6 billion as of the end of June.

He added that by amending the credit agreement now instead of after tripping the covenant, the firm would be in a better position to negotiate favorable terms and preserve its access to the revolving credit facility, which lenders could refuse under breach of covenant.

Concurrently, American Capital agreed to reduce the size of the facility from $1.565 billion to $1.409 billion and move the maturity date from May 2012 to March 2011.

Additionally, interest under the amended terms will be charged at Libor plus 325 basis points, up from 90 basis points, and the unused facility fee will increase from 12.5 basis points to 50 basis points.

“When amending a credit facility in this environment, you end up paying a lot more,” Jackson said. A group of 31 banks are lenders in the facility.

A spokesperson for American Capital declined to comment but John Hooker, vice president of debt capital markets at the firm, said in a statement that the change will enhance its “ability to maintain consistent liquidity”.

The firm has reported decreasing revenue and operating income over the last three quarters, though its quarterly dividend has steadily increased during the same period thanks to surplus dividend coverage in previous quarters.

Analysts predict that American Capital will hit its dividend forecasts for 2008, but many see 2009 as a more challenging year, even with $500 million of ordinary taxable income being rolled over into next year.

Jim Ballan, an analyst at JPMorgan, downgraded American Capital from neutral to underweight, arguing that while the firm will be able to hit its dividend targets for this year, to do so next year the company will need to raise incremental capital. However, he does not expect the company to raise equity capital at current levels. Its shares, which closed on $23.20 on Thursday, are down 30 percent this year.

Maryland-based American Capital also manages private equity and mezzanine fund European Capital and real estate trust American Capital Agency. It has $20 billion in capital under management across all its alternative asset management businesses and has 13 offices worldwide.