American Capital’s (ACAS) third quarter operating income of 12 cents per share was a penny short of the Zacks Consensus Estimate. Last year, the company had reported earnings of 74 cents per share. The results were negatively affected due to interest expense for “make-whole” interest accruals and dilution from stock dividend.

Total interest and dividend income for the quarter was $177 million, down 30% from $253 million in the prior-year quarter. The decline in interest and dividend income was due to a decline in the weighted average effective interest rate on debt investments due to a decrease in LIBOR and an increase in non-accrual loans. Total asset management and other fee income for the quarter decreased 36% year over year to $16 million.

Operating expenses increased 30% year over year to $160 million. Net realized investment loss was $66 million for the quarter, compared to a loss of $3 million in the prior-year quarter.

Credit quality continued to deteriorate, with delinquent and non-accruing loans increasing to $912 million as of Sept 30, 2009, or 21.5% of total loans, compared to $602 million or 10.2% of the total loans in the prior-year quarter. At the end of the quarter, 41 of the portfolio companies were on a non-accrual and past-due status, up from 27 in the comparable period last year.

Net asset value decreased 68% to $7.80 per share as of Sept 30, 2009, from $24.43 per share in the prior year period. The net operating return on average equity in the reported quarter was 2.5%, compared to 9.6% last year.

In the latest quarter, $463 million of proceeds were received from realizations of portfolio investment repayments and exits. There was $7 million in new committed investments in the quarter.

On the same day, the company also announced its debt restructuring program, pursuant to which it would revamp its revolving line of credit, by pledging substantially all of its assets as collateral, providing a basis for reorganizing all of its $2.4 billion worth of unsecured debt. During March 2009, the company disclosed that it had breached debt covenants, causing defaults on debt payments. The restructuring agreement that is expected to close by the end of the year will address the company’s liquidity issues.

Zacks Investment Research
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