May 11, 2010 05:21 PM Eastern Daylight Time
Fitch Comments on American Capital Debt Restructure
CHICAGO--(BUSINESS WIRE)--Over the past year, American Capital, Ltd. (Nasdaq: ACAS) has been pursuing an out-of court restructure with all unsecured creditors, which includes banks and holders of both publicly and privately issued debt.
In December 2009, Fitch downgraded ACAS' Issuer Default Rating (IDR) to 'C'. The downgrade reflected Fitch's expectation that ACAS intended to pursue a pre-packaged Chapter 11 plan of reorganization if it failed to reach an out-of-court restructure agreement with unsecured creditors. Also, in accordance with Fitch's Coercive Debt Exchange (CDE) criteria, published March 3, 2009, based on the proposed terms of the exchange transaction and the explicit threat of a bankruptcy filing in the event the exchange offer is not approved, Fitch believed the proposed restructure would be considered a CDE.
On May 3, 2010, ACAS commenced an offer to exchange its unsecured public and private debt. The exchange offer is part of a comprehensive restructuring of the company's unsecured indebtedness and is intended to address non-compliance with certain financial covenants and defaults relating to unsecured debt. As part of the restructuring, the company is also soliciting votes to accept a standby plan of reorganization under which the creditors would receive substantially identical consideration as the out-of-court restructure. Pursuant to a Lock Up agreement, in the event ACAS files for bankruptcy, bank lenders have agreed to support approval of a reorganization plan that largely reflects the terms of the out-of-court restructure should the company fail to obtain required approval of public and private bondholders for the proposed debt exchange.
The proposed debt exchange and restructure terms include a pledge of substantially all of the company's assets as collateral, an up-front principal payment of $960 million, issuance of new notes and loans totaling $1.4 billion. Terms of the new notes and loans include principal amortization payments totaling $690 million and revision of financial covenants and various maturity dates to Dec. 31, 2013.
Fitch believes the renegotiated covenants will provide the company with sufficient operating flexibility over the medium term, barring recognition of significant unrealized depreciation. Renegotiated covenants include debt service coverage requirement to maintain a minimum ratio of adjusted operating cashflow to interest expense of 1.2 times (x) in 2010, 1.5x in 2011 and 1.3x thereafter, and an asset coverage requirement to maintain minimum total pledged assets to secured debt of 1.0x in at the end of any quarter, 1.15x as of the end of at least one of any two consecutive quarters in 2010, 1.2x in 2011, and 1.25x thereafter. The company may elect to suspend the requirement if the VIX Index is greater than or equal to 35 as measured on the average daily close of the VIX Index over 10 consecutive days. The company may elect to apply only as to one covenant measurement date and not apply to any quarter in which the VIX Index is unable to be determined or is not quoted. The company's ability to pay cash dividends would be limited to no more than the minimum legally required.
If creditors approve the debt exchange on June 1, 2010, Fitch will downgrade ACAS' IDR to 'RD'. A rating of 'RD' indicates an issuer has experienced an uncured payment default on a material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased business. In the event the proposed debt exchange and restructure is not approved by creditors and ACAS files for bankruptcy, Fitch will downgrade the IDR to 'D'.
Subsequent to the downgrade to 'RD' or 'D', Fitch will evaluate the company's prospects on a going forward basis, and assign appropriate ratings. Given the company's expected need to continue to sell investment assets to meet future debt amortization payments and limited capital market access, Fitch anticipates that the company's IDR will likely remain highly speculative upon completion of a review of the reorganized firm. Notching of restructured debt will reflect collateral available to repay debt and likely recovery prospects given default
Fitch currently rates ACAS as follows:
American Capital, LTD
--IDR 'C';
--Senior unsecured debt 'CCC/RR2'.
Based on a Recovery Rating (RR) of 'RR2', notching of the senior unsecured debt rating remains above that of the IDR and continues to reflect Fitch's belief that collateral available to creditors, even on a stressed basis, provides superior recovery prospects given default.
Non lo so. 