American Capital slumps on loss; still in debt default

BANGALORE (Reuters) - Shares of American Capital Ltd (ACAS.O) plunged as much as 22 percent Wednesday, a day after the struggling private equity lender posted a $547 million loss and said it remained in default on a $2.3 billion debt facility.

The company, a provider of financing to small and mid-sized businesses, has struggled as the recession reduced the value of its portfolio companies to which it makes loans in return for equity stakes.

American Capital is not feeling pressed for cash or liquidity and had declined offers for some of its assets that were below fair value, a company official said on a conference call with analysts.

However, the company declined to give any details about ongoing negotiations with lenders in the conference call.

The company is also hopeful that its creditors would give it 12 to 24 months to realize the full value of its assets, an official said.

Stifel Nicolaus analyst Greg Mason said in the event that American Capital fails to achieve a covenant waiver and lenders accelerate repayment, the company could be forced into a bankruptcy filing.

"We remain concerned that the public debt holders don't have the desire like the bank holders to keep American Capital out of bankruptcy," the analyst said in a note to clients.

In addition, Mason said, significant deterioration in credit quality during the quarter may force the debt holders to try to seize assets before they deteriorate further.

American Capital spokeswoman Jennifer Burke declined to comment.

The lender said it generated $125 million of liquidity during the second quarter and sold more than $100 million of investments in July.

In late March, American Capital completed the buyout of minority shareholders in European Capital, paving the way for the possible sale of its European portfolio company, which is also in default of financial covenants.

"Our experience from the last recession leads us to believe that we will recover value in our portfolio companies as the economy strengthens.... We believe the worst is behind us," Chief Financial Officer John Erickson said in a statement.

Analyst Mason said the company has about $300 million in cash, which could help its negotiating process with lenders.

"It is probably looking to sell off better-performing assets in this type of an environment, so you have an adverse selection portfolio as good assets are sold off and weaker left behind," Mason told Reuters.

American Capital, which was removed from the Standard & Poor's 500 index .SPX in February, also said it had cut its workforce by 44 percent since March 2008.

A company official said on the call that the company has cut compensation for the remaining employees by about 56 percent for the quarter, on an annualized basis over peak levels of 2007.

On an operating basis, the Bethesda, Maryland-based company earned 9 cents a share, below analysts' average expectation of 21 cents a share.

Shares of the company were down 15 percent at $3.06 in afternoon trade on Nasdaq. More than 11.5 million shares changed hands on Wednesday, compared with a 25-day moving average volume of 2.7 million shares. The shares traded as high as $28.49 last September.

(Editing by Mike Miller, Dinesh Nair)