S&P Please American Capital (ACAS) Ratings on CreditWatch Positive Following M&A Deal

S&P Global Ratings today said it placed its 'BB' issuer credit and senior secured and senior unsecured debt ratings on American Capital Ltd. (Nasdaq: ACAS) on CreditWatch with positive implications.

The CreditWatch placement is based on Ares Capital Corp.'s (ARCC) announcement that it will acquire ACAS for approximately $3.43 billion (excluding American Capital Mortgage Management LLC). ARCC will pay about $1.47 billion in cash and $1.68 billion in stock. In addition, Ares Capital Management LLC, which serves as the investment adviser to ARCC, will provide $275 million of cash to ACAS shareholders. "The CreditWatch reflects our expectation that ACAS will be merged into higher-rated ARCC upon the completion of the transaction, which we expect to close in the second half of 2016," said S&P Global Ratings credit analyst Sebnem Caglayan. "Also, we expect ACAS' outstanding debt to be repaid in conjunction with the transaction."

Our ratings on ACAS reflect our view of its higher business and investment risk relative to banks and other business development companies (BDCs), which its conservative balance sheet leverage, stable funding, and diversification across business lines partially offset. Similar to other BDCs, ACAS' investments include unsecured and leveraged commercial loans, subordinated and mezzanine debt, and highly leveraged investments such as collateralized loan obligations. Although ACAS' nonaccrual loans have been declining, nonaccrual loans at cost (excluding the European Capital portfolio) were 7.9% as of March 31, 2016, compared with 5.8% as of Dec. 31, 2014, reflecting declining loans at cost--not an increase in nonaccrual loans. At the same time, ACAS' debt to adjusted total equity declined to 0.2x as of March 31, 2016, reflecting the wind-down of its senior floating-rate loan portfolios.

The CreditWatch with positive implications reflects our expectation that ACAS will be merged into higher-rated ARCC upon the completion of its announced agreement to be acquired by ARCC, which we expect to close during the second half of 2016. We expect to raise our ratings on ACAS to the same level as those on ARCC when the transaction closes and withdraw the ratings upon the completion of the merger. If the transaction unexpectedly is not completed, we likely would affirm our current ratings on ACAS.

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