Fitch Revises American Capital to Watch Positive on Announced Ares Acquisition

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has revised the Rating Watch for American Capital, Ltd.'s (ACAS; 'BB-') to Positive from Negative following ACAS's announced sale to Ares Capital Corporation (ARCC; 'BBB', Outlook Stable) for approximately $3.43 billion. Approximately $887 million of ACAS's outstanding debt, as of March 31, 2016, is affected by this rating action. A complete list of ratings follows this release.

The acquisition, valued at $3.43 billion, is expected to be funded in a combination of cash (51%) and stock (49%), consisting of approximately $1.7 billion of Ares stock, based on the May 20, 2016 closing stock price, $1.47 billion of cash from Ares, and $275 million of cash consideration received from the parent of Ares's external manager, Ares Management LLC (Ares Management). The transaction excludes the portion of American Capital Asset Management, LLC (ACAM) that manages American Capital Agency Corp. (AGNC) and American Capital Mortgage Investment Corp. (MTGE), which are both publicly-traded real estate investment trusts (REITs). The transaction is expected to close in the next 12 months and is subject to shareholder approval.

On Nov. 25, 2015, ACAS announced that the board instructed the company to undertake a full strategic review with its advisors, Goldman Sachs and Credit Suisse, to consider alternatives to maximize shareholder value including the possible sale of part or all of its business, or to proceed with the previously announced spin-off plans. On Jan. 7, 2016, the company completed the initial phase of its strategic review and announced it would proceed with the solicitation of offers to purchase the company or its various business lines in whole or in part.

KEY RATING DRIVERS

IDR AND SENIOR DEBT

The revision of the Rating Watch to Positive from Negative reflects Fitch's view that ACAS's sale to ARCC would have positive rating implications for ACAS's long-term Issuer Default Rating (IDR) and debt ratings, given ARCC's more favorable credit risk profile, supported by its consistent operating performance in a difficult market environment, experienced management team and relationship with Ares Capital Management, LLC, which has a very strong reputation and track record in credit. Upon consummation of the transaction, Fitch expects that ACAS's existing debt would be refinanced, at which point Fitch would likely upgrade ACAS's ratings to a level commensurate with ARCC's ratings (currently 'BBB') and subsequently withdraw the ratings as the debt would be paid in full and the issuing entity would no longer exist.

ACAS's ratings are supported by its relatively low leverage, modest oil and gas exposure and sufficient liquidity to service near term maturities. As a C corporation, ACAS can retain earnings, which is also viewed favorably by Fitch. Rating constraints include ACAS's inconsistent operating strategy, outsized equity exposure relative to peers, which is subject to more valuation volatility, large levels of non-accruals and paid-in-kind (PIK) interest income, limited funding flexibility, and an inability to access the equity markets without severely diluting existing shareholders.

Leverage, defined as total debt to equity, amounted to 0.20x, as of March 31, 2016, which was among the lowest compared to peer business development companies (BDCs). However, Fitch believes lower leverage is appropriate given ACAS's outsized exposure to equity and CLO investments, which represented approximately 52% at fair value, or 39% excluding ACAS's equity investment of American Capital Asset Management (ACAM), of the total investment portfolio, as of March 31, 2016.

RATING SENSITIVITIES

IDR AND SENIOR DEBT

Fitch expects to resolve ACAS's Rating Watch upon the close of the proposed sale to ARCC, which is expected to be in the next 12 months, at which point the ratings for ACAS would be upgraded to a level commensurate with ARCC's ratings (currently 'BBB') and subsequently be withdrawn as the debt would be paid in full and the issuing entity would no longer exist.

If the transaction were to fail to close, Fitch would likely revise the Rating Watch to Negative from Positive reflecting heightened strategic uncertainty for the standalone platform. That said, if ACAS's IDR were to ultimately be downgraded, Fitch recognizes that there is the potential for the outstanding senior secured and unsecured debt to stay at their current levels, subject to an assessment of ACAS's liquidity profile and asset coverage at that time.

Based in Bethesda, MD, ACAS is a publicly traded private equity firm and alternative asset manager organized in 1986 which completed its IPO in 1997. As of March 31, 2016, the company managed $20 billion of assets, including balance sheet assets and fee-earning assets under management by affiliated managers with $77 billion of total assets under management.

The Rating Watch for the following ratings has been revised to Positive from Negative:

American Capital, Ltd.

--Long-term IDR 'BB-';

--Senior secured debt 'BB+';

--Senior unsecured debt 'BB-'.

Date of Relevant Committee: May 23, 2016

Summary of Financial Statement Adjustments: Fitch has made no adjustments that are not disclosed within the company's public filings.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004968

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160523006315/en/

Fitch Ratings
Primary Analyst
Johann Juan
Director
+1-312-368-3339
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations
Hannah James, +1-646-582-4947
[email protected]

Source: Fitch Ratings

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