We have been saying here for oh, maybe a year that the markets perception of ECAS has been one of “immanent demise” due to ongoing European sovereign debt issues. We also said at that time even if it did evaporate, it hit would only be ~10% of $ACAS ‘s NAV due to its understated carrying value and that the potential upside was several times that. ECAS’s value has since rallied and now represents 23% of $ACAS ‘s NAV.
However, ECAS is still carried at a 25% discount to its “fair value” on $ACAS ‘s books. A simple realization of that gap would add 6% to the NAV of $ACAS. I expect a decent chunk of that gap to be closed in Q2 and Q3 2011. One must also note the deal specified below will add to the fair value of ECAS meaning there is still material additional upside for ECAS.
Deutsche Bank AG ($DBK) arranged Europe’s second collateralized loan obligation since Lehman Brothers Holdings Inc.’s collapse in 2008 in an 858 million-euro ($1.2 billion) bond for asset manager European Capital.
Germany’s largest bank priced one third of the deal, or 288 million euros, taking some of the bonds onto its own books and placing some with third-party investors, according to an e- mailed statement. The senior-ranking portion was 17 million euros short of the amount initially marketed in April. Most of the issue comprising 570 million euros of Class B and subordinated bonds was retained by European Capital, a unit of Bethesda, Maryland-based fund manager American Capital.
The deal, issued through ECAS 2011-1 Loan BV, is the first public sale of a European CLO in almost a year. CLOs repackage leveraged buyout loans into new bonds sold to insurance company and pension funds. CLO issuance vanished in 2009 after investors shunned the hard-to-value assets that contributed to the demise of Lehman.
ECAS 2011-1 issued senior notes with the top credit ratings to yield 350 basis points more than the euro interbank offered rate. The deal pools mostly second-lien, senior-secured, mezzanine and pay-in-kind corporate loans, Standard & Poor’s said on June 17.
The last CLO in Europe was Intermediate Capital Group Plc’s sale of ICG EOS Loan Fund I Ltd. in August, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
From FBR:
We rate $ACAS at a Market Perform with a $12 price target. We view this morning’s news that ACAS’s European subsidiary European Capital participated in Europe’s second public CLO deal since 2008 is a net positive for the company.
Positives
· The news validates ECAS as a viable and leading asset manager after its issues in 2007/2008 (in debt default).· As the asset manager, ECAS (and therefore ACAS) get asset management fees.
· The transaction also enforces that ECAS and the overall markets are liquid. The transaction also raises ECAS’s profile, in our view.
· Assuming no material weakness, ECAS’s retention of the sub-tranches will carry an attractive ROE.
Con
· ECAS will retain the subordinate bonds on a pool of assets comprised of second lien, senior secured, mezz and PIK Corporate loans. Widening of spreads on credit concerns or Greece may adversely impact net asset value. ECAS retained approx 2/3rds of the Euro 858M bond.