Confluence Parent Cuts Dividend To Preserve Cash

The publicly traded private equity fund that owns Confluence Watersports has cut its dividend, eliminated its stock buy-back program and will implement further cost cutting in a move to preserve cash.



American Capital, Ltd. said it is taking the moves because GAAP mark-to-market accounting rules are forcing it to write down the value of its assets by $731 million more than the company thinks they are worth. With $17 billion in capital resources under management, ACAS is the only private equity fund and the largest alternative asset management company in the S&P 500. Confluence is just one of dozens of companies in American Capital's portfolio and won't be affected by the moves, said Confluence CEO Sue Rechner.


“The good news is we are self sustaining right now,” said Rechner in a brief interview last week. “This is purely an FASB (Federal Accounting Standards Board) mark-to-market rules thing and has absolutely no impact on us.”

 

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Confluence Parent Cuts Dividend To Preserve Cash

The publically traded private equity fund that owns Confluence Watersports has cut its dividend, eliminated its stock buy-back program and will implement further costs cutting in a move to preserve cash.


American Capital, Ltd. said it is taking the moves because GAAP mark-to-market accounting rules are forcing them to write down the value of their assets by $731 million more than the company thinks they are actually worth. With $17 billion in capital resources under management, ACAS is the only private equity fund and the largest alternative asset management company in the S&P 500.


“The week ending October 10th should be considered a wake up call for any company that has to value its assets using market yield analysis as required under Generally Accepted Accounting Principles,” commented Malon Wilkus, American Capital Chairman and CEO. “During that week, market prices were reflecting tremendous forced selling of assets, overnight credit for the best rated companies disappeared and LIBOR was irrationally priced. Stock prices declined severely, but bond yields became virtually immeasurable because of the complete lack of liquidity in the credit markets. Most firms marking-to-market their assets under GAAP at the end of this week experienced tremendous depreciation, irrespective of the underlying performance of their assets. Through the third quarter of 2008, American Capital has had to depreciate its assets by about $731 million beyond what we believe will be the realizable value of our assets on settlement or maturity of our investments, after taking into account credit quality. This gives us great concern, since American Capital is subject to minimum tangible net worth requirements under our loan agreements. Therefore, American Capital is implementing a number of measures to build our capital base and delever our balance sheet. Our decisions to retain capital gains, reduce our dividend, implement further cost reductions, eliminate our stock buy-back program and acquire European Capital will build our capital base and generally reduce our debt. It is a great time to be levered less than 1:1 debt to equity, however it has become evident that in this environment, there is a need to be levered even less.”


                               AMERICAN CAPITAL, LTD.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
           Three and Nine Months Ended September 30, 2008 and 2007
                          (in millions, except per share data)
                                           (unaudited)

                                    Three Months Ended      Three Months Ended
                                       September 30,        September 30, 2008
                                                                Versus 2007
                                     2008        2007            $        %
    OPERATING INCOME:
    Investing operating income(1)    $253        $266          $(13)     -5%
    Asset management and advisory
     operating income(2)               25          44           (19)    -43%


        Total operating income        278         310           (32)    -10%


    OPERATING EXPENSES:
    Interest                           50          79           (29)    -37%
    Salaries, benefits and
     stock-based compensation          52          59            (7)    -12%
    General and administrative         21          25            (4)    -16%
        Total operating expenses      123         163           (40)    -25%


    OPERATING INCOME BEFORE
     INCOME TAXES                     155         147             8       5%


    (Provision) benefit for
     income taxes                      (2)          6            (8)     NM


    NET OPERATING INCOME              153         153             –       0%


    Net realized gain on investments
      Portfolio company investments    73          70             3       4%
      Taxes on realized gains         (49)         (4)          (45)  -1125%
      Foreign currency transactions   (13)          –           (13)    100%
      Derivative agreements           (14)          5           (19)     NM
        Total net realized (loss)
         gain                          (3)         71           (74)   -104%


    REALIZED EARNINGS                 150         224           (74)    -33%


    Net unrealized (depreciation)
     appreciation of investments
      Portfolio company investments  (599)       (197)         (402)   -204%
      Foreign currency translation    (90)         49          (139)     NM
      Derivative agreements            (9)        (55)           46      84%
        Total net unrealized
        (depreciation) appreciation  (698)       (203)         (495)   -244%


    NET (DECREASE) INCREASE IN NET
    ASSETS RESULTING FROM OPERATIONS
    (“EARNINGS”)                    $(548)        $21         $(569)     NM


    NET OPERATING INCOME PER
     COMMON SHARE*:
        Basic                       $0.74       $0.82        $(0.08)    -10%
        Diluted                     $0.74       $0.81        $(0.07)     -9%


    REALIZED EARNINGS PER COMMON
     SHARE*:
        Basic                       $0.72       $1.20        $(0.48)    -40%
        Diluted                     $0.72       $1.18        $(0.46)    -39%


    EARNINGS PER COMMON SHARE*:
        Basic                      $(2.63)      $0.11        $(2.74)     NM
        Diluted                    $(2.63)      $0.11        $(2.74)     NM


 

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Confluence Parent Cuts Dividend To Preserve Cash

The publically traded private equity fund that owns Confluence Watersports has cut its dividend, eliminated its stock buy-back program and will implement further costs cutting in a move to preserve cash.


American Capital, Ltd. said it is taking the moves because GAAP mark-to-market accounting rules are forcing it to write down the value of its assets by $731 million more than the company thinks they are worth. With $17 billion in capital resources under management, ACAS is the only private equity fund and the largest alternative asset management company in the S&P 500. Confluence is just one of dozens of companies in American Capital's portfolio and won't be affected by the moves, said Confluence CEO Sue Rechner.


“The good news is we are self sustaining right now,” said Rechner in a brief interview Monday. “This is purely an FASB (Federal Accounting Standards Board) mark to market rules thing and has absolutely no impact on us.” 

 

FASB Rule 157 was meant to ensure that all public companies use the same process for estimating the value of their assets. It has been roundly criticized for exacerbating the current financial crisis by requiring companies to value assets, including stocks and bonds, at current distressed values even if they have no immediate plans to sell them.  

 

“The week ending October 10th should be considered a wake up call for any company that has to value its assets using market yield analysis as required under Generally Accepted Accounting Principles,” said Malon Wilkus, American Capital Chairman and CEO. “During that week, market prices were reflecting tremendous forced selling of assets, overnight credit for the best rated companies disappeared and LIBOR was irrationally priced. Stock prices declined severely, but bond yields became virtually immeasurable because of the complete lack of liquidity in the credit markets. Most firms marking-to-market their assets under GAAP at the end of this week experienced tremendous depreciation, irrespective of the underlying performance of their assets.

 

“Through the third quarter of 2008, American Capital has had to depreciate its assets by about $731 million beyond what we believe will be the realizable value of our assets on settlement or maturity of our investments, after taking into account credit quality. This gives us great concern, since American Capital is subject to minimum tangible net worth requirements under our loan agreements.

 

“Therefore, American Capital is implementing a number of measures to build our capital base and delever our balance sheet. Our decisions to retain capital gains, reduce our dividend, implement further cost reductions, eliminate our stock buy-back program and acquire European Capital will build our capital base and generally reduce our debt. It is a great time to be levered less than 1:1 debt to equity, however it has become evident that in this environment, there is a need to be levered even less.”
                                

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