American Capital Senior Floating, Ltd. is a small cap business development company (BDC) that has been discounted by the market because of its sub-scale size, lack of Wall Street sponsorship and analyst coverage. ACSF trades at $11.10 per share (as of 1/25/2018), which is a 15% discount to its $13.12 net asset value as of 9/30/2017. It currently pays an attractive 10.49% dividend yield (as of 1/25/2018). ACSF owns a diversified portfolio of high quality, transparent and liquid bank loans. With a $108 million market capitalization, ACSF is a market orphan trading at a cheap valuation awaiting a catalyst to unlock its value.
ACSF is externally managed by Ivy Hill Asset Management, a wholly-owned portfolio company of Ares Capital Corp., which is part of the broader Ares Management investment platform. The overall Ares enterprise has a very long track record investing in alternative fixed income assets. We think ACSF is a cheap investment that stands to benefit from some form of strategic initiative, as it is too small and too cheap to remain a viable independent operator.
ACSF’s balance sheet is small, with $237 million in assets and $131 million in equity. Furthermore, ACSF has relatively modest leverage with a debt-to-equity ratio of 0.74x. The assets are composed of 83% senior secured loans and 17% collateralized loan obligation (CLO) equity (All portfolio composition statistics as of 9/30/2017). Overall, ACSF has solid portfolio diversity with 159 portfolio investments, which include the CLO assets that are themselves highly diversified with locked-in term financing. ACSF has a very low non-accrual rate of 0.60%. Finally, ACSF is structured with floating rate assets and liabilities that will generate increased income as short-term interest rates rise. In summary, we like the portfolio and structure of ACSF.
ARCC became the manager of ACSF as the result of ARCC’s acquisition of American Capital, Ltd. (ACAS) earlier in 2017. For some reason, ACSF was not merged into the larger enterprise at the time of the merger and was left as a standalone entity. As a sign of confidence, Ares Management already owns 5.25% of ACSF (as of 9/30/2017).
The Ares platform is a very large, alternative asset manager with over $100 billion in assets under management. Since taking over the management of ACSF, they have repositioned and improved the quality of ACSF’s portfolio. Finally, ACSF pays around $2 million in annual asset management fees and approximately $2.2 million in operating expenses, which are largely the result of being a small, sub-scale public company. This is too much cost for such a small enterprise to shoulder.
Given ACSF’s small scale, liquid portfolio and 15% discount to net asset value, we believe ACSF should either be liquidated or merged into the larger ARCC platform at its book value of $13.12 per share. With dividends included, this could generate a return over 20% without taking significant risk.Read more posts from Maury on Forbes.com