(Market Cap $4.1B)
American Capital, Ltd. will split the company’s businesses by transferring most of the corporation’s investment assets to two newly established business development companies (BDCs) and having American Capital continue primarily in the asset management business. It is contemplated that American Capital will spin off the new BDCs to its shareholders, resulting in three, publicly-traded companies.
The two new BDCs are anticipated to qualify and elect to be taxed as regulated investment companies with the objective of paying market rate dividends. The two planned BDCs are as follows:
- American Capital Growth and Income, Ltd., whose assets will consist primarily of securities issued by operating companies purchased through American Capital One Stop Buyouts, senior floating rate loans to private companies and CLO equity investments. Based on the Company’s current asset composition, this business is at present allocated approximately $3 billion of equity.
- American Capital Income, Ltd., whose assets will consist primarily of second lien and mezzanine loans to middle market companies of the type currently originated by American Capital’s Sponsor Finance business. Based on the Company’s current asset composition, this business is at present allocated approximately $1 billion of equity.
Each of the new BDCs will enter into management agreements to be managed by American Capital, where all employees would reside. Those management agreements are expected to be on terms consistent with current market practices. As part of the transaction, American Capital will consolidate its operations and remaining assets with American Capital Asset Management, LLC, its existing wholly-owned asset management portfolio company, and will discontinue being an investment company. Based on the company’s current asset composition, this business is at present allocated approximately $1 billion of equity.
American Capital also announced that due to changes in the composition of its investment portfolio and market conditions, it has undertaken various cost saving initiatives, which are expected to result in approximately $25 million of reduced costs annually, beginning in early 2015. Also, the Company will implement a program under which portfolio companies in which it or its managed funds have invested will reimburse the Company for certain services the Company provides to those portfolio companies. Based on current service levels and consistent with market practices and contractual understandings, this program is expected to provide for reimbursements at a$21 million annual rate by the end of 2015. In addition, at least $25 million of the Company’s current annual SG&A is for the benefit of funds that will be under management following the split, and the Company expects that such amount will be reimbursable under management fee agreements consistent with market practices.
The Company added that it will seek to accomplish the spin off of American Capital Growth and Income by issuing a tax free dividend to its shareholders and that the spin off of American Capital Income is expected to be treated as a taxable dividend to its shareholders. American Capital will continue to be a taxable corporation and will retain any net operating losses that exist at the time of the spin offs. The transaction is subject to certain conditions including the approval of American Capital shareholders who, among other matters, must approve American Capital’s de-election to be regulated as a BDC under the Investment Company Act of 1940, as amended.
Other conditions to completion of the transaction include final approval by the American Capital Board of Directors, receipt of a tax opinion from our tax advisers, the filing of registration statements with the U.S. Securities and Exchange Commission (“SEC”) and their effectiveness, the holding of a special meeting of shareholders and the filing with and review of a proxy statement for that meeting by the SEC staff, the refinancing of American Capital’sindebtedness and the establishment of credit facilities for the new BDCs. The transaction may also need regulatory relief from the SEC. American Capital expects to make necessary filings with the SEC as soon as practicable. There can be no assurances regarding the timing of the transaction, whether the transaction will be completed or the tax treatment of the transaction.