Standard & Poor's Ratings Services said Friday that it has lowered its ratings on private equity lender American Capital Ltd. (ACAS), reflecting concerns over debt and earnings performance.
S&P lowered the long-term counterparty credit rating of the Bethesda, Maryland-based company to 'B-' from 'BB-' and the outlook is negative.
Earlier this month, American Capital said its net loss for the second quarter widened to $547 million or $2.52 per share from $70 million or $0.34 per share in the prior-year quarter. Realized loss for the quarter was $306 million or $1.41 per share, compared with income of $194 million or $0.95 per share in the year-ago quarter.
The rating action reflects the accelerated deterioration in the firm's realized earnings and reported leverage in second-quarter 2009, as well as the weakening performance of its portfolio companies.
The firm's coverage of interest by realized earnings that are not dependent on investment exits declined significantly to 1.0x in the second quarter from 1.8x in the previous quarter and 2.9x for 2008.
Standard & Poor's credit analyst Jeffrey Zaun said, "We believe that mending the firm's balance sheet will take an extended period during which it will continue to face uncertainty in negotiations with lenders."
S&P said that the firm's financial woes and uncertain future could lead key personnel to depart for healthier investment firms.
Capital levels could continue to provide some cushion against losses and if the company is able to find some breathing room, the management will be able to shrink the firm's portfolio and pay down debt to improve leverage and debt-service coverage metrics.
The negative outlook reflects the expectation that the credit quality of the firm's loan portfolio will continue to deteriorate and its ability to successfully negotiate covenant relief. S&P said that it expects interest coverage will remain weak and that ACAS's access to equity or term funding could remain impaired well into 2010.
"We could lower the rating further if ACAS is unable to negotiate covenant relief or if management is unable to improve leverage and coverage metrics. On the other hand, we could revise the outlook to stable if the firm can satisfactorily amend its debt covenants, improve its debt metrics, and stabilize its portfolio performance," Zaun added.
ACAS rose $0.05 or 1.74% and closed Friday's regular trading at $2.93. After hours, ACAS declined $0.13 or 4.44% and traded at $2.80.
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