M&A

4 November, 2009

UPDATE 1-American Capital to hold on to European unit

* Says no longer considering sale of European Capital

* Has agreed with lenders to restructure debt

* Pledges all assets as part of agreement

* To focus on exiting portfolio to retire debt

* Shares close up nearly 3 percent

By Archana Shankar

BANGALORE, Nov 4 (Reuters) - American Capital Ltd (ACAS.O) said it no longer plans to sell its European Capital unit, a day after the company managed to keep the lenders on its side by agreeing to get its debt restructured.

The struggling private-equity lender said it is working with the lenders to resolve defaults of European Capital, which had assets under management of $3.5 billion at the end of 2008 third quarter.

Closing conditions of the deal with lenders on American Capital's unsecured debt includes restructuring of European Capital borrowing facilities, Chief Executive Officer Malon Wilkus said.

American Capital was sounding out buyers for its European portfolio since early this year, in a deal that could have been worth up to $2 billion. "I think they tried to offload the assets and pay back the debt, but the deals were not that good and lenders probably think it's in their best interest to have them run this (European Capital) portfolio and not sell them," analyst Howlett said.

As part of the tentative deal with the lenders to restructure its $2.4 billion of unsecured debt, the company said it will pledge substantially all of its assets as collateral.

"The agreement reached is a substantial step forward, addressing their liquidity issues which has been the major concern for shareholders ever since the default with their covenants," analyst Matt Howlett of Fox-Pitt Kelton said. American Capital, a provider of financing to small and mid-sized businesses, has struggled as the recession reduced the value of its portfolio companies to which it makes loans in return for equity stakes.

"We like that the fees of 2 percent in the debt restructuring are significantly below those of 16 percent paid by Allied Capital Corp (ALD.N)," analyst David Chiaverini of BMO Capital Markets said.

American Capital, which has about $500 million in cash, will have to retire $450 million of the outstanding principal notes at the closing of the agreement.

The company, which expects to complete the agreement by the year-end, said its principal unsecured credit facilities include $550 million of bonds and $390 million of privately placed term notes.

American Capital, which was removed from the Standard & Poor's 500 index .SPX in February, said it will have the ability to raise additional capital and will invest some excess proceeds in its portfolio or in new assets.

On Tuesday, American Capital said it earned net operating income of $32 million, or 12 cents a share, which were in line with analysts' estimates.

"We like that the portfolio appreciated for the first time in two years," analyst Chiaverini said. (Additional reporting by Anurag Kotoky and Abhinav Sharma in Bangalore; Editing by Anil D'Silva)

Source: http://www.reuters.com