Thanks for the compliment — sorry I couldn’t help you avoid this flameout but if it helps, I definitely eat my own cooking (yesterday was a bad day in this household!).

I also highly recommend checking out Jaded Consumer’s site for more insight into ACAS

http://jadedconsumer.blogspot.com/search/label/Ticker%3AACAS

Jaded,

Of course you are right on the cap gains tax credit but I was being selfish on my view of it as my exposure was via short a put and the credit is available to shareholders on record 09/30/2008.

I don’t know if anyone should have modeled the VIX @ 90 but if I was worried about the company’s leverage ratio back in July, then I would expect mgmt to either be more worried than I was or to prevent today’s situation from occuring (thus not needing to worry about it). Should management have considered the possibility of a drastic drop in NAV? YES — THE MARKET DID WHEN THEY MARKED THEM DOWN TO $10 earlier in the summer. Instead, in Q3, they made >$400M in new investments and paid another dividend in October (that’s a quick $600M out the door).

The September period was bad but October was much worse. Interesting to note how they wouldn’t really provide any current status on NAV, whining about how hard it is to make these valuations, etc. After Oct and with the Dow fast approaching previous lows, we’re probably brushing up against that NAV limit. Maybe the credit markets thawing a little is a help.

I’ve been mulling over ACAS and its chances going forward. It’s selling at $7 and guaranteed to pay ~$1.37 in dividends by Sept 2009 or else it’s probably going close to zero. So what are the odds of one or the other? I’d feel better if I could handicap the odds.

The biggest danger lurks in the “known unknowns” of market volatility and the resultant mark-to-market issues with NAV. Increased loan defaults and lower realizations are baked into the cake but I don’t think that poses the risk that the previous one does.

I haven’t gauged any increase in the relaxation of mark-to-market accounting requirements but that’s a possiblity and would relieve a lot of pressure on ACAS.

Care to put odds on the likelihood of forced selling or worse?

I posted a while back that in ACAS’ shoes in a panic environment, I’d pay the smallest dividend I could, using any available accounting gimmick, and plow the earnings into the business. This is what ACAS is now doing, albeit under the pressure of debt covenants’ net asset requirements rather than the zeal for good deals. ACAS’ continued deleveraging will help protect the company from panics, and I’m happy to hear management takes a crummy view of the future and is keeping open options like adopting a different tax status as needed to protect shareholder value.

Re-reading your paragraph on VIX … given the history of the company and the history of VIX, do you think management should have modeled for VIX of 90? I’m interested in how NOI is holding up — and that’s apparently good. So long as management can avoid meltdown in a liquidity panic, I think the long-term case is good for the diverse portfolio. Yes, I’d rather have bought it today below $8 than last year over $40, but we can’t rewind the clock.

I don’t expect a dividend (except the late-2009 distribution of 2008′s $1.37/sh required to maintain tax status, if ACAS does maintain tax status) until ACAS has pushed up its cushion over its debt covenant limit. After the 2009 distribution, the next mandatory distribution will be Sept. of 2010. Until further notice, ACAS is a value play (if at all; but look at NAV >$24 and share price $0.70/q. The fact ACAS got slammed with bond-yield-analysis and multiples compression in its FAS-157 valuations when the market collapsed doesn’t tell us anything bad about management; it tells us something frightening about the market in which management operates.

Going from 0.7:1 to 0.9:1 in the course of a collapse like September is frankly a lot better some people’s financial holdings did, and better than I’d have expected a company full of illiquid assets to do. I’m actually impressed they pulled off this quarter without an ugly emergency with most of the liquidity tricks gone (the forward sale agreements, the share-issuance-above-NAV trick, the ability to use credit — all gone gone gone). The fact that the asset valuation covenant has put the kibosh on the ever-growing dividend is certainly a downer, but paying that dividend in cash (rather than issuing new shares, which is what ACAS did under the DRIP while shares were above NAV) results in the company eating the seed corn, paying out the cap gains; unless you can bank on share price above NAV, the only way to play this and be able to raise dividends is to reinvest cap gains, so the corpus grows. The current dividend policy is sustainable in a bad environment, and the old one was sustainable only during share-price-above-NAV, which we’ll likely not see until financials are loved again some time down the road. The downside is that the current policy may result in one annual dividend paid nine months after close of each year, until the economic environment improves. The upside is that this capital is cheaper to the company than borrowing, and may allow some tax deferral for everybody while we get investment off the earnings.

Take care,
–J