In a filing with the Securities and Exchange Commission, the publicly traded Washington, D.C.-based firm said the default under its revolving credit facility also constitutes a default under its private notes. In a Feb. 24 research note addressing the company’s situation, Stifel Nicolaus analysts estimated Allied Capital had $880 million in private notes, and $1.1 billion in public notes. In its own disclosure, the company, which has been criticized for several years by activist investor David Einhorn, said the revolver consisted of $50 million in outstanding borrowings, and about $120 million in outstanding letters of credit, as of Feb. 13.
Troy Ward, an analyst with Stifel Nicolaus, noted the default doesn’t include the public notes, saying the company would remain in compliance with the public notes as long as it made the interest payments and retained its status as a business development company, although that does little to mitigate the seriousness of the situation.
“With the common stock of ALD [Allied Capital] trading near $0.60 and the public debt of ALD trading at 20 percent of par it is no surprise that rumors are circulating that ALD is on the brink of bankruptcy,” Stifel Nicolaus told clients in its note.
The default occurred when the company failed to complete the required documents related to a Dec. 30, 2008, amendment to its credit facility. Allied Capital said it was unable to complete the documents because discussions with its lenders about relief from an expected covenant default had expanded “to encompass a more comprehensive restructuring of these debt agreements to provide operational flexibility.” The firm cited the “current market environment” for the expansion of the talks.
The Dec. 30, 2008 amendment would have required the company to pay first-lien security interest on almost all of its assets, Allied Capital said. An event of default restricts the company from borrowing under its credit facility and declaring dividends or other distributions to its shareholders.The default also permits lenders to accelerate repayment of all amounts due and to require Allied Capital to have cash collateral equal to the value of all outstanding letters of credit.
According to the terms of the private notes, a default permits the holders of 51 percent or more of any issue of outstanding private notes to accelerate repayment of all amounts due thereunder. However, the company noted that neither its lenders nor the noteholders have asked it to speed up repayment of its obligations.
Assuming Allied Capital is able to secure a forbearance on the covenants it’s violated from its lenders, Stifel Nicolaus believes the keys from here are “what will the cushion on the new covenants be and what happens if ALD breaks a covenant again?” The firm expects Allied Capital will need to post its assets as collateral in order to secure the forbearance.
“This is where the devil is in the details,” Stifel Nicolaus said in its research note. “If the covenants remain extremely tight there could be another covenant violation if the financial markets don’t improve in the next 6-9 months.”
Ward told Buyouts the company needs to drive a hard bargain. “They won’t have any leverage after that,” he said, referring to the scenario where Allied Capital agrees to use its assets as collateral.
Stifel Nicolaus estimates Allied Capital’s portfolio has a cost basis of $5.2 billion and a fair value of $4.2 billion. The firm expects an announcement on a forbearance agreement could come as soon as early March, when Allied Capital is scheduled to announce its latest financial results.