Allied Capital Portfolio Company Ciena Files for Bankruptcy Protection

Allied Capital announced yesterday that one of its ailing portfolio companies, Ciena Capital, filed for bankruptcy protection, forcing Allied to use $320 million in capital to guarantee Ciena's line of credit with lenders.

The company attributed Ciena's troubles to the uncertainty in the financial markets, which it said forced it to write down the value of its loans to businesses to the point at which Ciena became insolvent. It voluntarily sought Chapter 11 bankruptcy protection, and Allied stepped in to guarantee Ciena's obligations to its lenders.

Allied said it would use $150 million in cash and other liquid securities and may borrow $170 million on its revolving line of credit to cover Ciena's obligations. Allied also will guarantee a remaining balance of $10 million on Ciena's line of credit.

A spokesman for District-based Allied Capital declined to comment.

The infusion of funds into Ciena, formerly known as Business Loan Express (BLX), left analysts differing on whether Allied would be forced to cut its hefty dividend, which was more than 20 percent of the price of Allied shares at yesterday's market close.

A research paper put out yesterday by Jim Shanahan of Wachovia Capital Markets said that Allied had enough income to support the company's dividend and that he did not anticipate a cut in the near term.

Other analysts were less optimistic, saying they thought a dividend cut was likely.

"What this does is slow their growth,'' said Ross A. Demmerle, an analyst with Hilliard Lyons. "They are going to have to borrow money in order to pay off this loan. That's going to limit how much they can grow over the next few quarters."

Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods, agreed, saying Allied's commitment to Ciena ties up funding that could have been used for other purposes.

"Liquidity is very precious in this environment. That $300 million could have been put into another high-quality company with a 15 percent yield," Sakhrani said.

Allied had written its investment in Ciena down to zero, but the company is hoping the bankruptcy filing will allow Ciena to hold its assets until market conditions improve, maximizing their sales value.

Ciena is a financial services company offering products such as conventional business real estate loans and Small Business Administration loans.

BLX last year pledged to reimburse the SBA for any losses sustained as a result of a fraud orchestrated by a former employee. Patrick Harrington, a former executive in the company's Troy, Mich., office pleaded guilty last October to a two-count indictment charging him with conspiracy to defraud and lying to a grand jury.

BLX immediately paid the SBA $9.1 million and set aside $10 million more. Harrington is scheduled to be sentenced next month.