Allied Capital Tries to Avert Defaulting on Debt Terms
Thursday, January 29, 2009
Buyout firm Allied Capital yesterday said the value of its investments in companies has declined so dramatically that it might default on its debt agreements, creating uncertainty over Allied's hefty dividend and its ability to borrow money in the future.
The District firm, which has been an anchor in the region's finance industry for 50 years, said it will open discussions with its lenders to try to get a waiver allowing its assets to go below 200 percent of its current debt.
Allied said in a news release that if it cannot obtain a waiver, it would not be able to pay dividends or make other distributions to shareholders. The company would also be unable to borrow.
Allied's high dividend, pegged at 65 cents for the last quarter of 2008, is one of its most attractive qualities for investors.
Allied stock closed at $1.91 yesterday, down 47 percent.
Founded in 1958 and operating as a public company since 1960, Allied Capital invests in small and mid-size businesses in return for equity.
Allied has about 117 companies in its portfolio. It employs 132 people, including 112 at its Northwest Washington office on Pennsylvania Avenue, 19 in New York and one in Dubai.
Business development firms such as Allied and its Bethesda-based rival American Capital Strategies have seen their investment portfolios drop and have had difficulty raising capital in the financial crisis.
If a default occurred, it would be because of the depreciating assets, not because of a missed payment, according to a source at the company, who asked not to be identified because he is not an official spokesman.
"We are working with our lenders to resolve this covenant matter so that we can continue to serve the needs of America's mid-sized businesses, many of whom depend upon business development companies to fuel their growth," said Jeff Lloyd, a spokesman for Allied Capital.
"The future of [Allied] is solely dependent on its lenders," analyst Jim Shanahan of Wachovia Capital Markets wrote in a note yesterday.