Turmoil Touches Local Firms
Longtime CEO Steps Down Amid $579 Million Loss

By Michael S. Rosenwald
Washington Post Staff Writer
Tuesday, March 3, 2009

Allied Capital, struggling for survival after defaulting on its debt agreements last month, said yesterday that longtime chief executive and prominent Washingtonian William L. Walton was stepping down after the firm recorded a $579 million loss in the fourth quarter.

The shakeup comes as the District buyout firm informed investors that auditors have told the firm there is "substantial doubt about the company's ability to continue as a going concern."

Walton, who sits on the board of many District institutions, including the Financial Services Roundtable, the U.S. Chamber of Commerce and the National Symphony Orchestra, will remain as chairman of the board and oversee overall strategy. John M. Scheurer, an Allied managing director who has been with the firm for 18 years, becomes chief executive.

The move surprised analysts. "Bill has been an institution," said Troy Ward, an analyst at Stifel Nicolaus. "He has been at the head of this company a long time. I just didn't see this happening."

Allied, which invests in middle-market companies, is classified by regulators as a business development company, meaning it can avoid paying taxes by returning profits to investors through dividends. But the firm is also subject to strict leverage rules by the government and lenders, which stipulate Allied is limited from carrying more debt than it has equity in the business.

The firm has tripped those covenants. Its investments, or assets, are valued quarter to quarter. As the economy shrinks, so do the investment values. Allied's portfolio fell $1.1 billion last year to $3.5 billion. For the year, the company recorded a $1 billion loss ($6.01 per share), compared with a $153.3 million profit (99 cents per share) in 2007.

Other business development companies are suffering similar problems. Yesterday, Bethesda-based American Capital said it had violated debt and other covenants and that auditors had also expressed doubts about its ability to continue operating as a going concern. American Capital's investment portfolio in 2008 declined $3.5 billion to $7.4 billion.

Both firms' shares tumbled on the sour news. Allied Capital fell 19 percent, or 20 cents, to 87 cents. American Capital fell 12 percent, or 16 cents, to $1.19.

In a conference call yesterday with analysts and investors, Allied executives said they are still working with their lenders to restructure the firm's debt and credit agreements, retaining the Blackstone Group for help. The company is also in the process of selling assets and trying to reduce leverage. It does not expect to declare a dividend in 2009.

Walton said it was his decision to step aside as chief executive. He waived any rights he may have had to a severance payment and agreed to a base salary of $1.1 million, a reduction of at least $400,000 from when he was chief executive. The company said separating the chief executive and chairman roles will help the firm get a better handle on the issues it must resolve.

"Our most significant task right now is to arrive at a comprehensive solution for our capital structure, and John has been leading our discussions with our lenders to modify our debt agreements in order to provide long-term operational flexibility," Walton said in the conference call.

Lawrence Hebert, Allied's lead independent director, said in a statement that Walton "created this idea to strengthen our management structure, brought it to the board, and we approved it. We are confronting these times of crisis and opportunity with a full-time Chairman focused on strategic management and a CEO focused on disciplined day-to-day management, both executives of demonstrated outstanding talent."

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