American Capital Posts Loss, Violates Debt Terms

American Capital said yesterday that it has defaulted on certain financial requirements with lenders, prompting the Bethesda company's accountants to caution investors about the firm's viability.

The publicly traded private-equity firm, which invests in mid-size companies, said it is working with lenders to amend agreements so it will not be in default of its loans.

The disclosure came as American Capital reported that it lost $1.68 billion ($8.13 per share) in the fourth quarter of 2008, compared with a loss of $243 million ($1.27) in the similar period a year earlier. For the full year, the firm said it lost $3.11 billion ($15.29), down from a profit of $700 million ($3.96) in 2007.

The company said in a statement that the losses were "a result of the economy falling into a severe recession including the tremendous reduction in liquidity in most markets leading to a reduction in acceptable offers for our assets."

American Capital's business model includes investing in and helping to run mid-size businesses with the goal of making them more profitable. American Capital then sells those businesses at a profit, distributing those profits to shareholders in dividends.

But the recession and the lack of credit has reduced the value of many companies, making it all but impossible to sell them. Lenders could force American Capital to sell some assets to obtain cash, but the recession would likely result in what the company called "fire-sale prices."

Steven Burge, president the firm's North American private finance business, said American Capital stopped the sales process on six companies because it appeared that bidders thought anyone who is selling anything is doing so out of necessity.

"Since we are a long-term, patient investor, we elected to wait rather than sell at distressed prices," Burge said.

The company, a key player in the region's finance industry for decades, said it is working with lenders to get a waiver allowing its assets to go below 200 percent of its current debt.

The company said it has enough cash to cover debt payments and service the firms in its portfolio.

American Capital said it received a "going concern" notice from its auditors, Ernst & Young, about its future viability because it had breached certain financial covenants under its $2.3 billion unsecured credit agreements. The breached covenants largely reflect the massive decline in the value of its assets.

American Capital had announced in November that would cease paying a dividend until it could reevaluate its financial situation.

In a statement, chief executive Malon Wilkus reminded shareholders that the company had cut its workforce by 32 percent and reduced bonuses by 93 percent last year. Employees, too, owned 11 million shares of common stock and 34 million options that, he said, are "deeply underwater."

"So, along with you, we have been personally devastated by the decline in our stock price," he said.

American Capital shares closed yesterday at $1.19, down 12 percent. The shares are 97 percent off their 52-week high of $37.85.