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Allied Capital Corporation Message Board

  • Rocky_6_66 Rocky_6_66 Sep 4, 2009 11:22 AM Flag

    ALD cannot buy AFC

    As long as the current private debt is outstanding, the new deal prevents ALD from buying AFC.

    ALD can buy the other public debt, but under pretty significant restrictions. It looks like ALD has to have over 100% of all obligations due in 6 months or 50% of all obligations due in 12 months on hand in cash at all times, whichever is greater. Since the first set of private notes is due 6/15/10 (within 12 months), ALD will have to wait until it accumulates half of their face, plus all other obligations due in 12 months. And it has to do it before 12/15/09, when the obligation goes to 100%. Check out 12.3 of the agreement - can be accessed through SEC on ALD's website.

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    • Doesn't look like cannot, more like should not. ALD has $1.3 bil. coming due over the next 3 years. Why would they buy back AFC which has it's longest maturity of all debt instruments?

      • 1 Reply to groans33
      • The primary reason to buy AFC is balance sheet help. It is selling at the greatest discount to par, so it has the biggest gain on repurchase and the most help on the 200% statutory requirement issue.

        I agree that the other debt is a better buy for ALD. Not only is due sooner, but the YTM is much higher so the return to ALD is mucher better.

        Your point that it is not "cannot" buy AFC is wrong. ALD has agreed in the latest deal that it "cannot" buy AFC as long as the reissued notes are outstanding. It can buy the other public debt, but only under very special conditions.

    • "Nicely done my surly friend!"

      You're right - I was surly. Probably in reaction to the several posts questioning what I thought was pretty clear language (as well as nasty posts from different posters). I'll try to be more civil. Hopefully, others will too.

      "You failed to note that it was in exhibit 10.1 and never quoted 12.3."

      I said that it was in section 12.3 and could be found at the ALD website. I didn't realize that I had to give the actual language. In fact, I thought it would help people to read the whole agreement. Section 12.2 dealing with the requirement to use 50% of all sale proceeds to pay down the private debt is pretty interesting too, as well as the the restrictive provisions.

      "The verbage in the 8K contradicts it."

      Really? The Agreement is part of the 8K. And I didn't see anything that counterdicts anything that I said. The primary introductory part of the 8K doesn't deal with buying debt at all. That is why I wnted to see what the agreement actually said. And the agreement clearly deals with buying debt.

      "Do you realize that with no changes over the next 3 years AFC will be the only debt ALD has?"

      No changes? You mean that if ALD is able to pay off its obligations due through '12 of $1,450MM, it will only have $230MM of debt? That is right of course. But how is ALD going to pay $1,450MM of debt? It has said that it will have no net income. So that leaves selling off assets, buying back debt at a discount, or selling equity. I doubt that it wants to sell even $1,000MM of assets in that time period. It surely can't do it without taking huge discounts to value. I hope that it will be able to buy the other public debt at a discount, but both series have gone up a lot and the discount has narrowed. And ALD is now significantly restricted on how much it can buy and when. And the amount of equity it can sell is fairly limited, even if the proposed dilution is permitted.

      I think that it is much more likely that some equity gets sold, some debt gets bought back at a discount, some of the private debt gets retired with 50% of sales proceeds, and then the rest of the private debt gets refinanced at much more reasonable terms (lower rates and longer maturities, etc).


    • Sometimes I think I am dealing with the slow reading group on this board. And y'all can get as surly as you want but you really need to pay better attention.

      "Where is ALD going to get $1450m to pay down debt?" Let me explain. This company is gushing cash, about $250m per quarter and the portfolio companies are continuing to pay that according to the last quarterly report.That money used to go to paying the dividend but now it is available to pay down debt. The first quarter is probably shot because of the cost of the restructuring and maybe the remaining quarters are reduced by $50m each due to the higher interest rate but between now and the end of 2011 that leaves $2.25B of cash.

      They did NOT say they will have no net operating income. What they said is they have none right now because of the "unrealized" depreciation writedowns they keep taking. And they said because of that they have no requirement to pay a dividend to maintain their BDC status. They also said because of their results this year they will not be required to pay a dividend next year. If they have net operating income in 2010 (because they stop taking writedowns) then they may need to pay a dividend sometime before the end of 2011.

      Since they have all this cash coming in there is no need to fire sale any assets. If good deals occur, half of the proceeds go toward the private debt but that money is in addition to all the cash I mentioned earlier. And as quickly as they can pay down the debt, the quicker they can reestablish profitability and net operating income.

      Lost in all this discussion is that ALD is in great shape from a cash standpoint and the reason for their "event of default" and need to restructure is all non cash nonsense created by the "unrealized" writedowns.

      There will be no common dividend for the next two years, at least, but the company will survive and do just fine. That is why I have bought into the AFC issue, which is rated BB+ by S&P.


    • Thank you Mogul for your explanation, I agree with you 100% and maintain a large position in AFC.

    • "'Where is ALD going to get $1450m to pay down debt?' Let me explain. This company is gushing cash, about $250m per quarter and the portfolio companies are continuing to pay that according to the last quarterly report.That money used to go to paying the dividend but now it is available to pay down debt. The first quarter is probably shot because of the cost of the restructuring and maybe the remaining quarters are reduced by $50m each due to the higher interest rate but between now and the end of 2011 that leaves $2.25B of cash."

      Really? Gushing cash? And where exactly is that coming from?

      Not earnings. Last quarter it had $18M of net investment income, and the compnay has made clear that there will no significant earnings for the forseeable future. It did have $416MM of principal collections and $171MM of collection of notes
      (which together incurrred a loss $174MM). It also invested $98MM in portfolio companies. So the "gushing cash" was from liquidating investments, clearly not from ongoing income.

      Of course that is not necessarily bad. As long as there is cash, the company can make payments on in its debt. Hopefully the debt reduction(required now by the agreement with the private creditors) will allow it to refinance on better terms. But ALD will be a much smaller company, with even less net investment income. Unfortunately, until it is able to refinance, it is pretty bad situation - no investment income, fewer assets and little flexibilty. Hopefully, the company will buy more of the public debt at a discount to help with the balance sheet issues, which will allow it to refinance sooner.


    • Rocky, I dont know your background but I am a retired financial executive and I have gone to the ALD annual meetings for several years and listened to all of their conference calls. Let me distinguish between reported earnings and cash. Stop me if I am boring you.

      Each quarter ALD runs each of their portfolio companies thru a model that places an "expected sales value" on them. If the economy is deteriorating the values are dropping and ALD takes a non cash charge called "unrealized depreciation" to drop the portfolio company's value on ALD's books. That non cash charge reduces ALD's net operating income and the writedowns have been so large recently that they have eliminated the net operating income altogether. But the cash from these portfolio companies is still rolling in. ALD has a chart in their CC presentation that shows the percent of their portfolio that is non performing (not paying) and it remains very low.

      When they sell a company they see what they get as compared to what is on their books at that point and if they get more they reverse some of the unrealized depreciation and if they get less they take an additional charge called "realized depreciation".

      But the net is that cash continues to pour in from their investments even though it is hidden by the non cash charges.

      That is why I knew they would not go into BK, as some where afraid of. The banks did not want to force that because they have no interest in owning illiquid portfolio companies, especially since ALD continued to make all payments on their loans since they had plenty of cash. While ALD experienced an "event of default", due to the asset coverage covenant,they were never actually IN default on any of their loans so the banks had them as "performing". The banks raped ALD some in return for "giving" on the covenants but there was never any chance they would force ALD into BK. That is why ALD was able to behave so arrogantly with the banks. The banks have too many loans that are NOT performing and there was no reason for them to force trouble with loans that were current.

      When the economy begins clearly improving, however, the process of evaluating the portfolio companies reverses and they begin taking "unrealized APPRECIATION", which adds income to the bottom line. The income improvement, when this happens, could be spectacular. That is when to get back into ALD.



    • You're a retired financial executive? Small world, my cat is too. And I thought the cat had some strange ideas. He did a lot of hallucinogenic drugs when he was young. ALD will have substantial liquidation going forward while interest paying portfolio holdings plummet.

    • Well, we will see. I think the writedowns are about done. The leading indicators say the recession is over and ALD's methodology will lead to a reversal of the "unrealized depreciation" and that will drop to the bottom line. Once that begins to be clear the recovery in ALD could be dramatic and AFC should trade nearer to par.

      Sorry, sweetie, no liquidation.


    • Obviously you went to the same business school as my cat. Writedowns mean nothing going forward, only cash flow will. And all cash flow is tied up paying increased interest rates. This only leaves liquidation to pay down principal as required by private note holders and the banking syndicate. Good luck with your fantasy world projections!

    • Are you really as dumb as you sound? Did you not listen to the conference call?


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