|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||430||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
|Entry||12/29/2008 02:51 PM|
It looks like they could free up most or all of the cash they need by eliminating the dividend. That would leave the bonds in good shape and also minimize dilution for current shareholders (that's assuming that raising equity at the current price would be dilutive). How far do you think they can cut? Could they pay the required BDC distribution in common shares? Or some kind of long-term debt or preferred (might not help their coverage ratio, but it would ease their short-term cash requirements)?
|Entry||12/29/2008 02:59 PM|
|I'm really only familiar with this situation from reading the headlines...leaving aside BLX, are the other portfolio companies real businesses that should support the stated NAV or something close? Just trying to figure out if this is worth rolling up the sleeves for....|
|Entry||12/29/2008 04:34 PM|
|Hi John, good point about dividends. Many BDCs have deeply cut or eliminated dividends and ALD already said 2009 dividend will be cut to approximate net investment income. That'd be $1 or so (vs. 2.60 in 2008) but I think they'll cut further. It does them no good at this point.|
Most of their 2008 dividends went to cover excess 2007 taxable income, so in theory they're still on the hook to pay out a lot of 2008 taxable income. I think they can minimize this by realizing losses and so forth. As a last resort I do think they can pay in preferred. I didn't think they could pay in common, but I recently heard of a court decision allowing REITs more freedom in this area which may also apply to BDCs.
Lindsay, I don't think there's significant fraud in the main portfolio. Einhorn did extensive research and found mismarking in the main portfolio but the fraud was in BLX. As a SBA lender BLX operated on an originate-and-securitize type model, similar to the one which recently produced such wonderful results with subprime mortgages. Since BLX did not keep loans in portfolio and reported earnings and calculated exec bonuses using gain-on-sale the incentives were all in place for bad behavior.
Except for some small exceptions ALD's main business is originate-and-hold. As such ALD has no incentive to make bad loans. Although you can't get financials on most companies in ALD's portfolio they are real companies operating real businesses. The issue with ALD is they don't mark loans down when borrowers get in trouble. But even if you whack ALD's carrying value by 50% AFC is still worth par. That's a pretty good margin of safety.
|Subject||Litigation and Legal Liability|
|Entry||12/29/2008 11:16 PM|
|Have you looked into the possibility of legal liability to the SBA. I read David's Book and I got the sense that the SBA was not interested in uncovering or punishing fraud at Allied Capital for some reason. However, if this changes, that could really eat into the cushion perhaps. Also, there are a number of BDC's, some of them a lot better and wondering what your thoughts are about relative value as I am sure at least some of them have issued debt that might also be priced very attractively. Hercules Tech and the old Silicon Valley Bank are two that come immediately to mind.|
|Entry||12/30/2008 09:28 AM|
|I am new to this situation so a newbie question - has management changed from that described in David's book. Ditto on the board? Secondly is there any issue of fines or other legal fees re class actions etc? or is there adequate balance sheet provisioning for all of that?|
|Subject||RE: Litigation and Legal Liabi|
|Entry||12/30/2008 11:10 AM|
|1. Have you looked into the possibility of legal liability to the SBA?|
A little. I consider it unlikely. I think the government would first have to expand the BLX fraud investigation beyond Detroit, greatly embarrassing the SBA and its Democratic supporters. Then they'd have to pierce the corporate veil, proving ALD participated. Why would ALD entangle themselves -- it's not like BLX needed help making bad loans. Also, the whole structure was set up to avoid entanglement. Einhorn says loan approval was handled by BLX employees (basically CEO Tannenhauser himself). It seems ALD execs only became involved during workout, after a loan went bad, and even then only at the committee level. At each stage ALD kept themselves one or two steps removed from the process. Meanwhile, the SBA is charged with direct oversight, so how can you prosecute ALD without prosecuting SBA personnel?
2. Also, there are a number of BDC`s, some of them a lot better .....
I haven't found anything this senior trading this cheap. ACAS, another $2 stock, has a 2012 bond that traded at 90+ earlier this month. I couldn't find much for Hercules or SVB, but I'm certainly open to suggestions.
|Subject||RE: Newbie question|
|Entry||12/30/2008 11:48 AM|
|ALD management and board remain in place. They are very entrenched and shareholders are too scattered to displace them. I think debtholders would end the executive gravy train in a hurry, giving management strong incentive to avoid BK.|
BLX (now called Ciena) is in BK/runoff with a different CEO. ALD wrote off their equity investment in BLX and wrote a $300m+ check to BLX's lenders. ALD carries the loan to Ciena at 180m; ultimate recovery may be far less but it's not that material. Also see my reply to Neo on BLX.
ALD settled the Einhorn-inspired SEC action on mismarking last year. Something could come out of stealing Einhorn's phone records, but they had an agent do it so again they were one step removed (and shocked, shocked to discover it). They have a couple shareholder lawsuits as is typical after a large price drop.
ALD is a genuine mess, but I think the assets are worth more than 20 cents on the dollar. If they BK in the next few years AFC should recover as much as the near bonds, which are priced around 75.
|Entry||12/30/2008 02:53 PM|
|Very interesting idea, doggy.|
Are there any BDCs that have filed for bankruptcy or liquidated in the past? And if so, could you compare how the bondholders fared in terms of timetable, recovery, etc, to a likely scenario for AFC?
|Entry||12/30/2008 05:32 PM|
|A friend told me of a tiny BDC which liquidated years ago. It did not go well for shareholders but I think they paid their debt. You can't really apply this to Allied.|
In the first 9 months of 2008 Allied received 400m in interest and fees and almost 900m in principal repayments. Against this they paid roughly 100m in opex and 100m in interest. These numbers imply they could retire all their debt AT PAR in 18 months if they went into pure runoff. Of course they won't go into pure runoff and principal repayments will slow dramatically, even so these numbers give me comfort for the near term. Longer term I worry about hollowing out and secured debt, but long term downside is mitigated when you pocket 20% each year.
|Entry||12/30/2008 06:57 PM|
|Hi, Doggy -- I looked at this and wound up passing (which isn't to say it's a bad idea) because it looked recovery given default would be poor. It seemed like EOD was defined, not just for this issue but in general, as missing interest, principal or violating BDC coverage ratios. This AFC runs for -- I forget, but there's no principal due for a long time. Coverage ratios can be maintained by dumping assets, which is not necessarily good for the debt. That leaves us with interest. If the assets don't throw off enough cash to meet interest at 1:1 D/E, then they're not woth much at all. So if ALD does go BK, returns are average, and if they don't, the common will outperform, and I don't want to own the common. If that makes any sense. Yours, Bowd|
|Subject||Banks get secured|
|Entry||12/31/2008 10:10 AM|
"The amendments add new covenants that require Allied Capital to grant to the private noteholders and the revolving credit facility lenders a first priority lien on substantially all of its assets no later than January 30, 2009 (subject to extension), ..."
I don't know which notes these are offhand. They also get 100 bpp rate bump. While I'm not happy to see debt get promoted in front of me (especially two days after my writeup!), it's not a huge surprise. The amendment also prohibits Allied from repurchasing bonds like AFC. So much for my catalyst #2. The silver lining is some additional covenants limiting the dividend, buybacks, etc.
|Subject||RE: Banks get secured|
|Entry||01/30/2009 01:47 PM|
Allied announced this week they blew their 200% asset coverage covenant and have re-opened negotiations with the revolver and private note lenders. It is strange that the original negotiation 4 weeks ago did not anticipate this high-probability event. My best theory is Allied hoped to convince auditors to buy their optiimistic marks (again) and thus avoid blowing the covenant. In any event, as things stand today the revolver and private note lenders do not have the liens.
I do not believe these lenders will force BK or fire sales. Scheduled interest and principal repayments are close to one billion dollars this year, almost as much as the soon-to-be-secured debt. It makes much more sense to force Allied to direct this cash flow toward debt repayment than to turn a performing asset into a non-performing one by forcing BK. The main risk continues to be the portfolio itself. If it's completely rotten to the core, instead of just around the edged, AFC could be impaired.
|Subject||RE: Author Exit Recommendation|
|Entry||09/03/2010 09:18 AM|
I'm just housekeeping, AFC at 21.50 is not a bad hold in a ZIRP environment and we still have our position.