Allied Capital Corp. makes its living lending money to develop small to medium-sized companies. But with the economy in a tailspin, its portfolio of companies ailing and the door to fresh funds nearly shut, the firm feels like it's sinking in quicksand. So it wasn't all that shocking when the the Washington-based company said Wednesday that it may default on its debt. In a press release Allied said it's talking with its lenders to renegotiate the terms of its revolving credit facility and with the holders of its outstanding private notes.
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Allied estimated that its asset coverage ratio at the end of 2008 will be less than the 200% required under its revolving credit facility and four outstanding private notes. The condition puts Allied in an even more precarious situation because it won't be able to borrow more money and will likely have to slash or end its dividend. "Failure of the company to satisfy the minimum 200% asset coverage ratio would constitute an event of default," Allied warned in its statement.
The move is emblematic of the state of the economy right now and heightened aversion to risk by lenders. Allied's future looks bleak with bankruptcy or a fire sale of its assets as possible future scenarios.
Investors fled the stock on Wednesday, as it was down nearly 44% to $1.59 by early afternoon. The company tried to stop the bleeding late last year -- closing its Chicago and Los Angeles offices and slashing its work force. The moves proved to be a temporary band aid, though, as the worsening economy crippled the value of its assets, leaving the company with a paltry $250 million in cash at the end of the third quarter and a crushing $2.1 billion debt load. - Gerald Magpily
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See Allied Capital press release
