FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC 20549
| x |
Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
The Quarterly Period
Ended September 30,
2009
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File
Number:
0-22832
ALLIED CAPITAL
CORPORATION
(Exact Name of Registrant as
Specified in its Charter)
|
Maryland (State or Jurisdiction of Incorporation of Organization) |
52-1081052 (IRS Employer Identification No.) |
1919 Pennsylvania Avenue,
N.W.
Washington, DC 20006
(Address of Principal Executive
Offices)
Registrant’s telephone number, including area code:
(202) 721-6100
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES x NO o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). YES o NO o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
| Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting
company)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule
12b-2 of the
Exchange
Act). YES o NO x
On November 5, 2009, there were 179,400,109 shares
outstanding of the Registrant’s common stock,
$0.0001 par value.
ALLIED
CAPITAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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| 124 | ||||||||
| EX-10.51 | ||||||||
| Ex-15 | ||||||||
| Ex-31.1 | ||||||||
| Ex-31.2 | ||||||||
| Ex-31.3 | ||||||||
| Ex-31.4 | ||||||||
| Ex-32.1 | ||||||||
| Ex-32.2 | ||||||||
| Ex-32.3 | ||||||||
| Ex-32.4 | ||||||||
PART I:
FINANCIAL INFORMATION
| Item 1. | Financial Statements |
|
September 30, |
December 31, |
|||||||
| (in thousands, except per share amounts) | 2009 | 2008 | ||||||
| (unaudited) | ||||||||
|
ASSETS
|
||||||||
|
Portfolio at value:
|
||||||||
|
Private finance
|
||||||||
|
Companies more than 25% owned (cost: 2009-$2,025,850;
2008-$2,167,020)
|
$ | 1,032,018 | $ | 1,187,722 | ||||
|
Companies 5% to 25% owned (cost: 2009-$219,671; 2008-$392,516)
|
178,253 | 352,760 | ||||||
|
Companies less than 5% owned (cost: 2009-$1,948,748;
2008-$2,317,856)
|
1,232,400 | 1,858,581 | ||||||
|
Total private finance (cost: 2009-$4,194,269; 2008-$4,877,392)
|
2,442,671 | 3,399,063 | ||||||
|
Commercial real estate finance (cost: 2009-$74,066; 2008-$85,503)
|
68,523 | 93,887 | ||||||
|
Total portfolio at value (cost: 2009-$4,268,335;
2008-4,962,895)
|
2,511,194 | 3,492,950 | ||||||
|
Accrued interest and dividends receivable
|
49,953 | 55,638 | ||||||
|
Other assets
|
125,653 | 122,909 | ||||||
|
Investments in money market and other securities
|
90,020 | 287 | ||||||
|
Cash and cash equivalents
|
62,737 | 50,402 | ||||||
|
Restricted cash
|
659 | — | ||||||
|
Total assets
|
$ | 2,840,216 | $ | 3,722,186 | ||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Liabilities:
|
||||||||
|
Notes payable (principal amount: 2009-$1,586,513;
2008-$1,895,000) (maturing within one year: 2009-$253,745;
2008-$1,015,000)
|
$ | 1,543,867 | $ | 1,895,000 | ||||
|
Bank term debt (former revolver)
|
50,000 | 50,000 | ||||||
|
Accounts payable and other liabilities
|
45,084 | 58,786 | ||||||
|
Total liabilities
|
1,638,951 | 2,003,786 | ||||||
|
Commitments and contingencies
|
||||||||
|
Shareholders’ equity:
|
||||||||
|
Common stock, $0.0001 par value, 400,000 shares
authorized; 179,362 and 178,692 shares issued and
outstanding at September 30, 2009, and December 31,
2008, respectively
|
18 | 18 | ||||||
|
Additional paid-in capital
|
3,037,718 | 3,037,845 | ||||||
|
Notes receivable from sale of common stock
|
(680 | ) | (1,089 | ) | ||||
|
Net unrealized appreciation (depreciation)
|
(1,883,617 | ) | (1,503,089 | ) | ||||
|
Undistributed earnings
|
47,826 | 184,715 | ||||||
|
Total shareholders’ equity
|
1,201,265 | 1,718,400 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,840,216 | $ | 3,722,186 | ||||
|
Net asset value per common share
|
$ | 6.70 | $ | 9.62 | ||||
The accompanying notes are an
integral part of these consolidated financial statements.
1
|
For the Three |
For the Nine |
|||||||||||||||
|
Months Ended |
Months Ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands, except per share amounts) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
|
Interest and Related Portfolio Income:
|
||||||||||||||||
|
Interest and dividends:
|
||||||||||||||||
|
Companies more than 25% owned
|
$ | 24,737 | $ | 29,699 | $ | 72,941 | $ | 85,167 | ||||||||
|
Companies 5% to 25% owned
|
4,775 | 9,864 | 25,123 | 31,587 | ||||||||||||
|
Companies less than 5% owned
|
36,118 | 72,644 | 131,953 | 249,325 | ||||||||||||
|
Total interest and dividends
|
65,630 | 112,207 | 230,017 | 366,079 | ||||||||||||
|
Fees and other income:
|
||||||||||||||||
|
Companies more than 25% owned
|
6,063 | 6,130 | 18,648 | 22,638 | ||||||||||||
|
Companies 5% to 25% owned
|
13 | 342 | 223 | 411 | ||||||||||||
|
Companies less than 5% owned
|
732 | 1,983 | 3,362 | 11,056 | ||||||||||||
|
Total fees and other income
|
6,808 | 8,455 | 22,233 | 34,105 | ||||||||||||
|
Total interest and related portfolio income
|
72,438 | 120,662 | 252,250 | 400,184 | ||||||||||||
|
Expenses:
|
||||||||||||||||
|
Interest
|
42,421 | 35,949 | 129,023 | 109,974 | ||||||||||||
|
Employee
|
10,905 | 21,443 | 32,939 | 57,439 | ||||||||||||
|
Employee stock options
|
392 | 1,477 | 2,369 | 9,531 | ||||||||||||
|
Administrative
|
7,205 | 14,138 | 25,509 | 36,100 | ||||||||||||
|
Impairment of long-lived asset
|
— | — | 2,873 | — | ||||||||||||
|
Total operating expenses
|
60,923 | 73,007 | 192,713 | 213,044 | ||||||||||||
|
Net investment income before income taxes
|
11,515 | 47,655 | 59,537 | 187,140 | ||||||||||||
|
Income tax expense (benefit), including excise tax
|
1,930 | 2,060 | 4,205 | 8,141 | ||||||||||||
|
Net investment income
|
9,585 | 45,595 | 55,332 | 178,999 | ||||||||||||
|
Net Realized and Unrealized Gains (Losses):
|
||||||||||||||||
|
Net realized gains (losses):
|
||||||||||||||||
|
Companies more than 25% owned
|
(12,681 | ) | 1,098 | (89,643 | ) | 1,967 | ||||||||||
|
Companies 5% to 25% owned
|
(824 | ) | 7,234 | (54,963 | ) | (6,569 | ) | |||||||||
|
Companies less than 5% owned
|
8,415 | 53,710 | (13,649 | ) | 51,932 | |||||||||||
|
Total net realized gains (losses)
|
(5,090 | ) | 62,042 | (158,255 | ) | 47,330 | ||||||||||
|
Net change in unrealized appreciation or depreciation
|
(27,681 | ) | (425,899 | ) | (380,528 | ) | (687,506 | ) | ||||||||
|
Total net gains (losses)
|
(32,771 | ) | (363,857 | ) | (538,783 | ) | (640,176 | ) | ||||||||
|
Gain on repurchase of debt
|
— | — | 83,532 | — | ||||||||||||
|
Loss on extinguishment of debt
|
(117,497 | ) | — | (117,497 | ) | — | ||||||||||
|
Net increase (decrease) in net assets resulting from operations
|
$ | (140,683 | ) | $ | (318,262 | ) | $ | (517,416 | ) | $ | (461,177 | ) | ||||
|
Basic earnings (loss) per common share
|
$ | (0.79 | ) | $ | (1.78 | ) | $ | (2.89 | ) | $ | (2.70 | ) | ||||
|
Diluted earnings (loss) per common share
|
$ | (0.79 | ) | $ | (1.78 | ) | $ | (2.89 | ) | $ | (2.70 | ) | ||||
|
Weighted average common shares outstanding — basic
|
179,054 | 178,692 | 178,815 | 171,084 | ||||||||||||
|
Weighted average common shares outstanding — diluted
|
179,054 | 178,692 | 178,815 | 171,084 | ||||||||||||
The accompanying notes are an
integral part of these consolidated financial statements.
2
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
For the Nine Months |
||||||||
| Ended September 30, | ||||||||
| (in thousands, except per share amounts) | 2009 | 2008 | ||||||
| (unaudited) | ||||||||
|
Operations:
|
||||||||
|
Net investment income
|
$ | 55,332 | $ | 178,999 | ||||
|
Net realized gains (losses)
|
(158,255 | ) | 47,330 | |||||
|
Net change in unrealized appreciation (depreciation)
|
(380,528 | ) | (687,506 | ) | ||||
|
Gain on repurchase of debt
|
83,532 | — | ||||||
|
Loss on extinguishment of debt
|
(117,497 | ) | — | |||||
|
Net increase (decrease) in net assets resulting from operations
|
(517,416 | ) | (461,177 | ) | ||||
|
Shareholder distributions:
|
||||||||
|
Common stock dividends
|
— | (340,381 | ) | |||||
|
Net decrease in net assets resulting from shareholder
distributions
|
— | (340,381 | ) | |||||
|
Capital share transactions:
|
||||||||
|
Sale of common stock
|
— | 402,478 | ||||||
|
Issuance of common stock in lieu of cash distributions
|
— | 3,751 | ||||||
|
Issuance of common stock upon exercise of stock options
|
489 | — | ||||||
|
Stock option expense
|
2,438 | 9,655 | ||||||
|
Net decrease in notes receivable from sale of common stock
|
409 | 841 | ||||||
|
Purchase of common stock held in deferred compensation trusts
|
— | (943 | ) | |||||
|
Distribution of common stock held in deferred compensation trusts
|
— | 27,335 | ||||||
|
Cancellation of stock options
|
(3,055 | ) | — | |||||
|
Net increase (decrease) in net assets resulting from capital
share transactions
|
280 | 443,117 | ||||||
|
Total increase (decrease) in net assets
|
(517,135 | ) | (358,441 | ) | ||||
|
Net assets at beginning of period
|
1,718,400 | 2,771,847 | ||||||
|
Net assets at end of period
|
$ | 1,201,265 | $ | 2,413,406 | ||||
|
Net asset value per common share
|
$ | 6.70 | $ | 13.51 | ||||
|
Common shares outstanding at end of period
|
179,362 | 178,692 | ||||||
The accompanying notes are an
integral part of these consolidated financial statements.
3
|
For the Nine Months |
||||||||
| Ended September 30, | ||||||||
| (in thousands) | 2009 | 2008 | ||||||
| (unaudited) | ||||||||
|
Cash flows from operating activities:
|
||||||||
|
Net increase (decrease) in net assets resulting from operations
|
$ | (517,416 | ) | $ | (461,177 | ) | ||
|
Adjustments:
|
||||||||
|
Portfolio investments
|
(118,095 | ) | (1,019,750 | ) | ||||
|
Principal collections related to investment repayments or sales
|
479,815 | 878,229 | ||||||
|
Collections of notes and other consideration received from sale
of investments
|
171,030 | 16,316 | ||||||
|
Realized gains from the receipt of notes and other consideration
from sale of investments
|
(577 | ) | (1,886 | ) | ||||
|
Realized losses
|
194,152 | 87,867 | ||||||
|
Gain on repurchase of debt
|
(83,532 | ) | — | |||||
|
Redemption of (investments in) money market and other securities
|
(89,733 | ) | 187,838 | |||||
|
Payment-in-kind
interest and dividends, net of cash collections
|
(24,352 | ) | (35,947 | ) | ||||
|
Change in accrued interest and dividends
|
4,577 | 835 | ||||||
|
Net collection (amortization) of discounts and fees
|
(4,875 | ) | (10,176 | ) | ||||
|
Stock option expense
|
2,438 | 9,655 | ||||||
|
Impairment of long-lived asset
|
2,873 | — | ||||||
|
Changes in other assets and liabilities
|
(95,823 | ) | (42,537 | ) | ||||
|
Depreciation and amortization
|
1,169 | 1,752 | ||||||
|
Net change in unrealized (appreciation) or depreciation
|
380,528 | 687,506 | ||||||
|
Net cash provided by (used in) operating activities
|
302,179 | 298,525 | ||||||
|
Cash flows from financing activities:
|
||||||||
|
Sale of common stock
|
— | 402,478 | ||||||
|
Sale of common stock upon the exercise of stock options
|
489 | — | ||||||
|
Collections of notes receivable from sale of common stock
|
408 | 841 | ||||||
|
Borrowings under notes payable
|
— | 193,000 | ||||||
|
Repurchase or repayment of notes payable
|
(224,357 | ) | (153,000 | ) | ||||
|
Net borrowings under (repayments on) revolver/bank term debt
|
— | (197,250 | ) | |||||
|
Purchase of common stock held in deferred compensation trusts
|
— | (943 | ) | |||||
|
Net change in restricted cash
|
(659 | ) | — | |||||
|
Deferred financing costs
|
(65,725 | ) | (8,611 | ) | ||||
|
Other financing activities
|
— | (35 | ) | |||||
|
Common stock dividends and distributions paid
|
— | (336,630 | ) | |||||
|
Net cash provided by (used in) financing activities
|
(289,844 | ) | (100,150 | ) | ||||
|
Net increase (decrease) in cash
|
12,335 | 198,375 | ||||||
|
Cash at beginning of period
|
50,402 | 3,540 | ||||||
|
Cash at end of period
|
$ | 62,737 | $ | 201,915 | ||||
The accompanying notes are an
integral part of these consolidated financial statements.
4
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
|
(in thousands, except number of shares)
|
Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Companies More Than 25% Owned
|
||||||||||||||
|
AGILE Fund I,
LLC(5)
|
Equity Interests | $ | 665 | $ | 417 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 665 | 417 | |||||||||||
|
AllBridge Financial, LLC
|
Senior Loan (6.6%, Due 12/09) | $ | 1,311 | 1,311 | 1,311 | |||||||||
|
(Asset Management)
|
Equity Interests | 40,118 | 15,523 | |||||||||||
| Total Investment | 41,429 | 16,834 | ||||||||||||
|
Allied Capital Senior Debt Fund,
L.P.(5)
|
Limited Partnership Interests | 31,800 | 33,044 | |||||||||||
|
(Private Debt Fund)
|
Total Investment | 31,800 | 33,044 | |||||||||||
|
Avborne,
Inc.(7)
|
Preferred Stock (12,500 shares) | — | 904 | |||||||||||
|
(Business Services)
|
Common Stock (27,500 shares) | — | — | |||||||||||
| Total Investment | — | 904 | ||||||||||||
|
Avborne Heavy Maintenance,
Inc.(7)
|
Common Stock (2,750 shares) | — | — | |||||||||||
|
(Business Services)
|
Total Investment | — | — | |||||||||||
|
Aviation Properties Corporation
|
Common Stock (100 shares) | 93 | — | |||||||||||
|
(Business Services)
|
Total Investment | 93 | — | |||||||||||
|
Border Foods, Inc.
|
Senior Loan (12.9%, Due 3/12) | 34,876 | 29,495 | 34,876 | ||||||||||
|
(Consumer Products)
|
Preferred Stock (100,000 shares) | 12,721 | 16,585 | |||||||||||
| Common Stock (260,467 shares) | 3,847 | — | ||||||||||||
| Total Investment | 46,063 | 51,461 | ||||||||||||
|
Calder Capital Partners,
LLC(5)
|
Senior Loan (12.5%, Due 5/09)(6) | 4,496 | 4,496 | 1,100 | ||||||||||
|
(Asset Management)
|
Equity Interests | 2,453 | — | |||||||||||
| Total Investment | 6,949 | 1,100 | ||||||||||||
|
Callidus Capital Corporation
|
Subordinated Debt (18.0%, Due 8/13) | 20,939 | 20,939 | 15,165 | ||||||||||
|
(Asset Management)
|
Common Stock (100 shares) | — | — | |||||||||||
| Total Investment | 20,939 | 15,165 | ||||||||||||
| Guaranty ($3,189) | ||||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(7)
|
Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies. |
The accompanying notes are an
integral part of these consolidated financial statements.
5
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Ciena Capital LLC
|
Senior Loan (5.5%, Due 3/09)(6) | $ | 319,031 | $ | 319,031 | $ | 102,232 | |||||||
|
(Financial Services)
|
Class B Equity Interests | 119,436 | — | |||||||||||
| Class C Equity Interests | 109,097 | — | ||||||||||||
| Total Investment | 547,564 | 102,232 | ||||||||||||
| Guaranty ($5,000 — See Note 3) | ||||||||||||||
|
CitiPostal Inc.
|
Senior Loan (3.7%, Due 12/13) | 692 | 683 | 683 | ||||||||||
|
(Business Services)
|
Unitranche Debt (12.0%, Due 12/13) | 51,180 | 51,001 | 51,001 | ||||||||||
| Subordinated Debt (16.0%, Due 12/15) | 10,265 | 10,265 | 10,265 | |||||||||||
| Common Stock (37,024 shares) | 12,726 | 1,124 | ||||||||||||
| Total Investment | 74,675 | 63,073 | ||||||||||||
|
Coverall North America, Inc.
|
Unitranche Debt (12.0%, Due 7/11) | 31,627 | 31,565 | 31,565 | ||||||||||
|
(Business Services)
|
Subordinated Debt (15.0%, Due 7/11) | 5,563 | 5,553 | 5,553 | ||||||||||
| Common Stock (763,333 shares) | 14,362 | 21,261 | ||||||||||||
| Total Investment | 51,480 | 58,379 | ||||||||||||
|
CR Holding, Inc.
|
Subordinated Debt (16.6%, Due 2/13)(6) | 40,623 | 40,510 | 10,271 | ||||||||||
|
(Consumer Products)
|
Common Stock (32,090,696 shares) | 28,744 | — | |||||||||||
| Total Investment | 69,254 | 10,271 | ||||||||||||
|
Crescent Equity
Corp.(8)
|
Senior Loan (10.0%, Due 6/10) | 433 | 433 | 433 | ||||||||||
|
(Business Services)
|
Subordinated Debt (11.0%, Due 9/11 – 6/17)(6) | 32,202 | 32,112 | 4,203 | ||||||||||
| Common Stock (174 shares) | 82,730 | — | ||||||||||||
| Total Investment | 115,275 | 4,636 | ||||||||||||
| Guaranty ($900) | ||||||||||||||
|
Direct Capital Corporation
|
Senior Loan (8.0%, Due 1/14)(6) | 8,175 | 8,175 | 8,573 | ||||||||||
|
(Financial Services)
|
Subordinated Debt (16.0%, Due 3/13)(6) | 55,671 | 55,496 | 7,139 | ||||||||||
| Common Stock (2,317,020 shares) | 25,732 | — | ||||||||||||
| Total Investment | 89,403 | 15,712 | ||||||||||||
|
Financial Pacific Company
|
Subordinated Debt (17.4%, Due 2/12 – 8/12) | 68,967 | 68,870 | 41,417 | ||||||||||
|
(Financial Services)
|
Preferred Stock (9,458 shares) | 8,865 | — | |||||||||||
| Common Stock (12,711 shares) | 12,783 | — | ||||||||||||
| Total Investment | 90,518 | 41,417 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(8)
|
Crescent Equity Corp. holds investments in Crescent Hotels & Resorts, LLC and affiliates. |
The accompanying notes are an
integral part of these consolidated financial statements.
6
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Hot Light Brands, Inc.
|
Senior Loan (9.0%, Due 2/11)(6) | $ | 30,572 | $ | 30,572 | $ | 10,471 | |||||||
|
(Retail)
|
Common Stock (93,500 shares) | 5,151 | — | |||||||||||
| Total Investment | 35,723 | 10,471 | ||||||||||||
|
Hot Stuff Foods, LLC
|
Senior Loan (3.7%, Due 2/11-2/12) | 45,417 | 45,310 | 45,417 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (12.3%, Due 8/12-2/13)(6) | 83,692 | 83,387 | 49,801 | ||||||||||
| Common Stock (1,147,453 shares) | 56,187 | — | ||||||||||||
| Total Investment | 184,884 | 95,218 | ||||||||||||
|
Huddle House, Inc.
|
Subordinated Debt (15.0%, Due 12/15) | 19,544 | 19,494 | 19,494 | ||||||||||
|
(Retail)
|
Common Stock (358,428 shares) | 36,348 | 7,651 | |||||||||||
| Total Investment | 55,842 | 27,145 | ||||||||||||
|
IAT Equity, LLC and Affiliates
|
Subordinated Debt (9.0%, Due 6/14) | 6,000 | 6,000 | 6,000 | ||||||||||
|
d/b/a Industrial Air Tool
|
Equity Interests | 7,500 | 9,948 | |||||||||||
|
(Industrial Products)
|
Total Investment | 13,500 | 15,948 | |||||||||||
|
Impact Innovations Group, LLC
|
Equity Interests in Affiliate | — | 322 | |||||||||||
|
(Business Services)
|
Total Investment | — | 322 | |||||||||||
|
Insight Pharmaceuticals Corporation
|
Subordinated Debt (15.0%, Due 9/12) | 54,167 | 54,100 | 52,098 | ||||||||||
|
(Consumer Products)
|
Common Stock (155,000 shares) | 40,413 | 10,419 | |||||||||||
| Total Investment | 94,513 | 62,517 | ||||||||||||
|
Jakel, Inc.
|
Subordinated Debt (15.5%, Due 3/08)(6) | 748 | 748 | 374 | ||||||||||
|
(Industrial Products)
|
Total Investment | 748 | 374 | |||||||||||
|
Knightsbridge CLO
2007-1
Ltd.(4)
|
Class E Notes (9.5%, Due 1/22) | 18,700 | 18,700 | 11,160 | ||||||||||
|
(CLO)
|
Income Notes (13.3%)(11) | 38,746 | 22,640 | |||||||||||
| Total Investment | 57,446 | 33,800 | ||||||||||||
|
Knightsbridge CLO
2008-1
Ltd.(4)
|
Class C Notes (7.8%, Due 6/18) | 12,800 | 12,800 | 12,246 | ||||||||||
|
(CLO)
|
Class D Notes (8.8%, Due 6/18) | 8,000 | 8,000 | 7,080 | ||||||||||
| Class E Notes (5.3%, Due 6/18) | 13,200 | 11,081 | 9,798 | |||||||||||
| Income Notes (21.2%)(11) | 21,327 | 20,112 | ||||||||||||
| Total Investment | 53,208 | 49,236 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
7
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
MVL Group, Inc.
|
Senior Loan (12.0%, Due 7/12) | $ | 25,260 | $ | 25,256 | $ | 25,256 | |||||||
|
(Business Services)
|
Subordinated Debt (14.5%, Due 7/12) | 41,434 | 41,402 | 36,021 | ||||||||||
| Subordinated Debt (8.0%, Due 7/12)(6) | 144 | 139 | — | |||||||||||
| Common Stock (560,716 shares) | 555 | — | ||||||||||||
| Total Investment | 67,352 | 61,277 | ||||||||||||
|
Penn Detroit Diesel Allison, LLC
|
Equity Interests | 20,081 | 13,870 | |||||||||||
|
(Business Services)
|
Total Investment | 20,081 | 13,870 | |||||||||||
|
Senior Secured Loan Fund LLC
|
Subordinated Certificates (8.4%) | 165,248 | 165,000 | |||||||||||
|
(Private Debt Fund)
|
Equity Interests | 1 | — | |||||||||||
| Total Investment | 165,249 | 165,000 | ||||||||||||
|
Service Champ, Inc.
|
Subordinated Debt (15.5%, Due 4/12) | 27,566 | 27,515 | 27,515 | ||||||||||
|
(Business Services)
|
Common Stock (55,112 shares) | 11,785 | 28,321 | |||||||||||
| Total Investment | 39,300 | 55,836 | ||||||||||||
|
Stag-Parkway, Inc.
|
Subordinated Debt (10.0%, Due 7/12) | 19,044 | 19,000 | 19,000 | ||||||||||
|
(Business Services)
|
Common Stock (25,000 shares) | 32,686 | 7,359 | |||||||||||
| Total Investment | 51,686 | 26,359 | ||||||||||||
|
Startec Equity, LLC
|
Equity Interests | 211 | — | |||||||||||
|
(Telecommunications)
|
Total Investment | 211 | — | |||||||||||
|
Total
companies more than 25% owned
|
$ | 2,025,850 | $ | 1,032,018 | ||||||||||
|
Companies 5% to 25% Owned
|
||||||||||||||
|
10th
Street, LLC
|
Subordinated Debt (13.0%, Due 11/14) | $ | 22,100 | $ | 22,004 | $ | 22,100 | |||||||
|
(Business Services)
|
Equity Interests | 422 | 485 | |||||||||||
| Option | 25 | 25 | ||||||||||||
| Total Investment | 22,451 | 22,610 | ||||||||||||
|
Air Medical Group Holdings LLC
|
Senior Loan (4.3%, Due 3/11) | 4,665 | 4,642 | 4,456 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 2,993 | 20,000 | |||||||||||
| Total Investment | 7,635 | 24,456 | ||||||||||||
|
BB&T Capital Partners/Windsor
|
||||||||||||||
|
Mezzanine Fund,
LLC(5)
|
Equity Interests | 11,789 | 10,009 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 11,789 | 10,009 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
8
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Driven Brands, Inc.
|
Subordinated Debt (16.6%, Due 7/15) | $ | 89,838 | $ | 89,477 | $ | 86,398 | |||||||
|
(Consumer Services)
|
Common Stock (3,772,098 shares) | 9,516 | 2,500 | |||||||||||
| Total Investment | 98,993 | 88,898 | ||||||||||||
|
Multi-Ad Services, Inc.
|
Unitranche Debt (11.3%, Due 11/11) | 2,508 | 2,491 | 2,488 | ||||||||||
|
(Business Services)
|
Equity Interests | 1,737 | 1,206 | |||||||||||
| Total Investment | 4,228 | 3,694 | ||||||||||||
|
Pendum Acquisition, Inc.
|
Common Stock (8,872 shares) | — | — | |||||||||||
|
(Business Services)
|
Total Investment | — | — | |||||||||||
|
Postle Aluminum Company, LLC
|
Senior Loan (6.0%, Due 10/12)(6) | 35,000 | 34,876 | 15,308 | ||||||||||
|
(Industrial Products)
|
Subordinated Debt (3.0%, Due 10/12)(6) | 23,953 | 23,868 | — | ||||||||||
| Equity Interests | 2,174 | — | ||||||||||||
| Total Investment | 60,918 | 15,308 | ||||||||||||
|
Progressive International
|
Preferred Stock (500 shares) | 500 | 5,847 | |||||||||||
|
Corporation
|
Common Stock (197 shares) | 13 | 153 | |||||||||||
|
(Consumer Products)
|
Warrants | — | — | |||||||||||
| Total Investment | 513 | 6,000 | ||||||||||||
|
Regency Healthcare Group, LLC
|
Equity Interests | 1,302 | 1,841 | |||||||||||
|
(Healthcare Services)
|
Total Investment | 1,302 | 1,841 | |||||||||||
|
SGT India Private
Limited(4)
|
Common Stock (150,596 shares) | 4,158 | — | |||||||||||
|
(Business Services)
|
Total Investment | 4,158 | — | |||||||||||
|
Soteria Imaging Services, LLC
|
Subordinated Debt (11.3%, Due 11/10) | 4,250 | 4,204 | 4,154 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 1,881 | 1,283 | |||||||||||
| Total Investment | 6,085 | 5,437 | ||||||||||||
|
Universal Environmental Services, LLC
|
Equity Interests | 1,599 | — | |||||||||||
|
(Business Services)
|
Total Investment | 1,599 | — | |||||||||||
|
Total companies 5% to 25% owned
|
$ | 219,671 | $ | 178,253 | ||||||||||
|
Companies Less Than 5% Owned
|
||||||||||||||
|
3SI Security Systems, Inc.
|
Subordinated Debt (16.6%, Due 8/13)(6) | $ | 29,548 | $ | 29,473 | $ | 14,865 | |||||||
|
(Consumer Products)
|
Total Investment | 29,473 | 14,865 | |||||||||||
|
Augusta Sportswear Group, Inc.
|
Common Stock (2,500 shares) | 2,500 | 1,523 | |||||||||||
|
(Consumer Products)
|
Total Investment | 2,500 | 1,523 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
9
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Axium Healthcare Pharmacy, Inc.
|
Subordinated Debt (8.0%, Due 3/15) | $ | 2,975 | $ | 2,975 | $ | 2,380 | |||||||
|
(Healthcare Services)
|
Total Investment | 2,975 | 2,380 | |||||||||||
|
BenefitMall Holdings Inc.
|
Subordinated Debt (18.0%, Due 6/14) | 40,326 | 40,250 | 40,250 | ||||||||||
|
(Business Services)
|
Common Stock (39,274,290 shares)(12) | 39,274 | 73,729 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 79,524 | 113,979 | ||||||||||||
|
Broadcast Electronics, Inc.
|
Senior Loan (8.8%, Due 11/11)(6) | 4,875 | 4,847 | 340 | ||||||||||
|
(Business Services)
|
Preferred Stock (2,044 shares) | — | — | |||||||||||
| Total Investment | 4,847 | 340 | ||||||||||||
|
Bushnell, Inc.
|
Subordinated Debt (6.8%, Due 2/14) | 41,325 | 40,161 | 30,204 | ||||||||||
|
(Consumer Products)
|
Total Investment | 40,161 | 30,204 | |||||||||||
|
Callidus Debt Partners
CDO Fund I, Ltd.(4)(10) |
Class C Notes (12.9%, Due 12/13)(6) | 19,420 | 19,527 | 2,935 | ||||||||||
|
(CDO)
|
Class D Notes (17.0%, Due 12/13)(6) | 9,400 | 9,454 | — | ||||||||||
| Total Investment | 28,981 | 2,935 | ||||||||||||
|
Callidus Debt Partners
CLO Fund III, Ltd.(4)(10) |
Preferred Shares (23,600,000 shares) | 20,138 | 2,199 | |||||||||||
|
(CLO)
|
Total Investment | 20,138 | 2,199 | |||||||||||
|
Callidus Debt Partners
CLO Fund IV, Ltd.(4)(10) |
Class D Notes (5.1%, Due 4/20) | 3,000 | 2,160 | 1,653 | ||||||||||
|
(CLO)
|
Income Notes (0.0%)(11) | 14,868 | 4,366 | |||||||||||
| Total Investment | 17,028 | 6,019 | ||||||||||||
|
Callidus Debt Partners
CLO Fund V, Ltd.(4)(10) |
Income Notes (2.6%)(11) | 13,521 | 4,625 | |||||||||||
|
(CLO)
|
Total Investment | 13,521 | 4,625 | |||||||||||
|
Callidus Debt Partners
CLO Fund VI, Ltd.(4)(10) |
Class D Notes (6.5%, Due 10/21) | 9,325 | 7,602 | 3,833 | ||||||||||
|
(CLO)
|
Income Notes (0.0%)(11) | 29,144 | 4,155 | |||||||||||
| Total Investment | 36,746 | 7,988 | ||||||||||||
|
Callidus Debt Partners
CLO Fund VII, Ltd.(4)(10) |
Income Notes (0.0%)(11) | 24,824 | 5,431 | |||||||||||
|
(CLO)
|
Total Investment | 24,824 | 5,431 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(10)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
10
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Callidus MAPS CLO Fund I
LLC(10)
|
Class E Notes (5.8%, Due 12/17) | $ | 17,000 | $ | 17,000 | $ | 11,400 | |||||||
|
(CLO)
|
Income Notes (0.0%)(11) | 41,176 | 13,662 | |||||||||||
| Total Investment | 58,176 | 25,062 | ||||||||||||
|
Callidus MAPS CLO Fund II,
Ltd.(4)(10)
|
Class D Notes (4.8%, Due 7/22) | 7,700 | 3,785 | 3,068 | ||||||||||
|
(CLO)
|
Income Notes (0.9%)(11) | 18,109 | 4,819 | |||||||||||
| Total Investment | 21,894 | 7,887 | ||||||||||||
|
Carlisle Wide Plank Floors, Inc.
|
Unitranche Debt (12.0%, Due 6/11) | 1,644 | 1,637 | 1,533 | ||||||||||
|
(Consumer Products)
|
Common Stock (345,056 Shares) | 345 | — | |||||||||||
| Total Investment | 1,982 | 1,533 | ||||||||||||
|
Catterton Partners VI,
L.P.(5)
|
Limited Partnership Interest | 3,287 | 1,789 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 3,287 | 1,789 | |||||||||||
|
Commercial Credit Group, Inc.
|
Subordinated Debt (15.0%, Due 6/15) | 22,000 | 21,970 | 21,970 | ||||||||||
|
(Financial Services)
|
Preferred Stock (64,679 shares) | 15,543 | 6,212 | |||||||||||
| Warrants | — | — | ||||||||||||
| Total Investment | 37,513 | 28,182 | ||||||||||||
|
Community Education Centers, Inc.
|
Subordinated Debt (19.5%, Due 11/13) | 36,654 | 36,602 | 36,501 | ||||||||||
|
(Education Services)
|
Total Investment | 36,602 | 36,501 | |||||||||||
|
Component Hardware Group, Inc.
|
Subordinated Debt (13.5%, Due 1/13) | 18,921 | 18,876 | 16,587 | ||||||||||
|
(Industrial Products)
|
Total Investment | 18,876 | 16,587 | |||||||||||
|
Cook Inlet Alternative Risk, LLC
|
Unitranche Debt (10.8%, Due 4/13) | 87,600 | 87,286 | 69,000 | ||||||||||
|
(Business Services)
|
Equity Interests | 552 | — | |||||||||||
| Total Investment | 87,838 | 69,000 | ||||||||||||
|
Cortec Group Fund IV,
L.P.(5)
|
Limited Partnership Interest | 6,572 | 3,812 | |||||||||||
|
(Private Equity)
|
Total Investment | 6,572 | 3,812 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(10)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
11
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Digital VideoStream, LLC
|
Unitranche Debt (11.0%, Due 2/12) | $ | 13,203 | $ | 13,155 | $ | 12,825 | |||||||
|
(Business Services)
|
Convertible Subordinated Debt (10.0%, Due 2/16) | 4,894 | 4,883 | 4,883 | ||||||||||
| Total Investment | 18,038 | 17,708 | ||||||||||||
|
DirectBuy Holdings, Inc.
|
Subordinated Debt (16.0%, Due 5/13) | 76,389 | 76,139 | 60,287 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 8,000 | — | |||||||||||
| Total Investment | 84,139 | 60,287 | ||||||||||||
|
Distant Lands Trading Co.
|
Senior Loan (6.3%, Due 11/11) | 6,800 | 6,781 | 6,358 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (11.0%, Due 11/11) | 43,581 | 43,499 | 41,967 | ||||||||||
| Common Stock (3,451 shares) | 3,451 | 1,147 | ||||||||||||
| Total Investment | 53,731 | 49,472 | ||||||||||||
|
Diversified Mercury
|
Senior Loan (4.5%, Due 3/13) | 2,814 | 2,803 | 2,525 | ||||||||||
|
Communications, LLC
|
Total Investment | 2,803 | 2,525 | |||||||||||
|
(Business Services)
|
||||||||||||||
|
Dryden XVIII Leveraged
|
Class B Notes (5.0%, Due 10/19)(6) | 9,092 | 7,872 | 2,355 | ||||||||||
|
Loan 2007
Limited(4)
|
Income Notes (0.0%)(11) | 23,164 | 2,415 | |||||||||||
|
(CLO)
|
Total Investment | 31,036 | 4,770 | |||||||||||
|
Dynamic India
Fund IV(4)(5)
|
Equity Interests | 9,350 | 7,982 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,350 | 7,982 | |||||||||||
|
EarthColor, Inc.
|
Subordinated Debt (15.0%, Due 11/13)(6) | 123,819 | 123,385 | — | ||||||||||
|
(Business Services)
|
Common Stock (63,438 shares)(12) | 63,438 | — | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 186,823 | — | ||||||||||||
|
eCentury Capital Partners,
L.P.(5)
|
Limited Partnership Interest | 7,274 | — | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 7,274 | — | |||||||||||
|
eInstruction Corporation
|
Subordinated Debt (12.1%, Due 7/14-1/15) | 36,069 | 35,951 | 32,708 | ||||||||||
|
(Education Services)
|
Common Stock (2,406 shares) | 2,500 | 750 | |||||||||||
| Total Investment | 38,451 | 33,458 | ||||||||||||
|
Farley’s & Sathers Candy Company, Inc.
|
Subordinated Debt (8.3%, Due 3/11) | 2,500 | 2,496 | 2,492 | ||||||||||
|
(Consumer Products)
|
Total Investment | 2,496 | 2,492 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
12
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Fidus Mezzanine Capital,
L.P.(5)
|
Limited Partnership Interest | $ | 12,828 | $ | 7,804 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 12,828 | 7,804 | |||||||||||
|
Freedom Financial Network, LLC
|
Subordinated Debt (13.5%, Due 2/14) | $ | 6,000 | 5,953 | 6,000 | |||||||||
|
(Financial Services)
|
Total Investment | 5,953 | 6,000 | |||||||||||
|
Geotrace Technologies, Inc.
|
Warrants | 2,027 | 2,300 | |||||||||||
|
(Energy Services)
|
Total Investment | 2,027 | 2,300 | |||||||||||
|
Gilchrist & Soames, Inc.
|
Subordinated Debt (13.4%, Due 10/13) | 25,304 | 25,186 | 23,101 | ||||||||||
|
(Consumer Products)
|
Total Investment | 25,186 | 23,101 | |||||||||||
|
Havco Wood Products LLC
|
Equity Interests | 910 | — | |||||||||||
|
(Industrial Products)
|
Total Investment | 910 | — | |||||||||||
|
Higginbotham Insurance Agency, Inc.
|
Subordinated Debt (13.7%, Due 8/13 – 8/14) | 53,305 | 53,129 | 53,129 | ||||||||||
|
(Business Services)
|
Common Stock (23,695 shares)(12) | 23,695 | 12,355 | |||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 76,824 | 65,484 | ||||||||||||
|
The Homax Group, Inc.
|
Senior Loan (6.3%, Due 10/12) | 10,116 | 10,072 | 9,168 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (14.5%, Due 4/14) | 14,159 | 13,619 | 4,945 | ||||||||||
| Preferred Stock (76 shares) | 76 | — | ||||||||||||
| Common Stock (24 shares) | 5 | — | ||||||||||||
| Warrants | 954 | — | ||||||||||||
| Total Investment | 24,726 | 14,113 | ||||||||||||
|
Ideal Snacks Corporation
|
Senior Loan (8.5%, Due 6/10) | 1,084 | 1,084 | 1,068 | ||||||||||
|
(Consumer Products)
|
Total Investment | 1,084 | 1,068 | |||||||||||
|
Kodiak
Fund LP(5)
|
Equity Interests | 9,332 | 900 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,332 | 900 | |||||||||||
|
Market Track Holdings, LLC
|
Senior Loan (8.0%, Due 6/14) | 2,500 | 2,450 | 2,392 | ||||||||||
|
(Business Services)
|
Subordinated Debt (15.9%, Due 6/14) | 24,600 | 24,504 | 23,166 | ||||||||||
| Total Investment | 26,954 | 25,558 | ||||||||||||
|
NetShape Technologies, Inc.
|
Senior Loan (4.0%, Due 2/13) | 875 | 875 | 368 | ||||||||||
|
(Industrial Products)
|
Total Investment | 875 | 368 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
13
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Network Hardware Resale, Inc.
|
Unitranche Debt (12.8%, Due 12/11) | $ | 16,330 | $ | 16,382 | $ | 16,330 | |||||||
|
(Business Services)
|
Convertible Subordinated Debt | 15,953 | 16,000 | 16,000 | ||||||||||
| (9.8%, Due 12/15) | ||||||||||||||
| Total Investment | 32,382 | 32,330 | ||||||||||||
|
Novak Biddle Venture Partners III, L.P.(5)
|
Limited Partnership Interest | 2,018 | 1,037 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,018 | 1,037 | |||||||||||
|
Oahu Waste Services, Inc.
|
Stock Appreciation Rights | 206 | 406 | |||||||||||
|
(Business Services)
|
Total Investment | 206 | 406 | |||||||||||
|
Pangaea CLO
2007-1
Ltd.(4)
|
Class D Notes (5.3%, Due 1/21) | 15,000 | 11,985 | 7,795 | ||||||||||
|
(CLO)
|
Total Investment | 11,985 | 7,795 | |||||||||||
|
PC Helps Support, LLC
|
Senior Loan (4.3%, Due 12/13) | 8,299 | 8,210 | 7,763 | ||||||||||
|
(Business Services)
|
Subordinated Debt (12.8%, Due 12/13) | 27,121 | 27,013 | 25,572 | ||||||||||
| Total Investment | 35,223 | 33,335 | ||||||||||||
|
Performant Financial Corporation
|
Common Stock (478,816 shares) | 734 | 920 | |||||||||||
|
(Business Services)
|
Total Investment | 734 | 920 | |||||||||||
|
Promo Works, LLC
|
Unitranche Debt (12.3%, Due 12/11) | 23,111 | 22,994 | 20,312 | ||||||||||
|
(Business Services)
|
Total Investment | 22,994 | 20,312 | |||||||||||
|
Reed Group, Ltd.
|
Senior Loan (6.4%, Due 12/13) | 12,060 | 11,929 | 9,530 | ||||||||||
|
(Healthcare Services)
|
Subordinated Debt (15.8%, Due 12/13) | 19,076 | 19,013 | 14,924 | ||||||||||
| Equity Interests | 1,800 | — | ||||||||||||
| Total Investment | 32,742 | 24,454 | ||||||||||||
|
S.B. Restaurant Company
|
Unitranche Debt (9.8%, Due 4/11) | 38,327 | 38,184 | 33,606 | ||||||||||
|
(Retail)
|
Preferred Stock (46,690 shares) | 117 | — | |||||||||||
| Warrants | 534 | — | ||||||||||||
| Total Investment | 38,835 | 33,606 | ||||||||||||
|
SPP Mezzanine Funding II, L.P.(5)
|
Limited Partnership Interest | 7,605 | 6,987 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 7,605 | 6,987 | |||||||||||
|
STS Operating, Inc.
|
Subordinated Debt (11.0%, Due 1/13) | 30,386 | 30,313 | 27,305 | ||||||||||
|
(Industrial Products)
|
Total Investment | 30,313 | 27,305 | |||||||||||
|
Summit Energy Services, Inc.
|
Common Stock (415,982 shares) | 1,861 | 2,150 | |||||||||||
|
(Business Services)
|
Total Investment | 1,861 | 2,150 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. |
The accompanying notes are an
integral part of these consolidated financial statements.
14
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
September 30, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Tappan Wire & Cable Inc.
|
Unitranche Debt (15.0%, Due 8/14)(6) | $ | 22,346 | $ | 22,248 | $ | 4,515 | |||||||
|
(Business Services)
|
Common Stock (12,940 shares)(12) | 2,043 | — | |||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 24,291 | 4,515 | ||||||||||||
|
The Step2 Company, LLC
|
Unitranche Debt (11.0%, Due 4/12) | 94,602 | 94,396 | 89,550 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 2,156 | 1,528 | |||||||||||
| Total Investment | 96,552 | 91,078 | ||||||||||||
|
Tradesmen International, Inc.
|
Subordinated Debt (12.0%, Due 12/12) | 40,000 | 39,793 | 18,347 | ||||||||||
|
(Business Services)
|
Total Investment | 39,793 | 18,347 | |||||||||||
|
TransAmerican Auto Parts, LLC
|
Subordinated Debt (18.3%, Due 11/12)(6) | 24,561 | 24,409 | — | ||||||||||
|
(Consumer Products)
|
Equity Interests | 1,033 | — | |||||||||||
| Total Investment | 25,442 | — | ||||||||||||
|
Trover Solutions, Inc.
|
Subordinated Debt (12.0%, Due 11/12) | 56,676 | 56,510 | 52,568 | ||||||||||
|
(Business Services)
|
Total Investment | 56,510 | 52,568 | |||||||||||
|
United Road Towing, Inc.
|
Subordinated Debt (11.8%, Due 1/14) | 19,060 | 18,988 | 18,792 | ||||||||||
|
(Consumer Services)
|
Total Investment | 18,988 | 18,792 | |||||||||||
|
Venturehouse-Cibernet Investors, LLC
|
Equity Interest | — | — | |||||||||||
|
(Business Services)
|
Total Investment | — | — | |||||||||||
|
WMA Equity Corporation and Affiliates
|
Subordinated Debt (16.8%, Due 4/13-4/14)(6) | 139,455 | 138,559 | 71,345 | ||||||||||
|
d/b/a Wear Me Apparel
|
Common Stock (86 shares) | 39,549 | — | |||||||||||
|
(Consumer Products)
|
Total Investment | 178,108 | 71,345 | |||||||||||
|
Webster Capital II,
L.P.(5)
|
Limited Partnership Interest | 1,338 | 809 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 1,338 | 809 | |||||||||||
|
Woodstream Corporation
|
Subordinated Debt (12.0%, Due 2/15) | 90,000 | 89,678 | 74,221 | ||||||||||
|
(Consumer Products)
|
Common Stock (6,960 shares) | 6,961 | 2,000 | |||||||||||
| Total Investment | 96,639 | 76,221 | ||||||||||||
|
Other companies
|
Other debt investments | 37 | (151 | ) | (151 | ) | ||||||||
| Other equity investments | 41 | 8 | ||||||||||||
| Total Investment | (110 | ) | (143 | ) | ||||||||||
|
Total companies less than 5% owned
|
$ | 1,948,748 | $ | 1,232,400 | ||||||||||
|
Total private finance (113 portfolio investments)
|
$ | 4,194,269 | $ | 2,442,671 | ||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
15
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
Commercial
Real Estate Finance
(in thousands, except number of loans)
(in thousands, except number of loans)
| September 30, 2009 | ||||||||||||||||
| (unaudited) | ||||||||||||||||
|
Stated Interest |
Number of |
|||||||||||||||
| Rate Ranges | Loans | Cost | Value | |||||||||||||
|
Commercial Mortgage Loans
|
||||||||||||||||
| Up to 6.99% | 3 | $ | 32,143 | $ | 31,006 | |||||||||||
| 7.00%–8.99% | 2 | 1,876 | 1,864 | |||||||||||||
| 9.00%–10.99% | 1 | 6,476 | 6,476 | |||||||||||||
| 11.00%–12.99% | 1 | 10,479 | 6,319 | |||||||||||||
| 15.00% and above | 2 | 3,970 | 4,848 | |||||||||||||
|
Total commercial mortgage
loans(13)
|
$ | 54,944 | $ | 50,513 | ||||||||||||
|
Real Estate Owned
|
$ | 5,937 | $ | 6,179 | ||||||||||||
|
Equity
Interests(2) —
Companies more than 25% owned
|
$ | 13,185 | $ | 11,831 | ||||||||||||
|
Total commercial real estate finance
|
$ | 74,066 | $ | 68,523 | ||||||||||||
|
Total portfolio
|
$ | 4,268,335 | $ | 2,511,194 | ||||||||||||
| Yield | Cost | Value | |||||||||||
|
Investments in Money Market and Other Securities
|
|||||||||||||
|
First American Treasury Obligations Fund
|
— | $ | 90,020 | $ | 90,020 | ||||||||
|
Total
|
$ | 90,020 | $ | 90,020 | |||||||||
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(13)
|
Commercial mortgage loans totaling $9.2 million at value were on non-accrual status and therefore were considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
16
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
|
(in thousands, except number of shares)
|
Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Companies More Than 25% Owned
|
||||||||||||||
|
AGILE Fund I,
LLC(5)
|
Equity Interests | $ | 694 | $ | 497 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 694 | 497 | |||||||||||
|
AllBridge Financial, LLC
|
Equity Interests | 33,294 | 10,960 | |||||||||||
|
(Asset Management)
|
Total Investment | 33,294 | 10,960 | |||||||||||
| Standby Letter of Credit ($15,000) | ||||||||||||||
|
Allied Capital Senior Debt Fund,
L.P.(5)
|
Limited Partnership Interests | 31,800 | 31,800 | |||||||||||
|
(Private Debt Fund)
|
Total Investment | 31,800 | 31,800 | |||||||||||
|
Avborne,
Inc.(7)
|
Preferred Stock (12,500 shares) | — | 942 | |||||||||||
|
(Business Services)
|
Common Stock (27,500 shares) | — | — | |||||||||||
| Total Investment | — | 942 | ||||||||||||
|
Avborne Heavy Maintenance,
Inc.(7)
|
Common Stock (2,750 shares) | — | — | |||||||||||
|
(Business Services)
|
Total Investment | — | — | |||||||||||
|
Aviation Properties Corporation
|
Common Stock (100 shares) | 93 | — | |||||||||||
|
(Business Services)
|
Total Investment | 93 | — | |||||||||||
| Standby Letters of Credit ($1,000) | ||||||||||||||
|
Border Foods, Inc.
|
Senior Loan (12.6%, Due 12/09 – 3/12) | $ | 33,027 | 26,860 | 33,027 | |||||||||
|
(Consumer Products)
|
Preferred Stock (100,000 shares) | 12,721 | 11,851 | |||||||||||
| Common Stock (260,467 shares) | 3,847 | — | ||||||||||||
| Total Investment | 43,428 | 44,878 | ||||||||||||
|
Calder Capital Partners,
LLC(5)
|
Senior Loan (10.5%, Due 5/09)(6) | 4,496 | 4,496 | 953 | ||||||||||
|
(Asset Management)
|
Equity Interests | 2,453 | — | |||||||||||
| Total Investment | 6,949 | 953 | ||||||||||||
|
Callidus Capital Corporation
|
Subordinated Debt (18.0%, Due 8/13 – 2/14) | 16,068 | 16,068 | 16,068 | ||||||||||
|
(Asset Management)
|
Common Stock (100 shares) | — | 34,377 | |||||||||||
| Total Investment | 16,068 | 50,445 | ||||||||||||
| Guaranty ($6,447) | ||||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(7)
|
Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies. |
The accompanying notes are an
integral part of these consolidated financial statements.
17
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Ciena Capital LLC
|
Senior Loan (5.5%, Due 3/09)(6) | $ | 319,031 | $ | 319,031 | $ | 104,883 | |||||||
|
(Financial Services)
|
Class B Equity Interests | 119,436 | — | |||||||||||
| Class C Equity Interests | 109,301 | — | ||||||||||||
| Total Investment | 547,768 | 104,883 | ||||||||||||
| Guaranty ($5,000 — See Note 3) | ||||||||||||||
| Standby Letters of Credit ($102,600 — See Note 3) | ||||||||||||||
|
CitiPostal Inc.
|
Senior Loan (4.0%, Due 12/13) | 692 | 681 | 681 | ||||||||||
|
(Business Services)
|
Unitranche Debt (12.0%, Due 12/13) | 51,758 | 51,548 | 51,548 | ||||||||||
| Subordinated Debt (16.0%, Due 12/15) | 9,114 | 9,114 | 9,114 | |||||||||||
| Common Stock (37,024 shares) | 12,726 | 8,616 | ||||||||||||
| Total Investment | 74,069 | 69,959 | ||||||||||||
|
Coverall North America, Inc.
|
Unitranche Debt (12.0%, Due 7/11) | 32,035 | 31,948 | 31,948 | ||||||||||
|
(Business Services)
|
Subordinated Debt (15.0%, Due 7/11) | 5,563 | 5,549 | 5,549 | ||||||||||
| Common Stock (763,333 shares) | 14,361 | 17,968 | ||||||||||||
| Total Investment | 51,858 | 55,465 | ||||||||||||
|
CR Holding, Inc.
|
Subordinated Debt (16.6%, Due 2/13)(6) | 39,307 | 39,193 | 17,360 | ||||||||||
|
(Consumer Products)
|
Common Stock (32,090,696 shares) | 28,744 | — | |||||||||||
| Total Investment | 67,937 | 17,360 | ||||||||||||
|
Crescent Equity
Corp.(8)
|
Senior Loan (10.0%, Due 1/09) | 433 | 433 | 433 | ||||||||||
|
(Business Services)
|
Subordinated Debt (11.0%, Due 9/11 – 6/17) | 22,312 | 22,247 | 14,283 | ||||||||||
| Subordinated Debt (11.0%, Due 1/12 – 9/12)(6) | 10,097 | 10,072 | 4,331 | |||||||||||
| Common Stock (174 shares) | 81,255 | 4,580 | ||||||||||||
| Total Investment | 114,007 | 23,627 | ||||||||||||
| Guaranty ($900) | ||||||||||||||
| Standby Letters of Credit ($200) | ||||||||||||||
|
Direct Capital Corporation
|
Subordinated Debt (16.0%, Due 3/13)(6) | 55,671 | 55,496 | 13,530 | ||||||||||
|
(Financial Services)
|
Common Stock (2,317,020 shares) | 25,732 | — | |||||||||||
| Total Investment | 81,228 | 13,530 | ||||||||||||
|
Financial Pacific Company
|
Subordinated Debt (17.4%, Due 2/12 – 8/12) | 68,967 | 68,840 | 62,189 | ||||||||||
|
(Financial Services)
|
Preferred Stock (9,458 shares) | 8,865 | — | |||||||||||
| Common Stock (12,711 shares) | 12,783 | — | ||||||||||||
| Total Investment | 90,488 | 62,189 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(8)
|
Crescent Equity Corp. holds investments in Crescent Hotels & Resorts, LLC and affiliates. |
The accompanying notes are an
integral part of these consolidated financial statements.
18
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
ForeSite Towers, LLC
|
Equity Interest | $ | — | $ | 889 | |||||||||
|
(Tower Leasing)
|
Total Investment | — | 889 | |||||||||||
|
Global Communications, LLC
|
Senior Loan (10.0%, Due 9/02)(6) | $ | 1,335 | 1,335 | 1,335 | |||||||||
|
(Business Services)
|
Total Investment | 1,335 | 1,335 | |||||||||||
|
Hot Light Brands, Inc.
|
Senior Loan (9.0%, Due 2/11)(6) | 30,522 | 30,522 | 13,678 | ||||||||||
|
(Retail)
|
Common Stock (93,500 shares) | 5,151 | — | |||||||||||
| Total Investment | 35,673 | 13,678 | ||||||||||||
| Standby Letter of Credit ($105) | ||||||||||||||
|
Hot Stuff Foods, LLC
|
Senior Loan (4.0%, Due 2/11-2/12) | 53,597 | 53,456 | 42,378 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (12.4%, Due 8/12-2/13)(6) | 83,692 | 83,387 | — | ||||||||||
| Common Stock (1,147,453 shares) | 56,187 | — | ||||||||||||
| Total Investment | 193,030 | 42,378 | ||||||||||||
|
Huddle House, Inc.
|
Subordinated Debt (15.0%, Due 12/12) | 57,244 | 57,067 | 57,067 | ||||||||||
|
(Retail)
|
Common Stock (358,428 shares) | 35,828 | 20,922 | |||||||||||
| Total Investment | 92,895 | 77,989 | ||||||||||||
|
IAT Equity, LLC and Affiliates
|
Subordinated Debt (9.0%, Due 6/14) | 6,000 | 6,000 | 6,000 | ||||||||||
|
d/b/a Industrial Air Tool
|
Equity Interests | 7,500 | 8,860 | |||||||||||
|
(Industrial Products)
|
Total Investment | 13,500 | 14,860 | |||||||||||
|
Impact Innovations Group, LLC
|
Equity Interests in Affiliate | — | 321 | |||||||||||
|
(Business Services)
|
Total Investment | — | 321 | |||||||||||
|
Insight Pharmaceuticals Corporation
|
Subordinated Debt (15.0%, Due 9/12) | 45,827 | 45,738 | 45,827 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (19.0%, Due 9/12)(6) | 16,177 | 16,126 | 17,532 | ||||||||||
| Preferred Stock (25,000 shares) | 25,000 | 4,068 | ||||||||||||
| Common Stock (620,000 shares) | 6,325 | — | ||||||||||||
| Total Investment | 93,189 | 67,427 | ||||||||||||
|
Jakel, Inc.
|
Subordinated Debt (15.5%, Due 3/08)(6) | 748 | 748 | 374 | ||||||||||
|
(Industrial Products)
|
Total Investment | 748 | 374 | |||||||||||
|
Knightsbridge CLO
2007-1
Ltd.(4)
|
Class E Notes (13.8%, Due 1/22) | 18,700 | 18,700 | 14,866 | ||||||||||
|
(CLO)
|
Income Notes (14.9%)(11) | 40,914 | 35,214 | |||||||||||
| Total Investment | 59,614 | 50,080 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
19
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Knightsbridge CLO
2008-1
Ltd.(4)
|
Class C Notes (9.3%, Due 6/18) | $ | 12,800 | $ | 12,800 | $ | 12,800 | |||||||
|
(CLO)
|
Class D Notes (10.3%, Due 6/18) | 8,000 | 8,000 | 8,000 | ||||||||||
| Class E Notes (6.8%, Due 6/18) | 13,200 | 10,573 | 10,573 | |||||||||||
| Income Notes (16.6%)(11) | 21,315 | 21,315 | ||||||||||||
| Total Investment | 52,688 | 52,688 | ||||||||||||
|
MHF Logistical Solutions, Inc.
|
Subordinated Debt (13.0%, Due 6/12 – 6/13)(6) | 49,841 | 49,633 | — | ||||||||||
|
(Business Services)
|
Preferred Stock (10,000 shares) | — | — | |||||||||||
| Common Stock (20,934 shares) | 20,942 | — | ||||||||||||
| Total Investment | 70,575 | — | ||||||||||||
|
MVL Group, Inc.
|
Senior Loan (12.0%, Due 6/09 – 7/09) | 30,674 | 30,663 | 30,663 | ||||||||||
|
(Business Services)
|
Subordinated Debt (14.5%, Due 6/09 – 7/09) | 41,074 | 40,994 | 40,994 | ||||||||||
| Subordinated Debt (3.0%, Due 6/09)(6) | 144 | 139 | 86 | |||||||||||
| Common Stock (560,716 shares) | 555 | — | ||||||||||||
| Total Investment | 72,351 | 71,743 | ||||||||||||
|
Old Orchard Brands, LLC
|
Subordinated Debt (18.0%, Due 7/14) | 18,951 | 18,882 | 18,882 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 16,857 | 27,763 | |||||||||||
| Total Investment | 35,739 | 46,645 | ||||||||||||
|
Penn Detroit Diesel Allison, LLC
|
Subordinated Debt (15.5%, Due 8/13) | 37,984 | 37,869 | 37,869 | ||||||||||
|
(Business Services)
|
Equity Interests | 18,873 | 21,100 | |||||||||||
| Total Investment | 56,742 | 58,969 | ||||||||||||
|
Service Champ, Inc.
|
Subordinated Debt (15.5%, Due 4/12) | 27,050 | 26,984 | 26,984 | ||||||||||
|
(Business Services)
|
Common Stock (55,112 shares) | 11,785 | 21,156 | |||||||||||
| Total Investment | 38,769 | 48,140 | ||||||||||||
|
Stag-Parkway, Inc.
|
Unitranche Debt (14.0%, Due 7/12) | 17,975 | 17,920 | 17,962 | ||||||||||
|
(Business Services)
|
Common Stock (25,000 shares) | 32,686 | 6,968 | |||||||||||
| Total Investment | 50,606 | 24,930 | ||||||||||||
|
Startec Equity, LLC
|
Equity Interests | 211 | 332 | |||||||||||
|
(Telecommunications)
|
Total Investment | 211 | 332 | |||||||||||
|
Senior Secured Loan Fund LLC
|
Subordinated Certificates (12.0)% | 125,423 | 125,423 | |||||||||||
|
(Private Debt Fund)
|
Equity Interests | 1 | 1 | |||||||||||
| Total Investment | 125,424 | 125,424 | ||||||||||||
|
Worldwide Express Operations, LLC
|
Subordinated Debt (14.0%, Due 2/14)(6) | 2,865 | 2,722 | 2,032 | ||||||||||
|
(Business Services)
|
Equity Interests | 11,384 | — | |||||||||||
| Warrants | 144 | — | ||||||||||||
| Total Investment | 14,250 | 2,032 | ||||||||||||
|
Total companies more than 25% owned
|
$ | 2,167,020 | $ | 1,187,722 | ||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
20
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Companies 5% to 25% Owned
|
||||||||||||||
|
10th Street, LLC
|
Subordinated Debt (13.0%, Due 11/14) | $ | 21,439 | $ | 21,329 | $ | 21,439 | |||||||
|
(Business Services)
|
Equity Interests | 422 | 975 | |||||||||||
| Option | 25 | 25 | ||||||||||||
| Total Investment | 21,776 | 22,439 | ||||||||||||
|
Advantage Sales & Marketing, Inc.
|
Subordinated Debt (12.0%, Due 3/14) | 158,617 | 158,132 | 135,000 | ||||||||||
|
(Business Services)
|
Equity Interests | — | 5,000 | |||||||||||
| Total Investment | 158,132 | 140,000 | ||||||||||||
|
Air Medical Group Holdings LLC
|
Senior Loan (3.3%, Due 3/11) | 3,360 | 3,326 | 3,139 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 2,993 | 10,800 | |||||||||||
| Total Investment | 6,319 | 13,939 | ||||||||||||
|
Alpine ESP Holdings, Inc.
|
Preferred Stock (701 shares) | 701 | — | |||||||||||
|
(Business Services)
|
Common Stock (11,657 shares) | 13 | — | |||||||||||
| Total Investment | 714 | — | ||||||||||||
|
Amerex Group, LLC
|
Subordinated Debt (12.3%, Due 1/13) | 8,789 | 8,784 | 8,784 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 3,508 | 9,932 | |||||||||||
| Total Investment | 12,292 | 18,716 | ||||||||||||
|
BB&T Capital Partners/Windsor
|
Equity Interests | 11,789 | 11,063 | |||||||||||
|
Mezzanine Fund,
LLC(5)
|
||||||||||||||
|
(Private Equity Fund)
|
Total Investment | 11,789 | 11,063 | |||||||||||
|
Becker Underwood, Inc.
|
Subordinated Debt (14.5%, Due 8/12) | 25,503 | 25,450 | 25,502 | ||||||||||
|
(Industrial Products)
|
Common Stock (4,376 shares) | 5,014 | 2,267 | |||||||||||
| Total Investment | 30,464 | 27,769 | ||||||||||||
|
Drew Foam Companies, Inc.
|
Preferred Stock (622,555 shares) | 623 | 512 | |||||||||||
|
(Business Services)
|
Common Stock (6,286 shares) | 6 | — | |||||||||||
| Total Investment | 629 | 512 | ||||||||||||
|
Driven Brands, Inc.
|
Subordinated Debt (16.5%, Due 7/15) | 84,106 | 83,698 | 83,698 | ||||||||||
|
(Consumer Services)
|
Common Stock (3,772,098 shares) | 9,516 | 4,855 | |||||||||||
| Total Investment | 93,214 | 88,553 | ||||||||||||
|
Hilden America, Inc.
|
Common Stock (19 shares) | 454 | 76 | |||||||||||
|
(Consumer Products)
|
Total Investment | 454 | 76 | |||||||||||
|
Lydall Transport, Ltd.
|
Equity Interests | 432 | 345 | |||||||||||
|
(Business Services)
|
Total Investment | 432 | 345 | |||||||||||
|
Multi-Ad Services, Inc.
|
Unitranche Debt (11.3%, Due 11/11) | 3,018 | 2,995 | 2,941 | ||||||||||
|
(Business Services)
|
Equity Interests | 1,737 | 1,782 | |||||||||||
| Total Investment | 4,732 | 4,723 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. |
The accompanying notes are an
integral part of these consolidated financial statements.
21
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Progressive International
|
Preferred Stock (500 shares) | $ | 500 | $ | 1,125 | |||||||||
|
Corporation
|
Common Stock (197 shares) | 13 | 4,600 | |||||||||||
|
(Consumer Products)
|
Warrants | — | — | |||||||||||
| Total Investment | 513 | 5,725 | ||||||||||||
|
Regency Healthcare Group, LLC
|
Unitranche Debt (11.1%, Due 6/12) | $ | 10,901 | 10,855 | 10,825 | |||||||||
|
(Healthcare Services)
|
Equity Interests | 1,302 | 2,050 | |||||||||||
| Total Investment | 12,157 | 12,875 | ||||||||||||
|
SGT India Private
Limited(4)
|
Common Stock (150,596 shares) | 4,137 | — | |||||||||||
|
(Business Services)
|
Total Investment | 4,137 | — | |||||||||||
|
Soteria Imaging Services, LLC
|
Subordinated Debt (11.3%, Due 11/10) | 4,250 | 4,167 | 4,054 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 1,881 | 1,971 | |||||||||||
| Total Investment | 6,048 | 6,025 | ||||||||||||
|
Triax Holdings, LLC
|
Subordinated Debt (21.0%, Due 2/12)(6) | 10,625 | 10,587 | — | ||||||||||
|
(Consumer Products)
|
Equity Interests | 16,528 | — | |||||||||||
| Total Investment | 27,115 | — | ||||||||||||
|
Universal Environmental Services, LLC
|
Equity Interests | 1,599 | — | |||||||||||
|
(Business Services)
|
Total Investment | 1,599 | — | |||||||||||
|
Total companies 5% to 25% owned
|
$ | 392,516 | $ | 352,760 | ||||||||||
|
Companies Less Than 5% Owned
|
||||||||||||||
|
3SI Security Systems, Inc.
|
Subordinated Debt (14.6%, Due 8/13) | $ | 29,200 | $ | 29,118 | $ | 28,170 | |||||||
|
(Consumer Products)
|
Total Investment | 29,118 | 28,170 | |||||||||||
|
Abraxas Corporation
|
Subordinated Debt (14.6%, Due 4/13) | 36,822 | 36,662 | 36,170 | ||||||||||
|
(Business Services)
|
Total Investment | 36,662 | 36,170 | |||||||||||
|
Augusta Sportswear Group, Inc.
|
Subordinated Debt (13.0%, Due 1/15) | 53,000 | 52,825 | 52,406 | ||||||||||
|
(Consumer Products)
|
Common Stock (2,500 shares) | 2,500 | 1,400 | |||||||||||
| Total Investment | 55,325 | 53,806 | ||||||||||||
|
Axium Healthcare Pharmacy, Inc.
|
Senior Loan (14.0%, Due 12/12) | 3,750 | 3,724 | 3,654 | ||||||||||
|
(Healthcare Services)
|
Unitranche Debt (14.0%, Due 12/12) | 8,500 | 8,471 | 7,908 | ||||||||||
| Common Stock (22,860 shares) | 2,286 | 100 | ||||||||||||
| Total Investment | 14,481 | 11,662 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
22
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Baird Capital Partners IV
Limited(5)
|
Limited Partnership Interest | $ | 3,636 | $ | 2,978 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 3,636 | 2,978 | |||||||||||
|
BenefitMall Holdings Inc.
|
Subordinated Debt (18.0%, Due 6/14) | $ | 40,326 | 40,238 | 40,238 | |||||||||
|
(Business Services)
|
Common Stock (39,274,290 shares)(12) | 39,274 | 91,149 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 79,512 | 131,387 | ||||||||||||
|
Broadcast Electronics, Inc.
|
Senior Loan (8.8%, Due 11/11)(6) | 4,912 | 4,884 | 773 | ||||||||||
|
(Business Services)
|
Preferred Stock (2,044 shares) | — | — | |||||||||||
| Total Investment | 4,884 | 773 | ||||||||||||
|
Bushnell, Inc.
|
Subordinated Debt (8.0%, Due 2/14) | 41,325 | 40,003 | 35,794 | ||||||||||
|
(Consumer Products)
|
Total Investment | 40,003 | 35,794 | |||||||||||
|
Callidus Debt Partners
CDO Fund I, Ltd.(4)(10) |
Class C Notes (12.9%, Due 12/13) | 18,800 | 18,907 | 10,116 | ||||||||||
|
(CDO)
|
Class D Notes (17.0%, Due 12/13) | 9,400 | 9,454 | — | ||||||||||
| Total Investment | 28,361 | 10,116 | ||||||||||||
|
Callidus Debt Partners
CLO Fund III, Ltd.(4)(10) |
Preferred Shares (23,600,000 shares) | 20,138 | 5,402 | |||||||||||
|
(CLO)
|
Total Investment | 20,138 | 5,402 | |||||||||||
|
Callidus Debt Partners
CLO Fund IV, Ltd.(4)(10) |
Class D Notes (9.1%, Due 4/20) | 3,000 | 2,045 | 1,445 | ||||||||||
|
(CLO)
|
Income Notes (13.2%)(11) | 14,591 | 10,628 | |||||||||||
| Total Investment | 16,636 | 12,073 | ||||||||||||
|
Callidus Debt Partners
CLO Fund V, Ltd.(4)(10) |
Income Notes (16.4%)(11) | 13,388 | 10,331 | |||||||||||
|
(CLO)
|
Total Investment | 13,388 | 10,331 | |||||||||||
|
Callidus Debt Partners
CLO Fund VI, Ltd.(4)(10) |
Class D Notes (9.8%, Due 10/21) | 9,000 | 7,144 | 3,929 | ||||||||||
|
(CLO)
|
Income Notes (17.8%)(11) | 28,314 | 23,090 | |||||||||||
| Total Investment | 35,458 | 27,019 | ||||||||||||
|
Callidus Debt Partners
CLO Fund VII, Ltd.(4)(10) |
Income Notes (11.4%)(11) | 24,026 | 15,361 | |||||||||||
|
(CLO)
|
Total Investment | 24,026 | 15,361 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(10)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
23
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Callidus MAPS CLO Fund I
LLC(10)
|
Class E Notes (7.0%, Due 12/17) | $ | 17,000 | $ | 17,000 | $ | 9,813 | |||||||
|
(CLO)
|
Income Notes (4.0%)(11) | 45,053 | 27,678 | |||||||||||
| Total Investment | 62,053 | 37,491 | ||||||||||||
|
Callidus MAPS CLO Fund II,
Ltd.(4)(10)
|
Class D Notes (8.8%, Due 7/22) | 7,700 | 3,555 | 2,948 | ||||||||||
|
(CLO)
|
Income Notes (13.3%)(11) | 18,393 | 12,626 | |||||||||||
| Total Investment | 21,948 | 15,574 | ||||||||||||
|
Carlisle Wide Plank Floors, Inc.
|
Senior Loan (6.1%, Due 6/11) | 1,000 | 998 | 953 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (14.5%, Due 6/11) | 3,161 | 3,139 | 3,047 | ||||||||||
| Preferred Stock (345,056 Shares) | 345 | 82 | ||||||||||||
| Total Investment | 4,482 | 4,082 | ||||||||||||
|
Catterton Partners VI,
L.P.(5)
|
Limited Partnership Interest | 2,812 | 2,356 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,812 | 2,356 | |||||||||||
|
Centre Capital Investors V,
L.P.(5)
|
Limited Partnership Interest | 3,049 | 2,344 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 3,049 | 2,344 | |||||||||||
|
CK Franchising, Inc.
|
Subordinated Debt (12.3%, Due 7/12 – 7/17) | 21,000 | 20,912 | 20,912 | ||||||||||
| Preferred Stock (1,281,887 shares) | 1,282 | 1,592 | ||||||||||||
| Common Stock (7,585,549 shares) | 7,586 | 10,600 | ||||||||||||
| Total Investment | 29,780 | 33,104 | ||||||||||||
|
Commercial Credit Group, Inc.
|
Subordinated Debt (15.0%, Due 6/15) | 19,000 | 18,970 | 18,970 | ||||||||||
|
(Financial Services)
|
Preferred Stock (64,679 shares) | 15,543 | 9,073 | |||||||||||
| Warrants | — | — | ||||||||||||
| Total Investment | 34,513 | 28,043 | ||||||||||||
|
Community Education Centers, Inc.
|
Subordinated Debt (14.5%, Due 11/13) | 35,548 | 35,486 | 34,056 | ||||||||||
|
(Education Services)
|
Total Investment | 35,486 | 34,056 | |||||||||||
|
Component Hardware Group, Inc.
|
Subordinated Debt (13.5%, Due 1/13) | 18,710 | 18,654 | 18,261 | ||||||||||
|
(Industrial Products)
|
Total Investment | 18,654 | 18,261 | |||||||||||
|
Cook Inlet Alternative Risk, LLC
|
Unitranche Debt (10.8%, Due 4/13) | 90,000 | 89,619 | 82,839 | ||||||||||
|
(Business Services)
|
Equity Interests | 552 | — | |||||||||||
| Total Investment | 90,171 | 82,839 | ||||||||||||
|
Cortec Group Fund IV,
L.P.(5)
|
Limited Partnership Interest | 4,647 | 3,445 | |||||||||||
|
(Private Equity)
|
Total Investment | 4,647 | 3,445 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(10)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
24
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Diversified Mercury
Communications, LLC |
Senior Loan (4.5%, Due 3/13) | $ | 2,972 | $ | 2,958 | $ | 2,692 | |||||||
|
(Business Services)
|
Total Investment | 2,958 | 2,692 | |||||||||||
|
Digital VideoStream, LLC
|
Unitranche Debt (11.0%, Due 2/12) | 14,097 | 14,032 | 14,003 | ||||||||||
|
(Business Services)
|
Convertible Subordinated Debt (10.0%, Due 2/16) | 4,545 | 4,533 | 4,700 | ||||||||||
| Total Investment | 18,565 | 18,703 | ||||||||||||
|
DirectBuy Holdings, Inc.
|
Subordinated Debt (14.5%, Due 5/13) | 75,909 | 75,609 | 71,703 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 8,000 | 3,200 | |||||||||||
| Total Investment | 83,609 | 74,903 | ||||||||||||
|
Distant Lands Trading Co.
|
Senior Loan (7.5%, Due 11/11) | 4,825 | 4,800 | 4,501 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (12.3%, Due 11/11) | 43,133 | 43,022 | 42,340 | ||||||||||
| Common Stock (3,451 shares) | 3,451 | 984 | ||||||||||||
| Total Investment | 51,273 | 47,825 | ||||||||||||
|
Dryden XVIII Leveraged
|
Class B Notes (8.0%, Due 10/19) | 9,000 | 7,728 | 4,535 | ||||||||||
|
Loan 2007
Limited(4)
|
Income Notes (16.0%)(11) | 22,080 | 17,477 | |||||||||||
|
(CLO)
|
Total Investment | 29,808 | 22,012 | |||||||||||
|
Dynamic India
Fund IV(4)(5)
|
Equity Interests | 9,350 | 8,966 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,350 | 8,966 | |||||||||||
|
EarthColor, Inc.
|
Subordinated Debt (15.0%, Due 11/13)(6) | 123,819 | 123,385 | 77,243 | ||||||||||
|
(Business Services)
|
Common Stock (63,438 shares)(12) | 63,438 | — | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 186,823 | 77,243 | ||||||||||||
|
eCentury Capital Partners,
L.P.(5)
|
Limited Partnership Interest | 7,274 | 1,431 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 7,274 | 1,431 | |||||||||||
|
eInstruction Corporation
|
Subordinated Debt (12.6%, Due 7/14-1/15) | 33,931 | 33,795 | 31,670 | ||||||||||
|
(Education Services)
|
Common Stock (2,406 shares) | 2,500 | 1,700 | |||||||||||
| Total Investment | 36,295 | 33,370 | ||||||||||||
|
Farley’s & Sathers Candy Company, Inc.
|
Subordinated Debt (10.1%, Due 3/11) | 2,500 | 2,493 | 2,365 | ||||||||||
|
(Consumer Products)
|
Total Investment | 2,493 | 2,365 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
25
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
FCP-BHI Holdings, LLC
|
Subordinated Debt (12.0%, Due 9/13) | $ | 27,284 | $ | 27,191 | $ | 25,640 | |||||||
|
d/b/a Bojangles’
|
Equity Interests | 1,029 | 1,700 | |||||||||||
|
(Retail)
|
Total Investment | 28,220 | 27,340 | |||||||||||
|
Fidus Mezzanine Capital,
L.P.(5)
|
Limited Partnership Interest | 9,597 | 6,754 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,597 | 6,754 | |||||||||||
|
Freedom Financial Network, LLC
|
Subordinated Debt (13.5%, Due 2/14) | 13,000 | 12,945 | 12,811 | ||||||||||
|
(Financial Services)
|
Total Investment | 12,945 | 12,811 | |||||||||||
|
Geotrace Technologies, Inc.
|
Warrants | 2,027 | 3,000 | |||||||||||
|
(Energy Services)
|
Total Investment | 2,027 | 3,000 | |||||||||||
|
Gilchrist & Soames, Inc.
|
Subordinated Debt (13.4%, Due 10/13) | 25,800 | 25,660 | 24,692 | ||||||||||
| Total Investment | 25,660 | 24,692 | ||||||||||||
|
Havco Wood Products LLC
|
Equity Interests | 910 | 400 | |||||||||||
|
(Industrial Products)
|
Total Investment | 910 | 400 | |||||||||||
|
Higginbotham Insurance Agency, Inc.
|
Subordinated Debt (13.7%, Due 8/13 – 8/14) | 53,305 | 53,088 | 53,088 | ||||||||||
|
(Business Services)
|
Common Stock (23,695 shares)(12) | 23,695 | 27,335 | |||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 76,783 | 80,423 | ||||||||||||
|
The Hillman Companies,
Inc.(3)
|
Subordinated Debt (10.0%, Due 9/11) | 44,580 | 44,491 | 44,345 | ||||||||||
|
(Consumer Products)
|
Total Investment | 44,491 | 44,345 | |||||||||||
|
The Homax Group, Inc.
|
Senior Loan (7.2%, Due 10/12) | 11,785 | 11,742 | 10,689 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (14.5%, Due 4/14) | 14,000 | 13,371 | 12,859 | ||||||||||
| Preferred Stock (76 shares) | 76 | — | ||||||||||||
| Common Stock (24 shares) | 5 | — | ||||||||||||
| Warrants | 954 | — | ||||||||||||
| Total Investment | 26,148 | 23,548 | ||||||||||||
|
Ideal Snacks Corporation
|
Senior Loan (5.3%, Due 6/10) | 1,496 | 1,496 | 1,438 | ||||||||||
|
(Consumer Products)
|
Total Investment | 1,496 | 1,438 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(3)
|
Public company. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
26
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Kodiak
Fund LP(5)
|
Equity Interests | $ | 9,422 | $ | 900 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 9,422 | 900 | |||||||||||
|
Market Track Holdings, LLC
|
Senior Loan (8.0%, Due 6/14) | $ | 2,500 | 2,450 | 2,352 | |||||||||
|
(Business Services)
|
Subordinated Debt (15.9%, Due 6/14) | 24,600 | 24,488 | 23,785 | ||||||||||
| Total Investment | 26,938 | 26,137 | ||||||||||||
|
NetShape Technologies, Inc.
|
Senior Loan (5.3%, Due 2/13) | 382 | 382 | 346 | ||||||||||
|
(Industrial Products)
|
Total Investment | 382 | 346 | |||||||||||
|
Network Hardware Resale, Inc.
|
Unitranche Debt (12.5%, Due 12/11) | 18,734 | 18,809 | 18,703 | ||||||||||
|
(Business Services)
|
Convertible Subordinated Debt | |||||||||||||
| (9.8%, Due 12/15) | 14,533 | 14,585 | 14,585 | |||||||||||
| Total Investment | 33,394 | 33,288 | ||||||||||||
|
Novak Biddle Venture Partners III,
L.P.(5)
|
Limited Partnership Interest | 2,018 | 1,349 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,018 | 1,349 | |||||||||||
|
Oahu Waste Services, Inc.
|
Stock Appreciation Rights | 206 | 750 | |||||||||||
|
(Business Services)
|
Total Investment | 206 | 750 | |||||||||||
|
Pangaea CLO
2007-1
Ltd.(4)
|
Class D Notes (9.2%, Due 10/21) | 15,000 | 11,761 | 7,114 | ||||||||||
|
(CLO)
|
Total Investment | 11,761 | 7,114 | |||||||||||
|
PC Helps Support, LLC
|
Senior Loan (4.8%, Due 12/13) | 8,610 | 8,520 | 8,587 | ||||||||||
|
(Business Services)
|
Subordinated Debt (13.3%, Due 12/13) | 28,136 | 28,009 | 28,974 | ||||||||||
| Total Investment | 36,529 | 37,561 | ||||||||||||
|
Performant Financial Corporation
|
Common Stock (478,816 shares) | 734 | 200 | |||||||||||
|
(Business Services)
|
Total Investment | 734 | 200 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. |
The accompanying notes are an
integral part of these consolidated financial statements.
27
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Peter Brasseler Holdings, LLC
|
Equity Interests | $ | 3,451 | $ | 2,900 | |||||||||
|
(Business Services)
|
Total Investment | 3,451 | 2,900 | |||||||||||
|
PharMEDium Healthcare Corporation
|
Senior Loan (4.3%, Due 10/13) | $ | 1,910 | 1,910 | 1,747 | |||||||||
|
(Healthcare Services)
|
Total Investment | 1,910 | 1,747 | |||||||||||
|
Postle Aluminum Company, LLC
|
Unitranche Debt (13.0%, Due 10/12)(6) | 58,953 | 58,744 | 9,978 | ||||||||||
|
(Industrial Products)
|
Equity Interests | 2,174 | — | |||||||||||
| Total Investment | 60,918 | 9,978 | ||||||||||||
|
Pro Mach, Inc.
|
Subordinated Debt (12.5%, Due 6/12) | 14,616 | 14,573 | 14,089 | ||||||||||
|
(Industrial Products)
|
Equity Interests | 1,294 | 1,900 | |||||||||||
| Total Investment | 15,867 | 15,989 | ||||||||||||
|
Promo Works, LLC
|
Unitranche Debt (12.3%, Due 12/11) | 23,111 | 22,954 | 21,266 | ||||||||||
|
(Business Services)
|
Total Investment | 22,954 | 21,266 | |||||||||||
|
Reed Group, Ltd.
|
Senior Loan (7.6%, Due 12/13) | 12,893 | 12,758 | 11,502 | ||||||||||
|
(Healthcare Services)
|
Subordinated Debt (13.8%, Due 12/13) | 18,543 | 18,469 | 16,683 | ||||||||||
| Equity Interests | 1,800 | 300 | ||||||||||||
| Total Investment | 33,027 | 28,485 | ||||||||||||
|
S.B. Restaurant Company
|
Unitranche Debt (9.8%, Due 4/11) | 36,501 | 36,295 | 34,914 | ||||||||||
|
(Retail)
|
Preferred Stock (46,690 shares) | 117 | 117 | |||||||||||
| Warrants | 534 | — | ||||||||||||
| Total Investment | 36,946 | 35,031 | ||||||||||||
| Standby Letters of Credit ($2,465) | ||||||||||||||
|
Snow Phipps Group,
L.P.(5)
|
Limited Partnership Interest | 4,785 | 4,374 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 4,785 | 4,374 | |||||||||||
|
SPP Mezzanine Funding II,
L.P.(5)
|
Limited Partnership Interest | 9,362 | 9,269 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,362 | 9,269 | |||||||||||
|
STS Operating, Inc.
|
Subordinated Debt (11.0%, Due 1/13) | 30,386 | 30,296 | 29,745 | ||||||||||
|
(Industrial Products)
|
Total Investment | 30,296 | 29,745 | |||||||||||
|
Summit Energy Services, Inc.
|
Subordinated Debt (11.6%, Due 8/13) | 35,730 | 35,547 | 32,113 | ||||||||||
| Common Stock (415,982 shares) | 1,861 | 1,900 | ||||||||||||
| Total Investment | 37,408 | 34,013 | ||||||||||||
|
Tank Intermediate Holding Corp.
|
Senior Loan (7.1%, Due 9/14) | 30,514 | 29,539 | 25,937 | ||||||||||
| Total Investment | 29,539 | 25,937 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
28
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
|
(in thousands, except number of shares)
|
Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Tappan Wire & Cable Inc.
|
Unitranche Debt (15.0%, Due 8/14) | $ | 22,346 | $ | 22,248 | $ | 15,625 | |||||||
|
(Business Services)
|
Common Stock (12,940 shares)(12) | 2,043 | — | |||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 24,291 | 15,625 | ||||||||||||
|
The Step2 Company, LLC
|
Unitranche Debt (11.0%, Due 4/12) | 95,083 | 94,816 | 90,474 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 2,156 | 1,161 | |||||||||||
| Total Investment | 96,972 | 91,635 | ||||||||||||
|
Tradesmen International, Inc.
|
Subordinated Debt (12.0%, Due 12/12) | 40,000 | 39,586 | 37,840 | ||||||||||
|
(Business Services)
|
Total Investment | 39,586 | 37,840 | |||||||||||
|
TransAmerican Auto Parts, LLC
|
Subordinated Debt (16.3%, Due 11/12)(6) | 24,561 | 24,409 | — | ||||||||||
|
(Consumer Products)
|
Equity Interests | 1,034 | — | |||||||||||
| Total Investment | 25,443 | — | ||||||||||||
|
Trover Solutions, Inc.
|
Subordinated Debt (12.0%, Due 11/12) | 60,054 | 59,847 | 57,362 | ||||||||||
|
(Business Services)
|
Total Investment | 59,847 | 57,362 | |||||||||||
|
United Road Towing, Inc.
|
Subordinated Debt (12.1%, Due 1/14) | 20,000 | 19,915 | 20,000 | ||||||||||
|
(Consumer Services)
|
Total Investment | 19,915 | 20,000 | |||||||||||
|
Venturehouse-Cibernet Investors, LLC
|
Equity Interest | — | — | |||||||||||
|
(Business Services)
|
Total Investment | — | — | |||||||||||
|
VICORP Restaurants, Inc.
|
Warrants | 33 | — | |||||||||||
|
(Retail)
|
Total Investment | 33 | — | |||||||||||
|
WMA Equity Corporation and Affiliates
|
Subordinated Debt (16.8%, Due 4/13-4/14)(6) | 139,455 | 138,559 | 63,823 | ||||||||||
|
d/b/a Wear Me Apparel
|
Common Stock (86 shares) | 39,721 | — | |||||||||||
|
(Consumer Products)
|
Total Investment | 178,280 | 63,823 | |||||||||||
|
Webster Capital II,
L.P.(5)
|
Limited Partnership Interest | 1,702 | 1,481 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 1,702 | 1,481 | |||||||||||
|
Woodstream Corporation
|
Subordinated Debt (12.0%, Due 2/15) | 90,000 | 89,633 | 83,258 | ||||||||||
|
(Consumer Products)
|
Common Stock (6,960 shares) | 6,961 | 2,500 | |||||||||||
| Total Investment | 96,594 | 85,758 | ||||||||||||
|
York Insurance Services Group, Inc.
|
Common Stock (12,939 shares) | 1,294 | 1,700 | |||||||||||
|
(Business Services)
|
Total Investment | 1,294 | 1,700 | |||||||||||
|
Other companies
|
Other debt investments | 155 | 74 | 72 | ||||||||||
| Other equity investments | 30 | 8 | ||||||||||||
| Total Investment | 104 | 80 | ||||||||||||
|
Total companies less than 5% owned
|
$ | 2,317,856 | $ | 1,858,581 | ||||||||||
|
Total private finance (138 portfolio investments)
|
$ | 4,877,392 | $ | 3,399,063 | ||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. |
|
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
29
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF INVESTMENTS — (Continued)
Commercial
Real Estate Finance
(in thousands, except number of loans)
(in thousands, except number of loans)
|
Stated Interest |
Number of |
December 31, 2008 | ||||||||||||||
| Rate Ranges | Loans | Cost | Value | |||||||||||||
|
Commercial Mortgage Loans
|
||||||||||||||||
| Up to 6.99% | 4 | $ | 30,999 | $ | 30,537 | |||||||||||
| 7.00%–8.99% | 1 | 644 | 580 | |||||||||||||
| 9.00%–10.99% | 1 | 6,465 | 6,465 | |||||||||||||
| 11.00%–12.99% | 1 | 10,469 | 9,391 | |||||||||||||
| 15.00% and above | 2 | 3,970 | 6,529 | |||||||||||||
|
Total commercial mortgage
loans(13)
|
$ | 52,547 | $ | 53,502 | ||||||||||||
|
Real Estate Owned
|
$ | 18,201 | $ | 20,823 | ||||||||||||
|
Equity
Interests(2) —
Companies more than 25% owned
|
$ | 14,755 | $ | 19,562 | ||||||||||||
|
Guarantees ($6,871)
|
||||||||||||||||
|
Standby Letter of Credit ($650)
|
||||||||||||||||
|
Total commercial real estate finance
|
$ | 85,503 | $ | 93,887 | ||||||||||||
|
Total portfolio
|
$ | 4,962,895 | $ | 3,492,950 | ||||||||||||
| Yield | Cost | Value | ||||||||||
|
Investments in Money Market and Other Securities
|
||||||||||||
|
SEI Daily Income Tr Prime Obligation Money Market Fund
|
0.9% | $ | 5 | $ | 5 | |||||||
|
Columbia Treasury Reserves Fund
|
— | 12 | 12 | |||||||||
|
Other Money Market Funds
|
— | 270 | 270 | |||||||||
|
Total
|
$ | 287 | $ | 287 | ||||||||
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(13)
|
Commercial mortgage loans totaling $7.7 million at value were on non-accrual status and therefore were considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
30
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
| Note 1. | Organization |
Allied Capital Corporation, a Maryland corporation, is a
closed-end, non-diversified management investment company that
has elected to be regulated as a business development company
(“BDC”) under the Investment Company Act of 1940
(“1940 Act”). Allied Capital Corporation
(“ACC”) has a real estate investment trust subsidiary,
Allied Capital REIT, Inc. (“Allied REIT”), and several
subsidiaries that are single member limited liability companies
established for specific purposes including holding real estate
properties. ACC also has a subsidiary, A.C. Corporation
(“AC Corp”), that generally provides diligence and
structuring services, as well as transaction, management,
consulting, and other services, including underwriting and
arranging senior loans, to the Company, its portfolio companies
and its managed funds.
ACC and its subsidiaries, collectively, are referred to as the
“Company.” The Company consolidates the results of its
subsidiaries for financial reporting purposes.
Pursuant to Accounting Standards Codification (“ASC”)
Topic 810 “Consolidations”, the financial
results of the Company’s portfolio investments are not
consolidated in the Company’s financial statements.
Portfolio investments are held for purposes of deriving
investment income and future capital gains.
The investment objective of the Company is to achieve current
income and capital gains. In order to achieve this objective,
the Company has primarily invested in debt and equity securities
of private companies in a variety of industries.
| Note 2. | Summary of Significant Accounting Policies |
The consolidated financial statements include the accounts of
ACC and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 2008 balances to conform
with the 2009 financial statement presentation.
In June 2009, the FASB issued SFAS No. 168,
“The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles,”
which was primarily codified into ASC Topic 105,
“Generally Accepted Accounting Standards.” This
standard is the single source of authoritative non-governmental
U.S. generally accepted accounting principles
(“GAAP”), superseding existing FASB, American
Institute of Certified Public Accountants (“AICPA”),
Emerging Issues Task Force (“EITF”), and related
accounting literature. Also included is relevant Securities and
Exchange Commission guidance organized using the same topical
structure in separate sections. This guidance is effective for
financial statements issued for reporting periods that end after
September 15, 2009. This guidance impacts the
Company’s consolidated financial statements and related
disclosures as all references to authoritative literature
reflect the newly adopted codification.
The accompanying unaudited consolidated financial statements of
the Company have been prepared in accordance with GAAP for
interim financial information. Accordingly, they do not include
all of the information and footnotes required by GAAP for
complete consolidated financial statements. In the opinion of
management, the unaudited consolidated financial results of the
Company included herein contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the
financial position of the Company as of September 30, 2009,
the results of operations for the three and nine months ended
September 30, 2009 and 2008, and changes in net assets and
cash flows for the nine months ended September 30, 2009 and
2008. The results of operations for the three and nine months
31
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 2. | Summary of Significant Accounting Policies, continued |
ended September 30, 2009, are not necessarily indicative of
the operating results to be expected for the full year.
The private finance portfolio and the interest and related
portfolio income and net realized gains (losses) on the private
finance portfolio are presented in three categories: companies
more than 25% owned, which represent portfolio companies where
the Company directly or indirectly owns more than 25% of the
outstanding voting securities of such portfolio company or where
the Company controls the portfolio company’s board of
directors and, therefore, are deemed controlled by the Company
under the 1940 Act; companies owned 5% to 25%, which represent
portfolio companies where the Company directly or indirectly
owns 5% to 25% of the outstanding voting securities of such
portfolio company or where the Company holds one or more seats
on the portfolio company’s board of directors and,
therefore, are deemed to be an affiliated person under the 1940
Act; and companies less than 5% owned which represent portfolio
companies where the Company directly or indirectly owns less
than 5% of the outstanding voting securities of such portfolio
company and where the Company has no other affiliations with
such portfolio company. The interest and related portfolio
income and net realized gains (losses) from the commercial real
estate finance portfolio and other sources, including
investments in money market and other securities, are included
in the companies less than 5% owned category on the consolidated
statement of operations.
In the ordinary course of business, the Company enters into
transactions with portfolio companies that may be considered
related party transactions.
The Company, as a BDC, has invested in illiquid securities
including debt and equity securities of portfolio companies, CLO
bonds and preferred shares/income notes, CDO bonds and
investment funds. The Company’s investments may be subject
to certain restrictions on resale and generally have no
established trading market. The Company values substantially all
of its investments at fair value as determined in good faith by
the Board of Directors in accordance with the Company’s
valuation policy and the provisions of the 1940 Act and ASC
Topic 820 “Financial Instruments,” which
codified FASB Statement No. 157, Fair Value
Measurements. The Company determines fair value to be the
price that would be received for an investment in a current
sale, which assumes an orderly transaction between market
participants on the measurement date. The Company’s
valuation policy considers the fact that no ready market exists
for substantially all of the securities in which it invests and
that fair value for its investments must typically be determined
using unobservable inputs. The Company’s valuation policy
is intended to provide a consistent basis for determining the
fair value of the portfolio.
The Company adopted the standards in ASC Topic 820 on a
prospective basis in the first quarter of 2008. These standards
require the Company to assume that the portfolio investment is
to be sold in the principal market to market participants, or in
the absence of a principal market, the most advantageous market,
which may be a hypothetical market. Market participants are
defined as buyers and sellers in the principal or most
advantageous market that are independent, knowledgeable, and
willing and able to transact. In accordance with the standards,
the Company has considered its principal market, or the market
in which the Company exits its portfolio investments with the
greatest volume and level of activity.
The Company has determined that for its buyout investments,
where the Company has control or could gain control through an
option or warrant security, both the debt and equity securities
of the portfolio investment would exit in the merger and
acquisition (“M&A”) market as the principal
market generally through a sale or recapitalization of the
portfolio company. The Company believes that the in-
32
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 2. | Summary of Significant Accounting Policies, continued |
use premise of value (as defined in ASC Topic 820), which
assumes the debt and equity securities are sold together, is
appropriate as this would provide maximum proceeds to the
seller. As a result, the Company uses the enterprise value
methodology to determine the fair value of these investments.
Enterprise value means the entire value of the company to a
market participant, including the sum of the values of debt and
equity securities used to capitalize the enterprise at a point
in time. Enterprise value is determined using various factors,
including cash flow from operations of the portfolio company,
multiples at which private companies are bought and sold, and
other pertinent factors, such as recent offers to purchase a
portfolio company, recent transactions involving the purchase or
sale of the portfolio company’s equity securities,
liquidation events, or other events. The Company allocates the
enterprise value to these securities in order of the legal
priority of the securities.
While the Company typically exits its securities upon the sale
or recapitalization of the portfolio company in the M&A
market, for investments in portfolio companies where the Company
does not have control or the ability to gain control through an
option or warrant security, the Company cannot typically control
the exit of its investment into its principal market (the
M&A market). As a result, in accordance with ASC Topic 820,
the Company is required to determine the fair value of these
investments assuming a sale of the individual investment (the
in-exchange premise of value) in a hypothetical market to a
hypothetical market participant. The Company continues to
perform an enterprise value analysis for the investments in this
category to assess the credit risk of the loan or debt security
and to determine the fair value of its equity investment in
these portfolio companies. The determined equity values are
generally discounted when the Company has a minority ownership
position, restrictions on resale, specific concerns about the
receptivity of the capital markets to a specific company at a
certain time, or other factors. For loan and debt securities,
the Company performs a yield analysis assuming a hypothetical
current sale of the investment. The yield analysis requires the
Company to estimate the expected repayment date of the
instrument and a market participant’s required yield. The
Company’s estimate of the expected repayment date of a loan
or debt security may be shorter than the legal maturity of the
instruments as the Company’s loans have historically been
repaid prior to the maturity date. The yield analysis considers
changes in interest rates and changes in leverage levels of the
loan or debt security as compared to market interest rates and
leverage levels. Assuming the credit quality of the loan or debt
security remains stable, the Company will use the value
determined by the yield analysis as the fair value for that
security. A change in the assumptions that the Company uses to
estimate the fair value of its loans and debt securities using
the yield analysis could have a material impact on the
determination of fair value. If there is deterioration in credit
quality or a loan or debt security is in workout status, the
Company may consider other factors in determining the fair value
of a loan or debt security, including the value attributable to
the loan or debt security from the enterprise value of the
portfolio company or the proceeds that would be received in a
liquidation analysis.
The Company’s equity investments in private debt and equity
funds are generally valued based on the fund’s net asset
value, unless other factors lead to a determination of fair
value at a different amount. The value of the Company’s
equity securities in public companies for which quoted prices in
an active market are readily available is based on the closing
public market price on the measurement date.
The fair value of the Company’s CLO bonds and preferred
shares/income notes and CDO bonds (“CLO/CDO Assets”)
is generally based on a discounted cash flow model that utilizes
prepayment, re-investment, loss and ratings assumptions based on
historical experience and projected performance, economic
factors, the characteristics of the underlying cash flow, and
comparable yields for similar bonds and preferred shares/ income
notes, when available. The Company recognizes unrealized
appreciation or
33
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 2. | Summary of Significant Accounting Policies, continued |
depreciation on its CLO/CDO Assets as comparable yields in the
market change
and/or based
on changes in estimated cash flows resulting from changes in
prepayment, re-investment, loss or ratings assumptions in the
underlying collateral pool or changes in redemption assumptions
for the CLO/CDO Assets, if applicable. The Company determines
the fair value of its CLO/CDO Assets on an individual
security-by-security
basis.
The Company records unrealized depreciation on investments when
it determines that the fair value of a security is less than its
cost basis, and records unrealized appreciation when it
determines that the fair value is greater than its cost basis.
Because of the inherent uncertainty of valuation, the values
determined at the measurement date may differ significantly from
the values that would have been used had a ready market existed
for the investments, and the differences could be material.
Additionally, changes in the market environment and other events
that may occur over the life of the investments may cause the
gains or losses ultimately realized on these investments to be
different than the values determined at the measurement date. In
accordance with ASC Topic 820 (discussed below), the Company
does not consider a transaction price that is associated with a
transaction that is not orderly to be indicative of fair value
or market participant risk premiums, and accordingly would place
little, if any, weight on transactions that are not orderly in
determining fair value. When considering recent potential or
completed transactions, the Company uses judgment in determining
if such offers or transactions were pursuant to an orderly
process for purposes of determining how much weight is placed on
these data points in accordance with the applicable guidelines
in ASC Topic 820.
Net
Realized Gains or Losses and Net Change in Unrealized
Appreciation or Depreciation
Realized gains or losses are measured by the difference between
the net proceeds from the repayment or sale and the cost basis
of the investment without regard to unrealized appreciation or
depreciation previously recognized, and include investments
charged off during the period, net of recoveries. Net change in
unrealized appreciation or depreciation primarily reflects the
change in portfolio investment values during the reporting
period, including the reversal of previously recorded unrealized
appreciation or depreciation when gains or losses are realized.
Net change in unrealized appreciation or depreciation also
reflects the change in the value of U.S. Treasury bills,
when applicable, and depreciation on accrued interest and
dividends receivable and other assets where collection is
doubtful.
Interest
and Dividend Income
Interest income is recorded on an accrual basis to the extent
that such amounts are expected to be collected. For loans and
debt securities with contractual
payment-in-kind
interest, which represents contractual interest accrued and
added to the loan balance that generally becomes due at
maturity, the Company will not accrue
payment-in-kind
interest if the portfolio company valuation indicates that the
payment-in-kind
interest is not collectible. In general, interest is not accrued
on loans and debt securities if the Company has doubt about
interest collection or where the enterprise value of the
portfolio company may not support further accrual. Interest may
not accrue on loans or debt securities to portfolio companies
that are more than 50% owned by the Company depending on such
company’s capital requirements.
When the Company receives nominal cost warrants or free equity
securities (“nominal cost equity”), the Company
allocates its cost basis in its investment between its debt
securities and its nominal cost
34
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 2. | Summary of Significant Accounting Policies, continued |
equity at the time of origination. At that time, the original
issue discount basis of the nominal cost equity is recorded by
increasing the cost basis in the equity and decreasing the cost
basis in the related debt securities. Loan origination fees,
original issue discount, and market discount are capitalized and
then amortized into interest income using a method that
approximates the effective interest method. Upon the prepayment
of a loan or debt security, any unamortized loan origination
fees are recorded as interest income and any unamortized
original issue discount or market discount is recorded as a
realized gain.
The weighted average yield on loans and debt securities is
computed as the (a) annual stated interest on accruing
loans and debt securities plus the annual amortization of loan
origination fees, original issue discount, and market discount
on accruing loans and debt securities less the annual
amortization of loan origination costs, divided by
(b) total loans and debt securities at value. The weighted
average yield is computed as of the balance sheet date.
The Company recognizes interest income on the CLO preferred
shares/income notes using the effective interest method, based
on the anticipated yield that is determined using the estimated
cash flows over the projected life of the investment. Yields are
revised when there are changes in actual or estimated cash flows
due to changes in prepayments
and/or
re-investments, credit losses, ratings or asset pricing. Changes
in estimated yield are recognized as an adjustment to the
estimated yield over the remaining life of the preferred
shares/income notes from the date the estimated yield was
changed. CLO and CDO bonds have stated interest rates. The
weighted average yield on the CLO/CDO Assets is calculated as
the (a) annual stated interest or the effective interest
yield on the accruing bonds or the effective yield on the
preferred shares/income notes, divided by (b) CLO/CDO
Assets at value. The weighted average yields are computed as of
the balance sheet date.
Dividend income on preferred equity securities is recorded as
dividend income on an accrual basis to the extent that such
amounts are expected to be collected and to the extent that the
Company has the option to receive the dividend in cash. Dividend
income on common equity securities is recorded on the record
date for private companies or on the ex-dividend date for
publicly traded companies.
Fee
Income
Fee income includes fees for loan prepayment premiums,
guarantees, commitments and services rendered by the Company to
portfolio companies and other third parties such as diligence,
structuring, transaction services, management and consulting
services, and other services. Loan prepayment premiums are
recognized at the time of prepayment. Guaranty and commitment
fees are generally recognized as income over the related period
of the guaranty or commitment, respectively. Diligence,
structuring, and transaction services fees are generally
recognized as income when services are rendered or when the
related transactions are completed. Management, consulting and
other services fees, including fund management fees, are
generally recognized as income as the services are rendered.
Fees are not accrued if the Company has doubt about collection
of those fees.
Cash
and Cash Equivalents
Cash and cash equivalents represents unrestricted cash and
highly liquid securities with original maturities of 90 days or
less.
35
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 2. | Summary of Significant Accounting Policies, continued |
Guarantees
Guarantees meeting the characteristics described in ASC Topic
460, “Guarantees” and issued or modified after
December 31, 2002, are recognized at fair value at
inception. Guarantees made on behalf of portfolio companies are
considered in determining the fair value of the Company’s
investments. See Note 5.
Financing
Costs
Debt financing costs are based on actual costs incurred in
obtaining debt financing and generally are deferred and
amortized as part of interest expense over the term of the
related debt instrument using a method that approximates the
effective interest method. Costs associated with the issuance of
common stock are recorded as a reduction to the proceeds from
the sale of common stock. Financing costs generally include
underwriting, accounting and legal fees, and printing costs.
Dividends
to Shareholders
Dividends to shareholders are recorded on the ex-dividend date.
Stock
Compensation Plans
The Company has a stock-based employee compensation plan. See
Note 9. Effective January 1, 2006, the Company adopted
the provisions of FASB Statement No. 123 (Revised 2004),
Share-Based Payment (“SFAS 123R”), which
was primarily codified into ASC Topic 718,
“Compensation — Stock Compensation”.
These standards were adopted using the modified prospective
method of application, which required the Company to recognize
compensation costs on a prospective basis beginning
January 1, 2006. Accordingly, the Company did not restate
prior year financial statements. Under this method, the
unamortized cost of previously awarded options that were
unvested as of January 1, 2006, is recognized over the
remaining service period in the statement of operations
beginning in 2006, using the fair value amounts determined for
pro forma disclosure under these standards. With respect to
options granted on or after January 1, 2006, compensation
cost based on estimated grant date fair value is recognized over
the related service period in the statement of operations.
36
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 2. | Summary of Significant Accounting Policies, continued |
The stock option expense for the three and nine months ended
September 30, 2009 and 2008, was as follows:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||
| ($ in millions, except per share amounts) | 2009 | 2008 | 2009 | 2008 | ||||||||
|
Employee Stock Option Expense:
|
||||||||||||
|
Previously awarded, unvested options as of January 1, 2006
|
$— | $— | $— | $3.9 | ||||||||
|
Options granted on or after January 1, 2006
|
0.4 | 1.5 | 2.4 | 5.6 | ||||||||
|
Total employee stock option expense
|
$0.4 | $1.5 | $2.4 | $9.5 | ||||||||
|
Per basic share
|
$0.00 | $0.01 | $0.01 | $0.06 | ||||||||
|
Per diluted share
|
$0.00 | $0.01 | $0.01 | $0.06 | ||||||||
Options Granted. The stock option
expense shown in the table above was based on the underlying
value of the options granted by the Company. The fair value of
each option grant was estimated on the date of grant using the
Black-Scholes option pricing model and expensed over the vesting
period. The following weighted average assumptions were used to
calculate the fair value of options granted during the three and
nine months ended September 30, 2009 and 2008:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
|
|
2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Expected term (in years)
|
— | 5.0 | 3.0 | 5.0 | ||||||||||||
|
Risk-free interest rate
|
— | 3.4 | % | 1.3 | % | 2.8 | % | |||||||||
|
Expected volatility
|
— | 32.8 | % | 105.0 | % | 27.8 | % | |||||||||
|
Dividend yield
|
— | 8.5 | % | 32.5 | % | 8.5 | % | |||||||||
|
Weighted average fair value per option
|
— | $1.81 | $0.21 | $2.18 | ||||||||||||
The expected term of the options granted represents the period
of time that such options are expected to be outstanding. To
determine the expected term of the options, the Company used
historical and other data to estimate option exercise time
frames, including considering employee terminations. The risk
free rate was based on the U.S. Treasury bond yield curve
at the date of grant consistent with the expected term. Expected
volatilities were determined based on the historical volatility
of the Company’s common stock over a historical time period
consistent with the expected term. The dividend yield was
determined based on an estimate of the Company’s future
dividends over the expected term, relative to the option price.
The estimate of future dividends takes into consideration the
Company’s estimate of future taxable income required to be
distributed in order to maintain its status as a registered
investment company (see “Federal and State Income Taxes and
Excise Tax” below). The Company currently is not paying a
dividend and may or may not be able to pay a dividend during the
expected term. In addition, actual future taxable income and
dividends may significantly differ from these estimates.
To determine the stock options expense for options granted, the
calculated fair value of the options granted is applied to the
options granted, net of assumed future option forfeitures. The
Company estimates that the employee-related stock option expense
will be $3.4 million, $3.9 million, and
37
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 2. | Summary of Significant Accounting Policies, continued |
$4.0 million for the years ended December 31, 2009,
2010, and 2011, respectively. This estimate may change if the
Company’s assumptions related to future option forfeitures
change. This estimate does not include any expense related to
stock option grants after September 30, 2009, as the fair
value of those stock options will be determined at the time of
grant. The aggregate total stock option expense remaining as of
September 30, 2009, is expected to be recognized over an
estimated weighted-average period of 1.30 years.
Federal
and State Income Taxes and Excise Tax
The Company has complied with the requirements of the Code that
are applicable to regulated investment companies
(“RIC”) and real estate investment trusts
(“REIT”). ACC and any subsidiaries that qualify as a
RIC or a REIT intend to distribute or retain through a deemed
distribution all of their annual taxable income to shareholders;
therefore, the Company has made no provision for income taxes
exclusive of excise taxes for these entities.
If the Company does not distribute at least 98% of its annual
taxable income in the year earned, the Company will generally be
required to pay an excise tax equal to 4% of the amount by which
98% of the Company’s annual taxable income exceeds the
distributions from such taxable income during the year earned.
To the extent that the Company determines that its estimated
current year annual taxable income will be in excess of
estimated current year dividend distributions from such taxable
income, the Company accrues excise taxes on estimated excess
taxable income as taxable income is earned using an annual
effective excise tax rate. The annual effective excise tax rate
is determined by dividing the estimated annual excise tax by the
estimated annual taxable income.
Income taxes for AC Corp are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
as well as operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Per
Share Information
Basic earnings per common share is calculated using the weighted
average number of common shares outstanding for the period
presented. Diluted earnings per common share reflects the
potential dilution that could occur if options to issue common
stock were exercised into common stock. Common stock equivalents
of 3,814,040 shares and 5,703 shares were not included
in the calculation of diluted earnings (loss) per common share
for the nine months ended September 30, 2009 and 2008,
respectively, as the effect would have been antidilutive.
Use of
Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from these estimates.
38
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 2. | Summary of Significant Accounting Policies, continued |
The consolidated financial statements include portfolio
investments at value of $2.5 billion and $3.5 billion
at September 30, 2009, and December 31, 2008,
respectively. At September 30, 2009, and December 31,
2008, 88% and 94%, respectively, of the Company’s total
assets represented portfolio investments whose fair values have
been determined by the Board of Directors in good faith in the
absence of readily available market values. Because of the
inherent uncertainty of valuation, the Board of Directors’
determined values may differ significantly from the values that
would have been used had a ready market existed for the
investments, and the differences could be material.
Recent
Accounting Pronouncements
Fair Value Measurements. In September 2006, the FASB
issued Statement No. 157, which was primarily codified into
ASC Topic 820, defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement was effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years.
The Company adopted this statement on a prospective basis
beginning in the quarter ended March 31, 2008. The initial
adoption of this statement did not have a material effect on the
Company’s consolidated financial statements.
ASC Topic 820 also includes the codification of Determining
the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active
(“FSP 157-3”),
which was issued by the FASB in October 2008. These
provisionsapply to financial assets within the scope of
accounting pronouncements that require or permit fair value
measurements in accordance with ASC Topic 820. These provisions
of ASC Topic 820 provide clarification in a market that is not
active and provide an example to illustrate key considerations
in determining the fair value.
The Company applied these provisions of ASC Topic 820 relating
to determining the fair value of a financial asset when the
market for that asset is not active, in determining the fair
value of its portfolio investments at December 31, 2008.
The application of these provisions did not have a material
impact on the Company’s consolidated financial position or
its results of operations.
ASC Topic 820 also includes the codification of Determining
Fair Value When the Volume and Level of Activity for the Asset
or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly
(“FSP 157-4”),
which was issued by the FASB in April 2009. These provisions
provide guidance on how to determine the fair value of assets
under ASC Topic 820 in the current economic environment and
reemphasize that the objective of a fair value measurement
remains an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at
the measurement date under current market conditions. These
provisions state that a transaction price that is associated
with a transaction that is not orderly is not determinative of
fair value or market-participant risk premiums and companies
should place little, if any, weight (compared with other
indications of fair value) on transactions that are not orderly
when estimating fair value or market risk premiums.
The Company adopted these provisions of ASC Topic 820 on a
prospective basis beginning in the quarter ending March 31,
2009. The adoption of these provisions did not have a material
effect on the Company’s consolidated financial statements.
39
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 2. | Summary of Significant Accounting Policies, continued |
The Fair Value Option for Financial Assets and Financial
Liabilities — Including an Amendment of FASB Statement
No. 115, which was primarily codified into ASC Topic
320. In February 2007, the FASB issued Statement
No. 159, which was primarily codified into ASC Topic 825,
permits an entity to choose to measure many financial
instruments and certain other items at fair value. This
statement applies to all reporting entities, and contains
financial statement presentation and disclosure requirements for
assets and liabilities reported at fair value as a consequence
of the election. This statement was effective for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years.
The Company did not elect fair value measurement for assets or
liabilities other than portfolio investments, which already were
required to be measured at fair value, therefore, the adoption
of this statement did not impact the Company’s consolidated
financial position or its results of operations.
Subsequent Events (“SFAS 165”), which was
primarily codified into ASC Topic 855. In May 2009, the FASB
issued SFAS 165 which establishes general standards for
reporting events that occur after the balance sheet date, but
before financial statements are issued or are available to be
issued. This standard requires the disclosure of the date
through which an entity has evaluated subsequent events and
whether that date represents the date the financial statements
were issued or were available to be issued.
The Company adopted these provisions of ASC 855 in the quarter
ended June 30, 2009. The adoption of these provisions did
not have a material impact on the Company’s financial
statements.
Accounting for Transfers of Financial Assets
(“SFAS 166”), which has not yet been
codified. In June 2009, the FASB issued SFAS 166, which
changes the conditions for reporting a transfer of a portion of
a financial asset as a sale and requires additional year-end and
interim disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009.
The implementation of SFAS 166 is not expected to have a
material impact on the Company’s financial statements.
Amendments to FASB Interpretation No. 46(R)
(“SFAS 167”), which will be codified into ASC
Topic 810, Consolidation. In June 2009, the FASB issued
SFAS 167, which amends the guidance on accounting for
variable interest entities. SFAS 167 is effective for
fiscal years beginning after November 15, 2009 and interim
periods within that fiscal year. The Company has not completed
the process of evaluating the impact of adopting this standard.
The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles
(“SFAS 168”), which was primarily codified
into Topic 105, was issued by the FASB in July 2009 This
standard, which supersedes SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles,
establishes the FASB Accounting Standards Codification, which
will become the source of authoritative GAAP recognized by the
FASB. This standard is effective for the period ending after
September 15, 2009. The implementation of this standard did
not have a material impact on the Company’s financial
statements.
40
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio |
Private
Finance
At September 30, 2009, and December 31, 2008, the
private finance portfolio consisted of the following:
| 2009 | 2008 | |||||||||||||||||||||||
| ($ in millions) | Cost | Value | Yield(1) | Cost | Value | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 553.1 | $ | 289.4 | 4.8% | $ | 556.9 | $ | 306.3 | 5.6% | ||||||||||||||
|
Unitranche
debt(2)
|
424.9 | 374.7 | 12.2% | 527.5 | 456.4 | 12.0% | ||||||||||||||||||
|
Subordinated
debt(3)
|
1,770.9 | 1,182.9 | 13.4% | 2,300.1 | 1,829.1 | 12.9% | ||||||||||||||||||
|
Total loans and debt
securities(4)
|
2,748.9 | 1,847.0 | 11.8% | 3,384.5 | 2,591.8 | 11.9% | ||||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Preferred shares/income notes of
CLOs(5)
|
245.0 | 84.4 | 12.1% | 248.2 | 179.2 | 16.4% | ||||||||||||||||||
|
Subordinated certificates in Senior Secured Loan
Fund LLC(5)
|
165.2 | 165.0 | 14.0% | 125.4 | 125.4 | 12.0% | ||||||||||||||||||
|
Other equity securities
|
1,035.2 | 346.3 | 1,119.3 | 502.7 | ||||||||||||||||||||
|
Total equity securities
|
1,445.4 | 595.7 | 1,492.9 | 807.3 | ||||||||||||||||||||
|
Total
|
$ | 4,194.3 | $ | 2,442.7 | $ | 4,877.4 | $ | 3,399.1 | ||||||||||||||||
| (1) | The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total loans and debt securities at value. At September 30, 2009, and December 31, 2008, senior loans included the senior secured loan to Ciena totaling $319.0 million and $319.0 million at cost, respectively, and $102.2 million and $104.9 million at value, respectively, which was placed on non-accrual status on the purchase date. |
The weighted average yield on the preferred shares/income notes
of CLOs is calculated as the (a) effective interest yield
on the preferred shares/income notes of CLOs, divided by
(b) total preferred shares/income notes of CLOs at value.
The weighted average yields are computed as of the balance sheet
date. The yield on the CLO assets represents the yield used for
recording interest income. The market yield used in the
valuation of the CLO assets may be different than the interest
yields.
The weighted average yield on the subordinated certificates in
the Senior Secured Loan Fund LLC is computed as the
(a) effective interest yield on the subordinated
certificates divided by (b) total investment at value.
| (2) | Unitranche debt is an investment that combines both senior and subordinated financing, generally in a first lien position. |
| (3) | Subordinated debt includes bonds in CLOs and in a CDO. |
| (4) | The total principal balance outstanding on loans and debt securities was $2,775.9 million and $3,418.0 million at September 30, 2009, and December 31, 2008, respectively. The difference between principal and cost is represented by unamortized loan origination fees and costs, original issue discounts, and market discounts totaling $27.0 million and $33.5 million at September 30, 2009, and December 31, 2008, respectively. |
| (5) | Investments in the preferred shares/income notes of CLOs and the subordinated certificates in Senior Secured Loan Fund LLC earn a current return that is included in interest income in the accompanying consolidated statement of operations. |
The Company’s private finance investment activity
principally involves providing financing through privately
negotiated long-term debt and equity investments. The
Company’s private finance debt and equity investments
generally are issued by private companies and generally are
illiquid and may be subject to certain restrictions on resale.
The Company’s private finance debt investments are
generally structured as loans and debt securities that carry a
relatively high fixed rate of interest, which may be combined
with equity features, such as conversion privileges, or warrants
or options to purchase a portion of the portfolio company’s
equity at a pre-determined strike price, which is generally a
nominal price for warrants or options in a private company. The
annual stated interest rate is only one factor in pricing the
investment relative to the Company’s rights and priority in
the portfolio company’s capital structure, and will vary
depending on
41
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio, continued |
many factors, including if the Company has received nominal cost
equity or other components of investment return, such as loan
origination fees or market discount. The stated interest rate
may include some component of contractual
payment-in-kind
interest, which represents contractual interest accrued and
added to the loan balance that generally becomes due at maturity.
At September 30, 2009, 80% of the private finance loans and
debt securities had a fixed rate of interest and 20% had a
floating rate of interest. At December 31, 2008, 85% of the
private finance loans and debt securities had a fixed rate of
interest and 15% had a floating rate of interest. Senior loans
may carry a fixed rate of interest or a floating rate of
interest, usually set as a spread over prime or LIBOR, and may
require payments of both principal and interest throughout the
life of the loan. Senior loans generally have contractual
maturities of three to six years and interest is generally paid
to the Company monthly or quarterly. Unitranche debt generally
carries a fixed rate of interest and generally requires payments
of both principal and interest throughout the life of the loan.
Unitranche debt generally has contractual maturities of five to
six years and interest generally is paid to the Company
quarterly. Subordinated debt generally carries a fixed rate of
interest generally with contractual maturities of five to ten
years and generally has interest-only payments in the early
years and payments of both principal and interest in the later
years, although maturities and principal amortization schedules
may vary. Interest on subordinated debt generally is paid to the
Company quarterly.
Equity securities primarily consist of securities issued by
private companies and may be subject to certain restrictions on
their resale and are generally illiquid. The Company may make
equity investments for minority stakes in portfolio companies or
may receive equity features, such as nominal cost warrants. The
Company also may invest in the equity (preferred
and/or
voting or non-voting common) of a portfolio company where the
Company’s equity ownership may represent a significant
portion of the equity, but may or may not represent a
controlling interest. If the Company invests in non-voting
equity in a buyout investment, the Company generally has the
option to acquire a controlling stake in the voting securities
of the portfolio company at fair market value. The Company may
incur costs associated with making buyout investments that will
be included in the cost basis of the Company’s equity
investment. These include costs such as legal, accounting and
other professional fees associated with diligence, referral and
investment banking fees, and other costs. Equity securities
generally do not produce a current return, but are held with the
potential for investment appreciation and ultimate gain on sale.
Ciena Capital LLC. Ciena Capital LLC
(f/k/a Business Loan Express, LLC) (“Ciena”) has
provided loans to commercial real estate owners and operators.
Ciena has been a participant in the Small Business
Administration’s 7(a) Guaranteed Loan Program and its
wholly-owned subsidiary is licensed by the SBA as a Small
Business Lending Company (“SBLC”). Ciena remains
subject to SBA rules and regulations. Ciena is headquartered in
New York, NY.
On September 30, 2008, Ciena voluntarily filed for
bankruptcy protection under Chapter 11 of Title 11 of
the United States Code (the “Bankruptcy Code”) in the
United States Bankruptcy Court for the Southern District of New
York (the “Court”). Ciena continues to service and
manage its assets as a
“debtor-in-possession”
under the jurisdiction of the Court and in accordance with the
applicable provisions of the Bankruptcy Code and the orders of
the Court.
As a result of Ciena’s decision to file for bankruptcy
protection, the Company’s unconditional guaranty of the
obligations outstanding under Ciena’s revolving credit
facility became due and the Company, in lieu of paying under its
guaranty, purchased the positions of the senior lenders under
Ciena’s revolving credit facility. As of September 30,
2009, the senior secured loan to Ciena had a cost
42
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio, continued |
basis of $319.0 million and a value of $102.2 million.
The Company continues to guarantee the remaining principal
balance of $5 million, plus related interest, fees and
expenses payable to a third party bank. In connection with the
Company’s continuing guaranty of the amounts held by this
bank, the Company has agreed that the amounts owing to the bank
under the Ciena revolving credit facility will be paid before
any of the secured obligations of Ciena now owed to the Company.
At September 30, 2009 and December 31, 2008, the
Company’s investment in Ciena was as follows:
| September 30, 2009 | December 31, 2008 | |||||||||||||||
|
($ in millions)
|
Cost | Value | Cost | Value | ||||||||||||
|
Senior Loan
|
$ | 319.0 | $ | 102.2 | $ | 319.0 | $ | 104.9 | ||||||||
|
Class B Equity
Interests(1)
|
119.5 | — | 119.5 | — | ||||||||||||
|
Class C Equity
Interests(1)
|
109.1 | — | 109.3 | — | ||||||||||||
|
Total(2)
|
$ | 547.6 | $ | 102.2 | $ | 547.8 | $ | 104.9 | ||||||||
| (1) | At September 30, 2009 and December 31, 2008, the Company held 100% of the Class B equity interests and 94.9% of the Class C equity interests. |
| (2) | In addition to the Company’s investment in Ciena included in the portfolio, the Company has amounts receivable from or related to Ciena that are included in other assets in the accompanying consolidated financial statements. See below. |
During the nine months ended September 30, 2009, the
Company funded $97.4 million to support Ciena’s term
securitizations in lieu of draws under related standby letters
of credit, including the funding of $46.0 million during
the third quarter of 2009. This was required primarily as a
result of the issuer of the letters of credit not extending
maturing standby letters of credit that were issued under the
Company’s former revolving line of credit. The amounts
funded were recorded as other assets in the accompanying
consolidated balance sheet. At September 30, 2009 and
December 31, 2008, other assets included amounts receivable
from or related to Ciena totaling $112.7 million and
$15.4 million, respectively, at cost and $2.0 million
and $2.1 million, respectively, at value. Net change in
unrealized appreciation or depreciation included a net decrease
related to the Company’s investment in and receivables from
Ciena of $36.8 million and $99.8 million for the three
and nine months ended September 30, 2009, respectively. Net
change in unrealized appreciation or depreciation included a net
decrease in the Company’s investment in and receivables
from Ciena of $151.9 million and $220.5 million for
the three and nine months ended September 30, 2008,
respectively.
At September 30, 2009, the Company had no outstanding
standby letters of credit issued under the Company’s former
line of credit. The Company has considered the letters of credit
and the funding thereof in the valuation of Ciena at
September 30, 2009 and December 31, 2008.
The Company’s investment in Ciena was on non-accrual
status, therefore the Company did not earn any interest and
related portfolio income from its investment in Ciena for each
of the three and nine months ended September 30, 2009 and
2008.
At September 30, 2009, Ciena had one non-recourse
securitization SBA loan warehouse facility, which has reached
its maturity date but remains outstanding. Ciena is working with
the providers of the SBA loan warehouse facility with regard to
the repayment of that facility. The Company has issued a
performance guaranty whereby the Company agreed to indemnify the
warehouse providers for any damages, losses, liabilities and
related costs and expenses that they may incur as a result of
Ciena’s
43
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio, continued |
failure to perform any of its obligations as loan originator,
loan seller or loan servicer under the warehouse securitizations.
The Office of the Inspector General of the SBA (OIG) and the
United States Secret Service are conducting ongoing
investigations of allegedly fraudulently obtained SBA guaranteed
loans issued by Ciena. Ciena also is subject to other SBA and
OIG audits, investigations, and reviews. In addition, the Office
of the Inspector General of the U.S. Department of
Agriculture is conducting an investigation of Ciena’s
lending practices under the Business and Industry Loan
(B&I) program. The OIG and the U.S. Department of
Justice are also conducting a civil investigation of
Ciena’s lending practices in various jurisdictions. The
Company is unable to predict the outcome of these inquiries, and
it is possible that third parties could try to seek to impose
liability against the Company in connection with certain
defaulted loans in Ciena’s portfolio. These investigations,
audits and reviews are ongoing.
These investigations, audits, reviews, and litigation have had
and may continue to have a material adverse impact on Ciena and,
as a result, could continue to negatively affect the
Company’s financial results. The Company has considered
Ciena’s voluntary filing for bankruptcy protection, the
letters of credit and the funding thereof, current regulatory
issues, ongoing investigations and litigation in performing the
valuation of Ciena at September 30, 2009 and at
December 31, 2008.
Collateralized Loan Obligations (“CLOs”) and
Collateralized Debt Obligations
(“CDOs”). At September 30,
2009, and December 31, 2008, the Company owned bonds and
preferred shares/income notes in CLOs and bonds in a CDO as
follows:
| 2009 | 2008 | |||||||||||||||||||||||
| ($ in millions) | Cost | Value | Yield(1) | Cost | Value | Yield(1) | ||||||||||||||||||
|
Bonds(2):
|
||||||||||||||||||||||||
|
Callidus Debt Partners CDO Fund I, Ltd.
|
$ | 29.0 | $ | 2.9 | —% | $ | 28.4 | $ | 10.1 | 39.4% | ||||||||||||||
|
Callidus Debt Partners CLO Fund IV, Ltd.
|
2.1 | 1.6 | 20.9% | 2.0 | 1.4 | 26.9% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund VI, Ltd.
|
7.6 | 3.8 | 21.4% | 7.1 | 3.9 | 26.1% | ||||||||||||||||||
|
Callidus MAPS CLO Fund I LLC
|
17.0 | 11.4 | 8.6% | 17.0 | 9.8 | 12.2% | ||||||||||||||||||
|
Callidus MAPS CLO Fund II LLC
|
3.8 | 3.1 | 25.1% | 3.6 | 3.0 | 30.2% | ||||||||||||||||||
|
Dryden XVIII Leveraged Loan 2007 Limited
|
7.9 | 2.4 | —% | 7.7 | 4.5 | 20.5% | ||||||||||||||||||
|
Knightsbridge CLO
2007-1
Ltd.(3)
|
18.7 | 11.2 | 15.9% | 18.7 | 14.9 | 17.4% | ||||||||||||||||||
|
Knightsbridge CLO
2008-1
Ltd.(3)
|
31.9 | 29.1 | 11.3% | 31.4 | 31.4 | 10.2% | ||||||||||||||||||
|
Pangaea CLO
2007-1
Ltd.
|
12.0 | 7.8 | 16.8% | 11.8 | 7.1 | 25.0% | ||||||||||||||||||
|
Total bonds
|
130.0 | 73.3 | 12.7% | 127.7 | 86.1 | 18.5% | ||||||||||||||||||
|
Preferred Shares/Income Notes:
|
||||||||||||||||||||||||
|
Callidus Debt Partners CLO Fund III, Ltd.
|
20.1 | 2.2 | —% | 20.1 | 5.4 | —% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund IV, Ltd.
|
14.9 | 4.4 | —% | 14.6 | 10.6 | 18.1% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund V, Ltd.
|
13.5 | 4.6 | 7.6% | 13.4 | 10.3 | 21.3% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund VI, Ltd.
|
29.1 | 4.2 | —% | 28.3 | 23.1 | 21.8% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund VII, Ltd.
|
24.8 | 5.4 | —% | 24.0 | 15.4 | 17.9% | ||||||||||||||||||
|
Callidus MAPS CLO Fund I LLC
|
41.2 | 13.7 | —% | 45.1 | 27.8 | 6.5% | ||||||||||||||||||
|
Callidus MAPS CLO Fund II, Ltd.
|
18.1 | 4.8 | 3.4% | 18.4 | 12.6 | 19.3% | ||||||||||||||||||
|
Dryden XVIII Leveraged Loan 2007 Limited
|
23.2 | 2.4 | —% | 22.1 | 17.5 | 20.2% | ||||||||||||||||||
|
Knightsbridge CLO
2007-1
Ltd.(3)
|
38.8 | 22.6 | 22.8% | 40.9 | 35.2 | 17.4% | ||||||||||||||||||
|
Knightsbridge CLO
2008-1
Ltd.(3)
|
21.3 | 20.1 | 22.5% | 21.3 | 21.3 | 16.6% | ||||||||||||||||||
|
Total preferred shares/income notes
|
245.0 | 84.4 | 12.1% | 248.2 | 179.2 | 16.4% | ||||||||||||||||||
|
Total
|
$ | 375.0 | $ | 157.7 | $ | 375.9 | $ | 265.3 | ||||||||||||||||
44
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio, continued |
| (1) | The weighted average yield is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective interest yield on the preferred shares/income notes, divided by (b) CLO and CDO assets at value. The yield on these debt and equity securities is included in interest income in the accompanying consolidated statement of operations. The market yield used in the valuation of the CLO and CDO assets may be different than the interest yields shown above. |
| (2) | These securities are included in private finance subordinated debt. |
| (3) | These funds are managed by the Company through a wholly-owned subsidiary. |
The initial yields on the cost basis of the CLO preferred shares
and income notes are based on the estimated future cash flows
expected to be paid to these CLO classes from the underlying
collateral assets. As each CLO preferred share or income note
ages, the estimated future cash flows are updated based on the
estimated performance of the underlying collateral assets, and
the respective yield on the cost basis is adjusted as necessary.
As future cash flows are subject to uncertainties and
contingencies that are difficult to predict and are subject to
future events that may alter current assumptions, no assurance
can be given that the anticipated yields to maturity will be
achieved.
The bonds, preferred shares and income notes of the CLOs and CDO
in which the Company has invested are junior in priority for
payment of interest and principal to the more senior notes
issued by the CLOs and CDO. Cash flow from the underlying
collateral assets in the CLOs and CDO is generally allocated
first to the senior bonds in order of priority. Any remaining
cash flow is then generally distributed to the preferred
shareholders and income note holders. To the extent there are
ratings downgrades, defaults and unrecoverable losses on the
underlying collateral assets that result in reduced cash flows,
the preferred shares/income notes will bear this loss first and
then the subordinated bonds would bear any loss after the
preferred shares/income notes. At both September 30, 2009,
and December 31, 2008, the face value of the CLO and CDO
assets held by the Company was subordinate to as much as 94% of
the face value of the securities outstanding in these CLOs and
CDO.
At September 30, 2009, and December 31, 2008, the
underlying collateral assets of these CLO and CDO issuances,
consisting primarily of senior corporate loans, were issued by
627 issuers and 658 issuers, respectively, and had balances as
follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Bonds
|
$ | 232.3 | $ | 268.3 | ||||
|
Syndicated loans
|
4,387.2 | 4,477.3 | ||||||
|
Cash(1)
|
107.9 | 89.6 | ||||||
|
Total underlying collateral assets at
cost(2)
|
$ | 4,727.4 | $ | 4,835.2 | ||||
| (1) | Includes undrawn liability amounts. | |
| (2) | At September 30, 2009, and December 31, 2008, the total cost basis of defaulted obligations was $139.6 million and $95.0 million, respectively, or approximately 3.0% and 2.0% respectively, of the total underlying collateral assets. |
45
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio, continued |
Loans and Debt Securities on Non-Accrual
Status. At September 30, 2009, and
December 31, 2008, private finance loans and debt
securities at value not accruing interest were as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Loans and debt securities
|
||||||||
|
Companies more than 25% owned
|
$ | 194.2 | $ | 176.1 | ||||
|
Companies 5% to 25% owned
|
15.3 | — | ||||||
|
Companies less than 5% owned
|
96.3 | 151.8 | ||||||
|
Total
|
$ | 305.8 | $ | 327.9 | ||||
Industry and Geographic
Compositions. The industry and geographic
compositions of the private finance portfolio at value at
September 30, 2009, and December 31, 2008, were as
follows:
|
|
2009 | 2008 | ||||||
|
Industry
|
||||||||
|
Business services
|
32 | % | 36 | % | ||||
|
Consumer products
|
28 | 24 | ||||||
|
Private debt funds
|
8 | 6 | ||||||
|
Financial services
|
8 | 5 | ||||||
|
CLO/CDO(1)
|
6 | 8 | ||||||
|
Consumer services
|
5 | 5 | ||||||
|
Industrial products
|
3 | 5 | ||||||
|
Retail
|
2 | 5 | ||||||
|
Healthcare services
|
2 | 2 | ||||||
|
Other
|
6 | 4 | ||||||
|
Total
|
100 | % | 100 | % | ||||
|
Geographic
Region(2)
|
||||||||
|
Mid-Atlantic
|
42 | % | 41 | % | ||||
|
Midwest
|
30 | 28 | ||||||
|
Southeast
|
15 | 17 | ||||||
|
West
|
12 | 13 | ||||||
|
Northeast
|
1 | 1 | ||||||
|
Total
|
100 | % | 100 | % | ||||
| (1) | These funds primarily invest in senior corporate loans. Certain of these funds are managed by Callidus Capital, a portfolio company of Allied Capital. |
| (2) | The geographic region for the private finance portfolio depicts the location of the headquarters for the Company’s portfolio companies. The portfolio companies may have a number of other locations in other geographic regions. |
46
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio, continued |
Commercial
Real Estate Finance
At September 30, 2009, and December 31, 2008, the
commercial real estate finance portfolio consisted of the
following:
| 2009 | 2008 | |||||||||||||||||||||||
| ($ in millions) | Cost | Value | Yield(1) | Cost | Value | Yield(1) | ||||||||||||||||||
|
Commercial mortgage loans
|
$ | 54.9 | $ | 50.5 | 6.9% | $ | 52.5 | $ | 53.5 | 7.4% | ||||||||||||||
|
Real estate owned
|
5.9 | 6.2 | 18.2 | 20.8 | ||||||||||||||||||||
|
Equity interests
|
13.2 | 11.8 | 14.8 | 19.6 | ||||||||||||||||||||
|
Total
|
$ | 74.0 | $ | 68.5 | $ | 85.5 | $ | 93.9 | ||||||||||||||||
| (1) | The weighted average yield on the commercial mortgage loans is computed as the (a) annual stated interest on accruing loans plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans less the annual amortization of origination costs, divided by (b) total interest-bearing investments at value. The weighted average yield is computed as of the balance sheet date. |
Commercial Mortgage Loans and Equity
Interests. The commercial mortgage loan
portfolio contains loans that were originated by the Company or
were purchased from third-party sellers. At September 30,
2009, and December 31, 2008, approximately 63% and 69% of
the Company’s commercial mortgage loan portfolio was
composed of fixed interest rate loans, respectively, and 37% and
31% of the Company’s commercial loan portfolio was composed
of adjustable interest rate loans, respectively. At
September 30, 2009, and December 31, 2008, loans with
a value of $9.2 million and $7.7 million,
respectively, were not accruing interest. Loans greater than
120 days delinquent generally do not accrue interest.
Equity interests primarily consist of equity securities issued
by privately owned companies that invest in single real estate
properties. These equity interests may be subject to certain
restrictions on their resale and are generally illiquid. Equity
interests generally do not produce a current return, but are
generally held in anticipation of potential investment
appreciation and ultimate realized gain on sale.
47
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio, continued |
The property types and the geographic composition securing the
commercial real estate finance portfolio at value at
September 30, 2009, and December 31, 2008, were as
follows:
| 2009 | 2008 | |||||||
|
Property Type
|
||||||||
|
Hospitality
|
54 | % | 52 | % | ||||
|
Recreation
|
30 | 22 | ||||||
|
Office
|
14 | 15 | ||||||
|
Retail
|
— | 9 | ||||||
|
Other
|
2 | 2 | ||||||
|
Total
|
100 | % | 100 | % | ||||
|
Geographic Region
|
||||||||
|
Southeast
|
46 | % | 43 | % | ||||
|
West
|
32 | 26 | ||||||
|
Midwest
|
13 | 22 | ||||||
|
Northeast
|
9 | 9 | ||||||
|
Mid-Atlantic
|
— | — | ||||||
|
Total
|
100 | % | 100 | % | ||||
Fair
Value Measurements
The Company, as a BDC, has invested in illiquid securities
including debt and equity securities of portfolio companies, CLO
bonds and preferred shares/income notes, CDO bonds and
investment funds. The Company’s investments may be subject
to certain restrictions on resale and generally have no
established trading market. The Company values substantially all
of its investments at fair value as determined in good faith by
the Board of Directors in accordance with the Company’s
valuation policy and the provisions of the 1940 Act and ASC
Topic 820. The Company determines fair value to be the price
that would be received for an investment in a current sale,
which assumes an orderly transaction between market participants
on the measurement date. The Company’s valuation policy
considers the fact that no ready market exists for substantially
all of the securities in which it invests and that fair value
for its investments must typically be determined using
unobservable inputs.
ASC Topic 820 establishes a fair value hierarchy that encourages
the use of observable inputs, but allows for unobservable inputs
when observable inputs do not exist. Inputs are classified into
one of three categories:
| • | Level 1 — Quoted prices (unadjusted) in active markets for identical assets | |
| • | Level 2 — Inputs other than quoted prices that are observable to the market participant for the asset or quoted prices in a market that is not active | |
| • | Level 3 — Unobservable inputs |
When there are multiple inputs for determining the fair value of
an investment, the Company classifies the investment in total
based on the lowest level input that is significant to the fair
value measurement.
48
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio, continued |
The Company has $90.0 million in investments in money
market and other securities, which the Company has determined
are Level 1 assets but are not included in the
Company’s investment portfolio. Portfolio assets measured
at fair value on a recurring basis by level within the fair
value hierarchy at September 30, 2009, were as follows:
|
Fair Value |
Quoted Prices in |
Significant Other |
Significant |
|||||||||||||
|
Measurement |
Active Markets for |
Observable |
Unobservable |
|||||||||||||
|
as of September 30, |
Identical Assets |
Inputs |
Inputs |
|||||||||||||
| ($ in millions) | 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Assets at Fair Value:
|
||||||||||||||||
|
Portfolio
|
||||||||||||||||
|
Private finance:
|
||||||||||||||||
|
Loans and debt securities
|
$ | 1,847.0 | $ | — | $ | — | $ | 1,847.0 | ||||||||
|
Preferred shares/income notes of CLOs
|
84.4 | — | — | 84.4 | ||||||||||||
|
Subordinated certificates in Senior Secured Loan Fund LLC
|
165.0 | — | — | 165.0 | ||||||||||||
|
Other equity securities
|
346.3 | — | — | 346.3 | ||||||||||||
|
Commercial real estate finance
|
68.5 | — | — | 68.5 | ||||||||||||
|
Total portfolio
|
$ | 2,511.2 | $ | — | $ | — | $ | 2,511.2 | ||||||||
The table below sets forth a summary of changes in the
Company’s assets measured at fair value using level 3
inputs.
| Private Finance | ||||||||||||||||||||||||
|
Preferred |
Subordinated |
|||||||||||||||||||||||
|
Loans and |
Shares/ |
Certificates in |
Other |
Commercial |
||||||||||||||||||||
|
Debt |
Income Notes |
Senior Secured |
Equity |
Real Estate |
||||||||||||||||||||
| ($ in millions) | Securities | of CLOs | Fund LLC | Securities | Finance | Total | ||||||||||||||||||
|
Balance at December 31, 2008
|
$ | 2,591.8 | $ | 179.2 | $ | 125.4 | $ | 502.7 | $ | 93.9 | $ | 3,493.0 | ||||||||||||
|
Total gains or losses
|
||||||||||||||||||||||||
|
Net realized gains
(losses)(1)
|
(116.5 | ) | 11.7 | — | (40.9 | ) | (3.7 | ) | (149.4 | ) | ||||||||||||||
|
Net change in unrealized appreciation or
depreciation(2)
|
(109.2 | ) | (91.5 | ) | (0.2 | ) | (72.3 | ) | (13.9 | ) | (287.1 | ) | ||||||||||||
|
Purchases, issuances, repayments and exits,
net(3)
|
(519.1 | ) | (15.0 | ) | 39.8 | (43.2 | ) | (7.8 | ) | (545.3 | ) | |||||||||||||
|
Transfers in and/or out of level 3
|
— | — | — | — | — | — | ||||||||||||||||||
|
Balance at September 30, 2009
|
$ | 1,847.0 | $ | 84.4 | $ | 165.0 | $ | 346.3 | $ | 68.5 | $ | 2,511.2 | ||||||||||||
|
Net unrealized appreciation (depreciation) during the period
relating to assets still held at the reporting
date(2)
|
$ | (205.0 | ) | $ | (91.5 | ) | $ | (0.2 | ) | $ | (89.9 | ) | $ | (15.3 | ) | $ | (401.9 | ) | ||||||
| (1) | Includes net realized gains (losses) (recorded as realized gains or losses in the accompanying consolidated statement of operations), and amortization of discounts and closing points (recorded as interest income in the accompanying consolidated statement of operations). |
| (2) | Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statement of operations. Net change in unrealized appreciation or depreciation includes net unrealized appreciation (depreciation) resulting from changes in portfolio investment values during the reporting period and the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. The net change in unrealized appreciation or depreciation in the consolidated statement of operations also includes the change in value of escrow and other receivables from portfolio companies that are included in other assets on the consolidated balance sheet. |
| (3) | Includes interest and dividend income reinvested through the receipt of a debt or equity security (payment-in-kind income) (recorded as interest and dividend income in the accompanying consolidated statement of operations). |
Managed
Funds
In addition to managing its own assets, the Company manages
certain funds that also invest in the debt and equity securities
of primarily private middle market companies in a variety of
industries and
49
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio, continued |
broadly syndicated senior secured loans. At September 30,
2009, the Company had eight separate funds under its management
(together, the “Managed Funds”) for which the Company
may earn management or other fees for its services. The Company
may invest in the equity of these funds, along with other third
parties, from which the Company may earn a current return
and/or a
future incentive allocation.
In the first quarter of 2009, the Company completed the
acquisition of the management contracts of three middle market
senior debt CLOs (together, the “Emporia Funds”) and
certain other related assets for approximately $11 million
(subject to post-closing adjustments). The acquired assets are
included in other assets in the accompanying consolidated
balance sheet and the cost will be amortized over the life of
the contracts.
The assets of the Managed Funds at September 30, 2009 and
December 31, 2008, and the Company’s management fees
as of September 30, 2009, were as follows:
| Assets of Managed Funds | ||||||||||||
|
($ in millions) |
September 30, |
December 31, |
Management |
|||||||||
|
Name of Fund
|
2009 | 2008 | Fee(2) | |||||||||
|
Senior Secured Loan
Fund LLC(3)
|
$ | 921.2 | $ | 789.8 | 0.375 | % | ||||||
|
Allied Capital Senior Debt Fund, L.P.
|
351.4 | 412.9 | 1.625 | %(1)(2) | ||||||||
|
Knightsbridge CLO
2007-1
Ltd.
|
500.7 | 500.6 | 0.600 | % | ||||||||
|
Knightsbridge CLO
2008-1
Ltd.
|
304.6 | 304.8 | 0.600 | % | ||||||||
|
Emporia Preferred Funding I, Ltd.
|
419.8 | — | 0.625 | %(1) | ||||||||
|
Emporia Preferred Funding II, Ltd.
|
355.7 | — | 0.650 | %(1) | ||||||||
|
Emporia Preferred Funding III, Ltd.
|
406.1 | — | 0.650 | %(1) | ||||||||
|
AGILE Fund I, LLC
|
83.5 | 99.3 | — | (1) | ||||||||
|
Total Assets
|
$ | 3,343.0 | $ | 2,107.4 | ||||||||
| (1) | In addition to the management fees, the Company is entitled to an incentive allocation subject to certain performance benchmarks. There can be no assurance that the incentive allocation will be earned. |
| (2) | Management fees are stated as a percent of assets except for the Allied Capital Senior Debt Fund, L.P. (“ACSDF”) which is stated as a percent of equity capital. The management fee paid by ACSDF was 2.000% at December 31, 2008 and was reduced to 1.625% effective January 1, 2009 for the 2009 calendar year. |
| (3) | In June 2009, the Unitranche Fund LLC was renamed the Senior Secured Loan Fund LLC. In October 2009, the Company sold its investment, including the outstanding commitments and the provision of management services, in the Senior Secured Loan Fund LLC. See Note 14. Subsequent Events. |
A portion of the management fees earned by the Company may be
deferred under certain circumstances. Collection of the fees
earned may be dependent in part on the performance of the
relevant Managed Fund. The Company may pay a portion of
management fees it receives to Callidus Capital Corporation, a
wholly owned portfolio investment , for services provided to the
Allied Capital Senior Debt Fund, L.P., Knightsbridge CLO
2007-1 Ltd.,
Knightsbridge CLO
2008-1 Ltd.
and the Emporia Funds.
The Company’s responsibilities to the Managed Funds may
include investment origination, underwriting, and portfolio
monitoring services. Each of the Managed Funds may separately
invest in the debt or equity of companies in the Company’s
portfolio, and these investments may be senior, pari passu or
junior to the debt and equity investments held by the Company.
The Company may or may not participate in investments made by
the Managed Funds.
50
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 3. | Portfolio, continued |
The Company accounts for the sale of securities to funds with
which it has continuing involvement as sales pursuant to ASC
Topic 860, when the securities have been legally isolated from
the Company, the Company has no ability to restrict or constrain
the ability of the Managed Funds to pledge or exchange the
transferred securities, and the Company does not have either the
entitlement and the obligation to repurchase the securities or
the ability to unilaterally cause the Managed Fund to put the
securities back to the Company.
During the nine months ended September 30, 2009, the
Company sold assets to certain of its Managed Funds for which
the Company received proceeds of $9.7 million and
recognized a net realized gain of $6.3 million. During the
nine months ended September 30, 2008, the Company sold
assets to certain of the Managed Funds, for which the Company
received proceeds of $352.7 million, and recognized
realized gains of $2.8 million.
In addition to managing these funds, the Company holds certain
investments in the Managed Funds as follows:
|
($ in millions) |
September 30, 2009 | December 31, 2008 | ||||||||||||||||
|
Name of Fund
|
Investment Description | Cost | Value | Cost | Value | |||||||||||||
|
Senior Secured Loan
Fund LLC(1)
|
Subordinated Certificates and Equity Interests | $ | 165.2 | $ | 165.0 | $ | 125.4 | $ | 125.4 | |||||||||
|
Allied Capital Senior Debt Fund, L.P.
|
Equity interests | 31.8 | 33.0 | 31.8 | 31.8 | |||||||||||||
|
Knightsbridge CLO
2007-1
Ltd.
|
Class E Notes and Income Notes | 57.4 | 33.8 | 59.6 | 50.1 | |||||||||||||
|
Knightsbridge CLO
2008-1
Ltd.
|
Class C Notes, Class D Notes, Class E Notes and Income Notes | 53.2 | 49.2 | 52.7 | 52.7 | |||||||||||||
|
AGILE Fund I, LLC
|
Equity Interests | 0.7 | 0.4 | 0.7 | 0.5 | |||||||||||||
|
Total
|
$ | 308.3 | $ | 281.4 | $ | 270.2 | $ | 260.5 | ||||||||||
| (1) | The Company has committed up to a total of $525.0 million of subordinated certificates to the Senior Secured Loan Fund. The Senior Secured Loan Fund will be capitalized as investment transactions are completed. In October 2009, the Company sold its investment, including the outstanding commitments and the provision of management services, in the Senior Secured Loan Fund LLC. See Note 14. Subsequent Events. |
51
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 4. Debt
At September 30, 2009, and December 31, 2008, the
Company had outstanding debt as follows:
| 2009 | 2008 | ||||||||||||||||||
|
Annual |
Annual |
||||||||||||||||||
|
Facility |
Amount |
Interest |
Facility |
Amount |
Interest |
||||||||||||||
| Amount | Drawn at par | Cost(1) | Amount | Drawn at par | Cost(1) | ||||||||||||||
| ($ in millions) | |||||||||||||||||||
|
Notes payable:
|
|||||||||||||||||||
|
Privately issued secured notes payable (formerly
unsecured)(5)
|
$ | 841.0 | $ | 841.0 | (6) | 13.8 | % | $1,015.0 | $1,015.0 | 7.8 | % | ||||||||
|
Publicly issued unsecured notes payable
|
745.5 | 745.5 | 6.7 | % | 880.0 | 880.0 | 6.7 | % | |||||||||||
|
Total notes payable
|
1,586.5 | 1,586.5 | 10.5 | % | 1,895.0 | 1,895.0 | 7.3 | % | |||||||||||
|
Bank secured term debt (former
revolver)(4)
|
50.0 | 50.0 | 17.0 | %(2) | 632.5 | 50.0 | 4.3 | %(2) | |||||||||||
|
Total debt
|
$ | 1,636.5 | $ | 1,636.5 | 10.7 | %(3) | $2,527.5 | $1,945.0 | 7.7 | %(3) | |||||||||
| (1) | The weighted average annual interest cost is computed as the (a) annual stated interest on the debt, plus the annual amortization of commitment fees, other facility fees and amortization of debt financing costs and original issue discount that are recognized into interest expense over the contractual life of the respective borrowings, divided by (b) debt outstanding on the balance sheet date. |
| (2) | The annual interest cost reflects the interest rate payable for borrowings under the revolving line of credit in effect at the balance sheet date. In addition to the current interest payable, there were annual costs of commitment fees, other facility fees and amortization of debt financing costs of $4.3 million at September 30, 2009, and $8.5 million at December 31, 2008. |
| (3) | The annual interest cost for total debt includes the annual cost of commitment fees, other facility fees and amortization of debt financing costs on the bank term debt regardless of the amount outstanding on the facility as of the balance sheet date. The annual interest cost reflects the facilities in place on the balance sheet date. |
| (4) | During the three months ended September 30, 2009, the commitments under the facility were reduced to $50.0 million subsequent to the funding of $46.0 million to Ciena securitizations in lieu of draws under letters of credit issued under the facility. |
| (5) | In the third quarter of 2009, the Company completed the restructuring of its private notes. |
| (6) | The notes payable on the consolidated balance sheet are shown net of OID of approximately $42.6 million as of September 30, 2009. |
Debt
Restructure
On August 28, 2009, the Company completed a comprehensive
restructuring of its private notes (the “Notes”) and
its bank facility (the “Facility”). Beginning in
January 2009, the Company engaged in discussions with the
revolving line of credit lenders (the “Lenders”) and
the private noteholders (the “Noteholders”) to seek
relief under certain terms of both the Facility and the Notes
due to certain covenant defaults. As of December 31, 2008,
the Company’s asset coverage was less than the 200% then
required by the revolving credit facility and the private notes.
Asset coverage generally refers to the percentage resulting from
assets less accounts payable and other liabilities, divided by
total debt.
In connection with the restructuring, the Company granted the
Noteholders and the Lenders a pari-passu blanket lien on a
substantial portion of its assets, including a substantial
portion of the assets of the Company’s consolidated
subsidiaries.
The financial covenants applicable to the Notes and the Facility
were modified as part of the restructuring. The Consolidated
Debt to Consolidated Shareholders’ Equity covenant and the
Capital Maintenance covenant were both eliminated. The Asset
Coverage ratio was set at 1.35:1 initially, increasing to 1.4:1
at June 30, 2010 and to 1.55:1 at June 30, 2011, and
maintained at that level thereafter. A new covenant, Total
Adjusted Assets to Secured Debt, was set at 1.75:1 initially,
increasing to 2.0:1 at June 30, 2010 and to 2.25:1 at
June 30, 2011, and maintained at that level thereafter. The
ratio of Adjusted EBIT to Adjusted Interest Expense was set at
1.05:1 initially, decreasing to 0.95:1 at December 31,
2009, 0.80:1 at March 31, 2010 and 0.75:1 at June 30,
2010. The covenant will then be increased to 0.80:1 on
December 31, 2010 and 0.95:1 on December 31, 2011 and
maintained at that level thereafter. At September 30, 2009,
the Company was in compliance with these financial covenants.
52
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 4. Debt, continued
The Notes and Facility impose certain limitations on the
Company’s ability to incur additional indebtedness,
including precluding the Company from incurring additional
indebtedness unless its asset coverage of all outstanding
indebtedness is at least 200%. Pursuant to the 1940 Act, the
Company is not permitted to issue indebtedness unless
immediately after such issuance the Company has asset coverage
of all outstanding indebtedness of at least 200%. At
September 30, 2009, the Company’s asset coverage ratio
was 175%, which is less than the 200% requirement. As a result,
the Company will not be able to issue additional indebtedness
until such time as its asset coverage returns to at least 200%.
The Company is required to apply 50% of all net cash proceeds
from asset sales to the repayment of the Notes and 6% of all net
cash proceeds from asset sales to the repayment of the Facility,
subject to certain conditions and exclusions. In the case of
certain events of default, the Company would be required to
apply 100% of all net cash proceeds from asset sales to the
repayment of its secured lenders. Under the new agreements,
subject to a limit and certain liquidity restrictions, the
Company may repurchase its public debt; however, the Company is
prohibited from repurchasing its common stock and may not pay
dividends in excess of the minimum the Company reasonably
believes is required to maintain its tax status as a regulated
investment company. In addition, upon the occurrence of a change
of control (as defined in the Note Agreement and Credit
Agreement), the Noteholders have the right to be prepaid in full
and the Company is required to repay in full all amounts
outstanding under the Facility.
The Note Agreement and Credit Agreement provide for customary
events of default, including, but not limited to, payment
defaults, breach of representations or covenants,
cross-defaults, bankruptcy events and failure to pay judgments.
Certain of these events of default are subject to notice and
cure periods or materiality thresholds. Pursuant to the terms of
the Notes, the occurrence of an event of default generally
permits the holders of more than 50% in principal amount of
outstanding Notes to accelerate repayment of all amounts due
thereunder. The occurrence of an event of default would
generally permit the administrative agent for the lenders under
the Facility, or the holders of more than 51% of the aggregate
principal debt outstanding under the Facility, to accelerate
repayment of all amounts outstanding thereunder. Pursuant to the
Notes, during the continuance of an event of default, the rate
of interest applicable to the Notes would increase by
200 basis points. Pursuant to the terms of the Facility,
during the continuance of an event of default, the applicable
spread on any borrowings outstanding under the Facility would
increase by 200 basis points.
In connection with the restructuring, the Company recorded a
loss on the extinguishment of debt of $117.5 million. In
addition to the $11 million of previously deferred
unamortized debt costs associated with the Notes and Facility,
the Company incurred and paid costs to the lenders of
$146 million and other third party advisory and other fees
of approximately $26 million in connection with the
restructuring. Approximately $20 million of the
restructuring costs were deferred and are being amortized into
interest expense over the life of the Notes and Facility. In
addition, the Company recorded approximately $45 million of
original issue discount (“OID”) related to the
restructuring of the Notes, which is being amortized into
interest expense over the life of the Notes. After giving effect
to the restructuring and the recording of the loss, the Company
estimates that the weighted average interest cost,
53
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 4. Debt, continued
including amortization of the deferred debt cost and OID, for
the Notes is approximately 13.75% and the for Facility is
approximately 17%. The loss on extinguishment of debt is
comprised of the following:
| ($ in millions) | ||||
|
Previously deferred unamortized costs
|
$ | 11.3 | ||
|
Fees paid to Noteholders/Lenders
|
145.9 | |||
|
Advisory and other fees paid
|
26.0 | |||
|
Costs deferred and amortizing into interest expense
|
(20.3 | ) | ||
|
OID recorded and amortizing into interest expense
|
(45.4 | ) | ||
|
Loss on extinguishment of debt
|
$ | 117.5 | ||
Privately Issued Notes Payable. The
Company had $1,015.0 million of Notes outstanding at
June 30, 2009. The Company made principal payments on the
Notes at and prior to the closing of the restructuring and had
$841.0 million of Notes outstanding following the closing
of the restructuring.
In connection with the restructuring, the existing Notes were
exchanged for three new series of Notes containing the following
terms:
|
Annual Stated |
Annual Stated |
Annual Stated |
Annual Stated |
|||||||||||||||||||
|
Interest Rate |
Interest Rate |
Interest Rate |
Interest Rate |
|||||||||||||||||||
|
Through |
Beginning |
Beginning |
Beginning |
|||||||||||||||||||
|
Principal |
Maturity |
December 31, |
January 1, |
January 1, |
January 1, |
|||||||||||||||||
| ($ in millions) | Amount |
Dates
|
2009(1) | 2010(1) | 2011(1) | 2012(1) | ||||||||||||||||
|
Series A
|
$ | 253.8 | June 15, 2010 | 8.50 | % | 9.25 | % | N/A | N/A | |||||||||||||
|
Series B
|
$ | 253.8 | June 15, 2011 | 9.00 | % | 9.50 | % | 9.75 | % | N/A | ||||||||||||
|
Series C
|
$ | 333.5 | March 31 & April 1, 2012 | 9.50 | % | 10.00 | % | 10.25 | % | 10.75 | % | |||||||||||
| (1) | The Notes generally require payment of interest quarterly. |
The Company made various cash payments in connection with the
restructuring of its Notes. The Company paid an amendment fee at
closing of $15.2 million. In addition, the Company paid a
make-whole fee of $79.7 million related to a contractual
provision in the old Notes. Due to the payment of this
make-whole fee, the new Notes have no significant make-whole
requirement. The Company also paid a restructuring fee of
$50.0 million at closing, which will be applied toward the
principal balance of the Notes if the Notes are refinanced in
full on or before January 31, 2010.
Bank Facility. At June 30, 2009,
the Company had an unsecured revolving line of credit that was
due to expire on April 11, 2011. The Company’s
Facility was restructured from a revolving facility to a term
facility maturing on November 13, 2010. Total commitments
under the Facility were reduced at closing to $96.0 million
from $115.0 million prior to closing. At closing, there
were $50.0 million of borrowings and $46.0 million of
standby letters of credit (“LCs”) outstanding under
the Facility. The $46.0 million of LCs terminated
and/or
expired prior to September 30, 2009 and the commitments
under the Facility were reduced by a commensurate amount. As a
result, the total commitment and outstanding balance was
$50.0 million at September 30, 2009.
Borrowings under the Facility bear interest at a floating rate
of interest, subject to a floor. The floating rate spread
increases by 0.5% per annum beginning on January 1, 2010
and continuing through maturity. At closing, the interest rate
on the Facility was 8.5% per annum. The Facility requires the
54
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 4. Debt, continued
payment of a commitment fee equal to 0.50% per annum of the
committed amount. In addition, the Company agreed to pay an
amendment fee at closing of $1.0 million, and a
restructuring fee payable on January 31, 2010 equal to 1.0%
of the outstanding borrowings on such date if the Facility
remains outstanding. The Facility generally requires payments of
interest no less frequently than quarterly.
Publicly Issued Unsecured Notes
Payable. At September 30, 2009, the
Company had outstanding publicly issued unsecured notes as
follows:
| ($ in millions) | Amount | Maturity Date | ||
|
6.625% Notes due 2011
|
$319.9 | July 15, 2011 | ||
|
6.000% Notes due 2012
|
195.6 | April 1, 2012 | ||
|
6.875% Notes due 2047
|
230.0 | April 15, 2047 | ||
|
Total
|
$745.5 | |||
The 6.625% Notes due 2011 and the 6.000% Notes due
2012 require payment of interest only semi-annually, and all
principal is due upon maturity. The Company has the option to
redeem these notes in whole or in part, together with a
redemption premium, as stipulated in the notes. In addition, the
Company may purchase these notes in the market at par or at a
discount to the extent permitted by the 1940 Act. During the
nine months ended September 30, 2009, the Company paid
$30.1 million to repurchase certain of the
6.625% Notes due 2011 which had a face value of
$80.1 million, and $20.2 million to repurchase certain
of the 6.000% Notes due 2012 which had a face value of
$54.4 million. After recognizing the remaining unamortized
original issue discount associated with the notes repurchased,
the Company recognized a net gain on repurchase of debt of
$83.5 million for the nine months ended September 30,
2009.
The 6.875% Notes due 2047 require payment of interest only
quarterly, and all principal is due upon maturity. These notes
are redeemable in whole or in part at any time or from time to
time on or after April 15, 2012, at par and upon the
occurrence of certain tax events as stipulated in the notes.
The Company has certain financial and operating covenants that
are required by the publicly issued unsecured notes payable. The
Company is not permitted to issue indebtedness unless
immediately after such issuance the Company has asset coverage
of all outstanding indebtedness of at least 200% as required by
the 1940 Act, as amended. At September 30, 2009, the
Company’s asset coverage ratio was 175%.
Scheduled Maturities. Scheduled future
maturities of notes payable at September 30, 2009, were as
follows:
| Amount Maturing at Par | ||||||||||||||||
|
Privately Issued |
Publicly Issued |
|||||||||||||||
|
($ in millions) |
Bank Secured Term |
Secured Notes |
Unsecured Notes |
|||||||||||||
|
Year
|
Debt | Payable | Payable | Total | ||||||||||||
|
2009
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
2010
|
50.0 | 253.7 | — | 303.7 | ||||||||||||
|
2011
|
— | 253.8 | 319.9 | 573.7 | ||||||||||||
|
2012
|
— | 333.5 | 195.6 | 529.1 | ||||||||||||
|
2013
|
— | — | — | — | ||||||||||||
|
Thereafter
|
— | — | 230.0 | 230.0 | ||||||||||||
|
Total
|
$ | 50.0 | $ | 841.0 | $ | 745.5 | $ | 1,636.5 | ||||||||
55
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 4. Debt, continued
Fair
Value of Debt
The Company records debt at cost. The fair value of the
Company’s outstanding debt was approximately
$1.4 billion and $1.4 billion at September 30,
2009 and December 31, 2008, respectively. The fair value of
the Company’s publicly issued 6.875% Notes due 2047
was determined using the market price of the retail notes at
September 30, 2009 and December 31, 2008. The fair
value of the Company’s other debt was determined based on
market interest rates for similar instruments as of the balance
sheet dates.
Note 5. Guarantees
and Commitments
In the ordinary course of business, the Company has issued
guarantees and has extended standby letters of credit through
financial intermediaries on behalf of certain portfolio
companies. All standby letters of credit had been issued through
Bank of America, N.A. As of September 30, 2009, and
December 31, 2008, the Company had issued guarantees of
debt and rental obligations aggregating $9.1 million and
$19.2 million, respectively, and had extended standby
letters of credit aggregating $0.0 million and
$122.3 million, respectively. Under these arrangements, the
Company would be required to make payments to third parties if
the portfolio companies were to default on their related payment
obligations or if the expiration dates of the letters of credit
are not extended. The maximum amount of potential future
payments was $9.1 million and $141.5 million at
September 30, 2009, and December 31, 2008,
respectively.
As of September 30, 2009, the guarantees and standby
letters of credit expired as follows:
| (in millions) | Total | 2009 | 2010 | 2011 | 2012 | 2013 | After 2013 | |||||||||||||||||||||
|
Guarantees
|
$ | 9.1 | $ | 5.0 | $ | 3.2 | $ | — | $ | 0.1 | $ | — | $ | 0.8 | ||||||||||||||
|
Standby letters of
credit(1)
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Total
|
$ | 9.1 | $ | 5.0 | $ | 3.2 | $ | — | $ | 0.1 | $ | — | $ | 0.8 | ||||||||||||||
(1) During
the three months ended September 30, 2009, the Company
funded $46.0 million in lieu of draws under standby letters
of credit and the remaining standby letters of credit
expired/terminated. At September 30, 2009, there were no
standby letters of credit issued under the facility.
In the ordinary course of business, the Company enters into
agreements with service providers and other parties that may
contain provisions for the Company to indemnify and guaranty
certain minimum fees to such parties under certain circumstances.
At September 30, 2009, the Company had outstanding
commitments to fund investments totaling $543.9 million,
including $515.5 million related to private finance
investments and $28.4 million related to commercial real
estate finance investments. Total outstanding commitments
related to private finance investments included
$352.2 million to the Senior Secured Loan Fund LLC.
During October 2009, the Company sold its investment, including
its outstanding commitments and the provision for management
services, in the Senior Secured Loan Fund. See Note 14.
Subsequent Events.
56
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 6. Shareholders’
Equity
The Company did not sell any common stock during the nine months
ended September 30, 2009. The Company sold
20.5 million shares of its common stock during the nine
months ended September 30, 2008, for gross proceeds of
$417.1 million. The Company paid $14.6 million in
costs, including underwriting fees, for net proceeds of
$402.5 million.
The Company issued 0.7 million shares of common stock upon
the exercise of stock options during the nine months ended
September 30, 2009. No stock options were exercised during
the nine months ended September 30, 2008.
The Company has a dividend reinvestment plan, whereby the
Company may buy shares of its common stock in the open market or
issue new shares in order to satisfy dividend reinvestment
requests. If the Company issues new shares, the issue price is
equal to the average of the closing sale prices reported for the
Company’s common stock for the five consecutive trading
days immediately prior to the dividend payment date. The Company
may not issue new shares below net asset value. During the nine
months ended September 30, 2009, the Company did not pay
dividends and there was no activity in the dividend reinvestment
plan. During the nine months ended September 30, 2008,
under the dividend reinvestment plan the Company issued
0.2 million shares at an average price of $19.49 per share,
and 0.5 million shares were purchased by a plan agent for
shareholders at an average price of $14.43 per share.
Note 7. Earnings
Per Common Share
Earnings per common share for the three and nine months ended
September 30, 2009 and 2008, were as follows:
|
For the Three |
For the Nine |
||||||||||||||
|
Months Ended |
Months Ended |
||||||||||||||
| September 30, | September 30, | ||||||||||||||
| (in millions, except per share amounts) | 2009 | 2008 | 2009 | 2008 | |||||||||||
|
Net increase (decrease) in net assets resulting from operations
|
$ | (140.7 | ) | $ | (318.3 | ) | $ | (517.4) | $ | (461.2 | ) | ||||
|
Weighted average common shares outstanding — basic
|
179.1 | 178.7 | 178.8 | 171.1 | |||||||||||
|
Dilutive options outstanding
|
— | — | — | — | |||||||||||
|
Weighted average common shares outstanding — diluted
|
179.1 | 178.7 | 178.8 | 171.1 | |||||||||||
|
Basic earnings (loss) per common share
|
$ | (0.79 | ) | $ | (1.78 | ) | $ | (2.89) | $ | (2.70 | ) | ||||
|
Diluted earnings (loss) per common share
|
$ | (0.79 | ) | $ | (1.78 | ) | $ | (2.89) | $ | (2.70 | ) | ||||
Note 8. Employee
Compensation Plans
The Company had an Individual Performance Award plan
(“IPA”), and an Individual Performance Bonus plan
(“IPB”’ each individually a “Plan,” or
collectively, the “Plans”). These Plans generally were
determined annually at the beginning of each year but could be
adjusted throughout the year. In 2008, the IPA was paid in cash
in two equal installments during the year. Through
December 31, 2007, the IPA amounts were contributed into a
trust and invested in the Company’s common stock. The IPB
was distributed in cash to award recipients throughout the year
(beginning in February of each respective
57
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 8. Employee Compensation Plans, continued
year) as long as the recipient remained employed by the Company.
The Company currently has not established an IPA or IPB for 2009.
The trusts for the IPA payments were consolidated with the
Company’s accounts. The common stock was classified as
common stock held in deferred compensation trust in the
accompanying financial statements and the deferred compensation
obligation, which represented the amount owed to the employees,
was included in other liabilities. Changes in the value of the
Company’s common stock held in the deferred compensation
trust were not recognized. However, the liability was marked to
market with a corresponding charge or credit to employee
compensation expense.
In December 2007, the Company’s Board of Directors made a
determination that it was in the best interests of the Company
to terminate its deferred compensation arrangements. The Board
of Directors’ decision primarily was in response to
increased complexity resulting from changes in the regulation of
deferred compensation arrangements. The Board of Directors
resolved that the accounts under these Plans would be
distributed to participants in full on March 18, 2008, the
termination and distribution date, or as soon as was reasonably
practicable thereafter, in accordance with the provisions of
each of these Plans.
The accounts under the deferred compensation arrangements
totaled $52.5 million at December 31, 2007. The
balances on the termination date were distributed to
participants in March 2008 subsequent to the termination date in
accordance with the transition rule for payment elections under
Section 409A of the Code. Distributions from the plans were
made in cash or shares of the Company’s common stock, net
of required withholding taxes.
The IPA and IPB expenses are included in employee expenses and
for the three and nine months ended September 30, 2009 and
2008, were as follows:
|
For the Three |
For the Nine |
||||||||||||
|
Months Ended |
Months Ended |
||||||||||||
| September 30, | September 30, | ||||||||||||
| ($ in millions) | 2009 | 2008 | 2009 | 2008 | |||||||||
|
IPA
|
$ | — | $ | 2.0 | $ | — | $ | 6.6 | |||||
|
IPA mark to market expense (benefit)
|
— | — | — | (4.1 | ) | ||||||||
|
Total IPA expense
|
$ | — | $ | 2.0 | $ | — | $ | 2.5 | |||||
|
Total IPB expense
|
$ | — | $ | 2.4 | $ | — | $ | 6.8 | |||||
Note 9. Stock
Option Plan
The purpose of the stock option plan (“Option Plan”)
is to provide officers and non-officer directors of the Company
with additional incentives. Options are exercisable at a price
equal to the fair market value of the shares on the day the
option is granted. Each option states the period or periods of
time within which the option may be exercised by the optionee,
which may not exceed ten years from the date the option is
granted. The options granted to officers generally vest ratably
over up to a three year period. Options granted to non-officer
directors vest on the grant date.
All rights to exercise options terminate 60 days after an
optionee ceases to be (i) a non-officer director,
(ii) both an officer and a director, if such optionee
serves in both capacities, or (iii) an officer (if
58
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 9. Stock Option Plan, continued
such officer is not also a director) of the Company for any
cause other than death or total and permanent disability. In the
event of a change of control of the Company, all outstanding
options will become fully vested and exercisable as of the
change of control.
At September 30, 2009, and December 31, 2008, there
were 37.2 million shares authorized under the Option Plan
and the number of shares available to be granted under the
Option Plan was 3.8 million and 9.5 million,
respectively.
Information with respect to options granted, exercised and
forfeited under the Option Plan for the nine months ended
September 30, 2009, was as follows:
|
Weighted |
Aggregate |
|||||||||||
|
Weighted |
Average |
Intrinsic |
||||||||||
|
Average |
Contractual |
Value at |
||||||||||
|
Exercise Price |
Remaining |
September 30, |
||||||||||
| (in millions, except per share amounts) | Shares | Per Share | Term (Years) | 2009(1) | ||||||||
|
Options outstanding at January 1, 2009
|
19.7 | $ | 26.56 | |||||||||
|
Granted
|
11.5 | $ | 0.88 | |||||||||
|
Exercised
|
(0.7 | ) | $ | 0.73 | ||||||||
|
Forfeited
|
(5.8 | ) | $ | 21.65 | ||||||||
|
Options outstanding at September 30, 2009
|
24.7 | $ | 16.48 | 5.10 | $ | 21.3 | ||||||
|
Exercisable at September 30,
2009(2)
|
15.2 | $ | 22.25 | 4.53 | $ | 6.8 | ||||||
|
Exercisable and expected to be exercisable at September 30,
2009(3)
|
23.3 | $ | 16.77 | 5.05 | $ | 19.7 | ||||||
| (1) | Represents the difference between the market value of the options at September 30, 2009, and the cost for the option holders to exercise the options. |
| (2) | Represents vested options. |
| (3) | The amount of options expected to be exercisable at September 30, 2009, is calculated based on an estimate of expected forfeitures. |
During the nine months ended September 30, 2008,
7.7 million options were granted, no options were exercised
and 4.5 million options were forfeited. The fair value of
the options vested during the nine months ended
September 30, 2008 was $13.5 million.
Note 10. Dividends
and Distributions and Taxes
At December 31, 2008, the Company met its dividend
distribution requirements for the 2008 tax year and therefore
did not have excess taxable income available for distribution to
shareholders in 2009. The Company’s Board of Directors has
not declared any dividends in 2009. The Company’s Board of
Directors declared and the Company paid a dividend of $0.65 per
common share for the first, second and third quarters of 2008,
totaling $340.4 million.
The Company generally will be required to pay an excise tax
equal to 4% of the amount by which 98% of the Company’s
annual taxable income exceeds the distributions for the year.
The Company records an excise tax based on the Company’s
estimated excess taxable income for the period. Such estimates
may change from period to period. The Company did not record an
excise tax for the three and
59
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 10. Dividends and Distributions and Taxes,
continued
nine months ended September 30, 2009. The Company recorded
an excise tax of $0.9 million and $5.1 million for the
three and nine months ended September 30, 2008,
respectively.
In certain circumstances, the Company is restricted in its
ability to pay dividends. Each of the Company’s Notes and
the Company’s Facility contain provisions that limit the
amount of dividends the Company can pay. In addition, pursuant
to the 1940 Act, the Company may be precluded from declaring
dividends or other distributions to its shareholders unless the
Company’s asset coverage of senior securities is at least
200%.
The Company had cumulative deferred taxable income related to
installment sale gains of approximately $218.9 million as
of December 31, 2008. These gains have been recognized for
financial reporting purposes in the respective years they were
realized, but are generally deferred for tax purposes until the
notes or other amounts received from the sale of the related
investments are collected in cash. A substantial portion of
these installment gains as of December 31, 2008 will be
recognized for tax purposes in 2009 as certain notes received
from the sale of the related investments have been sold.
The Company’s undistributed book earnings of
$184.7 million as of December 31, 2008 resulted from
undistributed ordinary income and long-term capital gains. The
difference between undistributed book earnings at the end of the
year and taxable income carried over from the current year into
the next year relates to a variety of timing and permanent
differences in the recognition of income and expenses for book
and tax purposes.
The Company’s consolidated subsidiary, AC Corp, is subject
to federal and state income taxes. For the three months ended
September 30, 2009 and 2008, AC Corp’s income tax
expense was $1.9 million and $1.2 million,
respectively, and for the nine months ended September 30,
2009 and 2008, income tax expense was $4.2 million and
$3.0 million, respectively. For the nine months ended
September 30, 2009, paid in capital was decreased by
$3.1 million primarily for the reduction of the deferred
tax asset related to stock options that expired unexercised.
Note 11. Supplemental
Disclosure of Cash Flow Information
The Company paid interest of $140.8 million and
$95.9 million, respectively, for the nine months ended
September 30, 2009 and 2008. The Company paid income taxes,
including excise taxes (net of refunds), of $5.5 million
and $13.0 million the nine months ended September 30,
2009 and 2008, respectively.
Non-cash operating activities for the nine months ended
September 30, 2009 and 2008, totaled $71.4 million and
$107.7 million, respectively. Non-cash operating activities
included the exchange of existing debt securities and accrued
interest for new debt and equity securities.
Non-cash financing activities included the issuance of common
stock in lieu of cash distributions totaling $3.8 million
for the nine months ended September 30, 2008.
60
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 12. Financial
Highlights
|
At and |
||||||||||||
|
At and for the |
for the |
|||||||||||
|
Nine Months Ended |
Year Ended |
|||||||||||
| September 30, | December 31, | |||||||||||
| 2009(1) | 2008 | 2008 | ||||||||||
|
Per Common Share Data
|
||||||||||||
|
Net asset value, beginning of period
|
$ | 9.62 | $ | 17.54 | $ | 17.54 | ||||||
|
Net investment
income(2)
|
0.31 | 1.04 | 1.23 | |||||||||
|
Net realized gains
(losses)(2)(3)
|
(0.89 | ) | 0.28 | (0.75 | ) | |||||||
|
Net investment income plus net realized gains
(losses)(2)
|
(0.58 | ) | 1.32 | 0.48 | ||||||||
|
Net change in unrealized appreciation
(depreciation)(2)(3)
|
(2.13 | ) | (4.02 | ) | (6.49 | ) | ||||||
|
Gain on repurchase of debt
|
0.47 | — | — | |||||||||
|
Loss on extinguishment of debt
|
(0.65 | ) | — | — | ||||||||
|
Net increase (decrease) in net assets resulting from
operations(2)
|
(2.89 | ) | (2.70 | ) | (6.01 | ) | ||||||
|
Net decrease in net assets from shareholder distributions
|
— | (1.95 | ) | (2.60 | ) | |||||||
|
Net increase (decrease) in net assets from capital share
transactions(2)
|
(0.03 | ) | 0.62 | 0.69 | ||||||||
|
Net asset value, end of period
|
$ | 6.70 | $ | 13.51 | $ | 9.62 | ||||||
|
Market value, end of period
|
$ | 3.07 | $ | 10.80 | $ | 2.69 | ||||||
|
Total
return(4)
|
14.1 | % | (43.3 | )% | (82.5 | )% | ||||||
|
Ratios and Supplemental Data
($ and shares in millions, except per share amounts) |
||||||||||||
|
Ending net assets
|
$ | 1,201.3 | $ | 2,413.4 | $ | 1,718.4 | ||||||
|
Common shares outstanding at end of period
|
179.4 | 178.7 | 178.7 | |||||||||
|
Diluted weighted average common shares outstanding
|
178.8 | 171.1 | 173.0 | |||||||||
|
Employee, employee stock option and administrative
expenses/average net
assets(5)
|
4.32 | % | 3.80 | % | 5.47 | % | ||||||
|
Total operating expenses/average net
assets(5)(6)
|
13.69 | % | 7.85 | % | 11.39 | % | ||||||
|
Income tax expense (benefit), including excise tax/average net
assets(5)
|
0.30 | % | 0.30 | % | 0.10 | % | ||||||
|
Net investment income/average net
assets(5)
|
3.93 | % | 6.59 | % | 8.47 | % | ||||||
|
Net increase (decrease) in net assets resulting from
operations/average net
assets(5)
|
(36.76 | )% | (16.99 | )% | (41.34 | )% | ||||||
|
Portfolio turnover
rate(5)
|
4.12 | % | 19.38 | % | 24.00 | % | ||||||
|
Average debt outstanding
|
$ | 1,833.3 | $ | 2,072.8 | $ | 2,091.6 | ||||||
|
Average debt per
share(2)
|
$ | 10.25 | $ | 12.12 | $ | 12.09 | ||||||
| (1) | The results for the nine months ended September 30, 2009, are not necessarily indicative of the operating results to be expected for the full year. |
| (2) | Based on diluted weighted average number of common shares outstanding for the period. |
| (3) | Net realized gains (losses) and net change in unrealized appreciation or depreciation can fluctuate significantly from period to period. As a result, quarterly comparisons may not be meaningful. |
| (4) | Total return assumes the reinvestment of all dividends paid, if any, for the periods presented. |
| (5) | The ratios for the nine months ended September 30, 2009 and 2008, do not represent annualized results. |
| (6) | Includes 0.20% for the effect of the impairment of long-lived asset during the nine months ended September 30, 2009. |
61
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 13. Litigation
On June 23, 2004, the Company was notified by the SEC that
the SEC was conducting an informal investigation of the Company.
The investigation related to the valuation of securities in the
Company’s private finance portfolio and other matters. On
June 20, 2007, the Company announced that it entered into a
settlement with the SEC that resolved the SEC’s informal
investigation. As part of the settlement and without admitting
or denying the SEC’s allegations, the Company agreed to the
entry of an administrative order. In the order the SEC alleged
that, between June 30, 2001, and March 31, 2003, the
Company did not maintain books, records and accounts which, in
reasonable detail, supported or accurately and fairly reflected
valuations of certain securities in the Company’s private
finance portfolio and, as a result, did not meet certain
recordkeeping and internal controls provisions of the federal
securities laws. In the administrative order, the SEC ordered
the Company to continue to maintain certain of its current
valuation-related controls. Specifically, during and following
the two-year period of the order the Company has:
(1) continued to employ a Chief Valuation Officer, or a
similarly structured officer-level employee, to oversee its
quarterly valuation processes; and (2) continued to employ
third-party valuation consultants to assist in its quarterly
valuation processes.
On December 22, 2004, the Company received letters from the
U.S. Attorney for the District of Columbia requesting the
preservation and production of information regarding the Company
and Business Loan Express, LLC (currently known as Ciena Capital
LLC) in connection with a criminal investigation relating
to matters similar to those investigated by and settled with the
SEC as discussed above. The Company produced materials in
response to the requests from the U.S. Attorney’s
office and certain current and former employees were interviewed
by the U.S. Attorney’s Office. The Company has
voluntarily cooperated with the investigation.
In late December 2006, the Company received a subpoena from the
U.S. Attorney for the District of Columbia requesting,
among other things, the production of records regarding the use
of private investigators by the Company or its agents. The Board
established a committee, which was advised by its own counsel,
to review this matter. In the course of gathering documents
responsive to the subpoena, the Company became aware that an
agent of the Company obtained what were represented to be
telephone records of David Einhorn and which purport to be
records of calls from Greenlight Capital during a period of time
in 2005. Also, while the Company was gathering documents
responsive to the subpoena, allegations were made that the
Company’s management had authorized the acquisition of
these records and that management was subsequently advised that
these records had been obtained. The Company’s management
has stated that these allegations are not true. The Company has
cooperated fully with the inquiry by the
U.S. Attorney’s Office.
On February 26, 2007, Dana Ross filed a class action
complaint in the U.S. District Court for the District of
Columbia in which she alleges that Allied Capital Corporation
and certain members of management violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5
thereunder. Thereafter, the court appointed new lead counsel and
approved new lead plaintiffs. On July 30, 2007, plaintiffs
served an amended complaint. Plaintiffs claim that, between
November 7, 2005, and January 22, 2007, Allied Capital
either failed to disclose or misrepresented information about
its portfolio company, Business Loan Express, LLC. Plaintiffs
seek unspecified compensatory and other damages, as well as
other relief. The Company believes the lawsuit is without merit,
and intends to defend the lawsuit vigorously. On
September 13, 2007, the Company filed a motion to dismiss
the lawsuit. A hearing was held on the motion to dismiss in
April 2009. The motion is pending.
62
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 13. Litigation,
continued
As of November 6, 2009, the Company is aware of a putative
class action and shareholder derivative complaint as well as an
additional shareholder derivative complaint filed against the
Company, its Board of Directors and Ares Capital Corporation.
Both complaints allege that the Company’s Board of
Directors failed to discharge adequately its fiduciary duties to
shareholders by failing to adequately value the Company’s
shares and ensure that its shareholders received adequate
consideration in a proposed sale of Allied Capital to Ares
Capital Corporation, that the proposed merger between the
Company and Ares Capital is the product of a flawed sales
process, that the Company’s directors and officers breached
their fiduciary duties by agreeing to a structure that was not
designed to maximize the value of Allied’s shares, and that
Ares Capital aided and abetted the alleged breach of fiduciary
duty. The plaintiffs demand, among other things, a preliminary
and permanent injunction enjoining the sale and rescinding the
transaction or any part thereof that has been implemented. The
Company believes that each of the lawsuits is without merit, and
it intends to defend each of these lawsuits vigorously.
In addition, the Company is party to certain lawsuits in the
normal course of business. Furthermore, third parties may try to
seek to impose liability on the Company in connection with the
activities of its portfolio companies. For a discussion of civil
investigations being conducted regarding the lending practice of
Ciena Capital LLC, a portfolio company of the Company, see
“Note 3, Portfolio — Ciena Capital LLC.”
While the outcome of any of the open legal proceedings described
above cannot at this time be predicted with certainty, the
Company does not expect these matters will materially affect its
financial condition or results of operations.
| Note 14. | Subsequent Events |
In accordance with ASC Topic 855, the Company has evaluated
events subsequent to September 30, 2009, and through the
issuance of these consolidated financial statements, which
occurred on November 6, 2009.
On October 26, 2009, the Company, entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with Ares
Capital Corporation, a Maryland corporation (“Ares
Capital”), and ARCC Odyssey Corp., a Maryland corporation
and wholly-owned subsidiary of Ares Capital (“Merger
Sub”). The Merger Agreement provides that, upon the terms
and subject to the conditions set forth in the Merger Agreement,
Merger Sub will merge with and into Allied Capital, with Allied
Capital as the surviving company (the “Merger”).
Immediately following the Merger, Allied Capital will merge with
and into Ares Capital.
Upon consummation of the Merger, each share of common stock, par
value $0.0001 per share, of Allied Capital issued and
outstanding immediately prior to the effective time of the
Merger will be converted into and become exchangeable for 0.325
common shares, par value $0.001 per share, of Ares Capital.
Based on the number of shares of Allied Capital common stock
outstanding on the date of the Merger Agreement and not
including the effect of outstanding
in-the-money
options, this will result in approximately 58.3 million
Ares Capital shares being exchanged for approximately
179.4 million outstanding Allied Capital shares, subject to
adjustment in certain limited circumstances.
Following consummation of the transactions contemplated by the
Merger Agreement, Ares Capital’s Board of Directors will
continue as directors of Ares Capital. However, Ares
Capital’s Board of Directors will be increased by at least
one member and Ares Capital will submit the name of one member
of
63
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 14. | Subsequent Events, continued |
Allied Capital’s current Board of Directors for
consideration to Ares Capital’s Nominating and Governance
Committee to fill the vacancy.
The Merger Agreement contains (a) customary representations
and warranties of Allied Capital and Ares Capital, including,
among others: corporate organization, capitalization, corporate
authority and absence of conflicts, third party and governmental
consents and approvals, reports and regulatory matters,
financial statements, compliance with law and legal proceedings,
absence of certain changes, taxes, employee matters,
intellectual property, insurance, investment assets and certain
contracts, (b) covenants of Allied Capital and Ares Capital
to conduct their respective businesses in the ordinary course
until the Merger is completed and (c) covenants of Allied
Capital and Ares Capital not to take certain actions during this
interim period.
Among other things, Allied Capital has agreed to, and will cause
its affiliates, consolidated subsidiaries, and its and each of
their respective officers, directors, managers, employees and
other advisors, representatives and agents to, immediately cease
and cause to be terminated all discussions and negotiations with
respect to a “Takeover Proposal” (as defined in the
Merger Agreement) from a third party and not to directly or
indirectly solicit or take any other action (including providing
information) with the intent to solicit any inquiry, proposal or
offer with respect to a Takeover Proposal.
However, if Allied Capital receives a bona fide unsolicited
Takeover Proposal from a third party, and its Board of Directors
determines in good faith, after consultation with reputable
outside legal counsel and financial advisers experienced in such
matters, that failure to consider such proposal would breach the
duties of the directors under applicable law, and the Takeover
Proposal constitutes or is reasonably likely to result in a
“Superior Proposal” (as defined in the Merger
Agreement), Allied Capital may engage in discussions and
negotiations with such third party so long as certain notice and
other procedural requirements are satisfied. In addition,
subject to certain procedural requirements (including the
ability of Ares Capital to revise its offer) and the payment of
a $30 million termination fee, Allied Capital may terminate
the Merger Agreement and enter into an agreement with a third
party who makes a Superior Proposal.
The representations and warranties of each party set forth in
the Merger Agreement (a) have been qualified by
confidential disclosures made to the other party in connection
with the Merger Agreement, (b) will not survive
consummation of the Merger and cannot be the basis for any
claims under the Merger Agreement by the other party after the
Merger is consummated, (c) are qualified in certain
circumstances by a materiality standard which may differ from
what may be viewed as material by investors, (d) were made
only as of the date of the Merger Agreement or such other date
as is specified in the Merger Agreement, and (e) may have
been included in the Merger Agreement for the purpose of
allocating risk between Allied Capital and Ares Capital rather
than establishing matters as facts.
Consummation of the Merger, which is currently anticipated to
occur by the end of the first quarter of 2010, is subject to
certain conditions, including, among others, Allied Capital
stockholder approval, Ares Capital stockholder approval,
required regulatory approvals (including expiration of the
waiting period under the
Hart-Scott-Rodino
Act), receipt of certain Ares Capital and Allied Capital lender
consents and other customary closing conditions.
The Merger Agreement also contains certain termination rights
for Allied Capital and Ares Capital and provides that, in
connection with the termination of the Merger Agreement under
specified circumstances, Allied Capital may be required to pay
Ares Capital a termination fee of $30 million
64
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 14. | Subsequent Events, continued |
($15 million if Allied Capital stockholders do not approve
the Merger) and Ares Capital may be required to pay Allied
Capital a termination fee of $30 million.
In a separate transaction on October 30, 2009, the Company
sold its interests, including its outstanding commitments and
the provision of management services, in its Senior Secured Loan
Fund LLC (the “SL Fund,” formerly known as the
Unitranche Fund) to Ares Capital for $165 million in cash.
At September 30, 2009, the SL Fund held “unitranche
loans” totaling approximately $921 million. In
addition, from September 30, 2009 through November 2,
2009, the Company has collected additional cash proceeds
totaling approximately $30 million and has identified
approximately $200 million of assets for potential future
sale. The Company has also paid down an additional
$94 million of private debt since September 30, 2009
and has cash and money market and other securities of
$273 million as of November 2, 2009.
65
Report of
Independent Registered Public Accounting Firm
The Board of Directors and
Shareholders
Allied Capital
Corporation:
We have reviewed the accompanying consolidated balance sheet of
Allied Capital Corporation and subsidiaries (the Company),
including the consolidated statement of investments, as of
September 30, 2009, the related consolidated statements of
operations for the three- and nine-month periods ended
September 30, 2009 and 2008, and the consolidated
statements of changes in net assets and cash flows and the
financial highlights (included in Note 12) for the
nine-month periods ended September 30, 2009 and 2008. These
consolidated financial statements and financial highlights are
the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the consolidated financial
statements and financial highlights referred to above for them
to be in conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Allied Capital Corporation and
subsidiaries, including the consolidated statement of
investments, as of December 31, 2008, and the related
consolidated statements of operations, changes in net assets and
cash flows (not presented herein), and the financial highlights,
for the year then ended; and in our report dated March 2,
2009, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet
including the consolidated statement of investments as of
December 31, 2008, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
Washington, D.C.
November 6, 2009
66
Schedule 12-14
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF
INVESTMENTS IN AND ADVANCES TO AFFILIATES
|
PRIVATE FINANCE |
Amount of Interest or Dividends |
December 31, |
September 30, |
|||||||||||||||||||||||
|
Portfolio Company |
Credited |
2008 |
Gross |
Gross |
2009 |
|||||||||||||||||||||
| (in thousands) | Investment(1) | to Income(6) | Other(2) | Value | Additions(3) | Reductions(4) | Value | |||||||||||||||||||
|
Companies More Than 25% Owned
|
||||||||||||||||||||||||||
|
AGILE Fund I, LLC
|
Equity Interests | $ | 497 | $ | 34 | $ | (114 | ) | $ | 417 | ||||||||||||||||
|
(Private Equity Fund)
|
||||||||||||||||||||||||||
|
AllBridge Financial, LLC
|
Senior Loan | $ | 21 | — | 1,311 | — | 1,311 | |||||||||||||||||||
|
(Asset Management)
|
Equity Interests | 10,960 | 6,926 | (2,363 | ) | 15,523 | ||||||||||||||||||||
|
Allied Capital Senior Debt Fund, L.P.
(Private Debt Fund) |
Limited Partnership Interests |
31,800 | 1,244 | — | 33,044 | |||||||||||||||||||||
|
Avborne, Inc.
|
Preferred Stock | 942 | — | (38 | ) | 904 | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
|
Avborne Heavy Maintenance, Inc.
|
Common Stock | — | — | — | — | |||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Aviation Properties Corporation
|
Common Stock | — | — | — | — | |||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Border Foods, Inc.
|
Senior Loan | 4,162 | 33,027 | 2,637 | (788 | ) | 34,876 | |||||||||||||||||||
|
(Consumer Products)
|
Preferred Stock | 11,851 | 4,734 | — | 16,585 | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
Calder Capital Partners, LLC
|
Senior Loan(5) | 953 | 147 | — | 1,100 | |||||||||||||||||||||
|
(Asset Management)
|
Equity Interests | — | — | — | — | |||||||||||||||||||||
|
Callidus Capital Corporation
|
Subordinated Debt | 2,321 | 16,068 | 4,872 | (5,775 | ) | 15,165 | |||||||||||||||||||
|
(Asset Management)
|
Common Stock | 34,377 | — | (34,377 | ) | — | ||||||||||||||||||||
|
Ciena Capital LLC
|
Senior Loan(5) | 104,883 | — | (2,651 | ) | 102,232 | ||||||||||||||||||||
|
(Financial Services)
|
Class B Equity Interests | — | 3,504 | (3,504 | ) | — | ||||||||||||||||||||
| Class C Equity Interests | — | — | — | — | ||||||||||||||||||||||
|
CitiPostal Inc.
|
Senior Loan | 23 | 681 | 2 | — | 683 | ||||||||||||||||||||
|
(Business Services)
|
Unitranche Debt | 4,734 | 51,548 | 424 | (971 | ) | 51,001 | |||||||||||||||||||
| Subordinated Debt | 1,198 | 9,114 | 1,151 | — | 10,265 | |||||||||||||||||||||
| Common Stock | 8,616 | — | (7,492 | ) | 1,124 | |||||||||||||||||||||
|
Coverall North America, Inc.
|
Unitranche Debt | 2,911 | 31,948 | 25 | (408 | ) | 31,565 | |||||||||||||||||||
|
(Business Services)
|
Subordinated Debt | 646 | 5,549 | 4 | — | 5,553 | ||||||||||||||||||||
| Common Stock | 17,968 | 3,293 | — | 21,261 | ||||||||||||||||||||||
|
CR Holding, Inc.
|
Subordinated Debt(5) | 17,360 | 1,316 | (8,405 | ) | 10,271 | ||||||||||||||||||||
|
(Consumer Products)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
|
Crescent Equity Corp.
|
Senior Loan | 33 | 433 | — | — | 433 | ||||||||||||||||||||
|
(Business Services)
|
Subordinated Debt(5) | 58 | $ | 166 | 18,614 | 83 | (14,494 | ) | 4,203 | |||||||||||||||||
| Common Stock | 4,580 | 2,165 | (6,745 | ) | — | |||||||||||||||||||||
|
Direct Capital Corporation
|
Senior Loan(5) | — | 8,573 | — | 8,573 | |||||||||||||||||||||
|
(Financial Services)
|
Subordinated Debt(5) | 13,530 | — | (6,391 | ) | 7,139 | ||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
Financial Pacific Company
|
Subordinated Debt | 8,084 | 62,189 | 30 | (20,802 | ) | 41,417 | |||||||||||||||||||
|
(Financial Services)
|
Preferred Stock | 10 | — | — | — | — | ||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
ForeSite Towers, LLC
|
Equity Interest | 889 | — | (889 | ) | — | ||||||||||||||||||||
|
(Tower Leasing)
|
||||||||||||||||||||||||||
|
Global Communications, LLC
|
Senior Loan | 1,335 | — | (1,335 | ) | — | ||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Hot Light Brands, Inc.
|
Senior Loan(5) | 13,678 | 50 | (3,257 | ) | 10,471 | ||||||||||||||||||||
|
(Retail)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
|
Hot Stuff Foods, LLC
|
Senior Loan | 1,526 | 42,378 | 11,219 | (8,180 | ) | 45,417 | |||||||||||||||||||
|
(Consumer Products)
|
Subordinated Debt(5) | — | 49,801 | — | 49,801 | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
Huddle House, Inc.
|
Subordinated Debt | 4,918 | 57,067 | 962 | (38,535 | ) | 19,494 | |||||||||||||||||||
|
(Retail)
|
Common Stock | 20,922 | — | (13,271 | ) | 7,651 | ||||||||||||||||||||
|
IAT Equity, LLC and Affiliates
|
Subordinated Debt | 410 | 6,000 | — | — | 6,000 | ||||||||||||||||||||
|
d/b/a Industrial Air Tool
|
Equity Interests | 8,860 | 1,088 | — | 9,948 | |||||||||||||||||||||
|
(Industrial Products)
|
||||||||||||||||||||||||||
See related footnotes at the end of
this schedule.
67
|
PRIVATE FINANCE |
Amount of Interest or Dividends |
December 31, |
September 30, |
|||||||||||||||||||||||
|
Portfolio Company |
Credited |
2008 |
Gross |
Gross |
2009 |
|||||||||||||||||||||
| (in thousands) | Investment(1) | to Income(6) | Other(2) | Value | Additions(3) | Reductions(4) | Value | |||||||||||||||||||
|
Impact Innovations Group, LLC
|
Equity Interests in Affiliate | $ | 321 | $ | 1 | $ | — | $ | 322 | |||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Insight Pharmaceuticals
|
Subordinated Debt | $ | 5,619 | 63,359 | 8,960 | (20,221 | ) | 52,098 | ||||||||||||||||||
|
Corporation (Consumer Products)
|
Preferred Stock | 4,068 | 20,932 | (25,000 | ) | — | ||||||||||||||||||||
| Common Stock | — | 34,088 | (23,669 | ) | 10,419 | |||||||||||||||||||||
|
Jakel, Inc.
|
Subordinated Debt(5) | 374 | — | — | 374 | |||||||||||||||||||||
|
(Industrial Products)
|
||||||||||||||||||||||||||
|
Knightsbridge CLO
2007-1
Ltd.
|
Class E Notes | 1,442 | 14,866 | — | (3,706 | ) | 11,160 | |||||||||||||||||||
|
(CLO)
|
Income Notes | 2,838 | 35,214 | 2,837 | (15,411 | ) | 22,640 | |||||||||||||||||||
|
Knightsbridge CLO
2008-1
Ltd.
|
Class C Notes | 842 | 12,800 | — | (554 | ) | 12,246 | |||||||||||||||||||
|
(CLO)
|
Class D Notes | 587 | 8,000 | — | (920 | ) | 7,080 | |||||||||||||||||||
| Class E Notes | 1,126 | 10,573 | 508 | (1,283 | ) | 9,798 | ||||||||||||||||||||
| Income Notes | 2,924 | 21,315 | 2,924 | (4,127 | ) | 20,112 | ||||||||||||||||||||
|
MHF Logistical Solutions, Inc.
|
Subordinated Debt | — | 49,633 | (49,633 | ) | — | ||||||||||||||||||||
|
(Business Services)
|
Preferred Stock | — | — | — | — | |||||||||||||||||||||
| Common Stock | — | 20,942 | (20,942 | ) | — | |||||||||||||||||||||
|
MVL Group, Inc.
|
Senior Loan | 2,433 | 30,663 | 70 | (5,477 | ) | 25,256 | |||||||||||||||||||
|
(Business Services)
|
Subordinated Debt | 3,842 | 40,994 | 42,123 | (47,096 | ) | 36,021 | |||||||||||||||||||
| Subordinated Debt(5) | 86 | 144 | (230 | ) | — | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
Old Orchard Brands, LLC
|
Subordinated Debt | 917 | 18,882 | 262 | (19,144 | ) | — | |||||||||||||||||||
|
(Consumer Products)
|
Equity Interests | 27,763 | — | (27,763 | ) | — | ||||||||||||||||||||
|
Penn Detroit Diesel Allison, LLC
|
Subordinated Debt | 2,767 | 37,869 | 578 | (38,447 | ) | — | |||||||||||||||||||
|
(Business Services)
|
Equity Interests | 21,100 | 1,262 | (8,492 | ) | 13,870 | ||||||||||||||||||||
|
Senior Secured Loan Fund LLC
|
Subordinated Certificates | 11,782 | $ | 7,548 | 125,423 | 47,373 | (7,796 | ) | 165,000 | |||||||||||||||||
|
(Private Debt Fund)
|
Equity Interests | 1 | — | (1 | ) | — | ||||||||||||||||||||
|
Service Champ, Inc.
|
Subordinated Debt | 3,235 | 26,984 | 531 | — | 27,515 | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | 21,156 | 7,165 | — | 28,321 | |||||||||||||||||||||
|
Stag-Parkway, Inc.
|
Subordinated Debt | 1,362 | — | 19,001 | (1 | ) | 19,000 | |||||||||||||||||||
|
(Business Services)
|
Unitranche Debt | 170 | 17,962 | 418 | (18,380 | ) | — | |||||||||||||||||||
| Common Stock | 6,968 | 391 | — | 7,359 | ||||||||||||||||||||||
|
Startec Equity, LLC
|
Equity Interests | 332 | — | (332 | ) | — | ||||||||||||||||||||
|
(Telecommunications)
|
||||||||||||||||||||||||||
|
Worldwide Express Operations, LLC
|
Subordinated Debt | 38 | 2,032 | 694 | (2,726 | ) | — | |||||||||||||||||||
|
(Business Services)
|
Equity Interests | — | 11,384 | (11,384 | ) | — | ||||||||||||||||||||
| Warrants | — | 144 | (144 | ) | — | |||||||||||||||||||||
|
Total companies more than 25% owned
|
$ | 1,187,722 | $ | 1,032,018 | ||||||||||||||||||||||
|
Companies 5% to 25% Owned
|
||||||||||||||||||||||||||
|
10th Street, LLC
|
Subordinated Debt | $ | 2,148 | $ | 21,439 | $ | 676 | $ | (15 | ) | $ | 22,100 | ||||||||||||||
|
(Business Services)
|
Equity Interests | 975 | — | (490 | ) | 485 | ||||||||||||||||||||
| Option | 25 | — | — | 25 | ||||||||||||||||||||||
|
Advantage Sales & Marketing, Inc.
|
Subordinated Debt | 2,286 | 135,000 | — | (135,000 | ) | — | |||||||||||||||||||
|
(Business Services)
|
Equity Interests | 5,000 | — | (5,000 | ) | — | ||||||||||||||||||||
|
Air Medical Group Holdings LLC
|
Senior Loan | 100 | 3,139 | 13,947 | (12,630 | ) | 4,456 | |||||||||||||||||||
|
(Healthcare Services)
|
Equity Interests | 10,800 | 9,200 | — | 20,000 | |||||||||||||||||||||
|
Alpine ESP Holdings, Inc.
|
Preferred Stock | — | 701 | (701 | ) | — | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | — | 13 | (13 | ) | — | ||||||||||||||||||||
|
Amerex Group, LLC
|
Subordinated Debt | 1,993 | 8,784 | 5 | (8,789 | ) | — | |||||||||||||||||||
|
(Consumer Products)
|
Equity Interests | 6,167 | 9,932 | — | (9,932 | ) | — | |||||||||||||||||||
|
BB&T Capital Partners/Windsor
Mezzanine Fund, LLC |
Equity Interests | 11,063 | — | (1,054 | ) | 10,009 | ||||||||||||||||||||
|
(Private Equity Fund)
|
||||||||||||||||||||||||||
|
Becker Underwood, Inc.
|
Subordinated Debt | 425 | 25,502 | 216 | (25,718 | ) | — | |||||||||||||||||||
|
(Industrial Products)
|
Common Stock | 2,267 | 2,748 | (5,015 | ) | — | ||||||||||||||||||||
|
Drew Foam Companies, Inc.
|
Preferred Stock | 512 | 111 | (623 | ) | — | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | — | 6 | (6 | ) | — | ||||||||||||||||||||
|
Driven Brands, Inc.
|
Subordinated Debt | 11,021 | 83,698 | 5,780 | (3,080 | ) | 86,398 | |||||||||||||||||||
|
(Consumer Services)
|
Common Stock | 4,855 | — | (2,355 | ) | 2,500 | ||||||||||||||||||||
|
Hilden America, Inc.
|
Common Stock | 76 | 378 | (454 | ) | — | ||||||||||||||||||||
|
(Consumer Products)
|
||||||||||||||||||||||||||
See related footnotes at the end of
this schedule.
68
|
PRIVATE FINANCE |
Amount of Interest or Dividends |
December 31, |
September 30, |
|||||||||||||||||||||||
|
Portfolio Company |
Credited |
2008 |
Gross |
Gross |
2009 |
|||||||||||||||||||||
| (in thousands) | Investment(1) | to Income(6) | Other(2) | Value | Additions(3) | Reductions(4) | Value | |||||||||||||||||||
|
Lydall Transport, Ltd.
|
Equity Interests | $ | 345 | $ | 87 | $ | (432 | ) | $ | — | ||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Multi-Ad Services, Inc.
|
Unitranche Debt | $ | 234 | 2,941 | 56 | (509 | ) | 2,488 | ||||||||||||||||||
|
(Business Services)
|
Equity Interests | 1,782 | — | (576 | ) | 1,206 | ||||||||||||||||||||
|
Pendum Acquisition, Inc.
|
Common Stock | — | — | — | — | |||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Postle Aluminum Company, LLC
|
Senior Loan(5) | — | 34,876 | (19,568 | ) | 15,308 | ||||||||||||||||||||
|
(Industrial Products)
|
Subordinated Debt(5) | — | 23,868 | (23,868 | ) | — | ||||||||||||||||||||
| Equity Interest | — | — | — | — | ||||||||||||||||||||||
|
Progressive International Corporation
|
Preferred Stock | 1,125 | 4,722 | — | 5,847 | |||||||||||||||||||||
|
(Consumer Products)
|
Common Stock | 4,600 | — | (4,447 | ) | 153 | ||||||||||||||||||||
| Warrants | — | — | — | — | ||||||||||||||||||||||
|
Regency Healthcare Group, LLC
|
Senior Loan | 44 | — | 4,001 | (4,001 | ) | — | |||||||||||||||||||
|
(Healthcare Services)
|
Unitranche Debt | 309 | 10,825 | 31 | (10,856 | ) | — | |||||||||||||||||||
| Equity Interests | 2,050 | — | (209 | ) | 1,841 | |||||||||||||||||||||
|
SGT India Private Limited
|
Common Stock | — | 21 | (21 | ) | — | ||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Soteria Imaging Services, LLC
|
Subordinated Debt | 396 | 4,054 | 100 | — | 4,154 | ||||||||||||||||||||
|
(Healthcare Services)
|
Equity Interests | 1,971 | — | (688 | ) | 1,283 | ||||||||||||||||||||
|
Triax Holdings, LLC
|
Subordinated Debt | — | 10,772 | (10,772 | ) | — | ||||||||||||||||||||
|
(Consumer Products)
|
Equity Interests | — | 16,528 | (16,528 | ) | — | ||||||||||||||||||||
|
Universal Environmental Services, LLC
|
Equity Interests | — | — | — | — | |||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Total companies 5% to 25% owned
|
$ | 352,760 | $ | 178,253 | ||||||||||||||||||||||
This schedule should be read in
conjunction with the Company’s consolidated financial
statements, including the consolidated statement of investments
and Note 3 to the consolidated financial statements.
Note 3 includes additional information regarding activities
in the private finance portfolio.
| (1) | Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. The principal amount for loans and debt securities and the number of shares of common stock and preferred stock is shown in the consolidated statement of investments as of September 30, 2009. | |
| (2) | Other includes interest, dividend, or other income which was applied to the principal of the investment and therefore reduced the total investment. These reductions are also included in the Gross Reductions for the investment, as applicable. | |
| (3) | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and closing fees, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation. | |
| (4) | Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation. | |
| (5) | Loan or debt security is on non-accrual status at September 30, 2009, and is therefore considered non-income producing. Loans or debt securities on non-accrual status at the end of the period may or may not have been on non-accrual status for the full period. | |
| (6) | Represents the total amount of interest or dividends credited to income for the portion of the year an investment was included in the companies more than 25% owned or companies 5% to 25% owned categories, respectively. |
69
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following analysis of the financial condition and results
of operations of the Company should be read in conjunction with
the Company’s Consolidated Financial Statements and the
Notes thereto included herein and in the Company’s annual
report on
Form 10-K
for the year ended December 31, 2008. In addition, this
quarterly report on
Form 10-Q
contains certain forward-looking statements. These statements
include the plans and objectives of management for future
operations and financial objectives and can be identified by the
use of forward-looking terminology such as “may,”
“will,” “expect,” “intend,”
“anticipate,” “estimate,” or
“continue” or the negative thereof or other variations
thereon or comparable terminology. These forward-looking
statements are subject to the inherent uncertainties in
predicting future results and conditions. Certain factors that
could cause actual results and conditions to differ materially
from those projected in these forward-looking statements are set
forth below in Part II. Other Information, Item 1A.
Risk Factors. Other factors that could cause actual results to
differ materially include:
| • | changes in the economy, including economic downturns or recessions; | |
| • | risks associated with possible disruption in our operations due to terrorism; | |
| • | future changes in laws or regulations or changes in accounting principles; and | |
| • | other risks and uncertainties as may be detailed from time to time in our public announcements and SEC filings. |
Financial or other information presented for private finance
portfolio companies has been obtained from the portfolio
companies, and the financial information presented may represent
unaudited, projected or pro forma financial information, and
therefore may not be indicative of actual results. In addition,
the private equity industry uses financial measures such as
EBITDA or EBITDAM (Earnings Before Interest, Taxes,
Depreciation, Amortization and, in some instances, Management
fees) in order to assess a portfolio company’s financial
performance and to value a portfolio company. EBITDA and EBITDAM
are not intended to represent cash flow from operations as
defined by U.S. generally accepted accounting principles
and such information should not be considered as an alternative
to net income, cash flow from operations or any other measure of
performance prescribed by U.S. generally accepted
accounting principles.
OVERVIEW
We are a business development company, or BDC, in the private
equity business and we are internally managed. Specifically, we
primarily invest in private middle market companies in a variety
of industries through long-term debt and equity capital
instruments. Our financing generally is used to fund buyouts,
acquisitions, growth, recapitalizations, note purchases, and
other types of financings. Our investment objective is to
achieve current income and capital gains.
The United States and the global economies continue to operate
in an unprecedented economic recession and the U.S. capital
markets continue to experience volatility and a severe lack of
liquidity. Our strategy in these difficult economic times has
been focused on reducing costs and streamlining our
organization; building liquidity through selected asset sales;
retaining capital by limiting new investment activity and
suspending dividend payments; and working with portfolio
companies to help them position for growth when the economy
recovers.
Our portfolio composition at September 30, 2009 and 2008,
and December 31, 2008, was as follows:
| September 30, | December 31, | ||||||||||||
| 2009 | 2008 | 2008 | |||||||||||
|
Private finance
|
97 | % | 97% | 97% | |||||||||
|
Commercial real estate finance
|
3 | % | 3% | 3% | |||||||||
Our earnings primarily depend on the level of interest and
dividend income, fee and other income, and net realized and
unrealized gains or losses on our investment portfolio after
deducting interest expense on borrowed capital, operating
expenses and income taxes, including excise tax.
70
Interest income primarily results from the stated interest rate
earned on a loan or debt security and the amortization of loan
origination fees and discounts. The level of interest income is
directly related to the balance of the interest-bearing
investment portfolio outstanding during the period multiplied by
the weighted average yield. Our ability to generate interest
income is dependent on economic, regulatory, and competitive
factors that influence new investment activity, interest rates
on the types of loans we make, the level of repayments in the
portfolio, the amount of loans and debt securities for which
interest is not accruing and our ability to secure debt and
equity capital for our investment activities. The level of fee
income is primarily related to the level of new investment
activity and the level of fees earned from portfolio companies
and funds managed by us. The level of investment activity can
vary substantially from period to period depending on many
factors, including the general economic environment, the amount
of debt and equity capital available to middle market companies,
the level of merger and acquisition activity for such companies,
the competitive environment for the types of investments we make
and our ability to secure debt and equity capital for our
investment activities.
In addition to managing our own assets, we manage certain funds
that also invest in the debt and equity securities of primarily
private middle market companies in a variety of industries. At
September 30, 2009, we had eight separate funds under our
management (together, the Managed Funds) for which we may earn
management or other fees for our services. In some cases, we
have invested in the equity of these funds, along with other
third parties, from which we may earn a current return
and/or a
future incentive allocation. At September 30, 2009, the
Managed Funds had total assets of approximately
$3.3 billion. In October 2009, we sold we sold our
investment, including our outstanding commitments and the
provision of management services, in the Senior Secured Loan
Fund LLC, which had assets of $921.2 million at
September 30, 2009, and we may sell additional Managed
Funds. See “— Managed Funds” below for
further discussion.
In the aggregate, including the total assets on our balance
sheet and assets under management in our Managed Funds, we had
$5.9 billion in managed assets at September 30, 2009.
On October 26, 2009, we entered into an Agreement and Plan
of Merger with Ares Capital Corporation. The merger agreement
provides that Allied Capital will merge into Ares Capital with
Ares Capital being the surviving company. Upon consummation of
the merger, each share of our common stock will be converted
into and become exchangeable for 0.325 common shares of Ares
Capital Corporation. Consummation of the merger, which is
currently anticipated to occur by the end of the first quarter
of 2010, is subject to certain conditions, including, among
others, Allied Capital stockholder approval, Ares Capital
stockholder approval, required regulatory approvals, receipt of
certain Ares Capital and Allied Capital lender consents and
other customary closing conditions. See “— Recent
Developments.”
PORTFOLIO AND
INVESTMENT ACTIVITY
The total portfolio at value, investment activity, and the yield
on interest-bearing investments at and for the three and nine
months ended September 30, 2009 and 2008, and at and for
the year ended December 31, 2008, were as follows:
|
At and for the |
At and for the |
At and for the |
||||||||||||||||||
|
Three Months Ended |
Nine Months Ended |
Year Ended |
||||||||||||||||||
| September 30, | September 30, | December 31, | ||||||||||||||||||
| ($ in millions) | 2009 | 2008 | 2009 | 2008 | 2008 | |||||||||||||||
|
Portfolio at value
|
$ | 2,511.2 | $ | 4,208.5 | $ | 2,511.2 | $ | 4,208.5 | $ | 3,493.0 | ||||||||||
|
Investments funded
|
$ | 19.4 | $ | 433.8 | $ | 118.1 | $ | 1,027.8 | $ | 1,078.2 | ||||||||||
|
Payment-in-kind
interest and dividends, net of cash collections
|
$ | 5.8 | $ | 11.4 | $ | 24.4 | $ | 35.9 | $ | 53.4 | ||||||||||
|
Principal collections related to investment repayments or
sales(1)
|
$ | 63.5 | $ | 280.6 | $ | 650.9 | $ | 878.2 | $ | 1,037.3 | ||||||||||
|
Yield on interest-bearing portfolio
investments(2)
|
11.9 | % | 11.9 | % | 11.9 | % | 11.9 | % | 12.1 | % | ||||||||||
71
| (1) | Principal collections related to investment repayments or sales for the three and nine months ended September 30, 2009, included $0.0 million and $171.0 million, respectively, of cash collections related to notes and other receivables received from the sale of investments in portfolio companies in prior periods. Principal collections related to investment repayments or sales for the three and nine months ended September 30, 2009 and 2008, and year ended December 31, 2008, included collections of $0.0 million, $274.9 million, $46.3 million, $352.7 million and $383.0 million, respectively, related to the sale of loans to certain of our Managed Funds. |
| (2) | The weighted average yield on interest-bearing investments is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, plus the effective interest yield on the preferred shares/income notes of CLOs, plus the effective stated interest yield on the subordinated certificates in the Senior Secured Loan Fund LLC divided by (b) total interest-bearing investments at value. The weighted average yield is computed as of the balance sheet date. |
Private
Finance
The private finance portfolio at value, investment activity, and
the yield on interest bearing investments at and for the three
and nine months ended September 30, 2009 and 2008, and at
and for the year ended December 31, 2008, were as follows:
|
At and for the Three Months |
At and for the Nine Months |
At and for the |
||||||||||||||||||||||||||||||||||||||
| Ended September 30, | Ended September 30, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2008 | ||||||||||||||||||||||||||||||||||||
| ($ in millions) | Value | Yield(1) | Value | Yield(1) | Value | Yield(1) | Value | Yield(1) | Value | Yield(1) | ||||||||||||||||||||||||||||||
|
Portfolio at value:
|
||||||||||||||||||||||||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||||||||||||||||||
|
Senior loans
|
$ | 289.4 | 4.8% | $ | 434.9 | 4.2% | $ | 289.4 | 4.8% | $ | 434.9 | 4.2 | % | $ | 306.3 | 5.6 | % | |||||||||||||||||||||||
|
Unitranche debt
|
374.7 | 12.2% | 579.3 | 12.0% | 374.7 | 12.2% | 579.3 | 12.0 | % | 456.4 | 12.0 | % | ||||||||||||||||||||||||||||
|
Subordinated debt
|
1,182.9 | 13.4% | 2,062.6 | 13.1% | 1,182.9 | 13.4% | 2,062.6 | 13.1 | % | 1,829.1 | 12.9 | % | ||||||||||||||||||||||||||||
|
Total loans and debt securities
|
1,847.0 | 11.8% | 3,076.8 | 11.7% | 1,847.0 | 11.8% | 3,076.8 | 11.7 | % | 2,591.8 | 11.9 | % | ||||||||||||||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||||||||||||||||||
|
Preferred shares/income notes of
CLOs(2)
|
84.4 | 12.1% | 218.3 | 17.1% | 84.4 | 12.1% | 218.3 | 17.1 | % | 179.2 | 16.4 | % | ||||||||||||||||||||||||||||
|
Subordinated certificates in Senior Secured Loan
Fund LLC(2)
|
165.0 | 14.0% | 114.3 | 10.3% | 165.0 | 14.0% | 114.3 | 10.3 | % | 125.4 | 12.0 | % | ||||||||||||||||||||||||||||
|
Other equity securities
|
346.3 | 692.5 | 346.3 | 692.5 | 502.7 | |||||||||||||||||||||||||||||||||||
|
Total equity securities
|
595.7 | 1,025.1 | 595.7 | 1,025.1 | 807.3 | |||||||||||||||||||||||||||||||||||
|
Total portfolio
|
$ | 2,442.7 | $ | 4,101.9 | 2,442.7 | $ | 4,101.9 | $ | 3,399.1 | |||||||||||||||||||||||||||||||
|
Investments funded
|
$ | 18.6 | (4) | $ | 428.9 | $ | 115.5 | (4) | $ | 1,020.7 | $ | 1,068.1 | ||||||||||||||||||||||||||||
|
Payment-in-kind
interest and dividends, net of cash collections
|
$ | 5.8 | $ | 11.4 | $ | 24.4 | $ | 35.8 | $ | 53.2 | ||||||||||||||||||||||||||||||
|
Principal collections related to investment repayments or
sales(3)
|
$ | 63.1 | $ | 280.6 | $ | 644.2 | $ | 861.5 | $ | 1,020.5 | ||||||||||||||||||||||||||||||
| (1) | The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total loans and debt securities at value. The weighted average yield on the preferred shares/income notes of CLOs is calculated as the (a) effective interest yield on the preferred shares/income notes of CLOs, divided by (b) preferred shares/income notes of CLOs at value. The weighted average yield on the subordinated certificates in the Senior Secured Loan Fund LLC is computed as the (a) effective interest yield on the subordinated certificates divided by (b) total investment at value. The weighted average yields are computed as of the balance sheet date. |
| (2) | Investments in the preferred shares/income notes of CLOs and the subordinated certificates in the Senior Secured Loan Fund LLC earn a current return that is included in interest income in the consolidated statement of operations. |
| (3) | Includes $0.0 million and $171.0 million, respectively, cash collections during the three and nine months ended September 30, 2009, related to notes and other receivables received from the sale of investments in prior periods. Also includes collections from the sale or repayment of senior loans totaling $13.4 million, $77.6 million, $101.2 million, $225.4 million and $285.3 million, respectively, for the three and nine months ended September 30, 2009 and 2008, and for the year ended December 31, 2008. |
72
| (4) | Includes $10.6 million and $38.7 million, respectively, funded under pre-existing commitments under revolving lines of credit during the three and nine months ended September 30, 2009. During the three and nine months ended September 30, 2009, a total of $10.1 million and $38.4 million, respectively, was repaid under these arrangements, which is included in principal collections related to investment repayments or sales. |
Our private finance portfolio primarily is composed of debt and
equity investments. Debt investments include senior loans,
unitranche debt (an instrument that combines both senior and
subordinated financing, generally in a first lien position), or
subordinated debt (with or without equity features). The junior
debt that we have in the portfolio is lower in repayment
priority than senior debt and is also known as mezzanine debt.
Our portfolio contains equity investments for a minority equity
stake in portfolio companies and includes equity features such
as nominal cost warrants received in conjunction with our debt
investments. In a buyout transaction, we generally invest in
senior
and/or
subordinated debt and equity (preferred
and/or
voting or non-voting common) where our equity ownership
represents a significant portion of the equity, but may or may
not represent a controlling interest.
Investment Activity. Investments funded
and the weighted average yield on interest-bearing investments
funded for the nine months ended September 30, 2009 and
2008, and for the year ended December 31, 2008, consisted
of the following:
| For the Nine Months Ended September 30, 2009 | ||||||||||||||||||||||||
| Debt Investments | Buyout Investments | Total | ||||||||||||||||||||||
|
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
|
Average |
Average |
Average |
||||||||||||||||||||||
| ($ in millions) | Amount | Yield(1) | Amount | Yield(1) | Amount | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 33.9 | 6.3% | $ | 14.3 | 2.8% | $ | 48.2 | 5.2% | |||||||||||||||
|
Unitranche debt
|
1.0 | 9.5% | — | 1.0 | 9.5% | |||||||||||||||||||
|
Subordinated debt
|
3.0 | 15.0% | 3.3 | 18.0% | 6.3 | 16.5% | ||||||||||||||||||
|
Total loans and debt securities
|
37.9 | 7.0% | 17.6 | 5.6% | 55.5 | 6.6% | ||||||||||||||||||
|
Subordinated certificates in Senior Secured Loan
Fund LLC(2)
|
47.4 | 8.4% | — | 47.4 | 8.4% | |||||||||||||||||||
|
Equity
|
7.1 | 5.5 | 12.6 | |||||||||||||||||||||
|
Total
|
$ | 92.4 | $ | 23.1 | $ | 115.5 | ||||||||||||||||||
| For the Nine Months Ended September 30, 2008 | ||||||||||||||||||||||||
| Debt Investments | Buyout Investments | Total | ||||||||||||||||||||||
|
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
|
Average |
Average |
Average |
||||||||||||||||||||||
| ($ in millions) | Amount | Yield(1) | Amount | Yield(1) | Amount | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 155.0 | 7.3% | $ | 12.6 | 6.0% | $ | 167.6 | 7.2% | |||||||||||||||
|
Senior secured loan to Ciena
|
||||||||||||||||||||||||
|
Capital LLC
|
— | — | 319.0 | 0.0% | 319.0 | 0.0% | ||||||||||||||||||
|
Unitranche
debt(3)
|
15.3 | 10.5% | 0.5 | 6.6% | 15.8 | 10.4% | ||||||||||||||||||
|
Subordinated debt
|
243.4 | (4) | 12.6% | 50.5 | 15.2% | 293.9 | 13.0% | |||||||||||||||||
|
Total loans and debt securities
|
413.7 | 10.5% | 382.6 | 2.2% | 796.3 | 6.5% | ||||||||||||||||||
|
Preferred shares/income notes of
CLOs(5)
|
35.6 | 18.6% | — | 35.6 | 18.6% | |||||||||||||||||||
|
Subordinated certificates in Senior Secured Loan
Fund LLC(2)
|
113.6 | 10.8% | — | 113.6 | 10.8% | |||||||||||||||||||
|
Equity
|
37.7 | 37.5 | 75.2 | |||||||||||||||||||||
|
Total
|
$ | 600.6 | $ | 420.1 | $ | 1,020.7 | ||||||||||||||||||
73
| For the Year Ended December 31, 2008 | ||||||||||||||||||||||||
| Debt Investments | Buyout Investments | Total | ||||||||||||||||||||||
|
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
|
Average |
Average |
Average |
||||||||||||||||||||||
| ($ in millions) | Amount | Yield(1) | Amount | Yield(1) | Amount | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 175.9 | 7.4% | $ | 13.9 | 5.4 | % | $ | 189.8 | 7.2 | % | |||||||||||||
|
Senior secured loan to Ciena Capital LLC
|
— | 319.0 | 0.0 | %(6) | 319.0 | 0.0 | %(6) | |||||||||||||||||
|
Unitranche
debt(3)
|
15.3 | 10.5% | 0.5 | 6.6 | % | 15.8 | 10.4 | % | ||||||||||||||||
|
Subordinated debt
|
246.4 | (4) | 12.6% | 54.8 | 15.4 | % | 301.2 | 13.1 | % | |||||||||||||||
|
Total loans and debt securities
|
437.6 | 10.4% | 388.2 | 2.4 | % | 825.8 | 6.6 | %(7) | ||||||||||||||||
|
Preferred shares/income notes of
CLOs(5)
|
35.6 | 18.6% | — | 35.6 | 18.6 | % | ||||||||||||||||||
|
Subordinated certificates in Senior
Secured Loan Fund LLC(2) |
124.7 | 10.9% | — | 124.7 | 10.9 | % | ||||||||||||||||||
|
Equity
|
40.5 | 41.5 | 82.0 | |||||||||||||||||||||
|
Total
|
$ | 638.4 | $ | 429.7 | $ | 1,068.1 | ||||||||||||||||||
| (1) | The weighted average yield on interest-bearing investments is computed as the (a) annual stated interest on accruing interest-bearing investments, divided by (b) total interest-bearing investments funded. The weighted average yield on the preferred shares/income notes of CLOs is calculated as the (a) effective interest yield on the preferred shares/income notes of CLOs, divided by (b) preferred shares/income notes of CLOs funded. The weighted average yield on the subordinated certificates in the Senior Secured Loan Fund LLC is computed as the (a) effective interest yield on the subordinated certificates (b) total investment at value. The weighted average yield is calculated using yields as of the date an investment is funded. |
| (2) | In June 2009, the Unitranche Fund LLC was renamed the Senior Secured Loan Fund LLC. In October 2009, we sold our investment, including our outstanding commitments and the provision of management services, in the Senior Secured Loan Fund. See “— Recent Developments.” |
| (3) | Unitranche debt is an investment that combines both senior and subordinated financing, generally in a first lien position. The yield on a unitranche investment reflects the blended yield of senior and subordinated debt. |
| (4) | Subordinated debt investments for the nine months ended September 30, 2008, and year ended December 31, 2008, included $43.8 million in investments in the bonds of collateralized loan obligations (CLOs). Certain of these CLOs are managed by Callidus Capital Corporation (Callidus), a wholly owned portfolio company. These CLOs primarily invest in senior corporate loans. |
| (5) | CLO equity investments included preferred shares/income notes of CLOs that primarily invest in senior corporate loans. Certain of these CLOs are managed by us or by Callidus. |
| (6) | The senior secured loan to Ciena Capital LLC was acquired on September 30, 2008, and was placed on non-accrual status on the purchase date. |
| (7) | Excluding the senior secured loan to Ciena, the weighted average yield on new investments for the year ended December 31, 2008 was 10.8%. |
For the nine months ended September 30, 2009, we made
private finance investments totaling $115.5 million.
Investments arose primarily from fundings under pre-existing
investment commitments, including fundings under revolving line
of credit instruments and $47.4 million to fund investments
made by the Senior Secured Loan Fund LLC.
Historically, our focus for investments generally has been on
higher return junior debt capital investments. Senior loans
funded by us generally were funded with the intent to sell the
loan or for the portfolio company to refinance the loan at some
point in the future as discussed below. We have made fewer
direct unitranche debt investments since the establishment of
the Senior Secured Loan Fund LLC (formerly, the Unitranche
Fund LLC) in the fourth quarter of 2007. Unitranche
loans sourced by us in these periods generally were referred to
the Senior Secured Loan Fund. Since its inception, we have
invested $172.8 million in the Senior Secured Loan Fund.
See “— Managed Funds” and “—
Recent Developments” below.
We generally fund new investments using cash. In addition, we
may acquire securities in exchange for our common equity. Also,
we may acquire new securities through the reinvestment of
previously accrued interest and dividends in debt or equity
securities, or the current reinvestment of interest and dividend
income through the receipt of a debt or equity security
(payment-in-kind
income). From time to time we may opt to reinvest accrued
interest receivable in a new debt or equity security in lieu of
receiving such interest in cash.
We may underwrite or arrange senior loans related to our
portfolio investments or for other companies that are not in our
portfolio. When we underwrite or arrange senior loans, we may
earn a fee for such activities. Senior loans underwritten or
arranged by us may be funded by us at closing. When these senior
loans are closed, we may fund all or a portion of the
underwritten commitment pending sale of the loan to other
investors, which may include loan sales to the Managed Funds or
funds managed by Callidus Capital Corporation (Callidus), a
wholly owned portfolio company. After completing loan sales, we
may retain a position in these senior loans. We generally earn a
fee on the senior loans we underwrite or arrange whether or not
we fund the underwritten commitment. In addition,
74
we may fund most or all of the debt and equity capital upon the
closing of certain buyout transactions, which may include
investments in lower-yielding senior debt. Subsequent to the
closing, the portfolio company may refinance all or a portion of
the lower-yielding senior debt, which would reduce our
investment.
We have focused our efforts on selling assets in our portfolio
to generate capital. Principal collections related to private
finance investment repayments or sales were $644.2 million
for the nine months ended September 30, 2009, including
$171.0 million of cash collections related to notes and
other receivables received from the sale of investments in
portfolio companies in prior periods. Principal collections
include repayments of senior debt funded by us that was
subsequently sold by us or refinanced or repaid by the portfolio
companies. We plan to continue to sell assets and re-balance our
portfolio with an emphasis on current income. However, there can
be no assurance that we will be able to achieve these objectives.
Outstanding Investment Commitments. At
September 30, 2009, we had outstanding private finance
investment commitments as follows:
|
Companies |
Companies |
|||||||||||||||
|
More Than |
Companies 5% |
Less Than |
||||||||||||||
| ($ in millions) | 25% Owned(1) | to 25% Owned | 5% Owned | Total | ||||||||||||
|
Senior loans
|
$ | 15.4 | $ | 7.4 | $ | 63.0 | $ | 85.8 | ||||||||
|
Unitranche debt
|
3.0 | — | 11.6 | 14.6 | ||||||||||||
|
Subordinated debt
|
16.5 | 4.3 | — | 20.8 | ||||||||||||
|
Total loans and debt securities
|
34.9 | 11.7 | 74.6 | 121.2 | (2) | |||||||||||
|
Senior Secured Loan Fund
|
352.2 | — | — | 352.2 | ||||||||||||
|
Equity securities
|
14.2 | 7.0 | 20.9 | 42.1 | (3) | |||||||||||
|
Total
|
$ | 401.3 | $ | 18.7 | $ | 95.5 | $ | 515.5 | ||||||||
| (1) | Includes a $4.0 million revolving line of credit commitment for working capital to Callidus Capital Corporation (Callidus), a portfolio company controlled by us, which owns 100% of Callidus Capital Management, LLC, an asset management company that structures and manages collateralized loan obligations (CLOs), collateralized debt obligations (CDOs), and other related investments. | |
| (2) | Includes $91.8 million in the form of revolving debt facilities to 22 companies. | |
| (3) | Includes $26.7 million to 7 private equity and venture capital funds. These fund commitments are generally drawn over a multi-year period of time as the funds make investments. |
Total commitments were $515.5 million at September 30,
2009, or $163.3 million excluding the $352.2 million
in commitments to the Senior Secured Loan Fund (see
“— Managed Funds”). In October 2009, we sold
our investment, including our outstanding commitments and the
provision for management services, in the Senior Secured Loan
Fund. See “— Recent Developments.”
In addition to these outstanding investment commitments at
September 30, 2009, we also had outstanding guarantees to
private finance portfolio companies. See “Financial
Condition, Liquidity and Capital Resources” below. We
intend to fund these commitments with existing cash and through
cash flows from operations before new investments, although
there can be no assurance that we will generate sufficient cash
flows to satisfy these commitments.
Net Unrealized Depreciation on Private Finance
Portfolio. At September 30, 2009, our
private finance portfolio totaled $4.2 billion at cost and
$2.4 billion at value, which included net unrealized
depreciation of $1.8 billion. $1.0 billion or 59.7% of
the total net unrealized depreciation of $1.8 billion was
related to our investments in four portfolio companies and our
investment in CLO/CDO Assets as follows: $445.3 million or
25.4% related to our investment in Ciena Capital, LLC;
$217.2 million or 12.4% related to investments in CLO/CDO
Assets; $186.8 million or 10.7% related to our investment
in EarthColor, Inc.; $106.8 million or 6.1% related to our
investment in WMA Equity Corporation and Affiliates; and
$89.7 million or 5.1% related to our investment in Hot
Stuff Foods, LLC.
75
Investments in Collateralized Loan Obligations and
Collateralized Debt Obligations (CLO/CDO
Assets). At both September 30, 2009, and
December 31, 2008, we had investments in CLO issuances and
a CDO bond, which totaled as follows:
| 2009 | 2008 | |||||||||||||||||||||||
| ($ in millions) | Cost | Value | Yield(1) | Cost | Value | Yield(1) | ||||||||||||||||||
|
CLO/CDO
bonds(2)
|
$ | 130.0 | $ | 73.3 | 12.7% | $ | 127.7 | $ | 86.1 | 18.5% | ||||||||||||||
|
Preferred shares/income notes of CLOs
|
245.0 | 84.4 | 12.1% | 248.2 | 179.2 | 16.4% | ||||||||||||||||||
|
Total
|
$ | 375.0 | $ | 157.7 | $ | 375.9 | $ | 265.3 | ||||||||||||||||
|
Percentage of total assets
|
5.6% | 7.1% | ||||||||||||||||||||||
| (1) | The weighted average yield is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective interest yield on the preferred shares/income notes, divided by (b) CLO and CDO assets at value. The market yield used in the valuation of the CLO and CDO assets may be different than the interest yields shown above. See discussion below. |
| (2) | Included in private finance subordinated debt. |
The CLO and CDO issuances in which we have invested are
primarily invested in senior corporate loans. Certain of these
funds are managed by Callidus, and certain of these funds are
managed by us. See also Note 3, “Portfolio” from
our Notes to the Consolidated Financial Statements included in
Item 1.
The initial yields on the cost basis of the CLO preferred shares
and income notes are based on the estimated future cash flows
expected to be paid to these CLO classes from the underlying
collateral assets. As each CLO preferred share or income note
ages, the estimated future cash flows are updated based on the
estimated performance of the underlying collateral assets, and
the respective yield on the cost basis is adjusted as necessary.
As future cash flows are subject to uncertainties and
contingencies that are difficult to predict and are subject to
future events that may alter current assumptions, no assurance
can be given that the anticipated yields to maturity will be
achieved.
The CLO/CDO Assets in which we have invested are junior in
priority for payment of interest and principal to the more
senior notes issued by the CLOs and CDO. Cash flow from the
underlying collateral assets in the CLOs and CDO generally is
allocated first to the senior bonds in order of priority, then
any remaining cash flow is generally distributed to the
preferred shareholders and income note holders. To the extent
there are ratings downgrades, defaults and unrecoverable losses
on the underlying collateral assets that result in reduced cash
flows, the preferred shares/income notes will bear this loss
first and then the subordinated bonds would bear any loss after
the preferred shares/income notes. At both September 30,
2009, and December 31, 2008, the face value of the CLO/CDO
Assets held by us was subordinate to as much as 94% of the face
value of the securities outstanding in these CLOs and CDO.
At September 30, 2009, and December 31, 2008, the
underlying collateral assets of these CLO and CDO issuances,
consisting primarily of senior corporate loans, were issued by
627 issuers and 658 issuers, respectively, and had balances as
follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Bonds
|
$ | 232.3 | $ | 268.3 | ||||
|
Syndicated loans
|
4,387.2 | 4,477.3 | ||||||
|
Cash(1)
|
107.9 | 89.6 | ||||||
|
Total underlying collateral assets at
cost(2)
|
$ | 4,727.4 | $ | 4,835.2 | ||||
| (1) | Includes undrawn liability amounts. | |
| (2) | At September 30, 2009, and December 31, 2008, the total cost basis of defaulted obligations was $139.6 million and $95.0 million, respectively, or approximately 3.0% and 2.0%, respectively, of the total underlying collateral assets. |
Throughout 2008, market yields for CLO securities increased. As
the market yields for our investments in CLO preferred
shares/income notes increased throughout 2008 and into 2009, the
fair value of certain of our investments in these assets
decreased. At September 30, 2009, the market yield used to
value our preferred shares/income notes ranged from 27.5% to
31.5%. Ratings agencies have continued to downgrade the
underlying collateral in these types
76
of structures regardless of the payment status of the loan or
debt security. In the current economic environment, we expect
ratings downgrades, defaults and losses to continue to increase,
and we have also considered this in our valuation analysis. Net
change in unrealized appreciation or depreciation for the nine
months ended September 30, 2009, included a net increase of
$6.1 million related to our investments in CLO/CDO Assets.
We received third-party valuation assistance for our investments
in the CLO/CDO Assets in each quarter of 2008 and in the first
three quarters of 2009. See “Results of
Operations — Valuation Methodology — Private
Finance” below for further discussion of the third-party
valuation assistance we received.
As the debt capital markets show significant volatility, yield
spreads may widen further. As a result, if the market yields for
our investments in CLOs continue to increase, or should the
performance of the underlying assets in the CLOs decrease or
additional ratings downgrades occur, the fair value of our
investments may decrease further.
Ciena Capital LLC. Ciena Capital LLC
(Ciena) has provided loans to commercial real estate owners and
operators. Ciena has been a participant in the Small Business
Administration’s 7(a) Guaranteed Loan Program, and its
wholly-owned subsidiary is licensed by the SBA as a Small
Business Lending Company (SBLC). Ciena remains subject to SBA
rules and regulations. Ciena is headquartered in New York, NY.
On September 30, 2008, Ciena voluntarily filed for
bankruptcy protection under Chapter 11 of Title 11 of
the United States Code (the Bankruptcy Code) in the United
States Bankruptcy Court for the Southern District of New York
(the Court). Ciena continues to service and manage its assets as
a
“debtor-in-possession”
under the jurisdiction of the Court and in accordance with the
applicable provisions of the Bankruptcy Code and the orders of
the Court.
As a result of Ciena’s decision to file for bankruptcy
protection, our unconditional guaranty of the obligations
outstanding under Ciena’s revolving credit facility became
due and, in lieu of paying under our guarantee, we purchased the
positions of the senior lenders under Ciena’s revolving
credit facility. As of September 30, 2009, the senior
secured loan to Ciena had a cost basis of $319.0 million
and a value of $102.2 million. We continue to guarantee the
remaining principal balance of $5 million, plus related
interest, fees and expenses payable to a third party bank. In
connection with our continuing guaranty of the amounts held by
this bank, we have agreed that the amounts owing to the bank
under the Ciena revolving credit facility will be paid before
any of the secured obligations of Ciena now owed to us.
At September 30, 2009 and December 31, 2008, our
investment in Ciena was as follows:
| September 30, 2009 | December 31, 2008 | |||||||||||||||
| ($ in millions) | Cost | Value | Cost | Value | ||||||||||||
|
Senior Loan
|
$ | 319.0 | $ | 102.2 | $ | 319.0 | $ | 104.9 | ||||||||
|
Class B Equity
Interests(1)
|
119.5 | — | 119.5 | — | ||||||||||||
|
Class C Equity
Interests(1)
|
109.1 | — | 109.3 | — | ||||||||||||
|
Total(2)
|
$ | 547.6 | $ | 102.2 | $ | 547.8 | $ | 104.9 | ||||||||
| (1) | At September 30, 2009 and December 31, 2008, we held 100% of the Class B equity interests and 94.9% of the Class C equity interests. |
| (2) | In addition to our investment in Ciena included in the portfolio, we have amounts receivable from or related to Ciena that are included in other assets in the accompanying consolidated financial statements. See below. |
During the nine months ended September 30, 2009, we funded
$97.4 million to support Ciena’s term securitizations
in lieu of draws under related standby letters of credit,
including the funding of $46.0 million during the third
quarter of 2009. This was required primarily as a result of the
issuer of the letters of credit not extending maturing standby
letters of credit that were issued under our former revolving
line of credit. The amounts funded were recorded as other assets
in the accompanying consolidated balance sheet. At
September 30, 2009 and December 31, 2008, other assets
included amounts receivable from or related to Ciena totaling
$112.7 million and $15.4 million, respectively at
cost, and $2.0 million and $2.1 million, respectively
at value. Net change in unrealized appreciation or depreciation
included a net decrease related to our investment in and
receivables from Ciena of $36.8 million and
$99.8 million for the three and nine months ended
September 30, 2009, respectively. Net change in unrealized
appreciation or depreciation included a net decrease in our
investment in and receivables from Ciena of $151.9 million
and $220.5 million for the three and nine months ended
September 30, 2008, respectively.
77
At September 30, 2009, we had no outstanding standby
letters of credit issued under our former revolving line of
credit. We have considered the letters of credit and the funding
thereof in the valuation of Ciena at September 30, 2009 and
December 31, 2008.
Our investment in Ciena was on non-accrual status, therefore we
did not earn any interest and related portfolio income from our
investment in Ciena for each of the three and nine months ended
September 30, 2009 and 2008.
At September 30, 2009, Ciena had one non-recourse
securitization SBA loan warehouse facility, which has reached
its maturity date but remains outstanding. Ciena is working with
the providers of the SBA loan warehouse facility with regard to
the repayment of that facility. We have issued a performance
guaranty whereby we agreed to indemnify the warehouse providers
for any damages, losses, liabilities and related costs and
expenses that they may incur as a result of Ciena’s failure
to perform any of its obligations as loan originator, loan
seller or loan servicer under the warehouse securitizations.
The Office of the Inspector General of the SBA (OIG) and the
United States Secret Service are conducting ongoing
investigations of allegedly fraudulently obtained SBA guaranteed
loans issued by Ciena. Ciena also is subject to other SBA and
OIG audits, investigations, and reviews. In addition, the Office
of the Inspector General of the U.S. Department of
Agriculture is conducting an investigation of Ciena’s
lending practices under the Business and Industry Loan
(B&I) program. The OIG and the U.S. Department of
Justice are also conducting a civil investigation of
Ciena’s lending practices in various jurisdictions. We are
unable to predict the outcome of these inquiries, and it is
possible that third parties could try to seek to impose
liability against us in connection with certain defaulted loans
in Ciena’s portfolio. These investigations, audits and
reviews are ongoing.
These investigations, audits, reviews, and litigation have had
and may continue to have a material adverse impact on Ciena and,
as a result, could continue to negatively affect our financial
results. We have considered Ciena’s voluntary filing for
bankruptcy protection, the letters of credit and the funding
thereof, current regulatory issues, ongoing investigations and
litigation in performing the valuation of Ciena at
September 30, 2009 and December 31, 2008.
Commercial Real
Estate Finance
The commercial real estate finance portfolio at value,
investment activity, and the yield on interest-bearing
investments at and for the three and nine months ended
September 30, 2009 and 2008, and at and for the year ended
December 31, 2008, were as follows:
|
At and for the |
||||||||||||||||||||||||||||||||||||||||
|
At and for the Three Months |
At and for the Nine Months |
Year Ended |
||||||||||||||||||||||||||||||||||||||
| Ended September 30, | Ended September 30, | December 31, | ||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2008 | ||||||||||||||||||||||||||||||||||||
| ($ in millions) | Value | Yield(1) | Value | Yield(1) | Value | Yield(1) | Value | Yield(1) | Value | Yield(1) | ||||||||||||||||||||||||||||||
|
Portfolio at value:
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial mortgage loans
|
$ | 50.5 | 6.9% | $ | 51.4 | 7.4% | $ | 50.5 | 6.9% | $ | 51.4 | 7.4% | $ | 53.5 | 7.4 | % | ||||||||||||||||||||||||
|
Real estate owned
|
6.2 | 24.0 | 6.2 | 24.0 | 20.8 | |||||||||||||||||||||||||||||||||||
|
Equity interests
|
11.8 | 31.2 | 11.8 | 31.2 | 19.6 | |||||||||||||||||||||||||||||||||||
|
Total portfolio
|
$ | 68.5 | $ | 106.6 | $ | 68.5 | $ | 106.6 | $ | 93.9 | ||||||||||||||||||||||||||||||
|
Investments funded
|
$ | 0.8 | $ | 4.9 | $ | 2.6 | $ | 7.1 | $ | 10.1 | ||||||||||||||||||||||||||||||
|
Payment-in-kind
interest, net of cash collections
|
$ | — | $ | — | $ | — | $ | 0.1 | $ | 0.2 | ||||||||||||||||||||||||||||||
|
Principal collections related to investment repayments or sales
|
$ | 0.4 | $ | — | $ | 6.0 | $ | 16.7 | $ | 16.8 | ||||||||||||||||||||||||||||||
| (1) | The weighted average yield on the interest-bearing investments is computed as the (a) annual stated interest on accruing loans plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing interest-bearing investments less the annual amortization of origination costs, divided by (b) total interest-bearing investments at value. The weighted average yield is computed as of the balance sheet date. Interest-bearing investments for the commercial real estate finance portfolio include all investments except for real estate owned and equity interests. |
78
At September 30, 2009, we had outstanding funding
commitments related to the commercial real estate portfolio of
$28.4 million.
Managed
Funds
In addition to managing our own assets, we manage certain funds
that also invest in the debt and equity securities of primarily
private middle market companies in a variety of industries and
broadly syndicated senior secured loans. In some cases, we have
invested in the equity of these funds, along with other third
parties, from which we may earn a current return
and/or a
future incentive allocation. At September 30, 2009, we had
eight separate funds under our management (together, the Managed
Funds) for which we may earn management or other fees for our
services. In October 2009, we sold our investment, including our
outstanding commitments and the provision of management
services, in the Senior Secured Loan Fund LLC, and we may sell
additional Managed Funds.
In the first quarter of 2009, we completed the acquisition of
the management contracts of three middle market senior debt CLOs
(together, the Emporia Funds) and certain other related assets
for approximately $11 million (subject to post-closing
adjustments). The acquired assets are included in other assets
in the accompanying consolidated balance sheet and will be
amortized over the life of the contracts.
The assets of the Managed Funds at September 30, 2009 and
December 31, 2008, and our management fees as of
September 30, 2009 were as follows:
| Assets of Managed Funds | ||||||||||||
|
($ in millions) |
September 30, |
December 31, |
Management |
|||||||||
|
Name of Fund
|
2009 | 2008 | Fee(2) | |||||||||
|
Senior Secured Loan
Fund LLC(3)
|
$ | 921.2 | $ | 789.8 | 0.375 | % | ||||||
|
Allied Capital Senior Debt Fund, L.P.
|
351.4 | 412.9 | 1.625 | %(1)(2) | ||||||||
|
Knightsbridge CLO
2007-1
Ltd.
|
500.7 | 500.6 | 0.600 | % | ||||||||
|
Knightsbridge CLO
2008-1
Ltd.
|
304.6 | 304.8 | 0.600 | % | ||||||||
|
Emporia Preferred Funding I, Ltd.
|
419.8 | — | 0.625 | %(1) | ||||||||
|
Emporia Preferred Funding II, Ltd.
|
355.7 | — | 0.650 | %(1) | ||||||||
|
Emporia Preferred Funding III, Ltd.
|
406.1 | — | 0.650 | %(1) | ||||||||
|
AGILE Fund I, LLC
|
83.5 | 99.3 | — | (1) | ||||||||
|
Total Assets
|
$ | 3,343.0 | $ | 2,107.4 | ||||||||
| (1) | In addition to the management fees, we are entitled to an incentive allocation subject to certain performance benchmarks. There can be no assurance that the incentive allocation will be earned. |
| (2) | Management fees are stated as a percent of assets except for the Allied Capital Senior Debt Fund, L.P. (“ACSDF”) which is stated as a percent of equity capital. The management fee paid by ACSDF was 2.000% at December 31, 2008 and was reduced to 1.625% effective January 1, 2009 for the 2009 calendar year. |
| (3) | In June 2009, the Unitranche Fund LLC was renamed the Senior Secured Loan Fund LLC. In October 2009, we sold our investment, including our commitments and the provision of management services, in the Senior Secured Loan Fund LLC. See “— Recent Developments.” |
A portion of the management fees earned by us may be deferred
under certain circumstances. Collection of the fees earned is
dependent in part on the performance of the relevant fund. We
may pay a portion of management fees we receive to Callidus
Capital Corporation, a wholly owned portfolio investment, for
services provided to the Allied Capital Senior Debt Fund, L.P.,
Knightsbridge CLO
2007-1 Ltd.,
Knightsbridge CLO
2008-1 Ltd.
and the Emporia Funds.
Our responsibilities to the Managed Funds may include investment
origination, underwriting, and portfolio monitoring services.
Each of the Managed Funds may separately invest in the debt or
equity of companies in our
79
portfolio, and these investments may be senior, pari passu or
junior to the debt and equity investments held by us. We may or
may not participate in investments made by the Managed Funds.
During the nine months ended September 30, 2009, we sold
assets to certain of the Managed Funds for which we received
proceeds of $9.7 million and we recognized a net realized
gain of $6.3 million. During the nine months ended
September 30, 2008, we sold assets to certain of the
Managed Funds, for which we received proceeds of
$352.7 million, respectively, and we recognized realized
gains of $2.8 million.
In addition to managing these funds, we hold certain investments
in the Managed Funds as follows:
|
($ in millions) |
September 30, 2009 | December 31, 2008 | ||||||||||||||||
| Name of Fund | Investment Description | Cost | Value | Cost | Value | |||||||||||||
|
Senior Secured Loan
Fund LLC(1)
|
Subordinated Certificates and | |||||||||||||||||
| Equity Interests | $ | 165.2 | $ | 165.0 | $ | 125.4 | $ | 125.4 | ||||||||||
|
Allied Capital Senior Debt Fund, L.P.
|
Equity interests | 31.8 | 33.0 | 31.8 | 31.8 | |||||||||||||
|
Knightsbridge CLO
2007-1
Ltd.
|
Class E Notes and Income Notes | 57.4 | 33.8 | 59.6 | 50.1 | |||||||||||||
|
Knightsbridge CLO
2008-1
Ltd.
|
Class C Notes, Class D Notes, | |||||||||||||||||
| Class E Notes and Income Notes | 53.2 | 49.2 | 52.7 | 52.7 | ||||||||||||||
|
AGILE Fund I, LLC
|
Equity Interests | 0.7 | 0.4 | 0.7 | 0.5 | |||||||||||||
|
Total
|
$ | 308.3 | $ | 281.4 | $ | 270.2 | $ | 260.5 | ||||||||||
| (1) | We have committed up to a total of $525.0 million of subordinated certificates to the Senior Secured Loan Fund. The Senior Secured Loan Fund will be capitalized as investment transactions are completed. In October 2009, we sold our investment, including our outstanding commitments and the provision of management services, in the Senior Secured Loan Fund LLC. See “— Recent Developments.” |
PORTFOLIO ASSET
QUALITY
Loans and Debt Securities on Non-Accrual
Status. In general, interest is not accrued
on loans and debt securities if we have doubt about interest
collection or where the enterprise value of the portfolio
company may not support further accrual. In addition, interest
may not accrue on loans to portfolio companies that are more
than 50% owned by us depending on such company’s capital
requirements. To the extent interest payments are received on a
loan that is not accruing interest, we may use such payments to
reduce our cost basis in the investment in lieu of recognizing
interest income.
At September 30, 2009, and December 31, 2008, loans
and debt securities at value not accruing interest for the total
investment portfolio were as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Private finance
|
||||||||
|
Companies more than 25% owned
|
$ | 194.2 | $176.1 | |||||
|
Companies 5% to 25% owned
|
15.3 | — | ||||||
|
Companies less than 5% owned
|
96.3 | 151.8 | ||||||
|
Commercial real estate finance
|
9.2 | 7.7 | ||||||
|
Total
|
$ | 315.0 | $335.6 | |||||
|
Percentage of total portfolio
|
12.5 | % | 9.6 | % | ||||
At September 30, 2009 and December 31, 2008, private
finance non-accruals included our senior secured debt in Ciena,
which was $102.2 million or 4.1% and $104.9 million or
3.0%, respectively, of the total portfolio at value. The Ciena
senior secured loan was acquired in the third quarter of 2008
and was placed on nonaccrual status upon its purchase. See
“— Private Finance — Ciena Capital
LLC” above. During the nine months ended September 30,
2009, we placed certain interest bearing investments in eight
portfolio companies on non-accrual; however, non-accruals
decreased primarily due to unrealized depreciation. The increase
in loans and debt securities not accruing
80
interest as a percentage of the total portfolio as of
September 30, 2009, as compared to December 31, 2008,
is primarily the result of the overall decrease in the size of
the portfolio. During the third quarter of 2009, one new loan
was placed on non-accrual status with a fair value of
approximately $14.9 million. The remainder of the increase
from June 30, 2009 to September 30, 2009 was the
result of a net increase in the fair value of loans on
non-accrual status.
Loans and Debt Securities Over 90 Days
Delinquent. Loans and debt securities greater
than 90 days delinquent at value at September 30,
2009, and December 31, 2008, were as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Private finance
|
$ | 124.8 | $106.6 | |||||
|
Commercial mortgage loans
|
4.3 | 1.4 | ||||||
|
Total
|
$ | 129.1 | $108.0 | |||||
|
Percentage of total portfolio
|
5.1 | % | 3.1 | % | ||||
At September 30, 2009 and December 31, 2008, private
finance loans and debt securities over 90 days delinquent
included our senior secured debt in Ciena, which was
$102.2 million or 4.1% and $104.9 million or 3.0%,
respectively, of the total portfolio at value. The Ciena senior
secured loan was acquired in the third quarter of 2008 and was
placed on nonaccrual status upon its purchase. See
“— Private Finance — Ciena Capital
LLC” above. The increase in loans over 90 days
delinquent from June 30, 2009 was due to the addition of
two new loans with a fair value of approximately
$19.4 million. The remainder of the increase was the result
of a net increase in the fair value of loans over 90 days
delinquent.
The amount of the portfolio that is on non-accrual status or
greater than 90 days delinquent may vary from period to
period primarily resulting from changes in the composition of
the portfolio as a result of new investment, repayment, and exit
activity, and changes in investment values. The private equity
business is, in part, about working with troubled portfolio
companies to improve their businesses and protect our
investment. We continue to follow our historical practice of
working with portfolio companies in order to realize the
potential of each investment. Loans and debt securities on
non-accrual status and over 90 days delinquent should not
be added together as they are two separate measures of portfolio
asset quality. Loans and debt securities that are in both
categories (i.e., on non-accrual status and over
90 days delinquent) totaled $129.1 million and
$108.0 million at September 30, 2009, and
December 31, 2008, respectively. Our assets on non-accrual
are higher than our loans over 90 days delinquent primarily
due to the effect of loans with
payment-in-kind
interest. Loans with
payment-in-kind
interest experience no payment delinquency, but collection of
that
payment-in-kind
interest in the future may be doubtful and we may determine that
the loan should be placed on non-accrual. Given the severity of
this economic recession, we would expect that non-accruals and
loans over 90 days delinquent may increase in the future.
81
RESULTS OF
OPERATIONS
Comparison of the
Three and Nine Months Ended September 30, 2009 and
2008
The following table summarizes our operating results for the
three and nine months ended September 30, 2009 and 2008.
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
|
Percent |
Percent |
|||||||||||||||||||||||||||||||
| (in thousands, except per share amounts) | 2009 | 2008 | Change | Change | 2009 | 2008 | Change | Change | ||||||||||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||||||||||||||
|
Interest and Related Portfolio Income
|
||||||||||||||||||||||||||||||||
|
Interest and dividends
|
$ | 65,630 | $ | 112,207 | $ | (46,577) | (41.5) | % | $ | 230,017 | $ | 366,079 | $ | (136,062) | (37.2) | % | ||||||||||||||||
|
Fees and other income
|
6,808 | 8,455 | (1,647) | (19.5) | % | 22,233 | 34,105 | (11,872) | (34.8) | % | ||||||||||||||||||||||
|
Total interest and related portfolio income
|
72,438 | 120,662 | (48,224) | (40.0) | % | 252,250 | 400,184 | (147,934) | (37.0) | % | ||||||||||||||||||||||
|
Expenses
|
||||||||||||||||||||||||||||||||
|
Interest
|
42,421 | 35,949 | 6,472 | 18.0 | % | 129,023 | 109,974 | 19,049 | 17.3 | % | ||||||||||||||||||||||
|
Employee
|
10,905 | 21,443 | (10,538) | (49.1) | % | 32,939 | 57,439 | (24,500) | (42.7) | % | ||||||||||||||||||||||
|
Employee stock options
|
392 | 1,477 | (1,085) | (73.5) | % | 2,369 | 9,531 | (7,162) | (75.1) | % | ||||||||||||||||||||||
|
Administrative
|
7,205 | 14,138 | (6,933) | (49.0) | % | 25,509 | 36,100 | (10,591) | (29.3) | % | ||||||||||||||||||||||
|
Impairment of long-lived asset
|
— | — | — | — | 2,873 | — | 2,873 | — | ||||||||||||||||||||||||
|
Total operating expenses
|
60,923 | 73,007 | (12,084) | (16.6) | % | 192,713 | 213,044 | (20,331) | (9.5) | % | ||||||||||||||||||||||
|
Net investment income before income taxes
|
11,515 | 47,655 | (36,140) | (75.8) | % | 59,537 | 187,140 | (127,603) | (68.2) | % | ||||||||||||||||||||||
|
Income tax expense (benefit), including excise tax
|
1,930 | 2,060 | (130) | (6.3) | % | 4,205 | 8,141 | (3,936) | (48.3) | % | ||||||||||||||||||||||
|
Net investment income
|
9,585 | 45,595 | (36,010) | (79.0) | % | 55,332 | 178,999 | (123,667) | (69.1) | % | ||||||||||||||||||||||
|
Net Realized and Unrealized Gains (Losses)
|
||||||||||||||||||||||||||||||||
|
Net realized gains (losses)
|
(5,090) | 62,042 | (67,132) | * | (158,255) | 47,330 | (205,585) | * | ||||||||||||||||||||||||
|
Net change in unrealized appreciation or depreciation
|
(27,681) | (425,899 | ) | 398,218 | * | (380,528) | (687,506 | ) | 306,978 | * | ||||||||||||||||||||||
|
Total net gains (losses)
|
(32,771) | (363,857 | ) | 331,086 | * | (538,783) | (640,176 | ) | 101,393 | * | ||||||||||||||||||||||
|
Gain on repurchase of debt
|
— | — | — | * | 83,532 | — | 83,532 | * | ||||||||||||||||||||||||
|
Loss on extinguishment of debt
|
(117,497) | (117,497) | * | (117,497) | — | (117,497) | * | |||||||||||||||||||||||||
|
Net income (loss)
|
$ | (140,683) | $ | (318,262 | ) | $ | 177,579 | 55.8 | % | $ | (517,416) | $ | (461,177 | ) | $ | (56,239) | 12.2 | % | ||||||||||||||
|
Diluted earnings (loss) per common share
|
$ | (0.79) | $ | (1.78 | ) | $ | 1.00 | 55.9 | % | $ | (2.89) | $ | (2.70 | ) | $ | (0.19) | (7.3) | % | ||||||||||||||
|
Weighted average common shares outstanding — diluted
|
179,054 | 178,692 | 362 | 0.2 | % | 178,815 | 171,084 | 7,731 | 4.5 | % | ||||||||||||||||||||||
| * | Comparisons may not be meaningful. Net change in unrealized appreciation or depreciation and net gains (losses) can fluctuate significantly from period to period. |
82
Interest and Related Portfolio Income. Interest
and related portfolio income includes interest and dividend
income and fees and other income.
Interest and Dividends. Interest and dividend income for
the three and nine months ended September 30, 2009 and
2008, was composed of the following:
|
For the Nine |
||||||||||||
| For the Three Months Ended September 30, | Months Ended September 30, | |||||||||||
| ($ in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||
|
Interest
|
||||||||||||
|
Private finance loans and debt securities
|
$ | 55.9 | $ | 95.8 | $ | 193.8 | $ | 311.0 | ||||
|
Preferred shares/income notes of CLOs
|
2.3 | 9.4 | 11.7 | 24.8 | ||||||||
|
Subordinated certificates in Senior Secured Loan Fund LLC
|
5.9 | 2.9 | 11.8 | 4.5 | ||||||||
|
Commercial mortgage loans
|
0.9 | 0.9 | 2.7 | 3.1 | ||||||||
|
Cash, U.S. Treasury bills, money market and other securities
|
0.0 | 1.2 | 0.5 | 3.6 | ||||||||
|
Total interest
|
65.0 | 110.2 | 220.5 | 347.0 | ||||||||
|
Dividends
|
0.6 | 2.0 | 9.5 | 19.1 | ||||||||
|
Total interest and dividends
|
$ | 65.6 | $ | 112.2 | $ | 230.0 | $ | 366.1 | ||||
The level of interest income, which includes interest paid in
cash and in kind, is directly related to the balance of the
interest-bearing investment portfolio outstanding during the
period multiplied by the weighted average yield. The
interest-bearing investments in the portfolio at value and the
yield on the interest-bearing investments in the portfolio at
September 30, 2009 and 2008, were as follows:
| 2009 | 2008 | |||||||||||||
| ($ in millions) | Value | Yield(1) | Value | Yield(1) | ||||||||||
|
Private finance:
|
||||||||||||||
|
Loans and debt securities:
|
||||||||||||||
|
Senior loans
|
$ | 289.4 | 4.8 | % | $ | 434.9 | 4.2 | % | ||||||
|
Unitranche debt
|
374.7 | 12.2 | % | 579.3 | 12.0 | % | ||||||||
|
Subordinated debt
|
1,182.9 | 13.4 | % | 2,062.6 | 13.1 | % | ||||||||
|
Equity securities:
|
||||||||||||||
|
Preferred shares/income notes of CLOs
|
84.4 | 12.1 | % | 218.3 | 17.1 | % | ||||||||
|
Subordinated certificates in Senior Secured Loan Fund LLC
|
165.0 | 14.0 | % | 114.3 | 10.3 | % | ||||||||
|
Commercial real estate:
|
||||||||||||||
| 7.4 | % | |||||||||||||
|
Commercial mortgage loans
|
50.5 | 6.9 | % | 51.4 | ||||||||||
|
Total interest-bearing investments
|
$ | 2,146.9 | 11.9 | % | $ | 3,460.8 | 11.9 | % | ||||||
| (1) | The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total interest-bearing investments at value. The weighted average yield on the preferred shares/income notes of CLOs is calculated as the (a) effective interest yield on the preferred shares/income notes of CLOs, divided by (b) preferred shares/income notes of CLOs at value. The weighted average yield on the subordinated certificates in the Senior Secured Loan Fund LLC is computed as the (a) effective interest yield on the subordinated certificates divided by (b) total investment at value. This yield excludes any return from the potential future excess cash flows from portfolio earnings available to the subordinated certificate holders and from related structuring fees and management and sourcing fees. See “— Fees and Other Income” below. The weighted average yields are computed as of the balance sheet date. |
Interest income has decreased over the 2008 periods primarily as
a result of decreases in the aggregate size of the
interest-bearing portfolio due to disposition of certain
investments as we have been selectively selling assets
83
from our portfolio in order to generate capital to repay our
indebtedness and de-lever our balance sheet. The amount of
subordinated debt in our portfolio, which carries a higher yield
than other categories of loans and debt securities, has
decreased from $2.1 billion at September 30, 2008 to
$1.2 billion at September 30, 2009. Interest income
also decreased by approximately $11.4 million due to
additional investments being placed on non-accrual status during
the nine months ended September 30, 2009. The weighted
average yield varies from period to period based on the current
stated interest on interest-bearing investments, the yield on
interest-bearing investments funded, the yield on amounts
repaid, the amount of interest-bearing investments for which
interest is not accruing, changes in the value of
interest-bearing investments and the mix of interest-bearing
investments in the portfolio. Because we recently have exited,
and in the future intend to exit, several interest-bearing
investments in order to accumulate capital for repayment of
debt, we expect that income from our interest-bearing
investments will continue to decrease for the remainder of 2009.
Dividend income results from the dividend yield on preferred
equity interests, if any, or the declaration of dividends by a
portfolio company on preferred or common equity interests.
Dividend income for the nine months ended September 30,
2009, was $9.5 million as compared to $19.1 million
for the nine months ended September 30, 2008. Dividend
income for the nine months ended September 30, 2008
includes a $7.1 million dividend received in connection
with the recapitalization of Norwesco, Inc., and
$5.4 million of dividends received in connection with the
sale of certain portfolio assets to AGILE Fund I, LLC.
Dividend income will vary from period to period depending upon
the timing and amount of dividends that are declared or paid by
a portfolio company on preferred or common equity interests.
Fees and Other Income. Fees and other income
primarily include fees related to financial structuring,
diligence, transaction services, management and consulting
services to portfolio companies, commitments, guarantees, and
other services and loan prepayment premiums. As a BDC, we are
required to make significant managerial assistance available to
the companies in our investment portfolio. Managerial assistance
includes, but is not limited to, management and consulting
services related to corporate finance, marketing, human
resources, personnel and board member recruiting, business
operations, corporate governance, risk management and other
general business matters.
Fees and other income for the three and nine months ended
September 30, 2009 and 2008, included fees relating to the
following:
|
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| ($ in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Fund management
fees(1)
|
$ | 4.4 | $ | 1.8 | $ | 11.5 | $ | 4.0 | ||||||||
|
Management, consulting and other services provided to portfolio
companies
|
1.8 | 2.9 | 5.9 | 8.9 | ||||||||||||
|
Structuring and diligence
|
0.0 | 2.3 | 1.5 | 15.8 | ||||||||||||
|
Commitment, guaranty and other fees from portfolio companies
|
0.6 | 1.1 | 2.4 | 4.7 | ||||||||||||
|
Loan prepayment premiums
|
— | 0.3 | 0.9 | 0.6 | ||||||||||||
|
Other income
|
— | 0.1 | — | 0.1 | ||||||||||||
|
Total fees and other income
|
$ | 6.8 | $ | 8.5 | $ | 22.2 | $ | 34.1 | ||||||||
| (1) | See “— Portfolio and Investment Activity — Managed Funds” above. |
Fees and other income generally are related to specific
transactions or services and therefore may vary substantially
from period to period depending on the level of investment
activity and types of services provided and the level of assets
in Managed Funds for which we earn management or other fees. The
increase in fund management fees for the three and nine months
ended September 30, 2009 as compared to the three and nine
months ended September 30, 2008 was due to an increase in
assets under management related to our Managed Funds. The amount
of fund management fees is directly based on the amount of
assets under management. During
84
October 2009, we sold our interests, including our outstanding
commitments and the provision of management services, in the
Senior Secured Loan Fund LLC. See “— Recent
Developments.” For the three and nine months ended
September 30, 2009, fee income related to the Senior Secured
Loan Fund was approximately $1.2 million and
$4.5 million, respectively. Despite the increase in assets
under management for the three and nine months ended September
30, 2009, fees and other income were lower for the three and
nine months ended September 30, 2009 than for the three and
nine months ended September 30, 2008 due to the significant
decrease in our investment activity. Loan origination fees that
represent yield enhancement on a loan are capitalized and
amortized into interest income over the life of the loan.
Structuring and diligence fees included fees earned by us in
connection with investments made by the Senior Secured Loan
Fund LLC of $0.0 million and $2.1 million for the
three months ended September 30, 2009 and 2008,
respectively, and $1.4 million and $9.3 million, for
the nine months ended September 30, 2009 and 2008,
respectively. See “— Managed Funds” above.
The remainder of the structuring and diligence fees for 2008
primarily related to the higher level of new investment
originations in 2008. Because we expect new investment activity
to continue to be at a low level, we expect structuring and
diligence fees to be lower for 2009 than for 2008.
Operating Expenses. Operating expenses
include interest, employee, employee stock options,
administrative expenses and the impairment of a long-lived asset.
Interest Expense. The fluctuations in interest
expense during the three and nine months ended
September 30, 2009 and 2008, primarily were attributable to
increases in our weighted average cost of debt capital as well
as changes in the level of our borrowings under various notes
payable and our former revolving line of credit. Our contractual
borrowing activity and weighted average cost of debt, including
fees and debt financing costs, at and for the three and nine
months ended September 30, 2009 and 2008, were as follows:
|
At and for the |
At and for the |
|||||||||||||||
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| ($ in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Total outstanding debt at par
|
$ | 1,636.5 | $ | 2,131.0 | $ | 1,636.5 | $ | 2,131.0 | ||||||||
|
Average outstanding debt
|
$ | 1,711.8 | $ | 1,967.2 | $ | 1,839.0 | $ | 2,072.8 | ||||||||
|
Weighted average
cost(1)
|
10.7% | 6.8% | 10.7% | 6.8% | ||||||||||||
| (1) | The weighted average annual interest cost is computed as the (a) annual stated interest rate on the debt plus the annual amortization of commitment fees, other facility fees and debt financing costs that are recognized into interest expense over the contractual life of the respective borrowings, divided by (b) debt outstanding on the balance sheet date. |
On December 30, 2008, we amended our former private notes
and former revolving line of credit, which increased the stated
interest rate on those obligations by 100 basis points.
Subsequent to this amendment, events of default occurred on
these instruments. Pursuant to the terms of the former revolving
credit facility, during the continuance of an event of default,
the applicable spread on outstanding borrowings and fees on any
letters of credit outstanding under the former revolving credit
facility increased by an additional 200 basis points.
Pursuant to the private notes, during the continuance of an
event of default, the rate of interest borne by the former
private notes increased by an additional 200 basis points.
During the three and nine months ended September 30, 2009,
we incurred additional interest expense totaling
$3.2 million and $12.0 million, respectively, related
to the default interest. On August 28, 2009, we completed
the restructuring of our private notes and bank facility. The
restructuring significantly increases our cost of capital. See
“Financial Condition, Liquidity and Capital Resources”
below.
In addition, interest expense included interest paid to the
Internal Revenue Service related to installment sale gains
totaling $1.5 million and $2.0 million for the three
months ended September 30, 2009 and 2008, respectively, and
$4.9 million and $5.8 million for the nine months
ended September 30, 2009 and 2008, respectively.
Installment interest expense for the year ended
December 31, 2009, is estimated to be approximately
$7.8 million. See “— Dividends and
Distributions” below.
85
Employee Expense. Employee expenses for the
three and nine months ended September 30, 2009 and 2008,
were as follows:
|
For the Three |
For the Nine |
|||||||||||||||
|
Months Ended |
Months Ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| ($ in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Salaries and employee benefits
|
$ | 10.0 | $ | 17.0 | $ | 27.5 | $ | 48.1 | ||||||||
|
Bonuses and performance
awards(1)
|
0.9 | 5.4 | ||||||||||||||
|
Individual performance award (IPA)
|
— | 2.0 | — | 6.6 | ||||||||||||
|
IPA mark to market expense (benefit)
|
— | — | — | (4.1 | ) | |||||||||||
|
Individual performance bonus (IPB)
|
— | 2.4 | — | 6.8 | ||||||||||||
|
Total employee
expense(2)
|
$ | 10.9 | $ | 21.4 | $ | 32.9 | $ | 57.4 | ||||||||
|
Number of employees at end of period
|
112 | 155 | 112 | 155 | ||||||||||||
| (1) | Amounts for the three and nine months ended September 30, 2008, include the reversal of previously accrued bonuses. |
| (2) | Excludes employee stock options expense. See below. |
During the second half of 2008, we consolidated our investment
execution activities to our Washington, DC headquarters and our
office in New York in an effort to improve our operating
efficiencies and reduced our headcount by approximately
50 employees. Our employee expense for the first three
quarters of 2009 reflects this reduction in headcount. During
the third quarter of 2009, we further reduced headcount by
approximately 22 employees. In connection with this reduction in
headcount, we incurred approximately $1.6 million of
severance expense in the third quarter of 2009.
The quarterly accrual for employee bonuses is based upon an
estimate of annual bonuses and is subject to change. The amount
of the current year bonuses will be finalized by the
Compensation Committee and the Board of Directors at the end of
the year. Employee bonuses generally are paid after the
completion of the fiscal year.
The IPA and IPB were part of an incentive compensation program
for certain officers and generally were determined annually at
the beginning of each year but could be adjusted throughout the
year. In 2008, the IPA was paid in cash in two equal
installments during the year. Through December 31, 2007,
the IPA amounts were contributed into a trust and invested in
our common stock. The IPB was distributed in cash to award
recipients throughout the year (beginning in February of each
respective year) as long as the recipient remained employed by
us. We have not established an IPA or IPB for 2009.
The trusts for the IPA payments were consolidated with our
accounts. The common stock was classified as common stock held
in deferred compensation trust in the accompanying financial
statements and the deferred compensation obligation, which
represented the amount owed to the employees, was included in
other liabilities. Changes in the value of our common stock held
in the deferred compensation trust were not recognized. However,
the liability was marked to market with a corresponding charge
or credit to employee compensation expense. In December 2007,
our Board of Directors made a determination that it was in
Allied Capital’s best interest to terminate our deferred
compensation arrangements. The Board of Directors’ decision
primarily was in response to increased complexity resulting from
changes in the regulation of deferred compensation arrangements.
The Board of Directors resolved that the accounts under these
Plans would be distributed to participants in full on
March 18, 2008, the termination and distribution date, or
as soon as was reasonably practicable thereafter, in accordance
with the provisions of each of these Plans.
The accounts under the deferred compensation arrangements
totaled $52.5 million at December 31, 2007. The
balances on the termination date were distributed to
participants in March 2008 subsequent to the termination date,
in accordance with the transition rule for payment elections
under Section 409A of the Code. Distributions from the
plans were made in cash or shares of our common stock, net of
required withholding taxes. The distribution of the
86
accounts under the deferred compensation arrangements resulted
in a tax deduction for 2008, subject to the limitations set by
Section 162(m) of the Code for persons subject to such
section.
Employee Stock Options Expense. The employee
stock options expense for the three and nine months ended
September 30, 2009 and 2008, was as follows:
|
For the Nine Months Ended |
||||||||||||||||
| For the Three Months Ended September 30, | September 30, | |||||||||||||||
| ($ in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Employee Stock Option Expense:
|
||||||||||||||||
|
Previously awarded, unvested options as of January 1, 2006
|
$ | — | $ | — | $ | — | $ | 3.9 | ||||||||
|
Options granted on or after January 1, 2006
|
0.4 | 1.5 | 2.4 | 5.6 | ||||||||||||
|
Total employee stock option expense
|
$ | 0.4 | $ | 1.5 | $ | 2.4 | $ | 9.5 | ||||||||
On March 3, 2009, the Compensation Committee of our Board
of Directors granted 10.6 million options with an exercise
price of $0.73 per share. The options vest in three equal
installments on June 30, 2009, June 30, 2010 and
June 30, 2011. On May 13, 2009, the Compensation
Committee of our Board of Directors granted 0.9 million
options with an exercise price of $2.63 per share. A total of
55,000 options vested immediately and the remaining options vest
as follows: 166,667 on June 30, 2009, 333,333 on
April 30, 2010, 180,000 on June 30, 2010 and 180,000
on June 30, 2011.
We estimate that the employee-related stock options expense will
be approximately $3.4 million, $3.9 million, and
$4.0 million for the years ended December 31, 2009,
2010, and 2011, respectively. This estimate does not include any
expense related to stock option grants after September 30,
2009, as the fair value of those stock options will be
determined at the time of grant. This estimate may change if our
assumptions related to future option forfeitures change.
Administrative Expense. Administrative
expenses include legal and accounting fees, valuation assistance
fees, insurance premiums, the cost of leases for our
headquarters in Washington, DC, and our regional offices,
portfolio origination and development expenses, travel costs,
stock record expenses, directors’ fees and stock option
expense, and various other expenses.
Administrative expenses were $7.2 million and
$14.1 million, for the three months ended
September 30, 2009 and 2008, respectively, and
$25.5 million and $36.1 million for the nine months
ended September 30, 2009 and 2008, respectively.
Administrative expenses decreased primarily due to a decrease in
travel costs and other professional fees.
Impairment of Long-Lived Asset. In our efforts
to reduce overall administrative expenses, we sold our corporate
aircraft during 2009. The sales price of the aircraft was less
than our carrying cost, therefore, we recorded an impairment
charge of $2.9 million during the quarter ended
March 31, 2009.
Loss on Extinguishment of Debt. During
the third quarter of 2009, we completed a comprehensive
restructuring of our private notes and bank facility and
recorded a loss on the extinguishment of debt of
$117.5 million. In addition to the $11 million of
previously deferred unamortized debt costs associated with the
private notes and bank facility, we incurred and paid costs to
the lenders of $146 million and other third party advisory
and other fees of approximately $26 million in connection
with the restructuring. Approximately $20 million of the
restructuring costs were deferred and are being amortized into
interest expense over the life of the private notes and bank
facility. In addition, we recorded approximately
$45 million of original issue discount
87
(OID) related to the restructuring of the private notes, which
is being amortized into interest expense over the life of the
private notes. The loss on extinguishment of debt is comprised
of the following:
| ($ in millions) | ||||
|
Previously deferred unamortized costs
|
$ | 11.3 | ||
|
Fees paid to Noteholders/Lenders
|
145.9 | |||
|
Advisory and other fees paid
|
26.0 | |||
|
Costs deferred and amortizing into interest expense
|
(20.3 | ) | ||
|
OID recorded and amortizing into interest expense
|
(45.4 | ) | ||
|
Loss on extinguishment of debt
|
$ | 117.5 | ||
Gain on Repurchase of Debt. During the
nine months ended September 30, 2009, we purchased publicly
issued notes in the market with a total par value of
$134.5 million, which consisted of $80.1 million of
our 6.625% Notes due 2011 and $54.4 million of our
6.000% Notes due 2012, for a total cost of
$50.3 million. After recognizing the remaining unamortized
original issue discount associated with the notes repurchased,
we recognized a net gain on repurchase of debt of
$0.0 million and $83.5 million for the three and nine
months ended September 30, 2009, respectively.
Income Tax Expense (Benefit), Including Excise
Tax. Income tax expense (benefit) for the
three and nine months ended September 30, 2009 and 2008,
was as follows:
|
For the Three |
||||||||||||||||
| Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| ($ in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Income tax expense (benefit)
|
$ | 1.9 | $ | 1.2 | $ | 4.2 | $ | 3.0 | ||||||||
|
Excise tax
expense(1)
|
— | 0.9 | — | 5.1 | ||||||||||||
|
Income tax expense (benefit), including excise tax
|
$ | 1.9 | $ | 2.1 | $ | 4.2 | $ | 8.1 | ||||||||
| (1) | While excise tax expense is presented in the consolidated statement of operations as a reduction to net investment income, excise tax relates to both net investment income and net realized gains (losses). |
Our wholly-owned subsidiary, A.C. Corporation, is a corporation
subject to federal and state income taxes and records a benefit
or expense for income taxes as appropriate based on its
operating results in a given period. We did not record an excise
tax for the three and nine months ended September 30, 2009.
See “Dividends and Distributions” below.
Realized Gains and Losses. Net realized
gains or losses primarily result from the sale of portfolio
investments. Net realized gains (losses) for the three and nine
months ended September 30, 2009 and 2008, were as follows:
|
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| ($ in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Realized gains
|
$ | 14.5 | $ | 97.5 | $ | 35.9 | $ | 135.2 | ||||||||
|
Realized losses
|
(19.6 | ) | (35.5 | ) | (194.2 | ) | (87.9 | ) | ||||||||
|
Net realized gains (losses)
|
$ | (5.1 | ) | $ | 62.0 | $ | (158.3 | ) | $ | 47.3 | ||||||
When we exit an investment and realize a gain or loss, we make
an accounting entry to reverse any unrealized appreciation or
depreciation, respectively, that we had previously recorded to
reflect the appreciated or depreciated value of the investment.
For the three and nine months ended September 30, 2009 and
2008, we reversed previously
88
recorded unrealized appreciation or depreciation when gains or
losses were realized or dividends were received as follows:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| ($ in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Reversal of previously recorded net unrealized appreciation
associated with realized gains
|
$ | (8.9 | ) | $ | (80.4 | ) | $ | (20.8 | ) | $ | (115.1 | ) | ||||
|
Reversal of previously recorded net unrealized appreciation
associated with dividends received
|
(0.4 | ) | (1.6 | ) | (10.8 | ) | (15.1 | ) | ||||||||
|
Reversal of previously recorded net unrealized depreciation
associated with realized losses
|
18.0 | 34.8 | 151.3 | 80.2 | ||||||||||||
|
Total reversal
|
$ | 8.7 | $ | (47.2 | ) | $ | 119.7 | $ | (50.0 | ) | ||||||
Realized gains for the three months ended September 30,
2009 and 2008, were as follows:
($ in
millions)
| 2009 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
CK Franchising, Inc.
|
$ | 13.6 | ||
|
Other
|
0.9 | |||
|
Total private finance
|
14.5 | |||
|
Commercial Real Estate:
|
||||
|
Other
|
— | |||
|
Total commercial real estate
|
— | |||
|
Total realized gains
|
$ | 14.5 | ||
| 2008 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Norwesco, Inc.
|
$86.9 | |||
|
BI Incorporated
|
7.4 | |||
|
Passport Health Communications, Inc.
|
1.8 | |||
|
Other
|
1.3 | |||
|
Total private finance
|
97.4 | |||
|
Commercial Real Estate:
|
||||
|
Other
|
0.1 | |||
|
Total commercial real estate
|
0.1 | |||
|
Total realized gains
|
$97.5 | |||
Realized losses for the three months ended September 30,
2009 and 2008, were as follows:
($ in
millions)
| 2009 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Worldwide Express Operations, LLC
|
$ | 13.0 | ||
|
Baird Capital Partners IV Limited
|
2.0 | |||
|
Snow Phipps Group, L.P.
|
1.6 | |||
|
Centre Capital Investors V, L.P.
|
1.4 | |||
|
Other
|
1.6 | |||
|
Total private finance
|
19.6 | |||
|
Commercial Real Estate:
|
||||
|
Real Estate Owned
|
— | |||
|
Total commercial real estate
|
— | |||
|
Total realized gains
|
19.6 | |||
| 2008 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Pendum, Inc.
|
$34.0 | |||
|
Other
|
1.5 | |||
|
Total realized losses
|
$35.5 | |||
89
Realized gains for the nine months ended September 30, 2009
and 2008, were as follows:
($ in
million)
| 2009 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
CK Franchising, Inc.
|
$ | 13.6 | ||
|
Advantage Sales & Marketing, Inc.
|
6.9 | |||
|
GC-Sun Holdings, LP
|
6.8 | |||
|
Other
|
4.4 | |||
|
Total private finance
|
31.7 | |||
|
Commercial Real Estate:
|
||||
|
Real Estate Owned
|
4.1 | |||
|
Other
|
0.1 | |||
|
Total commercial real estate
|
4.2 | |||
|
Total realized gains
|
$ | 35.9 | ||
| 2008 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Norwesco, Inc.
|
$ | 97.6 | ||
|
BI Incorporated
|
7.4 | |||
|
BenefitMall, Inc.
|
4.9 | |||
|
Advantage Sales & Marketing,
Inc.(1)
|
3.4 | |||
|
Mercury Air Centers, Inc.
|
3.3 | |||
|
Financial Pacific Company
|
3.1 | |||
|
Passport Health Communications, Inc.
|
1.8 | |||
|
Service Champ, Inc.
|
1.7 | |||
|
Penn Detroit Diesel Allison, LLC
|
1.4 | |||
|
Coverall North America, Inc.
|
1.4 | |||
|
Med Assets, Inc.
|
1.3 | |||
|
CR Holdings, Inc.
|
1 | |||
|
Other
|
6.5 | |||
|
Total private finance
|
134.8 | |||
|
Commercial Real Estate:
|
||||
|
Other
|
0.4 | |||
|
Total commercial real estate
|
0.4 | |||
|
Total realized gains
|
$ | 135.2 | ||
(1) Includes
an additional realized gain of $1.9 million related to the
release of escrowed funds from the sale of our majority equity
investment in 2006.
90
Realized losses for the nine months ended September 30,
2009 and 2008, were as follows:
($ in
millions)
| 2009 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
MHF Logistical Solutions, Inc.
|
$ | 70.7 | ||
|
Advantage Sales & Marketing, Inc.
|
27.3 | |||
|
Triax Holdings, LLC
|
22.7 | |||
|
Worldwide Express Operations, LLC
|
13.0 | |||
|
FCP-BHI Holdings, LLC
|
8.2 | |||
|
Augusta Sportswear Group, Inc.
|
6.2 | |||
|
The Hillman Companies, Inc.
|
5.7 | |||
|
Old Orchard Brands, LLC
|
4.5 | |||
|
Tank Intermediate Holding Corp.
|
4.2 | |||
|
Abraxas Corporation
|
3.5 | |||
|
Pro Mach, Inc.
|
2.9 | |||
|
Becker Underwood, Inc.
|
2.8 | |||
|
Baird Capital Partners IV Limited
|
2.0 | |||
|
Penn Detroit Diesel Allison, LLC
|
1.7 | |||
|
Snow Phipps Group, L.P.
|
1.6 | |||
|
Centre Capital Investors V, L.P.
|
1.4 | |||
|
Huddle House, Inc.
|
1.3 | |||
|
Summit Energy Services, Inc.
|
1.3 | |||
|
Other
|
5.3 | |||
|
Total private finance
|
186.3 | |||
|
Commercial Real Estate:
|
||||
|
Real Estate Owned
|
7.9 | |||
|
Other
|
0.0 | |||
|
Total commercial real estate
|
7.9 | |||
|
Total realized losses
|
$ | 194.2 | ||
| 2008 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Pendum, Inc.
|
$ | 34.0 | ||
|
Creative Group, Inc.
|
15.6 | |||
|
Crescent Equity Corp-Longview Cable & Data LLC
|
8.4 | |||
|
Mid-Atlantic Venture Fund IV, L.P.
|
5.2 | |||
|
WMA Equity Corporation and Affiliates
|
4.5 | |||
|
Driven Brands, Inc.
|
1.9 | |||
|
Direct Capital Corporation
|
1.7 | |||
|
EarthColor, Inc.
|
1.7 | |||
|
Sweet Traditions, Inc.
|
1.5 | |||
|
Walker Investment Fund II, LLLP
|
1.4 | |||
|
Other
|
9.5 | |||
|
Total private finance
|
85.4 | |||
|
Commercial Real Estate:
|
||||
|
Other
|
2.5 | |||
|
Total commercial real estate
|
2.5 | |||
|
Total realized losses
|
$ | 87.9 | ||
During the nine months ended September 30, 2009, we focused
our efforts on selectively selling assets from our portfolio in
order to generate capital to repay indebtedness and de-lever our
balance sheet. These asset sales have been completed under
distressed conditions in a very difficult market, and
consequently we have realized net losses upon their disposition.
For the nine months ended September 30, 2009, we sold or
had repayments on portfolio investments that generated cash
proceeds of $650.8 million.
Realized gains and losses for the nine months ended
September 30, 2009 and 2008, include net realized gains of
$6.3 million and $2.8 million, respectively
(subsequent to post-closing adjustments), from the sales of
certain investments to our Managed Funds. See
“— Managed Funds” above.
Change in Unrealized Appreciation or
Depreciation. We determine the value of each
investment in our portfolio on a quarterly basis, and changes in
value result in unrealized appreciation or depreciation being
recognized in our statement of operations. Value, as defined in
Section 2(a)(41) of the Investment Company Act of 1940, is
(i) the market price for those securities for which a
market quotation is readily available and (ii) for all
other securities and assets, fair value is as determined in good
faith by the Board of Directors. Since there is typically no
readily available market value for the investments in our
portfolio, we value substantially all of our portfolio
investments at fair value as determined in good faith by the
Board of Directors in accordance with our valuation policy and
the provisions of the 1940 Act and ASC 820, which includes the
codification of FASB Statement No. 157, Fair Value
Measurements and related interpretations. We determine fair
value to be the price that would be received for an investment
in a current sale, which assumes an orderly transaction between
market participants on the measurement date. At
September 30, 2009, portfolio investments recorded at fair
value using level 3 inputs (as defined under the Statement)
were approximately 88% of our total assets. Because of the
inherent uncertainty of
91
determining the fair value of investments that do not have a
readily available market quotation in an active market, the fair
value of our investments determined in good faith by the Board
of Directors may differ significantly from the values that would
have been used had a ready market existed for the investments,
and the differences could be material.
There is no single approach for determining fair value in good
faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of
each portfolio investment while employing a consistently applied
valuation process for the types of investments we make. Unlike
banks, we are not permitted to provide a general reserve for
anticipated loan losses. Instead, we are required to
specifically value each individual investment on a quarterly
basis. We will record unrealized depreciation on investments
when we determine that the fair value of a security is less than
its cost basis, and we will record unrealized appreciation when
we determine that the fair value is greater than its cost basis.
Changes in fair value are recorded in the statement of
operations as net change in unrealized appreciation or
depreciation.
As a BDC, we invest in illiquid securities including debt and
equity securities of portfolio companies, CLO bonds and
preferred shares/income notes, CDO bonds and investment funds.
The structure of each debt and equity security is specifically
negotiated to enable us to protect our investment and maximize
our returns. We include many terms governing interest rate,
repayment terms, prepayment penalties, financial covenants,
operating covenants, ownership parameters, dilution parameters,
liquidation preferences, voting rights, and put or call rights.
Our investments may be subject to certain restrictions on resale
and generally have no established trading market.
Because of the type of investments that we make and the nature
of our business, our valuation process requires an analysis of
various factors. Our fair value methodology includes the
examination of, among other things, the underlying investment
performance, financial condition, and market changing events
that impact valuation.
Valuation Methodology. We adopted the
standards in ASC Topic 820, on a prospective basis in the first
quarter of 2008. These standards require us to assume that the
portfolio investment is to be sold in the principal market to
market participants, or in the absence of a principal market,
the most advantageous market, which may be a hypothetical
market. Market participants are defined as buyers and sellers in
the principal or most advantageous market that are independent,
knowledgeable, and willing and able to transact. In accordance
with the standards, we have considered our principal market, or
the market in which we exit our portfolio investments with the
greatest volume and level of activity.
We have determined that for our buyout investments, where we
have control or could gain control through an option or warrant
security, both the debt and equity securities of the portfolio
investment would exit in the merger and acquisition (M&A)
market as the principal market generally through a sale or
recapitalization of the portfolio company. We believe that the
in-use premise of value (as defined in ASC Topic 820), which
assumes the debt and equity securities are sold together, is
appropriate as this would provide maximum proceeds to the
seller. As a result, we use the enterprise value methodology to
determine the fair value of these investments. Enterprise value
means the entire value of the company to a market participant,
including the sum of the values of debt and equity securities
used to capitalize the enterprise at a point in time. Enterprise
value is determined using various factors, including cash flow
from operations of the portfolio company, multiples at which
private companies are bought and sold, and other pertinent
factors, such as recent offers to purchase a portfolio company,
recent transactions involving the purchase or sale of the
portfolio company’s equity securities, liquidation events,
or other events. We allocate the enterprise value to these
securities in order of the legal priority of the securities.
There is no one methodology to determine enterprise value and,
in fact, for any one portfolio company, enterprise value is best
expressed as a range of fair values. However, we must derive a
single estimate of enterprise value. To determine the enterprise
value of a portfolio company, we analyze its historical and
projected financial results. This financial and other
information is generally obtained from the portfolio companies,
and may represent unaudited, projected or pro forma financial
information. We generally require portfolio companies to provide
annual audited and quarterly unaudited financial statements, as
well as annual projections for the upcoming fiscal year.
Typically in the private equity business, companies are bought
and sold based on multiples of EBITDA, cash flow,
92
net income, revenues or, in limited instances, book value. The
private equity industry uses financial measures such as EBITDA
or EBITDAM (Earnings Before Interest, Taxes, Depreciation,
Amortization and, in some instances, Management fees) in order
to assess a portfolio company’s financial performance and
to value a portfolio company. EBITDA and EBITDAM are not
intended to represent cash flow from operations as defined by
U.S. generally accepted accounting principles and such
information should not be considered as an alternative to net
income, cash flow from operations, or any other measure of
performance prescribed by U.S. generally accepted
accounting principles. When using EBITDA to determine enterprise
value, we may adjust EBITDA for non-recurring items. Such
adjustments are intended to normalize EBITDA to reflect the
portfolio company’s earnings power. Adjustments to EBITDA
may include compensation to previous owners, acquisition,
recapitalization, or restructuring related items or one-time
non-recurring income or expense items.
In determining a multiple to use for valuation purposes, we
generally look to private merger and acquisition statistics, the
entry multiple for the transaction, public trading multiples or
industry practices. In estimating a reasonable multiple, we
consider not only the fact that our portfolio company may be a
private company relative to a peer group of public comparables,
but we also consider the size and scope of our portfolio company
and its specific strengths and weaknesses. In some cases, the
best valuation methodology may be a discounted cash flow
analysis based on future projections. If a portfolio company is
distressed, a liquidation analysis may provide the best
indication of enterprise value.
While we typically exit our securities upon the sale or
recapitalization of the portfolio company in the M&A
market, for investments in portfolio companies where we do not
have control or the ability to gain control through an option or
warrant security, we cannot typically control the exit of our
investment into the principal market (the M&A market). As a
result, in accordance with ASC Topic 820, we are required to
determine the fair value of these investments assuming a sale of
the individual investment (the in-exchange premise of value) in
a hypothetical market to a hypothetical market participant. We
continue to perform an enterprise value analysis for the
investments in this category to assess the credit risk of the
loan or debt security and to determine the fair value of our
equity investment in these portfolio companies. The determined
equity values are generally discounted when we have a minority
ownership position, restrictions on resale, specific concerns
about the receptivity of the capital markets to a specific
company at a certain time, or other factors. For loan and debt
securities, we perform a yield analysis assuming a hypothetical
current sale of the investment. The yield analysis requires us
to estimate the expected repayment date of the instrument and a
market participant’s required yield. Our estimate of the
expected repayment date of a loan or debt security may be
shorter than the legal maturity of the instruments as our loans
have historically been repaid prior to the maturity date. The
yield analysis considers changes in interest rates and changes
in leverage levels of the loan or debt security as compared to
market interest rates and leverage levels. Assuming the credit
quality of the loan or debt security remains stable, we will use
the value determined by the yield analysis as the fair value for
that security. A change in the assumptions that we use to
estimate the fair value of our loans and debt securities using
the yield analysis could have a material impact on the
determination of fair value. If there is deterioration in credit
quality or a loan or debt security is in workout status, we may
consider other factors in determining the fair value of a loan
or debt security, including the value attributable to the loan
or debt security from the enterprise value of the portfolio
company or the proceeds that would be received in a liquidation
analysis.
Our equity investments in private debt and equity funds are
generally valued based on the fund’s net asset value,
unless other factors lead to a determination of fair value at a
different amount. The value of our equity securities in public
companies for which quoted prices in an active market are
readily available is based on the closing public market price on
the measurement date.
The fair value of our CLO/CDO Assets is generally based on a
discounted cash flow model that utilizes prepayment,
re-investment, loss and ratings assumptions based on historical
experience and projected performance, economic factors, the
characteristics of the underlying cash flow, and comparable
yields for similar bonds and preferred shares/ income notes,
when available. We recognize unrealized appreciation or
depreciation on our CLO/CDO Assets as comparable yields in the
market change
and/or based
on changes in estimated cash flows resulting from changes in
prepayment, re-investment, loss or ratings assumptions in the
underlying collateral pool or changes
93
in redemption assumptions for the CLO/CDO Assets, if applicable.
We determine the fair value of our CLO/CDO Assets on an
individual
security-by-security
basis. If we were to sell a group of these CLO/CDO Assets in a
pool in one or more transactions, the total value received for
that pool may be different than the sum of the fair values of
the individual assets.
We record unrealized depreciation on investments when we
determine that the fair value of a security is less than its
cost basis, and record unrealized appreciation when we determine
that the fair value is greater than its cost basis. Because of
the inherent uncertainty of valuation, the values determined at
the measurement date may differ significantly from the values
that would have been used had a ready market existed for the
investments, and the differences could be material.
Additionally, changes in the market environment and other events
that may occur over the life of the investments may cause the
gains or losses ultimately realized on these investments to be
different than the values determined at the measurement date. In
accordance with Topic ASC 820 (discussed below), we do not
consider a transaction price that is associated with a
transaction that is not orderly to be indicative of fair value
or market participant risk premiums, and accordingly would place
little, if any, weight on transactions that are not orderly in
determining fair value. When considering recent potential or
completed transactions, we use judgment in determining if such
offers or transactions were pursuant to an orderly process for
purposes of determining how much weight is placed on these data
points in accordance with the applicable guidelines in ASC Topic
820.
As a participant in the private equity business, we invest
primarily in private middle market companies for which there is
generally no publicly available information. Because of the
private nature of these businesses, there is a need to maintain
the confidentiality of the financial and other information that
we have for the private companies in our portfolio. We believe
that maintaining this confidence is important, as disclosure of
such information could disadvantage our portfolio companies and
could put us at a disadvantage in attracting new investments.
Therefore, we do not intend to disclose financial or other
information about our portfolio companies, unless required,
because we believe doing so may put them at an economic or
competitive disadvantage, regardless of our level of ownership
or control.
We work with third-party consultants to obtain assistance in
determining fair value for a portion of the private finance
portfolio each quarter. We work with these consultants to obtain
assistance as additional support in the preparation of our
internal valuation analysis. In addition, we may receive
third-party assessments of a particular private finance
portfolio company’s value in the ordinary course of
business, most often in the context of a prospective sale
transaction or in the context of a bankruptcy process.
The valuation analysis prepared by management is submitted to
our Board of Directors who is ultimately responsible for the
determination of fair value of the portfolio in good faith.
Valuation assistance from Duff & Phelps, LLC
(Duff & Phelps) for our private finance portfolio
consisted of certain limited procedures (the Procedures) we
identified and requested them to perform. Based upon the
performance of the Procedures on a selection of our final
portfolio company valuations, Duff & Phelps concluded
that the fair value of those portfolio companies subjected to
the Procedures did not appear unreasonable. In addition, we also
received third-party valuation assistance from other third-party
consultants for certain private finance portfolio companies. For
the three and nine months ended September 30, 2009 and
2008, we received third-party valuation assistance as follows:
| 2009 | 2008 | |||||||||||||||||||||||
| Q1 | Q2 | Q3 | Q1 | Q2 | Q3 | |||||||||||||||||||
|
Number of private finance portfolio companies reviewed
|
93 | 91 | 78 | 124 | 119 | 128 | ||||||||||||||||||
|
Percentage of private finance portfolio reviewed at value
|
94.0 | % | 96.9 | % | 97.8 | % | 94.0 | % | 94.9 | % | 97.2 | % | ||||||||||||
Professional fees for third-party valuation assistance were
$1.9 million for the year ended December 31, 2008, and
are estimated to be approximately $1.3 million for 2009.
94
Net Change in Unrealized Appreciation or
Depreciation. Net change in unrealized
appreciation or depreciation for the three and nine months ended
September 30, 2009 and 2008, consisted of the following:
|
For the Three |
For the Nine |
|||||||||||||||
| Months September 30, | Months September 30, | |||||||||||||||
| ($ in millions) | 2009(1) | 2008(1) | 2009(1) | 2008(1) | ||||||||||||
|
Net unrealized appreciation (depreciation)
|
$ | (36.4 | ) | $ | (378.7 | ) | $ | (500.2 | ) | $ | (637.5 | ) | ||||
|
Reversal of previously recorded unrealized appreciation
associated with realized gains
|
(8.9 | ) | (80.4 | ) | (20.8 | ) | (115.1 | ) | ||||||||
|
Reversal of previously recorded net unrealized appreciation
associated with dividends received
|
(0.4 | ) | (1.6 | ) | (10.8 | ) | (15.1 | ) | ||||||||
|
Reversal of previously recorded unrealized depreciation
associated with realized losses
|
18.0 | 34.8 | 151.3 | 80.2 | ||||||||||||
|
Net change in unrealized appreciation or depreciation
|
$ | (27.7 | ) | $ | (425.9 | ) | $ | (380.5 | ) | $ | (687.5 | ) | ||||
| (1) | The net change in unrealized appreciation or depreciation can fluctuate significantly from period to period. As a result, quarterly comparisons may not be meaningful. |
Per Share Amounts. All per share
amounts included in the Management’s Discussion and
Analysis of Financial Condition and Results of Operations
section have been computed using the weighted average common
shares used to compute diluted earnings per share, which were
179.1 million and 178.7 million for the three months
ended September 30, 2009 and 2008, respectively, and were
178.8 million and 171.1 million for the nine months
ended September 30, 2009 and 2008, respectively.
OTHER
MATTERS
Regulated Investment Company Status. We
have elected to be taxed as a regulated investment company (or
RIC) under Subchapter M of the Code. In order to maintain our
status as a RIC and obtain RIC tax benefits, we must, in
general, (1) continue to qualify as a BDC; (2) derive
at least 90% of our gross income from dividends, interest, gains
from the sale of securities and other specified types of income;
(3) meet asset diversification requirements as defined in
the Code; and (4) timely distribute to shareholders at
least 90% of our annual investment company taxable income (i.e.,
net ordinary investment income) as defined in the Code. With
respect to taxable realized net long-term capital gains, we may
choose to (i) distribute, (ii) deem to distribute, or
(iii) retain and pay corporate level tax on such gains. We
currently qualify as a RIC. However, there can be no assurance
that we will continue to qualify for such treatment in future
years.
As long as we qualify as a regulated investment company, we are
not taxed on our investment company taxable income or realized
net capital gains, to the extent that such taxable income or
gains are distributed, or deemed to be distributed, to
shareholders on a timely basis. Taxable income includes our
taxable interest, dividend and fee income, as well as taxable
net capital gains. Taxable income generally differs from net
income for financial reporting purposes due to temporary and
permanent differences in the recognition of income and expenses,
and generally excludes net unrealized appreciation or
depreciation, as gains or losses generally are not included in
taxable income until they are realized. In addition, gains
realized for financial reporting purposes may differ from gains
included in taxable income as a result of our election to
recognize gains using installment sale treatment, which
generally results in the deferment of gains for tax purposes
until notes or other amounts, including amounts held in escrow,
received as consideration from the sale of investments are
collected in cash. Taxable income includes non-cash income, such
as
payment-in-kind
interest and dividends and the amortization of discounts and
fees. Cash collections of income resulting from contractual
payment-in-kind
interest or the amortization of discounts and fees generally
occur upon the repayment of the loans or debt securities that
include such items. Noncash taxable income is reduced by
non-cash expenses, such as realized losses and depreciation and
amortization expense.
95
Taxable income available for distribution includes investment
company taxable income and, to the extent not deemed to be
distributed or retained, net long-term capital gains. To the
extent that annual taxable income available for distribution
exceeds dividends paid or deemed distributed from such taxable
income for the year, we may carry over the excess taxable income
into the next year and such excess income will be available for
distribution in the next year as permitted under the Code (see
discussion below). Such excess income will be treated under the
Code as having been distributed during the prior year for
purposes of our qualification for RIC tax treatment for such
year. The maximum amount of excess taxable income that we may
carry over for distribution in the next year under the Code is
the total amount of dividends paid in the following year,
subject to certain declaration and payment guidelines. Excess
taxable income carried over and paid out in the next year is
generally subject to a nondeductible 4% excise tax.
DIVIDENDS AND
DISTRIBUTIONS
We have elected to be taxed as a RIC under Subchapter M of the
Code. As a RIC, we are required to distribute substantially all
of our investment company taxable income to shareholders through
the payment of dividends. In certain circumstances, we are
restricted in our ability to pay dividends. Each of our private
notes and our bank facility contain provisions that limit the
amount of dividends we can pay. In addition, pursuant to the
1940 Act, we may be precluded from declaring dividends or other
distributions to our shareholders unless our asset coverage is
at least 200%.
We have met our dividend distribution requirements for the 2008
tax year. We intend to retain capital in 2009 in order to
achieve the 200% asset coverage threshold under the 1940 Act and
currently estimate that we will have no distribution requirement
for 2009; therefore, we currently do not expect to declare
dividends in 2009. In August 2009, we completed a restructuring
of our bank facility and our private notes. The restructured
debt significantly increases our cost of capital. As a result,
we expect our profitability will be substantially reduced and
that we will not be able to pay a cash dividend for an extended
period of time. No dividends were paid or declared for the three
and nine months ended September 30, 2009. Dividends to
common shareholders were $0.65 per share each quarter for the
first three quarters of 2008.
We currently qualify as a RIC. However there can be no assurance
that we will be able to comply with the RIC requirements to
distribute income for the current and future years and we may be
required to pay a corporate level income tax.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2009, and December 31, 2008, our cash
and investments in money market and other securities, total
assets, total debt outstanding, total shareholders’ equity,
debt to equity ratio and asset coverage for senior indebtedness
were as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Cash and investments in money market and other securities
(including money market and other securities: 2009-$90.0;
2008-$0.3)
|
$ | 153.4 | $ | 50.7 | ||||
|
Total assets
|
$ | 2,840.2 | $ | 3,722.2 | ||||
|
Total debt outstanding
|
$ | 1,636.5 | $ | 1,945.0 | ||||
|
Total shareholders’ equity
|
$ | 1,201.3 | $ | 1,718.4 | ||||
|
Debt to equity ratio
|
1.33 | 1.13 | ||||||
|
Asset coverage
ratio(1)
|
175 | % | 188 | % | ||||
| (1) | As a business development company, we generally are required to maintain a minimum ratio of 200% of total assets to total borrowings in order to incur additional indebtedness, declare dividends or other distributions or repurchase shares of our common stock. |
At September 30, 2009, our asset coverage ratio was 175%,
and we remain precluded under the 1940 Act from incurring
additional indebtedness, declaring dividends or other
distributions to our shareholders, or repurchasing shares of our
common stock until such time as our asset coverage would be at
least 200%. In addition, we generally
96
are not able to issue and sell our common stock at a price below
net asset value per share without the approval of our
stockholders. Our common stock currently is trading at a price
below our net asset value of $6.70 per share.
We may continue to engage in a variety of activities as a means
to improve our asset coverage ratio and net asset value, which
may include but are not limited to: continuing to sell assets to
generate capital to retire debt; refinancing or repurchasing, at
par or at a discount, our outstanding debt; and foregoing or
limiting dividend payments in order to retain capital. We also
plan to continue to carefully manage our employee and
administrative expenses. There can be no assurance that we will
be able to increase our asset coverage ratio or net asset value.
During the nine months ended September 30, 2009, we paid
$30.1 million to repurchase certain of the
6.625% Notes due 2011 which had a face value of
$80.1 million, and $20.2 million to repurchase certain
of the 6.000% Notes due 2012 which had a face value of
$54.4 million. In the third quarter of 2009, we repaid
$174 million of our privately issued unsecured notes
payable.
During the nine months ended September 30, 2009, we sold or
had repayments on portfolio investments that generated
$650.8 million of cash proceeds. These asset sales have
been completed under distressed conditions in a very difficult
market and consequently we have realized net losses upon their
disposition (see “— Realized Gains and
Losses” above). We expect to complete additional asset
sales throughout the course of the year and given the
challenging market and our desire to sell assets to generate
liquidity, we may incur additional realized losses upon such
dispositions. We expect that the cash generated from asset sales
and repayments will be used to repay indebtedness and provide
ongoing liquidity.
Cash generated from the portfolio includes cash flow from net
investment income and net realized gains and principal
collections related to investment repayments or sales. Cash flow
provided by our operating activities before new investment
activity for the nine months ended September 30, 2009 and
2008, was as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Net cash provided by operating activities
|
$ | 302.2 | $ | 298.5 | ||||
|
Add: portfolio investments funded
|
118.1 | 1,019.8 | ||||||
|
Total cash provided by operating activities before new
investments
|
$ | 420.3 | $ | 1,318.3 | ||||
Given the severe economic recession we are experiencing in the
United States, we believe that our cash flows from investment
exits for 2009 will be lower than prior years when we were in a
more robust economy. We believe, however, that we will generate
sufficient cash flow to fund our operations and meet our
scheduled debt service requirements, although there can be no
assurance that we will generate sufficient cash flow.
At September 30, 2009, and December 31, 2008, the
value and yield of the cash and investments in money market and
other securities were as follows:
| 2009 | 2008 | |||||||||||||||
| ($ in millions) | Value | Yield | Value | Yield | ||||||||||||
|
Money market and other securities
|
$ | 90.0 | — | $ | 0.3 | 1.7 | % | |||||||||
|
Cash and cash equivalents
|
62.7 | 0.1 | % | 50.4 | 0.1 | % | ||||||||||
|
Total
|
$ | 152.7 | 0.0 | % | $ | 50.7 | 0.1 | % | ||||||||
We invest otherwise uninvested cash in U.S. government- or
agency-issued or guaranteed securities that are backed by the
full faith and credit of the United States, or in high quality,
short-term securities. We place our cash with financial
institutions and, at times, cash held in checking accounts in
financial institutions may be in excess of the Federal Deposit
Insurance Corporation insured limit.
We evaluate our interest rate exposure on an ongoing basis.
Generally, we seek to fund our primarily fixed-rate debt
portfolio and our equity portfolio with fixed-rate debt or
equity capital. To the extent deemed necessary, we may hedge
variable and short-term interest rate exposure through interest
rate swaps or other techniques.
97
During the nine months ended September 30, 2008, we sold
new equity of $402.5 million in public offerings. In
addition, for the nine months ended September 30,
2008 shareholders’ equity increased through capital
share transactions by $4.6 million through the exercise of
stock options, the collection of notes receivable from the sale
of common stock, and the issuance of shares through our dividend
reinvestment plan. Shareholders’ equity also increased by
$26.4 million during the nine months ended
September 30, 2008, as a result of the distribution of the
common stock held in deferred compensation trusts.
At September 30, 2009, and December 31, 2008, we had
outstanding debt as follows:
| 2009 | 2008 | |||||||||||||||||||||||
|
Amount |
Annual |
Amount |
Annual |
|||||||||||||||||||||
|
Facility |
Outstanding |
Interest |
Facility |
Outstanding |
Interest |
|||||||||||||||||||
| ($ in millions) | Amount | at Par | Cost(1) | Amount | at Par | Cost(1) | ||||||||||||||||||
|
Notes payable:
|
||||||||||||||||||||||||
|
Privately issued secured notes
payable(5)
|
$ | 841.0 | $ | 841.0 | (6) | 13.8% | $ | 1,015.0 | $ | 1,015.0 | 7.8% | |||||||||||||
|
Publicly issued unsecured notes payable
|
745.5 | 745.5 | 6.7% | 880.0 | 880.0 | 6.7% | ||||||||||||||||||
|
Total notes payable
|
1,586.5 | 1,586.5 | 10.5% | 1,895.0 | 1,895.0 | 7.3% | ||||||||||||||||||
|
Bank secured term debt (former
revolver)(4)
|
50.0 | 50.0 | 17.0% | (2) | 632.5 | 50.0 | 4.3% | (2) | ||||||||||||||||
|
Total debt
|
$ | 1,636.5 | $ | 1,636.5 | 10.7% | (3) | $ | 2,527.5 | $ | 1,945.0 | 7.7% | (3) | ||||||||||||
| (1) | The weighted average annual interest cost is computed as the (a) annual stated interest on the debt, plus the annual amortization of commitment fees, other facility fees and the amortization of debt financing costs and original issue discount that are recognized into interest expense over the contractual life of the respective borrowings, divided by (b) debt outstanding on the balance sheet date. |
| (2) | The annual interest cost reflects the interest rate payable for borrowings under the revolving line of credit in effect at the balance sheet date. In addition to the current interest rate payable, there were annual costs of commitment fees, other facility fees and amortization of debt financing costs of $4.3 million at September 30, 2009, and $8.5 million at December 31, 2008. |
| (3) | The annual interest cost for total debt includes the annual cost of commitment fees, other facility fees and amortization of debt financing costs on the bank term debt regardless of the amount outstanding on the facility as of the balance sheet date. The annual interest cost reflects the facilities in place on the balance sheet date. |
| (4) | During the three months ended September 30, 2009, the commitments under the facility were reduced to $50.0 million subsequent to the funding of $46.0 million to Ciena securitizations in lieu of draws under letters of credit issued under the facility. |
| (5) | In the third quarter of 2009, the Company completed the restructuring of its private notes. |
| (6) | The notes payable on the consolidated balance sheet are shown net of OID of approximately $42.6 million as of September 30, 2009. |
Debt
Restructure
On August 28, 2009, we completed a comprehensive
restructuring of our private notes (the Notes) and our bank
facility (the Facility). Beginning in January 2009, we engaged
in discussions with the revolving line of credit lenders (the
Lenders) and the private noteholders (the Noteholders) to seek
relief under certain terms of both the Facility and the Notes
due to certain covenant defaults. As of December 31, 2008,
our asset coverage was less than the 200% then required by the
revolving credit facility and the private notes. Asset coverage
generally refers to the percentage resulting from assets less
accounts payable and other liabilities, divided by total debt.
In connection with the restructuring, we granted the Noteholders
and the Lenders a pari-passu blanket lien on a substantial
portion of our assets, including a substantial portion of the
assets of our consolidated subsidiaries.
The financial covenants applicable to the Notes and the Facility
were modified as part of the restructuring. The Consolidated
Debt to Consolidated Shareholders’ Equity covenant and the
Capital Maintenance covenant were both eliminated. The Asset
Coverage ratio was set at 1.35:1 initially, increasing to 1.4:1
at June 30, 2010 and to 1.55:1 at June 30, 2011, and
maintained at that level thereafter. A new covenant, Total
Adjusted Assets to Secured Debt, was set at 1.75:1 initially,
increasing to 2.0:1 at June 30, 2010 and to 2.25:1 at
June 30, 2011, and maintained at that level thereafter. The
ratio of Adjusted EBIT to Adjusted Interest Expense was set at
1.05:1 initially, decreasing to 0.95:1 at December 31,
2009, 0.80:1 at March 31, 2010 and 0.75:1 at June 30,
2010. The covenant will then be increased to 0.80:1 on
December 31, 2010 and 0.95:1 on December 31, 2011 and
maintained at that level thereafter. At September 30, 2009,
we were in compliance with these financial covenants.
98
The Notes and Facility impose certain limitations on our ability
to incur additional indebtedness, including precluding us from
incurring additional indebtedness unless our asset coverage of
all outstanding indebtedness is at least 200%. Pursuant to the
1940 Act, we are not permitted to issue indebtedness unless
immediately after such issuance we have asset coverage of all
outstanding indebtedness of at least 200%. At September 30,
2009, our asset coverage ratio was 175%, which is less than the
200% threshold. As a result, we will not be able to issue
additional indebtedness until such time as our asset coverage
returns to at least 200%.
We are required to apply 50% of all net cash proceeds from asset
sales to the repayment of the Notes and 6% of all net cash
proceeds from asset sales to the repayment of the Facility,
subject to certain conditions and exclusions. In the case of
certain events of default, we would be required to apply 100% of
all net cash proceeds from asset sales to the repayment of our
secured lenders. Under the new agreements, subject to a limit
and certain liquidity restrictions, we may repurchase our public
debt; however, we are prohibited from repurchasing our common
stock and may not pay dividends in excess of the minimum we
reasonably believe is required to maintain our tax status as a
regulated investment company. In addition, upon the occurrence
of a change of control (as defined in the Note Agreement and
Credit Agreement), the Noteholders have the right to be prepaid
in full and we are required to repay in full all amounts
outstanding under the Facility.
The Note Agreement and Credit Agreement provide for customary
events of default, including, but not limited to, payment
defaults, breach of representations or covenants,
cross-defaults, bankruptcy events and failure to pay judgments.
Certain of these events of default are subject to notice and
cure periods or materiality thresholds. Pursuant to the terms of
the Notes, the occurrence of an event of default generally
permits the holders of more than 50% in principal amount of
outstanding Notes to accelerate repayment of all amounts due
thereunder. The occurrence of an event of default would
generally permit the administrative agent for the lenders under
the Facility, or the holders of more than 51% of the aggregate
principal debt outstanding under the Facility, to accelerate
repayment of all amounts outstanding thereunder. Pursuant to the
Notes, during the continuance of an event of default, the rate
of interest applicable to the Notes would increase by
200 basis points. Pursuant to the terms of the Facility,
during the continuance of an event of default, the applicable
spread on any borrowings outstanding under the Facility would
increase by 200 basis points.
In connection with the restructuring, we recorded a loss on the
extinguishment of debt of $117.5 million. In addition to
the $11 million of previously deferred unamortized debt
costs associated with the Notes and Facility, we incurred and
paid costs to the lenders of $146 million and other third
party advisory and other fees of approximately $26 million
in connection with the restructuring. Approximately
$20 million of the restructuring costs were deferred and
are being amortized into interest expense over the life of the
Notes and Facility. In addition, we recorded approximately
$45 million of original issue discount (OID) related to the
restructuring of the Notes, which is being amortized into
interest expense over the life of the Notes. After giving effect
to the restructuring and the recording of the loss, we estimate
that the weighted average interest cost, including amortization
of the deferred debt cost and OID, for the Notes is
approximately 13.75% and for the Facility is approximately 17%.
The loss on extinguishment of debt is comprised of the following:
| ($ in millions) | ||||
|
Previously deferred unamortized costs
|
$ | 11.3 | ||
|
Fees paid to Noteholders/Lenders
|
145.9 | |||
|
Advisory and other fees paid
|
26.0 | |||
|
Costs deferred and amortizing into interest expense
|
(20.3 | ) | ||
|
OID recorded and amortizing into interest expense
|
(45.4 | ) | ||
|
Loss on extinguishment of debt
|
$ | 117.5 | ||
Privately Issued Notes Payable. We had
$1,015.0 million of Notes outstanding at June 30,
2009. We made principal payments on the Notes at and prior to
the closing of the restructuring and had $841.0 million of
Notes outstanding following the closing of the restructuring.
99
In connection with the restructuring, the existing Notes were
exchanged for three new series of Notes containing the following
terms:
|
Annual Stated |
Annual Stated |
Annual Stated |
Annual Stated |
|||||||||||||||||||
|
Interest Rate |
Interest Rate |
Interest Rate |
Interest Rate |
|||||||||||||||||||
|
Through |
Beginning |
Beginning |
Beginning |
|||||||||||||||||||
|
Principal |
December 31, |
January 1, |
January 1, |
January 1, |
||||||||||||||||||
| ($ in millions) | Amount |
Maturity Dates
|
2009(1) | 2010(1) | 2011(1) | 2012(1) | ||||||||||||||||
|
Series A
|
$ | 253.8 | June 15, 2010 | 8.50 | % | 9.25 | % | N/A | N/A | |||||||||||||
|
Series B
|
$ | 253.8 | June 15, 2011 | 9.00 | % | 9.50 | % | 9.75 | % | N/A | ||||||||||||
|
Series C
|
$ | 333.5 | March 31 & April 1, 2012 | 9.50 | % | 10.00 | % | 10.25 | % | 10.75 | % | |||||||||||
| (1) | The Notes generally require payment of interest quarterly. |
We made various cash payments in connection with the
restructuring of our Notes. We paid an amendment fee at closing
of $15.2 million. In addition, we paid a make-whole fee of
$79.7 million related to a contractual provision in the old
Notes. Due to the payment of this make-whole fee, the new Notes
have no significant make-whole requirement. We also paid a
restructuring fee of $50.0 million at closing, which will
be applied toward the principal balance of the Notes if the
Notes are refinanced in full on or before January 31, 2010.
Bank Facility. At June 30, 2009,
we had an unsecured revolving line of credit that was due to
expire on April 11, 2011. Our Facility was restructured
from a revolving facility to a term facility maturing on
November 13, 2010. Total commitments under the Facility
were reduced at closing to $96.0 million from
$115.0 million prior to closing. At closing, there were
$50.0 million of borrowings and $46.0 million of
standby letters of credit (LCs) outstanding under the Facility.
The $46.0 million of LCs terminated
and/or
expired prior to September 30, 2009 and the commitments
under the Facility were reduced by a commensurate amount. As a
result, the total commitment and outstanding balance was
$50.0 million at September 30, 2009.
Borrowings under the Facility bear interest at a floating rate
of interest, subject to a floor. The floating rate spread
increases by 0.5% per annum beginning on January 1, 2010
and continuing through maturity. At closing, the interest rate
on the Facility was 8.5% per annum. The Facility requires the
payment of a commitment fee equal to 0.50% per annum of the
committed amount. In addition, we agreed to pay an amendment fee
at closing of $1.0 million, and a restructuring fee payable
on January 31, 2010 equal to 1.0% of the outstanding
borrowings on such date if the Facility remains outstanding. The
Facility generally requires payments of interest no less
frequently than quarterly.
Publicly Issued Unsecured Notes
Payable. At September 30, 2009, we had
outstanding publicly issued unsecured notes as follows:
| ($ in millions) | Amount | Maturity Date | ||||||
|
6.625% Notes due 2011
|
$ | 319.9 | July 15, 2011 | |||||
|
6.000% Notes due 2012
|
195.6 | April 1, 2012 | ||||||
|
6.875% Notes due 2047
|
230.0 | April 15, 2047 | ||||||
|
Total
|
$ | 745.5 | ||||||
The 6.625% Notes due 2011 and the 6.000% Notes due
2012 require payment of interest only semi-annually, and all
principal is due upon maturity. We have the option to redeem
these notes in whole or in part, together with a redemption
premium, as stipulated in the notes. In addition, we may
purchase these notes in the market at par or at a discount to
the extent permitted by the 1940 Act. During the nine months
ended September 30, 2009, we paid $30.1 million to
repurchase certain of the 6.625% Notes due 2011 which had a
face value of $80.1 million, and $20.2 million to
repurchase certain of the 6.000% Notes due 2012 which had a
face value of $54.4 million. After recognizing the
remaining unamortized original issue discount associated with
the notes repurchased, we recognized a net gain on repurchase of
debt of $83.5 million for the nine months ended
September 30, 2009.
100
The 6.875% Notes due 2047 require payment of interest only
quarterly, and all principal is due upon maturity. These notes
are redeemable in whole or in part at any time or from time to
time on or after April 15, 2012, at par and upon the
occurrence of certain tax events as stipulated in the notes.
We have certain financial and operating covenants that are
required by the publicly issued unsecured notes payable. We are
not permitted to issue indebtedness unless immediately after
such issuance we have asset coverage of all outstanding
indebtedness of at least 200% as required by the 1940 Act. At
September 30, 2009, our asset coverage ratio was 175%,
which is less than the 200% requirement. As a result, under the
publicly issued unsecured notes payable, we will not be able to
issue indebtedness until such time as our asset coverage returns
to at least 200%.
Contractual Obligations. The following
table shows our significant contractual obligations for the
repayment of debt and payment of other contractual obligations
as of September 30, 2009.
| Payments Due By Year | ||||||||||||||||||||||||||||
|
After |
||||||||||||||||||||||||||||
| ($ in millions) |
Total
|
2009 | 2010 | 2011 | 2012 | 2013 | 2013 | |||||||||||||||||||||
|
Privately issued secured notes payable
|
$ | 841.0 | $ | — | $ | 253.7 | $ | 253.8 | $ | 333.5 | $ | — | $ | — | ||||||||||||||
|
Publicly issued unsecured notes payable
|
745.5 | — | — | 319.9 | 195.6 | — | 230.0 | |||||||||||||||||||||
|
Bank Term Debt (former
revolver)(1)
|
50.0 | — | 50.0 | — | — | — | — | |||||||||||||||||||||
|
Operating leases
|
11.8 | 1.2 | 4.4 | 1.7 | 1.7 | 1.7 | 1.1 | |||||||||||||||||||||
|
Total contractual obligations
|
$ | 1,648.3 | $ | 1.2 | $ | 308.1 | $ | 575.4 | $ | 530.8 | $ | 1.7 | $ | 231.1 | ||||||||||||||
| (1) | At September 30, 2009, $50.0 million was borrowed on the bank term debt and there were no outstanding standby letters of credit. |
Off-Balance
Sheet Arrangements
In the ordinary course of business, we have issued guarantees
and have extended standby letters of credit through financial
intermediaries on behalf of certain portfolio companies. We
generally have issued guarantees and have obtained standby
letters of credit under our line of credit for the benefit of
counterparties to certain portfolio companies. Under these
arrangements, we would be required to make payments to third
parties if the portfolio companies were to default on their
related payment obligations or if the expiration dates of the
letters of credit are not extended. The following table shows
our guarantees and standby letters of credit that may have the
effect of creating, increasing, or accelerating our liabilities
as of September 30, 2009.
| Amount of Commitment Expiration Per Year | ||||||||||||||||||||||||||||
|
After |
||||||||||||||||||||||||||||
| ($ in millions) | Total | 2009 | 2010 | 2011 | 2012 | 2013 | 2013 | |||||||||||||||||||||
|
Guarantees
|
$ | 9.1 | $ | 5.0 | $ | 3.2 | $ | — | $ | 0.1 | $ | — | $ | 0.8 | ||||||||||||||
|
Standby letters of
credit(1)
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Total commitments
|
$ | 9.1 | $ | 5.0 | $ | 3.2 | $ | — | $ | 0.1 | $ | — | $ | 0.8 | ||||||||||||||
| (1) | During the three months ended September 30, 2009, we funded $46.0 million of standyby letters of credit and the remaining standby letters of credit expired. As part of the debt restructure and subsequent to funding of $46.0 million under the standby letters of credit, the availability on the Bank Term Debt, which could be used to fund the then outstanding standby letters of credit, was reduced to zero. |
In addition, we had outstanding commitments to fund investments
totaling $543.9 million at September 30, 2009,
including $515.5 million related to private finance
investments and $28.4 million related to commercial real
estate finance investments. Outstanding commitments related to
private finance investments included $352.2 million to the
Senior Secured Loan Fund LLC. During October 2009, we sold
our investment, including our outstanding
101
commitments and the provision of management services, in the
Senior Secured Loan Fund. See “— Recent
Developments.”
We intend to fund these commitments with existing cash and
through cash flow from operations before new investments
although there can be no assurance that we will generate
sufficient cash flow to satisfy these commitments. Should we not
be able to satisfy these commitments, there could be a material
adverse effect on our financial condition, liquidity and results
of operations.
RECENT
DEVELOPMENTS
On October 26, 2009, we entered into an Agreement and Plan
of Merger (the Merger Agreement) with Ares Capital Corporation,
a Maryland corporation (Ares Capital), and ARCC Odyssey Corp., a
Maryland corporation and wholly-owned subsidiary of Ares Capital
(Merger Sub). The Merger Agreement provides that, upon the terms
and subject to the conditions set forth in the Merger Agreement,
Merger Sub will merge with and into Allied Capital, with Allied
Capital as the surviving company (the Merger). Immediately
following the Merger, Allied Capital will merge with and into
Ares Capital.
Upon consummation of the Merger, each share of common stock, par
value $0.0001 per share, of Allied Capital issued and
outstanding immediately prior to the effective time of the
Merger will be converted into and become exchangeable for 0.325
common shares, par value $0.001 per share, of Ares Capital.
Based on the number of shares of Allied Capital common stock
outstanding on the date of the Merger Agreement and not
including the effect of outstanding
in-the-money
options, this will result in approximately 58.3 million
Ares Capital shares being exchanged for approximately
179.4 million outstanding Allied Capital shares, subject to
adjustment in certain limited circumstances.
Following consummation of the transactions contemplated by the
Merger Agreement, Ares Capital’s Board of Directors will
continue as directors of Ares Capital. However, Ares
Capital’s Board of Directors will be increased by at least
one member and Ares Capital will submit the name of one member
of Allied Capital’s current Board of Directors for
consideration to Ares Capital’s Nominating and Governance
Committee to fill the vacancy.
The Merger Agreement contains (a) customary representations
and warranties of Allied Capital and Ares Capital, including,
among others: corporate organization, capitalization, corporate
authority and absence of conflicts, third party and governmental
consents and approvals, reports and regulatory matters,
financial statements, compliance with law and legal proceedings,
absence of certain changes, taxes, employee matters,
intellectual property, insurance, investment assets and certain
contracts, (b) covenants of Allied Capital and Ares Capital
to conduct their respective businesses in the ordinary course
until the Merger is completed and (c) covenants of Allied
Capital and Ares Capital not to take certain actions during this
interim period.
Among other things, Allied Capital has agreed to, and will cause
its affiliates, consolidated subsidiaries, and its and each of
their respective officers, directors, managers, employees and
other advisors, representatives and agents to, immediately cease
and cause to be terminated all discussions and negotiations with
respect to a “Takeover Proposal” (as defined in the
Merger Agreement) from a third party and not to directly or
indirectly solicit or take any other action (including providing
information) with the intent to solicit any inquiry, proposal or
offer with respect to a Takeover Proposal.
However, if Allied Capital receives a bona fide unsolicited
Takeover Proposal from a third party, and its Board of Directors
determines in good faith, after consultation with reputable
outside legal counsel and financial advisers experienced in such
matters, that failure to consider such proposal would breach the
duties of the directors under applicable law, and the Takeover
Proposal constitutes or is reasonably likely to result in a
“Superior Proposal” (as defined in the Merger
Agreement), Allied Capital may engage in discussions and
negotiations with such third party so long as certain notice and
other procedural requirements are satisfied. In addition,
subject to certain procedural requirements (including the
ability of Ares Capital to revise its offer) and the payment of
a $30 million termination
102
fee, Allied Capital may terminate the Merger Agreement and enter
into an agreement with a third party who makes a Superior
Proposal.
The representations and warranties of each party set forth in
the Merger Agreement (a) have been qualified by
confidential disclosures made to the other party in connection
with the Merger Agreement, (b) will not survive
consummation of the Merger and cannot be the basis for any
claims under the Merger Agreement by the other party after the
Merger is consummated, (c) are qualified in certain
circumstances by a materiality standard which may differ from
what may be viewed as material by investors, (d) were made
only as of the date of the Merger Agreement or such other date
as is specified in the Merger Agreement, and (e) may have
been included in the Merger Agreement for the purpose of
allocating risk between Allied Capital and Ares Capital rather
than establishing matters as facts.
Consummation of the Merger, which is currently anticipated to
occur by the end of the first quarter of 2010, is subject to
certain conditions, including, among others, Allied Capital
stockholder approval, Ares Capital stockholder approval,
required regulatory approvals (including expiration of the
waiting period under the
Hart-Scott-Rodino
Act), receipt of certain Ares Capital and Allied Capital lender
consents and other customary closing conditions.
The Merger Agreement also contains certain termination rights
for Allied Capital and Ares Capital and provides that, in
connection with the termination of the Merger Agreement under
specified circumstances, Allied Capital may be required to pay
Ares Capital a termination fee of $30 million
($15 million if Allied Capital stockholders do not approve
the Merger) and Ares Capital may be required to pay Allied
Capital a termination fee of $30 million.
In a separate transaction on October 30, 2009, we sold our
interests in the Senior Secured Loan Fund LLC (the “SL
Fund,” formerly known as the Unitranche Fund) to Ares
Capital for $165 million in cash. At
September 30, 2009, the SL Fund held “unitranche
loans” totaling approximately $921 million. In
addition, from September 30, 2009 through November 2,
2009, we have collected additional cash proceeds totaling
approximately $30 million and have identified approximately
$200 million of assets for potential future sale. We have
also paid down an additional $94 million of private debt
since September 30, 2009 and have cash and money market and
other securities of $273 million as of November 2,
2009.
CRITICAL
ACCOUNTING POLICIES
The consolidated financial statements are based on the selection
and application of critical accounting policies, which require
management to make significant estimates and assumptions.
Critical accounting policies are those that are both important
to the presentation of our financial condition and results of
operations and require management’s most difficult,
complex, or subjective judgments. Our critical accounting
policies are those applicable to the valuation of investments,
certain revenue recognition matters and certain tax matters as
discussed below.
Valuation of Portfolio
Investments. We, as a BDC, have invested in
illiquid securities including debt and equity securities of
portfolio companies, CLO bonds and preferred shares/income
notes, CDO bonds and investment funds. Our investments may be
subject to certain restrictions on resale and generally have no
established trading market. We value substantially all of our
investments at fair value as determined in good faith by the
Board of Directors in accordance with our valuation policy and
the provisions of the Investment Company Act of 1940 and ASC
Topic 820, which includes the codification of FASB Statement
No. 157, Fair Value Measurementsand related
interpretations. We determine fair value to be the price that
would be received for an investment in a current sale, which
assumes an orderly transaction between market participants on
the measurement date. Our valuation policy considers the fact
that no ready market exists for substantially all of the
securities in which we invest and that fair value for our
investments must typically be determined using unobservable
inputs. Our valuation policy is intended to provide a consistent
basis for determining the fair value of the portfolio.
We adopted the standards in ASC Topic 820 on a prospective basis
in the first quarter of 2008. These standards require us to
assume that the portfolio investment is to be sold in the
principal market to market participants, or in the absence of a
principal market, the most advantageous market, which may be a
hypothetical market. Market
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participants are defined as buyers and sellers in the principal
or most advantageous market that are independent, knowledgeable,
and willing and able to transact. In accordance with the
standards, we have considered our principal market, or the
market in which we exit our portfolio investments with the
greatest volume and level of activity.
We have determined that for our buyout investments, where we
have control or could gain control through an option or warrant
security, both the debt and equity securities of the portfolio
investment would exit in the merger and acquisition (M&A)
market as the principal market, generally through a sale or
recapitalization of the portfolio company. We believe that the
in-use premise of value (as defined in ASC Topic 820), which
assumes the debt and equity securities are sold together, is
appropriate as this would provide maximum proceeds to the
seller. As a result, we use the enterprise value methodology to
determine the fair value of these investments. Enterprise value
means the entire value of the company to a market participant,
including the sum of the values of debt and equity securities
used to capitalize the enterprise at a point in time. Enterprise
value is determined using various factors, including cash flow
from operations of the portfolio company, multiples at which
private companies are bought and sold, and other pertinent
factors, such as recent offers to purchase a portfolio company,
recent transactions involving the purchase or sale of the
portfolio company’s equity securities, liquidation events,
or other events. We allocate the enterprise value to these
securities in order of the legal priority of the securities.
While we typically exit our securities upon the sale or
recapitalization of the portfolio company in the M&A
market, for investments in portfolio companies where we do not
have control or the ability to gain control through an option or
warrant security, we cannot typically control the exit of our
investment into our principal market (the M&A market). As a
result, in accordance with ASC Topic 820, we are required to
determine the fair value of these investments assuming a sale of
the individual investment (the in-exchange premise of value) in
a hypothetical market to a hypothetical market participant. We
continue to perform an enterprise value analysis for the
investments in this category to assess the credit risk of the
loan or debt security and to determine the fair value of our
equity investment in these portfolio companies. The determined
equity values are generally discounted when we have a minority
ownership position, restrictions on resale, specific concerns
about the receptivity of the capital markets to a specific
company at a certain time, or other factors. For loan and debt
securities, we perform a yield analysis assuming a hypothetical
current sale of the investment. The yield analysis requires us
to estimate the expected repayment date of the instrument and a
market participant’s required yield. Our estimate of the
expected repayment date of a loan or debt security may be
shorter than the legal maturity of the instruments as our loans
historically have been repaid prior to the maturity date. The
yield analysis considers changes in interest rates and changes
in leverage levels of the loan or debt security as compared to
market interest rates and leverage levels. Assuming the credit
quality of the loan or debt security remains stable, we will use
the value determined by the yield analysis as the fair value for
that security. A change in the assumptions that we use to
estimate the fair value of our loans and debt securities using a
yield analysis could have a material impact on the determination
of fair value. If there is deterioration in credit quality or a
loan or debt security is in workout status, we may consider
other factors in determining the fair value of a loan or debt
security, including the value attributable to the loan or debt
security from the enterprise value of the portfolio company or
the proceeds that would be received in a liquidation analysis.
Our equity investments in private debt and equity funds are
generally valued based on the fund’s net asset value,
unless other factors lead to a determination of fair value at a
different amount. The value of our equity securities in public
companies for which quoted prices in an active market are
readily available is based on the closing public market price on
the measurement date.
The fair value of our CLO bonds and preferred shares/income
notes and CDO bonds (CLO/CDO Assets) is generally based on a
discounted cash flow model that utilizes prepayment,
re-investment, loss and ratings assumptions based on historical
experience and projected performance, economic factors, the
characteristics of the underlying cash flow, and comparable
yields for similar bonds and preferred shares/income notes, when
available. We recognize unrealized appreciation or depreciation
on our CLO/CDO Assets as comparable yields in the market change
and/or based
on changes in estimated cash flows resulting from changes in
prepayment, re-investment, loss or ratings assumptions in the
underlying collateral pool or changes in redemption assumptions
for the CLO/CDO Assets, if applicable. We determine the fair
value of our CLO/CDO Assets on an individual
security-by-security
basis.
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We record unrealized depreciation on investments when we
determine that the fair value of a security is less than its
cost basis, and record unrealized appreciation when we determine
that the fair value is greater than its cost basis. Because of
the inherent uncertainty of valuation, the values determined at
the measurement date may differ significantly from the values
that would have been used had a ready market existed for the
investments, and the differences could be material.
Additionally, changes in the market environment and other events
that may occur over the life of the investments may cause the
gains or losses ultimately realized on these investments to be
different than the values determined at the measurement date. In
accordance with ASC Topic 820 (discussed below), we do not
consider a transaction price that is associated with a
transaction that is not orderly to be indicative of fair value
or market participant risk premiums, and accordingly would place
little, if any, weight on transactions that are not orderly in
determining fair value. When considering recent potential or
completed transactions, we use judgment in determining if such
offers or transactions were pursuant to an orderly process for
purposes of determining how much weight is placed on these data
points in accordance with the applicable guidelines in ASC Topic
820.
See “— Results of Operations — Change
in Unrealized Appreciation or Depreciation” above for more
discussion on portfolio valuation.
Net Realized Gains or Losses and Net Change in Unrealized
Appreciation or Depreciation. Realized gains
or losses are measured by the difference between the net
proceeds from the repayment or sale and the cost basis of the
investment without regard to unrealized appreciation or
depreciation previously recognized, and include investments
charged off during the period, net of recoveries. Net change in
unrealized appreciation or depreciation primarily reflects the
change in portfolio investment values during the reporting
period, including the reversal of previously recorded unrealized
appreciation or depreciation when gains or losses are realized.
Net change in unrealized appreciation or depreciation also
reflects the change in the value of U.S. Treasury bills,
when applicable, and depreciation on accrued interest and
dividends receivable and other assets where collection is
doubtful.
Interest and Dividend Income. Interest
income is recorded on an accrual basis to the extent that such
amounts are expected to be collected. For loans and debt
securities with contractual
payment-in-kind
interest, which represents contractual interest accrued and
added to the loan balance that generally becomes due at
maturity, we will not accrue
payment-in-kind
interest if the portfolio company valuation indicates that the
payment-in-kind
interest is not collectible. In general, interest is not accrued
on loans and debt securities if we have doubt about interest
collection or where the enterprise value of the portfolio
company may not support further accrual. Interest may not accrue
on loans or debt securities to portfolio companies that are more
than 50% owned by us depending on such company’s capital
requirements.
When we receive nominal cost warrants or free equity securities
(nominal cost equity), we allocate our cost basis in our
investment between debt securities and nominal cost equity at
the time of origination. At that time, the original issue
discount basis of the nominal cost equity is recorded by
increasing the cost basis in the equity and decreasing the cost
basis in the related debt securities. Loan origination fees,
original issue discount, and market discount are capitalized and
then amortized into interest income using a method that
approximates the effective interest method. Upon the prepayment
of a loan or debt security, any unamortized loan origination
fees are recorded as interest income and any unamortized
original issue discount or market discount is recorded as a
realized gain.
The weighted average yield on loans and debt securities is
computed as the (a) annual stated interest on accruing
loans and debt securities plus the annual amortization of loan
origination fees, original issue discount, and market discount
on accruing loans and debt securities less the annual
amortization of loan origination costs, divided by
(b) total loans and debt securities at value. The weighted
average yield is computed as of the balance sheet date.
We recognize interest income on the CLO preferred shares/income
notes using the effective interest method, based on the
anticipated yield that is determined using the estimated cash
flows over the projected life of the investment. Yields are
revised when there are changes in actual or estimated cash flows
due to changes in prepayments
and/or
re-investments, credit losses, ratings or asset pricing. Changes
in estimated yield are recognized as an adjustment to the
estimated yield over the remaining life of the preferred
shares/income notes from the date the estimated yield was
changed. CLO and CDO bonds have stated interest rates. The
weighted average yield on the
105
CLO/CDO Assets is calculated as the (a) annual stated
interest or the effective interest yield on the accruing bonds
or the effective yield on the preferred shares/income notes,
divided by (b) CLO/CDO Assets at value. The weighted
average yields are computed as of the balance sheet date.
Dividend income on preferred equity securities is recorded as
dividend income on an accrual basis to the extent that such
amounts are expected to be collected and to the extent that we
have the option to receive the dividend in cash. Dividend income
on common equity securities is recorded on the record date for
private companies or on the ex-dividend date for publicly traded
companies.
Fee Income. Fee income includes fees
for loan prepayment premiums, guarantees, commitments, and
services rendered by us to portfolio companies and other third
parties such as diligence, structuring, transaction services,
management and consulting services, and other services. Loan
prepayment premiums are recognized at the time of prepayment.
Guaranty and commitment fees are generally recognized as income
over the related period of the guaranty or commitment,
respectively. Diligence, structuring, and transaction services
fees are generally recognized as income when services are
rendered or when the related transactions are completed.
Management, consulting and other services fees, including fund
management fees, are generally recognized as income as the
services are rendered. Fees are not accrued if we have doubt
about collection of those fees.
Federal and State Income Taxes and Excise
Tax. We have complied with the requirements
of the Internal Revenue Code that are applicable to regulated
investment companies (RIC) and real estate investment trusts
(REIT). We and any of our subsidiaries that qualify as a RIC or
a REIT intend to distribute or retain through a deemed
distribution all of our annual taxable income to shareholders;
therefore, we have made no provision for income taxes exclusive
of excise taxes for these entities.
If we do not distribute at least 98% of our annual taxable
income in the year earned, we will generally be required to pay
an excise tax equal to 4% of the amount by which 98% of our
annual taxable income exceeds the distributions from such
taxable income during the year earned. To the extent that we
determine that our estimated current year annual taxable income
will be in excess of estimated current year dividend
distributions from such taxable income, we accrue excise taxes
on estimated excess taxable income as taxable income is earned
using an annual effective excise tax rate. The annual effective
excise tax rate is determined by dividing the estimated annual
excise tax by the estimated annual taxable income.
Income taxes for AC Corp are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
as well as operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Recent Accounting
Pronouncements. Fair Value
Measurements. In September 2006, the FASB issued
Statement No. 157, which was primarily codified into ASC
Topic 820, defines fair value, establishes a framework for
measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurements.
We adopted this statement on a prospective basis beginning in
the quarter ended March 31, 2008. The initial adoption of
this statement did not have a material effect on our
consolidated financial statements.
ASC Topic 820 also includes the codification of Determining
Fair Value When the Volume and Level of Activity for the Asset
or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly
(FSP 157-4),
which was issued by the FASB in April 2009. These provisions
provide guidance on how to determine the fair value of assets
under ASC Topic 820 in the current economic environment and
reemphasize that the objective of a fair value measurement
remains an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at
the measurement date under current market conditions. These
provisions state that a transaction price that is associated
with a transaction that is not orderly is not determinative of
fair value or market-participant risk premiums and companies
should place little, if any, weight (compared with other
indications of fair value) on transactions that are not orderly
when estimating fair value or market risk premiums.
106
We adopted these provisions of ASC Topic 820 on a prospective
basis beginning in the quarter ending March 31, 2009. The
adoption of these provisions did not have a material effect on
our consolidated financial statements.
Subsequent Events (SFAS 165). In May
2009, the FASB issued SFAS 165, which was primarily
codified into ASC Topic 855, which establishes general standards
for reporting events that occur after the balance sheet date,
but before financial statements are issued or are available to
be issued. This standard requires the disclosure of the date
through which an entity has evaluated subsequent events and
whether that date represents the date the financial statements
were issued or were available to be issued.
We adopted these provisions of Topic 855 in the quarter ended
June 30, 2009. The adoption of these provisions did not
have a material impact on our financial statements.
Accounting for Transfers of Financial Assets
(SFAS 166). In June 2009, the FASB issued
SFAS 166, which has not yet been codified. SFAS 166
changes the conditions for reporting a transfer of a portion of
a financial asset as a sale and requires additional year-end and
interim disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. The implementation of
SFAS 166 did not have a material impact on our financial
statements.
Amendments to FASB Interpretation No. 46(R)
(“SFAS 167”), which will be codified into ASC
Topic 810, Consolidation. In June 2009, the FASB issued
SFAS 167, which amends the guidance on accounting for
variable interest entities. SFAS 167 is effective for
fiscal years beginning after November 15, 2009 and interim
periods within that fiscal year. We have not completed the
process of evaluating the impact of adopting this standard.
The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles (SFAS 168),
which was primarily codified into ASC Topic 105, was issued by
the FASBin July 2009. This standard establishes the FASB
Accounting Standards Codification, which will become the source
of authoritative U.S. generally accepted accounting
principles recognized by the FASB. This standard is effective
for the period ending after September 15, 2009.
The implementation of this standard is not expected to have a
material impact on our financial statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There has been no material change in quantitative or qualitative
disclosures about market risk since December 31, 2008.
| Item 4. | Controls and Procedures |
(a) As of the end of the period covered by this quarterly
report on
Form 10-Q,
the Company’s chairman of the board, chief executive
officer, chief financial officer and chief accounting officer
conducted an evaluation of the Company’s disclosure
controls and procedures (as defined in
Rules 13a-15
and 15d-15
of the Securities Exchange Act of 1934). Based upon this
evaluation, the Company’s chairman of the board, chief
executive officer, chief financial officer and chief accounting
officer concluded that the Company’s disclosure controls
and procedures are effective to allow timely decisions regarding
required disclosure of any material information relating to the
Company that is required to be disclosed by the Company in the
reports it files or submits under the Securities Exchange Act of
1934.
(b) There have been no changes in the Company’s
internal control over financial reporting that occurred during
the quarter ended September 30, 2009, that have materially
affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
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PART II.
OTHER INFORMATION
Item 1. Legal
Proceedings
On June 23, 2004, we were notified by the SEC that they
were conducting an informal investigation of us. The
investigation related to the valuation of securities in our
private finance portfolio and other matters. On June 20,
2007, we announced that we entered into a settlement with the
SEC that resolved the SEC’s informal investigation. As part
of the settlement and without admitting or denying the
SEC’s allegations, we agreed to the entry of an
administrative order. In the order the SEC alleged that, between
June 30, 2001, and March 31, 2003, we did not maintain
books, records and accounts which, in reasonable detail,
supported or accurately and fairly reflected valuations of
certain securities in our private finance portfolio and, as a
result, did not meet certain recordkeeping and internal controls
provisions of the federal securities laws. In the administrative
order, the SEC ordered us to continue to maintain certain of our
current valuation-related controls. Specifically, during and
following the two-year period of the order we have:
(1) continued to employ a Chief Valuation Officer, or a
similarly structured officer-level employee, to oversee our
quarterly valuation processes; and (2) continued to employ
third-party valuation consultants to assist in our quarterly
valuation processes.
On December 22, 2004, we received letters from the
U.S. Attorney for the District of Columbia requesting the
preservation and production of information regarding us and
Business Loan Express, LLC (currently known as Ciena Capital
LLC) in connection with a criminal investigation relating
to matters similar to those investigated by and settled with the
SEC as discussed above. We produced materials in response to the
requests from the U.S. Attorney’s office and certain
current and former employees were interviewed by the
U.S. Attorney’s Office. We have voluntarily cooperated
with the investigation.
In late December 2006, we received a subpoena from the
U.S. Attorney for the District of Columbia requesting,
among other things, the production of records regarding the use
of private investigators by us or our agents. The Board
established a committee, which was advised by its own counsel,
to review this matter. In the course of gathering documents
responsive to the subpoena, we became aware that an agent of
Allied Capital obtained what were represented to be telephone
records of David Einhorn and which purport to be records of
calls from Greenlight Capital during a period of time in 2005.
Also, while we were gathering documents responsive to the
subpoena, allegations were made that our management had
authorized the acquisition of these records and that management
was subsequently advised that these records had been obtained.
Our management has stated that these allegations are not true.
We have cooperated fully with the inquiry by the
U.S. Attorney’s Office.
On February 26, 2007, Dana Ross filed a class action
complaint in the U.S. District Court for the District of
Columbia in which she alleges that Allied Capital Corporation
and certain members of management violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5
thereunder. Thereafter, the court appointed new lead counsel and
approved new lead plaintiffs. On July 30, 2007, plaintiffs
served an amended complaint. Plaintiffs claim that, between
November 7, 2005, and January 22, 2007, Allied Capital
either failed to disclose or misrepresented information about
our portfolio company, Business Loan Express, LLC. Plaintiffs
seek unspecified compensatory and other damages, as well as
other relief. We believe the lawsuit is without merit, and we
intend to defend the lawsuit vigorously. On September 13,
2007, we filed a motion to dismiss the lawsuit. A hearing was
held on the motion to dismiss in April 2009. The motion is
pending.
As of November 6, 2009, we are aware of a putative class
action and shareholder derivative complaint as well as an
additional shareholder derivative complaint filed against us,
our Board of Directors and Ares Capital Corporation. Both
complaints allege that our Board of Directors failed to
discharge adequately its fiduciary duties to shareholders by
failing to adequately value our shares and ensure that our
shareholders received adequate consideration in a proposed sale
of Allied Capital to Ares Capital Corporation, that the proposed
merger between us and Ares Capital is the product of a flawed
sales process, that our directors and officers breached their
fiduciary duties by agreeing to a structure that was not
designed to maximize the value of Allied’s shares, and that
Ares Capital aided and abetted the alleged breach of fiduciary
duty. The plaintiffs demand, among other things, a
108
preliminary and permanent injunction enjoining the sale and
rescinding the transaction or any part thereof that has been
implemented. We believe that each of the lawsuits is without
merit, and we intend to defend each of these lawsuits vigorously.
In addition to the above matters, we are party to certain
lawsuits in the normal course of business. Furthermore, third
parties may try to seek to impose liability on us in connection
with the activities of our portfolio companies. For a discussion
of civil investigations being conducted regarding the lending
practices of Ciena Capital LLC, one of our portfolio companies,
see Note 3, “Portfolio — Ciena Capital
LLC” from our Notes to the Consolidated Financial
Statements included in Item 1.
While the outcome of any of the open legal proceedings described
above cannot at this time be predicted with certainty, we do not
expect these matters will materially affect our financial
condition or results of operations; however, there can be no
assurance whether any pending legal proceedings will have a
material adverse effect on our financial condition or results of
operations in any future reporting period.
| Item 1A. | Risk Factors. |
Investing in Allied Capital involves a number of significant
risks relating to our business and investment objective. As a
result, there can be no assurance that we will achieve our
investment objective.
Risks
Related to Liquidity
Our use of leverage magnifies the potential for gain or loss
on amounts invested and may increase the risk of investing in
us. Borrowings, also known as leverage, magnify
the potential for gain or loss on amounts invested and,
therefore, increase the risks associated with investing in our
securities. We borrow from and issue senior debt securities to
banks, insurance companies, and other lenders or investors.
Holders of these senior securities have fixed dollar claims on
our consolidated assets that are superior to the claims of our
common shareholders. In the case of the holders of our privately
issued secured notes and the lenders under our secured bank
credit facility, these claims are secured by a substantial
portion of our assets. If the value of our consolidated assets
increases, then leveraging would cause the net asset value
attributable to our common stock to increase more sharply than
it would have had we not leveraged. Conversely, if the value of
our consolidated assets decreases, leveraging would cause net
asset value to decline more sharply than it otherwise would have
had we not leveraged. Similarly, any increase in our
consolidated income in excess of consolidated interest payable
on the borrowed funds would cause our net income to increase
more than it would without the leverage, while any decrease in
our consolidated income would cause net income to decline more
sharply than it would have had we not borrowed. Leverage is
generally considered a speculative investment technique. We and,
indirectly, our stockholders will bear the cost associated with
our leverage activity. Our bank credit facility and private
notes payable contain financial and operating covenants that
restrict certain of our business activities, including our
ability to declare dividends. Breach of any of those covenants
could cause a default under those instruments. Such a default,
if not cured or waived, could have a material adverse effect on
us.
At September 30, 2009, we had $1.6 billion of
outstanding indebtedness bearing a weighted average annual
interest cost of 10.7% and a debt to equity ratio of 1.33 to
1.00. If our portfolio of investments fails to produce adequate
returns, we may be unable to make interest or principal payments
on our indebtedness when they are due. In order for us to cover
annual interest payments on indebtedness, we must achieve annual
returns on our assets of at least 6.12% as of September 30,
2009.
Regulations governing our operation as a BDC affect our
ability to, and the way in which we, raise additional debt and
equity capital. We will continue to need capital
to fund growth in our investments. Under the 1940 Act, we are
not permitted to issue indebtedness unless immediately after
such borrowing we have an asset coverage for total borrowings of
at least 200%. As of September 30, 2009, our asset coverage
was 175%. There can be no assurance as to when we will be able
to satisfy the asset coverage requirements of the 1940 Act, if
at all, and
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our failure to do so would have a material adverse impact on our
liquidity, financial condition, results of operations, and
ability to pay dividends.
We generally are not able to issue and sell our common stock at
a price below net asset value per share. We may, however, sell
our common stock, warrants, options, or rights to acquire our
common stock at a price below the current net asset value per
share of the common stock if our Board of Directors determines
that such sale is in our best interests and the best interests
of our stockholders and, in certain instances, our stockholders
approve such sale. In any such case, the price at which our
securities are to be issued and sold may not be less than the
price which, in the determination of our Board of Directors,
closely approximates the market value of such securities (less
any commission or discount). If our common stock continues to
trade at a discount to net asset value, this restriction could
adversely affect our ability to raise capital. Shares of BDCs,
including shares of our common stock, have been trading at
discounts to their net asset values. As of September 30,
2009, our net asset value per share was $6.70. The closing price
of our shares on the NYSE at September 30, 2009 was $3.07.
If our common stock trades below net asset value, the higher
cost of equity capital may result in it being unattractive to
raise new equity, which may limit our ability to grow. The risk
of trading below net asset value is separate and distinct from
the risk that our net asset value per share may decline.
Our credit ratings may change and may not reflect all risks
of an investment in the debt securities. At
September 30, 2009, our long-term debt carries a
non-investment grade credit rating of B1 by Moody’s
Investors Service, BB+ by Standard & Poor’s, and
BB by FitchRatings. Our credit ratings are an assessment of our
ability to pay our obligations. Consequently, real or
anticipated changes in our credit ratings will generally affect
the market value of the publicly issued debt securities. There
can be no assurance that the long-term debt ratings will be
maintained.
Our independent registered public accounting firm has
expressed substantial doubt about our ability to continue as a
going concern. Prior to our debt restructure,
certain events of default occurred under our bank credit
facility and our private notes. These events of default provided
the respective lenders the right to declare immediately due and
payable unpaid amounts approximating $1.1 billion at
June 30, 2009. Had the lenders accelerated these
obligations, we would not have had available cash resources to
satisfy all of the obligations under the bank credit facility
and the private notes. These factors raised substantial doubt
about our ability to continue as a going concern. In its audit
report on our financial statements for our fiscal year ended
December 31, 2008, our independent registered public
accounting firm included an explanatory paragraph indicating
that our consolidated financial statements were prepared
assuming that we will continue as a going concern.
Risks
Related to the Merger Agreement
On October 26, 2009, we entered into an Agreement and
Plan of Merger with Ares Capital Corporation. The merger is
subject to closing conditions, including stockholder approval,
that, if not satisfied or waived, will result in the merger not
being completed, which may result in material adverse
consequences to our business and operations. The
merger is subject to closing conditions, including the approval
of our stockholders that, if not satisfied, will prevent the
merger from being completed. The closing condition that our
stockholders adopt the merger agreement may not be waived under
applicable law and must be satisfied for the merger to be
completed. If our stockholders do not adopt the merger agreement
and the merger is not completed, the resulting failure of the
merger could have a material adverse impact on our business and
operations. In addition, due to the interim operating covenants
in the merger agreement, we may not be able to refinance our
private notes by January 31, 2010 and may therefore not
have the opportunity to apply the $50 million restructuring
fee to the repayment of the private notes.
Under certain circumstances, we are obligated to pay a
termination fee or other amounts upon termination of the merger
agreement. The merger agreement with Ares Capital
Corporation contains certain termination rights for Allied
Capital and Ares Capital and provides that, in connection with
the termination of the merger agreement under specified
circumstances, Allied Capital may be required to pay Ares
Capital a termination
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fee of $30 million ($15 million if Allied Capital
stockholders do not approve the merger) and Ares Capital may be
required to pay Allied Capital a termination fee of
$30 million. There can be no assurance that the merger will
be completed, and the obligation to make that payment may
adversely affect our ability to engage in another transaction in
the event the merger is not completed and may have an adverse
impact on our financial condition.
The merger agreement severely limits our ability to pursue
alternatives to the merger. The merger agreement
contains “no shop” and other provisions that, subject
to limited exceptions, limit our ability to discuss, facilitate
or commit to competing third-party proposals to acquire all or a
significant part of Allied Capital. These provisions might
discourage a potential competing acquiror that might have an
interest in acquiring all or a significant part of us from
considering or proposing that acquisition even if it were
prepared to pay consideration with a higher per share market
price than that proposed in the merger. We can consider and
participate in discussions and negotiations with respect to an
alternative proposal only in very limited circumstances so long
as certain notice and other procedural requirements are
satisfied. In addition, subject to certain procedural
requirements (including the ability of Ares Capital to revise
its offer) and the payment of a $30 million termination
fee, we may terminate the merger agreement and enter into an
agreement with a third party who makes a superior proposal.
Risks
Related to Current Economic and Market Conditions
We are currently in a period of capital markets disruption
and severe recession and we do not expect these conditions to
improve in the near future. These market conditions have
materially and adversely affected the debt and equity capital
markets in the United States, which has had and could continue
to have a negative impact on our business and
operations. The U.S. capital markets have
been experiencing extreme volatility and disruption for more
than 12 months as evidenced by a lack of liquidity in the
debt capital markets, significant write-offs in the financial
services sector, the repricing of credit risk in the credit
market and the failure of major financial institutions. These
events have contributed to worsening general economic conditions
that are materially and adversely impacting the broader
financial and credit markets and reducing the availability of
credit and equity capital for the markets as a whole and
financial services firms in particular. We believe these
conditions may continue for a prolonged period of time or worsen
in the future. A prolonged period of market illiquidity will
continue to have an adverse effect on our business, financial
condition, and results of operations. Unfavorable economic
conditions also could increase our funding costs, limit our
access to the capital markets or result in a decision by lenders
not to extend credit to us. Equity capital may be difficult to
raise because, subject to some limited exceptions, we generally
are not able to issue and sell our common stock at a price below
our net asset value per share. In addition, the debt capital
that will be available, if at all, may be at a higher cost and
on less favorable terms and conditions. These events and the
inability to raise capital has and may continue to significantly
limit our investment originations, limited our ability to grow
and negatively impacted our operating results.
Economic recessions, including the current global recession,
could impair our portfolio companies and harm our operating
results. Many of the companies in which we have
made or will make investments are susceptible to economic
slowdowns or recessions. An economic recession, including the
current and any future recessions or economic slowdowns, may
affect the ability of a company to repay our loans or engage in
a liquidity event such as a sale, recapitalization, or initial
public offering. Our non-performing assets are likely to
increase and the value of our portfolio is likely to decrease
during these periods. Current adverse economic conditions also
have decreased the value of any collateral securing our loans,
if any, and a prolonged recession or depression may further
decrease such value. These conditions are contributing to and if
prolonged could lead to further losses of value in our portfolio
and a decrease in our revenues, net income, assets and net worth.
Risks
Related to Asset Values
Declining asset values and illiquidity in the corporate debt
markets have adversely affected, and may continue to adversely
affect, the fair value of our portfolio investments, reducing
the value of our assets. As a BDC, we are
required to carry our investments at market value or, if no
market value is readily available, at fair value as determined
in good faith by our Board of Directors. Decreases in the values
of our investments are recorded
111
as unrealized depreciation. The unprecedented declines in asset
values and liquidity in the corporate debt markets have resulted
in significant net unrealized depreciation in our portfolio.
Conditions in the debt and equity markets may continue to
deteriorate and pricing levels may continue to decline. As a
result, we have incurred and, depending on market conditions, we
may incur further unrealized depreciation in future periods,
which could have a material adverse impact on our business,
financial condition and results of operations.
Substantially all of our portfolio investments, which are
generally illiquid, are recorded at fair value as determined in
good faith by our Board of Directors and, as a result, there is
uncertainty regarding the value of our portfolio
investments. At September 30, 2009,
portfolio investments recorded at fair value were 88% of our
total assets. Pursuant to the requirements of the 1940 Act, we
value substantially all of our investments at fair value as
determined in good faith by our Board of Directors on a
quarterly basis. Since there is typically no market quotation in
an active market for the investments in our portfolio, our Board
of Directors determines in good faith the fair value of these
investments pursuant to a valuation policy and a consistently
applied valuation process.
There is no single approach for determining fair value in good
faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of
each portfolio investment while employing a consistently applied
valuation process for the types of investments we make. In
determining fair value in good faith, we generally obtain
financial and other information from portfolio companies, which
may represent unaudited, projected or pro forma financial
information. Unlike banks, we are not permitted to provide a
general reserve for anticipated loan losses; we are instead
required by the 1940 Act to specifically value each individual
investment on a quarterly basis. We will record unrealized
depreciation on investments when we determine that the fair
value of a security is less than its cost basis, and unrealized
appreciation when we determine that the fair value of a security
is greater than its cost basis. Without a market quotation in an
active market and because of the inherent uncertainty of
valuation, the fair value of our investments determined in good
faith by the Board of Directors may differ significantly from
the values that would have been used had a ready market existed
for the investments, and the differences could be material. Our
net asset value could be affected if our determination of the
fair value of our investments is materially different than the
value that we ultimately realize.
Risks
Related to Our Portfolio
Our portfolio of investments is illiquid. We
generally acquire our investments directly from the issuer in
privately negotiated transactions. The majority of the
investments in our portfolio are subject to certain restrictions
on resale or otherwise have no established trading market. We
typically exit our investments when the portfolio company has a
liquidity event such as a sale, recapitalization, or initial
public offering of the company. The illiquidity of our
investments may adversely affect our ability to dispose of debt
and equity securities at times when we may need to or when it
may be otherwise advantageous for us to liquidate such
investments. In addition, if we were forced to immediately
liquidate some or all of the investments in the portfolio, the
proceeds of such liquidation could be significantly less than
the current value of such investments.
Our business of making private equity investments and
positioning them for liquidity events also may be affected by
current and future market conditions. Current economic and
capital markets conditions in the U.S. have severely
reduced capital availability, senior lending activity and middle
market merger and acquisition activity. The absence of an active
senior lending environment and the slowdown or stalling in
middle market merger and acquisition activity has slowed the
amount of private equity investment activity generally. As a
result, our investment activity has also significantly slowed.
In addition, significant changes in the capital markets,
including the recent extreme volatility and disruption, has had
and may continue to have a negative effect on the valuations of
our investments, and on the potential for liquidity events
involving such investments. This could affect the timing of exit
events in our portfolio, reduce the level of net realized gains
from exit events in a given year, and could negatively affect
the amount of gains or losses upon exit.
Investing in private companies involves a high degree of
risk. Our portfolio primarily consists of
long-term loans to and investments in middle market private
companies. Investments in private businesses involve a high
112
degree of business and financial risk, which can result in
substantial losses for us in those investments and accordingly
should be considered speculative. There is generally no publicly
available information about the companies in which we invest,
and we rely significantly on the diligence of our employees and
agents to obtain information in connection with our investment
decisions. If we are unable to identify all material information
about these companies, among other factors, we may fail to
receive the expected return on our investment or lose some or
all of the money invested in these companies. In addition, these
businesses may have shorter operating histories, narrower
product lines, smaller market shares and less experienced
management than their competition and may be more vulnerable to
customer preferences, market conditions, loss of key personnel,
or economic downturns, which may adversely affect the return on,
or the recovery of, our investment in such businesses. As an
investor, we are subject to the risk that a portfolio company
may make a business decision that does not serve our interest,
which could decrease the value of our investment. Deterioration
in a portfolio company’s financial condition and prospects
may be accompanied by deterioration in the collateral for a
loan, if any.
Our borrowers may default on their payments, which may have a
negative effect on our financial performance. We
make long-term loans and invest in equity securities primarily
in private middle market companies, which may involve a higher
degree of repayment risk. We primarily invest in companies that
may have limited financial resources, may be highly leveraged
and may be unable to obtain financing from traditional sources.
Numerous factors may affect a borrower’s ability to repay
its loan, including the failure to meet its business plan, a
downturn in its industry, or negative economic conditions. A
portfolio company’s failure to satisfy financial or
operating covenants imposed by us or other lenders could lead to
defaults and, potentially, termination of its loans or
foreclosure on its secured assets, which could trigger cross
defaults under other agreements and jeopardize our portfolio
company’s ability to meet its obligations under the loans
or debt securities that we hold. In addition, our portfolio
companies may have, or may be permitted to incur, other debt
that ranks senior to or equally with our securities. This means
that payments on such senior-ranking securities may have to be
made before we receive any payments on our subordinated loans or
debt securities. Deterioration in a borrower’s financial
condition and prospects may be accompanied by deterioration in
any related collateral and may have a negative effect on our
financial results.
We may be unable to fund our commitments to our portfolio
companies as they become due, which may have a material adverse
effect on our business. We have outstanding
investment commitments that at September 30, 2009 totaled
$543.9 million. Our asset coverage is less than the 200%
required by the 1940 Act for us to issue new debt. As a result,
we are currently unable to borrow additional money to fund these
commitments. In addition, because our common stock trades at a
price that is less than our net asset value per share, we may
not be able to raise funds through additional equity offerings
in order to fund these commitments. To the extent we are unable
to fund these commitments, it could have a material adverse
effect on our portfolio companies, and as a result, have a
material adverse effect on our results of operations.
Our private finance investments may not produce current
returns or capital gains. Our private finance
portfolio includes loans and debt securities that require the
payment of interest currently and equity securities such as
conversion rights, warrants, or options, minority equity
co-investments, or more significant equity investments in the
case of buyout transactions. Our private finance debt
investments are generally structured to generate interest income
from the time they are made and our equity investments may also
produce a realized gain. We cannot be sure that our portfolio
will generate a current return or capital gains.
Our financial results could be negatively affected if a
significant portfolio investment fails to perform as
expected. Our total investment in companies may
be significant individually or in the aggregate. As a result, if
a significant investment in one or more companies fails to
perform as expected, our financial results could be more
negatively affected and the magnitude of the loss could be more
significant than if we had made smaller investments in more
companies.
At September 30, 2009, our investment in Ciena Capital LLC
(Ciena) totaled $547.6 million at cost and
$102.2 million at value, after the effect of unrealized
depreciation of $445.3 million. Other assets includes
additional amounts receivable from or related to Ciena totaling
$112.7 million, which have a value of $2.0 million at
113
September 30, 2009. During the three months ended
September 30, 2009, we funded the remaining
$46.0 million of standby letters of credit issued in
connection with term securitization transactions completed by
Ciena. In addition, we have issued a performance guarantee in
connection with Ciena’s non-recourse warehouse facility. On
September 30, 2008, Ciena voluntarily filed for bankruptcy.
Ciena has been a participant in the SBA’s 7(a) Guaranteed
Loan Program and its wholly-owned subsidiary is licensed by the
SBA as a Small Business Lending Company (SBLC). Ciena remains
subject to SBA rules and regulations. The Office of the
Inspector General of the SBA (OIG) and the United States Secret
Service are conducting ongoing investigations of allegedly
fraudulently obtained SBA-guaranteed loans issued by Ciena.
Ciena is also subject to other SBA and OIG audits,
investigations, and reviews. In addition, the Office of the
Inspector General of the U.S. Department of Agriculture is
conducting an investigation of Ciena’s lending practices
under the Business and Industry Loan program. The OIG and the
U.S. Department of Justice are also conducting a civil
investigation of Ciena’s lending practices in various
jurisdictions. These investigations, audits, and reviews are
ongoing. These investigations, audits, and reviews have had and
may continue to have a material adverse impact on Ciena and, as
a result, could negatively affect our financial results. We are
unable to predict the outcome of these inquiries, and it is
possible that third parties could try to seek to impose
liability against us in connection with certain defaulted loans
in Ciena’s portfolio. See “Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Private Finance, Ciena
Capital LLC.”
We operate in a competitive market for investment
opportunities. We compete for investments with a
large number of private equity funds and mezzanine funds, other
business development companies, investment banks, other equity
and non-equity based investment funds, and other sources of
financing, including specialty finance companies and traditional
financial services companies such as commercial banks. Some of
our competitors may have greater resources than we do. Increased
competition would make it more difficult for us to purchase or
originate investments at attractive prices. As a result of this
competition, sometimes we may be precluded from making otherwise
attractive investments.
Risks
Related to Regulation as a Business Development Company and
Regulated Investment Company
Loss of regulated investment company tax treatment could
negatively impact our ability to service our debt and pay
dividends. We have operated so as to qualify as a
regulated investment company under Subchapter M of the Code. If
we meet source of income, asset diversification, and
distribution requirements, we generally will not be subject to
corporate-level income taxation on income we timely distribute,
or deem to distribute, to our shareholders as dividends. We
would cease to qualify for such tax treatment if we were unable
to comply with these requirements. In addition, we may have
difficulty meeting the requirement to make distributions to our
shareholders because in certain cases we may recognize income
before or without receiving cash representing such income. If we
fail to qualify as a regulated investment company, we will have
to pay corporate-level taxes on all of our income whether or not
we distribute it, which could negatively impact our ability to
service our debt and pay dividends to our shareholders. Even if
we qualify as a regulated investment company, we generally will
be subject to a corporate-level income tax on the income we do
not distribute. If we do not distribute at least 98% of our
annual taxable income (excluding net long-term capital gains
retained or deemed to be distributed) in the year earned, we
generally will be required to pay an excise tax on amounts
carried over and distributed to shareholders in the next year
equal to 4% of the amount by which 98% of our annual taxable
income available for distribution exceeds the distributions from
such income for the current year.
Failure to invest a sufficient portion of our assets in
qualifying assets could preclude us from investing in accordance
with our current business strategy. As a business
development company, we may not acquire any assets other than
“qualifying assets” unless, at the time of and after
giving effect to such acquisition, at least 70% of our total
assets are qualifying assets. Therefore, we may be precluded
from investing in what we believe are attractive investments if
such investments are not qualifying assets for purposes of the
1940 Act. If we do not invest a sufficient portion of our assets
in qualifying assets, we could lose our status as a business
development company, which would have a material adverse effect
on our business, financial condition and results of operations.
Similarly, these rules could prevent us from making additional
investments in existing portfolio companies, which could result
in the dilution of our position, or could require us to dispose
of investments at inopportune times in order to comply
114
with the 1940 Act. If we were forced to sell nonqualifying
investments in the portfolio for compliance purposes, the
proceeds from such sale could be significantly less than the
current value of such investments.
Changes in the law or regulations that govern us could have a
material impact on us or our operations. We are
regulated by the SEC. In addition, changes in the laws or
regulations that govern business development companies,
regulated investment companies, asset managers, and real estate
investment trusts may significantly affect our business. There
are proposals being considered by the current administration to
change the regulation of financial institutions that may affect,
possibly adversely, investment managers or investment funds. Any
change in the law or regulations that govern our business could
have a material impact on us or our operations. Laws and
regulations may be changed from time to time, and the
interpretations of the relevant laws and regulations also are
subject to change, which may have a material effect on our
operations.
Risks
Related to Our Ability to Pay Dividends to Our
Shareholders
There is a risk that our common stockholders may not receive
dividends or distributions. We may not be able to
achieve operating results that will allow us to make
distributions at a specific level or at all. In addition, due to
the asset coverage test applicable to us as a business
development company, we may be precluded from making
distributions. Also, certain of our credit facilities limit our
ability to declare dividends if we default under certain
provisions. As of September 30, 2009 we had an asset
coverage of 175%. Therefore, we may be precluded from declaring
dividends or other distributions to our shareholders unless our
asset coverage is at least 200%.
If we do not meet the distribution requirements for regulated
investment companies, we will suffer adverse tax consequences.
In addition, in accordance with U.S. generally accepted
accounting principles and tax regulations, we include in income
certain amounts that we have not yet received in cash, such as
contractual
payment-in-kind
interest, which represents contractual interest added to the
loan balance that becomes due at the end of the loan term, or
the accrual of original issue discount. The increases in loan
balances as a result of contractual
payment-in-kind
arrangements are included in income in advance of receiving cash
payment and are separately included in
payment-in-kind
interest and dividends, net of cash collections in our
consolidated statement of cash flows. Since we may recognize
income before or without receiving cash representing such
income, we may have difficulty meeting the requirement to
distribute at least 90% of our investment company taxable income
to obtain tax benefits as a regulated investment company.
Risks
Related to Changes in Interest Rates
Changes in interest rates may affect our cost of capital and
net investment income. Because we borrow money to
make investments, our net investment income is dependent upon
the difference between the rate at which we borrow funds and the
rate at which we invest these funds. As a result, there can be
no assurance that a significant change in market interest rates
will not have a material adverse effect on our net investment
income. In periods of rising interest rates, our cost of funds
would increase, which would reduce our net investment income. In
addition, defaults under our borrowing arrangements may result
in higher interest costs during the continuance of an event of
default. In August 2009, we completed a comprehensive
restructuring of our bank facility and our private notes, which
significantly increased our cost of capital. We may use interest
rate risk management techniques in an effort to limit our
exposure to interest rate fluctuations. Such techniques may
include various interest rate hedging activities to the extent
permitted by the 1940 Act.
Risks
Related to Asset Management Activities
There are potential conflicts of interest between us and the
funds managed by us. Certain of our officers
serve or may serve in an investment management capacity to funds
managed by us. As a result, investment professionals may
allocate such time and attention as is deemed appropriate and
necessary to carry out the operations of the managed funds. In
this respect, they may experience diversions of their attention
from us and
115
potential conflicts of interest between their work for us and
their work for the managed funds in the event that the interests
of the managed funds run counter to our interests.
Although managed funds may have a different primary investment
objective than we do, the managed funds may, from time to time,
invest in the same or similar asset classes that we target. In
addition, more than one fund managed by us may invest in the
same or similar asset classes. These investments may be made at
the direction of the same individuals acting in their capacity
on behalf of us and one or more of the managed funds. As a
result, there may be conflicts in the allocation of investment
opportunities between us and the managed funds or among the
managed funds. We may or may not participate in investments made
by investment funds managed by us or one of our affiliates. See
“Management’s Discussion and Analysis and Results of
Operations — Managed Funds.”
We have sold assets to certain managed funds and, as part of our
investment strategy, we may offer to sell additional assets to
managed funds or we may purchase assets from managed funds. In
addition, funds managed by us may offer assets to or may
purchase assets from one another. While assets may be sold or
purchased at prices that are consistent with those that could be
obtained from third parties in the marketplace, there is an
inherent conflict of interest in such transactions between us
and funds we manage.
Our financial results could be negatively affected if our
Managed Funds fail to perform as expected. In the
event that any of our Managed Funds were to perform below our
expectations, our financial results could be negatively affected
as a result of a reduction in management fees, the deferral in
payment of management fees or a reduction in incentive fees we
earn. Also, if the Managed Funds perform below expectations,
investors could demand lower fees or fee concessions which could
also cause a decline in our income. In addition, certain of our
Managed Funds are required to meet various compliance and
maintenance tests related to, among other things, the ratings on
fund assets and the ratio of collateral to a fund’s
outstanding debt. If a Managed Fund fails to comply with these
tests, the payment of a portion of our management fees could be
deferred until a fund regains compliance with such tests.
Moreover, because we are also an investor in certain of our
Managed Funds, we could experience losses on our investments.
Other
Risks
Our business depends on our key personnel. We
depend on the continued services of our executive officers and
other key management personnel. If we were to lose certain of
these officers or other management personnel, such a loss could
result in inefficiencies in our operations and lost business
opportunities, which could have a negative effect on our
business.
Results may fluctuate and may not be indicative of future
performance. Our operating results may fluctuate
and, therefore, you should not rely on current or historical
period results to be indicative of our performance in future
reporting periods. Factors that could cause operating results to
fluctuate include, but are not limited to, variations in the
investment origination volume and fee income earned, changes in
the accrual status of our loans and debt securities, variations
in timing of prepayments, variations in and the timing of the
recognition of net realized gains or losses and changes in
unrealized appreciation or depreciation, the level of our
expenses, the degree to which we encounter competition in our
markets, and general economic conditions.
Our common stock price may be volatile. The
trading price of our common stock may fluctuate substantially.
The capital and credit markets have been experiencing extreme
volatility and disruption for more than 12 months, reaching
unprecedented levels. We have experienced significant stock
price volatility. In general, the price of the common stock may
be higher or lower than the price paid by stockholders,
depending on many factors, some of which are beyond our control
and may not be directly related to our operating performance.
These factors include, but are not limited to, the following:
| • | price and volume fluctuations in the overall stock market from time to time; |
116
| • | significant volatility in the market price and trading volume of securities of business development companies or other financial services companies; | |
| • | volatility resulting from trading in derivative securities related to our common stock including puts, calls, long-term equity anticipation securities, or LEAPs, or short trading positions; | |
| • | the financial performance of the specific industries in which we invest on a recurring basis; | |
| • | changes in laws or regulatory policies or tax guidelines with respect to business development companies or regulated investment companies; | |
| • | actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts; | |
| • | general economic conditions and trends; | |
| • | loss of a major funding source; or | |
| • | departures of key personnel. |
The trading market or market value of our publicly issued
debt securities may be volatile. Our publicly
issued debt securities may or may not have an established
trading market. We cannot assure that a trading market for our
publicly issued debt securities will ever develop or be
maintained if developed. In addition to our creditworthiness,
many factors may materially adversely affect the trading market
for, and market value of, our publicly issued debt securities.
These factors include, but are not limited to, the following:
| • | the time remaining to the maturity of these debt securities; | |
| • | the outstanding principal amount of debt securities with terms identical to these debt securities; | |
| • | the ratings assigned by national statistical ratings agencies; | |
| • | the general economic environment; | |
| • | the supply of debt securities trading in the secondary market, if any; | |
| • | the redemption or repayment features, if any, of these debt securities; | |
| • | the level, direction and volatility of market interest rates generally; and | |
| • | market rates of interest higher or lower than rates borne by the debt securities. |
There also may be a limited number of buyers for our debt
securities. This too may materially adversely affect the market
value of the debt securities or the trading market for the debt
securities.
Our common stock could be delisted from the New York Stock
Exchange if we trade below $1.00 or if we fail to meet other
listing criteria. In order to maintain our
listing on the New York Stock Exchange (NYSE), we must continue
to meet the NYSE minimum share price listing rule, the minimum
market capitalization rule and other continued listing criteria.
Under the NYSE continued listing criteria, the average closing
price of our common stock must not be below $1.00 per share for
30 or more consecutive trading days. In the event that the
average closing price of our common stock is below $1.00 per
share over a consecutive
30-day
trading period, we would have a six-month cure period to attain
both a $1.00 share price and a $1.00 average share price
over 30 trading days.
If our common stock were delisted, it could (i) reduce the
liquidity and market price of our common stock;
(ii) negatively impact our ability to raise equity
financing and access the public capital markets; and
(iii) materially adversely impact our results of operations
and financial condition.
117
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
No unregistered sales of equity securities occurred during the
three months ended September 30, 2009 and 2008.
Issuer
Purchases of Equity Securities
We did not purchase shares of our equity securities during the
three months ended September 30, 2009. During the three
months ended September 30, 2008, we purchased a total of
250,198 shares by a plan agent for shareholders pursuant to
our dividend reinvestment plan at an aggregate cost of
$3.6 million.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
| Item 5. | Other Information |
None.
Item 6. Exhibits
(a) List of Exhibits
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
3.1
|
Restated Articles of Incorporation. (Incorporated by reference to Exhibit a.2 filed with Allied Capital’s Post-Effective Amendment No. 1 to registration statement on Form N-2 (File No. 333-141847) filed on June 1, 2007). | |||
|
3.2
|
Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 filed with Allied Capital’s Form 10-K on March 2, 2009). | |||
|
4.1
|
Specimen Certificate of Allied Capital’s Common Stock, par value $0.0001 per share. (Incorporated by reference to Exhibit d. filed with Allied Capital’s registration statement on Form N-2 (File No. 333-51899) filed on May 6, 1998). | |||
|
4.3
|
Form of Note under the Indenture relating to the issuance of debt securities. (Contained in Exhibit 4.4). (Incorporated by reference to Exhibit d.1 filed with Allied Capital’s registration statement on Form N-2/A (File No. 333-133755) filed on June 21, 2006). | |||
|
4.4
|
Indenture by and between Allied Capital Corporation and The Bank of New York, dated June 16, 2006. (Incorporated by reference to Exhibit d.2 filed with Allied Capital’s registration statement on Form N-2/A (File No. 333-133755) filed on June 21, 2006). | |||
|
4.5
|
Statement of Eligibility of Trustee on Form T-1. (Incorporated by reference to Exhibit d.3 filed with Allied Capital’s registration statement on Form N-2 (File No. 333-133755) filed on May 3, 2006). | |||
|
4.6
|
Form of First Supplemental Indenture by and between Allied Capital Corporation and the Bank of New York, dated as of July 25, 2006. (Incorporated by reference to Exhibit d.4 filed with Allied Capital’s Post-Effective Amendment No. 1 to the registration statement on Form N-2/A (File No. 333-133755) filed on July 25, 2006). | |||
|
4.7
|
Form of 6.625% Note due 2011. (Incorporated by reference to Exhibit d.5 filed with Allied Capital’s Post-Effective Amendment No. 1 to the registration statement on Form N-2/A (File No. 333-133755) filed on July 25, 2006). | |||
118
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
4.8
|
Form of Second Supplemental Indenture by and between Allied Capital Corporation and The Bank of New York, dated as of December 8, 2006. (Incorporated by reference to Exhibit d.6 filed with Allied Capital’s Post-Effective Amendment No. 2 to the registration statement on Form N-2/A (File No. 333-133755) filed on December 8, 2006). | |||
|
4.9
|
Form of 6.000% Notes due 2012. (Incorporated by reference to Exhibit d.7 filed with Allied Capital’s Post-Effective Amendment No. 2 to the registration statement on Form N-2/A (File No. 333-133755) filed on December 8, 2006). | |||
|
4.10
|
Form of Third Supplemental Indenture by and between Allied Capital Corporation and The Bank of New York, dated as of March 28, 2007. (Incorporated by reference to Exhibit d.8 filed with Allied Capital’s Post-Effective Amendment No. 3 to the registration statement on Form N-2/A (File No. 333-133755) filed on March 28, 2007). | |||
|
4.11
|
Form of 6.875% Notes due 2047. (Incorporated by reference to Exhibit d.9 filed with Allied Capital’s Post-Effective Amendment No. 3 to the registration statement on Form N-2/A (File No. 333-133755) filed on March 28, 2007). | |||
|
4.11(a)
|
Form of 6.875% Notes due 2047. (Incorporated by reference to Exhibit d.9(a) filed with Allied Capital’s Post-Effective Amendment No. 4 to the registration statement on Form N-2/A (File No. 333-133755) filed on April 2, 2007). | |||
|
10.1
|
Dividend Reinvestment Plan, as amended. (Incorporated by reference to Exhibit e. filed with Allied Capital’s registration statement on Form N-2 (File No. 333-87862) filed on May 8, 2002). | |||
|
10.2
|
Credit Agreement, dated April 9, 2008. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on April 10, 2008). | |||
|
10.2(a)
|
First Amendment to Credit Agreement, dated December 30, 2008. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K on December 31, 2008). | |||
|
10.2
|
Amended and Restated Credit Agreement, dated as of August 28, 2009, by and among Allied Capital Corporation, Bank of America, N.A., as Administrative Agent, and the lenders party thereto. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K on September 1, 2009). | |||
|
10.3
|
Note Agreement, dated October 13, 2005. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on October 14, 2005). | |||
|
10.3(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of October 13, 2005. (Incorporated by reference to Exhibit f.3(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.4
|
Note Agreement, dated May 1, 2006. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on May 1, 2006). | |||
|
10.4(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of May 1, 2006. (Incorporated by reference to Exhibit f.11(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.15
|
Second Amended and Restated Control Investor Guaranty, dated as of January 30, 2008, between Allied Capital and CitiBank, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on February 5, 2008). | |||
|
10.17
|
The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K filed on December 21, 2005). | |||
|
10.17(a)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II, dated January 20, 2006. (Incorporated by reference to Exhibit 10.17(a) filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.17(b)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II, dated December 14, 2007. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K filed on December 19, 2007). | |||
|
10.18
|
The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on December 21, 2005). | |||
|
10.18(a)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan, dated January 20, 2006. (Incorporated by reference to Exhibit 10.18(a) filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
119
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
10.18(b)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan, dated December 14, 2007. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on December 19, 2007). | |||
|
10.19
|
Amended Stock Option Plan. (Incorporated by reference to Appendix B of Allied Capital’s definitive proxy statement for Allied Capital’s 2007 Annual Meeting of Stockholders filed on April 3, 2007). | |||
|
10.20(a)
|
Allied Capital Corporation 401(k) Plan, dated September 1, 1999. (Incorporated by reference to Exhibit 4.4 filed with Allied Capital’s registration statement on Form S-8 (File No. 333-88681) filed on October 8, 1999). | |||
|
10.20(b)
|
Amendment to Allied Capital Corporation 401(k) Plan, dated April 15, 2004. (Incorporated by reference to Exhibit 10.20(b) filed with Allied Capital’s Form 10-Q for the period ended June 30, 2004). | |||
|
10.20(c)
|
Amendment to Allied Capital Corporation 401(k) plan, dated November 1, 2005. (Incorporated by reference to Exhibit 10.20(c) filed with Allied Capital’s Form 10-Q for the quarter ended September 30, 2005). | |||
|
10.20(d)
|
Amendment to Allied Capital Corporation 401(k) plan, dated April 21, 2006. (Incorporated by reference to Exhibit i.4(c) filed with Allied Capital’s Form N-2 (File No. 333-133755) filed on May 3, 2006). | |||
|
10.20(e)
|
Amendment to Allied Capital Corporation 401(k) plan, adopted December 18, 2006. (Incorporated by reference to Exhibit 10.20(e) filed with Allied Capital’s Form 10-K for the year ended December 31, 2006). | |||
|
10.20(f)
|
Amendment to Allied Capital Corporation 401(k) plan, dated June 21, 2007. (Incorporated by reference to Exhibit 10.20(f) filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2007). | |||
|
10.20(g)
|
Amendment to Allied Capital Corporation 401(k) plan, dated June 21, 2007. (Incorporated by reference to Exhibit 10.20(g) filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2007). | |||
|
10.20(h)
|
Amendment to Allied Capital Corporation 401(k) plan, dated September 14, 2007, with an effective date of January 1, 2008. (Incorporated by reference to Exhibit 10.20(h) filed with Allied Capital’s Form 10-Q for the quarter ended September 30, 2007). | |||
|
10.20(i)
|
Amendment to Allied Capital Corporation 401(k) Plan. (Incorporated by reference to Exhibit 10.20(i) filed with Allied Capital’s Form 10-Q for the period ended March 31, 2009). | |||
|
10.21
|
Employment Agreement, dated January 1, 2004, between Allied Capital and William L. Walton. (Incorporated by reference to Exhibit 10.21 filed with Allied Capital’s Form 10-K for the year ended December 31, 2003). | |||
|
10.21(a)
|
Amendment to Employment Agreement, dated March 29, 2007, between Allied Capital and William L. Walton. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on April 3, 2007). | |||
|
10.21(b)
|
Second Amendment to Employment Agreement, dated December 15, 2008, between Allied Capital and William L. Walton. (Incorporated by reference to Exhibit 10.21(b) filed with Allied Capital’s Form 10-K for the year ended December 31, 2008). | |||
|
10.21(c)
|
Third Amendment to Employment Agreement, dated February 26, 2009, between Allied Capital and William L. Walton. (Incorporated by reference to Exhibit 10.21(c) filed with Allied Capital’s Form 10-K for the year ended December 31, 2008). | |||
|
10.22
|
Employment Agreement, dated January 1, 2004, between Allied Capital and Joan M. Sweeney. (Incorporated by reference to Exhibit 10.22 filed with Allied Capital’s Form 10-K for the year ended December 31, 2003). | |||
|
10.22(a)
|
Amendment to Employment Agreement, dated March 29, 2007, between Allied Capital and Joan M. Sweeney. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K filed on April 3, 2007). | |||
|
10.22(b)
|
Second Amendment to Employment Agreement, dated December 15, 2008, between Allied Capital and Joan M. Sweeney. (Incorporated by reference to Exhibit 10.22(b) filed with Allied Capital’s Form 10-K for the year ended December 31, 2008). | |||
|
10.23
|
Employment Agreement, dated January 1, 2004, between Allied Capital and Penelope F. Roll. (Incorporated by reference to Exhibit 10.23 filed with Allied Capital’s Form 10-K for the year ended December 31, 2006). | |||
|
10.23(a)
|
Amendment to Employment Agreement, dated March 29, 2007, between Allied Capital and Penelope F. Roll. (Incorporated by reference to Exhibit 10.3 filed with Allied Capital’s Form 8-K filed on April 3, 2007). | |||
120
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
10.23(b)
|
Second Amendment to Employment Agreement, dated December 15, 2008, between Allied Capital and Penelope F. Roll. (Incorporated by reference to Exhibit 10.23(b) filed with Allied Capital’s Form 10-K for the year ended December 31, 2008). | |||
|
10.23(c)
|
Third Amendment to Employment Agreement, dated May 5, 2009, between Allied Capital and Penelope F. Roll. (Incorporated by reference to Exhibit 10.23(c) filed with Allied Capital’s Form 10-Q for the period ended March 31, 2009). | |||
|
10.24
|
Employment Agreement, dated May 5, 2009, between Allied Capital and John M. Scheurer. (Incorporated by reference to Exhibit 10.24 filed with Allied Capital’s Form 10-Q for the period ended March 31, 2009). | |||
|
10.25
|
Form of Custody Agreement with Riggs Bank N.A., which was assumed by PNC Bank through merger. (Incorporated by reference to Exhibit j.1 filed with Allied Capital’s registration statement on Form N-2 (File No. 333-51899) filed on May 6, 1998). | |||
|
10.26
|
Custodian Agreement with Chevy Chase Trust. (Incorporated by reference to Exhibit 10.26 filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.27
|
Custodian Agreement with Bank of America. (Incorporated by reference to Exhibit 10.27 filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.28
|
Code of Ethics. (Incorporated by reference to Exhibit 10.28 filed with Allied Capital’s Form 10-K for the year ended December 31, 2006). | |||
|
10.29
|
Custodian Agreement with Union Bank of California. (Incorporated by reference to Exhibit 10.29 filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2006). | |||
|
10.30
|
Custodian Agreement with M&T Bank. (Incorporated by reference to Exhibit 10.30 filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2006). | |||
|
10.31
|
Note Agreement, dated as of May 14, 2003. (Incorporated by reference to Exhibit 10.31 filed with Allied Capital’s Form 10-Q for the quarter ended March 31, 2003). | |||
|
10.31(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of May 14, 2003. (Incorporated by reference to Exhibit f.19(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.32
|
Custodian Agreement with Branch Banking and Trust Company. (Incorporated by reference to Exhibit 10.32 filed with Allied Capital’s Form 10-Q for the period ended March 31, 2009). | |||
|
10.33
|
Note Agreement, dated June 20, 2008. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on June 23, 2008). | |||
|
10.34
|
Retention Agreement dated May 13, 2009, between Allied Capital and Joan M. Sweeney. (Incorporated by reference to exhibit 10.1 filed with Allied Capital’s Form 8-K filed on May 19, 2009). | |||
|
10.37
|
Form of Indemnification Agreement between Allied Capital and its directors and certain officers. (Incorporated by reference to Exhibit 10.37 filed with Allied Capital’s Form 10-K for the year ended December 31, 2003). | |||
|
10.38
|
Note Agreement, dated as of March 25, 2004. (Incorporated by reference to Exhibit 10.38 filed with Allied Capital’s Form 10-Q for the period ended March 31, 2004.) | |||
|
10.38(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of March 25, 2004. (Incorporated by reference to Exhibit f.25(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.38(b)
|
First Waiver and Second Amendment dated as of July 25, 2008, to the Note Agreement dated as of March 25, 2004. (Incorporated by reference to Exhibit 10.38(b) filed with Allied Capital’s Form 10-Q for the period ended June 30, 2008). | |||
|
10.39
|
Note Agreement, dated as of November 15, 2004. (Incorporated by reference to Exhibit 99.1 filed with Allied Capital’s current report on Form 8-K filed on November 18, 2004.) | |||
|
10.39(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of November 15, 2004. (Incorporated by reference to Exhibit f.26(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.40
|
Real Estate Securities Purchase Agreement. (Incorporated by reference to Exhibit 2.1 filed with Allied Capital’s Form 8-K filed on May 4, 2005.) | |||
121
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
10.41
|
Platform Assets Purchase Agreement. (Incorporated by reference to Exhibit 2.2 filed with Allied Capital’s Form 8-K filed on May 4, 2005.) | |||
|
10.42
|
Transition Services Agreement. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on May 4, 2005.) | |||
|
10.43
|
First Omnibus Waiver and Amendment to the Note Agreements, dated as of July 25, 2008. (Incorporated by reference to Exhibit 10.40 filed with Allied Capital’s Form 10-Q for the period ended June 30, 2008). | |||
|
10.43(a)
|
Second Omnibus Amendment to the Note Agreements, dated as of December 30, 2008. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K December 31, 2008). | |||
|
10.44
|
Custodian Agreement, dated as of April 3, 2009 by and between Allied Capital Corporation and U.S. Bank National Association. (Incorporated by reference to Exhibit 10.44 filed with Allied Capital’s Form 10-Q for the period ended March 31, 2009). | |||
|
10.45
|
Amended, Restated and Consolidated Note Agreement, dated as of August 28, 2009, among Allied Capital Corporation and certain noteholders party thereto. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on September 1, 2009). | |||
|
10.46
|
Pledge, Assignment, and Security Agreement, dated as of August 28, 2009, among Allied Capital Corporation, certain of its Consolidated Subsidiaries and U.S. Bank National Association, as Collateral Agent for the Secured Parties. (Incorporated by reference to Exhibit 10.3 filed with Allied Capital’s Form 8-K on September 1, 2009). | |||
|
10.47
|
Contribution Agreement, dated as of August 28, 2009, by and among Allied Capital Corporation, A.C. Corporation and certain of its Consolidated Subsidiaries. (Incorporated by reference to Exhibit 10.4 filed with Allied Capital’s Form 8-K on September 1, 2009). | |||
|
10.48
|
Continuing Guaranty Agreement, dated as of August 28, 2009, by certain consolidated subsidiaries of Allied Capital Corporation in favor of U.S. Bank National Association, in its capacity as Collateral Agent. (Incorporated by reference to Exhibit 10.5 filed with Allied Capital’s Form 8-K on September 1, 2009). | |||
|
10.49
|
Continuing Guaranty Agreement, dated as of August 28, 2009, by Allied Asset Holdings LLC in favor of U.S. Bank National Association, in its capacity as Collateral Agent. (Incorporated by reference to Exhibit 10.6 filed with Allied Capital’s Form 8-K on September 1, 2009). | |||
|
10.50
|
Agreement and Plan of Merger. (Incorporated by reference to Exhibit 2.1 filed with Allied Capital’s Form 8-K on October 30, 2009). | |||
|
10.51*
|
Form of Custody Agreement with PNC Bank, National Association. | |||
|
11
|
Statement regarding computation of per share earnings is included in Note 7 to Allied Capital’s Notes to the Consolidated Financial Statements. | |||
|
15*
|
Letter regarding unaudited interim financial information. | |||
|
21
|
Subsidiaries of Allied Capital and jurisdiction of incorporation/organization: | |||
| A.C. Corporation | Delaware | |||
| Allied Capital REIT, Inc. | Maryland | |||
| Allied Capital Holdings, LLC | Delaware | |||
| Allied Capital Beteiligungsberatung GmbH (inactive) | Germany | |||
|
31.1*
|
Certification of the Chairman of the Board pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | |||
|
31.2*
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | |||
|
31.3*
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | |||
|
31.4*
|
Certification of the Chief Accounting Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | |||
|
32.1*
|
Certification of the Chairman of the Board pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |||
|
32.2*
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |||
|
32.3*
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |||
122
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
32.4*
|
Certification of the Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |||
| * | Filed herewith. |
123
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunder duly authorized.
ALLIED CAPITAL CORPORATION
(Registrant)
|
Dated: November 6, 2009
|
/s/ William
L. Walton William L. Walton Chairman of the Board |
|
|
/s/ John
M. Scheurer John M. Scheurer Chief Executive Officer and President |
||
|
/s/ Penni
F. Roll Penni F. Roll Chief Financial Officer |
||
|
/s/ John
C. Wellons John C. Wellons Chief Accounting Officer |
124
EXHIBIT INDEX
|
Exhibit |
||||
|
Number
|
Description
|
|||
| 10 | .51 | From of Custody Agreement with PNC Bank, National Association. | ||
| 15 | Letter regarding Unaudited Interim Financial Information. | |||
| 31 | .1 | Certification of the Chairman of the Board pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | ||
| 31 | .2 | Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | ||
| 31 | .3 | Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | ||
| 31 | .4 | Certification of the Chief Accounting Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | ||
| 32 | .1 | Certification of the Chairman of the Board pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
| 32 | .2 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
| 32 | .3 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
| 32 | .4 | Certification of the Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
125