Small-business lenders American Capital Ltd (ACAS.O: Quote, Profile, Research) and Allied Capital Corp (ALD.N: Quote, Profile, Research) posted huge quarterly losses and said auditors cast doubt on their ability to continue as going concerns, causing their shares to tank.
Allied Capital said long-standing Chief Executive William Walton stepped down after the company lost more than $1 billion in 2008. Walton, who has been CEO of Allied since 1997, will remain as chairman. John Scheurer, an 18-year veteran of the company, will be the new chief executive.
Allied, which has been criticized for several years by activist investor David Einhorn, posted a net loss of $579 million in the fourth quarter, hit by a significant drop in investment income and net realized losses, and said it did not expect to declare dividends in 2009.
American Capital posted a net loss of $1.7 billion in the quarter, battered by heavy declines in the value of its assets.
Shares of Allied Capital fell as much as 30 percent in midday trade, while American Capital’s shares were down 15 percent.
Allied Capital is not looking to change from the structure of a “business development company” as of now, a company official said in a conference call with analysts.
Business development companies like American and Allied, which make loans to small and mid-sized businesses in return for equity stakes, have seen their investment portfolios shrink, and raising capital has grown increasingly difficult in the current turbulent environment.
Allied, which said nonaccruals and loans over 90 days delinquent may increase in future, added that most senior executives at the company will not receive performance awards in 2009.
American Capital said it was in breach of certain covenants under its $2.3 billion of unsecured credit lines outstanding as of December 31, and auditors included a going concern explanatory paragraph in their opinion on its financial statements.
The company said it had begun working with its lenders in December to revise the covenants but had not yet reached agreement on any revisions.
The breached covenants include minimum tangible net worth covenants, asset coverage covenants and an available debt asset coverage covenant, American Capital said.
Allied Capital also said its auditors had expressed substantial doubt about its ability to continue as a going concern.
However, Allied said on the call it expects asset sales, debt repayment and restructuring to provide the company with ongoing operational flexibility.
The company is in discussions with lenders regarding a restructuring of debt agreements, it said.
Allied said last month its lenders had notified it of a default under its credit facility, which could hamper the firm’s liquidity and limit its ability to pay dividends and borrow.
The company also said it has sharply reduced new investment activity to conserve capital and repay debt.
Bethesda, Maryland-based American Capital recorded $1.7 billion in net unrealized depreciation during the quarter, which included $1.5 billion of depreciation on portfolio company investments.
The company’s net operating income declined about 75 percent to $44 million.
Washington-based Allied Capital said it had net realized losses of $177 million or 99 cents a share during the quarter, and it recorded a 41 percent drop in net investment income.
American Capital’s quarterly net loss amounted to $8.13 a share, while Allied Capital posted a net loss of $3.24 a share.
In midday trade, shares of American Capital were down 18 percent at $1.11 on Nasdaq, while Allied Capital fell 34 percent to 71 cents on the New York Stock Exchange.
(Reporting by Adheesha Sarkar and Anurag Kotoky in Bangalore; Editing by Mike Miller)