March 3 is a very big day for the financial sector. It’s the deadline to report their fourth quarter earnings, and you can bet those are going to be some depressing calls. Aside from KKR and Blackstone, peHUB will be closely watching announcements from the BDCs.
In particular, we’ll be interested in Allied Capital and American Capital. Allied Capital has breached its covenants and is in default on its private notes. Meanwhile, American Capital is expected to violate its covenants for the second time, according to analysts Troy Ward and Greg Mason at Stifel Nicolaus. I spoke to them about their predictions.
Regarding Allied Capital, the analysts said, out of all of its options, the firm is most likely to announce it has received forbearance from its lenders. It’s not unlike what happened with CapitalSource, which negotiated for a waiver of its covenants and managed to narrowly avoid a default. The difference for Allied is that the firm had collateral assets that weren’t yet pledged to something. The firm essentially has more to give, and lenders want a piece of that.
So Allied will have to pledge its assets as collateral to the private debt holders. Those debt holders will likely have no problem doing that because it would put them ahead of the public debt holders in the capital structure. That’s why the Stifel Nicolaus analysts suspect the forebearance agreements will have very tight covenants, which could lead to another violation in the next six to nine months. In a conversation yesterday The analysts believe the firm would negotiate for wide covenants or no covenants, Ward said.
The private noteholders in negotiations includes two pension plans and 44 insurance companies.
Things look worse for American Capital. Ward said he believes American Capital will default on its credit facility again when it announces its year-end numbers on Monday, March 2. The firm violated its covenants in September and renegotiated for some breathing room. The lenders didn’t seize any assets the first time around, but, if American Capital violates its covenants, they could throw American Capital in default. “The problem with that,” he said, “is that if you try to sell now, you won’t come out whole.” He said Allied Capital’s situation is slightly different because many of American Capital’s assets have already been pledged to lenders, whereas Allied’s lenders are negotiating for previously un-pledged assets.