CapitalSource Dodges Default

Once a major player in middle-market lending, CapitalSource is now seeking credit concessions to keep it from defaulting on its own debt.

According to a regulatory filing, the Chevy Chase, Md.-based company recently received a one-time waiver to keep it from breaching a covenant on a two-year-old loan it received from Wachovia Corp. and Bank of America. The waiver forgives what was likely a breach of a covenant in Q4 2008, which required CapitalSource to maintain a certain ratio of consolidated EBITDA to interest expenses (such waivers are important, or else you could wind up like Allied Capital).

Although the waiver only applies to the one fiscal quarter, the CapitalSource expects to obtain a permanent amendment to the covenant, according to a regulatory filing.

CapitalSource is among the many lenders to have been hit hard by the credit crunch and economic downturn. It reported a 72 percent drop in its Q3 2008 earnings to $8.05 million from $28.27 million the year before. Its nine-month total didn’t fair too much better with a 61 percent decrease to $74.89 million from prior year’s $191.32 million.

Read more on this situation in the next issue of Buyouts magazine.