Allied Capital (ALD) shareholders today approved the acquisition of the company by Ares Capital (ARCC). Allied Capital is the oldest Business Development Company (“BDC”) and the second company in this sector to be swallowed up by a more successful BDC, after Patriot Capital (bought by Prospect Capital (PSEC)-another BDC-late last year). The merger will take effect on April Fool’s Day.
With all the folderol of the Prospect Capital counter-offer for Allied and the public name calling which followed behind us, what have we learned about the BDC industry that might be of use going forward?
The principal lesson is that the most obvious buyers for BDC companies up for sale seem to be other BDCs, which is relatively small universe. Patriot Capital claims to have had numerous potential suitors, but Prospect Capital ended up winning the deal. Allied Capital appears to have only had meaningful discussions with Prospect and Ares. Where are private equity groups with asset management arms and deep pockets such as Blackstone Group (BX), or the numerous “vulture funds” that were expected to pick on the carcasses of troubled companies ? One explanation is that neither PCAP or ALD were troubled enough to attract the real bargain basement buyers.
This suggests that the potential buyers list for the handful of BDCs still in the troubled category will be composed of competitors, and may explain why more acquisitions have not occurred in this sector. GSC Investments (GNV) engaged Stifel Nicholas over a year ago to “explore strategic alternatives,” but has done nothing. American Capital (ACAS) has faced very similar financing difficulties and lender defaults as Allied Capital, but nobody has made any progress in buying the company or even its European subsidiary ECAS. Maybe this reflects the Board and management’s preference to stay independent. Kohlberg Capital (KCAP) has its own financing snafus, and is being forced into what amounts to an orderly liquidation of its assets (very much like what’s happening at GNV). Kohlberg would seem to make a logical buy-out candidate but no official word of any would-be buyers.
Is it too late in the day for any more acquisitions to happen? Certainly the gap between the haves and have nots in the industry continues to widen. The troubled BDCs are having to pay exorbitant borrowing costs, are unable to raise new capital (except for ACAS which raised some equity recently), cannot take advantage of the more favorable investing environment and are not paying regular dividends (except for KCAP whose distribution is reducing every quarter). Several of the more successful BDCs are swimming in new debt and equity capital, and have the capacity to close a deal. All this would seem to speak to a reasonable prospect of one or more “have not” BDCs finding a suitor in 2010.
On the other hand, the troubled BDCs may be looking at the example of MCG Capital Corporation (MCGC), another long standing BDC which got itself into big trouble two years ago but has managed-after much asset selling and loan renegotiating-to right the boat. Asset coverage is over the 200% threshhold required for all BDCs, and there is talk of restarting the dividend again in the first quarter of 2010.
Disclosure: Long ARCC, Long GNV, Long MCGC,No Position ALD; No Position KCAP; No Position ACAS