Fitch Ratings has placed the following ratings of Allied Capital Corporation (Allied) on Rating Watch Positive following the announcement of its merger agreement with Ares Capital Corporation (Ares):
--Long-term Issuer Default Rating 'B+';
--Senior secured debt 'BB/RR1'; and
--Senior unsecured debt 'B+/RR4'.
Approximately $1.6 billion of debt is affected by these actions.
Ares has agreed to purchase Allied in an all stock transaction for $648 million, which represents a 27.3% premium to its closing stock price on Oct. 23, 2009, but a 51.7% discount to its June 30, 2009 book value. The transaction is expected to close by the end of the first quarter of 2010, subject to shareholder approval and certain lender consent.
The Rating Watch Positive reflects Fitch's belief that Allied's debt holders will benefit from Ares' superior credit profile, improved funding flexibility, and the enhanced liquidity of the combined entity. The additional investment capital will provide an opportunity to better support Allied's legacy portfolio investments and the ability to maximize portfolio returns. At June 30, 2009, Ares had a debt-to-equity ratio of 0.81 times (x), had balance sheet cash of $46.3 million, and had over $300 million of available borrowing capacity on its secured revolving facilities (including the $200 million revolving facility closed in July 2009), subject to borrowing base and covenant limitations. Furthermore, Ares was able to access the equity markets in August 2009, netting $109.6 million of proceeds.
Fitch expects Allied's asset sales and debt repayments will continue over the near-term, so that the debt-to-equity ratio of the combined entity will be between 0.65x and 0.75x at closing. Should the achievement of this leverage ratio necessitate negotiations with Allied's note holders, Fitch would need to consider the terms of any such restructuring in the context of its criteria for coercive debt exchanges. Still, Fitch does not anticipate any material reduction in terms, as it expects Ares would seek to maximize its ability to maintain and improve funding flexibility over the long-term.
In a separate transaction, Allied has agreed to sell its interests in the Senior Secured Loan Fund LLC (formerly known as the Unitranche Fund) to Ares for $165 million in cash. This fund was formed in December 2007 to invest in unitranche securities of middle market companies and currently holds loans totaling approximately $900 million. The fund is co-managed by an affiliate of General Electric Capital Corporation. Should the merger transaction between Allied and Ares not be completed, Fitch does not believe the sale of the fund will materially alter the credit profile of Allied as a stand alone entity. Sale proceeds are expected to be used for the repayment of debt.
Additional information is available at 'www.fitchratings.com'.
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Contacts:
Fitch Ratings
Meghan (Crowe) Neenan, CFA, +1-212-908-9121 (New York)
William
A. Artz, +1-312-368-3178 (Chicago)
Media Relations:
Brian
Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com
