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| ALD > SEC Filings for ALD > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included herein and in the Company's annual report on Form 10-K for the year ended December 31, 2008. In addition, this quarterly report on Form 10-Q contains certain forward-looking statements. These statements include the plans and objectives of management for future operations and financial objectives and can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are set forth below in the Risk Factors section. Other factors that could cause actual results to differ materially include:
• changes in the economy, including economic downturns or recessions;
• risks associated with possible disruption in our operations due to terrorism;
• future changes in laws or regulations or changes in accounting principles; and
• other risks and uncertainties as may be detailed from time to time in our public announcements and SEC filings.
Financial or other information presented for private finance portfolio companies has been obtained from the portfolio companies, and the financial information presented may represent unaudited, projected or pro forma financial information, and therefore may not be indicative of actual results. In addition, the private equity industry uses financial measures such as EBITDA or EBITDAM (Earnings Before Interest, Taxes, Depreciation, Amortization and, in some instances, Management fees) in order to assess a portfolio company's financial performance and to value a portfolio company. EBITDA and EBITDAM are not intended to represent cash flow from operations as defined by U.S. generally accepted accounting principles and such information should not be considered as an alternative to net income, cash flow from operations or any other measure of performance prescribed by U.S. generally accepted accounting principles.
We are a business development company, or BDC, in the private equity business and we are internally managed. Specifically, we primarily invest in private middle market companies in a variety of industries through long-term debt and equity capital instruments. Our financing generally is used to fund buyouts, acquisitions, growth, recapitalizations, note purchases, and other types of financings. Our investment objective is to achieve current income and capital gains.
The United States and the global economies continue to operate in an unprecedented economic recession and the U.S. capital markets continue to experience volatility and a severe lack of liquidity. In addition, events of default have occurred and are continuing under our revolving line of credit and private notes related to certain financial and other covenants. See"- Financial Condition, Liquidity and Capital Resources." Our strategy in these difficult economic times has been focused on reducing costs and streamlining our organization; building liquidity through selected asset sales; retaining capital by limiting new investment activity and suspending dividend payments; and working with portfolio companies to help them position for growth when the economy recovers.
Our portfolio composition at March 31, 2009 and 2008, and December 31, 2008, was as follows:
March 31, December 31,
2009 2008 2008
Private finance 97 % 98% 97%
Commercial real estate finance 3 % 2% 3%
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Our earnings primarily depend on the level of interest and dividend income, fee and other income, and net realized and unrealized gains or losses on our investment portfolio after deducting interest expense on borrowed capital, operating expenses and income taxes, including excise tax. Interest income primarily results from the stated interest rate earned on a loan or debt security and the amortization of loan origination fees and discounts. The level of interest income is directly related to the balance of the interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. Our ability to generate interest income is dependent on economic, regulatory, and competitive factors that influence new investment activity, interest rates on the types of loans we make, the level of repayments in the portfolio, the amount of loans and debt securities for which interest is not accruing and our ability to secure debt and equity capital for our investment activities. The level of fee income is primarily related to the level of new investment activity and the level of fees earned from portfolio companies and managed funds. The level of investment activity can vary substantially from period to period depending on many factors, including the general economic environment, the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the competitive environment for the types of investments we make and our ability to secure debt and equity capital for our investment activities.
In addition to managing our own assets, we manage certain funds that also invest in the debt and equity securities of primarily private middle market companies in a variety of industries. At March 31, 2009, we had eight separate funds under our management (together, the Managed Funds) for which we may earn management or other fees for our services. We may invest in the equity of these funds, along with other third parties, from which we may earn a current return and/or a future incentive allocation. At March 31, 2009, the Managed Funds had total assets of approximately $3.2 billion. See "Managed Funds" below for further discussion.
In aggregate, including the total assets on our balance sheet and assets under management in our Managed Funds, we had $6.6 billion in managed assets at March 31, 2009.
In addition to the funds we already manage or co-manage, we may pursue additional managed fund opportunities including the potential acquisition of asset managers. These potential funds are focused on all levels of a middle market company's capital structure, from senior debt through equity capital. By growing our privately managed capital base, we seek to diversify our sources of capital, leverage our core investment expertise and increase fees and other income from asset management activities. There can be no assurance that these new fund raising initiatives will result in additional funds under management.
PORTFOLIO AND INVESTMENT ACTIVITY
The total portfolio at value, investment activity, and the yield on
interest-bearing investments at and for the three months ended March 31, 2009
and 2008, and at and for the year ended December 31, 2008, were as follows:
At and for the At and for the
Three Months Ended Year Ended
March 31, December 31,
($ in millions) 2009 2008 2008
Portfolio at value $ 2,909.1 $ 4,635.6 $ 3,493.0
Investments funded $ 39.9 $ 275.1 $ 1,078.2
Payment-in-kind interest and dividends, net of cash
collections $ 7.7 $ 13.4 $ 53.4
Principal collections related to investment
repayments or sales(1) $ 241.8 $ 264.8 $ 1,037.3
Yield on interest-bearing portfolio investments(2) 11.8 % 12.3 % 12.1 %
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(1) Principal collections related to investment repayments or sales for the three
months ended March 31, 2009, included $132.2 million of cash collections
related to notes and other receivables received from the sale of investments
in one portfolio company in prior periods. Principal collections related to
investment repayments or sales for the three months ended March 31, 2008, and
year ended December 31, 2008, included collections of $30.0 million and $216.3
million, respectively, related to the sale of loans to certain of our Managed
Funds.
(2) The weighted average yield on interest-bearing investments is computed as the
(a) annual stated interest on accruing loans and debt securities plus the
annual amortization of loan origination fees, original issue discount, and
market discount on accruing loans and debt securities less the annual
amortization of loan origination costs, plus the effective interest yield on
the preferred shares/income notes of CLOs, plus the annual stated interest on
the subordinated certificates in the Unitranche Fund LLC divided by (b) total
interest-bearing investments at value. The weighted average yield is computed
as of the balance sheet date.
Private Finance
The private finance portfolio at value, investment activity, and the yield on
interest bearing investments at and for the three months ended March 31, 2009
and 2008, and at and for the year ended December 31, 2008, were as follows:
At and for At and for the
Three Months Ended March 31, Year Ended December 31,
2009 2008 2008
($ in millions) Value Yield(1) Value Yield(1) Value Yield(1)
Portfolio at value:
Loans and debt securities:
Senior loans $ 289.1 5.9% $ 325.7 7.0% $ 306.3 5.6%
Unitranche debt 403.8 12.1% 655.7 11.8% 456.4 12.0%
Subordinated debt 1,492.7 13.5% 2,430.4 13.0% 1,829.1 12.9%
Total loans and debt securities 2,185.6 12.3% 3,411.8 12.2% 2,591.8 11.9%
Equity securities:
Preferred shares/income notes of CLOs(2) 104.4 8.0% 197.4 15.8% 179.2 16.4%
Subordinated certificates in Unitranche Fund LLC(2) 124.5 9.2% 31.5 12.4% 125.4 12.0%
Other equity securities 415.5 879.1 502.7
Total equity securities 644.4 1,108.0 807.3
Total portfolio $ 2,830.0 $ 4,519.8 $ 3,399.1
Investments funded $ 38.9 (4) $ 274.6 $ 1,068.1
Payment-in-kind interest and dividends, net of cash collections $ 7.7 $ 13.2 $ 53.2
Principal collections related to investment repayments or sales(3) $ 240.7 $ 256.4 $ 1,020.5
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(1) The weighted average yield on loans and debt securities is computed as the
(a) annual stated interest on accruing loans and debt securities plus the
annual amortization of loan origination fees, original issue discount, and
market discount on accruing loans and debt securities less the annual
amortization of loan origination costs, divided by (b) total loans and debt
securities at value. The weighted average yield on the preferred shares/income
notes of CLOs is calculated as the (a) effective interest yield on the
preferred shares/income notes of CLOs, divided by (b) preferred shares/income
notes of CLOs at value. The weighted average yield on the subordinated
certificates in the Unitranche Fund LLC is computed as the (a) annual stated
interest divided by (b) total investment at value. The weighted average yields
are computed as of the balance sheet date.
(2) Investments in the preferred shares/income notes of CLOs and the subordinated certificates in the Unitranche Fund LLC earn a current return that is included in interest income in the consolidated statement of operations.
(3) Includes $132.2 million of cash collections during the three months ended March 31, 2009, related to notes and other receivables received from the sale of investments in prior periods. Also includes collections from the sale or repayment of senior loans totaling $25.2 million, $48.6 million, and $285.3 million for the three months ended March 31, 2009 and 2008, and for the year ended December 31, 2008, respectively.
(4) Includes $20.5 million funded under pre-existing commitments under revolving lines of credit. During the three months ended March 31, 2009, a total of $15.8 million was repaid under these arrangements, which is included in principal collections related to investment repayments or sales.
Our private finance portfolio primarily is composed of debt and equity investments. Debt investments include senior loans, unitranche debt (an instrument that combines both senior and subordinated financing, generally in a first lien position), or subordinated debt (with or without equity features). The junior debt that we have in the portfolio is lower in repayment priority than senior debt and is also known as mezzanine debt. Our portfolio contains equity investments for a minority equity stake in portfolio companies and includes equity features such as nominal cost warrants received in conjunction with our debt investments. In a buyout transaction, we generally invest in senior and/or subordinated debt and equity (preferred and/or voting or non-voting common) where our equity ownership represents a significant portion of the equity, but may or may not represent a controlling interest.
Investment Activity. Investments funded and the weighted average yield on interest-bearing investments funded for the three months ended March 31, 2009 and 2008, and for the year ended December 31, 2008, consisted of the following:
For the Three Months Ended March 31, 2009
Debt Investments Buyout Investments Total
Weighted Weighted Weighted
Average Average Average
($ in millions) Amount Yield(1) Amount Yield(1) Amount Yield(1)
Loans and debt securities:
Senior loans $ 20.4 7.0% $ 8.3 8.0% $ 28.7 7.3%
Total loans and debt securities 20.4 7.0% 8.3 8.0% 28.7 7.3%
Equity 3.9 6.3 10.2
Total $ 24.3 $ 14.6 $ 38.9
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For the Three Months Ended March 31, 2008
Debt Investments Buyout Investments Total
Weighted Weighted Weighted
Average Average Average
($ in millions) Amount Yield(1) Amount Yield(1) Amount Yield(1)
Loans and debt securities:
Senior loans $ 26.8 7.4% $ 10.4 6.7% $ 37.2 7.2%
Unitranche debt(2) 4.5 10.3% 0.5 6.6% 5.0 9.9%
Subordinated debt 129.9 (3) 12.0% 31.3 14.2% 161.2 12.4%
Total loans and debt securities 161.2 11.2% 42.2 12.3% 203.4 11.4%
Preferred shares/income notes of CLOs(4) 3.0 27.6% - 3.0 27.6%
Subordinated certificates in Unitranche
Fund LLC 30.7 12.4% - 30.7 12.4%
Equity 13.6 23.9 37.5
Total $ 208.5 $ 66.1 $ 274.6
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For the Year Ended December 31, 2008
Debt Investments Buyout Investments Total
Weighted Weighted Weighted
Average Average Average
($ in millions) Amount Yield(1) Amount Yield(1) Amount Yield(1)
Loans and debt securities:
Senior loans $ 175.9 7.4% $ 13.9 5.4 % $ 189.8 7.2 %
Senior secured loan to Ciena Capital LLC - 319.0 0.0 %(5) 319.0 0.0 %(5)
Unitranche debt(2) 15.3 10.5% 0.5 6.6 % 15.8 10.4 %
Subordinated debt 246.4 (3) 12.6% 54.8 15.4 % 301.2 13.1 %
Total loans and debt securities 437.6 10.4% 388.2 2.4 % 825.8 6.6 %(6)
Preferred shares/income notes of CLOs(4) 35.6 18.6% - 35.6 18.6 %
Subordinated certificates in Unitranche
Fund LLC 124.7 10.9% - 124.7 10.9 %
Equity 40.5 41.5 82.0
Total $ 638.4 $ 429.7 $ 1,068.1
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(1) The weighted average yield on interest-bearing investments is computed as the
(a) annual stated interest on accruing interest-bearing investments, divided by
(b) total interest-bearing investments funded. The weighted average yield on
the preferred shares/income notes of CLOs is calculated as the (a) effective
interest yield on the preferred shares/income notes of CLOs, divided by
(b) preferred shares/income notes of CLOs funded. The weighted average yield on
the subordinated certificates in the Unitranche Fund LLC is computed as the
(a) annual stated interest divided by (b) total investment at value. The
weighted average yield is calculated using yields as of the date an investment
is funded.
(2) Unitranche debt is an investment that combines both senior and subordinated
financing, generally in a first lien position. The yield on a unitranche
investment reflects the blended yield of senior and subordinated debt.
(3) Subordinated debt investments for the three months ended March 31, 2008, and
year ended December 31, 2008, included $2.0 million and $43.8 million,
respectively, in investments in the bonds of collateralized loan obligations
(CLOs). Certain of these CLOs are managed by Callidus Capital Corporation
(Callidus), a portfolio company controlled by us. These CLOs primarily invest
in senior corporate loans.
(4) CLO equity investments included preferred shares/income notes of CLOs that
primarily invest in senior corporate loans. Certain of these CLOs are managed
by us or by Callidus.
(5) The senior secured loan to Ciena Capital LLC was acquired on September 30,
2008, and was placed on non-accrual status on the purchase date.
(6) Excluding the senior secured loan to Ciena, the weighted average yield on new
investments for the year ended December 31, 2008 was 10.8%.
For the three months ended March 31, 2009, we made private finance investments totaling $38.9 million. Investments in the first quarter arose primarily from fundings under pre-existing investment commitments, including fundings under revolving line of credit instruments.
Historically, our focus for investments generally has been on higher return junior debt capital investments. Senior loans funded by us generally were funded with the intent to sell the loan or for the portfolio company to refinance the loan at some point in the future as discussed below. We have made fewer direct unitranche debt investments since the establishment of the Unitranche Fund LLC (Unitranche Fund) in the fourth quarter of 2007. Unitranche loans sourced by us generally are referred to the Unitranche Fund. Since its inception, we have invested $125.4 million in the Unitranche Fund, which supported its closing of investments totaling $789.3 million. The 9.2% yield on the subordinated certificates in the Unitranche Fund at March 31, 2009, represents the contractual coupon on the subordinated certificates and excludes any return from potential future excess cash flows from portfolio earnings available to the subordinated certificate holders and from related structuring fees and management and sourcing fees. See "Managed Funds" below.
We generally fund new investments using cash. In addition, we may acquire securities in exchange for our common equity. Also, we may acquire new securities through the reinvestment of previously accrued interest and dividends in debt or equity securities, or the current reinvestment of interest and dividend income through the receipt of a debt or equity security (payment-in-kind income). From time to time we may opt to reinvest accrued interest receivable in a new debt or equity security in lieu of receiving such interest in cash.
We may underwrite or arrange senior loans related to our portfolio investments or for other companies that are not in our portfolio. When we underwrite or arrange senior loans, we may earn a fee for such activities. Senior loans underwritten or arranged by us may be funded by us at closing. When these senior loans are closed, we may fund all or a portion of the underwritten commitment pending sale of the loan to other investors, which may include loan sales to the Managed Funds or funds managed by Callidus Capital Corporation (Callidus), a portfolio company controlled by us. After completing loan sales, we may retain a position in these senior loans. We generally earn a fee on the senior loans we underwrite or arrange whether or not we fund the underwritten commitment. In addition, we may fund most or all of the debt and equity capital upon the closing of certain buyout transactions, which may include investments in lower-yielding senior debt. Subsequent to the closing, the portfolio company may refinance all or a portion of the lower-yielding senior debt, which would reduce our investment.
We have focused our efforts on selling assets in our portfolio to generate capital. Principal collections related to private finance investment repayments or sales were $240.7 million for the three months ended March 31, 2009, including $132.2 million of cash collections related to notes and other receivables received from the sale of investments in one portfolio company in prior periods. Principal collections include repayments of senior debt funded by us that was subsequently sold by us or refinanced or repaid by the portfolio companies.
Outstanding Investment Commitments. At March 31, 2009, we had outstanding private finance investment commitments as follows:
Companies Companies
More Than Companies 5% Less Than
($ in millions) 25% Owned(1) to 25% Owned 5% Owned Total
Senior loans $ 11.2 $ 11.8 $ 84.8 $ 107.8 (2)
Unitranche debt 3.0 - 15.6 18.6
Subordinated debt 19.5 4.3 3.0 26.8
Total loans and debt securities 33.7 16.1 103.4 153.2
Unitranche Fund 399.6 - - 399.6
Equity securities 20.2 10.3 36.0 66.5 (3)
Total $ 453.5 $ 26.4 $ 139.4 $ 619.3
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(1) Includes a $4.0 million revolving line of credit commitment for working capital to Callidus Capital Corporation (Callidus), a portfolio company controlled by us, which owns 100% of Callidus Capital Management, LLC, an asset management company that structures and manages collateralized loan obligations (CLOs), collateralized debt obligations (CDOs), and other related investments.
(2) Includes $105.1 million in the form of revolving senior debt facilities to 27 companies.
(3) Includes $45.2 million to 11 private equity and venture capital funds, including $3.3 million in co-investment commitments to one private equity fund. These fund commitments are generally drawn over a multi-year period of time as the funds make investments.
Total commitments were $619.3 million at March 31, 2009, which included $399.6 million in commitments to the Unitranche Fund (see "Managed Funds"). Investments made by the Unitranche Fund must be approved by the investment committee of the Unitranche Fund, which includes a representative from us and . . .
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