{ "docId": "019dd923-622c-750b-8b9d-39f11e449ba8", "docSlug": "2440e3a9300a", "documentTitle": "Allied Capital (ALD)", "authorId": "04_Greenlight_Capital", "authorName": "David Einhorn", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "activist_investor", "sourceTypeLabel": "Activist investor", "presentationDate": "2002-06-17 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 23, "pageCount": 27, "prevPage": 22, "nextPage": 24, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 5, "notes": "This is a page from a research note by Greenlight Capital, likely part of their short thesis on Allied Capital.", "elementsJson": [ "paragraph", "footnote" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b9d-39f11e449ba8/23", "deckHref": "/decks/019dd923-622c-750b-8b9d-39f11e449ba8", "deckJsonHref": "/decks/019dd923-622c-750b-8b9d-39f11e449ba8.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b9d-39f11e449ba8#slide-23", "components": [ { "bbox": null, "kind": "callout", "text": "In Greenlight's opinion, when an equity sponsor has to guarantee the bank debt the investment is a troubled situation.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd952-ee3c-76df-9653-d3b1bea7d886", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.72, "x": 0.14, "y": 0.48 }, "kind": "paragraph", "text": "Business Loan Express’s largest competitor is CIT. Tyco purchased CIT about six months after Allied purchased Business Loan Financial. Tyco paid a much lower multiple of book value that Allied paid. As the economy has deteriorated, the SEC recently forced Tyco to recognize an impairment in the value of CIT. Greenlight wonders whether Business Loan Express has suffered a similar impairment in value that has not been recognized by Allied.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "227af0c7-d1c0-431c-8fc3-2e00faa7d082", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.72, "x": 0.14, "y": 0.4 }, "kind": "paragraph", "text": "Moreover, Greenlight doubts that BLX has improved in value, as its recent credit facility could only be obtained through a 50% guarantee of principal from Allied. In Greenlight’s opinion, when an equity sponsor has to guarantee the bank debt the investment is a troubled situation.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "4d464b12-bc14-4780-b34e-1f6d67629239", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.72, "x": 0.14, "y": 0.09 }, "kind": "paragraph", "text": "Mr. Walton attempted to comfort investors on the May 16th conference call by highlighting that BLX is performing “above plan.” Since, in addition to having no financial information at all regarding BLX, the public markets do not know what “plan” is, it is difficult to assess how much comfort this provides.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "8616349d-f532-4e65-a3f7-fe850dc93ac4", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.72, "x": 0.14, "y": 0.62 }, "kind": "paragraph", "text": "Another Allied controlled investment, Hillman, has a $40 million loan outstanding for which Allied charges a rate at 18%. This charge is in addition to the fees Allied charges Hillman. Since Hillman has some publicly traded preferred securities, Hillman has publicly available financial information. While Hillman appears to generate enough cash to support its interest expense, Hillman reports net losses. Greenlight concludes, therefore, that Hillman is, in effect, drawing down its equity in order to pay Allied fees and interest. Allied does not appear to be reducing its carrying value of Hillman’s equity to reflect such drawdowns.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "8c2d6a9f-feb1-4acc-a39c-c3cdb089561b", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.72, "x": 0.14, "y": 0.26 }, "kind": "paragraph", "text": "Greenlight questions the quality of these earnings, particularly in the absence of full financial disclosure. As BLX is a securitizer of its loans, Greenlight wonders how much of its earnings come from low quality gain on sale accounting. Given Allied’s questionable practices for recognizing deterioration in credit, Greenlight wonders whether BLX has sufficiently provided for losses in its income statement. Further, Greenlight wonders whether there may be residuals from earlier securitizations that may be impaired because BLX probably did not assume delinquencies would reach 14.5% at December 31.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "97f0f27f-3eb3-455f-aa16-f51b467d7722", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.72, "x": 0.14, "y": 0.76 }, "kind": "paragraph", "text": "According to the Hillman 2001 form 10-K, in the description of the term loans and credit facility, the term loans have a face value of $54.1 million and were estimated to have a “fair value” of $41.3 million.24 This means that Allied’s $40 million of", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d98f78cc-c717-4335-87b9-ec2f18b27e8a", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.72, "x": 0.14, "y": 0.18 }, "kind": "paragraph", "text": "On the May 29th conference call management added, “For the nine months ended March 31, 2002, BLX made a profit after all expenses, including interest and fees to Allied Capital.” Greenlight has heard that Allied believes that BLX has $50 million of EBITDA and is undervalued on Allied’s balance sheet.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f2930cb8-5530-44b3-adc4-c66ea8b4a166", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "For the nine months ended March 31, 2002, BLX made a profit after all expenses, including interest and fees to Allied Capital. — Management (May 29th conference call)", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd952-ee3c-76df-9653-d632618ff4e3", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.45, "x": 0.14, "y": 0.89 }, "kind": "source-note", "text": "24 The Hillman Companies, Inc. Form 10-K, December 31, 2001, p. 48.", "attrs": { "numbered": true }, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "dbe81254-4130-4b3c-8943-1603290abf85", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.1, "x": 0.14, "y": 0.58 }, "kind": "title", "text": "Hillman", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "de938e3a-eb60-44f4-8d28-17edeb5141de", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }