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  "documentTitle": "Allied Capital (ALD)",
  "authorId": "04_Greenlight_Capital",
  "authorName": "David Einhorn",
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  "presentationDate": "2002-06-17 00:00:00",
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  "notes": "This is a page from a research note by Greenlight Capital regarding Allied Capital.",
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      "text": "Since Allied recognized $65 million in non-cash earnings last year that it paid out in dividends, Allied had to finance that payment by shrinking the portfolio, borrowing money or selling equity.",
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      "text": "PIK Income: $65 million",
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      "text": "unsecured subordinated notes and $57 million equity probably do not have a fair value of cost, though they are valued at cost on Allied’s books.",
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      "text": "Greenlight wonders whether it is appropriate to carry investments where Allied agreed to defer payment of principal or interest at cost. Greenlight also wonders whether it is appropriate to accrue non-cash interest on such loans.",
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      "text": "Allied has pledged to grow its dividend by 10% per year. To accomplish such growth, Allied must increase its Net Asset Value per share at a similar rate. Since Allied cannot retain most of its earnings, its principal means of increasing Net Asset Value per share is to periodically sell new shares at a premium.",
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      "text": "Greenlight believes this requirement could prove problematic if investors take a more critical view toward Allied’s valuation methods and earnings quality. Should that happen, equity investors might stop valuing Allied based on its dividend yield and start asking themselves what the portfolio is actually worth. Should regulators take a critical eye toward Allied’s practices, Allied’s ability to raise equity capital could become further",
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      "text": "Last year, Allied recognized approximately $65 million from non-cash or PIK interest and dividends from companies in which it invested. This figure represents another third of Allied’s dividend. Greenlight does not believe there is anything wrong with non-cash interest, provided Allied eventually collects the money and marks its portfolio fairly. For the reasons described above, Greenlight does not think that is happening. However, the non-cash interest creates a cash flow shortfall that must be funded.",
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      "text": "According to Allied’s 2001 annual report, “As a provider of long-term privately negotiated investment capital, it is not atypical to defer payment of principal or interest from time to time. As a result, the amount of the portfolio that is greater than 90 days delinquent may vary from quarter to quarter.”",
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      "text": "When Ms. Sweeney explained on the May 16th conference call that, as long as the cash portion of loans covers Allied’s cost of debt, incremental PIK interest merely enhances returns through reinvestment, she misses Greenlight’s point. Since Allied must pay out its earnings as a dividend, cash needs include both interest on Allied's debt and Allied's required dividend. Since Allied recognized $65 million in non-cash earnings last year that it paid out in dividends, Allied had to finance that payment by shrinking the portfolio, borrowing money or selling equity.",
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      "text": "In 2001 Allied earned $29 million in fees and at least $27 million in interest from controlled companies. These low quality earnings streams represented almost one-third of the $180 million that Allied paid in dividends last year.",
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      "text": "As a provider of long-term privately negotiated investment capital, it is not atypical to defer payment of principal or interest from time to time. As a result, the amount of the portfolio that is greater than 90 days delinquent may vary from quarter to quarter. — Allied's 2001 annual report",
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