Publicly traded “business development company” American Capital has reached a preliminary agreement with lenders to push back the maturity of $2.4 billion in debt and stave off bankruptcy.
The company, founded in 1986, has been in default on the unsecured debt, which is outstanding as of 30 June, 2009.
Significantly, the agreement pushes back the maturity on the $2.4 billion debt load to 31 December, 2013, but it also ramps up the price American Capital will have to pay on the loans. The agreement also will allow American Capital to raise capital, something it has not been able to do under default.
Under the agreement, American Capital will pay $450 million upon the close of the agreement. Malon Wilkus, American Capital’s founder and chief executive officer, said during an earnings call Wednesday the company has about $500 million of cash and expects to generate more cash from its portfolio.
The deal comes with a minimum repayment schedule. The company would owe $250 million in 2010, $300 million in 2011, $350 million in 2012 and $300 million in 2013, prior to the debt’s maturity date. The balance of $750 million is due at maturity.
American Capital hopes to get ahead of the amortisation schedule, paying off the minimum amounts early.
“Our goal is to get into the lower interest level grid and work hard to get amortisation paid off ahead of time,” Wilkus said.
The interest rate on the principal amount of debt will decline as the company pays down the debt. For example, American Capital will pay a rate of 9.5 percent over Libor on principal amount more than $1.7 billion, which will drop to 8.5 percent over Libor on amounts between $1.7 billion and $1.4 billion. The interest rate will continue to decline to minimum of 2 percent.
The agreement shows that American Capital’s creditors believe “in our future and our capability in enhancing our performance relative to our obligations to them. This allows us to operate as a going concern,” Wilkus said.
American Capital executives described the preliminary agreement during the company’s third quarter earnings call Wednesday. The company was able to write up its portfolio of investments for the first time since the second quarter of 2007.
Net unrealised appreciation of portfolio investments was recorded at $70 million for the third quarter, the company said. That compares to depreciations of $556 million in the second quarter, $570 million in the first quarter and depreciation of $1.7 billion in the fourth quarter of 2008.
“We’ve had two years of depreciating our assets in our portfolio, so [I’m grateful] to see we’re turning around,” Wilkus said.
The unrealised write-up is partly due to the positive growth in US domestic product that was recorded in the third quarter, Wilkus said.
The company also recorded $463 million of realisations in the third quarter, up from $125 million in the second quarter.
American Capital will continue to look for exits at attractive prices, but will remain a patient investor, he said. The company in September sold its portfolio company Axygen BioScience for about $400 million, reaping $182 million in proceeds.
“Since the beginning of the fourth quarter of 2008, we’ve received approximately $875 million of proceeds from realisations of portfolio investment repayments and exists, including over 20 exits of portfolio companies,” Darin Winn, American Capital senior vice president and senior managing director, said in a statement issued after the sale.
American Capital affiliate European Capital also is in default and negotiating with lenders. American Capital said it is no longer looking for a sale of European Capital.