Allied Capital says may default on debt, shares plunge

(Reuters) - Buyout firm Allied Capital Corp (ALD.N) said it may default on its revolving credit facility and outstanding private notes, sending its shares down more than 40 percent in before the bell trading on Wednesday.

Allied said based on its current estimates of asset values, its asset coverage ratio, a measure of a company's ability to cover debt obligations, was likely to be less than the required 200 percent, an event which constitutes a default.

The company also said it does not expect the process of granting a first priority lien on its assets under the revolving credit facility and the private notes by January 30 which would also lead to a default as per terms.

Allied said it has re-opened discussions with lenders of its credit facility and holders of its notes for an amendment to the terms.

Business development firms like Allied and larger rival American Capital Strategies Ltd (ACAS.O), which usually make loans to small businesses in return of equity stakes, have seen their investment portfolio deplete and raising capital increasingly difficult amid the financial crisis.

The company had in December amended certain terms under its revolving credit facility and private notes, reducing its capital maintenance covenant to more than $1.5 billion and 85 percent of consolidated adjusted debt.

A default on its credit facilities could have a material adverse impact on the its liquidity, financial condition or results of operations and could lead to the company barred from paying dividends, Allied said.

Shares of the Washington-based Allied Capital fell to a low of $2.15 in trading before the bell. They closed at $3.60 Tuesday on the New York Stock Exchange.

(Reporting by Anurag Kotoky in Bangalore, Editing by Dinesh Nair)