In October 2008, while credit markets were coming apart, a fund co-managed by Allied Capital and GE helped finance the purchase of a company that made coolers. Igloo was an unglamorous, legible business: insulated boxes, handles, lids. The fund supplied $95 million of debt for J.H. Whitney’s acquisition. GE Antares separately provided a $40 million undrawn revolving facility. Behind an ordinary household object sat a carefully assembled financial machine.
- Allied financed established American businesses through loans and equity.
- Its GE partnership made complicated borrowing simpler for customers.
- Its own financing constraints helped drive the 2010 merger into Ares Capital.
That deal is a useful introduction to Allied. It also sets up the puzzle of its ending. A financier could help get somebody else’s acquisition over the line while struggling to preserve its own room to maneuver. The borrower’s problem and the lender’s problem were connected, but they were not identical.
Money for the awkward middle
Allied occupied the space between a conventional business loan and an ownership investment. Its customers were established middle-market companies, management teams and private equity sponsors arranging acquisitions, buyouts, growth or recapitalizations. These were businesses expected to generate cash to service debt. The central question was how much financing their earnings could support, and in what combination.
It could offer senior loans, subordinated debt, equity, or a package of instruments. Senior lenders stood nearer the front of the repayment queue; subordinated, or mezzanine, lenders accepted a lower priority. Equity supplied ownership exposure. Allied’s expertise lay in underwriting the company and assembling those pieces around a transaction.
The price reflected the position. Its 1998 filing described typical mezzanine investments carrying fixed interest of 12% to 18%, with maturities of five to ten years. Some included warrants or options to acquire minority equity. Those are historical terms, not a rate card for every Allied loan. A borrower might pay interest and surrender some future upside to secure capital today.
Allied earned interest, fees and investment gains. Public shareholders and creditors supplied its capital. Its internally managed business development company structure made a portfolio of negotiated private investments accessible through a publicly traded share. Unlike a bank deposit, that share exposed its owner to the fortunes of the investment portfolio.
One agreement. Fewer moving parts.
In December 2007, Allied and GE Commercial Finance formed a unitranche fund with up to $3.6 billion in commitments. GE committed $3.075 billion; Allied committed $525 million. The borrower received one first-lien facility blending the pricing and terms of senior and junior debt. The partners handled the combination behind the scenes.
That arrangement addressed a practical nuisance: assembling separate lenders means coordinating separate decisions. GE and Allied offered simpler documentation and greater certainty of execution. For the joint fund, Igloo was a demonstration of the product doing its job. In that announcement, the partners targeted borrowers with EBITDA, a measure of operating earnings, of $15 million to $90 million.
Other BDCs, mezzanine funds, specialty lenders and banks competed for these transactions. Allied’s distinction was its range of financing tools and its ability, with GE, to combine them. For a sponsor trying to close an acquisition, fewer financing negotiations could matter alongside the interest rate.
The price needed a paper trail
Private investments presented another problem. Their prices did not arrive continuously from an exchange. Someone had to determine fair value. In June 2007, the SEC found recordkeeping and internal-control violations concerning certain valuations from June 2001 through March 2003. Allied settled without admitting or denying the findings.
The order described insufficient documentation and inadequately explained changes in valuation inputs. It also recorded reforms, including third-party valuation assistance and a chief valuation officer. The practical lesson is prosaic: a judgment needs evidence another person can inspect. In private credit, the paperwork helps establish what the portfolio is worth.
When the lender needed time
During the financial crisis, that valuation problem became a financing problem. Allied’s 2008 report recorded asset coverage of 188% at year-end, below the 200% covenant requirement. Falling portfolio values reduced its cushion against borrowings. Dividend declarations and additional borrowing were constrained. The lender’s ability to keep waiting had contractual limits.
12 percentage points below the requirement
Its merger materials described roughly $1.1 billion of obligations that lenders could have accelerated before a debt restructuring. Allied lacked the cash to satisfy them if called. Investments intended to be held for years were difficult to sell quickly. That is the mechanism to watch: an accounting decline can narrow a lender’s choices before its investments have time to recover.
The public rationale for joining Ares addressed those constraints directly. In October 2009, Allied CEO John Scheurer pointed to a stronger balance sheet, access to capital markets and the expected return of dividends for shareholders. The case for the deal rested on financing capacity as much as investment opportunity.
“Our stockholders should benefit through resumed receipt of dividends”
John Scheurer · Allied CEO · October 2009
The loan outlived the lender
The merger closed on April 1, 2010. Each Allied share became the right to 0.325 Ares shares. The stock consideration was worth approximately $648 million when announced and $908 million at closing. Those figures describe different dates in a fixed-ratio transaction. Allied ceased trading as an independent public company.
The useful idea remained: simplify a complicated purchase by coordinating its financing. Ares continued the senior secured lending partnership. For today’s reader, Allied offers two habits worth copying: evaluate financing as a complete package, and examine the lender’s own funding. This approach depends on borrowers generating cash and lenders retaining capacity through stress. A convenient agreement cannot supply either on its own.