NEW YORK, NY — (MARKET WIRE) — 01/20/10 — Prospect Capital Corporation (NASDAQ: PSEC)(“Prospect”) announced today that it has delivered a letter to the Board ofDirectors of Allied Capital Corporation (“Allied”) in connection with itsoffer to acquire Allied. Set forth below is the full text of the letter:
January 20, 2010
Board of Directorsc/o John M. ScheurerChief Executive Officer and PresidentAllied Capital Corporation1919 Pennsylvania Avenue N.W.Washington, DC 20006
Ladies and Gentlemen:
We were disappointed by your summary rejection of our offer to acquireAllied at a significant premium to the implied value offered to Allied’sshareholders by Ares Corporation. The cavalier manner in which you havedealt with our bona fide offer is a continuation of your stonewalling overthe last nine months in the face of our numerous expressions of seriousinterest in acquiring Allied.
We do not think it would be productive at this time to respond to each andevery point made in the Form 8-K filed by Allied yesterday. However, theForm 8-K misleadingly fails to disclose several material facts — madeclear in our offer — that directly refute your stated reasons forrejecting our offer out of hand.
-- Superior Current Value. Contrary to your assertion that we are offering only a "small premium" to the Ares merger, our offer provides significantly superior current value for Allied shareholders. More specifically, based on an after-market trading price of $12.93 per share of Prospect common stock on January 19, 2010, Prospect's offer represents a value of $4.98 per share of Allied common stock, which is an approximately 10% premium to the $4.53 value per Allied share implied by an exchange ratio of 0.325 of a share of Ares common stock in the Ares merger (based on a $13.94 after-market trading price of Ares common stock price on January 19, 2010).-- Superior Dividend Payments. You have asserted without any support that Prospect's offer presents "significant risks" relating to the combined company's ability to maintain dividend payments. In fact, Ares cut its dividend in 2009 by 17% while Prospect has increased its dividend in each of the 21 quarters since its 2004 initial public offering. Prospect pays a $0.40875 per share dividend, compared to $0.35 per share for Ares. Based on our proposed exchange ratio of 0.385 of a share of Prospect common stock for each share of Allied common stock, our offer would provide Allied shareholders with a dividend of $0.157 per share of Allied common stock as compared with a dividend of $0.114 per share of Allied common stock under the Ares merger.-- Superior Access to Additional Debt and Equity Capital. Contrary to your professed concern that Prospect's offer poses "significant risks" concerning future access to the capital markets, we believe that based on Prospect's track record, a Prospect/Allied combination would provide Allied shareholders with superior access to debt and equity capital markets. Prospect has successfully completed 13 equity offerings since 2004, including ten offerings aggregating more than $350 million since the inception of the credit dislocation in mid-2007 and six equity offerings aggregating more than $200 million during 2009. Unlike Ares, Prospect increased both its credit facility size and its number of lenders over the last year.-- Superior Leverage Profile. In addition, your Form 8-K fails to acknowledge the point made in our offer that Prospect currently has a debt/equity ratio of less than 0.1x, which, pro forma for the proposed Prospect/Allied combination, would provide significant de-leveraging for Allied shareholders. Ares, by comparison, has a debt/equity ratio of approximately 0.7x, which Prospect believes makes an Ares/Allied combination riskier for Allied's shareholders. Further, Prospect enjoys investment grade ratings with Standard and Poor's and Moody's for Prospect's corporate rating and credit facility rating, respectively, which we believe Allied's lenders and shareholders would view positively.
As you know, we have relied solely on Allied’s public documents in makingthe offer, which is conditioned on access to due diligence information. Tothe extent that you can provide us, which your agreement with Ares allowsyou to do, with information that demonstrates that a higher valuation ofAllied is justified, we would be prepared to discuss an increase in theconsideration to be paid in our offer.
In this context, your criticism of our offer based on our need to conductcustomary due diligence is at best disingenuous. After all, it is withinyour own control to provide us access to the information you have alreadyprovided to Ares. We are confident that we could complete our duediligence review expeditiously.
In light of all of the foregoing, we believe your contention that our offerdoes not constitute a “Superior Proposal” under the Ares merger is bothunfounded and contrary to the interests of Allied’s shareholders.
We remain convinced that our offer represents a compelling strategiccombination that we believe would generate superior value for Alliedshareholders in comparison to the Ares merger. We remain hopeful thatAllied’s Board of Directors will see the value of our offer and act in thebest interests of Allied’s shareholders. We urge you to immediatelydischarge your fiduciary duties and to reconsider your refusal to provideProspect with access to due diligence that could result in even highervalue to Allied’s shareholders.
We look forward to hearing from you.
Very truly yours, Prospect Capital Corporation By: /s/ M. Grier Eliasek Name: M. Grier Eliasek Title: President and COOcc: Gary Swidler, BofA Merrill Lynch Ian Simmonds, BofA Merrill Lynch
ABOUT PROSPECT CAPITAL CORPORATION
Prospect Capital Corporation (www.prospectstreet.com/) is a closed-endinvestment company that lends to and invests in private and microcap publicbusinesses. Our investment objective is to generate both current income andlong-term capital appreciation through debt and equity investments.
We have elected to be treated as a business development company under theInvestment Company Act of 1940 (“1940 Act”). We are required to comply witha series of regulatory requirements under the 1940 Act as well asapplicable NASDAQ, federal and state rules and regulations. We have electedto be treated as a regulated investment company under the Internal RevenueCode of 1986. Failure to comply with any of the laws and regulations thatapply to us could have an adverse effect on us and our shareholders.
Forward-Looking Statements
This press release contains forward-looking statements within the meaningof the Private Securities Litigation Reform Act of 1995, whose safe harborfor forward-looking statements does not apply to business developmentcompanies. Such forward-looking statements may relate to us and/or ourindustry and address matters that involve risks and uncertainties.Forward-looking statements reflect our current views and assumptions withrespect to future events, operations, business plans, business andinvestment strategies and portfolio management, the performance of ourinvestments and our investment management business and the economy. Theseforward-looking statements are not historical facts, but rather are basedon current expectations, estimates and projections about our industry, ourbeliefs, and our assumptions. Words such as “intends,” “intend,””intended,” “goal,” “estimate,” “estimates,” “expects,” “expect,””expected,” “project,” “projected,” “projections,” “plans,” “seeks,””anticipates,” “anticipated,” “should,” “could,” “may,” “will,” “designedto,” “foreseeable future,” “believe,” “believes,” “currently anticipates,””currently believes” and “scheduled” and variations of these words andsimilar expressions are intended to identify forward-looking statements.Our actual results or outcomes may differ materially from those anticipated.Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date the statement was made. Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events orotherwise. These statements are not guarantees of future performance andare subject to risks, uncertainties, and other factors, some of which arebeyond our control and difficult to predict and could cause actual resultsto differ materially from those expressed or forecasted in theforward-looking statements, including without limitation:
-- our future operating results;-- our business prospects and the prospects of our portfolio companies;-- the impact of investments that we expect to make;-- our contractual arrangements and relationships with third parties;-- the dependence of our future success on the general economy and its impact on the industries in which we invest;-- the ability of our portfolio companies to achieve their objectives;-- difficulty in obtaining financing or raising capital, especially in the current credit and equity environment;-- the level and volatility of prevailing interest rates and credit spreads, magnified by the current turmoil in the credit markets;-- adverse developments in the availability of desirable loan and investment opportunities whether they are due to competition, regulation or otherwise;-- a compression of the yield on our investments and the cost of our liabilities, as well as the level of leverage available to us;-- our regulatory structure and tax treatment, including our ability to operate as a business development company and a regulated investment company;-- the adequacy of our cash resources and working capital;-- the timing of cash flows, if any, from the operations of our portfolio companies;-- the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments;-- authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board, the Securities and Exchange Commission, Internal Revenue Service, the NASDAQ, and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business;-- our ability to manage future growth;-- our dependence on Prospect Capital Management's key management personnel;-- the highly competitive market for investment opportunities in which we operate;-- uncertainty as to the value of our portfolio investments;-- additional risks to which senior securities, including debt, expose us;-- changes in interest rates;-- our need to raise additional capital to grow because of the requirement that we distribute most of our income;-- the lack of liquidity in our investments;-- fluctuations in our quarterly results;-- fluctuations in our net asset value;-- potential conflicts of interest and their impact on investment returns;-- our incentive fee's impact on the types of investments made by Prospect Capital Management;-- changes in laws or regulations;-- risks relating to our operation as a business development company;-- risks relating to our investments and securities;-- the integration of Patriot or other businesses we acquire or new business ventures we may start;-- uncertainty as to whether Allied will enter into and consummate the proposed transaction with Prospect on the terms set forth in our offer; and-- the risks, uncertainties and other factors we identify in "Risk Factors" and elsewhere in our filings with the SEC.
Although we believe that the assumptions on which these forward-lookingstatements are based are reasonable, any of those assumptions could proveto be inaccurate, and as a result, the forward-looking statements based onthose assumptions also could be inaccurate. Important assumptions includeour ability to originate new loans and investments, certain margins andlevels of profitability and the availability of additional capital. Inlight of these and other uncertainties, the inclusion of a projection orforward-looking statement in this press release should not be regarded as arepresentation by us that our plans and objectives will be achieved. Theserisks and uncertainties include those described or identified in “RiskFactors” and elsewhere in our filings with the SEC. You should not placeundue reliance on these forward-looking statements, which apply only as ofthe date of such filings.
Additional Information about the Proposed Transaction and Where to Find It:
This press release is not a proxy statement or a solicitation of proxiesand does not constitute an offer to sell or a solicitation of an offer tobuy any securities. This press release relates to a business combinationtransaction with Allied proposed by Prospect, which may become the subjectof a registration statement filed with the Securities and ExchangeCommission (the “SEC”). This material is not a substitute for theprospectus/proxy statement Prospect would file with the SEC regarding theproposed transaction if such a negotiated transaction with Allied isreached or for any other document which Prospect may file with the SEC andsend to Allied or Prospect shareholders in connection with the proposedtransaction. INVESTORS AND SECURITY HOLDERS OF ALLIED AND PROSPECT AREURGED TO READ ANY SUCH DOCUMENTS FILED WITH THE SEC CAREFULLY IN THEIRENTIRETY IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAINIMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. Such documents wouldbe available free of charge through the web site maintained by the SEC atwww.sec.gov or by directing a request to the contact listed below.
Prospect and its directors, executive officers and other persons may bedeemed to be participants in any solicitation of shareholders in connectionwith the proposed transaction. Information about Prospect’s directors andexecutive officers is available in Prospect’s proxy statement for its 2009annual meeting of shareholders, which was filed with the SEC on October 16,2009. Other information regarding potential participants in such proxysolicitation and a description of their direct and indirect interests, bysecurity holdings and otherwise, will be contained in any proxy statementfiled in connection with the proposed transaction.
All information in this communication concerning Allied and Ares wasobtained from public sources. While Prospect has no knowledge that anysuch information is inaccurate or incomplete, Prospect has not had theopportunity to verify any of such information.