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Allied Capital Corporation (ALD)

Q4 2009 Earnings Call

February 24, 2010 10:15 AM ET

Executives:

John M. Scheurer - Chief Executive Officer

Penni F. Roll - Chief Financial Officer

Shelly Huchel - Director IR

Analysts:

Greg Mason - Stifel Nicolaus

Chris Harris - Wells Fargo

Jasper Burts – Macquarie

Robert Schwartzberg - Compass Point

John Fay – Fay Investments

Gary Bill - Private Investor

Drew Figdor – Tiedemann Investment Group

Presentation:

Operator

My name is Stephanie and I will be your conference operator today. At this time I would like to welcome to everyone to the Allied Capital Q4 2009 Earnings Conference Call. (Operator Instructions).

I would now like to turn the conference over to John Scheurer, Chief Executive Officer. Please go ahead sir.

John Scheurer

Thank you Stephanie. Good morning everyone and welcome to Allied Capital's fourth quarter 2009 conference call. I'm joined today by Penni Roll and Shelly Huchel. Shelly, would you open the discussion today with the required conference call information and a discussion about forward-looking statements please?

Shelly Huchel

Absolutely. Today's call is being recorded and webcast live through our website at www.alliedcapital.com. An archive of today's webcast will also be available on our website as will an audio replay of the conference call. Replay information is included in our press release today and is posted on our website.

Please note that this call is the property of Allied Capital. Any unauthorized rebroadcast of this call in any form is strictly prohibited. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release today regarding forward-looking information.

Today's conference call includes forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website or call investor relations toll free at 888-253-0512.

For today's conference call we have provided companion slide deck that complements our discussion and lays out many of the numbers we will discuss. These slides are available in the presentations and reports section of the investor resources portion of our website. We will make reference to date included in this slides throughout today's call.

This call includes communication being made in respect of the proposed business combination involving Ares Capital and Allied Capital. In connection with the proposed transactions, Ares Capital has filed with SEC, a registration statement on Form N-14 that includes proxy statements of Ares Capital and Allied Capital and that also constitutes our prospectus of Ares Capital.

On or around February 16th, 2010, Ares Capital and Allied Capital began mailing the joint proxy statement prospectus to their respective stock holders of record as of the close of business on February 2, 2010.

Investors and security holders of Ares Capital and Allied Capital are urged to read the joint proxy statement prospectus and other documents filed with the SEC carefully in their entirety, because they contain important information about the proposed transaction.

Investors and security holders can obtain free copies of the registration statement and joint proxy statement prospectus and other documents filed with the SEC by each of Ares Capital and Allied Capital through the websites maintained by the SEC at www.sec.gov.

Free copies of the registrations statement and joint proxy statement prospectus and other documents filed with the SEC on Ares Capital Corporation’s website at www.arescapitalcorp.com or on Allied Capital Corporation’s website at www.alliedcapital.com respectively.

Ares Capital, Allied Capital and their respective directors, executive officers and certain other members of management and employees, including employees at Ares Capital’s investment advisor, Ares Capital Management LLC and any of its affiliates maybe soliciting proxies from Ares Capital and Allied Capital stockholders in favor of the acquisition.

Information regarding the persons who may, under the rules of SEC, be considered participant in the solicitation of the Ares Capital and Allied Capital stockholders in connection with the proposed acquisition is set forth in the joint proxy statement prospectus filed with the SEC. You can obtain a free copy of this document in the manner set forth above.

Finally as always there will be a Q&A session after the presentation. With that I’ll turn it back over John.

John Scheurer

Thank you Shelley. 2009 was a challenging year for the U.S economy, the capital market and for Allied Capital. As you recall we had significant depreciation in the fair value of our portfolio in the second half of 2008, which reflected then existing market conditions and performance of certain portfolio companies.

As a result, we experienced a corresponding reduction in our net worth causing our asset coverage ratio to fall below 200% at December 31, 2008. Throughout 2009, we stayed focused on generating capital and liquidity through reduce leverage in our capital structure by selectively selling assets, retaining capital through the suspension of dividend payments and reducing employee and administrative costs.

In 2009 we generated cash proceeds totaling $1.1 billion, including realized gains of $52.7 million from investment repayments or asset sales. These cash proceeds represented approximately 96% of the aggregate fair value of these assets at the end of the quarter prior to exit.

We believe that the quality of the assets in our portfolio, the hard work of our Deal Teams and the strength of our relationships with market participants allowed us to complete such a significant amount of asset sale in a very difficult economic environment.

We used the cash generated from our asset sales and repayments to build cash and reduce debt throughout 2009. At December 31, 2008, our total par amount of debt outstanding was $1.9 billion as compared to $1.5 billion at December 31, 2009, a $451 million reduction.

This debt reduction resulted from the pay down of private debt by $317 million and the discounted repurchase of public debt with a face amount of $134 million. We realized a gain of $84 million on the public debt repurchase.

At December 31, 2009, we had cash on hand of $402 million. In January 2010, we continued to build liquidity through additional asset sales to put ourselves in a position to further de-lever by repaying in full, the existing secured private debt, which had an outstanding par balance of $673.2 million at December 31, 2009, in order to capture a $50 million credit on the private notes by repaying them by January 31st.

In January, we generated additional cash proceeds totalling approximately $150 million including realized gains of $0.2 million from investment repayment through asset sales. These cash proceeds approximated the aggregate fair value of these assets at December 31, 2009.

Assets sold in the fourth quarter of 2009, and in January 2010 included assets sold to Ares Capital, our pending merger partner or one of its affiliates for cash proceeds of $325 million, including realized gains of $6 million. These cash proceeds approximated the aggregate fair value of these assets at the end of the quarter prior to exit.

Using cash on the balance sheet at December 31, 2009, the additional proceeds from asset sales in January and the proceeds from the new $250 million senior secured term loan, we repaid our outstanding secured private notes and bank facility in full on January 29th.

By repaying the private notes in full before January 31, we are able to recover and apply towards principal the $50 million restructuring fee paid as part of the August 2009 restructuring.

The January refinancing reduced the company's total debt outstanding at par as of January 29, 2010 to $996 million from $1.5 billion at December 31, 2009. It also reduced our weighted average cost of debt from 10.4% at December 31, 2009 to approximately 6.7% at January 29th, as the interest payments under the new term debt are considerably more favorable.

In addition, this refinancing and the related pay-off of our existing private debt allowed us to return to an asset coverage ratio above 200%, assuming no changes in portfolio values since yearend 2009 for the first time since December 31, 2008.

While we have currently returned to an asset coverage ratio above 200%, our new term debt still limits our operational flexibility, as it among other things requires repayments from asset sales, new debt issuances and excess cash, generally restricts new investments beyond existing contractual commitment, and limits our ability to pay dividends.

While the efforts we’ve made since the beginning of 2009 were important to realigning our debt capital, during this time we were also focused on another equally, if not more important matter rebuilding shareholder value.

To this end we’ve sent considerable effort exploring strategic alternative including continuing our existing business on a standalone basis with our existing structure, converting to an operating company, agreeing to a large investment by our strategic investor or entering into a business combination with a financial services firm.

After a significant consideration of these options we concluded that the merger with Ares Capital was in the best interest of shareholders, an opinion we continue to hold. As we announced yesterday, we will be having a joint conference call with Ares on Wednesday, March 3rd at 10 AM to discuss the pending mergers.

Our definitive proxy, which you should have received by now, provides significant details about the merger transaction and we hope that you will take the time to read it. For today though, we want to discuss some of the elements of the merger from our perspective and then we plan to have a more fulsome discussion next week on a joint call with Ares.

If the merger is approved, Allied Capital shareholders will become Ares Capital shareholders with each Allied Capital shareholder receiving 0.325 shares of Ares Capital for each share of Allied Capital stock currently owned.

Upon completion of the merger, current Allied Capital shareholders will earn approximately 30% of the combined company. We believe there are a number of benefits of a merger with Ares Capital, including the resumption of dividend payments to Allied Capital shareholders.

Ares Capital has consistently paid a quarterly dividend since April 2006 in an amount of at least $0.35 per share and our shareholders would begin a dividend from Ares after the closing of the merger.

Some of our shareholders have asked if the Ares merger still makes sense in light of what we’ve accomplished to delever our balance sheet. We strongly believe that the merger is still better for our shareholders than proceeding on a stand alone basis for the following reasons.

Allied Capital has not paid a dividend to its shareholders since the fourth quarter of 2008. We’ve been focused and continue to focus on retaining capital to pay down debt and we are also restricted by the terms of our private term debt from paying dividends unless dividends need to paid in order to meet our (required) distribution requirements.

We currently estimate that we do not have any required distributions for 2009 and since we intend to continue to preserve capital, we would not expect Allied shareholders to receive dividends in 2010 on a standalone basis. Taxable income for 2010, if any, could be carried forward for distribution in 2011.

In addition to participating in the receipt of the dividend after an Ares merger, we believe our shareholders, as Ares shareholders will benefit from improved access to the debt and equity capital markets, increased portfolio diversity, a larger platform to support future growth and increased liquidity and flexibility.

In January, Ares Capital accessed both the debt and equity markets. Ares closed a new and expanded three-year revolving credit facility with its bank lenders with commitments of $690 million and a borrowing rate of LIBOR plus 300.

Ares Capital has an investment grade credit rate of BBB by SMT and Fitch ratings. In addition, Ares sold new equity totalling $293 million in an accretive equity raise at a price above its net asset value.

We believe this demonstrates their ability to effectively access both the debt and equity markets. While we access the debt markets to refinance our private debt, we are still a non-investment grade borrower and our borrowing cost, under the new term debt excluding fees, is 150 basis points more expensive than Ares’ new bank facility.

In addition, our new term debt of $250 million matures in February 2011 and therefore we will need to continue to sell assets to retire this debt and to put ourselves in a position to repay or refinance the $319 million of public debt that matures in July 2011.

As long as we have operating restrictions and are not paying dividend, in all likelihood, we also expect that our stock will continue to trade below NAV. We currently do not have shareholder approval to sell stock below NAV and therefore our current ability to raise equity is very limited.

We believe Ares’ ability to raise capital favorably positions the combined entity to grow to take advantage of attractive new investment opportunities and to potentially achieve greater value from our portfolio over time.

We believe the combined company will benefit from a well capitalized balance sheet, access to capital for growth, an experienced middle market investment origination team and a proven asset management platform. In addition to these benefits, I think it's important to point out the increase to the value of both company stocks since October 26, 2009, the date we announced the merger agreement.

On the day prior to the announcement Allied Capital stock was trading at $2.73 and Ares Capital stock was trading at $10.69. Yesterday Allied Capital stock closed at $4.05 and Ares Capital stock closed at $12.62, up 48% and 18% respectively. We are hopeful that the combined company’s growth prospects will continue to be reflected in its dividend payments and share price over time.

For these reasons, our Board of Directors has unanimously approved the merger agreement and recommends a vote for the merger.

Now, I'd like to turn the call over to Penni to discuss our proxy solicitation efforts with respect to the merger with Ares.

Penni Roll

Thanks John. The definitive proxy statement detailing the merger was mailed to shareholders last week and our proxy solicitation has begun. We hope that by now you have received your proxy and if you haven't please let us know, or let your broker know.

For the merger to be approved an affirmative vote is required from two-thirds of Allied Capital shares outstanding. The majority of Allied Capital's 180 million shares outstanding are held by individual investors. Therefore it is crucial that all of our shareholders participate in this vote and we ask that you read the proxy statement and vote your shares.

Shareholders who abstain or simply fail to return their proxies will have the same effect as if they vote against the merger. So, your participation is extremely important. We have incurred approximately $6 million in expenses to-date in connection with the proposed merger with Ares, which will be incurred by our shareholders even if the merger does not close. In addition, we must pay a $15 million breakup fee to Ares if our shareholders do not approve the merger.

Because of the importance of this proposal, we have engaged a proxy source at our Georgeson to assist us contacting shareholders to solicit your vote. For the shareholders on this call, you may have already received and in the upcoming weeks may continue to receive calls from our Georgeson representative to solicit your vote or to assist you in voting your shares.

Given the number of retail shareholders that we have and the vote required. We believe this is the best way to ensure that has many shareholders vote as possible. Whether you hold 50 shares or 500,000 shares, you can see that your vote is very important.

We hope that you will give this matter its due attention and vote your shares as soon as possible. It’s important to note that the voting instructions are different if you hold you shares in banker brokerage account or if you are registered shareholder.

Voting instructions have been included with the proxy statement mailed to shareholders. We have also included proxy voting instructions on page 3 of today’s conference call slide which provides important information on how to vote your shares.

In addition you can visit our website at www.alliedcapital.com, call investor relations at 888-253-0512 or call Georgeson at 866-695-6072 if you need clarity on voting instructions or have any other questions about the proxy statement.

At this time I would like to turn to the discussion to quickly revealing the results for the fourth quarter. For more details on our fourth quarter and full-year 2009 results, I refer you to our fourth quarter earnings release, the earnings presentation on our website, and our form 10-k which will be filed on the coming days.

To begin the discussion, please turn to Slide 4 in the earnings presentation. As of December 31st we had an investment portfolio of $2.1 billion and total assets of $2.7 billion. Total debt at quarter end was $1.4 billion and total shareholders equity was $1.2 billion. At December 31, 2009 our asset coverage ratio was 180%. Our debt to equity ratio was 1.19 to 1 and our net debt to equity ratio was 0.85 to 1.

As John mentioned earlier, we have continued to be successful in our efforts to sell selected assets to repay debt. Upon the repayment and refinancing of our private notes and bank facility in January 2010, our asset coverage ratio is currently back above 200%.

Our net asset value at December 31st was $6.66, down slightly from $6.70 at September 30. The interest bearing portfolio yield was 11.6% at December 31, 2009 as compared to 11.9% at September 30, 2009. Now please turn to Slide 7.

Net investment income was $0.2 million for the fourth quarter of 2009, as compared to net investment income of $9.6 million for the third quarter. The lower net investment income for the fourth quarter primarily relates to lower interest income and increased administrative expenses.

Interest income was $59.7 million for the fourth quarter of 2009, as compared to $65 million for the third quarter. The $5.3 million decline was primarily a result of the sale or repayment of interest bearing portfolio assets.

Administrative expenses are shown on Slide 9. Administrative expenses for the fourth quarter of 2009 were $12.6 million as compared to $7.2 million for the third quarter. The fourth quarter expense included $5.1 million in cost related to the merger with Ares.

As you can see on slide 10, we were focused on reducing expenses in 2009. In 2009, we reduced our average quarterly administrative expenses by approximately 31% and our average quarterly employee expense excluding IPA mark to market expense by approximately 48% as compared to 2008.

Going back to slide 7, net realized losses were $202.9 million for the fourth quarter of 2009 as compared to net realized losses of $5.1 million in the third quarter and $126.1 million for the second quarter.

Realized losses in the fourth quarter were $219.6 million, including a $103 million loss on the sale of Wear Me Apparel and a $62.6 million on the sale of CR Brands. Realized gains for the fourth quarter were $16.7 million, including a $6.2 million gain on the sale of our investment in the senior secured loan funds.

Net changed in unrealized appreciation or depreciation was a positive $203.8 million for the fourth quarter of 2009. Excluding reversals related to net realized losses and dividend income, net unrealized depreciation in the fourth quarter was $4.4 million as compared to net unrealized depreciation of $36.4 million in the third quarter. The net loss for the fourth quarter was $4.1 million or $0.02 per share.

Now please turn the slide 14. During 2009, investments funded totaled $130.4 million, which primarily related to funding existing investment commitments. As John mentioned, we generated significant capital from our portfolio during 2009 with principal collections related to repayment or sales totalling $1.1 billion including realized gains of $52.7 million.

As a result of these significant actions and the recording of net unrealized depreciation, our total portfolio value declined from $3.5 billion at December 31, 2008 to $2.1 billion at December 31, 2009.

Now please turn to slide 16 and 17 for discussion of portfolio quality. Loans and debt securities non-accruing interesting excluding Ciena were $147 million or 6.9% of the total portfolio value at December 31st as compared to $213 million or 8.5% at September 30. The decrease in non-accruals primarily relates to the sale of Wear Me Apparel and CR Brands, which were on non-accrual prior to the sale.

Loans and debt securities over 90 days delinquent excluding Ciena are $75.7 million or 3.6% of the portfolio value at December 31st, 2009 as compared to $26.9 million or 1.1% of the portfolio value at September 30.

The percentage of loans and debt securities on non-accrual and over 90 delinquent at December 31, 2009 is much higher on a relative basis as a percentage of the total portfolio as the size of the portfolio has declined from $3.5 billion at December 31, 2008 to $2.1 billion at December 31, 2009.

And with that I'll turn the call back to John.

John Scheurer

Thank you, Penni. Before I open the call for questions, I'd like to again reiterate the importance of each and every shareholder voting their shares. Please keep in mind that two-thirds of Allied Capital shares outstanding must vote for the merger for the merger to be approved and shareholders who abstain or simply fail to return their proxies will have the same effect as if they vote against the merger.

Our Board of Directors has unanimously recommended that you vote for the merger as we believe the merger with Ares is in the best interest of the shareholders. We thank you for your time and attention to this very important matter.

As I mentioned earlier, we will be holding a joint conference call with Ares on March 3rd and look forward to discussing the merger further at that time.

Let’s open the lines for questions, Stephanie.

Question-And-Answer

Operator

(Operator Instructions) Your first question comes from Greg Mason - Stifel Nicolaus.

Greg Mason - Stifel Nicolaus

Little bit more about the credit quality of your portfolio and how its performing this quarter, I know that non accruals decline but Penni as you mentioned that was largely due to Wear Me Apparel and CR.

What was the non accruals, would have been had those not been realized and just some commentary on the performance of the credit quality of the portfolio this quarter?

John Scheurer

I think in, answer to your question as a couple of things obviously you want to know some of the details but overall and I think we feel pretty good about the fact that we are, with the amount of assets that we’ve liquidated over the course of 2009 that, while you look at the percentage increase slightly still on a dollar basis particularly on the non accrual you were able to get the dollars down from $315 million to $347 million, if you tick out Ciena $213 million down to $147 million.

There has been, as Penni pointed out, I think we had two new loans that came on non-accrual during the fourth quarter, which had a slight affect. But on a net basis and with the differential between the two.

Penni Roll

Yes I think the easiest way to answer this for you is that two new loans that went fully on non-accrual this quarter had a value at December 31st of about $28 million. But I think the other way to look at the effect of the non-accruals is our portfolio yield that we compute for you, which is on Page 4 of the slide deck, is reflective of those non-accruals.

So the 11.6% portfolio yield of December 31st, 2009 reflects those additional non-accruals and that’s also effecting, in addition to these assets that were sold during the course of the quarter, the lower yield compared to 11.9% at September 30, about a 30 basis point decline in yield overall. And that 11.6% reflects those non-accruals and kind of gives you a sense of these portfolio yields perspectively, all other things being equal.

Greg Mason - Stifel Nicolaus

And could you give us a little color on the $150 million you sold on January, the mix of debt investments versus equity? And then of the fourth quarter investments that you sold, what was the weighted average yield on the debt portion that you sold in the quarter?

Penni Roll

The $150 million of proceeds of assets that were sold in the January timeframe primarily related to debt securities. And I don’t have the yield with me of what the weighted average yield of those are. We would have to get back to you on that.

John Scheurer

But it was primarily debt and it was – we needed a little extra cash to be able to make sure we could close the refinanced transaction.

Operator

Your next question comes from Chris Harris - Wells Fargo.

Chris Harris - Wells Fargo

First question here on the proposed Ares merger. I know in the past you guys have had some limited success in drumming up votes from your retail investor base and just curious as to kind of what processes or what you're doing maybe different this time to try to get shareholders to vote that maybe you weren't able to do last time or maybe if you can just kind of walk us through that process?

John Scheurer

Well, we have hired a proxy solicitor as Penni pointed out, to work on soliciting votes. And I think that's been done in the past. There's maybe a little bit more of a -- they realize that this is a very important as any other vote but they've been working very hard on soliciting the votes.

Beyond that we have meetings that have been setup. We are doing as I pointed out this joint conference call on March 3rd. There have been numerous meeting setup with the sides investors and as you know as well probably our investor base has changed somewhat over the past number of months particularly since the merger was announced.

So, we are doing everything that I think that we can do and I know that I was around and Penni was too, when Bill put together the five companies in 1997, which was an amazing feat.

And when you saw the amount of work that went into that and some of the strategies that were employed to be able to reach out to the shareholders during that period of time, I think we are certainly well aware of all of those and we are going to do everything that we can to make sure this happens.

Chris Harris - Wells Fargo

And then, with respect to your financing year, obviously the JP Morgan facility is, as you pointed out kind of a temporary facility. Do you think or are you in negotiations now with any lenders in maybe expanding your facility base or conversely, did you think that you could actually get that standalone debt facility exclusive of the Ares merger?

John Scheurer

Currently we just closed this other facility as you know in January, which was big scramble for us. Because we had a lot of work that we had to do in a very short period of time and the financing markets aren't exactly wide open for, particularly, non-investment grade borrowers.

And we also looked at many different financing alternatives. We are currently moving forward and happy with that facility, certainly for a number of months and I don't think we have any plans to go out and try and replace anything else and we are focused on getting the merger with Ares approved.

So, in answer to your question, we are not really doing anything else right now.

Chris Harris - Wells Fargo

Kind of along the same lines, clearly the pay-off of the private notes is a deposit for you guys. Maybe you can guide us a little bit here, is kind of your weighted average funding cost in the neighborhood of 6.5% now? Does that sound about right?

Penni Roll

I think we said the weighted average cost was around 6.7%. When you use this lower amount of $250 million of debt outstanding that we just use to refinance the other debt and now that was the cost of our public debt capital that is still out there.

Operator

Your next question comes from the line Jasper Burts – Macquarie.

Jasper Burts – Macquarie

Just looking at your asset sales last quarter for an $18 million divesture, you said $325 million of that was to Ares. I was just wondering and then the other $93 million of course.

I was just wondering what was the other $93 million and can we get some color on the $150 million sold post quarter and is that to Ares or is then just into the general market.

John Scheurer

The $150 million post quarter end was all to Ares.

Penni Roll

And another third party participated in that.

John Scheurer

Yes that right, one third party participated in one piece of that deal. And then the deals that were completed in the fourth quarter, let me say you are looking for, I think we announced the two big deal with the Allied, the senior debt fund and also the senior secured loan fund which were two pretty large deals in total that were close to $200 million.

Jasper Burts – Macquarie

With CR brands and Wear Me, were those sold to Ares.

Penni Roll

No.

John Scheurer

No.

Jasper Burts – Macquarie

No, those are sold okay.

Penni Roll

Yes, different transactions to other company.

Jasper Burts – Macquarie

Any major developments in some of your larger holding in Hot Stuff, Driven Brands, BenefitMall?

John Scheurer

No, I don’t think there is anything that’s of major note. I mean, no.

Operator

Your next question comes from Robert Schwartzberg - Compass Point.

Robert Schwartzberg – Compass Point

Good morning everyone. I have two questions. I just want to double check, is there going to be some sort of $50 million gain or boost to earnings in the first quarter because of the repayment of the private secured debt? That’s question one. And question two is, there was some sort of provision in the merger agreement that related to Ciena and Ciena’s valuation, and I was wondering if you could add a little clarity to that please.

John Scheurer

You want to take the first one?

Penni Roll

Yes, with respect to the refinancing, when we received the $50 million credit for repaying the private notes by January 31st that will cause a gain on the extinguisment of that debt. However there are other costs that we had capitalized as far as the restructure back in August of 2009, that were being amortized into interest expense over the life of that debt, that will trigger to then be fully amortized in as a loss on the extinguisment of that debt at the time.

And that loss on extinguisment of that eats up pretty much most of the $50 million. Now those are both kind of non-cash. Obviously the $50 million gain is a reduction in what we had to pay out to repay the debt in full. But the cash related to the loss on the extinguisment of debt all went out the door back in August when we did the restructure.

John Scheurer

Yes, and then on the second question, the Ciena question, you are right. In the merger agreement there was something called a special termination of that, which if the Ares board decided that there been losses related to Ciena which exceeded 66 and two thirds of its fair value, that would be a reason that they could do something and terminate the agreement.

However, since the date the merger agreement was signed, we have continued to provide all current information to Ares with regard to the Ciena. And to date we haven't heard anything from them with regard to any issues with it.

Robert Schwartzberg - Compass Point

Is it within the parameters with the fair value and everything that it needs to be in or is it just that they don't view it as an issue?

John Scheurer

We haven't heard – they haven't made any references to being an issue. An issue was certainly related to a merger issue at this point.

Operator

(Operator Instructions). Your next question comes from John Fay – Fay Investments.

John Fay – Fay Investments

Just wanted to touch base on the counter offered by Prospect Capital and why you're refusing to discuss what seems to be a superior offer at over a dollar more per share?

John Scheurer

Well, thanks for your question Jonathan. Our Board has continued to reaffirm its recommendation for the Ares merger that was announced on October 26th, 2009. The Prospect offer, for reasons we have enumerated in our letters and press releases of February 11th, February 3rd and our 8-K on January 19th, 2010, all stated the reasons that we didn't feel that the offer is constituted and were not reasonably likely to constitute a superior offer.

And our board would have to reach that hurdle first. They would have to decide that it was in fact a superior offer if we are to do anything else. So all those documents are publically available and you can go into our website and pull them up if you'd like to and go through any of the reasons.

Okay Stephanie if there is no more questions we'll sign off.

Operator

Your next question comes from Gary Bill - Private Investor.

Gary Bill - Private Investor

My question is, if everything goes through okay on this proxy when could we first expect that dividends will resume? I mean just approximate.

John Scheurer

There is going to be a conference call as I pointed out.

Gary Bill - Private Investor

I understand that, but I mean I am just curious. I mean you must know that by now that's not magic.

John Scheurer

An Ares dividend is depending on -- Ares board has to vote their dividends. And so it's really not for us to say. I mean I think we said, I said in our opening statements here that Ares has paid a quarterly dividend of at least $0.35 a quarter since 2006 and that’s as much as I can say, there is not I mean that’s really the Ares Board that defies when and announces and record dates and payment dates for dividend.

Gary Bill - Private Investor

I understand that but I’m just saying if the proxy went through and everything was signed okay, would it start for the first quarter, second quarter, third quarter assuming that Ares had dividends for all those quarters?

John Scheurer

Well, the first quarter will be over, right?

Gary Bill - Private Investor

Very close, yes.

John Scheurer

Yes, so that’s the reason we concluded whatever you can about that. I’ve kind of guided you as much as I can on the rest but its – as I said before, its Ares issue and they will address that. And their conference call is tomorrow, I would listen to Ares conference call tomorrow and I’d also listen to the conference call on March 3rd.

Operator

Your last question comes from Drew Figdor – Tiedemann Investment Group.

Drew Figdor – Tiedemann Investment Group

I wondered if you could talk about our choices here because fundamentally given all that you’ve done, the fact that your asset, 200% asset coverage ratio and the progress that you’ve made with the debt.

It seems as if the company could trade at these levels fundamentally, I wanted to get your understanding or opinion of why the Ares offers an appropriate value and what concerns you, and maybe go back to the dividend question, because I guess you mentioned you wouldn’t pay a dividend. So where would you set paying a dividend, at what point and help me understand that?

John Scheurer

Well, I think and Drew, I think we spoke on the phone the other day, anyway, didn’t we?

Drew Figdor – Tiedemann Investment Group

We did.

John Scheurer

We did. So we’re going to go over all this for everybody else. But –

Drew Figdor – Tiedemann Investment Group

Well, no, I mean the question on the call is given what you announced today for earnings in the (inaudible), I mean some things have changed since I spoke to you the other day to be fair.

John Scheurer

But anyway, as I said in our opening statement, as long as we have operating restrictions and are not paying a dividend, we would expect the stock will continue to trade below NAV. And we don’t have shareholder approval to sell stock below NAV. So our ability to raise equity is limited.

We made the comment about our dividends and what would likely to happen there. If you are asking for guidance beyond 2010, I don’t think that’s anything that we can do. We’ve given you as much guidance as we can for 2010, on dividends for 2010. But that’s probably as much as given. I say it again in here, all the reasons that we think that this is an attractive deal for our shareholders and for you as a shareholder.

Operator

At this time there are no further questions.

John Scheurer

All right, thank you very much Stephanie and thank you all for joining us today.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Allied Capital Corporation Q4 2009 Earnings Call Transcript
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