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Executives

Pete Deoudes - Director of Equity Capital Markets

Malon Wilkus - Chairman and CEO

John Erickson - President, Structured Finance and CFO

Gordon O'Brien - President, Specialty Finance and Operations

Sam Flax - EVP and General Counsel

Rich Konzmann - SVP, Accounting and Reporting

Analysts

Rich Shane - JPMorgan

John Hecht - JMP Securities

Greg Mason - Stifel Nicolaus

Andrew Shanahan - Knighthead Capital

Jasper Burch - Macquarie

Peter Quigley - Renvyle Partners

Joel Houck - Wells Fargo

American Capital, Ltd. (ACAS) Q3 2011 Earnings Call November 3, 2011 11:00 AM ET

Operator

At this time, I would like to welcome everyone to the American Capital shareholder Q3 2011 conference call. (Operator Instructions) I'd now like to turn the call over to Pete Deoudes to begin the conference.

Pete Deoudes

Thank you, everyone, for joining American Capital's third quarter 2011 earnings call. Before we begin the call, I'd like to review the Safe Harbor statement.

This conference call and corresponding slide presentation contain statements that to the extent that they are not resuscitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of American Capital. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in our periodic reports filed with the Securities & Exchange Commission. Copies are available on the SEC's website at www.sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law.

An archive of this presentation will be available on our website and the telephone recording can be accessed through November 16 by dialing 855-859-2056. The replay passcode is 16825455.

To view the Q3 slide presentation that corresponds with this call, please turn to our website at americancapital.com and click on the Q3 2011 earnings presentation link in the upper right-hand corner of the homepage. Select the webcast option for both slides and audio or click on the link in the conference call section to view the streaming slide presentation during the call.

Participating on today's call are Malon Wilkus, Chairman and CEO; John Erickson, President, Structured Finance and CFO; Gordon O'Brien, President, Specialty Finance and Operations; Sam Flax, Executive Vice President and General Counsel; Rich Konzmann, Senior Vice President, Accounting and Reporting.

With that, I'll turn the call over to Malon.

Malon Wilkus

Pete, thanks, and thanks everyone for joining us. This third quarter, I have to tell you, was a frustrating quarter for us, because we experienced very consistent net operating income, consistent with our last quarter. But as you'll see, we of course had depreciation which was driven predominantly by multiples and spreads in the industry as opposed to performance of our portfolio of companies.

So let's start at Slide 3. You can see the $0.19 net operating income per share, $65 million of total. We had a nice 10.3% effective yield on our debt assets. And just to remind folks, our cost of borrowing at American Capital on average is at 4.2%.

In addition, another element of the frustration is that we had a great quarter in terms of net realized earnings of $0.28, $98 million in total. A lot of that was driven by the $93 million realized gain that we experienced on the sale of Value Plastics, a very fine portfolio company, and I'm very pleased with those kind of results.

But as you can see, we had $1.34 in net loss, overall $464 million. That was driven by $562 million of unrealized depreciation, and that's primarily caused by depreciation at European Capital, two different Sponsor Finance loans, and at our asset management company, American Capital LLC. And I'll talk more about those in a minute. So our NAV is at $11.92. That's a 9% climb from the second quarter.

Moving to Slide 4 to talk about our $4 billion of value in our Private Finance portfolio, starting with our One Stop Buyouts, we had $100 million of net unrealized depreciation driven primarily by multiple reductions and offset by moderately positive aggregate adjusted EBITDA and sales growth.

So though we're experiencing in the last three months from a portfolio of companies, a nice growth. The fact of the matter is at the end of the quarter when the world was concerned with downgraded U.S. debt and with the sovereign debt problems in Europe that the world was struggling over, it caused values to drop and you can see the impact here on our One Stop Buyouts.

By the way, we are breaking out in our static pool analysis an additional data on our One Stop Buyouts, and you could see there in the back the presentation of $3 billion of aggregate total sales in our company and a total of $700 million of aggregate adjusted EBITDA. And we have about 48,000 employees in these companies.

Moving to our Sponsor Finance and Direct Investments, we had a $103 million of net unrealized depreciation due primarily to the material depreciation of two investments and actually the bulk of that in one. And I want to point out that it was just entirely company specific.

There was really nothing about the economy that caused this depreciation to occur. The company that we've had in our portfolio for a long time, we used to own the company. We executed the wonderful gain. We continue to provide mezzanine in financing to a great sponsor of the product, one of the largest in the industry. And yes, the company experienced some very company specific issues that caused the substantial depreciation. And we don't think it's reflective of rest of the portfolio.

In our Private Finance business, we had $260 million of realization, a $133 million from principal repayments and $127 million in the sale of equity investments. And then we had a $44 million of net realized gain, and again that was driven by the $93 million realized gain in Value Plastic. And by the way, that was a 31% above the prior quarter's valuations.

Moving to Slide 5, we made a $128 million of new investments in the third quarter. As you can see it's about $73 million of that, within seven portfolio companies. And I'm pleased to say that only $2 million of that $73 million was in companies that were in distress. So the vast majority is through very positive reasons for growth in acquisition financing.

We invested $40 million in the American Capital Mortgage Corporation where we supported the IPO of NASDAQ Exchange under the single MTGE need. We're very pleased about taking American Capital Mortgage public. We also invested the $40 million in support of that effort. So we now have $200 million of equity cost in American Capital Mortgage.

And then finally, we made a $15 million investment in our Sponsor Finance business. In a great company and actually we've rated to do that in, after the spreads had widen nicely partly as a result of course of as all of the developments in Europe and also some in U.S.

Let's skip Slide 6. We'll go to Slide 7. You could see our past due and non-accruing loans decline by $82 million on a fair value basis. They increased $50 million on cost basis. When you look at the detail of that, we had three new non-accruing loans offset by two loans coming off at non-accrual and also exiting three companies or writing off three companies that have long ago been depreciated.

So we again feel like looking at the details here that our portfolio companies are performing reasonably well despite the kind of depreciation we're experiencing.

Let's go to slide 8 to talk about the $700 million of value that we have invested in European Capital. Here's where we saw the large depreciation, $300 million, and $228 million of that was driven by implied discount to the NAV. And that was as a result of a decline in multiples of comparable companies, companies that are extremely comparable to European Capital.

And if you look at what occurred to them from the end of the second quarter to the end of the third quarter, and I think you can see why we felt required to depreciate European Capital to this extent. In addition, you can just look at foreign currency translations from the end of the second to the end of the third quarter, and you can see again we added $52 million of depreciation resulting to that.

I might point out that if we were to consolidate European Capital on our balance sheet, you would see none of this depreciation. There was a little bit of depreciation at portfolio companies of European Capital, but it was quite modest and resulting also from declines of comparable public companies.

Moving on to the outlook of European Capital, if we call it into the second quarter, we refinanced the company and we now have capital to make new and good investments. We expect in addition that there will be substantial liquidity just like we're experiencing here at American Capital. We've been experiencing some very fine liquidity in the European Capital. And that also allows us to reinvest and turn that portfolio to some very nice spread business.

The 53 portfolio companies there had a slight aggregate sales increase and slight adjusted EBITDA decrease in the past three months. But again looking at the actual portfolio performance, we're feeling good about what we're seeing despite all of terminal of that you read about in the papers having to do with Europe. So this result we're looking for, that's an opportunity there ranging from EUR40 million to EUR100 million in One Stop Buyouts.

Moving to Slide 9, as you know, we had $290 million of values invested in our asset management company, American Capital LLC. We have grown the assets under management there to $51 billion. When you look at the assets or what we call our earning assets under management, which would be placed between the equity and those funds that we're managing, and it's off of the equity, the earnout fees, we increased our earning assets by $300 million in the second quarter and $4 billion over the last year.

So we've really done a terrific job of growing our asset management company. Despite it, the comparable company declined. In fact, in the asset management business, multiples declined about 20% from the end of the second quarter to the end of third. And in addition, for right reasons, we had a reduced forecast in our growth mostly associated with some of the concerns that developed from SEC letter that questioned whether these would be able to operate outside The Investment Company Act.

We've been very pleased that concerns about that seem to be passing aside somewhat because we were able to do a $1 billion equity offering in agency in October. So that was evident that that could be achieved in the September, but indeed we were very successful and very pleased about that. In addition, as I already mentioned, we were able to take public American Capital Mortgage, and all that serves to enhance the value of our asset management company.

Turning to Slide 10, just to review our capital management for the quarter, we had $310 million of liquidity and we used $123 million of that to repay securitized debt. And I think most you've realized that that's required. It's not something under our control. The payments just go to repay that debt.

We used $117 million in new investments, as I've already mentioned and then $75 million to repurchase the shares. That left us with $187 million of cash at the end of the quarter. And if we are levered then at 0.4 to 1 debt-to-equity at the end of September, is we feel that that's a very good level of leverage and a good way to protect the balance sheet into these kind of uncertain times.

But just to remind folks, we don't have any scheduled amortizations until the end of 2013 for that debt. You would see our stock repurchase for the quarter totaled 9 million shares, 75 million in total $8.21 a share, as a 31% discount from the September NAV, and that the $0.10 accretion to our NAV at the end of September.

Turning to Slide 11. I don't need to review the policy, which we've already announced for our stock repurchases, other than to say that our policy generally is that we would be doing stock repurchases, when our stock is trading below NAV and dividends when it's trading above. I don't know about the rest of you, but I would love to get those dividends. And so with everyone we just hold their shares, not sell them, let us trade up to book and there about we'll start paying this amount in dividends.

Turning to Slide 12. To review the potential sources of NAV growth, of course we've just experienced a quarter of decline in our NAV. But since the U.S. has come out of the recession and we have positive GDP growth, and we've earned $1.6 billion of net earnings. And felt like it's necessary to remind folks about that. And we're in a position that we potentially retain a portion of our ordinary and capital income. And we do believe, we can also improve our NAV and take advantage of our stock price at such a low level, which we think is bargain by buying shares back and that would be felt accretive at these levels.

In addition, we think there is a potential of narrowing the discount, we have to European Capital's NAV. There is $287 million of that discount. And we think there is a potential of earnings, a very nice appreciation on the $2 billion of equity that we have in our portfolio at American Capital and European Capital. If the economies in U.S. and Europe continue to recover, we think we will be able to pickup some nice appreciations, as a result of our equity stakes. And then finally, there is the bond yield discount of about $223 million of performing debt assets that if we just collect those at our cost basis, we'll pickup that $223 million of appreciation.

So finally, before we open it up for questions, let me turn to Slide 13, and just we view our outlook. We do think there is some uncertain economic outlook in the macro environment today. However, we also were looking at our portfolio and seeing performance and it's moderately positive. So we remained focused on our portfolio companies providing operational financial support.

As you can see in our data here, we've continued to support in terms of organic and add-on acquisitions. We're getting a good number of those accomplished. We're very pleased about that, both here in the U.S. and in Europe. And we're out seeking new investment opportunities, our UniTranche, second lien, mezzanine investment opportunities and/or One Stop Buyouts. We're very actively in the market and we expect to be able to recycle our assets into some good investments.

Finally, we are either repurchasing our shares or paying dividends, as I mentioned earlier. We think that's quite accretive for our shareholders. And last, we are long-term and patient investor. And with that let me open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rich Shane from JPMorgan.

Rich Shane - JPMorgan

When we look at the topline, the interest income and the fees income are, at least in the short-term going different directions. Interest and dividend income was down about $14 million sequentially. How much of that is attributable to new non-accruals? And how much of that is a function of just the weighted average earning assets being down?

John Erickson

Let me check that.

Rich Shane - JPMorgan

Great. And John, as you're looking on that, I'll go ahead with my second question, because it may send you back to your notes as well, I apologize. The other part of this is that the fee income was up about $2 million quarter-over-quarter. When we break that down historically, there is a component of it which is from non-affiliates and a portion that is from controlled investments. And the control contribution has been increasing steadily. What was the mix this quarter? I know that the control stuff is basically completely recurring. The non-affiliate is that a more volatile measure or is that something that we should also see as a steady metrical as well?

John Erickson

Let me look at it as well. The non-accrual number was $11 million into interest income this quarter. So we lost $11 million from reversing on non-accrual.

Rich Shane - JPMorgan

And is that reversing previous interest income, so that the impact will be lower next quarter? Or will that have an $11 million impact?

John Erickson

That stuff is reversing out prior period income that we recognized. So it shouldn't have any run rate impact on the quarter. So if there were no new non-accruals next quarter, you'd have $11 million more of your interest income than you did this quarter on a run rate basis.

Pete Deoudes

Rich, we'll look up to your answer on the other question and we'll pass it along. So I'd like to ask everyone to limit themselves to one question and one clarifying question or follow-up question. If you have further question, please re-queue, so we can get through the list. Thank you.

Operator

And our next question comes from John Hecht from JMP Securities.

John Hecht - JMP Securities

Malon, you mention you're somewhat comfortable with the current balance sheet leverage at 0.4 to 1 and considering the portfolio total net debt to adjusted EBITDA level. And then you guys have expressed your capital management policy with respect to NOI. I'm wondering have you guys thought of what would you capital management policy be for a period of access to repayments to realizations. Assuming that you weren't able to redeploy that capital into the market fast enough?

Malon Wilkus

Well, first of all, I do think we have opportunities that are quite attractive that would allow for a capital raised that we met our realizations. But I have to tell our stock is at a price today that is extraordinarily attractive. And so we would certainly be interested and capable of moving, since we're going forward, the stock repurchase plan, the net cash provided by operating activities into a current period to take advantages of the stock price that is low as it is today, and then practically less in the future. So we view this as a cumulative plan really starting in the second quarter of this year.

John Erickson

But also we've said before, we're even paying down our debt is also an attractive option. I think that we were at a comfortable leverage level. I think that if you look at our leverage as an advance rate against just our debt asset, it's still probably about 57% range. And so we certainly have room to continue to delever as well.

And so depending on the stock price, as Malon said, if the stock price is very attractive that's a great use of capital as this stock price is higher. Then there is opportunity to continue paying debt down as well.

Malon Wilkus

We mentioned, I think on the first slide that our average cost of borrowing weighted average basis is around 4.2%. You do know that the $700 million to be held outstanding on the term loan is however substantially more expensive. And so on a blended basis it's 4.2%, but it's the incremental now. So we could actually get a very fine return and a riskless return about paying down that debt. And move it closer to the day when we could replace that debt with less expensive debt.

Operator

Our next question comes from Greg Mason from Stifel Nicolaus.

Greg Mason - Stifel Nicolaus

I want to talk about the marks this quarter. If you exclude the big mark from ECAS and American Capital LLC, and the one company specific credit issue. It looked like the portfolio assets declined by maybe 2% to 4%, which seems a little light relative to what the debt and equity markets did this quarter. So could you talk about, what you were seeing in your portfolios and what metrics you use as your fair value for the rest of your assets?

Malon Wilkus

We have a set of comparable companies for virtually every portfolio company we have including our asset management company and European Capital. We track those. We evaluate those every single quarter. We review those with our orders. We think very deep into what's gong on in those companies and how our companies are comparing to the public comps.

And as you know, we do this kind of cash flow, public company comparables and comparable transaction analysis. The middle market did not experience nearly the decline, as the public market did in term of multiples. So nonetheless, we still were very much impacted by the decline in public company multiples.

And you can see that I think on this slide, 57 or so. But in the middle market we're not experiencing as much and if they experience this in American Capital LLC or asset management company, the multiples there decline quite dramatically. But on the other hand American Capital LLC has far more of its assets as permanent asset under management versus a lot of comps. And so that comp mitigates against some of the decline in multiples.

Jon Erickson

We had some companies in the portfolio that are appreciating during the quarter, some of them appreciated nicely. So there was some good underlying performance in some of those companies. You know that multiples were down for this company. I would also remind you that in October we sold two companies from the portfolio, both of those companies were sold at multiples higher than where we had them marked.

Malon Wilkus

As I mention in the presentation, EBITDA has improved at American Capital. They only declined in slightly at European Capital. And so that helps to offset multiple declines.

Operator

Our next question comes from Andrew Shanahan from Knighthead Capital.

Andrew Shanahan - Knighthead Capital

I just had a quick question. If our portfolio companies in Europe are performing so well, why not fully consolidate ECAS to eliminate the volatility we get from using the comparable BDC multiples to value it?

John Erickson

That's a great question, we would love to do that. Unfortunately at time we do the accounting for it, the FASB and SEC guidance said we could not consolidate it. We thought that we'd have a direct dialogue with the SEC on. Just recently the FASB actually put out a draft release that actually is trying to converge U.S. GAAP with IFRS. And as a part of that process they would actually go back to saying that we have to consolidate ECAS.

So that's actually potentially in the work. It's something that we'll be monitoring and obviously at appropriate time we would be providing more disclosure around. But we've declined consolidating at this point and it's something that is really just driven by GAAP.

Andrew Shanahan - Knighthead Capital

Is that something that the SEC has put up for a comment yet or is it kind of in the pre-comment discussion period?

Pete Deoudes

Currently the FASB had issued exposure draft on accounting by investment companies. This was about a week ago and it's up for comment period right now. And that comment period ends in the beginning of January. And the expectation would be shortly thereafter they would issue a final accounting guidance on that.

John Erickson

Which the best guess would be applicable for 2013.

Pete Deoudes

They haven't provided any kind of guidance in terms of any types of implementation day or an adoption day.

John Erickson

Or voluntary adoption those type of things.

Pete Deoudes

They won't provide that until. They actually issue the final guidance.

Operator

Our next question comes from Jasper Burch from Macquarie.

Jasper Burch - Macquarie

I was hoping we could drill in a little bit on the valuation of the asset management franchise. Just looking at it, I guess how do your growth assumptions change? Can you give us a little more color on what valuation you're basing it on? Is it really just multiples on AUM or versus cash flows? What are some of the closer comps that you're looking at?

Malon Wilkus

Let's start with the forecast, the projections for the company. As you can imagine, if this is a company that manages other funds and the fee income is driven by increases of the equity in those funds. And so to the extent that, we can grow those funds that they have good performance, it's going to track more capital, that's the very good thing for the management company.

So we have a five-year forecast for that growth. And these things happened in the marketplace or in these individual funds that we've changed that forecast. We make the change, we use the same discount rates, we would have a decline or an increase in fair value of the company.

But when the quarter ended, so right around that time the SEC came out with a release asking for feedback, as to whether or not REIT should be viewed as being exempted from the 40Act. And as you know, the largest asset that the management company is managing is our agency REIT. And so the question of whether or not, given the subject of the 40 Act was a big, big deal at the time.

Since then there has been a substantial recognition that growing an NSE like American Capital agency would still be a good thing to do under the circumstance. But at the time, right at the end of the quarter, that was very uncertain. And so that had an impact on our forecast.

On the other hand, offsetting that impact was effectively took public American Capital Mortgage, and that was actually accomplished. So that was a good thing to the extent that it wasn't in our forecast already. If it had already been in our forecast, it would not have the big impact. And so we take things in and out of forecast all time. And that's true for all of our portfolio companies, determining their fair value.

In addition, then we do public company comps. In this industry, there is a good number of public asset managers. Many of them are mutual fund groups, and others are alternative to asset management companies. In both cases, there was a huge decline in their multiples from the second quarter till the end of the third quarter. And we are not going to comment on what the exact subtle comps we use, but you can just overlook for yourself what happened.

So you can debate what our absolute value is of the company. But if you compare it quarter-to-quarter, I think you can see why the change occurred in our valuing of our asset management companies.

Gordon O'Brien

I would say you have to keep in mind that one of our challenges, we have to put ourselves in the shoes of a potential buyer of these assets. So with the value that we have today, I wouldn't want to take an offer or hold an asset to sell it outside. I think there is a lot of potential value. I think there's opportunities to not only grow the assets under management in our existing platforms, but to add more to it.

But when we're doing these forecasts and the forecasts are as of September 30, we have to think about what the buyer reasonably think about and expect for future capital raises. And obviously when you have clouds over the market, it would taint a buyers' view as to what they would pay for that point in time.

We personally believe that there is a lot more future value there that we're going to work forward on creating more value and getting the value higher.

Malon Wilkus

I think it's fair to say this is our fastest growing portfolio company in terms of value. And so we are very keen on it and extremely focused on it. And we do hope that over time, we could then hope that this should be one of the highest value to the asset management company. But there is a variety of reasons, particularly concentration issues, that this would not necessarily be determined as the highest multiple in the industry.

John Erickson

And in terms of the actual metrics, we typically look at all the different valuation metrics, assets under management, revenue multiple, EBITDA multiple. Generally we end up selecting EBITDA multiple, but that's not 100% the case always, but EBITDA multiple is usually the one we select.

Jasper Burch - Macquarie

I think there is consensus that agency reach will be exempt from the 40 Act and also with the capital raise, does that mean we should expect some meaningful reversal of this quarter's decline?

John Erickson

Well, I guess you also have to project where the multiples will be. If you assume the multiples are flat, then you would say that probably the outlook has gotten more positive today.

Operator

The next question comes from Peter Quigley from Renvyle Partners.

Peter Quigley - Renvyle Partners

I just have a question about the American Capital Mortgage. Are you buying paper like the other company or are you going to be directly lending?

Malon Wilkus

That would really be a question for our shareholder calls for American Capital Mortgage.

John Erickson

They actually just held their call and have a good description out there on the papers that they have purchased so far as of September 30.

Malon Wilkus

And I think you go to the American Capital Mortgage website and listen to that call if you'd like.

Operator

Our next question comes from (Angelo Drerno) from DTI.

Unidentified Analyst

I have a follow-up question regarding the consolidation of ECAS. It was my understanding from a previous call that one of the major factors that was preventing that was if that was consolidated, you would be tripping RIC tests. Or there was something about your RIC status that prevented having overseas assets. So if you are able consolidate that, will that be an impediment to re-RIC-ing?

John Erickson

First of all, it's not with the SEC's view on some of these topics would be, because the RIC test is a tax test, not a GAAP test. So the consolidation or non-consolidation of ECAS from a GAAP perspective has no impact on the RIC test which is defined by tax accounting rules. It just wouldn't any part to it, because under tax accounting rules, ECAS would not be consolidated for tax accounting.

Gordon O'Brien

I was thinking the BDC test you would have some potential foreign asset.

Unidentified Analyst

So what's the RIC test that was a problem with the BDC test?

Gordon O'Brien

Potentially we would have to have dialogue with the SEC and clarify the situation. It is something we have to work on in it in conjunction with the change in accounting.

Unidentified Analyst

So it's not sufficient that this new ruling come through you might have to do some extra?

Malon Wilkus

Well, no. I think if you just consolidate it on the fair value on the assets at European Capital, I think we would not trip any BDC rule.

John Erickson

The rule is also interpreted on an unconsolidated basis. So regardless of how you do your accounting, the rule may be applied on a different basis.

Unidentified Analyst

So it's probably won't be a problem? I guess I'll walk away with it.

Malon Wilkus

I think it's fair to say that it's probably not a problem.

Operator

The next question will comes from Joel Houck from Wells Fargo.

Joel Houck - Wells Fargo

On the One Stop Buyouts, the $100 million of net unrealized depreciation, was that spread generally and ratably across the portfolio by a couple of specific movers in the quarter?

John Erickson

I wouldn't say it was grey lining. There are some that were up and some that were down. We'll take a look, but I think there were some ups and some downs. So I think it's fairly broadly distributed.

Joel Houck - Wells Fargo

There was not like one big down mover?

John Erickson

We're not thinking of one big one, no.

Operator

(Operator Instructions) And we do have one follow-up coming to queue from Jasper Burch from Macquarie.

Jasper Burch - Macquarie

Just looking at how you are managing your tax liability and your ability to sell assets at a loss in order to offset possible realized gains and income, I was just wondering if you could talk to your outlook on that going forward and how about the mixes with your desire to pay dividends. And also I was a little bit surprised on Slide 12 that you are talking about possibly becoming a C corp.? Just any commentary will be helpful.

Malon Wilkus

Keep in mind the tax that doesn't impact our ability to pay dividends is only if we're required to pay dividends to have the RIC status. But as we said with the current program, we actually could, in theory, be paying dividends if the stock price was high enough even though we're not ready at this time. So we did become C corp last quarter for tax purposes which we had covered.

And I think you can go back to the second quarter feeling you'll see in the third quarter to get a sense of footnote and discussion on the tax positions. So we do have both the ordinary and capital law tax position today that is sheltering future capital gains and future ordinary income. And we'll be updating that disclosure every single quarter. So you will be able to follow it right there.

Operator

We've another follow-up from the line of John Hecht from JMP Securities.

John Hecht - JMP Securities

A quick follow-up guys, Malon, you did referred that you're evaluating One Stop Buyouts and unitranche deals domestically and some attractive opportunities in Europe. Can you give us a little bit more color in sense of the volume that you're looking at or the size of the pipeline, maybe what pricing is across the various parts of the capital structure there?

Malon Wilkus

If you look at Slide 6, you could see what we've actually been doing, and I can tell you at the end of the last quarter, these have widened and that's really created a number of good and sponsor finance opportunities for us. The M&A market however has declined quite considerably since the middle of the third quarter.

We would think that that is going to be return and my guess is it will return back up to the levels that it was in the second quarter by this fourth quarter. And that means there will be some good opportunities. And we are working hard. We have a nice stream of opportunities that we are looking both on the Sponsor Finance side. On the buyout side, it's less. I would have to say there has been fewer opportunities that we find attractive.

And I should remind people too to take a long time to do either of these two investing. For the Sponsor Finance, it's usually about two to four month process. And for our Buyouts, it's usually a five to nine month process. And at this point, we have not proved the Buyouts. So it will take us a while before we get to our first Buyouts, while we close less than 1% of what we were. Closing rate is very low.

John Hecht - JMP Securities

And would you say you're looking at the opportunities, you're looking within the portfolio or is there a mix of new opportunities you're get along with activity within the portfolio?

Malon Wilkus

No, both, outside and within the portfolio. But we have to find a lot of good opportunities within the portfolio. We've been particularly doing a lot of small add-on acquisitions for the portfolio company.

Operator

Your next question comes from Greg Mason.

Greg Mason - Stifel Nicolaus

To follow up on the ordinary deferred tax asset, last quarter in the Q you had $465 million of ordinary deferred tax asset. But, John, you have talked in the past about the non-accrual loans that cost currently in your portfolio, the difference between that and the fair value could be additional, kind of ordinary deferred tax losses that could be harvested. Is any of that amount in the $465 million that was in the Q last quarter or should we look at plus-$465 million of that amount on Slide 54.

John Erickson

It would be $465 million-plus due depreciations, which you would think about. And it doesn't always time with the depreciation. We have loans that depreciate this quarter that it could be settled for us. You make the determination for tax purposes, then it would be a loss. So it is circumstance-specific.

Gordon O'Brien

Greg, we'll be filing our 10-Q in a couple of days and you'll see all the data with respect to that.

Greg Mason - Stifel Nicolaus

Does it have to be realized forward to go into that tax loss? For example, on Slide 54, you've got $569 million of non-accruals that cost $173 million of fair value. So if assuming you exited those at some point at fair value, that'd be almost $400 million of realized loss. Is a portion of that already in, whatever number you have put in the ordinary deferred tax asset in the Q?

Gordon O'Brien

To answer your question, generally speaking, most of that would be an ordinary loss. Certain loans that could be considered capital of ordinary nature. But in our deferred tax asset you see in the 10-Q from last quarter, it includes the income, but not the tax. But we haven't forgotten because of non-accrual. And it also includes unrealized depreciation on some of our Private Finance loans that if depending upon how they're exited could be ordinary loss write-offs.

John Erickson

It's complicated answer, because they are all facts of circumstances that drive whether it's ordinary or capital. And there is different tax under which we are taking this reduction.

Malon Wilkus

Patrick, you can go ahead and close the call. Thank you.

Operator

And at this time, we thank you for joining us for today's call. You may disconnect at this time. Thank you.

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