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Executives

Pete Deoudes – Director, Equity Capital Markets

Malon Wilkus – Chairman and CEO

Rich Konzmann – SVP, Accounting and Reporting

John Erickson – President, Structured Finance and CFO

Analysts

Rick Shane – JP Morgan

Troy Ward – Stifel Nicolaus

Andrew Brady – Marathon Asset Management

Michael Tanzer – DG Capital Management

Angelo Guarino – DTI

Ken Bruce – Bank of America/Merrill Lynch

Robert Alpert – Atlas Capital

Jonathan Bock – Wells Fargo

American Capital, Ltd. (ACAS) Q2 2012 Earnings Call August 1, 2012 11:00 AM ET

Operator

Good morning, and welcome to the American Capital’s Second Quarter 2012 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

At this time, I would like to turn the conference over to Peter Deoudes, Director of Investor Relations. Please go ahead, sir.

Pete Deoudes

Thank you, Laura, and thank you, everyone, for joining American Capital’s second quarter 2012 earnings call.

Before we begin the call, I’d like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical fact 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 their format. Actual outcomes and results could differ materially from those forecast 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 and 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 to by law.

An archive of this presentation will be available on our website, and the telephone recording can be accessed through August 16th by dialing 877-344-7529. The replay pass-code is 10015824.

To view the Q2 slide presentation that corresponds with this call, turn to our website, at www.americancapital.com, and click on the “Q2 2012 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 Calls” section to view the streaming slide presentation during the call.

Participating on today’s call are Malon Wilkus, Chairman and Chief Executive Officer; John Erickson, President, Structured Finance and Chief Financial Officer; Gordon O’Brien, President, Specialty Finance and Operations; Sam Flax, Executive Vice President and General Counsel; Rich Konzmann, Senior Vice President, Accounting and Reporting; Tom McHale, Senior Vice President, Finance.

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

Malon Wilkus

Thanks, Pete. Welcome, everyone, to our second quarter earnings conference call. And before I take you through our slides, I’d like to comment on the overall performance of our various business lines and capital management.

The performance of our portfolio companies and the diversity of our business lines and our focus on after-tax shareholder returns continued to increase shareholder value. We, like the market, were worried that we would underperform this quarter, because European Capital would be impacted by the volatility and stresses of the European markets and economy.

However, I am pleased to report that despite these pressures, which caused depreciation of our investment in European Capital, the overall performance of our aggregate business lines was quite good in the second quarter. This coupled with our capital management strategies leaves us well positioned for the second half of 2012.

American Capital LLC, our asset management company, at 806 million of fair market value, is now our largest portfolio company investment. After successfully serving the shareholders of American Capital Agency, and American Capital Mortgage by generating some of the highest returns in their industry, we helped raise a combined 644 million of equity for these two funds in the second quarter. We are pleased that we were able to grow our existing funds under management and look forward to increase the number of her funds under management overtime.

In addition, our portfolio companies, both in the U.S. and Europe experienced moderate revenue and EBITDA growth year-over-year. Our U.S. portfolio experienced unrealized appreciation and notably, European Capital’s euro denominated NAV held steady.

Our investment in European Capital was mostly impacted by a decline in the stock price to NAV of comparable public companies and negative foreign currency movements. So overall, we are pleased with portfolio company performance despite Europe’s troubles.

Our capital management strategies are also driving shareholder value. Over the past year we have repurchased 9% of our shares which has contributed $0.65 of accretion to our NAV per share. We remain committed to stock repurchase and dividend program and closing the discount to our NAV per share.

Additionally, our strategies have contributed – our tax strategies have contributed $1.70 to our NAV per share, $0.46 per share in the last quarter alone. Lastly, our cash management and debt reduction efforts have allowed us to continue to delever and derisk our balance sheet, improving the potential to refinance and lower our cost of debt and improve on its terms.

Many of you are aware of our recent 8-K filing concerning two potential new debt facilities and unfortunately, securities laws prevent us from commenting further on that announcement. Hopefully, these comments give a more wholesome picture of the American Capital’s performance in the second quarter.

Now let’s turn to the details starting with slide three. We had $0.29 of net operating income before income taxes per diluted share or $97 million for the second quarter. Our NOI was 58% – $0.58 after income taxes or $194 million.

That was comprised in part, $0.40 of tax benefit per diluted share, or 132 million related to change in tax treatment of our preferred stock dividends. And, we had a $0.07 per share or 22 million related to non-reoccurring income related to the removal of investments from non-accrual status.

The portfolio is producing 11% effective yield on a debt investment and 5.4% weighted average cost of our borrowing as of June 30th. And we produced a bottom line of $0.71 in earnings per diluted share or $237 million.

That, if you turn to slide four, brings our net asset value to $16.62 which is $0.91 greater or 6% greater than the first quarter of 2012, a 23% annualized growth rate. Its $3.40 higher or 739 million higher, 26% increase over the second quarter of a year ago, our stock repurchase plan, purchased through our stock repurchase plan, we purchased 9.1 million shares, that’s $85 million in the quarter at an average price of $9.34, that produced $0.20 per share accretion as of June 30, 2012. That’s equivalent to $64 million of additional retained earnings.

Now, if you move to slide five, I am going to start going through our product lines and the performance there. But I want to start with how our income, our total operating income has shifted over the years to become essentially more diversified. So, if you look in 2009 at the left-hand bar, you can see that 41% of our total operating income was coming from our sponsored finance investments and 45% from our one-stop buyouts.

A lot of income, coming off our one-stop buyouts is the debt investments that we have in the company’s that where we have majority ownership. But, fundamentally, we only had two sources of income, that’s our one-stop buyout income and are sponsored finance income. We had some other miscellaneous, but it added up to a total of 14%. But, you can see that’s changing, our sponsored finance income has been declining as a percent of our total, while our income coming off of our asset management Company in American capital LLC has been increasing.

And, we’ve also seen increases in our one-stop buyout income. But, today, you can basically say, we have four sources of income, I should’ve mentioned also that as the percent of the total income off our structured products is also been increasing.

So, we have 56% coming off of one-stop buyout, 60% up of our asset management company, 10% off of our structured or off of our sponsored finance investments and 10% from structured products. We feel very good about that improved diversity of income sources. And, I think it’s one of the reasons, we’ve been able to perform as well as we have over the last three years.

Turning to slide six now, I will start with our operating companies, the update on those starting with our one-stop buyouts. We had 2.6 billion of fair value there on a cost basis of 3 billion, we had 43 million of net unrealized appreciation for the quarter driven primarily by improved portfolio company performance, our companies in this segment had a moderate aggregate revenue increase and moderate adjusted EBITDA increase in the past three months year-over-year. And we continue to have very good performance overall, when you take into account the various substantial amount of income that we earn off of these investments as I noted on the prior slide.

So, they produced, since our – since 1997, 14% IRR on 11 billion of investments in this category. And, 19% IRR in the 4 billion of equity investments that we’ve done in this category.

Now, our asset management company and American Capital LLC is now worth to us 806 million at fair value. We’ve invested 127 million to make that happen, in the quarter we had 41 million of unrealized appreciation and that was driven by an increase in actual and forecast growth. And, today, our asset management company manages $95 billion of third-party assets, that’s $11 billion when you narrow it down to those assets that we earn income from, the balance is associated with levered assets. And that 11 billion of earning assets under management is up just shy of $5 billion from a year ago. So, we’re very pleased with how we’ve been able to grow our asset management company.

If you turn to slide seven, our sponsored finance investments are valued at 0.9 billion at fair value and on the cost basis of 1.1 billion. And we had 37 million of net unrealized appreciation for the quarter and in this segment, our companies had a moderate aggregate revenue increase and moderate adjusted EBITDA increase in the past three months year-over-year. Overall, since 1997 we had an 8% IRR on the $9 billion that we’ve invested in a blend of about a third senior debt, and a third mezzanine debt and a third equity investments. And I have to take that back, that ratio is probably not quite like that way. That would be the ratio of our one-stop buyouts. In our sponsored finance we’ve substantially less equity covered investments as a percent of our total investments in this segment.

Let’s turn to slide eight. With respect to non-performing in past-due loans we now have, we had a 46 million increase in those loans on the cost basis and 65 million increase out of fair value basis and the increase are comprised primarily of 54 million increase in new non-accruing loans due to weaker performance, 50 million increase due to appreciation of existing non-accruing loans and 4 million decrease from write-off of non-accruing loans. So, we will be happy to talk more about that in our Q&A if people have questions about it. But, fundamentally we view these changes as lumpy from quarter-to-quarter.

One thing I will point out is our non-accruing loans valued – are valued at 60% of cost and that’s up from the 50% of cost that they were valued at last quarter and essentially that’s the representative – representation of our expected recovery rate on these assets. So, we’re expecting to recover 60% of the cost basis of the three-year 400 million of non-accruing loans.

Let’s move to slide nine, on European Capital. We have – we wanted to know right from the beginning that our net asset value at European Capital is €650 million this quarter, while last quarter it was €653 million, so there was virtually no change in the net asset value of European Capital.

So, the reason for the 138 million of net unrealized appreciation for the quarter, was an increase, 98 million was an increase in implied discount to NAV due to a decrease in multiples of comparable public companies and an increase in the cost of the equity.

And then 40 million of the 138 million of depreciation was associated with foreign currency translation due to the weaker euro. So, today, at the end of the second quarter, we had European Capital value that 70% of its NAV, whereas last quarter we had a valued at 82% of its NAV.

We certainly hope that as Europe finds its recovery that we will be able to move back up to a higher percent of NAV and close the gap that we have it valued at. The performance for our assets in Europe through European Capital, we want to point out that 99.5% of our European Capital assets are invested in portfolio companies headquartered in countries with AA plus ratings are better. And, I would say most, generally most of our companies tend to operate mostly in the country in which they are headquartered so that’s not entirely true.

We expect continued portfolio company realizations and opportunities for new investments in Europe. I think most of you know we have a good credit facility there from which we can make new investments and we are trying to see whether we could find some undervalued assets in Europe, but there is not a lot of transactions occurring to Europe, in Europe at the moment.

Companies had an aggregate revenue increase and an adjusted EBITDA increase in the past three months, year-over-year so we are very pleased about that. I think most people would find that surprising. And, so we are seeking, making new investments in Europe as we can find the opportunities.

Moving to slide 10, we had 370 million of cash generation, in the second quarter of 332 million from realization, 39 million from net cash provided by operating activities and we ended the quarter with 306 million of cash and a 0.1 to 1 net debt to equity and we used 85 million of the cash to purchase 9.1 million shares that’s 2.8% of the outstanding shares at the beginning of the quarter at an average price of 9.34 which produced a $0.20 per share accretion to our NAV at the end of the second quarter. And, that’s equivalent, as I mentioned earlier to $64 million of additional retained earnings.

If you turn to slide 11, just to review the drivers of our growth, we’ve had 30% annualized growth since the third quarter of ‘09 when the GDP turned positive and everyone always wants to know how we can keep that up. And so, these are the components over the next couple of slides.

First of all, our share repurchase program, we believe, helps in that respect and we’ve done $260 million cumulatively. That’s 9% of our shares overall over the last four quarters, and that’s produced $0.65 in accretion, totaling net or equivalent to 207 million of additional retained earnings. We continue to find share repurchase program very attractive.

We’ve also optimized our tax assets and the potential to retain future ordinary and capital income as a C corp and today we have 700 million of net operating loss carry-forwards and 400 million of net capital loss carry-forwards.

Turning to slide 12, another source of potential growth of appreciation is the 2.4 billion of equity asset. We’re unique among the BBC’s to be so heavily invested in equities. And, we believe that can provide some great returns and those equity assets are fair valued at equity rates of return.

So, the way we are trying to grow those values is by supporting our portfolio of companies in their efforts of organic growth and accretive add-on acquisitions. We continue to improve operational performance of the portfolio of companies, quite focused on that.

We are always pursuing high exit multiples when we think it’s time to exit these companies and that we’ve maximized values. And we continue to grow, most significantly in the last few quarters, our asset management portfolio company where we’re expanding existing funds, raising new funds and leveraging our existing cost structure to grow assets under management.

And on an annualized basis, about 10% of the 204 million of annualized operating expenses before interest expense was reimbursed by our asset management portfolio company in the first half of 2012. So, growing our asset management company surged to also absorb some of our overhead costs.

If you go to slide 13, the – our investments in European Capital totaling $574 million, we believe we can grow that as well over time and we already mentioned that European Capital is to the most part focused its investments in northern Europe and the UK.

We have, at European Capital, 167 million of bond yield discount on performing debt assets and if those were repaid at cost, we would collect that difference – differential and we’ve collected over 760-some-dollars over the last two and a half years of that bond yield discount. So, we’ve been closing that gap over time, we expect to continue to do it as we collect those debt instruments.

And, we have 365 million of equity investments in Europe, which we have a fair value to grow at equity rates of return. However, I have to say that a recession year could instead lead to depreciation. And finally, let me just say that we have 245 million or our investment in European Capital is discounted 245 million from European Capitals on NAV. So, overtime, we would hope to close that gap.

So, let me end on slide 14, with our outlook. We do believe there’s an uncertain macroeconomic trend however, our portfolio operating performance has been moderately positive. We remain focused on our portfolio companies providing operational, financial support. We have a high priority to appreciate controlled companies by funding organic growth, add-on acquisitions and continued operational improvements. And we are seeking UniTranche second lien and mezzanine investment opportunities we think that has actually been improving both the volume and quality of opportunities.

We are continuing to pursue our American Capital one-stop buyouts; we think we have a very distinct advantage in that arena over some of our competitors. And we continue to repurchase shares or pay dividends depending on our share price relative to NAV. We’d love to turn our dividend back on as we hit our – as we move our price to NAV but, until we do that, we will focus on share repurchases. And finally as always we are long-term patient investor targeting high exit values.

And with that, let me open up for questions.

Pete Deoudes

Laura, if you can please open up the call for questions?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from Rick Shane of JP Morgan.

Rick Shane – JP Morgan

Hi. Thanks for taking my questions. I am intrigued by slide five in the transition that’s gone on in the business over the last three or four years. And clearly, strategy here has followed structure and in your opportunity what’s been going on within the business. You are now at a point where it looks like you’re going to have a lot more flexibility and a lot more opportunity going forward under levered relative to the peers under levered certainly to your history. When we look at slide five and especially the relatively small contribution today from what used to be your core business, is that something that we should expect to start to expand a little bit? I’m assuming given how you’re positioned now with the balance sheet actually a little bit of an economic slowdown and the widening of spreads would be viewed as an opportunity you guys would view that as an opportunity?

Malon Wilkus

You know we have delevered quite dramatically for the last three years. Reducing our debt $3.5 billion or more. And so, we have been kind of systematically exiting out of both our sponsored finance investments and are one stock buyout as the investments have naturally paid off on the sponsored finance side, or on the buyout side as it would make sense to maximize our investment through an exit.

But we’ve been utilizing the realization proceeds to pay down debt and we’ve been doing substantially less amount of investing. So that category or structured finance category has been declining, on the other hand in the One Stop Buyouts segment, you know, many other assets would substantially depreciate in 2009, those that actually didn’t depreciate where we had a lot of equity and in those where we had depreciation we also had a lot of equity. So they have been re-appreciating and continuing to appreciate, so both the combination of the re-appreciation and further appreciation has continued to grow that segment of the business. And so that’s a very good thing, of course.

Now, that we repaid so much of our debt, we feel like we were in a good position to maintain our debt level and make additional and more substantial amounts of new investments. And so we’re looking forward to the quarters ahead of investing in more sponsored finance opportunities. We have been aggressively pursuing them for some time, we have been making a few and I think we will have even more opportunity in the quarters ahead to make more.

Rick Shane – JP Morgan

Got it. So...

Malon Wilkus

But I have to say the market is very competitive out there and we’ll have to see whether we will be able to do a substantial volume in that area.

Rick Shane – JP Morgan

Got it. So fair to say that the shift has been driven by structure and then going forward you might have probably more balanced strategy in terms of what this bar chart looks like?

Malon Wilkus

Well, you know, I have to be careful about that. We have been working – we have a substantial sponsored finance team, they have been working for two years now in sourcing sponsored finance opportunities. And I have to say that we have been unhappy with the volume and of opportunity, the quality of opportunity and most particularly the pricing on opportunities.

Now, I do believe the volume and the quality might – may vary will be picking up and we get the sense for that and now August is always a slow period. But going into – prior to August, coming into August we thought that was happening and we’ll see coming out of August, how volumes look.

And on pricing, pricing is to some degree relative to one’s cost of capital and so we’ve been careful about how we’ve been pricing our opportunities. But I think we are in a good position to be competitive today and we’ll see whether that can result in greater volumes of investing in the sponsored finance side.

Rick Shane – JP Morgan

Great. I appreciate the time guys. Thank you.

Malon Wilkus

Thanks, Rick.

Operator

And our next question comes from Troy Ward of Stifel Nicolaus.

Troy Ward – Stifel Nicolaus

Great, thank you. And good morning. In the press release you mentioned you provided an extra $30 million investment into LLC to seek new funds. Can you just provide a little bit of color on maybe what asset class that 30 million is focused on and kind of a timeline of what you expect with your new funds in LLC?

Malon Wilkus

We are just not going to be prepared to comment on that. We have indicated for the purpose of developing additional funds, but – and that’s about all we want to say on that. Keep in mind American Capital LLC is a private company.

Troy Ward – Stifel Nicolaus

Okay. Very well. And then one quick follow up. One more question, the last quarter you commented on the BLT securitizations and how you expect I think one more to repay next year and then the final one to repay I think in 2014. Has the repayments from the portfolio changed any of that expectation of when those will be retired? And is it still your expectation that any significant restructuring has to occur after the securitizations are retired?

Malon Wilkus

Yes. I should say no, there hasn’t been a change in our view of the timing; it’s still – we expect the last one to be repaid. We think quite possibly as early as the first quarter of 2014. And, that hasn’t really changed for a couple of quarters and then with respect to any type of consideration for restructuring the answer is yes we think we would have to go through the retirement of all of those securitizations before there could be any difference, any changes to any kind of corporate structure.

Troy Ward – Stifel Nicolaus

Great. Thanks, guys

Malon Wilkus

You’re welcome.

Operator

And the next question comes from Andrew Brady of Marathon Asset Management.

Andrew Brady – Marathon Asset Management

Hi, can you elaborate on the increase in deferred tax assets given that that was increase in the book value?

Malon Wilkus

Rich, would you want to cover that?

Rich Konzmann

Yes. The biggest driver of that was a change in our tax accounting method of preferred stock investments that we did for the quarter, which was about $132 million of that, I believe it was $145 million increase in our deferred tax asset.

Andrew Brady – Marathon Asset Management

What change?

Malon Wilkus

So I’ll make a kind of the brief description of the change and how it runs through the financial statements. Historically we incurred dividends on our deferred equity investments on an accrual basis as ordinary income similar to account. We applied the tax accounting method change and we received that approval from the IRS during the second quarter, essentially accounting for our preferred stock investments more on a cash basis when they are actually paid and declared.

And, this change in method resulted in accumulative adjusted to our crude and unpaid dividends on preferred equity investments as previously recorded as ordinary income for tax purposes and that resulted in an increased and our net operating loss carry forwards as of June 30, 2012 of $338 million. And then once you get that increasing our net operating loss carry forward that increases our deferred tax asset by $132 million, which is a tax effected increase and we don’t have a valuation allowance on that because it increases our NOL and ordinary asset increases our deferred ordinary tax asset by that amount.

We had a corresponding change in our capital deferred tax asset but because we have a valuation allowance on that, we had no additional tax provision for that. So for the quarter, you will see, you will see we had $132 million one-time tax benefit recorded related to this change.

John Erickson

And Andrew, we gave disclosure on our first quarter too on page 40 of the subsequent events of this change.

Andrew Brady – Marathon Asset Management

Okay. And, it does point obviously European Capital and American Capital LLC you are not consolidated so it makes a little difficult to understand what sort of run rate revenue or operating income there may be from your true, core business of managing assets. And you have a stat on LTM, net operating income return on average equity at cost of 9% but what you think that number would be if you included those other money management subsidiaries which are very similar businesses, just in your consolidated operations? So, the revenues of those operations increased the true net operating income as reported?

Malon Wilkus

We don’t – we haven’t been normally disclosing that though recently we did a public filing that I believe include that information. So, the dividend run rate at American Capital LLC to American Capital, could you just remind me what that total, the dividend run rate?

John Erickson

I think it’s about $20 million for the quarter.

Malon Wilkus

For the quarter yeah.

John Erickson

Yeah.

Malon Wilkus

And, so, 80 for the quarter so...

John Erickson

For the quarter.

Malon Wilkus

Yeah, so it’s not actually and I would even call that what the run rate because more capital was raised in the quarter but, I don’t know if that answers your question?

John Erickson

And Andrew that agencies dividend or excuse me American Capital LLC’s to ACAS so it’s result are in ACAS numbers.

Malon Wilkus

If you were to consolidate American Capital LLC and specially the portfolio investment it really wouldn’t have any change on our NOI because we dividend out its net income each quarter to American capital. So, its net income is essentially included in our NOI, already consolidation of American Capital LLC wouldn’t change what we were reporting as our NOI.

Andrew Brady – Marathon Asset Management

Okay. So, on LLC again on the size of the dividend it’s obviously a very profitable enterprise so why would you need to invest another 30 million into them in order to grow if they already are generating such huge amounts of cash?

Malon Wilkus

Well that’s something we won’t comment on but in terms of how we would maximize values there, but I think our practice has been to dividend out all of our income and then make decisions about investments in it or its utilization. We could have, I suppose, retained some of the earnings but instead we dividend it out.

Andrew Brady – Marathon Asset Management

That’s an investment into the company or into a fund that they will manage?

Malon Wilkus

It was an investment into American Capital LLC, and as I mentioned earlier, we won’t comment on how we would use the investment.

Andrew Brady – Marathon Asset Management

Okay.

Malon Wilkus

Other than to say is for the purpose of trying to develop additional funds under management.

Andrew Brady – Marathon Asset Management

Right. You mentioned on that earlier press releases, so there was new CLO you guys have been working on first one in a long time CLO or business trust or whatever it is going to be called, is that intended to be a vehicle here that one or how you are thinking about that side of the business in the future where you’re looking to transfer assets off the balance sheet into that? Or, that would be new originations or just purchases of syndicated debt?

Malon Wilkus

We have – our structured products area, we are managing a CLO that we created in 2007. That CLO had initially asset funded into it that had originally been originated at American Capital. As well as then the bulk of the assets coming from just purchases in the marketplace of senior syndicated loans.

If we were to do a new CLO, the market probably is not conducive to mezzanine assets going into a CLO to a very any great extent, and so that would be difficult to do. In the future at some future date that maybe possible if so we were to generate mezzanine assets, but beyond that we really aren’t prepared to comment on the creation of a CLO.

We have indicated that American Capital LLC, the management company is working on the creation of several new funds that it would manage but we haven’t given any greater definition to that.

John Erickson

Laura, next question please?

Operator

The next question is from Michael Tanzer of DG Capital Management.

Michael Tanzer – DG Capital Management

Hi, guys. Great progress on expanding net asset value. Just have two quick questions. On NOI, when you look at interest and dividend income, what portion of that is actually dividend income?

And then the second part – the second question I have was in regards to your policy of returning cash to shareholders thinking about buybacks versus dividends in the past you’ve mentioned that you’ll consider issuing a dividend in the case where the stock price is trading above one times NAV per share. Now is that a hard and fast rule? Are you reconsidering issuing a dividend below that mark? Thanks.

Malon Wilkus

Michael, our view is that it is – when you are trading below book that it is much more efficient for, in terms of capital structure to be buying back shares then to use that same dollar amount for the payment of dividends.

That when you are trading below book you have just tremendous economics by buying back those shares and when you are trading above book, it makes sense to pay out income to the form of dividends.

And so we have a dividend and repurchase program that we mentioned earlier and have mentioned for some time that we would tend to use our net cash from operating activities to pay out a dividend if we were trading around book and then below book, we would tend to use it to buy back shares. And as you know we’re trading below book, so that is what we’re very focused on. We would love to convert that to the payment of a dividend, but it just doesn’t make economic sense for our shareholders to pay out a dividend when we were trading below book. It is just far and far more lucrative to our shareholders if we would have to buy back shares.

John Erickson

And Michael, to answer your question about the dividend income recorded for the quarter, we have $75 million of total dividend income recorded for the quarter which included $21 million from American Capital LLC, with the balance of 54 – approximately $54 million related to our preferred private finance for stock investment.

Michael Tanzer – DG Capital Management

Okay. Thanks. Just one quick follow-up on that, on the dividend policy of this. Supposed that you converted from a C Corp back to a – I guess BDC RIC and with the deferred tax asset that’s written up your balance sheet, will that go away?

John Erickson

Yeah, we disclosed that in our 10-K putting up from last year. If we were to convert back to a RIC all of – substantially all of the preferred tax asset would come off the balance sheet.

Michael Tanzer – DG Capital Management

So, when you’re thinking about trading as a multiple of NAV, do you take that deferred tax asset out?

John Erickson

Well, right now, we’re not a RIC, we’re a C Corporation, so we don’t think we would.

Michael Tanzer – DG Capital Management

Right. I mean, presumably to pay a dividend on the best cash basis?

John Erickson

We still pay a dividend as a C Corporation.

Michael Tanzer – DG Capital Management

Right. There with the more tax efficient if you were a RIC, right?

Malon Wilkus

Well, and not when we have these NOLs. So we’ve very substantial NOLs. We don’t expect to pay taxes, income taxes for sometime. And as long as that – as long as we have those NOLs, then in fact the RIC status doesn’t really gain us anything, in a sense we’re able to pay out all of our income as a dividend if we were – if we wanted to. Though, again as I mentioned, if you are trading below book, that doesn’t make economic sense. And – but it is entirely our option. We could pay out a dividend now. We could buy back shares now. It just makes more sense to be buying back shares.

Michael Tanzer – DG Capital Management

Okay. Thank you very much.

Malon Wilkus

Thank you.

Operator

And the next question comes from Angelo Guarino of DTI.

Angelo Guarino – DTI

Hi. Thanks for taking the questions and congratulations on a good quarter. Two questions. Can you give some kind of update on the progress, difficulty, successes of consolidating your controlled investments and where those regulatory changes are that are kind of pushing that?

And number two question, I am not going to ask a question about the debt refinance. But you did have a public – you have a PDF for your presentation and in that there was a corporate background slides, which I thought were phenomenal. Very informative and very well presented.

And there’s some color in there about the BLTs on page 19 and 20, where it’s really showing the BLTs having a potentially significant residual, positive residuals to ACAS. Are those – the way those are structured, are you projecting those potential residuals and putting them on the balance sheet, or do you have to wait till those close out before they are recognized at all?

Malon Wilkus

Angelo, we already have those on our balance sheet.

Angelo Guarino – DTI

Okay.

Malon Wilkus

So the BLTs, and when Angelo is referring to BLTs he’s referring to our on balance sheet securitizations, everything is on balance sheet, both the assets and the liabilities on the balance sheet, and so you already see in our NAV – in our book value, the value associated with the fact that there is more assets in those BLTs than there are liabilities.

Angelo Guarino – DTI

Okay.

Malon Wilkus

Okay. And for that matter you’re also seeing the income flowing through NOI on those assets that through a waterfall in the BLTs would come to our equity ownership of the BLTs.

Angelo Guarino – DTI

Okay.

Malon Wilkus

And then, when you talked about consolidation, please understand that we’re an investment company, and so we cannot consolidate our operating portfolio companies. So, a company like American Capital LLC, or any of the other operating companies that we own like Rug Doctor or AAMCO, we can’t consolidate those today as an investment company.

Angelo Guarino – DTI

Oh, I thought that you were working...

Malon Wilkus

An answer to your question there was a proposed – there is a proposed accounting standard that’s out there for investment companies that would make some changes in investment company accounting. And one of the items in that proposed accounting standard was to require investment companies to consolidate other controlled investment companies and that accounting standard is still being worked on.

And most recently, they haven’t issued an updated accounting standard, a proposed accounting standard, but based upon the minutes of the FASB deliberation it appears that they may be pulling out that requirement out of the proposed standard to require investment companies to consolidate other controlled investment companies. But it’s still in slots and we are still awaiting to see where the FASB is going to come out on that.

John Erickson

I remember past discussions of trying to get that variability out of the discount of ACAS’ NAV the discussion of the ability through this vehicle that of this regulatory change being able to not have to deal with that and basically roll that up. So...

Malon Wilkus

That’s right. So if there is an accounting change, we would probably be required and we would like to consolidate European Capital. And that would eliminate that discount to NAV that we have there. For the fair value of our investment relative to its NAV we would eliminate the discount.

Angelo Guarino – DTI

Right. So – but at this point you think it’s less likely, we’ve seen before that it was more likely and your estimate now is its less likely to be something –

Malon Wilkus

I think that’s probably accurate again because in the original proposed standard that they issued at the end of last year, there was a clause that would require that. They haven’t reissued that standard but based upon the FASB discussion in their board and the FASB meetings, it looks like they are going to probably take that provision out, but again it’s still influx so things could change, but I would say that it would probably be less likely than it was before.

Angelo Guarino – DTI

Okay. Thank you for taking the questions.

Malon Wilkus

Thank you.

Operator

And the next question comes from Ken Bruce of Bank of America Merrill Lynch.

Ken Bruce – Bank of America/Merrill Lynch

Good morning. My question relates to your comments surrounding returning back to more active investments style to your business and I’m interested in kind of what your assessment is of your origination platform? You had indicated just in terms of some disappointments in terms of the opportunities that you have seen in the sponsor finance business, but I’m wondering how much of that you think is a function of the market versus maybe the reputation of American capital, the view as to how strong you are as a counter party, any steps you are taking to improve that and any comments around that please?

Malon Wilkus

We have the largest balance sheet of any BDC in the industry and we have been performing, as I think you know quite phenomenally now for three and a half years producing great returns on equity. I don’t believe that there is an issue there. We continue to make investments, I think people understand that we are making substantial amount of investments, most of that’s been going into our existing portfolio companies. We continue to team up with sponsors to bid on – to support their bids on acquisitions or buyouts and it’s just that it’s a very competitive environment out there and most sponsors don’t win, of course. Right, by definition only one sponsor ends up winning a bid and the volume of activity is about in the second quarter seems to be about 20% of what it was in 2007, and yes you have the same number of firms chasing that business.

Mezzanine oriented sponsor finance firms such as BDC’s and other mezzanine firms. And for that matter there’s been a growing use of second lien and other financing techniques which is being funded in part by hedge funds and other sources. So, there’s a lot of competition out there. It’s just the facts and we will – I think will end up getting a fair share of that. We have a substantial platform; we have offices in Chicago, Dallas, New York, and Bethesda, originating our sponsored finance opportunities.

We – I think we have in the last several years been growing the dollar amounts that we are prepared to invest as well as trying to be even more flexible with respect to how we make the investment to be competitive with some of the other alternatives out there. And, I think it’s just a matter of time we will generate a decent business there.

But, it will depend more than anything else on the volume of opportunities. And right now, I said, it’s probably a low point though we do believe as I mentioned earlier that that’s picking up some.

Ken Bruce – Bank of America/Merrill Lynch

And I guess maybe as a follow-up to that, I mean, would you expect if in fact the economy continues to witness some of the slowing that it has recently that that would pick up in the near-term, or do you think it’s really just going to need to see better economic backdrop for that to return?

Malon Wilkus

No, the sense that we have is that things are picking up from a low point in the second quarter, and it’s because of summer time and particularly the low point in August that may not – you may not see a pickup in the third quarter, but I would be more hopeful about the fourth quarter.

Ken Bruce – Bank of America/Merrill Lynch

Great. Thanks for your comments.

John Erickson

And I should – you should note, we made a number of good investments this last quarter.

Malon Wilkus

Laura, next question please?

Operator

Yes. The next question is from Robert Alpert of Atlas Capital.

Robert Alpert – Atlas Capital

All Right. Thanks, great quarter. Quick question, just when you call up the insider selling on American Capital, it’s a lot of little small selling, while the company is buying back stock from insiders. Is there anything going on in terms of the windows, it’s no major officer or anything like that, it’s just something you knew, when you look at – when people look at the companies timing or is there a anything, or what do you think going on from that perspective that is why we see that now?

Malon Wilkus

I’ve never sold a chair and by the way I think in your comment, you probably accidentally said that we were buying back shares from insiders and...

Robert Alpert – Atlas Capital

No, no, no, just the companies buying back shares.

Malon Wilkus

That’s correct. That’s correct. So the company has been out buying back shares and I do believe that some employees are needing to sell some shares when they exercise options to be able to pay the taxes on those exercises and – but they’ve netted it out, but I think that it’s also the case that some employees have sold shares and maybe they have personal reasons for doing that. I don’t think it’s a – it adds up to a great amount and with respect to the Senior Management we are highly incentivized by equity interest, our Board of Directors are as well and I for one think our stock is at an incredibly low price and I am very keen on holding my shares.

Robert Alpert – Atlas Capital

Thank you.

Malon Wilkus

You’re welcome.

John Erickson

Yes. This is John Erickson, for example, the only shares I’ve sold have been tax shares as we have shares coming out of our – one of our deferred compensation plans that invested and so I retain all the net share, net of the tax payment, the shares that get sold just are sold under a 10b5-1 plan to pay the taxes.

Robert Alpert – Atlas Capital

Great. Thanks for the explanation.

Malon Wilkus

Yes.

Malon Wilkus

Next question.

Operator

Yes. Our final question will be from Jonathan Bock of Wells Fargo.

Jonathan Bock – Wells Fargo

Yes. Thank you for taking my questions, just first on the stock buyback versus new investments Malon and John, can you tell us how you’re looking at the investment opportunities versus stock and new investments and given the fact that at 62% discount or 60% of NAV today, I think your effective return risk-free on your stock is over 60%, can you maybe talk about how that plays into your view of making new investments in either the sub or one-stop buyout category which by their own very nature are not risk-free?

Malon Wilkus

We’re keenly interested in the stock buyback program. We think it’s incredible economic advantage for our shareholders and you pointed it out. But we’re also faced with a 382 issue that this is a provision under the tax code where if too much of our shares changed ownership hands that we lose our net operating losses or our tax deferred tax assets. And right now our deferred tax asset amounts to a very sizable amount of value for our shareholders. So, we most certainly don’t want lose that.

The test there is that number than 50% of shares can change hands or based on certain criteria over a three-year period. And our stock buybacks are included in that test. So, for instance, if we bought back $0.17 a quarter or 17% of our shares annually, we would exceed that amount by a bit over three years. And that would trip and we would lose our deferred tax asset which has – what is best on an NAV per share basis today?

Jonathan Bock – Wells Fargo

About $1.70, absolutely agree wouldn’t want to lose the DTA, nor would any of the current investors. I guess, though, if we’re looking at the potential for new credit facility, congratulations on that being announced and we’re certainly hopeful that gets close.

You also have $300 million of cash on the balance sheet which in our view could likely be used to maybe accelerate just a bit of your current buyback plans still well within that 50% of limitation that you mentioned, but kind of give an additional point to your first comment where you said you believe the stock is unbelievably cheap that would kind of be capital, I think at least the 300 million of cash could be used to point that out to the shareholders through the form of a may be a larger buyback?

John Erickson

Well, we appreciate that. I think we have indicated in our buyback plan that the discount to book that our stock is trading at is one of the factors that our Board of Directors takes into account and authorizing a share buyback plan.

And this last quarter was I think the largest amount of share buybacks where it equated to – I think it was about the largest amount of share buybacks that we did in the last four quarters and so we will pay very much attention to that share buyback and pay attention to the stock price.

We don’t otherwise try to comment on what our plans are in buyback shares other than to say that we have a stock repurchase plan approved and authorized. And we believe very much this is a great price to be buying back our shares.

Jonathan Bock – Wells Fargo

We do as well, and again congratulations on a good quarter. Thank you.

Malon Wilkus

Thank you.

John Erickson

Thanks, John.

Malon Wilkus

I should say a couple of things – a couple more things about the share buyback and that is, it’s very much driven by liquidity issues and both our plans and forecasts about new investments as well as our plans and forecasts about gaining realizations of the portfolio and then there tends to be a variety of other issues that come into play.

But, with that, I think we’ll come to an end on this call. We thank you very much for participating and look forward to talking to you again in another quarter. Take care now, bye-bye.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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