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Executives

Amanda Cuthbertson - Director, IR

Malon Wilkus - Chairman and CEO

Rich Konzmann - Sr. VP, Accounting and Reporting

John Erickson - President, Structured Finance and CFO

Samuel A. Flax - EVP and General Counsel

Steven Burge - President, North American Private Finance

Ira Wagner - President, European Private Finance

Analysts

Jim Shanahan - Wachovia

Faye Elliot - Merrill Lynch

Troy Ward - Stifel Nicolaus

Vernon Plack - BB&T Capital Markets

Sanjay Sakhrani - Keefe, Bruyette & Woods Inc.

Jim Ballan - JPMorgan

Adrian Day - Adrian Day Asset Management

John Neff - William Blair & Company

John Stilmar - FBR Capital Markets

Matthew Howlett - Fox-Pitt Kelton

American Capital, Ltd. (ACAS) Q2 FY08 Earnings Call August 6, 2008 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the American Capital Shareholders Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions].

As a reminder, this conference is being recorded. American Capital has asked that we notify all callers that a live webcast is available free of charge at www.americancapital.com. If you do not plan on asking a question today and have access to the Internet, please take advantage of the webcast.

I would now like to turn the conference over to our host, Amanda Cuthbertson, Director of Investor Relations. Please go ahead.

Amanda Cuthbertson - Director, Investor Relations

Thanks Mary. Good morning and thank you for joining American Capital's second quarter 2008 earnings call.

Before we begin, 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 replications 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 forecast due to the impact of many factors beyond the control of American Capital.

Certain factors that could cause actual results to differ materially are included in the risk factors section of American Capital's most recent 10-K and 10-Q and 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.

An archive of this presentation will be available on our website, www.americancapital.com and the telephone recording can be accessed through August 20th by dialing 800-475-6701, the replay passcode is 952932. To view the Q2 slide presentation, please go to our website and click on the Q2 2008 Shareholder Presentation link in the upper right corner of our homepage. If you have any trouble with the webcast during the call, please hit F5 to refresh.

And with that, I will turn the call over to Malon Wilkus, Chairman and CEO of American Capital.

Malon Wilkus - Chairman and Chief Executive Officer

Thank you, Amanda, and thank you everyone joining us. I would like to introduce our team here. With me is Ira Wagner who today and now is President of European Private Finance and also continues to be President of European Capital Financial Services. John Erickson is with me and is President of Structured Products and continues to be our Chief Financial Officer. Gordon O'Brien also with me is President of Specialty Finance and our operations team.

And in addition, joining us is Steve Burge who is President of our North American Private Finance business. And Steve Burge has joined American Capital a year ago in May of '07 and I just want to give you a little bit of his background from 1998 to 2006. He was partner at Norwest Equity Partners where he managed the firm's Los Angeles office and was responsible for all aspects of private equity investment activities. And prior to that, he was a co-founder and Managing Director of Wells Fargo Equity Capital where he directed the firm's private equity activities. And before joining Wells Fargo, he was a Managing Director of Wedbush Capital Partners, responsible for all private equity investments activity. Also one of the youngest managing directors there. And early in his career, Mr. Burge was in the Leverage Finance Group of Wells Fargo & Company and Security Pacific Bank. So we really are thrilled with Steve coming to Bethesda and joining our senior management team where we've expanded within our management ranks and I think where... that puts us in good shape to continue our performance in the years to come.

And so these gentlemen will be joining the conversation today. Also, Tom McHale, our SVP of Finance and Rich Konzmann, our... and I should have said Senior VP of Finance and Rich Konzmann, our Senior VP of Accounting and Reporting are here with me today and they probably will join in on the conversation.

So I would like to start on slide 5 of our shareholder presentation, and mention a few kind of key takeaways of the second quarter of '08.

It certainly is a very demanding investment environment today, and I think we did a good job in the second quarter. We successfully are operating in our steady state mode while in a recession. We believe we most likely are in recession today.

And in that steady state mode, we were able to pay a 2008 dividend that's well covered and we are forecasting the whole '08 dividend to be well covered. And in fact, we are planning to roll over $500 million of taxable income from '08 into '09 to pay 2009 dividends.

Because of this liquidity crisis, we really have had our access to capital substantially reduced and essentially increasing our cost of capital on the one hand. And then on the other hand, we've seen improved middle market pricing, also improvements in leverage levels and in the terms of investments.

So new investments should be accretive to our earnings and dividends. So this liquidity crisis is doing two things: it's making our cost of capital more expensive and we would certainly hope the markets will help us in that. But at the same time, we are seeing great opportunities because middle market pricing has improved quite dramatically.

And we go into this liquidity crisis with a extremely seasoned portfolio with our average yield on our portfolio, however, below the current middle market yields and rates. So that's why we've seen depreciation on our portfolio because we have a legacy portfolio and current market rates have changed.

But on the other hand, we are redeploying our capital rather quickly into higher yielding assets and our control by our portfolio gives us tremendous, really control over a large portion of our assets, allowing us to generate significant liquidity as attractive valuations. So our investment portfolio going into this is performing well and it continues to perform well. Our private finance portfolio is reporting sales and EBITDA up, and that's based on a weighting of our investments or weighting of our portfolio based on the fair value of our investments.

And our structured products portfolio is performing as underwritten. So we feel very good about our portfolio in this climate and then we feel that this is an outstanding investment environment. Now we don't have as much capital to invest as we have had in the past because, to the most part, we are simply redeploying capital that comes back to us and we are getting a very large amount of capital coming back to us, which will be deploying. And as a result, I think we will become this year one of the leading investors in the middle market worldwide.

Nonetheless, it's far less capital than we've been able to deploy in the past on an annual basis, and so despite that there is an outstanding investment environment, we are constrained by these capital limitations.

Going on to slide 7; slide 6, our dividends; slide 7, our forecast for the year for the dividend. We're continuing to reiterate a $4.19 in 2008 dividend. We believe it's well covered as we will discuss. For $4.19 is the 13% increase over '07 dividend. And almost half of the 2008 dividend we're forecasting to be paid from 2007 taxable income. Because as you recall, we rolled over $361 million of taxable income from '07 into '08 to cover the '08 dividend.

Our third quarter forecast is for our net operating income to be between $0.68 and $0.75 per diluted share and that our realized earnings is forecast to exceed the $1.05 per diluted share, which by the way is the dividend that we're announcing for the third quarter, $1.05 in dividend.

So we are reiterating our forecast, and I think we've reiterated this now about four times of having $500 million of taxable income rolling over from '08 into '09 to cover '09 dividends. And that's a substantial increase over the $361 million that we rolled over from '07 into '08.

Moving to slide 8; as you can seen now, we have paid out $29.25 per share in paid or declared dividends since our IPO at $15 a share. And we paid out $1.03 in our second quarter, which, to remind you then would be a 30% growth over the second quarter of '07. And our realized to earnings per basic share was 92% of that Q2 $1.03 dividend.

So we are doing a decent job of covering the dividend for the second quarter in particular. And that was paid from long-term capital gains and ordinary income for tax purposes that have been rolled over from 2007.

So not only did we produce the 92% of all of the realized earning needed to pay the dividend, I think when you add back to that the collection of PIK and OID, which isn't in the realized earnings numbers, we virtually cover the dividend that we paid in the second quarter.

But in reality, that dividend really came and is being covered by the income we produced in '07. So we're really able to retain this income in the second quarter and together with the fourth quarter income and roll over that income into '09.

Now as of this earnings call, or our release yesterday, we declared the $1.05 in the third quarter dividend and we then gave a... reiterated our forecast of $1.10 for the fourth quarter of this year dividend. And you can turn to slide 9 and see this long track record of dividend payments and you can see that we've been able to do that whether interest rates are high or low and we've been able to grow our dividend through the course of the last recession.

So let's talk a little bit more about dividend coverage. And so if you go to slide 11, you can see that... and if you look to the extreme right side of that slide, the two bars, the green bar represents the total dividends that we paid since we went public 11 years ago at $27.99. And you can see it's been covered by realized earnings. So that's a combination of our net operating income and realized... net realized gains totaling $29.92. So we covered it by 107... we covered the dividend by 107% since we went public 11 years ago. And in fact, net operating income covers our dividend during that 11 year period by 95%.

Now if you go the extreme left, you can see that in this last 12 months ending the second quarter, we paid out $3.96 in dividends and we had realized earnings of $4.23. So we covered it again by 107% with net operating income contributing to $0.81... 81% of that coverage.

Now this is I think a extremely good track record of covering the dividend. I think it's one of the best track records of covering the dividend. But some people have had some concerns about using realized earnings. And so if you go into slide 12, we have kind of just taken a different approach and hopefully addressed some of the concerns about covering the dividend.

And again, if you look to the extreme right, we look at these numbers since our IPO and the bottom... so we are again showing the total amount dividend and this time it's not on a per share basis, but it's total dividends paid $2.360 billion. And over to the right of it, the green section... or the blue section represents our cash flow from operations. You can pull this right off our cash flow statement and it's what I think people would very conventionally think is the cash flows that you have from your operations and available to pay things such as distributions and dividends.

We added to it the collection of PIK and original... the income associated with original issued discounts. Now both of those are booked originally on a non-cash basis and they get stripped out of cash flow from operations. But you have to add it back in because eventually, it comes back in the form of a principal payment. And if you fail to add that back in, you fundamentally never count that cash flow.

So we have since our IPO, $261 million of collection of PIK and OID, a very good track record of collecting PIK and OID. It corroborates that method of pricing and allows us to get excellent pricing on our investments. And then of course we have added our net realized gains on top of that stack, totaling them $2.574 billion to cover the $2.360 billion in dividends that we pay. So we've had 109% dividend coverage.

Well if you look at to the left of that chart, you can see what we've done since 2005. And the reason we use 2005 is that's when we initiated the policy of rolling over taxable income that exceeded the amount of our dividend and we could use it then to pay the subsequent year's dividend requirement. And we have been building up that amount year-after-year, the amount of the roll over. And we've discussed what that $500 million... this is $500 million we are talking about rolling over from '08 into '09. And you to see that we have actually exceeded since 2005 coverages [ph] by 20%. So 120% of the dividend is covered with cash flow, and that cash flow being cash flow from operations, collection of PIK and OID and net realized gains.

We think that's a terrific track record. It allows us then to have substantial rollover of essentially, or retention of realized earnings that can be used in the subsequent year to cover the dividend. And it is these numbers which continue to show our track record, and of course forecast it's our forecast of these numbers that give us the confidence to forecast and declare the kind of dividends that we've been doing for the year.

Let's move to slide 13. We continue to experience net realized gains. So if you are picking from those last chart, you can have a concern of whether realized gains can continue to be recognized. But we are experiencing a great track record of experiencing and enjoying these realized gains. And in fact, since the turn of the year, we've had 11 exits of controlled companies, a total of $1 billion in total proceeds, generating $217 million of gross gains. We also recognized $44 million of gross losses. On a net basis, we've had very good performance for the year-to-date. Median multiples at the exit on these 11 exits were one turn higher than when we entered these investments. And for that matter, the median enterprise multiple as of June 30th, so if you just go back to the height of the... what people will probably be looking at is a bubble last year of valuations, we actually exited these investments at the same enterprise multiple as we had them booked at June 30th of 2007.

So I know people are... people have been saying that these gain opportunities are somehow the cliff [ph]. We believe there are fundamental reasons why that's not been happening and fundamental reasons why it won't happen in the near future. And we believe our track record is completely corroborating our views of that.

By the way, the average EBITDA on these 11 exits expanded 55% from the time we entered the investment to the time we exited it. And I think that's just outstanding. So though we've benefited on these 11 exits from a one turn multiple increase in valuation from when we made the investment, the larger portion of the reason we made wonderful gains here is that we were able to help these companies expand their EBITDA quite materially.

So our private finance team has done just a terrific job here. The private finance portfolio today is reporting sales in EBITDA being up, and that's on a year-over-year through May basis weighted by the fair value of our investments. So we feel good about the portfolio continuing to perform so that we can harvest gains from the portfolio.

Now just to remind you, we have 118 private finance equity investments totaling about $2.8 billion. So we have a lot to work with and there is over $893 million of gross appreciation among those 818 private equity investments. So again, a lot that we can do to harvest gains in the next year, years ahead while we continue to move up the balance sheet with proceeds investing them in wider spreads and improving our NOI.

Now today we have 22 portfolio companies that are actively being sold. A lot of people think that's a huge number, but in fact that's just very typical for the size of our portfolio. You should always be assuming we have about 22 companies if we continue with the size of our current portfolio up for sale. It is... just think of it even if you just had a hold period of five years, you would expect 20% a year to be exited. And you certainly don't have to have those companies up for sale at any given moment in time.

Actually, our track record is that we actually have a materially faster exit period and hold these investments considerably less than five years.

Finally, American Capital has this great advantage over other typical private equity firms in that we can provide staple financing of senior and sub debt to help buyers buy our companies. So if they run into any difficulty at all in raising the financing to do their tran... to buy a company from us, they are going to of course take the equity risk. But we can provide financing for them, we call it a staple financing of senior and sub debt. That improves the odds of a portfolio company being sold. It means that American Capital goes up the balance sheet in companies we know extraordinarily well. And in this last year, I think at the timeframe here, perhaps it's... no, I believe that's just the... since the turn of the year, we have had $610 million invested in debt at staple financing to support these 11 exits.

Rich, you can speak up.

Rich Konzmann - Senior Vice President, Accounting and Reporting

That's actually for the 12 months since July 1st of last year.

Malon Wilkus - Chairman and Chief Executive Officer

Great. Thanks. And I want to say one final thing is though we do staple financings, we don't always win the bid to fund those companies. In fact, Ira and Steve, do you recall about the percentage that we are --

Unidentified Company Representative

I would say about half the time, roughly.

Unidentified Company Representative

And also other banks do participate in our staple financings.

Unidentified Company Representative

Right.

Malon Wilkus - Chairman and Chief Executive Officer

So though we do provide the staple financing, we do it at market. We demand very high returns for providing this senior debt and sub debt of course. The senior, as you all know, we don't intend to keep on our balance sheet and we generally syndicate that within a couple of months of having originated. But we do keep the sub debt and we keep it now with higher spreads and lower multiples. We're very happy about it. And if you turn to slide 14, you can see really some of what we're talking about in that respect. And it is important that I walk you through this slide.

If you notice the senior debt, the green portion, the green bar is the 12 months ending the second quarter of 2007, a year ago. Okay. So it's looking at the one year period at the height of the bubble and since then pricing has improved. And that's showing the yellow bar and that's on a 12 month basis also. So senior has gone from just shy of 12% up to 12.6%. But that's not really helpful to understand the real dynamics here, because in fact much of that senior that we are describing here is second lean senior. It no longer exists in the marketplace today. That's a good thing because frankly, it was being funded at spreads that were too narrow and it's being then replaced by sub debt. So it's gone from the 12% which was being priced for the 12 months ending the middle of last year and now it's gone from the 16.1% that we've experienced just in this last quarter.

And again help me here, is this the last quarter or the yellow is actually LTM period, right. So the 16% since the liquidity crisis began.

So that's a very material improvement in spread that's accretive for our business. So when we make exits and we turn around and invest in the current climate, those new investments should be quite accretive to our earnings.

And we'll be happy to talk more about that slide when we go to Q&A. And I'm just going to go and do one... I think two more slides out of the total here. That's slide 16. And just to review the earnings for people listening to this call, in the weeks ahead, we had good realized earnings at $0.71 NOI per diluted share. Though that is a 22% decrease over the prior year, we feel that's really outstanding considering our steady state mode and that's versus the $0.68 to $0.75 per share guidance that we gave.

So it's really what... really in the middle of our guidance, and that represents a 10% LTM return on equity. We had a $0.95 realized earnings per diluted share; though, it was 33% below the same period last year. It's still we think just outstanding considering the climate that we are in. We think it's fairly good in terms of its coverage of the dividend. And though we did give guidance that this number would be $1.10 or more than $1.10 per share, approximately $0.12 of the net gains per share has already occurred in Q3 that we had originally forecast to occur in Q2.

So we've had a couple of excellent exits already this quarter and we had thought they were actually going to occur last quarter. And so $0.95 realized earnings represents a 13% LTM return on equity at cost. That's excellent. And by the way, it was including $63 million of net realized gains on portfolio companies.

Now we did have a $0.34 loss overall. That's as a result of booking $215 million of net realized gains and net depreciation. And we can talk more about that if you would like in the Q&A. It brings our NAV to $27.1 per share, which is a $1.15 decrease from the first quarter.

Now I'm going to skip through here to slide 30, and just wanted to point out that we were successful in the second quarter of launching through an IPO American Capital Agency in which we raised $200 million of third party capital, invested $100 million of our own capital and also raised another $2.1 billion of debt and invested a total of $2.4 billion into agency paper. That's being managed by our RMBS team out of Providence and they've been doing a terrific job. And in fact American Capital Agency announced essentially a 27% return on equity at the end of their quarter, the second quarter.

So that is performing extremely well and we are very proud to have done one of the few IPOs year-to-date. And so our asset management strategy is still moving along quite nicely and we're working on a lot of things in that strategy.

And then finally, let me turn to slide 33, which is our historical price-to-book chart. And I just wanted to point out that we are at historically extraordinarily low levels of price-to-book. We have averaged since we went republic 1.4 times book. I don't know where we at quite today, but on July 30th, we were at 0.8 times book, which was really historical low for the end of any month I believe. So we think American Capital is just an outstanding buy.

So let me summarize for you on slide 35. We have successfully... we are successfully operating in steady state mode while in recession and producing... or continuing to give guidance of $4.19 in dividends for the year or 13% growth. The dividend is covered well. We are planning to roll over $500 million of taxable income into '09. This liquidity crisis, though, it has reduced our access to capital and increased our capital cost; on the other hand, it's given us great investment opportunities in the middle market that we think would be highly accretive to our earnings.

We have a seasoned portfolio and it's capable of producing lots of liquidity, allowing us to redeploy our assets into higher yields and in part it's because we have great control over our portfolio and the portfolio itself is performing well. And the latest statistics from the portfolio is that sales and EBITDA are up when we weight it on a fair value basis of our investment. And our structured product is performing well.

So we're continuing to rationalize this industry. In fact, this is the period where that actually... you can actually see results in that because a lot of our competitors are simply out of the market.

So with that, I'd like to open it up, and I'm sure you have lots of question. We would love to take them, so.

Question And Answer

Operator

Thank you. [Operator Instructions]. And our first question comes from the line of James Shanahan with Wachovia. Please go ahead James.

Jim Shanahan - Wachovia

Thank you. Good morning.

Malon Wilkus - Chairman and Chief Executive Officer

Good morning.

Unidentified Company Representative

Good morning.

Jim Shanahan - Wachovia

I didn't want to belabor this point because you did spend a fair amount of time talking about the dividend, but you... in the slide deck, you skipped a slide that was of interest to me and related to the dividend, slide number 19 please.

The question that I have is I understand the point you're trying to highlight here that your anticipated realizable value is in excess of your current carrying value for these classes of investments. But is it fair to come to the conclusion that if your realizable value is $10.2 billion on cost of roughly $10.7 billion, is there an expectation of a net realized loss on your... on these positions far in excess of your anticipated realized gains, everything else equal?

Unidentified Company Representative

No, I mean we don't think that's the case at all, because if you remember, in some cases, companies depreciate because multiples have gone down or the environment for selling them was not good. And certainly, we proved through the last recession that we have companies that are depreciated that will recover. So when we calculate the realizable value, we're not looking at the current fair value of a portfolio company that we think might re-appreciate. We are really looking at things like the CMBS portfolio where the mark-to-markets through a bond yield analysis has depreciated what we think the realizable value is.

But in the case of the bulk of our private finance portfolio where we have controlled companies, we think there is a number of cases where we've taken depreciation that's really related to where multiples are and mark-to-market. I think, for example, SMG is a company you'll see this quarter where in the Q, it's going to have depreciation and that's really been multiple driven. We've brought the multiple in on a company, but it's performing quite well. And so you can't look at that and say that that's what we will ultimately realize for the portfolio. We expect companies like SMG to be significant realized gains when we go to exit them down the road, but that could be 2, 3, 4 years from now.

Jim Shanahan - Wachovia

So you're suggesting that 2, 3, 4 years from now, either current weakness and EBITDA has reversed or multiples have returned to previous cyclical highs, something like that, when you go to exit, optimizing the value?

Unidentified Company Representative

Absolutely. And we wouldn't even say cyclical highs because that's not what we are depending upon. I mean certainly, we went through this in 2001 and 2002 right. We at that time had a number of portfolio companies that were depreciated that by 2003 and 2004, we had showed that those companies had come up significantly in value. I don't remember the numbers off the top of my head, but we had --.

Unidentified Company Representative

Just to remind you, we've just mentioned that would be eleven that we exceeded year-to-date, we increased their EBITDA 55%. So a lot of it is simply by increasing EBITDA, paying down debt in those portfolio companies. And you can really appreciate, and in fact you don't even need to have multiple expansion; you can actually get a wonderful gain on a company that has depreciated because of multiples simply by growing the company's EBITDA.

Unidentified Company Representative

Right. One other point is probably from 2007 and 2006 in that environment, in most of control investments, I think we were assuming on average a one to two multiple decline in the ex multiple from the entry multiple. So even how we underwrite those investments actually had assumed a multiple decline.

Jim Shanahan - Wachovia

Okay. One more clarifying point just to make sure. Regarding the taxable income, unrealized depreciation is not factored in, but realized losses are, correct?

Unidentified Company Representative

Taxable income is... right, it's realized gains and losses.

Jim Shanahan - Wachovia

So is it fair to say that if ACAS has control over the timing of exits to generate gains, then you would also exercise some control over the timing of realizing losses?

John Erickson - President, Structured Finance and Chief Financial Officer

Yes, I mean that's certainly a fair point. But I think history will show and our quarterly results will show that we are certainly realizing losses and gains at the same time. We have certainly looked to get out of portfolio companies where we think we can no longer add value. And even though it's depreciated, it may make sense to return the capital out of that portfolio company if we don't think it's going to reappreciate and redeploy that capital somewhere else. I think we have a long track record of having done that.

Malon Wilkus - Chairman and Chief Executive Officer

And year-to-date, as we've already mentioned, we took $44 million of gross losses. And I think you would look at virtually every single quarter, there are some losses that we are incurring.

Unidentified Company Representative

Right.

Jim Shanahan - Wachovia

Fair enough. Thank you. And I'll get back in the queue. Thanks.

Malon Wilkus - Chairman and Chief Executive Officer

Jim, thanks so much.

Operator

Thank you. And our next question comes from the line of Faye Elliot with Merrill Lynch. Please go ahead.

Faye Elliot - Merrill Lynch

Hi, good morning. I have a question over your debt to equity levels and if you are comfortable with where they currently are. And I know you said last quarter you want to be in steady state and maybe it will take sometime to get some exits going and maybe get some more liquidity and those levels back down. How do you expect or how do you plan to manage your leverage levels going forward given the tight capital markets and what levels of debt to equity are you comfortable with?

John Erickson - President, Structured Finance and Chief Financial Officer

Well, certainly, first of all, going back to last year, you might recall last summer as the credit market really started to tighten up, we raised about $3.5 billion of capital, and a significant amount of that was equity capital. And if you go back to where we were running prior to June 30th of '07, we were running our leverage very close to 1.1. But then since then, we've been running more in the 0.7 to 0.8 range. So we specifically delevered during that environment and we are very comfortable with where we are since we're really not running close to the 1.1 leverage limit. So we think we are in a very good position to operate in a steady state environment.

Faye Elliot - Merrill Lynch

So wouldn't... given that you have more exits that you were planning on seeing this quarter coming through next quarter, are you then gong to plan to maybe reinvest everything that comes back in or would you maybe reinvest under the amount that you recycled to kind of shore up the balance sheet for the credit environment, maybe possible future spread widening?

John Erickson - President, Structured Finance and Chief Financial Officer

Yes, look, I think that I wouldn't use the word shore up the balance sheet. As I said, I think we prepared for this environment and delevered specifically for this environment. Now clearly, every day, every month, every quarter, we're managing... we're analyzing the data and one of the options is to delever some more if we feel the need is there. We've certainly put our self in a position where we can do that on a proactive basis as we see things develop rather than have a gun to our heads.

So we are managing that and I think it just depends on our outlook day by day and quarter by quarter in terms of where we think the portfolio company valuations are going anywhere we think the capital markets are going. We have plenty of flexibility given the capital that we have coming back to make a decision on whether to reinvest it or whether to pay debt down, and it's likely we could do both.

Faye Elliot - Merrill Lynch

Okay. So you feel... kind of triple that [ph], if you did see that you needed some more room that you could create that space in a relatively short amount of time given your asset managers and the amount of recycling that you do see on a quarterly basis then?

John Erickson - President, Structured Finance and Chief Financial Officer

Yes, there is no question. You look at the liquidity we have experienced and what we will be continue to experience is we meant and we have got 22 companies currently up for sale. That give us huge flexibility and we don't anticipate all 22 selling in the near term, we anticipate something less than that will actually sell and close. But we've got a nice pipeline out there and plenty of flexibility. This is, as I said, we prepared for this environment over a year ago and I think we are operating very well given the environment.

Faye Elliot - Merrill Lynch

Okay, terrific. Thank you.

John Erickson - President, Structured Finance and Chief Financial Officer

Right. Thank you.

Operator

Thank you. And our next question comes from the line of Troy Ward with Stifel Nicolaus. Please go ahead.

Troy Ward - Stifel Nicolaus

Great, thank you and good morning.

Unidentified Company Representative

Good morning.

Troy Ward - Stifel Nicolaus

The increase in shares outstanding seems to indicate that you did exercise the remaining 4 million shares on your forward equity agreement, is that correct?

John Erickson - President, Structured Finance and Chief Financial Officer

That is correct.

Troy Ward - Stifel Nicolaus

Alright, can you tell us when during the quarter this was exercised and also maybe give us some color on I guess why you would exercise that in the second quarter when it would appear that you do have considerable capital availability either through your exit, repayments and additional leverage? What was the reasoning for going ahead and exercising on that forward agreement?

John Erickson - President, Structured Finance and Chief Financial Officer

Yes, I think that was done late in the quarter and you only get kind of a quarterly snapshot of the balance sheet. You don't have the day by day, blow by blow. And there is always timing issues when you put money out when it comes in, so. But that agreement was getting fairly old, so it was going to need to be exercised at some point in the near term.

Troy Ward - Stifel Nicolaus

Was there... is there a maturity on those forwards? I didn't recall that.

John Erickson - President, Structured Finance and Chief Financial Officer

Yes. There is. They are one year maturities.

Troy Ward - Stifel Nicolaus

Okay. I didn't understand that. Okay, and then just one quick follow u., Is the higher cash balance avail... on the balance sheet, is that related to the exercising of this equity offering, or just timing of something getting paid late in the quarter?

John Erickson - President, Structured Finance and Chief Financial Officer

I don't now. I'd have to go back and analyze that.

Troy Ward - Stifel Nicolaus

Okay.

Operator

Thank you. And our next question comes from the line of Vernon Plack with BB&T Capital Markets. Please go ahead.

Vernon Plack - BB&T Capital Markets

Hey John, I have a question about... I have some questions on the 2007 static pool and just trying to get a sense as I look at fair value to cost, that number is 80% on the 2007 static pool at the end of the quarter. First quarter was 84% and most of the fair value adjustment in the portfolio I think could probably be tied to that year. Could you give me a sense for how much of that is the result of multiple contraction and how much is the result of reductions in cash flow of those companies?

John Erickson - President, Structured Finance and Chief Financial Officer

Yes, you are referring to the 2007 static pool... I know almost all of it's multiples --

Unidentified Company Representative

No, no, that's almost all the bond yield analysis.

John Erickson - President, Structured Finance and Chief Financial Officer

Well, the bond yield I know for example, SMG and they are seeing significant multiple contraction on that one. So we'd have to take a look.

Vernon Plack - BB&T Capital Markets

Yes, okay. I am just trying to get a sense for how well that group of companies is performing.

John Erickson - President, Structured Finance and Chief Financial Officer

Yes, I think there is one company in there specifically in there that we have a credit issue, and we're working through that. But I think there is other companies that have performed well that I know the multiples have come in. So I can't give you a clear break own between which is which and there is go on certainly some bond yields impacting that as well.

Unidentified Company Representative

Yes, that line in the static... in the portfolio statistics, the static pool analysis, that is the GAAP unrealized appreciation, depreciation. We haven't shown there what it would be if we used realizable values, but for the '07 static pool, it would be up.

Unidentified Company Representative

you also have the structured products like the [indiscernible] that's in there as well.

John Erickson - President, Structured Finance and Chief Financial Officer

Right, yes, that's right, the CRE CDO. So there is a lot of things going on there. I do know we do have one credit issue that I am aware of that's a material one and we are working through it and it was a mezzanine investment where the equity sponsor put more money in. But it's been but still performing way below plan and we've ultimately taken an equity stake in the company and taken control. So our ops team is working that one out. So I know there is one credit issue, but a lot of... the rest of it is probably mark-to-market issues with multiple declines and bond yield declines.

Malon Wilkus - Chairman and Chief Executive Officer

And not... so some of it is not related in our view to credit; it has to do with liquidity in the markets.

John Erickson - President, Structured Finance and Chief Financial Officer

Right. I think probably a substantial part of it's not credit related.

Vernon Plack - BB&T Capital Markets

Okay, thank you.

John Erickson - President, Structured Finance and Chief Financial Officer

Yes.

Operator

And our next question comes from the line of Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani - Keefe, Bruyette & Woods Inc.

Thank you. I've got a couple of question on the exits and subsequent redeployment of those proceeds. You've kind of... you touched on it a little bit, but... and I know it's lumpy, but it's kind of relevant for modeling purposes for the yield and fee. I mean what kind of velocity should we... that we should assume for that process on a quarterly basis, maybe just for the remainder of the year. I know you guys are trying to address that in the realized guidance, but maybe some color there would be helpful?

Malon Wilkus - Chairman and Chief Executive Officer

If you go to slide 28... we have that... Rich will pull the slide for us. But you can see that we've had a great track record of liquidity and actually the year-to-date, its really quite outstanding degree of liquidity off the portfolio. And we've mentioned earlier that we have 22 companies up for sale. So you should continue to see quite a bit liquidity and I don't... we are not really in a position to forecast that, it is the hardest thing to forecast because its lengthy and just as we experienced in the second quarter, it can move easily from one quarter to the next. It takes five, six, seven months to sell a company in the middle market.

John Erickson - President, Structured Finance and Chief Financial Officer

Yes, I think because of the fact that we have some large portfolio companies, you will see some lumpiness in terms of the timing within a quarter that that realization comes in.

Unidentified Company Representative

Sanjay, was your question then more of what's the velocity, how quickly we'll redeploy that?

Sanjay Sakhrani - Keefe, Bruyette & Woods Inc.

I am just trying to get a run rate of kind of what a reasonable run rate of how much could be redeployed every quarter. And I know it's lumpy and hard to quantity, but some kind of help there would be useful. Just because the assumption is no balance sheet growth. So like the fee incomes, you are redeploying those assets, right. You are going to collect some fee income, and that's meaningful component of your earnings.

John Erickson - President, Structured Finance and Chief Financial Officer

Also, as we pointed out, we are hopefully generating higher NOI spreads because when we sell these companies and exit the equity, we are typically redeploying it into subordinated debt, which has a higher current yield. So...

Sanjay Sakhrani - Keefe, Bruyette & Woods Inc.

Yes, so it's like it's... the impact is two-fold.

John Erickson - President, Structured Finance and Chief Financial Officer

Yes, no, I understand that I...

Unidentified Company Representative

But Sanjay on that also, if you we're moving up balance sheet, so it means you are not generating large transaction fees with buyouts.

Sanjay Sakhrani - Keefe, Bruyette & Woods Inc.

Right. Okay. I guess we could take that offline, but just... and then on the guidance, I mean as far as the assumption that there in no balance sheet growth, I mean can there be balance sheet growth despite the fact that the stock is where it is, I mean would you guys consider other alternatives?

John Erickson - President, Structured Finance and Chief Financial Officer

Well the alternatives first going to be the managed funds right? And so we've said we don't want to issue dilutive equity in this environment. So I don't think you would see us wanting to go out there and do a dilutive equity raise. So the growth is going to come through turning the portfolio and then looking to raise more managed funds. As Malon mentioned, we obviously did the agency read in the second quarter and we're working on some other managed fund ideas which will help drive some growth.

Sanjay Sakhrani - Keefe, Bruyette & Woods Inc.

Okay. And I guess one more on that. I think you mentioned there is a liquidity from the portfolio and your successful in selling investments. I think what we've heard from others is that there is a bid for good companies, but I think the question remains kind of what does it say about what's being left on the balance sheet. I mean could you guys just talk about that a little bit. The idea of may be your selling the best ones versus keeping... and what remains on the balance sheet is kind of not that great?

John Erickson - President, Structured Finance and Chief Financial Officer

Yes. I think we have already kind of talked about it, which is we have been harvesting losses and selling losses as well. We are not selling just the best companies, we are not exiting just the best companies. We have historically done both and we're continuing to do both. But the other thing is you can't assume that every company that's depreciated is a bad company right? Because as we also went through, there has been some decline in multiples for some companies. I think in terms of the second quarter evaluation, if you look at the overall impact, we have more companies... probably far more companies with multiples that declined versus multiples that expanded. And so that is going to cause some depreciation, but those aren't necessarily bad companies.

Sanjay Sakhrani - Keefe, Bruyette & Woods Inc.

Okay. I mean, and you guys don't think that the non-accrual rates would get meaningfully worse relative to kind of where we saw it the last time around?

John Erickson - President, Structured Finance and Chief Financial Officer

No, in fact, we think it's probably better than the last time around. Right I think what we have said before is we were heavily invested in the capital goods sector and the last time around the capital goods sector was the leading... it was the most depressed sector out of any sector. So we felt like we had kind of a double whammy. Arguably, this time around, the financial services sector is the worst sector and we're seeing that maybe in our Ecast stock price investment and a couple of other financial service investments we have. But within the bulk of the rest of the portfolio, we're not seeing it nearly to the extent we did in '01 and '02. So I think the portfolio is much better positioned, much more diversified and...

Unidentified Company Representative

Let me... and let us give you some examples. Prior to the last recession, the average company probably had about... in our portfolio probably had about $35 million of revenues and today, they have $157 million on average revenues. They have $32 million on average EBITDA, 20% EBITDA margin. Those are just dramatically bigger, better companies than we had before... the day before the last recession.

So we really think we have a terrific portfolio to be in recession today and I would... I think there is not a soul in this organization that wouldn't rather have our assets today and being in a recession today than have their assets that we had the day before the last recession. So we think these assets will fare [ph] materially better. And in fact that's the kind of point I was trying to make earlier. Sales and EBITDA are up in our portfolio when it's weighted by our investment size in the companies and we just simply don't think that's the case in the middle market overall. We don't think that's the cast in the economy overall.

John Erickson - President, Structured Finance and Chief Financial Officer

Well in fact, if you don't weight it by our fair value, our fair weighting puts more emphasis on our largest investments, which have been our buyouts, 9 of the 10 largest in that analysis are our buyouts. So when you don't weight it on a fair value basis and just look company by company, the numbers are down. So that's indicating to us we've done a better job of picking the companies that we've bought.

Sanjay Sakhrani - Keefe, Bruyette & Woods Inc.

Right. Okay. And just in that recession scenario that you guys have, I mean are there any underlying assumptions that you guys make like GDP type assumptions, unemployment rate type assumptions?

Unidentified Company Representative

No. We are not practicing economists here. We are always assuming that things are going to get worst in a portfolio company that we are considering or a prospective investment. So we always assume recessions in our modeling. And the more we feel that we are either going into a recession or we are in a recession, we are going to make that more and more severe when we evaluate whether we want to make the investment.

Unidentified Company Representative

And obviously, when we do that modeling, we start by going back and looking at how the company performed in historical cycles, right? So one of the basis to trying the recession is looking at how companies performed in the previous recession and making assumptions on how they might perform in the next recession.

Sanjay Sakhrani - Keefe, Bruyette & Woods Inc.

Okay. Fair enough, thank you very much. Very good.

Unidentified Company Representative

Thank you.

Operator

And our next question comes from the line of Jim Ballan from JPMorgan. Please go ahead.

Jim Ballan - JPMorgan

Thanks a lot. The dividend growth that you've had over the past few years, I mean I can see through the slides and going through the numbers that realized earnings has covered it. But if we assume that we stay in a sort of the current environment that we have today lasts for a while and we generally see slower deal activity, when you think about dividend growth for 2009, I mean do you think that it's... you can justify sort of having similar growth rates on a year-over-year basis similar to what you've had?

Unidentified Company Representative

No.

John Erickson - President, Structured Finance and Chief Financial Officer

Right.

Unidentified Company Representative

The answer is no. If you look at the last recession, we went into that recession with a high dividend growth rate and we really came out of it at a significant lower dividend growth rate. That's to be expected, it never declines as you well know and I think if you don't anticipate it, it's going to decline in the course of this recession. But we also don't anticipate growing it at the rate that we have grown it in the past.

John Erickson - President, Structured Finance and Chief Financial Officer

Now fortunately, we'll will set that guidance in February. So hopefully, we'll have more insight into what we think about '09, and will make a decision on what to do over the $4.19 that we are paying this year. If anything, we'll look at that carefully and hopefully, we'll have six more month of insights and also, we're reviewing that much more portfolio performance data and make an assessment of what an appropriate dividend rate is at that time.

Jim Ballan - JPMorgan

Okay. Okay, terrific. Thanks a lot.

John Erickson - President, Structured Finance and Chief Financial Officer

Yes.

Operator

And your next question comes from the line of Adrian Day with Adrian Day Asset Management. Please go ahead.

Adrian Day - Adrian Day Asset Management

Yes, thank you. Good morning. You've talked a lot about the sales of companies. You talked earlier about money coming back. Now is most of this money coming back? Are we mostly talking about these control companies where you initiate the sale or are there other early payoffs and so on?

Unidentified Company Representative

We will try to give you an answer to that, but off the top of my head, we know that a good number of those was a result of control companies. But why don't we try to work on that while... during the call and give you an answer.

Adrian Day - Adrian Day Asset Management

Okay. And then if I may, as a follow up to that, if you do have a lot of early pay offs and so on, then a follow up would be whether this is perhaps more than usual and what the reasons for that might be.

John Erickson - President, Structured Finance and Chief Financial Officer

Yes, I don't think we have more than usual early payoffs. I think that where we do have early payoffs, we write less [ph]. But where we do have early payoffs is because we are typically doing a mezzanine investment in another private equity firm's transaction and they are going to be selling the portfolio company just like we're selling our interest in [ph] controlled companies. That's going to trigger the bulk of the early payoffs.

Adrian Day - Adrian Day Asset Management

Okay. But it's more than normal?

John Erickson - President, Structured Finance and Chief Financial Officer

No. no.

Unidentified Company Representative

No.

Adrian Day - Adrian Day Asset Management

Okay.

Malon Wilkus - Chairman and Chief Executive Officer

For the non-control companies, it's almost certainly less than last year, because last year in the early first half of the year, there is a lot of cheap capital, a lot of people who are recapitalizing and paying our more expensive capital off with less expensive capital. And there was just a lot of liquidity. So that decline... the speed of liquidity there has declined. On the other hand, in where we have control, we haven't seen a decline in liquidity or speed of liquidity. And that's because our staple financing just eliminates this question of a buyer being able to fund the transaction with senior where, as you know, senior is harder get these days.

John Erickson - President, Structured Finance and Chief Financial Officer

Right. I mean actually 2005, you had a number of transactions where equity sponsors were recapitalizing companies just because they can lower their cost of capital. That trend certainly has stopped. So the portfolio companies that you are getting liquidity are the ones being sold. But we will have mezzanine investments where the equity sponsors are other private equity firms and they are selling them. So some of that is certainly in our plans as we become aware of the fact that they are selling companies.

Adrian Day - Adrian Day Asset Management

Okay. I appreciate that. Thank you.

Operator

Thank you. And our next question comes from the line of Jeffrey Talbert [ph] with Wesley Capital. Please go ahead.

Unidentified Analyst

Hi, good morning. Thank you for taking my question. I have a question on the balance sheet. To the extent that debt was increased, could you try and give us the balances please as of June 30th for the secured and unsecured revolving facilities please [indiscernible] outstanding?

John Erickson - President, Structured Finance and Chief Financial Officer

So you wanted the secured and unsecured.

Unidentified Analyst

Yes, please.

John Erickson - President, Structured Finance and Chief Financial Officer

Revolvers at June 30th?

Unidentified Analyst

That's correct.

John Erickson - President, Structured Finance and Chief Financial Officer

Okay, let me look that up and we'll get back to you.

Unidentified Analyst

Okay, sure. Yes, I am going to ask you a follow up as part of that same question. It's a follow up to the earlier question with respect to the amount of cash. The reason I was curious as to the balances on the revolvers was just because the $262 million of cash is as awfully high balance. There nothing wrong with cash, cash is good. And I am just trying to understand the rationale in having that much cash on the left side of the balance sheet to the extent you are paying interest on the right side with respect to the revolvers. Thank you

Unidentified Company Representative

Yes, I think the cash was probably... because we had the dividend going out. Does that pay --

Unidentified Company Representative

Yes, Jeff, accrued dividend payable at the end of the quarter was $2.09; the dividend was paid right after the end of the quarter, so --

Unidentified Company Representative

Absent the cash.

Unidentified Company Representative

262, the dividend was $2.09.

Unidentified Analyst

Okay, that's not restricted cash; that would actually be the other cash?

Unidentified Company Representative

That cash growth is restricted cash, cash equivalents is just a result of the securitization end of that.

Unidentified Analyst

Got it. Okay.

Unidentified Company Representative

We had about 1 billion out on the unsecured and maybe 108... 186 million on the secured.

Unidentified Analyst

186 on the secured, and I am sorry, the other number please?

Unidentified Company Representative

And 1 billion on the unsecured.

Unidentified Analyst

1 billion unsecured, 186 on the secured. Great, thank you both very much.

Operator

Thank you. And our next question comes from the line of John Neff with William Blair. Please go ahead.

John Neff - William Blair & Company

Hi, thank you. Can you talk for maybe a minute about the decision to bring on Duff & Phelps into the valuation process and maybe a little bit about how the scope of what they were engaged to value --

John Erickson - President, Structured Finance and Chief Financial Officer

Sure. I mean I think we never really liked to have one service provider. As our firm has grown, the amount of valuations has grown as part of that. We actually brought Duff & Phelps on over a year ago. We brought them on first to help us with the FAS 157 consulting as we were getting through that. And so I think we started working with them maybe June of last year. And they really consulted with us first on the implementation of FAS 157. And then once we concluded that last quarter, we decided basically start splitting up the valuation work. So, I think it's certainly useful for us to have two different service providers given the size and scope of what we're doing.

Malon Wilkus - Chairman and Chief Executive Officer

Yes, I think we've actually said on this call in the past that we assumed over time, we would fine and expand the number of firms that was assisting... and keep in mind, this is actually engagements of the Board. So it's the Board that chose to expand their consultants on valuation. And Duff & Phelps did a terrific job for the Board and for our evaluation team in preparing for the FAS 157, we had engaged them and they worked really hard at it, did a... proved to us they really understood the whole FAS 157 issues.

John Erickson - President, Structured Finance and Chief Financial Officer

But it's... also, it's not just the growth in American Capital's valuation work, but having Ecast and having like grown has also increased the over valuation burden.

Malon Wilkus - Chairman and Chief Executive Officer

Jeff, did that answer the question? Did that --

Unidentified Analyst

Yes, that was great. Thank you.

Operator

Thank you. And our next question comes from the line of Kate Kutasi with Calnar Boleyo [ph].

Unidentified Analyst

Hi. Hello, thank you. Just a follow up call to that... or follow-up question to that gentleman's question regarding Duff & Phelps. You have the language in the press release that they concluded that the aggregate range of fair value was not unreasonable. Yet you don't have the same language regarding Houlihan. Does Houlihan have an issue with valuations or why would Duff & Phelps make that conclusion and not Houlihan?

Unidentified Company Representative

I am going to ask Sam Flax, our General Counsel to answer that.

Samuel A. Flax - Executive Vice President and General Counsel

That's just the policy of the two firms. If you'll notice, the Houlihan language is consistent with what they've given in past quarters and it's just a practice. Duff & Phelps has a different practice in how they phrase their opinions.

Unidentified Company Representative

And these are vigorously negotiated agreements with them. They'd... rather we say nothing. So at the end of the day, it's really where are legal department and their legal department can conclude on.

Unidentified Analyst

Okay

Unidentified Company Representative

But they was no real difference in the procedures and the conclusions.

Unidentified Company Representative

Yes, I want to reiterate that, with the addition of Duff & Phelps, we've really done nothing in terms of changing the way in which we do our valuations and the way in which we interact with these third party valuation firms assisting the Board.

So it was a fairly seamless process and I think both firms, generally we can say do a very good job for us and I think our Board feels that way. It makes for a very vigorous process and discussion over every single firm as we go through the valuation cost. In fact one of the key Houlihan beliefs [ph] went over to Duff this quarter, so it's pretty seamless.

Unidentified Analyst

Thank you. And just a follow up on that. Can you talk about how you determine which companies they are going to perform valuations on each quarter?

Unidentified Company Representative

They have basically a random... fundamentally, it's the companies that they valued a year before or the companies that entered into our portfolio a year before from that quarter. And so every quarter, it's a new set and in the course of the year, they end up valuing 100% that's meets the certain threshold standards that we have.

Unidentified Analyst

Okay.

Unidentified Company Representative

And the threshold standards is simply a way to keep the costs down for the valuation process.

Unidentified Company Representative

Right, right. We are out there spending money on [ph] value things we've written down that are immaterial, because the cost of this was getting to be pretty meaningful. So have tried to eliminate companies where the value is insignificant.

Unidentified Analyst

Okay, thank you.

Unidentified Company Representative

You are welcome. Thank you.

Operator

And our next question comes from the line of John Stilmar from FBR Capital Markets. Please go ahead.

John Stilmar - FBR Capital Markets

Good morning. Just a quick question with regards to how should I be thinking about your stock repurchase program? It doesn't appear like and maybe I missed it, but you guys have repurchased shares and it just seems to me on the surface discounts at book in excess of a 20% yield. How should we think about that relative to the opportunity cost that you may have with regards to other types of asset management strategies?

Malon Wilkus - Chairman and Chief Executive Officer

John, what we've reported for this quarter for the second quarter was that there were no days in which both the window was open and American Capital traded below our reported NAV per share. In fact, our General Counsel, Sam Flax is also our compliance officer and establishes the window. And it's probably not too different from most corporate company windows and during that closed window period, we simply are in not in a position. We are unable to purchase any shares. And so last quarter, even though there were times when we traded well below book, the period when the window was open, we simply were not trading below book at all. And actually the plan requires that minimum, we were treading below book.

In addition to that, I want to say, however, that our Board expects us only to use this plan if in fact it can be accretive relative to our other alternatives. So we are looking at what we can invest in, how that investment can be levered on our portfolio and therefore what the total return on equity is for an investment versus the purchase of shares. And we will always be evaluating it really strictly on the return on equity merit for our shareholders. And so we will of course report a quarter from now, where we stand with respect for the buy back program.

John Stilmar - FBR Capital Markets

Okay. And then in terms of look like do just light uptake in your non accrual by cost basis. And I was wondering if you could help me understand what were some of the new investments or at least industries that may have driven that change or are there any industries in your portfolio that are weakening or differentiated or some... can you provide a little color there?

Malon Wilkus - Chairman and Chief Executive Officer

I'm going to ask Steve and Ira if they want to discuss any of that.

Steven Burge - President, North American Private Finance

Well, this is Steve. I can't say that I've seen any gross trends from an industry standpoint in our portfolio. It may be even though we have a large portfolio that sample size of our individual companies may not be large enough to demonstrate a trend there.

Ira Wagner - President, European Private Finance

Yes, I'm going to agree with that. I don't think there is anything that you can look at as a trend. I mean one company I see certainly has resin prices which are oil-driven issues and that was new kind of new. There is another company we talked about previously which was an '07 investment where it's just been under performing and I think that that's probably overall consumer related issues. But nothing in the way of a broader trend. I think you just would expect in a period of economic weakness, we're going to see a pick up in companies that are not performing as well. But I think that as talked about before, we expect in this cycle our portfolios to perform better than it did in the last cycle.

Malon Wilkus - Chairman and Chief Executive Officer

And even in the companies that John mentions there, there may be business model issues in addition to economic factors. And the business model issues are things we can focus on, and we have our operations team involved that we are changing those business models where we can to improve their performance into the these industry aspect.

John Stilmar - FBR Capital Markets

Okay, very helpful. And then finally with regard to are you guys... can you please characterize for me with regards to the conversations you had with your bankers and the availability of liquidity and your thoughts about... I think November as your... as the renewal date for your secured warehouse facility. How should we be thinking about that coming forward and can you characterize for me the sense that you are... of the conversations you are having with the bankers and then I have one quick housekeeping question after that?

John Erickson - President, Structured Finance and Chief Financial Officer

Sure. Look, I think we just renewed the Ecast facility and that's probably a good proxy. I think that in this environment, you probably can expect that the banks are going to want to reduce their balances a little bit. So you expect probably a smaller facility size and they are going to increase pricing; that's not dissimilar to what we have seen with Ecast. And obviously we are working on the ACAS facility; we wrapped up Ecast I guess it was ay be a month ago now and we're working on ACAS. But that's where our expectations will be.

Malon Wilkus - Chairman and Chief Executive Officer

We have very... what do have drawn on that facility now?

John Erickson - President, Structured Finance and Chief Financial Officer

Well it's only $186 million.

Malon Wilkus - Chairman and Chief Executive Officer

So extremely little has been drawn on that facility right now and since we are in a steady state, you can assume that we don't need a lot more on that facility. So we... I think John has done a good job of characterizing.

John Erickson - President, Structured Finance and Chief Financial Officer

Well, and as we said, that was exactly the type of thing going in this environment we wanted to comfort. So we didn't want to come into this environment levered one to one with all of our facilities tapped out because we knew that you'd have to go through those negotiations. But as I've said, we have already successfully done it in Ecast, we are actively doing it at ACAS and we feel confident we will reach terms on a revised facility I would expect the amount will come down. But partially, it will come down because we don't need it bother caring the cost if we're not going to level up to one-to-one and use all the capacity, there is no sense paying that these and the banks are obviously anxious to reduce there balance sheet a little bit as well. So its almost one win-win from that perspective.

John Stilmar - FBR Capital Markets

Perfect. And then can you give me the fair value balance from the balance sheet for the debt and equity as it pertains to your portfolio?

John Erickson - President, Structured Finance and Chief Financial Officer

The fare value of the debt?

John Stilmar - FBR Capital Markets

That portion... the debt portion... on the asset side of the balance sheet please. So the sum totals to I think its $9.6 billion of the two to get 9.687 and can you break that out for me between debt and equity?

John Erickson - President, Structured Finance and Chief Financial Officer

Yes. I guess $3.8 billion in equity and $5.4 billion in debt assets.

John Stilmar - FBR Capital Markets

Thank you guys very much.

Unidentified Company Representative

Thank you. And we're going to take just one last question.

Operator

Okay our last question comes on the line of Matthew Howlett with Fox-Pitt Kelton. Please go ahead.

Matthew Howlett - Fox-Pitt Kelton

Great. Thanks for taking my question. Just in terms of the G&A and the salaries, I think you did some downsizing in the second quarter. What's the impact going forward and if the expenses are going to go down in the third quarter, what's the offset with the NOI guidance essentially being flat?

John Erickson - President, Structured Finance and Chief Financial Officer

I think that base salaries will be down in the third quarter, but the bonuses may offset as you might not see really a net, further decline in salaries and that total cost expense could actually be more flat. But most of the downsizing will hit in the third quarter.

Matthew Howlett - Fox-Pitt Kelton

Okay. Is there an offset in terms of the NOI guidance? I mean are there going to be sort of lower fees or asset management revenue or is that just going to be more essentially flat quarter-over-quarter?

John Erickson - President, Structured Finance and Chief Financial Officer

We have not given guidance line item by line item. And as you know, the fees certainly can be lumpy. The asset management revenues have been more stable because we have not been earning much in the way of incentive fees recently. We expect in this environment that you probably won't be earning incentive fees until '09 or 2010, which will be future growth. But the asset management fees will be a little bit more steady state as well.

Matthew Howlett - Fox-Pitt Kelton

Great. Okay, great. Thank you.

Malon Wilkus - Chairman and Chief Executive Officer

Thank you. And folks, thanks everyone. We do feel that we've done a very good job of operating in this steady state while in a recession. Let's hope this recession doesn't get worse but you can count on us that if it does, we will work very hard on behalf of our shareholders to perform.

So with that, thank you so much and we'll look forward to talking to you next quarter.

Operator

Thank you. Ladies and gentlemen, this conference will be made available for replay after 3:00 PM Eastern Time today until August 20th at midnight. You may access the AT&T Executive Playback Service at anytime by dialing 1-800-475-6701 and entering the access code 952932. International participants may dial 1-320-365-3844. Again, those numbers are 1-800-475-6701 and 1-320-365-3844 and the access code is 952932.

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Source: American Capital Ltd. Q2 2008 Earnings Call Transcript
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