N-2/A 1 acasn-22013.htm FORM N-2/A ACAS N-2 2013

As filed with the Securities and Exchange Commission on July 25, 2013
 

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  _________________________________________________
 
1933 Act File No. 333-183926
 
FORM N-2
 
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
PRE-EFFECTIVE AMENDMENT NO. 1
 
POST-EFFECTIVE AMENDMENT NO.   
 _________________________________________________
 AMERICAN CAPITAL, LTD.
(Exact name of registrant as specified in charter)
 
2 BETHESDA METRO CENTER
14TH FLOOR
BETHESDA, MD 20814
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (301) 951-6122
 
SAMUEL A. FLAX, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL,
CHIEF COMPLIANCE OFFICER AND SECRETARY
2 BETHESDA METRO CENTER
14TH FLOOR
BETHESDA, MD 20814
(Name and address of agent for service)
 _________________________________________________
 
COPIES TO:
 
RICHARD E. BALTZ, ESQ.
DARREN C. SKINNER, ESQ.
Arnold & Porter LLP
555 Twelfth Street, N.W.
Washington, DC 20004-1206
(202) 942-5000
  _________________________________________________
 
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
From time to time after the effective date of this registration statement.
 
If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), other than securities offered in connection with a dividend reinvestment plan, check the following box. þ
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until this registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), shall determine.
 


The information in this prospectus is not complete and may be changed. We may not sell these Securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these Securities and is not soliciting an offer to buy these Securities in any state where the offer or sale is not permitted. 

PROSPECTUS
American Capital, Ltd.
$1,000,000,000
COMMON STOCK
PREFERRED STOCK
SUBSCRIPTION RIGHTS
DEBT SECURITIES
 
We may offer, from time to time, up to $1,000,000,000 aggregate initial offering price of our common stock, $0.01 par value per share, preferred stock, $0.01 par value per share, subscription rights and one or more classes or series of debt securities (collectively, the “Securities”) in one or more offerings. The Securities may be offered separately or together, in amounts, at prices and on terms to be disclosed in one or more supplements to this prospectus. The preferred stock and debt securities may also be convertible or exchangeable into shares of our common stock. The Securities may be offered directly to one or more purchasers, including existing shareholders in a rights offering, by us or through agents designated from time to time by us, or to or through underwriters or dealers. In the case of our common stock, the offering price per share by us less any underwriting commissions or discounts will not be less than the net asset value (“NAV”) per share of our common stock at the time we make the offering, except that we may issue shares of our common stock pursuant to this prospectus and the accompanying prospectus supplement at a price per share that is less than our NAV per share (a) in connection with a rights offering to our existing shareholders, (b) with the prior approval of the majority of our common shareholders or (c) under such circumstances as the U.S. Securities and Exchange Commission (“SEC”) may permit. In the event that we do issue shares of common stock with an offering price per share below our NAV per share, the interests of our existing shareholders may be diluted. You should read this prospectus and the applicable prospectus supplement carefully before you invest in our Securities. Our common stock is traded on The NASDAQ Global Select Market under the symbol “ACAS.” As of July 24, 2013, the last reported sales price for our common stock was $13.68 per share.
 
We are a publicly traded private equity fund and a global asset manager. On August 29, 1997 we completed an initial public offering (“IPO”) and became a non-diversified closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, we primarily invest in senior and mezzanine debt and equity in buyouts of private companies sponsored by us (“American Capital One Stop Buyouts®”), or sponsored by other private equity funds (“Sponsored Finance Investments”) and provide capital directly to early stage and mature private and small public companies. We refer to our investments in these companies as our private finance portfolio. Our primary business objectives are to increase our net earnings and NAV by making investments with attractive current yields and/or potential for equity appreciation and realized gains. We are taxed as a corporation and pay federal and applicable state corporate taxes on our taxable income.
 
This prospectus contains information you should know before investing, including information about risks associated with an investment in us. Please read it before you invest and keep it for future reference. Additional information about us, including our Annual Reports, Quarterly Reports, Current Reports, Proxy Statements and our Statement of Additional Information (“SAI”), dated as of the same date as this prospectus, has been filed with the SEC. You may obtain a copy of any of these documents by writing us at our principal office, which is located at 2 Bethesda Metro Center, 14th Floor, Bethesda, MD 20814, Attention: Investor Relations or by calling 1-800-543-1976. This information is also available at our web site www.AmericanCapital.com. We will not charge you for these documents. The SEC maintains a web site (http://www.sec.gov) that contains the SAI and other information regarding us. The SAI is incorporated by reference in its entirety into this prospectus and its table of contents appears on page 98 of this prospectus.
 
An investment in our Securities involves certain risks, including, among other things, risks relating to investments in securities of small, private and developing businesses. We describe some of these risks in the section entitled “Risk Factors,” which begins on page 10. You should carefully consider these risks together with all of the other information contained in this prospectus and any prospectus supplement before making a decision to purchase our Securities.


 
The Securities being offered have not been approved or disapproved by the SEC or any state securities commission nor has the SEC or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
This prospectus may not be used to consummate sales of the Securities by us through agents, underwriters or dealers unless accompanied by a prospectus supplement and/or pricing supplement.
 
The date of this prospectus is July 25, 2013


TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


PROSPECTUS SUMMARY
 
The following summary contains basic information about this offering. It likely does not contain all the information that is important to an investor. For a more complete understanding of this offering, we encourage you to read this entire document and the documents to which we have referred.
 
Information contained or incorporated by reference in this prospectus or prospectus summary may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “plans,” “anticipate,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terminology. The matters described in “Risk Factors” and certain other factors noted throughout this prospectus and in any exhibits to the registration statement of which this prospectus is a part, constitute cautionary statements identifying important factors with respect to any such forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements.
 
AMERICAN CAPITAL, LTD.
 
American Capital, Ltd. (which is referred to throughout this prospectus as “American Capital”, “we” and “us”) is a publicly traded private equity fund and global asset manager. We primarily invest in American Capital One Stop Buyouts® or Sponsored Finance Investments and provide capital directly to early stage and mature private and small public companies. We also have investments in structured finance investments (“Structured Products”), including commercial mortgage backed securities (“CMBS”), collateralized loan obligation (“CLO”) securities and collateralized debt obligation (“CDO”) securities and invest in funds managed by us. We are also a fund manager with $112 billion of total assets under management (including levered assets), which includes $6.4 billion of total assets on our balance sheet and $105.2 billion of third-party assets under management, $15 billion of which are third-party earning assets under management for which we are paid a management fee.
 
Our primary business objectives are to increase our net earnings and NAV by investing in senior and mezzanine debt and equity securities of private companies and funds managed by our wholly-owned portfolio company, American Capital Asset Management, LLC (“American Capital Asset Management”), with attractive current yields and/or potential for equity appreciation and realized gains.
 
Our fund management is conducted through American Capital Asset Management. American Capital Asset Management manages the following funds: European Capital Limited (“European Capital”), American Capital Agency Corp. (“AGNC”), American Capital Mortgage Investment Corp. (“MTGE”), American Capital Equity I, LLC (“ACE I”), American Capital Equity II, LP (“ACE II”), ACAS CLO 2007-1, Ltd. (“ACAS CLO 2007-1”), ACAS CLO 2012-1, Ltd. (“ACAS CLO 2012-1”) and ACAS CLO 2013-1, Ltd. (“ACAS CLO 2013-1”).
 
Private Finance Investment Portfolio Overview
 
We provide investment capital to middle market companies, which we generally consider to be companies with revenue between $10 million and $750 million. We primarily invest in American Capital One Stop Buyouts® or Sponsored Finance Investments and provide capital directly to early stage and mature private and small public companies. We refer to our investments in these companies as our private finance portfolio companies. Currently, we will invest up to $500 million in a single middle market company in North America and $200 million in a fund managed by us. Our largest private finance portfolio investment at cost as of December 31, 2012 was $391 million.
 
A majority of our investments have been to assist in the funding of change of control buyouts of privately held middle market companies, and we expect that to continue in the future. A change of control transaction could be the result of a corporate divestiture, a sale of a family-owned or closely-held business, a going private transaction, the sale by a private equity fund of a portfolio company or an ownership transition. Our financing of a change of control transaction could either be for a American Capital One Stop Buyout® or for a Sponsored Finance Investment. In American Capital One Stop Buyouts®, we lend senior and mezzanine debt and make majority equity investments. As an investor in Sponsored Finance Investments, we lend senior and mezzanine debt and make minority equity co-investments.
 
Our private finance portfolio investments consist of loans and equity securities primarily to privately-held middle market companies. Our private finance loans consist of first lien secured revolving credit facilities, first lien secured loans, second lien secured loans and secured and unsecured mezzanine loans. Our loans typically mature in five to ten years and require monthly or quarterly interest payments at fixed rates or variable rates generally based on LIBOR, plus a margin. Certain of our loans permit the interest to be paid-in-kind by adding it to the outstanding loan balance and paid at maturity. We price our debt and equity investments based on our analysis of each transaction. As of December 31, 2012, the weighted average effective interest rate on our private finance debt investments was 11.7%, which includes the impact of non-accruing loans. As of December 31, 2012, our fully-diluted weighted average ownership interest in our private finance portfolio companies, excluding our investments in

2

European Capital and American Capital Asset Management was 68%, with a total equity investment at fair value of approximately $1.5 billion.
 
There is generally no publicly available information about these companies or primary or secondary market for the trading of these privately issued loans and equity securities. We have exited these investments historically through normal repayment, a change in control transaction or recapitalization of the portfolio company. However, we may also sell our loans or equity securities. Our ability to fund the entire capital structure is a competitive advantage in completing many middle market transactions. We sponsor American Capital One Stop Buyouts® in which we provide most, if not all, of the senior and mezzanine debt and equity financing in the transaction. We may initially fund all of the senior debt at closing and syndicate it to third-party lenders post closing. We have a loan syndications group that arranges to have all or part of the senior loans syndicated to third-party lenders.
 
As a BDC, we are required by law to make significant managerial assistance available to most of our portfolio companies. Such assistance, when accepted by the portfolio company, typically involves providing guidance and counsel concerning the management, operations and business objectives and policies of the portfolio company to its management and board of directors, including participating on the company's board of directors. We have an operations team with significant turnaround and bankruptcy experience and expertise in manufacturing services, consumer products, supply chain management, outsourcing and other services that assists our investment professionals in providing intensive operational and managerial assistance to our portfolio companies. As of December 31, 2012, we had board seats at 56 out of 96 of our private finance portfolio companies and had board observation rights at other private finance portfolio companies. Providing assistance to our portfolio companies serves as an opportunity for us to maximize their value.

American Capital Asset Management Investment

Our fund management business is conducted through our wholly-owned portfolio company, American Capital Asset Management. In general, a subsidiary of American Capital Asset Management will enter into management agreements with each of its managed funds. As of December 31, 2012, our investment in American Capital Asset Management was $149 million at cost basis and $828 million at fair value, or 16% of our total investments at fair value. This discussion of the operations of American Capital Asset Management includes its consolidated subsidiaries. American Capital Asset Management's earning assets under management totaled $15 billion, with $105 billion of total assets under management (including levered assets), including $93 billion of total assets under management at American Capital Agency Corp. (NASDAQ: AGNC) and $9 billion of total assets under management at American Capital Mortgage Investment Corp. (NASDAQ: MTGE), which are publicly traded residential mortgage real estate investment trusts (“REITs”).
 
American Capital Asset Management had over 80 employees as of December 31, 2012, including seven investment teams with over 25 investment professionals located in Bethesda (Maryland), London and Paris. We have entered into service agreements with American Capital Asset Management to provide it with additional asset management service support. Through these agreements, we provide management and other services to American Capital Asset Management, as well as access to our employees, infrastructure, business relationships, management expertise and capital raising capabilities. We charge American Capital Asset Management a fee for the use of these services. American Capital Asset Management generally earns base management fees based on the shareholders' equity or the net cost basis of the assets of the funds under management and may earn incentive income, or a carried interest, based on the performance of the funds. In addition, we may invest directly into these funds and earn investment income from our investments in those funds.
 
European Capital Investment

European Capital is a wholly-owned investment fund incorporated in Guernsey. European Capital invests in One Stop Buyouts®, Sponsor Finance Investments and provides capital directly to early stage and mature private and small public companies primarily in Europe. It primarily invests in senior and mezzanine debt and equity.

As of December 31, 2012, European Capital had investments in 60 portfolio companies totaling $1.5 billion at fair value, with an average investment size of $25 million, or 1.5% of its total assets. As of December 31, 2012, European Capital's five largest investments at fair value were $550 million, or 34% of its total assets.

As of December 31, 2012, 99.5% of European Capital's assets are invested in portfolio companies headquartered in countries with AA rating or better based on Standard & Poor's ratings. As of December 31, 2012, European Capital's NAV at fair value was $931 million. As of December 31, 2012, our investment in European Capital consisted of an equity investment with a cost basis and fair value of $1,267 million and $700 million, respectively, and a debt investment with a fair value and cost basis of $109 million. As of December 31, 2012, we valued our equity investment in European Capital below its NAV as a result of applying several discounts to its NAV in computing the fair value.


 

3


THE OFFERING
 
We may offer, from time to time, up to $1,000,000,000 of our Securities, on terms to be determined at the time of the offering. Our Securities may be offered at prices and on terms to be disclosed in one or more prospectus supplements. We are generally not able to issue and sell our common stock at a price below our NAV per share, exclusive of any underwriting commissions or discounts, except as otherwise noted herein. Additionally, as a BDC, we generally may not sell debt securities if our asset coverage ratio would be less than 200% after giving effect to such sale, except to refinance existing Senior Securities.
 
Our Securities may be offered directly to one or more purchasers, including existing shareholders in a rights offering, by us or through agents designated from time to time by us, or to or through underwriters or dealers. The prospectus supplement relating to the offering will disclose the terms of the offering, including the name or names of any agents or underwriters involved in the sale of our Securities by us, the purchase price, and any fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See “Plan of Distribution.” We may not sell any of our Securities through agents, underwriters or dealers without delivery of a prospectus supplement describing the method and terms of the offering of our Securities.
 
Set forth below is additional information regarding the offering of our Securities:
 
The NASDAQ Global Select Market Symbol
ACAS
Use of Proceeds
Unless otherwise specified in a prospectus supplement, we intend to use the net proceeds from the sale of our Securities for general corporate purposes, which may include investment in middle market companies in accordance with our investment objectives, repayment of indebtedness, acquisitions and other general corporate purposes. See “Use of Proceeds.”
Distributions
Through our tax year ended September 30, 2010, we were taxed as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, we were subject to annual distribution requirements and from the date of our IPO through December 2008, we historically paid quarterly dividends to the holders of our common stock. Beginning with our tax year ended September 30, 2011, our status changed from a RIC subject to taxation under Subchapter M to a corporation subject to taxation under Subchapter C. Under Subchapter C, we are able to carry forward any NOLs historically incurred to succeeding years, which we would not be able to do if we were subject to taxation as a RIC under Subchapter M. We are subject to federal and applicable state corporate income taxes on our taxable ordinary income and capital gains and are no longer subject to the annual distribution requirements under Subchapter M. During the third quarter of 2011, our Board of Directors adopted a program that may provide for additional repurchases of shares or dividend payments. Under the program, we will consider quarterly setting an amount to be utilized for stock repurchases or dividends. Generally, the amount may be utilized for repurchases if the price of our common stock represents a discount to the NAV of our shares, and the amount may be utilized for the payment of cash dividends if the price of our common stock represents a premium to the NAV of our shares. The repurchase and dividend program may be suspended, terminated or modified at any time for any reason. See “Price Range of Common Stock and Distributions” and “Stock Repurchases.” Other types of Securities will likely pay distributions in accordance with their terms.

4
Table of Contents             



Principal Risk Factors
Investment in our Securities involves certain risks relating to our structure and investment objectives that should be considered by the prospective purchasers of the Securities. We may decide to proceed with structural and organizational changes (certain of which may require the approval of our shareholders), which could result in spinning out to our shareholders an externally managed debt focused BDC, changes in our corporate form, termination of our election to be regulated as a BDC, our conversion from an investment company to an operating company or other fundamental changes. There is a risk you may not receive dividends and that you may receive our stock as dividends. In addition, as a BDC, our portfolio includes securities primarily issued by privately held companies. These investments may involve a high degree of business and financial risk, and are generally less liquid than public securities. Also, our determinations of fair value of privately held securities may differ materially from the values that would exist if there was a ready market for these investments. A large number of entities compete for the same kind of investment opportunities as we do. Moreover, our business requires a substantial amount of cash to operate and to grow, and we are dependent on external financing for growth. Our secured revolving credit facility and term loan facility have restrictions on the incurrence of certain additional indebtedness and liens, acquisitions and investments and the payments of dividends and other distributions. See “Risk Factors” for a discussion of these risks.
Certain Anti-Takeover Provisions
Our certificate of incorporation and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third-party from making an acquisition proposal for us and thereby inhibit a change in control of us in circumstances that could give the holders of our common stock the opportunity to realize a premium over the then prevailing market price for our common stock. See “Risk Factors—Provisions of our Third Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws Could Deter Takeover Attempts” and “Certain Provisions of the Third Amended and Restated Certificate of Incorporation and the Second Amended and Restated Bylaws.”
Dividend Reinvestment Plan
Cash distributions, if any, to holders of our common stock may be reinvested under our Dividend Reinvestment Plan (“DRIP”) in additional whole and fractional shares of our common stock if you or your representative elects to enroll in the DRIP. See “Dividend Reinvestment Plan.”


5
Table of Contents             



FEES AND EXPENSES
 
The following table will assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly.
 
Shareholder Transaction Expenses
 
Sales load (as a percentage of offering price)
—
%
Offering expenses (as a percentage of offering price)(1)
—
%
DRIP fees(2)
—
%
Annual Expenses (as a percentage of consolidated net assets attributable to our common stock)(3)
 
Management fees
—
%
Interest payments on borrowed funds(4)
1.08
%
Other expenses(5)
3.76
%
 
 
Total annual expenses(6)
4.84
%
 _____________________
(1)
In the event that we conduct an offering of any of our securities, a corresponding prospectus supplement will disclose the estimated offering expenses because they will be ultimately borne by us.
(2)
The expenses of the DRIP are included in stock record expenses, a component of “Other expenses.” We have no cash purchase plan. The participants in the DRIP will bear a pro rata share of brokerage commissions incurred with respect to open market purchases, if any.
(3)
Consolidated net assets attributable to our common stock equal net assets (i.e., total assets less total liabilities) at December 31, 2012.
(4)
The interest payments on borrowed funds percentage is calculated by using our interest expense for the year ended December 31, 2012, divided by net assets attributable to our common stock as of December 31, 2012. We had outstanding borrowings of $0.8 billion at December 31, 2012. See “Risk Factors—We have and may incur additional debt that could increase your investment risks” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources.”
(5)
The “Other expenses” percentage is based on an estimate of annual expenses representing all of our operating expenses (except fees and expenses reported in other items of this table) that are deducted from our operating income and reflected as operating expenses in our statement of operations. The estimate of such annual other expenses is calculated by using our actual operating expenses, net of interest expense, for the year ended December 31, 2012, divided by net assets attributable to our common stock as of December 31, 2012.
(6)
Total annual estimated expenses as a percentage of consolidated net assets attributable to our common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The total annual expenses percentage is required by the SEC to be calculated as a percentage of net assets, rather than the total assets, including assets that have been funded with borrowed monies. If the total estimated annual expenses percentage were calculated instead as a percentage of total assets as of December 31, 2012, our total annual expenses would be 4.16% of consolidated total assets as of December 31, 2012.

Example
 
The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. These amounts are based upon payment by us of operating expenses at the levels set forth in the table above. In the event that securities to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load.
 
 
1 Year
 
3 Years
 
5 Years
 
10 Years
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return

$48

 

$146

 

$243

 

$488

 
This example should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. Moreover, while the example assumes (as required by the SEC) a 5% annual return, our performance will vary and may result in a return greater or less than 5%. In addition, while the example assumes reinvestment of all dividends and distributions at NAV, participants in our DRIP may receive shares purchased by the administrator of the DRIP at the market price in effect at the time, which may be at, above or below NAV. See “Dividend Reinvestment Plan.”

6
Table of Contents             



ADDITIONAL INFORMATION
 
We have filed with the SEC a registration statement on Form N-2 under the Securities Act, with respect to the Securities offered by this prospectus. This prospectus, which is a part of the registration statement, does not contain all of the information set forth in the registration statement or exhibits and schedules thereto. For further information with respect to our business and our Securities, reference is made to the registration statement, including the amendments, exhibits and schedules thereto and the SAI, contained in the registration statement.
 
We also file reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You may read or copy such reports, proxy statements and other information, as well as the registration statement and the amendments, exhibits and schedules thereto, at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the public reference facilities may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SEC’s web site is http://www.sec.gov. Copies of such material may also be obtained from the Office of Investor Education and Advocacy of the SEC by written request, fax or email, to: 100 F Street, N.E., Washington, D.C. 20549, (202) 772-9295, or PublicInfo@sec.gov, respectively, at prescribed rates. Our common stock is listed on The NASDAQ Global Select Market and our corporate web site is located at http://www.AmericanCapital.com. Information contained on our web site or on the SEC’s web site about us is not incorporated into this prospectus and you should not consider information contained on our web site or on the SEC’s web site to be part of this prospectus.
 
We make available free of charge on our web site our Annuals Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
 
We also furnish to our shareholders Annual Reports, which will include annual financial information that has been examined and reported on, with an opinion expressed, by our independent registered public accounting firm. See “Independent Registered Public Accounting Firm.”

7

Selected Condensed Consolidated Financial Data
(in millions, except per share data)
 
You should read the condensed consolidated financial information below with the consolidated financial statements and notes thereto included herein. Financial information at and for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, has been derived from our financial statements that were audited by Ernst & Young LLP. Interim financial information is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for such interim periods. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Senior Securities” in this prospectus for more information.
 
 
 
Year Ended December 31, 
 
 
2012
 
2011
 
2010
 
2009
 
2008
Total operating revenue
 
$
646

 
$
591

 
$
600

 
$
697

 
$
1,051

Total operating expenses
 
263

 
288

 
396

 
582

 
521

Net operating income before income taxes
 
383

 
303

 
204

 
115

 
530

Tax benefit (provision)(1)
 
14

 
145

 
—

 
20

 
(37
)
Net operating income (“NOI”)
 
397

 
448

 
204

 
135

 
493

(Loss) gain on extinguishment of debt, net of tax
 
(3
)
 
—

 
—

 
12

 
—

Net realized (loss) gain(1)
 
(270
)
 
(310
)
 
(576
)
 
(825
)
 
32

Net realized earnings (loss)
 
124

 
138

 
(372
)
 
(678
)
 
525

Net unrealized appreciation (depreciation)(1)
 
1,012

 
836

 
1,370

 
(232
)
 
(3,640
)
Net increase (decrease) in net assets resulting from
   operations (“Net earnings (loss)”)
 
$
1,136

 
$
974

 
$
998

 
$
(910
)
 
$
(3,115
)
 
 
 

 
138

 
 

 
 

 
 

Per share data:
 
 

 
 
 
 

 
 

 
 

NOI:
 
 

 
 
 
 

 
 

 
 

Basic
 
$
1.24

 
$
1.30

 
$
0.63

 
$
0.56

 
$
2.42

Diluted
 
$
1.20

 
$
1.26

 
$
0.62

 
$
0.56

 
$
2.42

Net earnings (loss):
 
 
 
 
 
 

 
 

 
 

Basic
 
$
3.55

 
$
2.83

 
$
3.06

 
$
(3.77
)
 
$
(15.29
)
Diluted
 
$
3.44

 
$
2.74

 
$
3.02

 
$
(3.77
)
 
$
(15.29
)
Dividends declared(2)
 
$
—

 
$
—

 
$
—

 
$
1.07

 
$
3.09

Balance sheet data:
 
 

 
 

 
 

 
 

 
 

Total assets
 
$
6,319

 
$
5,961

 
$
6,084

 
$
6,672

 
$
7,910

Total debt
 
$
775

 
$
1,251

 
$
2,259

 
$
4,142

 
$
4,428

Total shareholders’ equity
 
$
5,429

 
$
4,563

 
$
3,668

 
$
2,329

 
$
3,155

NAV per share
 
$
17.84

 
$
13.87

 
$
10.71

 
$
8.29

 
$
15.41

Other data (unaudited):
 
 

 
 

 
 

 
 

 
 

Number of portfolio companies at period end
 
139

 
152

 
160

 
187

 
223

New investments(3)
 
$
719

 
$
317

 
$
234

 
$
109

 
$
2,607

Realizations(4)
 
$
1,498

 
$
1,066

 
$
1,293

 
$
1,143

 
$
2,176

Weighted average effective interest rate on private
    finance debt investments at period end(5)
 
11.7
%
 
10.8
%
 
10.2
%
 
9.9
%
 
10.8
%
NOI return on average shareholders’ equity(6)
 
7.7
%
 
10.7
%
 
6.8
%
 
5.5
%
 
9.5
%
Net realized earnings return (loss) on average
    shareholders’ equity(6)
 
2.4
%
 
3.3
%
 
(12.5
%)
 
(27.8
%)
 
10.1
%
Net earnings return (loss) on average shareholders’
    equity(6)
 
22.1
%
 
23.3
%
 
33.5
%
 
(37.3
%)
 
(60.0
%)
Assets under management(7)
 
$
116,800

 
$
68,129

 
$
22,645

 
$
14,022

 
$
12,804

Earning assets under management(8)
 
$
18,642

 
$
13,496

 
$
8,989

 
$
8,518

 
$
9,608

 
(1)
Beginning in 2011, we were no longer taxed as a RIC under Subchapter M of the Code and instead became subject to taxation as a corporation under Subchapter C of the Code. As a result, we recorded a net deferred tax asset of $428 million in 2011 recorded as a deferred tax benefit of $145 million in NOI, $75 million in net realized (loss) gain and $208 million in net unrealized appreciation (depreciation) in our consolidated statements of operations in this prospectus. In 2012, we recorded a tax benefit of $14 million in NOI, $87 million in net realized (loss) gain, $2 million in (loss) gain on extinguishment of debt, net of tax and a tax provision of $82 million in net unrealized appreciation (depreciation) in our consolidated statements of operations in this prospectus.

8

(2)
In 2009, we declared a dividend of $1.07 per share, which was paid part in cash and stock in August 2009.
(3)
New investments include amounts as of the investment dates that are committed.
(4)
Realizations represent cash proceeds received upon the exit of investments including payment of scheduled principal amortization, debt prepayments, proceeds from loan syndications and sales, payment of accrued payment-in-kind (“PIK”) notes, and dividends and payments associated with accreted original issue discounts and sale of equity and other securities.
(5)
Weighted average effective interest rate on private finance debt investments as of period end is computed as (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt, divided by (b) total debt at amortized cost.
(6)
Return represents net increase or decrease in net assets resulting from operations. Average equity is calculated based on the quarterly shareholders' equity balances.
(7)
Assets under management include both (i) the total assets of American Capital and (ii) the total assets of the funds under management by American Capital Asset Management, excluding any direct investment we have in those funds.
(8)
Earning assets under management include both (i) the total assets of American Capital and (ii) the total third-party earning assets under management by American Capital Asset Management from which the associated base management fees are calculated, excluding any direct investment we have in those funds.


9

RISK FACTORS
 
You should carefully consider the risks described below and all other information contained in this prospectus, including our consolidated financial statements and the related notes thereto before making a decision to purchase our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.
 
If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our securities could decline, and you may lose all or part of your investment.
 
Risks Related to Our Business and Structure
 
Future adverse market and economic conditions could cause harm to our operating results
 
Past recessions have had a significant negative impact on the operating performance and fair value of our portfolio investments. Many of our portfolio companies could be adversely impacted again by any future economic downturn or recession and may be unable to repay our debt investments, may be unable to be sold at a price that would allow us to recover our investment, or may be unable to operate during such recession. Such portfolio company performance could have a material adverse effect on our business, financial condition and results of operations.

We have loans to and investments in middle market borrowers who may default on their loans and we may lose our investment
 
We have invested in and made loans to privately-held, middle market businesses and plan to continue to do so. There is generally a limited amount of publicly available information about these businesses. Therefore, we rely on our principals, associates, analysts, other employees and consultants to investigate and monitor these businesses. The portfolio companies in which we have invested may have significant variations in operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position, may otherwise have a weak financial position or may be adversely affected by changes in the business cycle. Our portfolio companies may not meet net income, cash flow and other coverage tests typically imposed by senior lenders. Numerous factors may affect a portfolio company's ability to repay its loans, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. Deterioration in a portfolio company's financial condition and prospects may be accompanied by deterioration in the collateral for the loan. We have also made unsecured and mezzanine loans and invested in equity securities, which involve a higher degree of risk than senior secured loans. In certain cases, our involvement in the management of our portfolio companies may subject us to additional defenses and claims from borrowers and third-parties. These conditions may make it difficult for us to obtain repayment of our investments.
 
Middle market businesses typically have narrower product lines and smaller market shares than large businesses. They tend to be more vulnerable to competitors' actions and market conditions, as well as general economic downturns. In addition, these companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial and technical personnel.
 
These businesses may also experience substantial variations in operating results. Typically, the success of a middle market business also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on us. In addition, middle market businesses often need substantial additional capital to expand or compete and may have borrowed money from other lenders with claims that are senior to our claims.
 
Our senior loans generally are secured by the assets of our borrowers, however certain of our senior loans may have a second priority lien and thus, our security interest may be subordinated to the payment rights and security interest of the first lien senior lender. Additionally, our mezzanine loans may or may not be secured by the assets of the borrower; however, if a mezzanine loan is secured, our rights to payment and our security interest are usually subordinated to the payment rights and security interests of the first and second lien senior lenders. Therefore, we may be limited in our ability to enforce our rights to collect our second lien senior loans or mezzanine loans and to recover any of the loan balance through a foreclosure of collateral.





10

Non-accruing loans adversely affect our results of operations and financial condition and could result in further losses in the future

As of December 31, 2012 and 2011, our non-accruing loans at cost totaled $260 million and $419 million, or 12.9% and 15.3% of our total loans at cost, respectively. Non-accruing loans adversely affect net income in various ways. While we incur interest expense to fund non-accruing loans, no interest income is recorded on non-accruing loans, thereby adversely affecting income and returns on assets and equity. There is no assurance that we will not experience further increases in non-accruing loans in the future, or that non-accruing loans will not result in further losses to come.

There is uncertainty regarding the value of our portfolio investments
 
A substantial portion of our portfolio investments are not publicly traded. As required by law, we fair value these investments in accordance with the 1940 Act and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) based on a determination made in good faith by our Board of Directors. Due to the uncertainty inherent in valuing investments that are not publicly traded, as set forth in our consolidated financial statements in this prospectus, our determinations of fair value may differ materially from the values that would exist if a ready market for these investments existed. Our determinations of the fair value of our investments have a material impact on our net earnings through the recording of unrealized appreciation or depreciation of investments as well as our assessment of income recognition. Thus, our NAV could be materially affected in the event of any changes in applicable law or accounting pronouncements governing how we currently fair value assets, or if our determinations regarding the fair value of our investments are materially different from the values that would exist if a ready market existed for these securities.
 
Our business has significant capital requirements and may be adversely affected by a prolonged inability to access the capital markets or to sell assets
 
Our business requires a substantial amount of capital to operate. We historically have financed our operations, including the funding of new investments, through cash generated by our operating activities, the repayment of debt investments, the sale of equity investments, the issuance of debt by special purpose affiliates to which we have contributed loan assets, the sale of our stock and through secured and unsecured borrowings. Our ability to continue to rely on such sources or other sources of capital is affected by restrictions in both the 1940 Act and in certain of our debt agreements relating to the incurrence of additional indebtedness as well as changes in the capital markets from the recent economic recession. It is also affected by legal, structural and other factors. There can be no assurance that we will be able to earn or access the funds necessary for our liquidity requirements.
 
Our ability to recognize the benefits of our deferred tax asset is dependent on future taxable income and could be substantially limited if we experience an “ownership change” within the meaning of Section 382 of the Code

We recognize the expected future tax benefit from a deferred tax asset when the tax benefit is considered more likely than not to be realized. Otherwise, a valuation allowance is applied against the deferred tax asset. Assessing the recoverability of a deferred tax asset requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from investments and operations, the character of expected income or loss as either capital or ordinary and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and the amount or character of taxable income differ significantly from estimates, our ability to realize the deferred tax asset could be impacted. See Note 11 to our consolidated financial statements in this prospectus.

Additionally, under Sections 382 and 383 of the Code, following an “ownership change,” certain limitations apply to the use by a “loss corporation” of certain tax attributes including net operating loss carryforwards, capital loss carryforwards, unrealized built-in losses and tax credits arising before the “ownership change.” Such tax attributes represent substantially all of our deferred tax assets. In general, an “ownership change” would occur if there is a cumulative change in the ownership of our common stock of more than 50 percentage points by one or more “5% shareholders” during a three-year period. In the event of an “ownership change,” the tax attributes that may be used to offset our future taxable income in each year after the “ownership change” will be subject to an annual limitation. In general, the annual limitation is equal to the product of the fair market value of our common stock on the date of the “ownership change” and the “long term tax exempt rate” (which is published monthly by the Internal Revenue Service), subject to specified adjustments. This limitation could accelerate our cash tax payments and could result in a significant portion of our deferred tax asset expiring before we could fully use them. On April 27, 2012, we amended our Certificate of Incorporation to impose certain restrictions on the transfer of our common stock. These restrictions reduce, but do not eliminate, the risk of an “ownership change.”

Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business
 
We and our portfolio companies are subject to regulation by laws at the local, state, federal and foreign level, including with respect to securities laws, tax and accounting standards. These laws and regulations, as well as their interpretation, may be

11

changed from time to time. Accordingly, any change in these laws or regulations or the failure to comply with these laws or regulations could have a material adverse impact on our business. Certain of these laws and regulations pertain specifically to BDCs.
 
We may materially change our corporate structure and the nature of our business

We are very much affected by the legal, regulatory, tax and accounting regimes under which we operate. We are evaluating whether those regimes and our existing corporate structure are the optimum means for the operation and capitalization of our business. As a result of these evaluations, we may decide to proceed with structural and organizational changes (certain of which may require the approval of our shareholders), which could result in spinning out to our shareholders an externally managed debt focused BDC, changes in our corporate form, termination of our election to be regulated as a BDC, our conversion from an investment company to an operating company or other fundamental changes. If we were no longer an investment company, our accounting practices would change and, for example, lead to the consolidation of certain majority owned companies with which we do not now consolidate as an investment company. Additionally, if we were no longer an investment company, our shareholders would not benefit from the investor protections provided by the 1940 Act. We may incur certain costs in completing these evaluations and may receive no benefit from these expenditures, particularly if we do not proceed with any changes. No decisions have been made with respect to any such changes and there is no timetable for making any decisions, including any decision not to proceed with any such changes.

A change in interest rates may adversely affect our profitability
 
Because we have funded a portion of our investments with borrowings, our earnings are affected by the spread between the interest rate on our investments and the interest rate at which we borrowed funds. We have attempted to match-fund our liabilities and assets by financing floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liabilities or equity. We have entered into interest rate basis swap agreements to match the interest rate basis of a portion of our assets and liabilities, thereby locking in the spread between our asset yield and the cost of our borrowings, and to fulfill our obligations under the terms of our asset securitizations. However, our derivatives are considered economic hedges that do not qualify for hedge accounting under ASC Topic 815, Derivatives and Hedging (“ASC 815”). Therefore, payments under the hedges are recorded in net realized (loss) gain in our consolidated statements of operations in this prospectus and not in interest income or expense.
 
Under our interest rate swap agreements, we generally pay a fixed rate and receive a floating interest rate based on LIBOR. We may enter into interest rate swaption agreements where, if exercised, we would receive a fixed rate and pay a floating rate based on LIBOR. We may also enter into interest rate cap agreements that would entitle us to receive an amount, if any, by which our interest payments on our variable rate debt exceed specified interest rates.
 
An increase or decrease in interest rates could reduce the spread between the rate at which we invest and the rate at which we borrow, and thus, adversely affect our profitability, if we have not appropriately match-funded our liabilities and assets or hedged against such event. Alternatively, our interest rate hedging activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio.
 
Also, the fair value of certain of our debt investments is based in part on the current market yields or interest rates of similar securities. A change in interest rates could have a significant impact on our determination of the fair value of these debt investments. In addition, a change in interest rates could also have an impact on the fair value of our interest rate swap agreements that could result in the recording of unrealized appreciation or depreciation in future periods. For example, a decline, or a flattening, of the forward interest rate yield curve will typically result in the recording of unrealized depreciation of our interest rate swap agreements.
 
Therefore, adverse developments resulting from changes in interest rates could have a material adverse effect on our business, financial condition and results of operations. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2012 and Item 8. Financial Statements and Supplementary Data for additional information on interest rate swap agreements.
 
A change in currency exchange rates may adversely affect our profitability
 
We have or may make investments in debt instruments that are denominated in currencies other than the U.S. dollar. In addition, we have or may make investments in the equity of portfolio companies whose functional currency is not the U.S. dollar. Our domestic portfolio companies may also transact a significant amount of business in foreign countries and therefore their profitability may be impacted by changes in foreign currency exchange rates. The functional currency of one of our largest portfolio companies, European Capital, is the Euro. European Capital also has investments in other European currencies, including the British Pound. As a result, an adverse change in currency exchange rates may have a material adverse impact on our business, financial condition and results of operations.
 

12

We may experience fluctuations in our quarterly results
 
We have and could experience material fluctuations in our quarterly operating results due to a number of factors including, among others, variations in and the timing of the recognition of realized and unrealized gains or losses, placing and removing investments on non-accrual status, the degree to which we encounter competition in our markets, the ability to sell investments at attractive terms, the ability to fund and close suitable investments, the timing of the recognition of fee income from closing investment transactions and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods. See Management's Discussion and Analysis of Financial Condition and Results of Operations in this prospectus.
 
We are dependent upon our key management personnel for our future success
 
We are dependent on the diligence and skill of our senior management and other members of management for raising capital and the selection, structuring, monitoring, restructuring/amendment, sale and exiting of our investments. Our future success depends to a significant extent on the continued service of our senior management and other members of management. Our failure to raise additional capital that would enhance the growth of our business, or our failure to provide appropriate opportunities for or compensate competitively senior management and other members of management may make it difficult to retain such individuals. The departure of certain executive officers or key employees could materially adversely affect our ability to implement our business strategy. We do not maintain key man life insurance on any of our officers or employees.
 
We operate in a highly competitive market for investment opportunities
 
We compete with strategic buyers and hundreds of private equity and mezzanine debt funds and other financing sources, including traditional financial services companies such as finance companies, commercial banks, investment banks and other equity and non-equity based investment funds. Some of our competitors are substantially larger and have considerably greater financial resources than us. Competitors may have lower cost of funds and many have access to funding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to offer better pricing and terms to prospective portfolio companies, consider a wider variety of investments and establish more relationships and build their market shares. There is no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. In addition, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time and there can be no assurance that we will be able to identify and make investments that satisfy our investment objectives or that we will be able to meet our investment goals.

We could face losses and potential liability if intrusions, viruses or similar disruptions to our technology jeopardize our confidential information or that of users of our technology
 
Although we have implemented, and will continue to implement, security measures, our technology platform is and will continue to be vulnerable to intrusion, computer viruses or similar disruptive problems caused by transmission from unauthorized users. In addition, any misappropriation of proprietary information could expose us to a risk of loss or litigation.
 
Risks Related to Liquidity and Capital Resources
 
Our secured borrowing arrangements impose significant limitations on us
 
The loans under our four-year $600 million secured term loan facility (“Term Loan Facility”) may only be refinanced at a lower rate, in full or in part, prior to August 22, 2013 for an amount equal to 101% of the principal prepaid plus accrued interest. In addition, our secured term loans have scheduled amortization and mandatory prepayments in the event of a borrowing base deficiency or the issuance of new debt, and in certain cases, if there are realized proceeds from a portfolio company exit or excess cash flow. Any loans that may be outstanding under our four-year $250 million secured revolving credit facility (“Revolving Credit Facility”) are also subject to scheduled amortization after the three year revolving period and mandatory prepayments in the event of a borrowing base deficiency.

The Term Loan Facility and the Revolving Credit Facility have covenants that in certain circumstances limit our ability to incur additional debt and liens, pay cash dividends, repurchase common stock, dispose of assets and make new investments and acquisitions. We are also prohibited from seeking to resume our status as a RIC and changing our regulatory status as a BDC. Both facilities require us to maintain a 100% borrowing base coverage. The Revolving Credit Facility also includes other financial covenants that require us to maintain a maximum total leverage ratio not to exceed 0.75:1.00 and minimum adjusted EBITDA for American Capital Asset Management. There can be no assurance that we will be able to maintain compliance with each of these covenants and a failure to do so could result in an event of default under the facilities. Other events of default under the Term Loan Facility and the Revolving Credit Facility include without limitation, a payment default, an unremedied borrowing base deficiency, a cross default to our other facility, the cross acceleration of any debt in excess of an aggregate $50 million, the liquidation or

13

bankruptcy of us or American Capital Asset Management, the failure by us to conduct our asset management business through American Capital Asset Management, one or more judgments in excess of an aggregate $50 million and a change of control. The occurrence of an event of default under the facilities could have a material adverse effect on our business, financial condition and results of operations.

Additionally, debt obligations outstanding under our asset securitizations currently require that all principal and interest received on the loans securing such debt be used to repay such debt. Accordingly, we do not currently have access to the liquidity or current cash flows from the loans securing the debt in our asset securitizations for funding new investments or general corporate needs.
 
The 1940 Act limits our ability to issue Senior Securities in certain circumstances
 
As a BDC, the 1940 Act generally limits our ability to issue Senior Securities if our asset coverage ratio does not exceed 200% immediately after each issuance of Senior Securities or is improved immediately upon the issuance. Asset coverage ratio is defined in the 1940 Act as the ratio that the value of the total assets, less all liabilities and indebtedness not represented by Senior Securities, bears to the aggregate amount of Senior Securities representing indebtedness. We have operated at times in the past with our asset coverage ratio below 200% and there are no assurances that we will always operate above this ratio. The resulting restrictions on issuing Senior Securities could have a material adverse impact on our business operations.

The 1940 Act limits our ability to issue equity below our NAV per share
 
As a BDC, the 1940 Act generally limits our ability to issue and sell our common stock at a price below our NAV per share, exclusive of any distributing commission or discount, without shareholder approval. Since 2008, shares of our common stock have traded below our NAV per share. While our common stock continues to trade at a price below our NAV per share, there are no assurances that we can issue or sell shares of our common stock if needed to fund our business. In addition, even in certain instances where we could issue or sell shares of our common stock at a price below our NAV per share, such issuance could result in dilution in our NAV per share, which could result in a decline of our stock price.
 
Our interest rate swap agreements contain covenants that place limitations on us
 
We enter into interest rate swap agreements to manage interest rate risk and also to fulfill our obligations under the terms of our asset securitizations. Our interest rate swap agreements contain various events of default, including in certain cases an event of default that allows the counterparty to terminate transactions outstanding under the agreement following the occurrence of a cross default on certain of our other indebtedness. Certain of our interest rate swap agreements also contain an event of default that allows a counterparty to terminate transactions outstanding under the agreement if certain of our other indebtedness, as applicable, is accelerated. An event of default under certain of our interest rate swap agreements could also trigger a default under our secured debt facilities if such agreements are terminated early and would result in an aggregate amount due at such time in excess of $50 million. Some of our interest rate swap agreements are secured by first and second priority liens (subject to certain permitted liens) on substantially all of our non-securitized assets pari passu with the Term Loan Facility and, in certain cases, also the Revolving Credit Facility. The remaining interest rate swap agreements are secured by a first priority lien (subject to certain permitted liens) on our securitized assets pari passu with our securitized debt. Thus, if we violate the covenants in any of the interest rate swap agreements, it could have a material adverse effect on our business, financial condition and results of operations.
 
The lack of liquidity in our privately-held securities may adversely affect our business
 
Most of our investments consist of securities acquired directly from their issuers in private transactions. Some of these securities are subject to restrictions on resale or otherwise are less liquid than public securities. The illiquidity of our investments may make it difficult for us to obtain cash equal to the value at which we record our investments upon exiting the investment.
 
Risks Related to Our Investing and Financing Strategy
 
We have and may incur additional debt that could increase your investment risks
 
We and certain of our consolidated affiliates have borrowed money or issued debt securities, which give our lenders and the holder of our debt securities fixed dollar claims on our assets or the assets of such consolidated affiliates that are senior to the claims of our shareholders and, thus, our lenders have preference over our shareholders with respect to these assets. In particular, the assets that our consolidated affiliates have pledged to lenders under our asset securitizations were sold or contributed to separate affiliated statutory trusts prior to such pledge. While we own a beneficial interest in these trusts, these assets are the property of the respective trusts, available to satisfy the debts of the trusts, and would only become available for distribution to our shareholders to the extent specifically permitted under the agreements governing those term debt notes. Additionally, we have granted a security interest in substantially all of our other assets to the lenders of our Term Loan Facility and Revolving Credit Facility which impose certain limitations on us.
 

14

The following table is designed to illustrate the effect on returns to a holder of our common stock of the leverage created by our use of borrowing, at the weighted average interest rate of 6.1% for the year ended December 31, 2012, and assuming hypothetical annual returns on our portfolio of minus 15% to plus 15%. As illustrated below, leverage generally increases the return to shareholders when the portfolio return is positive and decreases the return when the portfolio return is negative. Actual returns may be greater or less than those appearing in the table.
Assumed Return on Portfolio (Net of
   Expenses)(1)
(15%)
(10%)
(5%)
—%
5%
10%
15%
Corresponding Return to Shareholders(2)
(18.54%)
(12.72%)
(6.90%)
(1.08%)
4.74%
10.56%
16.38%
 
(1)
The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance.
(2)
In order to compute the “Corresponding Return to Shareholders,” the “Assumed Return on Portfolio” is multiplied by the total value of our assets at the beginning of the period to obtain an assumed return to us. From this amount, all interest expense accrued during the period is subtracted to determine the return available to shareholders. The return available to shareholders is then divided by the total value of our net assets as of the beginning of the period to determine the “Corresponding Return to Shareholders.”
 
Although outstanding debt increases the potential for gain, it also increases the risk of loss of income or capital. This is the case, whether we are impacted by an increase or decrease in income or due to increases or decreases in asset values. Our ability to pay dividends is similarly impacted by outstanding debt.
 
We currently have a non-investment grade corporate credit rating and we could experience downgrades
 
As of December 31, 2012, our corporate credit rating was B2, B+ and B+ by Moody's Investor Services, Standard & Poor's Ratings Services and Fitch Ratings, respectively. Any rating below BBB or Baa2 is considered non-investment grade. A non-investment grade rating in general reduces a company's access to debt capital. If these credit ratings were to be downgraded, our ability to refinance or raise additional debt could be negatively impacted. Any of these occurrences could have a material effect on our business, financial condition and results of operations.
 
Our credit ratings may not reflect all risks of an investment in our debt securities
 
Our credit ratings are an assessment by major debt rating agencies of our ability to pay our obligations. Consequently, actual or expected changes in our credit ratings will likely affect the market value of our traded debt securities. Our credit ratings, however, may not fully or accurately reflect all of the credit and market risks associated with our outstanding debt securities.
 
We may not realize gains from our equity investments
 
We invest in equity assets with the goal to realize income and gains from the performance and disposition of these assets. Some or all of these equity assets may not produce income or gains; accordingly, we may not be able to realize income or gains from our equity assets.
 
Our portfolio companies may be highly leveraged with debt
 
The debt levels of our portfolio companies may have important adverse consequences to such companies and to us as an investor. Portfolio companies that are indebted may be subject to restrictive financial and operating covenants. The leverage may impair these companies' ability to finance their future operations and capital needs. As a result, their flexibility to respond to changing business and economic conditions and to business opportunities may be limited. A company's income and net worth will tend to increase or decrease at a greater rate than if the company did not capitalize itself in part with debt.

Investments in non-investment grade Structured Products may be illiquid, may have a higher risk of default, and may not produce current returns
 
Our investments in Structured Products securities are generally non-investment grade. Non-investment grade Structured Products bonds and preferred shares tend to be illiquid, have a higher risk of default and may be more difficult to value than investment grade bonds. Recessions or poor economic or pricing conditions in the markets associated with Structured Products may cause higher defaults or losses than expected on these bonds and preferred shares. Non-investment grade securities are considered speculative, and their capacity to pay principal and interest in accordance with the terms of their issue is not certain.
 




15

Our assets include investments in Structured Products that are subordinate in right of payment to more senior securities
 
Our assets include subordinated CLO, CDO and CMBS securities, which are subordinated classes of securities in a structure of securities secured by a pool of loans. Accordingly, such securities are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Thus, there is generally only a nominal amount of equity or other debt securities junior to our positions, if any, issued in such structures. Additionally, the estimated fair values of our subordinated interests tend to be much more sensitive to changes in economic conditions than more senior securities.
 
The trading market or market value of our debt securities may fluctuate
 
Many factors may materially adversely affect the trading market for, and market value of, our debt securities including, but not limited to, the following:
 
•
future defaults under the securities;

•
our creditworthiness;

•
the time remaining to the maturity of these debt securities;

•
the outstanding principal amount of debt securities with terms identical to these debt securities;

•
the supply of debt securities trading in the secondary market, if any;

•
the redemption or repayment features, if any, of these debt securities;

•
the level, direction and volatility of market interest rates generally; and

•
market rates of interest that are higher or lower than rates borne by the debt securities.
 
There may also be a limited number of buyers when an investor decides to sell its debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities.
 
We may issue preferred stock in the future to help finance our business, which would magnify the potential for gain or loss and the risks of investing in us in the same way as our borrowings

Preferred stock, which is another form of leverage, has the same risks to our common shareholders as borrowings because the dividends on any preferred stock we issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends or other payments to our common shareholders, and preferred shareholders are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference.

We have restrictions on the type of assets we can invest in as a BDC
 
As a BDC, we may not acquire any assets other than certain qualifying assets described in the 1940 Act, unless, at the time of and after giving effect to the acquisition, at least 70% of our total assets consist of such qualifying assets. Thus, in certain instances, we may be precluded from investing in potentially attractive investments that are not qualifying assets for purposes of the 1940 Act. In addition, there is a risk that this restriction could prevent us from making additional investments in our existing non-qualifying investments, which could cause our position to be diluted or limit the access to capital of our non-qualifying investments.

There are conflicts of interest with other funds that we manage
 
Through our wholly-owned portfolio company, American Capital Asset Management, we manage various funds that may compete with us for investments. Although we have policies in place to seek to mitigate the effects of conflicts of interest, these policies will not eliminate the conflicts of interest that our officers and employees and the officers and employees of our fund managers and affiliates will face in making investment decisions on behalf of American Capital or any other American Capital-sponsored investment vehicles. Further, we do not have any agreement or understanding with our funds that would give us any priority over them in opportunities to invest in overlapping investments. Accordingly, we may compete for access to investments with other funds that we manage.


16

Risks Related to Our Common Stock
 
We may not pay any cash dividends
 
We are subject to federal and applicable state corporate income taxes on our taxable ordinary income and capital gains beginning with our tax year ended September 30, 2011, and are not subject to the annual distribution requirements under Subchapter M of the Code. We have not paid a cash dividend during the last three fiscal years ended December 31, 2012 and there can be no assurance that we will pay any cash dividends in the future as we may retain our earnings to facilitate the growth of our business, to invest, to provide liquidity, to repurchase our shares or for other corporate purposes.
 
Future equity issuances may be on terms adverse to shareholder interests
 
We may issue equity capital at prices below our NAV per share with shareholder approval. As of the date of this filing, we do not have such authorization; however, we may seek such approval in the future or we may elect to conduct a rights offering, which would not require shareholder approval under the 1940 Act. If we issue any shares of common stock below our NAV per share, the interests of our existing shareholders may be diluted. Any such dilution could include a reduction in our NAV per share as a result of the issuance of shares at a price below the NAV per share and a decrease in a shareholder's interest in our earnings and assets and voting interest. As of December 31, 2012, the closing price of our common stock was below our NAV per share.

The following table is designed to illustrate the dilutive effect on NAV per share if we issue shares of common stock below our NAV per share. The table below reflects NAV per share diluted for the hypothetical issuance of 50,000,000 shares of common stock (about 16% of outstanding shares as of December 31, 2012), at hypothetical sales prices of 5%, 10%, 15%, 20%, 25% and 50% below the December 31, 2012 NAV of $17.84 per share.
 
Assumed Sales price per share below
   NAV per share(1)
(50%)
(25%)
(20%)
(15%)
(10%)
(5%)
Diluted NAV per share
$16.58
$17.20
$17.33
$17.46
$17.58
$17.71
% Dilution
(7.1%)
(3.5%)
(2.8%)
(2.1%)
(1.4%)
(0.7%)
 
(1)
The assumed sales price per share is assumed to be net of any applicable underwriting commissions or discounts.
 
The market price of our common stock may fluctuate significantly
 
The market price and marketability of shares of our securities may from time to time be significantly affected by numerous factors, including many over which we have no control and that may not be directly related to us. These factors include the following:
 
•
price and volume fluctuations in the stock market from time to time, which are often unrelated to the operating performance of particular companies;

•
defaulting on our debt covenants;

•
significant volatility in the market price and trading volume of securities of BDCs, financial service companies, asset managers or other companies in our sector, which is not necessarily related to the operating performance of particular companies;

•
changes in laws, regulatory policies, tax guidelines or financial accounting standards, particularly with respect to BDCs;

•
changes in our earnings or variations in operating results;

•
any shortfall in revenue or net income or any increase in losses from levels expected by securities analysts and the market in general;

•
decreases in our NAV per share;

•
general economic trends and other external factors; and

•
loss of a major funding source.
 
Fluctuations in the trading price of our common stock may adversely affect the liquidity of the trading market for our common stock and, in the event that we seek to raise capital through future equity financings, our ability to raise such equity capital.


17

Our common stock may be difficult to resell
 
Investors may not be able to resell shares of common stock at or above their purchase prices due to a number of factors, including:
 
•
actual or anticipated fluctuation in our operating results;

•
volatility in our common stock price;

•
changes in expectations as to our future financial performance or changes in financial estimates of securities analysts; and

•
departures of key personnel.
 
Provisions of our Charter and Bylaws could deter takeover attempts
 
Our charter and bylaws and the Delaware General Corporation Law contain certain provisions that may have the effect of discouraging and delaying or making more difficult a change in control. For example, we are subject to Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested shareholders except in certain cases. The existence of these provisions may negatively impact the price of our common stock and may discourage third-party bids. These provisions may also reduce any premiums paid to our shareholders for shares of our common stock that they own.
 
USE OF PROCEEDS
 
Unless otherwise specified in a prospectus supplement accompanying this prospectus, we intend to use the net proceeds from the sale of the Securities for general corporate purposes, including for our investment and lending activities, in accordance with our investment objectives, repayment of our indebtedness outstanding from time to time and acquisitions.
 
We anticipate that substantially all of the net proceeds of any offering of Securities will be utilized in the manner described above within two years. Pending such utilization, we intend to invest the net proceeds of any offering of Securities in time deposits, income-producing securities with maturities of three months or less that are issued or guaranteed by the federal government or an agency thereof and high quality debt securities maturing in one year or less from the time of investment.
 
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
 
Our common stock is quoted on The NASDAQ Global Select Market under the ticker symbol “ACAS”. As of June 1, 2013, we had 772 shareholders of record. Most of the shares of our common stock are held by brokers and other institutions on behalf of shareholders. We believe that there are approximately 116,800 additional beneficial holders of our common stock. During the years ended December 31, 2012 and 2011 we did not declare any dividends on our common stock.
 

18

The following table sets forth the range of high and low sales prices of our common stock as reported on The NASDAQ Global Select Market.
 
BID PRICE
 
 
NAV
Per
Share(1)
 
High
 
Low
 
Discount
of Low
Sales Price to
NAV Per Share
 

Discount
of High
Sales Price to
NAV Per Share
2011
 
 
 
 
 
 
 
 
 
First Quarter
$
11.97

 
$
9.93

 
$
7.65

 
(36.09
)%
 
(17.04
)%
Second Quarter
$
13.16

 
$
10.85

 
$
8.60

 
(34.65
)%
 
(17.55
)%
Third Quarter
$
11.92

 
$
10.29

 
$
6.75

 
(43.37
)%
 
(13.67
)%
Fourth Quarter
$
13.87

 
$
8.16

 
$
5.98

 
(56.89
)%
 
(41.17
)%
2012
 
 
 
 
 
 
 
 
 
First Quarter
$
15.71

 
$
9.26

 
$
6.86

 
(56.33
)%
 
(41.06
)%
Second Quarter
$
16.62

 
$
10.10

 
$
8.16

 
(50.90
)%
 
(39.23
)%
Third Quarter
$
17.39

 
$
12.00

 
$
9.50

 
(45.37
)%
 
(30.99
)%
Fourth Quarter
$
17.84

 
$
12.43

 
$
11.12

 
(37.67
)%
 
(30.33
)%
2013
 
 
 
 
 
 
 
 
 
First Quarter
$
19.04

 
$
14.27

 
$
12.19

 
(35.98
)%
 
(25.05
)%
Second Quarter
*

 
$
15.20

 
$
11.82

 
*
 
*
Third Quarter (through July 24, 2013)
*

 
$
13.94

 
$
12.58

 
*

 
*

 _____________________
(1)
NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sale price. Historically, our net assets have been highest at the end of the quarter. The NAVs per share shown are based on outstanding shares as of the end of each period presented.
*
Not determinable at the time of filing.

From the date of our IPO through December 31, 2008, our common stock traded above our NAV per share. Since December 31, 2008, our common stock has traded below NAV per share. In September 2011, our Board of Directors adopted a program that may provide for stock repurchases or dividend payments. Under this program, quarterly, we will consider setting an amount to be utilized for stock repurchases or dividends. Generally, the amount may be utilized for repurchases if the price of our common stock represents a discount to the NAV of our shares, and the amount may be utilized for the payment of cash dividends if the price of our common stock represents a premium to the NAV of our shares. The stock repurchase and dividend program is expected to be in effect through December 31, 2013. Since its adoption through December 31, 2012, we repurchased a total of 52.4 million shares of our common stock in the open market for $495 million at an average price of $9.46 per share, which was accretive to our NAV per share by $1.09.
























19


MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in millions, except per share data)
 
Forward-Looking Statements
 
All statements contained herein that are not historical facts including, but not limited to, statements regarding anticipated activity are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: (i) changes in the economic conditions in which we operate negatively impacting our financial resources; (ii) certain of our competitors have greater financial resources than us, reducing the number of suitable investment opportunities offered to us or reducing the yield necessary to consummate the investment; (iii) there is uncertainty regarding the value of our privately-held securities that require our good faith estimate of fair value, and a change in estimate could affect our NAV; (iv) our investments in securities of privately-held companies may be illiquid, which could affect our ability to realize the investment; (v) our portfolio companies could default on their loans or provide no returns on our investments, which could affect our operating results; (vi) we use external financing to fund our business, which may not always be available; (vii) our ability to retain key management personnel; (viii) an economic downturn or recession could impair our portfolio companies and therefore harm our operating results; (ix) our borrowing arrangements impose certain restrictions; (x) changes in interest rates may affect our cost of capital and NOI; (xi) we cannot incur additional indebtedness unless immediately after a debt issuance we maintain an asset coverage of at least 200%, or equal to or greater than our asset coverage prior to such issuance, which may affect returns to our shareholder; (xii) our common stock price may be volatile; and (xiii) general business and economic conditions and other risk factors described in our reports filed from time to time with the SEC. We caution readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.
 
American Capital Investing Activity
 
We primarily invest in senior debt, mezzanine debt and equity of middle market companies, which we generally consider to be companies with revenue between $10 million and $750 million. We primarily invest in American Capital One Stop Buyouts® or Sponsor Finance Investments and provide capital directly to early stage and mature private and small public companies. Currently, we will invest up to $500 million in a single middle market company in North America. We also invest in funds that we manage and Structured Products.

We seek to be a long-term partner with our portfolio companies. As a long-term partner, we will invest capital in a portfolio company subsequent to our initial investment if we believe that it can achieve appropriate returns for our investment. Add-on financings to our portfolio companies fund (i) strategic acquisitions by a portfolio company of either a complete business or specific lines of a business that are related to the portfolio company's business, (ii) recapitalization of a portfolio company to raise financing on better terms, buyout one or several owners or to pay a dividend, (iii) growth of the portfolio company such as product development or plant expansions, or (iv) working capital for a portfolio company, sometimes in distressed situations, that needs capital to fund operating costs, debt service or growth in receivables or inventory.

The total fair value of our investment portfolio was $5.3 billion, $5.1 billion and $5.5 billion as of December 31, 2012, 2011 and 2010, respectively. Our new investments totaled $719 million, $317 million and $234 million during the years ended December 31, 2012, 2011 and 2010, respectively. The amounts of our new investments include both funded commitments and unfunded commitments as of the investment date.


20

The type and aggregate dollar amount of new investments were as follows (in millions):
 
2012
 
2011
 
2010
American Capital One Stop Buyouts®
$
301

 
$
1

 
$
—

Sponsor Finance Investments
109

 
25

 
—

Investments in managed funds
50

 
137

 
75

Direct and other investments
—

 
15

 
35

Structured Products
9

 
—

 
—

Add-on investment in American Capital Asset Management
116

 
11

 
—

Add-on financing for growth and working capital
22

 
4

 
2

Add-on financing for acquisitions
19

 
58

 
22

Add-on financing for working capital in distressed situations
22

 
35

 
38

Add-on financing for recapitalizations, not including distressed investments
71

 
27

 
5

Add-on financing for purchase of debt of a portfolio company
—

 
4

 
57

       Total
$
719

 
$
317

 
$
234

    
The amounts of our new investments include both funded commitments and unfunded commitments as of the investment date.

We received cash proceeds from realizations and repayments of portfolio investments as follows (in millions):
 
2012
 
2011
 
2010
Principal prepayments
$
938

 
$
510

 
$
874

Sale of equity investments
274

 
394

 
266

Payment of accrued PIK notes and dividend and accreted original issue discounts
242

 
108

 
77

Loan syndications and sales
3

 
16

 
40

Scheduled principal amortization
41

 
38

 
36

Total
$
1,498

 
$
1,066

 
$
1,293



21

RESULTS OF OPERATIONS
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto.

Our consolidated financial performance, as reflected in our consolidated statements of operations, is composed of the following three primary elements:

•
The first element is “NOI,” which is primarily the interest, dividends, prepayment fees, finance and transaction fees and portfolio company management fees earned from investing in debt and equity securities and the fees we earn from fund asset management, less our operating expenses and provision for income taxes.
•
The second element is “Net realized gain (loss),” which reflects the difference between the proceeds from an exit of an investment and the cost at which the investment was carried on our consolidated balance sheets and periodic interest settlements and termination receipts or payments on derivatives, foreign currency transaction gains or losses and taxes on realized gains or losses.
•
The third element is “Net unrealized appreciation (depreciation),” which is the net change in the estimated fair value of our portfolio investments and of our interest rate derivatives at the end of the period compared with their estimated fair values at the beginning of the period or their stated costs, as appropriate, and taxes on unrealized gains or losses. In addition, our net unrealized depreciation includes the foreign currency translation from converting the cost basis of our assets and liabilities denominated in a foreign currency to the US dollar.

The consolidated operating results were as follows (in millions):
 
2012
 
2011
 
2010
Operating revenue
$
646

 
$
591

 
$
600

Operating expenses
263

 
288

 
396

NOI before income taxes
383

 
303

 
204

Tax benefit
14

 
145

 
—

NOI
397

 
448

 
204

Loss on extinguishment of debt, net of tax
(3
)
 
—

 
—

Net realized loss
(270
)
 
(310
)
 
(576
)
Net realized earnings (loss)
124

 
138

 
(372
)
Net unrealized appreciation
1,012

 
836

 
1,370

Net earnings
$
1,136

 
$
974

 
$
998


Fiscal Year 2012 Compared to Fiscal Year 2011

Operating Revenue

We derive the majority of our operating revenue by investing in senior and mezzanine debt and equity of middle market companies with attractive current yields and/or potential for equity appreciation and realized gains. We also derive operating revenue from investing in Structured Products and in our wholly-owned asset manager, American Capital Asset Management. Operating revenue consisted of the following (in millions):
 
2012
 
2011
Interest income on debt investments
$
274

 
$
350

Interest income on Structured Products investments
67

 
56

Dividend income on private finance portfolio investments
161

 
106

Dividend income from American Capital Asset Management
83

 
30

Interest income on bank deposits
1

 
1

Interest and dividend income
586

 
543

Portfolio company advisory and administrative fees
16

 
14

Advisory and administrative services - American Capital Asset Management
20

 
20

Other fees
24

 
14

Fee income
60

 
48

          Total operating revenue
$
646

 
$
591



22

Interest and Dividend Income

The following table summarizes selected data for our debt, Structured Products and equity investments outstanding, at cost (dollars in millions):
 
2012
 
2011
Debt investments at cost(1)
$
2,302

 
$
3,198

Average non-accrual debt investments at cost(2)
$
361

 
$
574

Effective interest rate on debt investments
11.9
%
 
11.0
%
Effective interest rate on debt investments, excluding non-accrual prior period adjustments
11.7
%
 
10.9
%
Structured Products investments at cost(1)
$
414

 
$
547

Effective interest rate on Structured Products investments
16.2
%
 
10.3
%
Debt and Structured Products investments at cost(1)
$
2,716

 
$
3,745

Effective interest rate on debt and Structured Products investments
12.6
%
 
10.9
%
Average daily one-month LIBOR
0.2
%
 
0.2
%
Equity investments - private finance portfolio at cost(1)(3)
$
2,124

 
$
2,228

Effective dividend yield on equity investments - private finance portfolio(3)
7.6
%
 
4.7
%
Effective dividend yield on equity investments - private finance portfolio, excluding non-accrual prior
   period adjustments(3)
5.8
%
 
3.1
%
Debt, Structured Products and equity investments at cost(1)(3)
$
4,840

 
$
5,973

Effective yield on debt, Structured Products and equity investments(3)
10.4
%
 
8.6
%
Effective yield on debt, Structured Products and equity investments, excluding non-accrual prior period
   adjustments(3)
9.5
%
 
7.9
%
 ——————————
(1)
Monthly weighted average of investments at cost.
(2)
Quarterly average of investments at cost.
(3)
Excludes our equity investment in American Capital Asset Management and European Capital.

Debt Investments

Interest income on debt investments decreased by $76 million, or 22%, for the year ended December 31, 2012 over the comparable period in 2011, primarily due to a decrease in our monthly weighted average debt investments outstanding. Our weighted average debt investments outstanding decreased by $896 million for the year ended December 31, 2012 over the comparable period in 2011 primarily as a result of the repayment or sale of debt investments. In addition, the average non-accrual debt investments outstanding decreased from $574 million during 2011 to $361 million during 2012. As a result of these factors, the effective interest rate on debt investments at cost increased 90 basis points from 11.0% in 2011 to 11.9% in 2012.

When a debt investment is placed on non-accrual, we may record reserves on uncollected PIK interest income recorded in prior periods as a reduction of interest income in the current period. Conversely, when a debt investment is removed from non-accrual, we may record interest income in the current period on prior period uncollected PIK interest income which was reserved in prior periods. For the years ended December 31, 2012 and 2011, we recorded additional interest income on uncollected PIK interest income recorded in prior periods of $6 million and $2 million, respectively, as a result of debt investments being removed from non-accrual.

Structured Products

Interest income on Structured Products investments increased by $11 million, or 20%, for the year ended December 31, 2012, respectively, over the comparable period in 2011 primarily due to increases in projected cash flows on our CLO investments. Our weighted average Structured Products investments outstanding decreased for the year ended December 31, 2012 over the comparable period in 2011 primarily as a result of the write-off of non-performing CMBS investments. See Note 2-Interest and Dividend Income Recognition policy to our consolidated financial statements in this prospectus for a description of how projected cash flows affect revenue recognition on our Structured Products investments.

Equity Investments - Private Finance Portfolio

Dividend income on private finance portfolio investments increased by $55 million, or 52%, for the year ended December 31, 2012 over the comparable period in 2011 primarily due to both an improvement in preferred equity investments that were previously non-accruing and an increase in non-recurring dividends on equity investments. As a result, the monthly weighted average effective

23

dividend yield on equity investments was 7.6% for the year ended December 31, 2012, a 290 basis point increase over the comparable period in 2011.

When a preferred equity investment is placed on non-accrual, we may record net reserves on uncollected accrued dividend income recorded in prior periods as a reduction of dividend income in the current period. Conversely, when a preferred equity investment is removed from non-accrual, we may record dividend income in the current period for prior period uncollected accrued dividend income which was reserved in prior periods. For the year ended December 31, 2012, we recorded additional dividend income for the reversal of reserves of accrued dividend income attributable to prior periods from private finance preferred stock investments of $37 million, which had an approximate 180 basis point impact on the effective dividend yield on equity investments. For the year ended December 31, 2011, we recorded additional dividend income for the reversal of reserves of accrued dividend income attributable to prior periods from private finance preferred stock investments of $36 million, which had an approximate 160 basis point impact on the effective dividend yield on equity investments.

For the year ended December 31, 2012, we recorded $36 million of dividend income for non-recurring dividends on equity investments compared to $7 million in 2011.

Equity Investments - American Capital Asset Management

Dividend income from American Capital Asset Management increased by $53 million, or 177%, for the year ended December 31, 2012 over the comparable period in 2011 primarily due to an increase in net income of American Capital Asset Management, which was primarily generated from an increase in fees earned for the management of AGNC and MTGE, both of which experienced significant growth in their equity capital as a result of follow-on equity offerings. For the years ended December 31, 2012 and 2011, we received an additional $9 million and $11 million, respectively, of dividends from American Capital Asset Management that was recorded as a reduction to our cost basis.

Fee Income

Portfolio Company Advisory and Administrative Fees

As a BDC, we are required by law to make significant managerial assistance available to most of our portfolio companies. This generally includes providing guidance and counsel concerning the management, operations and business objectives and policies of the portfolio company to the portfolio company's management and board of directors, including participating on the company's board of directors. Our portfolio company advisory and administrative fees for the years ended December 31, 2012 and 2011 were $16 million and $14 million, respectively.

Advisory and Administrative Services - American Capital Asset Management

We have entered into service agreements with American Capital Asset Management to provide additional asset management service support so that American Capital Asset Management can fulfill its responsibilities under its management agreements. The fees generated from these service agreements for the years ended December 31, 2012 and 2011 were $20 million and $20 million, respectively.

Other Fees

Other fees are primarily composed of transaction fees for structuring, financing and executing middle market portfolio transactions, which may not be recurring in nature. Other fees increased by $10 million, or 71%, for the year ended December 31, 2012 over the comparable period in 2011, primarily due to transaction structuring fees generated from the increased volume of American Capital One Stop Buyouts® investments in 2012.

Operating Expenses

Operating expenses decreased $25 million, or 9%, for the year ended December 31, 2012, respectively, over the comparable period in 2011. Operating expenses consisted of the following (in millions):
 
2012
 
2011
Interest
$
59

 
$
90

Salaries, benefits and stock-based compensation
148

 
143

General and administrative
56

 
55

Total operating expenses
$
263

 
$
288



24

Interest

Interest expense for the year ended December 31, 2012 decreased $31 million, or 34%, over the comparable period in 2011. The decrease in interest expense was primarily attributable to a decrease in the weighted average borrowings outstanding for the year ended December 31, 2012 over the comparable period in 2011 as well as a decrease in the amortization of deferred financing costs primarily as a result of unscheduled payments on our secured borrowings during 2011.

The components of interest expense, cash paid for interest expense, average interest rates and average outstanding balances for our borrowings are as follows (dollars in millions):
 
2012
 
2011
Asset Securitizations:
 
 
 
Cash interest expense
$
5

 
$
8

Amortization of deferred financing costs
3

 
3

Total interest expense
$
8

 
$
11

 
 
 
 
Weighted average interest rate, including amortization of deferred financing costs
2.0
%
 
1.3
%
Weighted average interest rate, excluding amortization of deferred financing costs
1.3
%
 
0.9
%
Weighted average balance outstanding
$
371

 
$
915

 
 
 
 
Public and Private Borrowings:
 
 
 
Cash interest expense
$
43

 
$
59

Amortization of deferred financing costs
8

 
20

Total interest expense
$
51

 
$
79

 
 
 
 
Weighted average interest rate, including amortization of deferred financing costs
8.7
%
 
10.6
%
Weighted average interest rate, excluding amortization of deferred financing costs
7.3
%
 
7.9
%
Weighted average balance outstanding
$
589

 
$
747

 
 
 
 
Total Borrowings:
 
 
 
Cash interest expense
$
48

 
$
67

Amortization of deferred financing costs
11

 
23

Total interest expense
$
59

 
$
90

 
 
 
 
Weighted average interest rate, including amortization of deferred financing costs
6.1
%
 
5.5
%
Weighted average interest rate, excluding amortization of deferred financing costs
5.0
%
 
4.1
%
Weighted average balance outstanding
$
960

 
$
1,662


Amortization of deferred financing costs on our public and private borrowings for the year ended December 31, 2012 decreased $12 million from the comparable period in 2011 primarily due to the acceleration of the amortization of deferred financing costs resulting from additional unscheduled principal paydowns on our secured debt in 2011.

Salaries, Benefits and Stock-based Compensation

Salaries, benefits and stock-based compensation consisted of the following (in millions):
 
2012
 
2011
Base salaries
$
55

 
$
53

Incentive compensation
40

 
35

Benefits
11

 
10

Stock-based compensation
42

 
45

Total salaries, benefits and stock-based compensation
$
148

 
$
143


Salaries, benefits and stock-based compensation for the year ended December 31, 2012 increased $5 million, or 3%, from the comparable period in 2011 primarily due to an increase in base salaries for non-executive officers and incentive compensation partially offset by a reduction in stock-based compensation. As of December 31, 2012, we had 256 total employees compared to 249 total employees as of December 31, 2011.


25

In 2012, we granted 8.8 million stock options with a weighted average fair value of $4.97 per option, or $44 million, and in 2011, we granted 23.6 million stock options with a weighted average fair value of $3.05 per option, or $72 million. For a further discussion on stock-based compensation, see Note 5 and Note 6 to our consolidated financial statements in this prospectus.

Tax (Provision) Benefit

Our tax (provision) benefit consisted of the following (in millions):
 
2012
 
2011
Tax benefit - net operating income
$
14

 
$
145

Tax benefit - net realized loss
87

 
75

Tax benefit - loss on extinguishment of debt
2

 
—

Tax (provision) benefit - net unrealized appreciation
(82
)
 
208

Total tax benefit
$
21

 
$
428


During our tax year ended September 30, 2011, we became subject to taxation as a corporation under Subchapter C of the Code. During 2011, we reversed part of our valuation allowance totaling $428 million, which is recorded in our consolidated statements of operations for the year ended December 31, 2011 as $145 million in net operating income, $75 million in total net realized loss and $208 million in total net unrealized appreciation. See Note 11 to our consolidated financial statements in this prospectus for a further discussion of deferred taxes.

Net Realized Gain (Loss)

Our net realized gain (loss) consisted of the following individual portfolio company realized gains (losses) greater than $15 million (in millions):
 
2012
 
2011
VP Acquisition Holdings, Inc.
$
—

 
$
93

CIBT Travel Solutions, LLC
12

 
43

Other, net
54

 
22

Total gross realized portfolio gain
66

 
158

 
 
 
 
FPI Holding Corporation
(81
)
 
—

Small Smiles Holding Company, LLC
(66
)
 
(19
)
Halex Holdings Inc.
(27
)
 
—

FreeConference.com, Inc.
(24
)
 
—

Wachovia Bank Commercial Mortgage Trust, Series 2007-C32
(23
)
 
(12
)
Contec, LLC
(17
)
 
(117
)
Orchard Brands Corporation
—

 
(174
)
J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11
—

 
(47
)
Citigroup Commercial Mortgage Securities Trust 2007-C6
—

 
(30
)
GE Commercial Mortgage Corporation, Series 2007-C1
—

 
(18
)
NECCO Holdings, Inc.
—

 
(18
)
European Touch, LTD. II
—

 
(18
)
Other, net
(99
)
 
(40
)
Total gross realized portfolio loss
(337
)
 
(493
)
Total net realized portfolio loss
(271
)
 
(335
)
Tax benefit
87

 
75

Interest rate derivative periodic interest payments, net
(25
)
 
(45
)
Interest rate derivative termination payments
(62
)
 
(5
)
Foreign currency transactions
1

 
—

Total net realized loss
$
(270
)
 
$
(310
)
 


26

The following are summary descriptions of portfolio company realized gains or losses greater than $30 million.

During 2012, due to declining performance, we wrote off all of our equity investments and mezzanine debt investments in FPI Holding Corporation and realized a loss of $81 million, which was offset by a reversal of unrealized depreciation of $81 million.

During 2012, a U.S. Bankruptcy Court issued an order authorizing the sale of substantially all of the assets of Small Smiles Holding Company, LLC (“Small Smiles”). The fair value of the consideration we received was zero. Accordingly, in the second quarter of 2012, we wrote off all of our equity investment and our senior debt investment in Small Smiles and realized a loss of $66 million, which was offset by a reversal of unrealized depreciation of $66 million.

During 2011, we sold all of our equity investments and received full repayment of our debt investments in VP Acquisition Holdings, Inc. for $138 million in total proceeds, realizing a gain of $93 million partially offset by a reversal of unrealized appreciation of $60 million.

During 2011, we sold substantially all of our equity investments and received full repayment of our debt investments in CIBT Travel Solutions, LLC and its subsidiaries for $229 million in total cash proceeds, realizing a gain of $43 million fully offset by a reversal of unrealized appreciation of $45 million. During 2012, we received additional proceeds from the original sale that were placed in escrow realizing an additional gain of $12 million. We also expect to receive $1 million of additional cash proceeds from CIBT Travel Solutions, LLC that remain held in a sale escrow as of December 31, 2012.

During 2011, we wrote off a portion of our unsecured mezzanine debt investment in Contec, LLC. We did not receive any proceeds, realizing a loss of $117 million fully offset by a reversal of unrealized depreciation.

During 2011, Appleseed's Intermediate Holdings, LLC, a wholly-owned operating subsidiary of Orchard Brands Corporation, emerged from bankruptcy after voluntarily filing for bankruptcy protection under Chapter 11 of the US Bankruptcy Code. Based on the reorganization plan, our existing senior first lien notes and senior second lien term A notes were exchanged for new senior first lien notes, junior term notes and common equity of Orchard Brands Corporation and our remaining senior second lien term notes were canceled. As a result, we recognized a realized loss of $174 million partially offset by a reversal of unrealized depreciation of $173 million.

During 2011, we wrote off $47 million of non-investment grade CMBS bonds in J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11. We did not receive any proceeds, realizing a loss of $47 million fully offset by a reversal of unrealized depreciation.

We have entered into interest rate swap agreements in which we pay a fixed rate and receive a floating rate based on LIBOR. The net interest payments or receipts are recorded as a realized gain (loss) on the interest settlement dates. For the year ended December 31, 2012, we made $62 million in early termination payments to terminate certain interest rate swap agreements, which were partially offset by a reversal of unrealized depreciation of $55 million. For the years ended December 31, 2012 and 2011, we recorded a realized loss of $25 million and $45 million, respectively, for net interest rate derivative periodic interest payments due to the significant decline in LIBOR as compared to LIBOR at the date of the origination of the interest rate swap agreements.


27

Net Unrealized Appreciation (Depreciation)

The following table itemizes the change in net unrealized appreciation (depreciation) (in millions):
 
2012
 
2011
Gross unrealized appreciation of private finance portfolio investments
$
412

 
$
403

Gross unrealized depreciation of private finance portfolio investments
(218
)
 
(428
)
Net unrealized appreciation (depreciation) of private finance portfolio investments
194

 
(25
)
Net unrealized appreciation (depreciation) of European Capital investment
146

 
(34
)
Net unrealized (depreciation) appreciation of European Capital foreign currency translation
(19
)
 
3

Net unrealized appreciation of American Capital Asset Management
329

 
280

Net unrealized appreciation (depreciation) of American Capital Mortgage Investment Corp.
12

 
(5
)
Net unrealized appreciation of Structured Products investments
47

 
52

Reversal of prior period net unrealized depreciation upon realization
296

 
375

Net unrealized appreciation of portfolio investments
1,005

 
646

Foreign currency translation - European Capital
26

 
(29
)
Foreign currency translation - other
1

 
(2
)
Derivative agreements
7

 
8

Reversal of prior period net unrealized depreciation upon realization of terminated swaps
55

 
5

Tax (provision) benefit
(82
)
 
208

Net unrealized appreciation
$
1,012

 
$
836

 
Private Finance Portfolio

Our private finance portfolio investments consist of loans and equity securities primarily to privately-held middle market companies with a cost basis of $3,932 million and fair value of $3,381 million as of December 31, 2012. There is generally no publicly available information about these companies and an active primary or secondary market for the trading of these privately issued loans and securities generally does not exist. Our investments have been historically exited through normal repayment or a change in control transaction such as a sale or recapitalization of the portfolio company.

For the year ended December 31, 2012, the $194 million of net unrealized appreciation on our private finance portfolio investments was driven primarily by improved company performance, multiple expansion of comparable companies and narrowing investment spreads. For the year ended December 31, 2012, our private finance portfolio of American Capital One Stop Buyouts® experienced $97 million of net unrealized appreciation while our private finance portfolio of Sponsor Finance Investments, direct and other investments experienced $97 million of net unrealized appreciation.

For the year ended December 31, 2011, the $25 million of net unrealized depreciation on our private finance portfolio investments was driven primarily by specific company performance. For the year ended December 31, 2011, our private finance portfolio of American Capital One Stop Buyouts® experienced $97 million of net unrealized appreciation while our private finance portfolio of Sponsor Finance Investments, direct and other investments experienced $122 million of net unrealized depreciation.

European Capital

As of December 31, 2012, our investment in European Capital consisted of an equity investment with a cost basis and fair value of $1,267 million and $700 million, respectively, and a debt investment with a cost basis and fair value of $109 million. For the year ended December 31, 2012, we recognized net unrealized appreciation of $127 million on our investment in European Capital comprised of $146 million unrealized appreciation on our investment and $19 million of unrealized depreciation from foreign currency translation of the cumulative unrealized depreciation of European Capital. For the year ended December 31, 2011, we recognized net unrealized depreciation of $31 million on our investment in European Capital comprised of $34 million unrealized depreciation on our investment and $3 million of unrealized appreciation from foreign currency translation of the cumulative unrealized depreciation of European Capital. As of December 31, 2011, our investment in European Capital consisted of an equity investment with a cost basis and fair value of $1,267 million and $547 million, respectively, and a debt investment with a cost basis and fair value of $73 million.

For foreign currency denominated investments recorded at fair value, such as European Capital, the net unrealized appreciation or depreciation from foreign currency translation on the accompanying consolidated statements of operations represents the economic impact of translating the cost basis of the investment from a foreign currency, such as the Euro, to the U.S. dollar. However, the economic impact of translating the cumulative unrealized appreciation or depreciation from a foreign currency to the U.S. dollar is not recorded as net unrealized depreciation or appreciation from foreign currency translation but

28

rather is included as net unrealized appreciation or depreciation of portfolio company investments on the accompanying consolidated statements of operations. For the year ended December 31, 2012, we recorded unrealized appreciation of $26 million for foreign currency translation on the cost basis in our investment in European Capital (included in our total unrealized appreciation of $27 million for foreign currency translation for the year ended December 31, 2012). For the year ended December 31, 2011, we recorded unrealized depreciation of $29 million for foreign currency translation on the cost basis in our investment in European Capital (included in our total unrealized depreciation of $31 million for foreign currency translation for the year ended December 31, 2011).

European Capital, a wholly-owned portfolio company of American Capital, is an investment fund that invests in One Stop Buyouts®, Sponsor Finance Investments and provides capital directly to early stage and mature private and small public companies primarily in Europe. It primarily invests in senior and mezzanine debt and equity. European Capital's underlying portfolio investments are recorded at fair value determined in accordance with ASC 820. In determining the fair value of our investment in European Capital, we concluded that our investment should be less than the NAV of European Capital due to comparable public traded funds which were trading at a discount to NAV on the measurement date and the risks associated with our ability to realize the full fair value of European Capital's underlying assets for several reasons, including a public to private liquidity discount and the ability to demonstrate an implied market return on equity required by market participants for a measurable period of time, which indicate fair values at a discount to the NAV.

During the year ended December 31, 2012, the unrealized appreciation on our investment of $146 million, excluding unrealized appreciation (depreciation) on foreign currency translation, was due primarily to an increase in the NAV of European Capital and a decrease to the discount applied to NAV. During the year ended December 31, 2011, the unrealized depreciation on our investment of $34 million, excluding unrealized appreciation (depreciation) on foreign currency translation, was due primarily to a decrease in the NAV of European Capital and an increase to the discount applied to NAV.

The following is a summary composition of European Capital's NAV at fair value and our equity investment's implied discount to European Capital's NAV at fair value (€ and $ in millions) as of December 31, 2012 and 2011:
 
2012
 
2011
Debt investments at fair value
€
786

 
€
712

Equity investments at fair value
341

 
262

Other assets and liabilities, net
20

 
92

Third-party secured debt at cost
(250
)
 
(271
)
Third-party unsecured debt at cost
(109
)
 
(111
)
American Capital unsecured debt at cost
(83
)
 
(57
)
NAV (Euros)
€
705

 
€
627

Exchange rate
1.32

 
1.30

NAV (US dollars)
$
931

 
$
815

Fair value of American Capital equity investment
$
700

 
$
547

Implied discount to NAV
24.8
%
 
32.9
%

American Capital Asset Management

American Capital Asset Management manages the following funds through various subsidiaries: European Capital, AGNC, MTGE, ACE I, ACE II, ACAS CLO 2007-1 and ACAS CLO 2012-1. American Capital Asset Management had a cost basis of $149 million and fair value of $828 million as of December 31, 2012. During the years ended December 31, 2012 and 2011, we recognized $329 million and $280 million of unrealized appreciation on our investment in American Capital Asset Management, respectively.

The unrealized appreciation on our investment in American Capital Asset Management for the years ended December 31, 2012 and 2011 was primarily due to increases in the historical and projected management fees for managing AGNC and MTGE due to significant growth in the equity capital of each company. During the year ended December 31, 2012, AGNC and MTGE raised $3.8 billion and $580 million of equity capital, respectively. During the year ended December 31, 2011, AGNC and MTGE raised $4.4 billion and $199 million of equity capital, respectively.




29

Structured Products Investments

American Capital has investments in Structured Products such as investment and non-investment grade tranches of CLO, CDO and CMBS securities with a cost basis of $385 million and fair value of $247 million as of December 31, 2012. During the year ended December 31, 2012, we recorded $47 million of net unrealized appreciation on our Structured Products investments. Our investments in CLO and CDO portfolios of commercial loans experienced $45 million of net unrealized appreciation during the year ended December 31, 2012, due primarily to a narrowing of investment spreads, higher broker quotes and improved projected cash flows. Our CMBS portfolio experienced $2 million of net unrealized appreciation during the year ended December 31, 2012.

During the year ended December 31, 2011, we recorded $52 million of net unrealized appreciation on our Structured Products investments. Our investments in CLO and CDO portfolios of commercial loans experienced $41 million of net unrealized appreciation during the year ended December 31, 2011, due primarily to a narrowing of investment spreads, higher broker quotes and improved projected cash flows. Our CMBS portfolio experienced $11 million of net unrealized appreciation during the year ended December 31, 2011.

Derivative Agreements

During the years ended December 31, 2012 and 2011, we recorded $7 million and $8 million, respectively, of net unrealized appreciation from derivative agreements. During the year ended December 31, 2012, cash termination payments totaling $62 million were made to settle terminated interest rate swap agreements, partially offset by a reversal of unrealized depreciation of $55 million. The fair value of the net liability for our derivative agreements as of December 31, 2012 was $27 million, which included a $3 million net reduction related to the incorporation of an adjustment for nonperformance risk of us and our counterparties. The fair value of the net liability for our derivative agreements as of December 31, 2011 was $89 million, which included a $17 million net reduction related to the incorporation of an adjustment for nonperformance risk of us and our counterparties.

For interest rate swap agreements, we estimate the fair value based on the estimated net present value of the future cash flows using a forward interest rate yield curve in effect as of the end of the measurement period, adjusted for nonperformance risk, if any, including an evaluation of our credit risk and our counterparty's credit risk. A negative fair value would represent an amount we would have to pay a third-party and a positive fair value would represent an amount we would receive from a third-party to assume our obligation under an interest rate swap agreement. The derivative agreements generally appreciate or depreciate primarily based on relative market interest rates and their remaining term to maturity as well as changes in our and our counterparty's credit risk.
 
Fiscal Year 2011 Compared to Fiscal Year 2010

Operating Revenue

We derive the majority of our operating revenue by investing in senior and mezzanine debt and equity of middle market companies with attractive current yields and/or potential for equity appreciation and realized gains. We also derive operating revenue from investing in Structured Products and in our wholly-owned asset manager, American Capital Asset Management. Operating revenue consisted of the following (in millions):
 
2011
 
2010
Interest income on debt investments
$
350

 
$
434

Interest income on Structured Products investments
56

 
52

Dividend income on private finance portfolio investments
106

 
58

Dividend income from American Capital Asset Management
30

 
—

Interest income on bank deposits
1

 
2

Interest and dividend income
543

 
546

Portfolio company advisory and administrative fees
14

 
18

Advisory and administrative services - American Capital Asset Management
20

 
16

Other fees
14

 
20

Fee income
48

 
54

          Total operating revenue
$
591

 
$
600



30

Interest and Dividend Income

The following table summarizes selected data for our debt, Structured Products and equity investments outstanding, at cost (dollars in millions):
 
2011
 
2010
Debt investments at cost(1)
$
3,198

 
$
4,137

Average non-accrual debt investments at cost(2)
$
574

 
$
723

Effective interest rate on debt investments
11.0
%
 
10.5
%
Effective interest rate on debt investments, excluding non-accrual prior period adjustments
10.9
%
 
10.6
%
Structured Products investments at cost(1)(3)
$
547

 
$
749

Effective interest rate on Structured Products investments(3)
10.3
%
 
6.9
%
Debt and Structured Products investments at cost(1)(3)
$
3,745

 
$
4,886

Effective interest rate on debt and Structured Products investments(3)
10.9
%
 
9.9
%
Average daily one-month LIBOR
0.2
%
 
0.3
%
Equity investments - private finance portfolio at cost(1)(3)
$
2,228

 
$
2,313

Effective dividend yield on equity investments - private finance portfolio(3)
4.7
%
 
2.5
%
Effective dividend yield on equity investments - private finance portfolio, excluding non-accrual prior
   period adjustments(3)
3.1
%
 
3.0
%
Debt, Structured Products and equity investments at cost(1)(3)
$
5,973

 
$
7,199

Effective yield on debt, Structured Products and equity investments(3)
8.6
%
 
7.6
%
Effective yield on debt, Structured Products and equity investments, excluding non-accrual prior period
   adjustments(3)
7.9
%
 
7.8
%
 ——————————
(1)
Monthly weighted average of investments at cost.
(2)
Quarterly average of investments at cost.
(3)
Excludes our equity investment in American Capital Asset Management and European Capital.

Debt Investments

Interest income on debt investments decreased by $84 million, or 19%, for the year ended December 31, 2011 over the comparable period in 2010, primarily due to a decrease in our monthly weighted average debt investments outstanding. Our weighted average debt investments outstanding decreased by $0.9 billion for the year ended December 31, 2011 over the comparable period in 2010 primarily as a result of the repayment or sale of debt investments or write-off of non-performing debt investments.

When a debt investment is placed on non-accrual, we may record reserves on uncollected PIK interest income recorded in prior periods as a reduction of interest income in the current period. Conversely, when a debt investment is removed from non-accrual, we may record interest income in the current period on prior period uncollected PIK interest income which was reserved in prior periods. For the year ended December 31, 2011, we recorded additional interest income on uncollected PIK interest income recorded in prior periods of $2 million as a result of debt investments being removed from non-accrual. For the year ended December 31, 2010, we recorded net reserves on uncollected PIK interest income recorded in prior periods of $7 million as a result of debt investments being placed on non-accrual.

Structured Products

Interest income on Structured Products investments increased by $4 million, or 8%, for the year ended December 31, 2011, respectively, over the comparable period in 2010 primarily due to an increase in interest income recognized on our CLO investments due to increases in projected cash flows. Our weighted average Structured Products investments outstanding decreased for the year ended December 31, 2011 over the comparable period in 2010 primarily as a result of the write-off of non-performing CMBS investments. See Note 2-Interest and Dividend Income Recognition policy to our consolidated financial statements in this prospectus for a description of how projected cash flows affect revenue recognition on our Structured Products investments.

Equity Investments - Private Finance Portfolio

Dividend income on private finance portfolio investments increased by $48 million, or 83%, for the year ended December 31, 2011 over the comparable period in 2010 primarily due to the recognition of prior period dividend income for private finance preferred stock investments removed from non-accrual during the year ended December 31, 2011, as well as the recording of reserves on uncollected accrued dividend income recorded in prior periods from private finance preferred stock investments during

31

the year ended December 31, 2010. As a result, the monthly weighted average effective dividend yield on equity investments was 4.7% for the year ended December 31, 2011, a 220 basis point increase over the comparable period in 2010.

When a preferred equity investment is placed on non-accrual, we may record net reserves on uncollected accrued dividend income recorded in prior periods as a reduction of dividend income in the current period. Conversely, when a preferred equity investment is removed from non-accrual, we may record dividend income in the current period for prior period uncollected accrued dividend income which was reserved in prior periods. For the year ended December 31, 2011, we recorded additional dividend income for the reversal of reserves of accrued dividend income attributable to prior periods from private finance preferred stock investments of $36 million, which had an approximate 160 basis point impact on the effective dividend yield on equity investments. For the year ended December 31, 2010, we recorded reserves on uncollected accrued dividend income recorded in prior periods from private finance preferred stock investments of $11 million, which had an approximate 50 basis point impact on the effective dividend yield on equity investments.

Equity Investments - American Capital Asset Management

Dividend income from American Capital Asset Management was $30 million and $0 million for the years ended December 31, 2011 and 2010, respectively. For the years ended December 31, 2011 and 2010, we received an additional $11 million and $17 million, respectively, of dividends from American Capital Asset Management that was recorded as a reduction to our cost basis. The increase in dividends received in 2011 was primarily due to an increase in net income primarily generated from management fees earned for the management of AGNC, which experienced significant growth in their equity capital as a result of follow-on equity offerings.

Fee Income

Portfolio Company Advisory and Administrative Fees

As a BDC, we are required by law to make significant managerial assistance available to most of our portfolio companies. This generally includes providing guidance and counsel concerning the management, operations and business objectives and policies of the portfolio company to the portfolio company's management and board of directors, including participating on the company's board of directors. Our portfolio company advisory and administrative fees for the years ended December 31, 2011 and 2010 were $14 million and $18 million, respectively.

Advisory and Administrative Services - American Capital Asset Management

We have entered into service agreements with American Capital Asset Management to provide additional asset management service support so that American Capital Asset Management can fulfill its responsibilities under its management agreements. The fees generated from these service agreements for the years ended December 31, 2011 and 2010 were $20 million and $16 million, respectively.

Other Fees

Other fees are primarily composed of transaction fees for structuring, financing and executing middle market portfolio transactions, which may not be recurring in nature. These fees amounted to $14 million and $20 million for the years ended December 31, 2011 and 2010, respectively.

Operating Expenses

Operating expenses decreased $108 million, or 27%, for the year ended December 31, 2011, respectively, over the comparable period in 2010. Operating expenses consisted of the following (in millions):
 
2011
 
2010
Interest
$
90

 
$
177

Salaries, benefits and stock-based compensation
143

 
134

General and administrative
55

 
64

Debt refinancing costs
—

 
21

Total operating expenses
$
288

 
$
396

 
Interest

Interest expense for the year ended December 31, 2011 decreased $87 million, or 49%, over the comparable period in 2010. The decrease in interest expense was primarily attributable to a decrease in the weighted average borrowings outstanding for the

32

year ended December 31, 2011 over the comparable period in 2010 partially offset by a $12 million increase in the amortization of deferred financing costs primarily as a result of unscheduled payments on our outstanding secured borrowings during 2011.

The components of interest expense, cash paid for interest expense, average interest rates and average outstanding balances for our borrowings are as follows (dollars in millions):
 
2011
 
2010
Asset Securitizations:
 
 
 
Cash interest expense
$
8

 
$
12

Amortization of deferred financing costs
3

 
4

Total interest expense
$
11

 
$
16

 
 
 
 
Weighted average interest rate, including amortization of deferred financing costs
1.3
%
 
1.0
%
Weighted average interest rate, excluding amortization of deferred financing costs
0.9
%
 
0.8
%
Weighted average balance outstanding
$
915

 
$
1,537

 
 
 
 
Public and Private Borrowings:
 
 
 
Cash interest expense
$
59

 
$
154

Amortization of deferred financing costs
20

 
7

Total interest expense
$
79

 
$
161

 
 
 
 
Weighted average interest rate, including amortization of deferred financing costs
10.6
%
 
9.3
%
Weighted average interest rate, excluding amortization of deferred financing costs
7.9
%
 
8.9
%
Weighted average balance outstanding
$
747

 
$
1,738

 
 
 
 
Total Borrowings:
 
 
 
Cash interest expense
$
67

 
$
166

Amortization of deferred financing costs
23

 
11

Total interest expense
$
90

 
$
177

 
 
 
 
Weighted average interest rate, including amortization of deferred financing costs
5.5
%
 
5.4
%
Weighted average interest rate, excluding amortization of deferred financing costs
4.1
%
 
5.1
%
Weighted average balance outstanding
$
1,662

 
$
3,275


Amortization of deferred financing costs on our public and private borrowings for the year ended December 31, 2011 increased $13 million from the comparable period in 2010 primarily due to the acceleration of the amortization of deferred financing costs resulting from additional principal paydowns on our secured debt in 2011.

Salaries, Benefits and Stock-based Compensation

Salaries, benefits and stock-based compensation consisted of the following (in millions):
 
2011
 
2010
Base salaries
$
53

 
$
56

Incentive compensation
35

 
26

Benefits
10

 
10

Stock-based compensation
45

 
42

Total salaries, benefits and stock-based compensation
$
143

 
$
134


Salaries, benefits and stock-based compensation for the year ended December 31, 2011 increased $9 million, or 7%, from the comparable period in 2010 primarily due to an increase in stock-based and incentive compensation. As of December 31, 2011, we had 249 total employees compared to 242 total employees as of December 31, 2010.

In 2011, we granted 23.6 million stock options with a weighted average fair value of $3.05 per option, or $72 million, and in 2010, we granted 17.7 million stock options with a weighted average fair value of $2.07 per option, or $37 million. For a further discussion on stock-based compensation, see Note 5 and Note 6 to our consolidated financial statements in this prospectus.

33

General and Administrative

General and administrative expenses decreased by $9 million, or 14%, for the year ended December 31, 2011, respectively, over the comparable period in 2010 primarily due to a reduction in legal and public reporting costs and $6 million of restructuring charges during the year ended December 31, 2010 related to excess facilities from office closures.

Debt Refinancing Costs

During the year ended December 31, 2010, we incurred $21 million of non-recurring debt refinancing costs from both our unsecured creditors’ legal and financial advisors that were engaged in connection with our debt refinancing negotiations and the closing of our debt refinancing transaction in June 2010.

Tax Benefit

Beginning with our tax year ended September 30, 2011, our status changed from a RIC subject to taxation under Subchapter M to a corporation subject to taxation under Subchapter C. As a result of our change in tax status during our tax year ended September 30, 2011, we are now required to recognize deferred tax assets and liabilities. During the fourth quarter of 2011, we reversed part of our valuation allowance totaling $428 million, which is recorded in our consolidated statements of operations for the year ended December 31, 2011 as $145 million in net operating income, $75 million in total net realized loss and $208 million in total net unrealized appreciation (depreciation). See Note 11 to our consolidated financial statements in this prospectus for a further discussion of deferred taxes.


34

Net Realized Gain (Loss)

Our net realized gain (loss) consisted of the following individual portfolio company realized gains (losses) greater than $15 million (in millions):
 
2011
 
2010
VP Acquisition Holdings, Inc.
$
93

 
$
—

CIBT Travel Solutions, LLC
43

 
—

American Capital Agency Corp.
—

 
21

Other, net
22

 
33

Total gross realized portfolio gain
158

 
54

 
 
 
 
Orchard Brands Corporation
(174
)
 
(50
)
Contec, LLC
(117
)
 
—

J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11
(47
)
 
—

Citigroup Commercial Mortgage Securities Trust 2007-C6
(30
)
 
—

Small Smiles Holding Company, LLC
(19
)
 
—

GE Commercial Mortgage Corporation, Series 2007-C1
(18
)
 
(9
)
NECCO Holdings, Inc.
(18
)
 
—

European Touch, LTD. II
(18
)
 
—

ACAS CRE CDO 2007-1, Ltd.
—

 
(170
)
UFG Member, LLC
—

 
(83
)
GS Mortgage Securities Trust 2007-GG10
—

 
(49
)
Fountainhead Estate Holding Corp.
—

 
(25
)
ETG Holdings, Inc.
—

 
(22
)
J-Pac, LLC
—

 
(21
)
Wachovia Bank Commercial Mortgage Trust, Series 2007-C32
—

 
(19
)
Resort Funding Holdings, Inc.
—

 
(17
)
CCRD Operating Company, Inc.
—

 
(15
)
Genband Inc.
—

 
(15
)
Other, net
(52
)
 
(58
)
Total gross realized portfolio loss
(493
)
 
(553
)
Total net realized portfolio loss
(335
)
 
(499
)
Tax benefit
75

 
—

Interest rate derivative periodic interest payments, net
(45
)
 
(61
)
Interest rate derivative termination payments
(5
)
 
(14
)
Foreign currency transactions
—

 
(2
)
Total net realized loss
$
(310
)
 
$
(576
)
 

See “Fiscal Year 2012 Compared to Fiscal Year 2011” for discussion on the net realized gains (losses) for the year ended December 31, 2011. The following are summary descriptions of portfolio company realized gains or losses greater than $30 million during 2010.

As a result of further deterioration of the commercial mortgage loan collateral securing the CMBS bonds in ACAS CRE CDO 2007-1, Ltd. (“ACAS CRE CDO”) during 2010, we no longer are receiving or expect to receive future cash flows on any of our remaining bonds in ACAS CRE CDO. Accordingly, during 2010, we wrote off our remaining bonds in ACAS CRE CDO. We did not receive any proceeds, realizing a loss of $170 million, which was fully offset by a reversal of unrealized depreciation.

During 2010, our portfolio company UFG Member, LLC was sold. As part of the sale proceeds, we received a partial payment on our remaining mezzanine debt investment. The sale proceeds we received included a subordinated note from the purchaser, AFA Investments, Inc., that had a fair value of $4 million. We wrote off our remaining mezzanine debt investment and our equity investment in UFG Member, LLC realizing a loss of $83 million offset by a reversal of unrealized depreciation of $68 million.


35

During 2010, we sold our unsecured mezzanine debt investment in Orchard Brands Corporation for nominal proceeds, realizing a loss of $50 million fully offset by a reversal of unrealized depreciation.

During 2010, we wrote off $49 million of non-investment grade CMBS bonds in GS Mortgage Securities Trust 2007-GG10. We did not receive any proceeds, realizing a loss of $49 million fully offset by a reversal of unrealized depreciation.

We have entered into interest rate swap agreements in which we pay a fixed rate and receive a floating rate based on LIBOR. The net interest payments or receipts are recorded as a realized gain (loss) on the interest settlement dates. For the years ended December 31, 2011 and 2010, we recorded a realized loss of $45 million and $61 million, respectively, for net interest rate derivative periodic interest payments due to the significant decline in LIBOR as compared to LIBOR at the date of the origination of the interest rate swap agreements.

Net Unrealized Appreciation (Depreciation)

The following table itemizes the change in net unrealized appreciation (depreciation) (in millions):
 
2011
 
2010
Gross unrealized appreciation of private finance portfolio investments
$
403

 
$
611

Gross unrealized depreciation of private finance portfolio investments
(428
)
 
(289
)
Net unrealized (depreciation) appreciation of private finance portfolio investments
(25
)
 
322

Net unrealized (depreciation) appreciation of European Capital investment
(34
)
 
371

Net unrealized appreciation of European Capital foreign currency translation
3

 
97

Net unrealized appreciation of American Capital Asset Management
280

 
111

Net unrealized (depreciation) of American Capital Mortgage Investment Corp.
(5
)
 
—

Net unrealized appreciation of Structured Products investments
52

 
50

Reversal of prior period net unrealized depreciation upon realization
375

 
517

Net unrealized appreciation of portfolio investments
646

 
1,468

Foreign currency translation - European Capital
(29
)
 
(104
)
Foreign currency translation - other
(2
)
 
(3
)
Derivative agreements
8

 
(5
)
Reversal of prior period net unrealized depreciation upon realization of terminated swaps
5

 
14

Tax benefit
208

 
—

Net unrealized appreciation
$
836

 
$
1,370


See “Fiscal Year 2012 Compared to Fiscal Year 2011” for discussion on the net unrealized appreciation (depreciation) for the year ended December 31, 2011.
 
Private Finance Portfolio

For the year ended December 31, 2010, the $322 million of net unrealized appreciation on our private finance portfolio investments was driven primarily by improved portfolio company performance, multiple expansion of comparable companies and narrowing investment spreads.

European Capital

For the year ended December 31, 2010, we recognized unrealized appreciation of $468 million on our investment in European Capital comprised of $371 million unrealized appreciation on our investment and $97 million of unrealized appreciation from foreign currency translation of the cumulative unrealized depreciation of European Capital.

In determining the fair value of our investment in European Capital, we concluded that our investment should be less than the NAV of European Capital due to comparable public traded funds which were trading at a discount to NAV on the measurement date and the risks associated with our ability to realize the full fair value of European Capital's underlying assets for several reasons, including a public to private liquidity discount and the ability to demonstrate an implied market return on equity required by market participants for a measurable period of time, which indicate fair values at a discount to the NAV. During the year ended December 31, 2010, the unrealized appreciation of $371 million, excluding unrealized appreciation (depreciation) on foreign currency translation, was due primarily to an increase in the NAV of European Capital and a reduction to the discount applied to NAV.


36

The following is a summary composition of European Capital's NAV at fair value and our equity investment's implied discount to its NAV at fair value (€ and $ in millions) as of December 31, 2011 and 2010:
 
2011
 
2010
Debt investments at fair value
€
712

 
€
868

Equity investments at fair value
262

 
207

Other assets and liabilities, net
92

 
38

Secured debt at cost
(271
)
 
(353
)
Unsecured debt at cost
(111
)
 
(110
)
Unsecured debt from American Capital at cost
(57
)
 
(21
)
NAV (Euros)
€
627

 
€
629

Exchange rate
1.30

 
1.33

NAV (US dollars)
$
815

 
$
837

Fair value of American Capital equity investment
$
547

 
$
608

Implied discount to NAV
32.9
%
 
27.4
%

American Capital Asset Management

During the year ended December 31, 2010, we recognized $111 million of unrealized appreciation on our investment in American Capital Asset Management. The unrealized appreciation in the fair value of American Capital Asset Management for the year ended December 31, 2010 was primarily due to increases in the projected management fees for managing AGNC due to significant growth in the equity capital of AGNC as a result of follow-on equity offerings and the lowering of the discount rate.

Structured Products Investments

During the year ended December 31, 2010, we recorded $50 million of net unrealized appreciation on our Structured Products investments. Our investments in CLO and CDO portfolios of commercial loans experienced $65 million of net unrealized appreciation during the year ended December 31, 2010, due primarily to a narrowing of investment spreads and higher broker quotes. Our CMBS portfolio experienced $15 million of net unrealized depreciation during the year ended December 31, 2010, due primarily to lower projected future cash flows due to continued credit impairments in the overall commercial real estate markets.

Foreign Currency Translation

We have investments in portfolio companies, including European Capital, for which the investment is denominated in a foreign currency, primarily the Euro. We also have other assets and liabilities denominated in foreign currencies. Fluctuations in exchange rates therefore impact our financial condition and results of operations, as reported in US dollars. For the year ended December 31, 2010, we recorded net unrealized depreciation of $107 million for foreign currency translation. This is primarily as a result of changes in the Euro and US dollar exchange rates.

For foreign currency denominated investments recorded at fair value, such as European Capital, the net unrealized appreciation or depreciation from foreign currency translation on the accompanying consolidated statements of operations represents the economic impact of translating the cost basis of the investment from a foreign currency, such as the Euro, to the US dollar. However, the economic impact of translating the cumulative unrealized appreciation or depreciation from a foreign currency to the US dollar is not recorded as net unrealized depreciation or appreciation from foreign currency translation but rather is included as net unrealized appreciation or depreciation of portfolio company investments on the accompanying consolidated statements of operations. For the year ended December 31, 2010, we recorded unrealized depreciation of $104 million for foreign currency translation on the cost basis in our investment in European Capital (included in our total unrealized depreciation of $107 million for foreign currency translation for the year ended December 31, 2010), which was partially offset by unrealized appreciation of $97 million for the foreign currency translation of our cumulative unrealized depreciation of our investment in European Capital, which is included in our total net unrealized appreciation (depreciation) of portfolio investments in our consolidated statements of operations.

Derivative Agreements

During the year ended December 31, 2010, we recorded $9 million of net unrealized appreciation from derivative agreements, primarily interest rate swaps. The fair value of the net liability for our derivative agreements as of December 31, 2010 was $102 million, which included a $13 million net reduction due to the incorporation of an adjustment for nonperformance risk of us and our counterparties.


37

For interest rate swap agreements, we estimate the fair value based on the estimated net present value of the future cash flows using a forward interest rate yield curve in effect as of the end of the measurement period, adjusted for nonperformance risk, if any, including an evaluation of our credit risk and our counterparty's credit risk. A negative fair value would represent an amount we would have to pay a third-party and a positive fair value would represent an amount we would receive from a third-party to assume our obligation under an interest rate swap agreement. The derivative agreements generally appreciate or depreciate primarily based on relative market interest rates and their remaining term to maturity as well as changes in our and our counterparty's credit risk.

Financial Condition, Liquidity and Capital Resources

Our primary sources of liquidity are our Revolving Credit Facility, cash and cash equivalents and our investment portfolio. As of December 31, 2012, we had no loans outstanding under our $250 million Revolving Credit Facility.

Our Term Loan Facility is subject to mandatory prepayments under certain conditions, set forth in the credit agreement, including at any time our borrowing base coverage is less than 150%. As of December 31, 2012, the borrowing base coverage for the Term Loan Facility was 267% and we were not subject to any mandatory prepayment requirements.

As of December 31, 2012, we had $331 million of cash and cash equivalents and $140 million of restricted cash and cash equivalents. Our restricted cash and cash equivalents consists primarily of collections of interest and principal payments on assets that are securitized. In accordance with the terms of the related securitized debt agreements, based on current characteristics of the securitized loan portfolios, the restricted funds are generally used each quarter to pay interest and principal on the securitized debt and are not distributed to us or available for our general operations. During the years ended December 31, 2012 and 2011, we principally funded our operations from (i) cash receipts from interest, dividend and fee income from our investment portfolio and (ii) cash proceeds from the realization of portfolio investments through the repayments of loan investments and the sale of loan and equity investments.

As of December 31, 2012, our required principal amortization for the next twelve months consists of $150 million scheduled amortization on our Term Loan Facility and any principal amortization of our secured notes within our asset securitizations as a result of principal and interest payments on our securitized debt investments. We believe that we will continue to generate sufficient cash flow through the receipt of interest, dividend and fee payments from our investment portfolio, as well as cash proceeds from the realization of select portfolio investments, to allow us to continue to service our debt, pay our operating costs and expenses, fund capital to our current portfolio companies and originate new investments. However, there is no certainty that we will be able to generate sufficient liquidity.

Operating and Investing Cash Flow

For the years ended December 31, 2012 and 2011, cash provided by operations was $164 million and $174 million, respectively. Our cash flows from operations for the years ended December 31, 2012 and 2011 was primarily from the collection of interest, dividends and fees on our investment portfolio less operating expenses.

For the years ended December 31, 2012 and 2011, net cash provided by investing activities was $823 million and $787 million, respectively. Our cash flow from investing activities includes cash proceeds from the realization of portfolio investments totaling $1,498 million and $1,066 million for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, we had portfolio investments totaling $5.3 billion at fair value, including $2.0 billion in debt investments, $3.1 billion in equity investments and $0.2 billion in Structured Products investments. However, our investments are generally illiquid and no active primary or secondary market exists for the trading of these investments and our estimates of fair value may differ significantly from the values that may be ultimately realized. We are generally repaid or exit our investments upon a change of control event of the portfolio company, such as a sale or recapitalization of the portfolio company.

For the year ended December 31, 2012, approximately $148 million of interest income collected was generated from securitized assets, which is included in our cash flow from operations on our consolidated statements of cash flows. However, because of defaulted loan collateral within our asset securitizations, all interest collections within the securitizations are currently required to be used to pay interest and principal on the outstanding notes in our securitizations with such principal payments included in our cash flow from financing activities on our consolidated statements of cash flows.

For the years ended December 31, 2012 and 2011, net cash used in financing activities was $860 million and $1,026 million, respectively. The primary use of cash from financing activities during the year ended December 31, 2012 was debt payments of $487 million on our asset securitizations and $362 million for repurchases of our common stock. The primary use of financing cash during the year ended December 31, 2011 was $1,008 million for debt payments and $134 million for repurchases of our common stock, partially offset by a $105 million decrease in debt service escrows.


38

Debt Capital

Our debt obligations consisted of the following as of December 31, 2012 and 2011 (in millions):
 
2012
 
2011
Secured revolving credit facility due August 2016, $250 million commitment
$
—

 
$
—

Secured term loan due August 2016, net of discount
597

 
—

Fixed rate private secured notes due December 2013
—

 
30

Floating rate private secured loans due December 2013
—

 
17

Fixed rate non-amortizing secured notes due December 2013
—

 
524

Floating rate non-amortizing secured notes due December 2013
—

 
4

Unsecured public notes due August 2012
—

 
11

ACAS Business Loan Trust 2004-1 asset securitization
—

 
21

ACAS Business Loan Trust 2005-1 asset securitization
—

 
227

ACAS Business Loan Trust 2006-1 asset securitization
85

 
180

ACAS Business Loan Trust 2007-1 asset securitization
71

 
140

ACAS Business Loan Trust 2007-2 asset securitization
22

 
97

Total
$
775

 
$
1,251


The daily weighted average debt balance for the years ended December 31, 2012 and 2011 was $960 million and $1,662 million, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the years ended December 31, 2012 and 2011 was 6.1% and 5.5%, respectively. The weighted average interest rate on all of our borrowings, excluding amortization of deferred financing costs, for the years ended December 31, 2012 and 2011 was 5.0% and 4.1%, respectively. The weighted average interest rate on all of our borrowings, excluding amortization of deferred financing costs, as of December 31, 2012 was 4.5%.

As a BDC, we are permitted to issue Senior Securities in any amounts as long as immediately after such issuance our asset coverage is at least 200%, or equal to or greater than our asset coverage prior to such issuance, after taking into account the payment of debt with proceeds from such issuance. Asset coverage is defined as the ratio of the value of the total assets, less all liabilities and indebtedness not represented by Senior Securities, bears to the aggregate amount of Senior Securities representing indebtedness. However, if our asset coverage is below 200%, we may also borrow amounts up to 5% of our total assets for temporary purposes even if that would cause our asset coverage ratio to further decline. As of December 31, 2012, our asset coverage was 801%.

Refinancing Transaction

Secured Debt Facilities—On August 22, 2012, we completed the refinancing of our then outstanding $575 million of secured debt with proceeds from the new Term Loan Facility.

We also obtained simultaneously a new four-year $250 million Revolving Credit Facility, which may be expanded to a maximum $375 million through additional commitments in accordance with the terms and conditions of the Revolving Credit Facility and Term Loan Facility.

Maturity Date and Optional Prepayment—The Term Loan Facility matures on August 22, 2016 and may be prepaid earlier at our option in whole or in part without penalty except in the event that the facility is refinanced with a lower interest rate prior to August 22, 2013, in which case the prepayment shall be made at a price equal to 101% of the principal amount prepaid, plus accrued interest. We may borrow, prepay and reborrow loans under the Revolving Credit Facility at any time prior to August 22, 2015, the commitment termination date, subject to certain terms and conditions, including maintaining a borrowing base coverage of 150%, or 110% so long as our borrowing base coverage does not decrease following an advance. The Revolving Credit Facility matures on August 22, 2016.

Scheduled Amortization—The following table sets forth the scheduled amortization on the Term Loan Facility:
August 22, 2013
$150 million
August 22, 2014
$150 million
August 22, 2015
$150 million
Maturity Date (August 22, 2016)
Outstanding Balance

Any outstanding balance on the Revolving Credit Facility as of the commitment termination date is repayable ratably over the final 12 months until the maturity date.

39


Mandatory Prepayments—Under certain conditions, the Term Loan Facility is subject to mandatory prepayments including if (i) the aggregate amount of the loans outstanding under the facility and amounts outstanding under certain of our secured hedging agreements exceed the borrowing base, as defined in the credit agreement, and we are unable to present a reasonably feasible plan to cure such deficiency within 30 business days, then we must prepay the loans in such amounts as necessary to correct such deficiency; (ii) the borrowing base coverage, as defined in the credit agreement, becomes less than 150%, then we must prepay the loan using excess cash flows (if such amounts plus any proceeds referenced in clauses (iii) and (iv) below equal or exceed $20 million) until such coverage is at least 150%; (iii) we incur certain additional indebtedness (other than permitted indebtedness), then the proceeds must be used to prepay our loan; and (iv) the borrowing base coverage, as defined in the credit agreement, becomes less than 200%, then we must prepay the loan with specified percentages of the proceeds from the sale of certain first lien collateral (if such proceeds plus the amounts referenced in clauses (ii) and (iii) above equal or exceed $20 million), until such coverage is at least 200%. The Revolving Credit Facility is subject to mandatory prepayment in the event that the borrowing base is less than the aggregate amount of revolving loans and certain other debt outstanding until such borrowing base deficiency has been cured. As of December 31, 2012, we were not subject to any mandatory prepayment requirements under the Term Loan Facility or the Revolving Credit Facility.

Interest—The Term Loan Facility bears interest at a rate per annum equal to LIBOR, subject to a LIBOR floor of 1.25% per annum, plus 4.25%. As of December 31, 2012, the interest rate on our Term Loan Facility was 5.5%. The Revolving Credit Facility bears interest at a rate per annum equal to LIBOR plus 3.75%.

Fees—We are required to pay a fee in an amount equal to 0.5% on the average daily unused amount of the lender commitments under our Revolving Credit Facility from the closing date to but excluding the earlier of the date on which a lender's commitment terminates and the commitment termination date, payable quarterly. As of December 31, 2012, the total commitments under our Revolving Credit Facility were $250 million.

Security and Ranking—The Term Loan Facility and Revolving Credit Facility are senior obligations of ours and each is secured by a first priority lien (subject to certain permitted liens) on different non-securitized assets and a separate second lien on the assets in which the other facility has a first lien. The facilities also have a pari passu first priority lien on most of our remaining non-securitized assets. J.P. Morgan Chase Bank, N.A. serves as the collateral agent for the secured parties under a collateral agency and intercreditor agreement.

Covenants—The Term Loan Facility includes a financial covenant that requires us to maintain a 100% borrowing base coverage. The Revolving Credit Facility has financial covenants that require us to maintain a (i) maximum total leverage ratio not to exceed 0.75:1.00, (ii) 100% borrowing base coverage and (iii) minimum adjusted EBITDA for American Capital Asset Management. We are also subject to additional covenants, including without limitation, restrictions on our ability to incur additional debt and liens, make certain acquisitions and investments, pay cash dividends, repurchase common stock, seek to become a RIC and change our regulatory status as a BDC. We are permitted though under the facilities to pay cash dividends or repurchase common stock if, on the date of such payment or purchase and after giving effect thereto, there are no defaults outstanding under the facilities and our borrowing base coverage is at least 150%. As of December 31, 2012, we were in compliance with all of the covenants under the Term Loan Facility and the Revolving Credit Facility. The borrowing base coverage for the Term Loan Facility was 267% as of December 31, 2012.

Events of Default—The Term Loan Facility and the Revolving Credit Facility include usual and customary events of default for facilities of their nature, including without limitation, the occurrence of a payment or covenant default, any unremedied borrowing base deficiency, a cross default to the other facility, the cross acceleration of debt in excess of an aggregate $50 million, the liquidation or bankruptcy of us or American Capital Asset Management, the failure by us to conduct our asset management business through American Capital Asset Management, one or more judgments in excess of an aggregate $50 million and a change of control.

Asset Securitizations

As of December 31, 2012 and 2011, we were in compliance with all of the covenants for our asset securitizations.

In August 2007, we completed a $500 million asset securitization. In connection with the transaction, ACAS Business Loan Trust 2007-2 (“BLT 2007-2”), an indirect consolidated subsidiary, issued $300.5 million Class A notes, $37.5 million Class B notes and $162 million of Class C through Class F notes (collectively, the “2007-2 Notes”). The Class A notes and Class B notes were sold to institutional investors and all of the Class C through Class F notes were retained by us. The 2007-2 Notes are secured by loans originated or acquired by us and sold to our wholly-owned consolidated subsidiary, BLT 2007-2. As of December 31, 2012 and 2011, all interest and principal collections were being applied sequentially to pay down the principal of the notes. The Class A notes have been paid in full as of December 31, 2012 and the outstanding balance as of December 31, 2011 was $62 million. As of December 31, 2012 and 2011, the Class B notes had an outstanding balance of $22 million and $35 million,

40

respectively. There was $33 million and $5 million of restricted cash in BLT 2007-2 as of December 31, 2012 and 2011, respectively. Subject to continuing compliance with certain conditions, we will remain as servicer of the loans. The Class A notes have an interest rate of three-month LIBOR plus 40 basis points, the Class B notes have an interest rate of three-month LIBOR plus 100 basis points, the Class C notes have an interest rate of three-month LIBOR plus 125 basis points, the Class D notes have an interest rate of three-month LIBOR plus 300 basis points and the Class E and Class F notes retained by us do not have an interest rate. The 2007-2 Notes are secured by restricted cash and loans from our portfolio companies with a fair value of $190 million as of December 31, 2012. The 2007-2 Notes contain customary default provisions and mature in November 2019 unless redeemed or repaid prior to such date.

In April 2007, we completed a $600 million asset securitization. In connection with the transaction, ACAS Business Loan Trust 2007-1 (“BLT 2007-1”), an indirect consolidated subsidiary, issued $351 million Class A notes, $45 million Class B notes, $81 million Class C notes, $45 million Class D notes and $78 million Class E notes (collectively, the “2007-1 Notes”). The Class A notes, Class B notes, Class C notes and $15 million of the Class D notes were sold to institutional investors and $30 million of the Class D notes and all the Class E notes were retained by us. In February 2009, we repurchased $20 million of Class B notes issued by BLT 2007-1 for $3 million. The 2007-1 Notes are secured by loans originated or acquired by us and sold to our wholly-owned consolidated subsidiary, BLT 2007-1. As of December 31, 2012 and 2011, all interest and principal collections were being applied sequentially to pay down the principal of the notes. The Class A and Class B notes have been paid in full as of December 31, 2012. The outstanding balance of the Class A and Class B notes as of December 31, 2011 was $47 million and $16 million, respectively. As of December 31, 2012 and 2011, there were $59 million and $65 million of the Class C notes outstanding, respectively, and $12 million of the Class D notes outstanding. There was $62 million and $4 million of restricted cash in BLT 2007-1 as of December 31, 2012 and 2011, respectively. Subject to continuing compliance with certain conditions, we will remain as servicer of the loans. The Class A notes have an interest rate of three-month LIBOR plus 14 basis points, the Class B notes have an interest rate of three-month LIBOR plus 31 basis points, the Class C notes have an interest rate of three-month LIBOR plus 85 basis points, the Class D notes have an interest rate of three-month LIBOR plus 185 basis points and the Class E notes retained by us do not have an interest rate. The 2007-1 Notes are secured by restricted cash and loans from our portfolio companies with a fair value of $203 million as of December 31, 2012. The 2007-1 Notes contain customary default provisions and mature in August 2019 unless redeemed or repaid prior to such date.

In July 2006, we completed a $500 million asset securitization. In connection with the transaction, ACAS Business Loan Trust 2006-1 (“BLT 2006-1”), an indirect consolidated subsidiary, issued $291 million Class A notes, $37 million Class B notes, $73 million Class C notes, $35 million Class D notes and $64 million Class E notes (collectively, the “2006-1 Notes”). The Class A through Class D notes were sold to institutional investors and the Class E notes were retained by us. The 2006-1 Notes are secured by loans originated or acquired by us and sold to our wholly-owned consolidated subsidiary, BLT 2006-1. As of December 31, 2012 and 2011, all interest and principal collections were being applied sequentially to pay down the principal of the notes. The Class A and Class B notes have been paid in full as of December 31, 2012. The outstanding balance of the Class A and Class B notes as of December 31, 2011 was $35 million and $37 million, respectively. As of December 31, 2012 and 2011, there were $49 million and $72 million of the Class C notes outstanding, respectively, and $36 million of the Class D notes outstanding. There was $29 million and $14 million of restricted cash in BLT 2006-1 as of December 31 2012 and 2011, respectively. Subject to continuing compliance with certain conditions, we will remain as servicer of the loans. The Class A notes have an interest rate of three-month LIBOR plus 23 basis points, the Class B notes have an interest rate of three-month LIBOR plus 36 basis points, the Class C notes have an interest rate of three-month LIBOR plus 65 basis points, the Class D notes have an interest rate of three-month LIBOR plus 125 basis points and the Class E notes retained by us do not have an interest rate. The 2006-1 Notes are secured by restricted cash and loans from our portfolio companies with a fair value of $206 million as of December 31, 2012. The 2006-1 Notes contain customary default provisions and mature in November 2019 unless redeemed or repaid prior to such date.

In October 2005, we completed a $1,000 million asset securitization. In connection with the transaction, ACAS Business Loan Trust 2005-1 (“BLT 2005-1”), an indirect consolidated subsidiary, issued $435 million Class A-1 notes, $150 million Class A-2A notes, $50 million Class A-2B notes, $50 million Class B notes, $145 million Class C notes, $90 million Class D notes and $80 million Class E notes (collectively, the “2005-1 Notes”). The Class A through Class C notes were issued to institutional investors and the Class D notes and Class E notes were retained by us. The 2005-1 Notes were secured by loans originated or acquired by us and sold to our wholly-owned consolidated subsidiary, BLT 2005-1. As of December 31, 2011, all interest and principal collections were being applied sequentially to pay down the principal of the notes. On October 25, 2012, the notes issued by BLT 2005-1 were paid off.

In December 2004, we completed a $500 million asset securitization. In connection with the transaction, ACAS Business Loan Trust 2004-1 (“BLT 2004-1”), an indirect consolidated subsidiary, issued $302 million Class A notes, $34 million Class B notes, $74 million Class C notes, $50 million Class D notes, and $40 million Class E notes (collectively, the “2004-1 Notes”). The Class A through Class C notes were issued to institutional investors and the Class D and Class E notes were retained by us. The 2004-1 Notes were secured by loans originated or acquired by us and sold to our wholly-owned consolidated subsidiary, BLT

41

2004-1. As of December 31, 2011, all interest and principal collections were being applied sequentially to pay down the principal of the notes. On April 25, 2012, the notes issued by BLT 2004-1 were paid off.

Equity Capital

As a BDC, we are generally not able to issue or sell our common stock at a price below our NAV per share, exclusive of any distributing commission or discount, except (i) with the prior approval of a majority of our shareholders, (ii) in connection with a rights offering to our existing shareholders, or (iii) under such other circumstances as the SEC may permit. As of December 31, 2012, our NAV was $17.84 per share and our closing market price was $12.02 per share.

During the third quarter of 2011, our Board of Directors adopted a program that may provide for repurchases of shares or dividend payments. On April 26, 2012, our Board of Directors extended the stock repurchase and dividend program through December 31, 2013. Under the program, we will consider quarterly setting an amount to be utilized for stock repurchases or dividends. Generally, the amount may be utilized for repurchases if the price of our common stock represents a discount to the NAV of our shares, and the amount may be utilized for the payment of cash dividends if the price of our common stock represents a premium to the NAV of our shares. In determining the quarterly amount for repurchases or dividends, our Board of Directors will be guided by our cumulative net cash provided by operating activities in the prior quarter and since the beginning of 2012, cumulative repurchases or dividends, cash on hand, debt service considerations, investment plans, forecasts of financial liquidity and economic conditions, operational issues and the then current trading price of our stock. The repurchase and dividend program may be suspended, terminated or modified at any time for any reason. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases. During the year ended December 31, 2012, we made open market purchases of 34.8 million shares, or $362 million, of our common stock at an average price of $10.39 per share, which was accretive to our NAV per share by $0.77. During the year ended December 31, 2011, we made open market purchases of 17.6 million shares, or $134 million, of our common stock at an average price of $7.61 per share, which was accretive to our NAV per share by $0.32.

Contractual Obligations
 
A summary of our contractual payment obligations as of December 31, 2012 are as follows (in millions):
 
Payment Due by Period 
 
Total 
 
Less than 1 year
 
2-3 years
 
4-5 years
 
After 5 years
Secured term loan due August 2016
$600
 
$150
 
$300
 
$150
 
$—
Secured notes from asset securitizations(1)
178
 
141
 
37
 
—
 
—
Interest payments on debt obligations(2)
77
 
33
 
38
 
6
 
—
Operating leases(3)
121