News Column

AMERICAN CAPITAL, LTD - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations (in millions, except per share data)

August 11, 2014

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of American Capital's financial statements with a narrative from the perspective of management. Our MD&A is presented in four sections:

•Executive Overview

•Results of Operations

•Financial Condition, Liquidity and Capital Resources

•Forward-Looking Statements

EXECUTIVE OVERVIEW

American Capital, Ltd. (which is referred to throughout this report as "American Capital", "we", "our" and "us") is a publicly traded global asset manager and private equity firm. We invest in private equity, private debt, private real estate securities, technology investments, special situation investments and funds managed by us. We provide investors the opportunity to participate in the asset management and private equity industry through an investment in our publicly traded stock. Our primary business objectives are to increase our funds under management and our net earnings and net asset value ("NAV") by making investments with attractive current yields and/or potential for equity appreciation and realized gains. 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 and provide capital directly to early stage and mature private and small public companies ("Sponsor Finance Investments"). We also invest in first and second lien floating rate loans to large-market U.S. based companies ("Senior Floating Rate Loans") and structured finance investments ("Structured Products"), including collateralized loan obligation ("CLO") securities and commercial mortgages and commercial mortgage backed securities ("CMBS"). We are also a fund manager with $83 billion of total assets under management (including levered assets) as of June 30, 2014, which includes $6 billion of total assets on our balance sheet and $77 billion of third-party assets under management, $13 billion of which are third-party earning assets under management for which we are paid a management fee. Our fund management is conducted through our wholly-owned portfolio company, American Capital Asset Management, LLC ("ACAM"). ACAM manages the following funds: • European Capital Limited ("European Capital")



• American Capital Agency Corp. ("AGNC")

• American Capital Mortgage Investment Corp. ("MTGE")

• American Capital Senior Floating, Ltd. ("ACSF")

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")

• ACAS CLO 2013-1, Ltd. ("ACAS CLO 2013-1")

• ACAS CLO 2013-2, Ltd. ("ACAS CLO 2013-2")

• ACAS CLO 2014-1, Ltd. ("ACAS CLO 2014-1")

ACAM will also manage American Capital Equity III, LP ("ACE III"), a $1.1 billion U.S. lower middle market private equity fund that entered into definitive agreements with a group of investors on April 28, 2014 and is expected to close in the third quarter of 2014. As a business development company ("BDC"), we are required by law to make significant managerial assistance available to most of our portfolio companies. Such assistance 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 43



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experience that assists our investment professionals in providing intensive operational and managerial assistance to our portfolio companies. As of June 30, 2014, we had board seats at 47 companies in our investment portfolio and had board observation rights at certain other companies. Providing assistance to the companies in our investment portfolio serves as an opportunity for us to maximize their value. American Capital Investment Portfolio Portfolio Composition Our investments can be divided into the following six business lines: (i) American Capital One Stop Buyouts®, (ii) Sponsor Finance Investments, (iii) European Capital, (iv) Asset Management, (v) Structured Products and (vi) Senior Floating Rate Loans. As of June 30, 2014, we had investments totaling $5.6 billion and $5.5 billion at cost basis and fair value, respectively. As of June 30, 2014, our ten largest investments had a cost basis and fair value totaling $2.6 billion and $3.0 billion, respectively, or 46% of total assets at fair value, and are as follows (in millions): Company Business Line Industry Cost Basis Fair Value American Capital Asset Management Capital Markets $ 189$ 925 Asset Management, LLC European Capital European Capital Diversified 959 827 Limited Financial Services



CML Pharmaceuticals, American Capital One Life Sciences Tools

443 343 Inc. Stop Buyouts® & Services



Mirion Technologies, American Capital One Electrical Equipment

92 155 Inc.(1) Stop Buyouts® The Tensar Sponsor Finance Construction & 159 154 Corporation(2) Investments Engineering Affordable Care American Capital One Health Care 90 154 Holding Corp.(1) Stop Buyouts® Providers & Services SMG Holdings, American Capital One Hotels, Restaurants 152 115 Inc.(1) Stop Buyouts® & Leisure WRH, Inc.(1) American Capital One Life Sciences Tools 344 111 Stop Buyouts® & Services Soil Safe Holdings, Sponsor Finance Professional 101 98 LLC Investments Services Unwired Holdings, American Capital One Electronic Inc. Stop Buyouts® Equipment, Instruments & Components 57 82 Total $ 2,586$ 2,964 ----------



(1) Potential exits as part of the ACE III transaction. See Note 12 to our

interim consolidated financial statements in this Form 10-Q.

(2) The Tensar Corporation was exited on July 9, 2014.

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The composition of our investment portfolio as of June 30, 2014, at fair value, as a percentage of total investments based on these different business lines, is shown below: [[Image Removed]] 45



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The following tables set forth the aggregate dollar amount of new investments by security type, use and business line (in millions). The amounts of our new investments include both funded and unfunded commitments as of the investment date: Three Months Ended Six Months Ended June 30, June 30, Security Type 2014 2013 2014 2013 Senior Debt $ 674$ 28$ 938$ 108 Structured Products 73 13 112 13 Common Equity 63 4 76 6 Mezzanine Debt 2 - 6 - Preferred Equity 1 5 2 21 Total by security type $ 813$ 50$ 1,134$ 148 Three Months Ended Six Months Ended June 30, June 30, Use 2014 2013 2014 2013 Senior Floating Rate Loans $ 579 $ - $ 778 $ - Sponsor Finance Investments 99 2 161 31 Structured Products 73 13 92 13 Investments in ACAM and Fund Development 50 12 84 12 American Capital One Stop Buyouts® - - - 27



Add-on financing for working capital in distressed situations

9 5 12 8 Add-on financing for growth and working capital 3 6 7 9



Add-on financing for recapitalizations, not including distressed investments

- - - 36 Add-on financing for purchase of debt of a portfolio company - 12 - 12 Total by use $ 813$ 50$ 1,134$ 148 Three Months Ended Six Months Ended June 30, June 30, Business Line 2014 2013 2014 2013 Senior Floating Rate Loans $ 579 $ - $ 778 $ - Sponsor Finance Investments 108 14 172 75 Structured Products 73 13 92 13 Asset Management 50 12 84 12 American Capital One Stop Buyouts® 3 11 8 48 Total by business line $ 813$ 50$ 1,134$ 148 46



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We received cash proceeds from realizations and repayments of portfolio investments by source and business line as follows (in millions):

Three Months Ended Six Months Ended June 30, June 30, Source 2014 2013 2014 2013 Principal prepayments $ 185$ 115$ 201$ 263 Equity investments 142 18 466 78



Payment of accrued PIK notes and dividend and accreted OID 61

7 124 67 Scheduled principal amortization 19 10 38 19 Loan syndications and sales 1 - 21 4 Total by source $ 408$ 150$ 850$ 431 Three Months Ended Six Months Ended June 30, June 30, Business Line 2014 2013 2014 2013 American Capital One Stop Buyouts® $ 282$ 85$ 348$ 254 Structured Products 42 6 59 11 Sponsor Finance Investments 41 56 98 155 European Capital 34 - 138 - Senior Floating Rate Loans 8 - 8 - Asset Management 1 3 199 11 Total by business line $ 408$ 150$ 850$ 431 American Capital One Stop Buyouts® In an American Capital One Stop Buyout®, we lend senior and mezzanine debt and make majority equity investments to finance our acquisition of an operating company through a change in control. A change in control transaction could be the result of a corporate divestiture, a sale by a private equity firm, a sale by a family-owned closely held business, going private transactions or ownership transitions. In addition, we may make additional add-on investments in our American Capital One Stop Buyouts® to finance strategic acquisitions, growth or for working capital. 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. For our American Capital One Stop Buyouts®, we typically fund all of the senior debt at closing. Currently, we intend to hold the senior debt of these controlled portfolio companies which will allow these controlled portfolio companies to pay cash dividends to their shareholders, including us. Generally, third-party senior debt limits the ability of our controlled portfolio companies to pay cash dividends to us. We will generally invest up to $750 million in a single American Capital One Stop Buyout®. As of June 30, 2014, there were 35 companies in our American Capital One Stop Buyout® portfolio with a fair value and cost basis of $1.8 billion and $2.3 billion, respectively, with an average investment size of $53 million at fair value. As of June 30, 2014, our American Capital One Stop Buyout® portfolio consisted of $879 million and $961 million of debt and equity investments at fair value. As of June 30, 2014, the weighted average effective interest rate on the debt investments in this portfolio was 9.8%, which includes the impact of non-accruing loans, and our fully-diluted weighted average ownership interest in the equity investments in this portfolio was 63%. During the three and six months ended June 30, 2014, we recognized operating revenues from our American Capital One Stop Buyouts® portfolio totaling $51 million and $101 million, respectively. There is generally no publicly available information about these companies and a primary or secondary market for the trading of these privately issued loans and equity securities generally does not exist. These investments have been historically exited through normal repayment, a change in control transaction or recapitalization of the portfolio company. Sponsor Finance Investments The majority of the investments in our Sponsor Finance Investments portfolio were originated either to assist in the funding of change of control buyouts of privately held middle market companies sponsored by other private equity firms or to support the growth or recapitalization of an existing portfolio company. A change of control transaction could be the result of a corporate 47



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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. In these transactions, we generally lend senior, mezzanine and unitranche debt and make minority equity co-investments in privately-held middle market companies. We will generally invest between $10 million and $150 million in a single Sponsor Finance Investment transaction. Generally, we make investments in companies that have a minimum earnings before interest, taxes, depreciation and amortization ("EBITDA") of $10 million. Our senior loans may consist of first lien secured revolving credit facilities, first lien secured term loans, second lien secured term loans and unitranche loans. Our mezzanine loans may consist of secured and unsecured 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 London Interbank Offered Rate ("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. As of June 30, 2014, there were 44 companies in our Sponsor Finance Investment portfolio with a fair value and cost basis of $813 million and $906 million, respectively, with an average investment size of $18 million at fair value. As of June 30, 2014, our Sponsor Finance Investment portfolio consisted of $609 million and $204 million of debt and equity investments at fair value. As of June 30, 2014, the weighted average effective interest rate on the debt investments in this portfolio was 8.9%, which includes the impact of non-accruing loans, and our fully-diluted weighted average ownership interest in the equity investments in this portfolio was 37%. During the three and six months ended June 30, 2014, we recognized operating revenues from our Sponsor Finance Investment portfolio totaling $(1) million and $(2) million, respectively, primarily due to the net negative impact from non-accrual investments in 2014. There is generally no publicly available information about these companies and a primary or secondary market for the trading of these privately issued loans and equity securities generally does not exist. These investments have been historically exited through normal repayment, a change in control transaction or recapitalization of the portfolio company. However, we may also sell our loans or equity investments in non-change of control transactions. Asset Management Our fund management business is conducted through our wholly-owned portfolio company, ACAM and its consolidated subsidiaries. In general, subsidiaries of ACAM will enter into management agreements with each of its managed funds. As of June 30, 2014, our investment in ACAM was $189 million and $925 million at cost basis and fair value, respectively, or 17% of our total investments at fair value. As of June 30, 2014, ACAM's earning assets under management totaled $13 billion. As of June 30, 2014, ACAM had $77 billion of total assets under management (including levered assets), including $67 billion of total assets under management for AGNC and $7 billion of total assets under management for MTGE, which are publicly traded mortgage real estate investment trusts ("REITs"), and $0.3 billion of total assets under management for ACSF. We believe that having capital to incubate new funds to be managed by ACAM is a competitive advantage for our asset management business. ACAM had over 115 employees as of June 30, 2014, including six investment teams with 55 investment professionals located in Bethesda (Maryland), New York, Annapolis (Maryland), London and Paris. We have entered into service agreements with ACAM to provide it with additional asset management and administrative services support. Through these agreements, we provide investment advisory and oversight services to ACAM, as well as access to our employees, infrastructure, business relationships, management expertise and capital raising capabilities. ACAM generally earns base management fees based on the shareholders' equity, total assets or the net cost basis of the funds under management and may earn incentive income, or a carried interest, based on the performance of the funds. In addition, American Capital or ACAM may invest directly into these funds and earn investment income from its investments in those funds. During the three and six months ended June 30, 2014, we recognized operating revenues from our investment in ACAM of $26 million and $49 million, respectively. 48



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The following table sets forth certain information with respect to ACAM's funds under management as of June 30, 2014:

Assets under Fund Fund type Established management Investment types Capital type European Capital Private Equity 2005 $1.2 Senior and Permanent Fund Billion Mezzanine Debt, Equity, Structured Products AGNC Publicly Traded 2008 $66.9 Agency Permanent REIT - NASDAQ Billion Securities (AGNC) MTGE Publicly Traded 2011 $7.0 Mortgage Permanent REIT - NASDAQ Billion Investments (MTGE)



ACSF Publicly Traded 2014 $0.3 Senior Floating Permanent

BDC - NASDAQ Billion Rate



Loans

(ACSF) ACE I Private Equity 2006 $0.4



Equity Finite Life

Fund Billion ACE II Private Equity 2007 $0.2



Equity Finite Life

Fund Billion ACE III(1) Private Equity 2014 $0.9



Equity Finite Life

Fund Billion ACAS CLO 2007-1 CLO 2006 $0.4 Senior Debt Finite Life Billion ACAS CLO 2012-1 CLO 2012 $0.4 Senior Debt Finite Life Billion ACAS CLO 2013-1 CLO 2013 $0.4 Senior Debt Finite Life Billion ACAS CLO 2013-2 CLO 2013 $0.4 Senior Debt Finite Life Billion ACAS CLO 2014-1(2) CLO 2014 $0.6 Senior Debt Finite Life Billion ----------



(1) ACE III's closing is subject to regulatory approvals and other standard

conditions that are expected to occur in the third quarter of 2014.

(2) ACAS CLO 2014-1 closed on the sale of $619 million of CLO bonds on July 9,

2014. Recent Fund Development ACSF is a BDC that invests primarily in first lien and second lien floating rate loans to large market, U.S. based companies and invests opportunistically in equity tranches of CLOs collateralized primarily by Senior Floating Rate Loans. On January 15, 2014, ACSF successfully completed its Initial Public Offering ("IPO") of ten million shares of common stock for proceeds of $150 million. Its shares are traded on The NASDAQ Global Select Market under the symbol "ACSF." ACAM earns a base management fee of 0.80% of ACSF's assets, as defined in ACSF's management agreement. In addition, ACAM also purchased 3% of the common stock of ACSF for $4.5 million. ACAS CLO 2014-1 completed a $619 million securitization in July 2014 that invests in broadly syndicated commercial senior secured loans purchased in the primary and secondary markets. ACAM manages ACAS CLO 2014-1 in exchange for a base management fee of 0.50% of ACAS CLO 2014-1's assets and a 20% Carried Interest, subject to certain hurdles. A subsidiary of ACAM also purchased 60% of the non-rated equity tranche of subordinated notes in ACAS CLO 2014-1 for $31 million. ACE III is a $1.1 billion U.S. lower middle market private equity fund that entered into definitive agreements with a group of investors on April 28, 2014 and is expected to close in the third quarter of 2014. ACAM will manage ACE III upon closing. European CapitalEuropean Capital is a wholly-owned investment fund incorporated in Guernsey and is managed by ACAM. European Capital invests in senior and mezzanine debt and equity in buyouts of private companies sponsored by European Capital ("European Capital 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 June 30, 2014, European Capital had investments in 29 portfolio companies totaling $1,037 million at fair value, with an average investment size of $36 million, or 3.1% of its total assets. As of June 30, 2014, European Capital's five largest investments at fair value were $676 million, or 57% of its total assets. 49



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The composition of European Capital's investment portfolio by business line as of June 30, 2014, at fair value, as a percentage of its total investments, is shown below: Business Line June 30, 2014 European Capital One Stop Buyouts® 51.4 % Sponsor Finance Investments 46.7 % Structured Products 1.9 % Total by business line 100.0 % As of June 30, 2014, all 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 June 30, 2014, European Capital's NAV at fair value was $949 million and our investment in European Capital consisted of an equity investment with a cost basis and fair value of $959 million and $827 million, respectively. 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. See Note 3 to our interim consolidated financial statements in this Form 10-Q for further discussion of our valuation of European Capital. Structured Products Our Structured Products portfolio is composed of investments in CLO and CMBS securities. As of June 30, 2014, over 90% of the fair value of this portfolio is invested in debt and equity tranches of CLOs that are generally collateralized by first and second lien floating rate loans. As of June 30, 2014, there were 54 investments in our Structured Products portfolio with a fair value and cost basis of $338 million and $411 million, respectively, with an average investment size of $6 million at fair value. During the three and six months ended June 30, 2014, we recognized operating revenues from our Structured Products portfolio totaling $20 million and $32 million, respectively. Senior Floating Rate Loans Our Senior Floating Rate Loans portfolio is composed primarily of diversified investments in first lien floating rate loans to large-market U.S. based companies, which are commonly referred to as leveraged loans. Our Senior Floating Rate Loans portfolio may also include second lien floating rate loans. Standard & Poor's ("S&P") defines large-market loans as loans from issuers with EBITDA of greater than $50 million. Senior Floating Rate Loans are typically collateralized by a first or second priority lien on a company's assets and a pledge of its stock, providing for greater security and potential recovery in the event of default compared to subordinated fixed-income products. Senior Floating Rate Loans pay interest based on a floating rate typically calculated as a spread over a market index, primarily LIBOR, and generally have a minimum market index floor. Our Senior Floating Rate Loans are also typically traded among investors in an active secondary market with no investor owning a significant percentage of the issue. We generally own less than 2% of any single loan issue. As of June 30, 2014, there were debt investments in 132 companies in our Senior Floating Rate Loans portfolio with a fair value and cost basis of $768 million and an average investment size of $6 million at fair value. As of June 30, 2014, the weighted average effective interest rate on the debt investments in this portfolio was 4.4%. As of June 30, 2014, more than 97% of our Senior Floating Rate Loan portfolio, at fair value, was comprised of loans with a facility rating by S&P of at least "B" or higher. Summary of Critical Accounting Policies The preparation of our financial condition and results of operations requires us to make judgments and estimates that may have a significant impact upon our financial results. We believe that of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management, which can materially impact reported results: valuation of investments; income taxes; interest and dividend income recognition; and stock-based compensation. All of our critical accounting policies are fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2013. See Note 3 to our interim consolidated financial statements in this Form 10-Q for further information regarding the classification of our investment portfolio by levels of fair value inputs used to measure our investments as of June 30, 2014. 50



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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 "Net operating income" ("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 or benefit for income taxes. • The second element is "Net realized (loss) gain," 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 U.S. dollar.



Our consolidated operating results were as follows (in millions):

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Operating revenue $ 100$ 130$ 184$ 263 Operating expenses 59 65 127 130 NOI before income taxes 41 65 57 133 Tax provision (15 ) (16 ) (26 ) (38 ) NOI 26 49 31 95 Net realized (loss) gain (7 ) (27 ) 14 (35 ) Net realized earnings 19 22 45 60 Net unrealized appreciation (depreciation) 193 (1 ) 237 307 Net earnings $ 212$ 21$ 282$ 367 51



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Operating Revenue

We derive the majority of our operating revenue from our investments in senior and mezzanine debt and equity of middle market companies and our investments in Structured Products as well as dividend income from our fund management business which is conducted through ACAM. Operating revenue by business line was as follows (in millions): Three Months Ended Six Months Ended June 30, June 30, Business Line 2014 2013 2014 2013



American Capital One Stop Buyouts® $ 51$ 47$ 101

$ 88 Asset Management 26 34 49 66 Structured Products 20 18 32 37 Senior Floating Rate Loans 4 - 4 - European Capital - 3 - 5 Sponsor Finance Investments (1 ) 28 (2 ) 67 Total by business line $ 100$ 130$ 184$ 263 American Capital One Stop Buyouts® Interest, dividend and fee income from our American Capital One Stop Buyouts® increased by $4 million, or 9%, and by $13 million, or 15%, for the three and six months ended June 30, 2014, respectively, over the comparable periods in 2013, primarily due to additional dividend income as a result of the removal of certain preferred equity securities from non-accrual status due to improved portfolio company performance. Sponsor Finance Investments Interest, dividend and fee income from our Sponsor Finance Investments decreased by $29 million, or 104%, and by $69 million, or 103%, for the three and six months ended June 30, 2014, respectively, over the comparable periods in 2013, primarily due to reserves on accrued payment-in-kind ("PIK") interest and dividend income as a result of the addition of certain securities to non-accrual status due to decreased portfolio company performance. Asset Management Dividend and fee income from ACAM decreased by $8 million, or 24%, and by $17 million, or 26%, for the three and six months ended June 30, 2014, respectively, over the comparable periods in 2013, primarily due to reduced dividend income as a result of a decrease in fees earned for the management of AGNC and MTGE as well as increased expenses incurred by ACAM related to the IPO of ACSF. This was partially offset by an increase in the funds under management of ACAM, primarily ACSF, ACAS CLO 2013-1 and ACAS CLO 2013-2. Structured Products Interest income on Structured Products investments increased by $2 million, or 11%, for the three months ended June 30, 2014, over the comparable period in 2013. Interest income on Structured Products investments decreased by $5 million, or 14%, for the six months ended June 30, 2014, over the comparable period in 2013. 52



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Operating revenue by investment type consisted of the following (in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Interest income on debt investments $ 38$ 47$ 67$ 115 Interest income on Structured Products investments 20 18 32 37 Dividend income from equity investments, excluding ACAM 6 24 22 32 Dividend income from ACAM 19 29 33 56 Interest and dividend income 83 118 154 240 Portfolio company advisory and administrative fees 3 4 6 8 Advisory and administrative services - ACAM 6 5 15 10 Other fees 8 3 9 5 Fee income 17 12 30 23 Total operating revenue $ 100$ 130$ 184$ 263 Interest and Dividend Income The following table summarizes selected data for our debt, Structured Products and equity investments outstanding, at cost (dollars in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Debt investments at cost(1) $ 2,116$ 1,855$ 1,937$ 1,894 Average non-accrual debt investments at cost(2) $ 307$ 331$ 300$ 307 Effective interest rate on debt investments 7.0 % 10.0 % 6.8 % 12.1 % Effective interest rate on debt investments, excluding non-accrual prior period adjustments 8.2 % 10.3 % 8.9 % 10.4 % Structured Products investments at cost(1) $ 389$ 373$ 373$ 377 Effective interest rate on Structured Products investments 21.1 % 19.8 % 17.3 % 19.6 % Debt and Structured Products investments at cost(1) $ 2,505$ 2,228$ 2,310$ 2,271 Effective interest rate on debt and Structured Products investments 9.2 % 11.7 % 8.5 % 13.4 % Average daily one-month LIBOR 0.2 % 0.2 % 0.2 % 0.2 % Equity investments at cost(1)(3) $ 1,769$ 1,995$ 1,901$ 2,004 Effective dividend yield on equity investments(3) 1.3 % 4.7 % 2.3 % 3.2 % Effective dividend yield on equity investments, excluding non-accrual prior period adjustments(3) 4.5 % 4.1 % 4.0 % 4.1 % Debt, Structured Products and equity investments at cost(1)(3) $ 4,274$ 4,223$ 4,211$ 4,275 Effective yield on debt, Structured Products and equity investments(3) 6.0 % 8.4 % 5.7 % 8.6 % Effective yield on debt, Structured Products and equity investments, excluding non-accrual prior period adjustments(3) 7.8 % 8.2 % 7.4 % 8.3 % ----------



(1) Monthly weighted average of investments at cost.

(2) Quarterly average of investments at cost.

(3) Excludes our equity investment in ACAM and European Capital.

Debt Investments Interest income on debt investments decreased by $9 million, or 19%, and by $48 million, or 42%, for the three and six months ended June 30, 2014, respectively, over the comparable periods in 2013, primarily due to the net negative impact from non-accrual investments in 2014 compared to 2013. Our weighted average debt investments outstanding increased by $261 million and $43 million for the three and six months ended June 30, 2014, respectively, over the comparable periods in 2013, primarily as a result of new investments in Senior Floating Rate Loans. The average non-accrual debt investments outstanding decreased from $331 million and $307 million for the three and six months ended June 30, 2013, respectively, to $307 million and $300 million during the three and six months ended June 30, 2014, respectively. 53



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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 three and six months ended June 30, 2014, we recorded a net reserve on uncollected PIK interest income recorded in prior periods of $6 million and $20 million, respectively, as a result of debt investments being placed on non-accrual, which had an approximate 120 basis point and 210 basis point negative impact, respectively, on the effective interest rate on debt investments. For the three months ended June 30, 2013, we recorded a net reserve on uncollected PIK interest income recorded in prior periods of $1 million as a result of debt investments being placed on non-accrual, which had an approximate 30 basis point negative impact on the effective interest rate on debt investments. For the six months ended June 30, 2013, we recorded additional interest income on uncollected PIK interest income reserved in prior periods of $16 million, as a result of debt investments being removed from non-accrual, which had an approximate 170 basis point positive impact on the effective interest rate on debt investments. Equity Investments, Excluding ACAM Dividend income from equity investments, excluding ACAM, decreased by $18 million, or 75%, and by $10 million, or 31%, for the three and six months ended June 30, 2014, respectively, over the comparable periods in 2013, primarily due to the recording of dividend income for the reversal of reserves of accrued dividend income attributable to prior periods from preferred stock investments during the three and six months ended June 30, 2013. As a result, the monthly weighted average effective dividend yield on equity investments was 1.3% and 2.3% for the three and six months ended June 30, 2014, respectively, a 340 basis point and 90 basis point decrease over the comparable periods in 2013. When a preferred equity investment is placed on non-accrual, we may record net reserves on uncollected accrued PIK 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 PIK dividend income which was reserved in prior periods. For the three months ended June 30, 2014, we recorded reserves on accrued PIK dividend income recorded in prior periods from preferred stock investments of $14 million, which had an approximate 320 basis point negative impact on the effective dividend yield on equity investments. For the three months ended June 30, 2013, we recorded dividend income for the reversal of reserves of accrued PIK dividend income attributable to prior periods from preferred stock investments of $3 million, which had an approximate 60 basis point positive impact on the effective dividend yield on equity investments. For the six months ended June 30, 2014 and 2013, we recorded reserves on uncollected accrued PIK dividend income recorded in prior periods from preferred stock investments of $16 million and $10 million, respectively, which had an approximate 170 basis point and 90 basis point negative impact on the effective dividend yield on equity investments. We recorded dividend income for non-recurring dividends on common equity investments of $9 million and $15 million for the three and six months ended June 30, 2014, respectively, and $1 million and $3 million for the three and six months ended June 30, 2013, respectively. Equity Investments - ACAM Dividend income from ACAM was $19 million and $33 million for the three and six months ended June 30, 2014, respectively, and $29 million and $56 million for the three and six months ended June 30, 2013, respectively. The decrease in dividend income during the three and six months ended June 30, 2014 over the comparable periods in 2013 was primarily due to a decrease in fees earned for the management of AGNC and MTGE as well as increased expenses incurred by ACAM related to the IPO of ACSF in January 2014. The decline in fees earned by ACAM for managing AGNC and MTGE was primarily due to a decline in their equity as a result of repurchases of common stock and realized losses. In addition, we received dividends from ACAM which were recorded as a reduction to the cost basis of our investment in ACAM of $1 million and $4 million for the three and six months ended June 30, 2014, respectively, and $2 million and $5 million for the three and six months ended June 30, 2013, respectively. 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 its management and board of directors, including participating on the company's board of directors. Our portfolio company advisory and administrative fees for the three and six months ended June 30, 2014 were $3 million and $6 million, respectively, compared to $4 million and $8 million for the three and six months ended June 30, 2013, respectively. 54



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Advisory and Administrative Services - ACAM We have entered into service agreements with ACAM to provide asset management and administrative service support so that ACAM can fulfill its responsibilities under its management agreements. The fees generated from these service agreements for the three and six months ended June 30, 2014 were $6 million and $15 million, respectively, compared to $5 million and $10 million for the three and six months ended June 30, 2013, respectively. The fees generated from these service agreements increased $1 million, or 20%, and $5 million, or 50%, for the three and six months ended June 30, 2014, respectively, over the comparable periods in 2013 due to an increase in the funds under management of ACAM, primarily ACSF, ACAS CLO 2013-1 and ACAS CLO 2013-2. 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 $8 million and $9 million for the three and six months ended June 30, 2014, respectively, and $3 million and $5 million for the three and six months ended June 30, 2013, respectively. Operating Expenses Operating expenses decreased by $6 million, or 9%, and $3 million, or 2%, for the three and six months ended June 30, 2014, respectively, over the comparable periods in 2013. Operating expenses consisted of the following (in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Interest $ 11$ 11$ 23$ 22 Salaries, benefits and stock-based compensation 35 40 77 81 General and administrative 13 14 27 27 Total operating expenses $ 59$ 65$ 127$ 130 Interest The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the three and six months ended June 30, 2014 was 5.7% and 5.8%, respectively, compared to 6.8% and 6.5%, respectively, for the comparable periods in 2013. The weighted average interest rate on all of our borrowings, excluding amortization of deferred financing costs, for the three and six months ended June 30, 2014 was 5.0% and 5.1%, respectively, compared to 5.5% and 5.2%, respectively, for the comparable periods in 2013. Salaries, Benefits and Stock-based Compensation Salaries, benefits and stock-based compensation consisted of the following (in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Base salaries $ 15$ 14$ 30$ 31 Incentive compensation 10 15 22 29 Benefits 2 3 7 6 Stock-based compensation 8 8 18 15



Total salaries, benefits and stock-based compensation $ 35$ 40$ 77$ 81

Salaries, benefits and stock-based compensation for the three and six months ended June 30, 2014 decreased $5 million, or 13%, and $4 million, or 5%, respectively, from the comparable periods in 2013 primarily due to a decrease in incentive compensation. As of June 30, 2014, we had 278 total employees compared to 274 total employees as of June 30, 2013. 55



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Tax Benefit (Provision) Our tax benefit (provision) consisted of the following (in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2012 2013 Tax provision - net operating income $ (15 )$ (16 )$ (26 )$ (38 ) Tax benefit - net realized (loss) gain 5 12 2 25



Tax benefit (provision) - net unrealized appreciation (depreciation)

23 (2 ) 35 (2 ) Total tax benefit (provision) $ 13 $



(6 ) $ 11$ (15 )

During the first quarter of 2014, we concluded that tax deductions recorded in fiscal years 2012 and 2013 pursuant to Section 162(m) of the Code were recorded in error for cash bonus payments and cash bonus awards under our non-qualified deferred compensation plan. As a result, $7.5 million of income tax expense associated with the reversal of these tax deductions was recorded in the financial statement line item tax provision in our consolidated statements of operations for the three months ended March 31, 2014. These errors were immaterial to the individual prior periods impacted. See Note 10 to our interim consolidated financial statements in this Form 10-Q for further discussion of income taxes. During the second quarter of 2014, we consolidated AC Corporate Holdings, Inc. ("ACCH"), a subsidiary for financial reporting purposes. ACCH is wholly-owned by us and had ordinary deferred tax assets of $30 million that are now reflected in our consolidated deferred tax assets. The capital deferred tax asset of $99 million that was reflected in prior periods, net of a valuation allowance of $99 million, related to the difference between our original equity cost basis for financial reporting purposes and our equity cost basis for tax purposes, which has been eliminated. Net Realized (Loss) Gain Our net realized (loss) gain consisted of the following individual portfolio companies with realized gains (losses) greater than $15 million (in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Specialty Brands Holdings, Inc. $ 35 $ - $ 35 $ - SPL Acquisition Corp. 33 - 33 - Anchor Drilling Fluids USA, Inc. - - 19 - Mirion Technologies, Inc. - - - 27 Other, net 1 11 7 15 Total gross realized portfolio gain 69 11 94 42 CH Holding Corp. (50 ) - (50 ) - Egenera, Inc. (28 ) - (28 ) - Paradigm Precision Holdings, LLC - - - (30 ) Other, net (5 ) (46 ) (9 ) (54 ) Total gross realized portfolio loss (83 ) (46 ) (87 ) (84 ) Total net realized portfolio (loss) gain (14 ) (35 ) 7 (42 ) Derivative agreements 1 (3 ) 2 (17 ) Foreign currency transactions 1 (1 ) 3 (1 ) Tax benefit 5 12 2 25 Total net realized (loss) gain $ (7 )$ (27 ) $



14 $ (35 )

The following are summary descriptions of portfolio companies with realized gains or losses equal to or greater than $30 million. In the second quarter of 2014, our portfolio company, Specialty Brands Holdings, Inc., was sold. As part of the sale, we received $51 million in cash proceeds, realizing a gain of $35 million offset by a reversal of unrealized appreciation of $38 million. We also expect to receive $3 million of additional cash proceeds from this sale that remain held in a sale escrow as of June 30, 2014. 56



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In the second quarter of 2014, our portfolio company, SPL Acquisition Corp., was sold. As part of the sale, we received $192 million in cash proceeds, realizing a gain of $33 million offset by a reversal of unrealized appreciation of $33 million. We also expect to receive $18 million of additional cash proceeds from this sale that remain held in a sale escrow as of June 30, 2014. Furthermore, as of June 30, 2014, we accrued an additional $18 million at fair value for additional proceeds contingent upon drug approval by the U.S. Food and Drug Administration and revenue earnout payments after certain milestones are achieved. In the second quarter of 2014, our portfolio company, CH Holding Corp., was sold. As part of the sale, we received $6 million in cash proceeds, realizing a loss of $50 million offset by a reversal of unrealized depreciation of $49 million. We also expect to receive $1 million of additional cash proceeds from this sale that remain held in a sale escrow as of June 30, 2014. In the first quarter of 2013, our portfolio company, Paradigm Precision Holdings, LLC, was sold. As part of the sale, we received $112 million in cash proceeds, realizing a loss of $30 million partially offset by a reversal of unrealized depreciation of $10 million. We also expect to receive $13 million of additional cash proceeds from this sale that remain held in a sale escrow as of June 30, 2014. Net Unrealized Appreciation (Depreciation)



The following table itemizes the change in net unrealized appreciation (depreciation) (in millions):

Three Months Ended Six Months Ended June 30, June 30, 2014



2013 2014 2013 Gross unrealized appreciation of American Capital One Stop Buyouts®

$ 47 $



78 $ 70$ 123 Gross unrealized depreciation of American Capital One Stop Buyouts®

(62 ) (64 ) (198 ) (100 ) Gross unrealized appreciation of Sponsor Finance Investments 22 34 26 61 Gross unrealized depreciation of Sponsor Finance Investments (4 ) (14 ) (41 ) (37 ) Net unrealized appreciation of European Capital investment 66



- 130 111 Net unrealized appreciation (depreciation) of European Capital foreign currency translation

2 (6 ) 2 11 Net unrealized appreciation (depreciation) of ACAM 101 (75 ) 222 139 Net unrealized appreciation (depreciation) of Structured Products investments 3



(12 ) 1 (20 ) Reversal of prior period net unrealized depreciation upon realization

10 39 8 27 Net unrealized appreciation (depreciation) of portfolio investments 185 (20 ) 220 315 Foreign currency translation - European Capital (8 ) 18 (12 ) (20 ) Foreign currency translation - other (4 ) 2 (4 ) - Derivative agreements and other (3 ) 1 (2 ) 14 Tax benefit (provision) 23 (2 ) 35 (2 ) Net unrealized appreciation (depreciation) $ 193 $



(1 ) $ 237$ 307

See Note 3 to our interim consolidated financial statements in this Form 10-Q for a description of our valuation methodologies. American Capital One Stop Buyouts® For the three and six months ended June 30, 2014, American Capital One Stop Buyouts® experienced $15 million and $128 million, respectively, of net unrealized depreciation driven by the ACE III transaction and specific company performance. For the three and six months ended June 30, 2013, American Capital One Stop Buyouts® experienced $14 million and $23 million, respectively, of net unrealized appreciation driven primarily by improved company performance, multiple expansion of comparable companies and narrowing investments spreads. Sponsor Finance Investments For the three and six months ended June 30, 2014, Sponsor Finance Investments experienced $18 million of net unrealized appreciation and $15 million of net unrealized depreciation, respectively, primarily driven by specific company performance. For the three and six months ended June 30, 2013, Sponsor Finance Investments experienced $20 million and $24 million, respectively, of net unrealized appreciation, respectively, primarily driven by specific company performance. 57



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European Capital As of June 30, 2014, our investment in European Capital consisted of an equity investment with a cost basis and fair value of $959 million and $827 million, respectively. For the three months ended June 30, 2014, we recognized net unrealized appreciation of $68 million on our investment in European Capital composed of $66 million of unrealized appreciation on our investment and $2 million of unrealized appreciation from foreign currency translation of the cumulative unrealized appreciation of European Capital. For the six months ended June 30, 2014, we recognized unrealized appreciation of $132 million on our investment in European Capital composed of $130 million unrealized appreciation on our investment and $2 million of unrealized appreciation from foreign currency translation of the cumulative unrealized appreciation of European Capital. For the three months ended June 30, 2013, we recognized net unrealized depreciation of $6 million on our investment in European Capital related to foreign currency translation of the cumulative unrealized depreciation of European Capital. For the six months ended June 30, 2013, we recognized unrealized appreciation of $122 million on our investment in European Capital composed of $111 million unrealized appreciation on our investment and $11 million of unrealized appreciation from foreign currency translation of the cumulative unrealized depreciation of European Capital. For the three and six months ended June 30, 2014, we recorded unrealized depreciation of $8 million and $12 million for foreign currency translation, respectively, on the cost basis in our investment in European Capital (included in our total unrealized depreciation of $12 million and $16 million for foreign currency translation for the three and six months ended June 30, 2014, respectively). For the three and six months ended June 30, 2013, we recorded unrealized appreciation of $18 million and unrealized depreciation of $20 million for foreign currency translation, respectively, on the cost basis in our investment in European Capital (included in our total unrealized appreciation of $20 million and unrealized depreciation of $20 million for foreign currency translation for the three and six months ended June 30, 2013, respectively). During the three and six months ended June 30, 2014, the unrealized appreciation on our investment in European Capital of $66 million and $130 million, respectively, excluding unrealized appreciation on foreign currency translation, was due primarily to an increase in the NAV of European Capital primarily due to net unrealized appreciation of its investment portfolio. In addition, we received dividends from European Capital of $34 million and $138 million for the three and six months ended June 30, 2014 that was treated as a return of capital. During the six months ended June 30, 2013, the unrealized appreciation on our investment in European Capital of $111 million, excluding unrealized 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 its 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 June 30, 2014, March 31, 2014 and December 31, 2013: June 30, 2014 March 31, 2014 December 31, 2013 Debt investments at fair value € 341 € 334 € 406 Equity investments at fair value 419 371 364 Other assets and liabilities, net 41 71 56 Third-party unsecured debt at cost (108 ) (107 ) (107 ) NAV (Euros) € 693 € 669 € 719 Exchange rate 1.37 1.38 1.38 NAV (U.S. dollars) $ 949 $ 923 $ 992



Fair value of American Capital equity investment $ 827 $

801 $ 841 Implied discount to NAV 12.9 % 13.2 % 15.2 % American Capital Asset ManagementACAM had a cost basis of $189 million and fair value of $925 million as of June 30, 2014. During the three and six months ended June 30, 2014, we recognized $101 million and $222 million of unrealized appreciation, respectively, on our investment in ACAM. The unrealized appreciation on our investment in ACAM for the three and six months ended June 30, 2014 was primarily due to increases in actual and forecasted growth for AGNC and MTGE, multiple expansion and projected fees for managing ACE III. During the three and six months ended June 30, 2013, we recognized unrealized depreciation of $75 million and unrealized appreciation of $139 million, respectively, on our investment in ACAM. The unrealized depreciation on our investment in ACAM for the three months ended June 30, 2013 was primarily due to a reduction in projected management fees for managing AGNC and MTGE. Due in part to the rapid and substantial increase in mortgage spreads relative to similar treasury securities during the second quarter of 2013, the NAV and stock price of two mortgage REITs declined during the quarter. The unrealized appreciation on our investment in ACAM for the six months ended June 30, 2013 was primarily due to increases in the projected management fees for managing AGNC and MTGE due to growth in the equity capital of each company. 58



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Structured Products Investments American Capital has investments in Structured Products (which includes investment and non-investment grade tranches of CLO and CMBS securities) with a cost basis of $411 million and fair value of $338 million as of June 30, 2014. During the three and six months ended June 30, 2014, we recorded $3 million and $1 million, respectively, of net unrealized appreciation on our Structured Products investments. During the three and six months ended June 30, 2013, we recorded $12 million and $20 million, respectively, of net unrealized depreciation on our Structured Products investments primarily due to unrealized depreciation on our investments in CLO portfolio of commercial loans as a result of decreasing spreads on the underlying collateral as investments were nearing the end of their lives. Financial Condition, Liquidity and Capital Resources Our primary sources of liquidity are our investment portfolio, cash and cash equivalents, our four-year $250 million secured revolving credit facility (the "$250 Million Revolving Credit Facility") and our two-year $750 million secured revolving credit facility (the "$750 Million Revolving Credit Facility"). As of June 30, 2014, we had no loans outstanding under our $250 Million Revolving Credit Facility and $750 Million Revolving Credit Facility. As of June 30, 2014, we had $135 million of cash and cash equivalents and $130 million of restricted cash and cash equivalents. As of June 30, 2014, our restricted cash and cash equivalents included $100 million of the funded cash collateral on deposit with a custodian under our total return swaps. During the three and six months ended June 30, 2014 and 2013, 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. As of June 30, 2014, our required principal amortization for the next twelve months consists of $4.5 million scheduled amortization on our secured term loans. 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, Investing and Financing Cash Flows For the six months ended June 30, 2014 and 2013, net cash provided by operations was $47 million and $86 million, respectively. Our cash flow from operations for the six months ended June 30, 2014 and 2013 was primarily from the collection of interest, dividends and fees on our investment portfolio less operating expenses. For the six months ended June 30, 2014, net cash used in investing activities was $111 million. For the six months ended June 30, 2013, net cash provided by investing activities was and $167 million, respectively. Our cash flow from investing activities includes cash proceeds from the realization of portfolio investments totaling $850 million and $431 million for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, we had portfolio investments totaling $5,511 million at fair value, including $2,289 million in debt investments, $2,884 million in equity investments and $338 million in Structured Products investments. However, a significant amount of 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 six months ended June 30, 2014 and 2013, net cash used in financing activities was $116 million and $277 million, respectively. The primary use of cash from financing activities during the six months ended June 30, 2014 was repurchases of our common stock of $137 million. The primary use of cash from financing activities during the six months ended June 30, 2013 was debt payments of $162 million on our asset securitizations and $253 million for repurchases of our common stock. Debt Capital As a BDC, we are permitted to issue senior debt securities and preferred stock (collectively, "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 June 30, 2014, our debt obligations, excluding discounts, were $800 million and our asset coverage was 593%. In our calculation of asset coverage, we are including a notional amount of $374 million for the loans related to our total return swap transactions less $100 million of cash collateral provided. See Note 4 to our interim consolidated financial statements in this Form 10-Q for further discussion of our debt obligations. 59



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The following table sets forth the scheduled amortization on the secured term loans and unsecured private notes: August 22, 2014$4.5 millionAugust 21, 2015$4.5 millionAugust 22, 2016$4.5 million



Secured Term Loans Maturity Date (August 22, 2017) Outstanding Balance Unsecured Private Notes Maturity Date (September 15, 2018) Outstanding Balance

Total Return Swaps American Capital TRS, LLC ("ACTRS"), a wholly owned consolidated affiliate of American Capital, entered into total return swap transactions with Citibank, N.A. (the "2012 TRS" and "2012 TRS II"). The total return swaps, which are non-recourse to American Capital, replicate the performance of reference pools of broadly syndicated loans (each, a "Reference Pool"). The maximum amount of the loans that can be included in the Reference Pool is $400 million (determined at the time each such loan is added to the Reference Pool) and the maximum cash collateral requirement is $100 million. As of June 30, 2014, ACTRS had provided $100 million of cash collateral for the loans in the 2012 TRS and 2012 TRS II Reference Pools, which is recorded in the financial statement line item restricted cash and cash equivalents in our consolidated balance sheets. ACTRS may also be required to post additional collateral from time to time as a result of unrealized losses on the loans included in each Reference Pool. As of June 30, 2014, the loans in the Reference Pools for the 2012 TRS and the 2012 TRS II had a notional of approximately $374 million. 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 Securities and Exchange Commission ("SEC") may permit. As of June 30, 2014, our NAV was $20.12 per share and our closing market price was $15.29 per share. During 2011, our Board of Directors adopted a program that may provide for stock repurchases or dividend payments ("Stock Repurchase and Dividend Program"). During the three months ended March 31, 2014, we repurchased a total of 8.9 million of our common stock in the open market for $137 million at an average price of $15.38 per share. During the three and six months ended June 30, 2013, we repurchased a total of 9.1 million shares and 18.1 million shares, respectively, of our common stock in the open market for $125 million and $253 million at an average price of $13.77 per share and $14.00 per share, respectively. In March 2014, our Board of Directors suspended the Stock Repurchase Program and Dividend Program for an indefinite period. See Note 9 to our interim consolidated financial statements in this Form 10-Q for further discussion of the Stock Repurchase and Dividend Program. Commitments As of June 30, 2014, we had commitments under loan and financing agreements to fund up to $220 million to 23 portfolio companies, with $75 million of the commitments related to the undrawn revolving credit facility for European Capital. These commitments are primarily composed of working capital credit facilities, acquisition credit facilities and subscription agreements. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and availability under borrowing base thresholds. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio. 60



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Non-Performing Loans Analysis We stop accruing interest on our debt investments when it is determined that interest is no longer collectible. Our valuation analysis serves as a critical piece of data in this determination. A significant change in the portfolio company valuation assigned by us could have an effect on the amount of our loans on non-accrual status. As of June 30, 2014, loans on non-accrual status for 18 portfolio companies had a cost basis and fair value of $299 million and $171 million, respectively. As of June 30, 2014 and December 31, 2013, current loans, past due accruing loans and loans on non-accrual status were as follows (dollars in millions): June 30, 2014 December 31, 2013 Current $ 2,101 $ 1,377 0 - 30 days past due - 26 31 - 60 days past due - - 61 - 90 days past due - - Greater than 90 days past due - - Total past due accruing loans at cost - 26 Non-accruing loans at cost 299 287 Total loans at cost $ 2,400 $ 1,690 Non-accruing loans at fair value $ 171 $ 154 Total loans at fair value $ 2,289 $ 1,580



Non-accruing loans at cost as a percent of total loans at cost

12.5 % 17.0 %



Non-accruing loans at fair value as a percent of total loans at fair value

7.5 % 9.7 % Non-accruing loans at fair value as a percent of non-accruing loans at cost 57.2 % 53.7 % Non-accruing loans at cost increased $12 million from December 31, 2013 to June 30, 2014 primarily due to approximately $74 million of loans placed on non-accrual status due to weaker portfolio company performance, partially offset by approximately $16 million of loans removed from non-accrual status due to improved portfolio company performance and $22 million of exits and write-offs. In addition, the cost basis of existing non-accrual loans was reduced by approximately $26 million for reserves of accrued PIK interest. 61



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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.


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