Allied Capital Announces Third Quarter 2008 Financial Results

Allied Capital Corporation (NYSE: ALD) today announced third quarter 2008 financial results.

Highlights for Q3 2008

• Net investment income was $0.26 per share, or $45.6 million
• Net realized gains were $0.35 per share, or $62.0 million
• The total of net investment income and net realized gains was $0.60 per share, or $107.6 million
• Net unrealized depreciation was $2.38 per share, or $425.9 million
• Net loss was $1.78 per share, or $318.3 million
• Third quarter 2008 dividend of $0.65 per share was paid; fourth quarter dividend of $0.65 per share has been declared
• Net asset value per share was $13.51
• Shareholders’ equity was $2.4 billion
• New investments totaled $433.8 million for the quarter; principal collections from investment repayments and sales totaled $280.6 million for the quarter

For the quarter ended September 30, 2008, net investment income was $45.6 million or $0.26 per share compared to net investment income of $18.3 million or $0.12 per share for the quarter ended September 30, 2007. Net investment income was reduced by employee stock option expense of $1.5 million or $0.01 per share and $18.3 million or $0.12 per share, and excise tax expense of $0.9 million or $0.01 per share and $9.0 million or $0.06 per share, for the quarters ended September 30, 2008 and 2007, respectively. Stock option expense in the third quarter of 2007 included a one-time charge of $14.4 million or $0.09 per share resulting from a FASB 123R expense related to the cancellation of stock options in conjunction with a tender offer that was completed in that quarter.

Interest and related portfolio income was $120.7 million or $0.68 per share for the quarter ended September 30, 2008, and $118.4 million or $0.77 per share for the quarter ended September 30, 2007. Total operating expenses were $73.0 million or $0.41 per share for the quarter ended September 30, 2008, and $88.9 million or $0.58 per share for the quarter ended September 30, 2007.

For the quarter ended September 30, 2008, the company had net realized gains of $62.0 million or $0.35 per share, including a realized gain of $86.9 million from its investment in Norwesco, Inc., and a realized loss of $34.0 million from its investment in Pendum, Inc. For the quarter ended September 30, 2007, the company had net realized gains of $212.4 million or $1.38 per share, which included a $259.5 million gain from the sale of its investment in Mercury Air Centers, Inc. Net realized gains or losses can vary substantially from period to period.

For the quarter ended September 30, 2008, net change in unrealized appreciation or depreciation was a decrease of $425.9 million or $2.38 per share. The net unrealized depreciation for the third quarter of 2008 resulted from the reversal of net unrealized appreciation associated with net realized gains of $47.2 million or $0.26 per share and net declines in investment values of $378.7 million or $2.12 per share. For the quarter ended September 30, 2007, net change in unrealized appreciation or depreciation was a decrease of $327.2 million or $2.12 per share, which included the reversal of net unrealized appreciation associated with net realized gains of $178.1 million. Net change in unrealized appreciation or depreciation can vary substantially from period to period.

Net loss for the three months ended September 30, 2008, was $318.3 million or $1.78 per share, as compared to a net loss of $96.5 million or $0.62 per share for the quarter ended September 30, 2007. Net income (loss) can vary substantially from period to period due to the recognition of realized gains and losses and unrealized appreciation and depreciation, among other factors. As a result, quarterly comparisons of net income (loss) may not be meaningful.

At December 31, 2007, the company had excess taxable income of $393.3 million available for distribution to shareholders in 2008. The company paid $340.4 million in dividends in the first three quarters of 2008, and the remaining excess taxable income will be distributed as part of the fourth quarter 2008 dividend.

Portfolio and Investment Activity

New investments totaled $433.8 million for the third quarter of 2008. New investments included:

• $319.0 million to purchase the positions of the senior lenders under the Ciena Capital LLC revolving credit facility. On September 30, 2008, Ciena Capital LLC, an Allied Capital portfolio company, voluntarily filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. As a result of Ciena's decision to file for bankruptcy protection, Allied Capital's unconditional guaranty of the obligations outstanding under Ciena's revolving credit facility became due, and Allied Capital, in lieu of paying under its guaranty, purchased the positions of the senior lenders under Ciena's revolving credit facility except for a $5 million position held by Citibank, N.A. Allied Capital continues to guarantee the remaining principal balance of $5 million plus related interest, fees and expenses payable to Citibank. This senior secured loan had a value of $180.2 million at September 30, 2008.
• $31.4 million to Tank Intermediate Holding Corp. to support the acquisition of Norwesco, Inc.;
• $19.8 million in Unitranche Fund LLC, a private fund co-managed by the company and an affiliate of General Electric Capital Corporation that generally focuses on making first lien unitranche loans to support middle market companies, to support its investment in one company;
• $12.8 million in Callidus Capital Corporation to purchase the minority equity interests in Callidus Capital Management, a manager of senior loan investments in senior loan collateralized loan obligations ("CLOs”), collateralized debt obligations ("CDOs”) and other related investments.

After principal collections related to investment repayments or sales of $280.6 million, portfolio exits and valuation and other changes during the quarter, the total portfolio at value was $4.2 billion at September 30, 2008. At both September 30, 2008, and September 30, 2007, the weighted average yield on the interest-bearing portfolio was 11.9%. The non-accrual status of the acquired Ciena senior secured loan reduced the weighted average yield on the interest-bearing portfolio by 0.6%.

Portfolio Quality

Grade 4 and Grade 5 assets totaled $379.1 million or 9.0% of the total portfolio at value at September 30, 2008, as compared to $77.9 million or 1.7% at June 30, 2008. Loans on non-accrual were $383.1 million or 9.1% of the total portfolio at value at September 30, 2008, as compared to $109.6 million or 2.4% of the total portfolio at value at June 30, 2008. The increase in Grade 4 and 5 assets and loans on non-accrual included the Ciena senior secured loan acquired on September 30, 2008, which had a value of $180.2 million at September 30, 2008. Loans and debt securities over 90 days delinquent totaled $21.4 million or 0.5% of the total portfolio at value at September 30, 2008, as compared to $23.7 million or 0.5% of the total portfolio at value at June 30, 2008. The senior secured loan to Ciena that was purchased on September 30, 2008, was not delinquent on the date of purchase. However, this loan will become delinquent as no payments will be made to the company while Ciena is under bankruptcy reorganization.

Liquidity and Capital Resources

At September 30, 2008, the company had cash and investments in money market and other securities totaling $215.3 million. The company also had outstanding borrowings under its revolving line of credit of $170.0 million and had issued standby letters of credit totaling $123.8 million. The company’s weighted average cost of debt was 6.8% and its regulatory asset coverage was 213% at September 30, 2008. The company is required to maintain regulatory asset coverage of at least 200%.

Quarterly Dividend of $0.65 Per Share Declared for the Fourth Quarter of 2008

As previously released on July 8, 2008, the company declared a fourth quarter dividend of $0.65 per share. This dividend represents the 181^st consecutive quarterly dividend for Allied Capital shareholders since 1963. In accordance with regulated investment company distribution rules, the company declared the fourth quarter dividend during the third quarter because a portion of the dividend will be paid from 2007 taxable income.

The record date for the dividend is December 12, 2008, and the dividend is payable December 26, 2008.

The company’s Board of Directors reviews the dividend quarterly. The company’s Board of Directors is currently evaluating the company’s dividend strategy for 2009 and currently anticipates that 2009 dividends will be reduced to a level that more closely approximates net investment income.

Webcast/ Conference Call at 8:30 a.m. (Eastern Time) on Monday, November 10, 2008

The company will host a webcast/conference call at 8:30 a.m. (Eastern Time) on Monday, November 10, 2008, to discuss the results for the quarter. PLEASE VISIT THE PRESENTATIONS & REPORTS SECTION OF THE INVESTOR RESOURCES PORTION OF THE COMPANY’S WEBSITE FOR A SLIDE PRESENTATION THAT COMPLEMENTS THE CONFERENCE CALL.

All interested parties are welcome to attend the live webcast, which will be hosted through our website at www.alliedcapital.com. Please visit the website to test your connection before the call. You can also access the conference call by dialing (888) 689-4612 approximately 15 minutes prior to the call. International callers should dial (973) 532-4907. All callers should reference the passcode "Allied Capital.”

An archived replay of the event will be available through December 10, 2008 by calling (800) 642-1687 (international callers please dial (706) 645-9291). Please reference passcode "69572631”. An archived replay will also be available on our website. For complete information about the webcast/conference call and the replay, please visit our web site or call Allied Capital Investor Relations at (888) 818-5298.

About Allied Capital

Allied Capital (NYSE: ALD) is a leading business development company (BDC) in the U.S. that invests long-term debt and equity capital in middle market businesses nationwide. Founded in 1958 and operating as a public company since 1960, Allied Capital is celebrating 50 years of investing in the U.S. entrepreneurial economy. With $4.6 billion in total balance sheet assets at September 30, 2008, Allied Capital is among the largest BDCs with a diverse portfolio of investments in 117 companies across a variety of industries. These companies generate aggregate revenues of over $13 billion and employ more than 100,000 people. For more information, please visit www.alliedcapital.com, call Allied Capital investor relations toll-free at (888) 818-5298, or e-mail us at ir@alliedcapital.com.

Forward-Looking Statements

The information contained in this press release contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results and conditions to differ materially from those projected in these forward-looking statements, and these factors are enumerated in Allied Capital’s filings with the Securities and Exchange Commission. This press release should be read in conjunction with the company’s recent SEC filings.

This summary should be read in conjunction with the Company's SEC filings. Certain reclassifications have been made to prior period balances to conform with the current period financial statement presentation.

This summary should be read in conjunction with the Company's SEC filings. Certain reclassifications have been made to prior period balances to conform with the current period financial statement presentation.

This summary should be read in conjunction with the Company's SEC filings. Certain reclassifications have been made to prior period balances to conform with the current period financial statement presentation.