2nd Ave.

Capital performed an analysis of the financial metrics of 16 BDC firms:

• ACAS
• AINV
• ALD
• ARCC
• BKCC
• FSC
• GAIN
• GLAD
• GNV
• KCAP
• MCGC
• PCAP
• PNNT
• TCAP
• HTGC
• PSEC

American Capital (ACAS) is the largest by far in the group on many metrics:
• Avg volume traded
• Enterprise Value (ttm)
• EBITDA (ttm)
• Operating Cash Flow (ttm)
• Leveraged Free Cash Flow (ttm)

ACAS is among the top 3 firms in:

• Leveraged Free Cash Flow per share
• EBITDA per share

And among the top 5 in:

• Total Cash Flow per share

ACAS has the worst ROE (ttm) in the group (-89.18%) and the worst quarterly
revenue growth (-46.80%) and it is among the 3 worst performers in ROA (ttm).

With such good performance in cash flow generation, the ROA and ROE numbers
(stemming primarily from hits to earnings resulting from large mark-to-market
write-downs) cannot explain the fact that ACAS has BY FAR the worst Price to Book
Value ratio (of 0.36) and Price to Sales ratio (of 1.12) - versus group means of 0.72
and 4.27 respectively.

Our conclusion is that there is a major overhang on the ACAS shares, much bigger
even than there is on its smaller rival – ALD, which was embroiled in the Business
Loan Express fiasco, due to the concerns relating to the company’s covenant
breach. This is exacerbated by ACAS management’s poor guidance and assurances
todate in the matter.

This is further demonstrated by the fact that the company also has BY FAR the
largest percentage of short shares vs. the float, as compared to it peers . It is
15.30% for ACAS vs. a group mean of 2.61% (or roughly a factor of 6X).

Practical Conclusion and Call to Action

ACAS is bound to get its covenants in order sooner or later – either because ECAS
will be sold, or a combination of additional portfolio company sales, or mark-to-
market will start a positive impact, or a new lending white knight will surface or a
reasonable compromise with lenders will be reached.
We believe the timeline for this event is within the next 3-4 months (by mid-Feb.
2010).
At that point ACAS’ shares (due to their high liquidity) will start a massive reversion
to the P/B and P/S means – guiding to a target price of around $7 (based on
price/book multiples) to $14 (based on price/sales multiples). This will be
compounded substantially because of the large amount of short shares –attempting
to cover, as the price increases.
Our target, based on price/book multiples, assuming no further decline in book
value and with a reasonably sized short squeeze – is $10 / share, by April 30th, 2010