DOC September 1, 2006



January 9, 2008

Research Associate: Tanuka De, m., MBA.

Editor: Madhurima Majumdar

Sr. Ed.: Ian Madsen, CFA; imadsen@; 1-800-767-3771, x9417

111 N. Canal Street, Suite 1101 ( Chicago, IL 60606

|Allied Capital Corporation |(ALD – NYSE) |$19.99 |

Note: All new or revised material since the last update is highlighted.

Reason for Report: Minor change in estimates (2/13 brkrs w. cvrg.) Prev. Ed.: 3Q07 Earnings Update; Nov. 21, 2007

Brokers’ Recommendations: Neutral: 76.9% (10 firms); Positive: 15.4% (2); Negative: 7.7 %( 1) Prev. Ed.: 10; 2; 1

Brokers’ Target Price: $27.10 (↔ with the last edition; 10 firms) Brokers’ Avg. Expected Return: 35.6%

Recent Events

On November 29, 2007, ALD priced a secondary stock offering of 3.25 million shares at $24.75 per share. Allied Capital expects to net $77.5 million from the offering and will use the money to reduce debt and fund investments.

On November 7, 2007, ALD announced 3Q07 earnings results. Highlights are as follows:

• Net realized gain was $212.4 million or $1.37 per share in 3Q07 versus $9.9 million in 3Q06.

• Net investment income was $18.3 million or $0.12 per share in 3Q07 versus $48.7 million or $0.33 per share in 3Q06.

• New investment totaled $577.5 million in 3Q07.

Overview

Investors should make an investment decision based on their assessment of the following issues:

|Key Positive Arguments |Key Negative Arguments |

|Capital Reinvestment – Management remains confident it can reinvest capital|Highly Concentrated Investment – ALD’s top ten investments represent 37% of|

|in higher yielding portfolio assets over a relatively short horizon. |the entire private investment portfolio. Losses in any of these portfolios|

|Sustained Dividend – ALD has consistently sustained or grown its dividend |could cause substantial losses in Allied companies. |

|and is expected to maintain this policy in the future. |Regulatory Overhang – ALD is currently under investigation by the SEC for |

|Positive Macro Trends – ALD’s business opportunities are robust, attributed|loan transfer and valuation practices related to a larger investment, |

|to aggressive investing by private equity firms, flush with capital, which |Business Loan Express. Since it is unable to quantify the likelihood of a |

|creates opportunities for mezzanine lenders like ALD. |positive or negative ruling, investors remain conscious of the risk |

|Asset Quality – Asset quality deteriorated slightly in this quarter, but |associated with this situation. |

|overall ALD’s asset quality remains solid. |Competitive Industry – ALD competes with a large number of private equity |

|Strong Portfolio Growth – Analysts expect strong investment portfolio |funds, mezzanine funds, other BDCs, investment banks, and commercial banks.|

|growth for the coming quarter. |Risk of Default and Weakened Credit Quality – As ALD lends to small |

| |businesses that are susceptible to marker declines, given narrower product |

| |lines and small market share, default risk on their part is high. |

Based in Washington, DC, Allied Capital Corporation (ALD or the Company) is a specialty finance company providing long-term debt and equity investment capital primarily to support the expansion of middle-market companies in a variety of industries. ALD is the nation's largest business development company (BDC), with more than $4.5B in loans and equity investments in the United States and regional offices throughout the country. The Company’s private finance group provides mezzanine debt and equity financing, typically ranging in size from $5M to $30M to middle market companies. Allied is also an active participant in the real estate capital markets, primarily investing in commercial mortgage-backed securities. For tax purposes, ALD operates as a registered investment company (RIC) and must distribute 90% of its net operating income in the form of dividends, as well as invest at least 70% of its assets in private U.S. companies or small public companies to avoid paying income taxes. In addition, structured as a BDC, Allied is limited to leveraging its equity capital to a 1-to-1 ratio. From inception through YE’06, ALD has invested more than $11 billion in thousands of companies nationwide. Its website is .

NOTE: The Company’s fiscal references coincide with the calendar year.

January 9, 2008

Revenue

Provided below is a summary of revenue as compiled by Zacks Research Digest:

|Revenue ($ in Million) |

|Positive |15.4% |

|Neutral |76.9% |

|Negative |7.7% |

|Avg. Target Price |$27.10 |

|Digest High |$33.00 |

|Digest Low |$22.00 |

|No of the analysts with target price/Total |10/13 |

According to analysts, risks to the price target include exposure to below investment grade commercial real estate, volatility of mark-to-market accounting, increasing competition, reduced activity in middle-market mergers and acquisitions, dependence on the capital markets for funding, the current SEC investigation, an economic downturn, liquidity, and execution risks.

Metrics detailing current management effectiveness are as follows:

|Metric (TTM) |Value |Industry |S&P 500 |

|Return on Assets (ROA) |3.4% |6.2%↓ |8.8%↑ |

|Return on Investment (ROI) |3.5% |11.1%↓ |12.9%↑ |

|Return on Equity (ROE) |5.7% |21.1%↓ |21.6%↓ |

Return on assets, return on investment, and return on equity are lower than the average of 8.8%, 12.9%, and 21.6%, respectively, as measured by S&P 500.

Please refer to the Zacks Research Digest spreadsheet for further details on valuation.

Capital Structure/Solvency/Cash Flow/Governance/Other

Changes in Interest Rate, Credit Spread and Others

Analysts are of the opinion that changes in the interest rate and credit spread environment should be closely monitored to gauge their effect on the market-demanded dividend yields on BDCs. In addition, weakness in the economy could be the leading indicator of any potential credit issues of the portfolio companies that ALD invests in.

As of September 30, 2007, the Company had cash and money market and other securities totaling $305.9 million, including the liquidity portfolio of $200.7 million. ALD had outstanding long-term debt of $1.9 billion and availability under its revolving line of credit of $859.0 million. The company had a weighted average cost of debt of 6.6% and its regulatory asset coverage was 244% and it is required to maintain regulatory asset coverage of at least 200%.

The Company declared a third quarter dividend of $0.65 per share, fourth quarter dividend of $0.65 per share and an extra dividend of $0.07 per share to be paid. The company expects that substantially all of the 2007 dividend payments will be made from excess 2006 taxable earnings. As a result, substantially all of the taxable income generated from 2007 net investment income and net realized gains will be available for distribution in 2008.

ALD completed a tender offer in July 2007 to cancel 10.3 million in-the-money employee options in exchange for settlement totaling $105.6 million of which half will be paid in cash and half by the issuance of 1.7 million registered shares.

On August 20, 2007, ALD completed the sale of its majority equity interest in Mercury Air Centers to Macquarie Infrastructure Company, thereby realizing a $259 million gain on investment.

On June 20, 2007, ALD announced a settlement resolving the SEC's informal investigation into potential violations of record keeping and internal controls provisions of federal securities laws. The two most important elements of this settlement are the affirmation of the current valuation process and the lack of financial penalties. One firm (AG Edwards) views the conclusion of the SEC investigation as a positive event.

On December 20, 2007, ALD announced that it had partnered with GE Commercial Finance to form a $3.6 billion senior unsecured unitranche loan fund.

On December 12, 2007, ALD announced to invest $83 million in the form of senior subordinated debt and an equity co-investment to support the buyout of DirectBuy, Inc. by private equity firm Trivest Partners, L.P.

On November 30, 2007, ALD announced the successful completion of the structuring and syndication of $73.5 million in senior credit facilities for PharMEDium Services, LLC (“PharMEDium”).

January 9, 2008

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

January 9, 2008

Long-Term Growth

The long-term growth estimates range from a low of 1.6% (Hilliard, Lyons) to a high of 15.2% (Wachovia). The Digest average long-term growth rate is 9.0%. Management believes expanding of asset management strategy with a second fund can lead to higher returns in the future. It appears Allied has begun to take advantages of reduced competition and the wider spreads that have come about from the turmoil in the credit markets.

Analysts expect ALD’s returns on the newly announced fund jointly with GE Finance will be generated from the performance of the junior tranches of the investments as well as asset management fees. Moreover the analysts are further comforted by the fact that ALD has been paying constant or growing dividends since 1963.

January 9, 2008

Upcoming Events

ALD expects to release its 4Q07 and 2007 earnings results on March 5, 2008.

Individual Analyst Opinions

POSITIVE RATINGS (15.4%)

Ferris Baker Watts – Buy ($33.00 – target price) – (12/21/07): The firm has assigned a Buy rating on the stock with a target price of $33.00.

Hilliard, Lyons – Buy (32.00 – target price) – (11/14/07): The firm reiterated the rating and a target price of $32.00. INVESTMENT SUMMARY: The firm believes shaky near-term fundamentals will prevent the stock price from reaching the target sooner.

NEUTRAL RATINGS (76.9%)

B. of America – Neutral ($26 target price) – (11/07/07): The firm reaffirmed the rating and a target price of $26.00. INVESTMENT SUMMARY: The firm believes that ALD has solid fundamentals and a conservative leverage profile.

BB&T – Hold (no target price) – (11/08/07): The firm maintained a Hold rating. INVESTMENT SUMMARY: The firm looks for ALD to take advantage of the improved environment following a return to risk-adjusted realism in the credit market.

Citigroup – Hold ($27.00 – target price) – (11/08/07): The firm maintained a Hold rating and a target price of $27.00. INVESTMENT SUMMARY: The firm believes ALD has the ability of generating surplus earnings to cover against future risks and its spillover taxable income provides dividend stability.

Davenport – Neutral (No target price) – (11/08/07): The firm maintained a Neutral rating. INVESTMENT SUMMARY: The firm believes credit concerns will serve as a valuation headwind in the intermediate term especially if the recent liquidity crunch is eventually acerbated by a decline in credit quality and an increase in defaults. The firm views any significant weakness from current levels as a potential buying opportunity.

Friedman, Billings – Market Perform ($27.00 – target price) – (11/08/07): The firm maintained a Market Perform rating but reduced the target price from $31.00 to $27.00. INVESTMENT SUMMARY: Despite the low NOI coverage, the firm remains assured of dividend payments in the near future prompting investors to assign a premium valuation relative to peers.

Jefferies – Hold ($25.00 – target price) – (11/08/07): The firm maintained a Hold rating but reduced the price target from $28.00 to $25.00. INVESTMENT SUMMARY: The firm believes ALD has the best long-term private equity investment track record in the industry. According to the firm, as the economy continues to be healthy, the near-term risk from investment underperformance becomes low, and management is prudent in disposing off investments that do not offer an adequate risk-adjusted return.

Keefe, Bruyette – Market Perform ($26.00 – target price) – (12/10/07): The firm maintained a Market Perform rating and a target price of $26.00.

Merrill – Neutral (no target price) – (11/08/07): The firm maintained a Neutral rating. INVESTMENT SUMMARY: The firm believes that pricing is improving and the junior lien market is particularly attractive, given the fluid market and credit re-pricing.

Piper Jaffray – Market Perform ($27.00 – target price) – (11/15/07): The firm has assigned a Market perform rating on the stock but reduced the target price from $32.00 to $27.00. INVESTMENT SUMMARY: The firm believes that the current valuation is justified due to the increased volatility in the LBO market. Moreover, an assured dividend and a strong historical investment performance justify the stock’s premium multiple.

Wachovia – Market Perform ($26.00 – target price) – (11/08/07): The firm provided a Market Perform rating with a target price a range of $25.00 to $27.00. INVESTMENT SUMMARY: The firm believes ALD has best-in-class management, competitive advantage and can generate a good internal rate of return over a long-term period.

NEGATIVE RATINGS (7.7%)

BMO Capital – Underperform ($22.00 – target price) – (11/08/07): The firm downgraded the rating from Market Perform to Underperform and reduced the price target from $30.00 to $22.00. INVESTMENT SUMMARY: The firm states in an environment where credit markets are in upheaval and financial stocks are under pressure, ALD will experience a multiple contraction. Also the forthcoming recession in the U.S. economy would render the environment challenging for net realized and unrealized portfolio gains.

Research Associate: Tanuka De

Copy Editor: Pushpanjali B.

Content Ed.: Madhurima Majumdar

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