FOR IMMEDIATE RELEASE:
February 13, 2007

Contact
John Erickson, Chief Financial Officer (301) 951-6122
Tom McHale, Senior Vice President, Finance (301) 951-6122

AMERICAN CAPITAL REPORTS $4.43 IN 2006 REALIZED EARNINGS
AMERICAN CAPITAL DECLARES $0.89 Q1 2007 DIVIDEND
ANNOUNCES 2007 DIVIDEND GUIDANCE OF $3.68 PER SHARE

Bethesda, MD – February 13, 2007 – American Capital Strategies Ltd. (NASDAQ: ACAS) announced today its first quarter 2007 dividend declaration, 2007 dividend and other guidance and its results for the fourth quarter and full year of 2006.

FIRST QUARTER 2007 DIVIDEND DECLARATION
American Capital’s Board of Directors has declared a first quarter 2007 regular dividend of $0.89 per share to record holders as of March 2, 2007, payable on April 2, 2007.  This is an 11% increase over the first quarter 2006 regular dividend of $0.80 per share.  American Capital has paid a total of $1.4 billion in dividends and paid or declared dividends of $23.33 per share since its August 1997 IPO at $15.00 per share.  American Capital paid $3.33 in dividends per share for 2006 from ordinary taxable income, a 75% dividend payout ratio of 2006 Realized Earnings. 

2007 DIVIDEND GUIDANCE
American Capital is forecasting total 2007 dividends of $3.68 per share to be paid from ordinary taxable income earned in 2007.  This would represent an 11% growth over the total 2006 dividends of $3.33 per share.  American Capital anticipates that its 2007 ordinary taxable income will exceed its dividends paid and it will elect to pay a 4% excise tax and retain its excess ordinary taxable income.  The 2007 dividends per share are estimated to be in the following quarterly amounts: $0.91 for Q2, $0.92 for Q3 and $0.96 for Q4.

2007 OTHER GUIDANCE
The following guidance assumes the economic and capital market environment throughout 2007 remains substantially the same as in 2006.

American Capital is forecasting 15% to 25% growth in net asset value per share (“NAV”), $4.38 to $7.38 growth, to a value in the range of $33.80 to $36.80 per share by December 31, 2007.  In addition, American Capital is forecasting that it will have between $17 billion and $23 billion of alternative assets under management by year end, of which $6 billion to $8 billion will be in funds managed by American Capital; the balance will be on American Capital’s balance sheet.

American Capital is forecasting the following first quarter 2007 per basic share results: $1.30 to $1.40 net increase in net assets resulting from operations (“Earnings”) and $0.78 to $0.82 in net operating income (earnings less appreciation, depreciation, gains and loss (“NOI”)). 

2006 RESULTS
American Capital announced today its results for the quarter and year ended December 31, 2006.  Earnings for the year increased 145% to $896 million in 2006, compared to $365 million for 2005.  On a basic per share basis for the year, Earnings increased 80% to $6.63 per share for 2006 from $3.68 per share for 2005.  On a basic per share basis for the quarter, Earnings increased 199% to $2.15 per share compared to $0.72 per share in the fourth quarter of 2005.  In 2006, net portfolio appreciation and realized gains totaled $451 million compared to $28 million for 2005.

Earnings less unrealized appreciation and depreciation (“Realized Earnings”) increased 25% to $4.43 per share for 2006 compared to $3.53 per share for 2005.  On a basic per share basis for the quarter, Realized Earnings increased 35% to $1.16 per share compared to $0.86 per share in the fourth quarter of 2005.

On a basic per share basis for the year, NOI decreased to $3.15 per share from $3.16 per share for 2005.  On a basic per share basis, NOI decreased 5% to $0.78 per share for the fourth quarter of 2006, compared to $0.82 per share in the fourth quarter of 2005.

In the fourth quarter of 2006, American Capital received $19 million of revenue related to its and its wholly-owned portfolio companies’ management of European Capital, American Capital Equity I and a collateralized loan obligation (“CLO”).

"We had an outstanding year in 2006," said Malon Wilkus, American Capital Chairman, President and CEO.  "We produced a 25% Earnings return on average equity, while having one of the least levered balance sheets among financial institutions, at just under 1 to1 debt to equity.  Our performance in 2006 and our plans for 2007 give us the confidence to increase our forecasted dividend by 11% in 2007 to $3.68 per share and to project a growth of our book value of between $4.38 and $7.38 per share.  As of today, we’ve grown our alternative assets under management to $11 billion, of which about $2 billion is in managed funds.  We are pleased to note that an alternative asset manager has joined our public company ranks.  We would like to congratulate Fortress (NYSE: FIG) on completing their IPO last week.  They join American Capital as one of two U.S. publicly traded alternative asset managers and provide a good comparable company to our alternative asset management business.  As we grow our alternative asset management business, we hope to obtain a valuation comparable to our asset management peers, which should provide significant value creation for our shareholders."

Fourth quarter 2006 dividends were $0.88 per share, an 11% growth over the fourth quarter 2005 regular dividends of $0.79 per share.  For the year, dividends were $3.33 per share compared to $3.08 per share in 2005, an 8% increase.  In addition, American Capital retained $108 million of its ordinary taxable income and accrued a 4% excise tax in 2006.  American Capital also retained its net capital gains for its tax year ended September 30, 2006 and paid a federal tax of $15 million, which is treated as a deemed distribution to shareholders.  For the year, American Capital’s dividend payout ratio was 75% of Realized Earnings of $4.43 per basic share.  American Capital’s NAV at December 31, 2006 was $29.42, a $5.05 or 21% growth over the December 31, 2005 NAV of $24.37.

For the year, American Capital invested $5.1 billion of capital and received $2.9 billion of proceeds from scheduled repayments and exits of portfolio investments.  In addition, American Capital funds under management invested an additional $1.9 billion, for a total of $7 billion of investments in 2006.  In 2006, American Capital had $470 million of net appreciation, depreciation, realized gains and losses.  For the year, American Capital had net realized gains of $173 million and net appreciation of $297 million.

“Our portfolio is performing very well,” said Ira Wagner, Chief Operating Officer.  “In 2006, our net appreciation from portfolio company investments totaled $276 million or $2.04 per basic share and our net gains from portfolio investments totaled $175 million or $1.30 per basic share.  We continued to exit underperforming companies when we believed we could no longer add value.  During 2006, we fully or partially exited 15 underperforming companies, realizing our losses and improving the aggregate quality of our remaining portfolio.  Today, we believe we have the highest quality portfolio in our history, with tremendous appreciation potential.”

In the fourth quarter of 2006, American Capital invested $1.7 billion of capital and received $1.5 billion of proceeds from exits and repayments of portfolio investments.  In the fourth quarter of 2006, American Capital had $199 million of net appreciation, depreciation, realized gains and losses.  For the quarter, American Capital had net realized gains of $55 million and net appreciation of $144 million.

“Credit quality remains excellent,” said Chief Financial Officer John Erickson.  “The economy in both the U.S. and Europe appears strong based on our review of the financial performance of our portfolio companies.  Also, the loans underlying our CMBS portfolio are performing well so we believe that the credit issues in the sub-prime residential mortgage market are isolated to that market and a result of relaxed underwriting standards.  In addition to strong portfolio performance in 2006, we had an outstanding year in the capital markets, capped off by receiving BBB, Baa and BBB investment grade ratings from Standard & Poor’s, Moody’s and Fitch, respectively.  In addition to receiving $3 billion of capital exits and repayments from our portfolio in 2006, we raised $5 billion of total capital including $1 billion of common equity, $436 million in on balance sheet term securitization financing, $645 million in unsecured credit facilities, $300 million in secured credit facilities, $1 billion of committed equity capital at American Capital Equity I, €900 million credit facility for European Capital and $400 million in a CLO warehouse.  The sources and flexibility of our capital have never been better.”

The weighted average effective interest rate on American Capital's total investments in debt securities at the end of 2006 was 12.3%.  At the end of 2006, loans totaling $183 million, with a fair value of $54 million, were on non-accrual.  Delinquent and non-accruing loans to 14 portfolio companies totaled $195 million, or 4% of total loans at the end of 2006, compared to $186 million, or 5% of total loans at the end of 2005.  The $54 million fair value of non-accrual loans represented 1% of total loans at fair value, at the end of 2006, compared to $48 million fair value of non-accrual loans representing 1% of total loans at fair value, at the end of 2005.

At the end of 2006, European Capital, managed by a wholly-owned consolidated subsidiary of American Capital, had $1.6 billion of capital resources.  Since inception in September of 2005 through the end of 2006, European Capital has invested in 40 portfolio companies totaling $1.8 billion.  European Capital declared a dividend for the fourth quarter of 2006, of which American Capital received dividend income totaling $20 million from its $654 million equity investment at cost in European Capital.

Since its August 1997 IPO through the fourth quarter of 2006, American Capital has earned a 17% compounded annual return, including interest, dividends, fees and net gains, on 164 exits and repayments of senior debt, subordinated debt and equity investments, totaling $4.7 billion of invested capital.  These exits and repayments represent 35% of all amounts invested by American Capital since its August 1997 IPO.  Proceeds from these exits and repayments exceeded the total associated prior quarter valuation of the investments by $72 million, or 2%.

THIRD PARTY VALUATION OF PORTFOLIO INVESTMENTS
American Capital’s Board of Directors is responsible for determining the fair value of American Capital’s portfolio investments on a quarterly basis.  In that regard, the board retained Houlihan Lokey Howard & Zukin Financial Advisors Inc. ("Houlihan Lokey") to assist it by having Houlihan Lokey regularly review a designated percentage of fair value determinations.  Houlihan Lokey is a leading valuation firm in the U.S., engaged in approximately 1,000 valuation assignments per year for clients worldwide.  Each quarter, Houlihan Lokey reviews American Capital’s determination of the fair value of approximately 25% of its portfolio company investments that have been portfolio companies for at least one year and that have a fair value in excess of $10 million.  In the fourth quarter of 2006, Houlihan Lokey reviewed valuations of 23 portfolio company investments having an aggregate $1.6 billion in fair value as of the period end.  Over the last four quarters, Houlihan Lokey has reviewed 96 portfolio companies totaling $4.9 billion in fair value as of their respective valuation dates.  In addition, Houlihan Lokey representatives attend American Capital’s quarterly valuation meetings and provide periodic reports and recommendations to the Audit and Compliance Committee of the Board of Directors.

For those portfolio company investments that Houlihan Lokey has reviewed during each applicable period, using the scope of review set forth by American Capital’s Board of Directors, the Board has made a fair value determination that is within the aggregate range of fair value for such investments as determined by Houlihan Lokey.

In addition to its standard scope, American Capital engaged Houlihan Lokey to review the value of both ASAlliances Biofuels, LLC and American Capital Equity Management LLC, a newly formed portfolio company managing American Capital Equity I, a $1 billion private equity fund of which American Capital has no ownership.  As of December 31, 2006, the fair value of these investments, as determined by American Capital's Board, is within the range of fair value for these investments as determined by Houlihan Lokey.

 

Financial highlights for the quarter are as follows:

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2006 and 2005

(in millions)

 

		Q4 2006				Q4      2005				Q4 2006 Versus Q4 2005
										$				%
		(unaudited)
Assets
Investments at fair value (cost of $7,781 and $5,134 respectively)		$	8,076			$	5,119			$	2,957			58	%
Cash and cash equivalents			77				97				(20	)		-21	%
Restricted cash			233				122				111			91	%
Interest receivable			44				33				11			33	%
Other			179				78				101			129	%
Total assets		$	8,609			$	5,449			$	3,160			58	%
Liabilities and Shareholders’ Equity
Debt		$	3,926			$	2,467			$	1,459			59	%
Derivative agreements			13				2				11			550	%
Accrued dividends payable			130				3				127			4233	%
Other			198				79				119			151	%
Total liabilities			4,267				2,551				1,716			67	%
Commitments and contingencies
Shareholders’ equity:
Undesignated preferred stock, $0.01 par value, 5.0 shares authorized, 0 issued and outstanding			—				—				—			0	%
Common stock, $0.01 par value, 200.0 shares authorized, 151.6 and 119.1 issued and 147.6 and 118.9 outstanding, respectively			1				1				—			0	%
Capital in excess of par value			3,957				2,943				1,014			34	%
Notes receivable from sale of common stock			(7	)			(7	)			—			0	%
Undistributed (distributions in excess of) net realized earnings			111				(22	)			133			NM
Net unrealized appreciation (depreciation) of investments			280				(17	)			297			NM
Total shareholders’ equity			4,342				2,898				1,444			50	%
Total liabilities and shareholders’ equity		$	8,609			$	5,449			$	3,160			58	%

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NM = Not meaningful.

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AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Twelve Months Ended December 31, 2006 and 2005

(in millions, except per share data)

(unaudited)

 

		Three Months Ended December 31,								Three Months Ended December 31, 2006 Versus 2005							Fiscal Year Ended December 31,								Fiscal Year Ended December 31, 2006 Versus 2005
		2006				2005				$				%			2006				2005				$				%
OPERATING INCOME:
Interest and dividend income		$	202			$	127			$	75			59	%		$	669			$	426			$	243			57	%
Asset management and other fee income			42				46				(4	)		(9	)%			191				129				62			48	%
Total operating income			244				173				71			41	%			860				555				305			55	%
OPERATING EXPENSES:
Interest			57				33				24			73	%			190				101				89			88	%
Salaries, benefits and stock-based compensation			59				30				29			97	%			161				86				75			87	%
General and administrative			22				14				8			57	%			73				41				32			78	%
Total operating expenses			138				77				61			79	%			424				228				196			86	%
OPERATING INCOME BEFORE INCOME TAXES			106				96				10			10	%			436				327				109			33	%
Benefit (provision) for income taxes			7				(5	)			12