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Rating Action:

Moody's reviews Ares for downgrade, Allied for upgrade

26 Oct 2009

New York, October 26, 2009 -- Moody's Investors Service placed Ares Capital Corporation's (Ares) Ba1 issuer rating on review for possible downgrade. In a related action, Moody's placed Allied Capital Corporation's (Allied) B1 issuer and senior unsecured ratings on review for possible upgrade.

These rating actions follow Ares' announcement that it has agreed to acquire 100% of Allied in an all stock transaction. The transaction is expected to close in the first quarter of 2010. As a result, Ares will inherit Allied's significant short-term maturities and troubled investment portfolio, putting pressure on its credit profile. On the positive side, Ares will substantially increase its scale and is acquiring Allied at a substantial discount to GAAP book value.

During its review, Moody's will focus on the Ares' and Allied's ability to mitigate the refinancing risks that the combined firm would face either 1) by substantially pre-paying (or pre-funding) 2010 maturities through investment portfolio liquidations and/or new equity issuance prior to the transaction closing or 2) by Allied extending the maturity schedule of its debt through a partial or full restructuring. Based on June 30, 2009 data, Allied has $304 million of debt maturing in 2010 and Ares $400 million (however Ares raised $109 million of equity in the third quarter that could have been used to pay down debt). Allied also has $574 of debt maturing in July 2011. Moody's will also focus on the company's ability to achieve its targeted combined debt to equity ratio of 0.65 times to 0.75 times (this is equivalent to an asset coverage ratio of approximately 230% to 250%) at closing.

Additionally, the quality of Allied's investment portfolio is very poor. Its fair value represented 59% of amortized cost and nonaccrual loans were equal to 36% of total loans at June 30, 2009. Ares will need to manage this troubled portfolio while at the same time maintaining vigilance over its current portfolio, and this represents a significant uncertainty.

Positively, this transaction will result in a gain to Ares' capital base. The $648 million purchase price represents 48% of Allied's June 30, 2009 GAAP book value. As a result Moody's estimates that Ares could recognize a bargain purchase gain of greater than $550 million upon closing the transaction. This gain, should it occur, would substantially reduce the leverage of the combined company. The primary risk to this gain not occurring is Allied's assets' value being substantially below reported value.

Allied's ratings were placed under review for upgrade as its creditors should benefit from being part of Ares, a higher rated firm that has performed substantially better than Allied through the credit cycle. Moody's will focus on completion of the proposed transaction, and its structure, including the structural subordination of unsecured creditors.

Ares ratings could be confirmed at their current level if the firm is able to reduce the refinancing risk that the combined firm would face and if it is able to achieve its targeted debt to equity ratio as discussed above. Additionally, a confirmation would require Moody's belief that any anticipated decline in the quality of Ares or Allied investment portfolio performance be manageable.

The last rating action on Ares was on March 4, 2009 when Moody's downgraded the company to Ba1 from Baa3 with a negative outlook. The last rating action on Allied was on March 2, 2009 when Moody's downgraded the company to B1 from Ba2 with a negative outlook.

The principal methodology used in rating Ares and Allied was Analyzing the Credit Risks of Finance Companies, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on the Moody's website.

Ares Capital Corporation is based in New York and reported total assets of $2.0 billion at June 30, 2009. Allied Capital Corporation is based in Washington DC and reported total assets of $3.2 billion at June 30, 2009.

On Review for Possible Downgrade:

..Issuer: Ares Capital Corporation

....Issuer Rating, Placed on Review for Possible Downgrade, currently Ba1

Outlook Actions:

..Issuer: Ares Capital Corporation

....Outlook, Changed To Rating Under Review From Negative

On Review for Possible Upgrade:

..Issuer: Allied Capital Corporation

....Issuer Rating, Placed on Review for Possible Upgrade, currently B1

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Upgrade, currently B1

Outlook Actions:

..Issuer: Allied Capital Corporation

....Outlook, Changed To Rating Under Review From Negative

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Craig A. Emrick
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's reviews Ares for downgrade, Allied for upgrade
No Related Data.
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