UPDATE 1-JPMorgan downgrades American Capital to underweight

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Oct 1 (Reuters) - American Capital Ltd (ACAS.O) may not be able to maintain its current dividend rate in the coming quarters if the market conditions do not improve, JPMorgan Securities said, while downgrading the buyout firm's stock to "underweight" from "neutral."

The company has been generating realized gains by actively selling its private equity investments and reinvesting capital in income producing assets, especially subordinated debt, analyst Jim Ballan wrote in a note to clients.

Although it will be able to cover its dividend in 2008 with the help of these gains, this strategy will be difficult to execute going forward as the current financial turmoil lowers valuations for both debt and equities and reduces deal activity, he said.

Ballan also said the transfer of investments from private equity to income producing assets will not be sufficient to make up the gap between the current regular dividend and cash net operating income.

In order to support its $1.05 quarterly dividend in 2009, American Capital will need to raise incremental capital, Ballan noted.

However, he does not expect the company to raise equity capital at current levels.

Shares of the company closed at $25.51 Tuesday on the New York Stock Exchange. (Reporting by Amiteshwar Singh in Bangalore; Editing by Anil D'Silva)