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WRAPUP 3-American Capital, Allied plunge on Q3 loss, dividend

* American Capital suspends dividend for rest of 2008

* Allied says may reduce dividend in 2009

* Both companies post Q3 loss

* American Capital stock falls 44 pct, Allied down 47 pct

(Adds details from American Capital’s conference call, analysts’ comments, updates share movement)

By Anurag Kotoky and Santosh Nadgir

BANGALORE, Nov 10 (Reuters) - Buyout firm American Capital Strategies Ltd ACAS.O suspended its quarterly dividend for the rest of 2008, while smaller rival Allied Capital ALD.N said it may reduce its 2009 dividend after the firms posted quarterly losses hurt by a depreciating investment portfolio.

Shares of American Capital, a component of the S&P 500 Index, tumbled as much as 44 percent to their life-time low while those of Allied fell 47 percent. They were the highest percentage losers on Nasdaq and the New York Stock Exchange respectively.

Bethesda, Maryland-based American Capital in a conference call with analysts said it was giving a “hard look” at making staff adjustments as a means to conserve capital.

“Do I think they are going to cut jobs? Absolutely,” BMO Capital Markets analyst David Chiaverini told Reuters.

Earlier in the day, American Capital said severe disruptions in the credit markets led to the depreciation in the value of its assets by about $731 million in the quarter.

“We are in the midst of a severe recession and tremendous volatility in every financial market,” said Chief Financial Officer John Erickson.

Washington-based Allied Capital may incur severance costs in the current quarter due to additional headcount reductions, Chief Operating Officer Joan Sweeney said in a conference call with analysts.

“We are acting again to reduce our costs across all areas of our firm, which will include further reductions in staff, compensation and administrative expenses over the next few months,” Chief Executive William Walton said.

The company also said most of its 2008 dividend payments have been or will be made from excess 2007 taxable earnings.

Business development firms like American Capital and Allied, which usually make loans to small businesses in return of equity stakes, have seen their investment portfolio deplete and raising capital increasingly difficult amid the financial crisis.

American Capital said it will retain its 2008 net long-term capital gains and added it will review its dividend policy after each quarterly result. It had been paying out a quarterly dividend of $1.05 a share.

“It looks like that in 2009, definitely the dividend is going to be cut. Its uncertain to what level, but it will,” Avondale Partners analyst Sean Jackson said by phone.

Allied Capital declared a quarterly dividend of 65 cents a share, but said it is reviewing its dividend strategy for 2009, and expects to reduce it to its net investment income levels.

COVENANT BREACH?

The companies warned that they may breach the minimum net-worth covenant in their credit agreements if the value of their portfolios continue to decline.

Allied Capital, which currently has a similar covenant on a Bank of America credit facility, would work with its lenders over the next several weeks and try to negotiate an amendment should the situation worsen, a company official said in a conference call with analysts.

However, American Capital still has a 7 percent cushion on their investment portfolio evaluation before that covenant would be breached. Even if they breach the covenant, it is unlikely that the lenders will put the company out of business, analyst Chiaverini said.

“They just want to re-negotiate so they get appropriately compensated because the covenant was breached,” he added.

A DEAL AMID THE GLOOM

American Capital, which currently owns 67.7 percent of European Capital Ltd ECAS.L, said it plans to acquire the remaining shares in the company for $158 million in stock.

The company said European Capital shareholders will receive 0.333 American Capital shares for each ordinary share held.

Shares of European Capital were trading up almost 40 percent at 2.42 pence Monday on the London Stock Exchange.

The deal, which will raise American Capital’s tangible net worth by about $260 million, is likely to close in the first quarter of 2009.

For the third quarter, American Capital posted a net loss of $2.63 per share, hurt by $698 million of net unrealized depreciation, compared with earnings of 11 cents a share a year earlier. [ID:nWNAB0627]

Allied posted a loss of $318.3 million, or $1.78 a share. [ID:nWNAB0871] .

Shares of American Capital were down $5.74 at $8.03, while those of Allied were down $3.38 at $3.91 in afternoon trade. (Editing by Dinesh Nair)

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