UPDATE 1-JPMorgan starts Allied Capital with underweight

(Changes source; adds details)

June 25 (Reuters) - JPMorgan Securities began coverage of Allied Capital Corp (ALD.N: Quote, Profile, Research) with an "underweight" rating, saying the business development company may need to consistently raise capital to avoid shrinking its investment portfolio.

Allied has sufficient liquidity for the short-to-medium term, the brokerage said, adding that it expects the company to neither raise nor cut its per-share dividend.

The combination of cash net investment income, returned capital from investment portfolio, and its liquidity portfolio of cash and treasury bills should be sufficient to cover the dividend, JPMorgan said.

But recurring cash net investment income may be significantly less than expected cash dividend payments, making the firm more dependent upon limited, non-recurring capital sources, analyst Jim Ballan said in a note to clients.

As Allied has become more dependent upon realizations, which could slow amid the credit crunch, and/or equity capital raises that could be less accretive, the management could take greater risks to enhance returns, which could make the firm more susceptible, the analyst said.

"We also believe that even in the event of an upswing in the credit cycle, Allied's total return could lag its peers," he said.

The company's shares, which have shed more than a quarter of their value so far this year, closed at $14.73 Tuesday on the New York Stock Exchange. (Reporting by Eric Yep in Bangalore; Editing by Deepak Kannan)