American Capital (Nasdaq: ACAS) has been through some hard times. It invested in commercial mortgage-backed securities that went south, and revenue from other investments has dried up during these difficult economic times. The company is currently trying to restructure $2.5 billion in debt; if it fails, bankruptcy looms. American Capital has literally lost billions of dollars over the past couple of years, and if a double-dip recession rolls around, its prospects could get even worse.

Yet with all that bad news, the stock trades at $5.66, up more than 100% year to date. How is this possible?

The true test of a company is how management handles itself in truly bad times -- and American Capital's management has made all the right moves. It exited investments in order to raise cash, cut overhead, and maintained a diversified portfolio.

Noted hedge fund manager John Paulson bought stock now equal to about a 13% stake, providing a big vote of confidence. Now, with still more than $900 million of cash on hand, the company has started to regain its footing, and announced plans to make equity investments in 2010.

Middle-market businesses need capital badly, and since these entities have often exhausted typical bank credit facilities, American Capital can pick and choose among the best investments. That's why it's taking equity positions; why not get a piece of a great company, instead of just making a loan?

However, investors looking for companies on more solid footing may want to check out Apollo Investment Corp. (Nasdaq: AINV). Apollo significantly pulled back on its investments, is not as levered, and is doing well enough to pay a 10.9% dividend. Ares Capital Corp. (Nasdaq: ARCC) also has a leaner portfolio, with less debt and a comparable yield.

Speculative investors may find a distressed play like American Capital will  return more over the long haul since it has longer to travel. John Paulson seems to think so, and he's not even holding a rock.

Fool contributor Rick Steier does not own shares in any company mentioned. The Fool's disclosure policy always gets a perfect score.