ARCC - Earnings call transcript Q4 2017 | Ares Capital Corporation

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Operator

Good afternoon. Welcome to Ares Capital Corporation’s Fourth Quarter and Year Ended December 31, 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode.

As a reminder, this conference call is being recorded on Tuesday, February 13, 2018. I will now turn the call over to Mr. Relations. Investor of Stilmar John

John Stilmar

Great. Thank everyone. afternoon and good to you,

differ the Comments some the as intends, and Let uncertainties. forward-looking its future expressions. materially forward-looking Many as can assumes risks with such Company’s such information Ares any forward-looking The identified subject reminders. and statements. webcast also not documents made should, are update in will, reason, statements well results of call could such me guarantee start Capital to words those similar such and market Please from is conference expects, by a and note important statements may the during including anticipates, to of contain results. actual expressed believes, this those course SEC Corporation as any past statements for these that obligation accompanying be of or use of forward-looking listed no in filings. performance

gains losses condition EPS to the any core increase related or losses, realized G. or Core financial fees stockholders’ and to the the Company and per one measure be share financial the income acquisition is website. incentive and of useful The by from in Regulation taxes measure third-party American derived no SEC not for performance, financial the and independently warranty discussed comparable investors including losses. capital During GAAP with and non-GAAP and operations realized information or any of realized such Certain, of gains information. to professional Capital, resulting this provides found and per and and for less was reconciliation information it by results the share presentation, the fees unrealized net gains, of unrealized decrease measure slide to Company makes this relating in verified gains the going the equity net from may most presentation its operations, Company’s attributable as stockholders’ has this sources a such measure this resulting from equity that share conference Company related A method to because representation core earnings companies, believes EPS Company or EPS uses costs EPS, is discuss the decrease call, information portfolio defined call which this to core core accordingly, other regarding operation. in to increase and per respect in been accompanying is directly financial can to

fourth presentation Investor Company’s December also quarter are on on full and XXXX the the website homepage Resources Capital the the XX-K reminder, earnings Ares ‘XX section. of release arescapitalcorp.com the XX, on and a Corporation’s Presentation earnings on Company’s clicking our year Earnings As at website. QX available link is by available

I’d like Chief turn Corporation’s call Executive to Officer. to deVeer, over Capital Now, the Ares Mr. Kipp

Kipp deVeer

members of Thanks, Smith; John. Goldstein investment Good our Roll, teams. Financial and including our Relations the thanks with the Investor today Mitch finance, I Chief Officer, here other am joining Presidents, our call and team and today. afternoon management Penni Michael and for

This from hear of which reported the to appreciation the strong, benefited in quarter year, and also the the $X.XX our strong and Penni earnings, portfolio. will $X.XX You Company’s net by the highlight start Mitch, call. earnings of reaching fourth reviewing quarter were I’d core the core like and GAAP share. of improved per earnings from accomplishments. we later some morning, share, per

the and at during value asset over the of the net share. Our fourth improved per $XX.XX full XXXX year course quarter ending

Capital our wind-down the LIBOR portfolio, with we SSLP, increases all points, the and of beginning rotating American we’ve set yield prudently increasing largely increased by through XX year, of by quarterly pleased We incumbent goals rates. basis the to-date, ARCC the that of our driven through we’re portfolio portfolio focus for the in of and our resolving Looking funding the namely at earnings back over on success a borrowers. out nearly investing American that XXXX, the Capital accomplished the rotation

Our in of and year core the quarters our in ended past earnings three have the increased now back dividend. with line each quarterly

to is stated past, we’ve earnings it payouts. regular the meet or core As in dividend goal our have our exceed our

just consecutive throughout on the has of the been net year year realized stable completed investment Non-accruals we portfolio. performance eighth been good. have Finally, and gains our

sources happy returns you’ve performing. As revenue, total in how us are our and overall emphasize diverse of cycle full is our from with heard from we we the past, business

out made progress expected. and had yield more core this rotating and non-core, the closing, the me of fact, a we a detail have first We greater improved very we’ve portfolio forward. American few see after reviewing on great update in initiatives year from redeploying higher acquisition minutes we we’ve and by things increasing our few feel a our and gave buy large XXXX going to than strategic no into may The in of investments realized And by believe a we Let to NAV. assets. since unique spend an gains portfolio upside discount surprises; Capital generated at where yielding to us found we during earnings capital a opportunity lower-yielding We’ve provide most portfolio closing.

realized than the a we of net these from more on billion $X exits. we and XXXX, gains $X.X billion During of assets, mostly $XX investments million portfolio exited non-core

still million the Similar currently we the investments basket. American $XXX are or assets are portfolio, Capital lower-yielding year. utilizing the year-end, in remaining hold, aggregate have opportunity believe addition, With during we value value that of non-core forward. expanding X.X%, on all we’ve yield going which to of an our $XXX In future yield extract we the earnings American portfolio, show be with as XX% fair Capital of net see is to cost, targeted for the we of of from at more acquired there had $XXX targeting rotation. this, at million the believe acquisition still depreciation to invested just there on we We for the unrealized opportunities

we’ve basket by reminder, remaining terminating in effectively the and As underlying $X.X purchasing freed a the SSLP billion of program. in up this the loans capacity XX%

makes While the is the XX.X% modest a billion well the the is certificates shareholders. AIG. support, capital attractive size for basket rewards cost we us expand new a in another The of subordinated a of we have other performing fee income the for flexibility enhancement $XXX more SDLP for very presents investment the form subordinated the million its SDLP new ARCC future $X.X the and yield as future represents generating available that was billion and morning. XX% increased under of with us our the we X.X% company expansion believe the compelling has Alongside yield, SSLP $X and to more us program with from increased reflects investment announced This and yielding commitments. available $X.X important. ARCC loans to capacity for this such capacity attractive opportunities Capital investment. and our global its this in approximately we $XXX certificates. to insurance see the investor SDLP Today, former as opportunity of should from announced allow doubled the risk also over expanded time, Varagon our new investments we the SDLP SDLP SDLP million earn billion At of investment from leading current year-end, capital the that arguably than for

the total earnings. increased billion SDLP believe in our new made $X.X the which should which program to During of investment SDLP future capacity us commitments, asset, $X.X for further We this billion. additional high-yielding to allow contribute XXXX, commitments to portfolio will grow the

economic it assets we our and financial Penni, provide strong the credit me high year. which for a through policy, us to year Before was and accommodated low take generally results market monetary activities, led witnessed level conditions, to rising where over earnings, I throughout historically let corporate a bid volatility commentary. XXXX some stable turn

market the credit volume And during from as volumes In meet post for formation formation coming CLO mid-market XXXX. fact, lending recession sponsors. conditions demand similarly, levels tighter led loan and many risk private entrants, new and structures. higher the to of in spreads middle capital syndicated weaker and companies from market players to benign appetite strong and record abundance to accelerated existing higher drove fund broadly benefitted The

we a ever origination than As believe result, infrastructure, and our in proactive the scale, more is experience deep portfolio important market. management

capital in it seems With this market So real however, prospects bit from the U.S. last a investors an volatility, of central direct believe we’ve importantly, far With in in middle environment equity higher in feel we as few flexible with and markets allow we And been yield we’ve volatility future prepared leverage markets other we years, most over rate are our will to Penni us could a And seems lending unchanged. unprecedented a Despite a long-dated the preservation. volatility volatility. high the and withstand built fixed through discuss, for are heightened and fortifying rates, capital here markets unwind busy the meaningful markets. to the change have grappling balance the inflation potential amount that markets, that’s stimulus flow we into credit the with treasury XXXX financing debt sell-off been outflows course. portfolio should the for of of of banks. that witnessed

more the details year me the let call Now, to on well fourth results provide quarter our Penni as full to as turn financing activities. and over

Penni Roll

Kipp. Good you, morning. Thank

$X.XX were of core quarter quarter and compared to of for the earnings the per increase strong XXXX and rise and Fourth $X.XX quarter share fourth our the diluted helped benefitted $X.XX basic from share activity for which from per from as per the share fourth fees quarter, for interest third during share XXXX Our LIBOR continued core income. in the quarter of XXXX. earnings origination per

XXXX of XXXX. $X.XX and net third for the $X.XX compared diluted $X.XX XXXX basic for share per the fourth fourth quarter of was quarter of quarter Our GAAP for and the to income

the primarily The share reversal buyout largely to $XXX Our from GAAP quarter. portfolio. outsourced million in $X.XX million realized from an in net fourth the Alcami, or in the per came our fourth quarter or provider unrealized due losses. on unrealized unrealized through share, quarter investments that had of gains controlled which $X.XX XXXX all gains which the substantially from unrealized losses to service largely a had investment compared gains higher of the of appreciation by the drug net as fourth share in or fully the our third investments the investments. in quarter acquisition, which acquired of share quarter per American $XXX realized were recognized driven sale per $XXX InfiLaw loss unrealized we Capital recognized $XX for for $X.XX million the on unrealized been on We of net or million related net previously the development earnings of were to Net $X.XX realized fourth included investment net losses per depreciation

value our amortized XXXX, we totaled income assets billion. yield XX, XX, debt billion at XXXX. December X.X%, At the and $XX.X was our total of yield As investments cost cost of other X.X% and up of the XXXX, securities portfolio had respectively September was $XX.X the XX, that average amortized X.X%, we weighted producing and fair X.X% December and total average on at from weighted on at reported

since in end LIBOR. Our quarter, increase third the increased from of portfolio yields the the primarily

to $X.XX Now, looking share and share and for GAAP diluted to for basic $X.XX earnings and XXXX XXXX basic $X.XX diluted compared income XXXX, $X.XX per net for compared core for per XXXX. at the a full-year, were

gains full-year by or investments share. for in net or appreciation including total $X.XX XXXX. $X.XX driven For the year net per of of $X.XX The per on largely realized unrealized investment the our per million $XX the Alcami gains $XXX were we on share and full of $XXX or net million million realized gains total XXXX, had share

of our generate undistributed additional stability. $XXX us stockholders or we’ve per XX, $X.XX on payable million record income we dividend to $XXX that our has income XXXX taxable from declared investments currently dividend cushion We cumulative to dividend excess allowed approximately realized shareholders This net net regular consistent March share. inception, and our of to on taxable into added and have generate in morning to share. ability million. a March was per We XXth is carry first income Our for provided distributions realized that recorded gains on well of XXXX. to estimate of our XXXX forward Since spillover gains announced $X.XX quarter this our

Turning to our capitalization.

from XXst up at equity X% asset stockholders’ a December $X.X of December resulting X% share well as billion, was compared up in quarter-ago value as Our XXXX. net XX, per to $XX.XX,

ratio restrictions. undrawn debt-to-equity times. cash credit was perspective, year primarily was be From over liability XXXX, XX, X.XX opportunistically rate $XXX At debt December billion of against costs net would times of approximately subject XX, advantage approximately December to X.X interest rate other and our borrowing expected low taking available $X.X capital ratio our facilities our a under the of As XXXX, revolving base and what we to we’ve the had of lock environment our million debt-to-equity environment. availability, been last rising a in of we

five-year During issuance XXXX, coupon fixed pricing and both investment spread convertible lowest notes markets with we our tightest for issued term in markets debt in these rate debt history. and at each the the grade

interest line a credit an the close swap years. fourth million term in issuing liabilities, to next floating of the to $XXX X.X% rate portion the our of also loan revolving during the rate approximately addition fixed coupon term entering lock we by rate In quarter, three into rate on to fixed of for

we’ve we XXXX how we our advantage sheet, believe well-positioned Given rising going an are of further to asset-sensitive balance take built rate that environment. into

As year-end floating was our XX% XXXX, of over rate. debt portfolio of

are leverage such rate coming with predominantly assets fixed level borrowings. capitalized of with and Our a leverage equity low from

our an XXXX, composition of in into XXX basis-point additional year-end balance translate from $X.XX change would rise share. in no Assuming approximately sheet incremental per LIBOR earnings

cost million move of term into of access issuing effective coupon at continue opportunistically long-dated notes a high $XXX January, grade of rate X.XX%. we fixed As seven-year debt to we forms by

maturity. convertible million we at higher of the of On issuance, heels $XXX X.XX% their notes that cost repaid our

only is of have which term have today, that one availability under as revolving we later credit we resolved $XXX maturing with debt this effectively million, of remaining year, the facilities. our issuance So, currently

the extended existing XX, We Lastly, program investment regarding to like And the over call recent our turn activity through I Goldstein, now, program. million February review Mitch our repurchase portfolio. to and the to $XXX stock would XXXX.

Mitch Goldstein

Thanks, Penni.

portfolio reviewing an a me the I ARCC. a performance. spend then initiatives Let recent few and quarter will full-year and provide fourth on at minutes few investment activity update

investing For and continue XXXX, we our market in coverage, size, our to markets. used relationships extensive

the year, billion to with For investment to these we XX% of on incumbent high-quality commitments of commitments closed $X.X borrowers. companies

incumbency, of support is in turn credits, important being in the factor to best able growth enhanced believe, performance. position which we results an Our portfolio our in of

in of reviewed be than estimated Additionally, year to represents more our a XXXX. we the continue $XXX volume as selective, deal fraction new volume we billion during

new During quarter. with $X.X a lien million, million of commitments to the from gross $XX our with the the wide opportunity and fourth ranging and billion XX% investments quarter, companies commitments we of made quarter this approximately average in XX of of million made totaling were being made fundings form $XX first in new for saw loans. weighted $XXX set EBITDA We

loans XXXX, of also now doubled XX% our During first weighting for we lien accounting portfolio the nearly towards total.

came this assets of of and of of result unwind those Some as purchase our the from a joint the venture. the SSLP

portfolio our able assets, increase to for However, lien even are in first increased yield year. weighting with we the

use attractive were highlight scale advantages to and arranger our runner context fourth to of give the BeyondTrust Veritas investments. lien support sole incumbency ours. a acquisition first transaction, Veritas we of and me client on Software. how Capital’s quarter, some source sponsor lead is our loan repeat for a we recent In Let to book

acquisition million $XX risk we held BeyondTrust this American solutions offers of to through to simplify reporting. acquired and reduce senior a Prior management transaction, that commitment IT we software account Capital. loan our

of our position sponsor American ability deep ourselves full into our We to Given incumbent the us to with compelling present acquired position from believe lead we financing credit the role. able a support commit financing and more move to the experience allowed Capital solution capitalize profitable and the to our the transaction, to were to Company knowledge

Now, shift the let to portfolio me performance.

better for average our at XXst, remained last corporate December approximately EBITDA leverage weighted at of growth year increased quarter was the we corporate both stable The companies than million companies the X.X levels their aggregate XX average weighted As XX the EBITDA respectively. companies earnings. This solid portfolio generate coverage X.X of and our portfolio end is XXXX reported of the in growth and and the levels of months X%. of continued portfolio of X%. interest our times, and to over of The the at times

in on a saw reduction of also non-accrual. number net the We companies

compared non-accruals and the they decreased compared the as During year-end to capabilities since X.X% new X.X% investment quarter, XXXX. slightly activity feel at come third well-positioned manage we non-accrual to quarter two investments. a Shifting in increase, investments. end value, quarter, from cost, positions the modest at this fourth have to XXXX the off to the At fourth at fair of portfolio we Despite at the to total to had portfolio three non-accrual non-accruals When Xth. in looking significant non-performing as QX any QX X.X%. increased through we X.X% of February our is percent

occurring We million a provide. opportunity have was XX senior in Western in the the capital as bank Ares loans middle than to Because of that sponsors. our Ares made portfolio market past commitments that are just portfolio investment plus the which time lenders and the exit this shown of example where plus by a XX companies new to for includes to is evaluate loans non-bank was lending scale an interesting the purchase secured for that banks sector, providing shift Recently, from private such leadership middle as billion closed. approached senior of years companies backed used the Ares to position more equity composed been to lending. real decided $XXX market Bancorp an Pacific has transaction of This totaling

assets. by under XX, ARCC of our incremental we’re many investment companies sponsors portion Due relationships using assets efficiently Hill appropriate of senior acquired The our lower in of to these breadth of Ivy expand with $X.X XX% the represented Therefore, funds acquisition billion. portfolio a managed the most increase orientation our at Hill’s had position advantages. Ivy assets market with transaction. to emerged Ivy to by they Hill that these supported $X needed incumbent billion underwrite to the informational buyer provided of and seen management Ivy of Ivy had will $X.X XXXX over Hill the this of the portfolio. over loan billion portfolio, this December yield and able the capital or Hill the and Given from as we term close coverage, an

We will a expect this translate that ARCC Ivy Hill’s into earnings Ivy which should from of as to grow result additional acquisition, Hill. income

this has call. this just transaction our in As will closed, on more in we report earnings QX detail

new this we approximately exited million to investment net at addition gains also In through X. activity million, ARCC, in realized realizing $XXX $X February

of transactions million roughly for Kipp to and this pipelines And date, as and respectively. at $XXX total our these certain will million, not As we’re closing over stood some $XXX it I’ll turn now, any And of close. that always, backlog remarks.

Kipp deVeer

Mitch. Thanks,

concluding your to take we a questions, I’d provide remarks. few Before like just

accomplishments we’d of and felt drive American We’re of At closing out would laid year, Capital Company’s transaction, XXXX. in beginning plan the value the just proud the year we’re for shareholders. the very we the for a that formidable

we’ve year. goals nearly happy delivered report for to all of We’re our that on the

we’ve year transition behind XXXX strong we Now, feel a with and beyond. built for this us, foundation that

well interest has earnings set benefit and well-capitalized, that’s initiatives. leveraged, that’s this several perhaps performing rising that During opportunities diversified improvement and has at earnings we overall the were real portfolio to a today see modestly up continued portfolio yield portfolio growth able liquid strong and rates. sheet core Company multiple highly most We And XXXX, drive improve on momentum we at based Company. importantly, balance from drive believe the to legs to and our ARCC the

very great we thanking XXXX, for the well-positioned. by is close I year. think want a entire optimistic team our We’re Company and to for

you We the us Operator, last the have support in questions? open the appreciate all months. for the helped of way lines others also XX the if many who along

Operator

question Our first Lynch Instructions] Ryan KBW. [Operator comes today from from

Ryan Lynch

taking thanks and my for Hey, questions. good afternoon

quarter far one of investment First as a $X billion was equity first investments. looking you some as about through XX% I in in unusual support for the the XXXX, -- the I from non-yielding that activity noticed other of roughly as first quarter just guys activity comes were quarter-to-date

was provide driver made and to And just the in so, equity smaller can above that the that of that several investment large investments one just color, you made, quarter? you first exposure some the you average investments what more was was

Kipp deVeer

we to the prepared exclusively discussed this relates in Ivy related portfolio to Hill we’re investment That the that Yes. that making in purchase remarks.

stated stated sense. income, financing, of of have Ivy we’d doesn’t its transaction welcome it expect as structuring have will the but midst and in that kind so a if And and obviously additional to additional doesn’t closing with we’re in obviously, it So, the coupon. dividend that investment speak, make Hill yield

Ryan Lynch

makes sense. Yes. That

originations Okay. description, investments. when other American I $XXX In professionals. some the at quarter, the and look pretty it’s is at education million. past, some investment, And then, for-profit look done trading education Academy about When to sizable Holdings the in healthcare you fourth your guys have I provider of

investment? You a you this you talk guys in this InfiLaw what about received education versus Could and of guys ones past for-profit in of really the what quarter about some guys decent the in you mentioned, this like loss realized kind just the do investment having past.

Kipp deVeer

is not deal. AAPC education a So, for-profit

apologize. for XX off been primarily years, in technology invested was a actually the we now space. It’s misleading, So, healthcare we if on company have coding in and that information about and

have in quarters, to answer education So, as I directly. much think, space dislike we as that we for-profit the

we’re category. away So, for-profit from fall into AAPC education that shouldn’t staying and

Ryan Lynch

your downturn blackout earnings. Certainly, current Okay. the you the guys’ guys your stock, Thanks just recent repurchasing you discounted feel we levels. potential for at you guys In price talk guys’ in of at been stock due Can thoughts have about a is program. your these I remarks, for clearing price? prepared repurchase that a stock mentioned very know, extending you guys to given out.

Kipp deVeer

Yes.

$XX.XX, and times. refreshed you to constantly evaluated. would it being important buyback And kind compelling the to buybacks, tool used. at a that can’t I value book and have in see use it. place the be we an major stock in think certainly, XXs I to it’s make tell with the it’s at extent it’s math super, So, the all opportunities, we incredibly active of there we just program to around but be high super And that’s we’ll meant

Ryan Lynch

just I one if last can. one Okay. then, And

guys With putting those SDLP good funded you any brand-new quarter. current your SDLP put investments originations pretty you in quarter this all growth quarter? or guys SSLP the that growth this had -- growth Was balance in legacy by sheet are of that the on that funded the

Kipp deVeer

We actually are looking around.

that the asking recall a is other I I can’t is mean, just was Mike, I I thought are sole it SSLP this anymore, we we’re way lender about any position portfolio a invested companies as us in there quarter, to actually legacy SSLP and that the generally deal kind old they’re right? of -- the think not we as it’s today. that reminder, company refinance We’re -- or just one with that existing not. -- new and if SSLP to likely the these hope are assets assets as willing

about else, there we guess, is anymore heads ripe But, we remember. our than as So, here scratching not I think to anything are it.

the no. I is answer think,

Ryan Lynch

you nice quarter, my taking Well, for thank Okay. and questions.

Kipp deVeer

Ryan. so much, Thanks

Operator

question. from Our comes Fargo. Wells your ahead next Bock Jonathan question go from Please with

Jonathan Bock

this an over was you first, Kipp, would you’ve like investment for dig for market attractive environment. with understand taking Good that just time. into I overall the to about questions. afternoon. grown Varsity Brands. talking my you that I Thank

in have for about you in position allowing table a term lien spread? the you loan sponsor you longer credit the a the obviated the tenure $XXX while talk divi tight comfort second off enter in fairly at as into subordinated a to a can However, million take

Kipp deVeer

in for in three a or a two second last recap company the time. a investment, have of invest subordinated in first lien a a don’t done not We’ve long dividend who be like the confidence And think We lot To years. the got We debt person it’s be clear, company. sponsor. I we’d investment. the can the

Jonathan Bock

the that that an have in do gets then, degree there additional you your table? whether environment question that then doubt risk process. sponsor overall additional How to into comfort a capital or off you because table? is right credit does underwriting by will in support that the trust More system, in in based importantly, purposes high how not do can takes is is the there that as to problems, discern performance the To off name want just if sponsor and of that the the deploy off into be run money on frothy, to no the the you money already have intents investment, all the folks event

Kipp deVeer

a a I Look, those investment we’ve make pretty got obviously to I but -- think well-respected, paid hope decisions gets days here certainly that experienced team XXX year.

think question, people is we so. us, with will large are I what we and hope than say, -- Jonathan, this doing, a to we a just that very again, we quite this agree we company is So, know answer that like. am not sure other to how

Jonathan Bock

would We Okay. as well.

Ares with lien So, certainly relates $X.X I billion platform. a management of the the new to oversubscribed it that come the part think -- fund; a you second investors next to closed amount significant have was

so, I that beasts I rather a two second talk that to is, imagine that overall it lien the sizeable fund lien would as second question think can about as well portion of didn’t. you feed the ability into But, And or the went BDC, maybe to that paper, that same yields, that that lien requires pipeline second mid-year quitting of order but sponsors rather you’re a also the large themselves fund probably we also right, actually feeding in BDC? with of can to find shows, being relevant your sure make

Kipp deVeer

all be clear, right. just why seriousness, But people. we to so many That’s in have

that with has point, a think, can fund obviously to that ARCC. the I co-invest private ARCC. with fund it to your freely But you’re is referring to do nothing

we because argument the ARCC I that the checks and sees an with co-investing have is offline were ability talk competed of fund think I transactions more benefit larger we we have extent do had with write the think I make fund. have that for folks that that to certainly some sponsors. with impact would real So, interested, of not we had to And the life and actually well and about the companies, with borrowers as not examples there would in

companies thrilled So, It’s couple because focused making lien years you’re larger definitely question, said guys a of these emphasize. on are to crazy it. I’d have all I you ago companies of to loan. when asking you Jonathan, be we’re large thrilled the remember I’m that second

a And and we’ve far great a good business actually of think pretty opportunity. what behind for down it’s we so been kind is us, doubled market

here. got this In terms of we’ve for investing years. look, the engine We’ve amazing origination XX We’ve feeding been mean, an team. been it, I behind doing

north this people have bring management on away business allows XXX We from the us platform Ares to focused else what a just of there.

big et business, high that a business loan As helps us reminder, drive of all cetera this. flows for yield deal big

can’t it private the to tell originating we’ll for work continue enough to I it that to But, hard deploy I be in you wasn’t confident I able last a funds. capital do the team, it both know and new was in did future. we’re think deals So, year public it and we

Jonathan Bock

about I appreciate comment. second particularly Yes. also the lien that and

be take large that whether here we’ve I of the credit bucket finance of several excellent to to So, in by number know, funds question. And expansion the or operator, fit and next your asset extremely managed that a momentum bucket, over fantastic. with that is broader past, could design an you’re Varagon and capabilities, distressed discussed could question Ares program; backed the your that’s XX% one ABL. the has utilization of And mean, institution. then, relates the asset I to it’s pick,

Ares money returns, lending more capital that outside If to of leaving could you great say, it raise take, backed were business BDC. and earning generate clearly the asset you for let’s for that’s

or of the push-pull outside XX% So, you talk build can of the have asset if or managing capital of passing of management the something on XX%, you about returns pool utilizing the would a taking bad those bucket? BDC BDC, the shareholders only inside business effectively to co with

Kipp deVeer

go obviously we how good look, we good to that I are by mean, public how do Yes. out figure going business we also run going for for figure to enrich have generally to counterpoint companies to right the try to fiduciary Ares. trying I our what’s shareholders. and is say and go can’t true. frankly ARCC by out we’re that The into We building their run discussions is shareholders ourselves. duty and for

obviously look, name complicated would that’s by taken, name that business type pretty a by through to business of example. we is But, and go So, or Jonathan. have point question your

I with CLO space that there fees think I’ll the do, say at same do elsewhere who’s position. our that charge to sure Ares to we’re external chosen make we shareholders I that taken to BDC in here is frankly the want our there that. certain for in do are We equity at another aligned know investors. things and instance lower ARCC, investing with because we third-party not we’ve and

all some it’s So, one really a doesn’t size are of a have question fits thoughts answer, complicated but that hopefully useful. those

Jonathan Bock

question. for momentum Yes. And or does Kevin write Ivy deal noticed mentioned the to Again, The So separate retention up that is, question the on the mentioned up? certainly million write the was one given was recent works the that’s fourth quarter and risk forthcoming Mitch up a $XX there that and prospects something ruling? was else to game-changer the one is, I last was at how Ivy write Hill. leading on congrats end a that for in then, that though And that Hill, the that’s more the that business. a based of his transaction change Mitch effectively there actually

Kipp deVeer

Sure.

do nothing actually whole reset was the legacy Ivy had profitability American the management. up PacWest benefit write transaction. came Hill Hill the to was largely pick-up Capital the of that the Ivy from kind improved ability at simply So, activities of in with at in It QX host There liabilities carry asset and some their of funds. around additional their also of some and to

So, nothing with events. to prospective do QX

Jonathan Bock

that retention, and risk then, And it? was

Kipp deVeer

vehicles. retention has issue of good Look, significant that news supporter we’ve hasn’t -- their an in ARCC Yes. and kind Ivy really about is Hill been the of been risk because investor

issues Hill to impact it Risk as obviously with CLO CLO on capital make Ivy today, small feel I raising will business. on we continue retention don’t to But, as had much not obviously the think any haven’t side support survive, capital. the it required to manager the Jonathan. meaningful they think easier So, for I

Operator

Morgan. from Instructions] go Please JP next comes [Operator Our your with Rick today from Shane ahead question question.

Rick Shane

I about just funding talk the little bit want strategy. a to

the replaced interesting offerings lock to forward, sheet more fixed efficiently I year; The of going maturities curious, of to the quarter. the will liabilities fourth entered essentially in me of balance this rate start billion $X thing with swaps have using aggressively. to you that did. XXXX You that ways you if swap am be you was in the one into the

Penni Roll

debt. generally context think the in about Really, rates, of credit. issue liabilities, line Rick. against best is an way market rising borrowing on the more if Thanks, and isolated really Yes. our out term we of of term manage our fixed I That’s vis-à-vis the to this we think incident go to

to purposes, and So, an the market credit. locked term revolving the $XXX historical outs use at context million we of up to for we and we the if look term line activities, to when the we of our our the to size you time on have go those that opportunity parcel outstanding at of the part and In look is will that fund ins that portfolio, line draw in, out. as liquidity at debt, the credits, reasonable in what borrowings, of of of best a

that a had into ways in the with So, to upsize we and transaction, when debt the JP opportunity one to connection out we ACAS went was credit revolver. of in facility put January upsized term Morgan the back the component

into that that it thought flip term that we like were basis floating given rate at better was we So, LIBOR financing, to on borrowing fixed. on X.XX plus a

seen So in you’ve that capital different, little just than was the something what past. that’s the structure a

we of are interest don’t the more other today to probably where know that So, management I do revolver it’s liability activity that because need on because side, like to continue to in notes. watch. rates we’ll opportunistic efficient is we something issuances, of seven-year bond in doing the it kind and by But did lock January, for just the we rate on straightforward swap

Rick Shane

interesting, you looks instruments. like much when because It the that efficient Yes. more the term, it’s other adjust some for swap than of not is really

Penni Roll

true. Right. That is

in then. just gone on X.XX around that basically liability if you issuance we at around five-year X.X. a versus three-year we doing locked a So, up But rates it, look good since have bit a

therefore, so, out. against reasonable what issue locking debt fairly term X.XX today, in And seems we a would

it’s will that we to So, durations way the traditionally more way the seven-year at by issuing we’ve in and continue range. five-year is something to more look agree at but term a just looked better

Rick Shane

one the X% cost then, had value? value on portfolios. between just Kipp non-core follow-up. a that big on And ACAS quick on the it. Was portfolio, given yield X% and or fair mentioned Got fair discrepancy cost those

Penni Roll

value. Fair

Kipp deVeer

value. Fair

Operator

from comes Jefferies. question Please your next question. from John ahead with Hecht go Our

John Hecht

taking afternoon, Thanks for questions. very God my much guys.

First one to Penni.

effective of I quarters move can the lot there? ACAS attributed last over a you the am what can terms then, and as in benchmark seeing rate of of attribute new increase You the [ph] couple loan optimization the portfolio of the in And wondering, that to maybe well anything yield portfolio? rates. yields to discuss we’re

Penni Roll

Yes.

on can lower yield that optimization, about from during of we some at still given isolation, expect look assets ACAS a could optimization targeted the coming LIBOR the we most just have we’ve QX in in out but that we million that still we $XXX upside do continued have of yielding was versus you XXXX. ACAS If rotate

Kipp deVeer

of, in your thanks for question. think I terms

on that seen with and about in -- is we quite seen In are seven to people terms quarters. in terms come what eight X% a about But really pretty of that in now continuing target this we compression in for rises and of XXinsh going last originated overall think LIBOR been spread it’s The now what yields battle that QX yields plateauing of a see of kind in reinforce LIBOR to that’s we’ve talked much versus relative on pipeline. going that’s again spread the up, quarters return particularly in I seeing again we think of what or originated quarter numbers in absolute bunch assets. how very in haven’t quarters line for just to consistent terms we’ve percent type we

John Hecht

related And That’s Okay. then helpful. to is second question taxes.

just on taking very you tax the is and of that this could still is last guys then accrual should it accruals steps you reform for quarters. speak a you how is, three And there actually how thanks much just questions. had small the perspective broadly the about about And can they which One the First, question sector my if over tax tied to have with tax broader anything them second, excise for into have said two your there borrowers. questions. then is

Penni Roll

relates can taxes. tax But take Maybe question. our general Kipp just Yeah. the accrual the the expense of borrower I’ll to then and most tax take excise speaking,

of do most corporate on we expenses continue tax year was $X.XX spell we for taxes accrue about think income we’re over exercise to the but So, our going do which We to part locker tax through based what portfolio, smaller from think a related. end I coming have some the share. for

Kipp deVeer

very portfolio side dug early in say kind of in to in the management of conclusion John Yeah, it’s continue borrowers and on as thinking here I’d terms through be overall understanding the it. we the XX and elements

we that’s a from interest analysis positive earlier the offset should net is less of work. on returns despite have impact terms a pretty there that but rates, think positive whole. it corporate just in wide our say portfolio lower a think And as that modest tax I from early deductibility generalization again of a that

the on I think doing still very and we’re it’s in much work that. of early that middle

Operator

Our Mewhirter comes Doug Please from next ahead SunTrust. with from go question. question your

Doug Mewhirter

is credit-oriented And dry said the coming the that negative into dry good market. environment, the think side that powder is you flow guess competitive trillions I deal they’ll of is steel money tension the equity. equity more huge be the lot deployed? wondering it private Question what get that do Hi, side to a powder drives your on between your because guess beneficial there to dry on to guess more chasing be I will business marginally that or of many afternoon. money powders guess was the in out people then the that I some there And there I of the I private of because pile business

Kipp deVeer

honest got of amount private a flow the may increases anyone we and its look in a is equity of the hard of equity a history us reminder private into a capital had equity that tailwind space. I your of the enough loss activity providing great us be XX% continue is firms and to owned not deal to see to partnering greater long lots that the levels concern about with XX% private fantastic value for by in to below the company's the are companies flow. and are guess we U.S. and real amount deals guess compressed that equities and we best desire huge where I broadly enterprise I of it's but for financing of frankly great un-invested that as and impetus us, potential to equity taking transactions typically it's think activity record investor you as have private answer history private that and equity. private we're deals, doing do the that. making think great and us I loans deal it best for it is mean companies think is us, and new simple negative capital track long returns just The have for we've I on the see a I for than relationships concerned

Operator

America Our Hewett Merrill of Lynch. next from Bank comes from Derek question

Derek Hewett

be think billion incremental think how or the the Kipp, fully there was to higher will that given acceleration is I'm to SDLP point? at long my take some so million of QX that capital this and deploy correct I levels X.X you assuming it XXX should which an if do the math versus it's capacity committed

Kipp deVeer

will bigger is there trajectory and the check did number diversity more bit the the but X.X billion ability additional that checks. in Yes, think we is write XX we deals some stay months larger size, but with little the terms of us program probably less and I new right to on to a gives I of that upside think I mean capital

Operator

Raymond comes Robert James. question from next from Our Dodd

Robert Dodd

is some written yield which coupons of from ones you the owned for balance the assets of kind the what's keeping have what's if at return lower coupon sort robust those total that off were available a so but like up keeping the LP lower new quick kind some the in portfolio keeping sheet getting weaker the real short the this market low of Two even than assets trade on of by risk adjusted guys appetite little you from the of is yield point a are but it's it on more a structure of -- even asset today? what's through coupon a higher getting origination, rotating versus a maybe structure types assets

Kipp deVeer

but like we're future are paying that they our really key, you've ourselves some hope super-super we the obviously it's question. say If I paying to them we yield with That's when you that larger same obviously to if it protection you if with that the X.X% a want not season on it’s in around do allows of which to incurred we reason. fall other balance a mean scale I long that's it's you excited path they for with something there this have enhancement incumbency preparing with to portfolio most got that long X.X% are the time seasoned about. hopefully transcript, us but known on right would you all credits re-read seasoning unhappy have a things and Robert but you not the that's really that our word do them, chose a something as actually their modest companies ask when choose are you good earnings refinance portfolio the to and based do we borrowers they those are deal when call and was questions that's that that is

Robert Dodd

just adjustment not down. with of kinds deals one And rules expect them proactive follow-up. risk more Got have now? the be requirements the on maybe it, PacWest but didn’t Should thank capital retention we more more to change but changed you. these Friday came given obviously, aggressive, Hill, Ivy

Kipp deVeer

and investor with mentioned very I have always as supporter Hill. Look a of an happy been of we earlier, I think kind with Jonathan Ivy

time, increasing the loans on than achieve it's Ivy XX% investment, along, to the something it nature with in time we in time think of basket, remarks like really I in PacWest But to execute the investments which making make opportunity a on conditions, the prepared I first the investments investment. mentioned We or opportunistic about can transaction is the in we great to have have typically exciting. that for ROE in and flexibility are pretty the see are the think long as Hill able which first actually having we of in the come we all long company standalone because a higher investments time it, when that right,

opportunities I step like that to like some to transaction So, bet and are think a I that things look be be different -- other there but away there'll opportunities things do be assets or ways. sort perhaps that I hope in will different of touch

Operator

comes Henry next please with question, your Wedbush, Our ahead from question. from go Coffey

Henry Coffey

where a portfolio First impactful the less trigger yield suddenly you floors as any on a relevant how in higher? just or see then increase very point LIBOR of and and item there LIBOR those goes a are larger floors technical is

Kipp deVeer

we XXXX expect years and is floating-rate for assets short attached so a kind benefit of did are last term in in LIBOR increases recap, been benefiting, we zero, however so at there that it's is and many LIBOR right, LIBOR so quarter earnings outsized with three-month this reliability rises has see Henry. just be through in so to over benefit now the that, X%, our able to LIBOR are as continue did year, an because we company the our LIBOR of obviously, into again have from Yeah, more floor because benefit well we we market this improvement we the

Henry Coffey

you how over know we as horizon about then sort over all represent guys a that a look about of real you over like challenge certainly some worried And market other and be comments the seems stumbling the the side. the look see places on you small made that you are going industries capital, specific But or there your to opportunities. -- specific where put when look I not where horizon, you'd problem the are are see positioned, to in richer you

Kipp deVeer

to For do frankly with don't a pick our we industry at sure, sector, What saying, XX% of a industry out want avoidance end we on express we consumer. top basis. originations type is lens go come at things and views year an do down

retail, out about is So, don’t our select do the than about and were XXXX, gas we during the also finance of a saw tough go things one Certainly industries industry, you a we business be have of sectors more the by we under great having we’re to in BTC that create and to XXXX, pretty seem In direct think the so have leverage to we that invested. lending oil to where defaults, the base, underexposed bit, that don’t median. run focus can we sector. meaningfully benchmark, ourselves diversify

the perform landmines, good and that picking we’ve is different think us even a environments in key continue we’ll emphasize industries, to companies the defensive I avoiding for or done economy. companies So, and focus well volatility market weaker on And look withstand that.

Operator

from with ahead comes Trading. Casey Research Please next [Operator and Instructions] Point Alexander Our question. go from question your Compass

Casey Alexander

in fee it waiver quarters Yeah. that curious dividend peel of to is less Hi. and pay-out another of seems margin issue Good What’s that seven core large although safety? spillover, of I per earnings level afternoon. the doing of starting off feel income I’m now an comfortable so. of pretty some the for $X.XX understand kind becoming as because spill or that the seems though a you still you’re over share would share a like coverage

Kipp deVeer

is, that I the What for we’ve what about in we’re should as thanks above want have believers and the levels. dividend believers we question, in core earnings the explicitly K.C enough, and the Fair debate we’re be said our talked at that right past prepared it or our remarks, ourselves number. -- we to obviously to

as XXXX. you over there many know of the been of haven’t course We

FSLP, would pretty that upfront go American was been we’ve point, this later. something much, XX which would buy to through been take about and had that the which it’s at our earnings was chosen have earlier we think I months think we need issue don’t I out not I to Capital resolve back much that we why think

that’s XXXX decide core to So, you. dividend of the the the level. the the basis. is or spillover entail And we your above based have probably here wanted from can consider core going can you earnings which obviously going the earnings we we a above to But can And to from to consider us goal answer the come we power one quite we the continue or we to increased the company. earnings raising of for dividend level excess special when dividend question earnings have at at sustainable to two until see we that on tell or -- things we’ve obviously can directly that our just forecasting or or aren’t consider on things, dividends tell

earnings has to dividend fact And making a in spillover dividend been period I eight the spill out-earned net and because years. for come as the mean realize through right. for over prepared out core time, meaningfully gains I of we’ve point, the the has So, through Mike's of longer that a just remarks that as mentioned

we’ve is last distribution by not time, to the So, to provide you as want continued so we’ve things to it. we and every is shareholders to we to eight be have we’re when frankly the conversation back, but it that more doing. make we for we’re well a to $X.XX simply about is look increases mentioned not in value fee any think are quarter want been and which we’ve years think goal cautious position, dividend add take virtually to big the number, that and specials what we’re through also building But, about our we happy there all that sure because

that things the are So, there. out

Casey Alexander

fixing the credit had that. time XXX the you was hearing term Thank at hard that of XXX? I for facility, a Real quick, or

Penni Roll

XXX.

Casey Alexander

thought. what I that’s XXX,

you Okay, very great. Thank much.

Operator

Securities. from Testa question Christopher comes next Our from National

Christopher Testa

have wondering discuss SDLP, a comparison could you and that's in investible average you just now you what's putting between loans was sheet how the that I the difference the on anymore if balance more and leverage that changing EBITDA on project SDLP? at or capital the the the if that you kind of are lot multiples

Kipp deVeer

on folks product with and new direct six basis. ARCC quote obviously exactly us unit SDLP, customers is trying a has the tell We be our partners is four so don’t a a into SDLP so product structuring at to that probably but times times tranche so the offering and rollout underwriting what the mean tranche and differentiate quote not it’s the a I is are the do all them Varagon the underwriting wants we offer a we engage on pricing I to there partner, and maybe our whether deals doing But now AIG to a certainly do party have end the from and to different. that's the tranche we edges sometimes what sometimes ability to unit deals would three at so probably will two unit lower which senior, based they've deals the is it fairway. range at like junior the offer way with and mean the I structuring partner our the not will SDLP and

Christopher Testa

And mentioned you guys the you where get to able was company. were know just the as ACAS look in at portfolio you pipeline it one sourcing had I transaction basically the

of portfolio pipeline from how companies? that existing looking is to repeat you much from If business are approximately coming ACAS

Kipp deVeer

I that. think past of think the can said investments we we we around room, XX% came 'XX portfolio, hook don’t have for new the we that looking made existing year from around and this I the

but for [indiscernible] sure. just we companies the with XX won't is that number said, we follow-up know around. handful But been -- acquired Mitchell as I actual the -- quality don’t the stick companies portfolio the years important it's us can As and hope have if is it we from

Christopher Testa

unsecured but side guess just to back as the rate And mean curious some hand you maybe you are in interest the looking rate you've of forward been on obviously right the debt of rates the of guy go balance over you to your as kind you put looking fixed at given debt offerings have portfolio to to of XX% of maturities doing. still floating kind are be or the swap stagger sheet looking going continue pair at I I you've

Penni Roll

access you as of today. need revolving will business. But we funding at both the to of we we the I X.X:X to amount look and markets build continue if diversity latter will are debt well maturities. we balance the to the have stagger sheet a capital lot sources that think $XX it's I really leverage to in the mean need billion to term we we that capital markets as look of among the debt build

Operator

And once JMP from Chris we have York Securities. again

Chris York

continues seems be that do benefits from others performance potentially a across did sorry of home is to to Ares, continues it you continuing find raising funds fund traffic Good because the maybe on two-year the specialty commercial they question My on on co-investment the of Ares this it enhance Ares ADL, deal financial and Jonathan are about capital Ares afternoon some the from and you at that. ask businesses. appears platform expect or process and the year, to deals. like close exemption thought to question robust, to guys, It the then

Kipp deVeer

guess great leverage included, we I of could to and actually talking and at and underwriting, them that a it's with things deal team building or invest a we’re for of one investment run set that like hope obviously XXXX their more the the I our so. that that for we’re yesterday the benefit point, their different ability mean business, commercial that I flows, running co-investment you giving kind one and flow origination approach, finance vehicle here relationships a of to very capability freely we’d using have drive down together all here, really mean different and closely same as same right. to we’re lending same BDC work there so hope It's different CC we your the I elsewhere, activity quick a have leverage, the it's team, but that’s to of we cash so of so. the just Ares say, just same obviously oriented, with Thanks, about it's ways team and us

Chris York

healthcare those then already there then specialization heavy growing My tech understanding strong a in Okay. And the in reservation sectors. PacWest and any on follow-up is advantages But cash hesitation which was the in have portfolio. there portfolio heavier or you today. my flow, was consolidated it in and competitive

Kipp deVeer

us, companies, it think a a it of saw the in a the when again we thing because to lot a skew fact diversification that’s going in point, diversified list company, was at portfolio capabilities because them, lot knew Hill. for I Well, diversified have a we good of we really of underwriting those sold, of such portfolio the the and being doesn’t Ivy portfolio it's sit to it your

you price great safe math a a part a the roughly say, of paid do what Ivy than do, differently there working portfolio the to could Hill I that’s little thought didn’t better was understand finance to kind others. get need but, actually it, we was what but and it think look through to concentration us opportunity So we it industry quicker maybe bit to I give we we us look think at attractively obviously to for to are an pause, that any

Operator

this concludes I’d call to for session. like our gentlemen question and to the Mr. this over ladies deVeer remarks. time, back any And conference Kipp At turn -and-answer closing

Kipp deVeer

anything I you call. to other don’t many next say add quarter’s we and catch think earnings Thanks. have than to thanks we’ll on

Operator

domestic end our conference X-XXX-XXX-XXXX. you call to archive conference at of X:XX today, callers, Eastern part after for call hour will if the approximately be one callers, missed dialing this time, by Ladies XX international through today’s and any PM XXXX, its gentlemen an call, this call dialing the February by available of of replay concludes XXX-XXX-XXXX,

For replays conference reference number, please all XXX-XXX-XX.

Ares Capital (ARCC) 13 Feb 182017 Q4 Earnings call transcript