Ares Capital Corporation (ARCC) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the Ares Capital Corporation's First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jana Markowicz, please go ahead.

Good morning. Welcome to Ares Capital Corporation's first quarter ended March 31, 2015 earnings conference call. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded on Monday, May 4, 2015. Comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. The Company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the Company may discuss core earnings per share or core EPS, which is a non-GAAP financial measure as defined by SEC Regulation G. Core EPS is the net per share increase or decrease in stockholders' equity resulting from operations less realized and unrealized gains and losses, any incentive fees attributable to such realized and unrealized gains and losses, and any income taxes related to such realized gains and losses. A reconciliation of core EPS to the net per share increase or decrease in stockholders' equity resulting from operations, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call by going to the Company's website. The Company believes that core EPS provides useful information to investors regarding financial performance because it is one method the Company uses to measure its financial condition and results of operations. Certain information discussed in this presentation including information related to portfolio of companies was derived from third-party sources and has not been independently verified and accordingly, the Company makes no representation or warranty in respect of this information. As a reminder, the Company's first quarter ended March 31, 2015 earnings presentation is available on the Company's website at www.arescapitalcorp.com by clicking on the first quarter 2015 earnings presentation link on the homepage of the Investor Resources section. Ares Capital Corporation's earnings release and 10-Q are also available on the Company's website. I will now turn the call over to Mr. Kipp deVeer, Ares Capital Corporation's Chief Executive Officer.

Thanks Jana. Good afternoon, everyone, and thanks you for joining us. We're pleased to report continued strong operating performance for the first quarter of 2015, with core and GAAP EPS of $0.37 and $0.32 respectively. Generally in line with our expectations despite the seasonally slow time of the year. We also recognized another $0.09 in net realized gains in the first quarter as we continue to generate gains from certain equity investments. Ares Capital emphasis a total return strategy and these gains are an important driver of our ability to deliver value for our shareholders. In addition, our portfolio rotation efforts are providing meaningful results again as we increased our overall portfolio yield and amortized costs by 30 basis points this quarter. We believe our investment portfolio remains strong as our corporate borrowers saw continued year-over-year EBITDA growth of 14% and our non-accruing investments and amortized costs declined to their lowest levels since before the financial crisis. Finally, due to the net repayments we experienced during the first quarter, our balance sheet and available capital are strong with the net debt to equity ratio of 0.63 times and available capital for new investments of $2.3 billion. We also declared a second quarter dividend of $0.38 per share, payable to shareholders of record as of June 15, 2015. We will provide more detail on our earnings and investment activity later in the call, however for now, I want to shift the discussion to the recent news from GE that it intends to divest approximately $165 billion of commercial lending, leasing and consumer banking assets. This divestiture is expected to include GE Capital's U.S. Sponsor Finance business, with whom Ares Capital has built a successful partnership through the senior secured loan program over the last five and a half years. We believe that SSLP has been a productive program for both parties and one that has brought real benefits to our clients and helped to provide both GE and Ares with significant advantages in the market. Our investment platform at Ares Capital today has significant scale and breadth, having grown to 86 dedicated investment professionals across the country who source, underwrite and manage our investments. Ares has great relationships across the sponsor community and of course, strong relationships with the financial sponsors and companies in the SSLP. We would seek to continue to finance those sponsors and businesses to support their ongoing capital needs either directly or with a new partner through the SSLP or through a new program. We believe that the strength of our network, experience in capital base makes us a desired partner for those looking to grow their mid-market lending businesses or to enter the market. And accordingly we believe that partnering with us and SSLP, or a similar joint-venture will be attractive to a number of third-parties and we are having active and productive dialogs with a few potential partners. About buying GE's interest, we're starting a new program, although we can't promise that a deal will be reached. The SSLP is operating business as usual today. In fact, we have five deals in the SSLP backlog and pipeline that we are currently expecting to close. As I mentioned, we plan to continue the partnership we've enjoyed with GE Capital with the new partner and believe that certain structural elements of the SSLP will help facilitate this. In particular, as a general matter, GE Capital may not unilaterally sell the underlying loans in the SSLP, since such as sale, as well as almost any other discussion in respect to SSLP must be approved by both Ares and GE. If no mutually acceptable replacement partner for GE Capital can be identified either by Ares or through the GE Capital sale process, then the program would likely would likely experience a gradual wind down as the underlying loans in the program are repaid. As of March 31, 2015, the weighted average remaining life of the loans in the SSLP is 4.3 years, although, of course, the loans in the portfolio could be repaid earlier in the event of a refinancing or a sale of the underlying borrower. As you know, we have strong relationships with these companies in the SSLP and we would expect to be well-positioned to have Ares Capital continue to provide them with capital either a loan or with a new partner in the SSLP or through a new program. Taking a step back to consider the bigger picture, we believe that GE Capital's exit from our industry presents a seismic shift in the landscape of middle-market lending. We also believe that this exit creates a significant opportunity for our company to grow our position in the market, it positions us to be a more active originator and syndicator of first lien senior debt, which traditionally has been a core business at GE Capital given their low cost of capital advantage. I hope this summary is helpful. We will endeavor to answer your questions later in the call, but please understand that both, we and GE Capital, are bound by certain mutual confidentiality restrictions around the SSLP that simply may not allow us to answer certain questions or otherwise comment on certain aspects of the program. Now, I will turn the call over to Penni to highlight the first quarter financial results and to discuss some of our recent financing activities.

Thank you, Kipp. Good morning. Our basic and diluted core earnings per share was $0.37 for the first quarter of 2015 compared to $0.38 for the first quarter of 2014 and $0.42 for the fourth quarter of 2014. Our first quarter core earnings included an additional dividend from Ivy Hill of $10 million and Ivy Hill is our wholly-owned portfolio company, which is returning previously undistributed earnings that were driven in large part by realized gains from its past investments. Our basic and diluted GAAP net income per share for the first quarter ended March 31, 2015 was $0.32 compared to $0.39 for the first quarter of 2014 and $0.49 for the fourth quarter of 2014. For the first quarter of 2015, our net realized gains on investments totaled $27 million or $0.09 per share and we had net unrealized losses on investments of $48 million or $0.15 per share, $24 million of which was due to reversals of net unrealized appreciation related to net realized gains on investments. As of March 31, 2015 our portfolio totaled $8.5 billion at fair value and we had total assets of $8.9 billion. As we discussed on our last call, we were focused on selling lower-yielding assets during the first quarter, which reduced the size of our investment portfolio that helps to improve the overall portfolio of yields. At March 31, 2015, the weighted average yield on our debt and other income-producing securities at amortized cost increased to 10.5%, and the weighted average yield on total investments at amortized cost increased to 9.6% as compared to 10.1% and 9.3%, respectively at December 31, 2014, and 10.2% and 9.2%, respectively at March 31, 2014. Our stockholders' equity at March 31 was $5.3 billion resulting in net asset value per share of $16.71, up 1.8% year-over-year versus March 31, 2014, but down 0.7% from NAV per share of $16.82 at the end of the fourth quarter of 2014. The NAV at March 31 also reflects the additional dividend of $0.05 per share that was paid to shareholders from undistributed earnings at the end of the first quarter. As of March 31, 2015, we had approximately $5.7 billion in committed debt capital, consisting of approximately $3.5 billion of aggregate principal amount of term indebtedness outstanding and $2.2 billion in committed revolving credit facilities. Approximately 61% of our total committed debt capital and 100% of our outstanding debt at quarter-end was in fixed rate unsecured term debt. As we discussed on our last call, we continue to focus on the right-hand side of our balance sheet with an eye on lowering our cost of debt capital, while still maintaining what we believe to be a prudent maturity ladder and diverse sources of capital. In January, we reopened and upsized our November 2014 bond issuance and were able to raise an additional $200 million of 3.875% notes at a premium to par. Then in March, we redeemed a part of the full $144 million of 7% unsecured notes that were scheduled to mature in February 2022. We will continue to evaluate these types of opportunities as we go forward. We also continue to receive strong support from the banks on our revolving credit facility who have extended credit to us at attractive pricing. During the first quarter, as part of an amendment to our largest revolving credit facility, we upsized the total commitments to the facility to $1.29 billion with commitments from 20 banks, extended the revolving period and maturity each by one year bringing it back to a five-year term and modified the borrowing spread through the introduction of formula-based calculation, which currently results in a stated interest rate of LIBOR plus 175 basis points as of March 31, down from LIBOR plus 200 basis previously. The weighted average stated interest rate on our drawn debt capital at quarter-end was 5.2%, which was up slightly from our weighted average stated interest rate of 4.9% at December 31, 2014, and down from 5.4% on March 31, 2014. The increase in the weighted average interest rate on our drawn debt at March 31, 2015 versus year-end 2014 reflects that we had nothing outstanding on our lower cost revolving credit facilities as of March 31, 2015, partially offset by the repayment of the 7% unsecured notes during the first quarter. Upon the repayment of these notes, we have realized a small loss on the extinguishment of debt of $0.01 per share. If we had borrowed all of the amounts available under our revolving credit facilities as of March 31, 2015, our fully funded weighted average stated interest rate would have been 4%, down from 4.1% at December 31, 2014. I am also happy to report that we recently received formal approval from the Small Business Administration for our wholly-owned subsidiary Ares Venture Finance LP to be licensed to operate as a Small Business Investment Company. The license will provide us with up to $150 million of attractively priced long-term debt, which we would anticipate using to finance our future investments in smaller companies, particularly our venture capital backed portfolio companies. We will be able to draw down this available debt capital as qualifying SBIC investments are funded. And we look forward to working with the SBA as we help them fulfill their mission to provide capital to small businesses in the US. As of March 31, 2015, our debt to equity ratio was 0.65 times and our debt to equity ratio, net of available cash of $122 million, was 0.63 times. As of quarter-end, the weighted average remaining term of our outstanding liabilities was 6.4 years and we had approximately $2.2 billion of undrawn availability under our lower cost revolving credit facilities, subject to borrowing base and leverage restrictions. And finally as Kipp mentioned this morning, we announced that we declared a regular second quarter dividend of $0.38 per share payable on June 30 to stockholders of record on June 15, 2015. Also, we estimate that we have carried over into 2015 approximately $181 million or $0.58 per share of undistributed taxable income. And with that, I’ll turn it back to Kipp.

Thanks, Penni. I like to spend a few minutes discussing recent investment activity in our portfolio before opening the call up for questions. In the first quarter of 2015, we made $500 million in new investment commitments and the weighted average yield at cost on our fund investments is 10.1%. 260 basis points above the 7.5% yield on the $1.1 billion of investment commitments that were repaid, sold or otherwise exited during the quarter. As we’ve seen in the past, the first quarter tends to be a seasonally slow period for new originations and this year was no different. However, we saw some nice opportunities to invest in second lien loans, which we believe offered good risk-adjusted returns. Many of these loans were either the companies we’ve known and invested in for a long time and/or were in larger companies. We believe that the benefits we enjoy from incumbency, the strength of our origination platform and our significant capital base provide us with significant competitive advantages and help us secure meaningful positions in borrowers’ capital structures. With respect to the $1.1 billion of investment commitments exited in the first quarter, approximately $485 million or 43% of those related to the proactive selling of lower yielding first lien assets, the weighted average yield on the $485 million of assets we sold in the quarter with 5.9%. As we mentioned on our last earnings call, a portion of the fourth quarter originations were in lower yielding first lien assets that we then subsequently sold in the first quarter, allowing us to earn fee income on those loans before we recycle that capital back into new investments. We currently have a diversified $8.5 billion portfolio, consisting investments in 201 portfolio companies and the portfolio is performing well. The weighted average total net leverage for our corporate borrowers increased in the first quarter from 4.8 times at 12/31 to 5.1 times at March 31 and the weighted average interest coverage decreased slightly from 2.9 times at December 31 to 2.7 times at March 31. The increase in leverage in the first quarter was driven by the mix of our new investments and the sale of lower levered lower yielding first lien investments. We expect that the underlying corporate borrowers in the portfolio at quarter end will delever from current levels given the positive 14% year-over-year EBITDA growth that they’ve experienced. The size of the corporate borrowers that we have invested in has also increased from a weighted average EBITDA of $51.6 million at the end of the first quarter a year ago to $61.2 million at the end of the first quarter of 2015, which can provide for an improved portfolio of credit profile. Non-accruals declined in the first quarter with 1.7% of the portfolio at cost and 1.3% of the portfolio at fair value on non-accrual at March 31 as compared to 2.2% at cost and 1.7% at fair value at December 31. We did not have any new non-accruals during the first quarter and we had one investment come of off non-accrual. I now like ual on March 31st 015, which can provide for an improved portfolio ofto finish with some commentary on our post quarter-end investment activity. We’re currently seeing light loan volumes in the middle-market. However, we continue to find some attractive opportunities. From April 1 to April 29 of 2015, we made new investment commitments totaling $153 million, all of which were funded with a weighted average yield at amortized cost of 9.9%. During that period, we also had sales, repayments or other access totaling $180 million with the weighted average yield at amortized cost of 7.5% on which we realized approximately $5 million of net gains. Of the $180 million, $79 million related to the sale of lower yielding loans which had a weighted average yield of approximately 6.4% and the remainder were due to normal course repayments in the portfolio. As of April 29, our total investment backlog and pipelines stood at approximately $385 million and $200 million respectively. And, of course, we can’t assure you that any of these investments will close. During closing, despite the seasonal headwinds for the first quarter, we are very pleased with the continued strong results at ARCC and we feel the company is well positioned as we move further into the year. The announced exit of GE Capital from our market is yet another example of the bank's unwillingness to lend to the middle market and we believe that this exit of a substantial competitor will result in a more favorable competitive landscape. This bring us even more conviction in our business strategy of directly originating investments in the middle market to achieve strong risk-adjusted returns. That concludes our prepared remarks. We’re happy to open the line for questions. Operator?

[Operator Instructions] Our first question comes from Greg Mason at KBW.

Great. Good morning and thanks for taking my questions. First, one of the questions that a lot of clients have had regarding the SSLP and potentially new partners or other opportunities there is the amount of leverage and cost and I know you can't give us specific numbers, but can you just maybe address the question of potential changes to the cost of the leverage that could occur in the SSLP and the amount of levers that you use given that GE used a good deal of leverage at what the market perceives is pretty cheap rates in that program?

Yes. I can provide some comments on that Greg. Good morning. Thanks for the question. Look, the agreement that we had with GE I think as we've said over and over again, we really don't view them as a lender, right, but as a co-invested partner in the structure. So I will just cover that off at first. Look, in terms of the return that GE takes as a partner versus where we hope obviously to see the program settle out, I’d say it's probably a little bit too early in some of our dialog to provide any comment on that. I think that the exposure that GE has to the program today is quite attractive. When comparing that to alternatives in the market, again we are talking about a $50 million portfolio that's very healthy that provides a lot of introduction obviously to midmarket borrowers and sponsors. So I don't think it will be difficult for us in some way say perform to reconstitute that and that's what we're working hard to do.

Okay, great. And then second question obviously a big number of, percentagewise of second lien deals versus looking at the past much more heavily weighted towards first lien, can you talk about is that a purposeful move, any additional commentary and the pipeline also looks like it's second lien as well, just any kind of commentary around that?

Well, I mean I think as you look around a lot, we are in the market most of the originations that you'll see there from us are from folks in our business who are generally coming either in unitranche or in second lien. Nothing inconsistent I would say where we’re out looking for new investments, our selectivity rates are incredibly low, as I think you appreciate having known the company for a while. There is no significant change in strategy other than I’d make a couple of broader market comments, which is the size of the companies that we are investing in are a bit larger than what you’ll see in the competition, but I think importantly look, we see base rates near zero, it's very difficult to invest in 5% assets in a BDC where you’re levered 0.7 to 1. So our goal here is to continue to take solid credits, but obviously to put ourselves in a position to deliver solid earnings at the company and that's the balance that we consider. I would also say that when you think about risk, we have to take a look forward, but we’ve got an incredibly healthy portfolio. We have a couple of names out of 205 names that are non-accrual of any substantial value and the portfolio is performing really, really well and as we observed the market around us, we’re not really seeing any increase in defaults. So without getting ahead of ourselves we want to continue to pick good credits, but there may be I think an appreciation on our side that this credit cycle is going to continue to extend for a while. We see reasonable growth in the portfolio coupled with low rates and I think that’s how we think about picking assets in terms of the backdrop that we sit against.

Great. Thank you, Kipp.

Sure.

Our next question comes from Matthew Howlett at UBS.

Thanks for taking my question. Kipp, just trying to get back to the senior loan fund, we look at the agreement with the fee sharing, there is a 50/50 fee sharing, I mean how much wiggle room is that in terms of negotiation? And I guess that leads me to, if this was to go around half, what are the – utilizing that 30% bucket, which theoretically that would open up – I mean, could you replace the loss, sort of yield a total return over time in a say, CLO or something of that nature?

Yeah, I mean, I think this gives us a real strategic opportunity to reposition a little bit away from both the strengths of what’s been a great partnership with GE, but also perhaps with some of the shortcomings that came with it. I would tell you that we haven’t been particularly active originator of senior debt here, and that there is real room to occupy a place in that market as GE exits the business. It doesn’t necessarily mean that we will hold all those loans at the BDC, but I think it widens the fairway of what we are able to do here. And if you recall, going back just to 2009, when we signed a partnership up with GE, our company had $2 billion of assets, I guess is we had 25 or so people. We are in the middle of a terrible financial crisis and we are also making an attempt to buy a reasonably distressed competitor. Six years later, a lot has changed, the size of our team is four times as large, I think our position in the market is significantly more meaningful, our capital base is four times what it was, five times almost what it was at that point. So I think there are some things that we can do opportunistically here five or six years later that are pretty exciting.

So does it make you stronger at the negotiating table that you can come in to say, listen, if you don’t -- you have these economics in place and we have other options, we don’t – we are not going to just – any price get this renewed, I mean, is that sort of how to think about it?

I am sorry, the negotiating table with a potential client?

With the potential buyer of the GE platform. In order words, the arrangement with fees, the 50/50 split if someone wants to push back on that, could you – are you more at a powerful – more powerful negotiating since given you have other options.

Yeah, I am not so sure. I mean, I think maybe yes, maybe no, it’s probably little bit too early. I think that looks – the fees accrued to folks that originate right and the theory generally speaking with GE was we both had substantial origination businesses and that we are both contributing substantial originations to the partnership. I think that the fee splits on new deal fee should probably be governed by who is driving origination and we are just not there yet in terms of where we hope to move with a partnership on a go forward basis. So I just think it’s a little bit too early just to comment on that, but certainly it’s a variable that you can move.

Right, exactly. And then just getting to where you are from a – you know, you’re below NAV, you guys haven’t raised equity capital for some time. Do you feel confident you can continue to service your clients, turnover the existing capital base until you see a lot of lower yielding stuff, and still generate the fee and the originations if you are, I mean you decided obviously not to raise equity capital for some time?

We are. We feel very confident and just where we sit for the remainder the year. The GE circumstance around SSLP brings a little bit of uncertainty, but we’ve done as you probably appreciate quite a lot of work here to analyze different circumstances there and I think that we feel that the company remains well positioned vis-à-vis, both in its current earnings profile and our existing dividend of $0.38 a share.

Right. And was it just seasonal – obviously the first quarter was just seasonal and you’ve seen another year, so no change with GE or any other negotiations.

Correct.

Great, thanks Kipp.

Sure.

Your next question comes from Jonathan Bock at Wells Fargo.

Good afternoon and thank you for taking my questions. Kipp, you mentioned earlier that you are focused on a tad bit [ph] of larger company. And given the things in the low market really have turned around and become quite competitive, let's say the BSL [ph] market takes out a few more of Ares' larger deals, how do you really avoid another shrink quarter, right that we saw today as the portfolio got smaller, which likely pressures earnings a bit in the future?

And I think again a portion of that, it doesn't you know a shrink quarter doesn't bother us that much on the asset side, again, we've doing some repositioning now vis-a-vis the capital for the last few quarters. I think, as you know Jonathan but others have been paying attention, the stocks in the space have not been performing all that well for whatever reason and I think we've been cautious back to the last question about when we'll raise equity capital, if we can when we want to et cetera. So we've really been trying to create enough dry powder, so that we can do the things that we want to do and most important is being in front of our customers and selecting the deals that we want to be in because we're positioned for capital. But, the goal again, in what we do for the remainder of the year is to continue to position the portfolio such that we are growing earnings over time. We're levered 0.63 times now, so we've got quite a lot of capacity going forward. And to your point on what the market looks like, the market is in a little bit of a funny period, right, we're seeing not nearly as much supply of new paper to your point as we see demand for it again, so it's kind of flat toed if not even reversed in terms of what we've seen vis-a-vis yield widening but we're seeing it on a very, very limited dataset i.e. there are just not a ton of deals right now. So before someone asks us the question why that is, we don't actually really have an answer kind of not sure, it just happens to be a little bit slow for early May, which is okay, but as we look out, a flat quarter, a modest shrink quarter, a modest growth quarter, we don't you know we're not asset focused, we're earnings and dividend focused Jonathan, so, so long as we're positioning that in the right way for shareholders, that's where our focus remains.

Makes sense Kipp, thank you. Now, thinking about shrink to the extent that it occurs, I know you said, earnings and dividend focus. So right now, you're 20% in the non-qualified bucket and given the caps of 30% [ph] and to the extend volumes light and perhaps repayments pick up et cetera or you see some opportunities to do selective sales, how should we think about managing that non-qualified bucket exposure in light of what might be a situational decline in total assets while the GE program remains outstanding, is it possible that industry should be thinking about SSLP and a bit of a smaller form in the future.

Well, I mean that 28% number, I can't say that we haven't been there before, I don't know if any of you recall, the highest that we've ever been, we're probably well within that range today i.e. we've been higher in the past. So I don't you know I'm not thinking about it any differently than I have at certain points in the past, Jonathan, but obviously, we're going to have to see what happens here with the Sponsor Finance sale and with our own negotiations around SSLP. As I mentioned, we're closing five deals right now, and it’s healthy. So we're not restricting deal flow there by any means because of the 28% number.

Okay, I appreciate that. Now, talking about an improved credit profile, obviously non-accruals, et cetera has improved and I think to the esteemed Mr. Mason, who asked about your second lien exposure, and that it was increasing. Just curious, so we've noticed diversification, diversification increased but we've also seen leverage at the underlying portfolio company go up perhaps a click or two from I think 4.8 to 5.1. Can you give us a sense of underlying risk here, when we look at some of the second lien deals that you've done, take the power plant for example or Netsmart, you own a smaller percentage than what we've normally seen of the total tranche outstanding, so perhaps at power plant you took $80 million of $180 million tranche. We know generally, you like to write the entire ticket most of the time, I mean, can you give us some sense here on just how this deal shared the risk profile, because second lien obviously in investor's mind is, it's just prompts more questions than a normal first lien secured investment today?

Without addressing specific situations and we can if you want to, look, we are seeing because of just tremendous amounts and this is really in the private equity backed transactions, tremendous amounts of private equity money chasing frankly not a lot of opportunities. We're seeing purchase price multiples about as high as we've ever seen them. In particular, in certain sectors where we also not surprisingly find good credit characteristics. So I'd tell you, if you looked at this on sort of a loan-to-value metric, i.e., what's the percentage of equity coming into capital structures versus debt, it hasn't changed much. But if you speak to the folks in the private equity side here or at other alternatives firms, I think they will tell you that it's not uncommon to see mid-market borrowers in the 50-ish million of EBITDA zip code where we play, easily command 10 times purchase price multiples. And certain of the names that you laid out, we are seeing some 12s and some 14s too. That being said, we do our own fundamental analysis, loan-to-value is a piece of it. And then when you look through to the other important metric, i.e. what’s the interest coverage of these borrowers, look, when you are in a situation of low rates and portfolio companies generally speaking can cover their interest cost by almost 3 times. And the weighted average debt to EBITDA is around 5 times. We just don't feel like we're taking undue risk to generate what we think are pretty good returns for our shareholders.

That's very helpful. And then, last piece as it relates to the SSLP. Curious about the attractiveness of the of $7.3 billion in senior notes to various constituencies and we will look at it in the context of bank versus non-bank. In your view is it -- what are the push and pulls from either a bank and a non-bank perspective, meaning that is the $7.3 billion for a bank a bit too large of a ticket to write and in which case it would go to the non-bank system at potentially a higher interest cost and lower leverage? Just trying to get a sense of bank versus non-bank and the appetite or the constructive views and the negative views on whether or not that's too big to-date or not? Any color there, Kipp, would be helpful.

Yes, sure. I mean, look, John, as you appreciate, we are spending an extraordinary amount of time on this exact point today. So some thoughts are, the GE divestiture is obviously being driven by a fair amount of long-running issues at their industrial company, right, in terms of things that folks have read about in the press. I would tell you that their position as a US Fed-regulated entity and SIFI has made their life difficult. So do we think that the obvious person to step in here and work with us is the US regulated banks, I can't say. I think that's the obvious place that we are spending a lot of our time. So there are other non-US regulated banks where I think there is a productive conversation. And then, to your point, there is sort of the non-bank world where I'd categorize folks as asset managers, insurance companies, some combination of all three of those things where we feel that a partnership like this could bring a lot to bear on one of those organizations or more than one of those organizations. By the way, to your point on size, there's no doubt -- I think it is really important point that we've always viewed despite other folks having what they call their own SSLP, we've always viewed GE as an extraordinary partner, an unusual partner, a unique partner in the structure. Part of that was origination and understanding the business. A part of it was also, to your point, just the significant scale that they brought to this program. And I think it's probably not lost on people that others have looked to copycat this program over last six years and no one has really been able to do that with any success and/or scale. That being said, we have the benefits of a funded portfolio where everybody else sort of had to start from scratch. So the ability to go show somebody a highly diverse portfolio that's performing extraordinarily well in size that I feel offers good relative value to a partner, but also allows them direct access to what Art and myself are congratulating our team is a best in class franchise over here in terms of what we’re able to deliver to our investors. We’re feeling reasonably optimistic that we will find some interest. But we're down the path with a lot of different kinds of people and it's too early to understand who is going to be the most interested and who's not. That's maybe some thoughts on what we've been doing over the last couple of weeks.

Well, appreciate the comments and thank you for taking my questions.

Sure. Thanks, Jonathan.

The next question comes from Terry Ma at Barclays.

Hey, guys. Just wanted to follow up on the second lien a little bit, can you can maybe just quantify the relative effectiveness of the second liens over the first liens and how that's evolved over the last quarter?

Look, when we look at first to second lien Terry, where we’re just looking at kind of where the market would put second lien pricing on top of first lien pricing. So I think the guideline over the years has always been that second lien is kind of 400 basis points on top of where you'd see first lien, to the extent we’re able to go out and originate and/or lead a second lien deal where we can do meaningfully better than that. I think that's where you're going to see our interest in being in second lien. We’ll very often underwrite both, but syndicate the first lien, which we’ve continued to do probably as far back as the third quarter of last year and something that I think will be more active on, but that's kind of how we think about it, I hope that answers the question.

Yes, it's good. I appreciate the color on the SSLP stuff, just want to make sure I got this right, the weighted average life of the existing portfolio is 4.3 years and that's contractual, right?

That's just the stated maturity if you went and you kind of unpacked all 50 borrowers, yes.

So is it a reasonable assumption that the actual duration will be 3 to 3.5 years.

I mean it depends what each underlying company is looking to do, right, I mean not every company refinances at the first moment that they can, others have an acquisition come along that makes them want to refinance earlier than they might have expected to relative to their de-leveraging profile. So we always say that the assets that we invest in tend to have three to five year lives and no surprise that this portfolio calculates out to be about for and change, I wouldn’t know how to handicap it any other way.

Okay, got it. Thanks.

I mean, people typically don't wait until 30 days before their maturity to refinance, so it's a reasonable assumption that you come inside that 4.3 years a little bit.

Okay, got it. Thank you.

Sure. You're welcome.

The next question is from Robert Dodd at Raymond James.

Hello, everybody. I probably missed about Ivy Hill actually. Looking March versus December, the fair value dropped about 20 million bucks, cost was the same, obviously there was a dividend, a special dividend and we know the source of those in the past, I mean could you give us a ballpark idea how much of the current fair value, that 240 number is from book value premium on a mark to market versus previously retained earnings, how much is left firstly, ballpark?

Yeah, I mean just so Rob, maybe on the same page on this, so when we take an extra dividend as we did in Q1, up of $10 million, that sort of provides an immediate unrealized loss obviously at Ivy Hill53, so 10 of the 20 is the 10 million of dividend that came up to ARCC. I think the incremental 10 of write-down was a balance of just taking a look at the manager which remains profitable and growing and the existing investments that are held inside Ivy Hill as a portfolio company. In terms of what's there again, the value is two-fold, the value is a multiple that we put on Ivy Hill’s operating profit as it's an asset manager. And on top of that, it's got an investment portfolio that they obviously fair value each quarter. And that tends to move around a little bit. So 10 million on 240 of unrealized NAV, excluding the dividend to us, didn't feel particularly material to a couple of percentage points.

Got it. And then just one more on the SSLP if I can, as you said earlier, roughly 50-50 fees from GE and you guys, the original concept with that would be the flow of kind of origination ideas at least maybe not closings per se [indiscernible] -- and I realize it’s very, very early days, but are any of the partners you are talking to when you mentioned here, non-US banks or insurance companies, et cetera, which aren’t necessarily known for their origination capacity in the US sponsor finance market, in the same way that GE is, what’s the risk of not being able to replace the origination capability of the whole platform, given that was one of the obviously primarily ideas of building the relationship with GE in the first place?

We -- I’m glad that you asked that question directly because we meant to answer it directly in our prepared remarks but maybe we didn’t. So, I’ll answer you directly. Look, we’ve got 85 people here originating every day. We’ve been doing volumes at the Company north of $4 billion a year on a gross basis and that includes the fact that we’re not obviously investing all of the capital in SSLP, i.e., GE is bringing some of the capital to bear. We have literally zero concern if our new partner in SSLP or in a different program going forward has no origination in the business. We have a lot of confidence in continuing just invest the program with our own team. So, I would like somebody, frankly, who understands the business, right, and that the ability to do new deals as contingent on both counterparties working well together and obviously improving new credits as you all know. So, familiarity and understanding of the credits and the market and the risk coming into the program so to speak to me is much, much more important than the origination that a potential partner has.

Got it, thank you.

Sure.

Next question comes from Hugh Miller of Macquarie.

Hi, good afternoon.

Hey, Hugh.

So, I guess wanted to shift a little bit and you guys obviously had made some investments in the energy space. Obviously, there has been a lot of turmoil over the past six months or so and was wondering how things are looking on that endeavor and I know you guys gaining more comfort in kind of originating credits and that’s based or is it still kind of early days?

I think it’s still early days. We’re at the time of year, where obviously I think most of the folks on the call know, we do have a dedicated team in that space just as a recap. Made two investments last year in the team’s kind of first year here at Ares and then slowed it down as obviously the commodity picture changed last fall. I’d say a lot of what’s been going on here over the course of the last two months in that sector in particular has been banks going in and revaluing obviously borrowing basis and understanding where companies fit from liquidity perspective and from a financial perspective. And I think management teams in the space have gone in and tried to be smart about reevaluating their asset bases, their CapEx and if you’re in E&P business, a drilling plan with a lower commodity price, right. So, that’s all been going on. There have been lots of discussions, you’ve seen a bunch of larger cap bankruptcies filings in the space in the first four months of the year, because a couple of companies just don’t have the combinations of assets, i.e., these assets are expensive in terms of where they sit on the cost curve and if you couple that with some tough balance sheets, they hit the screen pre-equipped but most of what we’ve seen, we have one name on the E&P side to work with and some of the other new deals that we’ve looked with are just a slow recalibrating of what companies and management teams and their investors whether it’s lenders or equity investors should expect and want to do together in kind of 2015/2016. So, I can’t say that we’re not looking at a bunch of new stuff; we are. Do we have more confidence today than we did four months ago? Not really, we feel about the same. We want to do anything in the space with a tremendous amount of downside protection where our capital really gets valued, i.e., generates a high return for the risk that we’re taking, which we feel in a space that can be quite cyclical and commodity oriented its early days. So, happy to follow-up some more.

No, no, that’s very helpful. Great color there. And you talked – obviously, you’ve had some questions about the impact from GE’s announcement on the SSLP, where you did talk about kind of the seismic shift in the middle-market space that’s going to occur. As you look at things both within the current verticals and then the potential to make some investments maybe to expand beyond your current verticals, where do you guys see opportunities on the horizon as a result of the shift?

I think we are built in every asset class generally that we want to be in today with a possible exception as we've mentioned of being in kind of the life sciences and healthcare space whether it's royalties or some of the credit products that are happening there. That’s not a place where GE is particularly attractive, or active rather, other than they've got a big healthcare finance group, which I think will be part of this divestiture as well. So I feel comfortable, I think we all feel comfortable here, I should say, with our positioning in terms of industry and coverage. I think elephant in the room is the fact that GE last year was a significant market share leader originating and syndicating senior debt to the tune of $15 billion, $16 billion of originations last year. And that's going to be a big -- that's going to be pretty significant in terms of capital to replace and one that's had an exceedingly low cost of capital relative to its competition, which has obviously led them to have such a high market share. So, my expectation is, when you take that amount of capital out, even if there is assets traded to somebody that want to remain in the business that they are unlikely to remain that active, and with such low cost and that should help all of our businesses as we think spreads widen. And we each have a better shot at that business which has been difficult to compete with in the past. In particular, for us, with GE in our partnership, there were certain things that we stayed away from to appeal to that partnership.

Yeah, that's helpful. That actually lead into the other question I had. You mentioned about spreads widening and do you anticipate that there is likely to be kind of a meaningful impact there on where spreads will be caught over the next 6 to 12 months? And then just with regard to the finding a replacement on the SSLP, do you have any sense as to what we should be thinking about? Is there a reasonable time period in which you could potentially find a new partner?

I am not making predictions, because I usually get proven wrong, but I don't know how you can take that much capital out of the market and not expected to have an impact. And obviously I know enough about capital fleeing certain assets that when they do the risk returns that folks required to be in those assets tend to go out. So I can't imagine that it doesn't happen, but I think there is a lot going on today vis-a-vis a lot of assets exiting GE and I think we will all just have to wait and see, but we intend to be pretty patient and kind of hope for that. Expected is the right word, but I think I expect. In terms of how long it will take us to find a partner, probably too early to give you any guidance on that. I think it's highly dependent on what GE is doing with its business and its own right. And we are going to continue to watch that and then also work independently if that's -- I don't think I have a timeline that I would be comfortable making a prediction on at this point yet.

It's understandable. No, I appreciate the insight, though. Thank you very much.

Sure, welcome.

Your next question comes from Rick Shane of JPMorgan.

Hey, guys, thanks for taking my questions this morning. I would hypothesize that after 11 years you are no longer really a growth company, but really increasingly a cyclical. I'd be curious to think about or hear your thoughts on how to manage capital when your growth opportunities going forward will probably have to be more opportunistic. And one of the challenges I would anticipate is and we've seen this with the BDCs in the past and Ares has done a good job of managing this, but the times where the best opportunities exist, it's most difficult for you to get capital. So how do you think not only about raising equity, but also managing leverage knowing that your opportunities going forward may be more cyclical?

Yeah. On your first point, Rick, and thanks for the question, but I will thank you before I respectfully disagree with you. The reality is, we operate in a market that’s probably between us and many others does somewhere between 120 billion and 170 billion of kind of new volume per year on new deals and on refinancings. To your second point on capital and how we access it, I think it's a great question and one that we spend a lot of time thinking on, but in terms of our opportunity to grow, I mean, this Company has grown every year for 11 years and I tell you that we still don't feel that we're at scale. Our non-sponsored business can grow, our oil and gas business can grow, our project finance business can grow, our venture business can grow and as I mentioned, there are a couple of other niches that we haven't even entered that we are looking to tap. Somewhere along the way, you're probably right that your Sponsor Finance business can only be so big but I don't think that we're there in that business either. And again, the GE news makes us feel even more confident that there is growth in kind of that core piece of the franchise. Accessing capital, with our stock trading at or around book for an extended period of time, we've done the best that we can here over the course of the last three quarters to reposition and to create capital and I think as I mentioned, we have $2.3 billion of capital available to the Company for new investments today, I think that should hold us over for a little while. On the equity side, we want to do it in a way, if and when we do it for growth, but it's obviously good for the Company and good for our shareholders in generating strong returns and I think we are not in a position where we have to think particularly hard about issuing equity capital today based on our low leverage ratio and the fact that we've got lot of excess capital to invest. But those are things that we talk about all the time and I think we've been successful evaluating and getting to the right answer on now for 11 years.

Got it, and to your first point, I'm disagreeing, remember I'm a sell-side analyst; my job is eventually be right.

I make predications too, and I'll be right one day too.

Fair enough, thanks guys.

Thanks Rick.

Your next question is from Chris York at JMP Securities.

Good morning guys, and thanks for taking my questions. So most of them on the SSLP have been asked but I'd be curious to know what the split maybe on originations, GE versus Ares in the portfolio because we do agree that there is franchise value in originations?

I'm sorry, I missed the question and I thought -- can you just repeat that?

Yeah, I'm trying to get a sense on the split of whose leading deals in the SSLP, GE versus Ares, just trying to know or maybe if you could quantify as a percentage of deals led?

Sure. We kind of don't really keep score to be honest; I tell you the balance is about 50-50. For most of the time, when we're convincing one of our clients to come into SSLP, it's where we and GE each have a particularly good relationship with the clients because one of the nuisance of SSLP is that unlike a broadly syndicated deal, where you can end up with call it 30 investors, we're in a mid-market deal or even at 5 or 6, and you kind of spread it around in SSLP, you really were doing business and had that confidence that you're doing business with two counterparties. So in a lot of those circumstances I'd say that we were each finding a customer who had interest in the program on the same name and we really never to be honest kept score on that front, but I'd tell you its pretty balanced.

Okay and then switching gears a little bit. So we notice that Ares Management recently acquired a portfolio of asset based loans through the acquisition of I believe, it was First Capital Holdings. So is there a willingness to add some ABL to Ares Capital's balance sheet?

I don't think so, I mean, we really view this business as our cash flow business and we can talk another time about what some of the initiatives we have is in commercial finance which was the entity that acquired First, but I don't think really has any consequence to the BDC today.

Got it, that's it from me, thanks.

Okay, thanks.

The next question comes from Andrew Kerai at BDC Income Fund.

Yes, fine and thank you for taking my questions. Most on the GE SSLP and Ivy Hill has been answered but I just wanted to follow-up on the SBIC license. Just your sense based on the origination outlook for venture lending platform. How long do you expect to be able draw on the $150 million of SBA debentures?

I mean, I think we've sized it to deal with obviously the size of the existing portfolio, which Penni today is?

It’s about a $180 million.

Yeah, it’s about a $180 million funded, so $150 million program seem to work for that. I think as you know, those loans tend to have shorter average lives, i.e. they are typically outstanding, call it 12 to 18 months. So we are going to start using that as soon as we can and I think we will draw some, but we will see how it goes.

Yeah, we have said that, in the SBIC program, you have to fund new deals, so we can’t go back and fund the deals we have on the books, and but in terms of size today relative to the program, I mean, we have to invest a little bit of the equity capital that we have to put in alongside it. So my guess is we will start drawing into the facilities toward the back half of this year.

Sure. And do you guys have the full $75 million of equity and that’s up here or no?

Well, I mean, we obviously have the capital to fund it, because it’s a wholly-owned subsidiary so that’s what we are concerned [ph], but it would still have to be invested even if the money is there, you still have to invest it in deals alongside the SBA, so there is a little bit of a ramp up period, but given the size our deals and the volume of activity, we think can ramp up through that to where we get to the leverage like I said, toward back half of this year.

Great. Thank you.

Your next question is from Jonathan Bock at Wells Fargo.

Yeah, so two small follow-ups. One pretty easy question, apologize if I have missed it. But Kipp of the 9 or so billion dollars in AUM, what percentage of that is – or should I say, of the GE portfolio, what is the percentage of sponsor SSLP assets in the their Sponsor Finance business. So $9.3 billion, what’s the denominator for GE as a whole in Sponsor Finance?

You know, we don’t actually know Jonathan. They don’t disclose that number for us, but I think SSLP is a big piece of what they have been doing obviously through over the last couple of years in terms of number of portfolio companies. I don’t know, I think they have got a couple of hundred portfolio companies in that business, but in terms of size I just can’t tell you.

Would 50% of assets or $16 billion maybe be close to the mark or not?

Don’t know.

Okay. Next question. If we were looking at growth, and I know you mentioned this on the – talking about the opportunities to grow and I wanted to highlight Shane’s question, which was a good one. Talking about the benefits of growth I guess, if we look back I think since 2011, the share count at ARCC has gone from 204 million to 314 million in total, but earnings have still been largely flat throughout that time period. So the question is, walk us through the benefits, I guess that we know there is more diversification et cetera, but really the incremental earnings benefit that come as you grow because as we look at the market I know, institutional investors hold us accountable to talk to folks that are able to grow earnings albeit prudently, yet if shares increase and earnings growth doesn’t materialize, it again raises questions. So could you walk us through some of the benefits of growth when in the last several years, the share counts increased, but earnings -- dividends have only increased marginally.

Yeah, sure. Look from an ROE perspective we are happy in terms of the company’s track record, but the last couple of years, I think as everybody knows, there has been one where, both rates and credit spreads have kind of come in in an accelerating fashion quarter-after-quarter. And in this low rate environment, that makes things difficult. So the growth has obviously allowed us to do a couple of things. We have been generating as we mentioned in terms of total return, meaningful return to our shareholders through things like these and equity gains and other sources obviously of earnings that have allowed us for instance to build up that spillover income today that we didn’t have three or four years ago. I would tell you that portfolio is to your point more diversified, the business that we are running today is a much more competitively positioned business in terms of the scale of capital that we have to offer our clients and really drive returns going forward. A number of people that we have been able to support in the larger organization will benefit the company going forward. The fact that we are larger has allowed us to bring in a whole bunch of new verticals as we have talked about over the last couple of years, whether it’s power, oil and gas, venture lending. I think in a company of smaller size, we just wouldn’t have been able to do a lot of those things. So, we’re thrilled about how we’re positioned going forward, but we do, I think as we consider growth going forward, recognize the point that you made about the fact that the Company is double the size in assets and its earnings are, generally speaking, in the same place. So, as we think about growth going forward, we’re trying to figure out ways that we can control earnings growth without capital raises, obviously, which is what you’ve seen so much over the course of generally speaking the last year and that remains the focus going forward. I’m hopeful that we’ll start to see some yields widening and again, we’ve got a balance sheet that’s very asset-sensitive for rising rates, I can’t say that. I think rates are going to jump through the range where we’d see real accretion, but we talk your point and we think we’ve delivered for shareholders over the last ten or 11 years and as we look forward and think about capital planning and investing and all of that on a go-forward basis, we take that point away very seriously about wanting to make sure that we generate growth only if it’s accretive for shareholders.

Very appreciative, Kipp. Thank you.

Sure, thanks Jonathan.

This concludes the question-and-answer session. I’d like to turn the conference back to management for closing comments.

I don’t think we have anything else to talk about. Appreciate the active Q&A and hope everyone has a great afternoon.