Ares Capital Corporation (ARCC) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon. Welcome to Ares Capital Corporation's First Quarter March 31, 2020, 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, May 5, 2020. [Operator Instructions]. I will now turn the call over to Mr. John Stilmar, Managing Director of Investor Relations.

Thank you. Let me start with some important reminders. 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 including the impact of COVID-19 relative changes in base rates and significant market volatility on our business and our portfolio companies. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar such 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 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 certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides a useful information to investors regarding the financial performance because it is one method the company uses to measure its financial condition and results of operations. A reconciliation of core EPS to 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. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information discussed in this presentation, including information relating to portfolio 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. The company's first quarter ended March 31, 2020, earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Q1 2020 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 would now like to turn the call over to Mr. Kipp deVeer, Ares Capital Corporation's Chief Executive Officer.

Thanks, John. Hello to everyone, and thank you for joining us. I'm joined on the line by our Co-President, Mitch Goldstein and Michael Smith; our Chief Financial Officer, Penni Roll; and several other members of the management team. We want to start by recognizing this very challenging time for our country and we send our thoughts and best wishes to those most affected by the COVID-19 pandemic, particularly those who have suffered from the virus and the extraordinary folks on the frontlines, who are allowing us to get by in these trying times. We're fortunate that our employees are safe and healthy. And we've successfully navigated the transition to a remote working environment without experiencing significant disruption in our day-to-day operations. We will now dig in to provide highlights on the first quarter results for Ares Capital Corporation and then provide some thoughts on the company's position in light of the current market conditions. This morning, we reported first quarter core earnings of $0.41 per share, which is a strong result given the current economic and market disruptions. As we will discuss in more detail later, most businesses across the U.S. have been impacted by the economic consequences of COVID-19 to varying degrees and our portfolio companies are not immune to the consequences of this pandemic. However, we do believe that we're operating from a position of relative strength as our portfolio is highly diversified and well-positioned in larger upper middle market franchise businesses in defensive industries like healthcare services, software, and business services. Furthermore, we remain underweight to the most impacted sectors such as energy, travel, restaurants, hospitality, and retail. Our recent focus has been on working with our portfolio companies, our management teams, and private equity sponsors to determine each company's liquidity needs, and operating plans to manage through to the recovery as we bridge to a time when the economy can restart. We're finding that each company has a different set of circumstances and our close working relationship with each company and often their private equity sponsor does have significant benefits. One key benefit in managing our portfolio in these difficult times is that we have one of the deepest and most experienced investment teams in the business. We have more than 130 investment professionals, including 25 dedicated portfolio management professionals. Keep in mind that Ares Capital does not have investment professionals solely focused on originations. All of our investment professionals are involved in the underwriting and risk management aspects of our investing activities. During periods like this, this allows us to put all of our investment professionals into risk management roles and bring very significant resources to bear on the portfolio. The size and breadth of our team's capabilities and experience allow us to be early, active and thorough in these volatile markets. As many of you know, we have a long track record of significant success managing through difficult economic environments, including selected workout situations with borrowers. In addition to working with portfolio companies, we believe we are operating with relative strength due to the way that we have constructed our funding and liabilities. We believe that our philosophy of fortifying the balance sheet with significant unsecured, long-dated financing has us very well-positioned to navigate volatile markets. Our debt maturities are well laddered, no maturities in 2022. And in this case, total 2022 maturities are less than 12% of our current total debt outstanding. With regard to our secured credit facilities, we're significantly over collateralized due to the predominantly unsecured nature of our capital structure, which gives us full access to these facilities. Today we have approximately $2.6 billion of available liquidity, which is more than two times our aggregate unfunded revolver and delay draw term loan commitments of $1.2 billion. We believe this deep liquidity position will be important enabling us to support our portfolio companies and to invest in the recovery. Given the strong position, we declared a $0.40 per share quarterly cash dividend for the second quarter of 2020. Even as we factor in a cautious outlook for a possible slow and uneven recovery, we're confident that we can continue to support a steady dividend level for the foreseeable future. As we look ahead, while there is a high bar for investing new capital during these uncertain times, we're seeing increasingly attractive opportunities to invest. Our focus will be on making new investments in existing portfolio companies and select investment in [indiscernible] companies. Investment spreads have widened, and documentation terms and leverage have improved materially. Our view of attractive investment opportunities includes investing in our own stock, which is trading well below net asset value. During the first quarter, we repurchased $100 million of our stock at an average price per share of $11.83 implying a 13% annualized return using the most recently declared dividend. Given the strength of our liquidity and balance sheet, we'll continue to consider acquiring our stock at attractive levels. Before I turn it over to Penni, let me reassure you with one additional thought. We do not foresee the need to issue any dilutive equity capital due to the current situation. I'll now turn it over to Penni to provide more details on our first quarter results.

Thank you, Kipp, and good afternoon. Our core earnings per share were $0.41 for the first quarter of 2020 compared to $0.45 for the fourth quarter of 2019 and $0.48 for the first quarter of 2019. We had a GAAP net loss per share for the first quarter of 2020 of $1.42 which compares to GAAP net income per share of $0.48 for the fourth quarter of 2019 and $0.50 for the first quarter of 2019. Our GAAP net loss per share for the first quarter of 2020 of $1.42 includes net realized gains of $0.08 per share and net unrealized losses of $2.04 per share. These net unrealized losses reflect the macro economic impact of COVID-19 on the fair value of our portfolio, largely driven by the widening of credit spreads and represented approximately 5% of total assets at fair value and 12% of net asset value. Our total portfolio at fair value at the end of the quarter was $14.4 billion. As of March 31, 2020, the weighted average yield on our debt and other income producing securities at amortized cost was 8.9% and the weighted average yield on total investments at amortized cost was 7.9% as compared to 9.6% and 8.6% respectively at December 31, 2019. The first quarter yield on total investments at amortized cost was down from the fourth quarter largely due to further declines in LIBOR. At March 31, 2020, 85% of our total portfolio was in floating rate investments. Additionally, excluding our investment in the SDLP certificates, 79% of the remaining floating rate investments had an average LIBOR floor of approximately 1.1%, which is above today's current three months LIBOR rate. Moving to the right hand side of the balance sheet, we've continued to be active extending our liabilities and building our liquidity position. During the first quarter, we expanded ARCC's borrowing capacity by more than $1.3 billion led by a five-year $750 million unsecured note issuance, with a 3.25% coupon. This issuance was the lowest cost unsecured note execution in BDC history and the timing of the raise demonstrates our ability to execute when markets are favorable. In addition to this successful transaction, we added a total of $565 million of incremental committed bank borrowing capacity and extended the final maturity to 2025 on $5 billion of our secured credit facilities. As a result, we ended the quarter with approximately $2.6 billion of available cash and borrowing capacity, which we believe positions us to have more than sufficient available liquidity for these existing unfunded loan commitments and to capitalize on the improving investing environment. In addition, we have embedded liquidity from our existing portfolio through investment repayments and sales, including through sales of loans to Ivy Hill Asset Management. With meaningful available liquidity in place, no term debt maturing until January 2022, and the earliest maturity of our bank credit facilities in 2024, we believe the strength of our capital structure represents a distinct competitive advantage for us in today's environment. An important component in the strength of our capitalization is having a balanced mix of secured and unsecured funding sources. At quarter end, 56% of our borrowings are from unsecured notes which resulted in over three quarters of our assets being supported by unsecured debt and equity. This approach to maintaining a largely unsecured capital structure provides for significant overcollateralization of our secured credit facilities. To demonstrate this at quarter-end, our credit lines had more than doubled the required assets to support the commitments under these facilities, which positions us well to fully access the total borrowing capacity available, if we choose, even if there were to be further depreciation in the portfolio. Now let's shift to discussing our shareholders equity. At March 31, 2020, our stockholders equity was $6.6 billion resulting in a net asset value of $15.58 per share, versus $7.5 billion or $17.32 per share at year-end 2019. The decline in our net asset value was primarily driven by the net unrealized losses that we recognized in the first quarter of 2020 that I mentioned earlier. However, our NAV benefited by $0.08 per share from our accretive stock repurchase activity during the quarter. As of today, we have $393 million remaining of our $500 million stock repurchase authorization. As of March 31, our debt-to-equity ratio was 1.26 times and our debt-to-equity ratio net of available cash of $430 million was 1.19 times compared to 0.95 times and 0.93 times respectively at December 31, 2019. We ended the first quarter of 2020 towards the higher end of our previously stated debt-to-equity target range of 0.9 to 1.25 times due to increased net investment growth and the net unrealized losses to shareholders equity at quarter-end. Depending on the level of net investment growth and any further impacts to shareholders equity from fair value changes in upcoming quarters, did see our GAAP net debt-to-equity ratio temporarily increase above the high-end of our target leverage range. Given our strong liquidity position, we feel comfortable temporarily operating above the high-end of the range, which would still provide a significant cushion to our regulatory and bank leverage covenants. Before I conclude, I want to discuss our undistributed taxable income and our dividends. We currently estimate that our spillover income was $408 million or $0.96 per share at the end of 2019. As we've said many times in the past, we believe having a strong and meaningful undistributed spillover supports our goal of maintaining a steady dividend through varying market conditions. As Kipp mentioned, this morning we declared a regular second quarter cash dividend of $0.40 per share, which is consistent with the regular quarterly dividend paid in the first quarter. This second quarter dividend is payable on June 30, 2020, stockholders of record on June 15, 2020. Now I will turn the call over to Mitch to discuss our investment activities and our portfolio in more detail.

Thanks, Penni. As Mike Smith and I tend to do at this point, I would like to spend a few minutes providing more detail on our first quarter investment activity and portfolio performance and then hit upon some post quarter-end activity. During the first quarter, our team originated $1.3 billion of new investment commitments across 37 transactions, 85% of these commitments were senior secured, and 54% of these transactions were to incumbent borrowers. Most of these new transactions closed prior to March 1. We also funded existing commitments during the quarter in support of the liquidity needs of our portfolio companies through the funding of $650 million of net revolver borrowings and delayed draw term loans. It is important to point out with minimal market M&A activity, we expect continued modest delay to our fundings as these commitments were generally put in place to support borrower acquisition. As of March 31, 68% of our revolver commitments were drawn and 25% of our DDTL commitments were drawn. Since quarter-end, we have not seen any material changes to those levels. Prior to the impact of C-19, our portfolio companies demonstrated accelerated EBITDA growth of approximately 5% over the prior 12 months as compared to 3% reported last quarter, which brought them into this environment in a strong position. However, since the outbreak of C-19, we have had to be in the frequent dialogue with our portfolio companies to evaluate their earnings power and determine their liquidity needs. As expected certain companies in our portfolio are experiencing challenges associated with the shutdown. Our approach to downside protection begins with the fact that we always seek to be the agent on our deals and the largest lender. This allows us to drive the discussions and better control our outcomes. Our portfolio of 76% senior secured and 83% of our portfolio companies are controlled by private equity firms that we believe have the resources to support these businesses. Where additional support is required from us, we've been using any required amendments as an opportunity to tighten loan documentation, secure additional equity, and re-price our risk. Given our view of the long-term value of our portfolio, we believe that liquidity is paramount for our companies. As Kipp and Penni described, we are in the enviable position of having significant liquidity at ARCC to support our borrowers. Additionally, the SEC's recent co-investment relief will enable other Ares managed funds to provide capital to our borrowers along with ARCC. We view this additional potential support for the portfolio as a positive sign as it provides even greater access to our capital. While the impact of C-19 has taken a toll on some of our portfolio companies, we believe our portfolio is well-positioned for these turbulent times. During the first quarter 99% of contractual interest payments for the quarter were collected. Three new companies were added to the non-accrual status in the first quarter, bringing the non-accrual rate to 3.1% and 1.7% on a cost and fair value basis respectively as of March 31, 2020, and increased from 1.9% and 0.9% respectively at year-end 2019. Before I turn the call back over to Kipp, let me provide a brief update on our post quarter-end investment activity. From April 1 through April 29, 2020, we made new investment commitments totaling $159 million of which $130 million were funded and we exited or were repaid on $137 million of investment commitments, resulting in a net realized loss of $1 million. The weighted average yield of debt and income producing securities funded during the period was 14.7% at amortized cost. And the weighted average yield of debt and income producing securities exited or repaid during this period was 8% at amortized cost. As of April 29, our backlog and pipelines stood at roughly $210 million and $140 million respectively with more than 90% focused on senior loans and a heavy bent towards existing portfolio of companies. Note that our backlog contains investments that are subject to approvals and documentation and may not close or we may sell a portion of these investments post-closing. I want to note that the investments exited or repaid since quarter-end included $61 million of loans sold to funds managed by Ivy Hill Asset Management. IHAM sources middle market loans from Ares Capital and other leading middle market credit managers to build new or maintain existing CLOs for its investors, and throughout our history, we have sold personal senior loans in the ordinary course to IHAM at fair value on an arm's linked basis. In addition to the loans sold to IHAM in April, we have an additional $395 million of loan sales in process and we currently anticipate that IHAM managed funds will have additional capacity to acquire more loans from us throughout the rest of the year. I will now turn the call back over to Kipp for some closing remarks.

Thanks, Mitch. In closing, we recognized that we're in unprecedented economic times and face the prospects of a lasting economic recession and rising default rates. However, we remain optimistic with regards to Ares Capital Corporation today. As discussed, we have a defensively positioned portfolio with a lot of control over our own destiny in terms of risk management. We benefit from the highly seasoned and cohesive team, which has significant experience managing through challenging times, and our robust portfolio management and restructuring infrastructure supports these efforts. Additionally, we believe we have a strong balance sheet that provides a unique advantage in today's market. We have access to all of our undrawn liabilities and this provides robust solutions to support portfolio companies. We view liquidity in this market as a strategic asset that allows us to remain supportive of our existing sponsor relationships and portfolio companies, while many others are retrenching. We also have no near-term debt maturities to satisfy, so we can focus our capital investing to support portfolio companies. So in closing, although the current market environment is extremely challenging for some, we're encouraged by the opportunities we see in this market for ARCC. We'd like to thank all of our shareholders for their loyalty and confidence in us through these very difficult times. I'd also like to thank the entire team for all of their hard work and dedication through this difficult period. That concludes our prepared remarks. We're happy to open the line for questions.

[Operator Instructions]. The Investor Relations team will be available to address any further questions at the conclusion of today's call. The first question comes from Arren Cyganovich of Citi. Please go ahead.

Thanks. You've been through this type of scenario in the past and have worked through The Great Recession coming out stronger. Maybe could you talk a little bit about how this differs compared to what you've dealt with in the past, given that it's kind of just so broadly impacting across the entire country, and what things you're doing to help support some of the portfolio company in what levels of support you're willing to give in terms of payment relief on some of your borrowings?

Sure, Arren, this is Kipp. I'm just checking to make sure you can hear me.

Yes, I can hear you.

Super. Thanks for the question. I won't go too much into comparing and contrasting the last go-around to this go-around but it's very different. The last go-around I viewed as I think we all viewed as a liability driven issue. There is concern that the company didn't have liquidity or couldn't finance itself, had a mismatch of assets and liabilities, et cetera. And maybe our collateral would get taken away. This one's very different, right? And we've tried to emphasize in the prepared remarks that we feel great about having long-term financing, having access to all of our borrowings, and having lots of liquidity, which is what we've been emphasizing because I think it's always been our view that the next credit downturn would be a liquidity-driven downturn where having excess capital and having dry powder around would be very important. Yes, this one is very different. We obviously have certain companies that are not operating right or have no attendance or revenue. If your restaurant that's closed, not doing takeout for instance. Yes, that's a whole new reality. So I think the way we're looking at it is, we've got a tremendous amount of liquidity to support portfolio companies. Mitch made the remark in the prepared comments that we did collect 99% of contractual interest payments in March, which was a very good outcome from our perspective. We did make some modifications to a few portfolio companies, payments, but it was really a small number, less than 10. So what we're doing right now is just digging in on the asset side with each company. And if they're private equity owned with each private equity sponsor to figure out how to create enough liquidity for the company so that they can get to the other side and reemerge.

I guess on that last point, how has the private equity sponsors that you're working with, I would imagine this is a very kind of joint effort to provide support, are they also willing to provide additional support along with you guys?

Yes, for sure. I mean, a lot of it's in process, right. And it was triage to figure out how to get through quarter-end in a few circumstances. And in some of those circumstances equity some private equity firms did come into the companies, know it's obviously hugely helpful. But yes, it's a joint approach. And the discussions that we're having around the most highly impacted names is exactly that. And it's kind of ongoing right now, i.e. how much liquidity headroom does the company have? Where can we create some additional liquidity if it's needed? But it's just so uncertain, it's difficult to forecast because we don't have a very good sense and the private equity firms that we deal with in those circumstances don't have great sense of when we reopen and -- and how we reopen and what the ramp looks like. So we're all trying to work through the same issues together, but I'd say generally, the private equity clients that we work with have been very supportive.

The next question comes from Rick Shane of JPMorgan. Please go ahead.

Hey, guys, can you hear me?

Yes, I can hear you, Rick.

Excellent, hi, Kipp. So look, this is a very unusual quarter in terms of the fair value process, given the degree of uncertainty, I'm just curious as you went through the process, did you find that your approach was any different in terms of either mark-to-market or mark-to-model or some sort of qualitative overlay in terms of your valuations?

Sure, no, exact same process Rick. Typically, there's a little bit of a lag, right. So when you're doing a March valuation, you'll have January financials for the most part, you're not going to see the full impacts. We had to take some qualitative view as to COVID impacts specifically in those companies that are most impacted. So what we did do was companies that were closer to the epicenter of the pandemic, I'd say, we were of course having very real time conversations with all the way up to the end of the quarter. And we incorporated those both quantitatively and qualitatively. An example of that would be a convention that we took upon ourselves that if we thought a company would have a liquidity need of say 10% of the outstanding debt, we actually factored that into the valuation where there were liquidity needs, but from a process perspective, nothing changed at all.

The next question comes from John Hecht of Jefferies. Please go ahead.

Good morning. Good to hear everybody's voice. You guys give us a pretty good picture of what was going on through March. I'm wondering, can you give us an update on April, just because that was the full month of activity where there was the shutdown largely in place. And are you seeing in certain categories of your portfolio where maybe things are bottoming and you can kind of see where those thresholds are. I'm just wondering if you can give us, what you've seen through the course of April, I guess.

Yes, I mean, hey John how are you? By the way, I think that -- I hope you guys are doing well. The month of March, I think was better, right, than the month of April. And that obviously, people were still sort of doing things through maybe the first week or two of March and the places that require attendance, whether it's restaurant or retail or whatever probably had tougher April's than they had March's. But again not materially different and no change in our approach. We're literally talking to private equity firms and our borrowers, on a weekly basis, if not a daily basis. But yes, the biggest issue now is just the duration of how long this goes on. And obviously, the longer it goes on for certain of these companies, the more support they're going to require and that's just where we have our hands today.

Okay. And then you guys did mention, spreads are up and obviously you guys are in a good position to take advantage of that at the right time and place. How much do we -- I guess maybe can you give us a sense of how wide spreads have got since the end of the curve? How much they've widened since the end of the quarter?

Yes, I mean, it's so hard to tell. And there's really not, not any new deal flow. I would say, on a regular way deal, which we've quoted on a couple, there are few things happening, we actually had a redo of an existing portfolio company that sold sponsor to sponsor right around quarter end. I would say it was -- it's at least 200 basis points for companies that are probably not COVID impacted. And we don't think this one was it was one of our software businesses. But things that are COVID related seem to have double-digit type deals on them now, even in large cap land, and we're looking at a lot of new capital in that range for existing companies, we're looking at secondary opportunities where we can buy first lien positions where we have investments at a discount. So it's 200 basis points at least in a kind of regular way unit tranche much better documentation, no response from sponsors on term sheets. They're just happy to get them. I think for the most part and see that they're folks willing to finance the transaction if they find something exciting. Yes, we did lay out one number, obviously, that Mitch referred to in April, where we invested some capital and the average rate of return on that capital was almost 15%. I think Mitch said it was 14.7%. So there's some things to do here if you have capital and you have liquidity that are pretty, pretty interesting.

Yes, I imagine. Excuse me; I imagine I appreciate the update and good luck with everything.

Thanks John. You're welcome.

The next question comes from Kenneth Lee of RBC Capital Markets. Please go ahead.

Hi, thanks for taking my question. Just wondering broadly, if you could just comment on whether you can see any kind of potential benefit within your portfolio company from the -- any of the Federal Reserve loan programs?

Yes, remember, that's not usually our decision to make, right. We're a lender to these companies. We've seen that some of the companies where we are a lender have actually taken advantage of the PPP program for the most part. It's a small number today. And I think as most people know, it tends to be in the non-private equity owned portfolio companies. So there have been some management teams there. And those businesses are typically either family-owned or owned by entrepreneurs where those folks who own those companies have chosen to apply and some have had success actually getting capital under those programs. But we don't have a lot of influence as to whether they apply or how that all works for them.

Got you, very helpful. And just one follow-up if I may. I wonder if you could just provide any updated expectations on near-term loan originations just given all the current environment? Thanks.

Yes, it's really hard. We typically don't provide guidance in any fashion. I would say that we do expect -- we had maybe a busier originations quarter in Q1 having glanced at some of the research this morning, and maybe people thought. Mitch made this point too. We funded a fair amount of revolvers going into the end of the quarter. So that is a big portion of it. We also had the one deal that I mentioned, which is likely to syndicate that will make that that growth number lower on a net basis. But it's really difficult. I don't think that there's going to be the flurry of revolver drawings, and as Mitch mentioned unlikely delayed draws will get funded because they're typically for acquisitions which are difficult to do in this market. So look I wouldn't be surprised to do a couple of new deals. But it's really hard to pick a number. And certainly the focus remains existing portfolio companies and financing where that's most needed.

The next question comes from Finian O'Shea of Wells Fargo. Please go ahead.

Hi, good morning. Hope everyone's doing well. I want to ask a question on the exemptive order. I think Mitch mentioned where you can now take follow-ons with more funds unrelated pursuant to that relief. Can you give us context on the nature of planned investments under this strategy? Would you be engaging in new follow-ons or given the scale of some of these issuers, would you buy out investor positions in the club or syndicated markets?

Thanks Fin. I hope you're doing well. I think we can do both right. So follow-ons are fine, secondaries are permissible and all of that. I think the big picture takeaway for us has been, it gives us just more liquidity, right. So in the past, if the BDC was invested in a company, or exemptive relief allowed for co-investment at the same time and at the same -- in the same security right, this actually gives us additional capital to help kind of protect positions, support portfolio companies, et cetera, et cetera. So it just gives us a bigger war chest to the extent ARCC ever had any issues doing follow-ons, which again, to the point in the prepared remarks. I don't think we will. It just brings additional capital to bear.

Yes, completely agree. And a little follow-on for Ivy Hill. This came down a little bit. Can you give any breakdown or context on the balance sheet investments that Ivy Hill holds? Is it mostly CLO equity in those vehicles? Or is it a breakdown of CLO debt and CLO equity? And then if I can just do a two-part on that, when you generally sell down to Ivy Hill, are these -- are you selling down in new commitments you make or you sell down from the existing Ares balance sheets?

Yes, so Ivy Hill, we have investments in loads of funds that they've raised over the years. Those investments are typically in CLO equity. As a reminder, they're not the traditional large cap CLO that's levered, 10 or 12 to 1 they typically have much less leverage than a typical CLO. But the marks in the quarter obviously in anything CLO-related were down, so the marks in Ivy Hill were down a bit too. In terms of the assets that we're selling to them, we typically are selling them existing investments that we've made. So they will more often than not be happy buyers of first lien transactions that we've done. Most of the time we sell them it's part of a general syndication, so a sale come reasonably soon after the closing of a new transaction. Mitch referenced that in the prepared remarks. They'll buy paper from us, but look most of the papers that they buy is from others.

The next question comes from Ryan Lynch of KBW. Please go ahead.

Yes. I had a question on the -- and maybe you said and I missed it, but of the $1.8 billion that you guys funded in the first quarter. How much of that was from existing either revolving or delayed drawn unfunded commitments through existing portfolio companies?

Yes, give us a second and I may kind of wave at Penni here, I'm going to look through some of my notes. We're obviously trying to do this remotely not all in the same room. Let us look real quick. So you can come up with that number if we can, I'll follow up with you.

Sure. And then if I look at your guys fee income, over last several quarters, I mean it can fluctuate, anywhere as high as north of 40 to kind of in the 30s range. Obviously that fee income is highly dependent on the level of; I would think new originations that you all make in a quarter. And that seems like that's coming to a dramatic change in the second quarter, at least for the near-term. Can you just talk about, out of that fee income that you guys record on a quarterly basis, you have structure fee income, is any of that recurring that that just recurs every quarter? Or is that all based on structuring, structuring and origination fees that you guys take and also as part of that, when you guys fund either a revolving an undrawn revolving facility or a delayed draw term loan that you guys have to an existing borrower, what are the typical fees with those? Are those the same level of fees that you guys get on a new commitment? Or is that something substantially smaller or do they not exist at all?

Yes, I mean the fee line is really two things, right. It's kind of new deal fees which I think you're right. There'll be fewer of, for the remainder of this year. It's also amendment fees which I think there will be more of, there's been historically. Penni was just texting me here that the number we actually did say in Mitch has mentioned. So I guess I forgot it too, Ryan, so don't feel bad, we funded $650 million under revolver and delayed draw term loan fundings. The fees on those are typically paid at closing. So the fees in this quarter really don't reference those fundings. They're coming from other places.

Okay.

Delayed draws are little bit different, revolvers typically upfront. Delayed drops sometimes we'll have a partial fee at closing and some paid at funding, they can differ.

The next question comes from Chris York of JMP Securities. Please go ahead.

Kipp, can you hear me?

Now I can Chris, hi, how are you?

Hi, I'm well. Thank you. Ryan asked my structuring fee question, so I will move to a high-level question. In this environment, I think relationships are probably more important than ever to achieve good outcomes for partners, but they probably can be tested from competing interests during stress. So the question for you as you dig in here, how are you evaluating the need to protect shareholder capital by enforcing our rights as a lender, when portfolio company conditions deteriorate versus the risk of impairing a sponsor relationship for future business?

Yes, I mean look, we've been doing this for 20 something years and obviously, we've built our company and our reputation on being a responsible counterparty. So not everything for us is a simple one-time negotiation. And we obviously have sponsors where we finance five to 10 transactions in the portfolio today. I think our relationships are really strong. And I think we have shared incentives right now with our private equity partners just to define solutions for these companies, right. That being said, I'm a little bit -- a little bit concerned that the current situation for private equity is difficult because high prices have been paid for companies on highly adjusted EBITDA, I think less in our portfolio than in others. But that discussion can be more challenging and if need to we can come in and own a business. As we've said to all of our private equity clients, certainly not our preferred outcome but we know how to do it. And if that's where it gets, we'll obviously roll-up our sleeves again with 130 or so people and own companies and get them through and we think achieve good recovery. So certainly a balance, we're not in the business of making loans that we hope turn into equity stakes in companies, right, that's really not our business, but we have an ability to do that where it's needed.

Perfect, thanks for the color. Investors appreciate 20 years or two decades more of long-term relationships. The follow-up question is on OTG, which was the largest portfolio company write-down in the quarter. And then I think it was a top five investment. So its business model, I think faces a threat from COVID, airline travel may be severely altered. Obviously, there's tons of uncertainty here in the future operating environment, but how comfortable are you in the company's liquidity and then your marks in all your investments?

Yes, I don’t want to provide a lot of commentary on single names, but I'll provide a little bit on OTG. To answer the question, look, I mean they operate at a fraction of the workforce that they've operated on in the past with the amount of passenger traffic going through airports. We think we've got the situation under control for now. But trying to forecast air travel for the back half of the year and get to a reasonable forecast for 2020 is tough, right. I mean the good news is they're current on their interest payments. So they've done everything right and they have sufficient liquidity today to deal with the situation. We're obviously working with them, and some advisors as well to figure out the best way to get through.

[Operator Instructions]. The next question comes from Casey Alexander of Compass Point. Please go ahead.

Hi, good morning, and I hope everyone there is doing well. Normally, I wouldn't ask a question like this, but I think the answer can be really instructive for all of us as we look across events across the space over the next few months. So I'm going to ask if you can explain what made you reclassify those three loans into non-accrual and implicit for forbearance, or a past interest payment or PIK? And in conjunction with that kind of what was the response from the private equity sponsor? Was it in a fund that was out of capital? I mean, I think the answers to questions like that can be very helpful to us looking out over the rest of the cycle?

Yes, yes, thanks Casey. Look I mean our policy on non-accruals remains unchanged, which is if a company doesn't make an interest payment, it goes on non-accrual. In terms of PIK, if cash is converted to PIK income, that PIK income will not accrue, or we want to approve that PIK income if we deem it to be uncollectible, right. So the policy hasn't changed at all. Q1 was better than expected, as I mentioned. I think Q2 is going to be an ongoing challenge as we look forward. But as I mentioned, we made fewer than 10 modifications in Q1 and we're working on solutions. So I hope that answers the question if you want to follow-on please.

Yes. The only part that you didn't answer was on those that that were placed on non-accrual kind of what was the communication flow with the private equity sponsor?

I don't think they -- non-accrual for us is pretty black and white, right. So if we think it's not collectible, et cetera, even if it's not past due, we won't collect it. But I don't think private equity firms spend a lot of time thinking about whether we have a loan non- accrual or not.

Okay, I appreciate it. Thank you for that. Yes, thanks for taking my questions. I appreciate it.

Thank you. Sorry about that. Thanks.

Your next question comes from Robert Dodd of Raymond James. Please go ahead.

Hi, hopefully everybody can hear me and everybody glad to hear as everybody is doing okay. So a couple of quick questions one first, kind of a follow-up on John Hecht's. So April, I mean you told us, 90 in the first quarter 99% of the contracted interest payments were collected and that you only amended essentially 10 loan structures in the first quarter but obviously April is now behind us. So for those that are contractually monthly payers which I think is the bulk, what percentage of the portfolio paid to contracted interest payment in April?

Yes, I don't -- we don't have many monthlies. We do have companies that have multiple term loans that roll different LIBOR contracts, right. So we haven't I just say general, we haven't experienced any material changes and people making interest payments in April versus the end of March.

Got it, got it. And then on any change in the pace maybe of I mean 10, only 10 changes amendments, whatever you want to call them and Q1 is pretty good. Any change in the pace that you're seeing those come across the desk right now?

Well, I mean I think the longer this lasts, the more impacted companies become, right. So trying to stay optimistic that we can work through solutions with folks. But the longer this goes, the tougher it becomes. And we need money from private equity firms. And part of that will come, I think with concessions from us, which we're willing to make to be part of the solution. But, yes, I mean look, we're hopeful that we're moving towards some sort of limited reopening. And I think that a lot of these companies in early March didn't really have a plan because no one was expecting this. And the good news is everybody's hunkered down, whether it's private equity lenders, management teams, et cetera trying to figure out how to deal with this and most of the companies have dealt pretty effectively. I mean, it's unfortunately included things like furloughing workers and having to talk to the government about programs on capital, et cetera. But I think it's about the same and it's just so difficult to forecast where we go from here.

Okay, fair enough. On next question, I can sort of follow-up. I mean in the past, you can go back to 2008/2009 et cetera, we go all the way back there, you've been pretty opportunistic in fact, and buying portfolios at deep discounts. Obviously, that hasn't happened yet. But if I look at one asset that stands out to me, it's tiny like but Systematic Power bought it at pennies on the dollar towards the end of the quarter. With the liquidity that you have available, what's your appetite to be really opportunistic in terms of maybe not even large portfolios, but this one was $1.7 million at cost of 4.5 at par of being opportunistic and picking up not necessarily liquid loans, but opportunistic portfolio pieces for maybe some of the other distressed or stressed credit funds or potentially even BDCs out there. Looks like you've already started that process a little bit.

Yes, I mean we think we know how to do that. We've obviously got to reasonably large, I'd argue underperforming BDCs in the past, we bought portfolios, we're absolutely open to it. And I think we have enough capital to really be serious in doing that. But it's early, I know that there is series of BDC earnings calls this week, but I think people will probably pay a fair amount of attention to. And I'm not sure we know exactly how everyone is truly positioned today. But for sure, we love buying things at what we think is a discount to fair value. And we'll absolutely look at that. There have been a few single name trades that we've done in the secondary markets and a few direct trades that we've done with some counterparties that you guys might be familiar with. But it's been small. It's been pretty limited so far.

The next question comes from Derek Hewett of Bank of America. Please go ahead.

Good afternoon, everyone. Hey, just could you provide a little bit more color on some of the credit statistics other than non-accruals, it looks like the net leverage went -- actually went down and interest coverage improves. So could you talk about that dynamic?

Yes, I mean I think the numbers -- the numbers speak for themselves. There's nothing, nothing there Derek other than just the mix and running those calcs. I mean if anybody from the portfolio management team has any great thoughts, feel free to -- feel free to jump on. But if I remember correctly, it was generally in the same neighborhood as it's been in the past.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Kipp deVeer for any closing remarks.

Well, say thanks to everyone after our first remote earnings call. I think the company's pretty well-positioned, and we've just got to get back to work dealing with all these portfolio companies, but certainly wish everybody on the line, well. I appreciate you for taking the time today to listen to what's going on at the company and we'll keep working hard for the shareholders through to the end of Q2 and we'll be back and talk to you in August. Thanks.

Ladies and gentlemen, this concludes our conference call for today. If you miss any part of today's call, an archived replay of the call will be available approximately one hour after the end of the call through May 19, 2020, at 5 P.M. Eastern Time to domestic callers by dialing (877) 344-7529 and to international callers by dialing 1 (412) 317-0088. For all replays please reference conference number 10140269, again 10140269. An archived replay will also be available on webcast link located on the homepage of the Investor Resources section of Ares Capital’s website. Once again the conference has ended. You may now disconnect. Thank you.