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Ares Capital Corporation (ARCC)
Q4 2008 Earnings Call
March 2, 2009 10:00 pm ET
Michael J. Arougheti – President & Director
S. Davis – Chief Financial Officer
Carl Drake – Senior Vice President Finance, Head of Capital Markets and Investor Relations
Scott Lem – Vice President of Finance
Eric Beckman – Investment Committee Member
R. Kipp deVeer – Investment Committee Member
Mitch Goldstein – Investment Committee Member
Michael L. Smith – Investment Committee Member
Greg Mason – Stifel Nicolaus & Company, Inc.
Vernon Plack – BB&T Capital Markets
Jasper Birch – Fox-Pitt Kelton
Sanjay Sakhrani – Keefe, Bruyette & Woods
Fay Elliott-Gurney – Bank of America/Merrill Lynch
[Adam Waldo – Private Investor]
[Dennis Foss – Private Investor]
Nicholas J. Capuano– Imperial Capital
Previous Statements by ARCC
» Ares Capital Corporation Q2 2009 Earnings Call Transcript
» Ares Capital Q1 2009 Earnings Call Transcript
» Ares Capital Corporation Q3 2008 Earnings Call Transcript
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 the 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 the past performances 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’s Regulation G core EPS and the net per share increase or decrease in stockholders’ equity resulting from operations less realized and unrealized gains and losses, any incentives and management fees attributed to such realized gains and losses and any income taxes related to such realized gains.
A reconciliation of core EPS to the net per share increases decreases in stockholders’ equity resulting from operations, the most directly comparable GAAP financial measure can be found in the company’s earnings press release. 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.
At this time we would like to invite participants to access the accompanying slide show presentation by going to the company’s website at www.AresCapitalCorp.com and clicking on the March 2, 2009 presentation link under the stock information section of the investor resources tab. Ares Capital Corporation’s earnings release and annual report are also available on the company’s website.
I will now turn the call over to Mr. Michael Arougheti, Ares Capital Corporation’s president.
Michael J. Arougheti
I’m joined today by Rick Davis our CFO; Carl Drake; and Scott Lem from our financing and accounting team and Eric Beckman, Kipp deVeer, Mitch Goldstein and Michael Smith, senior members of our investment advisors management team.
I hope you all have had a chance to review our press release and our investor presentation hosted on our website. Before Rick gets in to the financial details of the quarter, I want to take a few minutes to comment on current market conditions and describe how we are managing through these turbulent times. I’ll think finish by highlighting our results and then touch on our dividend.
As you all know the fourth quarter was one of the most challenging periods all of us have seen in terms of credit and stock market volatility as well as economic deterioration. The credit crunch that began in the summer of 2007 entered its most serious phase during the fourth quarter as the economic recession and financial crisis deepened. The broadly syndicated leverage loan market came under severe technical pressure as CLO and hedged fund unwinds triggered force selling of loan portfolios.
The fourth quarter set a record with over $5 billion in loans from liquidating portfolios sold at auction versus an average of $2 billion per quarter for the first nine months of the year. On the demand side funds flows were negative with CLO issuance down 85% for the year and with prime rate funds experiencing redemptions from retailer investors. In addition, repayments available for new investments slowed to the lowest pace in six years.
As the quarter progressed, these technical pressures gave way to weakening fundamentals as default rates began to rise. Although defaults remain most pronounced in cyclical industry sectors where ARCC has minimal or underweighted exposure, lagging 12 month industry defaults as measured by S&P increased from about 3.3% to 4.4% based upon the number of issuers defaulting.
Default rates have continued to increase significantly in 2009 and overall S&P index of broadly syndicated leverage loans which had been under pressure in the third quarter declined roughly 23% during the fourth quarter and 29% for the year. Within the loan market and S&P’s leverage loan index in particular, asset performance was bifurcated meaningfully based upon quality in certain portfolio attributes.
For example, defensive industry sectors within the index such as healthcare and food and beverage which represent nearly a third of ARCC’s portfolio collectively ended the year with average sector bid prices nearly 30 percentage points higher than more cyclical sectors such as auto, building and development, publishing and home furnishings which represent less than 5% of ARCC’s portfolio.
Overall, approximately 78% of ARCC’s portfolio industry weightings were above the median price performance within the index. Importantly, the types of loans more representative in our portfolio, 2008 vintage, full covenant and middle market all outperformed their respective index counter parts pre-2008, covenant light and large corporate.
As we described last quarter ARCC’s portfolio is not directly comparable to this index. In fact, it has very positive characteristics not exhibited in the index such as significantly higher LIBOR spreads, stronger covenant protection and mostly lead agent or control positions of a particular tranche within credits.
Now, as far as market conditions in the first quarter, recent federal reserve and government actions to stimulate broken credit markets has slowly improved credit market activity. We have recently seen the credit markets dealing from the equity markets. Forced auctions of portfolios have slowed significantly and net investor inflows to the sector are positive year-to-date. This is evidenced by the improvement in the broad leverage loan market indices since year end which are up about seven percentage points, the surge in investment grade issuances and lately the reopening of the high yield market.