Ares Capital Corporation (ARCC)

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Ares Capital Corporation

Q2 2009 Earnings Call

August 06 2009, 11:00 am ET


Michael Arougheti - President

Richard Davis - CFO


Vernon Plack - BB&T Capital Markets

Brian Roman - Robeco Investment Management

Sanjay Sakhrani - KBW

Jasper Birch - Fox-Pitt Kelton

Faye Elliott - Banc of America-Merrill Lynch

James Shanahan - Wells Fargo

Andrew Murray - UBS



Good morning. Welcome to the Ares Capital Corporation's Earnings Call. At this time all participants are in a listen-only-mode. As a reminder, this conference is being recorded on Thursday August 6, 2009. 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 the forward-looking statements for any reason, including those listed in the 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 the 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 incentives, management fees attributable 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 increase or decrease 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 it's financial condition and results of operations.

At this time, we will like to invite participants to access the accompanying slide presentation by going to the company's website at and clicking on the August 6, 2009 presentation link on the homepage of the Investor Resources section of our website. 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 Arougheti

Great. Thank you, operator. Good morning everyone and thanks for joining us. I'm joined today by Rick Davis our Chief Financial Officer; Carl Drake; and Scott Lem from our finance and accounting team and Eric Beckman, Kipp deVeer, Mitch Goldstein and Michael Smith, senior members of our investment advisors management team.

I hope you have had a chance to review our earnings press releases this morning, and our investor presentation posted on our website. As we have on past calls, I would like to start by giving you brief overview of market events in the second quarter and discuss of current strategy, before I turn the call over to Rick to walk through our second quarter results in more detail.

The broadly syndicated leverage loan market recovery that began in the first quarter picked up considerable steam in the second quarter driven by increased liquidity, some signs of economic improvement, better than expected earnings and technical factors which led to a reduction of loan outstanding.

Consequently, secondary loan prices sharply rebounded reaching pricing and spread level not seen since before the Lehman bankruptcy last fall. During Q2, S&Ps leveraged loan index increased more than 12 points or 20% of depressed price levels of 65 at the end of Q1, to 78 by the end of the second quarter.

There were many favorable technical factors that drove the recovery. Repayments increased, investment fund flows into prime funds and high yield accounts picked up, while forced portfolio loan sales abated. In addition, the high yield market heated up during the quarter providing an outlook for issuers to refinance billions in near term maturing loans.

Due to the market rebound, secondary spreads in the broadly syndicated market have declined substantially, and the risk adjusted spreads are now in line with more typical recessionary levels. However, despite the sharp decline in secondary loan spreads, comparable primary market spreads on recent transactions that we either closed or observed in the middle market, only modestly tightened and certainly much lesser than in the larger secondary market.

From a structural standpoint, the second quarter looks a lot like the first. Leverage levels, season pricing, covenant packages and equity contributions all remained very favorable. And investment opportunities in the primary market today remain at levels that are so very attractive from a risk adjusted perspective.

In the secondary market, while quality loans still trade well above lower rated or cyclical credits, lower quality loans outperformed sharply during the quarter and investors bid up the most depressed assets with a renewed appetite for risk.

In addition, average bid levels between legacy assets and new assets have also tightened considerably. We are not convinced that the rally in lower quality assets is sustainable and we believe this fundamental performance and analysis need to play a bigger role from here out.

The primary market is still focused on quality, perhaps more than at any point in the last decade. For example, over 66% of new issuers in the primary were BB rated, the highest percentage in over 10 ten years. In terms of new investment activity, the leverage buyout market remains at cyclical lows with volumes down between 75% and 85% year-over-year.

Given the high cost of capital, lack of debts in the broadly syndicated leverage loan market and wide bid-ask spreads between buyers and sellers primary market activity remains very slow.

We believe that our broad direct origination platform covering the middle market becomes even more valuable in a slow market such as this.

Furthermore, due to the strength of our origination platform and the reduced number of competitors in the market, we believe that we are well position for a pick up in activity, if recent market momentum translates into greater buyer in the M&A volumes. Although, macroeconomic conditions remained very challenging, an increasing number of recent economic indicators point to the beginning of the recovery in the second half of the year.

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