ARCC

Ares Capital Corporation (ARCC)

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Ares Capital (ARCC)

Q4 2012 Earnings Call

February 27, 2013 11:00 am ET

Executives

Michael J. Arougheti - President and Director

Penni F. Roll - Chief Financial Officer and Principal Accounting Officer

Analysts

Vernon C. Plack - BB&T Capital Markets, Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

Kyle M. Joseph - Stephens Inc., Research Division

Kannan Venkateshwar - Barclays Capital, Research Division

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Robert Ladyman

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Kenneth Bruce - BofA Merrill Lynch, Research Division

Gilles Marchand - Aladdin Capital Management LLC

Presentation

Operator

Good morning. Welcome to Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Wednesday, February 27, 2013.

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 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 share per increase or decrease in stockholders' equity resulting from operations less realized and unrealized gains and losses, any incentive management fees attributable to such realized and unrealized 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 to the most directly comparable GAAP financial measure can be found on the company's website at www.arescapitalcorp.com. 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 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.

At this time, I would like to invite participants to access the accompanying slide presentation by going to the company's website at www.arescapitalcorp.com and clicking on the Q4-12 Earnings Presentation link on the homepage of the investor relations section of the website. The company will refer to this presentation later in the call. Ares Capital Corporation's earnings release and Form 10-K are also available in the company's website.

I will now turn the call over to Mr. Michael Arougheti, Ares Capital Corporation's President.

Michael J. Arougheti

Great. Thank you, operator, and good morning to everyone, and thanks for joining us. This morning, we reported strong earnings for the fourth quarter of 2012, capping off a great year for Ares Capital.

Fourth quarter basic and diluted core earnings per share were $0.45, a level which fully covered our $0.38 per share regular quarterly dividend. Fourth quarter earnings were driven primarily by strong interest in fee income and positive credit and investment performance across our portfolio. Our fourth quarter GAAP earnings of $0.71 per share included $0.27 per share in net realized gains, which were driven in large part by the opportunistic exit, at favorable prices, of 2 of the remaining control equity positions from the legacy Allied portfolio; and $0.06 per share of net unrealized gains.

For the full year, we reported our highest ever core earnings per share of $1.65 and strong GAAP earnings per share of $2.21. Our net asset value per share as of the end of the fourth quarter of $16.04 represented increases of 1.9% and 4.6% from our third quarter 2012 and 2011 year-end net asset values per share, respectively.

We reported net realized gains of $0.19 per share for 2012, marking 8 out of the last 9 fiscal years since our IPO in October of 2004 in which we have reported realized gains in excess of realized losses. Specifically, on a cumulative basis, our realized gains have exceeded our realized losses by $194 million since our IPO, excluding the $196 million realized gain that we recognized from the Allied acquisition.

We believe our investment portfolio performed extremely well in 2012. First, our year-end non-accruing investments as a percentage of the portfolio were just 2.3% at cost and 0.6% at fair value, a post-Allied acquisition low as we exited a few non-accruing investments and added no new nonaccruals during the fourth quarter.

Secondly, our weighted average portfolio grade improved from 3 at the end of the third quarter to a 3.1 at the end of the fourth quarter. And finally, the weighted average EBITDA of our corporate portfolio companies increased in the aggregate by approximately 10% on a comparable basis for the fiscal year-to-date reported periods in 2012 versus the same periods in 2011.

We were very active from an investment standpoint during the fourth quarter, investing nearly $1.1 billion. We continued to focus on backing the capital needs of our existing portfolio companies and selectively making new investments in defensively positioned companies. While the fourth quarter investment activity was elevated, in part due to increased liquidity and activity spurred by anticipated changes in tax regulations, the size of our investment portfolio remained roughly flat compared to the prior quarter as repayments and exits offset this investment activity. So as of yearend, we had a sizable amount of available debt capacity totaling approximately $1.6 billion, subject to borrowing base and leverage restrictions, and our leverage ratio of 0.55x, or 0.49x net of available cash, was below our target range of 0.65x to 0.75x.

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