Ares Capital Corporation (ARCC)

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Ares Capital Corp. (ARCC)

Q1 2009 Earnings Call

May 07, 2009 11:00 AM ET


Michael Arougheti - President and Director

Richard Davis - Chief Financial Officer


Vernon Plack - BB&T Capital Markets

Jim Shanahan - Wachovia Securities

Matthew Howlett - Fox-Pitt Kelton

Andrew Wessel - J.P. Morgan

Greg Mason - Stifel Nicolaus & Co

Faye Elliott - BAS-ML

Nicholas Capuano - Imperial Capital Markets



Good morning and welcome to the Ares Capital Corporation Earnings Conference Call. At this time all participants are in a listen-only mode. As a reminder, this conference is being recorded on Thursday May 7, 2009. Comments made during the course of this conference call and webcast and the accompanying documents contains 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, anticipate, 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 performance or market information is not a guarantee of future results. During this conference call, the company may discuss core earnings per share which is a non-GAAP financial measure as defined by the SEC regulation G core earnings per share 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 attributed to such realized gains and losses and any income taxes related to such realized gains.

A reconciliation of the core earnings per share to the net per share increased, decreased and 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 the core earnings per share 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 accompanied slide presentation by going to the company's website at and clicking on the May 7, 2009 presentation link under homepage of the investor resources section of the website. Ares Capital Corporation 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. And good morning everyone and thanks for joining us as always. I'm joined today by Bennett Rosenthal our Chairman; Rick Davis our CFO; Carl Drake; and Scott Lem from our financing and accounting team and Eric Beckman, Kipp deVeer, Mitch Goldstein and Mike Smith, senior members of our investment advisors management team.

I hope you had a chance to review our two press releases this morning and our investor presentation posted on our website. As we have on past calls I'd like to start by giving you a brief overview of the market which should serve as a good backdrop from an update on our strategic priorities, our dividend strategy and our results.

Although, capital markets and macroeconomic conditions remain challenging and difficult to predict, we have recently seen some improvement in terms of investors sentiments and liquidity, which has positively impacted secondary pricing in the credit markets. Improvement in the functioning of the capital markets, some encouraging macroeconomic data, better than expected earnings and the continued actions of the federal reserve and U.S. Treasury to stimulate financial markets have helped enhance investor confidence.

Accordingly, the credit markets have rebounded from the lows seen at the end of the fourth quarter. These factors have also driven a fairly significant tightening in credit spreads since their peak in the fourth quarter, and a pick up in high-grade and high yield bond issuance.

Specifically, in the leverage loan market, we witnessed a turn around in various technical factors that has driven a rebound in secondary loan pricing thus far in 2009 following the worst year on record in 2008. On the supply side, force (ph) loan portfolio sales have slowed and new issue volume remains soft. On the demand side investor fund flows turned strongly positive and loan repayments increased to levels not seen since 2007 providing investors additional cash to reinvest.

Following a 23% decline in the leveraged loan market industries in Q4, these industries were sharply up yearly 10% in the first quarter and are up over 20% year-to-date. Quality loans continued to outperform throughout the first quarter, but the market did show renewed interest in lower rated more speculative loans in April.

Over the last 12 months -- and Q1 was no exception the market has placed a premium on loans with lower leverage, higher seniority and higher ratings in defensive industries and recent vintages. As an example S&P illustrated that loans with debt to EBITDA of less than five times had average good prices approximately 20 points higher compared to senior loans leveraged five times to eight times.

As one would expect, this price to start a likely reflects higher expected recovery values for such lower leveraged loans. We believe this validates our defensive strategy of maintaining a relatively more senior and lower average leveraged portfolio. Additionally, industry classifications remain a key factor as the top half of S&P's leveraged loan index ranked by industry price performance over the last 12 months, had average bid prices 20 points higher than the bottom half average.

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