Ares Capital Corporation (ARCC)

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Ares Capital (ARCC)

Q1 2013 Earnings Call

May 07, 2013 12:00 pm ET


Michael J. Arougheti - Chief Executive Officer and Director

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

Kipp deVeer


Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Richard B. Shane - JP Morgan Chase & Co, Research Division

Christopher York - JMP Securities LLC, Research Division

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

Kyle M. Joseph - Stephens Inc., Research Division

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Matthew Howlett - UBS Investment Bank, Research Division



Good morning. Welcome to Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, May 7, 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 such 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 a core EPS, which is a non-GAAP financial measure as defined by 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 incentive 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, the most directly comparable GAAP financial measure, can be found in the accompanying slide presentation for this call by going to the company's website at and clicking on the Q1 '13 earnings presentation link on the homepage of the Investor Resources section of the website.

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 to this information.

At this time, we would like to invite participants to access the accompanying slide presentation by going to the company's website at and clicking on the Q1 '13 earnings presentation link on the homepage of the Investor Resources section of the website. The company will refer to this presentation later in the call. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website.

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

Michael J. Arougheti

Great. Thank you, operator. Good morning to everyone, and thanks for joining us today. I'd like to start off today by congratulating Kipp deVeer on his promotion to President; and Eric Beckman, Mitch Goldstein and Michael Smith on their promotions to Executive Vice President of Ares Capital Corp. These individuals have been my long-term partners, very active in the management of ARCC since its IPO in 2004 and key drivers of our success. These new titles simply formalize the leadership roles that they have played and recognize their significant historical and expected contributions to our company. Congratulations again, guys.

For today's call, I'll briefly highlight our first quarter results and touch on market conditions before turning the call over to Penni, our CFO, to take us through our financial results in more detail. Kipp will then discuss our portfolio and recent investment activity, and I'll conclude the call and open it up for Q&A.

First, turning to earnings, our first quarter core earnings per share were $0.38, fully covering our first quarter dividend. Our core earnings per share declined from $0.45 per share in the fourth quarter of 2012 primarily on lower origination-related fee income. This is consistent with the trend that we've seen emerged over the last 3 years, where deal flow has been pulled into the fourth quarter from the first quarter. Following these same historical patterns, we are experiencing increase in new investment activity in the second quarter, and we've seen growth in our backlog and pipeline since our last call in late February. Seasonality aside, the general market environment hasn't changed materially since our last call. Aggressive central bank policies and investor appetite for risk and yield have combined to create significant demand for leveraged finance assets. This has effectively bid down yields on loans and increased asset-level risk as the supply of new loans hasn't been sufficient to absorb the capital flowing into the market.

Per Thomson Reuters, in our core middle market, loan volume was seasonally soft in the first quarter with an overall decline of 41%, and only 38% of this volume was new money related, with 62% tied to refinancings. Total middle-market sponsor-backed loan volume also declined 47% compared to the fourth quarter of 2012.

Consistent with the broader market, our originations were also lower in the first quarter of 2013, as we committed $410 million compared to about $1.1 billion in the fourth quarter. However, our net commitments and net fundings actually increased modestly to $188 million and $129 million, respectively, which grew our portfolio to over $6 billion at quarter end. As we've discussed before, this liquid market environment provides trade-offs for us. It clearly creates greater challenges when seeking new investments with attractive risk-adjusted returns and encourages the refinancing of existing loans. Our ability to perform well under these conditions underscores our competitive advantages, including our strong market coverage and extensive origination platform, a capital base significantly larger than many of our competitors and our long-standing incumbent relationships with private equity sponsors, intermediaries, capital markets participants and middle-market companies. We believe that these competitive advantages will give us the ability to continue to originate assets with appealing risk-return characteristics and to protect our existing portfolio, all without sacrificing credit discipline.

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