Ares Capital Corporation (ARCC)
Q4 2009 Earnings Call
February 25, 2010 11:00 am ET
Michael Arougheti – President
Rick Davis – Chief Financial Officer
Greg Mason – Stifel Nicolaus
Vernon Plack – BB&T Capital Markets
Don Fandetti – Citigroup
Chris Harris – Wells Fargo Securities
Jim Ballan – Lazard Capital Markets
John Stilmar – SunTrust
Aaron Heighonowich (ph) – Ladinburgh
Steven – KBW
Sla Lewis (ph) – Obatres Research (ph)
Rob Schwartzberg – Compass Point
Previous Statements by ARCC
» Ares Capital Corporation Q2 2009 Earnings Call Transcript
» Ares Capital Q1 2009 Earnings Call Transcript
» Ares Capital Corporation Q4 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 the SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements.
Please also note 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 non-GAAP financial measure as defined by SEC Regulation G. Core EPS is a net per share increase or decrease in stockholders’ equity resulting from operations, less realized and unrealized gains and losses, any incentive 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/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 its financial condition and results of operations.
At this time we 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 February 25, 2010 presentation link on the home page of the investor resources section of the website. Ares Capital Corporation earnings release and the annual report are also available on the company’s website.
I would now like to turn the call over to Mr. Michael Arougheti, Ares Capital Corporation’s President.
Good morning everyone and thanks for joining us. Here with me this morning are Rick Davis, our Chief Financial Officer; Carl Drake and Scott Lem from our financing and accounting team; Josh Bloomstein, our General Counsel; Eric Beckman, Kipp deVeer, and Mitch Goldstein and Michael Smith, all senior members of our investment advisors management team.
I hope you all have had a chance to review our earnings press release this morning and our investor presentation posted on our website. I would like to start this morning by highlighting recent conditions in the broader market and any impact on us and then discuss our credit performance, balance sheet and earnings, all of which we believe position us as well as any company in our marketplace today.
Rick will then walk through our fourth quarter results before I conclude our call with a discussion of our recent investments in our portfolio. We would then be happy to take Q&A.
However, while we understand there is a lot of interest in discussing Ares Capital’s proposed merger with Allied Capital Corporation, we will not discuss the proposed merger and the ongoing proxy solicitations by ARCC and Allied Capital on this call. Instead Ares Capital and Allied Capital have scheduled a joint conference call to discuss the proposed merger on March 3, 2010. You can obtain details about the call on Ares Capital’s website at www.arescapitalcorp.com. We also refer you to the information filed with the Securities and Exchange Commission regarding the proposed merger and the Ares Capital special meeting.
During the fourth quarter, the credit markets continued to improve driven by a combination of positive technical and fundamental factors. Significantly stronger loan repayments outpaced new originations leading to a further reduction in outstanding institutional loans and continued investment appetite from existing market participants. The higher repayments were driven in part by a robust high yield market, which set records for price performance and volume in 2009.
Fourth quarter new leverage loan originations rebounded reaching levels not seen since the third quarter of 2008 and additional liquidity also tightened credit spreads.
From a fundamental perspective, industry defaults began to decline during the fourth quarter and the industry outlook for 2010 improved significantly. Although the lagging 12-month S&P leverage loan index principal default rate peaked in November at 10.8%, the rate declined to 9.6% by the end of the year and market participants and rating agencies currently expect the rate to be potentially cut in half by the end of 2010.
Year-over-year (inaudible) growth for companies in the index has resumed principally through expense reductions. Positive performance is driving investor confidence and the net effect has been a modest increase in the asset values in the broadly syndicated loan market.
I remind everyone that while often taking cues from the broader market, our core middle market rarely sees the same volatility. Although the middle market has lately experienced some very modest tightening in spreads and higher leverage, spreads in the middle market remain near historical highs and in fact, the spread gap between middle market loans and the broadly syndicated loan market reached an all-time high during the fourth quarter per S&P data.
In our core market, we still see first lien floating rate debt opportunities with unlevered total expected return profiles in the 10% to 13% range and mezzanine in the mid to high teens. Total leverage levels remain attractive by historical standards. We are still find high quality company investment opportunities at less than 4.25 times debt-to-EBITDA from mezzanine and at approximately 3.5 to 3.75 times debt-to-EBITDA for unitranche investments.