Ares Capital Corporation (ARCC)

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Ares Capital (ARCC)

Q4 2010 Earnings Call

March 01, 2011 11:00 am ET


Penni Roll - Former Chief Financial Officer and Member of Portfolio Management Committee

Michael Arougheti - Principal Executive Officer, President, Portfolio Manager, Director, Member of Investment Committee and Member of Underwriting Committee


Faye Elliott - BofA Merrill Lynch

Vernon Plack - BB&T Capital Markets

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Arren Cyganovich - Evercore Partners Inc.

Joel Houck

John Stilmar - SunTrust Robinson Humphrey, Inc.

James Ballan - Lazard Capital Markets LLC

Greg Mason - Stifel, Nicolaus & Co., Inc.

John Hecht - JMP Securities LLC



Good morning. Welcome to Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] 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 the Core earnings per share or Core EPS, which is a non-GAAP financial measure as defined by SEC Regulation G. Core EPS, excluding professional fees and other costs related to Ares Capital Corporation's acquisition of Allied Capital Corporation is the net per share increase or decrease in stockholders' equity resulting from operations, less professional fees and other costs related to the Allied Acquisition, realized and unrealized gains and losses, any incentive management fees attributable to such realized gains and losses, any income taxes related to such realized gains and other adjustments as noted. A reconciliation of Core EPS, excluding professional fees and other costs related to the Allied Acquisition to the net per share increase or decrease in stockholders' equity resulting from operations, to 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.

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, we would like to invite participants to access the accompanying slide presentation by going to the company's website at and clicking on the Q4-10 Investor Presentation link on the homepage of the Investor Resources section of the website. Ares Capital Corporation's earnings release and quarterly 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

Thank you, operator. Good morning to everyone, and thanks for joining us. I'm joined today by our new Chief Financial Officer, Penni Roll, who is recently promoted from her previous position with us as our Investment Advisor's EVP of Finance. Please join me in welcoming Penni to her new position. Rick Davis, our former CFO, was promoted to Chief Operating Officer of Ares Management LLC, but he will remain as an officer of Ares Capital, holding the position of Treasurer. On behalf of everyone at Ares, I'd like to sincerely thank Rick for all of his hard work and contributions to ARCC as CFO. Rick and other members of our senior management team are also here with us this morning.

I hope you've had a chance to review our fourth quarter earnings press release and our fourth quarter investor presentation posted on our website. We'll refer to this investor presentation later in our call. I'd like to start with a discussion of current market and economic trends, and then update you on our recent capital raising activity before I highlight our fourth quarter and year-end results. Penni will then take you through our fourth quarter and year-end results in more detail. I'll then come back and cover our recent investment activity, the state of our current portfolio and update you on our backlog and pipeline before taking questions.

Fourth quarter activity was quite strong in both the broadly syndicated and middle markets as volumes reached the highest quarterly levels seen in the last three years. The elevated volume was driven in part by strong LBO and dividend recap activity as private equity sponsors sought dividends or capital gains ahead of a potential change in tax laws early in 2011. This likely pulled forward some volume from the first quarter of 2011 into the fourth quarter of 2010. While the broadly syndicated market is experiencing higher year-over-year volumes driven by strong refinancing and repricing activity thus far into 2011, actual new money transaction volume requiring fresh capital has been noticeably slower, although some seasonality is fairly typical.

Middle-market new money volume has also slowed, but the size of our current backlog and pipeline demonstrates that we are still finding attractive opportunities as we leverage our scale, origination and balance sheet strength and broad product offerings.

Given the prospect of higher interest rates, we are seeing renewed investor interest in the leveraged loan asset class. Retail inflows into high-yield and bank-loan mutual funds have been remarkably strong, and loan repayment activity has also been vibrant. This liquidity, coupled with relatively weak new issue supply, has adversely impacted pricing in terms of the broadly syndicated market thus far in 2011. Although the structural and pricing changes are more evident in the broadly syndicated market, they are starting to have an impact in the middle market as well. Of course, increased new issue supply, economic uncertainty or geopolitical events could all halt or reverse these trends. We plan to be prepared as always to take advantage of any potential market opportunities as they arise.

We are becoming increasingly cautious as the market transitions to higher leverage levels and tighter pricing. As we have in the past, expect us to become more conservative when other market participants become more aggressive. As we search for the most attractive risk-adjusted returns in the current market, we are increasingly focusing on more senior secured floating rate assets, including Unitranche loans. Senior secured loans continue to offer good relative value as spreads and fees are approximately 150 to 200 basis points wider than historical averages despite lower default outlook and the prospect for interest rate increases becoming more likely.

From a long-term perspective, we continue to believe that supply-demand equation in our market will become more attractive, given the hundreds of billions of middle-market debt maturing by 2014, the expiration of CLO reinvestment periods in the next few years and the estimated over $400 billion in uninvested private equity capital. In our view, these factors should create favorable conditions for attractive investment opportunities, and these trends highlight the importance of utilizing scale and broad origination to be more selective, as well as maintaining ample liquidity to take advantage of opportunities as they arise.

The stronger asset pricing environment and the improving economy have facilitated both the execution of our strategy of exiting non-core assets from the legacy Allied portfolio at favorable prices, particularly relative to our costs, as well as our portfolio rotation and repositioning objectives. We posted net realized gains in both the fourth quarter of 2010 and first quarter of 2011, primarily as a result of exits from the legacy Allied portfolio.

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