Ares Capital Corporation (ARCC)

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Ares Capital (ARCC)

Q2 2011 Earnings Call

August 04, 2011 11:00 am ET


Michael Arougheti - Principal Executive Officer, President, Portfolio Manager, Director, Member of Investment Committee, and Member of Investment Committee of Ares European Private Debt Group

Penni Roll - Chief Financial Officer and Principal Accounting Officer


Richard Shane - JP Morgan Chase & Co

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

Arren Cyganovich - Evercore Partners Inc.

Joel Houck

John Stilmar - SunTrust Robinson Humphrey, Inc.

Matthew Howlett - Macquarie Research

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

John Hecht - JMP Securities LLC



Good morning. Welcome to Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] As reminder, this conference is being recorded on Thursday, August 4, 2011.

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 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, 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 and unrealized 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, the most directly comparable GAAP financial measure, can be found on the company's website at 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 2Q '11 investor presentation link on the homepage of the Investor Resources section of the website. Ares Capital Corporation's earning 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

Great. Thank you, operator. Good morning, everyone and thanks for joining us. I'm joined today by the senior partners of Ares Management's Global Private Debt Group and members of our investment advisors and investment committee: Eric Beckman; Kipp deVeer; Mitch Goldstein and Michael Smith; our Chief Financial Officer, Penni Roll; and Carl Drake and Scott Lem, who Head our Investor Relations and Accounting teams, respectively.

This morning, we issued our second quarter earnings press release and posted an investor presentation on our website that supplement this information. We'll refer to the investor presentation later in our call. As always, I'd like to start with a brief discussion of current market trends and how they influence our business and strategy. I'll then highlight a few items from our second quarter before turning the call over to Penni, who'll then take you through our quarterly results in greater detail. Finally, I'll come back and cover our recent investment activity, the state of our current portfolio and then update you on our backlog and pipeline before Q&A.

As you may remember from our last call, during the first quarter of 2011, the broadly syndicated loan and high-yield markets saw extremely strong liquidity from fund inflows. These inflows pressured spread and structures, drove a high level of repayment activity and influenced trends in the middle market as well. However, during the second quarter, this liquidity and elevated repayment activity slowed while the supply of new money loans, meaning loans other than refinancings, increased substantially compared to the first quarter. As a result, the technical supply/demand imbalance witnessed in the first quarter reversed during the second quarter as loan supply outran loan demand.

Specifically, according to S&P, during the second quarter, retail loan fund inflows into the broadly syndicated market declined 36% and loan repayments declined about 38% from first quarter levels. Over the same period, new money loans increased by about 30%. At the same time, ongoing Greek and euro sovereign debt issues, softer U.S. economic trends and the debate over the U.S. debt ceiling all contributed to more volatility in the capital markets.

This uncertainty, coupled with the reversal in supply and demand, has begun to create a more favorable investment climate in our core markets. Senior loan spreads first stabilized and then began to widen moderately during the end of the second quarter and into the third quarter, and high-yield spreads have widened at least 50 basis points at the -- since the end of the first quarter, with meaningful additional spread widening in the last few weeks. Over the same period, leverage in our core market has stabilized at acceptable levels, particularly for senior and unitranche investments. Middle market loan volume was quite significant during the second quarter and activity levels appear strong heading into the third quarter. According to market data from Thomson Reuters, middle market loan issuance increased 32% both quarter-over-quarter and year-over-year. Drilling down further, middle market new money loans increased 39% and LBO loans increased approximately 34% compared to the first quarter.

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