ARCC

Ares Capital Corporation (ARCC)

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Ares Capital (ARCC)

Q4 2011 Earnings Call

February 28, 2012 11:00 am ET

Executives

Michael J. Arougheti - President and Director

Penni F. Roll - Chief Financial Officer

Analysts

John Hecht - JMP Securities LLC, Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

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

Joel Houck - Wells Fargo Securities, LLC, Research Division

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

Fla Lewis - Weybosset Research & Management LLC

Presentation

Operator

Good morning. Welcome to the Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, February 28, 2012.

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, the net per share increase or decrease in stockholders' equity resulting from operations to the most directly comparable GAAP financial measure can be found on the company's website at arescapitalcorp.com. 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 www.arescapitalcorp.com, and clicking on the Q4 Earnings 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 J. Arougheti

Thank you, operator, and good morning to everybody and thanks for joining us today. This morning, we issued our fourth quarter earnings press release and posted a supplemental earnings presentation on our website that highlight certain financial data. We'll refer to this presentation later in our call.

We're pleased to report record fourth quarter core earnings per share of $0.48. For the full year, our 2011 core earnings per share increased 9.1% from 2010 to $1.56. This compares to dividends paid in 2011 of $1.41 per share, representing the strong dividend coverage from core earnings. We also earned $1.56 in 2011 GAAP earnings per share, and our net asset value increased from 2010 by approximately 3% to $15.34 per share.

We also earned meaningfully more taxable income than we distributed again in 2011. As you may recall, we carried over approximately $64 million or $0.32 per share from 2010 for distribution in 2011. Subject to finalization of our 2011 tax returns, we currently estimate that our undistributed taxable income carried over from 2011 into 2012 is approximately $170 million or $0.77 per share. Therefore, in light of among other factors, our 2011 core earnings performance, our view on our core earnings power going forward and the estimated size of our excess undistributed taxable income carry forward, we have elected to increase our quarterly per share dividend from $0.36 to $0.37. Penni Roll, our CFO, will provide more detail on our results a little bit later in the call.

Now I'd briefly like to highlight recent changes in the market environment. At the time of our last call in early November, markets were reflecting significant uncertainty, driven primarily by euro sovereign debt and global economic growth concerns. On that call, we also highlighted that despite the volatility, the market environment might present us with attractive investment opportunities. Specifically, the ability to provide full balance sheet solutions for larger, high-quality middle-market borrowers, as many large investment banks were unwilling to take underwriting and distribution risk. As we'll discuss later in the call, we took advantage of these opportunities by making approximately $853 million in gross commitments at an attractive weighted average yield on debt and income producing securities of approximately 12.5%.

Since that time, investor sentiment and market tone have steadily improved and capital markets volatility has eased, primarily due to encouraging economic trends and more aggressive policy actions in the Eurozone. In the latter part of the fourth quarter, we saw slower fund outflows in the loan market and actually very strong fund inflows into the high-yield market. These trends helped drive a rebound in activity, higher asset prices and tighter spreads.

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