Ares Capital Corporation (ARCC)

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Ares Capital (ARCC)

Q3 2012 Earnings Call

November 05, 2012 1:00 pm ET


Michael J. Arougheti - President and Director

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


John Hecht - Stephens Inc., Research Division

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

Jasper Burch - Macquarie Research

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

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

John W. Stilmar - JMP Securities LLC, Research Division

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



Good day. Welcome to Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Monday, November 5, 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 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 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 is the 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 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, decrease in stockholders' equity resulting from operations 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 of 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 Q3 '12 earnings presentation link on the homepage of the Investor Relations -- excuse me, 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 conference call over to Mr. Michael Arougheti, Ares Capital Corporation’s President. Mr. Arougheti, the floor is yours, sir.

Michael J. Arougheti

Great. Thank you, operator. Good morning to everyone, and thanks for joining us. It's been a long week needless to say. So before we get started, I'd just like to extend our deepest sympathies to the victims of Hurricane Sandy, and our prayers and thoughts go out to all of those impacted by the storm. And we're with you as you begin the process of rebuilding your homes and your communities.

So now turning to our results this morning. We reported another strong quarter driven by our increased investment activity and positive portfolio performance. Our third quarter core earnings per share were $0.42, a 5% increase compared to the second quarter and in line with per share levels from a strong quarter a year ago. Our third quarter core earnings per share also fully covered our regular quarterly dividend of $0.38 per share. On a GAAP net income basis, we earned $0.59 per share for the third quarter, which included realized and unrealized investment gains totaling $0.20 per share. Our GAAP earnings per share for the third quarter were ahead of the second quarter and year-ago per share levels of $0.41 and $0.20, respectively.

We also declared a regular fourth quarter dividend of $0.38 per share, consistent with our third quarter's level and another $0.05 per share additional dividend for the fourth quarter of 2012. As you may recall from our last earnings call in August, we currently have excess undistributed taxable income, and we expect that we will continue to carryover an excess amount into 2013.

We had an active quarter with over $1 billion in gross commitments and fundings resulting in net investments funded of about $403 million after exits and repayments. Although the third quarter gross commitments were higher compared to our second quarter levels, they were down from the same period a year ago when we committed over $1.4 billion.

During the third quarter, we continue to primarily invest in senior debt, reflecting our view on risk-adjusted return under current market conditions. More than 3/4 of our commitments during the third quarter were in first-lien senior secured debt. Our investment portfolio continues to perform well despite the current slow growth environment. Our weighted average portfolio grade was stable at 3, and our nonaccruing loans remained low at 2.6% of our portfolio on an amortized cost basis and 1% on a fair value basis.

Interestingly, the slow and somewhat mixed economic environment is at odds with the current market technicals. Central bank easing and promises to keep interest rates low for extended periods of time have had a significant market impact through the creation of abundant liquidity and changes in investor risk appetite. Consequently, we've witnessed significant inflows into high-yield and syndicated bank loan funds as investors search for yield. The high-yield bond market in 2012 has already set a record for the most volume in a single year, and the broadly syndicated loan market reported record third quarter volume.

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