Ares Capital Corp (ARCC) 2010 Q1 法說會逐字稿

Good morning. Welcome to Ares Capital Corporation's earnings conference call. At this time all participants are in a listen-only mode. As a reminder, this conference is being recorded on Monday, May 10, 2010.

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 core earnings-per-share, or core EPS, which is a non-GAAP financial measure as defined by the 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 gains and losses, and any income taxes related to such realized gains.

A reconciliation of core EPS to the net per-share increase or 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 I 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 Q1-10 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 President.

Thank you operator, and good morning everyone, and thanks to joining us. I hope you've had a chance to review our earnings press release this morning and our investor presentation posted on our website.

Before I open with comments on the market, highlight our first quarter's results and discuss our dividend, I'd like to update everyone on our recent acquisition of Allied Capital, which closed on April 1.

Since the transaction closed during our second quarter, we will not be discussing any results from the former Allied portfolio until our second quarter's earnings conference call. However, I would like to review our strategic rationale and investment thesis for the transaction and then provide an update on our current strategy and progress to date with respect to the former Allied portfolio.

With the Allied transaction, Ares Capital now manages approximately $12 billion in committed capital. This increased scale brings many benefits including greater market coverage, the ability to support larger underwriting commitments and hold positions, more efficient access to capital, increased portfolio diversification and enhanced competitive relevance.

The former Allied Capital asset management funds and entities have also meaningfully increased the scale of Ares Capital's and Ivy Hill's asset management initiatives, which bring significant access to deal flow, research, and yet another potential source of capital for our borrowers.

We now have enhanced capabilities that we can offer to our middle market clients, and they are already making a difference in an increasingly competitive market environment.

As a reminder, our investment thesis for acquiring Allied Capital was based in part upon the following strategy. One, we wanted to opportunistically purchase a stressed portfolio at an attractive price and potentially benefit from an economic recovery. Two, to rotate and reposition a portion of this legacy portfolio into higher yielding assets. Three, to leverage the greater scale, market coverage and capital base of the combined company to solidify and improve our position in the marketplace. And four, to leverage Ares Capital's existing infrastructure and reduce duplicative costs.

While we are confident that we will execute well upon this strategy, it may take the better part of 2010 and into next year to fully implement our plans and realize all of the benefits of the acquisition. We believe we got the price and timing right, as it is clear that we are now in a stronger market environment for asset dispositions. This stronger market should help us realize improved values upon exiting certain nonstrategic assets.

Throughout 2010 you can expect to see us monetizing certain assets and rotating selected other assets into higher-yielding securities with the goal of driving earnings and recapturing a portion of the value in the former Allied portfolio. We believe we are making significant progress in this area, but keep in mind that as we continue to sell assets, the size of our investment portfolio and our core workings may be impacted in the short term until we reinvest sale proceeds.

Therefore, given this strategy, it will be important to track both core and GAAP earnings-per-share, since unrealized and realized gains or losses and prepayment fees are reflected only in our GAAP earnings. Net realized gains and prepayment fees would also be income available for potential dividends.

Finally, it is important to note that there will be some nonrecurring acquisition related costs that will be expensed throughout the balance of 2010, with some tail end costs that may continue into later periods. Some of these costs are obvious, like professional and advisory fees paid in the second quarter, but others may be more subtle, like transition employee costs and overlapping leases.

Now let me turn to the leveraged finance markets.

As expected, the broad leveraged finance markets continued to recover during the first quarter, but candidly, the pace and degree of such recovery has been much faster than we anticipated just a few short months ago. As a result of significantly improved liquidity, loan repayments have accelerated as a strong high-yield market and some new but primarily existing institutional investors reinvest capital into a shrinking loan supply.

Transaction activity has picked up, velocity has increased, and not surprisingly, new issue pricing has tightened, and leverage has expanded in the broadly syndicated loan market.

Although the middle market has lagged the broader market, we are experiencing similar directional trends. Middle market activity has clearly picked up again in the second quarter, as evidenced by the significant growth in our backlog and pipeline since the date of our fourth quarter's earnings release in February.

This market backdrop is a double-edged sword for us. On the positive side, our existing investment portfolio benefits from greater liquidity and higher asset values. Our access to the debt and equity capital markets has improved. We can also benefit from the greater overall transaction activity through fee income and longer-term asset growth as we work through our portfolio rotation initiatives.

The downside is that new issue spreads have tightened and leverage multiples on new transactions have continued to creep higher. This makes our competitive advantages in scale, product breadth and market coverage more critical than ever.

Similar to the broadly syndicated market, middle market spreads tightened 50 to 75 basis points during the quarter but remain attractive and are still in excess of 200 basis points higher than historical average levels.

Middle market straight senior leverage multiples were approximately 3 times EBITDA, with total leverage multiples increasing to approximately 4.5, and in some cases, 5.0 times. We are seeing further modest pressure on spreads and leverage multiples into the second quarter.

On a positive side note, loan to value ratios continue to be attractive by historical standards, as private equity sponsors have responded by paying higher purchase multiples and often contributing 40% or more of equity in such transactions. In this environment we are once again using our structuring capabilities to move incrementally up the balance sheet into higher first dollar of leverage attachment points.

Given the high level of market activity and the availability of attractive assets for sale, we had $304.7 million in gross fundings during the quarter of 2010, down only slightly from our record investment activity in the fourth quarter of 2009, but well above our quarterly average for the past two years.

However, during the quarter we also experienced an equivalent amount of exits and repayments in our portfolio, and we expect repayment velocity to remain elevated in the near future. Of course, these repayments may benefit us with realized gains, embedded call protection, and/or repayments at par on marked down assets.

In addition, during this period we were able to reinvest our capital in debt yields in excess of the yields on debt investments that were repaid during the quarter. Our new debt investments made during the quarter yielded approximately 13.6% on a weighted average basis, compared to our debt investments exited, which had a yield of approximately 12.1%.

Although we are encouraged by the greater level of market activity, the events of last week are a good reminder that volatility in the capital markets will persist throughout this recovery. Market windows are opening and closing more quickly, and there is a fair amount of concern in the market between sovereign debt contagion, rising interest rates, and others that could impact new issue pricing.

Expect us to remain highly selective and disciplined until we get greater visibility on how market conditions will play out.

We want to be opportunistic and flexible with our capital so that we can act accordingly as market conditions dictate. And we are leveraging our large-scale middle-market origination and asset management platform to ensure that we see the vast majority of the deals in our market and that we choose the most attractive to invest in.

We're also continuing to pursue our strategy of providing one-stop financing to meet client needs, exploit capital structure inefficiencies, and realize the highest risk adjusted returns on our portfolio.

Importantly, we believe that the favorable supply/demand imbalance in our market for private debt could exist for years to come, and therefore we are in no rush.

Now let me highlight our first quarter's results. Overall we believe our credit quality and investment performance remain very strong. As a reminder, our investment advisor employs an investment rating system with grades 1 through 4, with 1 being the lowest grade for investments that are not anticipated to be repaid in full, and with 4 being the highest grade for investments that involve the least amount of risk in the portfolio.

For the first quarter we experienced three times as many performance-related rating upgrades as downgrades, and our weighted average investment rating improved from a 3.0 to 3.1.

Our underlying portfolio performance from a revenue and cash flow standpoint continued to improve from already strong levels. We reported another quarter of increasing net asset value per share, primarily reflecting improved values for our assets.

While one issuer was removed from non-accrual status during the quarter, we placed three issuers on nonaccrual status during the quarter. However, one of these issuers subsequently repaid its entire loan amount near par after quarter end, resulting in a greater than 10% rate of return on that investment. The other two issuers remained current on interest payments, but we chose to apply the interest to principle and placed both on nonaccrual.

These two loans were not new credit situations but rather reflect continued underperformance in already lower rated credits.

Our quarter end nonaccruing loans, representing 4.2% of our portfolio at cost and 1% at fair value, remain very favorable when compared against our peers, particularly when measuring non-accruals in conjunction with net realized losses over the past 12 months. If you back out the loan that was repaid after quarter end, we would have had six issuers on nonaccrual status totaling 3.7% of our portfolio at cost and only 0.5% at fair value, using the portfolio fair values at cost -- and costs as of March 31.

Although industry default rates have fallen sharply since we saw the double-digit levels at year-end, S&P's leveraged loan index default rate was at 5.8%, measured by principal amount, and at 7.6%, measured by the number of loans in default as of March 31.

Turning now to our earnings, we reported another quarter of strong GAAP earnings of $0.61 per share, driven in part by higher asset fair values and overall improved portfolio performance.

Our net asset value increased to $11.78 per share, an increase of about 3% compared to the end of 2009.

However, our first quarter core earnings-per-share of $0.28, excluding $0.03 in professional fees associated with the Allied Capital acquisition, were partially impacted by a number of financing related costs and other items.

In the process of strengthening our balance sheet during the first quarter of 2010, we incurred certain non-recurring costs, investment related costs, and temporary dilution.

With respect to our primary credit facility, we increased commitments by $90 million and extended out the maturity to January of 2013. As part of this new facility, we incurred a 200 basis point increase in our borrowing spread, higher financing fees to be amortized, and a one-time write-off of the previously unamortized facility fees associated with the old facility that was retired.

The higher borrowing costs resulted in a reduction to core earnings-per-share of approximately $0.02, and these costs will continue to impact our core earnings-per-share going forward. However, the non-recurring write-off of old, unamortized fees, which resulted in the reduction of our core earnings-per-share this quarter of about $0.01, will not impact our core earnings per share going forward.

At March 31 our blended cost of debt stood at 2.3% with a weighted average maturity of over five years. In this environment we believe the trade-off of increased debt capacity at this cost and longer-term maturities is well worth the increased interest expense and fees.

Secondly, we raised approximately $277 million in net proceeds from an equity offering of approximately 23 million shares in early February. This add-on offering was priced at a 1.1 times premium to our then NAV and was our 11th equity capital raise as a public company.

The temporary earnings dilution we incurred by raising this capital, coupled with the lack of growth this quarter in our investment portfolio, lowered our quarterly core earnings-per-share by about $0.03. However we do expect this capital raise to be long-term accretive our core earnings-per-share as we use the proceeds to help grow our portfolio over time.

There were three other items of note in the quarter.

We earned slightly lower structuring fees in the first quarter relative to the fourth quarter's level. This accounted for a sequential quarter-to-quarter reduction in our core earnings-per-share of about $0.01. There were fewer primary market transactions, which typically carry higher fees, closed during the first quarter compared to the fourth quarter. And as in the past, structuring fees will continue to be variable, depending upon new origination activity.

Secondly, the additional loans placed on nonaccrual, and for which we are applying cash payments to principal, impacted our quarterly core earnings-per-share by about $0.01.

Finally, we received $2.2 million in prepayment fees during the first quarter, which accounted for between $0.01 and $0.02 of earnings-per-share. However, consistent with our past practice, we do not recognize prepayment fee income in our core earnings-per-share, but rather within realized gains and our GAAP earnings.

So to summarize, our $0.28 in core earnings per-share, excluding the professional fees associated with the Allied transaction, would have been $0.32 per share after adding back $0.03 of dilution from the equity offering and $0.01 for the non-recurring write-off of unamortized financing fees.

Since we were in the fortunate position to have approximately $500 million of debt capacity at quarter end, pro forma for the Allied Capital acquisition, and financing commitments received after quarter end, we will seek to increase our core earnings-per-share by making accretive investments with this available capital over the coming quarters.

As you may have seen from our press release this morning, we declared our second quarter dividend of $0.35 per share, payable on June 30 to shareholders of record. Many of you know we do not provide dividend guidance, but we recognize the importance of dividends to our shareholders. And we are proud of our consistent dividend track record, having now declared or paid at least $0.35 per share for the past 18 quarters, dating back to the first quarter of 2006.

Our goal of providing full dividend coverage from our core earnings-per-share has not changed, and we believe that embedded earnings potential may exist by using our available debt capacity to make new investments. However, there are no guarantees that we will achieve this goal.

With that I would like to turn it over to Rick Davis, our CFO, for more detailed comments on our first quarter financial results.

Thanks Mike. Please turn to the financial and portfolio highlights slide in our presentation, which is slide three.

As Mike mentioned, our basic and diluted core EPS were $0.28 per share for the first quarter, excluding $0.03 of professional fees related to the acquisition of Allied Capital, a $0.09 per share decrease over core earnings-per-share last quarter, and $0.03 lower versus a year ago.

As Mike discussed, this quarterly decrease primarily resulted from the impact from the increase in our shares outstanding, the non-recurring write-off of unamortized financing fees, higher borrowing costs, modestly lower structuring fees, and a modest increase in nonaccruals.

Net investment gains were $0.36 per share, comprised of higher net unrealized [appreciation] of $0.40 per share, partially offset by net realized losses of $0.04 per share. The net result was GAAP earnings per share of $0.61, compared to $0.64 last quarter and $0.36 for the first quarter of 2009. After paying our $0.35 first-quarter dividend, our net asset value was $11.78 per share, an increase of 3% from last quarter.

Consistent with the rebounding market and higher levels of transaction activity, we experienced both higher levels of new investments and prepayments during the first quarter. Gross fundings of $304.7 million were actually offset by higher exits and repayments of $313 million, resulting in a net reduction of $8.4 million. The exits and repayments included $94.5 million of loans sold to funds managed by Ivy Hill Asset Management. The remainder of the exits and repayments were comprised of prepayments, selected portfolio sales, portfolio amortization, and net pay-downs on revolving lines.

We ended the quarter with 94 portfolio companies valued at approximately $2.2 billion. Our quarter end portfolio was comprised of approximately 45% in senior secured debt securities, with 32% in first lien, and 13% in second lien assets, 26% in senior subordinated debt securities, 21% in equity and other securities, and approximately 8% in the senior secured loan fund that we co-manage with GE Capital, which currently holds a diversified pool of 12 loans.

Our weighted average investment spread at March 31 was 9.92%, which represented an 11 basis point decrease during the quarter and a 71 basis point increase year over year.

Our overall yield on debt and income producing securities at amortized cost increased to 12.2%, compared to 12.1% last quarter and a 11.2% a year ago. Up to this point we've been able to increase our portfolio yield due to higher yields on new investments and loan repricings.

As previously discussed, our weighted average funding cost increased somewhat to about 2.3% for the quarter, versus 2.1% last quarter and 2.0% a year ago. The weighted average funding cost does not include unamortized facility costs or unused fees.

On slide four, we provide detail regarding our fixed and floating rate portfolio assets at fair value.

Our fixed-rate assets accounted for 51.5% of our portfolio, with 32.5% of our assets at floating rates. We now have LIBOR floors on 21% of our total investments at fair value, and 64% of our floating rate portfolio. Our portfolio remains well matched from an interest rate standpoint.

During the quarter third-party independent valuation providers reviewed a little over 50% of the portfolio based on fair value. Over the last two quarters, third-party independent reviews have been conducted on approximately $2.1 billion of our portfolio at fair value, with 95% of the portfolio at fair value either reviewed or new to the portfolio over this period.

As shown on slide six, we incurred net realized losses of $5 million and net unrealized investment gains of $49.7 million for a total net appreciation of $44.7 million in the first quarter.

On a positive note, our realized losses on investments were approximately $3.5 million less than our previously recognized net [depreciation] for these assets. This is illustrated by the reversal of prior-period net unrealized depreciation of $8.5 million on investments for which we recognized $5 million in net realized losses.

As Mike mentioned, our net unrealized gains were broad-based and reflect both improved asset values, including tighter spreads on primary market loans and debt comparables, and overall stronger credit and investment performance.

Slide seven shows a summary of our debt facilities at quarter-end, before the Allied Capital acquisition. As discussed last quarter, we extended the maturities on our two primary credit facilities and increased the capacity on our revolving credit facility. As of March 31 we had approximately $771 million in total debt outstanding, cash on hand of approximately $84 million and approximately $509 million of debt capacity available for additional borrowing, subject to leverage and borrowing base restrictions.

Since quarter end we've further increased the size of the revolving credit facility by an additional $100 million, and we expect to receive an additional commitment of $25 million, bringing the total to $740 million of capacity. An increase of $75 million was contingent upon the closing of our Allied Capital acquisition. An additional $25 million increase in commitments was completed by adding one new lender through our accordion feature on our revolving credit facility, and as I mentioned, we expect to receive the additional $25 million commitment from another lender shortly.

These actions highlight our continued access to the debt capital market.

On April 1 we drew on our revolving credit facility to retire in full Allied Capital's $250 million senior secured term loan, which had approximately $130 million -- $[38] million outstanding at the closing of our acquisition.

In addition, we assumed approximately $745 million in Allied Capital's unsecured bonds, maturing in 2011, 2012 and 2047.

Even after retiring the Allied term debt, our available debt capacity was relatively unchanged. Although we increased our borrowings on our revolving credit facility by the $138 million to repay Allied Capital's outstandings on its senior secured term loan, we nearly offset this amount was the increase in our revolving credit facility capacity by $125 million since the end of the first quarter, assuming the receipt of the additional $25 million commitment.

On April 1, the closing date for the Allied transaction, we had increased our available debt capacity by $100 million at that point, bringing total availability, subject to borrowing base and leverage restrictions, to approximately $472 million at closing. The total available debt capacity amount will step up to approximately $500 million after we secure the additional $25 million commitments for our revolving credit facility.

On slide eight is our balance sheet. Our debt-to-equity ratio at quarter end was 0.49 times, and including cash and cash equivalents, our net debt to equity ratio was an even more conservative 0.44 times. This net debt to equity ratio is substantially lower than our targeted leverage of 0.65 0.75 times. Therefore, as Mike discussed, we plan to invest a portion of our available debt capacity in accordance with our investment objectives to bring our leverage more in line with our target range and increase core earnings.

Turning to slide nine, we paid our first quarter dividend of $0.35 per share on March 31 and are pleased to announce the declaration of our second quarter dividend of $0.35 per share this morning. This dividend is payable on June 30 to stockholders of record as of June 15.

As Mike mentioned earlier, we will be incurring certain non-recurring costs related to our acquisition of Allied Capital. In particular, these costs pertain to an acquisition advisory fee incurred upon closing, additional professional fees, compensation expenses for transitional former Allied employees, runoff insurance costs, dual lease expense, and other miscellaneous costs that we will break out in future reporting. We will provide an update on these non-recurring costs when we report our second quarter earnings, but we wanted to let investors know that there will be some lingering acquisition related transition costs throughout 2010, with a possibility of smaller costs incurred in 2011.

With that I'll turn the call back over to Mike.

Thanks Rick. Now a few words about our recent investment activity, our portfolio performance, and then our pipeline and backlog, before concluding and going to Q&A.

If you would turn to slide 10 -- in the first quarter we closed on approximately $300 million in new commitments across five new and 10 existing portfolio companies. Of the new investments made, 5% were in first lien debt, 57% in senior subordinated debt, 34% in equity and other securities, and 4% were in subordinated notes in the senior secured loan fund.

Our significant new commitments included a $54 million senior subordinated debt investment in a health plan management provider, $48.5 million in senior subordinated debt and equity of a diversified consumer products manufacturer, and $41.5 million in senior subordinated debt of an aftermarket automotive services provider.

In addition, as part of our purchase of Allied Capital CLO investments in the Knightsbridge funds, which closed at the end of March, we invested $51.9 million in certain CLO debt securities and made an incremental investment of $48.3 million into Ivy Hill Asset Management to facilitate its purchase of management contracts and certain equity securities in the Knightsbridge CLO vehicles.

As I mentioned in my earlier comments, debt and income producing securities purchased during the first quarter of 2010 had an aggregate yield of 13.6% on fair value, versus the 12.1% yield on assets repaid.

Now turn to slide 11 for a current review of our portfolio's aggregate credit statistics.

This historical data hopefully illustrates the success of the strategy that we pursued throughout the cycle. We increased portfolio investment spread while reducing portfolio risk throughout the credit dislocation of the past few years.

The left chart shows that our weighted average investment spread increased over the past year but declined slightly this past quarter due to the aforementioned increase in our borrowing costs.

The line graphs on the left demonstrate that our underlying portfolio's last dollar net leverage multiple has declined once again to 3.7 times, this past quarter.

And although not shown, it is equally important to understand that our portfolio's first dollar net leverage was at approximately 1.6 times at quarter end.

Our portfolio's interest coverage statistics have also improved, with our weighted average interest coverage moving from 2.7 times to 2.9 times.

Given that overall market leverage and interest rates are increasing, it may be difficult to hold these portfolio metrics or improve them going forward.

As you can see on the right chart, the average EBITDA for our portfolio of companies declined slightly from the previous quarter to approximately $44 million, reflecting our recent investments in companies with EBITDA of approximately $30 million.

We are finding better relative value in companies of this size in the current market environment, particularly given the recent strength in the high yield market.

Consistent with our past practice, I would like provide an update on our portfolio of companies revenue and EBITDA performance in the aggregate. As I mentioned earlier, our comparable portfolio of companies weighted average revenues and EBITDA continued to increase versus the same period a year ago.

For the first quarter, our comparable portfolio of companies weighted average revenues increased approximately 7%, and their comparable weighted average EBITDA increased approximately 21%, versus the prior period a year ago. This increase is after our portfolio of companies in the aggregate experienced 4% weighted average revenue growth and 25% weighted average EBITDA growth from 2008 to 2009.

One notable change is that we are seeing solid aggregate weighted-average revenue growth in our portfolio, which when combined with expense reductions and productivity improvements, has driven EBITDA margin expansion in the underlying portfolio.

Slide 12 shows additional detail on the diversification of our portfolio by issuer concentration, asset class, and geography.

We continue to be over-weighted in defensive industries such as health care, service industries, education and food services, but you will see that our recent CLO securities purchases and our investment in Ivy Hill, which includes investments in asset managers and various senior loan funds, resulted in our financial category increasing again from 16% to 21%.

The increase this quarter is due to our purchase of certain CLO securities in two Knightsbridge funds formerly managed by Allied Capital. The Knightsbridge funds are comprised of two senior loan funds with over 175 issuers and committed capital of $800 million.

Other than our investment in the senior secured loans funds, which in turn has invested in 12 different underlying borrowers, we believe that our portfolio remains highly diversified, with no single investment representing more than 4.6% of the portfolio at fair value.

Slide 13 provides another view of our attractive portfolio quality.

At the end of the first quarter, the weighted average grade of our portfolio investments increased from 3.0 to 3.1 this quarter, reflecting the overall improvement in our portfolio.

We experienced six performance-related upgrades and only two performance-related downgrades. We also experienced two downgrades from our highest rating of 4, which indicates an exit is likely to our average rating of 3, which means that underlying company performance is as expected, once it became clear that an imminent exit of these investments was less likely.

Therefore, the net rating changes were positive, and we believe are another reflection of the positive credit performance in our underlying portfolio.

Overall we have just 0.9% of our portfolio at fair value in our lowest rated category of 1, where we do not expect a full recovery, and 8.5% at fair value in our highest rated category of 4.

As I mentioned earlier, after backing out the loan on nonaccrual that we exited after quarter end at a profit and positive IRR, just 0.5% of our portfolio at fair value and 3.7% at cost was on nonaccrual as of March 31.

Other than these portfolio of companies on nonaccrual, we have no other companies delinquent in payment, and two of our issuers on nonaccrual were actually current in payment at quarter end; however, we elected to apply their interest payments to principle.

Turning to slide 14, you'll see our recent investment activity since quarter end and our backlog and pipeline.

As of May 6, we have made additional investment of $95 million since March 31. All of these new investments were floating rate with a weighted-average spread at amortized cost of 14%. Approximately 75% of these investments were in second lien secured debt, with 25% in first lien secured debt.

As of this date we had also exited $143 million of investments, of which 67% were in first and second lien secured debt, 28% were in senior subordinated debt, and 5% was in the senior secured loan fund.

Of the $143 million of investments repaid, 57% were in fixed-rate investments with a weighted average yield at amortized cost of 13%, and 32% were in floating-rate assets with a weighted-average spread at amortized cost of 13%.

On this date our total investment backlog and pipeline stood at $72 million and $980 million, respectively.

Of course we can't assure you that we will make any of these investments, and we may syndicate a portion of these investments.

Also, as a reminder, we define our backlog as committed transactions that are under a letter of intent. Our pipeline is defined as transactions with no formal commitment but where significant due diligence has been performed and there is a good probability of us consummating a transaction.

Unlike some of our peers, our pipeline does not include the more than 50 transactions that are currently being reviewed at various stages by our investment teams.

In light of our portfolio rotation strategy following the Allied acquisition, we thought it would also be important to update investors on potential portfolio exits over the coming quarters. As of May 7, 2010, we had identified between $300 million and $600 million of potential exit opportunities for the second quarter of 2010, which is higher than our normal level of exits. Approximately $400 million of these exits are portfolio investments acquired in connection with the Allied acquisition. Some of these exits are voluntary, where we are taking advantage of current market conditions to harvest and rotate the portfolio. Of course, other exits are involuntary, where we are getting refinanced by more aggressive market participants. However, we cannot assure you that any of these exits will be made.

Now let me conclude by summarizing some key points on the first quarter.

Our portfolio of quality and investment performance remains strong. You can see this in the number of upgrades compared to the number of downgrades, our higher asset values, our improved overall portfolio performance statistics, and our low level of nonaccruing loans.

We made great progress to continue to strengthen Ares Capital's balance sheet going into the closing of the Allied transaction. We expanded and extended the maturities on our credit facilities at a modest incremental cost, and further strengthened our balance sheet and capital base with February's equity raise of $277 million.

Subsequent to quarter end, we have increased our revolving credit capacity by an additional $100 million, and we expect to add an additional $25 million through the commitment of another lender in the near future.

Although the increased capital that we secured had a short-term economic cost to us this quarter, we expect that we will be able to deploy this capital in an accretive manner.

Of course, just after quarter end we completed the strategic acquisition of Allied Capital, making us a leading player in our industry, with significant capital and scale in the middle market. We remain very excited about this purchase and all of the benefits that we expect it to bring to ARCC.

We believe that our timing has worked quite well given the improved economic environment and the strong markets for leveraged assets. We are confident in our ability to monetize as well as to rotate and reposition certain assets in the former Allied portfolio into higher yielding assets.

And lastly, I would like to welcome our new shareholders that came to us from Allied Capital, and we would like to thank both our new and existing shareholders for their strong support throughout the Allied Capital acquisition process. We believe the acquisition will be rewarding to all of our shareholders, and we are confident that our company is well-poised for success in today's market.

We hope that you share our enthusiasm for what we believe is our unique competitive position and enhanced capabilities that leave us well positioned to pursue the market opportunities in front of us.

And with that, operator, I think now we'll open up the line for Q&A.

(Operator Instructions). Greg Mason, Stifel Nicolaus.

Mike, can you talk about the $400 million that you highlighted on potential exits from the Allied portfolio. As we look at reinvesting that capital, what generally are the types of returns on those investments, looking at recycling into higher-yielding investments?

I can't go into specifics now, but obviously as we laid out our strategy on Allied, if you recall from our prior call, we had about six buckets that we would put Allied's portfolio assets into -- performing debt, nonperforming debt, performing equity, nonperforming equity, CLO and structured product, and real estate. And each of those asset categories has a different strategy for us to try to drive value. Some may require just an outright sale and monetization. Some will require a reinvestment of capital and a repositioning within the portfolio.

I think generally speaking the good news is that the $400 million we are targeting, it's really a broad swath across each of those asset categories. And while I can't go into the details of the spread pickup, clearly the yield on the securities that we'll be selling is meaningfully lower than the returns that we are able to generate on new investments in today's market.

Touching on the new investments that you've made since March 31, I'm kind of surprised, given the increased competitiveness of the environment, you're getting 14% rates of return on these investments. Can you talk about -- are those unique? Or should we be expecting those types of returns even with the competition increasing?

I think those are frankly unique. If you remember, in our business, typically takes us anywhere from three to nine months to work through an investment process from our initial introduction to a transaction through to closing. So deals that are closing now were being formed and committed to in the back half of last year, if not the early half of 2010. So recognize the pricing you're seeing now is not necessarily a reflection of the pricing available in the current market environment.

So I would expect that on a go-forward basis you should see investment spreads continue to come under pressure.

I think anybody in this market who tells you that they're able to generate these types of returns on a go-forward basis is probably taking undue risk to try to generate those returns. And as a result, similar to what we did in 2006 and 2007, when we are faced with increased competition and a tightening spread environment, we try to take our scale and our origination clout and position ourselves for better risk adjusted returns.

So I would look at it -- if you see our spreads coming in in future quarters, you should also expect to see a maintenance of that first dollar/last dollar leverage that I described in our prepared remarks.

Great, thank you gentlemen.

Chris Harris, Wells Fargo Securities.

On the exits we were just talking about here, the $300 million to $600 million, is that -- are those exits you've identified and are expecting to perhaps close in subsequent quarters? Or do you think a large majority of that might close in the second quarter?

I think it's possible, given the strength in the high-yield market particularly and the performance in our underlying portfolio that you can see a lot of that happening in Q2.

Great. And then on the new investment landscape here, I guess if you add up the investments you've made subsequent to the end of the quarter and your current backlog, I think you're getting about $170 million of potential new investments. That number seems a little bit low, at least relative to our estimates. Is there something that's really driving that? I know you guys are really focused on rotating and rebalancing the portfolio, but is there some maybe seasonality impact related to the lower pace of originations here?

I don't think so. Historically we've talked about seasonality, and typically Q2 and Q4 are much busier periods for investments. But I don't think that's it. I think it's important for people to really appreciate what's happening in the broader markets. Despite what's happened over the last week, the bank loan capital markets are overheating, the high-yield market is very aggressive right now, and so what you are really seeing is, number one, a lot of increased velocity in our portfolio, and number two, while there is still a pretty meaningful inefficiency in our market and you can see that when you look at the spreads that we are generating relative to the historical spreads as well as the spreads in the current liquid market, that said, there is always some reference to the broader capital markets when people are looking to finance themselves in our market.

One of the things hopefully we have developed over this last cycle is credibility with the investor community and the research community that we are not the guys who are going to be out there chasing yield, we are not the guys that are going to be out there being aggressive to try to meet a quarter's origination targets.

Frankly with the Allied purchase, having bought it for what we bought it for and when we bought it, we feel that we are meaningfully participating in this rally. And as a result, I think we are being a little more cautious in how we are deploying capital given the strength of the capital markets.

But it really is amazing. If you look at even what's happened since the end of last week through to today, as we mentioned in our prepared remarks, the windows in the capital markets are opening and closing very quickly. And so while we are watching the rally, we have in no way slowed down our origination efforts, and you see that in our backlog and pipeline numbers. But what we are doing is when that backlog and pipeline finds its way to our boardroom, we are being a little bit more measured in what we are willing to book and for what rate of return.

So I am not today going to say that this is going to sustain itself throughout 2010. We are still very bullish about our opportunity throughout the course of the rest of the year and beyond. But I think everybody needs to recognize that at least in the broader liquid markets there's a lot of liquidity that has come into the market right now just given how low interest rates are and how much people really are looking for yield.

That's very helpful. One final question here if I could. Some of your peers obviously have access to SBA leverage. Is that something you guys would think about looking to add to your I guess funding mix?

Absolutely.

Okay. Any timing on that perhaps? Have you already submitted an application?

We have not submitted an application. It's something we are looking at and spending a fair amount of time with. Recognize that the nature of the program requires a pretty significant move down-market in terms of borrower size and the types of assets you're going after with that leverage. So it's something we are thinking spending a lot of time thinking about how we resource and how we would go after it. But obviously it's very attractive, and we think it could be a nice complement to our platform.

Great, thanks Mike.

Jim Ballan, Lazard Capital Markets.

Mike, just to make sure, are we going to get any kind of pro forma numbers relative Allied, anything on like a run rate, NII number, or how much in assets they sold in the first quarter? Are you planning on doing anything on that before you report second quarter?

Probably not. We are obviously in the process of pulling all that together. Depending on the timing of when all that work is completed, if we feel it would be helpful to communicate something to the market, we may. But at this point in time, I'm not -- it's not clear if that's something we're going to do.

All right. Great. So just a couple of other things. Can you talk a little bit about the unrealized gains in the quarter? Maybe just a little more granularity on how -- it's a nice number there, so anything you can -- is there -- were there a couple of specific investments that did well there? Or is there anything you could talk about to give us a little more granularity?

Sure. Well, let's just remind everybody about what our valuation process does when we think about fair valuing our portfolio. For each of our investments, the management team and the deal teams look at a number of inputs. We look at comparable public company multiples. We look at comparable private M&A transaction multiples. We look at high-yield debt comparables, to the extent that they exist. We look at relevant bank loan multiples, to the extent they exist. We run discounted cash flow analyses over a range of different model sensitivities for every portfolio company. We look at the general market backdrop against which we are valuing the portfolio, and then we obviously look at the underlying portfolio performance against prior periods and budget.

And our third-party valuation providers go through a similar process.

Given those inputs, you can appreciate the public equity markets were up, and so on the equity side we saw a healthy increase in multiples.

Number two, spreads tightened and leverage increased, which had a pretty meaningful impact on our debt securities.

I think most importantly, and hopefully it's not lost on people this quarter, the underlying performance in our portfolio continues to be amazing. So we've seen now 20% EBITDA growth throughout the full fiscal 2009. We are seeing continued profit growth of 20% plus into 2010, so with that EBITDA performance, we are getting a deleveraging and therefore enhanced value when we apply all of those variables to the portfolio.

The nice thing about this quarter is it was very broad-based. The move was roughly split evenly between increases in debt securities and increases in equity securities. And as I mentioned, it was very broad-based, there were not -- there wasn't one or two names that were driving the bulk of that. It was pretty much across the board.

Great. And the professional fees and integration fee -- expenses that you're expecting to have over the rest of this year and possibly into next, can you give us an idea maybe just of an aggregate number, of how much you think that might be, even roughly?

We don't want to mislead, but excluding the advisory fees, I would venture to say it's probably a $10 million number.

Okay.

And obviously as that materializes, we will communicate it to the market next quarter as well.

And that's probably more in the next couple of quarters than beyond that?

Yes. As Rick mentioned in his remarks, you may see some very modest lingering effect into 2011, but the majority of our transition expenses in terms of overlapping leases and transition employee expenses will be for the most part a 2010 line item. We do have tail insurance and some other things that go well beyond 2010, but the bulk of it will be for this fiscal year.

Great, thanks a lot.

Sanjay Sakhrani, KBW.

This is actually [Steven] (inaudible) filling in for Sanjay. Thanks for taking my question. I was wondering -- just to follow up on Jim's question -- if you could help us think about the run rate of investment income post the acquisition at Allied.

It's a little difficult to nail a run rate down right now, as Mike mentioned, with so much of the portfolio being rotated. And with the bulk of the valuation work still related to be done on the -- related to the Allied portfolio, it's -- I don't know if it would be very helpful to try to give a range, because the range would be so broad right now.

I'll highlight a couple of things though. Remember, around the closing of the acquisition we stated to the market that it would be an accretive transaction to NAV and accretive to earnings within the first year. And we are still standing by that. And you can already see the NAV numbers coming through in the pro formas that were part of the prospectus that was circulated as part of the acquisition.

Number two, this is a bittersweet market for us because you like being cash-rich in this kind of environment, and getting taken out by an aggressive high-yield market and a rising interest rate environment is not necessarily a bad thing. But when you're running at 0.4 times leverage versus a target of 0.70 to 0.75, obviously your stated earnings are going to be lower than your potential earnings. That's not something that concerns us, particularly given all of our competitive advantages.

And then lastly, when you think about the Allied purchase, as I mentioned in my prepared remarks, there will be a balance between core earnings and GAAP earnings that we need to strike and that we all need to focus on and communicate, because the reality is in certain situations you may decide to hold a non-interest-bearing security to try to maximize value, and the value of that investment may not materialize in the income statement for a year or two or three, and there may be other situations like you're going to see in the second quarter where we're aggressively taking advantage of the market environment to sell assets, either book gains or book prepayment fees, or at worst, reduce our exposure to lower yielding assets and reinvest into the market when it develops.

So we don't want to be nebulous here, but I think, as Rick pointed out, there's so many variables at play here, the best we can do right now is give you guys a roadmap to the strategy and the disposition of the portfolio. I think you'll see a lot of these things coming into play as the year develops.

I guess just to follow up on that, how much has Allied's portfolio changed post the latest numbers that we have, which was as of December 31 I guess?

In terms of changes in terms of performance? Or changes in terms of (multiple speakers) size?

In terms of the portfolio, like the mix of the portfolio, the yields.

Yes. I don't think we can comment on that today. But again, you should assume that we continue to execute on our strategy and we will continue to look at the portfolio to either monetize it or reinvest in it.

Great. Then just one final question, on the interest expense in the first quarter, it seems a little but high compared to the fourth quarter. Just wondering how much of it was related to the $15.6 million that was paid for the restructuring amendment fees.

Yes, the amount of carry in the first quarter was impacted both by a write-off of old, unamortized fees on our old facility of roughly $0.01, and then the new amortization during the quarter I think probably incrementally was about $1.0 million to $1.2 million that's included in that number.

And then plus a modest increase in (multiple speakers) spread.

For the spread, right.

So if you take all three of those combined, you're probably somewhere between $0.03 and $0.04.

Then I guess the $1 million to $2 million, that will continue going forward?

Yes. The only nonrecurring portion of that is the write-off of the unamortized facility fees from the prior revolver.

Great. Thanks.

Donald Fandetti, Citigroup.

Can you talk a little bit about the newer non-accruals. It sounds like credit's generally holding up relatively well, but can you provide some color?

Sure. As we mentioned in the remarks, I think the good news is -- if you could say that it's good news when you put something on nonaccrual -- is the two new loans that were put on nonaccrual -- because I'll exclude the third one. That was a little bit of a unique situation, but we had a 3 rated credit that we were working on a restructuring for. We got blocked as a sub debt provider and consistent with our policy, which I think may be a little bit more conservative than some of our peers -- we put that loan on nonaccrual, only to monetize it very shortly after the quarter at a greater than 10% IRR. So I'll exclude that one and just talk about the two true new non-accruals.

The two companies that we put on nonaccrual were Masterplan and Wastequip. They have been lower rated credits for probably the last 2.5 years. We've been aggressively monitoring them and hoping for improved performance.

As I mentioned, we are still current on interest there, so we are getting paid interest. It's just that we don't see a catalyst for improved performance in either of those companies. As a result we thought it would be appropriate to start applying interest to principle and reducing the principal balance. But interestingly, they are both still current on interest payments, and we think that should continue.

So it seems like there's almost kind of winners and losers coming out of this. These two, obviously as time passes, it's clear that they may not be in a position to recover. Do you expect a couple more of these sort of hiccups each quarter? Or is this -- what is your sort of outlook [here] (multiple speakers)

If we are doing our jobs well, you should never be surprised or we should never be surprised. Obviously we are heavily involved with these companies, we are very actively dialoging with management and sponsors. In some cases we are sitting on the Boards or observing the Boards.

As we've talked about on past calls, I think the good news is, we identified our basket of difficult credits two or three years ago going into the cycle, and for the most part that basket has been the same. And we have been working harder to try to shore up or restructure and protect value in the same small handful of names for the last two or three years.

These two names -- you'll see if you go back and look at the trajectory of NAV -- have been problems for us for a long time. So the fact that we've put them on nonaccrual is not a surprise to us, it's really just a recognition that we don't see an ability -- unlike in certain other situations -- to really turn this around and see our way to a full recovery.

So when you look at our 1-rated credits of about 0.9% at fair value, it's not surprising that that approximates the non-accruals. And it just so happens that most of our lower rated credits have been the same names.

So I can't rule out that another one or two names may find their way into the lower rated category. But for the most part -- and this has been true for the last year or two -- we haven't seen new problems emerging. It's really just been trying to resolve our existing issues.

Thank you.

John Stilmar, SunTrust.

Just the first one is a housekeeping item. Do you have the average portfolio before fair value adjustments? And then the average amount outstanding, at least on your debt facility, for the quarter? And we can come back a reckon off-line if it's not readily available.

We'll look at that. If there's another question, we'll hopefully be able to get that to you before we hang up.

Mike, I guess a couple of questions. It comes back to the thought process of capital raising. And you raised capital earlier in the quarter. Your new investments are almost equal to repayments. And so far through the second quarter the portfolio exits have been greater than new portfolio investment. While we certainly understand the discipline, can you help me understand the rationale of raising incremental capital when it seems like, for a lack of a better term, you're almost choking on the fact that you've got so much more of portfolio exits that you're prudently deploying, but what's the need for incremental capital? Is it that you have to have that cash and capital on hand to write a check six months out for current conversations, and that's (multiple speakers) the logic?

No, I don't think that's it at all. Number one, I wouldn't say that we're choking on it. Quite the opposite, I think we're thrilled to have it. The reality is, in this market -- and I'm sure that you're seeing this in other financial companies as well -- there has been a meaningful and drastic improvement in the liquid capital markets since the end of last year.

When we raised capital in February, leading up to the Allied transaction, we had a strategic view and continue to have a strategic view that being over-equitized, if that's where we wound up, is of much greater strategic value than being under-equitized -- number one.

Number two, the markets are so frothy right now, particularly the high yield market, we could not have foreseen -- as connected as we are to the broader capital markets, we could not have foreseen the number of repayments in the existing portfolio resulting from what's going on in the high yield market. However, you can't run your business quarter-to-quarter and you can't manage your liquidity quarter-to-quarter, you have to have a view as to what your secular opportunity is and what's going to happen over a multi-quarter and multi-year time frame.

So as we sit here today, we'd love to be a little bit more invested and a little bit more leveraged, but we are happy to have the cash, we are happy to have the origination infrastructure we have, and you look at the backlog in the pipeline, and we are out there actively seeing the market. I think we are seeing almost every deal that's available, but the reality is, now is not the market environment where I think you are supposed to be aggressive.

If we've learned nothing else from the prior cycle, those who moved too quickly into a market shift or those who exited a market shift were those who did not perform well. And our experience and track record would say that you're supposed to be moving in and out of volatile markets in a little bit more measured way.

And then lastly, when you think about where we are levered versus what our target range is, if you think about the size of our balance sheet, the ability for us to now increase our final holds, our available debt capacity of $500 million frankly relative to the size investments that we are looking to make and relative to the size of our market position is not a huge number. So it may feel like a big number today, but that could get eaten up by a handful of transactions. The last thing you want to do is be in a situation where you see an opportunity in the market and you can't take advantage of it.

So again, I think we got a little bit surprised by the froth in the liquid markets, but by no means are we concerned about it, and frankly, given some of the volatility we've experienced over the last week here, I think we are actually quite happy to be in cash right now.

Great. All right.

And again, those two numbers that you were looking for, the average cost basis of the portfolio was -- didn't change a lot at about $2.3 billion. And you can see that parenthetically on the balance sheet for the investments. And average debt outstanding for the quarter was about $815 million.

Okay, thank you gentlemen.

[Jasper Birch], Macquarie.

Just to start off with, the $52 million of CLO purchases, that was all in Knightsbridge?

Yes.

What is your outlook on possibly continuing to purchase CLOs? Or some more color on that. What was your -- what tranches were you buying in dollar pricing, and do you need -- are you looking to only buy notes in places where you could ultimately have management control?

We have no desire to buy a structured product where we don't control the asset. So all of the purchases of the CLO or structured products from Allied or elsewhere were all in situations where we maintain control.

I would highlight though now that we've sold the management contracts of [Caladis], we actually still hold a fair amount of underlying Caladis securities, both notes and equity.

Again, when we talk about getting the timing right on the Allied transaction, similar to what we are seeing in the high yield market and leveraged loan market, the structured products market has probably rallied even more. And so the good news is, they were strategic purchases for us to help build Ivy Hill Asset Management up given all the benefits that we derive from that. But this was all in a market where asset values were only going one way, and that way was up.

Great, thank you. Changing tacks here, Mike, you gave some really good commentary -- or some commentary on possibly pursuing an SBA license. I was just wondering, could you give us some color on what your long-term view of capital structure at Ares is going to be, what role an SBA might play, term debt, revolver, securitizations, etc.?

Sure. Well, let's just talk about what is available to us, and then we can talk about how we access them.

Obviously the bank loan market is something that we are always in. You could see this quarter that even in addition to the $75 million that was committed going into the Allied transaction, we brought two new lenders into the facility through the accordion, showing that we can continue to access capital in that market. My general sense -- and this is a long-term view -- is that market will continue to improve for us.

One of the investment theses for the BDC sector in general and for us specifically is that the larger money center banks and even some of the regional and smaller international banks will not be building direct origination and portfolio management infrastructures to go after the middle market. That said, with increased liquidity they are looking to deploy capital into the asset class. So again, if you think about how the markets have improved, a year ago banks were asking for their money back, and now you're getting reverse inquiry for people looking to put capital to work. We think that's a long-term trend for us, so we would expect the bank loan market to continue to improve for us and be open to us.

I would also highlight there though that I think that scale is very important. You have to be not only an investment-grade rated borrower, I think to truly efficiently access that market, but you have to be large enough that you can actually demonstrate the survivability, if you will, that some of the bank risk managers are looking for. So that's the bank loan market.

Two is the unsecured notes market, either private or public. Again, that market is quite hot as well. Spreads have tightened, although the underlying base rates are obviously widening, so the cost to borrow that market, while attractive on a long-term basis, is significantly in excess of our current cost of funds. But it's a market that we continue to look at, and at the appropriate time we would probably be issuing into that market.

Third is the securitization market. We are seeing meaningful signs of life in that market. I'll remind everybody on this call that Ares Management, the parent of the investment manager for ARCC, is one of the largest managers of bank loans in the world. We have seen researched -- a resurgence in appetite for leveraging bank loan assets, and as a result I think we will eventually be able to take advantage of strength in that market, both at Ivy Hill and on balance sheet.

Fourth is the SBA program. I don't want to belittle the program because it's a wonderful program for our sector, and it's a great thing for the US economy to get capital to small companies. But given the constraints on size, I can't say that it's going to be a meaningful component of our asset liability management. But it will be a nice complement to what we already have. But it's just not a large enough program right now to really move the needle and be a cornerstone of our liability management strategy.

And then there are a number of creative things that I think are available at different points in time, whether it's the convert market or the TRUFs market or the retail preferred market, and when the cycle was at a different place, those were available to us.

You look at Allied, for example, and we are inheriting some retail baby bonds with a 2047 maturity and a roughly 6% interest rate. So there is precedence for those markets to be open to folks like us, and obviously to the extent that it makes sense to get into those markets, we will.

So I think the good news is, with the improvement in the market, we are seeing improved capital access, and we're seeing it at long-term rates that are attractive. And I think, again, part of the investment thesis for the Allied acquisition is that when you're going into those markets, particularly the liquid markets, scale is very important to efficiently access those markets. And we think we are in a good position to do it.

In terms of secured versus unsecured, fixed versus floating, obviously we spend a lot of time thinking about that and working on our interest-rate strategy and our duration matching. But you should assume that over time you're going to see a fairly healthy mix of both senior secured and unsecured debt, as well as fixed and floating, as we work on our portfolio construction.

That's very helpful. And then Mike, also sort of on the other side, in terms -- you mentioned that you expect favorable supply and demand imbalance that could persist for years [in normal] market lending, but at the same time you're seeing a move down market a little bit in terms of company size that you're investing in. Could you just talk a little bit to the difference -- the segmenting [in] competition across sort of company size that you're seeing, and what part of the market you expect to be most attractive going forward?

Yes. It ebbs and it flows. So I can't say as we sit here today one is going to be more attractive for a long period of time versus others. One of the things that I think makes us unique and is a big differentiator given the scale of our platform and the way that we originate our business is we are participating in the entirety of the middle market, from sponsored finance to non-sponsored finance, from senior debt through to structured equity, from $10 million EBITDA issuers to $250 million EBITDA issuers.

At different points in the cycle, depending on what's going on in the high-yield market, depending on what's going on with community banks and regional lenders, depending on what's happening in the securitization market, different parts of the market are more or less attractive. So we think our responsibility to our investors is to be in all of those markets, looking for the best relative value and the best risk adjusted return.

As we sit here today, the high-yield market is frothy, and I would actually argue irrational right now and therefore has really eaten into the upper end of the middle market opportunity for private debt. And so as you saw in Q3, Q4 and Q1, you continue to see us pursuing smaller issuers, just because we are not in the business of competing against the high-yield market.

There are other mezzanine providers that view that as their core business, but obviously in an environment like this when you're competing against the high-yield market, you're sacrificing covenants and meaningfully sacrificing pricing relative to what you can get down market, and that's not something that we're very focused on doing right now.

At the lower end of the market, while liquidity is still constrained, it's actually easy to get a deal done at the lower end of the market because you only need one capital provider to be willing to do something, rational or irrational, in order to get a transaction done. And so in the smaller company market, while you can still get inefficient pricing, we don't perceive a real liquidity constraint.

So today -- and this is all obviously subject to change -- but today we think that kind of right down the middle of the fairway, middle market issuer with somewhere between $20 million and $50 million of EBITDA that's too big to access the local bank market but too small to really be attractive to the high-yield market or the syndicated loan market is where at least we are seeing the bulk of the attractive opportunity today.

But again, things are changing very quickly out there. If you look at our Q4 originations versus our Q1 originations, you'll see we went from being down market to being -- down balance sheet to being up balance sheet, where our originations quarter to date, as you saw, were predominantly first and second lien loans versus sub debt.

So we don't want to put ourselves in a position where we are laying out an asset strategy only to find that the asset opportunity changes. We are out in the market trying to see every possible deal in the available market, and then once we get them in-house, decide where we can exploit an inefficiency.

And again, aside from -- sorry to ramble here -- but aside from what we saw today from the ECB, it felt going into the weekend that the high-yield market was going to take a breather and maybe put us in a position to start financing some larger borrowers again. Obviously things have changed today. It may go back to being an opportunity a week or two from now. So you just have to be in the market looking at everything and continuing to exploit your competitive advantages to find good opportunities.

Great, thank you very much. Then just one really small housekeeping question. When you put something on cash nonaccrual and you are taking -- and it's still current, so you're taking the interest to pay down principle, I know that you back that out of core income. Do you also back that out of taxable?

Yes it is. It's backed out of taxable too.

Excellent. Thank you very much.

Jason Arnold, RBC Capital Markets.

Back to the $400 million in potential exits from Allied, are these coming more from loan repayments at cost, meaning they're potentially going off at levels higher than the fair value marks?

Well remember, when we bought the portfolio, we are fair valuing the portfolio as of April 1, and we are resetting basis. So I just want to make sure we are using the same language here.

To the extent that we are selling something, the gain would be measured against our new fair value as April 1. And I would say generally speaking, given the strength in the markets, we are loathe to sell assets below fair value, unless of course they are nonperforming and we want to generate cash or they are so far off the balance sheet and low yielding that we want to rotate the portfolio.

So I think you should assume that there's going to be a fair amount of discipline around where we are willing to sell an asset, and obviously for the non-debt securities and the equity portfolio, we have to look at the long-term IRR opportunity and cap gains opportunity in that portfolio, versus the ability to take a non-interest-bearing security and turn it into an interest-bearing security.

And again, the M&A market is improving, the multiple environment is improving, and so I wish I could say that equation is becoming easier for us. In certain instances it's actually becoming more difficult because there's just a lot more asset liquidity, and I think we have a lot more flexibility to make those types of decisions.

Terrific, thank you for the color.

David [Rothschild], Raymond James.

We seem to have lost David. Again, thank you for spending so much time with us this morning. Sorry it ran so late. We appreciate everybody's support, and we look forward to speaking with you on our next quarter's call and giving everybody more [full] (background noise) update as what's going on in the market and more specifically what's happening within the Allied portfolio.

So thanks again. We'll talk to you soon.

Ladies and gentlemen, that does conclude our conference call for today. If you missed any part of today's call, a recording of this conference call will be available through May 24, 2010 at nine a.m. Eastern Time. To access the replay, you can call 1-877-344-7529. To call internationally, you can call 1-412-317-0088. For all replays the ID number is 439895.