Ares Capital Corp (ARCC) 2010 Q2 法說會逐字稿

Good morning and welcome to Ares Capital Corporation earnings conference call. At this time, all participants are in listen only mode. As a reminder, this conference is being recorded on Thursday August 5, 2010. Comments made during the course of this call and webcast and the accompanying documents will 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 companies actual results could differ materially from 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 top they discuss core earnings-per-share or core EPS which is a non-GAAP financial measure as defined by the SEC regulation G. Core EPS excluding professional fees and other fees related to the allied acquisition is a 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 and incentive management fees attributable to such realized gains and income taxes related to such realized gains and adjusted 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 most directly comparable GAAP financial measure can be found in the Company earnings press release. The Company believes that core EPS provides useful information to investors regarding financial performance, because it is one method the Company uses to measure its financial condition and results of operations. Certain information discussed in this presentation including information relating to portfolio companies is 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 Company's slide presentation by going to the Company's website at www.AresCapitalCorp.com. And clicking on the Q2 -- 10 investor presentation link on the homepage of the investor resources section of the website. Ares Capital Corporation earnings release and quarterly report are also available on the Company's website. I will now -- I will now turn the call over to Mr. Michael Arougheti, Ares Capital Corporation's President Sir you may begin.

Great, thank you Operator. Good afternoon to everyone and thanks again for joining us. On the call with me today are the senior partners and the senior management team of Ares Capital Investment Advisors as well as our Chief Financial Officer, Rick Davis. I hope you've had a chance to review our second quarter earnings press release including our third quarter dividend announcement this morning as well as our second quarter investor press presentation posted on our website. We'll refer to the presentation a little later in the conference call.

I would like to start off by briefly discussing recent economic and market events that our primary market. Update everyone on the progress and benefit that we believe we have realized to date from our recent Allied Acquisition that closed on April 1st and then highlight our combined company second quarter results before I turn the call over to Rick Davis.

After Rick provides the detail behind our second-quarter results I will walk through the recent investment activity portfolio statistics, portfolio management strategy and our backlog and pipeline before we close and take Q and A. Please note for ease of presentation in a number of places we provide information separately for the Legacy Allied Portfolio as well as for the core ARCC portfolio.

As we highlighted in the last earnings call on May 10, the capital markets have recently experienced a significant amount of volatility. For a period of time after early May, the market experienced increased uncertainties over sovereign debt risk , financial reform and mixed economic data. This impacted public equity in high-yield markets which in turn returned reduced risk appetite in our market towards the latter part of the second quarter. High yield volume softened in May and June from the robust levels reached in April and spreads widen.

However, since June 30 high-yield files are recovering and high-yield spreads are once again narrowing. I remind everyone that while the high-end market may from time to time have impact on the upper end of our market as evidenced this past quarter, when a few of the larger portfolio companies managed to refinance our loans with high yields, I high yield market volatility or uncertainty can also create additional opportunity for us. Particularly when larger middle arc issuers require transaction certainties.

For example this quarter we earned a meaningful commitment fee by providing a mezzanine backstop for high yield bond financing in conjunction with the larger LBO transaction, where the high-yield financing was successfully completed. Regardless of the state of the high-yield market our core focus remains on middle market companies unable to access the high-yield market and this opportunity has remained fairly consistent as the year has developed.

In spite of the high-yield market volatility the condition in the second quarter in our core middle market were similar to the first quarter with a few noteworthy exceptions. Loan volumes were substantially higher and the tightening trend in primary market senior debt spreads finally reversed course. Per S&P data middle-market leverage buyout lending volume was up sharply during second quarter with an increase of over 50% from Q1 2010 levels.

Spreads on senior debt transactions average around (inaudible) 4.5% to 5% with approximate 1.5% to 2% (inaudible). Mezzanine pricing remained in the 12% to 15% range and unit (inaudible) average out in the nine to 10% range including (inaudible)

I also add that total leverage levels in buy out transactions appear to have stabilize after a modest upward bias during the second quarter to around 4.5 to five times total debt EBITDA. While not as attractive as 2009 the spreads relative to leverage levels are still significantly greater than historical averages.

In addition loan to value ratios continue to be attracted by historical standards as private equity sponsors continue to pay higher purchase multiples often contributing 40% or more of transactions consideration in equity. For from our vantage point middle market sponsor financed activity is fairly healthy as evidenced by our level of new commitments this quarter and our strong backlog and pipeline. The second half of the year for the market in general looks promising from the new issuance standpoint. Looking out longer term, we very encouraged about a continued potential supply demand in balance in our market.

Demand for credit should continue to be driven by two main factors: One, there is an abundant amount of uninvested capital from private equity funds that will need senior and junior debt providers to leverage their capital. Two, significant amount of maturing debt between 2012 and 2014 across middle market, large LBO loans and high-yield bonds, not to mention commercial real estate loans and other forms of credit originated in the peak years of 2006 and 2007.

On the supply side, we may believe credit-based to be constrained as a result of continued systemic leveraging and increased financial regulation. Given the magnitude of the future opportunity we will continue to be measured and selective in the current market.

Although expectations for economic growth have moderated recently we have not seen any significant impact for underlying portfolio Company results in either the core ARCC portfolio or the Legacy Allied portfolio. The economy has been strong enough to enable corporate default rates decline significantly in the leverage loan and high yield markets and credit rating agencies forecast continued improvement for the rest of 2010.

We believe our Core Ares Capital portfolio and our recently purchased Legacy Allied portfolio will follow along this path of improved credit and investment performance. Slow growth environment in fact favors credit investing over equity, particularly in debt investments with contractual amortization and maintenance covents. Importantly we believe we can take advantage of opportunities regardless of market direction.

If the market it over heats increased liquidity we may slow our investment pace or except lower returns but accelerate the dispossession of certain non-core and lower yielding assets from the Legacy Allied portfolio and to a lesser extent the Core ARCC portfolio.

On the other hand if the market softens helping spreads to widen and structural terms improve we may slow disposition but accelerate our capital deployment using our significant excess debt capacity.

Turning to our Allied Acquisition I would like to take a few minutes to remind you of the transaction rationale and highlight a few benefits we believe that we have achieved .

Our enhanced scale and capital resources following the acquisition allows us to be more competitive in the sourcing of execution of attractive investment opportunities. As I stated on our last earnings call we believe that the Allied transaction strengthen our competitive position by bringing increased commitment in whole capacity. It brought us improved market knowledge and better access to the debt and equity capital market as well.

While competition has increased this year, we believe the investment environment remains attractive with fewer of our competitors possessing comparable origination, underwriting and commitment capacity. Our deeper origination coverage coupled with what we believe is our relatively more complete product offerings comprised senior unitor and mezzanine debt has enabled us to review a greater percentage of opportunities in the market. As a result, we believe that we are able to increase asset selectivity as we search for superior companies and relative value investment opportunities within capital structures.

The rationale for acquisition of Allied capital was also based in part of the opportunistic purchase of a stressed portfolio an attractive price with the idea of benefiting from not only improving incoming but also from the rotation repositioning of a portion of the portfolio into higher yielding assets. We believe we got the price and timing right as it is clear we are now in a stronger market environment than last year for both asset dispositions and asset values. I will walk you through what we believe are opportunities to rotate and reposition the portfolio later in the call.

As they stated before, we are confident that over time we will execute well upon this strategy. But, it is likely to take the remainder of 2010 and into the next year to fully implement the plans and realize many of the other expected benefits of the Acquisition. While Rick will go into the second quarter in detail I would like to highlight several takeaways.

First, from a earnings standpoint we increase our core earnings per-share sequentially by four cents from $.28-$.32 excluding certain fees other costs associated with the Allied Acquisition despite a reduction in net originations for the quarter. Our portofilio appreciated during the quarter with net realized gains of six cents per share including two cents a repayment income and $0.38 in net unrealized gains. Our second quarter GAAP earnings per share were a record 1.73 driven primarily a $1.03 gain associated with the purchase of Allied assets below net asset value.

These earnings along with the issuance of common stock and connection with the Allied Acquisition lifted our net assets value by 20% to $14.11 compared to $11.78 last quarter. Second, although we experienced significantly more repayment that we made in new investments during the second quarter, we are encouraged that we continue to be able to reinvest we repay capital at higher yields and investments repaid.

Or in the second quarter, we exited or repaid approximately $162 million in primarily non-core assets from a Legacy Allied portfolio. As a result of repayment activity we ended the quarter with lower leverage of .41 times net available cash. And finally, credit performance improves from our perspective as neither the core ARCC portfolio nor the Legacy Allied portfolio experienced and nonaccuring loans and both portfolios incurred net appreciation during the second quarter.

We are very pleased so far with the purchase and remained excited about the opportunities as we believe lie ahead of us to create value for shareholders reactive management of the portfolio.

Lastly, as you may have seen from our press release this morning are declared our third quarter dividend $.35 per share payable on September 30 to shareholders of record. Following payment of this dividend we will have paid a dividend of least $.35 per share for 19 quarters in a row dating back to the first quarter of 2006 We continue to work of our goal of providing full dividend coverage from our core earning per share, with 0.32 cents in core earnings for share this quarter we step closer to this goal. And, in addition while not part of our core earnings per-share we encourage six cents per share this quarter and realized gains including two cents per share in prepayment fee income.

We believe we have embedded earnings potential in over $900 million of debt capacity in cash available for new investments and additional earnings potential from the opportunity to rotate a portion of the Legacy Allied portfolio in to higher yielding assets particularly via the investments of senior loan funds. However, there are no guarantees that we will achieve this goal or grow our core earnings per share. With that I would like to turn it over to Rick Davis our CFO for a more detailed discussion of second quarter financial results.

Thanks, Mike. Beginning this quarter we will be reporting a number of our Core portfolio statistics separately from the Legacy Allied portfolio stats so that investors can continue to track performance at the core ARCC portfolio as well as the progress we are making with respect to the Legacy Allied portfolio.

Please turn to financial and portfolio highlights slide in our presentation which is slide three.

As Mike mentioned our basic and diluted core EPS were $.32 per share for the second quarter excluding six cents per share professional fees and other costs related to the Allied Acquisition. A 4% per share improvement over core EPS last quarter excluding three cents of such acquisition related expenses and one cent lower compared to a year ago. Note the six cents per share professional fees and other costs includes our merger advisory fees that was expensed this quarter.

The core earnings-per-share quarterly increase was driven by higher structuring fees, increased yield on our debt of investment and higher management fee and dividend income which was partially offset by lost of income from the net reduction in our funding and higher interest costs from unsecured notes we assumed in the Allied Acquisition.

We had strong net investment gains for the second quarter of $.44 per share and prized pf net realized gains of six cents per share and net unrealized gains of $.38 per share. In addition as Mike mentioned we booked a one-time realized gain of $1.03 per share associated with the Allied Acquisition. This gain was the result of the purchase of Allied to the net asset value.

After accounting for the purchase price of approximately $908 million we booked a gain of approximately $196 million reflected the difference between our purchase price and Allied's net asset value as determined on April 1. This gain along with our core earnings and net investment appreciation for the quarter contributed to our GAAP earnings per share of $1.73. After paying $.35 second quarter dividend our net asset value was $14.11 per share an increase of 19.8% from last quarter.

Consistent with the increased liquidity in the market and higher levels of transaction activity we experienced both higher levels of new commitments and as expected, higher levels of involuntary and voluntary exits and repayment during the second quarter. In ARCC core portfolio gross commitments of $409.9 million were offset by 530.3 million in exits commitments . Resulting in net reduction of commitments of $120.4 million.

Gross fundings 275.5 million were offset by an higher exit and repayments of funding of $458.2 million resulting in a net reduction in the size of the ARCC core portfolio o of $182.6 million.

This level of quarterly portfolio turnover is much higher that we experienced over the last year. During the second quarter I would also like to point out in the aggregate we were able to reinvest a portion of capital and debt investments with yield in excess of the yields on debt investments that were repaid during the quarter.

Our new debt investments made during the quarter yielded approximately 14.2% on a weighted average basis. Compared to our debt investments exited which had a weighted yield average approximately 13.3%. Given all the realization activity on investments. We thought we would provide update on performance on fully realized investments.

As a June 30, we have now recorded an accumulative realized internally rate of return of approximately 13% to ARCC across 97 exits on investment capital on $2.2 billion, excluding the exits of -- including the exits of the three investments acquired in the Allied -- Allied acquisition.

totallying about 162 million during the quarter at a small gain. Importantly these assets and the aggregate had a relatively low weighted average yield just over 8%.

We continue to be focused on additional restructuring, repositioning and divestitures of non-core Allied assets. We seek to reinvest proceeds of these future exits into core assets with a higher blended yield although there can be no assurance that we can be successful with this strategy.

Although later in the call Mike will outline the attractive out opportunities with respect to the portfolio rotation and repositioning. We ended the quarter with 188 portfolio companies on the balance sheet, fair valued debt approximately $3.8 billion of which $102 billion was included in the Legacy/Allied Portfolio totaling 1.7 billion at fair value.

Our quarter end portfolio was comprised of approximately 38 % of senior securities debt investments with 31% in first lien and 7 % in second lien debt investments. And 33% in senior subordinated debt , 6% in CLO investments many of which are managed by Ares Capital Corporation or our portfolio Company, IB Hill Asset Management -- 17% in equity and other securities, 5% in the senior secured loan fund which we come comanage with GE capital and 1% commercial real estate.

Now let me walk you through changes in our yield ended has been spread which were driven primarily by the Allied acquisition. Our overall weighted investment spread the June 30 was 8.66% a decrease of about 126 basis points compared to last quarter.

From a yield standpoint we bolstered our the weighted average on income securities at cost for ARCC core portfolio from 12.17% to 12.79% quarter over quarter and we acquired Allied portfolio was a comparable weighted average yield of 14.29% at amortized cost. Our overall weighted average yield increased from 12.17% at amortized costs last quarter to 13.4% this quarter when combined with two portfolios and from 12.33% to 13.39% measured at fair value.

However weighted average cost of debt has also increased from 2.25% last quarter has also increased from 2.25% last 3:45 .74% in the aggregate this quarter primarily due to the assumption of Allied unsecured those which had a weighted average cost of 6.5 5 those which had a weighted average cost of 6.54%.

On slide four and five, we've provided additional quarterly a tale and I'd like to turn to slide six to highlight the extent floating rate assets in the non-accruals portfolio. On a combined basis and using fair value for portfolio our percentage of fixed rate debt asset is 51.9% is largely unchanged from last quarter.

Our floating rate debt assets declined from 32.5% of last quarter to approximately 23.7% this quarter was about 57% of those asset carrying(inaudible)and we continue to obtain such floors on most of our new floating rate transactions. Given the fact we are benefiting from(inaudible) we are slightly more sensitive to rising interest rates going forward. We continue to monitor interest rates in the yield curve with the continued goal of being matched funded as practical. Moving on to slide six I'd like to highlight the second quarter's credit performance on both portfolios. We are pleased that we did not experience any new non-accruing loans during the quarter.

Regarding our ARCC portfolio, credit to performance continued to be solid in our view with no new non-accruing loans added with one non-accruing repaid at a modest discount to par after the first quarter end as we discussed in our last call. As shown on this slide, at the end of the second quarter non-accruing loans as percent of the total combined portfolio was 2.3% and 0.2% at cost and fair value respectively.

Excluding the Legacy/Allied Portfolio the comparable nonaccruing loans to total portfolio ratio would have been 4% and 0.4% versus the 4.21% for the first quarter. Turning to the Legacy/Allied Portfolio the total investment portfolio was approximately $1.7 billion at fair value. Comprised of 102 different securities as of June 30.

Since April 1 and through June 30, the Legacy/Allied Portfolio has incurred no new nonaccruing loans while one non accuring loans has been exited. As of June 30, 7.1% of total investments were non-accruals status at cost with 7.4% at fair value. The small difference between percentage at cost and fair value reflects a slight improvement of value of those non accuring investments that we experienced during the quarter after the Allied Acquisition on April 1.

On a combined basis our portfolio had total investment on non-accrual as a percentage of our total portfolio of 9.4% and 7.6% at cost and fair value respectively. Now lets skip over to slide nine for discussion will portfolio gains and losses during the second quarter.

Before I begin let me provide an update on the evaluation of our portfolio from independent third-party providers. In connection with the closing of the Allied Acquisition on April 1, in addition to our own review of the entire portfolio, we employed third-party independent evaluation providers to review approximately 95.5% of the Legacy Allied portfolio.

In addition, at the end of the second quarter, third-party independent valuation providers agreed approximately 50% of the combined Portfolio including the Legacy Allied Portfolio based on fair value. In total, approximately 94% or $3.6 billion of the combined portfolio has been reviewed or has been newly originated into the portfolio over the last two quarters. On slide nine, you will see that we reported net realized and unrealized gains in total of approximately $85 million or $.44 per share.

For the quarter ARCC portfolio we incurred net realized gains of $11.8 million in the second quarter driven primarily by prepayment income, car repayment , and securities purchased at discount and equity co investment gains. The core ARCC portfolio also incurred $35.9 million of net unrealized appreciation. Combining these two categories, and after backing out previously recognized appreciation of about $9.3 million on the net gain realization the core ARCC portfolio contributed $38.3 million in net realized and unrealized gains.

Turning to the Legacy Allied Portfolio second quarter net realized gains were modest at about $.5 million and net unrealized appreciation, totaled about $46.3 million.

Therefore, the Allied portfolio contributed 46.8 million net realized and unrealized gains during the second quarter. In the aggregate, our net unrealized appreciation was broad based and reflects mark to market gains from slightly tighter spreads in a higher leveraged on primary work of loans, stronger credit and investment performance and improving the asset values for our structured products portfolio. Slide 10 shows a summary of debt facilities at quarter end including the debt assumed in connection with the Allied Acquisition. As of June 30 we had approximately $2.1 billion in committed debt facilities with a weighted average maturity of 9.2 years and a weighted average cost of 4.74%.

We had approximately $1.3 billion in total debt outstanding of which only $357.9 million was outstanding under our two credit facilities that have total capacity of just over $1.1 billion leaving $790 million available. Adding and availability from online balance debt securitization plus cash on hand of approximately $139 million we had approximately 946 million of debt capacity in cash subject to leverage and borrowing based restrictions.

As shown on slide 10 we assume three series of unsecured notes in the Allied Acquisition totaling about $736 million in aggregate in small amounts. Note that our carrying values for this debt are moderately lower than the associated principle amounts reflecting the lower fair value of the time of the acquisition in accordance with GAAP. This purchase discount was primarily attributable to the notes maturing in 2047.

During the second quarter, we exercised the accordion feature under our revolving credit facility and increase the size of the facility by 60 million to bring to commitments to 750 million. Since June 30 we received additional $25 million commitment from a new lender to our revolving credit facility under the accordion feature which brings the total facilities size to $775 million.

We also have very productive discussions with additional lenders to further increase total facilities size but there can be no assurance of that these discussions will result in additional commitments. As a reminder of the accordion feature of our revolving credit facility allows us to increase the total facility to just over $1 billion. These actions highlight our continued access to debt capital. On slide 11 is our balance sheet.

Our debt to equity ratio at quarter end was 0.46 times based on the carrying amount of our debt which when reduced by cash and equivalents our net debt to equity was even more conservative 44.1 times. This net debt to equity ratio is substantially lower than the targeted leverage of 0.65 to 0.75 times. Therefore, as Mike discussed we plan to invest a portion of our available debt capacity in accordance with our investment objective with intention of bringing our leverage more in line with our target range and increase in core earnings. However there can be no assurance there were be able to execute on this strategy. Now I will turn the call back over to Mike.

Great, thanks Rick. Now I would like to say a few words about our recent investment activity ,review performance stats for both portfolios, discuss our portfolio rotation initiatives and highlight our backlog and pipeline before concluding.

If folks could turn to slide 13 you will see in the second quarter, we booked 13 new commitments totaling about $410 million with average commitment sizes approaching $32 million. We hope to continue to consistently increase our average commitment sizes given our greater ability to underwrite and hold larger commitments.

We expect to accomplish this by making larger commitments to our existing target borrowers rather than altering our target area of focus to larger companies. As Rick stated our investments exited were rather significant in the quarter of $681.3 million which more than offset our gross new commitment by over $270 million.

Most of repayment activities with involuntary from the court ARCC portfolio, reflecting the increased liquidity repayment activity and velocity prevalent in the market particularly early in the second quarter. Turning to slide 14. You will find more detail behind this specific asset classes of the investments and exits. The table on the left illustrates that we were particularly active with first and second lien debt investments representing 56% and 18% of new investments, reflecting our strategy to move up the balance sheet into higher tax points as the leveraged finance markets transition. A select few of the commitments included $103 million of senior subordinated in the delayed draw debt to healthcare technology provider. $73 million of second lien senior secured and delayed draw debts at airports service operator. $43 million in first lien senior debt to a collection services provider and $33 million in subordinated notes in the senior secured loan fund to finance a post secondary education provider. These investments had aggregate yield of 14.2% fair value compared to the weighted average of 14.3% on the assets repaid during the quarter.

In addition, about 38% of new commitments made were to existing portfolio companies highlighted the importance of incumbency and our own portfolio of winning new investment opportunities. We hope to continue to mine the almost 500 portfolio Company relationships that exist on balance sheet or in the portfolio management ARCC or it's solely owned portfolio Company (Inaudible) asset management for new opportunities.

Regarding exits from our core ARCC portfolio of approximately 71% were from first and second lien debts assessments. In the Legacy Allied portfolio of $161 million exited investments the asset location was more balanced at 46% first lien 25% second lien, to 22% sub debt and 7% equity and other, all at fair value. Now let's look at slide 15 and I'll highlight our rotation initiatives to date and the potential opportunity with Legacy/Allied Portfolio. For the second quarter we exited or received repayments of $161.7 million in investments with the a yield of 8.2% at fair value. As shown this amount includes $53.1 million in non-income-producing investments and $45.3 million of a yield of 6.2% of fair value.

We did experience repayment on $61.6 million of assets yielding 17% at fair value ,but the aggregate our exits were considerably low yielding than the overall Legacy/Allied Portfolio yield and well below the yield on our new investments made this quarter. As of quarter end, Legacy/Allied Portfolio had various categories of low or non yielding assets at fair value. $162.2 million of lower yielding debt securities defined as having a yied of less than 10% and which yield 8.6% on average. $273.9 million of non-accruing loans with no yield. $251.9 million of non yielding equity securities. $39.4 million in commercial real estate and other assets with 2.8% yield.

We believe there is an attractive opportunity to rotate and reposition substantial of this portion over $700 million in low or non yielding securities into higher-yielding securities over time.

In fact ,June 30 we exited an additional $66 million of Legacy Allied portfolio investments at a weighted average yield of 10.47% and one investment totaling approximately $10 million has been removed from non-accrual. Now turn to slide 16 and I will review the leverage and interest converge statistics of each portfolio. In the core ARCC portfolio the underlying portfolio companies weighted average last dollars net leverage remains stable at 3.7 times.

Note the interest coverage on the underlying core ARCC portfolio improved from 2.9 times 3.3 times. Turning to the legacy allied portfolio, the initial last dollar weighted average total net leverage is higher as expected at 4.5 times and interest coverage lower the but still well over two times. On a combined basis, weighted average total net leverage was moderately high increasing from 3.7 times to approximately 4.1 times with interest coverage down only slightly from 2.9 times 22.8 times. On slide 17, we breakdown weighted average EBITDA for the two portfolios.

Overall, weighted average EBITDA for the core ARCC portfolio remains relatively steady at approximately $44 million. As you can see new portfolio companies funded during the quarter generally average about $30 million in EBITDA. Legacy allied portfolio had underlined portfolio Company weighted average EBITDA about $23 million. On a combined basis our total weighted average portfolio EBITDA was approximately $35 million at the end of second quarter. Skipping to slide 19 you can see the portfolio was more diversified on a combined basis with the allied portfolio.

Our largest single investment representing 5.35% of the portfolio at fair value, is a fund we co-manage with GE Capital called the Senior Secured Loan Funds which has presently 12 portfolio companies. We are very satisfied with the risk adjusted return from the fund last quarter the fund investment returned partially to 1% cash on cash. We continue to be excited about the opportunity to put more dollars to work in your trust fund in partnership with GE.

Beyond the senior secured loan fund we see the next artist investment is less than 2.8% of the portfolio fair value and top 15 represent just over 33% of portfolio at their value. Slide 23 and 22 provide snapshot of portfolio asset ,industry and geography. On slide 23, summary of the graves by category of two portfolios. In addition to various other risk managers our investment environment grades all investments in portfolio. This system intended primarily to reflect the underwriter portfolio investment relative to initial cost basis in respective such investment i.e. at the time of acquisition.

Although may also take into account under certain circumstances of portfolio companies business collateral coverage investment and other relative factors. Specifically the portfolio is graded on a scale of one through four within investment grade of one defined as the lowest grade generally indicating the risk to our ability to recoup the cost of such investments had substantially increased since origination or acquisition and the portfolio Company likely has maturely declined in performance.

And and investment grade of four defined as the highest grade with the least amount of risk to our initial cost basis. All new acquired originated investments in our portfolio are initially assessed the grade three. Accordingly the close of the allied acquisition each investments acquired as a grade 3. We do not experience any rate in changes we had to these April 1 and consequently each of these investments continue to have a grade of three at June 30. Importantly our grading system does not account when Allied Capital originated or acquired such portfolio investments where the current status of these investments with the respect to compliance with debt facilities or financial performance and similar factors.

Rather it is only intended to measure risk from the time that Ares acquired the portofolion investment in connection with the Allied acquisition. Accordingly the grade of these portfolio investments may be reduced or increased in the future. Within the core ARCC portfolio we have experienced equal number of great as downgrades . To each way. The ratings improvement combined to to highest rate in categories in three and four.

As of June 30, the weighted average grade of the core ARCC portfolio was three and the weighted average of the entire combined portfolio was also a three. Consistent with the past practice I would also like to update the weighted average revenue and portfolio performance in our underlying portfolio.

As I mentioned in my opening remarks the underlying core ARCC portfolio companies continue to experience solid comparable revenue and cash flow growth on a year to date basis. Weighted average revenue and EBITDA for the portfolio companies in the core ARCC portfolio increased 9% and 2 1% respectively. on a comparable basis for the year to date . Versus the same period last year. We have not seen signs of slowing growth and in fact revenue growth was very similar to the improved level we saw the first quarter.

The Legacy/Allied Portfolio is for more weighted towards lower growth sectors but we're encouraged by roughly y 10% cash flow growth as experiencing on generally flat revenue. The slower growth is primarily related to differences in industry selection compared to the ARCC portfolio. The overall combined portfolio Company companies increased comparable year to date weighted average in the EBITDA by about 5% and 16% respectively versus the same period last year. On slides and 25 and 26 recent investment activity since quarter end and backlog and pipeline.

As of August 4 we made additional new commitments approximately $138 million since June 30, with 80% such investments in the senior secured loan fund and about 18% of other float investments. We also exited $81 million of commitments of which $66 million were from Legacy/Allied Portfolio with $15 million from the core ARCC portfolio. As the data indicates our new investments in quarter and carry higher weighted average yields than such commitments. On this date our total investment that clog and pipeline send $376 million and $355 million in respectively. Of course we can assure you we all make any of these investments and may syndicate a portion of these as well.

As a reminder, we define our backlog as committed transactions with under a letter of intent. Our pipeline is defined as transactions with no formal commitment but significant due diligence with perform and good probability upon transaction. Our pipeline does not include more than 50 transactions currently being reviewed at various stages by our investment teams. Looking beyond what has occurred since quarter and on the repayments I we currently do not expect repayments to exceed new investments again during the third quarter.

Now let me conclude by reiterating some key takeaways of quarter before opening up to Q&A. We increased our core earnings-per-share by four cents quarter or for quarter excluding six cents per profession is a allied acquisition. Despite the fact that prepayment exceeded new investments during the quarter and inherited higher cost of capital. While portfolio rotation initially only begun and no assurances to the outcome of these initiatives we believe is initiatives they provide is to increase core earnings-per-share even if market conditions uncertain or not support of a significant balance sheet growth.

I stated earlier we believe the more liquid market opportunities to manage Legacy/Allied Portfolio more aggressively and rotate into higher yielding assets. That said at this point I we do in fact expect to grow investment portfolio during the and increase balance sheets leverage our net leverage was only .4 times at quarter end you we had over $900 million of debt capacity cash subject to leverage restrictions. Consistent with investment and start Lieutenant. more in line with target range and increase earnings per share. Our backlog and pipeline remain strong although lower in the aggregate from last quarter we made high levels totaling well over $700 million and in addition the backlog category which consists of investments committed and under a letter of intent 50% of the total. As I outlined the credit investment performance of the court air-- ARCC remain strong and legacy -- Legacy/Allied Portfolio is performing well within expectations.

Finally, we and successful to add revolver which incrementally lower average funding cost. We hope you share our enthusiasm to what we believe our unique competitive position that we have -- exciting market opportunities in front of us. Thanks as always for your time and support with that, Jamie let's open up the line for Q&A.

(Operator Instructions) And our first question comes from John Hecht from JMP Securities.

Good morning guys and congratulations on a successful integration and a good quarter. Thanks for taking my question. The first one is just looking at the facts of the quarter. You had pretty substantial increase in structuring fees, dividend income, and other income. Are these good, new run rate figures to think about in a pro forma situation or are there some noise that we should think about?

Well, you have to look at both categories separately, John. With regard to dividend income, I think that is much more of a steady state number based on investments that have already made and are in the book. I think as everybody is aware, structuring fee income is obviously a function of new investment activity. So as we continue to grow the book, I think you should expect to see continuing structuring fee income but it will be a function of the size of the new investment portfolio on a quarter-by-quarter basis.

Okay. Then, thinking about the relatively high turnover of the ares core portfolio and the payoffs. What are you seeing in the market? What is driving these payoffs and what type of rate would you expect through the second half of this year?

The amount of activity that we saw or the repayment activity we saw really came in a pretty significant wave early, this quarter and subsided towards the end of the quarter as we talked about in the prepared remarks. A lot of that was really being driven by significant inflows into the high-yield market and risks outside of the market early in the quarter. And we did not experience that towards the end of the quarter as well. Also, as we highlighted in the prepared remarks, we don't expect our repayments to exceed our new investments in Q3 based on what we see in front of us today. If you were to go back and look at our historical averages, even through the downturn we were experiencing roughly 20% to 30% annual velocity in the portfolio. So the best thing I can point you to is to be to look at the historical experience as a proxy for what you could expect in portfolio like ours.

Okay. Final question is, I wonder if you could characterize the pipeline? I know you did mention that you'd expect an increase the average size of commitment. But are you changing your focus in terms of where you might invest in the capital structure? Will that just change over time with something like a Unitranche Fund at your fingertips?

I think, as we've mentioned, quarter-to-date, Q3 to-date, most of the new investment activity is occurring with the Unitranche product either within the senior secured loan fund or without the senior secured loan fund. That is a function of two things. Number one, it's an extremely compelling product to borrowers and that provides a good blended cost of capital, certainty of closing, et cetera. It is also driven by the our view that offers an unbelievably attractive risk adjusted return.

So it is a win-win for us as a lender and a win-win for our borrowers. I think generally speaking, given where we see interest rates and given where we are in the recovery, I do think we have a bias towards Unitranche and floating rate senior secured loan product. But given the scope of origination activity, we continue to see attractive mezzanine investments and if we do see them, we're obviously going to invest in them. But generally, I think you'll see a biased towards up the balance sheet investment.

Great, thank you very much.

Our next question comes from Greg Mason from Stifel Nicolaus.

Great, I wanted to spend a little bit of time focusing on the liability side. First, the interest expense in the Q, you reported $15 million of Allied debt, yet multiplying the principal times the coupon rate that was $12 million. Can you talk about the difference? And then the remaining interest expense of $8 million was in line with last quarter yet, you're borrowings declined by about $200 million excluding Allied. Can you talk about the movements in the interest expense?

Yes I think part of it , you need to also include the accretion on with the discount -- the purchase accounting discount of the unsecured notes. Then, we also had a full quarter of amortization, with the upsides revolver that also flowed through this quarter. So that may help as you are trying to reconcile.

Okay. And, can you talk about -- do you want to keep the Allied debt out there given that it's significantly higher rate in your current borrowing credit facilities? What is your thought towards that debt?

In order for us to successfully achieve our objectives over long period of time, we have to be focused not only on cost of capital but diversity of funding sources. Having a presence in the unsecured market is important to us in developing those relationships. I think it's key to long-term success of our business. The nice thing is that the debt we inherited, waterfalls nicely from a maturity standpoint and we have a lot of options in how we choose to ultimately resolve those maturities. We are obviously in the rising interest rate environment or at least we believe that we will be. And in that type of environment, we have to look at all the debt markets to get not only efficient pricing but efficient access. So, yes, I think for the time being, our goal would be to leave those out and either resolve them at maturity or prior to maturity through new debt issuance or new extensions.

Great and then can you talk about for alternative debt sourcing, the ability of new on balance sheet securitizations? What you're seeing in that market? We saw Golub just close one. What's your thoughts there?

I think the Golub transaction is a pretty good indicator of where that market is today. Generally speaking, I think we talked about this in our last call as well, depending on the nature of assets and some of the restrictions you would incur in a securitization, you can lever middle market assets somewhere between two and three times and your costs on those excluding fees. But just on a spread basis is probably going to be somewhere between [LIBOR] 200 and 300. Probably closer to the high end of that range. If you look at where that market had been, obviously leverage is lower, spreads are lighter.

Given the amount of liquidity that we're finding that still remains in the bank loan market, as evidenced by the fact that we are still bringing people into our [courting] feature. At libor 300, there is so much more flexibility in terms of how you manage your balance sheet through bank lines. That for us at least , for the time being while we are looking at the securitization in the market on a relative basis is not all that attractive to us but clearly signs of life in that market. I think we will continue to see improvement there as well.

Then, one last quick question and I will hop back into queue. Following up on john's question on restructuring fees. Are those fees generally paid on the commitments or the fundings? You had 409 of commitments but $275 million of fundings. Which number should we think about going forward for structuring?

Generally speaking, it is paid on the fundings. I think for a modeling standpoint you will get a much better proxy. This quarter was slightly different in that as we mentioned the prepared remarks, we did provide a mezzanine back stop to a transaction as a commitment that actually did not fund. So, from a percentage standpoint, it is actually a little overstated if you try to back into the actual fee percentages. Generally speaking, in the market today, we are getting somewhere between 2 points and 4 points of structuring fee for new commitments. Obviously, there's going to be some play between the commitments in the fundings to the extent that we're syndicating. We obviously tend to syndicate at a lower fee than we would generate as an underwriter.

Okay, thank you guys.

Or next question comes from Jim Ballan from Lazard Capital Markets

Hi, great. Thanks a lot. I was looking at the non-accrual rates, it was considerably lower than what we had estimated just looking at the Allied book as of the end of last year. So I was just wondering, where -- it looks like it was -- based on what I saw the slides, there was not a lot of sales of Allied non-performing assets. So is there -- were there a number of assets on the Allied side that either came off non-accrual? Did you invest incremental capital into some of those to bring them off non-accrual? Can you just comment on that?

I think it is a combination of all of those things. We were very active or I should say -- Allied was very active in working through the portfolio prior to the April 1 closing. A lot of that work was getting done prior to acquisition on April 1, where they were in fact disposing of some of the more challenged names in the portfolio. Since we have acquired the portfolio, some of it has come from either restructuring and rehabilitating those companies and some has come from actually selling some of those companies. So, it's really a combination of all of those things. Lastly, as you saw and we are quite happy with it but the Allied portfolio showed 10% cash flow growth on flat revenues year-to-date. So, you also have the benefit of just improving underlying performances that help not only those that are running on non-accrual but obviously, those that may have been close.

Okay.

Jim, the other thing, too, if you are comparing or looking at the 12/31 Allied balances, that's -- it's obviously that's a little different from the numbers we are recording as we fare -- our fair value at 4.1 is now our cost basis. So that may be part of the difference you are looking at, too.

Yes I was trying to look at it on a cost basis. But, that is helpful, thanks. The other thing, I just wanted to follow-up on the capital structure questions. When you think about, obviously, you have two capital structures that were put together here. When you think about the optimal capital structure of where you would like to be within a reasonable timeframe, how do you think about that? Are you happy where you are? Is there a way that you would -- that you think you would be better off?

Yes, we are happy where we are. Although we would be happier if we have longer duration and cheaper costs. So, we're looking at all of the available avenues out there. That includes unsecured notes in the private and public markets. It includes unsecured or secured notes in the retail market. It includes looking at various convertible structures. It includes the securitization market. It includes to try to tap the bank loan market so our goal is to mange our balance sheet as aggressively as we can. I think when you look at where the portfolio is positioned relative to the liability side of the balance sheet, we are actually quite happy with it. I think we can continue to improve it from here but by no means are we unhappy.

I think the key is there's a lot of volatility in the capital markets, generally speaking, windows in all of our available funding markets are opening and closing with more frequency and much more volatility. So we are adopting the view that we're going to keep an eye on our debt capacity. We are going to keep an eye on our interest rate exposure We are going to keep an eye on our pending maturities and we're going to continue to try to optimize it. But I think the good news is, while there is always a sense of urgency about getting that right when you look at the maturities schedule, and the net spreads we're able to generate off our current balance sheet, it's still very compelling.

Terrific, thanks a lot.

Our next question comes from John Stilmar from SunTrust Robinson Humphrey.

Good afternoon now. Two quick questions for you, the first of which has to do with the fair value -- the write-up on your core portfolio after you've acquire Allied which I think was $0.44 this quarter. The question really is -- is this really -- is the growth from better than expected portfolio performance? The statistics you referenced in both in Allied and your own portfolio are certainly impressive but it sounds like you also may have anticipated those. So I guess my question comes in is, is this really a relative of how you are valuing the portfolio because the structures are different than the current market conditions? Or is it because the fundamental business performance is in better than your anticipation in aggregate? And I know there's lots of moving pieces. But I was wondering if you could broadly characterize where the general trend underneath in some of those investments.

I think it is broad-based and we mentioned it in our prepared remarks, but the good news was it was across asset classes, across companies and across industries It was clearly a combination of improved underlying revenue and EBITDA performance in the portfolio, as well as just looking at the data points in the market with higher leverage obviously helping mark-to-market evaluations on certain companies. As we also mentioned, there was a fair amount of rallying that occurred in the structured products market generally, so there is a fair bit of appreciation in that. And that's part of the portfolio but I can't attribute it to one of those things, just proportionally, it was really all of those things.

Okay. Great and then obviously the portfolio rotation story has been certainly very much discussed over the past -- for this year. But as I look at your (inaudible) on slide 15, the debt securities are non-accrual and then looking through your scheduled investments, the average cost of fair value is if you're holding those, it's about $0.80 on the $1. So, from hereon out, should we really be focused on those debt securities or how non-accrual is really having the most opportunity for near-term portfolio rotation or should we look at the performing securities because they might be more liquid? How should we be thinking about over for the next quarter or two in gauging your performance?

I think one of the reasons we laid this out. Again we will continue to report against this and look for new ways to help you all understand what we are trying to accomplish here. But I would look at all the things. John, if you look at obviously performing equity investments, those don't carry any current yield in a market such as the one we are in now -- those are fairly, fairly liquid investments and those have as much impact on our ability to generate income as it does if we were to sell some of the performing investments as well. So I would expect that you will see continued changes in each of these categories as the year progresses.

Okay, thank you gentleman and great quarter.

Thank you.

Or next question comes from Sanjay Sakhrani from KBW

Thank you. I just have a question on Friday. It seems like the credit metrics looked pretty good. And, some of your commentaries seems to indicate the worst may be over or the worst may be behind us. I was just wondering if you guys felt that way about the portfolio and what the portfolio companies were telling you guys as far as the economy was concerned? Thank you.

Yes, I think if you look at the revenue and the EBITDA trends that we've reported out of our portfolio over the last 12 to 24 months I think consistently you will hear that. I think there may be some sectors where you are not hearing that. But I think generally speaking, people have made appropriate adjustments to their operating cost structures that they are feeling pretty good about the world today and they have good balance sheet liquidity, et cetera. So, yes, it does feel like the worst is behind us. It is interesting though because Ares, as a credit manager, has slightly different view and sentiment as we said in our prepared remarks.

As a credit investor, we actually favor slow growth to no growth types of economic environments because that is where we generate outside risk adjusted return. So we don't require meaningful economic recovery to generate outsized returns unlike you would see if you were heavily weighted in the in the equity asset class. Yes I think the worst is definitely behind us. A lot of volatility right now in the public market feels that it's sentiment driven and maybe it is difficult to reconcile with some of the fundamentals, but the data continues to be mixed. So I guess that but we feel that we are in recovery. Our portfolio companies and the performance of those companies would seem to corraborate that

Maybe just one follow-up. As far as the growth, where is that going to come from in terms of asset c;lass, industries and sourcing, maybe over the next three to six months?

Well, you look at where we're sourcing business, we are sourcing across the entire country from the sponsored community and non-sponsored community. We do believe that we have very compelling competitor advantages, both in terms of the scale of our origination capability and the scope of our product set. So we continue to invest very heavily in originations to try to drive good credit decisions and I don't think that, that's going to slow. As I mentioned earlier though, when you look at where we're focusing and where we're getting most traction, the Unitranche product, whether it's in the senior secured loan fund or not, seems to be a very compelling product in the market today that is getting a lot of uptake.

So I would expect to continue to see that, that product represent a fairly sizable piece of our of our origination numbers. It is interesting because I think you hear different things from different people depending on the size of their platform and the breadth of their relationship network. We look at our pipeline in our backlog today, and we look at the amount of that activity that is flowing to the shop and we are extremely busy, the pipeline is growing. There is quality field flow coming through the house and so, as we mentioned, Q3 we expect that we will actually begin to net grow the assets again and I don't expect that trend to reverse itself.

Great, thank you.

Our next question comes from Vernon Plack from BB&T Capital Markets.

Thanks very much. Mike, I am trying to get a sense for, from a modeling standpoint, there is an agreement that you have where, you could defer up to $15 million in base management and incentive fees. It's certain earnings targets are not met. I don't know what those earning targets are but, will you in fact, do you think you'll actually be deferring some of your taste base management and incentive fees in order to hit targets?

It is still too early to tell but based on everything that we are seeing to date and based on some of the things that hopefully we demonstrated this quarter in terms of our ability to show the accretion in earnings and NAB. At least as we sit here today, I don't think that we going to hit that hurdle and therefore, I don't think we will need to defer fees to prove that out.

Okay. What are the earnings --

Vernon, just to keep in mind, too, that it's a deferral so, we would continue to accrue that fee.

Sure, sure. What are those earnings targets? Have you disclosed that ?

We haven't disclosed that.

Okay, all right. Thank you.

Our next question comes from Don Fandetti of Citigroup.

Hi, Michael, obviously it looks like the Allied acquisition is shaping up pretty nicely for you. As you were look over the landscape, are you -- do you see that as a model? Would you consider other deals and also is your Company gets bigger, do you hit that law of numbers where it is harder to grow and you feel compelled to make bigger bets?

Two separate questions. I will handle the first one first. You should assume that if there is a company for sale or there's portfolio for sale in our core market or in an adjacent market, we are looking at it. That said, it's -- we are not seeing very many opportunities either through acquisition of portfolios or companies that are attractive to us right now. The unique opportunity that was in Allied was the scale of the portfolio, the timing, and the overlap of our skill set and capital based with that portfolio opportunity. The reality of it is given the rally in the market, the valuation on some of the portfolios that are "for sale" are just really not that attractive. And you -- it is all well and good to try to acquire something to show that you can do it. But if you can't actually say that it is accretive to earnings and book value in a relatively short order, it is difficult justify putting the time and resources and capital behind it.

Secondly, most of those opportunities are actually quite small. When you look at what we believe is the opportunity in front of us in the new issue market, and our continuing access to capital, it is hard to justify putting the amount of resource to take behind that type of activity versus just going out and continuing to grow the book on a regularly way basis. So we will continue to look at things and if there's something that makes sense, then we can be opportunistic. We'll obviously do it. But, I think one nice thing about Allied is we timed it well and the market recovered and I'm not sure that there is very many Allied-type opportunities left out there in the world. The second question, I apologize I can't actually remember what it was.

It was just more -- that you're a larger Company, do you feel like there is enough opportunities on your footprint to grow the portfolio Do you feel the need to --

This is why you have to -- we are investing heavily in originations and as I mentioned in our prepared remarks, a lot of the growth in the short term is going to come from reducing the number of portfolio companies that we have and increasing the average final hold position. But we don't expect to increase the final holds position by changing our strategy or changing the way that we approach the market. It is really to become more relevant and more impactful than our existing market. So, that is fairly straightforward. If you have a $50 million EBITDA company that's looking to borrow $250 million.

At a different point in our development cycle maybe we were holding $25 million whereas today, we could hold $150 million and still have it represent the 3% portfolio position size. So, I'm pretty confident that we can maintain appropriate diversification without taking bigger bets relative to the portfolios. But I do think that you highlight an issue that we will necessarily have to grapple with years from now which is at some point , obviously, the growth of the portfolio will be always challenged by continued velocity in the portfolio. But we are not quite there yet.

Okay.

Due to time constraints we have time for two additional questions. Our first question comes from Jasper Birch from Macquarie Capital.

Good afternoon, gentlemen. Just starting out, looking at the 14.29% yield on the Allied book, do you mind -- just what portion of that is the purchase discount accretion? Does that include prepayment assumptions and what is your outlook for prepayments on the book?

Sorry, I'm getting the accretion number now. We had about $3.5 million of accretion -- total accretion coming through in the second quarter. It should be included in the yield .

Okay.

Your second question, I'm sorry.

Just modeling out prepayment assumptions on the book, I know that you said this coming quarter, you expect less divestiture than investments but on the Allied books specifically, do you have any visibility? Any prepayments that might be coming through?

No, only what we we've done to date is a good indicator of the types of things that we think we can do. But again, our goal is to rotate that book as aggressively as we can. It's obviously going to be lumpy and it's going to be a function of whether the markets are. But I think you will continue to see pretty significant moves in that portfolio as the year unfolds.

Okay I'll try to be quick with the rest of these. Looking at your taxable income, clearly, could you remind us of what the actual number was in the quarter and just looking at your dividend, I'm assuming you are committed to maintaining it even if you have a taxable income or shortfall?

We don't disclose the taxable income number and have not on a quarterly or we will give information at the end of the year as to what that, but we don't disclose that.

Okay really quickly, lastly. First slide financial, I saw it was written down just slightly in the quarter. I was wondering what's going on with that? Do you see upside in the name and was the quarter-over-quarter right now, was that just due to spreads -- spread writedown in general or company specific?

I think it's people that -- first slide is effectively a portfolio that is in wind down as we talked about before. Ivy Hill Asset Management took over the management of that portfolio about a year ago. The good news is, the velocity on the book has been pretty significant and continues to shrink which is always good when you're seeing a wind down. The challenges, obviously, the more velocity you see in a wind down, the more challenged your IRR becomes if you don't capture excess spread.

So the writedown was really a function of two things was, number one, a change in the spread environment and number two, frankly, just increased velocity in the portfolio which constrains the IRR opportunity over time. What we are playing for their quite frankly is we want to get all of our principal back that we made in the original investment. I think given the nature of that investment at the time we made would be a big win. Given where we have written it down to,obviously we believe that it is now written down to a level, to generate an appropriate IRR based on what we are seeing in the market today.

Great, thank you very much.

Our final question comes from Faye Elliott from Bank of America Merrill Lynch.

Hi. I apologize if this question has already been asked. I had to jump off the call. Is there room for additional gains to be recognized from the Allied purchase. Can you just give a little bit of color around why or why not?

Yes, I think the answer is yes. That opportunity will come either through the equity book continuing to appreciate and us being able to realize gains upon the exit of some of our equity investments. As we mentioned, we have seen pretty meaningful improvements in our structured products portfolio and I think as those markets continue to yield there is opportunity in that book as well. When you look at some of the names that we inherited and where we mark them, I do think that there is still upside to those marks over time. Depending on whether it is performing or not performing, it's obviously going to take more or less time and require more or less incremental capital.

I think the nice thing about the deal given when we bought it and where we bought it, if all we did was recover fair value for it, it was a wonderful transaction for the shareholders economically, not to mention all the qualitative advantages that we had. But obviously, that is not what we are playing for. We are looking to continue to drive both gains and incremental income from rotating portfolio. Yes, I think it's a part of the opportunity. I don't think it's as big of the opportunity in the short term as the income rotation, but over long term, I think it could be pretty meaningful.

And then what would your strategy be for returning that, or passing it along given that it is a bit chunky? I assume you wouldn't want to increase the dividend.

I don't we're -- as we said , we believe that our dividend should try to approximate our sustainable quarter earnings to the extent that we have capital gains, we will make that determination when and if we have them. But again, I think all things being equal we would probably roll those over versus pay them out .

Okay, terrific, thank you.

Thank you.

Ladies and gentlemen that does conclude the conference call for today. If you missed any part of today's call, an archive replay of this conference call will be available one hour after the end of this call through August 20, 2010 to domestic callers by dialing 877-344-7529 and to international callers by dialing 412-317-0088. For all replays, please reference conference passcode 442579, followed by the #. An archived replay will also be available on the webcast link located on the homepage of the Investor Resources section of our website. At this time, I would like to turn the call over to management for any final remarks.

Great, sorry to have kept everybody so long but we really do appreciate everybody spending time with us today. We are excited about everything we are able to accomplish this quarter and really look forward to giving everybody a progress report at the end of next quarter. Thanks again.

We thank you for attending today's presentation. That concludes today's conference call. You may now disconnect your telephone lines.