Ares Capital Corp (ARCC) 2010 Q3 法說會逐字稿

Good morning and welcome to Ares Capital Corporation's earnings conference call. At this time, all participants are in listen only mode. As a reminder, this conference is being recorded on Thursday, November 4, 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 SEC Regulation G. Core EPS, excluding professional fees and other costs related to Ares Capital Corporation's acquisition of Allied Capital Corporation is the net per share increase or decrease in stockholders equity resulting from operations less professional fees and other costs related to the Allied acquisition, realized and unrealized gains and losses, any incentive management fees attributable to such realized gains and losses, any income taxes related to such realized gains, and other adjustments as noted.

A reconciliation of core EPS excluding professional fees and other costs related to the Allied acquisition to the net per share increase/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.

Certain information discussed in this presentation, including information relating to portfolio companies, was derived from third-party sources and has not been independently verified, and accordingly, the Company makes no representation or warranty in respect of this information.

At this time we would like to invite participants to access the accompanying slide presentation by going to the Company's website at www.AresCapitalCorp.com and clicking on the Q3-10 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 conference over to Mr. Michael Arougheti, Ares Capital Corporation's President.

Great, thank you Operator. And good afternoon to everybody and thanks for joining us. I hope you've had a chance to review our third quarter earnings press release including our fourth quarter dividend announcement this morning as well as our third quarter investor press presentation posted on our website. We'll refer to this presentation a little bit later in the conference call.

I'd like to start off by discussing current market and economic and conditions and then update you on some recent events at ARCC including our strong third quarter results before I turn the call over to Rick Davis.

Once Rick takes you through the detail behind our third-quarter results I will cover our recent investment activity, discuss our portfolio in greater detail, and provide an update on our backlog and pipeline before closing and taking questions.

Following the volatility experienced during the second quarter, caused in part by sovereign debt concerns and mixed economic data, the broader leveraged finance markets bounced back during the third quarter with strong volumes, moderately tighter pricing, and slightly higher asset prices. While overall leveraged loan market volumes were modestly below second quarter levels, specifically all LBO and M&A driven volume increased during the third quarter.

Increased LBO activity is being driven by, among other things, improved earnings, uncertainty regarding tax rates, and a significant overhang of uninvested private equity capital. Spreads in the more liquid, broadly syndicated leverage loan market started higher on average at the beginning of the quarter but narrowed toward the end of the quarter as fund flows increased and investor confidence improved.

On the high yield bond side, record third quarter new issue volume of $76 billion was driven by strong in flows as investors chased yield in the sector. High yield spreads tightened as volatility declined and the default rate outlook improved.

Unlike the leveraged loan market where activity has been focused on M&A financing, high yield issuance continued to be dominated by refi activity. Within the less liquid middle market where we operate, activity has also been very healthy. Overall, third quarter closed volumes were slightly down from second quarter levels, but we too saw meaningful increase in sponsor driven activity. Middle market transactions in progress and under review increased, particularly post Labor Day, and this is reflected in our Q3 investment pace and strong current backlog and pipeline levels.

Unlike the spread tightening experienced in the broader syndicated and high yield markets, third quarter middle market pricing was relatively stable on average compared to the second quarter. That said, leverage levels did increase slightly during the third quarter. However, compared to the historical averages over the past decade, current market leverage levels are reasonable while current market spreads and fees remain well above historical average levels.

Despite the strong level of refinancing activity in the leveraged loan and high yield markets year to date, the medium term opportunity in our asset classes remains strong. Fitch Ratings estimates that over $1 trillion of loans in bonds will mature by 2015 with the potential of supply/demand gap of between $375 billion and $425 billion. Similarly, we've seen reports from Thomson Reuters estimating approximately $480 billion in middle market maturities between now and 2015. Clearly there is some overlap in this data, but it should give you an idea of the magnitude of the potential future capital opportunities and the importance of being in a strong position to capitalize on these opportunities in the future.

In terms of the macro economic environment and its impact on ARCC, the underlying companies in our portfolio continue to generate comparable weighted average revenue and EBITDA growth in the single and double digits respectively versus the prior year. We continue to believe that we are likely in a prolonged period of slow economic growth and in our view a slow growth environment can favor credit over equity, particularly if such slow growth is sufficient to allow companies to deleverage their balance sheet and maintain default rates at relatively benign levels.

Although Rick will go into our third quarter financial results in detail, I'd like to highlight a couple of key takeaways. First, from an earnings standpoint we increased our core earnings per share sequentially by $0.06 from $0.32 for the second quarter to $0.38 for the third quarter, excluding $0.06 and $0.01 per share respectively in fees and other costs associated with the Allied acquisition. The increase was driven in part by strong investment activity.

Our $0.67 in quarterly GAAP earnings per share also reflects our solid net portfolio appreciation during the quarter in both our core ARCC portfolio and the legacy Allied portfolio. As a result, our third quarter net asset value increased for the fourth consecutive quarter.

We continued to make progress on the rotation and repositioning of the legacy Allied portfolio. Of the $231 million of investments exited during the third quarter, $99 million were legacy Allied portfolio investments including $24 million that were on nonaccrual. Such legacy Allied investments were exited at a realized gain of approximately $1 million.

Our overall credit performance continues to be solid in our view as evidenced by the fact that we reduced our overall nonaccrual rate ratio by 1.9% of the combined portfolio and our weighted average portfolio rating remains stable. I'll provide more detail on our cumulative progress to date with our legacy Allied portfolio later in the call, but we're obviously pleased with what we've accomplished thus far.

We believe a significant opportunity remains to improve the expected risk adjusted returns of the remaining low or non yielding assets in the legacy Allied portfolio. And lastly, as you may have seen from our press release this morning, we declared our fourth quarter dividend of $0.35 per share payable on December 31st to shareholders of record on December 15th. And following payment of this dividend, we will have paid a dividend of at least $0.35 per share for five straight years going back to the first quarter of 2006.

And with that, I'd like to turn it over to Rick Davis, our CFO, for more detailed comments on our third quarter financial results. Rick?

Thanks, Mike. As you'll see, we've continued to report a number of the core ARCC portfolio statistics separately from the legacy Allied portfolio stats so that you can continue to track the performance of both. 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 $0.38 per share for the third quarter excluding $0.01 per share professional fees and other costs related to the Allied acquisition. A $0.06 per share improvement over core EPS of $0.32 per share for the second quarter excluding $0.06 per share of acquisition related professional fees and other costs incurred in Q2.

The quarterly increase in core earnings per share was driven largely by higher structuring fees, and interest and dividend income which offset a slight decrease in our weighted average investment spread. Structuring fee income can fluctuate from quarter to quarter, depending on the mix and level of new investments generated.

In addition, we had net investment gains for the third quarter of $0.30 per share, substantially all of which were unrealized. The growth in our core earnings and net investment appreciation for the quarter contributed to our GAAP earnings of $0.67 per share. After paying our $0.35 third quarter dividend, our net asset value was $14.43 per share, a 2.3% increase from last quarter.

Consistent with the higher market levels of transaction activity, we made significant new commitments of over $510 million during the third quarter. In addition, we experienced significantly lower exits and repayments during the third quarter relative to the unusually high levels we experienced in the second quarter. After $231 million of exits, our net new commitments in the quarter were approximately $281 million. Our new debt investments made during the quarter yielded approximately 13% on a weighted average basis compared to our debt investments exited or repaid which had a weighted average yield of approximately 13.2%.

Turning to the legacy Allied portfolio, we incurred exits and repayments of approximately $99 million at $1 million net gain during the third quarter. These exits were included in the $231 million in total exited commitments. We reduced the non-accruing investments acquired in the Allied acquisition through both exits and repayments and successful restructuring transactions resulting in new accruing loans.

We continue to be focused on divestitures of noncore assets and the restructuring and repositioning of selected assets. We will seek to reinvest the proceeds of these and future exits into core assets with a higher blended yield though there can be no assurance that we will be successful with this strategy.

We ended the quarter with an investment portfolio of approximately $4.1 billion at fair value including 184 portfolio companies. Our quarter end portfolio was comprised of approximately 37% of senior secured debt securities, with 31% in first lien and 6% in second lien debt investments, 29% in senior subordinated debt, 6% in CLO investments, some of which are managed by our portfolio company, Ivy Hill Asset Management, 17% in equity and other securities, 10% in the senior secured loan program, and 1% in commercial real estate.

Now I'll walk you through changes in our yields and investment spreads for the quarter. Our overall weighted investment spread at September 30 was 8.5%, a decrease of about 19 basis points compared to last quarter. From a yield standpoint, our weighted average yield on debt and income producing securities at amortized cost for ARCC's core portfolio declined from 12.79% to 12.4% quarter over quarter. Our overall combined portfolio weighted average yield decreased from 13.4% at amortized costs last quarter to 13.1% this quarter. This decline in weighted average yield at amortized cost primarily relates to the exits and repayments for the third quarter having a slightly higher yield than the new investments funded.

Due to increased borrowings on our revolving credit facilities, our weighted average cost of debt decreased from 4.74% last quarter to 4.63% in the aggregate this quarter. However, our funding costs may increase modestly due to our recent unsecured notes issuance which I'll discuss a little later.

On slides four and five, we've provided additional quarterly detail and I'd like to turn to slide six to highlight our fixed and floating rate assets and our nonaccrual statistics by portfolio. On a combined basis at fair value, our percentage of fixed rate debt asses increased slightly from 51.9% at the end of the second quarter to 53.2% at the end of the third quarter. Over this same period, our floating rate debt assets also increased slightly from 23.7% to 25.6%.

With respect to our floating rate assets, keep in mind that approximately 69% of those floating rate assets carry a LIBOR floor that is significantly higher than current short term LIBOR rates. Given the fact that we are benefiting from these LIBOR floors, we are slightly more sensitive to a sharp rise in interest rates going forward. We continue to monitor interest rates in the yield curve with the continued goal of being as match funded as practicable.

Staying on slide six I'd like to highlight our third quarter's strong credit performance for both portfolios. As shown on the slide, non-accruing investments as a percent of the total combined portfolio declined from 9.4% at cost and 7.6% at fair value at the end of the second quarter to 7.5% at cost and 5.2% at fair value respectively at the end of the third quarter.

With respect to the core ARCC portfolio, non-accruing investments as a percent of the combined portfolio were relatively unchanged at 2.2% at cost and 0.2% at fair value at the end of the third quarter, versus 2.3% and 0.2% respectively at the end of the second quarter. Excluding the legacy Allied portfolio from the denominator, the core ARCC portfolio's non-accruing investments were 3.6% at cost and 0.3% at fair value at the end of the third quarter, down from 4% and 0.4% at cost and fair value respectively at the end of the second quarter.

Since the closing of the Allied acquisition and through the end of the third quarter, the legacy Allied portfolio has incurred no new non-accruals and non-accruing investments have been reduced to 5.3% at cost and 5% at fair value as a percent of the combined portfolio, down from 7.1% at cost and 7.4% at fair value at the end of the second quarter.

Now let's skip over to slide nine for a discussion of portfolio gains and losses during the third quarter. On this slide you'll see that we reported net realized and unrealized gains in total of approximately $57 million or $0.30 per share. Approximately two thirds of the net unrealized gains were from the core ARCC portfolio with about one third from the legacy Allied portfolio.

The net unrealized gains primarily reflected the improvement in investment performance of specific investments and to a lesser extend higher market values. From a longer term standpoint, I'd like to point out that since our inception in 2004 through September 30th of 2010, excluding the gain recognized in connection with the Allied acquisition, we generated realized gains that have exceeded our realized losses.

Slide 10 shows a summary of our debt facilities at quarter end. As of September 30 we had approximately $2.1 billion in committed debt facilities with a weighted average maturity of 7.7 years and a weighted average cost of 4.63%. We had approximately $1.6 billion in aggregate principal amount of debt outstanding of which $714 million was outstanding under our two revolving lines of credit that have total capacity of approximately $1.2 billion leaving just under $500 million available. Adding in availability from unrestricted cash on hand of approximately $100 million, we had roughly $590 million of debt capacity and cash subject to leverage and borrowing base restrictions.

During the third quarter, we continued to exercise the accordion feature under our revolving credit facility securing an additional $60 million to bring total commitments to $810 million. Since the beginning of 2010 we've increased our revolving credit facility by $285 million in new commitments from the $525 million in commitments we had at the beginning of 2010. As a reminder, subject to attaining additional commitments, the accordion feature of our revolving credit facility allows us to increase the total facility size to just over $1 billion, although we cannot assure you that we will be able to attain additional commitments.

On slide 11 is our balance sheet. Our debt to equity ratio at quarter end was 0.55 times based on the carrying amount of our debt which when reduced by available cash and cash equivalents declines to an even more conservative 0.51 times. This net debt to equity ratio is still lower than our targeted leverage of approximately 0.65 to 0.75 times. Given the potential investment opportunities that we see in the middle market, we anticipate that we may continue to seek to raise debt or equity capital opportunistically in the most efficient manner possible.

Figures on this slide do not reflect our recently closed $200 million retail unsecured notes issuance. Since the net proceeds from the offering reduced our revolving credit facility borrowings, our leverage ratios would have not changed materially on a pro forma basis using our September 30 balance sheet. We're extremely pleased to have issued these 30 year unsecured fixed rate 7.75% notes at what we believe was an attractive credit spread inside a 4% over 30 year treasuries.

Although it modestly increased our overall funding costs, this transaction extended our debt maturity profile, further diversified our funding sources, and significantly increased our unsecured debt profile. Approximately 44% of the principal amount of our indebtedness outstanding was unsecured at the end of the third quarter and pro forma for the notes offering, our unsecured indebtedness would have increased to approximately 56%. We also placed great value on the call ability of these notes at par after the fifth year. With that, I will now turn the call back over to Mike.

Great, thanks Rick. I'll say a few words about our recent investment activity, review performance stats for the core ARCC portfolio and the legacy Allied portfolio, discuss our portfolio rotation initiatives, and highlight our backlog and pipeline before concluding.

If people could turn to slide 13, in the third quarter we booked 19 new transactions with an average commitment sizes of about $27 million. Our average commitment size declined slightly due to the relatively smaller dollars invested per name in the senior secured loan fund during the third quarter.

Turning to slide 14, you will find more detail behind the specific asset classes of the new investments and exits. The table on the left illustrates that we were particularly active with first lien debt investments either on our balance sheet representing 45% of investment activity or within the senior secured loan fund representing about 41% of this quarter's investment activity. This reflects our current portfolio strategy to move incrementally up the balance sheet into higher attachment points given our view that that's where the best risk adjusted return is in the current market.

In total, our third quarter new commitments in debt and income producing investments had an aggregate yield of 13%. Slide 14 also highlights that our exits have also been predominantly in the first lien debt category representing 66% of the total, and to a lesser extent subordinated debt representing 27% of the total. The higher level of exit for first lien debt was in large part driven by our portfolio rotation and repositioning strategy of lower yielding assets for the legacy Allied portfolio.

Now let's turn to slide 15 and we'll focus on our cumulative progress with respect to the rotation and repositioning of a portion of the legacy Allied portfolio during the third quarter. As shown on slide 15, the total legacy Allied portfolio at fair value has declined $153.5 million from $1.83 billion at the time of the acquisition on April 1, to $1.68 billion at the end of the third quarter. During this six month period, we have generated $261 million in cash from the legacy Allied portfolio with net realized gains of about $1.5 million.

The redeployment of these cash proceeds from investments averaging lower yields into investments averaging higher yields should drive growth in our interest income going forward. We've also reduced non-accruing investments from $335.6 million at fair value since April 1 to $208 million at fair value at the end of the third quarter. This $127.6 million reduction in nonaccruals represented about 38% of the beginning balance.

We've accomplished this reduction primarily through exists or repayments of $76.1 million and restructurings of investments with a fair value of $42.2 million. Through exits and repayments and to a lesser extent balance sheet restructurings of lower or non-yielding securities, we've also increased the yield on the remaining portfolio by approximately 80 basis points at fair value as of the end of the third quarter.

In addition to the $261 million in exits and repayments from the legacy Allied portfolio during this period, the portfolio has experienced $67 million in net unrealized appreciation and we've funded certain revolving and other commitments in this portfolio.

As you can see, the legacy Allied portfolio continues to provide further rotation and repositioning opportunities. And as of the end of the quarter, there were $600 million in such low or non-yielding securities at fair value remained with an aggregate yield of 1.6%.

Now turning to slide 16 for a review of the leverage and interest coverage statistics for the core ARCC portfolio and the legacy Allied portfolio. In the core ARCC portfolio, the underlying portfolio companies weighted average last dollar net leverage and weighted average interest coverage both remain little changed compared to the second quarter at 3.8 and 3.2 times respectively. For the combined portfolio, our weighted average total net leverage and interest coverage ratios were stable at 4.1 and 2.8 times respectively as the underlying weighted average net leverage was slightly reduced to 4.4 times and interest coverage slightly increased to 2.4 times in the legacy Allied portfolio.

Note that the portfolio statistics for the senior secured loan fund are not included in the ARCC averages. We co-manage this program with GE Capital and seek to manage and make senior secured unitronch loans to middle market companies. The senior secured loan program had 17 underlying borrowers with a weighted average total net leverage and interest coverage of 3.9 times and 3 times respectively as of the end of the third quarter. The program had no non-accruing investments as of September 30th.

The program invests in companies that are similar industries to the companies in which we invest and the largest single issuer in the program's portfolio at September 30 represented 12.9% of its total investments as of the end of the quarter. Of course, as the program invests further, portfolio diversification should increase.

On slide 17, we break down weighted average EBITDA for the core ARCC and legacy Allied portfolios. Overall, weighted average EBITDA for the core ARCC portfolio remained relatively steady at approximately $45 million. As you can see, new portfolio companies funded during the third quarter generally averaged a little over $30 million in annual EBITDA. And on a combined basis, our total weighted average portfolio company EBITDA was approximately $36 million at the end of the third quarter. Given competition from the high yield market at the upper end of our market opportunity, we expect our focus to remain on companies in these size ranges in the near term.

Skipping to slide 19, you can see that the portfolio remains well diversified by issuer. Our largest investment is in the senior secured loan program which increased from 5% of our portfolio to approximately 10% at the end of the third quarter at fair value. We are pleased with the risk adjusted returns from this fund to date, although such returns will likely vary from quarter to quarter and there's no assurance that we'll be able to maintain these historical returns.

Beyond the senior secured loan program you can see the next largest investment is 3.1% of the portfolio at fair value and the top 15 represent just over 39% of the portfolio at fair value.

Slides 20 through 22 provide a snapshot of the portfolios by asset class, industry, and geography. The portfolio remains balanced and diversified by asset class with not a lot of changes during the quarter. Given the growth in our investments in the senior secured loan program, our investment funds category is our largest at 18% followed by business services, healthcare services, consumer products, and restaurants and foodservices.

Our investment funds category includes investments in senior loan funds that are managed or co-managed by us or our wholly owned portfolio company, Ivy Hill Asset Management, and other various fund investments managed by third parties.

On slide 23 is a summary of the grades by category for the two portfolios. Specifically, the portfolio is graded on a scale of one through four with an investment grade of one defined as the lowest grade, generally indicating that the risk to our ability to recoup the cost of such investment has substantially increased since origination or acquisition and an investment grade of four is defined as the highest grade with the least amount of risk to our initial cost basis. As a reminder, all newly acquired or originated investments in new portfolio companies are initially assessed a grade of three.

Within the core ARCC portfolio we experienced four rating upgrades and two rating downgrades during the quarter. However, both downgrades were from grade four to grade three and one of the downgrades reflected a partial exit.

Turning to the legacy Allied portfolio, we experienced two rating upgrades from grade three to grade four and two rating downgrades from grade three to grade two. As of September 30, the weighted average grade of the core ARCC portfolio was three and the weighted average grade of the entire combined portfolio was also a three.

As I mentioned in my opening remarks, the underlying portfolio companies continue to experience solid comparable revenue and cash flow growth on year to date basis. Weighted average revenues and EBITDA for the core ARCC portfolio companies increased approximately 7% and 15% respectively on a comparable basis for the year to date period versus the same period last year.

We're seeing little signs of slowing growth and in fact, revenue growth trends are very similar to the levels we saw in the second quarter. The remaining legacy Allied portfolio companies also experienced improved comparable weighted average revenue and EBITDA growth of approximately 4% and 12% respectively for the year to date period versus a year ago.

The overall combined portfolio companies weighted average revenues and EBITDA increased year to date by about 6% and 14% respectively versus the same period last year.

On slides 25 and 26 you'll find our recent investment activity since quarter end and our background and pipeline. As of November 3rd, we made additional new commitments of approximately $128 million since September 30, including 61% of these investments in the senior secured loan program to fund unitronch and senior loans and 29% in first lien senior debt As of this date, we had also exited $146 million of commitments of which $80 million came from the core ARCC portfolio and $66 million came from the legacy Allied portfolio including another $4 million that were on nonaccrual. We've also realized net gains of approximately $19 million from the sale of legacy Allied investments since quarter end.

Turning to slide 26, as of November 3, our total investment backlog and pipeline stood at $180 million and $310 million respectively. Of course we can't assure you that we'll make any of these investments and we may syndicate a portion of these new investments. Our pipeline does not include the more than 75 transactions that were in process of being reviewed at various earlier stages by our investment teams.

Now let me conclude by reiterating some key takeaways on the quarter. We had an active quarter from an investment standpoint which allowed us to increase our investment portfolio and drive higher core earnings per share to $0.38 excluding nonrecurring costs associated with the Allied acquisition versus our declared $0.35 quarterly dividend.

As I outlined, our overall credit and investment performance remains strong as evidenced by the decline in our nonaccrual ratios, increase in underlying portfolio EBITDA growth, and the net portfolio appreciation we experienced during the third quarter. We've also continued to make progress with the legacy Allied portfolio by reducing nonaccrual investments, rotating $260 million in cash received into higher yielding investments, and improving the yield and credit profile in the remaining portfolio.

We believe that attractive portfolio rotation and repositioning opportunities remained with respect to the legacy Allied portfolio with approximately $600 million in low or non-yielding securities with an aggregate yield of 1.6% still in that portfolio. And although there can be no assurance that we'll be successful with these efforts, we will continue to actively pursue them with the intention of increasing interest income and improving expected risk adjusted returns.

We believe that our backlog and pipeline as well as the other transactions that we're currently reviewing reflect both the attractive current market opportunities available to us as well as our enhanced competitive position in the marketplace as the result of the Allied acquisition.

And finally, we've continued to be successful in securing additional debt capital on favorable terms. We added another $60 million in commitments to our primary revolving credit facility during the quarter and subsequent to quarter end, accessed a new funding channel for an additional $200 million. We believe these transactions highlight our continued access to debt capital and have provided us with additional balance sheet flexibility and investment capacity.

We hope that you continue to share our enthusiasm for our Company and thank you for your time and support today and always. And with that, Operator, we can now open up the line for questions.

(Operator Instructions) Vernon Plack, BB&T Capital Markets.

Thanks very much. Mike, my question has to do with portfolio rotation, something that you all have been talking about here for the last several quarters. And I know the equity other component of the portfolio at fair value stood at 17% and I'm curious in terms of where you'd like to see that number. I mean where will that go? Are you happy at 17% or could we see that number eventually go into the low teens or what's a good number do you think for that?

Sure. Obviously the 17% is reflective of the assets that we acquired in the Allied acquisition. If you look at the core ARCC portfolios over time leading up to the acquisition, that number was much closer to 10%. And as people know, that 10% was largely co-investment equity alongside debt investment as opposed to control buyout equity. As we've stated numerous times, on a go forward basis, we do not view ARCC as a buyout fund and we will not be for the most part buying companies at ARCC. So our hope is that we can take that 17% and move it down over time to be more in line with our historical portfolio composition.

Okay, and regarding Allied, I know that there was just a minimal amount of costs associated with the acquisition. Are there any additional or lingering fees or expenses that we can expect related to Allied?

They've come down significantly quarter over quarter. In this period they're about $0.01 a share. We'll still have some runoff of those expenses through the end of the year and into early 2011, but you should expect them to be in the similar range of $0.01 or less per share.

Okay, great. Thanks very much.

John Hecht, JMP Securities.

Good morning, guys, thanks for taking my questions. First one just related to modeling, you had elevated capital structuring fees this quarter and I know those are somewhat tied to your origination activity. Is there any other activity we should tie that to at this point or should we really just tie that to where we think the pipeline is going to come in the next couple of quarters?

There's really no change in how that flows through our income statement. I would highlight two things though. Number one, generally speaking fee levels in the market are higher today than they have been in prior periods. As spreads have come in broadly across the market, lenders such as ourselves are actually getting incremental income through fees. And we've seen in most instances increases in fees of about 100 basis points versus what we were getting historically. That's driving some of it.

Number two, as I think most people know, we do have a very efficient fee arrangement in the senior secured loan program and so to the extent that we're making investments disproportionately into that vehicle versus on the balance sheet, you should tend to see a higher fee line. Historically if you look at the company, our average investment income coming from capital and restructuring fees was about $0.06 per share versus $0.11 a share this quarter just given the heightened level of activity.

Okay. I guess an indirect follow up to that, I guess by all measures it looks like -- by all measures that senior secured loan fund has been somewhat of a success. Can you highlight, if you haven't done so, the remaining capacity? And are there any discussions to maybe form a new one?

The program as currently laid out is a $3.6 billion program of which our commitment is $525 million. Obviously given the amount of activity and the success that we've had in the market ramping, I do think that we'd like to increase the size of that program over time and it's something that we'll continue to discuss with our partner GE. And obviously keeping an eye on our own balance sheet capacity is something we need to factor in as well. But I would say that the program has been very successful from an economic standpoint for our Company, but also from a competitive positioning standpoint. I think it's really been well received in the market and our partnership with GE has been absolutely wonderful.

Okay. And final question, you inched up your composition of fixed rate assets or investments. I know you pushed out the duration of your portfolio. Is this part of maybe a longer term strategy or intermediate term strategy to start positioning the portfolio for a rising rate environment and kind of capture the right of part of the yield curve along the way?

It is, although you can never get it perfectly, but that is absolutely what we're focused on. Obviously as we talk about liability management, other things other than duration come into play, but we have been very focused on getting fixed rate and getting long dated maturities And as you see in the recent activity with the retail deal, we're also very focused on increasing the percentage of unsecured debt on the balance sheet which is going to be an ongoing initiative for us.

Great, guys, thanks for the color.

Don Fandetti, Citigroup.

Two questions. Like on the -- in terms of the companies you're investing in, I was curious what you're hearing from management teams in terms of their confidence, the tone and also hiring?

I think the tone is actually quite positive. Obviously it's all relative. I think everybody is aware of the economic backdrop and some of the challenges that we face in the economy, but I'd say generally speaking the tone is positive. And I think one of the reasons that the tone is positive is because most of the companies where they could cut costs in expectation of a different economic reality, they repositioned their operating expenses, they maybe revisited manufacturing processes, plant capacity, supply chain dynamics. And I think most of the companies that weathered the storm are operating much more efficiently with a lot more operating leverage than they have in the past. And therefore very moderate increases in revenue as we see in our own portfolio as well as across the boarder market are still resulting in pretty significant increases in profitability.

That said, I don't believe that that increase in operating leverage and efficiency necessarily is going to manifest itself in a rapid increase in hiring and jobs creation. I think that most of the companies that we're invested in, this is across the platform, are obviously happy where they are, running the businesses efficiently, and are able to continue to generate profits without adding bodies.

Okay. And then the other question, I know that you sort of highlighted your relative balance sheet capacity and scale was an advantage in the marketplace and also in your senior secured loan fund. Is that still the case today? And is that increasing or decreasing in relevance?

I think it's absolutely the case today and I'm not sure that it can increase more in relevance. If you think about the markets that we're in, and as we highlighted, we have moved down a little bit just given some of the levels of activity that we're seeing in the high yield market. But for a $40 million EBITDA company in today's environment that wants to borrow $200 million through a combination of senior debt, mezzanine debt, or in a unitronch structure, there are very few capital providers that have the scale to provide a single solution at $200 million or the flexibility to meet whatever the desired needs of the borrower are. So we're finding in our target size range that the scale and the flexibility are absolutely competitive advantages and we don't expect that to change.

Okay.

Jim Ballan, Lazard Capital Markets.

Thanks a lot. Mike, you talked about a large portion of the investments that you made in the quarter coming in senior debt. Can you talk a little bit about the structure whether it's first lien, second lien, unitronch? And also just the returns you're getting on senior debt? Maybe the returns you're getting on debt that you're putting into the BDC and then also what you're getting in the unitronch funds? I'm sorry, the senior debt --

Sure. The bulk of the senior investments are coming in as either first lien senior debt of first lien stretch senior debt which we all affectionately refer to as the unitronch. Giving you a general sense of where we see the market today, the first lien bank loan asset class is 3.0 to 3.5 times leverage with total rates of return through a combination of spread and fees somewhere in the 7% range. The mezzanine market is leveraging upwards of 5 times today as we mentioned in our prepared remarks, while spreads have remained consistent We have seen a little bit of a creep up in leverage as people are willing to take on a little bit more risk and the rates of return there on a total return basis are in the 15% to 18% range with spreads hovering around 12% to 14%. And when you take that balance and you look at what a unitronch price is at today, most unitronches at the asset level are getting funded somewhere between 8% and 10%, first lien.

When you look at what we're generating in the senior secured loan fund, and this is in the Q, and again, there's going to be some variability in the returns coming off of that fund depending on how much leverage we're suing at the fund level and what the underlying asset composition is, but generally speaking, that fund is kicking off 16% to 17% cash on cash returns right now.

That's great. And then one other thing. There's again, there was a good amount of investments that were made into existing portfolio companies. Can you talk about how much of that is supporting expansion or -- well expansion of the businesses versus supporting credits that are underperforming that need incremental capital?

Most of the activity is, as we said, coming from new change of control buyout activity and/or add on acquisition activity as opposed to growth capital or restructuring or refinancing.

Okay, that's great. And then just one last housekeeping thing. The $200 million, the new debt that you issued, is the $30 million in the overallotment, is that not going to happen? Or are we still waiting to find out?

That is not going to happen.

Okay, great So $200 million is the number we should model going forward?

Yes.

Okay, thanks a lot.

Chris Harris, Wells Fargo Securities.

Thank you. Good morning, guys. Nice appreciation again in your portfolio this quarter. I'm wondering how much of that appreciation is coming from the Allied assets versus legacy Ares?

Sure, let me just pull up the number here. And this is in the slide you'll see on page 9 to give you a little bit of a breakdown. Let us just pull it up for you. So $57 million in the quarter of the net appreciation was from the Allied portfolio.

Okay, great.

I think that's the gross number. And it was roughly $18 million of --

Net. So about two thirds core, one third Allied.

Okay, got it. And then kind of a follow up from an earlier question, I know you guys are definitely getting a lot of benefits having a larger portfolio from the origination perspective. But I'm just curious if you feel like as you get larger you might lose some flexibility and how might that impact your ability to generate alpha returns through kind of an asset rotation strategy that you guys have been able to execute in the past?

When you say losing flexibility, just to clarify, in what sense?

Well in other words, if you were seeing that things were getting choppy or the market was getting frothy, I would presume it would be a lot harder to rotate a $5 billion portfolio than it would be to kind of rotate a $1 billion portfolio.

I would actually focus on number of portfolio companies more than actually size of portfolio. Because again, when you're managing a $5 billion portfolio or a $10 billion portfolio, you have to mange your portfolio composition on a relative basis and a percentage basis. I think you highlight a good point which is post Allied we have 184 portfolio companies relative to what was roughly 90 to 100 for both companies pre-acquisition. And as we've talked about in prior quarters, one of our stated goals, and we're working towards it, is to reduce the number of portfolio companies and get it back to a level of diversification more consistent with what our historical composition was.

Now that obviously takes time and the 184 number is somewhat misleading. Because when you actually look at the average position size for a number of those names, there are some very small step companies that don't take up a lot of management time and attention, etc., etc. But I do think that you should expect that the number of portfolio companies in the book will continue to shrink over time as we try to market that down to what our historical levels were.

In terms of the ability to move the portfolio, again, it's a function of number of portfolio companies, where we are in the balance sheet. We always have believed and I think we've proved it through the downturn that the higher up the balance sheet you are, the more liquidity you have in the portfolio. And this year it's like growing our Ivy Hill subsidiary and some of our other third party managed account business provides other relationships for us to start to look for liquidity. So it's something you're always thinking about, but size in and of itself in our opinion doesn't necessarily constrain the liquidity or the ability to move the portfolio.

Okay, very helpful. Thanks, Mike. Congratulations on a good quarter.

John Stilmar, SunTrust.

Good morning. Real quickly, just to dovetail back on the senior secured loan fund, can you go through the amount of available capacity that remains? I think your disclosure in the Q said it was $95 million, but it seems like you've done some incremental investing. And dovetailing with that, also to follow up on a previous point, maybe it's not a senior secured loan fund or expanding it, but what is your level of confidence of creating sort of alternative funds to achieve some of the similar results? It may not be specifically a senior secured loan fund, but something along that line given you have a long track record of creating vehicles like Ivy Hill and the senior secured loan fund purchased out of Allied. Can you walk me through your level of confidence of creating structural advantages like you have in the past?

Sure. As I mentioned, the total program size was $3.6 billion and we were roughly $2 billion invested as of the end of the third quarter. When you look at the leverage profile in that fund, our unfunded commitment in the fund is about $98 million as of the end of the third quarter. As I mentioned earlier in the Q&A, I think our hope and goal is to continue to grow that program alongside GE and that's something that we're both working on as we speak.

That said, we aren't looking for alternatives to the program, again, given the strength of the partnership and the success of the fund. But I think given the scope of our operations and the success that we've had in the structured products market and in the debt capital markets both here and at Ares Management, to the extent that we're looking to continue to expand that type of operating, I have every confidence that we'll be able to do it.

Okay, and then can you help, given the return prospects that you outlined previously with first lien and mezzanine and unitronch, as I look at the investments where two thirds I think were fixed rate at a total yield of 15% and about a third were, had a weighted average spread implying that they were floating at 6.2%, if I look at the senior secured loan fund, which is traditionally I believe a floating rate piece of debt, can you -- and then if I look at the senior pieces which I wouldn't think are fixed, the yields versus what the investments are seem to be a little counterintuitive. Can you help reconcile fixed versus floating structure versus the yields that you're referencing here?

Sure. Just to clarify, for the purpose of the numbers that you just quoted, the senior secured loan fund is deemed to be a fixed rate investment, so that's probably skewing it a little bit. The other thing I'd highlight, too, is that as you know we're getting LIBOR floors on the bulk of the floating rate investments that we're making. In excess of 50% of our floating rate assets actually have LIBOR floors meaningfully in excess of the current LIBOR environment. And so fixed versus floating is obviously relevant, but you need to see a significant spike in interest rates in order for the floating rate nature of those assets to actually come into play.

And if I understand your question correctly, I think you feel that the stated interest spreads are higher or lower than what I quoted in terms of the market? Help me understand what your --

No, actually you answered it perfectly with the senior secured loan fund answer. And the final question has to do with expense leverage. As you certainly talked about managing the portfolio size, how should we be thinking about, not in the coming quarter or two quarters, but four to five quarters or even longer out, the degree of expense leverage that might be in the platform as we start unfurling sort of the Ares II after Allied becomes fully rotated and you start redeploying your capital?

Again, there's probably not a lot of expense leverage in the business given that we're externally managed. As we've talked about around the acquisition, there's clearly economic benefit as we get through the integration in the non-management fee and non-incentive fee expenses such as D&O insurance and the like. But the scope of those expense synergies, if you will, pale in comparison to all of the other operating and income benefits that we've been taking about from the Allied acquisition. But obviously as an externally managed structure, there's not a huge amount of expense leverage just running through given the acquisition.

As you would expect us to have done, we've meaningfully increased the number of people and the amount of infrastructure post acquisition in order to support the growth and continued management of the business. But obviously that's all being assumed by the management incentive fee coming off of the vehicle.

Great. Thanks, and congratulations on the good quarter.

Troy Ward, Stifel Nicolaus.

Great. Thanks, guys. Just, Mike, subsequent to the end of the quarter, you've announced originations and prepayments that obviously show a flattish if not slightly declining net portfolio growth. Can you just comment on what you see in the pipeline towards the end of the quarter and whether or not you think that can get to a positive portfolio growth for Q4?

Yes, as we mentioned in terms of the backlog in the pipeline, the backlog in the pipeline remains pretty healthy combined in excess of $400 million. As we sit here today, obviously fourth quarter tends to be very, very active but also very backend weighted just as people try to get deals closed before yearend. As you'll see on page 26, the backlog stood at $180 million, and again, that's deals that are committed and in process. The pipeline stood at $310 million and then as we've said, there's in excess of 75 transactions actively being reviewed and worked on behind what we consider to be an actionable pipeline. So our expectation as we sit here today is that we will see another quarter of net portfolio growth in Q4.

Great. And then as we think about moving into 2011, obviously there's been a lot of talk about volumes in Q4 for different reasons, whether it be tax or otherwise. Obviously looking at your pipeline today, it's not going to completely shot off because many of those deals won't close by the end of the year, but how do you see originations in the first quarter? Do you think there will be a slight lull heading into 2011?

Just based on the frenetic pace post Labor Day, I think you have to expect a lull. And if you look at just historical seasonality in the business, you tend to see elevated levels in Q4, people cleaning out the pipeline, it leaks a little bit into January and February and then ramps meaningfully through Memorial Day. So if it just followed that historical pattern, I think you would see slightly less activity levels in Q1 and then it would continue to ramp.

That said, the phone is still ringing off the hook and people are very busy and the activity levels are holding. So while a lot of this is clearly tax driven and technically driven by the market, another big driver that I think people need to recognize is the TTM performance of a lot of these companies is very strong and for the first time in a very long time, companies that were either looking to sell or companies that were looking to acquire, have very good visibility into positive performance trends which is somewhat new over the last couple of quarters. And I think that fact in and of itself is going to sustain some pretty healthy volumes into Q1 as well.

Okay, then finally, how should we be viewing potential equity issuance? Looking at your balance sheet you're not overly levered, but just all the different things that go into that, how should we look at equity issuance versus debt in the near term?

We never really talked about visibility on capital raising. I will say one of the things that we're very pleased with is number one, over the last two quarters, we've been able to show either earnings growth without growing our investment portfolio, or meaningful earnings growth in excess of our dividend while growing the investment portfolio. And in both scenarios we've been running at leveraged levels below our target leverage level.

So as far as positioning of the balance sheet and the earnings power of the business, we feel very, very good about it. Equity raises obviously have to be done with an eye on what our backlog and pipeline are but they also have to be done with an eye on opportunistically positioning the balance sheet not just for the short term but over the medium term and the long term and doing what's in the long term interest of the shareholders. And in an environment like the one we're in now where we're laser focused on taking advantage of the debt capital markets to reposition the liability side of our balance sheet, equity raises have to come into the conversation as we're thinking about resetting our debt capital structure.

So as Rick mentioned in his comments, I think we will be opportunistic in looking at both the equity and debt capital markets given the health of those markets, but we'll do it prudently and obviously always with an eye towards making sure that we're trying to maximize shareholder value.

Great. Thanks, guys.

Sanjay Sakhrani, KBW.

Thank you. Most of my questions have been asked already, but I had couple of questions. One is, just in terms of debt availability going forward from a funding perspective, I thought it was interesting that you guys, as well as your peers, kind of accessed the secured and unsecured market this time around. Do you think this is kind of a trend that we're going to see on a go forward basis? And I guess the second question is as far as your dividend policy is concerned, I was just wondering if you could just help conceptualize how you're thinking about it on a go forward basis. Thank you.

Sure. Well number one, I think there's a big difference between accessing secured debt markets versus accessing unsecured debt markets. And I think the answer is somewhat different whether you're talking about secured debt or unsecured debt. Our goal, as I stated earlier, is to diversify our funding sources, push back duration, get an appropriate waterfall of maturities, and do it all while having an efficient cost of capital. Obviously the more unsecured debt we have in our capital structure, I think the more upward pressure there is to our creditworthiness and our ratings profile which is one of the reasons why we're focused on it.

I think one of the challenges for finance companies in general, not just BDC is obviously going to be the ability to access the debt capital markets. One of the reasons why we pursued the Allied acquisition when we did was to increase our scale and increase our relevance in the market so that we could continue to diversify our funding sources.

So I think the answer is going to be different depending on the Company. I think some companies like ourselves and others will continue to access new channels and get deeper into existing channels, and I think others are going to be very challenged getting efficient access to debt capital. And while we don't wish bad for anybody, I think that will continue to show separation and differentiation. What we are recognizing is it is somewhat binary. I think certain companies are going to be able to access senior secured and unsecured debt and others are going to have a challenge in both markets.

And I apologize, the second question was just around our dividend policy?

Yes, how you're thinking about it on a go forward basis.

Yes, look, we've been pretty clear that we think that our business works best and our structure works best when you're running a diversified book of debt investments and that you're covering your dividends from core earnings per share. I think this quarter we stepped towards that goal with $0.38 of core against a $0.35 dividend We talked about it last quarter that even though we were under leveraged and shrunk the book, the earnings capacity in the business and the trajectory were positive towards that goal. So as we think about dividends obviously we're looking forward as to what we think the potential earnings power of the business can be given what we're seeing in the market and what we are seeing in our own capital raising and setting the dividend accordingly. But we've been very clear that we think that as a company and as a sector we all need to work towards recovering the dividend through operating income and I think that we've done that while running with very little effort.

Back to the first question answered, is there a reluctance by banks to want to provide revolvers on a go forward basis given all the accounting changes, etc.?

I think that the capacity in the bank loan market is limited. Now when I look at what's going on in the landscape, one of the reasons why our business exists to begin with is because it's inefficient for large financial institutions and banks to actually access this market directly. It's much more efficient for them to lend investment grade credit. They get better capital treatment and ultimately better ROEs. So while I believe that the capacity is limited today, looking forward I actually think that it's a fairly high probability that as they continue to look to grow their loan books, which everybody has stated they'd like to, that lending senior secured to investment grade borrowers like us to number one get access to the asset class, but number two, generate attractive ROEs is something that will get more attention. And so as you saw this quarter, we added a number of borrowers to our revolver as we did last quarter. So we're seeing continued interest, but as we sit here today the market is still fairly limited.

Great. Thank you.

Faye Elliott, BofA, Merrill Lynch.

This is a quick cleanup question. Of the investments made in the quarter, how many were in Allied legacy companies verses Ares companies?

We'll pull the exact number, Faye, for you, but just qualitatively very few were invested into the existing Allied portfolio.

I don't think we had any in existing --

Yes, I know one that was $3 million and there was some revolver activity within the portfolio, but it was a de minimis number.

Okay. And then what were the nature of the investments in the Ares legacy portfolio?

In terms of asset mix or in terms of the nature of the companies?

Nature of the companies, the investment purpose I guess, or the purpose of the --

The bulk of them as I mentioned previously were change of control financings or add-on acquisition financings as opposed to refi, restructure or growth capital. So the bulk were to finance change of control, buy outs, and acquisition activity. And in terms of the nature of the companies, if you look in our press release on Form 8K you'll see a description of what the largest investments we made were in the quarter.

Terrific. Thank you. Nice quarter.

Jasper Birch, Macquarie.

Good afternoon, everyone. Most of my questions have been answered but I just wanted to drill a little deeper into a couple of topics. First of all, thank you for all the commentary you gave this call and past quarters about optimizing your capital structure. Just wondering if we can go a little deeper into sort of -- I mean if you look at the notes that you issued, 3.75%, that seems really commendable, but then comparing that to sort of your equity cost of capital, I know you're yielding 8% right now and there's an expectation for your dividend to go up. But sort of how are you approaching your cost of capital in terms of optimizing sort of the mix of and how you trade that off to -- how you trade that off to compared to other metrics like staggering maturities, etc.?

Sure. A couple of general comments and then we can if we need to, drill down a little bit more. But number one, I think the ability for us to access 30-year notes that are callable after five years with the structure that we got is frankly extraordinary. And we're thrilled that we were able to do it and I think it obviously is a pretty big differentiator. I'm not sure that people fully appreciate the value in the call option there or of the value for us to be able to match fund our assets and our liabilities with that kind of duration profile. I hope people do appreciate that. And so when you're looking at the headline rate of 7.75%, you can't look at it in any quarter, near term quarterly period. You have to think about it in terms of long term value creation and we think that was an extraordinary value creation opportunity for the company.

When you look at where it would swap to on a floating rate basis, if you shortened the duration, while it's little bit more expensive near term than our current revolvers, it's not wildly more expensive given the amount of flexibility long term that we generated.

You bring up an interesting point in terms of the cost of equity versus the cost of debt. And it's our job to position the balance sheet for long term value creation and to make sure that we're in available markets and accessing efficiencies, or better said, inefficiencies where we see them. One of the interesting things about the capital markets now, and this is whether you're talking about an investment grade, corporate or financial borrower, or a corporate issuer, the markets are not necessarily trading in tandem.

And there is a little bit of a dislocation between the equity markets, the unsecured institutional market, the unsecure institutional private market versus the public market, the bank loan revolver market. There's -- I think our job is to have relationships in those markets and be able to issue where we see inefficiency, number one. But we have to do that prudently because obviously we're trying to set the balance sheet for long term value creation and income optimization.

And so for us, again, it's we want to be diverse in our funding sources even if it means it's little it more expensive or a little bit less expensive. We want to make sure that we're pushing out our durations, we want to make sure that we're match funded in terms of our interest rate exposure, so all of that is going into all of our capital raising decisions. But clearly what we're trying to do is find inefficiencies in various capital markets that meet our needs and go after them.

That's certainly helpful and I guess I'll back into that the premium and roughly maybe 3%, but that's helpful and then I guess I can sort of figure out what I want from that. And then just moving on, also in terms of rotating your portfolio and also looking at the equity, in particular in Allied's portfolio, I was just wondering if you guys could give a little more color on sort of -- I mean obviously the equity is going to be written up, and sort of what sort of ROEs you expect on the current equity portfolio and how you weigh those versus current income and current yielding assets?

We put a very high premium on current yield versus capital gains and equity appreciation. One of the nice things about the Allied acquisition is we got to buy the assets at fair value and fair value those assets as of April 1. So we feel good about where we bought these assets. And as we mentioned, up until the end of the third quarter we exited a number of assets on a net gain position of $1.5 million and since quarter end we've exited additional investments with realized gains of $19 million. So where we are able to, we're exiting our equity positions at gains. Clearly we have to look at the capital gains opportunity against the ability to redeploy into current yields. But obviously the volatility of the return profile in equity is much different that the current return profile and total return profile of debt securities. And I'd say all else being equal, our strong desire is to reduce our exposure to the equity asset class in favor of the debt asset class and particularly current pay debt.

Okay, so for the most part we'll continue to see sort of -- we'll continue to see equity sales until you get down to that sort of 10% level and that will put rotation into higher yielding assets?

Yes, I think that's right. And again, I think our goal over time is to reduce our exposure to control equity in favor of non-controlled equity that we're investing alongside debt investments as a way to enhance yield without meaningfully changing the risk profile. So even if we get down to 10%, I think the composition of that 10% will be different.

The other thing I'll highlight is, when you look at slide 15 in the investor presentation, you see a little bit less success or rapid success reducing the equity bucket. Two things. Obviously given the volatility of that asset class and given the capital markets backdrop, there's been some write ups in those securities as well. So we've actually made more progress than is probably indicated here just by looking at the 270 versus the 250. But I think as people probably know, these are private companies that have to go through a process in order to get sold as well. So they will probably be slowest in terms of our ability to disposition because we obviously need to go in, formulate a strategic view on the company, evaluate a sale decision versus a reinvest or a hold decision, and to the extent that we decide that we are going to sell, we then have to engage advisors and run a process. So those are the longest duration exits for us. But obviously now that we're six months post acquisition, our hope would be that we can accelerate our exits in that category.

Great. Well that's all very helpful and nice job, not just this quarter, but so far through the cycle.

Aaron Taiginovich, Evercore.

Hi. I'll try to be quick on this, but the senior secured loan program, since it's getting a little bit larger, I just want to understand it a little better. The yield on those notes you have, LIBOR plus 8%, where you said you're getting a cash yield of 16%. Can you explain to me what that leverage is going into to get the 16%? And is the structuring fees that you have included in that?

The structuring fees are not included in that. The way the fund works, without going into too much detail because it's obviously a confidential product with us and GE, is the contractual rate of our subordinated position in that fund is LIBOR 800, but as the subordinated tronch in the fund, we are privy to all the excess cash flow in the fund. And so similar to a moderately levered structured product, to the extent there's excess cash flow, it inures to the benefit of the equity. That's how you get the difference between the LIBOR 800 and the 17%.

Okay. And the floating rate securities that you had, you listed them as 26% of the portfolio and then you said 60% had floors. Is the 26% actually floating now? Or is more like 40% of that is actually floating right now?

I just want to make sure I understand the question. The -- we're not changing the characterization of a floating rate asset to a fixed rate asset if it has a floor, so those numbers are actually the floating rate assets. But of those floating rate assets, you could think of the portion with floors as fixed rate given where some of those floors are set.

Okay, thank you.

David Chiaverini, BMO Capital Markets.

Thanks. My question is on your new investments. It looks like 10 of 19 or a little more than half were on the non sponsored side which seems a little higher than what you normally do. Could you talk about the relative attractiveness of non-sponsored versus sponsored deals in this environment?

Yes, I think as people know, our platform from an origination and execution standpoint is broad enough that we're not reliant just on the sponsor channel but we're actively out originating product direct to companies and to non-sponsored entities. Obviously they're harder to originate just because there's less efficiency going through intermediaries and direct to companies versus going to sponsors who are serial users of capital.

Number two, it's always been our view that where we are coming into a non-sponsored situation as effectively the largest institutional capital provider, that that obviously comes with a different set of risks. And therefore we expect to get paid more in a situation where there is not institutional capital below us and where we're effectively serving as the sponsor.

Those opportunities have been some of the best performers in our portfolio, both on the realized side and what's currently in the portfolio. But again, they're hard to find, probably more resource intensive on an ongoing basis, and more risky and we expect to get paid more.

In terms of the activity this quarter though, a lot of the investments into non-sponsored transactions were into existing portfolio companies that were not sponsored. One of the nice attributes of the non-sponsored situation is because you're effectively the institutional capital partner for that company, to the extent that that company is growing and has capital needs, you tend to get an opportunity to continue to grow with that company without a competitive process. Whereas even with your best sponsored relationships, they may test your structures or test your pricing, so there is a much stickier relationship in my opinion when you're, when you finance a non-sponsored company and your relationship with the entrepreneur alone or the management team is there.

But most of what we did this quarter was into existing names like OTG and ADB. So not a lot of new non-sponsored activity in the quarter.

Okay, and do you have a rough estimate of what percent of the debt portfolio is made up of non-sponsored versus sponsored?

Well it's hard now post Allied because it skewed it. So I'll just give you a general range is that if you look historically at ARCC's business, 65% to 75% of our business has been sponsored versus non-sponsored and that fluctuates quarter to quarter. Now with Allied where we have a number of investments where we're effectively the sponsor, it kind of skews that number and it's not necessarily comparable. But generally speaking, given the size of the market opportunity and our position in it, it tends to be in that 65% to 75% range.

And is your pipeline made up of a similar split?

Yes. Again, it varies from quarter to quarter, but I think on a go forward basis, that tends to be what you should expect to see from us.

Thank you.

Jason Arnold, RBC Capital Markets.

Thank you. You mentioned you witnessed some great gains, both core and on your Allied investments. I was just wondering if you could offer some additional color here. I guess particularly where you're more optimistic that these investments were going to give you gains I guess relative to others in the portfolio. Just little bit of color there would be great.

On the Allied names in particular? Or just generally across the portfolio?

Allied names in particular please.

Again, we've talked about this quarter we've given some more numbers behind the investment fees and the progress we're making to date on the portfolio. But at a very high level as we talked about on prior quarters, our view was Allied came with strategic value and economic value. And the strategic value was the ability to grow our balance sheet at a time when we felt that we could have increased competitive relevance and access to the capital markets and to increase our asset management capabilities with similar benefits. On the economic side, given that we're able to purchase the assets at the price we did, we always felt that we were well positioned to generate gains both through sales with gains and rotation of the portfolio.

I don't think it's lost on anybody, ourselves included, that sometimes it's better to be lucky than good and our timing was extraordinary having announced the deal in October and closed it in April. And since both of those dates, directionally both the economy and the credit markets have been significantly improved. And so we went in as you would imagine, having underwritten that portfolio and that acquisition with a whole host of potential outcomes. It was always our expectation that even in the worst case, it was going to be an extraordinary value creation opportunity for the Company. But given what's happened in the broader market, I think we're pleasantly surprised at both the liquidity we're finding in the portfolio but as well as the valuation. And that's underpinned when you look at the economic performance of the portfolio with both revenue and EBITDA gains in the two quarters since we acquired the portfolio, we're obviously very pleased.

Great. Thank you.

This concludes our question and answer session. I would now like to turn the floor back over to our host for any closing remarks.

We have no closing remarks other than to thank everybody for spending so much time with us today and continuing to support us and we look forward to speaking to everybody next quarter with hopefully more to report. Have a great day.

Ladies and gentlemen, that does conclude our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available one hour after the end of this call through November 19, 2010 to domestic callers by dialing toll free, 877-344-7529 and to international callers by dialing +1-412-317-0088. For all replays, please reference conference pass code 445047. That's 445047. An archived replay will also be available on a webcast link located on the home page of the investor resources section of our website. You may now disconnect.