Ares Capital Corp (ARCC) 2013 Q3 法說會逐字稿

Good morning. Welcome to Ares Capital Corporation's earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Tuesday, November 5, 2013.

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 such 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 is the net per-share increase or decrease in stockholder's equity, resulting from operations less realized and unrealized gains and losses, and the incentive fees attributable to such realized and unrealized gains and losses, and any income taxes related to such realized gains. A reconciliation of core EPS to the net per share increase or decrease in stock quarters equity resulting from operations, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call by going to the Company's website at www.arescapitalcorp.com and clicking on the Q3 2013 earnings presentation link on the homepage of the investor resources section of the website. 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 related 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 2013 earnings presentation link on the homepage of the investor resources section of the website. The Company will refer to this presentation later in the call.

Ares Capital Corporation's earnings release and form 10-Q are also available on the Company's website. I will now turn the call over to Mr. Michael Arougheti, Ares Capital Corporation's Chief Executive Officer. Mr. Arougheti, the floor is yours, sir.

Great. Thank you, Operator, and good morning to everyone, and thanks as always for joining us. For today's call, I'll briefly highlight our third-quarter results and discuss current market conditions before turning the call over to Penni Roll, our CFO to take us through the financial results in more detail. Our President, Kipp deVeer will then discuss our investment activity and portfolio performance, and I'll conclude the call, and then open it up for Q&A.

We're very pleased to report strong results for the third quarter. Our core earnings per share were a record $0.48 and our GAAP earnings per share were $0.52, both well in excess of our quarterly dividend of $0.38 per share. Our earnings generally benefited from the growth in our investment portfolio, higher dividend and fee income, and continued strong underlying investment performance. Our net asset value increased 3.9% year-over-year to $16.35 per share. Our portfolio companies continue to perform well. Our non-accrual ratios remain near five-year lows and for the most recently available LTM period, the weighted average EBITDA of our underlying corporate portfolio companies grew 10% from the prior year. We continued to generate significant net realized gains from our investments, and through the third quarter of 2013, our realized gains have exceeded our realized losses on our investments by $223 million on a cumulative basis, for a net gain rate of a little over 1% annually since our IPO in 2004. In the quarter, we made $1.1 billion of new investment commitments, and we continued to leverage our origination platform to source a highly attractive set of new investments in new companies, and to support the financing needs of incumbent companies.

Finally, our balance sheet continued to be well positioned at quarter end, given our largely floating rate assets, funded with our predominantly fixed-rate, long-dated liability structure which provides asset sensitivity if interest rates were to rise materially. We maintain strong liquidity with investment capacity of over $1.3 billion on a pro forma basis at quarter end, including the proceeds of our recent $214 million equity raise that closed on October 1. This morning, we announced our quarterly dividend of $0.38 per share for the fourth quarter of 2013. And in addition, based on the strength of our results year-to-date, combined with the estimated size of our undistributed taxable income that we have built as our earnings and harvested gains have exceeded our dividends, we declared two additional dividends of $0.05 per share each as Penni will discuss later.

Briefly turning to the markets, as we discussed in our second quarter call in August, credit market volatility declined following the Fed's initial tapering commentary as investors became more convinced that such actions would either be less impactful or deferred into next year. Weekly in flows into the leverage loan market strengthened during the third quarter, indicating strong investor appetite for leverage loans. New loan volume, in both the broadly syndicated and middle markets, softened from strong Q2 levels, but the mix towards M&A and new money loans in both markets improved quarter-over-quarter. And yields on loans in both markets were relatively stable to slightly lower.

So in summary, near-term market conditions haven't changed materially since our last call. The level of transaction opportunities that we're reviewing remains robust and we continue to be highly selective. We must remain balanced as we weigh strong economic and portfolio company fundamentals against relatively weak market technicals. We plan to continue to use our broad origination platform to source and invest in what we view as the best franchise companies, as we look to generate attractive risk adjusted returns throughout the current business cycle. In addition, we will continue to seek opportunities to fund the financing needs of our existing portfolio companies. And now Penni can take us through the third quarter financial results in more detail. Penni?

For those of you viewing the earnings presentation posted on our website, please turn to slide 2, which highlights our financial and portfolio performance information. As Mike stated, our basic and diluted core earnings were $0.48 per share for the third quarter of 2013, which was $0.10 higher than the $0.38 per share for the second quarter of 2013, and $0.06 higher than the $0.42 per share in the third quarter of 2012. The $0.06 increase in our third quarter earnings per share versus the third quarter of last year, was primarily driven by higher net interest and dividend income for the third quarter of this year, compared to a year ago. GAAP net income for the third quarter of 2013 was $0.52 per share, a $0.02 increase compared to $0.50 per share for the second quarter of 2013, and $0.07 lower than the $0.59 per share for the third quarter of 2012.

Total investment income for the third quarter of 2013 was $246.8 million, a 20% increase over total investment income of $206.1 million for the second quarter of 2013. As compared to the second quarter, third-quarter investment income benefited from increased interest income due to the impact of net origination activity, and increase in dividend income and structuring fees. Dividend income for the third quarter of 2013 was higher than the second quarter of 2013, as Q3 dividend income included an additional dividend from our portfolio company, Ivy Hill Asset Management. The additional dividend, which totaled $15 million, or a $0.04 per share impact to core earnings, was paid out of accumulated earnings previously retained by IHAM. IHAM also paid a regular quarterly dividend in the third quarter of $10 million, consistent with the regular quarterly dividend paid in the second quarter.

As Mike highlighted, our originations remain strong, and as -- and such we made gross commitments totaling $1.1 billion compared to gross commitments of $1.2 billion during the second quarter of 2013, and $1 billion during the third quarter of 2012. We exited commitments of $391 million in the third quarter of 2013, resulting in net commitments for the quarter of $741 million. Net fundings for the third quarter of 2013 were $559 million, as compared to $747 million and $403 million for the second quarter of 2013 and third quarter of 2012, respectively. As of September 30, 2013, we had total assets of $7.8 billion and total stockholders equity of $4.4 billion.

As you can see on slide 4, as of September 30, our portfolio totaled $7.4 billion at fair value and consisted of 175 portfolio companies. We continue to focus primarily on floating rate senior loans. From a yield standpoint, the weighted average yield on our debt and other income producing securities at amortized cost, declined 20 basis points quarter-over-quarter, and 100 basis points year-over-year to 10.6%. While market spreads on new investments have tightened, this trend also reflects our continued focus on investing in more conservative and lower yielding senior secured debt. More importantly, when income generated from our other assets is measured against our interest costs, we have been able to increase our net interest and dividend margin. This margin increased for the third quarter of 2013 to 8.9%, from 8.7% in the second quarter of 2013, and was also higher than the 8.4% margin for the third quarter of 2012.

Now let's turn to slide 7, and I will highlight the components of our net realized and unrealized gains for the third quarter, which totaled $14.6 million, or $0.05 per share. During the quarter, we realized $8.9 million in net realized gains, in addition to the $11.1 million of net unrealized gains, and $5.5 million of reversals of prior net unrealized appreciation related to net realized gains.

Now let's turn to slide 9 for a discussion of our debt capital. As of September 30, we had approximately $4.3 billion in committed debt capital, with approximately $3.2 billion aggregate principal amount of total debt outstanding. Over 50% of our total committed debt capital and approximately 71% of our outstanding debt at quarter end, was in fixed rate long dated unsecured term debt. We believe the long weighted average maturity of our debt of nearly eight years provides us with significant financial stability and operating flexibility. During the third quarter, we completed a $300 million unsecured convertible notes offering. These notes mature in 2019 and have a stated interest rate of 4 3/8 and a conversion premium of 15%, resulting in an initial conversion price of $20.16 per share.

Also, during the third quarter and early in the fourth quarter, we increased commitments to our revolving credit facility, by a total of $130 million, bringing the total commitments for that facility today to $1.06 billion. The weighted average stated interest rate on our outstanding debt at quarter end decreased to 4.7%, as compared to 5% at the end of the second quarter of 2013. This decline reflected an increase in borrowings on our lower-cost secured revolving facilities, as well as the Q3 issuance of the 4 3/8 convertible notes which represents the lowest coupon to date for any of our term debt issuances. As of the end of the third quarter of 2013, on a fully funded basis, our weighted average stated interest rate remained at 4.1%. In total, at the end of the third quarter we had approximately $1.1 billion in available debt capacity, subject to borrowing base and leverage restrictions, and $117 million in available cash.

As of September 30, our debt to equity ratio was.71 times, and our debt to equity ratio net of available cash was.69 times. Based upon the strong growth -- net growth in our investment portfolio and our desire to be well-capitalized heading into the seasonally active fourth quarter, we completed a $214 million follow-on equity offering of common stock on October 1. Pro forma for this transaction as of September 30, our debt to equity ratio was.63 times, and our available debt capacity subject to borrowing base and leverage restrictions, was approximately $1.3 billion.

Finally, our fourth quarter dividend of $0.38 per share will be payable on December 31 to stockholders of record on December 16. As Mike mentioned, we also declared two additional $0.05 per share dividends, totaling $0.10 per share. Specifically, the first $0.05 per share additional dividend is payable on December 31 to stockholders of record on December 16. The second $0.05 per share additional dividend is payable on March 28, 2014 to stockholders of record on March 14, 2014. As a reminder, following the filing of our federal tax return for 2012, we carried over undistributed taxable income of approximately $246 million or $0.95 per share into tax year 2013. Now we'll turn the call over to Kipp to discuss recent investment activity and portfolio performance.

Thanks, Penni. I'm happy to discuss our recent investment activity and portfolio performance in more detail, and I'll also update our post-quarter end investment activity and discuss backlog and pipeline. If you would please turn to slide 12 in the presentation. We are again quite active in the third quarter with 25 new commitments totaling $1.1 billion. Our commitments were heavily weighted towards new borrowers, which accounted for 14 of the 25 commitments in total, and about 75% of the dollars committed. Our single largest commitment was $188 million first-lien loan to a market leader in the information technology sector. The deal was a take private transaction by a sponsor who was a significant participant in this sector. In the third quarter, our project finance team was also a meaningful contributor, with $237 million in new commitments.

Finally, we committed $221 million to the sub-certificates of the senior secured loan program to co-invest alongside GE in eight new investments. The SSLP has been a successful program for us and for GE, and we're pleased to announce that we just upsized the program again from $9 billion to $11 billion, and we're thrilled to continue the successful partnership with GE. Generally, we continue to focus on senior secured debt opportunities, with strong loan-to-value metrics, keeping with our continued emphasis on conservative structuring, and capital preservation in this environment. During the third quarter, 79% of our new commitments were in senior secured debt, and 20% were in the subordinated certificates of the senior secured loan program through which we invested with GE and senior secured loans. We also believe our ability to write large commitments to borrowers is a meaningful competitive advantage in winning new mandates and maintaining winners in our portfolio. We utilized these scale advantages this quarter in making six new commitments in excess of $75 million. Our clients have regularly conveyed to us that they value our ability to deliver a full scale balance sheet solution, particularly when they're engaged in an acquisition, recapitalization, or any other type of transaction where certainty of closing is a critical factor.

Turning to slide 13 in the presentation, you'll see our weighted average total net leverage and interest coverage levels for our corporate companies in the portfolio remain stable at 4.7 times and 2.6 times respectively, in the third quarter, and at these levels, we feel that we have significant protection from both a loan to value and cash flow coverage standpoint. Slides 14 to 17 provide other notable highlights of the investment portfolio at quarter end. There's several points to make here. On slide 14, you'll notice this quarter, that our new corporate portfolio companies had a weighted average LTM EBITDA of $37 million. This is lower than the $51 million average LTM EBITDA in our existing corporate portfolio companies, but remains well within our strike zone in the middle markets. This reflects a modest shift away from the larger end of the market, where we feel the current structures are less attractive to us. But our core investment focus will continue to be on portfolio companies with EBITDA levels in the $15 million to $75 million range, where we see solid risk adjusted returns, and middle market terms and documentation.

Slides 15 and 16 layout that the portfolio continues to be well diversified. Given the size of our balance sheet, our average commitment is less than 1% of our assets, and our largest single [NAM] exposure is less than 4% of the portfolio. The only exception here is the senior secured loan program, which, at quarter end represented approximately 22% of the portfolio at fair value. However SSLP is well diversified, with 44 separate underlying borrowers as of quarter end, and excluding SSLP, the next largest 14 investments in aggregate represented only 30.1% of the portfolio at fair value at quarter end. Turn to slide 18 and you can see that we continued to experience very low non-accrual levels, which are now at -- which are near five-year lows at about 2% and 1.1% of the portfolio at cost and fair value respectively.

If you turn to slides 19 and 20 for an update on our recent investment activity since quarter end, and our current backlog and pipelines, you'll see that from October 1 through October 31, we made new investment commitments of $211 million, of which $200 million were funded. Our commitments were primarily comprised of senior subordinated debt and first lien senior loans, and the weighted average yield on the debt and other income-producing securities funded during this period was 10.6%. Also from October 1 through October 31, we exited $91 million of investment commitments. The majority of our exited commitments were comprised of first-lien loans and the weighted average yield of the debt and other income producing securities exited or repaid during the period was 9.4%. During this period we were able to pick up some yields on our new investments compared to repaid or exited investments.

Slide 20 provides more color on what we're working on today. As you can see, deal flow remains strong as we head into what is typically a busy fourth quarter. And as of October 31, our total backlog and pipeline stood at approximately $390 million and $930 million, respectively. Of course we can't assure you that any of these investments will close, and we may syndicate a portion of these investments, but with $1.3 billion in total potential investment opportunities at these stages, we feel we're well-positioned in the current market. And we're pleased to report that Ares Capital continues to be viewed as a go-to provider of flexible financing solutions. Thanks, I'll turn the call back over to Mike for some closing thoughts.

Great. Thanks, Kipp. So to summarize, we believe that our third quarter performance was very strong, which is highlighted by our earnings and net asset value growth and continued consistent investment performance. Since we entered the year with $0.95 per share of spill-over income and we've been out-earning our quarterly dividends throughout 2013, we felt it was appropriate to reward stockholders with the additional dividends that we discussed.

In terms of our outlook, we believe that we've created significant competitive advantages for our business over the last decade. We are a leader in a large and growing market that continues to favor flexible, full spectrum financial solutions providers, and as we've discussed in the past, it continues to be difficult for banks to make leverage loans, particularly in the middle market. Inevitably, there will always be ebbs and flows of liquidity that will impact current terms of the market, but we have and will continue to operate under a highly selective credit first strategy, and we feel that we've demonstrated our ability to create shareholder value on both sides of our balance sheet through the cycle.

To that end, we believe that our scale has also allowed us to strengthen our balance sheet, extend debt maturities, diversify our funding, and lower our cost of capital. And with an asset sensitive balance sheet, modest leverage, and a diverse and long dated liability structure, we believe that we are very well positioned to execute on our strategy, including taking advantage of compelling investment opportunities as they arise. Finally, we're pleased that our hard work on both sides of the balance sheet over the past year has allowed us to maintain a strong net interest and dividend margin, realized net gains, and deliver attractive returns to our shareholders.

That concludes our prepared remarks, but before we open up to Q and A, I'd like to thank the entire team here at Ares for the hard work over the last year delivering such outstanding results. And as always thank you, our shareholders for all of your time and support, and with that, Operator we would like to open it up for Q and A.

Thank you, sir.

(Operator Instructions)

The first question we have comes from Arren Cyganovich of Evercore. Please go ahead.

Thanks, you've had really stellar growth recently, and I was just curious if you could talk about the fact that we're hearing a lot of details about the market heating up a bit, leverage levels rising, and obviously you have a strong track record of credit. I just wonder what kind of assurances you can give investors when you see numbers like 24% type of year-over-year growth in the investment portfolio, that you're sticking to the credit discipline that has paid you dividends thus far.

Yes, Aaron, this is Kipp. I mean, we -- there's no question that the markets are hot out there. We made reference to the fact, obviously, that our target in terms of company size has probably come down a little bit, so staying away from the broadly syndicated market is something that, obviously, we've emphasized.

I'll tell you this. We have a very large team. We have a substantial capital base that allows us to write larger commitment sizes than most, so when you see the volume like that from us it can be in a bunch of existing portfolio companies where we reposition, but also we're seeing a lot of new deal flow. I would say there's no way to provide you any assurances other than to say the underwriting' s the same its always been, our team is exactly the same.

And frankly, the deal flow that we're seeing is good, is strong as we've ever seen and our selectivity is the same. The close rates are very consistent with what they've been for a long period of time, i.e they're very low. So, other than to say we can point to our track record of underwriting credit over time that's what I'd look to, but there's no doubt the markets are hot out there and there are transactions you need to avoid.

Okay, fair enough, thanks. And then the other question I had, is it looked like there was a new investment quarter-to-date, in the fairly large mezz. It seemed like the mezzanine loan market had almost all but gone away recently. I was just curious as to how that came about, and whether you think there's any kind of secular change getting a mezz towards unitranche, and first and second lien and/or whether or not this is just a cyclical aspect of the fact that the overall rates are just absolutely so low, currently?

So generally we're not finding mezzanine to be particularly attractive. You'll notice one large mezz deal that we closed, obviously, the one that you're referring to, the company that we followed for three years. It's a company that's actually not very far from our team out in the Midwest, and there's a real relationship there with a family that's involved in the business.

It's a non-sponsored deal, so it's something that we've been working towards for awhile. It was modestly competitive. We thought it offered excellent relative value and obviously we're thrilled that we're able to win it. We weren't the only folks obviously, at the end of the day working on it, but it did come to us for a handful of reasons.

And just--

Sorry, I wouldn't read anything into that. I think when you look at the composition of the backlog and pipeline behind that, you'll see continued focus on senior secured loans. I think that was more of a one off than an indication of any kind of a secular or cyclical shift or change in view on the mezzanine asset class.

And I guess just more broadly though on the thoughts on mezzanine, do you think that market comes back once rates rise down the road, or it just seems very dead right now?

Yes, I mean, look. With rates this low and with second lien creeping back into the middle market, mezzanine often looks less attractive to issuers, i.e higher costs and tends to have more call protection than second lien. Our experience would likely tell you that as rates go up, mezzanine starts to look more attractive, but we'll see.

I do think there's been a secular decrease in the mezzanine market generally, just given the advent of the unitranche structure, but if you look at the mezzanine market, it's still active, albeit probably a little bit smaller than it was five years ago.

Okay, thank you.

Next we have Troy Ward with KBW.

Great, and thanks for taking my question. Mike, can you just talk a bit, give us some color on the Ivy Hill? Obviously, with a large special dividend this quarter, we saw that in the first quarter, and then second quarter was down to normal run rate of 10, and then back up with a $15 million special. Can you just speak to kind of the relationship between the operations at Ivy Hill and is it seasonal that's causing this, or how do we think about the dividend from Ivy Hill going forward?

Yes, so similar to the conversation we've had around Ares Capital Corp. 's dividend, I think it's important that we set a dividend policy around dividend consistency and stability. The board of Ivy Hill did the same by setting a regular dividend of $15 million, $10 million per quarter. To take a step back and look historically at what Ivy Hill has done and how its created value, I think people know Ivy Hill manages predominantly leveraged loan funds and middle market CLOs, largely on behalf of third party investors.

Through the downturn, Ivy Hill was a very opportunistic buyer of CLO securities, both rated and unrated, and as that market has recovered, we've been effectively harvesting those gains. It was a great opportunity for us to use the liquidity at Ivy Hill to buy those securities and that they fully appreciated. We're just really repositioning those portfolios and harvesting those gains, so I wouldn't say that it's seasonal.

It's really just has to do with the rhythm of how we're realizing those gains over time. If you look at Ivy Hill in our statement of investments, you'll see that it has an amortized cost basis of about $170 million against a fair value of $276 million. A portion of that is just growth in the assets under management, but a large part of it is the appreciation on the investments that we're able to buy through the downturn.

The other thing that we're noticing now, is given the liquidity in the markets, we're now raising new funds at Ivy Hill, using 100% third party equity, and really driving the fee revenue as a larger component of the profit there, as opposed to the investment gains that we saw coming out of the downturn.

Okay, great. That's good color.

And then also sticking to the fee theme, on just your regular structuring fees, given the high originations it clearly was above our number, but from a correlation standpoint, it just seemed higher fees than we would have expected even with this level of origination. So was there a higher fees because of new money deals versus refis, or was there one out-sized fee that drove that number higher?

No, I think you hit the nail on the head. It's really just mix and obviously we get paid, as we've talked about in prior quarters, higher fees on new money deals than on existing portfolio company transactions or recaps.

Okay, and then one final one. And you may have touched on this, Kipp, but as you were into the fourth quarter here, does it feel like you're seeing momentum picking up towards year-end? We've actually heard from industry sources a little bit of contradiction that one didn't feel like it and the other did. So do you feel like you're starting to see more deals in any particular avenue or any particular -- whether it be refis or new deals heading into year end?

Yes, I mean, I certainly don't want to provide any guidance around what the fourth quarter looks like, but I'd say we, as I mentioned on the activity side, but also on the pipeline and backlog side, it's pretty busy here, Troy. So billing three things we're working on, it's pretty busy.

Okay, great. Thanks guys.

Next we have Mickey Schlein with Ladenburg.

Yes, good morning. Couple questions. I do see that the portfolios leverage and interest coverage has been stable, but in the broader market, the proportion of government light deals has continued to increase. So I was curious whether you could give us some insight into how the proportion of covenant light deals has trended in the portfolio?

And also, some of your non-listed BDC competitors are getting ready to list and they're relatively sizeable and they're repositioning their portfolios. I was wondering if you could comment on any changes in the competitive behavior you're seeing from them or more broadly, if more appropriate?

Sure, so the last time we checked, and the market may have changed in the last 30 days or so, but there have been three covenant light deals done for companies that have EBITDA of $50 million or less this year. So if you look at kind of where we're focused these days, we really don't get involved in covenant light deals, just to hit that one straightaway.

Okay.

Doesn't mean that there haven't been exceptions over the years but it's just not a meaningful part of what we're underwriting here. So hopefully that answers the first question.

Yes.

And with regard to the unlisted, or the listed private BDCs, we're seeing no change in competitive behavior from them. And as surprising as this may sound, we rarely bump into them in the marketplace.

I think they're -- depending on which one you're talking about, they're tending to pursue a different strategy, either further down the size spectrum in terms of issuer size, potentially less self-originated and more club-oriented or bought transactions. So we know them, we're kind of aware of their activity, but we haven't seen any real shift in strategy leading up to potential listings, that we can speak of.

Thanks for your time today.

Sure.

Next, we have Kyle Joseph of Stephens.

Great, thanks. Mike, I think you referenced the EBITDA growth of your underlying portfolio companies. Can you tell us the revenue growth associated with that and I'm just trying to see what's driving that EBITDA growth whether it's revs or cost cutting, or a combination of both?

A for this quarter, it's about 12.4% against the 10% EBITDA growth, and that's been a pretty consistent trend that we've seen quarter over quarter or LTM versus LTM. So right now, it feels like it's both revenue and profit growth, not just cost cutting.

Great, thank you and then Kipp referenced that you guys made six commitments over $75 million in the quarter. Can you give us a little framework of who your competition is on deals of that size?

Oh, that's tough. The larger deals, we tend to segregate it a bit by asset class, so I'll take a stab, and maybe Mike will help me out, too. I mean look, most of the times when you're talking about folks that can actually write larger than $75 million senior tickets, it's GE whose a partner, whose really the leader on the senior side, ourselves, we see a couple other unitranche providers in the market, but not many frankly, that can do that.

I'd say the folks that can write bigger than $75 million tickets tend to be more often focused on the mezzanine space. So it's really all over the map there. There's no one that's really, truly consistent.

I hate to answer it that way. But, it's a fragmented market and we don't see the same folks at every meeting.

I agree with that. I think it may help reconcile Troy's question earlier, just about certain people seeing activity and certain people not seeing activity. We do believe, as we said in our prepared remarks, that we have real competitive advantages both in terms of origination, scale, and balance sheet, size, and flexibility and there are very few people that we see competing on a consistent basis in this part of the market the way that we do.

Great thanks and just one last one for you. Can you give us a sense of the timing of the third-quarter deal flows, was it relatively back weighted or -- just trying to see the contribution to those deals in the quarter.

It was pretty ratable I think.

Pretty evenly spread out. Generally speaking you're going to see spikes in activity towards quarter end. That's just the general rhythm of the business, but in Q3 it was fairly well spread out.

Okay, great. Thanks for answering my questions and congrats on a strong quarter.

Thank you.

The next question we have comes from Robert Dodd of Raymond James. Please go ahead.

Hi guys, thanks for taking the question. A follow-up on Ivy Hill, if I can. I mean, in the quarter, a substantial special, but the equity value is essentially marked up a million dollars, which implies to me at least one or two things. Either the valuation multiple was adjusted, or it's generating substantially more recurring income than is being distributed with the regular dividend, and that's certainly consistent with what we saw in the numbers in Q2 as well.

So can you give us any additional color? I mean you talked about obviously using 100% third party equity, et cetera. So the fee stream without putting capital investment may be running higher. So can you give us more visibility -- not more visibility, maybe a little bit more color on where it is in terms of performance versus valuation on the balance sheet right now because it looks like-- ?

Yes, I think -- as I mentioned, so we have the composition of the valuation is twofold. It's one, the discounted value of the asset management fee stream, and it's two, the investment income and value of the underlying investments in securities.

As we've transitioned Ivy Hill into this market, as I mentioned, we have been deemphasizing ownership of CLO equity, in favor of using third-party equity to grow the assets under management at Ivy Hill. And so when you look at the income trends at Ivy, it's a function of appreciation in the underlying assets, as well as the ability to raise new vehicles, as well as refinance old vehicles into new vehicles, taking advantage of liquidity in the current market.

Okay, got it.

There's been no real change in the valuation framework. It's all underlying fundamental performance.

Okay, perfect. And then following up on another past question, actually. On the structuring fee side, I mean you, talk about new money deals versus refis, et cetera. How -- is there any other shift in the marketplace right now relative to, obviously -- you do somewhat smaller EBITDA deals versus the larger side. Are there any dynamics that are shifting, in terms of the like-for-like, so to speak, pricing structures that are available absent putting yield aside for the moment?

I don't think so. We're all sort of shaking our heads at each other here saying it's pretty much the same as its been.

Okay, perfect. Thanks a lot.

Sure.

Next, John Bock of Wells Fargo.

Good afternoon, and thank you for taking my questions. Real quick, Mike, would you be able to walk through one disconnect I'm trying to reconcile. If you look at the senior secured loan program portfolio weights average yield roughly at about 8%, that's as of December of 2012. Today it's 7.4%, yet if you look at the SSLP stated yield, which I believe is on your piece of paper, that yield's gone from 15.4 to now roughly 15.3ish. Could you give a sense as to how the overall yield of SSLP can stay the same net to you, yet the average asset yield in that portfolio continues to decline?

Sure, I think that's one of the great things about SSLP, and you're seeing a very similar trend on the ARCC balance sheet where we're able to drive the cost of our capital down, against the spread tightening that we saw in the market. And as I mentioned, we have seen spreads stabilize this quarter, but the answer for SSLP is the same as on balance sheet, which is the cost of funds in that program has come down in conjunction with the decrease in asset spread.

Okay, so its come down, great. Also turning to repayment risk for a moment, and obviously, you've talked about how you've dealt with it.

As you look at some of your more subordinate pieces of paper that continue to mature, in terms of call protection, can you maybe give us a sense as to how long we as analysts should expect some of that higher yielding items to stay on balance sheet? Or would you have felt if you were going to describe it, that a majority of your, we'll call it significant repayments, perhaps this past and what sits on the balance sheet today, is relatively well call protected for the foreseeable future?

Yes, I think we've talked about this. Most of the refinancings that we would have expected have worked their way through the portfolio, and I think we talked about this last quarter. What we've tried to do is where we have a strong relationship with a borrower in a performing company, is to participate in that opportunistic refinancing in order to preserve significantly above market pricing and call protection, and avoid the full spread ratchet, and I think that's pretty much worked its way through the portfolio.

One of the important things of being a full balance sheet provider, as we've talked about, is the ability to own a relationship with a borrower over a long period of time. So a subordinated debt investment that is performing and exits its non-call period in and of itself, is not necessarily a bad thing and if they are looking at a financing alternative our hope is if it's a company that we know and like, that we would be a meaningful participant in whatever refinancing we're taking out that mezzanine, so it's a mix. We have some that's in hard call protection, hard no call, we have some that has soft no call, but generally speaking I don't see a significant refinance risk in the portfolio, particularly in the mezz.

Fair enough. And maybe taking a look at some of the new investments, Kipp, in particular let's say a brush power or dialysis [due co]. In general, Ares has always been the lead structurer or arranger of its facilities and that's been part of the allure that direct origination does yield outsized results.

But as I start to look at some of these additional investments, I see on the lines that Union Bank, RBC, GE, FITB, Key Bank, CIT, for a number of these investments. Is it fair to say that the direct origination role particularly as you've become larger, again this is outside assets LP, is perhaps getting mitigated or diluted somewhat as you pursue some of these larger transactions with these, what we'll call a partner/competitors?

No, quite the opposite. I think what you're referring to is probably brush power. Brushes is a deal that we did out of our growing Power-Gen lending group, and part of the value proposition that we bring to the market is providing capital in the middle of the balance sheet behind syndicated bank deals.

So in the instance that you're describing, that syndicate is not in our piece of paper, so it's not unlikely that you'll see us, particularly in our power business, being the lead agent on a second lien or junior piece of paper behind a very cheap broadly syndicated first lien loan.

Okay and then I guess would the story be the same Mike for like a dialysis new Co?

Yes. Generally speaking, I don't want to say 100%, but our core strategy of self originating, self structuring, and owning and controlling the tranches that we invest in is very much intact. From time to time you may see us partnering with somebody, but it's the exception rather than the rule.

Fair enough and then the last question relates to how you look at capital in order to fund both a new, as well as unfunded commitments, with unfunded commitments at about $617 million, and let's say that there is the prospect for somewhat, let's say heavy deal flow moving into the end of the year. Maybe give us a sense of capital needs at this point and how you look at perhaps growing the balance sheet both either with debt and equity, in light of the unfunded commitment number in the 10-Q?

You say unfunded commitment number you're talking about our unfunded drawn, unfunded to our borrowers?

Correct. I apologize Michael, so to a borrower where you would basically have a credit line outstanding that they may look to fund.

Yes, that's an ordinary part of our business that we talked about this all the way back through the downturn. Part of our daily management function here is to look at those exposures and evaluate where we see potential for funding. Some of those unfunded commitments are traditional working capital facilities, where we are the agent and can have a very good level of visibility into daily, monthly, quarterly type activity, and some is more strategic in the form of acquisition lines, delayed long loans, CapEx facilities, et cetera.

And obviously that's part of a longer term strategic capital plan for our underlying borrower. So we have pretty good visibility into utilization of all those types of facilities and factored into our capital planning process.

Generally speaking, I'd also just highlight capital planning, I think is something that we do very well. The name of the game here is to be successful in both sides of the balance sheet, both the assets and the liabilities, and I think we've demonstrated that we know how to manage the liquidity to generate shareholder returns. And I don't think that the unfunded commitments is anything new in terms of the equation of how we think about capital formation here.

Fair enough, thank you.

And the final question today will come from the location of Doug Mewhirter of SunTrust Robinson Humphrey.

Hi, thanks for taking my questions. Most have been answered.

First, you know, looks like the -- I guess the liquid markets leverage loan, the covenant light proportion has reached very high proportions in terms of the ones newly issued. And I do realize that seeing that Ivy Hill participates in the CLO market, where a lot of those loans go, and you have been scaling back a bit. Are there still any new issues, CLO opportunities out there, or is it really starting to dry up in terms of what they see, in terms of fair pricing and risk reward and all of that?

Just to be clear, Ivy Hill is in the CLO Management business, but it's all middle market, so when you look at the things, not all but predominantly middle market, but when you look at the assets that Ivy Hill tends to buy, they too are structured with tradition middle market structures.

They probably have a willingness, although knowing how strict they are in terms of their underwriting, they may have a very small handful of covenant light transactions where we have none, but again, I think that would be the stark exception and not the rule. Clearly, in the broadly syndicated loan market, the percentage of new deals coming with covenant light continues to increase a percentage of new transactions, but again that hasn't crept into the middle market.

That's very helpful and my last question, more general question, you're an active participant in the healthcare industry, financing various parts of it. How do you see your appetite or the way you look at investments relative to the ACA, and all of the different healthcare reform that could potentially disrupt a lot of the corners of that industry?

Yes, I think we factor all of that into our underwriting. Healthcare is a broad space, and if you drill down into our healthcare portfolio, you'll see everything from healthcare information technology and revenue cycle management businesses, through to different provider models and service models. So it's a broad portion of our portfolio, but each company and each industry sector they're playing in has a different exposure to the Affordable Care Act and reimbursement changes at CMS, so each one is distinct.

We do feel like we have a real core competency in healthcare. We understand what the issues are. I think generally speaking, I would say that we have avoided funding business models that we think have real risk from the changing healthcare landscape, and we've actually tried to identify business models that we think will benefit from some of the changes.

You can never get it perfect, but I think we have pretty good sense for risks and opportunities, both within the existing portfolio and market as regards of the changing dynamics.

And just to follow-up with that, thanks for your helpful answer by the way. This is very early days, but have your instincts been correct, have you noticed any issues crop up with your existing portfolio, or actually unusually good results from your existing portfolio, now that changes are starting to take place?

I think it's too, right now it's a little too early to tell in terms of the implementation. There were -- this is not news, so we've been preparing for this for a couple years now, and so there were some portfolio companies within the healthcare space that we felt may present some risks or challenges, and we've exited those. Again, most of the business models we think have a balance more opportunity than risk, but there's nothing that we're seeing crop up that I would say is overly positive, or overly negative.

Okay, thank you very much. That's all my questions.

Great, thank you.

This will conclude our question and answer session. I would now like to turn the conference back over to Mr. Arougheti and the management team for closing remarks. Sir?

Great, thank you very much everybody. Again, we really appreciate your continued support. Thanks for your participation and questions today, and look forward to speaking with everybody next quarter.

Thank you sir and to the rest of the management team for your time today. Ladies and gentlemen, this concludes our conference call. If you missed any part of today's call, an archived replay of this conference call will be available approximately one hour after the end of the call through November 18, 2013 to domestic callers by dialing 877-344-7529, and to international callers by dialing area code 412-317-0088.

For all replays, please reference conference number 10034529. Again, that is conference number 10034529. An archived replay will also be available on the webcast link, located on the homepage of the investor resources section of our website.

We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you and have a great day everyone.