Ares Capital Corp (ARCC) 2014 Q3 法說會逐字稿

Good morning. Welcome to Ares Capital Corporation's Third Quarter 2014 Earnings Conference Call. (Operator instructions) As a reminder, this conference is being recorded on Tuesday, November 4, 2014.

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. Any of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, contends, 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 stockholders' equity resulting from operations less realized and unrealized gains and losses, any incentive fees attributable to such realized and unrealized gains and losses, and any income taxes related to such realized gains and losses.

A reconciliation of core EPS to the net per share increase or decrease in stockholders' equity resulting from operations, the most directly comparable GAAP financial measure, can be found in the accompanying slide presentation for this call or by going to the Company's website at www.AresCapitalCorp.com, and clicking on the Q3 2014 Earnings Presentation listed on the home page 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 relating to portfolio of companies was derived from third-party sources and has not been independently verified, and accordingly the Company makes no representation or warranty in respect of this information.

As a reminder, the Company's third quarter 2014 earnings presentation is available on the Company's website at www.AresCapitalCorp.com and clicking on the Q3 2014 earnings presentation link on the home page of the Investor Resources section.

Ares Capital Corporation's earnings release and 10-Q are also available on the Company's website.

I will now turn the call over to Mr. Kipp deVeer, Ares Capital Corporation's Chief Executive Officer.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. Let me first start out with some high level comments on our third-quarter results.

We reported strong third-quarter GAAP and core earnings per share of $0.57 and $0.40 respectively, both in excess of our quarterly dividend of $0.38 per share. The GAAP and core earnings per share reflect the growth in our net interest income and fee revenue when compared with the first two quarters of 2014, along with a greater level of realized and unrealized gains in the portfolio, and accordingly we had another quarter of growth in our NAV from $16.52 to $16.71 per share.

I'd like to take a moment to discuss some general thoughts on the market. Relative to the last time we had the chance to speak with you in August, we find ourselves in a period of heightened market volatility. Over the last several months, the volatility has been created by a diverse set of events including concerns around the pace of global economic growth, ongoing tensions in the Middle East, fear around the Ebola outbreak, significant declines in oil and other commodity prices, and uncertainty around monetary policy and the direction of interest rates in both the US and in Europe.

And while there continues to be significant investor appetite for the direct lending assets that we specialize in, volatile times often lead investors into assets with more liquidity. But, keep in mind the middle market tends to be slower to react to global events, and to capital market volatility, than the liquid credit markets.

Taking all of this into account, we're pleased to have sufficient capital to take advantage of a market that we believe may be in the midst of a transition. At the end of the third quarter, we had available cash and debt capacity of approximately $1.5 billion and moderate leverage. We manage our capital with a long-term perspective, and we believe we have a proven record of being opportunistic when volatility is sustained for a meaningful period of time in the capital markets.

In the third quarter, we believe that we found strong relative value with over $1.3 billion of new commitments across 30 investments. Volatility in the markets created some nice opportunities, particularly toward the tail end of the third quarter, and we were active in funding the growth needs of our existing portfolio companies as well.

During the third quarter, we funded $1.4 billion and had exits and repayments of $633 million. The majority of these exits resulted from either a sale of a portfolio company, or an ARCC-led refinancing. However, certain exits were proactive sales driven by our desire to rotate out of certain lower-yielding assets to optimize the return on our portfolio and to create dry powder to reinvest in new investment opportunities.

This is a strategy we have discussed in the past, and one that we continue to execute upon. We feel this strategy is particularly important today, considering our lack of interest in raising equity capital when our stock trades below NAV.

This year, through the third quarter, we've sold $444 million of assets with a weighted average yield of 6.4%, generating repayments to invest into new transactions, and going forward we believe that our liquidity position will continue to benefit from the sale or syndication of lower-yielding assets as well as from natural repayments in the portfolio.

As we discussed on our second quarter call, we had a busy start to the third quarter which led to meaningful growth and interest income during the third quarter. We also benefited from significant net realized and unrealized gains, highlighting the success we've had with our total return investment strategy. As a reminder, we may select equity co-investments in situations where we see compelling value to enhance our total returns, and typically with a decline in asset yields and a rise in leverage multiples, we observe a period of higher equity valuations in the market when we can benefit from opportunistic sales of our equity investments.

Throughout the last few years, many portfolio companies have been sold, and this trend continued this quarter. Specifically in the third quarter, ARCC benefited from over $70 million of net realized gains coming primarily from the sale of the equity positions we held in a number of portfolio companies.

Let's take a moment to look back at the track record of investing and our focus on generating total return on investments across a market cycle. We do strive to invest with a long term view, emphasizing discipline and conservatism in aggressive markets and promoting opportunistic investing in more volatile, less liquid markets.

Since our IPO in 2004, through to September 30 of 2014, we've invested $21 billion of capital and fully exited $9.2 billion of those investments for a realized internal rate of return to the Company of approximately 13%.

These returns reflect not only income derived from interest payments on loans, but also meaningful amounts of fee income, dividends, and net realized gains, all which have been consistently earned throughout our history. And since our IPO ten years ago, through to the end of this quarter, we've generated $296 million in cumulative realized gains in excess of realized losses, resulting in net realized gains in every year but one.

I'll now turn the call over to Penni, to highlight our third quarter financial results and to provide some details around our recent financing activities.

Thanks, Kipp. Our basic and diluted GAAP net income per share for the third quarter 2014 was $0.57 compared to $0.48 for the second quarter of 2014, and $0.52 for the third quarter of 2013. Our basic and diluted core earnings per share were $0.40 for the third quarter of 2014 compared to $0.34 for the second quarter of 2014 and $0.48 for the third quarter of 2013.

The $0.06 per share increase in our third quarter core earnings, as compared to the second quarter of 2014, was primarily due to higher interest income and structuring fees, both of which were driven by our strong originations for the quarter. Our net realized and unrealized gains totaled $72 million, or $0.23 per share for the third quarter, largely driven by net realized gains on investments for the quarter outpacing the previous quarter's fair value for such exited investment, as well as net unrealized appreciation of $51.5 million on the portfolio.

Like last quarter, we have seen additional appreciation on certain investments where we expect to see an exit event sometime over the next couple of quarters.

As of September 30, 2014, our portfolio totaled $8.8 billion at fair value, and we had total assets of $9.2 billion. From a yield standpoint at September 30, 2014, the weighted average yield on our debt and other income-producing securities at amortized cost was 9.9%, and the weighted average yield on total investments on amortized costs was 9.1%, as compared to 10.1% and 9.2% respectively at June 30, 2014.

Our stockholders' equity at September 30 was $5.2 billion, resulting in net asset value per share of $16.71, up 1.2% from the second quarter of 2014 and up 2.2% compared to the third quarter of 2013. As of September 30, we had approximately $5.2 billion in committed debt capital consisting of approximately $3 billion of aggregate principal amount of term indebtedness outstanding, and $2.2 billion in committed revolving credit facilities, which are subject to borrowing base and leverage restrictions.

Approximately 58% of our total committed debt capital, and approximately 81% of our outstanding debt at quarter end, was in fixed-rate, long-dated, unsecured term debt. As of September 30, 2014, our debt-to-equity ratio was 0.7 times, and our debt-to-equity ratio net of available cash of $90 million was 0.68 times.

As of the end of the quarter, we had approximately $1.4 billion of undrawn, available capacity under our revolving credit facilities.

The weighted average remaining term of our outstanding liabilities was 6.8 years as of September 30, and given our heavy emphasis on longer-dated, unsecured fixed-rate funding, compared to our largely floating-rate loan portfolio, we believe we are well-positioned for rising interest rates whenever they may come.

We have locked in a meaningful amount of fixed-rate, longer-term debt over the past several years, and we are pleased that the current market prices for our bonds have increased well above their par value. If our bonds continue to trade near their current levels, we believe there may be an opportunity to lower our cost of term debt capital over time.

The weighted average stated interest rate on our drawn debt capital at quarter end was 4.9%, reflecting a slightly higher level of borrowings under our lower-cost revolving credit facilities at the end of the quarter as compared to the prior quarter. If at the end of the third quarter 2014 we were to borrow all of the amounts available under our revolving credit facilities, our weighted average stated interest rate would be 4.1%.

In addition to our existing sources of debt capital, we are in the process of applying to the Small Business Administration for an SBIC license. We have received our go-forth letter from the SBA and have now filed a formal license application. If approved, the license would provide us with an incremental source of attractively-priced long-term debt capital which we would anticipate using to finance our investments in smaller companies, particularly venture capital-backed companies.

While we have no assurances that the SBA will ultimately issue an SBIC license to us, we are hopeful that a license will be granted and that we will have the opportunity to work with the SBA to help them to fulfill their mission to provide capital to small businesses in the US.

Finally, this morning, we announced that we declared a fourth quarter dividend of $0.38 per share payable on December 31 to stockholders of record on December 15, 2014. As a reminder, at the end of 2013, we had approximately $0.78 per share of undistributed taxable income that was carried over into 2014. We believe that this has helped contribute to the stability and predictability of our dividend.

Now with that, I'd like to turn it back to Kipp for some closing comments.

Thanks, Penni. Today, we have a diversified $8.8 billion portfolio consisting of investments in 204 portfolio companies, and the portfolio's performing well. For the third quarter, our portfolio experienced very stable credit metrics in the aggregate. The weighted average total net leverage for our borrowers increased slightly from 4.6 times at June 30 to 4.7 times at September 30, and weighted average interest coverage for our corporate borrowers remained unchanged at 3 times.

The weighted average grade of the portfolio is stable at 3.1 at the end of the third quarter, and non-accrual ratios continue to be low with 2.2% of the portfolio at cost and 1.6% of the portfolio at fair value on non-accrual, as of September 30.

To provide some detail around our $1.3 billion in new investment commitments during the quarter, we continued to focus on senior secured investments, particularly stretch senior and unitranche loans, that come with what we see as strong balance of higher yield and adequate downside protection. The weighted average yield at cost on our funded investments during the quarter was 8.7%, above the 8.2% yield on the investments we exited or that were repaid during the quarter.

One important note on the new originations in the third quarter is that a portion of these commitments involve lower yielding senior assets that were sold post-quarter-end. From October 1 through October 29, we sold approximately $146 million of these loans with a weighted average yield at cost of 5.7%.

And looking forward towards the end of the year, our total investment backlog and pipeline stood at approximately $610 million and $320 million, respectively, as of October 29, 2014. And of course, we can't assure you that any of these investments will close, but we do expect to be busy through the end of the year.

So in closing, we're pleased with the continued strong results at ARCC. With more volatility in the market, we believe our position as a scale provider of capital brings valuable certainty of closing to our partners, and this should position us well for leadership and new transactions.

In addition in the third quarter, approximately 57% of our commitments were made to existing portfolio companies, which we feel highlights the importance of incumbency and the need for our companies to have a reliable partner in uncertain times. And with roughly $1.5 billion of dry powder at the end of the third quarter, coupled with our ongoing portfolio rotation efforts, we believe that ARCC is well-positioned going into the fourth quarter to fund attractive new investments. We look forward to following up in February on our year-end results for 2014, but for now, we'll conclude our prepared remarks and open it up for questions. Operator?

Thank you. (Operator instructions) Our first question comes from Tony Ward at KBW.

Great, it's Troy Ward, and thank you, and good morning. Hey, just real quick on talking about the capital structure and the liability structure as we move into the new calendar year, can you talk about your ability to potentially lower your debt costs in 2015, and if there's any fees associated with that we should be thinking about?

Yes, I mean, I'm going to hand it over for Penni for that, she's carried a lot of the water on this, but I would say if you look to the trading levels, all of the debt we've issued over the last couple of years, everything in a market like this trades meaningfully above par. So, it just gives us an indication that if we were to come out and obviously look to continue debt issuance, that we could issue at better rates than we've been able to in the past. I don't know if you'd like to add anything? But that's our thought, Troy.

I was hoping to specifically get some color on your ability to lower some of the outstanding debt costs through calling higher-yielding stuff?

Yes, I mean, if you look at our capital structure on the debt, we've issued a lot of debt into different markets. We have some flexibility around that particularly in the retail note market. We do have about $525 million of retail notes that become callable next year. Now, it's not to say we would do that, but if you're asking where we have potential optionality, that is a place we could have optionality for refinancing if we have a market that makes sense to do that, and we have a capital need.

But, and then when we get to 2016, we additionally have some higher-yielding bonds on the convert side that do mature. Those were five-bullet maturities we started issuing back in 2011, and if you look at the interest rates on those bonds, those are higher as well relative to where we think that we could issue today. And more specifically, those converts are about $805 million with coupons somewhere between 5-1/8 and 5-3/4, and today on a five-year basis, particularly, and even if you go to seven, we believe we could issue substantially inside of that.

Okay great, and then Kipp, you talked a lot about the ability to sell lower-yielding senior debt, and you've done some of that. Can you put some parameter of how much of that you think is available in the portfolio, and also can you talk about whether or not you would consider moving out of some of your large equity positions? Continue to do that?

Yes, I think on the first piece, what we're selling down is partially just existing names, obviously, that had been booked over the last year or two as a capital-raising initiative. We look to a market where we hope to see spreads continuing to widen, so obviously creating that availability by selling lower-yielding assets is something that we remain interested in. You know, there are a bunch of considerations that may not be obvious, but you can go down our SOI and obviously identify, we're pretty transparent, any name that you know, has a 6% or 7% all-in return next to it I think is up for debate.

That being said, we do have secured credit facilities that require us to pledge assets, and there's some complexity around that, so we haven't disclosed -- I don't think we will disclose the amount of available assets for sale. But just an ongoing program, and hopefully over time as we continue that program, you'll see yields on our book go up. I think one of the key things that we do remind our shareholders is, we're a company of significant scale that can simply at this point recycle our repayments, and we hope create earnings growth without raising capital. And I mentioned looking at a stock price trading below book, which is a touch surprising to us. You know, we don't really have any interest in accessing the equity markets, so we're looking for other ways to create capital for new investments. But I think I'm going to just stay away from actually highlighting a specific number, if that's okay with you, Troy.

And after that, sorry, what was your second question?

It was just whether or not you had similar appetite to continue to move out of non-yielding equity?

Yes, I mean, it's tricky. We've generated $300 million in gains in the last 10 years (technical difficulty) any loan losses, pretty significant number in this quarter alone, and we do view equity as an important piece of the strategy. I think BDCs are often perceived along with a handful of other public companies, whether it's mortgage REITs or MLPs or others, as being solely a yield play, and I think that we have through our ability to be good equity investors during down markets, but also through the Company's ten-year history, to be pretty solid generators of gains for the benefit of shareholders. So, we know that it puts a little bit of a crimp on yield, which people focus on, but I think if you look at the Company's ROE over the last ten years at 13%, the equity gains are a meaningful portion of that. We've been taking the equity down, but we haven't been doing it to make the yield go up. We've been doing it because we've seen what we thought is some really fantastic opportunities that the team's executed on. I give them a lot of credit to exit portfolio companies at substantial gains. So, it's driven more by that than it is by the desire to get the yields up by reducing equity as a percentage of the portfolio.

Okay great, great color. I'll hop back in the queue, thanks.

Sure, you're welcome. Thanks.

The next question comes from Doug Mewhirter at Suntrust.

Hi, good afternoon. First question, Penni, really quick -- I blanked out when you said what the amount of undistributed taxable income was. Could you just repeat that please, for me?

Sure, it's coming into 2014 from 2013, it was $0.78 a share.

Okay thanks, and --

Just to be clear, and I'll follow on it, that's a number that we only state every year.

Yes, we provide an estimate, but then we typically don't have a final number until we get to the third quarter of the following year because we file our tax returns in September, so we've been giving an estimate as we've gone along throughout the course of this year. But now that those returns are finalized, the final number is $0.78 per share coming into 2014.

Understood, and I know how you want to stay out of trouble with the IRS. (laughter) On the SBIC question, this program's been around for a while and I can definitely see how you like, that would appeal to you, another source of funding and it doesn't hit against a lot of your leverage constraints. It looks like you have a business you can plug into it. Why haven't you been as active, active at all in the SBIC program prior to this? It has been around for a while, a lot of your competitors do it, what's attractive now versus a couple years ago?

Yes, I mean, our decision to do it is really driven by the business that we have in venture lending, and I think as many of the folks on the phone know, that's something that's happened here and has grown successfully over the last couple of years. Ares Capital is a reasonably large company, and when you think about the size of what you can bring on board in the SBIC license process, it's somewhat small unless you apply it in a focused area, which is our intention. So, we really do intend to bring that on to go hand in hand with our originations in venture finance. It's really, there's been no dismissal of it before. It's just been deemed to be small.

Great, that makes sense, and just my last question -- the bigger picture question. Obviously, spreads have been kind of volatile, especially in the more liquid markets, with the fund outflows, a lot of concerns. And spreads have widened, and I've seen, and I?m sure the reports that you've read too, that some borrowers actually had canceled liquid loan deals, leverage loan deals, and quote-unquote, wait for things to stabilize. I mean, have you seen that yourself on sort of the high end of the middle market, where the buyer might say -- well, let's hold off for another quarter? Or is it just sort of business as usual for you guys?

Depends on what week it is. (laughter) In all seriousness, I mean, the prepared comments really -- I think what we know today is the world's a lot more volatile than it was, as I mentioned the last time that we did this. There have been certain weeks along the way, both in Q3 and moving forward, where we've been able to find some really, really interesting transactions, where we can provide certainty and again not [buy] the market, right? We are originating the paper that we are holding, we can do that in substantial size. This quarter is a perfect example of underwriting and syndicating to the market, transactions that we feel we can take a leadership position in.

I am slowly believing that spreads are widening, but again, the mid market takes a long time to follow. When you buy stocks, bonds, etc., that you can sell on a day-to-day basis, you get used to taking advantage of the liquidity that those markets offer you, and you tend to react maybe more violently to dislocation.

So look, when you see the ten-year trade, and a 30-basis-point range during a single day a couple of weeks ago, that makes people like us pretty nervous. That doesn't filter through to folks that bring private capital to companies where most deals take three, four months to close, and many of them already in pipeline.

I know it's a long-winded answer, but hopefully providing a little bit of color. We do think that spreads are widening. We do think that rates will go up next year. Those are both significant benefits for our business, and we think that being well-positioned with a lot of (technical difficulty) going into a market that we hope, but can't always be perfectly right about predicting when, will transition to be more interesting for us.

Great, that's very helpful. Thank you, that's all my questions.

Sure, thanks.

Our next question comes from Vernon Plack at BB&T.

Hi, thanks. Can you tell me, I noticed there was one portfolio company that was written up a lot during the quarter, 10th Street? I'm curious in terms of the reason behind that?

Yes, without getting into too much specifics, we don't like to talk in a tremendous amount of detail just for confidentiality reasons about portfolio companies, but 10th Street was sort of the other half of CitiStorage. If you were following, we owned a box records storage business over in Brooklyn here in New York that we sold last quarter at a reasonably substantial loss, and the reason for doing that was to start to engage in discussions about 10th Street, which is in our opinion highly valuable real estate property on the East River here in Manhattan. So, the write-up simply is I think reference to views that we have as it relates to the real estate, now that it's not encumbered by an operating company and is free for sale.

Okay, that's it for me. Thanks.

Sure.

(Operator instructions) Our next question comes from Robert Dodd at Raymond James.

Hi guys, thanks for taking the question. You mentioned earlier, a greater focus on stretch senior and unitranche this quarter on the first lien side particularly. Can you give us any more color on that, as to -- I mean obviously you give a leverage breakdown in the presentation, etc., but more color on what's driving that? I mean, is it just category in terms of how much leverage you're willing to put on there? Is there any shift in terms of fees or other covenant package elements that are slightly favoring that, versus other elements right now?

No, I don't think so. I mean, I think if -- as I know you have, Robert, been following us for a while, our view to markets like this are to really emphasize capital preservation even if it means seeing modestly lower yields and you know, typically the places where you see the ability to sort of protect your basis in a tricky market is in those first lien and unitranche deals where you are all the way up the capital structure, have good enforcement remedies, can write deals obviously that have real loan covenants, and offer you the ability to sort of have meaningful downside protection to these that you need to pursue rights and remedies. So, really nothing changed, there. I don't know if maybe we described it differently than we had in the past, but that wasn't our intention. Kind of business as usual here as it has been over the course of the last year or so.

Okay, got it, thank you. Just one detail one, on the SSLP structuring fees or as you disclose in the footnotes in the Q, this seemed unusually large this quarter relative to the amount of deployments into the SSLP. Obviously it skews because of the economics of that vehicle, but $10 million on 86 in originations or commitments in that (multiple speakers). Was there anything unusual there this quarter?

Just typically we will see higher origination fees on legitimately new transactions, i.e., new issue, versus going in and doing an upsize or an add-on to an existing facility. Last quarter, we saw I think more refinancing of existing names. This quarter I think we saw more legitimately sort of new deal flow come in to us, and again, I think that's the reason.

Yes, I think part of that too is just sometimes the SSLP may have repayments coming into the program, and they won't pay those out to us, so there can be recycling inside the program without us having to put new money in. So, when that happens --

Got it.

- we get the fees on the new deals, but you don't see new dollars necessarily going in right from our end. So, that means (multiple speakers) [higher].

Okay. Yes, yes, understood. Thank you.

Sure.

Our next question comes from Jonathan Bock at Wells Fargo.

Hi, good afternoon and thank you for taking my questions. Just a follow-up to Tony Ward's question. (laughter) Who was the buyer of the $140 million in loans that I believe you syndicated out this quarter, Kipp? Just curious who actually picked those loans up as you sold them?

Would you like me to name them by name, Jonathan?

No, more by entity would be helpful.

Yes, I?m kidding around, I'm surprised that no one had asked that question yet. You know, we were fortunate, actually. You know, some of the deals we underwrote in the third quarter as we mentioned, we actually syndicated through into October, in particular a couple underwritings and just one of them being a transaction we did with an existing borrower named [Mackenzie], one with a new company called Highgate Hotels. Both of those deals we syndicated a portion of the transaction to the market. Between those two deals, we had ten separate institutions buying loans from us, and despite the market volatility, much to our happiness I guess, we sold most of that paper at 99. So, we were able to take in net fees on the transaction relative to the underwritings that we did.

That's excellent. Now, just to make sure now, Ivy Hill, was that also a purchaser of that paper? Or were there any syndications down into that subsidiary at all?

Yes, in Q3 we actually didn't sell any paper to Ivy Hill. We do from time to time, but we didn't in the third quarter.

Okay, so still I guess then my second question can still stand, though not as strong as initially, but when you think about risk retention as it relates to Ivy Hill as an entity, right? CLO Manager? How is it -- how do you view the valuation of that investment, how do you view the operating kind of runway for that investment, in light of shall we say rather complex and in some cases untenable rules that will come out on the CLO market in the next three to five years?

Yes, I mean, risk retention is very tricky, and it's obviously evolving in a meaningful way here in the US. Ivy Hill again just to repeat it for us, you know, is a company that we own that structures CLOs, but also other funds that invest, generally speaking, in bank loans, right? We generate the value from Ivy Hill through the net profits that it earns on the management contracts, the funds that it manages, and also through securities that we own in Ivy Hill funds.

The good news for us is, we're a very happy owner of securities in Ivy Hill. The issue for the retention rule, for many players as it relates to the retention rule is, it's much more expensive to go out and put a $500 million CLO together if you have to hold $25 million of paper in that CLO. It used to be five years ago that you could go raise that fund and hold zero, which is why you had lots of irresponsible behavior in the space.

So obviously, the point of the rule is to get managers to be aligned with the performance of their funds, not only collecting management fees but investing in the funds themselves. So, there's really no change for us. We've been significant investors in Ivy Hill's funds back to 2007. We seeded the first vehicle Ivy Hill won, we made investments during the downturn into funds that we managed, we acquired managers, we've continued to support the growth of Ivy Hill through the market as it's transitioned from kind of 2009 (technical difficulty) and 2010 to now, and I think we will continue to on a go-forward basis relative to the growth opportunity.

But on that point, and we said it I think on last quarter's conference call and the one prior to that, Ivy Hill grew substantially during the downturn because we were able to make very opportunistic investments in the CLO market at very high rates of return that have generated substantial games at Ivy Hill, some of which have been used to make special dividend payments to ARCC over the last couple of years.

As we think about their growth going forward, I would expect them to continue to raise bank loan funds in regular course, that to your point on the retention rule, requires investment from ARCC and from Ivy Hill. And we think that the only reason that perhaps that investing will be slower is simply because there's a less attractive market to invest in both Ivy Hill and in bank loans than there were five years ago. And we're guessing that there'll be a time again where we can buy CLO securities at really deep discounts, and we'll be able to buy managers because of the retention rule, and these things tend to come and go. But the retention rules, to just kind of hit the nail on the head, don't really have any impact on our view of Ivy Hill today. It simply is cyclical, and will kind of come and go with the times.

That's very detailed, and thank you. So, maybe one last question as it relates to market volatility. Near the end of the quarter, lots of stuff was happening, lots of negative news, etc., and you mentioned taking advantage of that volatility by deploying capital. And I see that the largest investment near the end of the quarter, I think it was Castle Management, $160 million loan, yielding at roughly 7.5%. And so, I guess it's a matter of degree for us, and this is where I'd look to you for better understanding, is that would you consider a 7.5% yield loan taking advantage of supreme market dislocation as it broke down at the end of Q3? Were there some other items as it relates to that loan that might I'd say, better explain how the risk adjusted return in that manner, or what you're seeing today, really is attractive and being driven by what we'll say, the scares that the market's received over the last I'd say four or five weeks?

Yes sure, I mean, look. We certainly, 7.5% doesn't get that many people excited around here, so. Castle specifically is the Highgate Hotels transaction that I mentioned. So, a significant portion of what you see show up there was actually syndicated post-quarter-end.

Okay great, that's it for me. Thank you so much.

Sure, thanks Jonathan.

At this time, I see no further questions. I'd like to turn the conference back over to management for any closing remarks.

We don't have any follow-on comments other than to say thanks to all, and have a great day.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archive replay of this conference call will be available approximately one hour after the end of this call through November 17, 2014 to domestic callers by dialing 1-877-344-7529, and to international callers by dialing 1 +1-412-317-0088. For all replays, please reference conference number 10053030. An archive replay will also be available on a webcast link located on the home page of the Investor Resources section of our website.

Thank you, you may now disconnect.