Ares Capital Corp (ARCC) 2015 Q1 法說會逐字稿

Welcome to the Ares Capital Corporation first-quarter 2015 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Jana Marcowitz. Please go ahead.

Good morning. Welcome to Ares Capital Corporation's first-quarter ended March 31, 2015 earnings conference call. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded on Monday, May 4, 2015.

Comments made during the course of this conference call and webcast and the a 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 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 by going to the Company's 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.

As a reminder, the Company's first quarter ended March 31, 2015 earnings presentation is available on the Company's website at www.arescapitalcorp.com, by clicking on the first-quarter 2015 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. Kip deVeer, Ares Capital Corporation's Chief Executive Officer.

Thanks, Jana. Good afternoon everyone, and thanks for joining us.

We're pleased to report continued strong operating performance for the first quarter of 2015, with core and GAAP earnings per share of $0.37 and $0.32 respectively, generally in line with our expectations despite the seasonally slow time of the year. We also recognized another $0.09 in net realized gains in the first quarter, and we continue to generate gains from certain equity investments.

Ares Capital emphasizes a total return strategy, and these gains are an important driver of our ability to deliver value for our shareholders. In addition, our portfolio rotation efforts are providing meaningful results again as we increased our overall portfolio yield, and amortized costs by 30 basis points this quarter.

We believe our investment portfolio remains strong as our corporate borrowers saw continued year-over-year EBITDA growth of 14%, and our nonaccruing investments at amortized costs declined to their lowest levels since before the financial crisis.

Finally, due to the net repayments we experienced during the first quarter, our balance sheet and available capital are strong, with a net debt-to-equity ratio of 0.63 times and available capital for new investments of $2.3 billion. We also declared a second quarter dividend of $0.38 per share payable to shareholders of record as of June 15, 2015.

We will provide more detail on our earnings and investment activity later in the call. However for now, I want to shift the discussion to the recent news from GE, that it intends to divest approximately $165 billion of commercial lending, leasing and consumer banking assets.

This divestiture is expected to include GE Capital's US sponsor finance business, with whom Ares Capital has built a successful partnership through the Senior Secured Loan Program over the last 5.5 years. We believe that SSLP has been a productive program for both parties and one that has brought real benefits to our clients, and helped to provide both GE and Ares with significant advantages in the market.

Our investment platform at Ares Capital today has significant scale and breadth, having grown to 86 dedicated investment professionals across the country who source, underwrite and manage our investments. Ares has great relationships across the sponsor community, and of course strong relationships with the financial sponsors and companies in the SSLP.

We would seek to continue to finance those sponsors and businesses to support their ongoing capital needs, either directly or with a new partner through the SSLP or through a new program. We believe that the strength of our network, experience and capital base makes us a desired partner for those looking to grow their mid-market lending businesses, or to enter the market.

Accordingly we believe that partnering with us and SSLP, or a similar joint venture, will be attractive to a number of third parties. And we are having active and productive dialogue with a few potential partners about buying GE's interest or starting a new program, although we can't promise that a deal will be reached.

The SSLP is operating business as usual today. In fact, we have five deals in the SSLP backlog and pipeline that we are currently expecting to close. As I mentioned, we plan to continue the partnership we've enjoyed with GE Capital with a new partner, and believe that certain structural elements of the SSLP will help facilitate this.

In particular, as a general matter GE Capital may not unilaterally sell the underlying loans in the SSLP since such a sale, as well as almost any other discussion in respect to SSLP, must be approved by both Ares and GE. If no mutually acceptable replacement partner for GE Capital can be identified, either by Ares or through the GE Capital sale process, then the program would likely experience a gradual wind-down as the underlying loans in the program are repaid.

As of March 31, 2015 the weighted average remaining life of the loans in the SSLP is 4.3 years, although of course the loans in the portfolio could be repaid earlier in the event of a refinancing or a sale of the underlying borrower. As you know, we have strong relationships with these companies in the SSLP, and we would expect to be well positioned to have Ares Capital continue to provide them with capital, either alone or with a new partner in the SSLP, or through a new program.

Taking a step back to consider the bigger picture, we believe GE Capital's exit from our industry presents a seismic shift in the landscape of middle-market lending. We also believe that this exit creates a significant opportunity for our Company to grow our position in the market.

It positions us to be a more active originator and syndicator of first lien senior debt, which traditionally has been a core business at GE Capital, given their low cost of capital advantage. I hope this summary is helpful.

We will endeavor to answer your questions later in the call, but please understand that both we and GE Capital are bound by certain mutual confidentiality restrictions around the SSLP that simply may not allow us to answer certain questions or otherwise comment on certain aspects of the program.

Now I'll turn the call over to Penni to highlight the first quarter financial results and to discuss some of our recent financing activities.

Thank you, Kipp. Good morning.

Our basic and diluted core earnings per share were $0.37 for the first quarter of 2015, compared to $0.38 for the first quarter of 2014, and $0.42 for the fourth quarter of 2014. Our first quarter core earnings included an additional dividend from Ivy Hill of $10 million, and IB Hill's our wholly own portfolio company, which is returning previously undistributed earning that were driven in large part by realized gains from its past investments.

Our basic and diluted GAAP net income per share for the first quarter ended March 31, 2015 was $0.32, compared to $0.39 for the first quarter of 2014, and $0.49 for the fourth quarter of 2014. For the first quarter of 2015, our net realized gains on investments totaled $27 million or $0.09 per share, and we had net unrealized losses on investments of $48 million (sic -- see Press Release "$49 million"), or $0.15 per share (sic -- see Press Release "$0.16"), $24 million of which was due to reversals of net unrealized appreciation related to net realized gains on investments.

As of March 31, 2015 our portfolio totaled $8.5 billion at fair value and we had total assets of $8.9 billion. As we discussed on our last call, we were focused on selling lower yielding assets during the first quarter, which reduced the size of our investment portfolio, but helped to improve the overall portfolio yield.

At March 31, 2015, the weighted average yield on our debt and other income-producing securities at amortized costs increased to 10.5% and the weighted average yield on total investments at amortized costs increased to 9.6%, as compared to 10.1% and 9.3% respectively at December 31, 2014, and 10.2% and 9.2% respectively at March 31, 2014.

Our stockholders equity at March 31 was $5.3 billion, resulting in net asset value per share of $16.71, up 1.8% year over year versus March 31, 2014, but down 0.7% from NAV per share of $16.82 at the end of the fourth quarter of 2014. The NAV at March 31 also reflects the additional dividend of $0.05 per share that was paid to shareholders from undistributed earnings at the end of the first quarter.

As of March 31, 2015 we had approximately $5.7 billion in committed debt capital consisting of approximately $3.5 billion of aggregate principal amount of term indebtedness outstanding and $2.2 billion in committed revolving credit facilities. Approximately 61% of our total committed debt capital and 100% of our outstanding debt at quarter end, was in fixed-rate unsecured term debt.

As we discussed in our last call, we continue to focus on the right-hand side of our balance sheet with an eye on lowering our cost of debt capital, while still maintaining what we believe to be a prudent maturity ladder and diverse sources of capital. In January we reopened and upsized our November 2014 bond issuance, and were able to raise an additional $200 million of 3.875% notes at a premium to par.

Then in March we redeemed at par the full $144 million of 7% unsecured notes that were scheduled to mature in February 2022. We will continue to evaluate these types of opportunities as we go forward.

We also continue to receive strong support from the banks in our revolving credit facilities who have extended credit to us at attractive pricing. During the first quarter, as part of an amendment to our largest revolving credit facility, we upsized the total commitments to the facility to $1.29 billion with commitments from 20 banks, extended the revolving period and maturity each by one year, bringing it back to a five-year term, and modified the borrowing spreads through the introduction of a formula-based calculation, which currently results in a stated interest rate of LIBOR plus 175 basis points as of March 31, down from LIBOR plus 200 basis points previously.

The weighted average stated interest rate on our drawn debt capital at quarter end was 5.2%, which was up slightly from our weighted average stated interest rate of 4.9% at December 31, 2014, and down from 5.4% at March 31, 2014. The increase in the weighted average interest rate on our drawn debt at March 31, 2015 versus year-end 2014, reflects that we had nothing outstanding on our lower-cost revolving credit facilities as of March 31, 2015, partially offset by the repayment of the 7% unsecured notes during the first quarter.

Upon the repayment of these notes, we realized a small loss on the extinguishment of debt of $0.01 per share. If we had borrowed all of the amounts available under our revolving credit facilities as of March 31 2015, our fully funded weight average stated interest rate would have been 4%, down from 4.1% at December 31, 2014.

I'm also happy to report that we've recently received formal approval from the Small Business Administration for our wholly owned subsidiary, Ares Venture Finance LP, to be licensed to operates as a small business investment company. The license will provide us with up to $150 million of attractively priced long-term debt, which we would anticipate using to finance our future investments in smaller companies, particularly our venture capital backed portfolio companies.

We will be able to draw down this available debt capital as qualifying SBIC investments are funded. And we look forward to working with the SBA as we help them fulfill their mission to provide capital to small businesses in the US.

As of March 31, 2015, our debt-to-equity ratio was 0.65 times and our debt-to-equity ratio net of available cash of $122 million was 0.63 times. As of quarter end the weighted average remaining term of our outstanding liabilities was 6.4 years, and we had approximately $2.2 billion of undrawn availability under our lower-cost revolving credit facilities, subject to borrowing base and leverage restrictions.

Finally, as Kipp mentioned this morning, we announced that we declared a regular second quarter dividend of $0.38 per share, payable on June 30 to stockholders of record on June 15, 2015. Also, we estimate that we have carried over into 2015 approximately $181 million, or $0.58 per share of undistributed taxable income.

With that, I'll turn it back to Kipp.

Thanks, Penni. I'd like to spend a few minutes discussing recent investment activity in our portfolio before opening the call up for questions. In the first quarter of 2015 we made $500 million in new investment commitments, and the weighted average yield at cost on our funded investments was 10.1%, 260 basis points above the 7.5% yield on the $1.1 billion of investment commitments that were repaid, sold, or otherwise exited during the quarter.

As we've seen in the past, the first quarter tends to be a seasonally slow period for new originations, and this year was no different. However, we found some nice opportunities to invest in second lien loans, which we believe offer good risk-adjusted returns.

Many of these loans were either to companies we've known and invested in for a long time, and/or were in larger companies. We believe that the benefits we enjoy from incumbency, the strength of our origination platform, and our significant capital base provide us with significant competitive advantages and help us secure meaningful positions in our borrowers' capital structures.

With respect to the $1.1 billion of investment commitments exited in the first quarter, approximately $485 million, or 43% of those related to the proactive selling of lower yielding first lien assets. The weighted average yield on the $485 million of assets we sold in the quarter was 5.9%.

As we mentioned on our last earnings call, a portion of the fourth quarter originations were in lower yielding first lien assets, that we then subsequently sold in the first quarter, allowing us to earn fee income on those loans before we recycled that capital back into new investments.

We currently have a diversified $8.5 billion portfolio consisting investments in 201 portfolio companies, and the portfolio is performing well. The weighted average total net leverage for our corporate borrowers increased in the first quarter from 4.8 times at 12/31 to 5.1 times at March 31. And the weighted average interest coverage decreased slightly from 2.9 times at December 31 to 2.7 times at March 31.

The increase in leverage in the first quarter was driven by the mix of our new investments and the sale of lower levered, lower yielding first lien investments. We expect that the underlying corporate borrowers in the portfolio at quarter end will delever from current levels, given the positive 14% year-over-year EBITDA growth that they have experienced.

The size of the corporate borrowers that we have invested in has also increased, from a weighted average EBITDA of $51.6 million at the end of the first quarter a year ago, to $61.2 million at the end of the first quarter of 2015, which can provide for an improved portfolio credit profile. Non-accruals declined in the first quarter, with 1.7% of the portfolio at cost and 1.3% of the portfolio at fair value on non-accrual at March 31, as compared to 2.2% at cost and 1.7% at fair value at December 31. We did not have any new non-accruals during the first quarter, and we had one investment come off of non-accrual.

I'd now like to finish with some commentary on our post-quarter-end investment activity. We're currently seeing light loan volumes in the middle-market. However, we continue to find some attractive opportunities.

From April 1 to April 29, 2015 we made new investment commitments totaling $153 million, all of which were funded with a weighted average yield at amortized cost of 9.9%. During that period we also had sales, repayments or other exits totaling $180 million, with a weighted average yield at amortized cost of 7.5%, and which we realized approximately $5 million of net gains.

Of the $180 million, $79 million related to the sale of lower yielding loans, which had a weighted average yield of approximately 6.4%, and the remainder were due to normal course repayments in the portfolio. As of April 29, our total investment backlog and pipeline stood at approximately $385 million and $200 million respectively, and of course we can't assure you that any of these investments will close.

In closing, despite the seasonal headwinds for the first quarter, we are very pleased with the continued strong results at ARCC, and we feel the Company is well positioned as we move further into the year. The announced exit of GE Capital from our market is yet another example of the banks' unwillingness to lend to the middle-market, and we believe this exit of a substantial competitor will result in a more favorable competitive landscape.

This brings us even more conviction in our business strategy of directly originating investments in the middle-market to achieve strong risk-adjusted returns. That concludes our prepared remarks. We're happy to open the line for questions. Operator?

(Operator Instructions)

Our first question comes from Greg Mason at KBW.

Great. Good morning, and thanks for taking my questions.

First, one of the questions that a lot of clients have had regarding the SSLP and potentially new partners or other opportunities there is the amount of leverage and cost. And I know you can't give us specific numbers, but can you just maybe address the question of potential changes to the cost of the leverage that could occur in the SSLP and the amount of leverage that used, given that GE used a good deal of leverage at what the market perceives as pretty cheap rates in that program?

I can provide some comments on that, Greg. Good morning. Thanks for the question. Look, the agreement that we have with GE, I think as we've said over and over again, we really don't view them as a lender but as a co-invested partner in the structure.

So I'll just cover that [offit] first. In terms of the return that GE takes as a partner versus where we hope, obviously, to see the program settle out, I'd say it's probably a little bit too early in some of our dialogue to provide any comment on that. I think that the exposure that GE has to the program today is quite attractive when comparing that to alternatives in the market.

Again, we're talking about a 50-name portfolio that's very healthy, that provides a lot of introduction, obviously, to mid-market borrowers and sponsors. So I don't think it will be difficult for us in some way, shape or form to reconstitute that. And that's what we're working hard to do.

Great. Second question.

Obviously a big number of -- percentage-wise of second lien deals versus looking at the past, much more heavily weighted towards first lien. Can you talk about, is that a purposeful move? Any additional commentary?

And the pipeline also looks like it's full of second lien as well. Just any kind of comment commentary around that?

I think as you look around the market, most of the originations that you'll see, either from us or from folks in our business, are generally coming either in unit tranche or in second lien. Nothing inconsistent, I'd say, where we're out looking for new investments. Our selectivity rates are incredibly low, as I think you appreciate, having known the Company for a while.

There's no significant change in strategy, other than I'd make a couple of broader market comments, which is the size of the companies that we're investing in are a bit larger than what you'll see in the competition. But I think importantly, look, we see base rates near 0. It's very difficult to invest in 5% assets in a BDC where you're leveraged 0.7 to 1.

Our goal here is to continue to pick solid credits, but obviously to put ourselves in a position to deliver solid earnings at the Company. And that's the balance that we consider.

I would also say that when you think about risk, we have to take a look forward. But we've got an incredibly healthy portfolio. We have a couple of names out of 205 names on non-accrual of any substantial value. And the portfolio's performing really, really well. And as we have observed the market around us, we're not really seeing any increase in defaults.

So without getting ahead of ourselves, we want to continue to pick good credits. But there may be, I think, an appreciation on our side that this credit cycle is going to continue to extend for a while. We see reasonable growth in the portfolio coupled with low rates. And I think that's how we think about picking assets in terms of the backdrop that we sit against.

Great. Thank you, Kipp.

Our next question comes from Matthew Howlett at UBS.

Thanks for taking my question. Just trying to get back to the senior loan fund. You look at the agreement with the fee-sharing, there's a 50/50 fee sharing. How much wiggle room is that in terms of negotiation?

And that leads me to, what's the going run-off? What are the -- utilizing that 30% bucket, which theoretically that would open up, could you replace the lost yield and total return over time in a, say, CLO or something of that nature?

I think this gives us a real strategic opportunity to reposition a little bit away from both the strength of what's been a great partnership with GE, but also perhaps with some of the shortcomings that came with it. I'd tell you that we haven't been a particularly active originator of senior debt here. And that there's real room to occupy a place in that market as GE exits the business.

Right.

Doesn't necessarily mean that we'll hold all those loans at the BDC, but I think it widens the fairway of what we're able to do here. If you recall, going back just to 2009 when we signed the partnership up with GE, our Company had $2 billion of assets.

My guess is we had 25 or so people. We were in the middle of a terrible financial crisis, and we were also making an attempt to buy a reasonably distressed competitor.

It's six years later. A lot has changed. The size of our team is 4 times as large. I think our position in the market is significantly more meaningful.

Our capital base is 4 times what it was, 5 times almost what it was at that point. So I think there's some things that we can do opportunistically here five or six years later that are pretty exciting.

Does that make you stronger at the negotiating table, that you can come in and say listen, we have these economics in place, we have other options. We're not going to just, any price get this renewed. Is that how to think about it?

I'm sorry, the negotiating table with a potential client?

With a potential buyer of the GE platform. In other words the arrangement with fees, the 50/50 split. If someone was to push back on that, are you more at a powerful -- more powerful negotiating stance, given you have other options?

I'm not so sure. I think maybe yes, maybe no. It's probably a little bit too early. I think that look, the fees accrue to folks that originate. And the theory, generally speaking, with GE was we both had substantial origination businesses and that we were both contributing substantial originations to the partnership.

I think that the fee splits on new deal fees should probably be governed by who's driving origination. We're just not there yet in terms of where we hope to move with a partnership on a go-forward basis. I think it's a little bit too early just to comment on that, but certainly it's a variable that you can move.

Right. Exactly.

And then just getting to where you are from a -- you're below NAV, you haven't raised equity capital in some time. Do you feel confident that you can continue to service your clients, turn over the existing capital base. Obviously you sold a lot of lower yielding stuff, and still generate the fee and the originations if you are -- if you decide obviously not to raise equity capital for some time?

We are. We feel very confident in where we sit for the remainder of the year. The GE circumstance around SSLP brings a little bit of uncertainty, but we've done, as you probably appreciate, quite a lot of work here to analyze different circumstances there. And I think that we feel that the Company remains well positioned vis-a-vis both its current earnings profile and our existing dividend at $0.38 a share.

Right, and it was seasonal off -- the first quarter was just seasonal, and you've seen that in other years. So there's no change that went on with GE or any of the negotiations?

Correct.

Great. Thanks, Kipp.

Sure.

The next question comes from Jonathan Bock at Wells Fargo.

Good afternoon, and thank you for taking you my questions. Kipp, you mentioned earlier that you were focused on a tad bit of larger company. And given that things in the loan market really have turned around and it's become quite competitive, let's say the BSL market takes out a few more of Ares' larger deals. How do you really avoid another shrink quarter that we saw today as the portfolio got smaller, which likely pressures earnings a bit in the future?

I think again, a portion of that -- it doesn't -- a shrink quarter doesn't bother us that much on the asset side. Again, we've been doing some repositioning now vis-a-vis the capital for the last few quarters. I think as you know, Jonathan, but others have been paying attention, the stocks in the space have not been performing all that well, for whatever reason.

And I think we've been cautious, back to the last question about when we'll raise equity capital, if we can, when we want to, et cetera. So we've really been trying to create enough dry powder so that we can do the things we want to do.

Most important is being in front of our customers and selecting the deals that we want to be in because we're positioned for capital. But the goal, again, in what we do for the remainder of the year is to continue to position the portfolio such that we are growing earnings over time.

We're levered 0.63 times now. We've got quite a lot of capacity going forward.

And to your point on what the market looks like, the market's in a little bit of a funny period. We're seeing not nearly as much supply of new paper, to your point, as we see demand for it again. So it's kind of plateaued, if not even reversed in terms of what we'd seen vis-a-vis yield widening. But we're seeing it on a very, very limited dataset, i.e., there are just not a ton of deals right now.

So before someone asks us a question why that is, we don't actually really have an answer. We're kind of not sure. It just happens to be a little bit slow for early May, which is okay.

But look, as we look out, a flat quarter, a modest shrink quarter, a modest growth quarter, we don't -- we're not asset-focused. We're earnings and dividends focused, Jonathan. As long as we're positioning that in the right way for shareholders, that's where our focus remains.

Makes sense, Kipp. Thank you. Now, thinking about shrink to the extent that it occurs, I know you said earnings and dividend focused.

Right now you're at 28% in the nonqualified bucket. Given the cap's at 30%, and to the extent volume's light and perhaps repayments pick up, et cetera, or you see some opportunities to do selective sales, how should we think about managing that nonqualified bucket exposure in light of what might be a situational decline in total assets while the GE program remains outstanding? Is it possible that investors should be thinking about SSLP in a bit of a smaller form in the future?

Well, I mean, that 28% number, I can't say that we haven't been there before. I don't know if any of you recall the highest that we've ever been. We're probably well within that range today. We've been higher in the past.

I'm not thinking about it any differently than I have at certain points in the past, Jonathan. Obviously we're going to have to see what happens here with the sponsored-financed sale and with our own negotiations around SSLP.

As I mentioned, we're closing five deals right now in SSLP. So we're not restricting deal flow there by any means because of the 28% number.

Okay. Appreciate that. Talking about an improved credit profile, obviously non-accruals, et cetera, has improved. And I think to the esteemed Mr. Mason who asked about your second lien exposure and that it was increasing, just curious.

So we've noticed diversification increase, but we've also seen leverage at the underlying portfolio company go up perhaps a click or two from, I think, 4.8 to 5.1. Can you give us a sense of underlying risk here when we look at some of the second lien deals that you've done, take Power Plant, for example, or Netsmart.

You own a smaller percentage than what we've normally seen of the total tranche outstanding. So perhaps at Power Plant you took $80 million of $180 million tranche.

We know generally you like to write the entire ticket most of the time. Can you give us some sense here on just how this deal shared the risk profile, because second lien, obviously, in investors' minds, it just prompts more questions than a normal first lien secured investment today.

Without addressing specific situations, and we can if we want to, look, we're seeing because of tremendous amounts, and this is really in the private equity-backed transactions, tremendous amounts of private equity money chasing, frankly, not a lot of opportunities. We're seeing purchase price multiples about as high as we've ever seen them. In particular, in certain sectors where we also, not surprisingly, find good credit characteristics.

I'd tell you, if you looked at this on sort of a loan-to-value metric, i.e., what's the percentage of equity coming into capital structures versus debt, it hasn't changed much.

But as you speak to the folks in the private equity side here or at other alternatives firms, I think they'll tell you it's not uncommon to see mid-market borrowers in the $50 milliion-ish of EBITDA zip code where we play easily command 10 times purchase price multiples. Certain of the names that you laid out, we're seeing some 12s and some 14s, too.

That being said, we do our own fundamental analysis. Loan-to-value is a piece of it. And when you look through to the other important metric, i.e., what's the interest coverage of these borrowers, when you're in a situation of low rates and portfolio companies generally speaking can cover their interest cost by almost 3 times, and the weighted average debt-to-EBITDA is around 5 times. We don't feel like we're taking undue risk to generate what we think are pretty good returns for our shareholders.

Very helpful. And last piece as it relates to the SSLP. Curious about the attractiveness of the $7.3 billion in senior notes to various constituencies.

We'll look at it in the context of bank versus nonbank. In your view, is it -- what are the push and pulls from either a bank and a nonbank perspective, meaning that is the $7.3 billion for a bank a bit too large of a ticket to write? And in which case it would go into the nonbank system at potentially a higher interest cost on lower leverage.

Just trying to get a sense of bank versus nonbank and the appetite, or the constructive views and the negative views on whether or not that's too big to date or not? Any color there, Kipp, would be helpful.

Sure. I mean, look, Jonathan, as you appreciate, we're spending an extraordinary amount of time on this exact point today. Some thoughts are the GE divestiture is obviously being driven by a fair amount of long-running issues at, quote, their industrial company in terms of things that folks have read about in the press.

I would tell you that their position as a US Fed regulated entity and a SIFI has made their life difficult. So do we think that the obvious person to step in here and work with us is a US regulated bank? I can't say I think that's the obvious place that we're spending a lot of our time.

There are other non-US regulated banks where I think there's a productive conversation. And then to your point, there's sort of the nonbank world where I'd categorize folks as asset managers, insurance companies, some combination of all three of those things where we feel that a partnership like this could bring a lot to bear on one of those organizations, or more than one of those organization, by the way, to your point on size.

There's no doubt, I think this is a really important point, that we've always viewed, despite other folks having what they call their own SSLP, we've always viewed GE as an extraordinary partner, an unusual partner, a unique partner in this structure. Part of that was origination and understanding the business, But part of it was also, to your point, just the significant scale that they brought to this program.

And I think it's probably not lost on people that others have looked to copycat this program over the last six years, and no one's really been able to do that with any success and/or scale. That being said, we have the benefits of a funded portfolio, where everybody else sort of had to start from scratch.

The ability to go show somebody a highly diverse portfolio that's performing extraordinarily well in size that I feel offers good relative value to a partner that also you allows them direct access to what, pardon myself for congratulating our team, is a best-in-class franchise over here in terms of what we're able to deliver to our investors. We're feeling reasonably optimistic that we'll find some interest.

But we're down the path with a lot of different kinds of people, and it's too early to understand who's going to be the most interested and who's not. That's maybe some thoughts on what we've been doing over the last couple of weeks.

Appreciate the comments, and thank you for taking my questions.

Sure. Thanks, Jonathan.

Next question comes from Harry Ma at Barclays.

Just wanted to follow up on the second lien a little bit. Can you maybe just quantify the relative attractiveness of the second liens over the first liens, and how that's evolved over the last quarter?

When we look at first to second lien, Terry, we're always looking at kind of where the market would put second lien pricing on top of the first lien pricing. I think the guideline over the years has always been that second lien is 400 basis points on top of where you'd see first lien.

To the extent we're able to go out and originate and/or lead a second lien deal where we can do meaningfully better than that, I thinks that's where you're going to see our interest in being in second lien. We'll very often underwrite both, but syndicate the first lien, which we've continue to do probably as far back as third quarter of last year, and something that I think we'll be more active on.

That's kind of you how we think about it. I hope that answers the question.

Yes, that's good. Appreciate the color on the SSLP stuff.

Just want to make sure I got this right. The weighted average life of the existing portfolio is 4.3 years and that's contractual, right?

That's just the stated maturity. If you went and unpacked all 50 borrowers, yes/

Is it a reasonable assumption that the actual duration would be 3 to 3.5 years?

It depends what each underlying company is looking to do. Not every company refinances at the first moment that they can. Others have an acquisition come along that makes them want to refinance earlier than they might have expected to relative to their deleveraging profile.

So we always say that the assets that we invest in tend to have 3- to 5-year lives. And no surprises, this portfolio calculates out to be about four and change. I wouldn't know how to handicap it any other way [besides that].

Okay. Got it. Thanks.

People typically don't wait until 30 days before their maturity to refinance. So it's a reasonable assumption that you come inside that 4.3 years a little bit.

Okay. Got it. Thank you.

You're welcome.

Next question is from Robert Dodd at Raymond James.

Hello, everybody. (Inaudible) about Ivy Hill, actually. Looking at March versus December, the fair value dropped about $20 million. Cost was the same.

Obviously there was a dividend and a special dividend, and we know the source of those in the past. Could you give us a ballpark idea how much of the current fair value, that $240 million number is from, call it book value premium on a mark-to-market versus previously retained earnings? In other words, how much is left, so to speak, ballpark?

Just so we're all maybe on the same page on this, so when we take an extra dividend, as we did in Q1 up of $10 million, that provides an immediate unrealized loss, obviously at Ivy Hill. So $10 million of the $20 million is the $10 million of dividend that came up to ARCC.

I think the incremental $10 million of write-down was a balance of just taking a look at the manager, which remains profitable and growing, and the existing investments that are held inside Ivy Hill as a portfolio company. In terms of what's there, again, the value is two-fold.

The value is a multiple that we put on Ivy Hill's operating profit, as it's an asset manager. And on top of that it's got an investment portfolio that they obviously fair-value each quarter. And that tends to move around a little bit.

$10 million on $240 million of unrealized NAV excluding the dividend to us didn't feel particularly material. It's a couple percentage points.

Got it. And then just one more on the SSLP, if I can. As you said earlier, roughly 50/50 fees from GE and you. The original concept, that would be the flow of origination ideas at least, maybe not closings per se. Of the partners that -- and I realize it's very, very early days.

But are any of the partners you're talking to, and you mentioned non-US banks or insurance companies, et cetera which aren't necessarily known for their origination capacity in the US sponsor financed market in the same way that GE is. What's the risk of not being able to replace the origination capability of the whole platform, given that was one of the obviously primary ideas of building the relationship with GE in the first place?

I'm glad you asked the question directly, because we meant to answer it directly in our prepared remarks, but maybe we didn't. So I'll answer it directly.

Look, we've got 85 people here originating every day. We've been doing volumes at the Company north of $4 billion a year on a gross basis. That includes the fact that we're not obviously investing all of the capital in SSLP, i.e., GE is bringing some of the capital to bear.

We have literally zero concern. If our new partner in SSLP or in a different program going forward has no origination in the business. We have a lot of confidence in continuing to just invest the program with our own team.

I would like somebody, frankly, who understands the business, and that the ability to do new deals is contingent on both counterparties working well together and obviously approving new credits, as you all know. So familiarity and understanding of the credits and the market and the risk coming into the program, so to speak to me is much, much more important than the origination that a potential partner has.

Got it. Thank you.

Sure.

Next question comes from Hugh Miller at Macquarie.

Hi, good afternoon.

Hey, Hugh.

So I wanted to shift a little bit. You obviously had made some investments in the energy space.

Obviously there's been a lot of turmoil over the past six months or so. And was wondering how things are looking on that endeavor. And are you gaining more comfort in originating credits in that space, or is it still early days?

I think it's still early days. We're at the time of year where obviously as I think most of the folks on the call know, we do have a dedicated team in that space. Just as a recap, made two investments last year in the team's first year here at Ares. And then slowed it down, as obviously the commodity picture changed last fall.

I'd say a lot of what's been going on here over the course of the last two months in that sector in particular has been banks going in and revaluing, obviously, borrowing bases and understanding where companies sit from a liquidity perspective and from a financing perspective. And I think management teams in the space have gone in and tried to be smart about reevaluating their asset bases, their CapEx, and if you're an E&P business, a drilling plan for the lower commodity price. So that's all been going on.

There have been lots of discussions. You've seen a bunch of larger cap bankruptcies, filings in the space in the first four months of the year. Because couple of companies just don't have the combinations of assets, i.e., these assets are expensive in terms of where they sit on the cost curve. And if you couple that with some tough balance sheets, they hit the screen pretty quick.

Most of what we've seen, we have one name on the E&P side to work with, and some of the other new deals that we've looked with are just a slow recalibrating of what companies and management teams and their investors, whether it's lenders or equity investors, should expect and want to do together in 2015, 2016.

So I can't say that we're not looking at a bunch of new stuff. We are. Do we have more confidence today than we did four months ago? Not really. We feel about the same.

We want to do anything in the space with a tremendous amount of downside protection where our capital really gets valued, i.e., generates a high return for the risk that we're taking, which we feel in a space that could be quite cyclical and commodity-oriented, it's early days. Happy to follow up some more.

No, no, that's very helpful. Great color there. And you talked -- obviously you've had some questions about the impact from GE's announcement on the SSLP, but you did talk about the seismic shift in the middle-market space that's going to occur. As you look at things both within the current verticals and then the potential to make some investments, maybe to expand beyond your current verticals, where do you see opportunities on the horizon as a result of the shift?

I think we're built in every asset class generally that we want to be in today, with the possible exception, as we've mentioned, of being in the life sciences and healthcare space, whether it's royalties or some of the credit products that are happen there. That's not a place where GE is particularly attractive -- or active, rather, other than they've got a big healthcare finance group, which I think will be part of this divestiture, as well.

I feel comfortable. I think we all feel comfortable here, I should say, with our positioning in terms of industry and coverage.

I think the elephant in the room is the fact that GE last year was a significant market share leader originating and syndicating senior debt to the tune of $15 billion, $16 billion of originations last year. That's going to be a big -- going to be a pretty significant source course of capital to replace, and one that's had an exceedingly low cost of capital relative to its competition, which has obviously led them to have such a high market share.

My expectation is when you take that amount of capital out, even if those assets trade to somebody that want to remain in the business, that they're unlikely to remain that active and with such low cost. And that should help all of our businesses, as we think spreads widen and we each have a better shot at that business, which has been difficult to compete with in the past. In particular for us with GE and our partnership. There were certain things that we stayed away from to appeal to that partnership.

Yes. That's helpful and actually leads to the other question I had. You mentioned about spreads widening.

Do you anticipate that there's likely to be a meaningful impact there on where spreads will be, call it, over the next 6 to 12 months? And then just with regard to the finding a replacement on the SSLP, do you have any sense as to what we should be thinking about as a reasonable time period in which you could potentially find a new partner?

I hate making predictions, because I usually get proven wrong. I don't know how you can take that much capital out of the market and not expect it to have an impact. Obviously I know enough about capital fleeing certain assets that when they do the risk and returns that folks required to be in those assets tend to go up.

I can't imagine that doesn't happen, but I think there's a lot going on today vis-a-vis a lot of assets exiting GE. And I think we'll all just have to wait and see. But we intend to be pretty patient and hope for that. I don't know if expected is the right word, but I think I expect it.

In terms of how long it will take us to find a partner, probably too early to give you any guidance on that. I think it's highly dependent on what GE is doing with its business in its own right. And we're going to continue to watch that and then also work independently of that. I don't think I have a timeline that I'd be comfortable making a prediction on at this time, Hugh.

That's understandable. I appreciate the insight, though. Thank you very much. You're welcome.

Next question comes in Rick Shane at JPMorgan.

Hey. Thanks for taking my questions this morning.

I would hypothesize that after 11 years you're no longer really a growth company, but really increasingly a cyclical. I'd be curious to think about -- or hear your thoughts on how to manage capital when your growth opportunities going forward will probably have to be more opportunistic?

And one of the challenges I would anticipate is, and we've seen this with the BDCs in the past and Ares has done a good job of managing this, but the times where the best opportunities exist, it's most difficult for you to get capital. How do you think not only about raising equity, but also managing leverage knowing that your opportunities going forward may be more cyclical?

On your first point, Rick, and thanks for the question, but I'll thank you before I respectfully disagree with you. The reality is, we operate in a market that probably between us and many others does somewhere between $120 billion and $170 billion of kind of new volume per year on new deals and on refinancings.

So your second point on capital and how we access it, I think, is a great question and one that we spend a lot of time thinking on. In terms of our opportunity to grow, this Company's grown every year for 11 years, and I'd tell you that we still don't feel that we're at scale.

Our non-sponsored business can grow. Our oil and gas business can grow. Our project finance business can grow. Our venture business can grow.

And as I mentioned, there are a couple other niches that we haven't even entered that we are looking to tap. Somewhere along the way, you're probably right that your sponsor finance business can only be so big. But I don't think that we're there in that business either.

And again, the GE news makes us feel even more confident that there's growth in kind of that core piece of the franchise. Accessing capital with our stock trading at or around book for an extended period of time, we've done the best that we can here over the course of the last three quarters to reposition and create capital. And I think as I mentioned, we have $2.3 billion of capital available to the Company for new investment today. I think that should hold us over for a little while.

Again on the equity side, we want to do it in a way, if and when we do it, for growth. But it's obviously good for the Company and good for our shareholders and generating strong returns. I think we're not in a position where we have to think particularly hard about issuing equity capital today, based on our low leverage ratio and the fact that we've got a lot of excess capital to invest.

Those are things that we talk about all the time. And I think it's a been successful evaluating and getting to the right answer on now for 11 years.

Got it. To your first point on disagreeing, remember I'm a sell-side analyst. My job is to eventually be right.

I make predictions, too. And I'll be right one day, too.

Fair enough. Thanks.

Thanks, Rick.

The next question is from Chris York at JMP Securities.

Good morning. Thanks for taking my questions. So most of them on the SSLP have been asked.

I'd with curious to know what the split may be on originations, GE versus Ares in the portfolio. We do agree that there is franchise value in originations.

I'm sorry. I missed the question there. Could you just repeat that?

Yes. I'm trying to get a sense on the split of who's leading deals in the SSLP, GE versus Ares? Just trying to know if you could quantify as a percentage of deals led.

Sure. We don't really keep score, to be honest. I'd tell you the balance is about 50/50.

Most of the time when we're convincing one of our clients to come into the SSLP it's where we and GE each have a particularly good relationship with the client, because one of the nuances of SSLP is that, unlike a broadly syndicated deal where you can end up with, call it, 30 investors or an Club Med market deal where you can have 5 or 6 and you spread it around, an SSLP you really were doing business and had to have confidence that you're doing business with two counterparties.

So in a lot of those circumstances I'd say that we were each finding a customer who had interest in a program on the same name. And we really never, to be honest, kept score on that front. But I'd tell you it's pretty balanced.

Okay. And then switching gears a little bit. So we did notice that Ares management recently acquired a portfolio of asset-based loans through the acquisition of, I believe, it was First Capital Holdings. So is there a willingness to add some ABL to Ares Capital's balance sheet?

I don't think so. We really view this business as our cash flow business. And we can talk another time about what some of the initiatives we have is in Commercial Finance, which was the entity that acquired First. But I don't think really has any consequence to the BDC today.

Got it. That's it from me. Thanks.

Thanks.

Next question comes from Andrew Kerai at BDC Income Fund.

Yes, hi. Thank you for taking my questions. Most on the GE SSLP and Ivy Hill have been asked and answered.

Wanted to follow up on the SBIC license Just your sense based on your origination outlook for you venture platform how long you expect to be able to draw on the $150 million of SBA debentures?

I think we've sized it to deal with, obviously, the size of the existing portfolio, which Penni today is?

about $180 million.

It's about $180 million funded.

Sure.

So $150 million program seemed to work for that. I think as you know, those loans tend to have shorter average lives, i.e., they are outstanding, typically call it 12 to 18 months. So we're going to start using that as soon as we can. And I think we'll draw some, but we'll see how it goes.

Keep in mind at the SBA program you have to fund new deals. So we can't go back and fund the deals we have on the books.

Right.

(Multiple speakers) to give you a sense of size today relative to this program, and we have to invest a little bit of the equity capital that we have to put in alongside it. My guess is, we will start drawing into the facilities toward the back half of this year.

And do you have the full $75 million of equity in that sub yet, or no?

We obviously have the capital to fund it because it's a wholly owned subsidiary. (Multiple speakers). It would still have to be invested.

Even if the money's there, you still have to invest it in deals alongside the SBA. So there's a little bit of a ramp-up period. But given the size of our deals and the volume of activity, we think we can ramp up through that to where we get to the leverage, like I said, toward back half of this year.

Great. Thank you.

Our next question is from Jonathan Bock at Wells Fargo.

Yes. Two small follow-ups. One pretty easy question. Apologize if I've missed it.

Kip, of the $9 billion or so in AUM, what percentage of that is -- or should I say of the GE portfolio, what is the percentage of sponsor SSLP assets in their sponsor finance business? So $9.3 billion, what's the denominator for GE as a whole in sponsor finance?

We don't actually know, Jonathan. They don't disclose that number for us. SSLP is a big piece of what they've been doing obviously, too, over the last couple of years in terms of number of portfolio companies.

I don't know. I think they've got a couple hundred portfolio companies in that business. But in terms of size, I just couldn't tell you.

Would 50% of assets, or $16 billion maybe be close to the mark or not?

Don't know.

Okay. Next question.

If we were looking at growth, and I know you mentioned this and talking about the opportunities to grow. And I wanted to highlight Shane's question, which was a good one.

Talking pout the benefits of growth. I guess if we look back, I think since 2011 the share count at ARCC has gone from 204 million to 314 million total, but earnings have still been largely flat throughout that time period.

So the question is, walk us through the benefits, that we know there's more diversification, et cetera. But really the incremental earnings benefit that come as you grow, because as we look at the market, I know institutional investors hold us accountable to talk to folks that are able to grow earnings, albeit prudently. Yet if shares increase and earnings growth doesn't materialize, it again raises questions. So could you walk us through some of the benefits of growth, when in the last several years the share count's increased but earnings and dividends have only increased marginally?

Sure. Look, from an ROE perspective we're happy in terms of the Company's track record. But the last couple of years, I think as everybody knows, has been one where both rates and credit spreads have kind of come in in an accelerating fashion quarter after quarter. And in this low rate environment, that makes things difficult.

So the growth has obviously allowed us to do a couple of things. We've been generating, as we mentioned, in terms of total return meaningful return to our shareholders through things like fees and equity gains and other sources obviously of earnings that have allowed us, for instance, to build up that spillover income today that we didn't have three or four years ago.

I would tell you that the portfolio is, to your point, more diversified. The business that we're running today is a much, much more competitively positioned business in terms of the scale of capital that we have to offer our clients and really drive returns going forward.

The number of people that we've been able to support in a larger organization will benefit the Company going forward. The fact that we're larger has allowed us to bring in a whole bunch of new verticals, as we've talked about over the last couple of years, whether it's power, oil and gas, venture lending. I think in a Company of smaller size we just wouldn't have been able to do a lot of those things. So we're thrilled about how we're positioned going forward.

But we do, I think, as we consider growth going forward recognize the point that you made about the fact that the Company has doubled the size in assets and its earnings are, generally speaking, in the same place. So as we think about growth going forward, we're trying to figure out ways that we can control earnings growth without capital raise, is obviously -- which is what you've seen from us over the course of, generally speaking, the last year. And that remains the focus going forward.

I'm hopeful that we'll start to see some yield widening. And again, we've got a balance sheet that's very asset sensitive for rising rates. I can't say that I think rates are going jump through the range where we'd see real accretion.

But we take your point. And we think we've delivered for shareholders over the last 10, 11 years. As we look forward and think about capital planning and investing and all of that on a go-forward basis, we take that point away very seriously, about wanting to make sure that we generate growth, only if it's accretive for shareholders.

Very much appreciate it, Kipp. Thank you.

Sure. Thanks, Jonathan.

This concludes the question-and-answer session. I'd like to turn the conference back to management for closing comments.

I don't think we have anything else to talk about. Appreciate the active Q&A. And hope everyone has a great afternoon.

Ladies and gentlemen, this concludes our conference call for today. 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 this call through March 18, 2015 to domestic callers by dialing 877-344-7529 and international callers by dialing 1-412-317-0088. For all replays, please reference conference number 10063321.

An archived replay will also be available on a webcast link located on the home page of the investor resources section of our website. Thank you for attending. You may now disconnect.