Ares Capital Corp (ARCC) 2016 Q4 法說會逐字稿

Good afternoon. Welcome to Ares Capital Corporation fourth-quarter and fiscal year ended December 31, 2016, earnings conference call. As a reminder, this conference is being recorded on Wednesday, February 22nd, 2017. Comments made during the course of this conference call and webcast and 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 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 professional fees, and other costs related to the acquisition of American Capital, realized and unrealized gains and losses, any capital gains, incentive fees attributed 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 relating to portfolio companies was derived from third-party sources and has not been independently verified; and accordingly, the company makes no representation or warranty in respect of this information.

As a reminder, the company's fourth-quarter ended December 31st, 2016, earnings presentation is available on the company's website at www.arescapitalcorp.com by clicking on the Q4 2016 earnings presentation link on the home page of the Investor Resources section. Ares Capital Corporation's earnings release and 10-K 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. Please go ahead.

Thank you, Nicole. Good afternoon and thanks to everyone for listening today. I'm joined today by the majority of our management team including our president, Michael Smith, and our Chief Financial Officer, Penni Roll, as well as members of our finance, investment, and Investor Relations teams. You will hear from both Penni and Michael later in the call.

For those of you less familiar with Michael, let me introduce him quickly. Michael and I have been partners for 20 years. He's been here since the inception of Ares Capital Corporation and has contributed very broadly to the company's success over the last 13 years. Today he is our co-president with Mitch Goldstein.

I would like to start today by reviewing the year and the quarter and highlighting some of our company's accomplishments. ARCC delivered 2016 core earnings per share of $1.61, well ahead of the $1.52 per share in dividends paid to shareholders. In addition, we continued to lead the BDC industry with strong outcomes in terms of our realized performance which provided another year where our realized gains exceeded our realized losses. This marks the seventh year in a row of net realized gains and the 12th year in our 13-year operating history.

In 2016, we realized net gains of $0.35 per share, which together with our core earnings generated $1.96 per share of realized earnings for shareholders. We did retain some earnings in excess of the dividends in 2016, and this added to our spillover income. Our focus remains on combining excellent long-term investment performance with a conservative dividend policy.

Despite the achievements for the Company, 2016 was a bit of a roller coaster with what seemed like a lot of twists along the way, including continued volatility in oil prices, Brexit, and the outcome of the US presidential election. And we even witnessed the Cubs win a World Series. And although we experienced significant capital markets disruption and volatility at the beginning of the year, the year concluded with most of the financial indices ending the year with meaningful gains. The Dow finished the year up 13.4%, and the loan and high yield markets also showed strong returns for the year with total returns of approximately 10% and 17.5% respectively.

We believe that 2016 was a year where selectivity became even more critical for us as pricing and spreads tightened and underwriting standards eased. Leverage levels crept higher and looser covenants made their way into most new deals. During the fourth-quarter of 2016, and for the year as a whole, we were modestly active by our standards, making gross commitments of $1.2 billion during the fourth quarter and $3.7 billion during FY16. I will note, however, that we spent a lot of our time focused on financing the transaction needs of our existing portfolio companies, which represented over 80% of our volume in the fourth quarter and 70% of our volume for the full year. We did exit $3.8 billion of investment commitments through repayments and exits, as well as to our growing syndication and sales efforts as we sometimes reduce our exposure to manage risk and optimize our returns.

During 2016, we continued to manage the wind down of the SSLP, our former joint venture with GE Capital. The SSLP experienced a more rapid repayment of outstanding loans than we had originally anticipated, and we are pleased that this program is resolving quickly. At year end, the SSLP had only 19 borrowers remaining with an aggregate principal balance outstanding of $3.4 billion, down from 41 borrowers and $8.1 billion outstanding at the end of 2015.

At December 31st, 2016, the SSLP capitalization included just $1.5 billion of GE's senior notes remaining to be repaid ahead of repayments of the $2.3 billion in subordinated certificates including the $2 billion held by ARCC. We are focused on achieving a resolution quickly, and we now believe the full repayment of the GE senior notes and most, if not all, of the sub certificates could come in the next 12 to 15 months.

Despite the lower yield on the SSLP investment as it winds down, we are pleased to report that was not a barrier to earnings growth in 2016. As I mentioned, we increased our core and our GAAP earnings for the full year 2016 by 5% and 26% compared to the prior year, reaching $1.61 per share and $1.51 per share respectively.

One significant contributor to this earnings growth has been the expansion of our underwriting and syndication activities which has significantly expanded post-GE and allowed us to underwrite larger deals and to drive increased fee income. The second important contributor to offset SSLP was our ability to reduce our funding costs through the retirement of higher cost term debt and the issuance of new, lower cost term debt, as well as increased usage on our lower cost revolving credit facilities throughout the year.

Last September, we tapped a high grade notes market with the lowest cost coupon ever for a BDC at 3.625 for $600 million of five-year notes. And we followed that issuance early this year in the convert market with $388 million issued and 3.75% convertible notes due 2022. Penni will discuss these accomplishments in more detail later in the call. I'd like to finish my opening remarks with a few words on what was clearly the most significant event for our company over the last year, the closing of our strategic acquisition of American Capital on January 3, 2017. To repeat what we have emphasized in the past, we believe that this transaction provides many strategic and financial benefits to our company, including greater scale, opportunities for increased efficiency, and the ability to reposition the lower, non-yielding or non-core assets included in American Capital's approximately $3 billion investment portfolio into higher income producing assets. We also believe the increased scale bolsters our already strong leadership position in middle market direct lending as it increases our ability to originate and hold even larger transactions which we believe will drive more attractive returns to shareholders over the long term.

Let me conclude by saying that we closed the acquisition remaining highly confident about our purchase price as we continue to believe our purchase represents a discount to the company's NAV and the value we believe we can realize over time from the assets that we've acquired. From a financial point of view, we expect that the American Capital transaction will prove to be accretive to both the net asset value and core earnings with the contribution to our core earnings improving gradually over time as we rationalize the acquired portfolio.

We also expect the expansion of the balance sheet will increase our ability to grow our strategic and higher yielding SDLP over time. Finally, the transaction was modestly de-leveraging for us as we merged in ACAS debt-free balance sheet that carried excess cash. Taking all this together, you can see why we're excited about the transaction and why we see it as a catalyst for earnings and dividend growth in future years. ARCC's first quarter results will be the first time that we report combined earnings with the ACAS portfolio. And accordingly, we will provide a much more detailed update on the transaction on our earnings call in May.

Before I hand the call over to Penni, I'd like to highlight again that as part of the ACAS acquisition, Ares Capital Corporation shareholders will benefit from a waiver of income-based fees from our external manager of up to $10 million per quarter for the next 10 quarters beginning in the second-quarter of 2017. We continue to believe the team is already driving significant value in managing the assets acquired in the transaction. However, this fee waiver will provide even further comfort as we patiently and opportunistically seek to complete the portfolio rotation we are currently undertaking on the American Capital portfolio. With that, Penni, would you discuss our fourth-quarter and full-year financial results and provide some details on the financing activity?

Yes. Thank you, Kipp. Our basic and diluted core earnings per share were $0.42 for the fourth-quarter of 2016 as compared to $0.43 for the third-quarter of 2016 and $0.40 for the fourth-quarter of 2015. Fourth-quarter core earnings benefited from fees from our strong origination activity and from seasonally high dividend income as portfolio companies often pay unscheduled dividends in the fourth-quarter of the year. Our basic and diluted GAAP net income per share for the fourth-quarter of 2016 was $0.24 compared to $0.35 for the third-quarter of 2016 and $0.05 for the fourth-quarter of 2015. Our lower GAAP earnings in the fourth-quarter of 2016 as compared to the third-quarter were primarily driven by unrealized losses in the portfolio, largely from a single portfolio company which I will discuss in a moment.

As of December 31, 2016, our portfolio totaled $8.8 billion at fair value, and we had total assets of $9.2 billion. At December 31, 2016, the weighted average yield on our debt and other income producing securities at amortized cost was 9.3%, and the weighted average yield on total investments and amortized costs was 8.3% as compared to 9.7% and 8.7% respectively at September 30, 2016. Our portfolio yields declined since the end of the third quarter primarily from the continued decline in the yield on our SSLP is subordinated certificates. The decline in the yield on our SSLP sub certs is primarily due to the $1.4 billion of repayments in the SSLP during the quarter, which continues to repay only the senior notes until they are repaid in full.

Despite the fact that the yield on our SSLP sub certs has declined over time as anticipated, our LTM net interest and dividend margin has improved by 10 basis points since the wind-down began in the second-quarter of 2015, as we have continued to manage our margins by focusing on our cost of debt capital. Additionally, as the yield on our SSLP subordinated certificates declines over time, so too does the risk of holding this investment as the senior notes outstanding ahead of our sub certs are repaid.

We continue to generate solid net realized gains from our portfolio. And in the fourth quarter, net realized gains were $31 million or $0.10 per share. The key contributors were realizations in Step 2 and Ministry brands. Net unrealized losses on investments for the fourth quarter were $94 million or $0.30 per share, which included $19 million or $0.06 per share from the reversal of net unrealized appreciation related to net realized gains on investments. The net unrealized loss on investments for the fourth quarter was primarily driven by further decline in the value of InfiLaw, a for-profit law school operator that Michael will discuss later on the call.

Now looking at the full year, basic and diluted core earnings per share were $1.61 for 2016, compared to $1.54 for 2015, and basic and diluted GAAP net income per share was $1.51 for 2016 compared to $1.20 for 2015. For the full year of 2016, we had net realized gains on investments of $110 million or $0.35 per share, and we had net unrealized losses on investments of $125 million, or $0.40 per share which included $13 million or $0.04 per share from the reversal of net unrealized appreciation related to net realized gains on investment.

As Kipp mentioned, one important measure we track is core earnings plus realized gains and losses. The sum of our core earnings plus net realized gains per share of $1.96 for 2016 was well in excess of the dividends we paid in 2016 of $1.52 per share. Our current dividend level remains well supported by our earnings, and the earnings in excess of dividends paid has added to our spillover income which provides additional cushion for our dividend stability. We estimate that undistributed taxable income carried forward from 2016 into 2017 was approximately $339 million, or $0.80 per share when you use the increased number of shares that reflect the shares issued in the ACAS acquisition in January.

We are very pleased that our realized earnings meaningfully exceeded our dividends again this year. We announced this morning that we declared a regular first-quarter dividend of $0.38 per share. This dividend is payable on March 31 to stockholders of record on March 15, 2017. Moving to the right-hand side of the balance sheet, our stockholders' equity at December 31 was $5.2 billion resulting in net asset value per share of $16.45, down0.8% compared to a quarter ago, and roughly flat since December 31, 2015. As of December 31, 2016, our debt-to-equity ratio was0.6 times -- I'm sorry,0.76 times, and our debt-to-equity ratio net of available cash of $200 million was0.73 times. At December 31, 2016, we had approximately $1.4 billion of undrawn availability, primarily under our lower cost revolving credit facilities, subject to borrowing base leverage and other restrictions.

After closing on the ACAS acquisition on January 3, we further enhanced our capital structure to support the larger combined balance sheet. We increased the commitments available under two of our revolving credit facilities by approximately $1.3 billion, bringing aggregate total commitments under our secured revolving facilities to $3.5 billion, coming from 26 banks. Given the strong support of our bank partners, we are very well positioned to operate efficient with our larger balance sheet.

More specifically, we amended our revolving credit facility where we increased the total size of the facility from $1.265 billion to $2.1 billion and extended the maturity for $2 billion of the facility from May 2021 to January 2022. The $2.1 billion of commitments under this facility for the first time included a term loan component of $382.5 million. We also amended our revolving funding facility where we increased the total size of the facility from $540 million to $1 billion, and extended the maturity from May 2019 to January 2022.

In addition to ensuring we have significant amount of flexible revolving debt capacity, we've continued to focus on being an opportunistic issuer of term debt. As Kipp mentioned earlier, in January, we tapped the convertible notes market, issuing $388 million of 3.75% notes that mature in January 2022. We believe that we are well positioned as we progress into 2017 and only have one term debt issuance maturing for the full year of 2017. We expect to repay these $162 million of higher cost 4.875% convertible notes at their upcoming maturities in March.

As we head into the first quarter, I would like to make a few comments about the ACAS transaction. Given the timing of closing of the transaction on January 3, we have not yet completed the purchase accounting for the transaction. We will be completing that work towards the end of the first quarter and will be providing the full financial impact of the acquisition for the first time when we release earnings for the first quarter of 2017 in early May.

Until then, we thought we would recap some information that is currently available to you. Starting with the balance sheet at closing and using our pro forma fair values as of September 30, 2016, we believe that the acquisition was modestly accretive to our net asset value. In addition, the transaction was de-leveraging. Upon closing, ACAS had no debt outstanding and significant excess cash balances on hand. Using our debt and equity capitalization at September 31, 2016, and then considering the equity issued in connection with the acquisition on January 3, and the reported outstanding balances on our credit facilities on January 4, we estimate our pro forma debt-to-equity ratio declined post-closing to approximately0.63 times net of cash.

On one last capitalization matter, as you may recall in conjunction with the ACAS acquisition, we suspended our stock repurchase program. Following the closing of the acquisition, we have reinstated our stock repurchase program, and in light of the larger balance sheet, have also increased the program size from $100 million to $300 million and extended the term through February 28, 2018. And now I would like to turn the call over to Michael Smith to review our recent investment activity in the portfolio.

Thank you, Penni. I would like to spend a few minutes reviewing is our fourth-quarter investment activity, comment on our portfolio performance, and provide a quick update on our backlog and pipeline. During the third quarter, we made 24 commitments totaling $1.2 billion. New deal flow focused on first lien debt investments, and was heavily driven by funding to our existing borrowers which totaled over 80% of our investment activity.

During the quarter, we completed two large transactions of more than $250 million, which were great examples of existing portfolio companies requiring new financing where our position of incumbency allowed us to underwrite one-stop solutions. In both instances, ARCC arranged and underwrote complete financing packages, generated strong syndication income, and retained meaningful final hold positions and attractive earning assets. We continue to focus on originating a very broad array of middle market financing opportunities and selecting what we deem are the very best credits, typically closing around 5% of the transactions we review.

Unlike many other credit managers, we do not manage to a benchmark. But instead, we select companies and industries that have exhibited long-term financial stability. We continue to be meaningfully underweight in the oil and gas space. We do not have any direct exposure to metals and mining, auto, or home building. We are also limiting investments in areas where we see weakening trends, such as restaurants and retail. This proactive approach to industry selection is a key differentiator for ARCC, and is one of the reasons that we believe we are able to outperform other credit managers over a long period of time.

Turning to our portfolio, while earnings have been sluggish across the corporate sector and other middle-market indices, we do continue to see growth in our corporate borrowers' EBITDA with LTM year-over-year growth of more than 4%. We typically invest in borrowers with strong cash flows which allow them to de-leverage quickly, even in a slow-growth environment.

Our nonaccruals continue to remain below average for the industry. However, nonaccruals as a percentage of the portfolio at cost did show a modest increase this quarter from 2.9%, from 2.6% the prior quarter. Our nonaccruals as a percentage of fair value declined from 1.2% in Q3 to 0.8% in Q4 as we continue to mark down accruals and remain very conservative on our recovery assumptions.

As Penni mentioned in her remarks, our nonaccruals at cost remain highly concentrated in one legacy position, InfiLaw, which was already on nonaccrual. Real headwinds exist in the for-profit education sector generally and for this company specifically, where decreasing law school enrollment and regulatory pressures have negatively impacted its business model. As a reminder our total portfolio exposure for the for-profit education sector is limited to approximately 1% of the portfolio at fair value.

Before I turn the call back over to Kipp to conclude, let me provide some quick comments on our post-quarter and investment activity. From January 1, to February 16, 2017, we made new investment commitments, excluding commitments acquired in the ACAS acquisition totaling $342 million and sold or exited $399 million, including $116 million from the ACAS portfolio during the same period with net realized gains of approximately $3 million. Beyond this, as of February 16, our total investment backlog and pipeline stood at approximately $420 million and $890 million respectively.

These potential investments are all subject to final approvals and documentation and certain of these investments may be sold or syndicated post-closing. In addition, our final investment holds may be lower and, of course, we cannot assure you that any of these investments will close. I will now turn it back to Kipp for some closing remarks.

Thanks a lot, Michael. In closing, we finished strong in another very good year for Ares Capital, and most importantly, we believe we are well positioned for future earnings growth over time. While 2017 will be a transition year, we plan to integrate ACAS and rotate the acquired portfolio, substantially wind up the SSLP, and look to accelerate the growth of the higher yielding SDLP. We believe that each of these activities will help to drive potential ROE expansion at the Company. In addition, we believe we will also be able to drive earnings as we releverage our balance sheet toward the higher end of our target leverage range and generate greater fee income with our increased scale.

Finally, we see the freeing up of our non-BDC eligible asset basket through the continued reduction of SSLP as an opportunity that will position us to have meaningful capacity to creatively redeploy capital into higher return opportunities going forward.

Finally, if we see a gradual rise in interest rates as the market expects, our asset sensitive balance sheet and our earnings are well poised to benefit. As we progress further into 2017, the expectation for stronger growth from tax and regulatory reform has contributed to a robust bid for credit assets, and the market appears to be anticipating an extension of the current business cycle from contemplated fiscal stimulus and from pro-growth initiatives.

We have seen some positive developments on the regulatory front for ARCC. During the first quarter of this year, we received some good news from the SEC on our longstanding request for exemptive relief, which allows ARCC to co-invest with other vehicles managed by Ares Management. We believe that this added flexibility will benefit our shareholders by providing, amongst other things, increased deal flow, enhanced diversification, and the ability to more comfortably leverage our broad credit platform.

Additionally, we believe there's also momentum building in Congress for the contemplated BDC legislation that would provide the industry with more operating flexibility. But overall, given the strength and the experience of our team, and the breadth of our platform here at Ares Management we feel great about our prospects for navigating the current market and the ever changing landscape. That concludes our prepared remarks, Nicole. You can open the line for questions, please.

Thank you.

(Operator Instructions)

Our first question comes from Jonathan Bock of Wells Fargo Securities. Please go ahead.

Good afternoon and thank you for taking my questions. Kipp, you mentioned the power of the platform and the benefits that come now with exemptive relief. And so curious, what is the total amount of what we consider buying power on the private credit platform that is focused on middle market sponsored lending, either first lien or second lien? How much capital do you guys now have under commitments as well as what you have capacity in the BDC? How much capital do you have to deploy?

Sure. Thanks, Jonathan. Good afternoon. We have actually spent a lot of our time on the private side focused, I would tell you, on the bank loan business. As you know, there's a one to one limitation, obviously, in terms of leverage at Ares Capital Corporation. That means it's pretty difficult for the Company to, on a final hold basis, invest in, call it garden variety middle market bank deal, which today would probably price somewhere between LIBOR 450 and LIBOR 550.

So, without getting into tons and tons of detail about what our investors have done, we have raised several billion with more in the pipeline, I think, likely to come on board here just to focus on the bank loan business. So today, to try to give you some numbers, pro forma for the American Capital transaction, our Company, Ares, obviously Ares Capital has about $13 billion of what we've always laid out as flexible capital. So that's senior, that's uni tranche, that's second lien at junior capital, as well as equity investments. Because of the low rate environment, again, we've gone out and raised a couple of billion, of what I would say, is capital focused on the bank loan business and really depends how you want to count at this SSLP winding down and SDLP kind of ramping up.

But the two key pools are the public company and some private funds that surround it that are, as I mentioned, generally investing in bank loans. Look, we've continued to invest in origination behind the asset growth. I think we will continue to, with the ACAS acquisition. We've got 100 people obviously on the platform today, and that number just keeps going up.

Got it. And while you might tease me for asking, why isn't there more second lien in the book? I'm going to go along with it. So if we look at Restaurant Technologies, it's an SSLP name paid down, Ares was the co-lead. I think you took the second lien. I'd imagine, perhaps, this went into more of a second-lien focused fund. The question is -- and perhaps because it's a low-yield environment I'm asking this question, which I say you would tease me for, why wouldn't the BDC receive a second lien allocation in that deal? Why would it all go private? And walk us through how deals go where. Perhaps that was a great opportunity. And so, for the BDC to not participate, investors would be curious as to why, particularly if there's a competing fund that's also looking for the same type of asset.

That's not how we run the business in terms of conflicts and allocations. I'm happy to give you some details, but we didn't do the Restaurant Technologies second lien. We passed. We thought the terms, the pricing, the conditions of the new financing were too aggressive, so we passed.

Perfect. Okay. Then let's just say if there is a deal that you would like to share across platform, how does that effectively get allocated? Is it based on pro rata share of capital? What's the math?

Again, we continue to focus for the BDC on exactly the types of assets that we focused on for the last 13 years which are, today we think a bit of first lien loans. Although it's difficult to, again, generate 10 plus returns on equity which we've done for 13 years in a row buying bank debt which is why we've been raising some of these surrounding funds. We're able to underwrite, we're able to syndicate, speak for more because of the private fundraising. But what we're doing at the BDC is exactly the same that we've always done. I think I've said, the fairway has broadened a little bit as the company's size has increased. So probably at the bottom end, $10 million of EBITDA, up to the top end, $100 million of EBITDA. Again, we really believe in this flexible approach. Senior debt, uni tranche, junior capital, and as we've always said over the years, we will kind of modulate our risk appetite relative to where we see good risk-adjusted returns.

To answer your question about allocation, our allocation policy here at Ares across our entire credit platform is we look to the investment guidelines of a fund. So for instance, in the private accounts that we focused on so far, the investment guidelines very much coach us into owning first lien paper. It's kind of a benefit to the business and something that doesn't bump into the mandate of the BDC today, but I think adds a lot to our business. But again, we look to the investment guidelines of a fund. We deem whether a new transaction is appropriate for that fund, and then generally speaking, it's offered an opportunity against available capital. That being said, it's offered that opportunity only when size relative to a distinct accounts portfolio concentration, diversification type requirement. So to be clear, if the math on allowable capital said a $200 million account to get $20 million of new money, we probably wouldn't allocate them at 10% position because we like to manage portfolios that are more diverse than that. So there are a whole host of different things that go into thinking about allocation. It's complicated, but we've been doing it here for a long time across a credit business that has 100 plus funds and $60 billion of assets under management.

Very helpful.

Sure.

Very helpful. Look, just as a slight add, because I couldn't resist an ACAS question, both Penni and Kipp, you mentioned about in the press release $116 million of ACAS commitments sold. I'm curious how you are getting to that number when we think about ACAM sales, the loan business, ASAC commitment sales, the North Lane, et cetera, all that have been publicly announced. Not necessarily publicly announced by you, but publicly announced. So I'm just curious of what that $116 million actually is. Is it inclusive of those sales or not?

I will try to -- you mentioned the sale of the leveraged finance manager. There obviously was a press release there that a company called Marble Point Credit Management acquired the lion's share of the assets of what was formally known as American Capital Leverage Finance Manager, and we're happy about both the buyer, who we have a strong relationship with, and their sponsor at Stonepoint Capital. We're also happy about the price, so that was a good outcome for us as and them as well.

Remember there, Jonathan, in maybe doing some of your footing, that closed -- the sale of that asset closed before the closing of the transaction. So when you saw our press release of the 116 of exits since closing, that's literally in the last six weeks, or whatever it is since January 3. So just as you foot your math, the stuff that happened after the closing of the transaction, i.e. January 3, does include our sale of certain assets of the GP that was formerly known as Ace and its fund, one through three, which was the ACAM private equity funds business. We sold the GP there to a newly formed company called North Lane Capital Partners that was run by the existing team that sat inside ACAM prior to the closing. And we also sold the LP investment that American Capital had in those funds. We do retain some continued economics in that business and some continued value in that business, but that's the lion's share of the 116 of commitments that have been exited since January 3. There are two other positions that we sold that, frankly, are small and not really worth talking about. So hopefully that helps foot to the math a little bit.

Great. Congratulations on closing that purchase. Thank you.

Thanks, Jonathan.

Our next question comes from Ryan Lynch of KBW. Please go ahead.

Hey, good afternoon and thank you for taking my questions. Sticking with the ACAS theme for a minute. With ACAS's approximately $3 billion portfolio, you mentioned that you have targeted a portion of it, some of the non-yielding or lower yielding investments to rotate out of. Can you give us a little bit of color, an estimate of how much of that portfolio do you intend to rotate out of?

Yes, thanks, Ryan, and good afternoon to you. Thanks for the question. It's a pretty significant amount, as we've talked about. The key buckets, when you look through, perhaps, the SOI that you will see from them on a standalone basis for the last time at year end, you can identify a bunch of kind of sponsored finance names, lending names, that we think are good core names for us and represent opportunity for us going forward. About half of the $3 billion today is in kind of performing senior and sub-debt. Now, it's hard to categorize. Some of those are actually attached to what I would call controlled buyout names. But I think they're somewhere between 1 billion and 1.5 billion, rough numbers of the 3 billion that we expect to retain and what I think of as positions that are core and a good fit for us here at Ares Capital.

The things that are saleable are a handful of European buyouts, the fair market value of that is in the $200 million type range of NAV. There are also six or seven controlled buyout names that I think over time we would expect to be sellers of. I don't have all the numbers in front of me, but roughly it's $600 million or $700 million of value there. And the third piece that we've deemed -- and again, this is away from ACAM and what's remaining there, is a third piece that I think we have deemed nonstrategic and for sale over time, has been their portfolio of third-party investments in non-managed or other people's CLOs. So there's good income coming off that book, but we're balancing our desire to sell that both from a strategic and financial position over time. We've seen some good bids on those assets, and I think we'll continue to work towards selling those. But rough numbers, it's probably keep half, sell half, and the sell half are in the three or four categories of assets that I just laid out for you.

That's great color. I think Penni mentioned debt to equity pro forma post the close, maybe about0.63 times debt to equity. So I would estimate that gives you maybe 1 billion of capital that you can deploy to releverage the portfolio up to a more normalized leverage standpoint as well as, we're talking about these ACAS sales, maybe another 1.5 billion. That's maybe 2 to 3 billion of excess capital right now you guys can deploy. So can you just talk about maybe the tension right now of having a significant amount of excess capital to deploy, maybe in an environment that you talked about earlier on the call, of maybe being more competitive. So can you just talk about how you guys are planning on deploying that capital in a timely fashion but also be prudent and not just deploy it just to deploy it fast.

You have just answered your question for me. There's no doubt that's the tension here today. I mean, look, we have 100 people, as I mentioned, that are out looking at new deals. And I do think that we will add some people, frankly. We've, in fact, added some people prior to ACAS closing, and with the ACAS closing in kind of a limited size, but that's exactly the tension, Ryan. I think, as a I've mentioned in the past, we do think that our business has real competitive advantages. We think having a 350-name-plus portfolio on a pro forma basis gives us real advantages. We've got one of the largest teams in the space. It's multi-asset class. We have industry specialization.

And despite that, we look at a difficult reinvestment environment right now as one of the challenges. $1 billion for us, frankly to invest net, can happen pretty quickly. Again, a larger company allows us to write bigger checks. You go back to the quick transaction that we did, and we are finding the ability to work on larger deals. You take an example of a click where we held a pretty significantly sized position at ARCC. Would have been pretty easy for us to hold another $150 million in that transaction with a larger balance sheet.

So I do think it is going to be keeping selectivity the same, being more impactful, which is hopefully taking down a larger share of the deals that we're underwriting, which is good for our clients and good for us. But there's no doubt. Your question is a good one, and it's the one that we obviously, number one, wrestle with here every day; but number two, that's sort of how we earn our stripes here as well. So we're cautious, but we're optimistic that we will be able to deliver.

Okay. And then just one last one. You mentioned the 30% bucket, and as the SSLP winds down, it is obviously going to free up more capacity in that bucket. Are there any other strategies that you guys are looking to pursue to ramp up that bucket once you guys get some more capacity outside of just ramping up the SDLP?

Yes, there are a lot of things that we're talking about, as you have probably imagined. The prospect of getting $2 billion of capital back that today is earning below our threshold returns, because of our frustrating wind-down with our former partner GE, is a nice prospect for some of us that have had to deal with that for the last couple of years. There are a lot of interesting things that you can do with a couple a billion of capital in your 30% basket. I can't say that we have anything that's actionable right now, but you should expect that there's a lot of discussion amongst the management team about what to do with that capital when it comes back. So number one, we think we can build some pretty strategic assets there, but certainly we know we can improve returns on that $2 billion.

Okay. Those are all the questions from me. Thanks.

Thank you.

Our next question comes from Terry Ma of Barclays. Please go ahead.

Hey, good afternoon. Can you just talk broadly about your confidence in being able to rotate out of the legacy ACAS investment? So maybe just give some color on the timing and the pace we should expect for that rotation.

Sure. Thanks, Terry. We structured a 10-quarter fee waiver to kind of largely mimic what the timeframe was on the back end that we thought it would take to us reposition assets there. I think we've communicated somewhere between a year and three years, but for us, things are moving pretty aggressively. You have seen us sell quite a number of assets here, I think, at very good values. So the early returns on rotating the portfolio have been quite good, obviously, in the backdrop of a favorable market to sell virtually any asset today. So we've said 18 to 36 months, but I think we're on a quicker path than that, and we're feeling good about the values.

Got it. That's helpful. Just to confirm, ACAM, as I look at the 930 SOI, that's part of the saleable bucket, right?

Yes. So again, when you looked at the value that they have stated at 930, it will get reduced by the assets that we already sold prior to closing which include most of ACAS -- or ACAM leverage finance manager. And again, as I mentioned, since then, we've sold their private equity funds business as well. You see that after January 3, and it will start to get easier to decode. So what's left there, the largest asset remains a European direct lending business, which we have every intention to sell, as well as some holdover assets. But they're really those three kind of key assets and two of the three have been sold.

Got it. And then in terms of the increased fee opportunities going forward, what's the larger driver there? Is it just having a larger portfolio size and HOIT size, or is it also contingent on ramping the SDLP to size?

Probably a combination of everything. Our fees are up because we're holding larger percentage of the deals. Obviously, when you're -- if you are underwriting at 97 or 96 and you're holding and you are not selling down paper, you're just taking in a larger fee on a larger hold. But look, 2015 and 2016 were both years where we generated meaningful amounts of underwriting and syndication income from the activities that I've talked about post-GE. So skim fees on underwriting larger deals and bringing in other investors are definitely a piece of it, as is to your point, SDLP. So as SDLP ramps, we get a very high percentage of the fees relative to the capital that we're committing to the program just like SSLP. In the old days, we get about half of the fees relative to only putting up about 20% or 30% of the capital. So all three of them are contributors.

Okay. Got it. That's helpful. And then just on any potential legislation, have you guys done any analysis on any impacts if they eliminate the interest deductibility for corporates?

Yes, you know, we have. It's something that we've got pretty significant and interesting ability to work through our portfolio management system with. It's obviously a -- it's a sea change to the industry, I think as many of us have said, if you think about deductibility of interest and how it relates to leverage financing, private equity, I think. Not being a tax or policy expert, that the idea is that interest deductibility goes away in exchange for lower corporate tax rates. Our view is that based on our portfolio and the work that we have done internally, it is general a wash for us from a credit perspective, and that we obviously have more cash flow from our companies paying less in taxes and the impact of obviously the interest deductibility of leverage companies impacts those companies negatively. But our early returns are that it is generally a wash from a credit perspective so long as, I guess, corporate taxes are reduced to kind of that 20% to 25% level, which is what we've heard bantered about down in D.C.

Got it. That's it for me.

Thanks, Terry.

Our next question comes from Arren Cyganovich of D.A. Davidson. Please go ahead.

Thanks. The deal activity that you've had recently has still been relatively strong despite it being kind of a tougher investing environment. What are you finding in terms of the quality of deal flow and where -- what kind of deals are these being representative refinancing, recaps, M&A? How are you looking at the overall deal environment?

I think it's reasonably busy. I would say both in terms of new deals and refinancing. We have clearly come into a year here in the beginning of 2017 where the demand for new transactions exceeds the supply, which I think helps us frankly, as a company that can really lead transactions in a meaningful way. We have been focused, frankly, as I mentioned in 2016 -- rather in 2017, as we were in 2016, on existing portfolio but new deals. We are finding some good interesting things to work on. Again, it's just casting a really wide net and being selective. I don't know if I have anything more to add than that.

Got it. And then I guess in terms of the spillover dividend that you have, it's still pretty sizable, actually growing, I guess into this year. Is there a thought process of just saving that for a rainy day or would you expect to have some special dividends over time?

Yes. So we, I think, for the time being -- well, what we've said in the past, I will stay consistent, because I think we believe it is, is that has been there sort of for a rainy day. As we feel that we're nearing the end of what feels like very, very long credit cycle, we've chosen to be conservative around the spillover and kind of retain it. I think if you look back over the company's 13-year history, we have paid some special dividends. We all wonder a little bit here what benefit we've gotten in the past from paying special dividends, which maybe has made us hesitant to pay any going forward. We would rather talk more about growing the regular dividend, growing the quarterly dividend over time because that's what we think rewards our long-term shareholders, and we obviously want folks that are with us for the long haul.

So as it relates to the dividend policy at the Company, it's one source that gives us increased confidence about raising the quarterly dividend going forward; which I think again, I would prefer to paying special dividends. And as we've said, both the American Capital transaction, but also a couple of other factors, which include things like rising rates, we think are putting us on a path of upward earnings here over the next couple of years. And once we see earnings growth that we know is reliable, I think that's the path towards dividend growth in terms of the regular dividend. And I think our current belief is we sort of favor that goal over, and in your term, payments of special dividends. But hopefully that's helpful in terms of our current thinking.

Yes. Thank you.

Our next question comes from Kyle Joseph of Jefferies. Please go ahead.

Afternoon, guys, and thanks for answering my questions. A lot of them have been answered, but I just wanted to touch base on portfolio yields here. Obviously you guys have a lot of moving parts. You have the wind-down of the SSLP, the growth of the SDLP, you have the onboarding of the ACAS assets, and then at the same time you have what you have talked about as sort of a competitive lending environment overall. So if you can, just give us your outlook for the overall portfolio yield, maybe when we get some stabilization there, how long that takes, and then potentially with a rising rate environment, if we see any sort of potential for your yields to increase from here.

Pretty confusing stuff, huh? I'm with you. So thanks for the question, Kyle. Look, I mean, the lion's share of the yield deterioration that you have seen in the last couple of quarters, our Company has been from the decline in yields from SSLP. And that's sort of the overarching headwind that we've been dealing with. I would tell that you haven't seen a meaningful change in kind of new deal spreads. Things have kind of plateaued here over the course of the last, probably six quarters. The middle market has not continued to tighten, in at least my opinion, even as the large cap loan market has continued to tighten.

So overall spreads excluding SSLP are about the same. I do think that we will see rising LIBOR going forward. Don't know when, of course. And about 80% of our assets benefit from rising LIBOR. So definitely that's something that will help, as will just wind-up of SSLP, and as you mentioned as well, the continued growth of SDLP which again we've been kind of bringing on board new yields, of 13% to 15%. I think there are a couple of different contributors. I think in the past I've had some predictions that maybe corporate spreads would widen, and I just don't see it today based on the demand and the supply dynamic, but we're hopeful. But rising rates, less SSLP, more SDLP are all contributors to yields going up.

Got it. That's helpful. Thanks for answering my questions.

You're welcome.

Our next question comes from Chris York of JMP Securities. Please go ahead.

Good afternoon, guys, and thanks for taking my questions. So what we've talked throughout the call and what we have seen over the last couple quarters is structuring fees contributing meaningfully to total investment income, but what I would like to know is how are you evaluating the potential trade-off as you increase your average size and commitments towards larger borrowers in the upper middle market of a growing capital markets business and that fee stream versus extracting what may be pressure on middle market illiquidity premiums?

Again, I think we cast a broader net than a lot of the other BDCs you guys may follow. We're thrilled to do $50 million buy and hold transactions on $10 million EBITDA companies where we keep all the fees. I would tell you that we don't see illiquidity premiums being all that different in lower middle market companies relative to upper middle market companies. Maybe in the non-sponsored space, but the lower middle market sponsored space feels just as competitive as the upper middle market sponsored space. And we will play up to do some of these larger deals.

And the good news is, in the larger deals, Chris, to tell you how we think about it, we can achieve better economics. Our capital is more valuable. The certainty of our capital is more valuable. The fees that we derive from leading those transactions are higher. And as we've said in the past, we really do want to lead and originate our deals. We want to write loan documents, we want to negotiate covenants. We don't want to be a taker of other people's terms, and we don't want to do club deals. So, hopefully that gives you a sense about how we're thinking about it.

It does. And so maybe tieing in the next question, and it's kind of regulatory based, too is how do you think about the definition of eligible portfolio companies? So what I'm kind of thinking about, how do you think about the increased opportunity that we just talked about to land, hold larger sizes to the upper middle market that have flexible financing needs but also may have a class of a security in excess of 250 million, like Click, versus the definition of eligible portfolio of companies for BDCs, and then your current treatment of the SSLP and SDLP, [of] non-qualified assets?

Oh, man, I wish I had my 4D act expert in the room. He's unfortunately on vacation. I think as I read the definition literally which says your eligible basket is for private companies and for public companies that have less than $250 million market capitalizations, and obviously the 30% basket ticks up passive income from partnerships and other income that comes from sort of structures, is how I think about things.

We don't see a lot of opportunity financing those have more than $250 million market caps. Click was a public company, but it's not any more. So it obviously doesn't come into the calculus. I think more private equity firms are looking to take, frankly, smaller cap public companies private. I think that's great for us. That freeing up of the 30% basket, though, I think is something that we will have to evaluate over time and just get back to the community on a little bit. It's an opportunity for us, but we view the definition pretty strictly for the 4D act.

So are there any -- have you had any new discussions with the staff? I know there's a lot of moving parts there, but in their treatment and view of eligible portfolio companies?

No. I mean, I know that's been on the list of certain folks who have spent time in D.C. It's not particularly high on our list.

Okay. Fair enough. And then maybe for Penni, dividend income was up, both quarter over quarter and year over year in non-controlled portfolio companies. Could you provide us some color for the contributors there, and then how much of this line would you say is recurring?

How much of the line what?

Recurring.

We have a number of portfolio companies where we hold minority equity positions. Sometimes we will get a dividend that comes through from a dividend recap during the course of the year, and often at the end of the year, particularly fourth quarter, we will get incremental dividends up on their declaration of just paying a dividend on their equity. So it's not something that we necessarily determine, but we will get dividend income coming through from time to time, and it's not atypical, particularly in the fourth quarter, to have some incremental dividend income come through. But typically we're running around $15 million to $20 million, low $20 million a quarter of dividend income, and about $10 million of that each quarter is coming from IM, and the rest is coming from other portfolio companies. It will vary. It's not one company in and of itself that's always paying the dividends.

Got it. So we're at $22 million here, you said $10 million from IM, so essentially kind of $5 million maybe in non-control, excluding seasonality for Q4 is probably the recurring amount?

Yes, I would say you want to look at as a base line, yes, probably $15 million a quarter, on average, with some up side for another $6 million to $10 million, depending on the quarter.

Yep. Makes sense. That's it for me. Thanks for taking my questions.

Thank you.

Our next question comes from Robert Dodd of Raymond James. Please go ahead.

Hi, everybody. Going back to kind of the non-qualified bucket, obviously from the last data I can remember off the top of my head from ACAS, it was about 25% of their assets, about 26% of yours. Put it together. You mentioned in the prepared remarks the freeing up of the bucket. So on the ACAS side, obviously the CLO income, the third-party CLO income from them falls into that bucket. There's a bit of a tension, I would imagine.

It's high income but it's consuming space that can better be strategically used for you guys elsewhere in SDLP ramp-up, et cetera. So what's the balance? Where are you? What's the expected exits, and maybe what's the pro forma now, non-qualified asset bucket, and what's the balance of income that you have got currently coming from sources that fall into that from part of the acquisition versus redirecting that elsewhere?

Sure. Thanks for your question. I would answer it broadly as follows. I would say that the percentage of assets in non BDC eligible assets has been declining, both since the signing and the closing of the transaction. We would expect that will continue. To hit on one of the questions that you asked, reducing the amount of third-party CLO investments that we have on our balance sheet is certainly something that we're working towards. But we are taking, to your point, a balance of the fact that they generate high rates of current income. So you should expect the numbers to keep coming down in terms of the 30% basket, so to speak. But the big change is going to be obviously, when there are enough repayments in SSLP, such that GE's senior notes are paid off and distributions start to come to the SSLP sub notes. And again, we think that will start to happen over the course of this year.

To exactly that point, Penni mentioned, I think, $1.4 billion at payoff, then the fourth quarter at $4.7 billion, $4.8 billion, I think, for the year. At that rate, $1.2 billion a quarter were to keep going, GE would basically be fully paid off by the second quarter. And then obviously --

Pretty good math, we agree. We'll see what the future holds. But yes, that's the simple math.

Okay. Fair enough. One more follow-up, if I can. Totally different. Obviously the InfiLaw, you mentioned, obviously a markdown regulation change, falling (inaudible), et cetera, [obviously] that asset went on the balance sheet in 2011, I think. So things change over time. The biggest industry category you have on the balance sheet right now, other than your investment funds, is healthcare, obviously, which very much up in the air right now from regulatory. It looks like negotiating drug prices is off the table, might come back again.

Obviously the insurance market. What's your comfort, given sometimes you can't foresee regulatory changes of all sorts of -- not just reimbursement risk, but other areas within an industry? What's your comfort level with having that large an exposure to an industry even though obviously diversified within that industry? Given the --

I think your last point is the important one, which is healthcare picks up a whole lot of subsectors of healthcare. So you are talking about everything from a dental practice management business to a provider of true healthcare services, to information technology companies that serve the healthcare space, to a billing business that perhaps helps insurance companies audit bills. So there's so much picked up in that industry classification, that I think there's diversity to withstand some change in particular. I do think we have a long history here. I know we have a long history here of underwriting healthcare companies successfully. There's obviously been eight years of pretty significant regulation looking backwards to the Obama presidency that had limited to no impact on our healthcare portfolio.

I think we've been able to assess any risks there and to stay away from things that potentially would create credit problems. So today we mentioned a couple of industries, oil and gas, obviously last year was something that represented real issues for folks. I do think the post-secondary education industry has represented issues for us and others. We're nervous about retail and restaurants, frankly these days because we've seen a weak consumer, and in retail in particular we've seen real changes in the way people buy things, i.e. on-line versus in stores and in malls in particular. But our healthcare portfolio today, I would tell you, I feel very good about; the credit metrics across those names are quite good. So we don't have a lot of concern on the healthcare portfolio today.

Okay. Great. Thank you.

Sure. Thanks for the questions.

In the interest to equal access to all participants in the queue, please limit your questions to two questions per participant. Thank you. Our next question comes from Hugh Miller of Macquarie. Please go ahead.

Thanks for taking my questions. First one, just a housekeeping one that you guys had mentioned that the growth for the trailing 12-month EBITDA for the portfolio companies was 4%, and correct me if I'm wrong, did that compare to 7% as of 3Q 2016, and what would be causing that differential?

It does. Your numbers are right. I think we saw a modest slowdown in growth in the portfolio.

Okay. So it wasn't just a function of just kind of very strong growth rolling off of 3Q? 2015 is just more a function of slower pace of growth as we headed into the back half of last year?

Sure, I think that's right.

Okay. Then the second question, there's been some discussion about the impact to lending terms and the banking space, if we do get a cut in the corporate tax rate. There's some discussion about passing along some of that benefit to the borrower, being a little bit more aggressive in terms of lending terms if that were to come to fruition. Given the lack of a benefit in terms of lower taxes for the BDC space, is that something that you guys think about in terms of what could happen to competitive terms and any thoughts on that?

I mean, we talked a little bit, or I mentioned a little bit our early thoughts on deductibility of interest and taxes. To be honest, in the early days of change that, that's substantial, I don't really have anything else to add at this point unfortunately on the topic.

Thank you very much.

Thanks for the questions.

Our next question comes from Dodd Muerter of SunTrust. Please go ahead.

Hi. Good afternoon. Two quick questions. First, on the energy front, I know that on the Ares Management side, you have had some fairly public activities in the oil patch, and I know that, that is private equity as (inaudible), but has there, I guess for lack of a better term, enthusiasm for energy on the private equity side made you more interested in getting back into the oil patch in any kind of way?

Look, we've got pretty broad energy experience here at Ares, as you can see. Both our bank loan and high-yield business has significant exposure in the space. We have industry research dedicated there to buying liquid credits. We also, I think, as you know, as mentioned over time, have a dedicated direct lending team focused on the oil and gas space. As you probably noticed around the articles around Clayton Williams and maybe the press release on the [GasStar] transaction, we have dedicated resources in our private equity business that are focused on transactions there.

So we -- we've got different teams with different mandates. Clayton Williams was an equity deal. So something that while it was obviously a big win for the firm, was not something that really was a very good fit for the BDC. I will tell you that our direct lending team continues to look for interesting opportunities there, but a lot more of what's happening in the oil and gas space are kind of re-equitizations of balance sheets, are rescue deals that maybe are less attractive for us and more attractive for our friends in private equity.

That's helpful. Thanks. My second unrelated question with the SDLP, now that the ACAS acquisition may give you -- clear up some room in the 30% bucket, have you considered taking, or are you even allowed to by the covenants, allowed to take some of your Ares, some of your first lien Ares balance sheet loans and actually sending them upstream or downstream into the SDLP just to accelerate that ramp?

Sorry, just so I'm clear, can we take first lien assets from the acquired ACAS balance sheet and sell them to [IB Hill] or somewhere else?

Actually sell them to the SDLP.

If our clients view that as a good outcome. Remember, our borrowers actually have their own interests at stake, too. So typically when new underwritings occur, whether it's an SDLP or anywhere else, we charge new fees and we have a relationship with our borrow so that they agree to things. We don't just sell assets from X to Y without telling anybody. But look, it gives us an opportunity to go out and reengage with those clients in a collaborative Wisconsin and to offer them I think a broader product set here at Ares than they probably saw at American Capital. IB Hill, SDLP, all of these things that we have to offer people should add value.

Okay, thanks. That's all my questions.

Thanks a lot.

Our next question comes from Christopher Testa of National Securities Corporation. Please go ahead.

Hey, guys, thanks for taking my questions. Most have been asked and answered but just curious, how do you look at your pipeline and backlog currently and going forward in terms of existing versus new portfolio companies? Should we expect 2017 should be a continuation of lending to existing companies as well?

I don't have that in front of me so I asked one of the guys to pull it to take a look to give you a sense, but it's a reasonable balance. I think that's 70%, 80% from last year is a pretty high number. We're seeing more interesting new transactions here at the beginning of the year than we're used to. The end of the year tends to be much more oriented towards working with some of the existing companies that you are in constant dialogue with that you kind of work with through the year to get something done by year end. So nothing noticeable there. I think it's a reasonable mix.

Okay. Great. And just -- my second question, just curious how your borrowers are weighing the potential policy changes of lower taxes and regulations which are pro-growth versus how they might be adversely affected by protectionism and other trade policies?

I think they're as confused as we are.

That's a fair answer. Thank you. That's all from me.

Thanks, Chris.

Our next question comes from Nick Brown of Zazove Associates. Please go ahead.

Thanks for taking my questions. I guess first, just confirm something, I think you said before, there's been a lot of press about loan repricings in the market. Is that something that's affecting you? Is that offsetting the benefit of higher LIBOR rates, or is that more in bigger credits that you are not exposed to?

It's really unfortunate a large cap phenomenon -- or fortunately for us it's a large cap phenomenon. We really don't see repricing to middle market loans very often. You're right, January of this year was the most significant repricing year in the history of large financing market for the loan mark. Tougher for the guys buying broadly syndicated and obviously managing CLOs.

Okay, thank you. Switching gears, my other questions were related to the info law investment. I guess when was that loan originally made --when did you originally make that loan? And is it in some sort of reorg process already or forbearance or something like that?

So we did the original deal in 2011. I would tell you the company actually did quite well for the first couple of years of our investment period. We were very happy with it. 2011, 2012, 2013, we experienced some headwinds in 2015, mostly related to macro trends around law school admissions. Fewer applications and the negative trend sort of accelerated in 2016 with the prospect of having to comply with gainful employment. There was more pressure during 2016 around bar passage and the ABA requirements.

So we really didn't see issues in that company become sort of critical issues until last year, which is why you see the significant unrealized losses coming mostly through 2016. So it's not in a, quote, workout process, but we did place the loan on nonaccrual in October of 2016 and have taken kind of two quarters of significant unrealized losses in that name because it's a very challenged company today. It's got a challenged business model, and we're obviously working with the management team to try to stay it out and maximize value in those assets.

Okay. Terrific. Thank you for answering that.

Sure.

Our next question comes from Gil Martin of Knights of Columbus. Please go ahead.

Hi. Question. I'm wondering if you can reconcile, I guess, your nonaccruals went up in 2016, but your average quality increased. Just wondering if you can reconcile that. And secondly, Michael said that, I guess, you're not really expanding your oil and gas exposure. I just was wondering if you participated in the Gas Star transaction that your parent did, and if you did, if could you explain why.

Sure. Basically the way to explain that, the grading is by fair value. If you are whirling down your 1s, your poorer investments, or your 2 which are your poorer investments, it tends to skew the grade up. I would tell you, also we've also started to find that some of our winners, as you have heard through the realized gain performance, have continued. We've got plenty of winners in the portfolio relative to the amount of losers. So the nonaccruals at cost went up. The nonaccruals at fair value went down, because we obviously marked our portfolio in what we think is a very conservative fashion. We've got plenty of good remaining things that we think will contribute to good returns in the portfolio, particularly 4s. More 4s in this quarter than there were last quarter.

And then did you participate in the Gas Star transaction?

We did not.

Cool. Thank you.

Thank you.

Our last question comes from Jonathan Bock of Wells Fargo Securities. Please go ahead.

Kipp, thank you for just one quick follow-up. Kipp, talking about conservatism and focusing on the balance sheet and the correct loans, clearly Ares has done that quite well over the cycles. What's your view today on equity raises and whether or not it's needed on a go forward basis, given that the BDC is at such significant scale today?

Yes, look, we typically raise equity in a market where we see great investment opportunities and/or we don't have enough capital. We've told you we're cautious around the reinvestment environment. We're significantly under leveraged relative to our targets. For us today, we see no need to raise any capital anytime soon. And to hit on your larger point, Jonathan, we're a pretty big company these days. So we have the luxury of having built a company for 13 years to a pretty significant scale.

And while we do, as I have mentioned in the past, think that scale is a real advantage, $13 billion of capital is more than enough for the foreseeable future to be really, really dangerous in this business and do what we want to do. We can write transactions up to $1 billion, probably even $1.5 billion these days. We've built real syndications in capital markets infrastructure to sell down in some of these larger deals. So I see -- I don't see any need to raise equity at the company anytime soon, either improve the business model or to give us capital to invest because of where the balance sheet sits. So we're pretty happy just working what we're working on, which are all the things I mentioned on the call, obviously, rotating the American Capital portfolio, building SDLP, thinking about ways that we can use what will be a larger 30% basket to drive earnings, and just do our thing here. So we're pretty happy without needing to be in the equity markets anytime soon.

Great. Thank you so much.

Thanks for the question.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kipp deVeer for any final comments.

Thank so much, Nicole. I think we can just close the line but we will thank everybody for their time.

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 7, 2017, to domestic callers by dialing 877-344-7529, and to international callers by dialing 1-412-317-0088. For all replays, please reference conference number 10097976. An archived replay will also be available on a webcast link located on the home page of the Investor Resources section of our website. Have a great day.