Ares Capital Q1 2010 Earnings Call Transcript

Ares Capital Q1 2010 Earnings Call Transcript
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Ares Capital (ARCC)

Q1 2010 Earnings Call

May 10, 2010 11:00 am ET


Richard Davis - Chief Financial Officer

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Previous Statements by ARCC
» Ares Capital Corporation Q4 2009 Earnings Conference Call
» Ares Capital Corporation Q2 2009 Earnings Call Transcript
» Ares Capital Q1 2009 Earnings Call Transcript

Michael Arougheti - Principal Executive Officer, President, Portfolio Manager, Director, Member of Investment Committee and Member of Underwriting Committee


Jason Arnold - RBC Capital Markets Corporation

Greg Mason - Stifel, Nicolaus & Co., Inc.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

Donald Fandetti - Citigroup Inc

Jasper Birch - Fox-Pitt, Kelton

Christopher Harris - Wells Fargo Securities, LLC

Steven Kwok - KBW

James Ballan - Lazard Capital Markets LLC



Good morning. Welcome to Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] Comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may and similar expressions. The company's actual results could differ materially from those expressed in the forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss core earnings per share or core EPS, which is a non-GAAP financial measure as defined by the 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 management fees attributable to such realized gains and losses and any income taxes related to such realized gains. A reconciliation of core EPS to the net per share increase or decrease in stockholders' equity resulting from operations to the most directly comparable GAAP financial measure can be found in the company's earnings press release. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and results of operations. At this time, we would like to invite participants to access the accompanying slide presentation by going to the company's website at and clicking on the Q1-10 Investor Presentation link on the homepage of the Investor Resources section of the website. Ares Capital Corporation's earnings release and quarterly report are also available on the company's website. I would now turn the call over to Mr. Michael Arougheti, Ares Capital Corporation's President.

Michael Arougheti

Great. Thank you, operator, and good morning, everyone, and thanks for joining us. I hope you had the chance to review our earnings press release this morning and our investor presentation posted on our website.

Before I open with comments on the market, highlight our first quarter's results and discuss our dividend, I'd like to update everyone on our recent acquisition of Allied Capital, which closed on April 1. Since the transaction closed during our second quarter, we will not be discussing any results from the former Allied portfolio until our second quarter's earnings conference call. However, I would like to review our strategic rationale and investment thesis for the transaction and then provide an update on our current strategy and progress to date with respect to the former Allied portfolio.

With the Allied transaction, Ares Capital now manages approximately $12 billion in committed capital. This increased scale brings many benefits including greater market coverage, the ability to support larger underwriting commitments and hold positions, more efficient access to capital, increased portfolio diversification and enhanced competitive relevance.

The former Allied Capital Asset Management funds and entities have also meaningfully increased the scale of Ares Capital's and Ivy Hill Asset Management initiatives, which bring significant access to deal flow, research and yet another potential source of capital for our borrowers. We now have enhanced capabilities that we can offer to our middle-market clients, and they are already making a difference in an increasingly competitive market environment.

As a reminder, our investment thesis for acquiring Allied Capital was based in part upon the following strategy: one, we wanted to opportunistically purchase a stressed portfolio at an attractive price and potentially benefit from an economic recovery; two, to rotate and reposition a portion of this legacy portfolio into higher yielding assets; three, to leverage the greater scale, market coverage and capital base of the combined company to solidify and improve our position in the marketplace; and four, to leverage Ares Capital's existing infrastructure and reduce duplicative cost.

While we are confident that we will execute well upon this strategy, it may take the better part of 2010 and into next year to fully implement our plan and realize all of the benefits of the acquisition. We believe we got the price and timing right, as it is clear that we are now in a stronger market environment for asset dispositions. This stronger market should help us realize improved values upon exiting certain non-strategic assets.

Throughout 2010, you can expect to see us monetizing certain assets and rotating selected other assets into higher yielding securities with a goal of driving earnings and recapturing a portion of the value in the former Allied portfolio. We believe we are making significant progress in this area but keep in mind that as we continue to sell assets, the size of our investment portfolio and our core earnings may be impacted in the short term until we reinvest sale proceeds.

Therefore, given this strategy, it'll be important to track both core and GAAP earnings per share since unrealized and realized gains or losses and prepayments fees are reflected only in our GAAP earnings. Net realized gains and prepayments fees would also be income available for potential dividends.

Finally, it is important to note that there will be some non-recurring acquisition-related costs that will be expensed throughout the balance of 2010 with some tail-end cost that may continue until later periods. Some of these costs are obvious like professional and advisory fees paid in the second quarter, but others may be more subtle like transition employee costs and overlapping leases.

Now let me turn to the leveraged finance markets. As expected, the broad leveraged finance markets continue to recover during the first quarter but candidly, the pace and degree of such recovery has been much faster than we anticipated just a few months ago. As a result of significantly improved liquidity, loan repayments have accelerated as a strong high-yield market and some new, but primarily existing institutional investors, reinvest capital into a shrinking loan supply. Transaction activity has picked up, velocity has increased and not surprisingly, new issue pricing has tightened and leverages expanded in the broadly syndicated loan market.

Although the middle market has lagged the broader market, we are experiencing similar directional trends. Middle-market activity has clearly picked up again in the second quarter as evidenced by the significant growth in our backlog and pipeline since the date of our fourth quarter's earnings release in February. This market backdrop is a double-edged sword for us.

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