Ares Capital (ARCC)
Q2 2010 Earnings Call
August 05, 2010 12:00 pm ET
Richard Davis - Chief Financial Officer
Previous Statements by ARCC
» Ares Capital Q1 2010 Earnings Call Transcript
» Ares Capital Corporation Q4 2009 Earnings Conference Call
» Ares Capital Corporation Q2 2009 Earnings Call Transcript
Michael Arougheti - Principal Executive Officer, President, Portfolio Manager, Director, Member of Investment Committee and Member of Underwriting Committee
Faye Elliott - BofA Merrill Lynch
Vernon Plack - BB&T Capital Markets
Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.
John Stilmar - SunTrust Robinson Humphrey Capital Markets
Jasper Birch - Fox-Pitt, Kelton
Donald Fandetti - Citigroup Inc
James Ballan - Lazard Capital Markets LLC
Greg Mason - Stifel, Nicolaus & Co., Inc.
John Hecht - JMP Securities LLC
Good morning. Welcome to Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Thursday, August 5, 2010. 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 the 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, excluding professional fees and other costs related to the Allied acquisition, is the net-per-share increase or decrease in stockholders' equity resulting from operations, less professional fees and other costs related to the Allied acquisition, realized and unrealized gains and losses, any incentive management fees attributable to such realized gains and the income taxes related to such realized gains and other adjustments as noted.
A reconciliation of Core EPS, excluding professional fees and other costs related to the Allied acquisition, to the net-per-share increase or decrease and stockholders' equity resulting from operations, 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. Certain information discussed on 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.
At this time, we would like to invite participants to access the accompanying slide presentation by going to the company's website at www.arescapitalcorp.com, and clicking on the Q2-10 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 will now turn the call over to Mr. Michael Arougheti, Ares Capital Corporation's President. Sir, you may begin.
Great. Thank you, Operator, and good afternoon to everyone, and thanks again for joining us. On the call with me today are the senior partners and the senior management team of Ares Capital’s Investment Advisor as well as our Chief Financial Officer, Rick Davis.
I hope you’ve had a chance to review our second quarter earnings press release, including our third quarter dividend announcement this morning, as well as our second quarter investor presentation posted on our website. We will refer to this presentation a little later in our conference call.
I'd like to start off by briefly discussing recent economic and market events that influence our primary market, update everyone on the progress and benefits that we believe we have realized to date from our recent Allied Capital acquisitions that closed on April 1, and then highlight our combined company second quarter results before I turn the call over to Rick Davis.
After Rick provides the detail behind our second quarter results, I'll walk through the recent investment activity, portfolio statistics, portfolio management strategy and our backlog and pipeline before we close and take Q&A.
Please note that for ease of presentation, in a number of places, we provide information separately for the legacy Allied portfolio as well as for the Core ARCC portfolio.
As we highlighted in our last earnings call on May 10, the capital markets have recently experienced a significant amount of volatility. For a period of time after early May, the market experienced increased uncertainly over sovereign debt risk, financial reform and mixed economic data. This impacted public equity and high-yield markets, which in turn, reduced risk appetite in our market towards the latter part of the second quarter.
High-yield volumes softened in May and June from the robust levels reached in April, and spreads widened. However, since June 30, high-yield volumes are recovering and high-yield spreads are once again narrowing.
I remind everyone that while the high-yield market may from time to time have an impact on the upper end of our market, as evidenced this past quarter, when a few of our larger portfolio companies managed to refinance our loans with high yield, high-yield market volatility or uncertainty can also create additional opportunity for us, particularly when larger middle-market issuers require transaction certainty.
For example, this quarter, we earned a meaningful commitment fee by providing a mezzanine backstop for a high-yield bond financing in conjunction with a larger LBO transaction where the high-yield financing was successfully completed.
Regardless of the state of the high-yield market, our core focus remains on middle-market companies unable to access the high-yield markets, and this opportunity has remained fairly consistent as the year has developed.
In spite of the high-yield market volatility, the conditions in the second quarter in our core middle-market were similar to the first quarter, with a few noteworthy exceptions. Loan volumes were substantially higher and the tightening trend in primary markets' senior debt spreads finally reversed course.
Per S&P data, middle-market leveraged-buyout lending volume was up sharply during the second quarter, with an increase of over 50% from Q1 2010 levels. Spreads on senior debt transactions averaged around LIBOR plus 4.5% to plus 5% with an approximate 1.5% to 2% LIBOR floor.
Mezzanine pricing remained in the 12% to 15% range, and Unitranche pricing averaged out in the 9% to 10% range, including LIBOR floors. I'd also add that total leverage levels in buyout transactions appear to have stabilized, after a modest upward bias during the second quarter, to around 4.5x to 5x total debt to EBITDA.
While not as attractive as 2009, the spreads relative to leverage levels are still significantly greater than historical averages. In addition, loan-to-value ratios continue to be attractive by a historical standard as private equity sponsors continue to pay higher purchase multiples, often contributing 40% or more of transaction consideration in equity.