Ares Capital Management Discusses Q1 2012 Results - Earnings Call Transcript

Ares Capital (ARCC)

Q1 2012 Earnings Call

May 08, 2012 11:00 am ET

Executives

Michael J. Arougheti - President and Director

Penni F. Roll - Chief Financial Officer and Principal Accounting Officer

Analysts

Jasper Burch - Macquarie Research

Joel J. Houck - Wells Fargo Securities, LLC, Research Division

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

Presentation

Operator

Good morning, and welcome to Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, May 8, 2012.

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 the 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 management fees attributable to such realized and unrealized 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 on the company's website at arescapitalcorp.com. 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.

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 Q1 '12 Earnings Presentation link on the homepage of the Investor Resources section of the website. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website.

This morning, Ares Capital Corporation issued its first quarter earnings press release and posted a supplemental earnings presentation on its website. The company will refer to this presentation later in the call.

I will now turn the conference over to Mr. Michael Arougheti, Ares Capital Corporation's President. Go ahead, please.

Michael J. Arougheti

Great. Thank you, operator. Good morning to everyone, and thanks for joining us. We're pleased to report first quarter core earnings per share of $0.38, a level that is 23% higher than the $0.31 per share that we reported for the same period a year ago. On a net income basis, we reported first quarter GAAP earnings per share of $0.49, which included net realized and unrealized gains of $0.13 per share, driving a modest 1% sequential increase in our NAV to $15.47 per share.

This morning, we also announced that we upsized, lowered the pricing and extended the maturity on our revolving credit facility. Specifically, we increased commitments under this facility from $810 million to $900 million and lowered the spread over LIBOR in the facility by 75 basis points from LIBOR plus 300, to LIBOR plus 225. The amended facility has a 4-year maturity of May 2016, which includes a 3-year revolving period that ends in May 2015. Including this upsize, we now have $1.6 billion in total commitments across our 3 revolving credit facilities at a blended cost of LIBOR plus 2.3%, with no floor, and we have no debt maturities until 2016.

Pro forma for the upsized revolving credit facility, our available undrawn capacity on these lines is over $1 billion as of the end of the first quarter, subject to borrowing base and leverage restrictions, which we believe positions us well to take advantage of market opportunities as they arise. This availability of lower cost debt capital will enable us to reduce our blended funding cost as we draw on the revolvers to make new investments over time.

As most of you know, we also issued $163 million in 4 7/8% senior unsecured convertible notes in early March. This latest convert carries the same 17.5% conversion premium and 5-year term, but a coupon that is a 100 basis points lower than our first convertible note issuance in January of 2011. This latest capital raise has illustrated the fact that we're leveraging our scale and credit quality to reduce our cost of debt capital, while at the same time, increasing funding diversification, duration and flexibility.

Our Chief Financial Officer, Penni Roll, will provide more detail on our results and our financial condition a little bit later in the call.

I'd now like to give you a brief update on the market and investment environment. Many of the trends that we discussed in our last call are continuing. Generally speaking, investor sentiment and market tone remained positive, primarily due to strong corporate earnings and continuing signs of economic recovery in the U.S. as investors overlook potential economic and solvency issues in the Eurozone. During the first quarter, liquidity in the broader credit markets was quite strong, driven largely by record high-yield bond inflows, stable loan fund flows and higher loan repayment activity. Against this demand for loans, the new issue market was seasonally soft, causing the supply of loans to shrink, secondary market loan prices to rise and spreads on new issue loans to decline. This has had a modestly positive impact on portfolio valuation, but made the current investment market marginally less attractive.

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