Q2 2022 Ares Capital Corp Earnings Call

on working out their unsold inventory of committed financing, many of which we believe are being held at significant losses.

During these times, we rely on a playbook that we've developed over the past 17 years. We've developed over the past 17 years.

We try to be opportunistic on these situations with banks. We become incrementally more selected with our core deal flow to focus on the highest quality investment and the drive better pricing in terms.

We aggressively manage our portfolio and we strive to build additional liquidity for the company. And IPv2 owned by T??Me and WTHibe. We apply partnerships with our digital company with symbolic company.

Against this more volatile backdrop, the stability and scale of our capital is resulting in incremental demand from both our existing portfolio companies and some new borrowers, including some much larger companies that otherwise would turn to the liquid market in less uncertain times.

We believe our longstanding and disciplined approach to investing has resulted in an attractive, highly diversified portfolio that is focused on upper middle market businesses that have significant long-term franchise value and operating resilient industries. and operating resilient industries.

Demonstrating our focus on diversification, our average investment represents 0.2% of the portfolio, and this minimizes our exposure to any single portfolio company.

In addition, we've focused on larger companies in recent years, and the weighted average EBITDA of our portfolio has now reached $179 million.

This number has more than doubled over the past five years.

Our experience in previous cycles is demonstrated that larger companies tend to be more resilient than the Delta North Korean market.

All things being equal, we believe these larger companies have more diverse revenue streams, broader customer bases, deeper management teams, and more robust forces of capital.

These attributes should all serve to support the credit performance of our portfolio.

While we recognize the increasingly complex operating environment that many companies face in today's economy, our portfolio companies are performing well.

Our non-accrual of the cost remained well below our 10-year average, and we reported another quarter of strong underlying portfolio company EBITDA growth.

Furthermore, the weighted average loan to value on the aggregate loan court's volume remains comfortably below our five-year average of 51%, which reflects the significant structural support provided by the equity of our clients at both private equity best companies and non-ponsored borrowers.

As we discussed in our recent analyst day, we have a proactive and deeply embedded credit-oriented culture.

We believe our portfolio management team provides an important and different heated element to our overall approach to risk management.

During our quarterly portfolio review, our Portfolio Management team, alongside our Deal team.

and put a heightened focus on the risks brought by today's high inflationary environment.

While our analysis of our industry sectors and underlying company fundamentals is subjective, we take comfort that this quarter's review revealed only between 5% and 10% of our portfolio within the higher risk category, specifically regarding the potential impact from inflationary pressures such as rising energy prices, supply chain disruption, and staffing shortage. at we Frau

Looking forward, we believe the continued increase in market interest rates presents a potential opportunity for the growth of our core earnings given our largely floating-rate loan portfolio. It is financed by mostly low-cost, fixed-rate, unsecured sources of financing.

If any we'll discuss in more detail, if the full impact to the market rate moves this quarter, it flows through our entire quarter, we calculate that our second quarter, quarter earnings, could have been about 11% higher on a run rate basis.

Additionally, should market rates increase 100 basis points from the June 30th levels, are quarterly core earnings to benefit by about 8 cents per share, or 17% increase over our second quarter core earnings. For us, 17% increase over our second quarter core earnings.

We believe the benefits of these market rate increases to earnings will be more impactful in the third quarter and beyond.

We also do not believe that currently projected increase in the rate of school resulting deteriorating credit performance.

holding all else equal, including leverage at the borrower level, a 150 basis point increase in market rate.

Result in a weighted average interest coverage ratio in the portfolio of approximately two times.

Importantly, this analysis doesn't consider any EBITDA growth or deleveraging.

that is historically occurred in the portfolio.

We feel good about the ability of our portfolio companies to navigate a higher rate environment. We believe these dynamics will further differentiate our established many other income oriented alternatives in the market today.

Before I turn the call over to Penny, I wanted to highlight the dividend increase we announced this morning.

As a result of our run rate, core earnings outlook.

and the expected further benefits from higher interest rates coupled with our strong portfolio performance. We increased our regular quarterly dividend through 42 cents per share to 43 cents per share for the third quarter. Port qualify the drop in pay rate veins of higher interest rates quarter.

This amount is an addition to the three cents per share additional dividend that we've already declared for each of the third and fourth quarters this year.

Let me now turn the call over to Penny to provide more details on second quarter results and some other thoughts on the balance position.

Thanks, Kip. Good afternoon, everyone. Our core earnings per share of 46 cents for the second quarter of 2022 were 4 cents higher than a quarter ago and down 7 cents from the same quarter a year ago.

The second quarter of 2022 earnings were driven by strong recurring interest and dividend income, some higher one-time non-recurring dividends, and a solid level of capital structuring service fees from new originations. The third quarter of 2022 earnings were driven by strong recurring interest and dividend income, and a solid level of capital structuring service fees from new originations.

Our gap earnings per share for the second quarter of 2022 were 22 cents, which compares to 44 cents for the prior quarter and $1.9 for the second quarter of 2021.

Our GAAP earnings for the second quarter of 2022 included net realized and unrealized losses of 30 cents per share. The net realized and unrealized losses on our investments this quarter were largely a result of the unrealized losses we took and the loss of our investments this quarter.

for certain of our investments to reflect the current blinding spread environment, Kip mentioned earlier.

Our total portfolio at fair value at the end of the second quarter was $21.2 billion and we had total assets of $21.8 billion.

As of June 30, 2022, the weighted average yield on our debt and other income producing securities at Amortized Cost was 9.5% and the weighted average yield on total investments at Amortized Cost was 8.7%. The weighted average yield on total investments at Amortized Cost was 7%. The weighted average yield on total investments at Amortized Cost

The total investments yield at the end of the quarter increased approximately 60 basis points from last quarter, supported by the rise in base rates.

As it relates to our future interest rate sensitivity, we remain well positioned to continue benefiting from our rising rate environment. As of June 30, 2022, 74% of our total portfolio at Fair Value was in floating rate investments. At Fair Value was in floating rate investments.

As Kip mentioned earlier, we expect continued increases in short-term rates to have a positive impact on the net interest earnings performance of the company.

For starters, we have yet to see the full quarter benefit from higher market rates that have already occurred in the second quarter. Given about 60% of the base rates for our floating rate loans currently reset every three months, and the increase in base rates through these resets generally occurred in the latter part of the quarter, our second quarter earnings did not fully benefit from the increase in market rates reflected in our yields at quarter end.

By holding all else equal for the second quarter, and assuming that the June 30th base rates were in effect for the full quarter, we estimate our second quarter core earnings would have been about five cents per share higher resulting in core earnings of approximately 51 cents per share or about an 11% increase over actual Q222 core EPS results.

It is worth pointing out that this analysis does not forecast any other changes, including the incremental benefit from interest rate changes since June 30, 2022.

To look at this with a longer term lens, as a quarter end holding all else equal and after considering the impact of income-based fees, we calculated that a further 100 basis point increase in market rates from June 30th could increase our annual earnings by approximately 31 cents per share, a 17% increase above this quarter's annualized core EPS. The 2017% increase above this quarter's annualized core EPS.

We have provided details on our sensitivity to interest rate movements in this quarter's form, so thank you for those who want to further examine these impacts. Thank you for those who want to further examine these impacts.

Shifting to our capitalization and liquidity, during the quarter, we continue to enhance our liquidity by growing our committed debt capital more than $300 million by upsizing two of our revolving credit facilities. Aside from the base rate transition from Lyewort to Sofah, the terms of the two facilities remain the same, including the existing pricing.

After considering our investment in capital activities during the quarter, we ended the second quarter with nearly $4.6 billion of total available liquidity, including available cash of $200 million and a debt-to-equity ratio, net of the available cash, of 1.25 times, up from 1.06 times at the end of the first quarter.

Overall, with our significant dry powder and only $750 million in debt obligations maturing in the next 18 months, we believe our capital and liquidity remain one of our most significant competitive advantages and positions as well to remain active yet patient investors.

Before I conclude, I want to discuss our undistributed taxable income and our dividends.

We currently estimate that our spillover income from 2021 into 2022 will be approximately $694 million or $1.41 per share.

We believe having a strong and meaningful, undistributed spillover supports our goal of maintaining a steady dividend throughout market cycles and sets us apart from many other BDCs that do not have this level of spillover.

This morning, we announced that we declared a regular third quarter dividend of 43 cents per share and increased to our regular dividend rate. The second such increase in the past year, the third such increase in the past six quarters, and our 53rd consecutive quarter of unchanged or growing dividends.

This third quarter regular dividend is enhanced by the 3 cents per share additional third quarter dividend that we previously declared in February .

Those are payable on September 30, 2022, to stockholders of record on September 15, 2022.

And now we'll turn the call over to Michael to walk through our investment activities for the quarter.

Thanks, Penny. I'm going to spend a few minutes providing more detail on our investments and portfolio performance for the second quarter, and then provide an update on post-quarter end activity and our backlog in Type 1.

During the second quarter, our team originated $3.1 billion of new investment commitments across 52 transactions and more than 20 distinct industries.

72% of the commitments issued were senior secured and approximately 60% of the transactions

were to incumbent borrowers.

As we noted in our analyst day, incumbent portfolio companies, which we have provided additional financings, have historically had greater EBITDA growth and stronger interest coverage ratios on average in comparison to the rest of our portfolio.

We believe the opportunity to finance some of our best portfolio companies clearly provides informational and investing advantages.

Additionally, we believe our track record and ability to finance a business as it grows continues to be a key differentiating advantage in today's dynamic market.

Further to Kip's point earlier about the upper middle market focus of our portfolio, the weighted average EBITDA of companies to whom we issued commitments during the quarter was 183 million as compared to the average EBITDA of exited investments of 102 million. The average EBITDA of exited investments of 102 million.

While larger companies continue to be our focus, we are reviewing transactions with EBITDA that ranges from approximately 10 million of EBITDA to more than a billion dollars of EBITDA. And we continue to be very selective and only finance approximately 5% of the new deals we review. ?IES

We believe that our selectivity and focus on high free cash flow businesses with market leadership positions ultimately results in a differentiated and attractively position portfolio.

Our portfolio company's performance during the quarter supports this view.

the weighted average E-Bet the A growth of our portfolio companies.

over the last reported 12 month period was very strong at approximately 16 percent.

Importantly, this performance is broad-based with all of our top 10 industry concentrations demonstrating a healthy level of positive EBITDA growth.

It is also worth noting that industries where we have chosen to invest more heavily measured as industries that comprise 4% or more of the portfolio have experienced higher growth......

than the portfolio weighted average in aggregate.

In terms of credit quality metrics, the weighted average portfolio grade at fair value for the quarter slightly improved to 3.2, and continues to be above the 10-year average of 3.0. and continues to be above the 10-year average of 3.0.

underscoring the overall stability of underlying portfolio companies, only 5% of our portfolio companies had a change in their portfolio grade this quarter, which is consistent with our five-year average.

We experienced more upgrades than downgrades for the quarter, which resulted in a decline in the number and percentage of our high-risk grade one and grade two investments at fair value.

Our nonacrual rate at cost of 1.6% increased slightly from 1.2% at Q122, largely driven by the addition of one new nonacrual, but continues to be meaningfully below our 10-year average of 2.5%. L Angstabe has now been 2009, after the increase in voting today houses higher denouye taxes improving trends and youek titles have within the first grade of the agenda continue to be that.

Now, as Mitch and I do on a quarterly basis, I would like to shift our post-corder end investment activity and pipeline.

From July 1st to July 20th, 2022, we made new investment commitments totaling $245 million, of which $142 million were funded.

We exited or were repaid on 379 million of investment commitments.

As of July 20th, our backlog and pipeline stood at roughly $1.7 billion and $45 million respectively. Our backlog and pipeline contain investments that are subject to approvals and documentations and may not close or we may sell a portion of these investments post-closing. I will now turn the call back over to Kip for a few closing remarks.

Thanks a lot Michael.

I'll conclude simply by saying we believe that ARIES Capital remains well positioned to navigate the economic and market uncertainty ahead.

The stability of our capital and our ability to be a strong and capable financial partner to our borrowers is likely to only be more valuable and continue the trend of increasing borrower demand for private capital at scale.

While we anticipate further market volatility and the potential for additional spread widening as the cycle progresses, we feel very good about our portfolio and the capabilities of our team.

The size and breadth of our team's experience through cycle positions as well to address any future challenges. The position is well to address any future challenges.

We also feel the investing environment going forward to begin to look more and more attractive.

This confidence in our position and the potential for meaningful earnings growth from rising interest rates is reflected in our election to raise our quarterly dividend.

I'd like to finish by quickly taking a moment to thank our team for their continued focus and dedication to the success of the company. That concludes our prepared remarks. We'd be happy to open the line for questions.

At this time, if you'd like to ask a question, please press star followed by one on your touch time sign. If you'd like to ask a question, please press star followed by two.

Please note, as a courtesy to those who may wish to ask a question, please limit yourself to one question and a single follow on.

If you have a dis-no question, you may re-enter the key.

The Investor Relations team will be available to address any further questions at the conclusion of today's call.

Our first question today comes from Melissa Weddle of JP Morgan. Please go ahead, your line is open.

Thank you so much. The first question, I'm hoping that we can go back to the comment you made about the earning potential being driven by higher rates into 3Q. I think you said it was an 8-cent increase potentially.

And I guess I wanted to make sure I'm understanding sort of what's driving that. Is that based off of sort of 630? Is that based off of sort of 630?

Library rates or should we be thinking about that differently?

Yeah, Melissa, and I may pull Penny in here too, or John , for help on the numbers. So what—it's a little technical in that the borrowers obviously reset LIBOR typically every three months. So what's the $ legislation, which we would like you to set up for next month?

And the point is, as we got to the end of the quarter, we still had a bunch of companies that had not actually applied for their LIBOR resets, which when they do will imply a much higher base borrowing rate. So what we were trying to say is, at the end of the quarter, if we pulled forward our expectation of what our interest income would look like with all of those LIBOR resets,

getting done. We're going to, you know, Evan and Salvaton Q3, we thought we had just eight cents. We thought we had just eight cents. We thought we had just eight cents.

of additional learnings from where we kind of left off on June 30th, does that make sense? Yeah, I'll just maybe add a couple clarifying points on that because I know we threw a lot of math at you on this, but you know, kind of for this particular 100 basis points increase, there is some, hypothetically, if you increase rates,

By 100 basis points from where we were in June 30, then we would have approximately 31 cents per year in additional core earnings, with translates to about 8 cents a quarter.

because we did not see the full benefit of rating Q2.

They're, you know, we're just saying, you know, further increases in base rates benefit the earnings. So the A-10s is really more of the hypothetical side, where in addition to that, we said, if you would have taken the full quarter of higher rates, where they did reset to during the second quarter and had those rates and effects of the full quarter, it would have been $5 pro forma to Q2. So you kind of have this five to eight cents. And there are two different metrics at work. Five.

The second one is more just to say, look, we think we have further benefits from rising rates. And if you added 100 Bips, it would be about 8.25. Thank you.

to say, look, we think we have further benefits from rising rates. And if you added 100 bits, it would be about 8 cents a quarter. Thank you. Let's go. Let's go. Let's go.

Okay, it does tell if I ever say that. I think one of the things that's gonna be a lot easier once we get through to use gray. It'll be easier once we get an aftercute gray.

Okay, so on that potential, it's an increase per quarter that you know you've hypothetically laid out here. So that also include the impact of what we've seen on the dividend income line because we've seen a lot of growth there. I know it's something you talked about in tire quarters but I'm also wondering you know how much you.

growth in dividend and come from IHAM and recurring income in particular. Are you sort of baking into that number? Thanks so much.

Sure, so it doesn't include anything in regards to divin and income. In this quarter we actually had a...

Not necessarily expected one-time dividend from an equity investment in a portfolio company, but then the lion's share of the increases you can probably expect as our continued investment in Ivy Hill. If that's larger, it's going to just be paying us a larger dividend going forward.

Thank you.

Thank you.

Our next question comes from Vinnie O'Shea of Wells Fargo. Your line is open.

Hi, everyone. Good afternoon. Another question on Ivy Hill. Was the $379 million sold down this quarter, was that the total allotted amount from Annalee or are there other areas affiliated origination groups that may also syndicate down to Ivy Hill?

Yeah, that number is not part of the Annoley numbers. I just call that ordinary course, Ben.

Oh, the 379 sold down was not, okay, that's helpful. That's right. People will ask the question, you know, with the NLE portfolio, you know, IV Hill bought north of a billion dollars of that portfolio, so those are two separate numbers.

Okay, thanks so much.

Next in the queue today is Devon Ryan of JMP Securities. Please go ahead. Thank you. Please go ahead.

Hi, thanks. This is Kevin Fulton for Devon.

Kip, you mentioned that increased market volatility has led to an improved competitive environment with more attractive terms on new transactions. You know, just curious if you could talk a bit about the shift to a more lender-friendly environment and how that's materializing, both in terms of documentation and more specifically, if you could quantify how pricing has improved on the transaction.

Yeah, I mean, I think we're in a bit of a volatile period. We made reference obviously to the fact that, you know.

banks have underwritten some transactions that they are looking for liquidity on, right? That's probably gonna continue through the remainder of the summer and even into the early part of the fall. So all it's done is simply widen, you know, what we're seeing in the public markets. And thankfully now I think, you know, we and most of our other friends and competitors in the private lending space are widening pricing out as well. So, you know, an early just preview is probably an additional hundred basis points of.

spread across most of the tranches as well as higher fees. And we're also benefiting to your question from much more lender-friendly documentation, re-emergence of covenants and some of the smaller deals that perhaps tried to shed covenants during a frothy period. So pretty much every aspect of the investing environment from pricing, terms, and documentation has all improved materially in the last 30 to 60 days.

And then just looking at new commitment trends over the past two quarters used significantly reduced commitments to second-lane loans. Just curious, is that mainly driven by less attractive spreads on second-lane deals? Or is there an ongoing effort to reduce the mix of second-lane and the portfolio, given more uncertain economic outlook?

Yeah, I mean, I think, you know, a little bit of that, I mean, probably less opportunity on the junior side, you know, there are more unitaranches getting done. But I do think also we saw, you know, we've got a large public facing credit platform here. So when we think about where we were, you know, in March and April , I think we took a pretty conservative tone around how we wanted to, you know, play a transitioning market. It might have been.

a little bit less busy than some others during the second quarter. Certainly less busy than we could have been, but I think we were taking a bit of a pause as we expected a widening spread environment. And we were trying to make sure that we had capital here going through the summer into the fall to take advantage of what we thought was an improving investment environment. So that's a little bit of everything to your point. That's a little bit of everything to your point.

I'll leave it there and congratulations on a really nice quarter.

Thanks very much.

The next question comes from John Hecht of Jeffries. The line is open.

Morning, guys. Thanks very much for taking my questions. A quick question is in this is sort of maybe a segue from the last question a little bit. Is of your gross depreciation, I think you cited that most of that was from credit spread widening. Can you kind of allocate some of the gross depreciation to base rate changes versus credit spread changes? I try to just decide for how much of.

how much of the change in your book value is tied to call it generic credit risk versus rates.

Yeah, I mean, I think thanks for the question, John . We didn't see really

you know material change in the overall credit in the portfolio most of what we observed was simply unrealized losses pretty broadly across the portfolio in reference just to the you know reference securities that we obviously look to to value the portfolio mostly the loan market and the high yield market.

Okay, and then just thinking about that, I mean, because you guys obviously have a pretty detailed view and perspective on credit spreads. I mean, if you look at the past 15 years, including the great financial crisis, where are we right now with respect to how credit spreads are impacting the market relative to say more extreme times? And in other words, do you see a lot more potential for widening spreads or are we already at a point where the market's pressing in some stress?

That's an impact, I think, more potential stress in the portfolio than anything. Look, the other thing is difficult to call right now, John , is everything's widening because there is this underwritten, unsindicated backlog of some pretty large transactions that the banks are trying to clear out. And depending on how aggressive they are in clearing those, you could set some pretty low left-most-pun price, which would imply very, very widespread.

What I didn't expect that to potentially come back is deal flow is I think a little bit lesser and you don't have this unfortunate backlog of things to get to the market. Look, I mean, I think you've had a very low base rate environment with base rates going up.

Credit spreads typically only widen when you see defaults go up. And again, we're not seeing that really this is in our market in reference to, I think, the phenomenon of this summer and inventory trying to get cleared out. So we keep taking kind of a patient wait and see approach. I don't have a great crystal ball on that one. I wish I did. But I think we're just taking a little bit of a patient wait and see approach as to how we get through the summer and into the fall.

Great. Thanks very much for the color.

Thanks, John .

And next question comes from Ryan Lynch of KBW. Please go ahead with your question.

Hey, good morning everybody. My first question is, Ivy Hill has been just an incredible asset for you all.

But the question is, we've seen that have pretty considerable growth over the last...

four or five years and really in particular the last couple of years of the AUM as well as the dividend growth at Ivy Hill. So could you talk about one, what is driving kind of the really accelerated growth that you guys have been achieving in Ivy Hill and the assets that are going in there? What is sort of changed in that marketplace to kind of have that accelerated growth recently? And also, you know, it's obviously done really well, generated very high income.

But it's also becoming a very large portion of your portfolio. Now, I know it's a very diversified kind of action managers, not like individual loan credit risk with that large investment. But is there any sort of size limitation? It's 8.5% of your portfolio today. Is there any sort of size limitation where you guys say, okay, this is enough. We're not going to grow this anymore. We're not going to grow this anymore.

Yeah, I mean, you know, there's not obviously it's a judgment call. It's been going up because they've done a great job, obviously, managing portfolios of bank loan assets and you know, the cash on cash return, if you think about the dividend relative to the total investment we've made has been very consistent and very attractive over a long period of time.

Look, when I see something at 8.5% of the portfolio, it obviously begs the question you're asking, which is how large could it get, should it get? We just did a very large transaction there, obviously buying this portfolio from Anoly. They took on a billion plus dollars of assets. We made a substantial investment in the company. That's a little bit of a needle mover for this quarter relative to others. But for me, and I would certainly pull the management team too, for me, it's getting to be at the upper end, right? Eight or nine percent.

right is the management of the NASA manager. And we also invest in the subsurbs of a lot of the CLOs and leopard loan funds that we manage because it's such a tremendous return for ARCC. Over our history, and remember, Ida Hill has been around since 2007. We've had many times where other third party equity investors have invested in Ida Hill. So if it ever came to a point, and I agree with Kip, it's getting up to the upper levels. It's probably still room to grow. But if it ever came to a point, we've always had the ability to sell equity and continue to invest in the assets.

that's right the core of our business so we have the many levers to pull to moderate the size of iB health

many levers to pull to moderate the size of IV health. That's great.

Hopefully that makes sense. Understand that makes sense? That definitely makes sense. And again, it's been a great asset. It's just kind of how you guys feel comfortable with that. The other question I had, and I really do appreciate the color that you guys gave on kind of the run rate ending the quarter from kind of if you reset interest rates for the full quarter of Q2, and then also kind of the overall 100 basis points at the end of the quarter. Those statistics show and…

and kind of a forward live or a SOFR curve shows, you know, earnings are going to go up pretty meaningfully over the next several quarters likely. And so when I look at the core earnings today and the potential increases in the future, and then I look at your dividend that you have today and the one you've declared from the third quarter, even with the one cent increase, and then the three cents kind of special dividends you guys have at the end of the year, earnings look like they're going to be well above those combined when you kind of look at 2023.

Ernie's potential. And so can you remind us what are you guys thinking as far as dividend policy is going forward? Is your expectation does kind of pay out all of your earnings in the full of the dividend and how do you guys plan on, you know, achieving that the core dividend versus special dividends?

Yes, so I think we all agree with your analysis. As you look forward, we think that we've got, you know, great positive earnings trajectory here, you know, with a much, much higher base rate. We've obviously been fighting, you know, these persistently low base rates for a long time to advantage an issuer. But yes, we do pick up some very easy earnings going forward and look, I'll just say Ryan, you know, we never talked about dividends beyond, you know, this quarter, but...

We felt highly confident in our ability to increase the dividend in this quarter. And I coupled that by saying we've also built a pretty substantial amount of spill-over income as you're aware of the company. And I don't feel the need, frankly, to add any more to that number. I could argue that number might even be a little bit high, which is why we've been using it to pay a special dividend throughout this year. So we feel good about the earnings trajectory and we feel good about the dividend where it is today and potentially growing from here.

edit ratings you saw. More upgrades and downgrades within the portfolio just want to get a little bit more details behind, you know, perhaps some of the drivers behind more of those upgrades. Thanks.

You know, it's what you'd expect, I think. It's just generally all around good credit performance as we mentioned. You know, we had one name that we had added to Nonacrual, which was a pretty small number and well below sort of our historical average, if you look. But, you know, it's a large diversified portfolio kind of thing. There's nothing in particular to pull out there. It was, you know, good credit performance all around.

a couple of equity gains, I think, in certain areas that probably move that number up a little bit. But it's a pretty broad and diversified portfolio. I don't think there are any big takeaways that are worth sharing.

And just one follow-up question, if I may.

When are you talk a little bit more about or share your thoughts on how leverage your thoughts on how leverage your thoughts on how leverage

over the near term.

Just giving out the activity out there. Yeah, so we, you know, we had a busier quarter, the analyte situation in the upside that I be ill kind of got us to a point where our leverage is now at the upper end of our target range at about 1.23, I think times on a net basis.

Frankly, in a more volatile market like the one we're experiencing, I'd like to have that number come down. I think we all would. That being said, the ability to up size at IB Hill and the ability to make that portfolio acquisition that we did was just too attractive. So, we pushed the leverage to the upper end, but I think the goal longer term would be managing that down here on the third and fourth quarters. So much more that you put in the official computer.

Gotcha, very helpful. Thanks again.

Very helpful. Thanks again. Thank you.

Next we have a question from Robert Dodd of Raymond James. Please proceed. Please proceed.

Hi everyone, and congrats on the quarter and the outlook. A question, kind of a bigger picture question, your size of your bar has gone up a lot, and you've made comments about how those are more stable businesses etc., etc. Generally speaking, I would imagine you get to almost $200 million EBITDA businesses. These are global businesses. The economic outlook right now to me looks a lot better than the headwinds in the US, but compared to Europe for example.

the clouds appear less dark. Can you give us any color on the sky?

You know, how much of the end customer demand for some of these larger businesses comes from those international markets where the economic outlook might be more troubled than you have any.

concerns on that front, obviously it might not show up in the numbers yet, because it's still more looking backwards, but again, then the offset is effects can help them as well. Any color there?

Yeah, I mean, you know, it's a good question, you know, and with the 400 name portfolio, I can't say I can actually give you an answer. We'd have to go back and dig through a lot of data. You know, for the most part, despite the size of these companies, they are US companies, right? You know that that's the primary focus of what we do here. We've got a very large business over in Europe too, but we choose to do that away from the CDC, so certainly with...

Some of these businesses being large and global, I share your concern as we think about risk management. You know, Europe does look more difficult, I think to your point than it does over here in the US. But just trying to get to the risk and the heart of your question, we don't see any unusual risks in our portfolio where we're heavily weighted to Europe because we tend to be in some larger companies than other BDCs. But again, we'd have to go pull through a whole lot of data to get some really good answers.

It is much, much lower than that. Right? If you think about the industries and the sectors that we're in, you think, you know, US healthcare companies, software businesses, et cetera. I mean, a lot of this business is getting done in the state's Robert, right? So, you know, 40% in the S&P, that's a very large number, I think relative to where I would even guess at our portfolio, I would guess that, you know, we're at like a 10 relative to a 40 for your index. Got it. Thank you. Yeah. Go ahead.

Thanks for the question.

I'm Matt's question today comes from John Rowan of Danny Montgomery Scott. I'm Danny Montgomery Scott. I'm Danny Montgomery Scott.

Our next question today comes from John Rowan of Danny Montgomery Scott. Please go ahead.

Hi, this is Rishi Kambushkar on behalf of John Rowan. We're the unrecognized losses on directly originated loans or broadly syndicated loans.

Both I would assume.

Is there any way to get a better breakdown on either or, or is it just all together you're reporting the other? if we're, or you're still there?

And we could probably go offline and pull that for you guys. I don't have it at my fingertips. The reality is most of what we're doing is directly sourced loans. We don't have a lot of broadly syndicated loans on ARCC's balance sheet. But the larger borrowers, right, large Rebit.com companies probably have quotes. And obviously, we don't ignore quotes. We look at even in a thin market, something that's quoted, and we'll typically use that. But again, there's not a significant focus at ARCC on broadly syndicated loans.

All right, thank you very much.

As a reminder, if you'd like to ask a question today, start by the number one on your telephone keypad.

And next question comes from KC Alexander from Compass Point. Please go ahead.

Hi, good afternoon. This is Casey Alexander on behalf of Casey Alexander.

Oh

I'm just kind of wondering, this period of economic uncertainty or potential recession that we may or may not be going into are already in. We may or may not be going into are already in.

seems obviously far more telegraphed than the COVID recession.

And it allowed you to do an analysis that said 5 to 10 percent of your companies are in higher risk categories from inflation and supply chain impacts. Does the telegraphed nature of this particular cycle as we go into it give you a better opportunity to work with your portfolio companies and give them a better opportunity to prepare for it by bolstering balance sheets, managing expenses.

And would it be your expectation that there would be a better outcome through this cycle of companies that are higher risk category than perhaps in the past?

I think it's a great question. I think the simple answer is yes. And as we're all looking at our crystal balls, this is a situation. We have a team here that's been doing this together, prior to even getting to areas 20 plus years. This to me feels like a very traditional, although being influenced by different reasons, credit cycle, right? Where you're gonna have companies that are having more trouble operating. And are having more trouble operating.

And I do take your point, when you look back at COVID, that was very unpredictable, something that we'd never experienced before that impacted portfolio companies in a way that we probably couldn't have expected on underwriting. And the credit cycle prior to that, you know, for me in the GFC was really much more of a banking crisis, right? And something that was influenced away from traditional corporate credit. So we're taking some satisfaction that, you know, we've got a playbook.

to handle more traditional credit situation, right?

So, you know, our deal teams and our portfolio management teams are obviously in regular contact with borrowers and with private equity firms, but I think to your point, everybody sees what's happening now and it's not happening so quickly that you can't take measures to mitigate and help companies operate through this, right? It feels like a much more traditional credit cycle and we've got a very experienced team that I think knows how to navigate through that. Thank you.

Thanks for answering my question. I appreciate it.

Thanks for representing yourself.

Track.

And finally, we have a follow-up question from Ryan Lynch of KBW. Your line is open again. Stop a second!

I just had a couple more follow-up questions, so I appreciate the time.

You mentioned early in the paper marks.

you know turning to to some new larger borrowers that would normally turn to the the broadly syndicated loan market and now that those are You know under under some more stress that you have the ability to underwrite some of those deals. I know in the past Some of the deals that could have one of the broadest syndicated loan market that maybe once the direct route I know in order to meet the yield profile Sometimes you were participating in the second lead for those positions and you felt comfortable as such just because they were larger safer borrowers you

I'm just curious with the kind of a stress and the uncertainty that the broadly syndicated low market is as well as the increase in base rates we've seen recently, are you able to participate in more of these and in more traditional first lane or unitracht positions that you have in the past?

I mean, I think what we're seeing, Ryan, because the traditional sort of bank-led syndicate in a first lien, second lien, or first lien sort of high yield issuance is it's just kind of really not there, particularly on the junior side. I mean, the market, I don't want to say it's closed, but it's generally not operating very well around rated LBOs, getting sold by underwriters to new investors.

So what's happening is there's a desire in particular on the parts of private equity firms in doing LBOs to find partners that they feel can offer certainty of closing and the preponderance of some of these larger unit ranches has helped solve that, right? That being said, we're trying to find the right balance between extracting better terms and extracting higher fees. There is sort of one of the few games in town that are available for those types of transactions. And the good news is, is we're able to.

to push it there but it doesn't happen overnight. But no, nothing's different. I mean, you know, I think we're as well positioned as we've been in past cycles where volatility comes in and makes the capital markets less reliable. We become, again, more reliable, bigger right. The only difference maybe is the numbers are a little bit larger these days because we're bigger and a lot of our competition is bigger. Because we're bigger and a lot of our competition is bigger.

Okay.

That's helpful. And then the last one that I had was, you know, obviously you guys had put up very strong results. I would say this quarter, you know, there about the volatility in the marketplace, but overall book value, you know, held up well and not a cool or still pretty strong and well below your guys' historical average. So very good results, but I think everybody in the BDC space, with BDC investors are worried about.

kind of what does the next 12 months look like from a credit quality standpoint? You guys provided a statistic in your slides that I think you had never even mentioned on the call, 16% even to growth in your portfolio companies over the last 12 month period. But I think the question that I think a lot of investors have, and I'm not sure if you get this data from your portfolio companies if you guys work on this.

Do you guys get any sort of forecast from portfolio companies of what they are expecting from an EBITDA growth over the next 12 months? Do you guys have any sort of forecast that you guys provide? Because I think that is kind of the real crux and that's what really I think investors are worried about is what happens over the next 12 months in these portfolio companies.

of forecast from portfolio companies of what they are expecting from an EBITDA growth over the next 12 months. Are you guys having any sort of forecast that you guys provide? Because I think that is kind of the real crux. And that's what really I think investors are worried about. What happens over the next 12 months in these portfolio companies?

Well, I mean, I think there's some math. Yeah, I mean, that's obviously what we're talking about all the time here, right? So, I mean, I share some concern. Am I truly worried I actually think that with?

Lower growth, which we will likely see again, because we're comping off some COVID numbers, right? So there's a little bit of a nuance there. But yeah, I would expect slower growth in the portfolio. I think I've said publicly too. We would expect default broadly will go up. That being said, we've always been able to manage those aspects of the company better than most. So we feel pretty confident. But yeah, I mean, I share your forecast for probably not as rosy a back half of the years we'd seen for the first.

But I share your concern and others.

and others.

Okay, I appreciate the follow up questions.

Yeah, thanks, Ryan.

This concludes our question and answer session and I'd like to turn the conference back over to Mr Kip Devere for any closing remarks.

I'll now just thank everybody attending.

We're happy with the quarter and hope you enjoy the month of August and get some time with your friends and your families because I think it's going to be an interesting one as we get to positioned here for September and beyond. But thanks again for attending today.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the call will be available approximately one hour after the end of the call through August 9, 2022. Goodbye. I'm B.M. Easton Time to domestic callers by dialing 866-813-9403.

and to ask international callers by Darling Plus 4-4-204-525-0658.

For all replays please refer to conference number 715312.

An archive group will also be available on a webcast link located on the homepage of the Investor Resources section of Aries Capital website.