Q3 2023 Ares Capital Corp Earnings Call
Good afternoon, welcome to the Ares Capital Corporation's third quarter September 30th 20 twenty-three earnings conference call.
At this time all participants are in a listen only mode.
Reminder, this conference is being recorded on Tuesday October 24th 2023, I will now turn the call over to your host Mr. John Steele Mar managing director of Investor Relations. Thank you you may begin.
Thank you.
Let me start with some important reminders comments made during the course of this conference call and webcast as well as the accompanying documents contain forward looking statements.
Subject to risks and uncertainties 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.
<unk> Capital Corporation assumes no obligation to update any such forward looking statements.
Please also note the past performance or market information is not a guarantee of future results.
During this conference call. The company May discuss certain non-GAAP measures as defined by SEC regulation G. Such as core earnings per share or core EPS. 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.
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A reconciliation of GAAP net income per share the most directly comparable GAAP financial measure to core EPS can be found on the accompanying slide presentation for this call. In addition.
Reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on form 8-K.
Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies was derived from third party sources and has not been independently verified and accordingly, the company makes no representation or warranties with respect to this information.
The Companys third quarter September 30th 2023 earnings presentation can be found on the company's website at Www Dot Ares capital Corp, Dot com by clicking on the third quarter 2023 earnings presentation link on the homepage of the Investor Resources section.
Ares Capital Corporation's earnings release, and Form 10-Q are also available on the company's website.
Now I'll turn it over to Mr. Kipp, Davir Ares capital Corporation's Chief Executive Officer.
Thanks, John .
Hello, everyone and thanks for joining our earnings call today I'm here with our co presidents, Mitch Goldstein and court Schnabel, our Chief Financial Officer, Penni Roll, our Chief operating Officer, Jana Markowitz and other members of the management team.
Before I begin my prepared remarks on the company I'd like to express our deepest sympathies to those who have been affected by the recent horrific terrorist attacks in Israel and the subsequent loss of innocent lives. It.
It's truly a tragedy and we hope that a peaceful resolution is achieved as soon as possible.
Turning to our results I'll start with some highlights from our third quarter, and then add some thoughts on the economic environment and the current market.
This morning, we reported strong third quarter results, our core earnings per share of 59 cents increased 18% year over year, primarily reflecting higher net interest and dividend income.
Really a result of higher base interest rates, our GAAP earnings per share for the third quarter were <unk> 89 cents.
And by our strong core earnings and an increase in the overall value of our investment portfolio.
These results led to another quarter of sequential growth in our net asset value per share to $18.99, which has increased 3% since the beginning of the year.
We remain one of the few bdcs, that's been able to deliver a consistent or growing regular dividend while building N. A V over long periods of time.
We're pleased with these results and we think it's important to put them in the context of what we're seeing in the broader credit markets.
For much of the quarter and credit markets remain constructive and saw some lift as the soft landing narrative for the U S economy led to enhance liquidity and modestly higher transaction activity.
However, with expectation that higher for longer interest rates will be required to tame inflation volatility has returned to the capital markets.
There is no doubt the unsettled international landscape in Ukraine, and Israel in particular are adding to this volatility.
As a result, the leveraged finance market has less constructive to new transactions, particularly smaller ones.
Companies that thought the bank in liquid credit markets for their financing needs are turning to the private credit markets looking for worthy partners. They can deliver a higher certainty of closing.
Underscoring the market opportunity for direct lenders. This was the third most active quarter in history for $1 billion plus of Unitranche transactions in the private credit markets demonstrated the ability to provide a 5 billion dollar financing solution. That's been asked her transaction.
Driven by the scale and capabilities of managers like Ares private credit is continuing to gain market share over bank and syndicated capital market solutions.
During the third quarter market pricing and terms continue to be highly attractive for new transactions.
Credit spreads on new loans are well above historical averages.
Leverage levels are lower and equity contributions are at historical highs.
Looking forward were optimistic about the outlook for new investment opportunities and we expect an uptick in M&A and additional sponsor to sponsor portfolio company sales to accelerate in 2024.
Given the robust level of private equity dry powder that is largely gone unspent growing pressure from private equity L. P. Seeking returns of their capital and stronger sentiment amongst middle market companies to invest in the growth of their businesses, we expect stronger transaction volume in 2024.
The simple turning of the calendar year will also help we would expect the fourth quarter will be moderately better than the third quarter in terms of volume, but likely below fourth quarters in past years.
Yes.
We believe that our experience scale and capabilities position us well to benefit from these market dynamics Ares management has continued to invest in the quality and growth of its direct lending platform and we continue to focus on both sponsored.
And non sponsored companies and the expansion of our specialty industry coverage.
Leveraging what we believe is the largest and most tenured U S direct lending team in the market with 180 professionals across the U S. We feel that our broad sourcing capabilities provide significant and differentiated deal flow.
As an example in the third quarter, we have reviewed more transactions that were reported in both the leverage loan and the middle market combined.
We believe these sourcing advantages allow us to maintain a highly selective approach, which in turn drive strong long term investment performance.
He's sourcing capabilities have been a key driver to what we believe is a high quality diversified portfolio.
Our companies are continuing to perform well despite the increase in borrowing costs.
Our portfolio interest coverage ratio measured using current market interest rates at the end of the quarter with stable quarter over quarter and substantially all of our companies are consistently making their interest payments despite the higher base rates.
We'd also note that the weighted average portfolio grade is flat quarter over quarter and remains better than our 15 year average our non accruals at cost or just over 1% and continues to be well below our own and BDC averages for the past 15 years.
In addition, the amendment activity and modifications remained stable at historical levels.
The credit strength of our portfolio is supported by healthy levels of EBITDA growth across our portfolio of companies, which we believe are demonstrating comparatively stronger growth than the broader market due to the industries that we tend to overweight and our defensive positioning.
Our simple strategy of avoiding cyclical sectors more prone to default continues to pay dividends for the company.
We estimate that the weighted average LTV in our loan portfolio is around 43%, although we acknowledge the valuation environment is changing in response to higher rates.
Regardless of these shifting valuations we have confidence there is significant value beneath it didnt most capital structures a lot of it supplied by large and well established private equity firms with whom we have strong relationships and do repeat business.
Despite this constructive view on the portfolio and the economy generally as credit investors. We are laser focused on ensuring we are well prepared in the event of a more protracted economic downturn.
In addition to the benefits of our diversified and defensive portfolio, we have a large portfolio management and valuation team, which supports our investment teams and is proactive in identifying problems early and developing strategies to maximize our outcomes.
Our balance sheet remains strong with net debt to equity levels of around one times, we have ample access to capital to invest in this attractive vintage.
Importantly, we also have access to capital to deal with more challenging situations as they arise.
And tougher situations, we believe we have the appropriate resources to execute on our demonstrated playbook for managing the portfolio.
We believe these risk management workout capabilities are central to our ability to continue to look to continue to deliver on our industry, leading track record for credit performance.
Given these dynamics and the company's overall positioning we feel good about our third quarter results and our position looking forward and with that let me turn the call over to penni to provide some more details on our financial results and our balance sheet position.
Thanks, Ken.
We reported GAAP net income per share of 89 for the third quarter of 2023 compared to 61 cents in the prior quarter and 21 cents in the third quarter of 2022.
Our higher GAAP net income per share in the third quarter of 2023 benefitted from strong core earnings and higher portfolio values during the quarter driven largely by tightening market spreads.
On a core basis, we reported core earnings per share of 59 times for the third quarter of 2023.
Compared to 58 cents in the prior quarter and 50 cents in the third quarter of 2022.
We continue to see the benefits of higher rates on our predominantly floating rate portfolio in the third quarter of 2023, as our interest and dividend income increase from both the prior quarter and the third quarter of the prior year.
Our stockholders' equity ended the quarter at nearly $10.8 billion or $18.99 per share, which is an approximate 2% increase per share over the prior quarter, our year to date annualized return on equity using GAAP EPS and core EPS was 14, 5%.
And 12, 5% respectively.
This strong level of profitability further builds upon our long term track record of a 12% GAAP based annual return on NAV since inception.
Our total portfolio at fair value at the end of the quarter was $21 9 billion up from 21 5 billion at the end of the second quarter, reflecting a combination of net fundings and net unrealized gains from the portfolio for the quarter.
The weighted average yield on our debt and other income producing securities at amortized cost was 12, 4% at September 32023, which increased from 12, 2% at June 30, 2023.
And 10, 7% at September 32022.
The weighted average yield on total investments at amortized cost was 11, 2%, which increased from 11% at June 32023, and nine 6% at September 32022.
The yields on our portfolio largely reflect the continued increases in interest rates.
Now, let's shift to our capitalization and liquidity during.
During the quarter, we returned to the investment grade debt markets for the first time in over 18 months. This 600 million dollar debt issuance was our first sub five year term issuance in this market.
This shorter three and a half year duration benefited our maturity ladder as it allowed us to slot into 2027, where are we after this issuance still only have $1.1 billion maturing and that year.
Overall, our liquidity position remains strong with approximately $5 $3 billion of total available liquidity, including available cash and we ended the third quarter with a debt to equity ratio net of the available cash of one point or three times as compared to 1.0 southern tide.
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We believe our significant amount of dry powder positions us well to continue to support our existing portfolio company commitments to remain active in the current investing environment and to have no refinancing risk with respect to next year as term debt maturities.
We declared a fourth quarter 2023 dividend of 48 cents per share. This dividend is payable on December 28, 2023 to stockholders of record on December 15th 2023.
And is consistent with our third quarter 2023 dividend.
As Kipp stated we have a long standing dividend track record. We are one of a select few bdcs that have paid a stable or growing regular dividend over the past 14 plus years.
And with that I would like to turn the call over to Mitch to walk through our investment activities for the quarter.
Thanks, Danny I'm going to spend a few minutes, providing more detail on our investment activity our portfolio performance and our positioning for the third quarter. I will then conclude with an update on our post quarter end activity backlog and pipeline.
In the third quarter, we originated $1 6 billion of new investments, which increased from $1 2 billion in the prior quarter as we saw a slight uptick in M&A activity.
Underscoring the breadth of our market coverage the EBITDA of the companies, we finance during the quarter.
From below $20 million to over $800 million of EBITDA.
Approximately 50% of our new commitments were to existing borrowers, which is consistent with our historical practice.
With this quarter's activity our portfolio now includes 490 companies. This.
This is an increase from 354 companies pre COVID-19 and represents a growth rate of 38%.
Point this out to highlight the meaningful benefits that come from and compensate.
We believe incumbency drives future origination.
Additionally, we believe incumbency enables us to support our strongest portfolio companies reduces underwriting risk on new commitments and achieved better documentation in terms.
And finally incumbency enhances our relationship with financial sponsors this quarter over 85% of our sponsored transactions were with repeat sponsors.
Now as we have all year, we continue to find compelling value in today's market.
This is demonstrated by the first lien investments we originated in the quarter, which had a weighted average yield in excess of 12%, but a leverage ratio of 146 times.
This is a full turn of leverage lower than the industry senior leverage track by Pittsburgh L. C D over the past 10 years.
Underscoring <unk> earlier point about the historically attractive relative value, we are able to achieve in the current market. The weighted average LTV of all our new investments this quarter was below 40%.
In addition to adding accretive investments in the current market our existing portfolio continues to perform well and we are seeing stability in our credit metrics.
We believe this is largely due to our defensively positioned portfolio and market leading companies in resilient industries.
In the third quarter, the weighted average LTM EBITDA growth growth rate of our portfolio was a healthy 6%.
This compares to an estimated flat EBITDA growth rate for the S&P 500 over the last 12 months.
With respect to our portfolio grade the weighted average portfolio grade of our borrowers at cost was stable with last quarters at 3.1.
Our non accrual rate at fair value declined from one 1% last quarter to 6% this quarter, which continues to be well below historical levels.
Non accruals at cost decreased from two 1% last quarter to one 2% this quarter and remained well below our 3% 15 year historical average and the kw BDC averaged three 8% for the most recent 15 year period available.
Looking forward, we remain confident about the performance of our portfolio in part due to our disciplined approach to risk management and portfolio diversification.
Our $21 9 billion portfolio at fair value is diversified across 490 different companies and 25 different industries.
This means that any single investment accounts for just 2% of the portfolio on average and our largest investment in any single company, excluding SDLP and Ivy Hill is just 2% of the portfolio.
We believe we have the greatest level of portfolio diversification any publicly traded bdcs.
Finally, I will provide a brief update on our post quarter end investment activity and pipeline.
October 1st through October 18th 2023, we made new investment commitments totaling $410 million of which 297 million were funded with.
We exited or were repaid on $158 million of investment commitments.
As of October 18th our backlog and pipeline stood at roughly 820 months.
Our backlog and pipeline.
And then certain 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 Ken for some closing remarks. Thanks Mitch.
We're pleased with the quarter, our portfolio continues to perform well and our sourcing underwriting portfolio management and capital advantages are driving strong financial results.
We feel that we're well positioned to navigate any potential future economic challenges and to capitalize on todays attractive environment for new investing.
As always we appreciate you joining our call today and we'd be happy to open the line for questions operator.
Thank you.
At this time, if you'd like to ask a question. Please press Star then one on your Touchtone phone if you'd like to withdraw your question. Please press Star then two please.
Please note as a courtesy to those who may wish to ask a question that we ask you. Please limit yourself to one question and a single follow on.
If you have additional questions you may reenter the queue.
The Investor Relations team will be available to address any further questions at the conclusion of today's call.
Our first question comes from Melissa Wedel with JP Morgan. Please proceed with your question.
Good morning, Thanks for taking my questions today.
Hi wanted to start with some of the commentary you provided around expecting some rebound in activity and 2024.
You know it sounds like some of that is based on.
Dry powder, and if I could pressure from private equity investors to re engage a little bit but do you think there's risk to that recovery in activity should rates remain even higher than expected.
The forward curve right now.
I mean, it's probably just thanks for the question look there's probably just my own view, but I mean, I think this has been a difficult year to buy and sell things as I've said in some other.
Places you know if you haven't been in a need to sell mode. This is probably a pretty difficult year to think about selling.
And then buyers obviously, you're exploring we think.
Materially lower purchase prices for a lot of assets not just corporates and I think that translate similarly into real estate and infrastructure assets et cetera, everything is just worth less in a higher rate environment.
My optimism around next year is that if we see a leveling out of rates.
Which I think were seeing generally maybe there's another increase or two but generally.
Youre seeing a leveling of rates that price exploration, that's been going on between buyers and sellers just gets to be a bit easier right, but while youre seeing rates I think unexpectedly increase as quickly as they did and as materially as they did it just makes those conversations more difficult. So that's kind of number one.
And number two yeah. My my my belief is that there are a lot of limited partners out there that you now have money in the ground, particularly in private equity where they were looking to 'twenty four is a year, where they need more material repayments to come back right. When they think about managing their cash flows whether it's a pension.
Or any other investor so I'm hopeful that the combination of those two things should lead to better activity levels I think our deal flow today, you know Mitch talked a little bit about the backlog and pipeline is better than it's been.
So I'm cautiously optimistic, but I guess, we'll wait and see.
That's really helpful. Thanks, and then a question for Penni Penni did you have an update for us on any spillover income as of quarter end. Thanks, so much.
Thanks for the question you know we have been continuing to accrue well I may go back to we did finalize last year's tax return.
And the final spillover was about a $1 18 per share or $643 million as we finalize that number and that's what's reflected in the earnings presentation.
As we look into 2023, we continue to accrue excise tax to come to a similar level of spillover to last year, and we're still obviously going through the year and taxes never done until we get through a full year, but we are continuing to accrue excise tax at a similar level.
He was annualized where we are this year to date versus the final expense for last year.
Yeah.
Thanks, Tony.
Yeah.
Yeah.
Our next question is from Finian O'shea with Wells Fargo. Please proceed with your question.
Hi, everyone, sorry, I was on mute.
On the repeat borrower financing statistic you gave up 50% this quarter, which is helpful that you give that.
That appears to have come down from pretty elevated levels in the first half so I'm seeing if there's anything to see there in terms of.
Our completions say of refinancings of your portfolio companies.
There may be some as some of the exits are rolling off are out into the market.
I'll stop there or.
I guess, if you can add as well.
Year to date what percent of your Directionally of your commitments to repeat borrowers are for Refis versus.
M&A. Thank you.
Yes.
Yeah, Hey, Dan its course Schnabel I think on the first part of the question around the.
50% to existing borrowers that's actually consistent with our historical experience. If you look back over in a normal period at 50% to existing borrowers. So I think what you're just seeing is a pickup in activity.
For new borrowers rare.
Relative to the prior few quarters, where obviously that volume was a little more muted and thats what resulted in us returning to that 50% level to existing borrowers. So I don't think theres anything more to see there other than that.
And then on the second part of the question actually I'm, sorry, I don't know it was the you know is.
Is there a change in use of proceeds I don't actually think then we have kind of that analysis run frankly, we can go back and dig a little bit in the numbers, but.
Let it let US go take a look at that and we'll come back to you offline.
Okay. Thank you and a follow up on Ivy Hill do you have a breakdown of.
Say the weighted average duration for the CLO reinvestment periods are those materially shortening like that as.
As we're seeing in the in the BSL CLO market. Thank you.
Yeah, no not really I mean, we continue to actually be able to raise capital there.
I could go back and dig with the team and look at it but it's not something I spend a lot of time thinking about its pretty diversified its combination of.
Loan mandates and C L OS, but niches, Michigan waving at me that he has been as I mentioned I would say, it's not all cielo is an ideal anyway right. There's a lot of the spoke.
Corporate loan mandate bank loans, where we are.
Are able to adjust those maturities year after year and have a consistent basis within Ivy Hill.
There's not a shortening of that and we've been having lots of success refinancing when we needed to do but they are not all sellers is an important point.
Thanks, so much.
Yep. Thanks.
Our next question comes from Aaron sites like Janowicz with Citi. Please proceed with your question.
Thanks.
With 24, looking like it might be a better year for.
Or at least an increase in activity for investing are you expecting.
Exits to be of a similar amount and what are you thinking about in terms of potentially.
Potentially decreasing some of the leverage you have in the portfolio.
Yeah, I mean, they tend to be reasonably reciprocal Aaron. Thanks for the question I would I would think that new deal activity and repayments are likely to pick up next year relative to this year, which has been slower on all those fronts.
Okay.
Good to see your nonaccrual activity.
Ratios came down again, you know what what's your outlook for next year for.
You know expectations with with non accruals I would imagine in the industry.
Let's see a bit of an increase from here.
Yeah, I think you're probably right. I mean are you know this this quarter, where we actually realized a couple of restructurings in situations, where we took ownership of the company, where we continue to be a lender, we actually exited two situations.
That we were not feeling great about and realized to charge offs.
But but charge offs sort of add at the Mark. So I think we carried them well, yeah, I think you're probably right I mean with higher rates.
Being in place now for a while and a general slowdown in the economy that would tell you that the general expectation I think not just at this company, but most of our competitors in the market broadly is the defaults will continue to go up next year.
Thanks.
Thanks.
Yes.
Our next question comes from Casey Alexander with Compass point. Please proceed with your question.
Hi.
Good afternoon.
Just kind of a kind of a kind of a cross cross purposes question, but noticing that you swapped out the due debt maturity into a floater.
You know sort of feels like a call that that it's your expectation that rates have come down and that your cost on that it'll get cheaper otherwise not sure why you would swap it out.
But suggesting that 24 is a better year for deals that originations actually argues that that you think that the economy is going to be okay. In deal activity is going to pick up.
And you know that kind of argues that rates stay higher for longer I'm I'm curious as sort of the cross currents from those two items.
I'm going to turn to penny on the hedging comment because we had.
Quite a lot of debate about that it was a atypical.
From our past practice, but penni do you want to jump into some some thinking there maybe and then we can come back and talk about views on 24, and how we see things and Casey you know your guess is as good as mine around rates, but I'll, let penni come in on the hedging arrangement.
It obviously, none of us have the perfect crystal ball on rates, but in this case, we did a shorter duration three and a half year term loan and it is H ethical has kept sad for us to swap historically, we've tended to just stick with whatever the base rate is on the liability that we've issued in this case with a view.
The forward curve and a matching and looking at our portfolio of being predominantly floating rate assets. It felt like a good opportunity to swap that with the expectation at least at the time, we did it that rates would come down even if we knew that they would stay a little bit higher for longer based on the forward curve.
Yeah.
Yes, I think that's right I mean, I think we're operating today Casey with the belief and everybody has a pretty different view on this even hear these days.
That the base rate is going to be higher for longer I would agree with your commentary that the U S economy seems wallets.
While it's slowing to be.
Pretty pretty okay.
It's great, but I think it's pretty okay, and when you think about our portfolio, which I think is more defensively positioned and as we always mention less oriented towards cyclical companies. We're seeing as we reported EBITDA growth in the portfolio, while slowing substantially better than the economy.
So we're pretty constructive around the economy, we think that'll keep rates higher for longer to your point and I think I'd also just point out maybe to finish its unusual that the fed is.
Really in the market in a material way during a presidential election, and we happen to have one of those coming up next year. So I would expect to have less active fed next year, which would imply.
Higher for longer and that's what we're managing to.
Okay.
Thank you for that my follow up is that you know your rate of non accruals is.
Is.
Terrific Lee low I don't know a better adjective to use for it to what extent have you.
Your companies did your company is actually benefit from recasting their expense base is because of the Covid crisis and how much are they benefiting from the slow nature of this moving economy, that's allowing them to adjust along the way and that's benefiting your portfolio with a lower level of non accruals.
Then you might have expected.
I mean, I think it's a little bit of all of that we did make that point coming out of that really.
Most difficult period of the pandemic because it obviously force companies to really evaluate where they were from a cost perspective that'll happen. When you have no revenue right.
Yeah, well so I do think there is I do think theres some of that.
But look for credit investors and we've been saying this publicly we think this is a is.
As a reasonably good environment right, we've set up our portfolios, we don't need to see a tremendous amount of growth in the portfolio.
Where we have high free cash flow companies, maybe not deleveraging as quickly as they might have hoped with a lower base rate, but still able to deleverage I think this environment is a trickier one for some.
Some of the embedded equity that got put in the ground, particularly in private equity from call. It 2019 to 22, where prices were much higher.
Rates were much lower and expectations for growth were there a lot of those things have been.
Have changed right.
We are feeling again pretty good we appreciate the terrifically good commentary, but we're happy with where the portfolio is that we think it's very manageable for us going forward and we're just locked in making sure that we're early on problem companies and and doing what we've done a long time here, so we feel pretty pretty good about it.
The company's position as I mentioned in the prepared remarks.
Alright, thank you.
Sure Thanks for the questions.
Our next question comes from violence Abraham with UBS. Please proceed with your question.
Hey, everyone. Thanks for the question can you comment a little bit on the industry mix in the backlog it looks like a good chunk of it is as consumer and then just maybe more broadly are you seeing any meaningful divergent and EBITDA trends across industries.
Thank you.
Yeah, I mean, it's yes, it's such a short period of time and the backlog that given that he is pulling it up it probably represents just a handful of transactions and one that happens to be large in the consumer space I wouldn't I wouldn't draw a whole lot.
From frankly that that small sample set.
The origination.
Sort of opportunities are similar now as says as to how they have been all year and in the past.
You know how how we're seeing the mix of the economy and what's creating watchlist items as is the same.
For the most part it tends to be some elements in our health care portfolio as we and others have talked about in past quarters, where some of the practice space and service space.
<unk> care companies haven't been able to raise price as much as some others in Nevada labor issues and shortage issues. There. We've had some of the same concerns and then you know I think a certain portion of the portfolio.
I always describe it as companies that make things right that do have good pricing power have had the ability to put through quite a lot of price increases, but all of a sudden they may have run out of gas on their ability to continue to raise prices on.
Certain items, starting to see a little bit more margin pressure, but more often than not when you look at are ones and twos, which are kind of our watch list names, it's only about 7% of the portfolio and it's pretty diverse you know theres not a lot of comment underpinning their its more company specific than anything else.
Okay got it that's helpful and.
On leverage it sounds like the message there is.
On balance sheet leverage that you're kind of comfortable in this.
ZIP code here right around one one for the fourth.
Perceivable future is that a fair characterization and are there any any conditions.
And in your medium term that could that could change that one way or the other.
Yeah, No I mean, I think it's at the lower end of our target range, but as you know it kind of comes and goes quarter to quarter, depending on the activity I think we feel.
Comfortable being at the lower end because obviously the earnings are so good at the company that being more levered. It doesn't really create a material earnings benefit from here, we actually value having.
Access to the dry powder thinking about both the new investing environment as well as opportunities in the existing portfolio.
Okay, great. Thank you.
Youre welcome.
Our next question is from Robert Dodd with Raymond James. Please proceed with your question.
Hi, and congratulations on the quarter and our credit quality.
Got it.
Couple of Casey's question on this.
Question should we view this as kind of a one time.
<unk> just taken the opportunity of a more of a niche strategy. Obviously, you've got a couple of maturities in 2000 and a couple of more than 25 should should I be assuming you're likely to swap those as well.
If you replace them with like for like kind of structures over.
It might be one off.
Yeah.
Yeah. Thanks for the question honestly, it's hard to say this is something we assess on a deal by deal basis and as I said before it's rare that we actually do this we just thought this was an interesting opportunity in the current market.
So we would look to make this assessment upon each issuance as you know we go into 2024.
We have 1 billion line of maturities that are effectively resolved at this point and so we are well kind of contained to assess when it's appropriate and good for us to go to the market, but when we do that we will make the assessment on sloughing at that time.
Got it. Thank you and then the second one I'm talking about a typical.
Thanks.
You don't know who it's all about.
New defaults or anything like that any kind of credit metric is it's very very good can you give us any kind of I mean is that entirely the result of portfolio companies.
Company performance or has there been any thank you.
Typical behavior from our sponsors may be putting in more equity when it's all ex U a quiet again I wouldn't necessarily expect that but.
The credit quality.
The loans is.
Held in.
Remarkably well.
So any any kind of one is there anything unusual about that or is it just portfolio company performance.
No I don't think there's anything unusual at all I mean, we mentioned in the prepared remarks that to the extent, we've actually look too.
Some of the private equity partners, we've had a long time to support companies with capital.
But more than anything to your question I think we're actually seeing pretty good underlying performance in the portfolio of companies, it's better than I would've expected. If you asked me a year ago, which.
Which is why we're optimistic for 'twenty, four and beyond and I do expect some companies will perhaps have some problem as the clock ticks, along but and that's my expectation for modestly higher defaults, but we're.
I'm pretty constructive on where we are in terms of the economy in the portfolio.
Thank you.
Okay.
Thanks for your questions.
Our next question comes from Kenneth Lee with RBC Capital markets. Please proceed with your question.
Hi, Thanks for taking my question.
Wonder if you could just talk about any kind of outlook in terms of opportunities around.
Being able to partner with banks or you know any.
Any opportunities related to the change in regulatory framework on the bank side there. Thanks.
Sure I mean, I'll I'll go maybe up a level and just say in terms of Ares management and our credit platform here, we see extraordinary opportunity to potentially partner with the banks.
We bought a sizable portfolio as folks had seen from a bank this year.
And the dialogue around the banks and some of their.
Concerns relative to their balance sheets and their capacity continues to drive a lot of really interesting conversations with those counterparties.
But to come back into this company, specifically, well I think that Ares capital Corporation can potentially participate in those opportunities I think there are other parts of the credit platform that are frankly more engaged in those discussions because as you know most banks, which is obviously why.
Companies had so much success and it's just gotten so large really don't engage in middle market corporate lending anymore.
So our expectation that they would be selling the types of loans that this company would want to buy.
It seems to me at least to be pretty low most of the assets that we think will eventually.
Be discussed and potentially for sale from some of the banks probably are a little bit outside of the mandate of this company, but I can tell you that as a platform. Those discussions are very vibrant and I would expect them to be ongoing for a while.
Got you very helpful. There.
And then one final follow up question.
Actually just a follow up on Roberts question previously in terms of the portfolio support Youre seeing.
One of you just provide a little bit more color around there.
In terms of I think in your prepared remarks, you said you were relatively pleased with what Youre seeing I Wonder if you could just expand upon that.
I'm sorry.
I missed that there for a second.
Yes, again on that one please.
Just in terms of the portfolio.
<unk> will support you're seeing from the sponsors.
In the prepared remarks, you mentioned Youre really really pleased with what youre seeing so far I'm wondering if you could just provide a little bit more color or expand upon those remarks there. Thanks.
I think I think we're pleased with the support that we've seen from the private equity community.
I don't really know what else to say I mean when asked.
In situations, where it's required we've seen partners and private equity companies and obviously feel good about their continued ownership in those companies I mean, the good news here is.
We are as a team have been doing this with a lot of the same private equity firms for a long time.
It's very common that we have several if not more than several investments with a single private equity firms. So that relationship and that trust has been built over time and we've just seen great partnership from that community as they try to figure things out and as I mentioned I think it's a more challenging environment to be an owner of <unk>.
That's today than it has to be a lender to those assets.
Because when problems occur.
The dialogue tends to be one of us turning to ownership and saying, what's the plan and very often the plan is equity supports required and we've seen it fall I'm pretty pretty well and the benefit also of being leveraged 40% or 30% to 40% loan to value provides a lot of cushion such that in a slower environment.
The actual owners or how.
As you can see willing to put money in because you know they.
And we've been the beneficiaries of being where we sit in the cap structure.
It's they need to but they also.
Our doing it economically right theyre looking at investments that they've made.
And what are good companies that they want to support and own and while maybe the duration of their investment is going to extend a little bit and perhaps the return on that investment has to come down over time.
With higher rates there they are supporting these companies because they view that follow on support as a good investment right. One that's going to generate a return for their investors.
And that gives us lot of confidence that we have strong partners.
And that we're invested in good companies.
Got you very helpful. There. Thanks again.
Sure Youre welcome sorry, I missed the first time around.
Our next question comes from Mark Hughes with Truest Securities. Please proceed with your question.
Yes.
Good morning, and good afternoon.
Kipp you mentioned the leverage finance market, it's less constructed the new transactions you pointed out how are you.
The $1 billion plus unit tranche.
Was becoming more.
Prevalent with that a function of the broader transition to private credit or was that maybe are influenced by some of the well.
Volatility later in the market that are later in the quarter that you mentioned around.
Higher for longer.
Political uncertainty.
Yeah, I mean, I'm going to let Paul.
Jump into if you'd like to I would say you know to answer your question simply it's both.
Right. So I think over a long period of time the private credit.
Marketplace has been demonstrating.
The counterparties that it has a very attractive.
Solution for borrowers and owners that.
It can get achieved particularly in scale. These days away from the public markets.
So more and more adoption more and more recognition from our counterparties that the products that we're providing.
Again scale flexible customized et cetera to each solution are actually really attractive and and.
Support their investment thesis on the equity side that of course accelerates during periods of higher market volatility. So over the last few quarters, it's probably both but I think the long term arrow is very much to your question pointing towards higher and higher percentage of deals getting done with private capital.
It seems to me the numbers support fewer deals, particularly smaller you know billions 2 billion in under getting done away from the syndicated markets I.
I think our primary competitive advantage is certainty and over over the banks, which are.
Often they provide less certainty and so in periods of volatility we're going to win with that advantage, but then when banks will step back into the market and less volatile times people remember.
That volatility can come again and that certainty is valuable and so that just creates permanent market share shifts.
And it is not linear over time, but that as Kip said that trend toward that permanent shift we believe we will continue.
Understood.
It kind of approach here quite a question, maybe a little different way.
Do you get the sense to anybody the portfolio companies are foregoing capex or hiring if we're going to be higher for longer in terms of interest rates.
Or are they keeping ahead of the game in terms of a good EBITDA growth you've described or.
Excuse me I think you've noticed that.
2024, the outlook is for little more pressure on credit just the passage of time.
If interest rates don't decline will that passage of time, just put the natural pressure on them.
On credit.
Yeah, I mean I'd have to answer the first part of your question, which I think is the most interesting question that's sort of what we're all watching and talking to companies about alright, because the reality is we're sitting in an environment, where you're actually seeing pretty good economic performance again across the portfolio of reasonable growth, even if it's slow.
But all of a sudden companies that are achieving plan or are close to achieving plan.
I have a lot less cash flow around than they had right so servicing debt.
They obviously need to put the utmost focus on is that changing the way they run their business or they're making fewer investments.
Great question, it's like the.
The question that we're talking to all of our company is about.
To understand that but I think thats.
The answer to that question, which I don't have today will dictate sort of where the economy goes in 'twenty four and beyond.
I appreciate that thank you.
Thanks for your question.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question comes from Ryan Lynch with K B W. Please proceed with your question.
Hey, good afternoon.
My first question was just on the broadly syndicated loan markets.
Were pretty weak at the end of 2022 and as well as at the beginning of 2023, but in the previous in the third quarter, you're starting to see a lot more activity.
Back to the broadly syndicated loan market and again still relatively low relative to what private credit and direct lenders are doing I'm just curious with the most recent volatility.
It's just a broadly syndicated loan market still an option for borrowers out there or does that take a pretty big step back from the sort of momentum starting to kick in the third quarter.
Yeah, I mean the.
So.
Trying to come back right needs the CLO machine to function again, obviously and that's the largest buyer in this space and I think the banks today are our structuring to ratings frankly, too cheap btu ratings in larger deals they feel confident they can syndicate so to the extent it fits that profile very much an option to the extent it doesn't fit that profile.
It kind of comes to us and others.
Okay. So it just goes back to your comment on kind of a larger deals still having that option Lauren for high quality deals, but some of the smaller multibillion dollar term loans that get us to the market's open other stuff not so much.
And then the other question is.
Your opinion I know you talked about.
The most recent bond offering and swapping that right out of them and one of the questions I just had with that is.
<unk>, a swap or not swapped that out I understand the commentary on that but.
Was there any consideration for instead of doing it and additional unsecured bond just drawing down on the credit facility.
You would have a better spread you would reduce some commitment fees you still have that optionality, where if rates do go lower you would actually have a lower.
Overall yield on that on that on that debt as well as you guys have over 70% unsecured debt on your liability structure. So it's not like you guys.
Have a had a big need for.
Further unsecured euro for our liability structure. So I was just wondering how is the decision from.
Swapping out unsecured debt versus just drawing on the credit facility made.
No I think it's a great question as you know you can see from our capital structure. We have raised a lot of secured debt through revolving credit facilities and have continued to do so even into this year.
Well, we like to look at all of the capital markets in which we go to market for the liability structure and we care about the ladder and the maturities and the access to capital from multiple sources and.
And we are looking forward to debt maturities over the next one to three years. So we felt like it made sense to go cap back end to the investment grade market.
As one of those many sources of capital that we have if you look at where we swapped it to while higher than most of our credit facilities. It is still lower than our highest priced credit facility.
A little bit so it's in line with the revolvers and by Fluffing. It does give us the opportunity to ride it out and if you believe the curve when that happens over the three and a half year 10 years. So a lot of this is about continuing to build an appropriate capital structure.
And also think about a lot of our maturities. We did have a window in 2027 without much maturing on a relative basis and even with this issuance itself 1 billion won and the term debt market in 2007. So it just helps us continue to build out that ladder and access to multiple sources of capital.
Tina look to both markets, but I also think our team's done a great job of continuing to.
Got more capital and on the secured revolving rsi floating rate side, but it takes really all components to make the balance sheet.
Okay.
And there's a lot of dynamics that go into this.
Thats all from me I appreciate your time today.
Yeah.
Thanks, Brian .
This concludes our question and answer session I'd like to turn the conference back over to Mr. Kip to Vir for any closing remarks.
As usual I don't have any other than to say thanks for taking the time to join the call and appreciate the good questions and hope everybody has a great day and a great week.
Thank you ladies and gentlemen, this concludes our conference call for today, if you missed any part of the pie.
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