Q4 2023 Ares Capital Corp Earnings Call

Good morning, welcome to the Ares Capital Corporation's fourth quarter and year ended December 31st 2023 earnings Conference call.

Operator: Welcome to the Ares Capital Corporation's fourth quarter and year-ended December 31st, 2023 earnings conference call. At this time, all participants are in a listen-only mode.

At this time all participants are in a listen only mode. As a reminder, this conference is being recorded on Wednesday February.

Operator: As a reminder, this conference is being recorded on Wednesday, February 7th, 2024. I'll now turn the call over to John Stilmar, partner of Ares Public Markets Investor Relations. Please go ahead.

'twenty 'twenty four I'll now turn the call over to John Steele more partner of Ares public markets Investor Relations. Please go ahead Sir.

John Stilmar: 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 that are subject to risks and uncertainty. 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 file. The company is under no obligation to update any such forms.

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 are 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.

Ares 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.

John Stilmar: Please also note that past performance or market information is not a guarantee of future results. During the profit 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's a simple method the company uses to measure its financial condition and results of operations. A Reconciliation of Gaps in Net Income per Share, the most correctly comparable gap financial measure to Core ETF, can be found in the accompanying slide presentation for this call. In addition, the reconciliation of these measures may also be found in our earnings presentation filed this morning with the SEC on Form 8. Certain information discussed in this conference call and the accompanying slide presentation, including information relating to portfolios, has survived from third-party sources and has not been independently verified. And accordingly, the company makes no representation or warranty with respect to such information.

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 operation.

A reconciliation of GAAP net income per share the most directly comparable GAAP financial measure to core EPS can be found in the accompanying slide presentation for this call. In addition, a reconciliation of these measures may also be found in our earnings presentation filed this morning with the SEC on form 8-K.

Certain information discussed in this conference call and the accompanying slide presentation, including information relating to portfolio companies was derived from third party sources and has not been independently verified and accordingly, the company makes no representation or warranties with respect to this information.

John Stilmar: The company's fourth quarter, December 31st, 2023 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the fourth quarter, 2023 earnings presentation link on the homepage of the Investor Resource Center. Corporation, Earnings Relief, and Form 10-K are also available on this website. I'm now going to call over to Mr. Kip Tebir, Ares Capital Corporation's Chief Executive Officer.

Company's fourth quarter December 31, 2023 earnings presentation can be found on the company's website at Www Dot Ares Capital Corp Dotcom.

On the fourth quarter of 2023 earnings presentation link on the homepage of the Investor Resources section.

Capital Corporation earnings release, and Form 10-K are also available on this website.

I'll now turn the call over to Mr. Kip to Dear Ares Capital Corporation's Chief Executive Officer, Ken. Thanks.

Kip DeVere: Thanks, John. Hello everyone, and thanks for joining our earnings call today. I'm here with our co-presidents, Court Schnabel and Ms. Goldstein, our chief operating officer, Jana Markiewicz, or chief financial officer, Penny Roll, our chief accounting officer, Scott Lem, and other members of the management team. For those who may not have seen our announcement, Scott Lem has been appointed as our new chief financial officer, effective February 15th.

Thanks, John.

Hello, everyone and thanks for joining our earnings call today, I'm here with our co presidents, CT Schnabel, and Mitch Goldstein, our Chief operating Officer Jana Markowitz.

Our Chief Financial Officer Penni roll.

Our Chief Accounting Officer, Scott Lamb, and other members of the management team.

Yeah.

For those who may not have seen our announcement, Scott Lamb, who has been appointed as our new Chief Financial Officer effective February 15th.

Kip DeVere: Scott has been a key business leader within our finance and accounting team for more than two decades, and he has been instrumental in helping us drive growth and success at ARCC over our many years together. Along with this announcement, the company wants to thank Penny Roll for the tremendous contribution she has brought to our company over the past 14 years. As many of you know, she joined us with the acquisition of Allied Capital back in 2010 and has been a great partner to me and everyone on the team. And thankfully, she's staying with Ares in a senior leadership role, and it's noteworthy that Penny will also remain an officer of Ares Capital. Scott and Penny's new appointments underscore the depth and quality of our team, and we look forward to both continuing to serve Ares Capital in their new roles. Now to our strong results.

Scott has been a key business leader within our finance and accounting team for more than two decades, and he has been instrumental in helping us drive growth and success.

At ARCC over many years together.

And with this announcement the company wants to think penni roll for the tremendous contribution she has brought to our company over the past 14 years.

As many of you know she joined US with the acquisition of Allied capital back in 2010, and it's been a great partner to me and everyone on the team.

And thankfully she's staying with Aries and his senior leadership role and it's noteworthy that Penni will also remain an officer of Ares capital.

Scott and pennies, new Appointment's underscores the depth and quality of our team and we look forward to both continuing to serve Ares capital in their new roles.

Now to our strong results.

Kip DeVere: This morning, we reported another quarter of increased core earnings of $0.63 per share, which culminated in a year of record core earnings of $2.37 per share. These results largely reflect the continued strong credit performance of our portfolio and the earnings benefits of higher market interest rates on our net interest income. The strength of our earnings and positive valuation momentum in our portfolio also led to growth in our book value per share, which increased 5% year-over-year and reached a new record of $19.24 per share. In addition, our regular dividend of $1.92 per share for 2023 increased 10% over the 2022 regular dividend.

This morning, we reported another quarter of increased core earnings of 63 cents per share, which culminated in a year of record core earnings of $2 37 per share.

These results largely reflect the continued strong credit performance of our portfolio and the earnings benefits of higher market interest rates on our net interest income.

The strength of our earnings and positive valuation momentum in our portfolio also led to growth in our book value per share, which increased 5% year over year and reached a new record of $19.24 per share.

In addition, our regular dividend of $1 92 per share for 2023 increased 10% over the 2020 to regular dividend.

Kip DeVere: We're proud of our long-term track record of delivering stable and consistent dividends to our shareholders. We remain one of the few BDCs that's been able to build NAV while delivering an average dividend yield of roughly 10% on NAV over our 20-year history. Our strong results in 2023 and over the past several years reflect the market share gains that direct lenders like ARCC have enjoyed due to the greater certainty of execution, larger final hold amounts, and enhanced flexibility provided to companies. As an example, in 2023, over 90% of new LBOs were completed by direct lenders rather than through banks or bank-led syndications.

We're proud of our long term track record of delivering stable and consistent dividends to our shareholders.

We remain one of the few bdcs, that's been able to build N. A V. While delivering an average dividend yield of roughly 10% on the NAV over our 20 year history.

Our strong results in 2023 and over the past several years reflect the market share gains that direct lenders like ARCC have enjoyed due to the greater certainty of execution.

Larger final hold amounts and enhanced flexibility provided to companies.

As an example in 2023 over 90% of New L. B O. This work completed by direct lenders rather than through banks or bank lead syndications.

Kip DeVere: And while the markets were slower last year, we believe we saw substantial market share gains overall. Although many more traditional lenders are now returning to the market, and the syndicated loan and high yield markets seem to be finding their footing, we believe more borrowers recognize our ability to partner with them in support of their long-term growth objectives even during volatile and dip-located markets. In 2023 and into 2024, we've witnessed large, high-quality companies that were traditionally financed by the broadly syndicated markets turn to us to refinance their capital structures, not because they were unable to access the public markets, but because they prefer the stability that we provide through market cycles. By leveraging the broader scale of Ares' U.S.

And while the markets were slower last year, we believe we saw substantial market share gains overall.

Although many more traditional lenders now returning to the market and the syndicated loan and high yield markets seem to be finding their footing. We believe more borrowers recognized our ability to partner with them in support of their long term growth objectives, even during volatile in dislocated markets.

In 2023 and into 2024, we've witnessed a large high quality companies that were traditionally financed by the broadly syndicated markets turned to us to refinance their capital structures not because they were unable to access the public markets, but because they preferred the stability that we provide through market.

Nichols.

Kip DeVere: Through our Direct Lending platform, we believe we can unlock value for a wide range of businesses, whether they are large, high-quality companies seeking multibillion-dollar financings or strong-performing, core middle-market companies seeking a lender with flexible capital and the ability to support growth over time. Borrower demands for dependable financing partners are not exclusive to the larger end of the middle market, as we're also seeing many core middle market companies seeking our financing solutions As an example, the number of transactions we reviewed in 2023 for companies with EBITDA less than $100 million expanded 30% year over year. Our differentiated deal flow also stems from our ability to provide capital in situations where significant technical expertise is required or there is a high degree of complexity, particularly in industries such as software and technology and specialty health care. Financial Services, Infrastructure, and Power, and Sports Media and Entertainment, just to name a few.

Short growth overtime.

[noise] borrower demand for dependable financing partners is not exclusive to the larger under the middle market. As we're also seeing many core middle market companies seeking our financing solutions. As an example, the number of transactions. We reviewed in 2023 for companies with EBITDA less than $100 million expanded 30.

<unk> percent year over year.

Our differentiated deal flow also stems from our ability to provide capital in situations, where significant technical expertise is required or there is a high degree of complexity, particularly in industries, such as software and technology specialty health care.

Financial services infrastructure, and power and sports media and entertainment just to name a few we.

Kip DeVere: We believe that our capabilities have resulted in us transacting with a growing number of borrowers. Ultimately, we believe the breadth of our sourcing capabilities drives better selectivity, which in turn leads to better credit outcomes, and ultimately differentiates our performance relative to other market participants. Reflecting this focus on our sourcing capabilities, we estimate that we reviewed more than $500 billion of transaction opportunities in 2023.

We believe that our capabilities have resulted in us transacting with a growing number of borrowers.

Ultimately, we believe the breath of our sourcing capabilities drives better selectivity, which in turn leads to better credit outcomes and ultimately differentiates our performance relative to other market participants.

Reflecting this focus on our sourcing capabilities, we estimate that we reviewed more than $500 billion of transaction opportunities in 2023 and during the fourth quarter. We saw more transactions than were reported in the broadly syndicated loan and middle market combined.

Kip DeVere: And during the fourth quarter, we saw more transactions than were reported in the broadly syndicated loan and middle market combined. We believe our high selectivity and rigorous underwriting supports our historical track record of maintaining a relatively low level of non-accruals and generally healthy credit performance, and currently, we're seeing strong organic EBITDA growth in our portfolio companies and a below average level of non-accruing loans. Through the fourth quarter, we continued to collect 99% of contractual interest, and the weighted average interest coverage ratio of our portfolio companies remained stable quarter over quarter. Further, augmenting the health of our portfolio is a significant value to our loans. We estimate that the weighted average LTV of our total loan portfolio, including our junior capital investments, is around 43%.

We believe our high selectivity and rigorous underwriting supports our historical track record of maintaining a relatively low level of non accruals and generally healthy credit performance.

And currently we are seeing strong organic EBITA growth of our portfolio companies and a below average level of non accruing loans.

Through the fourth quarter, we continued to collect 99% of contractual interest and the weighted average interest coverage ratio of our portfolio companies remained stable quarter over quarter.

Further augmenting the health of our portfolio is of significant value junior to our loans we.

We estimate that the weighted average LTV of our total loan portfolio, including our junior capital investments is around 43%.

Kip DeVere: Our junior capital investments have attractive returns, with LTVs that are comparable to liquid-first mean structures. We believe that our ability to selectively invest in junior capital for relative value, often in much larger companies, differentiates our platform from senior-only competitors. Our ability to invest relative value across the capital structure and generate incremental risk-adjusted returns on junior capital investments has been a hallmark of our company and a significant contributor to our results over the past two decades. Given our size and long-term financing relationships, we maintain a strong capital position with excess liquidity in order to navigate market cycles and to be opportunistic when we see growing borrower demand. Our current net debt-to-equity level is reasonably low relative to historical standards, at around 1.02 times.

Our junior capital investments have attractive returns.

With Ltvs that are comparable to liquid first lien structures.

We believe that our ability to selectively invest in junior capital for relative value often in much larger companies differentiates our platform from senior only competitors.

Our ability to invest for relative value across the capital structure and generate incremental risk adjusted returns and junior capital investments has been a hallmark of our company and a significant contributor to our results over the past two decades.

Given our size of long term financing relationships, we maintain a strong capital position with excess liquidity in order to navigate market cycles and to be opportunistic when we see growing borrower demand.

Our current net debt to equity level is reasonably low relative to historical standards at around 1.02 times. This leaves us with additional earnings upside if we choose to operate with expanded leverage and plenty of capital to pursue what we feel are attractive new investments.

Penelope F. Roll: This leaves us with additional earnings upside if we choose to operate with expanded leverage and plenty of capital to pursue what we feel are attractive new investments. Our available liquidity was further enhanced in January 2024 with the issuance of a five-year unsecured note at industry-leading prices. With that, I'll turn the call over to Penny to provide more details on our financial results and some further thoughts on our balance sheet. Thanks, Kip.

Our available liquidity was further enhanced in January 2024, with the issuance of a five year unsecured note at industry leading pricing.

With that let me turn the call over to Penni to provide more details on our financial results and some further thoughts on our balance sheet.

Thanks Kipp.

Penelope F. Roll: We reported a gap net income per share of $0.72 for the fourth quarter of 2023 compared to $0.89 in the prior quarter and $0.34 in the fourth quarter of 2022. For the year, we reported a gap net income per share of $2.75 compared to $1.21 in 2022. On a core basis, we matched our record level of core earnings per share of $0.63 for the fourth quarter of 2023 compared to $0.59 in the prior quarter and $0.63 in the fourth quarter of 2022. We continue to see the benefits of higher base rates on our predominantly floating rate portfolio in the fourth quarter of 2023 as our interest in dividend income increased from both the prior quarter and the fourth quarter of the prior year. Additionally, we saw the benefits of an improving investing environment resulting in higher capital structure and service fees from our highest origination quarter of the year. Our stockholders' equity ended the quarter at $11.2 billion, or $19.24 per share, which is more than a 1% increase per share over the prior quarter and a 5% increase per share over the prior year-end.

We reported GAAP net income per share of <unk> 72 cents for the fourth quarter of 2023 compared to 89 cents in the prior quarter and 34 cents in the fourth quarter of 2020 to.

For the year, we reported GAAP net income per share of $2 75 and <unk>.

<unk> to $1 21 times for 2022.

On a core basis, we matched our record level of core earnings per share of 63 for the fourth quarter of 2023 compared to 59 cents in the prior quarter and 63 cents in the fourth quarter of 2022.

We continue to see the benefits of higher base rates on a predominantly floating rate portfolio in the fourth quarter of 2023, other interest and dividend income increased from both the prior quarter and fourth quarter of the prior year.

Additionally, we saw the benefits of an improving investing environment, resulting in higher capital structuring service fees from our highest origination quarter of the year.

Our stockholders' equity ended the quarter at $11.2 billion or $19.24 per share, which is over a 1% increase per share over the prior quarter and a 5% increase per share over the prior year at <unk>.

Penelope F. Roll: Our annualized return on equity for 2023 using GAAP EPS and Core EPS was 14.6% and 12.6%, respectively. This strong level of profitability further builds upon our long-term track record of a 12% total return on NAVs since inception. Our portfolio at fair value ended the quarter at $22.9 billion, up from $21.9 billion at the end of the third 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 costs was 12.5% at December 31st, 2023, which increased from 12.4% at September 30, 2023 and 11.6% at December 31, 2022. The weighted average yield on total investments at amortized cost was 11.3%, an increase from 11.2% at September 30, 2023 and 10.5% at September 31, 2022.

Our annualized return on equity for 2023, using GAAP EPS and core EPS was 14, 6% and 12, 6% respectively.

This is John level of profitability further builds upon our long term track record of a 12% total recurring on mob since inception.

Our portfolio at fair value you ended the quarter at $22 $9 billion up from $21 9 billion at the end of the third 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, 5% at December 31 2023.

Which increased from 12, 4% at September 32023, and 11, 6% at December 31st 2022.

The weighted average yield on total investments at amortized cost was 11, 3%, which increased from 11, 2% at September 32023, and 10, 5% at December 31st 2022.

Penelope F. Roll: Sticking to our capitalization and liquidity, we continue to benefit from the depth of our relationships we have built with our secured lenders over 20 years and with our investment-grade note holders over more than a decade. As the most tenured BDC issuer in the unsecured notes market, we capitalized on investor demand in the fourth quarter by reopening our three-year unsecured notes and ultimately executing the transaction at a better all-in yield than our original issuance. The initial issuance, which was done during the third quarter of 2023, was our first issuance in over 18 months, underscoring the merits of our approach to maintaining deep levels of liquidity, which, amongst other benefits, allows us to be patient and tactical in how we access the capital market. As a continuation of this theme, we capitalized on market demand for our notes at the start of the year and chose to enter the high-grade unsecured market once again. Given the constructive market and the deep support of our investors, we were able to issue $1 billion of long five-year notes at a market-leading spread.

Shifting to our capitalization and liquidity, we continue to benefit from the depth of our relationships. We have built with our secured lenders over 20 years and with our investment grade note holders over more than a decade.

As the most tenured EDC issuer in the unsecured notes market, we capitalized on investor demand in the fourth quarter by reopening our three year unsecured notes and ultimately executing the transaction at a better all in yield than our original issuance.

The initial issuance, which was done during the third quarter of 2023 was our first issuance in over 18 months underscoring the merits of our approach to maintain deep levels of liquidity, which amongst other benefits allows us to be patient and tactical in how we access the capital markets.

As a continuation of this theme we capitalized on the market demand for our notes at the start of the year and chose to enter the high grade unsecured market once again.

Given the constructive market and the deep support of our investors, we were able to issue $1 billion of long five year notes at market leading spreads.

Penelope F. Roll: This issuance represented our single largest initial issuance in the high-grade unsecured market in our history and the largest BDC issuance done this year, underscoring our market-leading execution. This is our only term maturing in 2029, as we continue to extend out our maturity to maintain a well-laddered maturity profile and to further strengthen our solid balance sheet position. We have built what we believe is a best-in-class, investment-grade capital structure with a diversified base of over 275 bank lenders and debt investors, providing for meaningful access to the capital markets and significant unfunded revolving commitments. As always, we are grateful for their continued support of Ares Capital. We believe that our liquidity position remains strong, with approximately $6.4 billion of total available liquidity, including available cash, per forma for the recent $1 billion of notes issued a few weeks ago.

This issuance represented our single largest initial issuance and the high grade unsecured market in our history and the largest BDC issuance done this year.

Underscoring our market leading execution.

This is our only term debt maturing in 2029, as we continue to extend out our maturities to maintain a well ladder maturity profile and to further strengthen our solid balance sheet position.

Yeah.

We have built what we believe is the best in class investment grade capital structure with a diversified base of over 275 bank lenders and debt investors, providing for meaningful access to the capital markets and significant unfunded revolving commitments.

As always we are grateful for their continued support of Ares capital.

Okay.

We believe that our liquidity position remains strong with approximately $6 $4 billion of total available liquidity, including available cash pro forma for the recent $1 billion of notes issued a few weeks back.

We ended the fourth quarter with a debt to equity ratio net of the available cash of one point or two times as compared to 1.03 times a quarter ago.

Penelope F. Roll: We ended the fourth quarter with a death-to-equity ratio, net of the available cash, of 1.02 times as compared to 1.03 times a quarter ago. We believe our significant amount of dry powder positions us well to continue to support our existing portfolio commitments, to remain active in the current investing environment, and to have no refinancing risk with respect to this coming year's term debt maturity. We declared a first quarter dividend for 2024 of 48 cents per share. This dividend is payable on March 29th, 2024 to stockholders of record on March 15th, 2024, and it's consistent with our fourth quarter 2023 dividend.

We believe our significant amount of dry powder positions us well to continue to support our existing portfolio commitments.

We remain active in the current investing environment and have no refinancing risks with respect to this coming years turned out maturities.

Okay.

We declared a first quarter dividend for 'twenty 'twenty four of 48 cents per share. This dividend is payable on March 29, 2024 to stockholders of record on March 15th 2024, and is consistent with our fourth quarter 2023 dividend.

In terms of our taxable income spillover. We currently estimate that we ended 2023 with approximately $635 million or one dollar and nine cents per share from 'twenty to 'twenty three for distribution to stockholders in 2024.

Court Schnabel: In terms of our taxable income spillover, we currently estimate that we ended 2023 with approximately $635 million, or $1.09 per share, for distribution to stockholders in 2024. This estimated spillover level is more than two times our current regular quarterly dividends, which we believe is very beneficial to the stability of our dividends. Before I finish, I would like to say that it has been my distinct honor to have served as the Chief Finance Officer of Ares Capital and to have had the opportunity to work for the benefit of our investors and lenders. I have been fortunate to be a part of this incredible team that has proactively built this company over the years. Scott and I have been in this together for my full tenure here, and I am very pleased that he will be our next CFO.

This estimated spillover level is more than two times, our current regular quarterly dividend, which we believe is very beneficial to the stability of our dividend.

Before I finish I would like to say that it has been my distinct honor to have served as the chief financial officer of Ares capital and to have had the opportunity to work for the benefit of our investors and lenders.

I've been fortunate to be a part of this incredible team that has collaboratively built this company over the years.

Scott and I have been in this together for my full tenure here and I am very pleased that he will be our next CFO.

I would like to express my deepest gratitude to him and our talented and dedicated finance and accounting Investor relations legal and compliance and investing teams. His tireless efforts have contributed to our collective success.

Court Schnabel: I would like to express my deepest gratitude to him and our talented and dedicated finance and accounting, investor relations, legal, and compliance, and investment teams, whose tireless efforts have contributed to our collective success. I am excited to continue as an officer of ARCC and to remain a part of Ares. And with that, I will now turn the call over to Court to walk through our investment activity. Thanks, Penny.

I am excited to continue as an officer of ARCC and to remain a part of Ares.

And with that I will now turn the call over to Clark to walk through our investment activities.

Thanks Patty.

To spend a few minutes, providing more details on our investment activity, our portfolio performance and our positioning for the fourth quarter and the year.

I will then conclude with an update on our post quarter end activity backlog and pipeline.

Court Schnabel: I'm now going to spend a few minutes providing more details on our investment activity, our portfolio performance, and our positioning for the fourth quarter of the year. I will then conclude with an update on our post-quarter-end activity, backlogs, and pipeline. Over the course of 2023, our team originated nearly $6 billion of new investment commitments across 200 transactions, including $2.4 billion of commitments to 74 different borrowers in the fourth quarter alone. Further building on our leadership position in the market after ARCC had the highest level of origination of any publicly traded BDC in Q3, our new commitments in the fourth quarter increased almost 50% quarter over quarter. This growth is in sharp contrast to the reported broadly syndicated market volume and the middle market per refinitive, both of which decreased quarter over quarter. One benefit of the Ares platform that was particularly valuable for us in 2023 and which stems from the scale we have built over the past 20 years is the benefit of incumbency.

Over the course of 2023, our team originated nearly $6 billion of new investment commitments across 200 transactions, including $2 4 billion of commitments to 74 different borrowers in the fourth quarter alone.

Further building on our leadership position in the market. After ARCC had the highest level of originations of any publicly traded BDC in Q3, our new commitments in the fourth quarter increased almost 50% quarter over quarter.

This growth is in sharp contrast to the reported broadly syndicated market volume in the middle market proliferative, both of which decreased quarter over quarter.

One benefit of the Ares platform that was particularly valuable for us in 2023, and which stems from the scale. We have built over the past 20 years is the benefit of incumbency.

Even during the less active market environment. We saw in 2023, we continued to find attractive investment opportunities from our existing portfolio companies, which represented approximately two thirds of our commitments during the year.

I further investing in our incumbent companies that we have a relationship with and know well.

We believe we can reduce underwriting risk and drive better credit performance.

Our new investments during the year, we're in a diverse set of companies across more than 20 distinct industries and included opportunities in both senior and junior capital investments, reflecting the continued benefit of our flexible strategy to invest across the capital structure as Kip mentioned.

Court Schnabel: Even during the less active market environment we saw in 2023, we continued to find attractive investment opportunities from our existing portfolio companies, which represented approximately two-thirds of our commitments during the year. By further investing in our incumbent companies that we have a relationship with and know well. We believe we can reduce underwriting risk and drive better credit performance. Our new investments during the year were in a diverse set of companies across more than 20 distinct industries and included opportunities in both senior and junior capital investments, reflecting the continued benefit of our flexible strategy to invest across the capital structure, as Kit mentioned. The EBITDA of the companies we financed this year ranged from less than $20 million to over $800 million, which further demonstrates the breadth of our sourcing capabilities. Our new investments will lead to what we believe are high quality opportunities that present opportunities for attractive risk-adjusted returns, especially compared to the broadly syndicated low-income. For example, ARCC's newly-originated first-string loans in 2023 had average spreads of 625 basis points, at an average LPV of only 33 percent.

The EBITDA of the companies, we finance this year range from less than 20 million to over 800 million, which further demonstrates the breadth and our sourcing capabilities.

Our new investments were made into what we believe are high quality companies that present opportunities for attractive risk adjusted returns, especially compared to the broadly syndicated loan market.

For example, arcc's newly originated first lien loans in 2023 had average spreads of 625 basis points and an average LTV of only 33%.

These senior loans had spreads that were approximately 200 basis points wider and had equity cushions that were more than 30% higher than L. B O's completed in the broadly syndicated loan market in 2023 based on data reported by LCD.

Shifting to our portfolio as of year end 2023, our strong and growing portfolio remains well diversified across 505 different borrowers.

The number of companies in our portfolio has increased 8% over the past year and 47% over the past five years.

To dig a little deeper our average hold size is only 0.2% at fair value.

Excluding our investments in Ivy Hill, SDLP, which we believe our diversified on their own no single investment accounts for more than 2% of the portfolio at fair value and our top 10 largest investments totaled just 12% of the portfolio at fair value.

Court Schnabel: These senior loans had spreads that were approximately 200 basis points wider and had equity cushions that were more than 30 percent higher than LBOs completed in the Broadway syndicated loan market in 2023, based on data reported by LCD. Shifting to our portfolio, as of year-end 2023, our strong and growing portfolio remains well-diversified across 505 different borrowers. The number of companies in our portfolio has increased 8% over the past year and 47% over the past five years. To dig a little deeper, our average hold size is only 0.10% at Fairbanks. Excluding our investments in Ivy Hill and the SDLP, which we believe are diversified on their own, no single investment accounts for more than 10% of the portfolio at fair value.

The significant diversification of our portfolio differentiates us from our competitors as it reduces the impact to the overall portfolio from any single negative credit event and individual company.

As Kipp mentioned, the fundamentals and overall credit performance of our portfolio remained healthy.

The weighted average EBITDA of our underlying portfolio companies demonstrated increased growth in the fourth quarter expanded 9% year over year up from 6% in the prior quarter.

This compares to an estimated flat earnings growth rate for the S&P 500 over the last 12 months.

As a reminder, the EBITA growth of our portfolio companies. We report excludes the impact from acquisitions as our goal has always been to provide investors with a view into the organic growth of our portfolio.

We are seeing this healthy level of positive EBITDA growth across both our senior and junior capital investments as well as our larger and smaller companies.

Court Schnabel: And our top 10 largest investments total just 12% of the portfolio at fair value. The significant diversification of our portfolio differentiates us from our competitors as it reduces the impact on the overall portfolio from any single negative credit event in an individual company. As Kit mentioned, the fundamental and overall credit performance of our portfolio remains strong. The weighted average EBITDA of our underlying portfolio companies demonstrated increased growth in the fourth quarter, expanding 9% year-over-year, up from 6% in the prior quarter. This compares to an estimated flat earnings growth rate for the S&P 500 over the last. As a reminder, the EBITDA growth of our portfolio companies we report excludes the impact of acquisitions, as our goal has always been to provide investors with a view into the organic growth of our products.

In addition, the EBITDA of our top five largest industries in aggregate is growing at a faster rate than the overall portfolio.

This underscores what we believe is one of the many merits of not being a benchmark style investor as we are able to be selective not only in regard to the companies. We are financing, but also to the industries, we target more generally.

With respect to our portfolio grades the weighted average portfolio grade of our borrowers at cost was stable with last quarters $3 one.

Non accruals at cost ended the year at one 3%.

Low the one 7% at year end, 2022, and well below our 3% 15 year historical average and the K B W. BDC average of three 9% for the most recent 15 year period available.

Court Schnabel: We are seeing this healthy level of positive EBITDA growth across both our senior and junior capital investments, as well as our larger and smaller companies. In addition, the EBITDA of our top five largest industries, in aggregate, is growing at a faster rate than the overall portfolio. This underscores what we believe is one of the many merits of not being a benchmark style investor, as we are able to be selective, not only in regard to the companies we are financing but also to the industries we target more generally. With respect to our portfolio grade, the weighted average portfolio grade of our borrowers at cost was stable at last quarter's 3.1.

Our non accrual rate at fair value remained consistent with last quarter at 6%, which continues to be well below historical levels for our company as well.

Sure.

Finally, I'll provide a brief update on our post quarter end investment activity and pipeline.

January one through February one 2024, we made new investment commitments totaling $705 million of which $478 million were funded.

We exited or were repaid on $695 million of investment commitments, which resulted in us, earning 19 million of net realized gains.

Court Schnabel: Non-accruals at cost ended the year at 1.3%, below the 1.7% at year-end 2022 and well below our 3% 15-year historical average and the KBW BDC average of 3.9% for the most recent 15-year period announced. Our non-accrual rate at fair value remained consistent with last quarter at 0.6%, which continues to be well below historical levels for our company as well. Finally, I'll provide a brief update on our post-quarter end investment activity and, From January 1st through February 1st, 2024, we made new investment commitments totaling $705 million, of which $478 million were funded. We exited or were repaid on $695 million of investments, which resulted in us earning $19 million of net realized gain. As of February 1st, our backlog and pipeline stood at roughly $1.1 billion. Our backlog contains investments that are subject to approval and documentation and may not close, or we may sell a portion of these investments post-closure. I will now turn the call back over to Kenneth.

As of February 1st our backlog and pipeline stood at roughly $1 1 billion.

Our backlog contains investments that are subject to approvals and documentation and may not close or we may sell a portion of these investments post closing.

I'll now turn the call back over to Kent for some closing remarks.

Thanks, a lot court.

Yeah.

Building on the strength of our results in 2023.

We believe that we're well positioned for the year to come.

We anticipate an uptick in deal activity in 2024 is a more stable capital markets backdrop as combined with growing pressure on private equity GPS and L piece to monetize positions and get returns of capital.

In addition, the robust level of.

Private equity dry powder that is largely gone on spend and as aging should support a more active M&A environment.

We believe that ARCC is uniquely positioned to benefit from an increase in transaction activity, which we anticipate would support our ability to earn higher capital structuring fees.

For context in 2023 capital structuring fees as a percentage of our stockholders' equity was less than half of our five year average.

As a reminder, at ARCC all capital structuring fee income is fully retained for the benefit of our shareholders and none is paid to Ares management. We believe the scale of our capital provides ARCC investors with these fee opportunities that some other market participants don't have or don't fully share with shareholders.

Kip DeVere: Thanks a lot, Corp. Building on the strength of our results in 2023, we believe that we are well positioned for the year ahead. We anticipate an uptick in deal activity in 2024 as a more stable capital markets backdrop is combined with growing pressure on private equity GPs and LPs to monetize positions and get returns of capital. In addition, the robust level of private equity dry powder that has largely gone unspent and is aging should support a more active M&A environment. We believe that ARTC is uniquely positioned to benefit from an increase in transaction activity, which we anticipate would support our ability to earn higher capital structuring fees. For context, in 2023, capital structuring fees as a percentage of our stockholders' equity were less than half of our five-year average. As a reminder, at ARCC, all capital structuring fee income is fully retained for the benefit of our shareholders, and none is paid to Ares Management.

Our many competitive advantages have resulted and differentiated performance in almost every relevant metric versus the competition.

The company has delivered the highest regular dividend per share growth rate the highest growth in NAV per share and the best stock based total return in each case when compared to every other externally managed BDC of size that's been publicly traded for the last 10 years.

We believe the factors that have driven our outperformance remains firmly in place and as a result, we remain optimistic about the year ahead.

Let me just close by saying that we're deeply grateful to our investors for the trust and confidence they've demonstrated in Ares capital and to our team for their tireless work and dedication in 2023.

And to conclude on a more personal note.

I just wanted to once more sincerely, thank penny for friendship and our partnership.

We've developed a close relationship over the years and I know I speak for the team as a whole we will Miss her day to day involvement with Ares capital.

And with that operator, please open the line for questions.

Yes, Sir at this time, if you would like to ask a question. Please press. The Star then one on your Touchtone phone.

If you would like to withdraw your question. Please press Star then two.

He's known as a courtesy to those who may wish to ask a question. Please limit yourself to one question and one single follow up if you have additional questions you may reenter the queue.

Kip DeVere: We believe the scale of our capital provides ARCC investors with these fee opportunities that some other market participants don't have or don't fully share with shareholders. Our many competitive advantages have resulted in differentiated performance in almost every relevant metric versus the competition. The company has delivered the highest regular dividends per share growth rate, the highest growth in NAB per share, and the best stock-based total return in each case when compared to every other externally managed BDC of size that's been publicly traded for the last ten years. We believe the factors that have driven our outperformance remain firmly in place, and as a result, we remain optimistic about the year ahead. Let me just close by saying we're deeply grateful to our investors for the trust and confidence they've demonstrated in Ares Capital and to our team for their tireless work and dedication in 2023. And I conclude on a more personal note. I just want to once more sincerely thank Penny for her friendship and her partnership.

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

Okay.

Okay.

Our first question comes from John Hecht with Jefferies.

Morning, guys. Thanks, very much for taking my question Penny Congratulations so I will Miss you and Scott look forward to working with you.

First question is you know when you think about kind of the mix of the forward curve and the implications for <unk>.

Lower rates and do you think of spreads in the market.

Just overall competition, what or where do you guys see kind of new deal yields coming in.

Relative to the run off at this point.

Yeah, Hey, John good.

It's Kevin.

Thanks for your comments to look I mean I think.

Generalization right.

Breads have tightened a little bit I think as folks have a lot more confidence.

And the economy. So you know a regular way unit tranche. These days is probably $5 50 over the base rate.

The mid point depends on company size credit quality and all of that.

Operator: We've developed a close relationship over the years, and I know I speak for the team as a whole. We will miss her day-to-day involvement with Ares Capital. And with that, Operator, please open the line for questions. Yes, sir. At this time, if you would like to ask a question, please press the star, then 1 on your touch-tone phone.

So relative to Onboarding, new investments vis vis the existing yield in the portfolio, it's probably.

Right right around the same so I think we're able to take on new investing.

That's still pretty accretive to the to the earnings.

In terms of rates and all of that I think we're in the camp of.

John Stilmar: If you would like to withdraw your question, please press star, then two. Please note, as a courtesy to those who may wish to ask a question, please limit yourself to one question and one single follow-up. If you have additional questions, you may re-enter 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 John Hecht. Morning, guys. Thank you very much for taking the question. Penny, congratulations. We'll miss you.

Likely higher base rates for a bit longer and I think so long as you know defaults remain reasonably muted you'll see the spreads kind of sit around these levels for a little while so I think we're in kind of a static kind of comfortable place where things have plateaued a bit we're hopeful that activity picks up.

Which we're seeing.

So pretty good environment for new investing.

Okay and then.

Second question is yes.

No your interest coverage ratio is actually.

<unk> been pretty steady given the rate environment and obviously your credit performance has been good you know theres been a couple of reports in the BDC sector, thus far but we have seen some you know have an increase in our.

Kip DeVere: And Scott, I look forward to working with you. The first question is, when you think about kind of the mix of the forward curve and the implications for lower rates and how you think it spreads in the market and just overall competition, where do you guys see kind of new deal yields coming in relative to the runoff at this point? Yeah, he's gone. Good morning, Skip.

Nonperforming asset accumulation.

Just throw all that together I'm wondering what your kind of industry outlook is for credit quality.

Kip DeVere: Thanks for your comments too. Look, I mean, I think a generalization, right? Threats have tightened a little bit, I think, as folks have a little more confidence in the economy. So, you know, a regular Unitron these days is probably 550 over the base rate, you know, it's kind of a midpoint, depends on company size, credit quality, and all of that. So relative to onboarding new investments, vis-a-vis the existing yield in the portfolio is probably, you know, right, right around the same, you know, so I think we're able to take on new investing that's still pretty In terms of rates and all of that, I think we're in the camp of likely higher base rates for a bit longer, and I think so long as defaults remain reasonably muted, you'll see the spreads kind of sit around these levels for a little while. So I think we're in kind of a static, comfortable place where things are plateaued a bit.

And that you guys are differentiated in that regard.

I mean, I think big picture, John it's been our expectation and we've said this in the past that we're likely to see defaults.

In the industry just increase this year.

It does take a little bit of time for that to manifest itself right. So.

In the bottom quartile of our portfolio and probably everybody else is you have some companies that.

Were making interest payments, but continue to live off you know.

Revolver availability cash et cetera, but the liquidity is getting tighter and tighter and so my expectation is that defaults will go up this year, probably more towards the historical norm.

We've had a little bit of amendment activity. That's that's elevated I think others, probably have to but but nothing that's causing us a whole lot of concern I think it's just a regular letting out is obviously rates are higher and companies have.

Higher debt service costs, and all that but.

Kip DeVere: We're hopeful that activity picks up, which we're seeing. So it's a pretty good environment for new investing. Okay, and the second question is, I know your interest coverage ratio has actually been pretty steady given the rate environment, and obviously, your credit performance has been good. There's been only a couple of reports in the DEC sector thus far, but we have seen some have an increase in non-performing asset accumulation. I'm here just throwing all that together.

Generally I think we will see that as well others.

Our next question comes from Finian O'shea with Wells Fargo Securities.

Yes.

Hey, everyone. Good morning would also like to.

First and foremost congratulate penny and Scott.

Chips.

Chips sticking with the market there.

First question is how would you describe the risk of a liquid market come back, bringing a major refi wave.

Kip DeVere: I'm wondering what your kind of industry outlook is for credit quality, understanding that you guys are differentiated in that regard. Yeah, I mean, big picture, John. It's been our expectation, and we've said this in the past, that we're likely to see defaults, you know, in the industry just increase this year. But it does take a little bit of time for that to manifest itself, right?

But without the corresponding pickup in new money volume.

Yeah, I mean, I think we're actually starting to see that and thanks for your comments.

We're starting to see that.

Some of the existing issuers that probably took on some higher cost debt are pursuing re pricings in the large cap market, that's going to carry over a little bit into our market. So it will bring a little bit of pressure.

Kip DeVere: So, you know, in the bottom quartile of our portfolio, and probably everybody else's, you have some companies that, you know, are making interest payments but continue to live off, you know, revolver availability, cash, et cetera, but the liquidity is getting, you know, tighter and tighter. So, my expectation is that defaults will go up this year, probably more towards the historical norm. You know, we've had a little bit of, you know, amendment activity that's elevated. I think others probably have, too, but nothing that's causing us a whole lot of concern.

But frankly, nothing that we can't handle from an earnings perspective, and it's just how strategically do we think about.

Staying in some of these credits versus potentially opting to exit but.

Yes that pressures there real time right now here in February of 2004, and we'll just keep evaluating it I'm hopeful.

As CLO spreads tightening and more I think capital comes into that market and there again to our prepared comments is a desire for more new deal activity.

On the GP side on the private equity side and on the company side. We're just hopeful that regular way new issuance will will come with time, and perhaps make that a little bit less of a pressure, but but it's there right now for sure and we're experiencing it but it's nothing that we can handle so.

Kip DeVere: I think it's just the regular, you know, letting out is obviously a race for hire, and companies have, you know, higher debt purpose costs and all that. Generally, I think we'll see that, as will others. Our next question comes from Kenyon O'Shea with Wells Fargo Securities. Hey everyone, good morning.

Kenneth S. Lee: I would also like to first and foremost congratulate Penny and Scott, and Kip, for sticking with the market there. The first question is, how would you describe the risk of a liquid market comeback bringing a major refi wave but without the corresponding pickup in new money volume? Yeah, I mean, you know, I think we're actually starting to see that. And thanks for your comments, too, Cindy.

Okay sure Thanks and.

As a follow up on.

<unk> deployment, you've obviously provided.

A lot on this threat in this call, but bringing it altogether.

Fourth quarter commitments were.

So a little lower roughly in line with last year.

We would have thought last year fourth quarter would have been the very bottom.

So if you could unpack like.

A bit why things weren't at least somewhat better.

Kip DeVere: I think we're starting to see that, you know, some of these are the issuers that probably took on some higher-cost debt and are pursuing repricings in the large cap market. That's going to carry over a little bit into our market. So it'll bring a little bit of pressure, but frankly, nothing that we can't handle from an earnings perspective. And it's just how strategically do we think about, you know, staying in some of these credits versus potentially, you know, opting to exit. But yeah, that pressure is there real-time, you know, right now here on February 24th, and we'll just keep evaluating.

Main reasons, there and that's all for me. Thank you.

Thanks.

You mean.

Yes, so the fourth quarter just to your comment if you need to follow on let me now just make sure I got the gist of it but yes, I mean, the fourth quarter I think there's a lot of pent up demand to get some transaction activity close.

By year end, we did.

Looking back at last year's start the year.

Very slow and then obviously accelerated into year end in terms of deployment, we're expecting a more.

Active 24.

Kip DeVere: And I'm hopeful, you know, with CLO spreads, TITAN, and more capital will come into that market. And there, again, in our prepared comments, is a desire for more New Deal activity on the GP side, on the private equity side, and on the company side. I'm just hopeful that, you know, regular new issuance will come with time and perhaps, you know, make that a little bit less of a pressure. But it's there right now for sure, we're experiencing it, but it's nothing that, you know, we can't handle. Okay, sure. Thanks.

I mean 21 was a was a peak year of 'twenty. Two is probably more normalized last year was a little bit slower and I think this year again, because a lot of GPS feel that their activity levels have been low and a lot of Lps are looking for capital back.

And I do think there is plenty of available financing to get deals done we think 24 will be a be.

Be a pretty good deployment year end should be busier I hope that answered the question.

Hey, this is <unk> the only other thing to add is the fourth quarter last year in 2022 was not actually a particularly slow quarter. We had some large transactions that came our way as a result of all the dislocation going on in the broader capital markets and so.

Kip DeVere: As a follow-up on deployment, you've obviously provided a lot on this thread and this call, but bringing it all together, fourth quarter commitments were, you know, a little lower, roughly in line with last year. We would have thought last year, fourth quarter would have been the very bottom, so if you could unpack, like, you know, a bit why things weren't at least somewhat better, the sort of main reasons there And that's all for me.

It was a fairly healthy quarter back then so I think the comparison and looking at that as being a slower quarter, probably isn't quite quite right.

Thanks Kurt.

Our next question comes from Melissa Wedel with JP Morgan.

Good morning, Thanks for taking my questions. Once again its opinion Scott congratulations to both of you.

Wanted to follow up on your comments, Kevin about higher activity in 2024.

Kip DeVere: The fourth quarter, just to your comment, if you need to follow on, let me know, just make sure I get the gist of it, but again, in the fourth quarter, I think there's a lot of pent-up demand to get some transaction activity closed. By year end, you know, looking back at last year, we started the year very slow and then obviously accelerated into year end. In terms of deployment, you know, we're expecting a more active 24, and 21 was a peak year; 22 was probably more normalized.

Should we think about that as being sort of skewed towards the back half of the year of course, there is normal seasonality, but more skewed towards the back half of the year with potential rate declines or you just expect a higher level kind of throughout the year.

I mean, it's hard to predict Melissa and thanks for your question I mean, I think I would say two things.

If rates do in fact start to decline.

Middle into the back of the year that should obviously.

<unk> increased transaction activity I think the counterbalance to that speaking personally as I actually think as the presidential election starts to creep into the equation things will slow down a bit.

Kip DeVere: Last year was a little bit slower than I think this year will be because, you know, a lot of GPs feel that, you know, their activity levels have been low, and a lot of LPs are looking for capital back. And I do think there's plenty of available financing to get deals done. We think 24 will be a pretty good deployment year and should be busier. I hope that answers the question. Hey, this is Kurt Schnabel.

But somebody else pointed out there is some tax changes.

That are currently in the system that are meant to roll off at one of our friends and competitors. It referenced that the roll off of those tax changes could actually compel people to pursue transactions. This year versus next year, but look I mean.

Court Schnabel: The only other thing to add is that the fourth quarter last year in 2022 was not actually a particularly slow quarter. We had some large transactions that came our way as a result of all the dislocation going on in the broader capital markets. And so it actually was a fairly healthy quarter back then. So I think the comparison and looking at that as being a slower quarter probably isn't quite right. Thank you. The next question comes from Melissa Whittle with J.P. Morgan. Good morning.

As we sit here today, we're pretty busy activity levels are good they are definitely better than they were.

At this time last year.

Hard to predict how it falls quarter to quarter, but I think it should just be.

A busier year.

And reasonably balanced how about that I don't think theres going to be a particularly big quarter relative to another we just see a more regular level of activity reoccurring and we're happy about that that's great for the business.

Alright understood.

Melissa Whittle: Thanks for taking my questions. Once again, to Payne and Scott, congratulations to both of you. One is a follow-up on Eric Thomas' tip about higher activity in 2024. Should we think about that as being sort of skewed towards the back half of the year? Of course, there's normal seasonality, but more skewed towards the back half of the year with potential rate declines, or do you just expect higher levels kind of throughout the year? I mean, it's hard to predict most of that group, but I think I'd say two things.

Just as a follow up.

Slide 18.

And the backlog and pipeline noticed that theirs.

You were.

Waiting towards the insurance services in the backlog and pipeline and I was just hoping you guys could provide a little context about the opportunity that you're seeing in that particular industry.

Yeah.

Yes, I mean, whenever we snap a quarter like that it's hard I mean theres no.

That's one or two big particular deals obviously in that sector.

It's an active area of new investing for a lot of private equity firms, we have a significant.

Kip DeVere: If rates do, in fact, start to decline, you know, middle into the back of the year, that should obviously compel some increased transaction activity. But I think the counterbalance to that, speaking personally, is I actually think as the presidential election starts to creep into the equation, things will slow down a bit. But somebody else pointed out, you know, there are some tax changes that are currently in the system that are meant to roll off. One of our friends and competitors had referenced that the roll off of those tax changes could actually compel people to pursue transactions this year versus next year. But look, I mean, you know, we sit here today, we're pretty busy; activity levels are good, they're definitely better than they were at this time last year.

Portfolio in that market or in that industry, rather so.

I think it's just reflective probably have one or two big deals that happen to pull in to the same quarter.

Other than that to take away.

Our next question comes from Ryan Lynch with K B W.

Hey, good morning, I would like to.

Also.

Congratulate Andy.

And Scott for this new role roles and transitions.

My first question has to do with.

You mentioned, the broadly syndicated loan market and some of the liquid markets, maybe just gain a little more footing here recently.

I know you've talked about in the past a lot of.

Kip DeVere: It's hard to predict how it falls quarter to quarter, but I think it should just be a busier year and reasonably balanced. How about that? I don't think there's going to be a particularly big quarter relative to another. We just see a more regular level of activity reoccurring, and we're happy about that. That's great for the business. Just as a follow-up to looking at slide 18, addressing the backlog and pipeline, notice that there's a particular weighting towards insurance services in the backlog and pipeline, and we're just hoping you guys could provide a little context about the opportunity that you're seeing in that particular industry. Thank you. Yeah, I mean, whenever we snap a quarter like that, it's hard.

Relationships with a lot of eyes bondholders. The reason they are choosing.

Your products and your relationship with some areas versus liquid market, but I'm. Just curious do you have any sense.

Just maybe a ballpark of what percentage of your portfolio.

Borrowers are of the size, where they could access the broadly syndicated loan market, our liquid markets, but choose to.

Hardwood areas because if the broadly syndicated loan market comes back very strongly I would just assume that that could potentially be a potential higher risk of refinancing.

Yes.

Yeah I mean.

Just hit mute now Scott.

Nothing off the top of my head Ryan. It's a good question I mean look I think when as you know the markets are a little bit more volatile.

Kip DeVere: I mean, there's no, you know, that's one or two big, particular deals, obviously, in that sector. It's an active area of new investing for a lot of private equity firms. You know, we have a significant portfolio in that market, or in that industry, rather. So, I think it's just reflective of one or two big deals that happen to pull into the same quarter, but nothing other than that to take away. Our next question comes from Ryan Lynch with KBW. Hey, good morning.

Direct lending will capture a larger share of those big transactions that just feel difficult.

Again in a volatile market.

I think the syndicated market. If you look just at the segmentation of that portfolio is probably focused on three or $400 million of EBITDA and above alright, and that number has grown over time.

As I made the point in the prepared remarks, we do feel that if you look over a 10 year period direct lending has continued to kind of show its value proposition to the larger companies.

So I'll see if we can dig around and the numbers a little bit and come up with an estimation, but I guess probably tenure.

Just guessing 10 or 20% of our deal flow is probably stuff that came.

Ryan Lynch: I'd also like to congratulate Eddie and Scott on their new roles and transitions. My first question has to do with, you mentioned the quality syndicated low market and some of the liquid markets maybe just gaining a little more footing here recently. I know you've talked about in the past building up a lot of relationships with a lot of your followers.

To us as a result of the syndicated markets just sort of not working for a while but let me.

Let me go to frankly, a few numbers with Scott and the team and we will see if we can come up with something along a little bit better than that.

Sure No I appreciate that and I understand that may not be at.

At your fingertips. The other question I had was you kind of talked about from a high level, probably some credit deterioration across the space maybe in your portfolio, but maybe just across the space broadly.

Kip DeVere: The reason they're choosing your product and your relationship with liquid markets. But I'm just curious, do you have any sense of... What percentage of your portfolio borrowers are of the size where they could access the broadly syndicated low market or liquid markets but choose to partner with Ares? Because if the broadly syndicated low market comes back very strongly, I would just assume that that could then be a potential higher risk of resigning. Yeah, I mean, to mute Matt Scott, nothing off the top of my head, right?

I think we were all a little bit surprised about how strong the economy. Why in 2023 is your prediction or estimation that credit is going to probably deteriorate. In 2024 is that based on more of a slowing of the economy is that based on.

Base rates, just being elevated at the levels, where they are now in that sort of finally, having an impact.

Kip DeVere: It's a good question. I mean, look, I think when, as you know, the markets are a little bit more volatile, direct lending will capture a larger share of those big transactions that just feel difficult, again, in a volatile market. I think the syndicated market, if you look just at the segmentation of portfolios, probably focused on three, four hundred million of EBITDA and above, right, and that number has grown over time. And as I made the point in my prepared remarks, we do feel that, you know, if you look over a 10-year period, direct lending has continued to kind of show its value proposition for the largest companies. So, you know, I'll see if we can dig around in the numbers a little bit and come up with an estimate.

Growers or.

Is that based on some sort of just maybe credit normalization or combination of ballpark I'd, just love, but maybe just unpack.

What gives you.

<unk>.

The thought behind kind of saying that you expect credit again CRA is.

It's probably the second one.

Share your comment that I actually think that the economy is proving to be more resilient than perhaps I hear a lot of other people.

Expected.

We we.

We all remarked a little bit that were we.

Report this EBITDA growth number on a quarterly basis, and we actually saw the first increase right on an LTM.

Trick in a bunch of quarters right with EBITDA growth of about 9% versus six the prior quarter so that.

Kip DeVere: But I guess probably 10 or, just guessing, 10 or 20% of our deal flow is probably stuff that came to us as a result of the syndicated markets just sort of not working for a while. But let me crunch some numbers with Scott and the team, and we'll see if we can come up with something a little bit better than that. Sure. No, I appreciate that. I understand it may not be easy at your fingertips.

The company performance is good but I think to your question. It's probably number two which is just it takes a little bit of time and when you look at the underperformers dealing with higher debt service costs because rates as I said earlier, we think are likely to remain higher for longer.

<unk> continues to deplete cash flow and create issues for companies that probably hope they'd be delevering, but arent.

Kip DeVere: The other question I had was, you just kind of talked about, from a high level, probably some credit deterioration across the space, maybe in your portfolio, but then maybe just across the space broadly. I think we were all a little bit surprised about how strong the economy was in 2023. Is your prediction or estimation that credit is going to deteriorate in 2024? Is that based on more of a slowing of the economy? Base rates just being elevated at the levels where they are now and that's sort of finally having an impact on borrowers, or is that based on some sort of maybe credit normalization or combination of all? I just love the DB just in tact. What was your kind of thought behind kind of saying that you expected credit to be serious? It's probably the second one.

So you really just look to the.

The watch list in the non accruals on our company and probably others and say.

They are hanging on for now, but it's probably just a matter of time before there needs to be a fix there and thats likely to create some more issues in defaults just as time.

Moves along and as things kind of mature a little bit in response to higher rates for a bit longer but again I don't.

I don't think it's anything that we can't handle right I don't think its particularly severe.

We have a very significant is that.

You guys know portfolio management, and risk management team and infrastructure to handle some of the underperformance. So.

Look if we go through a more traditional credit cycle, where defaults inch up and we have to resolve some more situations and then you start over and you continue to grow from a new base I actually think thats, a pretty constructive backdrop for credit and for this company.

Maybe just one other comment on the liquid syndicated market point, because it is certainly getting a lot of attention as we obviously knew the liquid syndicated market was going to come back and we've been providing alternative solutions against that market for 20 years and the value proposition.

Kip DeVere: I mean, I share your comment that I actually think that the economy is proving to be more resilient than perhaps I or a lot of other people expected. You know, we all remarked a little bit that we're, you know, we report this EBITDA growth number on a quarterly basis, and we actually saw the first increase, right, on an LTM metric in a bunch of quarters, right, with EBITDA growth around 9% versus 6% the prior quarter. So, the company performance is good, but I think your question is probably number two, which is just that it takes a little bit of time. And when you look at the underperformers dealing with higher debt service costs because rates, as I said earlier, are likely to remain higher for longer, it just continues to deplete cash flow and create issues for companies that probably hope they'd be delivering but aren't.

Private credit only becomes stronger anytime we go through these periods of dislocation. So we kind of we actually almost welcome back the syndicated market a little bit because it will increase transaction volumes yield the markets and as Kim mentioned in the prepared remarks.

Boost our.

Our structuring fees so.

I think it's just a continuation of what we've seen throughout our history, but with further proof of our value proposition.

Our next question comes from Robert Dodd with Raymond James.

Good morning.

One a pylon say congratulations to Scott I'll say, thank you to plentiful and what she's done yes.

Kip DeVere: So, you really just look at the watch list and the non-accruals, you know, in our company and probably others and say, you know, they're hanging on for now, but it's probably just a matter of time before there needs to be a fix there, and that's likely to create some more issues in the fall just as time moves along, right, and things kind of mature a little bit in response to higher rates for But again, I don't think it's anything that we can't handle, right? I don't think it's particularly severe.

Helping build out are you still so the space as a whole on.

Coming back to kind of the liquidity question, because when I look at the numbers I mean take collections with the lowest we've seen in many quarters interest receivable was a high you've mentioned that some of the borrowers.

Across the industry and living more on the Volvo.

Is that.

Robert Dodd: We have a very significant, as you guys know, portfolio management and risk management team and infrastructure to handle some of the underperformance. So, you know, look, if we go through a more traditional credit cycle where defaults inch up and we have to resolve some more situations, and then you start over and you continue to grow from a new base, I actually think that's a pretty constructive backdrop for credit and for this company. Maybe just one other comment on the liquid syndicated market point, because it's certainly getting a lot of attention, is that, you know, we obviously knew the liquid syndicated market was going to come back, and we've been providing alternative solutions against that market for 20 years, and the value proposition of private credit only becomes stronger any time we go through these periods of dislocation, so, you know, we kind of, we actually almost welcome back the syndicate Our next question comes from Robert Dodd with Raymond James. Good morning, and I want to pile on and say congratulations to Scott and also say thank you to Penny for the work she's done over the years helping to build our area but also the space as a whole.

It certainly seems to be an inclination for vars to hang onto as much cash as they can for as long as they can.

Is do you do you think that could really accelerate if rates remain high.

For longer I mean is this is this the beginning of the pulp illness Wheatstone.

Our big problem I mean, obviously this deterioration but.

How does that tie in with how bad could it be if say rates, it's still four and a half by the end of the year.

Yes, Thanks Robert.

Try to.

Maybe reinforce some of the comments that I made but.

We're not seeing an increase lately last couple of quarters in revolver draws.

So again it would.

Coach me to say look at the Underperformers were expecting to have to work things a little bit.

But all in all we think that the interest coverage levels of sort of bottomed at 1617.

We don't think rates are obviously going up from here and we think most of the companies in the portfolio. When you think about non accruals and percentage of the portfolio marked one and two which are kind of the underperformers.

We really haven't gone up the last couple of quarters, and we're well below 10%. So I think we know where the.

Potential credit issues are in the portfolio and 90 plus percent of the portfolio.

<unk> is performing quite well and having no real issue.

With higher rates for longer right.

The Pic interest is actually lower on a year over year basis.

Kip DeVere: Coming back to kind of the liquidity question because, when I look at the numbers, tip collections were the lowest we've seen in many quarters. Interest receivable was high. You've mentioned that some of the borrowers across the industry are living more on the revolver. I mean, there certainly seems to be an inclination for borrowers to hang on to as much cash as they can for as long as they can.

And again, we're into these companies with very very low loan to values.

So it's just thinking again about the ones and twos, the underperformers and how we achieve resolutions there, but all in all of the portfolio is performing quite well and I think the economy. I think it was Ryan's question is better than we might have expected at this point after a pretty dramatic tightening cycle. So we're feeling.

Yeah.

Understood.

T O D D.

Kip DeVere: Do you think that could really accelerate if rates remain high? I mean, is this the beginning of a problem if rates don't... a big problem? Obviously, there's deterioration, but how does that tie in with how bad it could be if, say, rates are still four and a half by the end of the year? Yeah, thanks, Robert. I mean, I guess I'll try to maybe reinforce some of the comments that I made, but, um... You know, we're not seeing an increase. Lately, the last couple of quarters in revolver draws, right?

The the doors on your delayed draw on your revolver commitments actually declined this quarter versus last year.

So I mean that that raises.

A hypothetical if you will is a <unk>.

Semi slugging portfolio company would have come to you and ask for a.

A liquidity revolver, what scale of concessions would you be looking for at this point from the company on the sponsor I mean would it just be a no or you wouldn't be something you would consider given the environment with appropriate levels of.

Kip DeVere: So again, it would coach me to say, look at the underperformers where we're expecting to have to work things a little bit. But all in all, we think that the interest coverage levels have sort of bottomed at 1.6, 1.7. We don't think rates are obviously going up from here, and we think most of the companies in the portfolio, when you think about non-accruals and the percentage of the portfolio, Marks 1 and 2, which are kind of the underperformers, really haven't gone up in the last couple of quarters and are well below 10%. So I think we know where the potential credit issues are in the portfolio, and 90-plus percent of the portfolio is performing quite well and having no real issue with higher rates for longer. The peak interest is actually lower on a year-over-year basis.

Maybe godzilla like concessions.

Yes, I mean, it's hard to generalize in that every every.

Every name is obviously different than most of the situations where companies are perhaps not achieving the performance. They were hoping for and have liquidity concerns were looking to the owners of companies to provide liquidity and as I mentioned in the past, we're happy to be part of the solution.

Where we can take a portion of our cash interest and perhaps convert to pik for a short period of time, but more often than not it really is on the owners of these companies to deliver solutions for us as the lender.

So I hope that answers the question, but.

Same as it's always been.

Our next question comes from Mark Hughes with Truest.

Yes. Thank you good morning, and congratulations Scott and Penny.

Kip DeVere: And again, you know, we're into these companies with very, very low loan-to-value. So it's just thinking, again, about the ones and twos, the underperformers, and how we achieve resolutions there. But all in all, the portfolio is performing quite well, and I think the economy, I think it was Ryan's question, is better than we might have expected at this point after a pretty dramatic tightening cycle, and I'm being interviewed by a delegation. The Draws on your Delayed Draw and your Revolver Convergence actually declined this quarter versus last quarter. So, I mean, that raises the question of what scale of concessions would you be looking for at this point from the company or the sponsor? I mean, would it just be a no?

It looked like you had.

It was more first lien activity in the fourth quarter and in January so far or is that just put the.

Better opportunities, where or is there some intentionality bank.

I think as.

As the market is recovering to do new transactions markets just.

It's keep it simple right so probably the down the middle of the fairway transaction has been particularly in private equity regardless of size, let's just structure of single unit tranche with partners that we know I think capital structures have been less levered and less complicated perhaps than in the past.

Purchase prices are coming down which is great.

And simple unit tranche loans are probably just carry the day over the last couple of quarters.

Okay. Understood then the aggregates were pretty low.

Fourth quarter, a little more balanced I guess in January but.

Anything there noteworthy.

Kip DeVere: Or would it be something you would consider, given the environment, with appropriate levels of... maybe Godzilla-like concessions? Yeah, I mean, it's hard to generalize because every, you know, every name is obviously different. In most of the situations where companies are, you know, perhaps, not achieving the performance they were hoping for and have liquidity concerns, we're looking to the owners of companies, you know, to provide liquidity. And as I mentioned in the past, you know, we're happy to be part of the solution, where we can take a portion of our cash interest and perhaps convert it to PIC for a short period of time. But more often than not, it really is up to the owners of these companies to deliver solutions for us as the lenders.

No not really I mean, I think again with lower activity on the new deal side, you'd expect lower repayments and lower exits so.

My guess is as transaction activity picks up and 24, you'll see a more normalized.

Right of right of exits as well, but not nothing particularly remarkable there.

Our next question comes from Erik Zwick with Hobdy group.

Good morning, first just wanted to echo everyone else's, congratulations too depending on Scott.

And then in terms of.

My questions I wanted to follow up on a commentary Kip I believe you gave to one of the earlier questions about your expectation for the portfolio yield to remain relatively stable just looking at the.

Activity through the first month of the year and the press release it looks like the weighted average yield on debt and income for new fundings was 11, 3% and then for exits during that same period $12 six so a little bit of compression there and I know one quarter arent sorry, one months certainly doesn't make a trend, but just curious if you could talk to kind of.

Kip DeVere: So I hope that answers the question, but it's the same as it always was. Our next question comes from Mark Hughes, a truist. Yeah, thank you. Good morning, and congratulations, Scott and Penny. Looks like you had more first lien activity in the fourth quarter and in January so far. Is that just what the better opportunities were, or is there some intentionality there?

If there are any factors in that first month that contributed.

And so that compression there and kind of what gives you confidence again that the portfolio you can stay relatively stable at this point.

Mark Douglas Hughes: I think, you know, as the market is recovering to do new transactions, markets just, it's keep it simple, right? So, probably the down the middle of the fairway transaction has been, particularly in private equity, regardless of size, let's just structure a single unitronics with partners that we know. I think capital structures have been, you know, less levered and less complicated perhaps than in the past. You know, purchase prices are coming And simple, unidirectional loans have probably just carried the day over the last couple of quarters. Let me see, then the egg bakes were pretty low in the fourth quarter, a little more balanced, I guess, in January, but anything noteworthy? Not really.

Yes, I mean look I think there I think the natural trend is likely to be lower and less defaults.

Pick up substantially right. So I think the expectation is that base rates are likely to go down this year. So we'll see a little bit of pressure there.

And.

If the economy remains resilient and defaults, even if they creep up modestly don't Spike, which is my expectation I think youll see sort of a stable spread environment.

With perhaps a little bit of pressure as transaction activity picks up so I do think that the general trend is likely to see the all in yield on new investments come down from the prior year or two where they've been elevated very attractive. We've obviously taken advantage of that but I'll just remind everybody I mean it does.

Kip DeVere: I mean, I think, again, with lower activity on the New Deal side, you'd expect lower repayments and lower exits. So my guess is, as transaction activity picks up in 2024, you'll see a more normalized rate of exits as well, but nothing particularly remarkable there. Our next question comes from Eric Zwick with Hovde Group. Good morning.

Isn't it doesn't have a particular impact I think on us having earn 60 plus sense of core earnings against <unk> 48 dividend this quarter, we've sort of built in.

As it relates to the dividend.

And assumption that over time yields are likely to come down and we've got plenty of earnings capacity to continue to support the current dividend in fact.

Eric Zwick: First, I just want to echo everyone else's congratulations to Penny and Scott. And then, in terms of the kind of questions I have, I wanted to follow up on a commentary Kip, I believe you gave to one of the earlier questions about expectations for the portfolio yield turning relatively stable. Just looking at the activity through the first month of the year and the pressure, at least it looks like the weighted average yield on debt and income for new funding was 11.3%. And then for exits during that same period, 12.6%; a little bit of compression there.

Support the dividend plus.

NAV over the next couple of quarters.

I appreciate that commentary there and I think the last part of your <unk>.

Answer there is the most important that dividend covered still remains very strong even with you know if we come down from historically high rates.

Okay.

We have a lot of room and obviously, we're using the current environment to obviously pay the dividend, but continue to build NAV to which is which is.

Luxury in this at this point in the cycle.

Yeah.

Great and just my second question in terms of the.

Kip DeVere: And I know one quarter or, sorry, one month certainly doesn't make a trend, but just curious if you could talk about kind of if there are any factors in that first month that contributed to that compression there and kind of, you know, what gives you kind of confidence again that the portfolio yield can stay relatively stable at this point. Yeah, I mean, look, I think the natural trend is likely to be lower unless defaults pick up substantially, right? So I think the expectation is that base rates are likely to go down this year, so we'll see a little bit of pressure there. If the economy remains resilient and defaults, even if they creep up modestly, don't spike, which is my expectation, I think you'll see sort of a stable spread environment with perhaps a little bit of pressure as transaction activity picks up. But I do think the general trend is likely to see the all-in yield on new investments come down from the prior year or two, where it was elevated and very attractive. We've obviously taken advantage of that.

The floor is I think the majority of new floating rate.

And in fundings, how Florida I'm, just curious if you've had any given the fact that we're kind of in this higher for longer rate environment have any success, having those floors and move up relative to say, maybe a year or so ago.

Yeah, we've tried it hasnt really work sort of annoying to be honest, but now the market convention kind of remains that 1% LIBOR floor, which doesn't make a lot of sense to me, but it is what it is.

Just a reminder to ask a question. Please press star one.

Our next question comes from Casey Alexander with Compass point.

Hi, good morning for another seven minutes.

I was going to ask if it was your expectation that first quarter originations might be seasonally slow, but you already answered that you expect it to be somewhat balanced at a higher rate across the year. So let me shift to.

Sure.

While we were in this period of slower originations you were able to just in time fill your capital needs through the ATM program have you see a higher level of activity.

Being generated across the year this year would it be shareholders' reasonable expectation that you would pepper in some syndicated offerings.

Kip DeVere: But I'll just remind everybody, I mean, it doesn't have a particular impact, I think, on us having earned 60-plus cents of quarterly earnings against a 48-cent dividend this quarter. We've sort of built in, as it relates to the dividend, an assumption that, over time, yields are likely to come down, and we've got plenty of earnings capacity to continue to support the current dividend and, in fact, support the dividend plus, you know, add to NAP over the next couple of quarters. I appreciate that commentary there, and I think the last part of your answer there is the most important.

To go along with the ATM program.

Thanks, KC I assume you mean on the equity side.

Yes, I mean, not not necessarily I mean, the ATM program has been a I think.

Efficient source for us to continue to kind of grow the equity base.

And with that grow on the asset side.

And the leverage levels at the end of Q4, we're probably in my mind on the lower side of where we might like them. So we've got a lot of debt capacity to continue to support new investing so I don't I.

I don't see any particular reason sitting here today to think about an issuance outside of the ATM program I'm also a little surprised frankly that the stock hasn't performed a little bit better than it has relative to the growth in book value over the course of 'twenty three.

Kip DeVere: Dividend coverage still remains very strong even if we come down from historically high rates. We have a lot of room and obviously we're using the current environment to obviously pay the dividend but continue to build NAB too, which is a great, um, you know, luxury at this point in the cycle.

So doing an issuance at this price to me isn't something that's particularly attractive.

Kip DeVere: And just my second question, in terms of the floors, I think the majority of new floating rate commitments and fundings have floors. I'm just curious if you've had any success having those floors move up relative to say maybe a year or so ago? Yeah, we've tried. It hasn't really worked.

So nothing nothing in the Hopper there I think.

Alright, well certainly agreed on your second point there my follow up.

Im going to tip, one over here to Penny and thank you for your years of work with Aries.

If.

Your thought processes that were in the higher for longer camp is your most recent unsecured offering was $1 billion that you then chose to swap out and slowed out at a couple of points higher than the stated coupon on that deal or so in that range.

Kip DeVere: Sort of annoying, to be honest, but now the market convention kind of remains that 1% live work order, which doesn't make a lot of sense to me, but it is what it is. Just a reminder to ask a question, please press star 1. Our next question comes from Casey Alexander with Compass Point. Hi, good morning for another seven minutes.

If you are in the higher for longer camp why swap it out I mean, the spread is still pretty attractive and rates would have to move pretty materially for it to balance out to the coupon on that over the course of the next five years.

Yeah.

Casey Alexander: I was going to ask if it was your expectation that, you know, first quarter originations might be seasonally slow, but you already answered that you expected them to be somewhat balanced at a higher rate across the year. So, let me shift to, you know, while we were in this period of slower originations, you were able to, just in time, fill your capital needs through the ATM program. If you see a higher level of activity being generated across the year this year, would it be shareholders' reasonable expectation that you would pepper in some syndicated offerings to go along with the ATM program? I'm saying KPI.

Yeah. Thanks for the question.

This is something that this is our second issuances that we've swapped recently, we are still in a higher rate environment for fixed rate debt issuances.

If you think about our portfolio, we have about 70% of our portfolio being in floating rate. So there is a benefit to kind of match funding the interest rate and looking at that opportunity to have that more aligned with the rate on the portfolio being floating.

So.

Over a longer period, the five year window, if you look at where we swapped it to which is roughly <unk> 200.

Kip DeVere: I assume you mean on the equity side. Yeah. Look, I mean, not necessarily.

Well in line or below what we could get new secured financing out today. So we think that it is a good.

Kip DeVere: I mean, the ATM program's been a, you know, I think... a suitable source for us to continue to kind of grow the equity base and, with that, grow on the asset side. And you know the leverage levels at the end of Q4 were probably, in my mind, on the lower side of where we might like them. We've got a lot of deft capacity to continue to support new investing. So I don't...

Good cost of capital, yes, it does kind of make it a little more expensive on the front end, but if you believe the curve and you look at that on a relative basis to where we can get secured debt. It's a good variable rate floating pricing for us and gives us that matching as we go through the five year window.

We look at this on a case by case basis, we may not only flop it but in this case, we felt like given the benefits of where the flat price at the time that we did it it made sense.

Kip DeVere: I don't see any particular reason sitting here today to think about an issuance outside of the ATM program. I'm also a little surprised, frankly, that the stock hasn't performed a little bit better than it has relative to the growth in book value over the course of 23, so doing an issuance at this price, to me, isn't something that's particularly attractive, so nothing in the hopper there, I think. All right, well, I certainly agree on your second point there.

This concludes our question and answer session I would like to turn the conference back over to Mr. Kipp Davir for any closing remarks.

Thanks for everybody joining the call.

Really happy with the quarter.

Again, just to finish off another congratulations to Scott him on his new appointment and.

Again, many thanks to Penny for all the contributions for partnership friendship over the years and we're thrilled VIX youll still be obviously with us day to day at areas, but.

Casey Alexander: My follow-up, I'm going to tip one over here to Penny, and thank you for your years of work with Ares. Your thought process is that we're in the hire-for-longer camp. Your most recent unsecured offering was a billion dollars that you then chose to swap out and float out at a couple points higher than the stated coupon on that deal, or so in that range. Anyway, if you're in the hire-for-longer camp, why swap it out?

Thanks for everybody attending and we will catch you next quarter.

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 one.

One hour after the end of the call through March 6th at five P. M. Eastern time to domestic callers by dialing one 870 536121, and two international callers by dialing 140 to 220 to 676, an archived replay will be available on the webcast link.

Penelope F. Roll: I mean, the spread is still pretty attractive, and rates would have to move pretty materially for it to balance out to the coupon on that over the course of the next five years. Yeah, thanks for the question. You know, this is something that this is our second issuance that we swapped recently. We are still in a higher rate environment for fixed-rate debt issuances.

Located on the homepage of the Investor Resources section of Ares capital website. Thank you and have a great day.

Penelope F. Roll: If you think about our portfolio, we have about 70% of our portfolio being floating rate. So there is a benefit to kind of matching funding the interest rate and looking at that opportunity to have that more aligned with the rate on the portfolio being floating. So over a longer period, this five-year window, if you look at where we swapped it to, which is roughly S200, that's well in line or below what we could get new secure financing at today. So we think that it is a good cost of capital. Yes, it does kind of make it a little more expensive on the front end, but if you believe the curve and look at that on a relative basis to where we can get secure debt, it's a good variable rate floating rate for us and gives us that matching as we go through the five-year window. We look at this on a case-by-case basis.

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Penelope F. Roll: We may not always swap it, but in this case, we felt like given the benefits of where the swap price was at the time that we did it, it made sense. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Kip DeVere for any closing remarks. You know, thanks to everybody who joined the call. Really happy with the quarter.

Kip DeVere: Again, just to finish off another congratulations to Scott on his new appointment and again, many thanks to Penny for all the contributions, for her partnership, her friendship over the years, and we're thrilled that she'll still be with us day-to-day, Ares, but thanks to everybody attending, and we'll catch you next quarter. 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 March 6th at 5 p.m. Eastern Time for domestic callers by dialing 1-800-753-6121 and to international callers by dialing 1-402-220-2676.

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Operator: An archived replay will be available on the webcast link located on the homepage of the investor resources section of Ares Capital's website. Thank you, and have a great day! The Ultimate Parody Site! www.thevenusproject.com Yay! Thanks for asking.

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Operator: The Ultimate Parody Site! .......... The Ultimate Parody Site!

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