Q1 2024 Ares Capital Corp Earnings Call
Good morning, welcome to Ares Capital Corporation's first quarter at March 31st 2024 earnings Conference call.
All participants are in a listen only mode.
This conference is being recorded on Wednesday may 1st 2024.
Speaker Change: Now I'll turn the call over to Mr. John Steele Mar partner of Aries public markets Investor Relations.
Speaker Change: Thank you.
Speaker Change: Let me start with some important reminders comments made during the course of this conference call and webcast and accompanying documents contain forward looking statements and are subject to risks and uncertainties.
Speaker Change: The company's actual results could differ materially from those expressed in such forward looking statements for any reason.
He knows most of that stuff and she pilot.
Speaker Change: Ares Capital Corporation assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results.
Speaker Change: During this conference call. The company May discuss certain non-GAAP measures as defined by SEC regulation G such as core earnings per share.
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.
Speaker Change: Reconciliations 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 reconciliation of these measures may also be found in our earnings release filed this morning with the SEC.
Speaker Change: Certain information discussed on this conference call and the accompanying slide presentation, including information related to portfolio companies was derived from third party sources.
Not been independently verified and accordingly, the company makes no representation or warranty with respect of this information.
Speaker Change: The company's first quarter ended March.
Speaker Change: 31st 2020 core earnings presentation can be found on the company's website at Www Dot Ares Capital Corp, 's dot com by clicking on first quarter 'twenty 'twenty four earnings presentation link on the homepage of the Investor Resources section.
Speaker Change: Capital Corporation's earnings release and Form 10-Q are also available on the company's website.
Speaker Change: I'll now turn the call over to chip to hear various capital Corporation's Chief Executive Officer.
Chip: Thanks, John.
Chip: Hello, everyone and thanks for joining our earnings call today, I'm here with our co presidents, Mitch Goldstein and cord Schnabel.
Chip: Our Chief operating Officer Jana Markowitz.
Chip: Our Chief Financial Officer, Scott Lamb, and other members of the management team.
Chip: I'd like to start by welcoming Scott to his first earnings call with me in his new role as Chief Financial Officer, Scott has been with us for quite a while as a key business leader within our finance and accounting team.
Chip: He's been at areas for more than 20 years, so having him join us as our newly appointed CFO always great.
Chip: We look forward to his continued contributions to Ares capital.
Chip: His promotion is just another example of our culture continuing to promote our strongest players and it shows the depth of the talent that exists at Ares we.
Chip: We still believe this differentiates us from other companies in the market.
Chip: Now, we'll move on to our results.
Chip: This morning, we reported another quarter of strong core earnings of 59 cents per share.
Chip: Our core earnings per share increased three 5% from the prior year and were well above our 48 cents per share first quarter regular dividend.
Chip: These results were driven by continued strong attractive investment environment, and the beneficial impact of higher base rates and attractive credit spreads.
Chip: The strength of our earnings and the positive valuation momentum in our portfolio is also supported solid growth.
Chip: Our net asset value per share after paying a healthy level of regular dividends or in a V, which increased 6% year over year reached another record of $19 53 per share.
Chip: In the first quarter of 2024, while merger and acquisition activity levels remain relatively low our share and the business continues to remain very strong.
Chip: The banks are more active again and this is generally good for all market participants as the increased availability of capital typically brings out more M&A and adds confidence to companies seeking financing for transactions.
Chip: The firming of the credit markets, the ageing of significant amounts of private equity dry powder and the continued pressures from L. P. As to return capital are all factors that support higher levels of activity.
Chip: We're seeing signs of a pickup in transaction activity as evidenced by the $1 $2 billion of commitments. We've closed in the second quarter to date.
Chip: While current market conditions are more competitive this is not a new phenomenon for us.
Chip: We have navigated many competitive markets over the past two decades.
Chip: 21 was the most recent it was similar.
Chip: These environments, we believe that our expansive direct origination capabilities that span the entirety of the middle market from the low middle and upper segments.
Chip: Got me even more valuable.
Chip: And having a very large portfolio also helps to drive new investment activity.
Chip: We continue to find attractive investments with compelling returns at historically lower levels of relative risk.
Chip: And specifically for originations in the first quarter the weighted average LTV was below 40%.
Chip: All in yields were nearly 11% and leverages nearly a half a turn below our weighted average over the past two years.
Chip: Furthermore, the originated yield per unit of leverage, which we view as one measure of the risk adjusted return in the current rate environment was 10% above the recent two year average.
Chip: Our credit fundamentals across our portfolio are also indicating health and strength.
Chip: Our portfolio of companies showed organic EBITDA growth over the last 12 months of 10%, which is remarkable in today's economic environment.
Chip: Coverage levels remained stable to slightly improved and leverage levels ticked down.
Chip: The annual EBITDA growth of our portfolio companies is more than double the annual growth of the companies in the S&P 500, which we source through data provided by S&P.
Chip: On a final point and as Scott will discuss further the current market environment does enable us to raise capital more efficiently.
Chip: So far this year, we've been active as an issuer in the unsecured notes market and the secured bank and CLO markets.
Chip: We've issued in all of these markets and what we believe are the tightest pricing levels amongst the bdcs, but.
Chip: With that let me turn the call over to Scott to provide more details on our financial results.
Scott Lamb: Further thoughts on our balance sheet.
Scott Lamb: Thanks Kipp.
Scott Lamb: I'm excited for the opportunity to serve as areas capitals CFO.
Scott Lamb: This morning, we reported GAAP net income per share of 76 cents for the first quarter of 'twenty 'twenty four compared to 72 cents in the prior quarter and 52 cents in the first quarter of 2023.
Scott Lamb: As Kipp stated, we also reported core earnings per share <unk> 59 for the first quarter.
Scott Lamb: 'twenty 'twenty four.
Chip: Compared to 63 cents in the prior quarter and 57 cents in the first quarter of 2023.
Chip: Our investment income in the quarter was primarily driven.
Chip: By the continued benefits of higher base rates and structuring fees due to an improving investing environment.
Chip: While restructuring fees decreased from the fourth quarter I would try and 23, given the usual seasonality in our business there.
Chip: The increased meaningfully from the first quarter of last year.
Chip: Our stockholders' equity ended the quarter at $11 9 billion.
Chip: Or $19.52 per share a new record high for us, which is a 1.5% increase per share over the prior quarter and nearly a 6% increase per share from a year ago.
Chip: Our total portfolio at fair value at the end of the quarter was $23 1 billion up from 22.9 billion at the end of the fourth quarter, largely driven by net unrealized gains from portfolio for the quarter.
Chip: The weighted average yield on our debt and other income producing securities at amortized costs was 12, 4% at March 31, 2024, which was down slightly from 12, 5% at December 31st 2023, but higher than the 12% at August 31 2023.
Chip: In terms of our capitalization and liquidity, we have had a fairly active start to the year, making sure. We are able to continue supporting our investment opportunities.
Chip: So far this year, we have amended and extended our raised over $7 billion of financing for ARCC.
Chip: More specifically in the first quarter, we issued 1 billion of unsecured notes at market, leading spreads and successfully set of our maturing foreign or a million dollar our convertible notes and almost all newly issued shares.
Chip: Allowing us to retain the capital and further bolster our permanent equity capital base.
Chip: In March we also extended each of their a voluntary and maturity date for our S. N B C funding facility by three years.
Chip: Post quarter end, we renewed our largest revolving credit facility for another year pushed.
Chip: Pushing it to a full five year maturity with the same pricing and terms.
Chip: We also lowered the pricing on our <unk> funding facility to sopra, plus 250 basis points.
Chip: Finally, just last week, we priced our first on balance sheet CLO nearly 18 years.
Chip: Blended pricing through the Tupperware tranche on the $476 million of notes with sopra plus from what her an 86 basis points, which we believe is one of the tightest executions amongst issuers in this part of the market.
Chip: Closing is expected in the next few weeks subject to customary closing conditions.
Chip: This transaction allows us to further diversify our sources of committed debt financing at pricing levels. Currently below other forms of secured funding available in the market.
Chip: Our overall liquidity position remains strong with approximately $6 $3 billion of total available liquidity.
Chip: Including available cash and pro forma for all the post quarter end transactions previously mentioned.
Chip: We also ended the first quarter with a debt to equity ratio net of available cash is 0.95 times as compared to 1.02 times a quarter ago.
Chip: And our lowest net leverage ratio since the end of 2019.
Chip: We believe our significant amount of dry powder.
Chip: Positions us well to continue supporting our portfolio company attendance remain active in the current investing environment and eliminating any refinancing risk.
Chip: Respect for this year's remaining term debt maturities.
Chip: Moving on to the dividend, we declared a second quarter of 2024 dividend at 48 cents per share.
Chip: This dividend is payable on June 28, 2024 to stockholders of record on June 14th 'twenty 'twenty, four and is consistent with our first quarter 'twenty 'twenty four dividend in.
Chip: In terms of our taxable income spillover. We currently estimate that we ended 2023 with approximately $635 million or $1.05 per share for distribution to stockholders in 2024.
Chip: This estimated spillover level is more than two times, our current regular quarterly dividend, which we believe helps springs stability to our dividend.
Chip: I will now turn the call over to Mitch to walk through our investment activities.
Mitchell S. Goldstein: Thanks Scott.
Mitchell S. Goldstein: I want to spend a few minutes, providing more detail on our investment activity our portfolio performance and our positioning for the first quarter. I will then conclude with an update on our post quarter end activity backlog and pipeline.
Mitchell S. Goldstein: In the first quarter, our team originated approximately $3 6 billion of new investment commitments across 61 transactions.
Mitchell S. Goldstein: We continue to find compelling investments with attractive risk adjusted returns despite the more competitive market conditions.
Mitchell S. Goldstein: We're generating double digit yields with a weighted average LTV on our senior loan commitments at levels below five times debt to EBITDA.
Chip: Excluding the $1 6 billion of loans on transactions, we originated and distributed as agent.
Chip: Our commitment has nearly tripled from the first quarter of 2023.
Chip: The breadth of our sourcing capabilities allowed us to find value in companies with EBITDA from less than $15 million to over 600 million.
Chip: Our extensive market coverage of companies of all sizes across the market enables us to source transactions and segments, where we are seeing less competition or where we believe we have a strong competitive advantage.
Chip: Shifting to the portfolio. We ended the first quarter with with a $23 $1 billion portfolio at fair value, which grew 1% from the prior quarter and 9% from the prior year.
Chip: The median EBITDA of our portfolio is $79 million, which reflects our presence in both the core middle market and the upper middle market.
Chip: Weighted average LTM EBITDA growth of our portfolio was 10% that Kipp mentioned is also broad based.
Chip: Importantly in our portfolio the size of the company has not been a driver of performance company.
Chip: We believe company industry selection as well as our underwriting process drive these types of positive results.
Chip: In fact, our view is based on a study done by the Ares quantitative research group. That's found that industry selection could account for approximately 500 basis points of difference in total for each senior U S loan returns over more than a decade of investing.
Chip: With respect to our credit performance, our weighted average portfolio a grade of 3.1 remained unchanged from the prior quarter's level.
Chip: Our non accruals at cost ended the quarter at one 7% up slightly from the prior quarter, but lower than the same quarter a year ago.
Chip: Our current non accrual levels remains well below our two 9% historical average since the great financial crisis, and the kw BDC average of three 8% for the same period.
Chip: Our non accrual rate at fair value remained consistent with last quarter at that 0.6%, which continues to be well below historical levels for our company.
Chip: Another indicator of stable credit performance is the fact that our portfolio companies with a risk rate of one or two declined quarter over quarter.
Chip: And finally, our portfolio quality is also reinforced by the substantial amount of equity invested in our companies primarily by large and well established private equity firms.
Chip: At the end of the first quarter, the weighted average loan to value in the portfolio with 43%, which we believe gives us strong downside protection in our loans.
Chip: As the market is starting to see more dispersion results among managers, we believe our outperformance in credit position, including our significant diversification differentiates us from our competition.
Chip: Our strong and growing portfolio is well diversified across 510 different companies that span the market.
Chip: A number of companies in our portfolio has increased 9% over the past year and 48% over the past five years and the average hold size is only 2% at fair value.
Chip: Excluding our investments in Ivy Hill, and the SDLP, which we believe are well 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 11% of the portfolio at fair value.
Chip: We believe this degree of diversification further adds to the credit strength of our portfolio as it reduces the impact to the overall portfolio from any single negative credit anytime.
Chip: On an individual company.
Chip: And finally, we have had an active start to the second quarter.
Chip: From April 1st through April 24, 2024, we made new investment commitments totaling $1 2 billion of which $1 1 billion were funded.
Chip: We exited or were repaid on 249 million in best of investment commitments, which resulted in us, earning 1 million of net realized gains.
Chip: As of April 24, our backlog and pipeline stood at roughly $1 3 billion.
Chip: Our backlog contains investments that are subject to approvals and documentations and may not close or we may sell a portion of these investments post closing.
Chip: I will now turn the call back over to Ken for some closing remarks.
Ken: Thanks, a lot Mitch.
Ken: In conclusion, we believe that the company is well positioned to navigate the opportunities that have us.
Ken: At Ares capital, we've navigated a variety of market environments.
Ken: Credit cycles and interest rate cycles over our 20 year history with accumulative average return on equity in the double digits.
Ken: In our opinion. This is a very good time to be invested in a high quality company focused on private credit.
Ken: Our portfolio is performing well and we believe that the potential returns on our investment.
Ken: Main compelling by historical standards.
Ken: While we remain mindful of the potential for increased credit risks delivered with a higher for longer rate environment. We are highly diversified and defensively positioned companies and our companies are demonstrating healthy and differentiated levels of growth.
Ken: Our balance sheet and liquidity position remains strong, which we believe allows us to take advantage of this compelling new investment environment.
Ken: Overall.
Ken: We are confident that the factors that have driven our historical outperformance remains firmly in place and as a result.
Ken: We remain optimistic about our future prospects.
Speaker Change: As always we appreciate you joining us today, we look forward to speaking with you next quarter with that operator, we can open the line for questions.
Speaker Change: Thank you at this time, if you'd like to ask a question. Please press Star then one on your Touchtone phone if you'd like to withdraw your question. Please press Star then two please.
Speaker Change: Please note as a courtesy to those who may wish to ask a question. Please limit yourself to one question and a single follow on.
Speaker Change: If you have additional questions you may reenter the queue.
Speaker Change: The Investor Relations team will be available to address any further questions at the conclusion of today's call.
Speaker Change: And we'll take our first question today from John Hecht with Jefferies.
John Hecht: Morning, guys. Thanks for taking my questions.
John Hecht: Hey, guys. Good morning, if you get a good morning thinking about all a lot of activity in the quarter both of them that deployment and repayment side I'm I'm wondering can you give us kind of an update.
John Hecht: On the syndicated in the liquid loan markets and how they're influencing activity.
John Hecht: With you guys and elsewhere in the market.
Speaker Change: I'm sure John I mean I think.
John Hecht: It's not a huge driver frankly of what were doing theres been a lot of press I'd say about the banks returning to the market and perhaps some more.
John Hecht: We have risk on way to try to arrange it underwrite and syndicate.
John Hecht: In a more traditional leveraged finance transactions, so thats certainly picked up.
John Hecht: I think if you look specifically at our activity I think it was about 70% of our new deals.
John Hecht: Were coming from the existing portfolio, a little bit slower on the kind of new platform side, which was a little bit surprising for us but yeah.
John Hecht: As I mentioned in the prepared remarks, we're pretty optimistic that a handful of factors remain in play that should compel at pretty good transaction activity. This year.
Speaker Change: Okay, and then you had a obviously a lot of again deployment in repayment activity in the capital structuring fees.
John Hecht: As a percentage that were a little lower is there anything to read on that side or is that just a function of the mix of our originations.
John Hecht: It's more mix than anything although I will say, we've noticed a little bit of pressure on upfront fees on new deals in the market simply because there arent as many of them.
John Hecht: So it's one of the levers that a borrower can fall to a certain degree to try to achieve more attractive financing, but it's more mix than anything else.
John Hecht: It's also to add real quick that the numbers are probably a little bit inflated just because we also rolled agent. We did frac from deal. So the true origination was probably closer to $2 billion that you sort of have to back that number exactly.
John Hecht: So it's just that the truth that what was that the true origination was what.
John Hecht: About $2 billion, because out of 1 billion and a half with US as are all of agent fronting for some deals.
Speaker Change: Got you. Okay. This happens from time to time, yes.
John Hecht: That happens from time to time, just depending on what you know syndicate competition looks like who can funded closing who can it sort of a technical point, but when you evaluated just make sure you look at the math in that light.
Speaker Change: Okay perfect. Thanks.
Speaker Change: Thanks, John.
John Hecht: Our next question will come from Finian O'shea with Wells Fargo.
John Hecht: Okay.
Finian O'shea: Hey, everyone. Good morning.
Finian O'shea: Hi, Kip Ken can.
Finian O'shea: Can you how are you.
Finian O'shea: Can you talk about the environment for <unk>.
John Hecht: Second lien.
John Hecht: If the the reduced exposure there is more market related or or your portfolio positioning.
John Hecht: And if that should continue or if applicable.
John Hecht: Our ability to replace that with other forms of junior and structured equity, there's a lot of that the portfolio but.
John Hecht: Wondering if there are sort of adequate volumes there if if second lien meaningfully receipts. Thanks.
Speaker Change: Yeah, and I'm going to have CT follow on a couple of thoughts on my side I would say look when when last year came around and kind of you know the private credit players. That's included really were representing new deals in the market almost everything that we're doing is getting done as a unit tranche regardless of size and that.
Speaker Change: <unk>.
Speaker Change: Second lien.
CT: Which has been a larger part of our investing effort is just frankly not as prevalent in the market in terms of the mix of new deals.
CT: Does that come back you know if some large deals actually get done as first lien in the syndicated market, where we can provide junior capital Yeah, maybe I guess, we'll wait we'll wait and see as you know our second lien investing tends to emphasize much much larger companies than us and is very often in line with the syndicated.
CT: First lien and that transaction, just really hasn't been prevalent in the market I'd say for the last call. It 369 months and then we'll see where we go from here. The only other thing I'd add and I'll take you to court if he wants to wants to add on it we are seeing a lot of really good companies to your point about junior capital investing in structured equity and all of that that are performed.
CT: Well that simply don't have the amount of cash flow that they expected.
CT: So you see some senior lenders that are probably saying wow with higher rates.
CT: Not really deleveraging the way I was hoping to and frankly on the other side. The equity is looking for an extension of duration to accomplish what they want to achieve from an IRR perspective. So there is we think a pretty interesting opportunistic credit pipeline and funnel to do some of these deleveraging junior capital deals.
Speaker Change: So hopefully that answers the question quarter, if you have anything to add.
Quarter: Chip I think you covered it all.
Speaker Change: Obviously, we are.
Speaker Change: The return opportunities in the first lien market are super attractive so regardless of the fact that there arent as many second lien opportunities right now, we're not too bothered by that given the other opportunities that the market showing aspect certainly more of a function of what the market is giving rather than a purposeful change on our part.
Quarter: Yeah.
Speaker Change: Awesome, Thanks, and a small follow up maybe sort of related we.
Speaker Change: Noticed the special opportunities or a soft group.
Quarter: Was moved over to the credit presumably.
Quarter: Under.
Quarter: Your domain Kip is that is there any anticipated change there like maybe if you can go over your your historical collaboration or co investment with that unit and.
Quarter: How might that change going forward. Thanks.
Kip: Yeah, I mean, it plays into the comment that I made about opportunistic rather than I guess, all I'd say is theres been a lot of collaboration over the years and frankly, because that business was changing.
Quarter: Changing I would say a little bit and its opportunity to look more credit facing and less like it should be attached or private equity effort. It was just a it was just a pretty simple move for us that we made them kind of around year end that became formal here at the end of the first quarter.
Speaker Change: Thanks, so much.
Speaker Change: Thanks Pat.
Speaker Change: Our next question will come from Melissa Wedel with JP Morgan.
Melissa Wedel: Good morning, Chris Thank you taking my questions.
Melissa Wedel: Noticed that dividend income was substantially higher.
Melissa Wedel: Over a quarter.
Melissa Wedel: As we think about the dividend income stream going forward should we think about that as being.
Melissa Wedel: Aligned with the direction of change in interest rate and really consider that as much.
Melissa Wedel: Floating rate.
Melissa Wedel: The portfolio.
Speaker Change: Yeah, Hey, thanks for the question. So it's two things right. So Ivy Hill, obviously represents the lion's share of that dividend income, but I'd say for this quarter, it's higher because we actually took on them.
Speaker Change: But kind of one time dividend from one of our equity investments. So that's probably why you see it tick up.
Speaker Change: I don't think Theres, a big change there away from maybe that one time event, but we obviously benefit from having a diversified equity portfolio that can deliver.
Speaker Change: From time to time.
Speaker Change: Okay.
Speaker Change: And then I was hoping to follow up on one of the thing.
Speaker Change: That Scott touched on Scott, Hi, Walker, and I look forward to working with you.
Speaker Change: Yes.
Speaker Change: The CLO adherence post quarter end. Thank you mentioned, it's been awhile since you've done something like that I was hoping you could talk about CLO issuance as part of the funding strategy and next going forward what role cannot play when Washington Flex that person either secured or unsecured. Thank you.
Speaker Change: Yeah sure so I think.
Speaker Change: One of our main <unk>.
Speaker Change: For capital raising is diversity and I think that you know it was a pretty compelling opportunity for us the spreads in that in that market, where our very attractive relative.
Speaker Change: Relative to other forms of secured financing so I think as we're seeing all sort of just SaaS.
Speaker Change: As assets have moved into the from the BSL side to the private credit.
Speaker Change: The flow of that capital in the CLO market is also moving that way so they.
Melissa Wedel: EMEA loss, hence for us to tap that market to diversify funding sources at a pretty attractive spread and you know going forward I think it's definitely part of our playbook now.
Melissa Wedel: Okay.
Melissa Wedel: Our next question will come from Casey Alexander with Compass point.
Casey Jay Alexander: Yeah, Hi, good morning, and thank you for taking my question.
Casey Jay Alexander: Scott did not mention with traditionally you guys mentioned, what the spillover income is but you did mentioned that I was wondering what that number is unless I missed it which could be but you know you.
Casey Jay Alexander: You continue to pile up the spillover income quarter over quarter at what point in time do you sort of reached the limit or do you just consider it to be a cheap form of financing with the excise tax, but when do you sort of reached the limit at which point in time, you would kind of be forced to make some special distributions.
Speaker Change: Yes, I mean look over the history of the company Casey I. Appreciate the question. We've obviously done specials in a whole host of different ways and I said this in the past we tend to really want to look at it on an annual basis, because it's a tax calculation that we can really true up at the end of the year and that's typically when we when we make determination, but we're in a little bit of a.
Speaker Change: Tricky position as you can probably appreciate because.
Casey Jay Alexander: While we have loads of earnings in excess of the regular dividend.
Casey Jay Alexander: The trajectory for rates going forward as reasonably uncertain I think if you. If you asked around the table folks that have very different views. So <unk>.
Casey Jay Alexander: Combining that with the fact that we really aren't in a position.
Casey Jay Alexander: In my opinion anyway, where we want to put the company in.
Casey Jay Alexander: In a place where it would have to reduce its regular dividend, we just feel better materially out, earning it today and building NAV.
Casey Jay Alexander: So hopefully that answers the question, but it's a little bit tricky in a world where the rate environment changed quickly. We obviously wanted to recognize that much more substantial earnings power of the company and when we increase the dividend to the <unk> 48.
Melissa Wedel: But yeah, it's something we talk about a lot when when's. The right time, you know do we get credit for specialists do we not all of that is very much in the in the dialogue with the management team and our board.
Speaker Change: Yes, that's my only question. Thank you.
Speaker Change: Okay. Thanks.
Melissa Wedel: Our next question will come from Paul Johnson with K B W.
Paul Conrad Johnson: Hey, good afternoon, or good morning, Thanks for taking my questions.
Paul Conrad Johnson: You touched on my question in terms of just kind of pressure on on.
Paul Conrad Johnson: Fee income.
Paul Conrad Johnson: But.
Paul Conrad Johnson: Is this is that something that you think you've experienced more on deals that you've refinanced in the market or are you also seeing a little bit of a fee compression on new platform deals as well.
Kort Schnabel: Yes, it's cort snapple here.
Kort Schnabel: I would say.
Cort: It's primarily on existing transactions new transactions are seeing some fee pressure, but as was mentioned before the mix shifts. This quarter. I think we were 72% of our originations were to incumbent borrowers and that was really.
Speaker Change: The big driver of the numbers that Youre seeing there there is definitely some pressure across all fronts, but.
Paul Conrad Johnson: As is normally the case existing portfolio companies.
Paul Conrad Johnson: Deliver the same kind of fees as new borrowers there.
Paul Conrad Johnson: Okay.
Speaker Change: I appreciate that and one last question I had just kind of higher level, but I was wondering kind of get your thoughts on.
Paul Conrad Johnson: A feature alone feature that we've heard more about portability.
Paul Conrad Johnson: If that's something that you've offered in any of your loans, if thats something that you come across but any any kind of thoughts on on.
Speaker Change: On that feature would be nice to hear thanks.
Speaker Change: Yeah.
Speaker Change: Yeah, we've agreed to do it a couple of times, you've put a lot of guardrails, obviously around when that financing Ken Board I yeah.
Speaker Change: Counterparty would we be continuing to be involved with would be the fees loan documentation all sorts of other stuff.
Speaker Change: I actually think that's more of a feature frankly of last year, where.
Speaker Change: The financing environment felt more complicated so having the value of an incumbent group kind of move over with the new equity check and a sponsor to sponsor deal.
Speaker Change: Is highly valuable right when the financing markets feel uncertain I wouldn't say that the financing markets, particularly uncertain. Today. So my guess is the request for portability Asps would go down.
Speaker Change: But we'll see where we go from here.
Speaker Change: I appreciate it that's helpful.
Speaker Change: Congrats on a good quarter thanks, guys.
Speaker Change: Thanks, I appreciate the questions.
Speaker Change: Our next question will come from Mark Hughes with Truest.
Mark Douglas Hughes: Yes. Thank you good morning.
Mark Douglas Hughes: You had mentioned earlier in the call that you're a quantitative group determined the industry selection got to 500 basis points or could account for 500 basis points it out performance.
Mark Douglas Hughes: How stable is that over time those industry groups to then migrate or is that.
Speaker Change: Pretty pretty steady.
Speaker Change: Great that is matched by the way.
Mark Douglas Hughes: Yes.
Mark Douglas Hughes: Our group if you look at how they did the analysis it was over extended period of time in our portfolio.
Mark Douglas Hughes: And if you have been following us for as long as we've been doing this hour.
Mark Douglas Hughes: This groups that we're we tend to invest has been pretty stable. So they were able to get that analytics through our portfolio over very extended period of time.
Mark Douglas Hughes: And.
Mark Douglas Hughes: Is it.
Mark Douglas Hughes: <unk>.
Mark Douglas Hughes: Industry groups that you're focused on have been reasonably stable and that'd be okay. If you look at our business services.
Mark Douglas Hughes: If you look at our business services or health care services, the industries, where we have met really haven't changed.
Mark Douglas Hughes: What we don't invest in cyclical businesses, we don't invest in low margin businesses. So they were able to.
Mark Douglas Hughes: I have a significant amount of data with which to make that analysis out of.
Speaker Change: Yeah, Okay I appreciate that and then the exit seemed a low for April anything to that.
Speaker Change: I happen to be lower.
Speaker Change: Yeah, I don't think Theres anything to it. It's just the single month of data so I wouldn't take too much away.
Speaker Change: Very good thank you.
Speaker Change: Thank you.
Speaker Change: Our next question will come from Erik Zwick with Hobdy group.
Speaker Change: Yeah.
Erik Edward Zwick: Good morning.
Erik Edward Zwick: Wanted to start just maybe a quick follow up Kipp, you mentioned earlier or something.
Erik Edward Zwick: Uncertainty I think as we all know with regard to the future direction of interest rates and you know just looking at slide five.
Erik Edward Zwick: The percentage of fixed rate investments in the portfolio is up a little bit year over year, not a huge change by any means but curious if that's reflective at all of either your preference or borrower preference.
Erik Edward Zwick: You know, maybe do floating versus fixed given their belief in the direction of interest rates or maybe that's just kind of natural migration.
Erik Edward Zwick: From quarter to quarter.
Erik Edward Zwick: Yes, I don't think there's anything particularly targeted there I will say when we do some of our junior capital investing we try to strike the right balance between floating and fixed rate and frankly haven't have a mix of both.
Erik Edward Zwick: But yes, you are right that what one borrower today I may say I want fixed because.
Speaker Change: I think prior for longer than another borrower may say the exact opposite.
Speaker Change: There is nothing particularly intentional there in different situations just lead to different outcomes I wouldnt take too much away nothing.
Speaker Change: Nothing nothing intentional around the small change quarter to quarter, but definitely intentional in terms of having some fixed rate exposure in the portfolio, which I think is a differentiator for us versus others in the market and just gives us more ballast to operate through all different kinds of environments.
Speaker Change: Some of that fixed rate all as Kipp mentioned, the junior capital tying back to his comment about some of the opportunistic situations we are seeing for delevering.
Speaker Change: Balance sheets right now given the higher rates.
Speaker Change: Those are also fixed rate opportunity. So, yes, that's probably driving a little bit of that that pickup that youre seeing.
Speaker Change: Thanks, I appreciate the color there.
Speaker Change: Just a bit of a follow up as well on.
Speaker Change: Kind of your funding strategy today, you noticed or mentioned how active you've been hearing the first part of the year on the unsecured debt market.
Speaker Change: Fred's had been very attractive and tight.
Speaker Change: For Ya also youre up to about 78% of unsecured debt to total debt at this point and I'm wondering if you could just kind of refresh me on your bigger picture view of you know over time, what your preferred mixes and it sounds like.
Speaker Change: You've noted as well CLO says kind of reentered the picture as well. So just curious of your overall kind of bigger picture thoughts there.
Speaker Change: Yeah look I think we're always.
Speaker Change: Our investment grade rating is very important to us in maintaining that and definitely a big component of that is making sure. We're majority unsecured.
Speaker Change: We're probably a little heavier unsecured.
Speaker Change: At the moment than we would normally but I think we're happy at the levels. We're at now and I think like doing the CLO and other form to secure financing are also part of our like I mentioned part of our playbook, so tedious prior to everything.
Speaker Change: Great. Thanks for taking my questions today.
Speaker Change: Thank you.
Speaker Change: As a reminder press star one if you have a question. Our next question will come from Robert Dodd with Raymond James.
Robert James Dodd: Good morning.
Robert James Dodd: Last quarter, you gave us an update on on the title side of the portfolio.
Robert James Dodd: Would you be corrections.
Robert James Dodd: Obviously, I mean, not a closest don't really lies with.
Robert James Dodd: If anyone you won this quarter, if I look at the revolver and delayed draw utilization ticked off a couple of hundred basis points this quarter.
Robert James Dodd: So could you give us any more color on what the liquidity question.
Robert James Dodd: Palin.
Robert James Dodd: Yeah.
Speaker Change: Do you think.
Speaker Change: If rates do state high ARPA long ago.
Speaker Change: 2025 is there a point at which this liquidity practices.
Speaker Change: Uh huh.
Speaker Change: Yeah. Thanks for the question Robert So I mean, yeah, we saw modest but I wouldn't say a material uptick in just revolver drawdown that probably does obviously.
Speaker Change: Tell us that theres likely companies that obviously have less liquidity than they might like and I mentioned this a.
Robert James Dodd: A bit earlier in the call. It is kind of a unique period at least in my opinion, having done. This a long time, because you have a lot of pretty strong company performance and even with that strong company performance you have capital structures that got set up that maybe can't lift through 5% base rates for a long period of time and Thats why youre seeing.
Robert James Dodd: <unk> have really shifted materially right. Our non accruals are are up a touch but materially below historical averages and again when you look at what we consider to be our Underperformers and watch list the ones and the twos, it's pretty consistent in terms of the percentage of the portfolio.
Robert James Dodd: So all in all you know us as a big macro overlay to thinking about the portfolio as a whole we definitely take that into consideration and that's how we think about managing the assets today, but it's not a particular concern.
Speaker Change: Got it thank you and one more.
Robert James Dodd: Yes.
Robert James Dodd: Okay.
Robert James Dodd: I don't necessarily have a problem we pick.
Robert James Dodd: <unk> for the last couple of quarters.
Robert James Dodd: Quite obviously.
Robert James Dodd: I think.
Robert James Dodd: Cash collections voluntarily by the ball.
Robert James Dodd: But you know at repayment I mean is there any.
Robert James Dodd: Trends.
Robert James Dodd: It's volatile quarter to quarter anyway, but.
Robert James Dodd: Anything anything you're seeing from borrowers.
Robert James Dodd: Might have in the past two years ago one of teeth.
Robert James Dodd: I hate that patch.
Robert James Dodd: So just hold protection instead.
Robert James Dodd: I don't think Theres any significant trend I, just looked at Scott and he he westford.
Robert James Dodd: It's episodic, which I think.
Robert James Dodd: If it comes in the quarter and it's not all that easy to predict I wouldn't take.
Robert James Dodd: I wouldn't take any big picture trend away from some of that data, yes, Robert It's Mitch I think you have to look at M&A picks up a lot of our preferred.
Robert James Dodd: We're we like to invest in down the balance sheet, where we see real value is based on exits right and if and when M&A picks up you'll see a lot of that preferred come through when M&A is slow youll see that just continue to stay out there, which we're happy too because the companies are performing.
Speaker Change: Got it understood. Thank you.
Speaker Change: Thank you.
Robert James Dodd: This concludes our question and answer session I would like to turn the conference back over to Mr. Kipp Davir for any closing remarks.
Kipp deVeer: I will just thank everybody for their participation today and look forward to speaking to you all next quarter.
Kipp deVeer: Thank you 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 may 30th at five P. M. Eastern time to domestic callers by dialing one 808 395635.
Kipp deVeer: And to international callers by dialing 140 to 220 to 561.
Kipp deVeer: A replay will also be available on a webcast link located on the homepage of the Investor resources section of Ares Capital's website.
Kipp deVeer: [music] Goodbye.
Kipp deVeer: Mhm.
Kipp deVeer: Got it.
Kipp deVeer: [music].
Kipp deVeer: Hum.
Kipp deVeer: Oh.
Kipp deVeer: [music].