Q2 2024 Ares Capital Corp Earnings Call
Please standby your program is about to begin.
Speaker Change: If you need assistance during todays program. Please press star zero.
Yeah.
Good morning, welcome to Ares Capital Corporation's second quarter June 32024 earnings Conference call.
At this time all participants are in a listen only mode.
As a reminder, this conference is being recorded on Tuesday July 30th 2024.
I'll now turn the call over to Mr. John Stoma partners areas as public markets Investor Relations. Please go ahead.
Thank you very much and 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.
Speaker Change: Actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in the chassis pilot.
These 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.
Speaker Change: During this conference call. The company May discuss certain non-GAAP measures as defined by FCC regulations G. Such as core earnings per share or core EPS. The company believes the court E. T. S provides useful information for 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 reconciliation of these measures may also be found in our earnings release filed this morning with the SEC 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 warranty with respect to this information.
The company's second quarter June 30 of 2024 earnings presentation can be found on the company's website at Www Dot Ares Capital Corp Dotcom.
Speaker Change: Clicking on the second quarter of 2024 earnings presentation link on the homepage of the Investor resources section of the website.
Capital Corporation's earnings release and Form 10-Q are also available on the company's website.
I'd like to now turn the call over to Mr. Cliff together, various capital Corporation's Chief Executive Officer.
Thanks, John.
Hello, everyone and thanks for joining our earnings call today.
I'm here with our co presidents, Mitch Goldstein and court Schnabel, our Chief operating Officer, Johanna Markowitz, our Chief Financial Officer, Scott Lamb and other members of the management team.
I'd like to start the call by highlighting our second quarter results and will follow that with some thoughts on the economic environment and the current market.
This morning, we reported another quarter of strong core earnings of 61 cents per share.
Core earnings per share increased 3% from the prior quarter and 5% from the prior year.
These results were driven by a continued attractive investment environment healthy credit performance and an acceleration of investing activity and a more active transaction environment.
We believe we continue to see the benefits of our well established platform and significant scale in direct lending.
We reported record earnings per share of $19.61 this quarter, which is up 6% year over year.
And we provided a healthy quarterly dividend.
Over the past year Ares capital has generated among the best growth in NAV.
Amongst its peer group of externally managed bdcs with over $1 billion of market capitalization.
Throughout the second quarter of 2024, we saw a healthy and improving market environment for companies seeking our flexible capital solutions.
And we observed a particularly clear acceleration in private equity sponsor activity as most sponsors are seeking capital to support the growth of their portfolio companies and to exit investments as they work to increase distributions from aging fund vintages.
Speaker Change: Against this backdrop direct lenders have continued to represent a meaningful part of leverage buyout transactions during the quarter underscoring the importance of direct lending solutions in the current market.
In conjunction with this more active market, we saw meaningful growth in deal flow during the second quarter.
Specifically, we reviewed 40% more new transactions compared to the prior quarter.
Resulting in an estimated $185 billion in total quarterly deal volume reviewed.
For some context this amount exceeded the completed transaction volume reported in a broader institutional loan market for the second quarter.
Many of you know our philosophy has always been the outer originate the competition, which we believe is a key contributor to driving deal selection and strong long term credit performance.
Although we increased our $3 $9 billion in originations three fold from the same quarter a year ago. Our overall selectivity roommate rate remained consistent in the mid single digits.
We believe that our deep origination and long standing relationships put us in a better position to say no if we need to and move onto the next transaction when terms are not favorable.
Despite operating in a more competitive market our originated investments for the quarter have characteristics that we believe are highly attractive.
Specifically, our second quarter originations had a weighted average loan to value of below 40%.
All in yield of approximately 11% and leverage levels nearly a half turn below our weighted average over the past three years.
Furthermore, the originated yield per unit of leverage, which we view as one measure the risk adjusted return in the current rate environment. It was 10% higher than the recent three year average.
Moving on.
Our portfolio also continues to perform well and companies have adjusted well to the higher base rate environment or not.
Non accrual rates declined quarter over quarter and remain at levels well below industry averages.
Speaker Change: In addition, the fair value of our risk graded one and two loans, which are typically our underperformers and watch list names also declined from the first quarter.
The LTM EBITDA growth of our portfolio of companies continue to accelerate now for the third consecutive quarter the.
Speaker Change: The organic weighted average LTM EBITDA growth of our portfolio of companies reached 12% in the quarter, which is roughly double the rate from a year ago.
We see the positive impact.
This portfolio company performance driving stable to slightly improving portfolio company interest coverage ratios and declining overall portfolio leverage levels now, reaching the lowest level seen in four years.
The current pick up in the liquid capital markets environment has also allowed us to enhance our capital base by accessing attractive forms of financing and extending the duration of our committed debt facilities.
As Scott will discuss further during the quarter, we accessed both secured and unsecured funding markets at levels that we believe are amongst the best in our industry.
With that let me turn the call over to Scott to provide some more details on our financial results in some further thoughts on the balance sheet.
Thanks, Ken.
Let me walk through our income statement before discussing our balance sheet and the actions we took during the quarter to enhance our capital position.
Speaker Change: This morning, we reported GAAP net income per share.
What's your sense for the second quarter of 2024.
Compared to 76 cents in the prior quarter and 61 cents in the second quarter of 2023.
We also reported core earnings per share of 61 cents for the second quarter trailing 24 <unk>.
<unk> to 59 cents in the prior quarter and 58 cents in the second quarter as 2023.
Our investment income in the quarter was primarily driven by increased investment activity, resulting in higher sustaining fees.
Interest income.
Construction fees more than doubled from the first quarter of 'twenty 'twenty four reaching their highest level since the fourth quarter of 2022.
Interest income also increased by over 5% since.
Since the first quarter due to the net portfolio growth.
In terms of our expenses the increase in our interest and credit facility fees.
It was consistent with our higher leverage.
During the quarter to fund a portion of our portfolio growth.
Lastly, you may have seen a notable uptick in our tax expense during the quarter.
This is largely driven by capital gains taxes.
Speaker Change: Associated with the sizable realized gain from the exit of our investment in hailstone.
Even after netting out these capital gains taxes, we still generate a very nice overall return on our investment, but the net realized gain of over $115 million.
Our total portfolio fair value at the end of the quarter was $25 billion.
From $23 billion at the end of the first quarter.
The weighted average yield on our debt and other income producing securities at amortized costs was 12, 2% at June 30th which was down slightly from 12, 4% at March 31.
And equal to 12, 2% from the same period a year ago.
Our total weighted average yield on total investments at amortized costs remained steady at 1.1% up slightly from 11% a year ago.
Our stockholders' equity ended the quarter at $12 4 billion or $19 61 per share.
Another record high for Us as Kipp stated.
In terms of our capitalization and liquidity, we remain busy making sure. We can continue supporting our investment opportunities.
Since our last earnings call we.
Speaker Change: Took advantage of very favorable market conditions and issued $850 million of long five year unsecured notes at a stated coupon of five.
595%.
Similar to our other most recent issuances during this higher rate environment.
We swap this issuance to floating rate and.
And time is such that we achieved highly favorable terms.
<unk> and our floating rate spread to one months, so far of 164 basis points.
These transactions God upon the amendment and extension of our $4 $5 billion revolving credit facility and our first on balance sheet securitization 18 years, both of which took place earlier in the second quarter.
Post quarter end, we amended and extended our BNP funding facility by increasing the facility size by $400 million.
Extending the end of the enrollment period, and then make sure every day to a four three and five years respectively.
And reducing that Jon Scranton the facilities.
Basis points to 210 basis points.
In total, including the benefits of excuse me the time and the swap on the recent notes issuance.
We have been able to reduce the overall weighted average spread for our floating rate debt obligations.
Speaker Change: Change to drive what we believe are industry, leading borrowing terms.
Our overall liquidity position remains strong with nearly $5 $5 billion.
Total available liquidity, including available cash and pro forma for the post quarter activity discussed earlier.
We also ended the second quarter with a debt to equity ratio net of available cash of 1.01 times.
Speaker Change: We believe our significant amount of dry powder.
Speaker Change: <unk> well to continue supporting our portfolio company commitments and remain active in the current investing environment.
Moving on to the dividend, we declared a third quarter 2024 dividend 48 cents per share. This marks arcc's 15th consecutive year of stable or increasing regular quarterly dividends.
This dividend is payable on September 30th.
<unk> 24 to stockholders of record on September 13th.
And it's consistent with our second quarter 2024 dividend.
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.
This estimate score of upper level is more than two times, our current regular quarterly dividend, which.
Which we believe helps to provide further visibility and stability to our dividend.
I will now turn the call over to court to walk through our investment activities.
Thanks, Scott I'm now going to spend a few minutes, providing more details on our investment activity our portfolio performance and our positioning for the second quarter.
Court: I will then conclude with an update on our post quarter end activity backlog and pipeline.
In the second quarter, our team originated approximately $3 $9 billion, new investment commitments meaningfully expanding our deployment from last quarter and from the same period last year.
Importantly, our $2 $5 billion of net commitments set a new quarterly record as our existing borrowers are consolidating their financing their relationships with us and new borrowers are increasingly selecting <unk> as their lender.
Court: We continue to believe our growing portfolio of 525 companies and 11% increase over last year provides.
<unk> provides a large installed base of differentiated lending opportunities for our company.
By further investing in our incumbent borrowers, where we have an existing relationship and significant knowledge of the company.
Court: We believe we can reduce underwriting risk and drive better credit performance.
We continue to lean into these advantages it's over 60% of our total commitments in the quarter were to existing portfolio companies.
We believe that the scale and flexibility we provide to our existing borrowers are driving market share gains for us.
Court: As borrowers consolidate their lending relationships in favor of those who can support the long term growth of their business plans.
As one example of this trend across our top 10 investments to existing portfolio companies in the quarter, we doubled our share of the overall financings compared to our previous share provided to those same companies.
Court: Yeah.
Court: During the second quarter, we also continued to add new borrower relationships.
Our investments into new portfolio companies increased 35% quarter over quarter, driven by our focus on covering the broader middle market as well as the growing buyout activity. Among these borrowers.
The median EBITDA of new portfolio companies in the quarter was $61 million slightly below the $81 million median EBITDA of our total portfolio, reflecting the rebound in activity across smaller and mid sized borrowers and our ability to originate across all different asset classes.
Yeah.
Reflecting on a very active quarter. We ended the second quarter with an approximately <unk> $25 billion portfolio at fair value, which grew 8% from the prior quarter and 16% from the prior year.
Let me now update you on the state of our overall portfolio.
With respect to our credit performance, our weighted average portfolio grade of 3.1 remained unchanged from the prior quarter's level.
Our non accruals at cost ended the quarter at one 5% 20 basis points lower than the prior quarter.
Our current non accrual level at cost remains well below our two 9% historical average since the great financial crisis, and the BDC average of three 8% over the same time period.
Our non accrual rate at fair value remained consistent with last quarter at <unk>, 7%, which continues to be well below historical levels for our company.
Further underpinning the strength of our portfolio at the end of the second quarter, the weighted average loan to value in the portfolio was 43%.
Which we believe provides us with strong downside protection for our loans.
In addition, we remain highly selective when extending credit to companies based on annual recurring revenue as our total exposure to these loans is currently less than 3% of the portfolio at fair value.
An additional point of differentiation in our portfolio is that company size has not been a driver of performance.
He is in our portfolio with $25 million to $50 million of EBITDA had similar or even higher growth rates as compared to companies with over 100 million of EBITDA.
Court: Our underwriting and portfolio management process and our ability to select what we believe are the best companies in attractive industries helps.
It helps drive our results.
We also remain highly focused on the benefits that diversification adds to the credit strength of our portfolio.
Our average hold size is only 2% of fair value.
Excluding our investments in Ivy Hill in 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 12% of the portfolio at fair value.
This level of diversification meaningfully reduces the impact to the overall portfolio from any single negative credit event and an individual company.
We believe this is a critical risk management tool that differentiates us in the market.
Finally, we had we've had an active start to the third quarter.
From July one through July 24th 2024, we made new investment commitments totaling $682 million.
Court: Of which $532 million refunded.
Court: We exited or repaid $493 million of investment commitments, which resulted in us, earning 2 million of net realized gains.
Court: As of July 24th our backlog and pipeline stood at roughly $3 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 will now turn the call back over to Kip for some closing remarks.
Thanks, a lot court.
In closing our strong earnings this quarter underpinned by the many durable advantages that we believe continue to drive differentiated results for our investors.
Todays more competitive investing environment, we are squarely focused on leveraging our origination scale to see is wide and opportunity set as possible maintaining our rigorous credit standards negotiating appropriate documentation and being highly selective around deal flow.
With our historically low leverage our proven ability to invest across the capital structure.
And a healthy underlying portfolio growing companies. We believe we are well positioned to deliver attractive financial results through varying market and interest rate conditions throughout the year.
As always we appreciate you joining us today and we look forward to speaking with you next quarter with that operator, we can open the line for questions.
Thank you at this time, if you would like to ask a question. Please press the star and one on your telephone keypad now.
Court: If you would like to withdraw your question. Please press star two.
Please note as a courtesy to those who may wish to ask a question. Please limit yourself to one question and a single follow up.
If you have additional questions you may reenter the queue.
The Investor Relations team will be available to address any further questions at the conclusion of today's call.
And we do have our first question from Melissa Wedel with JP Morgan.
Court: Yeah.
Alright, thanks for taking my questions today.
Repeated a few of them already.
Look I think there's a lot here that was really strong in the quarter.
But one of the things that has come up from arc line during the quarter was a pretty public situations with Claro site.
Certainly saw the markdown during the quarter and it looked like you added that to nonaccrual I'm wondering if there's anything that you can share with us in terms of sort of the ongoing situation. There how are you.
You think about that Mark and how you think about resolving it.
Sure. Thanks, Melissa and surprise people actually we're going to ask a question about fluoro side.
Kevin.
So look what I'd say is most of what's been reported in the press is not accurate.
So I think that's important just to put out there.
The last article that I did see was reasonably indicative of what's happening there which is.
Unfortunately.
For Vista equity partners is the sponsor you know, it's not going to be a situation that works out very well for them. So they're handing the company ever to a significant group of lenders were not the agent on the facility Owl rock is so we're sort of working with the group to.
Put a restructuring in place there where lenders will obviously reduce staff.
And take control of the company.
Court: That's the first time, that's happened in our history.
But for some reason its taken taken out a lot of a lot of press.
Court: But that's what's going on it's pretty simple.
Okay.
I think youre right our clients, we definitely got more than a few questions about it during the quarter.
I appreciate your willingness to share whatever you can there I think thats helpful.
Okay. Thanks.
Frankly, it and excited inside a lot of conversation based on a lot of.
Speculation in the situation that frankly wasn't very accurate so.
Alright, I appreciate the clarification.
If I could follow up on one of the comments you made about the real.
<unk> pickup and investment activity during the quarter.
Sounded like a lot of the sponsor driven activity.
We're seeing and certainly seem to be carried forward in the backlog, which I don't think we've seen some challenges in the last few years.
It sounded like it's driven by M&A.
Is that a fair characterization are you also seeing a decent amount of refi activity as well. Thank you.
Yes, we're not seeing a tremendous amount of refi activity. So you're right I think theres better M&A activity that the direction that we're seeing is actually sponsors in particular as you've probably read and it's actually reasonably accurate are under a lot of pressure to return capital of Lps.
Court: So there is a substantial amount of unrealized NAV thats just in the ground.
Hard time getting to realizations. During this increase in rates and then presumed decrease in valuations interestingly most of the M&A that we've seen has actually been for what I'd characterize as the best companies and sponsors portfolios and multiples on those M&A transactions are actually holding up to be.
Reasonably high at least in my estimation based on.
Reset that I think we all expected would occur with materially higher rates, we'd expected lower valuations on new transactions, but the ones that we're seeing get donner actually with some of the best companies that we know that are out there and they are getting done are reasonable multiples and obviously they are deals that we view as attractive that we want to participate that I'll. Just add this is cort one more thing that I think we mentioned.
The prepared remarks, as well is that we've seen a real pickup in M&A across all different size companies.
We are benefiting from some large transactions for the <unk>.
Last 18 or 24 months during the dislocation period, but we've really seen activity now across the middle market. The smaller end of the middle market as well as all of the large deals as well.
We always talk about our broad origination, but I think it's showing up now as we see.
The environment really start to rebound across all these different asset classes.
Yeah.
Thanks Scott.
Thanks Melissa.
And we have our next question from Finian O'shea with Wells Fargo Securities.
Hey, everyone. Good morning.
So I think Corp fin.
How are you.
Of course comments with you and I think new investments, which were up are in the $60 million range can you.
Add some color to that like how big of a drop is that from what <unk> been doing in recent years is that a function of less attractive terms in a large market and is that also something.
Going into the core middle market is that something that your large cap peers are doing as well.
Yes, Thanks, Great question.
More along the same lines of what I was just talking about which is just sort of the rebound across all these different size companies.
And I don't think its anything out of the ordinary for us to be originating from the middle market and the smaller end of the market. There's lots of great companies of all different sizes and stripes and it's highly strategic for us to get invested in companies. When they are small so that we can gain incumbency and then grow.
With them and support their business plans. So I don't think it's anything unusual I think it's just a change from this environment we've been operating in.
For the last 18 or 24 months.
As to the last part of your question.
I think we see a different set of competitors in the more medium and smaller sized companies than we see in the large sized companies.
Court: There are many competitors if any that compete across all different size ranges and I think that is one of our core differentiating advantages. So it's a different set of competitors in those markets.
They all those markets come with different <unk>.
Competitive dynamics as well so we were fortunate to be able to pivot up and down based on what the market is giving us and where we see attractive risk adjusted return.
Yes.
Okay.
So there's a small follow up on the on the post quarter commitment yields.
Down a touch too.
Speaker Change: 10, 6% is is that more of a.
Function of samples.
Sample size or is that sort of where we are now on new deployment.
I think theres I think theres been modest spread compression the reality is.
That didn't surprise us as much rate spreads were wide.
Tightened a little bit.
In response to what people see as better than expected economic performance and lower than.
Median average defaults right so in and what they think is a pretty strong recovery here in the U S.
Yes spreads will come in with great, though is that the all in.
The all in total return on the asset class is still in our opinion pretty extraordinary with base rates as high as they are.
Great. Thanks, so much.
Speaker Change: Sure Thanks for the questions.
And we have our next question from Paul Johnson with <unk>.
Paul Johnson: Yes. Good morning, Thanks for taking my question.
Paul Johnson: Just generally.
Speaker Change: Just with what.
Please.
Earl side I was wondering.
Yes.
That raise.
Brown: Raise any issues or questions just general Brown.
Sponsor concentration within.
Paul Johnson: It would be or your network and just kind of in general.
That's funded.
The portfolio.
Paul Johnson: Currently or going forward in terms of.
So that large.
Group deals kind of.
Participation Blake.
Investments and you've been working with.
Paul Johnson: The other.
Specific direct lenders.
If I heard the question correctly and you can let me know if I didn't but.
We don't have a lot of concentration in.
Our portfolio either with sponsors are sponsored versus non sponsored obviously with 500 plus investments so.
When we really drill through and look at who are the biggest sponsors in the portfolio. There. Obviously sponsors do we do a tremendous amount of business with that we have a lot of confidence in.
Yes.
It is one of them.
What I will say it didn't work out so well for them. Unfortunately, but as I mentioned earlier this won't be the first situation, where we have to step in and own a company with either.
The management team as a sole lender with a group of other lenders so.
I think again as I said a lot of the facts reported were really incorrect, it's an unfortunate situation, but like the other ones will go in and fix it and move on.
Thanks, Kevin appreciate that last question.
Question for me just on the higher tax expense in the quarter.
Speaker Change: It looks like they have been.
Speaker Change: Leveraged correct approximately $9 million or so was from the excise tax and $32 million or so.
Income related tax.
Should we look at that.
A portion of it that $32 million or so is kind of basically non recurring one time in nature.
Yes about $30 million of that.
Speaker Change: Was that related to the hill stone exit so.
One time Tam.
Tax because we held investment in a blocker corporation. So we unfortunately have to pay a corporate level taxes for that but still net net ahead on the overall on a net net basis of $115 million gain.
Speaker Change: Got it congratulations.
Again for you guys.
That's all for me thanks.
Thank you.
And we have our next question from Kenneth Lee with RBC capital markets.
Hey, good morning, Thanks for taking my question in terms of the quarter's originations.
What sort of like the mix between incumbents versus new borrowers that you saw.
Speaker Change: Yes, we're looking around and I think we're saying it's about two thirds, yes, I think it's around 60% incumbent borrowers, 40% new borrowers so a little higher on the new borrower mix than it was again during the dislocation period.
As the M&A environment picks up.
Got you very helpful. There and then in terms of a.
Junior debt opportunities, what sort of like the latest outlook there.
Thanks.
I'm, sorry, we missed that in terms of senior debt opportunities.
Junior debt opportunities.
Okay.
Thanks, Yes, just a little hard to hear there.
I would say there are probably fewer and far between these days in healthy performing kind of new buyouts and then.
Refinancings the unit tranche is really kind of taken over.
In driving most of the new deal flow.
So a little bit.
Less relevant in places that we're actually see junior capital would be the most impactful is where companies are finding himself with.
I think good performance, but maybe lower interest coverage right and they need some relief from the higher base rate, we're actually seeing some interesting opportunities where you can bring in deleveraging capital.
Probably can't pay cash interest to be honest, because that's the constraint, but then can make a make a situation with lenders improved extend duration for the equity and we think we can achieve some pretty interesting returns on that junior capital, but it's it's it's very light as the general answer to your question, Yes, I would just add the one place we are.
Speaker Change: Seeing second lien opportunities is in very large cap borrowers, where we're actually seeing an interesting dynamic where crossover high yield buyers are stepping in and pricing those second lien securities pretty darn tight from a spread perspective even.
Almost right on top of Unitranche spreads. So we're being just highly selective we are seeing those opportunities, but we're just being extremely selective.
Around where we're playing this.
Yes.
Got you very helpful. There. Thanks again.
Okay.
And we have our next question from Robert Dodd with Raymond James.
Hi, guys good morning.
Paul Johnson: All in all Paul.
Not really Paul, but what proportion of your portfolio I mean, you gave us.
But can you give us any color on what.
How common is the type of structure, you saw and Paul in terms of the covenant package et cetera, et cetera, how common is that within.
Within the portfolio more broadly.
Artifact confined to currently.
When he won originations or is that structure still.
Evelyn.
Today, obviously pull by itself and 20 basis points, you portfolio fair value it doesn't matter that much anymore questions.
Is it elsewhere.
Paul Johnson: Well.
Speaker Change: Yes, I think that's actually the important question. So I'll just say it explicitly which is we spend I think a tremendous amount of time, just because of the experience we have in the market thinking about frankly documentations.
And the way that we come into transactions is as most of you on the phone know we like to lead our own deals we'd like to write documents, we like to structure covenants et cetera.
Because we've been doing this a long time, and we think that we actually.
Allow for things that give us better downside protection and can mitigate risks so I'd actually say, Robert we don't view sort of liability management transactions, which are.
Obviously, increasing in the broadly syndicated world.
As something Thats really present in our portfolio.
We don't view them as generally a risk to our middle market borrowers and I'd actually telling you and I think quarter probably agree over the last 12 to 18 months, we probably passed on deals.
More often on a document.
And then any other reason.
Speaker Change: For passing on a deal.
There's a lot of debate about what the covenants look like unique covenants do not need covenants. We can all have those debates can you make loans to companies, where you have no liquidity, where companies can actually strip assets and move them into unrestricted subsidiaries that arent parts of your collateral package with no ability to exit.
I would argue no.
So we try very very hard to not put ourselves in that situation.
I don't again think that what was reported on Fluoro site was accurate.
Speaker Change: But I know for certain that it is not indicative of other things in the portfolio.
Or what was reported inaccurately is not indicative of what's what else is in the portfolio. So I don't view that as a huge risk and back to fins earlier question around origination across all different size ranges.
Because we are able to do that it gives us the luxury of saying no to <unk> point, when we need to say no.
Because of the documentation issue in a larger cap deal.
And I think again back to plural site.
A lot of what was reported was inaccurate and document the document protections actually worked pretty darn well in that transaction as well.
Got it. Thank you just following up on that.
The size issue.
Not related.
Besides the quality I mean, you've said a lot of the deals are getting done right now is a very high quality companies.
There's still a lot left that may be.
Lower quality companies that need to be refined at some point over the next couple of years.
Speaker Change: What what's your approach going to be.
Talking about credit quality to the market.
Good ones have been done and you're left with.
Be great to see great companies out in the market transacting.
Do you think youre going to be.
Sitting on the sidelines for some prolonged periods of time next year or any thoughts on that front.
I mean I can jump in on that.
Speaker Change: Yes.
I think the ingredients are in place for a pretty broad pick up in volume and that would get us back to a more normalized environment, where theres going to be sure. Some worse quality credits, but still some good quality credits.
Speaker Change: And I think you'll just see like we always do we'll just be very selective in choosing the best quality companies, obviously, if theres only weaker companies that we will be less active but.
I'm not sure that that's how we foresee the transaction environment being I think theres going to be a nice healthy mix.
Going forward, yes, that's right and I think our incumbency advantage as well will help us right I mean, having this many companies but look the reality is Robert we're in a situation where in People's numbers numbers are a little bit different I'll give you just rough numbers that we think are reasonably accurate theres about three trillion dollars of unrealized NAV.
Okay.
In private equity that's in the ground on return to LP capital.
Versus about a trillion dollars of private equity dry powder to do new transactions.
Till you unlock that unrealized NAV through selling its difficult to actually create new capital for transactions. So what I would think would happen is.
The $3 trillion will start looking for an exit and that's all going to be about at what price and my guess is that unrealized NAV get sold at lower multiples with lower leverage levels that can obviously support a capital structure taking into account a 5% base rate.
Because that capital can't stay locked in the ground forever.
Yeah.
Understood I appreciate the color. Thank you.
Thanks for your questions.
And our next question comes from Mitchel Penn with Oppenheimer.
Yeah.
Just a couple of quick questions on the perpetual preferreds in the portfolio.
How do we ultimately get collected.
Okay.
Typically.
Most of our Pic gets collected upon exit or repayment a company gets sold or gets refinanced.
Speaker Change: Doesn't matter if it's the actual.
Speaker Change: Or not.
Do you have like a 10 year.
Option to cause a conversion or typically you don't get that.
Sometimes yes, and sometimes now.
Got it.
In terms of synthetic tick can you do.
You guys do the synthetic picks.
Somebody mentioned this to me yesterday I actually don't know what that is I don't know what that means but if you want to describe it to me I don't think so because I don't know what that mean.
So essentially you issue.
Aligned to your borrower and they access the line to pay interest each each interest period, so they're essentially drawing the line down to pay the interest each quarter.
Yes, I don't think we really do that expressly I mean, the way that I guess I would think about that as companies typically have undrawn credit facilities and obviously they can use those to make interest payments and do a lot of other things from drawing that capital but.
That sounds a bit sort of like in like an interest reserve I guess, we've done that in a couple of transactions over 20 years, where you set a company up with effectively a cash balance or an interest reserve to get them through a period of time, whether it's a turnaround or a company that's not generating cash flow out of the gate, but it's very rare I think it's probably more common in some of the.
Recurring revenue loans the loans.
Loans and as we already talked about that's a very small percentage of our portfolio and even within that percentage in our portfolio and even within that percentage of our portfolio.
I think yes.
Very limited amount if any.
The type of transactions you are talking about.
Got it and last question the unrealized loss was there.
Driven by plural site this quarter.
Yes, partially I mean, obviously it has a handful of different components, but yes auto side for sure is in there.
Got it.
Speaker Change: All for me thanks, guys.
Sure no problem.
Yes.
And just a reminder, if you'd like to ask a question that is star one on your telephone keypad and our next question comes from Casey Alexander with Compass point.
Hi, good morning, and thanks for taking my questions. My first question is we saw the weighted average yield on interest, earning investments declined about 20 basis points.
Yield on the overall portfolio is stable I think because you were able to because it's 12% of your exits where non interest.
Earning assets.
<unk> was able to balance it out but.
Looking at sort of your new issue yields should we be thinking about some continuing yield compression over the next few quarters does that make sense.
Turning to court, but I mean, I think generally we've seen spreads come in as I mentioned earlier in one of the responses a little bit, but I think cort and I were talking about it yesterday you can chime in we kind of feel like they've plateaued again, and we don't see a lot of <unk>.
Compression in the last 60 to 90 days and so they're obviously might be a little bit of a lag effect of what we're seeing currently and then what shows up in the quarterly results as we report them.
Cort: But anecdotally I think seed.
Hopefully a little bit of a stabilization more recently.
Yes.
Maybe it goes without saying, but obviously there is lots of benefits of spread compression as well in terms of increased M&A activity higher capital structuring fees as you saw this quarter that jumped meaningfully so there's offsets.
That we're able to take advantage of when we see that and it's not really anything that we're particularly concerned about.
Now, let's skip I already talked about higher overall yields and lower leverage levels relative to historical averages set us up really well to be investing in today's environment.
Alright, great. Thank you Mike My follow up is you know.
Couple of quarters.
Cort: Kipp, maybe expressed a little bit of frustration that the stock valuation wasn't a little bit better.
Speaker Change: Now that the environment is picking up it seems like.
You sold a lot of shares 21 million shares in the quarter sort of relative to the activity the leverage ratio came up a little bit, but there's so much room to bring the leverage ratio up more.
How do you.
Is this are the stock sales indicative of also what you think.
Your origination environment might be in this next quarter or how should we think about your balancing the stock sales relative to the origination and deal calendar.
Jeremy: Yeah, I mean, I think the simple answer to your question is yes, right. So it got much busier. We felt despite it was one of my partners, who said to me every CEO thinks that their company's stock price is too low so jeremy into the mix, but despite that look we're still issuing through the ATM program very cost effectively accretively to the company.
And to your question, specifically supporting what we think is strong backlog and pipeline that we're excited about.
Alright, great. Thank you very much.
Thanks Casey.
And what's more if you would like to ask a question that is star and one.
And our next question comes from Doug Harter with UBS.
Yeah.
Speaker Change: And Doug if you could make sure your Mic is office when you pose your question.
And just a reminder, that is star and one for any questions <unk> comments now.
And this does conclude our question and answer session I would like to now turn the conference back over to Mr. Kipp severe for any closing remarks.
No. Thanks, I guess, they let us off the hook early.
I appreciate everyone's support and joining the call hope you enjoy the rest of the summer and we will.
If you're between.
Between the end of this quarter here and into the next thanks again.
Ladies and gentlemen, this concludes our conference call for today.
If you missed any part of today's call an archived replay of the call will be available approximately one hour. After the end of the call through August 30th at five P. M. Eastern time to domestic callers by dialing one 800 839 to $3 98, and two international callers by dialing 140 to 2207208.
An archived replay will also be available on a webcast link located on the homepage of the Investor resources section of Ares Capital's website.
And have a great day.
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