Q2 2024 Ares Capital Corp Earnings Call
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Yeah.
Operator: Good morning. Welcome to Ares Capital Corporation's second quarter June 30, 2024 earnings conference call. At this time, all participants are in a listen-only mode.
Speaker Change: Good morning, welcome to Ares Capital Corporation's second quarter June 30th 2024 earnings Conference call.
Speaker Change: At this time all participants are in a listen only mode.
Operator: As a reminder, this conference is being recorded on Tuesday, July 30th, 2024. I will now turn the call over to Mr. John Stilmar, partner of Ares' Public Markets Investor Relations. Please go ahead.
Speaker Change: As a reminder, this conference is being recorded on Tuesday July 30th 'twenty 'twenty four.
Speaker Change: I'll now turn the call over to Mr. John Stoma partners areas as public markets Investor Relations. Please go ahead.
John W. Stilmar: 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 and are subject to risks and uncertainty. The actual results of the company could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. The company assumes no obligation to update any such forward-looking statements.
Speaker Change: 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.
John W. Stilmar: Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information for investors regarding financial performance because it is one method the company uses to measure its financial condition and results of operations.
Speaker Change: Actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in the Chesapeake to Thailand.
Speaker Change: 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 that core Etfs 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.
John W. Stilmar: A reconciliation of Gap Net Income per Share, the most directly comparable gap 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 the earnings release filed this morning with the SEC on Form 8K. Certain information discussed in this conference call and the accompanying slide presentation, including information relating to portfolio companies, is derived from third-party sources and has not been independently verified, and accordingly, the company makes no representation or warranty with respect to such information.
Speaker Change: A reconciliation of GAAP net income per share the most directly comparable GAAP financial measure to core EPS.
We found in the accompanying slide presentation for this call.
Speaker Change: In addition reconciliation of these measures may also be found in our earnings release filed this morning with the SEC form 8-K.
Speaker Change: Certain information discussed on 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.
John W. Stilmar: The company's second quarter, June 30th, 2024, earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the second quarter 2024 earnings presentation link on the homepage of the investor resources section of the website. The company'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. Kipp deVeer, Ares Capital Corporation's Chief Executive Officer. Kipp?
Speaker Change: The company's second quarter June 30th 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 2024 earnings presentation link on the homepage of the Investor resources section of the website.
Speaker Change: These capital Corporation's earnings release and Form 10-Q are also available on the company's website.
Cliff: I'd like to now turn the call over to Mr. Cliff together Ares capital Corporation's Chief Executive Officer.
Kipp deVeer: Thanks, John. Hello, everyone. And thanks for joining our earnings call today. I'm here with our co-presidents Mitch Goldstein and Kort Schnabel, our Chief Operating Officer Jana Markowicz, our Chief Financial Officer Scott Lem, and other members of the management team. I'd like to start the call by highlighting our second quarter results, and we'll follow that with some thoughts on the economic environment and the current market. This morning, we reported another quarter of strong core earnings of $0.61 per share. Our core earnings per share increased 3% from the prior quarter and 5% from the prior year.
Cliff: Thanks, John.
Cliff Ares: Hello, everyone and thanks for joining our earnings call today.
Cliff Ares: 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.
Kipp deVeer: These results were driven by a continued attractive investment environment, healthy credit performance, and an acceleration of investing activity in 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 NAV 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.
Cliff Ares: 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.
Cliff Ares: This morning, we reported another quarter of strong core earnings of 61 cents per share.
Cliff Ares: Our core earnings per share increased 3% from the prior quarter and 5% from the prior year.
Cliff Ares: 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 indirect lending.
Speaker Change: 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.
Speaker Change: 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.
Kipp deVeer: Throughout the second quarter of 2024, we saw a healthy and improving market environment for companies seeking our flexible capital solution. 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 exit investments as they work to increase distributions from aging fund vintages. Against this backdrop, direct lenders continued to represent a meaningful part of leverage buyout transactions during the quarter, underscoring the importance of direct lending solutions in the current market.
Speaker Change: Throughout the second quarter of 2024, we saw a healthy and improving market environment for companies seeking our flexible capital solutions.
Speaker Change: 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 Adrian 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.
Kipp deVeer: 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.
Speaker Change: In conjunction.
Speaker Change: With this more active market, we saw meaningful growth in deal flow during the second quarter.
Speaker Change: Specifically, we reviewed 40% more new transactions compared to the prior quarter.
Speaker Change: Resulting in an estimated $185 billion in total quarterly deal volume reviewed.
Kipp deVeer: For some context, this amount exceeded the completed transaction volume reported in the broader institutional loan market for the second quarter. As many of you know, our philosophy has always been to outsource the competition, which we believe is a key contributor to driving deal selection and strong long-term credit performance. And although we increased our $3.9 billion in originations threefold from the same quarter a year ago, our overall selectivity rate remained consistent in the mid-single digits.
For some context this amount exceeded the completed transaction volume reported in a broader institutional loan market for the second quarter.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: The mid single digits.
Kipp deVeer: We believe that our deep origination and longstanding relationships put us in a better position to say no if we need to and move on to 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 yields of approximately 11%, and leverage levels nearly a half turn below our weighted average over the past three years.
Speaker Change: 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.
Speaker Change: Despite operating in a more competitive market our originated investments for the quarter have characteristics that we believe are highly attractive specifically.
Speaker Change: Specifically, our second quarter originations had a weighted average loan to value of below 40%.
Speaker Change: All in yield of approximately 11% and leverage levels nearly a half turn below our weighted average over the past three years.
Kipp deVeer: 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% 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. Our non-accrual rates declined quarter over quarter and remain at levels well below industry averages. In addition, the fair value of our risk-rated one and two loans, which are typically our underperformers and watch list names, also declined from the first quarter.
Speaker Change: Furthermore, the originated yield per unit of leverage, which we view as one measure of the risk adjusted return in the current rate environment.
Speaker Change: 10% higher than the recent three year average.
Speaker Change: Moving on.
Our portfolio also continues to perform well and companies have adjusted well to the higher base rate environment.
Speaker Change: 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.
Scott C. Lem: The LTM EBITDA growth of our portfolio companies continued to accelerate for the third consecutive quarter. The organic weighted average LTM EBITDA growth of our portfolio companies reached 12% in the quarter, which is roughly double the rate from a year ago. We see the positive impact of 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 we've seen in four years.
Speaker Change: The LTM EBITDA growth of our portfolio companies continue to accelerate now for the third consecutive quarter.
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.
Speaker Change: We see the positive impact.
Speaker Change: This portfolio company performance driving stable to slightly improving portfolio of company interest coverage ratios and declining overall portfolio leverage levels now, reaching the lowest level seen in four years.
Scott C. Lem: The current pickup 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 access both secured and unsecured funding markets at levels that we believe are amongst the best in our industry. With that, I'll turn the call over to Scott to provide some more details on our financial results and some further thoughts on the balance sheet. Thanks, Kip.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Scott: Thanks, Ken.
Scott C. Lem: 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. This morning we reported a gap in income per share of $0.52 for the second quarter of 2024 compared to $0.76 in the prior quarter and $0.61 in the second quarter of 2023. We also reported core earnings per share of $0.61 for the second quarter of 2024 compared to $0.59 in the prior quarter and $0.58 in the second quarter of 2023.
Scott: 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.
Speaker Change: <unk> for the second quarter of 2024.
Speaker Change: Compared to 76 cents in the prior quarter and 61 cents in the second quarter of 2023.
Speaker Change: We also reported core earnings per share of 61 cents for the second quarter of trailing 24.
Speaker Change: Compared to 59 cents in the prior quarter and 58 cents in the second quarter as 2023.
Scott C. Lem: Our investment income in the quarter was primarily driven by increased investment activity, resulting in higher structuring fees and interest income. The structuring fees more than doubled from the first quarter of 2024, reaching their highest level since the fourth quarter of 2022.
Speaker Change: Our investment income in the quarter was primarily driven by increased investment activity, resulting in higher shop tenancies.
Speaker Change: And interest income.
Speaker Change: Construction fees more than doubled from the first quarter of 'twenty 'twenty four reaching their highest level.
Speaker Change: The fourth quarter of 2022.
Scott C. Lem: Interest income also increased by over 5% since the first quarter due to net portfolio growth. In terms of our expenses, the increase in our interest and credit facility fees 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 associated with a sizable realized gain from the exit of our investment in Heelstone.
Speaker Change: Interest income also increased by over 5%.
Speaker Change: Since the first quarter due to the net portfolio growth.
Speaker Change: In terms of our expenses the increase in our interest and credit facility fees.
Speaker Change: Consistent with our higher leverage during the quarter to fund a portion of our portfolio growth.
Speaker Change: Lastly, you may have seen a notable uptick in our tax expense during the quarter.
Speaker Change: This is largely driven by capital gains taxes.
Speaker Change: Associated with the sizable realized gain from the exit of our investment in hailstone.
Scott C. Lem: Even after netting out these capital gains taxes, we still generated a very nice overall return on our investment with a net realized gain of over $115 million. Their total portfolio fair value at the end of the quarter was $25 billion, up from $23 billion at the end of the first quarter. The weighted average yield on our debt and other income-producing securities at advertised costs was 12.2% at June 30, which was down slightly from 12.4% at March 31st and equal to the 12.2% from the same period a year ago. Our total weighted average yield on total investments at amortized costs remained steady at 11.1%, up slightly from 11% a year ago.
Speaker Change: Even after netting out these capital gains taxes.
Speaker Change: We still generate a very nice overall return on our investment, but the net realized gain of over $115 million.
Speaker Change: Our total portfolio fair value at the end of the quarter was $25 billion.
Speaker Change: From $23 billion at the end of the first quarter.
Speaker Change: 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.
Speaker Change: And equal because the 12, 2% from the same period a year ago.
Speaker Change: Our total weighted average yield on total investments at amortized costs remained steady at 1.1% up slightly from 11% a year ago.
Scott C. Lem: 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 took advantage of very favorable market conditions and issued $850 million of long, five-year unsecured notes at a stated coupon of 5.95%, similar to our other recent issuances during this higher rate environment.
Speaker Change: Our stockholders' equity ended the quarter at $12 4 billion or $19 61 per share.
Speaker Change: 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.
Kipp: Since our last earnings call, we took advantage of very favorable market conditions.
Kipp: And issued $850 million of long five year unsecured notes at a stated coupon of five.
Kipp: 595%.
Kipp: Similar to our other most recent issuances during this higher rate environment.
Scott C. Lem: We swapped this issuance for floating rates, and timed it such that we achieved highly favorable terms, resulting in a floating rate spread to one month SOFR of 164 basis points. These transactions build upon the amendment and extension of our $4.5 billion revolving credit facility and our first on balance sheet securitization in 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 the maturity date to a full three and five years, respectively, and reducing the adrenaline spread in the facility from 150 basis points to 210 basis points.
Kipp: We swap this issuance to floating rate and.
Kipp: And time is such that we achieved highly favorable terms.
Kipp: <unk> and our floating rate spread to one months, so far of 164 basis points.
Kipp: These transactions go out 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.
Kipp: Post quarter end, we amended and extended our BNP funding facility by increasing the facility size by $400 million.
Kipp: Extending the end of the enrollment period and the maturity date to a four three and five years respectively.
Kipp: And reducing that Jon Scranton the facilities.
Kipp: Basis points to 210 basis points.
Scott C. Lem: In total, including the benefits we achieved with the timing of the swap on the recent notes issuance, we have been able to reduce the overall weight average spread for our floating rate debt obligations and continue to drive what we believe are industry-leading borrowing terms. Our overall equity position remains strong, with nearly $5.5 billion of total available equity, 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 available cash, of 1.01 times.
Kipp: In total, including the benefits of excuse me the time and the swap on the recent notes issuance.
Kipp: We have been able to reduce the overall weighted average spread for our floating rate debt obligations.
Kipp: Change to drive what we believe are industry, leading borrowing terms.
Kipp: Our overall liquidity position remains strong with nearly $5 $5 billion.
Kipp: Total available liquidity, including available cash and pro forma for the post quarter activity discussed earlier.
Kipp: We also ended the second quarter with a debt to equity ratio net of available cash of 1.01 times.
Scott C. Lem: We believe our significant amount of dry powder positions us as 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 of $0.48 per share. This marks ARCC's 15th consecutive year of stable or increasing regular quarterly dividends. This dividend is payable on September 30th, 2024 to stockholders of record on September 13th, and it's consistent with our second quarter 2024 dividend.
Kipp: We believe our significant amount of dry powder.
Kipp: <unk> well to continue supporting our portfolio company commitments and remain active in the current investing environment.
Kipp: Moving on to the dividend, we declared a third quarter 2024 dividend <unk> 48 per share. This marks arcc's 15th consecutive year of stable or increasing regular quarterly dividends.
Kipp: This dividend is payable on September 30th.
Kipp: <unk> 24 to stockholders of record on September 13th.
Kipp: And it's consistent with our second quarter 2024 dividend.
Kort Schnabel: 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 estimated spillover level is more than two times our current regular quarterly dividend, which we believe helps provide further visibility and stability to our dividend. I will now turn the call over to Kort to walk through our investment activities. Thanks, Scott.
Kipp: 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.
Kipp: This estimate star of upper level is more than two times, our current regular quarterly dividend, which.
Kipp: Which we believe helps to provide further visibility and stability to our dividend.
Court: I will now turn the call over to court to walk through our investment activities.
Kort 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 second quarter. 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 of new investment. 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 relationships with us, and new borrowers are increasingly selecting Ares as their lender.
Court: 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.
Speaker Change: 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.
Speaker Change: Importantly, our $2 $5 billion of net commitments set a new quarterly record as our existing borrowers are consolidating their financing relationships with us and new borrowers are increasingly selecting <unk> as their lender.
Kort Schnabel: We continue to believe that our growing portfolio of 525 companies... An 11% increase over last year provides a large installed base of differentiated lending opportunities for our customers. By further investing in our incumbent borrowers, where we have an existing relationship and significant knowledge of the company, we believe we can reduce underwriting risk and drive better credit.
Speaker Change: We continue to believe our growing portfolio of 525 companies and 11% increase over last year provides.
Speaker Change: <unk> provides a large installed base of differentiated lending opportunities for our company.
Speaker Change: By further investing in our incumbent borrowers, where we have an existing relationship and significant knowledge of the company.
Speaker Change: We believe we can reduce underwriting risk and drive better credit performance.
Kort Schnabel: We continue to lean into these advantages as over 60% of our total commitments in the quarter were to existing portfolios. We believe that the scale and flexibility we provide to our existing borrowers are driving market share gains for us. As borrowers consolidate their lending relationships in favor of those who can support the long-term growth of their businesses, 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 financing compared to our previous share provided to those same companies.
Speaker Change: We continue to lean into these advantages as over 60% of our total commitments in the quarter were to existing portfolio companies.
Speaker Change: We believe that the scale and flexibility we provide to our existing borrowers are driving market share gains for us.
Speaker Change: As borrowers consolidate their lending relationships in favor of those who can support the long term growth of their business plans.
Speaker Change: 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.
Kort Schnabel: 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.
Speaker Change: During the second quarter, we also continued to add new borrower relationships.
Speaker Change: 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.
Speaker Change: 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.
Kort Schnabel: 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 types of, Reflecting on our very active quarter, we ended the second quarter with an approximately $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. Our non-accruals at cost ended the quarter at 1.5%.
Speaker Change: Reflecting on our 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.
Speaker Change: Let me now update you on the state of our overall portfolio.
Speaker Change: With respect to our credit performance, our weighted average portfolio grade of 3.1 remained unchanged from the prior quarter's level.
Speaker Change: Our non accruals at cost ended the quarter at one 5% 20 basis points lower than the prior quarter.
Kort Schnabel: 20 basis points lower than the prior quarter. Our current non-accrual level at cost remains well below our 2.9% historical average since the Great Financial Crisis and the BDC average of 3.8% over the same time period. Our non-accrual rate at fair value remained consistent with last quarter at 0.7%, which continues to be well below historical levels for us.
Speaker Change: 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.
Speaker Change: 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.
Kort Schnabel: 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 investors. 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.
Speaker Change: 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%.
Speaker Change: Which we believe provides us with strong downside protection for our loans.
Speaker Change: 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.
Speaker Change: An additional point of differentiation in our portfolio is that company size has not been a driver of performance.
Kort Schnabel: Companies in our portfolio with 25 to 50 million of EBITDA had similar or even higher growth rates as compared to companies with over 100 million of EBITDA. Our Underwriting and Portfolio Management Process, and our ability to select what we believe are the best companies in attractive industries, helps drive our. We also remain highly focused on the benefits that diversification brings. Our average hold size is only 0.2% of fair value, 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 total just 12% of the portfolio at fair value.
Speaker Change: And he is in our portfolio with $25 million to $50 million of EBITDA.
Speaker Change: I had similar or even higher growth rates as compared to companies with over $100 million of EBITDA.
Speaker Change: Our underwriting and portfolio management process and our ability to select what we believe are the best companies in attractive industries helps.
Speaker Change: Helps drive our results.
Speaker Change: We also remain highly focused on the benefits that diversification adds to the credit strength of our portfolio.
Speaker Change: Our average hold size is only 2% of fair value.
Speaker Change: Excluding our investments in Ivy Hill in the SDLP, which we believe are well diversified on their own.
Speaker Change: 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.
Kort Schnabel: This level of diversification meaningfully reduces the impact on the overall portfolio from any single negative credit event at an individual company. We believe this is a critical risk management tool that differentiates us in the market. Finally, we've had an active start to the third quarter. From July 1st to July 24th, 2024, we made new investment commitments totaling $682 million, of which $532 million were funded. We exited, or were repaid, on $493 million of investment, which resulted in us earning $2 million of net realized gain. As of July 24th, our backlog and pipeline stood at roughly $3 billion.
Speaker Change: This level of diversification meaningfully reduces the impact to the overall portfolio from any single negative credit event at an individual company.
Speaker Change: We believe this is a critical risk management tool that differentiates us in the market.
Speaker Change: Finally, we had we've had an active start to the third quarter.
Speaker Change: From July <unk> to July 24th 2024, we made new investment commitments totaling $682 million.
Speaker Change: Of which $532 million refunded.
Speaker Change: We exited or repaid $493 million of investment commitments, which resulted in us, earning 2 million of net realized gains.
Speaker Change: As of July 24th our backlog and pipeline stood at roughly $3 billion.
Kort Schnabel: 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 Kipp for some closing remarks. Thanks a lot, Kort.
Speaker Change: Our backlog contains investments that are subject to approvals and documentations and may not close.
Speaker Change: Or we may sell a portion of these investments post closing.
Speaker Change: I will now turn the call back over to Kip for some closing remarks.
Kip: Thanks, a lot court.
Kipp deVeer: In closing, our strong earnings this quarter are underpinned by the many durable advantages that we believe continue to drive differentiated results for our investors. In today's more competitive investing environment, we are squarely focused on leveraging our origination scale to see as wide an opportunity set as possible, maintaining our rigorous credit standards, negotiating appropriate documentation, and being highly selective around deal flow. With our historically low leverage, a proven ability to invest across the capital structure, and a healthy underlying portfolio of growing companies, we believe we are well positioned to deliver attractive financial results through varying market and interest rate conditions throughout the year.
Kip: In closing our strong earnings this quarter underpinned by the many durable advantages that we believe continue to drive differentiated results for our investors.
Speaker Change: In today's 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.
Kip: With our historically low leverage our proven ability to invest across the capital structure.
Kip: In 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.
Kipp deVeer: 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.
Speaker Change: 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.
Operator: 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 re-enter the Q&A. 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 JPMorgan. Thanks for taking my questions today. You have anticipated a few of them already.
Speaker Change: Thank you at this time, if you would like to ask a question. Please press the star and one on your telephone keypad now.
Speaker Change: If you would like to withdraw your question. Please press star two.
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 up.
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.
Melissa Wedel: Look, I think there's a lot here that was really strong in the quarter. One of the things that came up from our clients during the quarter was a pretty public situation with Pluralsight. We certainly saw the markdown during the quarter, and it looked like you added it to non-accrual. I'm wondering if there's anything that you can share with us in terms of sort of the ongoing situation there, how you think about that mark, and how you think about results. Thanks, Melissa. I'm surprised people actually were going to ask a question about Pluralsight. I'm kidding,
Speaker Change: And we do have our first question from Melissa Wedel with JP Morgan.
Speaker Change: Yeah.
Melissa Wedel: Alright, thanks for taking my questions today.
Speaker Change: Repeated a few of them already.
Speaker Change: Look I think there's a lot here that was really strong in the quarter.
Speaker Change: But one of the things that has come up from our client during the quarter was a pretty public situations web site.
Speaker Change: Certainly some of 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.
Speaker Change: Think about that Mark and how you think about resolving it.
Speaker Change: Sure. Thanks, Melissa and surprise people actually we're going to ask a question about fluoro side.
Kipp deVeer: Look, what I'd say is that 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, for Vista Equity Partners, who's the sponsor, it's not gonna be a situation that works out very well for them. So they're handing the company over to a significant group of lenders.
Speaker Change: Kevin.
Speaker Change: So look what I'd say is most of what's been reported in the press is not accurate.
Speaker Change: So I think thats important just to put out there.
Speaker Change: The last article that I did see was reasonably indicative of what's happening there which is.
Speaker Change: Unfortunately.
Speaker Change: For Vista equity partners is the sponsor you know, it's not going to be a situational 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 too.
Kipp deVeer: You know, we're not the agent on the facility, Owl Rock is, so we're sort of working with the group to, you know, put a restructuring in place there where lenders will obviously reduce debt and take control of the company. So, not the first time that that's happened in our history, but for some reason, it's taken on a lot of press. But that's what's going on; it's pretty simple.
Speaker Change: Put a restructuring in place there where lenders will obviously reduce debt.
Speaker Change: And take control of the company.
Speaker Change: That's the first time, that's happened in our history.
Speaker Change: But for some reason its taken taken out a lot of a lot of press.
Speaker Change: But that's what's going on it's pretty simple.
Melissa Wedel: Okay. No, I think you're right. Our clients definitely got more than a few questions about it during the quarter, and I appreciate your willingness to share whatever you can there. I think it's helpful. It's okay.
Speaker Change: Okay.
Speaker Change: I think youre right our clients, we definitely got more than a few questions about it during the quarter.
Speaker Change: I appreciate your willingness to share whatever you can there I think thats helpful.
Kipp deVeer: I think, I mean, I think, frankly, it incited a lot of conversation based on a lot of speculation in the situation that, frankly, wasn't very accurate. So, All right, well, appreciate the clarifications. If I could follow up on one of the comments you made about the real strong pickup in investment activity during the quarter, it sounded like a lot of the sponsor-driven activity that you were seeing and certainly seems to be carried forward in the backlog, which I don't think we've seen anything like this strong in the last few years. It sounded like it was driven by M&A.
Okay. Thanks, Brad I mean, I think frankly, it and cited inside a lot of conversation based on a lot of.
Speaker Change: Speculation in the situation that frankly wasn't very accurate so.
Speaker Change: Alright, I appreciate the clarification.
Speaker Change: If I could follow up on one of the comments you made about the rail.
Long pickup in investment activity during the quarter.
Speaker Change: Like a lot of the sponsor driven activity that you are seeing and certainly seems to be carried forward in the backlog, which I don't think we've seen some challenges in the last few years.
Speaker Change: It sounded like it's driven by M&A.
Melissa Wedel: Is that a fair characterization, or are you also seeing a decent amount of refi activity as well? Thank you. Yeah, we're not seeing a tremendous amount of refi activity. So you're right, I think there's better M&A activity. The direction that we're seeing is actually sponsors, in particular, as you've probably read in the press, are actually reasonably accurate or under a lot of pressure to return capital to LPs. So there's a substantial amount of unrealized NAV that's just in the ground.
Speaker Change: Is that a fair characterization are you also seeing.
Speaker Change: Decent amount of refi activity as well thank you.
Speaker Change: Yes, we're not seeing a tremendous amount of refi activity, you say youre 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.
Speaker Change: So there is a substantial amount of unrealized NAV thats just in the ground.
Speaker Change: Our 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.
Kipp deVeer: It's had a 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 characterize as the best companies in sponsors' portfolios. And multiples on those M&A transactions are actually holding up to be reasonably high, at least in my estimation based on a reset that I think we all expected would occur with, you know, materially higher rates. We'd expected lower valuations on new transactions.
Speaker Change: Reasonably high at least in my estimation based on.
Speaker Change: 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 Don or actually with some of the best companies that we know that are out there and theyre getting done at reasonable multiples and obviously they are deals that we view as attractive that we want to participate at I'll. Just add this is cort one more thing that I think we mentioned.
Kort Schnabel: But the ones that we're seeing get done are actually some of the best companies that we know that are out there, and they're getting done at reasonable multiples, and obviously, they're deals that we view as attractive that we want to participate in. I'll just add, this is Kort. One more thing that I think we mentioned in the prepared remarks as well is that we've seen, you know, a real pickup in M&A across all different size companies.
Speaker Change: The prepared remarks, as well is that we've seen a real pickup in M&A across all different size companies.
Kort Schnabel: Obviously, we've been benefiting from some large transactions for the last 18 or 24 months during the dislocation period. But, you know, we've really seen activity now across the middle market, the smaller end of the middle market, as well as all the large deals as well. And, you know, 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. Thanks, Kort. Thanks for watching. And we have our next question from Finian O'Shea with Wells Fargo Securities. Hey, everyone. Good morning. So I think Kort, Mitch, how are you?
Speaker Change: We are benefiting from some large transactions for the <unk>.
Speaker Change: 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 and now 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.
Speaker Change: Yeah.
Scott: Thanks Scott.
Scott: Yeah.
Melissa Wedel: Thanks Melissa.
Melissa Wedel: And we have our next question from Finian O'shea with Wells Fargo Securities.
Finian O'shea: Kort's comments at the end: 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 you've 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? Yeah, thanks, Finn.
Finian O'shea: Hey, everyone. Good morning.
So I think Mitch.
Mitch: How are you.
Speaker Change: Of course comments at the end I think new investments, which were up are in the $60 million range can you.
Speaker Change: 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.
Speaker Change: Going into the core middle market is that something that your large cap peers are doing as well.
Kort Schnabel: 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 sized companies. And I don't think it's anything out of the ordinary for us to be originating from the middle market and the smaller end of the market. There are lots of great companies of all different sizes and stripes and, you know, highly strategic for us to get invested in companies when they're small so that we can gain an advantage and then grow with them and support their business plans. So I don't think it's anything unusual.
Yeah. Thanks fin 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.
Speaker Change: 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 is lots of great companies of all different sizes and stripes.
Kort Schnabel: 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, you know, I think we see a different set of competitors in the more medium and smaller size companies than we see in the large companies. There aren't many competitors, if any, that compete across all different size ranges, and I think that is one of our core differentiating advantages.
Speaker Change: 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.
Speaker Change: For the last 18 or 24 months.
As to the last part of your question.
Speaker Change: 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.
Speaker Change: There arent 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.
Kipp deVeer: So there is a different set of competitors in those markets, and those markets come with different competitive dynamics as well. So we are fortunate to be able to pivot up and down based on what the market is giving us and where we see attractive risk adjustment. Okay, thanks. A small follow up on the post-quarter commitment yields down a touch to 10.6%. Is that more of a function of sample size, or is that sort of where we are now on new deployment? I think there's, I think there's been modest spread compression. The reality is, that didn't surprise us much, right?
Speaker Change: They all those markets come with different <unk>.
Speaker Change: 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.
Speaker Change: Okay.
Okay.
Speaker Change: A small follow up on the on the post quarter commitment yields.
Speaker Change: Down a touch too.
Speaker Change: 10, 6% is is that more of a.
Speaker Change: Function of samples.
Speaker Change: Sample size or is that sort of where we are now on new deployment.
Kipp deVeer: Spreads were wide, and they've tightened a little bit, I think, in response to what people see as better than expected economic performance and lower than, you know, median average defaults, right? So in what's, I think, viewed as a pretty strong recovery here in the US. Yes, Brett will come in.
Speaker Change: I think theres I think theres been modest spread compression the reality is.
Speaker Change: That didn't surprise us as much rate spreads were wide.
Speaker Change: Tightened a little bit.
Speaker Change: In response to what people see as better than expected economic performance and lower than.
Speaker Change: Median average defaults right so in and what they think is a pretty strong recovery here in the U S.
Kipp deVeer: What's great, though, is that the all-in, 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. Thanks for the question. And we have our next question from Paul Johnson with ABW. Yeah, it'd be boring, that question.
Speaker Change: Spreads will come in with Great, though is that the all in.
Speaker Change: The all in total return on the asset class is still in our opinion pretty extraordinary with base rates as high as they are.
Speaker Change: Great. Thanks, so much.
Speaker Change: Sure Thanks for the questions.
Speaker Change: And we have our next question from Paul Johnson with <unk>.
Speaker Change: Yes.
Paul Conrad Johnson: Yes. Good morning, Thanks for taking my question.
Paul Conrad Johnson: Just, you know, generally, you know, with what took place with the floral site. I was wondering if, you know, does that raise any issues or questions, just, you know, general ground? Sponsor Concentration, your network, and just kind of in general.
Speaker Change: Just generally.
Paul Conrad Johnson: Just with what it is.
Speaker Change: The place.
Speaker Change: Earl side I was wondering.
Paul Conrad Johnson: Yes.
Paul Conrad Johnson: That raise.
Brown: Raise any issues or questions just general Brown.
Paul Conrad Johnson: Sponsor concentration within.
Paul Conrad Johnson: Of your network and just kind of in general.
Kipp deVeer: Fundraiser. Transcripts provided by Transcription Outsourcing, LLC, large, group deals, kind of, you know, club Page PAGE of NUMPAGES www.verbalink.com, investments, and even working with potentially other specific, 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 or sponsored versus non-sponsored So when we really drill through and look at who are the biggest sponsors in the portfolio, they're obviously sponsors that we do a tremendous amount of business with that we have a lot of confidence in. You know, this is one of them.
Paul Conrad Johnson: Investments funded in the portfolio.
Paul Conrad Johnson: Currently we're going forward in terms of.
Paul Conrad Johnson: Julian.
Paul Conrad Johnson: <unk>.
Paul Conrad Johnson: Group deals kind of.
Blake: Participation Blake.
Paul Conrad Johnson: Investments and even working.
Paul Conrad Johnson: The other.
Paul Conrad Johnson: Specific direct lenders.
Speaker Change: If I heard the question correctly and you can let me know if I didn't but.
Speaker Change: We don't have a lot of concentration.
Speaker Change: Our portfolio either with sponsors are sponsored versus non sponsored obviously with 500 plus investments so.
Paul Conrad Johnson: 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.
Paul Conrad Johnson: This is one of them.
Kipp deVeer: Pluralsight 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 the management team as a sole lender with a group of other lenders. I think, again, as I said, a lot of the facts reported were really incorrect.
Paul Conrad Johnson: 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 on a company with either the.
Paul Conrad Johnson: The management team as a sole lender with a group of other lenders so.
Paul Conrad Johnson: I think again as I said a lot of the facts reported were really incorrect.
Kipp deVeer: It's an unfortunate situation, but like the other ones, we'll go in and fix it and move on. Thanks Kipp. Last question for me, just on the higher tax expense in the quarter. It looked like, if I had the numbers correct, approximately $9 million or so was from the excise tax, and $32 million or so was from Income Related Tax. Should we look at that?
Paul Conrad Johnson: An unfortunate situation, but like the other ones will go in and fix it and move on.
Kevin: Thanks, Kevin appreciate that.
Speaker Change: Last question last question for me just on the higher tax expense in the quarter.
Speaker Change: It looks like.
Speaker Change: I have the numbers correct approximately $9 million or so was from the excise tax and $32 million or so.
Speaker Change: Income related tax.
Speaker Change: Should we look at that.
Paul Conrad Johnson: The fortune of it, that $32 million or so, is kind of basically non-recurring and one time in nature. Yeah, about $30 million of that was related to the Hillstone exit. So, kind of a one time tax because we held the investment in a blocker corporation.
Speaker Change: Portion of it that $32 million or so is kind of basically non recurring one time in nature.
Speaker Change: Yes about $30 million of that.
Speaker Change: It was related to the Hill stone exit so kind of a one time tax.
Speaker Change: 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.
Scott C. Lem: So we unfortunately have to pay corporate level taxes for that. But still, you know, we're net ahead on the overall basis of one hundred fifty million dollars gain. Guys, congratulations. Yeah, that was a good game for you guys.
Paul Conrad Johnson: That's all for me. Thank you. Thank you. And we have our next question from Kenneth Lee with RBC Capital. Hey, good morning.
Speaker Change: Got it congratulations.
Speaker Change: Again for you guys.
Speaker Change: That's all for me thanks.
Speaker Change: Thank you.
Speaker Change: And we have our next question from Kenneth Lee with RBC capital markets.
Kenneth S. Lee: Thanks for taking my question. In terms of the quarter's origination... What's sort of like the mix between incumbents versus new borrowers that you saw at the bank? Yeah, I think it's around 60% incumbent borrowers and 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. Gotcha. Very helpful there. And then, in terms of junior debt opportunities, what's sort of like the latest outlook there in the current environment? Thanks.
Kenneth S. Lee: Hey, good morning, Thanks for taking my question in terms of the quarter's originations.
Kenneth S. Lee: 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.
Speaker Change: As the M&A environment picks up.
Speaker Change: Got you very helpful. There and then in terms of.
Speaker Change: Junior debt opportunities, what sort of like the latest outlook there in the current environment. Thanks.
Kort Schnabel: I'm sorry, we missed that in terms of senior debt opportunities. A junior debt opportunity. Okay. Thanks. Yeah, it's just a little hard to hear there.
Speaker Change: I'm, sorry, we missed that in terms of senior debt opportunities.
Speaker Change: Junior debt opportunities.
Kort Schnabel: I would say, you know, they're probably fewer and far between these days in healthy performing new buyouts and refinancings. The Unitron has really kind of taken over in driving most of the new deal flow. So a little bit less relevant to places that we're actually seeing junior capital be the most impactful are where companies are finding themselves with, you know, 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, you know But it's, it's, it's very light is the general answer to your question.
Speaker Change: Okay.
Speaker Change: Thanks, Yes, just a little hard to hear there.
Speaker Change: I would say there are probably fewer and far between these days in healthy performing kind of new buyouts and then.
Speaker Change: Refinancings the unit tranche is really kind of taken over.
Speaker Change: In driving most of the new deal flow.
Speaker Change: So a little bit.
Speaker Change: Less relevant to places that we're actually see junior capital would be the most impactful is where companies are finding themselves with.
Speaker Change: 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.
Speaker Change: Probably can't pay cash interest to be honest because thats. 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.
Kort Schnabel: Yeah, I would just add the one place we are seeing second lien opportunities is in, you know, 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, you know, almost right on top of the unit tranche spread. So we're being highly selective; we are seeing those opportunities, but we're just being extremely selective around where we're playing. Very helpful people there. Thanks again. And we have our next question from Robert Dodd with Raymond James. Hi guys, good morning.
Speaker Change: Seeing second lien opportunities is in.
Speaker Change: 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.
Speaker Change: Almost right on top of unit tranche spreads. So we're being just highly selective we are seeing those opportunities, but we're just being extremely selective.
Speaker Change: Around where we're playing this.
Speaker Change: Yes.
Speaker Change: Got you very helpful. There. Thanks again.
Speaker Change: Okay.
Speaker Change: And we have our next question from Robert Dodd with Raymond James.
Robert James Dodd: On Pluralsight, well, not really Pluralsight, but what proportion of your portfolio, I mean, you gave us the AR at 3%, but can you give us any kind of idea how common is the type of structure you saw in Pluralsight, in terms of the covenant package, et cetera, et cetera, how common is that within the portfolio more broadly? And is it an artifact confined to kind of like, you know, 21 originations, or is that structure still Trevelyan?
Robert James Dodd: Hi, guys good morning.
Robert James Dodd: Paul.
Robert James Dodd: Not really Paul, but what proportion of your portfolio I mean, you gave us.
Speaker Change: 3%, but can you give us any color on what.
Speaker Change: 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.
Speaker Change: Within the portfolio more broadly.
Speaker Change: Artifact confined to currently.
Speaker Change: When he won originations or is that structure still.
Kipp deVeer: Today, obviously, Pluralsight itself is only 20 basis points in Portfolio Fair Value. Now, that doesn't matter that much anymore. The question is, is it elsewhere in the portfolio as well? Yeah, I think that's actually the most important question. So I'll just say it explicitly, which is that we spend, I think, a tremendous amount of time just because of the experience we have in the market thinking about, frankly, documentation. 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 like to write documents, we like to structure covenants, etc., 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 risk.
Speaker Change: Evelyn.
Speaker Change: Today, obviously pull by itself 20 basis points, you portfolio fair value it doesn't matter that much anymore questions.
Speaker Change: Is it elsewhere.
Speaker Change: Well.
Speaker Change: Yes, I think thats 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.
Speaker Change #100: And the way that we come into transactions 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.
Speaker Change #100: Because we've been doing this a long time, and we think that we actually.
Robert James Dodd: 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.
Kipp deVeer: So I'd actually say, Robert, we don't view these sort of liability management transactions, which are obviously increasing in the broadly syndicated world, as something that's really present in our portfolio. We don't view them as generally a risk to our middle market borrowers, and I'd actually tell you, and I think Kort would probably agree, over the last 12 to 18 months, we probably passed on deals more often on a document than any other reason for passing on a deal. There's a lot of debate about what a covenant looks like; do you need covenants, do you not need covenants?
Robert James Dodd: Obviously, increasing in the broadly syndicated world.
Robert James Dodd: As something Thats really present in our portfolio.
Robert James Dodd: We don't view them as generally a risk to our middle market borrowers and I'd actually tell you in any quarter would probably agree over the last 12 to 18 months, we probably passed on deals.
Speaker Change #101: More often on a document.
Speaker Change #102: And then any other reason.
Speaker Change #102: For passing on a deal.
Speaker Change #102: Yeah.
Speaker Change #103: There's a lot of debate about what the covenants look like do you need 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.
Kipp deVeer: 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 aren't part of your collateral package with no ability to exit? I would argue no.
Kipp deVeer: So we try very, very hard to not put ourselves in that situation. I don't, again, think that what was reported on Pluralsight was accurate, but I know for certain that it's not indicative of other things in the portfolio, or what was reported inaccurately is not indicative of what else is in the portfolio. So I don't view that as a huge risk. Back to Finn's earlier question about origination across all different size ranges.
Speaker Change #102: No.
Speaker Change #102: So we try very very hard to not put ourselves in that situation.
Speaker Change #104: I don't again think that what was reported on Fluoro site was accurate.
Speaker Change #104: But I know for certain that it is not indicative of other things in the portfolio.
Speaker Change #104: 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.
Kort Schnabel: Because we are able to do that, it gives us the luxury of saying no to Kipp's point when we need to say no because of a documentation issue in a larger cap deal. And I think, again, back to plural, Said. A lot of what was reported was inaccurate, and the document protections actually worked pretty darn well in that transaction as well.
Kipp: Because we are able to do that it gives us the luxury of saying no to Kipps point, when we need to say no.
Because of the documentation issue in a larger cap deal.
Kipp: And I think again back to plural site.
Speaker Change #105: A lot of what was reported was inaccurate and the document the document protection has actually worked pretty darn well in that transaction as well.
Kort Schnabel: Got it. Thank you. And just following up on that kind of size issue, not related to the foresight.
Speaker Change #106: Got it. Thank you just following up on that kind of the size issue.
Speaker Change #107: Not related.
Robert James Dodd: I, you know, the size of the quality. You said a lot of the deals that are getting done right now are really high quality companies. Well, that does mean there's still a lot left that may be lower quality companies that need to be refined at some point over the next couple years. I mean, what's your approach going to be to the market if all the good ones have been done and you're left with nothing?
Speaker Change #108: Besides the quality I mean, you said a lot of the deals are getting done right. Now is a really high quality companies that does mean, there's still a lot left that may be.
Speaker Change #108: Lower quality companies that need to be refined at some point over the next couple of years.
Speaker Change #109: What's your approach going to be.
Speaker Change #109: Talking about credit quality to the market.
Speaker Change #110: Good ones have been done and you're left with.
Robert James Dodd: You know, B grade or C grade companies out in the market transacting. Do you think you're going to be sitting on the sidelines for some prolonged periods of time next year or any thoughts on that? I mean, I could jump in on that.
Speaker Change #110: Be great to see great companies out in the market transacting.
Speaker Change #110: Do you think you're going to be.
Speaker Change #111: Sitting on the sidelines.
Speaker Change #112: Hello previous time next year or any thoughts on that front.
Kort Schnabel: I think the ingredients are in place for a pretty broad pickup in volume, and that would get us back to a more normalized environment where there's going to be, sure, some worse quality credits, but still some good quality credits. 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 there are only weaker companies, then we will be less active. But I'm not sure that that's how we foresee the transaction environment being. I think there's going to be a nice healthy mix going forward. Yeah, that's right. I think our incumbency advantage will also help us, right?
Speaker Change #113: I mean I can jump in on that.
Speaker Change #114: Yes I.
Speaker Change #114: 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 #114: And I think Youll 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.
Speaker Change #114: I'm not sure that Thats, how we foresee the transaction environment being I think theres going to be a nice healthy mix.
Speaker Change #114: Going forward, yes, that's right I think our incumbency advantage as well will help us right I mean, having this many companies well look the reality is Robert.
Kort Schnabel: I mean, having this many companies. But look, the reality is, Robert, we're in a situation where people's numbers are a little bit different. I'll give you just rough numbers that we think are reasonably accurate.
Robert James Dodd: We're in a situation where in People's numbers numbers are a little bit different I will give you just rough numbers that we think are reasonably accurate theres about three trillion dollars of unrealized NAV.
Kipp deVeer: There's about $3 trillion of unrealized NAV in private equity that's in the ground on return to LP capital versus about $1 trillion of private equity dry powder to do new transactions. So until you unlock that unrealized NAV through selling, it's 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 it's all going to be about at what price.
Speaker Change #114: In private equity that's in the ground on return to LP capital.
Speaker Change #114: Versus about a trillion dollars of private equity dry powder to do new transactions. So until you unlock that unrealized NAV through selling its difficult to actually create new capital for transactions. So what I would think would happen.
Speaker Change #114: Is.
Speaker Change #114: 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.
Kipp deVeer: My guess is that unrealized NAV gets 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.
Speaker Change #114: Because that capital can't stay locked in the ground forever.
Kipp deVeer: Understandable. I appreciate the color. Thank you. Mm-hmm. Thanks very much.
Speaker Change #114: Yeah.
Speaker Change #116: Understood I appreciate the color. Thank you.
Speaker Change #115: Thanks for the question.
Mitchell Penn: And our next question comes from Mitchell Penn with Oppenheimer. Just a couple of quick questions on the perpetual preferred shares in the portfolio. How do they ultimately get collected?
Speaker Change #115: And our next question comes from Mitchel Penn with Oppenheimer.
Speaker Change #115: Yeah.
Mitchell S. Goldstein: Just a couple of quick questions on the perpetual preferreds in the portfolio.
Mitchell S. Goldstein: How do we ultimately get collected.
Kort Schnabel: Typically, most of our pick gets collected upon exit or repayment, i.e., the company gets sold or gets refinanced. It doesn't matter if it's perpetual or not.
Mitchel Penn: Okay.
Mitchel Penn: Typically.
Speaker Change #119: Most of our tickets collected upon exit or repayment a company gets sold or gets refinanced.
Speaker Change #120: Doesn't matter if it's <unk>.
Speaker Change #120: Or not.
Mitchell Penn: Do you have like a 10-year option to cause a conversion, or typically, don't you get it? Sometimes yes and sometimes no. Got it. And in terms of the synthetic pick, do you guys do the synthetic pick?
Do you have like a 10 year.
Speaker Change #120: Option to cause a conversion or typically you don't get that.
Sometimes yes, and sometimes now.
Speaker Change #121: Got it.
Speaker Change #121: In terms of synthetic tick can you do.
Speaker Change #122: You guys do the synthetic picks.
Kort Schnabel: 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 means. So, essentially, you issue a line to your borrower, and they access the line to pay interest each interest period.
Speaker Change #123: 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.
Speaker Change #124: So essentially issue.
Speaker Change #125: 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.
Kort Schnabel: So they're essentially drawing the line down to pay the interest each quarter. Yeah, I don't think we really do that expressly. I mean, the way that I guess I think about that is companies typically have undrawn credit facilities. And obviously, they can use those to make interest payments and do a lot of other things, you know, from drawing on that capital.
Speaker Change #126: Yes, I don't think we really do that express fleet.
Speaker Change #127: Yes, 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.
Kort Schnabel: But that sounds a bit sort of 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 ARR loans.
Speaker Change #128: 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.
Speaker Change #128: The recurring revenue loans the.
Speaker Change #128: 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.
Kort Schnabel: And as we've already talked about, that's a very small percentage of our portfolio. And even within that percentage of our portfolio, and even within that percentage of our portfolio, I think, you know, a very limited amount, if any, of the type of transactions you're talking about. Got it. And the last question, the unrealized loss. Was that driven by Pluralsight this quarter? Yeah, and partially so. I mean, obviously, it has a handful of different components.
Speaker Change #128: I think.
Speaker Change #128: Very limited amount if any.
Speaker Change #129: The type of transactions you are talking about.
Speaker Change #130: Got it and last question the unrealized loss was.
Speaker Change #131: Driven by plural site this quarter.
Speaker Change #132: Yes, partially I mean, obviously it is a handful of different components, but yet or our site for sure is in there.
Kort Schnabel: But yeah, Fluorocyte for sure is in there. Got it. That's all for me. Thanks, guys. Sure. No problem.
Speaker Change #133: Got it.
Speaker Change #134: All for me thanks, guys.
Sure no problem.
Mitchell Penn: And just a reminder, if you'd like to ask a question, that is star and one on your telephone keypad. And our next question comes from Casey Alexander with... Hi, good morning, and thanks for taking my questions. My first question is, we saw the weighted average yield on interest-earning investments decline about 20 basis points. The yield on the overall portfolio was stable, I think, because you were able to because 12% of your exits were non-interest-earning assets.
Speaker Change #134: Yes.
Speaker Change #135: 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.
Casey Jay Alexander: So that 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? Turn it to Kort.
Casey Jay Alexander: 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.
Speaker Change #137: Yield on the overall portfolio is stable I think because you were able to because 12% of your exits where non interest.
Speaker Change #137: Turning assets.
Speaker Change #139: That was able to balance it out but.
Speaker Change #140: 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.
Kort Schnabel: But I mean, generally, we've seen spreads come in, as I mentioned earlier, and one of the responses a little bit, but I think Kort and I were talking about it yesterday. You can chime in. We kind of feel like they've plateaued again. And, you know, we don't see a lot of compression in the last 60-90 days.
Gordon: 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 Gordon 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>.
Gordon: <unk> 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.
Kort Schnabel: Yeah. And so there obviously might be a little bit of a lag between what we're seeing currently and then what shows up in the quarterly results as we report them. But anecdotally, I think seeing, you know, hopefully, a little bit of stabilization more recently goes without saying, but obviously, there are lots of benefits of spread compression as well in terms of increased M&A activity, higher capital structuring fees, as you saw this quarter, which jumped meaningfully.
Speaker Change #142: Anecdotally I think see hopefully a little bit of a stabilization more recently.
Speaker Change #143: Maybe goes without saying, but obviously there is lots of benefits of <unk>.
Speaker Change #143: <unk> 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.
Kort Schnabel: So there are 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. As Kip 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.
Speaker Change #143: That we're able to take advantage of when we see that and it's not really anything that we're particularly concerned about.
Speaker Change #143: 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.
Casey Jay Alexander: All right, great. Thank you. My follow-up is, you know, a couple quarters later. Kipp maybe expressed a little bit of frustration that the stock valuation wasn't a little bit better.
Speaker Change #143: Alright, great. Thank you Mike My follow up is a couple of quarters.
Speaker Change #143: Kipp, maybe expressed a little bit of frustration that the stock valuation wasn't a little bit better.
Kipp deVeer: You know, now that the environment is picking up, you know, it seemed like We 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 think 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? Yeah, I mean, I think the simple answer to your question is yes, right.
Speaker Change #143:
Speaker Change #144: Now that the environment is picking up it seems like.
Speaker Change #145: 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.
Speaker Change #146: How do you.
Speaker Change #147: Is this are the stock sales indicative of also what you think.
Speaker Change #148: 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.
Kipp deVeer: So it got much busier; we felt, despite, as one of my partners has said to me, every CEO thinks that their company stock price is too low. So throw me into the mix. But despite that, look, we're still issuing through the ATM program very cost effectively, and accretively to the company.
Speaker Change #149: 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 throw them into the mix, but despite that look we're still issuing through the ATM program very cost effectively accretively to the company.
Casey Jay Alexander: And to your question, specifically supporting what we think is a strong backlog and pipeline that we're excited about. All right, great. Thank you very much. Thank you. And once more, if you would like to ask a question, that is star and 1. And our next question comes from Doug Harder with UBS.
Speaker Change #149: And to your question, specifically supporting what we think is strong backlog and pipeline that we're excited about.
Doug Harder: And Doug, if you could make sure your mic is off of mute when you pose your question. And just a reminder, that is star and one for any questions and or comments now. And this does conclude our question and answer session. I'd like to now turn the conference back over to Mr. Kipp DeVeer for any closing remarks. No, thanks. I guess they let us off the hook early.
Speaker Change #150: Alright, great. Thank you very much.
Casey Jay Alexander: Thanks Casey.
Speaker Change #151: And what's more if you would like to ask a question that is star and one.
Speaker Change #152: And our next question comes from Doug Harter with UBS.
Speaker Change #151: Yeah.
Speaker Change #153: And Doug if you could make sure your Mic is office when you pose your question.
Speaker Change #153: And just a reminder, that is star and one for any questions <unk> comments now.
Kipp deVeer: 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.
Speaker Change #155: No. Thanks, I guess, they let us off the hook early.
Kipp deVeer: I appreciate everyone's support and joining the call. Hope you enjoy the rest of the summer, and we will get you 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 5 p.m. ET for domestic callers by dialing 1-800-839-2398 and for international callers by dialing 1-402-220-7208.
Kipp deVeer: I appreciate everyone's support and joining the call hope you enjoy the rest of the summer and we will.
Speaker Change #156: <unk> between.
Between the end of this quarter here and into the next thanks again.
Speaker Change #157: Ladies and gentlemen, this concludes our conference call for today.
Speaker Change #158: 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.
Operator: 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. Thank you, and have a great day! [inaudible] . .. [inaudible] .
Speaker Change #158: 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. Thank you and have a great day.
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