Q3 2024 Ares Capital Corp Earnings Call
The S.A.C.A.R.O.D.
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The New York Times, [inaudible]
Thank you. Let me start with some important reminders. Comments during the course of this conference call and webcasts and accompanying documents containing forward-looking statements are subject to risks and uncertainties.
The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings.
Aries Capital Corporation assumes no obligation to update any such forward-looking statements.
Please also note that past performance or market information is not a guarantee of future results.
During this conference call, the company may discuss certain non-GAAP measures as defined by FCC Regulation G, such as core earnings per share or core EPS.
The company believes that Core EPS provides useful information to investors regarding financial performance because it's one method the company uses to measure its financial condition and results of operation.
A reconciliation of GAAP net income per share, the most directly comparable GAAP financial measure to core EPS, can be found in the accompanying slide presentation for this call. In addition, a reconciliation of these measures may also be found in an earnings release filed this morning with the SEC on Form 8K.
The company's third quarter ended September 30, 2024 earnings presentation can also be found on the company's website at www.ariescapitalcorp.com by clicking on the third quarter 2024 earnings presentation link on the homepage of the investor resources section of the website.
Speaker Change: Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I will now turn the call over to Mr. Kip DeVeer, Ares Capital Corporation's Chief Executive Officer.
Thanks a lot, John. Hello, everyone, and thanks for joining our earnings call today.
I'm here with our co-president Kort Schnabel and our newly appointed co-president Jim Miller. Jana Markiewicz, our chief operating officer, Scott Lem, our chief financial officer, and other members of the management team will also be available during our Q&A session.
Before discussing our third quarter results, I want to recognize the leadership changes that we announced this morning.
Speaker Change: As I mentioned, Jim Miller will now join Kort Schnabel as a co-president of ARCC, and by way of background, Jim joined Ares in 2006 and currently serves as a co-head of our U.S. Direct Lending Strategy and as a member of our Investment Advisors Investment Committee.
Jim has been one of the key contributors to the success of ARCC and the Ares Direct Lending Platform, and we look forward to having him play an even more prominent role in this company's direction in the years ahead.
As part of this change, Mitch Goldstein is stepping down as Aries Capital's co-president, but he is joining Aries Capital's board where he and Michael Smith will serve as co-chairmen.
Mitch will also continue to lead Aries' Global Credit Group as a co-head.
And as part of this transition, Michael Arrighetti will relinquish his role as chairman but remain a director of the company.
This transition demonstrates the depth and tenure of our team and the continued evolution of our company and its success over a long period of time.
So with that, let me now turn to the third quarter results.
This morning we reported another quarter of strong core earnings of 58 cents per share and another quarter of record NAV per share of $19.77.
As we've discussed in the past, we believe we are well-positioned.
What we expect will be a more active deal environment in the future driven by expanding M&A and sponsor activity as private equity managers are benefiting from lower rates while at the same time feeling growing pressure to return capital to their investors.
In the third quarter, we saw further increase in overall M&A volume with an acceleration in sponsor-backed transactions in particular.
Against this backdrop, direct lenders have continued to finance a high percentage of new leveraged buyouts, specifically representing about half of the loan volume supporting buyouts in the third quarter.
Due to our strong competitive position and a more active investing environment, we saw meaningful year-over-year growth in both transactions reviewed and new commitments during the third quarter.
Specifically, we reviewed nearly 30% more transactions compared to the same period last year, resulting in an estimated $155 billion in quarterly deal volume reviewed.
For context, this amount exceeded the completed transaction volume reported for the entire broadly syndicated leveraged loan market for the quarter.
Our long-held approach of sourcing as many transactions as possible is a key factor in remaining highly selective, which we believe ultimately results in strong long-term portfolio performance.
Our ability to grow with our existing portfolio companies that we know well is another key factor in our high level of selectivity, further reducing underwriting risk and driving stronger credit performance.
This advantage supported our loan growth in the third quarter as over 75% of our new commitments were to incumbent borrowers.
We believe the growing trend of existing portfolio companies consolidating their financing relationships with us is an encouraging trend.
We also added 23 new companies to the portfolio, bringing our highly diverse portfolio to over 530 companies.
Aries Capital's strong credit portfolio profile, rather, can be seen in the health and performance of our portfolio companies.
Our nonaccrual rates declined quarter over quarter and remain at levels well below industry averages, and the fair value of our risk-graded one and two loans also declined from the second quarter.
Further underscoring the consistent health of our borrowers, the LTM EBITDA growth of our portfolio companies remained in the low double digits for the third consecutive quarter.
And finally, as Scott will discuss in more detail, the right-hand side of our balance sheet continues to support our investing activities and remains a competitive advantage.
You've seen that we were recently upgraded by Moody's to a higher investment grade notch, which we believe further solidifies Aries Capital as the highest rated company in our sector by all three major rating agencies.
with moderate leverage, just over one times debt-to-equity.
and well over $5 billion in available liquidity incorporating post-quarter-end financing activities.
We believe we have significant financial flexibility and leading access to efficient forms of capital.
Speaker Change: With that, let me turn the call over to Scott to provide more details on our financial results and some further thoughts on the balance sheet.
© The Bulletproof Executive 2013
Thanks, Kip. 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 62 cents for the third quarter of 2024.
compared to $0.52 in the prior quarter and $0.89 in the third quarter of 2023.
We also reported core earnings per share of $0.58 for the third quarter of 2024, compared to $0.61 in the prior quarter and $0.59 in the third quarter of 2023.
Overall, our total investment income
increased compared to the prior quarter largely due to higher interest and dividend income from net portfolio growth offset by lower structuring fees as a majority of the new commitments during the quarter were with existing portfolio companies.
Speaker Change: 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.
Our total portfolio at fair value at the end of the quarter was $25.9 billion, up from $25 billion at the end of the second quarter.
The weighted average yield on our debt and other income-producing securities at amortized costs was 11.7% at September 30th, which was down from 12.2% at June 30th and 12.4% for the same period a year ago.
The declines in our yields were largely due to reduced base rates and to a lesser extent spread on new investments.
Our stockholders' equity ended the quarter at $12.8 billion, or $0.1977 per share, another record high for us, as Kip noted earlier in the call.
Before discussing our capitalization liquidity, let me start by highlighting the notable accomplishment Kip mentioned related to our credit ratings.
At the end of September, Moody's upgraded the long-term issuer and senior unsecured rating for Aries Capital to BWA II.
From B-A-A-3.
In addition to being rated investment grade by all three of the major rating agencies, we now have two of our three ratings firmly mid-triple B.
We believe this should lead to even more efficient funding costs and potentially increased debt capacity over time.
These ratings further distinguish Aries Capital not only within the BDC sector but also among a select universe of firmly triple-beer higher rated public companies in the U.S.
Within the BDC sector, we are the only BDC that has both the highest credit ratings from all three major agencies and positive outlooks from S&P and Fitch.
In terms of our recent debt capital activity, we amended our revolving funding facility.
which included extending the end of the reinvestment period and the maturity to a full three and five years respectively and upside in the facility from 1.78 billion to 2.15 billion
We also announced that we priced our second on-balance sheet CLO for ARCC, which we expect will close next month, subject to customary closing conditions.
This closing will bring an additional $544 million of low-cost, secure debt capital priced at SOFR plus 158 basis points.
We are happy to continue both diversifying and lowering the weight average cost of our debt capital and believe CLO financing can continue to be a nice addition to our debt capital going forward.
Lastly, as we discussed in our last earnings call, earlier in the third quarter we amended our FB funding facility.
Speaker Change: where we extended the end of the reinvestment period and maturity each by more than one year, upsize the facility from $865 million to $1.3 billion, and reduce the draw and spread by 40 basis points.
In total, pro forma for all these transactions since June 30th, we have added over 1.3 billion dollars of new debt capacity and reduced the weight average spread of our committed floating rate debt capital.
Speaker Change: Our overall liquidity position remains strong with nearly $5.8 billion of total available liquidity, including available cash, on a pro forma basis for the post-quarter end activity that I just highlighted.
We also ended the quarter with a debt-to-equity ratio net of available cash of 1.03 times.
We believe our significant amount of dry powder positions us well to continue supporting our portfolio company commitments and new investing activities.
Moving on to the dividend, we declared a fourth quarter 2024 dividend of $0.48 per share.
Speaker Change: ARCC has been paying stable or increasing regular quarterly dividends for over 61 consecutive quarters.
This dividend is payable on December 30th, 2024 to stockholders of record on December 13th and is consistent with our third quarter 2024 dividend.
In terms of our taxable income spillover, we finalized our 2023 tax returns and are happy to report that we ended 2023 with approximately $631 million, or $1.04 per share, available for distribution to stockholders in 2024.
which we believe is a significant differentiator for us in the BDC sector and helps provide further visibility and stability to our dividend in a potentially declining rate environment.
Speaker Change: I will now turn the call over to Kort 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 third quarter.
I will then conclude with an update on our post-quarter end activity and backlogs.
In the third quarter, our team originated approximately $3.9 billion of new investment commitments across 74 different transactions.
Excluding the 670 million of loans we originated and distributed as agents, our new investment commitments more than doubled year over year, reflecting the strength of our platform and a more active overall M&A market.
Our level of originations also reflects our growing market share with our existing borrowers as Kip discussed previously.
Evidencing this trend, our share of the overall financings for our top ten largest incumbent commitments in the quarter more than doubled.
Shifting to our portfolio, we ended the third quarter with a $25.9 billion portfolio at fair value, which grew 4% from the prior quarter and 18% from the prior year.
Speaker Change: In addition to our expanding market share with incumbent borrowers, our growth is supported by our ability to provide flexible capital solutions to a wide variety of new companies seeking a direct lending solution.
This can be seen in the total number of companies in our portfolio, which reached 535 in the third quarter and increased 9% year-over-year.
Further underscoring our focus on covering the broader middle market, the median EBITDA of the borrowers in our portfolio was $82 million in the third quarter, with approximately one-third having less than $50 million of EBITDA.
As Kip mentioned, our portfolio companies remain healthy and credit performance remains strong.
and John Stilmar. Thank you. Thank you.
Our current non-accrual level remains well below our 2.8% historical average since the Great Financial Crisis and the BDC historical average of 3.8% over the same time period.
Our non-accrual rate at fair value also decreased to 0.6% from 0.7% last quarter, which continues to be well below historical levels for us as well.
Further underpinning the strength of our portfolio, at the end of the third quarter, the weighted average loan-to-value in the portfolio was 43%.
which we believe provides us with strong downside protection for our loans.
Speaker Change: This loan-to-value is also significantly below our 10-year average.
When looking at performance by company size, it is noteworthy that company size continues to not be a driver of performance, as companies in all size bands in our portfolio had similar EBITDA growth rates over the last 12 months.
In our view, our underwriting and portfolio management processes and our ability to select what we believe are the best companies in attractive industries drives these results.
It is also noteworthy that to further our advantages and to support our broad middle market coverage,
ARIES Management acquired Riverside Credit Solutions during the third quarter.
Riverside is a well-established lower middle market focused firm managed by a team that we have known for a long time with a very strong investing track record.
We believe this team is additive to Aries Direct Lending Platform's coverage in this important part of the market.
Speaker Change: As we discussed in detail at our investor day in June, we believe Ares is the only direct lending platform of scale that actively focuses across the lower, middle, and upper middle markets.
This differentiated coverage approach supports our ability to focus on market segments that offer better risk-adjusted returns while remaining highly selective.
Across our markets, we have seen credit dispersion start to emerge with certain other managers experiencing growing and elevated levels of nonaccruals.
We continue to believe the merits of our many competitive advantages are driving differentiated results as diversification and industry selection have contributed to ARCC's strong credit performance in comparison with other BDCs.
Our highly selective approach to investing and focus on incumbent borrowers as a differentiated opportunity for growth, we have been able to avoid many of the problems that have driven recent non-accruals in the BDC space.
Another point of differentiation for ARCC versus other BDCs is our high level of portfolio diversification.
and John Stilmar. This is a production of the U.S. Department of State. This is a production of the U.S. Department of State.
ARCC has been able to mitigate the impact of negative credit events in any one company or industry.
Finally, let me highlight our active start to the fourth quarter.
From October 1st to October 24th, 2024, we made new investment commitments totaling $408 million.
of which 320 million were funded.
We exited, or were repaid, on nearly $1.2 billion of investment commitments.
Speaker Change: which resulted in us earning $4 million of net realized gains.
Speaker Change: As of October 24th, our backlog stood at roughly $2.8 billion, more than triple the level one year ago.
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.
Speaker Change: I will now turn the call back over to Kip for some closing remarks.
Thanks so much, Kort.
So let me just take an opportunity to share a few thoughts on our past and our future. As many of you know, we're celebrating the company's 20th anniversary this month.
Kip DeVeer: Over the course of our 20-year history, my partners and I have seen the growth of direct lending evolve from a small handful of BDCs competing with banks for their lower middle market loans to a proven industry with real institutional backing and recognition.
During this time, we've continued to refine our processes, grow our team, and leverage some new thinking. However, we've remained consistent in our approach, our investment philosophy, and our focus on the team and our culture, which underpin everything that we do.
Our third quarter earnings and credit results build upon our 20-year track record of successfully managing the company throughout a wide variety of economic and market cycles.
Kip DeVeer: Over the past two decades, Aries Capital has made nearly 4,000 investments with a cumulative net realized loss rate of 0% and an asset level realized gross IRR of approximately 13%.
Kip DeVeer: and over the same time period our shareholders have been rewarded having enjoyed an average annual total return of roughly 13% which represents outperformance of over 225 basis points per year to the S&P 500 index.
Needless to say, we're very proud of this performance.
Kip DeVeer: Looking forward, we believe Aries Capital and its competitive advantages remain strong.
with the declaration of the fourth quarter dividend.
Kip DeVeer: ARCC's regular quarterly dividend has been stable or growing now for more than 15 years and we remain confident in our ability to maintain this dividend level in the foreseeable future even in the face of lower expected interest rates.
As we look to the future, we believe the company remains very well positioned to address what we see as a growing market opportunity, and the management team and the board remain committed in continuing to build upon what we believe is a successful long-term track record.
Kip DeVeer: As always, we appreciate you joining the call today. We'll look forward to speaking with you next quarter, but without Operator, we'd like to open the line for questions. Thanks.
Thank you.
At this time, if you'd like to ask a question, please press the star, then the 1 on your touch-tone phone. If you would like to withdraw your question, please press star, then 2.
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 any additional questions, you may re-enter the queue and the Investor Relations team will be available to address any further questions at the conclusion of today's call.
Speaker Change: We'll take our first question from John Hecht with Jeffries. Please go ahead, your line is open.
John Hecht: Morning guys, congratulations on the 20th anniversary. Very cool.
somewhat churned. You know, you've had a couple good quarters of investment activity and it sounds like the pipeline's good. I mean, are we now entering that phase of the market and are you guys kind of bracing for a really active 25 at this point or is it too early to make that call?
Speaker Change: I appreciate the comment, John. The last two quarters have been good, and I mean the simple answer is yes, we remain pretty busy. I mean, I think getting the election behind us will help, and then we'll obviously be getting into year-end, but I expect a busier next year for sure.
John Hecht: And then, just a quick question on Riverside. Maybe give us a sense of what's their kind of origination?
I guess trend and it sounds like it's the lower middle market. So, will that kind of take you into a slightly different asset class than you guys have been focused on for the last few years?
Kort Schnabel: Yeah, it's Kort. I can jump in on that. I wouldn't say it's a slightly different asset class. I think the takeaway is, you know, Riverside is a very active lower middle market lender. It's not a large team. It's a nine-person team. We've known them for a really long time and we have immediately integrated them into our team in our process and they're going to help us.
energize and double down on our commitment to cover the lower middle market even as we scale.
Kort Schnabel: And I think, you know, we're excited to have them on board. They're going to bring deals to our investment committee, just like any of our other 200 investment professionals. And it should be a good thing for our broader market coverage.
Great. Thanks guys very much.
Speaker Change: We'll take our next question from Finyan O'Shea with Wells Fargo Securities. Please go ahead, your line is open.
Kort Schnabel: © The Bulletproof Executive 2013
Hi everyone, good afternoon. On the market opportunity for the asset class
Finyan O'Shea: So today we have a lot of spread compression and hopefully volume heals and relieves that dynamic. But we wanted to ask your view in light of all the capital being raised.
Speaker Change: if the direct lending premium is on more of a secular decline.
Speaker Change: Um...
Speaker Change: I don't think so because the way that the market works typically is folks lock up capital in a liquid credit when they look at other reference securities in liquid credit in particular.
and, frankly, other surrounding markets, right?
So the risk premium, the complexity premium that we get for locking up investor capital in a liquid credit.
Speaker Change: of course.
Speaker Change: varies over time, right? If you look at the historical numbers, it's somewhere between 150 and maybe 400 basis points. But for me, it's that relationship that really needs to remain in place for the capital to continue to support growth in the market.
Speaker Change: I think your point on spread compression is fair and it's there, but it's in response
Not so much to lack of deal flow, but just I think to most of our teams as well as some of our competitors' belief that the economy is in a better place than we might have expected. Defaults are very low. There's growth.
Speaker Change: and when you see less risk investing in a market you're willing to take less return and that's what's happened over the last year or two.
Speaker Change: If I could do a small follow-up on Riverside, just seeing how
Speaker Change: perhaps one-offs that was or if...
Maybe this is indicative of another large trend where...
large managers such as yourselves are able to
Speaker Change: consolidate and add on a lot of sort of investment origination capacity that way amongst the perhaps you know likely sprawling lower-middle market firms out there. Thanks.
Speaker Change: Yeah, I mean, all I'd say is something that I can add on to what Kort said, which is really the meat of the bone, or the meat on the bone. Look, I mean, we've been at this 20 years, and the key is that you continue.
experience to build the best origination team you possibly can, which leads to the best outcomes. So we've been adding people in a whole host of different segments and industries and all of that for 20 years.
Speaker Change: Riverside is just another example of that right it's as Kort mentioned a lower middle market team that can add to what we're doing and you know remains our commitment to keep adding things we think bring value to the company and the shareholders
And Finn, as you know, we've talked a lot about our ability to cover all different parts of the market and, you know, I think, again, this is just a
reiteration of our commitment to that lower middle market. I think it might be you know natural for us as we scale to you know potentially take our eye off the ball or focus a little less on that part of the market and I think we want to make sure that we are intentionally not doing that.
Speaker Change: both with our existing team as well as adding resources here through the acquisition of Riverside. So hopefully that helps.
Yes, thanks so much.
We'll take our next question from Melissa Waddell with J.P. Morgan. Please go ahead, your line is open.
Speaker Change: Good afternoon. Thanks for taking my questions and congrats to everyone with a new or expanded role with the company
I was hoping to follow up on the comments about where we share with existing clients and as they sort of consolidate the relationship. I assume that...
Speaker Change: That involves a good amount of refi activity that happens within the portfolio. Is that the case in the third quarter? Do you have sort of a view on what that could look like going forward?
Speaker Change: I mean not really necessarily, Melissa. I think the point is, you know, we've got a very, very diverse
set of clients, right? I mean, the company today literally has representation with 200 plus sponsors, and that doesn't even, you know, take into account industry groups and non sponsored deals and all that stuff. But look, the key is that we keep
Speaker Change: doing more with the folks that we want to do more with.
And I think that the large players with big teams have been able to continue to capture more and more share with the most relevant clients. You know, it's not just us, it's others. But the focus is there. It's not needing to be heavier on refi activity in our minds. Yeah, in fact, I would say it's not.
It's not a lot of refi activity. It's a lot of add-on capital activity into our existing portfolio companies to support growth and M&A.
Speaker Change: You know, the fact of the matter is we are providing more of that add-on capital than our other club members in those facilities, which is what's contributing to our market share gain. So it's definitely more of that and less refinancing.
Speaker Change: Okay, I appreciate that.
Speaker Change: Go to Beadaholique.com for all of your beading supplies needs!
Speaker Change: Just as a follow-up, was there anything we should be thinking about in terms of the timing of originations during the third quarter? I think they generally tend to be a little bit back-end loaded. Was there anything exacerbated in pre-Q? Or is it pretty normal?
Thank you. I think it was a pretty good quarter. I mean, you know, comes and goes. Unpredictable from quarter to quarter, but I don't think there's anything other than just, you know, circumstance and randomness.
Speaker Change: Okay, thank you.
Yeah, thanks for your questions.
Speaker Change: We'll take our next question from Casey Alexander with Compass Point. Please go ahead, your line is open.
Casey Alexander: All right. Good morning, or I guess good afternoon. Thanks for taking my questions, and happy anniversary.
Thanks, David.
And so I'm wondering, have we been watching sort of a defined internal strategy on the run, or does this have to do more with the way that structure has changed across the private credit industry?
Speaker Change: Yeah.
Speaker Change: looking for good relative value in all market environments and investing into the opportunities that are in front of us. Obviously, we like the returns we're getting on the first lien asset class.
Speaker Change: And leverage levels are still lower than the average. Returns are higher. So we think it's a good place to be putting dollars. But, you know, we'll see how the market develops from here.
Speaker Change: Okay, well then let me follow up on that question. Okay, 53% of your portfolio is first lien.
Speaker Change: kind of how does that balance between pure first lean versus unit ranch and You know when you do a unit ranch, which is going into that first lean bucket What type of yield premium are you generally getting on that relative to a pure first lean?
Speaker Change: Thank you.
Speaker Change: I mean, it's a little bit in the eye of the beholder, right? We've talked about what a unit drach is versus a first lien term loan. That's kind of a hard question to answer, to be honest, Casey.
Speaker Change: Okay, thank you. Appreciate you taking my questions.
Speaker Change: Thanks for the follow-on.
Speaker Change: We'll take our next question from Robert Dodd with Raymond James. Please go ahead, your line is open.
Hi, everybody, and good morning from Central Time. And congratulations to everybody on the new role. So a couple of questions mainly about your spreads and yields. I mean, I think Scott, in the prepared remarks, said a dominant part of the decline in the weighted average yield this quarter was base rates. I mean, have you seen...
I mean the three-month libel at the beginning of the quarter wasn't that different from the beginning of the previous quarter but it's not always that recent. Have you seen a shift in elections to...
Speaker Change: or should we expect to see a shift in elections towards a shorter term like one month if rates start falling versus three months or when the reset dates are happening or anything like that?
Speaker Change: It seems like...
normal course three-month resets at the beginning of the quarter shouldn't have had that much impact. This quarter, the fourth quarter, yes, but can you give us any color on that?
Speaker Change: Yeah, so I think the comments about the decline in the yields weren't really, remember those yields we disclosed are at the end of the period.
Speaker Change: So, the effects of that really have not flown through until really the following quarter.
Speaker Change: In terms of the resets, I mean, it'll vary depending on the borrower. So usually it's at a month end, but we haven't really seen a shift yet in terms of the terms of the contracts from 3 to 1, just given the rates just recently moved.
Go ahead, take it. Go ahead. Maybe just save it.
Speaker Change: Thank you.
Speaker Change: I was just going to say, just to hit it really hard on the head and put some math around it, so there's been a 70 basis point decline in three months so far from Q2 to Q3. We've seen about 10 basis points of that.
every hundred basis point reduction.
and SOFR results in a three cent quarterly reduction for us so I think the good news is people can see there's a lot of cushion.
Speaker Change: relative to our dividend, which was, you know, very purposeful and intentional, because we knew that eventually rates were going to decline. And, you know, we've operated through lots of different rates and rate environments over our history and feel good about the ability to continue to do so.
Speaker Change: Got it, thank you. And then, kind of the follow-up one, it looks this quarter like new on-boarded, not refinanced, not repriced, but new portfolio companies on-boarded for first lean. Spreads look like they were sub 500.
And, I mean, you've talked about spread compression before. That seems like, I mean, that's the lowest I can...
find in a decade? I mean, is there something unique about this quarter? Or is that spread compression not just there, but getting worse? Can you give us any thoughts on that?
Speaker Change: Yeah, I mean, I think, look, spreads we've said, I think we said this last earnings call have come in at least 100 basis points, you know, this year, right from the beginning of this year towards, you know, the finish as we come up upon it.
There are plenty of large cap unit tranches getting done with fours, but you know, middle market deals or not. So I just say that the range is generally kind of a four, it's kind of a 450 to 550 market depending on quality of credit, size of company, etc.
Speaker Change: Thank you.
Speaker Change: Seeing returns go down modestly, so
We did see spreads stabilize this past quarter.
Speaker Change: relative to the prior quarters where there was consistent decline. So I think that's an important point.
Speaker Change: and then Kip's point around looking at the absolute return again relative to our historical experience we're still getting 10% on senior debt at leverage levels that are well below historical averages so I think on an absolute basis you know we're still feeling pretty good.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And Doug, your phone may be on. There, Doug.
Speaker Change: Moving on, we'll take our next question from Kenneth Lee with RBC Capital Markets. Please go ahead, your line is open.
Kenneth Lee: Hey, good afternoon. Thanks for taking my question. Just in terms of the portfolio there,
Looks like average interest coverage ratio has ticked up to 1.8 times. Just wondering,
Kenneth Lee: Do you still expect, you know, to see a pickup in terms of credit losses across the industry or are things just getting much better, especially with...
Kenneth Lee: that's the potential rate outlook there. Thanks.
Speaker Change: Thanks. You know, I was forecasting, frankly, that things would get worse than they've gotten. I mean, I see it currently as stable, right, you have.
Speaker Change: Very low non-accruals as a percentage of the portfolio, both on a fair value and cost basis.
Speaker Change: has been pretty consistent. So at this point, for me, it's a little bit difficult to predict. I guess we'll see what the economy does and we'll see what the trajectory of rate
Speaker Change: decreases likely are.
Speaker Change: But I see it as a pretty stable picture. I don't see an increase in defaults. I don't see things also materially getting, you know, much better than this. They're pretty good from a credit quality perspective today when you look against the historical numbers.
Speaker Change: Gotcha.
Speaker Change: And just in terms of just a little bit of housekeeping, any color around amendment activities seen in the quarter, and as well, you know, any kind of revolver facility drawdowns that you want to, you know, highlight.
Speaker Change: I'll just say amendment activity has been very stable if not even you know a little bit lighter than normal and then on the revolver draw point revolver drawings revolver draws at our portfolio companies have actually gone down this quarter versus prior quarter so liquidity and our borrowers feels healthy.
Speaker Change: Got you. Very helpful there. Thanks again.
Speaker Change: We'll take it.
Speaker Change: We'll take our next question from Mark Hughes with Truist. Please go ahead, your line is open.
Mark Hughes: Yeah, thank you. Good afternoon.
Mark Hughes: Exits in the fourth quarter, there was a chunk that went over to Ivy Hill, but it looked like net activity was still negative. How do you see that playing out for the full quarter?
Speaker Change: Yeah, I think you're just talking about the post-quarter-end activity. It's 24 days. I think it's not a lot there, not a lot there. Yeah, I wouldn't read too much into that. As you mentioned, 450 million of the exits were sales to Ivy Hill. Obviously, like you pointed out, still a net negative number. But the backlog we disclosed being, you know, a mid $2 billion level, we feel good about the level of activity out there.
Speaker Change: Many improvement in interest coverage.
Speaker Change: Was that largely the lower portfolio yield or was there some improvement in the...
Speaker Change: EBITDA, I think EBITDA was down a little bit sequentially but that's the...
Speaker Change: We saw EBITDA growth on the portfolio and slightly lower rates for portfolio companies. of EBITDA was down sequentially from 12% to 10%,
Speaker Change: has covered.
Speaker Change: math, as well as the, you know, modest rate declines.
Speaker Change: I did want to ask, Jim Miller, any plan to improve the 20-year process that's been put in place?
Speaker Change: laughter
Jim Miller: It's really difficult to come in after 20 years and improve something that's been run this well.
Jim Miller: We've been here for, what, 18 of the 20? Yeah, the first two years I was not here, so they can take full credit on that. But no, I'm very excited to be part of the team, close to working with ARCC, but this is a great business with a great team.
Speaker Change: Nothing exciting from my end.
Speaker Change: And as a reminder, if you'd like to ask a question today, please press the star and 1 on your telephone keypad.
Speaker Change: We'll take our next question from Paul Johnson with KBW. Please go ahead, your line is open.
Paul Johnson: Thank you for taking my questions. Congrats on the 20 years as well as the upgrade.
Paul Johnson: On the spread compressions that you've kind of seen this year, has that also impacted structuring fees at all for new deals, or is it just...
Maybe a little too early to tell, I'll just give it a minute.
Speaker Change: We're still kind of waiting on an M&A recovery.
Speaker Change: You know, a little bit of pressure on fees too, the same way we've seen some pressure on spreads. We'll see where it goes from here. I don't think we have anything to take away quite yet.
Speaker Change: I appreciate that. And then on just one line, emergency communications.
Speaker Change: I saw that that was removed from Nautical from last quarter. Is there anything you can say, I guess, on the resolution there? Is that still in the portfolio or has that been exited fully at this point?
Speaker Change: It's been fully exited from the portfolio.
Speaker Change: Got it. Thanks for that. And the last question is just broader. I mean, in terms of inflation, I guess, what do you see kind of from your broader observation of the portfolio? I mean, if we kind of last the worst points of inflation at this point, has it...
Speaker Change: sort of remained, you know, persistent. I mean, it seems to be a story that doesn't completely go away. You know, I'm just kind of wondering just with the higher inflation outlook due to a potential outcome of the election.
Speaker Change: We think it's moderated a lot. I mean, if you follow us from quarter to quarter,
Speaker Change: You know, it had been a theme that we actually had talked about and something that was very evident in our portfolio as far back as probably the third.
Speaker Change: Thanks, that's all for me.
Speaker Change: and Will Takers.
Speaker Change: We'll take our next question from Derek Hewitt with Bank of America. Please go ahead, your line is open.
Derek Hewitt: Good afternoon everyone and reiterate the congratulations on the successful 20 years. My question has to do with PICC. So it's been stable at about 15% of revenue the past few quarters. So the first part of my question is, do you think PICC has peaked at these levels? And more importantly than that,
Derek Hewitt: What percentage of PIC was just temporarily built into the original deal to kind of give the borrower some additional flexibility versus kind of PIC related to any sort of borrower liquidity issues?
Speaker Change: Yeah, and I, oh, thanks, Jerk. I think...
Speaker Change: You know this, but for others who...
Speaker Change: who may not think about it quite the same way. We do a fair amount of junior capital investing at this company, and we think we do it quite well. And a portion of that is particularly in a higher interest rate environment, being able to structure deals that have PIC components.
Speaker Change: That's why we win business in a lot of these circumstances.
Speaker Change: adjust to the higher rate environment and having less cash on hand.
Speaker Change: So the answer to your question is most of the PIC income is by choice, as I describe it, not as a concession.
Speaker Change: for a portfolio company under performance. You know, it's very different from obviously where we were in 2000, where most of it was coming as a concession to companies that weren't open and weren't generating cash. But I think a lot, you know, in the BDC world is made of
Speaker Change: Pick and we we spent a lot of time looking at the numbers The number that I look at is just what percentage of your total interest in dividend income is is picked, right?
Speaker Change: And the number that I'm looking at for this quarter for the company is down pretty substantially from 2020, 2021, and 2022. So it just doesn't give me a significant amount of concern.
Speaker Change: And we actually did disclose it our Investor Day, and it still holds true today, 90% of our PIC income was structured at the time of the investment, versus only 10%, which is amendment-oriented PIC.
Speaker Change: Okay, thank you for that. And then my follow-up question is, are there any, like, for lack of a better term, like, credit blind spots that investors need to kind of pay attention to within the sector, just given the surprisingly strong trends that we continue to see within the middle market?
Speaker Change: Yeah, I think personally, I think the one that everyone always misses is a lack of diversification.
Speaker Change: It's not something that we get enough credit for at this company with 500 plus portfolios. We're not exposed to a single name. And you've seen over time that we've had some, you know, credit problems, losses, whatever it may be, but over a 20 year history, investing in 4,000 companies, diversification is actually a pretty big deal. And what you'll see, we get asked questions about, oh, what, you know.
Speaker Change: That's it. That's it. What happened to this portfolio company? At the end of the day, most of the time, it doesn't matter.
Speaker Change: And companies have been able to generate really, really consistent results over a long period of time, which is why we really don't comment very often on single name risks, because we don't believe the company actually has any.
Speaker Change: Great, thank you.
Speaker Change: Thanks for the question.
Speaker Change: And this concludes our question and answer session. I'd like to turn the conference call back over to Mr. Kip DeVeer for any closing remarks.
Kip DeVeer: Nothing as usual other than thanks for attending the call and we will catch you next quarter.
Kip DeVeer: Have a great day.
Kip DeVeer: Thank you. Thank you. Thank you.
Speaker Change: 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.
Speaker Change: Approximately one hour after the end of the call through November 30th at 5 p.m. Eastern Time. To domestic callers by dialing 1-800...
Speaker Change: 839-5127 and to international callers by dialing plus 1-402-220-2692. An archived replay will also be available on a webcast link located at the home page of the Investor Resources section of the Aries Capital website.
Speaker Change: Thank you for your participation and you may now disconnect.
Speaker Change: Goodbye.
Speaker Change: John Stilmar, Kort Schnabel, Mitchell Goldstein, Robert DeVeer, Kort Schnabel, Kort Schnabel,
Speaker Change: Pageant Boys Merry Christmas