Q4 2024 Ares Capital Corp Earnings Call
Welcome to Ares capital Corporation's fourth quarter and year ended December 31, 2024 earnings conference call.
At this time all participants are in a listen only mode.
As a reminder, this conference is being recorded on Wednesday February 5th it's about 25, I will now turn the call over to Mr. John Steele, our partner Aries public markets Investor Relations. Please go ahead.
Speaker Change: Great. Thank you very much let me start with some important reminders comments made during the course of this conference call and webcast and accompanying documents contain forward looking statements.
Speaker Change: Due to risks and uncertainties the company's actual results could differ materially from those expressed in forward looking statements for any reason, including those listed in its SEC filings Ares.
Speaker Change: Ares Capital Corporation assumes no obligation to update any such forward looking statements. Please also note the past performance market information is not a guarantee of future results.
Speaker Change: On this call the company made to certain non-GAAP measures as defined by SEC regulation G such as core earnings per share or core EPS.
Speaker Change: They believe that core EPS provides useful information to investors regarding the financial information because it's one that the company uses to measure its financial results and condition.
Speaker Change: A reconciliation of GAAP net income per share and most directly comparable GAAP financial measure can be found in the accompanying slide presentation for the call.
Speaker Change: <unk> reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on form 8-K.
Speaker Change: Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies was derived from third party sources and enough, but independently verified and accordingly, the company makes no representation or warranty which factors information.
Speaker Change: The company's fourth quarter and year ended December 31, 2024 earnings presentation can be found in the company's website at Www Dot Ares capital Corp, Dot com by clicking on the fourth quarter earnings presentation on the homepage of Investor Resources section.
Speaker Change: Ares Capital Corporation earnings release, and Form 10-K are also available on the company's website.
Kip: We took all of them do there is capital Corporation's Chief Executive Officer Kip.
Speaker Change: Thanks, so much John.
Speaker Change: Everyone and thanks for joining our earnings call today.
Speaker Change: I'm joined by Court Schnabel.
Speaker Change: Our newly announced CEO Kim.
Speaker Change: Tim Miller, our President Jay Markowitz, our Chief operating Officer, and Scott <unk>, Our Chief Financial Officer, as well as other members of management team, who will also be available during our Q&A session.
Speaker Change: Before the team discusses our fourth quarter and full year results I wanted to discuss the leadership changes that were announced this morning.
Speaker Change: As you may have seen from our press release. This morning, CT Schnabel has been named as our New Chief Executive Officer effective April 30th.
Speaker Change: Or joined the reason 2001 is a widely respected and tenured executive areas with extensive leadership and private credit experience.
Speaker Change: The founding member of Aries is U S direct lending strategy back in 2004 quarters, it's been instrumental to the success and growth of the U S direct lending platform.
Speaker Change: Which is tripling the successful long term track record at <unk> capital.
Speaker Change: Elevating core.
Speaker Change: <unk> is a natural progression.
Speaker Change: Even as many past contributions and our confidence in his future leadership.
Speaker Change: In connection with disappointment and considering many responsibilities at Ares management, which were announced this morning, I will be stepping down as the CEO of Ares Capital Corporation at the end of April.
Speaker Change: I will however remain actively involved with the company, but there is a member of <unk> board of directors and theories U S direct lending investment Committee.
Speaker Change: Jim Miller, who currently serves as a co president of Ares capital alongside Mr. Schnabel well.
Speaker Change: We will continue with the sole president of the company.
Speaker Change: These changes reflect the natural evolution in the leadership at areas and we're very fortunate to have such a deep and committed team.
Speaker Change: Over the past decade as CEO its been a great privilege working day to day with the entire team that has driven all of the success ARCC.
Speaker Change: During this roughly 10 year period, the company paid over 40 quarters of steady or increasing dividends.
Speaker Change: Increased book value per share by over 20%.
Speaker Change: We generated $500 million of realized gains in excess of realized losses.
Speaker Change: This is investing success has led to a stock based total return for our investors of nearly 14% per annum outperforming the S&P 500.
Speaker Change: Yes, and keep 500 Naturals index and the <unk> Bank index over that period.
Speaker Change: And compared to other yield oriented investments available to shareholders, we've generated more than 300 basis points per annum about performance when compared to the Etfs for utility.
Speaker Change: And for mortgage Reits.
I'm confident the court and the broader area of the leadership team, which averaged 20 years of experience that the company will continue to execute strongly for our shareholders.
Speaker Change: I can't think of a better more capable leader for the next chapter.
Court: Before turning the call over to court for some additional comments on our company's successful 2024.
Court: I do want to acknowledge the tragic impact that we witnessed from the wildfires to the spread across the Los Angeles area.
Court: This tragedy is unfortunately impacts the lives of many of our clients and colleagues and our thoughts are with them and their loved ones. During this challenging time.
Court: Areas is working diligently to support them and the entire area and the recovery.
Speaker Change: Let me now turn the call over to court.
Court: Thank you Kirk and I, certainly look forward to continuing to work with you our executive team and the other members of the ARCC board in the years to come.
Speaker Change: So let me start by providing a few thoughts on current market conditions.
<unk> performance and our outlook heading into 2025.
Speaker Change: As our earnings release outlines our fourth quarter results concluded another strong year for ARCC with continued healthy credit performance in our underlying portfolio companies.
Speaker Change: Well positioned balance sheet.
Speaker Change: We are positioned with significant available capital.
Speaker Change: Should benefit us as we leverage increased in activity in 2025.
Speaker Change: We also ended 2024 with record NAV per share of $19 99.
Speaker Change: The growth in earnings per share in fourth quarter was the eighth consecutive quarter of <unk>.
Speaker Change: Continued our long term brand of ARCC delivering among the strongest returns.
I hereby dividends, plus NAV per share growth as compared to our BDC peers.
In addition to our positive performance in 2024 was another year, where our strong results were supported by the benefits of our well established platform.
Industry, leading scale.
Incumbent positions and differentiated strategy covering the broader middle market.
Speaker Change: Despite historically subdued M&A environment in 2024 and counter to many others in the direct lending market.
Speaker Change: We achieved one of the most active origination years.
Speaker Change: Company's history.
Speaker Change: We continue to see the total return opportunity in todays market is highly attractive with significant equity cushion supporting our debt investments into.
Speaker Change: <unk> total yield premium to the liquid loan market.
Speaker Change: During 2024, we reviewed a record volume of new opportunities totaling more than 650 billion.
Speaker Change: A number of potential investments, we evaluated during the year grew each quarter on a year over year basis.
Speaker Change: Given the strength of our pipeline, we will also able to generate a record level of new commitments net of repayments, which totaled $5 billion for.
Speaker Change: For the year.
Speaker Change: Many of you know our philosophy has been to originate our competition, which we believe is a key driver of long term credit performance.
Speaker Change: <unk> had a record year in both the estimated dollar value of transactions, we reviewed and in Arcc's net new originations, we still remain highly disciplined in terms of credit selection.
Speaker Change: Our overall selectivity rate remained in the mid single digits for 2024.
Speaker Change: With our long term average since our inception more than 20 years ago.
Speaker Change: A key driver of originations during 2024 has been our growing wallet share with income borrowers.
Speaker Change: As we have discussed in the past really financing incumbent borrowers can provide attractive risk adjusted returns as our tenure with these borrowers given any advantages.
Speaker Change: Okay.
Speaker Change: In 2024 of 70% by our new commitments were to existing borrowers and importantly, we are increasingly being asked to provide a larger portion of our borrowers overall capital structures.
Speaker Change: As an illustration our share of the overall for that space for our top 10 largest incumbent borrowers more than doubled in each of past few quarters.
Speaker Change: In addition to the sourcing advantages our focus on non cyclical high free cash flow doses.
Speaker Change: To drive strong credit results.
Speaker Change: As Jim will discuss later, we continue to believe our diversification industry selection has contributed to Arcc's strong credit performance in comparison with other adcs.
Through our time tested underwriting processes.
Speaker Change: The approach and focus on income borrowers, we have been able to avoid many of the problems that have driven recent increases in non accruals in the BDC space.
Speaker Change: Our non accrual rates continued to be below our own and peer group historical averages and the overall growth in our portfolio of companies continues to be strong.
Speaker Change: Specifically, the organic weighted average LTM EBITDA growth rate of our portfolio company reached 11% in the portfolio, which increased from 10% the prior quarter and 9% at year end 2022.
Speaker Change: In comparison, the average LTM EBITDA growth of the leveraged loan market in Q2, 2024 reached $3 five to low <unk>.
Speaker Change: Less than 1%.
Speaker Change: Although our portfolio is performing very well we are carefully monitoring the potential impacts from changes in new government policies.
Speaker Change: Given what we've seen in the early actions of the New administration. We don't currently expect any material direct impact to our portfolio of new government policies.
Speaker Change: But this new regime will be worth watching in terms of policy changes and we will be sure to thoughtful and vigilance about any material changes to the landscape for direct lending.
Speaker Change: We've also had a very successful year executing on our balance sheet initiatives.
Speaker Change: Scott will describe in more detail how competitive it answers and our long term track record helped us secure a ratings upgrades from two of the major credit rating agencies throughout the year, making ARCC the highest rated BDC amongst the three major rating agencies.
Scott: Good sources of liquidity.
Jeff: Jeff will then times net debt to equity providing significant flexibility to support our ability to invest.
Jeff: Looking ahead, we expect a healthy economy.
Jeff: The increasing pressure on private equity sponsors to seek liquidity.
Jeff: And a growing confidence for executives.
Jeff: To support and accelerating M&A environment in 2025.
It stands to reason that with the increasing importance of direct lending in the market, which continues to finance the majority of <unk> overall.
Jeff: Overall direct lending volumes will policies.
Our market remains competitive we believe our position at a largest publicly traded BDC managed by the largest global development platform.
Jeff: Abides meaningful advantages.
Jeff: Sourcing underwriting and risk management.
Jeff: I'm very proud of what our team accomplished in 2024 and believe we are well positioned for a successful 2025 and beyond.
Jeff: I will now turn the call over Scott take us through more details on our financial results and balance sheet.
Scott: Thanks, Nick.
Scott: This morning, we reported GAAP net income per share of <unk> for.
Scott: For the fourth quarter of 2024.
Scott: Compare to six years as the prior quarter.
Scott: And semi tools and so forth.
Scott: Fourth quarter of 2023.
Scott: For the year, we reported GAAP net income per share of $2.44.
Scott: Compared to $2 75 for 2023.
Scott: We also reported core earnings per share of 55 for the fourth quarter was priced before <unk>.
Scott: Fair enough.
Scott: The prior quarter.
Scott: And 63% from the fourth quarter of 2023.
Scott: Our decline in core earnings was largely driven by the impact of the declining yields.
Scott: Folio.
Base rates at the end of the year were nearly 100 basis points lower than where they were at the end of 'twenty three.
Scott: As you may recall from our last earnings call.
Scott: Typically up to a one quarter lag between the full quarter impact to interest income from the change in that area and you know that.
Scott: For the most recent quarter.
Simply put the <unk>.
Scott: Impact from the change in portfolio yields in the third quarter.
Scott: Primary driver of the sequential change in our core earnings for the fourth quarter.
Scott: While the market sentiment of future interest rates has generally change to a higher stronger sentiment.
Scott: In the third quarter.
Scott: <unk> pay rate to decline approximately 30 to 50 basis points.
Scott: Lending on what I can find and chain of one month ordering months ofer during the fourth quarter.
Scott: As such to change in our fourth quarter portfolio yield.
Scott: Were impacted by the change in moderate and to a lesser extent the higher mix of first lien loans in the portfolio in the fourth quarter that occurred in the third.
Scott: While our floating rate portfolio will be impacted by the full or impact of the most recent base rate declines. We also stand to benefit from the same rate declines in our interest expense as it relates to our floating rate debt obligations.
Scott: Turning to the balance sheet, our total portfolio at fair value at the end of the quarter was $26 7 billion.
Scott: Up from $25 9 billion.
Scott: In the third quarter.
Scott: <unk> of $22 9 billion a year ago.
The weighted average yield on our debt and other income producing securities amortized cost was 11, 1% at December 31.
Scott: Which was down from nine 7%.
Scott: At September 30th at all and at present at the end of 2023.
Scott: Our total weighted average yield at amortized cost at 10%.
Scott: This compares to 10, 7% a quarter ago.
Scott: And 11, 8% year ago.
Scott: Our stockholders' equity ended the quarter at $13 4 billion or $19 <unk> per share.
Scott: Another record high for US at Corp noted earlier in the call.
Before giving an update on our capitalization liquidity, let me start by highlighting a notable accomplishment related to our credit ratings during the year.
Scott: And then November S&P upgraded the issuer credit and senior unsecured ratings for Ares capital Jacoby from Triple B minus.
Scott: If you recall this is on the heels of Moody's recently upgraded our long term issuer and senior unsecured ratings first capital to either way too from beta one three at the end of September.
Scott: Along with existing Triple B rating and a positive outlook from Fitch. This clearly differentiate Ares capital as our highest rate of EDC.
Scott: We believe will allow us to continue enjoying best in class, finding us and potentially increase that capacity overtime.
Scott: Let me update you on our recent capital activity since our last call.
Scott: For the first time that a firm Mitchell B issuer, we opened the new year with a $1 billion unsecured notes issuance that matures in March 2032, and prices for Ed to treasuries of 150 basis points for an all in coupon of five 8%.
Scott: We did swap the notes issuance the sofa robust 70 basis points, which is alongside.
Scott: Weighted average fed our floating rate debt of 197 basis points as of December 31.
Scott: Overall, we were extremely pleased to capitalize on some very favorable issuer dynamics.
Scott: With a longer tenure issuance at an issuance spread less tied for our lowest spread in our history regardless of town.
Scott: Our overall equate position remains strong with nearly $6 7 billion of total available liquidity.
Scott: Including available cash on a pro forma basis for our.
Scott: Recent unsecured notes issuance.
Scott: This positions US well ahead of the upcoming just $100 million in us.
Scott: Training in March and the $1 5 billion of midst maturing in July.
Scott: In terms of our leverage we ended the fourth quarter with debt to equity ratio.
Scott: Available cash at <unk> 99 times down from the 1.03 times a quarter ago.
Scott: We believe a significant amount of dry powder.
Scott: This fall typically supporting our existing portfolio companies as well as new investment activities.
Scott: Moving onto our dividend, we declared a first quarter dividend <unk> 48 per share.
Scott: Yeah.
Speaker Change: There hasnt been stable or increasing regular dividends for over 15 consecutive years.
This dividend payable on March 31, 2025 to stockholders of record on March 14th and is consistent with our fourth quarter 2020 for Devon.
Speaker Change: In terms of our taxable income spillover. We currently I think we will have $920 million.
Speaker Change: Or $1.37 per share available for distributions all quarters in 2025.
Speaker Change: In addition to our fourth quarter earnings being well in excess of our current dividend. We believe the taxable income spillover is a significant differentiator for us in the BDC sector and help provide further stability.
And stability of our dividend.
Speaker Change: I will now turn the call to Jim block through our investment activities.
Jim: Thank you Scott as previewed I'll provide some additional detail on our investment connectivity, our portfolio performance and our positioning for the fourth quarter and the year.
Jim: I will then conclude with an update on our post quarter end activity and backlog.
Jim: The fourth quarter, our team originated approximately 3 billion.
Jim: Of new investment commitments, which is greater than a 50% increase over Q4 of 2023.
Jim: This was a strong quarter.
Jim: While we're very active year for the company in which we originate over $15 billion.
Jim: That's more than double the commitment volumes of 2023.
Jim: In addition to growing our growing market share with our existing borrowers there.
Jim: Previously our strong origination results are supported by our differentiated approach.
Jim: Covering the broader market.
Jim: Despite having what we believe is the highest level of deployment of any public BDC EMEA.
Jim: EMEA EBITDA of our new investments during the year was approximately $70 million.
Jim: About one third of our new investments were to borrowers with EBITDA of less than $50 million.
Speaker Change: We believe areas.
Speaker Change: Direct lending platform of scale that actively focuses across the lower middle and upper middle market.
Speaker Change: This broad and differentiated covers supports our ability to fund what we believe are the best risk adjusted returns.
Speaker Change: While remaining highly selective.
We believe that the lower middle market deals can provide 25% to 50 basis points of enhanced spread despite lower leverage levels.
Speaker Change: From her documents when compared to some of the upper middle market transactions being completed by our peers.
Speaker Change: Importantly, and further demonstrate our ability to successfully invest across the market size is not a driver of portfolio performance and our portfolio is company that all size bands in our portfolio.
Speaker Change: Similar EBITDA growth rate over the last 12 months.
Speaker Change: In fact, we believe with our scale and size, especially in that broader market, where you have the ability to establish points of incumbency.
Speaker Change: To allow us the opportunity to grow with these companies for years to come.
Speaker Change: With respect to our portfolio, we ended the year with a $26 $7 billion portfolio at fair value, which grew at 3% from the prior quarter.
Speaker Change: 17% from the prior year.
Speaker Change: In addition to expanding market share with our incumbent borrowers.
Speaker Change: Our growth supported by our ability to provide flexible capital solutions.
Speaker Change: Through a wide variety of new companies seeking a direct lending solution.
Speaker Change: This can be seen in the total number of companies in our portfolio.
Speaker Change: Reached 550.
Speaker Change: At year end 2024, an increase from just over 500 a year ago.
Speaker Change: And often overlooked point of differentiation for ARCC.
Speaker Change: Other bdcs as our high level of portfolio diversification.
Speaker Change: By maintaining small individual company position sizes of less than 2% of the portfolio on average.
Speaker Change: ARCC has been able to mitigate the impact of negative credit events in any one company or industry.
Speaker Change: Our non accruals at cost ended the quarter at one 7%.
Speaker Change: Up 40 basis points from the prior quarter and year end 2023.
Speaker Change: Despite this increase with a 1.7% remains well below our 2.8% historical average.
Speaker Change: Since the global financial crisis.
Speaker Change: This was also below the BDC historical average of three 8% over the same timeframe.
Speaker Change: Our non accrual rates.
Fair value also modestly increased two 9%.
Speaker Change: One 6% last quarter.
Speaker Change: But this two continues to be well below our historical levels.
Speaker Change: Our overall risk ratings remained stable throughout 2024 and.
Speaker Change: And the percentage of our portfolio at fair value.
Speaker Change: <unk> ended the year at two 9%.
Speaker Change: Meaningfully down from 64% at.
Speaker Change: At year end 2023.
Speaker Change: As a sign of additional strength in our portfolio.
Speaker Change: At the end of the fourth quarter, our weighted average loan to value was 44%.
Speaker Change: Which we believe provides us with strong down five 5%.
Speaker Change: Protection for our loan.
Speaker Change: This loan to value is also significantly below our 10 year average.
Speaker Change: While our portfolio interest coverage ratio reached one nine times.
Speaker Change: Up from one eight times the prior quarter.
Speaker Change: And one six times at year end 2023.
Speaker Change: Shifting to 2025.
Speaker Change: We've been busy supported by what we believe.
Speaker Change: And early signs of a growing market activities for <unk>.
Speaker Change: Growth capital and M&A.
Speaker Change: Our total commitments to January 28, 2025, or $1 2 million.
Speaker Change: Approximately 80% increase as compared to the tremendous closed in January of last year.
Speaker Change: Also our backlog as of January $22025 to $1 8 billion.
Speaker Change: More than double.
Speaker Change: Our reported backlog at February one of last year.
Speaker Change: As a reminder, our backlog contains investments theyre subject to approvals and documentation and may not close.
Speaker Change: We may sell a portion of these investments post closing.
Speaker Change: As we look at the future. We believe the company remains well positioned to address what we see as a growing market opportunity.
Speaker Change: We remain committed to building upon what we believe is a successful long term track record.
Speaker Change: As always we appreciate you joining us today.
Speaker Change: And we look forward to speaking with you next quarter with that operator, please open the line for questions.
Speaker Change: At this time, if you would like to ask a question. Please press Star then one on your telephone keypad.
Speaker Change: If you would like to withdraw your question. Please press Star then two.
Speaker Change: Please note as it could a see to those who may wish to ask a question. Please limit yourself to one question and one 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.
Speaker Change: Again, Thats star one to ask a question.
Speaker Change: We'll go first to Melissa Wedel with Jpmorgan. Please go ahead. Your line is open.
Melissa Wedel: Hi, good afternoon, thanks for taking my questions.
Speaker Change: First congrats.
Melissa Wedel: On the changing wrong.
Melissa Wedel: Im referring to me.
Melissa Wedel: And have those conversations.
Melissa Wedel: So you're correct in that environment.
Melissa Wedel: Yes.
Speaker Change: And how about the activity during the fourth quarter I was hoping we could just kind of a cadence a little bit.
Heading into the quarter.
Speaker Change: I think in either case that it might not.
Speaker Change: The seasonally busy quarter.
Speaker Change: Can be possibly because some companies are waiting until the end of year.
Speaker Change: <unk> sort of cap.
Speaker Change: The pace of activity on deals on.
Speaker Change: On strategic acquisitions.
Speaker Change: Hi.
Speaker Change: Assuming that with what we saw in the numbers.
Speaker Change: And just being down sequentially from the third quarter.
Speaker Change: Do you think that there was any impact in terms of.
Speaker Change: Timing of new investments and repayments during the quarter on NII.
Speaker Change: Yes. Thanks.
Speaker Change: The comments Cumulus I appreciate that.
Speaker Change: I mean look I think it was kind of flat versus the third quarter, if I'm coming at the numbers.
Speaker Change: The things that I think showed a little bit.
Speaker Change: The election, which may have delayed some some closings.
Speaker Change: And we're very happy with Q4 activity levels and as we mentioned in the prepared remark January was busy and they remain busy.
Speaker Change: I'm feeling good about.
Speaker Change: Deal flow new transactions.
Speaker Change: Okay.
Speaker Change: Definitely.
Speaker Change: To date the talent I appreciate those that the details they provide us the following.
Speaker Change: And when we think about now.
Speaker Change: The evolution of the pork play out it definitely thing can be the case.
Speaker Change: And as you.
Speaker Change: That kind of skewed sort of capital structure and a lot of focus on first lien not entirely by definitely skewed that way when we look at the <unk>.
Speaker Change: Thanks, Martin your capital.
Speaker Change: Larger piece.
Speaker Change: <unk> activity I'm, just wondering how you guys are thinking about the <unk>.
Speaker Change: Asset allocation within our portfolio.
Speaker Change: Thanks.
Speaker Change: Net first lien activity or is that really going out there.
Speaker Change: Opportunities that going forward.
Speaker Change: And is there any thanksgiving getting involved thank you so much.
Speaker Change: Yes, you're welcome thanks.
Speaker Change: The answer last question first because I think for everybody. There is really no change in how we see the mix of the portfolio over time.
Speaker Change: Definitely take your point that.
Speaker Change: For the back half of the year kind of particularly in large scale kind of the large unit tranche.
Speaker Change: Sometimes taking our junior positions with the prevailing transaction.
Speaker Change: We're still happy to do.
Speaker Change: Junior deals.
Speaker Change: We've seen.
Speaker Change: Spread compression I would say in the larger names that are cash pay and then a lot of what's available on the junior side today and the higher rate environment frankly.
Speaker Change: Noncash I E.
Speaker Change: <unk> transaction.
Speaker Change: We find a lot of them to be attractive we're doing some we're obviously conscious of.
Speaker Change: The percentage of picking kind of the company.
Speaker Change: Wanting to.
Speaker Change: Had that not grow from here so.
Speaker Change: So it's a balance of different things.
Speaker Change: Fortunately.
Speaker Change: We're responding to the market and the overall philosophy of how we see mix going forward has that changed.
Speaker Change: Thanks Curt.
Speaker Change: Yes. Thank you.
Speaker Change: Thank you. Our next question will come from Finian O'shea with Wells Fargo Securities. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Hey, everyone. Good morning, Thank you.
Speaker Change: I guess to continue on investing.
Speaker Change: First congratulations.
Speaker Change: Everyone on the underpinnings.
Speaker Change: Okay.
Speaker Change: Just wanted to ask about the sports franchise like new.
That's a newer.
Speaker Change: Happening effort there.
Speaker Change: We saw there.
Speaker Change: The platform that is but also in ARCC.
Speaker Change: Deals have come in.
Speaker Change: We saw I think equity.
Speaker Change: <unk>.
Speaker Change: This quarter it looks like the BDC are pretty good allocation.
Speaker Change: So question is on the understanding of that a lot of the.
Speaker Change: The higher risk return deals.
Speaker Change: More opportunistic and so forth franchises.
Speaker Change: Our less suitable for ARCC.
Speaker Change: Like why why this one.
Speaker Change: Is this.
Speaker Change: The sports equity.
Speaker Change: Is that sort of a.
Speaker Change: Some are on the bubble or something like that.
Speaker Change: Should we expect to see more of this is that franchise gross.
Speaker Change: Yeah.
Speaker Change: Yes, I'm going to ask Jim to help a little bit too because he is very engaged both with the sports media and entertainment franchise, specifically with the deal that we did that with.
Speaker Change: The dolphins and it's running out.
Speaker Change: To go backwards.
Speaker Change: Probably.
Speaker Change: Five six years and that having built out a very substantial footprint and I think incredible reputation as a knowledgeable kind of SME investor and it's not just themes in it not just sports.
Speaker Change: Philosophically the BDC as we always said wants to leverage the strength of the Ares credit platform, which is very broad.
Speaker Change: And creates a diverse set of opportunities for the BDC specifically.
Speaker Change: SME is definitely a place along with other parts of the franchise that we want to leverage for what we think a real unique investment.
Speaker Change: For both the platform and for the BDC I think.
Speaker Change: Yes, as it often specifically.
Speaker Change: Uh huh.
Speaker Change: It was roughly $200 million investments at the BDC and just to be clear the asset itself includes more than just the team at the <unk>.
Speaker Change: And with real estate as a formula one teams incentives ornament theres a lot of stuff going on there.
Speaker Change: And we think it's a very unique I mean, I think you've probably read about in the press areas.
Speaker Change: One a few firms that was granted the ability to come in.
Speaker Change: To a franchise investment like this do you think its top tier franchise in an absolutely top tier geography, that's growing and should grow.
Speaker Change: With a fair amount of consistency over the next.
Speaker Change: Long period.
Speaker Change: Yes.
Speaker Change: Because of the quality and the diversity of the asset.
Speaker Change: Again for me.
Speaker Change: Bill its investment and its not particularly large when you look at the overall scale.
Speaker Change: Scale of the company and its unique and attractive to Arcc's shareholders.
Speaker Change: ARCC shareholders, frankly, ultimately when youre talking about access.
Speaker Change: <unk> stock.
Speaker Change: Okay. That's very helpful. Thank you.
Speaker Change: As a follow up.
Speaker Change: <unk>.
Speaker Change: Melissa.
Speaker Change: Most of the topics a bit.
Speaker Change: The investment returns I think this is actually come up here and there in recent period, but.
Speaker Change: What should we think of.
They've got structuring fee, there is more and more emphasis on.
Speaker Change: And comment repeat borrowers are gearing up.
Speaker Change: For your sponsor support them.
Speaker Change: Like how much does that impact.
Speaker Change:
The structuring fee rate that.
Speaker Change: That youll see.
Speaker Change: Pass, it's obviously been really high.
Speaker Change:
Speaker Change: And if I could sneak in a bonus question maybe a follow on.
Speaker Change: Cable I think you mentioned.
In your new role Youll, you'll be involved in direct lending.
Speaker Change: Curious as to why.
Speaker Change: What other areas you'll see.
Speaker Change: Thank you that's all for me.
Speaker Change: Yeah.
Speaker Change: Sure. Thanks.
Speaker Change: Think in terms of fees has been.
Speaker Change: Yes.
Speaker Change: Continued emphasis on kind of existing portfolio companies incumbency, which tends to generate lower fees.
Speaker Change: Today as we've said in the last couple of calls Theres been some pressure in my fundamental.
Speaker Change: Broadly so I think.
Speaker Change: Fees are generally down a little bit in the market for pretty much everything so I think.
Speaker Change: Those are the two simple answers as to why you see that coming down.
Speaker Change: In terms of your question I would encourage you to go do the Aries earnings call.
Speaker Change:
Speaker Change: A handful of others that would make a couple of hours ago, but yes, I mean more or less I will continue to be very engaged with the company as a director.
Speaker Change: On the board.
Speaker Change: We remain on the U S direct lending investments.
You would obviously appliances all the new investments for this company and a lot of other things, but I think it gives me the ability to try to support Mike.
Speaker Change: A lot of different things that we're doing both from an operational and strategic perspective.
Speaker Change: At Ares our management company.
Speaker Change: And it's an exciting change for me having been.
Speaker Change: With this business for 20 years in this company for 20 years that allows us to do some things.
Praful: Thanks Praful.
Speaker Change: Thank you.
Praful: Thanks Pat.
Speaker Change: Thank you. Our next question will come from Casey Alexander with Compass point. Please go ahead.
Casey Alexander: Hi, good morning.
Casey Alexander: And again congratulations on the promotions.
Casey Alexander: Kip.
Speaker Change: Well, we will Miss your comp voice because it did help us through some pretty.
Casey Alexander: The turbulent times during Covid.
Casey Alexander: I think I think in support of <unk>.
Casey Alexander: Support of Gordon, Jim I think you'd be getting do Morris so don't worry.
Speaker Change: Okay. Okay.
Listen.
Casey Alexander: Thank you.
And we will make this question clearly marked as of 12 31, we've seen 100 basis point decline in base rates can you give me kind of percentage of.
Casey Alexander: How much of that has flowed through into the portfolio by the by the end of.
Casey Alexander: The December quarter is it 75% or what do you think we are in.
Casey Alexander: I don't want to earnings because it's not baseball.
Casey Alexander: And then qualitatively where you are seeing yield decline is largely due to base rates or more of these questions a little bit too.
Casey Alexander: To make shift some of the junior capital, that's coming out with with more replacement.
Scott: From kind of a senior secured or unitranche, but I was looking over to Scott to see if you have better quantitative answer that I might have right now yes.
Scott: We mentioned this on the last call and again.
Scott: Time, as well, but I think what you saw from the it is certainly a lag effect when it comes to the impact of the rates our portfolio and when you go through so.
Scott: You saw some of that in Q4.
Scott: As a result of our rates out of Q3, and so we expect that.
Scott: A similar level of decline.
Scott: When you think about the Q4 right now that would impact Q1.
Scott: Okay.
Scott: Right is that currently.
Scott: Yes.
Scott: Relative to the amount of your gross fundings in the quarter.
Scott: There's quite a bit of activity in the ATM and our leverage ratio is the lowest that it's been since 2019.
Scott:
Scott: Yeah.
Scott: Should I infer from that that you would.
Scott: Expect this.
Scott: This heightened bigger.
Scott: Building and preparing for a heightened level of activity of first half.
Scott: Which is on a seasonable because normally the heightened level of activities in second half.
Speaker Change: I think that's a fair assumption for sure you know I mean, I'll I'll I'll say two things.
Speaker Change: When we can raise equity accretively, we like to do it and obviously the stock price a lot of you that.
Speaker Change: Q4, but as I mentioned.
Speaker Change: In response to one of the prior questions we.
Speaker Change: We had a busy fourth quarter and it's busy right now so I think the simple answer your question yes.
Speaker Change: Alright, thanks for taking my questions.
Casey Alexander: Okay. Thanks Casey.
Speaker Change: Thank you. Our next question will come from Doug <unk> with UBS. Please go ahead.
Speaker Change: Thanks.
Speaker Change: Kind of.
Speaker Change: Piggyback on that last question as you think about 2025, how do you think about.
Speaker Change: Kind of targeted area, where leverage b versus you know.
Willingness or appetite to continue in a range of fresh content.
Speaker Change: Yes.
Speaker Change: Average ratio to be higher.
Speaker Change:
Speaker Change: Being able to increase the leverage ratio is obviously a driver of earnings which I think will be important if and when rates continue to come down, but that's one of the.
Speaker Change: Countervailing levers that we can pull to drive earnings in the face of tighter spread lower rate. So.
Speaker Change: We're fortunate in that we're still materially out earning quarter dividend. So we don't feel a.
Speaker Change: A desperate need to do that but again, just a reminder, that the leverage let's say lever that we can well Paul.
Speaker Change: So if that's the thing.
Speaker Change: Both the leverage ratio and the earnings I think that will tell us how much.
Speaker Change: And we feel comfortable raising and the ATM program.
Speaker Change: Q4 was a with a more a larger number than <unk> seen in prior quarters and I just commented on why that was.
Speaker Change: We will see where we go from here I would expect that we would.
Speaker Change: Get back into that range that you saw from us that was sort of more regular over the last year or two.
Speaker Change: Great and then just.
Speaker Change: On your.
Speaker Change: Youre kind of spillover income.
Speaker Change: I guess, how do you think about that level.
Speaker Change: Is there a level at which you would consider.
Speaker Change: Returning some of that or are you comfortable kind of continuing to build that.
Speaker Change: I think for the time being as we said in the past we usually use this time of year.
Speaker Change: Whether we want to pay a special dividend and we chose not to obviously that should tell you a couple of things.
Speaker Change: So for the time being we feel.
Speaker Change: Good about obviously very good about where the level of it because it's quite high.
Speaker Change: But theyre actually it wasn't much of a debate this year without paying a special or a handful of different reasons or for now you feel better frankly that reserving that and thinking about it again in 12 months.
Speaker Change: Great. Thank you.
Speaker Change: Thanks for your question.
Speaker Change: Thank you. Our next question will come from Mark Hughes with twists. Please go ahead.
Speaker Change: Yes. Thank you.
Speaker Change: Any specific.
Speaker Change: Specific to share on spread.
Speaker Change: Actually the trajectory.
Q4 in January things stabilized or are you just hoping so.
Speaker Change: <unk>.
Speaker Change: And again most of the decrease we saw pretty ratably through last year.
Speaker Change: 100, 150 basis points has been the number that we quoted elsewhere in terms of the declines that we've seen whether it was repricing existing names.
Speaker Change: Deals.
Speaker Change: For the time being I would feel like it's pretty much plateaued again, because we play across the entire spectrum and smaller companies larger companies.
Speaker Change: <unk> large cap.
Speaker Change: Unit tranches are probably 475 over 500 are in the smaller deals will command premium for that.
Speaker Change: We haven't seen that continue to decline into the first quarter as weak as we have been pricing new deals.
Speaker Change: And then your point about you.
Speaker Change: Your share doubled of your commitments with existing borrowers.
Speaker Change: Is that a phenomenon.
Speaker Change: A bigger versus smaller so the other sizable bdcs, maybe having the same experience with your output.
Speaker Change: Outperforming in that dimension.
Speaker Change: Yeah, I mean, I think for sure we're able to obviously continue.
Speaker Change: To bring large dollars to our best borrowers, which is something that we've emphasized.
Speaker Change: Emphasize that I think we've been really focused.
Speaker Change: Ben.
Speaker Change: Frankly doing even better than we have in the past.
Okay.
Speaker Change: Thank you as a reminder, if you'd like to ask a question. Please press star one at this time. Our next question comes from Jeff Lee with RBC capital markets. Please go ahead.
Jeff Lee: Hey, good afternoon, and thanks for taking my question and Echo the congrats on the new roles for everyone.
Speaker Change: Thanks, guys.
Jeff Lee: Sure.
Jeff Lee: The economic backdrop.
Jeff Lee: It seems very healthy here and in non accruals.
Speaker Change: As you mentioned still below long term averages just wanted to get your updated thoughts around potential.
Speaker Change: Credit losses on forward, either yourself or across the industry.
Speaker Change: What's the outlook there thanks.
Speaker Change: Well I mean at this company, specifically I'll just reiterate I mean.
Speaker Change: We're very pleased.
Speaker Change: I don't want to use the word surprise, but I think if you talk to the team a year or two ago there was.
Speaker Change: I believe that defaults nonaccrual everywhere would rise much whereas much more quickly than they have.
Thanks for commenting of course, we've outperformed a lot of the competition.
Speaker Change: Were you happy with where our portfolio is holding up because ordinarily well. So yes, we saw a small increase to non accrual this quarter, but again being below historical average and seeing strong underlying profit growth.
Speaker Change: At the portfolio, which is by the way very large and very bursty says a lot about the strength of the U S economy, which I think is.
Speaker Change: Quite good so.
Speaker Change: A lot of these companies have adjusted to the higher rate environment, which now seems to be getting some relief.
Speaker Change: The fed has lowered rates again, and we'll see where.
Speaker Change: We go from here.
Speaker Change: It's a very very good time.
Speaker Change: To be a credit investor with a largely healthy portfolio to couple that again with the source of diverse and reliable income Ares Capital Corporation.
Speaker Change: We're pretty pleased with where we are.
Speaker Change: Great very helpful. That's all I had thanks again.
Ken: Thanks, Ken.
Thank you. Our next question will come from Paul Johnson with <unk>. Please go ahead.
Paul Johnson: Yeah. Thanks, Thanks for taking my questions and congratulations to everyone.
Speaker Change: My question was mainly.
Paul Johnson: V Hill distribution.
Paul Johnson: Looks like that increased quite a bit quarter over quarter and I'm just wondering if there's any.
Paul Johnson: Any kind of one time items in there and maybe an idea of what sort of the run rate dividend for Ivy Hill going forward.
Paul Johnson: Yes, I mean, there Ivy Hill's continues to perform extraordinarily well so just a great asset for the company.
Paul Johnson:
Paul Johnson: Just.
Paul Johnson: In case, you didn't pick up but I bet she did.
Paul Johnson: Quarterly dividends up because the company has grown.
Paul Johnson: But on top of that as a special dividend.
Paul Johnson: So it's been a $10 million they've been entertaining cfe yet.
Paul Johnson: Any common capital for their growth, but frankly, I think they didn't feel the need to retain all of them.
Paul Johnson: So there was a small onetime distribution there, but I think on a go forward basis. So it will depend on how quickly the company growth.
Paul Johnson: That increased quarterly base dividend you should take is kind of a new.
Paul Johnson: Our run rate going forward, we feel comfortable supporting that occupancy the company as well as advertised having just made a special special dividend as well so.
Paul Johnson: Got it thanks for that.
Paul Johnson: And then.
Paul Johnson: In terms of.
Paul Johnson: Your portfolio.
Paul Johnson: I'm wondering if there's a way.
Paul Johnson: To quantify or maybe.
Paul Johnson: If you know how many of your businesses that maybe have exposure too.
Paul Johnson: Government contracts, maybe not necessarily government businesses, but.
Paul Johnson: Have exposure group.
Paul Johnson: Contract services.
Paul Johnson: Such debt.
Paul Johnson: Any sort of.
Paul Johnson: Anchor information that you can provide.
Paul Johnson: Yes.
Paul Johnson: Looking around the room and frankly thinking.
I don't have a number off hand, what we'd do a little bit of digging but I'm getting.
Paul Johnson: Shaking their heads from around the room.
Paul Johnson: It's not a tremendous amount of government contracting defense and aerospace and all that is de Minimis.
Paul Johnson: We can go back and run the numbers you want us to develop the answer is I don't think that it can have a significant impact on our portfolio.
Paul Johnson: Okay, Yes, I think that pretty much answers my question, there and then.
Paul Johnson: Last question I had was just kind of higher level, but I was wondering.
Paul Johnson: Probably at the upper end of the middle market.
Paul Johnson: Have you run.
Speaker Change: Run into any instances, where private equity sponsors have been.
Speaker Change: Effectively looking to limit border control or any sort of under control.
Speaker Change: Lender group.
Speaker Change:
Speaker Change: Performing situation.
Speaker Change: Not really I mean, I think the traditional one is the sponsor of affiliated death on typically will have.
Speaker Change: Voting or limited flooding, but.
Speaker Change: Purporting situations no I mean, one of the things that we've emphasized.
Speaker Change: Has been.
Speaker Change: You know just really sticking the middle middle market docks, and making sure that yes.
Speaker Change: Some of the <unk>, that's crept into the broadly syndicated markets, we don't enter our market I'd actually say, it's one of the.
Speaker Change: Probably the most significant reason that we pass on a deal that we like is the document that we don't think works.
Speaker Change: In a downside case.
Speaker Change: But look in in <unk>.
Speaker Change: Trouble situations, you do see co ops and bank groups, particularly in situations that the larger companies, where there is concern around <unk>.
Speaker Change: But to answer your question directly.
Speaker Change: I think the answer is I.
Speaker Change: We don't really see that much I mean pretty much everybody boats for dollars.
Speaker Change: Typical I'll deal with the club deal and you get your voting.
Speaker Change: Yes, nothing unusual there.
Speaker Change: There was at our Constancia you'd heard about but we don't know about but.
Speaker Change: <unk>.
Speaker Change: Nothing material from my standpoint.
Speaker Change: I think there have been one or two large deals where this may have.
Speaker Change: Third but.
Speaker Change: Just wondering if that's something that you.
Speaker Change: <unk> in the market.
Speaker Change: I appreciate the answers your question for me.
Speaker Change: Okay. Thanks, so much.
Speaker Change: Thank you we'll take our next question from Robert Dodd with Raymond James. Please go ahead.
Robert Dodd: Hi, everybody congratulations on or when you let alone. So I'm just just a quick one for me I think.
Speaker Change: It may be in any prepared remarks.
Robert Dodd: Talking about them.
Robert Dodd: We don't expect any direct impact from policy changes in China.
Speaker Change: Does that include.
Speaker Change: Thomas which also seem a hold right now, but maybe they will be in.
Speaker Change: It's not something you will the portfolio between the tariff rhodium happens so.
Speaker Change: I mean, you just what are your thoughts if they do goes to US is to put some email the companies to the same way to get back to high rates.
Have you already prepared for it.
Speaker Change: Or just any thoughts on that.
Speaker Change: Yeah, I mean, it seems to be one of the two or three questions of the day between.
Speaker Change:
Sure.
Speaker Change: Chinese and a few other things that seem to be dominating their weight.
Robert Dodd: Look I mean, Robert I think that the simple answer is we have a very large diverse portfolio right.
Speaker Change: Tariffs on.
Speaker Change: Countries like Mexico, and Canada will have an impact on every company Andy.
Speaker Change: Probably true.
Speaker Change: Of the tariffs that were placed with China I think we're very early in that discussion, obviously spending time with portfolio of companies and the good news is we have great dialogue with our portfolio companies right.
Speaker Change: As a strong partner getting monthly financial statements were in constant contact with.
Speaker Change: Ceos and Cfos, there to try to do with that.
Speaker Change: But it's really hard to generalize.
Speaker Change: How I see.
Big changes there because it's just so early but we're definitely taking share.
Speaker Change: Our prepared remarks.
Speaker Change: Uh huh.
Speaker Change: She is seeing what may be out there and making sure that we're vigilant smart about changes in and every portfolio company and depending on how things go.
Robert Dodd: Yes, It's court court Robert I can join in on that as well just put a little more color on where it is.
Speaker Change: We actually have run a lot of analysis around launch.
Robert Dodd: Richard.
Speaker Change: Soldiers to Paris.
Speaker Change: Some of their cost of goods sold might be exposed to the countries.
Speaker Change: Already been announced option yet J D.
Speaker Change: Day to day in terms of the countries that.
Speaker Change: So it might not make sense.
Speaker Change: But so far between China, and Mexico, we actually feel really confident that there is a very small impact.
Speaker Change: Our portfolio based on a pretty exhaustive numerical analysis done so.
Speaker Change: That was what I'm comfortable putting that statement in the prepared remarks.
Speaker Change: I would just also say overall, we are just unrelated.
Speaker Change: Third product businesses.
Speaker Change: Over the next four products right.
Speaker Change: Yeah understood. Thank you.
Speaker Change: Thank you and this does conclude our question and answer session I would like to turn the conference back over to Mr. Kipp Davir for any closing remarks.
Kipp Davir: Yeah, So I definitely have a few.
Kipp Davir: They haven't prepared any but a little bit bittersweet for me today, obviously, because I would expect our next our next earnings call, which I think at April 29th Youre, not going to hear a whole lot if anything to me but.
Kipp Davir: Just wanted to say thanks to the analyst community and all of our shareholders, who have supported a companywide been the CEO its been.
Kipp Davir: A real blessing for me to work with a great group of people and they've been involved with a company that has as much success over such a sustained period of time so.
Kipp Davir: Art felt banks and wish everybody a great week.
Kipp Davir: Bye.
Speaker Change: Ladies and gentlemen, this concludes our conference call for today.
Speaker Change: If you missed any part of today's call an archived replay of the call will be available approximately one hour.
Speaker Change: After the end of the call through March five.
At five P M eastern to domestic callers by dialing one $883 nine two for $5 seven and two international callers by dialing 140 to 2207 to $1 seven.
Speaker Change: An archived replay will also be available on our web site.
Speaker Change: Located on the homepage of the Investor Resources section of Ares Capital's website.
Speaker Change: And we ask that you are.
Speaker Change: Yes.
Speaker Change: Wonderful.
Speaker Change: Goodbye.
Speaker Change: Hum.
Yeah.
Speaker Change: Yeah.
Speaker Change: Hum.
Speaker Change: Hmm.