Q1 2025 Ares Capital Corp Earnings Call
Uh huh.
[music].
Okay.
Good afternoon.
Welcome to Ares Capital Corporation's first quarter ended March 31st 2025 earnings Conference call.
At this time all participants are in a listen only mode. As a reminder, this conference is being recorded on Tuesday April 29 2025.
Speaker Change: I will now turn the call over to Mr. John its filmar a partner on Aries public market Investor Relations team.
Speaker Change: Thank you and let me start with some important reminders comments during the course of this conference call and webcast I mean accompanying documents contain forward looking statements and are subject to risks and uncertainties.
Speaker Change: Company's actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in SEC filings.
Speaker Change: Ares Capital Corporation assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results.
Speaker Change: During this conference call. The company May discuss certain non-GAAP measures as defined by SEC regulation G. Such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method. The company uses to measure its financial condition and the results of its.
Speaker Change: <unk>.
Speaker Change: A reconciliation of GAAP net income per share the most commonly direct comparable GAAP financial measure to core EPS can be found in the accompanying slide presentation for this call.
Speaker Change: In addition reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on form 8-K.
Speaker Change: Certain information discussed in this conference call and the accompanying slide presentation, including information relating to portfolio companies was derived from third party sources and has not been independently verified and accordingly, the company makes no such representation or warranty with respect to this information.
Speaker Change: The company's first quarter ended March 31, 2025 earnings presentation can be found on the company's website at Www Dot Ares capital Corp, Dot com by clicking on the first quarter 2025 earnings presentation link on the homepage of the Investor resources section of our website.
Speaker Change: Ares Capital Corporation's earnings release, and Form 10-Q are also available on the company's website.
Speaker Change: I'd like to now turn the call over to Kip severe Ares capital Corporation's Chief Executive Officer Kip.
Speaker Change: Thanks, John Hello, everyone and thanks for joining our earnings call today.
Speaker Change: Driven by courts Schnabel, our incoming CEO, Tim Miller, our President Jana Markowitz, our Chief operating officer, and Scott <unk>, Our Chief Financial Officer, as well as other members of the management team who will be available during the Q&A session.
Speaker Change: I just wanted to briefly open the call to express what an honor it's been to lead this company over the past 10 years.
Speaker Change: I'm incredibly grateful for the hard work and the dedication of our team and I'm very proud of the growth and the success that Ares capital has experienced together, we've navigated challenges, we seized opportunities and we've achieved meaningful milestones.
Looking ahead, I couldnt be more confident about the future for ARCC.
Speaker Change: And it's my privilege to pass the torch to court will undoubtedly provide great leadership for the company along with Jim Gannon Scott.
Speaker Change: I've had the pleasure of working alongside all of them for close to 20 years and I've seen firsthand their vision leadership and deep understanding of our business.
Speaker Change: I doubt they importantly, ARCC leadership team will continue to push us forward and I know the company is in excellent hands.
Speaker Change: To our investors our team and other stakeholders. Thank you for your trust and support.
Speaker Change: And while my time as CEO comes to an end today I look forward to continuing to serve Ares capital as the director.
Speaker Change: And I know the company will continue to thrive under the new leadership team.
Speaker Change: So with that many thanks again for the support over the years, let me turn the call over to court.
Speaker Change: Thanks, Kevin and I'm, certainly honored to be here today as I step into the role of Arcc's CEO starting tomorrow.
Speaker Change: Let me start by providing a few thoughts on our recent performance and our current positioning in light of today's volatile and evolving market conditions.
Speaker Change: This morning, we reported solid first quarter results with 50 in core earnings, which equates to an annualized return on equity of 10%.
Speaker Change: Our credit quality remains strong and stable with our non accrual loans and lower risk rated credits at historically low levels.
Speaker Change: We continued to be active in our investing activity as we committed $3 $5 billion in gross commitments during the first quarter.
Speaker Change: Excluding commitments fronted and sold as agent gross commitments increased 54% versus the same period last year.
Speaker Change: We ended the quarter with conservative balance sheet leverage and significant dry powder to make new investments and a potentially improving spread environment on new loans.
Speaker Change: Scott will take you through our results in more detail, but let me update you on what we're seeing in our markets and how we believe we are positioned as a company.
Speaker Change: Beginning in late March and extending through April new transaction activity in the liquid loan market dropped significantly as banks have become more cautious when committing incremental capital and launching new syndications.
Speaker Change: Secondary markets experienced increased volatility and widening spreads and most banks have transitioned into a risk off position.
Speaker Change: Against this backdrop of increased volatility and tightening credit conditions. The direct lending market has remained open.
Speaker Change: <unk> continues to exhibit greater stability than the liquid markets.
Speaker Change: Once again certain transactions that previously would have gone toward the broadly syndicated loan market have instead began to explore private credit solutions.
While it is likely that some market participants we will take a pause on large launching new M&A processes and the overall level of M&A going forward could be slower than anticipated. We believe we are well positioned to take market share among the transactions that do occur.
Speaker Change: Additionally, we believe the long term fundamental drivers for increased M&A remain intact.
Speaker Change: Most notably the mounting pressure on private equity managers to return capital to their investors as well as pressures to deploy aging dry powder.
Speaker Change: Periods like this have also historically produced attractive financing opportunities to support take private transactions spin offs and other strategic initiatives.
Speaker Change: Capitalize on all of these opportunities, we leverage our long standing relationships and market reach to source opportunities, while also supporting our existing portfolio companies.
Speaker Change: During periods of market volatility and economic uncertainty, we initially focus inward by proactively assessing current and future economic impacts to our existing portfolio companies.
Speaker Change: We also positioned the balance sheet to be even more flexible with strong levels of liquidity and modest leverage.
Speaker Change: We then over communicate with market participants to ensure they know we are open for business and ready to partner with them.
Speaker Change: We remain confident in <unk> ability to successfully navigate future market conditions as we believe Ares has one of the most seasoned and experienced investment teams in the industry.
Speaker Change: Our investment committee members have been investing together Aries for over 16 years on average, which fosters a consistent approach to credit quality and portfolio construction.
Speaker Change: Furthermore, all four of us on Arcc's Executive management team have been at Ares since before the great financial crisis.
Speaker Change: With 200 investment professionals dedicated to U S direct lending and another 50 portfolio management professionals, our teams scale experience and agility enable us to navigate volatile markets positioning us to be early active and thorough and identifying and capitalizing on opportunities.
Speaker Change: <unk>.
Speaker Change: Consistent with our playbook, we are entering today's market environment with a significant amount of available capital totaling nearly $6 $8 billion.
Speaker Change: And our leverage expressed by our net debt to equity ratio is near the bottom end of our target range at below one times.
Speaker Change: Our confidence is also underpinned by the overall health of our portfolio companies, which continue to exhibit strong credit results.
Speaker Change: We ended the first quarter with sequentially lower non accruals, which continued to be well below our average and the BDC peer group historical average.
Speaker Change: Our portfolio companies are reporting double digit organic LTM EBITDA growth and our levered on a debt to EBITDA basis below our five year average.
Speaker Change: This lower level of leverage can also be seen through our portfolios historically low average loan to value, which currently sits in the low 40% range.
Speaker Change: We also take comfort in the fact that our portfolio is focused on domestic service oriented businesses, which should be more insulated from the direct impacts of higher tariffs.
Speaker Change: On that point, we are carefully monitoring the potential direct and indirect result of higher tariffs and we are proactively engaging with portfolio companies to mitigate the potential impact of tariffs on our portfolio.
Speaker Change: While trade policies and their economic impacts remains highly dynamic we only have a small number of borrowers that we believe are most directly exposed to the potential impacts from tariffs, particularly those that have higher exposure to China.
Speaker Change: Specifically these borrowers comprise only a mid single digit share of our portfolio today and we believe these companies are starting from a position of financial strength and flexibility.
Speaker Change: Importantly, this exposure assessment does not include any mitigates these companies can potentially implement such as adjusting pricing.
Speaker Change: Or the ability to transition and supply chains.
Speaker Change: Additionally, our portfolio management team one of the largest and most experienced in the industry is continuously monitoring the portfolio and is prepared to respond quickly to potential tariff changes.
Speaker Change: In conclusion, while this period brings new uncertainties. It also brings new opportunities.
Speaker Change: We feel confident that we are in a strong financial position to navigate what lies ahead just as we have in other periods of volatility over the past 20 years.
Speaker Change: With this view in mind, we declared a <unk> 48 per share quarterly dividend for the second quarter of 2025.
Speaker Change: This marks our 60, <unk> third consecutive quarter of delivering stable or increasing regular quarterly dividends at ARCC.
Speaker Change: We are proud of this track record and feel confident that we can continue to support a steady dividend level for the foreseeable future due to our view of our perspective earnings power and our significant undistributed spillover income.
Scott: I will now turn the call back over to Scott to take us through more details on our financial results and our balance sheet.
Scott: Thanks Cort.
Scott: This morning, we reported GAAP net income per share of 36 for the first quarter of 2025% compared to 55 in the prior quarter and 76% from the first quarter of 2024.
Scott: We also reported core earnings per share of <unk> 50.
Scott: Compared to 55 from the prior quarter and 59 for the same period a year ago.
Scott: Our decline in core earnings was largely driven by the decline in our portfolio yields.
Scott: Based upon the lower average market base rates, which occurred during the fourth quarter of last year.
Scott: As you May recall from our last couple of earnings calls there is typically up to a one quarter lag to reflect the full quarter impact.
Scott: Interest income from the changes in period end yields that we report for the most recent quarter.
Scott: Simply put impact from the changes in portfolio yields during the fourth quarter or the primary driver of the sequential change in our core earnings for the first quarter.
Scott: The good news here is that yields in our portfolio have generally stabilized through the end of the first quarter.
Scott: The weighted average yield of our debt and other income producing securities at amortized cost was 11% at March 31.
Scott: It was down slightly from 11, 1% at December 31.
Scott: Our total weighted average yield on total investments at amortized cost was nine 9%, which compares to 10% a quarter ago.
Scott: Importantly, unlike the 70 basis point decline, we experienced in our weighted average yield on total investments and then the third quarter to the end of the fourth quarter I'm, sorry, before we all experienced a 10 basis point decline from the end of the fourth quarter and this past quarter.
Scott: Therefore, all things being equal we should see more stable levels of interest income for this coming second quarter.
Scott: Turning to the balance sheet, our total portfolio at fair value at the end of the quarter was $27 1 billion.
Scott: Which was up from $26 7 billion at the end of the fourth quarter and up from $23 1 billion a year ago.
Scott: Shifting to our funding and capital position, we've remained active in adding capacity extending our debt maturities and reducing our cost.
Scott: In January we issued $1 billion of seven year unsecured notes with a new issue spread was 150 basis points, representing a new low for us and the BDC sector.
Scott: During the first quarter. We also extended the end of the reinvestment period and the maturity date for our one $3 billion of BNP funding facility to March 2028, and March 2030, respectively.
Scott: While reducing the drawn spread for the facility from two 1% down to one 9%.
Post quarter end.
Scott: With the continued support of our 30, plus bankers and our largest revolving credit facility.
Scott: Outside the facility by nearly $800 million.
Scott: Bringing the total facility size to $5 $3 billion.
Scott: Extended the revolving period and the maturity date to April 2029.
Scott: Oh, 2030, respectively, and reduce the drawn from the facility by more than 20 basis points.
Scott: As Cort mentioned, our overall liquidity position remains strong with nearly $6 $8 billion of total available liquidity, including available cash and pro forma for the recent amendment to the revolving credit facility.
Scott: We believe we are well positioned, especially with only a one term debt maturity for the remainder of this year.
Scott: In terms of our leverage we ended the first quarter with a debt to equity ratio net of available cash at <unk> 98 times down slightly from <unk> 99 times a quarter ago.
Scott: We believe our significant amount of dry powder positions us well to continue supporting our existing portfolio company climates, as well as new investing opportunities.
Scott: Finally, our second quarter 2025 dividend of 48 cents per share is payable on June 30 to.
Stockholders of record on June 13th.
Scott: <unk> stable or increasing regular accordingly, the events over 15 consecutive years.
Scott: In terms of our taxable income spillover. We currently estimate we will have $882 million or $1 29 per share available for distribution to stockholders in 2025.
Scott: In addition to our core earnings in excess of our current dividend, we remain hopeful for some potential portfolio of realized gains in the coming quarters, which may further enhance our taxable income spillover.
Scott: We believe are meaningful taxable income spillover provides further long term stability for our dividends and is a significant differentiator for us.
Scott: I will now turn the call over to Jim to walk through our investment activities.
Jim: Thank you Scott.
Jim: I will provide some additional details on our investment activity our portfolio performance and our positioning I will then conclude with an update on our post quarter end activity and backlog.
Jim: In the first quarter, our team originated $3 5 billion of new investment commitments with existing borrowers comprising approximately 60% of our commitments.
Jim: The strength of our incumbent relationships.
Jim: Particularly beneficial since our embedded knowledge and experience with these borrowers reduces underwriting risk on new commitments.
Jim: Another source of differentiated deal flow as our broad market presence across the lower middle and upper segments of the middle market.
Jim: We believe this coverage is critical to our strategy of selecting what we believe are the best credits across these market segments.
Jim: In recent quarters, we have been focusing on the less competitive core middle market segment.
Jim: Which is comprised of companies with $50 million to $100 million of EBITDA.
Jim: This trend is reflected in the weighted average EBITDA of our portfolio companies, which decreased for the fifth consecutive quarter to $274 million.
Jim: Our median EBITDA remains around $80 million.
Jim: And has been fairly consistent over the past few quarters.
Jim: Underscoring our ongoing presence in all parts of the middle market.
Jim: Additionally.
Jim: This quarter, we achieved a higher yield per unit of leverage on our first lien originations and our post Covid average.
Jim: Turning to the portfolio, we ended the quarter with $27 1 billion of investments at fair value.
Jim: A one 5% increase from the prior quarter.
Jim: We believe our longstanding underwriting strategy of focusing on market, leading companies with high free cash flows and what we believe to be resilient service oriented industries.
Jim: Be important drivers of stability and differentiation in the quarters ahead.
Jim: We believe another point of differentiation is our disciplined approach to risk management and portfolio diversification.
Jim: With 566 portfolio companies at the end of the first quarter and an average.
Jim: Rich position size of less than 2% of the portfolio on average.
Jim: We are able to mitigate the impact of negative credit events in any one company or industry.
Jim: The health of our portfolio can be seen in the 12% weighted average LTM EBITDA growth of our portfolio companies, which increased modestly from 11% in the prior quarter.
Jim: And was broad based across both industries in which we invest and the various company size ranges.
Jim: Another measure of highlighting the health of our portfolio is the low leverage of our underlying portfolio companies.
Jim: At five seven times debt to EBITDA. This weighted average leverage level is the lowest we've seen since the first quarter of 2020.
Jim: Coupled with this our interest coverage is strengthening.
Jim: Currently near two types.
Jim: Beyond that our non accruals at cost ended up the quarter at one 5% down 20 basis points from the prior quarter.
Jim: This remains well below our two 8% historical average since the great financial crisis.
Jim: And the BDC industry historical average of three 8% over the same timeframe.
Jim: Our non accrual rate at fair value also decreased by 10 basis points to 9%.
Jim: The percentage of our portfolio at fair value in grade one and two names decreased a further 10 basis points sequentially and.
Jim: Ending the quarter at two 8%.
The lowest level, we've seen since 2010.
Jim: As a final point on our portfolio quality when comparing our current position to our position just prior to Covid.
Jim: Last major challenge economic period.
Jim: Our portfolio of companies today have 17% lower loan to value ratios on average.
Jim: Underscoring the greater equity value beneath our positions today than at the year end 2019.
Jim: Our portfolio has also become even more diversified as the number of companies in our portfolio has increased by 60% to 566.
Jim: Yeah.
Jim: As a reminder, our portfolio performed very well through COVID-19 with lower non accruals lower realized losses.
Jim: And better ROE is the BDC peers on average over the course of 2020 and 2021.
Jim: In addition to our strong performance through Covid. We are the one of the few bdcs that operated under the severe stress of the great financial crisis. The crisis from 2007 to 2010.
Jim: And one of an even smaller subset that did that so successfully.
Jim: In addition to our distinct competitive advantages, we believe a key driver of this performance across cycles is also our flexible mandate.
Jim: Allows us to opportunistically invest across the capital structure.
Jim: Shifting to the second quarter, the widening of secondary market spreads in the broadly syndicated loan and high yield markets, which began in Q1 has intensified in April amid heightened capital markets volatility.
Jim: Indirect lending we are actively engaged in pricing discussions on new transactions tightening terms and documents and positioning ourselves strategically and ongoing discussions with potential borrowers.
Jim: We have been busy with ongoing discussions with borrowers and our backlog remains healthy.
Jim: Our total commitments through April 24, 2025.
Jim: Was <unk> 5 billion and our backlog as of April 24th 2025 stood at $2 6 billion.
Jim: As a reminder, 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.
Jim: Importantly, about 40% of this backlog represents incumbent borrowers.
Jim: Underscoring our ability to be active in all environments as we continue to gain market share with our existing borrowers.
As we look to the future.
We're confident in our team and our company's market and financial positioning.
Jim: We remain committed to building upon our over 20 year track record of investing across a variety of market environments.
Jim: And delivering attractive risk adjusted returns to our investors.
Jim: As always we appreciate you joining us today and we look forward to speaking with you next quarter.
Jim: 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 Touchtone phone.
Jim: If you would like to withdraw your question. Please press Star then two please.
Jim: Note as a courtesy to those who may wish to ask a question. Please limit yourself to one question and a single follow on if you have any additional questions you may reenter the queue.
Jim: Investor Relations team will be available to address any further questions at the conclusion of today's call.
Speaker Change: And we will take our first question from Finian O'shea with Wells Fargo Securities. Please go ahead.
Jim: Yeah.
Speaker Change: Hey, everyone. Thanks, good morning.
Corey: Corey I wanted to go to the beginning you talked about spreads in the banks reacting, especially to the market.
Corey: With with all the capacity and non traded Bdcs.
Corey: Do you think that privates will will be providing a similar if not lower pricing.
Corey: Then banks for some time.
Corey: And then as a.
Corey: Platform with a real institutional business indirect lending does that impacts your competitive position on deployment.
Corey: Yeah. Thanks, Thanks for the question I mean I think.
Corey: Okay.
Corey: First thing is we've already started to see some movement wider.
Corey: Overall yields between spread and fees in the last four weeks or so since the volatility started.
Corey: So I think that's.
Corey: One data point that shows that the market is already starting to move.
Corey: I think you can look back at the history also as some guide as to what we might be able to expect going forward in <unk>.
Corey: There were a lot of a lot of flows into non traded bdcs back in 2022.
Corey: And we entered into a period of volatility.
Corey: Our market lags, a little bit on the liquid markets.
Corey: But we saw spreads obviously widened materially through that period.
Corey: As those flows began to change and as our market adjusted so.
Corey: Thank the effective the flows into the private BDC as an overall kind of retail flows generally.
Corey: I don't have a material effect on the overall market obviously in the large cap ended the market. They can have some effect thats, where most of the competitors that are seeing those flows compete but.
Corey: As we've explained before we originate across all different asset classes.
Corey: As well as in the non sponsored universe and have a lot of different ways to source deals. So I think we feel pretty good about our ability.
Corey: <unk> to outperform our competitors.
Corey: I guess time will tell but again, we've already started to see a little bit of widening just in the last.
Corey: Okay.
Corey:
Corey: A follow up is it sounds like you had done a lot of work on on tariffs.
Corey: Seeing if you could expand on the.
Corey:
Corey: If you could drill down on what you meant by exposed are impacted.
Corey: For the portfolio names is that is that like in the context of a percentage of EBITDA for example, or any color you could give there.
Corey: Yes.
Corey: We essentially well first of all we reached out to every single portfolio company and we're in touch with them on a regular basis, obviously so it.
Corey: It wasn't anything Super unusual, but we did do the work to create a bottoms up analysis and really try to understand first and foremost.
Corey: Which companies import products.
Corey: And then of those companies, which companies are importing products from high tariff countries, obviously that high tariff country.
Corey: Data point moves around week to week, but based on what we see today.
Corey: A mid single digit exposure as we said in the prepared remarks in our portfolio for those kinds of companies that are importing those products.
Corey: We benefit from investing in and waiting toward domestic companies that are more service oriented and so that help minimize that that percentage and then.
Corey: The second part of your question. Yes. This is really important this is an exposure analysis not an impact analysis and we.
Corey: We don't know yet what the actual impact will be but all I will just say, we obviously when we just went through a pretty significant supply chain disruption period coming out of Covid.
Corey: There we saw a lot of inflation in a lot of supply chain disruption in our portfolio companies were able to pass on pricing.
Corey: And did pretty well through that so that's what we mean by exposure not impact as these companies could have ways to mitigate the exposure that they have and find ways to.
Corey: To soften the effects. So we just don't know how it's going to play out but.
Corey: But hopefully that helps and answers your question.
Corey: Yes, thanks, so much.
Speaker Change: Thank you and your next question comes from the line of Casey Alexander with Compass point. Please go ahead.
Yes.
Casey Alexander: A lot here.
Casey Alexander: You know I think that most people listening to this call wood wood.
Casey Alexander: Would feel like you guys are more optimistic than we generally expect the rest of the industry to be especially since the data points that we keep hearing is that private equity deal volume and M&A deal volume.
Casey Alexander: Has grind it to a very low level.
Casey Alexander: So I'm curious if there's a little more color.
Casey Alexander: And also what's the playbook going forward.
Casey Alexander: The origination volume doesn't pick up do you slow down the ATM and how do you manage your earnings against the rising cost of liabilities I know you only have one more maturity. This year, but you have another couple in early next year theyre going to raise the cost of your liabilities.
What's the playbook to manage all of those moving parts.
Casey Alexander: Yeah.
Casey Alexander: Thanks, Casey definitely a few different questions in there.
Casey Alexander: So I guess starting with deal flow.
Casey Alexander: Yes look it's actually we're going into an interesting time and it's hard to predict again I'll try to point to some some data points are things that we've seen in the last four weeks.
Casey Alexander: Which is.
Casey Alexander: Of all the processes that were kind of in the works and heading towards a conclusion.
Casey Alexander: When all of this volatility began and liberation day began.
Casey Alexander: I would say almost every single one of those processes continue to their conclusion.
Casey Alexander: We did not get pulled I E. The seller didn't decided not to sell or the buyers didn't work they got to signing and I think Thats, a testament to the direct lending market being open.
Casey Alexander: And filling in for the banks, which kind of.
Casey Alexander: <unk> stepped back and we were able to be there and allow those transactions to get to conclusion again at somewhat wider spreads and fees.
Casey Alexander: I think we saw those deals as they approach their conclusion at least in our portfolio and in our deals that we were working on yields kind of improve by 25% to 50 basis points between spread and fee.
Casey Alexander: And so that's at least some sign that deals are going to continue to get done, we obviously reported a pretty healthy backlog.
Casey Alexander: Going into the quarter. So that provides again a little more tailwind.
Casey Alexander: After that.
Casey Alexander: As I said in the prepared remarks, it's a little bit uncertain and it certainly could be the case that new processes don't get launched and people sort of take a pause.
Casey Alexander: In that environment. We've shared are proven that we have lots of other ways to source transactions, our existing portfolio kicks off a lot of opportunities.
Casey Alexander: Again, our non sponsored efforts refinancings of BSL.
Casey Alexander: Man's actions I think could be a really interesting opportunity for us if that market remains volatile and shut again, we saw that back in 2022.
Casey Alexander: So we've just been through this.
Casey Alexander: Kinds of periods before where deal flow might slow down and we find ways still to do deals. So I think that is my attempt to answer the first part of your question.
Casey Alexander: And I'm, sorry can you remind me the second part.
Casey Alexander: If they if the deal flow does emerge.
Casey Alexander: What's in the playbook slowed down.
Casey Alexander: The ATM sales how do you manage your earnings against rising cost of liabilities over the course of the next year sort of stair step two of where step one gets you.
Casey Alexander: Yeah, No look I think.
Casey Alexander: We're going to see how this plays out obviously, we still do have a fair amount of liabilities that are locked in for a longer period. So thats not like that's all going to unwind it.
Casey Alexander: And I think you have to remember that there are natural offsets that occur in.
Casey Alexander: In the market again going back to our 20 year history here, we've seen in the past lots of periods of time, where interest rates were near zero.
Casey Alexander: Gil flows slowed down and we've been able to over that 20 year period generate a pretty darn consistent Roe.
Casey Alexander: In the nine months to 12% range today, we're around 10%, we never really dipped below 9% over that 20 year period.
Casey Alexander: Despite going through all different types of economic environments, and so historically, we've seen that when base rates fall spreads widen.
Casey Alexander: Second lien opportunities become more available as the broadly syndicated market.
Casey Alexander: Executes more on some of those lower priced first lien deals.
Casey Alexander: We obviously had been operating at a very low <unk>.
Casey Alexander: Average ratio below one times low end of our range.
Casey Alexander: A lever that we can pull to.
Casey Alexander: Help with the earnings profile Ivy Hill is currently at a pretty low level in terms of our portfolio mix of around six or 7% today, we've been up above 10% before I think Ivy Hill could see some interesting opportunities to grow.
Casey Alexander: And we obviously have a lot of spillover income as well that we can dip into so there's there's all these different factors again, it's hard to predict what's going to happen, but I think we feel good about our ability to manage through that environment.
Casey Alexander: Well I'll just add.
Casey Alexander: Go ahead the environment. We're in right now does lead to lower repayments, so our portfolio tends to stay in place.
Casey Alexander: And that provides a lot of stability with a mature portfolio like we have.
Casey Alexander: We are seeing less refinancings.
Casey Alexander: From the public markets as well so the combination of those things gives us a lot of a bit of a hedge in markets like this which we've seen before.
Yeah.
Casey Alexander: Since that was multi pronged question I'll I'll stop there and not use my follow up.
Casey Alexander: Okay.
Casey Alexander: Yeah.
Speaker Change: Thank you and your next question comes from the line of Robert Dodd with Raymond James. Please go ahead.
Robert Dodd: Hi, guys.
Robert Dodd: Appreciate the commentary on.
Robert Dodd: The potential tariff impact of importing.
Robert Dodd: <unk>.
Robert Dodd: Have you done any analysis, yet I don't expect there'd be a lot of exposure going the other way, obviously with mist with <unk>.
Robert Dodd: Retaliatory tariffs I mean, as you say services not a lot of <unk>.
Robert Dodd: Manufacturing and exporting but if you turn on the analysis on that side to see if you have exposure to.
Robert Dodd: That kind of impact if.
Robert Dodd: If those fatality free tariffs do stick long term.
Robert Dodd: Yes, we've looked at that as well as you said it's.
Robert Dodd: Very unclear as to how that's going to play out we have minimal exposure as well on that front.
Robert Dodd: I think.
Robert Dodd: It's interesting right not only is there a potential risk factor I guess of the exporting and retaliatory tariffs. There's also just multiple domino effects and spill on effects of how this could play out right second order impacts their order impacts what happens does inflation dampened consumer demand and.
Robert Dodd: Obviously everybody's wondering does this potentially tip us into a recession I think all we can really do is look at our portfolio try to quantify.
Robert Dodd: The first order impacts.
Robert Dodd: And we'll see how the rest plays out I think what we come back to is just our conservative underwriting.
Robert Dodd: Our every time, we underwrite any new deal we're always looking at the supply chain. We're looking at supply concentration, we're making sure that our companies don't have any material supply concentration.
Robert Dodd: And obviously, we're always underwriting as if theres going to be a recession next year when we're running downside cases.
Robert Dodd: Our credit investors, we're always worried about a recession all the time, so we just kind of fall back on that.
Robert Dodd: Robert and our experience operating through prior periods of softness obviously it'll be harder work. If we do end up going through that kind of period, but we think we're prepared.
Robert Dodd: Got it thank you and just kind of follow up credit related but not passed.
Speaker Change: I mean, a few years back the whole industry not necessarily just your portfolio, but the whole industry went through kind of an issue with physician office roll ups.
Robert Dodd: Now obviously, there's a lot of veterinary office roll ups.
Robert Dodd: Across the industry as well one of them, obviously was put on non accrual this quarter. So.
Robert Dodd: Yes.
Robert Dodd: Is this the beginning of a cycle of that same kind of problem that <unk>.
Robert Dodd: The issues of booths and now it's the veterinary office rollout and we're going to see a lot more problems in that sector or.
Robert Dodd: What are your thoughts there because obviously you put five or jet IOL, what whatever you want to call. It on non accrual this quarter.
Robert Dodd: Yeah Yeah.
Speaker Change: Yes, it probably Robert I don't know they can help you too much on forward outlook on what that is going to be I guess, all I would say in terms of our portfolio and our exposure to that is it's really minimal we have less than less than 2% of our portfolio is in physician practice management businesses.
Speaker Change: That includes that so we really just don't have a lot of exposure.
Speaker Change: To that part of the market.
Speaker Change: I, probably just won't venture a guess as to what happens to the future of the veterinary space.
Speaker Change: Got it thank you.
Speaker Change: Thank you and your next question comes from the line of Melissa Wedel with JP Morgan. Please go ahead.
Melissa Wedel: Hi, good afternoon, Thanks for taking my question.
Melissa Wedel: A lot of mine have been answered already but I wanted to follow up on a comment made during the prepared remarks about again around assessing exposure.
Melissa Wedel: Direct exposure to tariffs.
Melissa Wedel: That's not including mitigating.
Melissa Wedel: Factors that companies can implement.
Melissa Wedel: You also made the comment that.
Melissa Wedel: Sure.
Melissa Wedel: Ready to respond quickly.
Speaker Change: In those situations can you just elaborate on that a little bit what does that look like as that restructuring is that something else.
Melissa Wedel: Yes.
Melissa Wedel: Bons Youre, asking if that impact does come through.
Melissa Wedel: Yes.
Melissa Wedel: Yeah.
Melissa Wedel: I think that just comes back to our playbook.
Melissa Wedel: That we employ when portfolio companies arent going according to plan, whether it's tariff related or related to any other region.
Melissa Wedel: And just so what we do in that situation is obviously, we we are proactive as I already said in terms of getting ahead of the situations. So we're in dialogue with those mid single digit percentage of our portfolio companies that are potentially exposed to tariffs, we're having conversations with them now about what they're planning to do what their liquidity.
Melissa Wedel: Okay looks like how well funded are they and obviously, we're in dialogue with the owners of those companies, which mainly or private equity firms that we've been doing business with for a long time.
Speaker Change: And <unk>.
Melissa Wedel: Preparing for what we need to do and.
Speaker Change: Our actions can take many forms but.
Speaker Change: Generally we look to help be part of the solution and the first thing. We say is if youre the owner of the business. We expect you to contribute to the liquidity need.
Speaker Change: And if our private equity partners step up and provide liquidity then we will help be part of that solution by.
Speaker Change: Offering to pick a portion of our interest for a short period of time in exchange for a premium.
Speaker Change: And in exchange for that capital contribution to help these companies get through these types of periods, we did that during COVID-19 very successfully.
Speaker Change: We saw lots of equity contributions come into our portfolio companies.
Speaker Change: Yes, we did pick interest or Pik exposure went up for a short period of time, but that is all come down and again, we weathered through that storm pretty darn well so.
Speaker Change: Yes.
Speaker Change: That's step one in the playbook, if the private equity owner or any owner of the business is not willing to step up then yes, we are not afraid to own a business. If we need to we have the capabilities, we've got the management expertise and.
Speaker Change: Owning businesses through those kinds of cycles has actually produced a lot of gains for us over a long period of time, so we're not afraid to roll up our sleeves and do that if we need to.
Speaker Change: Yeah.
Speaker Change: I appreciate that thanks for going into detail there.
Speaker Change: I would agree with an earlier comment that was made.
Speaker Change: About.
Speaker Change: Yeah.
Our sizable backlog entities <unk> and the amount of activity seems to be pretty robust despite.
Speaker Change: And uncertain more uncertain environment.
Speaker Change: Given the uncertainty around tariff policy, which I assume is what's driving them.
Speaker Change: Florida decision, making from.
Speaker Change: Borrowers.
Speaker Change: I guess, one I want to clarify if it's primarily tariff policy if you're hearing any other consternation from borrowers about moving forward with capital allocation project, but then also on that sizable backlog do you think there is.
Speaker Change: Maybe an incremental a degree of uncertainty.
Speaker Change: How much of that will close just because of this elevated volatility that we're in right now thank you.
Speaker Change: Yeah Okay.
Speaker Change: It's hard.
Speaker Change: Not to say that there could be some of those deals in the backlog that might fall away again I was pointing in an earlier question to the fact that at least in the last four weeks the deals that we're building to conclusion have moved forward.
Speaker Change: But that doesn't mean that things aren't going to change and again have to admit that if you are.
Speaker Change: As an owner of a business and contemplating a sale process now starting a sale process now you're probably going to think twice maybe before launching a new process. So it stands to reason that we could see a little bit of a slowdown and there might be a little bit of a lag effect to your point because there is a backlog that's already in place.
Speaker Change: Really hard to predict there's so much uncertainty right now I think all we can do is kind of point to point to what we're seeing in the last four weeks and try to draw some conclusions about what we're going to see in the future.
Speaker Change: One more thing the predictability, though you do have is that in.
Speaker Change: In these markets in these moments private capital tends to be a great solution.
Speaker Change: And so while volume what will we do expect to see lower M&A volume. We do also anticipate that we will get a.
Speaker Change: A bigger percentage of the pie because it just is a better solution at these moments in time so.
Speaker Change: We do think there will be deal volume that comes through and we think we're really well positioned to take advantage of those deals.
Speaker Change: In an uncertain environment the value of our capital, which is certainly comes with certainty goes up and that's why we're already starting to see a little bit of that.
Speaker Change: Spread widening Melissa I think there was another part of your question I apologize I didn't answer it.
Oh, okay.
Speaker Change: One there.
Speaker Change: I think there is a general assumption that.
Speaker Change: Uncertainty and the decision to.
Speaker Change: Maybe the propensity to delay capital allocation decisions right now has to do with Terra.
Speaker Change: Just was curious if you're hearing anything beyond that.
Speaker Change: Any broader macro concerns from your borrowers.
Speaker Change: Yes, most of it is around the tariffs, it's probably a little early to say it stands to reason that obviously given the recession risk is higher.
Speaker Change: You might see some other companies hold off on capital spending.
Speaker Change: I think it's just a little early to for us to say that we're seeing that seeing any kind of real trend there yet though.
Speaker Change: Okay.
Thanks.
Speaker Change: Thank you Andrew.
Speaker Change: And your next question comes from the line of Kenneth Lee with RBC capital markets. Please go ahead.
Kenneth Lee: Hey, good afternoon, Thanks for taking my question.
Kenneth Lee: One on on some of the newer deals new investments Youre seeing more recently.
Kenneth Lee: It sounds like there is still focus for the more core middle markets kind of deals.
Kenneth Lee: But are you seeing perhaps more attractive opportunities in the larger sized upper.
Or.
Market segments more recently, given the volatility thanks.
Kenneth Lee: We are yes for sure.
Kenneth Lee: Again, I think looking back historically, that's what we saw in 2022 and 2023.
Kenneth Lee: That market got a little more attractive.
Kenneth Lee: Again, we talked about this a lot, but thats what we feel is one of the biggest advantages of our broad sourcing network.
Kenneth Lee: Network and all the relationships that we built over 20 years is that we can pivot.
Kenneth Lee: When different pockets of the market become more attractive so.
Kenneth Lee: You saw us move up into larger deals in 2022 and 2023 then.
Kenneth Lee: And the last.
Kenneth Lee: Four to six quarters.
Kenneth Lee: Average down a little bit still doing larger deals, where there's attractive opportunities, but walking away from some of those deals a little bit more and.
Kenneth Lee: And moving a little bit more downmarket in now.
Kenneth Lee: It's early but we are already starting to absolutely see some of those larger deals.
Kenneth Lee: To the way the private credit market and I'm hopeful that you'll see some.
Kenneth Lee: It's a nice nice announcements from us coming forward on some of those deals.
Speaker Change: Got you very helpful. There and then just one follow up if I may just on.
Kenneth Lee: The liability side there.
Kenneth Lee: You've continued to optimize financing there tightens.
Kenneth Lee: <unk> tightened spreads and some of the facilities wondering if theres still some further opportunities over the near term to continue to optimize the financing side there. Thanks.
Kenneth Lee: Yes.
Kenneth Lee: You saw us do that during the quarter and then post quarter end.
Kenneth Lee: And we're working hard to keep.
Kenneth Lee: Those costs down.
Kenneth Lee: Quickly as we can.
Kenneth Lee: Our largest corporate facilities.
Now over 20 basis points cheaper than it was before so certainly trying to be as efficient as possible on the liability side.
Kenneth Lee: Unfortunately, you have seen bond spreads recently widened.
Kenneth Lee: But it's good to have the diversity of sources that we have and having the secured side remained pretty efficient.
Kenneth Lee: Got you very helpful. Thanks again.
Kenneth Lee: Yes.
Doug Harter: Thank you and your next question comes from the line of Doug Harter with UBS. Please go ahead.
Doug Harter: Thanks, just on the unrealized marks in the quarter can you talk about whether those were kind of broad based or more.
Doug Harter: Specific.
Doug Harter: Led to the remarks.
Doug Harter: Yes, the latter little more asset specific.
Doug Harter: And again, not really anything that is drawing any kind of trend that we can identify just a little more esoteric.
Doug Harter: And off.
Doug Harter: Great and then.
Doug Harter: The dividend income you receive this.
Doug Harter: Quarter was down from the fourth.
Doug Harter: Anything to note on that.
Doug Harter: Yes, there was a special dividend from Ivy Hill in the fourth quarter.
Doug Harter: That actually contributed about a penny of earnings per.
Doug Harter: For sure for us in the fourth quarter and I was just a one time special dividend. So that did not reoccur. This quarter. We did have a slight increase in the regular dividend from Ivy Hill from the fourth quarter to this quarter, but thats the answer.
Speaker Change: Great. Thank you.
Speaker Change: Thank you and your next question comes from the line of Mark Hughes with <unk>. Please go ahead.
Mark Hughes: Yes. Thank you good afternoon.
Speaker Change: The catalog.
I think you mentioned that 40% of the backlog was from incumbents is that typical will that then translate into say your thanks.
Speaker Change: I think this quarter, you did 60% with existing borrowers when you get to the end of the line or is 40%.
Speaker Change: Different than the norm.
Speaker Change: That's right around the average year.
Speaker Change: Obviously, it depends on the year it depends on the market.
Speaker Change: But over a fairly long period of time, we're usually around 50%.
Speaker Change: New commitments going into existing borrowers.
Speaker Change: And again, it can bounce around a little bit.
Speaker Change: In.
Speaker Change: When M&A slows down a little bit we have moved up to 60% to 70%.
Speaker Change: So.
Speaker Change: Nothing unusual.
Speaker Change: Yeah, So does the 40%.
Speaker Change: You've given the backlog number but.
Speaker Change: That may be it seems to imply more new borrowers in the backlog.
Speaker Change: That does imply that.
Speaker Change: Yeah, Okay and then.
Speaker Change: You'd also mentioned the potential for realized gains in coming quarters to help.
Speaker Change: Boost.
Speaker Change: Now.
Speaker Change: Is that based on some visibility that you have got you.
Speaker Change: Your pipeline that you can see on that front is more favorable or is that just a general comment.
Speaker Change: Yeah.
Speaker Change: Yes, I wouldn't say necessarily boost snap it in when we hit the Mark our portfolio to fair value. So I think as you.
Speaker Change: A couple of names and Youre seeing the value gone up.
Speaker Change: As always realize that would be added to our our taxable income and our our realizable spillover income.
Speaker Change: Fair enough.
Speaker Change: Is that like I say is there more potential for that more visibility or again was that a general comment.
Speaker Change: Yes, we can't comment on specific transactions, but I think theres a couple of your pricing pattern of it going up over time and our hope is that a couple of those can get realized this year.
Speaker Change: Understood. Thank you very much.
Speaker Change: Thank you and your next question comes from the line of Sean Paul Adams with B Riley Securities. Please go ahead.
Speaker Change: Hey, guys good afternoon.
Speaker Change: Putting on non accruals I know.
Speaker Change: The topic to death, but.
Speaker Change: The feedback that you received from portfolio companies existing non accruals and also your analysis on kind of tariff exposure can you touch on if youre seeing any thematic patterns in portfolio stress or sectors or industries that have just proactive.
Speaker Change: We had outreached in dialogue.
Speaker Change: Yes, I appreciate the question, it's something that we're always looking for and trying to draw conclusions around trends.
Speaker Change: Informa behavior, new investing unfortunately, there's just nothing.
Speaker Change: That we're really seeing yet that we can comment on that is that we can draw any conclusions around there being a trend.
Speaker Change: So, we'll just have to kind of wait and see.
Speaker Change: We can we can keep talking about that in future quarters.
Speaker Change: Got it thank you for the color.
Thank you and your next question comes from the line of Brian Mckenna with citizens. Please go ahead.
Speaker Change: Great. Thanks. So you noted that during periods of volatility the Ciena is more inward focus on the existing portfolio looking back over the past two decades. During these periods of volatility how long on average as the team inward focus before shifting more of the focus to new investment opportunities I'm, just trying to get a sense of the trajectory of <unk>.
Speaker Change: Originations from here and are there any signs that we should be looking for from the outside to indicate a pick up in related activity could be coming.
Speaker Change: Yes.
Speaker Change: Maybe it was a little misleading in the prepared remarks, it's not like we are only focused inward for weeks at a time and then shifting to origination I was sort of just.
Speaker Change: Giving an order of all the different things that we do during.
Speaker Change: During these periods and thankfully given the size of our team and the experience of our team are able to do all of it at the same time. So we're looking at the existing portfolio utilizing our portfolio management team as well as digital teams.
Speaker Change: And at the same time, our originating new transactions. So it's not like it's.
Speaker Change: It's really one or the other.
Speaker Change: Okay got it that's helpful.
Speaker Change: And then just maybe more of a modeling question any color on structuring service fees. Thus far in April and then any way to think about these in the second quarter based on everything that we know today.
Speaker Change: Can't really comment I don't think on what we're seeing in the recent quarter.
Speaker Change: There hasnt been anything that's changed a lot I guess I already did it say.
Speaker Change: Yields on new investments that have come to fruition and signing in the last four weeks overall yields are up 25 to 50 basis points and that's a mix of both spread and fee.
Speaker Change: It depends on the deal and the nature of the transaction, sometimes you get a little bit more on fee, sometimes you get a little bit more expression as you get a little bit of both.
Speaker Change: So theres, probably I guess, I'd say theres been a slight movement.
Speaker Change: For the better on fees.
Speaker Change: In the last four weeks, but.
Speaker Change: We will have to just we'll have to see again.
Speaker Change: Looking at the past as a guide when we go into periods of volatility and again looking back at the most recent period 2022, and 2023, we saw fees move materially wider.
Speaker Change: Again.
Speaker Change: It doesn't always predict the future, but that has been what we've seen in the past.
Speaker Change: Alright ill leave it there are helpful.
Speaker Change: Thank you.
Speaker Change: A reminder, if you would like to ask a question. Please press the star and one on your telephone keypad now.
Speaker Change: And your next question comes from the line of Finian O'shea with Wells Fargo Securities. Please go ahead.
Finian O'shea: Hey, everyone. Thanks for the follow up.
Speaker Change: I wanted to go back to.
Finian O'shea: A few times in the remarks, you guys mentioned.
Finian O'shea: Seemingly relying on spillover senior.
Finian O'shea: If you could expand on that and if you expect to go.
Finian O'shea: Below the dividend this year and how I guess eventually what the drivers would be to come back.
Finian O'shea: Let's say at today's curve comeback and coverage that is thank you.
Finian O'shea: Yeah no.
I.
Finian O'shea: I don't think we meant to imply that we're going to go below the dividend on core and dip into the spillover.
Finian O'shea: This year I think we were mentioning the amount of spillover to just give comfort that there is an additional lever that we have there.
Finian O'shea: To the extent that does occur its not our expectation we feel good about the dividend then.
Finian O'shea: It's funny when we raised the dividend of <unk> 48 cents, we were earning core in the mid <unk>.
Finian O'shea: And people were asking us why we didn't raise the dividend more than 48.
Finian O'shea: We didn't do it because we knew that rates were pretty elevated and there was some excess spread in the market given the dislocation and that that was likely going to correct and so we've just kind of seen that happen as we sort of expected and yields have come down and we're now back into what I would say as a more normalized environment, where we have a little bit of <unk>.
Finian O'shea: But not as much it was it was a.
Finian O'shea: Nice and comfortable to operate with all of that cushion, but that isn't that isn't the norm right. So I would just say we're back kind of in the norm now.
Finian O'shea: And as I already talked about before there's all these different offsets that occur if rates do decline in the future.
Finian O'shea: There's countervailing factors that also help us in that type of environment. So we.
Finian O'shea: We feel good about the dividend for the foreseeable future.
Speaker Change: Okay. Thanks, so much.
Speaker Change: Thank you. This concludes our question and answer session I would like to turn the conference back over to Cort Schnabel for any closing remarks.
Speaker Change: No closing remarks, thanks, everybody for the questions and engagement talk to you next quarter.
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 approximately one hour. After the end of the call through May 29 at five P. M. Eastern time to domestic callers by dialing one 870 535479 and two inter.
Speaker Change: National callers by dialing plus 140 to 220 to 675, an archived replay will also be available on a webcast link located on the homepage of the Investor resources section of Ares Capital's website.
Speaker Change: Okay.
Hum.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Goodbye.
Speaker Change: [music].
Speaker Change: Hum.
Speaker Change: Hum.
Speaker Change: [music].
Speaker Change: Uh huh.
Speaker Change: [music].