R. Kipp deVeer - Chief Executive Officer Penelope F. Roll - Chief Financial Officer Michael J. Arougheti - President & Director.

Terry Ma - Barclays Capital, Inc. Donald Fandetti - Citigroup Global Markets, Inc. (Broker) Richard B. Shane - JPMorgan Securities LLC Jonathan G. Bock - Wells Fargo Securities LLC Hugh M. Miller - Macquarie Capital (USA), Inc. Robert J. Dodd - Raymond James & Associates, Inc. Greg M. Mason - Keefe, Bruyette & Woods, Inc. Chris J. York - JMP Securities LLC.

Good morning. Welcome to Ares Capital Corporation's Fourth Quarter and Fiscal Year Ended December 31, 2014 Earnings Conference Call. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded on Thursday, February 26, 2015.

Comments made during the course of this conference call and webcast and the accompanying documents may contain forward-looking statements and are subject to risks and uncertainties.

Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings.

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. During this conference call, the company may discuss core earnings per share or core EPS, which is a non-GAAP financial measure as defined by SEC Regulation G.

Core EPS is the net per share increase or decrease in stockholders' equity, resulting from operations less realized and unrealized gains and losses, any incentive fees attributable to such realized and unrealized gains and losses, and any income taxes related to such realized gains and losses.

A reconciliation of core EPS to the net per share increase or decrease in stockholders' equity resulting from operations, the most directly comparable GAAP financial measure, can be found in the accompanying slide presentation for this call by going to the company's website.

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 results of operations.

Certain information discussed in this presentation including information relating to portfolio of companies, was derived from third-party resources and has not been independently verified. And accordingly, the company makes no representation or warranty in respect to this information.

As a reminder, the company's fourth quarter and year-ended December 31, 2014 earnings presentation is available on the company's website at www.arescapitalcorp.com by clicking on the Q4 2014 Earnings Presentation link on the homepage of the Investor Relations section.

Ares Capital Corporation's earnings release and 10-K are also available on the company's website. I will now turn the call over to Mr. Kipp deVeer, Ares Capital Corporation's Chief Executive Officer..

Thank you, Laura. Good afternoon, everyone, and thank you for joining us. We're pleased to report a strong finish to the year with fourth quarter and full year 2014 GAAP earnings per share of $0.49 and $1.94.

Our core earnings per share for the same period were $0.42 and $1.55, respectively; and both our Q4 and full year core and GAAP earnings per share exceeded our Q4 regular dividend of $0.38 and our 2014 regular dividends of $1.52 per share.

We also demonstrated another quarter of net asset value growth, as NAV grew to $16.82 per share from $16.71 at the end of the third quarter and from $16.46 at the end of 2013. We believe that our company's fundamentals are strong.

For the year, our GAAP earnings translated into about a 12% return on equity, which is slightly above our average annual return on equity, since inception, of roughly 11%. In 2014, we made $4.6 billion in new commitments and further diversified our portfolio, increasing the number of portfolio companies from 193 to 205.

Credit performance in the portfolio continues to be strong, and our non-accrual ratio has improved year-over-year. A highlight for the year was the $94 million of net gains that we realized in 2014, $54 million of which were in the fourth quarter alone.

It is important to remember that our income is derived not only from interest income on the loans that we make, but also from meaningful amounts of fee income, dividends, and net realized gains; each of which we've consistently earned throughout our history.

Since our inception as a public company over 10 years ago, our realized gains on investments have exceeded our realized losses by $351 million. And during the same timeframe, we paid $15.60 per share in cumulative dividends or roughly $1.52 per share annually.

And most importantly, we paid these dividends while growing our net asset value per share from the IPO price of $15 to $16.82 today.

Given the strong investment performance and the significant spillover income that we've generated, our Board of Directors declared an additional dividend of $0.05 per share to be paid in the first quarter of 2015, along with our first quarter regular dividend of $0.38 per share.

This is the third year in a row that we've declared additional dividends beyond our regular quarterly dividends. Both the regular and additional dividends will be paid on March 31, 2015.

The markets that we participate in have had a backdrop of low interest rates and benign credit; and accordingly, we were faced with continued yield compression in the portfolio for much of 2014.

We did expect this as yields typically decline when the economy is improving and when investors have an increased demand for investment and corporate credit as they search for yield. I'll talk about the markets and our pipeline in more detail later in the call.

But in summary, we believe that this long running trend of declining yields on new investments began to reverse in the fourth quarter, largely in response to weakness in the leverage finance markets, driven by falling oil prices and several other factors.

There was evidence of this trend in our portfolio as the weighted average yield on our debt and other income producing securities improved to 10.1% from 9.9% at the end of the third quarter.

This reversal marks the first time in nearly three years that we've seen the weighted average yield on our interest bearing portfolio increase; and we continue to see improved spreads on new investments closed so far in 2015.

On a slightly different note, we continue to focus on the right side of our balance sheet as well, where we believe there is opportunity both in terms of diversification and cost of capital.

As the largest BDC with a 10-plus year history of delivering strong credit performance, the debt capital markets remained open and attractive for ARCC during the fourth quarter.

We saw the benefits of being a seasoned issuer in the investment-grade notes market, and capitalized on these benefits by issuing $400 million of unsecured bonds this past November at a stated interest rate 100 basis points tighter than where we issued into the same market late in 2013.

Penni will talk about our capital raising activities in more detail shortly, but we are highly focused on reducing our aggregate cost of debt and continue to evaluate the ways we can lower our financing costs.

As a management team, we continue to take a long-term view, positioning our assets and our liabilities to withstand volatility and different market cycles.

Our objective, as always, is to remain focused on investing in companies and structures that provide attractive risk-adjusted returns, while optimizing the portfolio and raising capital that we believe will be accretive to shareholders.

A significant element of our strategy continues to be reinvesting the capital that comes back to us through the natural repayments in our season portfolio and through sales of lower yielding assets in the portfolio. We experienced significant refinancing activity in our portfolio throughout 2014, which provided natural liquidity for us to reinvest.

In 2014, we had $3.5 billion of commitments exit; $2.7 billion of which were due to normal course exits and repayments; and $887 million of which were due to opportunistic sales and syndications of lower yielding assets in the portfolio.

The assets we invest in tend to have an average life of three years to four years, creating a meaningful source of capital for us to reinvest each year. And the good news, looking forward, as I'll discuss later in the call, is that the environment for new investment seems to be improving.

I'd like to turn the call over to Penni to highlight our fourth quarter and 2014 annual financial results and to provide some detail around our recent financing activities..

Thanks, Kipp. Good morning. Our basic and diluted GAAP net income per share for the fourth quarter of 2014 was $0.49, compared to $0.57 for the third quarter of 2014 and $0.47 for the fourth quarter of 2013.

Our basic and diluted GAAP net income per share for the year ended December 31, 2014, was $1.94, as compared to $1.83 for the year ended December 31, 2013. Our basic and diluted core earnings per share was $0.42 for the fourth quarter of 2014, compared to $0.40 for the third quarter of 2014 and $0.41 for the fourth quarter of 2013.

For the full year of 2014, basic and diluted core earnings per share were $1.55, as compared to $1.66 for the full year of 2013.

Our net realized and unrealized gains totaled $25 million or $0.08 per share for the fourth quarter and $153 million or $0.51 per share for the year, largely driven by net realized gains on investments sold or exited during the fourth quarter of $54 million and of $94 million for the year, as well as net unrealized appreciation of $8 million on the portfolio for the fourth quarter and $56 million for the full year.

As of December 31, our portfolio totaled $9 billion at fair value, and we had total assets of $9.5 billion.

From a yield standpoint, at December 31, 2014, the weighted average yield on our debt and other income producing securities at amortized cost was 10.1%; and the weighted average yield on total investments at amortized cost was 9.3% as compared to – I think that was at fair value – as compared to 9.9% and 9.1%, respectively at September 30, 2014, and 10.4% and 9.4% at December 31, 2013.

Our stockholders' equity at December 31 was $5.3 billion resulting in net asset value per share of $16.82, up 0.7% from the end of the third quarter of 2014 and up 2.2% since the year-end 2013.

As of December 31, we had approximately $5.6 billion in committed debt capital, consisting approximately of $3.4 billion of aggregate principal amount of term indebtedness outstanding and $2.2 billion in committed revolving credit facilities, which are subject to borrowing base and leverage restrictions.

Approximately 61% of our total committed debt capital and approximately 86% of our outstanding debt at year-end was in fixed rate unsecured term debt.

Our cost of capital remains low with the weighted average stated interest rate on our drawn debt capital at year-end at 4.9%, which was consistent with our weighted average stated interest rate at September 30, 2014, and down from 5.3% at December 31, 2013.

If we had borrowed all of the amounts available under our revolving credit facilities at the end of 2014, our fully funded weighted average stated interest rate would have been 4.1%. As of December 31, 2014, our debt to equity ratio was 0.74 times and our debt to equity ratio, net of available cash of $184 million, was 0.71 times.

As of year-end, we had approximately $1.6 billion of undrawn availability under our revolving credit facilities subject to borrowing base and leverage restrictions; and the weighted average remaining term of our outstanding liabilities was 6.5 years.

Subsequent to year-end and through February 20, 2015, we have seen a net decline in the size of our portfolio through a combination of planned asset sales and syndications, as well as other natural repayments.

We've used the cash from the net repayments to repay outstanding borrowings under our revolving credit facilities and have thus reduced our leverage ratios since year-end.

As Kipp mentioned, we are focused on the right-hand side of our balance sheet with an eye on lowering our cost of debt capital, while still maintaining what we believe to be a prudent maturity ladder and diverse sources of capital.

Our debt at year-end included the $400 million of capital that we raised in November when we completed our second investment-grade bond issuance.

This debt was issued with a 3.875% coupon, which represents a 100 basis points reduction in our stated interest rate from the inaugural high-grade yield that we completed in November 2013, thus improving our overall cost of our unsecured term debt.

We've reopened and upsized the November 2014 bond issuance in January and were able to raise an additional $200 million of notes at a premium to par. Also, as we have mentioned on prior calls, we have the opportunity to redeem some of our higher cost liabilities this year and we plan to evaluate this on a case by case basis.

In connection with this strategy, a couple of weeks ago we notified the holders of our 7% unsecured notes maturing in February of 2022, which totaled $144 million, that we will redeem those notes in full in mid-March.

We believe it was prudent to exercise our option to repay 7% borrowings when we can utilize less expensive capital under our revolving credit facilities at LIBOR plus 2% to 2.25%. These debt-related activities will further improve our aggregate costs of unsecured term debt capital.

Pro forma for the issuance of the $200 million of 3.875% unsecured notes in January and the expected redemption of the $144 million of 7% unsecured notes in March, our fully funded weighted average stated interest rate at December 31, 2014, would have been about 10 basis points less at 4%.

Finally, as Kipp mentioned this morning, we announced that we declared a regular first quarter dividend of $0.38 per share, as well as an additional dividend of $0.05 per share, both payable on March 31 to stockholders of record on March 13, 2015.

At the end of 2014, we estimated that we had approximately $181 million or $0.58 per share of undistributable taxable income that is expected to be carried over into 2015. Now, I would like to turn it back to Kipp..

Thanks, Penni. I'd like to spend a few minutes discussing our portfolio and recent investment activity before opening the call up for questions. We currently have a diversified $9 billion portfolio consisting of investments in 205 portfolio companies; and the portfolio is performing well.

We witnessed year-over-year EBITDA growth of approximately 14% in the corporate borrowers in our portfolio; and this is the highest growth that we've seen since we started tracking this metric.

The weighted average total net leverage for our corporate borrowers increased slightly from 4.7 times at September 30, to 4.8 times at December 31; and weighted average interest coverage decreased slightly from 3 times at September 30, to 2.9 times at December 31.

Non-accruals continue to be low with 2.2% of the portfolio at cost and 1.7% of the portfolio at fair value on non-accrual at December 31, as compared to 2.2% at cost and 1.6% at fair value as of September 30. We did not have any meaningful new non-accruals added during the fourth quarter.

In light of the significant reduction in oil prices and, to a lesser extent, in natural gas prices since the fall of 2014, I want to spend a few minutes on our oil and gas exposure as I know this has been an area of interest for investors. In summary, our direct oil and gas exposure is minimal, and we've not identified any credit impairment.

We have two portfolio companies that we view as core oil and gas companies, representing only 1.3% of the portfolio at fair value. Only one borrower, Petroflow Energy, has direct oil price risk associated with current production and reserves. And we believe the credit merits of this company protect us as we're a first-lien lender with covenants.

Petroflow is an independent exploration and production company based in Tulsa, Oklahoma. The second borrower, Lonestar Prospects, has potential indirect risk from reduced oil and gas drilling activity. Lonestar is in the business of supplying silica sand for oil and natural gas fracking.

We also believe there are credit merits to this company that protect us, again, as a first-lien lender with covenants. As with all of our investments, we will continue to closely monitor these names.

Our project finance portfolio, which focuses on financing power generation projects, such as power plants and clean energy operators, is 7.3% of the portfolio at fair value; and we believe it currently has no meaningfully increased risk with the changing commodity price landscape.

As for the rest of the portfolio, we do believe there are significant number of our portfolio companies that could actually benefit if lower oil and gas prices lead to associated changes such as reduced input costs, reduced transportation costs, more U.S. car miles driven, and improved consumer discretionary income.

Moving to our investment activity for the fourth quarter. We made $1.4 billion in new investment commitments; and the weighted average yield at cost on our funded investments was 8.8%, above the 7.6% yield on the $1.3 billion of investment commitments that we exited or repaid during the quarter.

I'd like to make two important comments on these origination numbers for the fourth quarter. First, a number of these commitments that we made were full underwritings that required syndication to achieve our optimal final hold; and a portion of these commitments were sold post quarter-end.

These syndications allowed us to achieve a higher yield on our final hold amounts, which were, of course, smaller in total size. Second, as market volatility increased in November and December, we did see several interesting opportunities to lead a few higher-yielding second-lien transactions in larger companies.

In fact, the average EBITDA for our new commitments increased to $69 million for the fourth quarter from a range of $32 million to $58 million for the earlier quarters in 2014.

We believe that the size of our capital base is a competitive advantage during volatile periods as our partners seek leadership in getting their deals closed in more uncertain times. Let me finish with some commentary on our post quarter-end investment activity.

As we've mentioned in the past, the first quarter of every year tends to be a slower time in our business for new investments; and this year we've been actively selling and syndicating lower yielding assets.

From January 1, 2015 to February 20, 2015, we made new investment commitments totaling $171 million, of which $165 million were funded and exited or had repayments totaling $597 million, on which we realized $15 million of net gains.

$213 million of these exits were due to asset sales or syndications; and the remainder came from normal course repayments in the portfolio. The $213 million in asset sales and syndications had a weighted average yield of approximately 5.9%.

As of February 20, our total investment backlog and pipeline stood at approximately $190 million and $510 million, respectively; and, of course, we can't assure you that any of these investments will close. But we believe that 2015 will be a more attractive investment environment for us than 2014.

In closing, we're very pleased with the continued strong results at ARCC; and we believe that the company is well-positioned as we move into 2015. I'd lastly like to thank our team for all their efforts in 2014 as we wind up what was a great year for ARCC. And that concludes my prepared remarks. We're happy to open the line for questions.

Laura?.

Thank you. We will now begin the question-and-answer session. And our first question will come from Terry Ma of Barclays..

Hey, guys.

Just wanted to get a sense of how much opportunity there is for you to swap out of lower yielding assets this year? And is the trend quarter-over-quarter in the weighted average yield in your portfolio something you expect to persist?.

This is Kipp. I'll take the second question first. The turmoil that sort of came into the leveraged finance markets in the fourth quarter created some opportunities that we think are lasting. So we do feel that we have an opportunity in 2015 to continue to improve the yield on the book; and that's the goal.

On the liability – or sorry, on the asset side, it's not something, Terry, I think the question gets asked every quarter, that we quantify.

There remains, as you go through the SOI obviously opportunity when you look at assets that remain – pick a number, have yields of less than 6%, 7%, 8%, whatever your number may be, to continue to sell down some of those assets.

But we've been on this course now for a year in optimizing the portfolio, so I'd say opportunity remains, but it's probably not as significant as it was a year ago..

Okay, got it.

And the opportunity you guys saw for second-lien investments toward the end of last year, is that something that's still the case so far this quarter or how should we think about that?.

I have to think aloud a little bit here just in terms of what we've been doing now, I guess, for the first two months. I think generally, yes, the market's a little bit slow. So we're happy with the post-quarter activity. It's, I'd say, an ordinary course to what you saw from the fourth quarter and from probably prior years and quarters.

Nothing extraordinarily, no huge gapping out that you've seen in the last two months..

Okay, got it. Thanks. That's it for me..

Sure. Yeah. Thanks, Terry..

And our next question will come from Matt Howlett of UBS..

Hey, everybody. Thanks for taking my question. It's Ben on for Matt, and congratulations on a great quarter. Just really wanted to follow up on Terry's question on the second-lien.

And is that something you're seeing in the market or is part of that maybe this, originate and then are you syndicating that first-lien piece? And then should we expect to see that allocation go higher first quarter in 2015? Thanks..

Sure. Thanks. Thanks, Ben. So, look, the reality is we're a pretty large company, if you're just looking across the space. And we've seen a real change in the bank's behavior and ability to underwrite and syndicate transactions at the upper end of our market.

We always define our market – not always, but generally speaking – our market is kind of $10 million of EBITDA companies up to $100 million, $150 million of EBITDA. So think billion-dollar transactions at the top end. Those deals are simply not receiving the competitive proposals from banks that they were a year or two ago.

We're experienced originating and leading our deals; and with that also comes the ability and the capability to syndicate and optimize what we end up holding. So I think this theme of us underwriting and syndicating that you may have heard over the course of 2015 will continue – or sorry, in 2014 will continue into 2015.

Will we actively increase our mix of second-lien? Not by choice, right? I mean it's just – this is all opportunistic. I think the point I tried to make in the prepared remarks was we found three or four deals that we found particularly attractive in the quarter as spreads widened out, and we thought presented just great relative value.

So who knows where we go from here..

Great. Thanks a lot for taking the question..

Sure. Thanks..

And our next question is from Don Fandetti of Citi..

Yes. Kipp, I have two questions. One, it sounds like you used your balance sheet opportunistically in Q4 on these syndications.

Can you talk a little bit about who backed away? And then can you also talk about how you manage – if you're doing more syndications – how you manage that risk or think about it? Because, obviously, there are lot of companies that have gotten into trouble with syndicating too much and then the market pulls back.

Can you talk about that risk as well?.

Sure. I mean, the primary perhaps advantage that we have is I would say that the regulatory oversight of the banks has sort of made them weaker competition in these situations. And then to the point on syndication, as you may or may not know, in most of these underwritings that you do, you have room in your syndications, i.e., there flex language.

So it's really all about how much certainty that you can provide; and to your point, how much risk you're willing to take on that. We're a natural acquirer and owner of assets, right, whereas banks, particularly in mid-market and leveraged finance, are not.

So that alone allows us to underwrite and syndicate, I think, in a way that the bank can't today; and that's been the primary benefit for us. In terms of how we organize things, I mean, we have a fully built out distribution function here. I mean, that being said, a lot of us have been in the business for 15 years, 20 years.

We have quite a lot of relationships with institutional investors that we've developed. And I'd say the team is as a whole away from our capital markets franchise has clearly capabilities than just syndicating our own transaction.

So I don't know how to answer it any other way, and just we've been doing it a long time and we understand the balance sheet concern. But we've had most of our deals sort of oversold, i.e., it's had more interest than we've looked to syndicate in every transaction that we underwritten..

Yeah. Don, it's Mike Arougheti. I'd make one clarification if I can infer what risk you're trying to get at. We are not in the business of underwriting assets that we do not want to hold just for the purposes of generating syndication and distribution fee income.

So to the extent that we're actually using our distribution, we're doing it to optimize return. But in most, if not all, of those situations, we're plenty happy owning those assets on our balance sheet and really using the syndication to drive liquidity or optimize risk return.

But we're not in the business of underwriting low yielding assets just to generate fees..

Got it. Thank you..

And our next question is from Rick Shane of JPMorgan..

Good morning, guys. Thanks for taking my question. Just wanted to touch on dividend policy briefly. You've, over the last 18 months, paid three special dividends. Would love to hear the sort of the approach here.

What would it take, given sort of the consistently over earning the dividend to consider raising the core dividend? Is it a matter of seeing higher interest rates or what are the other considerations?.

Sure. Hey, Rick. It's Kipp. I think we've talked about this in the past, and I think you'll hear more about it. Look, I mean, our goal as a company is to continue to grow earnings and obviously the dividend in time; and that's what's good for the shareholders. I mean that's sort of what we're focused on.

The special dividend for us has been an easy way to, on a cash basis, right, make distributions to shareholders that we think of as really the benefits or beneficiary, so to speak, of a lot of these realized gains.

As I've said, the realized gains are often harvested as the cycle matures, right? So the special dividends – we get asked a lot about the spillover income. Is it there for a rainy day, or is there to pay special dividends; and the answer, frankly, is both, as I've said a bunch of times.

We thought that there were such significant gains this year that it was worthwhile to go ahead and pay some of that out as a special distribution at the end of the year. In terms of the dividend policy, 10 years later, folks get caught up with your core earnings were this and your GAAP earnings are that.

And the reality is we have a 10-year history of the earnings of our company exceeding the dividends that we've paid, to your point. So, we are always talking about the potential to raise the quarterly dividend; and that's been evaluated obviously with the good results over the last couple of years.

I'd say our philosophy is the same, which is we go back to that core earnings number which, for better or for worse, is a number that we came up with years ago to try to explain to investors the concept of very steady, predictable earnings, paying your dividend, and we still believe in that.

So some combination of rate increases and/or confidence that spreads have widened for the long haul, leading to a higher and sustainable path on the core earnings side is, I think, what we're looking for before we talk about quarterly dividend increases in terms of the regular dividend..

Got it. I mean when you think about it, there is, by design, some very structural asset sensitivity in the balance sheet at this point.

It strikes me that spreads widening, spreads tightening, that's volatile, that's probably not something that you wouldn't necessarily see as a trend, but an upward movement in rates would be?.

Certainly..

So is that ultimately – when you think about it – that's the greatest potential for eventually raising the dividend?.

I don't think so. I mean, I think, look, you've seen – how about this, to turn it on its head a little bit. I think we felt uncomfortable in light of the fact that our GAAP earnings have meaningfully exceeded our dividend raising the quarterly dividend, while we saw yield compression in the portfolio.

And that yield compression in the portfolio is both rate-based and spread-based. So I can't say that one is more important than the other. They're both important, right? We're happy to see the yield on the overall book increasing for the first time in three years, as I mentioned.

And if that continues, I think discussions around raising the quarterly dividend become more appropriate..

Got it. Okay, that's very helpful. Thank you..

Sure. I'm glad..

And our next question is from Greg Nelson of Wells Fargo Securities..

Good morning, everybody. This is actually Jonathan Bock, and I appreciate you taking my questions. So, Kipp, I mean obviously touching on this a bit and we want to try to understand it a bit more.

But if we look at kind of your net growth over the last several quarters, trailing 12, however you want to look at it, in general, you have gross originations of roughly $4 billion in a year and repayments of roughly $3 billion, if you look at it on a trailing 12 months, which means that there is roughly $1 billion of true net fundings that have to be either used or originated by raising equity or deploying your leverage? And given where we sit with leverage, it's possible to run that up higher.

But imagine if we sit flat today and are unable to issue equity given the fee component to earnings, we understand that selling assets might be a potential option to try to reinvest at higher spreads.

But I'm still wondering, is that really enough to cover what would be effectively, has always been, an additional $1 billion worth of net portfolio growth that always needs to be funded from either leverage or equity? Can you give us a better understanding of dividend stability in light of that with the stock price where it is?.

Yeah, sure. I mean, dividend stability for the company, I'm happy to say, is not a concern. It's just not something that we spend a lot of time worrying about. I think your point about less growth, or frankly no growth, inherently leads to less new underwriting, which I think, to your point, inherently leads to less fees.

That being said, if you're reinvesting your capital instead of just putting out $1 billion new, it's not that hard to sort of figure out what the shortfall is, right? You can say it's 1% of $1 billion, it's 2% of $1 billion, make up a number. It's not a meaningful component of our earnings, right, that temporary fee shortfall.

So it just doesn't keep me or I think anyone on the team up or, frankly, our board up at night in thinking about the regular dividend.

Obviously, our confidence in paying a special dividend hopefully makes that even clearer, because the spillover income, as I did mention, has always been something that we've said is there for a rainy day to the extent there's a shortfall. But, again, the shortfall that you may be seeing in fees is really from core earnings.

Again, in each of the last couple of years, our GAAP earnings, which is obviously what we use to pay our dividend, has meaningfully exceeded our dividends paid; and that's what we focus on, Jonathan..

Okay..

So little blips and little temporary changes in capital raising and all that don't keep us up at night..

That's very helpful, Kipp. Thank you for your candor. Now also an item, when we think about capital allocation, particularly given that you're part of a very large and successful franchise, there are times when it's a good idea to be opportunistic and take advantage of stock price volatility.

And so, can you walk through the reason why you didn't or would not buy back stock at current levels if they were, again, trading below book? It's an item that lots of investors see as a great validation of the portfolio, as well as a great way to earn outsized returns relative to what you're putting on the balance sheet..

Yeah. I mean, look, in the long history at the company we've had lots and lots of discussions with our board about buying back stock.

Some of those intensified perhaps back in October, November, when the stock was trading at a meaningful discount to book which, as we've mentioned to a whole handful of people was quite confusing to us, sitting around and actually knowing what was going on inside the company. That being said, our stock trades at a premium to book today.

So I don't really want to buy our stock at a premium to book and retire it. We think that there is plenty of other interesting things to do on the investment front, and that's improving.

But the fact that we haven't – let's hit this head on – the fact that we haven't declared a buyback program doesn't mean that we think stock buybacks aren't valuable and that we don't talk about them at length with our board on a regular basis..

Great..

Jon, I'll make one further comment because I know that this has been a consistent dialogue. We have to manage the balance sheet and the return profile of the company through a cycle; and I think it's very convenient to look at a quarter and look at the economics of a stock buyback versus investing into the market.

But telling you something you know, oftentimes you see stock price action that is disconnected from the realities of the investment environment.

And as some of our peers, who've not been performing as consistently as we have, see stock price decreases below book value, that actually creates, as Kipp pointed out in his prepared remarks, an investment environment where we can put capital to work at much higher spreads and much higher quality companies, as people are capital-constrained.

So I think as you think about this holistically, you have to appreciate the connection between what's going on in the asset spread environment and the ability for us to deploy at a time when certain company stocks are actually coming under pressure. I think, thankfully for us, we have capital availability, great performance in liquid assets.

But as other people are capital-constrained, we're not and we're actually able to capture a lot of this excess spread that Kipp was talking about..

Okay. Well said. Thank you so much. Appreciate you taking my questions..

Thanks, Jon..

Our next question comes from Hugh Miller of Macquarie..

Hi. I appreciate you taking my questions..

Certainly..

Wanted to just follow-up I guess on some of the comments you just made about kind of seeing some peers that are capital-constrained and obviously taking advantage of that when we have seen spreads that have widened.

It does appear though that of recent, in the past couple of weeks, we've started to see some of those spreads come in a bit, obviously still much wider than they were towards the midpoint of last year.

But was wondering if you could just talk to us about, obviously no one has a crystal ball, but what are the risks that you guys foresee that we could start to see at some point competition re-emerge and kind of head back to levels that we saw during last year?.

Yeah. I mean I'll try to answer that maybe one or two different ways, and obviously anybody else here in our room can chime in. But, look, when we were sort of moving through the fourth quarter, what was very obvious to us is that a lot of the competition really slowed down their pace of originations.

We happen to be a very liquid company at that point. We had quite a lot of availability, and I think took advantage of that; and I think we still have that. But look, it's pretty obvious, but when people are capital-constrained, the returns that people require of their capital go up, which is why I'm optimistic around yields improving.

So we've seen weaker competition. To your point about what's going on in the last couple of weeks, just remember the mid-market, for better or for worse, sort of doesn't react on a couple of weeks' basis. If you're looking at LTD and loan spreads and all that over the last couple of weeks, I would probably give that to you.

The real reason for that is just the issuance is off. So there is less supply of paper to meet what's an ongoing demand for loan paper, generally speaking, both from CLOs and from retail funds. I think last week was the first week in 33 weeks or something like that there were actually inflows into retail loan fund.

So that's a big change, and we'll keep an eye on that. But that doesn't influence the middle market immediately. But I'll take your point. The last couple of weeks it seemed to have firmed up, whereas maybe between October and now everything came off 100 basis points or so in terms of our favor.

That creep has probably slowed or stopped for the time being, and we'll just see where the market takes us..

It's very helpful. It's a very good point. And then getting back on to some of the questions. As we saw the shift from first-lien into second-lien, and I guess some of that's always opportunistic, as you mentioned, based on particular credits.

But can you help us kind of quantify what the incremental yield is that you're probably receiving off of a second-lien position versus a first-lien in the marketplace today?.

Sort of how far – I mean, the typical spread first to second-lien is about 400 basis points..

Okay..

That moves around in really tight markets, i.e., issuer-friendly markets. It gets tighter than that. And in dislocated markets, it can be quite a bit wider than that..

And is that where we're at now, kind of at the midpoint?.

Yeah. The 400 basis points seems about right..

Okay..

The first-lien deal is 450 basis points, 500 basis points over in the mid-market. Second-lien is 850 basis points to 950 basis points over..

Okay. Helpful. Thank you. And then the last question I had was just with regard to – and you gave us some great color on the energy portfolio. I did notice the inclusion of the Green Energy Partners, which seem to be at a very attractive yield. Was wondering if you could just give us a little bit of color on what they do.

And if there seems to be kind of more opportunities in that space, given the fallout in the energy markets to kind of look at north of 10% yields?.

I mean, we typically won't talk specifically about single-portfolio companies, and we're all sort of scrambling around here to figure out what Green Energy Partners is. Can you just give me some more detail? I've got to say, I am looking around the room at our investment team and none of us know what Green Energy Partners is..

Sure. Sorry about that. Give me one second here. It says gas turbine power generation facility operator was put on in November of 2014. It was an $82 million credit, yielding 13.3% senior subordinated loan..

Let's do this, if you don't mind (44:11)..

Yeah. I can always – I can circle around, but it's not that important..

That'd be great. I'd have to go back and actually pull our investment memo out and go by the name that we'll use rather than the SOI..

Yeah. I get that..

So it would just be better if we maybe pass on that for now..

Yeah. No problem. I appreciate it. Thank you for your time..

Okay. Thanks so much. Sorry..

And next, we have a question from Robert Dodd of Raymond James..

Hi, guys. Thanks for taking the question. Back to the beating the dead horse on the first-lien, second-lien issue. As you said, I mean there's a pretty good spread between first-lien and second-lien in the market. Now there isn't as much in your book because it's different segments of the market.

I mean, if we look, Q4 – I'm just trying to get a more holistic question about your approach to risk. Maybe in Q4, average in your company was $60 million. A lot of that, as you said, was second-lien. They were clearly much bigger companies. Go back to the first quarter; EBITDA is $30 million, but predominantly first-lien.

So what's your kind of approach to – if this market stays somewhat disrupted, would you intend to stay at those larger EBITDA companies getting the same kind of round numbers, call it 10%, all other things being equal, even though it's not that kind of yield, or would you rotate potentially back or shift back to the smaller companies where the spreads might be even a little bit wider given the disruptions? I mean that's the balance, obviously size arguably get you a bit more security, but it does come at, all other things being equal, lower price points.

So what's the balance between potentially really maintaining the ultra-focus on credit versus trying to get a little bit more spread expansion by targeting companies that a year ago you would have done $30 million EBITDA?.

Well, I mean, they're not mutually exclusive, I think we'll do both is the answer. I hate to say that, but it's the truth. We see north of 2,000 deals a year here. I think in each of the last two years, we've probably closed 40 or 50 new names. So for us, it's really all about credit selectivity.

And I can tell you that I think that $70 million EBITDA company in our pipeline is going to necessarily be better than the $20 million EBITDA company in our pipeline, where to your point there might be a little bit of incremental pricing. It's just everything is sort of on a name-by-name basis, and we're open to doing both.

To be honest, we haven't seen much of a differentiation over the last couple of years between where $20 million EBITDA companies can finance themselves and where $70 million EBITDA companies can finance themselves.

And the reason, just to add some color on that, typically is, look, if you're trying to borrow 5 times 20 in a market that's awash with capital, it's not very hard to raise $100 million.

And I'd tell you that very often the terms on those smaller and mid-market names get compressed because there's so much competition from folks that really can't lead and underwrite their own deals, but buy paper club up deals. Sometimes you actually see significantly less attractive returns in smaller deals; and that stuff just comes and goes.

So I mean, obviously, being able to look at a broad fairway of opportunities and see the most deal flow is something that we use as a key tool in just making those risk-reward decisions behind the scenes and obviously at our investment committee table every day..

Okay. Thank you. Just expanding a little bit, one of the things you've talked about in the past or Mike's talked about in the past is obviously on your first-lien, the first dollar in.

On the second-lien, can you give us any color on kind of where you are – obviously there is a big delta between being your first dollar in being a one-turn versus four turns on the second-lien deals? I mean what's kind of the market that you are seeing right now in terms of where the attachment, your first dollar attachment point is for the second-lien and how that affects your intent to be opportunistic in that market?.

Sure. I mean, it's certainly something that we pay attention to in every deal that we're doing.

And I'd tell you that a regular way sort of mid-market first-lien deal today, I think, probably is levered somewhere between 3 times and 4 times depending on its credit merits; and bigger companies probably are at the upper end of that, to your first question.

Beyond that, the total leverage multiples, I think, are about the same as where we were in Q3, Q4 but they've come in a touch with capital availability reduced. But sort of think 3.5 senior, 5.5 total maybe is the core mid-market today, in terms of just quoting new business..

Got it. Thank you. One final one, if I can.

Is there a point at which obviously – I mean very high originations in the fourth quarter, assuming mostly proprietary rather than buying paper, so is there a point at which ARCC becomes constrained in terms of its underwriting capacity? You're obviously tied in with the overall Ares platform and there's significant resources there.

But is there a point at which Ares, the BDC, has an issue with anything or is it just purely flow related, see it, you can do it, if it meets your criteria?.

I assume, you mean in terms of capital?.

I just mean in terms of origination. Obviously, you can manage the liability side of the balance sheet and whether you need to raise equity, revolver, et cetera, that's a separate question, if you would.

Just from an underwriting, an origination capacity point of view, is there anything that constrains Ares on that?.

No. I mean, I think in terms of people, look, we have really – we've got about 80 people dedicated to the business. I think we've got one of the largest teams in the space, if not the largest.

To trade-off Jonathan's point a little bit earlier, those 80 or so people have manufactured, managed, syndicated, et cetera, $4 billion plus of commitments in each of the last two years.

So if the projection is that we're not raising equity capital and we'll do fewer deals than that, I think, frankly, we've got more than enough capacity to continue to dig into some of these situations where we are truly leading and originating deals. But that's the way it's always been here. I mean, we're not buyer of paper.

We didn't set the business up that way 10 years ago. We rely on our origination team, and it hasn't changed much other than we're happy to step in and lead deals in syndicate when the banks can't or won't; and that's what we've been doing..

Got it. Thank you..

Sure..

And the next question comes from Greg Mason of KBW..

Great. Good morning, everyone. Just a couple of quick technical questions.

Are there any expenses associated with the calling of the February 2022 notes that we need to be aware of Q1?.

No. There's no cost to do that. They are redeemable at par..

Okay.

Any amortized – unamortized upfront fees that would add to a noticeable number?.

No, nothing noticeable. We will have some unamortized costs that are associated with that issuance that we will be writing off as a part of it, but nothing notable from an earnings perspective..

Great. And then on the old Allied notes, the 2047, 6.875%. I know those are callable, but if I've done my math right, I think there's like a $0.15 hit to book value if you call those, but you save 3% on your interest costs, you probably add like $0.02 a year to operating earnings.

So could you give us kind of how you're weighing those two potential impacts with those notes?.

Yeah. I think if you look at the notes, as we said, we started thinking about these redemptions with the notice that we gave to the February 2022 note holders and we'll be redeeming those in mid-March. Then we're going to continue to evaluate the other bonds that are callable or become callable during the course of the year.

Clearly, these are at interest rates that are higher than what we can borrow at now in the particularly high-grade market, as evidenced by the deal that we just did where we printed a coupon of 3.875%. So there is a nice trade-off differential. We're going to continue to evaluate that.

We're evaluating both, not only the cost of capital, but our sources and diversity of capital and the duration of the capital that we have in trying to trade off some of those component parts. We do have the remaining – we have the October 2022s and 2040s that become callable at the end of this year in October.

And if you look at those, that's about $382 million; that weighted average yield is just about under 7%. So we will continue to evaluate this as we go along. One of the things about the 2047 notes is those are very long duration notes.

And if you look at the yield on those today relative to what we could borrow for that duration, they're actually a pretty good yield for that duration; and that's something we think about.

But we will continue to look at this because we do think we have some nice opportunities here, as we go through the course of this year, to reduce our cost of capital and get our weighted average cost of term debt, particularly, down..

That's great information. And one last one, I think once a year we get the updated tax spillover number.

Is that available yet?.

Yeah. We discussed that earlier, but the updated spillover undistributed taxable income is about $0.58 a share at the end of the year.

One thing, since you asked about this, it's just sometimes a little bit confusing because you have to remember that the spillover undistributed taxable income is based upon our taxable income available for distribution, not our GAAP earnings.

And we do go through a process each year of determining what our taxable income is; and that process basically goes through looking at our GAAP income and applying the appropriate book tax differences to get to the taxable income.

So when we got to the end of 2014, we estimate that we had about $0.58 of undistributed taxable income per share that will be spilling over from 2014 to 2015. You will notice that that's lower than where we were a year ago at this time where we had about $0.78 of spillover coming from 2013 into 2014.

And it's kind of interesting because if you look at that, it seems a bit confusing because relative to the level of net realized gains that we had in 2014 for GAAP purposes. So maybe we'll just take a minute to talk about that because what happened is, is that our GAAP net realized gains didn't translate into taxable gains for 2014.

And the reason for that is because for tax purposes we had a much higher cost basis in certain of the assets that we exited this year because they were acquired in the Allied acquisition. And we also had some capital loss carry-forwards from exits in prior years that we were able to use against this year's gains.

So if you look at the specific book tax differences, that resulted in our taxable income being about $95 million or $0.30 per share lower than it would have been have not had these tax differences existing.

So, we actually kind of look at this as a positive because we've been able to shelter the bulk of this year's $94 million of net realized book gains, thus allowing us to retain the gains, reduce our excise tax expense, and build our NAV. So it leaves us still in a good position to from a spillover perspective at $0.58 per share.

And, as Kipp mentioned, we feel good about where we are still in that level because – and our declaration of the $0.05 additional dividend, I think, reflects that level of comfort..

Got it.

And that's the reason why paid-in capital went up $80 million even though there is no equity issue in the quarter, this tax?.

Yeah. The other thing is, this is always a little bit confusing too, because at the end of each fiscal year we actually do these tax adjustments that basically reclassifies our components of our stockholders' equity between paid-in capital and undistributed earnings, whether it be net investment income or net realized gains.

So that entry does do a reclassification such that it results in an increase in our paid-in capital, yes, even though we didn't raise any equity. So....

Great..

Let me come back just to get back on the natural gas name. So I apologize. I think the good news is our natural gas and power gen team has actually built a big enough portfolio that sometimes we have to go back and re-reference what our SOI says versus what some of our investment committee and portfolio management deck say.

But the loan that you guys were, one of the analysts, I forgot which, was asking about was a mezz deal that we did do, thank you, in November of last year. We think about – we call the company Stonewall Energy. It's actually a combined-cycle, natural gas-fired plant that's getting built in the PGM region in Loudoun County, Virginia.

We came in as part of the original sort of mezz and equity group that's building the project out. That is a in-construction plant that is meant to commence operations in May of 2017.

And so the way a lot of these assets get built obviously is with early equity support and construction financing; and then once the project is obviously able to operate and generate electricity, there's a takeout financing typically done by a larger bank group. But that was the nature of the deal, and you laid the number out for us.

But, yeah, we made roughly $80 million mezzanine investment in that company that had a 13.25% interest rate. So I just wanted to come back to it; and if there are follow-on questions, please feel free to jump back in the queue..

And next, we have a question from Chris York of JMP Securities..

Good morning. Most of my questions have been asked, so I'll switch topic a bit.

With the new Congress here, I'm curious to learn if you have an updated opinions on any momentum for legislation that would monetize BDCs in 2015?.

I'm going to turn this one over to Mike..

So it's just one man's opinion and I think I've been consistent, although things can take longer in Washington than some of us may appreciate. I think that the proposed legislation has had in the prior Congress and continues to have really good momentum and broad-based bipartisan support.

I would say that I think with the most recent elections, I think the probability and the timing have probably increased and moved in favor of the legislation happening and happening sooner. Again, we can never be certain, but I think the dialogue at least as we understand it continues to be very productive and constructive..

Great. That's it. Thanks, Mike..

And this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks..

We didn't have anything else, but thanks for, obviously, the support and certainly the good questions. And see you everybody around I bet. Thanks again..

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available in approximately one hour after the end of this call through March 11, 2015, to domestic callers by dialing 877-344-7529 and to international callers by dialing 1-412-317-0088.

For all replays, please reference conference number 10058521. An archived replay will also be available on a webcast link located on the home page of the Investor Relations section of our website. Thank you. You may now disconnect..