Kipp deVeer - Director and Chief Executive Officer Penni Roll - Chief Financial Officer.

Ryan Lynch - KBW Arren Cyganovich - D. A. Davidson Terry Ma - Barclays Chris York - JMP Securities Robert Dodd - Raymond James Doug Mewhirter - SunTrust John Hecht - Jefferies Jonathan Bock - Wells Fargo Securities.

Good afternoon. Welcome to Ares Capital Corporation's fourth quarter and year ended December 31, 2015, earnings conference call. At this time, all participants are in a listen-only mode. As a remainder, the conference is being recorded on Wednesday, February 24, 2016.

Comments made during the course of this conference call and webcast, and the accompanying documents, 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 capital gains, 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, 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 companies, was derived from third-party sources and has not been independently verified, and accordingly, the company makes no representation or warranty in respect of this information.

As a reminder, the company's fourth quarter and year ended December 31, 2015, earnings presentation is available on the company's website at www.arescapitalcorp.com, by clicking on the Q4 '15 Earnings Presentation link on the home page 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. Please go ahead, sir..

Thanks, Operator. Good afternoon, and thanks to everyone for joining us today. I'd like to start by quickly summarizing our solid earnings results. During the fourth quarter and full year 2015 we generated basic and diluted core earnings per share of $0.40 and $1.54, respectively.

2015 was a record year for net realized gains, as we had the opportunity to exit a number of our investments at meaningful gains, while recording minimal realized losses.

We generated net realized gains of $0.05 per share for the fourth quarter and $0.37 per share for 2015, marking our sixth consecutive year of net realized gains and the 11 year out of the last 12.

We attribute the strong investment performance to our careful and patient approach, our long tenure investing in middle market companies and our highly experienced and proactive investment team. With this strong quarter behind us, we declared a dividend payable to shareholders of $0.38 in the first quarter of 2016.

Moving away from our company, specifically, it's worth providing some color on the significant dislocation that the credit markets have experienced since we last gathered on our third quarter earnings call in November. September and October were both very difficult months in leveraged finance and the markets have become more challenged since then.

Loans finished 2015 with returns of negative 0.7%, only the second year of negative returns in a 19-year history of the S&P Leveraged Loan Index. Similarly, high yield finished the year with returns of negative 4.6%, which is the first negative year since 2008.

You heard from us as early as the beginning of last summer that we saw a change in market dynamics coming, and in fact many equity analysts and investors commented at our September 2015 Investor Day that we were among the most pessimistic managers in terms of market outlook, when compared with our peers.

The good news is that these views on the markets led ARCC to be increasingly selective throughout 2015, and we increased our focus on managing risk and preserving capital rather than chasing the market. We chose to pass on a lot of new investment opportunities and stayed away from investing in new deals with structures we felt were too aggressive.

We also continued to be very selective on credit. We believe that volatility in the high yield leveraged loan markets has been driven largely by declines in oil and other commodity prices, outflows of capital from both markets and concerns around the specter of higher interest rates and increased defaults in the future.

We also believe this is a lasting change and unlikely to reverse itself any time soon. Given our experience in volatile markets and our strong performance during the last downturn, we are confident in our ability to manage through these changes.

We've built a company to weather this environment through careful asset selection, a strong balance sheet and a conservative dividend policy focused on consistently achieving a level of core earnings generated from fees, net investment income and net realized gains, which meets or exceeds our dividend.

We believe the current markets allow us to make new investments with higher returns that more than compensate for the risk, should this current market volatility continue. We also see the potential for acquisitions becoming more interesting. I'll discuss this a bit later in the call.

As should be expected, we recognized some unrealized depreciation in the portfolio in the fourth quarter, the bulk of which resulted from negative mark-to-market yield-related valuation adjustments, rather than markdowns dictated by credit issues at underlying portfolio companies.

We'll speak more in depth about the portfolio during the call, but at a high-level, we continue to see stability and growth at our underlying portfolio companies.

Now, I'd like to turn the call over to Penni Roll, our Chief Financial Officer, to discuss our fourth quarter and full year financial results and to provide some details on our recent financing activities..

Thanks, Kipp. Our basic and diluted core earnings per share were $0.40 for the fourth quarter of 2015 as compared to $0.41 for the third quarter of 2015 and $0.42 for the fourth quarter of 2014.

Our basic and diluted GAAP net income per share for the fourth quarter of 2015 was $0.05 compared to $0.37 for the third quarter of 2015 and $0.49 for the fourth quarter of 2014. Our lower GAAP earnings in the fourth quarter were primarily driven by the unrealized losses in the portfolio that Kipp mentioned earlier.

As of December 31, 2015, our portfolio totaled $9.1 billion at fair value and we had total assets of $9.5 billion. At December 31, 2015, 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 9.1% as compared to 10.3% and 9.4%, respectively, at September 30, 2015, and 10.1% and 9.3%, respectively, at December 31, 2014.

The decline in our weighted average yield since September 30, 2015, is primarily a result of the decline in the yield on our subordinated certificates in the SSLP that also reflects the lower yielding first lien senior secured loans that we expect to sell to the SDLP, once we have built a sufficiently diversified portfolio.

For the fourth quarter of 2015, our net realized gains on investments totaled $24 million or $0.08 per share. And we had net unrealized losses on investments of $154 million or $0.49 per share, which includes $12 million or $0.04 per share from reversals of net unrealized appreciation related to net realized gains on investments.

As Kipp mentioned, the net unrealized losses in the fourth quarter of 2015 were primarily driven by a widening spread environment for the securities in which we invest, along with some credit-driven markdowns and select underperformers.

The largest unrealized loss in the portfolio for the fourth quarter was a $50 million write-down to our subordinated certificates in the senior secured loan program. The underlying loans in the SSLP portfolio continue to perform well from a fundamental credit perspective, and we do not currently foresee any credit events in the portfolio.

The write-down simply reflects that, in the current environment, we believe from a mark-to-market perspective that an investor would require a higher yield on these senior securities, thus reducing their fair value.

Our stockholders' equity at December 31 was $5.2 billion, resulting in net asset value per share of $16.46, down 2% compared to both one-quarter and one-year ago. For the full year, our basic and diluted core earnings per share were $1.54 for 2015 compared to $1.55 for 2014.

And basic and diluted GAAP net income per share was $1.20 for 2015 compared to $1.94 for 2014. For the full year 2015, we had net realized gains on investments of $121 million or $0.39 per share.

And we had net unrealized losses on investments of $249 million or $0.79 per share, which included $60 million or $0.19 per share from the reversal of net unrealized appreciation related to net realized gains on investments. One important measure we track for dividend distributions is core earnings plus realized gains and losses.

This is the actual cash earnings generated by the company that can be used for dividend payment. Based on this metric, we generated core earnings plus net realized gains per share of $1.91 for 2015, which is well in excess of the regular and special dividends we paid in 2015 of $1.57 per share.

We continue to be satisfied that our distributable earnings meaningfully exceed our dividend, and we feel we have been quite conservative with the dividends paid at the current level.

As of December 31, 2015, we had approximately $5.6 billion in committed debt capital, consisting of approximately $3.3 billion in aggregate principal amount of outstanding term indebtedness, $2.2 billion in committed revolving credit facilities and $75 million in committed SBA debentures.

Approximately 59% of our total committed debt capital and 79% of our outstanding debt at quarter-end was in fixed rate unsecured term debt. We believe that this predominantly fixed rate funded liability structure combined with our predominantly floating rate asset mix, leaves us well-positioned for a potential further rise in LIBOR.

During the fourth quarter of 2015, we completed the early redemption of the entire $200 million of aggregate principal amount of our 7.75% unsecured notes, which were originally scheduled to mature in 2040, but became callable during the forth quarter.

These notes were redeemed at par plus accrued in unpaid interest, and we recognized a realized loss on the extinguishment of this debt of approximately $6.6 million, due to the write-off of the related unamortized debt issuance cost.

The early redemption of the 24 notes helps to reduce the weighted average stated interest rate on our drawn debt capital to 4.4% at December 31, 2015, down from 5% at September 30. We anticipate that this lower cost of debt should provide some earnings benefits going forward.

As of December 31, 2015, our debt-to-equity ratio was 0.81x and our debt-to-equity ratio net of available cash of $229 million was 0.77x. At December 31, 2015, we had approximately $1.4 billion of undrawn availability under our lower cost revolving credit facilities and SBA debentures, subject to borrowing base leverage and other restrictions.

On February 1, 2016, we fully repaid our $575 million of aggregate principal amount of 5.75% unsecured convertible notes at their maturity. We primarily used borrowings under our revolving credit facilities to repay these notes. The repayment of this higher cost debt also benefits earnings.

Finally, this morning we announced that we declared a regular first quarter dividend of $0.38 per share. This dividend is payable on March 31 to stockholders of record on March 15, 2016.

Our cumulative taxable income earned continues to exceed our cumulative dividends paid and we estimate that ARCC will carry forward approximately $257 million or $0.82 per share in undistributed taxable income from 2015 into 2016.

We believe that our current dividend level is well-supported by our earnings, but the spillover income does provide additional comfort in that regard. Now, I would like to turn the call back to Kipp for some closing comments..

Thanks, Penni. I'd like to spend a few minutes discussing the portfolio and sharing some additional thoughts on the environment for BDCs and ARCC, specifically, before opening up the call for questions.

We feel good about the aggregate credit quality of our $9.1 billion portfolio, which is highly diversified and consist of investments in 218 companies.

The weighted average EBITDA of our corporate portfolio held steady this quarter at $59 million and EBITDA growth, as measured on an LTM basis for these companies, continues to be strong at 9% year-over-year.

Non-accruals remain low at 2.6% of the portfolio at cost and 1.7% of the portfolio at fair value at December 31 as compared to 2.3% at cost and 1.7% at fair value at September 30, 2015. Looking at the current composition of our non-accruals. Over 80% of the value of these investments are non-accrual, is attributable to loans to four companies.

We have significant firm resources and expertise dedicated to these situations and a strong track record of achieving favorable outcomes at non-performing investments. Turning to the fourth quarter numbers. We made $972 million in new investment commitments and exited or saw repayments totaling $569 million.

The weighted average yield on our debt and other income producing securities funded during the quarter was 9.8%, above the 8% weighted average yield on the debt and other income producing securities exited or repaid during the quarter.

We continue to emphasize investments in senior secured loans with 81% of our new commitments during the fourth quarter in first or second lien loans. And in addition, we continued to leverage our incumbency and our client relationships with approximately half of our new commitments during the fourth quarter made to existing portfolio of companies.

Finally, we are happy to report that we completed several transactions with Varagon this quarter. And as of yearend, we've closed six first lien loans, totaling over $300 million, and we continue to actively review new investment opportunities together.

Although, we're still in the process of building the initial portfolio for SDLP and determining the exact timing of the sale to the SDLP, we remain excited about this opportunity and recognize that the partnership has already tangible benefits. I'd also like to provide some quick commentary on our post-quarter end investment activity.

Despite light volumes in the middle market and our patient approach, we continue to leverage our direct origination platform to find attractive investment opportunities.

From January 1 to February 18 of this year, we made new investment commitments, totaling $338 million, and so they exited $339 million of investment commitments during the same period. We realized approximately $9 million of net gains on our exits through that date as well.

The weighted average yield on debt and other income producing securities funded during the period at amortized cost was 9.9% and the weighted average yield on debt and other income producing securities exited or repaid during the period was 9.6%.

As of February 18, our total investment backlog and pipeline stood at approximately $255 million and $140 million, respectively. These investments are all subject to final approvals and documentation, and we can't assure you that any of them will close.

So all of this market volatility and the ensuing declines in the stocks of many financial companies, I'd like to make a few comments on the BDC sector generally and ARCC, specifically. We have seen most BDC stocks trade meaningfully below book value and ARCC's stock has followed suite.

We believe many of the stocks in the BDC space today are oversold, and we feel that this is particularly true as it relates to ARCC. Unfortunately, certain companies that we're often compared with have not met the expectations of investors, and we are sympathetic with the sentiment of disappointed investors.

Investment performance and dividend stability has been quite core for a number of our peers. Many smaller BDCs have not built competitive advantages, and questions continue to be asked about certain management teams' alignment with in regard for shareholders.

This was unfortunate, and we believe these factors have negatively impacted both the sector and our stock. Turning specifically to ARCC, we believe there is a significant disconnect between the current trading price of our stock and the fundamentals of our company.

Accordingly, we continue to see potential opportunities for stock buybacks in the open market. To that end, last year our Board of Directors approved a $100 million stock buyback plan, which we used during the fourth quarter to purchase approximately 122,000 shares of our stock in the open market.

In order to increase our flexibility under this plan going forward, our Board has recently approved the implementation of a 10b5-1 trading program.

While the specific parameters of the program are still being determined, we're confident that it will immediately provide us with expanded flexibility around the timing and frequency of our stock repurchases.

In considering buybacks, we will of course continue to identify other potentially uses of available capital, including making new investments, pursuing acquisitions and other strategic opportunities. In closing, we are keenly focused on delivering long-term shareholder value.

We'll continue to do this by deploying capital and what we believe are attractive investments and by prudently managing our capital, both our liabilities and our equity. We continue to seek new investments, but we expect to better market to take some time to develop, and we are preaching patience internally as spreads widened and structures improve.

Our team has a successful track record in different market environments, and we are confident that we can manage risk in the portfolio while navigating through the changes ahead.

Finally, we believe that investors need to take the time to evaluate and differentiate managers based on fundamentals, and to support managers and companies that have proven that they know how to operate in these markets.

Based on past experience, we strongly believe that Ares management is one of these managers, and accordingly that ARCC is well-positioned to navigate the continued volatile markets and to deliver improving returns to shareholders. Make no mistake that we are aligned with our shareholders and that we continue to work on your behalf.

That concludes our prepared remarks. Operator, could you please open the line for questions..

[Operator Instructions] Our first question will come from Ryan Lynch of KBW..

My first question is just an update on the SSLP. I know nothing is formally been announced with the SSLP.

But can you give us any color, are you guys still having progressive conversations around that program? And is there still any active dialogue going on with trying to find a solution other than a slow wind-down of the program?.

Not much of an update. We are still in continued dialogs. I can't say that they're deeper or particularly substantive at this point. So ongoing for sure, but nothing really to report..

It looks like the assets in that program dropped about $500 million in the quarter, as that winds down three payments.

Is that a decent or a reasonable run rate we can think about going forward of kind of how that program is going to wind down in the near-term?.

Yes, sure. I think, obviously, if you're trying to get to your model, we're doing the same thing here as we assess that investment in that program. So you can be sure that we have run a whole bunch of different cases.

But yes, I think if you wanted to pick around number that seems reasonable, that the issuers obviously in that program probably are in two camps. They either continue to deleverage and don't really require any solution and are just sort of waiting for potential private equity assets, as you know all the names in that program are sponsored deals.

The alternative is that certain folks are earlier in their investment cycle and are looking for a more dynamic facility than perhaps SSLP can provide today. So outcomes all over the map could lead you to the $500 million last quarter, and I think it's a reasonable assumption to model going forward..

And then just turning to your debt structure for a minute, you guys had one convert already repay in February. You guys, I think funded those repayments with drawing down your credit facility. You guys have another convert coming due later this year.

Do you guys plan on funding that second convert with the credit -- drawing down your credit facility? And the first one that you guys just repaid with drawing down your credit facility, do you guys expect to kind of just draw out more leverage on your credit facility or do you guys expect to eventually term out the convert that was just came due and then potentially the convert coming due later this year?.

Yes, I'd say there are bunch of different options for us; obviously, using the credit facilities, and obviously, the liquidity that comes through the company through repayments to satisfy that maturity works for us.

We do still have access to the high-grade and convertible markets, but one, obviously have access to those markets at a price that makes sense for the company on a long-term basis, of course, because those are longer-dated liabilities.

So those markets didn't perform all that well through the end of this year and through the early parts of this year either, didn't offer us what we thought were attractive pricing opportunities to do a longer-term deal.

So I'd tell you that it's not a maturity that we have any concern around satisfying, but how we'll satisfy it, I think I can't tell you we know for sure now. It really depends on how the markets evolve between call it now the middle of February and end of June..

And then just one more. I know you kind of talked about you guys are seeing pretty decent trends, stable to some growth in your underlying portfolio companies. But when I look at Slide 16 of your presentation that's shows the underlying debt-to-EBITDA and kind of cash interest coverage charge.

It looks like debt-to-EBITDA is kind of trending higher in your portfolio and interest coverage is kind of trending lower.

So how do we as investors and analysts balance looking at these statistics with the fact that you guys are saying that that underlying portfolio trends are fairly strong?.

Yes. I mean, obviously, we're looking at the credits on a name by name basis. Certainly, acknowledging '16, those numbers have ticked up I'd say a little bit over the course of this year on the leverage multiple side not by much. Then on the interest coverage side down, and again, not by much, not material.

I mean the key we've always found is selecting the right credits, and frankly selecting away from certain industries that tend not to either generate good free cash flow and/or perform well in a tougher market environment.

It's sort of an interesting environment that we're in, and that I think if we gave a broad view on the economy, we would tell you that we see a reasonably flat, but reasonably sturdy economy across a lot of the industries that we're in. So we, generally speaking, feel good about portfolio and about the credit quality.

The markets based on kind of September to now are a lot more spooked.

And then I'll just say this, I think those markets continue to be spooked and led both in terms of trading levels being down, but also potential for default being up by oil and gas, by mining and metals, and increasingly by industries that are cyclical, whether it's retail, restaurants, manufacturing, specialty chemicals, et cetera.

Those are all places where we are meaningfully under-invested relative to a benchmark index, whether it's a loan or high-yield index. So I think that we position what we feel to be a much more durable portfolio for rockier times than maybe the industries might let you believe.

But to Page 16 in our Investor deck that that modest change, it's just doesn't cause me a lot of concern. The thing that we get wrong in our business is really misassessing business risk.

And as we always say, making a mistake on credit rather than on particularities of a coverage ratio or loan covenant here and there, it's really all about business risk. And as I mentioned, we're happy with how businesses are performing in the underlying portfolio..

Our next question will come from Arren Cyganovich of D. A. Davidson..

You had mentioned that you're kind of waiting for spreads to widen and structures to improve.

What are you seeing thus far as we have been in this kind of weakening technical type of situation for the past several months?.

So I'll maybe come from where we were discussing things in November around the last quarter, I mean I think it's safe to say that spreads probably since September, October in most of the assets that we're investing in have probably widened 100 basis points, that's slower to have widened than even the high yield market, which is off substantially more than that, but it's following too with the larger cap loan market.

The issue right now is there's just not a lot of volume, there is a lot of price discovery going on in the middle market, and folks who say this, this including ourselves, the mid-market really does tend to lag.

So because some of the transactions close in -- let's say, transactions that may close now in February are often negotiated with borrowers in October, because of the sales cycle and the closing cycle and middle market is so long, the key is that you're cautious in September, October, and November as the markets really were transitioning, because I think if you're closing a deal now in February, you're looking back, saying, well, I wanted to do right by my relationship, but it's maybe a touch off where you might think about issuing a term sheet today..

And, I guess, in terms of leverage, obviously leverage is a bit higher than it has been for a while, not very close to the limit, but still higher than, say, post-crises? What are your thoughts there, as you sell into the SDLP with that kind of naturally deleverage the portfolio that was kind of part of the process you're thinking about there?.

Both yes, I don't think we want to see the leverage ratio any higher, and I do think that SDLP is a transaction once it's in full formation that lowers that ratio, so both..

And then just lastly on, you had one new non-accrual, very small, in La Paloma, which appears to be some sort of gas fired cycle plant.

How does that relate to your gas turbine power generation because you have quite a few more investments in that side of the business or that industry?.

We took some marks frankly in our projects financing power book what you see, which is generally through across the space, whether it's larger cap names from middle market, lower gas prices has led, generally speaking, across the country to lower power prices.

And I'd also just say that the bid on some of those assets have come out of the market a bit for projects finance assets generally. Specific to La Paloma, there has been some performance decline at that asset. It is a operating power asset in the California market.

California power markets are a little bit weaker as more solars come online, but again, it's something we're working through today and feel that we have good solid ability to collect interest payments for a while, but it's just weaker in terms of where we see the market..

Our next question will come from Terry Ma from Barclays..

So I appreciate the color on the market environment. In your prepared remarks you mentioned you expect a lasting change.

Can you elaborate a little bit more on what makes you think this change will be lasting? And maybe can you just give us our best case outlook for the economy as well, whether or not you expect a recession or a muddle-through scenario?.

As long as you don't think I'm economist, maybe I'll try. So I, for one, but I think, we as a team, have a pretty strong view that 2016 is a transition year for the credit markets. We see a lot more stress and distress just as we look across credit business here at Ares that manages $60-plus billion of corporate and structured credit.

We have 200 people around the globe looking at markets. And I think that the view is influenced simply by being late in the cycle by more and more technical defaults in portfolios, whether it's large cap, mid-market, ours, competitors, the situations that we're seeing in the market.

But again, back to a comment I made earlier, I think that the problems that the oil and gas markets in particular are going to present, in particular, for the high yield market is misunderstood, but maybe not being currently kind of considered in the right way by many folks that aren't invested in high yield and in some of larger cap credit markets the way that we are.

We expect defaults will go up this year. They're already going up. If you look back historically when defaults go up, spreads tend to widened and defaults were lagging indicator.

So obviously when you see more of stress and distress in the market, it obviously has investor saying, I priced my capital today to higher returns that I did in prior years or prior quarters.

And I think also there's less capital in the market, right, so anytime there is less capital chasing the same opportunity, it doesn't compete as aggressively for price. So capital flows in the loan market over the last, call it, six to eight months, $10-plus billion of outflows, that's a big number.

Similarly very large numbers in the high yield market, and that transitions its way into the middle market, despite its good relative value still to the larger markets. It's true when BDCs trade below book value and they can't raise capital and grow that constraints capital.

It's true when CLO investors are less interested in supporting CLO new issuance, which is also happening right now. Most of the investment banks are in the midst of downsizing their forecast for CLO issuance for 2016 from what where ranges of kind of $60 billion to $80 billion down to $30 billion, $40 billion, $50 billion.

My guess is that continues to go down as the year progresses. So I think with more distress in portfolios and less capital in the market, we just see a real lasting change here rather than a blip, where you kind of buy on the declines and wait for a rally, we're really not expecting that. So that's good news for us.

Longer-term, it allows for us to invest money with much less risk being taken and with higher returns. And as I mentioned, the key is that you have portfolio that can weather the storm as you look for those opportunities going forward. So those changes in the market are happening.

And again, not to play economist, but I'll answer your question, we don't see the prospect of a near-term recession in U.S., that's not generally speaking something that we're considering here at Ares. I'm not going to say that it's not possible. Things gets worse, but our current view is that we don't expect to see a recession in the U.S.

We do see, as I mentioned, very flat growth. Obviously, Q4 GDP growth was revised downward, I'm not surprised. And we expect slow growth going forward..

Our next question will come from Chris York of JMP Securities..

So Kipp, you mentioned acquisitions a couple of times in your prepared remarks. And we noticed that Ares, again, asked for shareholder approval to issue shares below NAV on the recent proxy.

So can you talk a little bit about situations where you would realistically seek that approval, especially considering your current balance sheet leverage to fund the purchase of another BDC or a strategic deal?.

So in terms of the permission to sell stock below book, that's something that's ordinary course for us at this point and something that we've done, I want to say six or seven years now on a row, so really nothing new on that front, that proxy that was filed recently.

We think about acquisitions, frankly, is being more interesting today, because things are a lot cheaper than they used to o be. We are value-oriented in a period. I really don't like buying financial assets that we can originate at 97, at prices above book value. That's why we've spent so much money and so much effort building out strong origination.

When you do see assets at companies, whether they are controlled by BDCs or by other companies that trade below book that starts to make us sniff around a little bit and think that there is value buying performing assets, generally speaking at discounts. And how do we think about potentially using our stock to do that, we think long and hard.

I mean to be honest, we think very cautiously and very carefully about issuing stock below book.

We've really done it kind of once on elected issue below book deal and we did that in advance of buying Allied Capital, and that worked out reasonably well for us, that was obviously in the rearview mirror a deal that we did it, substantial value to this company. We generated fantastic returns for shareholders.

I think about much the same way to tell you that back in '09 when we did that. There's a lot of hand wringing about selling stock below book to do that, and I'm glad we did it.

So we'll evaluate things on that same basis, is it good the existing shareholders, is it good for the new shareholders, that would potentially be buying the stock below book, and of course, what we'd be using it for is pretty critical..

That was the genesis of my question, given your past history there and then the formality of asking for approval has been done over the last couple of years.

Switching gears, so you talked a little bit about the CLO market and it appears that Ivy Hill was marked down for the second consecutive quarter, and was one of the biggest drivers of unrealized losses.

The case stated that total AMs were flat sequentially, so I would be curious to get an update on how you're thinking this slowdown in the over CLO market in terms of new issuance? And then maybe risk retention rules in December may affect the business and the valuation of Ivy Hill?.

I'll hit on the last point first, because it's not really a big issue for us. Risk retention, obviously creates problems for folks who don't want to own equity in their own vehicles. We obviously retain significant equity in almost all of the vehicles that we manage at Ivy Hill.

That was the point of creating a company that we owned and controlled, and obviously could help monitor and shepherd in terms of strategic guidance. There is definitely a decrease at Ivy Hill and the value of our equity positions. You should expect it with declines in the CLO equity debt markets broadly.

I would just highlight though that the decrease at Ivy Hill wasn't all that substantial this quarter, as a couple of percentage points is less than $10 million of value and something that we'll continue to watch, but not a big issue there.

That company continues to chug along, do well, pay us dividends on a regular quarterly basis, so we're happy with their performance as it is..

And what are your expectations for new issuance at Ivy Hill in terms of middle market deals?.

Remember Ivy Hill, they manage more than just CLO structure. So they are able to, in the middle market, take another accounts whether they're leveraged or unleveraged, they're just focused on middle market bank loans. And I expect they will continue to be able to do that as spreads widen out. There's really no material update there.

It's all going to be just market driven. And their ability to collect assets, I'm sure will come in line with the ability of other middle market managers to collect assets too probably in line with some of the comments that I've already made on the call..

One quick comment, just tying those two things together, I remind people that through the downturn in and around the L.A. transaction and other, there was significant growth in Ivy Hill through the acquisition of troubled CLO managers and capital constraint CLO managers.

So people think about the acquisition opportunity and the history of the company, I think the question around capital constraint as a risk also has to just be thought of as a significant opportunity, as other people, to Kipp's point, who are less well-capitalized I think are going to become really addressing acquisitions, and not just for ARCC, but for Ivy Hill as well..

Question on buyback. So it looks like you guys haven't bought back stock in the current quarter, despite your views of an oversold industry.

Can you provide us with your thought process on the practical use of the 10b5-1, considering that balance sheet is high and then potentially further increase in the required yield on the SSLP, so potentially further unrealized losses intra-quarter..

So we haven't bought back any stock this quarter, because obviously we've been in a window where we're coming into earnings announcement, i.e., today. So I'll just a put a period on that one.

Look, there is some missed opportunities for this company around the amount of stock and I will say that we bought back in Q4, we didn't have 10b5-1 program in place we do now. I think that's a very good thing. I think you will see us use it as I mentioned in my prepared remarks.

From our prepared remarks, we are setting the parameters of those sort of as we speak. And I'll just reiterate that I think the stock at its current price very attractive, either to the company or to shareholders, whether they are existing shareholders or potentially new shareholders.

So this company will look at it the same way we would, if we're you all..

Our next question will come from Robert Dodd of Raymond James..

If I can just follow-up kind of on the acquisition question because obviously Allied worked out very, very well. One of the reasons, though, it was purchased at a steeper discount to book than the equity was issued at.

So obviously with the stock trade in the 77 here, which I do think is undervalued, but it is at 77, is one of the parameters you would look at from an acquisition that it be trading at a steeper discount than your stock currently is? Or is there any color on that issue?.

Consideration, yes for sure. Look, in a public company merger, you obviously have an exchange ratio, which is the relationship of two stock prices to one another. And of course, that is referenced back to each companies trading price relative to book, Robert.

So certainly that is an important consideration, putting that through a models key, but that's just financial model, I don't think we're anywhere in that one yet..

If I could, on the SDLP. Obviously, timing hard to figure out in terms of you growing that portfolio and just to hit a certain size before it's really ready to be contributed.

Are there any rules that would prohibit discussions between, say, SDLP buying SSLP assets? Like anything in the bylaws for either of the entities or any obscure '40 Act Rule I don't know about or is there anything that would be a problem there, or obviously, as you said, you're having discussions with GE, but they're not particularly productive, is that kind of issue off the table right now?.

Sure, SDLP could do a new transaction with an SSLP existing borrower, no issue..

And then on the other issue kind of I presume the SDLP is going to have industry concentration buckets as well, so you need a diversified portfolio.

Is there any prospect where the reaching the right scale with the right diversification in the portfolio might hit some low buckets if the assets just aren't out there, because as you say, volumes are pretty low right now.

And is industry diversification an issue for that getting up to scale as well?.

Again, we want to balance that with industry diversification. It's key in getting the initial portfolio right for the contribution of the program, but we don't foresee any issues there. We see plenty of deal flow, and obviously, are in a bunch of existing names, too, that can work for the program.

So a consideration, but we don't think a problem in any way, Robert..

One just little housekeeping one, if I can. Obviously, the bulk of your unrealized losses or unrealized markdowns related to just mark-to-market. You did have one new non-accrual.

Can you give us -- is it 90/10 markdowns versus credit issues 80/20, any kind of rough figure that you can give for there?.

Yes. Just rough numbers about 80% mark-to-market..

Our next question will come from Doug Mewhirter of SunTrust..

Most of my questions have been answered.

First, a follow-up on the buyback 10b-5 program, is it something that you would anticipate would be sort of an algorithmic really related programs that some of your competitors view? So if it's below -- as long as the stock trades below x percent of book value, you would buy x amount or would it be more discretionary than that?.

I mean that's a basic idea. So the point is that in the past quarter, it was buyback program solely subject obviously to management's discretion in price. What we experienced in the quarter was that it limited our ability to take action during certain periods where the company simply restricted. So it was exactly that.

It's meant to be something that is built around a set of mechanics that allows the company to buyback stock even during windows, when it otherwise couldn't. So it's exactly that. The details of the algorithmic approach, I'd tell you is still coming together right now, but that's the construct of 10b-15 program and why we're putting it in place..

And it's probably a little bit too obvious, but I assume that you would have to keep leverage in mind with the buyback pursuant to an earlier question where you are already sort of kind of up against the comfort zone, and if you can't sell down to the SDLP in time, then you might paint yourself into a corner, if you buy back too many shares too quickly in concurrently with a lot of investment activity..

Sure. I mean, just remember, we have natural repayments coming in that are deleveraging the company. We have a lighter investment pipeline, I think than you've seen in prior quarters. But yes, certainly, any time you're buying back stock, it increases the leverage ratio. Folks don't talk about all that much. So it's a good point.

Having flexibility in the balance sheet today is important. So yes, certainly, it's a consideration as we look at buybacks and the quantity of buybacks going forward..

My last question. Pertinent to investment activity, obviously there is unusually low number of exits, and I realize a lot of that relates to the reason that you didn't have a lot of originations either, as if there's a lot of fear out there, a lot of companies that just can't get access to capital because there's just not a lot of activity.

So would that be your expectation for maybe the first half of 2016 is you would have low exits or lower than normal industry exits and refinances and lower deal flow coming in?.

Yes, I mean, it's episodic, of course. So it moves quarter-to-quarter. Actually it's funny that you observed that. I really didn't view Q4 more then year-to-date period as particularly slow. I mean, I guess $339 million of exits in repayments in the first 45 days of the quarter is pretty big number.

We haven't really seen a meaningful slow down, I'd tell you in repayments, because of the market. I would expect that we could. I mean, that's usually the way it goes to the point of your question, which is there is less financing activity you see through your repayments.

But the numbers that we've seen both Q4 and year-to-date '16 don't really show me any indication of that yet..

Our next question will come from John Hecht of Jefferies..

I really appreciate your comments in the market earlier. First question is that just looking at, I guess, the last three quarters, the new commitment terms have been tightened in terms of the months and it looks like there is a little bit more fixed rate assets this quarter.

Just wonder, if there is any color around the strategy behind that?.

I hate to say it, but there was not..

Fair enough.

So that's the opportunity you see in the market it sounds like then?.

That's right, John. Nothing to it..

And then on the SDLP, I understand there is a lot to think about in terms of when you would kind of transfer that to the new fund in a snippet. And we talked about that your leverage would decline on the period of time when that occurs.

Is there anything else we should look for, either whether it's real or just accounting in terms of impacts in the business when you make that transfer?.

No, I mean nothing that we haven't covered in some of the prior questions about it. It's going shorter ordinary course now as expected..

Would there be any fluctuations to kind of, I guess, the average yield in the portfolio when you make that transfer occur, just given kind of the waterfall of payments?.

Yes. I mean, it goes up obviously with the current market..

I mean as we sell loans that are lower yielding today into the SDLP to have economics similar to the SSLP, I think clearly we have a benefit on the lower capital as well as an improved yield on the capital committed..

Maybe I misunderstood the point, but yes, Penni, obviously when you take this portfolio of assets and you contribute it to the program, it creates capital, right, and that the structure of the program takes in more capital from our partner, and of course, increases the yield on the existing pool that we're holding today outside the program, I think you know that too.

I didn't realize that was [multiple speakers]..

I just wanted to confirm that beyond the leverage that we'd see some type of effect to that regard as well?.

Yes..

And then last question is you guys had a fairly substantial -- and I know there is tax estimates and so forth in there, but you have a fairly significant spillover.

Given the market and the opportunities and leverage and so forth, I'm sure there is lots of considerations, but how do you think about that? And I guess, specifically, how do you think about that with potential special payments?.

Yes. I think as you know in the past, we've made some special dividends, using that numbers, it's gotten larger. I'm a little bit cautious around it now as the markets are transitioning to be a bit more difficult.

Look, I've also thought about it or we've also thought about it as a more important safeguard for the dividend maybe than ever and try to emphasize that in our prepared remarks. We're fortunate in that strong investment performance at our company has put us in a position that, frankly, not really any other company is, in today, in the space.

Couple of others, do have some spillover, and I commend them for obviously generating that on the backs of good investment performance. And we'll continue to kind of keep it for a rainy day, I think, for the next little bit. But yes, I'll take your point John, I mean, its getting to be a large number.

And in past periods, we tried to say that comes out as a special dividend based on kind of the cycle of realized gains. And this was a good realized gains here, there is no doubt.

But I think based on what's happening in the markets we're choosing for the time being to be cautious around that number and retain it rather than payout specials at the end of Q4, as we've done in the past..

Our next question will come from Jonathan Bock of Wells Fargo Securities..

Wanted to perhaps ask the question Mr. Dodd's question a little differently. Kipp, you mentioned that dilution was a consideration as it relates to purchases. My question will be a little bit more straightforward.

Are you willing to dilute investors on a NAV basis overall to make an acquisition?.

I'm not sure I can answer that in sort of a general statement, and in a vacuum, Jonathan. I mean look, if we pursue acquisitions and use our stock to do it, we'll want to make sure that it's good for shareholders.

And obviously, the way that we think about that is it's good for the existing and future dividends, it's good for book value, and certainly, that it would be accretive from an earnings per share perspective. Of course, modeling issuance and stock below book creates a risk of book value dilution, right.

So it really just depends on the math of a certain situation..

So turning next to Varagon, can you walk us through the ability to actually form the entity as it relates to capacity constraints tied to non-qualified assets? Where do you sit? And how do the guardrails of that 30% of assets, of non-qualified asset limitation, how does that factor into your ability and willingness to move forward with the Varagon transaction?.

I mean it's certainly one of the constraints. We actually feel that we're in a pretty good position today, Jonathan, to work through the contribution into the program. I'm looking at Penni now. I mean, she has the numbers in front of her and we don't have them in front of us exactly around the 30% test going kind of through the end of the year.

But we very much view it as on track for this year. It really depends more on the warehouse portfolio, the diversity of that portfolio and all that, but I think I was more concerned about that nine months ago than I am now..

So Kipp, you mentioned last quarter that there is a close number related to diversification of assets that's less of par value to get this done, but more eight to 10 assets that you are originating or so could then be a key number. You mentioned that today you are at six for the Varagon partnership.

The question that we would have is when you look at six investments near-term, you look at liquidity, you look at the potential for asset marks as well as increasing usage of your balance sheet revolver to be used for the debt payments that are likely coming due in '16.

How do you have capacity to hold some 7%-ish paper to kind of get you over the finish line, if you're going to keep leverage constant?.

Yes, I mean it's a good point. One of the things I'll say is the deals that we're generally speaking working through for SDLP have focused on slightly smaller deals and maybe you're used to for SSLP as it kind of trucked along for maybe 2013, 2014, where I think, as you know, we're buying and holding $300 million, $400 million deals.

SDLP in the early deals there were focused on slightly smaller names, obviously, building both industry, but also issuer account diversity. It's easier to do with just a smaller final holds, but all your points are well taken. I mean those are the balances that we're working through as a management team today.

We're obviously committed to the success of that program. But as we deal with the challenges that you laid out, they're all considerations. So we're taking our time. We're working on slightly smaller deals there and just pushing forward, as advertised..

And then one item as it relates to the SSLP is, I believe, the partnership recently kicked out an investment to you Instituto de Banca, I believe this is the name you've talked about. The private school operator in Puerto Rico.

The one thing I'm trying to understand is why a senior lender in this partnership would effectively divest collateral to you to allow you to pay down the sub-notes of the security, and then you put that Instituto on balance sheet.

Can you walk through that October distribution? And why it occurred?.

Yes. And there is some complicated accounting hereto, so I'm going to have to invoke Penni on this. But let me talk about EduK specifically, because you know it's been a point of discussion in the past. I think there's a worthwhile update. We actually did complete restructuring of EduK in Q4.

One of the key components of that restructuring was actually SSLPs divestiture of its participating in that loan. I would tell you that that divestiture, which was for the benefit of ARCC, today came in at a very attractive price, but I think most importantly allowed us to kind of control this from a go-forward basis.

So SSLP no longer has an investment in EduK. The entire loan at that company today is held by ARCC. I think a small portion also resides at Ivy Hill. But the good news there is we've converted the entire investment into a preferred equity investment.

It remains on non-accrual and that we restructured it to be a preferred equity investment with just a pick coupon. The preferred equity is the highest ranking security in the capital structure. And we just feel that this capital structure with no debt puts the company in a much better regulatory position, as it relates to accreditation of the schools.

So Puerto Rico has been a difficult backdrop. And obviously, the oversight of the DOE on a company with a difficult balance sheet has not helped the company operate or turn around. And I think we finally achieved an outcome that positions us for a much improved recovery down the road.

So I'll stop on that and say that we'll welcome any further question on the point. But I could turn it over to Penni for a moment just to help us all with some of what was somewhat complicated accounting issue as it relates to that loan coming out of SSLP..

Yes. I mean, we did have a good outcome with GE on how to deal with this and to get control of the asset. But from accounting perspective, I'll walk you through the steps that we took. But if you have any questions, anyone on the phone after this, we're happy to walk through with you one-on-one.

But basically, prior to the restructure of EduK, we and the SSLP were both invested on a pari passu basis in the same first lien loan in EduK. So to effectuate the restructuring, GE consented to us buying the loan out of the SSLP for a nominal amount, and thus the SSLP distributing the full loan to ARCC.

So then what happened for GAAP accounting purposes is, it was accounted for the distribution. So the SSLP distributed its EduK loan to ARCC at fair value, which at the time of the transfer was $67 million, thus reducing our cost basis in the SSLP by $67 million and increasing our cost basis in the EduK first lien loan by the same $67 million.

So then in the restructure, ARCC then exchanged our total first lien loan exposure with an aggregate cost basis of $121 million and to the small first lien and preferred equity that Kipp mentioned..

So you asked a question of why do the senior notes in a program sell so uneconomically. The answer is, number one, they do not have a lot of interest in the business anymore. They're not in the sponsor finance business.

So they're doing things perhaps in a transaction of that nature that they view is difficult that they might not do otherwise, and I think that's good. For us it's a positive outcome.

I think also, look, when you think about how conservatively built that program is today in terms of its underlying ratio of senior notes to sub-notes, I think they just view, GE does views I think rightfully so, very much rightfully.

So their senior notes is having limited to no risk and it can incur collateral coming out of the pool at virtually no value and still not impairing them. We're creating a lesser security for them in anyway..

And I think it is worth mentioning that GE still incurs a proportional loss on the EduK loan. Yes, so economically they still incur their loss on the loan. So we're not disadvantaged in that way.

But we could potentially benefit to the extent that any future recovery on the former interest of the loan comes to us, because we now own and control the full restructure and asset..

And still EduK for better or for worse with a better balance sheet, with less scrutiny from the DOE, I think continues to be something that we feel, while it's been challenged, is something that we can fix. It's a very important educational provider in Puerto Rico and for a lot of the Spanish speaking students.

And it something that we're committed to making sure we achieve really solid recovery on. And I think this quarter we accomplished something pretty important towards that goal..

Kipp, you also made a mention early on that in the summer and certainly you made the comment at the Investor Day, that Ares is perhaps one of the most conservatively focused managers. And totally understand the statement in light of past and to the extent that past is prologue makes total sense.

The one thing I'm trying to balance is that the proportion of second lien and subordinate debt that you invest in, even as of June 30 to date, right, you take the September 30 results and now the December 31 results, there is a high proportion of second lien. And there's no judgment call one way or the other.

I'm just trying to understand how do you balance that when, in some cases the circles that we run into is very uneducated analysts, all of us might not understand what are we missing, because when I look at that that seems more of a subordinate move, which would run contrary to your views of conservatism..

Yes, I mean, it seems like we have this conversation every quarter. I mean, I would tell you, first things first, pick the right company. Secondly, in our second lien, we structure and underwrite all of our second lien, Jonathan, so not every second lien is created equal.

And in fact, our second lien performance, whether they were investments we made in '05 or '09 or 2012, actually all performed quite well. And we've emphasized in the past too that they're in larger companies than most of the other folks that you'll see, as you analyze the BDC space.

And I'd argue in better borrowers and larger companies, more stable results. The problems, if look at the underperformance in our portfolio during the last downturn really came in mezz investments, right. It really came in unsecured positions where, number one, you had interest payments blocked.

You can't have interest payments blocked in second-lien securities, they're secured. If you do, you can accelerate immediately and you're a secured creditor as the same as your first-lien creditor, so long as you actually write your own documents and write good documents.

And secondly, being secured versus unsecured is really, really important in achieving recoveries, and I can't emphasize that enough.

So while that number has gone up a bit, we continue to focus people on saying or looking at kind of what the total second lien and mezz exposure is at this point in the cycle relative to where we were as a company back in '08, that's about half of where we were back in '08.

So we do think that we're much more conservatively positioned even today than we were going into potentially more difficult environment..

And then, finally, if you think of the CLO equity markets, I know a lot of people have discussed that Ivy Hill and risk retention. Some folks in the BDC are marking CLO equity down to where it's close to their mark-to-market.

The question that I would have for you is, of that Ivy Hill value, how much of that is actual CLO equity asset, because you invest in the own equity of your deal, so Ivy Hill obviously holds the CLO equity on its balance sheet and its general relative mark? And how you're thinking about that value next quarter in light of where CLO equity trades today?.

I mean, we've said this in the past. So I'll say it again, the value at Ivy Hill is really twofold, right. It's the value of the manager, which obviously comes from net profits we generate from managing vehicles as well as investments that we have in funds, that's a second source of value.

And I said this in the earlier question around risk retention, I think it was Chris. A lot of what Ivy Hill is doing today is managing non-CLO money, right. So I think that we have less valuation risk in some of the securities that we have there, because our vehicles are lower leveraged and we feel that we have better visibility into the portfolios.

We know that those portfolios have less oil and gas and commodity exposures than many. We know that they have lower triple-C baskets and triple-C exposure than most. So a significant portion of the value obviously is investing in our own funds. We think we've build the right structures and we think we've build the collateral basis at Ivy Hill.

I should give them credit for having done that over last couple of years on our behalf that allows them to withstand. The market it's a little bit better than maybe some other CLO managers who don't have those benefits..

We have a follow-up from Robert Dodd of Raymond James..

Just a follow-up on the market color. Obviously, spreads have started to widen, but your color seem to indicate the attachment points are still, if anything drifting up a tiny bit. Obviously, last cycle, CLO activity dries up, scarcity capital typically or in prior cycles like that attachment point is tended to head south as well on new deals.

There is obviously a lag in the middle market versus broader parts of the market and the broad market isn't seeing that come down yet.

Is there any color you can give us on whether we should expect that to happen with a bit of a lag or whether you just think it's not going to happen this time around?.

I think what you're seeing is our Q4 numbers and there is a lag. I would tell you that we've already seen kind of a-quarter-to-half a turn of leverage reductions in new deals, even through now to the middle of February, and I expect that to continue to go down.

So I think the way you're seeing in Q4, I'm hopeful it represent sort of the peak for the portfolio, and I'd expect the market will help us walk that weighted average debt to EBITDA down and we think that happens in connection or at the same time the spreads widen as well. Maybe wishful thinking. I don't think so..

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Kipp deVeer for any closing remarks. End of Q&A.

I really don't have anything further, but I'll thank everybody for their time and look forward to seeing everybody now that the quarter is behind us, and we'll probably see folks out on the road. So have a great day..

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 approximately one hour after the end of this call through March 9, 2016, 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 10078263. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. Thank you for attending today's presentation. You may now disconnect..