Kipp deVeer - CEO Penni Roll - CFO.

Hugh Miller - Macquarie Ryan Lynch - KBW Jonathan Bock - Wells Fargo Rick Shane - JP Morgan Arren Cyganovich - D. A. Davidson Chris York - JMP Securities Derek Hewett - Bank of America Merrill Lynch Doug Mewhirter - SunTrust Robert Dodd - Raymond James.

Good afternoon. Welcome to Ares Capital Corporation's First Quarter Ended March 31, 2016, Earnings Conference Call. At this time, all participants are in a listen-only mode. As a remainder, the conference is being recorded on Wednesday, May 4, 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 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 to 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 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 first quarter ended March 31, 2016, earnings presentation is available on the company's website at www.arescapitalcorp.com, by clicking on the Q1 '16 Earnings Presentation link on the home page of the Investor Resources section. Ares Capital Corporation's earnings release and 10-Q are 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..

Thanks, operator. Good afternoon, and thanks to everyone for joining us today. I'll start by providing a quick summary of our solid first quarter earnings results. We delivered basic and diluted GAAP and core earnings per share of $0.42 and $0.37 respectively, including net realized gains of $0.09 per share.

Our net asset value grew sequentially from $16.46 at December 31, 2015 to $16.50 at March 31, 2016. Our credit statistics also improved as our loans on nonaccrual declined from 2.6 percentage cost at the end of 2015 to 1.3 percentage cost at the end of the first quarter. At fair value our nonaccruals are now at 0.6% of our total assets.

Overall we're pleased with how the portfolio and the company as a whole are performing. We declared a second quarter dividend of $0.38 per share which is consistent with our first quarter dividend.

When we held our last earnings call few months ago, we're experiencing significant volatility in the capital markets, amidst uncertainty around oil and other commodity price declines, questions about the slowing of global economic growth and general confusion regarding the direction of interest rates around the world.

Since that time the credit markets in the U.S. have generally experience the modest recovery in terms of pricing, but we continue to see a slowdown in transaction flow, in the broader loan and high yield markets as well as the middle market.

We are happy to see the fear in the market that was so prevalent in the fourth quarter and the early first quarter subsiding a bit, which eases concerns that we are headed for more significant market correction in the near term.

With that being said we believe this recovery is largely technical and without a meaningful change in fundamentals, our attitude and our approach is generally unchanged. We remain cautious but confident that we can find select transactions with strong relative value attributes, amidst the broad opportunities set that our team is able to access.

As you know the first quarter tends to be a seasonally slow period for new originations and amidst the market volatility this year was no exceptions. We funded approximately $490 million in new loans during the first quarter of 2016, a mix of exits, syndications and pay downs on existing facilities led to roughly $480 million of repayments.

I'd like to turn the call over to Penni Roll, our CFO, to discuss our first quarter financial results and to provide details on recent financing activities..

Thank you, Kipp. Our basic and diluted GAAP net income per share for the first quarter of 2016 was $0.42 compared to $0.05 for the fourth quarter of 2015 and $0.32 for the first quarter of 2015.

Our basic and diluted core earnings per share was $0.37 for the first quarter of 2016 as compared to $0.40 for the fourth quarter of 2015 and $0.37 for the first quarter of 2015.

Our first quarter core earnings were relatively -- were reflective of the seasonality of our slower deal volumes that we’d often see during this time of the year and while lower than the fourth quarter they were in line with core earnings in the first quarter of 2015.

Our higher GAAP earnings in the first quarter were primarily driven by net gains of $0.06 per share compared to fourth quarter net losses of $0.42 per share. The net losses in the fourth quarter were mostly unrealized and primarily driven by widening spread environment whereas during the first quarter 2016 spreads were generally stable from yearend.

For the first quarter 2016 our net realized gains on investments totaled $26 million or $0.08 per share and we had net unrealized losses on investments of $5 million or $0.02 per share, which included $18 million or $0.06 per share of reversals of net unrealized appreciation related to the net realized gains on investments.

We continue to generate solid net realized gains from our portfolio. As of March 31, 2016 our portfolio total $9.1 billion of fair value and we had total assets of $9.4 billion.

At March 31, 2016 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 9.2% as compared to 10.1% and 9.1% respectively at December 31, 2015.

Stockholders' equity at March 31 was $5.2 billion resulting in net asset value for share of $16.50, up 0.2% compared to the quarter ago.

As of March 31, 2016 we had approximately $5 billion in committed debt capital consisting of approximately $2.7 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 54% of our total committed debt capital and 67% of our outstanding debt at quarter end was in fixed rate unsecured term debt. We believe that this majority fixed rate funded liability structure combined with our predominantly floating rate asset mix, leaves us well positioned for a rising rate environment.

During the first quarter 2016 we repaid $575 million aggregate principal amount of our 5.75% convertible notes at their maturity. The repayment of these convertible notes helped to reduce the weighted average stated interest rate on our drawn debt capital to 4% at March 31, 2016 down from 4.4% at December 31, 2015.

We anticipate that the repayment of this higher cost debt should continue to provide earnings benefits going forward as it did in the first quarter.

In April we amended our senior secured revolving credit facility to among other things, extend the re-investment and maturity date by one year to May 2020 and May 2121 respectively for $1.2 billion of the total facility amount. We are very appreciate of the continue support of the twenty banks in our line of credit.

During the first quarter of 2016, we re-purchased approximately 393,000 shares of our stock a total cost of $5.5 million at an average price of $13.94 per share. While we would have liked to purchase more at these levels, the stock recovered from these levels quite quickly.

We stand ready to take advantage of any additional weakness in the stock going forward with active share repurchase initiatives in place. We believe it is important to have this tool in place and we recently amended our $100 million stock repurchase program to extend the term of the program from September 2016 to February 2017.

As of March 31, 2016 our debt to equity ratio was 0.78 times and our debt to equity ratio net of available cash of 57 million was 0.77 times. At March 31, 2016 we had approximately $967 million of undrawn availability primarily under our revolving credit facilities that are lower cost, subject to borrowing base, leverage and other instructions.

Finally, as Kipp stated we announced that we declared a regular second quarter dividend of $0.38 per share. This dividend is payable on June 30th to stockholders of record on June 15, 2016. In addition, we estimate that undistributed taxable income carried forward from 2015 into 2016 was approximately $258 million or $0.82 per share.

We believe that our current dividend levels while supported by our earnings, but this spill over income does provide additional cushion in that regard. And now, I would like to turn it back to Kipp for some additional comments..

Thanks, Penni. I'd like to spend a few minutes discussing the positive developments in the portfolio that is referenced earlier in the call. As I discussed on our yearend call in February, our portfolio management team has been hard at work for quite some time on the small handful of challenging situations in the portfolio.

To that end I'm pleased to report as the two of the larger investment previously held on nonaccrual universal lubricants and competitor group returned to accruals status during the first quarter.

We valued our debt investment in universal lubricants above our cost basis, as we expect in near-term assets sales of the company to generate a meaningful pay down on our loan and we believe further recoveries from future activities to deliver incremental value. This investment is likely near a positive resolution after much hard work.

In regards to the investment in competitor group we achieved a balance sheet restructuring in the first quarter which allows this company more operating flexibility and we continue to work with our partners at competitor group to maximize the long-term value of the business.

Competitor group is a solid company with an exciting portfolio of enthusiast, athletic events that can now be repositioned for growth without the constraints of an over leveraged balance sheet. With these loans back on accrual status we have only a few investments of any meaningful value on nonaccruals.

The nonaccruals now instead of 1.3% of the portfolio at amortized cost as I mentioned earlier 0.6% at fair value at March 31, 2016. These levels are very low by comparison both to our own history and to the experience of other lenders and we recommend our team, it’s done a fabulous job working through these situations.

We believe there are ability to manage through our non-performing loans is a meaningful competitive advantage for ARCC and has help to differentiate us as one of the few BDCs that’s been able to consistently deliver NAV growth overtime. Switching gears to our recent investment activity.

The first quarter demonstrated a modest level of new activity and we remain focused on deploying capital flexibly in what we see as the most attractive opportunities. As part of this strategy we continue to build out portfolio for the SDLP, our joint venture with Varagon and AIG.

As of quarter end we have closed seven transactions, it totaled approximately $670 million in funded commitments that are ear-marked for sales to the SDLP and our current investment in these loans totaled to roughly 355 million today.

We and our joint venture partners continue to see a healthy pipeline of new investments appropriate for the program and we are getting closer to the diversification required to convert these assets into a fully ramped program that we believe will deliver improved risk adjusted returns to ARCC.

Before I conclude let me provide some quick comments on our first quarter and investment activity. Despite light volumes in the middle market and our continued patient approach we continue to leverage our strong direct origination platform to find attractive new opportunities.

From April 1st through April 27th of 2016 we made new investment commitments totaling 123 million and sold our exited $335 million during the same period. Allowing for some post to quarter end deleveraging. Two of these assets.

Netsmart Technologies and Nappa management services generated meaningful realized gains for us that will be recognized in the second quarter. As of April 27th our total investment backlog and pipeline stood at approximately $260 million and $210 million respectively.

These investments are all subject to final approvals and documentation and we can assure you that they will close. So in closing we are very pleased with the performance this quarter, with the modest increase in book value and a decrease in our nonaccruals.

We are beginning to see the benefit to our earnings from a lower cost of capital and our share repurchase program provides us with that effective tool to opportunistically enhance EPS and shareholders' value.

We’re confident that ARCC is well positioned today and we continue to believe this is a transitioning market that is likely to offer increased opportunities to ARCC to achieve attractive risk adjusted returns as we move forward through this credit cycle. That concludes our prepared remarks. I would love to open the line for questions..

[Operator Instruction] Our first question is from Hugh Miller of Macquarie. Please go ahead..

I wanted to start off on asset quality, I appreciate some of the color you guys gave regarding the shift in the non-accrual status. In terms of sectors as we look at -- we’ve started to see outside of energy, a little bit of deterioration and in retail some other areas.

As you guys look at that kind of the landscape in the coming quarters, how are you guys thinking about it in terms of, is it just really looking at individual credits in terms of risk or are there certain vertical that you are less enthusiastic about and seeing greater risk.

If you could just provide some color, as you think about asset quality?.

Sure, I mean I would tell you that when we look at the existing portfolio on the investor presentation that’s out there on Page 11, that will show you sort of that diversification by industry. We always -- I feel outperformed by avoiding certain sectors.

So you will see that we deemphasized things like oil and gas, media, retail and restaurants at certain parts of this cycle. Construction home building and auto, the things that tend to be very cyclical were in our view if you are just making what you hope [ph] of performing loan, you really don’t get paid for that risk.

Again, we have seen some weakness in our oil and gas portfolio, but it's very small. We haven't seen any meaningful weakness across any other industry sector, Hugh that would say is systemic or worthy of the conclusion.

For us it's all about having built a portfolio that we think withstands an economic and/or credit cycle and we think we have that today..

Okay, that’s helpful, thank you there. And I guess, looking at the portfolio activity, it looks like you guys were a little bit more active in exiting second lien positions in both the first quarter and into April.

I am wondering is that just kind of coincidence or given how light the origination opportunities are out there, were you just seeing more of an appetite out there for second lien assets in the market place, any follow up there?.

Well, the two substantial exits in April, NetSmart and Nappa, where both deals we were marginally involved in one going forward and not so much in the other one, so there is an exit there on the second lien side.

I would tell you that two of the new deals that we did in the quarter, one was actually exited within the quarter, so we did a deal for a company called MedAssets that actually came in and out during the quarter, it was $100 million, second lien deal that was really a bridge to future financing.

So we did 100 to 500, but it was excided in the quarters. So that probably skews the numbers a touched. Another exit in the quarter was in an existing portfolio company called Sernova, where we remain in the credit, but have a smaller final hold in new deals.

So probably just more circumstance around particular names than the market or any desired to exit second lien..

Okay that’s helpful thank you.

And then, just a question to SDLP, I am just trying to get a little bit color on kind of the opportunities there, what are you seeing in terms of yield for those assets relative to the overall portfolio and to the SSLP?.

Just so I’m clear on the question, I’ll answer in the way that I think you are asking, which is, when we are originating those loans with our partner -- their whole loans, first lien or unitranche loans that obviously tend to have yields that are lower than the aggregate portfolio today.

So, to pick a range call it LIBOR 6 maybe LIBOR 5 even on the bottom end to LIBOR 8.

When there is a conversion of SDLP obviously it will eventually take on the same treatment as SSLP, which is that portfolio of collateral gets put into a program and then by taking on significant capital in a structured fashion from AIG and from Varagon, there is the ability to improve returns on those assets.

Hopefully I’m answering the question the way that you are asking it. But if I didn’t feel free to ask a clarifying question..

No, no I mean that gives good color.

I am thinking about in terms of the effective yield for ARCC when you consider the additional feel anything like that? And just trying to get a sense of what the appetite in a market place right now? And kind of a shift in some of the credit spreads, how you are thinking about in terms of as we see a wind down of yield coming off of the SSLP and seeing the ramp up of the SDLP, how should we thinking about in terms of incremental yield as we see that transformation occur over the next several quarters?.

Yes, there are two benefits obviously in that as we exit, the way that the treatment for the conversion works, right is, we effectively exit those loans as ARCC on balance sheet investments, they exit and because we are generally holding about half as I mentioned in the details of the warehoused assets, that converting to something less than half, so upon a conversion we’ll see a return of capital to ARCC to that terminology right, we’ll effectively see a repayment.

So the size of our investment in the same pool will go down and the returns on the smaller investment, which remains -- it will eventually the single name investment into the SDLP, the same way that you see SSLP, we’ll see dramatically higher yield.

So obviously you get a benefit of removing lower yielding assets and you get the benefit of incremental capital and you get the benefit of the remaining investment clicking through at a roughly higher -- at a meaningfully higher yield. Also it would meaningfully higher yield to where SSLP currently stands as well. .

Our next question is from Ryan Lynch of KBW. Please go ahead. .

So broad based loan volumes were clearly down in Q1 and that’s, pretty typical of the Q1 season. It looks like so far core to date, your guys loan value, volumes -- your origination volumes I should say were down and are pretty weak.

So are you seen any market dynamics change to potentially increase, the amount of originations you guys can put out in Q2 and if not what sort of market dynamic need to change you think where you -- we can may be get more buyers and sellers, business to engage, any kind of help, further loan volume growth?.

We’re not seeing -- thanks for the question Ryan, we’re not seeing frankly a whole has to change as I tell you, we’ve been busy on a handful and I means that’s just a handful of deals. A lot of those deals are competitive, I mean these are obviously the things they get through the screen.

So they’re more -- the quality names are more competitive, I would say that. I think that the dynamic that needs to change right now is, number one the fourth quarter and in even the first quarter you seeing a really dramatic declines in the bank’s involvement in the leverage finance markets in particular, in mid-market.

So there is just less and less activity there.

I’d say there has also been lack of any apatite on the behalf of investors for dividend or recapitalization deals so it’s really been a focus for 6 months on new money deals and the issue around new money deals is, I think an equity issue on the LBO [ph] side, multiples have gotten very high for private equity firms and as they look around it, the B quality and below companies, you really want to pay less and/or see more growth, and they haven’t had the ability to pay less and/or see more growth.

So I think for us it’s less transaction flow right now from private equity because there really is a buyer-seller dynamic, where they’re not meeting in the middle and that usually, clears itself up over time one way or the other.

But I think we’re just at a little bit of a pause here years, some of those dynamics gets sorted out, it’s really not for a lack of capital in the direct lining markets, there is plenty of capital I think from ARCC and from others to support high quality transactions at reasonable multiples with good pricing, but there are just fewer of those today, I think amidst all the volatility and uncertainly that we’re feeling a little bit of pause from here after call it four to six months.

.

Got it and that’s great commentary.

Just falling up on the question with the SDLP, I mean you guys are obviously building a pretty sizable portfolio, it sounds like you guys are well in your way to having a portfolio, almost a size to drop into the SDLP, can you provide any guidance on potentially the timing of, when you guys plan on dropping at that end, is that something should expect, in the near term or is that something you guys are going to, continue to, continually building for the next couple of quarters and may be kind of a back half of 2016 type of event?.

And I without providing guidance, we’re a heck of a lot closer and I mentioned that we’ve got some good backlog in pipeline around names that could work for SDLP. So it was really the next couple of deals that we are hunting right now for that program, actually come through or not.

It could be pretty soon if we go kind of 3 for 3 or 4 for 4 on those names, but if you go 1 for 4 it will shift back and I would say, very certain I think at least from my prospective based one the warehouse portfolio and what we see in the pipeline that it’s kind of a next six month event..

Okay great, I got a couple of technical questions. So this quarter it looks like Ivy Hill contributed about $10 million dividend, it looks like over the previous two years in Q1, Ares received about a $20 million dividend from Ivy Hill.

So this quarter on Q1, it dropped down to 10 million, now typically the remaining quarters, two through four have been $10 million dividend, so how should we be thinking about that dividend from Ivy Hill, should expect to remain at the $10 million like it has been, typically the Q2 through Q4, or should we expect any uptick in these, in Q2 through Q4, considering the Q1 dividend was kind of lower from a historical standpoint..

Yes you remember, I’ve lost track of how many years you go now, but [Multiple Speakers] couple of years ago, Penny is saying, two straight years of actually taking some capital out of Ivy Hill.

Those Q1 kind of incremental $10 million dividends on top of the regular 10, we viewed as special dividends coming up to ARCC out of Ivy Hill, because there had been significant realized earnings because of gains at Ivy Hill.

Their performance had really allowed them to be more capital efficient, they had excess capital and obviously dividend at that backup, that excess capital is sort of less plentiful having done that a couple of times already.

And I would tell you that we look at Ivy Hill is actually something that as the market year changes, maybe more of a growth avenue for us going forward.

We're assessing that right now but again, the quarterly dividend that we targeted from Ivy Hill based on their earnings is 10 million a quarter and I'd just think of that 10 million that it’d come through in the previous two first quarters as truing up retained earnings from the past.

And then we got asked lots of questions about, do you expect to do that every year and we said, well as the company has done so well we're in a position to do it now, which was this time last year and we had done it the prior year, I think we just made a determination with that company that they were better off perhaps retaining some of that capital for potential growth this year and beyond..

Sure, makes sense.

And then just one more modeling question, so you guys has June 2016 controllable notes, obviously going to be due in June, are you guys comfortable with drawing down additional capacity from your credit facilities or replace those and have that additional draw downs on your credit facility or would you guys like to replace that with some more unsecured debt?.

Penni will give you a more detailed answer, but my answer is yes, we're comfortable with it. .

Okay..

That would probably be my answer too, but yes. We're comfortable, we have ample liquidity to meet that obligation in June without needing to go with the term market, but overtime we would like to go back and term out our liabilities in the term markets, but no concerning on the near-term maturity. .

Okay, great. .

Our next question is from Jonathan Bock of Wells Fargo. Please go ahead..

Kipp as I look at controlled affiliate company investments, and particularly interest income line in that, which I believe has a heavy amount or sold amount of SSLP running through it, can you walk us through why the line declined by about 15% from 74 million to run rate was about 63 million this quarter?.

We're just taking a look at this financial Jonathan, the pull out, thanks for the question, and pull out exactly, what's there other than SSLP if anything,.

We have some other items, but would have to go back to [Multiple Speakers]..

Yes, we'd actually have to go back and just reconcile the number Jonathan, I don' know offhand, we obviously disclosed a modestly declining yield on SSLP. I'm sure that's a portion of it, but I don't think it's all of it. So let’s go back and take a look..

That helped only because of 15% decline, I was also curious, does the rising impact -- does the impact of a rising LIBOR put additional pressure on SSLP returns in that, you likely have floors on your unitranche investments, but my guess would be that the liabilities that GE holds would rise in the event of LIBOR went from 30 to 60 bps.

Yes, there is some modest sensitivity and I don't want to get into the proprietary building of that document from way back but there is a sharing of LIBOR floors mechanism in that document that mitigates that a bit, but you are right because there are floating rate assets with floors, liabilities without floors and that they don't correspond one-to-one, there is some modest deterioration as LIBOR goes up..

Okay. So, looking at that, then a question, I appreciate the commentary on the dividend, it relates to Ivy Hill.

Kipp, Penni, does Ivy Hill actually own a CLO equity collateral on its balance sheet?.

Ivy Hill owns no third party --..

I mean, meaning like for risk retention -- sorry, Kipp.

Maybe I should rephrase, for risk retention purposes do they hold controls stakes in the CLOs as they manage?.

I'd have to go back name-by-name, they obviously have both debt and equity investment at Ivy Hill, in their own funds.

The purpose is not for risk retention compliance, it's frankly just a mechanism for that company and then obviously it consolidates up and our financial results, our company to invest in their vehicles because we think they provide really attractive rates of return whether it's the BBBs down through the equity, but driving compliances with risk retention is not the initiative, it’s really an economic decision..

Fair enough then I'll switch it, if there is some form of collateral if CLO equity held at Ivy Hill, how are we still able to maintain, what is close to have been the same fair value for the last year when CLO equity has fallen precipitously..

Yes, I'd tell you, if you go through the portfolios that Ivy Hill holds and funds that they manage, they're managing exclusively middle market deals..

Okay..

So the typical middle market deal tends to have meaningfully lower leverage, call it anywhere between 2.5 and 5 turns of debt, depending on where you set it up vis-à-vis a larger cap CLO, which obviously can be leveraged 10 to 12 times. So that equity inherently is meaningfully more volatile in a large cap CLO than you’d see in middle market deal.

Think also that a large cap CLO tends to see its assets be more volatile because they’re in liquid assets. Ivy Hill has quite a lot of its assets in middle market names which don’t trade and really get modeled differently than perhaps just on market price. And third they’ve done a really, really great job managing the collateral.

So their track record in terms of asset level underwriting is meaningfully better than what you’d see in terms of asset level quality in most CLOs. Importantly they have virtually no oil and gas investment at all in their funds, which obviously compares quite differently to what you’d see in other CLOs.

So that's just one example on the asset side, so there are couple of different reasons and you’d probably suspect, we know the CLO business pretty well, right.

I mean just as a reminder we manage at Ares about $20 billion of CLOs today and we also have investments here at the firm outside of ARCC managing about $3 billion of structured products and investment in other people’s CLOs.

So we’re very much in that business, we just don’t organize the business inside the BDC because we don’t see it as the right place to own CLO investments.

So there are a whole handful of thoughts around that as we debate valuation with that group, but those are some of the highlights that we discussed with Ivy Hill as we think about valuing the investments that we have in their funds..

Got it and then I also understand the management fees that come off of that for the collateral you know, they'd be managing. So maybe jumping to two more, so as it relates to qualified assets kind of a question arises, so with SSLP, when and how that's fixed to TBD right, but right now it's still a great investment, a diversified investment.

But we start to bud up against the ability to take on other non-qualified assets, right.

Now certainly you can do it if you want it, but in terms of replacing something or putting something on of similar size that just cannot be done at this time with SDLP and so the question is, how are you trying to manage your non-qualified bucket and do you see that as a limiting factor to earnings growth going forward?.

I think you asked me this question six months ago and my response was, carefully. So, I'll repeat my response.

So we think based on our modeling today and obviously things move around that we have the ability to convert the existing warehouse loans in SDLP at the size that we are targeting, as I mentioned during Ryan’s question within the next six months.

It's obviously a very significant constraint, if anybody models out to see that once you contribute those assets to SDLP and it creates bad assets out of good assets that we are very, very tight on the 30% basket. So it is a constraint.

We've got a whole lot of ideas just to how we are managing it, but for the time being we do see the ability to make that conversion without having an issue on the 30% basket, and I think we have some tools that you'd probably imagine are in process right now to mitigate that going forward, because it is a constraint that something that we spend a lot of time thinking about and are working through right now..

Sure. And then another question that I didn’t ask, would be or maybe I'll ask it in the different way because it's still somewhat similar. This is an eliminating factor and clearly what fixes it is growth, right. Growth in equity.

Now growth in equity can be done in two ways, it can be done through issuance below NAV, which is not a good idea, or issuance below NAV to acquire someone else.

And the question that I would put out there is that do you believe it's appropriate for investors to experience NAV dilution today for the potential for earnings growth tomorrow, when we know that the loans that get put on the books are off fairly limited lives and so as a result earnings impacts over time, I mean, unless stuff bought at deep discounts it could be earnings decretive or earnings negative event.

Help us understand book value dilution in relation to earnings growth through either issuance below book or through issuance buying a competitor at a higher price than stated price to NAV?.

I think to your point, I don’t view the growth -- growth would be an easy way to solve your question about the 30% basket. So if the stock was trading at 1.3 times book we’d be in a different world than we are in right now, but we are not.

So we are managing the company as if we have no access to the equity market and that’s why we are doing it carefully. I don’t particularly like the idea of issuing stock below book, period. Would we consider it in certain circumstances, I think we would, but it would have to be very accretive.

If you see book values dilution you would have to cure it very quickly, so obviously make sense to shareholders I would think.

I don’t think you should expect to see us, look at the 30% basket and say while doing a dilutive equity deal so that we can raise equity to ramp SDLP because it's can generate 15% cash and cash return and may lead to earnings growth. I wouldn’t expect that one from us, so..

Appreciate it guys. Thank you for taking my questions..

Our next question is from Rick Shane of JP Morgan. Please go ahead..

Most of them have been asked and answered, but I wanted to follow up on Hugh's question related to the funding strategy. By my estimates there is about $20 million saving replacing the Feb '16 converts with -- and putting them on the revolver. There is another I don’t know $7 million or $8 million from replacing the June '16 converts on the line.

Penni you alluded to the idea of going back to the term market, given where we stand right now and how attractive those facilities are and some of the challenges in the unsecured market.

Does it make more sense to just think about plain vanilla swaps as a way to effectively lock in the rates on those facilities?.

I think what we said -- we agree with you Rick and talk about this in the question, we talked about this quite a lot last year, that we had real opportunity to lower our cost of liabilities and we have been doing that, and your math is pretty good.

We thought that there was $0.05 to $0.10 of earnings accretion in the company on a pro forma basis just from sort of moving through the near term liabilities. Obviously it depends as to whether you draw down roughly 2% floating rate money versus borrowing, fixed rate 4% money. I think we will do both.

The market is there for a five or 10 year high grade deal at what we deem are long term rates that are attractive for the company, I think we’ll take advantage of them, trying to again be oriented towards more than just the next quarter.

But there is no doubt obviously that being in the revolving facilities on a funded basis saves your couple of pennies over the course of the year, and it’s just a question of what you scarifies to earn that couple of pennies versus what you actually get..

Do you think there is a enough efficiency in the swaps market that you can potentially sort of split the different and give up some of those economic but still wind up in a better situation than you were before, better situation meaning accretive, I’ll use Wall Street speak..

We’re sort of shaking out heads at one another, it's not something that we spend a lot of time with bankers on or with our lenders on. And not something that we pitched on a whole lot, it doesn’t mean that we couldn’t get smarter and go see.

But as Penni and I and some others in the room are sort of shaking our heads all at one another, I am not sure that -- it’s super obvious to us as to how we would accomplished that Rick..

Okay..

[Multiple speakers] facility to have the revolver capacity to be able to repay at any point in time and use up for funding flexibility and terming out liability. So [technical difficulty] for how much you want to put derivatives around something you want to flexibly to repay..

Got it [Multiple Speakers] Okay, who knows, it’s either a really out there question or a smart question, time will probably tell..

Yes thanks..

Thanks guys..

Our next question is from Arren Cyganovich of D. A. Davidson. Please go ahead..

Thanks, you had mentioned a little bit of I guess competition for higher quality investment opportunities, are you seeing that more on the unitranche side or just broadly across first and second lien middle market investment?.

It's just different from situation and the situation really depends, at the end of the day we don’t dictate to our clients what solution they’d take, they dictate to us their preference for borrowing and so the flexibility of our capital obviously is a wholemark of how we like to communicate with our partners and it continues but it really.

We're agnostic. We will look at situations in every way and obviously we build a portfolio on a name by name basis and what we think are the right capital structures. So it really changes from deal-to-deal, I can't say there is any indication that it's better to do unitranche or better to do first, second lien or any of that obviously.

First thing the deal tends to have better security provisions and more collateral than a second lien deal, so that’s why you get paid more to own second lien and junior capital. But we looked across the entire continuum and we’re interested in high quality transactions with any of those assets in the mix..

Okay, I mean in terms of the competitors that you are seeing at the table, has it changed much Over the past six months or so, or is it a lot of the same folks that you typically see?.

It’s lot of the people, you know in the first lien business we continue see Golub and now Antares [ph], what used to be the GE probably the folks that we bump into at the most meetings. The banks I’d say, as I mentioned early on the call are less relevant.

Deal-to-deal they are really focused on bigger deals and companies that are rated, certainly single B or better, but more often than naught BB or better and they are really not focused on the middle market today in any consistent way. And that junior capital side, same group of people just much more fragmented. So secondly lien mezzanine, et cetera.

Is always kind of provided by a group of alternatives firms and private asset managers et cetera. Largely it’s a same group of people, so not a lot of change there. .

Great thanks and just lastly on the SSLP as that continues to naturally deleverage, how long is this going to be a bit of a drag for you and is there a point where you’ll be able to re-lever Chad or find a solution for that to improve the profitability there?.

Yeah I think so, I mean as it mentioned in the past, the program was set up, when it was active to be sort of three parts capital from GE and genuine, one part from Ares right.

So the advance rate that you think about it, that we had from GE was about 75% and as that’s come down, it becomes each quarter much easier to provide them with the a solution.

So I’m steel hopeful that one of these days when we show up with a committed financing at GE, then we can take them out, parts that will be a minimal to that, but for the time being, we’re kind status quo as the program runs down, and there is really nothing to report there. .

Our next question is from Chris York from JMP Securities. Please go ahead. .

Most of them have been asked an answer, but I didn’t what to get a clarifications on buy back.

So the press release references stock repurchase program, yet our peers reference a program with multiple expiry dates, so do you have two stock repurchase programs?.

Yes we segregated into the 10b18 which is obviously just our voluntary at the market program and then we have the 10b5 that is the more pragmatic sort of automatic buying program, I would say that has constraints.

So the 10b18 is always available so long as we’re not in a window, so obviously after we got call today we’ll be able to purchase stock in the market today, under the existing 10b18.

And correct me if I’m wrong Penni of the existing 10b5, is about to expire and we’re about to go just put that program back in place, so that it’s available whenever the window to this quarterly period closes that obviously allows us to buy back stock during periods were we are outside the window and outside the discussion of management to just buy back stock at the market..

And just to be clear, it is one program, we just go at it in two different ways, on executing on it..

Our next question is from Derek Hewett of Bank of America Merrill Lynch. Please go ahead..

Kipp, could you talk about the pricing environment since middle market spreads tent to lack the boarder market.

Specifically are you still seeing tailwinds from the rising spread in Q4 up till mid-February? And then additionally since high yield is -- spreads have come in into mid-February, when will we see this dynamic flow through your new originations?.

Yeah sure, I mean we taken, because of the lack of activity a little bit of a pause of that widening that you saw and that we described through Q4 and probably into may be the second week in February or something like that right around, I guess our earnings call from the last quarter was towards the end of February.

Sadly, almost immediately after that, there has been a pretty significant technical rally that I referenced.

So you seeing it kind of plateau out where I’d say a regular middle market bank deal/unitranche prices, somewhere between L5 and L7 depending on the credit quality and the assets behind that flow from there, it was defiantly tied of that, six months ago. So hopefully that’s some helpful, guidance.

And then with high yield coming back in, I don’t see that having a meaningful impact to see spreads decline.

But I did say something about the capital availability, there is definitely fixed income managers, whether they have lone money, high yield money on middle market money looking to put it to work and to May 1 and I think people are anxious with limited transaction volume.

So, it’s possible, but we just don’t, we don’t know yet, but I think there is a lot of price discovery in the market right now around new transactions..

Okay great and then big picture, at least for the bigger BDCs industry valuations continue to trade at a discount to book, so really what’s it going to take to get industry evaluation to effectively pull it to par..

I don't know, all I do is fly around the country and ask people the same question, so maybe you could tell me, I actually don't know. .

Okay. Thank you very much for taking my questions..

You're welcome, sorry I don't have a better answer, but if I had one, I’d give it..

Our next question is from Doug Mewhirter of SunTrust. Please go ahead. .

I just had two questions, on two distinct parts in the market, first on the high end, what is the pipeline of syndicated bank debt deals look like for Ares in particular? I know you said that the bank have pull backs from the market and I know that this was a promising area of potential fee income plus some lower risk assets, I didn't know how, if banks pulling away, you have the opportunity to step in, or if the whole market was shrinking and new opportunities were lower along with the market..

Yes, I mean, I was thinking about it, this way which is, banks are obviously not really participating in those types of deals, so our market share in these large or middle markets syndicated deals were obviously, where we have the capital and we have the teams to originate and syndicate that paper is very much in place.

That being said, deal flow is very light. So I don't want to confuse anything, by saying that we’ve got a couple of $600 million to $700 million that we're planning underwriting and syndicate the next couple of weeks, we just don’t. We don't have that right now the activity levels remain low.

Okay.

And my follow up question on a very different part of the market, I know that you have been booking a few more subordinated loans, and obviously they always have a part of the --a role in the portfolio, I was just wondering if there's particular industry or sector or structure which makes subordinated loans attractive, given their less collateral protections for Ares and why you pursued these particular loans?.

Yes, I mean, we are pretty choosy on sub debt, in the first quarter we did one mezzanine deal that was in a power, project finance situation, where we're helping a developer build a power plant, it's an in construction asset, but no I'd say look, we look for when we becomes subordinated in a company for a very, very high level of contracted cash flow because obviously the biggest risk when you are the sub debt and have the ability to get interest payment blocked, which you typically don't have in person, secondly lien deals, you want to make sure, there is plentiful cash flow in any case that you underwrite and so I think that's first-things-first.

And look you will see us I think secondly gravitate towards only making mezzanine investments and what we think are the absolute highest quality companies because to your point, you certainly are taking more risk and that's why you're getting paid higher rates of return, but you really -- you can't be wrong in those situations because it's much more difficult in a downside or in a work out.

So, it's just every very transaction dependent and we're very selective in those names..

Okay. Thank you. .

Our last question today comes from Robert Dodd of Raymond James. Please go ahead..

Going back to a comment you made earlier about the private equity multiples are high, they have been high for a while now, obviously through much of '15 and I had hoped that maybe some of the market shakeout would scare some, maybe some rationality back into the price points, so people would be willing to take a lower multiple to get the money in lump [ph] so to speak.

So do you have any theory, idea about what it would really takes for those multiples to come back to more reasonable levels and you guys willing to put more of the money out and an activity to pick up..

Look there are a lot of answers to that question, I'll make one point which is something that one of the guys here just mentioned to me as you're asking the question, we've seen a very heavy weighting of deals in the private equity business in the software space over last six months.

Where multiples are extraordinarily high like 14, 15 times EBITDA stuff, because that's one of the few sectors where you actually continue to see growth.

So I think, planning of that point, reason for the light deal flows, as I mentioned earlier is there is a real disconnect on the private equity side between buyers who are being asked to pay 12 times EBITDA for companies, who on the selling side are growing 2% a year or 5% a year.

It’s just very difficult to make the unleveraged or the leveraged returns on equity work. So, look it's like as any market goes either the buyers keep paying the market price, or the market price comes down sellers achieve lower multiples and that’s how it resolves itself.

I'm not probably the right person to ask that question or probably be a little bit above but I think if you asked the guy is running big or a mid-market private equity funs, they say that there is a little bit of disconnect on multiples today and that flown activity done..

Got it. Thank you..

This conclude our question-and-answer session. I would like to turn the conference back to Mr. Kipp deVeer for any closing remarks..

We don't have anything to add other than just thank everyone for their time and hope you’ll 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 May 17, 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 10082737. An archived replay will be available on a webcast link located on the homepage of the Investor Resources section of our website. The conference call has concluded. You may now disconnect. Thank you and have a nice day..