Kipp deVeer - Director and CEO Penni Roll - CFO Michael Smith - Co-President.

Jonathan Bock - Wells Fargo Ryan Lynch - KBW Terry Ma - Barclays Arren Cyganovich - D.A. Davidson & Co.

Kyle Joseph - Jefferies Chris York - JMP Securities Robert Dodd - Raymond James Hugh Miller - Macquarie Research Dough Mewhirter - SunTrust Robinson Humphrey Christopher Testa - National Securities Nick Brown - Zazove Associates Gilles Marchand - Knights of Columbus Asset Advisors.

Good afternoon. Welcome to Ares Capital Corporation's Fourth Quarter and Fiscal Year Ended December 31, 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a remainder, this conference is being recorded on Wednesday, February 22, 2017.

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 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 professional fees and other costs related to the acquisition of American Capital, 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 the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call by going to the Company's Web-site.

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 ended December 31, 2016 earnings presentation is available on the Company's Web-site at www.arescapitalcorp.com by clicking on the Q4 2016 Earnings Presentation link on the homepage of the Investor Resources section.

Ares Capital Corporation's earnings release and 10-K are also available on the Company's Web-site. I will now turn the call over to Mr. Kipp deVeer, Ares Capital Corporation's Chief Executive Officer. Please go ahead..

Thank you, Nicole. Good afternoon and thanks to everyone for listening today. I'm joined today by the majority of our management team, including our President, Michael Smith, and our Chief Financial Officer, Penni Roll, as well as members of our finance, investment and investor relations teams.

You will hear from both Penni and Michael later in the call. For those of you less familiar with Michael, let me introduce him quickly. Michael and I have been partners for 20 years. He has been here since the inception of Ares Capital Corporation and has contributed very broadly to the Company's success over the last 13 years.

Today, he's our Co-President with Mitch Goldstein. I'd like to start today by reviewing the year and the quarter and highlighting some of our Company's accomplishments. ARCC delivered 2016 core earnings per share of $1.61, well ahead of the $1.52 per share in dividends paid to shareholders.

In addition, we continued to lead the BDC industry with strong outcomes in terms of our realized performance, which provided another year where our realized gains exceeded our realized losses. This marks the seventh year in a row of net realized gains and the 12th year in our 13-year operating history.

In 2016, we realized net gains of $0.35 per share, which together with our core earnings generated $1.96 per share of realized earnings for shareholders. We did retain some earnings in excess of the dividends in 2016 and this added to our spill-over income.

Our focus remains on combining excellent long-term investment performance with a conservative dividend policy. Despite the achievements for the Company, 2016 was a bit of a roller coaster with what seemed like a lot of twists along the way, including continued volatility in oil prices, Brexit, and the outcome of the U.S.

presidential election, and we even witnessed the Cubs win a World Series. And although we experienced significant capital markets disruption and volatility at the beginning of the year, the year concluded with most of the financial indices ending the year with meaningful gains.

The Dow finished the year up 13.4%, and the loan and high-yield markets also showed strong returns for the year, with total returns of approximately 10% and 17.5% respectively. We believe that 2016 was a year where selectivity became even more critical for us as pricing and spreads tightened and underwriting standards eased.

Leverage levels crept higher and looser covenants made their way into most new deals. During the fourth quarter of 2016 and for the year as a whole, we were modestly active by our standards making growth commitments of $1.2 billion during the fourth quarter and $3.7 billion during fiscal 2016.

I will note, however, that we spent a lot of our time focused on financing the transaction needs of our existing portfolio of companies, which represented over 80% of our volume in the fourth quarter and 70% of our volume for the full year.

We did exit $3.8 billion of investment commitments through repayments and exits as well as through our growing syndication and sales efforts, as we sometimes reduce our exposure to manage risk and optimize our returns. During 2016, we continued to manage the wind-down of the SSLP, our former joint venture with GE Capital.

The SSLP experienced a more rapid repayment of outstanding loans, that we had originally anticipated, and we are pleased that this program is resolving quickly. At year-end, the SSLP had only 19 borrowers remaining with an aggregate principal balance outstanding of $3.4 billion, down from 41 borrowers and $8.1 billion outstanding at the end of 2015.

At December 31, 2016, the SSLP capitalization included just $1.5 billion of GE senior notes remaining to be repaid, ahead of repayments of the $2.3 billion in subordinated certificates, including the $2 billion held by ARCC.

We are focused on achieving a resolution quickly and we now believe the full repayment of the GE senior notes and most, if not all, of the sub certificates could come in the next 12 to 15 months. Despite the lower yield on the SSLP investment as it winds down, we are pleased to report that it was not a barrier to earnings growth in 2016.

As I mentioned, we increased our core and our GAAP earnings for the full-year 2016 by 5% and 26% compared to the prior year, reaching $1.61 per share and $1.51 per share respectively.

One significant contributor to this earnings growth has been the expansion of our underwriting and syndication activities, which has significantly expanded post-GE and allowed us to underwrite larger deals and to drive increased fee income.

A second important contributor to offset SSLP was our ability to reduce our funding costs through the retirement of higher-cost term debt and the issuance of new lower-cost term debt as well as increased usage on our lower-cost revolving credit facilities throughout the year.

Last September, we tapped the high-grade notes market with the lowest-cost coupon ever for a BDC at 3.625% for $600 million of five-year notes, and we followed that issuance early this year in the convert market with $388 million issued in 3.75% convertible notes due 2022. Penni will discuss these accomplishments in more detail later in the call.

I'd like to finish my opening remarks with a few words on what was clearly the most significant event for our Company over the last year, the closing of our strategic acquisition of American Capital on January 3, 2017.

To repeat what we have emphasized in the past, we believe that this transaction provides many strategic and financial benefits to our Company, including greater scale, opportunities for increased efficiency, and the ability to reposition the lower non-yielding or non-core assets included in American Capital's approximately $3 billion investment portfolio in the higher income producing assets.

We also believe the increased scale bolsters our already strong leadership position in middle-market direct lending, as it increases our ability to originate and hold even larger transactions which we believe will drive more attractive returns to shareholders over the long term.

Let me conclude by saying that we closed the acquisition remaining highly confident about our purchase price, as we continue to believe our purchase represents a discount to the company's NAV and the value we believe we can realize over time from the assets that we have acquired.

From a financial point of view, we expect that the American Capital transaction will prove to be accretive to both the net asset value and core earnings, with the contribution to our core earnings improving gradually over time as we rationalize the acquired portfolio.

We also expect the expansion of the balance sheet will increase our ability to grow our strategic and higher-yielding SDLP over time. Finally, the transaction was modestly deleveraging for us as we merged in ACAS' debt-free balance sheet that carried excess cash.

Taking all of this together, you can see why we are excited about the transaction and why we see it as the catalyst for earnings and dividend growth in future years.

ARCC's first quarter results will be the first time that we report combined earnings with the ACAS portfolio, and accordingly, we will provide a much more detailed update on the transaction on our earnings call in May.

Before I hand the call over to Penni, I'd like to highlight again that as part of the ACAS acquisition, Ares Capital Corporation shareholders will benefit from a waiver of income-based fees from our external manager of up to $10 million per quarter for the next 10 quarters beginning in the second quarter of 2017.

We continue to believe the team is already driving significant value in managing the assets acquired in the transaction. However, this fee waiver will provide even further comfort as we patiently and opportunistically seek to complete the portfolio rotation we are currently undertaking on the American Capital portfolio.

With that, Penni, would you discuss our fourth quarter and full-year financial results and provide some details on the financing activities?.

Yes. Thank you, Kipp. Our basic and diluted core earnings per share were $0.42 for the fourth quarter of 2016, as compared to $0.43 for the third quarter of 2016 and $0.40 for the fourth quarter of 2015.

Fourth quarter core earnings benefited from fees from our strong origination activity and from seasonally high dividend income as portfolio companies often pay unscheduled dividends in the fourth quarter of the year.

Our basic and diluted GAAP net income per share for the fourth quarter of 2016 was $0.24, compared to $0.35 for the third quarter of 2016 and $0.05 for the fourth quarter of 2015.

Our lower GAAP earnings in the fourth quarter of 2016 as compared to the third quarter were primarily driven by unrealized losses in the portfolio, largely from a single portfolio company, which I will discuss in a moment. As of December 31, 2016, our portfolio totaled $8.8 billion at fair value and we had total assets of $9.2 billion.

At December 31, 2016, the weighted average yield on our debt and other income-producing securities at amortized cost was 9.3%, and the weighted average yield on total investments at amortized cost was 8.3%, as compared to 9.7% and 8.7% respectively at September 30, 2016.

Our portfolio yields declined since the end of the third quarter, primarily from the continued decline in the yield on our SSLP subordinated certificates.

The decline in the yield on our SSLP sub certs is primarily due to the $1.4 billion of repayments in the SSLP during the quarter, which continues to repay only the senior notes until they are repaid in full.

Despite the fact that the yield on our SSLP sub certs has declined over time as anticipated, our LTM net interest and dividend margin has improved by 10 basis points since the wind-down began in the second quarter of 2015 as we've continued to manage our margins by focusing on our cost of debt capital.

Additionally, as the yield on our SSLP subordinated certificates declines over time, so too does the risk of holding this investment as the senior notes outstanding ahead of our sub certs are repaid. We continue to generate solid net realized gains from our portfolio, and in the fourth quarter, net realized gains were $31 million or $0.10 per share.

The key contributors were realizations in Step2 and Ministry Brands. Net unrealized losses on investments for the fourth quarter were $94 million or $0.30 per share, which included $19 million or $0.06 per share from the reversal of net unrealized appreciation related to net realized gains on investments.

The net unrealized loss on investments for the fourth quarter was primarily driven by a further decline in the value of Infilaw, a for-profit law school operator that Michael will discuss later on the call.

Now looking at the full year, basic and diluted core earnings per share were $1.61 for 2016 compared to $1.54 for 2015, and basic and diluted GAAP net income per share was $1.51 for 2016 compared to $1.20 for 2015.

For the full year of 2016, we had net realized gains on investments of $110 million or $0.35 per share, and we had net unrealized losses on investments of $125 million or $0.40 per share, which included $13 million or $0.04 per share from the reversal of net unrealized appreciation related to net realized gains on investments.

As Kipp mentioned, one important measure we track is core earnings plus realized gains and losses. The sum of our core earnings plus net realized gains per share of $1.96 for 2016 was well in excess of the dividends we paid in 2016 of $1.52 per share.

Our current dividend level remains well supported by our earnings, and the earnings in excess of dividends paid has added to our spill-over income which provides additional cushion for our dividend stability.

We estimate that undistributed taxable income carried forward from 2016 into 2017 was approximately $339 million or $0.80 per share when you use the increased number of shares that reflect the shares issued in the ACAS acquisition in January. We are very pleased that our realized earnings meaningfully exceeded our dividends again this year.

We announced this morning that we declared our regular first quarter dividend of $0.38 per share. This dividend is payable on March 31 to stockholders of record on March 15, 2017.

Moving to the right hand side of the balance sheet, our stockholders' equity at December 31 was $5.2 billion, resulting in net asset value per share of $16.45, down 0.8% compared to a quarter ago and roughly flat since December 31, 2015.

As of December 31, 2016, our debt-to-equity ratio was 0.76x, and our debt-to-equity ratio net of available cash of $200 million was 0.73x. At December 31, 2016, we had approximately $1.4 billion of undrawn availability primarily under our lower-cost revolving credit facilities, subject to borrowing base, leverage and other restrictions.

After closing on the ACAS acquisition on January 3, we further enhanced our capital structure to support the larger combined balance sheet.

We increased the commitments available under two of our revolving credit facilities by approximately $1.3 billion, bringing aggregate total commitments under our secured revolving facilities to $3.5 billion coming from 26 banks.

Given the strong support of our bank partners, we are very well-positioned to operate efficiently with our larger balance sheet.

More specifically, we amended our revolving credit facility, where we increased the total size of the facility from $1.265 billion to $2.1 billion and extended the maturity for $2 billion of the facility from May 2021 to January 2022.

The $2.1 billion of commitments under this facility for the first time included a term loan component of $382.5 million. We also amended our revolving funding facility, where we increased the total size of the facility from $540 million to $1 billion and extended the maturity from May 2019 to January 2022.

In addition to ensuring we have significant amount of flexible revolving debt capacity, we've continued to focus on being an opportunistic issuer of term debt. As Kipp mentioned earlier, in January we tapped the convertible notes market issuing $388 million of 3.75% notes that mature in January 2022.

We believe that we are well-positioned as we progress into 2017 and only have one term debt issuance maturing for the full year of 2017. We expect to repay these $162 million of higher-cost 4.875% convertible notes at their upcoming maturity in March. As we head into the first quarter, I would like to make a few comments about the ACAS transaction.

Given the timing of closing of the acquisition on January 3, we have not yet completed the purchase accounting for the transaction.

We will be completing that work towards the end of the first quarter and will be providing the full financial impact of the acquisition for the first time when we release earnings for the first quarter of 2017 in early May. Until then, we thought we would recap some information that is currently available to you.

Starting with the balance sheet at closing and using our pro forma fair values as of September 30, 2016, we believe that the acquisition was modestly accretive to our net asset value. In addition, the transaction was deleveraging. Upon closing, ACAS had no debt outstanding and significant excess cash balances on hand.

Using our debt and equity capitalization at December 31, 2016 and then considering the equity issued in connection with the acquisition on January 3, and the reported outstanding balances on our credit facilities on January 4, we estimate our pro forma debt-to-equity ratio declined post-closing to approximately 0.63x net of cash.

On one last capitalization matter, as you may recall, in conjunction with the ACAS acquisition, we suspended our stock repurchase program.

Following the closing of the acquisition, we have reinstated our stock repurchase program and in light of the larger balance sheet have also increased the program size from $100 million to $300 million and extended the term through February 28, 2018.

And now, I would like to turn the call over to Michael Smith to review our recent investment activity and the portfolio..

Thank you, Penni. I would like to spend a few minutes reviewing our fourth quarter investment activity, comment on our portfolio performance and provide a quick update on our backlog and pipeline. During the fourth quarter, we made 24 commitments totaling $1.2 billion.

New deal flow focused on first lien debt investments and was heavily driven by funding to our existing borrowers, which totaled over 80% of our investment activity.

During the quarter, we completed two large transactions of more than $250 million, which were great examples of existing portfolio companies requiring new financing where our position of incumbency allowed us to underwrite one-stop solutions.

In both instances, ARCC arranged and underwrote complete financing packages, generated strong syndication income and retained meaningful final hold positions in attractive earning assets.

We continue to focus on originating a very broad array of middle-market financing opportunities and selecting what we deem are the very best credits, typically closing around 5% of the transactions we review.

Unlike many other credit managers, we do not manage to a benchmark, but instead we select companies and industries that have exhibited long-term financial stability. We continue to be meaningfully underweight in the oil and gas space. We do not have any direct exposure to metals and mining, auto or homebuilding.

We are also limiting investments in area where we see weakening trends, such as restaurants and retail. This proactive approach to industry selection is a key differentiator for ARCC and is one of the reasons that we believe we are able to outperform other credit managers over a long period of time.

Turning to our portfolio, while earnings have been sluggish across the corporate sector and other middle-market indices, we do continue to see growth in our corporate borrowers' EBITDA with LTM year-over-year growth of more than 4%.

We typically invest in borrowers with strong cash flows, which allow them to deleverage quickly even in a slow growth environment. Our non-accruals continue to remain below average for the industry. However, non-accruals as a percentage of the portfolio at cost did show a modest increase this quarter from 2.9% – from 2.6% the prior quarter.

Our non-accruals as a percentage of fair value declined from 1.2% in Q3 to 0.8% in Q4 as we continued to mark down accruals and remained very conservative on our recovery assumptions. As Penni mentioned in her remarks, our non-accruals at cost remained highly concentrated in one legacy position, Infilaw, which was already on non-accrual.

Real headwinds exist in the for-profit education sector generally and for this company specifically where decreasing law school enrollment and regulatory pressures have negatively impacted its business model. As a reminder, our total portfolio exposure for the for-profit education sector is limited to approximately 1% of the portfolio at fair value.

Before I turn the call back over to Kipp to conclude, let me provide some quick comments on our post-quarter-end investment activity.

From January 1 to February 16, 2017, we made new investment commitments, excluding commitments acquired in the ACAS acquisition, totaling $342 million, and sold or exited $399 million including $116 million from the ACAS portfolio during the same period, with net realized gains of approximately $3 million.

Beyond this, as of February 16, our total investment backlog and pipeline stood at approximately $420 million and $890 million respectively. These potential investments are all subject to final approvals and documentation, and certain of these investments may be sold or syndicated post closing.

In addition, our final investment holds may be lower, and of course we cannot assure you that any of these investments will close. I'll now turn it back to Kipp for some closing remarks..

Thanks a lot, Michael. In closing, we finished strong in another very good year for Ares Capital, and most importantly, we believe we are well-positioned for future earnings growth over time.

While 2017 will be a transition year, we plan to integrate ACAS and rotate the acquired portfolio, substantially wind-up the SSLP, and look to accelerate the growth of the higher-yielding SDLP. We believe that each of these activities will help to drive potential ROE expansion at the Company.

In addition, we believe we will also be able to drive earnings as we re-leverage our balance sheet towards the higher end of our target leverage range and generate greater fee income with our increased scale.

Finally, we see the freeing up of our non-BDC eligible asset basket through the continued reduction of SSLP as an opportunity that will position us to have meaningful capacity to creatively redeploy capital in the higher-return opportunities going forward.

Finally, if we see a gradual rise in interest rates, as the market expects, our asset-sensitive balance sheet and our earnings are well poised to benefit.

As we progress further into 2017, the expectation for stronger growth from tax and regulatory reform has contributed to a robust bid for credit assets, and the market appears to be anticipating an extension of the current business cycle from contemplated fiscal stimulus and from pro-growth initiatives.

We have seen some positive developments on the regulatory front for ARCC. During the first quarter of this year, we received some good news from the SEC on our long-standing request for exemptive relief, which allows ARCC to co-invest with other vehicles managed by Ares Management.

We believe that this added flexibility will benefit our shareholders by providing, amongst other things, increased deal flow, enhanced diversification and the ability to more comfortably leverage our broad credit platform.

Additionally, we believe there is also momentum building in Congress for the contemplated BDC legislation that would provide the industry with more operating flexibility.

But overall, given the strength and the experience of our team and the breadth of our platform here at Ares Management, we feel great about our prospects for navigating the current market and the ever-changing landscape. That concludes our prepared remarks, Nicole. You can open the line for questions please..

[Operator Instructions] Our first question comes from Jonathan Bock of Wells Fargo Securities. Please go ahead..

Kipp, you mentioned the power of the platform and the benefits that come now with exemptive relief, and so curious, what is the total amount of what we consider buying power on the private credit platform that is focused on middle-market sponsored lending, either first lien or second lien? How much capital do you guys now have under commitments as well as what you have capacity in the BDC, how much capital do you have to deploy?.

We have actually spent a lot of our time on the private side focused I would tell you on the bank loan business. As you know, there is a 1-to-1 limitation obviously in terms of the leverage at Ares Capital Corporation.

That means it's very difficult for the Company to on a final hold basis invest in call it a garden-variety middle-market bank deal which they would probably price somewhere between LIBOR 4.50 and LIBOR 5.50.

So, without getting into tons and tons of detail about what our investors have done, we have raised several billion with more in the pipeline I think likely to come onboard here just to focus on the bank loan business.

So today, to try to give you some numbers, pro forma for the American Capital transaction, our Company, Ares obviously, Ares Capital has about $13 billion of what we've always laid out as flexible capital. So, that's senior, that's unitranche, that's second lien and junior capital as well as equity investments.

Because of the low rate environment, again we've gone out and raised a couple of billion of what I'd say is capital focused on the bank loan business. And it really depends how you want to count SSLP winding down and SDLP kind of ramping up.

But the two key pools are the public company and some private funds that's surrounded, that are as I mentioned generally investing in bank loans. But we've continued to invest in origination behind the asset growth. I think we'll continue to with the ACAS acquisition.

We've got 100 people obviously on the platform today and that number just keeps going up..

Got it. And while you might tease me for asking why isn't there more second lien in the book, I'm going to go along with it. So if we look at Restaurant Technologies, it's an SSLP named paid down, Ares was the co-lead, I think you took the second lien, I'd imagine perhaps this went into more of a second lien focused fund.

The question is – and perhaps because it's a low yield environment I'm asking this question, which I think you'll tease me for – why wouldn't the BDC receive a second lien allocation in that deal, why would it all go private, and walk us through how deals go where? Perhaps that was a great opportunity, and so for the BDC to not participate, industrials will be curious as to why, particularly if there is a competing fund that's also looking for the same type of asset..

That's not how we run the business in terms of conflicts and allocations. I'm happy to give you some details, but we didn't do the Restaurant Technologies second lien, we passed. We thought the terms, the pricing, the conditions of the new financing were too aggressive, so we passed..

Okay.

Then let's just say, if there is a deal that you would like to share across platform, how does that effectively get allocated? Is it based on pro rata share of capital? What's the math?.

Sure. I mean again, we continue to focus for the BDC on exactly the types of assets that we focused on for the last 13 years, which are today we think a bit of first lien loans.

Although it's difficult to again generate 10-plus returns on equity, which we've done for 13 years in a row buying bank debt, which is why we've been raising some of these surrounding funds. We're able to underwrite, we're able to syndicate, speak for more because of the private fundraising.

But what we're doing at the BDC is exactly the same that we've always done. I think I've said, the fairway has broadened a little bit as the Company's size has increased, so probably at the bottom end, $10 million of EBITDA, up to the top end, $100 million of EBITDA.

And again, we really believe in this flexible approach, senior debt, unitranche, junior capital, and as we've always said over the years, we will kind of modulate our risk appetite relative to where we see good risk-adjusted returns.

To answer your question about allocation, our allocation policy here at Ares across our entire credit platform is, we look to the investment guidelines of a fund. So for instance in the private accounts that we focused on so far, the investment guidelines very much coach us into owning first lien paper.

It's kind of a benefit to the business and something that doesn't bump into the mandate of the BDC today, but I think adds a lot to our business. But again, we look to the investment guidelines of a fund, we deem whether a new transaction is appropriate for that fund, and then generally speaking, it's offered an opportunity against available capital.

That being said, it's offered that opportunity only when sized relative to a distinct account's portfolio concentration/diversification type requirement.

So, to be clear, if the math on allowable capital said, a $200 million account could get $20 million of new money, we probably wouldn't allocate them a 10% position because we like to manage portfolios that are more diverse than that.

So, there are a whole host of different things that go into thinking about allocation, it's complicated, but we've been doing it here for a long time across our credit business that has 100-plus funds and $60 billion of assets under management..

Yes, very helpful.

And then I looked at the slide, and just because I couldn't resist an ACAS question, so both Penni and Kipp, you mentioned about in the press release $116 million of ACAS commitments sold, I'm curious how you are getting to that number when we think about ACAM sales, the loan business, [indiscernible] commitment sales to Northlane, et cetera, all that have been publicly announced, now not necessarily publicly announced by you but publicly announced, so I'm just curious of what that $116 million actually is.

Is it inclusive of those sales or not?.

So, I'll try to – we mentioned the sale of the Leveraged Finance Manager.

There obviously was a press release there that a company called Marble Point Credit Management acquired the lion's share of the assets of what was formerly known as American Capital Leveraged Finance Manager and we are happy about both buyer who we have a strong relationship with and their sponsor at Stone Point Capital.

We are also happy about the price. So, that was good outcome for us and I think for them as well. Remember there, Jonathan, in maybe doing some of your footings, that closed, the sale of that asset closed before the closing of the transaction.

So when you saw our press release of the $116 million of exits since closing, that's literally in the last six weeks or whatever it is since January 3rd. So, just as you put your math, the stuff that happened after the closing of the transaction, i.e.

January 3rd, does include our sale of certain assets of the GP that was formerly known as ACE and its funds I through III, which was the ACAM private equity funds business. We sold the GP there to a newly formed company called Northlane Capital Partners that was run by the existing team that sat inside ACAM prior to the closing.

And we also sold the LP investment that American Capital had in those funds. We do retain some continued economics in that business and some continued value in that business, but that's the lion's share of the $116 million of commitments that have been exited since January 3rd.

There are two other positions that we've sold that frankly are about small and not really worth talking about. So, hopefully that helps put to the math a little bit..

Great, and congratulations on closing that purchase. Thank you..

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

Sticking with the ACAS theme for a minute, with ACAS' approximately $3 billion portfolio you mentioned that you've targeted a portion of some of the non-yielding or lower-yielding investments to rotate out of, can you just give us a little bit of color or an estimate of how much of that portfolio do you intend to rotate out of?.

It's a pretty significant amount, as we've talked about.

I mean the key buckets when you look through perhaps the SOI that you'll see from them on a standalone basis for the last time at year-end, you can identify a bunch of kind of sponsor-financed names, lending names, that we think are good core names for us and represent opportunity for us going forward.

About half of the $3 billion today is in kind of performing senior and sub-debt. Now it's hard to categorize. Some of those are actually attached to what I would call controlled buyout names.

But I think there is somewhere between $1 billion and $1.5 billion, rough numbers, of the $3 billion that we expect to retain in what I think of as positions that are core and a good fit for us here at Ares Capital. The things that are saleable are a handful of European buyouts. The fair market value of that is in the $200 million type range of NAV.

There are also six or seven controlled buyout names that I think over time we would expect to be sellers of. I don't have all the numbers in front of me but roughly it's $600 million or $700 million of value there.

And the third piece that we have deemed, and again this is away from ACAM and what's remaining there is the third piece that I think we have deemed nonstrategic and for sale over time, have been their portfolio of third-party investments in non-managed or other people CLOs.

So, there is good income coming of that book but we're balancing our desire to sell that both from a strategic and financial position over time, and we've seen some good bids on those assets and I think we'll continue to work towards selling those.

But rough numbers, it's probably keep half, sell half, and the sell half are on the three or four categories of assets that I just laid out for you..

Okay, that's great color. I think Penni mentioned debt-to-equity pro forma post the close is maybe about 0.63x debt-to-equity. So, I would estimate that gives you maybe $1 billion of capital that you can deploy to re-leverage the portfolio to a more normalized leverage standpoint, as well as from all these ACAS sales maybe another $1.5 billion.

That's maybe $2 billion to $3 billion of excess capital right now you guys can deploy.

So can you just talk about maybe the tension right now of having a significant amount of excess capital to deploy maybe in an environment that you talked about earlier on the call of maybe being more competitive, so can you just talk about how you guys are planning on deploying that capital in a timely fashion but also be prudent and not just deploy it just to deploy it fast?.

You've just answered your question for me. There is no doubt that that's the tension here today. I mean, look, we have 100 people as I mentioned that are out looking at new deals, and I do think that we'll add some people frankly. We've in fact added some people prior to ACAS closing and with the ACAS closing in kind of a limited size.

But that's exactly the tension, right. And I think as I've mentioned in the past, we do think that our business has real competitive advantages. We think having a 350-name-plus portfolio on a pro forma basis gives us real advantages. We've got one of the largest teams in this space. It's multi-asset class. We have industry specialization.

And despite that, we look at a difficult reinvestment environment right now as one of the challenges. $1 billion for us frankly to invest net can happen pretty quickly. Again, a larger company allows us to write bigger checks. You go back to the Qlik transaction that we did and we are finding the ability to work on larger deals.

You take an example of a Qlik where we held a pretty significantly sized position at ARCC, it would have been pretty easy for us just to hold another $150 million in that transaction with a larger balance sheet.

So, I do think it's going to be keeping selectivity the same, being more impactful, which is hopefully taking down a larger share of the deals that we are underwriting, which is good for our clients and good for us.

But there is no doubt, I mean your question is a good one and it's the one that we obviously, number one, wrestle with here every day, but number two, that's sort of how we earn our stripes here as well. So, we're cautious but we're optimistic that we'll be able to deliver..

Okay. And then just one last one, you mentioned the 30% bucket, and then as the SSLP winds down, that's obviously going to free up more capacity in that bucket.

Are there any other strategies that you guys are looking to pursue to ramp up that bucket once you guys get some more capacity outside of just ramping up the SDLP?.

Yes, there are a lot of things that we're talking about.

As you'd probably imagine, the prospect of getting $2 billion of capital back with today's earnings below our threshold returns because of our frustrating wind-down with our former partner GE is a nice prospect for some of us that have had deal with that for the last couple of years, and there are a lot of interesting things that you can do with a couple of billion of capital in your 30% basket.

I can't say that we have anything that's actionable right now, but you should expect that there is a lot of discussion amongst the management team about what to do with that capital when it comes back. So number one, we think we can build some pretty strategic assets there, but certainly we know we can improve returns on that $2 billion..

Okay. Those were all the questions from me. Thanks..

Our next question comes from Terry Ma of Barclays. Please go ahead..

Can you just talk probably about your confidence in being able to rotate out of the legacy ACAS investments and maybe just give some color on the timing and the pace we should expect for that rotation?.

Sure. So we structured a 10-quarter fee waiver that kind of largely mimic what the timeframe was on the backend that we thought that would take us to reposition assets there. So, I think we've communicated somewhere between a year and three years, but for us, things are moving pretty aggressively.

You've seen us sell quite a number of assets here I think at very good values. So the earlier returns on rotating the portfolio have been quite good obviously in the backdrop of a favorable market to sell virtually any asset today.

So look, we have said 18 to 36 months, but I think we're on a quicker path than that and we're feeling good about the values..

Okay, got it, that's helpful.

And just to confirm, ACAM, if I look at the 9/30 SOI, that's part of the saleable bucket, right?.

Yes. So again, when you looked at the value that they have stated at 9/30, it will get reduced by the assets that we already sold prior to closing, which include most of ACAS' or ACAM Leveraged Finance Manager, and again as I mentioned, since then we've sold their private equity funds business as well.

You see that after January 3rd, that will start to get easier to decode. So what's left there, the largest asset remains the European direct lending business which we have every intention to sell as well as some holdover assets, but there are really those three kind of key assets and two of the three have been sold..

Okay, got it.

And then in terms of the increased fee opportunities going forward, what's the larger driver there? Is it just having a larger portfolio size and hold size or is it also contingent on ramping the SDLP to size?.

It's probably a combination of everything. I mean, our fees are up because we are holding larger percentages of deal. So obviously, if you are underwriting at 97 or 96 and you're holding and you're not selling down paper, you're just taking in a larger fee on a larger hold.

But look, 2015 and 2016 were both years where we generated meaningful amounts of underwriting and syndication income from the activities that I've talked about post-GE. So, skim fees on underwriting larger deals and bringing in other investors are definitely a piece of it, as is to your point SDLP.

So as SDLP ramps, we get very high percentages of fees relative to the capital that we are committing to the program, just like SSLP in the old days we get about half the fees relative to only putting up about 20% or 30% of the capital. So, all three of them are contributors..

Okay, got it, that's helpful.

And then just on any potential legislation, have you guys done any analysis on any impacts of to eliminate the interest deductibility for corporate?.

We have. It's something that we got pretty significant and interesting ability to work through our portfolio management system with. It's obviously a sea-change to the industry.

I think as many of us have said, if you think about deductibility of interest and how it relates to leverage financing private equity, I think, not being a tax or policy expert, that the idea is that interest deductibility goes away in exchange for lower corporate tax rates, our view is that based on our portfolio and the work that we have done internally, it is generally a wash for us from a credit perspective and that we obviously have more cash flow from our companies paying less in taxes, and the impact of obviously the interest deductibility of leveraged companies impacts those companies negatively.

But our early returns are that it's generally a wash from a credit perspective, so long as I guess corporate taxes are reduced to kind of that 20% to 25% level, which is what we have heard bannered about down in DC..

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

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

The deal activity that you've had recently has still been relatively strong despite it being kind of a tougher investing environment.

What are you finding in terms of the quality of deal flow and what kind of deals are these being representative of, a refinancing, the recaps, M&A, how are you looking at the overall deal environment?.

I think it's reasonably busy I would say both in terms of new deals and refinancings. We've clearly come into a year here in the beginning of 2017 where the demand for new transactions exceeds the supply, which I think helps us frankly as a company that can really lead transactions in a meaningful way.

We've been focused frankly as I mentioned in 2016, or rather in 2017, as we were in 2016, on a lot of activity in our existing portfolio. But new deals, we are finding some good interesting things to work on. Again, it's just casting a really wide net and being selective. So, I don't know if I have anything more to add than that..

Got it. And then I guess in terms of the spill-over dividend that you have, it's still pretty sizable, actually growing I guess into this year.

Is there a thought process of just saving that for a rainy day or would you expect to have some special dividends over time?.

So we I think for the time being, what we have said in the past, I'll stay consistent, because I think we believe it is that has been there sort of for a rainy day, right. As we feel that we're nearing the end of what feels like a very, very long credit cycle, we've chosen to be conservative around the spill-over income and retain it.

I think if you look back over the Company's 13 year history, we have paid some special dividends. We all wonder a little bit here what benefit we've gotten in the past from paying special dividends, which maybe has made us hesitant to paying any going forward.

We'd rather talk more about growing the regular dividend, growing the quarterly dividend over time because that's what we think rewards our long-term shareholders and we obviously want folks that are with us for the long haul.

So, as it relates to the dividend policy at the Company, it's one source that gives us increased confidence about raising the quarterly dividend going forward, which I think again I'd prefer to paying special dividends.

And as we've said, both the American Capital transaction but also a couple of other factors, which include things like rising rates, we think are putting us on a path of upward earnings her over the next couple of years, and once we see earnings growth that we know is reliable, I think that's the path towards dividend growth in terms of the regular dividend.

And I think our current belief is, we sort of favor that goal over any near-term payments of special dividends. Hopefully, that's helpful in terms of our current thinking..

Yes, thank you..

Our next question comes from Kyle Joseph of Jefferies. Please go ahead..

A lot of them have been answered, but I just wanted to touch base on the portfolio yields here. Obviously you guys have a lot of moving parts.

You have the wind-down of the SSLP, the growth of the SDLP, you have the onboarding of the ACAS assets, and then at the same time you have what you've talked about as sort of a competitive lending environment overall.

So, if you can just give us your outlook for the overall portfolio yield and maybe when we get some stabilization there, how long that takes, and then potentially with a rising rate environment, if we see any sort of potential for your yields to increase from here?.

Pretty confusing stuff. I'm with you. So, thanks for the question, Kyle. Look, I mean the lion's share of the yield deterioration that you've seen in the last couple of quarters at our Company has been from the declining yields from SSLP, and that's sort of the overarching headwind that we've been dealing with.

I would tell you that we haven't seen a meaningful change in kind of new deal spreads. Things have kind of plateaued here over the course of the last probably six quarters. The middle-market has not continued to tighten, in at least my opinion, even as the large cap loan market has continued to tighten.

So overall, spreads excluding SSLP are about the same. I do think that we'll see rising LIBOR going forward, don't know when of course, and about 80% of our assets benefit from rising LIBOR.

So definitely that's something that will help, as will just the wind-up of SSLP, and as you mentioned as well, the continued growth of SDLP which again we've been kind of bringing onboard new yields of 13% to 15%. So, I think there are a couple of different contributors.

I think in the past I had some predictions that maybe corporate spreads would widen, and I just don't see it today based on the demand and the supply dynamics, but we are hopeful. But rising rates, less SSLP, more SDLP are all contributors to yields going up..

Got it, that's helpful. Thanks for answering my questions..

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

So what we've talked throughout the call and what we've seen over the last couple of quarters is structuring fees contributing meaningfully to total investment income.

But what I would like to know is how are you evaluating the potential trade-offs as you increase your average size and commitments towards larger borrowers in the upper middle-market of a growing capital markets business and that fee stream versus extracting what may be pressure on middle-market illiquidity premiums?.

I mean, again I think we cast a broader net than a lot of the other BDCs you guys may follow. Again, we are thrilled to do $50 million buy-and-hold transactions on $10 million EBITDA companies where we keep all the fees.

I would tell you that we don't see illiquidity premiums being all that different in lower middle-market companies relative to upper middle-market companies, maybe in the non-sponsored space but the lower middle-market sponsored space feels just as competitive as the upper middle-market sponsored space.

And we'll play up to do some of these larger deals. And the good news is, in the larger deals, Chris, maybe to tell you how we think about it is, we can achieve better economics there.

Our capital is more valuable, the certainty of our capital is more valuable, the fees that we drive from leading those transactions are higher, and as we've said in the past, we really do want to lead and originate our deals.

We want to write loan documents, we want to negotiate covenants, we don't want to be a taker of other people's terms and we don't want to do club deals. So, hopefully that gives you a sense about how we are thinking about it..

It does.

And so maybe tying in the next question, and it's kind of regulatory based too, is how do you think about the definition of eligible portfolio companies? So what I'm kind of thinking about is, how do you think about the increased opportunity that we just talked about to land and hold larger sizes to the upper middle-market that have flexible financing needs but also may have a class of a security in excess of $250 million, like Qlik, versus the definition of eligible portfolio companies for BDCs and then your current treatment of the SSLP and SDLP as non-qualified assets?.

Oh man, I wish I had my 40 Act expert in the room. He's unfortunately on vacation.

I think that we read the definition literally, which says your eligible basket is for private companies and for public companies that have less than $250 million market capitalizations, and obviously the 30% basket picks up passive income from partnerships and other income that comes from sort of structures, is how I think about things.

We don't see a lot of opportunity financing companies that have more than $250 million market caps. Qlik was a public company, but it's not anymore. So it obviously doesn't come into the calculus. I think more private equity firms are looking to take frankly smaller cap public companies private. I think that's great for us.

That freeing up of the 30% basket though I think is something that we'll have to evaluate over time and just get back to the community on a little bit. It's an opportunity for us. But we view the definition pretty strictly for the 40 Act..

And then, so are there any, have you had any new discussions with the staff, I know there's a lot of moving parts there, but in their treatment and view of eligible portfolio companies?.

No, I mean I know that's been on the list of certain folks who have spent time in DC. It's not particularly high on our list..

Okay, fair enough. And then maybe for Penni, dividend income was up both quarter-over-quarter and year-over-year in non-controlled portfolio companies.

Could you provide us some color for the contributors there, and then how much of this line would you say is recurring?.

So how much of the line what?.

Is recurring..

Is recurring. We have a number of portfolio companies where we hold minority equity positions.

Sometimes we'll get a dividend that comes through from a dividend recap during the course of the year, and often at the end of the year, particularly fourth quarter, we'll get incremental dividends up on their declaration of just paying a dividend on their equity.

So, it's not something that we necessarily determine, but we will get dividend income coming through from time to time, and it's not atypical particularly in the fourth quarter to have some incremental dividend income through.

But typically, we are running around $15 million to $20 million or low $20 million a quarter of dividend income, and about $10 million of that each quarter is coming from IHAM and the rest is coming from other portfolio companies. So, it will vary and it's not one company in and of itself that's always paying the dividends..

Got it.

So we're at $22 million here, you said $10 million from IHAM, and then so essentially kind of $5 million maybe in non-controlled excluding seasonality for Q4 is probably the recurring amount? Is that how you think about it?.

Yes, I would say we'll look it as a baseline, yes, where we're getting probably $15 million a quarter on average with some upside for another $6 million to $10 million depending on the quarter, something..

Yes, makes sense. That's it for me. Thanks for taking my questions..

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

Going back to kind of the non-qualified bucket, obviously from the last data I can remember that we had from ACAS was about ballpark 25% of their assets, about 26% of yours, put it together. You mentioned in the prepared remarks the freeing up of that bucket.

So, on the ACAS side, obviously the CLO income, the third-party CLO income from them falls into that bucket. There's a bit of a tension I would imagine now, and it's high income but it's consuming space that can better be strategically used for you guys elsewhere in SDLP ramp-up, et cetera.

So, what's the balance, where are you, what's the expected exits, and maybe what's the pro forma now, non-qualified asset bucket, what's the balance of income that you've got coming from sources that fall into that from part of the acquisition versus redirecting that elsewhere?.

Sure. I'd answer broadly as follows. I'd say that the percentage of assets in non-BDC eligible assets has been declining, both since the signing and the closing of the transaction. We'd expect that will continue.

To hit on one of the questions that you asked, reducing the amount of third-party CLO investments that we have on our balance sheet is certainly something that we are working towards, but we are taking to your point a balance of the fact that they generate high rates of current income.

So, you should expect the numbers to keep coming down in terms of the 30% basket, so to speak. But the big change is going to be obviously when there are enough repayments in SSLP such that GE senior notes are paid off and distributions start to come to the SSLP sub notes, all right.

And again, we think that will start to happen over the course of this year..

To exactly that point, I mean you mentioned or Penni mentioned I think $1.4 billion payoff in the fourth quarter and $4.7 billion or $4.8 billion I think for the year. If that rate of $1.2 billion a quarter would keep going, GE will basically be fully paid off by the second quarter. And then obviously you'll start going to the sub notes..

That's pretty good math. Yes, we agree. We'll see what the future holds, but yes, I mean that's the simple math..

Okay, fair enough. One more follow-up if I can, and totally different from that, obviously the Infilaw, you mentioned obviously a mark-down, regulation change, falling enrollment, et cetera, regulating, and obviously that asset went on the balance sheet in good 2011 I think quite so. Things change over time.

The biggest industry, kind of same category, you have on the balance sheet right now other than your investment funds is healthcare obviously, which very much up in the air right now from regulatory. It looks like negotiating drug prices is off the table, it might come back again, obviously the insurance market.

What's your comfort given sometimes you can't foresee regulatory changes of all sorts of not just reimbursement risk but other areas within an industry, what's your comfort level with having that large exposure to an industry even though obviously diversified within that industry?.

I think your last point is important one, which is healthcare picks up a whole lot of sub sectors of healthcare.

So, you're talking about everything from a dental practice management business, to provider of true healthcare services, to information technology companies that serve the healthcare space, to a billing business that perhaps helps insurance companies audit bills.

So, there is so much picked up in that industry classification that I think there is diversity to withstand some change in particular. I do think we have a long history here, I know we have a long history here of underwriting healthcare companies successfully.

There has obviously been eight years of pretty significant regulation, looking backwards to the Obama presidency that had limited to no impact on our health care portfolio. But I think we've been able to assess any risks there and to stay away from things that potentially would create credit problems. So today, we mentioned a couple of industries.

Oil and gas obviously last year was something that kind of represented real issues for folks. I do think the post-secondary education industry has represented issues for us and others.

We are nervous about retail and restaurants frankly these days because we've seen a weak consumer, and in retail in particular we've seen real changes in the way people buy things, i.e., online versus in stores and in malls in particular. But our healthcare portfolio today I would tell you I feel very good about.

The credit metrics across those names are quite good. So, we don't have a lot of concern on the healthcare portfolio today..

Okay, great. Thank you..

In the interest to equal access to all participants in the queue, please limit your questions to two questions per participant. Thank you. Our next question comes from Hugh Miller of Macquarie. Please go ahead..

Just I guess first one, just a housekeeping one, I think you guys had mentioned that the growth for trailing 12 months EBITDA for the portfolio companies was 4%, and correct me if I'm wrong, does that compare to 7% as of 3Q 2016 and what would be causing that differential?.

It does, your numbers are right, and I think we saw a modest slowdown in growth in the portfolio..

Okay, so it wasn't just a function of just kind of very strong growth rolling off as of 3Q 2015, it's just more a function of just a slower pace of growth as we headed into the back half of the last year?.

Sure, I think that's right..

Okay. And then the second question, there's been some discussion about the impact to lending terms in the banking space if we do get a cut in the corporate tax rate, there is some discussion about passing along some of that benefit to the borrower, being a little bit more aggressive in terms of lending terms if that were to come to fruition.

I guess given the lack of a benefit in terms of lower taxes to the BDC space, is that something that you guys think about just in terms of what could happen to competitive terms and any thoughts on that?.

I mean we talked a little bit or I mentioned a little bit our thoughts, early thoughts on deductibility of interest and taxes. To be honest, in the early days of a change that's that substantial, I don't really have anything else to add at this point unfortunately on the topic..

Okay. Thank you very much..

Our next question comes from Dough Mewhirter of SunTrust. Please go ahead..

Two quick questions, first on the energy front, I know that on the Ares Management side you've had some fairly public activities in The Oil Patch, and I know that that is a private equity [indiscernible], but has there, I guess a little bit of enthusiasm for energy on the private equity side made you more interested in getting back into the Oil Patch in any kind of way?.

I mean look, we've got pretty broad energy experience here at Ares. As you can see, both our bank loan and high-yield business has significant exposure in the space. We have industry research dedicated there to buying liquid credits.

We also, I think as you know, as I've mentioned over time, have a dedicated direct lending team focused on the oil and gas space.

And as you probably noticed from the articles around Clayton Williams and maybe the press release on the Gastar transaction, we have dedicated resources in our private equity business that are focused on transactions there. So, we've got different teams with different mandates. Clayton Williams was an equity deal, right.

So, something that while it was obviously a big win for the firm, was not something that really was very good fit for the BDC.

I will tell you that our direct lending team continues to look for interesting opportunities there, but a lot more of what's happening in the oil and gas space are kind of re-acquisitions of balance sheets, are rescue deals that maybe are less attractive for us and more attractive for our friends in private equity..

Okay, that's helpful. Thanks.

My second unrelated question, with the SDLP, now that the ACAS acquisition may give you some – clear up some room in that 30% bucket, have you considered taking or are you even allowed to by the covenants allowed to take some of your Ares, maybe some of your first lien Ares balance sheet loans and actually sending them upstream or downstream into the SDLP to sort of accelerate that ramp?.

Sorry, just unclear, can we take first lien assets from the acquired ACAS balance sheet and sell them to Ivy Hill or somewhere else?.

Or to actually sell them to the SDLP and lever [indiscernible]..

Sure. Yes, I mean if our clients do that as a good outcome. Remember, our borrowers actually have their own interest at stake too. So, typically when new underwritings occur, whether it's an SDLP or anywhere else, we charge new fees and we have a relationship with our borrowers. So, they agree to things.

We don't just sell assets from X to Y without telling anybody. But look, it gives us an opportunity to go out and reengage with those clients in a collaborative way and offer them I think a broader product set here at Ares than they probably saw at American Capital.

Ivy Hill, SDLP, all of these things that I think we have to offer people should add value..

Okay, thanks. That's all the questions..

Our next question comes from Christopher Testa of National Securities Corporation. Please go ahead..

Most have been asked and answered, but just curious, have you looked at your pipeline and backlog currently and going forward in terms of existing versus new portfolio companies, should we expect 2017 to be a continuation of lending to existing companies as well?.

I don't have it in front of me, so I'll ask one of the guys to just pull it and take a look to give you a sense, but it's a reasonable balance. Again, I mean I think that 70% to 80% from last year is a pretty high number.

I would tell you that I think we are seeing probably some more interesting new transactions here at the beginning of the year than we are used to.

Again, the end of the year tends to be much more oriented towards working with some of the existing companies that you are in constant dialog with that you kind of worked with through the year to get something done by year-end. So, nothing noticeable there, I think it's a reasonable mix..

Okay, great.

And just my second question, just curious how your borrowers are weighing the potential policy changes of lower taxes and regulations which are pro-growth versus how they might be adversely affected by protectionism and other trade policies?.

I mean I think they are as confused as we are..

That's a fair answer. Thank you. That's all for me..

Our next question comes from Nick Brown of Zazove Associates. Please go ahead..

I guess first just to confirm something I think you said before. There's been a lot of press about loan repricings in the market.

Is that something that's affecting you with that offsetting of the benefit of higher LIBOR rates or is that more in bigger credits that you are not exposed to?.

Yes, it's really unfortunately a large cap phenomenon. Or fortunately for us, it's a large cap phenomenon. So we don't really see repricing in middle-market loans very often.

But yes, you are right, I mean January of this year was the most significant repricing year in the history of leveraged finance markets in the loan market, so tougher for the guys buying broadly syndicated and obviously managing CLOs..

Okay, thank you. And then just switching gears, my other questions were related to the Infilaw investment.

I guess when was that loan originally made, when did you originally make that loan, and is it in some sort of rework process already or in a forbearance or something like that?.

Sure. So we did the original deal in 2011. I would tell you, the Company actually did quite well for the first couple of years of our investment period, we were very happy with it, 2011, 2012, 2013.

Experienced some headwinds in 2015, mostly related to just macro trends around law school admissions, fewer applications, and the negative trends sort of accelerated into 2016 with the prospect of having to comply with gainful employment. There was more pressure during 2016 around bar passage and the ABA requirements.

So, we really didn't see issues in that company become sort of critical issues until last year, which is why you see the significant unrealized losses coming mostly through 2016.

So, it's not in a 'work out' process, but we did place the loan on non-accrual in October of 2016 and have taken kind of two quarters of significant unrealized losses in that name because it's a very challenged company today.

It's got a challenged business model and we are obviously working with the management team to try to stay it out and maximize value in those assets..

Okay, terrific. Thank you for answering that..

Our next question comes from Gilles Marchand of Knights of Columbus. Please go ahead..

Question, I'm wondering if you can reconcile, I guess your non-accruals went up in 2016 but your average quality increased, and I'm just wondering if you can reconcile that. And secondly, Michael said that I guess you're not really expanding your oil and gas exposure.

I just was wondering if you participated in the Gastar transaction that you parented, and if you did, if you could explain why?.

Sure. I mean basically the way you think about that is degrading is by fair value, right. So, if you are writing down your 1s which are your poor investments, or your 2, which are your poor investments, it tends to skew the grade up.

I would tell you, look, we have also started to find that some of our winners, as you've heard through the realized gain performance, have continued. We have got plenty of winners in the portfolio relative to the amount of losers. So, the non-accruals at cost went up.

The non-accruals at fair value, that went down because we obviously marked our portfolio in what we think is a very conservative fashion. And we've got plenty of good remaining obviously things that we think will contribute to good returns in the portfolio, particularly 4s, right. So, more 4s I think in this quarter than there were last quarter..

And then did you participate in the Gastar transaction?.

We did not..

Cool. Thank you..

Our last question comes from Jonathan Bock of Wells Fargo Securities. Please go ahead..

Thank you for just one quick follow-up. Kipp, talking about conservatism and focusing on the balance sheet and correct loans, clearly Ares has done that quite well over the cycles.

What's your view today on equity raises and whether or not it's needed on a go forward basis, given that the BDC is at such significant scale today?.

Look, we typically raise equity in a market where we see great investment opportunities and/or we don't have enough capital to attack those. So I told you I think, we're cautious around reinvestment environment. We are significantly under-levered relative to our targets. I mean for us today, we see no need to raise any capital anytime soon.

And to hit on your larger point, Jonathan, I mean we are a pretty big company these days.

So, we have the luxury of having built the Company for 13 years to a pretty significant scale, and while we do, as I've mentioned in the past, think that scale is a real advantage, $13 billion of capital is more than enough for the foreseeable future to be really, really dangerous in this business and do what we want to do, right.

And we can write transactions up to $1 billion, probably even $1.5 billion these days. We build real syndications in capital markets infrastructure to sell down in some of these larger deals.

So, I don't see any need to raise equity at the Company anytime soon, either to improve the business model or to give us capital to invest, because of where the balance sheet sits.

So, we're pretty happy just working on what we are working on, which are all the things I mentioned on the call obviously, rotating the American Capital portfolio, building SDLP, thinking about ways that we can use what will be a larger 30% basket to drive earnings, and just to do our thing here.

So, we're pretty happy without needing to be in the equity markets anytime soon..

Great. Thank you so much..

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kipp deVeer for any final comments..

Thanks so much, Nicole. I think we can just close the lines, but we'll thank everybody for their time and wish you a great afternoon..

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 7, 2017 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 10097976. An archived replay will also be available on a Webcast link located on the homepage of the Investor Resources section of our Web-site. Have a great day..