Ares Capital Corporation

Good morning. Welcome to Aries Capital Corporation's June 30th, 2020 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Tuesday, August 4th, 2020. I will now turn the call over to Mr. John Stilmar, Managing Director of Investor Relations.

Thank you very much. Let me start with some important reminders. Comments made during the course of this conference call and webcast as well as the accompanying documents contain forward-looking statements that are subject to risks and uncertainties, including the impact of COVID-19, the related changes in base rates, and significant market volatility on our businesses and our portfolio companies. 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 such 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 filing. Aries Capital Corporation assumes no obligation to update any such forward-looking statement. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and results of operations. A reconciliation of core EPS to the net per share increase or decrease in stockholders' equity resulting from operations, the most directly comparable GAAP financial measure, can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information discussed in this presentation, including information related 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 to this information. The company's second quarter ended June 30, 2020 earnings presentation can be found on the company's website at www.AriesCapitalCorp.com by clicking on the Q2-20 earnings presentation link on the homepage of the investor resources section of the website. Aries Capital Corporation's earnings release and 10Q are also available on the company's website. I'll now turn the call over to Kip DeVere, Aries Capital Corporation's Chief Executive Officer.

Thanks, John. Hello to everyone and thank you for joining us. I'm joined on the line by our co-presidents, Michael Smith and Mitch Goldstein, our Chief Financial Officer, Penny Roll, and several other members of the management team. I will start by highlighting our second quarter results and then provide some thoughts on the company's position. This morning, We reported second quarter core earnings of $0.39 per share, which we believe is another strong result in light of the difficult economic conditions during this public health crisis. Our gap EPS of $0.65 rebounded this quarter and was supported by net gains in our investment portfolio. Our net asset value per share climbed to $15.83, a $0.25 per share increase reflecting 2% growth from March 31st. We also deleveraged our balance sheet and we meaningfully enhanced our available liquidity to more than $4.2 billion as of quarter end pro forma for our successful July notes offering. The second quarter gave us more visibility into the economic disruption caused by COVID-19. And with this, we've had more time to evaluate the health of our portfolio and understand how the duration of the economic recovery may affect our investments. under a variety of potential scenarios. Overall, we are feeling more confident in the financial and liquidity position of our portfolio companies despite the second quarter being a more difficult quarter for some of them. And I say all of this while acknowledging that this pandemic is creating a kind of uncertainty that we've never witnessed before. The good news is that our portfolio is highly diversified with the average investment representing just 0.3% of the total portfolio and remains weighted towards defensive sectors such as healthcare, software and business services. We're fortunate to be meaningfully underweight many of the most impacted sectors like travel, entertainment, restaurants, retail and oil and gas. And this was by design as we were more cautious in the New Deal market over the last few years. We believe the portfolio remains a solid collection of defensive, Upper Middle Market Companies, which we believe have significant franchise value over the long haul. The weighted average EBITDA of our portfolio companies is over $140 million, and the weighted average enterprise value remains over $1 billion. Our weighted average loan-to-value for our portfolio is approximately 50% to 55%, which provides a significant capital cushion for our loan positions when we take a long-range view. These upper middle market businesses are very different from lower middle market businesses in terms of resiliency, access to capital, and depth of management. A recent Proskauer default study on the middle market corroborated this belief, illustrating that defaults amongst middle market companies above $50 million in EBITDA were 40% lower than those with less than $25 million in EBITDA. Thank you for joining us. and witnessed a significant decline in outstanding revolver borrowings at our portfolio companies, indicating that the liquidity of a number of our borrowers has improved. On the other hand, two key metrics that we used to provide transparency on portfolio company performance, non-accruing loans and portfolio grades, trended modestly negative during the quarter. The recovery in the economy and those most impacted portfolio companies will certainly take time. However, we feel confident that we have the tools required to achieve good outcomes. Specifically, as it relates to our portfolio grades, at the end of the second quarter, the weighted average grade of our investment portfolio at fair value was 2.9%. The slight decrease from the 3.0 weighted average grade in the prior quarter. This modest aggregate change reflects an increase in grade two rated names as the performance of certain companies have deviated from our original underwriting expectations, primarily due to the economic impact of COVID-19. Overall, we believe the companies will recover during more certain and predictable economic times, and we take comfort that the owners and management teams of these businesses agree. A significant number of these underperforming companies have already received additional sponsor equity capital injections that are subordinated to our loan positions, which we believe validates the long-term enterprise value of these companies beyond these challenging times. In situations where we have been asked to be part of a near-term solution for portfolio companies, we've executed amendments to address covenant breaches and liquidity needs. As a general matter, we've provided short-term concessions measured in months or quarters rather than years, and we have often been able to get some combination of enhanced pricing, improved terms, and tighter documents along with the sponsor equity. Shifting towards our new investment opportunities, it's been very quiet on the New Deal front. However, due to the size of our portfolio and our wide range of relationships, we're still finding interesting opportunities to pursue. and many more. Thank you for joining us. Penny will spend some time in a moment on our capital and liquidity position, but I'll reiterate from our call last quarter, the balance sheet is in great shape. With our consistent earnings, strong balance sheet, and our portfolio positioning, we felt highly confident in declaring a 40 cent per share quarterly cash dividend for the third quarter of 2020, and we believe that we can continue to support a steady dividend level for the foreseeable future. I'll now turn it over to Penny to provide more details on our second quarter results.