Ares Capital Corporation

Good afternoon. Welcome to the Aries Capital Corporation September 30, 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, October 27, 2020. I will now turn the call over to Mr. John Stilmar, Managing Director of Investor Relations.

Thank you. Let me start with some important reminders. Comments made during the course of this conference call and webcast, as well as accompanying documents, contain forward-looking statements and are subject to risks and uncertainties, including the impact of COVID-19, related changes in base rates, and significant market volatility on our business 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 filings. Aries 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 certain non-GAAP measures as identified by SEC Regulation G, such as core earnings per share or core EPS. The company believes that Kort 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 its operations. A reconciliation of Kort EPS to the net per share increase or decrease in stockholders' equity resulting from operation, 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 relating to portfolio companies, was derived from third-party sources and has not been independently verified, and accordingly, the company makes no representation or warranties with respect to this information. The company's third quarter-ended September 30, 2020 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Q320 earnings presentation link on the homepage of the investor resources section of its website. Ares Capital Corporation's earnings release and 10Q were also available on the company's website.

And on the line by our co-presidents, Mitch Goldstein and Michael Smith, our chief financial officer, Penny Roll, and several other members of the management team. I will start by highlighting our third quarter results and then provide some thoughts on the company's position. This morning, we reported third quarter core earnings of 39 cents per share, consistent with our second quarter earnings, and we believe another strong result given the impact from COVID. Our Q3 gap EPS of $1.04 increased meaningfully. driven by strong net appreciation in our investment portfolio. Our net asset value per share climbed to $16.48, an increase of 90 cents per share or approximately 6% since March 31st, 2020, when we registered the most significant impact from COVID on portfolio values. During the third quarter, we also capitalized on strong market conditions to further extend the duration of our unsecured liabilities by raising over $1.1 billion of unsecured notes across two successful offerings. Our available liquidity now stands at more than $4.4 billion at quarter end, putting us in a good position to make investments in a more active market and to continue to support portfolio companies as needed. In terms of market conditions, investor risk appetite has improved due to some continuing signs of economic recovery Better Than Expected Corporate Earnings, and the Positive Effects of Fiscal Stimulus, all of which have been supportive of the broader liquid credit markets. With this firmer tone in the market and a slower new issue calendar, secondary market loan prices rose and loan spreads on new deals began to decline. These trends have flowed through to the middle market and have had a positive impact on the value of our portfolio. Observing these overall trends, we are generally seeing management teams and sponsors shifting their focus from risk management and value preservation to growth and value creation. And we are also now seeing an acceleration of M&A activity and our deal flow. Businesses are increasingly seeking acquisitions to reposition their business models or to capitalize on new growth verticals in a post-COVID world. In addition, there's pent up demand from a very slow period this spring and summer. Many transactions that were being considered pre-COVID are now returning to the foreground and seem actionable. Furthermore, some sponsors are seeking to lock in gains for 2020, especially ahead of the upcoming elections. And with these dynamics, we would expect to see busier quarters in the future compared with what we saw in both the second and third quarters. One interesting trend that we're observing is that the average company that's seeking our financing solutions is increasing in size. The average EBITDA of companies in our New Deal pipeline is roughly twice that of the companies that we were evaluating during the third quarter of last year. This trend reflects the expanding market opportunity and a growing desire by our clients to tap the increased certainty that direct lending solutions offer. versus public syndicated alternatives. Given our long-term relationships, significant scale, and extensive positions of incumbency, we believe ARCC remains well positioned to benefit from both the reemergence of activity and the continued secular growth opportunity in direct lending. Shifting back to the portfolio, As we mentioned at the outset, we saw a net increase in the fair value of our portfolio driven largely by supportive market prices and stable to improving earnings across the portfolio as a whole. Underscoring the health of our overall portfolio during the third quarter, we collected 99% of contractual interest due, had a 60% drop in the amount of new amendments, and continued to see net revolver repayments from our portfolio companies. Revolver drawings are now back to drawn levels that are near pre-COVID. We believe this highlights the improving liquidity profile of a number of our portfolio companies. We also continue to see evidence that our focus on upper middle market businesses results in a more resilient and stable portfolio of companies as compared to lower middle market companies. Across the portfolio, portfolio companies with EBITDA of $100 million or more showing greater earning stability or growth on average compared to our companies with less than $25 million of EBITDA. Regarding the health of our portfolio, our weighted average portfolio grade of 2.9 remained stable versus last quarter and less than 5% of our portfolio companies changed grades. The ratio of upgrades to downgrades was greater than three to one, which we believe highlights the steady to improving cash flows of our portfolio companies that is followed with partial or complete reopenings of many businesses. For the more COVID impacted names, which we largely see in our grade one and grade two names, we believe we have an informed view of their path to recovery. But we do think this recovery will take time and likely be quite uneven with the ever evolving COVID health crisis. We believe many of these companies are generally strong franchises with every reason to perform as they did pre-COVID and that they will recover during more certain economic times. Our confidence is further supported by the fact that a significant number of them have already received additional sponsor equity beneath our loan positions, which provides cushion to our capital and a validation for the future of these companies. Given our stable earnings, Our strong balance sheet and the improving outlook for investment activity, we declared a 40 cent per share quarterly cash dividend for the fourth quarter of 2020. We believe we can continue to support a steady dividend level through varying market conditions. I'll now turn it over to Penny to provide more details on our third quarter results.