Ares Capital Corporation

Good afternoon. Welcome to Aries Capital Corporation's second quarter and the June 30th, 2022 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Tuesday, July 26th, 2022. I'll now turn the call over to Mr. John Stillmar, 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 and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. 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 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 defined by SEC Regulation G, which is core earnings per share or core EPS. The company believes the 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 operation. A reconciliation of core EPS to GAAP net income per share, 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 the earnings release filed this morning with the SEC on Form 8K. All per share information discussed during this call is basic per share information. See the company's 10Q filed with the SEC this morning for more information. Certain information discussed on this conference call and the company's slide 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 such representation or warranty with respect to this information. The company's second quarter June 30, 2022 earnings presentation can be found on the company's website at www.AriesCapitalCorp.com by clicking on the second quarter 2022 earnings presentation link on the home page of the investor section of the website. Aries Capital Corporation's earnings release and 10Q are also available on the company's website. I will now turn the call over to Kip DeVere, Aries Capital Corporation's Chief Executive Officer.

Thanks, John. Hello, everyone. I hope you're all doing well, and we appreciate you joining our call today. I'm here with our co-presidents, Michael Smith and Mitch Goldstein, our Chief Financial Officer, Penny Roll, and several other members of the management team. I'd like to start by highlighting our second quarter results and then provide some thoughts on the changing market conditions and how we're seeing things. This morning, we reported second quarter core earnings of 46 cents per share, an increase of approximately 10% compared to the first quarter, driven by the early benefits of rising interest rates, higher dividend income, and continued credit stability within the portfolio. Our NAV of $18.81 per share declined 1% quarter over quarter, largely due to unrealized losses we took to reflect wider credit spreads in the markets. These unrealized marks are to be expected with more volatile markets. However, I will say it's a welcome trend as more volatile markets tend to provide more deal flow for direct lending participants and most likely more interesting investment opportunities for the longer term. Volatility within the leveraged finance and equity markets continued during the second quarter. as central banks around the world became more aggressive in their fight with elevated inflation by rapidly raising interest rates. With this tightening monetary policy, our concerns over an economic slowdown or a recession have increased. Leveraged finance markets are experiencing significant spread widening, weak secondary liquidity, and minimal primary issuance, as the large banks are highly focused on working out their unsold inventory of committed financing. many of which we believe are being held at significant losses. During these times, we rely on a playbook that we've developed over the past 17 years. We try to be opportunistic on these situations with banks. We become incrementally more selective with our core deal flow to focus on the highest quality investments and to drive better pricing and terms. We aggressively manage our portfolio, and we strive to build additional liquidity at the company. Against this more volatile backdrop, the stability and scale of our capital is resulting in incremental demand from both our existing portfolio companies and from new borrowers, including some much larger companies that otherwise would turn to the liquid markets in less uncertain times. We believe our longstanding and disciplined approach to investing has resulted in an attractive, highly diversified portfolio that is focused on upper middle market businesses that have significant long-term franchise value and operate in resilient industries. Demonstrating our focus on diversification, our average investment represents just 0.2% of the portfolio, and this minimizes our exposure to any single portfolio company. In addition, we've focused on larger companies in recent years, and the weighted average EBITDA of our portfolio has now reached $179 million. This number has more than doubled over the past five years. Our experience in previous cycles has demonstrated that larger companies tend to be more resilient during market dislocation. All things being equal, we believe these larger companies have more diverse revenue streams, broader customer bases, deeper management teams, and more robust sources of capital. These attributes should all serve to support the credit performance of our portfolio. While we recognize the increasingly complex operating environment that many companies face in today's economy, our portfolio companies are performing well. Our non-accrual to cost remain well below our 10-year average, and we reported another quarter of strong underlying portfolio company EBITDA growth. Furthermore, the weighted average loan-to-value on the aggregate loan portfolio remains comfortably below our five-year average of 51%. which reflects the significant structural support provided by the equity of our clients at both private equity-backed companies and at non-sponsored borrowers. As we discussed our recent analyst day, we have a proactive and deeply embedded credit-oriented culture. We believe our portfolio management team provides an important and differentiated element to our overall approach to risk management. During our quarterly portfolio review, our portfolio management team, alongside our deal team, and put a heightened focus on the risks brought by today's high inflationary environment. While our analysis of our industry sectors and underlying company fundamentals is subjective, we take comfort that this quarter's review revealed only between 5% and 10% of our portfolio was in the higher risk category specifically regarding the potential impact from inflationary pressures such as rising energy prices, supply chain disruption, and staffing shortage. Looking forward, we believe the continued increase in market interest rates presents a potential opportunity for the growth of our core earnings given our largely floating rate loan portfolio that is financed by mostly low-cost, fixed-rate, unsecured sources of financing. As Penny will discuss in more detail, If the full impact of the market rate moves this quarter had flowed through our entire quarter, we calculate that our second quarter core earnings could have been about 11% higher on a run rate basis. Additionally, should market rates increase 100 basis points from the June 30th levels, our quarterly core earnings could benefit by about $0.08 per share, or a 17% increase over our second quarter core earnings. We believe the benefits these market rate increases to earnings will be more impactful in the third quarter and beyond. We also do not believe the currently projected increase in rates will result in deteriorating credit performance. Holding all else equal, including leverage at the borrower level, a 150 basis point increase in market rates would result in a weighted average interest coverage ratio in the portfolio of approximately two times. Importantly, this analysis doesn't consider any EBITDA growth or deleveraging that has historically occurred in the portfolio. We feel good about the ability of our portfolio companies to navigate a higher rate environment, and we believe these dynamics will further differentiate Aries Capital from many other income-oriented alternatives in the market today. Before I turn the call over to Penny, I wanted to highlight the dividend increase we announced this morning. As a result of our run rate core earnings outlook and the expected further benefits from higher interest rates, coupled with our strong portfolio performance, we increased our regular quarterly dividend from 42 cents per share to 43 cents per share for the third quarter. This amount is in addition to the 3 cents per share additional dividend that we've already declared for each of the third and fourth quarters this year. Let me now turn the call over to Penny to provide more details on second quarter results and some other thoughts on the balance sheet position.