Ares Capital Corporation

Thank you and good afternoon, everybody. 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 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 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 defined by SEC Regulation G, such as core earnings per share, 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 basic and diluted net income per share, the most directly comparable financial measure, can be found in the accompanying slide presentation for this call. In addition, the reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8K. Certain information discussed in this conference call and the accompanying slide 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. The company's fourth quarter and year-end December 31, 2022 earnings presentation can be found on the company's website at www.areascapitalcorp.com by clicking on the fourth quarter 2022 earnings presentation link on the homepage of the investor resources section. Areas Capital Corporation's earnings release and Form 10-K are also available on the company's website. I'll now turn the call over to Kip DeVere, Area's Capital Corporation's Chief Executive Officer.

Thanks, John. Hello, everyone, and thanks for joining our earnings call today. I'm here with our co-presidents, Mitch Goldstein and Court Schnabel, our Chief Financial Officer, Penny Roll, our newly appointed Chief Operating Officer, Jana Markowitz, and other members of the management team. For those who don't already know, Janet has been an important member of the ARIES Direct Lending team for over 18 years, and we're delighted to have her join the executive team at ARIES Capital. Janet currently serves as the Chief Operating Officer, Head of Product Management and Investor Relations for our U.S. Direct Lending Strategy. Our newly appointed president, Court Schnabel, will speak later in the call, but I'd like to formally welcome him as well. Kurt's been instrumental in helping us grow and manage the U.S. direct lending business over the last 19 years, and we're thrilled to have him on board. A warm welcome to both of them. This morning, we reported strong results for the fourth quarter and the full year. We generated record quarterly core earnings per share, 63 cents. This 26% quarterly increase in core earnings was largely driven by the benefit of rising market interest rates and our net interest income. but also from strong capital structuring fee income on the fourth quarter transactions. For the year, our core EPS of $2.02 matched our prior record in 2021. On a gap basis, our fourth quarter and full year earnings of $0.34 per share and $1.21 per share, respectively, were below our core earnings as we recognized $0.40 per share and $1.08 per share respectively of net unrealized depreciation due largely to widening market yields. Despite these markdowns, if we take in stride with the transitioning market, we generated net realized gains through the full year of 2022 as we continue to deliver positive realized gains in excess of our losses. We view realized gains and losses as the more important metric in grading our performance than the unrealized gains and losses, which have substantially less impact on our long-term results. In our view, our track record of strong credit performance compared with other BDCs demonstrates the merits of our long-tenured proven investment process as we work to deliver differentiated results to our shareholders. I'd now like to shift and provide some thoughts on the market and the economic environment. 2022 is a year of transition for the U.S. economy. and one that brought significant volatility to the capital markets. As overall capital formation slowed in both the liquid and private credit markets, we believe the competitive dynamics and the risk-reward environment for ARIES Capital shifted positively to be as attractive as we've seen in quite some time. Market spreads on new deals are at least 100 to 150 basis points higher than at year-end 2021. And we believe that the total return opportunity afforded by the higher base rate in addition to this spread expansion is very compelling. These enhanced economics are being achieved in transactions that also have reduced leverage and meaningfully better documentation. We think this is an exciting development for our new investment business and we remain active in the market. To dig in a bit deeper, the senior loans that we originated in the fourth quarter had a weighted average yield of more than 10.5%, with weighted average leverage less than five times debt to EBITDA. Many of these investments focused on larger businesses. We provided loans to companies with a weighted average EBITDA of more than $500 million in the fourth quarter. We believe the volatility of 2022 also continues to widen the fairway for us and to expand the market in direct lending generally. larger companies continue to shift their focus to private capital alternatives as a preferred and more reliable source of financing for their businesses. And with challenges faced by the banks due to risk capital constraints and the lack of liquidity in the syndicated markets, we believe private lenders have steadily gained share throughout 2022. This has led to our involvement with larger companies. A year in 2022, the weighted average EBITDA of our portfolio companies reached $275 million, an increase from $162 million at the end of 2021, and meaningfully above the weighted average from five years ago of $62 million. We believe this offers significant benefits to Aerie's capital as we grow, as larger companies generally have stronger credit profiles as a result of more diverse revenue streams, broader customer bases, and more experienced management teams. As demand for our capital solutions has grown, we've responded by continuing to augment our direct origination capabilities through continued hiring and the addition of new capabilities. Today, we believe we employ the largest direct lending team in the United States with approximately 170 dedicated investment professionals. We believe that the scale of our team enables us to have complete market coverage by industry and by geography and to drive compelling opportunities in every channel that we target. For example, despite a 22% drop in US M&A volumes and a 45% decline in broadly syndicated transaction volumes in 2022, we reviewed more than $500 billion of transactions. This volume is comparable with or even slightly higher than the amount we reviewed in 2021, which was the busiest year in the company's history. Despite this, during periods of volatility, our inclination is to become incrementally more selective on new deals and utilize the experience of our large and tenured portfolio management team to focus on risk management efforts. We do have an expectation that a slower US economy and the higher rate environment will create more stress in the portfolio. And we're focused on getting ahead of it as we have in past economic and market cycles. Led by partners with an average of over 15 years tenure at Aries, we believe we have the largest and most experienced portfolio management team when compared with other direct lenders. And this team works in collaboration with our core investment teams to actively monitor and engage with our borrowers and sponsors. Our goal is to identify problems early and develop strategies to maximize our outcomes in companies that are underperforming the plan or having more difficulty in the higher interest rate environment. The economic benefits from our credit and portfolio management process have led to a strong culture focused on downside protection and risk mitigation in our lending activities. Since inception, ARIES Capital has generated a cumulative 1% net realized gain rate on our investments. This means that along with generating gains on many investments, we have also successfully minimized losses in the portfolio in more difficult times. One statistic to call out here, we've actually achieved about a 0.9 times multiple on invested capital on all the loans that have been placed on non-accrual over the years. Despite the more challenging backdrop and the higher prevailing interest rates, we feel the portfolio is defensively positioned today due to our longstanding underwriting strategy of focusing on market leading companies with high free cash flows in what we believe to be resilient industries. Using market interest rate levels at year end, our overall interest coverage for the total portfolio was 1.8 times. These strong coverage metrics allowed us to receive 99% of contractual interest in our portfolio during the fourth quarter. The health of the portfolio is also demonstrated by stable weighted average portfolio grades and non-accrual rates that remain quite low relative to historical averages. Finally, the strength of our portfolio continues to benefit from the substantial amount of equity invested in our companies, most often from large and well-established private equity firms. At year end 2022, we calculated the weighted average loan-to-value in the portfolio to be approximately 45%, which we believe gives us strong cushion to the downside in these loans. These metrics, along with our positive view of the company's earnings power, supported our decision to increase our regular quarterly dividend three times during 2022, moving from $0.41 per share in the fourth quarter of 2021 to $0.48 per share in the fourth quarter of 2022. This builds on our long-term track record of delivering consistent dividend growth. 2022 represents our 13th consecutive year of stable or increasing regular dividends to our shareholders. Supplementing this growing regular dividend, we paid $0.12 per share of additional dividends in 2022, resulting in $1.87 per share of dividends for the year, which represented a 15% increase in total dividends versus 2021. With that, let me turn the call over to Penny to provide more details on our financial results and some further thoughts on our balance sheet.

Thanks, Kip. For the fourth quarter of 2022, we had a record level of core earnings of 63 cents per share compared to 50 cents per share in the prior quarter and 58 cents per share in the fourth quarter of 2021. For the full year 2022, our core earnings per share was $2.02, matching the core earnings per share for 2021. Our 2022 earnings significantly benefited from the increase in market interest rates, driving a 17% increase in net interest and dividend income per share as compared to 2021. The growth in these recurring earnings roughly offset the decline in capital structuring fees in 2022 relative to the higher fees earned during the more active 2021. On a GAAP basis, we reported GAAP net income per share of $0.34 for the fourth quarter of 2022 compared to $0.21 in the prior quarter and $0.83 in the fourth quarter of 2021. For the year, we reported GAAP net income per share of $1.21 compared to $3.51 per share for 2021. Our core earnings for 2022 as compared to 2021 was stable year over year where our GAAP net income for 2022 was reduced by the net unrealized depreciation taken on the portfolio throughout the year driven primarily by market volatility. Conversely, our GAAP net income for 2021 benefited from the net unrealized appreciation seen on the portfolio throughout that year as we saw a rebound from valuation declines incurred in 2020 as a result of COVID. While we have seen volatility in asset values over the past few years, our underlying portfolio continues to perform well through this volatility as Kip mentioned earlier. Our stockholders' equity ended the year at $9.6 billion or $18.40 per share compared to $9.4 billion or $18.56 per share at the end of the third quarter 2022 and $8.9 billion or $18.96 per share at the end of 2021. Our portfolio at fair value at the end of the year grew to $21.8 billion, up modestly from $21.3 billion at the end of the third quarter and more meaningfully from $20 billion at the end of 2021. The weighted average yield on our debt and other income-producing securities at amortized cost was 11.6% at December 31, 2022, as compared to 10.7% at September 30, 2022, and 8.7% at December 31, 2021. The weighted average yield on total investments at amortized cost was 10.5%, which increased from 9.6% at September 30, 2022, and 7.9% at December 31, 2021. The yields on our portfolio reflected the significant increases in base rates given our predominantly floating rate loan portfolio. Shifting to our capitalization and liquidity, we ended the fourth quarter with a debt-to-equity ratio, net of available cash, of 1.26 times, Pro forma for the $223 million equity offering that we closed in January of 2023, our debt-to-equity ratio, net of the available cash, declined to 1.21 times. Our liquidity position remained strong with approximately $3.9 billion of total available liquidity, including available cash, pro forma for our financing activities in the beginning of this year. After accounting for the $750 million of unsecured notes that come due this month, our next nearest debt maturity is not until March of next year. With this level of dry powder, we believe that we remain well positioned to take advantage of the current investing environment. As Kip stated earlier, we declared a first quarter 2023 dividend of 48 cents per share. This dividend is payable on March 31, 2023 to stockholders of record on March 15, 2023, and is consistent with our fourth quarter 2022 dividend. We continue to consider our taxable income and the amount of spillover when setting our overall dividend. We recognize that we had a strong level of core earnings for the year, which far outpaced the total dividends we paid. When looking at our taxable income for the year, Our current estimate of undistributed taxable income, sometimes referred to as our spillover, at year end 2022 is $675 million, or approximately $1.27 per share after considering the shares issued in our January equity raise. This spillover reflects the realization of a tax deduction related to a legacy allied capital investment which reduced our total taxable income for the year and thus reduced our spillover. After considering this deduction, our estimated spillover for 2022 is generally in line with the $678 million that we carried over last year. Importantly, this 2022 spillover level is more than two and a half times greater than our current regular quarterly dividend rate. We continue to believe that having a healthy level of spillover income is beneficial to the stability of our dividend. We will continue to monitor our undistributed earnings and balance these levels against prudent capital management considerations. With that, I would like to welcome Cort to his first earnings call, and we'll now turn it over to him to walk through our investment activities.

Thanks, Penny, and hello, everyone. Before I get started, I just want to say, after 21 years at Aries, I could not be more excited to serve as the new co-president of Aries Capital Corporation and for the opportunity to help lead our company into the future. I look forward to spending more time with all of you on the phone here in the months and years ahead. Okay, let's move it forward and I can provide more detail on our investment activity and portfolio performance for the fourth quarter and the year. I will then conclude with an update on post-quarter end activity, backlog, and pipeline. Over the course of 2022, we completed over 180 investments across 23 distinct industries. In line with the overall loan portfolio, the top three industries where we made new financing commitments in 2022 were software and services, healthcare services, and commercial and professional services. Our new investments were made into what we believe are high-quality companies, which present opportunities for attractive risk-adjusted returns driven by lower leverage levels, tighter credit documents, and higher spreads. As we've seen in the past, periods of volatility amplify the secular shift toward private capital. This dynamic is clearly illustrated by LCD's recent report, which shows that 98% of the new LBO issuance in the fourth quarter of 2022 was completed by private capital providers, a market traditionally supported by the broadly syndicated channel. We believe that our scale, competitive position, and flexible capital have enabled us to take advantage of these opportunities. Importantly, we were leader ranger on 85% of our investment during 2022 and 95% of our investments in the fourth quarter. The ability to lead transactions is an important benefit we derive from our trusted relationships, our scale, and the attractiveness of the capital solutions we provide. We strongly believe our approach provides us greater control over capital structures, pricing, and documents, and longer term, better tools to drive successful credit outcomes. We also believe the size and quality of our incumbent portfolio drives differentiated access to attractive investments. In 2022, over 50% of our new commitments were to existing borrowers, which is consistent with our history. Incumbency enables us to support our strong performing portfolio companies that we know well, which we believe limits underwriting risk on new commitments. Shifting to our portfolio, as of year end 2022, our portfolio remained well diversified across 466 different borrowers with an average hold size of only 0.2% at fair value. Excluding our investment in Ivy Hill and the SDLP, which we believe are diversified on their own, No single investment accounts for more than 2% of the portfolio at fair value, and our top 10 largest investments totaled just 11.8%. We believe the diversification of our portfolio differentiates us from our competitors as it reduces the impact to the overall portfolio from any single negative credit event at an individual portfolio company. We also believe this diversification plays a significant role in ensuring that we have predictable revenue. which gives us confidence in the level of dividend we have declared. Kip discussed this a bit earlier as well, but we do believe the fundamentals and overall credit performance of our portfolio remain healthy. The weighted average EBITDA of our underlying portfolio companies demonstrated solid growth in the fourth quarter, expanding 11% year over year. This overall healthy EBITDA growth is skewed to our larger industry concentrations, which in aggregate are growing at a faster rate than our smaller industry concentrations and the overall portfolio. This underscores what we believe are one of the many merits of not being a benchmark style investor, as we are able to be selective, not only in regard to the companies we are financing, but also the industries we target more generally. The weighted average grade of our portfolio companies of 3.2 was consistent with last quarter and improved slightly from 3.1 in the fourth quarter of 2021. Also, our portfolio management team believes that the share of companies that were highly impacted by inflationary pressures, supply chain disruptions, and staffing shortages remained at stable and manageable levels. By our measures, those impacted represent less than 10% of the total loan portfolio. Our non-accrual rate during the fourth quarter increased slightly as we added one net new company to non-accrual. resulting in non-accruals at costs of 1.7% as compared to 1.6% in the third quarter of 2022. Our non-accrual rate is currently below our average during 2021 and well below our 10-year average of 2.4%. Amendment activity continues to represent a small number of companies relative to the size of our portfolio, although it has picked up since prior quarter. We do expect that amendment activity is likely to increase in future periods as well, but remain manageable. It is important to note that the amendments we enter into often come with positives to us as the lender in the form of fees, incremental spread, tighter documents, and sponsor equity injections. Finally, I'll provide a brief update on our post-quarter end investment activity and pipeline. From January 1st through February 1st, 2023, we made new investment commitments totaling $226 million, of which $158 million were funded. We exited or were repaid on $372 million of investment commitments. As of February 1st, our backlog and pipeline stood at roughly $265 million. Our backlog contains investments that are subject to approvals and documentation and may not close, or we may sell a portion of these investments post-closing. So while it's been a pretty slow start to the year, even for the typically seasonally slow first quarter, we do expect things should pick up here in regular course. And I will now turn the call back over to Kip for some closing remarks.

Thanks a lot, Court. We're thrilled to formally have you on board here at the company. And I know you'll add a ton of value here as the co-president with Mitch. So in closing, 2022 was a year of strong performance for the company. And we believe that we're well positioned to navigate through any uncertainty that lies ahead. Our long track record of successfully managing the company throughout economic and market cycles provides us with confidence as we enter a different environment in 2023 and likely beyond. Over the past 10 years through September 30th, 2022, which is the latest full reporting quarter for all the BDCs, Aries Capital has differentiated itself versus the competition in almost every relevant performance metric. The company has delivered the highest regular base dividend per share growth rate, the highest NAV per share growth rate, the highest total return on its NAV, and the best equity return on our stock. In each case, when compared with every other externally managed BDC, With a market capitalization of over $700 million, it's been publicly traded for the last 10 years. Let me close by saying that we're deeply grateful to our investors for the trust and confidence they've demonstrated in Aries and their support for the company. I'd also like to thank our team for their hard work and their dedication throughout 2022. With that, operator, I think we can open the line for questions.

At this time, if you would like to ask a question, please press star then 1 on your touch-tone phone. If you would like to withdraw your question, please press star then 2. Please note, as a courtesy to those who may wish to ask a question, please limit yourself to just one question and a single follow-on. If you have additional questions, you may re-enter the queue. The Investor Relations team will be available to address any further questions. At the conclusion of today's call. Our first question today comes from the line of Melissa Woodall from JP Morgan. Please go ahead. Your line is now open.

Good afternoon. Thanks for taking my questions today. To start, I thought maybe we could just touch on the dividend policy. I know that you've talked about how you've approached that both today but also in the past. I guess compared to where you were last year in paying out a small supplemental dividend per quarter, is there anything that we should read into the fact that you didn't establish something similar headed into 23, especially with the level of earnings power currently embedded in the portfolio?

Hey, Melissa, it's Kip. No, I don't think there's anything to read into it. We obviously... chose to increase the dividend pretty materially. You know, the regular dividend last quarter from 43 to 48 cents to obviously acknowledge the increased earnings power. You know, we said we were going to reevaluate the spillover, which when we trued up from a tax perspective is kind of the same as it was at year end last year. So we really tried to pursue... you know, the increase through a regular increase rather than a special. But I don't think there's anything to read into. And obviously, we have opportunities going forward to do, you know, other things, whether it's a regular increase or a special in the future. But I wouldn't read anything into it.

Okay. And then a follow-up to your comments about sort of non-accrual rates and how they compare to sort of the historical average for the portfolio. You did say that you expect, you know, stress to increase from incredibly low levels currently. In that context, are you expecting sort of a reversion to the mean for this portfolio, or are you expecting that to take a bit higher than the long-term average? Thanks so much.

Yeah, I mean, it's hard to tell. We obviously tried to lay out in the prepared remarks Um, I did, and I think court did as well, you know, look, our expectation that it's probably going to be a more volatile year that we would expect, you know, the increase in amendment activity and all of that to lead to, um, increases in non-accruals and defaults, not only for us, but we expect for our competitors and folks in the business in general. Um, based on how we see, uh, the portfolio and the economy as a whole though, I think, um, more of a reversion to average is likely. We get asked the question a little bit differently than you asked it, Melissa, but I'll ask the question that we get asked instead of the one you asked, which is we don't expect the current environment is going to create an extraordinary amount of defaults that blow through historical averages. We see this as a pretty regular credit cycle where defaults are likely to go up and not exceed the averages, I think is how we're seeing things today.

Okay, thanks, Kip.

You're welcome. Thanks for your question.

Thank you. The next question today comes from the line of Ryan Lynch from KBW. Please go ahead. Your line is now open.

Hey, good afternoon. First question I just had was, if I look at your capital structuring fees, they basically doubled this quarter versus the prior quarter on kind of a modest level of increasing commitments in the quarter. Was there anything kind of one time going on in the numbers this quarter, or is that just kind of more indicative of the current lender-friendly environment allowing you to kind of generate more economics from the deals you guys are doing?

Yeah, I mean, nothing extraordinary. I mean, I think fees generally for new deals are higher. This is a simple answer, Ryan.

Okay, so just the particular ones you guys had this quarter were higher fee deals.

Yeah, I mean the average fee rate on new commitments is higher relative to the average and relative to prior quarters.

The other one I had, you mentioned portfolio monitoring being a big competitive advantage. Ferraris versus some others and I do believe that you guys do have a more robust and deeper portfolio monitoring team. I'm just curious, can you maybe help me understand why that is a competitive advantage that if you have a business which is potentially going to come under stress because of the economic environment they're in, what can that portfolio monitoring team actually go in and do that can actually create better outcomes versus a different platform who maybe isn't able to get in there as early or maybe be creative in their solutions?

Yeah, I mean, I think it's – we could go on and on about this, to be honest, for a while, but I'll try not to. I mean, I think – Our philosophy, and Court mentioned this too, is we want to bring substantial, flexible capital solutions into the companies that we onboard into the portfolio. The way that we underwrite and the way that we approach our transactions as a lead investor helps us because we're a substantial source of capital. We have direct relationships with either private equity firms and or companies and or management teams where I think we're viewed as a valued partner. rather than just money. And that valued partnership transitions all the way through post-closing and in the monitoring stage. So I would say it's pretty easy on the companies that are performing well, right? In the LBO lending business, you collect financial statements, you don't do much, and you celebrate the fact that the company's performing as planned or better. In the underperformers, we're able to actually leverage the nature of that underwriting, the nature of that relationship, et cetera, to be very early. We try not to be surprised. Our management teams and the owners of companies where we're invested typically don't want us to be surprised. So when things are not performing to plan, we tend to be in the room. We have quality information. We can often provide other information. portfolio company data and information in existing industries where we're particularly deep to help management teams understand some of the complexities that they may be experiencing. But it really is all about that early intervention, seeing the early warning signs and good communication. How can we help? We can help in a whole host of different ways. We can provide amendments and modifications. We can change the nature of the loans that we've underwritten because we have the flexibility to do that. We can bring capital to the table if it's needed in situations where liquidity is, you know, less than optimal. So hopefully that gives you a flavor for it, Ryan. But we could, you know, we could go on quite a while about that.

Sure. No, that's helpful. And I understand it could be a very deep discussion. I appreciate the time today. I'll hop back in the queue.

Okay, thanks. Thank you. The next question today comes from the line of Casey Alexander from Compass Point. Please go ahead. Your line is now open.

Hi, good afternoon. First of all, welcome to the new team members. Congratulations on your assignment to Ares Capital. Most of my questions have been asked. I just wondered... The amendments and modifications that you do, they drive a certain amount of fee income. Does that show up also in capital structuring and servicing fees? And would we expect that to sort of impact the level of capital structure and servicing fees in 2023?

Yeah, thanks, Casey. I appreciate those comments around court and Jenna. The amendment fees do show up in the structuring fees line. Again, what's that? Othering. I'm sorry. Penny is telling me now it shows up in the other income line. So you'll see it there. And, you know, will you see a modest increase there if there are more amendments in the portfolio? Probably. But, you know, these aren't huge fees we're charging, right? They tend to be 50 basis points or less, depending on severity of outcome.

Okay, great. Thank you. That's all my questions. Thank you.

Thank you. The next question today comes from the line of Kevin Fultz from JMP Securities. Please go ahead. Your line is now open.

Hi, good morning, and thank you for taking my questions. I want to start with a question on NII. Clearly, the earnings power of the portfolio was boosted by the current rate environment. I'm just curious what you think net investment income generation will look like when we eventually transition to a neutral rate environment, and then also to kind of follow on from a previous question, how you're balancing elevator rates versus drawing the core dividends.

Yeah, I mean, Melissa asked the question as well about the dividend before. I mean, you know, the answer to your question is I don't know because I don't know what the normal rate environment is going to be. I think we're working on an expectation that rates are elevated. They likely will go up from here. They likely will not stay there. We can all debate how long folks think they'll stay there or not. But our best guess would be that rates will normalize and begin coming back down. My own personal view is we're unlikely to see, you know, 30 basis point LIBOR or SOFR again anytime soon, and that I think a lot of folks may look back as that potentially being a bit of a failed experiment. So our base case probably has rates down the line, way out, normalizing, you know, down certainly from here, but my guess is as good as yours as to where that is. It's been one of the reasons that we were cautious about raising the dividend as much as we did last quarter and frankly chose not to raise the dividend this quarter because we'd like a stronger view on where we see rates normalizing in the future.

Okay, I guess that all makes sense. And then, you know, my follow-up relates to the handful of companies in the portfolio that are underperforming expectations I'm just curious if the issues you're seeing there are more specific to inflation, supply chain issues, or more so the impact of rising debt service costs.

It's a little bit of both, to be honest. We started seeing inflation that everyone's been reading about in the portfolio as far back as probably the fall of 21. So it's not that we weren't expecting that. I bundle a lot of these operating concerns for companies into the same bucket, whether it's need to pass through price increases, labor shortages, production challenges, supply issues. It's just harder running companies these days, I think, for our management teams than it's been in a while. To your point, though, that being said, there are other companies that are not experiencing any of those issues, which simply have a lot of debt. and are dealing with higher debt service costs and very limited negative influence on their overall operating results, but just dealing with higher rates. So I'd say it's a little bit of both.

Okay, thank you. I'll leave it there, and congratulations on a nice quarter. Thanks very much.

Thank you. The next question today comes from the line of Robert Dodd from Raymond James. Please go ahead. Your line is now open.

Hi, thank you for taking the question. Can you give us any thoughts on your experience in terms of how sponsors react in terms of making amendment requests or injecting capital in terms of distance loans? I mean, whether it's financial stress, i.e. higher rates. or operational stress, does that tend to, or economic stress, does that tend to change how the sponsors respond in terms of injecting more capital or asking for amendments and how fast, et cetera? Because there's a lot of, I mean, just higher interest is one thing, but, you know, deteriorating economic environment is something else. I mean, any color on on how those different environments interact with the sponsors coming to you?

I mean, I guess the only thing that comes to mind, to be honest, is most of the sponsors that we deal with are longstanding and valued sort of relationships where we've done multiple deals with them over multiple years. And we find that when companies are experiencing issues, regardless of perhaps the driver of that issue, that if the private equity firm is kind of happily invested in the company, it's a somewhat recent investment, particularly in the last fund or the fund prior to that, i.e., it's fresh, and they feel that they still have the ability to, you know, generate an equity return despite, you know, a blip or two along the way that an amendment and You know, often a continued investment of equity in that company is good for them and it's good for their limited partners. It tends to be good for us as well. The places where sponsors often walk away, as you would probably imagine, are either companies that are materially underperforming, where they don't see the ability to earn an equity return or a recovery, regardless of almost any outcome that you can create. or potentially sort of that old fund problem, right? We do hear occasionally how it was, you know, in a fund that we raised 10 plus years ago and, you know, we don't have any more capital to support it, the fund's out of its investment period, et cetera. So I think some of that is more common than, you know, a sponsor feeling good or bad about a potential investment, whether it's, you know, rates or the supply chain, right? It tends to be just how they think about their position. and obviously their investors' capital on a go-forward basis more than anything else.

Got it. I appreciate that. Thank you. Sure.

Thanks, Robert.

Thank you. The next question today comes from the line of Kenneth Lee from RBC. Please go ahead. Your line is now open.

Hi. Thanks for taking my question. Just one on the portfolio activity in the fourth quarter in terms of originations and prepayments. both increased sequentially. I'm wondering how much of that was potentially due to the normal year-end seasonality and how much of that could be due to either a shift towards larger borrowers and or other trends, just given the elevator activity came in despite slowing economic conditions. Thanks.

I mean, I don't know. I mean, I'm looking at court. I don't think there was anything unusual about the fourth quarter.

I think it's a mix. It's what you said. It's a mix of both. It's a little bit of the seasonality. And certainly as we're seeing larger borrowers and larger opportunities come in, you know, that drove some of it also. And probably on the earlier fee question as well, obviously fee rates are up, but we did have the opportunity to underwrite a few larger deals in the fourth quarter. And that helps drive, some syndication, structuring fee income as well for us.

Gotcha. Very helpful there. And just one more follow-up on, in terms of the spillover income and realizing that there's some regulatory constraints around that, are there any other specific factors or other events that could drive a decision towards either paying out a portion in terms of a special dividend versus retaining some of it versus increasing the regular dividend there. Thanks.

I mean, not really beyond anything that we've discussed, Kenneth, to be honest.

Gotcha. Okay. Thank you very much.

Thank you. Thank you. The next question today comes from the line of Mark Hughes from Truist. Please go ahead. Your line is now open.

Yeah, thank you. Good afternoon. The weighted average – hello. Yeah, the portfolio weighted average EBITDA pretty substantially over the last year. How important is that in credit performance relative to other measures like net leverage or interest coverage? How important is just the size factor?

Yeah. We think it's reasonably important. I made the point in the prepared remarks, but I'll just reiterate it. I mean, larger companies tend to be more diverse, right, in terms of their revenue and their profits. They tend to have greater reason to exist, right, and a downside to the extent you need to actually work things out. And, you know, in the private equity landscape, they frankly tend to be owned by larger businesses. better capitalized, better established private equity firms, and almost all the time they have better management teams than small cap companies. So I would tell you I'd much rather lend five times debt to EBITDA to a $300 million EBITDA company than I would do a $10 million EBITDA company. And we've seen that the credit profile of these larger businesses is just better for a host of those reasons.

Understood. Looking at the backlog and pipeline, it looks like there's household, personal products, pharma, maybe that's a little more defensive. Am I reading that properly? Is that something on your part or just those deals are more likely to be getting done these days?

Yeah, I mean, I think we're being pretty cautious in the current environment. You know, those examples in particular are things that are common, you know, industries where we where we target investments regardless of whether it's, you know, the backlog for this quarter or not. But, yeah, we're definitely taking a more defensive posture, wanting to see how 2023 plays out. You know, the backlog's pretty light, as Court was talking about, going into Q1, and we're hopeful it picks up. And my guess is it'll be more diversified and larger here as the winter comes to an end and the spring rolls around and folks reevaluate, you know, deal activity and how to get things done for the remainder of the year. But... I think that backlog, the industry mix is in line with what we've done historically. Appreciate it. Thank you. Thanks for the questions.

Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from the line of Eric Zwick from HuffPay Group. Please go ahead. Your line is now open.

Good afternoon. Thank you. Just a question on your capital structure and that you've raised equity a few times over the past few quarters. And just curious how you look at that today versus, you know, raising additional unsecured debt and what that might mean for, you know, kind of your plans as you project the 23 year at this point.

Yeah, thanks for the question, Eric. You know, we don't really... Talk a whole lot about our capital raising plan. I mean, look, the equity issuance for us is a pretty strong statement that, you know, we have a desire to grow the company because we see the investment opportunity around us as being exceedingly attractive. Hand in hand with that is obviously the fact that we try to maintain a leverage ratio somewhere between 0.9 and 1.25 times our equity capital base And we're at the upper end of that. So that, you know, the equity raise, there was certainly consideration as well around the leverage ratio and how we thought about availability. You know, plans for raising capital or TBD, we'll see how the environment looks around us. You know, we've got a maturity on a bond deal here in the next week or two, if I remember correctly, which, you know, we can satisfy with existing borrowings. So we don't have any... need to go out and raise debt capital, but we're always opportunistic and thoughtful. The high-grade market seems to be finally healing a little bit, and our existing unsecured notes are trading better. I'd say more in line with market reality, so hopefully that market's reopening for us. We'll see for the remainder of this year, and we're probably not going to provide any comments beyond that in terms of our thoughts around capital raising, if that's all right. Thanks for the question.

That was helpful, particularly with regard to the fact that the trading of those unsecured notes in that market seems to be loosening. Thank you. That's all I had today. Thank you.

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Kip DeVere For any closing remarks, please go ahead.

I don't have any other than to thank everybody for joining us today, and we'll look forward to being in touch and finding you on this call next quarter.