Ares Capital Corporation

Good morning. Welcome to Aries Capital Corporation's second quarter, June 30, 2023 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Tuesday, July 25, 2023. I will now turn the call over to Mr. John Stillmar, Managing Director of Aries 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 and are subject to risks and uncertainty. 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. Barry's 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 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 operation. A reconciliation of GAAP net income per share, the most directly comparable GAAP financial measure to core EPS, 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 such representations or warranties with respect to this information. The company's second quarter end of June 30th, 2023 earnings presentation can be found on the company's website at www.ariescapitalcorp.com by clicking on the second quarter 2023 earnings presentation link on the homepage of the investor resources section of our website. Aries Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I'll now turn the call over to Mr. Kip DeVere, Aries Capital Corporation's Chief Executive Officer. Kip?

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 chief operating officer Jana Markowitz, and other members of the management team. I'd like to start by highlighting our second quarter results and I'll follow that with some thoughts on the economic environment and the current market. This morning we reported strong second quarter results. Our core earnings per share of 58 cents increased 26% year over year, primarily driven by the benefit of higher interest rates on new and existing investments. Our gap earnings per share for the quarter were 61 cents, driven by our strong core earnings and a modest increase in the overall value of our investment portfolio. These results led to another quarter of sequential growth in our net asset value per share to $18.58. We are pleased with these results, and we think it's important to put them into context of what we're seeing in the broader credit markets. Over the past two decades, direct lenders have demonstrated their ability to be a stable source of capital, supporting the growth of U.S. companies, even when bank and syndicated capital markets are volatile and hard to access. More recently, this trend has accelerated, and direct lenders such as Aries have stepped in to fill the void. Although second quarter transaction activity remained slower than recent history, it picked up compared to the first quarter and the firming tone of the capital markets is an important step towards greater M&A deal activity. Importantly, we are seeing direct lenders gain significant share as 85% of new issue LBO financing in the U.S. was completed by direct lenders. In less volatile markets, this percentage would typically be lower, and transactions, particularly the large deals, would be more heavily weighted towards the broadly syndicated bank loan and high yield markets. Direct lending also continues to be increasingly active away from the LBL market, as direct lenders completed one and a half times as many non-buyout financings as the broadly syndicated market during the second quarter, according to data by LCD. As it relates to our business, the number of deals we reviewed in the second quarter increased 20% over the first quarter. This includes certain incumbent portfolio companies seeking incremental financing opportunities, which provides us with a steady source of differentiated originations. Overall, we're sourcing many compelling transactions, and we're cautiously optimistic that a recent pickup inactivity will translate into a higher level of closed transactions. During the second quarter, Market pricing and terms continue to be highly attractive as it relates to our new deals. Breds on our new loans are well above historical averages, leverage levels are lower, and equity contributions are higher. Similar to the existing portfolio, most of our new investments are floating rate deals that benefit from higher base rates. Market data provided by LCB underscores our view that the current vintage of buyout transactions has the highest level of equity support of any time in history. At the same time, the risk-adjusted returns in our lending business are historically very attractive, as spread per unit of leverage, which measures returns relative to risk, are 15% better than the 10-year average. We believe the current vintage ranks as one of the best for our lending business in the past 10 years. Within this attractive and growing market, we continue to enhance our leading market position. We believe our large and long tenured US direct lending team of 170 investment professionals delivers a compelling brand in the market. And this provides us with many intangible benefits, particularly in sourcing. Given the impact of our participation and the value we add in transactions, we believe we sometimes get more looks on new opportunities and have an ability to negotiate preferred terms with our counterparties. In recent periods, we've taken additional steps to further support our sourcing and credit advantages. Expanding on our extensive sponsor and non-sponsor coverage over the past five to 10 years, we've continued to develop a significant amount of industry expertise, specifically in software and technology, specialty healthcare, financial services, infrastructure and power, and sports, media, and entertainment, to name a few. More recently, we formalized these industry specializations, creating eight dedicated industry teams that enhance the significant sponsor and non-sponsored coverage that we enjoy today. We believe that formalizing these teams has further contributed to the strength of our process and our risk management capabilities and made us an even more compelling partner for sponsors and for portfolio companies. Despite companies dealing with higher borrowing costs, we believe corporate fundamentals remain solid, perhaps stronger than we would have expected. Our portfolio companies continue to perform well, and we see no evidence of what many believe is an imminent recession. Credit quality has been stable, and inflationary pressures have begun to show some easing. Our weighted average portfolio grade is flat quarter over quarter, and slightly better than our 15-year average. Our non-accruals at cost decreased slightly, and remain well below our own and BDC averages over the past 15 years. Despite the constructive view that we maintain on the economy and the portfolio, we are paying particular attention to the cash flows at our portfolio companies. EBITDA continues to grow nicely, as Court will describe, and our portfolio interest coverage ratio remain relatively stable quarter over quarter. While some market participants are calculating interest coverage ratio tests using actual interest expense over the past 12 months, which we don't necessarily think is particularly relevant, we calculate the ratio using pro forma annual interest expense using market rates at quarter end. If we instead did the calculation using the actual interest expense over the past 12 months, our portfolio interest coverage ratio would have been 30% higher for the second quarter, approximately 2.1 times. The loan-to-value in our portfolio continues to be conservative, and at quarter end, we estimate it to be around 43%. There's significant invested capital and value beneath us in most capital structures, a lot of it supplied by large and well-established private equity firms with whom we have great relationships and do repeat business. We continue to believe that a lot of the focus should and will be on the behavior of our partners who own the equity in these businesses. And we would expect solutions for companies needing assistance to come from a partnership approach between lenders and these partners if history is any indication. So as a result of these dynamics and the company's overall performance, feel confident about the results we were able to deliver for the second quarter and our competitive positioning going forward. With that, let me turn the call over to Penny to provide more details on our results and our strong balance sheet position.