Ares Capital Corporation

Good afternoon. Welcome to Aries Capital Corporation's first quarter, ended March 31st, 2025, earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is 9th, 2025. I will now turn the call over to Mr. John Silmar, a partner on Aries Public Markets' investor relations team.

Thank you. And let me start with some important reminders. Comments 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 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 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 the results of its operations. A reconciliation of GAAP net income per share, the most commonly direct comparable GAAP financial measure to core EPS, 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 8K. Certain information discussed in this conference call and the information relating to portfolio companies was derived from third-party sources and has not been independently verified. Accordingly, the company makes no such representations or warranty with respect to this information. The company's first quarter ended March 31st, 2025 earnings presentation can be found on the company's website at www.ariescapitalcorp.com by clicking on the first quarter 2025 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 would like to now turn the call over to Kip DeVere, Aries Capital Corporation's Chief Executive Officer. Kip?

Thanks, John. Hello, everyone, and thanks for joining our earnings call today. I'm joined by Court Schnabel, our incoming CEO, Jim Miller, our president, Jana Markowitz, our chief operating officer, and Scott Lem, our chief financial officer, as well as other members of the management team who will be available during the Q&A session. I just wanted to briefly open the call to express what an honor it's been to lead this company over the past 10 years. I'm incredibly grateful for the hard work, and the dedication of our team, and I'm very proud of the growth and the success that Aries Capital has experienced. Together, we've navigated challenges, we've seized opportunities, and we've achieved meaningful milestones. Looking ahead, I couldn't be more confident about the future for ARCC, and it's my privilege to pass the torch to Cort, who will undoubtedly provide great leadership for the company, along with Jim, Jana, and Scott. I've had the pleasure of working alongside all of them for close to 20 years, and I've seen firsthand their vision, leadership, and deep understanding of our business. I have no doubt that Courtney and the ARCC leadership team will continue to push us forward, and I know the company is in excellent hands. To our investors, Our team and other stakeholders, thank you for your trust and support to an end today. I look forward to continuing to serve Aries Capital as a director, and I know the company will continue to thrive under the new leader. So with that, many thanks again to all for the support over the years. Let me turn the call over to Court.

Thanks, Kip, and I'm certainly honored to be here today as I step into the role of ARCC's CEO starting tomorrow. Let me start by providing a few thoughts on our recent performance and our current positioning in light of today's volatile and evolving market conditions. This morning, we reported solid first quarter results with 50 cents in core earnings, which equates to an annualized return on equity of 10%. Equity remains strong and stable with our non-accrual loans and lower risk-rated credits at historically low levels. We continued to be active in our investing activity as we committed $3.5 billion in gross commitments during the first quarter. Excluding commitments fronted and sold as agents, gross commitments increased 54% versus the same period last year. We ended the quarter with conservative balance sheet leverage and significant dry powder to make new investments in a potentially improving spread environment on new loans. Scott will take you through our results in more detail, but let me update you on what we're seeing in our markets and how we believe we are positioned as a company. Beginning in late March and extending through April, new transaction activity in the liquid loan market dropped significantly as banks have become more cautious when committing incremental capital and launching new syndications. Secondary loan markets experienced increased volatility and widening spreads, and most banks have transitioned into a risk-off position. Against this backdrop of increased volatility and tightening credit conditions, the direct lending market has remained open and continues to exhibit greater stability than the liquid markets. Once again, certain transactions that previously would have gone toward the broadly syndicated loan market have instead begun to explore private credit solutions. While it is likely that some market participants will take a pause on launching new M&A processes and the overall level of M&A going forward could be slower than anticipated, we believe we are well positioned to take market share among the transactions that do occur. Additionally, we believe the long-term fundamental drivers for increased M&A remain intact, most notably the mounting pressure on private equity managers to return capital to their investors. as well as pressures to deploy aging dry powder. Periods like this have also historically produced attractive financing opportunities to support take private transactions, spin-offs, and other strategic initiatives. Capitalized on all of these opportunities, we leverage our longstanding relationships and market reach to source opportunities while also supporting our existing portfolio companies. during periods of market volatility and economics inward by proactively assessing current and future economic impacts to our existing portfolio companies. We also position the balance sheet to be even more flexible with strong levels of liquidity and modest leverage. We then over-communicate with market participants to ensure they know we are open for business and ready to partner with them. We remain confident in ARCC's ability to successfully navigate future market conditions as we believe Aries has one of the most seasoned and experienced investment teams in the industry. Our investment committee members have been investing together at Aries for over 16 years on average, which fosters a consistent approach to credit quality and portfolio construction. Furthermore, all four of us on ARCC's executive management team have been at Aries since before the great financial crisis. With 200 investment professionals dedicated to U.S. direct lending and another 50 portfolio management professionals, our team's scale, experience, and agility enable us to navigate volatile markets, positioning us to be early, active, and thorough in identifying and capitalizing on opportunities. Consistent with our playbook, we are entering today's market environment with a significant amount of available capital totaling nearly $6.8 billion. And our leverage expressed by our net debt to equity ratio is near the bottom end of our target range at below one times. Our confidence is also underpinned by the overall health of our portfolio companies, which continue to exhibit strong credit results. We ended the first quarter with sequentially lower non-accruals, which continue to be well below our average and the BDC peer group historical average. Our portfolio companies are reporting double-digit organic LTM EBITDA growth and are levered on a debt-to-EBITDA basis below our five-year average. This lower level of leverage can also be seen through our portfolio's historically low average loan-to-value. which currently sits in the low 40% range. We also take comfort in the fact that our portfolio is focused on domestic, service-oriented businesses, which should be more insulated from the direct impacts of higher tariffs. On that point, we are carefully monitoring the potential direct and indirect results of higher tariffs, and we are proactively engaging with portfolio companies to mitigate the potential impact of tariffs on our portfolio. While trade policies and their economic impacts remain highly dynamic, we only have a small number of borrowers that we believe are most directly exposed to the potential impacts from tariffs, particularly those that have higher exposure to China. Specifically, these borrowers comprise only a mid-single-digit share of how these companies are starting from a position of financial strength and flexibility. Importantly, this exposure assessment does not include any mitigants these companies can potentially implement, such as adjusting pricing or the ability to transition supply chains. Additionally, our portfolio management team, one of the largest and most experienced in the industry, is continuously monitoring the portfolio and is prepared to respond quickly to potential tariff changes. In conclusion, While this period brings new uncertainties, it also brings new opportunities. We feel confident that we are in a strong financial position to navigate what lies ahead, just as we have in other periods of volatility over the past 20 years. With this view in mind, we declared a 48 cents per share quarterly dividend for the second quarter of 2025. This marks our 63rd consecutive quarter of delivering stable or increasing regular quarterly dividends at ARCC. We are proud of this track record and feel confident that we can continue to support a steady dividend level for the foreseeable future due to our view of our prospective earnings power and our significant undistributed spillover income. I will now turn the call back over to Scott to take us through more details on our financial results and our balance sheet.

Thanks, Court. This morning, we reported gap net income per share of $0.36 for the first quarter of 2025 compared to $0.55 in the prior quarter and $0.76 in the first quarter of 2024. We also reported core earnings per share of $0.50 this compared to $0.55 in the prior quarter and $0.59 for the same period a year ago. Our decline in core earnings was largely driven by the decline in our portfolio yields based upon the lower average market base rates which occurred during the fourth quarter of last year. As you may recall from our last couple of earnings calls, there's typically up to a one-quarter lag to reflect the full quarter impact on interest income from the changes in period and yields that we report for the most recent quarter. Simply put, impact from the changes in portfolio yields during the fourth quarter were the primary driver of the sequential change in our core earnings for the first quarter. The good news here is that yields in our portfolio have generally stabilized through the end of the first quarter. The weighted average yield on our debt and other income-producing securities at amortized cost was 1% at March 31st. which was down slightly from 11.1% at December 31st. Our total weighted average yield on total investments in amortized costs was 9.9%, which compares to 10% a quarter ago. Importantly, unlike the 70 basis point decline we experienced in our weighted average yield on total investments from the end of the third quarter to the end of the fourth quarter of 2024, we only experienced a 10 basis point decline from the end of the fourth quarter to the end of this past quarter. Therefore, all things being equal, we should see more stable levels of interest income for this coming second quarter. Turning the balance sheet, our total portfolio at fair value at the end of the quarter was $27.1 billion, which was up from $26.7 billion at the end of the fourth quarter and up from $23.1 billion a year ago. Shifting to our funding and capital positions, We've remained active in adding capacity, extending our debt maturities, and reducing our costs. In January, we issued $1 billion of seven-year unsecured notes with a new issue spread of 150 basis points, representing a new low for us and the BDC sector. During the first quarter, we also extended the end of the reinvestment period and the maturity date for our $1.3 billion BNP funding facility to March 2028 and March 2030, respectively, while reducing the drawn spread for the facility from 2.1% down to 1.9%. Post-quarter end, with the continued support of our 30-plus bank group and our largest revolving credit facility, We upsized the facility by nearly $800 million, bringing the total facility size to $5.3 billion, extended the end of the revolving period and the maturity date to April 2029, April 2030, respectively, and reduced the drawn spread in the facility by more than 20 basis points. As Court mentioned, our overall liquidity position remains strong, with nearly $6.8 billion of total available liquidity, including available cash, and pro forma for the recent amendment to the revolving credit facility. We believe we are well positioned, especially with only one term debt maturity for the remainder of this year. In terms of our leverage, we ended the first quarter with a debt-to-equity ratio net of available cash of 0.98 times, down slightly from 0.99 times a quarter ago. We believe our significant amount of dry powder positions us well to continue supporting our existing portfolio company commitments as well as new investing opportunities. Finally, our second quarter 2025 dividend of 48 cents per share is payable on June 30th to stockholders of record on June 13th. ARCC has been paying stable or increasing regular quarterly dividends for over 15 consecutive years. In terms of our taxable income spillover, we currently estimate we will have $883 million, or $1.29 per share, available for distribution to stockholders in 2025. In addition to our core earnings continuing to be in excess of our current dividend, we remain hopeful for some potential portfolio realized gains in the coming quarters, which may further enhance our taxable income spillover. We believe our meaningful taxable income spillover provides further long-term stability for our dividends and is a significant differentiator for us. I will now turn the call over to Jim to walk through our investment activities.

Thank you, Scott. I'll provide some additional details on our investment activity, our portfolio performance, and our positioning. I will then conclude with an update on our post-quarter end activity and backlog. In the first quarter, our team originated $3.5 billion of new investment commitments, with existing borrowers comprising approximately 60% of our commitments. The strength of our incumbent relationships is particularly beneficial since our embedded knowledge and experience with these borrowers reduces underwriting risk on new commitments. Another source of differentiated deal flow is our broad market presence across the lower, middle, and upper segments of the middle market. We believe this coverage is critical to our strategy of selecting what we believe are the best credits across these market segments. In recent quarters, we have been focusing on the less competitive core middle market segment, which is comprised of companies with 50 to 100 million of EBITDA. This trend is reflected in the weighted average EBITDA of our portfolio companies. which decreased for the fifth consecutive quarter to $274 million. Our median EBITDA remains around $80 million and has been fairly consistent over the past few quarters, underscoring our ongoing presence in all parts of the middle market. Additionally, this quarter we achieved a higher yield per unit of leverage on our first lien originations than our post-COVID average. Turning to the portfolio, we ended the quarter with $27.1 billion of investments at fair value, a 1.5% increase from the prior quarter. We believe our longstanding underwriting strategy of focusing on market-leading companies with high free cash flows in what we believe to be resilient, service-oriented industries will be important drivers of stability and differentiation in the quarters ahead. We believe another point of differentiation is our disciplined approach to risk management and portfolio diversification. With 566 portfolio companies at the end of the first quarter and an average position size of less than 0.2% of the portfolio on average, we are able to mitigate the impact of negative credit events in any one company or industry. The health of our portfolio can be seen in the 12% weighted average LTM EBITDA growth of our portfolio companies, which increased modestly from 11% in the prior quarter and was broad-based across both industries in which we invest and the various company size ranges. Another measure highlighting the health of our portfolio is the low leverage of our underlying portfolio companies. At 5.7 times debt to EBITDA, this weighted average leverage level is the lowest we have seen since the first quarter of 2020. Coupled with this, our interest coverage is strengthening, currently near two times. Beyond that, our non-accruals at cost ended up the quarter at 1.5%, down 20 basis points from the prior quarter. This remains well below our 2.8% historical average since the great financial crisis and the BDC industry historical average of 3.8% over the same timeframe. Our non-accrual rate at fair value also decreased by 10 basis points to 0.9%. The percentage of our portfolio at fair value in grade 1 and 2 names decreased a further 10 basis points sequentially. ending the quarter at 2.8%, the lowest level we have seen since 2010. As a final point on our portfolio quality, when comparing our current position to our position just prior to COVID, the last major challenging economic period, our portfolio companies today have 17% lower loan-to-value ratios on average, underscoring the greater equity value beneath our positions today than at the year-end 2019 our portfolio has also become even more diversified as the number of companies in our portfolio has increased by 60% to 566. As a reminder, our portfolio performed very well through COVID with lower non-accruals, lower realized losses, and better ROEs than BDC peers on average over the course of 2020 and 2021. In addition to our strong performance through COVID, We are one of the few VDCs that operated under the severe stress of the great financial crisis from 2007 to 2010, and one of an even smaller subset that did that so successfully. In addition to our distinct competitive advantages, we believe a key driver of this performance across cycles is also our flexible mandate that allows us to opportunistically invest across the capital structure. Shifting to the second quarter, the widening of secondary market spreads in the broadly syndicated loan and high-yield markets, which began in Q1, has intensified in April amid heightened capital markets volatility. In direct lending, we are actively engaged in pricing discussions on new transactions, tightening terms and documents, and positioning ourselves strategically in ongoing discussions with potential borrowers. We have been busy with ongoing discussions with borrowers, and our backlog remained healthy. Our total commitments through April 24, 2025 was $0.5 billion, and our backlog as of April 24, 2025 stood at $2.6 billion. As a reminder, 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. Importantly, about 40% of this backlog represents incumbent borrowers, underscoring our ability to be active in all environments as we continue to gain market share with our existing borrowers. As we look to the future, we are confident in our team and our company's market and financial positioning. We remain committed to building upon our over 20-year track record of investing across a variety of market environments and delivering attractive risk-adjusted returns to our investors. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter. With that, operator, please 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 one question and a single follow-on. If you have any 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. And we will take our first question from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Hey, everyone. Thanks. Good morning. Corey, I wanted to go to the beginning. You talked about spreads and the banks reacting especially to the market. With all the capacity in non-traded BDCs, Do you think that privates will be providing similar, if not lower, pricing than banks for some time? And then as a platform with a real institutional business in direct lending, does that impact your competitive position on deployment?

Yeah, thanks, Finn, for the question. I mean, I think – you know, first thing is we've already started to see some movement wider in overall yields between spread and fees in the last four weeks or so since the volatility started. So I think that's, you know, one data point that shows that the market is already starting to move. I think you can look back at history also as some guide as to what we might be able to expect going forward. And, you know, there were a lot of a lot of flows into non-traded BDCs back in 2022. And we entered into a period of volatility and, you know, our market lags a little bit on the liquid markets. But we saw spreads obviously widen materially through that period as those flows, you know, began to change and as our market adjusted. So, you know, I think the effect of the flows into the private BDCs and overall kind of retail flows generally don't have a material effect on, you know, the overall market. Obviously, in the large cap end of the market, they can have some effect, as that's where most of the competitors that are seeing those flows compete. But, you know, as we've explained before, we originate across all different asset classes. as well as in the non-sponsored universe and have a lot of different ways to source deals. So I think we feel pretty good about, you know, our ability to outperform our competitors. So I guess time will tell, but, again, we've already started to see, you know, a little bit of widening just in the last.

Okay. A follow-up, it sounded like you had done a lot of work on tariffs and Seeing if you could expand on the, you know, if you could drill down on what you meant by exposed or impacted for the portfolio names. Is that like in the context of a percentage of EBITDA, for example, or any color you could give there?

Yeah. I mean, we essentially, well, first of all, we reached out to every single portfolio company, and we're in touch with them on a regular basis, obviously, so it wasn't anything super unusual. But we did do the work to create a bottoms-up analysis and really try to understand, first and foremost, which companies import products, and then of those companies, which companies are importing products from high-tariff countries. And obviously, that high-tariff country data point moves around week to week, but based on what we see today, there's a mid-single-digit exposure, as we've said in the prepared remarks, in our portfolio for those kinds of companies that are importing those products. We benefit from investing in and wading toward domestic companies that are more service-oriented. And so, you know, that helped minimize that percentage. And then, you know, on the second part of your question, yeah, this is really important. This is an exposure analysis, not an impact analysis. And we don't know yet what the actual impact will be. But I'll just say we obviously went – we just went through a pretty significant supply chain disruption period coming out of COVID-19. where we saw a lot of inflation and a lot of supply chain disruption, and our portfolio companies were able to pass on pricing and did pretty well through that. So that's what we mean by exposure, not impact, is these companies could have ways to mitigate the exposure that they have and find ways to, you know, to soften the effect. So we just don't know how it's going to play out. But hopefully that helps and answers your question.

Yes, thanks so much.

Thank you. And your next question comes from the line of Casey Alexander with Compass Point. Please go ahead.

Yeah, there's a lot here. You know, I think that most people listening to this call would feel like you guys are more optimistic than we generally expect the rest of the industry to be. especially since the data points that we keep hearing is that private equity deal volume and M&A deal volume has grinded to a very low level. You know, so I'm curious if there's a little more color. And also, what's the playbook going forward if – The origination volume doesn't pick up. Do you slow down the ATM, and how do you manage your earnings against the rising cost of liabilities? I know you only have one more maturity this year, but you have another couple in early next year that are going to raise the cost of your liabilities. You know, what's the playbook to manage all of those moving parts?

Yeah. Thanks, Casey. Definitely a few different questions in there. So I guess starting with deal flow, Yeah, look, it's actually we're going in an interesting time and it's hard to predict. Again, I'll try to point to some data points of things that we've seen in the last four weeks, which is, you know, of all the processes that were kind of in the works and heading toward a conclusion when all this volatility began and Liberation Day began, I'd say almost every single one of those processes continued to their conclusion and did not get pulled, i.e. the seller didn't decide not to sell or the buyers didn't walk. They got to signing, and I think that's a testament to the direct lending market being open and filling in for the banks, which kind of stepped back, and we were able to be there and allow those transactions to get to conclusion. Again, at somewhat wider spreads and fees. I think we saw those deals, you know, as they approached their conclusion, at least in our portfolio and in our deals that we were working on, yields kind of improved by 25 to 50 basis points between spread and fee. And so that's at least, you know, some sign that deals are going to continue to get done. We obviously reported a pretty healthy backlog going into the quarter, so that provides, again, a little more tailwind. After that, As I said in the prepared remarks, it's a little bit uncertain, and it certainly could be the case that new processes don't get launched and people sort of take a pause. In that environment, we've sort of proven that we have lots of other ways to source transactions. Our existing portfolio kicks off a lot of opportunities. Again, our non-sponsored efforts, refinancings of BSL, transactions, I think could be a really interesting opportunity for us if that market remains volatile and shut. Again, we saw that back in 2022. So we've just been through these, you know, kinds of periods before where deal flow might slow down, and we find ways still to do deals. So I think that is my attempt to answer the first part of your question. And I'm sorry, can you remind me the second part?

Well, if the deal flow doesn't emerge, you know, what's in the playbook? Slow down, you know, the ATM sales. How do you manage your earnings against rising cost of liabilities over the course of the next year? It's sort of step two of where step one gets you.

Yeah. Look, I think we're going to see how this plays out. Obviously, we still do have – fair amount of liabilities that are locked in for a longer period so that that's not like that's all going to unwind at once um and i think you have to remember that there are natural uh offsets that occur um in the market again going back to our 20-year history here we've seen in the past lots of periods of time where interest rates were near zero or deal flow slowed down. And we've been able to, over that 20-year period, generate a pretty darn consistent ROE in the 9% to 12% range. Today we're around 10%. We've never really dipped below 9% over that 20-year period, despite going through all different types of economic environments. And, you know, historically we've seen that when base rates fall, spreads widen. Second lien opportunities become more available as the broadly syndicated market, you know, executes more on some of those lower-priced first lien deals. We obviously have been operating at a very low leverage ratio, below one times, low end of our range. That's a lever that we could pull to, you know, help with the earnings profile. Ivy Hill is currently at a pretty low level. In terms of our portfolio mix, we're around 6% or 7% today. We've been up above 10% before. I think Ivy Hill could see some interesting opportunities to grow. And we obviously have a lot of spillover income as well that we can dip into. So there's all these different factors. Again, it's hard to predict what's going to happen, but I think we feel good about our ability to manage through that environment.

Well, I'll just add, the environment we're in right now, does lead to lower repayments. So our portfolio tends to stay in place, and that provides a lot of stability with a mature portfolio like we have. And we're seeing less refinancings from the public markets as well. So the combination of those things gives us a bit of a hedge in markets like this, which we've seen before.

Since that was a multi-pronged question, I'll stop there and not use my follow-up.

Thank you. And your next question comes from the line of Robert Dodd with Raymond James. Please go ahead.

Hi, guys. I appreciate the commentary on the potential tax impact of importing goods. have you done any analysis yet? I mean, I don't expect there to be a lot of exposure going the other way, obviously, with vitalitary tariffs. I mean, as you say, services, not a lot of manufacturing and exporting, but have you done any analysis on that side to see if you have exposure to that kind of impact, if those vitalitary tariffs do stick long-term?

Yeah, we've looked at that as well. As you said, it's... very unclear as to how that's going to play out. We have minimal exposure as well on that front. I think, you know, it's interesting, right? Not only is there a potential, you know, risk factor, I guess, of exporting and retaliatory tariffs, there's also just multiple domino effects and spill-on effects of how this could play out, right? Second-order impacts, third-order impacts. What happens? Does inflation... dampen consumer demand, and obviously everybody's wondering, does this potentially tip us into a recession? I think all we can really do is look at our portfolio, try to quantify the first order impacts, and we'll see how the rest plays out. I think what we come back to is just our conservative underwriting. Every time we underwrite any new deal, We're always looking at the supply chain. We're looking at supply concentration. We're making sure that our companies don't have any material supply concentration that And obviously, we're always underwriting as if there's going to be a recession next year when we're running downside cases. We're credit investors. We're always worried about a recession all the time. So we just kind of fall back on that, Robert, and our experience operating through prior periods of softness. Obviously, it'll be harder work if we do end up going through that kind of period, but we think we're prepared.

got it thank you and just kind of follow-up credit related but not Paris I mean a few years back the whole industry not necessarily just your portfolio but the whole industry went through kind of an issue with physician office roll-ups now you know now obviously there's a lot of veterinary office roll-ups across the industry as well and one of them obviously was put on non-accrual this quarter so You know, is this the beginning of a cycle of that same kind of problem that, you know, the issues have moved and now it's the veterinary office roll-ups and we're going to see a lot more problems in that sector? Or, you know, what are your thoughts there? Because obviously you put Thrive or Jedi or whatever we want to call it on the call this quarter.

Yeah. Yeah. Yeah, probably, Robert, I don't know if I can help you too much on forward outlook on what that's going to be. I guess all I would say in terms of our portfolio and our exposure to that is it's really minimal. We have less than 2% of our portfolio is in physician practice management businesses. That includes vets. So we really just, you know, don't have a lot of exposure to that part of the market. You know, I probably just won't venture a guess as to what happens to the future of the veterinary space. Got it. Thank you. What's the try?

Thank you. And your next question comes from the line of Melissa Weddle with JPMorgan. Please go ahead.

Good afternoon. Thanks for taking my question. A lot of mine has been answered already, but I wanted to follow up on a comment made during the prepared remarks about, again, around assessing the exposure, direct exposure to tariffs, but then that not including mitigating factors that companies could implement. You also made the comment that you're ready to respond quickly in those situations. Can you just elaborate on that a little bit? What does that look like? Is that restructuring? Is that something else?

Yeah, the response. You're asking if that impact does come through? Yes. Yeah. I think that just comes back to our playbook. that we employ when portfolio companies aren't going according to plan, whether it's tariff-related or related to any other reason. And just so what we do in that situation is obviously we are proactive, as I already said, in terms of getting ahead of the situation. So we're in dialogue with those mid-single companies that are potentially exposed to tariffs. We're having conversations with them now about what they're planning to do, what their liquidity forecast looks like, How well funded are they? And obviously we're in dialogue with the owners of those companies, which mainly are private equity firms that we've been doing business with for a long time and preparing for what we need to do. And, you know, our actions can take many forms, but generally we look to help be part of the solution. And the first thing we say is if you're the owner of the business, we expect you to contribute. And if our private equity partners step up and provide liquidity, then we will help be part of that solution by offering to pick a portion of our interest for a short period of time in exchange for a premium and in exchange for that capital contribution to help these companies get through these types of periods. We did that during COVID very successfully. We saw lots of equity contributions come into our portfolio companies. Yes, we did pick interest. Our pick exposure went up for a short period of time, but that has all come down. And, again, we weathered through that storm pretty darn well. So, you know, that's step one in the playbook. If the private equity owner or any owner of the business is not willing to step up, then, yes, you know, we are not afraid to own a business if we need to. We have the capabilities. We've got the management expertise and, you know, owning businesses through those kinds of cycles has actually produced a lot of gains for us over a long period of time. So we're not afraid to roll up our sleeves and do that if we need to.

I appreciate that. Thanks for going into detail there. I would agree with an earlier comment that was made about – a sizable backlog into 2Q, and the amount of activity seems to be pretty robust, despite, you know, a more uncertain environment. Given the uncertainty around tariff policy, which I assume is what's driving slower decision-making from borrowers, I guess, one, I want to clarify if it's primarily tariff policy, if you're hearing any other consternation from borrowers about moving forward with capital allocation projects, But then also on that sizable backlog, do you think there's maybe an incremental degree of uncertainty on how much of that will close just because of this elevated volatility that we're in right now? Thank you.

Yeah. Look, it's hard – Not to say that there could be some of those deals in the backlog that might fall away. Again, I was pointing in an earlier question to the fact that at least in the last four weeks, The deals that we're building to conclusion have moved forward. But that doesn't mean that things aren't going to change. And, again, I have to admit that if you're an owner of a business and contemplating a sale process now, starting a sale process now, you're probably going to think twice maybe before launching a new process. So it stands to reason that we could see a little bit of a slowdown and there might be a little bit of a lag effect, to your point, because there is a backlog that's already in place. You know, really hard to predict. There's so much uncertainty right now. I think all we can do is kind of point to what we're seeing in the last four weeks and try to draw some conclusions about what we're going to see in the future. One more thing.

The predictability, though, that you do have is that in these markets, in these moments, private capital tends to be a great solution. And so while we do expect to see lower in any volume, we do also anticipate that we'll get a bigger percentage of the pie because it just is a better solution at these moments in time. So we do think there will be deal volume that comes through, and we think we're really well positioned to take advantage of those deals.

Yeah, and in an uncertain environment, the value of our capital, which is certain, comes with certainty, goes up. And that's why we're already starting to see a little bit of – Melissa, I think there was another part of your question. I apologize. I didn't answer it.

Oh, I snuck in a little one there. I think there's a general assumption that uncertainty and the decision to – or maybe the propensity to delay capital allocation decisions right now has to do with tariff uncertainty. I just was curious if you're hearing anything beyond that. Any broader macro concerns from your borrowers?

Thanks. Yeah, most of it's around the tariffs. It's probably a little early to say. It stands to reason, obviously, given recession risk is higher, that, you know, you might see some other companies hold off on capital spending. You know, I think it's just a little early for us to say that we're seeing any kind of real trend there yet, though.

Bob? Thank you. And your next question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead.

Hey, good afternoon. Thanks for taking my question. One, on some of the newer deals, newer investments you're seeing more recently, it sounds like they're still focused for the more core and middle markets kind of deals, but are you seeing perhaps more attractive opportunities in the larger-sized upper markets? market segments more recently given the volatility? Thanks.

We are, yes, for sure. Again, I think looking back historically, that's what we saw in 2022 and 2023 is that market got a little more attractive. And that's, again, we talk about this a lot, but that's, you know, what we feel is one of the biggest advantages of our broad sourcing network and all the relationships that we've built over 20 years is that we can pivot historically. uh when different pockets of the market become more attractive so um you saw us move up into larger deals in 2022 and 2023 then we've in the last you know four to six quarters you know averaged down a little bit still doing larger deals where there's attractive opportunities but walking away from some of those deals a little bit more and moving a little bit more down market and now you know it's early but we are already starting to absolutely see some of those larger deals come to the way of the private credit market. And I'm hopeful that you'll see some nice announcements from us coming forward on some of those deals.

Gotcha. Very helpful there. And just one follow-up, if I may, just on the liability side there. You continue to optimize financing there, tighten spreads on some of the facilities. Wondering if there's still some further opportunities over the near term to continue to optimize the financing side there. Thanks.

Yeah, I mean, I think we saw us do that during the quarter and then, you know, post-quarter end. And we're working hard to keep, you know, get those costs down as quickly as we can. You know, our largest corporate facility is now over 20 basis points cheaper than it was before. So, certainly trying to be as efficient as possible on the liability side. Unfortunately, you have seen bond spreads recently widen. but it's good to have the diversity of sources that we have and having the secured side remain pretty efficient.

Gotcha. Very helpful there. Thanks again.

Thank you. And your next question comes from the line of Doug Harder with UBS. Please go ahead.

Thanks. Just on the unrealized marks in the quarter, can you talk about whether those were kind of broad-based or more asset-specific that led to the marks?

Yeah, the latter, a little more asset-specific. And, again, not really anything that is drawing any kind of trend that we can identify, just a little more esoteric one-off.

Great. And then the dividend income you received this quarter was down from the fourth. Anything to note on that?

Yeah, there was a special dividend from Ivy Hill in the fourth quarter. that actually contributed about a penny of earnings per share for us in the fourth quarter. And that was just a one-time special dividend, so that did not reoccur this quarter. We did have a slight increase in the regular dividend from Ivy Hill from the fourth quarter to this quarter, but that's the answer.

Great. Thank you.

Thank you. And your next question comes from the line of Mark Hughes with Truist. Please go ahead.

Yeah, thank you. Good afternoon. The backlog, I think you mentioned that 40% of the backlog was from incumbents. Is that typical? Will that then translate into, say, I think this quarter you did 60% with existing borrowers when you get to the end of the line, or is 40% different than the norm?

It's right around the average year. Obviously, it depends on the year, depends on the market. But, you know, over a fairly long period of time, we're usually around 50% of new commitments going into existing borrowers. And, again, it can bounce around a little bit. You know, when M&A slows down a little bit, we have moved up to 60%, 70%. So, you know, nothing unusual.

Yeah. So does the 40% – I guess you've given the backlog number, but that maybe seems to imply more new borrowers in the backlog?

That does imply that.

Yeah. Okay. And then you also mentioned the potential for realized gains in coming quarters to help – boost NAV. Is that based on some visibility that you've got? Your pipeline that you can see on that front is more favorable, or is that just a general comment?

Yeah, I wouldn't say it necessarily boosts NAV because we have to mark our portfolio for our value. So I think there's a couple of names that have seen the value gone up. As those realize, that would get added to our taxable income and our a realizable spillover income.

Fair enough. Is that, like I say, is there more potential for that, more visibility, or, again, was that a general comment?

Yeah, I mean, we can't comment on specific transactions, but there's a couple you've probably seen. The pattern of it going up over time, and our hope is that, you know, a couple of those can get realized this year.

Understood. Thank you very much.

Thank you. And your next question comes from the line of Sean Paul Adams with B. Riley Securities. Please go ahead.

Hey, guys. Good afternoon. Touching on non-accruals, I know we beat kind of the topic to death, but the feedback that you received from portfolio companies, existing non-accruals, and also your analysis on kind of tariff exposure, Can you touch on if you're seeing any thematic patterns in portfolio stress or sectors or industries that have just proactively had outreach and dialogue?

Yeah, I appreciate the question. It's something we're always looking for and trying to draw conclusions around trends. to inform our behavior, you know, around new investing. Unfortunately, there's just nothing that we're really seeing yet that we can comment on that is, you know, that we can draw any conclusions around there being a trend. So we'll just have to kind of wait and see, but we can keep talking about that in future quarters.

Got it. Thank you for the call.

Thank you. And your next question comes from the line of Brian McKenna with Citizens. Please go ahead.

Great. Thanks. So you noted that during periods of volatility, the team is more inward focused on the existing portfolio. Looking back over the past two decades during these periods of volatility, how long on average is the team inward focused before shifting more of the focus to new investment opportunities? I'm just trying to get a sense of the trajectory of new originations from here. And are there any signs we should be looking for from the outside to indicate a pickup and related activity could be coming?

Yeah, I don't know if maybe it was a little misleading in the prepared remarks. It's not like we are only focused inward for, you know, weeks at a time and then shifting to origination. I was sort of just – giving an order of all the different things that we do during these periods. And we, thankfully, given the size of our team and the experience of our team, are able to do all of it at the same time. So we're looking at the existing portfolio, utilizing our portfolio management team as well as the digital teams, and at the same time out originating new transactions. So it's not like it's really one or the other.

Okay, got it. That's helpful. And then just maybe more of a modeling question, you know, any color on structuring service fees thus far in April? And then, you know, any way to think about these in the second quarter based on everything that we know today?

Can't really comment, I don't think, on what we're seeing in the recent quarter. There hasn't been anything that's changed a lot. I guess I already did say, you know, yields on new investments that have come to fruition and signing in the last four weeks, overall yields are up 25 to 50 basis points, and that's a mix. of both spread and fee and it just depends on the deal and the nature of the transaction sometimes you get a little bit more in fee sometimes you get a little bit more expressions you get a little bit of both um so there's probably i guess i'd say there's been a slight movement for the better on fees um in the last four weeks but um you know we'll have to just we'll have to see again looking at the past as a guide, when we go into periods of volatility and, again, looking back at the most recent period, 2022 and 2023, we saw fees move materially wider. Again, past doesn't always predict the future, but that has been what we've seen in the past.

All right. I'll leave it there. Helpful.

Thank you. And as a reminder, if you would like to ask a question, please press the star and 1 on your telephone keypad now. And your next question comes from the line of Finian O'Shea with Wells Fargo Securities. Please go ahead.

Hey, everyone. Thanks for the follow-up. I want to go back to a few times in the remarks you guys mentioned, seemingly relying on spillover. Seeing if you could expand on that and if you expect to go below the dividend this year or and, you know, how I guess eventually what the drivers would be to come back, let's say, at today's curve, come back at coverage, that is. Thank you.

Yeah. No, I don't think we meant to imply that we're going to go below the dividend on core and dip into the spillover, you know, this year. I think we were mentioning the amount of spillover to just give comfort to that there's, you know, an additional lever that we have there to the extent that that does occur. It's not our expectation. We feel good about the dividend, Finn. You know, it's funny. When we raised the dividend to $0.48, we were earning core in the mid-'60s. and people were asking us why we didn't raise the dividend more than 48 cents and we didn't do it because we knew that rates were pretty elevated and there was some excess spread in the market given the dislocation and that that was likely going to correct um and so we've just kind of seen that happen as we sort of expected and Yields have come down and we're now back into what I would say is a more normalized environment where we have a little bit of cushion, but not as much. It was nice and comfortable to operate with all that cushion, but that isn't the norm. I would just say we're back in the norm now. As I already talked about before, there's all these different offsets that occur if rates do decline in the future. There's countervailing factors that also help us in that type of environment. We feel good about the dividend for the foreseeable future.

Okay. Thanks so much.

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Court Schnabel for any closing remarks.

No closing remarks. Thanks, everybody, for the questions and engagement. Talk to you next quarter.