May 7, 2009
Executives
Michael Arougheti - President and Director Richard Davis - Chief Financial Officer
Analysts
Vernon Plack - BB&T Capital Markets Jim Shanahan - Wachovia Securities Matthew Howlett - Fox-Pitt Kelton Andrew Wessel - J.P. Morgan Greg Mason - Stifel Nicolaus & Co Faye Elliott - BAS-ML Nicholas Capuano - Imperial Capital Markets
Operator
Good morning and welcome to the Ares Capital Corporation Earnings Conference Call. At this time all participants are in a listen-only mode.
As a reminder, this conference is being recorded on Thursday May 7, 2009. Comments made during the course of this conference call and webcast and the accompanying documents contains forward-looking statements and are subject to risks and uncertainties.
Many of these forward-looking statements can be identified by the use of the words such as, anticipate, believes, expects, intends, will, should, may and similar expressions. The company's actual results could differ materially from those expressed in the forward-looking statements for any reason, including those listed in its SEC filings.
Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that the past performance or market information is not a guarantee of future results.
During this conference call, the company may discuss core earnings per share which is a non-GAAP financial measure as defined by the SEC regulation G core earnings per share is the net per share increase or decrease in stockholders' equity resulting from operations less realized and unrealized gains and losses, any incentives, management fees attributed to such realized gains and losses and any income taxes related to such realized gains. A reconciliation of the core earnings per share to the net per share increased, decreased and stockholders' equity resulting from operations, the most directly comparable GAAP financial measure can be found in the company's earnings press release.
The company believes that the core earnings per share 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. At this time we would like to invite participants to access the accompanied slide presentation by going to the company's website at www.arescapitalcorp.com and clicking on the May 7, 2009 presentation link under homepage of the investor resources section of the website.
Ares Capital Corporation earnings release and annual report are also available on the company's website. I will now turn the call over to Mr.
Michael Arougheti, Ares Capital Corporation's President.
Michael Arougheti
Great. Thank you operator.
And good morning everyone and thanks for joining us as always. I'm joined today by Bennett Rosenthal our Chairman; Rick Davis our CFO; Carl Drake; and Scott Lem from our financing and accounting team and Eric Beckman, Kipp deVeer, Mitch Goldstein and Mike Smith, senior members of our investment advisors management team.
I hope you had a chance to review our two press releases this morning and our investor presentation posted on our website. As we have on past calls I'd like to start by giving you a brief overview of the market which should serve as a good backdrop from an update on our strategic priorities, our dividend strategy and our results.
Although, capital markets and macroeconomic conditions remain challenging and difficult to predict, we have recently seen some improvement in terms of investors sentiments and liquidity, which has positively impacted secondary pricing in the credit markets. Improvement in the functioning of the capital markets, some encouraging macroeconomic data, better than expected earnings and the continued actions of the federal reserve and U.S.
Treasury to stimulate financial markets have helped enhance investor confidence. Accordingly, the credit markets have rebounded from the lows seen at the end of the fourth quarter.
These factors have also driven a fairly significant tightening in credit spreads since their peak in the fourth quarter, and a pick up in high-grade and high yield bond issuance. Specifically, in the leverage loan market, we witnessed a turn around in various technical factors that has driven a rebound in secondary loan pricing thus far in 2009 following the worst year on record in 2008.
On the supply side, force (ph) loan portfolio sales have slowed and new issue volume remains soft. On the demand side investor fund flows turned strongly positive and loan repayments increased to levels not seen since 2007 providing investors additional cash to reinvest.
Following a 23% decline in the leveraged loan market industries in Q4, these industries were sharply up yearly 10% in the first quarter and are up over 20% year-to-date. Quality loans continued to outperform throughout the first quarter, but the market did show renewed interest in lower rated more speculative loans in April.
Over the last 12 months -- and Q1 was no exception the market has placed a premium on loans with lower leverage, higher seniority and higher ratings in defensive industries and recent vintages. As an example S&P illustrated that loans with debt to EBITDA of less than five times had average good prices approximately 20 points higher compared to senior loans leveraged five times to eight times.
As one would expect, this price to start a likely reflects higher expected recovery values for such lower leveraged loans. We believe this validates our defensive strategy of maintaining a relatively more senior and lower average leveraged portfolio.
Additionally, industry classifications remain a key factor as the top half of S&P's leveraged loan index ranked by industry price performance over the last 12 months, had average bid prices 20 points higher than the bottom half average. As discussed in the past, our industry ratings remain very different from broadly syndicated loan market.
For example, approximately 82% of our portfolio's industry sectors taken on a weighted average basis outperformed the median industry sector price performance within the index during the first quarter and 76% of our portfolio's industry sectors outperform the index median over the last 12 months. While our loan portfolio was not directly comparable to the broadly syndicated leveraged loan industries, we did experienced significantly lower mark-to-market adjustments this quarter due to improved market conditions and portfolio company performance.
However it is important to recognize that equity valuations through the first quarter remain challenging with the S&P down 11.7% and with purchase multiples declining in the private markets. This kept pressure on evaluations in our equity portfolio.
Fortunately the equity markets have rebounded since quarter end. Although the leveraged loan and capital markets have improved, industry wide leverage loan default rates continue to increase during the first quarter reaching between 5% and 8% on a 12 month lag basis, depending upon the measurement.
Although it is likely that industry defaults will continue to worsen as the economy recovers in this deep recession, and the credit cycle progresses; we continue to believe that we are well positioned given our defensively positioned portfolio which again is over weighted in less cyclical industries as lower average leveraged levels in the broad market and reflects our emphasis as we age in on our investments. And finally let me highlight the market opportunity we seek today for new investments both in the primary and secondary markets.
Significant consolidation of the banking sector combined with reduced competition from hedge funds and other credit managers who historically provided debt capital to middle market companies has created a much improved competitive landscape. Due to the lack of available credit new debt securities come with higher pricing, lower leverage and meaningfully improved structures.
Importantly in markets like this one only the highest quality issuers can access capital. As you all know a record amount of capital was raised by private equity firms from 2005 to 2007, a large portion of which remains uninvested with should fuel new junior debt investment opportunities.
Additionally an unprecedented increase in the amount of debt originated in the last five years will lead to numerous refinancing opportunities with over 200 billion of high yield bonds maturing between 2009 and 2011. Finally, we expect that a rise in covenant breaches and distressed refinancings will increase demands for rescue lending and recapitalization financings over the coming year.
Given the breath of our platform, the strength of our balance sheet and the capabilities of our team, we believe that we are well positioned to take advantage of the attractive risk adjusted returns currently being offered in the middle market. Now, let me take a few minutes to update you on our strategic priorities.
First, we remained steadfastly focused on maintaining and improving the strength of our balance sheet, matching our assets and liabilities, maintaining a prudent amount of leverage and keeping a high degree of liquidity and operational flexibility. To that end, we are very pleased to announce the successful amendment and extension of our credit facility that was to mature in July with Wachovia, Wells Fargo, as well as the commitment for new revolving credit lines to make new investments and to support the growth of our portfolio.
We have converted the existing facility maturing in July, into a three year $225 million term loan, and we received a commitment subject to finalizing definitive documentation for a new 200 million three to five year revolving credit lines for new investments and portfolio needs. The extension of the existing facility's maturity is subject to completion of this new revolving credit line.
At a time when most of the finance companies have struggled with rolling over or refinancing credit lines, we were able to increase our aggregate debt commitments by $75 million from 350 million to 425 million. Importantly, we have converted what had been an annually renewable facility into a three to five year facility with only a modest increase in our funding spread.
We believe this arrangement will be a major positive for us as it provides additional capital to invest, provides balance sheet flexibility and supports the ongoing funding needs of our portfolio. Regarding leverage, we continue to prudently manage our debt to equity ratio which stood at 0.79 times at quarter end, by minimizing new investment activity in our balance sheet while maximizing repayments and seeking to exit assets with lower yields.
We continue to be pleased with the level of repayments and excellence in our portfolio which has averaged over $100 million over the last four quarters. And finally, as we discussed last quarter we have been repurchasing our lower cost long term on balance sheet CLO debt at steep discounts.
As of quarter end, we had successfully repurchased a total of $34.8 million of our own CLO debt for approximately 8.2 million. These transactions reduced our outstanding funded debt by 26.6 million and improved our asset coverage cushion by 53.2 million during increase in book value.
Second we are focused on aggressively managing our portfolio investments with the focus on maximizing returns. Our strategy continues to be proactive with respect to re-pricings, repayments, future funding needs and potential restructurings within the portfolio.
As such, in addition to our normal course portfolio management, we have been re-underwriting all of the credits in our portfolio, a process which involves site visits, management interviews, customer and supplier diligence and a reforecast of the company's financial and operating plans and associated covenant compliance. These actions have informed buy-sell hold decisions, lead to proactive covenant negotiations, helped us prepare for potential balance sheet restructurings and enabled us to reduce unfunded commitments.
Since we are a lead agent or have a blocking position in a significant majority of our investments, we often are in a position to drive this process. As we've said before, not only do we often reprice credits upon a covenant default, but we also reprice credits when a portfolio company experiences a corporate finance event such as an acquisition or need for growth capital.
Although, covenant defaults can occur due to deterioration in a portfolio company's fundamental performance, they can also occur due to the tightening of a particular covenant over time as is typical in our credit agreements. It's also important to understand that as we work through balance sheet restructurings of our lower rated credits, we may need to convert existing unrealized losses into realized losses.
Particularly in situations where we actively restructure portfolio company's balance sheet to reposition it for future growth. If appropriately reserved, this should not impact our GAAP earnings going forward, but it could impact our taxable income in future quarters.
As we worked through the portfolio, we will strive to be in the position to leverage our lead (ph) investor status and broad restructuring capabilities to turn around some of our current non-accruing loans into performing investments and hopefully to realize gains. Finally we are pursuing selected strategic initiatives including expanding our asset management business and entertaining potential acquisition opportunities.
We continue to pursue opportunities to expand our managed fund business either through raising new funds, assuming management contracts or completing acquisitions to bolster our existing assets under management and our Ivy Hill asset management affiliate. We believe there is an attractive opportunity for ARCC to be an industry consolidator given our scale, access to capital and asset management capabilities and infrastructure.
And finally as always we're exploring ways to monetize equity gains and or divest lower yielding assets when the reinvestment of capital can be strongly accretive. Now, I'd like to discuss our dividend strategy.
Over the last year, we have worked very hard to strike the right balance between driving higher earnings and protecting our balance sheet during the period of historic asset price volatility and extremely tight credit markets. Over the last year, our available investment capital has been reduced by mark-to-market volatility outside of our control.
This has obviously been frustrating given the attractive investment opportunities available in today's market. We have consistently communicated an ability to enhance our core earnings by investing available capital on higher return assets, rotating our portfolio, repricing our existing assets, harvesting gains, repurchasing our CLO debt and divesting lower yielding assets.
And this strategy has served as well. As we've been able to maintain stable core earnings and a strong balance sheet, while battling strong market headwinds.
Although these opportunities still exist today. Market conditions continue to be very difficult to predict.
Up until now, we had held out hope for some mark-to-market relief for hold to maturity investors such as ourselves, but we now believe that we will have to wait and be patient as the market returns to normalcy in order to gain access to this capital for investment. This could come through a combination of improving asset values or power (ph) realizations upon refinancing or maturity.
So, while we're encouraged by the current market improvement, it is difficult to say how far we are through the cycle and it is important for us to place equal value if not a premium on balance sheet strength over earnings growth in the near term. Therefore, we made the discussion to modestly reduce our second quarter dividend to $0.35, $0.07 lower than our $0.42 dividend in Q1 of '09.
We believe this reduction allows for a more sustainable level of quarterly dividends that can be generated from our core earnings and considers fully both the opportunities and the challenges that we face in today's market. We believe this reduction is in the best interest of our shareholders, since we will be able to retain more capital for existing and new investments and to use it for other corporate purposes.
Although, we are not changing our policy of not giving dividend guidance, we can tell you that we continue to have the means to grow our core EPS while still protecting the balance sheet. We believe our balance sheet remains very strong particularly given the flexibility, our new long term financing commitments may provide subject to our asset coverage requirements.
This new facility may enable us to improve our structuring fees for example, and spread income as the market opportunity improves. Now, let me briefly highlight our first quarter results, before Rick takes you through the details.
Well, no doubt market conditions remain challenging. We continue to make progress on many of our key strategic initiative, including reporting solid earnings on relatively stable portfolio performance, executing accretive debt repurchases, increasing our weighted average investment spread and securing new capital commitments.
We reported $0.31 in core earnings per share and $0.36 in GAAP earnings per share as our net realized gains of $0.25 driven by our accretive debt repurchases more than offset our relatively modest net unrealized depreciation for the quarter. And while we experienced a moderate increase in non-accruals, our overall portfolio of metrics remained stable as our weighted average rating remain unchanged to 2.9 and our overall write down activity including credit related write downs was down significantly from prior quarters.
Our balance sheet remains strong with a net debt to equity ratio of 0.79 times and the cushion on our asset coverage test remained healthy at 233.5 million, net of cash; all of which is available to us from a funding capacity stand point again subject to advance rates and other restrictions. Later in the call I'll discuss recent portfolio activity and credit quality and then conclude our prepared remarks before opening up to Q&A following Rick's comments in our Q1 financial results in greater detail.
Rick.
Richard Davis
Great thanks Mike. Please turn to the summary slide in our presentation which is slide three.
Our basic and diluted core EPS and net investment income were all $0.31 for the first quarter, a $0.02 decrease versus last quarter and a $0.04 decline from the same period last year. This decline was due to lower structuring fee income which contributed just a penny this quarter compared to $0.03 last quarter and $0.04 in the period a year ago.
Adding a net realized gains of $0.25 our core EPS plus net realized gains were $0.56 for the first quarter, well ahead of the $0.35 that we've reported on this metric both last quarter and a quarter a year ago. As Mike stated our strong net realized gains of $0.25 for the quarter driven by the CLO debt repurchases, more than offset net unrealized losses of $0.20 per share.
Net result was $0.36 on a GAAP basis. This was also a significant improvement compared to the fourth quarter's loss of a $1.14 per share and our first quarter earnings of $0.12 a year ago.
Consequently with the payment of our $0.42 dividend in the first quarter, our net asset value was down slightly to 11.20 versus 11.27 at the end of the year. You can see our net commitments declined in the quarter with 37.8 million in gross new commitments offset by a reduction of a 103.9 million in existing commitments.
From a funding stand point, our gross and net spendings were 84.8 million and 5.5 million respectively. We continued to experience a relatively healthy level of exits in repayments, totaling just under 80 million of which 36.5 million were asset sales to our Ivy Hill funds with the remaining 42.7 million due to portfolio, amortization, prepayments, revolver pay downs or syndication activity.
We closed the first quarter with a $2 billion investment portfolio add value covering 92 portfolio companies that have a weighted average EBITDA of 47 million. Excluding cash and cash equivalents, our quarter end portfolio was comprised of approximately 53% in senior secured securities with 32% in the first lien and 21% in second lien assets, 32% in senior subordinated debt securities and 15% in equity another securities.
During the quarter we were able to increase our weighted average investment spread by 51 basis points to 9.2% over the quarter and by 213 basis points compared with same period a year ago. Our overall portfolio yield declined 55 basis points to 11.2% due to lower LIBOR levels during the quarter.
This compares to a corresponding decline of a 106 basis points for a weighted average funding cost of just under 2%. On slide four of the presentation, we've provided the detail regarding our fixed rate assets which account for 56.8 million of our portfolio and our floating rate assets which make up 31% of the portfolio.
Including LIBOR floors (ph) on 21% of our floating rate portfolio, our fixed rate portfolio was currently over 62%. Before we turn to our gains and losses, let me update you on our valuation process and the recent FAS 157-4 announcement.
During the quarter, we continued our policy of using third party independent valuation providers to review approximately 50% of the portfolio based on value. Over the last two quarters, third party independent reviews had been conducted on approximately 1.7 billion add value with 86% of the portfolio either reviewed or new over this period.
Although, the implementation of FAS 157-4 clarify the objectives of fair value measurement among other nuances, it had little impact on the valuation process for our portfolio, which is reviewed by our investment advisor or different independent valuation providers and our auditors. However, we are hopeful that there maybe some positive indirect benefit from FAS 157-4 on the financial markets and therefore the BDC sector overtime.
As shown on slide six, we incurred net realized investment losses of 1.8 million, offset by 26.5 million in net realized gains on the extinguishment of our debt, for total net realized gains of 24.7 million. We incurred gross unrealized depreciation of 39.3 million offset by 18 million of unrealized appreciation and a reversal of 1.4 million in prior period depreciation resulting in net unrealized depreciation of 19.9 million.
In the aggregate we reported net total realized and unrealized gains of 4.8 million. We think our unrealized depreciation in three general categories; mark-to-market write downs, some combinations of mark-to-market write downs and some element of company underperformance and third, primarily credit related write downs.
The mark-to-market gains in our debt securities essentially offset our credit related write downs this quarter. The majority of our mark-to-market write downs for the quarter was in our equity portfolio.
Excluding the equity write downs, our mark-to-market adjustments on a net basis would've been modestly positive. Although its difficult to predict, the rebound in the equity market since quarter end could potentially alleviate this mark-to-market pressure.
As Mike stated, our credit related write downs during the first quarter were significantly lower than the credit related write downs of the prior two quarters. In fact since just under two-thirds of our credit write downs related to our non-accruing loans, the rest of our portfolio experienced modest credit related write down activity.
Said differently, outside of our specifically identified non-performing assets, we did not see significant new credit issues materialize during the quarter. Slide eight shows the summary of our debt facilities.
As of March 31, we had approximately 903 million in total debt outstanding with about 251.6 million of capacity available for additional borrowing under our existing credit facilities subject to leverage and borrowing based restrictions. We also had 48 million in cash on hand.
Reducing debt by this 48 million in cash, our net debt to equity ratio at quarter end was just under 0.79 times and our asset coverage ratio was 227%. Expressed as a dollar amount, our asset coverage cushion was 233.5 million consistent with our year end level.
What's not shown in this slide is our investment capacity and our managed funds, Ivy Hill middle market credit funds one and two. At quarter end these funds had approximately 33 million and a 131 million of investment capacity respectively.
If you competing our transactions with Wachovia Wells Fargo described earlier in call our next scheduled maturity dates for any of our financing facilities is December 2010, when our J.P. Morgan facility is scheduled to mature.
At quarter end we were in compliance with all of our covenants. We believe our most restrictive financial covenant is our two to one asset coverage test which as I just mentioned reflected a cushion of 233.5 million at March 31st.
As a reminder, we elected not to fair value our liabilities under the FAS 159 election during the short window of time we had the option. Given the long term lower cost liabilities we enjoy, our reported net asset value would be significantly higher had we made this election.
By marking our liabilities and market prices as of the end of the first quarter as disclosed in our 10-Q we estimate that the unrealized gains on the fair value of our debt would exceed a 170 million indicating that over a $75 per share a value is not reflected in our net asset value at quarter end. This value reflects the attractive, the low current market interest rates on our long term debt funding in place and the potential opportunity to repurchase this debt as a discount.
Turing to slide nine, we paid our first quarter dividend of $0.42 per share on March 31st, and as Mike discussed we declared our second quarter dividend of $0.35 per share payable on June 30th, stockholders of record as of June 15th. I'll now turn the call back over to Mike.
Michael Arougheti
Great. Thanks Rick.
Now a few words about our recent investment activity and then I'll touch on our portfolio performance before concluding. As Rick, mentioned earlier in the first quarter we closed 37.8 million in new commitments across six companies, which consisted of five to existing portfolio companies and one to a new company.
The two most significant new commitments were both to existing companies and included 25 million in senior and subordinated debt to a full profit post secondary education provider in Puerto Rico and $7.8 million in senior subordinated debt for a developer and manufacture of high visibility reflective products. Our other activities during the quarter consisted of fundings under existing commitments and opportunistic purchases of debt in existing portfolio companies in the secondary market.
I'd like to highlight the attractiveness of purchasing debt at sizable discounts in performing companies we know well. We believe, this is an excellent way to deploy capital since it provides an attractive current return and it is a way to increase our net asset value overtime as such loans mature or as the market appetite improves for such strong performing companies.
Slide 10 outlines our new investment activity. Of our new commitments 15% were in senior first lien debt with 84% in senior subordinated debt and 1% in equity securities.
The vast majority of the new commitments were fixed rate with only 15% of such commitments in floating rate assets. And from a repayment standpoint 57% were in first lien, 10% in second lien with 33% in senior subordinated debt.
Now if you turn to slide 11 for updated portfolio quality statistics. As the data reflects we continue to execute on our strategy of investing in larger companies at higher net investment spreads.
We have accomplished this by bringing our average portfolio last dollar total net debt leverage down now at 4.3 times versus 4.6 times a year ago. While increasing our interest coverage now at 2.6 times versus 2.2 times a year ago and 2.4 times last quarter.
As you can see the average EBITDA for transactions closed in the first quarter continues to run higher than the overall portfolio average at 56 million versus the overall portfolio average EBITDA of 47 million. The overall EBITDA average has increased significantly in the past year from 30.7 million to 47 million.
Although not shown, our portfolio weighted average revenues in EBITDA continue to grow on year-to-date basis, in the mid single digits versus the comparable period a year ago and on double digit basis versus the portfolio company's own budgets. Therefore, while conditions remain challenging, we have seen some improved performance recently that is better even than what our portfolio companies had expected, particularly in our largest investment positions.
Turning to slide 12, there hasn't really been significant shift in our industry breakdown in recent quarters, but it is important to note that our investments in more defensive non-cyclical and service oriented businesses have contributed to our performance. For example, at the end of the first quarter, our three largest industry concentrations now at 44% of the total and each representing 10% on more of our portfolio were healthcare at 20%, food and beverage at 13% and education at 11%.
Our overall portfolio of sector weightings compared very favorably to the sectors within the broad leverage loan market embassies in terms of both price performance and default experience. Accordingly, we continue to believe that our portfolio is less volatile compared to the broadly syndicated loan market, given our negligible exposure to real estate, autos, gaming and lodging, transportation, media and our underweighted exposure to publishing in favor of over weights in healthcare, education and food and beverage.
Slide 13 provides another view of our portfolio quality. As a reminder, we employ an investment rating system which grades a one-through-four, with one being the lowest grade for investments that are not anticipated to be repaid in full.
And with four being the highest grade for investments that involve the least amount of risk in our portfolio. As I stated earlier, at the end of the first quarter I'm pleased to say that our weighted average grade of our portfolio investments remained at 2.9, unchanged from the last few quarters.
Since, we had two downgrades and one upgrade the net effect was only one new two rated credit. Overall, we had 2.2% of our portfolio at value in our lowest rating category of one, where we do not expect a full recovery and 5.7% at value in our highest rating category of four with the company's performing well above expected rate (ph).
Continuing on with the quality discussion, we reported a modest quarterly increase in our non-accruing loans from 1.6% of portfolio value and 4.4% at cost to 2% of portfolio value and 5% at cost. Other than our portfolio companies on non-accrual, we have no other company's delinquent payment.
Looking at slide 15, since the end of the first quarter we closed 1.2 million in new investments and we exited 22.6 million, including 3 million in assets sales to Ivy Hill one and two for a net reduction of $21.4 million. At this point in time we have no significant backlog or pipeline to speak of.
And this is an obvious reflection of our stated balance sheet strategy as well as a reflection of the general slow down in the new issue market. In conclusion, we recognized that we continue to find ourselves in the middle of the credit cycle, with market leverage loan defaults and credit impairments heading higher.
However, we have seen improving credit markets, encouraging macroeconomic signs and even recent better than expected portfolio performance so far in 2009. We believe that we're well positioned to deliver attractive future returns to our shareholders for a number of reasons.
We believe our strategy of building expensively positioned portfolio from an industry leverage and assets class standpoint will prove to be the correct strategy for this cycle. Our lead agent or control position in a majority of our credits provide us with the ability to control repricing's and restructurings and to optimize our assets and drive returns.
Our affiliations with Ares management provides invaluable expertise, capital relationships and industry knowledge and positions us well to be a potential consolidator in the sector and to grow our franchise. And finally our capital position which has been considerably strengthened with new longer term capital provide us with the competitive advantages and the necessary balance sheet flexibility for our future needs.
At Ares our philosophy is and always has been to be a patient long term investor focused on generating consistent returns over complete credit cycle. We feel that we've risen to meet the challenges of the existing market and are in a position to grow our franchise and to deliver strong risk adjusted returns for our shareholders over the long term.
As always, we'd like to thank our shareholders for their loyalty, support and confidence in us, and we'd also like to thank our entire investment team for all of their hard work managing our portfolio in these difficult times. That covers our prepared remarks and as always we appreciate your time and thank you for your continued support.
And with that operator we'd now like to begin Q&A.
Operator
Thank you. (Operator Instructions).
Our first question will come from Vernon Plack from BB&T Capital Markets. Please go ahead.
Vernon Plack - BB&T Capital Markets
Thanks very much. Mike could you tell us what -- where that new facility is comprised?
Michael Arougheti
Sure Rick. Do you want to walk through the pricing on the new facility?
Richard Davis
Yeah. The new facility is -- the terms here we have now is it will be priced at L+ 400.
Vernon Plack - BB&T Capital Markets
Okay.
Richard Davis
And the rollover of the existing facility is LIBOR 350.
Vernon Plack - BB&T Capital Markets
Okay great. And Mike from your comments regarding repositioning the portfolio, I assume that we should not expect a lot of portfolio growth any time, also given what your leverage ratio is.
Are you -- I guess the thought is just to continue to reposition and it's all about current size correct?
Michael Arougheti
Yes or no. As I mentioned in our prepared remarks around the dividend discussion we do have a fair amount of liquidity what I would call trivet (ph) on our balance sheet based on the mark-to-market adjustments and we now have access to a pretty sizeable amount of new capital through the Wachovia transactions.
Vernon Plack - BB&T Capital Markets
Yup.
Michael Arougheti
I would say differently we will continue to watch the market and when we believe that the market has stabilized and reached a level of normalcy, I think you will see us start growing the balance sheet again. Until we have confidence that the worst news is behind us and the economy is moving in the right direction, I think you are right you will see a pretty consistent level of the balance sheet.
Vernon Plack - BB&T Capital Markets
Great thanks very much.
Michael Arougheti
Sure.
Operator
Thank you. Our next question will come from Jim Shanahan from Wachovia.
Please go ahead.
Jim Shanahan - Wachovia Securities
Just had a couple of quick ones, thanks for taking my call. The exited investments quarter to date -- the 22.6 million, are there any gains or losses that we should expect to see associated with those exit investments?
Michael Arougheti
No there is not, it was pretty much at par.
Jim Shanahan - Wachovia Securities
Par value. So, and then with regards to the, that includes the sales of loans to the Ivy Hill funds as well?
Michael Arougheti
Correct.
Jim Shanahan - Wachovia Securities
Now, and -- in one of the disclosures I was reading that there were loans sold to one of the Ivy Hill funds that actually resulted in a fairly sizeable realized loss to Ares investors, just likely to be one or 1.5 million dollars. I'm wondering what cause is that?
Is that a mark-to-market from the prior of the most previous fair value mark?
Richard Davis
Yeah. So those assets were sold at ARCC's marked value.
But were sold at a discount to ARCC cost. And when we sell it at a discounted value to cost, obviously we have to realize a loss.
Jim Shanahan - Wachovia Securities
Oh, I see. So they were -- but they were sold at the most at -- whatever the most recent
Richard Davis
Yes correct.
Jim Shanahan - Wachovia Securities
Their value. Okay.
That's interesting. And then the dividend, question about that.
We were somewhat surprised that the dividend wasn't cut last quarter in fact, but now you know we've got a run rate of operating income in the low $0.30 range. Why not just have cut it to more like $0.30 and given that you can likely shield some income here from distribution just due to the weakness in operating income and some of those -- the losses that you have taken?
Michael Arougheti
Yeah. This is I'm not quiet sure that there is every a right answer Jim and we've tried to have a very open and honest dialogue with the market about how we think about our dividend as it relates to our liquidity and our operating strategy.
The reality out is if you look at the core earnings capability of the business as we talked about we have five or six levers that we can pull particularly with new capital to grow our core earnings from where they sit today in the first quarter. And just to reiterate what those are, investing some of our new capital to drive increased spread and fee income, its continues to rotate our portfolio, its reprising our existing assets and taking advantage of incremental spread and fee for repricing, its harvesting capital gains, its repurchasing our debt.
So, when you look at the gap between the Q1 earnings and the amount of capital that's on our balance sheet available for investment, you have to have the view that we can continue to grow the core earnings and we've been pretty consistent in terms of laying out that strategy at least over the last 12 to 18 months. If you look at where we sit today and again this has been consistent prior quarters, we are trying to manage to a level of stability in what is a very volatile market and in a market that is very difficult to predict the direction of.
As we sit here today through the first quarter between core earnings per share in the first and the second quarter, plus gains realized to date in rollover income, we're trying to manage our run-rate profitability against our dividend levels and again we're going to keep taking it quarter-by-quarter and see what the market offers us to see how our core is developing.
Jim Shanahan - Wachovia Securities
Thank you. And one more I'm sure there are other questions.
I was curious if you could comment Mike, what you are seeing in the marketplace here with the significant spread, tightening in leveraged loan markets and more obvious performance you had during the call in the equity markets. Do you, how do you feel about unrealized depreciation in the quarter and the potential additive impact of that to your capital?
Michael Arougheti
Yeah I think its going to be a progression over time. If we all think back to how the original FAS 157 worked its way through the credit markets in the PDC sector and in particular, it was really a 12 month process of developing consensus around what 157 meant for a ill-liquid sub-originated assets like the ones that we hold.
And I would expect a similar type of progression on the way back up, but its not going to be immediate. I think we can expect that FAS 157 will obviously help the credit markets in general particularly as it relates the assets held on bank balance sheets and mortgage and other real estate related securities and as the credit markets kill themselves and asset values move up, I think the reference securities -- although we've always argued they're not particularly relevant to our assets.
Those reference securities should improve and as they do I'd expect to see a continued increase in asset values across the sector. But I do think its going to be a slow process, but a beneficial one.
Jim Shanahan - Wachovia Securities
Okay. Thanks very much.
Michael Arougheti
Sure.
Operator
Thank you, our next question will come from Matthew Howlett from Fox-Pitt Kelton. Please go ahead.
Matthew Howlett - Fox-Pitt Kelton
Hi guys thanks for taking my question. You got strong credit quality in the quarter.
Looks like its holding up great, I just wanted to know if you could elaborate on the five existing portfolio companies at what you contributed subordinated capital. Is that offensive or defensive we haven't got a chance to look through what companies that were about.
But can you maybe elaborate me on that?
Michael Arougheti
Yeah I -- most of those situations are what I would call offensive. They were particularly within the existing portfolio, companies that were making acquisitions, that required new capital in order to do so.
And as I mentioned in our prepared remarks around repricings, what's nice about those situation is we get to put more capital behind winners in our portfolio where we sit on the board and have real good visibility to company performance. But more importantly along with the new capital typically comes a repricing opportunity with the existing capital.
So you may see a situation where we have an existing senior secured loan to a company that's looking to make an acquisition and by making a mezzanine investment in that company and for some of the acquisition we can actually reprice our senior -- existing senior loan to market. So there's a double benefit there.
A: Matthew Howlett:} Okay got you. And then switching to the CLO debt repurchases, I think you're up to about 15 million this year.
How much more would you like to go, how much is available and how do you weight that versus really locked in long term funding that's Libor plus 38 or something?
Michael Arougheti
Yeah again you have to find the right balance, as Rick mentioned in his comments, were we to have adopted FAS 159 based on the market price of the similar assets today, our long term debt is worth up to $175 million of a $170 million of incremental NAV. I think we are trying to strike the right balance.
Clearly we view the ability to repurchase our CLO debt as a deep discount to be one of the best uses of our capital today. And we'll continue to do it, I think we are going to try to focus on some of the more junior trenches in those vehicles where we unlock the deepest discount without necessarily giving up to your point the benefit of the long term capital.
So we'll strike a balance. In terms of how much is available I think we've publicly disclosed how large that facility is.
Technically there's $314 million of notes under pinning that CLO. The challenge that you have and this is pretty widely distributed and takes a fairly longtime to execute on.
So it's something that we're very focused on but can't really give anybody a sense for how it will take or it will be successful buying more A: Matthew Howlett:} Okay. Good, and then the last question just on the long term credit picture I mean the portfolio companies the EBITDA looked really strong couple of big quarter-over-quarter.
If you look over the next two years if the EBITDA just stayed flat, it didn't go up on the portfolio of the companies due you feel comfortable that your underlying portfolio of companies not -- could not only maintain our interest coverage but they could de-lever. And I guess of -- just to follow on that I mean is that, it looks like the market just particularly where the market pricing on the CLO investment is looks as AAAs on the mid-20's.
Are they what's the difference between -- why is the market -- why is the notes trading at such a discount that they are expecting some cumulative loss rate and it looks like in sort of the mid-40s, related to?
Michael Arougheti
Let me answer the second question first, I can't answer specifically your first question but I'll try to give you a general sense for how we think about underwriting credit. The reason that the CLO notes both for our company and others like us trade where is a function of the two things that are really not related to an understanding a fundamental credit.
The first is its long dated paper at very low spreads to put it in perspective our existing AAAs are priced at LIBOR 25 with no LIBOR floor and 12 years left on maturity. So for any investor today given the relative value opportunities in the market clearly if you try to present value that back is what the key driver.
The second large driver is the holders of these securities are levered themselves and have been cross investing and lot of CMBS and RMBS paper. And tend to be fore sellers if they deal with their own de-leveraging.
And if those two combinations, both technical that really drive pricing in the CLO market generally in for these notes in particular. I don't believe that there is really any fundamental look through where people are expressing a view on the fundamental credit.
With regard to your first question you should know one of the reasons we like to be up in the balance sheet or the capital structure and to be a lead agent is because we get to control the documentation of our own transaction and put covenant packages in place that stepped down over time and force a company to de-leverage otherwise they have to come talk to us, about a potential restructuring or repricing. Typically when you underwrite a facility in the middle market be it senior or subordinated, you underwrite it to a discount to a budget of any where between 15% and 30 to 35%.
Now obviously when a lot of those facilities were put in place over the last four or five years, I think people's expectations for what that budgeted performance would be are higher than we should all expect over the next two to three years. So part and parcel with this re-underwriting process that I continue to describe on our calls is to go back out to our existing portfolio companies and reevaluate their ability to service debt in light of the current economic environment.
And I think the good news is, because we have a largest capital provider in most of these situations and control the structures, flat performance is actually a fairly healthy thing for this portfolio in the sense that it would give us an opportunity if there are tightening covenants actually get back to the table and reevaluate the risk adjusted return. So I can't comment generally on, specifically on how the portfolio would perform but I think it's designed and underwritten to actually generate attractive returns in a flat case.
And in terms of the numbers if you look on slide 11 the best place to -- you will see that is really the underlying interest coverage ratio in the portfolio that's already about 2.6 times on a portfolio weighted average basis and 2.9 times on a simple average basis, so clearly a lot of cushion within the portfolio on both an average and weighted average basis to accommodate reductions in EBITDA. A: Matthew Howlett:} Great.
Thanks a lot.
Michael Arougheti
Sure.
Operator
Thank you. Our next question will come from Andrew Wessel from J.P.
Morgan. Please go ahead.
Andrew Wessel - J.P. Morgan
Yeah, good afternoon, thanks for taking my question. It's just a quick one, just on the new line, the amortization period that's for your amortization period.
Is that a straight line amortization so one-third maybe on an annual basis?
Michael Arougheti
No. Its not.
It's really -- the way to think about it is it amortizes as loans pay off. So for example if there is a $20 million loan that's pledged to that facility, to the extent that that loan pays off, we will pay down the line.
The only scheduled maturity prior to the third anniversary is if that natural amortization does not reduce the facility by $25 million in the first year and the second year, then we would reduce the facility. So its really not a scheduled amort so much as a static pool where we've turn it out against that pool of assets.
Andrew Wessel - J.P. Morgan
Got you. So as well as the loans performed as expected you are more or less term financed.
Michael Arougheti
Correct.
Andrew Wessel - J.P. Morgan
Okay. Great thanks a lot I appreciate it.
Michael Arougheti
Sure.
Operator
Thank you, our next question will come from Greg Mason from Stifel Nicolaus. Please go ahead.
Greg Mason - Stifel Nicolaus & Co
Hi. Good morning.
Could you discuss as the credit markets have improved a little bit, what are the new types of returns that you are seeing both from an income perspective and fee perspective for new investments today?
Michael Arougheti
Sure. Why don't we talk about it in terms of the primary markets and the secondary markets because there has been a fairly large discrepancy between the return opportunities in those markets at points in time and everything that I'm about to say is obviously qualified by the fact that the new issue market is fairly inactive right now.
So, a lot of the pricing is being discussed in the market is really a reflection of where a certain people are willing to transact business, but not necessarily a reflection of where deals are getting done. I'd say in general the senior debt market is roughly a two times debt to EBITDA market, maybe 2.5 times and the pricing that one could get on those assets will range from 8 to 10% with a 2 to 3% fee.
The mezzanine market is roughly a four times market and the total return opportunity there is 18 to 20% and that comes through a combination of coupons, fees and call protection and in some instances warrants. Again fees are anywhere from 2 to 3%, spreads are typically 13 to 15% predominantly cash with real call protection and covenants, and the call protection periods we're seeing are typically anywhere from one to three years of hard call protection and then prepayment penalties after the no call period of anywhere from half of the coupon scaling down or 105 scaling down.
So if you add up the fee you get on the front end, the pre-payment penalty you get on the back-end plus the spread that will get you to that 18 to 20% range.
Greg Mason - Stifel Nicolaus & Co
Okay and you talked about under expanding your assets under management assuming contracts. Can you talk about what are the opportunities out there?
For assuming contracts and what do the economics look like?
Michael Arougheti
Sure, just to remind everybody on the call, Ares management is one of the largest bank loan managers in the country. We have a very significant capital markets and asset management infrastructure resident both here as well as in London and Los Angeles.
What's happening in the market is, as I think if you think about mass (ph) question around the CLO financing, a lot of the CLO's as they are currently structured have two fee components, one being a senior management fee and the second being a subordinated management fee that is performance related. Because of the way that these facilities tend to be structured, default rates increase and there is negative ratings migration, the subordinated fees tend to get shut off which significantly reduces the capital available to support an asset management infrastructure.
Given the amount of CLOs and other levered loan funds that have been raised or had been raised prior to December 2007 there are a number of what I would call subscale asset managers with significant infrastructure that's unable to be supported by just the senior management fees, and they can't grow. So the types of transactions that you should expect to see in this market are going to be either taking over those management contracts as a sub-advisor, buying those management contracts for cash, buying assets out of those facilities et cetera et cetera.
The reason that it's so attractive for us is given that we already have the infrastructure and the capabilities in place rolling those funds onto our platform is obviously highly accretive.
Greg Mason - Stifel Nicolaus & Co
And final question to follow up on Matt's commentary about repurchasing debt, what's the effective yield of the $8.2 million of debt that you repurchased? How does that compare to say the yields you just gave us on new investments?
Michael Arougheti
Yeah, I don't have the spreadsheets in front of me and we can follow up offline to help you through the calculation, but order of magnitude its going to comparable. My recollection is it's a 15 to 20% return.
Greg Mason - Stifel Nicolaus & Co
Great, thank you guys.
Michael Arougheti
Sure.
Operator
Thank you, our next question will come from Faye Elliott from the Bank of America Merrill Lynch. Please go ahead.
Faye Elliott - BAS-ML
Hi, thanks for taking my question.
Michael Arougheti
Sure.
Faye Elliott - BAS-ML
Most has been answered just wanted to ask if in your release you say that the facilities have been expanded or you have been nearly 200 million revolving facility subject to leverage restrictions which I guess are pretty obvious in other conditions. Are the other conditions minimum NAV numbers that we should be aware of, did they want any liens assigned is there anything?
Michael Arougheti
Yeah. They are going to be secured facilities similar to our existing facility Wachovia where we are hedging specific assets through an SPB structure against those loan facilities.
Faye Elliott - BAS-ML
Okay.
Michael Arougheti
In terms of the covenants, the covenants are going to look a lot like the covenants that exist in our current facility particularly referencing the assets coverage and minimum network test.
Faye Elliott - BAS-ML
Okay. And do you foresee any issues assigning those liens and that we've seen under different circumstances, trouble with some other BECs assigning those liens is this is the matter of working it out and..?
Michael Arougheti
No. They're -- again, they're in SPBs.
Faye Elliott - BAS-ML
Okay.
Michael Arougheti
It's the same lender. So with the existing turn out facility we are really just changing the maturity in the term structure and the new facility will obviously be investing new assets but there is really no prior lien on those assets.
Faye Elliott - BAS-ML
Okay, but there will be a liens assigned once.
Michael Arougheti
Yes. To the new facility to the extent we use the new facility to acquire.
Faye Elliott - BAS-ML
Okay. Great thank you.
Michael Arougheti
Sure.
Operator
Thank you. Our next question will come from Nick Capuano from Imperial Capital.
Please go ahead.
Nicholas Capuano - Imperial Capital Markets
Hey guys. Congratulation on the financing in the quarter.
Michael Arougheti
Thank you very much.
Nicholas Capuano - Imperial Capital Markets
Just one quick follow up on the buybacks. Just what are the prospects for you to do more buybacks of the CLO in terms of how much do you think you can source and is this something that we should be seeing material amount moreover the next few quarters.
Michael Arougheti
Yeah. As we just said that, our hope is that we'll able to execute more than we can't guarantee it.
It's a core strategic priority of ours, among many. But we do believe that that's an extraordinary use of our capital.
It's a pretty lengthy process to source and execute on this. But it's something that we'll continue to spent time on.
Nicholas Capuano - Imperial Capital Markets
And the magnitudes of the exists and funding, I know you already addressed the fact that you are given for now you plan to keeping the portfolio relatively steady. But if I don't know you're exits bounced around quite a bit lower this last quarter.
Do you have any or can you provide any insight now just on the magnitudes of the exits you think you are going to have coming up over the next quarter or two?
Michael Arougheti
We can't provide any visibility on that. What I will say is I have actually been pleasantly surprised by the level of repayments in the portfolio over the last three quarters given the M&A environment and the economic environment.
Nicholas Capuano - Imperial Capital Markets
Sure.
Michael Arougheti
But while they're obviously less than we would like them to be. We think that they are significantly higher than similar portfolio are experiencing.
We are continuing to look for ways to get liquidity in the portfolio. There is going to be natural amortization, there is going to be refinancings in some of our better performing assets and again where we can opportunistically sell assets to redeploy into this market we will do that as well but this is all step that we're looking at on a daily and weekly basis to evaluate.
Nicholas Capuano - Imperial Capital Markets
All right great job, thanks. Operator: (Operator Instructions).
Mr. Arougheti at this time, I show there are no further questions.
Please continue your presentation.
Michael Arougheti
Great, thank you operator. We have no further prepared remarks but we again want to thank every body for joining our call this morning.
And again a very heartfelt thanks to the investment team for all their hard work over the last quarters. And we thank every body for their continued support and look forward to speaking with you on our next quarterly call.
Thank you.
Operator
Thank you this does conclude today's Ares Capital Corporation's earnings conference call. Thank you for your participation.
You may now disconnect.