Kipp deVeer - CEO Penni Roll - CFO

Jonathan Bock - Wells Fargo Securities Hugh Miller - Macquarie Research Rick Shane - JPMorgan Doug Mewhirter - SunTrust Robinson Humphrey Kyle Joseph - Jefferies David Chiaverini - Cantor Fitzgerald Robert Dodd - Raymond James Greg Mason - KBW Jonathan Belanger - AlphaCore Capital Chris York - JMP Securities Derek Hewett - Bank of America Merrill Lynch

Thank you, Operator. Good afternoon, everyone and thanks for joining us.

We're pleased to report continued strong operating performance for the second quarter of 2015, with GAAP and core earnings per share of $0.47 and $0.37 respectively. We're happy with the quarter and we feel that it further demonstrates the stability and predictability of our business model and our continued ability to generate current income and capital appreciation.

We recognize $0.12 per share of net realized and unrealized gains in the second quarter and net asset value grew from $16.71 as of March 31 to $16.80 as of June 30, with good underlying performance in the portfolio. Originations in the second quarter were healthy, with $820 million of gross commitments.

Our net fundings for the quarter were modest at $71 million, as we continue to proactively sell lower-yielding assets and also experienced some repayments in the portfolio. The weighted average yield on the debt and income-producing securities in our portfolio at amortized cost increased to 10.6% as of June 30, representing the third consecutive quarterly increase in our overall yield.

Finally, our balance sheet remains strong, with a net debt to equity ratio of 0.62 times, below the low end of our target range of 0.65 to 0.75 times. We have cash and available liquidity under revolving lines of credit and SBA debentures of $2.4 billion to invest and we believe we're well-positioned going into the second half of the year, when we tend to be more active from an origination standpoint.

And with another successful quarter behind us, we announced that we declared a third quarter dividend of $0.38 per share this morning. We'll provide more detail on the earnings and investment activity later in the call.

However, I'd briefly like to discuss some exciting news relating to our external manager, Ares Management. On July 23, Ares Management and Kayne Anderson Capital Advisors entered into a definitive merger agreement, with the combined company to be named Ares Kayne Management which will become one of the largest and most diversified alternative asset managers.

The closing is anticipated to be on or around January 1, 2016 and is subject to various customary closing conditions. A significant portion of Kayne Anderson's AUM is in the energy sector, primarily in midstream assets and to a lesser extent in the upstream oil and gas sector.

Kayne also manages strategies in real estate, middle market credit and growth private equity that will fold into Ares' existing groups in these areas. With this merger, Ares Kayne will form a new energy vertical which we believe will benefit Ares' existing business lines, as they will be able to access the decades of experience the Kayne Anderson team has, investing in energy-related businesses.

The combined firm will also be a leading manager of publicly-traded yield-oriented vehicles managing 8 public companies, including ARCC, the largest business development company and KYN, the largest MLP closed-end fund. We do not expect any significant changes in ARCC's business as a result of this transaction, but we do expect to see some benefits in terms of access to information and insights, specifically as it relates to ARCC's investments in the project finance and oil and gas sectors.

I'll now move on to an area that's received a lot of attention since the sale of GE's U.S.-sponsored finance business to CPPIB. Since GE announced the sale, we've been focused on how to best capitalize on the exit of one of the largest players in our market and in short, we believe that it's created some meaningful opportunities for us.

The first opportunity is our new joint venture with Varagon Capital Partners and AIG, whereby we're establishing the Senior Direct Lending Program which we're calling SDLP. Our belief is that SDLP has the potentially to scale substantially and will be positioned to reach the same types of borrowers and provide the same capital solutions as the SSLP has in past years.

As I mentioned on our call last quarter, we had two major objectives in selecting our new joint venture partner. Number one, we wanted a partner that was highly experienced in lending to middle market companies, so that the program ramped naturally and, number two, we wanted a partner with a significant balance sheet to support the growth of the program.

We feel that we've accomplished both of these goals with Varagon and AIG. Our relationship with the management team at Varagon is longstanding and dates back to their prior history at GE and CIT.

Varagon has been an active syndication partner of ours since its inception and we have begun to build a portfolio together that we plan to eventually contribute to the SDLP. The SDLP joint venture is modeled after the SSLP and we expect our investment in the SSLP will be in a similar form, with similar returns over time.

Beyond this, we believe GE's exit puts us in a position to be a more active provider of first lien senior loans. Over the last few years, we've started to build out greater syndication in capital markets capabilities which puts us in a strong position to be able to offer a more complete set of capital structure alternatives to our borrowers, including providing more traditional first lien loans.

These capabilities should continue to enhance our market leadership position with our clients and help drive originations for the company. We feel this can become a more significant contributor to structuring fee income and provide for higher returns on our invested capital.

Now, I would like to turn the call over to Penni Roll, our CFO, to detail the second quarter financial results and to discuss some of our recent financing activities.

Thanks, Kipp. Our basic and diluted core earnings per share were $0.37 for the second quarter of 2015, up $0.03 from the second quarter of 2014 and flat versus the first quarter of 2015.

Our basic and diluted GAAP net income per share for the second quarter ended June 30, 2015 was $0.47, compared to $0.48 for the second quarter of 2014 and $0.32 for the first quarter of 2015. For the second quarter of 2015, our net realized gains on investments totaled $25 million or $0.08 per share and we had net unrealized gains on investments of $14 million or $0.04 per share which includes $8 million from reversals of net unrealized appreciation related to net realized gains on investments.

As of June 30, 2015, our portfolio totaled $8.6 billion at fair value and we had total assets of $9.1 billion. At June 30, 2015, the weighted average yield on our debt and other income-producing securities at amortized cost was 10.6% and the weighted average yield on total investments at amortized cost was 9.7%, as compared to 10.5% and 9.6% respectively at March 31, 2015 and 10.1% and 9.2% respectively at June 30, 2014.

Our stockholders' equity at June 30 was $5.3 billion, resulting in net asset value per share of $16.80, up 1.7% year over year versus June 30, 2014 and up 0.5% from NAV per share of $16.71 at the end of the first quarter of 2015. As of June 30, 2015, we had approximately $5.8 billion in committed debt capital, consisting of approximately $3.5 billion of aggregate principal amount of term indebtedness outstanding, $2.2 billion in committed revolving credit facilities and $75 million of committed small business administration debentures.

Approximately 60% of our total committed debt capital and 96% of our outstanding debt at quarter end, was in fixed rate unsecured term debt. This predominantly fixed rate funded liability structure, combined with our predominantly floating rate assets, leaves us very well-positioned for a potential rise in interest rates.

As discussed on our last call, we continue to focus on the right-hand side of our balance sheet, with an eye on lowering our cost of debt capital. During the second quarter, we amended our $400 million revolving funding facility with SMBC to extend both the stated maturity and the end of the reinvestment period, each by one year, to September 2017 and September 2022 respectively.

In connection with this amendment, we also amended the stated interest rate from 200 basis points over LIBOR to either 175 basis points or 200 basis points over LIBOR, depending on levels of usage on the facility. During the second quarter, our wholly owned subsidiary, Ares Venture Finance LP, received its license from the SBA to operate as a small business investment company.

In conjunction with this license, Ares Venture Finance received a $75 million debenture commitment for 10-year fixed rate financing from the SBA. We use SBA financing to fund our venture finance investments and as of the end of Q2 we had drawn $15 million under this commitment.

The weighted average stated interest rate on our drawn debt capital at quarter end was 5% which was down from our weighted average stated interest rate of 5.2% at March 2015. The decrease in the weighted average interest rate on our drawn debt at June 30, 2015 versus March 31, 2015, primarily relates -- or, reflects that we had more outstanding on our lower-cost revolving credit facility as of June 30, as compared to the end of the first quarter, when we had nothing drawn on those facilities.

If we had borrowed all of the amounts available under our revolving credit facilities as of June 30, 2015, our fully-funded weighted average stated interest rate would have been 3.9%, down from 4% at March 31, 2015. As we move into the next 4 quarters, we may have opportunities to further reduce our cost of debt capital, as we have more recently been able to issue long-term liabilities at lower coupons than the coupons in our existing term debt issuances that will be maturing next year.

As of June 30, 2015, our debt to equity ratio was 0.68 times and our debt to equity ratio net of available cash of $284 million was 0.62 times. As of quarter end, the weighted average remaining term of our outstanding debt was 6.1 years and we had approximately $2.1 billion of undrawn availability under our lower-cost revolving credit facilities and SBA debentures, subject to borrowing base, leverage and other restrictions.

Finally, as Kipp mentioned, this morning we announced that we declared a regular third quarter dividend of $0.38 per share. This dividend is payable on September 30 to stockholders of record on September 15, 2015.

We believe that our regular quarterly dividend is supported by an investment portfolio that has historically produced strong current incomes as well as net realized gains. And in addition, we estimate that we have carried over approximately $181 million or roughly $0.58 per share, in undistributed taxable income into 2015.

With that, I would like to turn it back to Kipp for some additional comments.

Thanks, Penni. I'd like to spend a few minutes discussing recent investment activity in our portfolio before opening the call up for questions.

In the second quarter of 2015, we made $820 million in new investment commitments and the weighted average yield at cost on our funded investments was 9.5%, 120 basis points above the 8.3% yield on the $783 million of investment commitments that were repaid, sold or otherwise exited during the quarter. We believe that we continue to see the benefit of the competitive advantages provided by our size and scale.

This quarter, almost 60% of our new investments were to existing portfolio companies. This position of incumbency and our existing relationships with these companies, positions us well to continue to support them with capital as they grow or change ownership.

It also allows the company to continue to grow with our strongest portfolio companies and to avoid some of the aggressive transactions that we see getting done in the market today. We've continued our focus in Q2 on senior secured investments, with 65% of our new commitments being made in first or second lien senior secured loans.

23% of our new commitments went into the subordinated certificates of the SSLP, as we continued investing in the SSLP throughout the second quarter in the ordinary course. Now that GE is exiting the space, we don't expect that SSLP will commit to transactions for new companies.

However, we may make additional investments in the sub certs to fund existing SSLP commitments or to support existing portfolio companies. Without any new investments being funded by the SSLP after the second quarter, we currently expect that we and GE will allow the portfolio to repay over time in an orderly manner.

At June 30, 2015 the SSLP portfolio was $10 billion with loans to 52 distinct borrowers. The weighted average contractual life of the loans in the portfolio was 4.4 years, so we expect that the repayment of this portfolio could take some time.

We had $783 million of exits in the second quarter. Through repayments, as well as our continued proactive selling of lower-yielding assets, approximately $383 million or 49% of the exits, related to our proactive selling of lower-yielding first lien assets.

The weighted average yield on the $383 million of assets sold in the quarter was 6.5%. As many of you know, we've been focused on optimizing the yield in our portfolio and over the last 18 months we've sold $1.8 billion of loans with a weighted average yield of 6.2%.

$500 million of these asset sales were to vehicles managed by Ivy Hill Asset Management and $1.3 billion were sold to other third parties in the market. Given the amount of asset sales that we've done, I would say these sales of existing lower-yielding assets are now largely behind us and you should expect repayments to be more than the ordinary course and for sales of lower-yielding assets to generally be those identified with new transactions and not with past investments.

We currently have a diversified $8.6-billion portfolio consisting of investments in 207 companies and the portfolio is performing very well. Financial performance has been strong at the underlying corporate borrowers in our portfolio, with year-over-year EBITDA growth continuing in the double digits at approximately 10%.

Non-accruals were unchanged in the second quarter, with 1.7% of the portfolio at cost and 1.3% of the portfolio at fair value on non-accrual at June 30. We did not have any new non-accruals during the second quarter.

I'll finish my prepared remarks with a comment on our post-quarter-end investment activity. We're currently seeing relatively light loan volumes in the middle market.

However, we continue to leverage our direct origination platform and broad relationships to find some attractive opportunities. From July 1 to July 29, 2015, we made new investment commitments totaling $470 million, of which $378 million were funded, with a weighted average yield at amortized cost of 8.2%.

During that period, we also had sales repayments and other exits totaling $237 million, with a weighted average yield at amortized cost of 8.4%, on which we realized approximately $9 million of net gains. A portion of the new first lien investment commitments made during this period were also sold during the period, illustrating our first lien syndication capabilities.

The weighted average yield on the new commitments made during this period, net of the assets sold pursuant to our syndication strategy, was 9.1%. As of July 29, our total investment backlog and pipeline stood at approximately $440 million and $810 million respectively.

And of course, we can't assure you that any of these investments will close. In closing, we continue to operate our business with a view to positioning ARCC for a strong second half of 2015 and beyond.

We've always managed the company with a long-term view and we firmly believe that we've built a preeminent provider of debt capital to the middle market. I'm also confident in the strength of our team to navigate through periods of volatility and change and I think that we're prepared for potential changes ahead as they may come.

The drivers of future volatility are likely to include higher interest rates in the U.S., volatile oil prices and a fair bit of geopolitical and global economic unrest. Our company has a successful track record in different market environments and is prepared for what may lie ahead.

And with a total GAAP ROE of 11.1% over the last 12 months, matching our average annual GAAP ROE since inception in 2004, I continue to strongly believe that ARCC offers investors an attractive source of both income and capital appreciation potential. That concludes our prepared remarks.

We're happy to open the line for questions.

Kipp, real quick, I appreciate the comments that you mentioned on the GE CPPIB situation. And as we were looking in the 10-Q, I think you mentioned the note in the SSLP program that, as that portfolio declines, you mention that the portion of your company's earnings attributable to that investment will decline as well.

The question is, the speed of that decline. And so, I'll start with a pretty simple question, is -- does this facility or does this program, maintain constant leverage as it delevers?

Yes. We're engaged, obviously, as you'd probably think, Jonathan, we're engaged in a pretty significant discussion with GE around what to do with SSLP.

We've got, obviously, a plan for the company, post-SSLP which I tried to make comments on in our prepared remarks. But, to be honest, we're excited, sort of, to move forward on that.

We do expect a pretty long runoff of that program, again, with 52 borrowers. But rather than get ahead of ourselves, the second quarter was a quarter where we continued to just invest SSLP.

We actually didn't see significant paydowns. So it's been operating business as usual, really, with no indication of the repayment and how we expect it to work going forward.

So, what I would like to do is achieve some certainty on answering your question before I actually answer it. So, again, we will continue to obviously have some discussions with GE about how to resolve those 52 borrowers in our joint venture.

And I promise you'll be the first to know when we achieve some resolution on that.

And I guess the question is and with all due respect, I know a number of the investors, when they look at the size of this program relative to Ares' revenue and earnings profile -- just kind of brings the question -- should that take that, while you're negotiating, generally you don't negotiate points that you like. And so, in this case, one could assume that it does amortize and that the senior notes are going to be paid down with any type of prepayments in the program, until you renegotiate those terms.

I'm not sure that's exactly accurate. But I think we're a little bit more focused on the long term.

Part of the -- well, most of the exercise that we've been going through around here, is just to look at what happens, obviously, as that portfolio does repay. So, the point that you reference in the Q is pretty obvious.

We expect that the size of the portfolio will decline, so the income associated with that portfolio will also decline. So, the plan that I think we have a very high level of confidence in, going forward, is twofold, as I mentioned in my prepared remarks.

Number one, we have obviously found a new partner and a new joint venture that we're off and running on, that we think will go a long way towards replacing the income that will decline, per your comment on the Q. And that's obviously the SDLP.

But again, we do think that our ability to be in the first lien business and to underwrite and generate fees there, should make up for a lot of the fees that I think you've seen historically coming off the SSLP.

And so, Kipp, as we look at, kind of, the average fees -- the capital structuring fees that are taken upfront in the income off of the GE program, I think that was roughly at about $9 million a quarter. I think it was $12 million this past quarter.

The question is, GE was a long-established program and GE had no problem writing significant checks, given their sizeable direct origination force, et cetera; but can you give us a sense how one can maintain or perhaps ramp SDLP at the same time that one would expect capital and structuring fees, from this entity that's been roughly $9 million a quarter and then as well as other income at about $7 million a quarter -- that income to fall drastically? Help us understand, kind of, the lever.

Because generally, new partnerships don't ramp fast. This one didn't.

And I'm trying to understand how we should think that SDLP would.

Sure. To put a little bit of that in color, Varagon has been in the business now for -- I want to say almost two years.

So, in terms of working with them, we have a pretty successful relationship, having worked with them before this arrangement came around and long before the contemplated GE sale. So, there's good familiarity about how to do business with one another.

I would tell you that we're already beginning -- we've already begun, I should say, to book some transactions where we're sort of co-lenders. So, the ramp has actually been pretty quick.

I would tell you, having been involved with the ramp of the broken GE/Allied SSLP and moving it over to Ares, the ramp with Varagon is actually occurring more quickly than probably the ramp with GE did, here for our first year. So, I don't have a lot of concern about that.

We've got a good working relationship and I think we've got a good blueprint for how it rolls out. On your point on fees, obviously we're seeing new commitment or new fees on all of our commitments.

But, again, maybe I'll just give you a highlight of something that we're working on today, for the third quarter, that we'll disclose in a little bit more detail when we report. But, unshackled from the joint venture with GE, we've gone out and taken on a couple of mandates.

And let me give you an example. We're actually working on closing and fully syndicating about an $800 million deal right now, for a sponsor.

I think you'd generally think that that was something that the banks might do. It's a whole lot of years later and we're actually able to out-compete the banks on that deal.

We're underwriting $800 million of financing for a $100-million EBITDA company. We expect that our final hold will be somewhere between $100 million and $200 million and we'll be syndicating somewhere between $600 million and $700 million of paper in that transaction to approximately 20 lenders and earning a fee of $8 million or $9 million, depending on how it finally comes out.

So, that right there alone is an $8 million or $9 million fee on a $100 million to $150 million final hold. I'm pretty confident that we can continue to do that.

I'm not sure we're going to have an $800 million deal every quarter; but to the extent we have two or three $300 million deals a quarter, we feel that we've got a business model that's free to generate fees in alternative ways, away from SSLP. And I think I've said this in other calls, but when we did enter into the joint venture with GE, we were a much, much smaller company.

This was the fall of 2009, we were in the middle of acquiring Allied Capital. We had about $2 billion of assets.

It was a very different time in the economy and we were buying a very troubled company. I don't think that we had capabilities, the way that we have capabilities now.

With $9 billion of assets and about $10 billion, $11 billion of committed capital, we can go out and do things that other players in our market simply can't do. And we expect that we'll benefit from the ability to capitalize on the growth of our company over the last 5 years, going forward.

And that kind of begs the question, if you're underwriting an $800 million transaction, to the extent that one is choosing to compete with the banks or how does that translate into what we should see as potential investment spreads, right? Generally, the size of Ares' balance sheet can be very beneficial.

But at times when the broadly syndicated market is relatively frothy and there's limited supply and significant demand, spreads compress. And so, I'm trying to understand where we would see spreads going, if you've mentioned that there's opportunities to now, in fact, compete with banks that are the lowest-cost provider of capital to the broadly syndicated markets.

Yes. Again, this is just at the upper end of our market i.e.

probably where the banks are less competitive, $100 million of EBITDA. I would tell you, the deal that -- in particular and we'll come with more details later, definitely has some special circumstances to it.

I would tell you that there's a relationship there that is unusually good on our side. Certainly we're not going in and planning to compete with banks on all 400 deals where we're going to sell paper down and hold nothing.

So, I think what you'll see on our SOI at the end of September 30 is something that'll look pretty attractive rather than violate the confidences of that deal, I'll just sort of leave that last point alone.

And then lastly, I think, of the announced repayments -- does that announced repayments as of end of July -- does that include two very significant prepays in the form of Cast & Crew and Global Healthcare? And that's all for me.

Thank you.

Cast & Crew, it does certainly include and GHX, it also includes -- no, it does not, it's saying. Yes.

So, GHX was right after the quarter. Cast & Crew is?

Yes. They're right over the end of the quarter.

Sorry, Jonathan.

So, you had mentioned on the prepared remarks, just seeing some aggressive transactions in the market. I was wondering if you could give us a little bit more color there, on whether or not in terms of kind of rates or terms on the transactions?

Or what are you seeing there?

I would tell you we just, over the last year, even or two, I think we've seen a lot of lower credit quality transactions getting done by other players in the market. I think we've seen weaker structures.

I think we've seen worse documentation and I think we've seen lower spreads. The only piece of it that seems to have reversed itself slightly has been maybe a touch of spread widening over maybe the last 3 or 4 quarters.

But we have a pretty high degree of selectivity here and the key for us obviously is leveraging the strength of our origination platform and staying away from some crazy things. And the problem is, when deal flow gets light and it's been light the first and second quarter, people tend to stretch to try to get some things closed.

And we continue, as I mentioned, just to benefit from the fact that a lot of our activity's occurring with existing portfolio companies, where it's less competitive.

And then, in talking about the pipeline, I mean, it seems like there was a noticeable pickup there during the quarter. And was wondering, if we look, it seems like there is outsize growth within the restaurant and food services industry relative to the current portfolio.

What are you seeing there and where do you see the best opportunities out there in the market?

Yes. So, the restaurant and food service point is literally the -- is this large transaction that I mentioned to Jonathan.

So, you'll hear more about that later. But the -- nothing other than a single deal.

The second point, I'm sorry, just as a follow-on?

Sure. Yes.

Just in general, I guess, where you're seeing the best opportunities to extend credit. But it seems like -- so, the restaurant is just kind of a one-off transaction.

There is nothing industry-wide, that you're seeing, kind of, an increase in opportunity?

No, I think that's right. I mean, we come to the market as generalists.

The way that we express our views on credit is to turn things down that we don't think are companies appropriate for the portfolio. But you see obviously broad industry diversification across our company and that continues.

Nothing different.

Okay. And it seems as though in the last couple of quarters there was more of a willingness to kind of go down the capital structure; look at second lien.

Was wondering if you could talk about what the differences in spreads that you're seeing now, between first and second lien. And in 2Q it seemed like there was more of a shift towards first lien extension of credit.

And is that just, kind of, where the market's showing you the best value or is that kind of pushed by you guys? Any color there would be great.

No. Again, I mean, look, we maintain, as always, just a focus on risk-adjusted returns.

So, it really depends on what's out there on a quarter-to-quarter basis. Obviously, there was a lot of discussion about the second lien exposure percentage of the mix increasing during Q4 and Q1 and I would tell you again, as I did now or, as we did then -- really circumstance.

Finding a couple of borrowers that we really loved, that we thought had great credit profiles. And as I look to the second quarter, we did -- or, to the second quarter and first lien there, we did do a bit more, as I mentioned, first lien underwriting, some of which has been sold.

So, it may take a little bit of time for these quarter-to-quarter fluctuations to clear up. But again, really, no change whatsoever in our strategy.

These percentages just tend to move around a little bit quarter to quarter, with the ordinary course of new investments and what we see out there in terms of potential for new deals. So, I don't think there's a lot to take away.

Okay. And last from me -- I mean, I appreciate some of the color and comments you gave around the Kayne Anderson merger and how that kind of might improve your information of -- in the midstream energy space.

But if we take a look at your pipeline, I mean, obviously you have very, very small exposure in the energy vertical. The pipeline seems as though there really wasn't much mention of that particular vertical.

Where do things stand with the team that you guys brought on? And, I guess, to what extent should we be anticipating that will be a ramp?

Like, what's a reasonable time period in which to kind of see something there on the energy vertical?

Yes. I mean, I would expect slow to ramp.

We're being very, very selective around transactions in that space. I would tell you there's a lot of the banks' asset-based facilities have reset borrowing bases to the lower commodity prices this spring.

Our transaction deal flow has improved. That being said, we've said no a lot and I think are just trying to get some clarity on where those markets are headed.

And obviously, the comments I made around Kayne Anderson are just to reflect the fact that they've got a just fabulous track record in that business and I think will help us evaluate opportunities as they come in. But I wouldn't expect a rapid dialing up of our energy exposure because the GP is now in a merger agreement with an energy manager.

I actually have one, I think, for Kipp and one for Penni. Kipp, and this follows up on the last question you just had, in terms of it, it sounds like the competitive environment at the moment is really being shaped by a lack of supply of paper.

I'm curious, given where leverage ratios are for most of the BDCs and where price-to-book multiples are, would you expect that the competitive environment's going to improve because many of your peers are going to be capital-constrained or should be at this point?

Yes, I think so. I do and we've continued to make the point.

I mean, one of the reasons that we've been selling some of our lower-yielding assets and generally at pretty good prices, is to obviously have capital to engage in a market that we think, over time, will become less competitive and where spreads will widen. You typically don't really see that happen until one of two things or two of two things.

To your point -- folks run out of money. Right?

So, a smaller, less well-capitalized competitor simply won't have the ability to really engage in new transactions unless they see repayments. And again, if you're a billing-of-assets competitor, you'll probably see $150 million of repayments on average any one year which maybe enables you to do a couple of new transactions a year.

It's really hard to get your phone ringing when you tell people that you have $100 million to $200 million over the next 12 months and you can't really lead their deals, et cetera, et cetera. So, our scale benefits us, both through proactively selling lower-yielding assets and obviously just seeing repayments as we position to continue to look into what we hope is an improving environment.

I can't tell you I see it as meaningfully improving right now. But yes, we do think that's the case.

I mean, the obvious other thing that contributes to folks not allocating capital into the sector is an increase in defaults. My own view is that we'll likely see an increase in defaults over the next couple of years.

But I can't say that anything in our portfolio would tell us that that's going to happen soon. Our portfolio is incredibly healthy and is performing well.

So, I think we'll have to wait a little while for that to play out.

I assume from your seat it's a little easier to root for the former rather than the latter.

I guess, yes.

And then my question for Penni, Penni, you laid out, sort of, the maturity schedule and talked about the opportunities there. Like -- I'd like to just explore a little bit, given that the initial maturities that you're -- that are upcoming, are primarily in converts, given the discount to book value -- or to NAV currently, is that as attractive a market or would you be more likely to address the unsecured markets?

I think if you look at what we've really focused on doing over the last 5 years, is to have diversity in our debt capital sources. So, getting to the term debt market was really important to us which we did November a year ago and that gives us a lot of flexibility as we move into the refinancing.

And I wouldn't disagree with you that probably the institutional high-grade market is more attractive, given where the convert market is and where our stock is trading, but I always like to have both options. And I think as we go into the refinancing, we're going to have to look at what those options are.

We'll look at where the stock is trading; what the pricing is and get the best relative value for us from a financing perspective. But I think the good news is, we're not really pigeonholed into one market.

We have a lot of optionality. And we also have some upside here, with the potential to refinance at a much lower coupon than we did those earlier convert deals.

You may recall those early deals which there is certainly a price of entry you have to pay to get into a market. But that first convert we did was at 5 3/4 and if you look at the last deal that we did in the high-grade market, it was at a 3 7/8 coupon.

So, we believe we have some upside here as we refinance and a lot of flexibility on how we do it.

I just had one remaining question. Your JV with Varagon Capital Partners -- you said you've done some co-investments already.

Do you have an idea when we would expect to see the first contribution to that JV from Ares' balance sheet? Are there additional legal hurdles you have to jump over or is it a particular deal or deals that you need to have certain criteria, that you want to pull the trigger on the first -- that first equity infusion?

Yes. So, maybe I'll just give you some guardrails around it.

We're not completely through the definitive documentation and that's what we're working on right now. As I mentioned, we're making loans together in advance of that and just sort of operating as partners.

I would tell you that there is a minimum sort of seed portfolio that's pretty modest, before we'll contribute it into the joint venture once it's closed. So, I would expect reasonably soon -- over the next couple of quarters.

But it really depends on deal flow and obviously a bunch of other variables.

I just had a little bit of a clarification and I'm sorry if I missed this, but on the backlog and pipeline I'm just wondering, are those deals in new companies or would that include investments in existing companies as well?

Let's just look here for the figure on a different schedule. Yes, it's a mix.

We actually don't have it calculated. The $800 million, I know, offhand is my guess is it's probably about half to two-thirds new and the remainder existing.

A significant portion of that backlog is us underwriting and then syndicating this large transaction. Beyond that, we would have to go back through and count.

But just -- I'm ticking down the list here with Penni, you know, existing, new, existing, new. It's a pretty balanced, call it 50/50.

And then, I know we saw deal flow sort of accelerate in the second quarter. Can you give us an idea on the timing of that?

Did that start in April or did you see it more in the latter part of the quarter?

It's just in terms of when closings occurred. I'd say a lot of our closings were happening in June and you saw a pretty active July.

We saw, I'd say just qualitatively, a lot of Q2 kind of fall out of Q2 which generated that pretty heavy July. And the backlog remains pretty significant.

But again, we don't have it weighted across the quarter. But a lot more May/June than there was April.

And then, just the last question, you guys referenced you're seeing very good weighted average portfolio growth. Can you walk through and see which industries you're seeing the best growth in and sort of which ones are more lackluster?

We can. I would actually have to go back and dig through our credit management dashboard.

We just don't have those stats with us. But we have capabilities to do that.

I would tell you that it's pretty broad-based. There are no meaningful outliers where we're seeing very, very strong growth relative to the mean or something weak in particular in any one sector.

Couple of questions. So, going back to the loan pricing environment -- so, the investments funded post-quarter-end and net of syndications, I think you said the yield was around 9.1% or 9.2%.

And looking at the overall portfolio yield of 10.6%, should we expect the overall portfolio yield to come down over time? What are your thoughts there?

The actual yield, I think, on the portfolio has been increasing, on new deals. So, yes, on our debt investments it's actually increased on a quarter-over-quarter basis for the last 3 quarters, David.

So, we can go back and look at the numbers. And just as a reminder, that 9%-ish number doesn't include any fees or any potential for prepayment fees or gains on anything that we're doing associated with those names.

So, that's just pure stated yield. Obviously, we've seen a couple of years of yield compression, I think, in our company, but also in others.

And we have worked pretty hard, pulling a bunch of different levers to put a stop to that. So, our goal is to continue to really maintain or increase the existing yield.

That being said, we don't intend to take undue risk to reach for yield. So, we're balancing that right now as we underwrite new deals.

And then on credit quality, are there any areas or signs of weakness in particular sectors that you're seeing?

No, nothing in particular. Obviously oil and gas is having its moments, but I think, away from folks understanding the significant change in that industry, I would say no.

Okay. And then lastly, on venture finance, can you remind me how big the size of that is now and what sort of yields you're seeing and the growth you're expecting there?

Sure. Yes.

Our venture finance portfolio's around $250 million. We see comparable yield to the remainder of the portfolio.

Their charge-off track record has been phenomenal and since the team joined we've had no credit issues and we've generated some gains on some exited investments. So, I would say it's in line with the existing portfolio, other than the fact that most of their loans have very, very low LTV; i.e., they're very conservative against these companies' valuations.

In terms of growth, they are starting to write some larger tickets in their space. But again, we've always, I think, generally said venture finance could get to be $400 million or $500 million, I think, in the near term.

That being said, we like the venture lending business. There are areas where we can add some capabilities and can probably grow in time.

But, because the duration of a lot of those loans are shorter than the remainder of the existing portfolio, it takes time for that business to scale.

Just going back to the SDLP, if I can, briefly. On the deals you've done in partnership with Varagon right now, is it fair to say, I mean one question is, are they being done off the Ares BDC balance sheet or off Ares Management?

And if that's on the BDC, should we expect to see, in the near term at least, some lower-yield assets being on-boarded, given the SSLP average yield was substantially below your overall portfolio yield -- before, obviously, leveraged fees, et cetera, et cetera, boosted the returns above. So, how's the mix there and what should we expect to see in terms of how that's coming on the balance sheet in the near term, before the leverage and fee structure boost, so to speak, comes into play a couple of quarters from now?

You’re accurate. So, just as a reminder, Ares Capital can't co-invest with Ares Management, obviously, as it relates to the 1940 Act.

So, all of the new loans that we're making with Varagon in anticipation of SDLP being formed and capitalized, will come onto the ARCC balance sheet. I would tell you that, while, yes, unit tranches in particular that may go into this program could be a modest drag on the 9%-ish yield where we're currently running, I wouldn't expect that to be material.

We're talking about a reasonably limited number of loans and the dollar size just won't be significant to really move the earnings a whole lot, in terms of what we're trying to do with the company's earnings growth.

And one more if I can. On Ivy Hill, obviously a major contributor to dividend income -- no special this quarter, but there was one in the first -- $10 million a quarter, occurring this quarter, marked up fair value, I think ballpark $5 million.

Is that an indicator that either the mark-to-market just moved up or Ivy Hill is actually earning at a greater rate than it's dividending to Ares BDC? And could that potentially be a source to make up, in the short term, some timing differentials, in terms of maybe taking up the dividend from Ivy Hill, if it is over-earning its current distributions?

Yes. It's really more of the former.

It's really a market value determination of obviously all of the investments there again. Ivy Hill has revenue from assets that they manage net of their expenses which creates manager value which of course we own.

And beyond that, a series of investments into funds that they manage. With movements in market pricing and the way that these funds all work, there can be modest $5 million here and there of just NAV fluctuations.

The $10 million of quarterly dividend is something that we view as sustainable from Ivy Hill. We obviously set it to be reasonably conservative.

As you've seen, special dividends come from Ivy Hill to Ares Capital. I would argue that that shows that we've been conservative in setting $10 million a quarter and that they've been able to pay above and beyond that.

So, we're happy with what they're doing. I can't tell you I expect any meaningful changes from what you're seeing as it relates to ARCC's ownership of Ivy Hill going forward.

We would love to see some more special dividends, but I can't say that I forecast any as of now. So I will count on the return as is.

One last question on the SSLP and SDLP. Given the 30% bucket, you've got 25% of it in the SSLP right now.

I think there's some other stuff that kind of filled that up. Will you be able to take equity -- your equity investment out of the SSLP and roll it into SDLP?

Or, how are the mechanics going to work in light of that 30% bucket limitation?

It is a constraint, obviously, our expectation is that SSLP, as I mentioned, will wind down and SDLP will go up. So, effectively, we'll be continuing to use and manage that 30% basket for those two programs, along with Ivy Hill which I think as you know represents, generally speaking, most of the 30% basket.

But it's something that we do have to watch as we wind down SSLP and start with our new partner.

I wasn't for sure on Jonathan's question on, would the leverage remain the same in the SSLP -- if you would have to use all of the repayments to just pay down the senior debt or if you could take out your equity investment in line with some of those wind-downs. So, it sounds like you will be able to take out some of your equity as those repayments occur?

That's the way it's working right now. Yes.

That's the way it's worked historically as well. So, that's--

And then, one last question. I know you guys are kind of in the know on some of the regulatory environments.

I believe Mike went and presented in mid-June to the House Financial Services Committee on the 2 to 1 leverage and the House has passed the SBIC Bill. So, just curious on your thoughts surrounding a couple of those legislative pieces for the BDCs.

Yes. I mean, I can't tell you -- we speak to folks about this pretty regularly.

Mike's actually not with us or I might have him comment on his visit down there. Look, I think we continue to believe that there's real enthusiasm around the Bill.

That being said, we're coming into an election and Congress can be tricky in an election year. So, I really don't think that we have an update or I have any additional information to help you handicap it.

Quick question about LIBOR floors. Any change on the LIBOR floor front relative to last quarter?

In terms of where we're underwriting new deals?

Yes.

No. No change.

Most of them have been asked, but I did have a follow-up. Kipp, you talked about the potential for the venture finance portfolio to grow with new products and maybe the size of the portfolio reaching $400 million.

Would that growth come from organic growth or is there a potential for acquisitions in the space?

We always think about growth both ways. So, if there are interesting acquisitions available, great; but right now we've been thinking mostly about just organic expansion.

Our team has a background I would say, more oriented towards technology and maybe less oriented towards life sciences and healthcare. So organic growth through capabilities added in that business, I think, would probably come on the life sciences and healthcare side, to be just specific, Chris.

My question goes back to the SSLP, specifically how will potential workout situations work, since the SSLP will be in wind-down and there's at least one troubled business that's currently on the books that's non-accrual?

My assumption -- although, again, we have some conversations to continue to have with GE as they move all of their people out of their offices in Connecticut, as to how they intend to manage the portfolio with us -- we haven't really had any significant issues on the problem credit site. Really, it's just IBC or [indiscernible] that's been a troubled credit.

But I would tell you that that one is something that we'll have to make sure that we have the right counterpoint on, to manage credits with. We don't expect them to change their view or change their behavior.

But I think we do need good connectivity over there, that seems to be leaving the organization. So, we'll just have to see how that plays out.

Just thanks, everyone for their time and hope you all have a great afternoon.