Kipp deVeer - Chief Executive Officer Penni Roll - Chief Financial Officer

John Hecht - Jefferies Greg Mason - KBW Jonathan Bock - Wells Fargo Dough Mewhirter - SunTrust Chris York - JMP Securities David Chiaverini - Cantor Fitzgerald Henry Coffey - Sterne, Agee CRT Rick Shane - JPMorgan

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

Our core and GAAP earnings per share for the third quarter of 2015 were $0.41 and $0.37, respectively. We are very pleased with the financial results for the quarter and the attractive total returns that we’ve delivered to shareholders.

Q3 was another period where we recognized substantial gains from our portfolio, with $45 million of net realized gains on investments. The company’s year-to-date net realized gains on investments now totaled $97 million, which puts us on track for a record year in this respect.

In periods like this when we have high multiples and sustained interest in our assets, we typically see to harvest net gains, which supplement the income we generate from fees and interest payments on our debt investments. Dividend coverage remained strong and year-to-date our net investment income plus net realized gains have meaningfully exceeded our dividend.

Penni will spend more time on our balance sheet and certain initiatives on this front, but we remained conservatively position with what we feel is a strong balance sheet with the net debt to equity ratio of 0.65 times. At the end of the third quarter we had and available liquidity of $2.3 billion, leaving us in a comfortable position from a capital standpoint.

With another successful quarter behind us, we announced that we declared a fourth quarter dividend of $0.38 per share this morning. Despite this strong quarter, we find ourselves navigating through volatile markets.

Capital continues to leave the leveraged finance markets as investors fear the impact of future interest rate rises and the potential for negative credit migration. We concur with most investors that we are in the later pages of what has been an extended credit cycle.

Funds flows and leveraged loan market year-to-date are decidingly negative as almost $10 billion of capital has been redeemed from retail loan funds in the first 10 months of this year. The high yield market has been clobbered since June 30th and returns are only narrowly positive for the year.

As a data point, BB new issue high yield spreads were in the 7% range at the end of September, a level not seen since 2011. Leveraged loan issuance is also down year-over-year with majority of transactions being centered around M&A and new acquisitions.

Opportunistically, refinancing and dividend recaps are very difficult these days. We believe that supply/demand dynamics are shifting back in investors favor.

However, as we've always said, the middle-market typically is slow to adjust and we remained very cautious in this market with a high borrowing credit in order to make new investments. An interesting case in point and that we have -- is that we've seen several of our portfolio companies sold the refinance this quarter that we would have like to support, but we passed on these transactions because the underwriting levels are simply too aggressive for us.

As we navigate through this environment, we intend to remain cautious, with a focus on managing hold sizes and the overall risk adjusted return of the portfolio. We've had the opportunity to originate larger investments for our clients and we have often made these investments with the planned to syndicate a portion of these transactions to manage our ultimate final holds, particularly for investments with lower yield.

While our originations in the third quarter look fairly significant with $1.5 billion of gross commitments, we syndicated over $550 million of these commitments during the quarter and ended the quarter with an additional $170 million that we intend to sell at a latter date. In most of these situations our clients look to us to lead and underwriter their deals in full, which we are thrilled to do.

We typically remain a significant investor in these companies which is also an advantage when selling portion of our loans to the market. Beyond this syndication can be an important tool to generate fees, particularly in the current market environment.

We discussed our American Seafoods transaction on our last call and this is a prime example of how we are operating today on the new deal front. Now I would like to turn the call over to Penni Roll, our CFO to detail the third quarter financial results and to discuss some of our recent financing activities.

Thank you, Kipp. Our basic and diluted core earnings per share were $0.41 for the third quarter of 2015, up $0.04 from the second quarter of 2015 and $0.01 from the third quarter of 2014.

Our basic and diluted GAAP net income per share for the third quarter of 2015 was $0.37, compared to $0.47 for the second quarter of 2015 and $0.57 for the third quarter of 2014. For the third quarter of 2015, our net realized gains on investments totaled $45 million or $0.14 per share and we had net unrealized losses on investments of $61 million or $0.19 per share, which includes $39 million or $0.12 per share from reversals of net unrealized appreciation related to the net realized gains on investments.

As of September 30, 2015, our portfolio totaled $8.7 billion at fair value and we had total assets of $9.2 billion. At September 30, 2015, the weighted average yield on our debt and other income-producing securities at amortized cost was 10.3% and the weighted average yield on total investments at amortized cost was 9.4%, as compared to 10.6% and 9.7%, respectively, at June 30, 2015 and 9.9% and 9.1%, respectively, at September 30, 2014.

The decline in our weighted average yield since June 30 is primarily a result of the decline in the yield on our subordinated certificates in the SSLP and an increase in lower yielding investments, where we've invested with either the intention to sell the loans at a later date or with the expectation that they will be sold to the SDLP once we've established a sufficiently diversified portfolio for the program. Our stockholders' equity at September 30th was $5.3 billion, resulting in net asset value per share of $16.79, up 0.5% year-over-year versus September 30, 2014, and just a penny lower than our NAV per share of $16.80 at the end of the second quarter of 2015.

As of September 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 94% 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 asset mix, leaves us very well-positioned for a potential rise in interest rates. As we highlighted at our Investor Day a month ago, we remained focus on the right-hand side of our balance sheet and lowering our cost of debt capital as we began to have more opportunities to replace or refinance higher cost debt.

To start, last week, we completed the early redemption of the entire $200 million of aggregate principle amount of our [0.875%] [ph] unsecured notes, which were originally schedule to mature in 2040 that recently became callable. These notes were redeemed at par plus accrued interest and we will recognize a realized loss on the extinguishment of this debt of approximately $6.6 million in the fourth quarter due to the write-off of the related unamortized debt issuance costs.

We borrowed money under our revolving credit facilities to repay these notes and if we were to continue to use our revolving credit facilities to be the refinancing source for this debt, the pro forma annualized benefit to net income resulting from this early redemption would be approximately $0.03 per share. We are also looking ahead the maturity of the $805 million of convertible notes due in 2016, $575 million of which matures in February and $230 million of which matures in June.

The February maturities have stated rate of 0.375% and the June maturities have a stated rate of 5.8%, both of which are well in excess of where we more recently been able to issue similar duration unsecured term liabilities. For example, earlier this year we issued five-year investment grade bonds which have stated interest rate of 3.78%.

If we were able to refinance both series of convertible notes at a similarly attractive yield, we estimate the annualized benefit to net income would be approximately $0.08 per share. Of course, we can't assure you that we will be able to refinance such data at the same yield we received earlier this year.

The weighted average interest rate on our drawn debt capital at quarter end was 5% which remained flat with the rate at June 30, 2015. If we had borrowed all of the amounts available under our revolving credit facility as of September 30, 2015, our fully funded weighted average stated interest rate would have been 3.9%, which is consistent with the rate at June 30, 2015 and 20 basis points lower than the rate at September 30, 2014.

As of September 30, 2015, our debt-to-equity ratio was 0.69 times and our debt-to-equity ratio net of available cash of $234 million was 0.65 times. As of quarter end, the weighted average remaining term on our outstanding debt was 5.9 years and we had approximately $2.1 billion of undrawn availability under our 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 fourth quarter dividend of $0.38 per share. This dividend is payable on December 31st to stockholders of record on December 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. In addition, we carried forward approximately $171 million or $0.54 per share in undistributed taxable income from 2014 into 2015.

Now, I’d like to turn it back to Kipp for some closing comments.

Thanks Penni. I'd like to spend a few minutes discussing our portfolio and sharing some additional thoughts before wrapping up.

We currently have a diversified $8.7 billion portfolio consisting investments in 216 companies. Financial performance has been strong at the underlying corporate borrowers in the portfolio with year-over-year EBITDA growth continuing into double digits at approximately 11%.

Our non-accruals remain low with 2.3% in the portfolio at cost and 1.7% of the portfolio at fair value on non-accrual at September 30th. Unfortunately we did place one new investment, Petroflow, on non-accrual during the quarter, which represents about 0.6% of the portfolio at amortized cost.

Petroflow is one of the three portfolio companies we consider to be true oil and gas related investments, which in the aggregate totaled less than 3% of our investment portfolio today. We underwrote the Petroflow financing in July of 2014 prior to the dramatic decline in oil prices.

Fortunately, we’re in a first lien position. We are working with the company in our lender group to restructure the company's balance sheet due to lower prevailing oil prices.

We feel confident that we can reposition the company for the longer term with a better balance sheet. It should allow us to focus on seeking to achieve borrower recovery overtime.

As a reminder, we currently have three portfolio companies that we consider to be in the oil and gas sector, Petroflow, Vista Sand and Primax which we underwrote during the third quarter. Vista is performing nicely and Primax is a transaction we underwrote opportunistically with the lower commodity price that contained view.

Primax starts reserve based loan from bank downside and look to bring up in its institutional lender to supplement its capital base. We feel good about the investment and we think the company is well-positioned in today's market.

Returning to the overall portfolio, we continue to emphasize investments in senior secured loans with 95% of our new commitments during the third quarter in first or second lien loans. We completed several transactions with Varagon as the co-lender during the third quarter and anticipate that these investments will form the foundation for our portfolio for SDLP.

As we’ve discussed in the past, our strategy for SDLP is for us and Varagon to build a sizable diversified portfolio of loans, which were initially capitalized on our respective balance sheets and ultimately expected to be sold into a joint venture. Given our activities with Varagon today, we believe that our joint venture is off to a strong start.

Finally, since I know it’s in front of people’s mind, I’ll simply say that we have no substantive update regarding the SSLP and GE, other than what's been disclosed. We continue to manage that portfolio with the team that remains at GE and the portfolio is healthy.

We’ve seen some repayments in the SSLP portfolio and as a result, the GE senior notes are starting to be repaid. Our view is that while our returns on this investments that the current structure will decline with time as portfolio repayments are directed entirely to GE senior notes so will the risk of our investment.

We continue to pursue alternative to the current situation and continue to believe that the overall health of the SSLP portfolio will give us time to thoroughly explore these alternatives. In closing, middle-market leveraged loan volumes are light for this time of the year.

And capital is generally constrained for BDCs and institutional lenders. Despite this, our team continues to find attractive investment opportunities and from October 1st through October 29th of this year, we made and funded new investment commitments totaling $305 million with a weighted average yield at amortized cost of 11.4%.

During that period, we also had sales, repayments and other assets totaling $152 million with a weighted average yield at amortized cost of 8%, on which we realized approximately $14 million of net gains further contributing to our net realized gains year-to-date in 2015. As of October 29th, our total investment backlog and pipeline stood at approximately $630 million and $425 million respectively.

These investments are all subject to final approvals and documentations and we cannot assure you till deal close. We continue to position the business for strength as we head into next year.

We believe the investment portfolio is performing well with growing cash flows and low non-accruals. In addition, our balance sheet is conservatively positioned with an attractive funding profile in several upcoming opportunities to lower our funding costs.

While we are taking a cautious approach to these uncertain market conditions, times of volatility often present some of the most interesting investment opportunities for our company. As previously announced, at the end of the third quarter, our Board of Directors approved our first ever stock buyback program and we have the tools in place to purchase stock should the opportunity prove compelling relative to our investment opportunities.

While we’re pleased to have this program in place, we also feel that we are well-positioned in the market that is beginning to look more attractive for new investing. That concludes our prepared remarks.

We’re happy to open the line for questions. Operator?

Great. Thanks very much for taking my questions guys.

Kipp, first one is, you mentioned that your agreement with others that were in the latter stages of the credit cycle yet your nonperforming assets are pretty low. Your EBITDA you see decent performance within the portfolio.

So I’m wondering first with the -- what kind of tempo is your commentary in the overall market at this point of cycle?

Yeah. I mean, it’s a little bit.

Thanks for the question, John. It’s a little bit of a conundrum here, right, as we sit around and just debate new investing, right.

We’re seeing again higher leverage multiples relative to the average across the cycle. You’re seeing tighter spreads.

At least, you have, lot of that’s widening out. So typically that makes you more conscious.

That being said when you have good underlying portfolio performance and you see a generally stable U.S. economy as we do.

I’m not saying that is to low to growth but a generally stable economy. And we credit select in what historically have been the most defensive sectors.

We’re still finding it funny to do. I think the caution is just an understanding, having been in the business for long time that as the times may go out, here things can look better in the future than maybe they did in the rearview mirror and we want to conserve capital for what we hope for some more opportunistic things going forward.

But we’ve gotten the question obviously in the past. And I think we’ve answered it pretty consistently.

I think we’re going in sort of a measured pace today, right. It would be how I describe it.

Okay. That’s helpful.

And then the second, I’m not sure you’re building it through this perfectly. But you had a lot of originations and it looks like some of them were in anticipation of pulling it on to the SDLP.

I assume that affected both the volume as well as the yields. I’m wondering can you just segregate out what -- if you kind of eyed what might go in the SDLP when that’s ready to form what the yields and volumes would have been like?

Yeah. So I made the point just to reiterate.

Gross originations about $1.5 billion, exits around things. They would plan to exit 500 plus million.

So generally speaking the assets they are going to go into SDLP, our first lien and/or unit tranche and they will tend to be assets that have yield but are lower on average than some of what remains on the balance sheet. So I’m not going to go name by name if you looked at what came under the SOI this quarter.

It would be a reasonable assumption that if you saw a name that was $50 million to $150 million and holds size in a first lien security with a sub 8% or 9% coupon, those are the types of assets that are targeted for SDLP.

Okay. Great.

We will look through the Q to determine that but thanks very much.

Sure.

Great. Thanks.

Wanted to touch on Penni’s comments about using the revolver to buyback the current debt or retire the current debt. What do you view is your optimal use of the revolver, with only $200 million drawn on it today.

That’s about 5% of the 47.7 billion of debt outstanding. What do you think is the optimal usage of your revolver going forward?

Good afternoon. By the way, thanks for the question.

We’ve always said that our target leverage ratio is somewhere between 0.6 and 0.8, right. So you can kind of back into that.

I don't think, Greg, we necessarily have a target. And I can let Penni answer the question directly too.

As we think about some near-term debt maturities, we have two options. We can obviously use the revolver to deal with those, or we can go out into the market and look for alternate capital, right.

So, I tell you at this point, we are evaluating both. The benefits obviously are taking down more revolver or of course if lower costs.

But I would tell you that we still view the markets for longer-term debt issuance for our company is pretty attractive. Under, 4% money on 5% type of around a five-year basis, which is generally speaking where our latest high-grade notes traded is pretty attractive over the long haul.

But sorry to not give you an answer. We just don't -- we don't really have that answer, right.

We want to keep that revolving facility to be flexible. Again, I mentioned, trying to be opportunistic in the markets on a go-forward basis.

We use it for liquidity, right. So the reason is not just fully draw it down and forgo any further debt issuances, is obviously to continue making investments and we are using it to buy back stock.

Okay. Great.

And then on some of the volatility that’s happened here in the quarter. We've been hearing about hung deals that are on banks or brokers’ balance sheet.

Historically, you have been just a primary originator and want to control the deals. What do you think about opportunities for some of these hung deals?

Does that appeal to you?

I can’t -- so, we did definitely see a series of banks who didn't have such wonderful quarters on execution front, on syndications. We didn't play -- our new names.

We really didn’t play a role in any of those names because frankly, we didn’t like the credits in particular that were hung. I can't say I know exactly how much paper continues to be on the banks balance sheets around those names.

It’s definitely changed their behavior around new underwritings where there is substantially less aggressive, substantially less interested in middle-market transactions than they were, call it six months ago. So, I think that’s all a benefit for us.

And then I think look, longer-term, when you have wounded banks and a capital provider like Ares Capital that has the ability to step into what historically could have been a bank-let transaction on American Seafoods or others, we think we are one of the few companies that’s really well positioned to take advantage of the fact that the banks definitely some hard knocks during Q3 and even into Q4 so. But none of the new investments that we made were coming into any of those deals and I don’t think it will either.

Yes. Okay.

Great. And then one last question on that.

As you're getting into doing more syndications how are you kind of differing your syndication process versus some of these banks so that you don't end up getting some type of hung deal on your balance sheet?

Yeah. The first difference in the way that we underwrite in syndicate is that we tend to be a very substantial holder in the names that we underwrite in syndicate.

We are usually the largest holder of the paper that we underwrite. That’s generally speaking, the rule around here.

That helps us in syndication, right. It’s very different, the confidence level when you go to an institution and say, we underwrote 500 and we are holding 250.

We think you should come into our deal. And then if you say, we are underwriting 500 and we are holding nothing.

And the terms aren’t so good and yeah, I know you're complaining, the covenants are wide and pricing is a little light. We structured deals to hold them and other people likes to follow along in our deals.

So it just is a little bit of a different mentality. I would tell you too.

Look, we are not a global bank with hundreds and hundreds of billion dollars of assets. So, I would tell you, we would be more cautious, I think on a lot of these transactions.

Some of the deals that the banks underwrote at the end of Q2 and to Q3, they got greedy on, they were tough credits, the leverage multiples were too high. The flex language was so tight and the market went away from them.

So, I think those were the two elements on how we think differently.

Okay. Great.

Thanks, Kipp. Appreciate it.

Yeah. Thanks for your question.

Good afternoon and thank you for taking my questions. Maybe jumping on along with John Hecht, real quick on the SDLP.

My apologies for missing it. Wanted to get a sense of the size that you effectively needed in order to transfer this into the SDLP, get leverage on and effectively recreate the SSLP.

I apologize if you’ve mentioned it before but do you have a sense of sizing to date, Kipp?

Yeah. Sure.

Thanks for the questions, Jon. It actually is more -- because it’s similar, a lot of the step is similar to the way a structured financing might look.

It tends to be more dependent on number of loans instead of principals value. It marks a lot of securitization examples, which is -- it tends to start to work, call it 8 to 10 names, right.

Okay. Okay.

Great. And then very quickly turning to the syndication strategy for a moment only because we've seen one BDC in particular.

As soon as syndication strategy come back and bite them on any deal transaction, right and so the BDC goes alongside brings along Jefferies. Jefferies gets hung, blows out the deal and now all of a sudden that BDC bought at 98, looking at a mark-to-market at something like 90 day one.

Question for you is Kipp, as when you think about the syndication capabilities that you’ve built out, do you include member banks to take hold positions in deals that you do? Thus, you are going to run the risk of a bank absolutely, blowing out the loan and perhaps forcing a technical mark-to-market on your position?

Or are you focused elsewhere in the market with, who you are syndicating your deals to like America Seafood?

Yeah. American Seafoods a fine example, I think as we described to people.

It’s a whole host of different participants there. There are banks.

There are funds, CLOs, et cetera. In that circumstance, we are replacing that paper with banks that were holders of paper, not the J.P.

Morgans or the BOAs of the world. I would tell you what.

It’s unfortunate. That was a very aggressive transaction, we passed on it.

It didn't get done well. These things happen.

I would tell you that typically, when we are lead arranging and syndication, we tend to handle that on our own. We occasionally are put into a position where we are co-underwriting and co-syndicating with the bank.

Bu there are pretty detailed syndication agreements that govern the way that you sell down relative to your co-agents sell down. We don't expect to be in that position.

I don’t know how to put it otherwise. Our experience underwriting, syndicating transactions, is a team over 15, 20 years.

That’s not something that’s been an issue for us.

Got it. And then another question, just as it relates to the top end of the middle-market because with several players going away or are being consolidated, et cetera.

There is really three main players, right that compete with you or alongside you, Golub, yourself and Antares. And if we think of all three, they are bit different in that.

One can self syndicate very easily amongst funds that are all part of the franchise. And one can easily syndicate to a number of partner funds that are outside the fund complex, right.

And so the question for Ares is you have the ability to portfolio if you need. You also now have demonstrated an ability to syndicate.

What's the right mix, when you present it to a sponsor of your ability to hold transactions of correct size? Are you happy with that?

Does the BDC not need to grow? Or do you believe that the BDC should perhaps get it bigger to date in order to hold bigger size transactions?

Just kind of curios on which side of the aisle of self syndication versus syndicating out? If you look at your competitors, there are two options of spectrum.

Where is really that sweet spot for ARCC and where are you going to drive that going forward?

Well, I could say that maybe a one-hour response on that one for another time. But let me try to give some direction on how we think about it, right.

I mean, company today has about $10 billion of capital. So just to answer your last point, ARCC doesn’t require any growth to underwrite the transactions that we want to be in, right.

Our middle of the fairway transaction could be $10 million, $15 million EBITDA, company that needs $50 million or $60 million of debt that we can hold all of, it can also be $75 million to $80 million, $90 million company where we likely look to syndicate a portion of that. Look we’ve tried to make ourselves user-friendly and flexible to our clients.

We built Ivy Hill as a way to be active in holding more senior paper years ago. We’ve raised some private capital around the BDC to do that as well.

So syndicating to ourselves so to speak or keeping in, in own system is something that we can and very much do today. On the other hand, we've established partnerships in the past with GE, today with Varagon, such that it gives us the ability to hold certain assets in ways that might have been uneconomic or less economic for the BDC as it’s built.

And we’ve also built out a substantial capital markets team that allows us to distribute paper if that’s the right answer. So I can’t tell you we have any optimal mix or perfect formula for that, Don.

It’s kind of on a deal-by-deal basis each circumstance that we encounter with the client is different and their preferences are different. So I’ll tell you we think we have all the tools in place to do all of the things that you mentioned and to be responsive and helpful for our clients and obviously to have it benefit our shareholders.

Got it.

There is no real optim -- there is no best answer.

Okay. Appreciate that.

And then one last question is -- and I think I, perhaps, or may call here, so please tell me if I am wrong. I think I actually referred to the BDC legislation H.R.

3868 that was fit to mark up yesterday as completely dead, I think I did that perhaps a month ago, month or two ago. Did that BDC bill effectively pass with bipartisan support?

And Kipp just because Ares has been such a major part of the process, could you give us a sense of what the next steps are to the extent that that bill did pass I believe 53 to 4 in favor? So just your thoughts there and then you can please tell me I was wrong.

I won’t do that. The folks who have carried the most water on that frankly are Mike Arougheti, who is in China and Josh Bloomstein, our General Counsel is here with us today.

Josh can give you on the more detail. I would tell you this look there was overwhelming bipartisan support.

I think the vote was 54 to 4 or something like that coming out of the Financial Services Committee. What that does in terms of process we hope is that it fast tracks it into the House we hope this fall for something that gets pass by the House and then it’s onto the Senate.

So I saw your note this morning that if you are in a football game here in the first quarter I think that’s right, I mean there is still lots of work to do and lots of things that need to happen, but this was a very, very positive first step and one that we’re happy about.

Great. Thank you.

Yeah, sure. Thanks for your question.

Just boarding on Jonathan’s question about the SDLP, actually my phone rang halfway through the answer so I missed part of it, I apologize if I make you repeat yourself. So if you imagine the pool of loans that you would want to sell into the SDLP or transfer to the SDLP as sort of a bucket of a certain size, and I think you said 8 to 10 names at a minimum.

Where are you now in terms of percentages terms of how much you thought of that bucket and what’s sort of the sell rate if you would?

I mean, generally, we are about half of the way there. I think we said that we’ve closed some transactions that are earmarked obviously for that program.

Some of them are in process right now. I would say generally speaking we are about halfway towards that 10 number.

Okay. Thanks.

And the second question may be more generally speaking, what is the -- talking about syndication, what’s the pipeline look like for the sort of large syndicated deals that you currently have at the table that they maybe or similar in size or structure to the American Seafoods, are there any sort of bigger ones looming either in your pipeline or backlog or how we want to term it?

Yeah, I mean, I can’t -- unfortunately, I can’t say there is anything that looks quite like an American Seafoods size deal. Generally, yeah, I mean, in that pipeline of that volume pipeline of $1billionish round number.

Yeah, we have a couple larger transactions that are upwards of a $150 million, $200 million in size where we would syndicate, but I don’t think we see anything today based on where the markets are that is a really substantial $5 million, $6 million, $7 million type deal.

Okay. Great.

Thanks. That’s all my questions.

Okay. Thanks, Dough.

Sure.

There is some stuff that’s right in there. But the comment you made Kipp about opportunistic transactions in recaps kind of not really getting done today, can you maybe discuss the quality of the pipeline today versus maybe how it’s been over the past, I don’t know if 6 to 12 months?

And you’ve talked in the past about kind of slow ramp of getting the credit spread wide and getting into the middle market, are we starting to see that open up a bit for your pipeline?

Yean, I think we are definitely seeing spreads widening as sort of response to the not so easily executed deals of September, October for sure and the outflows that I mentioned in the prepared remarks. In terms of quality, late in the cycle it tends to be low.

I mean, my own personal view I am sure if you looked around our investment table, people might disagree a little bit. I perceived the quality would be pretty low today.

And our selectivity has to be very, very high because as we always mentioned the one thing that we can do wrong in this company, has picked a wrong credits to underwrite and hope throughout a little bit on pricing and also a little bit on leverage, wherever it maybe it doesn’t tend to hurt you much every time, that’s really when you picked the wrong company. So we emphasize quality over everything else and underwrite business for us before we do anything else.

And I think late in the cycle and I would say particularly now the quality of things in the backlog and pipeline are better than what we’re seeing generally in the market, which is why selected them to be in the backlog and pipeline, but the quality is a little bit low, yeah.

Okay. That’s fair enough.

And I know this is a small investment, the Primax, it’s only I think 1.4% of your portfolio, but it’s second lean investment and obviously it’s structured with current commodity prices. Can you add a little bit of color as to how that investment was structured to give you protection against further volatility in oil and gas?

Yeah, I mean, without going obviously into too much detail on a particular company as it relates to some of the confidentiality provisions that we have with most of our portfolio companies, this was a widely marketed asset frankly that we understood extremely well very, very, very high quality assets that remain incredibly economic even at $45 oil today. In the Permian Basin, some of the best assets there, assets to our oil and gas team down in Texas know quite well.

The protection is obviously that we have our while it’s second lean, it’s behind a dramatically downsized reserve base loan from the banks that obviously got downsized because of the commodity price deflation in oil. I would tell you that we think we are in that incredibly conservative loan to values relative to the assets.

And while at second lean, full covenants both related to the price of oil and obviously that companies performance. So I did say either last quarter or prior that we were hopefully to find a few opportunities here and there in the oil and gas space where really, really high quality companies and really, really high quality assets needed to bring in some intermediate capital that was not dilutive to deal with the fact that lower oil prices means lower borrowing basis.

And we are obviously being incredibly selective in choosing those assets. But Primax is one of the companies that we think is absolutely best in class and something that we’re excited about even with lower oil prices.

Very helpful. Thank you.

Sure. Thanks.

Good morning, guys. So my questions on mitigating syndications have been asked and answered, so switch gears a little bit.

Risk retention rule is set to take effect at end of the year. So I’d be curious to learn about how you guys are thinking about allocating additional capital to Ivy Hill to support new issuance say, maybe over the next 18 months?

Yeah. Right.

We’re already risk retention compliance is what everybody is saying over to the plan. We already on more than 5% of the equity in those vehicles.

My question is so if you’re going to support -- if you need to support new issuance at Ivy Hill, let say in ‘16 you would potentially have to allocate more capital there. And so I’m curious on how you guys are thinking about managing capital ARCC and whether or not that makes sense to support the allocation of capital by Ivy Hill to support theologian?

Yeah. I mean we think it does.

Usually Ivy Hill path is they do one or two new funds a year in a traditional sort of levered CLO format. We’ll obviously invest in Ivy Hill managed CLOs if we think its good for ARCC and for the shareholders on returns with there.

I don't think that that risk retention point changed our view at all of Ivy Hill and whether we see it as attractive or economic. We do the spread.

The arbitrage in CLO land is little tighter obviously than it’s been in the past couple of years. So we’ve been cautious in growing Ivy Hill meaningfully which I think we’ve said in past calls.

But typically deals will come off and new deals will start at Ivy Hill and we’re happy to continue to support growth there.

Great. Thanks for the color, Kipp.

That’s it.

Hi. Thanks.

Question for you, so you made cautious comments on the credit environment mentioning we’re in the later innings and so forth but yet ARCC's second lien and sub debt exposure has increased by 10 percentage points year-to-date, while first lien is down by a like amount. And post quarter end, 73% of new originations were second lien in some deck.

Can you just comment on that dynamic?

Again, I mean the credit there we’re selecting obviously for investment in this company are less than 2% typically what we’re seeing. So with the obvious understanding that first lien assets tend to have lower risk than second lien and mezzanine assets.

We think that we found some pretty interesting things to invest in this year that are accretive to the company that you’re earning. I think just sort of a misperception sometimes, every first lien deals created the same or every second lien deals created the same.

You make a first lien loan in a bad company, you can have just as higher probability of entering in default situation as you make a second lien loan on bad company. So while we obviously look at that mix and we think about it as to where we are in the cycle, our kind of second lien mezz mixed is about half of what it was back in ‘06, ‘07.

So we still think that the portfolio that we’ve crafted is pretty conservative in its makeup.

Okay. Thanks very much.

Thanks, Dave.

Good day. And thank you for taking my question.

Instead of listening to a lot of the Q&A, how credit cost is sized to the equation going forward in terms of whether you have to put more money into other funds, whether you have more opportunities coming your way, more leverage or is it going to be a business that can just comfortably keep regenerating existing capital? And as part of that and I’ll just add to that I you’re your ad yesterday, would you ever step out again as you’ve done in the past and make a major acquisition as a way of achieving that size goal?

Yeah. Sure.

That’s a good question. It’s one that we talk about a lot around our company and with our Board, et cetera.

Look, I mean, we -- first things first, being a relatively large company we think has significant competitive advantages we outlined all the time. We’re more valuable to our counterparties.

Our solutions are full solutions not partial solutions. Being at the table early allows you to dictate pricing terms, et cetera.

It allows you to select yourself into the assets that you want to be in and syndicate the assets that maybe are less of a good fit. So we are clear believer that our scale is a competitive advantage.

How do we think about growth, maybe is how I characterize some of the follow on comment. As saturating below book today, I don't think that we unfortunately are well-positioned to grow our capital base today and you asked that we are content to recycle our capital, reinvest it and try to drive earnings that way.

We’re very content to do that. We think we’ve got a great business if we just do that.

But we think that there's a fabulous market out there for this company to continue to grow as we look around at the landscape of what the opportunities exist in direct lending and in private credit. Generally, we usually see somewhere between $100 billion and $150 billion of new issuance and refinancing in our markets per year.

Our origination tend to be somewhere between $3 billion and $4 billion per year over the last couple of years. So while we’re a large company, we remain a reasonably small market share player in a very large market.

And we think that lot of the advantages that we have allow us to grow and become a more meaningful player in the market. But your point on acquisitions and when did you have?

We’re pretty cautious here and I tell you that we’re very value-oriented. So, most of the growth that we’ve had during opportunistic markets and the acquisition that we did was, obviously, a highly opportunistic acquisition in a very different kind of a market.

So I do think that the excitement around here is that volatility will lead to more opportunities for growth. I'm hopeful that shareholders of our company but also in the BDC space generally speaking don't miss the boat of being in lot of these companies that have improving opportunities and not allow us to obviously grow when the vintage is good.

That’s how we think about growth. I think we’ll continue to pursue organic growth and if it makes sense, growth through acquisition, but we’ll do it in a careful and value-oriented way and obviously, one is that relates to the existing stock price and the existing shareholders, one that is good for our existing shareholders, i.e., that’s not dilutive and positions the company in the existing and potentially new shareholders for good returns.

So you wait for a replay of last time of an '08-'09 kind of like this environment or given where some of this -- Kipp one of your largest peers is absolutely just kind of stopped. And the specific question was whether that would be an opportunity you would look at?

Yeah, that’s quite an interesting situation, isn’t it. I hope to never really see 2008 or 2009 again.

It wasn’t lot of fun from my perspective, certainly afforded some opportunities for us and we emerged reasonably well from that period. I don't think we need to see periods of distress that were that significant for us to perhaps be more opportunistic and more aggressive.

Look I would tell you that I think in regards to the situation that you're referencing, we’re taking a high degree of interest from the sidelines having actually done one of the few acquisitions ever done in the BDC space. I would tell you that we understand how difficult and how complicated some of those transactions are and that we would only pursue that, if we thought that there was a clear path that added value for our company and obviously for a potential target.

And we tend to be collaborative in those types of situations. Never say never, but I don't think it's front of mind for us to go hostel and launch takeover type discussion on companies that are not hoping to be taken over.

Thank you.

Sure.

Thanks. I suspect the operator somehow name in queue inside a little relief.

A couple of things here. And my tongues could get a little bit muddle, but I'm going to say that that could be end of 2011.

You guys articulated a strategy which you’ve executed of moving up the capital stack, doing a lot more first lien senior and it was very consistent with some things that we were seeing in terms of attractive risk pricing here. Of course, you brought up a good point about the transition in the portfolio this year.

I’m curious should we see this is just idiosyncratic and opportunistic as opposed to a shift in that strategy.

Yeah. Again, we don’t see it as shift at all, Rick.

Most of the repositioning in the portfolio towards first lien that we did was during kind of the shake out of the last credit cycle. I’d say actually the most opportunistic we probably ever were on the sub that asset class was coming out of the last downturn.

One of the, I think, hallmarks of what we have done and I haven't said it today, so I’ll say it again, but we continue to obviously engage with a lot of our existing borrowers, right. So a high degree of where you're seeing as be opportunistic in the second lien and in mezz are in companies that we've known and been invested in for a very long period of time.

And obviously the risk is most people that lend money to LBOs and private equity guys know is that your first 12 to 18 months with a new company is your highest risk period. That's were the surprises tend to be.

Once you’ve been invested for 5 plus years, you pretty much know what the risks are and probably can change the way that you think about underwriting that company relative to maybe where you thought about underwriting it at first pass. So, I think if you look, a high degree of those seen in your capital investments are names that have been in the portfolio for a long period of time.

I think that's how we feel that risk is mitigated. But again, there is a no shift in strategy.

We remain super, super selective around picking the right credits and have a high degree of confidence in the portfolio.

Okay. Thank you.

The second question, one of the more interesting slides or data points that I’ve seen in last year was provided in your Investor Day related to the percentage of bank loans and bonds that are trading at discounts. And obviously, there is a significant contribution there from oil & gas.

But I’d love to get your thoughts. And we talked about this a little bit at the time.

But I’d love to pursue it some more. How much of this do you think is really technical versus how much of it is fundamental?

And to the extent that it's technical, are there opportunities for you guys in secondary markets?

Yeah. I mean, as you know, we managed $60 billion of corporate in structured creditors.

So, we are pretty opportunistic around the markets and pretty knowledgeable, obviously of secondary markets but liquid and liquid. Again, our BDC, Ares Capital is really focused on, originated private transactions unlike some others that maybe focused on some larger cap flow secondary names.

So while we do see that, I can't say that it’s going to be or likely source of new investments. On the technical versus fundamentals, you haven’t seen a dramatic uptick in defaults.

We continue to believe that you will and the defaults were lagging indicator, not a leading indicator. I think the oil & gas situation, as well as the mining and metal situation around, both the loan and high yield market has been, is the leading contributor to fundamental issues in those markets.

And we think that they are long from over, i.e. they will continue throughout 2016 and beyond.

And be increasingly painful for those who have heavy exposure to those sectors and of course we don't by design. A lot of the other pressure in what I consider to be more defensive industries is technical.

And I don't have a crystal ball and I think we won’t make a prediction as to where the secondary market prices go in ’16. It will be highly dependent on what large global investors want to do, both retail and institutional relative to credit and other ideas they may have.

But I think there is a very real looming increase in defaults on the way. And that’s probably not so good for the markets and it is one of the reasons that we continue to be cautious.

Okay. Kipp, thank you.

Thanks, Rick.

I’ll just say thanks to everybody for taking the time and we’ll follow with you all next quarter.