Ares Capital Corp Q3 FY2023 Earnings Call

Good afternoon. Welcome to the Ares Capital Corporation's Third Quarter, September 30, 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Tuesday, October 24th, 2023. I will now turn the call over to your host Mr. John Stilmar, Managing Director of Ares Investor Relations. Thank you, you may begin.

Thank you. Let me start with some important reminders. Comments made during the course of this conference call and webcast, as well as the accompanying documents, contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note the past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and results of operations. A reconciliation of GAAP net income per share to the most directly comparable GAAP financial measure to core EPS can be found on the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies, was derived from third-party sources and has not been independently verified, and accordingly, the company makes no representations or warranties with respect to this information. The company's third quarter September 30th, 2023 earnings presentation can be found on the company's website by clicking on the third quarter of 2023 earnings presentation link on the homepage of the Investor Resources section. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I'll now turn it over to Mr. Kipp DeVeer, Ares Capital Corporation's Chief Executive Officer.

Thanks, John. Hello, everyone, and thanks for joining our earnings call today. I'm here with our Co-Presidents, Mitch Goldstein and Kort Schnabel; our Chief Financial Officer, Penni Roll; our Chief Operating Officer, Jana Markowicz, and other members of the management team. Before I begin my prepared remarks on the company, I'd like to express our deepest sympathies to those who have been affected by the recent horrific terrorist attacks in Israel and the subsequent loss of innocent lives. It's truly a tragedy, and we hope that a peaceful resolution is achieved as soon as possible. Turning to our results, I'll start with some highlights from our third quarter and then add some thoughts on the economic environment and the current market. This morning, we reported strong third quarter results. Our core earnings per share of $0.59 increased 18% year-over-year, primarily reflecting higher net interest and dividend income, largely a result of higher base interest rates. Our GAAP earnings per share for the third quarter were $0.89, driven by our strong core earnings and an increase in the overall value of our investment portfolio. These results lead to another quarter of sequential growth in our net asset value per share to $18.99, which has increased 3% since the beginning of the year. We remain one of the few BDCs that have been able to deliver a consistent or growing regular dividend while building NAV over long periods of time. We're pleased with these results, and we think it's important to put them in the context of what we're seeing in the broader credit markets. For much of the quarter, the credit markets remained constructive and saw some lift as the soft lending narrative for the U.S. economy led to enhanced liquidity and modestly higher transaction activity. However, with expectations that higher for longer interest rates will be required to tame inflation, volatility has returned to the capital markets. There is no doubt that the unsettled international landscape in Ukraine and Israel, in particular, are adding to this volatility. As a result, the leveraged finance market is less constructive for new transactions, particularly smaller ones. Companies that sought the bank and liquid credit markets for their financing needs are turning to the private credit markets looking for worthy partners that can deliver a higher certainty of closing. Underscoring the market opportunity for direct lenders, this was the third most active quarter in history for $1 billion-plus unit tranche transactions, and the private credit markets demonstrated the ability to provide a $5 billion financing solution in the Finastra transaction. Driven by the scale and capabilities of managers like Ares, private credit is continuing to gain market share over bank and syndicated capital market solutions. During the third quarter, market pricing and terms continued to be highly attractive for new transactions. Credit spreads on new loans are well above historical averages, leverage levels are lower, and equity contributions are at historical highs. Looking forward, we're optimistic about the outlook for new investment opportunities and we expect an uptick in M&A and additional sponsor-to-sponsor portfolio company sales to accelerate in 2024. Given the robust level of private equity dry powder that has largely gone unspent, growing pressure from private equity LPs seeking returns of their capital, and stronger sentiment among middle-market companies to invest in the growth of their businesses, we expect stronger transaction volume in 2024. The simple turning of the calendar year will also help. We would expect the fourth quarter to be moderately better than the third quarter in terms of volume, but likely below fourth quarters in past years. We believe that our experience, scale, and capabilities position us well to benefit from these market dynamics. Ares management has continued to invest in the quality and growth of its direct lending platform and we continue to focus on both sponsored and non-sponsored companies and the expansion of our specialty industry coverage. Leveraging what we believe is the largest and most tenured U.S. direct lending team in the market with 180 professionals across the U.S., we feel that our broad sourcing capabilities provide significant and differentiated deal flow. As an example, in the third quarter, we reviewed more transactions than were reported in both the leveraged loan and the middle market combined. We believe these sourcing advantages allow us to maintain a highly selective approach, which in turn drives strong long-term investment performance. The sourcing capabilities have been a key driver of what we believe is a high-quality diversified portfolio. Our companies are continuing to perform well, despite the increase in borrowing costs. Our portfolio interest coverage ratio, measured using current market interest rates at the end of the quarter, was stable quarter-over-quarter, and substantially all of our companies are consistently making their interest payments despite the higher base rates. We'd also note that the weighted average portfolio grade is flat quarter-over-quarter and remains better than our 15-year average. Our non-accruals at cost are just over 1% and continue to be well below our own and BDC averages for the past 15 years. In addition, amendment activity and modifications remained stable at historical levels. The credit strength in our portfolio is supported by healthy levels of EBITDA growth across our portfolio companies, which we believe are demonstrating comparatively stronger growth in the broader market due to the industries that we tend to overweight and our defensive positioning. Our simple strategy of avoiding cyclical sectors more prone to default continues to pay dividends for the company. We estimate that the weighted average LTV in our loan portfolio is around 43%. Although we acknowledge the valuation environment is changing in response to higher rates, we have covenants that ensure significant value beneath most capital structures, a lot of it supplied by large and well-established private equity firms with whom we have strong relationships and do repeat business. In situations where we have asked sponsors to step up and support their portfolio companies, we've been pleased with sponsors' willingness and ability to provide capital. Despite this constructive view on the portfolio and the economy, generally, as credit investors, we are laser-focused on ensuring we are well prepared for a more protracted economic downturn. In addition to the benefits of our diversified and defensive portfolio, we have a large portfolio management and valuation team, which supports our investment teams. This team is proactive in identifying problems early and developing strategies to maximize our outcomes. Our balance sheet remains strong with net debt-to-equity levels of around one times. We have ample access to capital to invest in this attractive vintage. Importantly, we also have access to capital to deal with more challenging situations as they arise. In tougher situations, we believe we have the appropriate resources to execute on our demonstrated playbook for managing the portfolio. We believe these risk management workout capabilities are central to our ability to continue to deliver our industry-leading track record for credit performance. Given these dynamics and the company's overall positioning, we feel good about our third-quarter results and our position looking forward. And with that, let me turn the call over to Penni to provide some more details on our financial results and our balance sheet position.

Thanks, Kipp. We reported GAAP net income per share of $0.89 for the third quarter of 2023, compared to $0.61 in the prior quarter, and $0.21 in the third quarter of 2022. Our higher GAAP net income per share in the third quarter of 2023 benefited from strong core earnings and higher portfolio values during the quarter, driven largely by tightening market spreads. On a core basis, we reported core earnings per share of $0.59 for the third quarter of 2023, compared to $0.58 in the prior quarter, and $0.50 in the third quarter of 2022. We continue to see the benefits of higher rates on our predominantly floating rate portfolio in the third quarter of 2023, as our interest and dividend income increased from both the prior quarter and the third quarter of the prior year. Our stockholders' equity ended the quarter at nearly $10.8 billion, or $18.99 per share, which is an approximate 2% increase per share over the prior quarter. Our year-to-date annualized return on equity using GAAP EPS and core EPS was 14.5% and 12.5% respectively. This strong level of profitability further builds upon our long-term track record of a 12% GAAP-based annual return on NAV since inception. Our total portfolio at fair value at the end of the quarter was $21.9 billion, up from $21.5 billion at the end of the second quarter, reflecting a combination of net fundings and net unrealized gains from the portfolio for the quarter. The weighted average yield on our debt and other income-producing securities at amortized cost was 12.4% at September 30, 2023, which increased from 12.2% at June 30, 2023 and 10.7% at September 30, 2022. The weighted average yield on total investments at amortized cost was 11.2%, which increased from 11% at June 30, 2023 and 9.6% at September 30, 2022. The yields on our portfolio largely reflect the continued increases in interest rates. Now, let's shift to our capitalization and liquidity. During the quarter, we returned to the investment-grade debt markets for the first time in over 18 months. This $600 million debt issuance was our first sub-five-year term issuance in this market. This shorter three and a half year duration benefited our maturity ladder, as it allowed us to slot into 2027 where we, after this issuance, still only have $1.1 billion maturing in that year. Overall, our liquidity position remains strong with approximately $5.3 billion of total available liquidity, including available cash, and we ended the third quarter with a debt-to-equity ratio net of the available cash of 1.03 times compared to 1.07 times a quarter ago. We believe our significant amount of dry powder positions us well to continue to support our existing portfolio company commitments, remain active in the current investing environment, and have no refinancing risk with respect to next year's term debt maturities. We declared a fourth quarter 2023 dividend of $0.48 per share. This dividend is payable on December 28, 2023, to stockholders of record on December 15th, 2023, and is consistent with our third quarter 2023 dividend. As Kipp stated, we have a longstanding dividend track record. We're one of a select few BDCs that have paid a stable or growing regular dividend over the past 14-plus years. And with that, I would like to turn the call over to Mitch to walk through our investment activities for the fourth quarter.

Thanks, Penni. I'm going to spend a few minutes providing more detail on our investment activity, our portfolio performance, and our positioning for the third quarter. I will then conclude with an update on our post-quarter activity, backlog, and pipeline. In the third quarter, we originated $1.6 billion of new investments, which increased from $1.2 billion in the prior quarter, as we saw a slight uptick in M&A activity. Underscoring the breadth of our market coverage, the EBITDA in the companies we financed during the quarter ranged from below $20 million to over $800 million of EBITDA. Approximately 50% of our new commitments were to existing borrowers, which is consistent with our historical practice. With this quarter's activity, our portfolio now includes 490 companies. This is an increase from 354 companies pre-COVID and represents a growth rate of 38%. I point this out to highlight the meaningful benefits that come from incumbency. We believe incumbency drives future origination. Additionally, we believe incumbency enables us to support our strongest portfolio companies, reduce underwriting risks on new commitments, and achieve better documentation and terms. Finally, incumbency enhances our relationship with financial sponsors. This quarter, over 85% of our sponsored transactions were with repeat sponsors. Now, as we have all year, we continue to find compelling value in today's market. This is demonstrated by the first lien investments we originated in the quarter, which had a weighted average yield in excess of 12%, but a leverage ratio of only 4.6 times. This is a full turn of leverage lower than the industry senior leverage tracked by PitchBook LCD over the past 10 years. Underscoring its earlier point about the historically attractive relative value we're able to achieve in the current market, the weighted average LTV of all our new investments this quarter was below 40%. In addition to adding accretive investments in the current market, our existing portfolio continues to perform well, and we are seeing stability within our credit metrics. We believe this is largely due to our defensively positioned portfolio and market-leading companies in resilient industries. In the third quarter, the weighted average LTM EBITDA growth rate of our portfolio was a healthy 6%. This compares to an estimated flat EBITDA growth rate for the S&P 500 over the last 12 months. With respect to our portfolio grades, the weighted average portfolio grade of our borrowers at cost was stable with last quarter at 3.1. Our non-accrual rate at fair value declined from 1.1% last quarter to 0.6% this quarter, which continues to be well below historical levels. Non-accruals at cost decreased from 2.1% last quarter to 1.2% this quarter and remain well below our 3% 15-year historical average and the KBW BDC average of 3.8% for the most recent 15-year period available. Looking forward, we remain confident about the performance of our portfolio, in part due to our disciplined approach to risk management and portfolio diversification. Our $21.9 billion portfolio at fair value is diversified across 490 different companies and 25 different industries. This means that any single investment accounts for just 0.2% of the portfolio on average, and our largest investment in any single company, excluding SDLP and Ivy Hill, is just 2% of the portfolio. We believe we have the greatest level of portfolio diversification of any publicly traded BDC. Finally, I will provide a brief update on our post-quarter end investment activity and pipeline. From October 1 through October 18, 2023, we made new investment commitments totaling $410 million, of which $287 million were funded. We exited or were repaid on $158 million of investment commitments. As of October 18, our backlog and pipeline stood at roughly $820 million. Our backlog and pipeline contain certain investments that are subject to approvals and documentation and may not close, or we may sell a portion of these investments post-closing. I will now turn the call back over to Kipp for some closing remarks.

Thanks, Mitch. In closing, we're pleased with the quarter. Our portfolio continues to perform well, and our sourcing, underwriting, portfolio management, and capital advantages are driving strong financial results. We feel that we're well positioned to navigate any potential future economic challenges and to capitalize on today's attractive environment for new investing. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions.

Thank you. Our first question comes from Melissa Wedel with JPMorgan. Please go ahead with your question.

Good morning. Thanks for taking my questions today. Kipp, I want to start with some of the commentary you provided around expecting some rebounded activity in 2024. It sounds like some of that is based on dry powder and expected pressure from private equity investors to reengage a little bit. But do you think there's risk to that recovery and activity should rates remain even higher than expected as implied by the forward curve right now?

Thank you for the question, Melissa. In my opinion, this has been a challenging year for buying and selling. If you haven't needed to sell, considering doing so this year is quite difficult. Buyers are looking for significantly lower prices across various assets, not just in corporate sectors, and this trend extends to real estate and infrastructure as well. Everything seems to be worth less due to the higher interest rate environment. Looking ahead to next year, I'm optimistic that if we experience some stabilization in rates, which seems to be happening, the discussions between buyers and sellers may become easier. However, the rapid and substantial increase in rates has made those conversations more challenging. Additionally, I believe there are many limited partners with investments in private equity who are considering 2024 as a crucial year for receiving more substantial repayments to manage their cash flows. This could lead to improved activity levels. Our current deal flow, as Mitch mentioned regarding the backlog and pipeline, is better than it has been, so I remain cautiously optimistic, though we will need to wait and see.

That's really helpful. Thanks, Kipp. And then a question for Penni. Penni, did you have an update for us on any lower income as of quarter end? Thanks so much.

Thank you for the question. We have completed last year's tax returns, and the final spillover amounted to about $1.18 per share or $643 million, which is reflected in the earnings presentation. As we move into 2023, we are continuing to accrue excise tax with the aim of reaching a similar spillover level as last year. We are still in progress for the year, and tax matters are not fully resolved until the end of the year. However, we are consistently accruing excise tax at a level comparable to this year's year-to-date figures, when annualized, in relation to last year's final expenses.

Thanks, Penni.

Our next question is from Finian O'Shea with Wells Fargo. Please proceed with your question.

Hi, everyone. Sorry, I was on mute. The repeat borrower financing statistic showed 50% this quarter, which is helpful to know, but it seems to have decreased from elevated levels in the first half. I'm curious if there's more to explore regarding refinancing of your portfolio companies or if some of the exits are coming off the market. I'll stop there. Additionally, could you provide what percentage of your commitments to repeat borrowers this year are for refinancing versus M&A? Thanks.

Yeah, it's Kort Schnabel. Regarding the first part of your question about the 50% to existing borrowers, that aligns with our historical trends. If you look back over a typical period, we see around 50% to existing borrowers. What you're noticing is an increase in activity for new borrowers compared to the previous few quarters, where that activity was more subdued. This is why we've returned to the 50% level for existing borrowers. There's nothing more significant to note on that front. As for the second part of your question, I'm sorry, I don't...

Is there a change in the use of proceeds? I don't think we have conducted that analysis yet, but we can go back and review the numbers. Let's take a look at that, and we'll follow up with you later.

Okay. Thank you. And a follow-up on Ivy Hill, do you have a breakdown of, say, the weighted average duration for the CLO reinvestment periods? Are those materially shortening like we're seeing in the CLO market? Thank you.

We are still able to raise capital there. I can check with the team for more details, but it's not something I focus on a lot. It's quite diversified, consisting of loan mandates and CLOs.

I would say it's not all CLOs and idles anyway, right? There's a lot of bespoke, they call it the loan mandate, bank loans where we are able to adjust those maturities year after year and have a consistent basis with ideal. There's not a shortening of that, and we've been having lots of success refinancing when we needed to, but they're not all CLOs would be important for.

Thanks so much.

Our next question comes from Arren Cyganovich with Citi. Please proceed with your question.

With 2024 appearing to be a year that may bring increased investment activity, do you anticipate that exits will be at a similar level? Additionally, what are your thoughts on potentially increasing the leverage within your portfolio?

Yeah. I mean they tend to be reasonably reciprocal, Arren. Thanks for the question. I would think that new deal activity and repayments are likely to pick up next year relative to this year, which has been slower on all those fronts.

Okay. And it was good to see your non-accrual activity, ratios came down again. What's your outlook for next year for expectations with non-accruals? I would imagine in the industry expect to see a bit of an increase from here?

Yeah, I think you're probably right. I mean this quarter where we actually realized a couple of restructurings and situations where we took ownership of a company where we continue to be a lender. We actually exited two situations that we were not feeling great about and realized two charge-offs. But charge-offs sort of at the mark. So I think we carried them well. Yeah, I think you're probably right. I mean, with higher rates being in place now for a while and the general slowdown in the economy, that would tell you the general expectation, I think, not just at this company but most of our competitors in the market broadly is that defaults will continue to go up next year.

Thanks.

Our next question comes from Casey Alexander with Compass Point. Please proceed with your question.

Hi, good afternoon. On kind of a cross purposes question, but noticing that you swapped out the new debt maturity into a floater, it sort of feels like a call that it's your expectation that rates will come down and that your cost on that will get cheaper. Otherwise, I'm not sure why you would swap it out. But suggesting that '24 is a better year for deals and originations actually argues that you think that the economy is going to be okay and deal activity is going to pick up. And that kind of argues that rates stay higher for longer. I'm curious at sort of the cross currents from those two items.

I'm going to turn to Penni on the hedging comment because we had quite a lot of debate about that. It was atypical from our past practice. But Penni, do you want to jump into some thinking there maybe, and then we can come back and talk about this on 2024 and how we see things. And Casey, your guess is as good as mine around rates, but I'll let Penni comment on the hedging range.

We don't have a perfect forecast for rates. However, we opted for a shorter three and a half-year term loan, which is unusual for us to swap. Typically, we have just adhered to the base rate of the liabilities we've issued. In this instance, we took into account the forward curve and considered that our portfolio mainly consists of floating rate assets. It seemed like a good opportunity to make a swap, with the expectation that rates would decrease even though we anticipated they would remain elevated for an extended period based on the forward curve.

I believe you are correct. We are currently operating with the expectation that the base rate will remain high for an extended period. I agree with your observation that while the U.S. economy is slowing down, it seems to be in decent shape. I don't think the situation is excellent, but it is manageable. Considering our portfolio, which is more defensively positioned and generally less focused on cyclical companies, we are experiencing EBITDA growth that, although slowing, is still considerably better than the overall economy. Therefore, we maintain a positive outlook on the economy, which supports the idea of rates staying higher for longer. Additionally, it is noteworthy that the Federal Reserve is typically less active in the market during a presidential election year, which we will see next year. Hence, I anticipate a less active Fed next year, reinforcing the notion of higher rates persisting for a longer period, and that is how we are approaching our management strategy.

Thank you for that. My follow-up question is regarding your remarkably low rate of non-accruals. I can't think of a better way to describe it. How much have your companies benefited from adjusting their expense basis due to the COVID crisis? Additionally, how are they taking advantage of the gradual nature of the current economy, which is allowing them to make adjustments and ultimately benefiting your portfolio by keeping non-accruals at a lower level than anticipated?

I mean I think it's a little bit of all of that. We did make that point coming out of the really the most difficult period of the pandemic because it obviously forced companies to really weigh where they were from a cost perspective, that will happen when you have no revenue, right, and you're close. So I do think there's some of that. But look, for credit investors, and we've been saying this publicly, we think this is a reasonably good environment, right? We've set up our portfolios; we don't need to see a tremendous amount of growth in the portfolio where we have high free cash flow companies, maybe not deleveraging as quickly as they might have hoped with a lower base rate, but still able to deleverage. I think this environment is a trickier one for some of the embedded equity that got put in the ground, particularly in private equity from, call it, 2019 to '22, where prices were much higher, rates were much lower, and expectations for growth were a lot of those things have changed. So we're feeling, again, pretty good. We appreciate the terrifically good commentary. But we're happy with where the portfolio is at. We think it's very manageable for us going forward. And we're just locked in making sure that we're early on problem companies and doing what we've done a long time here. So we feel pretty good about how the company is positioned, as I mentioned in the prepared remarks.

Great. Thank you.

Sure. Thanks for the questions.

Our next question comes from Vilas Abraham with UBS. Please proceed with your question.

Hey, everyone. Thanks for the question. Can you comment a little bit on the industry mix and the backlog? Looks like a good chunk of it is consumer. And then just maybe more broadly, are you seeing any meaningful divergence in EBITDA trends across industries?

It's a brief period in the backlog, and it likely consists of just a few transactions, with one being significant in the consumer sector. I wouldn't read too much into this limited sample. The origination opportunities are consistent with what we've seen throughout the year and in previous periods. The economic mix and what is causing items to be on our watch list remain unchanged. Typically, these concerns are related to some segments of our health care portfolio, as we've previously discussed, where certain practice-based and service-based health care companies struggle to raise prices effectively and face labor shortages. We share some of those concerns. Additionally, a segment of our portfolio that usually has strong pricing power has encountered limits on its ability to continue raising prices, which is starting to lead to increased margin pressure. However, when we examine our watch list, which includes our ones and twos, it represents about 7% of the portfolio and is quite diverse, suggesting that the issues are more specific to individual companies rather than a broader trend.

Got it. That's helpful. Regarding leverage, it seems that your on-balance sheet leverage is comfortably around 1.1 for the foreseeable future. Is that an accurate assessment? Do you foresee any conditions in the near or medium term that might change that?

Yeah. No, I mean, I think it's at the lower end of our target range. But as you know, it kind of comes and goes quarter to quarter depending on the activity. I think we feel coming at the lower end because obviously, the earnings are so good at the company that being more levered doesn't really create a material earnings benefit from here. We actually value having access to the dry powder, thinking about both the new investing environment as well as opportunities in the existing portfolio.

Great. Thank you.

You're welcome.

Our next question comes from Robert Dodd with Raymond James. Please proceed with your question.

Hi. Congratulations on the quarter and the credit quality. Should we see the swap as a one-time event aimed at leveraging a near-term strategy? You have a few maturities in 2024 and a couple more in 2025. Should I expect you to swap those as well, or will you replace them with similar structures? Or was it truly a one-off situation?

Yeah. Thanks for the question. Honestly, it's hard to say. This is something we assess on a deal-by-deal basis. And as I said before, it's rare that we actually do this. We just thought this was an interesting opportunity in the current market. So we would look to make this assessment upon each issuance as we go into 2024. We have $1.1 billion of maturities that are effectively resolved at this point. And so we will kind of continue to assess when it's appropriate and good for us to go to the market. But when we do that, we will make the assessment on swapping at that time.

Got it. Thank you. Regarding atypical factors, it's clear that your levels are significantly low. Looking at new defaults and any credit metrics, everything appears to be very strong. Can you provide some insight on whether this is solely due to the performance of the portfolio companies, or have there been changes in sponsor behavior, such as increasing equity contributions without acquisitions? While I wouldn't necessarily anticipate that, the credit quality of the loans has remained impressive. Is there anything unusual about this situation, or is it purely a result of portfolio company performance?

No, I don't think there's anything unusual at all. We mentioned earlier that we've been looking to some of our long-time private equity partners to support companies with capital. However, more importantly, I believe we are seeing strong underlying performance in our portfolio of companies, which is better than I expected. If you had asked me a year ago, you would understand why we are optimistic for 2024 and beyond. While I do anticipate that some companies may face challenges, leading to modestly higher defaults, we feel positive about our position regarding the economy and the portfolio.

Thank you.

Thanks for your questions.

Our next question comes from Kenneth Lee with RBC Capital Markets. Please proceed with your question.

Hi, thanks for taking my question. Wonder if you could just talk about any kind of outlook in terms of opportunities around being able to partner with banks or any opportunity related to the change in regulatory framework on the bank side there. Thanks.

Sure. I mean I'll go maybe up a level and just say in terms of our management and our credit platform here, we see extraordinary opportunity to potentially partner with the banks. We bought a sizable portfolio as folks had seen from a bank this year. And the dialogue around the banks and some of their concerns relative to their balance sheets and their capacity continue to drive a lot of really interesting conversations with those counterparties. But to come back into this company specifically, while I think that Ares Capital Corporation can potentially participate in those opportunities, I think there are other parts of the credit platform that are frankly more engaged in those discussions because, as you know, most banks, which is obviously why our companies had so much success and have gotten so large really don't engage in middle-market corporate lending anymore. So our expectation that they'd be selling the types of loans that this company would want to buy seems to me, at least to be pretty low. Most of the assets that we think will eventually be discussed and potentially for sale from some of the banks probably are a little bit outside of the mandate of this company. But I can tell you that as a platform, those discussions are very vibrant, and I would expect them to be ongoing for a while.

I appreciate that. That's very helpful. I have one final follow-up question, which is related to Robert's earlier question. Regarding the support for your portfolio, could you provide more details? In your prepared remarks, you mentioned being relatively pleased with what you're observing. Could you elaborate on that? Thank you.

I think we're pleased with the support that we've seen from the private equity community. And I don't really know what else to say. I mean when asked in situations where it's required. We've seen partners and private equity companies and obviously, feel good about their continued ownership in those companies. I mean the good news here is we, as a team, have been doing this with a lot of the same private equity firms for a long time. It's very common that we have several, if not more than several, investments with a single private equity firm. So that relationship and that trust has been built over time, and we've just seen great partnership from that community as they try to figure things out. And as I mentioned, I think it's some it's a more challenging environment to be an owner of assets today than it is to be a lender to those assets, because when problems occur, the dialogue tends to be one of us turning to ownership and saying, what's the plan. And very often, the plan is equity support is required, and we've seen it follow on pretty well.

Yeah, the benefit also of being leveraged 30% to 40% loan-to-value provides a lot of cushion such that in a slower environment, the actual owners are, as you can see, willing to put money in because they need to. And we've been the beneficiaries of being where we sit in the capital structure.

Yeah. I mean I think if they need to, but they also are doing it economically, right? They're looking at investments that they've made in what are good companies that they want to support and own. And while maybe the duration of their investment is going to extend a little bit and perhaps the return on that investment has to come down over time. With higher rates, they're supporting these companies because they view that follow-on support is a good investment, right, one that's going to generate a return for their investors. And that gives us a lot of confidence that we have strong partners and that we're invested in good companies.

Got you. Very helpful there. Thanks again.

Sure. Yeah, you're welcome. Sorry, I missed that first half.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Kipp DeVeer for any closing remarks.

As usual, I don't have any other than to say thanks for taking the time to join the call. Appreciate the good questions. And I hope everybody has a great day, a great week.

Thank you. Ladies and gentlemen, this concludes our conference call for today. If you missed any part, an archived replay of the call will be available approximately one hour after the end of the call through November 21 at 5:00 p.m. Eastern to domestic callers by dialing 877-660-6853 and to international callers by dialing 1-201-612-7415. An archived replay will be also available on the webcast link located on the homepage of the investor resources section of Ares Capital's website. Thank you for participating. You may now disconnect.