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Ares Capital (NASDAQ:ARCC)

Q1 2013 Earnings Call

May 07, 2013 12:00 pm ET

Executives

Michael J. Arougheti - Chief Executive Officer and Director

Penni F. Roll - Chief Financial Officer and Principal Accounting Officer

Robert Kipp deVeer - Senior Partner and Member of Investment Committee

Analysts

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Richard B. Shane - JP Morgan Chase & Co, Research Division

Christopher York - JMP Securities LLC, Research Division

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Kyle M. Joseph - Stephens Inc., Research Division

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Ray Cheesman - Anfield Group, LLC, Asset Management Arm

Matthew Howlett - UBS Investment Bank, Research Division

Operator

Good morning. Welcome to Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, May 7, 2013.

Comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may and similar expressions. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in the SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results.

During this conference call, the company may discuss core earnings per share or a core EPS, which is a non-GAAP financial measure as defined by SEC Regulation G. Core EPS is the net per-share increase or decrease in stockholders' equity resulting from operations less realized and unrealized gains and losses, any incentive fees attributable to such realized and unrealized gains and losses and any income taxes related to such realized gains. A reconciliation of core EPS to the net per-share increase or decrease in stockholders' equity resulting from operations, the most directly comparable GAAP financial measure, can be found in the accompanying slide presentation for this call by going to the company's website at www.arescapitalcorp.com and clicking on the Q1 '13 earnings presentation link on the homepage of the Investor Resources section of the website.

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.

Certain information discussed in this presentation, including information relating to portfolio companies, was derived from third-party sources and has not been independently verified. And accordingly, the company makes no representation or warranty in respect to this information.

At this time, we would like to invite participants to access the accompanying slide presentation by going to the company's website at www.arescapitalcorp.com and clicking on the Q1 '13 earnings presentation link on the homepage of the Investor Resources section of the website. The company will refer to this presentation later in the call. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website.

I will now turn the call over to Mr. Michael Arougheti, Ares Capital Corporation's Chief Executive Officer.

Michael J. Arougheti

Great. Thank you, operator. Good morning to everyone, and thanks for joining us today. I'd like to start off today by congratulating Kipp deVeer on his promotion to President; and Eric Beckman, Mitch Goldstein and Michael Smith on their promotions to Executive Vice President of Ares Capital Corp. These individuals have been my long-term partners, very active in the management of ARCC since its IPO in 2004 and key drivers of our success. These new titles simply formalize the leadership roles that they have played and recognize their significant historical and expected contributions to our company. Congratulations again, guys.

For today's call, I'll briefly highlight our first quarter results and touch on market conditions before turning the call over to Penni, our CFO, to take us through our financial results in more detail. Kipp will then discuss our portfolio and recent investment activity, and I'll conclude the call and open it up for Q&A.

First, turning to earnings, our first quarter core earnings per share were $0.38, fully covering our first quarter dividend. Our core earnings per share declined from $0.45 per share in the fourth quarter of 2012 primarily on lower origination-related fee income. This is consistent with the trend that we've seen emerged over the last 3 years, where deal flow has been pulled into the fourth quarter from the first quarter. Following these same historical patterns, we are experiencing increase in new investment activity in the second quarter, and we've seen growth in our backlog and pipeline since our last call in late February. Seasonality aside, the general market environment hasn't changed materially since our last call. Aggressive central bank policies and investor appetite for risk and yield have combined to create significant demand for leveraged finance assets. This has effectively bid down yields on loans and increased asset-level risk as the supply of new loans hasn't been sufficient to absorb the capital flowing into the market.

Per Thomson Reuters, in our core middle market, loan volume was seasonally soft in the first quarter with an overall decline of 41%, and only 38% of this volume was new money related, with 62% tied to refinancings. Total middle-market sponsor-backed loan volume also declined 47% compared to the fourth quarter of 2012.

Consistent with the broader market, our originations were also lower in the first quarter of 2013, as we committed $410 million compared to about $1.1 billion in the fourth quarter. However, our net commitments and net fundings actually increased modestly to $188 million and $129 million, respectively, which grew our portfolio to over $6 billion at quarter end. As we've discussed before, this liquid market environment provides trade-offs for us. It clearly creates greater challenges when seeking new investments with attractive risk-adjusted returns and encourages the refinancing of existing loans. Our ability to perform well under these conditions underscores our competitive advantages, including our strong market coverage and extensive origination platform, a capital base significantly larger than many of our competitors and our long-standing incumbent relationships with private equity sponsors, intermediaries, capital markets participants and middle-market companies. We believe that these competitive advantages will give us the ability to continue to originate assets with appealing risk-return characteristics and to protect our existing portfolio, all without sacrificing credit discipline.

On the other hand, this market climate is also highly supportive of strong credit performance, and it fosters an ideal environment for us to reduce our cost of capital and extend the duration of our liabilities. To that end, we recently raised $333 million of net proceeds from the sale of new equity at a healthy premium to book value and at the lowest all-in offering cost in our history. In addition, this morning, we announced that we have reduced pricing, extended the maturity on and upsized our revolving credit facility. Penni will provide more details on this a little later in the call.

We do believe that middle-market activity is improving, and M&A volume appears to be slowly picking up. An increased supply of loans could help absorb a portion of the excess demand for yield product and create a better equilibrium in the market. As Kipp will touch on later in the call, our quarter-to-date activity and backlog and pipeline do support this view. As a result, we're hopeful that our origination volume and associated structuring fee income in the second quarter will improve over the first quarter.

And now, Penni, if you could take us through our first quarter results.

Penni F. Roll

Sure, thanks, Mike. For those of you viewing the earnings presentation posted on our website, please turn to Slide 2, which highlights our financial and portfolio performance information. Our basic and diluted core earnings were $0.38 per share for the first quarter of 2013, a $0.07-per-share decrease versus $0.45 per share for the fourth quarter of 2012 but in line with the $0.38 per share in the first quarter of 2012. The $0.07 decrease in our first quarter core earnings per share versus the fourth quarter of 2012 was primarily driven by lower structuring fees and interest income, partially offset by higher dividend income.

Interest income for the first quarter of 2013 declined quarter-over-quarter, primarily due to the impact of: one, net exit activity in the fourth quarter, which reduced the level of interest-bearing assets coming into the first quarter; and two, the recognition in the fourth quarter of 2012 of approximately $3.9 million of previously unaccrued interest income that was recorded upon the return of 1 loan to accrual status.

Dividend income for the first quarter of 2013 included dividends paid from our portfolio company, Ivy Hill Asset Management, totaling $27.4 million. The dividends from IHAM included both our regular quarterly dividend and an additional dividend. The regular quarterly dividend from IHAM in the first quarter was $10 million, an increase from the prior quarters' dividend received of $5.3 million, and was paid from IHAM's current net earnings. The increase in the regular quarterly dividend reflects IHAM's view of its current earnings level and a shift towards distributing a higher portion of its net earnings on a quarterly basis. IHAM also paid us an additional dividend of $17.4 million out of accumulated earnings previously retained by IHAM. There can be no assurance as to the size of any quarterly dividends or additional dividend payments that we may receive from IHAM in future quarters.

Our net investment income per share for the first quarter increased to $0.40 per share compared to $0.38 per share in the fourth quarter of 2012, and was also higher as compared to $0.36 per share in the first quarter of 2012. The higher first quarter 2013 net investment income per share was primarily due to the reversal of the $0.02 per share of capital gains incentive fees attributable both to net realized and unrealized gains and losses as compared to net capital gains incentive fees accruals of $0.07 and $0.02 per share in the fourth and first quarters of 2012, respectively.

By comparison, net realized and unrealized losses for the first quarter of 2013 were $0.08 per share compared to net realized and unrealized gains of $0.33 per share in the fourth quarter of 2012 and $0.13 per share for the first quarter of 2012.

GAAP net income for the first quarter of 2013 was $0.32 per share, a decrease compared to $0.71 per share for the fourth quarter of 2012 and $0.49 per share for the first quarter of 2012.

GAAP net income for the fourth and first quarters of 2012 reflected very strong net investment gains performance.

At March 31, 2013, our total assets were $6.4 billion and our total stockholders' equity was $4 billion, resulting in an NAV per share of $15.98, down 0.4% from $16.04 at the end of the fourth quarter of 2012 and 3.3% higher than the $15.47 we reported a year ago.

Now I will turn to our investment activity on Slide 4. As Mike highlighted, our origination pace was seasonally slower, as we made gross investment commitments totaling approximately $410 million compared to gross investment commitments of approximately $1.1 billion during the fourth quarter of 2012 and $384 million during the first quarter of 2012.

We exited commitments of approximately $222 million in the first quarter of 2013, resulting in net commitments for the quarter of $188 million. Net fundings for the quarter -- first quarter of 2013 were $129 million as compared to net repayments of $35 million for the fourth quarter of 2012 and net fundings of $63 million for the first quarter of 2012.

At March 31, our portfolio consisted of 156 portfolio companies and was 60% in senior secured debt investments; 21% in the subordinated certificates of the Senior Secured Loan Program, the proceeds of which were applied to co-investments with GE to fund first lien senior secured loans; 5% in senior subordinated debt; 4% in preferred equity; and 10% in other equity securities.

Floating rate assets were 75.3% of our portfolio at fair value at the end of the first quarter of 2013, which is the same amount as the end of the fourth quarter of 2012. Of these floating rate assets, excluding the Senior Secured Loan Program, approximately 98% feature LIBOR floors. Further, all of the first lien senior secured loans for the underlying borrowers in the Senior Secured Loan Program had LIBOR floors.

From a yield standpoint, the weighted average yield on our debt and other income-producing securities at amortized costs declined 30 basis points quarter-over-quarter and 110 basis points year-over-year to 11.1%. This decline reflects the continued focus on lower-yielding senior debt, lower yields on other new debt investments generally, the exit or repayment of some higher-yielding investments and the repricing of some loans. The weighted average yield on our total portfolio at amortized cost has shown a more moderate decline of 20 basis points quarter-over-quarter and 60 basis points year-over-year to 9.9% as we have reduced our portfolio weighting in nonyielding equity securities.

Interestingly, although our total portfolio yield declined, our net interest margin, which we look at as net interest and dividend income over our average total portfolio at amortized cost over the last 12 months, was actually up modestly to 8.7% as of the end of the first quarter of 2013 compared to 8.5% for the fourth quarter of 2012 and 8.4% for the first quarter of 2012.

Let's now turn to Slide 7, and I will highlight the components of our net realized and unrealized losses for the first quarter, which totaled $18.8 million or $0.08 per share. During the quarter, we realized $11.7 million in net realized gains, offset by $25.6 million of net unrealized losses and $4.8 million of reversals of prior period net unrealized appreciation related to net realized gains. Net unrealized losses for the first quarter include the impact of the $17 million additional cash dividend paid by IHAM in the first quarter, which reduced the fair value of IHAM as of March 31. If you exclude the impact of the additional dividend, net realized and unrealized losses would have been only $1.8 million, or nearly breakeven.

Now let's turn to Slide 9 for a discussion of our debt capital. As of March 31, we had approximately $3.9 billion in committed debt facilities and approximately $2.3 billion in aggregate principal amount of debt outstanding. Over 50% of our total committed debt capital and approximately 88% of our outstanding debt at quarter end was in fixed-rate term debt with intermediate to longer-term maturities. In our view, the long-weighted average maturity of our debt of nearly 10 years provides us with significant stability and contributes to the overall strength of our balance sheet. In addition, we enjoy operating flexibility by not having any debt maturities until 2016.

During the first quarter, we completed an amendment to our revolving funding facility with Wells Fargo, whereby we reduced the spread on the facility from 250 basis points to a spread ranging between 225 and 250 basis points over LIBOR. From the date of the amendment through today, the interest rate charge on the facility has been LIBOR plus 225 basis points.

The weighted average stated interest rate on our debt at quarter end remained consistent with the prior quarters' levels at 5.5%. The weighted average stated interest rate on our debt is calculated based upon the mix of our actual borrowings outstanding at period end, consisting of higher cost and longer-term fixed rate unsecured term debt and lower cost floating rate and relatively shorter-term secured revolving facilities. Importantly, this metric does not reflect the improvement that we have experienced in lowering our cost of debt capital. For example, on a fully funded basis, our weighted average stated interest rate has declined from 4.4% for the first quarter of 2012 to 4.2% for the first quarter of 2013.

In total, we had approximately $1.6 billion in available debt capacity, subject to borrowing based on leverage restrictions, plus $90 million in available cash at the end of the first quarter. At March 31, our debt-to-equity ratio was 0.55x, and our debt-to-equity ratio net of available cash was 0.53x. Since quarter end, we have continued to focus on our liquidity and cost of capital. In April, we completed an equity raise at an attractive price resulting in $330 million of net proceeds, which were used to repay outstanding indebtedness under our revolving credit facilities as well as for other general corporate purposes. In addition, as Mike mentioned, we just completed an amendment to our largest revolving credit facility. Through this amendment, we reduced the spread on the facility from 225 basis points to 200 basis points over LIBOR; extended the revolving period and the stated maturity by 2 years each to 2017 and 2018, respectively, which brings us to a 5-year tenor versus the previous 4-year tenor; and increased commitments to the facility by $30 million, bringing total commitments to $930 million.

We continue to have the ability to upsize the facility through an accordion feature, which gives us the capacity to increase commitments up to $1.4 billion. After this amendment and on a fully funded basis, our weighted average stated interest rate further declined to 4.1% on a pro forma basis as of March 31.

Finally, our second quarter dividend of $0.38 per share will be payable on June 28 to our stockholders of record on June 14.

For more details on our financial results, I refer you to our Form 10-Q that was filed with the SEC this morning. And now I will turn the call over to Kipp.

Robert Kipp deVeer

Thanks, Penni. I will now discuss our recent investment activity and portfolio performance in more detail and then provide an update on our post-quarter-end investments, backlog and pipeline. Please turn to Slide 12.

In the first quarter, we made 17 commitments for a combined total of $410 million, with 5 of these commitments to new portfolio companies, 8 to existing portfolio companies and 4 through the Senior Secured Loan Program, 3 of which were existing portfolio companies in the program. Therefore, approximately 3/4 of our commitments were to existing portfolio companies. In markets like the current one, we continue to focus on using our incumbent relationships to back our best portfolio companies. During the first quarter, we invested 84% in first and second lien senior debt, 10% in senior subordinated debt, 5% in the subordinated certificates of the Senior Secured Loan Program to co-invest in first lien senior secured debt and 1% in equity and other. Our 2 largest commitments were to strongly performing existing portfolio companies, including a $78 million commitment to a laundry service and equipment provider that's been in the portfolio since 2008 and a $57 million commitment to a collision repair site operator that's been in our portfolio since 2012. Our exits and repayments were 92% in first and second lien debt, 7% in subordinated certificates of SSLP and 1% in equity and other.

Now turn to Slide 13. As the chart reflects, weighted average total leverage for the companies in our portfolio remained steady for the first quarter at approximately 4.6x, while weighted average interest coverage for these companies improved from 2.4x to 2.7x quarter-over-quarter. And at the end of the first quarter, the underlying borrowers within the Senior Secured Loan Program had similar weighted average total net leverage of 4.5x but a higher weighted average total interest coverage ratio of 3.1x.

On Slide 14, you can see that we made investments in corporate portfolio companies during the first quarter, with a weighted average EBITDA of approximately $54 million. Please note that we generally use the 12-month period ending with the most recently available data to determine portfolio company EBITDA, as described in more detail on Slide 14.

The weighted average EBITDA of our corporate portfolio companies for the first quarter of 2013 was about $48 million. And for the same period, weighted average EBITDA for the underlying borrowers in SSLP was similar, at approximately $45 million. Reflecting strong credit performance in our portfolio, the weighted average EBITDA of our corporate portfolio companies increased in the aggregate by approximately 12% on a comparable basis for the most recently reported trailing 12-month period versus a similar prior period.

On Slide 15, you'll see that the portfolio continues to be well diversified. Our largest investment at quarter end continued to be in the Senior Secured Loan Program, representing approximately 21% of the portfolio at fair value. The program itself was comprised of investments in 37 separate borrowers as of March 31, 2013. As of this same date, none of the underlying borrowers in the program were on nonaccrual, and the largest loans extended to any single underlying borrower in the program represented about 5% of the total aggregate principal amount of loans extended to borrowers under the program.

Excluding the SSLP, our next-largest 14 investments totaled approximately 31.5% of the portfolio at fair value at the end of the first quarter.

On Slide 18, we illustrate the positive credit trends we're experiencing with our nonaccruing investments ratios. As you can see, nonaccruals as a percent of the portfolio remained flat at 2.3% measured at cost and 0.6% at fair value.

Now let's skip to Slides 19 and 20 for an update on our recent investment activity since quarter end and our current backlog and pipeline.

From April 1, 2013 through May 3, 2013, we made new investment commitments of $388 million, of which $376 million were funded. Of these new commitments, 74% were in first lien senior secured loans, 21% were investments in subordinated certificates of the SSLP and 5% were in second lien senior secured loans. And of the $388 million of new investment commitments, 94% were floating rate, 6% were fixed rate. The weighted average yield of debt and other income-producing securities funded during the period at amortized cost was 10.1%.

We may seek to syndicate a portion of these new investment commitments, although there can be no assurance that we will be able to do so. From April 1, 2013 through May 3, 2013, we exited $27 million of investments. Of these investment commitments, all were first lien senior secured loans. And of the $27 million of exited investment commitments, 83% were floating rate, 5% were fixed rate and 12% were on nonaccrual status. The weighted average yield of debt and other income-producing securities exited or repaid during the period at amortized cost was 7.9%. And on the $27 million investment -- of investment commitments exited, we recognized total net realized losses of approximately $1 million.

As shown on Slide 20, as of May 3, 2013, our total investment backlog and pipeline contributed approximately $640 million and $690 million, respectively, or about $1.3 billion of total. And of course, we can't assure you that we will consummate any of these transactions. And if we do consummate any of these transactions, we may syndicate portions of them, resulting in smaller final hold sizes.

Now I'll turn it back to Mike for some closing thoughts.

Michael J. Arougheti

Great. Thanks, Kipp. Clearly, spreads have tightened and leverage levels have increased over the last year. In our opinion, now is not the time to stretch for yields nor to take excessive risk. Rather, we believe it is a time to be patient and thoughtful and highly selective. We remain focused up the balance sheet on floating rate, shorter duration senior debt investments and defensively positioned companies. We have to have a willingness to accept lower asset yields for higher-quality investments in this environment, knowing that we can improve returns through syndication and structuring. We can also maintain return on equity by continuing to lower our funding costs and by rotating our portfolio into higher portion of yielding investments, much as we did in 2012. There will come a time when interest rates do rise and spreads will widen out again, and when they do, we want to have a large, diversified portfolio with as little asset level risk as possible and significant liquidity to take advantage of any market disruption. To that end, we believe we're currently very well positioned, with a strong balance sheet, a sizable amount of available debt capacity and a well-performing portfolio. Additionally, we ended 2012 with an estimated $0.97 per share in undistributed taxable income that we carried over into 2013, providing potential dividend support into the future.

In our view, the long-term outlook continues to be bright for skilled, non-bank capital providers like us that can provide flexible capital with larger commitment and hold amounts to support the growth needs of the middle market.

And with that, I will conclude our prepared remarks. As always, we thank you for your time and support, and we'd now like to open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Troy Ward of KBW.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Mike, a couple of quick questions. First of all, on Ivy Hill, just a couple -- first of all, what's the AUM at Ivy Hill now?

Michael J. Arougheti

That's $3.5 billion.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then you talked about -- they had a shift kind of in their methodology on how much they're going to distribute up, went from $5 million to $10 million and then, of course, this quarter, you had even above that level. Can you speak to why the shift in the level of percentage of distributions? And how much is still retained at Ivy Hill after the -- after this quarter?

Michael J. Arougheti

Sure. Let me take a step back, Troy, just for the benefit of everybody on the call and remind people exactly what Ivy Hill does as a company and how the economics of that portfolio company works. I think it will help to put the dividend in perspective. Remember, Ivy Hill is a middle-market asset manager that focuses on predominantly first lien middle-market bank loans. They raise money from third parties, typically through leveraged vehicles, to drive higher ROEs than you could achieve on a unleveraged basis. And they buy loans from our agents such as ARCC and other middle-market participants like GE, et cetera. The way that ARCC's investment in IHAM works is that it's twofold: one, we have an investment in the manager; and two, we have investments in securities in underlying Ivy Hill funds. I'd also highlight that on the balance sheet of the manager are held various securities in some of the funds as well. If you remember the history of Ivy Hill, it got launched in 2007 with our first credit fund and has since grown to about $3.5 billion, as I just mentioned. And through the downturn, Ivy Hill acquired and consolidated a number of underperforming, subscale middle-market managers and also embarked on the pretty aggressive and successful strategy of acquiring CLO securities, both debt and equity, through the downturn and has been monetizing those over time. So when you look at the components of value at Ivy Hill, it's a combination of the fee stream that we get from the underlying funds that Ivy Hill manages as well as the value and performance of the underlying fund and the securities that are held within those funds. So to handle the dividend question separately, the regular dividend increasing from $5 million to roughly $10 million this quarter is really an indication of continued outperformance at Ivy Hill and a renewed view on what the consistent current earnings of the business are. And the additional dividend that was paid this quarter of roughly $17 million is really the accumulated excess profit that hasn't been distributed up to ARCC over time.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

So that includes the majority of the accumulated that hadn't been...

Michael J. Arougheti

It actually does not. Ivy Hill today is sitting with about $20 million of cash on its balance sheet and an unfunded revolving credit facility of about $30 million. So there's a lot of liquidity, so back to your other question as to why is Ivy Hill willing to make that distribution, I think the management team of Ivy Hill made the determination that there was adequate capital, both on the balance sheet and through the access to the revolving credit facility, to support the growth needs going into 2013.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then just a little bit of color on the SSLP. I know Kipp said, I think, there's 37 companies represented in SSLP now. Can you just remind me what the total size of that platform is, and where are you on that today? And then also, as you think about kind of the portfolio and SSLP and the current market environment -- are you able to stay away from some of the, let's say, frothiness that we've seen and heard and read about in the more liquid loans? Are you able to stay away from that in the SSLP structure, or are you more comfortable taking down some of that inside of SSLP?

Robert Kipp deVeer

Sure, I'll answer that. It's Kipp. The program in aggregate size today is $6.1 billion. And a little bit of commentary on the market, obviously. As we write unitranche loans out of that program with our partner, GE, obviously, we're subject to the same market forces as any capital provider. So I would say we have a few advantages, right, that come with the way that the program itself is built. Most importantly, we're able to write very large commitments relative to what the market can offer. And in most SSLP transactions, we're actually not syndicating. So that certainty that we provide, either to a financial sponsor or company, I think gives us a little bit more headroom than we may see in a traditional marketed deal. I know some of the same market forces are obviously creeping into it. Despite that, I think its attractiveness has been demonstrated to the market now over a pretty long period, both in frothy markets and in tight markets. So we're pretty confident that we'll be able to continue to just make new, successful investments there.

Michael J. Arougheti

And the other thing I would add, Troy, is I think as people know, loans are getting financed on a deal-by-deal basis in the joint venture. And so the investments into the joint venture being made by GE reflect current market conditions. So when you look at the actual cash-on-cash returns being generated by the program to the subordinated certificates, it's dynamic. And so you're actually not seeing as much ROE degradation in the program as you would expect in the field environment.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Has the amount of return that GE receives from the SSLP, is that dynamic as well? Has that changed over time?

Michael J. Arougheti

Sorry if I wasn't clear. That was my last comment was, yes, it is dynamic, so it has changed and has come down.

Operator

And our next question comes from Rick Shane of JPMorgan.

Richard B. Shane - JP Morgan Chase & Co, Research Division

Just one question. When we look -- we understand that -- the movements in terms of capital structuring and service fees. We understand the movement in terms of dividend income. When we look at the interest from investments, it fell about $11.8 million sequentially. I understand a portion of that comes from yield compression, but we're still having a hard time sort of understanding -- fully explaining that movement. Can you help us see if there's anything sort of onetime in there, either last quarter or this quarter, that's impacting it, and give us a sense of where the run rate might be going forward?

Penni F. Roll

Yes, Rick, this is Penni. As we had mentioned on the call, there was an item in the fourth quarter of 2012 that I would say is probably more in the nonrecurring category, which was a loan that went back on accrual status after it had been on nonaccruals for a period of time. There was a catch-up of that income in the fourth quarter for $3.9 million when that returned. So that's explaining $3.9 million of the $11 million delta. And then, we talked about just other just movements in the portfolio with respect to the turnover in the portfolio, the lower yield on the aggregate portfolio contributing to the remainder. Also, you look at timing of investments in and out, and if you look at where we were at the end of the fourth quarter, we had, had a net decline in the portfolio during the fourth quarter, so we had a lower level of earning assets and aggregate dollars coming into the beginning of the first quarter, which just helps impact and drive down the aggregate dollars of interest income in Q1.

Richard B. Shane - JP Morgan Chase & Co, Research Division

Got it, okay. Yes, we could explain all but about $5 million of it through things like rounding errors and average balances. So it's really that nonaccrual reversal that caught us off guard, okay.

Operator

And the next question is from Chris York of JMP Securities.

Christopher York - JMP Securities LLC, Research Division

Most of my questions have been asked, but I did want to get clear on a couple of issues. First, I calculated total G&A as a percentage of your investment portfolio at 64 bps for the quarter. With growth as our context, how should we think about additional operating leverage available to you?

Michael J. Arougheti

Yes. As an external manager, there is, obviously, less operating leverage as you would see in an internally-managed business. That said, when you look at the G&A line, there's always going to be operating leverage within that particular line item. Things that are in there or things like rent and D&O insurance and whatnot. So clearly, with asset growth, you will continue to see better absorption of G&A.

Christopher York - JMP Securities LLC, Research Division

Okay. And then the S&P 500 earnings in the first quarter were driven again by cost reductions in the second quarter and not from top line growth. At what point in the credit cycle would you feel uncomfortable about your underwriting assumptions at middle-market companies with expanding EBITDA attachment points without top line growth to service these higher-leverage multiples?

Michael J. Arougheti

Yes, I think it's a really good question. I'll give you a long-winded answer. If you look at what's going on in the economy at large as reflected in this quarter's earnings season, and you're absolutely right, we've seen a miss of minus 2% on revenues and earnings growth of about 1.7% in the S&P 500 companies that have reported. And that's down sequentially from the fourth quarter, where we saw about 4% on 5% revenue growth. So we've been talking about, over the last year, continued growth but a declining trend in growth. That said, when you look at the trends in our portfolio on a revenue and EBITDA basis, as we mentioned in our prepared remarks, we're still seeing 12% EBITDA growth on a weighted average basis period-to-period, and we're still seeing pretty significant revenue growth as well. I think that can be explained in 2 things. Number one, understand, while the balance sheet is quite substantial, it's really comprised of 156 selected assets, if you will. We looked at close to 2,000 transactions last year and closed less than 5% of the deals that we looked at. So when you think about portfolio construction, our portfolio is hand-selected in terms of industry, company cash flow dynamics, et cetera, et cetera, whereas the S&P is going to give you a much broader index. So you should expect, in a portfolio like ours, that you should see outperformance. More importantly, I think it's important for everybody on the call to appreciate that our company actually performs best in a slow growth environment, particularly when we are first lien senior secured with covenants and we're the lead agent. Our best performers tend to be those companies that moderately underperform, stay in the portfolio a very long time and give us the opportunity to reprice risk through the cycle. So when you think about middle-market lending as a business, you'll see through cycles that we actually perform the best when you are in the weaker parts of the credit cycle. So as I said in my conclusion to the prepared remarks, I think it's important to always have a view as to where you think you are in both the credit cycle and the economic cycle and make sure that your portfolio construction reflects that and puts you in a position to deploy the most aggressively into weaker markets. But when we're looking at what's going on fundamentally, a slow growth environment is actually very good for our business.

Christopher York - JMP Securities LLC, Research Division

Yes, that's great. Your commentary actually dovetails quite nicely into my next question. It appears that investments -- that your health care sector increased meaningfully as a percentage of the investment portfolio quarter-over-quarter. So was this allocation strategic? And how are you thinking about sector investments currently?

Michael J. Arougheti

Yes, if you look at our historical portfolio construction, you will see overallocation to high free cash flow, high margin, high capital efficiency businesses. Health care services has always been one of our largest, if not our largest, industry vertical. Obviously, we believe that the macro trends in that space are good. We don't see a lot of the same cyclical risk in that space as we do in other industries. And yes, that is by design. The one thing I would point out is, obviously, health care is a very broad industry category. And so when you look through to what's in that vertical, you'll see a pretty diversified mix of provider models, acute care hospitals, et cetera, et cetera. So there's a lot of granularity and diversification within that particular industry code. But it has always been an area of focus for us, and in this kind of environment, I'd expect it to continue to be.

Operator

And our next question will come from Doug Mewhirter of SunTrust Robinson Humphrey.

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Most of my questions have been answered. Maybe a couple of high-level -- more high-level, bigger-picture questions. One, the -- it looked like you had talked about maybe going higher in seniority, lower yielding, maybe using some better structuring to maintain the ROE. That commentary seems to be similar with a lot of, I guess, your other peers or competitors. So do you think that there might be a -- that might be a, to use an abused term, a crowded trade where you think everyone sort of sees that as a thing that makes the most sense and ends up being a sort of self-defeating strategy?

Michael J. Arougheti

I wouldn't call it a crowded trade so much as I call it the right thing to do in a market environment like this. We had very similar dialogue with the market in the 2006 time frame, where we were willing to accept less yield in advance of what we thought would be a change in the market dynamic. And those capital providers and investors that reached for an absolute yield threshold took on excessive risk and, when you look at it on a risk-adjusted basis through the cycle, dramatically underperformed. So I think people have learned. Not everyone has learned, but a lot of people have learned. And so yes, we do see a lot more people willing to focus up the balance sheet and take less yield in this interest rate environment. That said, the reason I don't think it's a crowded trade is, when I look at our market position and our market share and the infrastructure that we have developed around origination and portfolio management, the existing entrants and the new entrants are not, in a meaningful way, changing our market opportunity. So as I mentioned in our prepared remarks, I think that we have meaningful competitive advantages around balance sheet size, scale, incumbency within our existing portfolio and the relationships that GE and Ivy Hill bring to the table to get more than our fair share of the senior debt market today.

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

That's a very helpful answer. The second question, and maybe you actually -- this is in the presentation, I just skipped over it. You gave some very great detail of your pipeline and backlog for assets that may be coming on the balance sheet. Do you have a rough idea of, I guess, the level of maturities that might be coming up over the next quarter or 2?

Michael J. Arougheti

Doug, in terms of contractual maturities?

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Yes, where your loans might be running off, the amount of loan...

Michael J. Arougheti

Yes, it's very rare. We had that, but I wouldn't -- I would discharge people from thinking about the portfolio in that way. Similar to how we managed our balance sheet, I could speak for, I think, everybody around the table, because we've been doing this together for 15 years. I think we have only taken 2 loans to maturity in 15 years. The reality is, as someone is approaching maturity, they are either engaging in a discussion with you about a maturity extension or refinancing or, as they approach maturity, they've deleveraged to the point where something is going to happen with that company's balance sheet, either through a refinancing or some kind of an M&A transaction. So when you look at the distribution of maturities, it's obviously something you have to mindful of, but it's not as though there is a significant refinancing risk in the portfolio. To give you a number, I'm looking at it right now, our debt investments in the underlying portfolio with 2013 maturities right now is about $275 million and represents 10 companies out of 160 companies. And my sense is, by the time we get to the end of 2013, those will have either exited or have been pushed back.

Operator

And our next question is from Kyle Joseph of Stephens.

Kyle M. Joseph - Stephens Inc., Research Division

My first question is on capital structuring fees. I know that deal activity was pretty light in the quarter, but if you look at it on a year-over-year basis, it's down significantly from first quarter of 2012. Is that a function of the market and the overall competitiveness, or is there something else I'm missing there?

Michael J. Arougheti

Yes, I think there's 2 things. There's been very modest pressure on upfront fees for new transactions. We've always talked about a 3%-type upfront fee environment, and now we're probably talking about a 2% to 2.5% upfront fee environment. And we've addressed this, I think, on prior calls. It's largely driven by the nature of the transactions. So when you're in a market where there's a high degree of releveraging of existing borrowers and refinancings, you tend to get paid less fee on existing commitments than you do on new money transactions. So the biggest explanation is really just the mix within the existing portfolio versus new money transactions.

Kyle M. Joseph - Stephens Inc., Research Division

Okay. And then for other income, it looked like the controlled affiliate line item picked up there. Is that IHAM-related, or is that something else?

Penni F. Roll

Well, the IHAM dividend would have come through the dividend income line, not the other income line but -- I mean, I think that's about it...

Michael J. Arougheti

Yes, nothing off the top of my head. We'll pour through it as we get through the Q, and to the extent that there's anything there, we'll let people know.

Kyle M. Joseph - Stephens Inc., Research Division

Okay. And then it looked like the average transaction size dropped in the quarter, especially when you exclude the 2 transactions that Kipp talked about, 2 existing companies. Is there anything going on there?

Michael J. Arougheti

No. That's -- I wouldn't read into that. In fact, I would expect, on a go-forward basis, that you'll see hopefully the average transaction size increasing. Part and parcel with the strategy of moving up the balance sheet and being more meaningful as a senior lender and a distributor of product is going to be larger commitment sizes. So I wouldn't read into the historicals, and I would come to expect, for the foreseeable future, that we'll be trying to increase average deal size and really focus our attention and capital on what we think are the best issuers in the market.

Operator

And the next question will come from Jonathan Bock of Wells Fargo.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Mike, you've talked about, in the past, Ares's demonstrated ability to back-end lever transactions, where you end up earning an outsized return. Could you talk about those efforts this and/or perhaps last quarter in terms of how active you were in back-end levering transactions?

Michael J. Arougheti

I'm not going to go into specifics, but that continues to be a core part of our strategy. As we've said before, we think that there's extraordinary strategic value to owning and controlling borrower relationships. And given our balance sheet scale and the flexibility of our capital, we think that we can come in, provide a full balance sheet solution and then, through syndication of either a pari passu strip or a first-out or a last-out, optimize the risk-adjusted return. Particularly in spread environments and competitive environments like the one we're in today, that is a very integral part of our balance sheet strategy.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

We would agree. And Penni, maybe an accounting question here. As we look at it, is it possible that the accountants and/or, I'd say, the regulators could look at the first-out part of a back-end levered transaction as debt on your balance sheet, effectively increasing your available -- or excuse me, increasing your leverage? And can you just talk about whether or not that's a possibility and/or if that's being considered in terms of when and how you're choosing to back-end lever transactions to date?

Penni F. Roll

Yes, I mean, all of these are nonrecourse. So I just don't see it being viewed as additional leverage for ARCC. And it is not debt under GAAP. So I just, at this point in time, don't see that being a risk.

Michael J. Arougheti

Okay. Just to clarify, Jon, because I -- this is no different than someone who underwrites a first lien, second lien or first lien mezz transaction and sells it to a third party. So the "financing" is happening at the asset level, where the first-out provider or the last-out provider is actually signing a credit agreement as a lender to a company. I think that is a 0 risk proposition that they would be considered debt. I do think your question raises another interesting point that's worth mentioning, which is it is important, I think, in this market environment that people appreciate the level of leverage and the attachment point at underlying borrowers. And there was a lot of conversation around last dollar of leverage exposure. For example, we discussed on our call today a 4.6x total net leverage on a weighted average basis for our portfolio and 4.5x for the unitranche program. But what hopefully is not lost on people is that, given the high percentage of senior debt, that our first dollar of exposure is very high up the balance sheet, close to 1x. It's actually about 1.3x. So as you're assessing, not the risk of leverage consolidation on the balance sheet, but the actual risk that's being taken at the asset level, people need to understand attachment point and where someone is actually starting to get paid for the risk they're taking as they evaluate the risk-return.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

I would completely agree, and thank you for clarifying that point, because I do happen to agree with you on the items of back-end leverage. Now one question also relates to average transaction sizes. So Michael, you brought up that you're looking at potentially larger transactions, safety, senior security. These are items that are kind of the hallmark of the GE unitranche fund. And I also see that Ares now, just due to size, is quite capable of holding very large pieces on the balance sheet, senior subordinated debt or otherwise. At what point does it become, I'd say, an issue between whether or not Ares would want to choose to balance sheet the entirety of a $100 million loan, as you did several last quarter, versus the GE unitranche fund -- or the SSLP, excuse me.

Michael J. Arougheti

Yes. So just to remind everybody, the partnership we have with GE is strong. It's been long lived. It's very productive and efficient, and I think it's been a big win for both GE and for Ares. Part of that partnership is that it is an exclusive partnership, and both organizations have committed to showing any unitranche transaction in either of our systems into that program first. And so there really is no flexibility that exists to do unitranches on the balance sheet without first showing it into the joint venture. That said, Ares and GE don't always see eye to eye on credit. Sponsors don't always have a desire to borrow through the joint venture. Companies don't always have an appetite to borrow through the joint venture. So there are other things at play that would have unitranches finding their way onto our balance sheet and not into the joint venture, but I think people need to understand that it first goes into -- it gets shown to the joint venture and then may not get invested in there. That is a separate discussion from doing non-unitranche large investing on the balance sheet, which is something that I think you've seen more of and I think you'll continue to see more of.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Okay. Great. And then the last question relates to liabilities. You've done extremely well in terms of lowering the cost of financing and also improving the strength off of the liability side of the balance sheet. At what point does it make sense, relative to what you own and also the strength for middle-market CLOs, that one might consider an on-balance sheet securitization, given that AAA financing is tightening and likely providing a very good, I'd say, cost of financing relative to that high-quality assets that you generate?

Michael J. Arougheti

Yes, I think we talked about this on the last call, so I'll be brief. It's absolutely an available tool for us. People may or may not remember, we did issue an on-balance sheet securitization in July of 2006, which has run off but performed very well for us through the downturn. For us, it's all about what is the arbitrage available to us in the securitization market versus what's available to us in other debt capital markets, because when you borrow through an on-balance sheet securitization, because of some peculiarities around structure and tax, you do give up a fair amount of operating flexibility around how you manage that portfolio. And we always look at the trade-off of that operating flexibility relative to the economics of the arbitrage on the financing. To put it in perspective, we are seeing AAA spreads in middle-market deals come down. Some of the most recent prints in middle-market CLOs have seen the AAAs come in at around the 150 over mark, which is down dramatically from 6 months or 12 months ago. So we're beginning to get into the realm where that may make sense. But up until we saw this break at the 150 range, it really hadn't made economic sense for us. As we demonstrated today with our new revolver, we can borrow through the bank market at close to similar all-in rates to the securitization market with infinitely more flexibility.

Operator

And our next question comes from Robert -- is a follow-up from Robert Dodd of Raymond James.

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

First question, actually, not a follow-up. But on the refinancing environment right now, obviously, you had a lot in Q4. The market, as you pointed out in your comments, still had a lot of refinancing activity in Q1. You saw a significant decline. And looking at the April through May numbers in terms of the commitment exits, which is not quite the same thing, it looks like you're still seeing a very moderate level there. I mean, where do you think your portfolio risk is now in terms of refinancing activity for the rest of the year being outsized, for example, rather than normal? Obviously, maturity is different, but refinancing activity can spike very quickly. I mean, what do you think the issue -- the potential risk is there?

Michael J. Arougheti

Yes, I actually think -- the good news is -- good news, bad news is I actually think that we've borne the significant brunt of the refinancings working their way through the portfolio. And if you look at the number of companies that have refinanced and/or repriced, either through a releveraging or just a repricing, have, for the most part, worked their way through the system. I highlighted this on the last call, but the good news is, as a lead agent and underwriter, where we're committing the entire right-hand side of the balance sheet to somebody, we charge significant upfront fees, as I mentioned, 2% to 3%. And we typically have some call protection depending on the nature of the security, call it an additional 1% to 3%. And so the economic decision that, that puts a borrower in is, do I go into the market and refinance areas with new money, having just paid them 3 points and having to pay them call protection? So to give simple math, if we got paid a 3% upfront fee and had call production of 3% and someone could save 150 basis points of spread, that's a 4-year payback. So you do have natural defenses against refinancing given the significant amount of upfront fees and call protection that we get. So where you've seen repricing, a lot of times, it's in conjunction with outperformance at the portfolio company level where they've deleveraged and moved themselves into a leverage profile where they can actually access the markets at a cheaper cost of financing. And if that is the case, we obviously don't have an issue with the repricing. In fact, we'll encourage the borrower to take on more leverage in order to try to maintain as much spread as we can.

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Got it. Last question for me, at least. Looking at the environment right now, at the investor demand for yield, it looks like it's an incredibly positive time for Ivy Hill to be out seeking additional third-party money and, don't take the words the wrong way, aggressively growing. I mean, do you have an opinion on that about -- I mean, obviously, with -- the dividend looks up, their expectations seem pretty -- seem to be increasing about how they're going to perform. I mean, is that driven by seeking additional third-party capital and just trying to grow their AUM?

Michael J. Arougheti

Yes, I think it is. It is a very good time for Ivy Hill, both in terms of availability of capital, appetite for middle-market bank debt within the private investor community. The trade-off there is, obviously, just making sure that there's adequate investment opportunity. And so whether it's here at Ares, Ares Capital Corp., or talking to the guys at Ivy Hill, you will never hear anybody talking about aggressive growth. We will take advantage of financing markets if we see the investment opportunity, and I think Ivy Hill will absolutely be growing in this market environment, but it will be tempered by their selectivity and investment discipline.

Operator

Our next question is from Ray Cheesman of Anfield Capital.

Ray Cheesman - Anfield Group, LLC, Asset Management Arm

Kind of following up on your comments just a second ago about discipline. On another call this morning, somebody mentioned covenants, covenant-light and covenant-ridiculous, but all 3 deals were getting done. Are you having success in applying that discipline in this current environment on the covenant side of your deals?

Robert Kipp deVeer

Yes, this is Kipp. I mean, I'd say generally, we are. We've been in the business for a long time. And really the difference, in our opinion, between the middle-market credit investment environment that we're in and the large syndicated market, at the end of the day, really is loan documentation and covenants. Those things are really important to us. So in the core middle market, which for us really is kind of $20 million of EBITDA to maybe $75 million of EBITDA, we've, in most circumstances, continued to insist on covenants, and real ones as well. In some of the larger deals, $75 million of EBITDA and up, that's where there's more pressure, I'd say, generally.

Ray Cheesman - Anfield Group, LLC, Asset Management Arm

And following up on that, you said a minute ago you thought you had borne the biggest burden of the refinancing. So when I read about a drive-by every other day, that's really bigger loans as opposed to the portfolio you're currently holding?

Michael J. Arougheti

Yes, think about it this way. The drive-by exists because they're broadly syndicated, so there's a lot of diversity and granularity in the syndicate, and the agent is not heavily invested in the loan. And so the ability for -- and by the way, there have not been meaningful upfront fees paid, nor is there call protection. So when you look at the way the broadly syndicated loan market performs, you may see a loan repriced 6 months after a closing because spreads have tightened enough to make that payback analysis I walked through earlier worthwhile for a borrower. The middle market doesn't function that way because of the significant amount of upfront fees and the call protection I referenced, but it also doesn't function that way because people do not know the credit. So if there's a company in Ares Capital's portfolio that's $150 million unitranche, and we took 3 to 6 months due diligence of a loan, structure it, document it, et cetera, there's a lot of inertia that's just -- not economic, but just a lot of inertia and barrier to the market aggressively repricing that. So when you see repricing happening in the middle market, it's much more of a dialogue with the borrower who is looking at the spread environment, looking at the credit environment and coming to you to talk about their cost of capital relative to our return expectations. It's a much more consensual type process. And when you look at the type of spread compression that we've seen, while we've seen directional correlation in terms of basis points of spread, we haven't given up nearly as much as the broader market has.

Ray Cheesman - Anfield Group, LLC, Asset Management Arm

That makes sense. One last question, if I may. How do you guys think about dividend growth this year versus -- we've just spent an hour talking about discipline, discipline, discipline, and your market outlook, you're trying to be careful of because I think we all see that there's -- there could be -- the storm clouds offshore could come onshore at any time. But so far, Benning Company has been successful in fighting them off. Your portfolio seems to be doing well, as you pointed with your EBITDA growth. You've got $0.97 in reserve, you mentioned. How do you see that flowing across '13?

Michael J. Arougheti

Yes, we've never, as a company, given dividend guidance, but we've always talked a lot about our dividend philosophy. And we think, given our size and market position, that it is critical that people appreciate the strength and diversity underlying the dividend and the stability and predictability of the dividend as much as focusing on the growth of the dividend. We had a lot of dialogue around this at the end of last year, as we paid 2 special dividends given the amount of spillover income that we had generated and given the underlying performance in the business. But you will never see us have the core earnings per share not covering the dividend or seeing the dividend get too far out ahead of core earnings. So in environments like this, we had conversations with people last year about dividend increases in excess of the $0.38 because we've been out-earning the dividend, and our response was exactly what you just hinted at, which is you have to look around the corner before thinking about spread compression and the competitive environment. And I think we will get rewarded for stability and predictability more than growth. So it's not to say that we don't have growth drivers available to us. We're moderately leveraged right now. We're driving our cost of capital down. But I would encourage people not to be focused on growth and really get into the underlying balance sheet and understand the quality of the dividend more than anything.

Operator

And our next question is from Matthew Howlett of UBS.

Matthew Howlett - UBS Investment Bank, Research Division

And just a follow-up on the cost of capital, lowering your cost of capital needs. Congrats on working the bank lines down and expanding the revolver out another 2 years. I mean, does that change anything with regard to how you look at the capital structure? Will you look at that and tend to maybe draw down that line as opposed to issuing the unsecured market, I mean, given it looks like the Fed is probably going to be on hold until '16. And then as it relates to issuing equity, I think the last deal you did was around a 9% dividend yield. I mean, your dividend -- your equity cost of capital really hasn't come down as much as we think it should or the industry's should given, particularly, that you're the leader in the space. I mean, does that change anything with the revolver, then, maybe utilizing that more going forward?

Michael J. Arougheti

Yes, 2 points. One, I'm as happy with the duration extension as I am with the reduction in cost of our -- and upsizing of the line. The amount of economic opportunity that gives us, given our and I think the market's view on interest rates, is significant. I think what you're also highlighting, which goes back to some of the levers we have to drive earnings growth, and Penni mentioned this in her prepared remarks, our stated interest rate right now is 5.5%. But on a fully funded basis, it comes down to 4.1%. So there's 140 basis points of net interest margin opportunity embedded in the fact that we have $1.6 billion of unfunded revolvers. So clearly, investing into those lines is something that we're focused on and we appreciate the power of. With regard to your comment about the cost of equity, we don't spend a lot of time talking about the stock as much as talking about the company. But given the yield environment, I would echo your sentiment. I'm surprised that, given the diversity of the portfolio, the performance of the portfolio, the size and leadership position of the business, that we have not seen spread tightening find its way into the stock price as much as other yield instruments.

Operator

And our final question today will be from Troy Ward of KBW.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Mike, just a follow-up. One of the questions that we get a lot covering a lot of BDCs, is what is the impact of new money coming into the space? Not just the BDC, so -- and let's not think about the SSLP as much as the balance sheet. What impact have you seen with regard to your ability to find and still get strong opportunities with new money coming in, and where is that money coming from?

Michael J. Arougheti

You mean new money coming in to -- as looking to make loans?

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Yes. I'm sorry, yes -- when you...

Michael J. Arougheti

It's interesting. We've talked about this a lot. New money is coming from everywhere, right? And we mentioned this in our prepared remarks, there is a significant global hunger for yield, particularly floating rate yield. And so we are seeing demand, by the way, across all of the Ares's businesses for yield and for leverage financed product. When you look at the structure of the middle market, you've got the BDCs that are allowing public capital to flow into the space. There are middle-market CLOs, although we talked about -- we still haven't seen the significant ramp-up in issuance in the CLO space given the cost of AAAs. There's only been a couple of billion dollars of middle-market CLO issuance this year. There continues to be private fund structures that get raised, either private mezzanine fund or specialty finance companies, credit hedge funds. The reality is, though, the middle market is fairly incestuous and small. The people who have been in it have been in it for a very long time. They have entrenched relationships on both the capital raising and deployment front. And so when we see a lot of new capital coming into the market, we're seeing a disproportionate amount of it going to incumbents in the market, which we think is a good thing. We're seeing a lot of it find its way into the hands of people that we think are very credible, rational competitors, which we think is a good thing. And when you're seeing capital flowing to new providers, a lot of times, it's experienced professionals or experienced teams that are raising capital somewhere else, but they're not necessarily new entrants. So there may be a misperception that there's more new entrants than there actually are. Not to reiterate what I've already said twice on this call, but when you look at our market share and our market position and the competitive advantage we have in terms of the flexibility and size of our balance sheet and the number of professionals we have, we're not that concerned about the flow of capital. And some of the barriers to entry still exist, just in terms of the difficulty to get capital into this market and get it deployed. If you look at liquid fixed income, a high-yield mutual fund, a loan primary fund, someone could go in and get capital deployed immediately. If someone actually wants to deploy capital in the private markets, there is a significant ramp that's involved. And that has actually deterred a lot of fast money coming into this space. So we're seeing a lot of money in and around the sector, but it doesn't concern us that much. The other thing I would say, too, and we saw this in the '06, '07, '08 time frame, the upstarts who do get funded, for better or for worse, tend to get adversely selected on credit. And it would not surprise me that new entrants who get funded in the current market environment, once you get through the cycle and come out the other side, it wouldn't surprise me to see credit underperformance. Because again, the market is pretty well established as to where people want to borrow and where those relationships reside. And so a lot of times, when someone is looking to get deployed aggressively with a new pool of capital, they're probably taking undue risk. Okay. Well, I appreciate everybody spending so much time with us today. And I just wanted to congratulate my partners again on their promotions, and look forward to continuing our successes together. And thanks, everybody, and we'll talk to you next quarter.

Operator

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available approximately 1 hour after the end of this call through May 20, 2013, to domestic callers by dialing (877) 344-7529 and to international callers by dialing 1 (412) 317-0088. For all replays, please reference conference number 10027054. An archived replay will also be available on the webcast link located on the homepage of the investor resources section of our website. The conference is now concluded. Thank you. You may now disconnect your lines.

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