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Ares Capital (NASDAQ:ARCC)

Q4 2010 Earnings Call

March 01, 2011 11:00 am ET

Executives

Penni Roll - Former Chief Financial Officer and Member of Portfolio Management Committee

Michael Arougheti - Principal Executive Officer, President, Portfolio Manager, Director, Member of Investment Committee and Member of Underwriting Committee

Analysts

Faye Elliott - BofA Merrill Lynch

Vernon Plack - BB&T Capital Markets

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Arren Cyganovich - Evercore Partners Inc.

Joel Houck

John Stilmar - SunTrust Robinson Humphrey, Inc.

James Ballan - Lazard Capital Markets LLC

Greg Mason - Stifel, Nicolaus & Co., Inc.

John Hecht - JMP Securities LLC

Operator

Good morning. Welcome to Ares Capital Corporation's Earnings Conference Call. [Operator Instructions] 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 the forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results.

During this conference call, the company may discuss the Core earnings per share or Core EPS, which is a non-GAAP financial measure as defined by SEC Regulation G. Core EPS, excluding professional fees and other costs related to Ares Capital Corporation's acquisition of Allied Capital Corporation is the net per share increase or decrease in stockholders' equity resulting from operations, less professional fees and other costs related to the Allied Acquisition, realized and unrealized gains and losses, any incentive management fees attributable to such realized gains and losses, any income taxes related to such realized gains and other adjustments as noted. A reconciliation of Core EPS, excluding professional fees and other costs related to the Allied Acquisition to the net per share increase or decrease in stockholders' equity resulting from operations, to most directly comparable GAAP financial measure can be found in the company's earnings press release. 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 of 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 Q4-10 Investor Presentation link on the homepage of the Investor Resources section of the website. Ares Capital Corporation's earnings release and quarterly report are also available on the company's website.

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

Michael Arougheti

Thank you, operator. Good morning to everyone, and thanks for joining us. I'm joined today by our new Chief Financial Officer, Penni Roll, who is recently promoted from her previous position with us as our Investment Advisor's EVP of Finance. Please join me in welcoming Penni to her new position. Rick Davis, our former CFO, was promoted to Chief Operating Officer of Ares Management LLC, but he will remain as an officer of Ares Capital, holding the position of Treasurer. On behalf of everyone at Ares, I'd like to sincerely thank Rick for all of his hard work and contributions to ARCC as CFO. Rick and other members of our senior management team are also here with us this morning.

I hope you've had a chance to review our fourth quarter earnings press release and our fourth quarter investor presentation posted on our website. We'll refer to this investor presentation later in our call. I'd like to start with a discussion of current market and economic trends, and then update you on our recent capital raising activity before I highlight our fourth quarter and year-end results. Penni will then take you through our fourth quarter and year-end results in more detail. I'll then come back and cover our recent investment activity, the state of our current portfolio and update you on our backlog and pipeline before taking questions.

Fourth quarter activity was quite strong in both the broadly syndicated and middle markets as volumes reached the highest quarterly levels seen in the last three years. The elevated volume was driven in part by strong LBO and dividend recap activity as private equity sponsors sought dividends or capital gains ahead of a potential change in tax laws early in 2011. This likely pulled forward some volume from the first quarter of 2011 into the fourth quarter of 2010. While the broadly syndicated market is experiencing higher year-over-year volumes driven by strong refinancing and repricing activity thus far into 2011, actual new money transaction volume requiring fresh capital has been noticeably slower, although some seasonality is fairly typical.

Middle-market new money volume has also slowed, but the size of our current backlog and pipeline demonstrates that we are still finding attractive opportunities as we leverage our scale, origination and balance sheet strength and broad product offerings.

Given the prospect of higher interest rates, we are seeing renewed investor interest in the leveraged loan asset class. Retail inflows into high-yield and bank-loan mutual funds have been remarkably strong, and loan repayment activity has also been vibrant. This liquidity, coupled with relatively weak new issue supply, has adversely impacted pricing in terms of the broadly syndicated market thus far in 2011. Although the structural and pricing changes are more evident in the broadly syndicated market, they are starting to have an impact in the middle market as well. Of course, increased new issue supply, economic uncertainty or geopolitical events could all halt or reverse these trends. We plan to be prepared as always to take advantage of any potential market opportunities as they arise.

We are becoming increasingly cautious as the market transitions to higher leverage levels and tighter pricing. As we have in the past, expect us to become more conservative when other market participants become more aggressive. As we search for the most attractive risk-adjusted returns in the current market, we are increasingly focusing on more senior secured floating rate assets, including Unitranche loans. Senior secured loans continue to offer good relative value as spreads and fees are approximately 150 to 200 basis points wider than historical averages despite lower default outlook and the prospect for interest rate increases becoming more likely.

From a long-term perspective, we continue to believe that supply-demand equation in our market will become more attractive, given the hundreds of billions of middle-market debt maturing by 2014, the expiration of CLO reinvestment periods in the next few years and the estimated over $400 billion in uninvested private equity capital. In our view, these factors should create favorable conditions for attractive investment opportunities, and these trends highlight the importance of utilizing scale and broad origination to be more selective, as well as maintaining ample liquidity to take advantage of opportunities as they arise.

The stronger asset pricing environment and the improving economy have facilitated both the execution of our strategy of exiting non-core assets from the legacy Allied portfolio at favorable prices, particularly relative to our costs, as well as our portfolio rotation and repositioning objectives. We posted net realized gains in both the fourth quarter of 2010 and first quarter of 2011, primarily as a result of exits from the legacy Allied portfolio.

From the closing of the Allied Acquisition in April through year end, we exited approximately 30% of the legacy Allied portfolio at fair value, reduced non-accruing investments in that portfolio by over 85% and significantly improved the yield on the remaining legacy Allied portfolio. We have made further progress since year end. Through February 25, 2011, we have exited an additional $270 million of investments at cost from the legacy Allied portfolio, with additional net realized gains in the first quarter of 2011 of approximately $98 million. The strength of the economic recovery also continues to be reflected in the growth in the revenues and EBITDA of our underlying portfolio companies, and I'll provide more detail on these activities and trends later in the call.

The improved liquidity in the capital markets has also enabled us to improve our financial position and secure additional capital on favorable terms. Since our last call, we've accessed both the equity and convertible debt markets and extended maturities of existing indebtedness to further strengthen our balance sheet. Following an equity raise in November, with net proceeds of approximately $181 million, we issued $575 million of five-year 5 3/4% convertible unsecured notes in January of this year. Also in January, we successfully extended the maturity on our $400 million Wells Fargo revolving credit facility from 2013 to 2016, with no change in pricing on the facility.

Because of our strong liquidity position, we recently elected to redeem the approximately $300 million in 6 5/8% notes that we assumed in the Allied Acquisition ahead of their scheduled July 2011 maturity. We believe these actions significantly improve our financial position. We have increased the average maturity of our liabilities to well over 11 years, and unsecured financing now represents the majority of our committed debt capital providing us additional flexibility.

As of December 31, pro forma for the convert offering, the use of proceeds therefrom to repay outstanding revolver borrowings and for the expected redemption of the 2011 notes on March 16, we have approximately $1.3 billion of principal term debt, including our 2006 debt securitization, with only one maturity of $161 million prior to 2016. These capital raising actions may also position us to benefit from a potential rise in interest rates. And as Penni will discuss later, we have significant available debt capacity to make new investments.

And a final note on capital raising. In January, we announced the expansion of the Senior Secured Loan Program with GE Capital from $3.6 billion to $5.1 billion in total available capital, with ARCC's commitment increasing from $525 million to $975 million. As a reminder, the Senior Secured Loan Program makes first-lien senior stretch and Unitranche loans of up to $300 million to middle market companies. With approximately $2.5 billion in total loans funded at year end, the program had about half of its available capital remaining. We continue to be very pleased with the partnership with GE Capital, the competitive benefits that the program enjoys in the marketplace and the financial performance of the underlying investments from the program.

In just a second, Penni will go over our fourth quarter and full year financial results in detail, but I'd like to highlight a few items. We announced Core earnings per share of $0.42 for the fourth quarter, excluding a $0.01 per share in professional fees and other costs related to the Allied Acquisition. This compares to $0.38 in Core earnings per share for the third quarter of 2010, also excluding $0.01 per share in professional fees and other costs related to the Allied Acquisition. The fourth quarter performance was driven by strong investment activity and improved credit trends, which was demonstrated by a significant reduction in the non-accruing investments in the legacy Allied portfolio.

We also reported higher fourth quarter GAAP earnings per share of $0.79, reflecting net realized gains and net portfolio appreciation from better performance in both core ARCC portfolio and the legacy Allied portfolio. As a result, our fourth quarter net asset value increased for the fifth consecutive quarter.

For the full year 2010, our $1.43 in Core earnings per share, excluding $0.11 per share in professional fees and other costs associated with Allied, provided full coverage of our $1.40 in dividends per share. In addition, for the fifth year out of the last six, we reported positive net realized gains per share for the full fiscal year, with $0.28 per share in 2010.

We currently estimate that our taxable income for 2010 exceeded our dividends paid from such income by approximately $62 million or $0.30 per share, which will allow us to spill over this excess income for distribution in 2011. Of course, these figures are subject to change pending finalization of our 2010 tax return. I'd now like to turn the call over to Penni Roll, our CFO, for a more detailed commentary on our fourth quarter financial results. Penni?

Penni Roll

Thank you, Mike. For purposes of this discussion, as we have done in the past, we continue to report a number of the core ARCC portfolio statistics separately from the legacy Allied portfolio statistics so that you can continue to track the performance of both. For more details on our financial results, I do refer you to our Form 10-K that was filed this morning with the SEC. To begin, please turn to Slide 3, which is the financial and portfolio highlight slide in our presentation.

As Mike mentioned, our basic and diluted Core EPS were $0.42 per share for the fourth quarter of 2010, excluding $0.01 per share of professional fees and other costs related to the Allied Acquisition, a $0.04 per share improvement over Core EPS of $0.38 per share for the third quarter, which also excluded $0.01 per share of Allied Acquisition-related professional fees and other costs incurred in Q3.

Quarterly increase in Core earnings per share was due to two primary revenue items. Higher capital structure and service fees on strong new issue activity, particularly within the Senior Secured Loan Program, and an increase in interest and dividend income, partially due to the return of certain loans from the legacy Allied portfolio to accrual status that were previously on non-accrual following successful restructuring.

As we have stated in the past, our structuring fee income will vary quarter-to-quarter depending on the level of originations and the mix of investments. Regarding the increase in interest and dividend income, a portion of the quarterly increase was due to nonrecurring past due interest income from prior periods amounting to about $0.03 per share in the fourth quarter.

On the expense side, we had increased expenses relative to the third quarter of 2010, primarily from accrued capital gain-related incentive management fees of $16 million or $0.08 per share, which I'll walk you through in just a moment, and excise taxes of approximately $2.2 million or $0.01 per share related to the estimated undistributed taxable income that we expect to carry over into 2011.

We experienced net investment gains for the fourth quarter of $0.47 per share with $0.22 per share of net realized gains and $0.25 per share of net unrealized gains. These net gains reflect the improved market conditions and our ability to exit investments at attractive prices that Mike previously mentioned.

Incentive management fees in the fourth quarter included an accrual of $16 million for capital gain-related incentive fees, which I referred to in our public disclosure as the capital gains fee. Under our investment management agreement with our investment adviser and consistent with statutory requirements, we only pay capital gains incentive fees if through the end of the most recently completed fiscal year, aggregate cumulative realized capital gains and losses, less aggregate cumulative gross unrealized depreciation, less cumulative capital gains incentive fees paid, is a positive number. As of December 31, 2010, there was no capital gains incentive fee payable to our investment adviser.

However, unlike the formulation in our investment and management agreement and applicable statutory authority, GAAP requires that one also consider any cumulative aggregate unrealized capital appreciation for determining whether a capital gains incentives fee should be accrued since a capital gains incentive fee would be payable if such unrealized capital appreciation were, in fact, realized. As a result of this significant net unrealized appreciation in the portfolio in the fourth quarter, the GAAP calculation as of December 31, 2010, became positive, and consequently, we accrued $16 million or $0.08 per share of capital gain-related incentive fees.

Although this accrual did not affect our Core earnings per share, it did reduce both our net investment income and GAAP earnings per share for the fourth quarter. As there can be no assurance that such unrealized appreciation will be realized in the future, the amount and timing of any capital gain-related incentive fees to be actually paid to our investment adviser in the future is uncertain since our adviser would only be paid after delivering actual realized gains to investors, subject to the terms and conditions of our investment advisor agreement and applicable statutory authority.

Our net gains for Q4, along with stronger core earnings partially offset by the capital gains-related incentive fee accrual contributed to our GAAP earnings of $0.79 per share. After paying our $0.35 per share of fourth quarter dividend, our net asset value was $14.92 per share, a roughly 3.4% increase from the last quarter.

For the full year 2010, we reported $1.43 in core earnings per share versus $1.35 in 2009, excluding $0.11 per share and $0.04 per share in professional fees and other costs related to the Allied Acquisition in 2010 and 2009, respectively. 2010 GAAP earnings per share were $3.91, including a $1.10 per share gain on the Allied Acquisition as compared to $1.99 per share in 2009.

Our net asset value increased from $11.44 per share at December 31, 2009, to $14.92 per share at December 31, 2010, an increase of over 30%. The $3.48 per share increase in NAV during 2010 includes an increase of $1.97 per share related to the Allied Acquisition. We have provided a roll forward of our NAV on Slide 29 of the fourth quarter investor presentation.

Given the elevated fourth quarter market volumes, we made significant new commitments of approximately $488 million during the fourth quarter. We experienced approximately $146 million in exits and repayments of commitments from the core ARCC portfolio, resulting in net realized gains of approximately $9 million. In addition, as Mike stated, we had significant exit and repayment activity in the legacy Allied portfolio, with such exits and repayments of commitments totaling approximately $278 million in the quarter, resulting in net realized gains of $28 million. New commitments, net of exits and repayments of commitments, were approximately $64 million.

We ended the quarter and the year with an investment portfolio of approximately $4.3 billion at fair value in 170 portfolio companies. This represents a net reduction of 13 portfolio companies since last quarter. Further, I would like to point out that 44 portfolio company investments remaining in the legacy Allied portfolio and 73 in total were less than $10 million at cost. Therefore, we only have 97 portfolio company positions greater than $10 million in value on a combined basis.

We continue to focus on reducing the number of names in the portfolio. Our year-end portfolio was comprised of approximately 40% of senior secured debt securities, with 28% in first lien and 12% in second lien debt investments, 23% in senior subordinated debt, 6% in CLO investments, 17% in equity and other securities, 13% in subordinated notes in the Senior Secured Loan Program, which comprised 20 different borrowers as of the end of the year and 1% in commercial real estate.

Now I will walk you through the changes in our yields and investment spread for the quarter. Our overall weighted average investment spread at December 31, 2010, was about 8%, a decrease of about 50 basis points compared to last year. From a yield standpoint, our weighted average yield on debt and income-producing securities at amortized cost increased from 13.1% to 13.2% quarter-over-quarter. However, our weighted average stated cost of debt capital increased from approximately 4.6% to 5.2%, primarily due to our issuance of 30-year unsecured notes in October 2010, which carry higher interest rates due to their long duration.

We expect that our weighted average stated cost of debt will increase again next quarter due to our recent 5 3/4% five-year senior unsecured convertible note issuance. I would like to direct you to our 10-K for details on our expected accounting treatment for those convertible notes.

On Slide 6, I would like to highlight our fixed and floating rate assets and our non-accrual statistics by portfolio. On a combined basis at fair value, our percentage of fixed-rate debt assets decreased from 42.9% at the end of the third quarter to 38.4% at the end of the fourth quarter. Over the same period, our floating rate debt assets on a combined basis increased fairly significantly from 35.9% to 43.3%, partially due to the increase in our investment in the Senior Secured Loan Program.

With respect to our floating rate assets, keep in mind that approximately 47% of our floating rate assets carry a LIBOR floor that is higher than current short-term LIBOR rates. Given the fact that we are benefiting from LIBOR floors at year end, we're slightly more sensitive to a sharp rise in interest rates. However, as of December 31, 2010, and pro forma for the convertible note issuance and the proceeds there from, we would have been a net beneficiary of a rise in interest rates.

Staying on Slide 6, I would like to highlight our fourth quarter strong credit performance in both the core ARCC portfolio and the legacy Allied portfolio. While the core ARCC portfolio's non-accrual statistics were relatively unchanged at 2.3% of cost and 0.3% at fair value as a percentage of the combined portfolio at the end of the fourth quarter, we experienced a significant reduction of non-accruals in the legacy Allied portfolio. As shown, the legacy Allied portfolio's non-accruing investments have declined to just 1.5% at cost and 1% at fair value as a percentage of the combined portfolio at the end of the year, down from 5.3% and 5%, respectively, at the end of the third quarter. We have continued to make progress on the remaining non-accruals in the legacy Allied portfolio in the first quarter. As a reminder, following our acquisition of Allied and as of the end of the second quarter of 2010, total non-accruing investments as a percent of the combined portfolio were 9.4% at cost and 7.6% at fair value. These decreased to 7.5% at cost and 5.2% at fair value at the end of the third quarter and further decreased to 3.8% at cost and 1.3% at fair value, respectively, at the end of the fourth quarter.

Now turning to Slide 9, I would like to outline the net gains for the quarter. We reported net realized and unrealized gains in total of approximately $94 million or $0.47 per share, with $0.22 per share as net realized gains and $0.25 per share as net unrealized gains. About 75% of the net realized gains were from exits of investments in the legacy Allied portfolio. However, the majority of the net unrealized investment gains were in the core ARCC portfolio. The total net unrealized gains primarily reflect the improved investment performance of specific investments and to some extent, higher market values, particularly for structured products and equity investments.

Slide 10 shows a summary of our debt facilities at year end. As of December 31, we had approximately $2.3 billion in committed debt facilities, with a weighted average maturity of 11.8 years and a weighted average stated interest rate of 5.2%. At year end, we had approximately $1.4 billion in aggregate principal amount of debt outstanding, of which $388 million was outstanding under our two revolving facilities, with total capacity of approximately $1.2 billion, subject to leverage restrictions. We also had unrestricted cash on hand of approximately $83 million as of December 31.

Subsequent to December 31, as we discussed earlier in the call, in January, we completed a $575 million convertible note offering and successfully extended the maturity on our $400 million Wells Fargo revolving funding facility from 2013 to 2016, with no change in pricing on the facility. We used a portion of the proceeds from the issuance of the convertible notes to pay down all outstanding balances under our two revolving facilities. And currently, we have no amounts drawn under these facilities. Since year end, we have added unrestricted cash to our balance sheet as a result of the convertible debt issuance, as well as from investment exits and repayments from our portfolio, net of new investment.

Given the excess liquidity that we have, we’ve recently elected to redeem our approximately $300 million in 6 5/8% notes maturing in July 2011, which redemption is expected to take place on March 16. As of December 31, 2010, and pro forma for the convertible notes offering, the use of proceeds therefrom to repay all outstanding borrowings on the revolving facilities and the expected early redemption of the 2011 notes on March 16, we would have available debt capacity of approximately $1.2 billion, subject to leverage and borrowing base restrictions. We believe that our liquidity level and the current favorable structure of our liabilities are highly strategic for us.

Our debt-to-equity ratio at year end was 0.45x based on the carrying value of our debt, which when reduced by available cash and cash equivalents, declines to an even more conservative 0.42x. Although this net debt-to-equity ratio is significantly lower than our targeted leverage of approximately 0.65x to 0.75x, we are pleased with our ability to deliver strong Core earnings per share at these reduced leverage levels. While we will seek to increase our leverage ratio towards our targeted range over time, there can be no assurance that this will be achieved since it will depend on, among other things, the availability of attractive investment opportunities as well as our own risk tolerance. As Mike noted before, we are becoming more cautious as the market adjusts to higher leverage levels and tighter pricing.

Lastly, as you may have seen from our press release this morning, we declared our first quarter dividend of $0.35 per share payable on March 31 to shareholders of record on March 15. As a reminder, we have paid quarterly dividends of at least $0.35 per share for 20 straight quarters, dating back to the first quarter of 2006. And with that, Mike, I'll turn the call back over to you.

Michael Arougheti

Great. Thanks, Penni. I'll say a few words about our recent investment activity, discuss our portfolio rotation initiatives on the legacy Allied portfolio, review performance stats for the core ARCC portfolio and the legacy Allied portfolio, and then highlight our backlog and pipeline before concluding. So if you don't mind, please turn to Slide 13.

In the fourth quarter, we made 15 investments across six new and nine existing portfolio companies. Of the 15 transactions, five were private equity sponsor-backed companies and 10 were non-sponsored. We believe that this mix highlights the breadth of our origination platform.

Turning to Slide 14. You can see that senior first-lien and second-lien secured debt were 59% of our investments, with another 28% invested in the subordinated notes in the Senior Secured Loan Program, which also invests in senior secured debt. As I discussed earlier, this reflects our current portfolio strategy to move incrementally up the balance sheet into higher attachment points in the current market with an emphasis on floating rate assets. Slide 14 also illustrates that we exited a significant amount of junior capital investments from the legacy Allied portfolio, with 55% in subordinated debt and another 13% in equity and other.

Now let's turn to Slide 15. And I'll highlight our cumulative progress rotating and repositioning the legacy Allied portfolio through the end of the fourth quarter. Primarily due to exits and repayments, the size of the total legacy Allied portfolio has been reduced by approximately $356 million from $1.83 billion at fair value on the acquisition date of April 1 to $1.48 billion at fair value at the end of the fourth quarter. During the nine-month period since we acquired Allied Capital through the end of the year, we generated $538 million in cash from exits to repayments of investments in the legacy Allied portfolio, including net realized gains of about $29 million.

The difference between the approximately $538 million in cash, exits and repayments shown and the $356 million reduction at fair value is as follows: we received net realized gains of approximately $29 million; we incurred approximately $83 million in cumulative net unrealized appreciation; and approximately $70 million in other portfolio changes, primarily fundings of revolvers and other commitments.

Notice, that after generating approximately $538 million in cash from these exits, the amount of investment income earned year end by the investments still in the legacy Allied portfolio is not materially different than the investment income earned by the total portfolio at April 1. As shown, our activities have increased the yield on the remaining investments in the legacy Allied portfolio by approximately 190 basis points at fair value as of the end of the fourth quarter.

We've also reduced non-accruing investments in the legacy Allied portfolio from $335.6 million at fair value since April 1 to $43.9 million at fair value at the end of the fourth quarter. During the fourth quarter, we exited $43.5 million in non-accruing investments and we restructured $135.8 million. This was accomplished primarily through the repayment of our loan to community education and related past due interest, as well as the successful restructuring of two portfolio companies, Ciena and Cook Inlet. We now expect that both Ciena and Cook Inlet will explore strategic alternatives. Since the closing of the Allied Acquisition, we have reduced non-accruing investments in the legacy Allied portfolio by over 85% at fair value.

We believe that the legacy Allied portfolio continues to provide further rotation and repositioning opportunities for low-yielding investments or those that are not core to our investment strategy. For example, as of the end of 2010, the legacy Allied portfolio contained nearly $490 million of securities at fair value that were yielding less than 10%, with an aggregate yield of 3.3%, including approximately $310 million in equity securities and non-accruing investments. Since year end and through February 25, we have generated an additional $368 million in proceeds from exits or repayments of investments from the legacy Allied book, including net realized gains of about $98 million.

Approximately $6 million of these exits were on non-accrual. These exit proceeds since year end include approximately $208 million from our recent sale of all of the CLO securities from the legacy Allied portfolio that were not managed by us or our wholly-owned portfolio company, Ivy Hill Asset Management. While the CLO securities were yielding 19.8% on a fair value basis at December 31, 2010, we realized a gain of approximately $98 million on the sale, and we reduced our exposure to an asset class that can be volatile and more vulnerable to changes in the market environment compared to other asset classes that had traditionally been included in the core ARCC portfolio. This brings the cumulative cash then since April 1, 2010, on the legacy Allied portfolio to approximately $906 million, including cumulative net realized gains of approximately $127 million.

Now turn to Slide 16 for a review of the leverage and interest coverage statistics for the core ARCC portfolio, the legacy Allied portfolio and the combined portfolio. In the core ARCC portfolio, the underlying portfolio company weighted average last dollar net leverage increased from 3.8x to 4.1x, reflecting higher market leverage levels on new transactions, particularly investments in larger companies and repayments of lower-leveraged investments.

Similarly, weighted average interest coverage declined from 3.2x at the end of the third quarter to 2.9x as of the end of the fourth quarter. For the combined portfolio, our weighted average total net leverage and interest coverage ratios moved slightly, ending the fourth quarter at 4.2x and 2.7x, respectively. Note that the portfolio statistics for the Senior Secured Loan Program are not included in the ARCC averages. At year end, the Senior Secured Loan Program had 20 underlying borrowers, with slightly more conservative weighted average total net leverage and interest coverage ratios of 3.8x and 3.2x, respectively, as of the end of the fourth quarter.

On Slide 17, we break down weighted average EBITDA for new commitments made and for the core ARCC and legacy Allied portfolios. As you can see, we invested in larger companies with an average EBITDA of over $61 million for investments made during the fourth quarter. The larger companies we invested in helped drive the weighted average EBITDA slightly higher as shown, reaching $47.4 million for the core ARCC portfolio and $36.9 million on a combined basis. Despite the increase in investments made in larger companies, we are likely to continue focusing on the core middle market, companies with EBITDA of $20 million to $50 million. And given the current strength in the high-yield market, companies with EBITDA larger than $50 million may have access to the high-yield market.

Skipping to Slide 19. You can see that the portfolio remains well-diversified by issuer. Our largest investment is in the Senior Secured Loan Program, which increased from 10% of our portfolio to approximately 13% at the end of the fourth quarter at fair value. However, as I previously mentioned, this investment was really an investment in 20 distinct borrowers as of yearend. The program continues to have no non-accruing investments as of December 31, and the largest single issuer in the program's portfolio represented under 11% of its total investments.

Given the recently increased capacity in the program, we would expect the program's portfolio diversification to increase even further as new investments are made. Following the Senior Secured Loan Program, you can see that the next largest investment is 3.4% of the portfolio at fair value and the top 15 represent just over 43% of the portfolio at fair value.

Skipping to Slide 23 is a summary of the grades for the two portfolios. As a reminder, the portfolio is graded on a scale of 1 through 4, with an investment grade of 1, defined as the lowest grade, and an investment grade of 4, defined as the highest grade with the least amount of risk to our initial cost basis. On a combined basis, the portfolio experienced 14 ratings upgrades compared to six rating downgrades, which we believe illustrates the portfolio's improved performance. In the aggregate as of December 31, the weighted average grade of the entire portfolio increased from 3 at the end of the third quarter to 3.1 as of the end of the fourth quarter.

The underlying core ARCC portfolio companies continue to experience solid comparable revenue and cash flow growth on a year-over-year basis. Weighted average revenues and EBITDA for these portfolio companies increased approximately 6% and 12%, respectively, on a comparable basis for the year-to-date period versus the same period last year. These growth trends were very similar compared to those experienced in the third quarter. The legacy Allied portfolio companies experienced modest comparable weighted average revenue and EBITDA growth of approximately 1% and 4%, respectively, for the year-to-date period over the prior-year period. Therefore, the overall combined portfolio of companies weighted average revenues and EBITDA increased year-to-date by about 4% and 9%, respectively, versus the comparable period a year ago.

On Slides 25 and 26, you'll find our recent investment activities since year end and our backlog and pipeline. As of February 25, we have made additional new commitments of approximately $173 million, all of which were funded since December 31, including 10% of these commitments in the subordinated notes of the Senior Secured Loan Program to fund Unitranche and stretch senior loans, 83% in second-lien senior secured debt and 7% in equity securities. Of these new commitments, 71% were floating rate, with a weighted average spread over LIBOR of 10.4%, and 22% were fixed rate with a weighted average yield of 12.4%.

As of this date, we had also exited $415 million of investments, of which $146 million came from the core ARCC portfolio and $269 million came from the legacy Allied portfolio. Of these $415 million of investments, 76% were fixed-rate with a weighted average yield of 20.4%. 19% were in floating rate with a weighted average spread of 6.5% and 1% were on non-accrual and 4% were non-interest earning.

From an origination standpoint, Q1 could be slower than Q4, given normal seasonality coupled with some previously anticipated Q1 volume pulled into Q4, our focus on asset dispositions due to the strength of current market asset values and lastly, our increasingly conservative view as new market terms develop.

Turning to Slide 26. As of February 25, our total investment backlog and pipeline stood at $353 million and $284 million, respectively. As I mentioned before, despite the more challenging market for new investment opportunities, our backlog and pipeline collectively remain at a level consistent with prior reported amounts throughout the course of 2010. Of course, we can't assure you that we will make any of these investments, and we may syndicate a portion of these investments.

So in conclusion, we believe we reported very strong fourth quarter and full year earnings. For 2010, we covered our dividends from core earnings per share, and we generated taxable income, including taxable net realized gains, which we currently estimate will result in a spillover of undistributed taxable income into 2011. Our net asset value per share increased over 30%, primarily benefiting from the accretive Allied acquisition, as well as from more favorable market and economic conditions. In our view, we made significant progress strengthening our balance sheet by raising attractively-priced unsecured fixed-rate capital while significantly extending our average debt maturities.

Upon consummation of the Allied Acquisition, we outlined an investment thesis that combined the strategic benefits of scale with the potential economic benefits of purchasing a portfolio at a discount to cost and fair value. This strategy has played out well for us, as demonstrated by our significant balance sheet repositioning and the substantial cumulative progress we have made rotating the legacy Allied book.

Since closing, we've exited over $778 million cost of legacy Allied portfolio investments through February 25, realizing significant gains on such exits, which total approximately $127 million also as of February 25, and reduced non-accruing investments by over 85%.

We also pointed out on previous calls that we believe the Allied acquisition created a natural hedge against an overheated market where new investment opportunities may not be as attractive. We discussed that to the extent liquidity in the markets increased, pressuring leverage in spreads in the new issue market, liquidity and values in the Allied portfolio should increase.

Now that market liquidity has in fact increased, making spreads tighter in new investments, we benefited from this liquidity through net unrealized appreciation and asset sales at attractive prices. However, our work is not done. We believe that we will continue to have the opportunity to rotate additional low or non-yielding securities in the legacy Allied portfolio into higher-yielding core investments well into 2011. For all these reasons, we believe ARCC has executed on stated strategy and continues to be well-positioned for the market opportunities that lie ahead. Thank you for your time and support today as always. And with that, operator, we'd now like to open it up to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Hecht at JMP Securities.

John Hecht - JMP Securities LLC

First question is related to, I guess, what you defined as heightened capital structuring fees and I assume, as Penni mentioned, heightened dividend income and prepay income, given the high amount of portfolio rotation and active capital markets. I was wondering, can you point to, in the intermediate term, what a decent base level we might assume would be in those categories? Because it seems like exits, so prepayment income might remain high but capital structuring fees might come down given the seasonal trends?

Michael Arougheti

Again, it's always hard to predict, John. We never set origination targets for ourselves here. Our experience has been if you set origination targets, you hit them and you wind up making investments that you otherwise shouldn't. I think what we are demonstrating, even in a more challenging environment where liquidity is prevalent and spreads are tightening and leverage levels are going up, because of the breadth of our origination infrastructure here, we continue to generate comparable levels of deal flow into the 2011 period versus 2010. It's always difficult to predict, but I think we should be able to continue on a comparable origination pace. With regard to the prepayment income, hopefully as people saw through the Allied rotation, a lot of the repayment activity and exit activity in the portfolio is as a result of our own initiatives. While we're in a market where refinancings and repayments are happening every day, we're very active continuing to rotate the portfolio to get back to what we want our core portfolio to look like. A perfect example of that is the sale of our CLO investments in this quarter, where we sacrificed a little bit of current yield in order to take advantage of what we thought were extraordinarily high market prices for an otherwise volatile asset. So there's always going to be a balance, but where we are exiting, hopefully we're making a good trade-off between any yield give-up versus any gains production. So John, the other thing I would add too is, while we're seeing pressure on spreads and we're seeing pressure on leverage levels, the one area where we haven't seen as much pressure is actually on upfront fees. And on new investments, we continue to see upfront fees between 2% to 4%. I think that's higher than you would typically see if you were just a market participant or a buyer. So being able to go out and self-originate and lead arrange and structured deals will continue to keep those numbers elevated. And so even on reduced volume, I think we're going to be generating higher percentage upfront fees than some of our peers.

John Hecht - JMP Securities LLC

And then a second related question based on some of your comments related to caution. What's driving the dynamics in the market, the leverage levels and the decrease in spreads? In your opinion, is it irrational behavior with capital coming to the market? Or is it just more comfort with the economic trends? And in that realm, are risk-adjusted spreads still to the point where you feel pretty good about the market?

Michael Arougheti

Yes, we learned a long time -- I don't think that the market is ever rational or irrational. The market is the market. And I think what's happening is there's a pretty significant technical imbalance right now. Interest rates have been too low for too long. I think most institutional and retail investors are grown tired of not generating any yield. At the same time, we're seeing a lot of institutional investors looking to get into floating rate securities in order to protect against a sharp rise in interest rates. And so we're seeing extraordinary funds flows into the bank loan asset class and into the high-yield asset class. Those technicals, as we talked about, you're seeing a lot of inflows but you're not seeing a lot of new issue supply. Now a lot of market participants will tell you that, that new issue supply is pending, and that we'll see it materialize in the second or third quarter. But once those funds flow into the market, if you're a single asset class asset manager and you can only buy high-yield long-only or you can only buy bank loans long-only, you're going to allocate that capital to whatever the existing market opportunity is. And so right now, there's a mismatch between the amount of capital that's come in to the liquid markets versus the supply of investment opportunities. I want to say, though, that our caution is not necessarily long-term caution. We learned a long time ago that these markets are volatile, and there are windows where there's a technical imbalance and they can shift pretty quickly based on economic concerns or geopolitical concerns. So what we're really doing now is being extra careful as we wait to see how this settles out. And once you know what the baseline is then you can start to make better risk-adjusted return decisions. Lastly, as you pointed out, I think that clearly in the U.S. at least, the recovery is in full effect. And while there continue to be lingering concerns over inflation and housing and unemployment, I think generally speaking, people have a fairly optimistic view, and that gets a lot of money off the sidelines and into these markets.

Operator

The next question comes from Greg Mason at Stifel, Nicolaus.

Greg Mason - Stifel, Nicolaus & Co., Inc.

Mike, on Slide 15, you highlight all of the different plans for the Allied assets. The one segment that really hasn't moved there is the equity investments. Can you talk about why you haven't seen a lot of investments from the equity portfolio yet? And what are your expectations there?

Michael Arougheti

Sure. Just first for the benefit of everybody on the phone, as we've talked about, we at ARCC are not in the control buyout business. We inherited a bunch of control buyout investments. Fortunately, at Ares Management, we have a very significant private equity capability, and we're taking our time evaluating our alternatives with these investments. But they are absolutely non-core to our portfolio strategy going forward. That said, if you think about what it takes to sell a control buyout position, and you say that we've really owned these assets for about 10 months, first, you have to go in, meet new management, you have to reconstitute the Board of Directors, you have to formulate a strategy for the company that either is continue to invest behind that company to maximize the future value or look for a short-term divestiture, et cetera, et cetera. So much of the initial, call it six months of ownership, we're really focused on making sure that we fully understood exactly what we own, making sure we have the right management teams in there, that we have the right board level support and that we laid out the right value creation strategy for those companies. Once we've done that, you can put them in different bucket. There are companies that are for sale now, there are companies that we're going to need to maybe restructure and work a little bit, and there are companies that with some fairly modest effort, either through acquiring another company, launching a new product line, buying a piece of equipment, et cetera, et cetera, we think we can meaningfully enhance value. And so now that we have a strategy for each company, we can really start to chip away at that number. All that said, from the time that you decide that you're going to sell a private company, it's typically a three-, six- or nine-month period to actually dispose of that company. It's unlike a debt security where you can go into the market and get somebody to move quickly on it. So you have to hire an M&A advisor, pull together a data room and allow people to come in and do their diligence. So I think a lot of it is really just the way that a process works for selling a private company versus selling a debt security is creating a little bit of a longer tail there.

Greg Mason - Stifel, Nicolaus & Co., Inc.

And with the potential of the repayments of the 2011 notes, I believe that carrying value today is about $4 million lower than the value you'll pay. Does that mean we're going to have about a $4 million acceleration of carrying value discount associated with that repayment in the first quarter?

Penni Roll

Well, when we repay those notes in March, we will have a loss on their repayment. And that loss will come from what we have to pay back versus our amortized costs. What we repay will include a redemption premium as stipulated under the notes. But that amount can't be finally determined until we actually get to the date of redemption.

Greg Mason - Stifel, Nicolaus & Co., Inc.

But that will not come through the interest expense line like the amortization has over the last couple of quarters?

Penni Roll

That's correct. Any remaining amount unamortized will go into loss on the extinguishment of debt.

Greg Mason - Stifel, Nicolaus & Co., Inc.

And then final one quick question for you, Penni. Can you talk about -- on the balance sheet and the shareholders' equity, the accumulated realized gains and losses went from a positive $171 million last quarter to a negative $169 million this quarter. Can you talk about the fundamentals that worked behind that?

Penni Roll

Sure. At the end of the year, when we reconcile our taxable income, we need to make a tax reclassification in the financial statements for the shareholders' equity section, which basically re-classes certain permanent-related book-to-tax differences, which includes certain merger-related items like related to Allied during the course of the year. You have certain book tax differences and basis. As you know, with the Allied Acquisition, we inherited the Allied cost basis for the tax purposes, which is different than the basis that we had on 4/1 that we booked the assets at fair value. So as a result of that, we have some built-in losses and permanent differences that are causing that reclassification to occur. I do point you to Page 40 in the 10-K that will show the reclassification that was made. And there's further discussion on it in Footnote 11 to our 10-K that will go through more details. But that's primarily the driving factors, just the reclassification of those permanent tax-related differences between capital and excess of par value and those accumulated net realized gains and losses.

Operator

Your next question comes from Vernon Plack at BB&T Capital Markets.

Vernon Plack - BB&T Capital Markets

Mike, you mentioned after the quarter that you realized a gain of $99 million on the sale of CLOs that were acquired during the Allied Acquisition. I'm curious as to how much of the value of the CLO has changed since they were added to the portfolio? Is it roughly $40 million to $50 million?

Michael Arougheti

Yes. To put that in perspective, the original cost basis on the securities that we sold was about $110 million. And we sold them for about $210 million, which is roughly the $100 million. The par value on those securities, just to get a sense for how significant the market run-up, was about $280 million. So we bought them at $110 million, they had a face value of $280 million and we wrote them up to $220 million and sold them.

Vernon Plack - BB&T Capital Markets

So essentially almost all of the CLO portfolio has been sold?

Michael Arougheti

Only in assets that we are not currently managing through Ivy Hill. So the Knightsbridge securities, the Emporia securities, any of the Ivy Hill securities, we continue to be believers that we want to invest behind those businesses. And we're in a better position than anybody in the market to really understand the value of those. So what we did was we got rid of the Callidus assets that were still on the books, the Dryden and the Pangaea assets which were not managed by us anymore.

Vernon Plack - BB&T Capital Markets

And just some clarity on non-accruals. It looks like the big adjustment was, of course, Ciena. And it looks as though, I think, at 9/30, that was an $84 million debt investment and on 12/31, the total cost basis, I think, was up to $99 million. I think $46 million was in debt and $53 million was in equity. So I assume you restructured that as well as added some additional capital to position it for...

Michael Arougheti

Yes. So remember, Ciena, when we acquired Allied, was in bankruptcy, and we had to get in there and understand the value of what we were buying. Coming out of bankruptcy, the legacy Allied senior secured debt effectively had a claim on the entire estate of Ciena, which is a combination of on-balance sheet investments as well as the residual cash flows from all of the SBA and other securitizations. And that was really the basis for the fair valuation. Now coming out of bankruptcy, being that we were now the single equity owner and single credit provider, in order to do various post-bankruptcy cleanup and other things, the company required a working capital line. So we restructured the legacy Allied debt investment into a combination of debt securities placed back on accrual plus equity and then we recommitted a capital line to the company in order for it to keep operating.

Operator

The next question comes from Jim Ballan at Lazard Capital Markets.

James Ballan - Lazard Capital Markets LLC

A lot of my questions have been either asked or answered, but I wanted to ask a little bit more about the floating rate debt and the emphasis on floating rate debt going forward. Maybe, Mike, you could talk a little bit about -- I mean, obviously, the rates can't go a whole lot lower on the short end, but maybe your thoughts on pros and cons of being in floating rate debt versus fixed rate? And also, maybe just a little more color on the LIBOR floors, like what most of those LIBOR floors are? And I think Penni mentioned it’s about half of them have LIBOR floors, but just maybe a little more color around that.

Michael Arougheti

So floating versus fixed. Again, you can look at the curve and get a general appreciation for at least what the market expects to happen. And in the long end, even since we issued our 30-year notes, as an example, we've seen an over 100 basis point increase there as well. We're big believers that we will see rising interest rates. And when you look at what we've done on the liability side, we've now pushed the weighted average duration on our liabilities out to 11.8 years. Once we resolve the '12 maturity, we won't have a maturity until 2016. And so we now we think we've put ourselves in a positive position where we will be net beneficiaries of an interest rate increase. It's not required to maintain the profitability that we've demonstrated, but we like being sensitive to rising interest rates in a positive way. When you look at the risk-adjusted returns of senior secured floating rate debt, either through an on-balance sheet senior secured term loan or a Unitranche loan and you swap it to what you can get today in the mezzanine asset class, they're almost the same. Mezzanine terms today for larger companies is pricing somewhere between 12% and 14%, and you can get Unitranches done, again, depending on the size of the company, roughly around L+800, with a floor and when you swap that over the life of the security, you're not really giving up a lot of yield relative to being senior secured in the capital structure. And so there is a little bit of a favorable opportunity now in floating rate senior secured versus fixed-rate sub debt. Again, that may fluctuate and one of the benefits that we have, given our broad origination, is if and when we see those moving, we can focus our attention at other parts of the capital structure. But for now, we like being fixed on our liabilities and floating on our assets. With regard to LIBOR floors, just to clarify, we don't have any LIBOR floors on our floating rate debt, but we do have LIBOR floors on our assets. I think the number is about 45% of our floating rate assets have floors. The interesting thing about the floors is we have been benefiting from the floors as short-term interest rates have been low. There will be a little bit of a speed bump, if you will, as you kind of get through the floor, and then you’ll become a beneficiary again. But for now, it's been a net positive.

James Ballan - Lazard Capital Markets LLC

Got it. I mean, just given that have a floating rate debt which tends to be more senior debt and the Unitranche debt and given your size and just the cautious view that you mentioned you have, is there, I mean -- do you think you'll see more of that debt coming back to -- or the assets coming back at you over the next couple of years? And maybe you could talk a little bit about the challenge of keeping the leverage at the target level based on that.

Michael Arougheti

Look, we do focus on trying to get some prepayment protection where we are senior secured and floating rate. One of the things that we have experienced as long as we've been this businesses is the benefits of incumbency are pretty significant. And where you may have to protect an asset to the extent that you are the lead arranger on a company's capital structure, you're going to get the opportunity to refinance yourself. In the middle market, unlike in the large liquid market, the amount of opportunistic refinancing is just not comparable. Now that said, you do have some sophisticated borrowers who will call and ask for a refinancing transaction in light of changing market conditions. But it tends to come to you as opposed to going elsewhere in the market. So I don't think that there's a significant risk that if market technicals continue on the trajectory that they're on, they will be losing assets, but you may have to protect the assets by getting back some spread. Now that said, when we look over the medium- to long-term as we talked about, the mitigant to that is you've got significant uninvested private equity that should, at some point, drive new issue volume and reduce competition for deals. You have maturity of CLO reinvestment periods, which should take capital out of the market, and you've got this huge wall of maturities in the middle market between 2013 and 2015 that will also be competing for capital. And so while there is some technical imbalance today, when we look out at our opportunity over the next two, three, five years, we actually don't think that there's enough capital in the market to resolve all those things that I just mentioned. So you want to be liquid, you want to be nimble, you want to have broad originations, but we have not resigned ourselves to a one directional market where we're going to be giving up spread and having to play defense on the portfolio for the next couple of years.

Operator

The next question comes from Joel Houck at Wells Fargo.

Joel Houck

Mike, on Slide 14, the increase in second-lien portfolio activity, is that related to the Unitranche that you just referenced, the LIBOR plus 800?

Michael Arougheti

I'm sorry, on Slide 14, which item are you looking at?

Joel Houck

The red box, the increase in second-lien debt in portfolio activity?

Michael Arougheti

No, that was one -- we made one large investment in a company called Sunquest. It was $145 million second lien. That was a larger company where we were willing to invest in a second-lien security behind a first-lien asset. So that is actually a second-lien investment. It looks disproportionately high just given the size of that investment relative to the investment activity in the quarter. You can see the blue bar, Joel, there of that 28% is the Senior Secured Loan Program, so we always report the Senior Secured Loan Program investment separately.

Joel Houck

And then again obviously, that drove up the weighted average EBITDA to $61 million, that second-lien investment?

Michael Arougheti

Yes, that had an EBITDA, I want to say, of about $100 million.

Joel Houck

The last question is as you look at the portfolio, we see oil now moving close to $100. I mean, have you guys gotten granular enough to look at your portfolio to see who might be both benefit as well as maybe be vulnerable to higher commodity input costs? And is there any particular area that you'd have concern about?

Michael Arougheti

It's a great question. We have about 15 portfolio management staff here, and we charged them about six months ago, given our views on inflationary pressures in the economy, to go into the portfolio and look at the impact of rising interest rates and rising commodities, oil being of one of them. But we basically looked at all of them. I think with regard to interest rates, most of the borrowers that we are invested in, we require them to hedge interest rate exposure and so we don't feel that there's a meaningful amount of interest rate risk at the underlying portfolio company level. And the good news is as you've seen historically, we tend not to invest heavily in cyclical companies that have a lot of commodity exposure. Most of our portfolio of companies tend to be high free cash flow, high-margin, service-oriented businesses in industries like healthcare. So just by virtue of the types of industries that we've historically invested in and continue to invest in, there's not a lot of cyclical exposure. And I would say when you dig in and you look at where we do have exposure, I think that there's a fair balance between where we might see a little bit of a negative pressure versus where we would actually benefit from rising commodity inputs.

Operator

The next question comes from Sanjay Sakhrani at KBW.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

I had a couple of questions. I think it's clear you guys are defensive, given where the market is. But I was hoping you could help us think about kind of the near-term trajectory of Core EPS? It seems like there's a number of puts and takes, many of which might take it slightly lower? And I was hoping you could just help us think about that. On a related topic, I was thinking about the Allied portfolio and some of the sales that you guys have made there. It seems like the yields on those loans are pretty attractive, but obviously, the market's gotten frothy. I was just wondering if you could just talk about the decision to sell versus hold at these levels.

Michael Arougheti

Sure. I'm glad you brought up that second part, Sanjay, because I think it's related. When you look at the drivers of Core EPS, they are obviously fees from new investments, dividend income from existing investments and spread income from the existing book. We, as a company, have historically guided the market to really look at Core earnings per share because we've always believed that dividend stability and dividend transparency ultimately is what is important for the investor base and for the people who've supported us as long as we've been a public company. We're in an interesting situation now with the Allied portfolio and the shape of the market, where you do have to start looking at a little bit between the interplay between GAAP earnings per share and Core earnings per share. And the CLO sale is really the perfect example. We had securities that we had bought at a very attractive price. The CLO equity securities are probably some of the most volatile assets that we have in the portfolio. If you think about what drives value there, you have an equity position in a very leveraged portfolio of loans. In some cases, they could've been levered upwards of 12x or 13x, and so they're very sensitive to changes in the spread environment and asset values generally. One of the things as an investor you have to always look at is you have to be as good of a buyer as you are as a seller, and any time that you can book a $100 million gain, you have to consider it pretty seriously. Again, we said at the time of sale, the spread at a fair value basis was about 19.8%, which meant that if you take the $200 million at fair value, just to simplify the math, and you said it was generating 20%, we basically pulled forward 2.5 years of investment income into capital gains that's now available for distribution to shareholders. I think a lot of people make the mistake sometimes of trying to manage their earnings for quarterly performance and not really looking at long-term shareholder value creation. But the opportunity to book $100 million gain today against what were high core earnings was pretty obvious to us, particularly given the volatility there. I think the good news is now with the rollover of undistributed taxable income from 2010 to 2011 of about $0.30 a share, the gains that we're currently generating in the first quarter and the low leverage that we have really put us in a position where again, we feel like we've got the right "hedge" in place, meaning we can be in market, we can be active, we can maybe sacrifice a little bit of yield if we need to in order to maintain the risk-adjusted return profile. But the all-in shareholder value opportunity is intact and as good as it's been for us. So you may see one quarter where we de-emphasize originations as we talked about in our prepared remarks because we don't like the market or because the market is transitioning. And in those environments, you'll probably see us be a net seller, but where we're selling, we're generating distributable income. And then if the market transitions back to where we think we can generate higher spread on new investments, you'll see us do that potentially in lieu of selling assets. So it's dynamic. But really, for the first time in a very long time, I think it's important that people think about both our Core and our GAAP EPS, not just our Core, given the opportunity that resides in the Allied book.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Just the near-term trajectory of the Core EPS, though?

Michael Arougheti

Well, we don't give any guidance on that. And it's always a function of what our new investment opportunities are. So again, unfortunately, we can't guide people as to what we think our EPS or our dividend trajectory are going to be. All we can really do is highlight how we generate Core EPS and leave it to you guys to figure out what we're capable of.

Operator

Our next question comes from Arren Cyganovich at Evercore.

Arren Cyganovich - Evercore Partners Inc.

If you could just help me understand, Penni, the differences that you were talking about in terms of the incentive fees in the $16 million? Did you say that was due to a taxable versus GAAP treatment of the gains associated on the capital gains fee?

Penni Roll

Well, the incentive fee calculation for GAAP purposes is the difference between the GAAP calculation and the contractual calculation. The GAAP calculation requires that you include, as part of the equation, the unrealized appreciation generated in the portfolio in addition to the net realized gains and losses and cumulative unrealized depreciation you would consider contractually. So when you add that unrealized appreciation into the equation, we end up with a positive number at the end of the year because of the appreciation recorded in the fourth quarter. And as a result of that, we needed to accrue about $15.6 million of incentive management fees on a GAAP basis, albeit there is no contractual obligation at the end of the year to pay anything under the agreement because you do not pay fees on unrealized gains or losses.

Arren Cyganovich - Evercore Partners Inc.

When did that balance out? Is there eventually a reversal? Or how do you think about that?

Michael Arougheti

You look at it quarterly to see where you are on an unrealized and realized basis, gains versus losses. It's interesting. The statute prohibits us from making a fee until an investment is realized. So if you look at our investment advisory agreement, basically the formula is realized gains less realized and unrealized losses, and if you do that calculation, then you're below the high-water mark to the tune of $200-plus million. If you look at the cumulative unrealized appreciation, just given the performance of the portfolio, it creates, to Penni's point, roughly $100 million of positive appreciation on a cumulative basis. And so GAAP requires that you take an accrual of the incentive fee, even though it's not payable under the four corners of the investment advisory agreement and frankly not payable as per the statutes. Back to my earlier comment on Core versus GAAP, hopefully it's not lost on people. What that means is in order for us to get paid that fee, that would mean that we would have to realize gains of $100 million that are distributable to shareholders.

Arren Cyganovich - Evercore Partners Inc.

And then just for clarification, you had $490 million roughly of the low-yielding, non-yielding securities, legacy Allied securities. Of the $269 million that you exited, what was that amount that's related to the $490 million?

Michael Arougheti

I'm sorry, can you repeat the question?

Arren Cyganovich - Evercore Partners Inc.

You had $488 million or so of low-yielding, non-yielding Allied legacy assets at the end of the year. Then you sold $269 million of legacy Allied assets year-to-date. What proportion of that is of that...

Michael Arougheti

The big chunk of that was the CLO securities. So if you looked at Page 15 of the investor presentation, you can see the $488 million number at the top of the page there. And then the CLO securities that we talked about, that's kind of at the bottom of the page. You could see the 19.8% yield on the $160.8 million. So subtract that out. And then in terms of the remainder, we give you a little bit of a breakdown on Page 25, but we also had a pretty significant exit of a mezzanine investment that was higher-yielding below that was about $90 million. So the bulk of it actually came below the line.

Arren Cyganovich - Evercore Partners Inc.

And then lastly, the convertible debt issuance you had, are you treating the diluted share count on an if-converted method for that?

Penni Roll

Well, we expect we'll be doing that on an as-converted basis on a net share settlement because at this point -- and we'll have more disclosure on that in our 10-Q as we wrap up the March quarter.

Operator

The next question comes from John Stilmar at Robinson Humphrey.

John Stilmar - SunTrust Robinson Humphrey, Inc.

The first one, Mike, is for you on the Senior Secured Loan Fund. Can you talk to me about what your sort of business plan or thoughts are around the pace of this? I know it's not a quarterly business, but are you looking to use the remaining capacity over 12 months, 24 months? Is there some general guidepost that you can lay out for how you're going to use this pretty strategic asset?

Michael Arougheti

Again, we can't give guidance, and in many respects, we don't control the pace of deployment. I'll reiterate some things we've talked about on prior calls. Number one, it's an extraordinarily compelling value proposition to the market. The ability to come in with the fund and invest $300 million in a buy-and-hold basis in support of a company's capital need is very difficult to replicate, if anybody can replicate it at all in this market. If you then couple that $300 million of capacity with our own capacity on balance sheet and within Ivy Hill, we can bring $400 million to $500 million of capital to bear to a specific situation, which again, I think, is very compelling and competitive. If you look at the share of market that, that fund is taking, I think it indicates that the market really likes the product and really understands the value proposition in terms of ease-of-use and certainty of close and the like. So the one thing I can tell you is, I think the market really likes the product, and as a result, we're seeing a lot of uptake and we're also seeing a lot of repeat borrowings within the program. So what we're finding is once a sponsor group uses the Unitranche Fund or the Senior Secured Loan Fund, they've had a positive experience and they tend to come back to it, which should accelerate deployment there. The other thing I would highlight, and we talked about this last call, too, is at least in the dollar-invested basis, it is probably the most attractive risk-adjusted dollar that we can invest on our balance sheet today. So all else being equal, we would prefer to invest in that fund versus investing on balance sheet and even senior secured or mezzanine. Now those decisions again are dynamic. Sometimes you don't have the opportunity to structure Unitranche, sometimes based on the nature of the cash flows or the risk profile of the company, you'd rather not do a Unitranche, you'd rather do a senior loan or a mezz loan. But again, most of the time, structured appropriately, the Unitranche product in the Senior Secured Loan Program is our most attractive risk-adjusted return. So where we can, we're trying to drive investment to that fund.

John Stilmar - SunTrust Robinson Humphrey, Inc.

And remind me, I think, the statistics were earlier, in which the credit profile of that fund relative to the core Ares portfolio, and the differences? So does that mean that not only -- is the low-risk assets that you're just putting a little bit more leverage on top of is really how we should be thinking about that?

Michael Arougheti

Well, remember, a Unitranche -- and it means different things to different people can really take one of two forms. It can be a stretch senior product, where the market may be willing to finance a pure first-lien senior debt investment at 3.5x and let's say, a mezzanine investment at 5x. A Unitranche could be a stretched senior loan, where you maybe provide 4x to 4.5x turns. Or in its most traditional sense, it was a senior secured loan that effectively disintermediated a senior mezz structure and went all the way to 5x leverage. If you look at the statistics that we quoted in our prepared remarks, it's a combination of both in the fund because the weighted average total leverage in that program is 3.8x, and the weighted average interest coverage is 3.2x. There's 20 borrowers, there's very healthy diversification, there are no loans on non-accrual. So they tend to be very high quality borrowers, and when you look at the leverage and coverage statistics, they're actually slightly better than the ARCC portfolio but pretty comparable.

John Stilmar - SunTrust Robinson Humphrey, Inc.

And then shifting to try and put a finer point on the very obvious cautious tone that you're taking with regards to middle-market originations, if I looked back, for instance, in the March quarter, it looks like the majority, just as a comparable, the majority of your investments were second-lien there. And then if I look at the activity that you've made so far in 2011, some of the majority of that activity was Senior Secured Loan Fund plus some second-lien investments. And you had a pretty big second-lien investment this quarter as well. So if I look at the activity, what are the things underneath the surface that we may not be seeing that we may just be looking for if it's first-lien, second-lien or some general structure that we might not see that are very big differences between the types of loans that might have been done before versus the types of loans that are done today?

Michael Arougheti

Well, the types of loans that are being done today again, generally speaking, are better structures. And you also have to look at what's happening in the larger liquid market versus what's happening in the middle market. I don't want anybody on this call to interpret our cautious tone with an inability to find attractive risk-adjusted return in this market. It's just that when you look at funds flows into the liquid credit markets and what's happening there in terms of opportunistic refinancings, some structural weakness, spread tightening, increased leverage levels, you have to pause and wait to see which direction the market is going to go and accumulate information before you aggressively invest. So I want to be clear that when you look at our backlog and pipeline, we have a backlog and pipeline cumulatively in excess of $600 million. So we're out in the market, we're finding attractive investments to invest in, and we're thrilled to own those investments at the risk-adjusted return that we're currently structuring. But behind that, when you look at what's happening in the large liquid market, you have to just look at it with caution because there are significant amount of dollars coming into a market chasing not a lot of new issue supply. And as a result, you're beginning to get data points on leverage and fees and structure and spread that were they to meaningfully creep into our market would change the opportunity. So again, the market is transitioning is how I would describe it. And whenever it's transitioning, we always tend to be conservative and cautious until we have a very firm view as to what the direction is and then we can start to evaluate medium-term and long-term strategy. But the speed with which the market has changed, our CLO security sales are a perfect example of how values in the liquid credit markets have meaningfully changed in the last couple of months. So whenever we're in that environment, it's really a yellow light, not a red light.

John Stilmar - SunTrust Robinson Humphrey, Inc.

And then a final question and I know you can't give guidance and we've asked -- all of us have probably asked 13 different ways on previous conference calls with regards to the dividend, but is there any thoughts around the timing at which you would probably re-address or think about it rather than getting into the specifics of what it's going to be?

Michael Arougheti

Well, I think about it all the time. As a dividend payer, that's what you guys pay us to think about. I've always hoped that the market would reward earnings performance and earnings consistency versus dividends. And I think where the market made mistakes in the prior cycle, I don't think that we did but some of our peers did, was a mismatch between dividends and earnings or potential earnings and dividends. And as we demonstrated in 2010, we generated core earnings of $1.43 and we paid $1.40 and we rolled over undistributed income. We're running at very low leverage levels and there's a lot of opportunity in the portfolio. So I would just emphasize, I think there is a fair amount of earnings capacity in the business is it’s currently structured, but we are not here to develop strategy around a dividend. We let our investment views and our portfolio views really drive ultimately what that dividend is. And at least from my personal perspective, I would hope that there is a high premium placed on dividend stability, and again, dividend transparency and dividend consistency as much as there is dividend growth because at the end of the day, if the earnings are growing by definition because of our payout requirements, the dividend has to follow at some point. And that's kind of how we've always thought about it. If the earnings trajectory requires it, then ultimately that's what would drive a dividend increase. But we're not really setting targets for ourselves again. I think that's a mistake. I think once you start doing that, you start to make day-to-day investment decisions and portfolio management decisions that are not in the long-term interest of shareholders.

Operator

We have time for one more question. That question is from Faye Elliott, Bank of America Merrill Lynch.

Faye Elliott - BofA Merrill Lynch

Quick question to follow up on the LIBOR floors. Can you give us a sense where those are set? I'm sure not the same for every contract, but just an idea of where rates would have to get before we see the benefit of rising rates?

Michael Arougheti

Sure. We don't disclose that, but I'll just give you a general sense for what the market is. Throughout 2010, I'd say the average LIBOR floor structured into assets that were comparable to those that we were booking was probably 150 basis points. Again, given the market tone right now and, I think, increasing conviction on rising interest rates, there's even pressure now on floors. And so current floors are starting to get booked in the LIBOR at equal to 100 range. And my sense is that as the market continues to develop and conviction around interest rate increases continues to come together, I think you'll see floors probably disappear over the course of 2011.

Faye Elliott - BofA Merrill Lynch

And is that because it would become more of a borrower's market? Or is that just because...

Michael Arougheti

I think it's a combination of just the shape of the forward LIBOR curve combined with some of the technical things I described earlier in terms of what's happening in the liquid markets.

Operator

And this time, we have no further questions. Would you like to meet any closing remarks?

Michael Arougheti

No, only to again thank everybody for spending so much time with us today and for your continued support. And we look forward to speaking with you again next quarter. Have a great day.

Operator

Ladies and gentlemen, that does conclude our conference call for today. If you've missed any part of today's call, an archived replay of this conference call will be available one hour after the end of this call through March 16, 2011, to domestic callers by calling 1-877-344-7529, and to international callers by dialing +1-412-317-0088. For all replays, please reference account number 447272. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.

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