Ares Capital's (ARCC) CEO Kipp deVeer on Q2 2016 Results - Earnings Call Transcript

| About: Ares Capital (ARCC)

Ares Capital Corporation (NASDAQ:ARCC)

Q2 2016 Earnings Conference Call

August 03, 2016 12:00 PM ET

Executives

Kipp deVeer - Chief Executive Officer

Penni Roll - Chief Financial Officer

Analysts

John Hecht - Jefferies

Richard Shane - J.P. Morgan

Dough Mewhirter - SunTrust

Ryan Lynch - KBW

Terry Ma - Barclays

Arren Cyganovich - D. A. Davidson

Hugh Miller - Macquarie Research

Robert Dodd - Raymond James

Ben Herbert - UBS

Christopher Testa - National Securities Corp

Operator

Good afternoon. Welcome to Ares Capital Corporation's Second Quarter Ended June 3o, 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a remainder, this conference is being recorded on Wednesday, August 3, 2016.

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 its SEC filings. Ares Capital Corporation assumes no obligation to update any forward-looking statements. Please also note that the 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 core EPS which is a non-GAAP financial measure as defined by the SEC Regulation G. Core EPS is the net per share increase or decrease in stockholders' equity resulting from operations less professional fees and other cost related to the propose acquisitions of American Capital, realized and unrealized gains and losses, any capital gains, incentive fees attributable to such realized and unrealized gains and losses, and any income taxes related to such realized gains and losses. A reconciliation of core EPS 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 accompanying slide presentation for this call by going to the company's website.

The company believes that core EPS provides useful information to investors regarding financial performance, because it is one of the 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. As a reminder, the company's first quarter ended June 3o, 2016, earnings presentation is available on the company's website at www.arescapitalcorp.com, by clicking on the Q2 '16 Earnings Presentation link on the home page of the Investor Resources section. Ares Capital Corporation's earnings release and 10-Q are available on the company's website.

I will now turn the conference call over to Mr. Kipp deVeer, Ares Capital Corporation's Chief Executive Officer. Please go ahead, sir.

Kipp deVeer

Thanks, Dan. Good afternoon and thanks to everyone for joining us today. Let me start today’s call by mentioning our pending merger with American Capital which will bring together the two largest business development companies in the industry and a transaction that we believe will generate both immediate and long term value for all shareholders.

We expect the transaction will be immediately accretive to our core earnings per share and we also see long term earnings that may serve as a catalyst for dividend growth at ARCC. Pro forma for the transaction, we currently estimate the company will have over $12 billion of assets. We believe this increase in scale will enhance our leadership position in middle market direct lending and give us the ability to originate and hold ever larger transactions, which we think it improve the business and shareholder returns over the long term.

As you may know, we have filed a registration statement and preliminary joint proxy with the SEC. And during this registration period, we are extremely limited in what we can discuss. Once finalized, we and ACAS will embark in a proxy solicitation process to achieve the records of shareholder approvals for the merger and we’ll be happy to engage in a more detailed dialog with our shareholder at that time. In the meantime, please understand that we will not be able to answer any questions related to the merger on today’s earnings call.

Transition to our results, we’re pleased with ARCC strong second quarter earnings. We delivered basis and diluted core and GAAP earnings per share of $.0.39 and $0.50 respectively, including net realized gains of $0.10 per share.

This morning we declared a third quarter dividend of $0.38 per share which is consistent with the quarterly dividend we paid shareholders for the last 16 quarters beginning with the third quarter of 2012.

We also continued to grow net asset value quarter-over-quarter from $16.50 at March 31st, to $16.62 at June 30th. Overall, we are pleased with how the portfolio and a company as a whole are performing and we’re excited to provide updates on some of our more notable activities and projects.

But first I’ll provide a few thoughts in the market environment. The leverage lending market rebounded in the second quarter after a rocky finish to 2015 and start to the year. We continue to see elevating interest in direct lending from our global investor base, however, most of our focused on private investments and private funds. From advantage point, we are having trouble reconciling this strong global demand for direct lending assets and the attractive returns they provide versus the tapping demand for investing for investing in high quality BDC’s holding similar assets.

We believe that ARCC trading below book value is an attractive proposition for investors particularly in a world dominated negative real interest rates. with this much inconsistency and investor approach to the asset class, we continue to focus on playing what we consider the long game and intend to continue to do what we’ve done since our IPO, create shareholder value and let the rest take care of itself.

The themes on the supply side of the market remained pretty consistent and that continue to retreat from lending the middle market companies and our clients seem the value as more and more. ARCC’s size and scale is always been a key competitive advantage as we are able to offer fully financing solutions to our borrower natural sponsor clients.

Many of you may have seen our announcement that we are leading a $1 billion unitranche financing to support the take private of Qlik Technologies. This is a prime example of how we are able to drive selectivity, aggregate high quality assets and generate consistent and meaningful fee income. The Qlik transaction is expected to close in the third quarter.

We have been busy on a number of interesting opportunities. However, we are forces to be quite selective in today’s market. We’re finding many new investment opportunities that simply do not make it passed our credit filter.

Loan volumes were light in middle market during the second quarter, terms are more competitive, structures were looser and pricing is tightened with the lack of supply of quality deal flow. And the ARCC’s new investment activity was light as well with growth commitments of $540 million.

We saw access of $759 million of commitments as a result of sales, syndications and pay downs in the second quarter and we experienced a net reduction in our portfolio of about a $170 million. With this, we’ve seen some deleveraging of the company with our net leverage ratio declining to 0.70 times at the end of the second quarter.

Before we move to the detail discussion of our financial results, I’d like provide an update on our senior direct lending program. As many of you know, last summer we announced an exciting partnership with Varagon Capital Partners and AIG as a strategic investment partner. Over the last year we’ve been busy building our portfolio loans to middle market companies which I am pleased to announce we sold to the program last week.

The SDLP portfolio is now $926 million of funded assets comprised of first lean senior secured loans to ten borrowers. Initially the program has investment capacity of approximately $2.9 billion and the program may invest up to $300 million in an individual loan.

We are happy to have this program fully operational and we look forward to its attractive returns and the growth contributing to our future earnings result to ARCC.

Now I’d like to turn the call over Penni, our CFO to discuss our second quarter financial results and to provide details on our recent financing activities.

Penni Roll

Thanks, Kipp. Our basic and diluted GAAP net income per share for the second quarter of 2016 was $0.50 compared to $0.42 for the first quarter of 2016 and $0.47 for the second quarter of 2015.

Our basic and diluted core earnings per share were $0.39 for the second quarter of 2016 as compared to $0.37 for the first quarter of 2016 and $0.37 for the second quarter of 2015.

Our higher GAAP earnings in the second quarter were primarily driven by net gains of $0.16 per share compared to first quarter net gains of $0.06 per share. Our higher core earnings in the second quarter were primarily driven by lower interest expense following repayments in the first half of this year of our higher cost convertible notes and a corresponding increased utilization on our lower cost revolving credit facilities.

As of June 30, 2016 our portfolio total $8.9 billion at fair value and we had total assets of $9.2 billion. At June 30, 2016 the weighted average yield on our debt and other income producing securities at amortized cost was 9.8% and the weighted average yield on total investments on amortized cost was 98.9% as compared to 10.1% and 9.2% respectively at March 31, 2016. The declines in our portfolio yields were primarily driven by the drop in our yield on our SSLP subordinated certificates which declined from 11.75% as the end of the first quarter to 10% as of the end of the second quarter.

The decline in yield is primarily due to the $1.2 billion of repayments in the SSLP during the second quarter. Over the last year, the SSLP portfolio has declined $3.8 billion from $10 billion at June 30, 2015 to $6.2 billion as of June 30, 2016. Despite the fact that our yield on our SSLP subordinated certificates has declined overtime has anticipated, we have continued to generated core earnings that are in line with or better than the second quarter of 2015, the last quarter before the SSLP began to line down.

Additionally as the yield on our SSLP subordinated certificates declines overtime, so too does the risk as a senior notes outstanding ahead of our subordinated certificates are repaid. Therefore we believe, we continue to receive a strong risk adjusted return on our investment in the SSLP and we are content with the status quo.

As Kipp mentioned, the SDLP was launched in July and win Varagon Partner to complete the initial funding of the SDLP. As part of the initial funding, we sold $474 million of funded first lean senior secured loans to the SDLP and we provided $194 million of capital through our investment in the subordinated certificates to support the acquisition of the initial funded portfolio by the SDLP. We estimate the initial yield on our SDLP sub-servicer will be at least 13.5% against the weighted average yield on the loans we sold to the SDLP a 7.3%. Overtime with the more diversification in the program, we expect to see the potential for even strong returns on this investment.

We also continue to generate solid net realized gains from our portfolio. For the second quarter 2016, our net realized gains on investments totaled $33 million or $0.11 per share largely from realizations in North American partners and Anesthesia and Netsmart Technologies. We also had unrealized gains on investments of $18 million or $0.06 per share. These gains include the negative impact of 24 million or $0.07 per share from reversals of net unrealized appreciation related to net realized gains on investments.

Stockholders' equity at June 30 was $5.2 billion resulting in net asset value per share of $16.62, up 0.7% compared to a quarter ago. As of June 30, 2016 we had approximately $4.8 billion in committed debt capital consisting primarily of $2.5 billion in aggregate principal amount of outstanding term indebtedness, and $2.2 billion in committed revolving credit facilities.

During the second quarter 2016, we repaid $230 million of aggregate principal amount of our 5.8% convertible notes at their maturity in June. All term debt maturing in 2016 has now been repaid and as we look forward, our term debt maturities in 2017 totaled only $163. After repaying unsecured term debt in the first half of the year, approximately 52% of our total committed debt capital and 65% of our outstanding debt at quarter end was in fixed rate unsecured term debt.

The recent repayment of the convertible notes help to further reduce the weighted average stated interest rate on our drawn debt capital to 3.9% at June 30, 2016, down from 4% at March 31, 2016.

In the last year, the weighted average stated interest rate on our drawn debt capital has declined by about 100 basis points resulting in lower interest expense.

As of June 30, 2016, our total debt-to-equity ratio was 0.74 times and our debt-to-equity ratio net of available cash of $102 million was 0.72 times. At June 30, 2016, we had approximately 891 million of undrawn availability primarily under our lower cost revolving credit facilities subject to borrowing base leverage and other restrictions.

Finally, as Kipp stated, we declared a regular third quarter dividend of $0.38 per share. This dividend is payable on September 30th, just all quarters of record on September 15th, 2016. In addition, we estimate that undistributed taxable income carried forward from 2015 into 2016 was approximately $258 million or $0.82 per share. We believe that our current dividend level remained well supported by our earnings but this spillover income does provide additional cushion in that regard.

And now I’d like to turn it back to Kipp for some additional comments.

Kipp deVeer

Thanks, Penni. Let me spend a few minutes discussion credit quality in the portfolio. We continue to see growth in our underlying portfolio companies despite the slow growth microenvironment with LTM EBITDA at our corporate borrowers increasing approximately 7% year-over-year. Non-accruals remained low at 1.3% of asset at cost and 0.7% at fair value just in line with last quarter.

On quarter’s call, I spoke about improvements at Universal Lubricants one of our larger investments, they return to accrual status in the first quarter. I am pleased to report that we repaid on over $40 million of our investment in the company at cost during the second quarter as the company’s largest division was sold. We now have a smaller loan to the remaining company that continues to improve interest, the fair value of our investment is well in excess of our current cost basis in the company and we’re to achieve further pricing.

Additionally post quarter end, we’re fully repaid on our second lean loan to Primexx Energy, one of our oil and gas investments which we previously marked below par due to the decline in commodity prices and the perception of increased risk in the name. This prepayment came at a premium to par.

We believe that our ability to manage through our underperforming investments and to manage our watch list as a meaningful competitive advantage for ARCC and has helped differentiate us as one of the few BDCs to consistently deliver NAV growth overtime.

And before I conclude, let me provide some quick comments on our post quarter end activity. From July 1st through to July 27th, we made new investment commitments totaling $469 million and sold are exited $752 million during the same period which allowed for some further post quarter end deleveraging.

This investment activity includes launching the SDLP and the related asset sales as Penni discussed earlier. Beyond this, as of July 27th, our total investment backlog and pipeline stood at approximately $555 million and $525 million respectively. These investments are all subject to final approvals and to documentation and we can assure that they’ll close.

So in closing, we are pleased with the performance this quarter. We delivered an increase in book value, meaningful realized gains and continued solid credit performance. We continue to see earnings benefits from our initiative to lower our cost of capital and we have ample liquidity to continue invest in what we believe to be best in market companies. We are confident that ARCC is well positioned today with a stable well covered dividend and a demonstrated ability to consistently generate realized gains in excess of realized losses. And with the launch of SDLP, we now have a highly strategic higher yielding asset on our balance sheet that we believe can grow overtime.

Finally, we are excited about the benefits that we believe our announced acquisition of American Capital will provide to our shareholders. We are confident in our ability to execute on the integration and we believe the repositioning of their portfolio will generate earnings accretion which may catalyze dividend growth in the years to come.

That concludes our prepared remarks. Dan, can you open the line for questions please.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from John Hecht of Jefferies. Please go ahead.

John Hecht

Good morning, guys and congratulations on the SDLP up and going and thanks for taking my questions. And on the SDLP, I know Penni you did mention some of the improvement in yield coming from that portfolio, I am wondering is this - I assume it’s a unitranche focus portfolio and can you guys maybe set some way kind terms along with yields are getting maybe leverage and so forth?

Kipp deVeer

I’ll tell you, it’s a pretty similar portfolio John in the types of investing that we doing in the old SSLP program. So it’s obviously everything is first lean you know that will range from traditional lower leverage maybe 4 times bought unitranche deal up to something it has higher leverage. And looking the market today 4 to 5 time leverage first lean deal generally make you something between 6% and 8% all in.

John Hecht

Okay. And on the SSLP, is there - at any point in time is it possible for you just to make an offer to that through the SSLP and just wrap the assets in that pool or is that not possible given the structure?

Kipp deVeer

Yeah, we would like to, we obviously need in the wine-down of SSLP we continue to be partnered with GE and obviously they have largely exited you know the capital business and they’ve certainly exited this finance business. So we have made every attempt to do that and I’d say that GE is just not focused on it today where it’s hopeful that we can gain their focus and do exactly what you are laying out, but we haven’t had any luck so far. Conceptually to just answer your question more completely, could we use SDLP to refinance endure by the SSLP portfolio? I think we absolutely could.

John Hecht

Okay, that’s helpful. Final question Kipp, you mentioned you know there you know I guess the quality, you mentioned a quality of deals are good enough for you guys to get more aggressive, is it the fundamental of the businesses you are referring to or is it the terms and the structures of the deals or is it some sort of combination there?

Kipp deVeer

Yeah, I think it’s a little bit everything. I mean look the end of last year was pretty tough times in leverage finance. In the beginning of this year has a real slow start, so it’s finally picked up a bit. I would tell you that I think we and couple of our competitors that tend to be first calls for most sponsors and frankly a lot of them are market advisors, borrowers, et cetera are still seeing pretty good deal flow. But we are also just seeing a lot of things that frankly because of sector in particular you know is interesting for all reasons. And look I would tell you with a lack of activity in the market, terms tend to get worst and documents tend to kind of losing up and covenants don’t look as good. So we passed on a whole hosted transactions over the course of really even last six months for all the reason you sided, yeah, companies specific like terms, specific like pricing. And I do think that we get a first look, I made all the things that we want to get a first look at based on our origination platform and the relationships that we have in our history but it’s just yield fewer quality names for us right now.

John Hecht

Great, thanks very much, guys.

Kipp deVeer

Yeah, thanks John.

Operator

And our next question comes from Richard Shane of J.P. Morgan. Please go ahead.

Richard Shane

Hey guys, thanks for taking my questions. Kipp you made really interesting point at the beginning of the call talking about the strong interest in private funds and the disconnect between what we are seeing implicitly in valuations for the BDCs, obviously you guys are very sophisticated and when you are having those conversations, what’s the feedback you are getting to explain that and when you presumably highlight to potential investors the ability to buy similar assets at a discount, what’s the pushback you get?

Kipp deVeer

Yeah, I could give you an extremely long answer to that question but I’ll try not to, but I’ll try to get to a good answer which is I’d say on one side of the discussion, we are seeing the frustrated fixed income investor reposition their portfolios into direct lending because of obviously the interest rate environment and sort of what their alternative are in core fixed income and that’s everything from, how high grades to mortgages, anything else that they potentially buy including liquid loans and high yield and all of that and folks have decided that taking a portion of their fixed income portfolios into something that is liquid to achieve better yields and better risk adjusted returns or something if they are willing to do. So we’re seeing lot of repositioning on that front form kind of core fixed income.

On the other side of it, we are seeing quite a lot of investors coming from the longer term locked up where all the private equity where they maybe haven’t generated you know the returns that they were hoping for and think of direct lending as something that is less risky, it doesn’t have curve offers, yield along the way and offers take a number 60%, 70%, 80% of the return that they might be looking for in private equity with just a lot risk.

So I don’t think we are the only one experiencing those trends but you know our credit business as a whole has about 60 billion of assets these days. We get to take a look at what these investors are hoping to achieving in a wide verity of ways and those are kind of the two big trends. When I tell them that they should buy ARCC stock, the answer usually is we don’t buy stocks, right, that’s what our equity group does. And it’s just a little bit of square begging around whole sort of discussion. I think that the reason that they don’t buy stocks as they frankly don’t want to see an asset that prices daily right, they don’t want to be subject to the market volatility of a public BDC of which there has been quite a lot way. And it’s odd because there hasn’t been a whole heck of lot of volatility in either our dividend or our NAV over the course of the last three years. But the stock tends to more around a big and I think that’s the reluctance to those investors have to buy BDC stocks.

Richard Shane

Okay. Thank you.

Kipp deVeer

Thanks Rick.

Operator

And our next question comes from Dough Mewhirter of SunTrust. Please go ahead.

Dough Mewhirter

Yeah, good afternoon. So just two questions about the market, first more conceptual question, so you described somewhat slow market where maybe competitors where maybe competitors are little aggressive which makes you less aggressive which is very prudent. But now you have this opportunity, we actually have a lot of more capacity with the pending ACAP’s merger and Varagon opening up. What are your - do you have sort of a plan A, B and C in terms of what the market would look like a year or two from now when you are trying to fill all those extra capacity and how are you handicapping those different scenarios now as you are going into 2017?

Kipp deVeer

Yeah, I mean I think the key for us first thought is we’ll syndicate less so if you take a click, we’ve talked about this a little bit, we are certainly not holding a billion dollar financing at ARCC, we have large hold there but that’s a classic deal where you are underwriting a large of deal and instead of holding what we are going to hold 150% of what we are going to hold simple because of portfolio concentration, thoughts are the same, it’s just larger numbers.

I don’t think I can forecast what the market will be like in two or three years, I think if I had to guess, it will probably be further along in the credit cycle with more defaults rather than last and I am hopeful that it be a better reinvestment environment and perhaps it is now but I would just be speculating that might be speculating.

I think the key for our shareholders is to see with the larger company that we are investing in the business, right. So I expect that we’ll bring more people on, I expect that we will widen the fair way in terms of the types of investing that we are doing. And that means covering more sponsors, that means being more active in our project finance and potentially our oil and gas business and venture lending business and again looking another verticals that we can be in, so more capital just give you the ability to do more obviously. And we’ll staff up as needed and we’ll broaden our reach as needed.

Dough Mewhirter

Okay, thanks for that, that’s helpful. My second question is maybe a smaller scale question but still marker related, you say you’ve passed on a bunch of deals as you didn’t like the terms relative to the prospects of the companies, are those deals still getting absorbed by the market or a lot of them just not or just falling apart, so you are taking them up or banks or private funds taking them up?

Kipp deVeer

They are generally all getting done by the competition. So that’s okay with us. We are in the business and not creating future credit issues, and obviously deals that we passed on or deals that we think not necessarily we’ve have problems but I would yeah, generally it’s not banks, more and more the banks that were treated from the middle market leading business it’s getting filled by you know some newer interest but also some existing players, you know the transaction for right now seems to be underwrite of 6 times levered deal with a 9 times total leverage covenant for the life of the deal. So we’re not going to do that. But we’ve seen a couple of people do that in the last eight weeks, that’s just an example of something that I don’t think we want to be part of some. The good news is we have plenty of folks out finding quality deal for the company and we can pass on things.

Dough Mewhirter

Okay, thanks. Once again very helpful and that’s all my questions.

Kipp deVeer

Okay, thanks Doug.

Operator

And our next question comes from Ryan Lynch of KBW. Please go ahead.

Ryan Lynch

Good afternoon. And first congratulations on the launch of SDLP fund. My first question is actually surrounding that, so you guys of code a yield on investment about 30.5%, is that more of a steady state yield, did you guys expected generate off that investment and not including in your origination fees meaning if that fund as the SDLP is expected to grow and you guys are start collection origination fees on that fund, do you expect that 13.5% can actually go up and maybe meaningfully?

Kipp deVeer

Yeah, I’d have to actually go back and look. I would say that the run rate of fees of the early investments probably touch lower we’d expect on a go forward basis, just in that we were converting some of our existing portfolio companies into the structure. But more than that look as you build diversity in these programs, you tend to achieve more efficient kind of cost of capital and I think that’s what we are working toward. So with greater diversity I think the return should improve.

Penni Roll

With respect to the fess themselves, the initial kind of estimate of the 13.5%, I think that will - idea will be at least that on our SDLP sub-servicer that is the return on those search that is not include of the fees that we were earned. So the 174 million of loans that we’ve sold into the program, we are in the fees on when we originally done, due to deals that will be funded directly by the SDLP, we will earn those fees outside of the yield on the sub-servicer, so it will be the 13.5.

Ryan Lynch

Okay, great. So now with the SDLPs up and running, you know how much capital do you think is reasonable, do you guys think you guys can reasonably deploy in that fund a quarterly basis and is you guys non-qualified bucket going to prevent growth in the SDLP in any way in the second half of 2016?

Kipp deVeer

So we don’t really have a target for originations but I think we did a billion-ish in the last 12 months, right, so it’s a reasonable history - reasonable guideline for the future without providing any direct guidance, I think that’s a reasonable number. I don’t it will be faster or be slower than it has been over the last 12 months.

And look yeah the 30% basked right now is obviously constraint. And there are two different answers, right, there is - with American Capital and without American Capital. Answer, I’d tell you I think in both circumstances we are planning for growth along the lines of that billion a year and we don’t expect the 30% basket to constraint that, we think there is a room to manage that in a whole.

Ryan Lynch

Okay. And then two maybe more technical questions, you guys had about $0.02 of additional professional costs for the ACAS deal in the second quarter, are you guys expecting any additional profession cost in the second half of 2016 regarding the ACAS deal?

Penni Roll

Yes, we do. I mean obviously we have the cost of a proxy and solicitation process depending on the timing of getting out of review what the SEC those cost will come in the according quarter. So yes there will be some more cost to come prior to closing, but we think that will be manageable.

Ryan Lynch

I mean is it reasonable to kind of use the $0.02 this quarter as kind of a good quarterly run rate until the deal would close?

Penni Roll

I don’t know, I mean clearly this second quarter was a heavy quarter for diligence and cost related to the transaction and getting to signing the deal. So we may not have cost quite a size of the quarter but we still will have some costs that are coming through and part of that will depend on the length of the proxy solicitation process, obviously we have large number of shareholders, et cetera so there will be some cost.

Ryan Lynch

Okay, thanks, that’s all the questions I have.

Kipp deVeer

Thank you.

Operator

And our next question comes from the Terry Ma of Barclays. Please go ahead.

Terry Ma

Hey guys. If we do assume that the closing of the ACAS you address into 2017, what kind of leverage you have to offset any earnings pressure from just be slow wined of the SSLP, and just given you guys are probably pushing for 30% bucket?

Kipp deVeer

Yeah, so you know I’ll repeat what we’ve said every quarter for the last four quarters which is we don’t expect to wine down of SSLP to have a material downdraft on earnings. If fact if you look at the last four quarter of earnings, since you know we went termination on SSLP, your earnings are flat and doing better than they were prior, so our net interest margins increased in all four quarters. We don’t see meaningful headwinds as it relates to SSLP.

Your points taken and I made the point earlier about the constraint on the 30% basket without ACAS, so we’re obviously planning on pushing very hard to close American Capital but you should feel confident that there is a backup plan on the 30% basket if you know we are somehow in successful giving shareholder approval.

Terry Ma

Got it. And can you maybe just give us a sense of how much if it new room you have to grow the SDLP, do you close ACAS?

Kipp deVeer

You can probably do some math on your own but I don’t think we are going to provide any guidance but I am not sure exactly what the calculation is on the 30% basket but it’s pretty darn close to 30%. So there is not very much on as reported basis today but certainly we’ve got a pretty large company that experiences pretty substantial repayments, some 30% assets, some not. It’s not something that’s particularly keeping us up and I would tell you I think if you spoke to Varagon, they are not particularly concern that we can continue to ramp SDLP either, so just not - I don’t know not particularly front of mine.

Terry Ma

Okay, got it. And then just one last question. You mentioned your - the EBITDA growth, LTM EBITDA growth in your portfolio companies it’s in 7% year-over-year and what’s the revenue growth number with that?

Kipp deVeer

We usually don’t disclose it. I probably have to dig it out, I am not sure. My guess is it would be a little bit less, but I don’t know.

Terry Ma

Okay, got it, that’s it from me. Thanks.

Kipp deVeer

Yeah.

Operator

And our next question comes from Arren Cyganovich of D. A. Davidson. Please go ahead.

Arren Cyganovich

Thanks. So your backlog and pipeline picked up pretty nicely, I guess I am trying to the balance comments of you seeing tougher stuff, lots of passing of opportunities with nice pick up in your investment opportunities. And is the Qlik portion of your investment in that backlog and pipeline or is that outside of that?

Kipp deVeer

Yes, Qlik is in there. Qlik is actually in the backlog number. The other comment that I will make is obviously we want - we are doing a whole lot more sort of underwriting then we are doing so think about that - thing about those two kind 500-ish million dollar number adding up is not necessarily being what we will retain. The way that we describe our investing is anything that we underwrite and then sell comes in as backlog and/or pipeline, so that doesn’t mean that all of that billion and changes going to stick at ARCC, some of it will be sold.

Arren Cyganovich

Okay, so that makes sense. That also plays into the - my next question is around the leverage you are kind of in your target leverage range now you expect additional deleveraging, you kind of maintaining this and then with respect to the relative large backlog and pipeline I suppose you just kind of answer this, you are going to have some repayments but also something not proportion of those originations?

Kipp deVeer

Yeah, I think we are comfortable with where the leverage is now, so there is no goal of deleveraging obviously we had a net negative quarter as well as net negative kind of short period post quarter end. But we are kind of running the business on a net zero basis is how I think about it. You know recycling capital and obviously improving returns we think with the existing capital base.

Arren Cyganovich

Okay, thank you.

Kipp deVeer

Thank you.

Operator

And our next question comes from Hugh Miller of Macquarie Research. Please go ahead.

Hugh Miller

Hi, thanks for taking my questions.

Kipp deVeer

Thank you.

Hugh Miller

You gave some great color on what you are seeing in the core business in terms of competition, terms, pricing et cetera. I was wondering if you could kind of give us a sense of what you are seeing in the VC business that you are operating and how you are seeing opportunities there and terms et cetera?

Kipp deVeer

Sure. I think the venture business is transitioning a bit and then obviously valuations as everybody read around in paper had gotten to be pretty robust. So we have seen it’s more challenging to bring you know round C or the round D into a venture back company today. And that’s actually created couple of issues at a couple of our smaller names. So we’re cautious around venture right now but we’ve got a pretty experience team there managing the asset. So they are certainly doing new deals but I think along with ARCC, they are being pretty selective on new deals there. So I think the venture base is definitely in a transition period.

Hugh Miller

That’s good color there. And as I guess I think about your portfolio there, do you tend to be more in a way of lending and kind of later or expansionary stage versus early stage or you know are you kind of spread throughout DC area?

Kipp deVeer

Yeah, I mean if anything it’s definitely later stage, our venture running business typically is shorter duration lending between rounds in a non-dilutive way, it sort of allows some of these early stage companies to have some cash on hand and improve valuations before they do that next round, it’s really sort of a bridge from around that kind of business. But there is a whole mix of things in there, it’s basically technology but there is also some healthcare and some life science names in there as well. But no change in what they have doing since they have been here.

Hugh Miller

Okay, that’s helpful, thank you. And then I guess hitting on the healthcare point, it looks like the pipeline is a little less weighted than what we’ve seen in prior quarters in terms of the healthcare exposure, you know is that kind of - how things just kind of fell out, is it by design, is there anything we should kind of read into that in terms of just the competitive landscape within that vertical?

Kipp deVeer

No, I don’t think so, I think our backlog and pipeline is just more circumstance in company’s specific and it is anything else. I mean we are seeing a lot of activity in the technology in business services space, it’s not that there is less activity in healthcare, maybe just you’ll see it in this quarter but I don’t think there is anything to draw from that.

Hugh Miller

Okay, and then last from me, if you could just give us a sense of the differences in yield you are seeing between first and second lean at this point?

Kipp deVeer

Sure, it’s about where it’s been historically which is called 400 basis points, it’s at regular way senior deals kinds of 450, 500, I think the second lean market depending on size is probably 850 to 950.

Hugh Miller

Great, thank you.

Kipp deVeer

Sure, thanks.

Operator

And our next question comes from Robert Dodd of Raymond James. Please go ahead.

Robert Dodd

Hi everybody. Just a couple of follow-ups on the SDLP, on the fee side, is this going to be structured somewhat like the SSLP obviously where you get half the fees in terms of origination fees and you book those upfront?

Kipp deVeer

Correct.

Robert Dodd

Okay, good. And then on the target leverage if you can give us an idea within that obviously notes to sub-servicer right now leveraged about 3.2 times on the SSLP, it’s closer to four, obviously there is only ten assets in the SDLP right now, so wouldn’t be - expected to be able to get it to fully leveraged right now, but is there a target leverage within that and obviously if you can get more leverage within that vehicle, I would expect that 13.5 to match it up a little bit, so can you give us any color on that?

Kipp deVeer

Sure. As a reminder, we don’t really consider the capital leverage facility, right, this is - it’s an arrangement that we have in partnership with Varagon and one of their clients effectively the co-invest and transactions together. But if you just think about the mix of you know their capital to our capital, I think that the goal overtime is to have it look just like SSLP where it’s kind of three parts to one part generally.

Robert Dodd

Okay, got it, thank you. Then one final one if I can, on the Qlik technology syndication billion dollars I mean can you give us a ballpark kind of what’s the going late on the syndication arrangement fee that we could looking at in the third quarter there 100 basis points something in that order?

Kipp deVeer

Yeah, I mean that’s the pubic transaction if its own, so we are really not going to comment on deal terms there but we were a leader enter there and obviously earned fees to lead that deal and build the group of which there were couple kind of top tier ranges that were named in the press release depending on where you came into that transaction, you earn more if you came in early versus if you came in late as a participant, you are in less. So without any specifics it worked the way most of these leader range leverage strand transactions work.

Robert Dodd

Okay, got it. Thank you.

Kipp deVeer

Thank you.

Operator

And our next question comes from Ben Herbert of UBS. Please go ahead.

Ben Herbert

Hi, Kipp and Penni, good afternoon, thanks for taking my question. Just on the SSLP and the drag, I think you had kind of call down about $0.02 a quarter back almost a year ago at the Investor Day, I mean is that still something, the cover around the yield differential and the pay downs over the past year has been helping, I mean is that still something we should kind of be thinking as a ballpark? And then related just are there other options you are exploring for refinancing that vehicle?

Kipp deVeer

Sure. I think that math is you know reasonable, it really hasn’t changed since we described what we expected what happened as the repayment in that vehicle directed back to GE. I think the good news is then I said this in the past, I’ll say it again which is generally these borrowers continue to deleverage and exit the program. And while that happening, the program itself becomes less risky right because we have more capital relative to the capital it’s ahead of us in the structure, so Penni said this in her remarks. Despite the fact that the return on our sub-servicers come down, we actually feel the risk has coming through with that return and we feel pretty happy with where we are today.

So - and again, would we love to you know exit that program completely? We would, we have some ideas continuously on the table for GE, we do but obviously we need to that with their consent and there are partners. And as I mentioned we can’t quite syndicate their attention on anything other than status for the timing being. So –and we tried something more meaningful to report there but I don’t.

Ben Herbert

And just related to that, I mean that 3 billion you said that was repaid over the past year, so I mean is that kind of a rough expectation I guess for the next year?

Kipp deVeer

I think it’s reasonable. I would tell you that the longer the portfolio companies sit in and in an inactive SSLP, the more difficult it is for them to achieve their objectives, right, many of these companies are growth businesses that need capital, they are wanting to make acquisitions et cetera, so I think as time goes on the inclination is that they exit more quickly, right. Once becomes clear that they are in an inactive leading program, they tend to want to go out and do something else. The problem is typically to exit and do a new deal, you have pay new fees, right, so really depends on where that portfolio company is there lifecycle if you are just hanging around and then IPO for incidence just trying to achieve cost cutting measure at particular company X, Y, Z with the idea that you will sell the company in the next 18 months, you probably going to hand around in the program because you don’t need any capital, if you are fast growing buy and build story and you don’t have access to anymore debt capacity, you are going to pay the new fees and you are going to exit the program. So it’s a little bit a mix of those types of situations, but I think there will be a quicker wind up of that program the longer it stays out.

Ben Herbert

That’s helpful color, thanks. Just one last one on the capital structure fees, I mean those haven’t come down a little bit over the last two quarters from kind of a 25-ish million the quarter run rate in ‘15, I mean is that something obviously the Qlik transaction hitting this quarter but and then likely greater hold underwriting size coming on with the probably cash acquisition. I mean is that something we should expect to get back kind of that 25-ish million or higher kind of run rate maybe ‘17 going forward?

Kipp deVeer

Look I mean, Q1 and Q3 I think are good examples of quarters where we want particularly busy. We had some syndication activity but there is nothing American Seafoods like or Qlik like in Q1 or Q2 that we generate outsize syndication fees. So for me that’s a number that’s on the low end obviously and that there is not a lot of syndication, there is not frankly that much activity. We do think obviously with a larger company and tweaking our business and that we are able to leave syndicate senior deals now in a world that we will increase the syndication fees in the company and that are feasible go back up, but at the end of the day, where fees are going to be driven our activity levels more than anything else. So a busy quarter with some more fees and not bust quarter with less fees. And I don’t know what - I don’t know if there is a right level, but I think these are both pretty low fee quarters, yeah.

Ben Herbert

Great, thanks a lot Kipp.

Kipp deVeer

Sure, thank you.

Operator

And our next question comes from Christopher Testa of National Securities Corp. Please go ahead.

Christopher Testa

Hey guys, thanks for taking my questions. Most of them asked and answered but just with the second leans the yield by corps has gone up steadily over the past four or five quarters or so, was up again this past quarter with spreads narrowing. I’m just wondering if there’s anything specific driving that, was it from Universal Lubricants being placed back on accrual, just any color there would be appreciated.

Kipp deVeer

Probably, I hadn’t noticed that. I’d have to go back and dig into the numbers a little bit. In terms of the types of second lean deals that we’re doing, nothing has changed. So I don’t think - qualitatively there’s nothing that comes to mind to answer your question. I mean, we can dig back the numbers a little bit and be happy to respond to you offline if we find anything, but I don’t think there’s any - I know there’s nothing unusual going on there in terms of how we’re underwriting and making new investments. We’ll go and take a look at that and get back to you.

Christopher Testa

Alright, yeah, that’s good. And just after the ACAS acquisition, post-acquisition, just for the capital structure, are you looking to upsize the revolver capacity or do unsecured debt issuances again, just I guess you’re boss on that.

Kipp deVeer

Yeah, the ideas as we mentioned that will increase our current facilities to handle the acquisition. We don’t have any capital market issuance required to get the transaction closed. I think on a more general basis we’ve said that we view the go forward strategy to be a combination of our existing senior facilities along with longer duration five, seven year high grade issuances. So we’ll certainly take advantage of that market if that looks attractive. I’m thinking that it’s - with pretty - lot more heat around the world than the U.S. as we benchmark to a five year or ten year, I think the base rate is freight on loan, so there may be an opportunity for us to do something there and certainly we take advantage of it. But nothing required to close the transaction will be opportunistic as we would just as ACAS written in the picture standalone company.

Christopher Testa

Got it, okay. And I just hope the thick interest on dividends kind of increased to 5% of interest income, usually hovering around 2% to 3%, was there anything that - anything outside that caused that jump this quarter or was that from anything being placed back on accrual?

Penni Roll

No, it wasn’t around things coming back on to accrual side.

Christopher Testa

And just I guess bigger picture, I’m just wondering if you guys could comment on, what you see for sponsor activity with M&A for the second half of the year relative to the first. It seems, IPO amounts that have come down a decent amount, are you seeing that start to pick up and drive volume.

Kipp deVeer

I mean it’s a busy year coming off a pretty low base and its August all of a sudden, which means its slow. Someone commented that billing in backlog and pipeline as a big number, it’s not particularly a big number for us, particularly when we think about syndicating things. So we got to know anything going into the Presidential election, there’s a lot of uncertainty, there seems to be a lot of uncertainty around the world, private equity multiples have gotten very elevated, that’s actually - a lot of our sponsor friends have said, I’d rather hold some of my existing names longer for fears that I can’t redeploy capital well in my funds. So, I’m a little bit with you, I actually don’t think it’s going to be a huge finish to the year, I think it will kind of continue with the current activity levels, maybe a little bit better, but I do look at the election as something that’s holding activity back quite a bit.

Christopher Testa

Okay, that’s all from me. Thank you.

Kipp deVeer

Thanks for your questions.

Operator

And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Kipp deVeer, for any closing remarks.

Kipp deVeer

I don’t have any other than to say, thanks for attending and for the good questions and we’re going to sign off. Thanks.

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 one hour after the end of this call through August 16, 2016, to domestic callers by dialing 877-344-7529 and to international callers by dialing 1-412-317-0088. For all replays, please reference the conference number 10088255. An archived replay will be available on a webcast link located on the homepage of the Investor Resources section of our website.

Thank you and have a good day.

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