Ares Capital Corp 3Q15 Earnings Call Notes

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Seeing higher leverage, tighter spreads. That makes you cautious

“It’s a little bit of a conundrum here, right, as we sit around and just debate new investing, right. We’re seeing again higher leverage multiples relative to the average across the cycle. You’re seeing tighter spreads. At least, you have, lot of that’s widening out. So typically that makes you more conscious.”

Some of the banks got greedy on transactions in Q2 and Q3

“Look, we are not a global bank with hundreds and hundreds of billion dollars of assets. So, I would tell you, we would be more cautious, I think on a lot of these transactions. Some of the deals that the banks underwrote at the end of Q2 and to Q3, they got greedy on, they were tough credits, the leverage multiples were too high. The flex language was so tight and the market went away from them.”

The quality of deals has gotten pretty low today

“I think we are definitely seeing spreads widening as sort of response to the not so easily executed deals of September, October for sure and the outflows that I mentioned in the prepared remarks. In terms of quality, late in the cycle it tends to be low. I mean, my own personal view I am sure if you looked around our investment table, people might disagree a little bit. I perceived the quality would be pretty low today.”

The place you can go wrong is by picking the wrong credits hoping that pricing will help

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

We emphasize quality over everything else. But quality is low in the market

“So we emphasize quality over everything else and underwrite business for us before we do anything else. And I think late in the cycle and I would say particularly now the quality of things in the backlog and pipeline are better than what we’re seeing generally in the market, which is why selected them to be in the backlog and pipeline, but the quality is a little bit low, yeah.”

Volatility will lead to more opportunities for growthIt doesn’t need to get as bad as ’08 and ’09 for there to be opportunities

“I hope to never really see 2008 or 2009 again. It wasn’t lot of fun from my perspective, certainly afforded some opportunities for us and we emerged reasonably well from that period. I don’t think we need to see periods of distress that were that significant for us to perhaps be more opportunistic and more aggressive.”

The risk in an LBO or PE deal is usually in the first 12-18 months

“most people that lend money to LBOs and private equity guys know is that your first 12 to 18 months with a new company is your highest risk period. That’s were the surprises tend to be. Once you’ve been invested for 5 plus years, you pretty much know what the risks are and probably can change the way that you think about underwriting that company relative to maybe where you thought about underwriting it at first pass.”