Ares Capital Corp

NASDAQ:ARCC

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. Welcome to Ares Capital Corporation's First Quarter Ended March 31, 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded on Tuesday, April 30, 2019.

I will now turn the conference over to Mr. John Stilmar of Investor Relations.

[John Stilmar, IR]

Thank you, Jake and good afternoon, everybody. Let me start with some important reminders. 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 words such as anticipates, believes, expects, intends, will, should, may and similar such expressions. The Company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in it's 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 certain non-GAAP measures as defined by the SEC Regulation G, such as core earnings per share or core EPS. The Company believes that core EPS provides useful information to investors regarding financial performance because; it's one method the Company uses to measure it's financial condition and results of operation. A reconciliation of core EPS to net per share increase or decrease in stockholders' equity resulting from operations, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K.

Certain information discussed in this 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 warranties in respect of this information. The Company's first quarter ended March 31, 2019 earnings presentation can be found on the Company's website at www.arescapitalcorp.com by clicking on the Q1 '19 earnings presentation link on the homepage of the Investor Resources section of the website. Ares Capital Corporation's earnings release and 10-Q are also available on the Company's website.

I will now turn the call over to Kipp DeVeer, Ares Capital Corporation's Chief Executive Officer.

[Kipp DeVeer, CEO]

Thanks, John. Hello to everyone and thanks for joining us. I am here with several members of the management team, including our Co-President, Michael Smith; our Chief Financial Officer, Penny Roll; and other folks in the Finance, Investment and Investor Relations teams. Penny and Michael will walk through our first quarter financial results, our investment activity, and our portfolio statistics in detail later in the call. Let me start by discussing our first quarter results, and I can put them in context with recent market conditions. I will also briefly update you on our recent balance sheet initiatives before turning the call over to Penny and Michael.

This morning we reported very strong financial results for the first quarter. Core earnings were $0.48 per share, which is an increase of 26% over the first quarter of last year. With our ACAS related rotation largely complete, our core earnings benefited from increased interest income driven by net portfolio growth and increased portfolio yields, as well as the higher level of fee income. We also generated higher quarterly GAAP earnings of $0.50 per share. Our core and GAAP earnings were both, well in excess of our recently increased quarterly dividend of $0.40 per share and we had another quarter of rising net asset value with growth to $17.21 per share.

Let me transition to some thoughts on the rebound in the leverage finance market. Following tremendous market volatility at the end of 2018 and the broadly syndicated market, things have rebounded quickly but this volatility did leave some after effects. The most significant reason for the rebound as the transaction volume continues to be lower across the Board and the existing demand for assets has outstripped the supply of deal flow. Several large signature transactions of cleared and the turnaround new deals has improved, however, the fourth quarter volatility has slowed M&A activity. Secondary prices for traded loans have rebounded, spreads have started to tighten, and new deal activity is finally building. And while this has had some impact on our company, Ares Capital has been able to continue to prosper and actively invest in what we believe are select franchise businesses. This is largely due to our broad market coverage, our large portfolio of existing companies to work with on our size and scale.

We're still seeing interesting origination opportunities. However, we need to be highly selective and remain engaged as a lead on new deals, influenced terms and economics. During the first quarter, we made $2 billion of new commitments with 45% of those commitments to incumbent borrowers. We continue to believe that we're late in the credit cycle, and we see some evidence of moderating economic growth. With this, we continue to see better risk reward for investment opportunities in the middle market as we evaluate relative value across the entire alternative investment landscape. The lower-middle market remains quite crowded in our opinion with competitors that lack differentiation and a real ability to compete.

Our successful investment approach has remained consistent for 15 years and we see no reason to make any adjustments today. We simply utilize our longstanding relationships and our direct origination focus to review a very broad opportunity set, provide flexible solutions to companies, support our successful incumbent borrowers and proactively manage our investments post-closing. The approach is cycle tested, and in fact our strong credit outperformance during the last downturn created substantial opportunities for us to consolidate market share from weaker players. We do look forward to some more volatility one of these days, it is likely to reemerge and it creates a great market for investing.

Similarly, conservative and proactive approach to finding new deals, we continue to expand our sources of financing and to extend the maturities of our liabilities; this enhances the stability of our balance sheet and it provides us with additional dry powder. As Penny will discuss in more detail, so far this year we've closed over $1.7 billion of incremental debt financing commitments and are renewed another $2.1 billion of financing commitments across a diverse set of lending institutions. These efforts position the capital base to support new investing and to take advantage of the regulatory relief provided by the SPCAA. As a reminder, ARCC can exceed the 1-to-1 leverage ratio on June 21, 2019.

I'd like to turn the call over now to Penny for a more detailed financial review.

[Penelope Roll, CFO]

Thanks, Kipp. Our core earnings per share were $0.48 for the first quarter of 2019, up compared to $0.45 for the fourth quarter of 2018 and $0.38 for the first quarter of 2018. Our GAAP earnings per share for the first quarter of 2019 were $0.50 including $0.03 per share from net gains on the portfolio and other transactions. This compares to GAAP net income of $0.36 per share for the fourth quarter of 2018.

In total, we've reported net realized and unrealized gains on investments and other transactions for the first quarter of 2019 of $13 million. The net gains were primarily a result of a $46 million net realized gain from the receipt of a litigation judgment payment related to a former American Capital portfolio company offset by $39 million of net unrealized depreciation on our portfolio. We also recognized $7 million of net realized gains on our investment transactions during the quarter.

Shifting to the balance sheet, as of March 31, our investment portfolio totaled $13.1 billion of fair value, an increase of 7% from a year ago. The yields on our portfolio at the end of Q1 increased slightly from Q4 as we benefited from exiting some lower yielding investments and originating new investments that had modestly higher yields during the quarter. At March 31, 2019, the weighted average yield on our debt and other income producing securities at amortized cost was 10.4% and the weighted average yield on total investments at amortized cost was 9.3%, as compared to 10.2% and 9% respectively at December 31, 2018.

Moving to the right hand side of the balance sheet; our stockholders equity at March 31st was $7.3 billion resulting in a net asset value per share of $17.21 versus $17.12, a quarter ago or a 0.5% increase. Compared to a year ago, our net per share increased over 2%. As of March 31st our debt to equity ratio was 0.86 times, and our debt to equity ratio net of available cash of $530 million was 0.79 times compared to 0.73 and 0.69 times respectively at December 31, 2018.

As Kipp mentioned, the Small Business Credit Availability Act becomes effective for us in June, and we expect to prudently begin making progress towards our long-term goal of operating with a moderately higher net debt to equity ratio. Our target range after June will be 0.9 times to 1.25 times. Consistent with the multi-year plan, we laid out last year we anticipate that it will take 12 months to 36 months post June to reach these targeted leverage levels. The speed at which we reached this long-term range will depend on the quality of the investment environment and the opportunities we have to source attractive new investments.

So far in 2019 we have made significant progress to position our balance sheet for future growth. During the first quarter, we repaid $300 million of 4 and 3 each convertible unsecured notes at their maturity in January; and then in March, we issued $403 million of 4 and 5-year convertible unsecured notes effectively replacing the notes that were repaid and extending maturity.

Post quarter-end, we also closed on an extension and significant upsize to our revolving credit facility. The total facility size increased from $2.1 billion to $3.4 billion adding 9 new lenders to the bank group and bringing the total number of banks in this facility to 34. We believe that the upside, not only shows confidence in the credit quality of the Company, but also reflects the ability for Ares Capital to benefit from the broader Ares platform with access to capital that few other BDCs can match. To date, we have closed or renewed over $3.8 billion of financing commitments across bank and capital markets transactions that not only added to our dry powder but further extended the committed term of our debt capital.

Pro forma for the facility upsizes on April 1st, our available and undrawn liquidity at March 31, 2019 was close to $2.8 billion, which is sufficient capacity to allow us to move into our new target leverage range. As such, we believe we are well positioned to take advantage of future investing opportunities, particularly, as we can operate with greater leverage flexibility.

Shifting to our dividends payable; we announced this morning that we declared a regular second quarter dividend of $0.40 per share. Also during the second quarter, we will pay the previously declared additional dividend of $0.02 per share. This is the second of our four previously declared additional quarterly dividends of $0.02 per share to be paid in 2019. The second quarter regular dividend, as well as the $0.02 per share additional dividend are both payable on June 28, 2019 to stockholders of record on June 14, 2019. We currently estimate that our undistributed taxable income from 2018 is approximately $323 million or $0.76 per share. The spillover income determination will not be complete until we file our final tax return later this year, and as such these amounts remains subject to change.

I will now turn the call over to Michael to walk through our investment activities for the quarter.

[Michael Smith, Co-President]

Thanks, Penny. As Mitch Goldstein and I do each quarter, I would like to spend a few minutes providing more detail on our first quarter investment activity and portfolio performance. I will then provide a quick update on post quarter-end activity and our backlog and pipeline.

During the quarter as Kipp mentioned, our team originated $2 billion of new commitments across 37 transactions with a focus on defensively positioned high quality companies. Our larger origination team and scaled balance sheet coupled with our flexible capital enables us to provide financing solutions to a wide array of borrowers. In particular, this quarter's activity reflects our efforts to continue to finance high quality middle market companies, and to opportunistically invest in the larger upper middle market companies at this stage in the cycle. I will further touch on this in a moment.

First, let me highlight two recent transactions to give some context and how we are using our sourcing and scale advantages in this market. In the quarter, Ares provided a $1.1 billion commitment as part of a $4.9 billion senior secured credit facility to support Veritas Capital and Evergreen Coast Capitals public-to-private acquisition of Athenahealth. Athenahealth provides electronic health records and revenue cycle management services to the ambulatory healthcare market in the United States. Using our ability to provide a scaled commitment across the capital structure that provided the buyers with certainty of execution, we were awarded the mandate to lead the second lien financing of the transaction and were named joint book runner on the senior secured tranches of the deal; this was particularly important in this take private transaction.

Additionally, during the quarter ARCC led a $273 million senior secured credit facility for IntraPac International to support the recapitalization of the business and provide capital for a strategic acquisition by the Company. IntraPac is a leading designer and manufacturer of a diversified set of specialty rigid packaging solutions. As part of this transaction, the sponsor on-cap with whom we have done a number of transactions start to replace the existing bank group with the capital solution and strategic partner better equipped to scale with the business. The depth of our relationship with the sponsor along with our ability to provide certainty of execution and additional capital as the business grows were all important factors in us winning the transaction.

Shifting to ARCC's balance sheet; as Penny mentioned, at quarter-end the total portfolio was $13.1 billion consisting of 345 individual borrowers. The portfolio remains highly diversified with an average hold position at fair value of only 0.3% of the portfolio. Our portfolio weighted average EBITDA increased to $122 million reflecting, as I mentioned earlier, our ability to provide compelling capital solutions to an increased number of borrowers including larger companies which has driven the weighted average EBITDA up over the past few quarters.

We have discussed our interest at this stage in the cycle and making investments in larger companies. However, it is worth making one clarification so that investors are clear that we are still very much a lender to middle market companies with quality documentation and covenant packages.

To this end, we wanted to point out some nuances behind the $122 million of weighted average EBITDA for our portfolio. As you may have noticed in our earnings presentation, we have added additional disclosure that provides our average borrower EBITDA, in addition to the weighted average, which for the quarter ended March 31, 2019 was $66 million. These two metrics illustrate that we continue to squarely focus on the core middle market that have opportunistically invested in strong upper middle market companies that have much higher EBITDA and require larger dollar commitments.

The increased focus on opportunities in large companies has been supported by structural changes to the liquid credit markets, particularly in the high yield market that have left a void at the upper end of the middle market. As an example, in 2004 about 40% of the high yield market had issuance sizes of less than $300 million. Today that segment of the high yield market represents only 5% of the high yield market. Given the nature of our capital base, we have been positioned very well to go direct on many of these companies as sponsors look for private capital solutions in this market. We feel we can get attractive terms and strong lender protections in these transactions due to our unique positioning.

Shifting to the portfolio, credit quality remained stable. Our portfolio companies continue to generate solid growth with weighted average EBITDA up 5% over the past 12 months. In the first quarter, the Company had no new non-accruals, non-accruals decreased in the quarter to 2.3% as a percentage of total portfolio amortized cost, down from 2.5% last quarter, and from 2.7% during the first quarter of 2018. Non-accruals at fair value also decreased to 0.4% in the first quarter, down from 0.6% last quarter, and from 1% during the first quarter of 2018.

Before I turn the call back over to Kipp, let me provide a brief update on our post quarter-end investment activity. From April 1 to April 24, we made new investment commitments totaling $183 million and we're -- and exited or we are repaid on $747 million of investment commitments generating approximately $14 million of net realized gains. As of April 24th, our backlog and pipeline stood at roughly $1.1 billion, and $195 million respectively. As always, these investments are subject to approval and documentation, and we may sell a portion of these investments post-closing. Please note, that there is no certainty that these transactions will close.

I'll now turn it back to Kipp for some closing remarks.

[Kipp DeVeer, CEO]

Thanks, Michael. In closing, we're pleased with our first quarter results, we believe the Company is very well positioned moving forward. We're navigating the shifting market conditions well, and we will seek the benefit from the enhanced flexibility provided in the Small Business Credit Availability Act. With our long tenure team, our national footprint, and a healthy $13 billion balance sheet; we're one of the largest providers of direct capital to the expanding middle market segment, it continues to enable us to finance strong middle market companies and deliver what we believe are attractive all in returns for our shareholders.

That concludes our prepared remarks today. We'd be happy to open the line for questions.

[Operator]

[Operator Instructions] The Investor Relations team will be available to address any further questions at the conclusion of today's call. The first question comes from Arren Cyganovich from Citi. Please go ahead.

[Arren Cyganovich, Citi]

Kipp, you had mentioned that M&A activity slowed a bit, yet you still had a very strong investment activity in the first quarter and your backlog also continues to look strong. What are you seeing from or where are you generating those investments, the M&A activity -- and the market in general has kind of slowed?

[Kipp DeVeer, CEO]

Yes, I mean I think it's picked back up a little bit. But the comment definitely sticks. I mean, the good news -- remember Arren, something we like to point out is the benefit that we have continuing to finance a lot of our existing portfolio companies, about half of our new investment activity is just driven from the portfolio, it remains a huge advantage. And look, I mean also -- we've got 100 people out looking for new investments; so as you know, $2 billion divided by 2, as you know, building them backing existing portfolio companies. When you're doing some larger transactions like an Athenahealth and other things like that, it's not all that hard to find enough deal flow to drive an additional $1 billion in kind of new deal volume. So, it's really the size and scale advantage as well as playing off the existing portfolio.

[Arren Cyganovich, Citi]

And then, I was wondering if you could give an update on your working with the SEC to get some relief from the AFFE rule, is there any updates from that process?

[Kipp DeVeer, CEO]

It's something that continues to be real effort on our behalf. Obviously, we responded to some comments that we received from the SEC earlier this year on the application for relief that was filed in September of last year. So it's just back and forth clarification points, we obviously are going to provide a formal response to the SEC and are working with other BDCs and trying to be coordinated but that's about it for now. The good news I think is the dialog is open and vibrant dialog, whereas a year or two ago it probably wasn't; so I think in this year an improvement and we're optimistic there that we can lose effort [ph].

[Operator]

The next question comes from Finian O'Shea with Wells Fargo.

[Finian O'Shea, Wells Fargo Securities]

I'll start one with Mitch to your comments on the core versus larger company would be liquid, may be opportunistic type plays; and forgive me, my phone dropped during this but can you talk about how you feel in terms of this being a sustainable part of your book in terms of a goings forward strategy; core middle market versus large opportunistic? And do you feel that these kind of deals would move off with faster turnover if the markets come back?

[Kipp DeVeer, CEO]

I'll start with the response to that, Michael can happily jump in too. I mean, I think we tried to -- in the prepared remarks indicate that we think that there has been a secular shift in the market that is not cyclical, and not sort of a point in time opportunity where particularly in the sponsor market we're seeing a lack of interest in pursuing sort of the subscale high yield deal, a lot of these deals are getting done privately as Michael mentioned, and I don't think we have an expectation that that's going to reverse anytime soon. So, part of scaling the capital base has been playing into that market opportunity that's continuing to emerge over the last 10 years.

To your point about getting refinanced more quickly, may be the good news around a lot of these larger cap changer pieces is they've got pretty hefty call protection on them; so if that's the case, we're going to see an acceleration of pretty higher returning investments and presumably be able to redeploy.

[Finian O'Shea, Wells Fargo Securities]

And then just as follow-on; for the deals where you kind of take the first and second split, we've seen more of these and recent quarters, especially -- but can you talk about the allocation mechanics, that would lead to your more so second lien overweights. Do these tend to be deals where you kind of lead the second lien and speak for some of the first or is it that the BDC doesn't choose to take allocation of the first or so?

[Kipp DeVeer, CEO]

That's sort of a difficult question to answer because there is not a single answer to how we approach each person. And secondly, we've got an allocation policy here, like many other investment firms that dictate -- if it fits the mandate, obviously each fund for which the mandate that is affecting the opportunity to see that. I don't want to -- I don't know how to answer it but I'm sorry, it's difficult but there is just not a simple answer to that question as all of our transactions are little bit different.

[Operator]

The next question comes from Rick Shane with JP Morgan. Please go ahead.

[Rick Shane, JPMorgan]

Thanks for taking my questions this morning. Hi, Kipp, will you said something interesting and I think about it in the context of you sitting in portfolio review, looking at all these companies. You talked about some signs of a global slow -- not of a global slowdown, you talked of some signs of a slowdown. I'm curious, when you delve into that what factors companies are citing; is it material inflation, wage inflation, interest rates -- is there something globally that's going on, what -- what do you attributed to and are you seeing in any particular sectors?

[Kipp DeVeer, CEO]

Yes, I mean, I think it's moderating growth which -- again for business, it's predominantly a lender doesn't give us concern; but I mean, you're definitely seeing a little bit of a slowdown. I would to your point categorize it more as sort of cost side inflation generally; some wage inflation, you hear about things like labor shortage or folks available to drive trucks, for instance, in one of our portfolio companies. In other places, it's -- some food cost in inflation or some material inflation, so a little bit of everything with a lack of real volume growth on the top line; so you're seeing just a moderating kind of margin contribution growth. Again, I think more of an issue for owners of companies at this point than for lenders to those companies.

So, we're still pretty positive on where we sit but we're definitely seeing a modest slowdown.

[Rick Shane, JPMorgan]

Got it. And it's a follow-up to that; with that in mind is there anything that as a management team you can communicate to your originators of places that you might want to raise the bar in terms of what you're willing to lend on at this point?

[Kipp DeVeer, CEO]

Yes. I mean, the bar is pretty high today. I mean, we do still think that we're late in the cycle, we got to be extremely cautious, this is a time and it has been a time for the last little while where people can make mistakes. We think some of the competition and deals that we've walked away from, probably made some mistakes; so the bar is pretty high. I would just say the easiest way and we emphasize this in investor meeting, certainly once we've been with you, Rick -- we don't have to invest to the benchmark, so for us the key is to stay out of industries that tend to produce the most defaults, that's historically been things like retail and media and other places where the spend is much more discretionary and can go away much more quickly and we're underexposed if we go through our industry breakdowns to most of the industries that tend to create the most of all.

So first things first, really orient the investing to defensive industries. And then of course, trying to pick the best companies and lay in place the best structures and the best occupancy that we can, all the while understanding that we're participant in the market and we need to compete for deals too.

[Operator]

The next question comes from Doug Hecht with Jefferies. Please go ahead.

[John Hecht, Jefferies]

First question, just -- you guys have had a very good trajectory of yields as the rate cycle has played out; I think now we're looking at kind of a flat curve. Maybe I guess the first question would be, what should we expect to your margins and your yields as the course of this year progresses given the benchmark, your background?

[Michael Smith, Co-President]

I don't know -- I appreciate the question and obviously, I'm not an interest rate strategist but I'm surprised about this -- kind of 70% outlook for rate cut this year. I said to others, I just don't see it. I think we do expect kind of a moderate, I probably know increases would be my guess too, just sort of maintenance of where LIBOR is today. So flat curve for us is actually kind of go-to-watch [ph] environment because we're lending on the asset side for the most part of LIBOR plus as you know, and we have a mix of financing cost, both fixed and floating. So we can keep issuing in the unsecured markets or in the convert markets off lower 5-year or even 7-year benchmark that's great for us. So I think if the yield curve stays sort of as it is, we would see a steady state net interest margin at the Company and that's kind of our expectation.

[John Hecht, Jefferies]

And then the second question, this is just looking at some of the disclosure. It looks like the term -- the new loan term has gone out, is that just the weighted average commitment term and months? Is that just a function of being about some larger deals or how should we think about that?

[Penelope Roll, CFO]

It's really just a matter of how we are rolling our maturities forward. So if you look at the liability side, we just paid off 5-year debt and then converts and issued a new 5-year debt instrument which extended the maturity. In addition to that, on April 1, we extended the maturity of our larger revolving line of credit by a year; so that would also extend out the maturity as well.

[John Hecht, Jefferies]

You there?

[Penelope Roll, CFO]

Yes.

[Kipp DeVeer, CEO]

Sorry. We're just borrowing here in something trying to make sure we've got the full answer for you.

[John Hecht, Jefferies]

Yes, I was actually looking at the commitment terms more than anything.

[Kipp DeVeer, CEO]

You're seeing on the asset side, John?

[John Hecht, Jefferies]

Yes, on the asset side. It looked like the average term went to 90 months?

[Kipp DeVeer, CEO]

To be honest, I didn't really notice that. I mean, none of the standard terms of our investing have changed, so it's going to just be a mixed thing.

[Penelope Roll, CFO]

It's a also a weighted average, so sometimes it we will skew a little bit depending on the size of the deal that we're holding for certain duration.

[Kipp DeVeer, CEO]

We'll take a look at it, John. We can come back to you offline and just see if there is an answer that's actually material, but I don't think it is.

[Operator]

The next question comes from Casey Alexander with Compass Point. Please go ahead.

[Casey Alexander, Compass Point]

Given the amount of repayments in your subsequent activities that have already taken place, and looking at the robust origination the last couple of quarters; would it be reasonable to expect somewhat more modest portfolio growth at least in the second quarter as you're looking at it right now?

[Kipp DeVeer, CEO]

I think, we -- Michael laid out, we've got a pretty significant backlog but when you add up the backlog and pipeline, it would suggest that we're sort of below where we were for Q1.

[Casey Alexander, Compass Point]

Secondly, I noticed on the balance sheet the inclusion of an operating lease asset and liability; and there -- can you explain what that is? They're not matched off dollar for dollar, was there a corresponding cash transaction that makes up for the difference? I'm just kind of wondering because I've never seen it before.

[Penelope Roll, CFO]

This is purely an accounting thing, there was a new GAAP pronouncement that we had to adopt related to any liabilities that we have in connection with leases that Ares Capital Corp is in. While we subleased most of what ARCC actually owns, we still have to have this disclosure that gives this gross up in the balance sheet that basically does a net present value of future payments on the leases and gives you an operating right of use asset with a corresponding liability. The reason there is a difference between the two, normally those would be the same but because of purchase accounting for Ares -- sorry, for American Capital a couple of years ago, we assumed some leases from ACAS that we already had a liability on our books for, and that's why the liability is greater than the asset.

[Casey Alexander, Compass Point]

So, the transaction that took place in this quarter Penny, was it actually -- did it knock $0.07 a share off of NAV, that's what I calculate the difference as?

[Penelope Roll, CFO]

No, because that -- if you look at the balance sheet, the operating lease asset is $1.05 and the lease liability is $1.37. The difference between $1.37 and $1.05 was already in the balance sheet from the ACAS purchase accounting ages ago. So the entry we booked, if you want to get into [indiscernible] accounting, is we booked an asset for $1.05 and a liability for $1.05 when we adopted this new pronouncement; so there was no P&L impact. It's just a balance sheet gross-up.

[Operator]

The next question comes from Robert Dodd with Raymond James. Please go ahead.

[Robert Dodd, Raymond James]

Just going back to kind of like the recent trends. I mean, obviously funded yields in the quarter advertise cost, it tends to be -- it was nine last quarter. So up a 130 basis points, on just the funded, not the average portfolio weighted average or average. Obviously SDLP was grew a bit this quarter, LIBOR was up a tiny bit, but they're still seems to indicate that may be deployed yields were up 70, 80, basis points. Sequentially, in the quarter where -- on a weighted average basis, in the quarter where your weighted average EBITDA went up pretty well, can you give us any more -- if I were to grossly simplify -- and you can correct me, if I've got rising yield and rising EBITDA from a borrower, I would tend to imply more risk as a simplistic view.

So can you talk us through that a little bit about how that yield popped up so much while the average borrower is rising and you're maintaining a late credit cycle view.

[Michael Smith, Co-President]

Sure, thanks for the question. I don't think that's the case. I mean, if we're looking just sequentially from Q4 2018 to Q1 obviously, we're up on our income producing securities, i.e. the stuff that backs out equity from 10.2 to 10.4; so not a whole lot going on there from my perspective. I do think that there is a modest widening in spreads at the end of the fourth quarter that probably carried over a little bit into particularly early Q1 investing. I don't think that's changed much but we are

[Kipp DeVeer, CEO]

We're definitely not trying to increase yields and put more risk into the underwriting process of this part. We're actually doing the opposite. So, my guess is, it's just a little bit of math flowing through the quarter.

[Operator]

[Operator Instructions] The next question comes from Mark Hughes with SunTrust. Please go ahead.

[Unidentified Analyst]

Good afternoon. This is Michael Ramirez [ph] for Mark. Thanks for taking our question. So while the leveraged finance market has rebounded as per your comments, we are seeing industry leverage loan volumes down significantly year-over-year. We consistently have managed to fund new originations at a greater pace than last year. So, I guess our question is -- are you guys causing a higher rate of deals seen or does your size and scale sort of -- to look at a majority the deals in the marketplace to remain selective? And I guess just as a quick follow-up additionally, has covenants changed for these new investments? Thank you.

[Kipp DeVeer, CEO]

Sure. Thanks for your question. Look, I'll just revert back to one of the comments that I made earlier which is, it was a pretty significant origination quarter, even in a slower market. About half of what we did $1 billion or so of investments were made to existing portfolio companies. So that's something that regardless of market activity allows us to stay busy and obviously allows us to continue to back what we think are the really high quality companies that they're looking for more capital in the portfolio.

The other billion or so of new deals, just to say, it's not that hard for us to get $1 billion to work even in a slow market in particularly, when we participate in something like an Athenahealth, which is a very large deal, very large investment for us. Driving the other billion of originations is not that difficult with the size of the team that we have out in the field. Look, we are fighting the good fight along with everybody else on the documentation and covenants front. We think that our ability to lead deals and be there at the front negotiating agreements that we believe makes sense for the long haul is a real advantage as we think about risk management going forward.

So, I think there is a material change in docs or in covenants from last quarter, but I think like you'd hear from many others in our markets deteriorated a bit over the last couple of years and we think our position allows us to -- get to a point that makes sense for us when taking on new assets.

[Operator]

We have time for one more question. So, Lana Chan with BMO Capital Markets. Please go ahead.

[Unidentified Analyst]

Good afternoon, I'm Christian DeGrasse [ph] on behalf of Lana Chan. I just have one question on the credit environment. In addition to a slowing economic growth. Are you seeing any cracks out there regarding credit?

[Kipp DeVeer, CEO]

I think that if you look at the metrics that would get you there, the answer is no. If you look at the broadly syndicated markets and the default rate in the market, it's at I think five-year low and in terms of the index, Clear Channel is about to roll out of the index and it will be at more than five-year low. So the broadly syndicated markets would be telling you that there is very little to no stress in the credit markets and I think, the way that we tried to communicate it to folks is, where do our non-accruals sit, companies that aren't performing are non-accruals or around 2.5% at cost and things that have been on non-accrual for a while have generally gotten marked down. We haven't seen any negative migration this quarter, i.e., we have no new non-accruals.

So, I think we're later in the cycle. I think we're keeping probably a longer watch list than we might just to be vigilant about risk management, but we don't see an increase in defaults in the portfolio, obviously as we've laid out the stat for you.

[Operator]

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

[Kipp DeVeer, CEO]

No, I think we're all set. Appreciate all the questions and hope you have a great day. We'll sign off.

[Operator]

Ladies and gentlemen, this concludes our conference for today. If you missed any part of today's call, an archived replay of this conference will be available approximately one hour after the end of the call through May 14, 2019, at 5 P.M. Eastern Time to domestic callers by dialing 877-344-7529, and to international callers by dialing [phone]. For all replays, please reference conference number 10129711. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital's website. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.