Ares Capital Corp

NASDAQ:ARCC

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon. Welcome to Ares Capital Corporation’s Fourth Quarter and Year Ended December 31, 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. As a reminder, this conference is being recorded on Wednesday, February 12, 2020.

I will now turn the call over to Mr. John Stilmar, Managing Director of Investor Relations.

[John Stilmar, Managing Director-Investor Relations]

Great, thank you, Kate, and good afternoon, everybody. Let me start with some important reminders. Comments made during the course of this conference call and webcast as well as 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 its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements.

Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, as core earnings per share or core EPS. The company believes that core EPS provides a useful information tool to investors regarding the financial performance because it is one method the company uses to measure its financial condition and results of operation.

A reconciliation of core EPS to the net per share increase or decrease in stockholders’ equity resulting from operations, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call. 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 of companies was derived from third-party sources and has not been independently verified, and accordingly, the company makes no representation or warranty in respect to this information. The company’s fourth quarter ended December 31, 2019, earnings presentation can be found on the company’s website at www.arescapitalcorp.com by clicking on the Q4 2019 Earnings Presentation link on the homepage of the Investor Resources section of the website. Ares Capital Corporation’s earnings release and 10-K are also available on the company’s website.

I would now like to turn the call over to Mr. Kipp DeVeer, Ares Capital Corporation’s Chief Executive Officer.

[Kipp DeVeer, Chief Executive Officer]

Thanks, John. Hello to everyone, and thank you for joining us. I’m here with our Co-President, Michael Smith; our Chief Financial Officer, Penni Roll, and several other members of our management team.

I’ll start by highlighting our fourth quarter and full year results and then provide some thoughts on the company’s position and current market conditions.

This morning we reported fourth quarter core earnings of $0.45 per share, which is a strong finish to a great year for Ares Capital Corporation. Our core earnings for the year of $1.89 per share benefited from an active year of investing modest portfolio growth and higher utilization of our low-cost borrowing facilities.

We generated strong GAAP earnings of $0.48 per share for the fourth quarter and $1.86 per share for the year, which drove another year of net asset value growth to $17.32 per share at year-end. Supporting these results, our portfolio continues to demonstrate stable credit performance.

Looking beyond these strong results, we believe the company is well positioned. The addressable market opportunity for Ares Capital is large and growing, but small and upper middle market companies are increasingly accessing the private markets for financial solutions.

We see concrete evidence of this as the pipeline of transactions that we review annually is increased by approximately 40% since 2015. We think a major factor here is our increased market share in larger deals where we feel we offer companies a more attractive solution than the alternative smaller syndicated deals that typically come with a lot of execution risk for their sponsors.

As our market opportunity expands, we benefit from our large direct origination platform, extensive market reach and long-standing relationships with companies, financial sponsors and deal participants. By reviewing a large pipeline, we can remain selective and choose to invest within what we believe are the strongest borrowers, which is critical in these highly competitive market conditions.

Over the past 10 plus years, we’ve closed on only about 4% of the investments we’ve evaluated with new borrowers. And due to our cautious view of the market, for much of 2019 we became increasingly selective resulting in the second lowest closing rate of deals to new borrowers in a decade.

One of the most important sources of deal flow is our expanding core of incumbent portfolio companies, which we believe allows us to finance the growth requirements of our best borrowers. Our incumbent portfolio company is accounted for half of our investments in 2019 and 52% of our investing activity in the fourth quarter.

We believe these opportunities provide attractive and differentiated investments and often reflect lower risk propositions as we typically have spent years observing a company’s management team and operations. While these long-term secular trends continue to drive an expanding opportunity for Ares Capital, we’ve had to counteract what have undoubtedly been strong flows of new capital to the sector that have put more pressure on our investing business.

In our view, newer entrants often acquiesce on terms and reduce pricing to win deals and to deploy their capital. Given our stringent underwriting criteria and the breadth of our deal flow, we’re finding ourselves passing more and more and for a host of different reasons, including pricing and structure. The good news is we see a stable and slow growing economy.

After a difficult end to 2018 the credit markets spent most of 2019 with positive momentum and this has continued into 2020. The healthy financing environment is likely to remain, although we are seeing things slow a bit in terms of activity.

U.S. companies and investors are highly focused on the fact that we have an upcoming presidential election and the uncertainty that exists with a seemingly wide variety of potential outcomes at this point. There’s also a belief that accommodative monetary policy and low interest rates for longer are needed to support growth in corporate America. With this in mind, we’re not surprised to see a wait and see approach from a lot of deal sponsors and companies, particularly with regard to M&A activity.

Finally, in these kinds of markets, we’re focused on building deep sources of committed capital so that we are positioned to be opportunistic should market volatility increase. Since the beginning of 2019, through to today, we’ve strengthened our financial position by closing on an additional $4.1 billion of new financing capacity from both bank and capital markets providers and we’ve extended maturities on over $3.5 billion of committed bank financing.

Given this progress, we currently have approximately $3 billion of undrawn credit commitments and believe that our balance sheet continues to be a source of strength for our company. I’ll now turn things over to Penni to provide some more detail on the fourth quarter and the full year results.

[Penni Roll, Chief Financial Officer]

Thank you, Kipp, and good afternoon. Our core earnings per share were $0.45 for the fourth quarter of 2019 compared to $0.48 for the third quarter of 2019 and consistent with $0.45 for the fourth quarter of 2018. Excluding the $0.025 per share impact from the expired fee waiver, our fourth quarter 2019 core earnings were largely consistent with the prior two quarters of 2019.

Our GAAP earnings per share for the fourth quarter of 2019 were $0.48, which compares to $0.41 for the third quarter of 2019 and $0.36 for the fourth quarter of 2018. As Kipp mentioned, we closed 2019 with strong financial results with core earnings per share of a $1.89 compared to $1.68 for 2018 and GAAP net income per share of $1.86 compared to $2.01 for 2018.

As of December 31, 2019 our investment portfolio totaled $14.4 billion of fair value and we had total assets of $14.9 billion. As of December 31, 2019 the weighted average yield on our debt and other income producing securities at an amortized cost was 9.6% and the weighted average yield on total investments at amortized cost was 8.6% as compared to 9.8% and 8.8% respectively at September 30, 2019 and compared to 10.2% and 9% respectively at December 31, 2018.

The year-end yields on our portfolio were down from the third quarter largely due to declines in LIBOR. Our earnings benefited in 2018 from a rising LIBOR, but we saw that upward trend began to reverse in early 2019 with one month LIBOR declining about 74 basis points during the course of 2019. This reversal created a modest headwind for us throughout the year and could continue to reduce all-in yields – further until reaching our LIBOR floors.

At year-end, excluding our investment in the SDLP certificates, 78% of our total portfolio was in floating rate investments and 79% of these floating rate investments had an average LIBOR floor of approximately 1.1%. We continue to be focused on obtaining LIBOR floors on new investments and amending documents on existing investments to add LIBOR floors whenever possible.

Importantly for our new commitments this quarter with a floor, we were able to negotiate a higher average LIBOR floor of approximately 1.3%.

Moving to the right hand side of the balance sheet, our stockholders’ equity at December 31, 2019 was $7.5 billion resulting in a net asset value per share of $17.32 versus $17.26 a quarter ago and $17.12 at year-end 2018. As of December 31, our debt-to-equity ratio was 0.95 times and our debt-to-equity ratio net of available cash of $153 million was 0.93 times. This compares to 0.91 times and 0.89 times respectively at September 30, 2019.

We ended 2019 with our leverage at the low end of our current target range of 0.9 to 1.25 times. I would add that we are a bit behind the higher leverage targets that we were hoping to reach by now, but we have lagged solely to be cautious on the investing front.

As Kipp mentioned, we focused throughout 2019 on extending and increasing our access to efficient and committed sources of debt capital. During the fourth quarter of 2019, we prepaid $600 million of 3.875% unsecured notes at par that were originally scheduled to mature in January 2020, taking advantage of the early par of redemption feature of the notes. And we upsized our SMBC’s revolving funding facility by $150 million. As of December 31, 2019, we had approximately $2 billion of available capital.

Post year-end, we’ve continued to be active on the capital raising front, increasing our available capital to just over $3 billion. In January, we issued $715 million of unsecured notes maturing in July 2025, with a coupon of 3.25%. This execution was the lowest cost unsecured note issuance in BDC history and is below the current all-in costs of our bank lines under today’s market rates. We now have no term debt maturing over the next two calendar years and our next maturity is not until January 2022.

As for our floating rate secured credit facilities, we upsized our SMBC and Wells Fargo funding facilities in January by a combined $325 million and extended the maturity for the Wells facility by one year. The earliest maturity of our bank credit facilities is now March 2024.

Before I conclude, I want to discuss our undistributed taxable income and our dividend. For 2019, we once again out-earned the dividends we paid, resulting in an increase in our undistributed taxable income. We currently estimate that our spillover income reached $408 million or $0.95 per share at the end of 2019, an increase of $65 million or $0.15 per share from 2018’s level. We believe having a strong and meaningful undistributed spillover supports our goal of maintaining a steady dividend through varying market conditions.

To that end, this morning we announced that we declared a regular first quarter dividend of $0.40 per share, which is consistent with the regular quarterly dividend paid throughout 2019. This first quarter dividend is payable on March 31, 2022, to stockholders of record on March 16, 2020. This represents our 42nd consecutive quarter of reporting a stable or higher regular dividend for our shareholders.

Now with that, I’d like to turn the call over to Michael to walk through our investment activities for the quarter and the year.

[Michael Smith, Co-President]

Thanks, Penni and good afternoon. I would like to spend a few minutes providing more detail on our investments and portfolio performance for both the fiscal year-end and fourth quarter of 2019. I will then provide an update on post quarter-end activity and our backlog and pipeline.

During 2019, our team originated $7.3 billion of new investment commitments across 163 transactions, including $1.6 billion of commitments to 43 borrowers in the fourth quarter. Our investments throughout the year came from a diverse set of high quality companies across more than 20 distinct industries. The EBITDA of the companies we financed this year range from $12 million to $670 million, which should give our investors more insight to the breadth of our sourcing capabilities. As Kipp mentioned earlier, in 2019, half of our commitments were to existing borrowers and the other half came from a significant and growing pipeline of new investment opportunities.

For the full year 2019, we evaluated more than 1,600 new lending opportunities, which were diversified across industries and geographies and had an average EBITDA of $47 million. If one assumes the average company requires roughly five to six times EBITDA in debt financing, this translates into approximately $375 billion to $450 billion of potential transaction volume that we reviewed for the year. As far as the portfolio composition at year-end 2019, 80% of our portfolio inclusive of the SDLP investment was in senior secured loans, which is similar to the portfolio composition at year-end 2018 and 2017.

The weighted average EBITDA of our portfolio companies of $139 million, gives greater prominence to our large hold position, while our portfolio average EBITDA of $75 million reflects our continued focus on the upper middle-market.

We continued to broaden and diversify our portfolio this quarter, reaching 354 different borrowers with an average hold position at fair value of only 0.3%. Excluding our investments in SDLP and Ivy Hill, our largest single borrower was just 2.6% of the portfolio at fair value, underscoring that no single name is likely to have a material impact on the aggregate performance of our company. We believe our large and diversified portfolio, which is focused on high free cash flow, non-cyclical industries is resilient and positioned to perform well through a wide variety of economic conditions.

You may have noticed that at year-end, we revised the industry classification of our investment portfolio to conform to the GICS classifications. We believe this presentation provides stakeholders more clarity with regard to our portfolio and is more consistent with broader market standards. You can review which GICS-driven industry each of our portfolio companies resides and our schedule of investments.

The credit quality of our portfolio continues to be stable. Our portfolio generated weighted average EBITDA growth of 3% over the past 12 months, which was consistent with this past quarter. Our 2019 year-end non-accrual ratio of 1.9% at amortized cost is lower than the 2.5% reported at year-end 2018. Two companies were added to the non-accrual list in 2019 and six companies came off, leaving the total number of companies on non-accrual slightly below that at last year-end.

Before I turn the call back over to Kipp for some closing remarks, let me provide a brief update on our post quarter investment activity. From January 1 through February 6, 2020, we made new investment commitments totaling $453 million, of which $361 million were funded. Over this same period, we exited or were repaid on $282 million of investment commitments, generating approximately $21 million of net realized gains on the exit. As of February 6, our backlog and pipeline stood at roughly $735 million and $390 million, respectively. Note that our backlog contains investments that are still subject to approvals and documentations, and may not close, or we may sell a portion of these investments post closings.

With that, I’ll turn it back over to Kipp.

[Kipp DeVeer, Chief Executive Officer]

Thanks a lot, Michael. In closing, our strong fourth quarter capped off another successful year of solid earnings and continued NAV growth. We continue to execute on the same plan that we’ve had for the past 15 years; maintaining a defensively positioned portfolio, investing in origination capabilities to see the broadest amount of deal flow, being highly selective in focusing our investments on the highest quality borrowers and maintaining a strong balance sheet with deep sources of liquidity.

We enter 2020 with continued caution on the investing side, but we are confident that we’re still able to find compelling investment opportunities for the company. We also remain optimistic about our competitive position and platform advantages, which we believe will allow ARCC to continue to benefit from the growth of the middle market and the secular shift we’re seeing as more companies seek private capital.

Reflecting on the year and to close out our prepared remarks, I would like to thank the investment and portfolio management teams for their tremendous effort in originating and monitoring the portfolio; the finance and accounting teams for their continued work in extending our credit facilities and long-term debt; the legal and compliance teams for always looking out for us in advancing our efforts in D.C.; and finally, thanks to our investor relations team, who always do a superb job representing the company. It was a fantastic 2019 for ARCC.

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

[Operator]

[Operator Instructions] Please note as a courtesy to those who may wish to ask a question, please limit yourself to one question and a single follow-on. If you have additional questions, you may reenter the queue. The investor relations team will be available to address any further questions at the conclusion of today’s call.

The first question comes from Rick Shane with JPMorgan. Please go ahead.

[Rick Shane, JPMorgan]

Hey guys, thanks for taking the question. I want to make sure that we understand the movements in the non-accrual. Sometimes, names change. It appears to us that the new non-accrual this quarter is VPROP, and just want to make sure that we’re looking at this correctly in terms of that was not on non-accrual before, it is a new non-accrual and what developed there.

[Kipp DeVeer, Chief Executive Officer]

That’s true. So there are two new non-accruals. One is VPROP, the other one was a small legacy loan called Ioxus from the old venture portfolio.

[Rick Shane, JPMorgan]

Got it. And, Kipp, do you mind providing a little bit – VPROP is a relatively large investment on a cost basis. The marks have been pretty benign at this point so the impact’s relatively low, but want to make sure we understand the risks there and also the impact from an interest income perspective.

[Kipp DeVeer, Chief Executive Officer]

Yes. I mean, Penni can take a quick look. I think she probably has the interest income number. But, look, Vista is one of the oil and gas investments that we’ve been in for quite a long period of time. We’ve upsized it over the years. It’s a company privately-held that process and distributes fracking sand for the drilling industry, the fracking and drilling industry. If you go look at some of the public comps in this space, you’ll see that there’s quite a lot of stress in that industry. There’s been a fair amount of overcapacity. This company, I think the good news is, has high-quality assets that are largely in drilling regions, i.e., all their assets are in Texas.

So the company has done a nice job over the years growing its business because it’s had logistics advantages. That being said, 2019 was a difficult year for that industry as the commodity price, because of the oversupply of sand assets and sand mines in the industry, had been overbuilt. You just saw commodity price collapse. So I think we’re being cautious on the mark but there is real work to do there. I mean, we’re engaged day-to-day with the management team there working on a restructuring.

[Rick Shane, JPMorgan]

Great. Thank you very much.

[Penni Roll, Chief Financial Officer]

Yes. And then – I’m sorry.

[Rick Shane, JPMorgan]

I’m sorry, Penni.

[Kipp DeVeer, Chief Executive Officer]

Yes. I don’t know if you need the numbers from Penni but you may have them.

[Rick Shane, JPMorgan]

Yes. Please go ahead.

[Penni Roll, Chief Financial Officer]

Sorry. Yes, if you look at the earnings loss for 2020, we did put it on non-accrual in the fourth quarter as we had a little bit of earnings loss for 2019. But if you look at a full year’s loss to 2020, it’s about $0.03 a share, net of fee.

[Kipp DeVeer, Chief Executive Officer]

Yes. So I mean, look, the good news is we’ve got, and I tried to emphasize this, too, quarter-to-quarter, we’ve got a highly diversified company. And unlike some of the other BDCs that people may be invested in or you all may follow as analysts, it’s really difficult to have an impact in any way, shape or form on our company’s operating profile with a single or even a couple of defaults even in larger names, right? The diversity allows us to generate very consistent income and keep the dividend where it is, obviously, even if we have some bumps along the road.

[Rick Shane, JPMorgan]

Got it. Thank you guys very much.

[Kipp DeVeer, Chief Executive Officer]

Thanks, Rick.

[Operator]

The next question is from Arren Cyganovich of Citi. Please go ahead.

[Arren Cyganovich, Citi]

Thanks. Not to hark on credit quality too much, but in the release, you had mentioned that 9% of the exits were in non-accruals, but I didn’t see anything that large last quarter that was on non-accrual. Was there something intra-quarter that got based on non-accrual and then exited?

[Kipp DeVeer, Chief Executive Officer]

I had not noticed that. So the – there were three names realized. One, I know for sure that was on non-accrual, which was Indra Holdings. I’m looking at you – what is it? I’m sorry. Dan is saying, yes. The recognition of an old oil and gas names that we have put on non-accrual years back called PetroFlow.

[Arren Cyganovich, Citi]

Okay.

[Kipp DeVeer, Chief Executive Officer]

But nothing specific in this quarter, but we can check the numbers with you, if you want offline, Arren, but that’s the…

[Arren Cyganovich, Citi]

It’s possible I just missed them. Okay. And then in terms of – you raised a small amount of equity in the ATM. Just curious as to why you would utilize that when you’re not quite at your leverage range that you wanted to be in, obviously, in the low end.

[Kipp DeVeer, Chief Executive Officer]

Yes, I think we think of the ATM program as a convenient and accretive way to raise small amounts of equity and to not have us think about a marketed or bought offering in a larger way. So we just think it’s good long-term planning as we continue to want to grow the company. Obviously, the company requires equity over the long haul for its growth, so just we take a long-range view on that.

[Arren Cyganovich, Citi]

Okay. Thank you.

[Kipp DeVeer, Chief Executive Officer]

You’re welcome.

[Operator]

The next question is from Ryan Lynch of KBW. Please go ahead.

[Ryan Lynch, KBW]

Hey, good afternoon, and thanks for taking my questions. I did want to follow up on the equity ATM offering. So because you guys issued some equity this quarter but you guys still actually had deployments that actually grew your overall leverage. Are we expect – should we expect that the ATM should just complement portfolio growth, and we should actually expect leverage to continue to grow? Or are you going to manage your target leverage right around this level via capital deployments as well as now ATM equity offerings?

[Kipp DeVeer, Chief Executive Officer]

Yes, we’re not – look, the direction that we’d like to take the leverage is up. You’ve seen that over the last couple of quarters. Again, the ATM issuance has been minimal but we found it to be a useful tool. So I think the simple answer is yes, i.e., we’re going to probably continue to raise a little bit of equity and, with that, grow the portfolio and take leverage up as well.

[Ryan Lynch, KBW]

Okay. And then my follow-up, I wanted to talk about the dividend. Obviously, you guys had a really strong year in 2019. You paid out some special dividends and actually even while paying out a special dividend, still grew your spillover income pretty meaningfully. I think it shows the strong results you had. You guys did not declare a special dividend for 2020. Can you just talk about why that decision was made, to not declare one at all? And so far in 2020, which is a little bit unlike the policy you guys said in 2019 of declaring quarterly special dividends to kind of start the year.

[Kipp DeVeer, Chief Executive Officer]

Sure. So the additional dividend for last year that we announced – we really announced, if you remember, because we had really significant sort of unusual net gains in 2018. So obviously, shareholders benefited from that with the payouts throughout 2019. There are a couple of things that are different as we look forward into 2020. Number one, LIBOR is down 90 basis points or so in the last 12 months, and there’s a forward curve that forecasted being lower, so I think we’re being cautious today.

The other thing I’d say is, look, we’ve been running the company now a long time. This is a space obviously where investors have conditioned us to be cautious around the dividend because there are pretty negative ramifications from dividend cuts, as we’ve seen in other companies. So I think we’re just being conservative for the time being, wanting to look at the LIBOR environment and the good performance. I appreciate you providing that comment, Ryan. May allow us to do that in the future, but we just thought this quarter, we’d let the specials from last year roll off and evaluate it as we get further into the year.

[Ryan Lynch, KBW]

Okay. Thank you for taking my questions. I appreciate the time.

[Kipp DeVeer, Chief Executive Officer]

Thanks.

[Operator]

The next question is from Kyle Joseph of Jefferies. Please go ahead.

[Kyle Joseph, Jefferies]

Hey, good afternoon, and thanks very much for taking my questions. Just first, in the quarter, can you give us a sense for the pace or the timing of deployments and repayments? Just to give us a better sense for yield dynamics in the quarter.

[Kipp DeVeer, Chief Executive Officer]

We typically don’t provide that kind of color. We don’t provide guidance with this company, so I don’t want to – I don’t want to really answer that question directly, if that’s okay, Kyle. I mean, look, as I said, activity is slow. Smitty gave you some numbers in terms of pipeline and backlog and all of that. So if you look over the last four quarters, I would tell you that our pacing is reasonably consistent quarter-to-quarter. So take the last four quarters of last year, divide it by four and then subtract the pipeline and backlog and probability adjusted, and you can probably get to a number that tells you what it looked like over the last six weeks. But I don’t want to provide any guidance really regarding Q1.

[Kyle Joseph, Jefferies]

Oh, no, sorry, Kipp. I was talking about Q4 in terms of were the – any of the deployment sort of backed your quarter?

[Kipp DeVeer, Chief Executive Officer]

Q4, I don’t know. I’d have to go back and look. I actually don’t, I’m not sure we have that in front of us. I just say nothing remarkable, but I don’t think it’s going to, nothing that’s going to change your modeling exercise or your thought on the quarter.

[Kyle Joseph, Jefferies]

Got it. And then my follow-up, just stepping back you guys commented on where rates have gone. And then also given, we’ve seen many peers raise leverage in the BDC space.

Can you just refresh us on sort of any competitive changes you’re seeing either from banks or other BDCs?

[Kipp DeVeer, Chief Executive Officer]

No, I’d say it’s the same, still competitive. A lot of capital has been brought into this space. I made the comment about slower activity to start the year, kind of wait and see approach on a lot of fronts for people. And again, we’re watching LIBOR because obviously we’re in a spread based business. We’ve got largely LIBOR plus assets on the left side of the balance sheet and about half the right side, in terms of liabilities anywhere floating rate. But I can’t tell you what, I don’t really have a view away from looking at the forward curve around LIBOR. If I had to guess, I see stability. We don’t see any need for decreases, but I also don’t really see it floating up. So, I hope that answers the question.

[Kyle Joseph, Jefferies]

It does. Thanks very much for answering my questions.

[Operator]

Your next question is Kenneth Lee of RBC Capital Markets. Please go ahead.

[Kenneth Lee, RBC Capital Markets]

Hi. Thanks for taking my question. Just one in terms of the funding costs, you’ve recently extended maturities and you’ve also recently embarked on efforts to diversify funding sources. Just wondering, given the current environment, whether you anticipate any further changes to your funding mix right now? Thanks.

[Kipp DeVeer, Chief Executive Officer]

I’ll let Penni comment but I don’t think we do. We’ve tried to keep it balanced between secured and unsecured, between floating and fixed and keep the average duration of liabilities in-line with where we think the average maturity or average sort of tenure of the assets.

[Penni Roll, Chief Financial Officer]

I mean, I think, it’s really same as usual. We try to watch the markets and continue to issue into the markets when we see a strong market to issue into just like we did back in January. But as far as the composition of the balance sheet, I see a lot of the same as we move forward.

[Kenneth Lee, RBC Capital Markets]

Gotcha. And just one follow-up. If I may just in terms of the – in the investment backlog the pipeline and realized this is just a snapshot but just looking at the industry breakdowns there when and how that lines up to what you think, which sectors are the most favorable or at least favorable to invest in, in the current environment, also realizing that you tend to prefer non-cyclical industries. Thanks.

[Kipp DeVeer, Chief Executive Officer]

I’m sure. Yes. I mean we have kept the industry mix albeit changing the way that we reported it as Smitty mentioned this quarter. Very similar. The places that we’re being cautious I think are the places where we’ve seen issues, oil and gas, retail, probably some aspects of the healthcare services business. But generally, the backlog and pipeline is in-line with what you’ve seen from us in the past.

[Kenneth Lee, RBC Capital Markets]

Okay. Thank you very much.

[Operator]

The next question is from Casey Alexander of Compass Point. Please go ahead.

[Casey Alexander, Compass Point]

Hi. Good morning, or good afternoon. I just have one question and no follow-up. I noticed in your originations a couple of sub-debt loans made in the solar power industry, which has been an area that has been kind of tricky for BDCs to lend to. So I was kind of wondering, what was unique or interesting about those opportunities that led you to go ahead and lend into those?

[Kipp DeVeer, Chief Executive Officer]

Yes. Thanks Casey. Yes, we did, the structure of that market is a little bit different. You tend to see more, mezzanine paper or equity like paper behind, longer termed out senior financing. So, I think we did a hundred, $135 million deal to develop a residential solar one of the in the U.S. the other one is a vertically integrated developer of utility scale solar projects.

So look, we’ve got a team that’s been here a long time making investments in this space for us. We think, the two that they found this past quarter were particularly interesting. We’ve actually had great experience and have had no defaults in our power investing vertical, so to speak these days. So we’re nothing, nothing unusual. Maybe just two deals that happen to come in the same quarter.

[Casey Alexander, Compass Point]

All right. Thanks for taking my question. I appreciate it.

[Kipp DeVeer, Chief Executive Officer]

Yes, you’re welcome.

[Operator]

The next question is from Fin O’Shea with Wells Fargo. Please go ahead.

[Fin O’Shea, Wells Fargo]

Hi. Good afternoon. Thanks for taking my question. Just a small one on the SDLP. I think with some of your opening remarks on execution risk in the syndicated market and some peers talking about this as well in the unitranche opportunity, would we look at the SDLP as perhaps a candidate for a leg-up in investment in size this year?

[Kipp DeVeer, Chief Executive Officer]

Maybe. I mean, I think it’ll grow. I think your point on some of these larger deals getting done by non-banks is a phenomenon that’s likely to continue to increase. That being said, Fin with the size of our balance sheet overall, these we can do those deals either on our own or in the SDLP so, and they could all perhaps be a beneficiary, but I think the company as a whole will be a beneficiary, whether it’s an SDLP or not.

[Fin O’Shea, Wells Fargo]

Sure. Thank you for the color. And then just one, Ivy Hill. This mark obviously moves around a little bit. Correct me if I’m wrong, the dividend was up this quarter. That’s also been sort of a normal thing for the fourth quarter, but any change in the course of business in Ivy Hill? Anything to look into on the valuation improvements?

[Kipp DeVeer, Chief Executive Officer]

Yes. No, I mean, it was just – maybe it was actually just a fair value increase. I don’t think the dividend increased this quarter. But look, I mean, they were a little bit under-invested, so they got more cash to work in their vehicles. And obviously, with less cash drag in a CLO, you’re generating better returns. The other thing I’d say, look, the market conditions have been more favorable, i.e., spreads have tightened and that’s a beneficiary for them or that’s a benefit for them, rather.

[Fin O’Shea, Wells Fargo]

Okay. That’s all for me. Thank you.

[Kipp DeVeer, Chief Executive Officer]

Thanks, Fin.

[Operator]

[Operator Instructions] The next question is from Robert Dodd with Raymond James, please go ahead.

[Robert Dodd, Raymond James]

Hi guys. In the LIBOR floor issue, and I appreciate the color that you gave on that already. I mean, you said 79% of the floating book has them. The new commitments were at slightly higher floors, but in the upper, upper end of the markets floors seem to be getting [better], which seems a little odd with LIBOR floor falling, but on the – so on the new commitments, is it, are they as relatively easy to get? Should we expect the round numbers, 80%, the uploading book that has floors, to stay stable? Or are they getting harder to achieve in the book, but where you can get them, at slightly higher floors? Any color on that?

[Kipp DeVeer, Chief Executive Officer]

Yes, I mean, I think the general answer is yes. With the prospect of, LIBOR likely to increase, call it whatever that was 12 months ago, the expectation was that short rates were going up. When that changes, obviously it forces us and the rest of the market to be more cautious and insist upon LIBOR floors. So I think over the last two quarters, I’d say it’s gotten easier to do that and we think it’ll continue in that direction, particularly with the forward curve showing a 40 basis point decline on the LIBOR side. I think we’re going to be pretty focused on it.

[Robert Dodd, Raymond James]

I appreciate it. Thank you.

[Kipp DeVeer, Chief Executive Officer]

Welcome.

[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, Chief Executive Officer]

I’d just thank everybody for joining the call and your interest in the company and we’ll catch up with you all next quarter.

[Operator]

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today’s call an archived replay of this conference call will be available approximately one hour after the end of the call through February 20, 2020 at 5:00 PM, to domestic collars by dialing 1-877-344-7529 and to international callers by dialing [phone]. For all replays please reference conference number one zero one three seven six two six an archived replay will also be available on a webcast link located on the homepage of the investor resources section of Ares Capital website. The conference has now concluded. Please disconnect. Thank you for attending today’s presentation.