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Ares Capital Corporation (NASDAQ:ARCC)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Ares Capital Corporation's Third Quarter, ended September 30, 2018, Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Wednesday, October 31, 2018. I will now turn the call over to Mr. John Stilmar of Investor Relations.

John Stilmar -- Principal, Public Investor Relations and Communications

Thank you, Brian, 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 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 the SEC Regulation G, such as core earnings or core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and results of 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, the 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 related 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 to this information. The company's third quarter, ended September 30, 2018, earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Q3 '18 Earnings Presentation link on the homepage of the Investor Resources section. Ares Capital Corporation's earnings release and 10-Q are also available on the company's website.

I'll now turn the call over to Mr. Kipp deVeer, Ares Capital Corporation's Chief Executive Officer.

Kipp deVeer -- Director and Chief Executive Officer

Thanks, John. Good afternoon and thanks to everyone for being with us today. I'm joined by members of our management team, including our Co-Presidents, Michael Smith and Mitch Goldstein, our Chief Financial Officer, Penni Roll, and other members of the finance, investment, and investor relations teams. You will hear from Penni and Michael later in the call.

Let me start by reviewing our strong third quarter results and I will then provide an update on current market conditions.

This morning, we reported strong third quarter earnings. Our core earnings were $0.45 per share, a 35% increase over the same period a year ago. The improved earnings were driven by higher total portfolio yields, as we benefited from continued increases in LIBOR, and stronger fee income. Fee income was higher primarily due to increased new borrower commitments made during the quarter.

Our third quarter was also a strong quarter for realizations. We delivered a quarterly record $0.87 per share of net realized gains, principally driven by the sale of our investment in Alcami. As discussed on last quarter's call, Alcami is the leading outsource drug development and manufacturing services company, which we acquired as part of the American Capital transaction, and on the Alcami sale, we recognized a $324 million, or $0.76 per share, realized gain, generating gross proceeds that were more than double the price we paid for the investment at acquisition. With our success in Alcami, the company has now generated approximately $1 billion of cumulative net realized gains since inception.

We also had our fourth consecutive quarter of NAV growth. Our NAV per share reached $17.16 per share in the third quarter, significantly above the $16.49 per share from Q3 2017.

Finally, we ended the third quarter in a conservative financial position, with a modest net debt to equity ratio of only 0.54 times. This is below our current target leverage range today of 0.65 times to 0.75 times. We believe the balance sheet is very well-positioned today, with long-dated maturities and significant available capital to deploy as market opportunities allow. We value this dried powder and financial flexibility at this point in what we view as an extended credit cycle.

I'd like to now transition with some thoughts on the market. Overall, market conditions remain competitive and thus far has seemed largely unphased by the broader liquid market volatility that has been evidenced over the last few months. For instance, during the week of October 11th, the S&P dropped over 4% and over $5 billion of high-yield outflows. However, liquid loan prices have remained stable, as continued loan fund inflows and strong CLO formation provided demand and supportive pricing for new issues in that market. And while the middle market doesn't react as quickly as the liquid market, we continue to use the liquid loan market as an input in assessing the health and relative value opportunity in our markets.

The high-yield market has had a much tougher year, as investors are less interested in longer duration, speculative-grade credits with fixed coupons, and new issuance in this market has contracted accordingly with less investor appetite.

In today's competitive market, we're able to differentiate ourselves from the competition by writing large-scale commitments and delivering certainty with our significant final hold capabilities. We also utilize our long-standing relationship to take advantage of our sizable portfolio of incumbent borrowers. And, finally, the flexibility of our capital remains a tremendous advantage. We continue to remain very selective on new deals, as evidenced by the fact that we closed just 3% of the transactions that we reviewed for new companies in the third quarter, which is running below our average close rate since 2010 of just over 4%, and it's an indication that we're being even more selective in today's environment.

We also continue to invest in larger companies as our capital base provides us opportunity to be relevant with larger middle market borrowers. The weighted average EBITDA of third quarter new commitments was over $100 million, which demonstrates how our size allows us to grow with our best borrowers and to be meaningful to larger, more established companies and transactions where we find compelling risk-adjusted returns.

Before I turn the call over to Penni, I'd like to highlight important developments related to our credit facilities and our corporate credit ratings. On October 3rd, we amended our secured revolving facilities to permit a 150% asset coverage ratio and to make certain related changes to the borrowing base calculations. Pricing and other significant terms in these facilities remained unchanged. This now positions us to fully take advantage of the regulatory relief from the Small Business Credit Availability Act, which is scheduled to go into effect for ARCC on June 21, 2019.

On the heels of finalizing these amendments to our credit facilities, setting the strength of our track record, competitive position, and the de-risking from our election of the SBCAA, Moody's upgraded our unsecured credit rating to Baa3, while still maintaining its positive outlook. Ares Capital is now the only BDC with an investment-grade rating from all three major rating agencies. We feel this further adds to our competitive advantage, especially as it relates to accessing the capital markets, and continues to differentiate us from other BDCs, private funds, and specialty finance companies in the market.

I'll now turn the call over to Penni to provide some more detail on our financials.

Penni Roll -- Chief Financial Officer

Thank you, Kipp, and good afternoon. As Kipp stated, our basic and diluted core earnings per share were $0.45 for the third quarter of 2018, as compared to $0.39 for the second quarter of 2018 and $0.36 for the third quarter of 2017. Our basic and diluted GAAP earnings per share for the third quarter of 2018 were $0.49, including net gains for the quarter of $0.05 per share. This compared to GAAP net income of $0.60 per share for the second quarter of 2018 and $0.33 per share for the third quarter of 2017.

In total, we reported net realized and unrealized gains on investments and other transactions for the third quarter of 2018 of $24 million. These net gains were primarily a result of our net realized gains on investments exited, exceeding their second quarter fair values. As of September 30th, our investment portfolio totaled $11.2 billion of fair value and we had total assets of $12.3 billion.

At the end of the third quarter, the weighted average yield on our debt and other income-producing securities at amortized cost was 10.3% and the weighted average yield on total investments at amortized cost was 9%, as compared to 10.4% and 9.1%, respectively, at June 30th, 2018. Overall, our yields remained fairly consistent with last quarter.

Moving to the right-hand side of the balance sheet, our stockholders' equity at September 30th was $7.3 billion, resulting in a net asset value per share of $17.16, an increase compared to $17.05 a quarter ago and $16.49 a year ago, up 0.6% and 4% respectively. As of September 30th, our debt to equity ratio was 0.63 times and our debt to equity ratio net of available cash of $726 million was 0.54 times, compared to 0.64 times and 0.57 times, respectively, at June 30th, 2018.

Our total available liquidity, including available cash, at the end of the third quarter was approximately $3.8 billion.

We continue to focus on our liability structure and in addition to the asset coverage-related amendments to two of our revolving facilities that Kipp mentioned, during the third quarter, we also amended and extended our revolving facility with SMBC, pushing out the reinvestment period and the maturity each by one year, with the remaining terms, including pricing, remaining substantially unchanged.

In November, coming up, we will also repay $750 million of maturing 4 7/8% unsecured notes using existing available liquidity. This is the first of our investment-grade unsecured note issuances that will mature since we began issuing in the investment-grade market back in 2013.

Our balance sheet continues to be asset sensitive and any further rise in short-term rates should continue to benefit our earnings. For example, using our balance sheet at September 30th and assuming a 100-basis point further increase in LIBOR, our annual GAAP earnings are positioned to increase by up to approximately $0.17 per share.

In terms of our quarterly dividend, our Board of Directors declared a fourth quarter dividend of $0.39 per share that is payable on December 28, 2018, to stockholders of record on December 14th.

Today, we are also spending more time monitoring our undistributed taxable income. We are currently on pace for a record year of GAAP net realized gains, which has caused investors to ask us if we will be required to pay a special dividend in order to meet our RIC tax distribution requirements. The short answer to this is that we will not be required because we are in the enviable position of having inherited tax losses available to us from investments acquired from Allied Capital which will allow us to offset a significant portion of these taxable gains. These tax-only losses will be recognized in determining taxable income but will have no impact on our GAAP earnings or net asset value.

Given taxable income is something that is only determined annually, we will not know our final 2018 tax position until we complete the full year. However, we do continue to anticipate that we will once again have a healthy level of spillover income from 2018 into 2019 and will be in a better place to discuss this with you on our year-end earnings call early next year once we know our specific tax position for 2018.

Now, with that, I will turn the call over to Michael to walk through our investment activities for the quarter.

Michael Smith -- Co-President

Thanks, Penni. I'd like to spend a few minutes reviewing our third quarter investment activity and portfolio performance. I'll then provide a quick update on post-quarter-end activity and our backlog and pipeline.

During the third quarter, we originated $1.9 billion of commitments across 41 transactions, of which 68% of commitments were first lien and 91% were in senior secured positions, reflecting our conservative approach and focus on being up the balance sheet in this market. As usual, the transactions were predominantly made in private equity-backed companies that have leading market positions in non-cyclical industries.

Of note during the third quarter, we led a $620 million senior secured financing in support of Bain Capital's acquisition of Varsity Brands, a leading manufacturer and supplier of athletic gear, graduation-related products, and cheerleading products and services. Varsity Brands has been an ARCC portfolio company since 2014 when the company was purchased by Charlesbank Capital. As a result of our incumbency and strong relationships with Charlesbank, Bain Capital, and the company, we were able to remain invested in this high-quality portfolio company with a well-regarded financial sponsor when the company was acquired by Bain Capital last quarter.

Additionally, this transaction underscores the value of our selective equity co-investments, as ARCC realized a $14 million gain on our legacy equity investment of approximately $8 million made alongside Charlesbank. To underscore the value of equity co-investments, overall, we have generated approximately $290 million in net realized gains from the equity co-investments that have been made since inception by ARCC. These gains have supported our long-term track record of steady net asset value growth.

Shifting to repayments, during the third quarter, we exited or repaid on $1.9 billion of commitments. Of note for the quarter, many of our repayments were weighted toward more junior capital positions, including Alcami, which, based on our strong senior debt originations, enabled us to shift a portion of the portfolio into more first-lien assets. Additionally, we were able to use the highly liquid market conditions to refine our portfolio and manage hold sizes, contributing to the portfolio rotation into more senior assets and our strong fee income.

As Penni mentioned, at quarter-end, our portfolio was $11.2 billion, consisting of 342 different portfolio companies, resulting in a highly diversified portfolio where our average hold position per name at fair value is only 0.3% of the portfolio. Consistent with our increased senior-focused investment activity in the third quarter, our portfolio is now comprised of 74% in senior secured positions, with 44% in first lien, up from 70% in senior secured positions and 40% in first lien positions at the end of the second quarter.

Performance continues to be strong in our underlying portfolio companies. As of September 30th, our portfolio companies continued to generate solid growth, with the weighted average EBITDA over the past 12 months increasing by approximately 6% in the third quarter of 2018, up from 4% in the third quarter of 2017.

Our non-accruals remained fairly stable this quarter, as non-accruals as a percentage of the total portfolio at cost remained at 2.7%. Non-accruals at fair value decreased from 0.6% in the third quarter from the 0.8% in the second quarter.

Before I turn the call back over to Kipp for some closing remarks, I would like to provide some brief comments on our post-quarter-end investment activity. From October 1st through October 24th, we made new investment commitments totaling $412 million and exited or were repaid on $389 million of investment commitments, generating approximately $20 million of net realized gains. As of October 24th, our backlog and pipeline stood at roughly $1.46 billion and $330 million, respectively.

As Mitch Goldstein and I reiterate on each quarterly call, these potential investments are subject to approvals and documentations 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 the call back over to Kipp.

Kipp deVeer -- Director and Chief Executive Officer

Thanks, Michael. In closing, we're pleased with our third quarter results and strong execution against our goals for 2018. Our core earnings have increased significantly over the last five quarters, and in the third quarter, we generated core earnings well in excess of our recently increased quarterly dividend. We achieved these strong third quarter earnings and increased revenue growth from the benefits of rising LIBOR and expanded fee income, despite being below our target level of leverage.

We also generated record net realized gains in the third quarter, as we successfully exited non-core assets from our American Capital transaction and further supplemented those gains with gains from ARCC-originated equity co-investments. We've now successfully exited most of the non-core investments from the ACAS acquisition, and at the end of the third quarter, we generated a 38% realized IRR on the transaction. The exits from the American Capital portfolio contributed to our under-leverage balance sheet but, at the same time, enabled us to reinvest the substantial gains accretively for our shareholders.

Looking forward, with the near completion of our portfolio rotation efforts and the benefit of higher LIBOR, we feel the company has achieved a new higher level of earnings that are sustainable and in excess of our regular dividend. We remain confident that this robust earnings profile exists even at a lower leverage level and we believe there is continued upside if we can move back toward our target leverage ratio and continue to realize the benefits of any further LIBOR increases.

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

Questions and Answers:

Operator

Absolutely. At this time, if you would like to ask a question, please press "*1" on your touchtone phone. If you'd like to withdraw the question, please press "*2". Please note, as a courtesy to those who may wish to ask a question, please limit yourself to one question and one single follow-up. 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. Once again, if you would like to ask a question, please press "*1". And today's first question will be from John Hecht with Jefferies. Please go ahead.

John Hecht -- Jefferies -- Analyst

Morning, guys. Congratulations on a good quarter and thanks for taking my questions. First, a question. Kipp, I think you had insinuated that spreads have been, even among a kind of volatile market backdrop, spreads have been reasonably stable. Are you seeing at this point any change in those dynamics or competitive factors? Is anybody maybe moving in or out of the market given the volatility?

Kipp deVeer -- Director and Chief Executive Officer

Not really, John. Spreads have remained, and it's fine to update, we always answer that question and are happy to. They've been pretty consistent for, I think, the last two years. Maybe even a little bit longer. What we've seen is just, I think as we've described to many of you, just our view is lower quality underwriting, higher adjustments to EBITDA that maybe make leverage levels on an actual basis higher than they might be interpreted to be on sort of an adjusted basis, but we haven't seen spreads come in at all lately in mid-market land.

Vis a vis the competition, there's not a lot of new competition. There's a lot of capital coming into the space but some of it's been in situations where capital has perhaps moved from a manager to another. If you take the FS transaction, which obviously moved a lot of capital from one manager to another. But most of what we've seen is existing managers just continuing to raise capital and I think that that just evidences the view that investors find the risk/reward and the asset class to be attractive.

John Hecht -- Jefferies -- Analyst

Okay. And then the follow-up question. I know it's difficult for you guys to forecast pre-payments and so forth within the portfolio, but just thematically, as rates move up, should we expect that activity to wane or how should we think about that as we step through next year?

Kipp deVeer -- Director and Chief Executive Officer

Yeah. I mean, look, specific to Ares Capital, we've seen elevated repayments as we've been doing two things: we've been monetizing, obviously, assets from an acquisition we did, as you all know, and I think we've also been pretty opportunistic sellers considering that it's been a pretty good market to sell things, where it's been more difficult to make new investments. I mean, I think over the years, John, we always think of average life of our assets as being somewhere between 3-5 years, not to be too specific. And, yeah, as rates go up and perhaps you're later in the cycle and you're seeing less de-leveraging, perhaps there are more cracks down the line, the timing of repayments should lengthen out a bit, i.e., they should slow.

John Hecht -- Jefferies -- Analyst

Great. Thank you, guys, very much.

Kipp deVeer -- Director and Chief Executive Officer

You're welcome. Thanks.

Operator

The next question will be from Rick Shane with J.P. Morgan. Please go ahead.

Richard Shane -- J.P. Morgan -- Analyst

Hey, guys. Thanks for taking my questions this morning. When we look at the debt summary, you have must over $1 billion maturing over the next three months. At the same time, you have more capacity undrawn on your revolving facilities than pretty much any time in the last several years. I'm curious how you are thinking about approaching those maturities. Last year, you did do five-year notes, $600 million of five-year notes, in anticipation of some maturities. I'm curious this year if you're going to let that go into the revolver and perhaps take some of those funding costs down.

Kipp deVeer -- Director and Chief Executive Officer

Thanks for the question, Rick. I'll let Penni start and can follow on.

Penni Roll -- Chief Financial Officer

Hey, Rick. The nice thing is we're sitting in a great position that we have a lot of liquidity to pay off the upcoming maturity of $750 million in November. As usual, our plan is to hit the markets and issue debt when we have a favorable market backdrop and we like to have a lot of flexibility around how we do that and not necessarily tie it specifically to a maturity. We've been thinking about this maturity for a while and it's why we really focused on issuing debt over the last 12 months so that we got ahead of it. So, I think where we're sitting is -- particularly now with the upgrade with Moody's -- we're well-positioned to be a continued issuer in the investment-grade markets. It's where we want to continue to issue debt, particularly as we grow. So, we will continue to watch the markets and if we get the right market to issue in, we would do that like we've done in the past. But we have no imminent need to have to do that.

Kipp deVeer -- Director and Chief Executive Officer

Yeah. And, Rick, just to repeat. I made a point of this in the prepared remarks. Partially because of the realizations and repayments, we're ending the 9/30 quarter with $726 million of cash. So, we'll obviously see some pretty significant pick-up just by paying down debt, relieving ourselves of, frankly, too much cash, and not having to borrow and pay interest expense to that tune. And there will be a little bit of modest accretion in the short-term, just getting out of an excess cash position.

Richard Shane -- J.P. Morgan -- Analyst

Got it. Okay. And I definitely tied in the comment about being the only investment-grade issuer for all three agencies. Curious, though. The one thing is, it seems the shift has been over the last couple of years toward unsecured versus secured. To the extent you do see that opportunity going forward, is that still the preference?

Penni Roll -- Chief Financial Officer

It is. I think if you look at our capitalization structure, we've had somewhere around -- if we're probably fully leverage in the balance sheet, 70% or 80% of our debt capitalization be in unsecured debt. It's been a little bit higher without any drawings on the revolver right now but that will shift back after this repayment in November. So, I think we like the composition and we would like to continue to drive a lot of our debt capital being in the unsecured area versus secured. And that's something that we think about a lot, also in the context of maintaining our investment-grade rating.

Richard Shane -- J.P. Morgan -- Analyst

Got it. Hey, Kipp, and point is well-taken on the cash position. I had looked at that and thought you must have some big transactions coming through but then, obviously, when you tie it in to what's available on the revolver, you actually just are going to be stuck in the short-term, to your point, with a fair amount of cash until it's reinvested.

Penni Roll -- Chief Financial Officer

Right. Yeah.

Operator

Next question will be from Ryan Lynch with KBW. Please go ahead.

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Hey, good afternoon, guys. First question. If I look at your kind of average portfolio company EBITDA, it's increased by almost 50% really, to about $93 million over the last year. And I think you said in the third quarter, you guys averaged well over $100 million of EBITDA for all of your commitments. So, can you just talk about really what has been the driver of that increase in EBITDA? Is it just more you guys having a larger capital base, both at ARCC as well as across the platform, that you guys can now be full-service or full-solution providers to some larger borrowers? Or is that intended to -- are you guys moving to larger companies because we're later in the credit cycle and you view those as safer? Can you just talk about what is really driving that pretty big increase in average EBITDA?

Kipp deVeer -- Director and Chief Executive Officer

Yeah, I'm glad you asked the question, Ryan. So, all of those things are true but I don't want to have a point lost that actually Mitch and Mike and I and a couple of the others here were talking about before we -- just as we were getting ready for the call. The weighted average number tends to skew up, obviously, because in the larger companies, you're writing larger checks. Right? It's just sort of the way that that business works. So, we were talking about actually introducing a second metric and we were asking ourselves, if we actually went to what's median EBITDA in the portfolio, and when we went back through it quickly, median EBITDA is around $40 million.

So, I don't want this number to skew people to say that we're not interested in smaller transactions, we're not funding value in more traditional middle market transactions, because we are. And there are actually a couple that we did this quarter when we looked back through the Q3 activity.

But the reality is, to your point, yeah, typically in those larger companies that have $75 million to $100 million of EBITDA, as we've talked about on prior calls, they're either large unit traunches that are displacing bank financings -- right? So, think about $500 million to $600 million deals, where we're holding significant final holds and/or they're second lien. Again, to your point, where we feel they're larger companies, they're better credits, they're more resilient, secondly, than you would see in a traditional mid-market deal. So, it's a little bit of the math skewing to tell a story that's not necessarily true.

But the points that you made about why we invest in larger companies and why we have larger hold sizes in these larger companies is definitely part of it. But I just -- I wanted to make that clarifying point because I thought it was interesting we had that conversation before we got on the call here today.

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Okay. Yeah, that is interesting. That makes sense. Just the larger deals are going to skew the average versus the median is going to be a bit lower. So, my follow-up question. You guys had $1.9 billion of exits this quarter. I know Alcami drove that a little bit larger than it would have otherwise been. But it's still a pretty large number from a portfolio turnover standpoint. I was just wondering how much of that, that $1.9 billion, I guess -- the composition of that -- how much of the $1.9 billion was really driven by you guys syndicating off or selling off portions of loans that you guys committed to?

The reason I ask is just because you guys had a great quarter from a fee income standpoint, really drove earnings very high this quarter. But I'm just wondering, obviously there is a cost to that. That that lowers, obviously, the average size of your portfolio and you guys have a tone of excess capital right now. So, I'm just wondering how much of that $1.9 billion was syndicated or sold off and how you guys think about generating good fees from syndications and balancing diversification of the portfolio versus you guys are in a portfolio position where you guys have excess liquidity and have a lot of capital you need to deploy.

Kipp deVeer -- Director and Chief Executive Officer

Yeah. I mean, look, there's more of a weighting toward new deals this quarter, I think, as we talked about in the prepared remarks. So that probably leads to a little bit more, potentially, commit and bring in partners and there's some of that. I was looking around for the number. The reality is we have prepayments in a couple of large names. Right? And places where we recognized gains: Accruent, Alcami, a couple of other places that were really successful investments that generated gains for us.

But, no, certainly, a portion of that number, which is large, was us bringing partners in, selling down, etc. It typically, in a $2 billion-ish gross origination quarter, it can be a quarter or so, would be my guess, just rough numbers. I have the numbers. I don't really want to disclose them on a quarterly basis. I'm not going to give you an exact number but it did generate some excess fee income.

And, look, this is a great market for us to be able to do that. WE have, as I've always said, advantages in terms of our capital scale. And some of that's being able to drive leadership in transactions and excess fee income and you definitely see that this quarter. And if the markets hold up the way that they've held up on the loan side, we'll be able to do that for a little while longer.

Richard Shane -- J.P. Morgan -- Analyst

Okay. Thanks. That's helpful color. And congrats on the really good quarter.

Kipp deVeer -- Director and Chief Executive Officer

Thanks so much, Rick.

Operator

The next question will be from Chris York with JMP Securities. Please go ahead.

Christopher York -- JMP Securities -- Analyst

Hey, guys. Thanks for taking my questions. So, I'll follow up on Ryan's question a little bit on structuring fees, which were a record. Kipp, you talked a little bit about the drivers there but is the structuring fee price -- it was 2.4%, I believe, this quarter, which was up attractively over the last couple of periods, comparable periods -- is that maybe sustainable as a result of your leadership?

Kipp deVeer -- Director and Chief Executive Officer

If you look historically, it's been a pretty significant portion of the total return proposition that we've delivered to shareholders over the years and that's obviously because we like to lead and originate our deals. So, some of it is bringing in partners but the reality is, when you go out, if you put $1.9 billion, rough numbers, to work in new transactions, then you get upfront fees on all those originations. So even if you assume you have a low fee number, call it 2% on $1.9 billion, that's still $38 million a quarter in fees. Right? So, this idea that all of it -- some of it comes and goes but there's a base structuring fee number there that, so long as we continue to be active investing money, is likely to be there.

But, no, this was a good fee quarter. And I think some of you all who wrote analysts' notes this morning said probably a little bit of a beat on fees. I think it's a little bit of a beat on investment income, fees, and certainly on gains. But, yeah, look, a couple of pennies, if they drop off because they're non-recurring, I'm not concerned. But that comes and goes. It depends on the activity, as you appreciate.

Christopher York -- JMP Securities -- Analyst

I certainly do. Another income line that drove the beat for us was other income. It was strong for the second consecutive quarter. We're aware that this income can be lumpy and generally characterized as non-reoccurring. But is there anything occurring in today's market that can be attributed to the last two quarters of solid contributions?

Kipp deVeer -- Director and Chief Executive Officer

No. I mean, this quarter, we actually had a one-time management fee associated with the Alcami sale that I think, Penni, was what?

Penni Roll -- Chief Financial Officer

$7 million.

Kipp deVeer -- Director and Chief Executive Officer

$7 million that you can consider one-time. So that's probably why it's a little bit elevated. In the quarter prior, I don't remember anything of any substance at all. But that's the number for this quarter that might be helpful. But, no, there's nothing in the market that's creating any differences in what we expect there.

Christopher York -- JMP Securities -- Analyst

Sure. That fee from Alcami is very helpful. So, thank you. And then, lastly, we've heard of some BDCs discuss bringing off-balance sheet joint ventures on-balance sheet. Now, your leverage remains well below your targets and your return on the SDLP of 15% is very attractive. So, could you share with us your thought process and whether it makes any sense for ARCC to consider bringing SDLP on-balance sheet?

Kipp deVeer -- Director and Chief Executive Officer

Not a lot of talk about that, frankly, today. I mean, we view the SDLP as a pretty attractive investment, in terms of the ROE that we're able to generate there with our partners is something that we'd like to continue to lean on. Look, you can see the return on assets in those programs. When your leveraged 0.6 to 1, it really doesn't generate sufficient ROE to be worth any consideration, in terms of revisiting the relationship or revisiting the structure. Maybe down the line, but there's really no meaningful discussion about that here today.

Christopher York -- JMP Securities -- Analyst

Kipp, I was just kind of thinking down the line, so longer term. I'll just switch to my last question. So, you've done a great job transitioning the portfolio, especially with ACAS, but with the remaining $700 million in what we'll call legacy American Capital assets, how much of that portfolio could be subject to any further repositioning?

Kipp deVeer -- Director and Chief Executive Officer

We think it's about half.

Christopher York -- JMP Securities -- Analyst

Great. That's it for me. Thanks, guys. Thanks, Kipp.

Operator

The next question will be from Finn O'Shea with Wells Fargo. Please go ahead.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Hi, guys. Thanks for taking my question. Just a little bit on the market and volatility environment. The fourth quarter-to-date numbers seem a little soft, given fourth quarter is traditionally the strongest. And you said the backlog is very strong, nearly $1.5 billion. Is this a timing issue? With sort of the fourth quarter wider volatility you referenced, are deals slowing up?

Kipp deVeer -- Director and Chief Executive Officer

The slowness point is just in terms of what we've done since October 1st, meaning that $412 million number that Mike laid out?

Finian O'Shea -- Wells Fargo Securities -- Analyst

Yes.

Kipp deVeer -- Director and Chief Executive Officer

Got it. Look. I mean, Finn, thanks for the question. It's maybe not as -- I actually had this comment the other day internally. It's not quite as busy as we typically will see on Halloween most year. I would say that. Our backlog and pipeline is fine. It probably is going to be weighted a bit toward the back of the year, to Mike's comments, meaning $400 million-ish closed in the October with a pretty significant backlog on a go-forward basis. But, look, yeah, we'll be reliant on closing a couple of the things that we think we have pretty well baked here for year-end.

As you know, Finn, having followed this space a long time, too, most of the things that we see in the pipeline are pretty well sorted through and diligenced at this point and it takes a long time to close things. A lot of deals don't really close after December 15th, December 20th. So, probably not in our pipeline if we don't expect it would close in the next six weeks. But I think, look, if you looked around broad leverage finance, you would see it a bit slower than you've seen in other fourth quarters.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Sure. Thank you for that. Very helpful. As a second question, I wanted to follow on the earlier line from Rick Shane's questions earlier. On your unsecured debt, given you've rather astutely structured these to provision the regulatory regime as your covenant, now that you're sort of testing those waters, or you will be very soon, presumably, on refinancing those, how are these structures and pricing terms holding up?

Penni Roll -- Chief Financial Officer

Just on the liability side?

Kipp deVeer -- Director and Chief Executive Officer

Yeah, just in terms of new deals. And then I'm happy to jump in, too, but go ahead.

Penni Roll -- Chief Financial Officer

I think we're in a great position to continue to access the markets. And if you look at pricing and terms, I think we would issue at a similar spread to what we have in the past. Clearly, we've lost a lot on treasury because treasuries continue to go up. But we do believe that we would still be best-in-class in the context of the size of deals that we can do and the pricing and the spreads that we can issue at. So, we feel good about the capacity in the market and our ability to effectively execute.

Like I said before, we just like to get into the best market that we can find to execute. It's been a little bit noisy, as you know, over the last several weeks in the markets generally. So, right now might not be the best time to do something. But given the amount of available liquidity we have and the ability to continue to ladder out our maturities, we have plenty of flexibility on the timing with which we continue to raise capital.

Kipp deVeer -- Director and Chief Executive Officer

Yeah. And I'll just add that with three investment-grade ratings, the recent upgrade, and all of that, the only negative really -- I think 2-to-1 leverage has been well-understood. I think the plan that we laid out about not maximizing leverage but perhaps getting to something like 1.2 times over the next few years, if we're able to get there, has been well-received by the agencies and by our debt holders. And, yeah, at this point, the only negative is it's been a tough year for the investment-grade markets and, obviously, the benchmark five-year, which we typically priced off, is wider than it was and not a lot we can do about that. But spreads on our existing bonds have held in and have not really traded down.

Penni Roll -- Chief Financial Officer

Right. But at the same time, we've added a lot of earnings power to the left-hand side of the balance sheet and the portfolio because of rising short-term rates so we're sitting in a well position to still have a good spread.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Very well. Thank you.

Kipp deVeer -- Director and Chief Executive Officer

Thank you.

Operator

The next question will be from David Miyazaki with Confluence Investment Management. Please go ahead.

David Miyazaki -- Confluence Investment Management -- Analyst

Hi. Good morning and congratulations on your progress to make the ACAS transaction as successful as the Allied one. Just a question. You have this combination of floating rate assets on the left side of the balance sheet with some fixed rate liabilities on the right side. But if we think about things like the length of the economic expansion, or even the dots charts that get provided by the Fed now, is there any thought to negotiating into your new deals LIBOR floors that are higher at a point in time where people might not be worrying about declining interest rates?

Kipp deVeer -- Director and Chief Executive Officer

That's a great question. There's no real discussion about it in the markets is the quick answer. I think everybody is living in a world where they're believing that the short-term rates at least a couple more times and the yield curves flattening. And, frankly, the discussion around what happens when we get there and if and when there's more difficult economic conditions, do you think see LIBOR reversing. We're just not there yet, David. But I appreciate your comment as well on the ACAS transaction. Thanks so much.

David Miyazaki -- Confluence Investment Management -- Analyst

Yeah. I mean, you guys have done great work there and that was not an easy act to follow. But kind of just getting back to the LIBOR issue, right now, I think you've worked on this, it's not what I'd call a huge mismatch, but it is a mismatch that's creating incremental earnings when LIBOR rises. But you could, at some point, face that headwind if LIBOR begins to decline and you've got fixed liability. So, I was just starting to think about, over the next few years, if we went through the last cycle with LIBOR floors at 100, do you put any thought into, at a point in time when people aren't worrying about declining rates, to maybe have a LIBOR floor at 200?

Kipp deVeer -- Director and Chief Executive Officer

We haven't done that. It's a good idea. We'll talk about it internally. It's sort of not out in the market but it's an interesting question that we'll take away.

David Miyazaki -- Confluence Investment Management -- Analyst

A second one was -- and you'll have to forgive me for not being entirely aware of the nuances with the rating agencies -- but it seems to me that Moody's has been pretty quiet with regard to ratings on the BDC industries. In your work with them, are you seeing more engagement from them with regard to the BDC industry?

Kipp deVeer -- Director and Chief Executive Officer

For sure. Yeah. And I can have Penni jump in, too, but I think that the upgrade was really the result of them reengaging in a meaningful way to sort of reunderwrite the industry. And we're thrilled about that. So, I don't have much else to add. Penni, I don't know if you have anything to add beyond that?

Penni Roll -- Chief Financial Officer

No, I just think in --

Kipp deVeer -- Director and Chief Executive Officer

But the answer is yes.

Penni Roll -- Chief Financial Officer

And in spending a lot of time with them, we do feel like they've reengaged and looked at the industry [audio cuts out] as a good thing for the whole group.

David Miyazaki -- Confluence Investment Management -- Analyst

Yeah. I agree. And so thanks for being at the vanguard of that effort. I think it really will help the overall industry, not just Ares, in having more credibility with regard to ratings. So, thank you for that effort.

Penni Roll -- Chief Financial Officer

You're welcome.

Operator

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

Casey Alexander -- Compass Point Research -- Analyst

Hi. Good afternoon. I wanted to make sure that I understood the conversation about the tax coverage of the Alcami gain. I mean, is what you're saying you're not going to be forced to do a distribution as a result of the Alcami gain but that doesn't necessarily preclude a special distribution based upon your spillover income?

Kipp deVeer -- Director and Chief Executive Officer

That's exactly what we said.

Casey Alexander -- Compass Point Research -- Analyst

Okay.

Kipp deVeer -- Director and Chief Executive Officer

And we can go into more detail on the intricacies of tax versus GAAP accounting for BDCs if you'd like but that's what we said.

Casey Alexander -- Compass Point Research -- Analyst

God, please don't. Secondly, when you go back a few years ago, the original discussion about the Small Business Credit Availability Act, there was a discussion that the strategy was potentially to move up the capital stack. But then when your Board authorized the resolution, you guys said that you were going to stick with your existing portfolio strategy. So, my question is, in the last couple of quarters, you have been moving up the capital stack anyway. Am I right in assuming that's not really in response to the Small Business Credit Availability Act but that's more strategic in relation to the macro environment?

Kipp deVeer -- Director and Chief Executive Officer

The answer to that question, simply, is yes. But just with the caveat that, obviously, higher leverage does allow us to make investing in traditional senior debt more accretive to shareholders. So, it makes it much easier for us to do that but it's very much our view that in this environment, a focus on first-lien investing, a continued focus on first-lien investing makes sense.

Casey Alexander -- Compass Point Research -- Analyst

I agree. Well, certainly, we all want to be able to see the other side of the rainbow when it comes. So, I appreciate you taking my questions.

Kipp deVeer -- Director and Chief Executive Officer

Thanks, Casey.

Operator

Next question will be from Robert Dodd with Raymond James. Please go ahead.

Robert Dodd -- Raymond James -- Analyst

Hi. Getting back to the fee income question for a minute, if I can. I mean, Kipp, in your comments, you refer to the higher levels as kind of "excess fees" a couple of times but you also talked about the company as a whole hitting a new full earnings profile -- higher level of earnings. At the same time, when we look at your average hold size in the quarter, incrementally was $47 million, even at a $40 million EBITDA business with your average attachment point, the average checks that you're speaking for are a lot larger than your hold size. So, to the point where bringing in partners has happened over the life of the company, is it just becoming, given the size, given your hold size, is it just going to become more and more common? And is that the contributor to kind of the new earnings profile? And maybe the fee income isn't so much excess but the plan? And you can put air quotes around the plan if you want.

Kipp deVeer -- Director and Chief Executive Officer

I mean, again, just when we think about the earnings today, just the point that we were trying to make, I think as we've discussed with many on the phone over the last, call it, 12-18 months, we've been on a little bit of a journey of portfolio rotation away from low-yielding assets at ACAS as well as equity investments and we're now finally here at the end of Q3 where we feel we're largely through that. So, a significant portion is simply just a repositioning of our assets over the last 18 months on a pro forma basis for the acquisition and that's largely done. The second key contributor, as I mentioned during the prepared remarks, is LIBOR.

The third point on fees is, obviously, your question and so I'll answer that now. It's less important to my conclusion that the company is on a higher overall sustainable kind of earnings trajectory than it was. It's really more dependent on those first two factors that I just mentioned. But on fees, again, our final holds are larger. We typically -- we do retain all of the fees. There's no skim to the manager or any other stuff. Right? I mean, ARCC, if it's underwriting and holding investments, is getting the benefit of all of those commitment fees. And then to the extent we're able to sell down over time, which if we're doing larger transactions, we can generate some excess fees based on where we bring folks into our transactions.

Our scale allows us to do larger deals these days. And what I referred to maybe as the excess income is, of course, bringing partners into some of those larger transactions. It's episodic. This is a good market for it. But it was only probably, as I mentioned, I think, in trying to answer one of the questions, a couple of pennies max, in terms of the earnings this quarter.

Robert Dodd -- Raymond James -- Analyst

Okay. Got it. I appreciate that. And then one more, if I can. On the EBITDA growth and Michael's comments also in the presentation, 6%. Obviously, that's trailing 12-month. And a year ago, the trailing 12-month was 4% so it's clearly improved. But we're talking about, when you add two trailing 12-month periods together, that's 24 months. I mean, any color you can give us about more recent trends? And, obviously, those can be volatile, etc. But any changes in kind of the path of EBITDA growth that have occurred over those 24 months that maybe don't get captured in the 6% and the 4%?

Kipp deVeer -- Director and Chief Executive Officer

I don't think so. I mean, I think that's really -- those are the metrics that we think are, for us, easy to get through and hopefully easy to understand for our investors. So, I don't have a lot to add on that one, Robert.

Robert Dodd -- Raymond James -- Analyst

Okay. Thank you.

Kipp deVeer -- Director and Chief Executive Officer

You're welcome. Thanks.

Operator

We'll have time for one more question and that question will be from Christopher Testa with National Securities Corporation. Please go ahead.

Christopher Testa -- National Securities Corporation -- Analyst

Hi. Good afternoon. Thank you for taking my questions today. Just curious. Kipp, you had mentioned that despite the volatility, spreads have remained relatively stable. I'm just wondering if you've seen, on behalf of lenders, any significant pushback in terms of the deterioration of terms. So, even though spreads might have not budged, are you starting to see more lenders, not just yourselves, but just across the board, kind of push back on what we've seen to be ridiculous EBITDA add-backs, priority of debt, cov-lite, things of that nature?

Kipp deVeer -- Director and Chief Executive Officer

I mean, look. I think there's always an attempt, whether you're a loan investor or whether you work in our business, it's really more of a supply and-demand issue as to whether it's a borrower-friendly market or a lender/investor-friendly market. And as I mentioned in the prepared comments a little bit, there's just tremendous inflows into loans, tremendous inflows into private credit that probably make those discussions more difficult relative to the supply for new transactions. And someone asked a question about new entrants. I think new entrants are probably most adversely selected on those points. I think we've been able to stay away from that more than others, again, because of our incumbent borrowers and long history in the market, strength of relationship, some of the things that I mentioned during the prepared comments.

So, I think there's an attempt but it's a push and pull and it depends when. Coming out of this summer, there was a real attempt there and then supply dried up in the loan market. So, there are a little bit of fits and starts now but I wouldn't say that there's a prevailing trend that's making things more investor-friendly today in any material way.

Christopher Testa -- National Securities Corporation -- Analyst

Got it. And just kind of sticking with that theme, aside from the obvious, inherent advantages of your company's platform, do you think that -- are you encouraged, I guess, by more of the composition of the loan volume going forward? Obviously, LBOs, specifically jumbo LBOs, have come back in a big way. Is that encouraging you at all, in terms of pricing power, as we go into the end of the year?

Kipp deVeer -- Director and Chief Executive Officer

Yeah, I mean, I guess. I mean, frankly, if I had to have a modest preference for a new deal versus a dividend recap, I'd have a preference for new deal. Equity support in the sponsored lending business is obviously a key thing that you hang your hat on so it's much better when private equity firms are putting money into companies than taking it out.

But away from that, I think we have -- look, we had a bunch of large-cap LBO volume that cleared coming out of the summer that I think was there was real nervousness about. If you were sitting on a loan desk in the middle of August, I think there was real nervousness and that all came through, showing that there was a lot of cash there to buy loans. As a result, I think some of the slowdown that we've seen now is the fact that the nervousness that existed in the banks during July and August probably led them to underwrite fewer new transactions that are transactions that probably would have closed over the last couple of weeks/would close over the next couple of weeks or months and may contribute to a slower Q4.

So, this is just -- it's a little bit of a rollercoaster from month to month, as I think investors have found conditions to be more difficult and are trying, again, to exert that pushback. But, again, as you all understand, we, along with other long-only investors in the loan market, don't really get paid to be in cash and trying to strike the right balance there is what creates that push and pull with intermediaries. It's really, for us, the focus of why we want to lead and originate our own deals. Right? And why we don't buy a lot of paper from the market.

Christopher Testa -- National Securities Corporation -- Analyst

Got it. Okay. Appreciate your answers and congrats on the great quarter.

Kipp deVeer -- Director and Chief Executive Officer

Thanks so much.

Operator

At this time, this will conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Kipp deVeer for any closing remarks.

Kipp deVeer -- Director and Chief Executive Officer

Such an onus to have to announce earnings on Halloween. Typically, you'd see Josh Easterly wishing everybody a Happy Halloween or something so I'll wish you all a Happy Halloween on our behalf and on his behalf. Thanks so much. Appreciate it.

Operator

Ladies and gentlemen, this does conclude 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 November 15, 2018, at 5:00 p.m. Eastern Time, to domestic dialers by dialing 877-344-7529 and to international callers by dialing 1-412-317-0088. For all replays, please reference conference number 10124526. 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. Once again, thank you for attending. You may now disconnect.

Duration: 57 minutes

Call participants:

John Stilmar -- Principal, Public Investor Relations and Communications

Kipp deVeer -- Director and Chief Executive Officer

Penni Roll -- Chief Financial Officer

Michael Smith -- Co-President

John Hecht -- Jefferies -- Analyst

Richard Shane -- J.P. Morgan -- Analyst

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Christopher York -- JMP Securities -- Analyst

Finian O'Shea -- Wells Fargo Securities -- Analyst

David Miyazaki -- Confluence Investment Management -- Analyst

Casey Alexander -- Compass Point Research -- Analyst

Robert Dodd -- Raymond James -- Analyst

Christopher Testa -- National Securities Corporation -- Analyst

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