News Column

ARES CAPITAL CORP - 10-K - Management's Discussion And Analysis Of Financial Condition And Results Of Operations

February 26, 2014

The information contained in this section should be read in conjunction with the Selected Financial Data and our financial statements and notes thereto appearing elsewhere in this Annual Report. In addition, some of the statements in this report (including in the following discussion) constitute forward- looking statements, which relate to future events or the future performance or financial condition of Ares Capital Corporation (the "Company," "ARCC," "Ares Capital," "we," "us," or "our"). The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning: our, or our portfolio companies', future business, operations, operating results or prospects; the return or impact of current and future investments;



the impact of a protracted decline in the liquidity of credit markets

on our business; the impact of fluctuations in interest rates on our business; the impact of changes in laws or regulations (including the



interpretation thereof) governing our operations or the operations of

our portfolio companies or the operations of our competitors;



the valuation of our investments in portfolio companies, particularly

those having no liquid trading market; our ability to recover unrealized losses;



market conditions and our ability to access alternative debt markets

and additional debt and equity capital;



our contractual arrangements and relationships with third parties;

the general economy and its impact on the industries in which we invest; uncertainty surrounding the financial stability of the U.S. and the EU;



Middle East turmoil and the potential for rising energy prices and its

impact on the industries in which we invest;



the financial condition of and ability of our current and prospective

portfolio companies to achieve their objectives; our expected financings and investments;



our ability to successfully complete and integrate any acquisitions;

the adequacy of our cash resources and working capital; the timing, form and amount of any dividend distributions;



the timing of cash flows, if any, from the operations of our portfolio

companies; and



the ability of our investment adviser to locate suitable investments

for us and to monitor and administer our investments.

We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may" and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" and elsewhere in this Annual Report.

60 -------------------------------------------------------------------------------- We have based the forward-looking statements included in this Annual Report on information available to us on the date of this Annual Report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K.



OVERVIEW

We are a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland. We have elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the "Investment Company Act").



We are externally managed by Ares Capital Management, a wholly owned subsidiary of Ares Management, a global alternative asset manager and a SEC-registered investment adviser, pursuant to our investment advisory and management agreement. Ares Operations, a wholly owned subsidiary of Ares Management, provides administrative services necessary for us to operate.

Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first lien senior secured loans (including unitranche loans), second lien senior secured loans and mezzanine debt, which in some cases includes an equity component like warrants.

To a lesser extent, we also make preferred and/or common equity investments, which have generally been non-control equity investments, of less than $20 million (usually in conjunction with a concurrent debt investment). However, we may increase the size or change the nature of these investments. Since our initial public offering on October 8, 2004 through December 31, 2013, our exited investments resulted in an aggregate cash flow realized internal rate of return (as discussed in more detail in footnote 1 to the last table in "Business-Investments") to us of approximately 13% (based on original cash invested, net of syndications, of approximately $7.7 billion and total proceeds from such exited investments of approximately $9.4 billion). Approximately 72% of these exited investments resulted in an aggregate cash flow realized internal rate of return to us of 10% or greater. Additionally, since our initial public offering on October 8, 2004 through December 31, 2013, our realized gains have exceeded our realized losses by approximately $258 million (excluding a one-time gain on the acquisition of Allied Capital and realized gains/losses from the extinguishment of debt and other assets). For this same time period, our average annualized net realized gain rate was approximately 1.1% (excluding a one-time gain on the acquisition of Allied Capital and realized gains/losses from the extinguishment of debt and other assets). Net realized gain/loss rates for a particular period are the amount of net realized gains/losses during such period divided by the average quarterly investments at amortized cost in such period. Information included herein regarding internal rates of return, realized gains and losses and annualized net realized gain rates since our initial public offering are historical results relating to our past performance and are not necessarily indicative of future results, the achievement of which cannot be assured. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities and indebtedness of private U.S. companies and certain public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. We also may 61

-------------------------------------------------------------------------------- invest up to 30% of our portfolio in non-qualifying assets, as permitted by the Investment Company Act. Specifically, as part of this 30% basket, we may invest in entities that are not considered "eligible portfolio companies" (as defined in the Investment Company Act), including companies located outside of the United States, entities that are operating pursuant to certain exceptions under the Investment Company Act, and publicly traded entities whose public equity market capitalization exceeds the levels provided for under the Investment Company Act. We have elected to be treated as a RIC under the Code, and operate in a manner so as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements and timely distribute to our stockholders generally at least 90% of our investment company taxable income, as defined by the Code, for each year. Pursuant to this election, we generally will not have to pay U.S. federal corporate-level taxes on any income that we distribute to our stockholders provided that we satisfy those requirements.



PORTFOLIO AND INVESTMENT ACTIVITY

The Company's investment activity for the years ended December 31, 2013, 2012 and 2011 is presented below (information presented herein is at amortized cost unless otherwise indicated). For the Year Ended December 31, (dollar amounts in millions) 2013 2012



2011

New investment commitments(1): New portfolio companies $ 2,148.5$ 1,794.7$ 1,778.0 Existing portfolio companies(2) 1,854.4



1,402.3 1,896.4

Total new investment commitments 4,002.9 3,197.0 3,674.4 Less: Investment commitments exited 1,840.0 2,614.5 2,603.1 Net investment commitments $ 2,162.9$ 582.5$ 1,071.3 Principal amount of investments funded: First lien senior secured loans $ 2,011.1$ 1,953.3$ 1,973.1 Second lien senior secured loans 602.8 733.1 511.1 Subordinated certificates of the SSLP(3) 652.5 270.0 496.8 Senior subordinated debt 181.0 101.3 51.8 Preferred equity securities 1.8 - 164.1 Other equity securities 44.0 103.9 41.2 Commercial real estate - - 0.9 Total $ 3,493.2$ 3,161.6$ 3,239.0 Principal amount of investments sold or repaid: First lien senior secured loans $ 885.8$ 1,455.9$ 1,320.9 Second lien senior secured loans 526.1 331.0 286.6 Subordinated certificates of the SSLP 145.2 66.3 - Senior subordinated debt 201.0 409.0 463.2 Collateralized loan obligations - 55.5 166.3 Preferred equity securities 26.3 26.2 43.5 Other equity securities 16.8 126.0 166.1 Commercial real estate 0.2 13.0 21.6 Total $ 1,801.4$ 2,482.9$ 2,468.2 Number of new investment commitments(4) 95 82 72 Average new investment commitment amount $ 42.1$ 39.0$ 51.0 Weighted average term for new investment commitments (in months) 74 66 63 Percentage of new investment commitments at floating rates 89 % 88 % 94 % Percentage of new investment commitments at fixed rates 10 % 8 % 5 % 62

-------------------------------------------------------------------------------- For the Year Ended December 31, (dollar amounts in millions) 2013 2012



2011

Weighted average yield of debt and other income producing securities(5): Funded during the period at amortized cost 9.8 % 9.9 % 10.9 % Funded during the period at fair value(6) 9.8 % 9.9 % 10.9 % Exited or repaid during the period at amortized cost 9.8 % 9.7 % 10.2 % Exited or repaid during the period at fair value(6) 9.7 %



9.6 % 10.1 %

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(1)

New investment commitments include new agreements to fund revolving credit

facilities or delayed draw loans.

(2)

Includes investment commitments to the SSLP to make co-investments with GE

in first lien senior secured loans of middle market companies of $736.6 million, $270.0 million and $496.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. (3)



See "Senior Secured Loan Program" below and Note 4 to our consolidated

financial statements for the year ended December 31, 2013 for more information on the SSLP. (4) Number of new investment commitments represents each commitment to a



particular portfolio company or a commitment to multiple companies as part

of an individual transaction (e.g., the purchase of a portfolio of investments). (5)



"Weighted average yield of debt and other income producing securities at

amortized cost" is computed as the (a) annual stated interest rate or yield

earned plus the net annual amortization of original issue discount and

market discount or premium earned on accruing debt and other income

producing securities, divided by (b) total accruing debt and other income

producing securities at amortized cost. "Weighted average yield of debt and

other income producing securities at fair value" is computed as the

(a) annual stated interest rate or yield earned plus the net annual

amortization of original issue discount and market discount or premium

earned on accruing debt and other income producing securities, divided by

(b) total accruing debt and other income producing securities at fair value. (6) Represents fair value for investments in the portfolio as of the most recent prior quarter end, if applicable. As of December 31, 2013 and 2012, our investments consisted of the following: As of December 31, 2013 2012 (in millions) Amortized Cost Fair Value Amortized Cost Fair Value First lien senior secured loans $ 3,461.6$ 3,433.6$ 2,329.9$ 2,321.2 Second lien senior secured loans 1,335.8 1,319.2 1,257.9



1,233.9

Subordinated certificates of the SSLP(1) 1,745.2 1,771.4 1,237.9



1,263.6

Senior subordinated debt 308.1 267.2 321.3



259.8

Preferred equity securities 226.0 229.0 238.8



250.1

Other equity securities 453.7 600.2 430.4



584.1

Commercial real estate 7.0 12.3 7.3 11.9 Total $ 7,537.4$ 7,632.9$ 5,823.5$ 5,924.6



--------------------------------------------------------------------------------

(1)

The proceeds from these certificates were applied to co-investments with GE

to fund first lien senior secured loans to 47 and 36 different borrowers as

of December 31, 2013 and 2012, respectively.

63



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The weighted average yields at amortized cost and fair value of the following portions of our portfolio as of December 31, 2013 and 2012 were as follows: As of December 31, 2013 2012 Amortized Cost Fair Value Amortized Cost Fair Value Debt and other income producing securities(1) 10.4 % 10.4 % 11.4 % 11.3 % Total portfolio(2) 9.4 % 9.3 % 10.1 % 10.0 % First lien senior secured loans(2) 7.8 % 7.9 % 9.0 % 9.0 % Second lien senior secured loans(2) 9.4 % 9.5 % 10.5 % 10.7 % Subordinated certificates of the SSLP(2)(3) 15.0 % 14.8 % 15.8 % 15.4 % Senior subordinated debt(2) 10.4 % 12.0 % 11.7 % 14.5 % Income producing equity securities (2) 10.1 % 9.1 % 9.9 % 8.8 %



--------------------------------------------------------------------------------

(1)

"Weighted average yield of debt and other income producing securities at

amortized cost" is computed as the (a) annual stated interest rate or yield

earned plus the net annual amortization of original issue discount and

market discount or premium earned on accruing debt and other income

producing securities, divided by (b) total accruing debt and other income

producing securities at amortized cost. "Weighted average yield of debt and

other income producing securities at fair value" is computed as the

(a) annual stated interest rate or yield earned plus the net annual

amortization of original issue discount and market discount or premium

earned on accruing debt and other income producing securities, divided by

(b) total accruing debt and other income producing securities at fair value. (2)



"Weighted average yields at amortized cost" are computed as the (a) annual

stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount or premium earned on the relevant accruing debt and other income producing securities, divided by



(b) the total relevant investments at amortized cost. "Weighted average

yields at fair value" are computed as the (a) annual stated interest rate

or yield earned plus the net annual amortization of original issue discount

and market discount or premium earned on the relevant accruing debt and other income producing securities, divided by (b) the total relevant investments at fair value. (3)



The proceeds from these certificates were applied to co-investments with GE

to fund first lien senior secured loans.

Ares Capital Management, our investment adviser, employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our investment adviser grades the credit risk of all investments on a scale of 1 to 4 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (i.e., at the time of origination or acquisition), although it may also take into account under certain circumstances the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors. Under this system, investments with a grade of 4 involve the least amount of risk to our initial cost basis. The trends and risk factors for this investment since origination or acquisition are generally favorable, which may include the performance of the portfolio company or a potential exit. Investments graded 3 involve a level of risk to our initial cost basis that is similar to the risk to our initial cost basis at the time of origination or acquisition. This portfolio company is generally performing as expected and the risk factors to our ability to ultimately recoup the cost of our investment are neutral to favorable. All investments or acquired investments in new portfolio companies are initially assessed a grade of 3. Investments graded 2 indicate that the risk to our ability to recoup the initial cost basis of such investment has increased materially since origination or acquisition, including as a result of factors such as declining performance and non-compliance with debt covenants; however, payments are 64

-------------------------------------------------------------------------------- generally not more than 120 days past due. An investment grade of 1 indicates that the risk to our ability to recoup the initial cost basis of such investment has substantially increased since origination or acquisition, and the portfolio company likely has materially declining performance. For debt investments with an investment grade of 1, most or all of the debt covenants are out of compliance and payments are substantially delinquent. For investments graded 1, it is anticipated that we will not recoup our initial cost basis and may realize a substantial loss of our initial cost basis upon exit. For investments graded 1 or 2, our investment adviser enhances its level of scrutiny over the monitoring of such portfolio company. The grade of a portfolio investment may be reduced or increased over time. Set forth below is the grade distribution of our portfolio companies as of December 31, 2013 and 2012: As of December 31, 2013 2012 Number of Number of



(dollar amounts in millions) Fair Value % Companies %

Fair Value % Companies % Grade 1 $ 54.6 0.7 % 7 3.6 % $ 75.1 1.3 % 9 5.9 % Grade 2 256.3 3.4 % 12 6.2 % 136.7 2.3 % 9 5.9 % Grade 3 6,636.2 86.9 % 162 84.0 % 5,108.8 86.2 % 121 79.7 % Grade 4 685.8 9.0 % 12 6.2 % 604.0 10.2 % 13 8.5 % Total $ 7,632.9 100.0 % 193 100.0 % $ 5,924.6 100.0 % 152 100.0 %



As of December 31, 2013 and 2012, the weighted average grade of the investments in our portfolio at fair value was 3.0 and 3.1, respectively.

As of December 31, 2013, loans on non-accrual status represented 3.1% and 2.1% of the total investments at amortized cost and at fair value, respectively. As of December 31, 2012, loans on non-accrual status represented 2.3% and 0.6% of the total investments at amortized cost and at fair value, respectively.



Senior Secured Loan Program

The Company co-invests in first lien senior secured loans of middle market companies with GE through an unconsolidated Delaware limited liability company, the Senior Secured Loan Fund LLC (d/b/a "The Senior Secured Loan Program") or the SSLP. The SSLP is capitalized as transactions are completed and all portfolio decisions and generally all other decisions in respect of the SSLP must be approved by an investment committee of the SSLP consisting of representatives of the Company and GE (with approval from a representative of each required). The Company provides capital to the SSLP in the form of SSLP Certificates. As of December 31, 2013 and 2012, the SSLP had available capital of $11.0 billion and $9.0 billion, respectively, of which approximately $8.7 billion and $6.3 billion in aggregate principal amount, respectively, was funded. As of December 31, 2013 and 2012, the Company had agreed to make available to the SSLP approximately $2.3 billion and $1.8 billion, respectively, of which approximately $1.7 billion and $1.2 billion in aggregate principal amount, respectively, was funded. Investment of any unfunded amount must be approved by the investment committee of the SSLP as described above. As of December 31, 2013 and 2012, the SSLP had total assets of $8.7 billion and $6.3 billion, respectively. As of December 31, 2013 and 2012, GE's investment in the SSLP consisted of senior notes of $6.7 billion and $4.8 billion, respectively, and SSLP Certificates of $249.3 million and $177.9 million, respectively. The SSLP Certificates are junior in right of payment to the senior notes held by GE. As of December 31, 2013 and 2012, the Company and GE owned 87.5% and 12.5%, respectively, of the outstanding SSLP Certificates. 65 -------------------------------------------------------------------------------- As of December 31, 2013 and 2012, the SSLP portfolio was comprised of all first lien senior secured loans to U.S. middle-market companies. As of December 31, 2013, one loan was on non-accrual status, representing 1.0% of the total loans at principal amount in the SSLP. As of December 31, 2012, no loans were on non-accrual status. The portfolio companies in the SSLP are in industries similar to the companies in the Company's portfolio. Additionally, as of December 31, 2013 and 2012, the SSLP had commitments to fund various delayed draw investments to certain of its portfolio companies of $510.4 million and $157.5 million, respectively, which had been approved by the SSLP investment committee. As of December 31, 2013 and 2012, the Company had commitments to co-invest in the SSLP for its portion of the SSLP's commitments to fund such delayed draw investments of up to $85.1 million and $26.4 million, respectively. Below is a summary of the SSLP portfolio, followed by a listing of the individual first lien senior secured loans in the SSLP portfolio as of December 31, 2013 and 2012: As of December 31, (dollar amounts in millions) 2013 2012 Total first lien senior secured loans(1) $ 8,664.4$ 5,998.1 Weighted average yield on first lien senior secured loans(2) 7.1 % 8.0 % Number of borrowers in the SSLP 47



36

Largest loan to a single borrower(1) $ 321.7$ 330.0 Total of five largest loans to borrowers(1) $ 1,510.7



$ 1,441.4

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(1) At principal amount. (2)



Computed as the (a) annual stated interest rate on accruing first lien

senior secured loans, divided by (b) total first lien senior secured loans

at principal amount. 66 --------------------------------------------------------------------------------

SSLP Loan Portfolio as of December 31, 2013 Stated (dollar amounts in millions) Interest Principal Fair Portfolio Company Business Description Maturity Date Rate(1) Amount Value(2) Access CIG, LLC(3) Records and information 10/2017 7.0 % $ 186.9$ 186.9 management services provider ADG, LLC Dental services 9/2019 8.1 % 217.5 217.5 AMZ Products Merger Specialty chemicals 12/2018 6.8 % 237.6 237.6 Corporation manufacturer Argon Medical Devices, Inc. Manufacturer and marketer 4/2018 6.5 % 239.2 239.2 of single-use specialty medical devices BECO Holding Wholesale distributor of 12/2017 8.3 % 143.4 143.4 Company, Inc.(5) first response fire protection equipment and related parts Brewer Holdings Corp. and Provider of software and 11/2019 7.0 % 175.5 175.5 Zywave, Inc. technology-enabled content and analytical solutions to insurance brokers Cambridge Manufacturer of custom 4/2018 8.0 % 86.0 86.0 International, Inc. designed and engineered metal products CCS Group Holdings, LLC(5) Correctional facility 4/2016 8.0 % 134.5 134.5 healthcare operator CH Hold Corp. Collision repair company 11/2019 5.5 % 270.0 270.0 Chariot Acquisition, LLC Distributor and designer 1/2019 7.8 % 142.3 142.3 of aftermarket golf cart parts and accessories CIBT Holdings, Inc.(5) Expedited travel document 12/2018 6.8 % 178.9 178.9 processing services CWD, LLC Supplier of automotive 6/2016 10.0 % 130.5 130.5 aftermarket brake parts Drayer Physical Therapy Outpatient physical 7/2018 7.5 % 136.7 136.7 Institute, LLC therapy provider Driven Holdings, LLC(5) Automotive aftermarket car 3/2017 7.0 % 159.1 159.1 care franchisor ECI Purchaser Company, LLC Manufacturer of equipment 12/2019 6.0 % 209.0 209.0 to safely control pressurized gases Excelligence Learning Developer, manufacturer 8/2018 7.8 % 174.0 174.0 Corporation(5) and retailer of educational products Fleischmann's Vinegar Manufacturer and marketer 5/2016 8.0 % 74.7 74.7 Company, Inc. of industrial vinegar products Fox Hill Holdings, LLC(3) Third party claims 6/2018 6.8 % 289.5 289.5 administrator on behalf of insurance carriers III US Holdings, LLC Provider of library 3/2018 7.6 % 194.5 194.5 automation software and systems Implus Footcare, LLC(5) Provider of footwear and 10/2016 9.0 % 210.3 210.3 other accessories Instituto de Banca y Private school operator 6/2015 82.4 74.2 (6) Comercio, Inc. & Leeds IV Advisors, Inc.(3)(5) Intermedix Corporation(4) Revenue cycle management 12/2018 6.3 % 321.7 321.7 provider to the emergency healthcare industry iParadigms, LLC Provider of 4/2019 6.5 % 164.2 164.2 anti-plagiarism software to the education industry JHP Pharmaceuticals, LLC(5) Manufacturer of specialty 12/2019 6.8 % 182.2 182.2 pharmaceutical products Laborie Medical Technologies Developer and manufacturer 10/2018 6.8 % 113.5 113.5 Corp(5) of medical equipment LJSS Acquisition, Inc. Fluid power distributor 10/2017 6.8 % 159.8 159.8 MWI Holdings, Inc.(3) Provider of engineered 3/2019 7.4 % 261.6 261.6 springs, fasteners, and other precision components 67

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SSLP Loan Portfolio as of December 31, 2013 Stated (dollar amounts in millions) Interest Principal Fair Portfolio Company Business Description Maturity Date Rate(1) Amount Value(2) Noranco Manufacturing Supplier of complex 4/2019 6.8 % 161.1 161.1 (USA) Ltd. machined and sheet metal components for the aerospace industry Nordco, Inc. Designer and manufacturer 8/2019 7.0 % 224.7 224.7 of railroad maintenance-of-way machinery Oak Parent, Inc.(3) Manufacturer of athletic 4/2018 7.5 % 307.1 307.1 apparel Penn Detroit Diesel Distributor of new 12/2016 9.0 % 59.5 59.5 Allison, LLC equipment and aftermarket parts to the heavy-duty truck industry PetroChoice Holdings, LLC Provider of lubrication 1/2017 10.0 % 158.3 158.3 solutions PODS Funding Corp. II(3) Storage and warehousing 12/2018 7.0 % 314.1 314.1 Pregis Corporation, Pregis Provider of 3/2017 7.8 % 152.0 152.0 Intellipack Corp. and Pregis highly-customized, Innovative Packaging Inc.(3) tailored protective packaging solutions Protective Industries, Inc. Plastic protection 10/2019 6.8 % 278.3 278.3 dba Caplugs(3)(5) products PSSI Holdings, LLC(3) Provider of 6/2018 6.0 % 224.4 224.4 mission-critical outsourced cleaning and sanitation services to the food processing industry Restaurant Provider of bulk cooking 6/2018 7.0 % 202.7 202.7 Technologies, Inc. oil management services to the restaurant and fast food service industries Selig Sealing Manufacturer of container 10/2019 6.8 % 209.0 209.0 Products, Inc. sealing products for rigid packaging applications Singer Sewing Company Manufacturer of consumer 6/2017 7.3 % 197.0 197.0 sewing machines Strategic Partners, Inc.(5) Supplier of medical 8/2018 7.8 % 232.1 232.1 uniforms, specialized medical footwear and accessories Talent Partners G.P. and Provider of 10/2017 8.0 % 62.0 62.0 Print Payroll technology-enabled Services, G.P. payroll to the advertising industry TecoStar Acquisition Company Manufacturer of precision 12/2019 6.4 % 118.0 118.0 components for orthopedic medical devices The Teaching Company, LLC Education publications 3/2017 9.0 % 111.5 109.3 and The Teaching Company provider Holdings, Inc.(3)(5) Towne Holdings, Inc. Provider of contracted 12/2019 6.8 % 154.0 154.0 hospitality services and parking systems U.S. Anesthesia Anesthesiology service 12/2019 6.0 % 210.0 210.0 Partners, Inc.(3) provider Universal Services of Provider of security 7/2019 6.0 % 253.9 253.9 America, LP officer and guard services WB Merger Sub, Inc. Importer, distributor and 12/2016 9.0 % 159.2 159.2 developer of premium wine and spirits $ 8,664.4$ 8,654.0



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(1)

Represents the weighted average annual stated interest rate as of

December 31, 2013. All interest rates are payable in cash. For loans on non-accrual status, the stated interest rate is not shown as there is no current yield on such loans.



(2)

Represents the fair value in accordance with ASC 820-10. The determination

of such fair value is not included in the Company's board of directors valuation process described elsewhere herein. (3) The Company also holds a portion of this company's first lien senior secured loan. (4)



The Company also holds this company's second lien senior secured loan.

(5) The Company holds an equity investment in this company. (6)



Loan was on non-accrual status, as determined by SSLP, as of December 31,

2013. 68 --------------------------------------------------------------------------------

SSLP Loan Portfolio as of December 31, 2012 Stated (dollar amounts in millions) Maturity

Interest Principal Fair Portfolio Company Business Description Date Rate(1) Amount Value(2) Access CIG, LLC(3) Records and information 10/2017 7.0 % $ 152.8$ 152.8 management services provider ADG, LLC Dental services 10/2016 8.8 % 199.4 199.4 AMZ Products Merger Specialty chemicals 12/2018 6.8 % 240.0 240.0 Corporation manufacturer BECO Holding Wholesale distributor of 12/2017 8.3 % 160.0 160.0 Company, Inc.(5) first response fire protection equipment and related parts Cambridge Manufacturer of custom 4/2018 8.0 % 88.3 83.9 International, Inc. designed and engineered metal products CCS Group Holdings, LLC(5) Correctional facility 4/2016 8.0 % 142.8 142.8 healthcare operator Chariot Acquisition, LLC Distributor and designer 1/2018 8.8 % 146.8 146.8 of aftermarket golf cart parts and accessories CIBT Holdings, Inc.(5) Expedited travel document 12/2017 8.5 % 146.4 146.4 processing services CT Technologies Intermediate Healthcare analysis 3/2017 7.8 % 284.9 273.5 Holdings, Inc. and CT services provider Technologies Holdings LLC(3)(5) CWD, LLC Supplier of automotive 3/2014 8.8 % 119.8 110.2 aftermarket brake parts Drayer Physical Therapy Outpatient physical 7/2018 7.5 % 138.1 138.1 Institute, LLC therapy provider Driven Holdings, LLC(5) Automotive aftermarket car 3/2017 7.0 % 160.4 160.4 care franchisor Excelligence Learning Developer, manufacturer 8/2016 8.0 % 115.8 115.8 Corporation(5) and retailer of educational products Fleischmann's Vinegar Manufacturer and marketer 5/2016 8.9 % 59.6 59.6 Company, Inc. of industrial vinegar products Fox Hill Holdings, LLC Third party claims 12/2017 8.0 % 292.5 292.5 administrator on behalf of insurance carriers III US Holdings, LLC Provider of library 3/2018 7.6 % 202.9 202.9 automation software and systems Implus Footcare, LLC(5) Provider of footwear and 10/2016 9.5 % 178.0 178.0 other accessories Instituto de Banca y Private school operator 6/2015 10.5 % 165.6 165.6 Comercio, Inc. & Leeds IV Advisors, Inc.(5) Intermedix Corporation(4) Revenue cycle management 12/2018 6.3 % 330.0 330.0 provider to the emergency healthcare industry LJSS Acquisition, Inc. Fluid power distributor 9/2017 6.8 % 163.9 163.9 MWI Holdings, Inc.(3) Highly engineered springs, 6/2017 8.0 % 251.2 251.2 fasteners, and other precision components Nordco, Inc. Designer and manufacturer 6/2016 7.0 % 113.2 113.2 of railroad maintenance-of-way machinery Oak Parent, Inc.(3) Manufacturer of athletic 4/2018 8.0 % 282.8 282.8 apparel



Opinionology, LLC and Survey Provider of outsourced 7/2017

8.5 % 152.3 152.3 Sampling International LLC data collection to the market research industry Penn Detroit Diesel Distributor of new 12/2016 9.0 % 65.3 65.3 Allison, LLC equipment and aftermarket parts to the heavy-duty truck industry PetroChoice Holdings, LLC Provider of lubrication 1/2017 10.0 % 162.4 162.4 solutions Power Buyer, LLC Provider of emergency 12/2018 7.8 % 208.0 208.0 maintenance services for power transmission, distribution, and substation infrastructure Powersport Auctioneer Powersport vehicle auction 12/2016 8.5 % 40.7 40.7 Holdings, LLC(5) operator 69

-------------------------------------------------------------------------------- SSLP Loan Portfolio as of December 31, 2012



Stated

(dollar amounts in millions) Maturity Interest Principal Fair Portfolio Company Business Description Date Rate(1) Amount Value(2) Pregis Corporation, Pregis Provider of 3/2017 7.8 % 125.9 125.9 Intellipack Corp. and Pregis highly-customized and Innovative Packaging Inc.(3) tailored protective packaging solutions PSSI Holdings, LLC Provider of 6/2017 6.8 % 161.7 161.7 mission-critical outsourced cleaning and sanitation services to the food processing industry Selig Sealing Manufacturer of container 7/2018 7.8 % 169.6 169.6 Products, Inc. sealing products for rigid packaging applications Singer Sewing Company Manufacturer of consumer 6/2017 7.3 % 199.0 199.0 sewing machines Strategic Partners, Inc. Supplier of medical 8/2018 7.8 % 234.4 234.4 uniforms, specialized medical footwear and accessories Talent Partners G.P. and Provider of 10/2017 8.0 % 65.5 65.5 Print Payroll technology-enabled Services, G.P. payroll to the advertising industry The Teaching Company, LLC Education publications 3/2017 9.0 % 113.9 113.9 and The Teaching Company provider Holdings, Inc.(3)(5) WB Merger Sub, Inc. Importer, distributor and 12/2016 9.0 % 164.2 164.2 developer of premium wine and spirits $ 5,998.1$ 5,972.7



--------------------------------------------------------------------------------

(1) Represents the weighted average annual stated interest rate as of December 31, 2012. All interest rates are payable in cash. (2)



Represents the fair value in accordance with ASC 820-10. The determination

of such fair value is not included in the Company's board of directors valuation process described elsewhere herein. (3) The Company also holds a portion of this company's first lien senior secured loan. (4)



The Company also holds this company's second lien senior secured loan.

(5)

The Company holds an equity investment in this company.

The amortized cost and fair value of the SSLP Certificates held by the Company was $1.7 billion and $1.8 billion, respectively, as of December 31, 2013, and $1.2 billion and $1.3 billion, respectively, as of December 31, 2012. The SSLP Certificates pay a weighted average contractual coupon of three month LIBOR plus approximately 8.0% and also entitle the holders thereof to receive a portion of the excess cash flow from the underlying loan portfolio, which may result in a return to the holders of the SSLP Certificates that is greater than both the contractual coupon on the SSLP Certificates as well as the weighted average yield on the SSLP's portfolio of 7.1% and 8.0% at December 31, 2013 and 2012, respectively. The Company's yield on its investment in the SSLP at amortized cost and fair value was 15.0% and 14.8%, respectively, as of December 31, 2013, and 15.8% and 15.4%, respectively, as of December 31, 2012. For the years ended December 31, 2013, 2012 and 2011, the Company earned interest income of $224.9 million, $184.7 million and $118.4 million, respectively, from its investment in the SSLP Certificates. The Company is also entitled to certain fees in connection with the SSLP. For the years ended December 31, 2013, 2012 and 2011, in connection with the SSLP, the Company earned capital structuring service, sourcing and other fees totaling $66.6 million, $58.2 million and $54.9 million respectively. 70 -------------------------------------------------------------------------------- Effective March 30, 2012, Ares Capital Management assumed from the Company the role of co-manager of the SSLP. However, this change did not impact the Company's economics in respect of its participation in the SSLP and Ares Capital Management does not receive any remuneration in respect of its co-manager role.



Selected financial information for the SSLP as of and for the years ended December 31, 2013 and 2012 is as follows:

As of and For the Years Ended December 31, (in millions) 2013 2012 Selected Balance Sheet Information: Investments in loans receivable, net $ 8,601.6 $

5,952.3 Cash and other assets $ 142.3$ 369.2 Total assets $ 8,743.9$ 6,321.5 Senior notes $ 6,699.5$ 4,840.4 Other liabilities $ 64.2$ 46.9 Total liabilities $ 6,763.7$ 4,887.3



Subordinated certificates and members' interests $ 1,980.2$ 1,434.2

Total liabilities and members' capital $ 8,743.9 $



6,321.5

Selected Statement of Operations Information:

Total revenues $ 554.2$ 479.4 Total expenses $ 296.7$ 258.7 Net income $ 257.5$ 220.7 RESULTS OF OPERATIONS



For the years ended December 31, 2013, 2012 and 2011

Operating results for the years ended December 31, 2013, 2012 and 2011 are as follows: For the Years Ended December 31, (in millions) 2013 2012 2011 Total investment income $ 881.7$ 748.0$ 634.5 Total expenses 437.2 387.9 344.6 Net investment income before income taxes 444.5 360.1 289.9 Income tax expense, including excise tax 14.1 11.2 7.5 Net investment income 430.4 348.9 282.4 Net realized gains on investments 63.7 46.7 96.6 Net unrealized gains (losses) on investments (5.6 ) 115.3 (40.2 ) Realized losses on extinquishment of debt -



(2.7 ) (19.3 )

Net increase in stockholders' equity resulting from operations $ 488.5$ 508.2$ 319.5 71



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Investment Income For the Years Ended December 31, (in millions) 2013 2012 2011 Interest income from investments $ 647.9$ 571.5$ 473.2 Capital structuring service fees 91.7 102.1 97.4 Dividend income 99.6 39.7 38.4 Management and other fees 20.2 18.9 16.7 Other income 22.3 15.8 8.8 Total investment income $ 881.7$ 748.0$ 634.5 The increase in interest income from investments for the year ended December 31, 2013 from the comparable period in 2012 was primarily due to the increase in the size of the portfolio, which increased from an average of $5.5 billion at amortized cost for the year ended December 31, 2012 to an average of $6.7 billion at amortized cost for the comparable period in 2013. Even though new investment commitments increased from $3.2 billion for the year ended December 31, 2012 to $4.0 billion for the comparable period in 2013, capital structuring service fees decreased for the year ended December 31, 2013 from the comparable period in 2012 primarily due to the decrease in the average capital structuring service fees received on new investments, which decreased from 3.2% in 2012 to 2.3% in 2013. The increase in dividend income for the year ended December 31, 2013 from the comparable period in 2012 was primarily due to $72.4 million in dividend payments from IHAM for the year ended December 31, 2013 as compared to $19.9 million for the comparable period in 2012. The dividend income from IHAM for the year ended December 31, 2013 included additional dividends of $32.4 million that were paid in addition to the quarterly dividends generally paid by IHAM. IHAM paid the additional dividends out of accumulated earnings that had previously been retained by IHAM. Also during the year ended December 31, 2013, we received $9.0 million in other non-recurring dividends from non-income producing equity securities compared to $2.2 million for the comparable period in 2012. The increase in other income for the year ended December 31, 2013 from the comparable period in 2012 was primarily attributable to higher amendment fees. The increase in interest income from investments for the year ended December 31, 2012 from the comparable period in 2011 was primarily due to the increase in the size of the portfolio, which increased from an average of $4.6 billion at amortized cost for the year ended December 31, 2011 to an average of $5.5 billion at amortized cost for the comparable period in 2012. Even though new investment commitments decreased from $3.7 billion for the year ended December 31, 2011 to $3.2 billion for the comparable period in 2012, capital structuring service fees increased for the year ended December 31, 2012 from the comparable period in 2011 primarily due to the increase in the average capital structuring service fees received on new investments, which increased from 2.7% in 2011 to 3.2% in 2012. For the year ended December 31, 2012, dividend income included $19.9 million from the Company's investment in IHAM as compared to $19.0 million for the comparable period in 2011. Also during the year ended December 31, 2012, we received $2.2 million in other non-recurring dividends from non-income producing equity securities compared to $10.5 million for the comparable period in 2011. The increase in other income for the year ended December 31, 2012 from the comparable period in 2011 was primarily attributable to higher amendment, letter of credit and agency fees. 72



--------------------------------------------------------------------------------

Operating Expenses For the Years Ended December 31, (in millions) 2013 2012 2011 Interest and credit facility fees $ 171.5 $



143.0 $ 122.5 Incentive fees related to pre-incentive fee net investment income

110.5 95.2 79.0 Incentive fees related to capital gains per GAAP 11.6 31.9 33.3 Base management fees 104.9 86.2 71.6 Professional fees 13.6 12.0 16.7 Administrative fees 12.3 9.3 9.5 Other general and administrative 12.8 10.3 12.0 Total operating expenses $ 437.2$ 387.9$ 344.6



Interest and credit facility fees for the years ended December 31, 2013, 2012 and 2011, were comprised of the following:

For the Years Ended December 31, (in millions) 2013 2012 2011 Stated interest expense $ 136.3$ 113.1$ 92.2 Facility fees 8.2 5.5 6.1 Amortization of debt issuance costs 13.2 13.1 13.2 Accretion of discount on notes payable 13.8 11.3 11.0 Total interest and credit facility fees $ 171.5$ 143.0$ 122.5 Stated interest expense for the year ended December 31, 2013 increased from the comparable period in 2012 primarily due to the increase in the average principal amount of debt outstanding and an increase in our weighted average stated interest rate of our debt outstanding. For the year ended December 31, 2013, our average principal debt outstanding was $2.6 billion as compared to $2.2 billion for the comparable period in 2012, and the weighted average stated interest rate on our outstanding debt was 5.3% for the year ended December 31, 2013 as compared to 5.2% for the comparable period in 2012. The higher weighted average stated interest rate for the year ended December 31, 2013 relates to having borrowed, on a relative basis, less from our lower-cost floating rate revolving debt facilities and having more fixed- rate term debt outstanding. Stated interest expense for the year ended December 31, 2012 increased from the comparable period in 2011 primarily due to the increase in the average principal amount of debt outstanding and an increase in our weighted average stated interest rate of our debt outstanding. For the year ended December 31, 2012, our average principal debt outstanding was $2.2 billion as compared to $1.8 billion for the comparable period in 2011, and the weighted average stated interest rate on our debt outstanding was 5.2% for the year ended December 31, 2012 as compared to 5.1% for the comparable period in 2011. The higher weighted average stated interest rate for the year ended December 31, 2012 relates to having borrowed, on a relative basis, less from our lower-cost floating rate revolving debt facilities and having more fixed-rate term debt outstanding. The increase in base management fees and incentive fees related to pre-incentive fee net investment income for the year ended December 31, 2013 from the comparable period in 2012 and for the year ended December 31, 2012 from the comparable period in 2011 were both primarily due to the increase in the size of the portfolio and in the case of incentive fees, the related increase in pre-incentive fee net investment income. 73 -------------------------------------------------------------------------------- For the years ended December 31, 2013, 2012 and 2011 the capital gains incentive fee expense accrual calculated in accordance with GAAP was $11.6 million, $31.9 million and $33.3 million, respectively. As a result of the Capital Gains Amendment to our investment advisory and management agreement during 2011, we accrued $26.0 million of capital gains incentive fees in accordance with GAAP for the year ended December 31, 2011 as a result of the application of the Capital Gains Amendment with respect to the assets purchased in the Allied Acquisition. The capital gains incentive fee accrued under GAAP includes an accrual related to unrealized capital appreciation, whereas the capital gains incentive fee actually payable under our investment advisory and management agreement does not. There can be no assurance that such unrealized capital appreciation will be realized in the future. The accrual for any capital gains incentive fee under GAAP in a given period may result in an additional expense if such cumulative amount is greater than in the prior period or a reduction of previously recorded expense if such cumulative amount is less than in the prior period. If such cumulative amount is negative, then there is no accrual. As of December 31, 2013 and 2012, the total capital gains incentive fee accrual calculated in accordance with GAAP was $80.9 million and $80.8 million, respectively (included in management and incentive fees payable in the consolidated balance sheet). However, the Capital Gains Fee actually payable under our investment advisory and management agreement for the years ended December 31, 2013 and 2012 was $17.4 million and $11.5 million, respectively. For the year ended December 31, 2011 there was no Capital Gains Fee payable under our investment advisory and management agreement.



See Note 3 to our consolidated financial statements for the year ended December 31, 2013 for more information on the base management and incentive fees.

Professional fees include legal, accounting, valuation and other professional fees incurred related to the management of the Company. The decrease in professional fees for the year ended December 31, 2012 from the comparable period in 2011 primarily resulted from declines in professional fees related to the Allied Acquisition following its completion in 2010 and having substantially completed the integration of Allied Capital by early 2011. Administrative fees represent fees paid to Ares Operations for our allocable portion of overhead and other expenses incurred by Ares Operations in performing its obligations under the administration agreement, including our allocable portion of the cost of certain of our executive officers and their respective staffs. Other general and administrative expenses include rent, insurance, depreciation, director's fees and other costs.



Income Tax Expense, Including Excise Tax

The Company has elected to be treated as a RIC under the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, the Company must, among other things, timely distribute to its stockholders generally at least 90% of its investment company taxable income, as defined by the Code, for each year. In order to maintain its RIC status, the Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will generally relieve the Company from U.S. federal corporate-level income taxes. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions from such current year taxable income into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such income, the Company accrues excise tax on estimated excess taxable income as such taxable income is earned. For the years ended December 31, 2013, 2012 and 2011, we recorded a net expense of $10.3 million, $7.9 million and $6.6 million, respectively, for U.S. federal excise tax. 74

-------------------------------------------------------------------------------- Certain of our consolidated subsidiaries are subject to U.S. federal and state income taxes. For the years ended December 31, 2013, 2012 and 2011, we recorded a tax expense of approximately $3.8 million, $3.2 million and $0.9 million, respectively, for these subsidiaries.



Net Realized Gains/Losses

During the year ended December 31, 2013, the Company had $1.8 billion of sales, repayments or exits of investments resulting in $63.7 million of net realized gains. These sales, repayments or exits included $442.3 million of investments sold to IHAM and certain vehicles managed by IHAM. A net realized loss of $0.1 million was recorded on these transactions. See Note 4 to our consolidated financial statements for the year ended December 31, 2013 for more detail on IHAM and its managed vehicles. Net realized gains of $63.7 million on investments were comprised of $112.9 million of gross realized gains and $49.2 million of gross realized losses.



The realized gains and losses on investments during the year ended December 31, 2013 consisted of the following:

(in millions) Net Realized Portfolio Company Gains (Losses) Passport Health Communications, Inc. $ 19.8 Financial Pacific Company 17.7 Component Hardware Group, Inc. 17.2 Tradesmen International, Inc. 10.0 AWTP, LLC 8.7 Performant Financial Corporation 8.6 Senior Secured Loan Fund LLC 7.1 Performance Food Group, Inc. 4.1 eInstruction Corporation (40.3 ) Other, net 10.8 Total $ 63.7 During the year ended December 31, 2012, the Company had $2.5 billion of sales, repayments or exits of investments resulting in $46.7 million of net realized gains. These sales, repayments or exits included $256.9 million of investments sold to IHAM and certain vehicles managed by IHAM. A net realized gain of $2.3 million was recorded on these transactions. Net realized gains of $46.7 million on investments were comprised of $172.0 million of gross realized gains and $125.3 million of gross realized losses. Additionally, during the year ended December 31, 2012, in connection with the repayment in full of the $60 million aggregate principal amount of the Company's asset-backed notes (the "CLO Notes") issued under its 2006 debt securitization (the "Debt Securitization") ahead of their scheduled maturities, $2.7 million of unamortized debt issuance costs were expensed and recorded as a realized loss on the extinguishment of debt. 75



--------------------------------------------------------------------------------

The realized gains and losses on investments during the year ended December 31, 2012 consisted of the following:

(in millions) Net Realized Portfolio Company Gains (Losses) Reed Group, Ltd. $ 41.5 Stag-Parkway, Inc. 30.0 R3 Education, Inc. and EIC Acquisitions Corp.



18.3

Savers, Inc. and SAI Acquisition Corporation



15.2

BenefitMall Holdings Inc.



12.5

Things Remembered Inc. and TRM Holdings Corporation



9.6

Sunquest Information Systems, Inc. 9.1 Norwesco 5.7 OTG Management, Inc. 4.0 Crescent Hotels & Resorts, LLC and affiliates



(5.5 )

LVCG Holdings LLC



(6.6 )

Direct Buy Holdings, Inc. and Direct Buy Investors, LP



(8.3 )

Aquila Binks Forest Development, LLC



(9.5 )

Making Memories Wholesale, Inc.



(12.3 )

Firstlight Financial Corporation (26.0 ) Prommis Solutions, LLC (46.8 ) Other, net 15.8 Total $ 46.7 During the year ended December 31, 2011, the Company had $2.5 billion of sales, repayments or exits of investments resulting in $96.6 million of net realized gains. These sales, repayments or exits included $261.3 million of investments sold to IHAM or certain vehicles managed by IHAM. A net realized gain of $0.1 million was recorded on these transactions. Net realized gains of $96.6 million on investments were comprised of $249.1 million of gross realized gains and $152.5 million of gross realized losses. Additionally, during the year ended December 31, 2011, in connection with the redemptions of all of the Company's outstanding 6.00% notes due on April 1, 2012 and all the Company's outstanding 6.625% notes due on July 15, 2011, the Company recognized a realized loss on the extinguishment of debt of $19.3 million. 76



--------------------------------------------------------------------------------

The realized gains and losses on investments during the year ended December 31, 2011 consisted of the following:

(in millions) Net Realized Portfolio Company Gains (Losses) Reflexite Corporation $ 40.9 DSI Renal, Inc. 27.5 Callidus Debt Partners CLO Fund VI, Ltd. 23.9 Industrial Container Services, LLC 19.9 Dryden XVIII Leveraged Loan 2007 Limited 19.3 Penn Detroit Diesel Allison, LLC 18.4 Callidus MAPS CLO Fund I LLC 15.0 Callidus Debt Partners CLO Fund VII, Ltd. 10.8 Callidus MAPS CLO Fund II, Ltd. 8.2 Callidus Debt Partners CLO Fund IV, Ltd. 8.0 Callidus Debt Partners CLO Fund V, Ltd. 5.7 Border Foods, Inc. 5.2 Driven Brands, Inc. 4.5 Callidus Debt Partners CLO Fund III, Ltd. 4.4 Sigma International Group, Inc. (4.3 ) AWTP, LLC (7.6 ) Universal Trailer Corporation (7.9 ) HB&G Building Products, Inc. (9.1 ) Summit Business Media, LLC (10.1 ) Wastequip, Inc. (10.2 ) Coverall North America, Inc. (12.3 ) Primis Marketing Group, Inc. (14.1 ) Cook Inlet Alternative Risk, LLC (15.7 ) Direct Buy Holdings, Inc. (17.7 ) MPBP Holdings, Inc. (27.7 ) Other, net 21.6 Total $ 96.6 77



--------------------------------------------------------------------------------

Net Unrealized Gains/Losses

We value our portfolio investments quarterly and the changes in value are recorded as unrealized gains or losses. Net unrealized gains and losses for the Company's portfolio for the years ended December 31, 2013, 2012 and 2011, were comprised of the following: For the Years Ended December 31, (in millions) 2013 2012 2011 Unrealized appreciation $ 106.5$ 151.0$ 144.1 Unrealized depreciation (105.1 )



(126.7 ) (205.1 ) Net unrealized (appreciation) depreciation reversed related to net realized gains or losses(1)

(7.0 )



91.0 20.8

Total net unrealized gains (losses) from investments $ (5.6 )$ 115.3$ (40.2 )

--------------------------------------------------------------------------------

(1)

The net unrealized (appreciation) depreciation reversed related to net

realized gains or losses represents the unrealized appreciation or

depreciation recorded on the related asset at the end of the prior period.

The changes in unrealized appreciation and depreciation during the year ended December 31, 2013 consisted of the following:

Net Unrealized (in millions) Appreciation Portfolio Company (Depreciation) Senior Secured Loan Fund LLC $ 9.8 Orion Foods, LLC 7.0 10th Street, LLC 6.8 American Broadband Communications, LLC 6.6 Imperial Capital Private Opportunities, LP 5.7 OTG Management, LLC 4.5 The Dwyer Group 4.2 Ciena Capital LLC (7.7 ) Competitor Group, Inc. (9.5 ) Instituto de Banca y Comercio, Inc. (12.6 ) UL Holding Co., LLC (13.2 ) CitiPostal Inc. (13.8 ) Ivy Hill Asset Management, L.P. (13.9 ) Other, net 27.5 Total (net) $ 1.4 78



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The changes in unrealized appreciation and depreciation during the year ended December 31, 2012 consisted of the following:

Net Unrealized (in millions) Appreciation Portfolio Company (Depreciation) Ivy Hill Asset Management, L.P. $ 41.6 ADF Restaurant Group, LLC 12.2 R3 Education, Inc. 6.9 Performant Financial Corporation 6.5 Tradesmen International, Inc. 6.5 AWTP, LLC 6.2 Financial Pacific Company 6.0 ELC Acquisition Corp. 5.1 The Dwyer Group 5.0 Campus Management Corp. (4.5 ) Community Education Centers, Inc. (4.6 ) Matrixx Initiatives, Inc. (4.8 ) HCP Acquisition Holdings, LLC (6.2 ) UL Holding Co., LLC (7.0 ) RE Community Holdings II, Inc. (7.3 ) American Broadband Communications, LLC (8.5 ) Orion Foods, LLC (10.4 ) eInstruction Corporation (16.7 ) MVL Group, Inc. (27.9 ) Other, net 26.2 Total (net) $ 24.3 79



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The changes in unrealized appreciation and depreciation during the year ended December 31, 2011 consisted of the following:

Net Unrealized (in millions) Appreciation Portfolio Company (Depreciation) Ivy Hill Asset Management, L.P. $ 48.9 Firstlight Financial Corporation 15.4 BenefitMall Holdings, Inc. 9.5 Things Remembered Inc. 5.5 American Broadband Holding Company 5.3 Insight Pharmaceuticals Corporation 4.9 Savers, Inc. 4.9 The Step2 Company, LLC (4.5 ) Direct Buy Holdings, Inc. (5.6 ) VSS-Tranzact Holdings, LLC (6.3 ) Orion Foods, LLC (6.8 ) Making Memories Wholesale, Inc. (7.0 ) Reed Group, Ltd. (8.3 ) CitiPostal Inc. (11.0 ) Pillar Processing, LLC (12.6 ) Ciena Capital LLC (27.0 ) eInstruction Corporation (27.9 ) Prommis Solutions, LLC (43.2 ) Other, net 4.8 Total (net) $ (61.0 )



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company's liquidity and capital resources are generated primarily from the net proceeds of public offerings of equity and debt securities, advances from the Facilities, net proceeds from the issuance of other securities, including convertible unsecured notes, as well as cash flows from operations.



As of December 31, 2013, the Company had $149.6 million in cash and cash equivalents and $3.0 billion in total debt outstanding at carrying value ($3.1 billion at principal amount). Subject to leverage and borrowing base restrictions, the Company had approximately $1.8 billion available for additional borrowings under the Facilities as of December 31, 2013.

We may from time to time seek to retire or repurchase our common stock through cash purchases, as well as retire, cancel or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. The amounts involved may be material. In addition, we may from time to time enter into additional debt facilities, increase the size of existing facilities or issue additional debt securities, including unsecured debt and/or debt securities convertible into common stock. Any such incurrence or issuance would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. In accordance with the Investment Company Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, calculated pursuant to the Investment Company Act, is at least 200% after such borrowing. 80



--------------------------------------------------------------------------------

Equity Issuances

The following table summarizes the total shares issued and proceeds we received in underwritten public offerings of our common stock net of underwriting and offering costs for the years ended December 31, 2013 and 2012. There were no sales of our equity securities during the year ended December 31, 2011. Proceeds net of Offering underwriting Shares price per discounts and



(in millions, except per share data) issued share(1) offering costs

2013

December 2013 public offering 16.4 $ 17.47 $



286.0

October 2013 public offering 12.7 $ 16.98 $ 214.3 April 2013 public offering 19.1 $ 17.43 $ 333.2 Total for the year ended December 31, 2013 48.2 $ 833.5 2012 August 2012 public offering 25.9 $ 16.55 $ 427.6 January 2012 public offering 16.4 $ 15.41 $ 252.4 Total for the year ended December 31, 2012 42.3 $



680.0

--------------------------------------------------------------------------------

(1)

The shares were sold to the underwriters for a price equal to the offering

price per share, which the underwriters were then permitted to sell at

variable prices.

As of December 31, 2013, total equity market capitalization for the Company was $5.3 billion compared to $4.4 billion as of December 31, 2012.

81



--------------------------------------------------------------------------------

Debt Capital Activities

Our debt obligations consisted of the following as of December 31, 2013 and 2012: As of December 31, 2013 2012 Total Total Aggregate Aggregate Principal Principal Amount Amount Available/ Principal Carrying Available/ Principal Carrying (in millions) Outstanding(1) Amount Value Outstanding(1) Amount Value Revolving Credit Facility $ 1,060.0 (2) $ - $ - $ 900.0 $ - $ - Revolving Funding Facility 620.0 (3) 185.0 185.0 620.0 300.0 300.0 SMBC Funding Facility 400.0 - - 400.0 - - February 2016 Convertible Notes 575.0 575.0 556.5 (4) 575.0 575.0 548.5 (4) June 2016 Convertible Notes 230.0 230.0 221.8 (4) 230.0 230.0 218.8 (4) 2017 Convertible Notes 162.5 162.5 159.2 (4) 162.5 162.5 158.3 (4) 2018 Convertible Notes 270.0 270.0 264.1 (4) 270.0 270.0 262.8 (4) 2019 Convertible Notes 300.0 300.0 295.3 (4) - - - 2018 Notes 600.0 600.0 596.7 (5) - - - February 2022 Notes 143.8 143.8 143.8 143.8 143.8 143.8 October 2022 Notes 182.5 182.5 182.5 182.5 182.5 182.5 2040 Notes 200.0 200.0 200.0 200.0 200.0 200.0 2047 Notes 230.0 230.0 181.4 (6) 230.0 230.0 181.2 (6) $ 4,973.8$ 3,078.8$ 2,986.3$ 3,913.8$ 2,293.8$ 2,195.9



--------------------------------------------------------------------------------

(1)

Subject to borrowing base and leverage restrictions. Represents the total

aggregate amount committed or outstanding, as applicable, under such instrument. (2) Provides for a feature that allows the Company, under certain



circumstances, to increase the size of the Revolving Credit Facility to a

maximum of $1,400.0 million.

(3)

Provides for a feature that allows the Company and Ares Capital CP, under

certain circumstances, to increase the size of the Revolving Funding Facility to a maximum of $865.0 million. (4)



Represents the aggregate principal amount outstanding of the Convertible

Unsecured Notes less the unaccreted discount initially recorded upon

issuance of the Convertible Unsecured Notes. The total unaccreted discount

for the February 2016 Convertible Notes, the June 2016 Convertible Notes,

the 2017 Convertible Notes, the 2018 Convertible Notes and the 2019

Convertible Notes was $18.5 million, $8.2 million, $3.3 million,

$5.9 million and $4.7 million, respectively, as of December 31, 2013. The

total unaccreted discount for the February 2016 Convertible Notes, the June

2016 Convertible Notes, the 2017 Convertible Notes and the 2018 Convertible

Notes was $26.5 million, $11.2 million, $4.2 million and $7.2 million, respectively, as of December 31, 2012. (5)



Represents the aggregate principal amount outstanding less the unaccreted

discount initially recorded upon issuance of the 2018 Notes. The total unaccreted discount for the 2018 Notes was $3.3 million as of December 31, 2013.



(6)

Represents the aggregate principal amount outstanding less the unaccreted

purchased discount. The total unaccreted purchased discount for the 2047

Notes was $48.6 million and $48.8 million as of December 31, 2013 and December 31, 2012, respectively. 82

-------------------------------------------------------------------------------- The weighted average stated interest rate and weighted average maturity, both on aggregate principal amount, of all our debt outstanding as of December 31, 2013 were 5.3% and 7.9 years, respectively, and as of December 31, 2012 were 5.5% and 9.8 years, respectively. The ratio of total principal amount of debt outstanding to stockholders' equity as of December 31, 2013 was 0.63:1.00 compared to 0.58:1.00 as of December 31, 2012. The ratio of total carrying value of debt outstanding to stockholders' equity as of December 31, 2013 was 0.61:1.00 compared to 0.55:1.00 as of December 31, 2012. In accordance with the Investment Company Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, calculated pursuant to the Investment Company Act, is at least 200% after such borrowing. As of December 31, 2013, our asset coverage was 264%.



Revolving Credit Facility

We are party to a senior secured revolving credit facility (as amended and restated, the "Revolving Credit Facility"), which allows us to borrow up to $1,060 million at any one time outstanding. The end of the revolving period and the stated maturity date for the Revolving Credit Facility are May 4, 2017 and May 4, 2018, respectively. The Revolving Credit Facility also provides for a feature that allows us, under certain circumstances, to increase the size of the facility to a maximum of $1,400 million. The interest rate charged on the Revolving Credit Facility is based on LIBOR plus an applicable spread of 2.00% or a "base rate" (as defined in the agreements governing the Revolving Credit Facility) plus an applicable spread of 1.00%. Additionally, we are required to pay a commitment fee of 0.375% per annum on any unused portion of the Revolving Credit Facility. As of December 31, 2013, there were no amounts outstanding under the Revolving Credit Facility and we were in compliance in all material respects with the terms of the Revolving Credit Facility.



Revolving Funding Facility

Our consolidated subsidiary, Ares Capital CP Funding LLC ("Ares Capital CP"), is party to a revolving funding facility (as amended, the "Revolving Funding Facility"), which allows Ares Capital CP to borrow up to $620 million at any one time outstanding. The Revolving Funding Facility is secured by all of the assets held by, and its membership interest in, Ares Capital CP. The end of the reinvestment period and the stated maturity date for the Revolving Funding Facility are April 18, 2015 and April 18, 2017, respectively. The Revolving Funding Facility also provides for a feature that allows, under certain circumstances, for an increase in the size of the facility to a maximum of $865 million. The interest rate charged on the Revolving Funding Facility is one month LIBOR plus an applicable spread ranging from 2.25% to 2.50% over LIBOR and ranging from 1.25% to 1.50% over "base rate" (as defined in the agreements governing the Revolving Funding Facility) in each case, determined monthly based on the composition of the borrowing base relative to outstanding borrowings under the facility. Additionally, we are required to pay a commitment fee of between 0.50% and 1.75% per annum depending on the size of the unused portion of the Revolving Funding Facility. As of December 31, 2013, the principal amount outstanding under the Revolving Funding Facility was $185.0 million and we and Ares Capital CP were in compliance in all material respects with the terms of the Revolving Funding Facility.



SMBC Funding Facility

Our consolidated subsidiary, Ares Capital JB Funding LLC, ("ACJB"), is party to a revolving funding facility (as amended, the "SMBC Funding Facility"), which allows ACJB to borrow up to $400 million at any one time outstanding. The SMBC Funding Facility is secured by all of the assets held by ACJB. The end of the reinvestment period and the stated maturity date for the SMBC Funding Facility are September 14, 2016 and September 14, 2021, respectively. The reinvestment period and the 83

-------------------------------------------------------------------------------- stated maturity date are both subject to two one-year extensions by mutual agreement. The interest rate charged on the SMBC Funding Facility is based on one month LIBOR plus an applicable spread of 2.00% or a "base rate" (as defined in the agreements governing the SMBC Funding Facility) plus an applicable spread of 1.00%. Through March 14, 2014, ACJB is required to pay a commitment fee of up to 0.75% per annum depending on the size of the unused portion of the SMBC Funding Facility. After March 14, 2014, ACJB is required to pay a commitment fee of between 0.35% and 0.875% per annum depending on the size of the unused portion of the SMBC Funding Facility. As of December 31, 2013, there were no amounts outstanding under the SMBC Funding Facility and we and ACJB were in compliance in all material respects with the terms of the SMBC Funding Facility.



Convertible Unsecured Notes

In January 2011, we issued $575 million aggregate principal amount of unsecured convertible senior notes that mature on February 1, 2016 (the "February 2016 Convertible Notes"), unless previously converted or repurchased in accordance with their terms. In March 2011, we issued $230 million aggregate principal amount of unsecured convertible senior notes that mature on June 1, 2016 (the "June 2016 Convertible Notes"), unless previously converted or repurchased in accordance with their terms. In March 2012, we issued $162.5 million aggregate principal amount of unsecured convertible senior notes that mature on March 15, 2017 (the "2017 Convertible Notes"), unless previously converted or repurchased in accordance with their terms. In the fourth quarter of 2012, we issued $270.0 million aggregate principal amount of unsecured convertible senior notes that mature on January 15, 2018 (the "2018 Convertible Notes", unless previously converted or repurchased in accordance with their terms. In July 2013, we issued $300.0 million aggregate principal amount of unsecured convertible senior notes that mature on January 15, 2019 (the "2019 Convertible Notes" and together with the February 2016 Convertible Notes, the June 2016 Convertible Notes, the 2017 Convertible Notes, the 2018 Convertible Notes, the "Convertible Unsecured Notes"), unless previously converted or repurchased in accordance with their terms. We do not have the right to redeem the Convertible Unsecured Notes prior to maturity. The February 2016 Convertible Notes, the June 2016 Convertible Notes, the 2017 Convertible Notes, the 2018 Convertible Notes and the 2019 Convertible Notes bear interest at a rate of 5.750%, 5.125% , 4.875% , 4.750% and 4.375%, respectively, per year, payable semi-annually. In certain circumstances, the Convertible Unsecured Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, at their respective conversion rates (listed below as of December 31, 2013) subject to customary anti-dilution adjustments and the requirements of their respective indenture (the "Convertible Unsecured Notes Indentures"). Prior to the close of business on the business day immediately preceding their respective conversion date (listed below), holders may convert their Convertible Unsecured Notes only under certain circumstances set forth in the respective Convertible Unsecured Notes Indenture. On or after their respective conversion dates until the close of business on the scheduled trading day immediately preceding their respective maturity date, holders may convert their Convertible Unsecured Notes at any time. In addition, if we engage in certain corporate events as described in their respective Convertible Unsecured Notes Indenture, holders of the Convertible Unsecured Notes may require us to repurchase for cash all or part of the Convertible Unsecured Notes at a repurchase price equal to 100% of the principal amount of the Convertible Unsecured Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date. 84



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Certain key terms related to the convertible features for each of the Convertible Unsecured Notes as of December 31, 2013 are listed below.

February 2016 2018 2019 Convertible June 2016 2017 Convertible Convertible Notes Convertible Notes Convertible Notes Notes Notes Conversion premium 17.5 % 17.5 % 17.5 % 17.5 % 15.0 % Closing stock price at issuance $16.28$16.20$16.46$16.91$17.53 Closing stock January 19, October 3, July 15, price date 2011 March 22, 2011 March 8, 2012 2012 2013 Conversion price(1) $18.71$18.62$19.11$19.76$20.10 Conversion rate (shares per one thousand dollar principal amount)(1) 53.4477 53.7116 52.3287 50.6160 49.7448 Conversion August 15, July

15, July 15, dates 2015 December 15, 2015 September 15, 2016 2017 2018



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(1)

Represents conversion price and conversion rate, as applicable, as of

December 31, 2013, taking into account certain de minimis adjustments that

will be made on the conversion date. Unsecured Notes 2018 Notes In November 2013, we issued $600.0 million in aggregate principal amount of senior unsecured notes, which bear interest at a rate of 4.875% per year and mature on November 30, 2018 (the "2018 Notes"). The 2018 Notes require payment of interest semi-annually, and all principal is due upon maturity. These notes are redeemable in whole or in part at any time at our option at a redemption price equal to par plus a "make whole" premium, as determined in the indenture governing the 2018 Notes, and any accrued and unpaid interest. See "Recent Developments," as well as Note 16 to our consolidated financial statements for the year ended December 31, 2013 for more information on the 2018 Notes.



February 2022 Notes

In February 2012, we issued $143.8 million in aggregate principal amount of senior unsecured notes, which bear interest at a rate of 7.00% per year and mature on February 15, 2022 (the "February 2022 Notes"). The February 2022 Notes require payment of interest quarterly, and all principal is due upon maturity. These notes are redeemable in whole or in part at any time or from time to time at our option on or after February 15, 2015, at a par redemption price of $25.00 per security plus accrued and unpaid interest.



October 2022 Notes

In September 2012 and October 2012, we issued $182.5 million in aggregate principal amount of senior unsecured notes, which bear interest at a rate of 5.875% per year and mature on October 1, 2022 (the "October 2022 Notes"). The October 2022 Notes require payment of interest quarterly and all principal is due upon maturity. These notes are redeemable in whole or in part at any time or from time to time at our option on or after October 1, 2015, at a par redemption price of $25.00 per security plus accrued and unpaid interest.



2040 Notes

In October 2010, we issued $200.0 million in aggregate principal amount of senior unsecured notes which bear interest at a rate of 7.75% and mature on October 15, 2040 (the "2040 Notes"). The 2040 Notes require payment of interest quarterly, and all principal is due upon maturity. These notes are redeemable in whole or in part at any time or from time to time at our option on or after October 15, 2015, at a par redemption price of $25.00 per security plus accrued and unpaid interest. 85



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2047 Notes

As part of the Allied Acquisition, we assumed $230.0 million aggregate principal amount of senior unsecured notes which bear interest at a rate of 6.875% and mature on April 15, 2047 (the "2047 Notes" and together with the 2018 Notes, the February 2022 Notes, the October 2022 Notes and the 2040 Notes, the "Unsecured Notes"). The 2047 Notes require payment of interest quarterly, and all principal is due upon maturity. These notes are redeemable in whole or in part at any time or from time to time at our option, at a par redemption price of $25.00 per security plus accrued and unpaid interest.



As of December 31, 2013 we were in compliance in all material respects with the terms of the Convertible Unsecured Notes Indentures and the indentures governing the Unsecured Notes.

The Convertible Unsecured Notes and the Unsecured Notes are our senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Unsecured Notes and the Unsecured Notes; equal in right of payment to our existing and future unsecured indebtedness that is not expressly subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities.



See Note 5 to our consolidated financial statements for the year ended December 31, 2013 for more detail on the Company's debt obligations.

CONTRACTUAL OBLIGATIONS

A summary of the maturities of our principal amounts of debt and other contractual payment obligations as of December 31, 2013 are as follows:

Payments Due by Period Less than After (in millions) Total 1 year 1-3 years 3-5 years 5 years Revolving Credit Facility $ - $ - $ - $ - $ - Revolving Funding Facility 185.0 - - 185.0 - SMBC Funding Facility - - - - - February 2016 Convertible Notes 575.0 - 575.0 - - June 2016 Convertible Notes 230.0 - 230.0 - - 2017 Convertible Notes 162.5 - - 162.5 - 2018 Convertible Notes 270.0 - - 270.0 - 2019 Convertible Notes 300.0 - - - 300.0 2018 Notes 600.0 - - 600.0 - February 2022 Notes 143.8 - - - 143.8 October 2022 Notes 182.5 - - - 182.5 2040 Notes 200.0 - - - 200.0 2047 Notes 230.0 - - - 230.0 Operating lease obligations 72.0 7.2 12.0 12.5 40.3 $ 3,150.8$ 7.2$ 817.0$ 1,230.0$ 1,096.6 86



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OFF BALANCE SHEET ARRANGEMENTS

The Company has various commitments to fund investments in its portfolio, as described below.

As of December 31, 2013 and 2012, the Company had the following commitments to fund various revolving and delayed draw senior secured and subordinated loans, including commitments to fund which are at (or substantially at) the Company's discretion:

As of December 31, (in millions) 2013



2012

Total revolving and delayed draw commitments $ 834.5$ 441.6 Less: funded commitments (87.1 ) (82.1 ) Total unfunded commitments 747.4 359.5



Less: commitments substantially at discretion of the Company (16.0 )

(6.0 ) Less: unavailable commitments due to borrowing base or other covenant restrictions

(1.7 )



(0.6 )

Total net adjusted unfunded revolving and delayed draw commitments $ 729.7$ 352.9 Included within the total revolving and delayed draw commitments as of December 31, 2013 were commitments to issue up to $39.9 million in letters of credit through a financial intermediary on behalf of certain portfolio companies. As of December 31, 2013, the Company had $16.3 million in letters of credit issued and outstanding under these commitments on behalf of the portfolio companies. In addition to these letters of credit included as a part of the total revolving and delayed draw commitments to portfolio companies, as of December 31, 2013 the Company also had $27.0 million of letters of credit issued and outstanding on behalf of other portfolio companies. For all these letters of credit issued and outstanding, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. None of these letters of credit issued and outstanding are recorded as a liability on the Company's balance sheet as such letters of credit are considered in the valuation of the investments in the portfolio company. Of these letters of credit, $42.5 million expire in 2014 and $0.8 million expire in 2015. The Company also has commitments to co-invest in the SSLP for the Company's portion of the SSLP's commitments to fund delayed draw investments to certain portfolio companies of the SSLP. See "Senior Secured Loan Program" above and Note 4 to our consolidated financial statements for the year ended December 31, 2013 for more information. As of December 31, 2013 and 2012, the Company was party to subscription agreements to fund equity investments in private equity investment partnerships as follows: As of December 31, (in millions) 2013 2012 Total private equity commitments $ 59.5$ 131.0 Less: funded private equity commitments (11.9 )



(66.5 )

Total unfunded private equity commitments 47.6



64.5

Less: private equity commitments substantially at discretion of the Company

(43.2 )



(53.1 )

Total net adjusted unfunded private equity commitments $ 4.4

$ 11.4 In the ordinary course of business, we may sell certain of our investments to third party purchasers. In particular, in connection with the sale of certain controlled portfolio company equity investments (as well as certain other sales), we have, and may continue to do so in the future, agreed 87 -------------------------------------------------------------------------------- to indemnify such purchasers for future liabilities arising from the investments and the related sale transaction. Such indemnification provisions may give rise to future liabilities. As of December 31, 2013, one of the Company's portfolio companies, Ciena Capital LLC ("Ciena"), had one non-recourse securitization Small Business Administration ("SBA") loan warehouse facility, which has reached its maturity date but remains outstanding. Ciena is working with the providers of the SBA loan warehouse facility with regard to the repayment of that facility. Allied Capital had previously issued a performance guaranty (which Ares Capital succeeded to as a result of the Allied Acquisition) whereby Ares Capital must indemnify the warehouse providers for any damages, losses, liabilities and related costs and expenses that they may incur as a result of Ciena's failure to perform any of its obligations as loan originator, loan seller or loan servicer under the warehouse facility. As of December 31, 2013, there were no known issues or claims with respect to this performance guaranty.



RECENT DEVELOPMENTS

In January 2014, we issued an additional $150.0 million aggregate principal amount of the 2018 Notes (the "Additional 2018 Notes") at a premium of 102.7% of their principal amount. Total proceeds from the issuance of the Additional 2018 Notes, net of underwriting discounts and offering costs, were approximately $151.9 million. From January 1, 2014 through February 20, 2014, we made new investment commitments of $233 million, of which $207 million were funded. Of these new commitments, 69% were in first lien senior secured loans, 20% were investments in subordinated certificates of the SSLP to make co-investments with GE in first lien senior secured loans through the SSLP, 6% were in senior subordinated debt, 4% were in second lien senior secured loans and 1% were in other equity investments. Of the $233 million of new investment commitments, 93% were floating rate, 6% were fixed rate and 1% were non-interest bearing. The weighted average yield of debt and other income producing securities funded during the period at amortized cost was 10.0%. We may seek to syndicate a portion of these new investment commitments, although there can be no assurance that we will be able to do so. From January 1, 2014 through February 20, 2014, we exited $409 million of investment commitments. Of these investment commitments, 75% were first lien senior secured loans, 23% were second lien senior secured loans, 1% were preferred equity securities and 1% were other equity securities. Of the $409 million of exited investment commitments, 89% were floating rate, 10% were fixed rate and 1% were non-interest bearing. The weighted average yield of debt and other income producing securities exited or repaid during the period at amortized cost was 8.9%. On the $409 million of investment commitments exited from January 1, 2014 through February 20, 2014, we recognized total net realized gains of approximately $5 million. In addition, as of February 20, 2014, we had an investment backlog and pipeline of approximately $635 million and $145 million, respectively. Investment backlog includes transactions approved by our investment adviser's investment committee and/or for which a formal mandate, letter of intent or a signed commitment have been issued, and therefore we believe are likely to close. Investment pipeline includes transactions where due diligence and analysis are in process, but no formal mandate, letter of intent or signed commitment have been issued. The consummation of any of the investments in this backlog and pipeline depends upon, among other things, one or more of the following: satisfactory completion of our due diligence investigation of the prospective portfolio company, our acceptance of the terms and structure of such investment and the execution and delivery of satisfactory transaction documentation. In addition, we may syndicate a portion of these investments and certain of these investments may result in the repayment of existing investments. We cannot assure you that we will make any of these investments or that we will syndicate any portion of these investments. 88



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CRITICAL ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with GAAP, and include the accounts of the Company and its consolidated subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition as of and for the periods presented. All significant intercompany balances and transactions have been eliminated.



Cash and Cash Equivalents

Cash and cash equivalents include funds from time to time deposited with financial institutions and short-term, liquid investments in a money market fund. Cash and cash equivalents are carried at cost which approximates fair value.

Concentration of Credit Risk

The Company places its cash and cash equivalents with financial institutions and, at times, cash held in money market accounts may exceed the Federal Deposit Insurance Corporation insured limit.



Investments

Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment without regard to unrealized gains or losses previously recognized, and include investments charged off during the period, net of recoveries. Unrealized gains or losses primarily reflect the change in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized. Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available (i.e., substantially all of our investments) are valued at fair value as determined in good faith by our board of directors, based on, among other things, the input of our investment adviser, audit committee and independent third-party valuation firms that have been engaged at the direction of our board of directors to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing 12-month period (with certain de minimis exceptions) and under a valuation policy and a consistently applied valuation process. The valuation process is conducted at the end of each fiscal quarter, and a minimum of 50% of our portfolio at fair value is subject to review by an independent valuation firm each quarter. In addition, our independent registered public accounting firm obtains an understanding of, and performs select procedures relating to, our investment valuation process within the context of performing the integrated audit. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time), the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company's securities to any similar publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments would trade in their principal markets and other relevant factors. When an external event such as a 89



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purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate our valuation.

Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors, as described herein. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.



Our board of directors undertakes a multi-step valuation process each quarter, as described below:



Our quarterly valuation process begins with each portfolio company or

investment being initially valued by the investment professionals responsible for the portfolio investment in conjunction with our portfolio management team.



Preliminary valuations are reviewed and discussed with our investment

adviser's management and investment professionals, and then valuation

recommendations are presented to our board of directors. The audit committee of our board of directors reviews these valuations, as well as the input of third parties, including independent third-party valuation firms, with respect to the valuations of a minimum of 50% of our portfolio at fair value.



Our board of directors discusses valuations and ultimately determines

the fair value of each investment in our portfolio without a readily

available market quotation in good faith based on, among other things,

the input of our investment adviser, audit committee and, where

applicable, independent third-party valuation firms.

Interest and Dividend Income Recognition

Interest income is recorded on an accrual basis and includes the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any. Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management's judgment, are likely to remain current. The Company may make exceptions to this if the loan has sufficient collateral value and is in the process of collection. Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. 90



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Payment-in-Kind Interest

The Company has loans in its portfolio that contain PIK provisions. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company's status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash.



Capital Structuring Service Fees and Other Income

The Company's investment adviser seeks to provide assistance to our portfolio companies in connection with the Company's investments and in return the Company may receive fees for capital structuring services. These fees are generally only available to the Company as a result of the Company's underlying investments, are normally paid at the closing of the investments, are generally non-recurring and are recognized as revenue when earned upon closing of the investment. The services that the Company's investment adviser provides vary by investment, but generally include reviewing existing credit facilities, arranging bank financing, arranging equity financing, structuring financing from multiple lenders, structuring financing from multiple equity investors, restructuring existing loans, raising equity and debt capital, and providing general financial advice, which concludes upon closing of the investment. Any services of the above nature subsequent to the closing would generally generate a separate fee payable to the Company. In certain instances where the Company is invited to participate as a co-lender in a transaction and does not provide significant services in connection with the investment, a portion of loan fees paid to the Company in such situations will be deferred and amortized over the estimated life of the loan. The Company's investment adviser may also take a seat on the board of directors of a portfolio company, or observe the meetings of the board of directors without taking a formal seat. Other income includes fees for asset management, management and consulting services, loan guarantees, commitments, amendments and other services rendered by the Company to portfolio companies. Such fees are recognized as income when earned or the services are rendered.



Foreign Currency Translation

The Company's books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:

(1)

Fair value of investment securities, other assets and liabilities-at

the exchange rates prevailing at the end of the period.

(2)

Purchases and sales of investment securities, income and expenses-at

the exchange rates prevailing on the respective dates of such

transactions, income or expenses.

Results of operations based on changes in foreign exchange rates are separately disclosed in the statement of operations. Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S. government securities.



Equity Offering Expenses

The Company's offering costs, excluding underwriters' fees, are charged against the proceeds from equity offerings when received.

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Debt Issuance Costs

Debt issuance costs are amortized over the life of the related debt instrument using the straight line method, which closely approximates the effective yield method.

Income Taxes

The Company has elected to be treated as a RIC under the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements and timely distribute to its stockholders at least 90% of its investment company taxable income, as defined by the Code, for each year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal corporate-level income taxes. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions from such current year taxable income into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as such taxable income is earned.



Certain of our consolidated subsidiaries are subject to U.S. federal and state corporate-level income taxes.

Dividends to Common Stockholders

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by our board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed, although we may decide to retain such capital gains for investment.

We have adopted a dividend reinvestment plan that provides for reinvestment of any distributions we declare in cash on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not "opted out" of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividend. We intend to use primarily newly issued shares to implement the dividend reinvestment plan (so long as we are trading at a premium to net asset value). If our shares are trading at a significant enough discount to net asset value and we are otherwise permitted under applicable law to purchase such shares, we intend to purchase shares in the open market in connection with our obligations under our dividend reinvestment plan. However, we reserve the right to issue new shares of our common stock in connection with our obligations under the dividend reinvestment plan even if our shares are trading below net asset value.



Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of actual and contingent assets and liabilities at the date of the financial statements and the reported amounts of income or loss and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation of investments. 92



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Recent Accounting Pronouncements

In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2013-08, Financial Services-Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements ("ASU 2013-08"). ASU 2013-08 amends the criteria that define an investment company, clarifies the measurement guidance and requires certain additional disclosures. Public companies are required to apply ASU 2013-08 prospectively for interim and annual reporting periods beginning after December 15, 2013. We have evaluated the impact of the adoption of ASU 2013-08 on our financial statements and disclosures and determined the adoption of ASU 2013-08 did not have a material effect on our financial condition and results of operations


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