Ares Capital Corporation (ARCC) - Q2 2017 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2017. Ares Capital Corporation is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC). The reporting period reflects the combined operations following the acquisition of American Capital, Ltd., which closed on January 3, 2017. The company is externally managed by Ares Capital Management LLC.
Key Financial Metrics
| Metric | Q2 2017 (3 Months) | YTD 2017 (6 Months) | YTD 2016 (6 Months) |
|---|---|---|---|
| Total Investment Income | $284 million | $559 million | $493 million |
| Net Investment Income | $124 million | $218 million | $218 million |
| Net Realized Gains | $110 million | $112 million | $58 million |
| Net Unrealized Gains (Losses) | ($52 million) | ($30 million) | $13 million |
| Net Increase in Stockholders' Equity | $178 million | $296 million | $289 million |
| Earnings Per Share (Diluted) | $0.42 | $0.70 | $0.92 |
| Total Assets | $12,328 million (as of June 30, 2017) | ||
| Total Investments (Fair Value) | $11,498 million (as of June 30, 2017) | ||
| Total Debt | $4,838 million (as of June 30, 2017) | ||
| Cash and Cash Equivalents | $536 million (as of June 30, 2017) | ||
| Net Assets Per Share | $16.54 (as of June 30, 2017) |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased from $8,820 million at December 31, 2016, to $11,498 million at June 30, 2017. This growth is primarily attributable to the American Capital Acquisition and new investment activity.
- Expense Structure: Total expenses for the six months ended June 30, 2017, were $332 million (net of a $10 million fee waiver), compared to $266 million in the prior year period. This increase reflects the integration of American Capital and higher base management fees due to the larger asset base.
- Fee Waiver: In connection with the American Capital Acquisition, the investment adviser waived $10 million of income-based fees for the quarter and year-to-date periods.
- Debt Levels: Total debt increased to $4,838 million from $3,874 million at the end of 2016, driven by new borrowings to fund the acquisition and portfolio expansion.
- Unrealized Losses: The company reported net unrealized losses of $30 million for the six months ended June 30, 2017, compared to net unrealized gains of $13 million in the same period in 2016.
Guidance, Outlook, and Risks
- Subsequent Event (SSLP Termination): In July 2017, the company and GE agreed to an early termination of the Senior Secured Loan Program (SSLP). The company purchased the remaining $1.6 billion of loans from the SSLP and assumed $50 million in unfunded commitments. This transaction resulted in an $18 million net realized loss recognized in connection with the liquidation distribution.
- Dividends: The company declared dividends of $0.38 per share in both Q1 and Q2 2017, totaling $0.76 per share for the six-month period.
- Legal Proceedings: The company is a defendant in a lawsuit filed by the bankruptcy trustee of DSI Renal Holdings LLC, seeking approximately $117 million in damages. The company intends to vigorously defend the claims. Additionally, a shareholder class action regarding the American Capital Acquisition reached a settlement in principle in June 2017, though court approval is pending.
- Market Risks: The filing highlights risks related to interest rate fluctuations, credit market liquidity, and the valuation of illiquid portfolio investments. The company notes that fair values are determined in good faith by the board and may differ from realized values.
Key Facts for Investor Verification
- Fee Waiver Impact: Verify the impact of the $10 million quarterly fee waiver on future expense ratios and net investment income calculations.
- SSLP Realized Loss: Confirm the accounting treatment and future cash flow implications of the $18 million realized loss from the SSLP termination occurring in July 2017.
- Debt Maturity Profile: Review the weighted average maturity of debt (4.6 years as of June 30, 2017) and the specific terms of the Revolving Credit Facility and Convertible Notes.
- Non-Accrual Status: Note that 2.7% of total investments at amortized cost were on non-accrual status as of June 30, 2017.
- Portfolio Concentration: Verify the concentration of investments in "Investment Funds and Vehicles" (22.5% of portfolio) and "Business Services" (17.0% of portfolio).