Business Context and Reporting Period
Ares Capital Corporation (ARCC) is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC). The company is externally managed by Ares Capital Management LLC. This report covers the quarterly period ended June 30, 2016.
A significant development during the period was the announcement on May 23, 2016, of a definitive agreement to acquire American Capital, Ltd. in a cash and stock transaction valued at approximately $4.0 billion. The company suspended its stock repurchase program in May 2016 pending the completion of this acquisition.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|
| Total Investment Income | $493.3 million | $502.7 million |
| Net Investment Income | $218.0 million | $230.2 million |
| Net Realized and Unrealized Gains | $70.9 million | $20.8 million |
| Net Increase in Stockholders' Equity | $288.9 million | $247.1 million |
| Earnings Per Share (Basic & Diluted) | $0.92 | $0.79 |
| Total Assets | $9.21 billion | $9.51 billion (Dec 31, 2015) |
| Total Debt Outstanding | $3.86 billion | $4.20 billion (Dec 31, 2015) |
| Cash and Cash Equivalents | $125.9 million | $257.1 million (Dec 31, 2015) |
| Net Asset Value (NAV) per Share | $16.62 | $16.46 (Dec 31, 2015) |
Material Changes vs. Prior Period
- Investment Income: Total investment income decreased by approximately 1.9% year-over-year, primarily driven by a reduction in income from controlled affiliate company investments (down 24.7%) and non-controlled affiliate investments (down 25.5%). This was partially offset by a 15.9% increase in income from non-controlled/non-affiliate investments.
- Expenses: Total expenses remained relatively flat at $266.1 million compared to $266.4 million in the prior year. However, the composition shifted: interest and credit facility fees decreased by 16.9% due to lower average debt balances, while capital gain incentive fees increased significantly to $14.2 million from $3.5 million.
- Realized Gains: Net realized gains increased to $58.0 million from $56.0 million, contributing to a higher net increase in stockholders' equity despite lower net investment income.
- Debt Reduction: Total debt outstanding decreased by approximately $337 million from the prior year-end, reflecting repayments of the February 2016 and June 2016 Convertible Notes.
Guidance, Outlook, and Risks
- American Capital Acquisition: The company expects to complete the acquisition of American Capital, Ltd. as early as the fourth quarter of 2016, subject to regulatory approvals and shareholder votes. The transaction involves a cash and stock exchange ratio of 0.483 shares of ARCC stock plus $6.41 cash per American Capital share.
- Co-Investment Programs: The Senior Secured Loan Program (SSLP) with GE is no longer making new investments but continues to fund existing commitments. The company is exploring options for the SSLP portfolio. A new joint venture, the Senior Direct Lending Program (SDLP) with Varagon Capital Partners, was established but had no funded amounts as of June 30, 2016.
- Legal Proceedings: Several putative shareholder class actions have been filed challenging the American Capital Acquisition, alleging breaches of fiduciary duty by American Capital's directors. The company intends to vigorously defend against these claims.
- Portfolio Quality: As of June 30, 2016, 1.3% of total investments at amortized cost were on non-accrual status, an improvement from 2.6% at December 31, 2015.
Investor Verification Checklist
- Acquisition Status: Verify the progress of the American Capital Acquisition, including regulatory approvals and shareholder vote outcomes, as this is a transformative event for the company.
- Debt Maturity Profile: Review the maturity schedule of the remaining convertible notes and unsecured notes to assess refinancing risks and interest rate exposure.
- SSLP Resolution: Monitor updates regarding the future of the Senior Secured Loan Program (SSLP) and the company's strategy for the portfolio held within that vehicle.
- Dividend Sustainability: Confirm the company's ability to maintain its dividend payout ratio given the reduction in net investment income and the potential cash outflows associated with the pending acquisition.
- Legal Risks: Track the status of the shareholder lawsuits regarding the American Capital deal, as a successful injunction could delay or alter the transaction terms.