Ares Capital Corporation 10-Q Summary
Business Context and Reporting Period
Company: Ares Capital Corporation (ARCC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: ARCC is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC). It invests primarily in first and second lien senior loans and mezzanine debt of private middle-market companies. The company is externally managed by Ares Capital Management LLC.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Investment Income | $115.1 million | $115.7 million |
| Net Investment Income | $62.1 million | $62.0 million |
| Net Increase in Stockholders' Equity (Operations) | $69.8 million | $12.4 million |
| Basic & Diluted EPS | $0.72 | $0.15 |
| Total Assets | $2.05 billion | $2.09 billion (Dec 31, 2008) |
| Total Debt Outstanding | $879.3 million | $908.8 million (Dec 31, 2008) |
| Cash and Cash Equivalents | $46.3 million | $89.4 million (Dec 31, 2008) |
| Net Assets Per Share | $11.21 | $11.27 (Dec 31, 2008) |
| Weighted Average Cost of Debt | 2.94% | 4.35% |
Material Changes vs. Prior Period
- Investment Income: Total investment income remained relatively flat year-over-year for the six-month period ($115.1M vs $115.7M). Interest income increased by 11% due to portfolio growth, but this was offset by an 88% decrease in capital structuring service fees due to fewer new investment commitments.
- Expenses: Total expenses decreased by 2% ($52.9M vs $53.8M). Interest expense dropped significantly by 25% ($12.9M vs $17.1M) driven by lower LIBOR rates, reducing the average cost of debt from 4.35% to 2.94%.
- Realized Gains: The company recognized a significant one-time realized gain of $26.5 million on the extinguishment of debt (repurchase of CLO notes) during the six months ended June 30, 2009. This contributed heavily to the net increase in stockholders' equity.
- Unrealized Gains/Losses: Net unrealized losses were $16.3 million for the six months ended June 30, 2009, compared to $49.8 million in the prior year period, indicating a stabilization in portfolio valuations.
- Portfolio Composition: The portfolio remained diversified across industries, with Healthcare (19.1%) and Education (10.3%) being the largest sectors. 6.2% of investments at amortized cost were on non-accrual status.
Guidance, Outlook, and Risks
- Liquidity and Capital: The company reported $46.3 million in cash and approximately $150 million available for additional borrowings under its facilities. Management noted that due to global market volatility, access to capital markets remains limited. They intend to adjust investment paces and pursue asset sales to maintain liquidity.
- Debt Facilities:
- Revolving Credit Facility: $375.1 million outstanding of $525.0 million available; matures Dec 2010.
- CP Funding Facility: $225.0 million outstanding of $225.0 million available; amended in May 2009 to extend maturity to May 2012.
- Debt Securitization (CLO): $279.2 million outstanding; matures Dec 2019.
- Recent Developments: On July 21, 2009, the company established a new $200 million revolving facility (CP Funding II) with Wachovia Bank to replace the expiring CP Funding Facility.
- Risks: Key risks include the illiquidity of portfolio investments, potential inability to refinance debt facilities on acceptable terms, and the impact of credit market volatility on investment valuations. The company holds significant unfunded commitments ($122.1 million net adjusted) and private equity commitments ($421.8 million).
Investor Verification Checklist
- Debt Refinancing: Verify the status of the Revolving Credit Facility (maturing Dec 2010) and the successful deployment of the new CP Funding II Facility.
- Non-Accrual Status: Monitor the 6.2% of the portfolio on non-accrual status and the specific performance of Grade 1 and Grade 2 investments.
- Dividend Sustainability: Confirm that net investment income continues to cover the declared dividend rate ($0.77 per share for the six months ended June 30, 2009), noting the reliance on PIK (Payment-in-Kind) interest.
- Valuation Methodology: Review the independent valuation firm's assessment of Level 3 assets, which comprise the vast majority of the portfolio ($1.94 billion).
- Unfunded Commitments: Assess the company's ability to fund $122.1 million in net adjusted revolving commitments and $421.8 million in private equity commitments given current market liquidity constraints.