Business Context and Reporting Period
Company: Ares Capital Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: May 7, 2009
Context: The filing discloses the entry into a material definitive agreement regarding an amendment to an existing Commercial Paper (CP) Funding Facility and the commitment to establish a new Revolving Facility.
Key Financial Metrics and Facility Terms
Amended CP Funding Facility:
- Structure Change: Converted from a revolving facility to an amortizing facility.
- Availability: Reduced from $350 million to $225 million.
- Maturity: Extended from July 21, 2009, to May 7, 2012.
- Amortization: Required reductions in outstanding balance by December 31, 2010, and December 31, 2011.
- Interest Rate: Increased from benchmark + 250 basis points to benchmark + 350 basis points.
- Fees: Commitment fee removed; a renewal fee of $2.8 million (1.25% of total facility) was paid.
- Advance Rates: Decreased for certain types of eligible loans.
New Revolving Facility (Commitment):
- Counterparty: Wachovia Bank N.A.
- Principal Amount: Up to $200 million.
- Term: Anticipated 3-year term with two one-year extension options.
- Interest Rate: Anticipated LIBOR + 400 basis points.
- Fees: Commitment fee anticipated between 0.50% and 2.50% on unused portions; structuring fee of $3.0 million (1.5% of total facility) payable on closing.
Liquidity and Debt: The filing does not provide current total debt, cash flow, or liquidity ratios. It notes that borrowings under both facilities are subject to leverage restrictions under the Investment Company Act of 1940.
Material Changes Versus Prior Period
- Facility Conversion: The primary change is the structural shift of the CP Funding Facility from revolving to amortizing, necessitating a reduction in available capital.
- Cost of Capital: The cost of borrowing increased significantly, with the interest rate margin on the CP facility rising by 100 basis points and the new Revolving Facility carrying a 400 basis point margin.
- Guaranty Structure: A new cross-guaranty structure was established where Ares Capital CP Funding II LLC guarantees the CP Facility, and Ares Capital CP guarantees the new Revolving Facility.
Outlook, Risks, and Contingencies
Contingencies:
- Documentation Execution: The extended term of the CP Funding Facility is contingent upon the execution of definitive documentation for the new Revolving Facility by October 19, 2009.
- Closing Conditions: The new Revolving Facility is subject to various conditions, including the negotiation of definitive documentation. The filing explicitly states there is no assurance that the facility will be entered into or that terms will match those described.
Risks:
- Default Provisions: Definitive documentation for the Revolving Facility is expected to include customary events of default, allowing the lender to pursue rights in collateral directly against the borrower and guarantor.
- Regulatory Constraints: Both facilities are subject to leverage restrictions under the Investment Company Act of 1940.
Investor Verification Checklist
- Verify the execution of definitive documentation for the Revolving Facility by the October 19, 2009 deadline.
- Confirm the actual closing of the $200 million Revolving Facility and the payment of the $3.0 million structuring fee.
- Monitor the amortization schedule of the CP Funding Facility to ensure compliance with required balance reductions in 2010 and 2011.
- Review the impact of the increased interest rate margins (350 bps and 400 bps) on future net interest income and profitability.
- Assess the implications of reduced advance rates on the Company's ability to originate new loans.