Ares Capital Corporation (ARCC) - Q3 2016 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2016. Ares Capital Corporation is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC). The Company invests primarily in first and second lien senior secured loans, mezzanine debt, and equity securities of middle-market companies. As of the reporting date, the Company had 313,954,008 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q3 2016 (Three Months) | Q3 2015 (Three Months) | YTD 2016 (Nine Months) | YTD 2015 (Nine Months) |
|---|---|---|---|---|
| Total Investment Income | $258.7 million | $260.9 million | $752.0 million | $763.7 million |
| Net Investment Income | $137.7 million | $130.5 million | $355.7 million | $360.7 million |
| Net Realized Gains | $20.6 million | $47.7 million | $78.5 million | $103.7 million |
| Net Unrealized Gains (Losses) | $(48.0) million | $(61.4) million | $(35.0) million | $(96.6) million |
| Net Increase in Stockholders' Equity | $110.2 million | $116.9 million | $399.2 million | $364.0 million |
| Earnings Per Share (Basic & Diluted) | $0.35 | $0.37 | $1.27 | $1.16 |
| Net Assets Per Share | $16.59 | $16.46 (Dec 31, 2015) | $16.59 | $16.46 (Dec 31, 2015) |
| Total Debt Outstanding | $3.72 billion | $4.11 billion (Dec 31, 2015) | $3.72 billion | $4.11 billion (Dec 31, 2015) |
| Cash and Cash Equivalents | $125.1 million | $257.1 million (Dec 31, 2015) | $125.1 million | $257.1 million (Dec 31, 2015) |
Material Changes vs. Prior Period
- Investment Portfolio: Total investments at fair value decreased to $8.80 billion from $9.06 billion at year-end 2015. This reflects a shift in portfolio composition and repayments.
- Debt Reduction: Total debt decreased by approximately $393 million to $3.72 billion, driven by the repayment of the February 2016 Convertible Notes ($575 million) and June 2016 Convertible Notes ($230 million), partially offset by new issuances (January 2022 Notes).
- Realized Gains: Net realized gains for the quarter dropped significantly to $20.6 million from $47.7 million in the prior year quarter, largely due to lower sales activity.
- Unrealized Losses: Net unrealized losses improved to $(48.0) million for the quarter compared to $(61.4) million in the prior year, indicating a stabilization in portfolio valuations.
- Dividends: The Company declared dividends of $0.38 per share for each of the three quarters in 2016, totaling $1.14 per share for the nine-month period.
Guidance, Outlook, and Material Events
- American Capital Acquisition: On May 23, 2016, the Company entered into a definitive agreement to acquire American Capital, Ltd. in a cash and stock transaction valued at approximately $4.0 billion. The transaction is expected to close in early 2017, subject to regulatory and shareholder approvals. Ares Capital Management has agreed to provide $275 million in cash consideration and waive up to $10 million of income-based fees per quarter for ten quarters post-closing.
- Co-Investment Programs:
- Senior Direct Lending Program (SDLP): Initial funding was completed in July 2016. The Company holds $195.3 million in SDLP certificates.
- Senior Secured Loan Program (SSLP): No new investments have been made since June 2015. The Company is in dialogue with GE and CPPIB regarding the future of the program, but no agreement has been reached.
- Stock Repurchase Program: The Company suspended its $100 million stock repurchase program in May 2016 pending the completion of the American Capital Acquisition. As of September 30, 2016, approximately $92.8 million remained available.
- Litigation: A consolidated putative shareholder class action has been filed challenging the American Capital Acquisition. The Company believes the claims are without merit. Additionally, the Company is defending a lawsuit regarding a purported fraudulent transfer involving DSI Renal Holdings LLC.
Investor Verification Checklist
- Verify the status and expected closing timeline of the American Capital Acquisition, including regulatory approvals and shareholder votes.
- Review the details of the SSLP (Senior Secured Loan Program) wind-down or restructuring discussions with GE and CPPIB, as this impacts future yield and capital deployment.
- Monitor the non-accrual status of the portfolio, which stood at 2.3% of amortized cost as of September 30, 2016.
- Assess the impact of the stock repurchase suspension on share count and potential dilution upon the closing of the American Capital merger.
- Confirm the dividend sustainability given the reduction in net investment income and the potential for increased expenses post-acquisition.