Ares Capital Corporation 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2012. 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 loans and mezzanine debt, with a lesser extent of equity investments. It is externally managed by Ares Capital Management LLC.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|
| Total Investment Income | $345.3 million | $280.0 million |
| Net Investment Income | $164.9 million | $91.6 million |
| Net Realized Gains (Losses) | ($46.6 million) | $56.2 million |
| Net Unrealized Gains | $80.8 million | $32.2 million |
| Net Increase in Stockholders' Equity | $196.5 million | $160.7 million |
| Earnings Per Share (Basic & Diluted) | $0.90 | $0.79 |
| Total Assets | $5.81 billion | $5.39 billion (Dec 31, 2011) |
| Total Debt (Carrying Value) | $2.19 billion | $2.07 billion (Dec 31, 2011) |
| Cash and Cash Equivalents | $101.3 million | $120.8 million (Dec 31, 2011) |
| Net Assets Per Share | $15.51 | $15.34 (Dec 31, 2011) |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased 23.3% year-over-year, driven primarily by a larger portfolio size (average amortized cost increased from $4.3 billion to $5.2 billion) and higher capital structuring service fees.
- Realized Losses: The Company recorded net realized losses of $46.6 million for the six months ended June 30, 2012, compared to net realized gains of $56.2 million in the prior year. Significant losses were attributed to exits from Prommis Solutions, LLC ($46.8 million) and Making Memories Wholesale, Inc. ($11.1 million), partially offset by gains from BenefitMall Holdings Inc. ($12.9 million).
- Unrealized Gains: Net unrealized gains increased significantly to $80.8 million, compared to $32.2 million in the prior year, reflecting improved valuations across the portfolio.
- Debt Extinguishment: The Company repaid its Debt Securitization (CLO Notes) in full in June 2012, resulting in a realized loss on extinguishment of debt of $2.7 million due to unamortized costs.
- Expense Reduction: Total operating expenses decreased to $174.8 million from $184.5 million, largely due to a reduction in GAAP capital gains incentive fee accruals ($6.3 million vs. $39.8 million in the prior year).
Guidance, Outlook, and Risks
- Dividends: The Company declared dividends of $0.74 per share for the six months ended June 30, 2012. In August 2012, a third-quarter dividend of $0.38 per share and an additional dividend of $0.05 per share were declared.
- Capital Resources: As of June 30, 2012, the Company had approximately $884 million available for additional borrowings under its credit facilities. The asset coverage ratio was 257%, well above the 200% regulatory minimum.
- Portfolio Activity: Between July 1 and August 3, 2012, the Company made new investment commitments of $299 million (70% first lien senior secured debt) and exited $144 million of commitments, recognizing net realized gains of approximately $23 million on these exits.
- Risks: Key risks include the impact of interest rate fluctuations, the liquidity of credit markets, the valuation of non-publicly traded investments, and the financial condition of portfolio companies. The Company notes that 2.3% of investments were on non-accrual status as of June 30, 2012.
Investor Verification Checklist
- Realized Loss Drivers: Verify the specific circumstances surrounding the $46.8 million realized loss on Prommis Solutions, LLC and the $11.1 million loss on Making Memories Wholesale, Inc.
- Non-Accrual Status: Review the composition of the 2.3% of the portfolio on non-accrual status and the Company's strategy for recovery.
- Debt Maturity Profile: Confirm the weighted average maturity of debt (9.8 years) and the impact of the new 2017 Convertible Notes issued in March 2012.
- Incentive Fee Accruals: Understand the GAAP accrual of $55.3 million for capital gains incentive fees, which may not be payable under the investment advisory agreement until gains are realized.
- SSLP Exposure: Review the performance and risk profile of the Senior Secured Loan Program (SSLP) co-investment with GE, which represents a significant portion of the portfolio.