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). This Form 10-Q covers the quarterly period ended September 30, 2010. A significant event during this period was the consummation of the acquisition of Allied Capital Corporation on April 1, 2010, in an all-stock transaction valued at approximately $908 million. This acquisition significantly expanded the Company's portfolio and asset base.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2009 |
|---|---|---|---|
| Total Investment Income | $138.1 million | $326.2 million | $176.0 million |
| Net Investment Income | $71.2 million | $152.5 million | $95.1 million |
| Net Increase in Stockholders' Equity (Operations) | $128.4 million | $534.9 million | $133.1 million |
| Earnings Per Share (Basic & Diluted) | $0.67 | $3.16 | $1.34 |
| Total Assets | $4.43 billion | — | — |
| Total Investments at Fair Value | $4.15 billion | — | — |
| Total Debt (Carrying Value) | $1.52 billion | — | — |
| Cash and Cash Equivalents | $134.4 million | — | — |
| Net Assets Per Share | $14.43 | — | — |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased 127% for the three months ended September 30, 2010, compared to the same period in 2009. This was primarily driven by the Allied Acquisition, which added approximately $46.6 million in interest income for the quarter.
- Expense Increase: Total expenses rose 144% to $67.1 million for the quarter, largely due to increased interest expense on Unsecured Notes assumed in the Allied Acquisition ($14.8 million) and higher management fees.
- Portfolio Expansion: Total investments at fair value grew from $2.17 billion at December 31, 2009, to $4.15 billion at September 30, 2010. The portfolio now consists of 184 companies.
- Debt Structure: Total debt increased from $969.5 million to $1.52 billion. The Company assumed Allied Capital's publicly issued unsecured notes (2011, 2012, and 2047 Notes) totaling approximately $692 million in principal.
- Unrealized Gains: The Company recorded net unrealized gains of $57.5 million for the quarter and $179.9 million for the nine-month period, significantly outpacing the prior year.
Guidance, Outlook, and Risks
- Acquisition Gain: The Company recognized a one-time gain of $195.9 million on the acquisition of Allied Capital due to the fair value of net assets acquired exceeding the consideration transferred.
- Dividends: The Company declared dividends of $1.05 per share for the nine months ended September 30, 2010. It maintains a dividend reinvestment plan (DRIP).
- Recent Developments: On October 21, 2010, the Company issued $200 million of senior unsecured notes (2040 Notes) at 7.75% interest to repay indebtedness under its Revolving Credit Facility.
- Investment Activity: Since September 30, 2010, the Company made $128 million in new investment commitments and exited $146 million of investments.
- Risks: Key risks include the valuation of illiquid portfolio investments, interest rate fluctuations (mitigated partially by an interest rate swap), and the ability to access capital markets. The Company notes that 7.5% of its portfolio was on non-accrual status as of September 30, 2010.
Investor Verification Checklist
- Allied Acquisition Integration: Verify the ongoing integration of Allied Capital's portfolio and the sustainability of the yield on acquired assets.
- Debt Maturity Profile: Review the maturity schedule of the assumed Unsecured Notes and the impact of the new 2040 Notes on future interest expense.
- Non-Accrual Status: Monitor the 7.5% of the portfolio on non-accrual status and the specific performance of these assets.
- Valuation Methodology: Confirm the continued application of the board's fair value determination process for illiquid assets, as these valuations significantly impact Net Asset Value (NAV).
- Liquidity Position: Assess the $495 million available for additional borrowings under existing facilities against the $171.3 million in net adjusted unfunded commitments.