ARCC

Ares Capital Corporation (ARCC) - Q1 2007 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2007. Ares Capital Corporation is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The Company's investment objective is to generate current income and capital appreciation through debt and equity investments in private U.S. middle-market companies. As of March 31, 2007, the portfolio consisted of 66 companies.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total investment income increased 97% year-over-year, driven primarily by a 93% increase in interest income from investments due to a larger portfolio size (average investments at fair value grew from $647 million in Q1 2006 to $1.3 billion in Q1 2007).
• Expense Increase: Total expenses rose 150% to $20.8 million. Interest and credit facility fees increased 394% to $8.5 million, reflecting a significant increase in average outstanding borrowings from $73.8 million to $529.6 million.
• Portfolio Expansion: The Company funded $288.6 million in commitments during the quarter, including $257.7 million in senior term debt and $43.1 million in senior subordinated debt. The portfolio grew from 60 to 66 companies.
• Capital Raising: The Company completed a public add-on offering in February 2007, raising approximately $26.9 million net of costs. Additionally, an over-allotment option from a December 2006 offering was exercised, raising $7.5 million.
• Debt Structure: Total debt increased by $188 million. The Revolving Credit Facility was increased by $100 million to $350 million in March 2007.

Guidance, Outlook, and Risks

• Dividends: The Company declared a quarterly dividend of $0.41 per share, payable March 30, 2007.
• Subsequent Event: On April 4, 2007, the Company completed a public add-on offering of 15.5 million shares, raising approximately $267.3 million net of costs.
• Investment Pipeline: As of the filing date, the Company had an investment pipeline of approximately $709.5 million and outstanding commitments to fund approximately $110.0 million.
• Interest Rate Risk: Approximately 54% of the portfolio is at variable rates, while 37% is at fixed rates. Borrowings are also primarily variable rate. The Company utilizes a costless collar agreement to manage interest rate exposure on fixed-rate investments.
• Valuation Risk: A significant portion of the portfolio consists of private securities valued by the Board of Directors. The filing notes that fair values may differ materially from values realized if a ready market existed.
• Commitments: The Company has $147.7 million in unfunded commitments as of March 31, 2007, with $209.7 million of total commitments extending beyond the maturity of the Revolving Credit Facility.

Key Facts for Investor Verification

• Debt Maturity: Verify the maturity dates of the CP Funding Facility (October 31, 2007) and the Revolving Credit Facility (December 28, 2010) against the Company's refinancing plans.
• Portfolio Yield: Confirm the weighted average yield of the portfolio (10.61% as of March 31, 2007) and the impact of new lower-yielding first-lien investments on future income.
• Unfunded Commitments: Assess the liquidity required to fund the $147.7 million in unfunded commitments and the $10.1 million in standby letters of credit.
• Valuation Methodology: Review the Board's valuation process for non-public securities, particularly given the $4.3 million in net unrealized gains recognized in the quarter.
• Related Party Transactions: Note the management fee structure (1.5% base + incentive) and the $9.8 million in unpaid management and incentive fees as of quarter-end.