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) under the Investment Company Act of 1940. The company is externally managed by Ares Capital Management LLC. Its investment objective is to generate current income and capital appreciation primarily through first and second lien senior secured loans, mezzanine debt, and to a lesser extent, equity investments.
Reporting Period: Quarterly report (Form 10-Q) for the period ended September 30, 2015.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2015 | Nine Months Ended Sep 30, 2015 | As of Sep 30, 2015 |
|---|---|---|---|
| Total Investment Income | $260.9 million | $763.7 million | N/A |
| Net Investment Income | $130.5 million | $360.7 million | N/A |
| Net Increase in Stockholders' Equity | $116.9 million | $364.0 million | N/A |
| Earnings Per Share (Basic & Diluted) | $0.37 | $1.16 | N/A |
| Total Assets | N/A | N/A | $9.17 billion |
| Total Investments (Fair Value) | N/A | N/A | $8.69 billion |
| Total Debt | N/A | N/A | $3.65 billion |
| Cash and Cash Equivalents | N/A | N/A | $247.1 million |
| Net Assets Per Share | N/A | N/A | $16.79 |
| Asset Coverage Ratio | N/A | N/A | 245% |
Material Changes vs. Prior Comparable Period
- Net Investment Income: Increased by 16.9% for the three months ended September 30, 2015 ($130.5 million) compared to the same period in 2014 ($105.3 million). For the nine-month period, net investment income increased by 16.5% to $360.7 million from $309.6 million.
- Total Expenses: Decreased by 7.8% for the three months ended September 30, 2015 ($129.6 million) compared to 2014 ($140.6 million), primarily due to a reduction in capital gains incentive fees (which were negative in 2015 vs. positive in 2014) and lower interest expense on the Revolving Credit Facility (which was fully paid down in Q3 2015).
- Realized and Unrealized Gains/Losses: The company reported a net loss of $13.6 million for the three months ended September 30, 2015, driven by net unrealized losses of $61.4 million, compared to a net gain of $72.4 million in the prior year period. For the nine months, the company reported a net gain of $7.1 million, a significant decrease from the $128.0 million net gain in the prior year.
- Portfolio Composition: The portfolio fair value decreased from $9.03 billion at December 31, 2014, to $8.69 billion at September 30, 2015. The weighted average yield of the total portfolio at fair value remained stable at 9.3%.
Guidance, Outlook, and Risks
- Senior Secured Loan Program (SSLP): GE completed the sale of its U.S. Sponsor Finance business to the Canada Pension Plan Investment Board (CPPIB) in August 2015. While GE and Ares continue to operate the SSLP, no new investments related to new portfolio companies have been made since June 30, 2015. GECC has directed that principal proceeds from SSLP repayments be applied to repay GE's Senior Notes first, which is expected to reduce the yield on Ares' SSLP Certificates.
- Stock Repurchase Program: In September 2015, the Board approved a program to repurchase up to $100 million of common stock in the open market when trading below net asset value. No shares were repurchased during the quarter.
- Subsequent Events: In October 2015, the company redeemed its entire $200 million aggregate principal amount of 2040 Notes, resulting in a realized loss on extinguishment of debt of approximately $6.6 million.
- Risks: The filing highlights risks related to the valuation of illiquid investments, the impact of interest rate fluctuations, the financial stability of portfolio companies, and the uncertainty surrounding the future structure of the SSLP following the GE/CPPIB transaction.
Key Facts for Investor Verification
- Dividend Sustainability: Verify the company's ability to maintain its quarterly dividend of $0.38 per share given the decline in net realized/unrealized gains and the potential yield compression in the SSLP.
- SSLP Yield Impact: Monitor the impact of the new repayment priority structure in the SSLP on the company's overall yield, as principal repayments will now service GE's senior notes before Ares' certificates.
- Debt Maturity Profile: Review the maturity schedule of the company's debt, noting the redemption of the 2040 Notes and the upcoming maturities of the Convertible Unsecured Notes (February and June 2016).
- Non-Accrual Status: Loans on non-accrual status represented 2.3% of total investments at amortized cost as of September 30, 2015, a slight increase from 2.2% at year-end 2014.
- Asset Coverage: Confirm the asset coverage ratio remains well above the 200% regulatory minimum (currently 245%), providing a buffer for additional leverage if needed.