Ares Capital Corporation (ARCC) - 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2006. 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 invests primarily in first and second lien senior loans, mezzanine debt, and equity securities of private U.S. middle-market companies. It is externally managed by Ares Capital Management LLC.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2006 | Six Months Ended June 30, 2005 |
|---|---|---|
| Total Investment Income | $50,681,056 | $15,352,207 |
| Net Investment Income | $20,984,431 | $9,297,963 |
| Net Realized Gains | $24,490,874 | $7,154,412 |
| Net Unrealized Losses | $(14,939,591) | $(346,213) |
| Net Increase in Stockholders' Equity | $30,535,714 | $16,106,162 |
| Earnings Per Share (Basic & Diluted) | $0.80 | $0.91 |
| Total Assets (as of June 30, 2006) | $942,430,333 | N/A |
| Total Liabilities (as of June 30, 2006) | $365,446,199 | N/A |
| Stockholders' Equity (as of June 30, 2006) | $576,984,134 | N/A |
| Net Assets Per Share (as of June 30, 2006) | $15.10 | $15.03 (Dec 31, 2005) |
| Cash and Cash Equivalents (as of June 30, 2006) | $44,844,697 | $16,613,334 (Dec 31, 2005) |
| Outstanding Borrowings (as of June 30, 2006) | $345,200,000 | $18,000,000 (Dec 31, 2005) |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased from $585.97 million at December 31, 2005, to $878.16 million at June 30, 2006. The number of portfolio companies grew from 38 to 50.
- Revenue Surge: Total investment income increased 230% year-over-year, driven by a larger portfolio size and increased capital structuring service fees ($7.6 million vs. $1.8 million).
- Expense Increase: Total expenses rose 305% to $24.5 million, primarily due to higher management fees, incentive fees, and a significant increase in interest expense ($5.7 million vs. $0.08 million) resulting from increased leverage.
- Leverage: Borrowings under credit facilities increased dramatically from $18 million to $345.2 million to fund portfolio expansion.
- Unrealized Losses: The period saw a net unrealized loss of $14.9 million, largely due to the reversal of prior unrealized appreciation on the sale of CICQ, LP and unrealized depreciation in specific equity positions (Making Memories Wholesale, Inc. and Berkline/Benchcraft Holdings LLC).
Guidance, Outlook, and Risks
- Subsequent Events: On July 7, 2006, the Company completed a $400 million debt securitization (ARCC CLO 2006 LLC), issuing $314 million in asset-backed notes. Proceeds were used to pay down existing credit facilities. On July 18, 2006, the Company completed an add-on offering of 10.78 million shares, raising approximately $162.2 million net.
- Dividends: The Company declared dividends of $0.38 per share for the quarter ended June 30, 2006, and $0.36 per share for the quarter ended March 31, 2006.
- Interest Rate Risk: Approximately 60% of the portfolio is at variable rates. A 100 basis point increase in base rates would increase interest income by ~$5.4 million and interest expense by ~$3.5 million annually.
- Valuation Risk: A significant portion of the portfolio consists of private securities valued in good faith by the Board. Fair values may differ materially from values in a ready market.
- Commitments: As of June 30, 2006, the Company had $50.4 million in unfunded commitments for revolving loans and $10.0 million in unfunded equity commitments.
Key Facts for Investor Verification
- Debt Maturity: The CP Funding Facility ($101.2 million outstanding) expires November 1, 2006, unless extended. The Revolving Credit Facility ($244.0 million outstanding) expires December 28, 2010.
- Asset Coverage: Verify compliance with the 1940 Act requirement of 200% asset coverage ratio for borrowings.
- Unrealized Depreciation: Review the specific drivers of the $14.9 million unrealized loss, particularly the performance of Berkline/Benchcraft Holdings LLC and Making Memories Wholesale, Inc.
- Subsequent Liquidity: Confirm the impact of the July 2006 securitization and equity offering on the Company's leverage ratios and available borrowing capacity.
- PIK Income: Note that $2.56 million of income recorded for the six months ended June 30, 2006, was Payment-in-Kind (PIK) interest, which is non-cash but must be distributed as dividends to maintain RIC status.