FOURTH QUARTER 2018 DIVIDEND DECLARED
Ares Capital Corporation (“Ares Capital”) (NASDAQ:ARCC)
announced that its Board of Directors has declared a fourth quarter
dividend of $0.39 per share. The third quarter dividend is payable
on December 28, 2018 to stockholders of record as of
December 14, 2018.
SEPTEMBER 30, 2018 FINANCIAL RESULTS
Ares Capital also announced financial results for its third
quarter ended September 30, 2018.
HIGHLIGHTS
Financial
Q3-18 Q3-17 (dollar amounts in
millions, except per share data)
Total Amount
Per Share(1)
Total Amount
Per Share(1)
Core EPS(2) $ 0.45 $ 0.36 Net investment income $ 185 $ 0.44 $ 153
$ 0.36 Net realized gains $ 373 $ 0.87 $ 35 $ 0.08 Net unrealized
losses $ (349 ) $ (0.82 ) $ (49 ) $ (0.11 ) GAAP net income $ 209 $
0.49 $ 139 $ 0.33 Dividends declared and payable $ 0.39 $ 0.38
As of (dollar amounts in millions, except per
share data) September 30, 2018 September 30,
2017 December 31, 2017 Portfolio investments at
fair value $ 11,220 $ 11,456 $ 11,841 Total assets $ 12,255 $
12,041 $ 12,347 Stockholders’ equity $ 7,313 $ 7,028 $ 7,098 Net
assets per share $ 17.16 $ 16.49 $ 16.65
__________________________________________________
(1)
All per share amounts are basic and
diluted.
(2)
Basic and diluted Core EPS is a non-GAAP
financial measure. Core EPS is the net per share increase
(decrease) in stockholders’ equity resulting from operations less
professional fees and other costs related to the acquisition of
American Capital, Ltd. (the “American Capital Acquisition”), net
realized and unrealized gains and losses, any capital gains
incentive fees attributable to such net realized and unrealized
gains and losses and any income taxes related to such net realized
gains and losses. Basic and diluted GAAP EPS is the most directly
comparable GAAP financial measure. Ares Capital believes that Core
EPS provides useful information to investors regarding financial
performance because it is one method Ares Capital uses to measure
its financial condition and results of operations. The presentation
of this additional information is not meant to be considered in
isolation or as a substitute for financial results prepared in
accordance with GAAP. Reconciliations of basic and diluted Core EPS
to the most directly comparable GAAP financial measure are set
forth in Schedule 1 hereto.
Portfolio Activity
(dollar amounts in millions) Q3-18
Q3-17 Q4-17 Portfolio Activity During the
Period: Gross commitments $ 1,924 $ 1,546 $ 1,506 Exits of
commitments $ 1,914 $ 1,644 $ 1,321 Portfolio as of the End
of the Period: Number of portfolio company investments 342 325 314
Weighted average yield of debt and other income producing
securities(3): At amortized cost 10.3 % 9.6 % 9.7 % At fair value
10.3 % 9.7 % 9.8 % Weighted average yield on total investments(4):
At amortized cost 9.0 % 8.5 % 8.7 % At fair value 9.2 % 8.7 % 8.7 %
__________________________________________________
(3)
Weighted average yield of debt and other
income producing securities is computed as (a) the annual stated
interest rate or yield earned plus the net annual amortization of
original issue discount and market discount or premium earned on
accruing debt and other income producing securities divided by (b)
the total accruing debt and other income producing securities at
amortized cost or at fair value as applicable.
(4)
Weighted average yield on total
investments is calculated as (a) the annual stated interest rate or
yield earned plus the net annual amortization of original issue
discount and market discount or premium earned on accruing debt and
other income producing securities divided by (b) the total
investments at amortized cost or at fair value as applicable.
THIRD QUARTER 2018 OPERATING RESULTS
For the third quarter of 2018, Ares Capital reported GAAP net
income of $209 million or $0.49 per share (basic and diluted), Core
EPS(2) of $0.45 per share (basic and diluted), net investment
income of $185 million or $0.44 per share (basic and diluted), and
net realized and unrealized gains of $24 million or $0.05 per share
(basic and diluted).
Net income can vary substantially from period to period due to
various factors, including the level of new investment commitments,
the amount of acquisition related expenses, the recognition of
realized gains and losses and unrealized appreciation and
depreciation. As a result, quarterly comparisons of net income may
not be meaningful.
As of September 30, 2018, total assets were $12.3 billion,
stockholders’ equity was $7.3 billion and net asset value per share
was $17.16.
In the third quarter of 2018, Ares Capital made $1,924 million
in new investment commitments, including commitments to 11 new
portfolio companies, 29 existing portfolio companies and one
additional portfolio company through the Senior Direct Lending
Program, LLC (the “SDLP”), through which Ares Capital co-invests
with Varagon Capital Partners (“Varagon”) and its clients to fund
first lien senior secured loans. Of the new commitments, 39 were
sponsored transactions. As of September 30, 2018, 166 separate
private equity sponsors were represented in Ares Capital’s
portfolio. Of the $1,924 million in new commitments made
during the third quarter of 2018, 68% were in first lien senior
secured loans, 23% were in second lien senior secured loans, 3%
were in the subordinated certificates of the SDLP, 3% were in
preferred equity and 3% were in other equity securities. Of
these commitments, 97% were in floating rate debt securities, of
which 97% contained interest rate floors and 3% were in the
subordinated certificates of the SDLP to make co-investments with
Varagon and its clients in floating rate first lien senior secured
loans through the SDLP, all of which contained interest rate
floors. Ares Capital may seek to sell all or a portion of these new
investment commitments, although there can be no assurance that
Ares Capital will be able to do so.
In the third quarter of 2018, significant new commitments
included:
- $513 million in first lien senior
secured revolving, delayed draw and term loans, a second lien
senior secured term loan and equity in a provider of
employer-sponsored onsite health and wellness clinics and
pharmacies;
- $336 million in first lien senior
secured revolving and term loans, a second lien senior secured term
loan and equity in an outsourced drug development services
provider;
- $123 million in first lien senior
secured revolving and term loans of a healthcare analytics
solutions provider;
- $120 million in a first lien senior
secured term loan of a wind and solar power facilities
developer;
- $101 million in a first lien senior
secured term loan of a rental equipment, labor and production
management provider to various entertainment end-markets;
- $76 million in first lien senior
secured revolving, delayed draw and term loans, second lien senior
secured delayed draw and term loans and equity in a child care
payment management software provider;
- $71 million in first lien senior
secured revolving, delayed draw and term loans and equity in a
breast cancer screening provider;
- $62 million in the subordinated
certificates of the SDLP to make co-investments with Varagon and
its clients in first lien senior secured loans to two portfolio
companies in a variety of industries;
- $57 million in first lien senior
secured revolving, delayed draw and term loans and second lien
senior secured delayed draw and term loans of a full service
independent insurance agency;
- $53 million in a first lien senior
secured term loan and equity in a physician-led urology practice;
and
- $52 million in second lien senior
secured delayed draw and term loans of an auto parts retailer.
Also in the third quarter of 2018, Ares Capital exited
approximately $1,914 million of investment commitments (including
exits of $444 million of commitments acquired as part of the
American Capital Acquisition). Of the total investment commitments
exited, 50% were first lien senior secured loans, 28% were second
lien senior secured loans, 14% were senior subordinated loans, 2%
were collateralized loan obligations, 2% were subordinated
certificates of the SDLP, 2% were preferred equity securities and
2% were other equity securities. Of the approximately
$1,914 million of exited investment commitments, 80% were
floating rate, 15% were fixed rate, 1% were on non-accrual status
and 4% were non-interest bearing.
The fair value of Ares Capital’s portfolio investments at
September 30, 2018 was $11.2 billion, including $10.0 billion
in accruing debt and other income producing securities. As of
September 30, 2018, the total portfolio at fair value included
$0.7 billion of investments acquired in the American Capital
Acquisition. The total portfolio investments at fair value were
comprised of approximately 44% of first lien senior secured loans,
30% of second lien senior secured loans, 6% of subordinated
certificates of the SDLP (the proceeds of which were applied to
co-investments with Varagon and its clients to fund first lien
senior secured loans through the SDLP), 7% of senior subordinated
loans, 4% of preferred equity securities and 9% of other equity
securities. As of September 30, 2018, the weighted average
yield of debt and other income producing securities in the
portfolio at amortized cost and fair value was 10.3%
and 10.3%, respectively, the weighted average yield on total
investments in the portfolio at amortized cost and fair value was
9.0% and 9.2%, respectively, and 83% of the total investments at
fair value were in floating rate securities.
“We generated another strong quarter with core earnings up 25%
from the same period a year ago driven by our portfolio rotation
initiatives, increases in short term interest rates and higher fee
income,” said Kipp deVeer, Chief Executive Officer of Ares Capital.
“Our portfolio continues to perform well with stable credit
statistics and record net realized investment gains.”
“We ended the third quarter in a conservative financial position
with a modest net debt to equity ratio of only 0.54x, leaving us
with substantial capital available to invest in order to further
increase our earning assets,” said Penni Roll, Chief Financial
Officer. “Following our recent upgrade from Moody’s, we are well
positioned as the only BDC with investment grade ratings from all
three major ratings agencies which we believe provides us with
significant funding advantages in the capital markets.”
PORTFOLIO QUALITY
Ares Capital Management LLC (“Ares Capital Management” or Ares
Capital’s “investment adviser”) employs an investment rating system
to categorize Ares Capital’s investments. In addition to various
risk management and monitoring tools, Ares Capital’s investment
adviser grades the credit risk of all investments on a scale of 1
to 4 no less frequently than quarterly. This system is intended
primarily to reflect the underlying risk of a portfolio investment
relative to Ares Capital’s initial cost basis in respect of such
portfolio investment (i.e., at the time of origination or
acquisition), although it may also take into account under certain
circumstances the performance of the portfolio company’s business,
the collateral coverage of the investment and other relevant
factors. Under this system, investments with a grade of 4 involve
the least amount of risk to Ares Capital’s initial cost basis. The
trends and risk factors for this investment since origination or
acquisition are generally favorable, which may include the
performance of the portfolio company or a potential exit.
Investments graded 3 involve a level of risk to Ares Capital’s
initial cost basis that is similar to the risk to Ares Capital’s
initial cost basis at the time of origination or acquisition. This
portfolio company is generally performing as expected and the risk
factors to Ares Capital’s ability to ultimately recoup the cost of
Ares Capital’s investment are neutral to favorable. All investments
or acquired investments in new portfolio companies are initially
assessed a grade of 3. Investments graded 2 indicate that the risk
to Ares Capital’s ability to recoup the initial cost basis of such
investment has increased materially since origination or
acquisition, including as a result of factors such as declining
performance and non-compliance with debt covenants; however,
payments are generally not more than 120 days past due. An
investment grade of 1 indicates that the risk to Ares Capital’s
ability to recoup the initial cost basis of such investment has
substantially increased since origination or acquisition, and the
portfolio company likely has materially declining performance. For
debt investments with an investment grade of 1, most or all of the
debt covenants are out of compliance and payments are substantially
delinquent. For investments graded 1, it is anticipated that Ares
Capital will not recoup Ares Capital’s initial cost basis and may
realize a substantial loss of Ares Capital’s initial cost basis
upon exit. For investments graded 1 or 2, Ares Capital’s investment
adviser enhances its level of scrutiny over the monitoring of such
portfolio company. The grade of a portfolio investment may be
reduced or increased over time.
As of September 30, 2018 and December 31, 2017, the
weighted average grade of the investments in Ares Capital’s
portfolio at fair value was 3.0 and 3.1, respectively, and loans on
non-accrual status represented 2.7% and 3.1%, respectively, of
total investments at amortized cost (or 0.6% and 1.4%,
respectively, at fair value).
LIQUIDITY AND CAPITAL RESOURCES
In September 2018, Ares Capital and Ares Capital JB Funding LLC
(“ACJB LLC”), a consolidated subsidiary of Ares Capital, amended
ACJB LLC’s revolving funding facility to, among other things, (a)
extend the reinvestment period from September 14, 2018 to September
14, 2019, and (b) extend the stated maturity date from September
14, 2023 to September 14, 2024.
As of September 30, 2018, Ares Capital had $799 million in
cash and cash equivalents and $4.6 billion in total aggregate
principal amount of debt outstanding ($4.5 billion at carrying
value). Subject to leverage, borrowing base and other restrictions,
Ares Capital had approximately $3.1 billion available for
additional borrowings under its existing credit facilities as of
September 30, 2018.
THIRD QUARTER 2018 DIVIDEND
On August 1, 2018, Ares Capital declared a third quarter
dividend of $0.39 per share for a total of approximately $166
million. The record date for this dividend was September 14,
2018 and the dividend was paid on September 28, 2018.
RECENT DEVELOPMENTS
In October 2018, Ares Capital amended and restated its
senior secured revolving credit facility to, among other things,
(a) amend the financial covenant requiring Ares Capital to maintain
a minimum ratio of total assets (less total liabilities) to total
indebtedness from 2.0:1.0 to 1.5:1.0 and (b) make certain
related changes to borrowing base advance rates.
In October 2018, Ares Capital and Ares Capital CP Funding
LLC (“Ares Capital CP”), a consolidated subsidiary of Ares Capital,
amended Ares Capital CP’s revolving funding facility to, among
other things, change the servicer termination event covenant
requiring Ares Capital to maintain a minimum ratio of total assets
(less total liabilities) to total indebtedness from 2.0:1.0 to
1.5:1.0.
From October 1, 2018 through October 24, 2018, Ares
Capital made new investment commitments of approximately $412
million, of which $259 million were funded. Of these new
commitments, 83% were in first lien senior secured loans, 15% were
in second lien senior secured loans, 1% were in the subordinated
certificates of the SDLP and 1% were in other equity securities. Of
the approximately $412 million of new investment commitments, 99%
were floating rate and 1% were non-interest bearing. The weighted
average yield of debt and other income producing securities funded
during the period at amortized cost was 8.7%. Ares Capital may seek
to sell all or a portion of these new investment commitments,
although there can be no assurance that it will be able to do
so.
From October 1, 2018 through October 24, 2018, Ares
Capital exited approximately $389 million of investment
commitments, including $1 million of investment commitments
acquired in the American Capital Acquisition. Of the total
investment commitments, 55% were first lien senior secured loans,
40% were second lien senior secured loans, 3% were preferred equity
securities, 1% were other equity securities and 1% were in the
subordinated certificates of the SDLP. Of the approximately $389
million of exited investment commitments, 96% were floating rate
and 4% were non-interest bearing. The weighted average yield of
debt and other income producing securities exited or repaid during
the period at amortized cost was 9.6% and the weighted average
yield on total investments exited or repaid during the period at
amortized cost was 9.1%. On the approximately $389 million of
investment commitments exited from October 1, 2018 through
October 24, 2018, Ares Capital recognized total net realized
gains of approximately $20 million.
In addition, as of October 24, 2018, Ares Capital had an
investment backlog and pipeline of approximately $1,460 million and
$330 million, respectively. Investment backlog includes
transactions approved by Ares Capital’s investment adviser’s
investment committee and/or for which a formal mandate, letter of
intent or a signed commitment have been issued, and therefore Ares
Capital believes are likely to close. Investment pipeline includes
transactions where due diligence and analysis are in process, but
no formal mandate, letter of intent or signed commitment have been
issued. The consummation of any of the investments in this backlog
and pipeline depends upon, among other things, one or more of the
following: satisfactory completion of our due diligence
investigation of the prospective portfolio company, Ares Capital’s
acceptance of the terms and structure of such investment and the
execution and delivery of satisfactory transaction documentation.
In addition, Ares Capital may sell all or a portion of these
investments and certain of these investments may result in the
repayment of existing investments. Ares Capital cannot assure you
that it will make any of these investments or that Ares Capital
will sell all or any portion of these investments.
WEBCAST / CONFERENCE CALL
Ares Capital will host a webcast/conference call on Wednesday,
October 31, 2018 at 12:00 p.m. (Eastern Time) to discuss
its quarter ended September 30, 2018 financial results. PLEASE
VISIT ARES CAPITAL’S WEBCAST LINK LOCATED ON THE HOME PAGE OF THE
INVESTOR RESOURCES SECTION OF ARES CAPITAL’S WEBSITE FOR A
SLIDE PRESENTATION THAT COMPLEMENTS THE EARNINGS CONFERENCE
CALL.
All interested parties are invited to participate via telephone
or the live webcast, which will be hosted on a webcast link located
on the Home page of the Investor Resources section of Ares
Capital’s website at www.arescapitalcorp.com. Please visit the website
to test your connection before the webcast. Domestic callers can
access the conference call by dialing (888) 317-6003. International
callers can access the conference call by dialing +1 (412)
317-6061. All callers will need to enter the Participant Elite
Entry Number 7899976 followed by the # sign and reference “Ares
Capital Corporation” once connected with the operator. All callers
are asked to dial in 10-15 minutes prior to the call so that name
and company information can be collected. For interested parties,
an archived replay of the call will be available approximately one
hour after the end of the call through November 15, 2018 at
5:00 p.m. (Eastern Time) to domestic callers by dialing (877)
344-7529 and to international callers by dialing +1 (412) 317-0088.
For all replays, please reference conference number 10124526. An
archived replay will also be available through November 15, 2018 on
a webcast link located on the Home page of the Investor
Resources section of Ares Capital’s website.
ABOUT ARES CAPITAL CORPORATION
Ares Capital is a leading specialty finance company that
provides one-stop debt and equity financing solutions to U.S.
middle market companies and power generation projects. Ares Capital
originates and invests in senior secured loans, mezzanine debt and,
to a lesser extent, equity investments through its national direct
origination platform. Ares Capital’s investment objective is to
generate both current income and capital appreciation through debt
and equity investments primarily in private companies. Ares Capital
has elected to be regulated as a business development company
(“BDC”) and is the largest BDC by both market capitalization and
total assets. Ares Capital is externally managed by a subsidiary of
Ares Management, L.P. (NYSE: ARES), a publicly traded, leading
global alternative asset manager. For more information about Ares
Capital Corporation, visit www.arescapitalcorp.com. However, the contents of
such website are not and should not be deemed to be incorporated by
reference herein.
FORWARD-LOOKING STATEMENTS
Statements included herein or on the webcast/conference call may
constitute “forward-looking statements,” which relate to future
events or Ares Capital’s future performance or financial
condition. These statements are not guarantees of future
performance, condition or results and involve a number of risks and
uncertainties. Actual results and conditions may differ
materially from those in the forward-looking statements as a result
of a number of factors, including those described from time to time
in Ares Capital’s filings with the Securities and Exchange
Commission. Ares Capital undertakes no duty to update any
forward-looking statements made herein or on the webcast/conference
call.
ARES CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions, except per share
data)
As of September 30, 2018
December 31, 2017 (unaudited) ASSETS Total
investments at fair value (amortized cost of $11,473 and $11,905,
respectively) $ 11,220 $ 11,841 Cash and cash equivalents 799 316
Interest receivable 93 93 Receivable for open trades 61 1 Other
assets 82 96 Total assets $ 12,255 $ 12,347
LIABILITIES Debt $ 4,546 $ 4,854 Base management fees
payable 44 44 Income based fees payable 35 27 Capital gains
incentive fees payable 122 79 Accounts payable and other
liabilities 114 181 Interest and facility fees payable 42 64
Payable for open trades 39 — Total liabilities 4,942
5,249
STOCKHOLDERS’ EQUITY Common stock, par value $0.001
per share, 600 common shares authorized; 426 common shares issued
and outstanding — — Capital in excess of par value 7,192 7,192
Accumulated overdistributed net investment income (80 ) (81 )
Accumulated undistributed net realized gains on investments,
foreign currency transactions, extinguishment of debt and other
assets 460 72 Net unrealized losses on investments, foreign
currency and other transactions (259 ) (85 ) Total stockholders’
equity 7,313 7,098 Total liabilities and
stockholders’ equity $ 12,255 $ 12,347
NET ASSETS
PER SHARE $ 17.16 $ 16.65
ARES CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
OPERATIONS
(in millions, except per share
data)
(unaudited)
For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
2018 2017 2018 2017
INVESTMENT INCOME Interest income from investments $ 262 $
238 $ 778 $ 700 Capital structuring service fees 42 32 96 73
Dividend income 25 18 71 58 Other income 13 6 47
22 Total investment income 342 294 992
853
EXPENSES Interest and credit
facility fees 59 56 180 166 Base management fees 44 44 135 127
Income based fees 45 35 123 97 Capital gains incentive fees 5 (3 )
43 23 Administrative fees 3 3 10 9 Professional fees and other
costs related to the American Capital Acquisition 1 4 3 42 Other
general and administrative 4 7 20 24
Total expenses 161 146 514 488 Waiver of income based fees (10 )
(10 ) (30 ) (20 ) Total expenses, net of waiver of income based
fees 151 136 484 468 NET INVESTMENT
INCOME BEFORE INCOME TAXES 191 158 508 385 Income tax expense,
including excise tax 6 5 17 14 NET
INVESTMENT INCOME 185 153 491 371
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS, FOREIGN
CURRENCY AND OTHER TRANSACTIONS: Net realized gains 373 35 388 147
Net unrealized losses (349 ) (49 ) (174 ) (79 ) Net realized and
unrealized gains (losses) on investments, foreign currency and
other transactions 24 (14 ) 214 68 REALIZED LOSSES ON
EXTINGUISHMENT OF DEBT — — — (4 ) NET INCREASE
IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS $ 209 $
139 $ 705 $ 435 BASIC AND DILUTED EARNINGS PER
COMMON SHARE $ 0.49 $ 0.33 $ 1.66 $ 1.02
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING - BASIC
AND DILUTED 426 426 426 425
SCHEDULE 1
Reconciliations of basic and diluted Core
EPS to basic and diluted GAAP EPS
Reconciliations of basic and diluted Core EPS to basic and
diluted GAAP EPS, the most directly comparable GAAP financial
measure, for the three and nine months ended September 30, 2018 and
2017 are provided below.
For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
2018 2017 2018 2017
(unaudited) (unaudited) (unaudited)
(unaudited) Basic and diluted Core EPS(1) $ 0.45 $ 0.36 $
1.24 $ 1.01 Professional fees and other costs related to the
American Capital Acquisition — (0.01 ) (0.01 ) (0.09 ) Ares
Reimbursement — — 0.03 — Net realized and unrealized gains (losses)
0.05 (0.03 ) 0.50 0.15 Capital gains incentive fees attributable to
net realized and unrealized gains and losses (0.01 ) 0.01 (0.10 )
(0.05 ) Income tax expense related to net realized gains and losses
— — — — Basic and diluted GAAP EPS $
0.49 $ 0.33 $ 1.66 $ 1.02
__________________________________________________
(1)
Basic and diluted Core EPS is a non-GAAP
financial measure. Core EPS is the net per share increase
(decrease) in stockholders’ equity resulting from operations less
professional fees and other costs related to the American Capital
Acquisition, the expense reimbursement (the “Ares Reimbursement”)
from Ares Capital Management, net realized and unrealized gains and
losses, any capital gains incentive fees attributable to such net
realized and unrealized gains and losses and any income taxes
related to such net realized gains and losses. Basic and diluted
GAAP EPS is the most directly comparable GAAP financial measure.
Ares Capital believes that Core EPS provides useful information to
investors regarding financial performance because it is one method
Ares Capital uses to measure its financial condition and results of
operations. The presentation of this additional information is not
meant to be considered in isolation or as a substitute for
financial results prepared in accordance with GAAP. For more
information about the Ares Reimbursement, see Note 12 “Related
Party Transactions” in Part I, Item I “Financial Statements” in the
Company’s Quarterly Report on Form 10-Q for the three and nine
months ended September 30, 2018.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20181031005218/en/
Investor RelationsAres Capital CorporationCarl G. Drake
or John Stilmar(888) 818-5298irarcc@aresmgmt.com
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