Ares Capital posts $490m in Q1 origination volume

ARCC executives said they are pleased with the BDC’s performance amid a challenging environment and optimistic about prospects for their Varagon JV.  

In its first quarter earnings call on Tuesday (4 May), Ares Capital Corporation (ARCC) reported that the firm was pleased with its returns and deployment volume during a period marked by uncertainty and slow deal activity.

 “We are happy to see the fear in the market that was so prevalent in the fourth quarter and early in the first quarter subsiding a bit, which eases concerns that we are heading towards a more significant market correction in the near term,” said chief executive officer Kipp deVeer. “With that being said, we believe this recovery is largely technical and without a meaningful change in fundamentals, our attitude and approach is generally unchanged,” he added.

ARCC declared a dividend of $0.38 per share. The firm saw a decline in net investment income to $113 million, down from $147 million reported in the fourth quarter of last year. DeVeer reported that ARCC collected $480 million during the first three months of the year through a mix of exits, syndications and paydowns on existing facilities. At the end of the first quarter, ARCC had about $967 million of undrawn availability and leverage for the BDC at the end of the period stood at 0.77x.

ARCC also said the company funded $490 million in new loans in the first three months of 2016. In response to a question from Ryan Lynch of KBW about whether the company expects originations to pick up in the second quarter, deVeer responded that the few quality deals in the market are drawing intense competition and that parties are reaching a stalemate over price and growth expectations that has the effect of slowing activity.

“There really is a buyer-seller dynamic, where they're not meeting in the middle and that usually clears itself up over time, one way or another,” he said.

DeVeer also said that ARCC had closed seven transactions, totaling $670 million in funded commitments, that have been set aside to roll into the Senior Direct Lending Program (SDLP) joint venture with Varagon. ARCC's investment in those loans currently stands at $355 million and the group continues to see new investments appropriate for the platform. DeVeer added that the group was getting closer to the diversification necessary to convert the assets into a fully ramped program and that doing so would improve returns for ARCC.

With regard to its portfolio, ARCC reported a decline of loans on nonaccrual from 2.6 percentage cost at the end of 2015 to 1.3 percentage cost at the end of March. This change came largely as a result of changes regarding two of the largest nonaccruals in the portfolio at the end of last year: Universal Lubricants and Competitor Group.

For Universal Lubricants, deVeer said that ARCC expects near term asset sales to generate a paydown on its loan and that future recoveries will likely bring the investment to a positive resolution soon. DeVeer said Competitor Group, a sports marketing and management company, had undergone a balance sheet restructuring that left it better positioned to grow over the long term.

He added that the ability of ARCC to manage through non-performing loans helped the company to consistently deliver NAV growth and distinguished itself from many of its BDC peers. Derek Hewett of Bank of America Merrill Lynch asked what it might take to improve stock performance across the BDC industry, with valuations that continue to trade a discount to book value.

“I don't know,” deVeer replied.  “All I do is fly around the country and ask people the same question, so maybe you could tell me. I actually don't know,” he said.

The BDC's price to book stood at 0.93x. At the end of the quarter, the firm had $9.4 billion in assets, compared to $9.5 billion at the end of the fourth quarter.