Ares Capital seeks to renew permission to issue equity

The $9 billion Ares BDC has scheduled a special meeting of stockholders where it will seek their permission to issue new shares as it trades at around 0.8x book value, a move that would be dilutive to existing investors.  

The Ares Capital Corporation is requesting shareholder permission for the listed firm to issue new equity below net asset value (NAV). The firm usually seeks this authorization annually, whether or not the stock is currently trading below book.*

The firm announced plans to hold a special meeting with investors. The date wasn’t specified, though the SEC filing notifying investors shows it is planned for this year.

Business development companies (BDCs) typically avoid issuing equity when their shares are trading below NAV as it dilutes existing shareholders. The filings outline the firm’s past form in this regard pointing out that even though Ares had permission in prior years to issue stock below book value, it exercised this right only once before.

Ares was trading below NAV for most of last year and the price currently stands at about 0.8x NAV.

The firm is seeking permission now because it wants to have greater investment resources at a time when market conditions have created “attractive acquisition opportunities”.

The statement reads: “The company believes that favorable investment opportunities to invest at attractive risk-adjusted returns, including opportunities to make acquisitions of other companies or investment portfolios at attractive values, may be created during these periods of disruption and volatility.”

The firm highlighted its acquisition of Allied Capital Corporation in 2009, another period of disruption, which was ultimately accretive to Ares. Fresh equity would allow the company to be a “more meaningful capital provider” and compete more effectively, the company’s pitch argues.

Several BDCs, beaten down by a recent spate of shareholder criticism, are trading at steep discounts to book value and are evaluating the sale of either their investment advisor or the whole portfolio. American Capital (ACAS), Fifth Street Asset Management’s two BDCs and TICC Capital Corp all fall under this umbrella.

Analysts and other media have speculated that of the three, ACAS is the more likely buy for Ares, as it has a large portfolio that Ares could absorb and has been subject to less scrutiny than the others.

Ares Capital chief executive Kipp DeVeer (pictured), when asked about the below NAV valuation of the firm, has said that he is not sure why the BDC trades below book when the underlying portfolio is healthy, though the sector as a whole has fallen on the back of broad equity market volatility and general criticism of the BDC arena.

DeVeer said on the company’s last earnings call that although Ares hasn’t been able to issue new equity, it can still recycle capital from maturing loans into new deals.

* This story was updated on 18 February to reflect the fact that this is an annual event.