Ares Capital Corporation posted strong earnings and return on investment in the third quarter, which also saw a higher volume of capital deployment versus redemptions.
The $9.2 billion BDC, at which assets were roughly flat quarter-on-quarter, reported net investment income of $130.5 million for the quarter, or $0.42 per share, up from $105.3 million or $0.34 cents per share for the third quarter of 2014. The firm declared a fourth quarter dividend of $0.38 cents per share.
Weighted average yield from income producing investments was 10.3 percent as of 30 September, a slight decline from 10.6 percent at the end of June. “The decline in our weighted average yield since 30 June is primarily a result of the decline in the yield on our subordinated certificates in the SSLP and an increase in lower yielding investments, where we’ve invested with either the intention to sell the loans at a later date or with the expectation that they will be sold to the SDLP once we’ve established a sufficiently diversified portfolio for the program,” said Kipp deVeer (pictured), chief executive of the BDC on the firm’s earnings call.
The now defunct SSLP (senior secured loan programme) was the lending partnership Ares ran with Antares Capital. The SDLP (senior direct lending programme) is the firm’s new tie-up with Los Angeles-based Varagon Capital Partners.
DeVeer said the firm has signed several deals as co-lenders with Varagon so far and expects to “lift them” into the SDLP formally, once the deal volume reaches a decent size.
He explained he wants the partnership to reach critical mass, which he defines by number of deals, rather than dollar value, before it is formalised. Answering questions from analysts, he said he would expect to do eight to 10 deals with Varagon before rolling them into the SDLP.
The firm’s portfolio consisted of investments in 216 companies at quarter end with fair value of about $8.7 billion. Gross commitments totaled $1.5 billion in the quarter, while exits reached $1.3 billion.
One of the firm’s oil and gas investments, Petroflow, was redefined as non-accrual in the quarter. But deVeer reassured analysts that Ares has limited investments in the oil & gas sector making up just 3 percent of assets.
He added that the BDC is focusing more on senior secured loans in this stage of the credit cycle.
David Chiaverini, an analyst with Cantor Fitzgerald, countered that ARCC’s second lien and subordinated debt investments have increased 10 percent year-to-date and post quarter-end, 73 percent of new originations were in second lien loans. DeVeer replied that the firm is being very selective in which second lien and subordinated deals it joins.
“Every first lien deal and every second lien deal are not created the same. You make a first lien loan in a bad company, you have just as higher probability of entering in a default situation as when you make a second lien loan on a bad company. So while we obviously look at the mix and think about where we are in the cycle, our second lien and mezz mixed is about half of what it was back in ’06 or ’07. We still think the portfolio that we’ve crafted is pretty conservative in its makeup,” he said.
DeVeer added that he is seeing more deal flow to lead large syndicated deals like its American Seafoods transaction and argued that Ares is often the preferred lender over banks, as the firm is willing to hold a larger slice of the deal than traditional bank lenders.