Consolidation has been much talked about in the business development company world but rarely seen. However, the ability to write significantly larger tickets and play in a rarefied part of the market, speaks to its merits. This was no doubt on the minds of Ares executives as they crossed the t’s and dotted the i’s on a landmark recent deal.
Wednesday’s Ares Capital Corporation earnings call produced a clear sign the firm is in enviable territory: following its merger with American Capital, which closed on 3 January, Ares has enough dry powder that it can likely forgo equity raises for the near future.
The firm added over $3 billion in assets through the transaction, giving what was already the largest BDC even more firepower. Most notably, American Capital’s balance sheet held no debt and had significant excess cash.
This let Ares de-lever itself to a debt-to-equity ratio of 0.63x, down from 0.77x, giving the New York-based firm the ability to take on more debt and still be below the 1:1 regulatory leverage limit. Ares likely will be able to raise capital at low rates, as it issued $600 million of unsecured notes in September at a fixed rate of 3.63 percent, which the firm said is the lowest pricing ever for a BDC.
The American Capital transaction, which we investigate in our upcoming March issue, has put the firm on a course to hold even larger positions and write even bigger cheques, and it has shown an appetite to do those types of deals.
Ares led the landmark $1.08 billion financing of Thoma Bravo’s buyout of Qlik Technologies in June. In the fourth quarter, the firm backed Insight Venture Partners’ acquisition of Ministry Brands with a $1 billion loan package. A source familiar with the situation said the firm took an impressive $320 million hold position in the latter.
The nature of BDC financing lends itself to consolidation. Firms raise equity when their shares are trading at or above book value, which Ares’ are, and can likely win more favourable debt pricing when they may not be in dire need of the capital. Firms going through a rough patch may be trading below book value and have a higher cost of capital.
Chief financial officer Penni Roll tells PDI: “You have to pick your timing to go into the market, and I think we are very good about opportunistically accessing the market when it’s available at an attractive price. You always want to go when you don’t need the money. You want to go when it’s the right time in the market to have the wind at your back to price at tight terms.”
Consolidation has arguably been one of the side effects of alternative lending becoming a portfolio mainstay, an effective maturation of the market. Large firms like Ares have benefitted from this trend and likely will continue to do so.