The Ares Capital Corporation will continue to co-manage the assets in its SSLP (Senior Secured Loan Program) partnership with GE Capital, as the portfolio likely winds down. The firms will harvest maturing loans over the next four years.
ARCC chief executive Kipp deVeer (pictured) told analysts on an earnings call yesterday (4 August) that the partnership has continued to rollover existing borrowers, although it hasn’t made any new investments and likely won’t from now on as the GE Antares business is sold to Canada Pension Plan Investment Board (CPPIB).
At the same time, the firm intends to ramp up its new SDLP (Senior Direct Lending Program) with Varagon Capital Partners, which was announced in June. Although legal documents around that partnership are pending, DeVeer said he expects it to close within the next two quarters.
The BDC reported core earnings per share at $0.37 in the second quarter, up from $0.34 per share in the same quarter last year. Net investment income also rose to $108.5 million from $92 million year-on-year. ARCC’s investments at fair value are at $8.57 billion, up from $8.07 billion in the second quarter of 2014. Its total assets are at $9.1 billion.
The BDC made $820 million in gross commitments in Q2. Commitments net off against assets sold and repaid left the firm funding $71 million in loans in the quarter. DeVeer explained: “We continue to proactively sell lower-yielding assets and also experienced some repayments in the portfolio.”
The weighted average yield on the portfolio was 10.6 percent.
DeVeer also told analysts that Ares Management’s acquisition of Kayne Anderson should help the BDC branch out into more midstream energy investments, an area Kayne Anderson has expertise in. “With this merger, Ares Kayne will form a new energy vertical, which we believe will benefit Ares’ existing business lines, as they will be able to access the decades of experience the Kayne Anderson team has investing in energy-related businesses,” he said.
Speaking about the new partnership with Varagon, deVeer said: “The SDLP joint venture is modeled after the SSLP and we expect our investment in the SDLP will be in a similar form, with similar returns over time.”
However, the legal framework for the new partnership isn’t finalised so it can’t lend on its own account yet. “We’re not completely through the definitive documentation. But we’re making loans together in advance of that and sort of operating as partners,” DeVeer said.
Of its new commitments, 23 percent went to subordinated certificates of the SSLP, as Ares continued investing the program through the second quarter. “Now that GE is exiting the space, we don’t expect that SSLP will commit to transactions for new companies. However, we may make additional investments in the subordinated certificates to fund existing SSLP commitments or to support existing portfolio companies,” deVeer said. “We expect that we and GE will allow the portfolio to repay over time in an orderly manner,” he added. At June 30, the value of the loans was about $10 billion with 52 borrowers. The weighted average contractual life of these loans is 4.4 years.
Analysts on the call brought up the issue of GE’s strong origination capabilities and ability to source large deals that generate fees for Ares. In response, deVeer said the firm should be able to continue to originate large deals on its own and via the new partnership. Citing an example, deVeer said Ares is currently working on syndicating an $800 million loan for a $100 million EBITDA borrower in the restaurant sector. Ares plans to hold $100 million to $200 million and syndicate the rest to 20 lenders, earning a fee of between $8 million and $9 million.
“I’m pretty confident that we can continue to do that. I’m not sure we’re going to have an $800 million deal every quarter, but to the extent that we have two to three $300 million deals a quarter, we feel that we’ve got a business model that can generate fees in alternative ways, away from the SSLP,” argued deVeer.