Ares Capital Corporation, the $9 billion BDC managed by the direct lending group of Ares Management, is in discussions about replacing its joint-venture partner GE Capital, in the SSLP (Senior Secured Loan Program), after General Electric announced that most of GE Capital is up for sale.
Kipp deVeer, the chief executive of the BDC and co-head of the direct lending group, said during the firm’s first quarter earnings call that Ares would either team up with the firm that acquires the SSLP portion of GE Capital’s portfolio, or seek a new partner altogether. If no suitable candidate is found, Ares would wind down the portfolio, although deVeer doesn’t think this is likely. He said the average tenor of the loans in the underlying portfolio is 4.3 years.
“We believe that partnering with us and SSLP, or a similar joint venture will be attractive to a number of third parties and we are having active and productive dialogues with a few potential partners,” deVeer said on the earnings call. In the meantime, the platform is continuing to lend money and deVeer said it has five deals in the pipeline at the moment and hasn’t encountered much disruption despite the planned GE Capital sale. “If no mutually acceptable replacement partner for GE Capital can be identified by either by Ares or through the GE Capital sale process, then the program would likely experience a gradual wind down as the underlying loans in the program are repaid,” deVeer said.
He declined to specify which firms Ares might partner up with, though he said he doesn’t expect it to be a US bank, as they are heavily regulated with respect to lending. Instead, he is looking at partnering with non-US banks, large asset management firms or insurers, or some combination of the above. It was also reported previously that Ares is in talks with Macquarie about acquiring some of GE Capital’s portfolio.
“The announced exit of GE Capital from our market is yet another example of the bank’s unwillingness to lend to the middle market and we believe that this exit of a substantial competitor will result in a more favorable competitive landscape. This brings us even more conviction in our business strategy of directly originating investments in the middle market to achieve strong risk-adjusted returns,” deVeer said.
DeVeer and analysts on the call noted GE Capital’s strong origination capabilities and relationships with sponsors, an asset that Ares might be losing in a partner. Though deVeer said Ares’ own origination capabilities and large team (85 people) could handle the task even if the new partner isn’t as strong on the origination side. DeVeer noted that he is interested in a partner that understands credit risk well. “Familiarity and understanding of the credits and the market and the risk coming into the program to me is much, much more important than the origination that a potential partner has,” deVeer said.
Ares’ declared a dividend of $0.38 cents per share for the first quarter of 2015. Its assets grew to $8.9 billion at the end of March from $8.2 billion 12 months earlier, but dropped quarter-on-quarter from $9.5 billion at the end of 2014. ARCC has $2.3 billion in available capital for new lending.
The vehicle also reported that twice as many loans matured or were sold as were originated, and deVeer said this is in line with expectations, as the first quarter tends to be slow for new deals. “We were focused on selling lower yielding assets in the first quarter, which reduced the size of our investment portfolio but helps improve the overall portfolio yields,” deVeer said.
ARCC exited $1.1 billion worth of loans in the quarter while it made $500.2 million in gross commitments. The firm had a weighted average yield of 10.5 percent on its investments. Its net investment income grew to $121.7 million from 112.3 million year-on-year.
ARCC’s stock is still trading below net asset value, so the firm can’t raise new equity capital, though deVeer told analysts that it has plenty of money to lend having freed up capital from exits and as other loans reach maturity.