SSLP set for wind-down

Almost a month after Canada Pension Plan Investment Board’s (CPPIB) acquisition of a unit of GE Capital, the Canadian pension plan and Ares Capital Corporation (ARCC) haven’t agreed on what to do with the SSLP (Senior Secured Loan Program), the joint venture co-managed by Ares and GE Capital. A final decision hasn’t been made, but it’s increasingly likely that the platform will be wound down, sources suggest.

A GE Capital spokeswoman said the firm has nothing new to add to the sale announcement, which confirmed that the sale didn’t include SSLP assets and that talks between CPPIB and the two firms were ongoing.

After engaging in a few discussions with CPPIB, the Canadian pension fund and Ares thought they didn’t see eye-to-eye on the future of the program and it was unlikely that they’d partner on it, sources told PDI. The assets from the SSLP partnership won’t transfer with GE Antares to CPPIB, so GE Capital will likely continue as co-manager with Ares and wind the portfolio down.

The JV controls $7.3 billion in outstanding senior notes and at issue is how those assets will be unwound, considering that GE, which is selling off most of its lending business, is eager to shed assets. ARCC chief executive Kipp deVeer has said on previous earnings calls that the average tenor of the loans is 4.3 years.

In a research piece titled ‘ARCC: This SSLP Wind-Down Could Hurt. All is still TBD’, Jonathan Bock a research analyst with Wells Fargo Securities, argues that the impact of the wind-down on Ares will depend on maintaining “constant leverage”. If maturing loans go to pay down GE’s share of the leverage, that could hit Ares, he argues. However, if debt and the firms’ equity are repaid in tandem, ARCC could maintain return on equity on the assets close to 13 percent.

Bock reckons that constant leverage is unlikely, which would cut Ares’ returns to about 9.1 percent from 13.5 percent. “Based on the prospect that GE forces pay down on their notes first, we believe ARCC will look to refi GE out of SSLP when collateral hits 50 percent LTV (loan to value),” wrote Bock. Lower origination fees are also likely in the near term, Bock added.

Ares has already announced a new partnership with AIG-backed lender Varagon Capital Partners, the Senior Direct Lending Program (SDLP), which will succeed the SSLP. And sources tell PDI that Antares, once it’s operating as a stand-alone business under CPPIB, would likely partner with the Canadian pension plan’s own lending group, Principal Credit Investors, or other pension funds and insurers that do direct lending. The thinking is that by partnering with an institutional investor, the returns in the program would go directly to the investor, whereas an asset manager is still taking a sizeable cut in fees (typically a two percent management fee and 20 percent performance fee).

DeVeer told PDI that the Varagon partnership would be set up much like the SSLP. “We structured it to be quite similar. They have a large investment-grade-rated balance sheet from AIG that wants to dedicate capital to mid-market lending and they’re doing that through Varagon. It has a lot of similarities to the partnership with GE,” deVeer said.

Part of the draw for borrowers working with GE Capital, was the firm’s low cost of capital, though deVeer said that, in partnership with Varagon, the interest rates on loans should be similar. “We actually think it should end up right around the same place, though we are still working on getting this documented. The cost of capital at GE wasn’t really the special sauce, it was the scale of that partnership and their ability to write large checks,” deVeer told PDI.

Analysts and industry observers have also pointed out that in losing GE Antares as a partner on the program, Ares will no longer have access to Antares’ origination muscle, which is often referred to as one of the biggest and best in the business. “We don’t have any concern about being able to originate on our own. GE had a good business, we like their team. I’m sure we’ll continue to work with them when they get to CPP, but I don’t have any fear of being able to invest in a new program with Varagon,” deVeer told PDI. He and other Ares executives have said on recent earnings calls that Ares’ own large origination group, which is a more than 80-strong team, can handle the work on its own.

GE’s European sponsor finance business was sold to Japanese bank Sumitomo Mitsui Banking Corporation (SMBC) last week and since then, Ares has also engaged in talks with GE on what to do with the assets in the European equivalent Ares / GE joint venture, which are not automatically moving to SMBC. “We’re in the early days of having a discussion about what to do vis-à-vis the ESSLP. It currently remains with GE,” deVeer explained.