Tough deal environment causes drop in Ares BDC earnings

The business development company has been a net seller so far in the second quarter. 

A competitive deal environment pinched Ares Capital Corporation’s quarterly results, causing a core earnings per share of 32 cents, below the New York-based firm’s dividend of 38 cents.

Chief executive officer Kipp deVeer said on Wednesday’s earnings call that the business development company, indirectly overseen by Ares Management, characterised the deal market as “frothy” and that the competitive environment caused “aggressive behaviour from other market participants”.

The decision not to do as many deals was a conscious one, management said, made in an era of tighter credit spreads. Ultimately, DeVeer said he is “excited about where the company is headed for the year”, cautioning though Ares is “on a path that may take a little time”.

The competitive environment caused fewer-than-expected investments, meaning less fee and interest income. Ares’ total investment income was $275 million. Among those figures was interest income of $231 million and fees for capital structuring, management and other services of $15 million.

Management also emphasised the firm’s plan to monetise non-yielding assets acquired through the American Capital and put the capital into yielding assets. In the first quarter, Ares exited $284 million of American Capital assets. It will also be able to invest the capital it receives from the wind-down of the senior secured lending programme, Ares’ former joint venture with GE Capital, into higher-yielding assets.

DeVeer said Ares’s senior direct lending programme, a joint venture with Varagon Capital that effectively replaced the SSLP with GE, is “one of the numerous bright lights” in its portfolio that could help drive future earnings.

Total commitments made in the first quarter amounted to $864 million, of which 74 percent were first lien senior secured, 20 percent were second lien senior secured and 6 percent were equity. The largest was a $229 million deal consisting of first lien senior secured and second lien senior secured debt alongside an investment in an unnamed software company. Ares also exited $836 million of investments in the first quarter.

 

From 1 April to 26 April, the firm said it had deployed $533 million, and exited $810 million of investments, including $105 million of assets garnered through the American Capital transactions.