ARCC Quick Update: Free Version
The following information was previously provided to paid subscribers of BDC Buzz along with:
ARCC target prices/buying points
ARCC risk profile, potential credit issues, and overall rankings
ARCC dividend coverage projections (base, best, worst-case scenarios)
Real-time changes to my personal portfolio
For paid subscribers, please access the full ARCC Deep Dive Projection report at the following link:
Recently Announced Equity Offering
After the close of the markets on July 28, 2021, Ares Capital (ARCC) announced an equity offering of 12,500,000 shares plus the underwriters an option to purchase up to an additional 1,875,000 shares. It should be noted that this is considered small relative to its 445,865,805 shares already outstanding as of July 28, 2021.
The equity offering will be slightly accretive to NAV per share by around $0.04 per share and depends on the amount of total shares issued.
I am expecting net proceeds of around $275 million (depending on the total amount of shares issued) which is relatively small compared to the $3.9 billion of new investments during Q2 2021 and the recent $1.35 billion of unsecured notes:
In June 2021, Ares Capital issued $850 million in aggregate principal amount of unsecured notes that mature on June 15, 2028, and bear interest at a rate of 2.875%.
In May 2021, Ares Capital issued an additional $500 million in aggregate principal amount of its existing unsecured notes that mature on July 15, 2025 and bear interest at a rate of 3.250%. These notes were issued at a premium that resulted in an effective yield of 2.0% for the Additional July 2025 Notes.
In April 2021, the company entered into amended/restated equity distribution agreements to issue and sell shares of its common stock up to $500 million. During the three months ended June 30, 2021, ARCC issued 7.0 million shares with net proceeds of $135 million or around $19.27 per share through its at-the-market (“ATM”) program.
“The ATM is a nice tool to issue some creative equity, I mentioned that I really do think coming out of COVID in into this recovery that we gained market share. And we think that there’s a reason for us to grow the company based on the investment environment being attractive. And as Mike said, on the call, or on the prepared remarks him more than investable, I mean, pretty attractive. The amount of stock that we’re actually able to issue in the ATM is quite limited. But you know, the good news is we’re doing it on a creative basis. That’s low cost that allows us to continue to grow the business.”
ARCC June 30, 2021 Results
For Q2 2021, Ares Capital (ARCC) reported another exceptional quarter easily beating its best-case projections due to the highest level of quarterly originations in the company’s history coupled with much higher-than-expected capital structuring service fees and dividend income. ARCC remains a ‘Level 1’ dividend coverage BDC and the company announced an increase to the regular quarterly dividend from $0.40 to $0.41 per share for the third quarter.
Kipp deVeer, CEO: “We reported another quarter of strong core earnings, healthy portfolio performance, record NAV per share and our highest level of quarterly originations in the company’s history. Our company continues to operate with significant scale, sourcing and investment advantages that come from our nearly 17-year track record in the market. Based on our favorable outlook and strong competitive position, we increased our regular quarterly dividend to $0.41 per share.”
ARCC’s net asset value (“NAV”) per share increased by another 4.1% partially due to by issuing 7 million shares (accretive to NAV) through its at-the-market (“ATM”) equity distribution agreement (discussed later) as well as overearning the dividend but mostly due to unrealized portfolio gains including from that will be discussed in the updated ARCC Deep Dive report.
There were additional net realized gains of around $59 million or $0.13 per share due to the exit of investments in Blue Angel and Mavis Tire Express Services and will likely be used to support upcoming supplemental dividends as discussed in the previous report.
ARCC continues to reduce its overall borrowing rates as well as laddering its maturities. On June 3, 2021, ARCC priced $850 million of 2.875% notes due June 15, 2028 which is an extremely low fixed rate for an unsecured note due 2028.
Leverage (debt-to-equity) increased due to the large amount of new portfolio investments partially offset by the recently issued shares and increase in NAV. In April 2021, the company entered into amended/restated equity distribution agreements to issue and sell shares of its common stock up to $500 million. During the three months ended June 30, 2021, ARCC issued 7.0 million shares with net proceeds of $135 million or around $19.27 per share which is a ~10% premium to its previous NAV per share.
Its portfolio yield (at cost) decreased from 7.9% to 7.7% due to new investments at lower yields. Through July 22, 2021, the company has already funded $430 million of new investments partially offset by $267 million of exits.
QC Supply is a specialty distributor and solutions provider to swine and poultry markets and was the only investment added to non-accrual during Q2 2021. Total non-accrual investments decreased from 2.2% to 1.9% of fair value (2.9% of cost) of the total portfolio due to removing Sundance Energy. Please note that ARCC has a very large portfolio with investments in 365 companies valued at over $17 billion so there will always be a certain amount of non-accruals.
There was another improvement in the amount of ‘Investment Grade 2’ (from 11.8% to 9.4% of the portfolio) which indicates that the “risk to our ability to recoup the initial cost basis of such investment has increased materially since origination or acquisition, including as a result of factors such as declining performance and non-compliance with debt covenants; however, payments are generally not more than 120 days past due”.
From July 1, 2021 through July 22, 2021, Ares Capital made new investment commitments of approximately $470 million, of which $430 million were funded. Of these new commitments, 97% were in first lien senior secured loans, 2% were in other equity and 1% were in preferred equity. Of the approximately $470 million of new investment commitments, 97% were floating rate, 2% were non-income producing and 1% were fixed rate. The weighted average yield of debt and other income producing securities funded during the period at amortized cost was 7.1% and the weighted average yield on total investments funded during the period at amortized cost was 6.9%. Ares Capital may seek to sell all or a portion of these new investment commitments, although there can be no assurance that it will be able to do so.
From July 1, 2021 through July 22, 2021, Ares Capital exited approximately $267 million of investment commitments, including $21 million of loans sold to IHAM or certain vehicles managed by IHAM. Of the total investment commitments exited, 62% were first lien senior secured loans, 34% were second lien senior secured loans and 4% were subordinated certificates of the SDLP. All of the approximately $267 million of exited investment commitments were floating rate. The weighted average yield of debt and other income producing securities exited or repaid during the period at amortized cost was 9.1% and the weighted average yield on total investments exited or repaid during the period at amortized cost was 9.1%. On the approximately $267 million of investment commitments exited from July 1, 2021 through July 22, 2021, Ares Capital recognized total net realized gains of approximately $31 million, with no realized gains or losses from the sale of loans to IHAM or certain vehicles managed by IHAM.
Full ARCC Report:
Again, for paid subscribers, please access the full ARCC Deep Dive Projection report at the following link:
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BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means that investors need to do their due diligence before buying.