Have you heard the news regarding the key Business Development company:Ares Capital (ARCC) desiring to become bigger?In the recent news, the company just declared an equity offering as much as $2bn in new equity. Ares isn’t saying particularly what the proceeds will most likely be used for. However, there’s an effective suggestion that the business has a bead on an acquisition. Here’s what the filing states:
“We believe the current dislocation and illiquidity within the credit areas has elevated the chance of further consolidation within our industry. In comparison to that particular finish, we and our portfolio company IHAM are evaluating (and anticipate to still evaluate later on) numerous potential proper acquisition options, including purchases of:
•asset investment investment investment portfolios •contracts to cope with CLO automobiles along with other investment automobiles •other public and private financial institutions or resource managers and •selected secondary market assets.”
There is no clue who Ares might be in discussions with but rumors have it that Micrograms Capital (MCGC) is a candidate. The stock cost of MCGC remains moving violently in recent days, up 20% from $3.65 on October 3 to $4.54 last Friday, a 25% raise (although within the low base). So, assuming that Ares was able to buy the portfolio at a discount, then the price be within the $700mn-$750mn range, which is within Ares’ ambit.
In addition to MCGC, Centralized Loan Obligations (“CLO”) is available.
ARES Remains VERY BUSY IN RECENT Days
Ares has not yet documented third quarter 2011 earnings, so, much of the filing is simply a copy of June 2011′s final results. On the other hand, it was revealed by the company that the thir quarter was a very busy quarter since total commitments to new investments were equal to 30% of total investments at June.
You’ll uncover numerous other interesting products of information incorporated inside the filing, that offers a sneak peek of the 3rd quarter earnings report. Within the $971mn in repayments, 2% were of non-accruing loans, which signifies Ares continues its very effective campaign to clean its balance sheet. That’s another $19mn of non-performing loans off the books. One of the greatest goals is always to reduce the amount investments acquired in the Allied Capital transaction, especially the equity investments. The filing guarantees that overall the following quarter was good for overall Realized Gains especially on the sale of investments which is around $47mn.
YIELDS Lower, THEN UP?
A very interesting revelation is that the average yields on new loans booked were 10.0%, while loans being repaid were generating 10.2% which indicates pressure on Ares’ average portfolio yield. On the other hand, when loan spreads are going forward so that new assets are now exceeding paid-off assets and risk remains unchanges, this is usually good news for the company and shareholders. Furthermore, Ares will be producing higher returns from all the new loans booked by distributing a percentage of them, which assists return on assets and equity. Even during slightly more challenging environment we will still expect Ares to have the ability to find a home for these newly minted loans considering that the majority are senior in the capital structure and came from larger sized borrowers. Moreover, Ares carries on investing more capital in its JV with GE Capital and the structure of that deal is accretive to the aggregate yield. Therefore we may have a little drop in the average yield in the third quarter, but notice a catch-up and a rise in future periods.
Ares is the cream of the crop when it comes to larger BDC’s though it has a laddered debt profile. With these moves from Ares, I believe that they are being optimistic and I know they have a reason to be and that includes withstanding a potential recession next year.