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Ares Capital: Files Preliminary Prospectus CORRECTED

BDCs:
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This is a corrected version. The earlier edition suggested ARCC might benefit from becoming FC and FSFR’s Investment Advisor when we should have said Ares Management, which is the BDC’s Investment Advisor.

On June 14, 2017 Ares Capital (ARCC) filed a Preliminary Prospectus with the SEC. Here are the details and a Wild Guess:

ON THE SHELF

ARCC filed a standard “shelf registration” seeking to raise – at some point in the future – up to $3.0 billion of securities, in return for a $300K fee that had previously been paid.

We reviewed the document for any material new developments, but there was nothing already not reported here. Nor was any intended purpose specifically stated, as is the norm.

WILD GUESS

We know that ARCC is absorbing the recent American Capital acquisition. Judging from a Q&A transcript we read today with Ares Management – the Investment Advisor to the BDC – that’s well ahead of schedule.

We also know Fifth Street Asset Management (FSAM), which has an unhappy lender, has announced its intention to explore a sale of its management contracts to a third party, which would affect principally Fifth Street Finance (FSC) and Fifth Street Senior Floating (FSFR).

We would argue that whatever both BDCs credit problems they are still more modest than the hodge podge of assets on two continents that ARCC just purchased off American Capital’s shareholders.

We also know that only a relatively large organization would have the ability to buy-out FSAM’s Investment Advisor contracts and manage or acquire the two Fifth Street public BDCs.

WE ASK : WHY NOT ?

Is it possible that Ares Management and ARCC might step up and be part of whatever transaction – if any -comes out of Fifth Street Management’s woes ?

If we were Mr Tannenbaum – who is a major shareholder in all 3 Fifth Street entities – we would be favorably inclined to sell the Investment Advisory contracts to Ares Management  and have that huge organization undertake the necessary turnaround and re-positioning credit work needed at FSC and FSFR.

WWW

Depending on the price paid, it’s a Win-Win-Win situation.

ARCC gains billions of dollars of new assets under management and presumably at a good price, and Ares Management the attendant Management and Incentive Fees from FSC and FSFR .

FSAM – its insiders and shareholders – receive substantial proceeds with which to pay off creditors and generate a profit, and resolve the open question as what to do next.

The FSC and FSFR shareholders gain a new, highly respected Investment Advisor which should boost results and the stock price and remove the uncertainty and malaise hanging over the two BDCs.

FULL DISCLOSURE

We’ve been intrigued by the possible upside that might come for FSC and FSFR ever since FSAM announced its intention to seek a buyer, which effectively means selling the right to manage the two public BDCs, the only material assets of FSAM except for the shares owned in both entities.

(All the other asset management activities of FSAM are in the process or have been closed down and much office space given up in Connecticut as the latest quarterly filing indicated). 

We bought positions in FSC and FSFR a few weeks ago – as previously announced – in our Special Situations portfolio with this upside in mind.

That’s not been a successful call so far, but we didn’t expect a resolution for months when making the decision to buy.

ARCC is only one of several potential buyers.

Mr Tannenbaum – who’s already putting his hand up to cover any deficiency where FSAM is concerned and owns big stakes all around – might go another way entirely and seek to take FSAM private and continue to manage FSC and FSFR.

Or he, and FSAM, could do nothing except renegotiate their troubled Revolving loan , which has been a subject of contention for several weeks and comes to a head in June.

However,  an ARCC solution would be elegant and probably well received by everyone except (maybe) by ARCC’s own shareholders (if a merger were envisaged) given the perceived swiss cheese nature of both BDCs credit portfolio.

(The BDC Reporter’s analysis suggests the FSC portfolio is worse than FSFR, which is the general consensus anyway, but both are salvageable and could be “fixed” in this environment within a couple of quarters).

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