Ares Capital Corporation
Ares Capital (ARCC) is a granddaddy of the BDC sector – launched in 2004 – and the largest player in terms of assets under management, starting with a mere billion and now fourteen times as large. You don’t get so big for so long without doing most things right. Along the way the BDC acquired its two largest competitors when they zigged into a ditch and ARCC zagged. Through the years the management; the business strategy and the liability management has been remarkably stable. Notably, ARCC pioneered joint venturing with moneyed partners – first GE and now an AIG affiliate – and has been very effective funding itself with an admixture of secured and unsecured debt. Given its size, the BDC necessarily lends into the upper middle or large cap borrower market, typically as lead lender and is able to syndicate out portions to third party lenders or to other Ares Management credit funds. There have been misfires or damp squids along the way. There was a push into venture debt and then a strategic retreat. Project finance has not amounted to much. Once in a while there are big individual credit losses. No one’s perfect in credit whatever you might hear. There was that painful break-up with GE…Through it all, the BDC has managed to maintain very stable earnings and distributions. There was a brief period during the Great Recession where the payout was reduced but that didn’t last long. In fact, the quarterly ARCC dividend today is not much different than in 2006. Nonetheless, the BDC – by its own admittance – is spooked by the ramifications of the Covid-19 crisis and has been quick to boost its liquidity and reset its strategic expectations. ARCC has plenty of cash and unused revolver availability – even if borrowing bases shrink in the months ahead – and the ability to sell assets to its IHAM subsidiary if need be. Leverage is moderate and access to the debt markets remains wide open. What we don’t know – and even ARCC itself is uncertain – is just how many of the hundreds of borrowers on the books will stumble or fail in 2020-2021. We don’t expect to see ARCC resuming its asset growth trajectory till that becomes clearer, but the BDC has the resources to play both defense and offense. For our part, we are currently assuming the distribution will drop by a tenth from the current level, similar to what happened the last time we had a recession. After all, there will be credit losses and there may not be a glorious acquisition or two as in the past to boost long term earnings. Nonetheless, we – and a good deal of individual and institutional investors – feel we’re in good hands with ARCC at this difficult and dangerous time in BDC history.