Ares Capital Corporation Announces December 31, 2018 Financial Results, Declares an Increased First Quarter 2019 Dividend of $0.40 Per Share and Additional Dividends Totaling $0.08 Per Share for 2019

Dividend Declarations

NEW YORK–(BUSINESS WIRE)–Ares Capital Corporation (“Ares Capital”) (NASDAQ: ARCC) announced that
its Board of Directors has declared a first quarter dividend of $0.40
per share, an increase of $0.01 per share over the prior quarter
dividend. The first quarter dividend is payable on March 29, 2019 to
stockholders of record as of March 15, 2019. The Board of Directors has
also declared additional dividends totaling $0.08 per share for 2019, to
be distributed in four consecutive quarterly payments of $0.02 per share
per quarter. The first additional dividend is also payable on March 29,
2019 to the stockholders of record as of March 15, 2019.

DECEMBER 31, 2018 FINANCIAL RESULTS

Ares Capital also announced financial results for its fourth quarter and
year ended December 31, 2018.

HIGHLIGHTS

Financial

       
Q4-18 Q4-17 FY-18 FY-17
(dollar amounts in millions, except per share data)

Total
Amount

 

Per
Share(1)

Total
Amount

 

Per
Share(1)

Total
Amount

 

Per
Share(1)

Total
Amount

 

Per
Share(1)

Core EPS(2) $ 0.45 $ 0.38 $ 1.68 $ 1.39
GAAP EPS $ 0.36 $ 0.54 $ 2.01 $ 1.57
Net investment income $ 203 $ 0.48 $ 140 $ 0.33 $ 694 $ 1.63 $ 511 $ 1.20
Net realized gains (losses) $ 31 $ 0.07 $ (123 ) $ (0.29 ) $ 419 $ 0.98 $ 20 $ 0.05
Net unrealized gains (losses) $ (81 ) $ (0.19 ) $ 215 $ 0.50 $ (255 ) $ (0.60 ) $ 136 $ 0.32
GAAP net income $ 153 $ 0.36 $ 232 $ 0.54 $ 858 $ 2.01 $ 667 $ 1.57
Dividends declared and payable $ 0.39 $ 0.38 $ 1.54 $ 1.52
 
As of December 31,
(dollar amounts in millions, except per share data)   2018 2017
Portfolio investments at fair value $ 12,417 $ 11,841
Total assets $ 12,895 $ 12,347
Stockholders’ equity $ 7,300 $ 7,098
Net assets per share $ 17.12 $ 16.65
 

__________________________________________________

 
(1) All per share amounts are basic and diluted.
 
(2) Basic and diluted Core EPS is a non-GAAP financial measure. Core EPS
is the net per share increase (decrease) in stockholders’ equity
resulting from operations less professional fees and other costs
related to the acquisition of American Capital, Ltd. (the “American
Capital Acquisition”), expense reimbursement (the “Ares
Reimbursement”) from Ares Capital Management LLC (“Ares Capital
Management” or Ares Capital’s “investment adviser”), net realized
and unrealized gains and losses, any capital gains incentive fees
attributable to such net realized and unrealized gains and losses
and any income taxes related to such net realized gains and losses.
Basic and diluted GAAP EPS is the most directly comparable GAAP
financial measure. Ares Capital believes that Core EPS provides
useful information to investors regarding financial performance
because it is one method Ares Capital uses to measure its financial
condition and results of operations. The presentation of this
additional information is not meant to be considered in isolation or
as a substitute for financial results prepared in accordance with
GAAP. Reconciliations of basic and diluted Core EPS to the most
directly comparable GAAP financial measure are set forth in Schedule
1 hereto.
 

Portfolio Activity

       
(dollar amounts in millions) Q4-18 Q4-17 FY-18 FY-17
Portfolio Activity During the Period:
Gross commitments (3)(4) $ 2,709 $ 1,506 $ 8,045 $ 5,889
Exits of commitments (3) $ 1,021 $ 1,321 $ 6,476 $ 5,593
 
Portfolio as of the End of the Period:
Number of portfolio company investments 344 314

Weighted average yield of debt and other income producing
securities(5):

At amortized cost 10.2 % 9.7 %
At fair value 10.3 % 9.8 %
Weighted average yield on total investments(6):
At amortized cost 9.0 % 8.7 %
At fair value 9.3 % 8.7 %
 

__________________________________________________

 
(3) In July 2017, in connection with the effective termination of the
Senior Secured Loan Fund LLC (the “SSLP”), Ares Capital purchased
$1.6 billion in aggregate principal amount of first lien senior
secured loans outstanding at par plus accrued and unpaid interest
and fees from the SSLP (the “SSLP Loan Sale”) and assumed the SSLP’s
remaining unfunded loan commitments totaling $50 million. Upon
completion of the SSLP Loan Sale, the SSLP made a liquidation
distribution to the holders of the subordinated certificates of the
SSLP of which Ares Capital received $1.5 billion. The FY-17 gross
commitments exclude those investment commitments acquired from the
SSLP and the FY-17 exits of commitments exclude the amounts received
by Ares Capital from the SSLP’s liquidation distribution.
 
(4) The FY-17 gross commitments exclude $2.5 billion of investments
acquired as part of the American Capital Acquisition on January 3,
2017.
 
(5) Weighted average yield of debt and other income producing securities
is computed as (a) the annual stated interest rate or yield earned
plus the net annual amortization of original issue discount and
market discount or premium earned on accruing debt and other income
producing securities divided by (b) the total accruing debt and
other income producing securities at amortized cost or at fair value
as applicable.
 
(6) Weighted average yield on total investments is calculated as (a) the
annual stated interest rate or yield earned plus the net annual
amortization of original issue discount and market discount or
premium earned on accruing debt and other income producing
securities divided by (b) the total investments at amortized cost or
at fair value as applicable.
 

FOURTH QUARTER 2018 OPERATING RESULTS

For the fourth quarter of 2018, Ares Capital reported GAAP net income of
$153 million or $0.36 per share (basic and diluted), Core EPS(2) of
$0.45 per share (basic and diluted), net investment income of $203
million or $0.48 per share (basic and diluted), and net realized and
unrealized losses of $50 million or $(0.12) per share (basic and
diluted).

Net income can vary substantially from period to period due to various
factors, including the level of new investment commitments, the amount
of acquisition related expenses, the recognition of realized gains and
losses and unrealized appreciation and depreciation. As a result,
quarterly comparisons of net income may not be meaningful.

As of December 31, 2018, total assets were $12.9 billion, stockholders’
equity was $7.3 billion and net asset value per share was $17.12.

In the fourth quarter of 2018, Ares Capital made $2.7 billion in new
investment commitments, including commitments to 23 new portfolio
companies, 27 existing portfolio companies and 1 additional portfolio
company through the Senior Direct Lending Program, LLC (the “SDLP”),
through which Ares Capital co-invests with Varagon Capital Partners
(“Varagon”) and its clients to fund first lien senior secured loans. Of
the new commitments, 43 were sponsored transactions. As of December 31,
2018, 167 separate private equity sponsors were represented in Ares
Capital’s portfolio. Of the $2.7 billion in new commitments made during
the fourth quarter of 2018, 72% were in first lien senior secured loans,
22% were in second lien senior secured loans, 3% were in preferred
equity, 2% were in other equity securities and 1% were in the
subordinated certificates of the SDLP. Of these commitments, 97% were in
floating rate debt securities, of which 99% contained interest rate
floors and 1% were in the subordinated certificates of the SDLP to make
co-investments with Varagon and its clients in floating rate first lien
senior secured loans through the SDLP, all of which contained interest
rate floors. Ares Capital may seek to sell all or a portion of these new
investment commitments, although there can be no assurance that Ares
Capital will be able to do so.

In the fourth quarter of 2018, significant new commitments included:

  • $608 million in first lien senior secured revolving, delayed draw and
    term loans, second lien senior secured delayed draw and term loans and
    equity in an owner and operator of veterinary hospitals;
  • $230 million in first lien senior secured revolving, delayed draw and
    term loans in a manufacturer and supplier for the power utility and
    automotive markets;
  • $222 million in first and second lien senior secured term loans and
    equity in a leading market research company to the consumer packaged
    goods industry;
  • $154 million in first lien senior secured revolving and term loans and
    equity in a designer, marketer and distributor of licensed and owned
    apparel;
  • $123 million in first lien senior secured revolving, delayed draw and
    term loans in an enterprise management software provider;
  • $110 million in first and second lien senior secured term loans and
    equity in a customized packaging solutions provider;
  • $94 million in first lien senior secured revolving and term loans in a
    marine preservation services provider;
  • $86 million in a first lien senior secured revolving loan, second lien
    senior secured delayed draw and term loans in a generic
    pharmaceuticals company;
  • $81 million in first and second lien senior secured term loans and
    equity in a specialized acrylic and polycarbonate manufacturer;
  • $75 million in first lien senior secured revolving and term loans in a
    facilities management services provider;
  • $68 million in first lien senior secured delayed draw and term loans
    and equity in an oil and gas exploration and production company;
  • $67 million in first lien senior secured revolving, delayed draw and
    term loans and equity in a dental consumer products manufacturer;
  • $65 million in first lien senior secured revolving and term loans in
    an automotive parts and repair services retailer;
  • $59 million in first lien senior secured revolving and term loans in a
    provider of branded lifestyle apparel;
  • $56 million in first lien senior secured revolving, delayed draw and
    term loans in an owner and operator of gastrointestinal physician
    practices; and
  • $51 million in first lien senior secured revolving, delayed draw and
    term loans in a benefits broker and outsourced workflow automation
    platform provider for brokers.

Also in the fourth quarter of 2018, Ares Capital exited approximately
$1,021 million of investment commitments (including exits of $61 million
of commitments acquired as part of the American Capital Acquisition). Of
the total investment commitments exited, 63% were first lien senior
secured loans, 20% were second lien senior secured loans, 12% were
senior subordinated loans, 3% were preferred equity securities, 1% were
subordinated certificates of the SDLP and 1% were other equity
securities. Of the approximately $1,021 million of exited investment
commitments, 82% were floating rate, 10% were fixed rate, 4% were on
non-accrual status and 4% were non-interest bearing.

The fair value of Ares Capital’s portfolio investments at December 31,
2018 was $12.4 billion, including $11.1 billion in accruing debt and
other income producing securities. As of December 31, 2018, the total
portfolio at fair value included $0.7 billion of investments acquired in
the American Capital Acquisition. The total portfolio investments at
fair value were comprised of approximately 47% of first lien senior
secured loans, 29% of second lien senior secured loans, 5% of
subordinated certificates of the SDLP (the proceeds of which were
applied to co-investments with Varagon and its clients to fund first
lien senior secured loans through the SDLP), 6% of senior subordinated
loans, 4% of preferred equity securities and 9% of other equity
securities. As of December 31, 2018, the weighted average yield of debt
and other income producing securities in the portfolio at amortized cost
and fair value was 10.2% and 10.3%, respectively, the weighted average
yield on total investments in the portfolio at amortized cost and fair
value was 9.0% and 9.3%, respectively, and 85% of the total investments
at fair value were in floating rate securities.

“Our strong fourth quarter results concluded a great year for ARCC in
which we increased annual core earnings 21% over last year, generated
record net realized gains, fully covered our dividends from core
earnings and grew book value per share for another year,” said Kipp
deVeer, Chief Executive Officer of Ares Capital. “With the strength in
our core earnings, the stability in our non-accruals and rotation of the
American Capital acquired portfolio largely completed, we increased our
Q1-19 quarterly dividend to $0.40 per share and declared additional
dividends totaling $0.08 per share for 2019 to be paid evenly over the
next four quarters.”

“Going forward, we believe our modestly leveraged balance sheet supports
our strong financial position and enhances our ability to invest
opportunistically across varying market conditions,” said Penni Roll,
Chief Financial Officer.

PORTFOLIO QUALITY

Ares Capital’s investment adviser employs an investment rating system to
categorize Ares Capital’s investments. In addition to various risk
management and monitoring tools, Ares Capital’s investment adviser
grades the credit risk of all investments on a scale of 1 to 4 no less
frequently than quarterly. This system is intended primarily to reflect
the underlying risk of a portfolio investment relative to Ares Capital’s
initial cost basis in respect of such portfolio investment (i.e., at the
time of origination or acquisition), although it may also take into
account under certain circumstances the performance of the portfolio
company’s business, the collateral coverage of the investment and other
relevant factors. Under this system, investments with a grade of 4
involve the least amount of risk to Ares Capital’s initial cost basis.
The trends and risk factors for this investment since origination or
acquisition are generally favorable, which may include the performance
of the portfolio company or a potential exit. Investments graded 3
involve a level of risk to Ares Capital’s initial cost basis that is
similar to the risk to Ares Capital’s initial cost basis at the time of
origination or acquisition. This portfolio company is generally
performing as expected and the risk factors to Ares Capital’s ability to
ultimately recoup the cost of Ares Capital’s investment are neutral to
favorable. All investments or acquired investments in new portfolio
companies are initially assessed a grade of 3. Investments graded 2
indicate that the risk to Ares Capital’s 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. An investment grade of 1
indicates that the risk to Ares Capital’s ability to recoup the initial
cost basis of such investment has substantially increased since
origination or acquisition, and the portfolio company likely has
materially declining performance. For debt investments with an
investment grade of 1, most or all of the debt covenants are out of
compliance and payments are substantially delinquent. For investments
graded 1, it is anticipated that Ares Capital will not recoup Ares
Capital’s initial cost basis and may realize a substantial loss of Ares
Capital’s initial cost basis upon exit. For investments graded 1 or 2,
Ares Capital’s investment adviser enhances its level of scrutiny over
the monitoring of such portfolio company. The grade of a portfolio
investment may be reduced or increased over time.

As of December 31, 2018 and December 31, 2017, the weighted average
grade of the investments in Ares Capital’s portfolio at fair value was
3.0 and 3.1, respectively, and loans on non-accrual status represented
2.5% and 3.1%, respectively, of total investments at amortized cost (or
0.6% and 1.4%, respectively, at fair value).

LIQUIDITY AND CAPITAL RESOURCES

In December 2018, Ares Capital and Ares Capital CP Funding LLC (“Ares
Capital CP”), a consolidated subsidiary of Ares Capital, amended Ares
Capital CP’s revolving funding facility (“the Revolving Funding
Facility”) to, among other things, (a) extend the stated maturity date
from January 3, 2022 to January 3, 2024; (b) extend the reinvestment
period from January 3, 2019 to January 3, 2022; (c) adjust the interest
rate from the previous spread of 2.15% over LIBOR to a spread of 2.00%
over LIBOR; and (d) adjust the ranges of the unused portion of the
Revolving Funding Facility under which certain fees are paid.

As of December 31, 2018, Ares Capital had $296 million in cash and cash
equivalents and $5.3 billion in total aggregate principal amount of debt
outstanding ($5.2 billion at carrying value). Subject to leverage,
borrowing base and other restrictions, Ares Capital had approximately
$1.6 billion available for additional borrowings under its existing
credit facilities as of December 31, 2018.

FOURTH QUARTER 2018 DIVIDEND PAID AND 2019 DECLARED DIVIDENDS

On October 31, 2018, Ares Capital declared a fourth quarter dividend of
$0.39 per share for a total of approximately $166 million. The record
date for this dividend was December 14, 2018 and the dividend was paid
on December 28, 2018.

On February 12, 2019, Ares Capital declared a first quarter 2019
dividend of $0.40 per share payable on March 29, 2019 to shareholders of
record on March 15, 2019.

On February 12, 2019, Ares Capital declared an additional $0.08 per
share of dividends, to be distributed in quarterly payments of $0.02 per
share during 2019. The first quarter 2019 additional dividend of $0.02
per share will be payable on March 29, 2019 to stockholders of record as
of March 15, 2019. The second quarter 2019 additional dividend of $0.02
per share will be payable on June 28, 2019 to stockholders of record as
of June 14, 2019. The third quarter 2019 additional dividend of $0.02
per share will be payable on September 30, 2019 to stockholders of
record as of September 16, 2019. The fourth quarter 2019 additional
dividend of $0.02 per share will be payable on December 27, 2019 to
stockholders of record as of December 16, 2019. Payment of the
additional June 28, 2019, September 30, 2019 and December 27, 2019
dividends are subject to the satisfaction of certain Maryland law
requirements.

RECENT DEVELOPMENTS

In February 2019, Ares Capital’s Board of Directors authorized an
amendment to its stock repurchase program to (a) increase the total
authorization under the program from $300 million to $500 million and
(b) extend the expiration date of the program from February 28, 2019 to
February 28, 2020. Under the stock repurchase program, Ares Capital may
repurchase up to $500 million in the aggregate of its outstanding common
stock in the open market at a price per share that meets certain
thresholds below its net asset value per share, in accordance with the
guidelines specified in Rule 10b-18 of the Exchange Act. The timing,
manner, price and amount of any share repurchases will be determined by
Ares Capital, in its discretion, based upon the evaluation of economic
and market conditions, stock price, applicable legal and regulatory
requirements and other factors.

From January 1, 2019 through February 7, 2019, Ares Capital made new
investment commitments of approximately $623 million, of which $577
million were funded. Of these new commitments, 45% were in first lien
senior secured loans, 40% were in second lien senior secured loans, 13%
were in the subordinated certificates of the SDLP and 2% were in
preferred equity securities. Of the approximately $623 million of new
investment commitments, 98% were floating rate and 2% fixed rate. The
weighted average yield of debt and other income producing securities
funded during the period at amortized cost was 10.0%. 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 January 1, 2019 through February 7, 2019, Ares Capital exited
approximately $469 million of investment commitments. Of the total
investment commitments, 74% were first lien senior secured loans and 26%
were second lien senior secured loans. Of the approximately $469 million
of exited investment commitments, 100% were floating rate. The weighted
average yield of debt and other income producing securities exited or
repaid during the period at amortized cost was 9.0% and the weighted
average yield on total investments exited or repaid during the period at
amortized cost was 9.0%. On the approximately $469 million of investment
commitments exited from January 1, 2019 through February 7, 2019, Ares
Capital recognized total net realized gains of approximately $2 million.

In addition, as of February 7, 2019, Ares Capital had an investment
backlog and pipeline of approximately $1,435 million and $150 million,
respectively. Investment backlog includes transactions approved by Ares
Capital’s investment adviser’s investment committee and/or for which a
formal mandate, letter of intent or a signed commitment have been
issued, and therefore Ares Capital believes are likely to close.
Investment pipeline includes transactions where due diligence and
analysis are in process, but no formal mandate, letter of intent or
signed commitment have been issued. The consummation of any of the
investments in this backlog and pipeline depends upon, among other
things, one or more of the following: satisfactory completion of our due
diligence investigation of the prospective portfolio company, Ares
Capital’s acceptance of the terms and structure of such investment and
the execution and delivery of satisfactory transaction documentation. In
addition, Ares Capital may sell all or a portion of these investments
and certain of these investments may result in the repayment of existing
investments. Ares Capital cannot assure you that it will make any of
these investments or that Ares Capital will sell all or any portion of
these investments.

WEBCAST / CONFERENCE CALL

Ares Capital will host a webcast/conference call on Tuesday,
February 12, 2019 at 10:00 a.m. (Eastern Time) to discuss its quarter
and year ended December 31, 2018 financial results. PLEASE VISIT ARES
CAPITAL’S WEBCAST LINK LOCATED ON THE HOME PAGE OF THE INVESTOR
RESOURCES SECTION OF ARES CAPITAL’S WEBSITE FOR A SLIDE PRESENTATION
THAT COMPLEMENTS THE EARNINGS CONFERENCE CALL.

All interested parties are invited to participate via telephone or the
live webcast, which will be hosted on a webcast link located on the Home
page of the Investor Resources section of Ares Capital’s website at www.arescapitalcorp.com.
Please visit the website to test your connection before the webcast.
Domestic callers can access the conference call by dialing (888)
317-6003. International callers can access the conference call by
dialing +1 (412) 317-6061. All callers will need to enter the
Participant Elite Entry Number 6180815 followed by the # sign and
reference “Ares Capital Corporation” once connected with the operator.
All callers are asked to dial in 10-15 minutes prior to the call so that
name and company information can be collected. For interested parties,
an archived replay of the call will be available approximately one hour
after the end of the call through February 26, 2019 at 5:00 p.m.
(Eastern Time) to domestic callers by dialing (877) 344-7529 and to
international callers by dialing +1 (412) 317-0088. For all replays,
please reference conference number 10127020. An archived replay will
also be available through February 26, 2019 on a webcast link located on
the Home page of the Investor Resources section of Ares Capital’s
website.

ABOUT ARES CAPITAL CORPORATION

Ares Capital is a leading specialty finance company that provides
one-stop debt and equity financing solutions to U.S. middle market
companies and power generation projects. Ares Capital originates and
invests in senior secured loans, mezzanine debt and, to a lesser extent,
equity investments through its national direct origination platform.

Contacts

INVESTOR RELATIONS
Ares Capital Corporation
Carl G.
Drake or John Stilmar
(888) 818-5298
[email protected]

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