ARCC Reports NII of $0.2137 compared to a Div of $0.35 Business Wire 8-03 Ares Capital Corporation reported for Q2-11 [after tax] Net Investment Income of $43.763 million [$0.2137/share]. Of ARCC's $144.307 million in gross investment income, $111.314 million [77%] was in interest and dividends; $20.154 million [14%] was in structuring fees; $6.677 million [5%] was in dividend income; $4.601 million [3%] was in management fees; and $1.561 million [1%] was in 'other'. The Net Asset Value per share was $15.28. ARCC's weighted average yield of debt and income producing securities at at cost was 12.5% [12.8% last quarter and 13.4% in Q2-10]. The weighted average cost of debt was 5.1% [5.7% last quarter and 4.7% in Q2-10] - and the weighted average spread at cost was 7.4% [7.1% last quarter and 8.7% in Q2-11]. The number of portfolio company investments was 148 [91 from ARCC and 60 from ALD - with 3 companies being in both groupings]. ARCC had $4.643 billion of portfolio investments (excluding cash and cash equivalents) which were comprised of approximately 49% in senior secured debt securities (37% in first lien assets and 12% in second lien assets); 16% in senior subordinated debt securities; 16% in the Senior Secured Loan Program; 17% in equity/other securities; 2% in collateralized loan obligations; and 0% in commercial real estate. ARCC's ratio of operating expenses to average net assets was an annualized x.xx%. ARCC's ratio of net investment income to average net assets was an annualized x.xz%. ACRR's annulaized portfolio turnover rate for Q2 was 9%. With Long-term debt ['debt'] of $1.133143 billion and credit facility debt of $0.348678 billion [total of $1.620142 billion] and Shares outstanding at the end of the quarter of 205.130 million, the Debt/share was $6.9z and the Debt/NAV ratio was 45.1z%. Floating rate debt had a cost of 2.28% and fixed rate debt had a cost of 6.17% - with a weighted average cost of 5.09%. Core ARCC Portfolio non-accrual investments were 2.4% at amortized cost and 0.8% at fair value at 6/30/11; 3.6% at amortized cost and 1.5% at fair value at 3/31/11; and 3.4% at amortized cost and 05% at fair value at 12/31/10. Total ARCC non-accrual investments were 3.5% at amortized cost and 1.6% at fair value at 6/30/11; 4.8% at amortized cost and 2.6% at fair value at 3/31/11; and 3.8% at amortized cost and 1.3% at fair value at 12/31/10. ARCC provides credit metrics broken into four grouping: for the ARCC portfolio ex ALD investments and ex its Senior Secured Loan Program; for the ALD legacy portfolio; for those two portfolios combined; and for the Senior Secured Loan Program only [which is 13% of ARCC's total investments]. The data: ARCC ALD Total SSLPDebt/EBITDA 4.4x 4.7x 4.4x 4.4xInterest Coverage 2.9x 2.4x 2.7x 2.9xARCC has a current dividend of $0.35/shareTotal Investment Income $144.307 million [divided by 204.752 million average shares = $0.7048/share]Interest and Credit Facility Fees = - $28.593 million [- $0.1396/share]Incentive Management Fees = - $41.746 million [- $0.2039/share]Total Investment Expenses = - $98.637 million [- $0.4817/share]Net Investment Income = $45.670 million [$0.2230/share]Net Investment Income after tax expense = $43.763 million [$0.2137/share]Realized gain (loss) on investments = - $6.374 million [- $0.0311/share]Unrealized gain (loss) on investments = $13.610 million [$0.41xx/share]Loss on Extenguishment of debt = - $10.458 million [$0.04xx/share]Net Increase in Net Assets Resulting from Operations = $36.923 million [$0.1803/share]Investments at fair value = $4,643.163 millionCash and cash equivalents = $ 84.889 millionFrom the ARCC Conference Call: During Q1 there were strong inflows of available funds and fewer deals. During Q2 the supply demand reversed. Loan repayments decline 38%. There were more favorable investment conditions - with spreads widening. There was meaningful widening in the last few weeks. For the market as a whole, debt issuance increased 32%; LBOs were up 34%. ARCC had $889 million of new capital invested. There were fewer portfolio exits in Q2. ARCCls loan pipeline has expanded. We like Senior Loans - but still pursue mezzanine loans. Core earnings per share was $0.34/share - up 3 cents from last quarter - higher structuring fees due to there being more transactions - and there being more 'new' transactions. The Allied portfolio is only 20% of current portfolio. NII was $0.21/share vs. $0.26/share in Q2-10. there was a $0.12/share reduction in NII due to incentive fees. The loss on extinguishment of debt was for a loan to Allied. ARCC ended Q2-11 with investments in 148 portfolio companies - reduced from last quarter - and it is a goal to reduce portfolio companies. The portfolio weighted average yield at cost 12.5% - lower yields on larger mix of senior debt [and a lot of that debt was floating]. 7.4% spread was up from 7.1% due to lower cost of debt, Non-accruals fell from 2.6% to 1.6% of the portfolio - ARCC exited four of those portfolio companies that were on non-accrual while one company's debt returned to accrual. ARCC has a 5.1% average cost of debt with maturity of 12 years. Greg Mason with Stephil Nicholas asked about spreads. ARCC: Yields are lower due to investing in better credits. Also the growth of the senior loan program resulted in lower yields. 8% yields could come with 3% fees. Most deals have call protections that will enhance yields. We can then sell traunches of first out debt at lower yields - and that will increase our yields. When we syndicate, we can increase our total yields. Spreads have compressed over the last several years. Even with lower yields, NIM is up. The mismatch in supply and demand and a higher risk environment should help spreads going forward. The volatility in the market could slow deal flow - but most of the middle market is insolated. It is too early for the current volatility to slow deal flow due to a lag time or long time to close deals. Asked about Prepayment expectations and other conditions projected for Q3? ARCC: Our portfolio companies are doing well with EBITDA growth. That growth could slow. We expect forward spreads to be consistent to what we are doing now. The book will grow in Q3. Prepayments are difficult to predict. Who are the clients to buy debt that you syndicate? ARCC: First out term loans tend to go to regional banks. Higher risk tranches could go to other BDCs. Is second lien taking out mezzanine debt? ARCC: Yes. Second liens are prevalent into larger companies - but not so much in the middle market. No all companies are good Mezzanine candidates. Mezzanine is 12-14 and fixed rate - and needs call protection. Traditional mezzanine debt? Providers are currently giving up some call protection to close deals. The Mezzanine environment is currently challenging. Some BDCs trading below NAV. Given ARCC's success with Allied, what is your appetite for deals. ARCC: Allied has been an absolute success for us. We were dispensed with our purchase. It took a year to close. To take on other people problems, the price has to be right. We can originate more deals in one quarter than we would get in buying some of the smaller BDCs. And entrenched managements and boards will tend to view their valuations higher than they probably belong. Beauty is in the eye of the beholder. Every investment that we are closing now - we get to see how managements reacted to dramatic economic events that occurred in 2009. Before, we had to go back ten to 15 years to see a time of stress. And that visibility gives us a better handle of the risk in an investment; their ability to weather falling EBITDAs; and the skills of management.
ARCC ALD Total SSLPDebt/EBITDA 4.4x 4.7x 4.4x 4.4xInterest Coverage 2.9x 2.4x 2.7x 2.9x
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