Release Date: May 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ares Capital Corp reported strong core earnings of $0.59 per share, a 3.5% increase from the previous year, exceeding the regular dividend of $0.48 per share.
- Net asset value per share increased by 6% year-over-year, reaching a record $19.53, indicating solid growth and financial health.
- The company successfully closed $1.2 billion of commitments in the second quarter, demonstrating robust transaction activity and market confidence.
- Ares Capital Corp's portfolio companies showed a remarkable 10% organic EBITDA growth over the last 12 months, outperforming the S&P 500's annual growth.
- The company has maintained a strong liquidity position with approximately $6.3 billion available, including cash and post-quarter transactions, ensuring operational flexibility and growth potential.
Negative Points
- Despite overall strong performance, the company noted an increase in competitive market conditions, which could impact future investment opportunities and returns.
- The weighted average yield on debt and other income-producing securities slightly decreased from 12.5% at the end of the previous quarter to 12.4%, indicating a potential reduction in income generation efficiency.
- Nonaccruals at cost increased slightly from the previous quarter, although they remain below historical averages, indicating some level of increased credit risk.
- There is ongoing pressure on structuring fees, particularly due to fewer new deals in the market, which could affect future revenue from these sources.
- The company faces uncertainties in the interest rate environment, which could impact borrowing costs and investment valuations moving forward.
Q & A Highlights
Q: Thinking about a lot of activity in the quarter, both on the deployment and repayment side, can you give us an update on the syndicated and liquid of owned markets and how they're influencing activity with you guys and elsewhere in the market?
A: (Robert Kipp DeVeer - CEO & Director) The syndicated and liquid markets are not a huge driver of our activities. There's been an increase in traditional leveraged finance transactions, which is generally positive, but our new deals were primarily from existing portfolios. We anticipate that various factors will continue to drive transaction activity throughout the year.
Q: Can you talk about the environment for second lien if the reduced exposure there is more market related or your portfolio positioning?
A: (Robert Kipp DeVeer - CEO & Director) The market has shifted towards unitranche deals, reducing the prevalence of second lien opportunities. Our second lien investments are typically in larger companies and aligned with syndicated first lien transactions, which have been rare recently. We are seeing opportunities in junior capital investing and structured equity due to companies performing well but having less cash flow than expected.
Q: I noticed that dividend income was substantially higher quarter-over-quarter. Should we consider the dividend income stream as being aligned with the direction and change in interest rates?
A: (Robert Kipp DeVeer - CEO & Director) The increase in dividend income this quarter was mainly due to a one-time dividend from an equity investment. Generally, our diversified equity portfolio can deliver dividends occasionally, but there's no significant change expected in the dividend income stream related to interest rate changes.
Q: You mentioned earlier in the call that your quantitative group determined that industry selection could account for 500 basis points of outperformance. How stable is that over time?
A: (Mitchell S. Goldstein - Senior Partner, Co-President & Co-Head of Ares Credit Group) The analysis was based on a long-term study of our portfolio, which has consistently focused on non-cyclical, high-margin businesses like business services and healthcare services. The industry groups we invest in have been stable, allowing for reliable data analysis.
Q: Can you give us any more color on what the liquidity pressures are in the tail end of the portfolio?
A: (Robert Kipp DeVeer - CEO & Director) We observed a modest uptick in revolver drawdowns, indicating some companies might have less liquidity than desired. Despite strong company performance, some capital structures may struggle with prolonged high base rates. However, our portfolio metrics like nonaccruals and underperformers remain stable.
Q: On the funding strategy, you've been active in the unsecured debt market with attractive spreads. What is your bigger picture view on the preferred mix of secured versus unsecured debt going forward?
A: (Scott C. Lem - CFO & Treasurer) Maintaining our investment-grade rating is crucial, and having a majority of unsecured debt is a significant component of that. While we are currently a bit heavier on unsecured debt, we aim for a balanced approach, including secured financing like CLOs, to diversify our funding sources.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
