Ares Capital to See Higher Leverage on Acquisition

American Capital funding

Ares Capital (ARCC) has already raised commitments of $460 million to fund its acquisition of American Capital (ACAS). The funding is expected to raise its leverage, partially offset by higher exits over the past few quarters, resulting in repayment of existing debt.

In the June quarter, the company repaid $230 million in unsecured convertible notes with an interest rate of 5.1%. These repayments are being funded through a revolving line of credit that could result in a benefit of $0.03 on a per-share basis.

Ares Capital to See Higher Leverage on Acquisition

Ares Capital’s leverage, its net debt-to-equity ratio, has fallen to 0.73x as of June 30, 2016, which is higher than the prior year’s quarter. The leverage is toward the higher end of management’s target of 0.65x–0.75x. As interest rates rise, a smart debt level will translate to higher valuations and stock prices. Investors will discount those entities carrying higher leverages in the midst of rising rates.

Below are some returns on equity for some of Ares Capital’s peers:

  • CIT Group (CIT): 12.7%
  • American Capital (ACAS): 7.2%
  • United Rentals (URI): 35.9%

Together, these companies form 0.03% of the SPDR S&P 500 ETF (SPY).

Facilities cushion

As of June 30, 2016, Ares Capital had an additional facility of $0.9 billion available for borrowing under revolving lines of credit and small business administration debentures. The company had $125.9 million in cash and equivalents and $3.9 billion in an aggregate principal amount of outstanding debt.

Ares Capital has managed to have a lower cost of debt by borrowing under its revolving line of credit. If the company were to borrow completely under a revolving line of credit, it could lower its interest cost to 3.9% from the current 5.0%.