After ending its Senior Secured Loan Program (or SSLP) with GE Capital, Ares Capital (ARCC) is successfully building up a new senior direct lending program (or SDLP). Under the new program, the company has been offering senior secured loans to middle-market companies. It’s also aiming to build strong relationships with other financial sponsors and companies.
Under SDLP, Ares and Varagon are underwriting and holding first lien loans, including stretch senior and unitranche loans. Of the new investments in 4Q16, 7% were in investments in SDLP certificates, compared to 15% in the previous quarter.
In 4Q16, Ares Capital made commitments to 14 portfolio companies, of which two were directed toward SDLP programs jointly managed with Varagon. On December 31, 2016, the company still had 22% of its total portfolio invested in the senior secured loan program (or SSLP). This percentage has been falling, however, at a slower pace.
Overall, the SDLP program has an investment cap of $2.9 billion, with an investment of up to $300 million in a single company. Ares Capital’s peers in the investment management industry have posted the following earnings per share rises:
Ares and Varagon have modeled their SDLP joint venture after the SSLP. The company is targeting marginally higher yields for the program. As a result, it’s witnessing a marginally slower pace of the building up of the program. In the short term, the shift could either witness marginally lower yields or a slower pace of buildup. However, Ares Capital has demonstrated good earnings power in spite of its ACAS acquisition and portfolio shift toward SDLP.
In the next article, we’ll study Ares Capital’s liquidity and leverage in 4Q16.