Marginally higher leverage
Ares Capital’s (ARCC) net DE (debt-to-equity) ratio had fallen to 0.75x as of December 31, 2016, compared to 0.71x in the previous quarter. This value was toward the top end of management’s target of 0.65x–0.75x.
The company’s leverage is higher than the industry average and is expected to be marginally higher in the upcoming quarters due to the acquisition of American Capital, partially offset by a halt in repurchases to support inorganic expansion.
Ares Capital has been financing redemptions in the recent quarters by borrowing under its existing revolving credit facility. The optimum utilization of its revolving credit facility could result in a $0.03 benefit per share on an annualized basis.
Below is a snapshot of some of ARCC’s competitors’ returns on equity:
Amending revolving facility
In January 2017, Ares Capital entered into an agreement to expand the commitments under its existing revolving credit facility from $540 million to $1 billion. The company also extended its reinvestment period from May 2017 to January 2019 and its maturity date from May 2019 to January 2022.
The company issued $350 million in unsecured convertible notes carrying interest of 3.75% per year with a maturity of February 2022. The company doesn’t have the option of redeeming the notes prior to maturity.
Ares Capital had $223 million in cash and cash equivalents for investments as of December 31, 2016. It had $3.9 billion in an aggregate principal amount of outstanding debt and $1.4 billion in additional borrowings under its existing credit facilities and small business administration guaranteed debentures.
In the next article, we’ll study Ares Capital’s dividends and valuations in 2017.