Ares’s Senior Direct Lending Program to Drive Originations, Yield

Senior direct lending program

After closing its SSLP (senior secured loan program) with GE Capital, Ares Capital (ARCC) is building up a new SDLP (senior direct lending program) in line with the previous program. In the program, the company offers senior secured loans to middle-market companies. It aims to build strong relationships with financial sponsors and companies to expand its loan book.

Ares’s Senior Direct Lending Program to Drive Originations, Yield

Under the SDLP, Ares Capital and Varagon Capital will underwrite and hold first-lien loans, including stretch senior and unitranche loans. In 3Q16, 15% of new investments were under the SDLP. The percentage increased to 71% for deployments in October 2016. Ares Capital’s competitors posted the following EPS (earnings per share) increases:

  • CIT Group (CIT): 27%
  • American Capital (ACAS): 143%
  • United Rentals (URI): 18%

Together, these companies form 0.04% of the SPDR S&P 500 ETF (SPY) (SPX).

Building up the program

In 3Q16, Ares Capital made commitments to 12 new companies, of which ten were directed towards the SDLP. Also, the company transferred $528.9 million of its existing investment commitments to the SDLP. Ares still has 22% of its total portfolio invested in the SSLP. The company expects its SSLP to wind up over the next few quarters.

The SDLP portfolio carried investments of $929 million, consisting of ten first-lien senior secured loans, as of September 30, 2016. Overall, the SDLP has an investment cap of $2.9 billion in total and $300 million in one company. Ares and Varagon Capital have modeled their SDLP joint ventures after the SSLP. However, the major challenge is that the shifting of portfolios could impact yields and earnings in the short term. In the next part, we’ll study Ares Capital’s balance sheet strength.