For Q3/20, Ares Capital reported GAAP net income of $441 million, net investment income of $166 million, and net realized and unrealized gains of $275 million.
As of Sept. 30, 2020, total assets were $15 billion, stockholders’ equity was $7 billion and net asset value per share was $16.48.
In Q3/20, Ares Capital made $706 million in new investment commitments, of which $447 million were funded, including nine new portfolio companies and 15 existing portfolio companies. As of Sept. 30, 2020, 166 separate private equity sponsors were represented in Ares Capital’s portfolio. Of the $706 million in new commitments made during Q3/20, 94% were in first lien senior secured loans, 4% were in preferred equity securities and 2% were in other equity securities. Of these commitments, 90% were in floating rate debt securities. Ares Capital also funded $185 million related to previously existing unfunded revolving and delayed draw loan commitments in the third quarter.
New commitments included in the third quarter were:
- $76 million in first lien senior secured revolving, delayed draw and term loans and equity of a provider of independent contract research focused on medical devices
- $72 million in first lien senior secured revolving, delayed draw and term loans and equity of a provider of facility maintenance services
- $58 million in first lien senior secured revolving, delayed draw and term loans of a provider of disaster recovery services
- $57 million in first lien senior secured revolving and term loans of a manufacturer of biologic, metal and synthetic medical implants and devices
- $55 million in first lien senior secured delayed draw and term loans of a provider of safety systems for businesses and residential customers
- $50 million in a first lien senior secured term loan of a provider of business management solutions
- $49 million in first lien senior secured delayed draw and term loans and equity of a provider of residential solar systems
- $47 million in first lien senior secured revolving, delayed draw and term loans of a provider of secure software solutions for board and leadership team documents
- $44 million in first lien senior secured revolving and term loans and equity of a provider of software solutions to insurance companies
- $41 million in a first lien senior secured delayed draw term loan of a provider of electronic health record solutions
- $41 million in a first lien senior secured delayed draw term loan and equity of an independent power producer and solar developer
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Ares Capital also exited approximately $352 million of investment commitments, including $19 million of loans sold to Ivy Hill Asset Management or certain vehicles managed by IHAM. Of the total investment commitments exited, 54% were first lien senior secured loans, 39% were second lien senior secured loans, 2% were senior subordinated loans, 2% were preferred equity securities, 2% were other equity securities and 1% were subordinated certificates of the senior direct lending program. Of the approximately $352 million of exited investment commitments, 88% were floating rate, 9% were on non-accrual and 3% were non-income producing.
The fair value of Ares Capital’s portfolio investments at Sept. 30, 2020, was $14.4 billion, including $12.6 billion in accruing debt and other income producing securities. The total portfolio investments at fair value were comprised of approximately 45% of first lien senior secured loans, 28% of second lien senior secured loans, 8% of other equity securities, 7% of senior subordinated loans, 7% of subordinated certificates of the SDLP (the proceeds of which were applied to co-investments with Varagon and its clients to fund first lien senior secured loans through the SDLP) and 5% of preferred equity securities. As of Sept. 30, 2020, the weighted average yield of debt and other income producing securities in the portfolio at amortized cost and fair value was 9.1% and 9.4%, respectively. The weighted average yield on total investments in the portfolio at amortized cost and fair value was 7.8% and 8.2%, respectively. In addition, 83% of the total investments at fair value were in floating rate securities.
“We reported another strong quarter of core and GAAP earnings driven by stable credit performance, modestly improving corporate profitability and higher asset prices,” Kipp deVeer, CEO of Ares Capital, said. “With our extensive footprint, deep market relationships and a modestly improving economic outlook, we are seeing a material pickup in investment activity and high-quality investment opportunities.”
“During the quarter, we further executed on our strategy of maintaining a strong balance sheet and funding profile,” Penni Roll, CFO of Ares Capital, said. “Our successful investment grade unsecured notes issuances during the third quarter extended the duration of our liabilities and further expanded our available liquidity, which now stands at more than $4.4 billion. With a mostly unsecured funding mix and no maturities until 2022, we continue to believe that we have a highly durable balance sheet that is well positioned for varying market conditions.”
Beginning in Q1/20 and continuing into Q3/20, Ares Capital’s operating results, as well as the fair value and performance of its portfolio, have been negatively impacted by the coronavirus pandemic, which has caused severe disruptions in the global economy. As of Sept. 30, 2020, the net unrealized depreciation on Ares Capital’s investment portfolio was $0.7 billion. As of Sept. 30, 2020 and Dec. 31, 2019, the weighted average grade of the portfolio at fair value was 2.9 and 3.0 out of four, respectively, and loans on non-accrual status represented 5.1% of total investments at amortized cost (or 3.2% at fair value) and 1.9% at amortized cost (or 0.9% at fair value), respectively.
As of Sept. 30, 2020, Ares Capital had $233 million in cash and cash equivalents and $7.6 billion in total aggregate principal amount of debt outstanding ($7.6 billion at carrying value). Subject to borrowing base and other restrictions, Ares Capital had approximately $4.2 billion available for additional borrowings under its existing credit facilities as of Sept. 30, 2020.
From Oct. 1 through October 21, 2020, Ares Capital made new investment commitments of approximately $419 million, of which $341 million were funded. Of these new commitments, 51% were in first lien senior secured loans, 47% were in second lien senior secured loans, 1% were in preferred equity securities and 1% were in other equity securities. Of the approximately $419 million of new investment commitments, 98% were floating rate, 1% were fixed rate and 1% were non-income producing. The weighted average yield of debt and other income producing securities funded during the period at amortized cost was 8.7%. Ares Capital may seek to sell all or a portion of these new investment commitments, although there can be no assurance that it will be able to do so.
From Oct. 1 through Oct. 21, 2020, Ares Capital exited approximately $326 million of investment commitments. Of the total investment commitments exited, 61% were first lien senior secured loans, 22% were second lien senior secured loans, 9% were senior subordinated loans and 8% were other equity securities. Of the approximately $326 million of exited investment commitments, 54% were floating rate, 38% were on non-accrual and 8% were non-income producing. The weighted average yield of debt and other income producing securities exited or repaid during the period at amortized cost was 7.7%, and the weighted average yield on total investments exited or repaid during the period at amortized cost was 4.3%. On the approximately $326 million of investment commitments exited from Oct. 1 through October 21, 2020, Ares Capital recognized total net realized losses of approximately $83 million.
In addition, as of Oct. 21, 2020, Ares Capital had an investment backlog and pipeline of approximately $1.5 billion and $75 million, respectively. Investment backlog includes transactions approved by Ares Capital’s investment adviser’s investment committee and/or for which a formal mandate, letter of intent or a signed commitment have been issued, and therefore Ares Capital believes are likely to close. Investment pipeline includes transactions where due diligence and analysis are in process, but no formal mandate, letter of intent or signed commitment have been issued. The consummation of any of the investments in this backlog and pipeline depends upon, among other things, one or more of the following: satisfactory completion of Ares Capital due diligence investigation of the prospective portfolio company, Ares Capital’s acceptance of the terms and structure of such investment, and the execution and delivery of satisfactory transaction documentation. In addition, Ares Capital may sell all or a portion of these investments and certain of these investments may result in the repayment of existing investments.
