The completion of the acquisition of American Capital by Ares Capital leads money manager Adrian Day to reappraise an investment in Ares, causing him to ask if investors should buy or continue to hold at this time.
Ares Offers 9% on Top BDC
Ares Capital Corp. (ARCC:NASDAQ, 16.91, 8.99%) is not only by far the largest Business Development Company (BDC), with about $12 billion in investment assets, it is also one of the best and one of the most conservative. It has a strong balance sheet, with sizeable liquidity, and one of the top platforms for new investments. Over the past three years, it has a ROE (NAV growth plus dividend) of 9.7%, almost twice the average BDC, and the growth outlook remains positive, with quarterly earnings on track to grow from last quarter’s 39 cents per share to 43 cents over the next several quarters, according to analysts. Most loans have floating rates, so the company’s income will increase as rates move up.
The acquisition of American Capital Ltd. was by far the largest M&A transaction in the BDC space ever. Given American Capital’s $1 billion in cash (with no debt), following some steady asset sales by that company since the acquisition by Ares was first announced, the transaction is modestly deleveraging for Ares. Most of the payment for American Capital was in cash—$10.13 per share plus 0.483 of an Ares share—minimizing the share dilution. American Capital adds just over 100 million new shares to ARCC’s 418 million.
Is the yield safe after American Capital buy?
American Capital’s portfolio was relatively low yielding (about 7.5%) with many equity investments. Although Ares will look to monetize some of these, it won’t happen overnight; American Capital doubtless already sold much of the low-hanging fruit. So the question has …read more