Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ares Capital Corp (ARCC, Financial) reported strong core earnings of $0.61 per share, a 3% increase from the prior quarter and 5% from the prior year.
- The company achieved a record NAV per share of $19.61, up 6% year over year.
- Ares Capital Corp (ARCC) declared a third-quarter 2024 dividend of $0.48 per share, marking the 15th consecutive year of stable or increasing regular quarterly dividends.
- The portfolio companies showed strong performance with a 12% LTM EBITDA growth, the highest in four years.
- The company maintained a strong liquidity position with nearly $5.5 billion of total available liquidity.
Negative Points
- GAAP net income per share decreased to $0.52 for the second quarter of 2024 from $0.76 in the prior quarter.
- There was a notable uptick in tax expense during the quarter, largely driven by capital gains taxes associated with the exit of an investment in Heelstone.
- The weighted average yield on debt and other income-producing securities at amortized cost slightly decreased from 12.4% to 12.2%.
- The company faced a public situation with Pluralsight, which resulted in a markdown and hit to nonaccruals.
- Interest and credit facility fees increased due to higher leverage during the quarter to fund portfolio growth.
Q & A Highlights
Highlights of Ares Capital Corp (ARCC) Q2 2024 Earnings Call
Q: Can you provide an update on the situation with Pluralsight and its impact on your portfolio?
A: (Kipp deVeer, CEO) Most of what's been reported in the press about Pluralsight is not accurate. Vista Equity Partners, the sponsor, is handing the company over to a significant group of lenders, including us. This is the first time this has happened in our history, but we are working on a restructuring plan where lenders will reduce debt and take control of the company.
Q: What drove the strong pickup in investment activity during the quarter? Is it mainly M&A or also refi activity?
A: (Kipp deVeer, CEO) We are not seeing much refi activity. The increase is primarily driven by M&A, particularly from sponsors under pressure to return capital to LPs. The M&A transactions we are seeing involve high-quality companies, and multiples are holding up reasonably well.
Q: Can you provide more color on the new investments, particularly the median EBITDA of new portfolio companies?
A: (Kort Schnabel, Co-President) The median EBITDA of new portfolio companies was $61 million, slightly below the $81 million median EBITDA of our total portfolio. This reflects a rebound in activity across smaller and midsized borrowers.
Q: How do you view the current environment for junior debt opportunities?
A: (Kipp deVeer, CEO) Junior debt opportunities are fewer and far between in new buyouts and refinancings. The unitranche has taken over most new deal flow. However, we see some interesting opportunities in companies needing relief from higher base rates, where we can bring in deleveraging capital.
Q: Does the situation with Pluralsight raise any concerns about sponsor concentration in your portfolio?
A: (Kipp deVeer, CEO) We don't have significant concentration with any single sponsor. Our portfolio is well-diversified with over 500 investments. While Pluralsight is an unfortunate situation, it is not indicative of broader risks in our portfolio.
Q: Can you explain the higher tax expense this quarter?
A: (Scott Lem, CFO) About $30 million of the tax expense was related to the exit of our investment in Heelstone, which was held in a blocker corporation. This resulted in corporate-level taxes, but we still netted a $115 million gain.
Q: What was the mix between incumbents and new borrowers in your originations this quarter?
A: (Kort Schnabel, Co-President) Approximately 60% of our commitments were to existing portfolio companies, and 40% were to new borrowers. This is a higher mix of new borrowers compared to the dislocation period.
Q: How common are the types of structures seen in Pluralsight within your portfolio?
A: (Kipp deVeer, CEO) We spend a lot of time on documentation to ensure better downside protection. Liability management transactions are not prevalent in our portfolio. We often pass on deals due to documentation issues.
Q: Should we expect continuing yield compression over the next few quarters?
A: (Kort Schnabel, Co-President) While there has been some spread compression, we believe it has plateaued. We are not particularly concerned as higher overall yields and lower leverage levels set us up well for today's environment.
Q: How do you balance stock sales relative to your origination and deal calendar?
A: (Kipp deVeer, CEO) We continue to issue shares through the ATM program cost-effectively and accretively to support our strong backlog and pipeline.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
