PM Images One of the big questions is what will happen to business development corporations (BDC) when the Fed starts its rate-cutting cycle. BDCs have become increasingly popular during the rate-hiking cycle as they generate larger returns for their shareholders and higher yields from their distributed income compared to risk-free assets. I think many of the popular BDCs will do well in a lower-rate environment, especially Ares Capital (NASDAQ:ARCC), often called the gold standard in the BDC realm. Rat ...

The most recent trading session ended with Ares Capital (ARCC) standing at $19.95, reflecting a -0.5% shift from the previouse trading day's closing. The stock trailed the S&P 500, which registered a daily gain of 0.57%. Meanwhile, the Dow experienced a rise of 0.83%, and the technology-dominated Nasdaq saw an increase of 0.39%.The the stock of private equity firm has fallen by 0.5% in the past month, lagging the Finance sector's gain of 2.81% and the S&P 500's gain of 2.97%.The upcoming earnings release of ...

Ares Capital Corporation (ARCC) is poised for top-line growth, driven by the rise in the demand for customized financing. An increase in investment commitments will likely keep supporting financials.However, while the company’s expansion plans are expected to enhance growth prospects, they might lead to increased expenses. Elevated expenses will, in turn, hurt the bottom line to an extent.The Zacks Consensus Estimate for the company’s current-year earnings has been unchanged over the past 30 days. This refl ...

Richard Drury Focus of Article: The focus of PART 1 of this article is to analyze Ares Capital Corp.’s (NASDAQ:ARCC) recent results and compare a handful of the company’s metrics to 14 business development company (“BDC”) peers. This analysis will show past and current data with supporting documentation within two detailed tables. Table 1 will compare ARCC’s recent net asset value (“NAV”) economic return (loss), net investment income (“NII”), stock price to annualized NII ratio, and percentage of total ...

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In the latest market close, Ares Capital (ARCC) reached $20.39, with a +0.79% movement compared to the previous day. The stock outperformed the S&P 500, which registered a daily gain of 0.51%. Elsewhere, the Dow gained 0.2%, while the tech-heavy Nasdaq added 0.58%.The private equity firm's stock has climbed by 1.45% in the past month, falling short of the Finance sector's gain of 4.57% and the S&P 500's gain of 2.94%.The investment community will be closely monitoring the performance of Ares Capital in its ...

Key Points Industry Overview - **Evolution of BDCs**: The BDC sector has evolved significantly over the past two decades, moving from smaller transactions and asset liability mismatches to larger, more transparent deals with institutional managers. [8-10] - **Private Credit Growth**: The rise of private credit has been driven by the need for alternative credit solutions, particularly post the global financial crisis. [11-12] - **Competitive Landscape**: The industry has seen an increase in new entrants, particularly in smaller deals. However, larger players with significant capital and experience maintain a competitive advantage. [32-33, 38-39, 41-42] Origination and Return Profiles - **Normalization of Syndicated Loan Markets**: The normalization of syndicated loan markets has led to increased competition for deals, but direct lending remains a preferred option due to its certainty, privacy, and customization. [15-18, 20] - **Impact on Return Profiles**: The normalization of markets has led to slightly tighter spreads and underwriting standards, but overall risk-adjusted returns remain attractive. [29-30] M&A Activity - **Pickup in M&A Activity**: There is a strong expectation for a pickup in M&A activity in 2024, driven by increased pressure on sellers to return capital and the availability of dry powder among buyers. [23-25, 27] - **Dependence on M&A**: While M&A activity is a significant driver of origination, larger BDCs like Ares Capital Corporation also benefit from a diverse portfolio of existing companies that require additional capital. [26] Credit Performance - **Low Non-Accrual Rates**: Despite elevated rates and economic concerns, non-accrual rates have remained low, reflecting the strong credit quality of portfolio companies. [46-47, 50] - **Downside Protections**: BDCs offer strong downside protections through low leverage, match-funded structures, and close relationships with private equity firms. [56-58, 60] Alternative Credit Outlook - **Shift to Direct Lending**: There is a structural shift away from syndicated lending towards direct lending, driven by the need for certainty, privacy, and customization. [65-67, 74-77] - **Banks' Role**: Banks are likely to remain in the business of distributing risk, but they are losing market share to direct lenders. [75-77] Macro and Rates - **Impact of Rate Changes**: A decline in base rates would likely reduce net investment income and dividends, but could be offset by increased transaction volume and upfront fees. [82-86] - **Funding Mix**: BDCs prefer diversified, durable sources of funding with laddered maturities to avoid forced debt issuance in unfavorable market conditions. [89-90]

imaginima Going into 2024, I issued an article comparing two largest BDCs: Ares Capital (NASDAQ:ARCC) vs FS KKR Capital (NYSE:FSK). The bottom line was that both BDCs are attractive and positioned to deliver solid long-term returns. Yet, my recommendation was more skewed towards FSK as it had the necessary characteristics to register alpha in the case of favorable systematic factors such as low defaults and active transactions across the board. Ycharts Entering the year, the thesis started to play out n ...

Ares Capital Corporation Conference Call Summary Company Overview - Ares Capital Corporation (NASDAQ:ARCC) is a leading business development company focused on direct lending to middle-market companies in the United States, primarily sourced through private equity channels, accounting for approximately 85%-90% of loans [2][3] - The company has a 20-year public track record since its IPO in 2004 and has grown to become the largest publicly traded business development company by assets globally, with a portfolio of $22 billion [3][4] Key Financial Metrics - Ares Capital has invested over $91 billion since inception, achieving a realized asset-level gross internal rate of return (IRR) of 13% annually over 20 years [3] - The company has a net realized gain in excess of loss ratio of 1%, indicating effective management of loan losses [4] - Ares Capital has outperformed the S&P 500 by 75% in stock-based performance since its IPO [4] Business Model and Strategy - The company is managed by Ares Management, a major alternative asset manager with approximately $420 billion in assets under management (AUM), which enhances its sourcing and execution capabilities [5][6] - Ares Capital employs a unique investment team structure where all 180 investment professionals are involved in origination, underwriting, and portfolio management, fostering accountability and better investment decisions [8][9] - The firm sees about 1,500 deals annually, representing approximately $0.5 trillion in deal flow, but only closes about 4% of these opportunities, allowing for selective investment [12][11] Portfolio Composition - The asset mix includes approximately 60% senior secured debt, with 45% in first lien and 15% in second lien, alongside preferred equity and common equity [21] - The portfolio is diversified across over 500 companies and 34 different industries, with a focus on defensive sectors such as software and healthcare [23][22] Risk Management and Loss Rates - Ares Capital has maintained low loss rates, with first lien investments showing less than 10 basis points of realized loss performance and second lien investments at less than 20 basis points [24][25] - The company emphasizes diversification in its portfolio to mitigate risks associated with economic downturns [20] Capital Structure and Financing - Ares Capital has strategically diversified its debt financing sources, accessing seven distinct types of debt financing and establishing strong relationships with over 240 investors [31][30] - The company has achieved investment-grade ratings from multiple agencies, enhancing its access to capital markets [32][31] Market Dynamics and Competitive Position - Ares Capital competes with banks in the direct lending space but has maintained a strong market presence by providing reliable capital during volatile periods when banks have retreated [40][41] - The company anticipates a gradual recovery in M&A volume and overall market activity, positioning itself to capitalize on emerging opportunities [43] Conclusion - Ares Capital Corporation's robust business model, diversified portfolio, and strategic capital management position it well for continued growth and resilience in the face of market fluctuations [35][34]

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