Ares Capital(ARCC) - 2023 Q2 - Quarterly Report

Investment Commitments and Funding - New investment commitments for Q2 2023 totaled $1.218 billion, with $366 million in new portfolio companies and $852 million in existing portfolio companies[962] - Net investment commitments for Q2 2023 were $80 million, compared to $2.024 billion in Q2 2022[962] - Total principal amount of investments funded in Q2 2023 was $1.329 billion, with $959 million in first lien senior secured loans and $141 million in second lien senior secured loans[962] - Total principal amount of investments sold or repaid in Q2 2023 was $1.197 billion, with $677 million from first lien senior secured loans[962] - 73% of new investment commitments in Q2 2023 were at floating rates, compared to 89% in Q2 2022[962] - New investment commitments for the six months ended June 30, 2023 decreased to $1,984 million, down from $5,110 million in 2022[1019] - From July 1, 2023, through July 19, 2023, the company made new investment commitments of approximately $211 million, with a weighted average yield of 11.3%[1082] - During the same period, the company exited approximately $118 million of investment commitments, with a weighted average yield of 13.5%[1083] - As of July 19, 2023, the company had an investment backlog of approximately $425 million and a pipeline of $45 million[1084] Portfolio Performance and Yields - Weighted average yield of debt and other income producing securities funded during Q2 2023 was 11.7% at both amortized cost and fair value[962] - The total portfolio weighted average yield at amortized cost increased to 11.0% as of June 30, 2023 from 10.5% as of December 31, 2022[970] - Second lien senior secured loans had a weighted average yield of 12.5% at amortized cost as of June 30, 2023, up from 11.6% as of December 31, 2022[970] - The weighted average yield on first lien senior secured loans increased to 10.8% as of June 30, 2023 from 10.1% as of December 31, 2022[985] - The yield on SDLP Certificates at amortized cost was 13.5% and at fair value was 14.1% as of June 30, 2023, compared to 13.5% and 13.8% respectively as of December 31, 2022[983] - The yield on the subordinated loan in IHAM was 11.6% at both amortized cost and fair value as of June 30, 2023[997] - The yield on the equity investment in IHAM was 14.1% at amortized cost and 12.7% at fair value as of June 30, 2023[997] - The average size of the portfolio for the six months ended June 30, 2023 was $21,647 million, compared to $19,884 million in 2022, with a weighted average yield of 10.9%[1017] SDLP (Senior Direct Lending Program) Portfolio - The total capital funded to the SDLP increased to $5,191 million as of June 30, 2023 from $5,127 million as of December 31, 2022[980] - The company's unfunded capital commitments to the SDLP decreased to $65 million as of June 30, 2023 from $68 million as of December 31, 2022[980] - The company and Varagon clients had agreed to make $6.2 billion in capital available to the SDLP as of both June 30, 2023 and December 31, 2022[978] - The company owned 87.5% of the outstanding SDLP Certificates as of June 30, 2023[978] - SDLP Certificates had an amortized cost of $1,289 million and a fair value of $1,237 million as of June 30, 2023, compared to $1,274 million and $1,249 million respectively as of December 31, 2022[982] - Interest income from SDLP Certificates was $43 million for the three months ended June 30, 2023, up from $34 million in the same period in 2022[984] - Total first lien senior secured loans in the SDLP portfolio were $5,113 million as of June 30, 2023, slightly down from $5,174 million as of December 31, 2022[985] - The SDLP portfolio included a $272.9 million loan to Arrowhead Holdco Company with a stated interest rate of 9.9% and a fair value of $251.1 million as of June 30, 2023[988] - Walnut Parent, Inc. had the largest loan in the SDLP portfolio at $373 million with a stated interest rate of 10.7% and a fair value of $358.1 million as of June 30, 2023[988] - SDLP Loan Portfolio as of December 31, 2022, has a total principal amount of $5,173.5 million and a fair value of $4,958.1 million[990] Ivy Hill Asset Management (IHAM) - Ivy Hill Asset Management, L.P. (IHAM) had assets under management of approximately $13.5 billion as of June 30, 2023[992] - IHAM's total investments had an amortized cost of $2,436 million as of June 30, 2023, compared to $2,370 million as of December 31, 2022[992] - IHAM earned management and incentive fee income of $13 million and $27 million for the three and six months ended June 30, 2023, respectively[992] - The total investment in IHAM had an amortized cost of $1,968 million and a fair value of $2,151 million as of June 30, 2023[994] - IHAM or certain IHAM Vehicles purchased $691 million of loans from the company during the six months ended June 30, 2023[995] - IHAM reimburses Ares Operations for all actual costs associated with services provided under the IHAM administration agreement[998] - IHAM consolidates certain IHAM Vehicles for GAAP purposes, reflecting assets, liabilities, revenues, and expenses on a gross basis[1001] - Net income attributable to Ivy Hill Asset Management, L.P. was $91 million for the three months ended June 30, 2023, up from $35 million for the same period in 2022[1007][1010] - The amortized cost of IHAM's total investments on a consolidated basis was $9,730 million as of June 30, 2023, up from $9,306 million as of December 31, 2022[1006] - Non-controlling interests in Consolidated IHAM Vehicles included net unrealized depreciation of $278 million as of June 30, 2023, compared to $309 million as of December 31, 2022[1006] Financial Performance and Income - Total investment income for the three months ended June 30, 2023 was $140 million, up from $77 million in the same period in 2022[987] - Net investment income for the six months ended June 30, 2023 was $123 million, up from $86 million in the same period in 2022[987] - Total revenues for the six months ended June 30, 2023, were $534 million, compared to $123 million for the same period in 2022[1009][1010] - Net operating income for the six months ended June 30, 2023, was $190 million, compared to $49 million for the same period in 2022[1009][1010] - Net unrealized gains on investments and other transactions were $28 million for the six months ended June 30, 2023, compared to net unrealized losses of $118 million for the same period in 2022[1009][1010] - Total net realized and unrealized gains on investments and other transactions were $8 million for the six months ended June 30, 2023, compared to net losses of $117 million for the same period in 2022[1009][1010] - Total investment income for the six months ended June 30, 2023 increased to $1,252 million, up from $919 million in the same period in 2022[1015] - Net investment income before income taxes for the six months ended June 30, 2023 was $640 million, compared to $478 million in 2022[1015] - Net unrealized gains on investments for the six months ended June 30, 2023 were $108 million, a significant improvement from a net unrealized loss of $140 million in 2022[1015] - Interest income from investments for the six months ended June 30, 2023 increased to $946 million, up from $629 million in 2022, driven by rising interest rates and portfolio growth[1016] - Dividend income received from IHAM for the six months ended June 30, 2023 increased to $117 million, up from $95 million in 2022[1021] - Capital gains incentive fee for the three months ended June 30, 2023 was $4 million, compared to a reduction of $29 million in 2022[1027] - Net realized losses on investments for the three months ended June 30, 2023 were $68 million, compared to $24 million in 2022[1034] - Net unrealized gains on investments for the three months ended June 30, 2023 were $97 million, compared to a loss of $151 million in 2022[1044] - Net realized losses on investments for the six months ended June 30, 2023 were $88 million, compared to gains of $45 million in 2022[1034] - Net unrealized gains on investments for the six months ended June 30, 2023 were $82 million, compared to a loss of $161 million in 2022[1044] - Net unrealized appreciation (depreciation) for the three months ended June 30, 2023 totaled $29 million, with significant contributions from Ivy Hill Asset Management ($27 million) and Heelstone Renewable Energy ($22 million)[1046] - Net unrealized depreciation for the three months ended June 30, 2022 was $156 million, primarily driven by CoreLogic ($34 million) and other net losses ($144 million)[1048] - For the six months ended June 30, 2023, net unrealized appreciation totaled $17 million, with Heelstone Renewable Energy contributing $33 million and Ivy Hill Asset Management adding $30 million[1050] Expenses and Liabilities - Total expenses for the six months ended June 30, 2023 increased to $612 million, compared to $441 million in 2022, primarily due to higher interest and credit facility fees[1022] - Stated interest expense for the six months ended June 30, 2023 rose to $256 million, up from $174 million in 2022, driven by higher average debt outstanding and rising interest rates[1023] - U.S. federal excise tax expense for the three months ended June 30, 2023 was $6 million, compared to $7 million in 2022[1032] - Net tax expense for the six months ended June 30, 2023 was $(7) million, compared to $7 million in 2022[1033] - Total liabilities increased to $8,495 million as of June 30, 2023, compared to $8,189 million as of December 31, 2022[1003][1004] - Total debt obligations as of June 30, 2023, were $15.876 billion, with a weighted average interest rate of 4.6% and a weighted average maturity of 3.5 years[1067][1068] - The ratio of total debt to stockholders' equity improved from 1.29:1.00 in December 2022 to 1.10:1.00 in June 2023[1069] - The Revolving Credit Facility allows borrowing up to $4.8 billion, with an option to increase to $7.1 billion under certain conditions[1067][1070] - As of June 30, 2023, $1.922 billion was outstanding under the Revolving Credit Facility, with an applicable spread of 1.75%[1070] - The Revolving Funding Facility allows borrowing up to $1.8 billion, with $850 million outstanding as of June 30, 2023[1071] - The SMBC Funding Facility provides for a potential increase to $1.0 billion under certain circumstances[1068] - The company repaid the 2023 Notes in full upon their maturity in February 2023[1068] - SMBC Funding Facility allows ACJB to borrow up to $800 million, with a potential increase to $1.0 billion, secured by all assets held by ACJB[1072] - As of June 30, 2023, $401 million was outstanding under the SMBC Funding Facility with an applicable spread of 1.75%[1072] - BNP Funding Facility allows AFB to borrow up to $790 million, secured by all assets held by AFB[1073] - As of June 30, 2023, $475 million was outstanding under the BNP Funding Facility with an interest rate based on three-month SOFR plus a margin of 2.80% during the reinvestment period[1073] - The company issued $403 million in aggregate principal amount of unsecured convertible notes maturing on March 1, 2024, bearing interest at 4.625% per annum[1074] Valuation and Fair Value - The company's investment portfolio is valued at fair value, determined by the investment adviser with oversight from the board of directors[1088] - The valuation process considers factors such as enterprise value, collateral, portfolio company earnings, and market conditions[1089] - The company follows ASC 820-10 for fair value measurement, which defines fair value as the price received in an orderly transaction between market participants[1094] - Level 3 valuations, based on unobservable inputs, are typically used for most portfolio investments due to the lack of readily available market values[1096] - Portfolio investments are valued using enterprise value (EV) analysis, primarily through EBITDA multiples and discounted cash flow methods[1098] - The company's investment adviser determines fair value using a multi-step process, including input from independent third-party valuation firms[1091][1092] - 68% of the company's portfolio investments at fair value bear interest and dividends at variable rates, with 6% attributed to SDLP Certificates[1105] - 12% of the portfolio investments bear interest at fixed rates, while 10% are non-income producing[1105] - 95% of the remaining variable rate investments (excluding SDLP Certificates) contain interest rate floors[1105] - A 300 basis point increase in interest rates would result in an annual net income impact of $349 million, while a 300 basis point decrease would reduce net income by $340 million[1108] - The company is exposed to interest rate risk, with net investment income affected by the difference between investment and borrowing rates[1103] - Changes in market conditions, such as rising interest rates and inflation, could materially impact the company's financial performance[1100] Capital Structure and Equity - Total assets increased to $10,140 million as of June 30, 2023, compared to $9,601 million as of December 31, 2022[1003][1004] - Investments at fair value rose to $9,476 million as of June 30, 2023, up from $8,998 million as of December 31, 2022[1003][1004] - The company had $411 million in cash and cash equivalents and $11.4 billion in total debt outstanding as of June 30, 2023, with an asset coverage ratio of 190%[1054] - Total equity market capitalization increased from $9.6 billion at December 31, 2022 to $10.5 billion at June 30, 2023[1056] - The company issued 37.4 million shares of common stock during the six months ended June 30, 2023, raising $703.8 million in net proceeds[1057] - As of June 30, 2023, $771 million remained available for issuance under the company's "at the market" equity distribution agreements[1059] - The company's stock repurchase program had $1.0 billion available for additional repurchases as of June 30, 2023, with no shares repurchased during the first six months of 2023[1060][1061] - The company's common stock closed at $19.62 per share on July 19, 2023, representing a 5.60% premium to the June 30, 2023 net asset value per share[1062] - Net Asset Value (NAV) per share increased from $17.45 in Q1 2021 to $18.58 in Q2 2023, with a peak of $19.03 in Q1 2022[1063] - The premium (discount) to NAV ranged from (9.27)% in Q3 2022 to 18.65% in Q1 2022, indicating significant volatility in market valuation[1063] - Cash dividend per share increased from $0.40 in Q1 2021 to $0.48 in Q2 2023, with an additional $0.12 per share paid in Q1 2022[1063][1065] Historical Performance and Returns - Since IPO in 2004 through June 30, 2023, exited investments resulted in a realized gross internal rate of return of approximately 13%[954] - Realized gains exceeded realized losses by approximately $1.0 billion since IPO through June 30, 2023, with an average annualized net realized gain rate of 0.9%[955] - As a BDC, the company is required to invest at least 70% of total assets in qualifying assets, with up to 30% in non-qualifying assets[957] - The company has elected to be treated as a RIC, distributing at least 90% of investment company taxable income to stockholders to avoid U.S. federal corporate-level taxes[958] - First lien senior secured loans had an amortized cost of $9,304 million and a fair value of $8,