Compared to the more regulated corner of the financials universe, BDCs lack a backbone. Banks revolve around deposits. BDCs revolve around the capital markets.
Thus, the availability of financing is very important for a BDC because they need to continuously raise capital to support their investments. Some, however, have an advantage on others. Ares Capital Corporation (NASDAQ: ARCC ) is the undisputed leader when it comes to raising money.
Why it matters
I'm writing this today because of Ares Capital's latest presentation. Every quarter, Ares Capital shows how its balance sheet is financed, and when its debts will come due.
Here's a chart of its debt maturities by year from a recent presentation:
This chart always bugs me because it doesn't say much about the company's liquidity going forward. Raising debt capital is good -- especially when it's cheap. But what's really important is matching debt and assets. In this category, Ares Capital's scale gives it a massive advantage.
I built the following chart from Ares Capital's latest quarterly report. It shows when Ares Capital's investments come due -- the point at which its portfolio companies need to pay Ares back. This can tell us a lot about the structure of the portfolio. How well do future cash flows match up with Ares Capital's own needs?
Compare the two charts. You'll notice that in years when it will owe its creditors the most, its portfolio companies should be writing it the biggest checks. Maturing investments provide it with timely cash to repay its own debts.
And while it's likely that some of its debt investments will be refinanced well before the stated due date, and some loans won't be repaid at all, the simple fact is Ares' size does impart it with a unique advantage. It can easily raise $500 million -- even $1 billion -- in one debt issue without tilting its balance sheet.
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