Ares Capital Corporation: Going Under the Hood

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:

Source: Company 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?

Note: I excluded investments as part of its Senior Secured Loan Fund, since it is highly unlikely that Ares Capital will demand its money come back when the joint venture ends.

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.

Are BDCs the top dividend stocks for the next decade?
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2974294, ~/Articles/ArticleHandler.aspx, 12/21/2014 5:03:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement