Shares of high-yield business development companies are taking a beating in 2015. Of more than 40 companies in the industry, only four are trading at a premium to their last reported net asset value, or book value, per share.
Ares Capital Corporation (NASDAQ:ARCC), the industry's bellwether and one of the best-performing BDCs over its history, hasn't been able to escape the sell-off. On Monday, the company announced a $100 million share repurchase program to acquire shares under net asset value. But don't bank on its repurchase program to hold up the company's lagging share price.
Ask the past
Many BDCs approve share repurchases; few use their authority. There is a natural conflict of interest between the manager (who wants to manage more assets) and shareholders (who want buybacks to boost book values per share).
Because managers are typically paid based on the size of their portfolios, shrinking the portfolio to buy back stock is a nonstarter. This is especially true for Ares Capital, which is managed by Ares Management (NYSE:ARES), a publicly traded asset manager.
History serves as a guide for what to expect from Ares Capital's new repurchase program. Its filings reveal share repurchases in only three years -- 2007, 2008, and 2009 -- and only in quantities sufficient to cover shares it issued to investors as part of its dividend reinvestment program. It ultimately repurchased, but then reissued, about 4.5% of its beginning-period shares with its repurchase program.
I suspect that the recently authorized $100 million plan will be used similarly to soak up shares that would ordinarily be issued through its dividend reinvestment program, and at best, used sparingly to acquire additional shares.
Moving the needle
Ares Capital could repurchase about 2.2% of its shares outstanding at an average price of $14.25 under its program. That's good for a fractional percentage point increase in net asset value per share.
Whereas other BDCs have announced 10b-51 repurchase plans, which result in automatic repurchases when shares trade at preset prices, even during "blackout" periods, it appears as though Ares Capital will retain complete discretion in how it chooses to repurchase shares, and at what price.
This buyback might help jump-start a conversation about buybacks between management, analysts, and shareholders, but don't bank on it boosting book value per share or share prices. It's fodder for a press release, not the foundation for an investment thesis.