ARES CAPITAL CORPORATION The information contained in this section should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this Quarterly Report. In addition, some of the statements in this Quarterly Report (including in the following discussion) constitute forward- looking statements, which relate to future events or the future performance or financial condition ofAres Capital Corporation (the "Company," "Ares Capital ," "we," "us," or "our"). The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning:
•our, or our portfolio companies', future business, operations, operating results or prospects;
•the return or impact of current and future investments;
•the impact of global health crises, such as the ongoing coronavirus
("COVID-19") pandemic, on our or our portfolio companies' business and the
•the impact of a protracted decline in the liquidity of credit markets on our business;
•the impact of the elimination of the London Interbank Offered Rate ("LIBOR") and implementation of alternatives to LIBOR on our operating results;
•changes in the general economy, slowing economy, rising inflation and risk of recession;
•the impact of changes in laws or regulations (including the interpretation thereof), including tax laws, such as the recently announced Inflation Reduction Act of 2022, the Coronavirus Aid, Relief and Economic Security Act of 2020 and the American Rescue Plan Act of 2021, governing our operations or the operations of our portfolio companies or the operations of our competitors;
•the valuation of our investments in portfolio companies, particularly those having no liquid trading market;
•our ability to recover unrealized losses;
•market conditions and our ability to access different debt markets and additional debt and equity capital and our ability to manage our capital resources effectively;
•our contractual arrangements and relationships with third parties;
•the state of the general economy;
•the impact of supply chain constraints on our portfolio companies and the global economy;
•uncertainty surrounding global financial stability;
•the social, geopolitical, financial, trade and legal implications of Brexit;
•the war in
•the financial condition of our current and prospective portfolio companies and their ability to achieve their objectives;
•the impact of information technology system failures, data security breaches, data privacy compliance, network disruptions, and cybersecurity attacks;
•our ability to raise capital in the private and public debt markets;
•our ability to anticipate and identify evolving market expectations with respect to environmental, social and governance matters, including the environmental impacts of our portfolio companies' supply chain and operations;
•our ability to successfully complete and integrate any acquisitions;
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--------------------------------------------------------------------------------•the outcome and impact of any litigation;
•the adequacy of our cash resources and working capital;
•the timing, form and amount of any dividend distributions;
•the timing of cash flows, if any, from the operations of our portfolio companies; and
•the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments.
We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may" and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and in this Quarterly Report. We have based the forward-looking statements included in this Quarterly Report on information available to us on the filing date of this Quarterly Report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with theSEC , including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K.
OVERVIEW
We are a specialty finance company that is a closed-end, non-diversified management investment company incorporated inMaryland . We have elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the "Investment Company Act").
We are externally managed by
Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first lien senior secured loans (including "unitranche" loans, which are loans that combine both senior and subordinated debt, generally in a first lien position) and second lien senior secured loans. In addition to senior secured loans, we also invest in subordinated loans (sometimes referred to as mezzanine debt), which in some cases includes an equity component and preferred equity. To a lesser extent, we also make common equity investments, which have generally been non-control equity investments of less than$20 million (usually in conjunction with a concurrent debt investment). However, we may increase the size or change the nature of these investments. Since our initial public offering ("IPO") onOctober 8, 2004 throughSeptember 30, 2022 , our exited investments resulted in an asset level realized gross internal rate of return to us of approximately 14% (based on original cash invested, net of syndications, of approximately$38.2 billion and total proceeds from such exited investments of approximately$49.1 billion ). Internal rate of return is the discount rate that makes the net present value of all cash flows related to a particular investment equal to zero. Internal rate of return is gross of expenses related to investments as these expenses are not allocable to specific investments. Investments are considered to be exited when the original investment objective has been achieved through the receipt of cash and/or non-cash consideration upon the repayment of a debt investment or sale of an investment or through the determination that no further consideration was collectible and, thus, a loss may have been realized. Approximately 58% of these exited investments resulted in an asset level realized gross internal rate of return to us of 10% or greater. 151 -------------------------------------------------------------------------------- Additionally, since our IPO onOctober 8, 2004 throughSeptember 30, 2022 , our realized gains have exceeded our realized losses by approximately$1.1 billion (excluding a one-time gain on the acquisition ofAllied Capital Corporation ("Allied Capital ") inApril 2010 (the "Allied Acquisition") and realized gains/losses from the extinguishment of debt and other transactions). For this same time period, our average annualized net realized gain rate was approximately 1.0% (excluding a one-time gain on the acquisition ofAllied Capital and realized gains/losses from the extinguishment of debt and other transactions). Net realized gain/loss rates for a particular period are the amount of net realized gains/losses during such period divided by the average quarterly investments at amortized cost in such period. Information included herein regarding internal rates of return, realized gains and losses and annualized net realized gain rates are historical results relating to our past performance and are not necessarily indicative of future results, the achievement of which cannot be assured. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities and indebtedness of privateU.S. companies and certain publicU.S. companies, cash, cash equivalents,U.S. government securities and high-quality debt investments that mature in one year or less. We also may invest up to 30% of our portfolio in non-qualifying assets, as permitted by the Investment Company Act. Specifically, as part of this 30% basket, we may invest in entities that are not considered "eligible portfolio companies" (as defined in the Investment Company Act), including companies located outside ofthe United States , entities that are operating pursuant to certain exceptions under the Investment Company Act, and publicly traded entities whose public equity market capitalization exceeds the levels provided for under the Investment Company Act. We have elected to be treated as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"), and operate in a manner so as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, we must, among other requirements, meet certain source-of-income and asset diversification requirements and timely distribute to our stockholders generally at least 90% of our investment company taxable income, as defined by the Code, for each year. Pursuant to this election, we generally will not have to payU.S. federal corporate-level taxes on any income that we distribute to our stockholders provided that we satisfy those requirements.
MACRO-ECONOMIC ENVIRONMENT
Credit markets continued to be under pressure during the first half of 2022 amid
a risk-off environment and sustained macro-economic uncertainty due to
record-high inflation, tighter financial conditions and growing recession risk.
Central banks have remained focused on restoring price stability by raising
interest rates and have signaled that growth may be hindered until inflation
comes under control.
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PORTFOLIO AND INVESTMENT ACTIVITY
Our investment activity for the three months ended
For the Three Months Ended September 30,
(dollar amounts in millions) 2022 2021
New investment commitments(1):
New portfolio companies $ 1,041 $ 1,215
Existing portfolio companies 1,201 1,895
Total new investment commitments(2) $ 2,242 $ 3,110 Less:
Investment commitments exited(3) (1,996) (2,263) Net investment commitments $ 246$ 847 Principal amount of investments funded: First lien senior secured loans(4) $ 1,362$ 1,912 Second lien senior secured loans 100 111 Subordinated certificates of the SDLP(5) 100 96 Senior subordinated loans 19 131 Preferred equity 193 188 Ivy Hill Asset Management, L.P.(6) 342 - Other equity 107 93 Total $ 2,223$ 2,531 Principal amount of investments sold or repaid: First lien senior secured loans(4) $ 1,376$ 1,446 Second lien senior secured loans 305 247 Subordinated certificates of the SDLP(5) 2 125 Senior subordinated loans 1 113 Preferred equity 50 130 Ivy Hill Asset Management, L.P.(6) 189 - Other equity 21 16 Total $ 1,944$ 2,077 Number of new investment commitments(7) 40 47 Average new investment commitment amount $ 56$ 66 Weighted average term for new investment commitments (in months) 66 77 Percentage of new investment commitments at floating rates 81 % 90 % Percentage of new investment commitments at fixed rates 7 % 7 %
Weighted average yield of debt and other income producing securities(8): Funded during the period at amortized cost
9.5 % 7.7 %
Funded during the period at fair value(9) 9.5 % 7.8 %
Exited or repaid during the period at amortized cost 8.3 % 8.6 %
Exited or repaid during the period at fair value(9) 8.3 % 8.7 %
_______________________________________________________________________________
(1)New investment commitments include new agreements to fund revolving loans or
delayed draw loans. See Note 7 to our consolidated financial statements for the
three and nine months ended September 30, 2022 , for more information on our
commitments to fund revolving loans or delayed draw loans.
(2)Includes both funded and unfunded commitments. Of these new investment
commitments, we funded
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(3)Includes both funded and unfunded commitments. For the three months ended
September 30, 2022 and 2021, investment commitments exited included exits of
unfunded commitments of $115 million and $274 million , respectively.
(4)For the three months ended September 30, 2022 , net fundings of first lien
secured revolving loans were $60 million . For the three months ended September
30, 2021 , net repayments of first lien secured revolving loans were $15 million .
(5)See "Senior Direct Lending Program" below and Note 4 to our consolidated
financial statements for the three and nine months ended
(6)Includes our equity and subordinated loan investments in IHAM, as applicable.
(7)Number of new investment commitments represents each commitment to a particular portfolio company or a commitment to multiple companies as part of an individual transaction (e.g., the purchase of a portfolio of investments).
(8)"Weighted average yield of debt and other income producing securities" is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount or premium earned on accruing debt and other income producing securities (including the annualized amount of the dividend received by us related to our equity investment in IHAM during the most recent quarter end, as applicable), divided by (b) the total accruing debt and other income producing securities at amortized cost or at fair value (including the amortized cost or fair value of our equity investment in IHAM as applicable), as applicable.
(9)Represents fair value for investments in the portfolio as of the most recent prior quarter end, if applicable.
As ofSeptember 30, 2022 andDecember 31, 2021 , our investments consisted of the following: As of September 30, 2022 December 31, 2021 (in millions) Amortized Cost Fair Value Amortized Cost Fair Value First lien senior secured loans(1) $ 9,821 $
9,509 $ 9,583
4,011 3,797 4,614 4,524
Subordinated certificates of the SDLP(2) 1,121 1,121 987 987
Senior subordinated loans 1,102 1,051 912 906
Preferred equity 2,071 2,052 1,547 1,561
Ivy Hill Asset Management, L.P.(3) 1,809 1,958 781 936
Other equity 1,534 1,851 2,167 2,572
Total $ 21,469 $ 21,339 $ 19,810 $ 20,009 _______________________________________________________________________________
(1)First lien senior secured loans include certain loans that we classify as "unitranche" loans. The total amortized cost and fair value of the loans that we classified as "unitranche" loans were$5.1 billion and$5.0 billion , respectively, as ofSeptember 30, 2022 , and$5.2 billion and$5.2 billion , respectively, as ofDecember 31, 2021 .
(2)The proceeds from these certificates were applied to co-investments with
(3)Includes our equity and subordinated loan investments in IHAM, as applicable.
We have commitments to fund various revolving and delayed draw senior secured
and subordinated loans, including commitments to fund which are at (or
substantially at) our discretion. Our commitment to fund delayed draw loans is
triggered upon the satisfaction of certain pre-negotiated terms and conditions.
Generally, the most significant and uncertain term requires the borrower to
satisfy a specific use of proceeds covenant. The use of proceeds covenant
typically requires the borrower to use the additional loans for the specific
purpose of a permitted acquisition or permitted investment, for example. In
addition to the
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use of proceeds covenant, the borrower is generally required to satisfy
additional negotiated covenants (including specified leverage levels). We are
also party to subscription agreements to fund equity investments in private
equity investment partnerships. See Note 7 to our consolidated financial
statements for the three and nine months ended September 30, 2022 for more
information on our unfunded commitments, including commitments to issue letters
of credit, related to certain of our portfolio companies.
The weighted average yields at amortized cost and fair value of the following
portions of our portfolio as of September 30, 2022 and December 31, 2021 were as
follows:
As of
September 30, 2022 December 31, 2021
Amortized Cost Fair Value Amortized Cost Fair Value
Debt and other income producing securities(1) 10.7 % 10.8 % 8.7 % 8.7 %
Total portfolio(2) 9.6 % 9.7 % 7.9 % 7.9 %
First lien senior secured loans(3) 9.4 % 9.7 % 7.2 % 7.3 %
Second lien senior secured loans(3) 10.3 % 10.9 % 8.6 % 8.8 %
Subordinated certificates of the SDLP(3)(6) 13.5 % 13.5 % 13.5 % 13.5 %
Senior subordinated loans(3) 9.6 % 10.0 % 10.2 % 10.3 %
Ivy Hill Asset Management L.P.(4) 16.0 % 14.5 % 14.6 % 12.2 %
Other income producing equity securities(5) 11.3 % 11.1 % 10.6 % 10.0 %
_______________________________________________________________________________
(1)"Weighted average yield on debt and other income producing securities" is
computed as (a) the annual stated interest rate or yield earned plus the net
annual amortization of original issue discount and market discount or premium
earned on accruing debt and other income producing securities (including the
annualized amount of the dividend received by us related to our equity
investment in IHAM during the most recent quarter end), divided by (b) the total
accruing debt and other income producing securities at amortized cost or at fair
value (including the amortized cost or fair value of our equity investment in
IHAM as applicable), as applicable.
(2)"Weighted average yield on total portfolio" is computed as (a) the annual
stated interest rate or yield earned plus the net annual amortization of
original issue discount and market discount or premium earned on accruing debt
and other income producing securities (including the annualized amount of the
dividend received by us related to our equity investment in IHAM during the most
recent quarter end), divided by (b) total investments at amortized cost or at
fair value, as applicable.
(3)"Weighted average yields" are computed as (a) the annual stated interest rate
or yield earned plus the net annual amortization of original issue discount and
market discount or premium earned on the relevant accruing investments, divided
by (b) the total relevant investments at amortized cost or at fair value, as
applicable.
(4)Represents our equity investment in IHAM. The yield on IHAM is computed as
(a) the annualized amount of the dividend received by us related to our equity
investment in IHAM during the most recent quarter end, divided by (b) the
amortized cost or fair value of our equity investment in IHAM, as applicable.
(5)"Weighted average yield on other income producing equity securities" is computed as (a) the yield earned on the relevant income producing equity securities, divided by (b) the total relevant income producing equity securities at amortized cost or fair value, as applicable.
(6)The proceeds from these certificates were applied to co-investments with Varagon and its clients to fund first lien senior secured loans.
Ares Capital Management employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our investment adviser grades the credit risk of all investments on a scale of 1 to 4 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (i.e., at the time of origination or acquisition), although it may also take into account under certain circumstances the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors. The grade of a portfolio investment may be reduced or increased over time. The following is a description of each investment grade: 155 --------------------------------------------------------------------------------
Investment grade Description
4 Involves the least amount of risk to our initial cost basis. The
trends and risk factors for thisinvestment since origination or
acquisition are generally favorable, which may include the
performance of the portfolio company or a potential exit.
3 Involves a level of risk to our initial cost basis that is similar to
the risk to our initial cost basis at the time of origination or
acquisition. This portfolio company is generally performing as
expected and the risk factors to ourability to ultimately recoup the
cost of our investment are neutral to favorable. All investments or
acquired investments in new portfolio companies are initially
assessed a grade of 3.
2 Indicates that the risk to our ability to recoup the initial cost
basis of such investment has increased materially since origination
or acquisition, including as a result of factors such as declining
performance and non-compliance withdebt covenants; however, payments
are generally not more than 120 days past due. For investments graded
2, our investment adviser enhances its level of scrutiny over the
monitoring of such portfolio company.
1 Indicates that the risk to our ability to recoup the initial cost
basis of such investment hassubstantially increased since
origination or acquisition, and the portfolio company likely has
materially declining performance. For debt investments with an
investment grade of 1, most or all of the debt covenants are out of
compliance and payments are substantially delinquent. For investments
graded 1, it is anticipated that we will not recoup our initial cost
basis and may realize a substantial loss of our initial cost basis
upon exit. For investments graded 1, our investment adviser enhances
its level of scrutiny over the monitoring of such portfolio company.
Set forth below is the grade distribution of our portfolio companies as of
As of
September 30, 2022 December 31, 2021
(dollar amounts in Number of Number of
millions) Fair Value % Companies % Fair Value % Companies %
Grade 4 $ 4,332 20.3 % 67 15.0 % $ 3,422 17.1 % 49 12.7 %
Grade 3 15,982 74.9 344 75.0 15,529 77.6 294 76.0
Grade 2 968 4.5 28 6.0 910 4.5 24 6.1
Grade 1 57 0.3 19 4.0 148 0.8 20 5.2
Total $ 21,339 100.0 % 458 100.0 % $ 20,009 100.0 % 387 100.0 %
As of
As of
Senior Direct Lending Program
We have established a joint venture with Varagon to make certain first lien senior secured loans, including certain stretch senior and unitranche loans, primarily toU.S. middle-market companies. Varagon was formed in 2013 as a lending platform by American International Group, Inc. and other partners. The joint venture is called theSenior Direct Lending Program, LLC (d/b/a the "Senior Direct Lending Program" or the "SDLP"). InJuly 2016 , we and Varagon and its clients completed the initial funding of the SDLP. The SDLP may generally commit and hold individual loans of up to$350 million . The SDLP is capitalized as transactions are completed and all portfolio decisions and generally all other decisions in respect of the SDLP must be approved by an investment committee of the SDLP consisting of representatives of ours and Varagon (with approval from a representative of each required). We provide capital to the SDLP in the form of subordinated certificates (the "SDLP Certificates"), and Varagon and its clients provide capital to the SDLP in the form of senior notes, intermediate funding notes and SDLP Certificates. As ofSeptember 30, 2022 , we and a client of Varagon owned 87.5% and 12.5%, respectively, of the outstanding SDLP Certificates.
As of
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respectively, is to be made available from us. This capital will only be
committed to the SDLP upon approval of transactions by the investment committee
of the SDLP. Below is a summary of the funded capital and unfunded capital
commitments of the SDLP.
As of
September 30,
(in millions) 2022 December 31, 2021
Total capital funded to the SDLP(1) $ 4,772 $ 4,168
Total capital funded to the SDLP by the Company(1) $ 1,121 $ 987
Total unfunded capital commitments to the SDLP(2) $ 311 $ 262
Total unfunded capital commitments to the SDLP by the Company(2) $
73 $ 62
___________________________________________________________________________
(1) At principal amount.
(2)These commitments to fund delayed draw loans have been approved by the investment committee of the SDLP and will be funded if and when conditions to funding such delayed draw loans are met.
The SDLP Certificates pay a coupon equal to LIBOR plus 8.0% and also entitle the holders thereof to receive a portion of the excess cash flow from the loan portfolio, after expenses, which may result in a return to the holders of the SDLP Certificates that is greater than the stated coupon. The SDLP Certificates are junior in right of payment to the senior notes and intermediate funding notes. The amortized cost and fair value of our SDLP Certificates were$1.1 billion and$1.1 billion , respectively, as ofSeptember 30, 2022 and$1.0 billion and$1.0 billion , respectively, as ofDecember 31, 2021 . Our yield on our investment in the SDLP Certificates at amortized cost and fair value was 13.5% and 13.5%, respectively, as ofSeptember 30, 2022 and 13.5% and 13.5%, respectively, as ofDecember 31, 2021 . The interest income from our investment in the SDLP Certificates and capital structuring service and other fees earned for the three and nine months endedSeptember 30, 2022 and 2021 were as follows: For the Nine Months Ended September For the Three Months Ended September 30, 30, (in millions) 2022 2021 2022 2021 Interest income $ 37$ 33 $ 105$ 106 Capital structuring service and other fees $ 7 $ 7 $ 15$ 13 As ofSeptember 30, 2022 andDecember 31, 2021 , the SDLP portfolio was comprised entirely of first lien senior secured loans primarily toU.S. middle-market companies and were in industries similar to the companies in our portfolio. As ofSeptember 30, 2022 , one of the loans was on non-accrual status. As ofDecember 31, 2021 , none of the loans were on non-accrual status. Below is a summary of the SDLP's portfolio as ofSeptember 30, 2022 andDecember 31, 2021 : As of (dollar amounts in millions) September 30, 2022 December 31, 2021 Total first lien senior secured loans(1)(2) $ 4,798 $ 4,194 Weighted average yield on first lien senior secured loans(3) 8.7 % 6.7 % Largest loan to a single borrower(1) $ 380 $ 342 Total of five largest loans to borrowers(1) $ 1,616 $ 1,540 Number of borrowers in the SDLP 21 19 Commitments to fund delayed draw loans(4) $ 311 $ 262 _______________________________________________________________________________
(1)At principal amount.
(2)First lien senior secured loans include certain loans that the SDLP
classifies as "unitranche" loans. As of
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--------------------------------------------------------------------------------(3) Computed as (a) the annual stated interest rate on accruing first lien senior secured loans, divided by (b) total first lien senior secured loans at principal amount.
(4)As discussed above, these commitments have been approved by the investment committee of the SDLP.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
For the three and nine months ended
Operating results for the three and nine months ended
For the Three Months Ended September For the Nine Months Ended September
30, 30,
(in millions) 2022 2021 2022 2021
Total investment income $ 537 $ 442 $ 1,456 $ 1,291
Total expenses 235 253 676 771
Net investment income before income taxes 772 189 2,132 520
Income tax expense, including excise tax 14 5 37 21
Net investment income 758 184 2,095 499
Net realized gains on investments, foreign
currency and other transactions - 149 55 267
Net unrealized gains (losses) on
investments, foreign currency and other
transactions (184) 1 (324) 462
Realized loss on extinguishment of debt - - (48) (43)
Net increase in stockholders' equity
resulting from operations $ 574 $ 334 $ 1,778 $ 1,185
Net income can vary substantially from period to period due to various factors,
including acquisitions, the level of new investment commitments, the recognition
of realized gains and losses and unrealized appreciation and depreciation. As a
result, comparisons of net increase in stockholders' equity resulting from
operations may not be meaningful.
Investment Income
For the Three Months Ended September For the Nine Months Ended September
30, 30,
(in millions) 2022 2021 2022 2021
Interest income from investments $ 385
32 59 94 190
Dividend income 107 54 314 158
Other income 13 12 34 32
Total investment income $ 537 $ 442 $ 1,456 $ 1,291
Interest income from investments for the three and nine months ended September
30, 2022 increased from the comparable periods in 2021 primarily as a result of
an increase in the average size of our portfolio as well as the impact of rising
interest rates. The average size and weighted average yield of our portfolio at
amortized cost for the three and nine months ended September 30, 2022 and 2021
were as follows:
For the Three Months Ended September For the Nine Months Ended September
30, 30,
(in millions) 2022 2021 2022 2021
Average size of portfolio $ 21,291 $ 17,362 $ 20,353 $ 16,498
Weighted average yield on portfolio 9.2 % 8.0 % 8.5 % 8.0 %
Capital structuring service fees for the three and nine months ended September
30, 2022 decreased from the comparable periods in 2021 primarily due to a
decrease in the weighted average capital structuring service fee percentage and
a decrease in new investment commitments during the three and nine months ended
September 30, 2022 . During the three and nine months ended September 30, 2021 ,
we experienced higher fee opportunities as compared to the comparable periods in
2022 primarily due to a higher number of transactions in new portfolio
companies. The new investment commitments and weighted average capital
structuring service fee percentages for the three and nine months ended
September 30, 2022 and 2021 were as follows:
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For the Nine Months Ended September
For the Three Months Ended September 30, 30,
(in millions) 2022 2021 2022 2021
New investment commitments $ 2,242 $ 3,110 $ 7,352 $ 9,707
Weighted average capital structuring
service fee percentages(1) 1.4 % 1.9 % 1.3 % 2.0 %
_______________________________________________________________________________ (1) Excluding$342 and$1,261 million of investment commitments to IHAM for the three and nine months endedSeptember 30, 2022 , respectively, the weighted average capital structuring service fee percentage was 1.7% and 1.5%, respectively. Excluding$52 million of investment commitments to IHAM for the three and nine months endedSeptember 30, 2021 , the weighted average capital structuring service fee percentage was 2.0% and 2.0%, respectively.
Dividend income for the three and nine months ended
For the Three Months Ended September For the Nine Months Ended September
30, 30,
(in millions) 2022 2021 2022 2021
Dividend income received from IHAM $ 55 $ 23 $ 150 $ 65
Recurring dividends 51 30 135 75
Non-recurring dividends 1 1 29 18
Total dividend income $ 107 $ 54 $ 314 $ 158
Dividend income received from IHAM for the three and nine months ended September
30, 2022 increased from the comparable periods primarily due to the continued
increase in IHAM's assets under management, which generally has been supported
by our additional investments in IHAM. Recurring dividend income for the three
and nine months ended September 30, 2022 increased from the comparable periods
in 2021 primarily due to an increase in yielding preferred equity investments.
Operating Expenses
For the Three Months Ended September For the Nine Months Ended September
30, 30,
(in millions) 2022 2021 2022 2021
Interest and credit facility fees $ 120 $ 94 $ 314 $ 267
Base management fees 78 65 226 184
Income based fees 63 53 171 158
Capital gains incentive fees(1) (37) 30 (64) 133
Administrative fees 3 4 9 11
Other general and administrative 8 7 20 18
Total expenses $ 235 $ 253 $ 676 $ 771 _______________________________________________________________________________
(1)Calculated in accordance with
Interest and credit facility fees for the three and nine months ended
For the Three Months Ended September For the Nine Months Ended September
30, 30,
(in millions) 2022 2021 2022 2021
Stated interest expense $ 107 $ 76 $ 282 $ 222
Credit facility fees 7 9 13 23
Amortization of debt issuance costs 8 9 22 19
Net (amortization) accretion of discount on
notes payable (2) - (3) 3
Total interest and credit facility fees $ 120 $
94 $ 314
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Stated interest expense for the three and nine months ended September 30, 2022
increased from the comparable periods in 2021 primarily due to the increase in
the average principal amount of debt outstanding. Our weighted average stated
interest rate for the three months ended September 30, 2022 increased for the
comparable period in 2021 due to the higher utilization of our floating rate
revolving facilities and the impact of rising interest rates. Our weighted
average stated interest rate for the nine months ended September 30, 2022
remained steady from the comparable period in 2021. Average debt outstanding and
weighted average stated interest rate on our debt outstanding for the three and
nine months ended September 30, 2022 and 2021 were as follows:
For the Three Months Ended September For the Nine Months Ended September
30, 30,
(in millions) 2022 2021 2022 2021
Average debt outstanding $ 11,867 $ 9,409 $ 11,170 $ 8,869
Weighted average stated interest rate on
debt 3.6 % 3.3 % 3.3 % 3.3 %
Credit facility fees for the three and nine months ended September 30, 2022 were
lower from the comparable periods in 2021 primarily due to the higher
utilization of our revolving facilities resulting in lower unused commitment
fees.
Base management fees for the three and nine months ended September 30, 2022
increased from the comparable periods in 2021 primarily due to the increase in
the average size of our portfolio for the three and nine months ended September
30, 2022 as compared to the comparable periods in 2021.
Income based fees for the three and nine months ended September 30, 2022
increased from the comparable periods in 2021 primarily due to the pre-incentive
fee net investment income, as defined in the investment advisory and management
agreement, for the nine months ended September 30, 2022 being higher than in the
comparable period in 2021.
For the three and nine months ended September 30, 2022 , the reduction in the
capital gains incentive fee calculated in accordance with GAAP was $37 million
and $64 million , respectively. For the three and nine months ended September 30,
2021 , the capital gains incentive fee calculated in accordance with GAAP was $30
million and $133 million , respectively. The capital gains incentive fee accrual
for the nine months ended September 30, 2022 changed from the comparable period
in 2021 primarily due to net losses on investments, foreign currency, other
transactions and the extinguishment of debt of $184 million compared to net
gains of $686 million for the nine months ended September 30, 2021 . The capital
gains incentive fee accrued under GAAP includes an accrual related to unrealized
capital appreciation, whereas the capital gains incentive fee actually payable
under our investment advisory and management agreement does not. There can be no
assurance that such unrealized capital appreciation will be realized in the
future. The accrual for any capital gains incentive fee under GAAP in a given
period may result in an additional expense if such cumulative amount is greater
than in the prior period or a reduction of previously recorded expense if such
cumulative amount is less than in the prior period. If such cumulative amount is
negative, then there is no accrual. As of September 30, 2022 , there was $72
million of capital gains incentive fees accrued in accordance with GAAP. As of
September 30, 2022 , there was no capital gains incentive fee actually payable
under our investment advisory and management agreement. See Note 3 to our
consolidated financial statements for the three and nine months ended September
30, 2022 , for more information on the base management fees, income based fees
and capital gains incentive fees.
Cash payment of any income based fees and capital gains incentive fees otherwise
earned by our investment adviser is deferred if during the most recent four full
calendar quarter period ending on or prior to the date such payment is to be
made the sum of (a) the aggregate distributions to our stockholders and (b) the
change in net assets (defined as total assets less indebtedness and before
taking into account any income based fees and capital gains incentive fees
payable during the period) is less than 7.0% of our net assets (defined as total
assets less indebtedness) at the beginning of such period. These calculations
will be adjusted for any share issuances or repurchases. Any income based fees
and capital gains incentive fees deferred for payment are carried over for
payment in subsequent calculation periods to the extent such fees are payable
under the terms of the investment advisory and management agreement.
Administrative fees represent fees paid to Ares Operations for our allocable
portion of overhead and other expenses incurred by Ares Operations in performing
its obligations under the administration agreement, including our allocable
portion of the compensation, rent and other expenses of certain of our corporate
officers and their respective staffs. See Note 3 to our consolidated financial
statements for the three and nine months ended September 30, 2022 , for more
information on the administrative fees.
161
--------------------------------------------------------------------------------Other general and administrative expenses include, among other costs, professional fees, insurance, fees and expenses related to evaluating and making investments in portfolio companies and independent directors' fees.
Income Tax Expense, Including Excise Tax
We have elected to be treated as a RIC under the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, we must (among other requirements) meet certain source-of-income and asset diversification requirements and timely distribute to our stockholders at least 90% of our investment company taxable income, as defined by the Code, for each year. We have made and intend to continue to make the requisite distributions to our stockholders which will generally relieve us fromU.S. federal corporate-level income taxes. Depending on the level of taxable income earned in a tax year, we may choose to carry forward such taxable income in excess of current year dividend distributions from such current year taxable income into the next tax year and pay a 4% excise tax on such income, as required. To the extent that we determine that our estimated current year taxable income will be in excess of estimated dividend distributions for the current year from such income, we accrue excise tax, if any, on estimated excess taxable income as such taxable income is earned. For the three and nine months endedSeptember 30, 2022 , we recorded an expense of$8 million and$24 million , respectively, forU.S. federal excise tax. For the three and nine months endedSeptember 30, 2021 , we recorded a net expense of$7 million and$19 million , respectively, forU.S. federal excise tax. Certain of our consolidated subsidiaries are subject toU.S. federal and state income taxes. For the three and nine months endedSeptember 30, 2022 , we recorded a net tax expense of$6 million and$13 million , respectively, for these subsidiaries. For the three and nine months endedSeptember 30, 2021 , we recorded a net tax (benefit) expense of$(1) million and$3 million , respectively, for these subsidiaries. The income tax expense for our taxable consolidated subsidiaries will vary depending on the level of realized gains from the exits of investments held by such taxable subsidiaries during the respective periods.
Net Realized Gains/Losses
The net realized gains (losses) from the sales, repayments or exits of
investments during the three and nine months ended
For the Three Months Ended September For the Nine Months Ended September
30, 30,
(in millions) 2022 2021 2022 2021
Sales, repayments or exits of
investments(1) $ 1,903 $ 2,185 $ 5,549 $ 6,904
Net realized gains (losses) on
investments:
Gross realized gains $ 71 $ 233 $ 153 $ 395
Gross realized losses (93) (110) (130) (137)
Total net realized gains (losses) on
investments $ (22) $ 123 $ 23
_______________________________________________________________________________
(1)Includes$860 million and$2.4 billion of loans sold to IHAM and certain vehicles managed by IHAM during the three and nine months endedSeptember 30, 2022 , respectively, and$201 million and$1.0 billion during the comparable periods in 2021, respectively. Net realized losses of$4 million and$10 million , respectively, were recorded on these transactions with IHAM during the three and nine months endedSeptember 30, 2022 . Net realized losses of$1 million and$5 million were recognized on these transactions with IHAM during the three and nine months endedSeptember 30, 2021 , respectively. See Note 4 to our consolidated financial statements for the three and nine months endedSeptember 30, 2022 for more information on IHAM and its managed vehicles. 162 --------------------------------------------------------------------------------
The net realized losses on investments during the three months ended
(in millions) Net Realized GainsPortfolio Company
(Losses)
Primrose Holding Corporation $ 29
21 Bearcat Buyer, Inc. and Bearcat Parent, Inc. 16 Teligent, Inc (31) PhyMED Management LLC (55) Other, net (2) Total $ (22)
During the three months ended
The net realized gains on investments during the three months endedSeptember 30, 2021 consisted of the following: (in millions) Net Realized Gains Portfolio Company (Losses) SVP-Singer Holdings Inc. and SVP-Singer Holdings LP $ 110 RMCF III CIV XXIX, L.P 30 GB Auto Service, Inc. and GB Auto Service Holdings, LLC 29 ChargePoint Holdings, Inc. 17 PERC Holdings 1 LLC 11 NECCO Holdings, Inc. and New England Confectionery Company, Inc. (12) Garden Fresh Restaurant Corp. and GFRC Holdings LLC(24) ADF Capital, Inc.,ADF Restaurant Group, LLC , and ARG Restaurant Holdings, Inc. (58) Other, net 20 Total $ 123
During the three months ended
The net realized gains on investments during the nine months ended
(in millions) Net Realized GainsPortfolio Company (Losses)
$ 38
Primrose Holding Corporation 29
22 Navisun LLC and Navisun Holdings LLC 19 Bearcat Buyer, Inc. and Bearcat Parent, Inc. 16 Sundance Energy Inc. (23) Teligent, Inc (30) PhyMED Management LLC (55) Other, net 7 Total $ 23
During the nine months ended
During the nine months ended
163
--------------------------------------------------------------------------------
The net realized gains on investments during the nine months ended
(in millions) Net Realized Gains Portfolio Company (Losses) SVP-Singer Holdings Inc. and SVP-Singer Holdings LP $ 110 Blue Angel Buyer 1, LLC and Blue Angel Holdco, LLC 46 RMCF III CIV XXIX, L.P 30 GB Auto Service, Inc. and GB Auto Service Holdings, LLC 29 Evolent Health LLC and Evolent Health, Inc. 21 BW Landco LLC 21
18
ChargePoint Holdings, Inc. 17
11 PERC Holdings 1 LLC 11 NECCO Holdings, Inc. and New England Confectionery Company, Inc. (12) Garden Fresh Restaurant Corp. and GFRC Holdings LLC(24) ADF Capital, Inc.,ADF Restaurant Group, LLC , and ARG Restaurant Holdings, Inc. (58) Other, net 38 Total $ 258
During the nine months ended
During the nine months endedSeptember 30, 2021 , we redeemed the entire$230 million in aggregate principal amount outstanding of the unsecured notes that were scheduled to mature onApril 15, 2047 (the "2047 Notes") in accordance with the terms of the indenture governing the 2047 Notes. The 2047 Notes were redeemed at par plus accrued and unpaid interest for a total redemption price of approximately$233 million , which resulted in a realized loss on the extinguishment of debt of$43 million . The$186 million carrying value of the 2047 Notes at the time of redemption represented the aggregate principal amount of the 2047 Notes less the unaccreted purchased discount recorded in connection with the Allied Acquisition. Net Unrealized Gains/Losses We value our portfolio investments quarterly and the changes in value are recorded as unrealized gains or losses in our consolidated statement of operations. Net unrealized gains and losses on investments for the three and nine months endedSeptember 30, 2022 and 2021, were comprised of the following: For the Three Months Ended September For the Nine Months Ended September 30, 30, (in millions) 2022 2021 2022 2021 Unrealized appreciation $ 213$ 230 $ 405$ 612 Unrealized depreciation (439) (127) (757) (118) Net unrealized (appreciation) depreciation reversed related to net realized gains or losses(1) 12 (91) (23) (37) Total net unrealized gains (losses) on investments $ (214) $
12
_______________________________________________________________________________
(1)The net unrealized depreciation reversed related to net realized gains or losses represents the unrealized appreciation or depreciation recorded on the related asset at the end of the prior period.
For the three and nine months ended
164
--------------------------------------------------------------------------------
The changes in net unrealized appreciation and depreciation on investments
during the three months ended September 30, 2022 consisted of the following:
Net Unrealized
(in millions) Appreciation
Portfolio Company (Depreciation)
Apex Clean Energy TopCo, LLC $ 47
Alcami Corporation and ACM Holdings I, LLC 25
Production Resource Group, L.L.C. and PRG III, LLC 16
14
Global Medical Response, Inc. and GMR Buyer Corp. (11)
DFC Global Facility Borrower III LLC (11)
H-Food Holdings, LLC and Matterhorn Parent, LLC (11)
Visual Edge Technology, Inc. (12)
(12)CoreLogic, Inc. andT-VIII Celestial Co-Invest LP (15)
(16)Potomac Intermediate Holdings II LLC (18)Eckler Industries, Inc. andEckler Purchaser LLC (20)SHO Holding I Corporation (21)
(31)
Other, net (150)
Total $ (226)
During the three months ended
The changes in net unrealized appreciation and depreciation on investments during the three months endedSeptember 30, 2021 consisted of the following: Net Unrealized (in millions) Appreciation Portfolio Company (Depreciation) Ivy Hill Asset Management, L.P. $ 19 CoreLogic, Inc. and T-VIII Celestial Co-Invest LP 14 OTG Management, LLC 11 Other, net 59 Total $ 103
During the three months ended
165
--------------------------------------------------------------------------------
The changes in net unrealized appreciation and depreciation on investments
during the nine months ended
Net Unrealized
(in millions) Appreciation
Portfolio Company (Depreciation)
Apex Clean Energy TopCo, LLC $ 47
Production Resource Group, L.L.C. and PRG III, LLC 34
33
Alcami Corporation and ACM Holdings I, LLC 29
VPROP Operating, LLC and V SandCo, LLC 24
LSP Holdco, LLC and ZBS Mechanical Group Co-Invest Fund 2, LLC 11
Cipriani USA, Inc. and Cipriani Group Holding S.A.R.L. 11
11
Rug Doctor, LLC and RD Holdco Inc. (11)
OUTFRONT Media Inc. (12)
Dcert Buyer, Inc. , DCert Preferred Holdings, Inc. and Destiny Digital Holdings,
L.P. (13)
OTG Management, LLC (14)
DFC Global Facility Borrower III LLC (14)
Global Medical Response, Inc. and GMR Buyer Corp. (15)
High Street Buyer, Inc. and High Street Holdco LLC (16)
Potomac Intermediate Holdings II LLC (16)
(16)
(16)Ardonagh Midco 2 plc andArdonagh Midco 3 plc (17)H-Food Holdings, LLC andMatterhorn Parent, LLC (18)
(19)Visual Edge Technology, Inc. (20)SCM Insurance Services Inc. (21)Cornerstone OnDemand, Inc. andSunshine Software Holdings, Inc. (22)SHO Holding I Corporation (25)Eckler Industries, Inc. andEckler Purchaser LLC (29)
(31)
CoreLogic, Inc. and T-VIII Celestial Co-Invest LP (46)
Other, net (161)
Total $ (352)
During the nine months ended
166
--------------------------------------------------------------------------------
The changes in net unrealized appreciation and depreciation on investments
during the nine months ended
Net Unrealized
(in millions) Appreciation
Portfolio Company (Depreciation)
Ivy Hill Asset Management, L.P. $ 47
Sundance Energy, Inc. 38
Heelstone Renewable Energy, LLC 26
OTG Management, LLC 26
ADG, LLC and RC IV GEDC Investor LLC 22
14
CoreLogic, Inc. and T-VIII Celestial Co-Invest LP 13
Instituto de Banca y Comercio , Inc. & Leeds IV Advisors, Inc. 12
T1 Power Holdings LLC 12
12
11
North American Science Associates, LLC , Cardinal Purchaser LLC and Cardinal
Topco Holdings, L.P. 11
Reef Lifestyle, LLC 11
Visual Edge Technology, Inc. (11)
QC Supply, LLC (16)
Other, net 266
Total $ 494
During the nine months ended
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources are generated primarily from the net proceeds of public offerings of equity and debt securities, advances from the Revolving Credit Facility, the Revolving Funding Facility, the SMBC Funding Facility and the BNP Funding Facility (each as defined below, and together, the "Facilities"), net proceeds from the issuance of other securities, including unsecured notes, as well as cash flows from operations. In accordance with the Investment Company Act, we are allowed to borrow amounts such that our asset coverage calculated pursuant to the Investment Company Act, is at least 150% after such borrowings (i.e., we are able to borrow up totwo dollars for every dollar we have in assets less all liabilities and indebtedness not represented by senior securities issued by us). As ofSeptember 30, 2022 , we had$257 million in cash and cash equivalents and$11.9 billion in total aggregate principal amount of debt outstanding ($11.8 billion at carrying value) and our asset coverage was 179%. Subject to borrowing base and other restrictions, we had approximately$4.3 billion available for additional borrowings under the Facilities as ofSeptember 30, 2022 . We may from time to time seek to retire or repurchase our common stock through cash purchases, as well as retire, cancel or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. The amounts involved may be material. In addition, we may from time to time enter into additional debt facilities, increase the size of existing facilities or issue additional debt securities, including secured debt, unsecured debt and/or debt securities convertible into common stock. Any such purchases or exchanges of common stock or outstanding debt, or incurrence or issuance of additional debt would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. 167 --------------------------------------------------------------------------------
Equity Capital Activities
As of
We may from time to time issue and sell shares of our common stock through
public or "at the market" offerings. In connection with the issuance of our
common stock, we issued and sold the following shares of common stock during the
nine months ended
(in millions, except per Underwriting Average Offering share amount) Number of Fees/Offering Price Per Issuances of Common Stock Shares Issued Gross Proceeds Expenses Net Proceeds Share(1) Public offerings 20.4$ 432.0 $ 22.0$ 410.0 $ 20.13 (2) "At the market" offerings 19.6 403.4 4.6 398.8$ 20.57 Total 40.0$ 835.4 $ 26.6$ 808.8
________________________________________
(1) Represents the gross offering price per share before deducting underwriting discounts and commissions and offering expenses.
(2) 11.2 million and 9.2 million of the shares were sold to the underwriters for a price of$21.06 per share and$19.00 per share, respectively, which the underwriters were then permitted to sell at variable prices to the public.
"At the Market" Offerings
We have entered into equity distribution agreements with several banks (the "Equity Distribution Agreements"). The Equity Distribution Agreements provide that we may from time to time issue and sell, by means of "at the market" offerings, up to$500 million shares of our common stock. Subject to the terms and conditions of the Equity Distribution Agreements, sales of common stock, if any, may be made in transactions that are deemed to be "at the market" offerings as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended. Under the currently effective Equity Distribution Agreements, common stock with an aggregate offering amount of$413 million remained available for issuance as ofSeptember 30, 2022 . Stock Repurchase Program We are authorized under our stock repurchase program to purchase up to$500 million in the aggregate of our outstanding common stock in the open market at certain thresholds below our net asset value per share, in accordance with the guidelines specified in Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The timing, manner, price and amount of any share repurchases will be determined by us, in our sole discretion, based upon an evaluation of economic and market conditions, stock price, applicable legal and regulatory requirements and other factors. The stock repurchase program does not require us to repurchase any specific number of shares of common stock or any shares of common stock at all. Consequently, we cannot assure stockholders that any specific number of shares of common stock, if any, will be repurchased under the stock repurchase program. The expiration date of the stock repurchase program isFebruary 15, 2023 . The program may be suspended, extended, modified or discontinued at any time. As ofSeptember 30, 2022 , there was$500 million available for additional repurchases under the program. During the nine months endedSeptember 30, 2022 and 2021, we did not repurchase any shares of our common stock in the open market under the stock repurchase program. Price Range of Common Stock The following table sets forth, for the first two quarters of the year endingDecember 31, 2022 and each fiscal quarter for the fiscal years endedDecember 31, 2021 and 2020, the net asset value per share of our common stock, the range of high and low closing sales prices of our common stock, the closing sales price as a premium (discount) to net asset value and the dividends or distributions declared by us. OnOctober 20, 2022 , the last reported closing sales price of our common stock on The NASDAQ Global Select Market was$17.90 per share, which represented a discount of approximately 3.56% to the net asset value per share reported by us as ofSeptember 30, 2022 . 168 --------------------------------------------------------------------------------
High Low
Sales Price Sales Price
Premium Premium
(Discount) (Discount) Cash
Net Asset to Net Asset to Net Asset Dividend
Value(1) Price Range Value(2) Value(2) Per Share(3)
High Low
Year ended December 31, 2020
First Quarter $ 15.58 $ 19.23 $ 8.08 23.43 % (48.14) % $0.40
Second Quarter $ 15.83 $ 16.20 $ 9.13 2.34 % (42.32) % $0.40
Third Quarter $ 16.48 $ 15.02 $ 13.27 (8.86) % (19.48) % $0.40
Fourth Quarter $ 16.97 $ 17.28 $ 13.82 1.83 % (18.56) % $0.40
Year ended December 31, 2021
First Quarter $ 17.45 $ 19.23 $ 16.51 10.20 % (5.39) % $0.40
Second Quarter $ 18.16 $ 19.97 $ 18.29 9.97 % 0.72 % $0.40
Third Quarter $ 18.52 $ 20.43 $ 19.52 10.31 % 5.40 % $0.41
Fourth Quarter $ 18.96 $ 21.70 $ 19.66 14.45 % 3.69 % $0.41
Year ending December 31,
2022
First Quarter $ 19.03 $ 22.58 $ 19.70 18.65 % 3.52 % $0.54 (4)
Second Quarter $ 18.81 $ 22.44 $ 17.12 19.30 % (8.98) % $0.42
Third Quarter $ 18.56 $ 20.70 $ 16.84 11.53 % (9.27) % $0.43 _______________________________________________________________________________ (1) Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low closing sales prices. The net asset values shown are based on outstanding shares at the end of the relevant quarter.
(2) Calculated as the respective high or low closing sales price less net asset value, divided by net asset value (in each case, as of the applicable quarter).
(3) Represents the dividend or distribution declared in the relevant quarter.
(4) Consists of a quarterly dividend of$0.42 per share and additional quarterly dividends totaling$0.12 per share, all of which were declared in the first quarter of 2022, payableMarch 31, 2022 ,June 30, 2022 ,September 30, 2022 andDecember 29, 2022 , subject to the satisfaction of certainMaryland law requirements. 169 --------------------------------------------------------------------------------
Debt Capital Activities
Our debt obligations consisted of the following as ofSeptember 30, 2022 andDecember 31, 2021 : As of September 30, 2022 December 31, 2021 Total Total Aggregate Aggregate Principal Principal Amount Amount Available/ Principal Amount Carrying Available/ Principal Amount Carrying (in millions) Outstanding(1) Outstanding Value Outstanding(1) Outstanding Value Revolving Credit Facility $ 4,843 (2)$ 1,787 $ 1,787 $ 4,232 (2)$ 1,507 $ 1,507 Revolving Funding Facility 1,775 932 932 1,525 762 762 SMBC Funding Facility 800 (3) 456 456 800 (3) 401 401 BNP Funding Facility 300 175 175 300 - - 2022 Convertible Notes - - - 388 388 388 (4) 2024 Convertible Notes 403 403 399 (4) 403 403 395 (4) 2023 Notes 750 750 750 (4) 750 750 748 (4) 2024 Notes 900 900 898 (4) 900 900 897 (4) March 2025 Notes 600 600 597 (4) 600 600 596 (4) July 2025 Notes 1,250 1,250 1,258 (4) 1,250 1,250 1,260 (4) January 2026 Notes 1,150 1,150 1,144 (4) 1,150 1,150 1,143 (4) July 2026 Notes 1,000 1,000 990 (4) 1,000 1,000 988 (4) 2027 Notes 500 500 494 (4) - - - 2028 Notes 1,250 1,250 1,246 (4) 1,250 1,250 1,246 (4) 2031 Notes 700 700 690 (4) 700 700 689 (4) Total$ 16,221 $ 11,853 $ 11,816 $ 15,248 $ 11,061 $ 11,020
________________________________________
(1)Represents the total aggregate amount committed or outstanding, as applicable, under such instrument. Borrowings under the committed Revolving Credit Facility, Revolving Funding Facility, SMBC Funding Facility and BNP Funding Facility (each as defined below) are subject to borrowing base and other restrictions.
(2)Provides for a feature that allows us, under certain circumstances, to
increase the size of the Revolving Credit Facility (as defined below) to a
maximum of
(3)Provides for a feature that allows ACJB (as defined below), under certain circumstances, to increase the size of the SMBC Funding Facility (as defined below) to a maximum of$1.0 billion . (4)Represents the aggregate principal amount outstanding, less unamortized debt issuance costs and the net unaccreted/amortized discount or premium recorded upon issuance. InFebruary 2022 , we repaid in full the 2022 Convertible Notes (defined below) upon their maturity. The weighted average stated interest rate and weighted average maturity, both on aggregate principal amount outstanding, of all our debt outstanding as ofSeptember 30, 2022 were 3.8% and 3.8 years, respectively, and as ofDecember 31, 2021 were 3.1% and 4.2 years, respectively. The ratio of total principal amount of debt outstanding to stockholders' equity as ofSeptember 30, 2022 was 1.27:1.00 compared to 1.26:1.00 as ofDecember 31, 2021 . 170 --------------------------------------------------------------------------------
Revolving Credit Facility
We are party to a senior secured revolving credit facility (as amended and restated, the "Revolving Credit Facility"), that allows us to borrow up to$4.8 billion at any one time outstanding. The Revolving Credit Facility consists of a$1.1 billion term loan tranche and a$3.7 billion revolving tranche. For$1.0 billion of the term loan tranche, the stated maturity date isMarch 31, 2027 . For$28 million of the term loan tranche, the stated maturity date isMarch 31, 2026 . For the remaining$50 million of the term loan tranche, the stated maturity date isMarch 30, 2025 . For$3.5 billion of the revolving tranche, the end of the revolving period and the stated maturity date areMarch 31, 2026 andMarch 31, 2027 , respectively. For$107 million of the revolving tranche, the end of the revolving period and the stated maturity date areMarch 31, 2025 andMarch 31, 2026 , respectively. For the remaining$150 million of the revolving tranche, the end of the revolving period and the stated maturity date areMarch 30, 2024 andMarch 30, 2025 , respectively. The Revolving Credit Facility also provides for a feature that allows us, under certain circumstances, to increase the overall size of the Revolving Credit Facility to a maximum of$7.3 billion . The interest rate charged on the Revolving Credit Facility is based on Secured Overnight Financing Rate ("SOFR") (or an alternative rate of interest for certain loans, commitments and/or other extensions of credit denominated in Sterling, Canadian Dollars, Euros and certain other foreign currencies) plus a credit spread adjustment of 0.10% and an applicable spread of either 1.75% or 1.875% or an "alternate base rate" (as defined in the agreements governing the Revolving Credit Facility) plus a credit spread adjustment of 0.10% and an applicable spread of either 0.75% or 0.875%, in each case, determined monthly based on the total amount of the borrowing base relative to the sum of (i) the greater of (a) the aggregate amount of revolving exposure and term loans outstanding under the Revolving Credit Facility and (b) 85% of the total commitments of the Revolving Credit Facility (or, if higher, the total revolving exposure) plus (ii) other debt, if any, secured by the same collateral as the Revolving Credit Facility. As ofSeptember 30, 2022 , the applicable spread in effect was 1.75%. We are also required to pay a letter of credit fee of either 2.00% or 2.125% per annum on letters of credit issued, determined monthly based on the total amount of the borrowing base relative to the total commitments of the Revolving Credit Facility and other debt, if any, secured by the same collateral as the Revolving Credit Facility. Additionally, we are required to pay a commitment fee of 0.375% per annum on any unused portion of the Revolving Credit Facility. As ofSeptember 30, 2022 , there was$1.8 billion outstanding under the Revolving Credit Facility and we were in compliance in all material respects with the terms of the Revolving Credit Facility.
Revolving Funding Facility
We and our consolidated subsidiary,Ares Capital CP Funding LLC ("Ares Capital CP"), are party to a revolving funding facility (as amended, the "Revolving Funding Facility"), that allows Ares Capital CP to borrow up to$1.8 billion at any one time outstanding. The Revolving Funding Facility is secured by all of the assets held by, and the membership interest in, Ares Capital CP. The end of the reinvestment period and the stated maturity date for the Revolving Funding Facility areDecember 29, 2024 andDecember 29, 2026 , respectively. The interest rate charged on the Revolving Funding Facility is based on SOFR plus a credit spread adjustment of 0.10% or a "base rate" (as defined in the agreements governing the Revolving Funding Facility) plus an applicable spread of 1.90% per annum. Ares Capital CP is also required to pay a commitment fee of between 0.50% and 1.25% per annum depending on the size of the unused portion of the Revolving Funding Facility. As ofSeptember 30, 2022 , there was$932 million outstanding under the Revolving Funding Facility and we and Ares Capital CP were in compliance in all material respects with the terms of the Revolving Funding Facility.
SMBC Funding Facility
We and our consolidated subsidiary,Ares Capital JB Funding LLC ("ACJB"), are party to a revolving funding facility (as amended, the "SMBC Funding Facility"), with ACJB, as the borrower, andSumitomo Mitsui Banking Corporation , as the administrative agent and collateral agent, that allows ACJB to borrow up to$800 million at any one time outstanding. The SMBC Funding Facility also provides for a feature that allows ACJB, subject to receiving certain consents, to increase the overall size of the SMBC Funding Facility to$1.0 billion . The SMBC Funding Facility is secured by all of the assets held by ACJB. The end of the reinvestment period and the stated maturity date for the SMBC Funding Facility areMay 28, 2024 andMay 28, 2026 , respectively. The reinvestment period and the stated maturity date are both subject to two one-year extensions by mutual agreement. The interest rate charged on the SMBC Funding Facility is based on an applicable spread of either 1.75% or 2.00% over LIBOR or 0.75% or 1.00% over a "base rate" (as defined in the agreements governing the SMBC Funding Facility), in each case, determined monthly based on the amount of the average borrowings outstanding under the SMBC Funding Facility. As ofSeptember 30, 2022 , the applicable spread in effect was 1.75%. ACJB is also required to pay a commitment fee of between 0.50% and 1.00% per annum depending on the size of the unused portion of the SMBC Funding Facility. As ofSeptember 30, 2022 , there was$456 million outstanding under the SMBC Funding Facility and we and ACJB were in compliance in all material respects with the terms of the SMBC Funding Facility. 171 --------------------------------------------------------------------------------
BNP Funding Facility
We and our consolidated subsidiary,ARCC FB Funding LLC ("AFB"), are party to a revolving funding facility (as amended, the "BNP Funding Facility") with AFB, as the borrower, andBNP Paribas , as the administrative agent and lender, that allows AFB to borrow up to$300 million at any one time outstanding. The BNP Funding Facility is secured by all of the assets held by AFB. The end of the reinvestment period and the stated maturity date for the BNP Funding Facility areJune 11, 2023 andJune 11, 2025 , respectively. The reinvestment period and the stated maturity date are both subject to a one-year extension by mutual agreement. The interest rate charged on the BNP Funding Facility is based on three month LIBOR, or a "base rate" (as defined in the agreements governing the BNP Funding Facility) plus a margin of (i) 1.80% during the reinvestment period and (ii) 2.30% following the reinvestment period. Beginning onDecember 11, 2020 , AFB is required to pay a commitment fee of between 0.00% and 1.25% per annum depending on the size of the unused portion of the BNP Funding Facility. As ofSeptember 30, 2022 , there was$175 million outstanding under the BNP Funding Facility and we and AFB were in compliance in all material respects with the terms of the BNP Funding Facility.
Convertible Unsecured Notes
We have issued$403 million in aggregate principal amount of unsecured convertible notes that mature onMarch 1, 2024 (the "2024 Convertible Notes") unless previously converted or repurchased in accordance with the terms. We do not have the right to redeem the 2024 Convertible Notes prior to maturity. The 2024 Convertible Notes bear interest at a rate of 4.625% per annum, payable semi-annually. In certain circumstances, assuming the conversion date below has not already passed, the 2024 Convertible Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, at the conversion rate (listed below as ofSeptember 30, 2022 ) subject to customary anti-dilution adjustments and the requirements of the indenture (the "Convertible Unsecured Notes Indenture"). Prior to the close of business on the business day immediately preceding the conversion date (listed below), holders may convert their 2024 Convertible Notes only under certain circumstances set forth in the Convertible Unsecured Notes Indenture. On or after the conversion date until the close of business on the second scheduled trading day immediately preceding the maturity date for the 2024 Convertible Notes, holders may convert their 2024 Convertible Notes at any time. In addition, if we engage in certain corporate events as described in the Convertible Unsecured Notes Indenture, holders of the 2024 Convertible Notes may require us to repurchase for cash all or part of the 2024 Convertible Notes at a repurchase price equal to 100% of the principal amount of the 2024 Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.
Certain key terms related to the convertible features for the 2024 Convertible
Notes as of
2024 Convertible Notes
Conversion premium 15.0 %
Closing stock price at issuance $ 17.29
Closing stock price date March 5, 2019
Conversion price(1) $ 19.78
Conversion rate (shares per
50.5549
Conversion date December 1, 2023 ________________________________________
(1)Represents conversion price and conversion rate, as applicable, as of
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In February 2022 , we repaid in full the $388 million in aggregate principal
amount of unsecured convertible notes (the "2022 Convertible Notes") upon their
maturity at a premium in accordance with the terms of the indenture governing
the 2022 Convertible Notes, resulting in a realized loss on the extinguishment
of debt of $48 million . The 2022 Convertible Notes bore interest at a rate of
4.60% per year, payable semi-annually.
Unsecured Notes
We issued certain unsecured notes (each issuance of which is referred to herein using the "defined term" set forth under the "Unsecured Notes" column of the table below and collectively referred to as the "Unsecured Notes"), that pay interest semi-annually and all principal amounts are due upon maturity. Each of the Unsecured Notes may be redeemed in whole or in part at any time at the Company's option at a redemption price equal to par plus a "make whole" premium, if applicable, as determined pursuant to the indentures governing each of the Unsecured Notes, plus any accrued and unpaid interest. Certain key terms related to the features for the Unsecured Notes as ofSeptember 30, 2022 are listed below. Aggregate (dollar amounts in millions) Principal Amount Unsecured Notes Issued Interest Rate Original Issuance Date Maturity Date 2023 Notes $ 750 3.500% August 10, 2017 February 10, 2023 2024 Notes $ 900 4.200% June 10, 2019 June 10, 2024 March 2025 Notes $ 600 4.250% January 11, 2018 March 1, 2025 July 2025 Notes$ 1,250 3.250% January 15, 2020 July 15, 2025 January 2026 Notes$ 1,150 3.875% July 15, 2020 January 15, 2026 July 2026 Notes$ 1,000 2.150% January 13, 2021 July 15, 2026 2027 Notes $ 500 2.875% January 13, 2022 June 15, 2027 2028 Notes$ 1,250 2.875% June 10, 2021 June 15, 2028 2031 Notes $ 700 3.200% November 4, 2021 November 15, 2031
See Note 5 to our consolidated financial statements for the three and nine
months ended
As ofSeptember 30, 2022 , we were in compliance in all material respects with the terms of the 2024 Convertible Unsecured Notes Indentures and the indentures governing the Unsecured Notes. The 2024 Convertible Notes and the Unsecured Notes are our senior unsecured obligations and rank senior in right of payment to any future indebtedness that is expressly subordinated in right of payment to the 2024 Convertible Notes and the Unsecured Notes; equal in right of payment to our existing and future unsecured indebtedness that is not expressly subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities.
RECENT DEVELOPMENTS
FromOctober 1, 2022 throughOctober 20, 2022 , we made new investment commitments of approximately$1.1 billion , of which$1.0 billion were funded. Of these new investment commitments, 68% were in first lien senior secured loans, 31% were in second lien senior secured loans and 1% were in other equity. Of the approximately$1.1 billion of new investment commitments, 98% were floating rate, 1% were non-income producing and 1% were on non-accrual status. The weighted average yield of debt and other income producing securities funded during the period at amortized cost was 11.0% and the weighted average yield on total investments funded during the period at amortized cost was 10.9%. We may seek to sell all or a portion of these new investment commitments, although there can be no assurance that we will be able to do so. FromOctober 1, 2022 throughOctober 20, 2022 , we exited approximately$418 million of investment commitments, including$6 million of loans sold to IHAM or certain vehicles managed by IHAM. Of the total investment commitments exited, 77% were first lien senior secured loans, 20% were preferred equity and 3% were second lien senior secured loans. Of the approximately$418 million of exited investment commitments, 80% were floating rate and 20% were fixed rate. The weighted average yield of debt and other income producing securities exited or repaid during the period at amortized cost was 173 -------------------------------------------------------------------------------- 10.0% and the weighted average yield on total investments exited or repaid during the period at amortized cost was 10.0%. Of the approximately$418 million of investment commitments exited fromOctober 1, 2022 throughOctober 20, 2022 , we recognized total net realized gains of approximately$8 million , with no realized gains or losses recognized from the sale of loans to IHAM or certain vehicles managed by IHAM. In addition, as ofOctober 20, 2022 , we had an investment backlog and pipeline of approximately$605 million and$0 , respectively. Investment backlog includes transactions approved by our investment adviser's investment committee and/or for which a formal mandate, letter of intent or a signed commitment have been issued, and therefore we believe are likely to close. Investment pipeline includes transactions where due diligence and analysis are in process, but no formal mandate, letter of intent or signed commitment have been issued. The consummation of any of the investments in this backlog and pipeline depends upon, among other things, one or more of the following: satisfactory completion of our due diligence investigation of the prospective portfolio company, our acceptance of the terms and structure of such investment and the execution and delivery of satisfactory transaction documentation. In addition, we may sell all or a portion of these investments and certain of these investments may result in the repayment of existing investments. We cannot assure you that we will make any of these investments or that we will sell all or any portion of these investments.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting estimates, including those relating to the valuation of our investment portfolio, are described below. The critical accounting estimates should be read in conjunction with our risk factors as disclosed in "Item 1A. Risk Factors." See Note 2 to our consolidated financial statements for three and nine months endedSeptember 30, 2022 for more information on our critical accounting policies.
Investments
Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment using the specific identification method without regard to unrealized gains or losses previously recognized, and include investments charged off during the period, net of recoveries. Unrealized gains or losses primarily reflect the change in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized. Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available (i.e., substantially all of our investments) are valued at fair value as determined in good faith by our board of directors, based on, among other things, the input of our investment adviser, audit committee and independent thirdparty valuation firms that have been engaged at the direction of our board of directors to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing 12month period (with certain de minimis exceptions) and under a valuation policy and a consistently applied valuation process. The valuation process is conducted at the end of each fiscal quarter, and a portion of our investment portfolio at fair value is subject to review by an independent third-party valuation firm each quarter. In addition, our independent registered public accounting firm obtains an understanding of, and performs select procedures relating to, our investment valuation process within the context of performing the integrated audit. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time), the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company's securities to any similar publicly traded securities, changes in the interest rate environment and the credit markets, which may affect the price at which similar investments would trade in their principal markets and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate our valuation.
Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors, as described
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herein. Due to the inherent uncertainty of determining the fair value of
investments that do not have a readily available market value, the fair value of
our investments may fluctuate from period to period. Additionally, the fair
value of our investments may differ significantly from the values that would
have been used had a ready market existed for such investments and may differ
materially from the values that we may ultimately realize. Further, such
investments are generally subject to legal and other restrictions on resale or
otherwise are less liquid than publicly traded securities. If we were required
to liquidate a portfolio investment in a forced or liquidation sale, we could
realize significantly less than the value at which we have recorded it.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.
Our board of directors undertakes a multistep valuation process each quarter, as described below:
•Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment in conjunction with our portfolio management team.
•Preliminary valuations are reviewed and discussed with our investment adviser's management and investment professionals, and then valuation recommendations are presented to our board of directors. •The audit committee of our board of directors reviews these valuations, as well as the input of third parties, including independent thirdparty valuation firms who have reviewed a portion of the investments in our portfolio at fair value. •Our board of directors discusses valuations and ultimately determines the fair value of each investment in our portfolio without a readily available market quotation in good faith based on, among other things, the input of our investment adviser, audit committee and, where applicable, independent thirdparty valuation firms.
Fair Value of Financial Instruments
We follow ASC 825-10, Recognition and Measurement of Financial Assets and
Financial Liabilities ("ASC 825-10"), which provides companies the option to
report selected financial assets and liabilities at fair value. ASC 825-10 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities and to more easily understand the effect
of the company's choice to use fair value on its earnings. ASC 825-10 also
requires entities to display the fair value of the selected assets and
liabilities on the face of the balance sheet. We have not elected the ASC 825-10
option to report selected financial assets and liabilities at fair value. With
the exception of the line items entitled "other assets" and "debt," which are
reported at amortized cost, the carrying value of all other assets and
liabilities approximate fair value.
We also follow ASC 820-10, which expands the application of fair value
accounting. ASC 820-10 defines fair value, establishes a framework for measuring
fair value in accordance with GAAP and expands disclosure of fair value
measurements. ASC 820-10 determines fair value to be the price that would be
received for an investment in a current sale, which assumes an orderly
transaction between market participants on the measurement date. ASC 820-10
requires us to assume that the portfolio investment is sold in its principal
market to market participants or, in the absence of a principal market, the most
advantageous market, which may be a hypothetical market. Market participants are
defined as buyers and sellers in the principal or most advantageous market that
are independent, knowledgeable, and willing and able to transact. In accordance
with ASC 820-10, we have considered its principal market as the market in which
we exit our portfolio investments with the greatest volume and level of
activity. ASC 820-10 specifies a hierarchy of valuation techniques based on
whether the inputs to those valuation techniques are observable or unobservable.
In accordance with ASC 820-10, these inputs are summarized in the three broad
levels listed below:
•Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.
•Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
•Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
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In addition to using the above inputs in investment valuations, we continue to
employ the net asset valuation policy approved by our board of directors that is
consistent with ASC 820-10. Consistent with our valuation policy, we evaluate
the source of inputs, including any markets in which our investments are trading
(or any markets in which securities with similar attributes are trading), in
determining fair value. Our valuation policy considers the fact that because
there is not a readily available market value for most of the investments in our
portfolio, the fair value of the investments must typically be determined using
unobservable inputs.
Our portfolio investments (other than as described below in the following
paragraph) are typically valued using two different valuation techniques. The
first valuation technique is an analysis of the enterprise value ("EV") of the
portfolio company. Enterprise value means the entire value of the portfolio
company to a market participant, including the sum of the values of debt and
equity securities used to capitalize the enterprise at a point in time. The
primary method for determining EV uses a multiple analysis whereby appropriate
multiples are applied to the portfolio company's EBITDA (generally defined as
net income before net interest expense, income tax expense, depreciation and
amortization). EBITDA multiples are typically determined based upon review of
market comparable transactions and publicly traded comparable companies, if any.
We may also employ other valuation multiples to determine EV, such as revenues
or, in the case of certain portfolio companies in the power generation industry,
kilowatt capacity. The second method for determining EV uses a discounted cash
flow analysis whereby future expected cash flows of the portfolio company are
discounted to determine a present value using estimated discount rates
(typically a weighted average cost of capital based on costs of debt and equity
consistent with current market conditions). The EV analysis is performed to
determine the value of equity investments, the value of debt investments in
portfolio companies where we have control or could gain control through an
option or warrant security, and to determine if there is credit impairment for
debt investments. If debt investments are credit impaired, an EV analysis may be
used to value such debt investments; however, in addition to the methods
outlined above, other methods such as a liquidation or wind-down analysis may be
utilized to estimate enterprise value. The second valuation technique is a yield
analysis, which is typically performed for non-credit impaired debt investments
in portfolio companies where we do not own a controlling equity position. To
determine fair value using a yield analysis, a current price is imputed for the
investment based upon an assessment of the expected market yield for a similarly
structured investment with a similar level of risk. In the yield analysis, we
consider the current contractual interest rate, the maturity and other terms of
the investment relative to the risk of the company and the specific investment.
A key determinant of risk, among other things, is the leverage through the
investment relative to the enterprise value of the portfolio company. As debt
investments held by us are substantially illiquid with no active transaction
market, we depend on primary market data, including newly funded transactions,
as well as secondary market data with respect to high yield debt instruments and
syndicated loans, as inputs in determining the appropriate market yield, as
applicable.
For other portfolio investments such as investments in the SDLP Certificates and
IHAM, discounted cash flow analysis is the primary technique utilized to
determine fair value. Expected future cash flows associated with the investment
are discounted to determine a present value using a discount rate that reflects
estimated market return requirements.
In December 2020 , the SEC adopted new Rule 2a-5 under the 1940 Act. Rule 2a-5
permits boards of directors of registered investment companies and BDCs to
either (i) choose to continue to determine fair value in good faith, or (ii)
designate its investment adviser as the valuation designee tasked with
determining fair value in good faith, subject to the board's oversight. Our
board of directors has designated our investment adviser to serve as our
valuation designee effective October 1, 2022 .
See Note 8 to our consolidated financial statements for the three and nine
months ended
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