Ares Capital, a mid-market BDC, reported a GAAP net loss of $110.5 million or $1.14 per share (basic and diluted).
For the year ended December 31, 2008, Ares Capital made $905.5 million in new commitments across 39 portfolio companies (17 new companies and 22 existing companies). 27 different private equity sponsors were represented in the new commitments. Also, during the year, we made 10 investments in non-sponsored transactions. Of the $905.5 million in new commitments made during the year, approximately 30% were made in first lien senior secured debt, 26% in second lien senior secured debt, 36% in senior subordinated debt and 8% in equity/other securities. Of these investments, 27% were floating rate.
The fair value of Ares Capital’s investments at December 31, 2008 was $2.0 billion. These portfolio investments (excluding cash and cash equivalents) were comprised of approximately 54% in senior secured debt securities (32% in first lien and 22% in second lien assets), 31% in senior subordinated debt securities and 15% in equity/other securities. As of December 31, 2008, the weighted average yield of debt and income producing securities at fair value(2) was 12.79% (11.73% at cost(3)) and 32% of the Company’s assets were in floating rate debt securities.
(2) Computed as (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt included in such securities, divided by (b) total debt and income producing securities at fair value included in such securities.
(3) Computed as (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt included in such securities, divided by (b) total debt and income producing securities at amortized cost included in such securities.
As of February 27, 2009, we had made $9.6 million of investments since December 31, 2008. Of these investments, substantially all were senior subordinated debt. Of these investments, 14% have stated interest at floating rates and 81% have stated interest at fixed rates with a weighted average stated rate of 16.5%. As of February 27, 2009, we exited $21.7 million of investments since December 31, 2008. Of these investments, 56% were senior secured debt and 44% were senior subordinated debt. Of these investments, 98% bore interest at fixed rates with a weighted average stated rate of 13.0%.
“Overall, we are pleased with our performance given the extremely challenging market and economic conditions we faced during the fourth quarter. Our weighted average investment interest spread improved an additional 88 basis points sequentially from 7.8% to 8.7% this quarter and we believe our portfolio remains well positioned with significant weightings in traditionally defensive sectors. Although we experienced our most significant quarter of net unrealized depreciation mostly resulting from marking our assets lower after the precipitous decline in loan values, we experienced only one new non-accruing loan during the quarter. In addition, over 60% of our portfolio was independently valued by third party providers this quarter as a result of adding further valuation procedures,” said President Michael Arougheti.
“We remain focused on strengthening our balance sheet and liquidity, aggressively managing credit quality in our portfolio and opportunistically exploring initiatives to enhance shareholder value. Given our balance sheet as of December 31, 2008 with approximately $235 million of credit facility capacity and cash and a net debt to equity ratio of 0.79x (net of $48.6 million of cash not restricted for our dividend paid on January 2nd), we believe we are well positioned to execute our strategy through this challenging and uncertain period. As an example of our strategy after quarter end, we reduced our leverage by repurchasing $27 million of our on balance sheet CLO debt for $6.6 million, creating a realized gain of $0.21 per share and an increase in our asset coverage ratio cushion of $40.8 million. After giving effect to the debt repurchase, our cushion against our asset coverage test would have increased to approximately $276 million (net of cash after subtracting dividends payable at year end) and our net debt to equity ratio would have declined to 0.75x at December 31, 2008,” added Arougheti.
Ares Capital Management LLC, our investment adviser, employs an investment rating system (Grades 1 to 4) to categorize our investments. Grade 4 is for those investments that involve the least amount of risk in the portfolio (i.e. the portfolio company is performing above expectations and the trends and risk factors are generally favorable, including a potential exit). Grade 3 is for those investments that involve a level of risk that is similar to the risk at the time of origination (i.e. the portfolio company is performing as expected and the risk factors are neutral to favorable). All new investments are initially graded 3. Grade 2 is for those investments where a portfolio company is performing below expectations and indicates that the risk has increased materially since origination. Grade 1 is for those investments that are not anticipated to be repaid in full and our investment adviser will reduce the fair market value of the investment to the amount our investment adviser anticipates will be recovered. Our investment adviser employs half-point increments to reflect underlying trends in portfolio company operating or financial performance, as well as general outlook. As of December 31, 2008, the weighted average investment grade of the investments in Ares Capital Corporation’s portfolio was 2.9 with 4.4% of total investments at amortized cost (or 1.6% at fair value) on non-accrual status.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2008, Ares Capital had $89.4 million in cash and cash equivalents and $908.8 million in total debt outstanding. Subject to leverage restrictions, the Company had approximately $265.2 million available for additional borrowings under its existing credit facilities as of December 31, 2008.
In January 2009, we partially exercised the “accordion feature” of our Revolving Credit Facility, increasing the total amount available for borrowing from $510.0 million to $525.0 million. In February 2009, we also repurchased $27.0 million in aggregate principal amount of notes, issued as a part of our Debt Securitization, for $6.6 million.
For the three months ended December 31, 2008, Ares Capital declared a dividend on November 6, 2008 of $0.42 per share for a total of $40.8 million. The record date was December 15, 2008 and the dividend was distributed on January 2, 2009.
WEBCAST / CONFERENCE CALL
Ares Capital will host a webcast/conference call on Monday, March 2, 2009, at 10:00 a.m. (ET) to discuss its fourth quarter and year ended December 31, 2008 financial results. PLEASE VISIT OUR WEBCAST LINK LOCATED ON THE STOCK INFORMATION PAGE OF THE INVESTOR RESOURCES SECTION OF OUR WEBSITE FOR A SLIDE PRESENTATION THAT COMPLEMENTS THE EARNINGS CONFERENCE CALL.
All interested parties are invited to participate via telephone or the live webcast, which will be hosted on a webcast link located on the Stock Information page of the Investor Resources section of our website at http://www.arescapitalcorp.com. Please visit the website to test your connection before the call. You can also access the conference call by dialing (800) 860-2442 approximately 5-10 minutes prior to the call. International callers should dial +1 (412) 858-4600. All callers should reference “Ares Capital Corporation.” For the convenience of our stockholders, an archived replay of the call will be available through March 23, 2009 by calling (877) 344-7529. International callers please dial +1 (412) 858-4600. For all replays, please reference conference passcode #428049. An archived replay will also be available on a webcast link located on the Stock Information page of the Investor Resources section of our website.
ABOUT ARES CAPITAL CORPORATION
Ares Capital Corporation is a specialty finance company that provides integrated debt and equity financing solutions to U.S. middle market companies. Ares Capital Corporation invests primarily in first and second lien loans and mezzanine debt, which in some cases includes an equity component. To a lesser extent, Ares Capital Corporation also makes equity investments. The Company is externally managed by Ares Capital Management LLC, an affiliate of Ares Management LLC, an SEC registered investment advisory management firm with approximately $29 billion of committed capital under management as of December 31, 2008. Ares Capital Corporation is a closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940.
Statements included herein or on the webcast/conference call may constitute “forward-looking statements,” which relate to future events or our future performance or financial condition. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. Actual results and condition may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in our filings with the Securities and Exchange Commission. Ares Capital Corporation undertakes no duty to update any forward-looking statements made herein or on the webcast/conference call.
Ares Capital Corporation’s filings with the Securities and Exchange Commission, press releases, earnings releases and other financial information are available on its website at www.arescapitalcorp.com.