Ares touts senior-lending boost from American Capital deal

Ares Capital Corp expects higher fee income, lower costs and a larger and faster deployment of its senior direct lending program with Varagon Capital as part of its pending $3.4 billion purchase of American Capital Ltd.

The acquisition, expected to close in the next 12 months, will make Ares the middle-market leader among business-development companies, Ares said.

The firm estimates more than $13 billion in total pro-forma investments as of March 31. That’s more than double the $6 billion for the No. 2 BDC, Prospect Capital Corp, and triple the $3.9 billion for FS Investment Corp, according to an Ares presentation.

Ares said its bigger scale from the deal may enable it to speed deployment and increase the target size of loans in its SDLP with Varagon, a firm backed by American International Group.

Ares CEO Kipp deVeer said the firm hopes to “accelerate the growth of our potentially high-yielding SDLP joint venture,” according to a conference call with Wall Street analysts on May 23.

Potential for larger deals

Ares said it’s seeing more potential for larger deals such as its $800 million first- and second-lien credit facility to back a recapitalization by American Seafoods Group, a portfolio company of Bregal Partners, in 2015. As part of the deal, Ares retained a significant position in each tranche, putting its own skin in the game.

Those transactions are popping up more and more often for us,” deVeer said. “Two, three years ago, we may have gone and felt that we had a real competitive advantage underwriting $300 million and holding $100 million. I think what we’re receiving now is the ability to literally commit $500 million to $1 billion per transaction.”

American Capital had said in January it would work with Goldman Sachs and Credit Suisse to solicit merger offers.

Overall, mergers between BDCs have been rare. TPG Specialty Lending has offered to buy TICC Capital Corp, but no deal has been reached.

In one of the few past acquisitions, Ares Capital paid $648 million for Allied Capital Corp in 2009.

Debt-research firm Fitch Ratings said Ares’s acquisition of Allied Capital turned out to be “highly accretive,” partly because the deal was well-managed by exiting equity investments and junior debt positions in favor of senior debt investments.

Ares will opportunistically exit ACAS’s controlled equity book and collateralized loan obligations over time to reduce the risk profile of its combined portfolio, Fitch said.

Nathan Flanders, managing director and head of non-bank financial institutions at Fitch, said the firm will keep watch about divestments by American Capital, particularly before the deal closes.

Overall, Fitch prefers that BDCs invest higher up in the capital stack, in senior forms of debt that offer higher recovery prospects and lower volatility of investments, he said.

“If they’re unable to do that, they may need to think about the leverage level of the portfolio — they may need to de-lever to account for a higher risk profile,” Flanders said.

Along with benefits to its senior lending, Ares expects the deal to generate near-term cost savings and increased fee income from a larger balance sheet, the company said.

A spokesman for Ares did not return an email from Buyouts.

Action Item: Ares investor presentation: http://bit.ly/1U7Xssk

Photo ©iStock/Paolo Cipriani