Ares Capital yesterday reported a big quarter for new issues, $2.4 billion across 50 borrowers, compared to $1.3 billion in the previous quarter and $1.9 billion in the same period last year.
Management attributed much of the spike to catch up business that might have hit the market in the first half had the fourth quarter last year not been so volatile.
Deal Sourcing
By number, existing portfolio companies accounted for about 65% of commitments. One of Ares’ largest investments was $107.2 million of first-lien add-on debt (L+425) for long-time relationship WASH Multifamily, an EQT-backed laundry equipment and services company. Others included Murchison Oil & Gas, Advarra and FastSigns.
Among the larger tickets to new borrowers were a $76.5 million first-lien (L+675) investment backing the buyout of WebPT by Warburg Pincus, and a $66.1 million first-lien (L+700) behind Warburg’s buyout of Qualifacts.
Netting out repayments and exits, new issues still clocked in at an impressive $985 billion, up from negative $41 million in the second quarter, and a net increase of $600 million in the first three months of the year.
The lender continues to play across all deal sizes despite a bigger push in recent years into large direct lending opportunities. The EBITDA of the companies Ares financed in 3Q19 ranged from $12 million to $116 million, with a weighted average $50 million. In comparison, the weighted average EBITDA of borrowers in the portfolio was $137 million.
Yields
Average new issue yields in the quarter slipped to 9.8% from 10.4%. Lower LIBOR drove the decline, but so did structuring, with 90% of new issues concentrated in first-lien loans compared to 50% in the second quarter. Much of the first-lien volume was driven by add-on acquisition activity among existing borrowers.
Non-Accruals
Non-accruals fell to 1.5% from 2.3%, as Ares wrote down Trident Health Services to realize a loss of $96 million. Taking away some of the sting was about $47 million in gains realized among other companies, including the sale of Soil Safe during the quarter. No new non-accruals were added during the quarter.
Looking ahead
Since the end of the quarter, Ares has booked $360 million in new commitments. Management says their backlog — deals with a signed commitment and expected to close —totals $665 million. The pipeline — deals where no formal mandate has been inked — stands at $265 million.
Those levels are below average for Ares, however management noted a recent pickup in activity and expects to see the typical year end push. And, there could be more than meets the eye should the market experience the same turbulence of the fourth quarter last year. —Kelly Thompson
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