Ares Capital (ARCC) had another very strong quarter, with positive indications for the future. The business development company reported its second-highest earnings quarter in his history and a record quarter for originations, explains Adrian Day, editor of Global Analyst.

Over half its loans are to companies with which it already has relationships. Loans on non-accrual remain less than 3%, at cost, almost back to pre-covid levels. One company was removed, but one was added.

The company reported an increase in queries for loans, particularly from larger companies who see the advantages of private loans (as opposed to bank loans) in speedier and more certain closing as well as flexibility on conditions. Ares, being the largest BDC, is gaining share because of its size.

The company increased its regular dividend, by 1 cent. It continues to have significant spill-over income which, though it does not have to be distributed, will likely lead to a special year-end distribution as it has paid in previous years (before 2020). A small extra dividend, payable in November, was announced.

The company surprised the market by announcing a 12.5 million share offering immediately after its quarterly results conference call, on which the size of its credit facilities was emphasized, and it was noted that its “at-the-market” share facility was “a nice tool to have so as not to surprise the market with a large overnight offering.”

The market was surprised, and the stock fell. During the last quarter, it had restructured much of its debt and credit facilities, in most cases increasing availability and lowering rates.

With a fully covered dividend (equating to a yield for the year-ahead of 8.3%), and spill-over income equivalent to three-quarters worth of dividends; with a low non-accrual rate and deep pipeline; plus total liquidity of over $7 billion, Ares is a solid holding for income-oriented investors. If you do not own, you can buy for the above-average yield.

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