Hi YXI friends,

Ares Capital (ARCC) reported earnings earlier this week. As the biggest Business Development Company of them all, has ARCC saturated its deal flow? Will the Fed’s rate cuts hammer the stock? How sound is ARCC’s capital structure?

Let’s go through a detailed review of ARCC’s portfolio performance, capital structure, comparable valuation, and price analysis to find out the answers.

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1. ARCC’s Portfolio Expands To 535 Companies

In Q3, ARCC’s portfolio expanded by 10 companies to 535 names in its portfolio, the largest by far among Business Development Companies.

The majority of ARCC’s portfolio is in First Lien Senior Secured. Just under a quarter falls under Second Lien or Senior loans. The final quarter is split between Preferred Equity, Ivy Hill, and Other Equity. Ivy Hill is a Hedge Fund focused on complex private credit deals.

69% of ARCC’s portfolio is in floating rate, which is the norm for BDC lending. To me, the non-income producing portion of the portfolio (e.g. equity investments) is rather high.

In terms of yields across ARCC’s investments at fair value, Ivy Hill is producing the highest return. On average, the yields are pretty tidy across the different loan classes, with a weighted average yield of 10.5% on portfolio’s fair value.

2. ARCC Is Still Expanding Its Income, But The Market Is Competitive

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