The following information was previously provided to subscribers of Premium BDC Reports along with:
- ARCC target prices/buying points
- ARCC risk profile, potential credit issues, and overall rankings
- ARCC dividend coverage projections and worst-case scenarios
ARCC Dividend Update
As of March 31, 2021, ARCC had around $454 million or $1.04 per share of “undistributed taxable income” which is the amount of earnings in excess of what has been paid to shareholders. Similar to other BDCs such as TSLX, GAIN, and CSWC, there is a good chance that ARCC will need to pay a portion of this amount as a supplemental dividend in 2021 to satisfy the Regulated Investment Company (“RIC”) requirements set forth by the Internal Revenue Code (“IRC”) even when utilizing the spillback provision. For now, management is retaining this amount as a cushion to support “our goal of maintaining a steady dividend throughout market cycles”:
“I want to discuss our undistributed taxable income and our dividends. We currently estimate that our spillover income from 2020 into 2021 will be approximately $454 million or $1.04 per share. We believe having a strong and meaningful undistributed spillover supports our goal of maintaining a steady dividend throughout market cycles and sets us apart from many other BDCs that do not have any spillover.”
ARCC continues to reduce its overall borrowing rates as well as laddering its maturities. On June 3, 2021, ARCC priced $850 million of 2.875% notes due June 15, 2028, which is an extremely low fixed rate for an unsecured note due 2028 and is taken into account with the updated projections. Also taken into account are additional returns from its investment in Ivy Hill Asset Management as discussed by management on the recent call:
“We have continued to invest in Ivy Hill and with that obviously, we generate typically more funds under management, assets under management there that obviously increases the management fees of that company. As you know, we also invest securities in a lot of the funds and vehicles that they put together, which also just allows us to ramp up the investment income from Ivy Hill. So it is simply just an increased dividend this quarter that you should expect to see. As we invest more, obviously, we should be taking in more income from Ivy Hill. And obviously, a dividend increase just represents our continued belief that it is a very attractive investment vehicle and relationship with Ivy Hill, so just continuing upwards.”
For Q1 2021, ARCC reported another strong quarter slightly beating its best-case projections mostly due to much higher-than-expected dividend income and capital structuring service fees. Leverage (debt-to-equity) declined due to the recent accretive equity offering as well as no portfolio growth (slight decline). Its portfolio yield (at cost) decreased slightly from 8.0% to 7.9% due to new investments at lower yields.
ARCC is now near its lower targeted leverage with a debt-to-equity ratio of 1.01 (adjusted for $337 million in cash). Through April 22, 2021, the company has already funded $630 million of new investments partially offset by $432 million of exits.
“After considering our investment in capital activities during the quarter, we ended the first quarter with nearly $5.2 billion of total available liquidity and a debt-to-equity ratio net of available cash of $285 million of 1.02 times, down from 1.17 times at the end of the fourth quarter. While our leverage ratios will vary overtime, depending on activity levels, we will continue to work to operate within our stated target leverage range of 0.9 to 1.25 times.”
During Q1 2021, ARCC issued $1.0 billion of 2.150% unsecured notes due 2026 at a slight discount to par partially used to redeem $230 million of 6.875% unsecured notes which resulted in a realized loss on the extinguishment of debt of $43 million. In February 2021, ARCC completed a public equity offering of 14 million shares at $17.85 per share resulting in total proceeds, net of estimated offering expenses, of approximately $249.4 million. As of March 31, 2021, ARCC had $337 million in cash and cash equivalents and approximately $4.9 billion available for additional borrowings under its existing credit facilities.
“During the quarter, we extended our corporate revolving credit facility to a full five-years and upsized it by nearly $350 million, bringing the total facility size to $4 billion, which is the largest single credit facility for any BDC. In addition, we took advantage of the historically low rate environment and issued $1 billion of 2.15% unsecured notes maturing in July 2026, which was a record low coupon for us or any BDC, while also optimizing our liability structure by exercising our option to early redeem our 2047 notes at par. These $230 million of notes, which we assumed in our acquisition of Allied Capital over 10-years ago, represented the highest interest rate of any of our outstanding debt securities at 6 7/8%. We also returned to the equity markets for a secondary issuance for the first time since 2014, issuing 14 million shares of our common stock at a premium to our net asset value, bringing us net proceeds of approximately $250 million.”
Penni Roll, CFO: “With $5.2 billion of available liquidity and a predominately unsecured funding profile, we believe that our balance sheet remains one of our most significant competitive advantages and provides us with significant flexibility.”
Previously, ARCC’s Board reaffirmed its second quarter dividend of $0.40 per share payable on June 30, 2021:
As discussed in the Dividend Coverage Levels report, only BDCs that can cover dividends by at least 90% using the lower-yield Leverage Analysis with a debt-to-equity ratio of 0.80 will be considered for ‘Level 1’ dividend coverage.
Full BDC Reports
This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.