The following information was previously provided to subscribers of BDC Buzz Premium Reports along with:
- ARCC target prices/buying points
- ARCC risk profile, potential credit issues, and overall rankings. Please see BDC Risk Profiles for additional details.
- ARCC dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.
BDC Buzz is a higher quality service providing investors with detailed institutional quality research in a timely manner to take advantage of buying/selling opportunities. The following information was provided to subscribers along with updated target prices and dividend coverage projections.
ARCC’s pricing could dip this morning related to the equity offering as most of the information discussed below was not provided in a “press release” and was only included in the associated SEC filings. If you get a chance, please read the comments from retail investors on the following breaking news from SA:
ARCC Equity & Notes Offering Update
On January 12, 2022, ARCC announced that it had priced a public offering of 10 million shares at $21.40 with the underwriters’ option to purchase up to an additional 1.5 million shares and is expected to close on January 18, 2022. Net proceeds after fees and expenses will be just under ~$250 million depending on the total amount of shares (underwriters option) which is relatively small compared to the estimated net new investments during Q4 2021 of around $1.3 billion and the additional $500 million of unsecured notes discussed next. Also, 11.5 million shares are only 2.5% more than the number of total shares as of November 2021.
- I have updated the projections for ARCC to take into account the following information.
- Most of this information was not included in a “press release” and was only available in the associated SEC filings.
NAV per share increased by around 2.1% to 2.6% during Q4 2021 and this offering will be accretive adding another 0.3% firmly putting it over $19.00 per share as of Q1 2022. Investors should be expecting additional dividend increases in 2022 that could be announced as soon as next month when the company reports Q4 2021 results. Included in the SEC filings were the following preliminary estimates for the three months ended December 31, 2021:
- Core NII between $0.56 and $0.58
- NAV per share between $18.90 to $19.00 (previously $18.52)
The Company estimates that basic and diluted GAAP earnings per share (“EPS”) will be in the range of $0.77 to $0.86 and basic and diluted Core EPS will be in the range of $0.56 to $0.58, in each case, for the three months ended December 31, 2021 and net asset value per share as of December 31, 2021 will be in the range of $18.90 to $19.00.
Analysts are currently expecting Core EPS of $0.44 to $0.48 which is much lower resulting in an “earnings beat” announcement on February 9, 2022.
As mentioned earlier this week in the BDC Sector Weekly Update, on January 7, 2022, ARCC priced another $500 million of 2.875% unsecured notes due 2027 just below par (99.504%) resulting in a yield-to-maturity of 2.975%. (CUSIP: 04010L BD4).
More importantly was the additional portfolio detail included in the SEC filings especially the $4.8 billion of new funded investments through December 29, 2021, at a weighted average yield of 6.3%. These new investments were partially offset by exiting $3.5 billion at a weighted average yield of 6.8%, a portion of which were non-accrual investments resulting in a realized loss of around $11 million or $0.02 per share.
“From October 1, 2021 through December 29, 2021, we made new investment commitments of approximately $5.6 billion, including $296 million of new investment commitments to IHAM. Of the approximately $5.6 billion of new investment commitments, $4.8 billion were funded. Of these new commitments, 64% were in first lien senior secured loans, 16% were in second lien senior secured loans, 2% were in subordinated certificates of the SDLP, 2% were in senior subordinated loans, 4% were in preferred equity and 12% were in other equity. Of the approximately $5.6 billion of new investment commitments, 83% were floating rate, 12% were non-income producing and 5% were fixed rate. The weighted average yield of debt and other income producing securities funded during the period at amortized cost was 7.2% and the weighted average yield on total investments funded during the period at amortized cost was 6.3%. We may seek to sell all or a portion of these new investment commitments, although there can be no assurance that we will be able to do so.”
“From October 1, 2021 through December 29, 2021, we exited approximately $3.5 billion of investment commitments, including $1.3 billion of loans sold to IHAM or certain vehicles managed by IHAM. Of the total investment commitments exited, 78% were first lien senior secured loans, 15% were second lien senior secured loans, 4% were senior subordinated loans, 2% were subordinated certificates of the SDLP and 1% were other equity. Of the approximately $3.5 billion of exited investment commitments, 98% were floating rate, 1% were non-income producing and 1% were on non-accrual status. The weighted average yield of debt and other income producing securities exited or repaid during the period at amortized cost was 7.0% and the weighted average yield on total investments exited or repaid during the period at amortized cost was 6.8%. Of the approximately $3.5 billion of investment commitments exited from October 1, 2021 through December 29, 2021, we recognized total net realized losses of approximately $11 million, including $3 million of net realized losses from the sale of loans to IHAM or certain vehicles managed by IHAM.”
My takeaway from this information is another strong quarter of originations and repayments (as expected) likely driving large amounts of fee income in Q4 2021. However, the yield on new investments is a bit lower than expected which will partially offset but I firmly believe that ARCC will report closer to its ‘best case’ projections for NII. Also, ARCC continues to lock in lower rate unsecured borrowings to keep appropriate margins and dividend coverage as well as positioning for rising interest rates.
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This information was previously made available to subscribers of BDC Buzz Premium 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 including setting target prices using the portfolio detail shown in this article (at a minimum) as well as financial dividend coverage projections over the next three quarters as discussed earlier.