Ares buys $1.6 billion first-lien loans to wrap joint venture with GE

By Susanna Moon

Chicago, Aug. 2 – Ares Capital Corp. said it purchased the remaining loans of the Senior Secured Loan Fund LLC, or SSLP, to conclude a joint venture under a definitive agreement.

Under the terms, Ares Capital purchased the remaining $1.6 billion portfolio of first-lien senior secured loans at par plus accrued interest and fees from the SSLP, according to an announcement by the firm.

The SSLP committed more than $20 billion of senior secured loans since the joint venture with GE in 2009, and the SSLP has been winding down without any new investments since June 30, 2015. In August 2015, GE sold its U.S. Sponsor Finance business, which had participated in the SSLP with Ares.

After the loan sale, the SSLP made a final distribution of $1.7 billion to the SSLP subordinated certificates, of which Ares Capital received about $1.5 billion.

Over the life of the investment, Ares Capital generated a gross internal rate of return of 20%, the company said.

As a result, Ares Capital increased its investment in first-lien senior secured loans by $1.6 billion, yielding about 7.1% and exited the remaining $1.5 billion of SSLP subordinated certificates, which were yielding about 5.75% at closing.

“We are pleased to have reached an agreement with the SSLP that will successfully wind down the joint venture in an expedited and beneficial manner for our shareholders,” Kipp deVeer, chief executive officer of Ares Capital, said in the press release.

“In addition to receiving an immediate boost to our portfolio yield, this transaction significantly increases the capacity under our 30% basket, allowing us to gradually expand our investment mix into higher earning strategic investments.”

The company noted in its recent earnings release that its investment in the SSLP certificates at amortized cost and fair value was $1.9 billion and $1.9 billion, respectively, as of June 30.

Ares Capital and GE agreed to terminate the SSLP in July, and Ares purchased $1.6 billion of loans on July 26 and assumed the SSLP’s remaining unfunded loan commitments totaling $50 million, according to the company’s earnings results for the second quarter ended June 30.

After the loan sale, the SSLP made a liquidation distribution to the SSLP certificates and Ares received $1.5 billion of that. With the liquidation distribution, Ares Capital recognized a net realized loss of $18 million as a result of the early termination.

As of June 30, the SSLP had $1.2 billion in cash and GE’s senior notes outstanding totaled $601 million. In early July, the SSLP made its monthly waterfall distribution from this cash, which repaid GE’s senior notes and included distributions to the subordinated certificates. From this distribution, Ares Capital’s SSLP certificates received $474 million. After this distribution, Ares Capital’s amortized cost in its SSLP certificates was $1.5 billion.

Excluding the SSLP loans, Ares Capital made new investment commitments of about $128 million from July 1 through July 26, of which $101 million were funded. Of these new commitments, 99% were in first-lien senior secured loans and 1% was in the subordinated certificates of the SDLP to make co-investments with Varagon and its clients in floating-rate first-lien senior secured loans through the SDLP. Of the $128 million of new investment commitments, 100% were floating rate. The weighted average yield of debt and other income producing securities funded during the period at amortized cost was 7.6%. Ares said it may seek to sell all or a portion of these new investment commitments, although there can be no assurance that it will be able to do so.

Excluding the SSLP repayments, Ares exited about $327 million of investment commitments from July 1 through July 26, including $276 million of investment commitments acquired in the American Capital Acquisition. Of the total investment commitments, 46% were other equity securities, 25% were second-lien senior secured loans, 13% were preferred equity securities, 13% were first-lien senior secured loans, 1% were senior subordinated loans, 1% were collateralized loan obligations and 1% were investments in the subordinated certificates of the SDLP.

Of the $327 million of exited investment commitments, 59% were non-interest bearing, 40% were floating-rate and 1% were fixed-rate. The weighted average yield of debt and other income producing securities exited or repaid during the period at amortized cost was 9.6% and the weighted average yield on total investments exited or repaid during the period at amortized cost was 4.1%.

As of July 26, Ares Capital had an investment backlog and pipeline of about $530 million and $325 million, respectively

Ares Capital is a specialty finance company based in New York City.

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