Ares Capital grows even bigger with $3.4B American Capital purchase

Two of the largest listed BDCs are merging to form a middle market lending behemoth that will have $13 billion in investments (at fair value). The largest, Ares Capital (ticker: ARCC), announced yesterday that it’s buying American Capital (ticker: ACAS) for $3.4 billion.

The purchase will put even more miles between ARCC and its nearest competitor, now Prospect Capital (ticker: PSEC), which has $6.2 billion in assets against ARCC’s $9.3 billion. The ACAS portfolio will give ARCC another $4.7 billion in investments and expand the number of portfolio companies to 385 from 220.

With the purchase, ARCC will gain scale and flexibility to underwrite larger commitments to compete against traditional banks. Last year’s financing for American Seafoods Group whetted ARCC’s appetite for bigger names. After all, bigger deals generate bigger underwriting and distribution fees. ARCC underwrote an $800 million loan for American Seafoods, snagging a mandate that typically would’ve gone to large banks.

ARCC management yesterday said that it wants the ability to extend commitments of $500 million to $1 billion for any one transaction, with the aim of holding $250 million, whereas before ARCC would go as large as $300 million, with the aim of holding $100 million.

The ACAS purchase also will give ARCC more breathing room under its 30% non-qualifying bucket to ramp its new joint-venture fund with Varagon. The Varagon platform is replacing ARCC’s joint-venture with GE Capital, which began to wind down last year in the wake of GE Capital asset sales.

The boards of directors of both companies have unanimously approved the acquisition.

The purchase requires shareholder approvals and is contingent on the $562 million sale of ACAS’s mortgage unit to American Capital Agency (ticker: AGNC) in a separate transaction.

Elliott Management, holder of a 14.4% interest in American Capital, strongly supports the transactions and will vote its shares in favor.

Ares Management agreed to an income-based fee waiver of up to $100 million for the first ten quarters after closing.

The combined company will remain externally managed by Ares Capital Management LLC, and all current Ares Capital officers and directors will remain in their current roles.

ACAS will continue with planned asset sales ahead of closing, in collaboration with Ares. ACAS hired Goldman Sachs and Credit Suisse in January to vet buyers. Since March 31, ACAS has announced sales of over $550 million in balance sheet investments. In addition to the mortgage business, ACAS is looking to sell its European Capital assets. — Kelly Thompson/Jon Hemingway


With Market Frowning on Risk, Issuers and Sponsors Privately Place 2nd-Lien Leveraged Loans

privately placed loans

The issuance of second-lien credits in the U.S. syndicated loan market has dropped off dramatically over the past year as economic volatility has sent prices in the secondary sharply higher and often stalled activity in the primary market, especially for riskier transactions (like second-liens).

That’s not to say 2nd-liens have disappeared. Indeed, so far in 2016 LCD has reported on more $2.6 billion of second-lien loans that have been privately placed, in many cases by sponsors seeking junior debt, reaching out directly to buyside firms. This is up from roughly $1 billion during the same period in 2015.

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This story is part of more detailed analysis, by LCD’s Kerry Kantin, first appearing on, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.


Senate hearing opens discussion on BDC regulation changes

A hearing by the Senate banking committee showed bi-partisan agreement for BDCs as a driver of growth for smaller U.S. companies, but exposed some rifts over whether financial companies should benefit from easier regulation.

BDCs are seeking to reform laws, including allowing more leverage of a 2:1 debt-to-equity ratio, up from the current 1:1 limit. They say the increase would be modest compared to existing levels for other lenders, which can reach 15:1 for banks, and the low-20x ratio for hedge funds.

A handful of BDCs are seeking to raise investment limits in financial companies. They argue that the current regulatory framework, dating from the 1980s when Congress created BDCs, fails to reflect the transformation of the U.S. economy, away from manufacturing.

BDCs stress that they are not seeking any government or taxpayer support.

They are also seeking to ease SEC filing requirements, a change that would streamline offering and registration rules, but not diminish investor protections.

Ares Management President Michael Arougheti told the committee members in a hearing on May 19 that although BDCs vary by scope, they largely agree that regulation is outdated and holding back the industry from more lending from a sector of the U.S. economy responsible for much job creation.

“While the BDC industry has been thriving, we are not capitalized well enough to meet the needs of middle market borrowers that we serve. We could grow more to meet these needs,” Arougheti said.

In response to criticism about expansion of investment to financial services companies, the issue of the 30% limit requires further discussion, Arougheti said.

The legislation under discussion is the result of lengthy bi-partisan collaboration and reflects concern about increased financial services investments, resulting in a prohibition on certain investments, including private equity funds, hedge funds and CLOs, Arougheti added.

“There are many financial services companies that have mandates that are consistent with the policy mandates of a BDC,” Arougheti added.

Senator Elizabeth Warren (D-MA) raised the issue of high management fees of BDCs even in the face of poor shareholder returns. Several BDCs have indeed moved to cut fees in order to better align interests of shareholders and BDC management companies.

She said that Ares’ management and incentive fees have soared, at over 35% annually over the past decade, outpacing shareholder returns of 5%, driving institutional investors away from the sector, and leaving behind vulnerable mom-and-pop retail investors. Arougheti countered by saying reinvestment of dividends needed to be taken into account when calculating returns, and said institutional investors account for 50–60% of shareholders.

Warren said raising the limit of financial services investment to 50%, from 30%, diverts money away from small businesses that need it, while BDCs still reap the tax break used to incentivize small business investment.

“A lot of BDCs focus on small business investments and fill a hole in the market. A lot of companies in Massachusetts and across the country get investment money from BDCs,” said Warren.

“If you really want to have more money to invest, why don’t you lower your high fees and offer better returns to your investors? Then you get more money, and you can go invest it in small businesses,” Warren said.

Brett Palmer, President of the Small Business Investor Alliance (SBIA), said the May 19 hearing, the first major legislative action on BDCs in the Senate, was a step toward a bill that could lead to a new law.

“There is broad agreement that BDCs are filling a critical gap in helping middle market and lower middle market companies grow. There is a road map for getting a BDC bill across the finish line, if not this year, then next,” Palmer said, stressing the goal was this year.

Technically, the hearing record is still open. The Senate banking subcommittee for securities and investment could return with further questions to any of the witnesses. Then, senators can decide what the next stop will be, ranging from no action to introduction of a bill.

Pat Toomey (R-PA) brought up the example of Pittsburgh Glass Works, a company that has benefited from a BDC against a backdrop that has seen banks pulling back from lending to smaller companies following the financial crisis, resulting in a declining number of small businesses from 2009 to 2014.

The windshield manufacturer, a portfolio company of Kohlberg & Co., received $410 million in financing, of which $181 million came from Franklin Square BDCs.

“Business development companies have stepped in to fill that void,” Toomey told the committee hearing. “For Pittsburgh Glass, it was the best financing option available to them.”

FS Investment Corp.’s investment portfolio showed a $68 million L+912 (1% floor) first-lien loan due 2021 as of March 31, an SEC filing showed.

Arougheti cited the example of OTG Management, a borrower of Ares Capital. OTG Management won a contract to build out and operate food and beverage concessions at JetBlue’s terminal at New York airport JFK, but was unable to borrow from traditional senior debt lenders or private equity firms due to its limited operating history.

Ares Capital’s investment in OTG Management included a $24.7 million L+725 first-lien loan due 2017 as of March 31, an SEC filing showed. — Abby Latour

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As Prices Rise in Trading Mart, US Leveraged Loan Fund Assets Grow for 2nd Straight Month

loan fund assets under management

Loan mutual funds’ assets under management continued to grow in April after expanding in March, increasing by $1.44 billion, to $111 billion.

As was the case in March, however, the driver behind the increase wasn’t a surge of demand for the asset class from retail investors, but rather a rally in the secondary loan market.

In fact, funds that report weekly to Lipper FMI actually posted a modest $503 million net outflow for the four weeks ended April 27, which was handily cancelled out by gains in the secondary, according to LCD, an offering of S&P Global Market Intelligence. – Kerry Kantin

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This story first appeared on, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.


Another Dividend: CHG Healthcare Readies $990M Leveraged Loan Backing Recap

An arranger group led by Goldman Sachs has scheduled a lender meeting for CHG Healthcare Services on Thursday, May 19, at 10 a.m. EDT.

The issuer is raising a $990 million term loan B, while $300 million of second-lien notes have been privately placed, according to sources. Proceeds back a dividend recapitalization. Additional arrangers are expected to be named shortly.

The healthcare-staffing provider is controlled by Leonard Green & Partners and Ares Management.

CHG roughly a year ago wrapped a $225 million add-on to its covenant-lite first-lien term loan to repay second-lien term debt and fund a small dividend, sources noted. The add-on took first-lien outstandings to roughly $800 million.

The CHG deal is the latest in a relative spurt of recap/dividend loans lately. — Chris Donnelly
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High Yield Issuance Jumps, Leveraged Loan Recaps Emerge As Finance Market Plods Along

U.S. leveraged finance issuance totaled $9.4 billion last week thanks largely to a spate of drive-by high yield bond deals, with the leveraged loan market seeing a host of opportunistic credits amid unimpressive overall volume in that segment.

The $9.4 billion is down slightly from the $10.7 billion recorded the previous week. High yield issuance totaled $6.8 billion last week, bringing the year-to-date total in that sector to $78.6 billion. That’s down 47% from the same period in 2015, according to LCD, an offering of S&P Global Market Intelligence.

US leveraged finance issuanceLeveraged loan issuance was a tepid $2.6 billion during the week, a sharp drop from the previous week’s $7 billion. That brings U.S. leveraged loan issuance to $128 billion so far in 2016, down some 18% from the same period last year.

Of note in high yield last week, Cheniere Energy wrapped a $1.25 billion offering backing a refinancing at the company’s Cheniere Corpus Christi level. The offering was upsized from $1 billion. NRG Energy also refinanced last week, pricing a $1 billion deal (BB-) at 7.25%.

This activity comes amid another hefty withdrawal from U.S. high yield funds (though cash inflows have returned in the past few days).

The leveraged loan market was slow last week as far as new issues, despite increasingly solid fundamentals. Indeed, there were a pair of dividend/recapitalizations – for Amneal Pharmaceuticals and clothing retailer J.Jill Group – indicating that market tone is improving.

The largest deal to launch was a $1.3 billion credit backing Pilot Travel Centers, which refinanced existing bank debt, trimming interest expense in the process.

The biggest news in the loan market last week: Investors poured a relatively whopping $303 million into U.S. loan funds, the largest such inflow in more than a year.

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As Investor Sentiment Picks Up, Refinancings/Recap Loans Re-Emerge

leveraged loan refi recap issuance

More evidence that tone is improving in the U.S. leveraged loan market: opportunistic refinancing – including credits backing dividends to private equity sponsors – began to pick up in April (and there’s been at least three recap deals in May, as well).

This chart was taken from LCD’s monthly U.S. Leveraged Loan Technicals analysis, by Kerry Kantin.

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Investors Pour $303M into US Leveraged Loan Funds

U.S. leveraged loan funds had a net inflow of $303 million in the week ended May 11, according to Lipper. This is the second inflow after a five-week outflow streak totaling $693 million, and it’s the largest one-week inflow in just over a year, since the week ended April 15, 2015.

US leveraged loan fund flowsTake note, however, that today’s reading is hugely ETF-related, at 85% of the inflow. While last week’s was inverse, with outflows of $42 million from mutual funds filled back in by inflows of $126 million to the exchange-traded fund market, there has been a net inflow dominated by ETFs since the week ended March 23 when the $126 million was 95% related to ETFs.

Whatever that might say about fast money, hedging strategies, and other market-timing efforts, this past week’s net inflow takes the trailing-four-week average into the black for the first time in six weeks, at positive $55 million, from negative $254 million last week and negative $126 million two weeks ago.

Year-to-date outflows from leveraged loan funds shrank a bit, to $5 billion, with an inverse of negative $5.2 billion mutual fund against positive $180 million ETF. A year ago at this juncture, it was similarly mostly mutual fund outflows, at $3.3 billion, versus a small inflow of $93 million to ETFs, for a net negative reading of approximately $3.2 billion.

The change due to market conditions this past week was essentially nothing, at positive $12 million against total assets, which were $61.2 billion at the end of the observation period. ETFs represented about 10% of the total, at $5.9 billion. — Matt Fuller

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This story first appeared on, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.


Leveraged Loan Price-Flexes Change Course in Europe as Market Strengthens

European leveraged loan price flex

The European leveraged loan market outlook brightened in April, thanks in part to a combination of an uptick in loan repayments and continued CLO issuance, both of which contribute to increased investor demand.

These influences come at a time when primary loan issuance also is improving, though not enough to overwhelm buyside appetite, according to LCD, an offering of S&P Global Market Intelligence.

One example of just how much sentiment has turned: Price-flexes, where the interest rate or discount on a proposed loan is changed during syndication, due to investor demand – reversed course in April, vastly favoring issuers (pricing was lowered during marketing).

In March, in contrast, it clearly was an investors’ market.

You can read more about how price-flexes work here, in LCD’s free Loan Primer Almanac.

This chart was taken from LCD’s monthly European Leveraged Loan Technicals analysis, by Ruth McGavin. It also details

  • Change in loan outstandings vs inflows/outflows
  • Monthly loan repayments
  • Amount of par loans outstanding
  • Loan forward calendar
  • Loan yields



Leveraged Loans: Herbert Park CLO amends transaction as to be Volcker Compliant

Noteholders of GSO/Blackstone’s Herbert Park CLO have been advised that the issuer has amended the transaction documents to enable it to comply with Volcker, by allowing the rated notes to be held in any one of three sub-classes; Collateral Manager (CM) Voting Notes, which will have voting rights with respect to manager removal and replacement, CM Non-Voting Notes, and CM Exchangeable Non-Voting Notes, which will not include voting rights.

The latter class of notes is also exchangeable into CM Voting notes or CM Non-Voting notes. The changes were effective as of May 9.

This follows a similar Volcker-related amendment to Richmond Park CLO.

Both Herbert Park and Richmond Park priced in 2013 ahead of the Volcker Rule coming into effect in 2014.

Last year, ICG sought to Volckerize two of its European CLOs—St. Paul’s II and III—via amendments, while Carlyle amended the AAA tranche on CGMSE 2013-1 CLO and Cairn Volckerized Cairn CLO III via refinancing exercises. — Sarah Husband

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This story first appeared on, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.