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RPT-Fitch expects to rate Ares Capital Corporation's convertible notes 'BBB'
July 15 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings expects to rate Ares Capital Corporation's (Ares) $250 million convertible notes 'BBB'. Fitch does not believe there will be a material impact on the company's leverage levels as a result of the issuance, as proceeds will largely be used to repay borrowings on secured credit facilities. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
The expected rating is equalized with the ratings assigned to Ares' existing senior unsecured debt as the new notes will rank equally in the capital structure. The equalization of the unsecured ratings with the secured debt rating reflects Ares' relatively low leverage, its focus on senior debt investments, and Fitch's expectation that proceeds from the issuance will be used to repay a portion of secured debt outstanding, thus increasing the amount of unsecured funding in the capital structure.
Ares long-term Issuer Default Rating has a Positive Rating Outlook reflecting peer-superior funding flexibility, operating consistency throughout the recent downturn, a strong liquidity profile, and conservative dividend strategy. At March 31, 2013, approximately 88% of the company's debt was considered unsecured and borrowing capacity on the revolving facilities was approximately $1.6 billion.
RATING SENSITIVITIES
Ares' ratings could potentially be upgraded over the next 18-24 months provided the company demonstrates measured portfolio growth in the face of what Fitch believes is an overheating credit environment. This will be evaluated in the context of the stability and consistency of Ares' operating performance, asset quality, valuation, and underlying portfolio metrics, including leverage and interest coverage. Specifically, up-ticks in underlying portfolio leverage, and/or deterioration in portfolio company interest coverage or overall portfolio yields, could signal the potential for asset quality issues down the road, which would likely lead to an Outlook revision.
Conversely, negative rating actions would be driven by an extended increase in leverage above the targeted range, resulting from increased borrowings or material unrealized depreciation, and/or a meaningful increase in the proportion of equity holdings without a commensurate decline in leverage. A spike in non-accrual levels and weaker cash income dividend coverage would also be viewed unfavorably from a ratings perspective.
Headquartered in New York, NY, Ares is an externally managed business development company, organized on April 16, 2004. As of March 31, 2013, the company had investments in 156 portfolio companies amounting to approximately $6 billion.
Fitch expects to assign the following ratings:
Ares Capital Corporation:
--Convertible notes 'BBB'.
Fitch currently rates Ares as follows:
--Long-term Issuer Default Rating (IDR) 'BBB';
--Secured debt 'BBB';
--Unsecured debt 'BBB'.
The Rating Outlook is Positive.
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