DEF 14A: Ares Capital Seeks Stockholder Approval to Issue Shares Below Net Asset Value

Ares Capital Corporation is seeking stockholder approval to authorize the company to issue shares of its common stock below its net asset value (NAV) under certain conditions.

Summary

• Ares Capital Corporation is holding a Special Meeting of Stockholders on August 8, 2024, to vote on a proposal to authorize the company to issue shares of its common stock below its net asset value (NAV).
• The authorization, if approved, would be effective for one year.
• The company is seeking this authorization to provide flexibility in accessing capital markets, pursuing investment opportunities, and maintaining a favorable debt-to-equity ratio.
• The proposal limits the number of shares that can be issued below NAV to 25% of the company's outstanding common stock.
• Stockholders of record as of May 13, 2024, are eligible to vote at the meeting, which will be held virtually.
• The board of directors recommends voting in favor of the proposal.

Sentiment

Score: 6

Explanation: The document is neutral in tone, presenting both the potential benefits and risks of the proposal. While it highlights the flexibility and opportunities the authorization would provide, it also acknowledges the potential for dilution and market price decline. The board recommends voting for the proposal, suggesting a positive outlook from management's perspective.

Positives

• The authorization provides Ares Capital with flexibility to access capital markets during periods of volatility.
• It enables the company to pursue attractive investment and acquisition opportunities.
• It improves capital resources to compete effectively for high-quality investments.
• It adds financial flexibility to comply with regulatory requirements and debt facility covenants.
• The company's history shows that such flexibility can lead to accretive acquisitions, such as Allied Capital Corporation.

Negatives

• Issuing shares below NAV can result in immediate dilution for existing stockholders who do not participate in the offering.
• Dilution includes a reduction in NAV and a proportionately greater decrease in a stockholder's interest in the earnings and assets of the company.
• The market price of shares may decline, reflecting potential decreases in NAV.
• Stockholders who do not purchase shares to maintain their percentage interest will experience voting power dilution.

Risks

• Global capital markets may experience periods of disruption and instability.
• Adverse market conditions may limit access to sufficient debt and equity capital.
• Market events may negatively impact the valuations of certain investments and create unrealized losses.
• Exceeding the allowable debt-to-equity ratio could have severe negative consequences.
• There is no guarantee that the company's common stock will trade at prices above NAV in the future.

Future Outlook

The company seeks to maintain consistent access to capital to take advantage of investment opportunities as they arise, and the authorization to issue shares below NAV is intended to provide flexibility in achieving this goal.

Management Comments

• The Board believes that having the flexibility for the Company to sell its common stock below NAV in certain instances is in the Company's best interests and the best interests of its stockholders.
• Michael J Arougheti, Chairman of the Board of Directors, thanks stockholders for their continued interest and support.

Industry Context

BDCs as an industry historically have traded below NAV, and the company is seeking this authorization to align with industry practices and maintain competitiveness.

Comparison to Industry Standards

• The document mentions that BDCs as an industry historically have traded below NAV.
• Ares Capital's request to issue shares below NAV is a common practice among BDCs to maintain financial flexibility.
• The document references the company's acquisition of Allied Capital Corporation during a period of disruption and volatility, which was accretive to the company.
• The company's total stockholder return outperformed that of every other BDC with a market capitalization of greater than $500 million for the one-year period following the date of the 2009 issuance.

Stakeholder Impact

• Existing stockholders may experience dilution if they do not participate in any offering of shares below NAV.
• New investors may experience an immediate increase in the NAV of their shares if they participate in an offering of shares below NAV.
• The company's ability to pursue attractive investment opportunities could benefit all stakeholders.
• Maintaining a favorable debt-to-equity ratio could improve the company's financial stability and access to debt markets.

Next Steps

• Stockholders are encouraged to vote on the proposal to authorize the company to issue shares below NAV.
• The company will hold a Special Meeting of Stockholders on August 8, 2024, to vote on the proposal.
• The Board will consider the potential dilutive effect of the issuance of shares of common stock at a price below NAV when considering whether to authorize any such issuance pursuant to the stockholder approval being sought here.
• The company will furnish a copy of its Annual Report on Form 10-K for the fiscal year ended December 31, 2023, to any stockholder upon request.

Key Dates

Keywords

Ares Capital Corporation, Stockholder Meeting, NAV, Share Issuance, Dilution, Proxy Statement, ARCC, BDC