{"id":83131,"date":"2023-11-10T16:09:49","date_gmt":"2023-11-10T21:09:49","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/ares-capital-vs-ofs-capital-two-fat-yields-the-bdc-giant-vs-a-minnow-nasdaqarcc\/"},"modified":"2023-11-10T16:09:59","modified_gmt":"2023-11-10T21:09:59","slug":"ares-capital-vs-ofs-capital-two-fat-yields-the-bdc-giant-vs-a-minnow-nasdaqarcc","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=83131","title":{"rendered":"Ares Capital Vs OFS Capital: Two Fat Yields, The BDC Giant Vs. A Minnow (NASDAQ:ARCC)"},"content":{"rendered":"
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Ares Capital (NASDAQ:ARCC<\/span>) at $11.11 billion is the largest business development company by market cap, OFS Capital (NASDAQ:OFS<\/span>) at $140.7 million is one of the smallest. If income is the prize, which is the better buy? New York-based ARCC last declared a quarterly cash dividend of <\/span>$0.48 per share, unchanged from its prior distribution for what currently works out to be a 9.87% annualized forward dividend yield. The business development company is externally managed by a subsidiary of Ares Management Corporation (<\/span>ARES), one of the largest alternative asset management firms with $395 billion in AUM. It has a storied history, going <\/span>public in 2004, it’s become a bellwether for the blooming publicly traded private credit vehicles known as BDCs. OFS Capital (<\/span>OFS) is comparatively a minnow, externally managed by Chicago-based OFS Capital Management with $4.3 billion in AUM, the BDC invests in senior secured floating rate loans to US middle market companies.<\/span><\/span><\/p>\n

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\"ARCC<\/span><\/picture>
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Seeking Alpha<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

ARCC has outperformed OFS year-to-date on a total return basis but performance materially diverges when looked at over three years with OFS up 200% versus a return of 70% from ARCC. OFS last declared a quarterly cash dividend of $0.34 per share, unchanged from its prior distribution for what currently works out to be a 13.3% annualized forward dividend yield. It’s important to note that OFS cut its dividend in half by 14 cents per share at the onset of the pandemic in 2020. This was a move that saw its common shares suffer a more material drop than ARCC with the distributions only recently recovering back to this level. Hence, whilst ARCC has a yield that’s roughly 346 basis points lower than OFS, it has the edge for stability. Total returns over three years were impacted by the steeper OFS drop during the pandemic.<\/p>\n

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\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

Growth, Investment Income, And Portfolio Diversification<\/h2>\n

ARCC also invests in US-based middle market firms with loans ranging from $30 million to $500 million. The BDC reported fiscal 2023 third quarter total investment income of $655 million, up 22% over its year-ago comp but a miss by $4.14 million on consensus estimates. Growth was driven by the Fed raising rates to a 22-year high at 5.25% to 5.50% to boost a portfolio that was 69% invested in floating rate loans at the end of the third quarter. Around 43% of ARCC’s portfolio are first lien senior secured loans with broad industry diversification, albeit with a focus on software and services which categorized 23% of tenants at the end of the third quarter.<\/p>\n

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\"Ares<\/span><\/picture>
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Ares Capital Fiscal 2023 Third Quarter Presentation<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

ARCC’s portfolio investments at fair value stood at $21.9 billion, up from $21.5 billion in the prior second quarter, and were spread across 490 companies. The BDC’s weighted average yields on total investments at amortized cost at 11.2% at the end of the third quarter advanced 160 basis points over its year-ago comp and came as the BDC saw gross commitments of $1.6 billion dip from $2.24 billion in the year-ago quarter. The lower investment activity likely underscores a level of defensive positioning ahead of expectations that the US economy might fall into a recession in calendar 2024.<\/p>\n

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\"Ares<\/span><\/picture>
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Ares Capital Fiscal 2023 Third Quarter Presentation<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

OFS saw its total investment income of $14.65 million, up a lower 9.6% over its year-ago comp and a small miss on analyst consensus by roughly $26K. OFS had a $457 million investment portfolio at fair value with debt investments of $279.2 million spread across 43 companies and 94% invested in floating rate loans. Around 61% of its broader total investment portfolio is in senior secured loans. These are not all first lien loans though with the second lien component at 20%. A higher first-lien loan exposure reduces the risk of losses as it provides the lender first claim on collateral. OFS also differs more markedly from ARCC from its 21% position in common and preferred securities, a positioning that comes with more risk albeit with the potential of higher upside.<\/p>\n

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\"OFS<\/span><\/picture>
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OFS Capital Fiscal 2023 Third Quarter Presentation<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

OFS is also heavier on lending to manufacturing companies which form 28.1% of its portfolio of company investments with healthcare and social assistance forming the second largest sector at 19.3%. The BDC recorded a net investment income of $5.39 million, around $0.40 per share, and up 7 cents from $0.33 per share in the year-ago quarter. This means the dividend is 117% covered by third-quarter NII, around an 85% payout ratio. The 21% growth in NII per share reflects an uplift from floating rate loans with OFS seeing an 80 basis point increase in its portfolio’s weighted average realized yield on income-bearing investment to 13.3% from 12.5% in the second quarter. Total investments conducted during the third quarter at $8.3 million dipped by 49% over the second quarter with the BDC also moderating new investment activity.<\/p>\n

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\"OFS<\/span><\/picture>
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OFS Capital Fiscal 2023 Third Quarter Presentation<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Net Asset Value, Non Accruals, And The Economy<\/h2>\n

ARCC recorded third quarter NII of $289 million, around $0.52 per share, and down $0.05 per share from $0.57 in the year-ago quarter. Hence, the BDC is currently covering its dividend by 108%, a roughly 92% payout ratio. ARCC’s net asset value at $ 18.99 per share, grew from $18.57 per share in the year-ago quarter and means the BDC is currently swapping hands for a 2.5% premium to NAV. OFS recorded a third-quarter NAV of $12.74 per share, a dip from $13.58 per share in the year-ago period. The BDC has recorded a decline in NAV on a per share basis for six consecutive quarters with NAV per share peaking at $15.53 per share as of the end of the first quarter of fiscal 2022. Over the last year, ARCC has been able to raise its net asset value by 13% versus a decline of 5.4% for OFS on a nominal basis.<\/p>\n

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\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

Total investments at fair value on non-accrual status for OFS stood at 3.7% at the end of the third quarter, materially higher than ARCC whose figure of 0.6% dipped from 1.1% in the second quarter. For OFS, second quarter investments at fair value on non-accrual status was 2.1%, hence, the BDC is seeing a decline in NAV on both a nominal and per share basis as investments on non-accrual status rise. This instability means the BDC is currently trading at a large 20% discount to NAV. Does the minnow beat the giant? No. ARCC is the better pick as we enter a new year set to see continued macroeconomic uncertainty. BDCs currently face a Goldilocks economic scenario of high rates, resilient economic growth, and strong labor figures. A deterioration of this macro picture could cause non-accruals to spike and it is imperative to be defensive ahead of any such discombobulation. The giant in this case provides a defensive positioning.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Ares Capital (NASDAQ:ARCC) at $11.11 billion is the largest business development company by market cap, OFS Capital (NASDAQ:OFS) at $140.7 million is one of the smallest. If income is the prize, which is the better buy? New York-based ARCC last declared a quarterly cash dividend of $0.48 per share, unchanged from its prior distribution for […]<\/p>\n","protected":false},"author":1,"featured_media":83132,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-83131","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nAres Capital Vs OFS Capital: Two Fat Yields, The BDC Giant Vs. 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