Earn 9% From a Well-Positioned Lending Company
Contributed Opinion

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Orogen Royalties Inc., Barrick Mng Corp., Pan American Silver Corp., Altius Minerals Corp., Metalla Royalty & Streaming, and Midland Exploration Inc. 
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Ares Capital Corp. (ARCC:NASDAQ), while reporting somewhat soft Q1 results, demonstrated its ability to withstand any economic turmoil ahead. Earnings per share came in below estimates, while NAV slipped slightly. Lower earnings was largely the result of a decline in yields, which the company had warned about last quarter, while the decline in NAV-per-share was largely due to a larger number of shares outstanding, even as the company's portfolio increased in value.

Ares invested a staggering $3.5 billion in the quarter, up 54% on the first quarter of 2024, but net originations fell because of an increase in exits and repayments. However, the company said it had a large pipeline, including almost half-a-billion dollars in commitments, with a backlog of $2.6 billion.

Although not all of the backlog will necessarily be completed, some 40% of the backlog is with existing borrowers and more likely to close. The average yield on its loans, at fair value, is 11%.

The Well-Covered, Stable Dividend Can Survive Downturns

Non-accruals improved to just 1.5% at cost, at the low end of its historical range, and well below BDC competitors. The 48 cent quarterly dividend was maintained — the 63rd consecutive quarter of stable or rising dividends — and the company has spillover income equal to $1.29 per share, not far from three quarters of regular dividend payments.

The base dividend is well covered, while large spillover income will support dividend stability. Ares, in recent years, has preferred to pay bonus dividends than to increase its core payout, a reflection of caution on the economic outlook. While the company did not repurchase any shares during the first quarter, it did issue 17 million shares under its "at-the-market" program. The shares were issued at a slight premium to NAV, and are equivalent to less than 2% of shares outstanding, which is a reasonable issuance.

The Lending Market Has Its Challenges, but Ares Can Prosper

In the market overall, lending has dropped significantly in the last two months, as banks have become more cautious, while the secondary loan market saw increased volatility and widening spreads. However, the direct lending market, including Business Development Companies, have continued to lend, meaning BDCs are able to undertake transactions that previously would have gone to banks.

These will typically be larger transactions and often better quality. Though overall, M&A activity may be slower, Ares is well positioned to take market share. It is equipped to lend across the capital structure, unlike some other, smaller BDCs. A period of uncertainty and volatility, such as the current one, even if rates were to decline, leads to lower repayments, so loans stay in place. This helps to offset a smaller number of new loans, should that come to pass.

Its Portfolio Businesses Are in a Good Position

The company said that tariffs would have only a minor effect on the company. Incoming CEO Kort Schnabel said that during period of volatility and uncertainty, "we initially focus inward, proactively assessing economic impacts to our existing portfolio companies." Most companies in the portfolio are focused on domestic service-oriented businesses, which will be more insulated from the direct impact of higher tariffs.

An internal study estimated that a mid-single digit percentage of portfolio companies are directly exposed to tariffs as importers. The businesses to which Ares lends are in strong shape. They have low leverage, with an average loan-to-value in the low 40% range, historically low. Interest coverage for these companies is close to two times, stronger than the period immediately ahead of Covid, the last period of major economic stress. Ares' lending is well diversified, with 566 portfolio companies, and an average size of less than 0.2% of the portfolio.

Ares Can Withstand Economic Weakness

Ares is also in a strong position, entering this period with available capital of $6.8 billion, while leverage is near the bottom end of the company's target range, with net debt-toequity ratio below one times.

Bloomberg Credit writes that Ares is equipped to manage credit stress, even though it has more junior debt than peers. Non-accruals are low, and the company's size and credit capabilities, with its ties to Ares Management, will help it through uncertain times.

Trading at a modest premium of 5% over book, with a current yield of 9.2%, Ares is a Buy, particularly for income investors.

Orogen Has Record Final Full Year

Orogen Royalties Inc. (OGN:TSXV; OGNRF:OTCQX) reported record revenue and profits for the year ending December 31. Royalty revenue rose 34%, while G&A expenses fell about 16%, and net income jumped 126% over 2023. The company ended the year was a rock-solid balance sheet of $26.8 million. It had previously reported preliminary fourth-quarter and full-year results.

That cash balance will be meaningfully depleted by costs associated with the sale of the company's most valuable asset, a 1% royalty on AngloGold's Expanded Silicon Project, to Triple Flag. Because of this, last year's financials are to some extent irrelevant, at least in the near term. But they emphasize again that there is life after Silicon.

Given the current stock price discount to the acquisition price and the ability to obtain Triple Flag shares at a discount, as well as to obtain the Orogen "spinco" shares, Orogen remains a Buy.

Barrick Says Gold Still Important as It Emphasizes Copper

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) said that, in addition to changing its name to Barrick Mining, it will change its NYSE stock symbol from the highly symbol "GOLD" to "B". CEO Mark Bristow said this "better reflects (our) business and mission" as it pivots towards copper for growth.

But Bristow emphasized that gold remains "core to our foundation" and promised to continue to explore for and develop new gold mines, this even as it is selling several gold mines, including its last mine in Canada.

If you do not own it, Barrick can be bought here.

TOP BUYS this week, in addition to above, include Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ), Altius Minerals Corp. (ALS:TSX), Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American), Midland Exploration Inc. (MD:TSX.V),  and Hutchison Port Holdings Trust (HPHT:Singapore).

The disclosure under articles by Adrian Day was altered without his knowledge from what he had previously approved to include the following: ‘My company has a financial relationship with: ALL’.  This was intended to refer to the purchase of stocks by Mr. Day’s management company for their clients.  Streetwisereports wishes to make clear that this does not in any way suggest that Mr. Day’s firm has any direct financial relationship with any of the companies he recommends or companies whose stocks he purchases for clients.”

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