Ares Capital's (ARCC) Outlook Raised To Positive By Moody's

Moody's Investors Service, the credit rating wing of Moody's Corporation (NYSE:MCO) , upgraded the outlook of Ares Capital Corporation (NASDAQ:ARCC) from negative to positive. Additionally, the company’s corporate family rating and senior unsecured debt rating has been affirmed at Ba1.

Moody’s affirmed the corporate family rating to reflect the company’s disciplined investment approach and strong earnings-generating potential. The company also displays strong liquidity with a solid funding profile, which has enough availability under the secured credit facilities.

Moody’s believes that the company’s efficiency in managing the risk of its investment portfolio has been helping it to consistently generate profits for the last few years. Moreover, Ares Capital has had low earnings volatility. To reflect these qualities, Moody’s upgraded the company’s outlook to positive.

Notably, Ares Capital acquired American Capital, Ltd. in Jan 2017, in an effort to enhance its position as a major business development company and also displayed its superiority in disposing risky assets.

As of Mar 31, 2016, only 38% of American Capital’s investment portfolio comprised less risky senior secured loans. While acquiring American Capital, Ares Capital arranged the investment portfolio in such a way that as of Mar 31, 2017, the latter had 77% of its portfolio comprising senior secured loans.

Moreover, because of the realizations from American Capital’s investments as well as the equity issued by Ares Capital during the acquisition, the latter’s Asset Coverage Ratio as of Mar 31, 2017 was 249%, increasing from 226% as of Mar 31, 2016.

However, if Ares Capital’s Asset Coverage Ratio falls below 230% for a continued period of time, its outlook will be downgraded to stable. In fact, the outlook could be revised down even if the composition of the company’s investment portfolio changes in a way which brings the proportion of senior debt to below 75%. Further, similar action could be triggered if the company’s Net Investment Income is significantly lower than its dividend distributions on a regular basis.

Similarly, the company’s ratings could be downgraded if its Asset Coverage Ratio falls below 220% or the proportion of senior debt in its investment portfolio goes below 70%. On the other hand, a rating upgrade could take place if Ares Capital maintains an Asset Coverage Ratio of 230–250%, has a modest amount of junior investments in its portfolio with senior debt comprising at least 75% on a regular basis, and displays continued low-earnings volatility.

Shares of Ares Capital have gained 12.1% in the last one year, marginally underperforming the Zacks categorized Financial - SBIC & Commercial industry’s rally of 12.4%.



Currently, the company carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the finance space are Walker & Dunlop, Inc. (NYSE:WD) and Comerica Incorporated (NYSE:CMA) .

The Zacks Consensus Estimate for Walker & Dunlop was revised 17.7% upward for the current year, in the last 60 days. The company’s share price increased 95% in the last one year. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Comerica witnessed a marginal upward earnings estimate revision for the current year, in the last 60 days. Its share price increased 65.1% in the last one year. The company currently carries a Zacks Rank #2 (Buy).

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