The current spread between the average rate earned on investments and the average fixed-rate debt rate is 4.2 percentage points. This spread will surely widen if the Fed pulls the trigger next month.
The potential for more income has yet to resonate with investors. At the end of the third quarter, Ares’ net asset value (NAV) per share was $16.79, a $0.08 increase compared to the NAV a year ago. This time last year, Ares shares were trading at a 2% discount to NAV. Today, they trade at a 9.3% discount. Over the past decade, Ares shares have typically traded at a 5% to 10% premium.
Ares shares have been held in check since it announced that a successful syndicated lending relationship with General Electric’s (NYSE: GE) GE Capital unit will wind down. Investors are worried Ares will be unable to reinvest the capital tied up with GE at the same remunerative rate.
I don’t see the dissolution of the GE relationship as an issue. Since the announcement a couple months ago, Ares has already formed new ventures with Varagon Capital Partners and insurance giant American International Group (NYSE: AIG). What’s more, GE’s exit puts Ares in a better position to expand its portfolio of first-lien senior loans.
In short, Ares offers the potential for a rising income stream if the Fed raises interest rates. And if the Fed doesn’t raise interest rates, investors still get a stable source of high-yield income on the cheap.
This article is brought to you courtesy of Steve Mauzy From Wyatt Investment Research.