Before you start
BDC leverage and asset coverage: a descriptive ratio is not a compliance test, Floating rates and floors: why a BDC is not a one-way rate bet, BDC NAV and market discounts: separate the valuation from the trading price, NII and distribution coverage: match the income, denominator and period
- Compare debt-only and equity-assisted refinancing on a consistent period.
- Use net proceeds rather than gross issuance to reduce debt.
- Separate interest savings, per-share dilution and available liquidity.
State what the baseline income already includes
All monetary totals in this workshop are USD millions; common shares are in millions; per-share amounts are in USD. Use an invented full-year NII of 120 and 50 million common shares. The starting income already includes a full year of 3% interest on the 300 debt principal to be refinanced. The transaction takes effect at the start of the modeled year, and the new debt rate is 6%. Assume unchanged asset earnings and all other expenses, no swaps, no taxes and no additional amortization of issuance costs. These exclusions are explicit so that the comparison isolates funding and share-count effects. A real model must restore those items and use actual transaction dates rather than treat this exercise as a forecast.
Calculate the debt-only branch from the incremental cost
Refinancing all 300 at 6% creates annual interest of 18 instead of the 9 already embedded in baseline NII. The incremental cost is 9, not 18, so modeled NII becomes 111. With 50 million shares, NII per share is 2.22. A halfway-through-the-year repricing would instead add 4.5 during that particular year before other effects, but its subsequent full-year run rate would still differ. Do not subtract both the full new interest and the incremental cost. Keep modeled-period income, future run rate and the principal maturity table as distinct outputs.
Model equity funding with net cash and new shares
In the separate equity-assisted branch, issue 50 of gross common equity at 20 per share, creating 2.5 million shares. A 2% issuance cost consumes 1, leaving 49 to reduce refinancing principal from 300 to 251. New annual interest is 251 × 6% = 15.06, which is 6.06 above the original 9. NII is therefore 113.94, higher than the debt-only branch, but the 52.5 million shares reduce NII per share to 2.170286. The higher total income does not establish per-share accretion. The 1 equity issuance cost reduces net equity proceeds. Any debt issuance fees or other financing-cost amortization would require a separate explicit adjustment; it is not an automatic second deduction of this equity issuance cost.
Reconcile the dividend and liquidity questions separately
If the assumed annual common distribution is 2.20 per share, the debt-only branch requires 110 of common distributions and has 111/110 = 1.009091× coverage. The equity-assisted branch requires 115.5 and has 113.94/115.5 = 0.986494×. Neither ratio predicts the board's decision. Separately, principal of 90 due inside a selected horizon compared with unrestricted cash of 40 and confirmed usable capacity of 30 leaves a funding difference of −20 before required spending. Do not add a spillover-tax balance or an unconfirmed facility extension to close that gap. Exact dates and legal availability matter independently of the income comparison.
Synthetic: total income can improve while per-share income falls
The equity branch saves 49 × 6% = 2.94 of annual new interest relative to debt-only funding. Adding 2.94 to 111 gives 113.94. But 113.94 / 52.5 is lower than 111 / 50. The extra 2.5 million shares also require 5.5 of annual common distributions at the assumed 2.20 rate. These are matched full-year calculations. They do not measure statutory leverage, NAV accretion, market reaction or a return on any future assets. A transaction can benefit liquidity or capital flexibility even while its immediate per-share earnings arithmetic is dilutive.
Scroll horizontally to see all columns. With the table focused, use the left and right arrow keys.
| Measure (amounts: USD millions; shares: millions; per share: USD) | Debt only | Equity-assisted |
|---|---|---|
| New debt principal | 300 | 251 |
| New interest at 6% | 18 | 15.06 |
| Increment versus embedded 9 | 9 | 6.06 |
| Modeled NII | 111 | 113.94 |
| Common shares, million | 50 | 52.5 |
| NII per share | 2.22 | 2.170286 |
| Distributions at 2.20/share | 110 | 115.5 |
| Income / common distributions | 1.009091× | 0.986494× |
Test your reasoning
Assume no equity issue and the new rate is 5% instead of 6%. What are incremental interest, NII and NII per share?
Reveal the worked answer
New annual interest is 300 × 5% = 15. The increment above the embedded 9 is 6; NII becomes 114 and NII per share 114/50 = 2.28. This branch still excludes fees, hedges and timing changes.
Check your understanding
A common mistake
Using gross equity proceeds to repay debt, forgetting new common distributions or comparing a partial-year expense with a full-year share count.
What to check in the disclosures
- Identify interest already present in baseline income.
- Retain issue price, costs, net proceeds and new shares.
- Match the income period and distribution share base.
- Verify facility expiry and cash restrictions in a separate dated bridge.
Sources & scope
US BDC education. Examples are hypothetical unless expressly attributed. Filing dates, contractual definitions and tax rules matter. An issuer source describes that issuer; it is not evidence that every BDC uses the same policy.
- Ares Capital January 2025 filed financing prospectus: instrument terms and claims — historical example ↗
- Ares Capital original 2025 Form 10-K: historical definitions, not current issuer data; check amendments and later filings ↗
- Ares Capital March 2026 results: statement and reconciliation format — not example data ↗
Educational material, not a recommendation or personalized investment advice. Source and correction policy.