Ares Capital Q4 2024 Earnings Report

Ares Capital EPS Results

• Actual EPS: $0.55
• Consensus EPS: $0.58
• Beat/Miss: Missed by -$0.03
• One Year Ago EPS: N/A

Ares Capital Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $785.38 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Ares Capital Announcement Details

• Quarter: Q4 2024
• Date: 2/5/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, February 5, 2025
• Conference Call Time: 12:00PM ET

Ares Capital (NASDAQ:ARCC) is a business development company specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors. The fund will also consider investments in industries such as restaurants, retail, oil and gas, and technology sectors. It focuses on investments in Northeast, Mid-Atlantic, Southeast and Southwest regions from its New York office, the Midwest region, from the Chicago office, and the Western region from the Los Angeles office. The fund typically invests between $20 million and $200 million and a maximum of $400 million in companies with an EBITDA between $10 million and $250 million. It makes debt investments between $10 million and $100 million The fund invests through revolvers, first lien loans, warrants, unitranche structures, second lien loans, mezzanine debt, private high yield, junior capital, subordinated debt, and non-control preferred and common equity. The fund also selectively considers third-party-led senior and subordinated debt financings and opportunistically considers the purchase of stressed and discounted debt positions. The fund prefers to be an agent and/or lead the transactions in which it invests. The fund also seeks board representation in its portfolio companies.

Ares Capital Q4 2024 Earnings Call Transcript

Key Takeaways

• Leadership transition: Court Schnabel named new CEO effective April 30, with Kip Devir remaining on the board and U.S. Direct Lending Investment Committee, ensuring continuity of experienced management.
• Ares Capital delivered a record NAV per share of $19.89 at year-end, marking the eighth consecutive quarter of NAV growth and driving total shareholder returns of nearly 14% annually over the past decade.
• Strong origination momentum with $5 billion of net new commitments in 2024 (including $3.8 billion in Q4), countering a subdued M&A market and maintaining a mid-single-digit selectivity rate.
• Robust credit performance: non-accruals at cost of 1.7% remain well below the 2.8% historical average, while portfolio companies achieved an 11% LTM EBITDA growth rate versus sub-1% in the leveraged loan market.
• Balance sheet strength highlighted by upgrades to the highest BDC credit ratings from S&P, Moody’s, and Fitch, $6.7 billion of available liquidity, and a conservative leverage ratio of 0.99x net debt to equity.

Presentation

[Operator]

Good afternoon, and welcome to Ares Capital Corporation's Fourth Quarter and Year Ended December thirty one, twenty twenty four Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded on Wednesday, 02/05/2025. I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations. Please go ahead.

[John Stilmar, Partner & Co-Head of Public Markets Investor Relations at Ares Capital]

Great. Thank you very much. Let me start with some important reminders. Comments made during the course of this conference call and webcast and the accompanying documents contain forward looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings.

[John Stilmar, Partner & Co-Head of Public Markets Investor Relations at Ares Capital]

Ares Capital Corporation assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results. During this call, the company may discuss certain non GAAP measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding the financial information because it's one method the company uses to measure its financial results and condition. A reconciliation of GAAP net income per share, the most directly comparable GAAP financial measure to core EPS can be found in the accompanying slide presentation for this call.

[John Stilmar, Partner & Co-Head of Public Markets Investor Relations at Ares Capital]

In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form eight K. Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies, was derived from third party sources and has not been independently verified. And accordingly, the company makes no representation or warranty with respect to this information. The company's fourth quarter and year ended 12/31/2024 earnings presentation can be found on the company's website at www.areescapitalcorp.com by clicking on the fourth quarter earnings presentation on the homepage of the Investor Resources section. Ares Capital Corporation earnings release and Form 10 ks are also available on the company's website.

[John Stilmar, Partner & Co-Head of Public Markets Investor Relations at Ares Capital]

I'll now turn the call over to Mr. Kit Duvier, Ares Capital Corporation's Chief Executive Officer. Kit?

[Kipp deVeer, CEO at Ares Capital]

Thanks so much, John. Hello, everyone, and thanks for joining our earnings call today. I'm joined by Court Schnabel, our newly announced CEO Jim Miller, our Co President Janna Markowitz, our Chief Operating Officer and Scott Lem, our Chief Financial Officer as well as other members of the management team who will also be available during our Q and A session. Before the team discusses our fourth quarter and full year results, I want to discuss the leadership changes that were announced this morning. As you may have seen from our press release this morning, Cort Schnabel has been named as our new Chief Executive Officer effective April 30.

[Kipp deVeer, CEO at Ares Capital]

Port, who joined Ares in 02/2001, is a widely respected and tenured executive at Ares with extensive leadership and private credit experience. As a founding member of Ares' U. S. Direct lending strategy back in 02/2004, Cord has been instrumental to the success and growth of The U. S.

[Kipp deVeer, CEO at Ares Capital]

Direct lending platform, which has driven the successful long term track record at Ares Capital. Elevating Court to CEO is a natural progression given his many past contributions and our confidence in his future leadership. In connection with this appointment and considering my new responsibilities at Ares management, which were announced this morning, I will be stepping down as the CEO of Ares Capital Corporation at the April. I will however remain actively involved with the company both as a member of the ARCC Board of Directors and the Ares U. S.

[Kipp deVeer, CEO at Ares Capital]

Direct Lending Investment Committee. Jim Miller, who currently serves as a Co President of Ares Capital alongside Mr. Schnabel will continue as the sole President of the company. These changes reflect the natural evolution in the leadership at Ares and we're very fortunate to have such a deep and committed team. Over the past decade as CEO, it's been a great privilege working day to day with the entire team that has driven all of the success of ARCC.

[Kipp deVeer, CEO at Ares Capital]

During this roughly ten year period, company has paid over 40 quarters of steady or increasing dividends, increased book value per share by over 20% and generated $500,000,000 of realized gains in excess of realized losses. This investing success has led to a stock based total return for our investors of nearly 14% per annum, outperforming the S and P five hundred, the S and P five hundred Financials Index and the KBW Bank Index over that period. And when compared to other yield oriented investments available to shareholders, we've generated more than 300 basis points per annum of outperformance when compared to the ETFs for utility and REIT stocks and for mortgage REITs. I'm confident that Court and the broader Ares Capital leadership team, which averages twenty years of experience at the company, will continue to execute strongly for our shareholders. I can't think of a better more capable leader for the next chapter.

[Kipp deVeer, CEO at Ares Capital]

And before turning the call over to Court for some additional comments on our company's successful 2024, I do want to acknowledge the tragic impact that we've witnessed from the wildfires that have spread across the Los Angeles area. This tragedy has unfortunately impacted the lives of many of our clients and colleagues and our thoughts are with them and their loved ones during this challenging time. Ares is working diligently to support them and the entire area in the recovery. Let me now turn the call over to Court.

[Kort Schnabel, Co-President at Ares Capital]

Thank you, Kip. And I certainly look forward to continuing to work with you, our executive team and the other members of the ARCC board in the years to come. So let me start by providing a few thoughts on current market conditions, ARCC's performance and our outlook heading into 2025. As our earnings release outlines, our fourth quarter results concluded another strong year for ARCC with continued healthy credit performance at our underlying portfolio companies and a well positioned balance sheet. We are positioned with significant available capital that should benefit us as we look for an increase in activity in 2025.

[Kort Schnabel, Co-President at Ares Capital]

We also ended 2024 with record NAV per share of $19.89 The growth in NAV per share in the fourth quarter was the eighth consecutive quarter of NAV growth, which continued our long term trend of ARCC delivering among the strongest total returns as measured by dividends plus NAV per share growth as compared to our BDC peers. In addition to our positive NAV performance, 2024 was another year where our strong results were supported by the benefits of our well established platform, industry leading scale, deep incumbent positions and differentiated strategy covering the broader middle market. Despite a historically subdued M and A environment in 2024 and counter to many others in the direct lending market, we achieved one of the most active origination years in our company's history. We continue to see the total return opportunity in today's market as highly attractive with significant equity cushions supporting our debt investments and a healthy total yield premium to the liquid loan market. During 2024, we reviewed a record volume of new opportunities totaling more than $650,000,000,000 and the number of potential investments we evaluated during the year grew each quarter on a year over year basis.

[Kort Schnabel, Co-President at Ares Capital]

Given the strength of our pipeline, we were also able to generate a record level of new commitments, net of repayments, which totaled $5,000,000,000 for the year. As many of you know, our philosophy has been to out originate our competition, which we believe is a key driver of long term credit performance. While ARCC had a record year in both the estimated dollar value of transactions we reviewed and in ARCC's net new originations, we still remain highly disciplined in terms of credit selection. Our overall selectivity rate remained in the mid single digits for 2024, consistent with our long term average since our inception more than twenty years ago. A key driver of originations during 2024 has been our growing wallet share with incumbent borrowers.

[Kort Schnabel, Co-President at Ares Capital]

As we have discussed in the past, we believe financing incumbent borrowers can provide attractive risk adjusted returns as our tenure with these borrowers gives us many advantages when making incremental investment decisions. In 2024, over 70% of our new commitments were to existing borrowers and importantly, we are increasingly being asked to provide a larger portion of our borrowers' overall capital structures. As an illustration, our share of the overall financings for our top 10 largest incumbent borrowers more than doubled in each of the past three quarters. In addition to these sourcing advantages, our focus on non cyclical high free cash flow businesses continues to drive strong credit results. As Jim will discuss later, we continue to believe our diversification and industry selection have contributed to ARCC's strong credit performance in comparison with other BDCs.

[Kort Schnabel, Co-President at Ares Capital]

Through our time tested underwriting processes, highly selective approach and focus on incumbent borrowers, we have been able to avoid many of the problems that have driven recent increases in non accruals in the BDC space. Our non accrual rates continue to be below our own and peer group historical averages and the underlying growth in our portfolio companies continues to be strong. Specifically, the organic weighted average LTM EBITDA growth rate of our portfolio companies reached 11% in the fourth quarter, which increased from 10% in the prior quarter and 9% at year end twenty twenty three. In comparison, the average LTM EBITDA growth of the leverage loan market in 3Q twenty twenty four reached a three point five year low less than 1%. Although our portfolio is performing very well, we are carefully monitoring for potential impacts from changes in new government policies.

[Kort Schnabel, Co-President at Ares Capital]

Given what we have seen from the early actions of the new administration, we don't currently expect any material direct impact to our portfolio for new government policies. But this new regime will be worth watching in terms of policy changes and we will be sure to be thoughtful and vigilant about any material changes to the landscape for direct lending. We've also had a very successful year executing on our balance sheet initiatives. As Scott will describe in more detail, our competitive advantages and our long term track record helped us secure ratings upgrades from two of the major credit rating agencies throughout the year, making ARCC the highest rated BDC amongst the three major rating agencies. We have further added to our deep sources of liquidity and are levered at just below one times net debt to equity, providing significant flexibility to support our ability to invest.

[Kort Schnabel, Co-President at Ares Capital]

Looking ahead, we expect a healthy economy combined with increasing pressure on private equity sponsors to seek liquidity and a growing confidence from executives to support an accelerating M and A environment in 2025. It stands to reason that with the increasing importance of direct lending in the market, which continues to finance the majority of LBOs, overall direct lending volumes will follow suit. While our market remains competitive, we believe our position as the largest publicly traded BDC managed by the largest global direct lending platform provides meaningful advantages in sourcing, underwriting and risk management. I'm very proud of what our team accomplished in 2024 and believe we are well positioned for a successful 2025 and beyond. I will now turn the call over to Scott to take us through more details on our financial results and balance sheet.

[Scott Lem, CFO & Treasurer at Ares Capital]

Thanks, Court. This morning, we reported GAAP net income per share of $0.55 for the fourth quarter of twenty twenty four compared to $0.62 in the prior quarter and $0.72 in the fourth quarter of twenty twenty three. For the year, we reported GAAP net income per share of $2.44 compared to $2.75 for 2023. We also reported quarterly per share of $0.55 for the fourth quarter of twenty twenty four compared to $0.58 in the prior quarter and $0.63 in the fourth quarter of twenty twenty three. Our decline in core earnings was largely driven by the impact of the decline in yields from the portfolio as base rates at the end of the year were nearly 100 basis points lower than where they were at the end of twenty twenty three.

[Scott Lem, CFO & Treasurer at Ares Capital]

As you may recall from our last earnings call, there is typically up to a one quarter lag between the full quarter impact to interest income from the changes in period end yields that we report for the most recent quarter. Simply put, the impact from the changes in portfolio yields during the third quarter were the primary driver of the sequential change in our core earnings for the fourth quarter. While the market sentiment on future interest rates has generally changed to a higher for longer sentiment since the end of the third quarter, market base rates did decline approximately 30 to 50 basis points depending on whether comparing the change of one month or three months during the fourth quarter. As such, the change in our fourth quarter portfolio yields were impacted by this change in market rates and to a lesser extent a higher mix of first lien loans in the portfolio in the fourth quarter as compared to the third. While our floating rate portfolio will be impacted by the full quarter impact of the most recent base rate declines, we also stand to benefit from the same rate declines in our interest expense as it relates to our floating rate debt obligations.

[Scott Lem, CFO & Treasurer at Ares Capital]

Turning to the balance sheet, our total portfolio at fair value at the end of the quarter was $26,700,000,000 up from $25,900,000,000 at the end of third quarter and up from $22,900,000,000 a year ago. The weighted average yield on our debt and other income producing securities at amortized costs was 11.1% at December 31, which was down from 11.7% at September 30 and twelve point five percent at the end of twenty twenty three. Our total weighted average yield on total investments at amortized cost was 10%, which compares to 10.7% a quarter ago and 11.3% a year ago. Our stockholders' equity ended the quarter at $13,400,000,000 or $19.89 per share, another record high for us as Court noted earlier in the call. Before giving an update on our capitalization liquidity, let me start by highlighting the notable accomplishments related to our credit ratings during the year.

[Scott Lem, CFO & Treasurer at Ares Capital]

At the November, S and P upgraded the issuer credit and senior unsecured ratings for Ares Capital to BBB from BBB- If you recall, this is on the heels of Moody's recently upgrading the long term issuer and senior unsecured ratings for Ares Capital to BWA II from BWA III at the September. Along with the existing BBB rating and a positive outlook from Fitch, this clearly differentiates Ares Capital as the highest credit rated BDC, which we believe will allow us to continue enjoying best in class funding costs and potentially increase debt capacity over time. Let me update you on our recent debt capital activity since our last call. For the first time as a firm mid BBB issuer, we opened the new year with a $1,000,000,000 unsecured notes issuance that matures in March 2032 and priced at its spread to treasuries of 150 basis points for an all in coupon of 5.8%. We did swap the notes issuance to sell for plus 170 basis points, which is well inside of the weighted average spread on our floating rate debt of 197 basis points as of December 31.

[Scott Lem, CFO & Treasurer at Ares Capital]

Overall, we were certainly pleased to capitalize on some very favorable issuer dynamics with a longer tenure issuance at an issuance spread that was tied for our lowest new issued spread in our history regardless of tenure. Our overall liquidity position remains strong with nearly $6,700,000,000 of total available liquidity including available cash on a pro form a basis for our recent unsecured notes issuance. This positions us well as the upcoming $600,000,000 of notes maturing in March and the $1,250,000,000 of notes maturing in July. In terms of our leverage, we ended the fourth quarter with debt to equity ratio net available cash of 0.99x, down from the 1.03x a quarter ago. We believe our significant amount of dry powder positions us well to continue supporting our existing portfolio company commitments as well as new investing activities.

[Scott Lem, CFO & Treasurer at Ares Capital]

Moving on to our dividend. We declared a first quarter twenty twenty five dividend of $0.48 per share. ARCC has been paying stable or increasing regular quarterly dividends for over fifteen consecutive years. This dividend is payable on 03/31/2025 to stockholders of record on March 14 and is consistent with our fourth quarter twenty twenty four dividend. In terms of our taxable income spillover, we currently estimate we will have $922,000,000 or $1.37 per share available for distribution to stockholders in 2025.

[Scott Lem, CFO & Treasurer at Ares Capital]

In addition to our fourth quarter earnings being well in excess of our current dividend, we believe the tax one income spillover is a significant differentiator for us in the BDC sector and helps provide further visibility and stability to our dividend. I will now turn the call over to Jim to walk through our investment activities.

[Jim Miller, Co-President at Ares Capital]

Thank you, Scott. As previewed, I'll provide some additional detail on our investment activity, our portfolio performance and our positioning for the fourth quarter and the year. I will then conclude with an update on our post quarter end activity and backlog. In the fourth quarter, our team originated approximately $3,800,000,000 of new investment commitments, which is greater than a 50% increase over Q4 of twenty twenty three. This was a strong quarter to end what was a very active year for the company in which we originated over $15,000,000,000 of new commitments, more than double the commitment volumes of 2023.

[Jim Miller, Co-President at Ares Capital]

In addition to growing our growing market share with our existing borrowers that Court discussed previously, our strong origination results are supported by our differentiated approach in covering the broader mail market. Despite having what we believe is the highest level of deployment of any public BDC, The median EBITDA of our new investments during the year was approximately $70,000,000 About one third of our new investments were to borrowers with EBITDA of less than $50,000,000 We believe Ares is the only direct lending platform of scale that actively focuses across the lower, middle and upper middle markets. This broad and differentiated coverage supports our ability to find what we believe are the best risk adjusted returns while remaining highly selective. We believe that the lower middle market deals can provide 25 to 50 basis points of enhanced spread despite lower leverage levels and stronger documents when compared to some of the upper middle market transactions being completed by our peers. Importantly and further demonstrating our ability to successfully invest across the middle market, size is not a driver of portfolio performance in our portfolio as companies in all size bands in our portfolio had similar EBITDA growth rates over the last twelve months.

[Jim Miller, Co-President at Ares Capital]

In fact, we believe with our scale and size, especially in that part of the market, we have the ability to establish points of incumbency to allow us the opportunity to grow with these companies for years to come. With respect to our portfolio, we ended the year with a $26,700,000,000 portfolio at fair value, which grew at 3% from the prior quarter and 17% from the prior year. In addition to expanding market share with our incumbent borrowers, our growth is supported by our ability to provide flexible capital solutions to a wide variety of new companies seeking a direct lending solution. This can be seen in the total number of companies in our portfolio, which reached five fifty at year end twenty twenty four, an increase from just over 500 a year ago. An often overlooked point of differentiation for ARCC versus other BDCs is our high level of portfolio diversification.

[Jim Miller, Co-President at Ares Capital]

By maintaining small individual company position sizes of less than 0.2 of the portfolio on average, ARCC has been able to mitigate the impact of negative credit events in any one company or industry. Our non accruals at cost ended the quarter at 1.7%, up 40 basis points from the prior quarter and year end 2023. Despite this increase, the 1.7% metric remains well below our 2.8% historical average since the global financial crisis. This is also below the BDC historical average of 3.8% over the same timeframe. Our non accrual rate at fair value also modestly increased to 0.9% from 0.6% last quarter, but this too continues to be well below our historical levels.

[Jim Miller, Co-President at Ares Capital]

Our overall risk ratings remain stable throughout 2024 and the percentage of our portfolio fair value in grade one and two names ended the year at 2.9% meaningfully down from 6.4% at year end 2023. As a sign of additional strength in our portfolio, at the end of the fourth quarter, our weighted average loan to value was 44%, which we believe provides us with strong downside protection for our loans. This loan to value is also significantly below our ten year average, while our portfolio interest coverage ratio reached 1.9 times, up from 1.8 times the prior quarter and 1.6 times at year end 2023. Shifting to 2025, we've been busy supported by what we believe are the early signs of a growing market activity for growth capital and M and A. Our total commitments through 01/28/2025 were $1,200,000,000 approximately 80% increase as compared to the commitments closed in January of last year.

[Jim Miller, Co-President at Ares Capital]

Also our backlog as of 01/28/2025 stood at $1,800,000,000 which is more than double our reported backlog at February one of last year. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close or we may sell a portion of these investments post closing. As we look to the future, we believe the company remains well positioned to address what we see as a growing market opportunity. We remain committed to building upon what we believe is a successful long term track record. As always, we appreciate you joining us today and we look forward to speaking with you next quarter. With that, operator, please open the line for questions.

[Operator]

We'll go first to Melissa Weddle with JPMorgan. Please go ahead. Your line is open.

[Melissa Wedel, Vice President, Equity Research at JP Morgan]

Good afternoon. Thanks for taking my questions. First, congrats to Court and Skip on the change in your roles. Look forward to continuing to have these conversations more so with you, Kurt, going forward. In terms of the activity during the fourth quarter, I was hoping we could just chat about the cadence a little bit.

[Melissa Wedel, Vice President, Equity Research at JP Morgan]

I think heading into the quarter, it definitely seemed to be the case that it might not be the seasonally busy quarters at the December can be possibly because some companies are waiting until the New Year to sort of pick up the pace of activity on deals and strategic acquisitions, etcetera. Assuming that was what we saw in the numbers in 4Q, just being down sequentially from the third quarter, do you think that there was any impact in terms of like timing of new investments or repayments during the quarter on NII

[Kipp deVeer, CEO at Ares Capital]

No, I mean, look, I think it was kind of flat versus the third quarter if I'm looking at the numbers correctly. Things did I think shift a little bit. Obviously, we had the election, which may have delayed some closings. But we're very happy with the Q4 activity levels. And as we mentioned in the prepared remarks, January was busy and it remains busy.

[Kipp deVeer, CEO at Ares Capital]

So we're feeling good about deal flow and new transactions.

[Melissa Wedel, Vice President, Equity Research at JP Morgan]

Okay. And definitely noted the quarter to date details. Appreciate those details that you provide us as always. When we think about sort of the evolution of the portfolio, it's definitely seemed to be the case that there has been a skew new investments have skewed sort of up the capital structure. So a lot of focus on first lien, not entirely, but definitely skewed that way.

[Melissa Wedel, Vice President, Equity Research at JP Morgan]

When we look at the mix of repayments, we've seen some more junior capital be a larger piece of the repayment activity. I'm just wondering how you guys are thinking about the asset allocation within the portfolio? Do you think of a sort of target level of first lien activity or is that really going to vary with the opportunity set going forward? And is there any change given the new goals? Thank you so much.

[Kipp deVeer, CEO at Ares Capital]

Yes, you're welcome. Thanks. I mean to answer the last question first because I think it's the most important, there's really no change in how we see the mix of the portfolio over time. Definitely take your point that for the back half of the year kind of particularly in large deals kind of the large unit tranche sometimes taking out junior positions was the prevailing transaction. We're still happy to do junior deals.

[Kipp deVeer, CEO at Ares Capital]

We've seen spread compression, I would say, in the larger names that are cash pay. And then a lot of what's available on the junior side today in the higher rate environment, frankly, are non cash, I. E. All pick junior transactions. And we find a lot of them to be attractive.

[Kipp deVeer, CEO at Ares Capital]

We're doing some, but we're obviously conscious of the percentage of PIK income at the company and wanting to have that not kind of grow from here. So it's a balance of different things. But I think most importantly, we're responding to the market and the overall philosophy of how we see mix going forward is unchanged.

[Melissa Wedel, Vice President, Equity Research at JP Morgan]

Thanks, Kit.

[Kipp deVeer, CEO at Ares Capital]

Yes. Thank you.

[Operator]

Thank you. Our next question will come from Finian O'Shea with Wells Fargo Securities. Please go ahead.

[Finian O'shea, Analyst at Wells Fargo]

Hey, everyone. Good morning. Thank you. I guess to continue on investing, I oh, and first, congratulations to everyone on their new beginnings. Thank you.

[Finian O'shea, Analyst at Wells Fargo]

So I wanted to ask about the sports franchise. I know you that's a newer happening effort there. I think we saw there at the broader platform that is, but also in ARCC, it's the deals have come in. We saw I think equity in the Dolphins this quarter. It looks like the BDC got a pretty good allocation.

[Finian O'shea, Analyst at Wells Fargo]

So question is like on the understanding of that a lot of the higher risk return deals and the more opportunistic and so forth franchises are less suitable for ARCC, like why this one is the sports equity, is that sort of somewhere on the bubble or something like that? And should we expect to see more of this as that franchise growth? Thanks.

[Kipp deVeer, CEO at Ares Capital]

Yes. I'm going to ask Jim to help a little bit too because he's very engaged both with the sports media and entertainment franchise, but also specifically with the deal that we did with the Dolphins and the surrounding assets. But I mean to go backwards, we're now probably five, six years into having built out a very substantial footprint and I think incredible reputation as a knowledgeable kind of SME investor. And it's not just teams and it's not just sports. Philosophically, the BDC, as we've always said, wants to leverage the strength of the Ares Credit platform, which is very broad and creates a diverse set of opportunities for the BDC.

[Kipp deVeer, CEO at Ares Capital]

Specifically, SME is definitely a place along with other parts of the franchise that we want to leverage for what we think are really unique investments for both the platform and for the BDC. I mean, I think the Dolphin specifically is a roughly $200,000,000 investment at the BDC. And just to be clear, the asset itself includes more than just the team. It's the stadium, it's real estate, it's a Formula One team, it's tennis tournament. There's a lot of stuff going on there.

[Kipp deVeer, CEO at Ares Capital]

And we think it's very unique. I mean, I think as you probably read about in the press, Ares was one of the few firms that was granted the unique ability to come in to a franchise investment like this. We think it's a top tier franchise and an absolutely top tier geography that's growing and should grow with a fair amount of consistency over the next long period of time because of the quality and the diversity of the assets. So again, for me, I think it's a fabulous investment and it's not particularly large when you look at the overall scale of the company. And it's unique and attractive to ARCC shareholders and ARCC shareholders frankly only when you're talking about access through a BDC stock.

[Finian O'shea, Analyst at Wells Fargo]

Very helpful. Thank you. As a follow-up, I think this ties into Melissa's topics a bit on investment in returns. I think this has actually come up here and there in recent periods, but where should we think of the cap structuring fee? There's more and more emphasis on incumbent repeat borrowers you're gearing up for your sponsors to support them, But like how much does that impact the structuring fee rate that you'll see in years past it's obviously been really high? And then if I could sneak in a bonus question, maybe a fun one. Kip, I think you mentioned in your new role, you'll be involved in direct lending, but curious as to what other areas you'll be focused on? And thank you. That's all for me.

[Kipp deVeer, CEO at Ares Capital]

I'm sure. Thanks. But I think in terms of fees, there's been a continued emphasis on kind of existing portfolio companies and incumbency, which tends to generate lower fees. I'll also say, as we've said in the last couple of calls, there's been some fee pressure in direct funding broadly. So I think upfront fees are generally down a little bit in the market for pretty much everything.

[Kipp deVeer, CEO at Ares Capital]

So I think those are the two simple answers to why you see that coming down. In terms of your fun question, I would encourage you to go listen to the Ares earnings call that I and a handful of others did with Mike a couple of hours ago. But yes, I mean, more or less, I will continue to be very engaged with this company as a Director on the Board. I'll remain on the U. S.

[Kipp deVeer, CEO at Ares Capital]

Direct Lending Investment Committee, which obviously opines on all the new investments for this company and a lot of other things. But I think it gives me the ability to try to support Mike with a lot of different things that we're doing both from an operational and strategic perspective at Ares, our management company. And it's an exciting change for me. Having been with this business for twenty years and this company for twenty years, it allows me to do some new things and I'm excited about it. So thanks for asking.

[Finian O'shea, Analyst at Wells Fargo]

Thank you.

[Kipp deVeer, CEO at Ares Capital]

Thanks Ben.

[Operator]

Thank you. Our next question will come from Casey Alexander with Compass Point. Please go ahead.

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

Hi, good morning. And again, congratulations on the promotions. I think. We'll miss your calm voice because it did help us through some pretty turbulent times during COVID.

[Kipp deVeer, CEO at Ares Capital]

I think in support of Court and Jim, I think you'll be getting two more, so don't worry.

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

Okay. Okay. Listen.

[Kipp deVeer, CEO at Ares Capital]

Thank you.

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

And we'll make this question clearly marked as of twelvethirty one.

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

We've seen 100 basis point decline in base rates. Can you give me kind of a percentage of how much of that has flowed through into the portfolio by the end of the December? Is it 75% or where do you think we are? And I don't want to do innings because it's not baseball season.

[Kipp deVeer, CEO at Ares Capital]

No, I mean qualitatively what you're seeing with yield declines is largely due to base rates. And for Melissa's question, it's a little bit to mix shift, I. E. Some of the senior capital stuff coming out with more replacement from kind of senior secured or unit tranche. But I was looking over at Scott to see if he had a better quantitative answer that I might have right now.

[Scott Lem, CFO & Treasurer at Ares Capital]

Yes. I think we mentioned this in the last call and I think again this time as well, but I think you saw from the certainly a lag effect when it comes to the impact of the rates in our portfolio and when they flow through. So you saw some of that in Q4 as a result of the rates as of Q3. And so we expect that similar level of decline when you think about the Q4 rates and how that impact Q1.

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

Okay. All right. Secondly, relative to the amount of your gross fundings in the quarter, there was quite a bit of activity in the ATM and the leverage ratio is the lowest that it's been since 2019. Should I infer from that that you expect this heightened that you're building and preparing for a heightened level of activity in the first half, which is unseasonable because normally the heightened level of activity is in the second half?

[Kipp deVeer, CEO at Ares Capital]

I think that's a fair assumption for sure. I mean, I'll say two things. When we can raise equity accretively, we like to do it. And obviously, the stock price allowed us to do that in Q4. But as I mentioned in response to one of the prior questions, we had a busy fourth quarter and it's busy right now.

[Kipp deVeer, CEO at Ares Capital]

So I think the simple answer to your question is yes.

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

All right. Thanks for taking my questions.

[Kipp deVeer, CEO at Ares Capital]

Thanks, Casey.

[Operator]

Our next question will come from Doug Carter with UBS.

[Douglas Harter, Equity Research Analyst at UBS Group]

Just to kind of piggyback on that last question, as you think about 2025, how do you think about kind of target area where leverage should be versus willingness or appetite to continue to raise fresh capital?

[Kipp deVeer, CEO at Ares Capital]

Yes, I think we'd like the leverage ratio to be higher. Being able to increase the leverage ratio is obviously a driver of earnings, which I think will be important if and when rates continue to kind of come down, right? That's one of the countervailing levers that we can pull to drive earnings in the face of tighter spreads and lower rates. So we're fortunate in that we're still materially out earning the core dividend. So we don't feel a desperate need to do that.

[Kipp deVeer, CEO at Ares Capital]

But again, just a reminder, that's a leverage that's a lever that we can and will pull. So in assessing both the leverage ratio and the earnings, I think that will tell us how much equity we feel comfortable raising in the ATM program. Again, Q4 was a more was a larger number than we've seen in prior quarters. And I just commented on why that was. We'll see where we go from here.

[Kipp deVeer, CEO at Ares Capital]

I would expect though that we would get back into that range that you saw from us that was sort of more regular over the last year or two.

[Douglas Harter, Equity Research Analyst at UBS Group]

Great. And then just on your kind of still over income, I guess how do you think about that level? Is there a level which you would consider returning some of that? Or are you comfortable kind of continuing to build that?

[Kipp deVeer, CEO at Ares Capital]

I think for the time being, as we've said in the past, we usually use this time of year to assess whether we want to pay a special dividend. We chose not to, obviously. So that should tell you a couple of things. So for the time being, we feel good about obviously, very good about where the level is because it's quite high. But there actually wasn't much of a debate this year about paying a special for a handful of different reasons.

[Kipp deVeer, CEO at Ares Capital]

So for now, we feel better frankly about reserving that and thinking about it again in twelve months.

[Douglas Harter, Equity Research Analyst at UBS Group]

Great. Thank you.

[Kipp deVeer, CEO at Ares Capital]

Thanks for your questions, Doug.

[Operator]

Thank you. Our next question will come from Mark Hughes with Truist. Please go ahead.

[Mark Hughes, Analyst at Truist Securities]

Yes. Thank you. Any specifics you can share on spread and especially the trajectory through Q4 and January and things stabilized or you're still seeing some movement?

[Kipp deVeer, CEO at Ares Capital]

I think there is most of the decrease we saw pretty ratably through last year. 100 basis points to 150 basis points has been the number that we quoted elsewhere in terms of the declines that we've seen, whether it was repricing existing names or new deals.

[Kipp deVeer, CEO at Ares Capital]

For the time being, I feel like it's pretty much plateaued again because we play across the entire spectrum, smaller companies, larger companies. It varies. Large cap unit tranches are probably four seventy five over, 500 over and the smaller deals will demand premiums to that. We haven't seen them continue to decline really into the first quarter as we've been pricing new deals.

[Mark Hughes, Analyst at Truist Securities]

And then your point about your share doubled of your commitments with existing borrowers.

[Mark Hughes, Analyst at Truist Securities]

Is that a phenomenon of bigger versus smaller, so say other sizable BDCs maybe having the same experience? Do you think you're outperforming in that dimension?

[Kipp deVeer, CEO at Ares Capital]

Yes. I mean, I think for sure we're able to obviously continue to bring larger dollars to our best borrowers, which is something that we've emphasized. But I think we've been really focused on it.

[Kipp deVeer, CEO at Ares Capital]

We've been frankly doing even better than we have in the past.

[Operator]

Our next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

[Kenneth Lee, Vice President at RBC Capital Markets]

Hey, good afternoon and thanks for taking the question and echoing the congrats on the congrats on the new rules for everyone.

[Kipp deVeer, CEO at Ares Capital]

Thanks, Ken.

[Kenneth Lee, Vice President at RBC Capital Markets]

In terms of the economic backdrop, seems very healthy here and the non accruals, as you mentioned, are still below long term averages. Just want to get your latest updated thoughts around potential for credit losses going forward, either yourself or across the industry, what's the outlook there? Thanks.

[Kipp deVeer, CEO at Ares Capital]

Well, I mean, at this company specifically, I'll just reiterate, I mean, we're very pleased. I don't want to use the word surprise, but I think if you had talked to the team a year or two ago, there was belief that defaults non accruals everywhere would rise much more quickly than they have. Thanks for commenting. Of course, I think we've outperformed a lot of the competition.

[Kipp deVeer, CEO at Ares Capital]

Where you have seen some weakness elsewhere, our portfolio is holding up extraordinarily well. So we saw a real small increase in non accruals this quarter, but again being below historical average and seeing strong underlying profit growth at the portfolio, which is by the way very large and very diverse says a lot about the strength of The U. S. Economy, which I think is quite good. So a lot of these companies have adjusted to the higher rate environment, which now seems to be getting some relief as the Fed has lowered rates.

[Kipp deVeer, CEO at Ares Capital]

Again, we'll see where we go from here. But we think it's a very, very good time to be a credit investor with a largely healthy portfolio to collect again with the source of diverse and reliable income at Ares Capital Corporation. So we're pretty pleased with where we are.

[Kenneth Lee, Vice President at RBC Capital Markets]

Great. Very helpful there. That's all I had. Thanks again.

[Kipp deVeer, CEO at Ares Capital]

Thanks, Ken.

[Operator]

Thank you. Our next question will come from Paul Johnson with KBW. Please go ahead.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

Yeah. Thanks. Thanks for taking my questions and congratulations to everyone. My question was mainly on just the Ivy Hill distribution. It looks like that increased quite a bit quarter over quarter.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

I'm just wondering if there's any kind of one time items in there and maybe an idea of what sort of the run rate dividend for Ivy Hill going forward?

[Kipp deVeer, CEO at Ares Capital]

Yes. I mean, Ivy Hill continues to perform extraordinarily well. So just a great asset for this company. Just in case you didn't pick up, but I bet you did, the quarterly base dividend is up because the company has grown.

[Kipp deVeer, CEO at Ares Capital]

But on top of that was a special dividend that got made to the tune of $10,000,000 They've been retaining significant income and capital for their growth that frankly, I think they didn't feel the need to retain all of. So there was a small one time distribution there. But I think on a go forward basis, it will depend on how quickly that company grows. But again, that increased quarterly base dividend, you should take as kind of the new run rate going forward. We feel comfortable supporting that.

[Kipp deVeer, CEO at Ares Capital]

Obviously, the company is well equitized, having just made a special dividend as well, so.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

Got it. Thanks for that. And then in terms of your portfolio, I'm wondering if there's any way to quantify or maybe just give us a sense of if you know of how many of your businesses that maybe have exposure to government contracts, maybe not necessarily government businesses, but have exposure through contracts, services, things such as that, if there's any sort of anecdotal information that you can provide?

[Kipp deVeer, CEO at Ares Capital]

Yes.

[Kipp deVeer, CEO at Ares Capital]

I mean, looking around the room and frankly thinking that you said I don't have a number for you offhand. We'll go do a little bit of digging, but I'm getting shakes of heads from around the room. It's not a tremendous amount of government contracting, defense and aerospace and all that is de minimis. So we can go back and run some numbers if you want us to follow-up, but the answer is I don't think that's going to have a significant impact on the portfolio.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

Okay.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

Yes, I think that pretty much answers my question there. And then the last question I had was just kind of higher level, but I was wondering probably at the upper end of the middle market, have you run into any instances where private equity sponsors have been effectively looking to limit voter control or any sort of lender control within a lender group?

[Kipp deVeer, CEO at Ares Capital]

In a performing situation?

[Kipp deVeer, CEO at Ares Capital]

Not really. I mean, I think the traditional one is a sponsor affiliated debt fund typically will have less voting or limited voting. But in performing situations, no. I mean, one of the things that we've emphasized has been just really sticking the middle market docs and making sure that some of the LME stuff that's crept into the broadly syndicated markets really don't enter our market. I'd actually say it's one of the probably the most significant reason that we pass on a deal that we like is just a document that we don't think works in our downside case.

[Kipp deVeer, CEO at Ares Capital]

But look, in troubled situations, you do see co ops and bank groups, particularly in situations in larger companies where there's concern around LMEs. But to answer your question directly, I think the answer is we don't really see that much. I mean, pretty much everybody votes for their dollars. And if it's a club deal, it's a club deal and you get your voting and nothing unusual there. I don't know if there is a circumstance you'd heard about that we don't know about, but nothing material from my standpoint.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

Yes. I think there have been one or two large deals where this may have occurred, but just wondering if that's something that you've observed in the market. But I appreciate the answers. Those are all the questions for me.

[Kipp deVeer, CEO at Ares Capital]

Okay. Thanks so much.

[Operator]

Thank you. We'll take our next question from Robert Dodd with Raymond James. Please go ahead.

[Robert Dodd, Director - Finance at Raymond James Financial]

Hi, everybody. Congratulations on all the new levels. Just a quick one for me. I think, Kip, it may have been clear. In the prepared remarks, you talked about don't expect any direct impact from government policy changes.

[Robert Dodd, Director - Finance at Raymond James Financial]

Does that I mean, just want to clarify, does that include tariffs, which obviously you're on hold right now, but maybe they won't be and it's not the first time you or the portfolio have been through the tariff rodeo if that happens. So I mean, you just what are your thoughts now on if they do go through, is the portfolio now the company is just the same way they've adapted to higher rates? Have they are they already prepared for it because it's happened before? Or just any thoughts on that?

[Kipp deVeer, CEO at Ares Capital]

Yes. I mean, it seems to be one of the two or three questions of the day between that and Chinese AI and a few other things that seem to be dominating the airwaves. Look, I mean, Robert, I think the simple answer is we have a very large diverse portfolio, right? Tariffs on countries like Mexico and Canada will have an impact on every company in The United States. Probably true of the tariffs that look like they're in place with China.

[Kipp deVeer, CEO at Ares Capital]

I think we're very early in that discussion and obviously spending time with portfolio companies. And the good news is we have great dialogue with our portfolio companies, right. They view us as a strong partner. We're getting monthly financial statements. We're in constant contact with CEOs and CFOs there to try to assess it.

[Kipp deVeer, CEO at Ares Capital]

But it's really hard to generalize kind of how I see big changes there because it's just so early. But we're definitely to court's prepared remarks, seeing what may be out there and making sure that we're vigilant and smart about changes in every portfolio company depending on how things go.

[Kort Schnabel, Co-President at Ares Capital]

It's Cort, Robert. I could dive in on that as well just with a little more color, which is we actually have run a lot of analysis around which of our companies have exposure to tariffs, what percent of their cost of goods sold might be exposed to the countries that have already been announced. Obviously, we have to stay day to day in terms of the countries that might or might not be exposed to tariffs. But so far between China, Canada and Mexico, we actually are really confident that there is a very small impact on our portfolio based on a pretty exhaustive numerical analysis that we've done. So that was why we felt comfortable putting that statement into the prepared remarks.

[Kort Schnabel, Co-President at Ares Capital]

And I guess I would just also say overall, we are just underweighted toward product businesses that import and export products, right?

[Robert Dodd, Director - Finance at Raymond James Financial]

Yes. Understood. Thank you.

[Operator]

Thank you. And this does conclude our question and answer session. I'd like to turn the conference back over to Mr. Kipp Devir for any closing remarks.

[Kipp deVeer, CEO at Ares Capital]

Yes. So I definitely have a few. Today I haven't prepared any, but it's a little bit bittersweet for me today obviously because I'd expect in our next earnings call, which I think is April 29, you're not going to hear a whole lot, if anything, from me. But just wanted to say thanks to the analyst community and all of our shareholders who have supported the company while I've been the CEO. It's been a real blessing for me to work with a great group of people and to be involved with a company that's had this much success over such a sustained period of time.

[Kipp deVeer, CEO at Ares Capital]

So heartfelt thanks and wish everybody a great week. Bye bye.

[Operator]

Ladies and gentlemen, this concludes our conference call

Participants

Executives

• John Stilmar, Partner & Co-Head of Public Markets Investor Relations
• Kipp deVeer, CEO
• Kort Schnabel, Co-President
• Scott Lem, CFO & Treasurer
• Jim Miller, Co-President

Analysts

• Melissa Wedel, Vice President, Equity Research at JP Morgan
• Finian O'shea, Analyst at Wells Fargo
• Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC
• Douglas Harter, Equity Research Analyst at UBS Group
• Mark Hughes, Analyst at Truist Securities
• Kenneth Lee, Vice President at RBC Capital Markets
• Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)
• Robert Dodd, Director - Finance at Raymond James Financial