Ares Capital Q1 2025 Earnings Call Transcript

Skip to Participants
Operator

Good afternoon. Welcome to Ares Capital Corporation's First Quarter Ended 03/31/2025 Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is at 09:20 twenty five. I will now turn the call over to Mr.

Operator

John Sylmar, a partner on Ares Public Markets Investor Relations team.

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

Thank you. And let me start with some important reminders. Comments 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. Ares Capital Corporation assumes no obligation to update any such forward statements.

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

Please also note that past performance or market information is not a guarantee of future results. During this conference 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 financial performance because it is one method the company uses to measure its financial condition and the results of its operations. A reconciliation of GAAP net income per share, the most commonly direct comparable GAAP financial measure to core EPS can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form eight ks.

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

Certain information discussed in this conference call and the information relating to portfolio companies was derived from third party sources and has not been independently verified. Accordingly, the company makes no such representations or warranty with respect to this information. The company's first quarter ended 03/31/2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the first quarter twenty twenty five earnings presentation link on the homepage of the Investor Resources section of our website. Ares Capital Corporation's earnings release and Form 10 Q are also available on the company's website. I would like to now turn the call over to Kip DeVeer, Ares Capital Corporation's Chief Executive Officer.

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

Kip?

Kipp deVeer
Kipp deVeer
CEO at Ares Capital

Thanks, John. Hello, everyone, and thanks for joining our earnings call today. I'm joined by Cort Schnabel, our incoming CEO Jim Miller, our President Jana Markowitz, our Chief Operating Officer and Scott Lem, our Chief Financial Officer as well as other members of the management team who will be available during the Q and A session. I just wanted to briefly open the call to express what an honor it's been to lead this company over the past ten years. I'm incredibly grateful for the hard work and the dedication of our team, and I'm very proud of the growth and the success that Ares Capital has experienced.

Kipp deVeer
Kipp deVeer
CEO at Ares Capital

Together, we've navigated challenges, we've seized opportunities and we've achieved meaningful milestones. Looking ahead, I couldn't be more confident about the future for ARCC. And it's my privilege to pass the torch to Cort, who will undoubtedly provide great leadership for the company, along with Jim, Jana and Scott. I've had the pleasure of working alongside all of them for close to twenty years, and I've seen firsthand their vision, leadership and deep understanding of our business. I have no doubt that Cort and the ARCC leadership team will continue to push us forward, and I know the company is in excellent hands.

Kipp deVeer
Kipp deVeer
CEO at Ares Capital

To our investors, our team and other stakeholders, thank you for your trust and support. To an end today, I look forward to continuing to serve Ares Capital as a Director and I know the company will continue to thrive under the new leader. So with that, many thanks again to all for the support over the years. Let me turn the call over to Cort.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Thanks, Kipp, and I'm certainly honored to be here today as I step into the role of ARCC's CEO starting tomorrow. Let me start by providing a few thoughts on our recent performance and our current positioning in light of today's volatile and evolving market conditions. This morning, we reported solid first quarter results with $0.50 in core earnings, which equates to an annualized return on equity of 10%. Our liquidity remains strong and stable with our non accrual loans and lower risk rated credits at historically low levels. We continue to be active in our investing activity as we committed $3,500,000,000 in gross commitments during the first quarter.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Excluding commitments fronted and sold as agents, gross commitments increased 54% versus the same period last year. We ended the quarter with conservative balance sheet leverage and significant dry powder to make new investments in a potentially improving spread environment on new loans. Scott will take you through our results in more detail, but let me update you on what we're seeing in our markets and how we believe we are positioned as a company. Beginning in late March and extending through April, new transaction activity in the liquid loan market dropped significantly as banks have become more cautious when committing incremental capital and launching new syndications. Secondary loan markets experienced increased volatility and widening spreads, and most banks have transitioned into a risk off position.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Against this backdrop of increased volatility and tightening credit conditions, the direct lending market has remained open and continues to exhibit greater stability than the liquid markets. Once again, certain transactions that previously would have gone toward the broadly syndicated loan market have instead begun to explore private credit solutions. While it is likely that some market participants will take a pause on launching new M and A processes and the overall level of M and A going forward could be slower than anticipated, we believe we are well positioned to take market share among the transactions that do occur. Additionally, we believe the long term fundamental drivers for increased M and A remain intact, most notably the mounting pressure on private equity managers to return capital to their investors as well as pressures to deploy aging dry powder. Periods like this have also historically produced attractive financing opportunities to support take private transactions, spin offs and other strategic initiatives.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Capitalizing all of these opportunities, we leverage our long standing relationships and market reach to source opportunities while also supporting our existing portfolio companies. During periods of market volatility and economic impacts, are inward by proactively assessing current and future economic impacts to our existing portfolio companies. We also position the balance sheet to be even more flexible with strong levels of liquidity and modest leverage. We then over communicate with market participants to ensure they know we are open for business and ready to partner with them. We remain confident in ARCC's ability to successfully navigate future market conditions as we believe Ares has one of the most seasoned and experienced investment teams in the industry.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Our investment committee members have been investing together average, which fosters a consistent approach to credit quality and portfolio construction. Furthermore, all four of us on ARCC's executive management team have been at Ares since before the great financial crisis. With 200 investment professionals dedicated to U. S. Direct lending and another 50 portfolio management professionals, our team's scale, experience and agility enable us to navigate volatile markets, positioning us to be early, active and thorough in identifying and capitalizing on opportunities.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Consistent with our playbook, we are entering today's market environment with a significant amount of available capital totaling nearly $6,800,000,000 and our leverage expressed by our net debt to equity ratio is near the bottom end of our target range at below one times. Our confidence is also underpinned by the overall health of our portfolio companies, which continue to exhibit strong credit results. We ended the first quarter with sequentially lower non accruals, which continue to be well below our average and the BDC peer group historical average. Our portfolio companies are reporting double digit organic LTM EBITDA growth and are levered on a debt to EBITDA basis below our five year average. This lower level of leverage can also be seen through our portfolio's historically low average loan to value, which currently sits in the low 40% range.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

We also take comfort in the fact that our portfolio is focused on domestic service oriented businesses, which should be more insulated from the direct impacts of higher tariffs. On that point, we are carefully monitoring potential direct and indirect results of higher tariffs and we are proactively engaging with portfolio companies to mitigate the potential impact of tariffs on our portfolio. While trade policies and their economic impacts remain highly dynamic, we only have a small number of borrowers that we believe are most directly exposed to the potential impacts from tariffs, particularly those that have higher exposure to China. Specifically, these borrowers comprise only a mid single digit share of Altice companies are starting from a position of financial strength and flexibility. Importantly, this exposure assessment does not include any mitigants these companies can potentially implement such as adjusting pricing or the ability to transition supply chains.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Additionally, our portfolio management team, one of the largest and most experienced in the industry is continuously monitoring the portfolio and is prepared to respond quickly to potential tariff changes. In conclusion, while this period brings new uncertainties, it also brings new opportunities. We feel confident that we are in a strong financial position to navigate what lies ahead, just as we have in other periods of volatility over the past twenty years. With this view in mind, we declared a $0.48 per share quarterly dividend for the second quarter of twenty twenty five. This marks our sixty third consecutive quarter of delivering stable or increasing regular quarterly dividends at ARCC.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

We are proud of this track record and feel confident that we can continue to support a steady dividend level for the foreseeable future due to our view of our perspective earnings power and our significant undistributed spillover income. I will now turn the call back over to Scott to take us through more details on our financial results and our balance sheet.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

Thanks, Court. This morning, we reported GAAP net income per share of $6 for the first quarter of twenty twenty five compared to $0.55 in the prior quarter and $0.76 in the first quarter of twenty twenty four. We also reported core earnings per share of $0.50 compared to $0.55 in the prior quarter and $0.59 for the same period a year ago. Our decline in core earnings was largely driven by the decline in our portfolio yields based upon the lower average market base rates, which occurred during the fourth quarter of last year. As you may recall from our last couple of earnings calls, there's typically up to a one quarter lag to reflect the full quarter impact on interest income from the changes in period end yields that we report for the most recent quarter.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

Simply put, impact from the changes in portfolio yields during the fourth quarter were the primary driver of the sequential change in our core earnings for the first quarter. The good news here is that yields in our portfolio have generally stabilized through the end of the first quarter. The weighted average yield on our debt and other income producing securities at amortized cost was 1% at March 31, which was down slightly from 11.1% at December 31. Our total weighted average yield on total investment in amortized costs was 9.9%, which compares to 10 a quarter ago. Importantly, unlike the 70 basis point decline we experienced in our weighted average yield on total investments from the end of the third quarter to the end of the fourth quarter of twenty twenty four, we only experienced a 10 basis point decline from the end of the fourth quarter to end of this past quarter.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

Therefore, all things being equal, we should see more stable levels of interest income for this coming second quarter. Turning to balance sheet. Our total portfolio at fair value at the end of the quarter was $27,100,000,000 which was up from $26,700,000,000 at the end of the fourth quarter and up from $23,100,000,000 a year ago. Shifting to our funding capital position. We've remained active in adding capacity, extending our debt maturities and reducing our cost.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

In January, we issued $1,000,000,000 of seven year unsecured notes with a new issue spread of 150 basis points, representing a new low for us and the BDC sector. During the first quarter, we also extended the end of the reinvestment period and the maturity date for our $1,300,000,000 BNP funding facility to March 2028 and March 2030, respectively, while reducing the drawn spread for the facility from 2.1% down to 1.9%. Post quarter end, with the continued support of our thirty plus bank group and our largest revolving credit facility, we upsized the facility by nearly $800,000,000 bringing the total facility size to $5,300,000,000 extended the end of the revolving period and the maturity date to April 2029, April '2 thousand and '30, respectively, and reduced the drawn spread in the facility by more than 20 basis points. As Cort mentioned, our overall liquidity position remains strong with nearly $6,800,000,000 of total available liquidity, including available cash and pro form a for the recent amendment to the revolving credit facility. We believe we are well positioned, especially with only one term debt maturity for the remainder of this year.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

In terms of our leverage, we ended the first quarter with a debt to equity ratio net of available cash of 0.98 times, down slightly from 0.99 times 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 opportunities. Finally, our second quarter twenty twenty five dividend of $0.48 per share is payable on June 30 to stockholders of record on June 13. ARCC has been paying stable or increasing regular quarterly dividends for over fifteen consecutive years. In terms of our taxable income spillover, we currently estimate we will have $883,000,000 or $1.29 per share available for distribution to stockholders in 2025.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

In addition to our core earnings continue to be in excess of our current dividend, we remain hopeful for some potential portfolio realized gains in the coming quarters, which may further enhance our taxable income spillover. We believe our meaningful taxable income spillover provides further long term stability for our dividends and is a significant differentiator for us. I will now turn the call over to Jim to walk through our investment activities.

Jim Miller
Jim Miller
Co-President at Ares Capital

Thank you, Scott. I'll provide some additional details on our investment activity, our portfolio performance and our positioning. I will then conclude with an update on our post quarter end activity and backlog. In the first quarter, our team originated $3,500,000,000 of new investment commitments with existing borrowers comprising approximately 60% of our commitments. The strength of our incumbent relationships is particularly beneficial since our embedded knowledge and experience with these borrowers reduces underwriting risk on new commitments.

Jim Miller
Jim Miller
Co-President at Ares Capital

Another source of differentiated deal flow is our broad market presence across the lower, middle and upper segments of the middle market. We believe this coverage is critical to our strategy of selecting what we believe are the best credits across these market segments. In recent quarters, we have been focusing on the less competitive core middle market segment, which is comprised of companies with 50,000,000 to $100,000,000 of EBITDA. This trend is reflected in the weighted average EBITDA of our portfolio companies, which decreased for the fifth consecutive quarter to $274,000,000 Our median EBITDA remains around $80,000,000 and has been fairly consistent over the past few quarters, underscoring our ongoing presence in all parts of the middle market. Additionally, this quarter we achieved a higher yield per unit of leverage on our first lien originations than our post COVID average.

Jim Miller
Jim Miller
Co-President at Ares Capital

Turning to the portfolio, we ended the quarter with $27,100,000,000 of investments at fair value, a 1.5% increase from the prior quarter. We believe our long standing underwriting strategy of focusing on market leading companies with high free cash flows and what we believe to be resilient service oriented industries will be important drivers of stability and differentiation in the quarters ahead. We believe another point of differentiation is our disciplined approach to risk management and portfolio diversification. With five sixty six portfolio companies at the end of the first quarter and an average position size of less than 0.2% of the portfolio on average, we are able to mitigate the impact of negative credit events in any one company or industry. The health of our portfolio can be seen in the 12% weighted average LTM EBITDA growth of our portfolio companies, which increased modestly from 11% in the prior quarter and was broad based across both industries in which we invest and the various company size ranges.

Jim Miller
Jim Miller
Co-President at Ares Capital

Another measure highlighting the health of our portfolio is the low leverage of our underlying portfolio companies. At 5.7 times debt to EBITDA, this weighted average leverage level is the lowest we have seen since the first quarter of twenty twenty. Coupled with this, our interest coverage is strengthening, currently near two times. Beyond that, our non accruals at cost ended up the quarter at 1.5%, down 20 basis points from the prior quarter. This remains well below our 2.8% historical average since the great financial crisis and the BDC industry historical average of 3.8% over the same timeframe.

Jim Miller
Jim Miller
Co-President at Ares Capital

Our non accrual rate at fair value also decreased by 10 basis points to 0.9%. The percentage of our portfolio at fair value in Grade one and two names decreased a further 10 basis points sequentially, ending the quarter at 2.8%, the lowest level we have seen since 2010. As a final point on our portfolio quality, when comparing our current position to our position just prior to COVID, the last major challenging economic period, our portfolio companies today have 17% lower loan to value ratios on average, underscoring the greater equity value beneath our positions today than at the year end 2019. Our portfolio has also become even more diversified as the number of companies in our portfolio has increased by 60% to five sixty six. As a reminder, our portfolio performed very well through COVID with lower non accruals, lower realized losses and better ROEs than BDC peers on average over the course of 2020 and 2021.

Jim Miller
Jim Miller
Co-President at Ares Capital

In addition to our strong performance through COVID, we are one of the few BDCs that operated under the severe stress of the great financial crisis from 02/2007 to 2010, and one of an even smaller subset that did that so successfully. In addition to our distinct competitive advantages, we believe a key driver of this performance across cycles is also our flexible mandate that allows us to opportunistically invest across the capital structure. Shifting to the second quarter, the widening of secondary market spreads in the broadly syndicated loan and high yield markets, which began in Q1, has intensified in April amid heightened capital markets volatility. In direct lending, we are actively engaged in pricing discussions on new transactions, tightening terms and documents and positioning ourselves strategically in ongoing discussions with potential borrowers. We have been busy with ongoing discussions with borrowers and our backlog remains healthy.

Jim Miller
Jim Miller
Co-President at Ares Capital

Our total commitments through 04/24/2025 was $500,000,000 and our backlog as of 04/24/2025 stood at $2,600,000,000 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. Importantly, about 40 of this backlog represents incumbent borrowers, underscoring our ability to be active in all environments as we continue to gain market share with our existing borrowers. As we look to the future, we are confident in our team and our company's market and financial positioning. We remain committed to building upon our over twenty year track record of investing across a variety of market environments and delivering attractive risk adjusted returns to our investors. As always, we appreciate you joining us today and we look forward to speaking with you next quarter.

Jim Miller
Jim Miller
Co-President at Ares Capital

With that, operator, please open the line for questions.

Operator

The Investor Relations team will be available to address any further questions at the conclusion of today's call. And we will take our first question from Finian O'Shea with Wells Fargo Securities.

Finian O'shea
Finian O'shea
Director, WFS Research at Wells Fargo Securities

Corey,

Finian O'shea
Finian O'shea
Director, WFS Research at Wells Fargo Securities

I wanted to go to the beginning. You talked about spreads and the banks reacting especially to the market. With all the capacity in non traded BDCs, do you think that privates will be providing similar, if not lower pricing than banks for some time? And then as a platform with a real institutional business in direct lending, does that impact your competitive position on deployment?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. Thanks, Fin, for the question. I mean, I think, first thing is we've already started to see some movement wider in overall yields between spread and fees in the last four weeks or so since the volatility started. So I think that's one data point that shows that the market is already starting to move. I think you can look back at history also as some guide as to what we might be able to expect going forward.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

And there were a lot flows into non traded BDCs back in 2022, and we entered into a period of volatility. And our market lags a little bit on the liquid markets, but we saw spreads obviously widen materially through that period as those flows began to change and as our market adjusted. So I think the effect of the flows into the private BDCs and overall kind of retail flows generally don't have a material effect on the overall market. Obviously, the large cap end of the market, they can have some effect as that's where most of the competitors that are seeing those flows compete. But as we've explained before, we originate across all different asset classes, as well as in the non sponsored universe and have a lot of different ways to source deals.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

So I think we feel pretty good about our ability to outperform our competitors. So I guess time will tell. But again, we've already started to see a little bit of widening just in the last.

Finian O'shea
Finian O'shea
Director, WFS Research at Wells Fargo Securities

Okay. A follow-up is, it sounds like you had done a lot of work on tariffs. Seeing if you could expand on the if you could drill down on what you meant by exposed or impacted for the portfolio names. Is that like in the context of a percentage of EBITDA, for example, or any color you could give there?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. I mean, we essentially well, first of all, we reached out to every single portfolio company, and we're in touch with them on a regular basis, obviously. So, wasn't anything super unusual, but we did do the work to create a bottoms up analysis and really try to understand first and foremost, which companies import products. And then of those companies, which companies are importing products from high tariff countries. And obviously, that high tariff country data point moves around week to week.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

But based on what we see today, there's a mid single digit exposure, as we've said in the prepared remarks, in our portfolio for those kinds of companies that are importing those products. We benefit from investing in and waiting toward domestic companies that are more service oriented. And so that helped minimize that percentage. And on the second part of your question, yes, this is really important. This is an exposure analysis, not an impact analysis.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

And we don't know yet what the actual impact will be, but I'll just say we obviously went we just went through a pretty significant supply chain disruption period coming out of COVID, where we saw a lot of inflation and a lot of supply chain disruption. Our portfolio companies were able to pass on pricing and did pretty well through that. So that's what we mean by exposure not impact is these companies could have ways to mitigate the exposure that they have and find ways to soften the effect. So we just don't know how it's going to play out. But hopefully that helps and answers your question.

Finian O'shea
Finian O'shea
Director, WFS Research at Wells Fargo Securities

Yes. Thanks so much.

Operator

Thank you. And your next question comes from the line of Casey Alexander with Compass Point. Please go ahead.

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

Yes. There's a lot here. I think that most people listening to this call would feel like you guys are more optimistic than we generally expect the rest of the industry to be, especially since the data points that we keep hearing is that private equity deal volume and M and A deal volume has grinded to a very low level. So I'm curious if there's a little more color. And also what's the playbook going forward if the origination volume doesn't pick up?

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

Do you slow down the ATM and how do you manage your earnings against the rising cost of liabilities? I know you only have one more maturity this year, but you have another couple in early next year that are going to raise the cost of your liabilities. What's the playbook to manage all of those moving parts?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. Thanks, Casey. Definitely a few different questions in there. So I guess starting with deal flow. Yes, look, it's actually, we're going in an interesting time, and it's hard to predict.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Again, I'll try to point to some data points of things that we've seen in the last four weeks, which is of all the processes that were kind of in the works and heading toward a conclusion when all this volatility began and Liberation Day began, I'd say almost every single one of those processes continued to their conclusion and did not get pulled, I. E. The seller didn't decide not to sell or the buyers didn't walk. They got to signing. And I think that's a testament to the direct lending market being open and filling in for the banks, which kind of stepped back and we were able to be there and allow those transactions to get to conclusion, again, at somewhat wider spreads and fees.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

I think we saw those deals as they approached their conclusion, at least in our portfolio and in our deals that we were working on, yields kind of improved by 25 to 50 basis points between spread and fee. And so that's at least some sign that deals are going to continue to get done. We obviously reported a pretty healthy backlog going into the quarter. So that provides again a little more tailwind. After that, as I said in the prepared remarks, it's a little bit uncertain and it certainly could be the case that new processes don't get launched and people sort of take a pause.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

In that environment, we've sort of proven that we have lots of other ways to source transactions. Our existing portfolio kicks off a lot of opportunities. Again, our non sponsored efforts, refinancings of BSL transactions, I think could be a really interesting opportunity for us if that market remains volatile. Again, we saw that back in 2022. So we've just been through these kinds of periods before where deal flow might slow down and we find ways still to do deals.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

So I think that is my attempt to answer the first part of your question. And I'm sorry, can you remind me the second part?

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

Well, the deal flow doesn't emerge, what's in the playbook? Slow the ATM sales, how do you manage your earnings against rising cost of liabilities over the course of the next year? It's sort of step two of where step one gets you.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. Look, I think we're going to see how this plays out. Obviously, we still do have a fair amount of liabilities that are locked in for a longer period. So that's not like that's all going to unwind at once. And I think you have to remember that there are natural offsets that occur in the market.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Again, going back to our twenty year history here, we've seen in the past lots of periods of time where interest rates were near zero or deal flow slowed down. And we've been able to, over that twenty year period, generate a pretty darn consistent ROE in the 9% to 12% range. Today, we're around 10%. We've never really dipped below 9% over that twenty year period, despite going through all different types of economic environments. And historically, we've seen that when base rates fall, spreads widen.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Second lien opportunities become more available as the broadly syndicated market executes more on some of those lower priced first lien deals. We obviously have been operating at a very low leverage ratio, below one times, low end of our range. That's a lever that we could pull to help with the earnings profile. Ivy Hill is currently at a pretty low level in terms of our portfolio mix of around 6% or seven percent today. We've been up above 10% before.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

I think Ivy Hill could see some interesting opportunities to grow. And we obviously have a lot of spillover income as well that we can dip into. So there's all these different factors. Again, it's hard to predict what's going to happen, but I think we feel good about our ability to manage through that environment.

Jim Miller
Jim Miller
Co-President at Ares Capital

Well, I'll just add the environment we're in right now does lead to lower repayments. So our portfolio tends to stay in place as and that provides a lot of stability with a mature portfolio like we have. And we're seeing less refinancings from the public markets as well. So the combination of those things gives us a lot of a bit of a hedge in markets like this, which we've seen before.

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

Since that was a multipronged question, I'll stop there and not use my follow-up.

Operator

Thank

Operator

you. And your next question comes from the line of Robert Dodd with Raymond James. Please go ahead.

Robert Dodd
Robert Dodd
Director - Finance at Raymond James Financial

Hi, guys. I appreciate the commentary on the potential tariff impact of importing goods. Have you done any analysis yet? I mean, I don't expect there'd be a lot of exposure going the other way, obviously, with this year with, retaliatory tariffs. I mean, as you say, services, not a lot of manufacturing and exporting, but have you done any analysis on that side to see if you have exposure to that kind of impact if those retaliatory tariffs do stick long term?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. We've looked at that as well. As you said, it's very unclear as to how that's going to play out. We have minimal exposure as well on that front. I think it's interesting, right?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Not only is there a potential risk factor, I guess, of exporting and retaliatory tariffs, there's also just multiple domino effects and spill on effects of how this could play out, right? Second order impacts, third order impacts, what happens as inflation dampen consumer demand and obviously everybody's wondering does this potentially tip us into a recession. I think all we can really do is look at our portfolio, try to quantify the first order impacts, and we'll see how the rest plays out. I think what we come back to is just our conservative underwriting. Every time we underwrite any new deal, we're always looking at the supply chain.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

We're looking at supply concentration. We're making sure that our companies don't have any material supply concentration. And obviously, we're always underwriting as if there's going to be a recession next year when we're running downside cases, where credit investors were always worried about a recession all the time. So we just kind of fall back on that, Robert, and our experience operating through prior periods of softness. Obviously, it will be harder work if we do end up going through that kind of period, but we think we're prepared.

Robert Dodd
Robert Dodd
Director - Finance at Raymond James Financial

Got it. Thank you. And just kind of follow-up credit related, but not tariffs. I mean a few years back, the whole industry, not necessarily just your portfolio, but the whole industry went through kind of an issue with physician office roll ups. Obviously, there's a lot of veterinary office roll ups across the industry as well, and one of them obviously was put on non accrual this quarter.

Robert Dodd
Robert Dodd
Director - Finance at Raymond James Financial

So is this the beginning cycle of that same kind of problem that the issues have moved and now it's the veterinary office roll ups and we're going to see a lot more problems in that sector? Or are your thoughts there? Because obviously, put Thrive or JEDI or whatever we want to call it on non accrual this quarter.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. Probably, Robert, I don't know I can help you too much on forward outlook on what that's going to be. I guess all I would say in terms of our portfolio and our exposure to that is it's really minimal. We have less than 2% of our portfolio is in physician practice management businesses. That includes vet.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

So we really just don't have a lot of exposure to that part of the market. I probably just won't venture a guess as to what happens to the future of the veterinary space.

Robert Dodd
Robert Dodd
Director - Finance at Raymond James Financial

Got it. Thank you. Worth a try.

Operator

Thank you. And your next question comes from the line of Melissa Wedel with JPMorgan. Please go ahead.

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

Good afternoon and thanks for taking my questions. A lot of mine has been answered already, but I wanted to follow-up on a comment made during the prepared remarks about again, around assessing the exposure direct exposure to tariffs, but then that's not including mitigating factors that companies could implement. You also made the comment that you're ready to respond quickly in those situations. Can you just elaborate on that a little bit? What does that look like?

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

Is that restructuring? Is that something else?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. The response, you're asking if that impact does come through?

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

Yes.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. Look, I think that just comes back to our playbook that we employ when portfolio companies aren't going according to plan, whether it's tariff related or related to any other reason. And just so what we do in that situation is obviously we are proactive, as I already said, in terms of getting ahead of the situation. So we're in dialogue with those mid single companies that are potentially exposed to tariffs. We're having conversations with them now about what they're planning to do, what their liquidity forecast looks like, how well funded are they.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

And obviously, we're in dialogue with the owners of those companies, which mainly are private equity firms that we've been doing business with for a long time and preparing for what we need to do. And our actions can take many forms, but generally we look to help be part of the solution. And the first thing we say is, if you're the owner of the business, we expect you to contribute. And if our private equity partners step up and provide liquidity, then we will help be part of that solution by offering to pick a portion of our interest for a short period of time in exchange for a premium and in exchange for that capital contribution to help these companies get through these types of periods. We did that during COVID very successfully.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

We saw lots of equity contributions come into our portfolio companies. Yes, we did pick interest. Our PIK exposure went up for a short period of time, but that has all come down. And again, we weathered through that storm pretty darn well. So, that's step one in the playbook.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

If the private equity owner or any owner of the business is not willing to step up, then yes, we are not afraid to own a business if we need to. We have the capabilities. We've got the portfolio management expertise. And businesses through those kinds of cycles has actually produced a lot of gains for us over a long period of time. So we're not afraid to roll up our sleeves and do that if we need to.

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

I appreciate that. Thanks for going into detail there. I would agree with an earlier comment that was made about a sizable backlog into 2Q, and the amount of activity seems to be pretty robust despite an uncertain more uncertain environment. Given the uncertainty around tariff policy, which I assume is what's driving slower decision making from borrowers. I guess, one, I want to clarify if it's primarily tariff policy, if you're hearing any other consternation from borrowers about moving forward with capital allocation projects.

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

But then also on that sizable backlog, do you think there's maybe an incremental degree of uncertainty on how much of that will close just because of this elevated volatility that we're in right now? Thank you.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. Look, it's hard not to say that there could be some of those deals in the backlog that might fall away. Again, I was pointing in an earlier question to the fact that at least in the last four weeks, the deals that we're building to conclusion have moved forward. But that doesn't mean that things aren't going to change. And again, I have to admit that if you're an owner of a business and contemplating a sale process now, starting a sale process now, you're probably going to think twice maybe before launching a new process.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

So it stands to reason that we could see a little bit of a slowdown and there might be a little bit of a lag effect to your point, because there is a backlog that's already in place. Really hard to predict. There's so much uncertainty right now. I think all we can do is kind of point to the point to what we're seeing in the last four weeks and try to draw some conclusions about what we're going to see in the future.

Jim Miller
Jim Miller
Co-President at Ares Capital

More thing. The predictability though that you do have is that in these markets, these moments, private capital tends to be a great solution. And so while we do expect to see lower M and A volume, we do also anticipate that we'll get a bigger percentage of the pie because it just is a better solution at these moments in time. So we do think there will be deal volume that comes through, and we think we're really well positioned to take advantage of those deals.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. In an uncertain environment, the value of our capital, which is certain comes with certainty goes up. And that's why we're already starting to see a little bit of spread widening. Melissa, think there was a part of your question. I apologize if I didn't answer it.

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

I snuck in a little one there. I think there's a general assumption that uncertainty and the decision to or maybe the propensity to delay capital allocation decisions right now has to do with tariff uncertainty. I just was curious if you're hearing anything beyond that, any broader macro concerns from your borrowers? Thanks.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. Most of it's around the tariffs. It's probably a little early to say. It stands to reason, obviously, given recession risk is higher that you might see some other companies hold off on capital spending. I think it's just a little early for us to say that we're seeing any kind of real trend there yet though.

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

Thanks.

Operator

Thank you. And your next question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead.

Kenneth Lee
Kenneth Lee
Vice President at RBC Capital Markets

Hey, good afternoon. Thanks for taking my question. One on some of the newer deals, newer investments you're seeing more recently. It sounds like there's still focus for the more core and middle market kind of deals. But are you seeing perhaps more attractive opportunities in the larger sized upper market segments more recently given the volatility?

Kenneth Lee
Kenneth Lee
Vice President at RBC Capital Markets

Thanks.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

We are. Yes, for sure. Again, I think looking back historically, that's what we saw in 2022 and 2023 is that market got a little more attractive. And that's, again, we talk about this a lot, but that's what we feel is one of the biggest advantages of our broad sourcing network and all the relationships that we've built over twenty years is that we can pivot when different pockets of the market become more attractive. So you saw us move up into larger deals in 2022 and 2023 than we've in the last four to six quarters averaged down a little bit, still doing larger deals where there's attractive opportunities, but walking away from some of those deals a little bit more and moving a little bit more down market.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

And now it's early, but we are already starting to absolutely see some of those larger deals come to the way of the private credit market. And I'm hopeful that you'll see some nice announcements from us coming forward on some of those deals.

Kenneth Lee
Kenneth Lee
Vice President at RBC Capital Markets

Got you. Very helpful there. And just one follow-up, if I may, just on the liability side there. You've continued to optimize financing there, tightened spreads on some of the facilities. Wondering if there's still some further opportunities over the near term to continue to optimize the financing side there.

Kenneth Lee
Kenneth Lee
Vice President at RBC Capital Markets

Yes.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

I mean, I think, well, you saw us do that during the quarter and then post quarter end. And we're working hard to keep get those costs down as quickly as we can. Our largest corporate facility is now over 20 basis points cheaper than it was before. So certainly trying to be as efficient as possible on the liability side. Unfortunately, you have seen bond spreads recently widen, but it's good to have the diversity of sources that we have and having the secured side, remain pretty efficient.

Kenneth Lee
Kenneth Lee
Vice President at RBC Capital Markets

Got you. Very helpful there. Thanks again.

Operator

Thank you. And your next question comes from the line of Doug Harter with UBS. Please go ahead.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Thanks. Just on the unrealized marks in the quarter, can you talk about whether those were kind of broad based or more asset specific that led to the marks?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes, the latter, a little more asset specific. And again, not really anything that is drawing any kind of trend that we can identify, just a little more esoteric one off.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Great. And then the dividend income you received this quarter was down from the fourth. Anything to note on that?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. There was a special dividend from Ivy Hill in the fourth quarter that actually contributed about $01 of earnings per share for us in the fourth quarter. And was just a one time special dividend. So that did not reoccur this quarter. We did have a slight increase in the regular dividend from Ivy Hill from the fourth quarter to this quarter, but that's the answer.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Great. Thank you.

Operator

Thank you. And your next question comes from the line of Mark Hughes with Truist. Please go ahead.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Yes. Thank you. Good afternoon. Backlog I think you mentioned that 40% of the backlog was from incumbents. Is that typical?

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Will that then translate into, say, your I think this quarter you did 60% with existing borrowers when you get to the end of the line or is 40% different than the norm?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

It's right around the average year. Obviously, it depends on the year, depends on the market. But over a fairly long period of time, we're usually around 50% of new commitments going into existing borrowers. And again, it can bounce around a little bit. When M and A slows down a little bit, we have moved up to 60%, seventy %.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

So nothing unusual.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Yes. So does the 40% I guess you've given the backlog number, but that maybe seems to imply more new borrowers in the backlog? That does imply that. Yes. Okay.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

And then you'd also mentioned the potential for realized gains in coming quarters to help boost NAV. Is that based on some visibility that you've got, your pipeline that you can see on that front is more favorable? Or is that just a general comment?

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

Yes. I wouldn't say it necessarily boost NAV because we're going to mark our portfolio to fair value. So I think as you there's a couple of names and you've seen the value gone up. As those realized, that would get added to our taxable income and our realizable spillover income.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Fair enough. That like I say, is there more potential for that, more visibility or again, was that a general comment?

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

Yes. I mean, we can't comment on specific transactions, but I think there's a couple you're probably seeing the pattern of it's going up over time. And our hope is that a couple of those can get realized this year.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Understood. Thank you very much.

Operator

Thank you. And your next question comes from the line of Sean Paul Adams with B. Riley Securities. Please go ahead.

Sean-Paul Adams
Equity Research Analyst at B. Riley Securities

Hey, guys. Good afternoon. Touching on non accruals, I

Sean-Paul Adams
Equity Research Analyst at B. Riley Securities

know we beat kind of

Sean-Paul Adams
Equity Research Analyst at B. Riley Securities

the topic to death, but the feedback that you received from portfolio companies, existing non accruals and also your analysis on kind of tariff exposure, Can you touch on if you're seeing any thematic patterns in portfolio stress or sectors or industries that have just proactively had outreach and dialogue?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. I appreciate the question. It's something that we're always looking for and trying to draw conclusions around trends to inform our behavior around new investing. Unfortunately, there's just nothing that we're really seeing yet that we can comment on that that we can draw any conclusions around there being a trend. So we'll just have to kind of wait and see, but we can keep talking about that in future quarters.

Sean-Paul Adams
Equity Research Analyst at B. Riley Securities

Got it. Thank you for the color.

Operator

Thank you. And your next question comes from the line of Brian McKenna with Citizens. Please go ahead.

Brian Mckenna
Director - Equity Research at Citizens JMP

Great. Thanks. So you noted that during periods of volatility, the team is more inward focused on the existing portfolio. Looking back over the past two decades, during these periods of volatility, how long on average is the team inward focused before shifting more of the focus to new investment opportunities? I'm just trying to get a sense trajectory of new originations from here.

Brian Mckenna
Director - Equity Research at Citizens JMP

And are there any signs we should be looking for from the outside to indicate a pickup in related activity could be coming?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. I don't

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

know if maybe it was a little misleading in the prepared remarks. It's not like we are only focused inward for weeks at a time and then shifting to origination. I was sort of just giving an order of all the different things that we do during these periods and we thankfully given the size of our team and the experience of our team are able to do all of it at the same time. So we're looking at the existing portfolio, utilizing our portfolio management team as well as the teams and at the same time out originating new transactions. So it's not like it's really one or the other.

Brian Mckenna
Director - Equity Research at Citizens JMP

Okay, got it. That's helpful. And then just maybe more modeling question. Any color on structuring service fees thus far in April? And then any way to think about these in the second quarter based on everything that we know today?

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Can't really comment, I don't think on what we're seeing in the recent quarter. There hasn't been anything that's changed a lot. I guess I already did say yields on new investments that have come to fruition in signing in the last four weeks, overall yields are up 25 to 50 basis points and that's a mix of both spread and fee. I mean, it just depends on the deal and the nature of the transaction. Sometimes you get a little bit more in fee, sometimes you get a little bit more spreads and then you get a little bit of both.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

So there's probably I guess I'd say there's been a slight movement for the better on fees in the last four weeks, but we'll have to just we'll have to see. Again, looking at the past as a guide, when we go into periods of volatility and again, looking back at the most recent period, 2022 and 2023, we saw fees move materially wider. Again, past doesn't always predict the future, but that has been what we see in the past.

Brian Mckenna
Director - Equity Research at Citizens JMP

All right. I'll leave it there. Helpful.

Operator

Thank you. And your next question comes from the line of Finian O'Shea with Wells Fargo Securities. Please go ahead.

Finian O'shea
Finian O'shea
Director, WFS Research at Wells Fargo Securities

Hey, everyone. Thanks for the follow-up. I want to go back to a few times in the remarks you guys mentioned seemingly relying on spillover. Seeing if you could expand on that and if you expect to go below the dividend this year? And how, I guess, what the drivers would be to come back, let's say, at today's curve, come back at coverage that is?

Finian O'shea
Finian O'shea
Director, WFS Research at Wells Fargo Securities

Thank you.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

Yes. No, I don't think we meant to imply that we're going to go below the dividend on core and dip into the spillover this year. I think we were mentioning the amount of spillover to just give comfort that there's an additional lever that we have there to the extent that does occur. It's not our expectation. We feel good about the dividend, Fin.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

It's funny when we raised the dividend to zero four eight dollars we were earning core in the mid-60s and people were asking us why we didn't raise the dividend more than $0.48 And we didn't do it because we knew that rates were pretty elevated and there was some excess spread in the market given the dislocation and that was likely going to correct. And so we've just kind of seen that happen as we sort of expected and yields have come down and we're now back into what I would say is a more normalized environment where we have a little bit of cushion, but not as much. Was nice and comfortable to operate with all that cushion, but that isn't the norm, right? So I would just say we're back kind of in the norm now. As I already talked about before, there's all these different offsets that occur if rates do decline in the future.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

There's countervailing factors that also help us in that type of environment. So we feel good about the dividend for the foreseeable future.

Finian O'shea
Finian O'shea
Director, WFS Research at Wells Fargo Securities

Okay. Thanks so much.

Operator

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Cort Schnabel for any closing remarks.

Kort Schnabel
Kort Schnabel
Incoming CEO at Ares Capital

No closing remarks. Thanks everybody for the questions and engagement. Talk to you next quarter.

Operator

Ladies

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

Key Takeaways

  • Ares Capital completed a planned leadership transition as Kip DeVeer passed the CEO role to Cort Schnabel after ten years at the helm, ensuring continuity with long-time executives on the management team.
  • In Q1 2025, ARCC reported core EPS of $0.50 (10% annualized ROE), deployed $3.5 billion in gross commitments (up 54% YoY) and maintained strong liquidity with $6.8 billion of dry powder and conservative leverage.
  • Amid volatile syndicated loan markets and rising caution from banks, the direct lending market remained open and stable, positioning ARCC to capture market share as sponsors seek private credit solutions.
  • ARCC’s portfolio showed robust credit metrics with sequentially lower non-accruals, 12% LTM EBITDA growth, 5.7× debt/EBITDA leverage, low 40% loan-to-value and minimal mid-single-digit exposure to potential tariff impacts.
  • The board declared a $0.48 quarterly dividend for Q2 2025—marking 63 consecutive quarters of stable or increasing distributions—and ARCC estimates $883 million ($1.29 per share) of taxable income spillover in 2025.
A.I. generated. May contain errors.
Earnings Conference Call
Ares Capital Q1 2025
00:00 / 00:00

Transcript Sections