Ares Capital NASDAQ: ARCC executives said the business development company delivered “a strong start” to 2026 despite a volatile and seasonally slower first quarter for transaction activity, as management pointed to solid earnings, healthy portfolio fundamentals, and improving deal terms across private credit markets.
First-quarter results and drivers
Chief Executive Officer Kort Schnabel said the company produced “solid earnings and strong fundamental portfolio performance,” highlighting Core earnings of $0.47 per share, which he said equated to an annualized ROE of 9.6%. Schnabel added that portfolio quality “remains healthy with continued low levels of non-accruing loans and problem assets.”
Chief Financial Officer Scott Lem reported GAAP net income per share of $0.13, down from $0.41 in the fourth quarter of 2025. Lem attributed the decline “largely” to net unrealized losses tied primarily to spread widening in private credit markets, which drove “market-driven unrealized depreciation.”
Lem said Core EPS of $0.47 was down from $0.50 in the prior quarter and a year earlier, citing the impact of “a full quarter of current base rates” on interest income and lower capital structuring service fees due to seasonally reduced market activity and broader credit volatility.
Portfolio, NAV, and credit quality
ARCC ended the quarter with a $29.5 billion portfolio at fair value, consistent with the prior quarter and up from $27.1 billion a year earlier, Lem said. Net asset value finished at $19.59 per share, down $0.35 sequentially. While acknowledging the quarterly decline, Lem contrasted it with longer-term results, citing NAV growth exceeding 10% over the past five years and more than 30% since inception.
On marks, management emphasized that most of the quarter’s valuation pressure was market-related rather than tied to borrower-specific stress. In response to a question on NAV decline drivers, management said around 70% of marks were “mark-to-market related rather than credit related.”
President Jim Miller said underlying borrower metrics remained solid, with interest coverage stable sequentially and improving year over year and leverage broadly stable. He also cited an aggregate loan-to-value ratio “in the mid-40% range.”
Non-accruals ticked up but remained below longer-run benchmarks, Miller said. Non-accruals at cost ended the quarter at 2.1%, up 30 basis points from the prior quarter, while non-accruals at fair value were 1.2% and stable quarter over quarter. Miller noted management would not be surprised to see industry credit quality revert closer to historical norms given slower economic growth and geopolitical and supply chain risks.
Market conditions: wider spreads, lower leverage, tighter documentation
Management described a first-quarter environment shaped by “heightened capital markets volatility,” geopolitical uncertainty, and retail outflows that weighed on transaction volumes and reduced competition. Schnabel said lenders dependent on retail flows “have retrenched,” and the syndicated bank loan market has been “uneven” amid diminished bank risk appetite.
As a result, Schnabel said a reset is underway, with “wider spreads, lower leverage levels, and more attractive overall deal terms.” He said new transactions were being discussed with 50 to 75 basis points of improvement in fees and spread compared with the second half of last year, as well as “a half to full turn of lower leverage and tighter documentation.”
During the Q&A, Schnabel said documentation terms were also moving in lenders’ favor at the margin, including greater ability to obtain financial covenants on certain borrowers, though he cautioned that large-cap high-quality borrowers can still access covenant-lite structures.
Miller said ARCC’s first-quarter originations reflected improving economics: spreads on first lien originations increased by about 20 basis points quarter over quarter, while leverage declined by nearly half a turn of EBITDA.
Origination activity, repayments, and pipeline
Miller said ARCC originated over $3.2 billion of new investment commitments in the first quarter, with 70% coming from existing borrowers. He said the company leaned on relationships to “selectively invest in top-performing existing portfolio companies” as volumes slowed later in the quarter, and noted the quarter’s activity spanned 22 industries and 57 sub-industries.
Repayments (excluding sales to Ivy Hill) totaled about 7% of the portfolio at cost, which Miller described as a “source of natural liquidity.” The company exited four equity co-investments that were the primary drivers of $114 million of net realized gains for the quarter; Miller said those exits generated a “mid-teens” weighted average realized IRR.
Looking to the second quarter, Miller said activity remained slow as market participants continued price discovery. Through April 23, total commitments were about $200 million, with a backlog of approximately $1.8 billion. He said the backlog reflected a 35 basis point increase in spreads and a 40 basis point increase in fees compared with first-quarter loans, but cautioned that the backlog is subject to approvals and documentation and may not close. Management said the slower start could affect both originations and exits in the second quarter.
Balance sheet, funding, liquidity, and dividend
Management repeatedly emphasized balance-sheet flexibility. Schnabel cited available liquidity of approximately $6 billion, and said minimal near-term maturities provide “flexibility to pursue opportunities.”
Lem detailed more than $1.25 billion of incremental debt financing in the quarter, including $750 million of five-year unsecured notes issued at a spread of 180 basis points over Treasuries (swapped to SOFR plus 172 basis points) and a $500 million expansion of the SMBC funding facility with a 5 basis point spread reduction. He also highlighted ARCC’s bank relationships across four credit facilities with more than 40 banks and said the company’s facilities are fully committed with no maturities before 2030 and no mark-to-market provisions.
On leverage, Lem said debt-to-equity net of available cash was 1.1 times at quarter-end versus 1.08 times in the prior quarter.
ARCC declared a $0.48 per share dividend payable June 30 to stockholders of record June 15. Lem said the company has paid stable or increasing regular quarterly dividends for 67 consecutive quarters, and estimated taxable income spillover of $988 million, or $1.38 per share, available for distribution in 2026. Schnabel said Core EPS plus $0.15 per share of net realized gains exceeded the dividend in the quarter, supporting what he described as a stable dividend outlook.
Software and AI risk review
A central topic in the call was software exposure and AI-related disruption risk. Schnabel said ARCC’s software investments are largely in “foundational infrastructure” and “systems of record” with high switching costs, regulated end markets, and proprietary data advantages. He added that these investments are supported by larger businesses with weighted average EBITDA of $340 million.
To “pressure test” its view, Schnabel said ARCC engaged a top-tier global management consulting firm in the fourth quarter of 2025 to assess AI risk across software-oriented portfolio companies, giving the consultant direct access to borrowers and relevant owners. Schnabel said the study found AI-related risk across the software-oriented portfolio was “relatively limited,” with roughly 85% of the software portfolio at fair value categorized as low risk. Higher-risk names represented about 1% of reviewed names by fair value and about 0.3% of ARCC’s total investment portfolio at fair value, while medium-risk names represented 14% of reviewed companies by fair value and count and about 3% of the total portfolio at fair value.
Management emphasized that medium or higher risk classifications did not imply current impairment, but rather the need for continued product evolution. Schnabel also said ARCC analyzed maturity profiles for software exposures, noting that higher and medium risk names had a shorter average maturity (about 2.4 years) than the low-risk category (about 4.2 years).
About Ares Capital NASDAQ: ARCC
Ares Capital Corporation NASDAQ: ARCC is a publicly traded business development company (BDC) that specializes in providing debt and equity financing solutions to U.S. middle-market companies. As a BDC, Ares Capital offers investors access to a diversified portfolio of tailored credit investments, including senior secured loans, unitranche financing, mezzanine debt and equity co-investments. The firm's flexible capital structures are designed to support companies seeking growth capital, refinancing or strategic acquisitions.
Through its credit platform, Ares Capital focuses on originations, underwriting and portfolio management across a range of industries, with a particular emphasis on sectors such as healthcare, technology, industrials and business services.
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