Ares Capital NASDAQ: ARCC reported second-quarter core earnings of $0.47 per share, unchanged from the prior quarter, while GAAP net income rose to $0.24 per share from $0.13 in the first quarter. Chief Executive Officer Kort Schnabel said the company’s core earnings represented an annualized return on equity of 9.7% and reflected healthy portfolio performance despite subdued market activity.
The business development company said its portfolio continued to show organic weighted-average last-12-month EBITDA growth of about 8%, in line with its 10-year average. Schnabel said interest coverage, leverage and revolving-credit-facility utilization among portfolio companies remained near historical averages, while borrowers maintained average equity cushions of more than 50% below Ares Capital’s investments.
Portfolio and Credit Performance
Ares Capital ended the quarter with investments totaling $29.7 billion at cost and a portfolio valued at $29.3 billion at fair value, down slightly from $29.5 billion in the first quarter. Chief Financial Officer Scott Lem attributed the change principally to mark-to-market valuation adjustments and net repayment activity.
Net asset value was $13.9 billion, or $19.35 per share, down $0.24 per share sequentially. Lem said the company has increased NAV per share by more than 30% since inception while paying stable dividends.
Non-accrual investments represented 2.4% of the portfolio at cost and 1.4% at fair value at quarter-end. President Jim Miller said the cost-based non-accrual rate remained below the company’s approximately 3% historical average since the global financial crisis and below an approximately 4% historical average for the BDC industry over the same period.
Management expects industry credit conditions to continue normalizing toward longer-term averages, though it said performance differences among managers have widened. Schnabel said Ares Capital added four investments to non-accrual during the quarter, but the companies were in unrelated businesses and did not indicate a sector-specific trend.
In response to questions about challenged portfolio companies, Schnabel said the company’s preference is for sponsors to provide additional capital and work with lenders rather than for Ares Capital to take control of businesses. He said the company is prepared to take control when necessary and views that capability as a competitive advantage.
Origination Activity and Market Conditions
Ares Capital originated $2.6 billion of new investment commitments during the quarter across 20 industries and 38 sub-industries. About 75% of transactions involved existing borrowers, which management said demonstrated the value of its incumbent borrower and sponsor relationships.
While overall market transaction activity remained muted, Schnabel said Ares reviewed more than 25% more transactions than in the prior quarter. June was one of the company’s strongest months for transactions reviewed in the past two years, and management said the increased activity continued into July.
Miller said new senior loan commitments during the quarter carried average spreads 20 basis points wider than in the fourth quarter of 2025, while average upfront fees were 50 basis points higher. He said market terms had improved, particularly in the upper middle market, where fewer lenders have the scale to compete for larger transactions.
Schnabel said Ares Capital’s closing ratio was moderately below its historical average of roughly 5%, reflecting continued selectivity amid lower-quality deal flow earlier in the quarter. Management said it has recently seen deal quality improve alongside rising transaction volume.
The company said it committed to a nearly $2 billion credit facility during the second quarter, initially providing the full commitment before reducing its position. Schnabel said the ability to underwrite commitments of that size can create opportunities for higher fees and economics.
Management also said interest-rate volatility can be more disruptive to deal activity than the absolute level of rates, because buyers and sellers face more difficulty modeling financing costs under a wide range of potential rate outcomes.
Software and AI Exposure
Schnabel said Ares Capital’s software investments continued to produce organic EBITDA growth above the broader portfolio average during the second quarter. The company has one small software loan on non-accrual and said its software debt investments have loan-to-value ratios in the low 40% range.
The company reiterated that its independent review of software-oriented portfolio companies found limited overall AI-related risk. Less than 50 basis points of the portfolio’s fair value was attributed to software investments considered higher AI risk, while less than 4% was attributed to medium or higher AI risk investments. Management said companies classified as medium risk were performing in line with the overall portfolio.
Liquidity, Funding and Dividend
Ares Capital reported debt-to-equity leverage, net of available cash, of 1.12 times at quarter-end, effectively unchanged from the first quarter. The company had about $6 billion of available liquidity after repaying $1 billion of unsecured notes in July, Lem said.
During the quarter, the company completed approximately $1.2 billion of additional financing, including $800 million of unsecured notes and about $370 million of incremental commitments across two secured revolving credit facilities. It also launched what management described as the BDC sector’s first commercial paper program, with up to $1 billion of capacity.
Lem said commercial paper could lower funding costs by roughly 50 to 100 basis points compared with the company’s average secured borrowings at current market levels. The company made its first issuance under the program after the quarter ended and expects to use a few hundred million dollars of capacity initially.
The company declared a regular third-quarter dividend of $0.48 per share, payable Sept. 30 to shareholders of record Sept. 15. Ares Capital has paid stable or increasing regular quarterly dividends for 68 consecutive quarters, according to Lem. The company estimated taxable income spillover available for future distributions at approximately $988 million, or $1.38 per share.
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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