Ares Capital NASDAQ: ARCC reported third-quarter Core Earnings of $0.46 per share and GAAP net income of $0.44 per share, while announcing an agreement to acquire MidCap Financial Investment Corporation, or MFIC, in a transaction management said is expected to be modestly accretive to Core Earnings per share.
Chief Executive Officer Kort Schnabel said the acquisition would add more than 200 incumbent portfolio positions, bringing Ares Capital’s portfolio to more than 800 companies and expanding the number of sponsors with which the firm has transacted to more than 600. The acquired MFIC portfolio is expected to contribute approximately $2.5 billion of assets.
“While we have similar enthusiasm for the MidCap acquisition, its size relative to ARCC positions the transaction as additive rather than transformative,” Schnabel said.
MFIC Deal Targets Scale and Portfolio Diversification
Schnabel said Ares Capital’s due diligence found that the MFIC portfolio was largely performing and that most of the discount to net asset value was concentrated in a relatively small number of investments with more uncertain business outcomes and wider bid-ask spreads. He added that direct cash consideration from Ares Management was an important component of the structure, enabling Ares Capital to purchase the assets at a deeper discount while providing MFIC shareholders a premium.
Management said the portfolio is complementary to Ares Capital’s existing holdings. Of MFIC’s 229 portfolio companies, only 12 overlap with Ares Capital’s portfolio, according to Schnabel. He also said MFIC has less software exposure and more healthcare exposure than Ares Capital, potentially increasing the combined portfolio’s industry diversification. The acquired portfolio is more focused on the core middle market, with average EBITDA of roughly $50 million to $55 million.
Management said Ivy Hill Asset Management, an Ares affiliate, is expected to play a role in the transaction, though no final determinations have been made. Schnabel said many of the acquired loans are minority participations that could be a fit for Ivy Hill, which will independently review the assets before deciding whether to purchase any positions.
Chief Financial Officer Scott Lem said Ares Capital has secured a $750 million upsize commitment for an existing Wells Fargo-led funding facility, expected to close with the MFIC acquisition subject to customary conditions. He said the company’s existing liquidity and the facility upsize provide sufficient capacity to acquire the portfolio without requiring additional debt capital.
Third-Quarter Results and Balance Sheet
GAAP net income rose from $0.24 per share in the second quarter, driven largely by net unrealized appreciation from mark-to-market improvements in investments. Core EPS declined slightly from $0.47 per share in the prior quarter, primarily because of lower capital structuring fees as transaction timelines lengthened.
Ares Capital’s investment portfolio had a fair value of $29.2 billion at Sept. 30, compared with $29.3 billion at the end of the second quarter. Net asset value was $13.9 billion, or $19.31 per share, down $0.04 per share sequentially.
- Net leverage was 1.06 times debt to equity, compared with 1.12 times in the prior quarter.
- Available liquidity totaled approximately $7 billion.
- The company had no unsecured note maturities remaining in 2026 and $1.4 billion maturing in 2027.
- Ares Capital issued $750 million of seven-year unsecured notes due in 2033 during September.
Lem said the company’s largely floating-rate portfolio remains sensitive to base-rate movements. Based on the quarter-end balance sheet and unchanged investment and borrowing structures, each 100-basis-point increase in base rates would provide about a $0.02 per-share quarterly earnings benefit, he said. Because of contractual reset timing, the company expects to begin recognizing some benefit from the recent rate increase during the fourth quarter.
Origination Activity Slows, but Backlog Builds
Ares Capital originated $2.1 billion of new investment commitments during the quarter. Its closing ratio was moderately below its historical average of about 5%, reflecting both management’s selectivity and a slower overall transaction environment, Schnabel said.
The company reviewed approximately 25% more transactions year to date than in the prior-year period and reviewed more than $1 trillion in potential investments over the past 12 months. Schnabel said post-quarter-end commitments totaled $1.1 billion, while the investment backlog stood at approximately $2.5 billion.
President Jim Miller said first-lien spreads on new originations widened by 50 basis points from the previous quarter, while leverage levels fell by a half turn. Terms and lender protections remained strong, he said.
About 60% of third-quarter commitments involved existing portfolio companies. Separately, Ares Capital and other Ares funds acquired a portfolio of performing loans from an institutional investor at what Miller described as a modest discount.
Credit Metrics Remain Stable
Management said portfolio companies generated weighted-average last-12-month organic EBITDA growth of about 7%, in line with the company’s long-term average. Borrower leverage was unchanged from the prior quarter, while weighted-average interest coverage was two times.
Non-accruals remained unchanged at 2.4% of cost and 1.4% of fair value. Loan-to-value was approximately 47%, below Ares Capital’s 10-year average. Miller said the portfolio’s weighted-average risk rating was stable at 3.1, with 19% of fair-value assets in the company’s lowest-risk Grade 4 category.
Ares Capital declared a fourth-quarter regular dividend of $0.48 per share, payable Dec. 29 to shareholders of record on Dec. 15. Lem said the company has paid stable or increasing regular quarterly dividends for 69 consecutive quarters and carried forward $983 million, or $1.37 per share, of taxable income spillover available for distribution in 2026.
About Ares Capital (NASDAQ:ARCC)
Ares Capital Corporation NASDAQ: ARCC is a business development company that provides financing to middle-market companies. The company primarily invests in first-lien senior secured loans, second-lien loans, subordinated debt, and, to a lesser extent, equity securities. Its investments are generally designed to support acquisitions, recapitalizations, refinancings, growth initiatives, and other corporate activities.
Founded in 2004, Ares Capital is externally managed by Ares Capital Management LLC, an affiliate of Ares Management Corporation.
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