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    ARCC
    Earnings call· Mar 2026(Q1 FY26)

    ARES CAPITAL Q1 FY26 earnings call ARCC

    Apr 28, 2026 Source

    Executive summary

    Ares Capital Corporation Q1 FY26 — Strong Earnings and Improved Lending Conditions

    Ares Capital Corporation reported solid Q1 FY26 core earnings and healthy portfolio performance, benefiting from improving lending conditions characterized by wider spreads and lower leverage. The company's strong balance sheet and significant liquidity position it to capitalize on these market dynamics, despite a decline in GAAP net income and NAV primarily due to market-driven unrealized losses. Management emphasized the resilience of its software portfolio, validated by an independent review, and its disciplined approach to capital allocation amidst market volatility.

    Highlights

    5

    • Core earnings of $0.47 per share, representing an annualized ROE of 9.6%.

    • Available liquidity of approximately $6 billion provides significant advantages in the current market.

    • Originated over $3.2 billion in new investment commitments in Q1 FY26, with 70% from existing borrowers.

    • Nonaccruals remained low at 2.1% at cost and 1.2% at fair value, well below historical averages.

    • 99% of fully paid off U.S. debt investments realized at valuations in line with or better than their valuations 1 year prior over the past 2 years.

    Concerns

    5

    • GAAP net income per share declined to $0.13 from $0.41 QoQ, largely due to net unrealized losses from spread widening.

    • Core EPS decreased to $0.47 from $0.50 QoQ and YoY, primarily due to full quarter base rates impact and lower capital structuring service fees.

    • Net asset value declined by $0.35 per share QoQ to $19.59 per share, driven by market-driven unrealized depreciation.

    • Outsized markdowns totaling almost $100 million across 2 names were noted in Q&A, though not captured in nonaccruals.

    • Market activity remained slow in April, with total commitments of approximately $200 million through April 23, 2026.

    Guidance & targets

    2
    CategoryTargetConfidence
    Quarterly dividend
    Stable level
    high materiality
    High
    Taxable income spillover
    $988 million
    medium materiality
    High

    Operational metrics

    38
    Core earnings per share
    $0.47down from $0.50 last quarter and a year ago
    Q1 FY26

    Represents an annualized ROE of 9.6% in what has historically been a seasonally slow quarter for originations.

    Net realized gains per share
    $0.15
    Q1 FY26

    Core EPS taken together with $0.15 per share of net realized gains was well in excess of the dividend this quarter.

    GAAP net income per share
    $0.13down from $0.41 in Q4 FY25 and $0.36 a year ago
    Q1 FY26

    The decline was largely driven by net unrealized losses primarily due to spread widening in private credit markets causing market-driven unrealized depreciation.

    Net asset value
    $14.1 billionstable QoQ
    Q1 FY26

    Our net asset value ended the quarter at $14.1 billion or $19.59 per share, which represents a decline of $0.35 per share from a quarter ago and $0.23 per share from a year ago.

    Net asset value per share
    $19.59down $0.35 QoQ, down $0.23 YoY
    Q1 FY26

    Represents a decline of $0.35 per share from a quarter ago and $0.23 per share from a year ago.

    Total portfolio at fair value
    $29.5 billionconsistent QoQ, up from $27.1 billion YoY
    Q1 FY26

    Our total portfolio at fair value at the end of the first quarter was $29.5 billion, consistent with the end of the fourth quarter and up from $27.1 billion a year ago.

    Available liquidity
    $6 billion
    Q1 FY26

    Our healthy levels of available capital, combined with our connectivity to the broader Ares U.S. direct lending platform and its significant dry powder from institutional sources positions us well to capitalize on these market conditions.

    Incremental debt financing
    $1.25 billion
    Q1 FY26

    By accessing over $1.25 billion of incremental debt financing to further build on what we believe is a best-in-class balance sheet structure.

    Unsecured notes issuance
    $750 million
    Q1 FY26

    Issuing $750 million of long 5-year unsecured notes at an industry-leading spread of 180 basis points over treasuries, which we swapped to SOFR plus 172 basis points.

    SMBC funding facility expansion
    $500 million
    Q1 FY26

    Expanding our SMBC funding facility by $500 million at similar or improved terms, including a 5 basis point reduction in the spread.

    Debt-to-equity ratio (net available cash)
    1.1xvs 1.08x last quarter
    Q1 FY26

    Ended the quarter with debt-to-equity ratio, net available cash of 1.1x versus 1.08x last quarter.

    Quarterly dividend
    $0.48
    Q1 FY26

    Our first quarter 2026 dividend of $0.48 per share is payable on June 30 to stockholders of record on June 15.

    Taxable income spillover
    $988 million
    FY26

    Currently estimate that we will carry forward $988 million or $1.38 per share available for distribution of stockholders in 2026.

    Net realized gains in excess of losses
    $114 million
    Q1 FY26

    Exited 4 equity co-investments which were the primary drivers of our $114 million of net realized gains in excess of losses in this quarter.

    Realized IRR on equity co-investments
    mid-teens
    Q1 FY26

    These latest 4 exits generated a mid-teens weighted average realized IRR.

    Realized investments at valuation in line or better than 1 year prior
    99%
    past 2 years

    Found that 99% of fully paid off U.S. debt investments were realized at valuations in line with or better than their valuations 1 year prior.

    PIK income (net of collections) as % of total interest and dividend income
    7%below historical 5-year average
    Q1 FY26

    In the first quarter, our PIK income net of collections represented approximately 7% of total interest and dividend income, which is below our historical 5-year average.

    MOIC on realized PIK investments
    1.4x
    21-year history

    Across more than 190 realized PIK investments, we have generated a return measured by a multiple of our invested capital, or MOIC, of 1.4x.

    MOIC on all exited investments
    1.3x
    since inception in 2004

    This MOIC is a modest premium to the 1.3 MOIC on all of our exited investments since our inception in 2004.

    Origination commitments
    $3.2 billion
    Q1 FY26

    In the first quarter, our team originated over $3.2 billion in new investment commitments with 70% of transactions coming from existing borrowers.

    First lien origination spread increase
    20 bpsQoQ
    Q1 FY26

    Spreads on first lien originations in the first quarter increased by approximately 20 basis points quarter-over-quarter.

    First lien origination leverage decline
    0.5 turn
    Q1 FY26

    Leverage levels declined by nearly 0.5 turn of EBITDA.

    Number of portfolio companies
    607
    Q1 FY26

    With investments across 607 companies at an average position size of less than 20 basis points.

    Average position size
    less than 20 bps
    Q1 FY26

    Average position size of less than 20 basis points of the total portfolio.

    Weighted average LTM EBITDA growth (portfolio)
    9%in line with 10-year average, more than twice syndicated loan benchmark
    Q1 FY26

    Our borrowers generate organic weighted average LTM EBITDA growth of approximately 9% through the end of the first quarter, in line with ARCC's 10-year average and more than twice the growth rate of the companies within the broader syndicated loan benchmark.

    Nonaccruals at cost
    2.1%up 30 bps QoQ
    Q1 FY26

    Our non accruals at cost ended the quarter at 2.1% and a 30 basis point increase from prior quarter, but still well below our approximately 3% historical average since the global financial crisis and the BDC historical average of approximately 4% over the same time frame.

    Nonaccruals at fair value
    1.2%stable QoQ
    Q1 FY26

    Our nonaccrual rate at fair value also remained low at 1.2% of the portfolio, stable quarter-over-quarter, and well below our historical levels.

    Aggregate loan-to-value ratio (portfolio)
    mid-40%
    Q1 FY26

    Our investments remain well protected by substantial equity cushion beneath us, with an aggregate loan-to-value ratio in the portfolio in the mid-40% range.

    Weighted average EBITDA (software companies)
    $340 million
    Q1 FY26

    Our software investments are supported by large diversified businesses with a weighted average EBITDA of $340 million.

    Software portfolio AI risk (low)
    85%
    Q1 FY26

    Independent review found that about 85% of our software portfolio at fair value represented low AI-related risk, well positioned to adapt and benefit from AI.

    Software portfolio AI risk (high)
    1%
    Q1 FY26

    Only 1% of reviewed software names by fair value (0.3% of total portfolio) categorized as higher risk, requiring business model transformation.

    Software portfolio AI risk (medium)
    14%
    Q1 FY26

    An additional 14% of reviewed software companies by fair value (3% of total portfolio) classified as medium risk, needing continued investment and product evolution.

    Software portfolio LTV (debt investments)
    low 40sbelow total book LTV
    Q1 FY26

    Loan-to-values on the software book as a whole are healthy and low, standing in the low 40s, below the LTV of the total book.

    Software portfolio weighted average EBITDA growth
    9%consistent with rest of book
    YoY

    The EBITDA growth rate of our software companies remains consistent with the growth rate of the rest of the book at 9% year-over-year.

    Software portfolio maturity (medium/high risk)
    2.4 yearsvs 3.9 years total book
    Q1 FY26

    The maturity profile for the higher and medium-risk software names is materially shorter at 2.4 years, compared to 3.9 years for the total book.

    Software portfolio maturity (low risk)
    4.2 years
    Q1 FY26

    The maturity for low-risk software names is approximately 4.2 years.

    Outsized markdowns
    $100 million
    Q1 FY26

    Almost $100 million in markdowns across 2 names in Q1 FY26, primarily market-driven rather than credit-specific.

    Implied markdown percentage (analyst hypothetical)
    25%
    Q1 FY26

    An analyst's hypothetical example referenced a $50 million markdown on a $350 million position, implying a 25% markdown, reflecting market pricing for such credits.

    Industry KPIs

    1
    MetricValueDetails
    Deployment realizations$3.2 billion commitments, $114 million net realized gainsUSD

    Risks & headwinds

    4
    Capital markets volatility and geopolitical uncertaintyQ1 FY26, ongoing

    Contributed to lower transaction volumes and diminished competition in Q1 FY26, leading to a seasonally slow market period.

    Mitigation: Strong balance sheet, $6 billion available liquidity, and connectivity to broader Ares platform position the company to capitalize on improved lending conditions.

    Slower economic growth and geopolitical issuesOngoing

    Expected to cause industry-wide credit quality and nonaccruals to revert closer to historical norms, leading to higher manager dispersion.

    Mitigation: ARCC's strong underwriting discipline, experienced portfolio management, and diversified portfolio are expected to mitigate these trends.

    AI disruption in software portfolioOngoing, with medium-risk companies needing continued investment and product evolution.

    1% of software portfolio (by fair value) categorized as high risk, 14% as medium risk. No significant deterioration in performance observed yet.

    Mitigation: Proactive engagement of a top-tier global management consulting firm for independent review; focus on foundational infrastructure software, high switching costs, proprietary data, and large diversified businesses. Shorter maturity profile for higher/medium risk names (2.4 years) provides flexibility.

    Outsized markdowns on specific namesQ1 FY26

    Almost $100 million in markdowns across 2 names in Q1 FY26. An analyst's hypothetical example referenced a $50 million markdown on a $350 million position, implying a 25% markdown, and discussed nonaccrual exposure metrics marked below $0.75 on the dollar.

    Mitigation: Markdowns are primarily market-driven (spread widening) rather than credit-specific (over 2/3 of marks are mark-to-market related). Management believes principal and interest are collectible if covered by enterprise value, even if market valuation trends lower, and these are not reflected in nonaccruals.

    What to watch in Q2 FY26

    5

    New deal activity pickup

    Next quarter
    CurrentCadence of deals coming through investment committee has picked up in the last 3 to 4 weeks
    TargetSustained increase in deal flow and originations

    Why it matters

    Indicates a more favorable environment for new investments with better terms and spreads, impacting future earnings.

    But whether or not, I think it depends on a lot of different variables out there. maybe most notably just the geopolitical situation. I think if that can get resolved in a sustainable manner, then I think you could see things really pick back up meaningfully but that's something that's just really hard to predict📌.

    Q&A highlights

    6

    Are non-economic terms and documentation also improving alongside spreads and fees?

    Yes, non-economic terms and documentation provisions are moving more positively, including financial covenants and collateral protection. While not a 'wildly bearish' market, it's a better time for lenders, with the market moving more slowly than public markets.

    “But I would say yes, those other noneconomic terms and documentation provisions are moving more positively in our direction. As well as the economic points of fees and spread, as I mentioned in the prepared remarks.”

    asked by Rick Shane · answered by Unknown Executive

    2 min read5 chapters

    Detailed Narrative

    01

    Market Conditions and Origination Opportunities

    The first quarter saw diminished competition and improved lending conditions due to capital markets volatility and retail product outflows. This has led to a reset with wider spreads (50-75 bps enhanced levels), lower leverage (half to full turn lower), and tighter documentation. Management noted a noticeable pickup in new deal activity over the past 3-4 weeks as borrowers adjust expectations, with the backlog reflecting a 35 basis point increase in spreads and a 40 basis point increase in fees compared to Q1 first lien loans.

    02

    Software Portfolio Resilience

    An independent consulting firm reviewed ARCC's software-oriented portfolio, finding that 85% of the portfolio (by fair value) represented low AI-related risk. Only 1% (by fair value) was categorized as higher risk, and 14% as medium risk. The low-risk companies are well-positioned to benefit from AI enhancements, while medium-risk companies need continued investment and product evolution. The weighted average EBITDA of software companies is $340 million, with a debt LTV in the low 40s and a 9% YoY EBITDA growth rate.

    03

    Balance Sheet Strength and Liquidity

    ARCC maintains a strong balance sheet with approximately $6 billion in available liquidity and a well-structured liability profile. The company accessed $1.25 billion in incremental debt financing, including $750 million in 5-year unsecured notes at SOFR plus 172 bps and a $500 million expansion of its SMBC funding facility with a 5 basis point spread reduction. All credit facilities are fully committed with no maturities before 2030 and no mark-to-market provisions, ensuring stable access to capital.

    04

    Valuation Process and Realized Outcomes

    The company's rigorous, bottoms-up valuation process is supported by realized outcomes. Over the past two years, 99% of fully paid off U.S. debt investments were realized at valuations in line with or better than their fair values one year prior to exit. This underscores the effectiveness of their company-by-company analysis, which considers specific comparables and private market indications rather than broad generalizations.

    05

    Credit Quality and Nonaccruals

    Portfolio fundamentals remain solid with stable interest coverage and leverage levels. Nonaccruals at cost were 2.1% (up 30 bps QoQ) and 1.2% at fair value (stable QoQ), both well below historical averages. Management expects industry-wide credit quality to revert closer to historical norms given slower economic growth and geopolitical issues, leading to higher manager dispersion, but ARCC's portfolio remains well-protected by substantial equity cushions.

    AI-generated summary of the company’s earnings call. Not investment advice.