ARES CAPITAL CORP Q3 FY2024 earnings call

Leadership Changes: Announced leadership changes with Jim Miller joining Kort Schnabel as Co-President. Mitch Goldstein stepping down as Co-President but joining the Board as Co-Chairman. Michael Arougheti relinquishing Chairman role but remaining a Director. ### Third Quarter Results: Reported strong core earnings of $0.58 per share and record NAV per share of $19.77. Saw increase in overall M&A volume, with direct lenders financing about half of loan volume supporting buyouts. Reviewed nearly 30% more transactions than the same period last year, resulting in an estimated $155 billion in quarterly deal volume reviewed. Over 75% of new commitments were to incumbent borrowers. Added 23 new companies to the portfolio, bringing the total to over 530. ### Credit Ratings: Moody's upgraded the long-term issuer and senior unsecured rating to Baa2 from Baa3, making Ares Capital investment grade by all 3 major rating agencies. ### Investment Activity: Originated approximately $3.9 billion of new investment commitments across 74 transactions in Q3. Portfolio at fair value grew 4% from prior quarter and 18% from prior year. Median EBITDA of borrowers in portfolio was $82 million. Acquired Riverside Credit Solutions, a lower middle market-focused firm, to enhance coverage. ### Post-Quarter-End Activity: From October 1 to October 24, 2024, made new investment commitments totaling $408 million, with $320 million funded. Exited or were repaid on nearly $1.2 billion of investment commitments, earning $4 million of net realized gains. Backlog stood at roughly $2.8 billion as of October 24.

In the third quarter ended September 30, 2024, Ares Capital reported GAAP net income per share of $0.52, compared to $0.52 in the prior quarter and $0.89 in the third quarter of 2023. Core earnings per share were $0.58 for the quarter, compared to $0.61 in the prior quarter and $0.59 in the third quarter of 2023. Total portfolio at fair value at the end of the quarter was $25.9 billion, up from $25 billion at the end of the second quarter. The weighted average yield on debt and other income-producing securities at amortized costs was 11.7% at September 30. Stockholders' equity ended the quarter at $12.8 billion or $19.77 per share, a record high.

Forward-Looking: Expect a busy 2025. Confident in maintaining the dividend level even with lower expected interest rates. Believes the company remains well positioned to address growing market opportunities. ### Dividend: Declared a fourth quarter 2024 dividend of $0.48 per share, consistent with the third quarter 2024 dividend. ### Outlook: Sees the company's competitive advantages remaining strong and is committed to building on its long-term track record.

Market Spread Compression: Concerns about spread compression in the direct lending market, though management notes it is in response to market conditions and expected to stabilize. ### Market Structure Changes: Shift towards unitranche transactions taking market share from second lien, with management stating it's a result of market dynamics rather than intentional strategy. ### Economic Uncertainty: Potential impact of economic conditions on credit performance, though current nonaccrual rates remain well below industry averages.

Q: Are we entering a phase of active market with potential for a busy 2025?

A: Kipp DeVeer stated he expects a busy year in 2025.

Q: Thoughts on Riverside Credit Solutions and its impact?

A: Kort Schnabel said Riverside is a lower middle market-focused firm that will help energize and double down on coverage of the lower middle market.

Q: View on spread compression in the direct lending asset class?

A: Kipp DeVeer said spreads have come in by at least 100 basis points this year, but they have stabilized and returns on first lien asset class remain attractive.

Q: Thoughts on interest coverage ratios and credit losses?

A: Kipp DeVeer said credit losses are stable with low nonaccrual rates and no expected increase in defaults.

Q: Activity on revolver facilities and amendments?

A: Kort Schnabel said amendment activity has been stable and revolver drawings at portfolio companies have decreased.