Ares Capital Corporation Q1 FY2026 earnings call

• ARCC had a strong start in 2026 with solid earnings and healthy portfolio quality. • Market conditions included tightened capital markets, volatility, geopolitical uncertainty, and retail outflows, leading to lower transaction volumes but improved lending conditions. • ARCC's strong balance sheet with $6 billion liquidity and connectivity to the ARIES U.S. Direct Lending Platform positions it well. • Diversified portfolio with investments across 607 companies and low loan concentration. • Software investments are in foundational infrastructure with mitigants to AI risk, and an independent consultant study found low AI-related risk. • Scott discussed financial metrics, balance sheet, and dividend; Jim talked about investment approach, activity, portfolio performance, and borrower health. • Repayments provided liquidity, and second quarter market activity was slow but picking up.

Core earnings were 47 cents per share with an annualized ROE of 9.6%. The total portfolio at fair value at the end of the first quarter was $29.5 billion. Net asset value ended the quarter at $14.1 billion, or $19.59 per share. Portfolio quality remained healthy with low non-accruing loans and problem assets. Borrowers had organic weighted average LTN EBITDA growth of approximately 9%. Software investments: 85% of software portfolio at fair value was low risk, 14% medium risk, and 1% high risk. Low-risk software companies are well positioned to benefit from AI, medium-risk need to evolve products, and high-risk have limited mitigants.

• Outlook for relative stability in earnings leads to maintaining stable quarterly dividends. • With spreads widening and terms improving, ARCC believes current dividend approximates long-run underlying earnings power. • Significant spillover income provides flexibility during seasonally slow transaction levels. • Expectations for continued building on stable or growing regular quarterly dividends over 16 consecutive years.

• Market conditions such as tightened capital markets, volatility, geopolitical uncertainty, and retail outflows can impact transaction volumes and lending conditions. • AI-related risks in software investments, although relatively limited, require vigilance. • Potential for credit quality and non-accruals to revert to historical norms from low levels. • Uncertainty around the sustainability of wider spreads and better terms in the market. • Risks associated with refinancing software companies, including potential difficulties in exiting or refinancing if market conditions change.

Q: Asked about covenants and control provisions in deal structure normalizing.

A: Non-economic terms and documentation provisions are moving positively, with better financial covenants, collateral protection, etc., though large-cap high-quality borrowers still have some advantages.

Q: Follow-up on deal structure mean reversion and insulation from moves.

A: It's due to a combination of capital supply changes, retail and wealth channel flows, and recognition of higher risks from geopolitical and economic factors.

Q: Question on aggressive growth in the environment.

A: No immediate need to grow capital base with $6 billion liquidity; focus on call protection and evaluating capital raising based on market conditions.

Q: Follow-up on bank funding spreads.

A: Potential for banks to push back on spreads, but currently not seeing it, and if it happens, it should be commensurate with asset side changes.

Q: Asked about April to date trends and future activity.

A: Activity picked up in recent weeks but hard to predict sustainability, with lag effects and dependence on geopolitical situation.

Q: Question on software refinancing risk.

A: Market exists for software deals, some exits have occurred, loan-to-values are healthy, and strategies include requesting capital injections from sponsors if needed.

Q: Question on sensitivity analysis of revenue shifts in software portfolio.

A: Low and medium-risk software companies are performing well, low-risk likely benefit from AI, medium-risk need to evolve products, high-risk have limited mitigants.

Q: Question on private equity portfolio maturities and activity.

A: No barriers obstructing potential activity beyond current volatility, with optimism in unaffected sectors.

Q: Question on NAV decline and mark-to-market vs credit write-downs.

A: More than two-thirds of marks are mark-to-market related.

Q: Question on software investment marks and discount rates.

A: Valuation is bottoms-up, company-specific, and involves private market analysis.

Q: Question on software company challenges.

A: Hesitate to discuss individual names, but some are mark-to-market related.

Q: Question on sponsor-backed high-risk software investments and portfolio management.

A: High-risk names are sponsor-backed, have a large portfolio management team to handle issues, and have expertise in restructuring.

Q: Question on reversing first quarter markdowns.

A: Difficult to answer as valuation process is extensive and market moves slowly.

Q: Question on recently originated software loans.

A: Few recent deals, higher-quality companies with wider spreads than average.

Q: Question on downside protection for software investments.

A: Rely on enterprise value cushion, strategic value to acquirers, and good documentation.

Q: Question on mark-to-market risk expression.

A: Marks reflect market valuations, independent of non-accrual status if principal and interest is collectible.

Q: Question on unsecured debt to total debt ratio.

A: Target to have majority funded unsecured debt, and current level is healthy with room to go.

Q: Question on durable wider spreads and terms.

A: Can't predict, but factors like bank behavior and market conditions are creating widening.

Q: Question on sponsor selection and investment sizing after Pluralsight and Medallia.

A: Good relationships with sponsors, not materially changing view, and deals don't always go as planned.

Q: Question on hiring consultant for AI risk evaluation.

A: Motivated by complex nature of AI risk, desire to test own thesis, and external concern, not new to engaging third parties for diligence.

Q: Question on AI risk timeline for medium-risk assets.

A: Consultants said medium-risk companies have ample time to execute AI strategy, but specific time frame not detailed.