Ares Capital Corporation (ARCC) Earnings

Management highlights

• Market Environment & Competitive Positioning - Overall market deal volume remained subdued in Q2 2026, driven by macro uncertainty and low sponsor-backed M&A activity, but transaction review volume rose 25% quarter-over-quarter, with June marking one of the strongest monthly review volumes in the past two years. - Retail-capital-heavy competitors have become less active, increasing demand for Ares' stable, scaled institutional capital from borrowers and sponsors. 75% of Q2 transactions were with existing borrowers, highlighting the value of long-standing relationships, and Ares is able to increase its share of commitments to high-performing incumbent borrowers. - The most attractive relative value is currently in the upper middle market, where Ares' scale allows it to deliver better execution and achieve more attractive risk-adjusted returns relative to the lower middle market. Ares maintained a closing ratio moderately below its 5% historical average, demonstrating disciplined investment selectivity amid pressure on other lenders to deploy capital. • Portfolio Performance & Risk Profile - Portfolio companies delivered 8% organic weighted average LTM EBITDA growth, consistent with Ares' 10-year average and above broader syndicated loan benchmarks. Key credit metrics (interest coverage, leverage, revolving facility utilization) are in line with historical averages, and portfolio companies maintain an average 50%+ equity cushion beneath Ares' investments, providing strong downside protection. - AI risk across the software portfolio remains limited: less than 50 basis points of total fair value is attributable to high AI risk investments, and less than 4% to medium or higher AI risk. Medium AI risk companies are performing in line with the broader portfolio, and software investments overall delivered accelerating EBITDA growth above the portfolio average in Q2. - Ares' portfolio is highly diversified, with no single investment representing more than 1.3% of the portfolio (excluding diversified Ivy Hill and SDLP positions), limiting company-specific risk. • Balance Sheet & Capital Structure Improvements - Leverage (debt-to-equity net of cash) was 1.12x, stable quarter-over-quarter and within the firm's 0.9x to 1.25x target range. The firm ended the quarter with ~$6 billion in available liquidity, with no material near-term maturities (no unsecured maturities in 2026, only $1.4 billion maturing in 2027). - Ares launched the first commercial paper program in the BDC sector, a $1 billion program backed by a fully committed long-dated revolving credit facility that is expected to reduce funding costs by 50 to 100 basis points relative to average secured borrowings, with full flexibility to switch to committed bank funding if commercial paper markets become unfavorable. - Additional actions included extending the maturity of the firm's largest revolving credit facility to May 2031 and reducing its borrowing cost by 10 basis points, as well as resetting the firm's inaugural debt securitization post-quarter to reduce its weighted average spread by 35 basis points, extend its reinvestment period by three years and final maturity by two years. • Dividend - Ares maintained its stable regular quarterly dividend of 48 cents per share for Q3 2026, extending its 17-year (68 consecutive quarter) track record of stable or increasing dividends. Core earnings have exceeded the regular dividend over the past 12 months, supplemented by 15 cents per share in net realized gains, and the firm holds ~$988 million (=$1.38 per share) in taxable spillover income to support future distributions.

Guidance

- Management expects industry-wide non-accrual and default rates to continue reverting to historical long-term averages, a trend that is already underway, with no industry-wide concentration driving this normalization. - Management expects transaction activity to continue building, as the market has thawed after a period of low activity, with particular momentum in larger upper middle market deals where Ares has a competitive advantage. - Prepayment activity is expected to move in tandem with new deal volume, with no expectation of abnormally high or low prepayments in the near term. - Ares will maintain its target leverage range of 0.9x to 1.25x debt-to-equity; current leverage is in the middle of the range, leaving room for modest additional leverage to support new investments. - Management expects the currently improved market terms (wider spreads, higher upfront fees) for upper middle market investments to be sustainable, supported by reduced competition from larger capital-constrained lenders.

Segment performance

Ares Capital Corporation is a single publicly traded business development company (BDC) with a single consolidated investment portfolio segment. As of Q2 2026: total portfolio cost was $29.7 billion; total portfolio fair value was $29.3 billion, a modest decrease from $29.5 billion in Q1 2026. Net asset value (NAV) was $13.9 billion, or $19.35 per share, a 24 cent per share decrease quarter-over-quarter. Core earnings were $0.47 per share, consistent with Q1 2026, representing an annualized return on equity of 9.7%. GAAP net income per share was $0.24, up from $0.13 in Q1 2026, driven by lower net unrealized depreciation. New investment originations totaled $2.6 billion in new commitments during the quarter, with 75% of transactions coming from existing incumbent borrowers, spanning 20 industries and 38 sub-industries. Non-accrual loans were 2.4% of the portfolio at cost (1.4% at fair value), below the firm's 3% historical average and the broader BDC average of 4%.

Risks & headwinds

- Persistent macroeconomic uncertainty and interest rate volatility continue to suppress M&A and overall deal volume, which can slow new investment and earnings growth. - Industry-wide credit quality is normalizing toward historical averages, with wider performance dispersion across BDC managers, and some peers are facing larger spikes in non-accruals than Ares. - While AI risk is currently limited across Ares' software portfolio, ongoing monitoring is required, as software businesses may need substantial AI investment to maintain competitiveness. - Valuation dispersion exists across the BDC industry, particularly for stressed credits, which creates uncertainty for potential strategic transactions.

Analyst Q&A

• Q: Given performance dispersion across BDCs and peer asset quality issues, is the likelihood of acquisitions of other BDCs/portfolios higher than in the past, and are there motivated sellers currently? /

  A: Management notes that Ares is always evaluating strategic alternatives, and the current environment of wider performance dispersion across the industry means the likelihood of a transformative acquisition transaction is higher than it has been previously. Management declined to comment on any specific ongoing deals, and added that Ares has not seen the same spike in non-accruals and credit weakening that many competitors are experiencing.

• Q: What is driving industry-wide NAV declines and credit headwinds, and is this normalization a permanent new normal or a temporary trend? /

  A: Management states that the trend reflects mean reversion after an extended period of below-average non-accrual and default rates, which is still ongoing across the industry. The normalization is also driven by portfolio maturation at newer peer platforms, where underlying credit performance is only now becoming clear. There is no concentrated industry weakness driving the trend: Ares' four new non-accruals in Q2 were from unrelated, uncorrelated industries, with no sector-wide weakness.

• Q: How do competing market dynamics play out, with less active retail-heavy competitors but Ares maintaining a lower closing ratio to stay disciplined? /

  A: Management explains that competitive dynamics differ by market segment: competition has decreased in the larger upper middle market as retail-driven larger players have pulled back, making terms more attractive with wider spreads and lower leverage, while competition remains tighter in the smaller end of the market. Ares' lower closing ratio reflects intentional selectivity: the firm will not chase low-quality deal flow just to boost volume, and is content to wait for higher-quality opportunities. Ares' scale allows it to commit to very large (nearly $2 billion) deals entirely on its own, generating outsized fees and economics that are unique to Ares in the current market.

• Q: Does rate volatility or the absolute level of interest rates have a larger negative impact on deal pipeline, and which environment benefits Ares more? /

  A: Management states that interest rate volatility is a much larger headwind to transaction volume than the absolute level of rates. When rates are volatile, buyers and sellers cannot confidently model future outcomes, leading to delayed transactions as they build in extra risk cushions. With rates now stabilized at current levels, market participants have settled into a clear outlook, which is supporting a pickup in deal activity. Stable rates, even at current higher absolute levels, are a positive for Ares' net interest income.