ARES CAPITAL CORP Q1 FY2025 earnings call

Key Remarks

• Kipp DeVeer handed over the CEO role to Kort Schnabel, expressing pride in the company's growth over ten years and confidence in the future under new leadership.
• Kort Schnabel highlighted solid Q1 results, strong credit quality, $3.5 billion in gross commitments, conservative balance sheet leverage, and significant dry powder for investments.
• Scott Lem discussed GAAP and core earnings per share, noting a decline in core earnings due to lower portfolio yields but stabilization by Q1 end. He also detailed balance sheet activities like $1 billion of seven-year unsecured notes issuance and facility upsizing.
• Jim Miller talked about investment activities, with $3.5 billion in new investment commitments, a backlog of $2.6 billion, portfolio performance including 566 portfolio companies, 12% weighted average LTM EBITDA growth, low leverage, and a diversified portfolio.

In the first quarter ended March 31, 2025, Ares Capital reported core earnings per share of $0.50, equating to an annualized return on equity of 10%. The credit quality remained strong with non-accrual loans at historically low levels. The total portfolio at fair value was $27.1 billion, up from prior quarters. Portfolio yields declined due to lower average market base rates but stabilized by the end of Q1, with the weighted average yield on debt and other income-producing securities at amortized cost at 9.9% as of March 31. Non-accrual loans were sequentially lower, remaining well below historical averages.

• Declared a $0.48 per share quarterly dividend for Q2 2025, marking 63 consecutive quarters of stable or increasing regular quarterly dividends.
• Confidence in the future supported by portfolio health, strong credit quality, dry powder for investments, and taxable income spillover estimated at $883 million or $1.29 per share available for distribution in 2025.

• Market volatility, including banks becoming more cautious, secondary loan market volatility, and potential impact of tariffs on portfolio companies (mid-single-digit exposure, but mitigants like pricing adjustments and supply chain transitions exist).
• Uncertainty around M&A volume, potential recession risk, and retaliatory tariffs posing indirect risks to the portfolio.

Q: With all the capacity in non-traded BDCs, do you think privates will be providing similar, if not lower pricing than banks for some time? And how does your platform impact competitive position on deployment?

A: Kort Schnabel noted market spreads have started to widen, historical flows into non-traded BDCs showed spreads widening, and Ares has multiple ways to source deals, feeling confident in outperforming competitors.

Q: Can you expand on the exposure to tariffs not including mitigating factors and what response looks like?

A: Kort Schnabel said they proactively engage with exposed portfolio companies, private equity partners contribute liquidity, and they can own businesses if needed, having successfully navigated similar situations like COVID.