ARES CAPITAL CORPORATION Q3 2026 EARNINGS - ARES CAPITAL CORP

Financial Performance:

• Reported Q3 2026 GAAP net income per share of $0.44, up from $0.24 in Q2, driven by mark-to-market improvements on investments.
• Core earnings per share (Core EPS) were $0.46, slightly down from $0.47 in the prior quarter, attributed to lower capital structuring fees due to extended transaction timelines.
• Total portfolio fair value stood at $29.2 billion, down from $29.3 billion, reflecting net exits and repayments.
• Net Asset Value (NAV) per share ended at $19.31, a negligible decrease of $0.04 sequentially; year-over-year NAV per share has grown over 25% since inception.
• Net leverage ratio improved to 1.06x debt-to-equity (1.10x pro forma for unsettled trades), with $7 billion in available liquidity.
• Borrowers generated a weighted average LTM organic EBITDA growth of 7%; non-accrual loans remained stable at 2.4% of cost (1.4% of fair value).
• Taxable income spillover for 2026 determined at $983 million ($1.37/share), providing dividend stability.

Guidance and Future Outlook:

• Earnings are highly sensitive to base rate changes; a 100 basis point increase is estimated to add ~$0.02 per share quarterly, with benefits expected to flow through in Q4.
• The acquisition of MFIC is expected to be modestly accretive to Core EPS, driven by the purchase discount and ARCC's lower cost of capital.
• Investment backlog stands at approximately $2.5 billion, with $1.1 billion of commitments closed in Q4 to date, indicating strong origination visibility.
• Management anticipates a recovery in transaction activity as deal review volumes remain 25% higher year-over-year, despite slower closing speeds.
• The Q4 2026 regular dividend is confirmed at $0.48 per share, payable December 29, maintaining 69 consecutive quarters of stable/increasing payouts.

Business Segments and Product Lines:

• Strategic Acquisition: Announced agreement to acquire MidCap Financial Investment Corporation (MFIC), adding ~200 portfolio companies and 600+ sponsors to the existing 600+ sponsors/636 companies.
• Portfolio Diversification: The MFIC portfolio is complementary, with fewer software exposures and higher healthcare allocation; only 12 of 229 MFIC names overlap with ARCC's portfolio.
• Non-Traditional Origination: Acquired a portfolio of high-quality loans from an institutional investor at a modest discount, expanding connectivity in the middle market.
• Lending Verticals: Maintaining disciplined underwriting with new originations showing 50 basis point wider spreads and lower leverage levels compared to the prior quarter.
• Future Capacity: Hiring additional investment management headcount to support the expanded portfolio of over 800 companies.

Market and Competitive Landscape:

• Viewed the direct lending market as constructive with stable pricing, favorable terms, and lender protections.
• ARCC positions itself as a "natural solution provider" capable of closing in volatile markets, citing extensive coverage of over $1 trillion in potential transactions over 12 months.
• The combined entity will be the largest BDC acquired by ARCC, following the history of acquiring Allied Capital and American Capital.
• Management notes that while spread compression exists in the core-middle market, the broader middle market remains attractive due to dislocation and the value of incumbent relationships.

Risks and Challenges:

• Macro Uncertainty: Volatility in interest rates, inflation, and global trade has elongated M&A timelines and reduced deal closing velocity.
• Credit Quality: While non-accruals are low, a small percentage of the MFIC portfolio contains assets with uncertain outcomes and wider bid-ask spreads, which constituted the primary source of the acquisition discount.
• Maturity Walls: Management dismissed concerns regarding maturity walls in 2028-2029, noting the portfolio's maturity profile is typical (~10% in 2028, ~13% in 2029) and that borrowers can restructure similar to the "Simpler Software" case.
• Operational Scaling: Managing the integration of 200+ new portfolio companies requires careful allocation of resources and potential headcount increases.

Management Commentary and Tone:

• Tone was confident and strategic, emphasizing the "modestly accretive" nature of the MFIC deal and its long-term strategic value over immediate financial size.
• CEO Court Schnabel highlighted ARCC's financial strength, scale, and ability to navigate volatility as key differentiators.
• CFO Scott Lenn expressed high confidence in the dividend sustainability due to spillover income and favorable market conditions.
• Management reiterated that the MFIC deal is additive rather than transformative, allowing the company to maintain its investment cadence without disruption.

Analyst Questions and Answers:

• Closing Rates: The closing ratio dipped below 5% due to a combination of heightened selectivity and market-wide slower deal timelines, not a lack of pipeline.
• Accretion Drivers: MFIC accretion is derived from the purchase price discount and cost of capital advantages; future upside may increase via asset allocation to IAMP or strategic moves, but day-one accretion is confirmed.
• Non-Accruals: The acquisition is not expected to materially impact the combined company's non-accrual rate, as the non-accrual assets represent a small portion of the discounted portfolio and will be marked to fair value upon acquisition.
• Funding: The transaction will be funded primarily through existing liquidity and a newly upsized $750 million facility commitment; IAMP (Ares Alternative Investment Management) may purchase minority participations in the MFIC portfolio post-closing.
• Leverage: ARCC will maintain its target net leverage of 0.9x to 1.25x; the MFIC portfolio's higher leverage is expected to naturally run off or be managed without altering the company's overall leverage strategy.
• Dividend Policy: Confirmed no noise or adjustments to funding facilities post-closing; the dividend is protected by the sizeable taxable spillover.

Other Key Points:

• ARCC has now acquired all three of the largest BDCs from its IPO era (Allied Capital, American Capital, and now MFIC), demonstrating a 22-year track record of disciplined consolidation.
• The company recently issued $750 million in 7-year unsecured notes at 185 bps over Treasuries, the lowest spread and longest duration in the sector for the quarter.
• The MFIC transaction price includes a cash component from Ares management, allowing ARCC to secure a deeper discount while providing a premium to MFIC shareholders.
• Software portfolio remains resilient, with only one small loan on non-accrual and strong loan-to-value ratios in the low 40% range.