Ares Capital Corporation Q2 2026 Earnings Call

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Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press star zero and a member of our team will be happy to help you. Good afternoon. Welcome to Ares Capital Corporation's second quarter ended June 30th, 2026 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Wednesday, July 29th, 2026. I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations.

Thank you. Let me start with some important reminders. Comments made during the course of this conference call and webcast, as well as accompanying documents, contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information does not guarantee future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, which encompasses measures such as core earnings or Core EPS. The company believes that Core EPS provides useful information to investors regarding financial performance because it's one method the company uses to measure its financial condition and results of operation.

A reconciliation of GAAP net income per share, the most directly comparable to GAAP financial measure to Core EPS, can be found in the accompanying slide presentation for this call. A reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information discussed on this conference call and the accompanying slide presentation, including credit ratings and information relating to portfolio companies, was derived or obtained from third-party sources and has not been independently verified, and accordingly, the company makes no representation or warranty in respect to this information.

The company's second quarter ended June 30th, 2026 earnings presentation can be found on the company's website at www.arcc.ares.com by clicking on the Second Quarter Earnings Presentation link on the Events and Presentations page of the Investor Resources section of the Ares Capital Corporation's earnings release and in the Form 10-Q, which are also available on the company's website. I would like to now turn the call over to Mr. Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort? Thanks, John, and hello everyone, and thank you for joining our earnings call today.

I am joined by Jim Miller, our President, Jana Markowicz, our Chief Operating Officer, Scott Lemm, our Chief Financial Officer, and other members of the management team who will be available during our Q&A session. This morning, we reported solid second quarter results with Core EPS of $0.47 per share, representing an annualized return on equity of 9.7% consistent with the prior quarter. We also continued to see healthy overall portfolio performance with attractive organic EBITDA growth and historically low levels of non-accruing loans and problem assets. As Scott will discuss later, we continued to enhance our already strong balance sheet during the quarter, and we are well-positioned with significant available capital for new investment opportunities and no meaningful near-term maturities. Let me begin with a few observations on the market environment.

We saw fewer deals close across the market in the second quarter as sponsors and borrowers continued to navigate a more uncertain macroeconomic backdrop. This was particularly evident in a lack of sponsor-backed M&A activity. As the quarter progressed, we became more active. We reviewed over 25% more transactions than in the prior quarter, and June marked one of our strongest months for new transactions reviewed in the past 2 years. We believe this momentum reflects the value borrowers and sponsors place on the stability and scale of our capital in a more selective financing environment, particularly as we have seen some managers more heavily indexed to retail capital become less active. As uncertainty persists, borrowers and sponsors are increasingly focused not only on execution, but also on partnering with lenders they are confident can provide incremental capital throughout the cycle.

We believe Ares and ARCC remain meaningfully differentiated in this regard. Ares' institutionally focused fund complex is supported by stable long-term capital and substantial dry powder, providing borrowers with confidence that we can support their financing needs across market cycles. Those advantages reinforce ARCC's position as the largest publicly traded BDC and the highest rated BDC across the three major credit rating agencies, supporting differentiated access to capital and financial flexibility. We believe these strengths continue to set ARCC apart and position the company to capitalize on opportunities across market cycles while delivering attractive long-term performance to our shareholders. Another key differentiator for our business is the strength of our relationships with existing borrowers. In the second quarter, 75% of our transactions were with incumbent borrowers, highlighting the sourcing advantages created by our borrower and sponsor relationships.

The value of those relationships is reflected in our ability to increase our share of financing commitments across many of our new originations, allowing us to deepen our exposure to some of our best performing borrowers. With 619 portfolio companies, we believe our incumbent relationships will continue to be a meaningful driver of origination activity and long-term value creation for our shareholders. We are also seeing attractive opportunities emerge, particularly in the upper middle market, where the scale of our capital is driving enhanced economics, stronger terms, and more compelling risk-adjusted returns than we saw a year ago, particularly relative to segments such as the lower middle market. We are one of only a few lenders with the scale, certainty, and flexibility to serve borrowers across the entire middle market, which allows us to focus our capital where we see the most compelling relative value.

We believe those advantages continue to differentiate ARCC and support strong risk-adjusted returns over time. Underlying these advantages is our institutionalized credit process and disciplined investment approach, which keep us highly selective. While industry transaction volumes remain below what many had expected, we believe some lenders are facing increased pressure to deploy capital, leading them to compromise on quality. By contrast, our second quarter closing ratio was moderately below our historical average of approximately 5%, underscoring the discipline that has been a hallmark of our long-term investment performance. The strength of our investment process is reinforced by the experience and tenure of our leadership team, which remain important differentiators for ARCC. Every member of ARCC's executive leadership team has spent roughly two decades at Ares, and our investment committee members have been with the firm for over 18 years on average.

That continuity has helped foster a deeply ingrained credit culture across our U.S. direct lending platform and has been an important contributor to our long-term investment performance. Over our history, our differentiated approach has enabled us to maximize outcomes on challenging credits while capturing additional upside through our equity co-investments. Importantly, our equity co-investment vintages over the last decade have generated an average gross IRR of more than 20%, helping to generate more than $1 billion cumulative net realized gains in excess of realized losses since inception. Turning to the portfolio, our diverse, high-quality portfolio continues to perform well. We ended the quarter with investments of $29.7 billion at cost, with no single investment representing more than 1.3% of the portfolio, excluding our investments in Ivy Hill and the SDLP, which offer diversified exposures to senior loans.

We believe our level of diversification is an important advantage, particularly as dispersion across the market continues to increase, helping to limit company-specific risk while supporting more consistent portfolio performance over time. The performance of our borrowers also remains healthy overall. Our borrowers generated organic weighted average LTM EBITDA growth of approximately 8% through the end of the second quarter, which is consistent with ARCC's 10-year average and remains well in excess of the broader syndicated loan benchmark. We're also seeing that strength show up in other key credit indicators as interest coverage, leverage levels, and revolving credit facility utilization remain in line with historical averages for our portfolio. Alongside these performance trends, our portfolio companies, on average, continue to maintain equity capital cushions of more than 50% beneath our investments, which we believe provides meaningful downside protection and supports the resilience of the portfolio.

As we discussed in detail last quarter, we believe the potential impact of AI varies meaningfully across different businesses and risk profiles. Nearly all of our software investments are focused on what we view as foundational infrastructure for complex businesses, often serving as systems of record in regulated end markets with high switching costs and significant embedded value. Importantly, we continue to see strong operating performance across our software investments with organic LTM EBITDA growth accelerating during the second quarter and exceeding the broader portfolio average. Within our software portfolio, only one small loan is currently on non-accrual, and our debt investments remain supported by loan-to-value ratios in the low 40% range, providing substantial equity value beneath our positions. As a reminder, as we mentioned on last quarter's call, we recently completed an independent assessment of our software-oriented portfolio companies by a top-tier global management consulting firm.

Consistent with the last quarter, we continue to believe AI risk across our software-oriented portfolio remains limited overall, with less than 50 basis points of ARCC's total portfolio at fair value attributable to higher AI risk software investments, and less than 4% attributable to medium or higher AI risk software investments. Importantly, medium risk companies are performing well today, with credit statistics comparable to the overall portfolio. While we believe businesses in this category will need to continue investing considerably in AI to maintain their competitive positions, we have not seen that translate into weaker credit performance. Overall, we continue to feel good about our current positioning as it relates to potential AI-related risks, while recognizing the importance of remaining vigilant in our ongoing portfolio monitoring and thoughtful in how we allocate new capital to the sector.

Turning to our dividend outlook, we continue to believe ARCC's current regular dividend appropriately reflects our long-run underlying earnings power. Our earnings and dividend profile is further supported by substantial spillover income, modest leverage, a more stable interest rate environment, and continued overall healthy credit performance. Our significant spillover income provides an additional layer of flexibility and can help bridge during periods of slower transaction activity. In addition, over the last 12 months, core earnings have exceeded our regular dividend, while an additional $0.15 per share of net realized gains has provided further support for our overall dividend-paying capacity. Taken together, these factors support our outlook for relative stability and earnings and our decision to maintain a stable quarterly dividend, building on our track record of stable or growing regular quarterly dividends for 17 consecutive years.

With that, I will turn the call over to Scott to take us through our financial results and balance sheet.

Thanks, Kort. I'll begin by reviewing several key financial metrics from the second quarter, then discuss the steps we took to further strengthen our balance sheet, and conclude with an update on our dividend and the taxable spillover income Kort referenced earlier. This morning, we reported GAAP net income per share of $0.24, up from $0.13 in the first quarter of 2026. The sequential improvement was largely driven by lower net unrealized depreciation. As a reminder, and consistent with the first quarter, this unrealized depreciation was primarily due to mark-to-market changes. Core earnings of $0.47 per share in the second quarter of 2026 were consistent with the prior quarter, reflecting continued healthy portfolio performance and stable earnings generation despite the more subdued transaction environment. Now turning to the balance sheet.

Our total portfolio at fair value at the end of the second quarter was $29.3 billion, down slightly from $29.5 billion in the first quarter, primarily reflecting the mark-to-market valuation adjustments and healthy net repayment activity. Our net asset value ended the quarter at $13.9 billion, or $19.35 per share, which represents a decrease of $0.24 per share from a quarter ago. While NAV declined modestly during the second quarter, this should be viewed in the context of ARCC's long track record of generating NAV growth while paying stable and attractive dividends to shareholders. Consistent with that track record, ARCC has grown NAV per share by more than 30% since inception.

Importantly, our leverage of 1.12 times debt to equity, net of available cash, was effectively stable quarter-over-quarter, and we ended the quarter with approximately $6 billion of available liquidity after giving effect to the repayment of $1 billion of unsecured notes earlier this month. Our maturity profile also remains well-laddered, with no additional unsecured note maturities in 2026 and only $1.4 billion maturing in 2027. This combination of modest leverage, substantial liquidity, and a well-laddered maturity profile continues to support significant investment capacity and financial flexibility. During the second quarter, we continued to benefit from our broad and diversified access to capital. In total, we've done approximately $1.2 billion of additional financing through the issuance of $800 million of unsecured notes and approximately $370 million of additional commitments across two of our secured revolving credit facilities, all at what we believe continue to reflect industry-leading pricing and terms.

We also continue to lower our borrowing costs while further diversifying our funding sources. Most notably, we launched the first commercial paper program in the BDC sector. The $1 billion program provides access to a lower cost funding source and is effectively backed by our recently renewed, fully committed, long-dated $5.5 billion revolving credit facility. At current market levels, issuing commercial paper has the potential to reduce our funding costs by approximately 50 to 100 basis points relative to our average secured borrowings. Importantly, should the commercial paper market become less favorable, we have the flexibility to instead fund through our long-term committed bank credit facilities. We believe this structure provides greater durability than programs supported by shorter-dated 364-day facilities. As a reminder, we currently have $10.8 billion of fully committed revolving credit facilities with a weighted average remaining maturity of more than four years.

More broadly, the commercial paper program aligns with our balance sheet philosophy of lowering funding costs and improving efficiency while preserving the durability, flexibility, and resilience of our liability structure. We also further advanced these objectives during the second quarter by reducing the borrowing costs on our largest revolving credit facility by 10 basis points and extending its maturity to May 2031. After quarter end, we also took advantage of favorable market dynamics to reset our inaugural $476 million debt securitization, reducing its weighted average spread by 35 basis points while extending its reinvestment period by three years and its final maturity by two years. Together, these actions further improve the efficiency of our funding profile while reinforcing the strength and durability of our balance sheet.

Looking ahead, while some market participants may face tighter credit conditions and reduced access to capital in this environment, we believe investors and lenders will continue to favor scaled platforms with broad capabilities, proven track records, and deep market relationships. As the highest rated BDC across all three major rating agencies, we believe ARCC is particularly well-positioned in this environment, supporting our investment capabilities and strong long-term performance through cycles. Finally, our third quarter 2026 regular dividend of $0.48 per share is payable on September 30th to stockholders of record as of September 15th. ARCC has now paid stable or increasing regular quarterly dividends for 68 consecutive quarters. Turning to our taxable income spillover, we currently estimate that we will carry forward approximately $988 million, or $1.38 per share, available for distribution to stockholders in future periods.

I will now turn the call over to Jim to walk through our investment activities.

Thank you, Scott. I'll start with some additional context on our investment approach in the current environment, and then walk through our investment activity, portfolio performance, and overall positioning. While overall market activity remained subdued during the quarter, we believe this environment reinforces the value of ARCC scale, committed capital, longstanding borrower and sponsor relationships, and highly selective approach. In the second quarter, we originated $2.6 billion of new investment commitments while maintaining broad exposure across 20 industries and 38 sub-industries. We completed approximately 75% of our transactions with existing borrowers, underscoring the value of our incumbent relationships and the embedded opportunity set within our portfolio. In a slower market, we were able to remain selective and direct capital towards companies we know well.

Importantly, we have continued to strengthen these positions of incumbency as the number of companies in our portfolio has grown by approximately 10% over the past year. Our competitive position and disciplined investment approach are also evident in the terms we are able to achieve. On our new senior loan commitments this quarter, average spreads were 20 basis points wider than in the fourth quarter of 2025, while average upfront fees increased by 50 basis points over the same period. These improvements reflect our ability to remain selective and leverage our scale to achieve more attractive risk-adjusted economics for our shareholders. We ended the quarter with a portfolio of $29.3 billion at fair value, down modestly quarter-over-quarter due to healthy net repayments and fair value changes.

Importantly, we believe the majority of the change in fair value across our debt and preferred equity investments was primarily driven by changes in market spreads and valuations rather than changes in the underlying credit performance of our portfolio companies. Borrower fundamentals also remain solid. Interest coverage and leverage levels were generally consistent with our five-year average. Our debt investments continue to benefit from meaningful equity cushions, with average loan-to-value in the mid-40% range. We believe these metrics demonstrate the underlying resilience of the portfolio and provide important downside protection in a more uncertain macro environment. Supported by these underlying portfolio trends, the credit performance of our portfolio remains solid. Our non-accruals at cost ended the quarter at 2.4%, still well below our approximate 3% historical average since the global financial crisis, and the BDC historical average of approximately 4% over the same time frame.

Our non-accrual rate at fair value of 1.4% also remained well below our historical levels. Our overall risk ratings remain stable. The share of our portfolio companies in our higher risk categories, grade 1 and 2, remain comfortably below our 10-year average and meaningfully lower than the portion of our portfolio companies in grade 4, which are outperforming our original underwriting expectations. While we continue to expect credit quality and non-accruals across the industry to trend towards historical norms, we believe increasing dispersion among managers will further highlight the value of our platform scale, disciplined underwriting, and active portfolio management. In this environment, we believe ARCC is particularly well-positioned. One of the key drivers of our long-term track record is our dedicated portfolio management team, which includes more than 50 professionals, and in our view, is the largest and most experienced in the industry.

The team is led by three partners with an average of 27 years of experience, including one who serves as a voting member of our investment committee. This helps to ensure the portfolio management perspectives remain fully integrated into our investment decision-making process. Our long-term credit performance is also underpinned by our life of loan philosophy. Early in our history, we recognized the inherent conflicts that exist in lending models which reward originators solely for sourcing new investments. At Ares, our investment professionals are responsible not only for sourcing and underwriting new opportunities, but also for partnering closely with our portfolio management team throughout the life of each investment to help drive strong credit outcomes, particularly when situations do not unfold as expected. In our experience, this approach strengthens sponsor and borrower relationships over the years and drives more effective outcomes on challenging credits.

We believe our institutionalized credit process and the close integration of our investment and portfolio management teams have been important drivers for our long-term track record of generating net realized gains in excess of losses, which Kort referenced earlier. In summary, the main attributes that have long differentiated ARCC, including our scale, the experience, and stability of our team, our deep relationships with borrowers and sponsors, and the strength of our platform, resources, and capital base are even more important in today's market. While industry credit metrics may continue to normalize, we believe increasing dispersion creates an environment where these advantages matter even more. Supported by a high-quality portfolio and meaningful liquidity, we believe ARCC is well-positioned to navigate the current environment and capitalize on attractive opportunities as market activity improves. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter.

With that, operator, please open up the line for questions.

At this time, if you would like to ask a question, please press star then one on your touch tone phone. If you would like to withdraw your question, please press star then two. Please note, as a courtesy to those who may wish to ask a question, please limit yourself to one question and a single follow-on. If you have additional questions, you may re-enter the queue. The investor relations team will be available to address any further questions at the conclusion of today's call. Our first question today will come from Rick Shane with JPMorgan. Your line is open. Hey, everybody.

Thanks for taking my question this morning. Look, you guys discussed the fact that over the history of ARCC, you guys have accreted book value, and that's really been, I would argue, a function of three things: accretive issuance, which obviously at the moment is challenging, two, investment gains, and three, two significant acquisitions where you accretively exchanged stock. You talk right now a great deal about your advantages in terms of your debt ratings. From a pure financial engineering perspective, and given where peers are trading, the setup for that type of acquisition or that type of merger on paper makes a great deal of sense.

I am curious whether or not given the asset quality issues in the space, this makes sense for you now, and whether or not you actually think that there are motivated sellers in the market who would be looking to unlock value for their shareholders in this way.

Yeah. Thanks for the question, Rick. I need to be obviously careful in the way we answer it because we're always evaluating various strategic alternatives. I guess I would just say given the dispersion in performance that we're seeing across managers in the space, and some of the weakness that is coming out to the fore, the likelihood of a transaction like that occurring is probably higher than it's been in the past. Other than saying that, I'm not really sure that we can speak too much more about anything that we are working on or giving too much more forward guidance about what might or might not occur. I think your point is a good one, and it highlights our relative performance to others and the fact that while we are seeing some normalization of credit performance back to historical means We are not seeing the same kind of spikes in non-accruals and further weakening that maybe some of our competitors are seeing.

Got it. If I can ask one follow-up. One thing that would make that type of transaction challenging is if you thought that systematically marks in the industry were off, and that the valuations you're looking at aren't really the valuations that you think you would realize. Are you, in general, constructive on how the industry is valuing their portfolios at the moment? I guess, are we asking about how we feel about other managers' marks? I think it's, again, something that I probably want to stay away from just commenting on other managers and their marks.

I think as has been pointed out historically, and I think the media's certainly written about this, there is some dispersion in valuation, especially when you get into some more stressed credits and you look across different managers. That can occur for a variety of different reasons. I guess I would just say on our side, we have, I think, been proven to be on the more conservative end of the spectrum as it pertains to that. Rick, I'm sorry, I just really kind of want to avoid just getting into opinions about other managers' marks. Yeah, totally fair. I realized as I asked the question that it's probably not framed in the right way, so I appreciate the answer to the first, and I appreciate the discretion on the second. Great. Thank you. Our next question will come from Finian O'Shea with Wells Fargo.

Your line is now open.

Hi, everyone. Good morning. Just sticking with the big picture sort of industry question on credit. This is much less so for Ares, but NAVs have clearly been trending down, even without some of the more severe names that you just touched on with Rick. How would you describe the why or the drivers underneath of credit headwinds for the industry? Are they items that will sort of run their course, or does this sort of reflect a new normal where we should expect BDCs to revert back to those sort of longer-term non-accrual ratios and such? Thanks. Hey, Fin. It's Jim here.

Thanks for the question. It's hard to look across the industry and give a great perspective on where each manager is going, so I'll keep it probably more macro and market level.

As you know, we've been operating for an extended period of time where non-accrual rates and default experience has been below the long-term average. We've been saying it for a bit that we think there is a reversion towards the mean there, and that's still our expectation across the industry. What we are also seeing, and it's been highlighted, is just a wider dispersion amongst managers on performance there. What we think is happening is there's a general maturing of portfolios. You have a handful of managers who have ramped, invested their time. It takes time for those investments to mature and settle, then you start to see where the long-term performance really is. I think that's what's really going on right now and why the average has been below.

It's also been obviously a very benign credit environment. It's a little bit of both. I do think the industry is really kind of going through a normalization period right now, and we're still working our way through that. Yeah. Maybe I'll add one more thing on, Fin, which is that we get the question a lot, are there any industries in particular that are driving that normalization? I think the answer to that is, from our perspective in our portfolio, no. When you look at the 4 names that we added, we had 4 new names to non-accrual, which took it from 2.1 to 2.4 this quarter. All 4 names are companies that do different things, not related to each other.

We are not able to discern any trends yet around certain industries that are experiencing any kind of outsized weakness or leading us down this path toward more credit normalization.

Very helpful. Thank you. Follow-up on the SDLP. A lot of movement there. Looks like a lot of movement toward diversification by borrower names and such. Any implication, and correct me if I'm wrong on that, of course, any implications on the earnings power? Does that allow you to lever more origination fee, cap structuring fees? Should we think about it as just simply more diversifying?

Yeah. No, I'm glad you pointed it out. I think you should think about it as more diversification and better utilization of that specific joint venture. The driver there, Finn, just so everybody is aware, we did recently receive some co-investment relief that allows SDLP to invest alongside other Ares funds, and that historically was not the case. Historically, we would put an asset into SDLP only, or it would go into the other Ares funds. Now we can co-invest alongside. What that does is it just expands SDLP's opportunity set and fairway, and that creates that diversification that you're referencing. We expanded the number of borrowers in SDLP from 28 to 72 in the last quarter alone, and we're expecting and hoping that that continues to diversify going forward. Thank you. Thank you. Our next question comes from Arren Cyganovich with Truist Securities.

Your line is now open.

Thanks. Kort, in your commentary, you had kind of noted a couple of push and pull in the marketplace. One being that some retail-heavy competitors might be less active that you're seeing, also that you had kind of a lower closing rate because folks were maybe being a little bit more aggressive in terms of, I don't know if it was either a price or structure, maybe you could just talk a little bit about the kind of competing dynamics there.

Yeah. Hey, Arren, it's Jim again. I'll maybe just give a little more commentary around the market generally. I think that'll help answer the question. What we saw over the last, call it 60, 90 days, is competition is different in the lower end of the market than it is in the upper end of the market. That's always been the case. With some of the dynamics going on with the larger players who are more driven by capital flows from the retail channel, we've seen less competition in the larger company market and maybe more competition in the smaller company market. I think both markets are healthy, we saw spreads widen, we saw leverage levels decline, we saw fees improve. We mentioned all that in the narrative.

It was more pronounced, interestingly, in the large end of the market, that the terms in that end of the market are just slightly more attractive, the relative value is better. The number of players that can compete with scale, like in Ares, has shrunk a bit, it's just become a better hunting ground for us. We are seeing smaller players and smaller companies remain competitive, that part of the market is a little healthier and maybe a little bit more active as it relates to M&A. Those dynamics are really sort of what's going on more broadly in the market. Both remain healthy, though. I think what we saw was in terms of just backlog and build-up of transactions. Reviewed a lot of transactions, that's continuing to ramp.

We saw a big lift in June, about 50% increase month-over-month in terms of the number of transactions we reviewed at Ares. We're seeing what is the thawing of the market on the M&A side and the lag effect of that thawing start to really flow through. We're optimistic around where the pipeline is headed, and we're seeing larger transactions become more prevalent. What we saw is more activity, as I mentioned, in the smaller end of the market, just because those were probably a little easier to execute on and maybe thaw out a little quicker than in the larger end of the market. Yeah. I'll add maybe one or two more things. I think on the question around quality and selectivity, I think that's really important to expand upon a little bit because, again, we talked about it in prepared remarks.

We are always extremely disciplined in trying to make sure that we are always selective. In this slower environment, we did see the quality of the flow dip down a little bit as well. That is absolutely improving as we see the transaction volume PIK up. Jim mentioned the huge month of June, the volume that we saw, that's continuing into July. The quality was a bit lower in the second quarter. We chose to close on less deals as a percent of what we reviewed. That also hampered the overall volume. I think it also speaks to our strengths as well, which is just that we are not going to chase deal flow just because things are slow. We're okay sort of waiting it out and waiting for things to come back and for the quality to improve a little bit.

Maybe just one more point. I think Jim made great comments about the larger end of the market being more attractive. I think there's a very unique opportunity for Ares as a platform in this market environment where the other larger lenders are lower on capital right now. A good example of that is we actually committed to a nearly $2 billion credit facility in the second quarter, and we committed to that facility entirely at Ares, 100% of the deal. We did lighten up a little bit afterwards, but still had a big hold on that credit. The ability to stand up in this market for a $2 billion commitment allows us to generate significantly outsized fees and economics on that kind of a deal. That's a benefit that I think is unique to Ares right now.

We're hopeful as the deal flow picks back up and we see some of these larger deals start to come back in, and the competitive environment, if it stays where it is, that'll be another really nice benefit that I think we can tap into.

Thanks. I really appreciate the color from both of you.

Thank you. Our next question comes from Kenneth Lee with RBC Capital Markets. Your line is now open.

Hey, good afternoon. Thanks for taking my question. Just one on prepayments, I realize it's difficult to predict there, but any sense of what the level of prepayment activity could be like over the near term? Thanks. Hard to answer, Ken.

Generally, what we've seen is the repayment activity moves relatively in tandem with new deal activity. As new deal volume picks up, I would expect that also could lead to some repayment activity picking up. It's not always correlated in that respect, but that's kind of what we see it over the long term. I guess that's how I would answer the question, there's no other specific driver that I can think of. I'm not sure if you're alluding to any certain drivers that are in your mind, there's nothing that's jumping out to me that would say repayments would be abnormally high or abnormally low going forward.

Gotcha. Very helpful there. Just one follow-up, if I may. I think earlier in the call you mentioned still having some capacity around leverage, obviously it's going to be predicated on the deal activity. Is there anything within your target range that you could target to operate within just going forward? Thanks. Yeah, thanks, guys. Well, our stated range is still the same, 0.9 to 1.25 times.

We're still kind of in the middle of that range now. I think there's probably a little room to go. We are sensitive to the leverage impact from the devaluations. That is all part of our. We're keeping an eye out for that. We do think there's a little room to grow on leverage.

Gotcha. Very helpful there. Thanks again.

Thank you. We'll go next to Chris Muller with Citizens Capital Markets.

Hey, guys, good to be on with you today. I wanted to ask about interest rates and the impact on the pipeline. This is a 2-part question, how does the absolute level of rates versus volatility of rates impact the pipeline? Which scenario would create a better opportunity for lenders like you guys?

Interesting question. I think volatility of rates is a greater impact and a hampering impact on transaction volume than the absolute level of rates. I think the difficulty for buyers and sellers to sort of transact often occurs when the buyer doesn't know what rate to put in his model a year or 2 out. When you have to model in downside scenarios based on a wider dispersion of rate outcomes, then it's harder to lean in on price, and you have to sort of build in some cushion. That can hamper transaction volume. I think what we've seen is, historically when rates went up, there was a period of time where deal flow was a little bit gummed up.

Even when rates settled out, base rates settled out in the 5s, there was a fair amount of transaction activity that occurred last year, for instance, even with rates being higher in 2024 because people settle in and they know what to put in their model. I think that's how I'd answer it. With the rate picture today, it feels certainly more stable than we've seen in a while. I think the rates having stabilized where they are now, obviously, even a little bit of an outlook toward a slight widening of base rates going forward, which should be a benefit to us, but not a negative in terms of transaction flow, because it seems like people are settling in to a pretty clear picture as to what that looks like.

Got it. That's very helpful. Just a quick clarification follow-up. You guys mentioned expecting non-accruals trending back towards historical norms. Is there anything in your portfolio that you're starting to see bubble up, or is that more just a comment on, like a mean reversion type observation?

It's the latter. As I mentioned, my commentary was really around the industry and just maturation of the portfolios from the competitor set, and how performance has really been below the long-term average. I think that's really all it is.

Got it. Makes a lot of sense. Appreciate you guys taking the questions today.

Thanks. Thank you. We'll go next to Melissa Wedel with UBS.

Your line is now open.

Thanks for taking my questions today. Wanted to follow up on the CP program. Interesting development there. I noticed that while you announced that there weren't any outstanding by the end of the quarter. I'm just curious how long you think it would take you to ramp to, I believe it was a $1 billion in capacity you had there. How big could that get?

Yeah, thanks, Melissa, and congrats on your new role. The purpose behind it was really just efficiency. I don't think we're going to use the full $1 billion anytime soon. We do have gaps. We want to just test it out a little bit to see how it goes and that's her response. We did do our first issuance post quarter end, so we're going to start seeing some of those savings come through. If I had to guess, it's maybe a few hundred million dollars or so that we would issue on that program and then kind of take it from there.

Okay. Makes sense. I wanted to shift gears also to the post quarter end investment activity. I know that's only maybe a month at that. Those things can fluctuate a lot every quarter that you report. It does strike me in the July activity to date that two things. There was a real increase in sort of fixed subordinated, fixed rate, I think subordinated, but also fixed rate allocations. Also the spread between the new investment yields and the yields on what you've exited so far this quarter widened out quite a bit, and it seems like that could be a tailwind. I'm curious if that is something that is a sustainable trend or is that more of a function of just individual investments that repaid? Thank you. Yeah. Maybe to start with the latter.

I mentioned before there has been an improvement in market terms, and we certainly saw that last quarter. I think the question is how long will that sustain itself and where? We're optimistic that the market is less competitive now, particularly as I mentioned in the larger end of the market. I don't think there's going to be any major changes month-over-month, quarter-over-quarter. I think our ability to go generate higher returns for high quality businesses in the larger end of the market, we're pretty optimistic that sustains itself. There definitely was a period of time in the last quarter where it was more severely dislocated, and I think it's now more healthy and stable, and that leads to more transaction volume.

You want to have that balance where you're not seeing as much competition, but you're also able to price risk a little better. I think that's kind of what we're facing right now. Hard to say how long that'll last, but it feels pretty good at the moment.

Yeah. On the mix of the fixed rate, I just think, Melissa, that's just small numbers in a small period of time. I don't think there's any trend to read into there. Scott was just showing me that it's just two deals, and again, it's just small numbers. There actually was this one deal that was an existing name, a software name, which I'm sure everybody's interested to hear about, where there was a refinancing of an existing second lien position that we had in the bond market. Actually refinanced that second lien position, and we took a small piece of that new bond deal. So we downsized our position, de-risked from a pretty large company, actually large software company, and thought it's still a nice piece of paper to take a small piece of that bond deal. So there was a fixed rate security there.

Just as one example, little bit of randomness in the numbers.

Fair enough. Thanks very much.

Thank you. Our next question will come from Robert Dodd with Raymond James. Your line is now open.

Hi, guys. On the credit quality of the book, right? Non-accruals on a cost basis, they're not high, but they're not low anymore. You have a number of more troubled assets that you've talked about, right? Your track record on getting recoveries on assets is based on my math at least meaningfully better than industry average. It's also better than industry average if you get control sooner. Is there any prospect for you maybe being more aggressive? Obviously, you can't force a sponsor's hand necessarily, maybe being more aggressive on taking control of some of these things and putting your workout group more fully in control given the historic track record of performance there?

Yeah, I appreciate the question, Robert. I would say as much as we enjoy the higher returns that can often come from those type of situations, it's not our strategy to go in and aggressively take control of companies from owners of businesses when there's weakness. We would much rather the owner of the business put in capital and support that company and work together as a team to help those companies get through to the other side. Really the ability, we are fortunate, and I think it's an important competitive advantage that we are willing to take control and that we have the skills and the know-how to do that. Oftentimes, that willingness and the reputation that we have for knowing how to do that incentivizes the equity contribution from the owner, which again, is what we would prefer. It's not our desire. That's sort of a last resort.

If it does occur, yeah, you're rightly pointing out that we've got a good track record in knowing how to do that and coming out the other side.

Thank you for that. Just to follow up to that directly tied to your response. Of the assets that are contributing the majority of the markdowns, how many of those have had incremental capital injections from owners over the last, call it six months?

We're sort of looking at each other here. I don't know that we have that number handy, Robert. I can say it's a meaningful amount. I don't know the dollar amount or how many of the borrowers. I guess thematically, to answer it thematically, we are absolutely seeing owners of businesses support their companies with capital on the whole. That gets back to one of the things we always talk about, which is the LTV in our portfolio, overall being sub 50%. There is a lot of cash equity invested in our portfolio companies beneath our loans, and that incentivizes the sponsors to step up and kick in money when there is an issue.

Got it. Thank you. Thank you.

We'll go next to Paul Johnson with KBW. Your line is now open.

Thank you. Good afternoon. Thanks for taking my questions. I was just curious, where at this point in the cycle, it seems like terms have improved a little bit, but activity is somewhat muted. I'm curious in terms of what you are seeing maybe on the new deal side, granted most of it was kind of existing borrowers this quarter, but where are sponsors at in terms of the position and for asking for PIK on new deals? I would ask more specifically in the upper middle market where you're starting to see more attractive deal flow.

Yeah. It's hard to say. It's sort of deal by deal right now. We saw a period of time where that really kind of went away from the market for 30, 60 days. We've seen it come back again on a few transactions. As in more often than not, it hasn't been a term that's been in the market in the last quarter. Just speculating a bit, I do think that's not going away. I think there's more scrutiny around it. I think there's more sensitivity from competition around it as everyone is managing a certain amount of PIK in their portfolio, et cetera. I do think we should anticipate that term or that concept is not going away either. It's probably just not going to be as prevalent as it once was.

I think we're in a better place than we were last year and the year before. It's probably how I would describe it.

Got it. Appreciate that. Last quarter, you mentioned around approximately 90% of the portfolio was kind of structurally originated PIK. Does that roughly hold for this quarter as well, or have there been any changes to those metrics?

No. That's holding the same each quarter.

Appreciate it. One thing real quick on Ivy Hill. You mentioned within the ARCC's portfolio, I think it's around no position accounts for more than 1% or a little more than 1%. Is that same diversification level roughly held across the funds managed under the Ivy Hill investment vehicle, or is it typically a little bit more concentrated on the higher end, just kind of due to transaction size? Just trying to get an idea, I guess, the level of diversification across that vehicle as well.

Yeah. No, you should think of it as being equally, if not more diverse. Definitely not less diverse. Got it.

Appreciate that. That's all the questions from me. Thank you very much. Thank you.

As a reminder, if you would like to ask a question, please press star and one on your keypad now. We'll go next to Sean Adams with B. Riley Securities. Your line is now open.

Good morning. Touching specifically on two credits that continue to slide. Cornerstone and Simpler Software. Do you have anything to add color-wise on those specific names? On a separate note, on Q3 and Q4, it seems like with volume up but quality down and repayment activity high, are you guys pointing to a flatter half of the year on the back end just due to the mix?

On the first question, we unfortunately just can't comment on specific names. We've said that in the past. I think that holds true here. Apologies. Really can't provide any more color on either of those names. On the second question, we're optimistic. We're seeing, like I said, a lot more deal flow, a lot more activity, more sponsor to sponsor, more early-stage books in the market, more just general health in the M&A market. I'm not sure that I would translate some of the market commentary into a concern around the portfolio running off or being a look. I actually think we're optimistic we're going to see growth. I just want to underscore that. I really want to make sure everybody does take that away, which is we are really seeing a building environment for transaction activity.

Again, the quality also is improving in the deals that are coming in. I think that should be an important takeaway. We can't talk about individual performance of those names, but it is the same sponsor owner of those two names you mentioned. The only thing we can say is we are engaging in a lot of ongoing and constructive dialogue with the sponsor of those two companies that give us some degree of confidence in our ability to address the near-term maturities in those two names.

Got it. Appreciate the color.

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Kort Schnabel for any closing remarks.

Okay, great. Thanks. Yeah, we got through a quarter without any software questions. I don't really have any other closing remarks. Thanks everybody for joining us and for your continued support and engagement, and we'll see you next quarter.