Ares Capital - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 core EPS was $0.50, down sequentially from $0.55 and below S&P Global consensus of $0.54; GAAP EPS was $0.36 due to net realized and unrealized losses. Core EPS vs consensus: $0.50 vs $0.536*, a miss; GAAP revenue (total investment income) was $732M vs $770M* consensus, also a miss. Values retrieved from S&P Global.
• Net investment income (NII) was $365M ($0.54/share), essentially flat vs Q4 per-share but modestly higher YoY; portfolio yields stabilized into quarter-end, supporting expectation of more stable interest income in Q2.
• Credit quality remained strong: nonaccruals declined to 1.5% of amortized cost (0.9% at fair value), and the weighted-average grade held at 3.1; portfolio FV rose to $27.1B and equity/NAV remained resilient at $19.82/share.
• Management emphasized widening spreads and banks’ risk-off stance, positioning direct lending to take share; ARCC declared a $0.48 Q2 dividend (63rd consecutive quarter stable or increasing) and highlighted $6.8B of liquidity and $883M spillover income as support for dividend sustainability.

What Went Well and What Went Wrong

What Went Well

• Portfolio health and credit quality: Nonaccruals fell to 1.5% of cost and 0.9% of fair value, below long‑term BDC averages; grade 1–2 exposure fell to 2.8%, lowest since 2010.
• Liquidity and funding improvements: Upsized the revolver to $5.3B, extended maturities, and tightened spreads; ended Q1 with $6.8B available liquidity and net debt/equity below 1x.
• Origination momentum and backlog: $3.5B in gross commitments in Q1 and a $2.6B backlog post quarter‑end; 60% of commitments with existing borrowers and improving yields on new originations.

Management quotes:

• “We are starting the year with solid first quarter results, underpinned by a healthy portfolio, stable credit quality, and significant financial flexibility.” — Kort Schnabel.
• “We should see more stable levels of interest income for this coming second quarter.” — CFO Scott Lem.
• “This marks our 63rd consecutive quarter of delivering stable or increasing regular quarterly dividends.” — Kort Schnabel.

What Went Wrong

• Earnings vs estimates: Core EPS of $0.50 missed $0.536* consensus; revenue of $732M missed $770M* consensus. Values retrieved from S&P Global.
• Sequential earnings pressure: Core EPS down to $0.50 from $0.55 due to lower average market base rates and a lagged impact on portfolio yields; GAAP EPS compressed to $0.36 on realized/unrealized losses.
• Market volatility headwinds: Banks turned risk‑off, syndicated loan spreads widened, and tariff uncertainty could delay new M&A processes; management expects some backlog attrition even as private credit captures share.

Transcript

Operator (participant)

Good afternoon. Welcome to Ares Capital Corporation's First Quarter Ended March 31, 2025 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is on the 9th, 2025. I will now turn the call over to Mr. John Stilmar, a partner on Ares Public Markets' investor relations team.

John Stilmar (Partner and Co-Head of Investor Relations)

Thank you. Let me start with some important reminders. Comments during the course of this conference call and webcast and the 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 is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and the results of its operations.

A reconciliation of GAAP net income per share, the most commonly direct comparable GAAP financial measure, to core EPS can be found in the accompanying slide presentation for this call. In addition, 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 in this conference call and the information relating to portfolio companies was derived from third-party sources and has not been independently verified. Accordingly, the company makes no such representations or warranty with respect to this information. The company's first quarter-ended March 31, 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the first quarter-2025 earnings presentation link on the homepage of the investor resources section of our website. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website.

I would like to now turn the call over to Kipp deVeer, Ares Capital Corporation's Chief Executive Officer. Kipp.

Kipp deVeer (Director and EVP)

Thanks, John. Hello, everyone, and thanks for joining our earnings call today. I'm joined by Kort Schnabel, our incoming CEO; Jim Miller, our President; Jana Markowitz, our Chief Operating Officer; and Scott Lem, our Chief Financial Officer, as well as other members of the management team who will be available during the Q&A session. I just wanted to briefly open the call to express what an honor it's been to lead this company over the past 10 years. I'm incredibly grateful for the hard work and the dedication of our team, and I'm very proud of the growth and the success that Ares Capital has experienced. Together, we've navigated challenges, we've seized opportunities, and we've achieved meaningful milestones. Looking ahead, I couldn't be more confident about the future for ARCC. It's my privilege to pass the torch to Kort.

Will undoubtedly provide great leadership for the company along with Jim, Jana, and Scott. I've had the pleasure of working alongside all of them for close to 20 years, and I've seen firsthand their vision, leadership, and deep understanding of our business. I have no doubt that Kort and the ARCC leadership team will continue to push us forward, and I know the company is in excellent hands. To our investors, our team, and other stakeholders, thank you for your trust and support. To an end today, I look forward to continuing to serve Ares Capital as a director, and I know the company will continue to thrive under the new leader. Many thanks again to all for the support over the years. Let me turn the call over to Kort.

Kort Schnabel (CEO)

Thanks, Kipp, and I'm certainly honored to be here today as I step into the role of ARCC's CEO starting tomorrow. Let me start by providing a few thoughts on our recent performance and our current positioning in light of today's volatile and evolving market conditions. This morning, we reported solid first quarter results with $0.50 in core earnings, which equates to an annualized return on equity of 10%. It remains strong and stable with our non-accrual loans and lower risk-rated credits at historically low levels. We continued to be active in our investing activity as we committed $3.5 billion in gross commitments during the first quarter. Excluding commitments fronted and sold as agent, gross commitments increased 54% versus the same period last year. We ended the quarter with conservative balance sheet leverage and significant dry powder to make new investments in a potentially improving spread environment on new loans.

Scott will take you through our results in more detail, but let me update you on what we're seeing in our markets and how we believe we are positioned as a company. Beginning in late March and extending through April, new transaction activity in the liquid loan market dropped significantly as banks have become more cautious when committing incremental capital and launching new syndications. Secondary loan markets experienced increased volatility and widening spreads, and most banks have transitioned into a risk-off position. Against this backdrop of increased volatility and tightening credit conditions, the direct lending market has remained open and continues to exhibit greater stability than the liquid markets. Once again, certain transactions that previously would have gone toward the broadly syndicated loan market have instead begun to explore private credit solutions.

While it is likely that some market participants will take a pause on launching new M&A processes and the overall level of M&A going forward could be slower than anticipated, we believe we are well positioned to take market share among the transactions that do occur. Additionally, we believe the long-term fundamental drivers for increased M&A remain intact, most notably the mounting pressure on private equity managers to return capital to their investors, as well as pressures to deploy aging dry powder. Periods like this have also historically produced attractive financing opportunities to support private transactions, spinoffs, and other strategic initiatives. Capitalized on all of these opportunities, we leverage our long-standing relationships and market reach to source opportunities while also supporting our existing portfolio companies. During periods of market volatility and economic markets inward by proactively assessing current and future economic impacts to our existing portfolio companies.

We also position the balance sheet to be even more flexible with strong levels of liquidity and modest leverage. We then over-communicate with market participants to ensure they know we are open for business and ready to partner with them. We remain confident in ARCC's ability to successfully navigate future market conditions as we believe Ares has one of the most seasoned and experienced investment teams in the industry. Our investment committee members have been investing together at Ares for over 16 years on average, which fosters a consistent approach to credit quality and portfolio construction. Furthermore, all four of us on ARCC's executive management team have been at Ares since before the Great Financial Crisis. With 200 investment professionals dedicated to U.S.

direct lending and another 50 portfolio management professionals, our team's scale, experience, and agility enable us to navigate volatile markets, positioning us to be early, active, and thorough in identifying and capitalizing on opportunities. Consistent with our playbook, we are entering today's market environment with a significant amount of available capital totaling nearly $6.8 billion, and our leverage expressed by our net debt to equity ratio is near the bottom end of our target range at below 1x. Our confidence is also underpinned by the overall health of our portfolio companies, which continue to exhibit strong credit results. We ended the first quarter with sequentially lower non-accruals, which continue to be well below our average and the BDC peer group historical average. Our portfolio companies are reporting double-digit organic LTM EBITDA growth and are levered on a debt to EBITDA basis below our five-year average.

This lower level of leverage can also be seen through our portfolio's historically low average loan-to-value, which currently sits in the low 40% range. We also take comfort in the fact that our portfolio is focused on domestic service-oriented businesses, which should be more insulated from the direct impacts of higher tariffs. On that point, we are carefully monitoring the potential direct and indirect results of higher tariffs, and we are proactively engaging with portfolio companies to mitigate the potential impact of tariffs on our portfolio. While trade policies and their economic impacts remain highly dynamic, we only have a small number of borrowers that we believe are most directly exposed to the potential impacts from tariffs, particularly those that have higher exposure to China. Specifically, these borrowers comprise only a mid-single-digit share of our companies that are starting from a position of financial strength and flexibility.

Importantly, this exposure assessment does not include any mitigants these companies can potentially implement, such as adjusting pricing or the ability to transition supply chains. Additionally, our portfolio management team, one of the largest and most experienced in the industry, is continuously monitoring the portfolio and is prepared to respond quickly to potential tariff changes. In conclusion, while this period brings new uncertainties, it also brings new opportunities. We feel confident that we are in a strong financial position to navigate what lies ahead, just as we have in other periods of volatility over the past 20 years. With this view in mind, we declared a $0.48 per share quarterly dividend for the second quarter of 2025. This marks our 63rd consecutive quarter of delivering stable or increasing regular quarterly dividends at ARCC.

We are proud of this track record and feel confident that we can continue to support a steady dividend level for the foreseeable future due to our view of our prospective earnings power and our significant undistributed spillover income. I will now turn the call back over to Scott to take us through more details on our financial results and our balance sheet.

Scott Lem (CFO and Treasurer)

Thanks, Kort. This morning, we reported GAAP net income per share of $0.36 for the first quarter of 2025 compared to $0.55 in the prior quarter and $0.76 in the first quarter of 2024. We also reported core earnings per share of $0.50 compared to $0.55 in the prior quarter and $0.59 for the same period a year ago. Our decline in core earnings was largely driven by the decline in our portfolio yields based upon the lower average market base rates, which occurred during the fourth quarter of last year. As you may recall from our last couple of earnings calls, there's typically up to a one-quarter lag to reflect the full quarter impact on interest income from the changes in period and yields that we report for the most recent quarter.

Simply put, impact from the changes in portfolio yields during the fourth quarter were the primary driver of the sequential change in our core earnings for the first quarter. The good news here is that yields in our portfolio have generally stabilized through the end of the first quarter. The weighted average yield on our debt and other income-producing securities at amortized cost was 11% at March 31st, which was down slightly from 11.1% at December 31st. Our total weighted average yield on total investments at amortized cost was 9.9%, which compares to 10% a quarter ago.

Importantly, unlike the 70 basis point decline we experienced in our weighted average yield on total investments from the end of the third quarter to the end of the fourth quarter of 2024, we only experienced a 10 basis point decline from the end of the fourth quarter to the end of this past quarter. Therefore, all things being equal, we should see more stable levels of interest income for this coming second quarter. Turning to the balance sheet, our total portfolio at fair value at the end of the quarter was $27.1 billion, which was up from $26.7 billion at the end of the fourth quarter and up from $23.1 billion a year ago. Shifting to our funding and capital position, we've remained active in adding capacity, extending our debt maturities, and reducing our cost.

In January, we issued $1 billion of seven-year unsecured notes with a new issue spread of 150 basis points, representing a new low for us and the BDC sector. During the first quarter, we also extended the end of the reinvestment period and the maturity date for our $1.3 billion BNP funding facility to March 2028 and March 2030, respectively, while reducing the drawn spread for the facility from 2.1% down to 1.9%. Post-quarter end, with the continued support of our 30-plus bank group and our largest revolving credit facility, we upsized the facility by nearly $800 million, bringing the total facility size to $5.3 billion, extended the end of the revolving period and the maturity date to April 2029 and April 2030, respectively, and reduced the drawn spread in the facility by more than 20 basis points.

As Kort mentioned, our overall liquidity position remained strong with nearly $6.8 billion of total available liquidity, including available cash and pro forma for the recent amendment to the revolving credit facility. We believe we are well positioned, especially with only one term debt maturity for the remainder of this year. In terms of our leverage, we ended the first quarter with a debt to equity ratio net of available cash of 0.98x, down slightly from 0.99x a quarter ago. We believe our significant amount of dry powder positions us well to continue supporting our existing portfolio company commitments as well as new investing opportunities. Finally, our second quarter 2025 dividend of $0.48 per share is payable on June 30th to stockholders of record on June 13th. ARCC has been paying stable or increasing regular quarterly dividends for over 15 consecutive years.

In terms of our taxable income spillover, we currently estimate we will have $883 million or $1.29 per share available for distribution to stockholders in 2025. In addition to our core earnings continuing to be in excess of our current dividend, we remain hopeful for some potential portfolio realized gains in the coming quarters, which may further enhance our taxable income spillover. We believe our meaningful taxable income spillover provides further long-term stability for our dividends and is a significant differentiator for us. I will now turn the call over to Jim to walk through our investment activities.

Jim Miller (President)

Thank you, Scott. I'll provide some additional details on our investment activity, our portfolio performance, and our positioning. I will then conclude with an update on our post-quarter end activity and backlog. In the first quarter, our team originated $3.5 billion of new investment commitments, with existing borrowers comprising approximately 60% of our commitments. The strength of our incumbent relationships is particularly beneficial since our embedded knowledge and experience with these borrowers reduces underwriting risk on new commitments. Another source of differentiated deal flow is our broad market presence across the lower, middle, and upper segments of the middle market. We believe this coverage is critical to our strategy of selecting what we believe are the best credits across these market segments. In recent quarters, we have been focusing on the less competitive core middle market segment, which is comprised of companies with $50-$100 million of EBITDA.

This trend is reflected in the weighted average EBITDA of our portfolio companies, which decreased for the fifth consecutive quarter to $274 million. Our median EBITDA remains around $80 million and has been fairly consistent over the past few quarters, underscoring our ongoing presence in all parts of the middle market. Additionally, this quarter, we achieved a higher yield per unit of leverage on our first-line originations than our post-COVID average. Turning to the portfolio, we ended the quarter with $27.1 billion of investments at fair value, a 1.5% increase from the prior quarter. We believe our long-standing underwriting strategy of focusing on market-leading companies with high free cash flows and what we believe to be resilient, service-oriented industries will be important drivers of stability and differentiation in the quarters ahead. We believe another point of differentiation is our disciplined approach to risk management and portfolio diversification.

With 566 portfolio companies at the end of the first quarter and an average position size of less than 0.2% of the portfolio on average, we are able to mitigate the impact of negative credit events in any one company or industry. The health of our portfolio can be seen in the 12% weighted average LTM EBITDA growth of our portfolio companies, which increased modestly from 11% in the prior quarter and was broad-based across both industries in which we invest and the various company size ranges. Another measure highlighting the health of our portfolio is the low leverage of our underlying portfolio companies. At 5.7x debt to EBITDA, this weighted average leverage level is the lowest we have seen since the first quarter of 2020. Coupled with this, our interest coverage is strengthening, currently near 2x.

Beyond that, our non-accruals at cost ended up the quarter at 1.5%, down 20 basis points from the prior quarter. This remains well below our 2.8% historical average since the Great Financial Crisis and the BDC industry historical average of 3.8% over the same timeframe. Our non-accrual rate at fair value also decreased by 10 basis points to 0.9%. The percentage of our portfolio at fair value in grade one and two names decreased a further 10 basis points sequentially, ending the quarter at 2.8%, the lowest level we have seen since 2010. As a final point on our portfolio quality, when comparing our current position to our position just prior to COVID, the last major challenging economic period, our portfolio companies today have 17% lower loan-to-value ratios on average, underscoring the greater equity value beneath our positions today than at the year-end 2019.

Our portfolio has also become even more diversified as the number of companies in our portfolio has increased by 60% to 566. As a reminder, our portfolio performed very well through COVID with lower non-accruals, lower realized losses, and better ROEs than BDC peers on average over the course of 2020 and 2021. In addition to our strong performance through COVID, we are one of the few BDCs that operated under the severe stress of the Great Financial Crisis from 2007 to 2010 and one of an even smaller subset that did that so successfully. In addition to our distinct competitive advantages, we believe a key driver of this performance across cycles is also our flexible mandate that allows us to opportunistically invest across the capital structure.

Shifting to the second quarter, the widening of secondary market spreads in the broadly syndicated loan and high-yield markets, which began in Q1, has intensified in April amid heightened capital markets volatility. In direct lending, we are actively engaged in pricing discussions on new transactions, tightening terms and documents, and positioning ourselves strategically in ongoing discussions with potential borrowers. We have been busy with ongoing discussions with borrowers, and our backlog remains healthy. Our total commitments through April 24, 2025, was $0.5 billion and our backlog as of April 24, 2025, stood at $2.6 billion. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close, or we may sell a portion of these investments post-closing.

Importantly, about 40% of this backlog represents incumbent borrowers, underscoring our ability to be active in all environments as we continue to gain market share with our existing borrowers. As we look to the future, we are confident in our team and our company's market and financial positioning. We remain committed to building upon our over 20-year track record of investing across a variety of market environments and delivering attractive risk-adjusted returns to our investors. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter. With that, Operator, please open the line for questions.

Operator (participant)

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 any 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. We will take our first question from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Finian O'Shea (Director and Senior Equity Research Analyst)

Hey, everyone. Thanks. Good morning. Kort, I wanted to go to the beginning. You talked about spreads and the banks reacting, especially to the market. With all the capacity in non-traded BDCs, do you think that privates will be providing similar, if not lower, pricing than banks for some time? As a platform with a real institutional business in direct lending, does that impact your competitive position on deployment?

Kort Schnabel (CEO)

Yeah. Thanks, Finn, for the question. I mean, I think the first thing is we've already started to see some movement wider in overall yields between spread and fees in the last four weeks or so since the volatility started. I think that's one data point that shows that the market is already starting to move. I think you can look back at history also as some guide as to what we might be able to expect going forward. There were a lot of flows into non-traded BDCs back in 2022, and we entered into a period of volatility. Our market lags a little bit on the liquid markets, but we saw spreads obviously widen materially through that period as those flows began to change and as our market adjusted.

I think the effect of the flows into the private BDCs and overall kind of retail flows generally do not have a material effect on the overall market. Obviously, in the large cap end of the market, they can have some effect as that is where most of the competitors that are seeing those flows compete. As we have explained before, we originate across all different asset classes as well as in the non-sponsored universe and have a lot of different ways to source deals. I think we feel pretty good about our ability to outperform our competitors. I guess time will tell, but again, we have already started to see a little bit of widening just in the last few weeks.

Finian O'Shea (Director and Senior Equity Research Analyst)

Okay. A follow-up is, it sounds like you had done a lot of work on tariffs. Seeing if you could expand on the, if you could drill down on what you meant by exposed or impacted for the portfolio names, is that in the context of a percentage of EBITDA, for example, or any color you could give there?

Kort Schnabel (CEO)

Yeah. I mean, we essentially, first of all, we reached out to every single portfolio company, and we're in touch with them on a regular basis, obviously. It was not anything super unusual, but we did do the work to create a bottoms-up analysis and really try to understand, first and foremost, which companies import products and then, of those companies, which companies are importing products from high tariff countries. Obviously, that high tariff country data point moves around week to week. Based on what we see today, there is a mid-single-digit exposure, as we said in the prepared remarks, in our portfolio for those kinds of companies that are importing those products. We benefit from investing in and weighting toward domestic companies that are more service-oriented. That helped minimize that percentage. On the second part of your question, yeah, this is really important.

This is an exposure analysis, not an impact analysis. We do not know yet what the actual impact will be, but I'll just say we obviously went, we just went through a pretty significant supply chain disruption period coming out of COVID where we saw a lot of inflation and a lot of supply chain disruption. Our portfolio companies were able to pass on pricing and did pretty well through that. That is what we mean by exposure, not impact, is these companies could have ways to mitigate the exposure that they have and find ways to soften the effect. We just do not know how it is going to play out, but hopefully that helps and answers your question.

Finian O'Shea (Director and Senior Equity Research Analyst)

Yes. Thanks so much.

Operator (participant)

Thank you. Your next question comes from the line of Casey Alexander with Compass Point. Please go ahead.

Casey Alexander (Managing Director and Senior Equity Analyst)

Yeah. There's a lot here. I think that most people listening to this call would feel like you guys are more optimistic than we generally expect the rest of the industry to be, especially since the data points that we keep hearing is that private equity deal volume and M&A deal volume has grinded to a very low level. I am curious if there's a little more color. Also, what's the playbook going forward if the origination volume doesn't pick up? Do you slow down the ATM, and how do you manage your earnings against the rising cost of liabilities? I know you only have one more maturity this year, but you have another couple in early next year that are going to raise the cost of your liabilities. What's the playbook to manage all of those moving parts?

Kort Schnabel (CEO)

Yeah. Thanks, Casey. Definitely a few different questions in there.

I guess starting with deal flow, yeah, look, it's obviously we're going in an interesting time, and it's hard to predict. Again, I'll try to point to some data points of things that we've seen in the last four weeks, which is of all the processes that were kind of in the works and heading toward a conclusion when all of this volatility began and Liberation Day began, I'd say almost every single one of those processes continued to their conclusion and did not get pulled, i.e., the seller didn't decide not to sell or the buyers didn't walk. They got to signing, and I think that's a testament to the direct lending market being open and filling in for the banks, which kind of stepped back, and we were able to be there and allow those transactions to get to conclusion. Again, at somewhat wider spreads and fees.

I think we saw those deals as they approached their conclusion, at least in our portfolio and in our deals that we were working on, yields kind of improved by 25-50 basis points between spread and fee. That is at least some sign that deals are going to continue to get done. We obviously reported a pretty healthy backlog going into the quarter, so that provides, again, a little more tailwind. After that, as I said in the prepared remarks, it is a little bit uncertain, and it certainly could be the case that new processes do not get launched and people sort of take a pause. In that environment, we have sort of proven that we have lots of other ways to source transactions. Our existing portfolio kicks off a lot of opportunities.

Again, our non-sponsored efforts, refinancings of BSL transactions, I think could be a really interesting opportunity for us if that market remains volatile and shut. Again, we saw that back in 2022. We have just been through these kinds of periods before where deal flow might slow down, and we find ways still to do deals. I think that is my attempt to answer the first part of your question. I'm sorry, can you remind me the second part?

Casey Alexander (Managing Director and Senior Equity Analyst)

If the deal flow does not emerge, what is in the playbook? Slow down the ATM sales? How do you manage your earnings against rising cost of liabilities over the course of the next year? It is sort of step two of where step one gets you.

Kort Schnabel (CEO)

Yeah. Yeah. Look, I think we are going to see how this plays out.

Obviously, we still do have a fair amount of liabilities that are locked in for a longer period. That is not like that is all going to unwind at one time. I think you have to remember that there are natural offsets that occur in the market. Again, going back to our 20-year history here, we have seen in the past lots of periods of time where interest rates were near zero or deal flow slowed down. We have been able to, over that 20-year period, generate a pretty darn consistent ROE in the 9%-12% range. Today, we are around 10%. We have never really dipped below 9% over that 20-year period despite going through all different types of economic environments.

Historically, we've seen that when base rates fall, spreads widen, second lien opportunities become more available as the broadly syndicated market executes more on some of those lower-priced first lien deals. We obviously have been operating at a very low leverage ratio, below 1x, low end of our range. That's a lever that we could pull to help with the earnings profile. Ivy Hill is currently at a pretty low level in terms of our portfolio mix. We're around 6% or 7% today. We've been up above 10% before. I think Ivy Hill could see some interesting opportunities to grow. We obviously have a lot of spillover income as well that we can dip into. There are all these different factors. Again, it's hard to predict what's going to happen, but I think we feel good about our ability to manage through that environment.

Jim Miller (President)

I'll just add.

All right. What?

The environment we're in right now does lead to lower repayments, so our portfolio tends to stay in place, and that provides a lot of stability with a mature portfolio like we have. We're seeing less refinancings from the public markets as well. The combination of those things gives us a bit of a hedge in markets like this, which we've seen before.

Casey Alexander (Managing Director and Senior Equity Analyst)

Since that was a multi-pronged question, I'll stop there and not use my follow-up.

Operator (participant)

Thank you. Your next question comes from the line of Robert Dodd with Raymond James. Please go ahead.

Robert Dodd (Director, Specialty Finance)

Hi, guys. I appreciate the commentary on the potential tariff impact of importing goods. Have you done any analysis yet? I mean, I don't expect there'd be a lot of exposure going the other way, obviously, with retaliatory tariffs. I mean, as you say, services, not a lot of manufacturing and exporting. Have you done any analysis on that side to see if you have exposure to that kind of impact if those retaliatory tariffs do stick long-term?

Kort Schnabel (CEO)

Yeah. We've looked at that as well. As you said, it's very unclear as to how that's going to play out. We have minimal exposure as well on that front. I think it's interesting, right? Not only is there a potential risk factor, I guess, of exporting and retaliatory tariffs, there's also just multiple domino effects and spill-on effects of how this could play out, right? Second-order impacts, third-order impacts, what happens as inflation dampens consumer demand. Obviously, everybody's wondering, does this potentially tip us into a recession? I think all we can really do is look at our portfolio, try to quantify the first-order impacts, and we'll see how the rest plays out. I think what we come back to is just our conservative underwriting. Every time we underwrite any new deal, we're always looking at the supply chain. We're looking at supply concentration.

We're making sure that our companies don't have any material supply concentration. Obviously, we're always underwriting as if there's going to be a recession next year when we're running downside cases. We're credit investors. We're always worried about a recession all the time. We just kind of fall back on that, Robert, and our experience operating through prior periods of softness. Obviously, it'll be harder work if we do end up going through that kind of period, but we think we're prepared.

Robert Dodd (Director, Specialty Finance)

Got it. Thank you. I mean, just kind of follow-up, credit-related, but not tariffs. I mean, a few years back, the whole industry, not necessarily just your portfolio, but the whole industry went through kind of an issue with physician office roll-ups. Now, obviously, there's a lot of veterinary office roll-ups across the industry as well, and one of them obviously was put on non-accrual this quarter. Is this the beginning of a cycle of that same kind of problem that the issues have moved, and now it's the veterinary office roll-ups, and we're going to see a lot more problems in that sector? What are your thoughts there? Because obviously, you put Thrive or Jedi or whatever we want to call it on non-accrual this quarter.

Kort Schnabel (CEO)

Yeah. Yeah. Probably, Robert, I don't know if I can help you too much on forward outlook on what that's going to be. I guess all I would say in terms of our portfolio and our exposure to that is it's really minimal. We have less than 2% of our portfolio is in physician practice management businesses. That includes vets. So we really just don't have a lot of exposure to that part of the market. I probably just won't venture a guess as to what happens to the future of the veterinary space.

Robert Dodd (Director, Specialty Finance)

Got it. Thank you. Worth a try.

Operator (participant)

Thank you. Your next question comes from the line of Melissa Wedel with JPMorgan. Please go ahead.

Melissa Wedel (VP, U.S. Equities Research)

Good afternoon. Thanks for taking my question. A lot of mine have been answered already, but I wanted to follow up on a comment made during the prepared remarks about, again, around assessing the exposure, direct exposure to tariffs, but then that not including mitigating factors that companies could implement. You also made the comment that you're ready to respond quickly in those situations. Can you just elaborate on that a little bit? What does that look like? Is that restructuring? Is that something else?

Kort Schnabel (CEO)

Yeah. The response, you're asking if that impact does come through?

Melissa Wedel (VP, U.S. Equities Research)

Yes.

Kort Schnabel (CEO)

Yeah. Look, I think that just comes back to our playbook that we employ when portfolio companies aren't going according to plan, whether it's tariff-related or related to any other reason. What we do in that situation is obviously we are proactive, as I already said, in terms of getting ahead of the situation. We're in dialogue with those mid-single companies that are potentially exposed to tariffs. We're having conversations with them now about what they're planning to do, what their liquidity forecast looks like, how well-funded are they. Obviously, we're in dialogue with the owners of those companies, which mainly are private equity firms that we've been doing business with for a long time, and preparing for what we need to do. Our actions can take many forms, but generally, we look to help be part of the solution.

The first thing we say is, if you're the owner of the business, we expect you to contribute. If our private equity partners step up and provide liquidity, then we will help be part of that solution by offering to pick a portion of our interest for a short period of time in exchange for a premium and in exchange for that capital contribution to help these companies get through these types of periods. We did that during COVID very successfully. We saw lots of equity contributions come into our portfolio companies. Yes, we did pick interests. Our pick exposure went up for a short period of time, but that has all come down. Again, we weathered through that storm pretty darn well. That is step one in the playbook.

If the private equity owner or any owner of the business is not willing to step up, then yes, we are not afraid to own a business if we need to. We have the capabilities. We have got the portfolio management expertise. Owning businesses through those kinds of cycles has actually produced a lot of gains for us over a long period of time. We are not afraid to roll up our sleeves and do that if we need to.

Melissa Wedel (VP, U.S. Equities Research)

I appreciate that. Thanks for going into detail there. I would agree with an earlier comment that was made about a sizable backlog into Q2, and the amount of activity seems to be pretty robust despite a more uncertain environment. Given the uncertainty around tariff policy, which I assume is what's driving slower decision-making from borrowers, I guess, one, I want to clarify if it's primarily tariff policy or if you're hearing any other consternation from borrowers about moving forward with capital allocation projects. Also, on that sizable backlog, do you think there's maybe an incremental degree of uncertainty on how much of that will close just because of this elevated volatility that we're in right now? Thank you.

Kort Schnabel (CEO)

Yeah. Look, it's hard not to say that there could be some of those deals in the backlog that might fall away. Again, I was pointing in an earlier question to the fact that at least in the last four weeks, the deals that we're building to conclusion have moved forward. That does not mean that things are not going to change. Again, I have to admit that if you're an owner of a business and contemplating a sale process now, starting a sale process now, you're probably going to think twice maybe before launching a new process. It stands to reason that we could see a little bit of a slowdown, and there might be a little bit of a lag effect to your point because there is a backlog that's already in place. Really hard to predict. There's so much uncertainty right now.

I think all we can do is kind of point to what we're seeing in the last four weeks and try to draw some conclusions about what we're going to see in the future.

Jim Miller (President)

One more thing. The predictability, though, that you do have is that in these markets, in these moments, private capital tends to be a great solution. While we do expect to see lower M&A volume, we do also anticipate that we'll get a bigger percentage of the pie because it just is a better solution at these moments in time. We do think there will be deal volume that comes through, and we think we're really well-positioned to take advantage of those deals.

Kort Schnabel (CEO)

Yeah. In an uncertain environment, the value of our capital, which is certain, comes with certainty, goes up. That is why we are already starting to see a little bit of spread widening. Melissa, I think there was another part of your question. I apologize. I did not answer it.

Melissa Wedel (VP, U.S. Equities Research)

Oh, I snuck in a little one there. I think there's a general assumption that uncertainty and the decision to, or maybe the propensity to delay capital allocation decisions right now has to do with tariff uncertainty. I just was curious if you're hearing anything beyond that, any broader macro concerns from your borrowers. Thanks.

Kort Schnabel (CEO)

Yeah. Most of it is around the tariffs. It is probably a little early to say. It stands to reason, obviously, given recession risk is higher, that you might see some other companies hold off on capital spending. I think it is just a little early for us to say that we are seeing any kind of real trend there yet, though.

Operator (participant)

Thank you. Your next question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead.

Kenneth Lee (VP and Senior Equity Analyst)

Hey, good afternoon. Thanks for taking my question. One on some of the newer deals, newer investments you're seeing more recently, it sounds like they're still focused for the more core and middle markets kind of deals. Are you seeing perhaps more attractive opportunities in the larger-sized upper market segments more recently given the volatility? Thanks.

Kort Schnabel (CEO)

We are. Yes, for sure. Again, I think looking back historically, that's what we saw in 2022 and 2023, is that market got a little more attractive. Again, we talk about this a lot, but that's what we feel is one of the biggest advantages of our broad sourcing network and all the relationships that we've built over 20 years is that we can pivot when different pockets of the market become more attractive. You saw us move up into larger deals in 2022 and 2023. In the last four to six quarters, we averaged down a little bit, still doing larger deals where there's attractive opportunities, but walking away from some of those deals a little bit more and moving a little bit more down market.

It is early, but we are already starting to absolutely see some of those larger deals come to the way of the private credit market. I am hopeful that you will see some nice announcements from us coming forward on some of those deals.

Kenneth Lee (VP and Senior Equity Analyst)

Gotcha. Very helpful there. Just one follow-up, if I may, just on the liability side there. You've continued to optimize financing there, tightening spreads on some of the facilities. Wondering if there's still some further opportunities over the near term to continue to optimize the financing side there. Thanks.

Kort Schnabel (CEO)

Yeah. I mean, I think we saw us do that during the quarter and then post-quarter end. We're working hard to get those costs down as quickly as we can. Our largest corporate facility is now over 20 basis points cheaper than it was before. Certainly trying to be as efficient as possible on the liability side. Unfortunately, you have seen bond spreads recently widen, but it's good to have the diversity of sources that we have and having the secured side remain pretty efficient.

Kenneth Lee (VP and Senior Equity Analyst)

Gotcha. Very helpful there. Thanks again.

Operator (participant)

Thank you. Your next question comes from the line of Doug Harter with UBS. Please go ahead.

Doug Harter (Equity Research Analyst)

Thanks. Just on the unrealized marks in the quarter, can you talk about whether those were kind of broad-based or more asset-specific that led to the marks?

Kort Schnabel (CEO)

Yeah. The latter, a little more asset-specific. Again, not really anything that is drawing any kind of trend that we can identify, just a little more esoteric one-off.

Doug Harter (Equity Research Analyst)

Great. The dividend income you received this quarter was down from the fourth. Anything to note on that?

Kort Schnabel (CEO)

Yeah. There was a special dividend from Ivy Hill in the fourth quarter that actually contributed about a penny of earnings per share for us in the fourth quarter. That was just a one-time special dividend, so that did not reoccur this quarter. We did have a slight increase in the regular dividend from Ivy Hill from the fourth quarter to this quarter, but that's the answer.

Doug Harter (Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. Your next question comes from the line of Mark Hughes with Truist. Please go ahead.

Mark Hughes (Equity Analyst)

Yeah. Thank you. Good afternoon. The backlog.

Kort Schnabel (CEO)

Good afternoon.

Mark Hughes (Equity Analyst)

I think you mentioned that 40% of the backlog was from incumbents. Is that typical? Will that then translate into, say, your I think this quarter you did 60% with existing borrowers when you get to the end of the line, or is 40% different than the norm?

Kort Schnabel (CEO)

It's right around the average here. Obviously, it depends on the year, depends on the market. But over a fairly long period of time, we're usually around 50% of new commitments going into existing borrowers. And again, it can bounce around a little bit. When M&A slows down a little bit, we have moved up to 60%-70%. So nothing unusual.

Mark Hughes (Equity Analyst)

Yeah. Does the 40%—I guess you've given the backlog number, but that maybe seems to imply more new borrowers in the backlog.

Kort Schnabel (CEO)

That does imply that.

Mark Hughes (Equity Analyst)

Yeah. Okay. You'd also mentioned the potential for realized gains in coming quarters to help boost NAV. Is that based on some visibility that you've got? Your pipeline that you can see on that front is more favorable, or is that just a general comment?

Kort Schnabel (CEO)

Yeah. I wouldn't say it would necessarily boost NAV because we're going to have to mark our portfolio to fair value. I think there's a couple of names, and you're seeing the value have gone up. As those realize, that would get added to our taxable income and our realizable spillover income.

Mark Hughes (Equity Analyst)

Fair enough. Is that, like I say, is there more potential for that, more visibility, or again, was that a general comment?

Kort Schnabel (CEO)

Yeah. I mean, we can't comment on specific transactions, but I think there's a couple you're probably seeing the pattern of it going up over time. Our hope is that a couple of those can get realized this year.

Mark Hughes (Equity Analyst)

Understood. Thank you very much.

Operator (participant)

Thank you. Your next question comes from the line of Sean-Paul Adams with B. Riley Securities. Please go ahead.

Sean-Paul Adams (Research Analyst)

Hey, guys. Good afternoon. Touching on non-accruals, I know we've beat kind of the topic to death, but the feedback that you received from portfolio companies, existing non-accruals, and also your analysis on kind of tariff exposure, can you touch on if you're seeing any thematic patterns in portfolio stress or sectors or industries that have just proactively had outreach and dialogue?

Kort Schnabel (CEO)

Yeah. I appreciate the question. It's something we're always looking for and trying to draw conclusions around trends to inform our behavior around new investing. Unfortunately, there's just nothing that we're really seeing yet that we can comment on that we can draw any conclusions around there being a trend. We'll just have to kind of wait and see, but we can keep talking about that in future quarters.

Sean-Paul Adams (Research Analyst)

Got it. Thank you for the call.

Operator (participant)

Thank you. Your next question comes from the line of Brian McKenna with Citizens. Please go ahead.

Brian McKenna (Director of Equity Research)

Great. Thanks. You noted that during periods of volatility, the team is more inward-focused on the existing portfolio. Looking back over the past two decades, during these periods of volatility, how long on average is the team inward-focused before shifting more of the focus to new investment opportunities? I'm just trying to get a sense of the trajectory of new originations from here. Are there any signs we should be looking for from the outside to indicate a pickup in related activity could be coming?

Kort Schnabel (CEO)

Yeah. I do not know if maybe it was a little misleading in the prepared remarks. It is not like we are only focused inward for weeks at a time and then shifting to origination. I was sort of just giving an order of all the different things that we do during these periods. We, thankfully, given the size of our team and the experience of our team, are able to do all of it at the same time. We are looking at the existing portfolio, utilizing our portfolio management team as well as the deal teams, and at the same time, out-originating new transactions. It is not like it is really one or the other.

Brian McKenna (Director of Equity Research)

Okay. Got it. That's helpful. Just maybe more of a modeling question. Any color on structuring service fees thus far in April? Any way to think about these in the second quarter based on everything that we know today?

Kort Schnabel (CEO)

Can't really comment, I don't think, on what we're seeing in the recent quarter. There hasn't been anything that's changed a lot. I guess I already did say yields on new investments that have come to fruition and signing in the last four weeks, overall yields are up 25-50 basis points. That is a mix of both spread and fee. It just depends on the deal and the nature of the transaction. Sometimes you get a little bit more in fee. Sometimes you get a little bit more in spreads. Sometimes you get a little bit of both. I guess I'd say there's been a slight movement for the better on fees in the last four weeks, but we'll have to just see.

Again, looking at the past as a guide, when we go into periods of volatility, and again, looking back at the most recent period, 2022 and 2023, we saw fees move materially wider. Again, past does not always predict the future, but that has been what we have seen in the past.

Brian McKenna (Director of Equity Research)

All right. I'll leave it there. Helpful.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press the star and one on your telephone keypad now. Your next question comes from the line of Finian O'Shea with Wells Fargo Securities. Please go ahead.

Finian O'Shea (Director and Senior Equity Research Analyst)

Hey, everyone. Thanks for the follow-up. I want to go back to a few times in the remarks you guys mentioned seemingly relying on spillover. Seeing if you could expand on that and if you expect to go below the dividend this year and how, I guess, eventually what the drivers would be to come back, let's say, at today's curve, come back at coverage that is. Thank you.

Kort Schnabel (CEO)

Yeah. No, I don't think we meant to imply that we're going to go below the dividend on core and dip into the spillover this year. I think we were mentioning the amount of spillover to just give comfort that there's an additional lever that we have there to the extent that that does occur. It's not our expectation. We feel good about the dividend, Finn. It's funny when we raised the dividend to $0.48, we were earning core in the mid-60s, and people were asking us why we didn't raise the dividend more than $0.48. We didn't do it because we knew that rates were pretty elevated and there was some excess spread in the market given the dislocation, and that that was likely going to correct. We have just kind of seen that happen as we sort of expected.

Yields have come down, and we're now back into what I would say is a more normalized environment where we have a little bit of cushion, but not as much. It was nice and comfortable to operate with all that cushion, but that isn't the norm, right? I would just say we're back kind of in the norm now. As I already talked about before, there are all these different offsets that occur if rates do decline in the future. There are countervailing factors that also help us in that type of environment. We feel good about the dividend for the foreseeable future.

Finian O'Shea (Director and Senior Equity Research Analyst)

Okay. Thanks so much.

Operator (participant)

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.

Kort Schnabel (CEO)

No closing remarks. Thanks, everybody, for the questions and engagement. Talk to you next quarter.