Sign in
AC

ARES CAPITAL CORP (ARCC)·Q1 2025 Earnings Summary

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 .

Financial Results

MetricQ3 2024Q4 2024Q1 2025
Total Investment Income (Revenue, $M)$775 $759 $732
Net Investment Income ($M)$361 $359 $365
NII per Share ($)$0.57 $0.55 $0.54
GAAP EPS ($)$0.62 $0.55 $0.36
Core EPS ($)$0.58 $0.55 $0.50
Dividends Declared ($/share)$0.48 $0.48 $0.48
Portfolio Investments at Fair Value ($B)$25.918 $26.720 $27.130
NAV per Share ($)$19.77 $19.89 $19.82
Debt/Equity (x)1.06x 1.03x 1.02x
Net Debt/Equity (x)1.03x 0.99x 0.98x

Actual vs Consensus (Q1 2025):

MetricConsensusActualSurprise
EPS (Primary/Normalized)$0.536*$0.50 Miss ($0.036)*
Revenue ($M)$769.9M*$732M Miss ($37.9M)*
# of EPS Estimates12*——
# of Revenue Estimates10*——

Values retrieved from S&P Global.

KPIs and Credit Quality:

KPIQ3 2024Q4 2024Q1 2025
Weighted Avg Yield on Debt & Other Income Producing (Amortized Cost)11.7% 11.1% 11.0%
Weighted Avg Yield on Total Investments (Amortized Cost)10.7% 10.0% 9.9%
Nonaccruals (% of amortized cost / fair value)1.3% / 0.6% 1.7% / 1.0% 1.5% / 0.9%
Number of Portfolio Companies535 550 566
Portfolio Weighted-Average Grade (FV)3.1 3.1 3.1

Segment (Asset Class) Composition at Fair Value:

Asset ClassQ4 2024Q1 2025
First Lien Senior Secured Loans57% 58%
Second Lien Senior Secured Loans7% 6%
SDLP Subordinated Certificates5% 4%
Senior Subordinated Loans5% 5%
Preferred Equity10% 10%
Ivy Hill Asset Management (IHAM)7% 7%
Other Equity9% 10%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Regular Dividend ($/share)Q2 2025$0.48 (Q1 2025 declared) $0.48 Maintained
Interest Income OutlookQ2 2025N/A“Should see more stable levels of interest income” Qualitative improvement
Liquidity AvailabilityPost Q1 2025~$5.1B facility availability at 12/31/24 ~$6.8B total available liquidity; revolver upsized to $5.3B, spreads tightened >20 bps Improved
Net Debt/Equity TargetOngoingOperating near low end of range Below 1x; 0.98x at Q1 Maintained conservative posture

Dividends: Q1 2025 dividend paid $0.48/share on Mar 31; Q2 2025 dividend declared $0.48/share payable Jun 30 .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2024 and Q4 2024)Current Period (Q1 2025)Trend
Macro/Capital Markets VolatilityStrong activity, improved investment-grade profile; robust originations Banks risk‑off; syndicated spreads widened; direct lending gaining share Volatility up; private credit share increasing
Spreads/YieldsWeighted yields eased from Q3 to Q4 (11.7% → 11.1%) Yields stabilized into Q1 end; expecting stable interest income in Q2 Stabilizing after decline
Credit Quality/NonaccrualsNonaccruals 1.3% cost in Q3; 1.7% in Q4 Nonaccruals improved to 1.5% cost; grade 1–2 names at 2.8% (low since 2010) Improving
Tariffs/PolicyNot highlighted in prior PRsBottoms‑up exposure analysis; mid‑single‑digit direct exposure; mitigants in place New monitoring focus
Liquidity/LeverageAmended facilities; share issuance; liquidity $4.5–$5.1B available Liquidity ~$6.8B; revolver upsized to $5.3B; net leverage <1x Strengthened
Dividend Policy/SpilloverStable $0.48 dividend; long track record $0.48 declared for Q2; spillover ~$883M ($1.29/share) supports stability Maintained with strong coverage

Management Commentary

  • Strategic positioning: “We are entering today’s market environment with a significant amount of available capital totaling nearly $6.8 billion… net debt‑to‑equity… below 1x.” — Kort Schnabel .
  • Earnings trajectory: “We should see more stable levels of interest income for this coming second quarter.” — Scott Lem .
  • Market share opportunity: “Direct lending… remained open and continues to exhibit greater stability than the liquid markets… transactions… explore private credit solutions.” — Kort Schnabel .
  • Dividend durability: “63rd consecutive quarter of delivering stable or increasing regular quarterly dividends… confident we can continue to support a steady dividend level… significant undistributed spillover income.” — Kort Schnabel .

Q&A Highlights

  • Pricing and competition: Management already seeing 25–50 bps widening in yields (spread + fees) over the last four weeks; expects private credit to capture more large‑cap deals as volatility persists .
  • Tariff exposure: Bottom‑up analysis indicates mid‑single‑digit direct exposure; characterized as exposure not impact, with potential mitigants (pricing adjustments, supply chain shifts) .
  • Origination/backlog: Backlog $2.6B as of Apr 24; while some deals may fall away amid uncertainty, private capital’s certainty improves its value and share of the pie .
  • Liability optimization: Reduced facility spreads and extended maturities; bond spreads widened recently but diversified funding provides flexibility .
  • Dividend coverage: Management does not expect to dip below the dividend; spillover is a lever if needed; today’s environment reduces repayments and supports portfolio stability .

Estimates Context

  • Q1 2025 results vs S&P Global consensus: EPS $0.50 vs $0.536* (miss); revenue $732M vs $769.9M* (miss). Values retrieved from S&P Global.
  • Implications: Sequential yield declines from late‑2024 were primary driver of the earnings change; with yields stabilizing into Q1 end, management expects more stable interest income in Q2, which may temper further estimate cuts. Conversely, wider spreads/fees on new originations could support revenue/NII over subsequent quarters as deployment converts backlog to assets .

Key Takeaways for Investors

  • Near‑term: Earnings softness vs consensus was driven by lagged yield declines; management expects stabilization in Q2 interest income, reducing downside risk to near‑term EPS .
  • Credit quality: Nonaccruals and lower‑risk ratings improved; broad diversification (566 companies, avg position <0.2%) mitigates idiosyncratic risk .
  • Deployment alpha: $3.5B Q1 commitments and a $2.6B backlog position ARCC to benefit from widening spreads/fees as private credit displaces banks; expect attractive new loan economics .
  • Dividend durability: Q2 dividend maintained at $0.48; $883M ($1.29/share) spillover and sub‑1x net leverage support payout stability through volatility .
  • Balance sheet strength: Upsized $5.3B revolver, spread reductions, and diversified funding sources lower liability costs and enhance liquidity optionality (~$6.8B) .
  • Watchlist risks: Tariff policy path and macro uncertainty could slow M&A; some backlog attrition is possible, but private capital’s certainty increases share capture .
  • Medium‑term thesis: Scale, incumbent relationships, flexible mandate across capital structure, and disciplined underwriting in service‑oriented domestic sectors underpin resilient ROE and NAV stability through cycles .
Notes: All consensus estimate figures marked with * are Values retrieved from S&P Global.