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ARES CAPITAL CORP (ARCC)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 GAAP EPS was $0.55; Core EPS was $0.55, down sequentially on lower portfolio yields as base rates fell 30–50 bps during the quarter and first‑lien mix increased .
  • Total investment income rose to $759M, up year over year, while net investment income was $359M ($0.55/share), comfortably covering the $0.48 dividend; NAV per share reached a record $19.89, the eighth consecutive quarter of NAV growth .
  • Balance sheet and funding strengthened: S&P upgraded ARCC to BBB (Moody’s to Baa2), $1.0B 2032 notes issued at 5.800% and swapped to SOFR+170 bps; total available liquidity ~$6.7B pro forma .
  • Origination was robust: Q4 gross commitments $3.75B; first‑lien exposure increased to 57% (from 53% in Q3 and 44% a year ago); non‑accruals ticked up modestly to 1.7% of cost (1.0% FV) but remain below long‑term averages .
  • Wall Street consensus (S&P Global) was unavailable at time of analysis due to provider limits; estimate comparison could not be completed.*

What Went Well and What Went Wrong

What Went Well

  • Record NAV per share ($19.89), marking eight straight quarters of growth; management emphasized stable credit performance and a record investing year supporting book value .
    “We concluded another successful year … stable credit performance and a record year of investing supported strong earnings and further growth in book value per share.” — Kipp deVeer .
  • Funding costs and ratings improved: upgrades by S&P (BBB) and Moody’s (Baa2), and $1.0B notes at 5.800% swapped to SOFR+170 bps; ARCC highlighted best‑in‑class funding dynamics .
  • Strong origination and incumbent share: Q4 gross commitments $3.75B; ~70% of 2024 new commitments were to existing borrowers; top‑10 incumbent financing share more than doubled across the last three quarters .

What Went Wrong

  • Earnings pressure from rate moves: Core EPS declined sequentially ($0.55 vs $0.58 in Q3) as portfolio yields fell due to base rate declines and mix shift to more first‑lien loans; management noted a one‑quarter lag effect on interest income .
  • Spreads compressed 100–150 bps through 2024; fees under pressure, particularly with greater emphasis on incumbent borrowers (lower upfront fees) .
  • Non‑accruals increased modestly to 1.7% of cost (1.0% FV) vs 1.3% (0.6% FV) prior quarter/year; still below ARCC’s ~2.8% long‑term average and BDC historical average, but a negative datapoint .

Financial Results

Income Statement Metrics (Total Investment Income treated as “Revenue” for BDCs)

MetricQ4 2023Q2 2024Q3 2024Q4 2024
Total Investment Income ($USD Millions)$707 $755 $775 $759
Net Investment Income ($USD Millions)$345 $358 $361 $359
GAAP EPS ($)$0.72 $0.52 $0.62 $0.55
Core EPS ($)$0.63 $0.61 $0.58 $0.55

Capital & Portfolio KPIs

KPIQ4 2023Q3 2024Q4 2024
NAV per Share ($)$19.24 $19.77 $19.89
Portfolio Investments at Fair Value ($USD Billions)$22.874 $25.918 $26.720
Debt/Equity (x)1.07x 1.06x 1.03x
Debt/Equity, Net of Cash (x)1.02x 1.03x 0.99x
Non‑Accruals (% of Cost / % of Fair Value)1.3% / 0.6% 1.3% / 0.6% 1.7% / 1.0%
Weighted Avg Yield on Debt & Other Income (Amortized Cost)12.5% 11.7% 11.1%

Asset Class Mix (% of Portfolio Fair Value)

Asset ClassQ4 2023Q3 2024Q4 2024
First Lien Senior Secured Loans44% 53% 57%
Second Lien Senior Secured Loans16% 11% 7%
SDLP Subordinated Certificates6% 5% 5%
Senior Subordinated Loans5% 5% 5%
Preferred Equity11% 10% 10%
Ivy Hill Asset Management (IHAM)9% 7% 7%
Other Equity9% 9% 9%

Consensus vs Actual (Q4 2024)

MetricActualConsensus (S&P Global)Surprise
GAAP EPS ($)$0.55 N/A*N/A
Core EPS ($)$0.55 N/A*N/A
Total Investment Income ($USD Millions)$759 N/A*N/A

*Estimates unavailable; S&P Global request limit prevented retrieval.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Regular Dividend per Share ($)Q1 2025$0.48 (Q4 2024) $0.48 Maintained
Taxable Income SpilloverFY 2025Not previously disclosed$922M ($1.37/share) New disclosure
Stock Repurchase ProgramThrough Feb 2026Expires Feb 15, 2025 [implicit prior]Extended to Feb 15, 2026; capacity up to $1.0B below NAV thresholds Extended
Leverage Target (Qualitative)2025~1.0x net debt/equity run-rate [context]Desire to run leverage higher to offset lower rates/spreads Indicated higher
Funding Cost Outlook2025Prior investment‑grade profileUpgrades (S&P BBB; Moody’s Baa2); $1.0B notes at 5.800% swapped to SOFR+170 bps Improved

Dividends: ARCC reiterated a history of 15+ years of stable/growing regular dividends .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2024, Q3 2024)Current Period (Q4 2024)Trend
Portfolio Yields/Base RatesQ2: 12.2% at cost; Q3: 11.7% at cost 11.1% at cost; base rates down ~30–50 bps; one‑quarter lag to NII Declining yields; pressure easing if rates stabilize
SpreadsNoted compression vs 2023 Compression of 100–150 bps through 2024; plateauing into Q1 Compressed, stabilizing
Origination/M&AQ2/Q3 gross commitments $3.86B/$3.92B; backlog grew Q4 gross commitments $3.75B; Jan’25 $1.2B commitments; backlog $1.8B Activity healthy; pipeline building
Credit Quality/Non‑AccrualsQ2/Q3 non‑accrual cost 1.5%/1.3% 1.7% cost (1.0% FV), still below historical averages; LTV 44%; coverage 1.9x Slight uptick, still strong
Balance Sheet & RatingsInvestment‑grade enhancements Q3; ATM issuances S&P upgrade to BBB; Moody’s to Baa2; $1.0B notes; liquidity ~$6.7B Improved funding profile
Dividend CapacityStable dividend history Spillover $922M ($1.37/share) supports visibility Strong coverage
Tariffs/RegulatoryNot highlighted in Q2/Q3Analysis shows minimal portfolio exposure; monitoring policy changes Watchful, limited impact
Fees/IncumbencyStructuring fees strong in Q2; incumbency rising Upfront fees under pressure with incumbents; fees trending lower Downward pressure
Sector Exposure (Sports/Media)Not a highlight~$200M Dolphins asset investment via SME franchise; diversified asset base Strategic niche exposure

Management Commentary

  • Strategy and positioning: “We are positioned with significant available capital that should benefit us as we look for an increase in activity in 2025.” — Kort Schnabel .
  • Earnings drivers: “Our decline in core earnings was largely driven by the impact of the decline in yields… base rates… were nearly 100 basis points lower than… at the end of 2023.” — Scott Lem .
  • Funding strength: “We opened the new year with a $1 billion unsecured note issuance… all‑in coupon of 5.8%… swapped to SOFR + 170 bps… nearly $6.7 billion of total available liquidity.” — Scott Lem .
  • Credit quality: “Our nonaccrual rates continue to be below our own and peer group historical averages… LTM EBITDA growth rate… reached 11% in the fourth quarter.” — Kort Schnabel .
  • Dividend stability: “ARCC has been paying stable or increasing regular quarterly dividends for over 15 consecutive years… taxable income spillover… $922 million or $1.37 per share.” — Scott Lem .

Q&A Highlights

  • Activity cadence and mix: Q4 activity “kind of flat versus the third quarter”; election timing pushed some closings; continued tilt toward first‑lien, with selective junior exposure and sensitivity to PIK income .
  • Leverage and capital raises: Management would like leverage higher as a counterweight to lower rates/spreads; Q4 ATM issuance was sizable and accretive; equity raising to be assessed based on earnings/leverage .
  • Spreads and fees: Spreads compressed 100–150 bps in 2024 and appear to have plateaued; fees trending lower given incumbency emphasis .
  • Dividend capacity: No special dividend this year; prefer to reserve spillover and reassess in 12 months .
  • Portfolio specifics: Ivy Hill paid a $10M special dividend; base dividend increased; sports/media exposure includes a ~$200M Dolphins‑related asset set with diversified components (stadium, real estate, F1, tennis) .

Estimates Context

  • S&P Global Wall Street consensus for Q4 2024 was unavailable due to provider limits; as a result, we cannot quantify beats/misses versus consensus at this time.*
  • Given the available data, ARCC’s $0.55 GAAP/Core EPS covered the $0.48 dividend, supported by strong net investment income and sizable taxable spillover .

Key Takeaways for Investors

  • Dividend visibility is high: $0.48 quarterly dividend covered by Q4 Core EPS and supported by ~$922M spillover ($1.37/share) .
  • Record NAV per share and eight consecutive quarters of growth underscore credit performance and origination strength; asset mix shifted toward first‑lien, lowering risk .
  • Earnings headwind from lower base rates and compressed spreads appears to be stabilizing; management can offset via higher leverage and robust deployment pipeline/backlog .
  • Funding and ratings upgrades reduce cost of capital and expand flexibility; $1.0B 2032 notes priced favorably and swapped to floating .
  • Credit quality remains resilient: non‑accruals modestly higher but below long‑term average; portfolio interest coverage 1.9x and LTV 44% provide downside protection .
  • Origination momentum: Q4 commitments $3.75B; January 2025 commitments $1.2B; increasing share with incumbents supports fee‑adjusted returns and deployment .
  • Tactical exposures (e.g., sports/media assets via SME franchise) are small relative to portfolio size but can add differentiated return streams .

Citations:
All numeric and quoted information is sourced from ARCC’s 8‑K and press releases and its Q4 2024 earnings call transcript: .

*Estimates unavailable; S&P Global request limit prevented retrieval.