Ares Capital's Earnings Slip as Non-Accrual Loans Climb
Ares Capital reported GAAP earnings of $0.24 a share for the second quarter, less than half the $0.52 a share it posted a year earlier, as unrealized losses widened and problem loans crept higher.
Ares Capital (ARCC) reported second-quarter GAAP net income of $0.24 a share, down 54% from $0.52 a share a year earlier. The decline traced to a swing in the portfolio's mark-to-market performance: the company recorded $183 million in net unrealized losses in the quarter, compared with $15 million in net unrealized losses a year ago.
Core earnings per share, which strips out realized and unrealized gains and losses, told a milder story. That measure fell to $0.47 from $0.50, a 6% decline, while net investment income actually rose to $359 million, or $0.50 a share, from $342 million, or $0.49 a share, a year earlier. The gap between the GAAP and core figures pointed to portfolio marks, not operating income, as the source of the quarter's headline weakness.
Net asset value per share fell to $19.35 from $19.94 at the end of 2024, a 3.0% decline, and total stockholders' equity dropped to $13,891 million from $14,318 million. Leverage rose modestly alongside the shrinking equity base, with the debt-to-equity ratio climbing to 1.15x from 1.12x at year-end, or 1.12x from 1.08x net of available cash. Total assets fell to $30,498 million from $31,235 million, and cash on hand dropped to $383 million from $638 million.
Credit quality showed signs of strain. Non-accrual loans rose to 2.4% of investments at amortized cost as of June 30, up from 1.8% at the end of 2024, even as management described problem assets as historically low. Net realized results also swung negative, a $5 million loss in the quarter versus a $34 million gain a year earlier.
The portfolio itself contracted on a net basis for the first time in the comparison: exits of $2,915 million outpaced $2,592 million in new commitments during the quarter, a reversal from a year earlier when $2,573 million in new commitments exceeded $1,963 million in exits. New commitment yields fell sharply as the quarter progressed, with debt securities funded at 9.4% at amortized cost in the second quarter, versus a stub-period rate of 10.2% reported for the first 23 days of July. New commitment volume also slowed to roughly $244 million in that July stub period, compared with about $2.6 billion for the full second quarter, suggesting a pullback in deployment pace heading into the third quarter. The asset mix shifted as well, with first-lien senior secured loans falling to 59% of fair value from 61% and the company's stake in Ivy Hill Asset Management rising to 10% from 8%.
Ares Capital continued to manage its balance sheet actively during the quarter. It launched the BDC sector's first commercial paper program, established in June for up to $1.0 billion, a facility first disclosed in a standalone press release and now expanded upon in the quarterly filing. The company also upsized its revolving credit facility to roughly $5.5 billion from $5.3 billion, repriced it by dropping a 0.10% credit spread adjustment, and extended maturities to 2030 and 2031 for electing lenders. In May, it issued $800 million of unsecured notes at 5.550% due January 2030, paired with an interest rate swap converting the coupon to a floating rate of SOFR plus 1.6995%. In July, the company repaid $1,000 million of 2.150% unsecured notes in full at maturity and closed a new $708.7 million CLO refinancing extending maturities to 2038.
Ares Capital declared a third-quarter 2025 dividend of $0.48 a share, unchanged from the second-quarter payout made on June 30, marking what management called the 17th consecutive year of stable or increasing dividends. The flat payout came even as net asset value declined and new-money yields showed signs of compression heading into the third quarter.