Ares Capital (ARCC) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary highlights strong financial performance, a robust market strategy, and a commitment to shareholder returns, with record high transaction volumes and a healthy investment pipeline. The Q&A section supports this with positive sentiment from analysts, minimal risks from AI, and strategic positioning in the software sector. While some uncertainties remain, such as market volatility and share repurchase plans, the overall outlook and optimistic guidance suggest a positive stock price movement.
Key Financial Performance
Core Earnings Per Share (EPS) $0.50 for Q4 2025 and $2.01 for the full year, fully covering dividends and driving an ROE in excess of 10% for both the quarter and the year. The year-over-year decrease in core EPS (from $2.33 in 2024 to $2.01 in 2025) was driven by a decline in base rates.
Net Asset Value (NAV) Per Share $19.94 at the end of 2025, up 0.25% from the prior year. This reflects modest growth in NAV per share.
Gross Originations $15.8 billion in 2025, a record for the company, supported by a rebound in transaction activity in the second half of the year and the expansion of specialized industry verticals.
Portfolio at Fair Value $29.5 billion at the end of Q4 2025, a 10% increase from the prior year, driven by strong origination activity and portfolio growth.
Nonaccruals at Cost 1.8% at the end of 2025, consistent with prior year levels and below the historical average of 2.8%, indicating stable credit quality.
Weighted Average Portfolio Leverage Decreased by approximately 0.25 turn of EBITDA from the prior year, reflecting improved portfolio fundamentals.
Interest Coverage Ratio Improved to 2.2x in 2025, driven by lower market interest rates and earnings growth.
Net Realized Gains on Investments Over $100 million in 2025, including $470 million of gross gains from equity co-investments, with an average IRR in excess of 25%.
Debt Commitments $4.5 billion in new gross debt commitments in 2025, a record for the company, supported by strong execution across multiple funding channels.
GAAP Net Income Per Share $0.41 for Q4 2025 and $1.86 for the full year, compared to $0.55 and $2.44, respectively, in 2024. The decline was attributed to lower base rates and other market conditions.
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Operating Highlights
New Investment Commitments: ARCC added more than 100 new borrowers to its portfolio in 2025, setting a new record. The company originated $15.8 billion in new commitments, marking a record year.
Specialized Industry Verticals: ARCC expanded its specialized industry verticals, including sports, media, entertainment, specialty health, healthcare, energy, software, consumer, and financial services. Nonsponsored originations grew by more than 50% in 2025.
Market Share Gains: ARCC doubled its share of financing in its top 10 incumbent transactions in 2025, reflecting market share gains.
M&A and LBO Market Activity: The M&A and LBO markets gained momentum in the second half of 2025, contributing to increased transaction activity and new borrowers.
Portfolio Growth: ARCC's portfolio grew to $29.5 billion at fair value, a 10% increase from the prior year, with 603 borrowers.
Credit Quality: Nonaccruals at cost remained stable at 1.8%, below historical averages. Portfolio leverage decreased by 0.25 turn of EBITDA, and interest coverage improved to 2.2x.
Diversification: The portfolio is highly diversified, with an average position size of 0.2% and top 10 investments comprising only 11% of the portfolio.
Dividend Stability: ARCC maintained its dividend level, supported by factors like low balance sheet leverage, strategic investments, and spillover income.
Funding and Liquidity: ARCC added $4.5 billion in new gross debt commitments in 2025, with a strong liquidity position of over $6 billion.
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Risk or Challenges
Macroeconomic Uncertainty: Uncertainty around macroeconomic policies, particularly in the early months of 2025, posed challenges to transaction activity and investment decisions.
Interest Rate Declines: Declining base rates in 2025 created earnings headwinds, impacting core earnings and potentially affecting dividend stability in the future.
Competitive Market Pressures: Competitive market conditions led to declining market spreads, requiring ARCC to maintain stringent underwriting and documentation standards to preserve returns.
Seasonality in Origination Volumes: Origination volumes tend to be slower in the first quarter, which could impact earnings and capital structuring service fees.
Retail Capital Flow Volatility: Choppiness in retail capital flows could impact the competitive landscape and fundraising stability for certain managers.
Portfolio Credit Risks: While credit quality remains stable, nonaccruals at cost were at 1.8%, requiring vigilance in monitoring and addressing potential credit issues.
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Guidance & Outlook
Dividend Stability: ARCC is in a good position to maintain its dividend despite market expectations for further declines in short-term interest rates. The company has set its dividend level at an achievable benchmark and has multiple factors supporting earnings, including low balance sheet leverage, incremental growth opportunities from strategic investments, and spillover income providing a cushion for dividend stability.
Earnings Impact from Rate Changes: The decline in base rates during the fourth quarter of 2025 will create about $0.01 per share of earnings headwind for the first quarter of 2026. Seasonal patterns in origination volumes may also impact earnings.
Portfolio Growth and Diversification: ARCC ended 2025 with a record $29.5 billion portfolio at fair value, a 10% increase from the prior year. The portfolio is well-diversified across 603 borrowers, with a focus on maintaining small position sizes to minimize single-name risk.
Market Activity and Origination Trends: ARCC expects to benefit from an expanding M&A-driven market environment in 2026. The company has a strong start to the year with $1.4 billion in commitments through January 2026 and a backlog of $2.2 billion, indicating continued growth opportunities.
Credit Quality and Risk Management: The company expects continued healthy credit performance, supported by stable portfolio fundamentals, low nonaccrual rates, and strong risk management practices. The portfolio's average interest coverage ratio and leverage levels have shown improvement.
Funding and Liquidity: ARCC has a strong liquidity position with over $6 billion in available cash and a debt-to-equity ratio of 1.08x, leaving meaningful headroom for growth. The company continues to benefit from a diversified funding mix and lower borrowing costs.
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Shareholder Return Plan
Dividend Coverage: Core earnings per share of $0.50 for the fourth quarter and $2.01 for the full year fully covered the dividends.
Dividend Track Record: ARCC has paid a consistent or growing level of regular quarterly dividends for over 16 years.
Dividend Stability: ARCC is in a good position to maintain its dividend despite market expectations for further declines in short-term interest rates.
Dividend Spillover Income: ARCC has more than 2 quarters of spillover income, providing an additional cushion to support dividend stability.
Dividend Payout: First quarter 2026 dividend of $0.48 per share is payable on March 31 to stockholders of record on March 13.
Share Repurchase Program: No specific share repurchase program was mentioned in the transcript.
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Key Q&A
Q:How does Ares Capital view the impact of AI on its software portfolio?
A:Ares Capital feels confident about its software portfolio's resistance to AI-related risks. They have been investing in the software space for 15 years, focusing on foundational infrastructure software, proprietary data, and regulated end markets. The average EBITDA of their software portfolio is $350 million, and the loan-to-value ratio is 37%, providing a significant equity cushion. They also have a dedicated software credit team and an in-house AI team to evaluate risks and opportunities.
Q:What is the composition of Ares Capital's active pipeline, and how does it reflect market trends?
A:About half of the pipeline consists of buyout sponsor-related deals, while the remainder includes add-on acquisitions, refinancings, and some transactions from the broadly syndicated market. Dividend transactions are not a significant driver currently.
Q:How does Ares Capital plan to take advantage of market dislocations?
A:Ares Capital sees market dislocations as opportunities to provide financing, especially in sectors like software where the broadly syndicated market may struggle. Their diversified capital base and ability to fill market gaps give them a competitive advantage.
Q:What are the potential risks to Ares Capital's software portfolio from AI?
A:Ares Capital believes the risk to its core enterprise software businesses and regulated industries is minimal. They are cautious about single-function software apps, content creation software, and data analysis tools, which are more susceptible to AI disruption. However, these represent a very small portion of their portfolio.
Q:What is Ares Capital's outlook on dividend structuring fees and deployment?
A:Structuring fees remained consistent, and Ares Capital expects strong deployment to continue if the spread environment remains stable. If volume decreases, other factors like spread widening could offset the impact.
Q:Why haven't spreads widened significantly despite market dislocations?
A:The volatility in the broadly syndicated market has been short-lived, and the private market lags in reacting to such changes. Additionally, inflows into non-traded funds have slowed but remain stable, which has not yet significantly impacted competitive behavior.
Q:What is Ares Capital's stance on share repurchases given recent market volatility?
A:Ares Capital is open to share repurchases and has done so in the past. They continue to evaluate this option based on market conditions and discussions with their Board.
Q:How does Ares Capital differentiate its software portfolio from public software companies?
A:Ares Capital focuses on EBITDA and cash flow for lending, unlike public markets that emphasize revenue and growth metrics. They have been conservative with recurring revenue loans, which make up less than 2% of their portfolio.
Q:What is Ares Capital's view on the M&A and IPO markets for software?
A:Ares Capital expects some impact on software M&A due to valuation gaps but sees opportunities in add-ons and take-private transactions. They remain optimistic about the broader economy and other sectors.
Q:What are the potential benefits of AI for Ares Capital's portfolio companies?
A:AI could help portfolio companies augment their products, create new tools, and accelerate growth. This could benefit Ares Capital's equity co-investments in these companies.
Q:How does Ares Capital leverage its platform and capabilities to win deals?
A:Ares Capital's large investment team, long-term relationship building, and flexible product offerings make it a preferred capital provider. They emphasize being a long-term partner rather than just a lender.
Q:Would Ares Capital consider increasing its allocation to software?
A:Ares Capital values diversification and is cautious about increasing its software allocation despite its confidence in the sector. They will evaluate opportunities based on market conditions.
Q:What is Ares Capital's view on the recent changes to leverage loan guidance for banks?
A:Ares Capital does not expect significant changes in the competitive landscape due to the relaxation of leverage loan guidance, as regulatory capital requirements remain a more significant factor.
Q:Have there been any changes in terms and documentation for new investments?
A:There has been no loosening of terms or documentation. If anything, there is a heightened focus on documentation due to recent headlines in the broadly syndicated market.
Q:What percentage of Ares Capital's software portfolio is below profitability?
A:Almost none of Ares Capital's software portfolio is below profitability, with only a very small portion of ARR loans potentially being negative EBITDA.
Q:Is there a tilt toward software in Ares Capital's PIK portfolio?
A:The software book has a slightly higher percentage of PIK, but almost all of it is structured at the outset of the investment, not amended PIK.
Q:How large is Ares Capital willing to grow its SDLP and Ivy Hill investments?
A:Historically, Ivy Hill has gone as high as 11% and SDLP as high as 7% of the portfolio. Ares Capital values these strategic investments and sees room for growth within regulatory limits.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer on their willingness to deploy the share repurchase program in response to market volatility, stating only that it is always on the table and has been used in the past.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
CLO
Co Head
Direct Lending
IRR
Partner Co
SOFR basis
ability capital
bond
borrower portfolio
borrowing
capital provider
channel
co portfolio
decline base
differentiation
dividend level
dividend quarter
equity co
headwind
inception
interest rate
investment grade
investment result
issuer
majority
market activity
market rate
merit
momentum
month
note market
opportunity investment
origination borrower
portfolio core
quality portfolio
rate borrower
rating
result track
standard
turn
vertical
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ARCC Transcript
Ares Capital (ARCC) Q4 2025 Earnings Call Transcript
Positive2-4
The earnings call summary highlights strong financial performance, a robust market strategy, and a commitment to shareholder returns, with record high transaction volumes and a healthy investment pipeline. The Q&A section supports this with positive sentiment from analysts, minimal risks from AI, and strategic positioning in the software sector. While some uncertainties remain, such as market volatility and share repurchase plans, the overall outlook and optimistic guidance suggest a positive stock price movement.
Ares Capital (ARCC) Q3 2025 Earnings Call Transcript
Positive10-28
The earnings call summary and Q&A indicate a positive outlook for Ares Capital Corporation. The company anticipates increased market activity and investment opportunities, strong portfolio performance, and dividend stability. The Q&A session revealed no significant risks, with management displaying confidence in their strategies. The positive sentiment is further supported by the company's involvement in large-scale transactions and the recovery of transaction activity. Despite some vague responses, the overall sentiment remains positive, suggesting a likely stock price increase in the short term.
Ares Capital Corporation (ARCC) Q2 2025 Earnings Call Transcript
Positive7-29
The earnings call summary and Q&A session indicate a stable financial performance with positive growth in investment commitments and portfolio quality. Despite some concerns over non-accrual rates, management's confidence in navigating market conditions and maintaining strong liquidity is reassuring. The dividend stability and strong core earnings further enhance the positive outlook. Although management avoided forward guidance on some aspects, the strategic focus and market positioning suggest a positive sentiment overall.
Ares Capital Corporation (NASDAQ:ARCC) Q1 2025 Earnings Call Transcript
Unknown4-30
The earnings call presents a mixed picture: while there are positive elements such as a stable dividend and increased investment activity, the decline in core EPS and GAAP net income raises concerns. The Q&A section highlights management's confidence in navigating volatility and minimal exposure to tariffs, but the lack of clear guidance on potential risks tempers optimism. The absence of a share repurchase program and the stable dividend signal a cautious approach. Overall, the sentiment is balanced, leading to a neutral prediction for the stock price movement.
ARCC Report
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