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Introduction & Market Context
Ares Capital Corporation (NASDAQ:ARCC), one of the largest business development companies (BDCs) in the market, presented its second quarter 2025 results on July 29, highlighting stable core earnings despite yield compression and increasing portfolio size. The company maintained its quarterly dividend at $0.48 per share while continuing to expand its investment portfolio to $27.9 billion, up from $27.1 billion in the previous quarter.
The presentation revealed a strategic shift toward more secured investments amid rising non-accrual loans, suggesting a more defensive positioning in response to market volatility. This approach aligns with comments made during the previous quarter’s earnings call, where CEO Cort Schnabel emphasized "the value of certainty in capital during uncertain times."
Quarterly Performance Highlights
Ares Capital reported GAAP net income per share of $0.52 for Q2 2025, matching the same period last year and improving from $0.36 in Q1 2025. Core EPS remained stable at $0.50, unchanged from the previous quarter but down from $0.61 in Q2 2024. Net investment income per share decreased to $0.49 from $0.54 in Q1 2025 and $0.62 in Q2 2024.
As shown in the following financial highlights chart, the company’s net asset value per share increased to $19.90, up from $19.82 in the previous quarter and $19.61 year-over-year, indicating overall portfolio appreciation despite yield compression:
The company’s investment activity showed a more selective approach, with gross commitments of $2.57 billion in Q2 2025, down from $3.45 billion in Q1 2025 and $3.86 billion in Q2 2024. Net commitments increased slightly to $610 million from $596 million in the previous quarter, but were significantly lower than the $2.48 billion reported in Q2 2024.
Portfolio Composition and Strategy
Ares Capital’s investment portfolio remains well-diversified across 566 companies, with the top 15 investments comprising 25.4% of the total portfolio. The company’s largest investment continues to be Ivy Hill Asset Management at 7.4%, followed by Senior Direct Lending Program at 3.8%.
The following chart illustrates the company’s portfolio diversification by issuer as of June 30, 2025:
The company has strategically shifted its portfolio toward more secured investments, with first lien senior secured loans now representing 59% of the portfolio, up from 50% in Q2 2024. This defensive positioning comes as the company faces declining yields, with weighted average yields on debt and other income-producing securities at 10.9%, down from 11.0% in Q1 2025 and 12.2% in Q2 2024.
The portfolio’s industry diversification shows a significant concentration in Software (ETR:SOWGn) and Services at 24%, followed by Pharmaceuticals, Biotechnology and Life Sciences at 7%, and Financial Services at 6%. The following chart details the portfolio breakdown by asset class and industry:
Credit Quality and Risk Management
A notable concern in the presentation was the increase in non-accrual loans, which rose to $546 million at amortized cost (2.0% of the portfolio) and $327 million at fair value (1.2% of the portfolio) in Q2 2025. This represents an increase from previous quarters and may indicate emerging credit quality issues in certain portfolio companies.
The following chart shows the trend in non-accrual loans over recent quarters:
Despite these concerns, the company’s portfolio companies maintain healthy credit statistics, with interest coverage ratios stable at 5.7-5.8x and net leverage around 1.8x-1.9x. The portfolio weighted average EBITDA of companies in the portfolio ranges from $274 million to $317 million, indicating substantial scale in their underlying investments.
Ares Capital’s portfolio grading system shows that Grade 1 investments (performing at or above expectations) constitute approximately 77-80% of the portfolio fair value, suggesting that the majority of investments continue to perform well despite the increase in non-accrual loans.
Forward-Looking Statements
Following the quarter’s end, Ares Capital reported continued investment activity with approximately $1.1 billion of new investment commitments and $365 million of investment exits through July 24, 2025. The company also reported an investment backlog of approximately $2.6 billion as of the same date, indicating a robust pipeline of potential investments.
The company’s debt maturity schedule appears well-structured, with a balanced approach to maturities that helps manage refinancing risk. As illustrated in the following chart, Ares Capital has diversified its debt across secured revolving facilities, debt securitizations, and unsecured notes:
Ares Capital maintains a strong balance sheet with a debt-to-equity ratio of 0.98x, unchanged from the previous quarter. The company has increased its proportion of unsecured debt to 73.3% of total debt, up from 68.8% in Q1 2025, providing greater financial flexibility.
Despite the challenges of yield compression and increasing non-accrual loans, Ares Capital’s consistent dividend of $0.48 per share and growing NAV suggest management’s confidence in the company’s ability to navigate the current market environment while maintaining returns to shareholders. The company’s strategic shift toward more secured investments and selective approach to new commitments indicate a prudent response to market conditions while positioning for long-term growth.
Full presentation:
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