ARCC ARES CAPITAL CORP 10-Q 2026-09-30 section summaries

Ares Capital Corporation (ARCC) — Section Summary

Business and portfolio

ARCC is an externally managed business development company that invests primarily in first-lien senior secured and unitranche loans, with additional second-lien, subordinated, preferred-equity and common-equity investments. It reports as a single operating segment. Its portfolio is predominantly floating-rate, and much of its fair value depends on unobservable valuation inputs.

At September 30, 2026, investments totaled $29.4775B at amortized cost and $29.2126B at fair value, compared with $29.2499B and $29.4848B, respectively, at December 31, 2025. The portfolio therefore shifted from a $234.9M premium to cost to a $264.9M discount. First-lien loans were the largest category ($17.426B cost / $16.871B fair value, versus $18.103B / $17.858B at year-end); unitranche loans were $13.615B / $13.289B, up from $11.349B / $11.239B. Software and services remained the largest industry exposure, although its share declined to 21.6% from 23.8%; financial services increased to 14.6% from 12.4%.

Credit and valuation concerns include non-accrual investments rising to 2.4% of portfolio amortized cost (1.4% of fair value) from 1.8% (1.2%) at year-end. Examples of stressed positions include Continental Group loans on non-accrual ($52.7M principal, $42.6M cost and $18.5M fair value) and VPROP/V SandCo ($85.4M cost versus $18.7M fair value). PIK interest and dividends add to reported income but are not necessarily received in cash; during the first nine months, $168M of PIK interest and $194M of PIK dividends accrued, while collections were $71M and $50M, respectively.

Results and financial position

For Q3 2026, total investment income was $763M, down from $782M in Q3 2025; total expenses were $429M, from $433M; and net investment income was $328M, from $338M. Net increase in stockholders’ equity resulting from operations was $319M, from $404M, and net income per share was $0.44, from $0.57.

For 9M 2026, total investment income was $2.294B, from $2.259B; total expenses were $1.189B, from $1.188B; and net investment income was $1.085B, from $1.045B. The net increase in equity resulting from operations fell to $582M, from $1.006B, and net income per share was $0.81, from $1.45. The weaker reported result principally reflected investment marks: realized and unrealized losses were $501M, versus $39M of losses in 9M 2025, including $552M of unrealized losses and $51M of realized gains. Q3 realized and unrealized results were a $7M loss, versus $66M of gains a year earlier.

At September 30, 2026, total assets were $30.596B, total stockholders’ equity $13.946B, and net asset value per share $19.31, compared with $31.235B, $14.318B and $19.94, respectively, at year-end. Goodwill and intangible assets were not separately presented in the supplied balance-sheet information. Shares outstanding increased from 718M at December 31, 2025, to 722M at September 30, 2026; Q3 weighted-average shares were 720M, versus 709M.

For 9M 2026, operating cash flow was $1.572B, compared with $1.290B used in 9M 2025. Portfolio investment purchases were $8.033B, versus $9.263B; these are investment activity, not capital expenditures. The filing does not report a conventional capital-expenditure line. Cash, cash equivalents and restricted cash ended at $942M.

Funding, commitments and valuation

Debt at September 30 was $15.474B principal and $15.124B carrying value, compared with $16.012B and $15.991B at year-end. Weighted-average stated debt cost, including swaps, rose to 5.2% from 4.9%; weighted-average maturity was 4.4 years. Asset coverage was 188%, above the statutory 150% minimum. The main revolving facility had $5.481B of commitments, $1.261B outstanding and $4.162B available, subject to borrowing-base restrictions. Cash dividends paid in 9M were $1.036B, versus $945M.

Net unfunded revolving and delayed-draw loan commitments were $4.663B, down from $5.190B at year-end; net unfunded equity commitments were $125M. These commitments, along with letters of credit, can create future funding needs. Nearly all investments were Level 3: $28.639B of the $29.213B investment portfolio, underscoring estimation and realization risk.

Other developments

ARCC’s wholly owned Ivy Hill Asset Management had $17.7B AUM across 25 vehicles. Its investment-related income and operating income increased year over year, but 9M net income attributable to IHAM declined to $171M from $216M, including $63M of net realized and unrealized investment/foreign-currency losses. The Senior Direct Lending Program’s loan portfolio grew to $4.671B principal across 73 borrowers, from $4.297B across 39 borrowers.

On October 26, 2026, ARCC agreed to acquire MFIC in a cash-and-stock transaction with an implied value of approximately $2.6B. Closing is expected in 1H 2027, subject to conditions; the exchange ratio, financing and execution remain uncertainties.

Ares Capital (ARCC) — Part I, Item 2

Portfolio activity, composition and credit quality

ARCC is an externally managed BDC focused mainly on first- and second-lien secured lending, including unitranche loans, with smaller mezzanine, preferred- and common-equity investments. Its strategy targets current income and capital appreciation.

In Q3 2026, new investment commitments fell to $2.109B from $3.924B; exits were $2.473B from $2.625B, leaving negative net commitments of $364M, versus positive $1.299B a year earlier. ARCC funded $1.6B of new commitments, compared with $3.0B in Q3 2025. Commitments covered 53 transactions (80 prior-year), averaged $40M ($49M), and had a 59-month weighted-average term (71 months). Floating-rate commitments were 85%, down from 93%.

At September 30, 2026, investments totaled $29.478B amortized cost and $29.213B fair value, versus $29.250B and $29.485B at year-end 2025. Thus, fair value was $265M below cost, compared with $235M above cost at year-end. First-lien loans were $17.426B at cost/$16.871B fair value, including $13.6B/$13.3B of unitranche loans; second-lien loans were $1.301B/$1.172B. Other significant holdings included preferred equity of $2.672B/$2.440B, IHAM of $2.886B/$3.066B, and other equity of $2.062B/$2.596B. Weighted-average yield on debt and other income-producing securities was 10.6% at cost and 10.8% at fair value, up from 10.3% on both bases at year-end.

Credit indicators weakened. The portfolio covered 636 companies versus 603; weighted-average internal grade remained 3.1, but Grade 3 declined to 75.0% of fair value from 79.1%, while Grade 4 rose to 19.2% from 17.1%. Non-accruals increased to 2.4% of investments at amortized cost (1.4% at fair value), from 1.8% (1.2%).

Earnings and investment marks

Q3 2026 investment income was $763M from $782M in Q3 2025; expenses were $429M from $433M, net investment income before taxes was $334M from $349M, and net investment income was $328M from $338M. Net increase in stockholders’ equity from operations was $319M from $404M. For 9M, investment income rose to $2.294B from $2.259B, expenses were $1.189B from $1.188B, net investment income before taxes was $1.105B from $1.071B, and net investment income was $1.085B from $1.045B; net increase in equity from operations fell to $582M from $1.006B.

Average portfolio size increased, but weighted-average yield declined: in Q3 it was 9.5% versus 9.9%, and for 9M 9.5% versus 10.1%. Q3 interest income was $558M from $561M; 9M was $1.665B from $1.620B. Lower base rates and yields weighed on quarterly interest income, while larger average portfolio size supported year-to-date growth. Capital structuring fees were $23M from $48M in Q3 and $102M from $128M in 9M, primarily reflecting fewer commitments. Dividend income increased to $160M from $141M in Q3 and $468M from $442M in 9M.

Q3 realized investment results included $61M net losses, versus $247M net gains; 9M net realized gains were $46M versus $272M. Consolidated results included net unrealized gains of $43M in Q3 versus losses of $96M, but 9M net unrealized losses were $552M versus $174M. Separately, investment-level 9M marks showed $485M net unrealized depreciation, compared with $7M appreciation in 2025. Marks and realized outcomes materially reduced year-to-date growth in equity. Named depreciations included Cornerstone OnDemand ($112M) and ATI Restoration ($15M); “Other, net” was ($227M).

IHAM and SDLP

IHAM, a wholly owned portfolio company, managed 25 vehicles with $17.7B AUM. Its standalone Q3 revenue was $126M from $99M, operating income $82M from $77M, and net income $56M from $66M; the lower net income reflected $26M of investment and other losses versus $11M. For 9M, revenue was $355M from $267M, operating income $234M from $214M, and net income $171M from $216M, including $63M of losses versus $2M of gains. Standalone assets were $3.797B, liabilities $1.912B and equity $1.885B. ARCC’s IHAM investment was $2.886B at cost/$3.066B fair value; its discretionary funding commitment increased to up to $1.0B from $750M. IHAM-related loan purchases from ARCC totaled $3.292B in 9M.

The SDLP joint venture’s first-lien loan principal was $4.671B, up from $4.297B; its weighted-average stated yield declined to 8.1% from 8.5%. Borrowers increased to 73 from 39, and one loan was on non-accrual versus none at year-end. ARCC’s certificates had $1.140B amortized cost/$1.153B fair value and a 13.1%/13.0% yield. SDLP Q3 investment income was $95M from $99M, expenses $54M from $59M, and net investment income $41M from $40M. SDLP assets were $4.452B, liabilities $3.399B and certificates and members’ capital $1.053B.

Funding, capital and outlook

At September 30, cash was $722M and debt was $15.474B principal/$15.124B carrying value, down from $16.012B/$15.991B at year-end. Asset coverage was 188%, above the 150% statutory minimum; debt principal-to-equity was 1.11:1. Approximately $6.9B remained available for borrowing, subject to restrictions. Weighted-average debt rate, including swaps, was 5.2% versus 4.9%, and weighted-average maturity was 4.4 years versus 4.2. Interest and facility fees were $221M from $209M in Q3 and $648M from $583M in 9M, mainly reflecting higher average debt. ARCC issued 4.2M shares through its ATM in 9M for $82.3M net proceeds; the quarterly dividend was $0.48 per share.

After quarter-end through October 22, ARCC committed approximately $1.1B, funded $855M, and exited approximately $727M; the investment backlog was about $2.5B, with closing uncertain. On October 26, ARCC agreed to acquire MFIC in a cash-and-stock transaction valued at approximately $2.6B, subject to approvals and other conditions, with closing expected in the first half of 2027.

Most investments are illiquid Level 3 holdings valued using significant unobservable inputs and quarterly fair-value processes, including independent-provider review of substantially all investments since Q1 2025. Recorded values may differ materially from realizable proceeds. Management also cited inflation, rate and geopolitical uncertainty, borrower health, funding needs and market liquidity as risks.

Market and valuation risk

Market risk reflects uncertainty around tariffs and trade disputes, global interest-rate movements, the Russia–Ukraine war, conflict in the Middle East and political unrest, inflation, and investor sentiment. These conditions have materially affected—and could continue to affect—portfolio values and the company’s ability to raise or deploy capital.

Substantially all portfolio investments lack readily available market quotations. They are carried at fair value determined in good faith by the investment adviser as valuation designee, with board oversight and quarterly support from independent valuation providers for most investments. Because these investments are generally less liquid and may be restricted from resale, fair values are uncertain and may differ materially from proceeds ultimately realized; forced-sale proceeds could be significantly lower. Realized gains or losses may therefore differ from recorded unrealized amounts.

Interest-rate exposure

As of September 30, 2026, measured at fair value, 70% of investments bore variable rates, including SDLP Certificates (4% of total investments); 13% bore fixed rates; 9% were non-income-producing; 1% was on non-accrual; and 7% was the IHAM equity investment, which generally pays a quarterly dividend. Excluding SDLP Certificates, 95% of variable-rate investments had interest-rate floors.

Interest-rate changes affect net investment income through the spread between investment yields and borrowing costs. Prolonged low rates may compress that spread, while rising rates may increase it. The Credit Facilities, July 2038 CLO Secured Debt, October 2036 CLO Secured Loans, and January 2038 CLO Secured Notes have variable rates without floors. Unsecured Notes are generally fixed-rate, although the January 2027, March 2029, July 2029, January 2030, September 2030, January 2031, April 2031, March 2032, and September 2033 Notes were swapped from fixed to floating rates.

Annualized interest-rate sensitivity

The following sensitivity is based on the September 30, 2026 consolidated balance sheet and assumes no change in investment or borrowing structure. Amounts are in millions; the estimates exclude income-based fees, and interest expense includes the effects of specified interest-rate swaps.

The modeled effects are asymmetric: at larger rate decreases, income declines are smaller than corresponding increases, consistent with floors on variable-rate assets. The company monitors rate-sensitive assets against liabilities and may use hedges to manage exposure.

Controls and Procedures

As of September 30, 2026, management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at the reasonable-assurance level. No changes during the quarter ended September 30, 2026 materially affected, or were reasonably likely to materially affect, internal control over financial reporting.

Proposed MFIC transaction risks

ARCC’s principal new risk is its proposed transaction with MFIC, which is expected to close in the first half of 2027 but remains subject to conditions, including approval by MFIC stockholders holding a majority of MFIC’s outstanding common shares. The timing and completion are uncertain. If the transaction does not close, ARCC may be unable to recover substantial investment-banking, legal, accounting, and other costs already incurred. MFIC may owe a termination fee in certain circumstances, but ARCC cannot assure that the fee will be triggered or collected.

If completed, the transaction’s expected benefits may not materialize or may take longer than anticipated. Integrating MFIC’s portfolio and business could be unsuccessful or delayed, divert management attention from ARCC’s day-to-day operations, and create unanticipated costs. ARCC would also be exposed to weaker-than-expected performance by MFIC’s investments, which could adversely affect the combined company’s financial results.

The transaction would dilute existing ARCC stockholders’ ownership and voting power through the issuance of shares to MFIC stockholders. ARCC estimates that its current stockholders would own approximately 95% of the combined company and MFIC’s current stockholders approximately 5%, though dilution could be greater than estimated. The final exchange ratio—and thus the number of shares issued—depends on variables not yet fixed, including closing net asset value (NAV), closing share price relative to closing NAV, and MFIC tax dividends declared after the merger agreement. The exchange ratio will not be reduced for previously unknown or unanticipated MFIC liabilities or declines in the fair value of MFIC portfolio investments, leaving ARCC stockholders exposed to those risks through the transaction consideration.

Item 5 — Other Information

On October 22, 2026, Chief Accounting Officer and Principal Accounting Officer Paul Cho notified the board that he would step down from the Principal Accounting Officer role effective October 31, 2026, while continuing in Ares Management’s finance and accounting function. His departure was not related to any disagreement with the company concerning its operations, policies, or practices. Effective October 31, CFO and Treasurer Scott Lem resumed responsibility as Principal Accounting Officer for SEC filings.

During the quarter ended September 30, 2026, no directors or executive officers adopted or terminated Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements. This section reported no financial results or metrics.