Q2 2025 Ares Capital Corp Earnings Call

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John Stilmar: Good afternoon. Welcome to Ares Capital Corporation's second quarter ended June 30, 2025 earnings conference call. At this time, all participants are in a listen-only mode.

Good afternoon, welcome to Aries Capital corporations. Second quarter ended June 30th 2025 earnings conference call.

Operator: As a reminder, this conference is being recorded on Tuesday, July 29th, 2025.

At this time, all participants are in a listen-only mode.

John Stilmar: I will now turn the call over to Mr. John Stilmar, a partner on Ares' Public Markets Investor Relations Team. Great, thank you very much. And good afternoon, everybody.

As a reminder, this conference is being recorded on Tuesday, July 29th, 2025,

I will now turn the call over to Mr. John Stilmar, a Partner on Ares' Public Markets Investor Relations team.

John Stilmar: Let me start with some important reminders, comments made during the course of this conference call and webcast, as well as the accompanying document. contain four booking statements and are subject to risks and uncertainty. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC file. Ares Capital Corporation assumes no obligation to update any such forward-looking statement. Please also note that past performance or market information is not a guarantee of future results.

Great, thank you very much, and good afternoon, everybody.

Let me start with some important reminders. Comments made during the course of this conference call and webcast, as well as the accompanying documents, contain forward-looking statements that are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements.

John Stilmar: During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, which include factors such as core earnings per share or core EPS. The company believes that Kort EPS provides useful information to investors regarding the financial performance because it's one method that the company uses to measure its financial condition and the results of its operation. A reconciliation of GAAP net income per share, the most directly comparable GAAP measure to core EPS, can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning on Form 8K with the SBA.

Please also note that past performance or market information is not a guarantee of future results.

During this conference call, the company may discuss certain non-gaap measures as defined by SEC. Regulation G which include factors such as core earnings per share or core eps

The company believes that core EPS provides useful information to investors regarding financial performance because it is one method that the company uses to measure its financial condition and the results of its operations.

Our reconciliation of GAAP net income per share, the most directly comparable GAAP measure to court EPS, can be found in the accompanying slide presentation for this call.

John Stilmar: Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies, has arrived from third-party sources and has not been independently verified, and accordingly, the company makes no representation or warranties with respect to this information.

In addition, reconciliation of these measures may also be found in our earnings release file this morning on Form 8-K with the SEC.

John Stilmar: The company's second quarter ended June 30th, 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the second quarter 2025 earnings presentation link on the homepage of the investor resources section. Corporation's earnings release and Form 10-Q are also available on the company's website.

Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies, has arrived from third-party sources and has not been independently verified. Accordingly, the company makes no representation or warranties with respect to this information.

The company's second quarter ended June 30, 2025, earnings presentation can be found on the company's website at www.AresCapitalCorp.com by clicking on the second quarter 2025 earnings presentation link in the homepage of the investor resources section.

Kort Schnabel: I'd like to now turn the call over to Mr. Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort? Thanks, John, and hello, everyone, and thanks for joining our earnings call today.

There is capital corporations, earnings release, and Form 10-Q are also available on the company's website.

I would like to now turn the call over to Mr. Court's novel, Ares Capital Corporation's Chief Executive Officer, Court.

Kort Schnabel: I'm joined by Jim Miller, our President, Jenna Markowitz, our Chief Operating Officer, Scott Lem, our Chief Financial Officer, and other members of the management team who will be available during our Q&A session.

Thanks, John, and hello everyone. And thank you for joining our earnings call today.

Kort Schnabel: Before we begin today's call, I want to take a moment to acknowledge the tragedy that occurred at 345 Park Avenue. just a few blocks from our New York office. This senseless act of violence has deeply affected our community and our hearts go out to everyone impacted.

I'm joined by Jim Miller, our President; Janna Meirowitz, our Chief Operating Officer; Scott Lem, our Chief Financial Officer; and other members of the management team, who will be available during our Q&A session.

Before we begin today's call, I want to take a moment to acknowledge the tragedy that occurred at 3:45 Park Avenue.

Just a few blocks from our New York office.

Kort Schnabel: We extend our deepest condolences to the families and loved ones of the victims and to our friends and colleagues at Blackstone, KPMG, NFL, Rudin, and others who work at 345 Park Avenue, as well as the brave NYPD officer who lost his life protecting the building. In times like these, we are reminded of the importance of standing together as a community with compassion, resilience, and support for one another. We are keeping all who have been affected in our thoughts.

This senseless act of violence has deeply affected our community, and our hearts go out to everyone impacted.

We extend our deepest condolences to the families and loved ones of the victims, to our friends and colleagues at Blackstone, KPMG, NFL, Rudin, and others who work at 3:45 Park Avenue, as well as to the brave NYPD officer who lost his life protecting the building.

In times like these, we are reminded of the importance of standing together as a community, with compassion, resilience, and support for one another.

Kort Schnabel: Let me now turn to our second quarter results. I will begin with a few quarterly highlights, and we'll follow that with some thoughts on current market conditions. This morning, we reported solid second quarter results. delivering stable core earnings of $0.50 per share, representing an annualized return on equity of 10%, consistent with the prior quarter. Additionally, our net asset value per share increased both sequentially and year over year. The growth in our net asset value per share was supported by earnings in excess of our dividend and robust net investment gains, including strong net realized gains from our equity co-investment portfolio.

We are keeping all who have been affected in our thoughts.

Let me now turn to our second quarter results.

I will begin with a few quarterly highlights, and we'll follow that with some thoughts on current market conditions.

This morning, we reported solid second-quarter results.

Delivering stable core earnings of $0.50 per share, representing an annualized return on equity of 10%, consistent with the prior quarter.

Sequentially and year-over-year.

Kort Schnabel: These results support our position as one of the few BDCs to consistently generate NAV per share growth since our IPO. We are pleased with our profitability and the continued strength of our portfolio, particularly in light of the tariff related volatility that led to economic uncertainty and reduced investment activity during the second quarter.

Growth in our net asset value per share was supported by earnings in excess of our dividend and robust net investment gains, including strong net realized gains from our equity co-investment portfolio.

These results support our position as one of the few BDCs to consistently generate NAV per share growth since our IPO.

Kort Schnabel: Let me now discuss what we are seeing in our markets and our position. The second quarter began with policy-driven volatility, which temporarily slowed transaction activity, particularly in the liquid loan market. During the early part of the quarter, we remained active while traditional market participants retrenched and were not underwriting many new transactions, if any at all. We believe our ability to transact in varying market conditions and provide certainty in uncertain times, yet again, reinforced our value proposition and allowed us to garner enhanced terms and premium economic For more information visit www.FEMA.gov As volatility subsided later in the quarter, the liquid credit markets reopened.

We are pleased with our profitability and the continued strength of our portfolio, particularly in light of the tariff-related volatility that led to economic uncertainty and reduced investment activity. During the second quarter,

Let me now discuss what we are seeing in our markets and our positioning.

The second quarter began with policy-driven volatility, which temporarily slowed transaction activity, particularly in the liquid loan markets.

During the early part of the quarter, we remained active while traditional market participants retrenched and were not underwriting many new transactions, if any at all.

We believe our ability to transact in varying market conditions and provide certainty in uncertain times yet again reinforced our value proposition and allowed us to garner enhanced terms and premium economics.

Kort Schnabel: Overall financing activity began to rebuild and has returned to a more normalized. As we have discussed many times in the past, we benefit from periods of volatility as our broad portfolio of 566 borrowers, extensive market relationships, and strong balance sheet positions us as a valuable partner to many market participants, despite reductions in overall M&A volume. We saw this dynamic play out in the second quarter as nearly three quarters of our gross commitments were from the incumbent relationship. We continued to serve as a stabilizing force for our existing portfolio companies who are increasing their borrowings with us and enabling us to take share from other established lenders.

As volatility subsided later in the quarter, the liquid credit markets reopened, overall financing activity began to rebuild, and has returned to a more normalized pace.

As we have discussed many times in the past, we benefit from periods of volatility, as our broad portfolio of 566 borrowers, extensive market relationships, and strong balance sheet position us as a valuable partner to many market participants despite reductions in overall M&A volume.

We saw this dynamic play out in the second quarter, as nearly three quarters of our gross commitments were from incumbent relationships.

Kort Schnabel: For example, across our 10 largest transactions with incumbent borrowers in the second quarter, we more than doubled our previous lending commitments, and in doing so, increased our wallet share with these borrowers, which we view as some of our highest quality opportunities. As our track record illustrates, we believe we can generate attractive risk-adjusted returns and enhance our overall credit quality by supporting the capital needs of our existing portfolio. Beyond expanding our commitments with our existing borrowers, we remained proactive with our extensive sponsor relationships and continued to grow our presence among non-sponsored borrowers in our targeted industry.

We continued to serve as a stabilizing force for our existing portfolio companies, who are increasing their borrowings with us and enabling us to take share from other established lenders.

For example, across our 10 largest transactions with incumbent borrowers in the second quarter, we more than doubled our previous lending commitments. In doing so, we increased our wallet share with these borrowers, which we view as some of our highest quality opportunities.

As our track record illustrates, we believe we can generate attractive risk-adjusted returns and enhance our overall credit quality by supporting the capital needs of our existing portfolio companies.

Kort Schnabel: Despite overall declines in reported middle market M&A and transaction activity, we are continuing to review a growing number of opportunities with the number of transactions we reviewed increasing 20% quarter over quarter. This growing level of opportunities reviewed should support greater investing volumes in the future, and it is particularly notable that June accounted for nearly half of the quarter's transaction activity. This momentum gives us visibility into a potentially more active second half of the year. As we have discussed in the past, we believe we are one of the only direct lenders with a meaningful presence across each of the lower, core and upper middle markets.

Beyond expanding our commitments with our existing borrowers, we remained proactive with our extensive sponsor relationships and continued to grow our presence among non-sponsored borrowers in our targeted industries.

Despite overall declines in reported middle market M&A transaction activity, we are continuing to review a growing number of opportunities, with the number of transactions we reviewed increasing 20% quarter over quarter.

This growing level of opportunities reviewed should support greater investing volumes in the future. It is particularly notable that June accounted for nearly half of the quarter's transaction activity.

This momentum gives us visibility into a potentially more active second half of the year.

Kort Schnabel: More recently, we have been particularly active in the upper end of the market, providing certainty of capital to potential borrowers in the face of market uncertainty. For example, as you have probably seen in media reports, we will serve as the lead left arranger for the largest private credit LBO on record, with the take private of Dun & Bradstreet, which is expected to close in the third quarter. Dun & Bradstreet is a long-standing, high-quality company with strong recurring cash flows, and this transaction clearly demonstrates our scale and leadership position in the market. We believe our ability to be a meaningful capital provider to larger borrowers, alongside those in the core and lower middle market, remains a notable differentiator for our platform.

As we have discussed in the past, we believe we are one of the only direct lenders with a meaningful presence across each of the lower core and upper middle markets.

More recently, we've been particularly active in the upper end of the market, providing certainty of capital to potential borrowers in the face of market uncertainty.

For example, as you have probably seen in media reports, we will serve as the lead left arranger for the largest private credit LBO on record with the take-private of Dun & Bradstreet, which is expected to close in the third quarter.

Dunn and Bradstreet is a long-standing, high-quality company with strong, recurring cash flows, and this transaction clearly demonstrates our scale and leadership position in the market.

Kort Schnabel: Importantly, we believe that the breadth of our origination capabilities is one of the key contributors to our long term credit performance, as it enables us to see a broader view of the market opportunity, and then be highly selective in choosing where we invest. Shifting now to our existing portfolio, we are continuing to see healthy overall performance as our borrower's weighted average organic EBITDA growth rates accelerated further into the double digits over the last 12 months. Supported by this underlying growth, borrower leverage levels are below our five-year average, and the portfolio average loan-to-value remains in the low 40% range.

We believe our ability to be a meaningful capital provider to larger borrowers, alongside those in the core and lower middle market, remains a notable differentiator for our platform.

Importantly, we believe that the breadth of our origination capabilities is one of the key contributors to our long-term credit performance, as it enables us to see a broader view of the market opportunity and then be highly selective in choosing where we invest.

Healthy overall performance as our borrowers' weighted average organic IBA growth rates accelerated further into the double digits over the last 12 months.

Kort Schnabel: We also take comfort in the fact that our portfolio is focused on domestic, service-oriented businesses that, in our view, carry lower policy risk from tariffs and other recently proposed and implemented government policies. While we ended the second quarter with a modest uptick in non-accruals, these levels still remain well below both our historical average and that of the broader BDC peer group. We remain highly confident in our ability to manage these idiosyncratic situations as we have an experienced veteran portfolio management and valuation team of approximately 50 dedicated professionals. We believe the deep credit experience of our team and our differentiated strategy of investing across the capital structure is a cornerstone of our track record and supports our generating realized gains, well in excess of realized losses on our investments since inception.

Supported by this underlying growth, borrower leverage levels are below our 5-year average, and the portfolio average loan-to-value remains in the low 40% range.

We also take comfort in the fact that our portfolio is focused on domestic service-oriented businesses that, in our view, carry lower policy risk from tariffs and other recently proposed and implemented government policies.

While we ended the second quarter with a modest uptick in non-accruals, these levels still remain well below both our historical average and that of the broader BDC peer group.

We remain highly confident in our ability to manage these idiosyncratic situations. As we have an experienced veteran portfolio management and valuation team of approximately 50 dedicated professionals.

Kort Schnabel: Specifically in the second quarter, we continued to build on this track record of gains in excess of losses as we exited several of our equity co-investments, realizing a three times multiple of our initial invested capital and generating a gross realized internal rate of return in the mid 20% range. In summary, we demonstrated stability amid significant market uncertainty in the As we've seen in past periods of volatility, we believe these environments continue to reinforce our resilient business model and strong competitive position. We believe our consistent execution, disciplined approach, and differentiated platform leave us well-positioned to navigate evolving market conditions and to capitalize on emerging opportunities.

We believe that deep credit experience of our team and our differentiated strategy of investing. The capital structure is a Cornerstone of our track record and supports our generating realized gains. Well in excess of realized losses on our investments since Inception,

Specifically in the second quarter, we continued to build on this track record of gains in excess of losses, as we exited several of our equity co-investments, realizing a 3x multiple of our initial invested capital and generating a gross realized internal rate of return in the mid-20% range.

In summary, we demonstrated stability amid significant market uncertainty in the second quarter.

As we've seen in past periods of volatility, we believe these environments continue to reinforce our resilient business model and strong competitive positioning.

Scott Lem: With that, I'll turn the call over to Scott to walk us through our financial results and the continued progress we're making on our strong balance. Thanks, Kort. This morning, we reported gap in income per share of $0.52 for the second quarter of 2025, compared to $0.36 in the prior quarter and $0.52 in the second quarter of 2024. We also reported co-earnings per share of $0.50 compared to $0.50 in the prior quarter and $0.61 for the same period a year ago. Stable core earnings are consistent with the general stability we have seen in yields, which for our portfolio essentially remained flat with the prior quarter.

We believe our consistent execution, disciplined approach, and differentiated platform leave us well positioned to navigate evolving market conditions and to capitalize on emerging opportunities.

With that, I'll turn the call over to Scott to walk us through our financial results and the continued progress we're making on our strong balance sheet.

Next court this morning, we reported a gap in income per share with $0.52 for the second quarter of 2025 compared to $0.36 in the prior quarter and $0.52 in the second quarter of 2024.

We also report a core earnings per share of $0.50 compared to $0.50 in the prior quarter and $0.61 for the same period a year ago.

The stable core earnings are consistent with the general stability we have seen in yields.

Which for our portfolio essentially remain flat with the prior quarter.

Scott Lem: Drilling in a bit more into the net realized gains that Kort highlighted earlier, we generated $117 million of net realized gains on investment. during the second quarter, bringing our cumulative net realized gains and investments since inception to nearly $900 million. Related to certain of these gains, we incurred $44 million of capital gains tax. As you may have noticed, we now break out these amounts separately on our income statement to make them easier to identify. While we do not typically pay taxes on the annual income we generate, we occasionally incur taxes on certain gross realized gains.

Growing a bit more into the net realized gains that Court highlighted earlier, we generated $170 million of net realized gains on investments during the second quarter, bringing our cumulative net realized gains on investments since inception to nearly $900 million.

Related to certain of these gains, we incurred $44 million of capital gains taxes.

As you may have noticed, we now break out these amounts separately on our income statement to make them easier to identify.

While we do not typically pay taxes on the annual income we generate, we occasionally incur taxes on certain gross.

Scott Lem: Even none of these taxes are realized equity gains have delivered attractive returns for our investors. Turning to the balance sheet, our total portfolio at fair value at the end of the quarter was $27.9 billion. which was up from $27.1 billion at the end of the first quarter and up from $25 billion a year ago.

Realized gains.

Even though none of these taxes are realized, equity gains have delivered attractive returns for our investors.

Turn into the balance sheet our total portfolio, at fair value. At the end of the quarter, it was $27.9 billion.

which was up from $27.1 billion at the end of the first quarter and up from $25 billion a year ago.

Scott Lem: shifting to our funding and capital position. We have remained active in adding capacity, extending our debt maturities, and reducing our costs. In June, following a recovery in the capital markets from earlier volatility, we issued $750 million of long five-year unsecured notes at a new issue spread to treasuries of 175 basis points, marking the tightest five-year new issue spread achieved by BDCs since the beginning of the second quarter. We also continue to benefit from the deep and strong relationship we have with our banking partners. During the second quarter, we upsized our largest revolving credit facility by $880 million, bringing the total facility size to $5.4 billion, extended the end of the revolving period and the maturity date to April 2029 and April 2030, respectively, and reduced the drawn spread on the facility by more than 20 basis points.

15 to our funding and capital position.

We have remained active in adding capacity, extending our debt maturities, and reducing our cost.

In June, following a recovery in the capital markets from earlier volatility, we issued $750 million of long 5-year, unsecured notes at a new issue spread to Treasuries of 175 basis points. Mark in the Titus 5-year, new issue spread achieved by BDCs since the beginning of the second quarter.

We also continue to benefit from the deep and strong relationship we have with our banking partners.

Scott Lem: Subsequent to Quarter End, we added a new banking partner, contributing an additional $100 million to this facility. With this latest increase, we've expanded our revolving credit facility by nearly $1 billion since the first quarter of 2025. This momentum is carried through to our other credit facilities. So far in the third quarter, we extended and upsized two of our other credit facilities by a combined $400 million and reduced the draw on spreads on each by 20 basis. Overall, pro forma for this post-quarter activity, as well as the retainment of our July 2025 notes two weeks ago.

During the second quarter, we upsized our largest revolving credit facility by $880 million, bringing the total facility size to $5.4 billion. We extended the end of the revolving period and the maturity date to April 2029 and April 23rd, respectively, and reduced the drawn spread on the facility by more than 20 basis points.

Contributing an additional $100 million to the facility.

With displaced increase, we've expanded our evolving credit facility by nearly $1 billion since the first quarter of 2025.

This momentum is carried through to our other credit facilities. So far in the third quarter, we extended an upsized $400 million in 2 of our other credit facilities and reduced the drawn spreads on each by 20 basis points.

Scott Lem: Our liquidity remains very strong, totaling nearly $6.5 billion, including available cash. We believe we are well positioned, particularly since we have no debt maturing for the remainder of this year. In terms of our leverage, we ended the quarter with a debt-to-debt ratio net available cash of 0.98 times, consistent with the quarter ago. We believe our significant amount of dry powder positions as well to continue supporting our existing portfolio company commitments, which remains a significant source of deal flow, as well as investment opportunities in new portfolio companies.

Overall profile for the post-quarter and activity, as well as repayment of our July 2025 notes, two weeks ago.

Our liquidity remains very strong, totaling nearly $6.5 billion, including available cash.

We believe we are well positioned, particularly since we have no debt maturing for the remainder of this year.

In terms of our leverage, we entered the quarter with a debt-to-equity ratio of 0.98 times, consistent with the quarter ago.

We believe our significant amount of dry powder.

Scott Lem: Finally, our third quarter 2025 dividend of $0.48 per share is payable on September 30th to stockholders of record on September 15th. ARCC has been paying stable or increasing regular quarterly dividends for 64 consecutive quarters.

Positioned as well to continue supporting our existing portfolio company commitments, which remains a significant source of deal flow as well as investment opportunities in new portfolio companies.

Finally, our third quarter 2025 dividend of $0.48 per share is payable on September 30th to stockholders of record on September 15th.

Scott Lem: In terms of our taxable income spillover, we currently estimate we will have $878 million, or $1.29 per share, available for distribution to stockholders in 2025. In addition to our core earnings continuing to be in excess of our current dividend, as seen by the net realized gains this past quarter and the potential for further net realized gains, we remain optimistic we will further enhance our taxable income spillover. We believe our meaningful taxable income spillover provides further long-term stability for our dividends and is a significant differentiator for us.

Arcc has been paying stable or increasing regular quarterly dividends for 64 consecutive quarters.

In terms of our taxable income spillover, we currently estimate we will have $878 million, or $1.29 per share, available for distribution to stockholders in 2025.

In addition to our core earnings,

Continuing to be in excess of our current dividend.

I see, by the net realized gains as past quarter and the potential for further net realized gains, we remain optimistic. We will further enhance our taxable income spillover.

Jim Miller: I will now turn the call over to Jim to walk through our investment activity. Thank you, Scott. I will now provide some additional details on our investment activity, our portfolio performance, and our position. In the second quarter, our team originated over $2.5 billion of new investment commitment, as our long standing relationships with existing portfolio companies enabled us to remain active during the second quarter, with incumbent borrowers accounting for 74% of our commitment. As Kort also mentioned, we believe we are the only direct lender that focuses on the upper, core, and lower middle markets, which in our view, drives differentiated deal By making new commitments to borrowers ranging from under $10 million to over $500 million in EBITDA, we are able to select what we believe are the most compelling credits across a multi-trillion dollar total addressable market in the U.S.

We believe our meaningful taxable income and spillover provide further long-term stability for our dividends and are a significant differentiator for us.

I will now turn the call over to Jim to walk through our investment activities.

Thank you, Scott.

I will now provide some additional details on our investment activity, our portfolio performance, and our positioning.

In the second quarter, our team originated over $2.5 billion of new investment commitments. Our long-standing relationships with existing portfolio companies enabled us to remain active during the second quarter, with incumbent borrowers accounting for 74% of our commitments.

As Court also mentioned, we believe we are the only direct lender that focuses on the upper.

Core and lower middle markets, which in our view drive differentiated deal flow.

By making new commitments to borrowers, ranging from under.

10 million to over $500 million in EBITDA.

Jim Miller: The scale and broad market coverage of our investment team, which includes more than 200 investment professionals, supports our ability to invest in attractive risk-adjusted return opportunities across varying market environments. While our gross commitments were lower than the prior quarter, reflecting the reduced market activity through much of the quarter, the decrease was less pronounced than in the liquid loan market. and our net fundings of $644 million were more than double the prior quarter's level. These results contributed to a 3% quarter over quarter increase in the overall size of the portfolio at fair value. Our $27.9 billion portfolio at fair value continues to be highly diversified across 566 companies and 25 different industries.

We are able to select what we believe are the most compelling credits across a multi-trillion dollar total addressable market in the U.S.

The scale and broad market coverage of our investment team, which includes more than 200 investment professionals, supports our ability to invest in attractive risk-adjusted return opportunities across varying market environments.

While our gross commitments were lower than the prior quarter, reflecting the reduced market activity through much of the quarter.

The decrease was less pronounced than in the liquid loan market.

And our net fundings of $644 million were more than double the prior quarter's level.

These results contributed to a 3% quarter-over-quarter increase in the overall size of the portfolio at fair value.

Jim Miller: This means that any single investment accounts for just 0.2% of the portfolio on average. And our largest investment in any single company, excluding our investments in SDLP and Ivy Hill, is less than 2% of the portfolio. Our emphasis on portfolio diversification mitigates the impact of negative credit events. in any one company or industry.

Our $27.9 billion portfolio, at fair value, continues to be highly diversified across 566 companies and 25 different industries.

This means that any single investment accounts for just 0.2% of the portfolio on average.

And our largest investment in any single company, excluding our investments in SDLP and Ivy Hill, is less than 2% of the portfolio.

Jim Miller: on that point. Our portfolio management team is monitoring our portfolio on an ongoing basis for potential impacts from changing domestic and foreign policies and geopolitical shifts among a multitude of other potential risks. with respect to tariff As we learn more about our portfolio company's exposures and available mitigate We feel incrementally better about the risks posed by potentially higher tariffs and our portfolio company's strategies to address them. The health of our portfolio is reflected in the 13% weighted average LTM EBITDA growth of our portfolio company. up modestly from 12% last quarter and broad based across industries and company sizes.

Our emphasis on portfolio diversification mitigates the impact of negative credit events in any one company or industry.

On that point.

Geopolitical shifts, among a multitude of other potential risks.

With respect to tariffs.

As we learn more about our portfolio companies, exposures, and available mitigants.

We feel incrementally better about the risk posed by potentially higher tariffs and our portfolio companies' strategies to address them.

The health of our portfolio is reflected in the 13% weighted average LTM IBEDA growth of our portfolio companies, up modestly from 12% last quarter.

Jim Miller: This strength is further supported by the low leverage. and Strong and Stable Interest Coverage of our Portfolio Company. Notably, we see consistently strong performance across company sizes. companies with EBITDA of less than 100 million and those with greater than 100 million of EBITDA. all exhibited double-digit organic EVADA growth over the last 12 Our non accrual rates continue to be well below historical levels, but did tick up modestly at costs from 1.5% to 2%. and on a fair value basis from 0.9% to 1.2% since last quarter. On a cost basis, these metrics remain below our five-year average and our historical average since the Great Financial Crisis.

And broad-based across industries and company sizes.

This strength is further supported by the low leverage.

And strong and stable interest coverage of our portfolio companies.

Notably, we see consistently strong performance across company sizes.

Companies with EVA of less than $100 million and those with greater than $100 million of EBITDA.

All exhibited double-digit organic EBITDA dog growth over the last 12 months.

Our non-accrual rates continue to be well below historical levels, but did tick up modestly at cost from 1.5% to 2.0%.

and on a fair value basis, from 0.9% to 1.2% since last quarter,

Jim Miller: Relative to other BDCs, our non-accruals at cost are 180 basis points below the BDC average over the same time period.

On a cost basis, these metrics remain below our 5-year average and our historical average since the Great Financial Crisis.

Jim Miller: Looking ahead, we remain confident in the caliber of our team, health of our portfolio, and strength of our position. In the third quarter, we are seeing transaction activity recovering to pre tariff levels. As a result, our backlog remains healthy. Our total commitments for the third quarter to date through July 24, 2025 were $1.1 billion. and our backlog as of July 24 2025 stood at $2.6 billion. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close, or we may sell a portion of these investments post-close.

Relative to other BDCs, our non-accruals at cost are 180 basis points below the BDC average over the same time frame.

Looking ahead, we remain confident in the caliber of our team, the health of our portfolio, and the strength of our positioning.

In the third quarter.

We are seeing transaction activity recovering to pre-tariff levels. As a result, our backlog remains healthy.

Our total commitments for the third quarter to date, through July 24, 2025, were $1.1 billion, and our backlog, as of July 24, 2025, stood at $2.6 billion.

Jim Miller: In closing, we're encouraged by the normalization of transaction activity so far, as well as the consistency of our core earnings in the second quarter, which continues to exceed our $0.48 per share dividend. Our declared third quarter dividend of $0.48 per share marks our 16th consecutive year of stable or increasing regular dividends. We're proud of this track record and remain confident in our ability to sustain a steady dividend, supported by our earnings power and significant undistributed spillover income.

As a reminder, our backlog contains investments that are subject to approvals and documentation and may not grow, or we may sell a portion of these investments post-closing.

In closing.

We're seeing the normalization of transaction activity so far, as well as the consistency of our core earnings in the second quarter, which continues to exceed our $0.48 per share dividend.

Our declared third quarter dividend of $0.48 per share marks our 16th consecutive year of stable or increasing regular dividends.

Operator: As always, we appreciate you joining us today and we look forward to speaking with you in the future. With that, operator, please open the line for questions. At this time, if you would like to ask a question, please press star then one on your touchtone phone. If you would like to withdraw your question, please press star then 2. Please Note.

We’re proud of this track record and remain confident in our ability to sustain a steady dividend supported by our earnings power and significant undistributed spillover income.

As always, we appreciate you joining us today, and we look forward to speaking with you in the future.

With that operator, please open the line for questions.

First time, if you would like to ask a question, please press star then 1 on your touchtone phone.

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Finian O'shea: We'll take our first question from Finian O'Shea with Wells Fargo Securities. Your line is open, please go ahead. Hey everyone, good morning. First question on the activity picking up. Can you talk about any improvement in terms of Spreads and Upfront Fees and How Might That Drive an NOI Improvement on the Go-Forward. Thank you. Yeah, sure, Finn. Thanks for the question. Yeah, look, I'd say, although there was some volatility intra quarter on terms, and we saw things improve a bit in the beginning of the quarter, toward the back half of the quarter. I would just reiterate the theme of stability in overall spreads and terms and total yields.

The investor relations team will be available to address any further questions at the conclusion of today's call.

We'll take our first question from Finny and OSHA with Wells Fargo Securities. Your line is open. Please go ahead.

Uh, hey everyone, good morning. Um, so first question on, on the activity, uh picking up can you talk about any um Improvement in in terms of spreads and upfront fees? And and how might that drive um, and and knee Improvement on the go forward. Thanks.

Yeah, sure, Finn. Thanks for the question. Um,

Kort Schnabel: in the new investment environment. Obviously, who knows what the future holds? We're certainly in a little bit more of a volatile time as we try to highlight the prepared remarks. volatility can be good for us.

Kort Schnabel: So if we see that in the future, then there will be an opportunity for, you know, potentially improved terms. But so far, I would just say, we're seeing stability, which, you know, I would say over the last several quarters, now, we do seem to have kind of found Point of stability in terms of spread. And then, yeah, the volume really does seem to be picking up. Again, the story on volume was. a little bit mixed throughout the quarter. First half, a little bit of an air pocket as people were digesting some of the tariff-related news.

Obviously, who knows what the future holds. We're certainly in a little bit more of a volatile time. As we tried to highlight the prepared remarks, uh, volatility can be good for us. So if we see that, uh, in the future, then there will be an opportunity for, you know, potentially improved terms. But so far, I would just say we're seeing stability, which, um, you know, I would say over the last several quarters. Now we, we do seem to have kind of found that that point of stability in terms of spreads. Now, for for 3 to 4 quarters in a row,

Finian O'shea: But as we mentioned in June, really saw a fall. Commitments Post-Quarter End. Very good. Thanks. And for a follow-up on the off-balance sheet vehicles, the FDLP and Ivy Hill, those are on the website.

Um, and then yeah, the volume really does seem to be picking up again. Uh, the the story on volume was uh a little bit mixed throughout the quarter first half, a little bit of an air pocket as people were digesting some of the Tariff related news. Um, but you know, as we mentioned in in June really saw saw a lot of momentum and our, our commitments post quarter end were very strong.

Kort Schnabel: a little smaller as a percent, given the growth of ARCC, but seeing if you can hit on the ability or likelihood to expand those back to historical averages or peaks or wherever you might see fit, thanks. Yeah, both of those vehicles are strategically important vehicles for us, and I guess I would say I wouldn't be surprised if if they grow more from here. Okay, thank.

A very good thanks, and for a follow-up on the off-balance sheet vehicles, the SDLP and Ivy Hill, those are...

You know a little smaller as a percent um given the growth of arcc. Um but seeing if you can hit on the the ability or likelihood um to to expand those back to

Historical averages are peaks or wherever you might see fit. Thanks. Yeah.

Yeah. Both of those vehicles are strategically important for us. And I guess I would say I wouldn't be surprised if, um, if they grow more from here.

Okay, thanks.

Doug Harter: We'll go next to Doug Harter with UBS. Your line is open. Please go ahead. Thanks.

We'll go next to Doug Harter with UBS. Your line is open, please go ahead.

Kort Schnabel: As you think about taking advantage of the growing pipeline that you talked about or deal activity you talked about, you know, how are you weighing the balance between maybe taking leverage up versus continuing? I think it's a balance. And it's something that we're, you know, obviously always monitoring quarter to quarter. We do think that it is It's a key jig for us to raise capital via the ATM program. when it's available. And obviously, this quarter, we moderated it a bit relative to prior quarters, given the transaction volume was a little bit lower. So, you know, 300 million ish this quarter via the ATM versus four to five hundred million ish in the prior few quarters.

Uh, thanks. Uh, as you think about taking advantage of the, uh, the growing pipeline that you talked about or deal activity, you talked about, you know, how are you weighing, uh, the balance between maybe taking leverage up versus, uh, continuing.

Kort Schnabel: Again, you never know where the markets are going to go. crucial for us and our competitive advantage and value proposition to have capital for our existing borrowers and for potential new borrowers in all market And as a reminder, also, when we're raising equity via the ATM program, we're doing that at a premium to book, which, you know, is accreted to now. think good for our shareholders. Obviously, with the volume being a little bit lighter than we had hoped in this past quarter, we weren't able to get more into leverage, but again, core earnings at 50 cents a share still feels very good and stable and well covering the dividend.

Yeah, I think it's a balance um and it's something that we're, you know, obviously always monitoring quarter to quarter. Uh, we do think that it is strategic for us to raise Capital via the ATM program uh when it's available. And obviously this quarter, we moderated it a bit relative to Prior quarters given the transaction volume was a little bit lower. So, you know, 300 million is this quarter via the ATM versus 4 to 500 million ish in the prior few quarters. Um, again you you never know.

Where the markets are going to go is crucial for us and our competitive advantage and value proposition to have capital for our existing borrowers and for potential new borrowers in all market environments.

Um, and as a reminder, when we're raising equity via the ATM program, we're doing that at a premium to book, which, you know, is accreted to NAV. We think this is good for our shareholders.

Um, obviously, with the volume being a little bit lighter than we had hoped in this past quarter, we weren't able to get more into leverage. But again, core earnings at $0.50 a share.

Kort Schnabel: And so it doesn't really bother us that we are operating around one times leverage.

Kort Schnabel: In fact, it probably just gives us a lot of financial flexibility going forward to take advantage of whatever kind of So long answer, but I guess it comes back to what I said in the beginning, which is it's a balance. Great. Appreciate that.

Still feels very good and stable and well covering the dividend. Um, it doesn’t really bother us that we are operating around 1 times leverage; in fact, that probably just gives us a lot of financial flexibility going forward to take advantage of whatever kind of market environments we encounter. So, long answer, but um, I guess it comes back to what I said in the beginning, which is it's a balance.

Robert Dodd: Thank We'll go next to Robert Dodd with Raymond James. Your line is open. Please go ahead.

Great. I appreciate that. Thank you.

Robert Dodd: Hi guys, Congressman Laquoda. On the credit side of Academy, you added a couple, a few more names to Nautical, but a couple of those weren't new, right? I mean, TRG and KBS had defaulted before and been restructured and now they're back. So can you use it? Is it? Those are obviously kind of club deals. Is it getting? harder because you've got a really good track record of doing this, but is it getting harder to restructure a club asset? I appreciate the question, Robert, and yeah, you're absolutely right. Interestingly, a couple of those names, we added, by the way, you know, a handful of names, a little less than a handful of names.

We'll go next to Robert Dodd. With Raymond James, your line is open. Please go ahead.

Uh, hi guys. Um, congrats on the quarter on on the the the credit side. If we can, I mean you had it a couple, a few more names to non call but a couple of those weren't new right. I mean, um,

Pi and KBS had defaulted before and been restructured, and now they're back. Um,

So can you use it? Is it, is it? Those are obviously kind of, you know, club deals. Is it getting...

Harder. Because you've got a really good track record of doing this, but is it getting harder to restructure a club asset?

Kort Schnabel: And yes, a couple of those names had been restructured. So a little bit unusual. But I would say I don't think there's anything to read into there. It's not really about the club nature of those transactions. It's really about the underlying Companies. And I guess what I would say about the increase in non-accruals is, you know, it's obviously something we're paying close attention to, but I would say that there are really not any underlying trends. within these handful of names that we added that we can really discern that would tell us there's, you know, any pockets of the economy that are showing certain weakness relative to other pockets.

Kort Schnabel: Obviously, we're always looking for those kinds of trends in our portfolio. And when we see a little bit of a tick up like this, it gets our attention, but they're really just idiosyncratic factors that are affecting each. So I don't know that I'd read too much into it. The non-accrual number can bounce around a bit quarter to quarter and has. And on an absolute basis, it's still at a pretty low level and below our historical averages and the industry averages. So it's not really something that's giving us a lot of concern at this point, but certainly we're paying close attention.

Becomes a problem again. Any color there. Yeah. I appreciate the question Robert and you yeah, you're absolutely right. Um interestingly a couple of those names we added by the way you know a handful of names, a little less than a handful of names to the non-accruals. Um and yes uh couple of those names had been restructured. So um a little bit unusual. But I I would say I I I don't think there's anything to read into there. It's not really about the club nature of those transactions. It's really about the underlying companies. Um, and I guess what I would say about the increase in non-accruals is, you know, it's obviously something we're playing close attention to, but I would say that there are really not any underlying Trends uh, Within These handful of names that we added that we can really discern. Um, that would tell us, there's, you know, any pockets of the economy that are showing certain weakness relative to other Pockets. Obviously, we're always looking for those kinds of Trends in our portfolio. Um,

And when we see a little bit of the tick up like this, it gets our attention, but they're really just idiosyncratic factors that are affecting each. Um, so I don't know that, I'd read too much into it. The, the non-accrual number can bounce around a bit quarter to quarter and has you look back over the last, you know, many quarters uh and on an absolute basis. It's still at a pretty low level and below our historical averages in the industry averages, so it's not really something that's giving us a lot of concern at this point. But certainly

Robert Dodd: Got it. Thank you.

They were paying close attention to it.

Robert Dodd: And then one more, if I can, not technically a follow up. On Ivy Hill, you injected some more capital into Ivy Hill this quarter. Is that part of just kind of the long term growth plan? Or was that opportunistic, given the volatility in the liquid loan markets? Yeah, good question. It is just part of the long term growth plan, normal course, we did take a little bit of a pause on selling assets, you know, for a few quarters prior to this one. But for that reason, we felt like it was the right time to sell some more assets.

Got it, got it. Thank you. And then 1 1 more, if I can not technically a follow up on Ivy Hill, um you you injected some more sample into Ivy Hill. This quarter is that part of just kind of the long-term growth plan or was that opportunistic given? Um, the volatility in in the liquid loan markets that obviously we saw in Q2

Kort Schnabel: Again, part of our policy, normal course, IAMS is strategic. vehicle, and they have demand for assets. And it felt like a good time to sell some assets down. So really nothing, nothing specifically opportunistic about the fact that we did this quarter versus prior. Got it.

Robert Dodd: Thank you.

Yeah, good question. It, it is just part of the long-term growth plan, normal course. Uh, we did take a little bit of a pause on selling assets, you know, for a few quarters prior to this 1. But um for that reason, we felt like it was the right time to uh sell some more assets. Again, part of our policy, normal course I hams a strategic um vehicle and they have demand for assets and it felt like a good time to sell some assets down. So, um, really nothing nothing. Specifically opportunistic about the fact that we did this quarter versus prior quarter.

Got it. Got it. Thank you.

Aaron Saganovich: We'll go next to Aaron Saganovich with Truist. Your line is open. Please go ahead. Thanks. You mentioned that in the activity that you're seeing recently has been a little bit more skewed to the upper middle market, which Yeah. about that. Yes, we are seeing it broadened out, for sure across all different types, you know, types and sizes of companies. Again, one of our, I think, big advantages is the broad origination, and you'll see us move around a bit based on the opportunities that we're finding in the market. And, you know, it's interesting in 2022 and 2023, we moved up market significantly when there was dislocation, then we kind of broadened back out.

We'll go next to Aaron Ciganovich with Truist. Your line is open, please go ahead.

Thanks. Um, you mentioned that the activity you’re seeing recently has been a little bit more skewed to the upper middle market, which makes sense given the volatility. But, you know, as you talk about the activity and the pipeline looking pretty strong for the second half, are you seeing that broadened out into the core and lower middle market as well?

Yeah.

Kort Schnabel: And you look at the average EBITDA of our new borrowers that we're bringing into the portfolio, that's kind of come down through 2024, we moved a little bit more down market this quarter, the average EBITDA ticked back up again a little bit.

Kort Schnabel: But if you look at the pipeline and the post quarter end commitment. is more broad based, which again is another sign to us that suggests there, you know, should be some nice momentum going into Yeah, and I just want to follow up on the leverage question. Totally understand and appreciate.

Sorry about that. Um, yes, uh, we are seeing it brought out uh, for short cross all different type, you know, types and sizes of companies. Um, again 1 of our I think big advantages is the broad origination and you'll see us move around a bit based on the opportunities that we're finding in the market. And you know, it's interesting and 2022 and 2023. We moved up Market significantly. When there was dislocation then we kind of broadened back out and you look at the average EBA of our new borrowers that were bringing into the portfolio. That's kind of come down through 2024, we moved a little bit more down Market, this quarter, the average ebit dot, ticked back up again, a little bit, um, but if you look at the, the pipeline and the post quarter end commitments,

It is more broad-based, which again is another sign to us that suggests there should be some nice momentum going into the second half of the year.

Got it. Yeah. And I I just want to follow up on the The Leverage question, um, in a totally understand and appreciate, you know, balancing the equity issuance Etc. Um, The Leverage, you know, it's it's not at a

Kort Schnabel: Unknown Executive, Robert DeVeer, Derek Hewett, Brian McKenna, Mitchel Penn, Scott Lem, Ares to raise that up. I'm not saying a lot, just one minute or two, something like that. No, I understand. I understand. Look, it's, yeah, we have a stated range of 0.9 to 1.25. So it's, you know, a little bit toward the lower bound of that range. You know, I think we feel we feel great about the fact that we're well covering the dividend and delivering nice stable results. while keeping that leverage level toward the low end of the range, because I think it does, as you pointed out in the question, give us a lot of flexibility going forward to capitalize if there is a pickup in transaction activity or more volatility that might provide an opportunity to take advantage of better terms in the market.

Extremely low level, but it is lower um than what typical peers uh would have, you know, is there, is there a, you know, a tip, is there a specific reason? Uh, that you're, you know, at that level just the the broader volatility in the in the global economy, you know, just just curious as to what would give you a little bit more confidence to to raise that up a little bit.

And I understand. Look, it's, yeah, we have a stated range of 0.9 to 1.25. Um, and so it's, you know, a little bit toward the lower bound of that range. Um,

Kort Schnabel: So I actually kind of like the fact that we're operating with this amount of flexibility and it's just another lever that we would have to help earnings to the extent that we need it, but we don't really. You don't really need it right now and Transaction volume was a little bit slow. It's not like we are managing the business to this leverage level. It just kind of happens to be where we're ending up and we kind of quite like that. Okay. All right. Thank you.

you know, I I think we feel we feel great about the fact that we're well covering the dividend and delivering nice, stable results, uh, while keeping that leverage level toward the lower end of the range, because I think it does as you pointed out in the question, give us a lot of flexibility going forward. Uh, to capitalize if there is a pickup and transaction activity or more volatility that might provide an opportunity to take advantage of better terms in the market. Um, so, uh, I actually, I actually kind of, like, the fact that we're operating with this amount of flexibility and it's just another lever that we would have, uh, to, you know, help earnings, um, to the extent that we need it. But we don't really, uh, we don't really need it right now. And, um, I think it puts us in a nice spot. So, um, you know, obviously transaction volume was a little bit slow. It's not like we are managing the business to this leverage level. It just kind of happens to be where we're ending up and we, we

Kind of quite like it.

Okay, all right. Thank you.

Casey Alexander: We'll go next to Casey Alexander with Compass Point. Your line is open, please go ahead. Yeah, hi. I appreciate your commentary about spread. I'm sorry, I must be failing my piano lessons. I appreciate your your commentary about about spreads. I'm wondering, you should you're you're getting a little bit better pipeline fill.

We'll go next to Casey Alexander with Compass. Your line is open; please go ahead.

Yeah. Hi. Um

I appreciate your commentary about spreads.

Kort Schnabel: Is it your view that, you know, a real and dynamic increase in deal activity would help push spreads out to a little bit more attractive levels, or is there just so much capacity out there that it's really hard for spreads to make much of a move? Yeah, look, the laws of supply and demand would suggest that if more deal flow comes into the market, you know, spreads could, should widen modestly. I guess I would say, I don't think we're unhappy with where spreads are, you know, total, you have to look at total yields, and with base rates being where they are now.

Um, sorry. I must be failing my piano lessons. I appreciate your commentary about spreads. I'm wondering, you should be getting a little bit better pipeline filled.

Is it your view that that, you know, a real and dynamic increase in Deal activity, would help push spreads out to a little bit more attractive levels. Or or is there just so much capacity out there? That that it's really hard for spreads to make much of a move

Kort Schnabel: And then you combine up front fees and spreads, you know, we're earning high single digits on lower levered first lane senior assets, unit tranches. and low double digits on, you know, low to mid double digits, even on junior debt assets. And so the course of history, those are pretty good total absolute returns. Historically, it's been the case that, you know, Spreads move around if base rates come down, spreads widen. Base rates go up, spreads can tighten. They kind of move against each other, and that creates some balance. So I guess I would just, again, say we're not, we feel like this is a good investing environment.

Um, yeah, look the laws that supply and demand would suggest that if more deal flow, comes into the market, you know, spreads could should widen modestly. Um, I, I guess I would say, I, I don't think we're unhappy with where spreads are, um, you know, total you have to look at total yields and with base rates being where they are now, um, and then you combine upfront fees and, and spreads, you know, we're earning

Um, high single digits on lower levered FirstLink senior assets, unit tranches, uh, and low double digits on, you know, low to mid double digits even on junior, uh, debt assets. And the course of history, um, those are pretty good total absolute returns. Um, historically, it's been the case that, you know,

Kort Schnabel: And also, if you look at leverage level. that exist in our current portfolio and where we're investing new assets. They've been very stable over the last several quarters and. you know, not anywhere near the high end of our historical range of where we're investing in new leverage levels. So on a risk adjusted return basis, we feel pretty good.

Casey Alexander: But yes, certainly, you know, we're hopeful that more transaction activity, you know, could could lead to some spread widening. But Hard to Thanks for that.

Spreads move around. If you know base rates come down, spreads, widen, base rates, go up, spreads can tighten, they kind of move against each other and that creates some balance. Um so I I guess I would just you know, again say we're not we feel like this is a good investing environment. And also if you look at leverage levels uh that uh exist in our current portfolio and where we're investing new assets, they've been very stable over the last several quarters and um, you know, not anywhere near uh, the high end of our historical range of where we're investing in new leverage levels. So on a risk adjusted return basis. Uh, we feel pretty good

Um, but yes, uh, certainly, you know, we’re hopeful that more transaction activity, you know, could lead to some spread widening. Um, but, you know, it’s hard to predict.

Casey Alexander: Just a maintenance question, and I'm sorry if I missed this. I had a couple distractions, but there's a pretty good jump in dividend income quarter over quarter. Was there any one time in that, or was that just based upon growth of the vehicle? Yeah, it's a question. It's a mix. I mean, we definitely had a little bit of recurring portion of the portfolio, but there also was a non-recurring portion as well. It does tend to happen on occasion. So that's, that's what drove that. Do you have, you know, about how much was that non-recurring? Uh, about 10 million of it.

Uh, thanks for that. Uh, just a maintenance question, and I'm sorry if I missed this; there have been a couple of distractions, but they're pretty good. Jump in dividend income quarter over quarter. Was there any one-time effect in that, or was that just based upon the growth of the vehicles?

Yeah, it I think it's a question. It's, it's a mix. I mean, we definitely had a little bit of um, increases from the recurring portion of the portfolio, but there also was a non-recurring portion as well, which it does tend to happen on occasion. So that's um, that's what drove that.

Do you have, you know, about how much was that?

Non-recurring.

Uh, about $10 million of it.

Scott Lem: Okay, great. is coming off of our equity co-investment portfolio. Every now and then, you know, we get All right. Thank you.

Okay, great. Thank you.

Those are just coming off of our equity co-investment portfolio. Every now and then, you know, we get dividends on those.

Those Equity go.

All right. Thank you.

Kenneth Lee: We'll go next to Kenneth Lee with RBC Capital Markets. Your line is open, please go ahead. Hey, thanks for taking my question. As you look across your pipeline of potential originations there, and it sounds like are you seeing a lot more of the upper end of the segment more recently? How do the relative pricing and returns for the smaller scale or more core middle market segment compare to the upper? Are you seeing more attractive returns in any particular segment? I just want to get a little bit more color around that. Thanks. Yeah, it's not just spread and yield, it's also leverage levels.

We'll go next to Kenneth Lee with RBC Capital Markets. Your line is open, please go ahead.

As you look across your pipeline, a potential origination is there. And it sounds like.

You've been seeing a lot more of the upper and the of the segment more recently, um how do the relative pricing and and returns for for the the smaller scale or more core Middle Market segment compared to to the upper are you seeing more attractive um, returns in in any particular segment? Just want to get a little bit more color around that, thanks.

yeah, it's it's not just

Kort Schnabel: You know, and I would say, you know, it's a spectrum, right? As you get into smaller companies, leverage levels are generally a bit lower, and spreads are generally a bit wider. I don't want to get too specific on terms because it is a range and don't want to, you know, mislead in any way. But, you know, maybe generally would say, you know, you're seeing probably 50 basis points, if not more. yield, incremental yield on sort of smaller size companies versus larger size companies. But again, the leverage levels can also be several turns lower, turns of EBITDA lower than what we're seeing in comparable large cap companies.

Spread and yield. It's also leverage levels.

Um, you know, and I would say, you know, it's a spectrum, right? As you get into smaller companies, leverage levels are generally a bit lower and spreads are generally a bit wider. Um, I don't want to get too specific on terms because it is arranged and don't want to, you know, mislead in any way. But, you know, maybe generally would say, you know, you're seeing probably 50 basis points, if not more.

Kenneth Lee: So that's kind of, Okay, very helpful there.

Uh, yield, uh, incremental yield, uh, on sort of smaller-sized companies versus larger-sized companies. But again, the leverage levels can also be several turns lower, uh, in terms of EBITDA lower than what we're seeing in comparable large-cap companies. So, um, that's kind of we be how I didn't try to answer the question.

Kort Schnabel: And just one, one quick follow up, if I may, in terms of the equity co-investments, the exits, I presume they were not driven by Ares Capital. I, you know, they were not discretionary, but just want to double check that and to the extent that you have any visibility, is there any potential outlook for further equity realizations or is it primarily driven by the sponsors? definitely primarily driven by the sponsors. Not a lot of control that we have, we're not obviously in the control equity business. So they are a little bit sporadic. But if you look over a long period of time, obviously, that's been a huge differentiator for us and our strategy of building that diversified portfolio.

Okay, very helpful there and just 1 1, quick follow-up. Uh, if I met in terms of the the equity, co-investments the, the exits, I I presume. They, they were not driven by, by Aries capital. I, I, you know, they were not discretionary, we just want to double check that and, um, you know, to the extent that that you have any visibility, is there any potential outlook for further Equity realizations or, or is it primarily driven by by the sponsors? Thanks.

Kenneth Lee: In terms of looking forward, probably can't comment or get really... Too much forward-looking guidance around what to expect going forward. Okay, gotcha. Very helpful there. Thanks again.

Definitely primarily driven by the sponsors. Um, not a lot of control that we have; we're not obviously in the control equity business. Um, so they are a little bit sporadic. Um, but if you look over a long period of time, obviously that's been a huge differentiator for us in our strategy of building that diversified portfolio so that we can offset our losses with gains. Um, and in terms of looking forward, probably can't comment or get really.

Too much forward-looking guidance around. What to expect going forward? Sorry, sorry for that.

Okay, gotcha. Very helpful there. Thanks again.

Melissa Wedel: We'll go next to Melissa Wedel with J.P. Morgan. Your line is open. Please go ahead. Good afternoon. Thanks for taking my questions.

We'll go next to Melissa Weddle with J.P. Morgan. Your line is open. Please go ahead.

Melissa Wedel: Just to follow up on a couple of things, I wanted to go back to the comments made about the impact of tariffs. on portfolio companies. Are you still estimating a roughly mid single digit exposure across the portfolio to companies that could be impacted by tariffs sort of before any mitigating factors? Yeah, glad you asked, Melissa. It's actually, you know, I think we're feeling better this quarter than we were last quarter. So we spent a lot of time If you remember last quarter, it was all fresh and we were kind of reacting pretty quickly. But we spent a lot of time through the quarter speaking to all of our impacted portfolio companies, understanding their ability to mitigate the tariffs via pricing actions or moving manufacturing or other measures.

Good afternoon. Thanks for taking my questions. I wanted to follow up on a couple of things. I wanted to go back to the comments made about the impact of tariffs.

On portfolio companies, are you still estimating a roughly mid-single-digit exposure across the portfolio to companies that could be impacted by tariffs sort of before any mitigating factors?

Kort Schnabel: And, you know, I think our portfolio companies feel quite good about being able to pass through pricing. People are starting also to look into moving manufacturing, although that hasn't really started yet in any material way. I think people are still waiting to see where the final tariff rates shake out. But the visibility these companies have into the mitigating actions feel pretty good. So and I guess I should also mention there have been some new tariffs that have come out, obviously, and there's a lot of change still going on. But in some of these specific sectors, steel and whatnot, and we've looked into our portfolios and we really don't have a lot of exposure to those types of sectors and materials.

Yeah, glad you asked Melissa, um, it's actually, you know, I think we're feeling better this quarter than we were last quarter. So we spent a lot of time. Um, if if you remember last quarter, it was all fresh and we were kind of reacting pretty quickly. Uh, but we spent a lot of time through the quarter, speaking to all of our impacted portfolio companies, understanding their ability to mitigate the terrorists via pricing actions or moving manufacturing, um, or other measures and, you know, I think our portfolio companies feel quite good about being able to pass through pricing. Um, people are starting also to look about look into moving manufacturing. Although that hasn't really started. Yet in any material way, I think people are still waiting to see where the final tariff rates shake out, uh, but the the visibility of these companies have into the mitigating actions, feel pretty good.

Kort Schnabel: We're sort of investing in mainly service oriented businesses. So we're happy to say that actually the high risk names. In our portfolio, we think now are a low single digit percentage of the portfolio relative to the mid single digit that we talked about.

Kort Schnabel: Okay, thanks for that update. And then just to clarify, it sounds like some of the price increases are happening already. starting to a little bit Obviously, the tariffs, you know, there was a pause on a lot of the tariffs. The facts of them are just starting to flow through now, but I think what we found is that our companies have reached out to their customers and had discussions about pending price increases and are feeling relatively good about the responses they're getting. So, you know, I don't know if it's actually like broad based actions that have been pushed through yet, but, you know, kind of just starting.

Um so uh and and I guess I should also mention there. There have been some new tariffs that have come out obviously. And there's a lot of change still going on, uh, but in some of these specific sectors that steel and and whatnot, and we looked into our portfolios and uh we we really don't have a lot of exposure to those types of uh sectors and materials. We're a service, you know investing in mainly service oriented businesses. So uh we're happy to say that actually the high-risk names uh in our portfolio. We think now are a low single digit percentage of the portfolio relative to the mids single digit that we talked about last quarter.

Just to clarify, it sounds like some of the price increases are happening already.

Starting to a little bit, um,

Uh, obviously the tariffs, you know,

Melissa Wedel: Got it. Thank you.

That the pause on a lot of the tariffs and the effects of them are just starting to flow through now. But, um, I think what we found is that our companies have reached out to their customers and had discussions about pending price increases and are feeling relatively good about the responses they're getting. Um, so, you know, I don't know if it's actually like broad-based actions that have been pushed through yet. Um, but, you know, kind of just starting now.

Scott Lem: And my last question, I wanted to follow up on the capital injection or the additional investment into IHAM this past quarter. I also noted that one of the comments in the deck about exited investments post-quarter end included a sizable amount in the subordinated loan to IHAM. So I'm just curious how we reconcile those two, the flows into Ivy Hill this quarter and then apparently out of the subloan in 3Q. Yeah, so we do have a just a reminder, we have a subordinated loan with Ivy Hill that sometimes uses effectively as a working capital line for Ivy Hill.

Got it. Thank you. And my last question, um, wanted to follow up on the capital injection or the, the additional investment into IAM, um, this past quarter. I also noted that 1 of the comments on the, uh, in the deck about exited Investments, post quarter, end included a sizable amount in the subordinated loan that I am. So, I'm just curious how to how we reconcile. Those 2, the Flows In into Ivy Hill, this quarter, and then apparently, um, out of the sub loan uh in 3Q.

Scott Lem: And so we use that to put capital in there, and then they were able to send some of the proceeds back to us post quarter. Okay, got it. Thank you. Is that clear? I mean, it's similar to equity, just more recyclable. It allows Yep, makes sense.

Yeah, so we we do have a a this is a reminder we have a subordinate alone with Ivy Hill that sometimes uses effectively as a working capital line for Ivo. And so we use that to put capital in there and then they were able to um send some of the proceeds back to US Post quarter in

Okay, got it. Thank you.

Yeah, is that clear? I mean, it's similar to equity. It’s more recycled; it allows us to recycle.

Yep, makes sense.

Operator: And as a reminder, if you'd like to ask a question today, you may do so by pressing star one.

Sean Paul Adams: We'll go next to Sean Paul Adams with B. Reilly Securities. Your line is open, please go ahead.

And as a reminder, if you'd like to ask a question today, you may do so by pressing star 1.

Sean Paul Adams: Hey guys, good afternoon. Touching back on Ivy Hill, it seemed there was a slight shift in the gross commitments portion for first lien loans, which I'm guessing is largely the reflection of Ivy Hill repayments. So it was just an allocation rebalancing. But when you're looking at the balance of Ivy Hill, will there be more of a long term shift in the target asset classes to balance the growth targets or a change in the target for first lien? Um, no, Ivy Hill has a first lane investment strategy. And that will primary thrust. Got it.

We'll go next to Sean. Paul Adams with B. Riley Securities, your line is open. Please go ahead.

Hey guys, good afternoon. Um, touching back on Ivy Hill, it seemed there was a slight shift in the gross commitments portion for first lien loans, which I'm guessing is largely a reflection of Ivy Hill repayments, so it was just an allocation rebalancing. But when you are looking at the balance of Ivy Hill, will there be more of a long-term shift in the target asset classes to balance the growth targets, or a change in the target for first lien?

Um, no. Ivy Hill has a first-line investment strategy, and that will continue to be the primary thrust of their strategy. We really don't anticipate any strategic changes.

Kort Schnabel: Thank you.

Got it. Thank you.

Kort Schnabel: This concludes our question and answer session.

Kort Schnabel: I'd like to turn the conference back over to Kort Schnabel for any closing remarks. No closing remarks. Thanks, everybody, for joining, and we'll talk to you next.

Includes our question and answer session.

I'd like to turn the conference back over to Kort Schnabel for any closing remarks.

No closing remarks. Thanks, everybody, for joining, and I'll talk to you next quarter.

Operator: Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the call will be available approximately one hour after the end of the call through August 29th at 5 p.m. Eastern Time to domestic callers by dialing 1-800-695-1624 and to international callers by dialing plus 1-402-530-9026. An archived replay will also be available on a webcast link located on the home page of the Investor Resources section of Ares Capital's website.

Ladies and gentlemen, this concludes our conference call for today.

If you missed any part of today's call, an archived replay of the call will be available approximately 1 hour after the end of the call, through August 29th, at 5:00 p.m. Eastern Time. Domestic callers can access the replay by dialing 1-800-695-51624, and international callers can reach the replay by dialing +1 402-530-926.

An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital's website.

Unknown Executive: I'm Deval Pattear, Unknown Recording