Ares Capital Corporation Q1 2026 Earnings Call - Navigating Software AI Anxiety and Improving Deal Terms

Operator: Good afternoon, everyone. Welcome to the Ares Capital Corporation’s first quarter ended March thirty-first, 2026 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Tuesday, April twenty-eighth, 2026. I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations. Please go ahead, sir.

John Stilmar, Partner, Public Markets Investor Relations, Ares Capital Corporation: Thank you, good morning, 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 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. 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, such as Core earnings per share or Core EPS. The company believes that Core EPS provides a useful information to investors regarding financial performance because it’s one method the company uses to measure its financial condition and results of operation.

A reconciliation of GAAP net income per share, the most directly comparable GAAP financial measure to Core EPS, can be found in the accompanying slide presentation for this call. In addition, the reconciliation of these measures may also be found in the earnings release filed this morning with the SEC on Form 8-K. Certain information discussed in this conference call and the accompanying slide presentation, including credit ratings and information relating to portfolio companies, was derived from or obtained by third-party sources and has not been independently verified, and accordingly, the company makes no representation or warranties with respect to this information. The company’s first quarter ended March 31st, 2026 earnings presentation can be found on the company’s website at Ares, www.arescapitalcorp.com by clicking on the first quarter 2026 earnings presentation link on the homepage of the Investor Resources section.

Ares Capital Corporation’s earnings release and Form 10-Q are also available on the company’s website. I’d like to now turn the call over to Kort Schnabel, Ares Capital Corporation’s Chief Executive Officer. Kort?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Thanks, John. Hello, everyone, and thank you for joining our earnings call today. I’m joined by Jim Miller, our President, Jana 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. Let me start by providing a few thoughts on ARCC’s performance, current market conditions, and our positioning in this environment. We believe we are off to a strong start in 2026 with solid earnings and strong fundamental portfolio performance. Our Core earnings of $0.47 per share represents an annualized ROE of 9.6% in what has historically been a seasonally slow quarter for originations. Our overall portfolio quality remains healthy with continued low levels of non-accruing loans and problem assets.

We are seeing an improving investment environment as terms and economics are becoming more attractive on new transactions, and we believe our strong balance sheet and available liquidity of approximately $6 billion provide us significant advantages in this environment. Let’s now discuss the changes we are seeing in overall market conditions. Heightened capital markets volatility, geopolitical uncertainty, and net outflows from retail products exacerbated an already seasonally slow market period in the first quarter. These factors contributed to not only lower transaction volumes, but also diminished competition and improved lending conditions as lenders more heavily dependent on retail flows have retrenched and the syndicated bank loan market has been uneven with many banks exhibiting diminished risk appetite. As a result, we are seeing a reset underway with wider spreads, lower leverage levels, and more attractive overall deal terms across the market.

New transactions today are being discussed at 50-75 basis points of enhanced levels of fees and spread alongside a half to full turn of lower leverage and tighter documentation versus the 2nd half of last year. As risk premiums widened during the 1st quarter, overall market activity slowed as the market searched for clearing prices during this period. However, over the past 3-4 weeks, we have seen a noticeable pickup in new deal activity as borrowers recalibrate expectations for economics and terms and continue to pursue their capital needs. One of the key themes we see unfolding is that the ability to provide capital at scale and with certainty is becoming increasingly differentiated. We believe these types of situations are creating greater economic opportunities for the largest and most stable platforms with capital.

Our healthy levels of available capital, combined with our connectivity to the broader Ares U.S. direct lending platform and its significant dry powder from institutional sources, positions us well to capitalize on these market conditions. Our diverse, high-quality portfolio also continues to perform well. Our granular level of diversification further advantages us as loan concentration is one driver of growing dispersion in results across our market. With investments across 607 companies and an average position size of less than 20 basis points, we believe this level of diversification meaningfully limits idiosyncratic risk to any one position. Our borrowers generated organic weighted average LTM EBITDA growth of approximately 9% through the end of the first quarter, in line with ARCC’s 10-year average and more than twice the growth rate of the companies within the broader syndicated loan benchmark.

Portfolio fundamentals also remain solid with broadly stable interest coverage and leverage levels, low loan-to-value ratios by historical standards, and revolving credit facility utilization in line with historical norms. Our non-accruals also remain well below historical average levels. With this as context to the overall health of the portfolio, let me provide some important updates about our views on the specific strength and position of our software investments. As I articulated on our last earnings call, not all software companies carry the same level of AI disruption. In fact, many are embracing AI and seeing enhanced growth. We believe the most important question is not how much software exposure we have, but what types of companies we have invested in and what staying power, risks, and opportunities our companies have through this latest technological cycle.

Nearly all of our software companies are focused on what we view as foundational infrastructure for complex businesses, and this infrastructure often powers customers’ core operating systems. These software products generally operate as systems of record in regulated end markets, have high switching costs, and benefit from proprietary data. Importantly, our software investments are supported by large, diversified businesses with a weighted average EBITDA of $340 million, strong cash flow, and meaningful equity cushions, even as valuation multiples have come down for most software companies broadly. Most of these companies are also protected by business models with strong contractual cash flows and continue to sign up new customer contracts as they move forward and invest in AI themselves.

To pressure test this view of our software investments, we proactively engaged a top-tier global management consulting firm in the fourth quarter of 2025 to challenge our AI risk assessment across our software-oriented portfolio companies. Prior to engaging this firm, we conducted extensive diligence in the middle of 2025 and ultimately selected this firm not only for its deep technical expertise, but also for its reputation as a rigorous and objective evaluator. As part of this independent study, the consulting firm had direct access to each borrower, its financials, and if relevant, the associated financial sponsors or other key owners of the business. This enabled them to assess whether AI is likely to be additive, whether it could enhance or hurt positioning depending on execution and product evolution, or whether it poses a direct risk to the core business absent significant strategy change.

The consultant’s study found the largest differences between higher and lower risk companies to be system of record positioning, high switching costs, the benefit of regulatory barriers, proprietary data moats, and control of data. The firm also assessed human dependency, data availability, risk of error, and task structure, among other dimensions. Overall, the independent review conducted over the past several months found that the AI-related risk across our software-oriented portfolio is relatively limited. Their report indicated that about 85% of our software portfolio at fair value represented low risk, with only a small subset of companies categorized as higher risk. These higher risk companies represented only 1% of reviewed names by fair value and 2% by count, or only about 0.3% of ARCC’s total investment portfolio at fair value.

An additional 14% of reviewed companies by fair value and count were classified as medium risk, representing only about 3% of ARCC’s total investment portfolio at fair value. Importantly, medium or higher risk classifications do not imply current business impairment. Rather, they reflect the need for continued investment and product evolution, with many of these companies well-positioned to adapt within the time necessary. Of the 85% of names categorized as low risk, these companies are well-positioned to adapt and, in the majority of cases, benefit from AI-driven enhancements. In these businesses, AI is primarily augmenting existing SaaS platforms through incremental or high-value features layered on top of core software, with existing revenue streams largely maintained and incremental AI upside accruing to incumbent vendors.

While we believe we have a solid view of the positioning of our portfolio, we recognize the need to remain vigilant with our portfolio companies on this topic. We also will remain disciplined in allocating new capital to the software sector. As we seek to take advantage of opportunities in the current market, it is critical that we are supported by a conservatively constructed balance sheet and a stable capital base. As Scott will address, our substantial available liquidity of approximately $6 billion and our well-structured liability profile with minimal near-term maturities offer us the flexibility to pursue opportunities with both new and existing portfolio companies. Our outlook for relative stability in our earnings leads us to maintain a stable level of quarterly dividends.

Importantly, Core EPS, taken together with $0.15 per share of net realized gains, was well in excess of the dividend this quarter, providing a strong underlying foundation for current distributions. That foundation is further supported by ample spillover income, modest leverage, a more stable rate environment, and credit performance that aligns with our historical track record. Looking ahead, with spreads widening and terms improving, and given our strong competitive position, we continue to believe that ARCC’s current dividend approximates the long run underlying earnings power of our business. Our significant level of spillover income provides an added degree of flexibility and can serve as a short-term bridge during periods of seasonally slow transaction levels. These factors position us to continue building on our track record of stable or growing regular quarterly dividends for more than 16 consecutive years.

With that, I will turn the call over to Scott to take us through more details on our financial results and balance sheet.

Brian McKenna, Analyst, Citizens4: Thanks, Kort. I will begin by reviewing certain key financial metrics from the first quarter, followed by an analysis and discussion of our robust balance sheet and liquidity, and conclude with details of our dividend and the taxable spillover referenced earlier by Kort. This morning, we reported GAAP net income per share of $0.13, down from $0.41 in the fourth quarter of 2025 and $0.36 for the same period a year ago. The decline was largely driven by net unrealized losses, primarily due to spread widening in private credit markets, causing market-driven unrealized depreciation.

Core earnings per share was $0.47 in the first quarter of 2026, down from the $0.50 we reported both last quarter and a year ago, primarily due to the impact of a full quarter of current base rates on our interest income as well as lower capital structuring service fees. The decline in capital structuring service fees is largely due to reduced market activity typical of the first quarter, in addition to softness from the broader credit market volatility that Kort mentioned earlier. Turning to the balance sheet. Our total portfolio at fair value at the end of the first quarter was $29.5 billion, consistent with the end of the fourth quarter and up from $27.1 billion a year ago.

Our NAV ended the quarter at $14.1 billion or $19.59 per share, which represents a decline of $0.35 per share from a quarter ago and $0.23 per share from a year ago. This decline in the first quarter contrasts with the long-term NAV growth we have generated alongside paying a stable level of dividends. For example, ARCC has delivered NAV growth exceeding 10% over the past five years and more than 30% since inception. Supporting the strength of our balance sheet, we had an active quarter enhancing our liability profile by accessing over $1.25 billion of incremental debt financing to further build on what we believe is a best-in-class balance sheet structure.

Reflecting our long-standing strategy of being a consistent issuer in the investment grade notes market, we kicked off the year by issuing $750 million of long five-year unsecured notes at an industry-leading spread of 180 basis points over Treasuries, which we swapped to SOFR plus 172 basis points. During the first quarter, we remained active with our diverse bank capital providers and specifically expanded our SMBC funding facility by $500 million at similar or improved terms, including a 5 basis point reduction in the spread. On the topics of banks, I would like to take a few minutes to share our perspective on bank financing markets and the stability of banks providing capital to our sector.

At ARCC, across our 4 credit facilities, we maintain relationships with more than 40 banks and lending institutions, many of which have been longstanding supporters of ours. The weighted average length of these relationships exceeds 13 years, with several dating back more than 20 years to the early days of our company. Over that time, we have continued to broaden and deepen these partnerships with most of these banks and lenders working with us not only at ARCC, but across the Ares platform. We believe these well-established long-term relationships, combined with our scale, capabilities, and performance, provide us with unique and consistent access to capital across multiple markets, and especially with our banking and lending partners. Additionally, drawing on our experience successfully navigating the global financial crisis, we view the structure, duration, and diversification of our funding facilities as essential factors in ensuring balance sheet stability.

As a reminder, all our credit facilities are fully committed with no maturities before 2030 and no mark-to-market provisions. Unlike pre-crisis facilities, which often involve margin calls and shorter maturities that impacted capital availability and liquidity, our current facilities offer stable access to capital throughout the commitment periods. Our experience through the Global Financial Crisis also reinforced the importance of maintaining diverse funding sources, which has been one of the keys to our success and will remain one of our most important strategic priorities. Reflecting this focus, we are the highest-rated BDC across all three major rating agencies, with the longest ratings history, 19 years with two agencies and 16 years with the third, and more than 15 years of experience issuing investment grade and convertible notes.

The combination of our ratings and the fact that the vast majority of our assets are funded by unsecured debt and the largest permanent equity capital base in the sector further bolsters our position in the eyes of our banking partners. More recently, in 2024, we further enhanced the diversity of our funding sources and broadened our lender base through the securitization market. By generally issuing only through the double-A tranche, we are able to achieve similar advantage rates to what we receive on our credit facilities while further advancing our financial goals and benefiting from Ares’ strong reputation with investors.

Looking forward, while market participants may anticipate tighter credit conditions and reduce access for certain private credit managers, we believe BDCs affiliated with large-scale leading managers who possess long-term proven track records, extensive capabilities, and deep and enduring relationships, such as ourselves, will continue to receive strong support on attractive terms from debt capital stakeholders, including investors, banks, and other lending institutions. Our liquidity position remains strong, totaling approximately $6 billion. In terms of our leverage, we ended the fourth quarter with debt-to-equity ratio net available cash of 1.1 times versus 1.08 times last quarter, leaving us with meaningful headroom to support investing while maintaining ample cushion to absorb potential future volatility. Our first quarter 2026 dividend of $0.48 per share is payable on June 30th to stockholders of record on June 15th.

ARCC has been paying stable or increasing regular quarterly dividends for 67 consecutive quarters. In terms of our taxable income spillover, we currently estimate that we will carry forward $988 million or $1.38 per share available for distribution to stockholders in 2026. I will now turn the call over to Jim to walk through our investment activities.

Jim Miller, President, Ares Capital Corporation: Thank you, Scott. I’ll start with some additional context on our investment approach in the current environment and then walk through our investment activity, portfolio performance, and overall positioning. We have always viewed ourselves as patient, long-term relative value investors, and we believe that perspective instructs our constructive and opportunistic approach during periods of market volatility. In these environments, capital availability generally decreases. Lending terms may improve, and our partnership-oriented solution becomes increasingly pertinent and valuable to our borrowers. Beyond the decades-long positioning of our platform around these principles, there’s compelling empirical evidence supporting the resiliency and opportunity within the private credit sector, which we believe remains underappreciated in parts of today’s broader market narrative. Our own Ares quantitative research team recently examined 25 years of aggregated private credit data to evaluate the association between managers’ ability to invest during periods of market-wide volatility and the subsequent levels of returns.

In short, this study found that U.S. private credit managers that invested more actively during periods of elevated volatility generated, on average, more than 10% higher levels of annual returns than those managers that were not as active during the same volatile market conditions. While this analysis does not address manager-specific outcomes, current market conditions reinforce the importance of manager selection in this environment and further underpin our strategy of maintaining plenty of flexible capital to invest during these periods. In the first quarter, our team originated over $3.2 billion in new investment commitments, with 70% of transactions coming from existing borrowers. As transaction volume slowed in the second half of the quarter, our strong relationships allowed us to selectively invest in top-performing existing portfolio companies.

These opportunities focused on achieving attractive risk-adjusted returns and reinforced our ability to support our best borrowers and sponsors, particularly during periods of volatility. Our first quarter originations reflected meaningful sector diversification across 22 different industries and 57 sub-industries. As Kort noted earlier, the shift in supply-demand dynamics across direct lending is beginning to translate into more favorable pricing and terms. We are beginning to see this come through our new originations as spreads on first lien originations in the first quarter increased by approximately 20 basis points quarter-over-quarter, while leverage levels declined by nearly half a turn of EBITDA. We ended the quarter with a portfolio of $29.5 billion at fair value, which stable quarter-over-quarter as new fundings were offset by fair value changes and repayments.

Repayments during the quarter, excluding sales to Ivy Hill, totaled approximately 7% of the portfolio at cost and continue to serve as a source of natural liquidity that we can deploy into today’s market. As part of this repayment activity, we exited 4 equity co-investments, which were the primary drivers of our $114 million of net realized gains in excess of losses in this quarter. As a reminder, since inception, Ares Capital has generated more than $1 billion in net realized gains in excess of realized losses across more than $70 billion of exited investments over the last 21 years. These latest 4 exits generated a mid-teens weighted average realized IRR. Importantly, over the last 10 years, our equity co-investment portfolio generated an average gross IRR well in excess of the double-digit total return of S&P 500 index.

As we’ve discussed previously, these minority equity investments are made selectively, generally alongside loans we originate and underwrite ourselves, allowing us to participate in the equity where we see particularly strong upside cases. Another important component of our repayments this quarter was the collection of PIK income. In the first quarter, our PIK income, net of collections, represented approximately 7% of total interest and dividend income, which is below our historical five-year average. As we’ve discussed previously, we have selectively used PIK over our history and have been transparent in our PIK reporting, including explicitly disclosing PIK collections in the statement of cash flows. From a portfolio composition standpoint, approximately 90% of our PIK income is structured at origination and is associated with larger, well-performing companies, not reactive amendments.

As with all investments, PIK investments are underwritten with the same discipline as cash pay loans, with a strong focus on structure, leverage, and exit protections. Importantly, over our 21-year history and across more than 190 realized PIK investments, we have generated a return measured by a multiple of our invested capital or MOIC of 1.4x. This MOIC is a modest premium to the 1.3 MOIC on all of our exited investments since our inception in 2004. We believe that this demonstrates that the selective use of PIK does not create unnecessary levels of risk in our portfolio or correlates to future losses. On the contrary, it has supported our strong returns over the past 21 years for our shareholders. Repayments also offer us an opportunity to assess our valuation process over time.

We believe the scale we have built in portfolio management is a meaningful competitive advantage. The merits of our large team and time-tested process are reflected in our realized outcomes at exit. Specifically, when comparing realized investments exit over the past two years to their respective fair values one year prior to exit, we found that 99% of fully paid off U.S. debt investments were realized at valuations in line with or better than their valuations one year prior. We believe these observations underscore the rigor of our valuation process. Turning now to further details on borrower health, the financial position of our portfolio companies remains solid, with interest coverage stable sequentially and improving year-over-year, and leverage levels broadly stable. Our investments remain well protected by substantial equity cushion beneath us, with an aggregate loan-to-value ratio in the portfolio in the mid-40% range.

Supported by these underlying portfolio trends, the credit performance of our portfolio remains solid. Our non-accruals at cost ended the quarter at 2.1%, a 30 basis point increase from prior quarter. Still well below our approximately 3% historical average since the global financial crisis and the BDC historical average of approximately 4% over the same time frame. Our non-accrual rate at fair value also remained low at 1.2% of the portfolio, stable quarter-over-quarter and well below our historical levels. Our overall risk ratings remain stable and the share of our portfolio companies in our higher risk categories, grades one and two, remain below our five-year average and notably lower than our portfolio companies in grade four. Which are outperforming companies.

With this backdrop of our portfolio continuing to perform well, we would note that as we have said several times in the past, we would not be surprised to see credit quality and non-accruals across the industry revert closer to historical norms from what has been a period of unusually low levels in the industry, particularly given slower economic growth, repercussions from geopolitical issues, and supply chain disruptions. We are already seeing higher levels of manager dispersion, and we believe this trend will continue. Shifting to the second quarter, as Kort noted earlier, market activity has remained slow as participants continue to work through price discovery. Through April 23, 2026, total commitments were approximately $200 million. Our backlog was approximately $1.8 billion as of the same date, and our activity levels as measured by discussions have increased in recent weeks.

Additionally, our current backlog reflects a 35 basis point increase in spreads and a 40 basis point increase in fees as compared to the first quarter of personally loans. 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-closing. While we are beginning to see deal flow pick up, we expect this slower start to affect both originations and exits in the second quarter. In summary, we believe ARCC is navigating this period of market transition from a position of strength. The current environment is reinforcing the advantages of scale, balance sheet strength, capital availability, underwriting discipline, and portfolio management.

Supported by a well-performing, diversified portfolio and significant liquidity at ARCC and across the broader Ares platform, we believe we are well positioned to thrive in this market and continue generating attractive dividends for our shareholders. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter. With that, operator, please open the line for questions.

Operator: Certainly. Thank you, Mr. Miller. Ladies and gentlemen, at this time, if you would like to ask a question, please press star then one on your touch tone phone. If you would like to withdraw your question, please press star two. Please note, as a courtesy to those who may wish to ask a question, please limit yourself to one question and a single follow on. If you do have additional questions, you may re-enter the queue, and the investor relations team will be available to address any further questions at the conclusion of today’s call. We’ll go first to Rick Shane with JPMorgan.

Brian McKenna, Analyst, Citizens2: Hey, guys. Thanks for taking my questions this morning. Look, you know, it’s obviously an interesting time. You’ve talked about the widening of spreads, and you’ve talked about the better origination fees. I am curious when we look at some of the other elements of transaction structure, particularly things like covenants, and control provisions, if the market is readjusting as well. I think that when we sort of hear what’s happened over the last couple of years, that’s been one area of concern, and I’m curious if that’s normalizing also.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah. Thanks for the question, Richard. This is Kort. I can jump in on that one and see if anyone else on the team wants to chime in. I would say yes, those other non-economic terms and documentation provisions are moving more positively in our direction as well as the economic points of fees and spread, as I mentioned in the prepared remarks. You know, whether it’s getting a financial covenant on companies that, you know, might have been previously on the margin of getting one, yeah, I would say that’s tipping in our direction. I don’t want to overstate it. Obviously, large cap borrowers of high quality are still able to access deals from the private credit market cov-lite.

Jim Miller, President, Ares Capital Corporation: At the margin, it’s moving in our direction, as well as collateral protection terms and other documentation terms that a lot of people have been talking about certainly of late. Yeah, it feels like certainly a better time. Obviously, our market moves a little bit more slowly, so we’ll continue to watch and see how things change from here.

Brian McKenna, Analyst, Citizens2: Great. Hey, Kort, if I can just ask one quick follow-up to that. I think what I’m hearing from you is in terms of all of deal structure, mean reversion. It’s not like we’ve swung from a wildly bullish market to a wildly bearish market in terms of wider spreads and et cetera. Given all of the noise and drama we had during the first quarter, is this just a reflection of the continued supply of capital from both the public and private BDCs sort of insulating those moves?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: I think it’s probably a little bit of two things. I think it’s, one, supply of capital and the changes that we’re seeing in the flows in the retail and wealth channel. I think it’s probably also just part of what Jim said in his prepared remarks, which is that I think people do recognize that the risks out there are a little bit higher now with some of the geopolitical developments and slowing economic growth. You know, that probably is also influencing people’s behavior when it comes to pricing new deals. I think it’s a little bit of both of those things. In terms of your comments around reverting to the mean, I think that’s correct.

Jim Miller, President, Ares Capital Corporation: I don’t think we’re saying we’re in an environment today where spreads are blown out super wide. Obviously, we got to a very tight place last year, and it’s good to see them, you know, widening. Like we said, 50 to 75 basis points of kinda total yield improvement between spread and fees doesn’t indicate, you know, a blowing out of spreads.

Brian McKenna, Analyst, Citizens2: Got it. Thank you, guys. I really appreciate you taking my questions this morning.

Jim Miller, President, Ares Capital Corporation: Sure thing.

Operator: Thank you. We go next now to Finian O’Shea with Wells Fargo Securities.

Finian O’Shea, Analyst, Wells Fargo Securities: Hey, everyone. Good morning. Just following up on that topic, and Jim, you talked about the benefits of investing in volatility. It does. You know, this sort of activity on the runway does sound like the higher quality kind of deal that would reprice down when the retail vehicles, say, eventually recover, and that could pressure NOI more. As you approach book and can raise capital, how aggressive do you wanna be in terms of growing into this environment? Thanks.

Jim Miller, President, Ares Capital Corporation: Thanks, Fin. I’ll start by saying that I don’t think we’re in need of growing the capital base right now with the $6 billion liquidity position that we have. We also do our best to, when we’re in a market like this to get call protection on deals so that we can lock in terms when the market is favorable for us like it is today. Certainly there’s some period of time that will pass, and you will end up in scenarios where repricing will come back to the market. I think we’re seeing that pendulum actually swing both ways. We have opportunities right now to reprice many of the deals in our portfolio as they look for amendments or add-on acquisitions, things like that.

We’re doing a lot of that right now. You know, that is sort of how the market works. It’s not as rapid and, you know, it does as a public market. You’ll see insulation from those repricings to a certain extent, more in the private markets than in the public markets. It’s not as rapid. Because it’s not as active, the volatility is not as high. You just see a little bit more stability, and the bands on either side are tighter. As it relates to raising capital, I mean, we’ll just evaluate that quarter to quarter, month to month as we see what’s in the pipeline, the nature of the market at that point in time and where the stock price is.

Finian O’Shea, Analyst, Wells Fargo Securities: It’s helpful. Follow-up, Scott, I appreciate your comment on the bank side of the funding arena. I think it’s fair to say you’re a desirable counterparty, but you’ve also done your job in fighting those borrowing spreads down for yourselves. We have seen banks sort of push back. I think there were a bunch of repricings upward in, say, 2022, 2023. Do you see any of that on the runway as your spreads widen? Will the banks, do you think, fight their spreads back up? Thanks.

Brian McKenna, Analyst, Citizens4: Yeah. Thanks, Fin. I do think that, you know, there’s potential for that. We’re not seeing it at the moment. As you saw during the quarter, we actually repriced one of our facilities down a little bit. You know, these things will ebb and flow. I think for us, if it does move, that it’s not gonna be just for us, it’ll be for the whole sector. That’s happening. That, you know, that should mean that we should be able to put pressure on the asset side too. You know, our ability to take increases on our liabilities should be commensurate with increases on the asset side. It’s too early to tell right now.

Finian O’Shea, Analyst, Wells Fargo Securities: Thank you.

Operator: We go next now to Arren S. Cyganovich at Truist Securities.

Arren S. Cyganovich, Analyst, Truist Securities: Thanks. The April to date trends were quite low. You highlighted that as, you know, as borrowers are trying to adjust to the new spread and document environment. You mentioned that, you know, things have picked up in recent weeks. Should we expect kind of a similar slowdown that we saw last year due to the tariff stuff we saw in the second quarter? Do you think that this could actually potentially pick up as you know, have had these conversations in recent weeks?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah. Why don’t I try to answer that one? You know, it’s obviously really hard to predict, and I probably don’t wanna venture a guess as to, you know, how we’re gonna see transaction activity evolve from here because it just has been very up and down. Obviously, you know, you mentioned last year

Kind of similar. Things really slowed down with the tariff noise. The second half was extremely busy, and we posted record volumes. It was really hard to see that coming when we were sitting here in April, May last year. I guess what I would say about the backlog or the, I guess the activity in the last few weeks since the end of the quarter, you know, obviously, there’s a little bit of a lag effect. The stuff that we’re committing to in the first few weeks of April, you know, has been sort of teed up and discussed through investment committee for, you know, weeks, if not months prior to that leading up to it. A little bit of a lag effect.

We’re starting to see the comments we had in the prepared remarks referred to the fact that we’re starting to see a pickup just in terms of our cadence of deals that we’re seeing come through investment committee, I would say, in the last three to four weeks. We’re at the front end of seeing that pickup, and we did wanna go out and make sure that people are aware we’re seeing that. You know, whether it’s sustained or not, I think depends on a lot of different variables out there. You know, maybe most notably just the geopolitical situation. I think if that can get resolved in a sustainable manner, then I think you could see, you know, things really pick back up meaningfully. You know, that’s something that’s just really hard to predict. Hopefully that helps a little bit.

Arren S. Cyganovich, Analyst, Truist Securities: Yeah. No, absolutely. It’s obviously something that’s evolving rapidly, so I appreciate those comments. The other question I had was around the consultant that you hired and appreciate all the numbers and, you know, kind of fits with what you’ve been saying to us publicly in terms of the, you know, higher quality type of well-protected enterprise type of companies. Some small risk from AI, some, I guess medium risk as you kind of pushed, pointed to that. You know, I think the biggest question that people have, and this is gonna take quite a while to unfold, is these companies are doing well now. They’re gonna probably continue to do well in the near term.

At some point they have to be refinanced and the equity markets have, you know, repriced software down, I don’t know, 40% or so. You know, what are some of the options if you have a private equity firm that maybe bought a company at 21x EBITDA and now they’re trading at 13 and maybe not wanna exit those and you probably don’t wanna hold on to those loans through a next cycle. Maybe you could just talk about the refinancing risk and some of the options that you’ll have to use whenever you get to that kind of point of refinance whenever that occurs.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah, sure. Obviously, you know, fair amount to unpack on the software topic. I guess just specifically to the refinancing risk. Number one, there already is a market that exists currently despite the fact that the deal flow is low. We are seeing deals get done in the software space. There have been a couple in the last month or two, where the market has been able to finance these transactions. They’re, you know, for higher quality borrowers without AI risk. They’re coming in at obviously a little bit wider spreads, but they’re getting done.

We actually had 1 company in our portfolio, that, you know, we didn’t think was particularly risky, but, sort of on the straddle of the low to medium risk category, and we decided to not extend maturity, and the lender group took us out of that name. Just as 1 case study of our ability to exit when there’s a maturity if we’re not willing to provide an extension. You know, I guess, you know, again, there’s so many names in the book, it’s hard to go, you know, kind of granular on a call like this. I would just remind everyone that our loan to values on our software book as a whole still are very healthy and low relative to the broader book.

You know, we took a lot of markdowns on the equity values on our software names in our portfolios and the LTV in our debt software book still stands in the low 40s below the LTV of the total book. The growth rate, the EBITDA growth rate of our software companies remains consistent with the growth rate of the rest of the book at 9% year-over-year. And I guess I would also say we can spend more time if people want to on the consultant study and the different categories and risk ratings. We obviously have a lot of detail there, but we did actually make an effort to unpack and do a maturity waterfall on the entire software book and compare the maturities in the lower risk category versus the higher and medium risk category.

You know, the maturity profile actually for the higher and medium risk names is materially shorter. It’s 2.4 years versus 3.9 on the total book. The low risk names are about 4.2 years. You know, when it comes to trying to mitigate technology risk, obviously shorter maturities is better. You know, when— I guess to the final specific point of your question, when we get to the point of the maturity, and if we’re not willing to give an extension, then we’re gonna have a conversation with the owner of that business. If it’s a financial sponsor, then we’re gonna, you know, in most cases probably request that a capital injection is made in order to pay down our debt and de-risk us to get a maturity extension. Obviously, it’s a case-by-case basis.

It’s hard to generalize, but we are not unfamiliar with having some difficult conversations with sponsors about needing to exit names. We’ve done it over a long period of time, and we feel confident we’ll be able to do that, you know, again now.

Arren S. Cyganovich, Analyst, Truist Securities: Thanks. I appreciate it. I know it’s a tough question.

Operator: Thank you. We’ll go next now to John Hecht with Jefferies.

John Hecht, Analyst, Jefferies: Afternoon, guys. Thanks for taking my question. You know, maybe a little bit of a tack-on to the prior question. I really appreciate all the context you gave us around your software portfolio. Understand you had a, you know, a highly regarded third-party management consulting firm evaluate your exposures. I am wondering, are you able to give us any, call it, a sensitivity analysis around, like, impacts or disruptions to revenue as revenue models shift within the portfolio? You know, and what that did to, call it, leverage calculations during that exercise?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: I’m sorry. You’re asking about how are the revenue trends changing within the different categories?

John Hecht, Analyst, Jefferies: Well, when you analyzed sensitivity or exposure to AI disruption, did that include, like, an assessment of potential revenue model shifts for the software companies? If so, you know, can you give us any you know, any, call it, materiality of the revenue shift as the industry, you know, changes?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Sure. Yeah. I think I get it. Why don’t I just give a little bit of color around kind of the definitions of these three categories. I was anticipating people might wanna go into this because I think it’ll help with your question. The first thing I would say is we’re not seeing any significant deterioration in the performance of these companies, you know, regardless of whether they’re in the low or the medium risk. I should say in the high-risk category, again, it’s only 0.3% of the entire portfolio at fair value. You know, it actually is only three names in that high-risk category. One of them is Pluralsight, which people know is not performing well. Within that high-risk category, there is performance issues.

In the medium risk and low risk category, this portfolio as a whole continues to perform very strongly. To the prior question, nothing’s happening yet in the numbers. It’s all about the look forward into the future that everybody, you know, wants to talk about and is, you know, focused on. Maybe just, you know, on the definitions of these categories, the low-risk names are companies that were identified by the consultants and us, by the way. They validated the work that we’ve been doing ourselves, rating these names for the past 6 months. Companies that have lots of layers of mitigants to AI risk.

We’ve talked about this before, whether it’s system of record positioning, proprietary data, regulated end markets, network-less business models, all these things that insulate a company from being disrupted. That low-risk category, you know, these companies have lots and lots of those mitigants. What I would just kind of say is they don’t have to do a lot to prevent disruption. They actually will likely benefit from AI. The 85% of the companies that are in that low-risk category in our software book, much more poised to benefit from AI than to be disrupted.

The medium-risk category, which is 14% of the software portfolio or 3% of the total portfolio, what I would say about this category is there are still mitigants that exist, some of those mitigants I mentioned before, less than in the low-risk category. These companies need to execute on their own AI strategy and keep evolving their products in order to stay competitive. To your point, you know, I don’t know if it’s a. It’s not a revenue model change, but it’s just making sure that they’re evolving their product suite to incorporate AI so that they can stay competitive and ahead of the curve. That is how I categorize those names. Really importantly, in this medium-risk category, we’re not saying, nor is the consultant saying there’s going to be disruption.

Actually, the study specifically states that many of these companies are well-positioned to adapt within the time necessary to adapt. But it’s just that there are less mitigants than the companies in the low-risk category. In the high-risk category, the definition there is these companies really need to transform their business model, in order to, you know, in order to sort of survive the disruption risk. I don’t know if that helps, you with your question, John, or not. But hopefully, that color, you know, helps provide some more insight into the study that we conducted.

John Hecht, Analyst, Jefferies: That helps a lot. I really appreciate that. You know, second question is, you know, and you talked about the deal environment, yeah, how it’s temporarily been impacted by all the global, you know, stuff. But that it. You know, maybe you’re seeing some early indications of a renormalization. You know, We’ve been waiting for, you know, a long time for this wave of, call it, you know, private equity, call it, you know, portfolio maturities and, you know, how there’s a, there’s a lot of pressure to liquidate and return capital to LPs. I’m wondering, you know, what are the. You know, assuming this geopolitical stuff stabilizes? Is there anything obstructing that, call it, wave of potential activity beyond this?

Guys have an opinion about when and if that wave might occur?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: It feels like all the ingredients are still in place, if you take out the volatility that’s going on in the world and the market right now. That the pressures on the private equity firms to return capital is only increasing. The hold periods are lengthening. Again, even though economic growth overall is slowing a little bit, in the sectors that we invest in, growth is still really strong. I really don’t see any other barriers that would prevent us from being able to get back to a really active deal environment. Obviously all the noise around software is likely to hamstring volume within that sector specifically. Other than that, I don’t really see any other barriers.

Jim Miller, President, Ares Capital Corporation: Yeah, maybe I’ll add, Kort. There is a fair amount of healthy discussion dialogue in the sectors and areas that are unaffected, either with geopolitical or, you know, software. There’s, you know, I think there’s an optimism around deal flow. It’s not optimal for a private equity firm to go bring their company to market in the midst of the most intense moments. There’s a lot of interest in migrating towards companies and getting invested in companies that are sheltered from some of those issues, and I think there’s a lot of optimism there. I think those will lead the way probably, and then you’ll see a more active, broader market if, you know, if history repeats itself. That’s what we should expect to see over the next few quarters.

John Hecht, Analyst, Jefferies: Wonderful. Thank you guys very much.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Sure thing.

Operator: Thank you. We go next now to Paul Johnson with KBW.

Brian McKenna, Analyst, Citizens0: Yeah, thanks. Good afternoon. Thanks for taking my questions. Credit is still relatively strong today, but I was wondering, in relation to the NAV decline this quarter, how much of that would you say is kind of just the broader mark-to-market with spreads this quarter versus kind of credit-specific write-downs?

Jim Miller, President, Ares Capital Corporation: Yeah, happy to take that. More than two-thirds of the marks we’ve had, or around 70% are mark to market related rather than credit related. The significant majority of it is from, you know, mark to market.

Brian McKenna, Analyst, Citizens0: Got it. Appreciate that. I mean, you’ve clearly done some extensive analysis on the book. You’ve provided a lot of transparency on top of that. I was wondering if I could just ask kind of higher level on marks, you know, more specifically on software investments. How do the discount rates, I guess, move, you know, quarter to quarter? Is the assumption that the fundamentals of these companies, ’cause it sounds like a lot of them still have very strong performance, are the fundamental performance just strong enough to offset any sort of spread widening that we would have seen in the quarter? Or is it just more of a lag, the fact that we might expect to see throughout the year if spreads continue to widen out?

Jim Miller, President, Ares Capital Corporation: Yeah. Look, I think it’s. I think everyone would like to try and create a generalization around how to approach the answer to that question, which is just not easy to do. It’s probably a good moment in time just to express, and we said some of it in our prepared remarks, but we have an extraordinarily extensive valuation process that’s worked for a really long period of time, and it’s proven out to be quite effective. You know, it’s really a bottoms-up company-by-company analysis, right? Every company is distinctly different. To answer that question, you have to go look at that company. You have to look at the comparables that are very specific to that company. That’s even within software. There, you know, there are so many categories that exist within software.

Broadly speaking, you know, you want to draw a parallel to probably syndicated market or to sort of mark to market issues there, but it’s not something that we should do. We should just look at them one-off. There is, there isn’t a simple answer to that question. You know, what I will say is there’s clearly an impact on EV, and it was more pronounced in software, right, for the quarter. You know, the assumption is fair, but that EV doesn’t just flow directly into mark to market on the loan, right? You know, and once again, the private market, Court said it. The private market is active and still active in software.

You know, there is some movement, but what we are looking at a lot in the analysis, which is bottoms up again, is what is the private market doing for these companies and where indications there. That is a better source or one of the more important variables, I should say, that go into the equation.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah, maybe I’ll just add, you know, one more bit of color to just further illustrate what Jim was talking about, that it’s not so simple. Obviously, spreads widen, that affects the value of the loans and marks should go down. It’s not that simple on a portfolio-wide basis because on each individual name that might not occur. For instance, if we have a software company that has performed extremely well and de-levered such that, you know, the pricing and the spread on that loan is actually somewhat wide relative to the risk. We don’t mark that loan above par, we mark it at par. When spreads then widen, that loan can stay at par because the performance indicates that the pricing is still appropriate for the risk.

That loan might not get a markdown even in a spread widening environment, whereas another software name that, you know, is more levered would get a markdown in a spread widening environment. Just one example of, like, 50 of why it’s, you know, you have to do it name by name. You can’t do it on a portfolio-wide basis. Obviously we’re paying very close attention to each one of these names. We’ve got third parties in here validating all of our marks. As Jim said, 70% or so of the write-downs were mark-related.

Brian McKenna, Analyst, Citizens0: Got it. Appreciate that. Very, very good answer. Very helpful answer. Thanks, Kort and Scott there. My last question here was just, in terms of, you know, Cornerstone Software that was marked lower this quarter, Medallia, which you are not, you know, not an investor, not a, not a lender to, but Medallia getting restructured this quarter. Pluralsight, which you have a very small investment, also that company is struggling a little bit. I was wondering if you could just kind of tell us broadly for these companies, what exactly do you think, you know, it is that those companies are lacking, in terms of, you know, the challenges that they’re going through today?

I mean, was it, you know, lack of a system, critical system of record, that sort of thing, you know, for these companies to be running into trouble today?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah, I appreciate the question. You know, I really just think we always hesitate to dive into any individual name discussion and really start getting into trends or, you know, performance results on individual names. I just don’t think I’m gonna necessarily go there and get into that level of detail. On any portfolio, when you have 600 and some names and 100 and whatever, 130 software names, you’re gonna have some names that are gonna underperform. We thankfully only have, you know, a few of them. You know, Pluralsight’s been underperforming for a while. People understand, you know, what’s going on there. Some of the other names you mentioned, performance actually, you know, fine.

More of a just mark-to-market issue based on, you know, what we’re seeing the market and how the market is viewing those kinds of credits. Not everything is what it seems, you know. A lot of it isn’t really performance related. Really, other than that, I just think it’s not appropriate to dive into, you know, individual name discussions.

Brian McKenna, Analyst, Citizens0: Okay, fair enough. Thank you very much.

Operator: Thank you. We’ll go next now to Brian McKenna with Citizens.

Brian McKenna, Analyst, Citizens: Great. Thanks. One more follow-up on your software exposure. How much of the $1 billion roughly of the more at-risk software investments are sponsor backed? You also have the largest portfolio management platform in the industry. I’m curious how you can leverage that entire team to get out ahead of any potential AI risk and really how you can ultimately, and that team ultimately drives better outcomes within this part of the portfolio.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Sure. Again, in that high-risk category, I think all the names are sponsor backed actually. There’s only three names. We’ll go back and check, but I believe they’re all three are sponsor backed. In terms of our portfolio management and our playbook, I’m glad you raised it. Something that we’re, we think is differentiating for our platform. It’s something we try to highlight a lot. We have a over 50 person portfolio management restructuring team. We’ve operated over 21 years here through lots of different cycles, including the GFC. We are not afraid to have tough conversations with the owners of businesses. As I already mentioned, I think once on this call before.

Look, the first thing we look for is if there’s a liquidity problem, the owner of the business has to put in capital to support the liquidity problem. If the owner of the business is not willing to do that, then we are not afraid to restructure and own the company ourselves. It’s never what we want to do. It’s never the plan. We have the expertise and the team in place to own these companies, to be patient with them, to provide additional capital, to come out the other side. Over our history, we’ve generated, you know, an enormous amount of gains by doing that. Just this year, we posted a big gain on a portfolio company that was a mezzanine investment that we restructured and owned for 10 years and posted a big gain on it.

There’s lots of examples like that over the course of time. You know, it might, it might be harder work. It might take more involvement, but, you know, we absolutely have the expertise in place to do that.

Brian McKenna, Analyst, Citizens: Okay, great. That’s helpful. If you were to mark to market the portfolio today to reflect quarter to date trends, how much of the first quarter markdowns would be reversed?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: I’m not sure we’re in a position to answer that one at this point in time. I think. You know, our valuation mark process is extremely extensive, as you can imagine. That would be a difficult one to address as a one-off. Yeah, our market doesn’t move as fast as the liquid market does either. Really tricky to say.

Brian McKenna, Analyst, Citizens: Yep. Thought I’d give it a try. Thanks.

Operator: Thank you. We’ll go next now to Kenneth Lee with RBC Capital Markets.

Kenneth Lee, Analyst, RBC Capital Markets: Hey, good afternoon, and thanks for taking my question. Just another one on the software loan side. Sounds like the private markets are still originating software loans. For Ares in particular, wondering if you could talk a little bit more about some of the more recently originated software loans. You know, what sorts of economics and terms are you seeing? Also roughly, you know, what’s like the average LTVs that you’re underwriting at? Thanks.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah, sure. I appreciate the question. There really have not been a lot. There, you know, just a handful or less in the last few months of deals. Some of them were existing portfolio companies of ours where the sponsor may be looking for, you know, a, a little bit of incremental capital to do a tuck-in acquisition. There have not been any that have come across our transom here that are sort of larger kind of bellwether-type software names where we can really point to and say this. Smaller deals get priced sometimes a little bit more indiscriminately if we have, you know, another lender who might just really wanna own that name and can clear the deal. I think it’s a really a hard question to answer.

I guess I would probably say on the deals that we have seen clear, the, you know, spread in fee increase on those transactions is a little bit wider than the 50 to 75 basis point, you know, average that we put out in our prepared remarks. These are higher quality companies. If a software company has, you know, some kind of material question around the AI risk, that type of company is not really out raising capital right now. These are the higher quality companies, it’s a little bit wider than the average is probably what I would say.

Kenneth Lee, Analyst, RBC Capital Markets: Gotcha. Very helpful there. Then one follow-up, if I may. Once again, just on the software side. Broadly across the portfolio there, how do you think about potential downside protection for software investments there, especially protection that could potentially put a floor on recoveries? You know, I’m thinking about, for example, intangible assets, any sorts of IP. Wondering if you could just give us a little bit more color on that. Thanks.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah, look, again, first of all, we are cash flow lenders in our core and always have been. Our underwriting theses are always not always, but most of the time underpinned by a very high degree of recurring revenues and predictability of cash flow conversion through lots of different cycles as it pertains to software, technological cycles. As we think about downside protection here, I think we’ll just keep coming back to the fact that these companies have, you know, again, the vast majority, as we’ve been saying and as now third parties have validated, vast majority of our companies have very high barriers that insulate them from technology and obsolescence risk. The retention rates of the revenues on these companies continues to be very, very high.

The cash flow conversion is strong, the EBITDA growth is strong, and the loan to value, again, on our software book for our debt investments is 41%. Even today after the markdowns we took on the equity values. I think we rely on the significant amount of enterprise value cushion and the strategic value of these companies to lots of different acquirers, either strategic acquirers or private equity acquirers, for values that are well in excess of our debt if we needed to sell these companies to recover our principal. I don’t know if anything else.

Jim Miller, President, Ares Capital Corporation: Maybe just one additional point. I don’t know if this is what you were referencing, but we think we do a pretty good job with documentation. We obviously care a lot about the IP and protect it as part of our documentation. I think we do a better job in private markets than the public markets do in that point.

Kenneth Lee, Analyst, RBC Capital Markets: Gotcha. No, that’s very helpful. Thanks again.

Operator: We’ll go next now to Sean-Paul Adams with B. Riley Securities.

Brian McKenna, Analyst, Citizens5: Hi, good afternoon. While non-accruals are still relatively within low levels, it seems like there was 2 outsized markdowns totaling almost $100 million for the quarter, and that was across just 2 names that aren’t captured within the non-accrual figure. I understand not wanting to delve into portfolio-specific names. However, if your headline non-accrual exposure metrics aren’t capturing asset-based positions marked below $0.75 on the dollar, you know, how are you trying to really express, you know, true exposure per, you know, mark-to-market risk in the next couple quarters?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: I was following you until the very end when the actual question came out there.

Brian McKenna, Analyst, Citizens5: Right.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: So-

Brian McKenna, Analyst, Citizens5: Right

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: ... I’m not sure exactly the point of the question. The one thing I’ll say, and then maybe I’ll have you rephrase it, is, obviously in volatile markets like we’re in today, we see more dispersion of valuations and marks, and we see what the broadly syndicated market is doing to, you know, a bunch of names in the software space. That is going to be reflected in our marks. We have to mark our portfolio based on where the comps and the market is saying, these debt positions are, you know, should be valued. That mark is independent of our analysis of whether the loan is covered by enterprise value and whether we deem the principal and interest collectible.

There certainly could be in a more volatile market, you know, loan valuations that trend lower, but where we still feel that the principal and interest is collectible because we’re covered by enterprise value. My guess is that that would apply to the names that you’re citing, again, without getting into individual name discussions. I don’t know if that was specifically what you were asking, but wanna make sure that point does come across clearly.

Brian McKenna, Analyst, Citizens5: Right. Right. To refine the question, you know, if you’re having a position with an exposure of, you know, $350 million at cost, right? You’re having a $50 million difference quarter-over-quarter, you know, 25% of the mark’s at debt. Like, it’s not calling out the full risk to that name.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: It’s valuing the loan at the level that the market today is pricing that loan at. That’s a fair value mark, and it is reflected in our NAV. Which, you know, these markdowns this quarter is why we saw NAV, you know, decline this quarter for the first time, you know, in a pretty long time here in Ares Capital. It’s reflected in the NAV, it’s reflected in the marks. If we still deem that we’re covered by enterprise value, it is not reflected in the non-accruals. Is I think the point that you’re making, and that is accurate. We reflect it in the non-accruals when we believe there is risk of impairment and that the full interest and principal is not collectible.

Brian McKenna, Analyst, Citizens5: Okay. Perfect. I appreciate the color. Thank you.

Operator: We’ll go next now to Peter Troisi with Barclays.

Brian McKenna, Analyst, Citizens1: Hi, thanks for taking the question. Appreciate all the comments on funding on the call so far. Just wondering if you could talk a little bit more about the mix of funding. You know, just looking at the ratio of unsecured debt to total debt has been gradually declining over the past few quarters. It ended March at about 59%. You know, and obviously secured funding is, you know, always gonna be cheaper for you, especially now given where BDC unsecured spreads are generally. Wondering if you had a target for the ratio of unsecured debt to total debt or maybe even to total assets, and where we could expect that ratio to go over the next few quarters.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah, sure. Hey, Peter, thanks for the question. You know, I think, we certainly have run at fairly high levels of funded unsecured debt in the past. I think even at the current level you cite, it’s still pretty healthy and relative to the rest of the sector. You know, certainly early part of this year, post our deal, the spreads gapped out quite a bit in the unsecured market, and were fairly unattractive. I’d say the past few weeks have been very productive. Certainly makes it a little better. I think the point is, you know, we have a fair amount of liquidity on hand, and, you know, we like doing that on purpose to make sure we can be very opportunistic about our issuances.

You know, I think the way we look at it is if we can’t still do no issuance for the rest of the year and we know we have maturity coming up, you know, it still puts us at majority funded and unsecured. I’d say that’s probably our target is to make sure that the majority of our funded debt is unsecured. I do still have some room to go there. You know, certainly is a more productive market than it has been.

Brian McKenna, Analyst, Citizens1: Okay. Thanks very much.

Operator: We’ll go next now to Casey Alexander with Compass Point.

Casey Alexander, Analyst, Compass Point: Good afternoon. I want a badge of honor for being the last question on the longest quarterly conference call in Ares Capital history. I do have two. First one is, in the last six years, we’ve heard multiple periods where all of a sudden spreads widen out and it, and it looked like it was gonna be durable and better terms and better documentation. Then just immediately, almost immediately, competition came in and slammed them right back to where they were. Why should we believe that this cycle is different than that and that wider spreads and better terms can be a little bit more durable?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah. You know, Jim Miller and I can maybe tag team in on that answer, Casey Alexander. I don’t know that we’re actually sitting here saying pounding our chest saying that anybody should expect it to be more durable than in past cycles. I think we’re just saying we’re seeing it widen. We are, you know, watching the factors as to what’s creating the widening, which we talked about before. I think, you know, both flows within private credit and maybe risk premiums in the market. I think the other thing I should say is banks. Bank behavior is also driving the widening. We’re seeing banks, you know, be less risk on in terms of new commitments. We’ve seen the broadly syndicated market widen out as well in terms of their, you know, implied spreads and the pricing in that market.

You know, there’s lots of different things that are creating it. You know, every period is different. I mean, we did see wider spreads be pretty darn sustained when they started to widen out in mid-2022, and that lasted for 18-24 months. We saw, you know, spreads peak out at 650-700, and fees were 2-2.5 points, and that was pretty well sustained. If you’re referring to, you know... Yeah, look, last year, the tariff tantrum period, obviously we garnered some premium economics through that, right through the teeth of that period when everything was extremely uncertain. Then, you know, things changed immediately when our government decided to undo, you know, their announcement, and things were right back on track.

Really hard to predict, and I don’t think we are actually predicting whether it’s going to be sustained or not. You know, I think time will tell.

Casey Alexander, Analyst, Compass Point: Okay. Thanks for that. My follow-on is, you know, Pluralsight, which you were involved in, Medallia, which you’re not, involved two of the highest profile sponsors within the space, and two very large deals. I’m just curious, internally, how has that impacted your thinking in terms of sponsor selection and also sizing of investments going forward?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: You know, I think we have good relationships with both of those sponsors. You know, I would say on Pluralsight, the way that that deal resolved itself was the sponsor worked consensually with us to effectuate a restructuring and hand over the keys to the lender group. We were not the lead in that lender group. We didn’t lead those negotiations. We were a smaller holder. They, you know, certainly behaved ultimately in the way that obviously we would have liked to see them support the company with capital. They did work consensually with us. You know, I don’t think it’s materially changing our view of whether we wanna work with those sponsors or not. Not every deal is gonna go according to plan, and we didn’t really.

Again, we didn’t see any sort of nefarious behavior, on the part of those sponsors.

Casey Alexander, Analyst, Compass Point: All right. Thank you for taking my questions.

Operator: Thank you. Just a quick reminder, ladies and gentlemen, any further questions today, please press star one. We will go next now to Robert Dodd with Raymond James.

Brian McKenna, Analyst, Citizens3: Thank you for taking the question. Sorry, Casey, but I guess I’m after you. A question on the management consult hiring them. I apologize for the background noise. Less about the output and more about the why. I mean, to your point, you know, a year ago there was the tariff tantrum, et cetera. You didn’t hire a consultant at that point to evaluate embedded tariff risk in the portfolio or anything like that. You did it in-house with your in-house expertise, et cetera. My question there is, like, it feels different this time, right? You’ve hired a consultant who might be agreeing with what you’ve said. Was there a level of complexity increase and uncertainty about the capabilities of the in-house expertise?

What motivated the decision to bring in that third party when that’s not typically been the pattern in the past when there’s been, you know, some theme, be it tariffs or something else?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah, I love the question. With tariffs, it’s a math-based equation pretty much, and we were able to pretty quickly speak to all of our portfolio companies, ask them to break down their cost of goods sold. Not all of our portfolio companies, but the ones that actually import products, and break down the cost of goods sold and do a quick analysis as to the impact based on various tariff rates and come up with an exposure. You know, we put that number out with a clear explanation of how we did it, and people seemed satisfied and agreed with the analysis. By the way, then the tariff thing went away, like we said on the prior question. This is a much more complicated situation.

It’s becoming apparent to us, it’s not exactly numbers based, is what I would say, because the numbers continue to be very, very strong in the software portfolio, and yet the concern really from the outside world, not from the inside world, continues to be present. Even as we continue to talk about why we feel good about the software portfolio and the underwriting we’ve done, I guess I’ll just remind people a couple things. First, 2 years ago, right around now, we had a public investor day in New York, invited anybody who wanted to show up. We had a whole slide we had on AI risk and how it might impact the software business and how we felt good about our underwriting and how we’ve always underwritten mitigating against technology risk.

That was two years ago. That wasn’t even the beginning of when we started thinking about that topic. As we said in the prepared remarks, you know, it was middle of last year that we started to think about bringing in a consultant because we just felt like as we kept talking about the underwriting we’ve done and the mitigants, the fact that it wasn’t a math-based, you know, equation and the fact that everybody was looking forward and not backward, meant that we should probably bring in a third party to help us validate, you know, our opinions. Obviously we feel good about our opinions, but like any, I think, prudent investment manager, you wanna test your own thesis, and you wanna figure out, do we have some bias potentially?

’Cause we are the ones that have been underwriting this portfolio, and we wanted to bring in a third party, not only just to help satisfy the external world, but also to test our own thesis. We started interviewing those parties and decided on the consultant at the end of last year. You know, we actually had in our prepared remarks in the October earnings call. A lot of comments about AI. Again, that didn’t seem to satisfy people because in February seemed like the world woke up and everybody thought all of a sudden there was gonna be massive explosions in, you know, software and private credit portfolios. I think just the continued concern by the external world, the lack of math-based formulas and the desire to test our own thesis were the reasons why we went and did it this time.

Hopefully it’s helping give people a little more color around the situation.

Jim Miller, President, Ares Capital Corporation: Kort, maybe I’ll clarify.

Brian McKenna, Analyst, Citizens3: Go ahead.

Jim Miller, President, Ares Capital Corporation: If you don’t mind, I’m just going to adjust the response a little bit. We often engage third parties to help us evaluate transactions, right? And sectors and white paper, new spaces, and we utilize third-party work from consultants like this as part of our diligence, as part of our ongoing re-review of portfolio companies too. That part of it is not new. I think what the scale of this and maybe the disclosure or the outbound to the community is what’s new here. I do think we, you know, this is a part of our work in a regular way too. It’s a combination of the circumstances Kort laid out and just this is good practice for us, and we do it often.

Brian McKenna, Analyst, Citizens3: Got it. Thank you. Yeah. I can understand it’s part of the process. It’s not normally a footnote in the presentation note. On the kind of a follow-up sort of related. I mean, you said that medium risk assets have about a 2.5, 2.4, I think, 2.5-year maturity left. I mean, from the review, did you get a takeaway on, like, you know, what’s the timeline for these AI risks if they happen, right? If a medium business does get impacted and it’s in the next 9 months, then the maturity being, you know, a year plus a lot further out is one thing. If it’s 5-year horizons, then, you know, most of these assets are gonna be matured and possibly gone before it ever becomes an issue.

Can you give us any color on, like, what the outputs were on, like, where the maturities are versus what time horizon the risks actually really exist on?

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Yeah. It’s a good question, Robert. I guess the more detail, the more facts we disclose, the more questions that come up when you talk about the 2.4-year maturity.

Brian McKenna, Analyst, Citizens3: Every time.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: There was not really a strong part of the study or conclusion that delved into the amount of time that it would take. I’m sure obviously that’s very company specific and not something that can necessarily be calculated. Again, this is a very complex topic, and I think it’s a great question, but not something that I’m really in a position to answer other than to say that the consultants did report. I already said it once, but I’ll say it again. The medium risk companies in our portfolio do have ample time to execute on their own AI strategy in order to avoid being disrupted. That was the specific commentary, but it didn’t really talk about, you know, the actual specific length of time.

Brian McKenna, Analyst, Citizens3: Got it. Thank you.

Operator: Thank you. Ladies and gentlemen, this does conclude our question and answer session. I would like to turn the conference back over to Mr. Kort Schnabel for any closing remarks.

Kort Schnabel, Chief Executive Officer, Ares Capital Corporation: Great. No closing remarks. Thanks, everybody, for joining today and for your support and engagement. We look forward to connecting with you on our next quarterly call.

Operator: Thank you, Mr. Schnabel. Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today’s call, a replay of the call will be available approximately one hour after the end of today’s call through May 28th, 2026 at 5:00 P.M. Eastern Time. You can access the replay for domestic callers by dialing 1-800-727-6189, and international callers, 1-402-220-2671. An archive replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital website. Again, thanks for joining us, everyone. We wish you all a great day.