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DATE
Tuesday, Oct. 28, 2025 at 12:00 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Kort Schnabel
President — Jim Miller
Chief Operating Officer — Jenna Markowitz
Chief Financial Officer — Scott Lem
Managing Director, Investor Relations — John Stilmar
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TAKEAWAYS
GAAP Net Income Per Share -- $0.57 net income per share for Q3 2025, a sequential increase of nearly 10% over the prior quarter, driven by net realized gains on portfolio exits.
Core Earnings Per Share -- $0.50 core earnings per share (non-GAAP) for Q3 2025, consistent with the prior quarter, and exceeding the regular quarterly dividend, extending a 20-quarter track record of dividend coverage.
Annualized Return on Equity -- 10%, affirming Ares Capital (ARCC +1.25%)'s profitability target and dividend strategy established during higher-rate periods.
Net Realized Gains on Investments -- $247 million for the quarter, including a $262 million realized gain related to the sale of Potomac Energy Center, and $30 million from three equity co-investment exits (with a combined 2.5x gross multiple and>30% IRR).
Nonaccruals (At Cost) -- 1.8%, down 20 basis points sequentially and below the historical average of 2.8% since the global financial crisis.
Portfolio at Fair Value -- $28.7 billion as of quarter-end, up from $27.9 billion sequentially and $25.9 billion as of Q3 2024; represents growth of nearly 3% quarter over quarter and over 10% year over year.
Origination Activity -- $3.9 billion in new commitments, an increase of more than 50% over the prior quarter; approximately 60% of originations were with new borrowers, and about half supported M&A-driven deals.
Net Deployment -- $1.3 billion net deployment, more than double the prior quarter, reflecting increased transaction activity and selectivity.
Portfolio Diversification -- Comprises 587 companies across 25 industries; average single investment represents 0.2% of the portfolio, with no non-STLP or Ivy Hill position exceeding 2% of the portfolio.
Leverage (Debt-to-Equity Net of Cash) -- 1.02 times, remaining near the lower end of the 0.9-1.25 targeted range, providing substantial capacity for further portfolio growth.
Liquidity -- $6.2 billion, including available cash.
Dividend -- Fourth-quarter dividend set at $0.48 per share, payable December 30 to stockholders of record on December 15, marking 65 consecutive quarters of stable or increasing dividends.
Taxable Spillover Income -- $1.26 per share ($878 million), equivalent to more than two quarters of current dividends and available for distribution.
Weighted-Average Interest Coverage -- Over 2 times for portfolio companies, showing improved credit protection.
Portfolio Company EBITDA Growth -- Weighted average organic LTM EBITDA growth exceeded 10%.
First Lien Loan Spreads -- Originations for the quarter averaged SOFR plus 560 basis points at 4.8x leverage; spreads were 20 basis points higher than the prior twelve-month average.
Preferred PIK Investment Exits -- Generated IRR in excess of 20% on exits from three preferred PIK investments; these are held in large companies (average EBITDA of roughly $480 million).
Nonaccrual Rate (At Fair Value) -- 1%, down 20 basis points quarter over quarter at fair value and below the BDC industry average of 3.8%.
Grade 1 and 2 Investments -- These lowest rating buckets declined as a percentage of portfolio fair value, from 4.5% to 3.6% quarter over quarter.
Fourth-Quarter Commitments To-Date -- $735 million as of October 23, with a record backlog of $3 billion as of October 23 (subject to closing and possible post-closing syndication).
Credit Facilities -- Added $500 million in July, reduced spreads by 20 basis points to 180 over SOFR in July, maturities extended to July 2030.
Unsecured Debt Issuance -- $650 million in new notes at 5.1%, maturing in January 2031, swapped to floating rate to align with interest rate decreases.
Exposure to Headlines/Risk Segments -- "we have no exposure to First Brands or Tricolor, nor do we have any exposure to nonprime consumer finance firms like Tricolor," according to CEO Kort Schnabel.
Software Portfolio Metrics -- Average loan-to-value for software sector loans is 36%; none are on nonaccrual; software portfolio companies have weighted average EBITDA over $350 million, with continued strong double-digit EBITDA growth over the last twelve months.
SUMMARY
Management reported substantial realized investment gains, notably from the profitable exit and turnaround of Potomac Energy Center, which drove sequential EPS growth in Q3 2025. Origination activity accelerated in Q3 2025, with new commitments exceeding half of originations directed to new borrowers, highlighting a shift in M&A cycle momentum. Ares Capital increased its balance sheet flexibility through credit facility expansion, longer maturity profiles, and sizeable taxable spillover income to support future dividends. Internal metrics, including falling nonaccruals (down 20 basis points to 1.8% at cost and to 1% at fair value) and robust portfolio company organic LTM EBITDA growth (over 10%), signaled enduring asset quality and increased Ares Capital's competitive positioning. Diversification by issuer, sector, and capital structure, together with measured leverage and recurring dividend coverage, underpinned management's assertion of continued stability despite scrutiny of private credit markets.
The issuance of $650 million in new unsecured notes in September at a 5.1% rate and a lower spread than previous deals, along with a subsequent swap to floating rate, may provide earnings flexibility amid falling SOFR rates.
President Jim Miller confirmed, "PIK collections that were actually greater than the aggregate amount of PIK income we accrued for the third quarter," following a rise in repayments from change-of-control transactions.
CEO Kort Schnabel stated, "spreads for the last three quarters now have been stable in the market," with the quarter showing modest spread widening despite heightened origination volumes.
Nearly 60% of originations in the quarter were to new borrowers, contrasting with prior periods where most were incumbent; this was indicative of an uptick in marketwide M&A cycle activity.
CEO Kort Schnabel explained structural safeguards on off-balance sheet or receivables financing by stating, "Additionally, as part of a normal ordinary course business practice, our team thoroughly diligences any receivables financing arrangement along with vetting the broader capital structure of the business during the underwriting process. If such financing remains in place post-close, it is typically subject to strict parameters and is monitored during the life of our investment."
Taxable spillover income of $1.26 per share—exceeding two quarters of dividends—was highlighted as a key buffer against earnings volatility for Ares Capital, reinforced by finalized 2024 tax returns disclosing $878 million in carryforward spillover income available for distribution to stockholders in 2025 and its potential future use.
No slowdown or negative impact from recent market headlines (e.g. Tricolor, First Brands) was observed in Ares Capital's lending segments, and credit metrics remain ahead of both Ares Capital's historical and industry-wide benchmarks.
INDUSTRY GLOSSARY
Nonaccrual: Loan or investment classified as not currently generating expected interest or dividend income, often due to borrower financial distress.
PIK (Payment-in-Kind): A type of debt or preferred equity that pays returns through additional securities or principal rather than cash.
Spillover Income: Taxable income earned but not distributed in the year generated; can be distributed in future periods to support dividends.
First Lien Loan: A loan that holds a senior position in the borrower's capital structure and has the first claim on secured assets in the event of default.
SOFR (Secured Overnight Financing Rate): A benchmark interest rate for dollar-denominated derivatives and loans, replacing LIBOR in the U.S. market.
M&A (Mergers & Acquisitions): Transactions in which corporate control or significant assets are transferred, often requiring complex financing solutions.
LTM EBITDA: Last Twelve Months Earnings Before Interest, Taxes, Depreciation, and Amortization; a measure of a company’s operating performance.
Full Conference Call Transcript
John Stilmar: Thank you, and good afternoon, everyone. Let me start with some important reminders. Comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and 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 useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition results of operations. 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, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K.
Certain information discussed on this conference call and the accompanying slide presentation, including information relating to portfolio companies, was derived from 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 third quarter ended September 30, 2025, earnings presentation can be found on the company's website www.arescapitalcorp.com by clicking on the third quarter 2025 earnings presentation link on the homepage of the Investor Resources section of our webpage. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I will now turn the call over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort?
Kort Schnabel: Thanks, John, and hello, everyone, and thanks for joining our earnings call today. I am 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. I would like to start by highlighting our third quarter results and will follow that with some thoughts on current market conditions and our positioning. This morning, we reported strong third quarter results with stable core earnings of $0.50 per share, exceeding our regular quarterly dividend, and generating an annualized return on equity of 10%.
GAAP earnings of $0.57 per share increased almost 10% sequentially and included robust net realized gains from the exit of a previously restructured portfolio company, as well as several equity co-investments. These outcomes led to another quarter of NAV growth, marking the ninth NAV increase in the past ten quarters and underscoring our position as one of the few BDCs with consistent and growing dividends and cumulative NAV per share growth over the last ten years. Let me start with our views on the market environment and how we are positioned.
New issue transaction volumes are returning to a more normalized pace driven by greater clarity on tariffs, and the direction of short-term interest rates, and narrowing bid-ask spreads on buyouts. With this healthier market backdrop, we saw a noticeable acceleration in the volume of transactions under review, both sequentially and compared to the prior year, with more deals reviewed in September than in any month this year. We also received an increase in requests from advisers who are running sale processes and looking for our indicative terms and pricing.
Amid a firming market for M&A and Ares' leading presence in US and global direct lending, we reviewed more than $875 billion in estimated transactions over the last twelve months, which was a record for us and supports our view that the market continues to expand. As a reminder, we view our origination scale, which enables us to be highly selective, as a critical driver of our long-term credit performance. The breadth of our origination platform provides the opportunity to pass on transactions when we cannot find acceptable documentation terms or pricing. Our scale and sector specialization enhance our market knowledge and underwriting capabilities while also providing us a real-time view of relative value in the market.
These factors contributed to net deployment for ARCC of $1.3 billion in the third quarter, more than double the prior quarter, while remaining highly selective on the transactions we pursued. Our focus on investing in the highest quality credits continues to support strong, fundamental credit metrics. The last twelve months' organic EBITDA growth for our portfolio companies remains in the low double digits, which is well in excess of market growth rates. Our interest coverage increased further to over two times, and weighted average loan-to-values continue to be in the low 40% range.
Our strong credit quality is also evidenced by our declining non-accruals on a quarter-over-quarter basis, along with net realized and unrealized gains and growth in NAV per share for the third quarter. We also take comfort in our portfolio's focus on domestic, service-oriented businesses, which mitigates risks associated with tariffs, shifts in government spending, and other recent policy changes. Our third quarter net realized gains reinforced our long-term track record of generating over $1 billion of net realized gains in excess of realized losses since our inception over two decades ago.
Our differentiated results stem from our extensive origination capabilities allowing for selectivity and strong underwriting, as well as our large and experienced portfolio management team, which focuses not just on minimizing losses, but also on maximizing returns when situations do not go as planned. We also benefit from our deliberate equity co-investment strategy that has generated attractive returns over time. Our third quarter results illustrate the value we provide to our shareholders from realized equity gains. Most notably, we recognized a $262 million realized gain on the sale of Potomac Energy Center, a previously underperforming investment that was on nonaccrual in the past and was then restructured and ultimately owned by ARCC.
With the restructuring of Potomac's balance sheet, the incremental capital we invested, our proactive management of the company, and patience, we were able to achieve an IRR of approximately 15% on our investment rather than incurring a loss. We also generated net realized gains from the exit of three equity co-investments, generating over $30 million in realized proceeds and representing a two and a half times multiple on our original invested capital and an average gross IRR in excess of 30%. This supports our track record of generating an average gross IRR on our equity co-investment portfolio that was more than double the S&P 500 total return over the last ten years.
Collectively, our net realized gain performance both this quarter and cumulatively underscores the strength of our investment strategy and deep portfolio management capabilities that drive differentiated results for our investors. As I noted earlier, we believe our portfolio remains healthy and demonstrates solid, underlying credit trends. With respect to risks recently in the headlines, we have no exposure to First Brands or Tricolor, nor do we have any exposure to nonprime consumer finance firms like Tricolor. Following the recent events at First Brands, we have been asked about whether our portfolio companies use receivables financing and if such financing poses any hidden risks for us.
We do not believe there are hidden risks in our portfolio from the small number of portfolio companies that may use receivables financing. Additionally, as part of a normal ordinary course business practice, our team thoroughly diligences any receivables financing arrangement along with vetting the broader capital structure of the business during the underwriting process. If such financing remains in place post-close, it is typically subject to strict parameters and is monitored during the life of our investment. These structural safeguards are a core part of our documentation standards and, in our view, represent one of the strengths of our documentation, especially in comparison to the broadly syndicated market.
Like First Brands and Tricolor, another topic that has been in the headlines recently is software and the potential risks posed by AI. Let me make a few comments on how we have carefully constructed our software portfolio over two decades of investing in this sector and why we believe AI is much more of an opportunity than a risk for our software borrowers. As a starting point, our software loans are financed at what we believe are conservative leverage levels with an average loan-to-value ratio of only 36%, and none of our software loans are currently on nonaccrual. Our focus is on financing large, market-leading, and well-capitalized software companies with strong growth prospects.
As an example, our software portfolio companies have a weighted average EBITDA of over $350 million, and they continue to demonstrate strong double-digit EBITDA growth over the last twelve months. Our borrowers are generally backed by leading sponsors in the software industry who not only have substantial capital resources but are also proactively investing in their platforms to embrace the changes and potential prompted by AI. While we believe AI excels at analyzing data and generating high-quality content, it typically does not provide the foundational infrastructure required for critical business operations or systems of record. These functions still rely heavily on traditional software systems that can securely store data and facilitate complex transactions.
We have, therefore, historically focused almost entirely on financing software companies that operate B2B platforms and typically serve highly regulated industries, leverage proprietary data, or deliver repeatable, consistent results core to business operations. Importantly, these companies are deeply embedded within customer operations and also benefit from high switching costs given the risk of business disruption from moving to alternative vendors, which, in our view, provides additional layers of durability and resilience against potential AI disruption. While we believe AI poses minimal risk to our software loans, advancements in AI remain an important component to future value creation for these businesses.
For example, insights generated by AI can enhance these foundational systems by improving analytics, user experience, and operational efficiencies while serving as a valuable complement and not typically a replacement for mission-critical software. Importantly, these views reflect Ares' ongoing collaboration among our highly experienced software investment team, our in-house software analysts, and Ares' in-house AI experts at Bootstrap Labs, a leading AI-focused venture capital investment team that joined the Ares platform a few years ago. We leverage our entire platform to drive credit decisions on each software transaction we consider, as well as in our quarterly valuation and risk assessment processes led by our portfolio management team.
Now, before turning the call over to Scott, let me address our outlook on our future earnings potential and dividend levels. In light of market expectations for further declines in short-term interest rates, we believe there are distinct competitive and financial factors that position ARCC to maintain its current dividend level for the foreseeable future despite the potential headwinds to earnings posed by lower short-term interest rates. As a starting point, in 2025, our core earnings continued to exceed our dividend.
Second, during the last period of rising short-term interest rates, in 2022 to '23, we intentionally set our dividend at a level equivalent to a 9% to 10% ROE, which is a level we have historically achieved through different interest rate cycles over the last twenty years. We set the dividend at this level because we believe we can sustain this level of profitability through market cycles. The third point worth highlighting on this topic is what we view as our unique financial position with multiple levers to expand earnings or offset headwinds solely from falling market rates.
Notably, our balance sheet leverage remains around one times, which is well below the upper end of our target range of 1.25 times, giving us ample flexibility to drive higher earnings by supporting prudent growth using our efficient sources of capital. We also believe there is growth potential to capitalize on higher-yielding opportunities within our 30% nonqualifying asset basket, including through strategic investments like Ivy Hill and SDLP. Additionally, given the prospects for a more active environment, alongside our origination scale, we believe there is potential for increased velocity of capital, which could drive additional capital structuring fees to further support our earnings.
Lastly, the historical strength of our earnings and credit performance has provided us with $1.26 per share in spillover income, which is equivalent to more than two quarters of our current dividends. We believe this level of spillover income gives further visibility to our investors since it provides a cushion to support our quarterly dividends in the event of temporary shortfalls in our quarterly earnings. In summary, we had a strong quarter with healthy credit performance and financial results that demonstrate our enduring competitive advantages. And with that, I will turn the call over to Scott to walk us through our financial results and the continued progress we are making on our strong balance sheet.
Scott Lem: Thanks, Kort. This morning, we reported GAAP net income per share of $0.57 for 2025 compared to $0.52 in the prior quarter and $0.62 in 2024. We also reported core earnings per share of $0.50 compared to $0.50 in the prior quarter and $0.58 for the same period a year ago. This is the twentieth consecutive quarter of our core earnings exceeding our regular dividend, demonstrating our ability to consistently cover our dividends.
Drilling a bit more into the net realized gains that Kort highlighted earlier, we generated $247 million of net realized gains on investments during the third quarter, which represents our second-highest net realized gain quarter since our inception and brings our cumulative net realized gains on investments since inception to approximately $1.1 billion. Similar to last quarter, we incurred capital gains taxes related to certain other net realized gains, which amounts to $72 million in the third quarter. While we do not typically pay taxes on the annual income we generate, we occasionally incur taxes on certain gross realized gains. Even net of these taxes, our net realized gains on investments remained a healthy $175 million for the third quarter.
Turning to the balance sheet, our total portfolio at fair value at the end of the quarter was $28.7 billion, which increased from $27.9 billion at the end of the second quarter and $25.9 billion a year ago. Shifting to our funding and capital position, we have remained active in adding capacity, extending our debt maturities, and reducing costs at our committed facilities. In July, we added nearly $500 million of additional capacity across our credit facilities. We also reduced the drawn spreads on two of our credit facilities by 20 basis points each to 180 basis points over SOFR and extended the maturities on both to July 2030.
We continue to benefit from our long-standing banking relationships, which are supported by our scale, as well as our long-term track record through cycles. The significant diversification of our overall portfolio also has direct benefits for our credit facilities, enhancing the attractiveness of the collateral pool that supports the facilities. For context, our asset-based bank credit facility advance rates are generally similar to the double-A rated tranche of a typical middle-market CLO. It is important to highlight that a AA middle-market CLO tranche has never defaulted.
With this low level of risk, the current bank capital framework supports a return on capital for our banks that is significantly more attractive than if the banks held the individual loans directly on their own balance sheet. Beyond the systemic benefits that this type of lending provides to the banking system as a whole, the strength of our relationships and the economics that we can provide to our banks further strengthen our ability to be an investor through all cycles. In addition to our continued engagement with our banking partners, we also further expanded our nonbank capital sources in September by issuing $650 million of unsecured notes priced at 5.1% and maturing in January 2031.
These notes were issued at a spread inside of our previous notes issuance in June. Consistent with our recent offerings, we swapped this issuance to floating rate, therefore positioning our funding cost to decrease with expected declines in SOFR. As a reminder, ARCC remains the highest-rated BDC across the three major rating agencies. In addition to these strategic advantages embedded in our funding, our overall liquidity position remains strong, totaling $6.2 billion, including available cash. In terms of our leverage, we ended the first quarter with a debt-to-equity ratio net of available cash of 1.02 times. We believe our significant amount of dry powder positions us well to actively support both our existing and new portfolio companies.
Finally, our fourth quarter 2025 dividend of $0.48 per share is payable on December 30 to stockholders of record on December 15. ARCC has been paying stable or increasing regular quarterly dividends for sixty-five consecutive quarters. In terms of our taxable income spillover, we finalized our 2024 tax returns and determined that we carried forward $878 million or $1.26 per share available for distribution to stockholders in 2025. As Kort stated, we believe our meaningful taxable income spillover provides further support for the long-term stability of our dividends and continues to be one of our significant differentiators. I will now turn the call over to Jim to walk through our investment activities.
Jim Miller: Thank you, Scott. I will now provide some additional details on our investment activity, our portfolio performance, and our positioning. In the third quarter, our team originated over $3.9 billion in new investment commitments, an increase of more than 50% from the previous quarter. About half of our originations supported M&A-driven transactions such as LBOs and add-on acquisitions, which highlights our ability to benefit from the early signs of a more active and M&A-driven market environment. Further reflecting this broader trend of growing M&A, approximately 60% of our third-quarter originations were with new borrowers, a shift from the past few quarters where the majority of our originations were from incumbent borrowers.
We believe the shift reflected an influx of high-quality companies coming to market in the early part of a potential M&A cycle. Our origination activity continues to underscore our broad market coverage. About a quarter of our new investments were made in companies with EBITDA below $50 million, which highlights our strong presence in the core middle market and lower middle market as well as the more visible upper middle market. On the upper end of the market, we led the $5.5 billion financing for the take-private transaction of Dun & Bradstreet, the largest private credit LBO recorded to date.
This well-established, high-quality company with strong recurring cash flows chose Ares to lead their financing as an alternative to the syndicated markets due to our flexibility and execution certainty. Alongside this increased activity, our credit spreads remain stable. Our new first lien commitments in the third quarter were completed at spreads that were consistent with the prior quarter and actually 20 basis points higher than the prior twelve-month average. We achieved these pricing results with attractive risk profiles as well, as the spread per unit of leverage on first lien loans completed in the third quarter was the highest in more than a year.
Our broad origination team and flexible approach continue to drive our ability to source opportunities with a differentiated yield profile, including the selective use of PIK preferred investments. In the third quarter, we generated an IRR in excess of 20% on the exit of three preferred PIK investments. These PIK preferred securities are invested in large, established companies with an average EBITDA of roughly $480 million. Our preferred investments have a low double-digit fixed rate yield and implied loan-to-value ratios in the 50% to 60% range. On average, we value these at 98% of cost at the end of the third quarter.
Reflecting a more active market environment, we experienced increased repayments through change of control transactions, including from investments that were accruing PIK income. As a result, and as disclosed in our cash flow statement, these full repayments generated PIK collections that were actually greater than the aggregate amount of PIK income we accrued for the third quarter. Shifting to our portfolio, our $28.7 billion portfolio at fair value increased nearly 3% quarter over quarter and over 10% year over year, further underscoring the extent of our origination scale at ARCC. Even during the slower transaction environment experienced in the market over the past year, our portfolio continues to be highly diversified across 587 companies and 25 different industries.
This means that a single investment accounts for just 0.2% of the portfolio on average, and our largest investment in any single company, excluding our investments in STLP and Ivy Hill, is less than 2% of the portfolio. We believe our emphasis on portfolio diversification and industry selection reduces the frequency and impact of negative credit events on the company. As Kort mentioned, the credit quality of our portfolio continued to demonstrate strength and resilience in the quarter. Our nonaccruals at cost ended the quarter at 1.8%, down 20 basis points from the prior quarter.
This remains well below our 2.8% historical average since the great financial crisis and the BDC industry historical average of 3.8% over the same time frame. Our nonaccrual rate at fair value also decreased by 20 basis points to 1%. Finally, on credit, our grade one and two investments, representing our lowest two rating buckets, in the aggregate declined from 4.5% to 3.6% of the portfolio at fair value quarter over quarter. And our portfolio companies' average leverage levels and interest coverage ratios both improved when compared to last quarter and the prior year. The health of our portfolio is also reflected in the profitability and growth profile of our borrowers.
In the third quarter, the weighted average organic LTM EBITDA growth of our portfolio companies was again over 10%. Importantly, this EBITDA growth rate was more than double that of the broadly syndicated market, based on a second-quarter analysis done by JPMorgan. Additionally, both our sponsored and non-sponsored companies are growing EBITDA at consistent rates. As a reminder, we believe our industry specialization has allowed us to further penetrate the non-sponsored market as well as service the sponsored market in a differentiated way.
Further to my earlier point on our extensive market coverage and its role in attracting strong, high-performing companies within the middle market, we continue to see healthy growth across the lower, core, and upper middle market segments of our portfolio. Importantly, size is not a distinguishing factor of performance in our portfolio, as companies with EBITDA of less than $25 million had EBITDA growth that was modestly higher than the rest of our portfolio. Looking ahead, we are seeing healthy transaction activity levels so far in the fourth quarter. Our total commitments for the fourth quarter to date through October 23, 2025, were $735 million, and our backlog reached a new record of $3 billion as of October 23, 2025.
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. In closing, our strong earnings this quarter are underpinned by many durable advantages that we believe continue to drive differentiated results for our investors. In today's environment, we remain focused on leveraging our origination scale to see as wide an opportunity set as possible, maintaining our rigorous credit standards, negotiating appropriate documentation, and being highly selective around deal flow. We remain confident that sticking to our long-standing principles will support our ability to continue to capitalize on new opportunities and build on our track record of strong performance.
We are proud that our declared fourth-quarter dividend of $0.48 per share extends a record of over sixteen straight years of stable or increasing regular dividends for our shareholders. As always, we appreciate you joining today, and we look forward to speaking with you in the future. With that, operator, please open the line for questions.
Operator: Certainly. Thank you, sir. To ask a question, please press 1 on your telephone. If you would like to withdraw your question, please press 2. Please note, as a courtesy to those who may wish to ask a question, please limit yourself to one question and one single follow-up. If you do have additional questions, you may reenter the queue. Additionally, the investor team will be available to address any further questions at the conclusion of today's call. With that, we will go first this afternoon to Finian O'Shea with Wells Fargo.
Finian O'Shea: Hey, everyone. Good morning. Kort, I just want to hit on a couple of your inputs on dividend coverage. One with the sort of traditional levers more on balance sheet leverage, more perhaps junior or alpha-laden opportunities. Can you remind us if, on an allocable capital framework, ARCC is different to have more of this stuff tilt toward it versus AISF as the market opens up for this kind of opportunity, or should the two vehicles continue to be essentially the same going forward?
Kort Schnabel: Yeah. Thanks, Fin. Yeah. Both vehicles will get allocated any kind of deal based on the available capital math, and that is an allocation policy that we have had in place for a very long time and has not changed. You know, obviously, those types of transactions have been more muted of late, but I do think as we see overall transaction activity increase, in particular, change in control activity, and even potentially as you know, rates do decline further, that hopefully will create more junior capital opportunities. We have seen that be a product of those kinds of trends in the past. At ARCC, we will certainly get its fair share of those transactions.
Finian O'Shea: And do you appreciate that? And just to be clear, like that, maybe I could have worded it better. That math is the same overall for a percentage of allocation to the more, you know, junior or plus 700 or sports equity and so forth?
Kort Schnabel: Yeah. I you know, I would also just say is that the ACEF has a different yield profile than the RCC. So you know, that is also part of the decision-making in terms of the assets that may go into those funds as well. But, yeah, Finn, if you are talking about different types of assets, whether it is sports and media or infrastructure assets or you know, any kind of assets, it is all based on the mandate of the fund of which ARCC obviously has an extremely diverse and flexible mandate and then available capital. And so that is how those deals get allocated.
And ARCC, obviously, being our most flexible vehicle, gets a sliver, gets a piece of almost everything we do.
Finian O'Shea: No. Appreciate that. If I could do one on the spillover component, can you give us color on how big of an input that would be to support the base dividend? Would you run it all the way down before cutting the base dividend? Or you know, halfway down? Is there sort of a target or threshold there as to how much support that would be? And that is all for me. Thanks.
Kort Schnabel: Yeah. Fin, I mean, I do not look. I first of all, we have a lot of confidence, as we talked about in the prepared remarks, of covering the dividend into the foreseeable future. And, you know, we are running lots of different modeling scenarios, including, you know, base rate declines as forecasted in the curve or further declines. All different kinds of scenarios, obviously, liability costs, and we just feel very confident. So I do not know that I really want to speculate in terms of, you know, where we would be in the instance, you know, well into the future that does not hold up.
But I think the reason why we talk about the spillover income is because it does provide, you know, additional stability to the dividend if needed. If core earnings temporarily drop below the dividend level. We have rarely seen that in the course of our history. But the amount of spillover hopefully just provides a lot of comfort for shareholders. But I do not think it is worth speculating as to all the different scenarios that could occur and how much of that spillover we might, you know, need to use.
Finian O'Shea: Okay. Thanks.
Operator: Thank you. We will go next now to John Hecht at Jefferies.
John Hecht: Hey, guys. Thanks very much for taking my questions. You guys gave a lot of information about the market and your sustainable competitive advantages in the call. But if you kind of step higher level, I am wondering, you know, how you like, thinking more about broadly in the industry, how would you describe competition in light of the fact that spreads are fairly narrow, there is a lot of there. But also over the last few weeks, as there have been a couple of hiccups and crack events, that have, you know, probably caused some disruption, you know, reverberations industry-wide.
Kinda how do you, how do you, you know, the one-minute kind of explanation of your perspective of industry competition?
Kort Schnabel: Yeah. Look. I think it is a competitive environment as it has always been over our twenty-one-year history. It is just sometimes, you know, new competitors come in, some competitors leave. Obviously, we have seen as the industry has matured and we have moved up market, certain competitors compete up market with us. We have a different set of competitors that compete in the middle market and in the lower middle market. We have talked a lot about how, you know, we believe we are the only scaled direct lender that competes across lots and lots of different markets.
And then when we go into our, you know, non-sponsored origination and the various industry verticals, we see a whole another set of competitors. So it is really hard to generalize. You know, I the events of the last few weeks, I would say it is a little too early to say, but so far, there has been no real significant impact on the competitive landscape if you are talking about just, you know, the news around Tricolor and First Brands and, you know, a few of these issues that are cropping up in the broadly syndicated market. You know, it is not really impacting our market that much so far.
And again, I think it probably does highlight that our documents and protections and our credit selection are differentiated relative to the broadly syndicated market. So long-winded answer of saying a little too early to say and no real impact so far.
Jim Miller: Add one thing, Kort. We also get the benefit when the broadly syndicated market does see reverberations, as you said. That is a great time for private credit. Those are moments in time where we can take market share from the broadly syndicated market and, you know, people are looking for that certainty. So those moments and, you know, sometimes they are short a week or two, sometimes they are a month or longer. Those moments tend to be quite favorable for us.
John Hecht: Yeah. That makes sense. And second and non-related question, I am just curious if there is an update on some of the, call it, regulatory opportunities like AFFE. Just I have not heard much about that for a few months, and I am wondering if there is anything to discuss there.
Kort Schnabel: Nothing on that. Meaningful, John. I mean, there was some temporary excitement around progress that had occurred down in Washington on that front. But it is hard for us to get too excited because we have seen it, you know, kinda go up and down in its momentum over the last few decades, frankly. So we try not to read in too much to the movements, you know, kinda month to month or even year to year.
John Hecht: Great. Thank you guys very much.
Operator: Thank you. We will go next now to Aaron Saganovich at Truist Securities.
Aaron Saganovich: Thanks. Just following on the line of questioning about, you know, where are we in the cycles at a late cycle or type credit spreads? You laid out a lot of reasons why things continue to go well for you with, you know, EBITDA surprising at your portfolio companies. A lot of activity. You know, what are some of the guideposts that you are looking for that would, you know, maybe cause you to be a little bit more strict in terms of your underwriting? And what are some of those things that we might be able to monitor from afar?
Kort Schnabel: Yeah. It is not too complicated. I mean, certainly, on underlying EBITDA growth or, you know, potential reductions in that growth would be something we would look at. We are always looking sector by sector as well. We talk about the overall portfolio average EBITDA growth, which again remains double-digit growth and bounces around here and there. But still remains really strong. But we are looking underneath the hood there and all the individual industries that are driving that growth, and we are not really seeing any trends in certain industries that would lead us to believe that there are points of weakness in, you know, any kind of individual sector.
You know, so and if we did see those, we would certainly point those out. But that would be, you know, number one on the list. You know, obviously, overall access to capital, the flow of credit in the markets, historically, when you see credit start to seize up, you know, that can also then flow through and create problems for businesses and lead to downturns. Again, we are seeing that actually go the other way now in terms of increased activity in the M&A market. Our transaction volume and opportunities remain really strong. So, you know, that would be something else to look for. But, again, no signs on the horizon there.
So I do not, there is nothing we are seeing here at Ares Capital that would tell us that we are, you know, nearing the end of any kind of cycle. Certainly, from an M&A standpoint, the M&A cycle, I think we feel like we are at sort of an early end of a new cycle that is beginning. And you can see that in our origination numbers this quarter, which tilted toward 60% new borrowers for the first time in a long time. Usually trending around 50% or even, you know, more recent in the last year or two, you know, 30, 40% went up to 60%. Change of control transactions were over half of our origination.
So I think the M&A market really is picking up. And, you know, I think that is also a sign that people feel good about the stability of the economy, where we are going, underlying businesses, and we are seeing that reflected in that transaction volume. So that would be my answer to your question.
Aaron Saganovich: Yeah. No. That is very helpful. And largely what I would have expected, but it is good to hear you said. And the second question, kind of a quicker one, but you commented on September being one of the biggest, busiest months, but spreads on first lien for your investments in the third quarter actually rose a little bit. Seems a little bit, you know, backwards. Obviously, not a big amount. I think you said 20 basis points, but just curious as to those dynamics.
Kort Schnabel: I think the dynamics are that it reflects the broad origination funnel that we are able to capitalize on here by virtue of being managed by Ares Management and all the different deals that we are able to see come into the platform and originate. I mean, it is, yeah. I am glad you pointed it out. Look, we put out $3.9 billion of gross originations in the third quarter at an average spread of SOFR plus $5.60. And that went into borrowers at an average leverage of 4.8 times. So we certainly feel like it is a good investing environment to be in despite, you know, the fact that it is competitive like we talked about before.
We think we have meaningful competitive advantages in terms of the types of deals we see. It will be interesting to compare our originations and those metrics that I just put out relative to our competitors as we see people put out earnings over the coming weeks.
Aaron Saganovich: Great. Thank you.
Operator: We will go next now to Melissa Wedel at JPMorgan.
Melissa Wedel: Good afternoon. Thanks for taking my questions. I think from our conversations, it seems like what has been driving some of the price action in the industry the last few months has been concerns about two things. One is earnings power and the second would be credit. You have addressed the credit. You are not seeing anything thematic, and certainly showing up in the nonaccrual rates. I was hoping to dig in a little bit more on the earnings power and follow-up on some of the levers that you talked about earlier that you could pull.
You know, one of the things you talked about was being a bit below the top end of your target range in terms of portfolio leverage of one and a quarter. Given that you have bandwidth there to increase leverage at the portfolio level, I am curious how you are thinking about using the at-the-market program, especially as share prices have declined.
Kort Schnabel: Yeah. Sure. Thanks for the question. You know, so I think as you probably can see, we have been reducing the amount of at-the-market issuances over the last three quarters. So we have gone from $400 to $500 million a quarter down to, I think, it is, you know, $300 million last quarter down to $200 million this quarter. So, you know, that has been influenced by a view that we are operating slightly below the mid of the range on leverage, that 0.9 to 1.25 times range. And our desire to get a little bit more into leverage here over time. Again, we do like the position that we are in at one time.
It is a conservative place to be. It positions us well to capitalize on opportunities in the market. Jim mentioned earlier, maybe there is an opportunity to broadly syndicated market seizes up. We want to be in a position to have that kind of financial flexibility. But, you know, we do think it is appropriate to potentially start moderating that ATM, which is what we have done over the last several quarters. Not to say, you know, what the future will hold, but that has been our view. So I do not know too much more to say on that topic, Melissa, but hopefully that is helpful.
Melissa Wedel: It is. And I appreciate that. And then in terms of further optimizing the nonqualifying asset bucket, I am curious if there is anything in particular or forthcoming in the near term on that. And if not, maybe more generally, would you think about additional assets there that would be similar to your current exposures in IAM or STLP, or would it be a different type of exposure and just how you are thinking about that sort of longer term? Thank you.
Kort Schnabel: Sure. Yeah, sure. One good piece of news that we certainly are happy to report is on the 100 basis point increase in the yield on the SDLP that you can see in our numbers on a go-forward basis. So I think that will, you know, provide a nice boost to the return on that program. You know, I think our ability to increase the utilization of SDLP and to help IAM hopefully achieve more growth as well will, you know, partially be based on the overall transaction volume in the market and our ability to originate, again, has been increasing.
So that gives us confidence that we should be able to better utilize some of those joint ventures and structures within our 30% basket. I think, Melissa, it is probably, hopefully, that does that answer your question? Or is there something else you were getting at there?
Melissa Wedel: Nope. That is helpful. Thank you.
Operator: Thank you. We will go next now to Casey Alexander at Compass Point.
Casey Alexander: Yeah. Good morning. And good afternoon, and thanks for taking my questions. My first question and why sound a little convoluted, but you know, we have gone through this mini hysteria, you know, created by, you know, the wet blanket of the worst private credit thrown over the entire arena. As if it is all-encompassing. So first of all, you should change the name of what you do. And take the words private credit out of it. But I am wondering if this mini hysteria did you notice any even temporary stall in the market?
There is, you know, so much over the last couple quarters of there were more loans leaving the directly originated private credit arena for the broadly syndicated market. Have you felt some relief from that? Because, clearly, the banks have been twisting themselves into knots over this. And also, you know, spreads have been at all-time tight, you know, which, again, does not presuppose a real credit crisis. Does it feel like you might see new origination spreads within the broadly syndicated market widen a little bit, which would also allow you some more spread relief?
Kort Schnabel: Sure. Thanks, Casey. So a few things in there. I think, you know, first of all, yeah. Much too much noise made about the banks and private credit and fighting over assets, you know, I really think that is way overstated. We, as an industry, have been both working together with banks and, you know, competing with banks on transactions for decades. This is really nothing new. It is just that, I think, the dollar amount of the transaction as an industry that we are now providing have gotten to the point where it is starting to get more attention. But the dynamic is really nothing all that new. Banks are great partners for us.
They provide leverage facilities on a lot of our funds, including, obviously, ARCC. And, you know, there are movements in the market from time to time where borrowers are more apt to, you know, lean toward broadly syndicated transactions. Sometimes borrowers are more apt to lean toward private credit transactions. The longer-term trend is borrowers moving more toward private credit transactions because of the value of certainty knowing that the capital is going to be there in all market environments.
And every time we go through a period of volatility, where the broadly syndicated market gets choppy and maybe cannot support its borrowers or banks get hung on transactions that they are looking to syndicate, that just reinforces that long-term trend and makes it so that borrowers are more apt to consider private credit even when banks are back in the broadly syndicated market. So the banks, you know, broadly syndicated market. This year. But on the whole, more transactions were still done in the private credit market than the broadly syndicated market.
So, you know, I think on that, not much more there to add, Casey, but we can get more into it if there is something specific that I missed there in that part. I guess on the question about spread widening, I think you were sorry, maybe restate the spread question again.
Casey Alexander: Well, just that before we had this mini, you know, hysteria over private credit driven by two loans that went bad. Spreads were at all-time tights. So I am just wondering if you have seen, and a lot of that driven by really aggressive bidding in the broadly syndicated market. Have you seen any deals in the broadly syndicated market that might indicate that they are widening out a little bit? Because you guys do, to an extent, price against that market. So
Kort Schnabel: Yeah. Well, I think Jim actually made that point, is it could create that opportunity. It is a little early. I just think it is a little early. I am not going to say that we have really seen that cause and effect exactly yet, where all of a sudden we are seeing deals tip our way because of that. But certainly, that could potentially be an outcome.
I think what really matters is how long and sustained the sort of concern or dislocation or spread widening in the broadly syndicated market lasts because our market, one of the benefits of our market, I think, certainly for borrowers, is that we do not move in lockstep with the broadly syndicated market, right? We lag a little bit. We are a little bit more stable. We take a longer-term view because we are holding these assets. We are not looking to sell the assets. So we are not going to move up and down 25, 50 basis points in line with the broadly syndicated market when it moves. So I think time will tell.
We will just have to wait and see.
Casey Alexander: All right. Thanks for that. And I do have one follow-on. I think that is a great answer, though. Thank you. In the recent developments, you pointed out that in your exits, you recognized total net realized losses of $67 million. Could you tell us where that was relative to their third-quarter marks? I mean, are they likely to be an unrealized offset to that? Because they were close to the marks? Or is there some difference in there?
Kort Schnabel: They are pretty much right at the marks.
Casey Alexander: That is what I assumed since it was so close after the end of the quarter. All right. Thanks for taking my questions.
Kort Schnabel: Great. Thank you.
Operator: We will go next now to Doug Harter with UBS.
Doug Harter: Thanks. Hoping you could talk about your expected pace of exits in the near term and how that might influence the kind of the velocity of portfolio turnover and fee income you can generate?
Kort Schnabel: It usually moves kind of in lockstep with overall transaction volume in the market and new originations. So we have talked about that in the past too. People get sometimes a little concerned when transaction volume declines like we saw in the second quarter of this year, but then exits decline as well. So they kind of move together and the net number really is, I think, a more important number to look at. Obviously, the quarter was very strong on a net basis as well as our $1 billion even though the exits did increase.
So I do not know if I could provide anything super insightful there other than just to say they kind of move together with overall transaction volume.
Doug Harter: Makes sense. Thank you.
Operator: Thank you. We will go next now to Robert Dodd with Raymond James.
Robert Dodd: Hi, guys. In talking about supporting earnings power, etcetera, I mean, one thing that stood out to me this quarter is other income quite high. I mean, by any historic. Now, I mean, that is not usually where the origination fees go, but could be amendments, can be consulting. Can you give us any idea like what drove that? And is that now going to be more geared to just what activity is rather than which obviously drives the capital obstruction fees? Or has there been more of an effort to seek out like kind of consulting kind of fee arrangements?
And maybe is that going to be an ongoing story in terms of one of the tools to support earnings power?
Kort Schnabel: Yes. Thanks, Robert. In that is mainly typically like transaction or like amendment type fees. I would not necessarily say that is replicable every quarter. So really more one-time in nature. The capital structure fees are really more indicative of the origination volume.
Robert Dodd: Yes, yes, yes. Got it. Thank you. On the AI question, I mean, you mentioned you have the in-house think tank, lack of a better term, from several years back. How has that changed over the last couple of years? How you go about underwriting software? I mean, you laid out in the prepared remarks all the ways you do it currently. But I mean, is that fundamentally in any way different today because of the in-house AI expertise? Or is it just always been that way?
Kort Schnabel: Yes. No, great question. Look, think multi-part answer. Number one, it has always been that way in terms of our desire to provide capital to software that is foundational and infrastructure-like in its business model, i.e., software that is highly ingrained in the workflow of its customer base, that powers off of and a key part of its value prop is off of a proprietary database. And in a lot of times, that is provided into highly regulated end markets that are extremely reliant on high-quality data and accuracy of data and auditability of data. So that has always been our strategy in software for decades. And so that really has not changed.
I think over the last few years when the rise of AI and obviously our focus on making sure that our portfolio is defensively positioned. And certainly, any new investment we make is defensively positioned. Obviously, we are spending a lot more time thinking now about what AI is good at and what it is not good at. To ensure that we continue to build a portfolio that is resistant to disruption. And when you think about what AI is good at, it is really good at creating content, can create amazing content so much faster than humans can. It is very good at analyzing and synthesizing lots of data. It does actually house the data.
Not a database, but it can synthesize lots of data. And so you want to make sure that you are not investing in software companies that are simply providing content, learning modules, delivered over software, that can be disrupted. So those are the kind of areas we are trying to make sure that we are staying away from or software companies that are just analyzing third-party data. That would be something to stay away from. And we want to make sure we are still very focused on providing software to companies that are actually powering businesses and are entrenched in businesses and are infrastructure-like in their nature.
Robert Dodd: Got it. Thank you.
Operator: Thank you. We will go next now to Paul Johnson with KBW.
Paul Johnson: Yes. Thanks for taking my questions. Just one, a little bit further on Doug's questions for exits. I am just wondering if you have any sort of updated outlook, I guess, in terms of monetization and sort of further gains from realizations this year or if the Potomac intermediate kind of represents more of the meaningful opportunity there near term?
Kort Schnabel: Yes. Look, I think obviously our strategy is to leverage our portfolio management team to make sure, as I said in the prepared remarks, we are not only avoiding loss but capitalizing on potential opportunities to make big gains. Potomac is a great example, but it is not the only example of our history, and I can certainly guess that it is not going to be the only example going forward into the future. Cannot give forward-looking guidance or remarks about what might be the next big gain, obviously.
But I guess what I would say is we provide a lot of disclosure for all of our investors in our SOI, in our 10-Q and 10-Ks, and you could see every investment we have, the nature of that. You can see the investments we have that are restructured where we own equity or own the businesses outright via those restructurings. And that could provide some clues as to what might be sitting in the portfolio that could provide future gains. But I would venture a guess that will not be the last one that you guys will see.
Paul Johnson: Appreciate that. Very helpful. And then last one is just kind of higher level. I had. But we see like a mega financing deal like the EA SPORTS JPMorgan led deal there. LBO financing. Does the deal of that size do enough, I guess, to kind of soak up any sort of oversupply of capital in the financing markets, or is kind of the reality we would need to see a number of those to really accelerate sort of a balance of the supply and demand in the private credit market?
Kort Schnabel: Yes. I think it helps. I mean, I do not know that one deal alone is going to move markets. You probably need several, but that is a lot of capital. So I think if we start to see, and again, it is just emblematic of, I said earlier, the markets are functioning very well. The credit market money is flowing, buyouts, new buyouts are happening. And if we start to see a number of these larger buyouts, I do think that will start to potentially widen spreads, soak up demand in the broadly syndicated market, move deals back our way. So every deal like that, I think, helps.
In the market, we are seeing a fair amount of the regular way activity, but we are also seeing a regular cadence of larger transactions, right? Those are becoming more common. Records are broken over and over again, but it is really more about the regular cadence of large transactions that helps absorb the capital into the market.
Paul Johnson: Got it. Appreciate it. That is all for me. Congrats on a good quarter.
Operator: We will go next now to Kenneth Lee at RBC Capital Markets.
Kenneth Lee: Hey, good afternoon and thanks for taking my question. Just one for me. And you touched upon this in your prepared remarks around receivables financing, and more broadly, I guess, when you look at any kind of off-balance sheet financing, wonder if you could just remind us how does Ares Capital avoid such situations? And more specifically, how are they flagged during the due diligence process when you are making new investments? Thanks.
Kort Schnabel: Yes. Well, so they are flagged during the due diligence process by an exhaustive analysis of all of the company's liabilities on balance sheet and off balance sheet. We obviously have almost every transaction, we do new transaction. We have a quality of earnings provider that is coming in and doing a third-party report. Scrubbing numbers, asking lots and lots of questions. Companies are required to disclose their liabilities to us as part of the reps and warranties. So it is diligenceable at the outset and at the underwriting of the transaction. And then on a go-forward basis, we have protections in the document.
We have baskets that limit securitization facilities, which includes factoring of receivables and all different sorts of off-balance sheet liabilities. And those baskets are tight. And talk a lot about the baskets in the private credit market or the documents in the private credit market being tighter than the documents in the broadly syndicated market. And this is just one very good public example of something where the broadly syndicated market documents were a bit looser. And I do not expect that you would see that occur in one of our transactions.
Kenneth Lee: Got you.
Operator: We will go next now to Sean Paul Adams at B. Riley Securities.
Sean Paul Adams: Hey guys, good afternoon. Most of my questions have already been asked and answered, but on the portfolio grade, the weighting improved quarter over quarter and the nonaccruals declined. Do you view any general improvements in the economic environment? Or is it just a reflection of the runoff of nonaccruals from the portfolio?
Kort Schnabel: I think the economic environment is pretty stable. So I think it is just the runoff of a couple of the nonaccruals. The number obviously bounces around a little bit quarter to quarter. The movement was not anything extreme. So I do not think there is much to read into there.
Sean Paul Adams: Got it. And as a quick follow-up, on spreads, you guys talked about this pretty in-depth, but you know, there is a race towards the bottom. Is there a kind of a bottom that you are envisioning as far as spread level declines? Just among the general economic environment for deal flow?
Kort Schnabel: Yes. I mean, it is just hard to prognosticate and look forward and say where everything is going to go. I guess I would just point to a couple of things. Number one, spreads for the last three quarters now have been stable in the market. So it feels like we have found a bottom for now. And I think that is due to just overall transaction activity starting to come back. I think it is also due to just the fact that private credit managers have dividends to pay, and we sort of found where this floor seems to be at least now for the last three or four quarters. So that is one important point to look at.
Again, would probably just remind people, our third-quarter originations showed spread widening. Modest, but some spread widening. I talked about it already. We put out $3.9 billion at S plus five sixty at 4.8x leverage. So that feels like a pretty good environment to be investing into and does not really suggest that we are in a race to the bottom type environment. But like I said, not going to sit here and really try to predict too much going to happen in the future.
Operator: Thank you. We will go next now to Ethan Kaye at Lucid Capital Markets.
Ethan Kaye: Hey, guys. Thanks for taking my question. Maybe nitpicking here a little bit given very solid results, but dividend income came in a tad bit softer quarter over quarter. It looks like the distribution from Ivy Hill was stable. There were some exits of equity positions as you guys talked about, which ostensibly is a factor there. But can you talk about if there is maybe anything else that might have contributed to that kind of evolution in dividend income? And then as a quick follow-up, can you kind of remind us of the sensitivity of Ivy Hill's dividend to changes in interest rates given the fact that it is largely underlying the underlying is largely floating rate debt?
Kort Schnabel: Yes. On dividend, yes, you hit it. There are a couple of things there. There were some nonrecurring dividends that we got last quarter, but we also just saw some of the exits of our preferred yield and preferred equity that exited the quarter. And so the dividend income came down with those two factors. I will note that most of those preferred investments that paid off were picking. So it certainly helped the collection of our PIK, which I know has been a hot topic for investors as of late.
Jim Miller: Yes. We did not even really hit that, but we had a great PIK collections quarter. I know we do get a lot of questions about that. And that obviously just occurred with a pickup in transaction volume. And I think on the Ivy Hill question, I think you are asking about the sustainability of Ivy Hill dividends and interest rate sensitivity. I mean, Ivy Hill invested floating rate assets. They have floating rate liabilities as well. And we think about the Ivy Hill dividend very similarly to the ARCC dividend, where we think there are reasons why we think it is very sustainable.
One thing I will point out is like the ARCC dividend, Ivy Hill is currently out earning its dividend pretty materially in the third quarter. We were about 107% dividend coverage at Ivy Hill. And there also exists $130 million of retained earnings down at Ivy Hill as well. So we feel like there are a lot of reasons why that dividend should be sustainable in all different kinds of environments.
Ethan Kaye: Excellent. Thank you, guys.
Jim Miller: Thank you.
Operator: We will go next now to Brian McKenna at Citizens.
Brian McKenna: Great. Thanks for squeezing me in here. So credit quality remains resilient. And as you mentioned, nonaccrual still well below that. Historical 3% average. But why do you think credit has been so resilient outside of any broader macro reasons? Is it where your exposure sits? From a sector perspective? High structure deals and price risk? Or is it being driven by greater levels of scale? And as your platform gets bigger and bigger, it is really just driving better outcomes for all stakeholders through the cycle.
Kort Schnabel: Yes. Thanks, Brian. All of the above, for sure. I think as a reminder, one of the benefits of running a BDC is we do not have to manage to an index, we can select industries that are defensive and that work well for credit investing. So we have avoided a lot of industries that have been showing softness of late. And we have been leaning into industries that are very consistent growers. And so I think certainly industry selection and industry diversification as well have been really important drivers of our outperformance on credit. And then certainly, look, Rich, you mentioned scale. So I have to take the opportunity to hit on that.
The scale of our platform is unmatched. And our ability to originate an incredibly broad amount of deals into our system allows us to be very, very selective, right? The more opportunities we can see, the more selective we can be and the better able we are to find the market-leading companies, the best companies in all of these different industries, and then choose to invest in those companies and then pass on the other opportunities. If your funnel is more narrow, obviously, the job is to put money to work. And so you are going to put money to work into lower quality. So that larger funnel, I think, is a huge advantage.
It comes from our scale, it comes from the size of our team, the tenure of our team as well. The fact that we have all been working together for such a long time. And I think just the DNA in our system around underwriting and credit has been passed down and just continues to get reinforced throughout the year. So I think you hit all the reasons, Brian, but thanks for giving me the opportunity to talk more about it.
Brian McKenna: Yes, sure thing. Appreciate the context as always. And then just one quick one. If I may. And touched on this a little bit, but looking back historically at periods of volatility, really when liquidity dries up, how much incremental spread on average have you been able to capture in those environments? Appreciate every period of volatility is a little bit different, but I am trying to figure out is there a way to quantify this dynamic and ultimately how much incremental ROE is generated from these types of situations? Through the cycle for ARCC?
Kort Schnabel: I do not know there is a way to really quantify it just because it is so different. It all depends on so many different factors, right? What is the broadly syndicated market doing, what are base rates doing, how bad do people feel about the dislocation? I mean, a couple of examples, to point to recently with the Liberation Day and the tariffs back in April, there was probably a multi-week period where we were able to capture 50 basis points of increased spread and maybe another 50 basis points of increased upfront fee. Call it maybe 75 basis points or so of total yield. But that was not very long-lasting.
But there were certainly a couple of transactions that were going into signing that we were able to move terms on and rightly so because it was an uncomfortable and a difficult period to be investing in for most people. And then you look back in the period in 2022, late 2022 and early 2023, I think we saw spreads widen by 150 basis points back then and fees probably widened by 100 basis points upfront fees and that was more driven just by banks exiting the market, the broadly syndicated market shutting down entirely because banks were hung on transactions as rates rose and they could not sell them.
And so that just created a huge imbalance in the competitive landscape and the supply of capital. So really, it is just those are two recent examples of very different movements in spread and for different reasons. And it is just really hard to generalize.
Brian McKenna: Thanks so much.
Operator: Thank you. Mr. Schnabel, it appears we have no further questions this afternoon. Sir, I would like to turn the conference back to you for any closing comments.
Kort Schnabel: Okay, great. Thank you all for joining us today and for all your continued support. And we look forward to seeing you on our next quarterly call.
Operator: Thank you, Mr. Schnabel. Again, ladies and gentlemen, that will conclude today's conference call. Again, thanks so much for joining us, everyone, and we wish you all a great day.
Jim Miller: Goodbye.
Operator: Goodbye.