ARCC Q3 Deep Dive: Stable Credit Quality and Origination Drive Resilient Results

Business development company Ares Capital (NASDAQ:ARCC) beat Wall Street’s revenue expectations in Q3 CY2025, but sales were flat year on year at $782 million. Its GAAP profit of $0.57 per share decreased from $0.62 in the same quarter last year.

Is now the time to buy ARCC? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Ares Capital delivered Q3 results that were in line with recent trends, with revenue coming in slightly above Wall Street expectations despite flat year-over-year sales. Management attributed performance to strong credit metrics in its loan portfolio, proactive risk management, and increased net realized gains from equity investments. CEO Kort Schnabel pointed to “healthy credit performance and financial results that demonstrate our enduring competitive advantages,” highlighting the company’s ability to generate stable returns through diversified origination and disciplined underwriting. Nonaccruals declined, and realized gains from exits, such as Potomac Energy Center, contributed positively to results.

Looking ahead, management emphasized flexibility to sustain dividend levels and earnings, even if market rates decline. The company is focused on deploying dry powder to capitalize on higher-yielding opportunities and leveraging partnerships for additional growth. Schnabel stated, “We believe there are distinct competitive and financial factors that position ARCC to maintain its current dividend level for the foreseeable future,” underpinned by a robust balance sheet and spillover income reserves. Management also sees continued momentum in M&A-driven lending as a driver for future portfolio growth and fee income.

Key Insights from Management’s Remarks

Management credited the quarter’s resilience to stable credit quality, selective origination, and strong realized gains from equity exits, setting the stage for ongoing discipline in portfolio construction and risk management.

• Credit quality remains robust: The company reported declining nonaccrual rates and cited strong interest coverage and low loan-to-value ratios across its portfolio. This resilience is attributed to industry selection and the ability to be highly selective due to broad origination scale.

• Realized gains from exits: Ares Capital posted significant net realized gains, notably from the sale of Potomac Energy Center, which had previously been restructured. These exits reinforce the firm’s strategy of maximizing value from both debt and equity investments.

• Origination activity accelerates: The third quarter saw over $3.9 billion in new investment commitments, with a shift toward more M&A-driven transactions and a higher share of new borrowers. This increase in deal flow signals an early stage of a new M&A cycle in private lending.

• Portfolio diversification: The portfolio remains broadly diversified, with 587 companies across 25 industries and a single investment averaging just 0.2% of total assets. This structure reduces exposure to isolated credit events and supports long-term stability.

• Careful exposure to software and AI: Management described a conservative approach to software lending, focusing on large, mission-critical business platforms with high switching costs. The company views AI as a complementary tool rather than a disruptive threat to its software borrowers.

Drivers of Future Performance

Ares Capital’s outlook centers on maintaining earnings power, dividend stability, and disciplined growth as M&A activity resumes and market conditions evolve.

• Sustaining dividends amid rate shifts: Management believes the company can maintain its current dividend even if short-term interest rates decline, citing balance sheet leverage flexibility and a spillover income reserve equivalent to over two quarters of dividends.

• Capital deployment opportunities: The company plans to use available liquidity and lower leverage to capture higher-yielding investments, particularly within its nonqualifying asset basket, and to take advantage of increased M&A-driven opportunities.

• Monitoring credit and competitive risks: While credit quality remains strong, management is vigilant about potential sector-specific slowdowns and the impact of competition and market volatility, especially in light of industry-wide events and tightening spreads.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will be watching (1) the pace and quality of new investment originations as M&A activity accelerates, (2) the impact of interest rate changes on earnings and dividend coverage, and (3) any signs of deterioration in credit quality, particularly in cyclical sectors. The utilization of spillover income and strategic capital deployment will also be key areas to monitor for ongoing stability.

Ares Capital currently trades at $20.60, up from $20.35 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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