ARCC - NASDAQ

Good afternoon, and welcome to Ares Capital Corporation's Fourth Quarter and year ended December 31, 2024, earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Wednesday, February 5, 2025. I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations. Please go ahead.

Great. Thank you very much. Let me start with some important reminders. Statements made during the course of this conference call and webcast and 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 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 the financial information because it's one method the company uses to measure its financial results and condition. A reconciliation of GAAP net income per share to 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 in this conference call and the accompanying slide presentation, including information related to portfolio companies, is derived from third-party sources and has not been independently verified, and accordingly, the company makes no representation or warranty with respect to this information. The company's fourth quarter and year ended December 31, 2024, earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the fourth quarter earnings presentation on the homepage of the Investor Resources section. Ares Capital Corporation earnings release and Form 10-K are also available on the company's website. I will now turn the call over to Mr. Kipp DeVeer, Ares Capital Corporation's Chief Executive Officer.

Thanks so much, John. Hello, everyone, and thanks for joining our earnings call today. I'm joined by Kort Schnabel, our newly announced CEO, Jim Miller, our Co-President, Jana Markowitz, our Chief Operating Officer, and Scott Lem, our Chief Financial Officer, as well as other members of the management team who will also be available during our Q&A session. Before the team discusses our fourth quarter and full-year results, I want to discuss the leadership changes that were announced this morning. As you may have seen from our press release this morning, Kort Schnabel has been named as our new Chief Executive Officer effective April 30th. Kort joined Ares in 2001 and is a widely respected and tenured executive at Ares with extensive leadership and private credit experience. As a founding member of Ares' US direct lending strategy back in 2004, Kort has been instrumental to the success and growth of the US direct lending platform at Ares Capital. Elevating Kort to CEO is a natural progression given his many past contributions and our confidence in his future leadership. In connection with this appointment, and considering my new responsibilities at Ares Management, which were announced this morning, I will be stepping down as the CEO of Ares Capital Corporation at the end of April. I will, however, remain actively involved with the company both as a member of the ARCC board of directors and the Ares US direct lending investment committee. Jim Miller, who currently serves as a Co-President of Ares Capital alongside Mr. Schnabel, will continue as the sole President of the company. These changes reflect the natural evolution in the leadership at Ares, and we're very fortunate to have such a deep and committed team. Over the past decade as CEO, it's been a great privilege working day to day with the entire team that has driven all of the success of ARCC. During this roughly ten-year period, the company has paid over forty quarters of steady or increasing dividends, increased book value per share by over 20%, and generated $500 million of realized gains in excess of realized losses. This investing success has led to a stock-based total return for our investors of nearly 14% per annum, outperforming the S&P 500, the S&P 500 Financials Index, and the KBW Bank Index over that period. And when compared to other yield-oriented investments available to shareholders, generated more than 300 basis points per annum of outperformance when compared to the ETFs for utility and REIT stocks, and for mortgage REITs. I'm confident that Kort and the broader Ares Capital leadership team, which averages 20 years of experience at the company, will continue to execute strongly for our shareholders. I can't think of a better, more capable leader for the next chapter. Before turning the call over to Kort for some additional comments on our company's successful 2024, I do want to acknowledge the tragic impact that we've witnessed from the wildfires that have spread across the Los Angeles area. This tragedy has unfortunately impacted the lives of many of our clients and colleagues, and our thoughts are with them and their loved ones during this challenging time. Ares is working diligently to support them and the entire area in the recovery. Let me now turn the call over to Kort.

Thank you, Kipp. And I certainly look forward to continuing to work with you, our executive team, and the other members of the ARCC board in the years to come. So let me start by providing a few thoughts on current market conditions and ARCC's performance, and our outlook heading into 2025. As our earnings release outlines, our fourth quarter results concluded another strong year for ARCC with continued healthy credit performance at our underlying portfolio companies and a well-positioned balance sheet. We are positioned with significant available capital that should benefit us as we look for an increase in activity in 2025. We also ended 2024 with a record NAV per share of $19.89. The growth in NAV per share in the fourth quarter was the eighth consecutive quarter of NAV growth, which continued our long-term trend of ARCC delivering among the strongest total returns as measured by dividends plus NAV per share growth as compared to our BDC peers. In addition to our positive NAV performance, 2024 was another year where our strong results were supported by the benefits of our well-established platform, industry-leading scale, deep incumbent positions, and differentiated strategy covering the broader middle market. Despite a historically subdued M&A environment in 2024, and counter to many others in the direct lending market, we achieved one of the most active origination years in our company's history. We continue to see the total return opportunity in today's market as highly attractive with significant equity cushions supporting our debt investments and a healthy total yield premium over the liquid loan market. In 2024, we reviewed a record volume of new opportunities totaling more than $650 billion, and the number of potential investments we evaluated during the year grew each quarter on a year-over-year basis. Given the strength of our pipeline, we were also able to generate a record level of new commitments net of repayments, which totaled $5 billion for the year. As many of you know, our philosophy has been to out-originate our competition, which we believe is a key driver of long-term credit performance. While ARCC had a record year in both the estimated dollar value of transactions, we still remained highly disciplined in terms of credit selection. Our overall selectivity rate remained in the mid-single digits for 2024, consistent with our long-term average since our inception more than 20 years ago. A key driver of originations during 2024 has been our growing wallet share with incumbent borrowers. As we have discussed in the past, we believe financing incumbent borrowers can provide attractive risk-adjusted returns as our tenure with these borrowers gives us many advantages when making incremental investment decisions. In 2024, over 70% of our new commitments were to existing borrowers, and importantly, we are increasingly being asked to provide a larger portion of our borrowers' overall capital structures. As an illustration, our share of the overall financings for our top ten largest incumbent borrowers more than doubled each of the past three quarters. In addition to these sourcing advantages, our focus on non-cyclical high free cash flow businesses continues to drive strong credit results. As Jim will discuss later, we continue to believe our diversification and industry selection have contributed to ARCC's strong credit performance in comparison with other BDCs. Through our time-tested underwriting processes, highly selective approach, and focus on incumbent borrowers, we have been able to avoid many of the problems that have driven recent increases in non-accruals in the BDC space. Our non-accrual rates continue to be below our own and peer group historical averages, and the underlying growth in our portfolio companies continues to be strong. Specifically, the organic weighted average LTM EBITDA growth rate of our portfolio companies reached 11% in the fourth quarter, which increased from 10% the prior quarter and 9% at year-end 2023. In comparison, the average LTM EBITDA growth of the leveraged loan market in Q3 2024 reached a three-and-a-half-year low of less than 1%. The lower portfolio is performing very well. We are carefully monitoring for potential impacts from changes in new government policies. Given what we have seen from the early actions of the new administration, we don't currently expect any material direct impact to our portfolio from new government policies. But this new regime will be worth watching in terms of policy changes, and we will be sure to be thoughtful and vigilant about any material changes to the landscape for direct lending. We've also had a very successful year executing on our balance sheet initiatives. As Scott will describe in more detail, our competitive advantages and our long-term track record helped us secure ratings upgrades from two of the major credit rating agencies throughout the year, making ARCC the highest-rated BDC amongst the three major rating agencies. We have further added to our deep sources of liquidity and are levered at just below one times net debt to equity, providing significant flexibility to support our ability to invest. Looking ahead, we expect a healthy economy, combined with increasing pressure on private equity sponsors to seek liquidity and a growing confidence from executives, to support an accelerating M&A environment in 2025. It stands to reason that with the increasing importance of direct lending in the market, which continues to finance the majority of LBOs, overall direct lending volumes will follow suit. While our market remains competitive, we believe our position as the largest publicly traded BDC managed by the largest global direct lending platform provides meaningful advantages in sourcing, underwriting, and risk management. I'm very proud of what our team accomplished in 2024 and believe we are well-positioned for a successful 2025 and beyond. I will now turn the call over to Scott to take us through more details on our financial results and balance sheet.

Thanks, Kort. This morning, we reported GAAP net income per share of $0.55 for the fourth quarter of 2024 compared to $0.62 in the prior quarter and $0.72 in the fourth quarter of 2023. For the year, we reported GAAP net income per share of $2.44 compared to $2.75 for 2023. We also reported core earnings per share at $0.55 for the fourth quarter of 2024, compared to $0.58 in the prior quarter and $0.63 in the fourth quarter of 2023. Our decline in core earnings was largely driven by the impact of the decline in yields for the portfolio, as base rates at the end of the year were nearly 100 basis points lower than where they were at the end of 2023. As you may recall from our last earnings call, there's typically up to a one-quarter lag between the full-quarter impact to interest income from changes in period-end yields. We report for the most recent quarter. Simply put, the impact from the changes in portfolio yields during the third quarter was the primary driver of a sequential change in our core earnings for the fourth quarter. While the market sentiment on future interest rates has generally changed to a higher-for-longer sentiment since the end of the third quarter, market base rates did decline approximately 30 to 50 basis points, depending on whether comparing the change of one-month or three-month LIBOR during the fourth quarter. As such, the change in our fourth-quarter portfolio yields was impacted by the change in market rates and, to a lesser extent, a higher mix of first lien loans in the portfolio in the fourth quarter as compared to the third. While our floating rate portfolio will be impacted by the full-quarter impact of the most recent base rate declines, we also stand to benefit from the same rate declines in our interest expense as it relates to our floating rate debt obligations. Turning to the balance sheet, our total portfolio at fair value at the end of the quarter was $26.7 billion, up from $25.9 billion at the end of the third quarter and up from $22.9 billion a year ago. The weighted average yield on our debt and other income-producing securities at amortized cost was 11.1% at December 31, which was down from 11.7% at September 30 and 12.5% at the end of 2023. Our total weighted average yield on total investments at amortized cost was 10%, which compares to 10.7% a quarter ago and 11.3% a year ago. Our stockholders' equity ended the quarter at $13.4 billion or $19.89 per share, another record high for us as Kort noted earlier in the call. Before giving an update on our capitalization and liquidity, let me start by highlighting a notable accomplishment related to our credit ratings during the year. At the end of November, S&P upgraded the issuer credit and senior unsecured ratings for Ares Capital to BBB from BBB-. If you recall, this is on the heels of Moody's recently upgrading the long-term issuer and senior unsecured ratings for Ares Capital to Baa2 from Baa3 at the end of September. Along with the existing BBB rating and a positive outlook from Fitch, this clearly differentiates Ares Capital as the highest credit-rated BDC, which we believe will allow us to continue enjoying best-in-class funding costs and potentially increase debt capacity over time. Let me update you on our recent debt capital activity since our last call. For the first time as a firm, mid-BBB issuer, we opened the new year with a $1 billion unsecured notes issuance due in March 2032 and priced at a spread to treasuries of 150 basis points for an all-in coupon of 5.8%. We did swap the notes issuance to LIBOR plus 170 basis points, which is well inside of the weighted average spread on our floating rate debt of 197 basis points as of December 31. Overall, we were certainly pleased to capitalize on some very favorable issuer dynamics with a longer-tenor issuance at an issuance spread that was tied for our lowest issuance spread in our history, regardless of tenor. Our overall liquidity position remains strong, with nearly $6.7 billion of total available liquidity, including available cash on a pro forma basis for our recent unsecured notes issuance. This positions us well as the upcoming $600 million of notes maturing in March and the $1.25 billion of notes maturing in July. In terms of our leverage, we ended the fourth quarter with a debt-to-equity ratio net of available cash of 0.99 times, down from the 1.03 times a quarter ago. We believe our significant amount of dry powder positions us well to continue supporting our existing portfolio company commitments as well as new investing activities. Moving on to our dividend, we declared a first-quarter 2025 dividend of $0.48 per share. ARCC has been paying stable or increasing regular quarterly dividends for over 15 consecutive years. This dividend is payable on March 31, 2025, to stockholders of record on March 14, and is consistent with our fourth-quarter 2024 dividend. In terms of our taxable income spillover, we currently estimate we will have $922 million or $1.37 per share available for distribution to stockholders in 2025. In addition to our fourth-quarter earnings being well in excess of our current dividend, we believe the tax income spillover is a significant differentiator for us in the BDC sector and helps provide further visibility and stability to our dividend. I will now turn the call over to Jim to walk through our investment activities.

Thank you, Scott. As previewed, I'll provide some additional detail on our investment activity, our portfolio performance, and our positioning for the fourth quarter and year. I will then conclude with an update on our post-quarter-end activity and backlog. In the fourth quarter, our team originated approximately $3.8 billion of new investment commitments, which is greater than a 50% increase over Q4 of 2023. In what was a very active year for the company, we originated over $15 billion of new commitments, more than double the commitment volumes of 2023. In addition to growing our market share with our existing borrowers that Kort discussed previously, our strong origination results are supported by our differentiated approach in covering the broader middle market. Despite having what we believe is the highest level of deployment of any public BDC, the median EBITDA of our new investments during the year was approximately $70 million. About one-third of our new investments were to borrowers with EBITDA of less than $50 million. We believe Ares is the only direct lending platform of scale that actively focuses across the lower middle and upper middle markets. This broad and differentiated coverage supports our ability to find what we believe are the best risk-adjusted returns while remaining highly selective. We believe that the lower middle market yields can provide 25 to 50 basis points of enhanced spread despite lower leverage levels and stronger documents when compared to some of the upper middle market transactions being completed by our peers. Importantly, in further demonstrating our ability to successfully invest across the middle market, size is not a driver of portfolio performance in our portfolio. As companies in all size bands in our portfolio had similar EBITDA growth rates over the last twelve months. In fact, we believe with our scale and size, especially in that part of the market, we have the ability to establish points of incumbency to allow us the opportunity to grow with these companies for years to come. With respect to our portfolio, we ended the year with a $26.7 billion portfolio at fair value, which grew at 3% from the prior quarter and 17% from the prior year. In addition to expanding market share with our incumbent borrowers, our growth is supported by our ability to provide flexible capital solutions to a wide variety of new companies seeking a direct lending solution. This can be seen in the total number of companies in our portfolio, which reached 550 at year-end 2024, an increase from just over 500 a year ago. An often overlooked point of differentiation for ARCC versus other BDCs is our high level of portfolio diversification. By maintaining small individual company position sizes of less than 0.2% of the portfolio on average, ARCC has been able to mitigate the impact of negative credit events in any one company or industry. Our non-accruals at cost ended the quarter at 1.7%, up 40 basis points from the prior quarter and year-end 2023. Despite this increase, the 1.7% metric remains well below our 2.8% historical average since the global financial crisis. This is also below the BDC historical average of 3.8% over the same time frame. Our non-accrual rate at fair value also modestly increased to 0.9% from 0.6% last quarter. But this too continues to be well below our historical levels. Our overall risk ratings remain stable throughout 2024, and the percentage of our portfolio fair value in grade one and two names ended the year at 2.9%, meaningfully down from 6.4% at year-end 2023. As a sign of additional strength in our portfolio, at the end of the fourth quarter, our weighted average loan-to-value was 44%, which we believe provides us with strong downside protection for our loans. This loan-to-value is also significantly below our ten-year average, while our portfolio interest coverage ratio reached 1.9 times, up from 1.8 times the prior quarter and 1.6 times at year-end 2023. Shifting to 2025, we've been busy, supported by what we believe are the early signs of growing market activity for growth capital and M&A. Our total commitments to January 28, 2025, were $1.2 billion, approximately an 80% increase as compared to the commitments closed in January last year. Also, our backlog as of January 28, 2025, stood at $1.8 billion, which is more than double our reported backlog at February 1 of last year. 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. As we look to the future, we believe the company remains well-positioned to address what we see as a growing market opportunity. We remain committed to building upon what we believe is a successful long-term track record. 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.

A question, please limit yourself to one question and one single follow-on. If you have additional questions, you may reenter the queue. The Investor Relations team will be available to address any further questions at the conclusion of today's call. We'll go first to Melissa Wedel with JPMorgan. Please go ahead. Your line is open.

Good afternoon. Thanks for taking my questions. First, congrats to Kort and Kipp on the changing of your roles. Look forward to continuing to have these conversations more so with you, Kort, going forward. In terms of the activity during the fourth quarter, I was hoping we could just talk about the cadence a little bit. I think heading into the quarter, it definitely seemed to be the case that it might not be the seasonally busy quarter as the December quarter can be, possibly because some companies are waiting until the New Year to sort of pick up the pace of activity on deals and strategic acquisitions, etcetera. Assuming that was what we saw in the numbers in Q4, just being down sequentially from the third quarter, do you think that there was any impact in terms of, like, timing of new investments or repayments during the quarter on NII?

Yeah. Thanks for the comments too, Melissa. Appreciate that. No. I mean, look, I think it was kind of flat versus the third quarter from, I'm looking at the numbers correctly. Things did, I think, shift a little bit, you know, obviously, we had the election, which may have delayed some closings. But we're very happy with the Q4 activity levels. And as we mentioned in the prepared remarks, January was busy and it remains busy. So we're feeling good about, you know, deal flow and new transactions.

Okay. And definitely noted the quarter-to-date details. Appreciate those details that you provide us as always. When we think about sort of the evolution of the portfolio, it's definitely seemed to be the case that there has been a skew. New investments have skewed sort of up the capital structure. So a lot of focus on first lien, not entirely, but definitely skewed that way. When we look at the mix of repayment, we think more junior capital via a larger piece of the repayment activity. I'm just wondering how you guys are thinking about the asset allocation within the portfolio. Do you think of a sort of target level of first lien activity, or is that really going to vary with the opportunity set going forward? And is there any change given the new roles? Thank you so much.

Yeah. You're welcome. Thanks. I mean, the answer to the last question first, because I think it's the most important. There's really no change in how we see the mix of the portfolio over time. Definitely take your point that, you know, for the back half of the year, kind of particularly in large deals, kind of the large unit tranche, you know, sometimes taking out junior positions was the prevailing transaction. We're still happy to do junior deals. We've seen spread compression, I would say, in the larger names that are cash pay. And then a lot of what's available on the junior side today in the higher rate environment, frankly, you know, non-cash, i.e., all PIK junior transactions. And find a lot of them to be attractive. We're doing some or, obviously, conscious of the percentage of PIK income at the company and wanting to, you know, have that not kind of grow from here. So it's a balance of different things. But I think most importantly, we're responding to the market, and the overall philosophy of how we see mix going forward is unchanged.

Thanks, Kipp.

Yep. Thank you.

Thank you. Our next question will come from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Hey, everyone. Good morning. Thank you. I used to continue on investing. I would first, congratulations to everyone on their new beginnings. But to continue, I wanted to ask about the sports franchise. I know that's a newer happening effort there. I think we saw there at the broader platform that is, but also in ARCC, it's the deals have come in. We saw, I think, equity in the Dolphins this quarter. It looks like the BDC got a pretty good allocation. So the question is, like, on the understanding of that a lot of the higher risk return deals and, you know, the more opportunistic and so forth franchises are less suitable for ARCC. Like, why this one? Is the sports equity, is that sort of a, but somewhere on the bubble or something like that? And should we expect to see, you know, more of this as that franchise grows? Thanks.

Yeah. I'm gonna ask Jim to help a little bit too because he's very engaged both with the sports media and entertainment franchise, but also specifically with the deal that we did with the Dolphins and the surrounding assets. But, I mean, to go backwards, we're now probably five, six years into having built out a very substantial footprint and I think incredible reputation as a knowledgeable kind of SME investor. And it's not just teams and it's not just sports. Philosophically, the BDC, as we've always said, wants to leverage the strength of the Ares credit platform, which is very broad. And creates a diverse set of opportunities for the BDC specifically. SME is definitely a place along with other parts of the franchise that we want to leverage for what we think are really unique investments, you know, for both the platform and for the BDC. I mean, I think, you know, the Dolphins specifically, you know, there's a roughly $200 million investment at the BDC. And just to be clear, the asset itself includes more than just the team. It's, you know, the stadium. It's real estate. It's a Formula One team. It's a tennis tournament. There's a lot of stuff going on there. And we think it's very unique. I mean, I think you probably read about it in the press, Ares is one of the few firms that was granted the unique ability to come into a franchise investment like this. We think it's a top-tier franchise and an absolute top-tier geography that's growing. And should grow with a fair amount of consistency over the next, you know, long period of time because of the quality and the diversity of the assets. So again, for me, I think it's a fabulous investment. It's not particularly large when you look at the overall scale of the company. And it's unique and attractive to ARCC shareholders and ARCC shareholders, frankly, only when you're talking about access through a BDC stock.

It's very helpful. Thank you. As a follow-up, I think this ties into Melissa's topics a bit on the investment in returns. I think this has actually come up here and there in recent periods, but where should we think of the cap structuring fee? There's more and more emphasis on incumbent repeat borrowers. You're gearing up for your sponsors to support them. But, like, how much does that impact the structuring fee rate that you'll see, you know, in years past? It's obviously been really high. And then if I could sneak in a bonus question, maybe a fun one. Kipp, I think you mentioned in your new role, you'll be involved in direct lending, but curious as to what other areas you'll be focused on. And thank you. That's all for me.

Sure. Thanks. But I think, you know, in terms of fees, there's been continued emphasis on kind of existing portfolio companies and incumbency, which tends to generate lower fees. Well, let's just say, as we've said in the last couple of calls, there's been some fee pressure in direct lending, you know, broadly. So I think upfront fees are generally down a little bit in the market for pretty much everything. So I think those are the two simple answers to why you see that coming down. In terms of your fun question, I would encourage you to go listen to the Ares earnings call that, you know, I and a handful of others did with Mike a couple of hours ago, but yeah, I mean, more or less, you know, I will continue to be very engaged with this company as a director on the board. I'll remain on the US direct lending investment committee, which obviously opines on all the new investments for this company and a lot of other things. But I think it, you know, gives me the ability to try to support Mike with a lot of different things that we're doing both from an operational and strategic perspective at Ares, our management company. And it's an exciting change for me, you know, having been, you know, with this business for 20 years and this company for 20 years. It allows me to do some new things. I'm excited about it, so thanks for asking.

Thank you.

Thank you. Our next question will come from Casey Alexander with Compass Point. Please go ahead.

Hi. Good morning. My name again, congratulations on the promotions. I will miss your calm voice because it did help us through some pretty turbulent times during COVID.

I think in support of Kort and Jim, I think you'll be getting two more, so don't worry.

Okay. Okay. Listen. Thank you. And we'll make this question clearly marked as of December 31. You know, we've seen a 100 basis point decline in base rates. Can you give me kind of a percentage of how much of that has flowed through into the portfolio by the end of, you know, the December quarter? Is it 75% or, you know, where do you think we are? And I don't want to do innings because it's not baseball season.

Oh, I mean, you know, qualitatively, what you're seeing with yield declines is largely due to base rates and for Melissa's question, it's a little bit due to mix shift, i.e., some of the junior capital stuff coming out with more replacement from kind of senior secured or unitranche. But I was looking over at Scott to see if he had a better quantitative answer than I might have right now.

Yeah. So I think, you know, we mentioned this in the last call, and I think we end this time as well. But I think you saw from the, there's certainly a lag effect when it comes to the impact of the rates in our portfolio and when they flow through. So you saw some of that in Q4 as a result of the rates as of Q3. And so we expect a, you know, similar level of decline when you think about the Q4 ratio and how that would impact Q1.

Okay. Secondly, you know, relative to the amount of your gross fundings in the quarter, there was quite a bit of activity in the ATM. And the leverage ratio is the lowest that it's been since 2019. You know, should I infer from that that you expect this heightened, that you're building and preparing for a heightened level of activity in the first half, which is unseasonable because normally the heightened level of activity is in the second half.

I think that's a fair assumption for sure. You know? I mean, I'll say two things. You know, when we can raise equity accretively, we like to do it. And, obviously, the stock price allowed us to do that in Q4. But as I mentioned in response to one of the prior questions, we had a busy fourth quarter, and it's busy right now. So I think the simple answer to your question is yes.

Alright. Thanks for taking my questions.

Thanks, Casey.

Thank you. Our next question will come from Doug Carter with UBS.

Thanks. Yeah. Just to kind of piggyback on that last question, as you think about, you know, 2025, you know, how do you think about, you know, kind of target area where leverage should be versus, you know, willingness or appetite to continue to raise fresh capital?

I think we'd like the leverage ratio to be higher. Being able to increase the leverage ratio is obviously a driver of earnings, which I think will be important if and when rates continue to kind of come down. Right? That's one of the countervailing levers that we can pull to drive earnings in the face of tighter spreads and lower rates. So we're fortunate in that we're still materially out-earning the core dividend, so we don't have a desperate need to do that. But, again, just a reminder, that's a lever that we can and will pull. So in assessing both the leverage ratio and the earnings, I think that will tell us how much equity we feel comfortable raising in the ATM program. Again, Q4 was a larger number than we've seen in prior quarters. And I just commented on why that was. We'll see where we go from here. I would expect, though, that we would get back into that range that you saw from us that was sort of more regular over the last year or two.

Great. And then just on your kind of spillover income, you know, I guess, how do you think about that level? You know, is there a level at which you would consider returning some of that, or are you comfortable kind of continuing to build that?

I think for the time being, as we've said in the past, we usually use this time of year to assess whether we want to pay a special dividend. We chose not to, obviously, so that should tell you a couple of things. So for the time being, we feel good about, obviously, very good about where the level is because it's quite high. But there actually wasn't much of a debate this year about paying a special for a handful of different reasons. So for now, we feel better, frankly, about reserving that and thinking about it again in twelve months.

Great. Thank you.

Thanks for your questions, Doug.

Thank you. Our next question will come from Mark Hughes with Truist. Please go ahead.

Yeah. Thank you. Any specifics you can share on spread and especially the trajectory through Q4 in January? Have things stabilized, or are you still seeing some movement?

I think, you know, most of the decrease we saw pretty ratably through last year. You know, 100 to 150 basis points has been the number that we quoted elsewhere in terms of the declines that we've seen, you know, whether it was repricing existing names or new deals. For the time being, I feel like it's pretty much plateaued. Again, because we play across the entire spectrum, smaller companies, larger companies, it varies, you know, large cap, unit tranches are probably 475 over 500 over, and the smaller deals will command premiums to that. We haven't seen them continue to decline really into the first quarter as we've been pricing new deals.

Then your point about your share doubled of your commitments with existing borrowers. Is that a phenomenon of bigger versus smaller? So say other sizable BDCs may be having the same experience, you think you're outperforming in that dimension.

Yeah. I mean, I think for sure we're able to obviously continue to bring larger dollars to our best borrowers, which is something that we've emphasized, but I think we've been really focused on it. We've been, frankly, doing even better than we have in the past.

Thank you. Our next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Hey, good afternoon and thanks for taking the question and echoing the congrats on the new roles for everyone.

Thanks, Ken.

In terms of the economic backdrop, seems very healthy here. And the non-accruals, as you mentioned, still below long-term averages. Just want to get your latest updates and thoughts around the potential for credit losses going forward, either yourself or across the industry. You know, what's the outlook there? Thanks.

Well, I mean, at this company specifically, I'll just reiterate. I mean, we're very pleased. I don't want to use the word surprise, but I think if you had talked to the team a year or two ago, there was, you know, a belief that default non-accruals everywhere would rise much more quickly than they have. Thanks for commenting. Of course, I think we've outperformed a lot of the competition. Where you have seen some weakness elsewhere. Our portfolio is holding up extraordinarily well. So we saw a real small increase in non-accrual this quarter. But, again, being below historical average and seeing strong underlying profit growth at the portfolio, which is, by the way, very large and very diverse, says a lot about the strength of the US economy, which I think is quite good. So a lot of these companies have adjusted to the higher rate environment, which now seems to be getting some relief as the Fed has lowered rates. Again, we'll see where we go from here, but we think it's a very, very good time to be a credit investor. With a largely healthy portfolio to collect, again, with the source of diverse and reliable income at Ares Capital Corporation. So we're pretty pleased with where we are.

Great. Very helpful there. That's all I had. Thanks again.

Thanks, Ken.

Thank you. Our next question will come from Paul Johnson with KBW. Please go ahead.

Yeah. Thanks for taking my questions and congratulations to everyone. My question was mainly on just the Ivy Hill distribution. Looks like that increased quite a bit quarter over quarter. I'm just wondering if there's any kind of one-time items in there and maybe an idea of what sort of the run rate dividend for Ivy Hill going forward?

Yes. I mean, Ivy Hill continues to perform extraordinarily well. So just a great asset for this company. Just so you, in case you didn't pick up, but I bet you did. The quarterly base dividend is up because the company's grown. On top of that was a special dividend that got made to the tune of $10 million. They've been retaining significant income and capital for their growth that, frankly, I think they didn't feel the need to retain all of. So there was a small one-time distribution there. But I think on a go-forward basis, you know, it'll depend on how quickly that company grows again, that increased quarterly base dividend, you should take as kind of the new run rate going forward. We feel comfortable supporting that. Obviously, the company is well-equitized having just made a special dividend as well.

Got it. Thanks for that. And then in terms of your portfolio, I'm wondering if there's any way to quantify or maybe just give us a sense of if you know of how many of your businesses that maybe have exposure to government contracts, maybe not necessarily government businesses, but, you know, have exposure through contracts, services, you know, things such as that. If there's any sort of anecdotal information that you can provide.

Yeah. I mean, looking around the room and frankly thinking that you said I don't have a number for you offhand. We'll go do a little bit of digging, but I'm getting, you know, shakes of heads from around the room. Yeah. It's not a tremendous amount of government contracting. Defense and aerospace and all that is de minimis. So we can go back and run some numbers if you want to follow up, but the answer is I don't think it's gonna have a significant impact on the portfolio.

Okay. Yeah. I think that pretty much answers my question there. And then the last question I have is just kind of higher level. But I was wondering, you know, probably at the upper end of the middle market, have you run into any instances where private equity sponsors have been effectively looking to limit voter control or any sort of lender control within a lender group in a performing situation?

Not really. I mean, I think the traditional one is a sponsor-affiliated debt fund, you know, less voting or limited voting, but, you know, in performing situations, no. I mean, one of the things that we've emphasized has been, you know, just really sticking to middle market docs and making sure that, you know, some of the LME stuff that's crept into the broadly syndicated markets really doesn't on our market. I'd actually say it's one of the probably the most significant reasons that we passed on a deal that we like is just a document that we don't think works in our downside case. But, you know, look, in troubled situations, you do see co-ops and bank groups, particularly in situations in larger companies where there's concern around LMEs. But to answer your question directly, I think the answer is we don't really see that much. I mean, pretty much everybody votes for their dollars, and if it's a club deal, it's a club deal, and you get your voting. And yeah, nothing unusual there. I don't know if there was a circumstance you'd heard about that I don't know about, but nothing material from my standpoint.

Yeah. I think there have been one or two large deals where this may have occurred, but just wondering if that's something that you've observed in the market. But appreciate the answers. Those are all the questions for me.

Okay. Thanks so much.

Thank you. We'll take our next question from Robert Dodd with Raymond James. Please go ahead.

Hi, everybody. Congratulations on all the new roles. Just a quick one for me. I think, Kipp, it may have been Kort. In the prepared remarks, you talked about not expecting any direct impact from government policy changes. Does that, I mean, just want to clarify, does that include tariffs, which obviously are on hold right now, but maybe they won't be? And it's not the first time you or the portfolio have been through the tariff rodeo if that happens. So, I mean, you know, what are your thoughts now if they do go through? Is the portfolio now, the company is just the same way they're back to higher rates? Have they already prepared for it because it's happened before? Or just any thoughts on that?

Yeah. I mean, it seems to be one of the two or three questions of the day between that, Chinese AI, and a few other things that seem to be dominating the airwaves. Look. I mean, Robert, I think the simple answer is we have a very large diverse portfolio. Right. Tariffs on countries like Mexico and Canada will have an impact on every company in the United States. Probably true of the tariffs that look like they're in place with China. I think we're very early in that discussion, and, obviously, spending time with portfolio companies. And the good news is we have great dialogue with our portfolio companies. Right? They view us as a strong partner. We're getting monthly financial statements. We're in contact with CEOs and CFOs there to try to assess it, but it's really hard to generalize kind of how I see big changes there because it's just so early. But definitely to Kort's prepared remarks, seeing what may be out there and making sure that we're vigilant and smart about changes in every portfolio company depending on how things go.

Yeah. It's Kort, Robert. I could jump in on that as well just with a little more color, which is, you know, we actually have run a lot of analysis around which of our companies have exposure to tariffs, what percent of their cost of goods sold might be exposed to the countries that have already been announced. Obviously, we have to stay day to day in terms of the countries that might or might not be exposed to tariffs. But so far, between China, Canada, and Mexico, we actually feel really confident that there is a very small impact on our portfolio based on a pretty exhaustive numeric analysis. That was why we felt comfortable putting that statement into the prepared remarks. And I guess I would just also say overall, we are just underweighted toward product businesses that import and export products. Right?

Yep. Yep. Understood. Thank you.

Thank you. And this does conclude our question and answer session. I'd like to turn the conference back over to Mr. Kipp DeVeer for any closing remarks.

Yeah. So I definitely have a few. Today, I haven't prepared any, but it's a little bit bittersweet for me today, obviously, because I expected our next earnings call, which I think is April 29th. You're not gonna hear a whole lot, if anything, from me, but just wanted to say thanks to the analyst community and all of our shareholders who have supported the company while I've been the CEO. It's been a real blessing for me to work with a great group of people and to be involved with the company that had this much success over such a sustained period of time. So heartfelt thanks, and wish everybody a great week. Bye-bye.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the call will be available approximately one hour after the end of the call through March 5 at 5 PM Eastern, to domestic callers by dialing 1-800-839-2457 and to international callers by dialing 1-402-220-7217. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital's website. Again, we ask that you please disconnect your line at this time. And have a wonderful day.