Ares Capital (ARCC) Q3 2026 earnings review
Ares Capital's deal backlog rebounds, but profit trails its dividend
Ares Capital, a lender to mid-sized US companies, saw third-quarter profit dip while its autumn deal pipeline rebounded. Total investment income slipped 2% from a year ago as slow summer lending cut upfront deal fees in half, and profit per share excluding one-offs fell to $0.46, two cents below the quarterly dividend. However, chief executive Kort Schnabel said lending picked up in October, lifting the backlog of approved deals to $2.5 billion.
| Total investment income | $763M -2.4% from a year ago |
|---|---|
| Profit per share, excluding one-offs | $0.46 $0.48 quarterly dividend |
| Portfolio yield at cost | 9.5% 9.3% last quarter |
| Fourth-quarter dividend plan | Unchanged $0.48 per share declared |
⚖️ Verdict: 🟢 Bullish
The story got better because the two forward pressures on income — a shrinking deal backlog and falling loan yields — both turned upward. After three quarters of declines, the backlog jumped by $1 billion, portfolio yields rose to 9.5%, and the company agreed to buy rival lender MidCap Financial. One caution: higher borrowing costs after paying off cheap debt pushed quarterly profit further below the dividend, and nearly half of third-quarter loan exits were sales to its own Ivy Hill fund.
The question now is whether the October lending rebound and higher loan yields can lift quarterly profit back above the $0.48 dividend. Either upfront fees from the larger pipeline cover higher interest costs, or the lender keeps leaning on past undistributed income and loan sales to its affiliate. Fourth-quarter profit per share excluding one-offs will tell.
🐂 Bull Case
Deal Backlog Rebounds and Portfolio Yields Rise
Ares Capital lends money to mid-sized US businesses, so its growth depends on finding new loans to replace borrowers who pay off old ones. For three straight quarters its investment backlog, which tracks approved loans waiting to close, shrank while the average interest rate on its loan book fell.
Both trends reversed in October. Chief executive Kort Schnabel said that "our investment backlog is up meaningfully from last quarter, and we are seeing stronger transaction activity entering the fourth quarter" as dealmaking picked up.
- Investment backlog as of October 22: $2.5 billion, up 67% from July's $1.5 billion
- Early fourth-quarter net commitments: $373 million added between October 1 and October 22, reversing the third quarter's $364 million net outflow
- Yield on total investments at cost: 9.5%, up from 9.3% last quarter
- Yield on newly funded loans at cost: 10.4% in the third quarter, up from 9.4% in the second quarter
This rebound matters because a shrinking loan book and falling yields were the twin threats to the lender's income. Adding $1.1 billion of new commitments in the first three weeks of October against $727 million of exits shows the loan book is expanding again at yields near 10%.
What to watch: fourth-quarter net investment commitments after repayments. A positive figure for the full quarter would confirm the larger backlog is rebuilding the earning asset base.
Overdue Loans Stopped Rising
When borrowers fall behind on interest payments, Ares Capital puts their loans on non-accrual status and stops booking income from them. Non-accrual loans had climbed for two straight quarters, rising from 1.8% of the loan book at cost at the end of 2025 to 2.4% in June.
In the third quarter, that measure held steady at 2.4% of cost and 1.4% of fair value. The overall credit grade of the portfolio also stayed unchanged at 3.1, and net unrealized gains on investments turned positive at $54 million after two quarters of markdowns.
What to watch: non-accrual loans at cost in the fourth quarter. Holding at or below 2.4% for a second quarter would show credit losses have leveled off below the historical 3% average.
🐻 Bear Case
Core Profit Falls Further Behind the Dividend
Schnabel said the third-quarter results and upcoming deal benefits "reinforce our strong underlying earnings power" and support the $0.48 quarterly dividend. Finance chief Scott Lem also pointed to "reducing our funding costs through the reset of our debt securitization and modest utilization of our commercial paper program" during the summer.
Despite those steps, profit per share excluding one-offs (Core EPS) fell for a second straight quarter to $0.46, down from $0.50 a year ago. It now trails the $0.48 dividend by two cents, which pulled net asset value down four cents to $19.31 per share.
- Total investment income: $763 million, down 2.4% from a year ago
- Capital structuring service fees (upfront fees for arranging new loans): $23 million, down 52% from $48 million a year ago
- Interest and credit facility fees (borrowing costs): $221 million, up 2.2 percentage points of revenue from a year ago by our math
- Unpaid performance fees owed to the manager: $166 million, up from $84 million last quarter
Borrowing costs rose because the lender paid off $1 billion of cheap 2.15% notes in July and issued $750 million of new notes swapped to a much higher floating rate. Meanwhile, the balance of unpaid income-based fees doubled to $166 million, which by our math means the company again deferred its $82 million quarterly fee after missing its four-quarter total return hurdle.
What to watch: Core EPS and capital structuring fees in the fourth quarter. If closing the $2.5 billion backlog does not lift Core EPS back to $0.48, the company will keep funding part of its dividend from past undistributed income.
Sales to Its Own Fund Keep Rising
Ivy Hill Asset Management (IHAM) is a wholly owned asset manager that Ares Capital funds with loans and equity. Supporters view IHAM as a high-yielding growth engine because it now makes up 10% of the portfolio and pays a hefty dividend back to the parent.
The third quarter showed how much Ares Capital relies on IHAM to recycle its own balance sheet. The lender sold $1.2 billion of loans to IHAM and its vehicles, which by our math accounted for 49% of all loan exits in the quarter and brought nine-month sales to $3.3 billion. At the same time, 18% of all new commitments in the quarter went right back into funding IHAM, followed by another $497 million of loan sales in early October.
What to watch: IHAM's standalone profit and unrealized marks in the quarterly filing. Rising loan transfers while the affiliate's own earnings fall would mean the parent is leaning harder on an internally funded vehicle.
Risks this quarter didn't answer
Four standing concerns from prior quarters cannot be read from the earnings release alone and await the full quarterly filing or conference call.
- Watchlist loan grades: the release gives only the 3.1 overall portfolio grade, leaving the share of troubled Grade 1 and Grade 2 loans (5.4% last quarter) unreadable until the filing.
- Share buybacks: the weighted average share count rose to 720 million from 718 million last quarter, showing no sign that the board used its $1 billion repurchase plan while net asset value dipped.
- Software AI risk: the release gives no industry table or update on how artificial intelligence affects the software loan book.
- Sponsor loan workouts: the status of two troubled credits under the same private equity sponsor with near-term maturities is not disclosed in the release.
👓 Other Themes
Ares Capital Agrees to Buy MidCap Financial
On October 26, the lender announced a deal to "enter into a definitive agreement to acquire MidCap Financial Investment Corporation in a cash and stock transaction", buying a smaller publicly traded rival. Schnabel said the purchase will "reinforce our strong underlying earnings power", though the release does not state the purchase price, closing timeline, or exact per-share earnings impact.
💲 Other KPIs
The total value of the investment portfolio slipped 0.5% from last quarter and rose 1.8% from a year ago. Portfolio size shrank for a second straight quarter because loan repayments and sales exceeded new commitments by $364 million during a quiet summer for dealmaking.
Net leverage — borrowed money minus available cash, divided by stockholder equity — fell to 1.06x from 1.12x last quarter and 1.08x at the end of 2025. Total principal debt dropped 2.7% from June to $15.5 billion as net loan repayments freed up cash, leaving $6.9 billion of borrowing capacity.
The average share count ticked up by 2 million from last quarter and rose 1.6% from 709 million a year ago. Period-end shares reached 722 million, up from 718 million in June, before the upcoming stock issuance to buy MidCap Financial.
🔮 Guidance
New. The board declared a fourth-quarter regular dividend of $0.48 per share, payable on December 29. That keeps the quarterly payout unchanged for a seventeenth straight quarter, even though third-quarter profit excluding one-offs came in two cents lower at $0.46 per share.
❓ Key Questions
What are the financial terms of the MidCap Financial acquisition?
The release announces the cash-and-stock buyout of MidCap Financial Investment Corporation as a boost to earnings power, but leaves out the price relative to book value, expected cost savings, and how much it will lift Core EPS.
Did the four-quarter return test trigger another fee deferral?
Unpaid income-based fees on the balance sheet nearly doubled from $84 million in June to $166 million in September, indicating the $82 million third-quarter fee was also held back under the total return hurdle.
How much did troubled Grade 1 and 2 loans change?
The release reports a flat 3.1 overall credit grade, but last quarter's filing showed lower-rated Grade 1 and Grade 2 loans had risen from 3.8% to 5.4% of portfolio fair value in six months.
How did Ivy Hill fund $1.7 billion of loan purchases?
Ares Capital sold $1.2 billion of loans to its Ivy Hill affiliate in the third quarter and another $497 million in early October, while directing 18% of its own third-quarter commitments into funding Ivy Hill.