管理層發言
Thank you for your continued patience. Your meeting will begin shortly. A member of our team will be happy to help you. Thank you for your continued patience. Please press 0 and a member of our team will be happy to help you. Good afternoon. Welcome to Ares Capital Corporation's second quarter ended June 30, 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Wednesday, July 29, 2026. I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations.
Thank you. Let me start with some important reminders. Comments made during the course of this conference call and webcast as well as 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, which encompasses measures such as core earnings 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 and 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, a 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 credit ratings and information relating to portfolio companies was derived or obtained from third-party sources and has not been independently verified. Accordingly, the company makes no representation or warranty in respect to this information. The company's second quarter ended June 30, 2026 earnings presentation can be found on the company's website at www.arcc.com by clicking on the second quarter earnings presentation link on the Events and Presentations page of the Investor Resources section of Ares Capital Corporation's earnings release and in the Form 10-Q, which are also available on the company's website. I would like to now turn the call over to Mr. Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort?
Thanks, John, and hello, everyone, and thank you for joining our earnings call today. 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. This morning, we reported solid second quarter results, with core earnings of $0.47 per share representing an annualized return on equity of 9.7%, consistent with the prior quarter. We also continued to see healthy overall portfolio performance, with attractive organic EBITDA growth and historically low levels of non-accruing loans and problem assets. As Scott will discuss later, we continued to enhance our already strong balance sheet during the quarter and we are well positioned with significant available capital for new investment opportunities and no meaningful near-term maturities. Let me begin with a few observations on the market environment. We saw fewer deals close across the market in the second quarter as sponsors and borrowers continued to navigate a more uncertain macroeconomic backdrop. This was particularly evident in a lack of sponsor-backed M&A activity. As the quarter progressed, we became more active. We reviewed more than 25% more transactions than in the prior quarter, and June marked one of our strongest months for new transactions reviewed in the past two years. We believe this momentum reflects the value borrowers and sponsors place on the stability and scale of our capital in a more selective financing environment, particularly as we have seen some managers more heavily indexed to retail capital become less active. As uncertainty persists, borrowers and sponsors are increasingly focused not only on execution, but also on partnering with lenders they are confident can provide incremental capital throughout the cycle. We believe Ares and ARCC remain meaningfully differentiated in this regard. Ares' institutionally focused fund complex is supported by stable long-term capital and substantial dry powder, providing borrowers with confidence that we can support their financing needs across market cycles. Those advantages reinforce ARCC's position as the largest publicly traded BDC and the highest-rated BDC across the three major credit rating agencies, supporting differentiated access to capital and financial flexibility. We believe these strengths continue to set ARCC apart and position the company to capitalize on opportunities across market cycles while delivering attractive long-term performance to our shareholders. Another key differentiator for our business is the strength of our relationships with existing borrowers. In the second quarter, 75% of our transactions were with incumbent borrowers, highlighting the sourcing advantages created by our borrower and sponsor relationships. The value of those relationships is reflected in our ability to increase our share of financing commitments across many of our new originations, allowing us to deepen our exposure to some of our best performing borrowers. With 619 portfolio companies, we believe our incumbent relationships will continue to be a meaningful driver of origination activity and long-term value creation for our shareholders. We are also seeing attractive opportunities emerge particularly in the upper middle market, where the scale of our capital is driving enhanced economics, stronger terms, and more compelling risk-adjusted returns than we saw a year ago, particularly relative to segments such as the lower middle market. We are one of only a few lenders with the scale, certainty, and flexibility to serve borrowers across the entire middle market, which allows us to focus our capital where we see the most compelling relative value. We believe those advantages continue to differentiate ARCC and support strong risk-adjusted returns over time. Underlying these advantages is our institutionalized credit process and disciplined investment approach, which keep us highly selective. While industry transaction volumes remain below what many had expected, we believe some lenders are facing increased pressure to deploy capital, leading them to compromise on quality. By contrast, our second quarter closing ratio was moderately below our historical average, approximately 5%, underscoring the discipline that has been a hallmark of our long-term investment performance. The strength of our investment process is reinforced by the experience and tenure of our leadership team, which remain important differentiators for ARCC. Every member of ARCC's executive leadership team has spent roughly two decades at Ares, and our investment committee members have been with the firm for over 18 years on average. That continuity has helped foster a deeply ingrained credit culture across our U.S. Direct lending platform and has been an important contributor to our long-term investment performance. Over our history, our differentiated approach has enabled us to maximize outcomes on challenging credits while capturing additional upside through our equity co-investments. Importantly, our equity co-investment vintages over the last decade have generated an average gross IRR of more than 20%, helping to generate more than $1 billion of cumulative net realized gains in excess of realized losses since inception. Turning to the portfolio, our diverse high-quality portfolio continues to perform well. We ended the quarter with investments of $29.7 billion at cost with no single investment representing more than 1.3% of the portfolio. Excluding our investments in Ivy Hill and the SDLP, which offer diversified exposures to senior loans, we believe our level of diversification is an important advantage particularly as dispersion across the market continues to increase, helping to limit company-specific risk while supporting more consistent portfolio performance over time. The performance of our borrowers also remains healthy overall. Our borrowers generated organic weighted average LTM EBITDA growth of approximately 8% at the end of the second quarter, which is consistent with ARCC's 10-year average and remains well in excess of the broader syndicated loan benchmark. We are also seeing that strength show up in other key credit indicators as interest coverage, leverage levels, and revolving credit facility utilization remain in line with historical averages for our portfolio. Alongside these performance trends, our portfolio companies on average continue to maintain equity capital cushions of more than 50% beneath our investments, which we believe provide meaningful downside protection and support the resilience of the portfolio. As we discussed in detail last quarter, we believe the potential impact of AI varies meaningfully across different businesses and risk profiles. Nearly all of our software investments are focused on what we view as foundational infrastructure for complex businesses, often serving as systems of record in regulated end markets with high switching costs and significant embedded value. Importantly, we continue to see strong operating performance across our software investments, with organic LTM EBITDA growth accelerating during the second quarter and exceeding the broader portfolio average. Within our software portfolio, only one small loan is currently on non-accrual; our debt investments remain supported by loan-to-value ratios in the low 40% range, providing substantial equity value beneath our positions. As a reminder, as we mentioned on last quarter's call, we recently completed an independent assessment of our software-oriented portfolio companies by a top-tier global management consulting firm. Consistent with the last quarter, we continue to believe AI risk across our software-oriented portfolio remains limited overall, with less than 50 basis points of ARCC's total portfolio at fair value attributable to higher AI-risk software investments, and less than 4% attributable to medium or higher AI-risk software investments. Importantly, medium-risk companies are performing well today, with credit statistics comparable to the overall portfolio. While we believe businesses in this category will need to continue investing considerably in AI to maintain their competitive positions, we have not seen that translate into weaker credit performance. Overall, we continue to feel good about our current positioning as it relates to potential AI-related risks, while recognizing the importance of remaining vigilant in our ongoing portfolio monitoring and thoughtful in how we allocate new capital to the sector. Turning to our dividend outlook, we continue to believe ARCC's current regular dividend appropriately reflects our long-run underlying earnings power. Our earnings and dividend profile is further supported by substantial spillover income, modest leverage, a more stable interest rate environment, and continued overall healthy credit performance. Our significant spillover income provides an additional layer of flexibility and can help bridge during periods of slower transaction activity. In addition, over the last 12 months, core earnings have exceeded our regular dividend while an additional $0.15 per share of net realized gains has provided further support for our overall dividend paying capacity. Taken together, these factors support our outlook for relative stability in earnings and our decision to maintain a stable quarterly dividend, building on our track record of stable or growing regular quarterly dividends for 17 consecutive years. With that, I will turn the call over to Scott to take us through our financial results and balance sheet.
Thanks, Kort. I will begin by reviewing several key financial metrics from the second quarter, then discuss the steps we took to further strengthen our balance sheet and conclude with an update on our dividend and the taxable spillover income Kort referenced earlier. This morning, we reported GAAP net income per share of $0.24, up from $0.13 in the first quarter of 2026. The sequential improvement was largely driven by lower net unrealized depreciation. As a reminder, consistent with the first quarter, this unrealized depreciation was primarily due to mark-to-market changes. Core earnings of $0.47 per share in the second quarter of 2026 were consistent with the prior quarter, reflecting continued healthy portfolio performance and stable earnings generation despite a more subdued transaction environment. Now turning to the balance sheet. Our total portfolio at fair value at the end of the second quarter was $29.3 billion, down slightly from $29.5 billion in the first quarter, primarily reflecting mark-to-market valuation adjustments and healthy net repayment activity. Our net asset value ended the quarter at $13.9 billion or $19.35 per share, which represents a decrease of $0.24 per share from a quarter ago. While NAV declined modestly during the second quarter, this should be viewed in the context of ARCC's long track record of generating NAV growth while paying stable and attractive dividends to shareholders. Consistent with our track record, ARCC has grown NAV per share by more than 30% since inception. Importantly, our leverage of 1.12x debt-to-equity net of available cash was effectively stable quarter-over-quarter and we ended the quarter with approximately $6 billion of available liquidity, after giving effect to the repayment of $1 billion of unsecured notes earlier this month. Our maturity profile also remains well-laddered with no additional unsecured note maturities in 2026 and only $1.4 billion maturing in 2027. This combination of modest leverage, substantial liquidity, and a well-laddered maturity profile continues to support significant investment capacity and financial flexibility. During the second quarter, we continued to benefit from our broad and diversified access to capital. In total, we did approximately $1.2 billion of additional financing through the issuance of $800 million of unsecured notes and approximately $370 million of additional commitments across two of our secured revolving credit facilities, all at what we believe continue to reflect industry-leading pricing and terms. We also continue to lower our borrowing costs while further diversifying our funding sources. Most notably, we launched the first commercial paper program in the BDC sector. The $1 billion program provides access to a lower-cost funding source and is effectively backed by our recently renewed fully committed long-dated $5.5 billion revolving credit facility. At current market levels, issuing commercial paper has the potential to reduce our funding costs by approximately 50 to 100 basis points relative to our average secured borrowings. Importantly, should the commercial paper market become less favorable, we have the flexibility to instead fund through our long-term committed bank credit facilities. We believe this structure provides greater durability than programs supported by shorter-dated 364-day facilities. As a reminder, we currently have $10.8 billion of fully committed revolving credit facilities with a weighted average remaining maturity of more than four years. More broadly, the commercial paper program is aligned with our balance sheet philosophy of lowering funding costs and improving efficiency while preserving the durability, flexibility, and resilience of our liability structure. We also further advanced these objectives during the second quarter by reducing the borrowing costs in our largest revolving credit facility by 10 basis points and extending its maturity to May 2031. After quarter end, we also took advantage of favorable market dynamics to reset our inaugural $476 million debt securitization, reducing its weighted average spread by 35 basis points while extending its reinvestment period by three years and its final maturity by two years. Together, these actions further improve the efficiency of our funding profile while reinforcing the strength and durability of our balance sheet. Looking ahead, while some market participants may face tighter credit conditions and reduced access to capital in this environment, we believe investors and lenders will continue to favor scale platforms with broad capabilities, proven track records, and deep market relationships. As the highest-rated BDC across all three major rating agencies, we believe ARCC is particularly well positioned in this environment, supporting our investment capabilities and strong long-term performance through cycles. Finally, our third quarter 2026 regular dividend of $0.48 per share is payable on September 30 to stockholders of record as of September 15. ARCC has now paid stable or increasing regular quarterly dividends for 68 consecutive quarters. Turning to our taxable income spillover, we currently estimate that we will carry forward approximately $988 million or $1.38 per share available for distribution to stockholders in future periods. I will now turn the call over to Jim to walk through our investment activities.
Thank you, Scott. I will start with some additional context on our investment approach in the current environment and then walk through our investment activity, portfolio performance, and overall positioning. While overall market activity remains subdued during the quarter, we believe this environment reinforces the value of ARCC's scale, committed capital, longstanding borrower and sponsor relationships, and highly selective approach. In the second quarter, we originated $2.6 billion of new investment commitments while maintaining broad exposure across 20 industries and 38 sub-industries. We completed approximately 75% of our transactions with existing borrowers, underscoring the value of our incumbent relationships and the embedded opportunity set within our portfolio. In a slower market, we were able to remain selective and direct capital towards companies we know well. Importantly, we have continued to strengthen these positions of incumbency as the number of companies in our portfolio has grown by approximately 10% over the past year. Our competitive position and disciplined investment approach are also evident in the terms we are able to achieve. On our new senior loan commitments this quarter, average spreads were 20 basis points wider than in the fourth quarter of 2025, while average upfront fees increased by 50 basis points over the same period. These improvements reflect our ability to remain selective and leverage our scale to achieve more attractive risk-adjusted economics for our shareholders. We ended the quarter with a portfolio of $29.3 billion at fair value, down modestly quarter-over-quarter due to healthy net repayments and fair value changes. Importantly, we believe the majority of the change in fair value across our debt and preferred equity investments was primarily driven by changes in market spreads and valuations rather than changes in the underlying credit performance of our portfolio companies. Borrower fundamentals also remain solid. Interest coverage and leverage levels were generally consistent with our five-year average. Our debt investments continue to benefit from meaningful equity cushions, with average loan-to-value in the mid-40% range. We believe these metrics demonstrate the underlying resilience of the portfolio and provide important downside protection. In a more uncertain macro environment, supported by these underlying portfolio trends, the credit performance of our portfolio remains solid. Our non-accruals at cost ended the quarter at 2.4%, still well below our approximate 3% historical average since the global financial crisis and the BDC historical average of approximately 4% over the same timeframe. Our non-accruals at fair value of 1.4% also remained well below our historical levels. Our overall risk ratings remain stable. The share of our portfolio companies in our higher risk categories, Grades 1 and 2, remain comfortably below our 10-year average and meaningfully lower than the portion of our portfolio companies in Grade 4, which are outperforming our original underwriting expectations. While we continue to expect credit quality and non-accruals across the industry to trend towards historical norms, we believe increasing dispersion among managers will further highlight the value of our platform, scale, disciplined underwriting, and active portfolio management. In this environment, we believe ARCC is particularly well positioned. One of the key drivers of our long-term track record is our dedicated portfolio management team, which includes more than 50 professionals and, in our view, is the largest and most experienced in the industry. The team is led by three partners with an average of 27 years of experience, including one who serves as a voting member of our investment committee today. This helps to ensure the portfolio management perspective remains fully integrated into our investment decision-making process. Our long-term credit performance is also underpinned by our life-of-loan philosophy. Early in our history, we recognized inherent conflicts that exist in lending models which reward originators solely for sourcing new investments. At Ares, our investment professionals are responsible not only for sourcing and underwriting new opportunities, but also for partnering closely with our portfolio management team throughout the life of each investment to help drive strong credit outcomes, particularly when situations do not unfold as expected. In our experience, this approach strengthens sponsor and borrower relationships over the years and drives more effective outcomes on challenging credits. We believe our institutionalized credit process and the close integration of our investment and portfolio management teams have been important drivers of our long-term track record of generating net realized gains in excess of losses, which Kort referenced earlier. In summary, the main attributes that have long differentiated ARCC — including our scale, the experience and stability of our team, our deep relationships with borrowers and sponsors, and the strength of our platform resources and capital base — are even more important in today's market. While industry credit metrics may continue to normalize, we believe increasing dispersion creates an environment where these advantages matter even more. Supported by a high-quality portfolio and meaningful liquidity, we believe ARCC is well positioned to navigate the current environment and capitalize on attractive opportunities as market activity improves. As always, we appreciate you joining us today and we look forward to speaking with you next quarter. With that, operator, please open up the line for questions.
分析師問答
Please note, as a courtesy to those who may wish to ask a question, please limit yourself to one question and a single follow-on. If you 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. Our first question today will come from Rick Shane with JPMorgan. Your line is open.
Hey, everybody. Thanks for taking my question this morning. Look, you guys discussed the fact that over the history of ARCC, you guys have accreted book value. And that has really been, I would argue, a function of three things: accretive issuance, which obviously at the moment is challenging; two, investment gains; and three, two significant acquisitions where you accretively exchanged stock. You talk right now a great deal about your advantages in terms of your debt ratings. So from a pure financial engineering perspective, and given where peers are trading, the setup for that type of acquisition or that type of merger on paper makes a great deal of sense. I am curious whether or not, given the asset quality issues in the space, this makes sense for you now and whether or not you think that there are motivated sellers in the market who would be looking to unlock value for their shareholders in this way.
Yes. Thanks for the question, Rick. I need to be careful in how we answer because we are always evaluating various strategic alternatives. I would just say given the dispersion in performance that we are seeing across managers in the space, and some of the weakness that is coming to the fore, the likelihood of a transaction like that occurring is probably higher than it has been in the past. But other than saying that, I am not really sure that we can speak too much more about anything that we are working on or give too much forward guidance about what might or might not occur. I think your point is a good one, and it highlights our relative performance to others and the fact that while we are seeing some normalization of credit performance back to historical means, we are not seeing the same kind of spikes in non-accruals and further weakening that maybe some of our competitors are seeing.
Got it. And if I can ask one follow-up: one thing that would make that type of transaction challenging is if you thought that systematically marks in the industry were off and that the valuations you are looking at are not really the valuations you think you would realize. Are you, in general, constructive on how the industry is valuing their portfolios at the moment?
I guess are we asking about how we feel about other managers' marks? I think it is something I probably want to stay away from commenting on. As has been pointed out historically, and I think the media has certainly written about this, there is some dispersion in valuation, especially when you get into some more stressed credits and you look across different managers. That can occur for a variety of reasons. I would just say, on our side, I think we have been proven to be on the more conservative end of the spectrum as it pertains to marks. But Rick, I am sorry, I just really kind of want to avoid getting into opinions about other managers' marks.
Yes, of course, totally fair. I realize as I ask the question that it is probably not framed in the right way, so I appreciate the answer to the first and I appreciate the discretion on the second.
Our next question will come from Finian O'Shea with Wells Fargo. Your line is now open.
Hey, everyone. Good morning. Just sticking with the big picture industry question on credit. This is much less so for Ares, but NAVs have clearly been trending down and even without some of the more severe names that you just touched on with Rick. How would you describe the drivers underneath the credit headwinds for the industry? Are they items that will sort of run their course, or does it reflect a new normal where we should expect BDCs to revert back to those longer-term non-accrual ratios and such? Thanks.
Hey, Finian. It's Jim here. Thanks for the question. I will keep it more macro and market-level. We have been operating for an extended period where non-accrual rates and default experience has been below the long-term average, and we have said we think there's a reversion toward the mean. That is still our expectation. What we are also seeing, and it has been highlighted, is a wider dispersion among managers on performance. What we think is happening is a general maturing of portfolios. A handful of managers who ramped and invested, and it takes time for those investments to mature and settle, and then you start to see where the long-term performance really is. I think that's what's going on right now and why the average has been below; it's also been obviously a very benign credit environment, so it's a bit of both. I do think the industry is going through a normalization period right now, and we are still working our way through that.
Maybe I'll add one more thing, Finian. We get the question a lot: are there any industries driving that normalization? From our perspective and our portfolio, no. When you look at the four names we added to non-accrual this quarter, they are companies that do different things and are not related to each other. We are not seeing trends yet around certain industries experiencing outsized weakness that would lead us down this path toward more credit normalization.
Very helpful. Thank you. Follow-up on the SDLP: a lot of movement there, looks like a lot of movement toward diversification by borrower names and such. Any implication—correct me if I'm wrong—on earnings power? Does that allow you to lever more origination fees, capital structuring fees? Or should we think about it as simply more diversification?
I'm glad you pointed that out. You should think about it as more diversification and better utilization of that specific joint venture. The driver there: we recently received co-investment relief that allows SDLP to invest alongside other Ares funds, which historically was not the case. Historically, we would put an asset into SDLP only or into other funds; now we can co-invest alongside, expanding SDLP's opportunity set. That creates the diversification you're referencing. We expanded the number of borrowers in SDLP from 28 to 72 in the last quarter alone, and we expect that diversification to continue.
And our next question comes from Arren Cyganovich with Truist Securities. Your line is now open.
Thanks. Kort, in your commentary you noted a couple of push and pull dynamics in the marketplace: one being that some retail-heavy competitors might be less active, but also that you had a lower closing rate because folks were maybe being more aggressive on price or structure. Could you talk a bit more about the competing dynamics there?
Hey Arren, it's Jim. I'll give more color around the market generally to help answer that. Over the last 90 days, competition differs across the market. The lower end of the market remains relatively competitive, while the larger company market has seen less competition, particularly from larger players who were more driven by capital flows from the retail channel. We saw spreads widen, leverage decline, and fees improve, and that was more pronounced in the large end of the market. The number of players that can compete with scale like Ares has shrunk a bit, which is a better hunting ground for us. We're seeing smaller players and smaller companies remain competitive, and that part of the market is a bit healthier and more active on M&A. We also saw transaction review volume ramp, with a big lift in June — about a 50% month-over-month increase in transactions reviewed at Ares — which we view as a sign the M&A market is thawing and the pipeline is improving. We're optimistic about where the pipeline is headed and seeing larger transactions become more prevalent.
I'll add a couple points on quality and selectivity. We were extremely disciplined in the quarter; the quality of flow dipped a bit in Q2, which hampered overall volume, but we chose to close fewer deals as a percent of what we reviewed. We're okay waiting for quality to improve. Also, there's a unique opportunity for Ares now: some larger lenders are lower on capital, and we can stand up larger commitments and capture outsized fees and economics. A good example: we committed to a nearly $2 billion credit facility in the second quarter and held a significant piece of it. That ability to commit at scale is a competitive benefit right now, and we hope deal flow and larger transactions continue to pick up.
I really appreciate the color from both of you. Thank you.
Our next question will come from Kenneth Lee with RBC Capital Markets. Your line is now open.
Hey, good afternoon and thanks for taking my question. Just one on prepayments — I realize it is difficult to predict. But any sense of what the level of prepayment could be like over the near term? Thanks.
Hard to answer, Kenneth. Generally, what we have seen is that repayment activity moves relatively in tandem with new deal activity. So as new deal volume picks up, I would expect that could lead to some repayment activity picking up as well. Repayments and new deal activity are correlated over the long term, but I don't see any specific drivers today that would cause repayments to be abnormally high or abnormally low going forward.
Gotcha. Very helpful there. And one follow-up: earlier in the call you mentioned still having some capacity around leverage. Anything within your target range that you could target to operate within going forward?
Yes. Our stated leverage range is still 0.9x to 1.25x. We're in the middle of that range now, so there's probably a little room to go. We are sensitive to the leverage impact from valuations and are keeping an eye on that, but we do think there is some room to grow leverage within our stated range.
Got you. Very helpful there. Thanks again.
Thank you. We will go next to Chris Muller with Citizens. Your line is now open.
Hey, guys. Good to be on with you today. I want to ask about interest rates and the impact on the pipeline. How does the absolute level of rates versus volatility of rates impact the pipeline? Which scenario would create a better opportunity for lenders like you guys?
Interesting question. I would say volatility of rates has a greater hampering impact on transaction volume than the absolute level of rates. When there's high volatility, it's harder for buyers and sellers to model future rate outcomes and to be confident about what rate to put in their models, which can slow transaction activity. Historically, when rates moved up and then settled — even if base rates were higher — deal flow resumed once people knew what to put in their models. The current rate picture feels more stable than we've seen in a while, and even a slight widening of base rates going forward should be a benefit to us and not a negative for transaction flow, because market participants are settling into a clearer picture.
Got it. That is very helpful. And a quick clarification: you mentioned expecting non-accruals trending back towards historical norms. Is there anything in your portfolio that you are starting to see bubble up, or is that more just a comment on mean reversion in the industry?
The latter. My commentary was around the industry, and the maturation of portfolios in the competitor set. Performance has been below the long-term average and we expect some normalization toward historical norms as portfolios mature.
Got it. Makes a lot of sense. Appreciate you guys taking the questions today. Thanks.
Thank you. We will go next to Melissa Wedel with UBS. Your line is now open.
Thanks for taking my questions today. I wanted to follow up on the commercial paper program. I noticed there were no outstanding issuances by the end of the quarter. How long do you think it will take you to ramp to the $1 billion capacity? How big could that get?
Thanks, Melissa, and congrats on your new role. The purpose behind the program is efficiency. I don't think we'll use the full billion anytime soon. We want to test it out and see how it goes. We did do our first issuance post quarter end, so we'll start seeing some savings come through. If I had to guess, maybe a few hundred million dollars in issuance to start and then we'll scale from there based on market conditions.
Okay, makes sense. I wanted to shift to post-quarter-end investment activity. In July activity to date, there was an increase in fixed-rate subordinated allocations and the spread between the new investment yield and the yield on what you've exited widened. Is that sustainable or just a function of individual repayments?
Maybe I'll start. There has been an improvement in market terms and we saw that last quarter. How long that sustains is hard to say, but we're optimistic the market is less competitive now, particularly in the larger end. We expect to generate higher returns for high-quality businesses in that segment. It feels healthier and more stable at the moment, which leads to more transaction volume. It's hard to predict the duration, but the current dynamics feel constructive.
On the mix toward fixed-rate in July, I think that's a small-sample effect — just small numbers over a short period. There was one deal that was an existing software name where the bond market refinanced an existing second-lien position; we took a small piece of that bond deal. We downsized our position and de-risked from a relatively large software company and still took a small position in the new bond, so there's some randomness in those numbers.
Fair enough. Thank you.
Next question will come from Robert Dodd with Raymond James. Your line is now open.
Hi, guys. On the credit quality of the book: non-accruals on a cost basis are not high but not low anymore. You have a number of more troubled assets that you've talked about. Your track record on recovering assets is meaningfully better than industry average, and that tends to be stronger if you get control sooner. Is there any prospect of being more aggressive in taking control of some of these assets and putting your workout group more fully in control given the historic track record of performance there?
I appreciate the question, Robert. While we enjoy the higher returns that can come from situations where we take control, it is not our strategy to aggressively take control of companies from owners when there's weakness. We would much rather the owner put in capital and support the company and work together to get through the other side. We are willing and able to take control when necessary — and that's an important competitive advantage — but that willingness often incentivizes equity contributions from owners, which is preferable. Taking control is a last resort; when it occurs, we've got a good track record for achieving strong outcomes.
Just a follow-up: of the assets contributing the majority of the markdowns, how many have had incremental capital injections from owners over the last six months?
I don't have that number handy, Robert. Thematically, we are absolutely seeing owners support their companies with capital on the whole. That ties back to the LTV profile in our portfolio overall being sub-50% — there is a lot of cash equity invested in our portfolio companies beneath our loans, which incentivizes sponsors to step up when there is an issue.
We will go next to Paul Johnson with KBW. Your line is now open.
Curious where you are in the cycle: terms have improved a little, but activity is muted. On new deals, is PIK being requested by sponsors, particularly in the upper middle market where you're seeing more attractive deal flow? Also, last quarter you mentioned approximately 90% of the portfolio was structurally originated PIK — is that roughly the same this quarter?
It's deal-by-deal. We saw a period where PIK largely went away for 30 to 60 days, but we've seen it come back on a few transactions. It won't go away entirely, but there is more scrutiny and sensitivity from competition. It likely won't be as prevalent as it once was. On the structurally originated PIK metric, that is holding roughly the same this quarter.
Appreciate that. One quick question: you mentioned Ivy Hill positions within ARCC — no position accounts for more than about 1% of the portfolio. Is the diversification level similar across the funds managed under the Ivy Hill vehicle, or is it more concentrated due to transaction size?
You should think of it as equally if not more diverse, definitely not less diverse.
Got it. Appreciate that. That's all my questions.
Thank you. And we will go next to Sean-Paul Adams with B. Riley Securities. Your line is now open.
Touching specifically on two credits that continue to slide — Cornerstone and Simpler Software — do you have anything to add color on those names? And on Q3 and Q4, with volume up but quality down and repayment activity high, are you pointing to a flatter back half of the year because of mix?
On the first question, I cannot comment on specific names; we've said that in the past and that holds here. On the second, no — we are optimistic. We're seeing more deal flow and a healthier M&A market: more sponsor-to-sponsor deals, early-stage books in the market, and general improvement in M&A activity. Quality is improving in the deals that are coming in. So we are optimistic we will see growth. The only thing we can say about those names is that they have the same sponsor/owner, and we are engaging in a lot of ongoing and constructive dialogue with that sponsor, which gives us some degree of confidence in our ability to address near-term maturities in those names.
Got it. I appreciate the color. Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Kort Schnabel for any closing remarks.
Okay, great. Thanks. Yes, we got through the quarter without any software questions. I don't really have any other closing remarks. Thanks, everybody, for joining us and for your continued support and engagement. We will see you next quarter.
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.