Tear Sheet: Ares Capital Corp.

As of Sept. 30, 2023, the portfolio's weighted average interest coverage was 1.6x--unchanged from the prior quarter and down from 1.8x at year-end 2022. Given the Federal Reserve's aggressive interest rate hikes and the lagged impact of higher rates on borrowers, we anticipate that the interest coverage ratio will decline further. But given ARCC's long operating record through different credit cycles, we think it will prudently manage this risk. We remain focused on potential strains in asset quality through increased nonaccruals and PIK income. We're starting to see BDCs actively amend some of the troubled credits by converting them to PIK. While this provides some relief to the borrower in the short run, over time we expect that borrowers' underlying

...What's new: Despite macroeconomic headwinds from higher rates and sticky inflation, asset quality at Ares Capital Corp. (ARCC) remained steady as of Sept. 30, 2023, with loans on nonaccruals at cost at 1.8% and payment-in-kind (PIK) income and dividends at 13.8% of gross investment income (versus 14.9% at year-end 2022). Our base-case expectation is for PIK income to increase for most business development companies (BDCs) in the next few quarters while borrowers continue to face liquidity pressures. As of Sept. 30, 2023, the portfolio's weighted average interest coverage was 1.6x--unchanged from the prior quarter and down from 1.8x at year-end 2022. Given the Federal Reserve's aggressive interest rate hikes and the lagged impact of higher rates on borrowers, we anticipate that the interest coverage ratio will decline further. But given ARCC's long operating record through different credit cycles, we think it will prudently manage this risk. Why it matters: While market trends and valuation...

Full Report