Ares Capital's First-to-Market CP Program Signals Funding Advantage Amid Market Dislocation
Steady core earnings and a clean portfolio underpin ARCC's stability, but the new commercial paper program may be the true differentiator.
ARCC · Earnings Call · 2026-07-29
Ares Capital Corporation (ARCC) reported second-quarter 2026 results on July 29 that, on the surface, were steady: core earnings of $0.47 per share, an annualized ROE of 9.7%, and a maintained quarterly dividend of $0.48. But beneath the consistency, the company moved decisively to extend its funding-cost advantage in a market where commercial paper is a brand-new lever for a BDC. The launch of a $1 billion CP program, a sector first, points to a deliberate strategy to lower liabilities costs while preserving liquidity and flexibility—a theme that aligns with the company's push into upper middle market deals where scale matters most.
"We also 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," said CEO Kort Schnabel in prepared remarks. CFO Scott Lem added: This move dovetails with the team's broader normalization narrative—credit performance is reverting toward historical averages, but ARCC's funding engine is being upgraded. Meanwhile, the lending environment is ripe for a player with ARCC's scale. "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," noted Kort. The company's closing ratio was deliberately below its historical average, signaling selectivity as deal quality dips, but 75% of second-quarter transactions were with incumbent borrowers—a powerful relationship moat. This focus on incumbency is not entirely new; in the July 2025 call, management stressed the strategic importance of the ATM program to fund growth: “We do think that it is strategic for us to raise capital via the ATM program when it's available.” — Kort Schnabel, Chief Executive Officer · 2025-07-29 Now, the CP program offers a cheaper lever to deploy into a market where spread widening is finally appearing. The portfolio itself remains resilient, with non-accruals at cost of 2.4% and still below historical levels. Management's message on software and AI risk has become a recurring theme; in the February 2026 call, Kort was emphatic that the portfolio is built to withstand disruption: “We still believe strongly that we've constructed a portfolio that will remain highly resistant to this risk.” — Operator · 2026-02-04 In the current quarter, that caution persists, but the emphasis has shifted to balance-sheet engineering. The company also reset its debt securitization, reducing spreads and extending maturities, and ended Q2 with leverage of 1.12x—right in the middle of its stated 0.9x–1.25x range, back from the lower bound that management flagged a year ago: “we have a stated range of 0.9x to 1.25x. And so it's a little bit toward the lower bound of that range.” — Kort Schnabel, Chief Executive Officer · 2025-07-29 Fundamentally, the balance sheet shows a slight deleveraging trend: Liabilities to Assets fell from 57.5% in Q4 2021 to 54.2% in Q1 2026, even as Common Equity expanded to $14.1B. This gives ARCC meaningful dry powder to exploit credit dislocation while maintaining a defensive posture. The stock has rebounded +10% over the last 90 days, though it remains 16% below its early-2025 peak, suggesting the market is still pricing in credit normalization. In sum, ARCC is no longer just standing still on dividend coverage; it is actively engineering a finer cost of capital. The CP program is genuinely company-unique and could become a structural earnings tailwind if rates stay volatile. Combined with the disciplined focus on upper-middle-market deals and a pristine credit book, the story here is not about a single quarter—it's about how a scaled market leader uses its balance sheet to separate itself further from peers.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.