Fitch Expects to Rate Ares Capital's Unsecured Notes 'BBB(EXP)'

Published: 2025-05-28 05:46:11 ET ARCC

Published on 05/28/2025 at 05:46

Fitch Ratings expects to assign a 'BBB(EXP)' rating to Ares Capital Corporation's (Ares) unsecured debt issuance.

Fitch does not expect a material impact on the company's leverage levels as a result of the issuance, as proceeds will be used largely to repay outstanding borrowings and for general corporate purposes.

Ares has a Long-Term Issuer Default Rating (IDR) of 'BBB'. The Rating Outlook is Positive.

Key Rating Drivers

Positive Outlook: The Positive Outlook continues to reflect Ares' strong and differentiated asset quality, operating consistency, capital markets access and dividend coverage through a variety of economic and market cycles. Competition in the direct lending market is expected to remain intense, with variability in deal spreads and terms over time. A one-notch upgrade of the rating over the next 12 months could be supported by the maintenance of strong absolute and relative asset quality performance and a reduction in accrued paid-in-kind (PIK) balances and PIK as a percentage of investment income.

Affiliation with Broader Platform: Ares' ratings continue to reflect its scaled platform, moderate portfolio concentrations, strong funding flexibility and solid liquidity. The ratings also reflect an experienced management team and access to investment resources from its investment adviser, Ares Capital Management, LLC.

Rating Constraints: Rating constraints include above-average exposure to equity investments, which could experience more valuation volatility than first-lien debt investments, particularly in times of stress, and above-average PIK balances. Ares' significant size, relative to other BDCs, also poses some potential constraints on its operational flexibility. At certain points in the cycle, for example, Ares may be more challenged to identify sufficient investment opportunities to invest the proceeds from repayments and maturities, which could impact earnings. Ares' size may also limit capital markets' capacity to provide it with sufficient unsecured financing particularly as affiliate BDCs look to access the market.

Competitive Environment: Rating constraints for BDCs include the market impact on leverage, dependence on access to the capital markets to fund growth and limited ability to retain capital. Fitch believes BDCs will face a competitive underwriting environment, weaker earnings and dividend coverage metrics and the potential for further deterioration in asset quality metrics in 2025.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A material increase in non-accrual metrics, the recognition of outsized realized losses on the portfolio or an inability to reduce accrued PIK and PIK as a percentage of interest and dividend income could result in the Outlook being revised to Stable.

Beyond that, an increase in leverage that is not commensurate with the risk profile of the portfolio, an inability to maintain sufficient cushion to asset coverage to account for valuation volatility, a sustained reduction in unsecured debt below 40% of total debt and/or weaker cash income dividend coverage could result in negative rating actions.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Continued strong and differentiated asset quality performance of recent vintages through the more challenging economic backdrop, combined with a reduction in accrued PIK balances and a decline in PIK as a percentage of investment income, could result in a one-notch upgrade of the rating.

A rating upgrade would also be conditioned on the maintenance of a strong funding profile, with unsecured debt maintained at or above 50% of total debt, ample liquidity, and consistent core operating performance. A material reduction in leverage not accompanied by an offsetting increase in the portfolio risk profile could also contribute to positive rating momentum.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The expected rating is equalized with the ratings assigned to Ares' existing senior unsecured debt, as the new notes will rank equally in the capital structure. The alignment of the unsecured debt rating with the Long-Term IDR reflects average recovery prospects under a stress scenario, as Ares is subject to a 150% asset coverage limitation and has a meaningful unsecured funding component.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The expected unsecured debt rating is primarily linked to the Long-Term IDR and is expected to move in tandem, although the notching could change if there is a shift in funding mix or reduction in reduction in available asset coverage, which Fitch believes impacts the recovery prospects of the instruments in a stress scenario.

ADJUSTMENTS

The Standalone Credit Profile (SCP) has been assigned in line with the implied SCP.

Date of Relevant Committee

11 April 2025

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.