Operator:
Stand by, your meeting is about to begin. Good afternoon, everyone. Welcome to Ares Capital Corporation's First Quarter Ended March 31, 2026 Earnings Conference Call. As a reminder, this conference is being recorded on Tuesday, 04/28/2026. I will now turn the call over to John Stilmar, Partner of Ares Public Markets Investor Relations. Please go ahead, sir.

John Stilmar:
Thank you. Good morning, everybody. Let me start with some important reminders. Comments made during the course of this conference call and webcast, as well as the 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, such as core earnings per share 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 operation. A reconciliation of GAAP net income per share to the most directly comparable GAAP financial measure to core EPS can be found in the accompanying slide presentation for this call. In addition, the reconciliation of these measures may also be found in our earnings filed this morning with the SEC on Form 8-Ks. Certain information discussed in this conference call and the accompanying slide presentation, including credit ratings and information relating to portfolio companies, was derived from or obtained by third-party sources and has not been independently verified. Accordingly, the company makes no representation or warranties with respect to this information. The company's first quarter ended 03/31/2026 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the First Quarter 2026 Earnings Presentation link on the homepage of the Investor Resources section. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I would like to now turn the call over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort Schnabel?

Kort Schnabel:
Thanks, John, and hello, everyone, and thank you for joining our earnings call today. I am joined by Jim Miller, our President; Jana 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. Let me start by providing a few thoughts on ARCC's performance, current market conditions, and our positioning in this environment. We believe we are off to a strong start in 2026 with solid earnings and strong fundamental portfolio performance. Our core earnings of $0.47 per share represent an annualized ROE of 9.6% in what has historically been a seasonally slow quarter for originations. Our overall portfolio quality remains healthy with continued low levels of nonaccruing loans and problem assets. We are seeing an improving investment environment as terms and economics are becoming more attractive on new transactions, and we believe our strong balance sheet and available liquidity of approximately $6 billion provide us significant advantages in this environment. Let us now discuss the changes we are seeing in overall market conditions. Heightened capital markets volatility, geopolitical uncertainty, and net outflows from retail products exacerbated an already seasonally slow market period in the first quarter. These factors contributed to not only lower transaction volumes but also diminished competition and improved lending conditions, as lenders more heavily dependent on retail flows have retrenched and the syndicated bank loan market has been uneven with many banks exhibiting diminished risk appetite. As a result, we are seeing a reset underway with wider spreads, lower leverage levels, and more attractive overall deal terms across the market. New transactions today are being discussed at 50 to 75 basis points of enhanced levels of fees and spread, alongside a half to full turn of lower leverage and tighter documentation versus the second half of last year. As risk premiums widened during the first quarter, overall market activity slowed as the market searched for clearing prices during this period. However, over the past three to four weeks, we have seen a noticeable pickup in new deal activity as borrowers recalibrate expectations for economics and terms and continue to pursue their capital needs. One of the key themes we see unfolding is that the ability to provide capital at scale and with certainty is becoming increasingly differentiated. We believe these types of situations are creating greater economic opportunities for the largest and most stable platforms with capital. Our healthy levels of available capital, combined with our connectivity to the broader Ares U.S. Direct Lending platform and its significant dry powder from institutional sources, position us well to capitalize on these market conditions. Our diverse, high-quality portfolio also continues to perform well. Our granular level of diversification further advantages us, as loan concentration is one driver of growing dispersion in results across our market. With investments across 607 companies and an average position size of less than 20 basis points, we believe this level of diversification meaningfully limits idiosyncratic risk to any one position. Our borrowers generated organic weighted average LTM EBITDA growth of approximately 9% through the end of the first quarter, in line with ARCC's ten-year average and more than twice the growth rate of the companies within the broader syndicated loan benchmark. Portfolio fundamentals also remained solid with broadly stable interest coverage and leverage levels, low loan-to-value ratios by historical standards, and revolving credit facility utilization in line with historical norms. Our nonaccruals also remained well below historical average levels. With this as context to the overall health of the portfolio, let me provide some important updates about our views on the specific strength and position of our software investments. As I articulated on our last earnings call, not all software companies carry the same level of AI disruption, and in fact, many are embracing AI and seeing enhanced growth. We believe the most important question is not how much software exposure we have, but what types of companies we have invested in, what staying power, risks, and opportunities our companies have through this latest technological cycle. Nearly all of our software companies are focused on what we view as foundational infrastructure for complex businesses, and this infrastructure often powers customers' core operating systems. These software products generally operate as systems of record in regulated end markets, have high switching costs, and benefit from proprietary data. Importantly, our software investments are supported by large diversified businesses with a weighted average EBITDA of $340 million, strong cash flow, and meaningful equity cushions, even as valuation multiples have come down for most software companies broadly. Most of these companies are also protected by business models with strong contractual cash flows and continue to sign up new customer contracts as they move forward and invest in AI themselves. To pressure test this view of our software investments, we proactively engaged a top-tier global management consulting firm in 2025 to challenge our AI risk assessment across our software-oriented portfolio companies. Prior to engaging this firm, we conducted extensive diligence in 2025 and ultimately selected this firm not only for its deep technical expertise, but also for its reputation as a rigorous and objective evaluator. As part of this independent study, the consulting firm had direct access to each borrower, its financials, and, if relevant, the associated financial sponsors or other key owners of the business. This enabled them to assess whether AI is likely to be additive, whether it could enhance or hurt positioning depending on execution and product evolution, or whether it poses a direct risk to the core business absent significant strategy change. The consultant’s study found the largest differences between higher- and lower-risk companies to be system-of-record positioning, high switching costs, the benefit of regulatory barriers, proprietary data moats, and control of data. The firm also assessed human dependency, data availability, risk of error, and task structure, among other dimensions. Overall, the independent review conducted over the past several months found that the AI-related risk across our software-oriented portfolio is relatively limited. The report indicated that about 85% of our software portfolio at fair value represented low risk, with only a small subset of companies categorized as higher risk. These higher-risk companies represented only 1% of reviewed names by fair value and 2% by count, or only about 0.3% of ARCC's total investment portfolio at fair value. An additional 14% of reviewed companies by fair value and count were classified as medium risk, representing only about 3% of ARCC's total investment portfolio at fair value. Importantly, medium or higher risk classifications do not imply current business impairment. Rather, they reflect the need for continued investment in product evolution, with many of these companies well positioned to adapt within the time necessary. Of the 85% of names categorized as low risk, these companies are well positioned to adapt and, in the majority of cases, benefit from AI-driven enhancements. In these businesses, AI is primarily augmenting existing SaaS platforms through incremental or high-value features layered on top of core software, with existing revenue streams largely maintained and incremental AI upside accruing to incumbent vendors. While we believe we have a solid view of the positioning of our portfolio, we recognize the need to remain vigilant with our portfolio companies on this topic. We also will remain disciplined in allocating new capital to the software sector. As we seek to take advantage of opportunities in the current market, it is critical that we are supported by a conservatively constructed balance sheet and a stable capital base. As Scott Lem will address, our substantial available liquidity of approximately $6 billion and our well-structured liability profile, with minimal near-term maturities, offer us the flexibility to pursue opportunities with both new and existing portfolio companies. Our outlook for relative stability in our earnings leads us to maintain a stable level of quarterly dividends. Importantly, core EPS, taken together with $0.15 per share of net realized gains, was well in excess of the dividend this quarter, providing a strong underlying foundation for current distributions. That foundation is further supported by ample spillover income, modest leverage, a more stable rate environment, and credit performance that aligns with our historical track record. Looking ahead, with spreads widening and turns improving, and given our strong competitive position, we continue to believe that ARCC's current dividend approximates the long-run underlying earnings power of our business. And our significant level of spillover income provides an added degree of flexibility and can serve as a short-term bridge during periods of seasonally slow transaction levels. These factors position us to continue building on our track record of stable or growing regular quarterly dividends for sixteen consecutive years. With that, I will turn the call over to Scott Lem to take us through more details on our financial results and balance sheet.

Scott Lem:
Thanks, Kort Schnabel. I will begin by reviewing certain key financial metrics from the first quarter, followed by an analysis and discussion of our robust balance sheet and liquidity, and conclude with details of our dividend and the taxable spillover referenced earlier by Kort Schnabel. This morning, we reported GAAP net income per share of $0.13, down from $0.41 in the fourth quarter of 2025 and $0.36 for the same period a year ago. The decline was largely driven by net unrealized losses primarily due to spread widening in private credit markets causing market-driven unrealized depreciation. Core earnings per share were $0.47 in the first quarter of 2026, down from the $0.50 we reported both last quarter and a year ago, primarily due to the impact of a full quarter of current base rates on our interest income, as well as lower capital structuring service fees. The decline in capital structuring service fees is largely due to reduced market activity typical in the first quarter and in addition to softness from the broader credit market volatility that Kort Schnabel mentioned earlier. Now turning to the balance sheet. Our total portfolio at fair value at the end of the first quarter was $29.5 billion, consistent with the end of the fourth quarter and up from $27.1 billion a year ago. Our net asset value ended the quarter at $14.1 billion, or $19.59 per share, which represents a decline of $0.35 per share from a quarter ago and $0.23 per share from a year ago. This decline in the first quarter contrasts with the long-term NAV growth we have generated alongside paying a stable level of dividends. For example, ARCC has delivered NAV growth exceeding 10% over the past five years and more than 30% since inception. Supporting the strength of our balance sheet, we had an active quarter enhancing our liability profile by accessing over $1.25 billion of incremental debt financing to further build on what we believe is a best-in-class balance sheet structure. Reflecting our long-standing strategy of being a consistent issuer in the investment grade notes market, we kicked off the year by issuing $750 million of long five-year unsecured notes at an industry-leading spread of 180 basis points over Treasuries, which we swapped to SOFR plus 172 basis points. During the first quarter, we remained active with our diverse bank capital providers and specifically expanded our SMBC funding facility by $500 million at similar or improved terms, including a five basis point reduction in the spread. On the topic of banks, I would like to take a few minutes to share our perspective on bank financing markets and the stability of banks providing capital to our sector. At ARCC, across our four credit facilities, we maintain relationships with more than 40 banks and lending institutions, many of which have been longstanding supporters of ours. The weighted average length of these relationships exceeds thirteen years, with several dating back more than twenty years to the early days of our company. Over that time, we have continued to broaden and deepen these partnerships, with most of these banks and lenders working with us not only at ARCC but across the Ares platform. We believe these well-established long-term relationships, combined with our scale, capabilities, and performance, provide us with unique and consistent access to capital across multiple markets, especially with our banking and lending partners. Additionally, drawing on our experience successfully navigating the Global Financial Crisis, we view the structure, duration, and diversification of our funding facilities as essential factors in ensuring balance sheet stability. As a reminder, all our credit facilities are fully committed with no maturities before 2030 and no mark-to-market provisions. Unlike pre-crisis facilities, which often involved margin calls and shorter maturities that impacted capital availability and liquidity, our current facilities offer stable access to capital throughout the commitment periods. Our experience through the Global Financial Crisis also reinforced the importance of maintaining diverse funding sources, which has been one of the keys to our success and will remain one of our most important strategic priorities. Reflecting this focus, we are the highest rated BDC across all three major rating agencies, with the longest ratings history—nineteen years with two agencies and sixteen years with the third—and more than fifteen years of experience issuing investment grade and convertible notes. The combination of our ratings and the fact that the vast majority of our assets are funded by unsecured debt and the largest permanent equity capital base in the sector further bolsters our position in the eyes of our banking partners. More recently, in 2024, we further enhanced the diversity of our funding sources and broadened our lender base through the securitization market. By generally issuing only through the AA tranche, we are able to achieve similar advance rates to what we receive on our credit facilities while further advancing our financial goals and benefiting from Ares' strong reputation with investors. Looking forward, while market participants may anticipate tighter credit conditions and reduced access for certain private credit managers, we believe BDCs affiliated with large-scale leading managers who possess long-term proven track records, extensive capabilities, and deep and enduring relationships, such as ourselves, will continue to receive strong support on attractive terms from debt capital stakeholders including investors, banks, and other lending institutions. Overall, our liquidity position remains strong, totaling approximately $6 billion. In terms of our leverage, we ended the first quarter with a debt-to-equity ratio net of available cash of 1.10x versus 1.08x last quarter, leaving us with meaningful headroom to support investing while maintaining ample cushion to absorb potential future volatility. Finally, our first quarter 2026 dividend of $0.48 per share is payable on June 30, 2026 to stockholders of record on June 15, 2026. ARCC has been paying stable or increasing regular quarterly dividends for sixty-seven consecutive quarters. In terms of our taxable income spillover, we currently estimate that we will carry forward $988 million, or $1.38 per share, available for distribution to stockholders in 2026. I will now turn the call over to Jim Miller to walk through our investment activities.

Jim Miller:
Thank you, Scott Lem. 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. We have always viewed ourselves as patient, long-term relative value investors, and we believe that perspective instructs our constructive and opportunistic approach during periods of market volatility. In these environments, capital availability generally decreases, lending terms may improve, and our partnership-oriented solution becomes increasingly pertinent and valuable to our borrowers. Beyond the decades-long positioning of our platform around these principles, there is compelling empirical evidence supporting the resiliency and opportunity within the private credit sector, which we believe remains underappreciated in parts of today’s broader market narrative. Our own Ares Quantitative Research team recently examined twenty-five years of aggregated private credit data to evaluate the association between managers' ability to invest during periods of market-wide volatility and the subsequent levels of returns. In short, this study found that U.S. private credit managers that invested more actively during periods of elevated volatility generated, on average, more than 10% higher levels of annual returns than those managers that were not as active during the same volatile market conditions. While this analysis does not address manager-specific outcomes, current market conditions reinforce the importance of manager selection in this environment and further underpin our strategy of maintaining plenty of flexible capital to invest during these periods. In the first quarter, our team originated over $3.2 billion in new investment commitments, with 70% of transactions coming from existing borrowers. As transaction volume slowed in the second half of the quarter, our strong relationships allowed us to selectively invest in top-performing existing portfolio companies. These opportunities focus on achieving attractive, risk-adjusted returns and reinforced our ability to support our best borrowers and sponsors, particularly during periods of volatility. Our first quarter originations reflected meaningful sector diversification across 22 different industries and 57 sub-industries. As Kort Schnabel noted earlier, the shift in supply-demand dynamics across direct lending is beginning to translate into more favorable pricing and terms. We are beginning to see this come through our new originations, as spreads on first-lien originations in the first quarter increased by approximately 20 basis points quarter over quarter, while leverage levels declined by nearly half a turn of EBITDA. We ended the quarter with a portfolio of $29.5 billion at fair value, which was stable quarter over quarter as new fundings were offset by fair value changes and repayments. Repayments during the quarter, excluding sales to Ivy Hill, totaled approximately 7% of the portfolio at cost and continue to serve as a source of natural liquidity that we can deploy into today's market. As part of this repayment activity, we exited four equity co-investments, which were the primary drivers of our $114 million of net realized gains in excess of losses in this quarter. As a reminder, since inception, Ares Capital has generated more than $1 billion in net realized gains in excess of realized losses across more than $70 billion of exited investments over the last twenty-one years. These latest four exits generated a mid-teens weighted average realized IRR. Importantly, over the last ten years, our equity co-investment portfolio generated an average gross IRR well in excess of the double-digit total return of the S&P 500 Index. As we have discussed previously, these minority equity investments are made selectively, generally alongside loans we originate and underwrite ourselves, allowing us to participate in the equity where we see particularly strong upside cases. Another important component of our repayments this quarter was the collection of PIK income. In the first quarter, our PIK income, net of collections, represented approximately 7% of total interest and dividend income, which is below our historical five-year average. As we have discussed previously, we have selectively used PIK over our history and have been transparent in our PIK reporting, including explicitly disclosing PIK collections in the statement of cash flows. From a portfolio composition standpoint, approximately 90% of our PIK income is structured at origination and is associated with larger, well-performing companies, not reactive amendments. As with all investments, PIK investments are underwritten with the same discipline as cash-pay loans, with a strong focus on structure, leverage, and exit protections. Importantly, over our twenty-one year history, and across more than 190 realized PIK investments, we have generated a return measured by a multiple of our invested capital, or MOIC, of 1.4x. This MOIC is a modest premium to the 1.3x MOIC on all of our exited investments since our inception in 2004. We believe that this demonstrates the selective use of PIK does not create unnecessary levels of risk in our portfolio or correlate to future losses. On the contrary, it has supported our strong returns over the past twenty-one years for our shareholders. Repayments also offer us an opportunity to assess our valuation process over time. We believe the scale we have built in portfolio management is a meaningful competitive advantage. The merits of our large team and time-tested process are reflected in our realized outcomes at exit. Specifically, when comparing realized investments exited over the past two years to their respective fair values one year prior to exit, we found that 99% of fully paid-off U.S. debt investments were realized at valuations in line with or better than their valuations one year prior. We believe these observations underscore the rigor of our valuation process. Turning now to further details on borrower health. The financial position of our portfolio companies remains solid, with interest coverage stable sequentially and improving year over year, and leverage levels broadly stable. Our investments remain well protected by substantial equity cushion beneath us, with an aggregate loan-to-value ratio in the portfolio in the mid-40% range. Supported by these underlying portfolio trends, the credit performance of our portfolio remains solid. Our nonaccruals at cost ended the quarter at 2.1%, a 30 basis point increase from the prior quarter, but still well below our approximately 3% historical average since the Global Financial Crisis and the BDC historical average of approximately 4% over the same timeframe. Our nonaccrual rate at fair value also remained low at 1.2% of the portfolio, stable quarter over quarter and well below our historical levels. Our overall risk ratings remain stable, and the share of our portfolio companies in our higher-risk categories, Grades 1 and 2, remains below our five-year average and notably lower than our portfolio companies in Grade 4, which are outperforming companies. With this backdrop of our portfolio continuing to perform well, we would note that, as we have said several times in the past, we would not be surprised to see credit quality and nonaccruals across the industry revert closer to historical norms from what has been a period of unusually low levels in the industry, particularly given slower economic growth, repercussions from geopolitical issues, and supply chain disruptions. We are already seeing higher levels of manager dispersion, and we believe this trend will continue. Shifting to the second quarter, as Kort Schnabel noted earlier, market activity has remained slow as participants continue to work through price discovery. Through 04/23/2026, total commitments were approximately $200 million. Our backlog was approximately $1.8 billion as of the same date, and our activity levels, as measured by discussions, have increased in recent weeks. Additionally, our current backlog reflects a 35 basis point increase in spreads and a 40 basis point increase in fees as compared to the first quarter for first-lien loans. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close, or we may sell a portion of these investments post-closing. While we are beginning to see deal flow pick up, we expect this slower start to affect both originations and exits in the second quarter. In summary, we believe ARCC is navigating this period of market transition from a position of strength. The current environment is reinforcing the advantages of scale, balance sheet strength, capital availability, underwriting discipline, and portfolio management. Supported by a well-performing diversified portfolio and significant liquidity at ARCC and across the broader Ares platform, we believe we are well positioned to thrive in this market and continue generating attractive dividends for our shareholders. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter. We will now open the call for questions. Operator, please open the line.

Operator:
Certainly. Thank you, Mr. Miller. The Investor Relations team will be available to address any further questions at the conclusion of today's call. We will go first to Analyst with JPMorgan.

Analyst:
Hey, guys. Thanks for taking my questions this morning. Look, it is obviously an interesting time. You have talked about the widening of spreads, and you have talked about better origination fees. I am curious, when we look at some of the other elements of transaction structure, particularly things like covenants and control provisions, if the market is readjusting as well. I think that when we sort of hear what has happened over the last couple of years, that has been one area of concern, and I am curious if that is normalizing also.

Kort Schnabel:
Yes. Thanks for the question. I can jump in on that one, and if anyone else on the team wants to chime in. I would say yes, those other non-economic terms and documentation provisions are moving more positively in our direction as well as the economic points of fees and spread, as I mentioned in the prepared remarks. Whether it is getting a financial covenant on companies that might have been previously on the margin of getting one, I would say that is tipping in our direction. I do not want to overstate it. Obviously, high-quality borrowers are still able to access deals from the private credit market covenant-light, but at the margin, it is moving in our direction, as well as collateral protection terms and other documentation terms that a lot of people have been talking about certainly of late. So yes, it feels like certainly a better time. Obviously, our market moves a little bit more slowly, so we will continue to watch and see how things change from here.

Analyst:
Great. If I can just ask one quick follow-up to that. So I think what I am hearing from you is in terms of all of deal structure mean reversion. It is not like we have swung from a wildly bullish market to a wildly bearish market in terms of wider spreads and so on. And given all of the noise and drama we had during the first quarter, is this just a reflection of the continued supply of capital from both the public and private BDCs sort of insulating those moves?

Kort Schnabel:
I think it is probably a little bit of two things. I think it is, one, supply of capital and the changes that we are seeing in the flows in the retail and wealth channel. But I think it is probably also just part of what Jim Miller said in his prepared remarks, which is that I think people do recognize that the risks out there are a little bit higher now, with the geopolitical developments and slowing economic growth, and that probably is also influencing people's behavior when it comes to pricing new deals. So I think it is a little bit of both of those things. But in terms of your comments around reverting to the mean, I think that is correct. I do not think we are saying we are in an environment today where spreads are blown out super wide. Obviously, we got to a very tight place last year. It is good to see them widening, but like we said, 50 to 75 basis points of kind of total yield improvement between spread and fees does not indicate a blowing out of spreads.

Analyst:
Got it. Thank you, guys. I really appreciate you taking my questions this morning.

Kort Schnabel:
Sure. Thanks.

Operator:
Thank you. We will go next now to Finian O'Shea with Wells Fargo Securities.

Finian O'Shea:
Hey, everyone. Good morning. Following up on that topic, and Jim Miller, you talked about the benefits of investing in volatility. This sort of activity on the runway does sound like the higher-quality kind of deal that would reprice down when the retail vehicles, say, eventually recover, and that could pressure NOI more. So as you approach book and can raise capital, how aggressive do you want to be in terms of growing into this environment? Thanks.

Kort Schnabel:
Thanks, Finian O'Shea. I will start by saying that I do not think we are in need of growing the capital base right now with the $6 billion liquidity position that we have. We also do our best, when we are in a market like this, to get call protection on deals so that we can lock in terms when the market is favorable for us like it is today. Certainly, there is some period of time that will pass and you will end up in scenarios where repricings will come back to the market. I think we are seeing that pendulum actually swing both ways. We have opportunities right now to reprice many of the deals in our portfolio as they look for amendments or add-on acquisitions—things like that—and we are doing a lot of that right now. So that is sort of how the market works. It is not as rapid as in the public markets. In the private markets, you will see insulation from those repricings to a certain extent. It is not as rapid; you do not have as much activity, the volatility is not as high, and you just see a little bit more stability, and the bands on either side are tighter. And then, as it relates to raising capital, we will just evaluate that quarter to quarter, month to month as we see what is in the pipeline, the nature of the market at that point in time, and where the stock price is.

Finian O'Shea:
It is helpful. A follow-up, Scott Lem, I appreciate your comment on the bank side of the funding arena. I think it is fair to say you are a desirable counterparty; you have also done your job in fighting those borrowing spreads down for yourselves. And we have seen banks sort of push back. I think there were a bunch of repricings upward in, say, 2022, 2023. Do you see any of that on the runway as your spreads widen? Will the banks, do you think, fight their spreads back up?

Scott Lem:
Thanks, Finian O'Shea. Yes, I do think that there is potential for that. We are not seeing it at the moment. As you saw during the quarter, we actually repriced some of our facilities down a little bit. So these things will ebb and flow. I think for us, if it does move, it is not going to be just for us; it would be for the whole sector. If that is happening, that should mean that we would be able to put pressure on the asset side too. So our ability to take increases on our liabilities should be commensurate with increases on the asset side. But it is too early to tell right now.

Operator:
We will go next now to Arren Cyganovich at Truist Securities.

Arren Cyganovich:
Thanks. The April-to-date trends were quite low. You highlighted that as borrowers are trying to adjust to the new spread and document environment. You mentioned that things have picked up in recent weeks. Should we expect kind of a similar slowdown that we saw last year due to the tariff stuff we saw in the second quarter? Or do you think that this could actually potentially pick up as you have had these conversations in recent weeks?

Kort Schnabel:
Yes. I will try to answer that one. It is obviously really hard to predict, and I probably do not want to venture a guess as to how we are going to see transaction activity evolve from here because it just has been very up and down. Obviously, you mentioned last year, kind of similar things—things really slowed down with the tariff noise and then the second half was extremely busy and we posted record volumes. It was really hard to see that coming when we were sitting here in April–May. I guess what I would say about the backlog, or the activity the last few weeks since the end of the quarter: obviously there is a little bit of a lag effect. So the stuff that we are committing to in the first few weeks of April has been sort of teed up and discussed through investment committee for weeks, if not months, prior to that leading up to it. So, a little bit of a lag effect. We are starting to see the comments we had in the prepared remarks—namely that we are starting to see a pickup just in terms of our cadence of deals that we are seeing come through investment committee, I would say, in the last three to four weeks. So we are at the front end of seeing that pickup. We did want to go out and make sure that people are aware we are seeing that. But whether it is sustained or not, I think it depends on a lot of different variables out there—maybe most notably just the geopolitical situation. I think if that can get resolved in a sustainable manner, then I think you could see things really pick back up meaningfully. But that is something that is just really hard to predict. So hopefully that helps a little bit.

Arren Cyganovich:
Yeah, no, absolutely. It is obviously something that is evolving rapidly. So I appreciate those comments. The other question I had was around the consulting that you hired, and I appreciate all the numbers. It kind of fits with what you have been saying to us publicly in terms of the higher-quality type of well-protected enterprise-type of companies—some small risk from AI, some, I guess, medium risk as you kind of pointed to that. I think the biggest question that people have, and this is going to take quite a while to unfold, is companies are doing well now; they are going to probably continue to do well in the near term. But at some point, they have to be refinanced, and the markets have down, I do not know, 40% or so. What are some of the options if you have a private equity firm that maybe bought a company at 21 times EBITDA and now they are trading at 13 and maybe do not want to exit those, and you probably do not want to hold on to those loans through the next cycle? So maybe you could just talk about the refinancing risk and some of the options that you will have to use whenever you get to that kind of point of refinance whenever that occurs.

Kort Schnabel:
Yes, sure. Obviously there is a fair amount to unpack on the software topic. I guess, just specifically to the refinancing risk: number one, there already is a market that exists currently, despite the fact that the deal flow is low. We are seeing deals get done in the software space. There have been a couple in the last month or two where the market has been able to finance these transactions. They are for higher-quality borrowers without AI risk. They are coming in at, obviously, a little bit wider spreads, but they are getting done. We actually had one company in our portfolio that we did not think was particularly risky, but sort of on the straddle of low to medium category, and we decided to not extend maturity, and the lender group took us out of that name. So just as one case study of our ability to exit when there is a maturity, if we are not willing to provide an extension. Again, there are so many names in the book it is hard to go granular on a call like this, but I would just remind everyone that our loan-to-values on our software book as a whole still are very healthy and low relative to the broader book. We took a lot of markdowns on the equity values on our software names in our portfolios, and the LTV in our software debt book still stands in the low 40%s, below the LTV of the total book. The EBITDA growth rate of our software companies remains consistent with the growth rate of the rest of the book at 9% year over year. And I would also say, we can spend more time if people want to on the consultant study and the different categories and risk ratings—we obviously have a lot of detail there—but we did actually make an effort to unpack and do a maturity waterfall on the entire software book and compare the maturities in the lower-risk category versus the higher- and medium-risk category. The maturity profile actually for the higher- and medium-risk names is materially shorter—it is 2.4 years versus 3.9 years on the total book. The low-risk names are about 4.2 years. So, when it comes to trying to mitigate technology risk, obviously shorter maturities are better. And to the final specific point of your question, when we get to the point of the maturity and if we are not willing to give an extension, then we are going to have a conversation with the owner of that business. If it is a financial sponsor, then in most cases we are probably going to request that a capital injection is made in order to pay down our debt and derisk us to get a maturity extension. Obviously, it is a case-by-case basis; it is hard to generalize. But we are not unfamiliar with having some difficult conversations with sponsors about underperforming names. We have done it over a long period of time and feel confident we will be able to do that again now.

Arren Cyganovich:
Thanks. I appreciate it. I know it is a tough question.

Operator:
Thank you. We will go next now to John Hecht with Jefferies.

John Hecht:
Maybe a little bit of a tack-on to the prior question. I really appreciate all the context you gave us around your software portfolio and understand you had a highly regarded third-party management consulting firm evaluate your exposures. I am wondering, are you able to give us any, call it, sensitivity analysis around impacts or disruptions to revenue as revenue models shift within the portfolio? And what that did to, call it, leverage calculations during that exercise.

Kort Schnabel:
I am sorry. So, you are asking about how are the revenue trends changing within the different categories?

John Hecht:
When you analyzed sensitivity or exposure to AI disruption, did that include an assessment of potential revenue model shifts for the software companies? And if so, can you give us any, call it, materiality of the revenue shift as the industry changes?

Kort Schnabel:
Sure. Yes, I think I get it. Why do I not just give a little bit of color around the definition of these three categories? I was anticipating people might want to go into this because I think it will help with your question. The first thing I would say is we are not seeing any significant deterioration in the performance of these companies, regardless of whether they are in the low or the medium risk. I should say, in the high-risk category—again, it is only 0.3% of the entire portfolio at fair value, and it actually is only three names in that high-risk category—one of them is Pluralsight, which people know is not performing well. So within that high-risk category, there are performance issues. But in the medium-risk and low-risk categories, this portfolio as a whole continues to perform very, very strongly. So to the prior question, nothing is happening yet in the numbers; it is all about the look-forward into the future that everybody wants to talk about and is focused on. So maybe just on the definitions of these categories: the low-risk names are companies that were identified by the consultants and us, by the way—they validated the work that we have been doing ourselves rating these names for the past six months—as companies that have lots of layers of mitigants to AI risk. We have talked about this before: whether it is system-of-record positioning, proprietary data, regulated end markets, network-based business models—all these things that insulate a company from being disrupted. That low-risk category—these companies have lots and lots of those mitigants, and what I would just kind of say is they do not have to do a lot to prevent disruption, and they actually will likely benefit from AI. The 85% of the companies that are in that low-risk category in our software book are much more poised to benefit from AI than to be disrupted. The medium-risk category, which is 14% of the software portfolio, or 3% of the total portfolio—what I would say about this category is there are still mitigants that exist—some of those mitigants I mentioned before—just fewer than in the low-risk category. And these companies need to execute on their own AI strategy and keep evolving their products in order to stay competitive. So to your point, I do not know if it is a revenue model change; it is just making sure that they are evolving their product suite to incorporate AI so that they can stay competitive and ahead of the curve. That is how I would categorize those names. And really importantly, in this medium-risk category, we are not saying, nor is the consultant saying, there is going to be disruption. In fact, the study specifically states that many of these companies are well positioned to adapt within the time necessary to adapt. But it is just that there are fewer mitigants than the companies in the low-risk category. In the high-risk category, the definition there is these companies really need to transform their business model in order to survive the disruption risk. I do not know if that helps with your question, John Hecht, or not. But hopefully that color helps provide some more insight into the study.

John Hecht:
That helps a lot. I really appreciate that. My second question is, you talked about the deal environment—it has temporarily been impacted by all the global stuff—but maybe you are seeing some early indications of a renormalization. We have been waiting for a long time for this wave of private equity portfolio maturities and how there is a lot of pressure to liquidate and return capital to LPs. I am wondering, assuming this geopolitical stuff stabilizes, is there anything obstructing that wave of potential activity beyond this? And do you guys have an opinion about when and if that wave might occur? It feels like all the ingredients are still in place if you take out the volatility that is going on in the world and the market right now.

Kort Schnabel:
The pressures on the private equity firms to return capital are only increasing. The hold periods are lengthening. Again, even though economic growth overall is slowing a little bit, in the sectors that we invest in, growth is still really strong. So I really do not see any other barriers that would prevent us from being able to get back to a really active deal environment. Obviously, noise around software is likely to hamstring volumes within that sector specifically. But other than that, I do not really see any other barriers.

Jim Miller:
Maybe I will add, Kort Schnabel. There is a fair amount of healthy discussion and dialogue in the sectors and areas that are unaffected—be they geopolitical or software—so I think there is an optimism around deal flow. It is not optimal for a private equity firm to bring their company to market in the midst of the most intense moments. But there is a lot of interest in migrating towards companies and getting invested in companies that are sheltered from some of those issues, and I think there is a lot of optimism there. So I think those will lead the way, probably, and then you will see a more active broader market. If history repeats itself, that is what we should expect to see over the next few quarters.

John Hecht:
Wonderful. Thank you guys very much.

Kort Schnabel:
Sure thing.

Operator:
Thank you. We will go next now to Paul Johnson with KBW.

Paul Johnson:
Yes. Thanks. Good afternoon. Thanks for taking my questions. Credit is still relatively strong today, but I was wondering, in relation to just the NAV decline this quarter, how much of that would you say is kind of just the broader mark-to-market with spreads this quarter versus credit-specific write-downs?

Scott Lem:
Yes, happy to take that. More than two-thirds of the marks we have had—around 70%—are mark-to-market related rather than credit related. So the significant majority of it is from mark-to-market.

Paul Johnson:
Got it. Appreciate that. And then you guys have done—I mean, you have clearly done some extensive analysis on the book. You have provided a lot of transparency on top of that. But I was wondering if I could just ask kind of higher level on marks more specifically on software investments: how do the discount rates move quarter to quarter? And is the assumption that the fundamentals of these companies—because it sounds like a lot of them still have very strong performance—is fundamental performance just strong enough to offset any sort of spread widening that we would have seen in the quarter? Or is it just more of a lag effect that we might expect to see throughout the year if spreads continue to widen out?

Jim Miller:
Yes. Look, I think everyone would like to try and create a generalization around how to approach the answer to that question, which is just not easy to do. It is probably a good moment in time just to express—and we had said some of it in our prepared remarks—that we have an extraordinarily extensive valuation process that has worked for a really long period of time, and it has proven out to be quite effective. It is really a bottoms-up, company-by-company analysis. And every company is distinctly different. To answer that question, you have to go look at that company. You have to look at the comparables that are very specific to that company. And that is even within software—there are so many categories that exist within software. So broadly speaking, you want to draw a parallel to the broadly syndicated market or to mark-to-market issues there, but it is not something we should do. We should just look at them one-off. So there is not a simple answer to that question. What I will say is there is clearly an impact on EV and it was more pronounced in software for the quarter. So the assumption is fair. But that EV does not just flow directly into mark-to-market on the loan. Once again, the private market—as Kort Schnabel said—is active and still active in software. And so there is some movement, but what we are looking at a lot in the analysis, which is bottoms-up again, is what the private market is doing for these companies and what the indications there are. And so that is a better—one of the more important variables, I should say—that goes into the equation.

Kort Schnabel:
Maybe I will just add one more bit of color to further illustrate what Jim Miller was talking about—that it is not so simple. Obviously, when spreads widen, that affects the value of the loans and marks should go down, but it is not that simple on a portfolio-wide basis because on each individual name, that might not occur. For instance, if we have a software company that has performed extremely well and delevered, such that the pricing and the spread on that loan is actually somewhat wide relative to the risk, we do not mark that loan above par—we mark it at par. And so when spreads then widen, that loan can stay at par because the performance indicates that the pricing is still appropriate for the risk. So that loan might not get a markdown even in the spread-widening environment, whereas another software name that is more levered might get a markdown in a spread-widening environment. So that is just one example of many of why you have to do it name by name; you cannot do it on a portfolio-wide basis. But obviously, we are paying very close attention to each one of these names. We have got third parties in here validating all of our marks. And as Jim Miller said, about 70% of the write-downs were mark-related.

Paul Johnson:
Got it. Appreciate that. Very helpful answer. Thanks, Kort Schnabel and Scott Lem there. My last question here was just in terms of Cornerstone software that was marked lower this quarter; Medallia—which you are not an investor, not a lender to—but Medallia getting restructured this quarter; Pluralsight—which you have a very small investment—also, that company is struggling a little bit. I was wondering if you could just kind of tell us broadly for these companies what exactly do you think it is that those companies are lacking in terms of the challenges that they are going through today? Is it lack of a critical system-of-record? That sort of thing? For these companies to be running into trouble today.

Kort Schnabel:
Yes, I appreciate the question. I really just think we always hesitate to dive into any individual name and really start getting into trends or performance results on individual names, so I do not think I am going to necessarily go there and get into that level of detail. On any portfolio, when you have 600-and-some names and 130 software names, you are going to have some names that are going to underperform. We thankfully only have a few of them. Pluralsight has been underperforming for a while; people understand what is going on there. Some of the other names you mentioned, performance is actually fine—more of just a mark-to-market issue based on how the market is viewing those kinds of credits. Not everything is what it seems. A lot of it is not really performance related. Other than that, I just think it is not appropriate to dive into individual name discussions.

Paul Johnson:
Okay. Fair enough. Thank you very much.

Operator:
Thank you. We will go next now to Brian McKenna with Citizens.

Brian McKenna:
Great, thanks. So one more follow-up on your software exposure. How much of the roughly $1 billion of the more at-risk software investments are sponsor-backed? Then you also have the largest portfolio management platform in the industry, so I am curious how you can leverage that entire team to get out ahead of any potential AI risk and really how you and that team ultimately drive better outcomes within this part of the portfolio.

Kort Schnabel:
Sure. So again, in that high-risk category, all the names are sponsor-backed actually. There are only three names. We will go back and check, but I believe all three are sponsor-backed. In terms of our portfolio management and our playbook, I am glad you raised it. It is something that we think is differentiating for our platform. It is something we try to highlight a lot. We have an over 50-person portfolio management and restructuring team. We have operated over twenty-one years here through lots of different cycles, including the GFC. We are not afraid to have tough conversations with the owners of businesses. As I already mentioned once on this call before, the first thing we look for is if there is a liquidity problem, the owner of the business has to put in capital to support the liquidity problem. And if the owner of the business is not willing to do that, then we are not afraid to restructure and own the company ourselves. That is never what we want to do; it is never the plan. But we have the expertise and the team in place to own these companies, to be patient with them, to provide additional capital, and to come out the other side. Over our history, we have generated an enormous amount of gains by doing that. Just this year, we posted a big gain on a portfolio company that was a mezzanine investment that we restructured and owned for ten years and posted the gain on it. So there are lots of examples like that over the course of time. It might be harder work and might take more involvement, but we absolutely have the expertise in place to do that.

Brian McKenna:
Okay, great. That is helpful. And then if you were to mark to market the portfolio today to reflect quarter-to-date trends, how much of the first-quarter markdowns would be reversed?

Jim Miller:
I am not sure we are in a position to answer that one at this point in time. I think that requires a whole valuation mark process—it is extremely extensive, as you can imagine. So that would be a difficult one to address as a one-off.

Kort Schnabel:
Yes. Our market does not move as fast as the liquid market does either, so really tricky to say.

Brian McKenna:
Yep. Thought I would give it a try. Thanks.

Operator:
Thank you. We will go next now to Kenneth Lee with RBC Capital Markets.

Kenneth Lee:
Hey, good afternoon, and thanks for taking my question. Just another one on the software loan side. It sounds like the private markets are still originating software loans. But for Ares in particular, I wonder if you could talk a little bit more about some of the more recently originated software loans. What sorts of economics and terms are you seeing? And also, roughly, what are the average LTVs that you are underwriting at? Thanks.

Jim Miller:
Yes, sure. I appreciate the question. There really have not been a lot. There are just a handful or less in the last few months of deals. Some of them were existing portfolio companies of ours where the sponsor may be looking for a little bit of incremental capital to do a tuck-in acquisition. There have not been any that have come across our transom here that are larger, kind of bellwether-type software names where we can really point to and say, “Here is where the market is.” Smaller deals get priced sometimes a little bit more indiscriminately if we have another lender who might just really want to own that name and can clear the deal. So I think it is a really hard question to answer. I guess I would probably say, the deals that we have seen clear—the spread and fee increase on those transactions—is a little bit wider than the 50 to 75 basis point average that we put out in our prepared remarks. These are higher-quality companies. It is not like if a software company has some kind of material question around AI risk, that type of company is out raising capital right now. So these are the higher-quality companies, and it is a little bit wider than the average is probably what I would say.

Kenneth Lee:
Got you. Very helpful there. And then one follow-up, if I may. Once again, just on the software side, broadly across the portfolio there, how do you think about potential downside protection for software investments there—especially protection that could potentially put a floor on recoveries? I am thinking about, for example, intangible assets, any sorts of IP. If you could just give us a little bit more color on that. Thanks.

Jim Miller:
Yes. Look, again, first of all, we are cash flow lenders at our core and always have been. Our underwriting theses are most of the time underpinned by a very high degree of recurring revenues and predictable cash flow conversion through lots of different cycles, as it pertains to software and technological cycles. As we think about downside protection here, I think we will just keep coming back to the fact that the vast majority of our companies—as we have been saying and as third parties have validated—have very high barriers that insulate them from technology and obsolescence risk. The retention rates of the revenues in these companies continue to be very, very high. The cash flow conversion is strong. The EBITDA growth is strong. And the loan-to-value, again, on our software book for our debt investments is 41%, even today after the markdowns we took on the equity values. So we rely on the significant amount of enterprise value cushion and the strategic value of these companies to lots of different acquirers—either strategic acquirers or private equity acquirers—for values that are well in excess of our debt if we needed to sell these companies to recover our principal. Maybe just one additional point. I do not know if this is what you were referencing, but we think we do a pretty good job with documentation. We obviously care a lot about the IP and protect it as part of our documentation. I think we do a better job in private markets than public markets do on that point.

Kenneth Lee:
Gotcha. No, that is very helpful. Thanks again.

Operator:
We will go next now to Sean-Paul Adams with B. Riley Securities.

Sean-Paul Adams:
Hi, good afternoon. While nonaccruals are still relatively within low levels, it seems like there were a couple of outsized markdowns totaling almost $100 million for the quarter—that was across just two names—that are not captured within the nonaccrual figure. I understand not wanting to delve into portfolio-specific names. However, if your headline nonaccrual exposure metrics are not capturing AI-based positions marked below $0.75 on the dollar, how are you trying to really express true exposure for mark-to-market risk in the next couple of quarters?

Kort Schnabel:
I was following you until the very end when the actual question came out there. I am not sure exactly the point of the question. I get it. The one thing I will say, and then maybe I will have you rephrase it, is obviously in volatile markets like we are in today, we see more dispersion of valuations and marks. We see what the broadly syndicated market is doing to a bunch of names in the software space, and so that is going to be reflected in our marks. We have to mark our portfolio based on where the comps and the market are saying these debt positions should be valued. That mark is independent of our analysis of whether the loan is covered by enterprise value and whether we deem the principal and interest collectible. And so there certainly could be, in a more volatile market, loan valuations that trend lower but where we still feel that the principal and interest are collectible because we are covered by enterprise value. My guess is that would apply to the names that you are citing—again, without getting into individual name discussions. I do not know if that was specifically where you were asking, but I want to make sure that point does come across clearly.

Sean-Paul Adams:
Right. And so to refine the question, if you are having a position with an exposure of $350 million at cost, and you are having a $50 million difference quarter over quarter—25% of the marks at debt—it is not calling out the full risk to that name.

Kort Schnabel:
It is valuing the loan at the level that the market today is pricing that loan at. So that is a fair value mark. It is reflected in our NAV, which—these markdowns this quarter—are why we saw NAV decline this quarter for the first time in a pretty long time here at Ares Capital. So it is reflected in the NAV and reflected in the marks. It is not reflected in the nonaccruals if we still deem we are covered by enterprise value. I think that is the point that you are making, and that is accurate. It will be reflected in the nonaccruals when we beli