Earnings Call Transcript - ARCC Q3 2025

Operator, Operator

Good afternoon, everyone. Welcome to Ares Capital Corporation's Third Quarter Earnings Conference Call for the period ending September 30, 2025. This conference is being recorded on Tuesday, October 28, 2025. I will now turn the call over to Mr. John Stilmar, a partner on Ares Public Markets Investor Relations team. Please go ahead, sir.

John Stilmar, Investor Relations Partner

Great. Thank you, and good afternoon, everyone. Let me start with some important reminders. Comments made during the course of this conference call and webcast and 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 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, 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 on this conference call and the accompanying slide presentation, including information relating to portfolio companies, was derived from third-party sources and has not been independently verified. And accordingly, the company makes no representation or warranties with respect to this information. The company's third quarter ended September 30, 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Third Quarter 2025 Earnings Presentation link of the homepage of the Investor Resources section of our web page. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I will now turn the call over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort?

Kort Schnabel, CEO

Thanks, John, and hello, everyone, and thanks for joining our earnings call today. I'm joined by Jim Miller, our President; Jana Markowicz, 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. I'd like to start by highlighting our third quarter results, and we'll follow that with some thoughts on current market conditions and our positioning. This morning, we reported strong third quarter results with stable core earnings of $0.50 per share, exceeding our regular quarterly dividend and generating an annualized return on equity of 10%. GAAP earnings of $0.57 per share increased almost 10% sequentially and included robust net realized gains from the exit of a previously restructured portfolio company as well as several equity co-investments. These outcomes led to another quarter of NAV growth, marking the ninth NAV increase in the past 10 quarters and underscoring our position as one of the few BDCs with consistent and growing dividends and cumulative NAV per share growth over the last 10 years. Let me start with our views on the market environment and how we are positioned. New issue transaction volumes are returning to a more normalized pace, driven by greater clarity on tariffs and the direction of short-term interest rates and narrowing bid-ask spreads on buyouts. With this healthier market backdrop, we saw a noticeable acceleration in the volume of transactions under review, both sequentially and compared to the prior year, with more deals reviewed in September than in any month this year. We also received an increase in requests from advisers who are running sale processes and looking for our indicative terms and pricing. Amid a firming market for M&A and Ares's leading presence in U.S. and global direct lending, we reviewed more than $875 billion in estimated transactions over the last 12 months, which was a record for us and supports our view that the market continues to expand. As a reminder, we view our origination scale, which enables us to be highly selective as a critical driver of our long-term credit performance. The breadth of our origination platform provides the opportunity to pass on transactions when we cannot find acceptable documentation, terms or pricing. Our scale and sector specialization enhances our market knowledge and underwriting capabilities while also providing us a real-time view of relative value in the market. These factors contributed to net deployment for ARCC of $1.3 billion in the third quarter, more than double the prior quarter, while remaining highly selective on the transactions we pursued. Our focus on investing in the highest quality credits continues to support strong fundamental credit metrics. The last 12 months organic EBITDA growth for our portfolio companies remains in the low double digits, which is well in excess of market growth rates. Our interest coverage increased further to over 2x and weighted average loan to values continue to be in the low 40% range. Our strong credit quality is also evidenced by our declining nonaccruals on a quarter-over-quarter basis, along with net realized and unrealized gains and growth in NAV per share for the third quarter. We also take comfort in our portfolio's focus on domestic service-oriented businesses, which mitigates risks associated with tariffs, shifts in government spending and other recent policy changes. Our third quarter net realized gains reinforced our long-term track record of generating over $1 billion of net realized gains in excess of realized losses since our inception over 2 decades ago. Our differentiated results stem from our extensive origination capabilities, allowing for selectivity and strong underwriting as well as our large and experienced portfolio management team, which focuses not just on minimizing losses, but also on maximizing returns when situations don't go as planned. We also benefit from our deliberate equity co-investment strategy that has generated attractive returns over time. Our third quarter results illustrate the value we provide to our shareholders from realized equity gains. Most notably, we recognized a $262 million realized gain on the sale of Potomac Energy Center, a previously underperforming investment that was on nonaccrual in the past and was then restructured and ultimately owned by ARCC. With the restructuring of Potomac's balance sheet, the incremental capital we invested, our proactive management of the company and patience, we were able to achieve an IRR of approximately 15% on our investment rather than incurring a loss. We also generated net realized gains from the exit of 3 equity co-investments, generating over $30 million in realized proceeds and representing a 2.5x multiple on our original invested capital and an average gross IRR in excess of 30%. This supports our track record of generating an average gross IRR on our equity co-investment portfolio that was more than double the S&P 500 total return over the last 10 years. Collectively, our net realized gain performance, both this quarter and cumulatively underscores the strength of our investment strategy and deep portfolio management capabilities that drive differentiated results for our investors. As I noted earlier, we believe our portfolio remains healthy and demonstrates solid underlying credit trends. With respect to risks recently in the headlines, we have no exposure to First Brands or Tricolor nor do we have any exposure to non-prime consumer finance firms like Tricolor. Following the recent events at First Brands, we have been asked about whether our portfolio companies use receivables financing and if such financing poses any hidden risks for us. We do not believe there are hidden risks in our portfolio from the small number of portfolio companies that may use receivables financing. Additionally, as part of a normal ordinary course business practice, our team thoroughly diligences any receivables financing arrangement, along with vetting the broader capital structure of the business during the underwriting process. If such financing remains in place post close, it is typically subject to strict parameters and is monitored during the life of our investment. These structural safeguards are a core part of our documentation standards and in our view, represent one of the strengths in our documentation, especially in comparison to the broadly syndicated market. Like First Brands and Tricolor, another topic that has been in the headlines recently is software and the potential risks posed by AI. Let me make a few comments on how we have carefully constructed our software portfolio over 2 decades of investing in this sector and why we believe AI is much more of an opportunity than a risk for our software borrowers. As a starting point, our software loans are financed at what we believe are conservative leverage levels with an average loan-to-value ratio of only 36% and none of our software loans are currently on nonaccrual. Our focus is on financing large, market-leading and well-capitalized software companies with strong growth prospects. As an example, our software portfolio companies have a weighted average EBITDA of over $350 million, and they continue to demonstrate strong double-digit EBITDA growth over the last 12 months. Our borrowers are generally backed by leading sponsors in the software industry who not only have substantial capital resources but are also proactively investing in their platforms to embrace the changes and potential prompted by AI. While we believe AI excels at analyzing data and generating high-quality content, it typically does not provide the foundational infrastructure required for critical business operations or systems of record. These functions still rely heavily on traditional software systems that can securely store data and facilitate complex transactions. We have, therefore, historically focused almost entirely on financing software companies that operate B2B platforms and typically serve highly regulated industries, leverage proprietary data or deliver repeatable, consistent results core to business operations. Importantly, these companies are deeply embedded within customer operations and also benefit from high switching costs given the risk of business disruption from moving to alternative vendors, which, in our view, provides additional layers of durability and resilience against potential AI disruption. While we believe AI poses minimal risk to our software loans, advancements in AI remain an important component to future value creation for these businesses. For example, insights generated by AI can enhance these foundational systems by improving analytics, user experience and operational efficiencies while serving as a valuable complement and not typically a replacement for mission-critical software. Importantly, these views reflect Ares's ongoing collaboration among our highly experienced software investment team, our in-house software analysts and Ares' in-house AI experts at BootstrapLabs, a leading AI-focused venture capital investment team that joined the Ares platform a few years ago. We leverage our entire platform to drive credit decisions on each software transaction we consider as well as in our quarterly valuation and risk assessment processes led by our portfolio management team. Now before turning the call over to Scott, let me address our outlook on our future earnings potential and dividend levels in light of market expectations for further declines in short-term interest rates. We believe there are distinct competitive and financial factors that position ARCC to maintain its current dividend level for the foreseeable future despite the potential headwinds to earnings posed by lower short-term interest rates. As a starting point, in the third quarter of 2025, our core earnings continued to exceed our dividend. Second, during the last period of rising short-term interest rates in 2022 to '23, we intentionally set our dividend at a level equivalent to a 9% to 10% ROE, which is a level we have historically achieved through different interest rate cycles over the last 20 years. We set the dividend at this level because we believe we can sustain this level of profitability through market cycles. The third point worth highlighting on this topic is what we view as our unique financial position with multiple levers to expand earnings or offset headwinds solely from falling market rates. Notably, our balance sheet leverage remains around 1x, which is well below the upper end of our target range of 1.25x, giving us ample flexibility to drive higher earnings by supporting prudent growth using our efficient sources of capital. We also believe there is growth potential to capitalize on higher-yielding opportunities within our 30% nonqualifying asset basket, including through strategic investments like Ivy Hill and SDLP. Additionally, given the prospects for a more active environment alongside our origination scale, we believe there is potential for increased velocity of capital, which could drive additional capital structuring fees to further support our earnings. Lastly, the historical strength of our earnings and credit performance has provided us with $1.26 per share in spillover income, which is equivalent to more than 2 quarters of our current dividends. We believe this level of spillover income gives further visibility to our investors since it provides a cushion to support our quarterly dividends in the event of temporary shortfalls in our quarterly earnings. In summary, we had a strong quarter with healthy credit performance and financial results that demonstrate our enduring competitive advantages. And with that, I'll turn the call over to Scott to walk us through our financial results and the continued progress we're making on our strong balance sheet.

Scott Lem, CFO

Thanks, Kort. This morning, we reported GAAP net income per share of $0.57 for the third quarter of 2025 compared to $0.52 in the prior quarter and $0.62 in the third quarter of 2024. We also reported core earnings per share of $0.50 compared to $0.50 in the prior quarter and $0.58 for the same period a year ago. This is the 20th consecutive quarter of our core earnings exceeding our regular dividend, demonstrating our ability to consistently cover our dividends. Drilling a bit more into the net realized gains that Kort highlighted earlier, we generated $247 million of net realized gains on investments during the third quarter, which represents our second highest net realized gain quarter since our inception and brings our cumulative net realized gains on investments since inception to approximately $1.1 billion. Similar to last quarter, we incurred capital gains taxes related to certain of the net realized gains, which amounted to $72 million in the third quarter. While we do not typically pay taxes on the annual income we generate, we occasionally incur taxes on certain gross realized gains. Even net of these taxes, our net realized gains on investments remained a healthy $175 million for the third quarter. Turning to the balance sheet. Our total portfolio at fair value at the end of the quarter was $28.7 billion, which increased from $27.9 billion at the end of the second quarter and $25.9 billion a year ago. Shifting to our funding and capital position. We have remained active in adding capacity, extending our debt maturities and reducing costs in our committed facilities. In July, we added nearly $500 million of additional capacity across our credit facilities. We also reduced the drawn spreads on 2 of our credit facilities by 20 basis points each to 180 basis points over SOFR and extended the maturities on both to July 2030. We continue to benefit from our long-standing banking relationships, which are supported by our scale as well as our long-term track record through cycles. The significant diversification of our overall portfolio also has direct benefits for our credit facilities, enhancing the attractiveness of the collateral pool that supports the facilities. For context, our asset-based bank credit facility advance rates are generally similar to the AA-rated tranche of a typical middle market CLO. It is important to highlight that a AA middle market CLO tranche has never defaulted. With this low level of risk, the current bank capital framework supports a return on capital for our banks that is significantly more attractive than if the banks held the individual loans directly on their own balance sheets. Beyond the systemic benefits that this type of lending provides, the banking system as a whole, the strength of our relationships and economics that we can provide to our banks further strengthens our ability to be an investor through all cycles. In addition to our continued engagement with our banking partners, we also further expanded our nonbank capital sources in September by issuing $650 million of unsecured notes priced at 5.1% and maturing in January 2031. These notes were issued at a spread inside of our previous notes issuance in June. Consistent with our recent offerings, we swapped this issuance to floating rate, therefore, positioning our funding costs to decrease with expected declines in SOFR. As a reminder, ARCC remains the highest rated BDC across the 3 major rating agencies. In addition to the strategic advantages embedded in our funding, our overall liquidity position remains strong, totaling $6.2 billion, including available cash. In terms of our leverage, we ended the first quarter with a debt-to-equity ratio net of available cash of 1.02x. We believe our significant amount of dry powder positions us well to actively support both our existing and new portfolio companies. Finally, our fourth quarter 2025 dividend of $0.48 per share is payable on December 30 to stockholders of record on December 15. ARCC has been paying stable or increasing regular quarterly dividends for 65 consecutive quarters. In terms of our taxable income spillover, we finalized our 2024 tax returns and determined that we carried forward $878 million or $1.26 per share available for distribution to stockholders in 2025. As Kort stated, we believe our meaningful taxable income spillover provides further support for the long-term stability of our dividends and continues to be one of our significant differentiators. I will now turn the call over to Jim to walk through our investment activities.

James Miller, President

Thank you, Scott. I will now provide some additional details on our investment activity, our portfolio performance and our positioning. In the third quarter, our team originated over $3.9 billion in new investment commitments, an increase of more than 50% from the previous quarter. About half of our originations supported M&A-driven transactions such as LBOs and add-on acquisitions, which highlights our ability to benefit from the early signs of a more active and M&A-driven market environment. Further reflecting this broader trend of growing M&A, approximately 60% of our third quarter originations were with new borrowers, a shift from the past few quarters where the majority of our originations were from incumbent borrowers. We believe the shift reflected an influx of high-quality companies coming to market in the early part of a potential M&A cycle. Our origination activity continues to underscore our broad market coverage. About 1/4 of our new investments were made in companies with EBITDA below $50 million, which highlights our strong presence in the core middle market and lower middle market as well as the more visible upper middle market. On the upper end of the market, we led the $5.5 billion financing for the take-private transaction of Dun & Bradstreet, the largest private credit LBO recorded to date. This well-established, high-quality company with strong recurring cash flows chose Ares to lead their financing as an alternative to the syndicated markets due to our flexibility and execution certainty. Alongside this increased activity, our credit spreads remained stable. Our new first lien commitments in the third quarter were completed at spreads that were consistent with the prior quarter and actually 20 basis points higher than the prior 12-month average. We achieved these pricing results with attractive risk profiles as well as the spread per unit of leverage on first lien loans completed in the third quarter was the highest in more than a year. Our broad origination team and flexible approach continue to drive our ability to source opportunities with differentiated yield profiles, including the selective use of PIK preferred investments. In the third quarter, we generated an IRR in excess of 20% on the exit of 3 preferred PIK investments. These PIK preferred securities are invested in large established companies with an average EBITDA of roughly $480 million. Our PIK preferred investments have a low double-digit fixed rate yield and implied loan-to-value ratios in the 50% to 60% range. On average, we value these investments at 98% of cost at the end of the third quarter. Reflecting a more active market environment, we experienced increased repayments through change of control transactions, including from investments that were accruing PIK income. As a result, and as disclosed in our cash flow statement, these full repayments generated PIK collections that were actually greater than the aggregate amount of PIK income we accrued for the third quarter. Shifting to our portfolio. Our $28.7 billion portfolio at fair value increased nearly 3% quarter-over-quarter and over 10% year-over-year, further underscoring the extent of our origination scale at ARCC, even during the slower transaction environment experienced in the market over the past year. Our portfolio continues to be highly diversified across 587 companies and 25 different industries. This means that a single investment accounts for just 0.2% of the portfolio on average and our largest investment in any single company, excluding our investments in SDLP and Ivy Hill is less than 2% of the portfolio. We believe our emphasis on portfolio diversification and industry selection reduces the frequency and impact of negative credit events on the company. As Kort mentioned, the credit quality of our portfolio continued to demonstrate strength and resilience in the quarter. Our nonaccruals at cost ended the quarter at 1.8%, down 20 basis points from the prior quarter. This remains well below our 2.8% historical average since the great financial crisis and the BDC industry historical average of 3.8% over the same time frame. Our nonaccrual rate at fair value also decreased by 20 basis points to 1%. Finally, on credit, our Grade 1 and 2 investments representing our lowest 2 rating buckets in the aggregate declined from 4.5% to 3.6% of the portfolio at fair value quarter-over-quarter and our portfolio companies' average leverage levels and interest coverage ratios both improved when compared to last quarter and the prior year. The health of our portfolio is also reflected in the profitability and growth profile of our borrowers. In the third quarter, the weighted average organic LTM EBITDA growth of our portfolio companies was again over 10%. Importantly, this EBITDA growth rate was more than double that of the broadly syndicated market based on a second-quarter analysis done by JPMorgan. Additionally, both our sponsored and nonsponsored companies are growing EBITDA at consistent rates. As a reminder, we believe our industry specialization has allowed us to further penetrate the nonsponsored market as well as service the sponsored market in a differentiated way. Further to my earlier point on our extensive market coverage and its role in attracting strong, high-performing companies within the middle market, we continue to see healthy growth across the lower core and upper middle market segments of our portfolio. Importantly, size is not a distinguishing factor of performance in our portfolio as companies with EBITDA of less than $25 million had EBITDA growth that was modestly higher than the rest of our portfolio. Looking ahead, we are seeing healthy transaction activity levels so far in the fourth quarter. Our total commitments for the fourth quarter to date through October 23, 2025 were $735 million, and our backlog reached a new record of $3 billion as of October 23, 2025. 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. In closing, our strong earnings this quarter are underpinned by many durable advantages that we believe continue to drive differentiated results for our investors. In today's environment, we remain focused on leveraging our origination scale to see as wide an opportunity set as possible, maintaining our rigorous credit standards, negotiating appropriate documentation and being highly selective around deal flow. We remain confident that sticking to our long-standing principles will support our ability to continue to capitalize on new opportunities and build on our track record of strong performance. We are proud that our declared fourth quarter dividend of $0.48 per share extends a record of over 16 straight years of stable or increasing regular dividends for our shareholders. As always, we appreciate you joining today, and we look forward to speaking with you in the future. With that, operator, please open the line for questions.

Operator, Operator

Additionally, the Investor Relations team will be available to address any further questions at the conclusion of today's call. With that, we'll go first this afternoon to Finian O'Shea with Wells Fargo.

Finian O'Shea, Analyst

Kort, I just want to hit on a couple of your inputs on dividend coverage. One, with the sort of traditional levers, more on-balance sheet leverage, more perhaps junior or alpha laden opportunities. Can you remind us if on an allocable capital framework, ARCC is different to have more of this stuff tilt toward it versus ACIF as the market opens up for this kind of opportunity? Or should the 2 vehicles continue to become essentially the same going forward?

Kort Schnabel, CEO

Yes. Thanks, Fin. Yes, both vehicles will get allocated any kind of deal based on the available capital math, and that is an allocation policy that we've had in place for a very long time and has not changed. Obviously, those types of transactions have been more muted of late, but I do think as we see overall transaction activity increase and in particular, changes in control activity and even potentially as rates do decline further, that hopefully will create more junior capital opportunities. We've seen that be a product of those kinds of trends in the past. And ARCC will certainly get its fair share of those transactions.

Finian O'Shea, Analyst

I appreciate that. Just to clarify, maybe I could have expressed it better. Is the overall math still the same regarding the percentage of allocation to the more junior equity, those above 700, or sports equity, and so on?

Scott Lem, CFO

Yes. I would also just say that ACIF has a different yield profile than ARCC. So that's also part of the decision-making in terms of the assets that may go into those funds as well.

Kort Schnabel, CEO

But yes, if you're talking about different types of assets, whether it's sports and media or infrastructure assets or any kind of assets, it's all based on mandate of the fund, of which ARCC obviously has an extremely diverse and flexible mandate and then available capital. And so that's how those deals get allocated. And ARCC, obviously, being our most flexible vehicle gets a sliver, gets a piece of almost everything we do.

Finian O'Shea, Analyst

I appreciate that. And if I could do one on the spillover component. Can you give us color on how big of an input that would be to support the base dividend? Would you run it all the way down before cutting the base dividend or halfway down? Is there sort of a target or threshold there as to how much support that would be? And that's all for me.

Kort Schnabel, CEO

Yes, Fin, first of all, we have a lot of confidence in our ability to cover the dividend in the foreseeable future. We are conducting various modeling scenarios, including anticipated base rate declines and potential further declines, along with other factors like liability costs. We feel very confident in this regard. I don't want to speculate on specific future scenarios that might not hold up. However, we discuss the spillover income because it offers additional stability to the dividend if needed, particularly if core earnings temporarily fall below the dividend level. This has rarely happened in our history, but the amount of spillover should provide reassurance to our shareholders. That said, I don't think it's productive to speculate on all the possible scenarios and how much spillover we might need to utilize.

Operator, Operator

We'll go next now to John Hecht at Jefferies.

John Hecht, Analyst

You provided a lot of information about the market and your sustainable competitive advantages during the call. However, from a broader industry perspective, how would you describe the competition, especially considering that spreads are relatively narrow and there have been a few recent events that might have caused disruptions across the industry? Could you give a brief overview of your perspective on industry competition?

Kort Schnabel, CEO

Yes. Look, I think it's a competitive environment as it's always been over our 21-year history. It's just sometimes new competitors come in, some competitors leave. Obviously, we've seen as the industry has matured and we've moved upmarket, certain competitors compete upmarket with us. We have a different set of competitors that compete in the middle market and in the lower middle market. We've talked a lot about how we believe we are the only scaled direct lender that competes across lots and lots of different markets. And then when we go into our non-sponsored origination in the various industry verticals, we see a whole another set of competitors. So it's really hard to generalize. The events of the last few weeks, I would say it's a little too early to say. But so far, there's been no real significant impact to the competitive landscape. If you're talking about just the news around Tricolor and First Brands and a few of these issues that are cropping up in the broadly syndicated market. It's not really impacting our market that much so far. And again, I think it probably does highlight that our documents and protections and our credit selection is differentiated relative to the broadly syndicated market. So long-winded answer of saying a little too early to say and no real impact so far.

James Miller, President

I'll add one thing, Kort. We also get the benefit when the broadly syndicated market does see disruptions, as you said, that's a great time for private credit. Those are moments in time where we can take market share from the broadly syndicated market and people are looking for that certainty. So those moments and sometimes they're short a week or 2, sometimes they're a month or longer. Those moments tend to be quite favorable for us.

John Hecht, Analyst

Yes, that makes sense. And second, a nonrelated question, I'm just curious if there's an update on some of the, call it, regulatory opportunities like AFFE. Just I haven't heard much about that for a few months, and I'm wondering if there's anything to discuss there.

Kort Schnabel, CEO

Nothing all that meaningful, John. I mean there was some temporary excitement around progress that had occurred down in Washington on that front. But it's hard for us to get too excited because we've seen it kind of go up and down in its momentum over the last few decades, frankly. So we try not to read in too much to the movements kind of month-to-month or even year-to-year.

Operator, Operator

We'll go next now to Arren Cyganovich at Truist Securities.

Arren Cyganovich, Analyst

Just following on the line of questioning about where are we in the cycle? Is it a late cycle where it got tight credit spreads. You laid out a lot of reasons why things continue to go well for you with EBITDA is rising at your portfolio companies, a lot of activity. What are some of the guideposts that you're looking for that would maybe cause you to be a little bit more strict in terms of your underwriting? And what are some of those things that we might be able to monitor from afar?

Kort Schnabel, CEO

It's not too complicated. We're definitely monitoring the potential for EBITDA growth or any reductions in that growth. We're examining sector by sector and discussing the overall portfolio's average EBITDA growth, which remains strong at double digits. We're looking closely at individual industries that contribute to that growth and haven't identified any trends indicating weaknesses in specific sectors. If we did notice any, we would highlight them. The first point of consideration is overall access to capital and the flow of credit in the markets. Historically, when credit tightens, it can create problems for businesses and lead to downturns. Currently, we're actually witnessing an increase in M&A activity, and our transaction volume and opportunities are staying strong. So that’s another aspect to watch for, but there are no signs of concern at this time. We don't see evidence at Ares Capital suggesting we're approaching the end of any cycle. From an M&A perspective, it feels like we're at the beginning of a new cycle. This is reflected in our origination numbers for the quarter, which shifted to 60% new borrowers, a notable increase from the typical 50% or more observed over the past couple of years. Over half of our originations were change of control transactions. I believe the M&A market is indeed gaining momentum, indicating confidence in the stability of the economy and the underlying businesses, as reflected in the transaction volume. That addresses your question.

Arren Cyganovich, Analyst

Yes, that's very helpful and largely what I expected, but it's good to hear you say it. The second question is a quicker one. You mentioned that September was one of the busiest months, but the spreads on first lien for your investments in the third quarter actually increased slightly. This seems a bit counterintuitive. It's not a large amount, just 20 basis points, but I'm curious about those dynamics.

Kort Schnabel, CEO

I believe the situation reflects our ability to take advantage of the diverse origination opportunities available to us through Ares Management and the various deals we are seeing on our platform. I appreciate you highlighting this. In the third quarter, we reported $3.9 billion in gross originations at an average spread of SOFR plus 560, with borrowers averaging a leverage of 4.8x. We feel optimistic about the investment environment, even though it remains competitive, as we previously discussed. We believe we have significant competitive advantages regarding the types of deals we encounter, and it will be interesting to contrast our originations and the metrics I mentioned with those of our competitors as their earnings reports come out over the next few weeks.

Operator, Operator

We'll go next now to Melissa Wedel at JPMorgan.

Melissa Wedel, Analyst

I think from our conversations, it seems like what's been driving some of the price action in the industry the last few months has been concerns about 2 things. One is earnings power and the second would be credit. I think you've addressed the credit, you're not seeing anything thematic and certainly showing up in the nonaccrual rates. I was hoping to dig in a little bit more on the earnings power and follow up on some of the levers that you talked about earlier that you could pull. One of the things you talked about was being a bit below the top end of your target range in terms of portfolio leverage of 1.25. Given that you have bandwidth there to increase leverage at the portfolio level, I'm curious how you're thinking about using the at-the-market program, especially as share prices have declined.

Kort Schnabel, CEO

Yes, sure. Thanks for the question. So I think as you probably can see, we've been reducing the amount of at-the-market issuances over the last 3 quarters. So we went from $400 million to $500 million a quarter down to, I think it's $300 million last quarter, down to $200 million this quarter. So that's been influenced by a view that we are operating slightly below the midpoint of the range on leverage, that 0.9 to 1.25x range and our desire to get a little bit more into leverage here over time. Again, we do like the position that we're in at 1x. It's a conservative place to be. It positions us well to capitalize on opportunities in the market. As Jim mentioned earlier, maybe there's an opportunity the broadly syndicated market seizes up. We want to be in a position to have that kind of financial flexibility. But we do think it's appropriate to potentially start moderating that ATM, which is what we've done over the last several quarters, not to say what the future will hold, but that's been our view. So I don't know too much more to say on that topic, Melissa, but hopefully, that's helpful.

Melissa Wedel, Analyst

It is, and I appreciate that. And then in terms of further optimizing the nonqualifying asset bucket, I'm curious if there's anything in particular or forthcoming in the near term on that? And if not, maybe more generally, would you think about additional assets there that would be similar to your current exposures in IHAM or SDLP? Or would it be a different type of exposure? And just how you're thinking about that sort of longer term?

Kort Schnabel, CEO

One positive update we’re pleased to share concerns the SDLP joint venture. We recently amended the related documents and our partnership with the joint venture’s liability providers, successfully reducing the cost of capital on those liabilities. This change led to a 100 basis point increase in the yield on the SDLP that will be reflected in our future results. We believe this enhancement will contribute positively to the returns from that program. Our capacity to boost the utilization of SDLP and support IHAM's growth will depend on the overall transaction volume in the market and our ability to originate, which has been on the rise. This gives us confidence in our ability to better utilize some of those joint ventures and structures within our 30% basket. Does that address your question, Melissa, or is there something else you are inquiring about?

Operator, Operator

We'll go next now to Casey Alexander at Compass Point.

Casey Alexander, Analyst

My first question, and it might sound a little convoluted, but we've gone through this mini hysteria created by the wet blanket of the words private credit thrown over the entire arena as if it's all encompassing. So first of all, you should change the name of what you do and take the words private credit out of it. But I'm wondering if this mini hysteria, did you notice any even temporary stall in the market? There's so much over the last couple of quarters of there were more loans leaving the directly originated private credit arena for the broadly syndicated market. Have you felt some relief from that because clearly, the banks have been twisting themselves into knots over this? And also, spreads have been at all-time tights, which, again, doesn't presuppose a real credit crisis. Does it feel like you might see new origination spreads in the broadly syndicated market widen out a little bit, which would also allow you some more spread relief?

Kort Schnabel, CEO

Sure. Thanks, Casey. A few things to mention. First, I believe there is too much noise regarding banks, private credit, and competition for assets. This notion is overstated. As an industry, we've been collaborating and competing with banks on transactions for many years. This is nothing new; rather, the amount of transactions we are handling has increased to a level that garners more attention. However, the dynamics remain the same. Banks are valuable partners, offering leverage facilities for many of our funds, including ARCC. Market movements vary, with borrowers occasionally favoring syndicated transactions and at other times leaning towards private credit. The long-term trend shows borrowers increasingly favoring private credit due to the assurance of available capital in various market conditions. Periods of market volatility, where the syndicated market struggles or banks face challenges in syndicating transactions, reinforce this trend, leading borrowers to prefer private credit even when banks re-enter the syndicated market. While banks have engaged in the syndicated market this year, more transactions occurred in the private credit market overall. There's not much more to add on that, Casey, but I'm open to discussing any specifics I might have missed. Regarding the spread widening, could you please restate your question about spreads?

Casey Alexander, Analyst

Before the recent concerns regarding private credit triggered by two problematic loans, spreads were at their narrowest ever. I'm curious if you've observed any deals in the broadly syndicated market that might suggest they are starting to widen a bit, since your pricing is somewhat aligned with that market.

Kort Schnabel, CEO

I think Jim made a valid point about the potential opportunity that could arise. However, it’s still a bit early to see a direct impact; we haven’t observed significant deals coming our way as a result just yet. What’s crucial is the duration of the current concerns in the broadly syndicated market. Our market offers the advantage of not moving in sync with that market; we tend to lag and are more stable. We maintain a long-term perspective because we hold these assets rather than looking to sell them, so we won’t fluctuate the same way the broadly syndicated market does. Ultimately, we'll need to wait and see how things unfold.

Operator, Operator

We'll go next now to Melissa Wedel at JPMorgan.

Melissa Wedel, Analyst

Kort Schnabel, CEO

Melissa Wedel, Analyst

Kort Schnabel, CEO

One positive update that we are pleased to share is regarding the SDLP joint venture. We have recently made amendments to the documents related to that joint venture and our partnership with the liability providers, which has allowed us to reduce the cost of capital on those liabilities. As a result, we have observed a 100 basis point increase in the yield on the SDLP, which will be reflected in our future numbers. This should enhance the returns from that program. Additionally, our capacity to increase the utilization of SDLP and support IHAM's potential growth will depend significantly on the overall transaction volume in the market and our ability to originate, which has been on the rise. This gives us confidence that we can better leverage some of the joint ventures and structures within our 30% basket. I hope that addresses your question, Melissa. Is there anything else you were looking to discuss?

Operator, Operator

We'll go next now to Casey Alexander at Compass Point.

Casey Alexander, Analyst

So credit quality remains resilient. And as you mentioned, nonaccruals still well below that historical 3% average. But why do you think credit has been so resilient outside of any broader macro reasons? Is it where your exposure sit from a sector perspective, how you structure deals and price risk? Or is it being driven by greater levels of scale? And as your platform gets bigger and bigger, it's really just driving better outcomes for all stakeholders through the cycle.

Kort Schnabel, CEO

Yes. Thanks, Brian. All of the above for sure. I think as a reminder, one of the benefits of running a BDC is we don't have to manage to an index. So we can select industries that are defensive and that work well for credit investing. So we've avoided a lot of industries that have been showing softness of late. And we've been leaning into industries that are very consistent growers. And so I think certainly, industry selection and industry diversification as well have been really important drivers of our outperformance on credit. And then certainly, look, you mentioned scale. So I have to take the opportunity to hit on that. The scale of our platform is unmatched and our ability to originate an incredibly broad amount of deals into our system allows us to be very, very selective, right? The more opportunities we can see, the more selective we can be and the better able we are to find the market-leading companies, the best companies in all of these different industries and then choose to invest in those companies and then pass on the other opportunities. If your funnel is more narrow, obviously, our job is to put money to work. And so you're going to put money to work into lower quality companies. So that larger funnel, I think, is a huge advantage comes from our scale, comes from our size of our team, the tenure of our team as well, the fact that we've all been working together for such a long time. And I think just the DNA in our system around underwriting and credit has been passed down and just continues to get reinforced throughout the year. So I think you hit on all the reasons, Brian, but thanks for giving me the opportunity to talk more about them.

Brian McKenna, Analyst

Yes, sure thing. I appreciate the context as always. And then just one quick one, if I may. And you touched on this a little bit, but looking back historically at periods of volatility, really when liquidity dries up, how much incremental spread on average have you been able to capture in those environments? I appreciate every period of volatility is a little bit different, but I'm trying to figure out, is there a way to quantify this dynamic? And ultimately, how much incremental ROE is generated from these types of situations through the cycle for ARCC?

Kort Schnabel, CEO

I don't think there’s really a way to quantify it because everything varies so much. It hinges on many different factors, such as the state of the broadly syndicated market and base rates, as well as how investors feel about the market disruptions. For instance, during the Liberation Day and the tariffs back in April, we experienced a multi-week period where we managed to secure an increase of about 50 basis points in spread and maybe another 50 basis points in upfront fees. So, overall, we could say around 75 basis points in total yield. However, that situation didn’t last long. There were a few transactions we could adjust terms on, which was justifiable given how challenging it was for most investors at that time. Looking back to late 2022 and early 2023, we observed spreads widen by 150 basis points and fees increase by about 100 basis points, primarily because banks were leaving the market. The broadly syndicated market effectively shut down as banks were stuck with transactions that they couldn’t sell as rates increased. This created a significant imbalance in the competitive landscape and the available capital. Those are just two recent examples of how spreads can move differently for varying reasons, making it difficult to generalize.

Operator, Operator

Mr. Schnabel, it appears we have no further questions this afternoon. Sir, I'd like to turn the conference back to you for any closing comments.

Kort Schnabel, CEO

Okay. Great. Thank you all for joining us today and for all your continued support, and we look forward to seeing you on our next quarterly call.

Operator, Operator

Thank you, Mr. Schnabel. Again, ladies and gentlemen, that will conclude today's conference call. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.