As a reminder, this conference is being recorded on Tuesday, October 27, 2026. I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations. Please go ahead, sir.
Thank you, and good afternoon, 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 EPS. The company believes that Core EPS provides useful information to investors regarding its 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, reconciliations 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, as well as the accompanying slide presentation, include credit ratings and information relating to portfolio companies, was derived from or obtained from 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 third quarter September 30, 2026 earnings presentation can be found on the company's website at www.arescapitalcorporation.com by clicking on the Third Quarter 2026 Earnings Presentation link on the Events and Presentations page of the Investor Resources section of Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. Now, I would like to turn the call over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort.
Thanks, John, and hello, everyone, and thank you for joining our earnings call today. I am 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. This morning, we reported solid third quarter results with Core Earnings of $0.46 per share, representing an annualized return on equity of approximately 9.5%. Our underlying investment portfolio remains healthy as borrower cash flow growth supports strong credit performance and steady Net Asset Value per share, while our level of non-accruing loans and problem assets remains stable at historically low levels.
Our earnings are well positioned to potentially benefit from an expected higher level of interest rates, and we enter the seasonally strongest fourth quarter from a position of considerable financial strength after taking a number of important actions to advance ARCC's strategic and financial priorities. Most notably, this morning, we announced our agreement to acquire Midcap Financial Investment Corporation, or MFIC. The transaction is expected to be modestly accretive to Core Earnings Per Share, providing attractive financial benefits from the outset while also creating strategic value that we believe extends well beyond the initial economics. A key driver of value creation from this acquisition is the added scale that this broad-based and well-diversified portfolio brings to ARCC.
With this combination, the MidCap Financial portfolio is expected to add over 200 additional incumbent positions, increasing our portfolio to over 800 portfolio companies and expanding the number of sponsors we have transacted with to over 600 sponsors. This will further strengthen our longstanding middle market presence and broaden the relationships from which we can generate future investment opportunities. Based on the depth of our due diligence on each investment in the portfolio, along with the capabilities of the broader Ares platform and direct financial support from Ares Management, we believe we have an excellent foundation in place for this transaction to add to our track record of successful acquisitions over our 22-year history as a public company.
Importantly, and central to our view on the quality of the portfolio, the vast majority of the discount to NAV was concentrated in a small percentage of investments that consisted primarily of situations that, in our view, involved greater uncertainty of business outcomes and resulted in wider bid-ask spreads. Consolidation has been an important part of our history. We have consistently used periods of market volatility and dislocation to create differentiated opportunities for our shareholders while building greater scale and a durable cost of capital advantage. In fact, upon closing the acquisition of MidCap, formerly Apollo Investment Corporation, ARCC will have acquired all three of the largest BDCs in operation at the time of our IPO over 20 years ago, including Allied Capital and American Capital.
Our track record of disciplined consolidation has created significant value for our shareholders as both Allied and American Capital generated IRRs in excess of 20% over the three years following their respective acquisitions. The value of these acquisitions, however, has extended well beyond the assets we acquired. They have expanded our scale, deepened our sponsor and borrower relationships, broadened our incumbent portfolio, and strengthened our ability to originate attractive investments. While we have similar enthusiasm for the MidCap acquisition, its size relative to ARCC positions the transaction as additive rather than transformative. Turning to the broader investment environment, macroeconomic shifts and geopolitical developments created greater uncertainty around transaction activity during the third quarter. Volatility around interest rates, inflation, and global trade reduced visibility and elongated M&A processes across the market.
Combined with our continued discipline and highly selective approach to new investments, this resulted in a more modest pace of new investment activity during the third quarter. Importantly, we view much of the slower origination volume during the third quarter as a matter of timing, since underlying deal review activity remained strong. In the third quarter, we reviewed more transactions than we did a year ago, and year to date, we have reviewed approximately 25% more transactions than in the prior year. More broadly, our extensive market coverage, including our specialized lending verticals, has enabled us to review more than $1 trillion of potential investment transactions over the past 12 months. As transaction timelines have extended, more of that activity is carrying into the fourth quarter, providing greater visibility into the months ahead as borrowers and sponsors continue to place a premium on lenders that can provide certainty of close.
So far in the fourth quarter, we have closed on $1.1 billion of commitments, and our investment backlog now stands at approximately $2.5 billion. When taken together, our post-quarter end originations and backlog are at historically strong levels, which further supports our enthusiasm for a recovery in investing activity. More broadly, across the U.S. direct lending market, we continue to see a constructive environment for lenders, with market pricing, terms, and lender protections remaining stable at generally favorable levels by historical standards. As we progress through the fourth quarter, we have substantial liquidity, extensive access to financing, a large and diversified incumbent portfolio, and the connectivity of the broader Ares platform, leaving us well positioned to pursue opportunities as they emerge. With respect to our quarterly dividend, we continue to believe ARCC's current regular dividend appropriately reflects the underlying earnings power of the business.
While earnings will naturally fluctuate from quarter to quarter, the strength of our portfolio, attractive market pricing and terms, the current interest rate environment, and the expected benefits from the acquisition I discussed earlier reinforce our confidence in the current dividend level. Our substantial spillover income provides additional flexibility during periods when quarterly earnings temporarily fall below the dividend. Ultimately, our focus remains the same: use ARCC's financial strength, scale, and connectivity to generate attractive long-term returns for our shareholders and maintain the stability of our regular quarterly dividend, as we have for more than 17 years. With that, I will turn the call over to Scott to take us through our financial results and balance sheet.
Thanks, Kort. I will begin by reviewing several key financial metrics from the third quarter and discuss our balance sheet and funding activity and conclude with an update on the dividend and taxable spillover income. This morning, we reported GAAP net income per share of $0.44, up from $0.24 in the second quarter of 2026. The sequential improvement was largely driven by net unrealized appreciation, primarily from mark-to-market improvements on investments. Core EPS were $0.46 per share compared to $0.47 in the prior quarter, primarily reflecting lower capital structuring fees due to the longer transaction timelines Kort referenced alongside continued healthy portfolio performance. Looking forward, our earnings remain sensitive to changes in base rates, given the predominantly floating rate nature of our portfolio.
Based on our balance sheet at quarter end, and assuming no change in our investment in borrowing structure, every 100 basis point increase in base rates will create about $0.02 per share of earnings tailwind for us per quarter. Keep in mind, the recent increase in base rates occurred just prior to quarter end. Given the timing of contractual rate resets across our floating rate loan portfolio, it typically takes about a quarter for changes in base rates to be fully reflected in earnings. So we would expect to start seeing some of the interest income benefit in the fourth quarter. Turning to the balance sheet. Our total portfolio at fair value at the end of the third quarter was $29.2 billion, compared with $29.3 billion at the end of the second quarter, primarily reflecting net exit and repayment activity.
Our NAV ended the quarter at $13.9 billion, or $19.31 per share, which represents a decrease of $0.04 per share from a quarter ago. The relative stability of our NAV this quarter builds on a long-term record that we believe distinguishes ARCC within the BDC sector. Since inception, we have grown NAV per share by more than 25%, while also delivering stable and attractive dividends to our shareholders. Turning to our debt capital, we report a net leverage of 1.06 times debt to equity compared to 1.12 times last quarter. Pro forma for an unsettled trade payable related to a portfolio acquisition that closed at quarter end, our net leverage would have been 1.10 times. With approximately $7 billion of available liquidity, our maturity profile remains well-laddered, with no unsecured note maturities for the remainder of 2026 and just $1.4 billion maturing in 2027.
With modest leverage, substantial liquidity, and limited near-term maturities, we have meaningful capacity to support new investment opportunities. We continue to strengthen that position during the quarter through several financing activities. In September, we issued $750 million of seven-year unsecured notes due in 2033 at a spread of 185 basis points over Treasuries, representing the lowest new issue spread and longest duration in the BDC sector during the quarter. In addition, we took advantage of favorable market conditions to reset our inaugural $476 million debt securitization, reducing its weighted average spread by 35 basis points while extending both its reinvestment period and final maturity. This lowers our cost of capital while further strengthening the duration and flexibility of our funding profile. We also enhanced our cost of capital during the quarter by accessing the commercial paper market under the $1 billion program we established last quarter.
By maintaining $200 million to $300 million of commercial paper outstanding on average during the quarter, we reduced our borrowing costs by approximately 70 basis points on these amounts compared with borrowing under our corporate revolver. At quarter end, we had no commercial paper outstanding. Taken together, these actions continue to advance our balance sheet objectives of maintaining diversified access to capital, lowering our funding costs where appropriate, and preserving significant liquidity and financial flexibility. Looking ahead, we believe scale, broad financing capabilities, and a proven track record will remain increasingly important differentiators. As the highest-rated BDC across all three major rating agencies, ARCC is well positioned to support our investment activity through changing market conditions. We believe these advantages have been important contributors to our long-term performance and will continue to serve us well across market cycles.
Consistent with this approach, in conjunction with today's announcement to acquire MFIC, we obtained a $750 million upsize commitment to our existing Wells Fargo-led funding facility that we expect to close upon the consummation of the acquisition, subject to customary closing conditions. As we prepare for a larger pro forma portfolio, we remain proactive in expanding our funding capacity alongside the growth of the business. While we continue to explore additional financing opportunities ahead of closing, our significant existing liquidity, coupled with this upsize, provides sufficient capacity to acquire the MFIC portfolio without the need for additional debt capital. Finally, our fourth quarter 2026 regular dividend of $0.48 per share is payable on December 29 to stockholders of record as of December 15th. As Kort mentioned, we are proud of the fact that ARCC has now paid stable or increasing regular quarterly dividends for 69 consecutive quarters.
Turning to our taxable income spillover, we finalized our 2025 tax returns and determined that we carried forward $983 million, or $1.37 per share, available for distribution to stockholders in 2026. As Kort mentioned, 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.
Thank you, Scott. I will start with some additional context on our investment activity and then discuss the performance and positioning of the portfolio. Against an uneven transaction environment and in navigating various economic and geopolitical crosscurrents, we continued to prioritize selectivity and maintaining our underwriting standards. We originated $2.1 billion of new investment commitments during the quarter, while our closing ratio was moderately below our historical average of approximately 5%. We believe this discipline has been an important contributor to our long-term investment performance. At the same time, our scale, incumbent relationships, and broad market presence continued to provide access to attractive opportunities across a variety of channels, including opportunities outside of traditional transaction activity. In addition to agreeing to acquire MFIC, ARCC, alongside other Ares funds, acquired a portfolio of high-quality loans from an institutional investor.
This represents another good example of non-traditional transaction activity, as this year's volatility reinforced Ares' position as a natural solution provider in a market we have invested in for decades. Our familiarity with many of the businesses and management teams represented in the portfolio advantaged us in our underwriting of the portfolio and, in our view, allowed us to provide a differentiated solution. The transaction also added new borrowers to the portfolio, expanding ARCC's connectivity across the middle market and creating additional avenues for future investment. This transaction illustrates the value of both sides of our origination model. The ability to deepen relationships with existing borrowers while continuing to expand our opportunity set through new relationships. Furthermore, this fully performing portfolio was acquired at a modest discount, supporting what we view as attractive overall economics.
Together with MFIC, this portfolio purchase demonstrates how ARCC's relationship with Ares, combined with the scale of the broader platform and its ability to deliver differentiated solutions, can create value that extends well past the investments themselves. We believe those advantages become even more meaningful when markets are less predictable. Beyond these larger strategic opportunities, our existing portfolio provides a consistent source of opportunity across our investment activity. Approximately 60% of our third quarter commitments were with existing portfolio companies, and we have expanded our share of many of these borrowers' financing needs over time. These relationships allow us to invest behind the businesses and management teams we know well, and where appropriate, increase our exposure to stronger performing borrowers. While the pace of originations during the third quarter was more measured, we continued to originate at attractive economics relative to the broader market.
First lien spreads on our new originations widened 50 basis points from the prior quarter, and leverage levels decreased by a half term while terms and lender protections remained strong. Our broad opportunity set is supported by a diverse portfolio of 636 companies that continue to perform well. Our portfolio companies generated weighted average LTM organic EBITDA growth of approximately 7%, broadly in line with our long-term average. As a reminder, this measure reflects only organic growth and excludes the impact from M&A. Performance across our largest industries was even stronger, with our top 10 industries in aggregate growing above the portfolio average. Specifically, within our software portfolio, we continue to see strong operating performance across our investments, with organic LTM EBITDA growth in line with the broader portfolio average during the third quarter.
Within our software portfolio, only one small loan is currently on non-accrual, and our debt investment remains supported by loan-to-value ratios in the low 40% range, providing substantial equity value beneath our positions. More broadly, the strong operating performance we are seeing across the portfolio is complemented by stable credit metrics and capital structures. The average leverage of our borrowers was unchanged last quarter, and the weighted average interest coverage was two times, which I will point out is based on market interest rates at 9/30 quarter end. Importantly, both metrics are consistent with their five-year averages. As Kort mentioned, credit performance also remains healthy. Loan-to-value remained approximately 47%, below our 10-year average, providing meaningful equity support beneath our investments.
Non-accruals were unchanged sequentially at 2.4% of cost and remain well below our approximate 3% historical average since the global financial crisis and the BDC's historical average of approximately 4% over the same timeframe. Our non-accrual rate at fair value of 1.4% also remained well below our historical levels. Further supporting the strength of our portfolio, our overall risk ratings remain stable with a weighted average of 3.1 and 19% of the portfolio at fair value in our lowest risk category, Grade four, where we expect to realize returns above our cost basis. The share of the portfolio in Grade four has increased over the past few quarters and remains above our 10-year average. Meanwhile, the share of our portfolio companies in our higher risk categories, Grade one and Grade two, remains comfortably below our 10-year average and represents less than one-third of the assets in the lowest risk category four.
As we look ahead, we believe the combination of a healthy portfolio, differentiated sourcing relationships, and our scale and breadth in the market positions us well as transaction activity progresses. This allows us to remain patient and disciplined while maintaining our underwriting standards and pursuing opportunities that offer attractive risk-adjusted returns. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter. With that, operator, please open the line for questions.
Certainly. Thank you, Mr. Miller. Ladies and gentlemen, at this time, if you would like to ask a question, please press star one on your telephone. If you would like to withdraw your question, please press star then two. Please note as a courtesy to those who may wish to ask a question, please limit yourself to one question. Additional questions, you may re-enter the queue. Additionally, the investor relations team will also be available to address any further questions at the conclusion of today's call. We'll go first this afternoon to Rick Shane of JPMorgan.
Hey, guys. Thanks for taking my question. Obviously interesting full circle to see you guys complete sort of the or get close to completing the trifecta of the three legacy BDCs. So that is exciting. Wanted to ask about the close rate on the quarter. You guys said it dipped below 5%. The pipeline for the last couple of quarters has been larger than sort of the origination growth. I'm curious, is this a function of you guys being deliberately more selective, or is it just challenges of meeting of the minds as the market is repricing with borrowers and sponsors?
Yeah. Hey, Rick. Thanks for the question. I would say it is a little bit of both of those things that you mentioned. I think that we are being slightly more selective in this environment, just given obviously all the volatility going on and uncertainty out there in the world, in the economy. So that is a part of it. Additionally, it is just a slower overall deal environment, which is contributing to the more measured pace of origination as well. So, it is all of the above in there.
Got it. As you guys close the acquisition and rotate that portfolio, does this transaction in any way, beyond sort of recycling of capital, create additional liquidity in a time when your peers and competitors are constrained?
Yeah. We do think it should help us create more liquidity. Obviously, we are in a position of competitive strength right now. We already were in a great position of competitive strength given our superior liquidity position, and this should only boost that even more.
Got it. Any way to quantify that beyond better fits?
Not really. It's obviously the larger portfolio we're going to have, so they're going to have just more repayments. I think historically, we've seen repayment rates based on our portfolio be 30%-35%. So you'll just see natural turnover and as we can actively sell things off the portfolio, we'll do that too. We've got a track record of doing that from our previous acquisition as well.
Got it. I appreciate it very much, guys. Thank you.
Thank you.
Thank you. We go next now to Paul Johnson with KBW.
Good morning. Thanks for taking my questions. I think it's a very impressive structure of a deal that you guys have put forth here for MFIC. I was curious in terms of the discount to MFIC's preliminary NAV in the acquisition price. I guess, how much of that is kind of due to expected credit losses between now and closing versus, I guess, negotiating leverage, just given the discount and share in MFIC's shares prior to the announcement? Then I guess the second question I would have to that is, are these the conditions here in your ability to acquire assets at a discount, is that unique to this situation where there's sort of one-off conditions to make that possible by the seller? Or is this something that could be replicated elsewhere in other acquisitions in the space?
Yeah. So, on the discount, I would say I just repeat something that we said in the prepared remarks, which is, and maybe provide a little more color on it, which is the portfolio was largely, or is largely a performing portfolio. And the vast majority of the portfolio we saw relatively eye to eye on the marks. There was a smaller percentage of the portfolio that has outcomes that are more uncertain on those names. So that is where the vast majority of the discount was centered. I do want to highlight a really important point that I think is clear, but just to make sure it is. The cash consideration being provided by Ares Management is a really important component of the deal. It allows ARCC to buy the assets at an even deeper discount while still providing the MidCap shareholders with a nice premium.
Obviously, it's a valuable transaction for Ares Management as well. So, you sort of have a win-win here for, I think, all the different parties. But that piece certainly helped contribute to the deeper discount and made it really a great transaction for ARCC. As it pertains to any future transactions, obviously we're not in the position to speculate on that on a call like this or provide any kind of guidance. I think the only thing to say, and we've been asked on previous calls about likelihood of acquisitions. The only thing to say is just obviously in this environment and given our competitive advantages and where our stock is trading relative to the peer set, we're in a pretty good position to review and potentially capitalize on any other opportunities that might be out there.
Got it. Thanks, Kort. That's very helpful. In terms of just the portfolio retention for MidCap's portfolio post-closing I guess, would you expect there to be any sort of digestion period or slowdown of originations in anticipation of closing? Or is the deal, I guess, simply small enough that you wouldn't expect any kind of change to the cadence in deployment?
You shouldn't expect to see any impact there. Again, while it's an exciting and strategic transaction, it's not that material from a size standpoint for us. We don't expect any changes there.
Got it. One last question from me on just credit. During the quarter, I guess speaking a little more broadly to the portfolio company itself, but I was curious of your thoughts on the recent restructuring, or sorry, should call it recapitalization of Symplr Software with the preferred capital being raised there. I was wondering if that particular deal offers, I guess, more of a blueprint for any other distressed software company in the market or just, I guess, more of a one-off scenario for this particular company. That's all for me. Thanks.
Happy to take that. I think it is a good example and maybe a bit of a blueprint. We've been talking about this for a while and sort of repeat it again. The software portfolio, just like many of the other companies in our portfolio that have a significant amount of equity value, we often see sponsor support to support equity value that remains in the company. We often see a set of outcomes that you saw with Symplr with respect to repricing, getting better document terms, a variety of different things that we will achieve at a point in time when a negotiation takes place like that, where we end up in a better place. But it does show and highlight what we think will happen often and has happened historically very often in scenarios like that. So, it's a great example.
I think it's the right way to put it. It's a great example and sort of a playbook that we utilize often in situations like that.
Thank you. We'll go next now to Arren Cyganovich at Truist Securities.
Thanks. Congrats on the transaction. I got a quick question on the accretion, the modest accretion assumption assumed with this. Is the discount of that accretion, is part of that discounted value assumed into the accretion? I feel like the deals from years past, a lot of the upsize was kind of from, I don't know, loans or credits that you had marked down that had performed better than expected. Is that obviously much smaller potential here, but is that also potential opportunity on this transaction?
You got it. Exactly. The accretion is really driven by two primary factors. The first is the discount and the higher yield that that creates on those assets. The second is just our cost of capital advantages, the benefits we have of scale versus the MidCap platform. That'll allow us also to generate the modest accretion that we're expecting.
Okay. Then kind of following up on Paul's question on maturity wall, I'm sure everybody saw the Journal article about that today or yesterday. This is something we've been talking about, so it's not new, but maybe a little bit of update on what you're doing to proactively get in front of maybe some of the credits that might be in that kind of situation and where you might be in that process. We still have a decent runway until we get to 2028.
Yeah. I mean, we saw the article. I think we can reflect on the Ares portfolio more than the market. We look at what we are seeing in the future with respect to maturities. If you look at 2028, 2029, the percent of maturities that we are expecting in that period of time is pretty typical. It is a standard sort of market level. There is not really anything there is really the short answer. We are always actively and proactively looking at maturities and how we want to extend ahead of that. I think this topic comes up quite often when people talk about maturity walls. It does not really play out as people expect. For whatever reason, I am not sure why it becomes a focus over and over again. We are not expecting any specific issue there.
We are always looking at ways to extend it for the right companies. The level there that we are seeing in, I think, 2028 is about 10%, something like that. There is nothing meaningful for us to have to deal with.
Okay. Thank you.
Yeah. Even if you go forward, 2029 is about 13% of the portfolio as well. Not super outsized numbers in those two years on our book. Again, I just underscore what Jim said about Symplr as being a good example of how these maturities can get addressed. A company like that actually performing fine and has a capital structure that is a little over-leveraged. Again, sponsors putting in equity, getting more time, first lien and second lien extending and giving the company more time to grow into its capital structure.
Thank you. Appreciate it.
We will go next now to Kenneth Lee with RBC Capital Markets.
Hey, good afternoon, and thanks for taking my question. Just in terms of the MFIC transaction, do you anticipate any potential change in the management fee rate in terms of the portfolio there that you are acquiring? Thanks.
We do not.
Great. Just one follow-up, if I may. Just in terms of the average portfolio yields that you saw in the quarter on a cost basis, they ticked up a little bit. Just wondering whether there was any specific drivers driving that pickup in portfolio yields there. Thanks.
I think if I understood the question, we are just seeing a better market for lending right now. I think we saw about 50 basis points wider in the market, slightly better leverage levels, slightly better terms. We are seeing based on some of the cross currents we mentioned, the broadly syndicated market has moved off. The direct lending market has moved off. So, it is just a market right now that we really like. The conditions have improved quarter over quarter. It is continuing.
There is probably a little bit of the recent base rate increases that are now starting to creep into the numbers in a good way. There is a little bit of a lag effect. Generally, one quarter lag before that gets into our numbers. I think you are starting to see a little bit of that as well. All those things Jim talked about, as well as the forecast for potential future base rate increases are what make us feel confident about the go-forward picture on earnings.
Great. Very helpful there. Thanks again.
We'll go next now to Jason Stewart with Compass Point.
Hey, thanks. In terms of the MFIC transaction, is it your anticipation that it's all going to be funded within ARCC or whether it's going to go to any IHAM vehicles?
Yeah, thanks for the question. Nothing is definitive yet, but I guess I would say that I think Ivy Hill is expected to play a role in the transaction. Just given that most of the assets in the portfolio are actually minority participations in these loans. Again, it's largely a performing loan book. Those two factors mean that a bunch of these assets could be a strong fit for Ivy Hill Asset Management. They're going to review the assets and make their own independent determination as to whether they want to purchase them. They'll start that review process between now and closing or even post-closing. We'll see where that shakes out. I'd say it's likely. I'd also say that IHAM has also played an important role in our prior acquisitions as well, taking on the performing part of those loan books.
Okay. That's helpful. Thank you. To follow up on your liquidity comment in terms of related to the marks, is the right way to think about how those marks will ultimately be realized, is it time or is there a particular way to accelerate through financing structures the realization of a liquidity discount?
Right. Yeah. A little bit early to say. I would say it is probably over time is when we expect to be able to monetize those assets above their purchase costs. But at this point, obviously, we are still five or six months away from closing the transaction. We do not actually know where we are going to mark these assets individually when the transaction does close and they come onto our books because obviously the marks are a point in time in the future and dependent on market conditions that might change between now and then, or portfolio company performance that could change between now and then. Hard to say, but we do believe strongly that the accretion benefits will be there over time as we monetize the assets above our purchase price.
Okay. Fair enough. Thank you.
Thank you. We will go next now to Robert Dodd with Raymond James.
Hi, guys. Congrats on the announcement. A couple of questions. One, over the last sort of decade, not necessarily you guys, but the industry norm has sort of emerged to exclude any purchase price discount amortization or accretion from purchasing assets as a discount from the calculation of the incentive fee. Is it your intent to do that or just essentially treat it like OID and take the full incentive fee participation on that discount?
I think you are referring to probably the capital gains fee in terms of when you decide to
No. Just
the cost basis
if you buy an asset at 90 and you accrete it to par by maturity of the asset, there is accretion of income on a GAAP basis, right? Certainly, what we have seen with other BDCs when they buy assets at a discount.
Yeah. I'm not aware of that. It's not how we've done our previous transactions. I do know there's a component of the capital gains incentive fee that gets adjusted for the cost basis, but nothing I'm aware of on the income side.
Got it. Thank you. Just to follow up to that, on the accretion, and you've addressed this partly already. Is the modest accretion, which it takes into all of this, that kind of like the day one theory, right? It doesn't take into account, I'm asking, not to tell you. Does it take into account things you might do, like if Ivy Hill comes into it. But none of those, I don't want to say creative initiatives, are necessary for day one accretion. Is that fair to say? But you may be able to squeeze out more accretion if you get more creative on how assets are allocated. Is that fair?
I think that's a fair characterization, Robert. Yes. There's too many different scenarios that could play out for us to give guidance around all those different considerations. I think all we feel confident in saying is that it will be modestly accretive. But the amount of accretion will depend on some of those different strategic moves or considerations that you mentioned and that we might be able to employ. I guess I would just highlight again a couple of things. The strategic importance of the transaction relative to the accretion. Obviously, the deal is just not that big, right? So, we're bringing in $2.5 billion of assets, that's less than one quarter's worth of average originations for ARCC. So, the level of accretion, although we certainly expect it to be positive, will be modest. But the strategic benefits include expanding our number of borrowers from over 600 to over 800.
It's a very complementary portfolio, I would say, to ours. Of the 229 portfolio companies, there's only 12 overlapping names. So, there are a lot of new sponsor relationships that we're bringing sort of under the tent here at Ares Capital that we can kind of mine for future business opportunities. So, there are a lot of really exciting strategic reasons for us to do this in addition to just the modest financial accretion impact.
Got it. Thank you.
Thank you. We go next now to Peter Troisi with Barclays.
Thanks for taking the question. I have one on the MidCap transaction as well. How do you think the acquired portfolio will affect non-accrual formation for the combined company? The question is, should we expect the go forward non-accrual rate of the pro forma company to be higher?
Yeah. Thanks, Peter. First off, we do not know what the actual portfolio is going to be till we obviously close on it. MidCap has their own non-accrual policy. I would say when we acquire the assets, we certainly will apply our own non-accrual policy as to what we think the assets should be accruing or not. I think the good factor in play is that we are going to mark the assets day one at fair value, and that is going to be our cost basis going forward. So that ultimately, we think about recovery of that cost basis. It does factor as we think about whether the asset will go on accrual or not.
So hard to say exactly the numbers going forward, but I think it goes back to the fact that it is a very small portfolio, and that we do think that any non-accruals are not going to materially move the needle for our non-accruals.
Yes. So when we bring the assets onto our books, as Scott was saying, we will readjust the cost basis to be our purchase price. And I think you can assume that the non-accrual assets are part of that small percentage of assets where there is a big bid-ask spread, and we got a meaningful discount. So, the dollar value of all those non-accrual assets combined will not be very large.
Okay. Thanks both for that. Just one more from me. You mentioned you might look to expand your financing capacity. Maybe just expand on that a little bit more. Obviously, the banks provided more secured financing commitments, but I am curious how this might affect your broader approach to debt funding and in particular in the unsecured market.
Yes. The commitment for the upsize was really just that more of effectively kind of a backstop for us just in case the markets are shut down between now and close. So, we have effectively de-risked the financing specifically this deal. But assuming markets are open and functioning, which we hope they will be, it does not really change our plans in terms of how we finance our business in terms of the unsecured and secured mix. It goes back to diversity and making sure we have a wide range of funding sources. So, this does not change that at all.
Thanks very much.
We'll go next now to Melissa Wedel with UBS.
Thanks for taking my questions today. A lot of them have already been asked, but I wanted to follow up on the funding question. Would you expect any noise in that first quarter or two in winding down some of the MFIC debt funding facilities?
No, I don't think so. I think they actually have a pretty uncomplicated balance sheet structure, especially relative to ours. I'm not seeing any issues with any of that at all, quite honestly.
Okay. Thanks for that. Then just pulling up to a higher level, I think it's interesting that you guys are pursuing this acquisition right now, and you've always been very flexible across capital structure. First lien, second lien, very diversified portfolio, and also across the upper middle market and the core middle market. I think what we've been hearing from some managers is that there's been more spread compression more recently in the core middle market than perhaps in the upper middle market, and I think you've talked about that yourselves, too. From a strategic perspective, when you think about increasing your exposure to the core middle market, partly through this acquisition, but just generally, how does that line up with some of the opportunity set, maybe some of the different spread widening and contraction that you've seen in different parts of the market over time?
Yeah. There are a couple parts to that question. We maybe separate them out. One is, what are we seeing in this portfolio today when we acquire it? It goes back to what Kort had said about buying the assets well and feeling like we have a good return which includes our purchase price. I think the second part of your question is more about the strategic part. We found over many years that different parts of the market behave differently at different times. It is really important for us to be active in all parts of the market, down to the low end, and all the way up to large cap, at all times, but in varying size. Or we may be much less active for a quarter or two or even a year in a part of the market that is less attractive or offering weaker relative value.
But we want to be around it, because they change. They move, and they often move quickly. We will be very opportunistic at points in time when this part of the market can dislocate or just become more attractive. There is probably some truth to the comment that you made around the lower end of the market or middle market being a little bit more competitive over the prior couple of quarters. But that doesn't mean it stays that way. So, it is highly strategic, again, to be active there. We also, by the way, have expressed the value of incumbency, the long-term value of being attached to an asset. Some of these companies will grow meaningfully. Their platforms, the sponsors are highly acquisitive. We will look for moments and portions of the portfolio will become really, really valuable.
This is a granular, 200-plus names where we are going to get the opportunity to go lean into a handful of those over time that we think will outperform or would just become more suitable to us at moments in time. So, I hope that answers your question, but there is a variety of reasons why this is valuable and strategic to us.
Yep, I appreciate that. Thanks very much.
Thank you. We'll go next now to Ethan Kaye with Lucid Capital Markets.
Hey, guys. Congrats on the announcement. You kind of categorized the MFIC portfolio as complementary to ARCC's. I guess for those of us maybe who don't cover MFIC or maybe are kind of less familiar with them, can you maybe just high-level kind of compare and contrast their strategy and portfolio with ARCC's?
Yeah. It's obviously a publicly traded portfolio, so there's lots of information out there. We can't really provide anything more than what's public. Obviously, we're not going to own the assets for another five or six months. In this window, there's just not too much more we can say. But as we already stated, there's 229 portfolio companies. It's very diversified by sector. There are no big areas of concentration. I do believe it is very complementary to our portfolio. In addition to there only being 12 overlapping names of the 229, they also have less software allocation than we do, but more healthcare allocation. So those kind of balance each other out and create even more industry diversification on a pro forma basis.
Other than that, there's a lot of information out there that people can pull up about the portfolio, but for now, probably can't say. I guess maybe the last thing is, and Melissa already hit it on her question, it is a little bit more of a core middle market portfolio. Average EBITDA size is in kind of the $50 million-$55 million ZIP code. So, it does also complement our portfolio nicely in that respect.
Okay. I appreciate that. Then I guess one unrelated to MFIC, kind of on increasing base rates here. It seems like kind of most portfolio companies, at least in your portfolio, have some room to kind of absorb higher rates. Is there kind of a level of base rates or maybe a period of time of which base rates stay elevated where you kind of start to worry more about credit issues there? Obviously, a tailwind for earnings, but thinking about the other side there.
Yeah. Definitely want to start by agreeing that it is a great tailwind for earnings. Maybe some historical reference around base rates and sensitivity there, as well as where the portfolio sits today. The portfolio today sits with around 2x interest coverage. So, there's a fair amount of cushion there that exists in the portfolio that we have. Second, a 1% base rate increase, which I think is what is sort of embedded in the forward curve, is something that we think is very manageable for our portfolio. We saw back, I think it was in 2023, it was more of a 5% type move and had great performance coming through that period of time and did a lot of work around interest rate sensitivities and managed through that very effectively.
So, at 1% and more, we feel like there's extremely a net positive for the business and it's something that the portfolio companies can handle. There may be obviously on the tail end, some portfolio companies that will get a little more stressed as you push on that string, but we don't view it's going to be a meaningful contributor.
Got it. Thank you, guys.
Thank you. Just a quick reminder, ladies and gentlemen, any further questions today, please press star one. We'll go next now to Chris Muller with Citizens Capital Markets.
Hey, guys. Nice to be on with you today, and congrats on the transaction. I guess leverage on the MFIC portfolio is above where you guys typically run. Longer term, what would the plan for that portfolio be? Are you guys going to intentionally bring down leverage there or just kind of naturally let it run off as capital gets recycled over time?
Yeah. Look, when we bring their portfolio into ours, it doesn't change our overall leverage strategy at ARCC. I think we're still targeting the 0.9 to 1.25 times, and we've been kind of in that 1.1-ish range past few quarters. I think, again, given the size of the portfolio we're bringing on, it's not going to change our leverage profile going forward.
Got it. The number of portfolio companies increases by a decent amount. Can you guys just talk through the asset management process and how you absorb that increase? Is there a need to increase headcount at all, or does this just kind of plug into existing processes you guys have in place?
Yeah, great question. Obviously, there is a fair amount of infrastructure that we can leverage. But with a couple of hundred new names, we definitely are looking to bring on some more headcount at the manager and invest in that to continue support a growing portfolio. But that's no different than what we do on an ongoing basis as we naturally have been organically growing our number of borrowers over time. So maybe a little bit more of a step function in conjunction with this, but it's easily managed, I think, given our history and given the existing infrastructure and resources we have.
Got it. That makes a lot of sense. Appreciate you guys taking the questions today.
Thank you.
Thank you. Ladies and gentlemen, this concludes our question-and-answer session. Mr. Schnabel, I'd like to turn things back to you, sir, for any closing comments.
Great. Well, thanks everybody for joining us and for all your support and engagement, and we look forward to connecting with you all on our next quarterly call.
Thank you, Mr. Schnabel. Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the call will be available approximately one hour after the end of the call through November 27, 2026, at 5:00 P.M. Eastern Time to domestic callers by dialing toll-free 1-800-839-1247, and to international callers by dialing 402-220-0470. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital's website. Thanks again for joining us, everyone. We wish you all a great day.