Ares Capital (ARCC) Raised $750M Through 2033 Notes. Should Dividend Fans Care?

On September 8, Ares Capital (NASDAQ:ARCC) issued $750 million in unsecured notes at a 6.250% interest rate, maturing on September 15, 2033. The deal was completed on September 15, and the funds will be used to pay down existing bank borrowings, which can be tapped again in the future. While this may seem like routine financial management, the coupon rate is higher than what Ares Capital paid on notes sold in May 2026, and recent quarterly results have shown a decline.

The fine print warrants closer examination. To begin with, the timing is favorable, as the note's maturity extends beyond the company's main credit facility, which has its latest maturity date on May 21, 2031, following an amendment. Ares Capital's CFO, Scott Lem, stated that the company had $6.0 billion in available liquidity as of the June quarter, with no significant maturities due.

Additionally, net investment income of $0.50 per share covered the $0.48 dividend declared on July 29, payable on September 30 to holders of record on September 15. The portfolio's debt and income-producing holdings generate an average yield of 10.3%, surpassing the new coupon rate, leaving a significant margin. CEO Kort Schnabel also notes that there has been a streak of 17 years without a dividend cut.

The May 2026 notes, maturing on January 15, 2030, offer a lower interest rate of 5.550%, with the higher rate being attributed to the longer maturity period. However, the funds are not being used to fund new lending but rather to repay existing borrowings. The slower deal environment and the impact of $183 million in net unrealized losses on net income per share, which dropped from $0.52 to $0.24, also need to be considered.

The company's core earnings per share (EPS) also fell short of the $0.48 dividend. Furthermore, non-accrual loans have increased to 2.4% of investments at amortized cost from 1.8%. While there are 26 hedge funds still holding Ares Capital, down from 28 a quarter earlier, indicating a slight reduction in interest, approximately 5.77% of the company's float is sold short, suggesting substantial skepticism.

The price-to-earnings (P/E) ratio of 10.15 implies that the stock is valued for income generation rather than substantial capital appreciation, making it a more suitable choice for a steady, yield-oriented investor. Despite the cautious outlook, the deal appears to be a strategic move focused on buying time, with the costs associated with this extended period well worth scrutinizing.

The runway appears extensive, but the underlying performance appears softer than the dividend suggests. Ultimately, while we recognize the potential of ARCC as an investment, we believe that certain AI stocks offer greater upside potential and carry less downside risk. For those seeking an undervalued AI stock that could also benefit from Trump-era tariffs and the onshoring trend, our free report on the best short-term AI stock is available. Disclosure: None. Follow Insider Monkey on Google News.