Ares Capital (NASDAQ: ARCC) is a business development company (BDC). Its core business is making loans to smaller businesses. So the ability of its clients to repay their loans on time is very important. In the second quarter of 2026, there was a 60-basis-point year-over-year increase in the number of troubled loans Ares Capital is carrying. That's a move in the wrong direction, but don't get overly concerned just yet. Here's why.
There's no question that investors in a BDC like Ares Capital have to pay close attention to loan quality. The company issues stock and takes on debt to fund the loans it makes to its clients. As long as those loans continue to be paid, Ares Capital earns the spread between its cost of capital and the interest it charges on its loans. In the second quarter, the average interest rate paid by its clients was 10.3%. This can be a very lucrative business.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »
However, the loans Ares Capital makes are typically to smaller companies that lack access to lower-cost funding. During periods of economic weakness, such as a recession, smaller companies can find it increasingly difficult to cover the costs of high-interest loans. If too many loans become troubled, Ares Capital could struggle to support its lofty 9.5% yield.
That's why non-accrual loans are so important to watch. If the percentage of non-accrual loans is increasing, your risk as a dividend investor is increasing, too. So the 60-basis-point rise in non-accrual loans shouldn't be ignored. But it also has to be put into perspective.
#ares #smaller
There's no question that investors in a BDC like Ares Capital have to pay close attention to loan quality. The company issues stock and takes on debt to fund the loans it makes to its clients. As long as those loans continue to be paid, Ares Capital earns the spread between its cost of capital and the interest it charges on its loans. In the second quarter, the average interest rate paid by its clients was 10.3%. This can be a very lucrative business.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »
However, the loans Ares Capital makes are typically to smaller companies that lack access to lower-cost funding. During periods of economic weakness, such as a recession, smaller companies can find it increasingly difficult to cover the costs of high-interest loans. If too many loans become troubled, Ares Capital could struggle to support its lofty 9.5% yield.
That's why non-accrual loans are so important to watch. If the percentage of non-accrual loans is increasing, your risk as a dividend investor is increasing, too. So the 60-basis-point rise in non-accrual loans shouldn't be ignored. But it also has to be put into perspective.
#ares #smaller
15 days ago
