How will the $650 million note issuance affect Ares Capital's leverage ratios and overall credit profile?
Leverage impact – The $650 million of 5.10 % senior unsecured notes will add roughly $620 million of net debt to Ares Capital’s balance sheet (after deducting the cash‑on‑hand component of the proceeds). Assuming the company’s FY‑2024 EBITDA remains in the $1.7‑$1.9 billion range, the issuance will lift the net‑debt/EBITDA metric by about 0.3‑0.4 ×, taking the aggregate leverage from roughly 4.3‑4.5 × today to the high‑4.5/low‑5 × range. The total‑debt/EBITDA ratio will move in tandem, while the interest‑coverage ratio will dip modestly because the new 5.1 % coupon adds ~$33 million of annual interest expense. Because the notes are senior unsecured, they sit above the BDC’s existing subordinated debt but below any senior secured facilities, so the senior‑unsecured coverage ratio will be the first metric rating agencies will scrutinize.
Credit profile – The issuance is modest relative to Ares’ market‑capitalization (≈$8‑9 bn) and is priced at a low‑mid‑single‑digit spread, indicating market confidence that the added debt will be comfortably serviced. If the proceeds are deployed to acquire higher‑yielding portfolio companies or to refinance higher‑cost borrowings, the net impact on the weighted‑average cost of capital could be neutral or even positive, mitigating the leverage drag. Conversely, if the cash is used for dividend recapitalizations, the credit profile could weaken and trigger a rating watch. Overall, the credit outlook is likely to remain “stable” provided leverage stays below the 5.0 × threshold and cash flow generation meets the 1.2‑1.3 × interest‑coverage target.
Trading implications – In the short term the note pricing may exert mild downward pressure on ARCC equity as investors price‑in the incremental leverage, but the effect should be limited given the low coupon and the firm’s strong cash‑flow track record. Fixed‑income traders can view the 2031 notes as a “core‑plus” senior unsecured exposure: the spread should stay in line with the high‑grade BDC segment unless leverage spikes or a rating downgrade is announced. A prudent play is to monitor the next quarterly filing for the updated net‑debt/EBITDA and senior‑unsecured coverage ratios; a breach of the 5 × leverage ceiling would likely widen spreads and create a buying opportunity for yield‑seeking investors, while a stable or improving ratio would support the current equity valuation and keep the credit spread tight.