What are the specific make‑whole redemption terms, and how could they impact Ares Capital's future cash‑flow and refinancing risk?

Make‑whole redemption terms

The 5.100 % unsecured notes due 2031 are callable at Ares Capital’s option at any time before maturity.

If Ares elects to redeem “in whole or in part” the notes, the redemption price is par (100 % of principal) + a make‑whole premium. The premium is calculated as the present‑value of the remaining scheduled interest‑payments, discounted at a benchmark Treasury rate that is 1 % (or 100 bp) above the 20‑year Treasury yield on the call date (the standard “make‑whole” formula used in most corporate note covenants). In practice, the premium is a modest “interest‑saving” uplift when rates have fallen since issuance, and it disappears when market yields are higher than the original 5.10 % coupon (i.e., the notes trade above 100).

Implications for cash‑flow and refinancing risk

1. Cash‑flow exposure: Should Ares elect to call the notes when Treasury yields dip below the 5.10 % coupon, the make‑whole premium will trigger an out‑flow roughly equal to the net present value of the remaining interest streams (generally 2‑4 % of the outstanding $650 mm). Because the call can be exercised at any time, Ares must keep a liquidity buffer to cover a potential lump‑sum premium payment; the “par plus premium” could represent a $13‑$20 mm cash‑hit in a worst‑case early‑call scenario.

2. Refinancing risk mitigation: The embedded call gives Ares flexibility to retire this higher‑‑coupon debt early and replace it with cheaper capital if the yield curve stays low or flattens further. By redeeming the notes and issuing lower‑cost financing (e.g., 4‑% senior loans or new high‑grade unsecured notes), the company can compress its effective borrowing cost and extend the maturity profile of its balance sheet—thereby lowering the concentration of debt maturing in 2031. However, if market yields rise above 5.10 % (as they have in recent volatility), the make‑whole premium would be negligible and the call is unlikely; Ares would then remain committed to the 5.10 % cash‑flow burden for the next eight years, heightening refinancing exposure when the 2031 balloon payment comes due.

Trading takeaway

• Long‑duration holders should price the bond with a potential make‑whole call in mind: the note’s yield‑to‑worst (YTW) is lower than the static yield because the call price is effectively par + premium.
  
• In a flattening‑/declining‑rate environment, expect Ares to evaluate a call, which could prompt a short‑term price rally as the “call‑risk” premium is priced out; downside protection comes from the expectation that cash will be spent on the premium, modestly denting liquidity.
  
• Conversely, if rates climb and the make‑whole premium evaporates, the notes will trade closer to par with a higher YTW and the “refinancing‑risk” at the 2031 maturity becomes a key downside catalyst.
  

Actionable position: Keep a modest long exposure (or buy the note at a discount) while monitoring Treasury yield movements and Ares’ liquidity disclosures. A call‑triggered redemption any time before 2025 would be a bullish catalyst; a persistently high‑rate scenario makes the 2031 balloon payment a refinement risk, suggesting a defensive stance as the maturity approaches.