Ares Capital Corp

NASDAQ:ARCC

Earnings Call Analysis

Core EPS Grows; Strong Liquidity Maintained

The company reported a core earnings per share (EPS) of $0.59 for Q3 2023, showing a slight increase from $0.58 in Q2 2023, and a more significant rise from $0.50 in Q3 2022. Interest and dividend income rose, benefiting from higher rates impacting the floating rate portfolio. Stockholders' equity reached nearly $10.8 billion, marking a 2% per share increase over the previous quarter. Annualized return on equity stood at 14.5% based on GAAP EPS and 12.5% based on core EPS. Total portfolio value was $21.9 billion, slightly up from $21.5 billion, with the weighted average yield on debt and income-producing securities at 12.4%. A $600 million investment grade debt issuance improved their maturity ladder and liquidity, leaving a debt-to-equity ratio of 1.03. The company declared a consistent $0.48 Q4 dividend, reinforcing a historic pattern of steady dividends.

Third Quarter Earnings and Return on Equity Highlighted

The company reported core earnings per share (EPS) of $0.59 for Q3 2023, reflecting an incremental rise from Q2’s $0.58 and a more significant year-over-year improvement from Q3 2022's $0.50. This EPS growth symbolizes the benefits deriving from a predominantly floating rate portfolio amidst a period of higher interest rates, leading to increased interest and dividend income. Stockholders’ equity rose by 2% over the prior quarter to $10.8 billion, or $18.99 per share, fueling an annualized return on equity (ROE) of 14.5% using GAAP EPS and 12.5% with core EPS, maintaining the company's historical average of a 12% annual return on net asset value (NAV).

Portfolio and Dividend Announcements

The total investment portfolio appreciated to $21.9 billion, driven by net fundings and gains. Consequently, the weighted average yield on investments also saw an uptick, with debt and income-producing securities at 12.4% and total investments at 11.2%. These figures were spurred by the progressive increase in interest rates. To share the generated returns, a Q4 dividend of $0.48 per share has been declared, payable at the year's end. The company sustains a robust liquidity position with $5.3 billion available, keeping a debt-to-equity ratio, net of cash, at 1.03 times.

Originations and Portfolio Performance

This quarter marked $1.6 billion in new investment originations, showcasing a rise from $1.2 billion in the previous quarter. The portfolio now spans 490 companies, a 38% surge since pre-COVID figures, emphasizing the 'incumbency advantage' which aids in repeat business. New first lien investments carried high yields but restrained leverage ratios. Portfolio performance remained stable with a consistent weighted average borrower grade of 3.1, and a notable decline in the non-accrual rate from 1.1% to 0.6%.

Future Outlook and Economic Challenges

Management expressed satisfaction with the quarter's performance, attributing success to robust sourcing, underwriting, and portfolio management. They also believe the company is strategically positioned to confront any forthcoming economic challenges.

Tax Considerations and Excise Accruals

The company concluded tax filings for the past year, reporting a spillover of $1.18 per share, amounting to $643 million. They continue to accrue excise tax in 2023 at levels similar to the previous year, with a view to maintain a comparable level of spillover.

Debt Swapping and Interest Rate Strategy

In an atypical move, the company converted a new debt maturity into a floating rate, primed for a scenario where interest rates decrease over time. Nevertheless, management retains a bullish stance on the economy, despite expectations for persistently higher base rates. They project '24 to be a more vibrant year for deals and origination activities, underscored by a sturdy economy and the company's defensive portfolio positioning. A proactive swap approach was taken based on the forward curve, catering to their floating rate asset portfolio.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon. Welcome to the Ares Capital Corporation's Third Quarter September 30, 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded on Tuesday, October 24, 2023.

I will now turn the call over to your host, Mr. John Stilmar, Managing Director of Ares Investor Relations. Thank you. You may begin.

[John Stilmar, executive]

Thank you. 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 earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding 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 on the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. And accordingly, the company makes no representations or warranties with respect to this information. The company's third quarter September 30, 2023, earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Third Quarter 2023 Earnings Presentation link on the homepage of the Investor Resources section. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I'll now turn it over to Mr. Kipp DeVeer, Ares Capital Corporation's Chief Executive Officer.

[Robert DeVeer, executive]

Thanks, John. Hello, everyone, and thanks for joining our earnings call today. I'm here with our Co-Presidents, Mitch Goldstein and Kort Schnabel, our Chief Financial Officer, Penni Roll; our Chief Operating Officer, Jana Markowicz and other members of the management team.

Before I begin my prepared remarks on the company, I'd like to express our deepest sympathies to those who have been affected by the recent horrific terrorist attacks in Israel and the subsequent loss of innocent lives. It's truly a tragedy and we hope that a peaceful resolution is achieved as soon as possible.

Turning to our results. I'll start with some highlights from our third quarter and then add some thoughts on the economic environment and the current market. This morning, we reported strong third quarter results. Our core earnings per share of $0.59 increased 18% year-over-year, primarily reflecting higher net interest and dividend income largely a result of higher base interest rates. Our GAAP earnings per share for the third quarter were $0.89, driven by our strong core earnings and an increase in the overall value of our investment portfolio. These results led to another quarter of sequential growth in our net asset value per share to $18.99, which has increased 3% since the beginning of the year. We remain one of the few BDCs that's been able to deliver a consistent or growing regular dividend while building NAV over long periods of time. We're pleased with these results and we think it's important to put them in the context of what we're seeing in the broader credit markets. For much of the quarter, the credit markets remain constructive and saw some lift. As the soft landing narrative for the U.S. economy led to enhanced liquidity and modestly higher transaction activity. However, with expectation that higher for longer interest rates will be required to tame inflation, volatility is returned to the capital markets. There is no doubt the unsettled international landscape in Ukraine and Israel, in particular, are adding to this volatility.

As a result, the leverage finance market is less constructive to new transactions, particularly smaller ones and companies that sought the bank and liquid credit markets for their financing needs are turning to the private credit markets looking for worthy partners that can deliver a higher certainty of closing.

Underscoring the market opportunity for direct lenders, this was the third most active quarter in history for $1 billion-plus unitranche transactions and the private credit markets demonstrated the ability to provide a $5 billion financing solution in the [ Finastra ] transaction. Driven by Dale and capabilities of managers like [ Gary ], private credit is continuing to gain market share over bank and syndicated capital market dilutions. During the third quarter, market pricing and terms continue to be highly attractive for new transactions. Credit spreads on new loans are well above workable averages. Leverage levels are lower, and equity contributions are at historical highs.

Looking forward, we're optimistic about the outlook for new investment opportunities, and we expect an uptick in M&A an additional sponsor to sponsor portfolio company sales to accelerate in 2024. Given the robust level of private equity dry powder, that has largely gone on spent growing pressure from private equity LPs seeking returns of their capital and bigger sentiment amongst middle market companies to invest in the growth of their businesses, we expect stronger transaction volume in 2024. The simple turning of the calendar year will also help. We would expect the fourth quarter will be moderately better than the third quarter in terms of volume but likely below fourth quarters of past years. We believe our experience, scale and capabilities position us well to benefit from these market dynamics. Ares management has continued to invest in the quality and growth of its direct lending platform, and we continue to focus on both sponsored and nonsponsored companies and the expansion of our specialty industry coverage, leveraging what we believe is the largest and most tenured U.S. direct lending team in the market with 180 professionals across the U.S. We feel that our broad sourcing capabilities provide significant and differentiated deal flow.

As an example, in the third quarter, we reviewed transactions that were reported in both the leveraged loan and the middle market combined. We believe these sourcing advantages allow us to maintain a highly selective approach, which in turn drives strong long-term investment performance. These sourcing capabilities as the key driver to what we believe is a high-quality, diversified portfolio. Our companies are continuing to perform well despite the increase in borrowing costs. Our portfolio interest coverage ratio measured using current market interest rates at the end of the quarter was stable quarter-over-quarter, and substantially all of our companies are consistently making their interest payments despite the higher base rates. We'd also note that the weighted average portfolio grade is flat quarter-over-quarter and remains better than our 15-year average. Our nonaccrual costs are just over 1% and continue to be well below our own and BDC averages for the past 15 years.

In addition, amendment activity and modifications remain stable at historical levels. The credit strength in our portfolio reported by healthy levels of EBITDA growth across our portfolio of companies, which we believe are demonstrating comparatively stronger growth than the broader market due to the industries that we tend to overweight and our defensive positioning. Our simple strategy of avoiding cyclical sectors more prone to default continues to pay dividends for the company.

We estimate that the weighted average LTV in our loan portfolio is around 43%, although we acknowledge the valuation environment is changing in response to higher rates. But regardless of these shifting valuations we have confidence there is significant value beneath us at most capital structures, a lot of it is led by large and well-established private equity firms with whom we have strong relationships and do repeat business. In situations where we have asked sponsors to step up and support their portfolio of companies, we've been pleased with sponsors [ and ] ability to provide capital.

Despite this constructive view on the portfolio and the economy generally as credit investors, we are laser focused on ensuring we are well prepared in the event of a more protracted economic downturn. In addition to the benefits of our diversified and defensive portfolio, we have a large portfolio management and valuation team, which supports our investment teams and is proactive in identifying problems early and developing strategies to maximize our outcomes. Our balance sheet remains strong with net debt to equity levels of around 1x. We have ample access to capital to invest in this attractive vintage. Importantly, we also have the capital to deal with more knowledging situations as they arise. In tougher situations, we believe we have the appropriate resources to execute on our demonstrated playbook for managing the [ portfolio ]. We believe these risk management and workout capabilities are central to our ability to continue to deliver on our industry-leading track record for credit performance.

Given these dynamics and the company's overall positioning, we feel good about our third quarter results and our position looking forward. And with that, let me turn the call over to Penni to provide some more details on our financial results and our balance sheet position.

[Penni Roll, executive]

Thanks, Kipp. We reported GAAP net income per share of $0.89 for the third quarter of 2023 compared to $0.61 in the prior quarter and $0.21 in the third quarter of 2022. Our higher GAAP net income per share in the third quarter of 2023 benefited from strong core earnings and higher portfolio values during the quarter, driven largely by tight market spreads. On a core basis, we reported core earnings per share of $0.59 for the third quarter of 2023 compared to $0.58 in the prior quarter and $0.50 in the third quarter of 2022. We continue to see the benefits of higher rates on our predominantly floating rate portfolio in the third quarter of 2023 as our interest and dividend income increased from both the prior quarter and the third quarter of the prior year. Our stockholders' equity ended the quarter at nearly $10.8 billion or $18.99 per share, which is an approximate 2% increase per share over the prior quarter. Our year-to-date annualized return on equity using GAAP EPS and core EPS was 14.5% and 12.5%, respectively. This strong level of profitability further builds upon our long-term track record of a 12% GAAP-based annual return on NAV since inception. Our total portfolio at fair value at the end of the quarter was $21.9 billion, up from $21.5 billion at the end of the second quarter reflecting a combination of net funding and net unrealized gains from the portfolio for the quarter. The weighted average yield on our debt and other income-producing securities at amortized cost was 12.4% at September 30, 2023, which increased from 12.2% at June 30, 2023, and 10.7% at September 30, 2022.

The weighted average yield on total investments at amortized cost was 11.2% which increased from 11% at June 30, 2023, and 9.6% at September 30, 2022. The yields on our portfolio largely reflect the continued increases in interest rates.

Now let's shift to our capitalization and liquidity. During the quarter, we returned to the investment-grade debt markets for the first time in over 18 months. This $600 million debt issuance was our first sub 5-year term issuance in this market. This shorter 3.5-year duration benefited the latter as it allowed us to slot into 2027, where we, after this issuance, still only have $1.1 billion maturing in that year. Overall, our liquidity position remains strong with approximately $5.3 billion of total available liquidity, including available cash, and we ended the third quarter with a debt-to-equity ratio net of the available cash of 1.3x as compared to 1.07x a quarter ago. We believe our significant amount of dry powder positions us well to continue to support our existing portfolio company commitments to remain active at current investing environment and to have no refinancing risk with respect to next year's term debt maturities.

We declared a fourth quarter 2023 dividend of $0.48 per share. This dividend is payable on December 28, 2023, to stockholders of record on December 15, 2023, and is consistent with our third quarter 2023 dividend. As Kipp stated, we have a long-standing dividend track record. We are one of the select few BDCs that have paid a stable or growing regular dividend over the past 14-plus years.

And with that, I would like to turn the call over to Mitch to walk through our investment activities for the quarter.

[Mitchell Goldstein, executive]

Thanks, Penni. I'm going to spend a few minutes providing more detail on our investment activity, our portfolio performance and our positioning for the third quarter. I will then conclude with an update on our post-quarter-end activity, backlog and pipeline.

In the third quarter, we originated $1.6 billion of new investments which increased from $1.2 billion in the prior quarter as we saw a slight uptick in M&A activity. Underscoring the breadth of our market coverage, the EBITDA of the companies we financed during the quarter range from below $20 million to over $800 million of EBITDA. Approximately 50% of our new commitments were to existing borrowers, which is consistent with our historical practice. With this quarter's activity, our portfolio now includes 490 companies. This is an increase from 354 companies pre-COVID and represents a growth rate of 38%. I point this out to highlight the meaningful benefits that come from incumbency. We believe incumbency drives future origination. Additionally, we believe incumbency enables us to support our strongest portfolio companies reduces underwriting risk on new commitments and achieves better documentation and terms.

And finally, incumbency enhances our relationship with financial sponsors. This quarter, over 85% of our sponsored transactions were with repeat sponsors. Now as we have all year, we continue to find compelling value in today's market. This is demonstrated by the first [ lien ] investments we originated in the quarter, which had a weighted average yield in excess of 12% and at a leverage ratio of almost 4.6x. This is a full turn of leverage lower than the industry senior leverage track by PitchBook [ LTV ] over the past 10 years.

Underscoring Kip's earlier point about the historically attractive relative value we are able to achieve in the current market, the weighted average LTV of all our new investments for this quarter was below 40%. In addition to adding accretive investments in the current market, our existing portfolio continues to perform well, and we are seeing stability within our credit metrics. We believe this is largely due to our defensively positioned portfolio, in market-leading companies in resilient industries.

In the third quarter, weighted average LTM EBITDA growth rate of our portfolio was a healthy 6%. This compares to an estimated flat EBITDA growth rate for the S&P 500 over the last 12 months. With respect to our portfolio grade, the weighted average portfolio grade of our borrowers at cost was stable with last quarter's at [ 3.1 ]. Our nonaccrual rate at fair value declined from 1.1% last quarter to 0.6% this quarter, which continues to be well below historical levels. Nonaccruals at cost decreased from 2.1% last quarter to 1.2% this quarter and remain well below our 3% 15-year historical average and the KBW BDC average of 3.8% and for the most recent 15-year period available. Looking forward, we remain confident about the performance of our portfolio in part due to our disciplined approach to risk management and portfolio diversification.

Our $21.9 billion portfolio at fair value is diversified across 49 different companies and 25 different industries. This means that any single investment accounts for just 0.2% of the portfolio on average and our largest investment in any single company, excluding SDLP and IVL just 2% of the portfolio. We believe we have the greatest level of portfolio diversification of any publicly traded BDC.

Finally, I will provide a brief update on our post quarter end investment activity and pipeline. From October 1 through October 18, 2023, we made new investment commitments totaling $410 million of which $287 million were funded. We exited or were repaid on $158 million of investment commitment. As of October 18, our backlog and pipeline stood at roughly $820 million. Our backlog and pipeline contain certain investments that are subject to approvals and documentation and may not close or we may sell a portion of these investments post closing.

I will now turn the call back over to Kipp for some closing remarks.

[Robert DeVeer, executive]

In closing, we're pleased with the quarter. Our portfolio continues to perform well and our sourcing, underwriting, portfolio management and capital advantages are driving strong financial results. We feel that we're well positioned to navigate any potential future economic challenges and to capitalize on today's attractive environment for new investing. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions. Operator?

[Operator]

[Operator Instructions]. Our first question comes from Melissa Wedel with JPMorgan.

[Melissa Wedel, analyst]

I want to start with some of the commentary you provided around expecting some rebounded activity in 2024. It sounds like some of that is based on dry powder and expected pressure from private equity investors to reengage a little bit. But do you think there's risk to that recovery and activity should rates remain even higher than expected as implied by the forward curve right now?

[Robert DeVeer, executive]

I mean it's probably just -- thanks for the question, Melissa. It's probably just my own view. But I mean, I think this has been a difficult year to buy and sell things, as I've said in some other places. If you haven't been in a need to sell mode, this is probably a pretty difficult year to think about selling. And then buyers, obviously, are exploring, we think, materially lower purchase prices for a lot of assets, not just corporates, and I think that translates similarly into real estate and infrastructure assets, et cetera, everything is just worth less in a higher rate environment. My optimism around next year is that if we see a leveling out of rates, which I think we're seeing, generally, maybe there's another increase or two. But generally, you're seeing a leveling of rates that price exploration that's been going on between buyers and sellers just gets to be a bit easier, right? But while you're seeing rates, I think unexpectedly increase as quickly as they did. And as materially as they did, it just makes those conversations more difficult. So that's kind of number one.

And number two, yes, my belief is that there are a lot of limited partners out there that have money in the ground, particularly in private equity, where they're looking to 24 a year where they need more material repayments to come back, right? When they think about managing their cash flows, whether it's a pension or any other investor. So I'm hopeful that the combination of those 2 things should lead to better activity levels. I think our deal flow today, Mitch talked a little bit about the backlog and pipeline is better than it's been. So I'm cautiously optimistic, but I guess we'll wait and see.

[Melissa Wedel, analyst]

That's really helpful. And then a question for Penni. Penni, did you have an update for us on any lower income as of quarter end?

[Penni Roll, executive]

Thanks for the question. We have been continuing to accrue -- well, I may go back to -- we did finalize last year's tax returns. And the final spillover was about $1.18 per share or $643 million as we finalize that number, and that's what's reflected in the earnings presentation. As we look into 2023, we continue to accrue excise tax to come to a similar level of spillover to last year. We're still obviously going through the year and tax is never done until we get through a full year. But we are continuing to accrue excise tax at a similar level, if you annualize where we are this year-to-date versus the final expense for last year.

[Operator]

Our next question is from Finian O'Shea with Wells Fargo.

[Finian O'Shea, analyst]

Sorry, I was on mute. On the repeat borrower financing statistic you gave 50% this quarter, which is helpful that you give that, that appears to have come down from pretty elevated levels in the first half. So I'm seeing if there's anything to see there in terms of a completion, say, refinancings of your portfolio companies or maybe some of the exits are rolling off out into the market. I'll stop there. And I guess if you can add as well year-to-date, what percent of your -- directionally of your commitments to REIT borrowers are for refis versus M&A?

[Kort Schnabel, executive]

Hey, Finian, it's Kort Schnabel. I think on the first part of the question around the 50% to existing borrowers, that's actually consistent with our historical experience, if you look back over a normal period at 50% to existing borrowers. So I think what you're just seeing is a pickup in activity for new borrowers relative to the prior few quarters where, obviously, that volume was a little more muted. And that's what resulted in us returning to that 50% level to existing borrowers. So I don't think there's anything more to see there other than that. And then on the second part of the question, actually, I'm sorry, I don't...

[Robert DeVeer, executive]

Now was the -- is there a change in use of proceeds? I don't think then we have kind of that analysis run, frankly, we can go back and dig a little bit in the numbers. But let us take a look at that, and we'll come back to you offline.

[Finian O'Shea, analyst]

Okay. And a follow-up on Ivy Hill, do you have a breakdown of, say, the weighted average duration for the CLO reinvestment periods? Are those materially shortening like as we're seeing in the CLO market.

[Robert DeVeer, executive]

Yes. No, not really. I mean we continue to actually be able to raise capital there. I could go back and dig with the team and look at it, if it's not something I spend a lot of time thinking about. It's pretty diversified. It's a combination of loan mandates and CLOs, but Mitch waving at me that he's...

[Mitchell Goldstein, executive]

I would say it's not all CLOs and idle anyway, right? There's a lot of bespoke, they call it the loan mandate, bank loans where we are able to adjust those maturities year after year and have a consistent basis within ideal. There's not a shortening of that, and we've been having lots of success refinancing when we needed to, but they're not all CLOs would be important for.

[Operator]

Our next question comes from Aaren Cyganovich with Citi.

[Arren Cyganovich, analyst]

With 24 looking like it might be a better year for -- or at least an increase in activity for investing, are you expecting exits to be of a similar amount? And what are you thinking about in terms of potentially increasing some of the leverage you have in the portfolio?

[Robert DeVeer, executive]

Yes. I mean they tend to be reasonably reciprocal Aaren. Thanks for the question. I would think that new deal activity and repayments are likely to pick up next year relative to this year, which has been slower on all those fronts.

[Arren Cyganovich, analyst]

Okay. And it was good to see your nonaccrual activity, ratios came down again. What's your outlook for next year for expectations with nonaccruals? I would imagine in the industry, expect to see a bit of an increase from here?

[Robert DeVeer, executive]

Yes, I think you're probably right. I mean this quarter where we actually realized a couple of restructurings and situations where we took ownership of a company where we continue to be a lender. We actually exited 2 situations that we were not feeling great about and realized 2 charge-offs but charge-offs sort of at the mark. So I think we carried them well.

Yes, I think you're probably right. I mean, with higher rates, being in place now for a while and the general slowdown in the economy, that would tell you the general expectation, I think, not just at this company, but most of our competitors in the market broadly is the defaults will continue to go up next year.

[Operator]

Our next question comes from Casey Alexander with Compass Point.

[Casey Alexander, analyst]

On kind of a cross purposes question, but noticing that you swapped out the new debt maturity into a floater, it sort of feels like a call that it's your expectation that rates will come down and that your cost on that will get cheaper. Otherwise, I'm not sure why you would swap it out. But suggesting that 24% is a better year for deals and originations actually argues that you think that the economy is going to be okay and deal activity is going to pick up. And that kind of argues that rates stay higher for longer. I'm curious at sort of the cross currents from those 2 items.

[Unknown Executive]

I'm going to turn to Penni on the hedging comment because we had quite a lot of debate about that. It was atypical from our past practice. But Penni, do you want to jump into some thinking there maybe and then we can come back and talk about this on 24 and how we see things. And Casey, your guess is as good as mine around rates, but I'll let Penni comment on the hedging range.

[Penni Roll, executive]

Yes. And Obviously, none of us have the perfect crystal ball on rates. But in this case, we did a shorter-duration 3.5-year term loan. And it is atypical as Kipp said, for us to swap. Historically, we've tended to just stick with whatever the base rate is on the liability that we've issued. In this case, a view toward the forward curve. And a matching -- looking at our portfolio being predominantly floating rate assets. It felt like a good opportunity to swap that with the expectation, at least at the time we did it at rates would come down even if we knew they would stay a little bit higher for longer based on the forward curve.

[Robert DeVeer, executive]

Yes, I think that's right. I mean I think we're operating today, Casey, with the belief and everybody has a pretty different view on this, even here these days. The base rate is going to be higher for longer. I would agree with your commentary that the U.S. economy seems while it's slowing to be pretty okay. Yes, I don't think it's great, but I think it's pretty okay. And when you think about our portfolio, which I think is more defensively positioned and as we always mentioned, less oriented towards cyclical companies, we're seeing, as we reported, EBITDA growth in the portfolio while slowing substantially better than the economy. So we're pretty constructive around the economy. We think that will keep rates higher for longer, to your point. And I think I'd also just point out maybe to finish, it's unusual that the Fed is really in the market in a material way during a presidential election, and we happen to have one of those coming up next year. So I would expect a less active Fed next year, which would imply higher for longer, and that's what we're managing to.

[Casey Alexander, analyst]

Okay. My follow-up is that your rate of nonaccruals is terrifically low. I don't know a better adjective to use for it. To what extent had your companies -- did your companies actually benefit from recasting their expense basis because of the COVID crisis? And how much are they benefiting from the slow nature of this moving economy that's allowing them to adjust along the way and that's benefiting your portfolio with a lower level of nonaccruals than you might have expected?

[Robert DeVeer, executive]

I mean I think it's a little bit of all of that. We did make that point coming out of the really the most difficult period of the pandemic because it obviously forced companies to really wait where they were from a cost perspective, that will happen when you have no revenue, right, and you're close. So I do think there's some of that.

But look, for credit investors, and we've been saying this publicly, we think this is a reasonably good environment, right? We've set up our portfolios. We don't need to see a tremendous amount of growth in the portfolio where we have high free cash flow companies, maybe not deleveraging as quickly as they might have hoped with a lower base rate, but still able to deleverage. I think this environment is a trickier one for some of the embedded equity that got put in the ground, particularly in private equity from, call it, 2019 to '22, where prices were much higher. Rates were much lower and expectations for growth were there a lot of those things have been, have changed, right? So we're feeling, again, pretty good. We appreciate the terrifically good commentary. But we're happy with where the portfolio is at. We think it's very manageable for us going forward. And we're just locked in making sure that we're early on problem companies and doing what we've done a long time here. So we feel pretty good about how the company is positioned, as I mentioned in the prepared remarks.

[Operator]

Next question comes from Vilas Abraham with UBS.

[Vilas Abraham, analyst]

Can you comment a little bit on the industry mix and the backlog? Looks like a good chunk of it is consumer. And then just maybe more broadly, are you seeing any meaningful divergence in EBITDA trends across industries?

[Robert DeVeer, executive]

Yes. I mean it's such a short period of time in the backlog. I can -- Penni's pulling it up. It probably represents just a handful of transactions and one that happens to be large in the consumer space. I wouldn't -- I wouldn't draw a whole lot from, frankly, that small sample set. The origination sort of opportunities are similar now as to how they have been all year and in the past. How we're seeing the mix of the economy and what's creating watch list items is the same. For the most part, it tends to be some elements in our health care portfolio, as we and others have talked about in past quarters where some of the practice based and service-based health care companies haven't been able to raise price as much as some others and have had labor issues and shortage issues there. We've had some of the same concerns. And then I think a certain portion of the portfolio, as I always describe it, as a company to make things, right, that do have good pricing power, had the ability to put through quite a lot of price increases, but all of a sudden, they may have run out of gas on their ability to continue to raise prices on certain items, starting to see a little bit more margin pressure. But more often than not, when you look at our 1s and 2s, which are kind of our watch list name, it's only about 7% of the portfolio, it's pretty diverse. There's not a lot of common underpinning there. It's more company specific than anything else.

[Vilas Abraham, analyst]

Got it. That's helpful. And on leverage, sounds like the message there is on your on balance sheet leverage that you're kind of comfortable in this -- in the [ ZIP ] code here, right around [ 1.1 ] for the foreseeable future. Is that a fair characterization? And are there any conditions do you think in the near or medium term that could change that one way or the other?

[Robert DeVeer, executive]

Yes. No, I mean, I think it's at the lower end of our target range. But as you know, it kind of comes and goes quarter-to-quarter depending on the activity, I think we feel coming at the lower end because obviously, the earnings are so good at the company that being more levered doesn't really create a material earnings benefit from here. We actually value having access to the dry powder, thinking about both the new investing environment as well as opportunities in the existing portfolio.

[Operator]

Our next question is from Robert Dodd with Raymond James.

[Robert Dodd, analyst]

Congratulations on the quarter on the credit quality. On the -- if you go back to the couple of questions on the swap question, should we view this as kind of a onetime event just take opportunity on more of a near-term strategy? Obviously, you've got a couple of maturities in '24, a couple more in '25. Should I be assuming that you're likely to swap those as well? Or if you replace them with like-for-like kind of structures? Or was it really a one-off thing?

[Penni Roll, executive]

Yes. Thanks for the question. Honestly, it's hard to say. This is something we assess on a deal-by-deal basis. And as I said before, it's rare that we actually do this. We just thought this was an interesting opportunity in the current market. So we would look to make this assessment upon each issuance as we go into 2024. We have $1.1 billion of maturities that are effectively resolved at this point. And so we will kind of continue to assess when it's appropriate and good for us to go to the market. But when we do that, we will make the assessment on swapping at that time.

[Robert Dodd, analyst]

Got it. And then the second one, talk about atypical things. I mean, you now, of course, are very, very [ low ]. If I look at new defaults, anything like that, any kind of credit metric is very, very good. Can you give us any comment, is that entirely the result of portfolio company performance? Or has there been any typical behavior from sponsors may be putting in more equity when it's not actually acquired. Again, I wouldn't necessarily expect that. But the credit quality of the loans is held in remarkably well. So any color on -- is there anything unusual about that? Or is it just portfolio company performance?

[Robert DeVeer, executive]

No, I don't think there's anything unusual at all. I mean, we mentioned in the prepared remarks that to the extent we've actually look to some of the private equity partners we've had a long time to support companies with capital they have. But more than anything, to your question, I think we're actually seeing pretty good underlying performance in the portfolio of companies. It's better than I would have expected. If you asked me a year ago, which is why we're optimistic for '24 and beyond. And I do expect some companies will perhaps have some problems, the clock ticks along, but -- and that's my expectation for modestly higher defaults, but we're feeling pretty constructive on where we are in terms of the economy and the portfolio.

[Operator]

Our next question comes from Kenneth Lee with RBC Capital Markets.

[Kenneth Lee, analyst]

Wonder if you could just talk about any kind of outlook in terms of opportunities around being able to partner with banks or any opportunity related to the change in regulatory framework on the bank side there.

[Unknown Executive]

Sure. I mean I'll go maybe up a level and just say a in terms of our [ management ] and our credit platform here, we see extraordinary opportunity to potentially partner with the banks. We bought a sizable portfolio as folks had seen from a bank this year. And the dialogue around the banks and some of their concerns relative to their balance sheets and their capacity continues to drive a lot of really interesting conversations with those counterparties. But to come back into this company specifically, while I think that Ares Capital Corporation can potentially participate in those opportunities. I think there are other parts of the credit platform that are frankly more engaged in those discussions because, as you know, most banks, which is obviously why our companies had so much success and has gotten so large really don't engage in middle market corporate lending anymore. So our expectation that they'd be selling the types of loans that this company would want to buy seems to me, at least to be pretty low. Most of the assets that we think will eventually be discussed and potentially for sale from some of the banks probably are a little bit outside of the mandate of this company. But I can tell you that as a platform, those discussions are very vibrant, and I would expect them to be ongoing for a while.

[Kenneth Lee, analyst]

Got you. Very helpful. And then one final follow-up question. This is actually just a follow-up on Robert's question previously. In terms of the portfolio support you're seeing, I wonder if you just provide a little bit more color around there, in terms of -- I think in your prepared remarks, you said you were relatively pleased with what you're seeing. I wonder if you could just expand upon that.

[Robert DeVeer, executive]

I'm sorry. I missed that there for a second. Could your repeat that one, please.

[Kenneth Lee, analyst]

Yes. Just in terms of the portfolio support you're seeing from the PE sponsors, in the prepared remarks, you mentioned you're really pleased with what you're seeing so far. Wondering if you could just provide a little bit more color or expand upon those remarks there.

[Robert DeVeer, executive]

I think we're pleased with the support that we've seen from the private equity community. And I don't really know what else to say. I mean when asked in situations where it's required. We've seen partners and private equity companies and obviously, feel good about their continued ownership in those companies. I mean the good news here is we, as a team, have been doing this with a lot of the same private equity firms for a long time. It's very common that we have several, if not more than several, investments with a single private equity firm. So that relationship and that trust has been built over time, and we've just seen great partnership from that community as they try to figure things out. And as I mentioned, I think it's some it's a more challenging environment to be an owner of assets today than it is to be a lender to those assets because when problems occur, the dialogue tends to be one of us turning to ownership and saying, what's the plan. And very often, the plan is equity support is required, and we've seen it follow on pretty well.

[Mitchell Goldstein, executive]

Yes, the benefit also of being leveraged 40% or 30% to 40% loan to value provides a lot of cushion such that in a slower environment, the actual owners are, as you can see, willing to put money in because they need to. And we've been the beneficiaries of being where we sit in the cap structure.

[Robert DeVeer, executive]

Yes. I mean I think if they need to, but they also are doing it economically, right? They're looking at investments that they've made. In what are good companies that they want to support and own. And while maybe the duration of their investment is going to extend a little bit and perhaps the return on that investment has to come down over time. With higher rates, they're supporting these companies because they view that follow-on support is a good investment, right, one that's going to generate a return for their investors. And that gives us a lot of confidence that we have strong partners and that we're invested in good companies.

[Operator]

Our next question comes from Mark Hughes with Truist Securities.

[Mark Hughes, analyst]

Yes. Thanks. Good morning, good afternoon. If you mentioned the leveraged finance market, it's less constructive than the transaction you pointed out how the $1 billion-plus unitranche was becoming more prevalent. Was that a function of this broader transition to private credit? Or was that maybe influenced by some of the volatility later in the market that later in the quarter that you mentioned around higher for longer and political uncertainty.

[Robert DeVeer, executive]

Yes. I mean, and let Kort jump in too, if you'd like. I'd say, to answer your question simply, both right? So I think over a long period of time, the private credit marketplace has been demonstrating to counterparties that it has a very attractive solution for borrowers and owners that can get achieved, particularly in scale these days away from the public markets. So more and more adoption, more and more recognition from our counterparties that the products that we're providing, again, scale, flexible, customized, et cetera, to each solution are actually really attractive and support their investment thesis on the equity side. That, of course, accelerates during periods of higher market volatility. So over the last few quarters, it's probably both, but I think the long-term arrow is very much to your question, pointing towards higher and higher percentage of getting done with private capital, and it seems to me the numbers support fewer deals, particularly smaller $1 billion, $2 billion and under getting done away from the syndicated markets.

[Kort Schnabel, executive]

I think our primary competitive advantage is certainty over the banks, which often they provide less certainty. And so in periods of volatility, we're going to win with that advantage. But then when banks will step back into the market in less volatile times, people remember that volatility can come again and that certainty is valuable. And so that just creates permanent market share shifts, and it's not linear. Over time, but that, as Kipp said, that trend toward that permanent shift, we believe will continue.

[Mark Hughes, analyst]

Understood. And I'll kind of approach the credit question maybe a little different way the -- do you get the sense to anybody or the portfolio of companies are, say, foregoing FX or hiring if we're going to be higher for longer in terms of interest rates. Are they keeping ahead of the game in terms of the good EBITDA growth you've described? Or I think you might have said it 2024, the outlook is for a little more pressure on credit, just the passage of time. If interest rates don't decline, will that passage of time just put the natural pressure on credit?

[Unknown Executive]

Yes. I mean to answer the first part of your question, which I think is the most interesting question. That's sort of what we're all watching and talking to our company is about right? Because the reality is we're sitting in an environment where you're actually seeing pretty good economic performance again across the portfolio, reasonable growth even if it's slowing but all of a sudden, companies that are achieving plan or close to achieving plan have a lot less cash flow around than they had, right? So servicing debt something that they obviously need to put the utmost focus on is that changing the way they run their business, are they making fewer investments. It's a great question. It's like the question that we're talking to all of our companies about to understand that. But I think that's -- the answer to that question, which I don't have today, we'll dictate sort of where the economy goes in '24 and beyond.

[Operator]

[Operator Instructions]. Our next question comes from Ryan Lynch with KBW.

[Ryan Lynch, analyst]

My first question was just on the broadly syndicated loan market. We're pretty weak at the end of 2022 and as well as the beginning of 2023. But in the previous -- in the third quarter, you start to see a lot more activity coming back to the broadly syndicated loan market, again, still relatively low relative to what private credit and direct lenders are doing. I'm just curious with the most recent volatility. Is the broadly syndicated loan market still an option for borrowers out there? Or did that take a pretty big step back from the sort of momentum it started to get in the third quarter?

[Unknown Executive]

Yes. I mean -- so trying to come back, it needs the CLO machine to function again, obviously, and that that's the largest buyer in the space. And I think the banks today are structuring to ratings, frankly, cheap [ B2 ] ratings and larger deals, they feel confident they can syndicate. So to the extent it's that profile, very much an option to the extent it doesn't fit that profile kind of comes to us and others.

[Ryan Lynch, analyst]

Okay. So it just goes back to your comment of kind of the larger deals still having that option, long to high-quality deals.

[Unknown Executive]

Multibillion dollar term loans that get a B2 rating the markets up and other stuff, not so much.

[Ryan Lynch, analyst]

Okay. And then the other question is for you, Penni. I know you talked about the most recent bond offering and swapping that radar. And one of the questions I just had with that is versus the swap or not swap that out. I understand the commentary on that. But was there any consideration for instead of doing an additional [indiscernible] I was just drawing down on the credit facility you would have a better spread, you would reduce some commitment fees. You still have that optionality where if rates do go lower, you would actually have a lower overall yield on that debt as well as you guys have over 70% unsecured debt on your liability structure, so it's not like you guys had a big need for further unsecuring your overall liability structure. So I just wanted to know how is the decision from swapping out unsecured debt versus just drawing on the credit facility made.

[Penni Roll, executive]

No, I think it's a great question. As you can see from our capital structure, we have raised a lot of secured debt through revolving credit facilities and have continued to do so even into this year. We like to look at all of the capital markets in which we go to market for the liability structure, and we care about the latter and the maturities and the access to capital from sources. And we are looking forward to debt maturities over the next 1, 2, 3 years. So we felt like it made sense to go cap back into the investment-grade market as one of those many sources of capital that we have. If you look at where we swapped it to while higher than most of our credit facilities, it is still our highest priced credit facility by a little bit. So it's in line with revolvers. And by swapping it does give us the opportunity to drive rates down if you believe the curve when that happens over the 3.5 year 10 or so. A lot of this is about continuing to build an appropriate capital structure and also think about the latter maturities. We did have a window in 2027. Without much maturing on a relative basis. And even with this issuance, it's still $1.1 billion in the term debt market in '27. So it just helps us continue to build out that ladder. And access multiple sources of capital. We'll continue to look to both markets, but I also think our team has done a great job of continuing to get more capital in on the [ secure ] revolving -- or sorry, floating rate side. But it takes really all components to make the balance sheet work.

[Operator]

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Kipp DeVeer for any closing remarks.

[Robert DeVeer, executive]

As usual, I don't have any other than to say thanks for taking the time to join the call. Appreciate the good questions. And I hope everybody has a great day, a great week.

[Operator]

Thank you. Ladies and gentlemen, this concludes our conference call for today. If you missed any part an archived replay of the call will be available approximately 1 hour after the end of the call through November 21 at 5:00 p.m. Eastern to domestic callers by dialing [phone] and to international callers by dialing 1 [phone]. And for all replays, please reference 137-40714. An archived replay will be also available on the webcast link located on the homepage of the investor sources sections of Ares Capital's website. Thank you for participating. You may now disconnect.