Key Points
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Ares Capital’s non-accrual loans rose to 2.4% in the second quarter of 2026, up from 1.8% a year ago.
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Compared to the BDC industry and Ares Capital’s own history, the portfolio is still performing very strongly.
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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.
Loan quality matters for Ares Capital
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.
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.
Wrong direction, but not yet a problem
Directionally, rising non-accruals isn’t good news. But there will always be some number of troubled loans in a portfolio. Which is why it is important to keep the absolute percentage in mind. In the second quarter of 2026, Ares Capital’s non-accrual loans accounted for 2.4% of its portfolio (up from 1.8%). That’s a fairly modest number on an absolute basis.
Even better, the 2.4% figure is below Ares Capital’s historical average since the Great Recession, which is around 3%. The industry average is roughly 4%. The 60-basis-point increase could simply be a reversion to the mean. So, at this point, Ares Capital’s non-accrual loans aren’t a problem, though the direction of the rate change should still be monitored. If non-accrual loans jump to 3% and still continue rising, there could be deeper issues to consider.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ares Capital. The Motley Fool has a disclosure policy.