RBC Capital Markets, LLC

EQUITY RESEARCH
Kenneth S. Lee (Analyst) Baier (Bonnie) Liu
(212) 905-5995 (Associate)
kenneth.s.lee@rbccm.com (917) 655-1124
baierbonnie.liu@rbccm.com

Sector: Specialty Finance

October 29, 2020

Outperform
Ares Capital Corporation NASDAQ: ARCC; USD 13.92
3Q20 Review Price Target USD 16.00
Our view: 3Q results were in-line with our expectations. Mgmt feeling WHAT'S INSIDE
more optimism around outlook for deal flow over the quarters ahead. Rating/Risk Change Price Target Change
Several metrics suggest some improvements in the overall portfolio. We
In-Depth Report Est. Change
continue to favor ARCC's scale advantages, well-supported dividends,
and strong track record of managing risks across the cycle. Maintain Preview News Analysis
Outperform and $16 PT. Scenario Analysis*
Key points: Downside Current Price Upside
Scenario Price Target Scenario
Our estimate changes: We are fine-tuning our 2020 core EPS estimate to
$1.58 (from $1.57), and our 2021 core EPS estimate to $1.65 (from $1.60). 8.00 13.92 16.00 18.00
31% 26% 41%
We are introducing our 2022E core EPS estimate at $1.71. We roll forward
our valuation methodology but we are maintaining our $16 PT. *Implied Total Returns
Key Statistics
Ares Capital Corp (ARCC) reported 3Q20 core EPS of $0.39, in line with Shares O/S (MM): 423.0 Market Cap (MM): 5,888
Dividend: 1.60 Yield: 11.5%
our $0.39 estimate (consensus at $0.38). NAVPS: 16.46 P/NAVPS: 0.85x
Float (MM): 423.3 Tr. 12 ROE: 11.50%
Busier quarters ahead: Management is feeling more optimism and Avg. Daily Volume: 1,856,934

constructive about the outlook, given what they see as potentially busier
RBC Estimates
quarters ahead (compared to 2Q and 3Q of this year), as they see FY Dec 2019A 2020E 2021E 2022E
management teams and financial sponsors focus on growth and value Core EPS 1.90 1.58 1.65 1.71
creation, from risk management earlier in the year, and, consequently, Prev. 1.57 1.60
a pickup in M&A activity (and thus deal flow for ARCC). Interestingly, P/CEPS 7.3x 8.8x 8.4x 8.1x
management notes that they see less intense competition for larger Ebitda BVPS Diluted 17.32 16.44 16.49 16.60
(> $100mn) portfolio company deals than for smaller middle-market deals, Prev. 15.79 15.78
P/BVPS 0.80x 0.85x 0.84x 0.84x
as fewer players can provide complete financial solutions, and note, as
a consequence, smaller companies can borrow at similar or even better Core EPS Q1 Q2 Q3 Q4
2019 0.48A 0.49A 0.48A 0.45A
terms than larger companies.
2020 0.41A 0.39A 0.39A 0.38E
2021 0.39E 0.41E 0.42E 0.42E
Investment portfolio: Several metrics suggest improvements in trends BVPS Diluted
within ARCC’s portfolio: 99% of contractual interest payments being made 2019 17.23A 17.30A 17.27A 17.32A
in the quarter, a 60% decline in new amendments, and net revolver 2020 15.56A 15.83A 16.46A 16.44E
Prev. 15.81E 15.79E
repayments being made across portfolio (revolver drawings are back to
2021 16.44E 16.44E 16.46E 16.49E
near pre-Covid levels). Recall, we consider ARCC’s portfolio as being well- All values in USD unless otherwise noted.
diversified, with less exposure to cyclical sectors. Granted, roughly 20%
of the portfolio is internally categorized as portfolio grade 1 or 2, and
our sense is that many of the most Covid-impacted names are within
these categories, which means there could be elevated risks. However,
management indicated a significant number of these companies received
sponsor equity below ARCC’s debt positions, which should help increase
the cushion against potential losses, and management views many of
these companies as having strong franchises.

Positives: 1) investment income higher than expected; 2) NAV/sh higher

than expected; 3) higher than expected other income due to amendment
fees;

Negatives: 1) sequential increase in non-accruals; 2) gross commitments

lower than expected; 3) interest expense higher than expected.

Disseminated: Oct 29, 2020 23:01ET; Produced: Oct 29, 2020 23:01ET Priced as of prior trading day's market close, EST (unless otherwise noted).
For Required Conflicts Disclosures, see Page 9.
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 Specialty Finance
Ares Capital Corporation

Target/Upside/Downside Scenarios Investment summary

ARCC is a market-leading BDC with scale, with access to
Exhibit 1: Ares Capital Corporation
the Ares global credit platform a competitive advantage. We
125 Weeks 08JUN18 - 29OCT20 believe ARCC has potential to generate above-peer-average
20
18 UPSIDE 18.00 ROEs. We have an Outperform rating on shares.
16 TARGET 16.00
14 CURRENT 13.92
Market-leading BDC with scale: Ares Capital Corporation
12
(ARCC) is the largest business development company (BDC)
10 and we believe ARCC’s scale is a competitive advantage,
especially viewed within the context of a BDC sector that
8 DOWNSIDE 8.00 is relatively fragmented and where there are only a few
60m large-scale players. In our view, some advantages include: 1)
better access to deal flow versus smaller peers (ARCC has
40m
20m

2018 2019 2020

J J A S O N D J F M A M J J A S O N D J F M A M J J A S O
ARCC US Rel. S&P 500 COMPOSITE MA 40 weeks
Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target
Price target/base case
Our price target $16 is based on our base case scenario,
which assumes zero non-accruals in the investment portfolio
(unrealized/realized credit losses are excluded from core net
investment income, we note); 1.17x debt/equity leverage ratio
in 2021; and asset yield roughly in the 9% range.
Upside scenario
Our upside valuation of $18 assumes the company utilizing
leverage closer to the upper end of the targeted 0.9-1.25x
debt/equity leverage ratio; zero non-accruals; and a ~50bps
increase in the average asset yield across the portfolio; and a
~25bps decline in cost of debt.
Downside scenario
Our downside valuation of $8 assumes a 0.9x debt/equity
leverage ratio, less than the base case driven by slower than
expected deployment of called capital; 3.0% realized credit
losses within the portfolio (which is roughly less than what we
have seen from at-scale peers during the financial crisis, but
consistent with ARCC’s track record); and a ~50bps decrease
in average asset yield across the portfolio, partly offset by a
25bps increase in cost of debt (given the company matches
liabilities with assets in terms of interest type).
Oct 2021 relationships with ~450 different financial sponsors); 2) ability
to better diversify the investment portfolio vs smaller peers;
and 3) ARCC can be considered a ‘total solutions’ provider, able
to provide a broad set of financing solutions for middle market
companies for various transaction types.
Access to diversified Ares credit platform a competitive
advantage: In our view, Ares Capital’s ability to access the
resources of the Ares Credit Group within Ares Management
Corp (ARES) is a competitive advantage. Overall, the Ares
Credit Group has 250 dedicated investment professionals,
with 15 PMs and 50+ industry research analysts covering
55+ sectors, 13 restructuring professionals, and 120 direct
origination professionals. Altogether, these resources give
Ares Capital extensive capabilities to perform investment
research and underwriting, due diligence, direct origination of
assets and portfolio management.
Cycle-tested and experienced management team: We
highlight Ares Capital has a very experienced senior
management team, with members having industry experience
ranging from 18 to 30 years, and having managed the portfolio
successfully through the last major downturn during the
financial crisis (with only net realized losses of ~2% in 2009).
Dividends well supported: In our view, ARCC’s dividends are
well supported by the company’s core earnings per share
generation plus potential net realized gains.

Key risks include: 1) price volatility in the leveraged loan

markets or any economic downturn could negatively impact
the investment portfolio; 2) changes in interest rates could
impact asset yields and funding costs; 3) competition within
the direct lending space could slow capital deployment pace;
4) company’s use of leverage, through borrowing money,
could magnify risks; 5) potential conflicts of interests arising
from the investment advisor's affiliation.

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 Specialty Finance
Ares Capital Corporation

Key takeaways for the quarter

 Busier quarters ahead: Management is feeling more optimism and constructive about
the outlook, given what they see as potentially busier quarters ahead (compared to 2Q
and 3Q of this year), as they see management teams and financial sponsors focus on
growth and value creation, from risk management earlier in the year, and, consequently,
a pickup in M&A activity (and thus deal flow for ARCC). Further, we note management
has been conservative on new originations, with 94% of commitments as senior secured
debt and 2/3 of commitments to non-cyclical sectors, including software, healthcare
services, commercial services and life science companies. Interestingly, management
notes that they see less intense competition for larger Ebitda (> $100mn) portfolio
company deals than for smaller middle-market deals, as fewer players can provide
complete financial solutions, and note, as a consequence, smaller companies can borrow
at similar or even better terms than larger companies.
 Investment portfolio: Several metrics suggest improvements in trends within ARCC’s
portfolio: 99% of contractual interest payments being made in the quarter, a 60%
decline in new amendments, and net revolver repayments being made across portfolio
(revolver drawings are back to near pre-Covid levels). Recall, we consider ARCC’s
portfolio as being well-diversified, with less exposure to cyclical sectors, largely
composed of senior secured debt investments, and having a weighted average LTV in the
low 50% range (suggesting meaningful equity cushion). Granted, roughly 20% of the
portfolio is internally categorized as portfolio grade 1 or 2, and our sense is that many of
the most Covid-impacted names are within these categories, which means there could
be elevated risks. However, management indicated a significant number of these
companies received sponsor equity below ARCC’s debt positions, which should help
increase the cushion against potential losses, and management views many of these
companies as having strong franchises. Granted, non-accruals increased to 3.2% of the
portfolio on a fair value basis (5.1% on an amortized cost basis), from the 2.6% seen in
2Q20 (4.4% on an amortized cost basis), however management feels non-accruals may
stabilize, or could improve, given improving corporate earnings. Further, ARCC exited
~$124mn of investments on non-accrual post 3Q (38% of $326mn of investments exited
post 3Q were on non-accrual), which would be a meaningful portion of the $764mn of
non-accrual investments at amortized cost.

Net/Net: In our view, ARCC reported an in-line quarter relative to our expectations, with
some puts and takes. Bottom-line core EPS matched our estimate (though were above
consensus). Positively, investment income was above our expectations, driven by higher than
expected interest income and other income. NAV/sh was above our estimate, driven mainly
by unrealized portfolio gains of $300mn.

Our estimate changes: We are fine-tuning our 2020 core EPS estimate to $1.58 (from $1.57),
and our 2021 core EPS estimate to $1.65 (from $1.60). We are introducing our 2022E core
EPS estimate at $1.71. We roll forward our valuation methodology but we are maintaining
our $16 PT.

Recent results
Ares Capital Corp (ARCC) reported 3Q20 core EPS of $0.39, in line with our $0.39 estimate
(consensus at $0.38). Reported net investment income per share was $0.39 (vs our $0.39
estimate). Reported GAAP net income per share was $1.04, which includes impact from net
realized and unrealized gains of $0.65.

October 29, 2020 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 3

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 Specialty Finance
Ares Capital Corporation

Operational highlights
Portfolio spreads: Weighted-average yield on debt investments and other income producing
securities was 9.4% in the quarter, compared to the 9.3% in 2Q. Total investment income
was $352mn, above our $334.1mn estimate.

Debt investment portfolio: Total fair value of investments at the end of the quarter was
$14.358bn, above the $13.842bn in 2Q and our $13.492bn estimate. Gross commitments in
the quarter totalled $706mn, lower than our $850mn estimate, while exits/prepayments
totalled $352mn, much lower than our $1.2bn estimate. The portfolio, at quarter end, was
composed of 87% debt securities and 13% equity investments. Non-accruals increased to
3.2% of the portfolio on a fair value basis (5.1% on an amortized cost basis), from the 2.6%
seen in 2Q20 (4.4% on an amortized cost basis).

Leverage declined sequentially, with the debt/equity ratio at 1.10x (vs 1.12x in 2Q), slightly
higher than our 1.05x estimate, though falling within management's targeted range of 0.9x
to 1.25x post SBCAA. In terms of liquidity, at the end of the quarter, ARCC had $233mn in
cash and $4.2bn available borrowing capacity under existing credit facilities (subject to
borrowing base and other restrictions).

NAV per share: Net asset value (NAV) per share was $16.48, meaningfully above our
$15.81/sh estimate, and an increase q/q from the $15.83/sh in the prior quarter.

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Ares Capital Corporation

Valuation
Given ARCC’s scale and capital position, access to the resources of the broader Ares Credit
Group platform, including access to potential deal flow and investment resources, experienced
management team, and our expectations that the firm can generate annualized ROE above
peer averages, which we believe is comfortably above the firm’s cost of equity capital, we
would ascribe a target P/NAV multiple of 0.97x. Our $16 price target is based on 0.97x our
2021 estimated NAV/sh of $16.49. Our price target supports an Outperform rating.

Risks to rating and price target

• Price volatility in corporate leveraged loan market may adversely affect fair value of the
company’s portfolio: Further, a significant percentage of portfolio company investments may
be acquired from private companies, which may be subject to legal and other restrictions
on resale or are otherwise less liquid than publicly-traded securities.
• Economic recessions, market downturns, or any slowdown driven by negative economic
impact from Covid-19, could impair the company’s portfolio companies and negatively
impact the company’s operating results: Many of the company’s portfolio companies may
be susceptible to economic slowdowns, and may be unable to repay the company’s debt
investments during these periods, which could increase the company’s non-performing
assets and the value of the company’s portfolio is likely to decrease.
• Recent legislation may allow the company to incur additional leverage; further, the
company’s use of leverage, through borrowing money, could magnify the risk of investing in
the company: The company, as part of its business strategy, may borrow from or issue senior
debt securities to banks, insurance companies or other lenders or investors. If the value of
the company’s assets decreases, leverage would cause the net asset value to decline more
sharply than it otherwise would have been if the company did not employ leverage.
• Increased competition for investment opportunities could delay deployment of capital
and could reduce returns: The company competes for investments with other BDCs and
investment funds, including alternative investment vehicles such as hedge funds, as well as
commercial banks and other sources of funding. Some competitors may have lower cost of
capital or higher risk tolerances than the company.
• The company is exposed to risks associated with changes in interest rates: As the company
earns an investment spread between investment income and cost of funding, declining
interest rates could reduce investment income on new investments. Rising interest rates
could increase borrowing costs.
• The company may compete for capital and investment opportunities with other affiliates
or entities managed by Ares Capital’s investment advisor, Ares Capital Management LLC,
subjecting the company’s adviser to certain conflicts of interests: In our view, while potential
conflicts of interest exist, as the adviser or affiliates of the adviser may have overlapping
investment objectives, they are minimized through incentive fee structure embedded in the
management agreement that aims to ensure the adviser’s interests are aligned with Ares
Capital’s interests (and ultimately ARCC shareholders).

Company description
Ares Capital Corporation (ARCC) is a specialty finance company, incorporated under the laws
of Maryland, and was founded in April 2004. As of year-end 2018, ARCC was the largest
BDC in the U.S., with $12.9bn in assets. ARCC is externally-managed by an investment
advisor, Ares Capital Management LLC, a subsidiary of Ares Management Corporation (ARES),
a publicly traded global alternative investment firm. Ares Operations LLC, a subsidiary of
Ares Management Corp, provides certain administrative and other services for ARCC. ARCC is
focused on lending to U.S. middle-market companies, with “middle-market companies” being
defined as companies with annual Ebitda between $10mn to $250mn. The company typically

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Ares Capital Corporation

invests in first-lien senior secured debt, including ‘unitranche’ loans, second lien secured debt,
and mezzanine debt, which may have equity components. ARCC’s portfolio companies, or
companies that ARCC would invest in, would typically use the capital to support growth,
acquisitions, market or product expansion, re-financings and/or recapitalizations.

Ares Capital is an externally-managed, closed-end, management investment company that

has elected to be regulated as a business development company (BDC) under the 1940
Investment Company Act. The company has elected and intends to qualify annually as a
regulated investment company (RIC) under U.S. federal income tax purposes.

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 Specialty Finance
Ares Capital Corporation

Ares Capital Corporation (ARCC)

($ millions, except per share data)
Source: Company Filings and RBC Capital Markets Estimates
Kenneth S. Lee (Analyst), 212.905.5995, kenneth.s.lee@rbccm.com
1/1/2019 3/31/2020 6/30/2020 9/30/2020 ######### 1/1/2020
Income Statement 2019A 1Q20A 2Q20A 3Q20A 4Q20E 2020E 1Q21E 2Q21E 3Q21E 4Q21E 2021E 2022E
Interest income - investments 1,180.0 298.0 287.0 280.0 280.8 1,145.8 278.7 279.3 279.5 281.5 1,119.0 1,130.8
Dividend income 152.0 36.0 36.0 37.0 36.0 145.0 36.0 36.0 36.0 36.0 144.0 156.0
Capital structuring fees 162.0 28.0 16.0 12.0 12.0 68.0 25.0 30.0 40.0 40.0 135.0 160.0
Other Income 34.0 7.0 11.0 23.0 11.0 52.0 10.0 10.0 10.0 10.0 40.0 32.0
Total Investment Income 1,528.0 369.0 350.0 352.0 339.8 1,410.8 349.7 355.3 365.5 367.5 1,438.0 1,478.8

Interest Expense 291.0 82.0 76.0 77.0 77.3 312.3 79.3 79.6 79.6 80.8 319.3 323.9
Management Fees 205.0 55.0 53.0 53.0 55.8 216.8 56.6 56.7 56.7 57.2 227.2 229.6
Incentive Fees - income based 194.0 44.0 41.0 42.0 36.9 163.9 38.4 39.6 41.6 41.6 161.3 167.8
Incentive Fees Gains (4.0) (58.0) - - - (58.0) - - - - - -
Total Management/Incentive Fees 395.0 41.0 94.0 95.0 92.7 322.7 95.0 96.3 98.4 98.8 388.5 397.4
Organizational - - - - - - - - - - - -
Administrative 14.0 4.0 3.0 3.0 3.0 13.0 3.5 3.0 3.0 3.5 13.0 14.5
Professional - - - - - - - - - - - -
Other 1.0 5.0 7.0 7.0 6.0 25.0 5.0 5.0 5.0 5.0 20.0 20.0
Total Other 15.0 9.0 10.0 10.0 9.0 38.0 8.5 8.0 8.0 8.5 33.0 34.5
Total Expenses 701.0 132.0 180.0 182.0 179.0 673.0 182.9 183.9 186.0 188.1 740.8 755.8

Pre-Tax Operating Income 827.0 237.0 170.0 170.0 160.8 737.8 166.8 171.4 179.5 179.4 697.1 723.0
Provision For Income Taxes 16.0 3.0 5.0 4.0 - 12.0 - - - - - -
Tax Rate 1.9% 0.0% 0.0% 0.0% 0.0% 1.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Net investment income 811.0 234.0 165.0 166.0 160.8 725.8 166.8 171.4 179.5 179.4 697.1 723.0
Net Realized Gains/(Losses) (65.0) 34 8 (25) - 17.0 - - - - 0.0 0.0
Net Unrealized Gains/(Losses) 47.0 (880) 104 300 - (476.5) - - - - 0.0 0.0
Net Income 793.0 (612.0) 276.5 441.0 160.8 266.3 166.8 171.4 179.5 179.4 697.1 723.0

Net investment income per share $1.90 $0.54 $0.39 $0.39 $0.38 $1.71 $0.39 $0.41 $0.42 $0.42 $1.65 $1.71
Adjustments to NII per share $0.00 -$0.13 $0.00 $0.00 $0.00 -$0.13 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Core EPS $1.90 $0.41 $0.39 $0.39 $0.38 $1.58 $0.39 $0.41 $0.42 $0.42 $1.65 $1.71

Realized Gains, p/s ($0.15) $0.08 $0.02 ($0.06) $0.00 $0.04 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Unrealized Gains, p/s $0.11 ($2.05) $0.24 $0.71 $0.00 ($1.12) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
GAAP EPS $1.86 ($1.42) $0.65 $1.04 $0.38 $0.63 $0.39 $0.41 $0.42 $0.42 $1.65 $1.71

Average Diluted Share Count 427.0 430.0 423.0 423.0 423.0 424.8 423.0 423.0 423.0 423.0 423.0 423.0
EOP Shares Outstanding 431.0 423.0 423.0 423.0 423.0 423.0 423.0 423.0 423.0 423.0 423.0 423.0

Dividends Per Share $1.60 $0.40 $0.40 $0.40 $0.40 $1.60 $0.40 $0.40 $0.40 $0.40 $1.60 $1.60
Dividend Payout on core EPS 84% 74% 103% 102% 105% 94% 101% 99% 94% 94% 97% 94%
Special Dividends $0.08 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
NAV Per Share $17.32 $15.56 $15.83 $16.46 $16.44 $16.44 $16.44 $16.44 $16.46 $16.49 $16.49 $16.60
Leverage ratio (debt/equity) 0.93x 1.24x 1.11x 1.08x 1.14x 1.14x 1.14x 1.14x 1.14x 1.17x 1.17x 1.20x

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Balance Sheet 2019A 1Q20A 2Q20A 3Q20A 4Q20E 2020E 1Q21E 2Q21E 3Q21E 4Q21E 2021E 2022E
Senior Debt 10,675.2 10,921.2 10,243.1 10,481.3 10,736.8 10,736.8 10,773.3 10,773.3 10,791.6 10,955.8 10,955.8 11,174.8
Mezzanine Debt 1,731.1 1,724.4 1,799.5 2,010.1 2,059.1 2,059.1 2,066.1 2,066.1 2,069.6 2,101.1 2,101.1 2,143.1
Equity Investments 2,019.6 1,724.4 1,799.5 1,866.5 1,912.0 1,912.0 1,918.5 1,918.5 1,921.8 1,951.0 1,951.0 1,990.0
Other - - - - - - - - - - - -
Total Investments At FMV 14,426.0 14,370.0 13,842.0 14,358.0 14,708.0 14,708.0 14,758.0 14,758.0 14,783.0 15,008.0 15,008.0 15,308.0
Cash 167.0 460.0 278.0 233.0 233.0 233.0 233.0 233.0 233.0 233.0 233.0 233.0
Total Interest Earning Assets 12,573.4 13,105.6 12,320.5 12,724.5 13,029.0 13,029.0 13,072.5 13,072.5 13,094.2 13,290.0 13,290.0 13,551.0
Total Other Assets 312.0 976.0 397.0 359.0 359.0 359.0 359.0 359.0 359.0 359.0 359.0 359.0
Total Assets 14,905.0 15,806.0 14,517.0 14,950.0 15,300.0 15,300.0 15,350.0 15,350.0 15,375.0 15,600.0 15,600.0 15,900.0

Debt Outstanding 6,971.0 8,179.0 7,398.0 7,550.0 7,907.5 7,907.5 7,959.0 7,956.0 7,969.8 8,183.7 8,183.7 8,433.9
Other Liabilities 467.0 1,044.0 428.0 437.0 437.9 437.9 438.7 439.6 440.5 441.4 441.4 444.9
Total Liabilities 7,438.0 9,223.0 7,826.0 7,987.0 8,345.4 8,345.4 8,397.8 8,395.6 8,410.3 8,625.1 8,625.1 8,878.9

Beginning Equity 7,300.0 7,467.0 6,583.0 6,691.0 6,963.0 7,467.0 6,954.6 6,952.2 6,954.4 6,964.7 6,954.6 6,974.9
Unrealized Gains/(Losses) 47.0 (880.0) 103.5 300.0 - (476.5) - - - - - -
Excess Distributions - - - -
New Equity Issuance - - - - - -
Total Equity 7,467.0 6,583.0 6,691.0 6,963.0 6,954.6 6,954.6 6,952.2 6,954.4 6,964.7 6,974.9 6,974.9 7,021.1
check 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total Originations ('gross commitments') 7277.0 1272.0 867.0 706.0 725.0 3570.0 800.0 950.0 975.0 1250.0 3975.0 5400.0
Est annualized prepayment speed 41% 25% 41% 10% 10% 22% 20% 26% 26% 28% 25% 34%
Exits/Prepayments 5349.0 918.0 1484.0 352.0 375.0 3129.0 750.0 950.0 950.0 1025.0 3675.0 5100.0
Net Portfolio Additions 1928.0 354.0 -617.0 354.0 350.0 441.0 50.0 0.0 25.0 225.0 300.0 300.0

Portfolio Composition 2019A 1Q20A 2Q20A 3Q20A 4Q20E 2020E 1Q21E 2Q21E 3Q21E 4Q21E 2021E 2022E
Senior secured debt % 74% 76% 74% 73% 73% 73% 73% 73% 73% 73% 73% 73%
SDLP/Senior subordinated debt % 12% 12% 13% 14% 14% 14% 14% 14% 14% 14% 14% 14%
Equity Investments % 14% 12% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%
Other % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Total Investments 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Source: Company reports, RBC Capital Markets estimates

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Required disclosures
Conflicts disclosures
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,
this report. To access current conflicts disclosures, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/
DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza,
29th Floor, South Tower, Toronto, Ontario M5J 2W7.
A member company of RBC Capital Markets or one of its affiliates managed or co-managed a public offering of securities for Ares
Capital Corporation in the past 12 months.
A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from
Ares Capital Corporation in the past 12 months.
RBC Capital Markets, LLC makes a market in the securities of Ares Capital Corporation.
A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than
investment banking services from Ares Capital Corporation during the past 12 months. During this time, a member company of RBC
Capital Markets or one of its affiliates provided non-investment banking securities-related services to Ares Capital Corporation.
A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than
investment banking services from Ares Capital Corporation during the past 12 months. During this time, a member company of
RBC Capital Markets or one of its affiliates provided non-securities services to Ares Capital Corporation.
RBC Capital Markets is currently providing Ares Capital Corporation with non-investment banking securities-related services.
RBC Capital Markets is currently providing Ares Capital Corporation with non-securities services.
RBC Capital Markets has provided Ares Capital Corporation with investment banking services in the past 12 months.
RBC Capital Markets has provided Ares Capital Corporation with non-investment banking securities-related services in the past
12 months.
RBC Capital Markets has provided Ares Capital Corporation with non-securities services in the past 12 months.
Explanation of RBC Capital Markets Equity rating system
An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned
to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the
analyst's sector average.
Ratings
Outperform (O): Expected to materially outperform sector average over 12 months.
Sector Perform (SP): Returns expected to be in line with sector average over 12 months.
Underperform (U): Returns expected to be materially below sector average over 12 months.
Restricted (R): RBC policy precludes certain types of communications, including an investment recommendation, when RBC is
acting as an advisor in certain merger or other strategic transactions and in certain other circumstances.
Not Rated (NR): The rating, price targets and estimates have been removed due to applicable legal, regulatory or policy constraints
which may include when RBC Capital Markets is acting in an advisory capacity involving the company.
As of March 31, 2020, RBC Capital Markets discontinued its Top Pick rating. Top Pick rated securities represented an analysts best
idea in the sector; expected to provide significant absolute returns over 12 months with a favorable risk-reward ratio. Top Pick
rated securities have been reassigned to our Outperform rated securities category, which are securities expected to materially
outperform sector average over 12 months.
Risk Rating
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The Speculative risk rating reflects a security's lower level of financial or operating predictability, illiquid share trading volumes,
high balance sheet leverage, or limited operating history that result in a higher expectation of financial and/or stock price volatility.

Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories -
Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Outperform (O),
Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are
not the same because our ratings are determined on a relative basis.
Distribution of ratings
RBC Capital Markets, Equity Research
As of 30-Sep-2020
Investment Banking
Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [Outperform] 788 52.96 248 31.47
HOLD [Sector Perform] 619 41.60 135 21.81
SELL [Underperform] 81 5.44 11 13.58

Rating and price target history for: Ares Capital Corporation, ARCC US as of 28-Oct-2020 (in USD)
01-Aug-2018 07-Feb-2019 12-Nov-2019 09-Apr-2020 05-May-2020 04-Aug-2020
Rtg:SP Rtg:NR Rtg:O Rtg:O Rtg:O Rtg:O
Target: 20.00 Target: NA Target: 20.00 Target: 14.00 Target: 15.00 Target: 16.00

20
18
16
14
12
10
8
6
Q3 2018 Q1 Q2 Q3 2019 Q1 Q2 Q3 2020 Q1 Q2 Q3 2021

Legend:
TP: Top Pick; O: Outperform; SP: Sector Perform; U: Underperform; R: Restricted; I: Initiation of Research Coverage; D: Discontinuation of Research Coverage;
NR: Not Rated; NA: Not Available; RL: Recommended List - RL: On: Refers to date a security was placed on a recommended list, while RL Off: Refers to date
a security was removed from a recommended list; Rtg: Rating.
Created by: BlueMatrix

References to a Recommended List in the recommendation history chart may include one or more recommended lists or model
portfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists include
the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: ADR (RL 10),
and the Guided Portfolio: All Cap Growth (RL 12). RBC Capital Markets recommended lists include the Strategy Focus List and
the Fundamental Equity Weightings (FEW) portfolios. The abbreviation 'RL On' means the date a security was placed on a
Recommended List. The abbreviation 'RL Off' means the date a security was removed from a Recommended List.

Equity valuation and risks

For valuation methods used to determine, and risks that may impede achievement of, price targets for covered companies, please
see the most recent company-specific research report at https://www.rbcinsightresearch.com or send a request to RBC Capital
Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.

Ares Capital Corporation

Valuation
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Given ARCC’s scale and capital position, access to the resources of the broader Ares Credit Group platform, including access to
potential deal flow and investment resources, experienced management team, and our expectations that the firm can generate
annualized ROE above peer averages, which we believe is comfortably above the firm’s cost of equity capital, we would ascribe
a target P/NAV multiple of 0.97x. Our $16 price target is based on 0.97x our 2021 estimated NAV/sh of $16.49. Our price target
supports an Outperform rating.

Risks to rating and price target

• Price volatility in corporate leveraged loan market may adversely affect fair value of the company’s portfolio: Further, a significant
percentage of portfolio company investments may be acquired from private companies, which may be subject to legal and other
restrictions on resale or are otherwise less liquid than publicly-traded securities.
• Economic recessions, market downturns, or any slowdown driven by negative economic impact from Covid-19, could impair
the company’s portfolio companies and negatively impact the company’s operating results: Many of the company’s portfolio
companies may be susceptible to economic slowdowns, and may be unable to repay the company’s debt investments during
these periods, which could increase the company’s non-performing assets and the value of the company’s portfolio is likely to
decrease.
• Recent legislation may allow the company to incur additional leverage; further, the company’s use of leverage, through
borrowing money, could magnify the risk of investing in the company: The company, as part of its business strategy, may borrow
from or issue senior debt securities to banks, insurance companies or other lenders or investors. If the value of the company’s
assets decreases, leverage would cause the net asset value to decline more sharply than it otherwise would have been if the
company did not employ leverage.
• Increased competition for investment opportunities could delay deployment of capital and could reduce returns: The company
competes for investments with other BDCs and investment funds, including alternative investment vehicles such as hedge funds,
as well as commercial banks and other sources of funding. Some competitors may have lower cost of capital or higher risk
tolerances than the company.
• The company is exposed to risks associated with changes in interest rates: As the company earns an investment spread between
investment income and cost of funding, declining interest rates could reduce investment income on new investments. Rising
interest rates could increase borrowing costs.
• The company may compete for capital and investment opportunities with other affiliates or entities managed by Ares Capital’s
investment advisor, Ares Capital Management LLC, subjecting the company’s adviser to certain conflicts of interests: In our view,
while potential conflicts of interest exist, as the adviser or affiliates of the adviser may have overlapping investment objectives,
they are minimized through incentive fee structure embedded in the management agreement that aims to ensure the adviser’s
interests are aligned with Ares Capital’s interests (and ultimately ARCC shareholders).
Conflicts policy
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to
https://www.rbccm.com/global/file-414164.pdf
or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South
Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.
Dissemination of research and short-term trade ideas
RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having
regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary website
to ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional
distribution may be done by the sales personnel via email, fax, or other electronic means, or regular mail. Clients may also
receive our research via third party vendors. RBC Capital Markets also provides eligible clients with access to SPARC on the Firms
proprietary INSIGHT website, via email and via third-party vendors. SPARC contains market color and commentary regarding
subject companies on which the Firm currently provides equity research coverage. Research Analysts may, from time to time,
include short-term trade ideas in research reports and / or in SPARC. A short-term trade idea offers a short-term view on
how a security may trade, based on market and trading events, and the resulting trading opportunity that may be available. A
short-term trade idea may differ from the price targets and recommendations in our published research reports reflecting the
research analyst's views of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons,
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methodologies and/or other factors. Thus, it is possible that a subject company's common equity that is considered a long-term
'Sector Perform' or even an 'Underperform' might present a short-term buying opportunity as a result of temporary selling pressure
in the market; conversely, a subject company's common equity rated a long-term 'Outperform' could be considered susceptible
to a short-term downward price correction. Short-term trade ideas are not ratings, nor are they part of any ratings system, and
the firm generally does not intend, nor undertakes any obligation, to maintain or update short-term trade ideas. Short-term trade
ideas may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, and
investors should make their own independent decisions regarding any securities or strategies discussed herein. Please contact
your investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research.
For a list of all recommendations on the company that were disseminated during the prior 12-month period, please click on the
following link: https://rbcnew.bluematrix.com/sellside/MAR.action
The 12 month history of SPARCs can be viewed at https://www.rbcinsightresearch.com.

Analyst certification
All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of
the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or
indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

Third-party-disclaimers
The Global Industry Classification Standard ("GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor's Financial Services
LLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied
warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties
of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing,
in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special,
punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

RBC Capital Markets disclaims all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any statements made to the media
or via social media that are in turn quoted in this report, or otherwise reproduced graphically for informational purposes.

References herein to "LIBOR", "LIBO Rate", "L" or other LIBOR abbreviations means the London interbank offered rate as administered by ICE Benchmark Administration (or any other
person that takes over the administration of such rate).

Disclaimer
RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBC
Capital Markets, LLC, RBC Europe Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, Sydney Branch. The information contained in this
report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal
Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this
report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but without
legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general
circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or
services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about
the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide
to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital Markets research analyst compensation is based
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the latest published research reports available to clients may not reflect recent material changes in the applicable industry and/or applicable subject companies.
RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report is not, and under no circumstances should be
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contact and place orders with RBC Capital Markets, LLC.
To Canadian Residents:

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This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution in
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Copyright © RBC Capital Markets, LLC 2020 - Member SIPC
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