Ares Capital Pays 6.25% to Borrow: What a Rising Funding Cost Says About That 9.7% Dividend

Ares Capital, the giant of the business development company world, just did something a retiree with an eye on its 9.7% dividend should read carefully: it priced $750 million of unsecured notes due 2033 at a 6.250% coupon. A company that lends money for a living deciding it now has to pay 6.25% to borrow for seven years is a number worth understanding — not because the payout is in danger today, but because it tells you how the engine that funds that payout is being repriced.

How a BDC actually earns its dividend

A business development company is a simple machine when you strip away the jargon. It borrows money from banks and bondholders, lends that money to mid-sized private companies, and keeps the gap between the two rates. That gap, after operating costs, is what pays its dividend. Ares Capital is the biggest such machine in the country, with roughly $14 billion in market value and a balance sheet carrying about $16.6 billion of debt.

The striking thing is how the numbers on either side of that spread have moved. The loans Ares owns yield around 10.3% on an amortized-cost basis. Its new money, by contrast, is becoming more expensive in a hurry. In January it priced $750 million of notes due 2031 at 5.250%. In May it added $800 million of notes due 2030 at 5.550%. Now a new $750 million seven-year note at 6.250% — a full percentage point above the January coupon, even before you account for the longer maturity.

Part of that climb is simply duration. Paying 6.25% for money locked up until 2033 costs more than borrowing for five years, and Ares is deliberately stretching its maturities so it does not face a wall of refinancing at once. But the trend line across this year's issues is real: the cost of Ares Capital's own borrowing is rising, and every new dollar of debt it issues carries a thinner cushion over the 10.3% it earns on the other side.

Does the dividend still hold up?

Here is the reassuring part, followed immediately by the mechanism that makes it hold. The dividend is $0.48 per quarter, and net investment income — the cash Ares actually earns from lending — is still covering it. In the first quarter NII came to $0.55 a share. In the second quarter it was $0.50 a share, or about 1.04 times the $0.48 payout. That is a real, if modest, cushion.

The mechanism behind that cushion is worth spelling out. A BDC's dividend is paid out of earned interest and fee income on its loan book, not out of unrealized marks on the assets. Because Ares carries a large stock of older, cheaper debt alongside the new 6.25% notes, its blended funding cost is still well below the margin on its newest borrowing — so the average spread it harvests remains wide enough to cover the dividend even as the incremental cost rises.

That is why a rising coupon at the margin does not automatically mean a cut. It means the price of "tomorrow's" money is going up, which is precisely when you stop trusting the yield alone and start watching one number instead.

The number that matters now

What separates this from a headline-yield scare is that the income engine is intact while the economics are thinning — visible in two places a holder should track. Net asset value slipped to $19.35 a share by June 30 from $19.94 at the end of 2025, the kind of drift you see when markdowns and funding headwinds nibble at the edges rather than break anything. Leverage sits around 1.1 times debt-to-equity, elevated for an everyday company but unremarkable for a BDC.

The individual item to follow is net investment income per share against the $0.48 dividend, quarter by quarter. In Q1 it was $0.55, in Q2 $0.50, still above the payout but trending down. If NII falls and stays below $0.48, the contract the article's reader relies on — a covered, durably earned stream — would actually be broken, and that is the moment the income case changes, not when the stock dips.

What it means for a portfolio

For a retired income investor, Ares Capital's job is not to be a hero holding but one bolt in a diversified income machine. Its scale, its access to the unsecured debt market at all, and its roughly four-percentage-point spread between a 10.3% loan book and new borrowing cost are the reasons it can carry a 9.7% yield dozens of smaller BDCs cannot. You keep it for the cash flow it pays now and the scale that lets it raise money through the cycle.

What this note offering adds is a reason to hold it on a clear-eyed footing rather than on auto-pilot. Ares is borrowing at 6.25% to fund a book that yields about 10.3% — a workable margin, but a thinner one than it earned on its older 5.25% money. So the portfolio action is simple: keep collecting the $0.48 quarterly dividend while it is covered, and let a sustained drop in net investment income below that payout — not a lower stock price — be the trigger that forces a second look. Rising funding costs do not break this income stream today. They just tell you exactly which lever to watch.