The Private Credit Boom Faces a Real Test. What It Means for Ares Capital.

The most attractive feature of Ares Capital (NASDAQ: ARCC) today is probably its huge 10.5% dividend yield. However, investors need to fully understand what supports that lofty yield before buying this stock. And recognize that the dividend has been cut before. Here's why the test the private credit markets are facing is so important for Ares Capital right now.

The difference between Ares Capital and a non-public credit fund

Ares Capital issues shares to the public, and those shares will continue to exist until it repurchases them. In this way, the business development company (BDC) has permanent capital. The stock price may rise and fall, but nobody can force Ares Capital to return their cash. That's an important dynamic as you watch non-public private credit funds limit redemptions.

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Companies like BlackRock (NYSE: BLK) and Blue Owl Capital (NYSE: OWL) have been making headlines as customers who can withdraw cash from the private credit funds they operate ask for their money back. If withdrawals are large enough, non-public private credit funds can be forced to sell assets to meet redemption requests. That can trigger a downward spiral in asset prices.

The ability to limit redemptions is supposed to help prevent that spiral. However, the news that redemptions are being limited can have the unintended consequence of increasing fear and, in turn, the number of customers requesting a return of their cash.

Ares Capital's portfolio is holding up reasonably well

Despite the withdrawals from private credit funds, Ares Capital's portfolio is performing reasonably well. Loans on non-accrual status sat at 2.1% at the end of the first quarter of 2026. That was up from 1.8%, which isn't good news directionally, but the absolute level is still reasonable. The BDC's core earnings of $0.47 per share didn't cover the $0.48 per share paid in dividends, but when you add in $0.15 per share in realized gains, there was ample coverage.

That said, interest rates appear likely to remain at current levels or rise. Ares Capital issues many floating-rate loans to the largely smaller businesses it works with, so it will generate more income as rates rise. But higher rates can make it harder for its clients to pay back their loans, so dividend investors will want to pay close attention to its non-accrual loan rate. If that rate rises too high, a dividend cut could be in the cards.

Moreover, while the redemptions hitting companies like BlackRock aren't necessarily indicative of the quality of private credit loans, investors are clearly worried that loan quality is deteriorating. That isn't shocking, given the huge growth of the private credit market in recent years. As more and more capital enters the market, weaker and weaker loans are likely to be made. If you own Ares Capital, there's no reason to panic, but redemptions at BlackRock and Blue Owl Capital could still be the canary in the coal mine on the loan quality front.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ares Capital and BlackRock. The Motley Fool has a disclosure policy.