Ares Capital's Problem Loans Held Par Until They Didn't

For two years, Ares Capital valued its loans to Flinn Scientific, a supplier of lab equipment and chemicals to school science classrooms, at close to every dollar it had lent. Then, in a single quarter, it marked them down to 78 cents.

The loans also stopped listing an interest rate in Ares Capital's latest filing.

Flinn's slide fits a pattern running through the weakest part of the business development company's $29 billion portfolio, according to a PMI analysis of eight quarters of its loan-level filings using PRISM Private Markets data. Loans hold near full value for long stretches, then lose half their worth or more within about a year. All marks cited are PMI calculations.

Management describes the overall picture as steady. "Our level of nonaccrual loans and problem assets remained stable at historically low levels," Chief Executive Kort Schnabel told analysts on the company's earnings call.

By the broad measures, he's right. The portfolio is still valued at about 99% of its cost. The trouble is concentrated in a handful of borrowers, and the average hides it.

Lenders such as Ares Capital estimate every quarter what each loan they hold is worth, a process known as marking. The filings show when those marks moved. They don't show when the lender first saw the trouble.

Slow, then sudden

Pluralsight, an online tech-training company, shows how the slide can unfold. Ares Capital carried its loans at full value as late as September 2025. They now stand at 42 cents and no longer list an interest rate.

Great Expressions Dental Centers has reached the end of the road. Its debt fell from full value to below half within a year. This quarter, its second-lien loan dropped off Ares Capital's books. Its first-lien loan passed its September due date and is still outstanding.

More money in

At Absolute Dental, Ares Capital's exposure grew as its loans lost value. Its cost in the company rose by about $19 million over two years. Part of that is unpaid interest added to the loans. Part is fresh cash drawn on a credit line. The debt is now marked under 50 cents.

Ares Capital President Jim Miller played down concerns about a coming wave of loan maturities across the industry. "It doesn't really play out as people expect," he said.

Only one price

When several funds lend to the same company, investors can compare how each one values the loan. About two-thirds of Ares Capital's borrowers also borrowed from a BDC outside Ares at the end of June.

Flinn had no other such lender. Neither did V SandCo, whose loans have fallen to about a third of face value. For those two, Ares Capital's mark is the only public price.

Two ways out

Some troubled borrowers recover. Loans to symplr, which makes software hospitals use to run their operations, fell to about two-thirds of face value by mid-2026. They rebounded to the mid-80s this quarter after the company's private-equity owner agreed to put in more money. Miller called the deal "a good example and maybe a bit of a blueprint."

Others end in a swap. About $39 million of loans to Momentec Brands, a youth sports uniform maker carried under the name Team Acquisition, were replaced this quarter with a smaller loan and an equity stake. Together, the new positions are carried at less than half the old debt.

Problem loans remain a small slice of the book. Loans with no listed interest rate number 25, out of roughly 970 debt holdings, up from 18 two years ago.

Flinn's loans come due in April. Until then, the only public estimate of what they're worth is Ares Capital's own.