Fitch Assigns Initial L-T IDR of 'BBB' to Ares Capital Corp.; Rating Watch Negative

Fitch Ratings has assigned first-time ratings to Ares Capital Corporation (Ares) as follows:

--Long-term Issuer Default Rating (IDR) 'BBB';

--Senior secured debt 'BBB'.

All ratings are placed on Rating Watch Negative. Approximately $600 million of debt is affected by this action.

The assigned ratings reflect Ares's low leverage, demonstrated access to the capital markets, increased cushion on its asset coverage ratio, consistent operating performance in a very difficult market environment, moderate portfolio investment concentrations, experienced management, and the company's access to deal flow and investment resources from asset manager, Ares Capital Management, LLC and its affiliate Ares Management, LLC. Rating constraints reflect the company's secured funding profile, capital markets impact on leverage, dependence on the capital markets to fund portfolio growth, and limited ability to retain capital due to dividend requirements.

The Negative Watch solely reflects the risks associated with Ares' recently announced acquisition of Allied Capital Corporation (Allied). While Fitch recognizes the purchase represents a 54% discount to Allied's second quarter book value, the transaction could pose operational and financial risks given Allied's higher leverage, outsized equity investments, and debt burden that matures before 2012.

Resolution of the Rating Watch will be driven by Ares' ability to achieve a pro forma leverage ratio between 0.65 times (x) and 0.75x, manage and/or restructure Allied's relatively shorter-term liability structure, manage and/or reset dividend payments for a larger shareholder base, and rebalance the consolidated investment portfolio in order to rotate into higher-yielding debt securities and reduce Allied's equity exposure. Fitch recognizes that portfolio rebalancing will likely extend beyond the close of the transaction, which is expected to occur in the first quarter of 2010. Should the achievement of targeted leverage necessitate negotiations with Allied's noteholders, Fitch would need to consider the terms of any such restructuring in the context of its criteria for coercive debt exchanges. An inability to make progress toward achieving the company's financial targets on a consolidated basis would result in negative rating action.

Headquartered in New York, NY, Ares Capital Corporation is an externally managed business development company, organized on April 16, 2004, initially funded on June 3, 2004, and, on Oct. 8, 2004 completed its initial public offering of $159.8 million. The company invests primarily in middle-market companies in the form of first and second lien senior secured loans, senior subordinated debt, and direct equity investments. As of June 30, 2009, Ares had investments in 94 portfolio companies amounting to approximately $1.96 billion.

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