A troubled loan can become a smaller percentage of a lender’s portfolio because its recorded value has fallen. The borrower need not have paid back a dollar. That is the tension inside a reassuring-looking non-accrual figure.
A loan on non-accrual is one on which the lender has stopped recognising interest on the normal accrual basis. For listed business development companies, or BDCs, which finance businesses, the percentage is a useful sign of credit strain. It needs two denominators and an account of what changed.
Fact: the same loans, two measurements
Ares Capital Corporation (Nasdaq: ARCC) reported loans on non-accrual at 2.4% of total investments at amortised cost and 1.4% at fair value on 30 September 2026. The corresponding year-end 2025 figures were 1.8% and 1.2%. These are observations at two dates, not forecasts of eventual losses. The figures come from its 27 October results.
Ares Capital · 30 September 2026
One status, two denominators
At amortised cost
Share of total investments
At fair value
Share of total investments
Amortised cost starts with the investment’s cost and incorporates relevant accounting adjustments. Fair value estimates what the holding is worth at the measurement date. A markdown can reduce the value assigned to a problem holding well below its cost. Comparing the two ratios therefore helps distinguish the amount originally committed, as adjusted, from the value still carried.
Blue Owl Capital Corporation (NYSE: OBDC) provides another dated example. Its June-quarter results put non-accrual investments at 2.8% of portfolio cost and 0.8% of fair value. FS KKR Capital Corp. (NYSE: FSK) reported 7.1% at amortised cost and 3.8% at fair value for the same date in its second-quarter release.
Those June snapshots precede Ares’s September snapshot. They illustrate the measurement problem; they do not form a current league table of credit quality.
Interpretation: a smaller ratio needs a bridge
Imagine a hypothetical portfolio with £1,000 of cost, including £100 of non-accrual loans. Suppose everything else is valued at cost, while those loans are marked to £40. Non-accruals would represent 10% at cost and about 4.3% at fair value: £40 divided by £940. No repayment is assumed.
The lower figure describes the value remaining in those positions relative to the marked portfolio. It does not erase the £60 difference from cost. Equally, that difference is a valuation markdown in this example, rather than proof that the final cash recovery will be £40.
A change over time needs a bridge between opening and closing balances. New loans can enter non-accrual. Others can resume accruing, be sold, be repaid or be written off. The rest of the portfolio can grow or shrink. Each route changes the ratio’s meaning.
FS KKR’s June release reported lower non-accrual percentages than in March: 3.8% against 4.2% at fair value, and 7.1% against 8.1% at amortised cost. That is a factual improvement in the reported ratios. Whether it represents stronger borrowers, completed exits or changes in portfolio composition requires the underlying movement, rather than the headline alone.
Fact: the accounting judgement matters
Blue Owl’s June 2026 Form 10-Q, Note 2 says investments are generally placed on non-accrual when there is reasonable doubt that principal or interest will be collected in full. It also describes exceptions where collateral is sufficient and collection is in progress. Non-accrual is therefore an accounting assessment with judgement in it.
That makes a reported percentage a starting point for examining credit quality. It cannot identify every borrower under pressure. Nor does a loan returning to accrual establish that all the lender’s original economic expectations have been recovered.
The next distinction is between recognised income and cash. FS KKR’s June Form 10-Q explains that cash associated with non-cash revenues can arrive reporting periods or years after recognition. Payment-in-kind interest adds to the claim rather than providing an immediate cash receipt. That can be contractual from the outset; it is not by itself evidence of a failed payment.
Who could benefit?
Interpretation: Ares, Blue Owl and FS KKR could benefit if troubled borrowers resume sustainable cash payments or if completed recoveries exceed the values carried. The mechanism is specific: recovered cash becomes available for obligations or new lending, while a return to accrual may support future income. The likely timetable depends on each loan’s workout, rather than the date of the next dividend announcement.
The same accounting logic limits the upside claim. Recovery above a heavily reduced carrying value can produce a gain while still leaving a loss against cost. Its significance for the BDC depends on the position’s size relative to the whole portfolio and shareholder capital. A successful small workout cannot establish that every other exposure is sound.
Who’s at risk?
Interpretation: The same three lenders face lost income and further valuation pressure if borrowers weaken or recoveries fall short. Their common shareholders bear the consequences through earnings and net asset value; the effect is not established by multiplying the non-accrual percentage by an assumed total loss.
Resilience deserves equal attention. Ares disclosed $722 million in cash and approximately $6.9 billion of additional credit-facility capacity at September-end, with the latter subject to borrowing-base and other restrictions. That capacity can support financing flexibility, but it is conditional borrowing capacity, not collected loan interest. Credit losses and a lender’s ability to fund itself are related questions with different evidence.
Speculation: what would change the assessment?
A scenario in which weaker borrowers create more non-accruals is plausible, but these ratios do not assign it a probability. A scenario in which workouts return cash is also possible. Neither is a forecast here.
The useful next evidence is loan-level movement: fresh non-accruals, cash recoveries, realised losses, revised marks and sustained payment after a return to accrual. The disclosed dates and accounting policies must travel with any comparison. These snapshots cannot establish today’s undisclosed borrower performance or rank future shareholder returns.
Find the dependency. In this case it is the cash that borrowers can ultimately deliver, measured against both what the lender put in and what its accounts still carry.
Sources checked 30 October 2026. This article is informational analysis, not a recommendation to buy, sell or hold securities.
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