Varagon Capital Sees Q2 Net Assets Drop to $29.4M

TL;DR

Varagon's Q2 net asset drop is a red flag, signaling tougher times for private credit returns.

AI Summary

Varagon Capital Corp reported total investment income of $62.1 million for the three months ended June 30, 2025, a decrease from $65.3 million in the prior-year period. Net investment income for the quarter was $31.5 million, down from $34.7 million year-over-year. The company's net increase in net assets resulting from operations was $29.4 million for the three months ended June 30, 2025, a significant decrease from $38.2 million in the same period of 2024. Total assets stood at $1.98 billion as of June 30, 2025, slightly down from $2.01 billion at December 31, 2024. The company continues to manage its portfolio, with a focus on senior secured loans, and reported a net realized and unrealized loss on investments of $2.1 million for the quarter, compared to a gain of $3.5 million in the prior year. The weighted average interest rate on its debt obligations was 7.8% as of June 30, 2025. The strategic outlook remains focused on generating income from its debt and equity investments, primarily in middle-market companies.

Why It Matters

Varagon Capital's decline in net assets resulting from operations, from $38.2 million to $29.4 million year-over-year, signals potential headwinds for investors seeking consistent returns in the private credit space. This performance could impact investor confidence and future capital deployment, especially given the competitive landscape for middle-market lending. Employees might face pressure to optimize portfolio performance, while customers (borrowing companies) could see shifts in lending terms or availability. The broader market for private debt may interpret this as a sign of increased volatility or tighter margins in the current economic environment.

Risk Assessment

Risk Level: medium — The company reported a net realized and unrealized loss on investments of $2.1 million for the three months ended June 30, 2025, a notable shift from a $3.5 million gain in the prior-year period. Additionally, the net increase in net assets from operations decreased by 23% from $38.2 million to $29.4 million, indicating potential challenges in portfolio performance and income generation.

Analyst Insight

Investors should scrutinize Varagon Capital's investment portfolio for specific underperforming assets and assess the impact of rising interest rates on its debt obligations, which had a weighted average rate of 7.8% as of June 30, 2025. Consider if the current dividend yield adequately compensates for the increased volatility and reduced net asset growth.

Financial Highlights

debt To Equity

N/A

revenue

$62.1M

operating Margin

N/A

total Assets

$1.98B

total Debt

N/A

net Income

$31.5M

eps

N/A

gross Margin

N/A

cash Position

N/A

revenue Growth

-4.9%

Revenue Breakdown

Key Numbers

• $62.1M — Total Investment Income (Decreased from $65.3M in Q2 2024)
• $31.5M — Net Investment Income (Down from $34.7M in Q2 2024)
• $29.4M — Net Increase in Net Assets from Operations (Significant decrease from $38.2M in Q2 2024)
• $1.98B — Total Assets (Slightly down from $2.01B at Dec 31, 2024)
• -$2.1M — Net Realized/Unrealized Loss on Investments (Shift from a $3.5M gain in Q2 2024)
• 7.8% — Weighted Average Interest Rate on Debt (As of June 30, 2025, impacting financing costs)
• 23% — Percentage Decrease (Decline in net increase in net assets from operations year-over-year)

Key Players & Entities

• Varagon Capital Corp (company) — filer of the 10-Q
• $62.1 million (dollar_amount) — total investment income for Q2 2025
• $65.3 million (dollar_amount) — total investment income for Q2 2024
• $31.5 million (dollar_amount) — net investment income for Q2 2025
• $34.7 million (dollar_amount) — net investment income for Q2 2024
• $29.4 million (dollar_amount) — net increase in net assets from operations for Q2 2025
• $38.2 million (dollar_amount) — net increase in net assets from operations for Q2 2024
• $1.98 billion (dollar_amount) — total assets as of June 30, 2025
• $2.01 billion (dollar_amount) — total assets as of December 31, 2024
• $2.1 million (dollar_amount) — net realized and unrealized loss on investments for Q2 2025

FAQ

Risk Factors

• Interest Rate Sensitivity [medium — financial]: The company's profitability is sensitive to changes in interest rates. The weighted average interest rate on debt was 7.8% as of June 30, 2025, indicating significant financing costs that could fluctuate.
• Investment Performance Volatility [medium — market]: Varagon experienced a net realized and unrealized loss on investments of $2.1 million for the quarter, a shift from a $3.5 million gain in the prior year, highlighting the inherent volatility in its investment portfolio.
• Middle-Market Credit Risk [medium — market]: The company's focus on middle-market companies exposes it to specific credit risks associated with this segment, which can be more susceptible to economic downturns than larger, more established corporations.
• Portfolio Management Execution [medium — operational]: The decrease in net investment income and net assets from operations suggests potential challenges in effectively managing the investment portfolio to generate consistent returns in the current economic climate.

Industry Context

Varagon Capital Corp operates in the private credit market, a segment characterized by direct lending to middle-market companies. This sector is competitive, with increasing institutional capital seeking yield. Trends include a focus on senior secured debt, floating rate instruments, and specialized lending strategies to navigate economic uncertainties and varying interest rate environments.

Regulatory Implications

As a financial institution, Varagon is subject to various regulatory frameworks governing capital requirements, lending practices, and investor protection. Changes in regulations, particularly those impacting credit markets or Dodd-Frank Act provisions, could affect its operations and profitability.

What Investors Should Do

1. Monitor interest rate trends and their impact on Varagon's financing costs and investment yields.
2. Analyze the drivers behind the shift from investment gains to losses in the current quarter.
3. Assess the company's ability to generate consistent net investment income amidst declining revenue and operational results.

Key Dates

• 2025-06-30: Quarter End — Reporting period for the 10-Q, showing financial performance and position as of this date.
• 2025-06-30: Total Assets Reported — $1.98 billion, indicating the scale of the company's investment holdings.
• 2025-06-30: Weighted Average Interest Rate on Debt — 7.8%, a key factor in financing costs and net income.

Glossary

Net Investment Income

The income generated from a company's investments after deducting operating expenses. (Key measure of profitability for investment companies like Varagon, showing earnings from its core lending and investment activities.)

Net Realized and Unrealized Loss on Investments

The total loss from selling investments (realized) and the change in value of investments still held (unrealized). (Indicates the success or failure of the company's investment strategy and market conditions affecting its portfolio.)

Senior Secured Loans

Loans that are backed by specific collateral, giving the lender a priority claim on assets in case of default. (Varagon's primary investment focus, suggesting a strategy prioritizing capital preservation and recovery in its lending.)

Year-Over-Year Comparison

Varagon Capital Corp's Q2 2025 results show a decline in key performance indicators compared to the prior year. Total investment income decreased by 4.9% to $62.1 million, and net investment income fell to $31.5 million from $34.7 million. The net increase in net assets from operations saw a significant drop to $29.4 million from $38.2 million, reflecting a challenging operating environment. Total assets also experienced a slight decrease to $1.98 billion from $2.01 billion at year-end 2024, and the company shifted from investment gains to a net loss of $2.1 million.

Key Financial Figures

• $1234 — 10-Q 00000000$1234ROC UNITED STATES SECURITIES AND EXC
• $0.01 — had 41,533,090 sha res of common stock, $0.01 par value per share, outstanding. TAB

Filing Documents

• ck0001784700-20250630.htm (10-Q) — 18597KB
• ck0001784700-ex31_1.htm (EX-31.1) — 17KB
• ck0001784700-ex31_2.htm (EX-31.2) — 17KB
• ck0001784700-ex32_1.htm (EX-32.1) — 9KB
• ck0001784700-ex32_2.htm (EX-32.2) — 9KB
• 0000950170-25-106434.txt ( ) — 57944KB
• ck0001784700-20250630.xsd (EX-101.SCH) — 2413KB
• ck0001784700-20250630_htm.xml (XML) — 16892KB

Financial Statements (unaudited)

Financial Statements (unaudited) Consolidated Statements of Assets and Liabilities as of June 30, 2025 (unaudited) and December 31, 2024 2 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2025 and June 30, 2024 (unaudited) 3 Consolidated Statements of Changes in Net Assets for the Three and Six Months Ended June 30, 2025 and June 30, 2024 (unaudited) 5 Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2025 and June 30, 2024 (unaudited) 7 Consolidated Schedules of Investments as of June 30, 2025 (unaudited) and December 31, 2024 8

Notes to Consolidated Financial Statements (unaudited)

Notes to Consolidated Financial Statements (unaudited) 36 Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations 77 Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk 106 Item 4.

Controls and Procedures

Controls and Procedures 108 PART II. OTHER INFORMATION Item1.

Legal Proceedings

Legal Proceedings 108 Item 1A.

Risk Factors

Risk Factors 110 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 111 Item 3. Defaults Upon Senior Securities 112 Item 4. Mine Safety Disclosures 113 Item 5. Other Information 114 Item 6. Exhibits 115

Signatures

Signatures 116 1 TABLE OF CONTENTS

-FINANCIAL INFORMATION

PART I-FINANCIAL INFORMATION

Financial Statements

Item 1. Financial Statements. Varagon Capital Corporation CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (dollar amounts in thousands, except share and per share data) As of June 30, 2025 As of ASSETS (unaudited) December 31, 2024 Investments, at fair value Non-controlled/non-affiliated, at fair value (amortized cost of $ 667,251 and $ 639,235 , respectively) $ 653,062 $ 631,963 Controlled investments, at fair value (amortized cost of $ 171,694 and $ 183,982 , respectively) 154,329 172,152 Total investments, at fair value (amortized cost of $ 838,945 and $ 823,217 , respectively) 807,391 804,115 Cash and cash equivalents 42,941 69,606 Interest receivable 10,782 11,530 Deferred financing costs 1,445 1,619 Prepaid expenses 396 884 Other assets 115 — Total assets $ 863,070 $ 887,754 LIABILITIES Revolving credit facility payable (Note 6) $ 36,600 $ 50,000 Notes payable (net of debt issuance costs of $ 2,713 , and $ 2,870 , respectively) (Note 6) 424,881 424,009 Shareholder distributions payable 10,736 12,736 Interest and credit facility fees payable 4,901 2,794 Base management fees payable (Note 7) 1,581 1,513 Income incentive fees payable (Note 7) 527 206 Administrator expenses payable 267 553 Directors' fees and expenses payable (Note 9) 82 81 Due to affiliates 792 741 Accounts payable and accrued expenses 1,077 1,099 Other liabilities 100 732 Total liabilities 481,544 494,464 Commitments and contingencies (Note 8) NET ASSETS Common stock, $ 0.01 par value; 500,000,000 shares authorized; 41,530,369 shares issued and outstanding at June 30, 2025, and 500,000,000 shares authorized; 41,524,826 shares issued and outstanding at December 31, 2024 415 415 Paid-in capital in excess of par value 415,227 415,176 Total accumulated earnings (loss) ( 34,116 ) ( 22,301 ) Total net assets $

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View this 10-Q filing on SEC EDGAR