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    Ares Dynamic Credit Allocation Fund, Inc. (NYSE: ARDC) Annual Report December 31, 2019 Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from the Fund or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report. If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund or your financial intermediary electronically at any time by (i) calling 877-855-3434 toll-free or by sending an e-mail request to Ares Dynamic Credit Allocation Fund, Inc. Investor Relations Department at ARDCInvestorRelations@aresmgmt.com, if you invest directly with the Fund, or (ii) contacting your financial intermediary (such as a broker-dealer or bank), if you invest through your financial intermediary. You may elect to receive all future reports in paper free of charge. You can inform the Fund or your financial intermediary that you wish to continue receiving paper copies of your shareholder reports by (i) calling 877-855-3434 toll-free or by sending an e-mail request to Ares Dynamic Credit Allocation Fund, Inc. Investor Relations Department at ARDCInvestorRelations@aresmgmt.com, if you invest directly with the Fund, or (ii) contacting your financial intermediary. Your election to receive reports in paper will apply to all funds held in your account, if you invest through your financial intermediary, or all funds held with the fund complex if you invest directly with the Fund.


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    Ares Dynamic Credit Allocation Fund, Inc. Contents Letter to Shareholders ............................................................1 Fund Profile & Financial Data ...................................................4 Schedule of Investments .........................................................5 Statement of Assets and Liabilities ........................................15 Statements of Operations .....................................................16 Statements of Changes in Net Assets ....................................17 Statements of Cash Flows.....................................................18 Financial Highlights ...............................................................19 Notes to Financial Statements...............................................20 Proxy & Portfolio Information..................................................35 Dividend Reinvestment Plan ..................................................36 Corporate Information ..........................................................37 Privacy Notice.......................................................................38 Directors and Officers ...........................................................39 Annual Report 2019


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    Ares Dynamic Credit Allocation Fund, Inc. Letter to Shareholders As of December 31, 2019 (Unaudited) covering the partial reporting period from November 1, 2019 to December 31, 2019 Dear Shareholders, We thank you for your support of the Ares Dynamic Credit Allocation Fund, Inc. (“ARDC” or the “Fund”) and recognize the trust and confidence that you have demonstrated in Ares through your investment in ARDC. Economic Conditions and Leveraged Finance Market Update Financial markets continued to rally in November and December 2019 fueled by an initial resolution in U.S.-China trade relations and accommodative central bank policy. The Federal Reserve (the “Fed”) kept rates unchanged and affirmed a positive overall economic outlook despite geopolitical tensions and uncertainties surrounding the 2020 elections. U.S. economic data indicated a stable end to 2019 as the unemployment rate remained at a multi-decade low,1 inflation risks remained muted,2 and expectations of 2020 GDP remained fairly consistent with the last six months’ GDP of 2019.3 Although the U.S. manufacturing index contracted for the fifth straight month in December, the U.S. services sector, which comprises a majority of U.S. economic activity, continued to expand.4 With respect to corporate credit, markets were bifurcated for most of 2019 as demand skewed toward higher quality assets. However, as a result of supportive macroeconomic and geopolitical conditions, the high yield and leveraged loan markets experienced a risk rally in December, and lower rated CCC securities outperformed BB rated securities, making up for much of the weakness earlier in the year.5 Reflecting positive investor sentiment, nearly half of the leveraged loan market and over 80% of the high yield market ended the calendar year trading at a premium to par (after starting 2019 close to 0% and under 20%, respectively).5 The fundamental credit environment continues to be resilient with both the high yield and loan default rates of 2.63% and 1.64%, respectively, remaining below their long-term averages (3.44% and 3.01%).6 Against this backdrop, the Credit Suisse Leveraged Loan Index (“CSLLI”) posted 2.17% in returns during the last two months of 2019 with December as the strongest month since January 2019. In a notable reversal, the energy sector led industry performance as the ICE BofA High Yield Master II Index (“H0A0”) posted 2.37% in returns during the last two months of the calendar year. In this environment, we remain acutely focused on credit selection and on finding opportunities to take advantage of oversold conditions to drive attractive-risk adjusted returns for our investors. In the CLO market, new issue volumes remained healthy with $21.9 billion pricing during the last two months of 2019. For the full calendar year, global issuance volumes recorded $151.7 billion across 318 deals, but were approximately 6% lower than the $161.2 billion recorded across 307 deals in 2018.7 While foreign AAA buyers have been less active in 2019 due to increased regulatory scrutiny, strong demand from bank treasury groups has filled the void. Further down the capital stack, spreads on lower rated tranches tightened, 8 driven by the attractive relative value offered by CLOs vs. similarly rated corporate securities. Despite the tightening, manager tiering continues to be meaningful, and new issue creation is very challenging for less seasoned and less liquid managers, in our view. As a result, the volume of CLO resets and refinancings, which lack the degree of economic concessions of new issue deals, has remained muted throughout the year. In this environment, we maintain our heightened focus on credit quality, documentation, cleaner transaction structures and downgrade risk protections. Looking ahead, we expect 2020 to present bouts of episodic market volatility, particularly given the geopolitical landscape and the uncertainty surrounding the U.S. Presidential election. Consequently, we believe the opportunities for bottom-up, fundamental active managers like Ares will be robust, and we intend to remain disciplined credit pickers so that we are positioned to take advantage of these opportunities to find value. Portfolio Performance and Positioning For the two month period ending December 31, 2019, ARDC generated 4.99% in returns based on Net Asset Value (“NAV”) and 7.53% in stock-based total returns, which compares to 2.17% for the CSLLI and 2.37% for the H0A0.9 It is important to note that given its flexible mandate and focus on senior secured bank loans, high yield bonds and CLOs, we believe there is no single established benchmark that reasonably compares to ARDC. ARDC’s strong performance during the two months ended December 31, 2019 was primarily driven by the recovery in CLO valuations and was also supported by the rally in leveraged loans and high yield bonds. ARDC’s CLO investments generated 6.97% in returns during the two-month period, while our senior secured loan and high yield investments generated 2.68% and 2.11% in returns, respectively. We continue to believe CLO debt is an attractive investment option for ARDC due to the compelling return and risk attributes of these securities. In today’s market, BB-rated CLO debt offers approximately 480 bps and 465 bps of spread premium, respectively, for a similarly rated loan and bond.10 CLO debt also typically possesses Annual Report 2019 1


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    Ares Dynamic Credit Allocation Fund, Inc. Letter to Shareholders (continued) As of December 31, 2019 (Unaudited) covering the partial reporting period from November 1, 2019 to December 31, 2019 attractive risk-mitigation features, such as over-collateralization and portfolio diversification, which do not exist when investing in single-borrower securities. Reflecting our fundamental credit views and our conservative stance on the aging of the U.S. credit cycle, we continued to position our portfolio within higher-rated investments, and ARDC’s portfolio of investments rated B, BB or BBB was 76.21% as of December 31, 2019.11 In addition, the portfolio remains well diversified across 216 issuers and 26 industries.12 The average position size across ARDC is 0.46% and the largest position is 1.43%.13 We continue to have strong conviction in the quality of the ARDC portfolio and believe that the Fund continues to be well positioned to take advantage of buying opportunities in both the new issue and secondary markets. We continue to believe that the ability to dynamically allocate is critical to successfully navigating an evolving market environment with headline risk and interest rate driven volatility. The increasing importance of credit selection has become the primary driver of generating alpha. Looking ahead, we will remain focused on performing solid fundamental credit analysis and in-depth due diligence as we seek attractive risk adjusted returns for our investors. We thank you again for your continued support in ARDC. Best Regards, Ares Capital Management II LLC Ares Dynamic Credit Allocation Fund, Inc. ARDC is a closed-end fund that trades on the New York Stock Exchange under the symbol “ARDC” and is externally managed by Ares Capital Management II LLC (the “Adviser”), a subsidiary of Ares Management Corporation. ARDC’s investment objective is to provide an attractive level of total return, primarily through current income and, secondarily, through capital appreciation by investing in a broad, dynamically-managed portfolio of below investment grade senior secured loans, high yield corporate bonds and collateralized loan obligation securities. On November 6, 2015, the Board of Directors (the “Board”) of ARDC authorized the repurchase of shares of common stock of the Fund (the “Common Shares”) on the open market when the Common Shares are trading on the New York Stock Exchange at a discount of 10% or more (or such other percentage as the Board may determine from time to time) from the net asset value (“NAV”) of the Common Shares. The Fund may repurchase its outstanding Common Shares in open-market transactions at the Fund management’s discretion. The Fund is not required to effect share repurchases. Any future purchases of Common Shares may not materially impact the discount of the market price of the Common Shares relative to their NAV and any narrowing of this discount that does result may not be maintained. Since the inception of the program through December 31, 2019, we have repurchased 566,217 shares at an average price of $13.17, representing an average discount of -15.3%. Thank you again for your continued support of ARDC. If you have any questions about the Fund, please call 1-877-855-3434, or visit the Fund’s website at www.arespublicfunds.com. Note: The opinions of the Adviser expressed herein are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. This information should not be considered investment advice or an offer of any security for sale. This material may contain “forward-looking” information that is not purely historical in nature. No representations are made as to the accuracy of such information or that such information will be realized. Actual events or conditions are unlikely to be consistent with, and may differ materially from, those assumed. Past performance is not indicative of future results. Ares does not undertake any obligation to publicly update or review any forward-looking information, whether as a result of new information, future developments or otherwise, except as required by law. Indices are provided for illustrative purposes only and not indicative of any investment. They have not been selected to represent appropriate benchmarks or targets for ARDC. Rather, the indices shown are provided solely to illustrate the performance of well-known and widely recognized indices. Any comparisons herein of the investment performance of ARDC to an index are qualified as follows: (i) the volatility of such index will likely be materially different from that of ARDC; (ii) such index will, in many cases, employ different investment guidelines and criteria than ARDC and, therefore, holdings in ARDC will differ significantly from holdings of the securities that comprise such index and ARDC may invest in different asset classes altogether from the illustrative index, which may materially impact the performance of ARDC relative to the index; and (iii) the performance of such index is disclosed solely to allow for comparison on ARDC’s performance to that of a well-known index. Comparisons to indices have limitations because indices have risk profiles, volatility, asset composition and other material characteristics that will differ from ARDC. The indices do not reflect the deduction of fees or expenses. You cannot invest directly in an index. No representation is being made as to the risk profile of any benchmark or index relative to the risk profile of ARDC. There can be no assurance that the future performance of any specific investment, or product will be profitable, equal any corresponding indicated historical performance, or be suitable for a portfolio. 2 Annual Report 2019


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    Ares Dynamic Credit Allocation Fund, Inc. Letter to Shareholders (continued) As of December 31, 2019 (Unaudited) covering the partial reporting period from November 1, 2019 to December 31, 2019 This may contain information sourced from Bank of America, used with permission. Bank of America’s Global Research division’s fixed income index platform is licensing the ICE BofA Indices and related data “as is,” makes no warranties regarding same, does not guarantee the suitability, quality, accuracy, timeliness, and/or completeness of the ICE BofA Indices or any data included in, related to, or derived therefrom, assumes no liability in connection with their use and does not sponsor, endorse, or recommend Ares Management, or any of its products or services. The ICE BofA US High Yield Index (“H0A0”) tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one-year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $100 million. Index constituents are capitalization-weighted based on their current amount outstanding times the market price plus accrued interest. Accrued interest is calculated assuming next-day settlement. Cash flows from bond payments that are received during the month are retained in the index until the end of the month and then are removed as part of the rebalancing. Cash does not earn any reinvestment income while it is held in the index. The index is rebalanced on the last calendar day of the month, based on information available up to and including the third business day before the last business day of the month. No changes are made to constituent holdings other than on month end rebalancing dates. Inception date: August 31, 1986. ICE BofA BB US High Yield Index (“H0A1”) is a subset of ICE BofA US High Yield Index including all securities rated BB1 through BB3, inclusive. Inception date: December 31, 1996. The Credit Suisse Leveraged Loan Index (“CSLLI”) is designed to mirror the investable universe of the $US-denominated leveraged loan market. The index inception is January 1992. The index frequency is daily, weekly and monthly. New loans are added to the index on their effective date if they qualify according to the following criteria: 1) loan facilities must be rated “5B” or lower; 2) only fully-funded term loan facilities are included; 3) the tenor must be at least one year; and 4) issuers must be domiciled in developed countries. REF: TC-01165 All data as of December 31, 2019, unless otherwise stated. 1 U.S. Bureau of Labor Statistics, January 10, 2020. 2 U.S. Bureau of Labor Statistics, January 14, 2020. 3 Conference Board Economic Forecast, January 8, 2020. 4 Institute for Supply Management, January 3, 2020. 5 Credit Suisse Leverage Loan Index (“CSLLI”) and Ice BofA High Yield Master II Index (“H0A0”), December 31, 2019. 6 J.P. Morgan, January 2, 2020. Historical average represents the simple average from 1980 to 2019 for high yield, and 1998 to 2019 for leveraged loans. 7 S&P LCD. “Global Databank,” December 31, 2019. 8 Wells Fargo, “The CLO Monthly Market Overview,” January 6, 2020. 9 Past performance is not indicative of future results. Index provided for comparison purposes only. 10 Source: J.P. Morgan CLOIE Monitor, Credit Suisse Leverage Loan Index (“CSLLI”), ICE BofA BB US High Yield Index (“H0A1”), December 31, 2019. 11 Based on S&P and/or Moody’s rating. Credit quality is an assessment of the credit worthiness of an issuer of a security. AAA is the highest rating, meaning the obligor’s capacity to meet its financial commitments is strong. As ratings decrease, the obligor is considered more speculative by market participants. Credit ratings apply only to the bonds and preferred securities in the portfolio and not to the shares of the fund which are not rated and will fluctuate in value. 12 Based on the Credit Suisse Industry Classification. Diversification does not assure profit or protect against loss. 13 Diversification does not assure profit or protect against loss. Annual Report 2019 3


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    Ares Dynamic Credit Allocation Fund, Inc. Fund Profile & Financial Data December 31, 2019 (Unaudited) Portfolio Characteristics as of 12.31.19 Portfolio Composition as of 12.31.19 Weighted Average Floating Coupon1 6.39% Bond - 46.04% Weighted Average Bond Coupon2 7.83% Loan - 22.25% Current Distribution Rate3 8.40% CLO Debt - 24.07% Dividend Per Share $0.1075 CLO Equity - 8.79% 1 The weighted-average gross interest rate on the pool of loans as of December 31, 2019. 2 The weighted-average gross interest rate on the pool of bonds at the time the securities were issued. 3 Monthly dividend per share annualized and divided by the December 31, 2019 market price per share. The Fund’s December 2019 distributions were comprised of net investment income and short-term capital gains. The This data is subject to change on a daily basis. As of 12.31.19, the Fund held distribution rate alone is not indicative of Fund a negative traded cash balance of -1.15%. performance. To the extent that any portion of the current distributions were estimated to be sourced from something other than income, such as return of capital, Fixed vs. Floating Rate as of 12.31.19 the source would have been disclosed in a Section 19(a) Notice located under the “Investor Fixed - 49.84% Information” section of the Fund’s website. Please note that the distribution classifications are preliminary and Floating - 50.16% certain distributions may be re-classified at year end. Please refer to year-end tax documents for the final classifications of the Fund’s distributions for a given year. Top 10 Holdings4 as of 12.31.19 HCA Healthcare Inc 1.43% Tegna 1.20% Genesys Telecommunications Laboratories Inc 1.19% Altice NV 1.15% Excludes Equity and CLO Equity Energy Transfer Operating LP 1.14% Industry Allocation5 as of 12.31.19 NRG Energy Inc 1.10% CLOs - 32.86% Olin Corporation 1.08% Healthcare - 9.84% XPO Logistics Inc 1.07% Energy - 7.20% Williams Cos Inc/The 1.05% Information Technology - 5.87% GFL Enviromental Inc. 1.05% Service - 5.25% 4 Market value percentage may represent multiple instruments by the named issuer and/or multiple Gaming/Leisure - 3.75% issuers being consolidated to the extent they are owned by the same parent company. These values Financial - 3.75% may be different than the issuer concentrations in certain regulatory filings. Telecommunications - 3.73% Performance as of 12.31.19 Cable/Wireless Video - 2.96% Market NAV Chemicals - 2.81% 1 Month 4.58% 4.06% Other - 23.14% Year to Date 21.22% 12.24% 5 Credit Suisse industry classifications weighted by market value. These values 3 Years (annualized) 9.13% 6.78% may be different than industry classifications in certain regulatory filings. 5 Years (annualized) 8.30% 6.40% Since Inception** 4.59% 5.90% **Since Inception of fund (11/27/2012) and annualized. Source: Morningstar Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. Since Inception returns assume a purchase of common shares at the initial offering price of $20.00 per share for market price returns or initial net asset value (NAV) of $19.10 per share for NAV returns. Returns for periods of less than one year are not annualized. All distributions are assumed to be reinvested either in accordance with the dividend reinvestment plan (DRIP) for market price returns or NAV for NAV returns. 4 Annual Report 2019


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    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments December 31, 2019 Senior Loans 31.2%(b)(c)(g) Senior Loans(b)(c)(g) (continued) Principal Principal Amount Value(a) Amount Value(a) Aerospace & Defense 0.3% DCG Acquisition Corp., Initial 1st Lien Term Loan B, 3M LIBOR + 4.50%, 6.51%, B.C. Unlimited Liability Co., Initial 09/30/2026(e) $1,837,005 $ 1,841,597 1st Lien Term Loan B-2, (Canada), 3M LIBOR + 4.00%, 5.95%, Perstorp Holding AB, Facility 1st Lien 04/06/2026 $ 447,969 $ 450,698 Term Loan B, (Sweden), 3M LIBOR + 4.75%, 6.70%, Dynasty Acquisition Co., Inc., Initial 02/27/2026(e) 2,977,500 2,813,738 1st Lien Term Loan B-1, 3M LIBOR + 4.00%, 5.95%, Starfruit Finco B.V., Initial 1st Lien 04/06/2026 833,223 838,297 Term Loan B, (Netherlands), 1M LIBOR + 3.25%, 4.96%, 1,288,995 10/01/2025 1,461,796 1,460,582 Trident TPI Holdings, Inc., 1st Lien Automotive 1.0% Term Loan Tranche B-1, L + 3.00%, Navistar, Inc., Tranche 1st Lien 10/17/2024(d) 1,250,000 1,212,050 Term Loan B, 1M LIBOR + 3.50%, 7,328,711 5.24%, 11/06/2024 4,079,533 4,062,521 Banking, Finance, Insurance & Real Estate 2.4% Construction & Building 1.6% Asurion, LLC, 2nd Lien ACProducts, Inc., Initial 1st Lien Term Loan B-2, L + 6.50%, Term Loan, 1M LIBOR + 5.50%, 7.30%, 08/04/2025(d) 3,799,695 3,843,392 02/15/2024(e) 2,484,177 2,465,546 Financiere Holding CEP, EUR SRS Distribution, Inc., 1st Lien 1st 1st Lien Term Loan B, (France), Amendment Incremental Term Loan, 3M EURIBOR + 4.25%, 4.25%, 1M LIBOR + 4.50%, 6.30%, 01/16/2025 €3,000,000 3,393,436 05/23/2025 1,000,000 1,001,250 Forest City Enterprises, LP, The Hillman Group, Inc., Initial 1st Replacement 1st Lien Term Loan B, Lien Term Loan B, 1M LIBOR + 4.00%, 1M LIBOR + 3.50%, 5.30%, 5.80%, 05/30/2025 2,784,127 2,734,013 12/08/2025 $1,978,472 1,986,504 6,200,809 9,223,332 Consumer goods: Durable 1.0% Beverage, Food & Tobacco 1.1% AI Aqua Merger Sub, Inc., 1st Lien Atkins Nutritionals Holdings, Inc., 5th Amendment Incremental Term Initial 1st Lien Term Loan, L + 3.50%, Loan, 3M LIBOR + 4.25%, 6.35%, 07/07/2024(d) 1,000,000 1,006,250 12/13/2023 2,000,000 1,955,000 Chobani, LLC / Chobani Finance Corp., MI Windows and Doors, LLC, Initial Inc., 1st Lien Term Loan B, L + 3.50%, 1st Lien Term Loan, 1M LIBOR + 10/10/2023(d) 1,500,000 1,499,625 5.50%, 7.21%, 11/06/2026 2,000,000 1,995,000 IRB Holding Corp., 1st Lien Term 3,950,000 Loan B, 3M LIBOR + 3.25%, 5.22%, 02/05/2025 1,984,848 1,995,328 Containers, Packaging & Glass 1.5% 4,501,203 Irel AcquiCo GmbH, Facility 1st Lien Term Loan B1, (Germany), Chemicals, Plastics & Rubber 1.9% 6M EURIBOR + 3.75%, 3.75%, 05/29/2026 €2,258,065 2,548,576 DCG Acquisition Corp., 1st Lien Delayed Draw Term Loan, L + 4.50%, Tank Holding Corp., Initial 1st Lien 09/30/2026(e)(f) 297,428 744 Term Loan B, L + 4.00%, 03/26/2026(d) $3,231,405 3,241,099 5,789,675 Annual Report 2019 5


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    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2019 Senior Loans(b)(c)(g) (continued) Senior Loans(b)(c)(g) (continued) Principal Principal Amount Value(a) Amount Value(a) Energy: Electricity 0.2% RegionalCare Hospital Partners Holdings, Inc., 1st Lien Term Loan B, Helix Gen Funding, LLC, 1st Lien 1M LIBOR + 4.50%, 6.30%, Term Loan, 1 M LIBOR + 3.75%, 5.55%, 11/16/2025 $ 671,644 $ 676,514 06/03/2024 $ 949,255 $ 933,564 Sotera Health Holdings, LLC, Initial 1st Energy: Oil & Gas 1.7% Lien Term Loan, 3M LIBOR + 4.50%, 6.29%, 12/11/2026 4,000,000 4,008,760 Blackstone CQP Holding Co., LP, Initial 1st Lien Term Loan B, 21,953,908 3M LIBOR + 3.50%, 5.41%, 09/30/2024 2,032,893 2,040,841 High Tech Industries 3.8% Equitrans Midstream Corporation, Applied Systems, Inc., 2nd Lien Term 1st Lien Term Loan Facility, Loan, 3M LIBOR + 7.00%, 8.95%, 1 M LIBOR + 4.50%, 6.30%, 09/19/2025 2,500,000 2,541,675 01/31/2024 2,493,703 2,475,524 Dun & Bradstreet Corp., Initial 1st Traverse Midstream Partners, LLC, Lien Term Loan, 1M LIBOR + 5.00%, 1st Lien Term Loan, 1 M LIBOR + 4.00%, 6.79%, 02/06/2026 2,500,000 2,519,800 5.80%, 09/27/2024 2,244,318 2,015,398 Ellie Mae, Inc., 1st Lien Term Loan, 6,531,763 2M LIBOR + 4.00%, 5.95%, 04/17/2026 3,477,767 3,492,999 Healthcare & Pharmaceuticals 5.6% Huskies Parent, Inc., 1st Lien Closing Albany Molecular Research, Inc., Date Term Loan, 1M LIBOR + 4.00%, 2nd Lien Term Loan, 1M LIBOR + 7.00%, 5.84%, 07/31/2026 2,045,045 2,045,045 8.80%, 08/30/2025 1,000,000 996,250 Hyland Software, Inc., 2nd Lien Term Albany Molecular Research, Inc., Loan, 1M LIBOR + 7.00%, 8.80%, Initial 1 st Lien Term Loan, 07/07/2025 1,750,000 1,769,688 1M LIBOR + 3.25%, 4.95%, MH Sub I, LLC, Initial 1st Lien Term 08/30/2024 940,183 933,724 Loan, 1M LIBOR + 3.75%, 5.55%, Cambrex Corporation, Initial 1 st Lien 09/13/2024 2,480,964 2,483,718 Term Loan, 3M LIBOR + 5.00%, 6.70%, 14,852,925 12/04/2026 4,000,000 3,980,000 CPI Holdco, LLC, 1st Lien Term Loan B, Media: Broadcasting & Subscription 0.4% 3M LIBOR + 4.25%, 6.20%, 11/04/2026(e) 1,736,111 1,740,451 Intelsat Jackson Holdings S.A., 1st Lien Term Loan B4, (Luxembourg), Gentiva Health Services, Inc., Initial 6M LIBOR + 4.50%, 6.43%, 1st Lien Closing Date Term Loan, 01/02/2024 703,125 708,019 1M LIBOR + 3.75%, 5.56%, 07/02/2025 2,890,657 2,903,318 Intelsat Jackson Holdings S.A., Tranche 1st Lien Term Loan B-3, (Luxembourg), Hanger, Inc., 1st Lien Term Loan, 6M LIBOR + 3.75%, 5.68%, 1M LIBOR + 3.50%, 5.30%, 11/27/2023 800,000 800,712 03/06/2025 1,812,264 1,815,671 1,508,731 Radiology Partners, Inc., 1st Lien Term Loan B, 1M LIBOR + 4.75%, 6.62%, 07/09/2025 1,040,812 1,042,551 Media: Diversified & Production 0.5% Radiology Partners, Inc., 2nd Lien Equinox Holdings, Inc., Initial 2nd Lien Term Loan B, 12M LIBOR + 8.25%, Term Loan, 1M LIBOR + 7.00%, 8.80%, 10.12%, 07/09/2026(e) 1,923,888 1,875,791 09/06/2024 1,850,000 1,846,540 Radnet Management, Inc., 1st Lien Retail 1.0% Term Loan B-1, 3M LIBOR + 3.50%, 5.51%, 06/30/2023 1,971,847 1,980,878 Mister Car Wash Holdings, Inc., 1st Lien Delayed Draw Term Loan 5, L + 3.50%, 05/14/2026(f) 98,540 287 6 Annual Report 2019


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    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2019 Senior Loans(b)(c)(g) (continued) Senior Loans(b)(c)(g) (continued) Principal Principal Amount Value(a) Amount Value(a) Mister Car Wash Holdings, Inc., Initial 1st Telecommunications 0.5% Lien Term Loan B, 3M LIBOR + 3.50%, Avaya, Inc., Tranche 1 st Lien Term 5.41%, 05/14/2026 $1,960,938 $ 1,966,664 Loan B, 1M LIBOR + 4.25%, 5.99%, PetSmart, Inc., Tranche 1st Lien Term 12/15/2024 $1,826,015 $ 1,788,582 Loan B-2, L + 4.00%, 03/11/2022(d) 2,000,000 1,976,040 Transportation: Cargo 0.5% 3,942,991 Sabert Corporation, 1 st Lien Term Services: Business 3.7% Loan B, 3M LIBOR + 4.50%, 6.25%, 12/10/2026 1,858,144 1,872,860 AVSC Holding Corp., 1st Lien Term Loan, 3M LIBOR + 3.25%, 5.23%, Total Senior Loans 03/03/2025(e) 2,481,061 2,468,655 (Cost: $120,840,099) 121,635,462 AVSC Holding Corp., Initial 2nd Lien Term Loan, L + 7.50%, Corporate Bonds 64.5% 09/01/2025(d) 1,250,000 1,175,000 Aerospace & Defense 1.8% Casmar Holdings, Ltd., Initial 1st Lien Bombardier, Inc., 144A, (Canada), Term Loan A, (Australia), 7.50%, 12/01/2024(g) 1,500,000 1,575,945 3M LIBOR + 4.50%, 6.44%, Bombardier, Inc., 144A, (Canada), 12/20/2023 860,241 754,862 8.75%, 12/01/2021(g) 2,250,000 2,465,156 CCC Information Services, Inc., Leidos Holdings, Inc., 7.13%, 2nd Lien Term Loan, L + 6.75%, 07/01/2032 2,500,000 2,925,000 04/28/2025(d) 558,815 559,654 6,966,101 Explorer Holdings, Inc., 1st Lien Term Loan, L + 4.50%, 11/20/2026(d) 3,084,839 3,104,119 Automotive 2.6% Kronos, Inc., Initial 2nd Lien American Axle and Manufacturing, Inc., Term Loan, 3M LIBOR + 8.25%, 6.63%, 10/15/2022 3,500,000 3,548,125 10.16%, 11/01/2024 1,525,000 1,552,953 Goodyear Tire and Rubber Co., Packers Holdings, LLC, Initial 1st Lien 8.75%, 08/15/2020 3,522,000 3,658,477 Term Loan B, 3M LIBOR + 3.25%, Navistar International Corporation, 4.99%, 12/04/2024 2,398,312 2,397,569 144A, 6.63%, 11/01/2025(g) 1,000,000 1,018,750 Team Health Holdings, Inc., Initial Panther BF Aggregator 2, LP, 144A, 1st Lien Term Loan, 1M LIBOR + 8.50%, 05/15/2027(g) 1,760,000 1,870,000 2.75%, 4.55%, 02/06/2024 2,958,988 2,386,601 10,095,352 14,399,413 Banking, Finance, Insurance & Real Estate 2.5% Services: Consumer 2.5% Acrisure, LLC, 144A, 8.13%, Diebold Nixdorf Inc., 1st Lien Term 02/15/2024(g) 1,762,000 1,916,175 Loan A-1, 1M LIBOR + 9.25%, 11.00%, 08/31/2022 3,310,252 3,484,041 Acrisure, LLC, 144A, 10.13%, 08/01/2026(g) 1,023,000 1,102,283 Global Education Management Systems Establishment, Facility 1st Lien Term Ally Financial, Inc., 7.50%, Loan B, (Cayman Islands), 3M LIBOR + 09/15/2020 500,000 517,500 5.00%, 6.91%, 07/31/2026(e) 2,375,450 2,390,297 Ally Financial, Inc., 8.00%, St. George’s University Scholastic 03/15/2020 2,250,000 2,269,687 Services, LLC, 1st Lien Term Loan B, Refinitiv US Holdings, Inc., 144A, 1M LIBOR + 3.50%, 5.30%, 8.25%, 11/15/2026(g) 3,500,000 3,941,875 07/17/2025 3,751,773 3,784,601 9,747,520 9,658,939 Annual Report 2019 7


  • Page 10

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2019 Corporate Bonds (continued) Corporate Bonds (continued) Principal Principal Amount Value(a) Amount Value(a) Beverage, Food & Tobacco 0.7% Energy: Oil & Gas 8.4% Chobani, LLC / Chobani Finance Cheniere Energy Partners, LP, Corp., Inc., 144A, 7.50%, 5.63%, 10/01/2026 $1,500,000 $ 1,586,250 04/15/2025(g) $1,000,000 $ 1,005,000 Energy Transfer Operating, LP, IRB Holding Corp., 144A, 6.75%, 7.50%, 10/15/2020 6,000,000 6,235,376 02/15/2026(g) 1,500,000 1,571,250 Exterran Energy Solutions, LP, 2,576,250 8.13%, 05/01/2025 2,551,000 2,512,735 Hess Midstream Operations, L.P., Capital Equipment 3.1% 144A, 5.13%, 06/1 5/2028(g) 1,667,000 1,687,838 Avantor, Inc., 144A, 9.00%, Hilcorp Energy I, LP / Hilcorp 10/01/2025(g) 5,000,000 5,587,650 Finance Co., 144A, 6.25%, 11/01/2028(g) 3,000,000 2,850,000 Titan Acquisition, Ltd., 144A, (Canada), 7.75%, 04/15/2026(g) 2,025,000 2,004,750 Laredo Petroleum, Inc., 6.25%, 03/15/2023 3,754,000 3,519,375 Welbilt, Inc., 9.50%, 02/15/2024 4,398,000 4,661,880 Parsley Energy, LLC, 144A, 6.25%, 12,254,280 06/01/2024(g) 1,089,000 1,132,560 Chemicals, Plastics & Rubber 2.4% Range Resources Corp., 5.88%, 07/01/2022 2,510,000 2,491,175 Aruba Investments, Inc., 144A, 8.75%, 02/15/2023(g) 2,500,000 2,487,500 Seven Generations Energy, Ltd., 144A, (Canada), 6.88%, Blue Cube Spinco, Inc., 9.75%, 06/30/2023(g) 3,500,000 3,600,625 10/15/2023 5,500,000 5,914,260 Targa Resources Partners LP, Starfruit Finco B.V., 144A, 6.75%, 03/15/2024 490,000 507,763 (Netherlands), 8.00%, 10/01/2026(g) 800,000 848,000 Vine Oil and Gas, LP, 144A, 9,249,760 9.75%, 04/15/2023(g) 1,824,000 912,000 Williams Cos., Inc., 8.75%, Construction & Building 1.2% 03/15/2032 4,000,000 5,753,700 SRS Distribution, Inc., 144A, 8.25%, 32,789,397 07/01/2026(g) 2,250,000 2,336,414 Tutor Perini Corp., 144A, 6.88%, Environmental Industries 1.5% 05/01/2025(g) 2,500,000 2,412,500 GFL Environmental, Inc., 144A, 4,748,914 (Canada), 7.00%, 06/01/2026(g) 1,300,000 1,373,320 GFL Environmental, Inc., 144A, Consumer goods: Non-Durable 0.4% (Canada), 8.50%, 05/01/2027(g) 3,957,000 4,352,700 Sotheby’s, 144A, 7.38%, 5,726,020 10/15/2027(g) 1,667,000 1,687,838 Containers, Packaging & Glass 2.2% Healthcare & Pharmaceuticals 5.3% Crown Cork & Seal Co., Inc., 7.38%, Bausch Health Cos., Inc., 144A, 12/15/2026 4,350,000 5,165,625 (Canada), 7.00%, 03/15/2024(g) 1,000,000 1,040,000 Owens-Brockway Packaging, Inc., Envision Healthcare Corp., 144A, 144A, 6.38%, 08/15/2025(g) 1,500,000 1,638,750 8.75%, 10/15/2026(g) 2,501,000 1,550,620 Plastipak Holdings, Inc., 144A, HCA, Inc., 7.50%, 02/15/2022 3,250,000 3,591,250 6.25%, 10/15/2025(g) 2,000,000 1,724,920 HCA, Inc., 7.69%, 06/15/2025 3,500,000 4,217,500 8,529,295 Immucor, Inc., 144A, 11.13%, 02/15/2022(g) 4,261,000 4,250,348 8 Annual Report 2019


  • Page 11

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2019 Corporate Bonds (continued) Corporate Bonds (continued) Principal Principal Amount Value(a) Amount Value(a) RegionalCare Hospital Partners Media: Advertising, Printing & Publishing 1.5% Holdings, Inc., 144A, 8.25%, Lee Enterprises, Inc., 144A, 9.50%, 05/01/2023(g) $2,500,000 $ 2,643,750 03/15/2022(g) $4,175,000 $ 3,882,750 RegionalCare Hospital Partners Terrier Media Buyer, Inc., 144A, 8.88%, Holdings, Inc., 144A, 11.50%, 12/15/2027(g) 2,000,000 2,115,000 05/01/2024(g)(h) 1,000,000 1,077,200 5,997,750 Tenet Healthcare Corp., 8.13%, 04/01/2022 2,125,000 2,350,781 Media: Broadcasting & Subscription 7.4% 20,721,449 Belo Corp., 7.25%, 09/15/2027 5,750,000 6,540,625 High Tech Industries 4.2% CSC Holdings, LLC, 144A, 6.63%, 10/15/2025(g) 1,000,000 1,063,750 Dell International, LLC, 144A, 6.02%, 06/15/2026(g) 3,750,000 4,317,000 CSC Holdings, LLC, 144A, 7.50%, 04/01/2028(g) 1,750,000 1,977,500 Genesys Telecommunications Laboratories, Inc., 144A, 10.00%, CSC Holdings, LLC, 144A, 7.75%, 11/30/2024(g) 6,000,000 6,487,500 07/15/2025(g) 550,000 586,416 Informatica, LLC, 144A, 7.13%, CSC Holdings, LLC, 144A, 10.88%, 07/15/2023(g) 2,750,000 2,791,250 10/15/2025(g) 1,760,000 1,966,800 SSL Robotics, LLC, 144A, 9.75%, Cumulus Media New Holdings, Inc., 12/31/2023(g) 1,463,000 1,591,012 144A, 6.75%, 07/01/2026(g) 1,316,000 1,409,765 TIBCO Software, Inc., 144A, 11.38%, Diamond Sports Group, LLC, 144A, 12/01/2021(g) 1,000,000 1,036,300 6.63%, 08/15/2027(g) 2,223,000 2,161,867 16,223,062 Gray Television, Inc., 144A, 7.00%, 05/15/2027(g) 2,000,000 2,222,500 Hotel, Gaming & Leisure 4.1% Hughes Satellite Systems Corp., Golden Nugget, Inc., 144A, 8.75%, 7.63%, 06/15/2021 3,001,000 3,206,418 10/01/2025(g) 3,500,000 3,742,812 Intelsat Jackson Holdings S.A., International Game Technology PLC, 144A, (Luxembourg), 8.00%, 144A, (Great Britain), 6.25%, 02/15/2024(g) 2,500,000 2,565,625 02/15/2022(g) 4,000,000 4,220,000 Lamar Media Corp., 5.75%, Jack Ohio Finance, LLC, 144A, 02/01/2026 3,000,000 3,179,700 6.75%, 11/15/2021(g) 64,000 65,280 Quebecor Media, Inc., (Canada), Jack Ohio Finance, LLC, 144A, 5.75%, 01/15/2023 2,000,000 2,172,500 10.25%, 11/15/2022(g) 2,250,000 2,374,875 29,053,466 Scientific Games International, Inc., 6.63%, 05/15/2021 2,750,000 2,784,375 Media: Diversified & Production 0.7% Scientific Games International, Inc., Life Time Fitness, Inc., 144A, 8.50%, 144A, 7.00%, 05/15/2028(g) 600,000 643,500 06/15/2023(g) 2,745,000 2,799,900 Scientific Games International, Inc., Metals & Mining 0.2% 144A, 7.25%, 11/15/2029(g) 600,000 651,000 Zekelman Industries, Inc., 144A, Scientific Games International, Inc., 9.88%, 06/15/2023(g) 740,000 777,925 144A, 8.25%, 03/15/2026(g) 1,250,000 1,378,125 15,859,967 Retail 1.7% eG Global Finance PLC, 144A, (Great Britain), 8.50%, 10/30/2025(g) 1,698,000 1,802,002 L Brands, Inc., 6.75%, 07/01/2036 435,000 381,713 L Brands, Inc., 6.88%, 11/01/2035 1,500,000 1,342,500 Annual Report 2019 9


  • Page 12

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2019 Corporate Bonds (continued) Corporate Bonds (continued) Principal Principal Amount Value(a) Amount Value(a) L Brands, Inc., 7.50%, 06/15/2029 $1,897,000 $ 1,953,910 Transportation: Cargo 1.5% PetSmart, Inc., 144A, 7.13%, XPO Logistics, Inc., 144A, 6.50%, 03/15/2023(g) 750,000 735,000 06/15/2022(g) $1,500,000 $ 1,528,500 PetSmart, Inc., 144A, 8.88%, XPO Logistics, Inc., 144A, 6.75%, 06/01/2025(g) 500,000 493,750 08/15/2024(g) 3,995,000 4,339,968 6,708,875 5,868,468 Services: Business 1.0% Utilities: Electric 2.1% Solera, LLC, 144A, 10.50%, NRG Energy, Inc., 7.25%, 05/15/2026 5,500,000 6,008,750 03/01/2024(g) 2,000,000 2,122,120 NSG Holdings, LLC / NSG Holdings, Inc., United Rentals North America, Inc., 144A, 7.75%, 12/15/2025(g) 2,026,963 2,239,794 6.50%, 12/15/2026 1,500,000 1,648,594 8,248,544 3,770,714 Wholesale 0.3% Services: Consumer 1.1% Builders FirstSource, Inc., 144A, Dole Food Co., Inc., 144A, 7.25%, 6.75%, 06/01/2027(g) 1,191,000 1,305,634 06/15/2025(g) 2,500,000 2,418,750 Total Corporate Bonds GEMS MENASA Cayman Ltd., 144A, (Cayman Islands), 7.13%, (Cost: $243,794,114) 251,617,658 07/31/2026(g) 1,639,000 1,725,048 4,143,798 Collateralized Loan Obligations 46.0%(e)(g)(i) Collateralized Loan Obligations — Debt 33.7%(c) Telecommunications 6.6% AMMC CLO XI, Ltd., (Cayman Islands), Altice Financing S.A., 144A, 7.50%, 3M LIBOR + 5.80%, 7.74%, 05/15/2026(g) 500,000 537,500 04/30/2031 2,000,000 1,851,388 Altice Financing S.A., 144A, AMMC CLO XI, Ltd., (Cayman Islands), (Luxembourg), 6.63%, 02/15/2023(g) 1,000,000 1,017,500 3M LIBOR + 7.95%, 9.89%, 04/30/2031 500,000 429,004 Altice Finco S.A., 144A, (Luxembourg), 7.63%, 02/15/2025(g) 500,000 517,500 AMMC CLO XIV, Ltd., (Cayman Islands), 3M LIBOR + 7.35%, 9.29%, Altice Finco S.A., 144A, (Luxembourg), 07/25/2029 1,250,000 1,223,110 8.13%, 01/15/2024(g) 3,000,000 3,092,940 AMMC CLO XIX, Ltd., (Cayman Islands), Altice France S.A., 144A, (France), 7.38%, 05/01/2026(g) 3,235,000 3,473,225 3M LIBOR + 7.00%, 9.00%, 10/15/2028 2,000,000 1,979,502 Altice France S.A., 144A, (France), 8.13%, 02/01/2027(g) 769,000 866,086 AMMC CLO XXII, Ltd., (Cayman Islands), 3M LIBOR + 5.50%, 7.44%, Altice Luxembourg S.A., 144A, 04/25/2031 3,000,000 2,881,491 (Luxembourg), 10.50%, 05/15/2027(g) 1,000,000 1,140,050 Apidos CLO XX, Ltd., (Cayman Islands), Iridium Communications, Inc., 144A, 3M LIBOR + 5.70%, 7.70%, 10.25%, 04/15/2023(g) 2,500,000 2,675,000 07/16/2031 2,000,000 1,912,494 Qwest Corp., 6.75%, 12/01/2021 1,750,000 1,884,243 Apidos CLO XX, Ltd., (Cayman Islands), Qwest Corp., 6.88%, 09/15/2033 3,750,000 3,766,875 3M LIBOR + 8.70%, 10.70%, 07/16/2031 850,000 819,885 Sprint Corp., 7.63%, 03/01/2026 1,425,000 1,571,490 Atlas Senior Loan Fund VII, Ltd., T-Mobile USA, Inc., 6.38%, 03/01/2025 3,500,000 3,616,655 (Cayman Islands), 3M LIBOR + 8.05%, 9.97%, 11/27/2031 1,550,000 1,278,108 T-Mobile USA, Inc., 6.50%, 01/15/2026 1,500,000 1,608,315 25,767,379 10 Annual Report 2019


  • Page 13

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2019 Collateralized Loan Obligations(e)(g)(i) (continued) Collateralized Loan Obligations(e)(g)(i) (continued) Principal Principal Amount Value(a) Amount Value(a) Bain Capital Credit CLO, Ltd. 2016-2, KKR CLO 15, Ltd., (Cayman Islands), (Cayman Islands), 3M LIBOR + 7.04%, 3M LIBOR + 6.44%, 8.44%, 9.04%, 01/15/2029 $2,000,000 $ 1,950,668 01/18/2032 $3,000,000 $ 2,717,109 Canyon Capital CLO, Ltd., LCM 30, Ltd., (Cayman Islands), (Cayman Islands), 3M LIBOR + 5.75%, 3M LIBOR + 6.95%, 8.92%, 7.75%, 07/15/2031 750,000 685,301 04/20/2031 1,200,000 1,202,120 Carlyle Global Market Strategies LCM XVII, LP, (Cayman Islands), CLO, Ltd. 2017-1, (Cayman Islands), 3M LIBOR + 6.00%, 8.00%, 3M LIBOR + 6.00%, 7.97%, 10/15/2031 3,750,000 3,406,920 04/20/2031 3,000,000 2,681,046 LCM XXIII, LP, (Cayman Islands), CBAM, Ltd. 2017-3, (Cayman Islands), 3M LIBOR + 7.05%, 9.02%, 3M LIBOR + 6.50%, 8.50%, 10/20/2029 3,000,000 2,729,628 10/17/2029 3,000,000 2,999,814 Madison Park Funding XIV, Ltd., Cedar Funding CLO VIII, Ltd., (Cayman Islands), 3M LIBOR + 7.77%, (Cayman Islands), 3M LIBOR + 6.35%, 9.72%, 10/22/2030 2,500,000 2,278,805 8.35%, 10/17/2030 2,000,000 1,956,018 Madison Park Funding XXVI, Ltd., Crestline Denali CLO XIV, Ltd., (Cayman Islands), 3M LIBOR + 6.50%, (Cayman Islands), 3M LIBOR + 6.35%, 8.43%, 07/29/2030 1,500,000 1,471,113 8.28%, 10/23/2031 2,000,000 1,893,092 Madison Park Funding XXXII, Ltd., Crestline Denali CLO XV, Ltd., (Cayman Islands), 3M LIBOR + 7.10%, (Cayman Islands), 3M LIBOR + 7.35%, 9.05%, 01/22/2031 3,000,000 3,007,338 9.32%, 04/20/2030 3,875,000 3,637,575 Marble Point CLO XIV, Ltd., Denali Capital CLO XII, Ltd., (Cayman Islands), 3M LIBOR + 6.53%, (Cayman Islands), 3M LIBOR + 5.90%, 8.50%, 01/20/2032 2,500,000 2,302,407 7.90%, 04/15/2031 5,000,000 4,579,865 Mariner CLO, LLC 2019 1A E, Dryden 26 Senior Loan Fund, (Cayman Islands), 3M LIBOR + 6.89%, (Cayman Islands), 3M LIBOR + 5.54%, 8.83%, 04/30/2032 1,000,000 946,254 7.54%, 04/15/2029 2,000,000 1,940,988 Newark BSL CLO 1, Ltd., Dryden 40 Senior Loan Fund, (Cayman Islands), 3M LIBOR + 6.75%, (Cayman Islands), 3M LIBOR + 5.75%, 8.69%, 12/21/2029 2,000,000 1,971,664 7.66%, 08/15/2031 3,000,000 2,827,062 Northwoods Capital XII-B, Ltd., Dryden 45 Senior Loan Fund, (Cayman Islands), 3M LIBOR + 5.79%, (Cayman Islands), 3M LIBOR + 5.85%, 7.68%, 06/15/2031 2,000,000 1,653,096 7.85%, 10/15/2030 3,000,000 2,855,334 Oaktree CLO 2019-4, Ltd., Dryden 68 CLO, Ltd., (Cayman Islands), (Cayman Islands), 3M LIBOR + 7.23%, 3M LIBOR + 6.75%, 8.75%, 9.15%, 10/20/2032 1,500,000 1,444,377 07/15/2032 1,250,000 1,208,404 Oaktree CLO, Ltd. 2014-1, Goldentree Loan Opportunities X, Ltd., (Cayman Islands), 3M LIBOR + 6.30%, (Cayman Islands), 3M LIBOR + 5.65%, 8.21%, 05/13/2029 5,000,000 4,385,990 7.62%, 07/20/2031 1,750,000 1,678,378 Oaktree CLO, Ltd. 2019-2, Highbridge Loan Management, Ltd. (Cayman Islands), 3M LIBOR + 6.77%, 2013-2, (Cayman Islands), 3M LIBOR + 8.77%, 04/15/2031 2,000,000 1,845,104 8.25%, 10.22%, 10/20/2029 2,250,000 1,897,155 Octagon Investment Partners XV, Ltd., Highbridge Loan Management, Ltd. (Cayman Islands), 3M LIBOR + 2014-4, (Cayman Islands), 7.00%, 8.97%, 07/19/2030 1,500,000 1,481,972 3M LIBOR + 7.36%, 9.30%, Octagon Investment Partners XXI, Ltd., 01/28/2030 2,000,000 1,718,038 (Cayman Islands), 3M LIBOR + 7.00%, ICG U.S. CLO, Ltd. 2018-2, 8.91%, 02/14/2031 2,075,000 2,028,271 (Cayman Islands), 3M LIBOR + 5.75%, 7.70%, 07/22/2031 1,200,000 1,084,009 Annual Report 2019 11


  • Page 14

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2019 Collateralized Loan Obligations(e)(g)(i) (continued) Collateralized Loan Obligations(e)(g)(i) (continued) Principal Principal Amount Value(a) Amount Value(a) Octagon Loan Funding, Ltd., Venture XXVIII CLO, Ltd. 2017-28A, (Cayman Islands), 3M LIBOR + 6.00%, (Cayman Islands), 3M LIBOR + 6.16%, 7.90%, 11/18/2031 $3,000,000 $ 2,790,591 8.13%, 10/20/2029 $4,000,000 $ 3,624,676 OHA Credit Partners VII, Ltd., Vibrant CLO X, Ltd., (Cayman Islands), (Cayman Islands), 3M LIBOR + 7.50%, 3M LIBOR + 6.19%, 8.16%, 9.40%, 11/20/2027 2,850,000 2,851,271 10/20/2031 3,000,000 2,661,165 OHA Credit Partners XI, Ltd., Voya CLO, Ltd. 2013-3, (Cayman Islands), (Cayman Islands), 3M LIBOR + 7.90%, 3M LIBOR + 5.90%, 7.90%, 9.87%, 01/20/2032 2,750,000 2,580,911 10/18/2031 2,750,000 2,626,063 OHA Credit Partners XII, Ltd., Voya CLO, Ltd. 2015-3, (Cayman Islands), (Cayman Islands), 3M LIBOR + 5.45%, 3M LIBOR + 6.20%, 8.17%, 7.38%, 07/23/2030 1,500,000 1,426,548 10/20/2031 3,000,000 2,850,228 OZLM XI, Ltd., (Cayman Islands), Voya CLO, Ltd. 2017-3, (Cayman Islands), 3M LIBOR + 7.00%, 8.94%, 3M LIBOR + 6.20%, 8.17%, 10/30/2030 2,750,000 2,604,742 07/20/2030 2,390,000 2,314,751 OZLM XXIII, Ltd. 2019-23A, Wellfleet CLO, Ltd. 2017-2, (Cayman Islands), 3M LIBOR + 6.80%, (Cayman Islands), 3M LIBOR + 6.75%, 8.80%, 04/15/2032 1,750,000 1,688,482 8.72%, 10/20/2029 2,000,000 1,891,354 Silver Creek CLO, Ltd., (Cayman Islands), 131,562,117 3M LIBOR + 6.40%, 8.37%, 07/20/2030 1,000,000 968,947 Collateralized Loan Obligations — Equity 12.3% Steele Creek CLO, Ltd. 2015-1, Allegro CLO VIII, Ltd., (Cayman Islands), (Cayman Islands), 3M LIBOR + 8.85%, 15.47%, 07/15/2031 3,500,000 2,583,399 10.74%, 05/21/2029 3,000,000 2,482,158 Allegro CLO, Ltd. 2017-1A, Steele Creek CLO, Ltd. 2016-1, (Cayman Islands), 8.97%, 10/16/2030 2,000,000 1,261,204 (Cayman Islands), 3M LIBOR + 5.75%, 7.64%, 06/15/2031 3,000,000 2,501,607 AMMC CLO XXI, Ltd., (Cayman Islands), 10.64%, 11/02/2030 500,000 377,342 TCI-Flatiron CLO, Ltd. 2018-1, (Cayman Islands), 3M LIBOR + 6.60%, Atlas Senior Loan Fund III, Ltd., 8.53%, 01/29/2032 3,000,000 2,980,686 (Cayman Islands), 9.70%, 11/17/2027 1,800,000 563,654 TCI-Symphony CLO, Ltd. 2017-1, (Cayman Islands), 3M LIBOR + 6.45%, Canyon Capital CLO, Ltd. 2019-1, 8.45%, 07/15/2030 2,100,000 2,089,536 (Cayman Islands), 12.67%, 04/15/2032 1,000,000 794,802 TICP CLO XIII, Ltd., (Cayman Islands), 3M LIBOR + 6.75%, 9.12%, Carlyle Global Market Strategies 07/15/2032 2,500,000 2,500,475 CLO, Ltd. 2013-4, (Cayman Islands), 24.74%, 01/15/2031 1,259,000 623,746 Venture 36 CLO, Ltd., (Cayman Islands), 3M LIBOR + 6.92%, 8.89%, Carlyle Global Market Strategies 04/20/2032 2,000,000 1,851,580 CLO, Ltd. 2017-3, (Cayman Islands), 10.69%, 07/20/2029 1,750,000 1,048,096 Venture XXIV CLO, Ltd. 2016-24A, (Cayman Islands), 3M LIBOR + 6.72%, Carlyle Global Market Strategies 8.69%, 10/20/2028 700,000 657,992 CLO, Ltd. 2018-3, (Cayman Islands), 12.64%, 10/15/2030 3,222,500 2,445,114 Venture XXVI CLO, Ltd. 2017-26A, (Cayman Islands), 3M LIBOR + 6.80%, Cedar Funding CLO IV, Ltd., 8.77%, 01/20/2029 1,000,000 906,367 (Cayman Islands), 20.52%, 07/23/2030 2,500,000 1,863,132 Venture XXVII CLO, Ltd. 2017-27A, (Cayman Islands), 3M LIBOR + 6.35%, Cedar Funding CLO V, Ltd., 8.32%, 07/20/2030 2,025,000 1,872,090 (Cayman Islands), 15.24%, 07/17/2031 2,546,000 2,501,516 12 Annual Report 2019


  • Page 15

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2019 Collateralized Loan Obligations(e)(g)(i) (continued) Collateralized Loan Obligations(e)(g)(i) (continued) Principal Principal Amount Value(a) Amount Value(a) Cedar Funding CLO VI, Ltd., OZLM XXI, Ltd. 2017-2 1A, (Cayman Islands), 18.73%, (Cayman Islands), 13.50%, 10/20/2028 $2,000,000 $ 1,692,580 01/20/2031 $1,750,000 $ 1,289,409 Cedar Funding CLO VIII, Ltd., Venture XXX CLO, Ltd., (Cayman Islands), 10.25%, (Cayman Islands), 15.70%, 10/17/2030 2,000,000 1,410,832 01/15/2031 2,100,000 1,639,672 Crestline Denali CLO XVI, Ltd. Vibrant CLO VI, Ltd., 2018-1A, (Cayman Islands), (Cayman Islands), 9.34%, 12.91%, 01/20/2030 2,000,000 1,474,044 06/20/2029 1,500,000 847,551 Dryden 57 Senior Loan Fund, Voya CLO, Ltd. 2017-2, (Cayman Islands), 16.23%, (Cayman Islands), 10.22%, 05/15/2031 573,500 504,358 06/07/2030 1,000,000 666,595 Halcyon Loan Advisors Funding, Ltd. Wellfleet CLO, Ltd. 2018-3, 2017-1, (Cayman Islands), 9.83%, (Cayman Islands), 15.68%, 06/25/2029 1,750,000 1,002,271 01/20/2032 3,000,000 2,220,129 ICG U.S. CLO, Ltd. 2018-2, West CLO, Ltd. 2013-1, (Cayman Islands), 20.82%, (Cayman Islands), 0.00%, 07/22/2031 3,500,000 3,340,939 11/07/2025 500,000 107,387 LCM XIII, LP, (Cayman Islands), 48,018,184 9.68%, 07/19/2027 2,175,000 803,676 Total Collateralized Loan Obligations LCM XV, LP, (Cayman Islands), (Cost: $191,193,196) 179,580,301 16.60%, 07/20/2030 5,875,000 2,198,736 LCM XXIII, LP, (Cayman Islands), Common Stocks 0.0%(e)(g)(k) 5.14%, 10/20/2029 3,100,000 1,521,204 Madison Park Funding XII, Ltd., Shares (Cayman Islands), 15.45%, Energy: Oil & Gas 0.0% 07/20/2026 4,000,000 1,209,124 Templar Energy, LLC, Class A Madison Park Funding XXXI, Ltd., Common Equity 145,457 — (Cayman Islands), 13.79%, 01/23/2048 2,000,000 1,566,536 Templar Energy, LLC, Class A Preferred Equity(l) 254,588 — Mariner CLO, Ltd. 2018-5, (Cayman Islands), 12.57%, Total Common Stocks 04/25/2031 2,567,500 1,939,089 (Cost: $7,606,719) — Oaktree CLO, Ltd. 2015-1A, Warrants 0.0%(e)(g)(j)(k) (Cayman Islands), 21.39%, 10/20/2027 4,000,000 2,296,840 Media: Advertising, Printing & Publishing 0.0% Oaktree CLO, Ltd. 2018-1, Affinion Group Holdings, Inc. 7,874 — (Cayman Islands), 13.78%, Total Warrants 10/20/2030 4,250,000 3,570,956 (Cost: $3,922,355) — OHA Credit Partners VII, Ltd., Total Investments — 141.7% (Cayman Islands), 7.66%, (Cost: $567,356,483) $ 552,833,421 11/20/2027 2,000,000 1,129,066 Liabilities in Excess of OZLM XIX, Ltd. 2017-19A, Other Assets — (41.7%) (162,736,969) (Cayman Islands), 12.09%, 11/22/2030 2,440,000 1,525,185 Net Assets — 100.0% $ 390,096,452 Annual Report 2019 13


  • Page 16

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2019 Footnotes: (a) Investment holdings in foreign currencies are converted to U.S. Dollars using period end spot rates. All investments are in United States enterprises unless otherwise noted. (b) Interest rates on floating rate term loans adjust periodically based upon a predetermined schedule. Stated interest rates in this schedule represents the “all-in” rate as of December 31, 2019. (c) Variable rate coupon rate shown as of December 31, 2019. (d) This position or a portion of this position represents an unsettled loan purchase. The interest rate will be determined at the time of settlement and will be based upon the London-Interbank Offered Rate (“LIBOR” or “L”) or the applicable LIBOR floor plus a spread which was determined at the time of purchase. (e) Investments whose values were determined using significant unobservable inputs (Level 3) (See Note 3 of the Notes to Financial Statements). (f) As of December 31, 2019, the Fund had entered into the following commitments to fund various revolving and delayed draw senior secured and subordinated loans. Such commitments are subject to the satisfaction of certain conditions set forth in the documents governing these loans and there can be no assurance that such conditions will be satisfied. See Note 2 of the Notes to Financial Statements for further information on revolving and delayed draw loan commitments. Total revolving and delayed Total undrawn Unfunded commitment draw loan commitments Less: drawn commitments commitments DCG Acquisition Corp. $297,428 $0 $297,428 Mister Car Wash Holdings, Inc. 98,540 0 98,540 Total $395,968 $0 $395,968 (g) All of Ares Dynamic Credit Allocation Fund, Inc. (the “Fund”) Senior Loans, Collateralized Loan Obligations, Common Stocks, Warrants and Corporate Bonds issued as 144A, which as of December 31, 2019 represented 115.3% of the Fund’s net assets or 78.5% of the Fund’s total assets, are subject to legal restrictions on sales. (h) When-Issued or delayed delivery security based on typical market settlement convention for such security. (i) Collateralized Loan Obligations are all issued as 144A securities. (j) Non-income producing security as of December 31, 2019. (k) Security valued at fair value using methods determined in good faith or under the direction of the board of trustees. (l) Pay-In-Kind security (PIK), which may pay interest/dividends in additional par/shares. As of December 31, 2019, the aggregate cost of securities for Federal income tax purposes was $569,363,104. Unrealized appreciation and depreciation on investments for Federal income tax purposes are as follows: Gross unrealized appreciation $ 11,841,337 Gross unrealized depreciation (28,371,020) Net unrealized depreciation $(16,529,683) Abbreviations: 144A Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid. CLO Collateralized Loan Obligation Currencies: € Euro Currency $ U.S. Dollars 14 Annual Report 2019


  • Page 17

    Ares Dynamic Credit Allocation Fund, Inc. Statement of Assets and Liabilities December 31, 2019 Assets: Investments, at value (cost $567,356,483) $552,833,421 Cash 4,191,270 Cash denominated in foreign currency, at value (cost $58,114) 59,051 Receivable for securities sold 7,814,049 Interest and principal receivable 7,410,704 Deferred debt issuance cost 193,359 Other assets 199,627 Total assets 572,701,481 Liabilities: Line of credit outstanding 163,316,318 Payable for securities purchased 17,818,490 Payable for investment advisory fees 458,286 Payable for interest expense 326,391 Payable for commitment fee 43,591 Payable for investor support fees 32,084 Payable for administration and transfer agent fees 18,841 Accrued expenses and other payables 591,028 Total liabilities 182,605,029 Net assets $390,096,452 Net assets consist of: Paid-in capital $444,104,685 Distributable earnings accumulated loss (54,008,233) Net assets $390,096,452 Common shares: Net assets $390,096,452 Shares outstanding (authorized 1 billion shares of $0.001 par value) 22,914,939 Net asset value per share $17.02 Annual Report 2019 15


  • Page 18

    Ares Dynamic Credit Allocation Fund, Inc. Statements of Operations For the Period Ended For the Year Ended December 31, 2019(a) October 31, 2019 Investment income: Interest $6,072,683 $44,901,693 Expenses: Investment advisory fees (Note 6) 901,705 5,535,855 Interest expense (Note 5) 707,788 5,209,026 Administrative services of the adviser (Note 6) 68,019 405,138 Legal fees 75,069 153,788 Investor support fees (Note 6) 63,119 387,510 Administration, custodian and transfer agent fees (Note 6) 69,524 424,614 Insurance expense 27,910 219,245 Amortization of debt issuance cost (Note 5) 29,903 129,885 Audit fees 89,500 129,630 Directors fee expense 26,773 160,197 Commitment fee expense (Note 5) 13,251 72,969 Printing expense 23,750 95,000 Tax expense 15,997 70,000 Other expenses 22,906 137,190 Total expenses 2,135,214 13,130,047 Net investment income 3,937,469 31,771,646 Net realized and unrealized gain/(loss) on investments and foreign currency Net realized gain/(loss) on investments (325,785) (9,694,555) Net realized gain on foreign currency 40,353 203,362 Net unrealized gain/(loss) on investments 15,152,621 (20,161,177) Net unrealized gain/(loss) on foreign currency (63,233) 2,444,903 Net realized and unrealized gain/(loss) on investments and foreign currency 14,803,956 (27,207,467) Total increase in net assets resulting from operations $18,741,425 $4,564,179 (a) For the two month period ended December 31, 2019. See Note 1 of Notes to Financial Statements. 16 Annual Report 2019


  • Page 19

    Ares Dynamic Credit Allocation Fund, Inc. Statements of Changes in Net Assets For the Period Ended For the Year Ended For the Year Ended December 31, 2019(a) October 31 , 2019 October 31 , 2018 Increase (decrease) in net assets from operations: Net investment income $3,937,469 $31,771,646 $30,937,542 Net realized gain/(loss) on investments and foreign currency (285,432) (9,491,193) 4,020,664 Net unrealized gain/(loss) on investments and foreign currency 15,089,388 (17,716,274) (16,880,811) Net increase from operations 18,741,425 4,564,179 18,077,395 Distributions to shareholders from (Note 2): Distributable earnings (4,926,712) (29,565,391) (29,506,878) Increase (decrease) in net assets from operations and distributions 13,814,713 (25,001,212) (11,429,483) Share transactions: Cost of shares repurchased (Note 4) — (673,460) — Net decrease from share transactions — (673,460) — Total increase (decrease) in net assets 13,814,713 (25,674,672) (11,429,483) Net Assets, beginning of period 376,281,739 401,956,411 413,385,894 Net Assets, end of period $390,096,452 $376,281,739 $401,956,411 (a) For the two month period ended December 31, 2019. See Note 1 of Notes to Financial Statements. Annual Report 2019 17


  • Page 20

    Ares Dynamic Credit Allocation Fund, Inc. Statements of Cash Flows For the Period Ended For the Year Ended December 31, 2019(a) October 31, 2019 Operating Activities: Net increase in net assets resulting from operations $18,741,425 $4,564,179 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Purchases of investments (63,578,517) (441,049,358) Proceeds from the sale of investments 71,865,557 434,243,833 Amortization and accretion of discounts and premiums, net 379,712 1,774,401 Net realized (gain)/loss on investments 325,785 9,694,555 Net unrealized (gain)/loss on investments (15,152,621) 20,161,177 Effect of exchange rate changes on line of credit 21,694 (2,546,513) Amortization of debt issuance cost 29,903 129,885 Changes in operating assets and liabilities: Receivable for securities sold 368,373 (2,707,611) Interest and principal receivable (846,563) 110,242 Other assets (150,876) (48,750) Payable for securities purchased (1,127,853) (3,342,760) Payable for investment advisory fees (10,395) (16,206) Payable for interest expense (47,181) (59,482) Payable for commitment fees (5,192) 48,783 Payable for investor support fees (727) (1,135) Payable for administration and transfer agent fees (489) (19,447) Accrued expenses and other payables 150,913 180,951 Net cash provided by operating activities 10,962,948 21,116,744 Financing Activities: Borrowings on line of credit 27,500,000 144,204,362 Paydowns on line of credit (33,692,240) (137,584,653) Deferred debt issuance costs (3,314) (137,506) Cost of shares repurchased — (673,460) Distributions paid to common shareholders (4,926,712) (29,565,391) Net cash used in financing activities (11,122,266) (23,756,648) Net decrease in cash (159,318) (2,639,904) Cash: Beginning of period 4,409,639 7,049,543 End of period $4,250,321 $4,409,639 Supplemental disclosure of cash flow information: Cash paid for interest during the period $754,969 $5,268,508 (a) For the two month period ended December 31, 2019. See Note 1 of Notes to Financial Statements. 18 Annual Report 2019


  • Page 21

    Ares Dynamic Credit Allocation Fund, Inc. Financial Highlights For the For the For the For the For the For the Period Ended Year Ended Year Ended Year Ended Year Ended Year Ended December 31, October 31, October 31, October 31, October 31, October 31, 2019* 2019 2018 2017 2016 2015 Per share data: Net asset value, beginning of period $16.42 $17.50 $18.00 $17.04 $16.95 $18.72 Income from investment operations: Net investment income 0.17 1.39 1.35 1.33 1.23 1.21 Net realized and change in unrealized gain (loss) 0.65 (1.18) (0.56) 0.87 0.16 (1.58) Total increase (decrease) from investment operations 0.82 0.21 0.79 2.20 1.39 (0.37) Less distributions declared to shareholders: From net investment income (0.22) (1.29) (1.29) (1.24) (1.23) (1.33) From net realized gains — — — — — (0.07) From return of capital — — — — (0.07) —(a) Total distributions declared to shareholders (0.22) (1.29) (1.29) (1.24) (1.30) (1.40) Net asset value common shares, end of period $17.02 $16.42 $17.50 $18.00 $17.04 $16.95 Market value common shares, end of period $15.35 $14.48 $14.97 $16.45 $14.70 $14.37 Net asset value total return (b) 4.99% (c) 1.23% 4.47% 13.33% 8.98% (2.11)% Market value total return(d) 7.53%(c) 5.49% (1.43)% 20.91% 12.47% (6.74)% Ratios to average net assets/ supplemental data: Net assets, end of period $390,096,452 $376,281,739 $401,956,411 $413,385,894 $391,787,051 $398,044,094 Expenses, inclusive of interest expense and amortization of debt issuance 3.36%(e) 3.37% 3.20% 2.90% 2.96% 2.83% Expenses, exclusive of interest expense and amortization of debt issuance 2.20%(e) 2.03% 2.02% 2.08% 2.34% 2.39% Net investment income 6.15%(e) 8.16% 7.54% 7.52% 7.68% 6.51% Portfolio turnover rate 11.70%(c) 78.40% 82.47% 84.35% 92.30% 89.67% * For the two month period ended December 31, 2019. See Note 1 of Notes to Financial Statements. (a) Less than $0.005. (b) Based on net asset value per share. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund’s Dividend Reinvestment Plan. Total Return is not annualized for periods less than one year. (c) Not annualized. (d) Based on market value per share (beginning market value common shares $20.00). Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund’s Dividend Reinvestment Plan. (e) Annualized. Annual Report 2019 19


  • Page 22

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements December 31, 2019 (1) Organization (2) Significant Accounting Policies Ares Dynamic Credit Allocation Fund, Inc. (NYSE: ARDC) Basis of Presentation (“ARDC” or “Fund”) is a corporation incorporated under the The accompanying financial statements have been prepared on laws of the State of Maryland and registered with the U.S. an accrual basis of accounting in conformity with U.S. Securities and Exchange Commission (the “SEC”) under the generally accepted accounting principles (“GAAP”) and Investment Company Act of 1940, as amended (the includes the accounts of the Fund. The Fund is an investment “Investment Company Act”), as a closed-end, diversified, company following accounting and reporting guidance in management investment company, and intends to qualify each Financial Accounting Standards Board (“FASB”) Accounting year to be treated as a Regulated Investment Company Standards Codification (“ASC”) Topic 946, Financial (“RIC”), under Subchapter M of the Internal Revenue Code of Services — Investment Companies. The Adviser makes 1986 (“the Code”), as amended. The Fund commenced estimates and assumptions that affect the reported amounts operations on November 27, 2012. Ares Capital and disclosures in the financial statements. Actual results may Management II LLC (the “Adviser”) was registered as a differ from those estimates and such differences may be Registered Investment Adviser with the SEC on June 9, 2011 material. and serves as the investment adviser to the Fund. Investments Valuation Investment Objective and Policies All investments in securities are recorded at their fair value. The Fund’s investment objective is to seek an attractive risk See Note 3 for more information on the Fund’s valuation adjusted level of total return, primarily through current income process. and, secondarily, through capital appreciation. The Fund seeks to achieve its investment objective by investing primarily in a Interest Income broad, dynamically managed portfolio of (i) senior secured Interest income is recorded on the accrual basis to the extent loans (“Senior Loans”) made primarily to companies whose that such amounts are expected to be collected and adjusted debt is rated below investment grade, (ii) corporate bonds for accretion of discounts and amortization of premiums. The (“Corporate Bonds”) that are primarily high yield issues rated Fund may have investments that contain payment-in-kind below investment grade, (iii) other fixed-income instruments (“PIK”) provisions. The PIK interest, computed at the of a similar nature that may be represented by derivatives, and contractual rate specified, may be added to the principal (iv) securities issued by entities commonly referred to as balance and adjusted cost of the investments and recorded as collateralized loan obligations (“CLOs”) and other asset- interest income. All interest for the period ended backed securities. The Fund’s investments in CLOs may December 31, 2019 and year ended October 31, 2019 was include investments in subordinated tranches of CLO recorded as cash. securities. The Adviser will dynamically allocate the Fund’s portfolio among investments in the various targeted credit Discounts and Premiums markets, to seek to manage interest rate and credit risk and the Discounts and premiums on securities purchased are duration of the Fund’s portfolio. Under normal market accreted/amortized over the life of the respective security conditions, the Fund will not invest more than (i) 40% of its using the effective interest method. The adjusted cost of Managed Assets in CLOs and other asset-backed securities, or investments represents the original cost adjusted for PIK (ii) 10% of its Managed Assets in subordinated (or residual) interest, the accretion of discounts, and amortization of tranches of CLO securities. “Managed Assets” means the total premiums. assets of the Fund (including any assets attributable to any preferred shares that may be issued or to indebtedness) minus Cash and Cash Equivalents the Fund’s liabilities other than liabilities relating to The Fund considers all highly liquid investments with original indebtedness. maturities of 90 days or less to be cash equivalents. The Fund’s cash and cash equivalents are maintained with a major United Fiscal Year End Change States financial institution, which is a member of the Federal On September 25, 2019, the Fund’s board of directors Deposit Insurance Corporation. While the Fund’s current cash approved a change to the fiscal year end of the Fund from balance exceeds insurance limits, the risk of loss is remote. October 31 to December 31. Accordingly, the Fund’s financial statements and related notes include information as and for the Investment Transactions, Related Investment two month period ended December 31, 2019, and the year Income and Expenses ended October 31, 2019. Investment transactions are accounted for on the trade date. Interest income, adjusted for amortization of premiums and 20 Annual Report 2019


  • Page 23

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 accretion of discounts on investments, is earned from exchange rate on a future date. The Fund may also enter into settlement date and is recorded on the accrual basis. Realized these contracts for purposes of increasing exposure to a gains and losses are reported on the specific identification foreign currency or to shift exposure to foreign currency method. Expenses are recorded on the accrual basis as fluctuations from one currency to another. The net U.S. dollar incurred. value of foreign currency underlying all contractual commitments held by the Fund and the resulting unrealized Foreign Currency Transactions and Forward Foreign appreciation or depreciation are determined using foreign Currency Contracts currency exchange rates from an independent pricing service. Amounts denominated in foreign currencies are translated into The Fund is subject to the credit risk that the other party will U.S. dollars on the following basis: (i) investments and other not complete the obligations of the contract. The fair values of assets and liabilities denominated in foreign currencies are the forward foreign currency exchange contracts are obtained translated into U.S. dollars based upon currency exchange from an independent pricing source. rates effective on the date of valuation; and (ii) purchases and sales of investments and income and expense items Dividends to Shareholders denominated in foreign currencies are translated into U.S. The Fund intends to make regular monthly cash distributions dollars based upon currency exchange rates prevailing on of all or a portion of its net investment income available to transaction dates. common shareholders. The Fund intends to pay common shareholders at least annually all or substantially all of its net The Fund does not isolate that portion of the results of investment income. The Fund intends to pay any capital gains operations resulting from the changes in foreign exchange distributions at least annually. Dividends to shareholders are rates on investments from fluctuations arising from changes in recorded on the ex-dividend date. market prices of securities held. Such fluctuations are included within the net realized and unrealized gain (loss) on The distributions for any full or partial year might not be made investments in the Statement of Operations. in equal amounts, and one distribution may be larger than another. The Fund will make distributions only if authorized Reported net realized foreign exchange gains or losses arise by its board of directors and declared by the Fund out of assets from sales of foreign currencies, currency gains or losses legally available for these distributions. The Fund may pay a realized between the trade and settlement dates of securities special distribution at the end of each calendar year. This transactions, and the difference between the amounts of distribution policy may, under certain circumstances, have income and expense items recorded on the Fund’s books and certain adverse consequences to the Fund and its shareholders the U.S. dollar equivalent of the amounts actually received or because it may result in a return of capital to shareholders, paid. Net unrealized foreign currency gains and losses arise which would reduce the Fund’s net asset value and, over time, from the changes in fair values of assets and liabilities, other potentially increase the Fund’s expense ratios. If the Fund than investments in securities at period end, resulting from distributes a return of capital, it means that the Fund is changes in exchange rates. returning to shareholders a portion of their investment rather Investments in foreign companies and securities of foreign than making a distribution that is funded from the Fund’s governments may involve special risks and considerations not earned income or other profits. The board of directors may typically associated with investing in U.S. companies and elect to change the Fund’s distribution policy at any time. securities of the U.S. government. These risks include, among other things, revaluation of currencies, less reliable Commitments and Contingencies information about issuers, different transaction clearance and In the normal course of business, the Fund’s investment settlement practices, and potential future adverse political and activities involve executions, settlement and financing of economic developments. Moreover, investments in foreign various transactions resulting in receivables from, and companies and securities of foreign governments and their payables to, brokers, dealers and the Fund’s custodian. These markets may be less liquid and their prices more volatile than activities may expose the Fund to risk in the event that such those of comparable U.S. companies and the U.S. government. parties are unable to fulfill contractual obligations. The Fund may enter into forward foreign currency exchange Management does not anticipate any material losses from contracts for operational purposes and to protect against counterparties with whom it conducts business. Consistent adverse exchange rate fluctuations. A forward foreign with standard business practice, the Fund enters into contracts currency contract is an agreement between the Fund and a that contain a variety of indemnifications, and is engaged from counterparty to buy or sell a foreign currency at a specific time to time in various legal actions. The maximum exposure of the Fund under these arrangements and activities is Annual Report 2019 21


  • Page 24

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 unknown. However, the Fund expects the risk of material loss The characterization of distributions made during the fiscal to be remote. period from net investment income or net realized gains may Commitments to extend credit include loan proceeds the Fund differ from its ultimate characterization for federal income tax is obligated to advance, such as delayed draws or revolving purposes. In addition, due to the timing of dividend credit arrangements. Commitments generally have fixed distributions, the fiscal period in which amounts are expiration dates or other termination clauses. Unrealized gains distributed may differ from the fiscal period that the income or or losses associated with unfunded commitments are recorded realized gains or losses were recorded by the Fund. in the financial statements and reflected as an adjustment to The characterization of distributions paid during the period the fair value of the related security in the Schedule of ended December 31, 2019 and year ended October 31, 2019 Investments. The par amount of the unfunded commitments is was as follows: not recognized by the Fund until it becomes funded. As of December 31, 2019 October 31, 2019 December 31, 2019, the value of loans disclosed in the Ordinary income $4,926,712 $29,565,391 Schedule of Investments does not include unfunded Capital gain — — commitments, which total $395,968. Return of capital — — Income Taxes For the period ended December 31, 2019 and year ended The Fund intends to distribute all or substantially all of its October 31, 2019, the components of accumulated earnings taxable income and to comply with the other requirements of (deficit) on a tax basis were as follows: the Code, as amended, applicable to RICs. Accordingly, no December 31, 2019 October 31, 2019 provision for U.S. federal income taxes is required. Undistributed ordinary The Fund may elect to incur an excise tax if it is deemed income $ 4,700,563 $ 5,476,923 prudent by its board of directors from a cash management Undistributed capital perspective or in the best interest of shareholders due to other gains — — facts and circumstances. For the period ended December 31, Accumulated capital and 2019 and year ended October 31, 2019, the Fund incurred U.S. other losses (42,084,678) (41,700,708) federal excise taxes of $15,997 and $70,000 respectively. Net unrealized appreciation As of December 31, 2019, which is the end of the Fund’s (depreciation) (16,624,118) (31,615,158) taxable year, the Fund had no uncertain tax positions that Total accumulated deficit $(54,008,233) $(67,838,943) would require financial statement recognition, derecognition, or disclosure. The Fund files a U.S. federal income tax return As of December 31, 2019, the Fund had capital loss annually after its fiscal year-end, which is subject to carryovers as indicated below. The capital loss carryovers are examination by the Internal Revenue Service for a period of available to offset future realized capital gains to the extent three years from the date of filing. provided in the Code and regulations promulgated thereunder. No Expiration Short-Term(1) No Expiration Long-Term(1) Net investment income and net realized gains and losses may differ for financial statement and tax purposes because of $4,307,993 $37,776,685 temporary or permanent book/tax differences. These (1) On December 22, 2010, the Regulated Investment Company differences are primarily due to differing treatments for Modernization Act of 2010 (the “Modernization Act”) was signed into foreign currency gains and losses, distributions, excise taxes, law. The Modernization Act modifies several of the federal income and excise tax provisions related to RICs. Under the Modernization Act, new pay down gains and losses and losses due to wash sales, and capital losses may now be carried forward indefinitely, and retain the QEF income and capital gains. To the extent these differences character of the original loss as compared with pre-enactment law are permanent, reclassifications are made to the appropriate where capital losses could be carried forward for eight years, and carried forward as short-term capital losses, irrespective of the capital accounts in the fiscal period that the differences arise. character of the original loss. These losses without expiration must be On the Statement of Assets and Liabilities, the following used prior to the loss layers with expiration. reclassifications were made: During the period ended December 31, 2019, the Fund did not December 31, 2019 October 31, 2019 utilize capital loss carryforwards. Additional paid-in capital/(reduction) $(15,997) $(70,000) ASC 740, Income Taxes, provides guidance for how uncertain Distributable earnings tax positions should be recognized, measured, presented, and accumulated loss 15,997 70,000 disclosed in the financial statements. The Fund has evaluated 22 Annual Report 2019


  • Page 25

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 the implications of ASC 740 for all open tax years, and have participants at the measurement date. The hierarchal determined there is no impact to the Fund’s financial disclosure framework establishes a three-tier hierarchy to statements as of period ended December 31, 2019. The Fund’s maximize the use of observable data and minimize the use of federal and state income returns for which the applicable unobservable inputs. Inputs refer broadly to the assumptions statutes of limitations have not expired remain subject to that market participants would use in pricing the asset or examination by the Internal Revenue Service and states liability, including assumptions about risk, for example, the department of revenue. risk inherent in a particular valuation technique used to All penalties and interest associated with income taxes, if any, measure fair value (such as a pricing model) and/or the risk are included in other expenses in the Statement of Operations. inherent in the inputs to the valuation technique. There were no penalties and interest incurred by the Fund for Inputs may be observable or unobservable. Observable inputs the current fiscal year. are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on market data Deferred Debt Issuance Costs obtained from sources independent of the reporting entity. Debt issuance costs are amortized over the life of the related Unobservable inputs are inputs that reflect the reporting debt instrument using the straight line method. entity’s own assumptions about the assumptions market Recently Issued Accounting Pronouncements participants would use in pricing the asset or liability based on the best information available in the circumstances. The three- In March 2017, the FASB issued ASU No. 2017-08, tier hierarchy of inputs is summarized in the three broad levels Receivables — Nonrefundable Fees and Other Costs listed below. (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in the ASU shorten • Level 1 — Valuations based on quoted prices in active the amortization period for certain callable debt securities, markets for identical assets or liabilities that the Fund held at a premium, to be amortized to the earliest call date. has the ability to access. The ASU does not require an accounting change for securities • Level 2 — Valuations based on quoted prices in markets held at a discount, which continue to be amortized to maturity. that are not active or which all significant inputs are The ASU is effective for fiscal years and for interim periods observable either directly or indirectly. within those fiscal years beginning after December 15, 2018. • Level 3 — Valuations based on inputs that are The Fund has adopted and applied ASU 2017-08 on a unobservable and significant to the overall fair value modified retrospective basis through a cumulative-effect measurement. adjustment as of the beginning of the period of adoption. As a result of the adoption of ASU 2017-08, as of November 1, In addition to using the above inputs in investment valuations, 2019, the amortized cost basis of investments was reduced and the Fund continues to employ a valuation policy that is unrealized appreciation of investments was increased. The consistent with the provisions of ASC 820. Consistent with the adoption of ASU 2017-08 had no impact on beginning net Fund’s valuation policy, the Fund evaluates the source of assets, the current period results from operations, or any prior inputs, including any markets in which the Fund’s investments period information presented in the financial statements. are trading (or any markets it evaluates in which securities with similar attributes are trading), in determining fair value. (3) Investments The Fund’s valuation policy considers the fact that because Fair Value Measurements there may not be a readily available market value for the investments in the Fund’s portfolio, therefore, the fair value of The Fund follows the provisions of ASC 820, Fair Value the investments may be determined using unobservable inputs. Measurements and Disclosures under U.S. GAAP, which among other matters, requires enhanced disclosures about The investments classified as Level 1 or Level 2 are typically investments that are measured and reported at fair value. This valued based on quoted market prices, forward foreign standard defines fair value and establishes a hierarchal exchange rates, dealer quotations or alternative pricing sources disclosure framework, which prioritizes and ranks the level of supported by observable inputs. The Adviser obtains prices market price observability used in measuring investments at from independent pricing services which generally utilize fair value and expands disclosures about assets and liabilities broker quotes and may use various other pricing techniques measured at fair value. ASC 820 defines “fair value” as the which take into account appropriate factors such as yield, price that would be received to sell an asset or paid to transfer quality, coupon rate, maturity, type of issue, trading a liability in an orderly transaction between market characteristics and other data. The Adviser is responsible for Annual Report 2019 23


  • Page 26

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 all inputs and assumptions related to the pricing of securities. of the values of debt and equity securities used to capitalize The Adviser has internal controls in place that support its the enterprise at a point in time. The primary method for reliance on information received from third-party pricing determining EV uses a multiple analysis whereby appropriate sources. As part of its internal controls, the Adviser obtains, multiples are applied to the portfolio company’s EBITDA reviews, and tests information to corroborate prices received (generally defined as net income before net interest expense, from third-party pricing sources. For any security, if market or income tax expense, depreciation and amortization). EBITDA dealer quotations are not readily available, or if the Adviser multiples are typically determined based upon review of determines that a quotation of a security does not represent a market comparable transactions and publicly traded fair value, then the security is valued at a fair value as comparable companies, if any. The Fund may also employ determined in good faith by the Adviser and will be classified other valuation multiples to determine EV, such as revenues. as Level 3. In such instances, the Adviser will use valuation The second method for determining EV uses a discounted techniques consistent with the market or income approach to cash flow analysis whereby future expected cash flows of the measure fair value and will give consideration to all factors portfolio company are discounted to determine a present value which might reasonably affect the fair value. using estimated discount rates (typically a weighted average Senior loans and corporate debts: The fair value of senior cost of capital based on costs of debt and equity consistent loans and corporate debt is estimated based on quoted market with current market conditions). The EV analysis is performed prices, forward foreign exchange rates, dealer quotations or to determine the value of equity investments, the value of debt alternative pricing sources supported by observable inputs and investments in portfolio companies where the Fund has are generally classified within Level 2 or 3. The Adviser control or could gain control through an option or warrant obtains prices from independent pricing services which security, and to determine if there is credit impairment for debt generally utilize broker quotes and may use various other investments. If debt investments are credit impaired, an EV pricing techniques which take into account appropriate factors analysis may be used to value such debt investments; however, such as yield, quality, coupon rate, maturity, type of issue, in addition to the methods outlined above, other methods such trading characteristics and other data. If the pricing services as a liquidation or wind down analysis may be utilized to are only able to obtain a single broker quote or utilize a estimate enterprise value. pricing model the securities will be classified as Level 3. If the The following is a summary of inputs used as of December 31, pricing services are unable to provide prices, the Adviser will 2019 in valuing the Fund’s investments carried at fair value: attempt to obtain one or more broker quotes directly from a Level 2 — dealer and price such securities at the last bid price obtained; Other Level 3 — Level 1 — Significant Significant such securities are classified as Level 3. Quoted Observable Unobservable Collateralized loan obligations: The fair value of CLOs is Prices ($) Inputs ($) Inputs ($) Total ($) estimated based on various valuation models from third-party Senior Loans — 106,038,643 15,596,819 121,635,462 pricing services as well as internal models. The valuation Corporate models generally utilize discounted cash flows and take into Bonds — 251,617,658 — 251,617,658 consideration prepayment and loss assumptions, based on Collateralized Loan historical experience and projected performance, economic Obligations — — 179,580,301 179,580,301 factors, the characteristics and condition of the underlying Common collateral, comparable yields for similar securities and recent Stocks — — — — trading activity. These securities are classified as Level 3. Warrants — — — — Common Stocks and warrants: The fair value of common Total stocks and warrants are estimated using either broker quotes Investments — 357,656,301 195,177,120 552,833,421 or an analysis of the enterprise value (“EV”) of the portfolio company. Enterprise value means the entire value of the The following is a reconciliation of the Fund’s investments in portfolio company to a market participant, including the sum which significant unobservable inputs (Level 3) were used in determining fair value. 24 Annual Report 2019


  • Page 27

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 For the year ended December 31, 2019: Collateralized Senior Loan Common Loans ($) Obligations ($) Stock ($) Warrants ($) Total ($) Balance as of October 31, 2019 12,743,556 169,510,000 — — 182,253,556 Purchases(a) 2,201,828 4,925,267 — — 7,127,095 Sales (b) (3,505,489) (4,998,175) — — (8,503,664) Net realized and unrealized gain/ (loss) 36,246 10,114,586 — — 10,150,832 Net accrued discounts 3,207 28,623 — — 31,830 Transfers in to Level 3 6,998,721 — — — 6,998,721 Transfers out of Level 3 (2,881,250) — — — (2,881,250) Balance as of December 31, 2019 15,596,819 179,580,301 — — 195,177,120 Net change in unrealized appreciation/(depreciation) from investments held as of December 31, 2019 13,515 9,813,243 — — 9,826,758 (a) Purchases include PIK interest and securities received from restructure. (b) Sales include principal redemptions. Investments were transferred into and out of Level 3 and out of and into Level 2 during the year ended December 31, 2019 due to changes in the quantity and quality of information obtained to support the fair value of each investment as assessed by the Adviser. The valuation techniques used by the Adviser to measure fair value as of December 31, 2019 maximized the use of observable inputs and minimized the use of unobservable inputs. The valuation techniques and significant amounts of unobservable inputs used in the valuation of the Fund’s Level 3 securities are outlined in the table below. Fair Value Valuation Unobservable Weighted ($) Technique Inputs Range Average Assets Investments in securities Senior Loans 15,596,819 Broker Quotes and/or 3rd N/A N/A N/A Party Pricing Services Collateralized Loan Obligations 179,580,301 Broker Quotes and/or 3rd N/A N/A N/A Party Pricing Services Common Stock — Enterprise Value Analysis — IOI N/A N/A Adjusted NAV Warrants — Enterprise Value Analysis — EBITDA 10x 10x Adjusted NAV Total Level 3 Investments 195,177,120 Annual Report 2019 25


  • Page 28

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 (4) Common Stock Common share transactions were as follows: Period Ended December 31, 2019 Year Ended October 31, 2019 Shares Amount ($) Shares Amount ($) Common shares outstanding — beginning of period 22,914,939 429,112,863 22,962,441 429,786,323 Common shares repurchased — shares repurchase plan — — (47,502) (673,460) Common shares outstanding — end of period 22,914,939 429,112,863 22,914,939 429,112,863 The board of directors has authorized the repurchase of shares accompanying Statement of Assets and Liabilities at cost for of the Fund’s outstanding common stock on the open market at the remaining maturity for which the Fund has determined the Fund management’s discretion when shares of the common would be categorized as Level 2 in the fair value hierarchy. stock are trading on the NYSE at a discount of 10% or more For the period ended December 31, 2019 the components of (or such other percentage as the board of directors may interest and unused commitment fees expense, average stated determine from time to time) from the net asset value of the interest rates (i.e., rate in effect plus the spread) and average shares. The Fund is not required to effect common share outstanding balances for the Credit Facility were as follows: repurchases. Any such purchases of Fund shares of common For the Period Ended For the Year Ended stock may not materially impact the discount of the market December 31, 2019 October 31, 2019 price of the Fund’s shares of common stock relative to their ($) ($) net asset value and any narrowing of this discount that does Stated interest expense 707,788 5,209,026 result may not be maintained. Unused commitment fees 13,251 $72,969 (5) Credit Facility Total interest and credit facility fees expense 721,039 5,281,995 The Fund is a party to a senior secured revolving credit Annualized average stated facility (as amended, the “Credit Facility”), which allows for interest rate 2.65% 3.22% the Fund to borrow up to $212 million at any one time Average outstanding outstanding. The Credit Facility maturity date is October 2, balance 159,866,345 164,020,384 2021. Under the Credit Facility, the Fund is required to Amortization of debt comply with various covenants, reporting requirements and issuance costs 29,903 129,885 other customary requirements for similar revolving credit facilities, including, without limitation, covenants related to: Under the Investment Company Act, the Fund is not permitted (a) limitations on the incurrence of additional indebtedness to incur indebtedness, including through the issuance of debt and liens, (b) limitations on certain investments, (c) limitations securities, unless immediately thereafter the Fund will have an on certain restricted payments, and (d) maintaining a ratio of asset coverage of at least 300%. In general, the term “asset total assets (less total liabilities other than indebtedness) to coverage” for this purpose means the ratio which the value of total indebtedness of the Fund of not less than 3:1.0. These the total assets of the Fund, less all liabilities and indebtedness covenants are subject to important limitations and exceptions not represented by senior securities, bears to the aggregate that are described in the documents governing the Credit amount of senior securities representing indebtedness of the Facility. Amounts available to borrow under the Credit Facility Fund. In addition, the Fund may be limited in its ability to (and the incurrence of certain other permitted debt) are also declare any cash distribution on its capital stock or purchase subject to compliance with a borrowing base that applies its capital stock unless, at the time of such declaration or different advance rates to different types of assets in the purchase, the Fund has an asset coverage (on its indebtedness) Fund’s portfolio that are pledged as collateral. of at least 300% after deducting the amount of such As of December 31, 2019, there was $163,316,318 distribution or purchase price, as applicable. For non-public outstanding under the Credit Facility. Loans under the Credit indebtedness issued by the Fund (for example, the Credit Facility generally bear interest at the applicable LIBOR rate Facility), the Fund may be able to continue to pay distributions plus 0.95%. Unused portions of the Credit Facility accrue a on its capital stock or purchase its capital stock even if the commitment fee equal to an annual rate of 0.15%. The fair asset coverage ratio on its indebtedness falls below 300%. As value of the Fund’s borrowings under the Credit Facility of December 31, 2019, the Fund’s asset coverage was 339%. approximates the carrying amount presented in the 26 Annual Report 2019


  • Page 29

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 (6) Investment Advisory and Other include providing ongoing contact with respect to the Fund Agreements and its performance with financial advisors that are representatives of broker-dealers and other financial The Adviser is registered as an investment adviser under the intermediaries, communicating with the NYSE specialist for Investment Advisers Act of 1940, as amended (the “Advisers the Fund’s common shares and with the closed-end fund Act”). The Adviser is an affiliate of Ares Management analyst community regarding the Fund on a regular basis, and Corporation (“Ares”) and leverages Ares’ entire investment maintaining a website for the Fund. The Fund pays Destra a platform and benefits from the significant capital markets, fee equal to 0.07% of Managed Assets per annum for these trading and research expertise of all of Ares’ investment services. The terms of this agreement are in effect for an initial professionals. period of two years and shall thereafter continue for successive The Adviser provides certain investment advisory and one year periods. administrative services to the Fund pursuant to the investment The total expenses incurred by the Fund for the period ended advisory agreement with the Fund (“Investment Advisory December 31, 2019 and year ended October 31, 2019 were Agreement”). Pursuant to its Investment Advisory Agreement, $63,119 and $387,510 respectively. the Fund has agreed to pay the Adviser a management fee at an annual rate of 1.00% of the average daily value of the (7) Investment Transactions Fund’s total assets (including any assets attributable to any For the period ended December 31, 2019, the cost of preferred shares that may be issued or to indebtedness) minus investments purchased and proceeds from the sale of the Fund’s liabilities other than liabilities relating to investments, excluding short obligations, were as follows: indebtedness (“Managed Assets”). The management fees Cost of Investments Proceeds from the incurred by the Fund for the period ended December 31, 2019 Purchased Sale of Investments and year ended October 31, 2019 were $901,705 and $63,875,945 $(71,065,756) $5,535,855 respectively. In addition to advisory services, the Adviser and its affiliates (8) Risk Factors provide certain administrative services to the Fund at the Senior Loans Risk Fund’s request. Under the Investment Advisory Agreement, the Adviser may seek reimbursement from the Fund for the Although senior loans (“Senior Loans”) are senior and costs of these administrative services provided to the Fund by typically secured in a first or second lien position in contrast the Adviser and its affiliates. The Fund incurred such to other below investment grade fixed income instruments, administrative costs for the period ended December 31, 2019 which are often subordinated or unsecured, the risks and year ended October 31, 2019 of $68,019 and $405,138 associated with such Senior Loans are generally similar to the respectively. risks of other below investment grade fixed income instruments. Investments in below investment grade Senior The Fund has engaged State Street Bank and Trust Company Loans are considered speculative because of the credit risk of (“State Street”) to serve as the Fund’s administrator, custodian the issuers of debt instruments (each, a “Borrower”). Such and transfer agent. Under the service agreements between Borrowers are more likely than investment grade Borrowers to State Street and the Fund, State Street provides certain default on their payments of interest and principal owed to the administrative services necessary for the operation of the Fund, and such defaults could reduce the net asset value of the Fund. Such services include maintaining certain Fund books Fund and income distributions. An economic downturn would and records, providing accounting and tax services and generally lead to a higher non-payment rate, and a Senior preparing certain regulatory filings. State Street also performs Loan may lose significant market value before a default custodial, fund accounting and portfolio accounting services, occurs. Moreover, any specific collateral used to secure a as well as transfer agency and dividend paying services with Senior Loan may decline in value or become illiquid, which respect to the common shares. The Fund pays State Street for could adversely affect the Senior Loan’s value. these services. The total expenses incurred by the Fund for the period ended December 31, 2019 and year ended October 31, Senior Loans are subject to the risk of non-payment of 2019 were $69,524 and $424,614 respectively. scheduled interest or principal. Such non-payment would result in a reduction of income to the Fund, a reduction in the The Fund has retained Destra Capital Investments LLC value of the investment and a potential decrease in the net (“Destra”) to provide investor support services in connection asset value of the Fund. There can be no assurance that the with the ongoing operations of the Fund. Such services liquidation of any collateral securing a Senior Loan would Annual Report 2019 27


  • Page 30

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 satisfy the Borrower’s obligation in the event of nonpayment difficult to value them. Illiquidity and adverse market of scheduled interest or principal payments, whether when due conditions may mean that the Fund may not be able to sell or upon acceleration, or that the collateral could be liquidated, Senior Loans quickly or at a fair price. To the extent that a readily or otherwise. In the event of bankruptcy or insolvency secondary market does exist for certain Senior Loans, the of a Borrower, the Fund could experience delays or limitations market for them may be subject to irregular trading activity, with respect to its ability to realize the benefits of the wide bid/ask spreads and extended trade settlement periods. collateral, if any, securing a Senior Loan. The collateral Senior Loans are subject to legislative risk. If legislation or securing a Senior Loan, if any, may lose all or substantially all state or federal regulations impose additional requirements or of its value in the event of the bankruptcy or insolvency of a restrictions on the ability of financial institutions to make Borrower. Some Senior Loans are subject to the risk that a loans, the availability of Senior Loans for investment by the court, pursuant to fraudulent conveyance or other similar laws, Fund may be adversely affected. In addition, such could subordinate such Senior Loans to presently existing or requirements or restrictions could reduce or eliminate sources future indebtedness of the Borrower or take other action of financing for certain Borrowers. This would increase the detrimental to the holders of Senior Loans including, in risk of default. If legislation or federal or state regulations certain circumstances, invalidating such Senior Loans or require financial institutions to increase their capital causing interest previously paid to be refunded to the requirements this may cause financial institutions to dispose Borrower. Additionally, a Senior Loan may be “primed” in of Senior Loans that are considered highly levered bankruptcy, which reduces the ability of the holders of the transactions. If the Fund attempts to sell a Senior Loan at a Senior Loan to recover on the collateral. time when a financial institution is engaging in such a sale, the There may be less readily available information about most price the Fund could receive for the Senior Loan may be Senior Loans and the Borrowers thereunder than is the case adversely affected. for many other types of securities, including securities issued Subordinated Loans Risk in transactions registered under the Securities Act of 1933, as amended (the “Securities Act”) or the Securities Exchange Act Subordinated loans generally are subject to similar risks as of 1934, as amended (the “Exchange Act”), and Borrowers those associated with investments in Senior Loans, except that subject to the periodic reporting requirements of Section 13 of such loans are subordinated in payment and/or lower in lien the Exchange Act. Senior Loans may be issued by companies priority to first lien holders. In the event of default on a that are not subject to SEC reporting requirements and these Subordinated Loan, the first priority lien holder has first claim companies, therefore, do not file reports with the SEC that to the underlying collateral of the loan to the extent such claim must comply with SEC form requirements and, in addition, are is secured. Additionally, an over secured creditor may be subject to a less stringent liability disclosure regime than entitled to additional interest and other charges in bankruptcy companies subject to SEC reporting requirements. As a result, increasing the amount of their allowed claim. Subordinated the Adviser will rely primarily on its own evaluation of a Loans are subject to the additional risk that the cash flow of Borrower’s credit quality rather than on any available the Borrower and property securing the loan or debt, if any, independent sources. Consequently, the Fund will be may be insufficient to meet scheduled payments after giving particularly dependent on the analytical abilities of the effect to the senior obligations of the Borrower. This risk is Adviser. In certain circumstances, Senior Loans may not be generally higher for subordinated unsecured loans or debt, deemed to be securities under certain federal securities laws, which are not backed by a security interest in any specific other than the Investment Company Act. Therefore, in the collateral. Subordinated Loans generally have greater price event of fraud or misrepresentation by a Borrower or an volatility than Senior Loans and may be less liquid. arranger, the Fund may not have the protection of the antifraud Corporate Bonds Risk provisions of the federal securities laws as would otherwise be available for bonds or stocks. Instead, in such cases, parties The market value of a corporate bond generally may be generally would rely on the contractual provisions in the expected to rise and fall inversely with interest rates. The Senior Loan agreement itself and common law fraud market value of intermediate- and longer-term corporate protections under applicable state law. bonds is generally more sensitive to changes in interest rates than is the market value of shorter-term corporate bonds. The The secondary trading market for Senior Loans may be less market value of a corporate bond also may be affected by liquid than the secondary trading market for registered factors directly related to the Borrower, such as investors’ investment grade debt securities. No active trading market perceptions of the creditworthiness of the Borrower, the may exist for certain Senior Loans, which may make it Borrower’s financial performance, perceptions of the 28 Annual Report 2019


  • Page 31

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 Borrower in the market place, performance of management of equal basis any distributions with other creditors holding such the Borrower, the Borrower’s capital structure and use of securities in the event of an insolvency, liquidation, financial leverage and demand for the Borrower’s goods and dissolution, reorganization or bankruptcy of the relevant CLO. services. There is a risk that the Borrowers of corporate bonds Therefore, the Fund may not receive back the full amount of may not be able to meet their obligations on interest or its investment in a CLO. principal payments at the time called for by an instrument. The transaction documents relating to the issuance of CLO High yield corporate bonds are often high risk and have Securities may impose eligibility criteria on the assets of the speculative characteristics. High yield corporate bonds may be CLO, restrict the ability of the CLO’s investment manager to particularly susceptible to adverse Borrower-specific trade investments and impose certain portfolio-wide asset developments. quality requirements. These criteria, restrictions and CLO Securities Risk requirements may limit the ability of the CLO’s investment manager to maximize returns on the CLO Securities. In CLOs issue securities in tranches with different payment addition, other parties involved in CLOs, such as third-party characteristics and different credit ratings. The rated tranches credit enhancers and investors in the rated tranches, may of securities issued by CLOs (“CLO Securities”) are generally impose requirements that have an adverse effect on the returns assigned credit ratings by one or more nationally recognized of the various tranches of CLO Securities. Furthermore, CLO statistical rating organizations. The subordinated (or residual) Securities issuance transaction documents generally contain tranches do not receive ratings. Below investment grade provisions that, in the event that certain tests are not met tranches of CLO Securities typically experience a lower (generally interest coverage and over-collateralization tests at recovery, greater risk of loss or deferral or non-payment of varying levels in the capital structure), proceeds that would interest than more senior tranches of the CLO. otherwise be distributed to holders of a junior tranche must be The riskiest portion of the capital structure of a CLO is the diverted to pay down the senior tranches until such tests are subordinated (or residual) tranche, which bears the bulk of satisfied. Failure (or increased likelihood of failure) of a CLO defaults from the loans in the CLO and serves to protect the to make timely payments on a particular tranche will have an other, more senior tranches from default in all but the most adverse effect on the liquidity and market value of such severe circumstances. Since it is partially protected from tranche. defaults, a senior tranche from a CLO typically has higher Payments to holders of CLO Securities may be subject to ratings and lower yields than the underlying securities, and can deferral. If cash flows generated by the underlying assets are be rated investment grade. Despite the protection from the insufficient to make all current and, if applicable, deferred subordinated tranche, CLO tranches can experience payments on CLO Securities, no other assets will be available substantial losses due to actual defaults, increased sensitivity for payment of the deficiency and, following realization of the to defaults due to collateral default and disappearance of underlying assets, the obligations of the Borrower of the protecting tranches, market anticipation of defaults and related CLO Securities to pay such deficiency will be aversion to CLO Securities as a class. The risks of an extinguished. investment in a CLO depend largely on the collateral and the tranche of the CLO in which the Fund invests. The market value of CLO Securities may be affected by, among other things, changes in the market value of the The CLOs in which the Fund invests may have issued and sold underlying assets held by the CLO, changes in the debt tranches that will rank senior to the tranches in which the distributions on the underlying assets, defaults and recoveries Fund invests. By their terms, such more senior tranches may on the underlying assets, capital gains and losses on the entitle the holders to receive payment of interest or principal underlying assets, prepayments on underlying assets and the on or before the dates on which the Fund is entitled to receive availability, prices and interest rate of underlying assets. payments with respect to the tranches in which the Fund Furthermore, the leveraged nature of each subordinated class invests. Also, in the event of insolvency, liquidation, may magnify the adverse impact on such class of changes in dissolution, reorganization or bankruptcy of a CLO, holders of the value of the assets, changes in the distributions on the more senior tranches would typically be entitled to receive assets, defaults and recoveries on the assets, capital gains and payment in full before the Fund receives any distribution. losses on the assets, prepayment on assets and availability, After repaying such senior creditors, such CLO may not have price and interest rates of assets. Finally, CLO Securities are any remaining assets to use for repaying its obligation to the limited recourse and may not be paid in full and may be Fund. In the case of tranches ranking equally with the tranches subject to up to 100% loss. in which the Fund invests, the Fund would have to share on an Annual Report 2019 29


  • Page 32

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 Asset-Backed Securities Risk less than the original amount invested, even after taking into account distributions paid by the Fund, if any, and the ability Asset-backed securities often involve risks that are different of common shareholders to reinvest dividends. The Fund may from or more acute than risks associated with other types of utilize leverage, which will magnify the Fund’s risks and, in debt instruments. For instance, asset-backed securities may be turn, the risks to the common shareholders. particularly sensitive to changes in prevailing interest rates. In addition, the underlying assets are subject to prepayments that Interest Rate Risk shorten the securities’ weighted average maturity and may The market value of Corporate Bonds and other fixed-income lower their return. Asset-backed securities are also subject to securities changes in response to interest rate changes and risks associated with their structure and the nature of the other factors. Interest rate risk is the risk that prices of bonds assets underlying the security and the servicing of those and other fixed-income securities will increase as interest rates assets. Payment of interest and repayment of principal on fall and decrease as rates rise. Accordingly, an increase in asset-backed securities is largely dependent upon the cash market interest rates (which are currently considered low by flows generated by the assets backing the securities and, in historic standards) may cause a decrease in the price of a debt certain cases, supported by letters of credit, surety bonds or security and, therefore, a decline in the net asset value of the other credit enhancements. The values of asset-backed Fund’s common shares. The magnitude of these fluctuations in securities may be substantially dependent on the servicing of the market price of bonds and other fixed-income securities is the underlying asset pools, and are therefore subject to risks generally greater for those securities with longer maturities. associated with the negligence by, or defalcation of, their Because Senior Loans with floating or variable rates reset their servicers. Furthermore, debtors may be entitled to the interest rates only periodically, changes in prevailing interest protection of a number of state and federal consumer credit rates (and particularly sudden and significant changes) can be laws with respect to the assets underlying these securities, expected to cause some fluctuations in the net asset value of which may give the debtor the right to avoid or reduce the Fund’s common shares. In addition, Senior Loans or payment. In addition, due to their often complicated similar loans or securities may allow the Borrower to opt structures, various asset-backed securities may be difficult to between LIBOR-based interest rates and interest rates based value and may constitute illiquid investments. If many on bank prime rates, which may have an effect on the net asset Borrowers on the underlying loans default, losses could value of the Fund’s common shares. exceed the credit enhancement level and result in losses to investors in asset-backed securities. LIBOR Rate Risk Investment and Market Risk National and international regulators and law enforcement agencies have conducted investigations into a number of rates An investment in the common shares of the Fund is subject to or indices that are deemed to be “reference rates.” Actions by investment risk, including the possible loss of the entire such regulators and law enforcement agencies may result in principal amount invested. An investment in the common changes to the manner in which certain reference rates are shares of the Fund represents an indirect investment in the determined, their discontinuance, or the establishment of portfolio of Senior Loans, Corporate Bonds, CLO Securities alternative reference rates. In particular, on July 27, 2017, the and other securities and loans owned by the Fund, and the Chief Executive of the U.K. Financial Conduct Authority (the value of these securities and loans may fluctuate, sometimes “FCA”), which regulates LIBOR, announced that the FCA rapidly and unpredictably. For instance, during periods of will no longer persuade or compel banks to submit rates for global economic downturn, the secondary markets for Senior the calculation of LIBOR after 2021. Such announcement Loans and investments with similar economic characteristics indicates that the continuation of LIBOR on the current basis (such as second lien loans and unsecured loans) and Corporate cannot and will not be guaranteed after 2021. It appears highly Bonds may experience sudden and sharp price swings, which likely that LIBOR will be discontinued or modified by 2021. can be exacerbated by large or sustained sales by major investors in these markets, a high-profile default by a major The U.S. Federal Reserve, in conjunction with the Alternative Borrower, movements in indices tied to these markets or Reference Rates Committee, a steering committee comprised related securities or investments, or a change in the market’s of large U.S. financial institutions, is considering replacing perception of Senior Loans and investments with similar U.S. dollar LIBOR with a new index calculated by short-term economic characteristics (such as second lien loans and repurchase agreements, backed by Treasury securities (the unsecured loans) and Corporate Bonds. At any point in time, “Secured Overnight Financing Rate,” or “SOFR”). The future an investment in the common shares of the Fund may be worth of LIBOR at this time is uncertain. Potential changes, or uncertainty related to such potential changes, may adversely 30 Annual Report 2019


  • Page 33

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 affect the market for LIBOR-based securities, including our Fund may have to invest the proceeds in securities with lower portfolio of LIBOR-indexed, floating-rate debt securities, or yields. In periods of falling interest rates, the rate of the cost of our borrowings. In addition, changes or reforms to prepayments tends to increase (as does price fluctuation) as the determination or supervision of LIBOR may result in a Borrowers are motivated to pay off debt and refinance at new sudden or prolonged increase or decrease in reported LIBOR, lower rates. During such periods, reinvestment of the which could have an adverse impact on the market for prepayment proceeds by the Adviser will generally be at lower LIBOR-based securities, including the value of the LIBOR- rates of return than the return on the assets that were prepaid. indexed, floating-rate debt securities in our portfolio, or the Prepayment reduces the yield to maturity and the average life cost of our borrowings. Additionally, if LIBOR ceases to exist, of the security. the Fund may need to renegotiate the credit agreement Special Situations and Stressed Investments Risk extending beyond 2021 with our credit facility lenders that utilize LIBOR as a factor in determining the interest rate to Although investments in debt and equity securities and other replace LIBOR with the new standard that is established. obligations of companies that may be in some level of financial or business distress, including companies involved Liquidity Risk in, or that have recently completed, bankruptcy or other The Fund may not be able to readily dispose of illiquid reorganization and liquidation proceedings (“Stressed securities or loans at prices that approximate those at which Issuers”) (such investments, “Special Situation Investments”) the Fund could sell the securities or loans if they were more may result in significant returns for the Fund, they are widely traded and, as a result of that illiquidity, the Fund may speculative and involve a substantial degree of risk. The level have to sell other investments or engage in borrowing of analytical sophistication, both financial and legal, necessary transactions if necessary to raise cash to meet its obligations. for successful investment in distressed assets is unusually Limited liquidity can also affect the market price of securities, high. Therefore, the Fund will be particularly dependent on the thereby adversely affecting the net asset value of the common analytical abilities of the Adviser. In any reorganization or shares and ability to make dividend distributions. Some Senior liquidation proceeding relating to a company in which the Loans are not readily marketable and may be subject to Fund invests, the Fund may lose its entire investment, may be restrictions on resale. Senior Loans generally are not listed on required to accept cash or securities with a value less than the any national securities exchange and no active trading market Fund’s original investment and/or may be required to accept may exist for the Senior Loans in which the Fund may invest. payment over an extended period of time. Among the risks When a secondary market exists, if at all, the market for some inherent in investments in a troubled company is that it may be Senior Loans may be subject to irregular trading activity, wide difficult to obtain information as to the true financial bid/ask spreads and extended trade settlement periods. condition of such company. Troubled company investments Further, the lack of an established secondary market for and other distressed asset-based investments require active illiquid securities may make it more difficult to value such monitoring. securities, which may negatively affect the price the Fund The Fund may make investments in Stressed Issuers when the would receive upon disposition of such securities. Adviser believes it is reasonably likely that the Stressed Issuer Duration and Maturity Risk will make an exchange offer or will be the subject to a plan of reorganization pursuant to which the Fund will receive new The Fund has no fixed policy regarding portfolio maturity or securities in return for a Special Situation Investment. There duration. Holding long duration and long maturity investments can be no assurance, however, that such an exchange offer will will expose the Fund to certain additional risks. be made or that such a plan of reorganization will be adopted. When interest rates rise, certain obligations will be paid off by In addition, a significant period of time may pass between the the Borrower more slowly than anticipated, causing the value time at which the Fund makes its investment in the Special of these obligations to fall. Rising interest rates tend to extend Situation Investment and the time that any such exchange offer the duration of securities, making them more sensitive to or plan of reorganization is completed, if at all. During this changes in interest rates. The value of longer-term securities period, it is unlikely that the Fund would receive any interest generally changes more in response to changes in interest rates payments on the Special Situation Investment, the Fund would than shorter-term securities. As a result, in a period of rising be subject to significant uncertainty whether the exchange interest rates, securities may exhibit additional volatility and offer or plan of reorganization will be completed and the Fund may lose value. may be required to bear certain extraordinary expenses to When interest rates fall, certain obligations will be paid off by protect and recover its investment. Therefore, to the extent the the Borrower more quickly than originally anticipated, and the Fund seeks capital appreciation through investment in Special Annual Report 2019 31


  • Page 34

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 Situation Investments, the Fund’s ability to achieve current into certain transactions that are not deemed prohibited by law income for its shareholders may be diminished. The Fund also when made may potentially lead to a condition that raises will be subject to significant uncertainty as to when, in what regulatory or legal concerns in the future. This may be the manner and for what value the obligations evidenced by case, for example, with Stressed Issuers who are near default Special Situation Investments will eventually be satisfied and more likely to enter into restructuring or work-out (e.g., through a liquidation of the obligor’s assets, an exchange transactions with their existing debt holders, which may offer or plan of reorganization involving the Special Situation include the Fund and its affiliates. In some cases, to avoid the Investments or a payment of some amount in satisfaction of potential of future prohibited transactions, the Adviser may the obligation). Even if an exchange offer is made or plan of avoid recommending allocating an investment opportunity to reorganization is adopted with respect to Special Situation the Fund that it would otherwise recommend, subject to the Investments held by the Fund, there can be no assurance that Adviser’s then-current allocation policy and any applicable the securities or other assets received by the Fund in exemptions. connection with such exchange offer or plan of reorganization Below Investment Grade Rating Risk will not have a lower value or income potential than may have been anticipated when the investment was made or even no Debt instruments that are rated below investment grade are value. Moreover, any securities received by the Fund upon often referred to as “high yield” securities or “junk bonds.” completion of an exchange offer or plan of reorganization may Below investment grade instruments are rated “Ba1” or lower be restricted as to resale. Similarly, if the Fund participates in by Moody’s, “BB+” or lower by S&P or “BB+” or lower by negotiations with respect to any exchange offer or plan of Fitch or, if unrated, are judged by the Adviser to be of reorganization with respect to an issuer of Special Situation comparable credit quality. While generally providing greater Investments, the Fund may be restricted from disposing of income and opportunity for gain, below investment grade debt such securities. To the extent that the Fund becomes involved instruments may be subject to greater risks than securities or in such proceedings, the Fund may have a more active instruments that have higher credit ratings, including a higher participation in the affairs of the issuer than that assumed risk of default. The credit rating of an instrument that is rated generally by an investor. below investment grade does not necessarily address its market value risk, and ratings may from time to time change, To the extent that the Fund holds interests in a Stressed Issuer positively or negatively, to reflect developments regarding the that are different (or more senior or junior) than those held by Borrower’s financial condition. Below investment grade other funds and/or accounts managed by Ares or its affiliates instruments often are considered to be speculative with respect (“Other Accounts”), the Adviser is likely to be presented with to the capacity of the Borrower to timely repay principal and decisions involving circumstances where the interests of such pay interest or dividends in accordance with the terms of the Other Accounts may be in conflict with the Fund’s interests. obligation and may have more credit risk than higher rated Furthermore, it is possible that the Fund’s interest may be securities. Lower grade securities and similar debt instruments subordinated or otherwise adversely affected by virtue of such may be particularly susceptible to economic downturns. It is Other Accounts’ involvement and actions relating to their likely that a prolonged or deepening economic recession could investment. In addition, when the Fund and Other Accounts adversely affect the ability of some Borrowers issuing such hold investments in the same Stressed Issuer (including in the debt instruments to repay principal and pay interest on the same level of the capital structure), the Fund may be instrument, increase the incidence of default and severely prohibited by applicable law from participating in disrupt the market value of the securities and similar debt restructurings, work-outs, renegotiations or other activities instruments. related to its investment in the Stressed Issuer absent an exemption due to the fact that Other Accounts hold The secondary market for below investment grade instruments investments in the same Stressed Issuer. As a result, the Fund may be less liquid than that for higher rated instruments. may not be permitted by law to make the same investment Because unrated securities may not have an active trading decisions as Other Accounts in the same or similar situations market or may be difficult to value, the Fund might have even if the Adviser believes it would be in the Fund’s best difficulty selling them promptly at an acceptable price. To the economic interests to do so. Also, the Fund may be prohibited extent that the Fund invests in unrated securities, the Fund’s by applicable law from investing in a Stressed Issuer (or an ability to achieve its investment objectives will be more affiliate) that Other Accounts are also investing in or currently dependent on the Adviser’s credit analysis than would be the invest in even if the Adviser believes it would be in the best case when the Fund invests in rated securities. economic interests of the Fund to do so. Furthermore, entering 32 Annual Report 2019


  • Page 35

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2019 Under normal market conditions, the Fund will invest in debt hedge its currency exposure. As such, the Fund makes instruments rated in the lower rating categories (“Caa1” or investments that are denominated in British pound sterling or lower by Moody’s, “CCC+” or lower by S&P or “CCC+” or Euros. The Fund’s assets are valued in US dollars and the lower by Fitch) or unrated and of comparable quality. For these depreciation of the British pound sterling and/or the Euro in securities, the risks associated with below investment grade relation to the US dollar in anticipation of Brexit or otherwise instruments are more pronounced. The Fund may incur adversely affects the Fund’s investments denominated in additional expenses to the extent it is required to seek recovery British pound sterling or Euros that are not fully hedged upon a default in the payment of principal or interest on its regardless of the performance of the underlying issuer. Global portfolio holdings. In any reorganization or liquidation central banks may maintain historically low interest rates proceeding relating to an investment, the Fund may lose its longer than was anticipated prior to the Brexit vote, which entire investment or may be required to accept cash or could adversely affect the Fund’s income and its level of securities with a value substantially less than its original distributions. investment. (9) Subsequent Events European Risk The Adviser has evaluated the impact of all subsequent events The Fund may invest a portion of its capital in debt securities on the Fund through the date the financial statements were issued by issuers domiciled in Europe, including issuers issued and has determined that there were the following domiciled in the United Kingdom (“UK”). Concerns regarding subsequent events: the sovereign debt of various Eurozone countries and The following common share distributions were declared on proposals for investors to incur substantial write-downs and January 10, 2020: reductions in the face value of the sovereign debt of certain countries give rise to concerns about sovereign defaults, the Ex-Date: January 21, 2020 possibility that one or more countries might leave the Record Date: January 22, 2020 European Union or the Eurozone and various proposals (still Payable Date: January 31, 2020 under consideration and unclear in material respects) for Per Share Amount: $0.1075 support of affected countries and the Euro as a currency. The Ex-Date: February 20, 2020 outcome of any such situation cannot be predicted. Sovereign Record Date: February 21 22, 2020 debt defaults and European Union and/or Eurozone exits Payable Date: February 28, 2020 could have material adverse effects on investments by the Per Share Amount: $0.1075 Fund in securities of European companies, including but not limited to the availability of credit to support such companies’ Ex-Date: March 19, 2020 financing needs, uncertainty and disruption in relation to Record Date: March 20, 2020 financing, customer and supply contracts denominated in Euro Payable Date: March 31, 2020 and wider economic disruption in markets served by those Per Share Amount: $0.1075 companies, while austerity and other measures that have been introduced in order to limit or contain these issues may themselves lead to economic contraction and resulting adverse effects for the Fund. A number of the Fund’s securities may be denominated in the Euro. Legal uncertainty about the funding of Euro denominated obligations following any breakup or exits from the Eurozone (particularly in the case of investments in securities of companies in affected countries) could also have material adverse effects on the Fund. The uncertainty in the wake of the UK’s “Brexit” referendum and subsequent political developments could have a negative impact on both the UK economy and the economies of other countries in Europe. The Brexit process also may lead to greater volatility in the global currency and financial markets, which could adversely affect the Fund. In connection with investments in non-US issuers, the Fund may engage in foreign currency exchange transactions but is not required to Annual Report 2019 33


  • Page 36

    Ares Dynamic Credit Allocation Fund, Inc. Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Ares Dynamic Credit Allocation Fund, Inc. Opinion on the Financial Statements We have audited the accompanying statement of assets and liabilities of Ares Dynamic Credit Allocation Fund, Inc. (the “Fund”), including the schedule of investments, as of December 31, 2019, and the related statements of operations and cash flows for the period from November 1, 2019 to December 31, 2019 and the year ended October 31, 2019, the statements of changes in net assets for the period from November 1, 2019 to December 31, 2019 and each of the two years in the period ended October 31, 2019, the financial highlights for the period from November 1, 2019 to December 31, 2019 and each of the five years in the period ended October 31, 2019 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund at December 31, 2019, the results of its operations and its cash flows for the period from November 1, 2019 to December 31, 2019 and for the year ended October 31, 2019, the changes in its net assets for the period from November 1, 2019 to December 31, 2019 and for each of the two years ended October 31, 2019 and its financial highlights for the period from November 1, 2019 to December 31, 2019 and for each of the five years in the period ended October 31, 2019, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund’s internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2019, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Fund’s auditor since 2012. Los Angeles, California February 28, 2020 34 Annual Report 2019


  • Page 37

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information December 31, 2019 Proxy Information The policies and procedures used to determine how to vote proxies relating to securities held by the Fund are available (1) without charge, upon request, by calling 1-877-855-3434, or (2) on the SEC’s website at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 will be available on Form N-PX by August 31 of each year (1) without charge, upon request, by calling 1-877-855-3434, or (2) on the SEC’s website at http://www.sec.gov. Portfolio Information The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q will be available (1) without charge, upon request, by calling 1-877-855-3434; (2) on the SEC’s website at http ://www.sec.gov. Annual Report 2019 35


  • Page 38

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2019 Dividend Reinvestment Plan Unless a shareholder specifically elects to receive distributions in cash, distributions will automatically be reinvested in additional common shares of the Fund. A shareholder may elect to have the cash portion of dividends and distributions distributed in cash. To exercise this option, such shareholder must notify State Street, the plan administrator and the Fund’s transfer agent and registrar, in writing or by telephone so that such notice is received by the plan administrator not less than 10 days prior to the record date fixed by the board of directors for the dividend or distribution involved. Participants who hold their common shares through a broker or other nominee and who wish to elect to receive any dividends and other distributions in cash must contact their broker or nominee. The plan administrator will set up an account for shares acquired pursuant to the plan for each shareholder that does not elect to receive distributions in cash (each a “Participant”). The plan administrator may hold each Participant’s common shares, together with the other Participant’s common shares, in noncertificated form in the plan administrator’s name or that of its nominee. The shares are acquired by the plan administrator for a Participant’s account, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized common shares from the Fund (“Newly Issued Shares”) or (ii) by purchase of outstanding common shares on the open market (“Open-Market Purchases”) on the NYSE or elsewhere. If, on the dividend payment date, the net asset value per share of the common shares is equal to or less than the market price per common share on the NYSE plus estimated brokerage commissions (such condition being referred to as “market premium”), the plan administrator will invest the dividend amount in Newly Issued Shares on behalf of the Participant. The number of Newly Issued Shares to be credited to the Participant’s account will be determined by dividing the dollar amount of the dividend by the net asset value per share of the common shares on the date the shares are issued, unless the net asset value of the common shares is less than 95% of the then current market price per share on the NYSE, in which case the dollar amount of the dividend will be divided by 95% of the then current market price per common share on the NYSE. If on the dividend payment date the net asset value per share of the common shares is greater than the market price per common share on the NYSE (such condition being referred to as “market discount”), the plan administrator will invest the dividend amount in common shares acquired on behalf of the Participant in Open-Market Purchases. The plan administrator’s service fee, if any, and expenses for administering the plan will be paid for by the Fund. There will be no brokerage charges to shareholders with respect to common shares issued directly by the Fund as a result of dividends or distributions payable either in common shares or in cash. However, each participant will pay a pro-rata share of brokerage commissions incurred with respect to the plan administrator’s Open-Market Purchases in connection with the reinvestment of dividends and distributions. Shareholders who elect to receive their distributions in cash are subject to the same federal, state and local tax consequences as shareholders who reinvest their distributions in additional common shares. A shareholder’s basis for determining gain or loss upon the sale of shares acquired due to reinvestment of a distribution will generally be equal to the total dollar amount of the dividend payable to the shareholders. Any shares received due to reinvestment of a dividend will have a new holding period for tax purposes commencing on the day following the day on which the shares are credited to the U.S. shareholder’s account. Participants may terminate their accounts under the dividend reinvestment plan by writing to the plan administrator at State Street Bank and Trust Company, located at One Lincoln Street, Boston, Massachusetts, 02111 or by calling the plan administrator’s hotline at (877) 272-8164. Such termination will be effective immediately if the Participant’s notice is received by the plan administrator at least 10 days prior to any dividend or distribution record date for the payment of any dividend or distribution by the Fund; otherwise, such termination will be effective only with respect to any subsequent dividend or distribution. Participants who hold their common shares through a broker or other nominee and who wish to terminate their account under the plan may do so by notifying their broker or nominee. The dividend reinvestment plan may be terminated by the Fund upon notice in writing mailed to each Participant at least 30 days prior to any record date for the payment of any dividend or distribution by the Fund. Additional information about the dividend reinvestment plan may be obtained by contacting the plan administrator by mail at One Lincoln Street, Boston, Massachusetts 02111 or by telephone at (877) 272-8164. 36 Annual Report 2019


  • Page 39

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2019 Investment Adviser Ares Capital Management II LLC 2000 Avenue of the Stars, 12th Floor Los Angeles CA 90067 Administrator Custodian and Transfer Agent State Street Bank and Trust Company One Lincoln Street Boston, MA 02111 DRIP Administrator State Street Bank and Trust Company One Lincoln Street Boston, MA 02111 Investor Support Services Destra Capital Investments LLC 901 Warrenville Road, Suite 15 Lisle, IL 60532 Independent Registered Public Accounting Firm Ernst & Young LLP 725 South Figueroa Street Los Angeles, CA 90017 Fund Counsel Willkie Farr & Gallagher LLP 787 7th Avenue New York, NY 10019 Annual Report 2019 37


  • Page 40

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2019 Privacy Notice We are committed to maintaining the privacy of our shareholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties. Generally, we will not receive any non-public personal information about shareholders of the common stock of the Fund, although certain of our shareholders’ non-public information may become available to us. The non-public personal information that we may receive falls into the following categories: • Information we receive from shareholders, whether we receive it orally, in writing or electronically. This includes shareholders’ communications to us concerning their investment; • Information about shareholders’ transactions and history with us; or • Other general information that we may obtain about shareholders, such as demographic and contact information such as address. We do not disclose any non-public personal information about shareholders, except: • to our affiliates (such as our investment adviser) and their employees that have a legitimate business need for the information; • to our service providers (such as our administrator, accountants, attorneys, custodians, transfer agent, underwriter and proxy solicitors) and their employees as is necessary to service shareholder accounts or otherwise provide the applicable service; • to comply with court orders, subpoenas, lawful discovery requests, or other legal or regulatory requirements; or • as allowed or required by applicable law or regulation. When the Fund shares non-public shareholder personal information referred to above, the information is made available for limited business purposes and under controlled circumstances designed to protect our shareholders’ privacy. The Fund does not permit use of shareholder information for any non-business or marketing purpose, nor does the Fund permit third parties to rent, sell, trade or otherwise release or disclose information to any other party. The Fund’s service providers, such as their adviser, administrator, and transfer agent, are required to maintain physical, electronic, and procedural safeguards to protect shareholder nonpublic personal information; to prevent unauthorized access or use; and to dispose of such information when it is no longer required. Personnel of affiliates may access shareholder information only for business purposes. The degree of access is based on the sensitivity of the information and on personnel need for the information to service a shareholder’s account or comply with legal requirements. If a shareholder ceases to be a shareholder, we will adhere to the privacy policies and practices as described above. We may choose to modify our privacy policies at any time. Before we do so, we will notify shareholders and provide a description of our privacy policy. In the event of a corporate change in control resulting from, for example, a sale to, or merger with, another entity, or in the event of a sale of assets, we reserve the right to transfer your non-public personal information to the new party in control or the party acquiring assets. 38 Annual Report 2019


  • Page 41

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2019 Directors Number of Principal Funds in the Other Public Occupation(s) Complex(3) Company Board Length of Time or Employment Overseen by Memberships Name, Address(1) Position(s) Held Served and During Past the Director During Past and Year of Birth with the Fund Term of Office Five Years or Nominee Five Years Interested Directors(2) David A. Sachs Director and Since 2011*** Partner, Ares 1 Terex Corporation; 1956 Chairman of the Management, L.P. CION Ares Board Diversified Credit Fund Seth J. Brufsky President, Chief Since 2012** Mr. Brufsky is a 1 None 1966 Executive Officer, Partner and Co- Director and Head and Portfolio Portfolio Manager of Manager of U.S. ARDC Liquid Credit in the Ares Credit Group and a member of the Management Committee of Ares Management. Additionally, he serves as a member of the Ares Credit Group’s U.S. Liquid Credit Investment Committee and the Ares Dynamic Credit Allocation Fund Investment Committee. He has served as Director, President and Chief Executive Officer of ARDC since 2012. Independent Directors James K. Hunt Director Since 2016*** Consultant, 1 PennyMac Financial 1951 Tournament Capital Services, Inc.; CION Advisors, LLC; from Ares Diversified 2015 to 2016, Credit Fund Managing Partner and Chief Executive Officer, Middle Market Credit platform — Kayne Anderson Capital Advisors LLC; from 2014 to 2015, Chairman, THL Credit, Inc.; from 2010 to 2014, Chief Executive Officer and Chief Investment Officer, THL Credit, Inc. and THL Credit Advisors LLC John J. Shaw Director Since 2012** Independent 1 CION Ares 1951 Consultant; prior to Diversified Credit 2012, President, Fund Los Angeles Rams Annual Report 2019 39


  • Page 42

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2019 Directors Number of Principal Funds in the Other Public Occupation(s) Complex(3) Company Board Length of Time or Employment Overseen by Memberships Name, Address(1) Position(s) Held Served and During Past the Director During Past and Year of Birth with the Fund Term of Office Five Years or Nominee Five Years Bruce H. Spector Director Since 2014* Independent 1 The Private Bank of 1942 Consultant; from California 2007 to 2015, (2007-2013); CION Senior Advisor, Ares Diversified Apollo Global Credit Fund Management LLC (private equity) (1) The address of each Director is care of the Secretary of the Fund at 2000 Avenue of the Stars, 12th Floor, Los Angeles, CA 90067. (2) “Interested person,” as defined in the Investment Company Act, of the Fund. Mr. Sachs and Mr. Brufsky are interested persons of the Fund due to their affiliation with the Adviser. (3) The term “Fund Complex” means two or more registered investment companies that share the same investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies or hold themselves out to investors as related companies for the purpose of investment and investor services. * Term continues until the Fund’s 2020 Annual Meeting of Stockholders and until his successor is duly elected and qualifies. ** Term continues until the Fund’s 2021 Annual Meeting of Stockholders and until his successor is duly elected and qualifies. *** Term continues until the Fund’s 2022 Annual Meeting of Stockholders and until his successor is duly elected and qualifies. 40 Annual Report 2019


  • Page 43

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2019 Officers Name, Address(1) Position(s) Held and Year of Birth with Funds Officer Since Principal Occupation(s) or Employment During Past Five Years Seth J. Brufsky President, Chief Since 2012 Mr. Brufsky is a Partner and Co-Head and Portfolio Manager of U.S. 1966 Executive Officer, Liquid Credit in the Ares Credit Group and a member of the Director and Management Committee of Ares Management. Additionally, he Portfolio Manager of serves as a member of the Ares Credit Group’s U.S. Liquid Credit ARDC Investment Committee and the Ares Dynamic Credit Allocation Fund Investment Committee. He has served as Director, President and Chief Executive Officer of ARDC since 2012. Penni F. Roll 1965 Treasurer Since 2016 Ms. Roll is a Partner and the Chief Financial Officer of the Ares Credit Group. She also serves as the Chief Financial Officer of Ares Capital Corporation, and Treasurer of CION Ares Diversified Credit Fund. She joined Ares in April 2010 as Executive Vice President — Finance of Ares Capital Management. She previously served as Chief Financial Officer of ARDC from October 2016 to September 2017. Lisa Morgan 1976 Chief Compliance Since 2019 Ms. Morgan is a Managing Partner and Head of Regulatory Officer and Anti- Compliance in the Ares Compliance Department. She joined Ares in Money Laundering September 2017. Officer Scott Lem 1977 Chief Financial Since 2016 Mr. Lem is a Partner and Chief Accounting Officer, Credit (Direct Officer Lending) in the Ares Finance Department. Mr. Lem additionally serves as Chief Accounting Officer, Vice President and Treasurer of Ares Capital Corporation. He also serves as Chief Financial Officer of CION Ares Diversified Credit Fund. Mr. Lem previously served as Assistant Treasurer of ARCC from May 2009 to May 2013 and Treasurer of ARDC from October 2016 to September 2017. Mr. Lem joined Ares in 2003. Ian Fitzgerald 1975 General Counsel, Since 2019 Mr. Fitzgerald is a Managing Director and Associate General Counsel Chief Legal Officer (Credit) in the Ares Legal Group, where he focuses on credit matters. and Secretary He also serves as Vice President and Assistant Secretary of Ivy Hill Vice President and 2017-2019 Asset Management, L.P. and Vice President and Assistant Secretary Assistant Secretary of Ivy Hill Asset Management GP, LLC, Ivy Hill Asset Management’s General Partner. Mr. Fitzgerald joined Ares in 2010. Michael Weiner Vice President and Since 2012 Mr. Weiner is a Partner and Head of Public Policy & Legislative 1952 Assistant Secretary Affairs and is a member of the Management Committee of Ares Management. Mr. Weiner has been an officer of Ares Capital Corporation since 2006, including General Counsel from September 2006 to January 2010, and also serves as Vice President of Ares Commercial Real Estate Corporation. Mr. Weiner joined Ares in 2006. Keith Ashton 1967 Vice President and Since 2013 Mr. Ashton is a Partner in the Ares Credit Group, Portfolio Manager of Portfolio Manager of Alternative Credit and a member of the Management Committee of ARDC Ares Management. Additionally, he serves as a member of the Ares Credit Group’s Global Structured Credit Investment Committee and the Ares Dynamic Credit Allocation Fund Investment Committee. Prior to joining Ares in 2011, Mr. Ashton was a Partner at Indicus Advisors LLP, where he focused on launching the global structured credit business in May 2007. Previously, Mr. Ashton was a Portfolio Manager and Head of Structured Credit at TIAA-CREF, where he focused on managing a portfolio of structured credit investments and helped launch TIAA’s institutional asset management business. Daniel Hayward Vice President Since 2016 Mr. Hayward is a Partner and Co-Portfolio Manager in the Ares Credit 1985 Group. Additionally, he serves as a member of the Ares Credit Group’s U.S. Liquid Credit Investment Committee. Prior to joining Ares in 2012, he was a senior collateralized loan obligation analyst at State Street Bank, where he focused on managing a team in the Trustee Department. Annual Report 2019 41


  • Page 44

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2019 Officers Name, Address(1) Position(s) Held and Year of Birth with Funds Officer Since Principal Occupation(s) or Employment During Past Five Years Charles Arduini Vice President and Since 2018 Mr. Arduini is a Partner and Portfolio Manager in the Ares Credit 1969 portfolio manager of Group, where he focuses on structured credit investments. ARDC Mr. Arduini joined Ares in 2011. Samantha Milner Vice President and Since 2018 Ms. Milner is a Partner, Portfolio Manager and Head of Research of 1978 portfolio manager of U.S. Liquid Credit in the Ares Credit Group, where she is primarily ARDC responsible for managing Ares’ U.S. bank loan credit strategies. Additionally, she serves as a member of the Ares Credit Group’s U.S. Liquid Credit Investment Committee. Ms. Milner joined Ares in 2004. Jason Duko 1977 Vice President Since 2018 Mr. Duko is a Partner and Portfolio Manager of U.S. Liquid Credit in the Ares Credit Group, where he is primarily responsible for managing Ares’ U.S. bank loan credit strategies. Additionally, he serves as a member of the Ares Credit Group’s U.S. Liquid Credit Investment Committee. Prior to joining Ares in 2018, Mr. Duko was a Portfolio Manager at PIMCO, where he managed bank loan assets across a broad range of investment strategies and was responsible for secondary loan trading across all sectors. Previously, Mr. Duko was an Associate Portfolio Manager at Lord Abbett & Co. LLC, where he focused on its leveraged loan business, portfolio management, trading decisions and marketing. Kapil Singh 1971 Vice President Since 2018 Mr. Singh is a Partner and Portfolio Manager of U.S. Liquid Credit in the Ares Credit Group, where he is primarily responsible for managing Ares’ U.S. high yield credit strategies. Additionally, he serves as a member of the Ares Credit Group’s U.S. Liquid Credit Investment Committee. Prior to joining Ares in 2018, Mr. Singh was a Portfolio Manager in the Global Developed Credit Group at DoubleLine Capital, where he managed high yield bonds across strategies and portfolios in a variety of investment vehicles. Previously, Mr. Singh was a Senior Analyst at the Post Advisory Group, where he managed high yield bonds and leveraged loans within the energy sector. In addition, Mr. Singh was a Co-Portfolio Manager and Senior Credit Analyst at Four Comers Capital, a subsidiary of Macquarie Funds Group. He also held positions as Bradford & Marzec, PPM America and Heller Financial. Joshua Bloomstein Vice President and Since 2019 Mr. Bloomstein serves as a Partner and General Counsel (Credit) 1973 Assistant Secretary and Deputy General Counsel (Corporate) of Ares Management where he focuses on direct lending matters. He is General Counsel, Vice President and Secretary of Ares Capital Corporation and Vice President and Assistant Secretary of Ares Commercial Real Estate Corporation. He is also a member of the Ares Enterprise Risk Committee. Mr. Bloomstein joined Ares in 2006. Naseem Sagati Vice President and Since 2019 Ms. Sagati Aghili is a Partner and General Counsel, Corporate and Aghili 1981 Assistant Secretary General Counsel, Private Equity, in the Ares Legal Group and is a member of the Management Committee of Ares Management. Ms. Sagati Aghili also serves as Vice President and Assistant Secretary for the CION Ares Diversified Credit Fund. Ms. Sagati Aghili joined Ares in 2009. (1) The address of each officer is care of the Secretary of the Fund at 2000 Avenue of the Stars, 12th Floor, Los Angeles, CA 90067. 42 Annual Report 2019


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