avatar Ares Dynamic Credit Allocation Fund, Inc Finance, Insurance, And Real Estate
  • Location: California 
  • Founded:
  • Website:

Pages

  • Page 1

    Ares Dynamic Credit Allocation Fund, Inc. (NYSE: ARDC) Annual Report December 31, 2020 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.


  • Page 2

    Ares Dynamic Credit Allocation Fund, Inc. Contents Letter to Shareholders ............................................................1 Fund Profile & Financial Data ...................................................6 Schedule of Investments .........................................................7 Statement of Assets and Liabilities ........................................16 Statement of Operations .......................................................17 Statements of Changes in Net Assets ....................................18 Statement of Cash Flows.......................................................19 Financial Highlights ...............................................................20 Notes to Financial Statements...............................................21 Proxy & Portfolio Information..................................................36 Dividend Reinvestment Plan ..................................................37 Renewal of Investment Advisory Agreement ............................38 Corporate Information ...........................................................41 Privacy Notice.......................................................................42 Directors and Officers ...........................................................43 Annual Report 2020


  • Page 3

    Ares Dynamic Credit Allocation Fund, Inc. Letter to Shareholders December 31, 2020 Dear Shareholders, On behalf of Ares’ leadership, we hope this note finds you, your families and your colleagues healthy and safe. We thank you for your support of the Ares Dynamic Credit Allocation Fund, Inc. (“ARDC” or the “Fund”). Economic Conditions and Leveraged Finance Market Update U.S. Economy: COVID-19 brought unprecedented economic and capital markets volatility in 2020, prompting historic government support. In response to this looming crisis, the U.S. Government and Federal Reserve led an unprecedented and coordinated effort to support the economy and maintain the flow of capital to consumers and businesses. The broad response from the government and central banks led to a rebound in economic activity and drove significant liquidity in the corporate financing markets. The declines in quarterly GDP in the first and second quarters reversed course and the third quarter GDP had a record increase, recovering nearly two-thirds of the economic output lost during the first half of 2020. As a result of the policy driven response by the Federal Reserve, record retail investor inflows to fixed rate asset classes provided a robust amount of liquidity and a healthy backdrop for many corporate borrowers to access the liquid credit markets. By October of 2020, both the investment grade1 and high yield bond2 markets had experienced record new annual issuance levels. Further optimism was supported during the fourth quarter as the FDA approved two COVID-19 vaccines. This led to increased confidence in the economic recovery despite the increase in new cases and further regional lockdown restrictions. U.S. Loan and High Yield Bond Markets: The aforementioned policies and the improved investor sentiment led to strong price recovery. As measured by the ICE BofAML High Yield Master II Index (“H0A0”) for high yield bonds and the Credit Suisse Leveraged Loan Index (“CSLLI”) for leveraged loans, the price declines of 20.3%3 and 24.3%4, respectively, from March 1 to the valuation trough on March 23, were nearly erased by the end of the year. The average price of par of the H0A0 and CSLLI troughed at 78.6%3 and 76.5%4, respectively, in March and finished the year at 104.7%3 and 95.7%4 of par. Although capital markets prices nearly recovered to pre-pandemic levels, defaults continued to rise. The leveraged loan trailing twelve-month default rate ended the year at 4.4%, up from year-end 2019 of 1.6% and its long-term average of 2.2%5. High yield bond default rates also rose to 7.0%, up from 3.4% at year-end 2019 and above their historical average of 4.1%6. While defaults increased during 2020 across loans and high yield bonds, 2021 default expectations moderated throughout the year. Currently, 2021 leverage loan default rates are expected to be 4.5% compared to the 7-8% expected earlier in during 2020. High yield default rates are expected to decline to 3.5% in 2021, also much improved compared to the 5-6% expectations that underpinned the market in mid-20207. U.S. CLO Markets: The trajectory of improved pricing and sentiment was also evident in the CLO market. In March and April, the market was pricing in fears that rising defaults and credit rating agency downgrades would impair cash flows to support CLO securities. Adding to these price declines was an increasingly popular misconception that CLOs would be forced sellers of the underlying loan collateral. With this backdrop, BB CLO bond prices dropped to 53.4% in March from 93.9% at year-end 20198. However, as policy intervention by the U.S. Government and Federal Reserve drove loan prices higher and default expectations lower, CLO managers largely began navigating the ratings driven impacts on the structures. Like most securities beyond the March and April time period, prices for CLO securities rose steadily in the second and third quarters of 20208. The measured pace of price increases became more dramatic during the fourth quarter when CLO securities, such as the BBs, outperformed the loan and high yield market3,4,8. Fundamentally, 2020 proved the benefits of the CLO structure and reinforced our view that CLOs are stable holders of credit investments through changing markets. Underscoring the resiliency of the asset class, we found no CLO security defaults during the year9. Key Economic and Market Observations: Looking back at 2020, the U.S. economy experienced its most severe GDP contraction since the Great Depression. The unprecedented government stimulus programs and the reopening of the economy quickly pulled the U.S out of a recession, resulting in the shortest recession in U.S. history. The rapid stabilization of the economy and liquidity driven recovery of the credit markets left investors that could not move quickly enough unable to fully benefit from the price recovery of the liquid Annual Report 2020 1


  • Page 4

    Ares Dynamic Credit Allocation Fund, Inc. Letter to Shareholders (continued) December 31, 2020 credit markets. Nimble management is becoming critical to successfully capitalizing on market dislocations. Fluctuating asset performance across economic cycles underscores the importance of a tactical approach to portfolio management, particularly when identifying mispriced assets. Structural changes in capital markets have caused market dislocations to become shorter and more frequent. In our view, diversification and active allocation are essential to capturing the best relative value opportunities that arise in episodic periods of volatility. ARDC Portfolio Performance and Positioning Performance: For the calendar year ending December 31, 2020, ARDC has returned 3.0% based on Net Asset Value (“NAV”) and 2.3% based on stock total returns10,11. This performance is favorable against the most comparable closed-end fund peer group to ARDC12, which generated median NAV returns of 1.1% and median stock based total returns of 2.2% for the year10. It is important to note that given ARDC’s flexible mandate and focus on senior secured bank loans, high yield bonds and CLOs, we believe there is no single peer or established benchmark that reasonably compares to ARDC. As another measure of ARDC’s success, the company had no defaults on any of its investments in 2020, which compares favorably to the leveraged loan and high yield default rates of 4.0% and 6.2%, respectively5,6. Dynamic Portfolio Positioning: We believe ARDC’s performance has been supported by the strengths of its manager and the merits of its strategy to deliver enhanced portfolio yield and strong overall diversification13. We view Ares Management’s deep credit research capabilities, differentiated sourcing advantages and multi-asset class experience as keys to ARDC’s track record of creating value throughout varying market conditions. One way we used the market volatility throughout the year was to adjust the portfolio based on the relative value of credit ratings in loans and bonds. Early in 2020, we invested in higher rated credits, including some former investment grade names that entered the high yield market at technically-driven steep discounts. It was our view early on that these credits would be defensive and as the market began to recover, would lead the price recovery. Based on this view, we increased the allocation to BB and BBB rated credits in the loan and high yield portfolio from 28% at year-end 2019 to 36% in April. We saw this playout as BB loans and bonds outperformed B loans and bonds by ~380bps and ~310bps, respectively from January through April of 20203,4,14,15. As the market began to rally, we rotated away from some of these higher rated credits and increased our exposure to B rated credits in order to capture what we believed would be greater return opportunities during a recovery. Beginning in May, we increased our allocation to B rated credits within the loan and high yield portfolio from 45% to 53% at year-end 2020. During this time, B rated loan and high yield securities in fact rallied more meaningfully than the lower risk BB loans and high yield securities for the remainder of the year from May to December3,4,16,17. Credit ratings are just one measure of how we positioned ARDC’s portfolio throughout the year. We also found value by moving up the capital structure. Our secured loan and high yield investments rose to 55% of the loan and high yield portfolio by year-end 2020, as compared to 46% at year-end 2019. In addition, we repositioned the portfolio to minimize exposure to businesses negatively affected by COVID and increased exposure to more resilient or benefiting segments of the economy. The increasing adoption of technology and the strong visibility to recurring contracted revenues in many software and services business led us to increase our allocation to information technology companies during the year. This industry was the largest increase in the portfolio, growing from just under 6% of the total portfolio at year-end 2019 to over 10% at year-end 2020 and represents our largest single industry concentration18. Conversely, some healthcare revenue models were impacted by social distancing standards and a temporary pause in elective procedures amongst other impacts during the year. In our view, the market had overly optimistic view on valuation in some of the securities in the healthcare sector. As a result, we reduced our healthcare exposure from approximately 10% of the portfolio at year-end 2019 to approximately 5% of the total portfolio at year-end 2020. While our more selective approach in healthcare led to the largest industry reduction across the ARDC portfolio during the year, we believe there are still significant opportunities in the sector as healthcare remains ARDC’s third largest industry concentration. 2020 also impacted capital formation for loan and high yield issuers. The long-term trend of traditional liquid credit products converging with private market direct loans accelerated during the year. The combination of Ares’ large-scale 2 Annual Report 2020


  • Page 5

    Ares Dynamic Credit Allocation Fund, Inc. Letter to Shareholders (continued) December 31, 2020 liquid credit platform and its leading direct lending franchise positions ARDC to benefit from differentiated deal flow opportunities. Ultimately, we believe these advantages result in favorable allocations and economics for ARDC. These opportunities represent another avenue for differentiated investment performance for ARDC. Our experience in CLOs continues to be another area of significant opportunity for delivering differentiated performance. Throughout the year, we used the market dislocation to rotate into more CLO equity versus CLO debt, allowing ARDC to more meaningfully participate in what we believe was a mispriced asset class. At year-end 2020, ARDC’s total portfolio was comprised of 21% in CLO debt and 11% in CLO equity, a shift from the 24% CLO debt and 9% in CLO equity allocation at year-end 2019. CLO price recovery, as measured by BB securities, significantly outperformed the more liquid loan and high yield market in the fourth quarter, supporting the funds strong quarter performance3,4,8. Aided by the strength in CLO assets, ARDC’s NAV-based returns reached 10.8% in the fourth quarter of 2020, significantly outpacing loan and bond ETFs, such as the Invesco Senior Loan ETF’s return of 3.4% and the iShares High Yield Corporate Bond ETF’s return of 5.8% in the fourth quarter10. Looking Ahead to 2021 Heading into 2021, ARDC’s overall portfolio remains well positioned, diversified across 207 issuers and 25 industries. The average position size across ARDC is 0.40% and the largest position is 1.3%19. Looking forward, we have positioned our portfolio thoughtfully to benefit from the continued reopening of the economy and asset price appreciation without reaching for risk. We believe deep fundamental credit experience will be even more critical in 2021. We expect credit dispersion to increase and episodic bouts of volatility to continue. As a result, we believe this will provide a compelling opportunity set for active managers like Ares and the dynamic allocation strategy of ARDC to succeed. 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 believe the distinct advantages that come from being managed by Ares will provide unique buying opportunities in both the new issue and secondary markets for ARDC. As a result, it is our view that ARDC is well positioned to deliver an attractive yield-based return for our investors into 2021 and beyond. We appreciate the trust and confidence you have demonstrated in Ares through your investment in ARDC. 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, 2020, 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. Annual Report 2020 3


  • Page 6

    Ares Dynamic Credit Allocation Fund, Inc. Letter to Shareholders (continued) December 31, 2020 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. The outbreak of a novel and highly contagious form of coronavirus (“COVID-19”), which the World Health Organization has declared to constitute a pandemic, has resulted in numerous deaths, adversely impacted global commercial activity and contributed to significant volatility in certain equity and debt markets. The global impact of the outbreak is rapidly evolving, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of COVID-19, are creating significant disruption in supply chains and economic activity and are having a particularly adverse impact on energy, transportation, hospitality, tourism, entertainment and other industries. The impact of COVID-19 has led to significant volatility and declines in the global financial markets and oil prices and it is uncertain how long this volatility will continue. As COVID-19 continues to spread, the potential impacts, including a global, regional or other economic recession, are increasingly uncertain and difficult to assess. Any public health emergency, including any outbreak of COVID-19 or other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could have a significant adverse impact on the Fund, the value of its investments and its portfolio companies. The performance information herein is as of December 31, 2020, and the full effects, directly and indirectly, resulting from COVID-19 are not necessarily fully reflected in such information. 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. 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. 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. The Invesco Senior Loan ETF (“BKLN”) is an exchange-traded fund incorporated in the USA. The fund tracks the market cap weighted S&P/LSTA US Leveraged Loan 100 index, which represents the 100 largest loan facilities in the leverage loan market. Each week the index is reviewed to reflect early principal repayment and ensure that no loan balances become more than 2% f the index. The iShares iBoxx High Yield Corporate Bond ETF (“HYG”) is an exchange-traded fund incorporated in the USA. The fund seeks to track the investment results of an index composed of U.S. dollar denominated, high yield corporate bonds. REF: TC- 02010 1 Bloomberg, U.S. High-Grade Bond Sales Set Record, Reach $1.346 Trillion, August 17, 2020. 2 S&P Global, U.S. High Yield Issuance Blasts Past Prior Years to Set New Record, October 8, 2020. 3 ICE BofA High Yield Master II Index as of December 31, 2020 or as otherwise noted. 4 Credit Suisse Leveraged Loan Index as of December 31, 2020 or as otherwise noted. 5 Monthly Credit Suisse Default Reports. 6 BAML HY Credit Chartbook. 7 Fitch 2021 US Loan Default Rate in Line with 2020; HY Trending Lower, January 13, 2021. 8 J.P. Morgan CLOIE Monitor as of December 31, 2020 or as otherwise noted. 9 Based on Ares view of the market. 4 Annual Report 2020


  • Page 7

    Ares Dynamic Credit Allocation Fund, Inc. Letter to Shareholders (continued) December 31, 2020 10 Y-Charts as of December 31, 2020. 11 Past performance is not indicative of future results. 12 Peer group consists of AIF, BGB, BGH, DSU, EFF, HFRO, HNW, KIO, VTA. This is the same peer group the management uses to benchmark its performance. 13 Diversification does not assure profit or protect against market loss. 14 For the period January 1, 2020 through April 30, 2020. 15 As measured by price returns of High-Yield BB vs. High-Yield B’s and Leveraged Loan BB’s vs. Leveraged Loan B’s. 16 For the period May 1, 2020 to December 31, 2020. 17 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. 18 As defined by Credit Suisse industry classifications weighted by market value. These values may be different than industry classifications in certain regulatory filings. 19 Diversification does not assure profit or protect against loss. Annual Report 2020 5


  • Page 8

    Ares Dynamic Credit Allocation Fund, Inc. Fund Profile & Financial Data December 31, 2020 (Unaudited) Portfolio Characteristics as of 12.31.20 Portfolio Composition as of 12.31.20 Weighted Average Floating Coupon1 5.81% Bond - 48.53% Weighted Average Bond Coupon2 7.53% CLO Debt - 21.17% Current Distribution Rate3 8.19% Loan - 19.92% Monthly Dividend Per Share4 $0.0975 1 The weighted-average gross interest rate on the pool CLO Equity - 11.08% of loans as of December 31, 2020. 2 The weighted-average gross interest rate on the pool of bonds at the time the securities were issued. 3 Dividend per share annualized and divided by the December 31, 2020 market price per share. The distribution rate alone is not indicative of Fund performance. 4 Represents the Fund’s December 2020 dividend of This data is subject to change on a daily basis. As of 12.31.20, the Fund held $0.0975 per share, which was comprised of net a negative traded cash balance of -0.70%. investment income. To the extent that any portion of the current distributions were estimated to be sourced from Fixed vs. Floating Rate as of 12.31.20 something other than income, such as return of capital, the source would have been disclosed in a Fixed - 53.64% Section 19(a) Notice located under the “Investor Documents” section of the Fund’s website. Please note Floating - 46.36% that distribution classifications are preliminary and 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 Holdings5 as of 12.31.20 Angus Chemical 1.49% CenturyLink Inc 1.39% Tegna 1.31% PowerTeam Services 1.30% Excludes Equity and CLO Equity EQT Corp 1.27% Industry Allocation7 as of 12.31.20 Asurion, LLC 1.19% CLOs - 32.25% NRG Energy Inc 1.17% Arby’s Restaurant Group, Inc. 1.16% Information Technology - 10.09% Numericable 1.12% Energy - 7.05% Williams Cos Inc/The 1.11% Healthcare - 4.89% 5 Market value percentage may represent multiple Financial - 3.65% instruments by the named issuer and/or multiple issuers being consolidated to the extent they are Utility - 3.59% owned by the same parent company. These values may be different than the issuer concentrations in Chemicals - 3.29% certain regulatory filings. Performance as of 12.31.20 Telecommunications - 3.21% Market NAV Forest Prod/Containers - 3.02% 1 Month 6.42% 4.22% Food/Tobacco - 2.99% Year to Date 2.33% 3.00% Other - 26.67% 3 Years (annualized) 4.21% 4.09% 7 Credit Suisse industry classifications weighted by market value. These values 5 Years (annualized) 10.46% 8.60% may be different than industry classifications in certain regulatory filings. Since Inception6 4.31% 5.53% This data is subject to change on a daily basis. As of 12.31.20, the Fund held 6 Since Inception of fund (11/27/2012) and annualized. a negative traded cash balance of -0.70%. Source: Ares 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. The NAV total return takes into account the Fund’s total annual expenses and does not reflect transaction charges. If transaction charges were reflected, NAV total return would be reduced. 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. 6 Annual Report 2020


  • Page 9

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments December 31, 2020 Senior Loans 28.4%(b)(c)(d) Senior Loans(b)(c)(d) (continued) Principal Principal Amount(a) Value(a) Amount(a) Value(a) Capital Goods 4.9% Diversified Financials 0.7% Boels Topholding B.V., 1st Lien Delta TopCo, Inc., 2nd Lien Term Loan, Term Loan, (Netherlands), 3M 3M LIBOR + 7.25%, 8.00%, EURIBOR + 4.00%, 4.00%, 12/01/2028 $1,071,429 $ 1,078,125 02/06/2027 €2,205,882 $ 2,690,800 LBM Acquisition, LLC, 1st Lien Term CP Atlas Buyer, Inc., 1st Lien Loan, 12/09/2027(e) 305,267 304,950 Term Loan, 3M LIBOR + 4.50%, LBM Acquisition, LLC, 1st Lien Term 5.25%, 11/23/2027 $3,600,000 3,604,500 Loan, 12/17/2027(e) 1,373,704 1,372,275 Dynasty Acquisition Co., Inc., 2,755,350 1st Lien Term Loan, 3M LIBOR + 3.50%, 3.75%, 04/06/2026(e) 2,487,405 2,363,035 Food & Staples Retailing 0.6% MI Windows and Doors, LLC, Quirch Foods Holdings, LLC, 1st Lien 1st Lien Term Loan, Term Loan, 3M LIBOR + 5.25%, 6.25%, 12/18/2027(e) 2,217,983 2,220,756 10/27/2027 2,181,273 2,164,913 Traverse Midstream Partners, LLC, Food, Beverage & Tobacco 1.1% 1st Lien Term Loan, 1M LIBOR + 5.50%, 6.50%, 09/27/2024(e) 2,870,860 2,809,855 WOOF Holdings, Inc., 1st Lien Term Loan, 12/21/2027(e) 2,876,253 2,870,270 Tutor Perini Corp., 1st Lien Term Loan, 3M LIBOR + 4.75%, 5.75%, WOOF Holdings, Inc., 2nd Lien Term 08/18/2027(e) 4,031,181 4,041,259 Loan, 12/21/2028(e) 1,250,000 1,253,125 17,730,205 4,123,395 Consumer Durables & Apparel 1.0% Health Care Equipment & Services 2.9% AI Aqua Merger Sub, Inc., Bio Lam LCD, 1st Lien Term Loan, 1st Lien Term Loan, 1M LIBOR + (France), 3M LIBOR + 4.75%, 4.75%, 4.25%, 5.25%, 12/13/2023(f) 1,980,000 1,980,000 04/25/2026 €2,400,000 2,932,367 AI Aqua Merger Sub, Inc., 1st Lien Project Ruby Ultimate Parent Term Loan, 1M LIBOR + 5.25%, Corporation, 1st Lien Term Loan, 6.25%, 12/13/2023(f) 226,600 226,600 02/09/2024(e)(f) $2,500,000 2,493,750 MSG National Properties, LLC, Project Ruby Ultimate Parent 1st Lien Term Loan, 3M LIBOR + Corporation, 2nd Lien Term Loan, 6.25%, 7.00%, 11/12/2025(f) 1,500,000 1,507,500 02/10/2025(e)(f) 2,000,000 2,000,000 3,714,100 Sotera Health Holdings, LLC, 1st Lien Term Loan, 3M LIBOR + 4.50%, 5.50%, 12/11/2026(e) 3,326,604 3,336,318 Consumer Services 2.5% 10,762,435 Alterra Mountain Co., 1st Lien Term Loan, 1M LIBOR + 4.50%, 5.50%, 08/01/2026(e) 2,089,129 2,096,963 Household & Personal Products 0.9% Equinox Holdings, Inc., 1st Lien Term Alphabet Holding Co., Inc., 2nd Lien Loan, 3M LIBOR + 9.00%, 10.00%, Term Loan, 1M LIBOR + 7.75%, 7.90%, 03/08/2024(e)(f) 2,487,500 2,475,063 09/26/2025 3,500,000 3,477,250 Gems Menasas Cayman, Ltd., 1st Lien Insurance 1.7% Term Loan, (Cayman Islands), 6M Asurion, LLC, 1st Lien Term Loan, LIBOR + 5.00%, 6.00%, 07/31/2026 2,846,803 2,825,452 12/23/2026(e) 1,000,000 988,700 IRB Holding Corp., 1st Lien Term Loan, Asurion, LLC, 2nd Lien Term Loan, 12/15/2027(e) 2,000,000 2,000,620 1M LIBOR + 6.50%, 6.65%, 9,398,098 08/04/2025 5,226,987 5,259,655 6,248,355 Annual Report 2020 7


  • Page 10

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2020 Senior Loans(b)(c)(d) (continued) Senior Loans(b)(c)(d) (continued) Principal Principal Amount(a) Value(a) Amount(a) Value(a) Materials 1.8% Informatica, LLC, 2nd Lien Term Loan, 7.13%, 02/25/2025 $1,455,878 $ 1,478,808 Aruba Investments, Inc., 2nd Lien Term Loan, 3M LIBOR + 7.75%, 8.50%, Ivanti Software, Inc., 1st Lien Term 11/24/2028 $2,777,778 $ 2,777,778 Loan, 4.75%, 12/01/2025(f)(g) 250,000 (2,910) LSF11 Skyscraper HoldCo SARL, 1st Ivanti Software, Inc., 1st Lien Term Lien Term Loan, (Luxembourg), Loan, 3M LIBOR + 4.75%, 5.75%, 3M EURIBOR + 4.50%, 4.50%, 12/01/2027 3,053,053 3,042,550 09/29/2027 €2,415,714 2,952,010 MA FinanceCo., LLC, 1st Lien Term Pretium PKG Holdings, Inc., 2nd Lien Loan, 3M LIBOR + 4.25%, 5.25%, Term Loan, 3M LIBOR + 8.25%, 06/05/2025 1,649,625 1,660,628 9.00%, 11/06/2028(f) $1,000,000 995,000 Sabre GLBL, Inc., 1st Lien Term Loan, 6,724,788 12/17/2027(e) 1,028,807 1,030,093 Sophia, LP, 1st Lien Term Loan, Pharmaceuticals, Biotechnology & Life Sciences 1.6% 3M LIBOR + 3.75%, 4.50%, 10/07/2027 3,401,549 3,403,964 Albany Molecular Research, Inc., 1st Lien Term Loan, 3M LIBOR + 3.25%, 23,686,911 4.25%, 08/30/2024 1,738,452 1,741,355 Cambrex Corp., 1st Lien Term Loan, Transportation 1.0% 1M LIBOR + 4.50%, 5.50%, Mileage Plus Holdings, LLC, 1st Lien 12/04/2026(f) 3,970,000 3,999,775 Term Loan, 3M LIBOR + 5.25%, 5,741,130 6.25%, 06/21/2027 1,452,327 1,509,520 SkyMiles IP, Ltd., 1st Lien Term Loan, Retailing 0.9% 3M LIBOR + 3.75%, 4.75%, 10/20/2027(e) 2,000,000 2,070,680 BW Gas & Convenience Holdings, LLC, 1st Lien Term Loan, 11/18/2024(e) 1,544,836 1,546,767 3,580,200 Petco Animal Supplies, Inc., 1st Lien Term Loan, 3M LIBOR + 3.25%, Utilities 0.4% 4.25%, 01/26/2023 2,000,000 1,910,280 PG&E Corp., 1st Lien Term Loan, 3,457,047 3M LIBOR + 4.50%, 5.50%, 06/23/2025(e) 1,492,500 1,507,798 Software & Services 6.4% Total Senior Loans (Cost: $102,495,979) 105,071,975 Applied Systems, Inc., 2nd Lien Term Loan, 3M LIBOR + 7.00%, 8.00%, Corporate Bonds 68.9% 09/19/2025 3,750,000 3,764,062 Automobiles & Components 1.5% Cvent, Inc., 1st Lien Term Loan, 1M LIBOR + 3.75%, 3.90%, Adient U.S., LLC, 9.00%, 04/15/2025(d) 1,175,000 1,310,125 11/29/2024(e) 1,466,818 1,408,145 Ford Motor Co., 8.50%, 04/21/2023 1,920,000 2,160,979 Epicor Software Corp., 2nd Lien Term Ford Motor Co., 9.00%, 04/22/2025 1,625,000 1,992,266 Loan, 1M LIBOR + 7.75%, 8.75%, 07/31/2028 1,252,354 1,303,237 5,463,370 eResearch Technology, Inc., 1st Lien Term Loan, 1M LIBOR + 4.50%, Banks 0.3% 5.50%, 02/04/2027(e) 3,069,415 3,034,884 NMI Holdings, Inc., 7.38%, Huskies Parent, Inc., 1st Lien Term 06/01/2025(d) 1,140,000 1,276,800 Loan, 3M LIBOR + 4.00%, 4.18%, 07/31/2026(e) 2,024,595 2,014,472 Capital Goods 9.9% Hyland Software, Inc., 2nd Lien Term Clarios Global, LP, 8.50%, Loan, 1M LIBOR + 7.00%, 7.75%, 05/15/2027(d) 1,375,000 1,493,813 07/07/2025 1,540,000 1,548,978 8 Annual Report 2020


  • Page 11

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2020 Corporate Bonds (continued) Corporate Bonds (continued) Principal Principal Amount(a) Value(a) Amount(a) Value(a) Clarios Global, LP, (Canada), 6.75%, Diversified Financials 6.5% 05/15/2025(d) $1,675,000 $ 1,804,812 Algeco Global Finance Plc, (Great Core & Main Holdings, LP, 8.63%, Britain), 6.25%, 02/15/2023(c)(d) €2,000,000 $ 2,432,943 09/15/2024(d)(h) 2,500,000 2,556,250 Algeco Global Finance Plc, CP Atlas Buyer, Inc., 7.00%, (Great Britain), 8.00%, 02/15/2023(d) $2,000,000 2,037,500 12/01/2028(d) 307,000 319,280 CrownRock, LP, 5.63%, 10/15/2025(d) 1,495,000 1,526,739 Forterra Finance, LLC, 6.50%, Diebold Nixdorf Dutch Holding B.V., 07/15/2025(d) 3,000,000 3,225,000 (Netherlands), 9.00%, 07/15/2025 €1,700,000 2,252,228 Meritor, Inc., 6.25%, 06/01/2025(d) 2,500,000 2,700,000 Enviva Partners, LP, 6.50%, Navistar International Corp., 9.50%, 01/15/2026(d) $2,140,000 2,273,750 05/01/2025(d) 1,750,000 1,964,375 LBM Acquisition, LLC, 6.25%, PowerTeam Services, LLC, 9.03%, 01/15/2029(d) 538,000 555,485 12/04/2025(d) 6,119,302 6,808,397 Refinitiv U.S. Holdings, Inc., 8.25%, Specialty Building Products Holdings, 11/15/2026(d) 4,500,000 4,910,625 LLC, 6.38%, 09/30/2026(d) 4,500,000 4,768,830 Tallgrass Energy Partners, LP, 6.00%, SRS Distribution, Inc., 8.25%, 12/31/2030(d) 2,683,000 2,760,941 07/01/2026(d) 3,000,000 3,187,500 Tallgrass Energy Partners, LP, 7.50%, SSL Robotics, LLC, 9.75%, 10/01/2025(d) 1,511,000 1,631,260 12/31/2023(d) 2,637,000 2,979,810 Vertical Holdco GmbH, (Germany), TransDigm, Inc., 8.00%, 12/15/2025(d) 4,250,000 4,697,525 6.63%, 07/15/2028 €1,000,000 1,308,661 36,505,592 Vertical Holdco GmbH, (Germany), 7.63%, 07/15/2028(d) $2,000,000 2,180,000 Commercial & Professional Services 1.6% 23,870,132 Covanta Holding Corp., 5.88%, 07/01/2025 1,000,000 1,040,000 Energy 7.0% Covanta Holding Corp., 6.00%, EQT Corp., 6.13%, 02/01/2025 1,035,000 1,178,606 01/01/2027 925,000 971,571 EQT Corp., 7.00%, 02/01/2030 4,500,000 5,512,500 GFL Environmental, Inc., (Canada), EQT Midstream Partners, LP, 6.00%, 8.50%, 05/01/2027(d) 3,500,000 3,885,000 07/01/2025(d) 1,250,000 1,368,750 5,896,571 EQT Midstream Partners, LP, 6.50%, 07/01/2027(d) 1,250,000 1,407,544 Consumer Services 3.5% EQT Midstream Partners, LP, 6.50%, Caesars Entertainment, Inc., 6.25%, 07/15/2048 2,000,000 2,080,000 07/01/2025(d) 2,500,000 2,662,500 Exterran Energy Solutions, LP, 8.13%, Caesars Entertainment, Inc., 8.13%, 05/01/2025 1,500,000 1,252,500 07/01/2027(d) 1,275,000 1,411,454 Laredo Petroleum, Inc., 9.50%, Gems Menasa Cayman, Ltd., (Cayman 01/15/2025 2,500,000 2,187,500 Islands), 7.13%, 07/31/2026(d) 1,000,000 1,042,500 Laredo Petroleum, Inc., 10.13%, IRB Holding Corp., 7.00%, 01/15/2028 1,250,000 1,062,500 06/15/2025(d) 3,742,000 4,088,135 Occidental Petroleum Corp., 8.88%, MGM Resorts International, 6.75%, 07/15/2030 3,500,000 4,108,125 05/01/2025 3,000,000 3,247,200 Williams Cos., Inc., 8.75%, MGM Resorts International, 7.75%, 03/15/2032 4,000,000 5,851,365 03/15/2022 500,000 532,500 26,009,390 12,984,289 Annual Report 2020 9


  • Page 12

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2020 Corporate Bonds (continued) Corporate Bonds (continued) Principal Principal Amount(a) Value(a) Amount(a) Value(a) Food & Staples Retailing 1.6% Owens-Brockway Glass Container, Inc., 6.38%, 08/15/2025(d) $1,750,000 $ 1,938,125 Albertsons Cos., Inc., 7.50%, 03/15/2026(d) $1,500,000 $ 1,678,575 Owens-Brockway Glass Container, Inc., 6.63%, 05/13/2027(d) 2,172,000 2,351,190 Iceland Bondco, PLC, (Great Britain), 6.75%, 07/15/2024(d) £3,000,000 4,163,956 Trident TPI Holdings, Inc., 9.25%, 08/01/2024(d) 2,500,000 2,662,500 5,842,531 Tronox, Inc., 6.50%, 05/01/2025(d) 1,747,000 1,869,290 Food, Beverage & Tobacco 2.0% Venator Finance SARL, 5.75%, 07/15/2025(d) 1,138,000 1,064,030 Chobani, LLC, 7.50%, 04/15/2025(d) $1,000,000 1,048,600 Venator Finance SARL, (Luxembourg), Dole Food Co., Inc., 7.25%, 9.50%, 07/01/2025(d) 100,000 109,000 06/15/2025(d) 3,500,000 3,570,000 30,095,290 JBS USA LUX SA, 6.75%, 02/15/2028(d) 2,500,000 2,808,750 7,427,350 Media & Entertainment 4.8% Altice Financing S.A., (Luxembourg), Health Care Equipment & Services 1.1% 7.50%, 05/15/2026(d) 2,000,000 2,110,600 HCA, Inc., 7.69%, 06/15/2025 3,500,000 4,200,000 Belo Corp., 7.25%, 09/15/2027 6,000,000 6,900,000 Household & Personal Products 1.3% CSC Holdings, LLC, 7.50%, 04/01/2028(d) 3,500,000 3,937,500 CD&R Smokey Buyer, Inc., 6.75%, 07/15/2025(d) 2,500,000 2,671,875 Cumulus Media New Holdings, Inc., 6.75%, 07/01/2026(d) 1,189,000 1,215,752 Kronos Acquisition Holdings, Inc., 5.00%, 12/31/2026(d) 668,000 696,864 Diamond Sports Group, LLC, 6.63%, 08/15/2027(d) 2,306,000 1,395,130 Kronos Acquisition Holdings, Inc., 7.00%, 12/31/2027(d) 1,291,000 1,351,703 Gray Television, Inc., 7.00%, 05/15/2027(d) 2,000,000 2,190,000 4,720,442 17,748,982 Insurance 0.6% Pharmaceuticals, Biotechnology & Life Sciences 0.6% Acrisure, LLC, 8.13%, 02/15/2024(d) 750,000 794,036 Bausch Health Cos., Inc., (Canada), NFP Corp., 7.00%, 05/15/2025(d) 1,366,000 1,468,450 7.00%, 03/15/2024(d) 2,250,000 2,314,688 2,262,486 Real Estate 0.3% Materials 8.1% Brookfield Property REIT, Inc., 5.75%, Aruba Investments, Inc., 8.75%, 05/15/2026(d) 1,225,000 1,206,625 02/15/2023(d) 5,000,000 5,050,000 Retailing 1.8% Blue Cube Spinco, LLC, 9.75%, 10/15/2023 792,000 813,780 Burlington Coat Factory Warehouse Corp., 6.25%, 04/15/2025(d) 1,778,000 1,889,125 Crown Cork & Seal Co., Inc., 7.38%, 12/15/2026 4,350,000 5,296,125 L Brands, Inc., 6.63%, 10/01/2030(d) 1,000,000 1,112,500 First Quantum Minerals, Ltd., (Canada), L Brands, Inc., 6.88%, 07/01/2025(d) 1,250,000 1,357,225 6.88%, 10/15/2027(d) 2,500,000 2,712,500 L Brands, Inc., 9.38%, 07/01/2025 (d) 2,000,000 2,460,000 Intelligent Packaging, Ltd. Finco, Inc., 6,818,850 (Canada), 6.00%, 09/15/2028(d) 3,500,000 3,596,250 Kraton Polymers, LLC, 7.00%, Software & Services 2.9% 04/15/2025(d) 2,500,000 2,632,500 CommScope Technologies, LLC, 6.00%, 06/15/2025(d) 2,000,000 2,045,000 10 Annual Report 2020


  • Page 13

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2020 Corporate Bonds (continued) Corporate Bonds (continued) Principal Principal Amount(a) Value(a) Amount(a) Value(a) Leidos, Inc., 7.13%, 07/01/2032 $2,500,000 $ 3,373,875 Utilities 2.3% Sabre GLBL, Inc., 7.38%, 09/01/2025 1,860,000 (d) 2,018,100 NRG Energy, Inc., 6.63%, 01/15/2027 $ 335,000 $ 353,773 Solera, LLC, 10.50%, 03/01/2024(d) 3,000,000 3,108,750 NRG Energy, Inc., 7.25%, 05/15/2026 5,500,000 5,802,500 10,545,725 NSG Holdings, LLC, 7.75%, 12/15/2025(d) 2,240,842 2,375,293 Technology Hardware & Equipment 2.7% 8,531,566 Dell International, LLC, 6.02%, Total Corporate Bonds 06/15/2026(d) 2,350,000 2,866,871 (Cost: $239,588,501) 254,893,615 Dell International, LLC, 6.10%, 07/15/2027(d) 1,500,000 1,864,505 Collateralized Loan Obligations 45.8% (d)(f) Diebold Nixdorf, Inc., 9.38%, Collateralized Loan Obligations — Debt 30.1%(c) 07/15/2025(d) 2,427,000 2,718,240 AMMC CLO XI, Ltd., (Cayman Islands), Seagate HDD Cayman, (Cayman Islands), 3M LIBOR + 5.80%, 6.01%, 5.75%, 12/01/2034 2,000,000 2,357,100 04/30/2031 2,000,000 1,830,762 9,806,716 AMMC CLO XI, Ltd., (Cayman Islands), 3M LIBOR + 7.95%, 8.16%, 04/30/2031 500,000 403,264 Telecommunication Services 6.0% AMMC CLO XIV, Ltd., (Cayman Islands), Altice France Holding S.A., 3M LIBOR + 7.35%, 7.57%, (Luxembourg), 10.50%, 05/15/2027(d) 1,000,000 1,122,500 07/25/2029 1,250,000 1,193,253 Altice France S.A., (France), 7.38%, AMMC CLO XXII, Ltd., (Cayman Islands), 05/01/2026(d) 3,735,000 3,931,087 3M LIBOR + 5.50%, 5.72%, Altice France S.A., (France), 8.13%, 04/25/2031 3,000,000 2,741,592 02/01/2027(d) 769,000 847,830 Apidos CLO XX, Ltd., (Cayman Islands), Embarq Corp., 8.00%, 06/01/2036 4,444,000 5,481,452 3M LIBOR + 8.70%, 8.93%, 07/16/2031 850,000 723,650 Hughes Satellite Systems Corp., 7.63%, 06/15/2021 5,500,000 5,637,500 Atlas Senior Loan Fund VII, Ltd., (Cayman Islands), 3M LIBOR + 8.05%, Qwest Corp., 6.75%, 12/01/2021 1,750,000 1,830,763 8.28%, 11/27/2031 1,550,000 1,119,932 Sprint Corp., 7.63%, 03/01/2026 1,425,000 1,768,703 Bain Capital Credit CLO, Ltd. 2016-2, T-Mobile USA, Inc., 6.50%, (Cayman Islands), 3M LIBOR + 7.04%, 01/15/2026 1,500,000 1,552,500 7.28%, 01/15/2029 2,000,000 1,935,762 22,172,335 Bain Capital Credit CLO, Ltd. 2020-1, (Cayman Islands), 3M LIBOR + 8.25%, 8.47%, 04/18/2033 3,000,000 3,049,071 Transportation 2.5% Canyon Capital CLO, Ltd. 2018-1, Mileage Plus Holdings, LLC, 6.50%, (Cayman Islands), 3M LIBOR + 5.75%, 06/20/2027(d) 1,053,000 1,131,975 5.99%, 07/15/2031 750,000 689,186 Uber Technologies, Inc., 7.50%, Carlyle Global Market Strategies 05/15/2025(d) 3,000,000 3,240,660 CLO, Ltd. 2017-1, (Cayman Islands), Watco Cos., LLC, 6.50%, 06/15/2027(d) 2,000,000 2,165,000 3M LIBOR + 6.00%, 6.22%, 04/20/2031 3,000,000 2,676,147 XPO Logistics, Inc., 6.75%, 08/15/2024(d) 2,500,000 2,656,250 CBAM, Ltd. 2017-3, (Cayman Islands), 9,193,885 3M LIBOR + 6.50%, 6.72%, 10/17/2029 1,615,385 1,540,518 Cedar Funding CLO VIII, Ltd., (Cayman Islands), 3M LIBOR + 6.35%, 6.57%, 10/17/2030 2,000,000 1,938,384 Annual Report 2020 11


  • Page 14

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2020 Collateralized Loan Obligations(d)(f) (continued) Collateralized Loan Obligations(d)(f) (continued) Principal Principal Amount(a) Value(a) Amount(a) Value(a) CIFC Funding, Ltd. 2015-2A, LCM XXX, Ltd., (Cayman Islands), (Cayman Islands), 3M LIBOR + 6.81%, 3M LIBOR + 6.95%, 7.17%, 7.05%, 04/15/2030 $1,500,000 $ 1,501,184 04/20/2031 $1,200,000 $ 1,199,162 Crestline Denali CLO XIV, Ltd., Madison Park Funding XIV, Ltd., (Cayman Islands), 3M LIBOR + 6.35%, (Cayman Islands), 3M LIBOR + 7.77%, 6.56%, 10/23/2031 2,000,000 1,739,656 7.99%, 10/22/2030 2,500,000 2,093,203 Crestline Denali CLO XV, Ltd., Madison Park Funding XXVI, Ltd., (Cayman Islands), 3M LIBOR + 7.35%, (Cayman Islands), 3M LIBOR + 6.50%, 7.57%, 04/20/2030 3,875,000 3,566,178 6.71%, 07/29/2030 1,500,000 1,458,341 Denali Capital CLO XII, Ltd., Madison Park Funding XXXII, Ltd., (Cayman Islands), 3M LIBOR + 5.90%, (Cayman Islands), 3M LIBOR + 7.10%, 6.14%, 04/15/2031 5,000,000 4,195,290 7.32%, 01/22/2031 3,000,000 3,000,975 Dryden 26 Senior Loan Fund, Mariner CLO, LLC 2019 1A, (Cayman Islands), 3M LIBOR + 5.54%, (Cayman Islands), 3M LIBOR + 6.89%, 5.78%, 04/15/2029 2,000,000 1,896,582 7.10%, 04/30/2032 1,000,000 1,001,303 Dryden 40 Senior Loan Fund, Northwoods Capital XII-B, Ltd., (Cayman Islands), 3M LIBOR + 5.75%, (Cayman Islands), 3M LIBOR + 5.79%, 5.97%, 08/15/2031 3,000,000 2,826,177 6.00%, 06/15/2031 2,000,000 1,614,776 Dryden 45 Senior Loan Fund, Oaktree CLO, Ltd. 2014-1, (Cayman Islands), 3M LIBOR + 5.85%, (Cayman Islands), 3M LIBOR + 6.30%, 6.09%, 10/15/2030 3,000,000 2,883,732 6.52%, 05/13/2029 5,274,737 4,173,256 Dryden 68 Senior Loan Fund, Oaktree CLO, Ltd. 2019-2, (Cayman Islands), 3M LIBOR + 6.75%, (Cayman Islands), 3M LIBOR + 6.77%, 6.99%, 07/15/2032 1,250,000 1,251,671 7.01%, 04/15/2031 2,000,000 1,861,170 Elmwood CLO I, Ltd., Oaktree CLO, Ltd. 2019-4, (Cayman Islands), 3M LIBOR + 7.71%, (Cayman Islands), 3M LIBOR + 7.23%, 7.93%, 10/20/2033 3,000,000 3,059,205 7.45%, 10/20/2032 1,500,000 1,503,279 Elmwood CLO II, Ltd., OHA Credit Partners VII, Ltd., (Cayman Islands), 3M LIBOR + 6.80%, (Cayman Islands), 3M LIBOR + 7.50%, 7.02%, 04/20/2031 1,500,000 1,501,815 7.72%, 11/20/2027 2,850,000 2,853,238 Highbridge Loan Management, Ltd. OHA Credit Partners XI, Ltd., 2013-2, (Cayman Islands), (Cayman Islands), 3M LIBOR + 7.90%, 3M LIBOR + 8.25%, 8.47%, 8.12%, 01/20/2032 2,750,000 2,380,345 10/20/2029 2,250,000 1,879,018 OHA Credit Partners XII, Ltd., Highbridge Loan Management, Ltd. (Cayman Islands), 3M LIBOR + 5.45%, 2014-4, (Cayman Islands), 5.66%, 07/23/2030 1,500,000 1,411,734 3M LIBOR + 7.36%, 7.58%, OZLM XI, Ltd., (Cayman Islands), 01/28/2030 2,000,000 1,630,784 3M LIBOR + 7.00%, 7.21%, ICG U.S. CLO, Ltd. 2018-2, 10/30/2030 2,750,000 2,462,009 (Cayman Islands), 3M LIBOR + 5.75%, Silver Creek CLO, Ltd., 5.97%, 07/22/2031 1,200,000 1,076,528 (Cayman Islands), 3M LIBOR + 6.40%, INGIM, Ltd. 2013-3, (Cayman Islands), 6.62%, 07/20/2030 1,000,000 943,071 3M LIBOR + 5.90%, 6.12%, Steele Creek CLO, Ltd. 2015-1, 10/18/2031 2,750,000 2,531,427 (Cayman Islands), 3M LIBOR + 8.85%, 9.06%, 05/21/2029 3,000,000 2,380,590 LCM XVII, LP, (Cayman Islands), 3M LIBOR + 6.00%, 6.24%, Steele Creek CLO, Ltd. 2016-1, 10/15/2031 3,750,000 3,389,490 (Cayman Islands), 3M LIBOR + 5.75%, 5.97%, 06/15/2031 3,000,000 2,451,528 LCM XXIII, Ltd., (Cayman Islands), 3M LIBOR + 7.05%, 7.27%, TCI-Flatiron CLO, Ltd. 2018-1, 10/20/2029 3,000,000 2,761,026 (Cayman Islands), 3M LIBOR + 6.60%, 6.81%, 01/29/2032 3,000,000 2,941,695 12 Annual Report 2020


  • Page 15

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2020 Collateralized Loan Obligations(d)(f) (continued) Collateralized Loan Obligations(d)(f) (continued) Principal Principal Amount(a) Value(a) Amount(a) Value(a) TCI-Symphony CLO, Ltd. 2017-1, Carlyle Global Market Strategies (Cayman Islands), 3M LIBOR + 6.45%, CLO, Ltd. 2013-4, (Cayman Islands), 6.69%, 07/15/2030 $2,100,000 $ 2,016,723 15.42%, 01/15/2031 $1,259,000 $ 493,899 Venture XXIV CLO, Ltd., Carlyle Global Market Strategies (Cayman Islands), 3M LIBOR + 6.72%, CLO, Ltd. 2017-3, (Cayman Islands), 6.94%, 10/20/2028 700,000 629,838 07/20/2029 1,750,000 717,035 Venture XXVI CLO, Ltd., Carlyle Global Market Strategies (Cayman Islands), 3M LIBOR + 6.80%, CLO, Ltd. 2018-3, (Cayman Islands), 7.02%, 01/20/2029 1,000,000 854,606 7.51%, 10/15/2030 3,222,500 2,309,102 Venture XXVII CLO, Ltd., Cedar Funding CLO IV, Ltd., (Cayman Islands), 3M LIBOR + 6.35%, (Cayman Islands), 13.75%, 6.57%, 07/20/2030 2,025,000 1,762,100 07/23/2030 2,500,000 1,363,677 Venture XXVIII CLO, Ltd., Cedar Funding CLO V, Ltd., (Cayman Islands), 3M LIBOR + 6.16%, (Cayman Islands), 9.26%, 6.38%, 10/20/2029 4,000,000 3,527,980 07/17/2031 2,546,000 2,296,482 Venture XXXVI CLO, Ltd., Cedar Funding CLO VI, Ltd., (Cayman Islands), 3M LIBOR + 6.92%, (Cayman Islands), 12.24%, 7.14%, 04/20/2032 2,000,000 1,958,236 10/20/2028 2,000,000 1,188,642 Vibrant CLO X, Ltd., (Cayman Islands), Cedar Funding CLO VIII, Ltd., 3M LIBOR + 6.19%, 6.41%, (Cayman Islands), 2.40%, 10/20/2031 3,000,000 2,554,197 10/17/2030 2,000,000 1,127,418 Voya CLO, Ltd. 2015-3, CIFC Funding, Ltd. 2018-5A, (Cayman Islands), 3M LIBOR + 6.20%, (Cayman Islands), 18.52%, 6.42%, 10/20/2031 3,000,000 2,715,225 01/15/2032 375,000 277,377 Wellfleet CLO, Ltd. 2017-2, CIFC Funding, Ltd. 2020-3A, (Cayman Islands), 3M LIBOR + 6.75%, (Cayman Islands), 12.32%, 6.97%, 10/20/2029 2,000,000 1,896,864 10/20/2031 1,750,000 1,779,038 111,176,728 Crestline Denali CLO XVI, Ltd., (Cayman Islands), 01/20/2030 2,000,000 1,316,980 Collateralized Loan Obligations — Equity 15.7% Dryden 57 Senior Loan Fund, (Cayman Islands), 13.15%, AIMCO CLO XI, Ltd., (Cayman Islands), 05/15/2031 573,500 512,501 12.32%, 10/15/2031 1,881,020 1,843,277 Eaton Vance CLO 2018-1, Ltd., Allegro CLO V, Ltd. 2017-1A, (Cayman Islands), 38.50%, (Cayman Islands), 0.09%, 10/16/2030 2,000,000 1,132,948 10/15/2030 2,430,000 1,727,990 Allegro CLO VII, Ltd. 2018-2A, Halcyon Loan Advisors Funding, Ltd. (Cayman Islands), 8.09%, 07/15/2031 3,500,000 2,469,211 2017-1, (Cayman Islands), 1.74%, AMMC CLO XXI, Ltd., (Cayman Islands), 06/25/2029 1,750,000 744,271 6.72%, 11/02/2030 500,000 303,468 ICG U.S. CLO, Ltd. 2018-2, Atlas Senior Loan Fund I, Ltd., (Cayman Islands), 16.72%, (Cayman Islands), 11/17/2027 1,800,000 296,093 07/22/2031 3,500,000 2,779,889 Bain Capital Credit CLO, Ltd. 2020-2, LCM XIII, LP, (Cayman Islands), (Cayman Islands), 18.19%, 2.40%, 07/19/2027 2,175,000 456,426 07/21/2031 1,250,000 1,312,566 LCM XV, LP, (Cayman Islands), Bardot CLO, Ltd., (Cayman Islands), 10.99%, 07/20/2030 5,875,000 1,343,977 15.76%, 10/22/2032 500,000 471,140 LCM XXIII, LP, (Cayman Islands), Canyon Capital CLO, Ltd. 2019-1, 4.06%, 10/20/2029 3,100,000 935,223 (Cayman Islands), 9.31%, 04/15/2032 1,000,000 755,490 Madison Park Funding XII, Ltd., (Cayman Islands), 07/20/2026 4,000,000 565,612 Annual Report 2020 13


  • Page 16

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2020 Collateralized Loan Obligations(d)(f) (continued) Collateralized Loan Obligations(d)(f) (continued) Principal Principal Amount(a) Value(a) Amount(a) Value(a) Madison Park Funding XXII, Ltd., Venture XXX CLO, Ltd., (Cayman Islands), 12.32%, (Cayman Islands), 11.65%, 01/15/2033 $4,000,000 $ 3,120,568 01/15/2031 $2,100,000 $ 1,469,546 Madison Park Funding XXXI, Ltd., Vibrant CLO VI, Ltd., (Cayman Islands), 15.32%, (Cayman Islands), 06/20/2029 1,500,000 642,623 01/23/2048 2,000,000 1,741,418 Voya CLO, Ltd. 2017-2, Madison Park Funding XXXII, Ltd., (Cayman Islands), 4.11%, 06/07/2030 1,000,000 535,737 (Cayman Islands), 20.86%, Wellfleet CLO, Ltd. 2018-3, 01/22/2048 2,000,000 1,581,564 (Cayman Islands), 14.56%, Magnetite XXVIII, Ltd., 01/20/2032 3,000,000 2,232,738 (Cayman Islands), 12.32%, West CLO, Ltd. 2013-1, 10/25/2031 2,500,000 2,467,607 (Cayman Islands), 11/07/2025 500,000 35,000 Mariner CLO, Ltd. 2018-5A, 58,181,573 (Cayman Islands), 11.85%, 04/25/2031 2,567,500 1,973,671 Total Collateralized Loan Obligations Oaktree CLO, Ltd. 2015-1, (Cost: $185,391,945) 169,358,301 (Cayman Islands), 10/20/2027 4,000,000 1,137,928 Oaktree CLO, Ltd. 2018-1, Warrants 0.0% (d)(f)(j)(k) (Cayman Islands), 6.08%, 10/20/2030 4,250,000 2,746,108 Shares Value(a) OHA Credit Partners VII, Ltd., Media & Entertainment 0.0% (Cayman Islands), 1.97%, 11/20/2027 2,000,000 709,170 Affinion Holdings, Common Stock Warrants 7,874 — OHA Loan Funding, Ltd. 2016-1, (Cayman Islands), 15.28%, Total Warrants 01/20/2033 3,250,000 2,674,116 (Cost: $3,922,356) — OZLM XXI, Ltd. 2017-21A, Total Investments — 143.1% (Cayman Islands), 7.04%, (Cost: $531,398,781) $ 529,323,891 01/20/2031 1,750,000 1,062,847 Liabilities in Excess of Other Assets — (43.1%) (159,347,462) Signal Peak CLO 8, Ltd., Net Assets — 100.0% $ 369,976,429 (Cayman Islands), 12.32%, 04/20/2033(i) 4,000,000 3,531,200 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 and all principal amounts are shown in U.S. Dollars unless otherwise noted. (b) Variable rate loans bear interest at a rate that may be determined by reference to either the London Interbank Offered Rate (“LIBOR”) or an alternate base rate such as the Euro Interbank Offered Rate (“EURIBOR”) at the borrower’s option. Stated interest rates in this schedule represent the “all-in” rate as of December 31, 2020. (c) Variable rate coupon rate shown as of December 31, 2020. (d) All of Ares Dynamic Credit Allocation Fund, Inc. (the “Fund”) Senior Loans, Collateralized Loan Obligations, Warrants and Corporate Bonds exempt from registration under Rule 144A, which as of December 31, 2020 represented 120.7% of the Fund’s net assets or 79.9% of the Fund’s total assets, are subject to legal restrictions on sales. (e) This loan or a portion of this loan represents an unsettled loan purchase. The interest rate will be determined at the time of settlement and will be based upon a spread plus the applicable reference rate determined at the time of purchase. (f) Investments whose values were determined using significant unobservable inputs (Level 3) (See Note 3 of the Notes to Financial Statements). 14 Annual Report 2020


  • Page 17

    Ares Dynamic Credit Allocation Fund, Inc. Schedule of Investments (continued) December 31, 2020 (g) As of December 31, 2020, 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 Security draw loan commitments Less: drawn commitments commitments Ivanti Software, Inc. $250,000 $— $250,000 (h) Includes a Payment-In-Kind (“PIK”) provision. (i) When-Issued or delayed delivery security based on typical market settlement convention for such security. (j) Security valued at fair value using methods determined in good faith by or under the direction of the board of trustees. (k) Non-income producing security as of December 31, 2020. As of December 31, 2020, the aggregate cost of securities for Federal income tax purposes was $531,718,734. Unrealized appreciation and depreciation on investments for Federal income tax purposes are as follows: Gross unrealized appreciation $ 22,911,889 Gross unrealized depreciation (25,782,177) Net unrealized depreciation $ (2,870,288) 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 £ British Pounds $ U.S. Dollars Annual Report 2020 15


  • Page 18

    Ares Dynamic Credit Allocation Fund, Inc. Statement of Assets and Liabilities December 31, 2020 Assets: Investments, at value (cost $531,398,781) $529,323,891 Cash 2,640,692 Cash denominated in foreign currency, at value (cost $6,134,850) 6,166,716 Receivable for securities sold 10,822,939 Interest and principal receivable 6,834,617 Deferred debt issuance costs 180,645 Other assets 153,059 Total assets 556,122,559 Liabilities: Line of credit outstanding 162,593,714 Payable for securities purchased 22,427,127 Payable for investment advisory fees 440,913 Interest and commitment fee payable 160,996 Accrued expenses and other payables 523,380 Total liabilities 186,146,130 Commitments and contingencies (Note 2) Net assets $369,976,429 Net assets consist of: Paid-in capital $441,377,933 Distributable earnings accumulated loss (71,401,504) Net assets $369,976,429 Common shares: Net assets $369,976,429 Shares outstanding (authorized 1 billion shares of $0.001 par value) 22,914,939 Net asset value per share $16.15 16 Annual Report 2020


  • Page 19

    Ares Dynamic Credit Allocation Fund, Inc. Statement of Operations For the year ended December 31, 2020 Investment income: Interest $36,864,458 Expenses: Investment advisory fees (Note 6) 4,741,535 Interest and credit facility fees (Note 5) 2,328,285 Administrative services of the adviser (Note 6) 800,000 Administration, custodian and transfer agent fees (Note 6) 378,502 Investor support fees (Note 6) 332,328 Other expenses 818,255 Total expenses 9,398,905 Tax expense (Note 2) 190,000 Net expenses 9,588,905 Net investment income 27,275,553 Net realized and unrealized gain/(loss) on investments and foreign currency Net realized losses on investments (31,135,242) Net realized gains on foreign currency 316,671 Net unrealized gains on investments 12,448,172 Net unrealized losses on foreign currency (1,527,250) Net realized and unrealized losses on investments and foreign currency (19,897,649) Net increase in net assets resulting from operations $7,377,904 Annual Report 2020 17


  • Page 20

    Ares Dynamic Credit Allocation Fund, Inc. Statements of Changes in Net Assets For the Year Ended For the Period Ended For the Year Ended December 31, 2020 December 31, 2019(a) October 31, 2019 Increase (decrease) in net assets from operations: Net investment income $27,275,553 $3,937,469 $31,771,646 Net realized losses on investments and foreign currency (30,818,571) (285,432) (9,491,193) Net unrealized gains/(losses) on investments and foreign currency 10,920,922 15,089,388 (17,716,274) Net increase from operations 7,377,904 18,741,425 4,564,179 Distributions to shareholders from (Note 2): Distributable earnings (27,497,927) (4,926,712) (29,565,391) Increase (decrease) in net assets from operations and distributions (20,120,023) 13,814,713 (25,001,212) Share transactions: Cost of shares repurchased (Note 4) — — (673,460) Net increase (decrease) from share transactions — — (673,460) Total increase (decrease) in net assets (20,120,023) 13,814,713 (25,674,672) Net Assets, beginning of period 390,096,452 376,281,739 401,956,411 Net Assets, end of period $369,976,429 $390,096,452 $376,281,739 (a) For the two month period ended December 31, 2019. See Note 1 of Notes to Financial Statements. 18 Annual Report 2020


  • Page 21

    Ares Dynamic Credit Allocation Fund, Inc. Statement of Cash Flows For the year ended December 31, 2020 Operating Activities: Net increase in net assets resulting from operations $7,377,904 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Purchases of investments (610,597,384) Proceeds from the sale of investments 614,063,968 Amortization and accretion of discounts and premiums, net 1,355,876 Net realized (gains)/losses on investments 31,135,242 Net unrealized (gains)/losses on investments (12,448,172) Effect of exchange rate changes on line of credit 1,310,838 Amortization of debt issuance cost (179,421) Changes in operating assets and liabilities: Receivable for securities sold (3,008,890) Interest and principal receivable 576,087 Prepaid expenses 46,568 Payable for securities purchased 4,608,637 Payable for investment advisory fees (17,373) Interest and commitment fee payable (208,986) Accrued expenses and other fees (118,573) Net cash provided by operating activities 33,896,321 Financing Activities: Borrowings on line of credit 220,738,723 Paydowns on line of credit (222,772,165) Deferred debt issuance costs 192,135 Distributions paid to common shareholders (27,497,927) Net cash used in financing activities (29,339,234) Net increase in Cash 4,557,087 Cash: Beginning of period 4,250,321 End of period $8,807,408 Supplemental disclosure of cash flow information: Cash paid for interest during the period $2,357,850 Cash paid for taxes during the period 180,838 Annual Report 2020 19


  • Page 22

    Ares Dynamic Credit Allocation Fund, Inc. Financial Highlights For the For the For the For the For the For the Year Ended Period Ended Year Ended Year Ended Year Ended Year Ended December 31, December 31, October 31, October 31, October 31, October 31, 2020 2019* 2019 2018 2017 2016 Per share data: Net asset value, beginning of period $17.02 $16.42 $17.50 $18.00 $17.04 $16.95 Income from investment operations: Net investment income 1.19 0.17 1.39 1.35 1.33 1.23 Net realized and change in unrealized gain (loss) (0.86) 0.65 (1.18) (0.56) 0.87 0.16 Total increase (decrease) from investment operations 0.33 0.82 0.21 0.79 2.20 1.39 Less distributions declared to shareholders: From net investment income (1.20) (0.22) (1.29) (1.29) (1.24) (1.23) From return of capital — — — — — (0.07) Total distributions declared to shareholders (1.20) (0.22) (1.29) (1.29) (1.24) (1.30) Net asset value common shares, end of period $16.15 $17.02 $16.42 $17.50 $18.00 $17.04 Market value common shares, end of period $14.29 $15.35 $14.48 $14.97 $16.45 $14.70 Net asset value total return(a) 3.00% 4.99%(b) 1.23% 4.47% 13.33% 8.98% Market value total return(c) 2.33% 7.53%(b) 5.49% (1.43)% 20.91% 12.47% Ratios to average net assets/supplemental data: Net assets, end of period $369,976,429 $390,096,452 $376,281,739 $401,956,411 $413,385,894 $391,787,051 Expenses, inclusive of interest expense and amortization of debt issuance 2.83% 3.36%(d) 3.37% 3.20% 2.90% 2.96% Expenses, exclusive of interest expense and amortization of debt issuance 2.17% 2.20%(d) 2.03% 2.02% 2.08% 2.34% Net investment income 8.04% 6.15% (d) 8.16% 7.54% 7.52% 7.68% Portfolio turnover rate 127.09% 11.70%(b) 78.40% 82.47% 84.35% 92.30% * For the two month period ended December 31, 2019. See Note 1 of Notes to Financial Statements. (a) 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. (b) Not annualized. (c) 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. (d) Annualized. 20 Annual Report 2020


  • Page 23

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements December 31, 2020 (1) Organization October 31 to December 31. Accordingly, the Fund’s financial statements and related notes include information as of and for Ares Dynamic Credit Allocation Fund, Inc. (NYSE: ARDC) the year ended December 31, 2020, the two month period (“ARDC” or “Fund”) is a corporation incorporated under the ended December 31, 2019 and the year ended October 31, laws of the State of Maryland and registered with the U.S. 2019. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940, as amended (the “Investment (2) Significant Accounting Policies Company Act”), as a closed-end, diversified, management investment company, and intends to qualify each year to be Basis of Presentation treated as a Regulated Investment Company (“RIC”), under The accompanying financial statements have been prepared on Subchapter M of the Internal Revenue Code of 1986, as an accrual basis of accounting in conformity with U.S. amended (“the Code”). The Fund commenced operations on generally accepted accounting principles (“GAAP”), and November 27, 2012. Ares Capital Management II LLC (the includes the accounts of the Fund. The Fund is an investment “Adviser”) was registered as a Registered Investment Adviser company following accounting and reporting guidance in with the SEC on June 9, 2011 and serves as the investment Financial Accounting Standards Board (“FASB”) Accounting adviser to the Fund. Standards Codification (“ASC”) Topic 946, Financial Services — Investment Companies. The Adviser makes Investment Objective and Policies estimates and assumptions that affect the reported amounts The Fund’s investment objective is to seek an attractive risk and disclosures in the financial statements. Actual results may adjusted level of total return, primarily through current differ from those estimates and such differences may be income and, secondarily, through capital appreciation. The material. The Fund reclassified certain prior period amounts in Fund seeks to achieve its investment objective by investing the accompanying consolidated balance sheet. These primarily in a broad, dynamically managed portfolio of reclassifications had no impact on prior periods’ net earnings (i) senior secured loans (“Senior Loans”) made primarily to or net assets. companies whose debt is rated below investment grade, (ii) corporate bonds (“Corporate Bonds”) that are primarily Investments Valuation high yield issues rated below investment grade, (iii) other All investments in securities are recorded at their fair value. fixed-income instruments of a similar nature that may be See Note 3 for more information on the Fund’s valuation represented by derivatives, and (iv) securities issued by process. entities commonly referred to as collateralized loan Interest Income obligations (“CLOs”) and other asset-backed securities. The Fund’s investments in CLOs may include investments in Interest income is recorded on the accrual basis to the extent subordinated tranches of CLO securities. The Adviser will that such amounts are expected to be collected and adjusted dynamically allocate the Fund’s portfolio among investments for accretion of discounts and amortization of premiums. The in the various targeted credit markets, to seek to manage Fund may have investments that contain payment-in-kind interest rate and credit risk and the duration of the Fund’s (“PIK”) provisions. The PIK interest, computed at the portfolio. Under normal market conditions, the Fund will not contractual rate specified, may be added to the principal invest more than (i) 45% of its Managed Assets in CLOs and balance and recorded as interest income. All interest for the other asset-backed securities, or (ii) 15% of its Managed year ended December 31, 2020 was recorded as cash. Assets in subordinated (or residual) tranches of CLO Discounts and Premiums securities. Prior to July 2020, the Fund could not invest more than (i) 40% of its Managed Assets in CLOs and other Discounts and premiums on securities purchased are asset-backed securities, or (ii) 10% of its Managed Assets in accreted/amortized over the life of the respective security subordinated (or residual) tranches of CLO securities. using the effective interest method. The adjusted cost of “Managed Assets” means the total assets of the Fund investments represents the original cost adjusted for the (including any assets attributable to any preferred shares that accretion of discounts, amortization of premiums, and PIK may be issued or to indebtedness) minus the Fund’s liabilities interest. other than liabilities relating to indebtedness. Cash and Cash Equivalents Fiscal Year End Change The Fund considers all highly liquid investments with original On September 25, 2019, the Fund’s board of directors maturities of 90 days or less to be cash equivalents. The Fund’s approved a change to the fiscal year end of the Fund from cash and cash equivalents are maintained with a major United States financial institution, which is a member of the Federal Annual Report 2020 21


  • Page 24

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 Deposit Insurance Corporation. While the Fund’s current cash Dividends to Shareholders balance exceeds insurance limits, the risk of loss is remote. The Fund intends to make regular monthly cash distributions Investment Transactions, Related Investment of all or a portion of its net investment income available to Income and Expenses common shareholders. The Fund intends to pay common shareholders at least annually all or substantially all of its net Investment transactions are accounted for on the trade date. investment income. The Fund intends to pay any capital gains Interest income, adjusted for amortization of premiums and distributions at least annually. Dividends to shareholders are accretion of discounts on investments, is earned from recorded on the ex-dividend date. settlement date and is recorded on the accrual basis. Realized gains and losses are reported on the specific identification The distributions for any full or partial year might not be made method. Expenses are recorded on the accrual basis as in equal amounts, and one distribution may be larger than incurred. another. The Fund will make distributions only if authorized by its board of directors and declared by the Fund out of assets Foreign Currency Transactions legally available for these distributions. The Fund may pay a Amounts denominated in foreign currencies are translated into special distribution at the end of each calendar year. This U.S. dollars on the following basis: (i) investments and other distribution policy may, under certain circumstances, have assets and liabilities denominated in foreign currencies are certain adverse consequences to the Fund and its shareholders translated into U.S. dollars based upon currency exchange because it may result in a return of capital to shareholders, rates effective on the date of valuation; and (ii) purchases and which would reduce the Fund’s net asset value and, over time, sales of investments and income and expense items potentially increase the Fund’s expense ratios. If the Fund denominated in foreign currencies are translated into U.S. distributes a return of capital, it means that the Fund is dollars based upon currency exchange rates prevailing on returning to shareholders a portion of their investment rather transaction dates. than making a distribution that is funded from the Fund’s The Fund does not isolate that portion of the results of earned income or other profits. The board of directors may operations resulting from the changes in foreign exchange elect to change the Fund’s distribution policy at any time. rates on investments from fluctuations arising from changes in Commitments and Contingencies market prices of securities held. Such fluctuations are included In the normal course of business, the Fund’s investment within the net realized and unrealized gain (loss) on activities involve executions, settlement and financing of investments in the Statement of Operations. various transactions resulting in receivables from, and Reported net realized foreign exchange gains or losses arise payables to, brokers, dealers and the Fund’s custodian. These from sales of foreign currencies, currency gains or losses activities may expose the Fund to risk in the event that such realized between the trade and settlement dates of securities parties are unable to fulfill contractual obligations. transactions, and the difference between the amounts of Management does not anticipate any material losses from income and expense items recorded on the Fund’s books and counterparties with whom it conducts business. Consistent the U.S. dollar equivalent of the amounts actually received or with standard business practice, the Fund enters into contracts paid. Net unrealized foreign currency gains and losses arise that contain a variety of indemnifications, and is engaged from from the changes in fair values of assets and liabilities, other time to time in various legal actions. The maximum exposure than investments in securities at period end, resulting from of the Fund under these arrangements and activities is changes in exchange rates. unknown. However, the Fund expects the risk of material loss Investments in foreign companies and securities of foreign to be remote. governments may involve special risks and considerations not Commitments to extend credit include loan proceeds the Fund typically associated with investing in U.S. companies and is obligated to advance, such as delayed draws or revolving securities of the U.S. government. These risks include, among credit arrangements. Commitments generally have fixed other things, revaluation of currencies, less reliable expiration dates or other termination clauses. Unrealized gains information about issuers, different transaction clearance and or losses associated with unfunded commitments are recorded settlement practices, and potential future adverse political and in the financial statements and reflected as an adjustment to the economic developments. Moreover, investments in foreign fair value of the related security in the Schedule of Investments. companies and securities of foreign governments and their The par amount of the unfunded commitments is not recognized markets may be less liquid and their prices more volatile than by the Fund until it becomes funded. As of December 31,2020, those of comparable U.S. companies and the U.S. government. the Fund had unfunded commitments of $250,000. 22 Annual Report 2020


  • Page 25

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 Income Taxes As of December 31, 2020, the components of accumulated earnings (deficit) on a tax basis were as follows: The Fund intends to distribute all or substantially all of its taxable income and to comply with the other requirements of Undistributed ordinary income $ 4,878,884 the Code, as amended, applicable to RICs. Accordingly, no Undistributed capital gains — provision for U.S. federal income taxes is required. Accumulated capital and other losses (74,325,167) The Fund may elect to incur an excise tax if it is deemed Net unrealized appreciation (depreciation) (1,955,221) prudent by its board of directors from a cash management Total accumulated deficit $(71,401,504) perspective or in the best interest of shareholders due to other facts and circumstances. For the year ended December 31, As of December 31, 2020, the Fund had capital loss 2020, the Fund incurred U.S. federal excise tax of $190,000. carryovers as indicated below. The capital loss carryovers are available to offset future realized capital gains to the extent As of December 31, 2020, which is the end of the Fund’s provided in the Code and regulations promulgated thereunder. taxable year, the Fund had no uncertain tax positions that would require financial statement recognition, derecognition, No Expiration Short-Term(1) No Expiration Long-Term(1) or disclosure. The Fund files a U.S. federal income tax return $14,978,890 $59,346,277 annually after its fiscal year-end, which is subject to (1) On December 22, 2010, the Regulated Investment Company examination by the Internal Revenue Service for a period of Modernization Act of 2010 (the “Modernization Act”) was signed into law. The Modernization Act modifies several of the federal income and three years from the date of filing. excise tax provisions related to RICs. Under the Modernization Act, new capital losses may now be carried forward indefinitely, and retain the Net investment income and net realized gains and losses may character of the original loss as compared with pre-enactment law differ for financial statement and tax purposes because of where capital losses could be carried forward for eight years, and temporary or permanent book/tax differences. These carried forward as short-term capital losses, irrespective of the character of the original loss. These losses without expiration must be differences are primarily due to differing treatments for used prior to the loss layers with expiration. foreign currency gains and losses, distributions, excise taxes, pay down gains and losses and losses due to wash sales, and During the year ended December 31, 2020, the Fund did not qualified electing fund (“QEF”) income and capital gains. To utilize capital loss carryforwards. the extent these differences are permanent, reclassifications ASC 740, Income Taxes, provides guidance for how uncertain are made to the appropriate capital accounts in the fiscal tax positions should be recognized, measured, presented, and period that the differences arise. On the Statement of Assets disclosed in the financial statements. The Fund has evaluated and Liabilities, the following reclassifications were made as of the implications of ASC 740 for all open tax years, and have December 31, 2020: determined there is no impact to the Fund’s financial statements as of December 31, 2020. The Fund’s federal and Additional paid-in capital/(reduction) $(190,000) state income returns for which the applicable statutes of Distributable earnings accumulated loss 190,000 limitations have not expired remain subject to examination by The characterization of distributions made during the fiscal the Internal Revenue Service and states department of period from net investment income or net realized gains may revenue. differ from its ultimate characterization for federal income tax All penalties and interest associated with income taxes, if any, purposes. In addition, due to the timing of dividend are included in other expenses in the Statement of Operations. distributions, the fiscal period in which amounts are There were no penalties and interest incurred by the Fund for distributed may differ from the fiscal period that the income or the current fiscal year. realized gains or losses were recorded by the Fund. Deferred Debt Issuance Costs The characterization of distributions paid during the year Debt issuance costs are amortized over the life of the related ended December 31, 2020, the period ended December 31, revolving credit facility using the straight line method. 2019, and the year ended October 31, 2019 were as follows: December 31, December 31, October 31, Recent Accounting Pronouncement 2020 2019 2019 In March 2020, the Financial Accounting Standards Board Ordinary income $27,497,927 $4,926,712 $29,565,391 (“FASB”) issued Accounting Standards Update (“ASU”) Capital gain — — No. 2020-04, “Reference Rate Reform (Topic 848),” which Return of capital — — provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other Annual Report 2020 23


  • Page 26

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 transactions affected by reference rate reform if certain criteria that market participants would use in pricing the asset or are met. The amendments apply only to contracts, hedging liability, including assumptions about risk, for example, the relationships, and other transactions that reference LIBOR or risk inherent in a particular valuation technique used to another reference rate expected to be discontinued because of measure fair value (such as a pricing model) and/or the risk reference rate reform. ASU 2020-04 is effective for all entities inherent in the inputs to the valuation technique. as of March 12, 2020 through December 31, 2022. The Inputs may be observable or unobservable. Observable inputs expedients and exceptions provided by the amendments do not are inputs that reflect the assumptions market participants apply to contract modifications and hedging relationships would use in pricing the asset or liability based on market data entered into or evaluated after December 31, 2022, except for obtained from sources independent of the reporting entity. hedging transactions as of December 31, 2022, that an entity Unobservable inputs are inputs that reflect the reporting has elected certain optional expedients for and that are entity’s own assumptions about the assumptions market retained through the end of the hedging relationship. The Fund participants would use in pricing the asset or liability based on is currently evaluating the impact of adopting ASU 2020-04 the best information available in the circumstances. The three- on the Fund’s consolidated financial statements. tier hierarchy of inputs is summarized in the three broad levels In October 2020, FASB issued Accounting Standards Update listed below. No. 2020-08 (“ASU 2020-08”), “Receivables — • Level 1 — Valuations based on quoted prices in active Nonrefundable Fees and Other Costs (Codification markets for identical assets or liabilities that the Fund Improvements Subtopic 310-20), Premium Amortization on has the ability to access. Purchased Callable Debt Securities”. ASU 2020-08 is an update of ASU No. 2017-08, which amends the amortization • Level 2 — Valuations based on quoted prices in markets period of certain purchased callable debt securities held at a that are not active or which all significant inputs are premium. ASU 2020-08 updates the amortization period for observable either directly or indirectly. callable debt securities to be amortized to the next call date. • Level 3 — Valuations based on inputs that are For purposes of this update, the next call date is the first date unobservable and significant to the overall fair value when a call option at a specified price becomes exercisable. measurement. Once that date has passed, the next call date is when the next In addition to using the above inputs in investment valuations, call option at a specified price becomes exercisable, if the Fund continues to employ a valuation policy that is applicable. The amendments are effective for fiscal years, and consistent with the provisions of ASC 820. Consistent with the interim periods within those fiscal years, beginning after Fund’s valuation policy, the Fund evaluates the source of December 15, 2020. Management has evaluated and adopted inputs, including any markets in which the Fund’s investments the disclosure requirements and the impact is reflected within are trading (or any markets it evaluates in which securities the Funds’ financial statements. with similar attributes are trading), in determining fair value. (3) Investments The Fund’s valuation policy considers the fact that because there may not be a readily available market value for the Fair Value Measurements 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 The investments classified as Level 1 or Level 2 are typically among other matters, requires enhanced disclosures about valued based on quoted market prices, forward foreign investments that are measured and reported at fair value. This exchange rates, dealer quotations or alternative pricing sources standard defines fair value and establishes a hierarchal supported by observable inputs. The Adviser obtains prices disclosure framework, which prioritizes and ranks the level of from independent pricing services which generally utilize market price observability used in measuring investments at broker quotes and may use various other pricing techniques fair value and expands disclosures about assets and liabilities which take into account appropriate factors such as yield, measured at fair value. ASC 820 defines “fair value” as the quality, coupon rate, maturity, type of issue, trading price that would be received to sell an asset or paid to transfer characteristics and other data. The Adviser is responsible for a liability in an orderly transaction between market all inputs and assumptions related to the pricing of securities. participants at the measurement date. The hierarchal The Adviser has internal controls in place that support its disclosure framework establishes a three-tier hierarchy to reliance on information received from third-party pricing maximize the use of observable data and minimize the use of sources. As part of its internal controls, the Adviser obtains, unobservable inputs. Inputs refer broadly to the assumptions 24 Annual Report 2020


  • Page 27

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 reviews, and tests information to corroborate prices received the enterprise at a point in time. The primary method for from third-party pricing sources. For any security, if market or determining EV uses a multiple analysis whereby appropriate dealer quotations are not readily available, or if the Adviser multiples are applied to the portfolio company’s EBITDA determines that a quotation of a security does not represent a (generally defined as net income before net interest expense, fair value, then the security is valued at a fair value as income tax expense, depreciation and amortization). EBITDA determined in good faith by the Adviser and will be classified multiples are typically determined based upon review of as Level 3. In such instances, the Adviser will use valuation market comparable transactions and publicly traded techniques consistent with the market or income approach to comparable companies, if any. The Fund may also employ measure fair value and will give consideration to all factors other valuation multiples to determine EV, such as revenues. which might reasonably affect the fair value. The second method for determining EV uses a discounted Senior loans and corporate debt: The fair value of Senior cash flow analysis whereby future expected cash flows of the Loans and Corporate Bonds is estimated based on quoted portfolio company are discounted to determine a present value market prices, forward foreign exchange rates, dealer using estimated discount rates (typically a weighted average quotations or alternative pricing sources supported by cost of capital based on costs of debt and equity consistent observable inputs and are generally classified within Level 2 with current market conditions). The EV analysis is performed or 3. The Adviser obtains prices from independent pricing to determine the value of equity investments, the value of debt services which generally utilize broker quotes and may use investments in portfolio companies where the Fund has various other pricing techniques which take into account control or could gain control through an option or warrant appropriate factors such as yield, quality, coupon rate, security, and to determine if there is credit impairment for debt maturity, type of issue, trading characteristics and other data. investments. If debt investments are credit impaired, an EV If the pricing services are only able to obtain a single broker analysis may be used to value such debt investments; however, quote or utilize a pricing model the securities will be in addition to the methods outlined above, other methods such classified as Level 3. If the pricing services are unable to as a liquidation or wind down analysis may be utilized to provide prices, the Adviser will attempt to obtain one or more estimate enterprise value. broker quotes directly from a dealer and price such securities The following is a summary of inputs used as of December 31, at the last bid price obtained; such securities are classified as 2020 in valuing the Fund’s investments carried at fair value: Level 3. Level 2 — Collateralized loan obligations: The fair value of CLOs is Other Level 3 — Level 1 — Significant Significant estimated based on various valuation models from third-party Quoted Observable Unobservable pricing services as well as internal models. The valuation Prices ($) Inputs ($) Inputs ($) Total ($) models generally utilize discounted cash flows and take into Senior Loans — 89,397,198 15,674,777 105,071,975 consideration prepayment and loss assumptions, based on Corporate historical experience and projected performance, economic Bonds — 254,893,615 — 254,893,615 factors, the characteristics and condition of the underlying Collateralized collateral, comparable yields for similar securities and recent Loan trading activity. These securities are classified as Level 3. Obligations — — 169,358,301 169,358,301 Warrants — — — — Common stock and warrants: The fair value of common stock Total and warrants are estimated using either broker quotes or an Investments — 344,290,813 185,033,078 529,323,891 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 of the values of debt and equity securities used to capitalize determining fair value. Annual Report 2020 25


  • Page 28

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 For the year ended December 31, 2020: Collateralized Senior Loan Common Preferred Loans ($) Obligations ($) Warrants ($) Stocks ($) Stocks ($) Total ($) Balance as of December 31, 2019 15,596,819 179,580,301 — — — 195,177,120 Purchases(a) 14,828,001 27,602,862 — — — 42,430,863 Sales and principal redemptions (13,174,999) (27,977,900) — — — (41,152,899) Net realized and unrealized gains (losses) (757,422) (10,085,287) — — — (10,842,709) Accrued discounts/(premiums) 27,830 238,325 — — — 266,155 Transfers in to Level 3 1,980,000 — — — — 1,980,000 Transfers out of Level 3 (2,825,452) — — — — (2,825,452) Balance as of December 31, 2020 15,674,777 169,358,301 — — — 185,033,078 Net change in unrealized appreciation/(depreciation) from investments held at December 31, 2020 284,601 (5,718,536) — — — (5,433,935) (a) Purchases include PIK interest and securities received from restructure. Investments were transferred into and out of Level 3 and out of and into Level 2 during the year ended December 31, 2020 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, 2020 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 Type ($) Technique Input Range Average Senior Loans 15,674,777 Broker Quotes and/or 3rd N/A N/A N/A Party Pricing Services Collateralized Loan Obligations 169,358,301 Broker Quotes and/or 3rd N/A N/A N/A Party Pricing Services Warrants — Enterprise Value Analysis — EBITA 10x 10x Adjusted NAV Total Level 3 Investments 185,033,078 (4) Common Stock determine from time to time) from the net asset value of the shares. The Fund is not required to effect common share Common share transactions were as follows: repurchases. Any such purchases of Fund shares of common For the Year Ended December 31, 2020 stock may not materially impact the discount of the market Shares Amount ($) price of the Fund’s shares of common stock relative to their Common shares outstanding — net asset value and any narrowing of this discount that does beginning of period 22,914,939 429,112,863 result may not be maintained. There were no shares Common shares issued — — repurchased during the year ended December 31, 2020. Common shares redeemed — — (5) Credit Facility Common shares outstanding — end of period 22,914,939 429,112,863 The Fund is a party to a senior secured revolving credit facility (as amended, the “Credit Facility”), which allows for The board of directors has authorized the repurchase of shares the Fund to borrow up to $212 million at any one time of the Fund’s outstanding common stock on the open market at outstanding. The Credit Facility maturity date is June 8, 2022. the Fund management’s discretion when shares of the common Under the Credit Facility, the Fund is required to comply with stock are trading on the NYSE at a discount of 10% or more various covenants, reporting requirements and other (or such other percentage as the board of directors may customary requirements for similar revolving credit facilities, 26 Annual Report 2020


  • Page 29

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 including, without limitation, covenants related to: purchase, the Fund has an asset coverage (on its indebtedness) (a) limitations on the incurrence of additional indebtedness of at least 300% after deducting the amount of such and liens, (b) limitations on certain investments, (c) limitations distribution or purchase price, as applicable. For non-public on certain restricted payments, and (d) maintaining a ratio of indebtedness issued by the Fund (for example, the Credit total assets (less total liabilities other than indebtedness) to Facility), the Fund may be able to continue to pay distributions total indebtedness of the Fund of not less than 3:1.0. These on its capital stock or purchase its capital stock even if the covenants are subject to important limitations and exceptions asset coverage ratio on its indebtedness falls below 300%. As that are described in the documents governing the Credit of December 31, 2020, the Fund’s asset coverage was 328%. Facility. Amounts available to borrow under the Credit Facility (and the incurrence of certain other permitted debt) are also (6) Investment Advisory and Other subject to compliance with a borrowing base that applies Agreements different advance rates to different types of assets in the The Adviser is registered as an investment adviser under the Fund’s portfolio that are pledged as collateral. As of Investment Advisers Act of 1940, as amended (the “Advisers December 31, 2020, the Fund was in compliance in all Act”). The Adviser is an affiliate of Ares Management material respects with the terms of the Credit Facility. Corporation (“Ares”) and leverages Ares’ entire investment As of December 31, 2020, there was $162,593,714 platform and benefits from the significant capital markets, outstanding under the Credit Facility. Loans under the Credit trading and research expertise of all of Ares’ investment Facility generally bear interest at the applicable LIBOR rate professionals. plus 0.95%. Unused portions of the Credit Facility accrue a The Adviser provides certain investment advisory and commitment fee equal to an annual rate of 0.15%. The fair administrative services to the Fund pursuant to the investment value of the Fund’s borrowings under the Credit Facility advisory agreement with the Fund (“Investment Advisory approximates the carrying amount presented in the Agreement”). Pursuant to its Investment Advisory Agreement, accompanying Statement of Assets and Liabilities at cost for the Fund has agreed to pay the Adviser a management fee at the remaining maturity for which the Fund has determined an annual rate of 1.00% of the average daily value of the would be categorized as Level 2 in the fair value hierarchy. Fund’s total assets (including any assets attributable to any For the year ended December 31, 2020 the components of preferred shares that may be issued or to indebtedness) minus interest and unused commitment fees expense, average stated the Fund’s liabilities other than liabilities relating to interest rates (i.e., rate in effect plus the spread) and average indebtedness (“Managed Assets”). The management fees outstanding balances for the Credit Facility were as follows: incurred by the Fund for the year ended December 31, 2020 For the Year Ended were $4,741,535. December 31, 2020 ($) In addition to advisory services, the Adviser and its affiliates provide certain administrative services to the Fund at the Stated interest expense 2,031,459 Fund’s request. Under the Investment Advisory Agreement, Unused commitment fees 117,405 the Adviser may seek reimbursement from the Fund for the Total interest and credit facility fees expense 2,148,864 costs of these administrative services provided to the Fund by Annualized average stated interest rate 1.50% the Adviser and its affiliates. The Fund incurred such Average outstanding balance 135,385,813 administrative costs of $800,000 for the year ended Amortization of debt issuance costs 179,421 December 31, 2020. The Fund has engaged State Street Bank and Trust Company Under the Investment Company Act, the Fund is not permitted (“State Street”) to serve as the Fund’s administrator, custodian to incur indebtedness, including through the issuance of debt and transfer agent. Under the service agreements between securities, unless immediately thereafter the Fund will have an State Street and the Fund, State Street provides certain asset coverage of at least 300%. In general, the term “asset administrative services necessary for the operation of the coverage” for this purpose means the ratio which the value of Fund. Such services include maintaining certain Fund books the total assets of the Fund, less all liabilities and indebtedness and records, providing accounting and tax services and not represented by senior securities, bears to the aggregate preparing certain regulatory filings. State Street also performs amount of senior securities representing indebtedness of the custodial, fund accounting and portfolio accounting services, Fund. In addition, the Fund may be limited in its ability to as well as transfer agency and dividend paying services with declare any cash distribution on its capital stock or purchase respect to the common shares. The Fund pays State Street for its capital stock unless, at the time of such declaration or Annual Report 2020 27


  • Page 30

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 these services. The total expenses incurred by the Fund for the Senior Loans are subject to the risk of non-payment of year ended December 31, 2020 were $378,502. scheduled interest or principal. Such non-payment would The Fund has retained Destra Capital Investments LLC result in a reduction of income to the Fund, a reduction in the (“Destra”) to provide investor support services in connection value of the investment and a likely decrease in the net asset with the on-going operations of the Fund. Such services value of the Fund. There can be no assurance that the include providing ongoing contact with respect to the Fund liquidation of any collateral securing a Senior Loan would and its performance with financial advisors that are satisfy the Borrower’s obligation in the event of nonpayment representatives of broker-dealers and other financial of scheduled interest or principal payments, whether when due intermediaries, communicating with the NYSE specialist for or upon acceleration, or that the collateral could be liquidated, the Fund’s common shares and with the closed-end fund readily or otherwise. In the event of bankruptcy or insolvency analyst community regarding the Fund on a regular basis, and of a Borrower, the Fund could experience delays or limitations maintaining a website for the Fund. The Fund pays Destra a with respect to its ability to realize the benefits of the fee equal to 0.07% of Managed Assets per annum for these collateral, if any, securing a Senior Loan. The collateral services. The terms of this agreement are in effect for an initial securing a Senior Loan, if any, may lose all or substantially all period of two years and shall thereafter continue for successive of its value in the event of the bankruptcy or insolvency of a one year periods. The total expenses incurred by the Fund for Borrower. Some Senior Loans are subject to the risk that a the year ended December 31, 2020 were $332,328. court, pursuant to fraudulent conveyance or other similar laws, could subordinate such Senior Loans to presently existing or (7) Investment Transactions future indebtedness of the Borrower or take other action For the year ended December 31, 2020, the cost of investments detrimental to the holders of Senior Loans including, in purchased and proceeds from the sale of investments, certain circumstances, invalidating such Senior Loans or excluding short obligations, were as follows: causing interest previously paid to be refunded to the Borrower. Additionally, a Senior Loan may be “primed” in Cost of Investments Proceeds from the bankruptcy, which reduces the ability of the holders of the Purchased Sale of Investments Senior Loan to recover on the collateral. $610,793,528 $(604,886,871) There may be less readily available information about most (8) Risk Factors Senior Loans and the Borrowers thereunder than is the case for many other types of securities, including securities issued Senior Loans Risk in transactions registered under the Securities Act of 1933, as Although senior loans (“Senior Loans”) are senior and amended (the “Securities Act”) or the Securities Exchange Act typically secured in a first lien (including “unitranche” loans, of 1934, as amended (the “Exchange Act”), and Borrowers which are loans that combine both senior and subordinated subject to the periodic reporting requirements of Section 13 of debt, generally in a first lien position) or second lien position the Exchange Act. Senior Loans may be issued by companies in contrast to other below investment grade fixed income that are not subject to SEC reporting requirements and these instruments, which are often subordinated or unsecured, the companies, therefore, do not file reports with the SEC that risks associated with such Senior Loans are generally similar must comply with SEC form requirements and, in addition, are to the risks of other below investment grade fixed income subject to a less stringent liability disclosure regime than instruments. Investments in below investment grade Senior companies subject to SEC reporting requirements. As a result, Loans are considered speculative because of the credit risk of the Adviser will rely primarily on its own evaluation of a the issuers of debt instruments (each, a “Borrower”). Such Borrower’s credit quality rather than on any available Borrowers are more likely than investment grade Borrowers to independent sources. Consequently, the Fund will be default on their payments of interest and principal owed to the particularly dependent on the analytical abilities of the Fund, and such defaults would likely reduce the net asset value Adviser. In certain circumstances, Senior Loans may not be of the Fund and income distributions. An economic downturn deemed to be securities under certain federal securities laws, would generally lead to a higher non-payment rate, and a other than the Investment Company Act. Therefore, in the Senior Loan may lose significant market value before a event of fraud or misrepresentation by a Borrower or an default occurs. Moreover, any specific collateral used to arranger, the Fund may not have the protection of the antifraud secure a Senior Loan may decline in value or become illiquid, provisions of the federal securities laws as would otherwise be which would likely adversely affect the Senior Loan’s value. available for bonds or stocks. Instead, in such cases, parties generally would rely on the contractual provisions in the 28 Annual Report 2020


  • Page 31

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 Senior Loan agreement itself and common law fraud CLO Securities Risk protections under applicable state law. Collateralized Loan Obligations (“CLO”) issue securities in The secondary trading market for Senior Loans may be less tranches with different payment characteristics and different liquid than the secondary trading market for registered credit ratings. The rated tranches of securities issued by CLOs investment grade debt securities. No active trading market (“CLO Securities”) are generally assigned credit ratings by may exist for certain Senior Loans, which may make it one or more nationally recognized statistical rating difficult to value them. Illiquidity and adverse market organizations. The subordinated (or residual) tranches do not conditions may mean that the Fund may not be able to sell receive ratings. Below investment grade tranches of CLO Senior Loans quickly or at a fair price. To the extent that a Securities typically experience a lower recovery, greater risk of secondary market does exist for certain Senior Loans, the loss or deferral or non-payment of interest than more senior market for them may be subject to irregular trading activity, tranches of the CLO. wide bid/ask spreads and extended trade settlement periods. The riskiest portion of the capital structure of a CLO is the Senior Loans are subject to legislative risk. If legislation or subordinated (or residual) tranche, which bears the bulk of state or federal regulations impose additional requirements or defaults from the loans in the CLO and serves to protect the restrictions on the ability of financial institutions to make other, more senior tranches from default in all but the most loans, the availability of Senior Loans for investment by the severe circumstances. Since it is partially protected from Fund may be adversely affected. In addition, such defaults, a senior tranche from a CLO typically has higher requirements or restrictions could reduce or eliminate sources ratings and lower yields than the underlying securities, and can of financing for certain Borrowers. This would increase the be rated investment grade. Despite the protection from the risk of default. If legislation or federal or state regulations subordinated tranche, CLO tranches can experience require financial institutions to increase their capital substantial losses due to actual defaults, increased sensitivity requirements this may cause financial institutions to dispose to defaults due to collateral default and disappearance of of Senior Loans that are considered highly levered protecting tranches, market anticipation of defaults and transactions. If the Fund attempts to sell a Senior Loan at a aversion to CLO Securities as a class. The risks of an time when a financial institution is engaging in such a sale, the investment in a CLO depend largely on the collateral and the price the Fund could receive for the Senior Loan may be tranche of the CLO in which the Fund invests. adversely affected. The CLOs in which the Fund invests may have issued and sold Corporate Bonds Risk debt tranches that will rank senior to the tranches in which the The market value of a corporate bond generally may be Fund invests. By their terms, such more senior tranches may expected to rise and fall inversely with interest rates. The entitle the holders to receive payment of interest or principal market value of intermediate- and longer-term corporate on or before the dates on which the Fund is entitled to receive bonds is generally more sensitive to changes in interest rates payments with respect to the tranches in which the Fund than is the market value of shorter-term corporate bonds. The invests. Also, in the event of insolvency, liquidation, market value of a corporate bond also may be affected by dissolution, reorganization or bankruptcy of a CLO, holders of factors directly related to the Borrower, such as investors’ more senior tranches would typically be entitled to receive perceptions of the creditworthiness of the Borrower, the payment in full before the Fund receives any distribution. Borrower’s financial performance, perceptions of the After repaying such senior creditors, such CLO may not have Borrower in the market place, performance of management of any remaining assets to use for repaying its obligation to the the Borrower, the Borrower’s capital structure and use of Fund. In the case of tranches ranking equally with the tranches financial leverage and demand for the Borrower’s goods and in which the Fund invests, the Fund would have to share on an services. There is a risk that the Borrowers of corporate bonds equal basis any distributions with other creditors holding such may not be able to meet their obligations on interest or securities in the event of an insolvency, liquidation, principal payments at the time called for by an instrument. dissolution, reorganization or bankruptcy of the relevant CLO. High yield corporate bonds are often high risk and have Therefore, the Fund may not receive back the full amount of speculative characteristics. High yield corporate bonds may be its investment in a CLO. particularly susceptible to adverse Borrower-specific The transaction documents relating to the issuance of CLO developments. Securities may impose eligibility criteria on the assets of the CLO, restrict the ability of the CLO’s investment manager to trade investments and impose certain portfolio-wide asset Annual Report 2020 29


  • Page 32

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 quality requirements. These criteria, restrictions and global economic downturn, the secondary markets for Senior requirements may limit the ability of the CLO’s investment Loans and investments with similar economic characteristics manager to maximize returns on the CLO Securities. In (such as second lien loans and unsecured loans) and Corporate addition, other parties involved in CLOs, such as third-party Bonds may experience sudden and sharp price swings, which credit enhancers and investors in the rated tranches, may can be exacerbated by large or sustained sales by major impose requirements that have an adverse effect on the returns investors in these markets, a high-profile default by a major of the various tranches of CLO Securities. Furthermore, CLO Borrower, movements in indices tied to these markets or Securities issuance transaction documents generally contain related securities or investments, or a change in the market’s provisions that, in the event that certain tests are not met perception of Senior Loans and investments with similar (generally interest coverage and over-collateralization tests at economic characteristics (such as second lien loans and varying levels in the capital structure), proceeds that would unsecured loans) and Corporate Bonds. At any point in time, otherwise be distributed to holders of a junior tranche must be an investment in the common shares of the Fund may be worth diverted to pay down the senior tranches until such tests are less than the original amount invested, even after taking into satisfied. Failure (or increased likelihood of failure) of a CLO account distributions paid by the Fund, if any, and the ability to make timely payments on a particular tranche will have an of common shareholders to reinvest dividends. The Fund adverse effect on the liquidity and market value of such currently utilizes leverage, which magnifies the Fund’s risks tranche. and, in turn, the risks to the common shareholders. Payments to holders of CLO Securities may be subject to Interest Rate Risk deferral. If cash flows generated by the underlying assets are The market value of Corporate Bonds and other fixed-income insufficient to make all current and, if applicable, deferred securities changes in response to interest rate changes and payments on CLO Securities, no other assets will be available other factors. Interest rate risk is the risk that prices of bonds for payment of the deficiency and, following realization of the and other fixed-income securities will increase as interest rates underlying assets, the obligations of the Borrower of the fall and decrease as rates rise. Accordingly, an increase in related CLO Securities to pay such deficiency will be market interest rates (which are currently considered low by extinguished. historic standards) may cause a decrease in the price of a debt The market value of CLO Securities may be affected by, security and, therefore, a decline in the net asset value of the among other things, changes in the market value of the Fund’s common shares. The magnitude of these fluctuations in underlying assets held by the CLO, changes in the the market price of bonds and other fixed-income securities is distributions on the underlying assets, defaults and recoveries generally greater for those securities with longer maturities. on the underlying assets, capital gains and losses on the Because Senior Loans with floating or variable rates reset their underlying assets, prepayments on underlying assets and the interest rates only periodically, changes in prevailing interest availability, prices and interest rate of underlying assets. rates (and particularly sudden and significant changes) can be Furthermore, the leveraged nature of each subordinated class expected to cause some fluctuations in the net asset value of may magnify the adverse impact on such class of changes in the Fund’s common shares. In addition, Senior Loans or the value of the assets, changes in the distributions on the similar loans or securities may allow the Borrower to opt assets, defaults and recoveries on the assets, capital gains and between LIBOR-based interest rates and interest rates based losses on the assets, prepayment on assets and availability, on bank prime rates, which may have an effect on the net asset price and interest rates of assets. Finally, CLO Securities are value of the Fund’s common shares. limited recourse and may not be paid in full and may be LIBOR Rate Risk subject to up to 100% loss. National and international regulators and law enforcement Investment and Market Risk 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 the London Interbank Offered Rate rapidly and unpredictably. For instance, during periods of (“LIBOR”), announced that the FCA will no longer persuade 30 Annual Report 2020


  • Page 33

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 or compel banks to submit rates for the calculation of LIBOR Further, the lack of an established secondary market for after 2021. On November 30, 2020, ICE Benchmark illiquid securities may make it more difficult to value such Administration (“IBA”), the administrator of LIBOR, with the securities, which may negatively affect the price the Fund support of the United States Federal Reserve and the FCA, would receive upon disposition of such securities. announced plans to consult on ceasing publication of USD Duration and Maturity Risk LIBOR on December 31, 2021 for only the one-week and two-month USD LIBOR tenors, and on December 31, 2023 The Fund has no fixed policy regarding portfolio maturity or for all other USD LIBOR tenors. Such announcement duration. Holding long duration and long maturity investments indicates that the continuation of LIBOR on the current basis will expose the Fund to certain additional risks. cannot and will not be guaranteed after 2021. It appears highly When interest rates rise, certain obligations will be paid off by likely that LIBOR will be discontinued or modified by 2021. the Borrower more slowly than anticipated, causing the value The U.S. Federal Reserve, in conjunction with the Alternative of these obligations to fall. Rising interest rates tend to extend Reference Rates Committee, a steering committee comprised the duration of securities, making them more sensitive to of large U.S. financial institutions, is considering replacing changes in interest rates. The value of longer-term securities U.S. dollar LIBOR with a new index calculated by short-term generally changes more in response to changes in interest rates repurchase agreements, backed by Treasury securities (the than shorter-term securities. As a result, in a period of rising “Secured Overnight Financing Rate,” or “SOFR”). The future interest rates, securities may exhibit additional volatility and of LIBOR at this time is uncertain. Potential changes, or may lose value. uncertainty related to such potential changes, may adversely When interest rates fall, certain obligations will be paid off by affect the market for LIBOR-based securities, including the the Borrower more quickly than originally anticipated, and the Fund’s portfolio of LIBOR indexed, floating rate debt Fund may have to invest the proceeds in securities with lower securities, or the cost of the Fund’s borrowings. In addition, yields. In periods of falling interest rates, the rate of changes or reforms to the determination or supervision of prepayments tends to increase (as does price fluctuation) as LIBOR may result in a sudden or prolonged increase or Borrowers are motivated to pay off debt and refinance at new decrease in reported LIBOR, which could have an adverse lower rates. During such periods, reinvestment of the impact on the market for LIBOR-based securities, including prepayment proceeds by the Adviser will generally be at lower the value of the LIBOR indexed, floating rate debt securities in rates of return than the return on the assets that were prepaid. the Fund’s portfolio, or the cost of the Fund’s borrowings. Prepayment reduces the yield to maturity and the average life Additionally, if LIBOR ceases to exist, the Fund may need to of the security. renegotiate the credit agreements extending beyond 2021 with the Fund’s lenders and the Fund’s portfolio companies that Special Situations and Stressed Investments Risk 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 Liquidity Risk financial or business distress, including companies involved 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 liquidation proceeding relating to a company in which the securities are not readily marketable and may be subject to Fund invests, the Fund may lose its entire investment, may be restrictions on resale. Securities generally are not listed on any required to accept cash or securities with a value less than the national securities exchange and no active trading market may Fund’s original investment and/or may be required to accept exist for the securities in which the Fund may invest. When a payment over an extended period of time. Among the risks secondary market exists, if at all, the market for some inherent in investments in a troubled company is that it may be securities 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. Annual Report 2020 31


  • Page 34

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 condition of such company. Troubled company investments decisions involving circumstances where the interests of such and other distressed asset-based investments require active Other Accounts may be in conflict with the Fund’s interests. monitoring. Furthermore, it is possible that the Fund’s interest may be The Fund may make investments in Stressed Issuers when the subordinated or otherwise adversely affected by virtue of such Adviser believes it is reasonably likely that the Stressed Issuer Other Accounts’ involvement and actions relating to their will make an exchange offer or will be the subject to a plan of investment. In addition, when the Fund and Other Accounts reorganization pursuant to which the Fund will receive new hold investments in the same Stressed Issuer (including in the securities in return for a Special Situation Investment. There same level of the capital structure), the Fund may be can be no assurance, however, that such an exchange offer will prohibited by applicable law from participating in be made or that such a plan of reorganization will be adopted. restructurings, work-outs, renegotiations or other activities In addition, a significant period of time may pass between the related to its investment in the Stressed Issuer absent an time at which the Fund makes its investment in the Special exemption due to the fact that Other Accounts hold Situation Investment and the time that any such exchange offer investments in the same Stressed Issuer. As a result, the Fund or plan of reorganization is completed, if at all. During this may not be permitted by law to make the same investment period, it is unlikely that the Fund would receive any interest decisions as Other Accounts in the same or similar situations payments on the Special Situation Investment, the Fund would even if the Adviser believes it would be in the Fund’s best be subject to significant uncertainty whether the exchange economic interests to do so. Also, the Fund may be prohibited offer or plan of reorganization will be completed and the Fund by applicable law from investing in a Stressed Issuer (or an may be required to bear certain extraordinary expenses to affiliate) that Other Accounts are also investing in or currently protect and recover its investment. Therefore, to the extent the invest in even if the Adviser believes it would be in the best Fund seeks capital appreciation through investment in Special economic interests of the Fund to do so. Furthermore, entering 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 (e.g., and more likely to enter into restructuring or work-out through a liquidation of the obligor’s assets, an exchange offer transactions with their existing debt holders, which may 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 Debt instruments that are rated below investment grade are been anticipated when the investment was made or even no often referred to as “high yield” securities or “junk bonds.” value. Moreover, any securities received by the Fund upon Below investment grade instruments are rated “Ba1” or lower completion of an exchange offer or plan of reorganization may by Moody’s, “BB+” or lower by S&P or “BB+” or lower by be restricted as to resale. Similarly, if the Fund participates in Fitch or, if unrated, are judged by the Adviser to be of negotiations with respect to any exchange offer or plan of comparable credit quality. While generally providing greater reorganization with respect to an issuer of Special Situation income and opportunity for gain, below investment grade debt Investments, the Fund may be restricted from disposing of instruments may be subject to greater risks than securities or such securities. To the extent that the Fund becomes involved instruments that have higher credit ratings, including a higher in such proceedings, the Fund may have a more active risk of default. The credit rating of an instrument that is rated participation in the affairs of the issuer than that assumed below investment grade does not necessarily address its generally by an investor. 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 32 Annual Report 2020


  • Page 35

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 pay interest or dividends in accordance with the terms of the contracts denominated in Euro and wider economic disruption obligation and may have more credit risk than higher rated in markets served by those companies, while austerity and securities. Lower grade securities and similar debt instruments other measures that have been introduced in order to limit or may be particularly susceptible to economic downturns. It is contain these issues may themselves lead to economic likely that a prolonged or deepening economic recession could contraction and resulting adverse effects for the Fund. A adversely affect the ability of some Borrowers issuing such number of the Fund’s securities may be denominated in the debt instruments to repay principal and pay interest on the Euro. Legal uncertainty about the funding of Euro instrument, increase the incidence of default and severely denominated obligations following any breakup or exits from disrupt the market value of the securities and similar debt the Eurozone (particularly in the case of investments in instruments. securities of companies in affected countries) could also have The secondary market for below investment grade instruments material adverse effects on the Fund. The United Kingdom may be less liquid than that for higher rated instruments. ceased to be a member state of the European Union on Because unrated securities may not have an active trading January 31, 2020 commonly referred to as “Brexit,” and the market or may be difficult to value, the Fund might have transition period provided for in the withdrawal agreement difficulty selling them promptly at an acceptable price. To the entered by the United Kingdom and the European Union ended extent that the Fund invests in unrated securities, the Fund’s on December 31, 2020. In December 2020, the UK and the EU ability to achieve its investment objectives will be more agreed on a trade and cooperation agreement that will apply dependent on the Adviser’s credit analysis than would be the provisionally after the end of the transition period until it is case when the Fund invests in rated securities. ratified by the parties to the agreement. On December 31, 2020, the UK passed legislation giving effect to the trade and Under normal market conditions, the Fund will invest in debt cooperation agreement, with the EU expected to formally instruments rated in the lower rating categories (“Caa1” or adopt the agreement in early 2021. The trade and cooperation lower by Moody’s, “CCC+” or lower by S&P or “CCC+” or agreement covers the general objectives and framework of the lower by Fitch) or unrated and of comparable quality. For these relationship between the UK and the EU The impact of Brexit securities, the risks associated with below investment grade on the UK and EU and the broader global economy is unknown instruments are more pronounced. The Fund may incur but could be significant and could result in increased volatility additional expenses to the extent it is required to seek recovery and illiquidity and potentially lower economic growth. Brexit upon a default in the payment of principal or interest on its also may lead to greater volatility in the global currency and portfolio holdings. In any reorganization or liquidation financial markets, which could adversely affect the Fund. In proceeding relating to an investment, the Fund may lose its connection with investments in non-U.S. issuers, the Fund may entire investment or may be required to accept cash or securities engage in foreign currency exchange transactions but is not with a value substantially less than its original investment. required to hedge its currency exposure. As such, the Fund European Risk makes investments that are denominated in British pound sterling or Euros. The Fund’s assets are valued in U.S. dollars The Fund may invest a portion of its capital in debt securities and the depreciation of the British pound sterling and/or the issued by issuers domiciled in Europe, including issuers Euro in relation to the U.S. dollar could adversely affect the domiciled in the United Kingdom (“UK”). Concerns regarding Fund’s investments denominated in British pound sterling or the sovereign debt of various Eurozone countries and proposals Euros that are not fully hedged regardless of the performance for investors to incur substantial write-downs and reductions in of the underlying issuer. the face value of the sovereign debt of certain countries give rise to concerns about sovereign defaults, the possibility that Market Disruption Risk one or more countries might leave the European Union (“EU”) The outbreak of a highly contagious form of a novel or the Eurozone and various proposals (still under coronavirus (“COVID-19”) pandemic in early 2020, for which consideration and unclear in material respects) for support of the World Health Organization declared a global pandemic affected countries and the Euro as a currency. The outcome of and the United States has declared a national emergency, led any such situation cannot be predicted. Sovereign debt defaults to significant and continued volatility in the public and private and EU and/or Eurozone exits could have material adverse markets during 2020. Many states, including those in which effects on investments by the Fund in securities of European the Fund’s portfolio companies operate, have issued orders companies, including but not limited to the availability of requiring the closure of, or certain restrictions on the operation credit to support such companies’ financing needs, uncertainty of, non-essential businesses and/or requiring residents to stay and disruption in relation to financing, customer and supply at home. The COVID-19 pandemic and restrictive measures Annual Report 2020 33


  • Page 36

    Ares Dynamic Credit Allocation Fund, Inc. Notes to Financial Statements (continued) December 31, 2020 taken to contain or mitigate its spread have caused, and are taken in response thereto. As a result, the Fund may continue continuing to cause, business shutdowns, or the re-introduction to see a negative impact to the fair value of its investments. of business shutdowns, cancellations of events and restrictions on travel, significant reductions in demand for certain good (9) Subsequent Events and services, reductions in business activity and financial The Adviser has evaluated the impact of all subsequent events transactions, supply chain interruptions and overall economic on the Fund through the date the financial statements were and financial market instability both globally and in the issued and has determined that there were the following United States. Such effects will likely continue for the subsequent events: duration of the pandemic, which is uncertain, and for some The following common share distributions were declared on period thereafter. While several countries, as well as certain January 11, 2021: states, counties and cities in the United States, began to relax the early public restrictions with a view to partially or fully Ex-Date: January 20, 2021 reopening their economies, many cities, both globally and in Record Date: January 21, 2021 the United States, have since experienced a surge in the Payable Date: January 29, 2021 reported number of cases, hospitalizations and deaths related Per Share Amount: $0.0975 to the COVID-19 pandemic. This recent increase in cases has The following common share distributions were declared on led to the reintroduction of restrictions and business February 11, 2021: shutdowns in certain states, counties and cities in the United Ex-Date: February 18, 2021 States and globally and could continue to lead to the re- Record Date: February 19, 2021 introduction of such restrictions elsewhere. Additionally, in Payable Date: February 26, 2021 December 2020, the U.S. Food and Drug Administration Per Share Amount: $0.0975 authorized the distribution and administration of certain COVID-19 vaccinations. However, it remains unclear how Paula B. Pretlow was appointed to the Board as an independent quickly the vaccines will be distributed nationwide and director and a member of the audit committee. Ms. Pretlow’s globally or when “herd immunity” will be achieved and the appointment became effective February 16, 2021. restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and the Fund, as well as its portfolio companies, could be materially adversely affected by a prolonged recession in the U.S. and other major markets. The COVID-19 pandemic has adversely impacted the fair value of certain of the Fund’s investments, including those reported as of December 31, 2020, and the values reported may differ materially from the values that the Fund may ultimately realize with respect to its investments. The impact of the COVID-19 pandemic may not yet be fully reflected in the fair value of the Fund’s investments as the Fund’s valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information that is often from a time period earlier, generally two to three months, than the quarter for which the Fund is reporting. The valuation of the Fund’s investments may not show the complete or the continuing impact of the COVID-19 pandemic and the resulting restrictive measures 34 Annual Report 2020


  • Page 37

    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, 2020, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for the year ended December 31, 2020, the period from November 1, 2019 to December 31, 2019, and the year ended October 31, 2019, the financial highlights for the year ended December 31, 2020, the period from November 1, 2019 to December 31, 2019, and each of the three 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, 2020, the results of its operations and its cash flows for the year then ended, the changes in its net assets for year ended December 31, 2020, the period from November 1, 2019 to December 31, 2019, and the year ended October 31, 2019 and its financial highlights for the year ended December 31, 2020, the period from November 1, 2019 to December 31, 2019, and each of the three 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, 2020, 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 25, 2021 Annual Report 2020 35


  • Page 38

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information December 31, 2020 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 year ended December 31, 2020 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 for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on SEC Form N-PORT. The Fund’s Form N-PORT 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. 36 Annual Report 2020


  • Page 39

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2020 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. Annual Report 2020 37


  • Page 40

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2020 Renewal of Investment Advisory Agreement The Board of Directors (the “Board”) of the Ares Dynamic Credit Allocation Fund, Inc. (the “Fund”), a majority of whom are not “interested persons” (as defined in the Investment Company Act of 1940, as amended (the “1940 Act”)) of the Fund (the “Independent Directors”), renewed the Investment Advisory and Management Agreement between Ares Capital Management II LLC (the “Adviser”) and the Fund (the “Investment Advisory Agreement”) at a meeting held on August 11, 2020 (the “Meeting”). The Fund’s Board has the responsibility under the 1940 Act to consider the renewal of the Fund’s Investment Advisory Agreement on an annual basis at an in-person meeting of the Board called for the purpose of voting on such renewal. In addition, the Fund’s Board generally receives, reviews and evaluates information concerning the services and personnel of the Adviser at quarterly meetings of the Board. While particular emphasis might be placed on information concerning the Fund’s investment performance, comparability of fees and total expenses and the Adviser’s profitability at any meeting at which a renewal of the Investment Advisory Agreement is considered, the process of evaluating the Adviser and the Fund’s Investment Advisory Agreement is an ongoing one. In this regard, the Board’s consideration of the nature, extent and quality of the services provided by the Adviser under the Investment Advisory Agreement includes deliberations at multiple meetings. In addition, the Fund’s Board generally receives, reviews and evaluates information concerning the Fund’s operations, expenses and performance throughout the year, including at quarterly Board meetings. On March 25, 2020 and June 19, 2020, as a result of health and safety measures put in place to combat the global COVID-19 pandemic, the U.S. Securities and Exchange Commission issued exemptive orders (the “Orders”) pursuant to Sections 6(c) and 38(a) of the 1940 Act, that temporarily exempts registered management investment companies from the in person voting requirements under the 1940 Act, subject to certain requirements, including that votes taken pursuant to the Orders are ratified at the next in-person meeting. The Fund’s Board of the Directors determined that reliance on the Orders was necessary or appropriate due to the circumstances related to current or potential effects of COVID-19 and therefore, the August 11, 2020 Board meeting was held telephonically in reliance on the Orders. In connection with the renewal of the Investment Advisory Agreement, the Independent Directors met with their independent counsel in executive session. Counsel to the Independent Directors reviewed with the Independent Directors a memorandum outlining the legal duties of the Board under the 1940 Act and applicable state law and discussed the factors outlined by the federal courts as relevant to a board’s consideration of the approval of an investment advisory agreement. In considering whether to renew the Investment Advisory Agreement, the Fund’s Board reviewed certain information provided to the Board by the Adviser in advance of the Meeting, and supplemented orally at the Meeting, including, among other things, information concerning the services rendered to the Fund by the Adviser, comparative fee, expense and performance information, and other reports of and presentations by representatives of the Adviser concerning the Fund’s and Adviser’s operations, compliance programs and risk management. The Board also reviewed a report prepared by Broadridge, an independent provider of investment company data, which included information comparing (1) the Fund’s performance with the performance of a group of comparable funds (the “Performance Group”) for various periods ended June 30, 2020, and (2) the Fund’s actual and contractual management fees and total expenses with those of a group of comparable funds (the “Expense Group”), which was identical to the Performance Group. The Board noted that the Adviser (with the cooperation of Broadridge) has maintained the same Performance Group as last year to reflect the Fund’s investment strategy given its focus on senior loans, corporate bonds, and collateralized loan obligations (“CLOs”). The Broadridge categories that the Adviser believes are most comparable to the Fund are hybrid credit closed-end funds that invest across several credit-oriented asset classes. This criteria was suggested by the Adviser, and used by Broadridge in selecting comparable funds for the Performance Group and Expense Group. In determining whether to renew the Investment Advisory Agreement, the Board considered all factors that it believed to be relevant, including those discussed below. The Board did not identify any one factor as dispositive, and each Director may have attributed different weights to the factors considered. (a) The nature, extent and quality of services provided by the Adviser — With respect to the nature, extent and quality of services provided by the Adviser, the Board reviewed the information regarding the types of services provided under the Investment Advisory Agreement and information describing the Adviser’s organization and business, including the quality of the investment research capabilities of the Adviser and the other resources dedicated to performing services 38 Annual Report 2020


  • Page 41

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2020 for the Fund. The Board noted the professional experience and qualifications of the Fund’s portfolio management team and other senior personnel of the Adviser involved with the Fund, including the portfolio management team’s expertise in managing loan portfolios, the integrated platform of the Adviser and its affiliates and the benefits, resources and opportunities of the platform that the Adviser is able to access. Fund management discussed the size and experience of the Adviser’s staff, the experience of its key personnel in providing investment management services, and the ability of the Adviser to attract and retain capable personnel. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Fund’s other service providers, were also considered. The Board also noted the reputation and track record of the Adviser’s organization as a leading manager of credit assets. The Board also noted that investment performance is probative of the quality of services provided. (b) Investment performance of the Fund and the Adviser — With respect to investment performance of the Fund and the Adviser, the Board reviewed statistical information concerning the Fund’s investment performance in relation to its stated objective, as well as comparative data with respect to the performance of unaffiliated closed-end funds employing similar investment strategies provided by the Adviser as well as the comparative information provided by Broadridge. Representatives of the Adviser reviewed with the Board the Fund’s performance and discussed the Fund’s stock price and net asset value. In connection with its review, the Board discussed the results of the performance comparisons provided by the Adviser and Broadridge. In reviewing the Adviser’s report, the Board took into consideration that the Adviser identified hybrid credit closed-end funds that invest across several credit-oriented asset classes as the peer categories the Adviser believed were most comparable to the Fund given the Fund’s flexible mandate and focus on senior secured bank loans, corporate bonds and CLOs. The Board noted that the Fund’s: i) cumulative market-based return outperformed the average return of the hybrid credit closed-end funds for the one-year and five-year periods ended June 30, 2020 and underperformed the average return of the hybrid credit closed-end funds for the year-to-date period, five-year period and the since inception annualized period ended June 30, 2020, and ii) NAV-based return outperformed the average return of the hybrid credit closed-end funds for the three-year, five-year and the since inception annualized periods ended June 30, 2020 and underperformed the average return of the hybrid credit closed-end funds for the year-to-date and one-year periods ended June 30, 2020. The Board noted, in reviewing the Broadridge report, that the Fund’s total return performance, on a net asset value basis: i) outperformed the Performance Group average and median returns for the three-year period ended June 30, 2020, ii) slightly outperformed the Performance Group average return, and underperformed the Performance Group median return, for the two-year period ended June 30, 2020, and iii) underperformed the Performance Group average and median returns for the one-year period ended June 30, 2020. The Fund ranked third, seventh and ninth out of ten funds in the Performance Group for the three-year, two-year and one-year periods ended June 30, 2020, respectively. Representatives of the Adviser noted that the usefulness of performance comparisons may be affected by a number of factors, including different investment limitations that may be applicable to the Fund and comparable funds, highlighting, in particular, the difficulty in finding an appropriate universe of comparable funds. In discussing the Fund’s underperformance, they noted, among other things, that the near-term underperformance may be attributable to the Fund’s overweighing to CLO investments. Given the recent COVID-19 market disruption, the Board observed that CLO investments have experienced greater price volatility relative to loans and high yield bonds. (c) Cost of the services provided and profits realized by the Adviser from the relationship with the Fund — The Board considered information about the profitability of the Fund to the Adviser, as well as the costs of services provided by the Adviser to the Fund. The Board received and reviewed information relating to the financial condition of the Adviser’s parent, Ares Management Corporation. Representatives of the Adviser reviewed the expenses allocated and profit received by the Adviser and its affiliates and the resulting profitability percentage for managing the Fund and the method used to determine the expenses and profit. The Board concluded that the profitability results were not unreasonable, given the services rendered and service levels provided to the Fund by the Adviser and its affiliates. (d) Economies of scale and whether fee levels reflect these economies of scale — The Board considered the extent to which economies of scale are expected to be realized and whether fee levels reflect these economies of scale. It was noted that, because the Fund is a closed-end fund, any increase in asset levels generally would have to come from Annual Report 2020 39


  • Page 42

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2020 material appreciation through investment performance absent a special corporate action such as a material acquisition or an offering of additional shares. Further, the Board noted that as the Fund’s assets increased, administration and custodial services were billed at lower incremental rates. (e) Comparison of services rendered and fees paid to those under other investment advisory contracts, such as contracts of the same and other investment advisers or other clients — The Board reviewed the results of the expense comparisons provided by the Adviser and Broadridge. The Board discussed the range of actual and contractual management fees and total expenses of the Expense Group and Expense Universe funds as contained in Broadridge’s report and discussed the results of the comparisons. The Board noted that the Fund’s contractual management fee, based on common assets, was identical to, or essentially in-line with, the Expense Group median, and that the Fund’s actual management fee, based on common assets alone, was slightly above the Expense Group median and above the Expense Universe median. The Board further noted that based on common assets and leveraged assets, the Fund’s actual management fee was above the Expense Group median and above the Expense Universe median. The Board also noted that the Fund’s total expenses, based on common assets alone, were below the Expense Group median. The Board further noted that the Fund’s total expenses, based on common assets and leveraged assets, were above the Expense Group median. In analyzing the comparative expense information provided by the Adviser, the Board considered that, pursuant to the terms of the Investment Advisory Agreement, after the Fund’s second fiscal year, which ended on October 31, 2014, the Fund began reimbursing the Adviser for its cost of providing certain accounting, legal, clerical or administrative services to the Fund by employees of the Adviser or its affiliates. Representatives of the Adviser noted that although the Fund’s use of leverage is an expense, the use of leverage has contributed positively to the Fund’s return. In discussing the Fund’s management fees and expenses, representatives of the Adviser noted, among other things, that the Adviser believes that the Fund is essentially in line with the Peer Group medians across key expense comparisons (i.e., management fees and total expenses). Representatives of the Adviser also reviewed with the Board the management or investment advisory fees paid by commingled funds or separately managed accounts advised by the Adviser or its affiliates that are considered to have similar investment strategies and policies as the Fund (the “Similar Clients”), and explained the nature of the Similar Clients. They discussed differences in fees paid and the relationship of the fees paid in light of any differences in the services provided and other relevant factors. The Board considered the relevance of the fee information provided for the Similar Clients to evaluate the appropriateness and reasonableness of the Fund’s management fee. (f) Benefits derived or to be derived by the Adviser from its relationship with the Fund — The Board also considered the extent to which benefits other than the fees and reimbursement amounts pursuant to the Investment Advisory Agreement might accrue to the Adviser and its affiliates from their relationships with the Fund. The Board noted in this regard that while certain funds and accounts managed by the Adviser engage from time to time in cross-trade and co- investment transactions with the Fund as permitted by the 1940 Act, neither the Adviser nor its affiliates execute portfolio transactions on behalf of the Fund, and that the Adviser had confirmed that the Fund does not invest in securities issued by affiliates of the Adviser, including CLOs sponsored by the Adviser. However, it recognized that the Adviser might derive reputational and other benefits from its association with the Fund. Conclusion At the conclusion of these discussions, the Board agreed that it had been furnished with sufficient information to make an informed business decision with respect to the renewal of the Investment Advisory Agreement. Based on the discussions and considerations at the Meeting, and in reliance on information received on a routine and regular basis throughout the year relating to the operations of the Fund and the investment management and other services provided under the Investment Advisory Agreement, the Board, including the Independent Directors voting separately, voted to approve the renewal of the Investment Advisory Agreement for an additional one-year period. 40 Annual Report 2020


  • Page 43

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2020 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 2020 41


  • Page 44

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2020 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. 42 Annual Report 2020


  • Page 45

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2020 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 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 (2016-2020) 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 2020 43


  • Page 46

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2020 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 2023 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. 44 Annual Report 2020


  • Page 47

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2020 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 Treasurer Since 2016 Ms. Roll is a Partner and the Chief Financial Officer of the Ares 1965 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 Chief Compliance Since 2019 Ms. Morgan is a Managing Director and Head of Regulatory 1976 Officer and Anti- Compliance in the Ares Compliance Department. Ms. Morgan also Money Laundering serves as the Chief Compliance Officer of Ares Capital Corporation. Officer She joined Ares in September 2017. Scott Lem Chief Financial Since 2016 Mr. Lem is a Partner and Chief Accounting Officer, Credit (Direct 1977 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 Ares Capital Corporation from May 2009 to May 2013 and Treasurer of ARDC from October 2016 to September 2017. Mr. Lem joined Ares in 2003. Ian Fitzgerald General Counsel Since 2019 Mr. Fitzgerald is a Managing Director and Associate General Counsel 1975 and Secretary (Credit) in the Ares Legal Group, where he focuses on credit matters. Vice President and 2017-2019 He also serves as Vice President and Assistant Secretary of Ivy Hill Assistant Secretary Asset Management, L.P. and Vice President and Assistant Secretary of Ivy Hill Asset Management GP, LLC, Ivy Hill Asset Management’s General Partner. Mr. Fitzgerald joined Ares in 2010. Keith Ashton Vice President and Since 2013 Mr. Ashton is a Partner in the Ares Credit Group, Portfolio Manager of 1967 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. 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. Annual Report 2020 45


  • Page 48

    Ares Dynamic Credit Allocation Fund, Inc. Additional Information (continued) December 31, 2020 Officers Name, Address(1) Position(s) Held and Year of Birth with Funds Officer Since Principal Occupation(s) or Employment During Past Five Years Jason Duko Vice President Since 2018 Mr. Duko is a Partner and Portfolio Manager of U.S. Liquid Credit in 1977 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 Vice President Since 2018 Mr. Singh is a Partner and Portfolio Manager of U.S. Liquid Credit in 1971 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 Double Line 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 credit 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 Assistant Secretary General Counsel, Private Equity, in the Ares Legal Group and is a 1981 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. 46 Annual Report 2020


  • Page 49

    Ares Dynamic Credit Allocation Fund, Inc. (This page intentionally left blank.) Annual Report 2020 47


  • Page 50

  • View More

Get the full picture and Receive alerts on lawsuits, news articles, publications and more!