Carlyle Secured Lending, Inc. Q1 FY2025 earnings call

Key Points

• Justin Plouffe discussed first quarter results, noting growth in the portfolio despite headwinds from declining base rates and tight market spreads. GAAP net investment income was $0.40 per share, adjusted net investment income was $0.41 per share. Board declared a $0.40 per share dividend for Q2. Portfolio size increased from $1.9 billion to $2.5 billion due to organic originations, merger, and consolidation.
• Tom Hennigan provided an overview of financial results, noting total investment income was $55 million, expenses were $33 million, resulting in GAAP net investment income of $21 million or $0.40 per share. Discussed credit performance, with some underperformance in certain names but overall stability. Mentioned optimization of credit funds, including consolidating Credit Fund II and extending investment period for Credit Fund I. Talked about financing facilities, upsizing and extending the revolving credit facility, assuming CSL III's credit facility, and entering an equity distribution agreement.

Portfolio Activity

• Added ~$180 million in organic originations. Merged with CSL III, receiving ~$490 million in new investments, and consolidated Credit Fund II, increasing portfolio size by net $127 million. Portfolio as of 3/31 had 195 investments, 138 companies across over 25 industries, 94% in senior secured loans.

In the first quarter, CGBD generated GAAP net investment income of $0.40 per share and adjusted net investment income of $0.41 per share. The portfolio size increased from $1.9 billion to $2.5 billion this quarter based on net investment and strategic activity. Organic originations added approximately $180 million, and the merger with CSL III and consolidation of Credit Fund II contributed to the portfolio growth. The annualized yield on 3/31 NAV was approximately 10%.

Guidance

• Board declared a second quarter dividend of $0.40 per share. Expect net investment income to remain in the same range as Q1. Discussed that the earnings power of the combined portfolio will be reflected in Q2 earnings. Feel comfortable maintaining the base dividend with $0.85 per share of spillover income generated over the last five years.

Risks

• Broader market volatility, including recent volatility around tariffs, which is a near-term headwind to overall capital markets and M&A activity. Potential secondary effects of reduced demand on businesses not directly impacted by tariffs. Volatility in credit spreads in the private credit space, which could be a headwind to near-term earnings. Uncertainties related to trade policy evolving and its impact on portfolio companies.

Q: On the credit fund, Tom, I think you said it would enhance ROE. Is that -- does that go on a nominal basis? I think you paid the same dividend this quarter but it is smaller now. I know there's higher leverage, maybe it's still ramping or whatnot. But first, trying to get a sense of what the credit fund dividend looks like on the go forward?

A: Good morning Fin. Thanks for the question. You're right. The nominal value outstanding, the cost for both JVs, the JV 2 going to 0, JV 1, we had a return of capital. in the aggregate in the near term, we see the dividend being flat over time. We look on an overall NII basis being roughly neutral in terms of the higher ROE on a lower capital base, but then, of course, deploying those proceeds in regular assets, at least in the near-term.

Q: And is the financing what kind of securitization is it? Does it run down?

A: So, it is what I would classify as a more of a typical bank-like facility with a revolving period and a typical amortization period, but with CLO like qualities and tests where we were able to achieve the attractive pricing level.

Q: And your comments on opening up this bucket, what you just shrunk the standard BSL type JVs? Is it something -- do you just want to do new ones that are essentially similar? Or is there a different strategy you'll pursue in there?

A: I don't think you'll see anything dramatically different, but we're in active negotiations and conversations internally. And that's something -- it won't be an overnight opening, but something that we're working on actively, and we anticipate making some progress in the next couple of quarters.

Q: I wanted to know that the merger sign on, you've brought some assets on balance sheet from the funds. I'm curious if there is any asset rotation that you expect to take place. It's typically something we see when some of these mergers get completed, how do the yields compare to the pre-merger portfolio yield for CGBD and what's the plan there?

A: Melissa. Yeah, the impact -- so the CSL3 book, very clean book, Newer Vintage, 99% first lien. So inherently, the overall yield compared to CGBD lower. So on an emergent to the absolute impact on CGBD is a reduction in the aggregate portfolio of about 15 basis points. The rotation you'll see -- and there's also roughly about 100% overlap. So just that every loan in CSL was already in CGBD such as in upsizing those positions. Where we will selectively look to do what near-term rotating is for some of the lower spread assets is to move those into our current JV to get better overall return on those investments.

Q: We also wanted to ask on the dividend. I think Tom, you mentioned that spillover may come into play to support the base dividend. Can you give us -- I know this is tough, but let's just say, around today's SOFR curve how much that is expected to come into play? And then also, to what extent you would run down spillover over the long term, if you want to keep some or eventually pay it all out?

A: Right now, when we look at second quarter combined basis, we're looking at racket $0.40 right where we were for the first quarter on a stand-alone CGBD basis. In terms of various levers, obviously, the headwind is going to be the curve, and we can't control that. That's going to be a headwind for everyone. The magnitude and the extent and the speed we'll see in terms of levers we have on the positive leverage the lower end. We haven't seen it quite yet the potential reversal in historically tight credit spreads non-accruals. We'll probably see pluses and minuses. The current non-accruals we're working on, positive resolutions there, but we have limited tariff exposure, but we will anticipate that non-accruals, let's say, will be neutral. And then there's the JVs, and that's, I think, in terms of ramping up our current JV and then utilizing that non-asset -- non-qualifying asset capacity for new endeavors, that will really be our driver in terms of what our goal will be to remain in the current territory. But certainly, with SOFR, there will be some obvious headwinds in terms of earnings.

Q: Yeah. I appreciate the uncertainty and you have various levers at hand. But say it goes against you on SOFR like how far would you dip into spillover? Would you under earn the dividend and to what extent for how long?

A: And that's something that we have not put numbers to a page and something that we'll take quarter-by-quarter. Right now, we'll assess that on a go-forward day.

Q: Yes. We'll have to assess it as we developed through the summer. I think it's probably an understatement to say that our entire market is in state of greater uncertainty than it's been in the past. But our intention is certainly to remain consistent with the dividend and hopefully, the market allows us to do that.