Carlyle Secured Lending, Inc. Q3 FY2025 earnings call

Key Points - CEO Justin Plouffe: - Third quarter benefited from strong originations but impacted by tight market spreads. - Generated $0.37 per share GAAP net investment income and $0.38 after adjusting for asset acquisition accounting. - Board declared fourth quarter dividend of $0.40 per share. - Net asset value as of September 30 was $16.36 per share. - Deployed $260 million in investments, with net investment activity of $117 million after repayments and $48 million in investments sold to JV. - Pipeline of new originations building, with deal flow up nearly 30% over last 2 months. - No direct/indirect exposure to First Brands or Tricolor, confident in portfolio credit quality. - Portfolio diversified, average exposure to single company <1% of total investments. ### CFO Thomas Hennigan: - Total investment income $67 million, in line with prior quarter. - Expenses increased slightly due to higher interest expense. - GAAP net investment income $0.37 per share, adjusted $0.38 per share. - Dividend of $0.40 per share declared, with $0.86 per share of spillover income to support. - Valuations had $3 million net loss, partially due to unrealized markdowns. - Credit quality stable, nonaccruals at 1.6% cost and 1% fair value after Maverick restructuring. - JV MMCF: Upsized credit facility, working on optimizing nonqualifying asset capacity, in discussions with institutional partner for new JV. - Financing facilities: Raised $300 million 5-year institutional unsecured bond, will redeem $85 million baby bond, capital structure optimizations lower borrowing cost, extend maturity, reduce reliance on mark-to-market leverage. Statutory leverage 1.1x towards target range.

Total investment income for the third quarter was $67 million, in line with prior quarter. GAAP net investment income was $0.37 per share for the quarter, and $0.38 after adjusting for asset acquisition accounting. CGBD funded $260 million of investments into new and existing borrowers, with total investments increasing from $2.3 billion to $2.4 billion during the quarter. Nonaccruals were 1.6% of total investments at cost and 1% at fair value. The portfolio was comprised of 221 investments in 158 companies across more than 25 industries, with 95% of investments in senior secured loans.

Guidance - Future activity expected to increase supported by declining base rates, normalization of tariff and regulatory policy, and resilient economic growth expectations. - Dividend policy of $0.40 per share comfortable for now, with earnings expected to trough in next couple of quarters and then pick up. - JVs will take time to ramp, with existing JV increased credit facility and potential second JV in advanced discussions.

Risks - Forward-looking statements involve inherent risks and uncertainties, including those in Risk Factors section of 10-K and 10-Qs, which could cause actual results to differ materially from expectations. - Uncertainties related to merger synergies and ability to realize anticipated benefits.

Q: Can you give color on the top line this quarter, including mix of average portfolio, onetime fees, etc.?

A: Total investment income $67 million, in line with prior quarter. Delta due to OID accretion on repaid investments. Fee income up modestly. Average daily principal balance of loans outstanding flat.

Q: The 10 bps on borrowing spreads, is it just from baby bond?

A: Primarily post quarter end items. Repaid legacy CSL III facility, baby bond to be repaid, new institutional deal done, net-net lowering weighted average cost of borrowing by 10 basis points.

Q: Can you expand on the $0.40 dividend 'for now', including SOFR curve and JVs?

A: Earnings expected to trough in next couple of quarters due to SOFR curve. Existing JV increased credit facility and equity commitments, potential second JV in advanced discussions, but takes time to ramp.

Q: Looking at first lien debt concentration increase, will it continue?

A: In tight spread environment, no significant value in second liens currently, so portfolio will continue to trend first lien.

Q: Average yield in pipeline vs current portfolio yield?

A: Current portfolio weighted average spread shade over 500 basis points, new originations more squarely 500 weighted average. Pressure on spreads, but new transactions good candidates for JV.

Q: Drivers of risk rating distribution improvement?

A: Primarily a couple of deals transitioning from 3 category to 2 category, net originations in main categories like health care, software, technology and financial services.

Q: Nonaccruals decrease and rating shift, comment?

A: Restructuring of Arch Maverick was largest component of 4 category decline. Migration from 4 to 5 due to one credit in restructuring with path to recovery but likely not full return of capital.

Q: Potential second JV structure and similarity to existing?

A: Contemplated JV structure similar to existing in terms of 50-50 governance and economic ownership, different investment strategy with 0 overlap to current JV.

Q: Quality of pipeline deals and terms?

A: Pipeline consists of high-quality borrowers in same industry makeup as current portfolio, LTV on first lien loans 38% to 42% on average.

Q: JVs impact on earnings power and spreads expectation?

A: JVs take time to scale, not near-term impact on earnings power. Spreads not necessarily near-term widening, but reasonable to expect movement in intermediate term as credit cycles.