Carlyle Credit Income Fund Q2 2025 Earnings Call Transcript

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May 21, 2025

There are 7 speakers on the call.

Operator

and thank you for standing by. Welcome to the Carlyle Credit Income Fund Second Quarter twenty twenty five Earnings Call. At this time, all participants are in a listen only mode. After this presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to Nelson Joseph, Principal Financial Officer at CCIF. Please go ahead.

Speaker 1

Good morning, and welcome to Carlyle Credit Income Fund's Second Quarter twenty twenty five Earnings Call. With me on the call today is Nishal Mehta, CCIF's Principal Executive Officer and President, as well as Lauren Vasmagian, CCIF's Chair and Carlyle's Global Head of Liquid Credit. Last night, we issued our Q2 financial statements and a corresponding press release and earnings presentation discussing our results, which are available on the Investor Relations section of our website. Following our remarks today, we will hold a question and answer session for analysts and institutional investors. This call is being webcast and a replay will be available on our website.

Speaker 1

Any forward looking statements made today do not guarantee future performance and any undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the Risk Factors section of our annual report on the form NCSR. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlyle Credit Income Fund assumes no obligation to update any forward looking statements at any time. During the conference call, we may discuss adjusted net investment income per common share and core net investment income per common share, which are calculated and presented on a basis other than in accordance with GAAP.

Speaker 1

We use these non GAAP financial measures internally to analyze and evaluate financial results and performance. And we believe these non GAAP financial measures are useful to investors gauging the quality of the funds financial performance, identifying trends in its results, and providing meaningful period to period comparisons. The presentation of this non GAAP measure is not intended to be a substitute for financial results prepared in accordance with GAAP and should not be considered in isolation. With that, I will turn

Speaker 2

the call over to Nishal. Thanks, Elsin. Good morning, everyone, and thank you for all joining CCIS quarterly earnings call. I'd like to start by reviewing the Fund's activities over the last quarter. We maintained our monthly dividend at $0.01 $05 per share or 18.8% annualized based on the share price as of 05/16/2025, which is now declared through August of twenty twenty five.

Speaker 2

The monthly dividend is supported by $0.49 of recurring cash flows for the quarter. New CLO investments during the quarter totaled $30,300,000 with a weighted average GAAP yield of 15.4%. The aggregate portfolio weighted average GAAP yield was 16.5% as of March 31. Within CCI's portfolio, we completed 13 refinancings and resets in q two twenty twenty five, reducing the cost of liabilities and extending the reinvestment periods across these CLOs and bolstering equity cash flows. We sold 1,610,000.00 of our common shares in connection with the ATM offering program for total net proceeds of 12,200,000.0.

Speaker 2

As a reminder, in January, we completed a private placement of five year, seven and half percent convertible preferred shares due in 02/1930. '6 months after issuance, the holders have the option to convert the preferred shares into common stock at the greater of NAV or the average closing price of the five previous trading dates. We continue to leverage Carlyle's long standing presence in the CLO market as one of the world's largest CLO managers and a 15 track record investing in third party CLOs to manage a diversified portfolio of CLO equity investments. As of March 31, our portfolio comprised 61 unique CLO investments managed by 30 different cloud managers. While recent widening in CLO liabilities and tariff induced volatility can weigh on CLO equity valuations, we remain encouraged by the credit fundamentals across our holdings, which have demonstrated resilience to date.

Speaker 2

We continue to closely monitor these dynamics and have positioned CSAS portfolio defensively with an emphasis on higher quality managers and structures that have ample time left in reinvestment period and significant cushions. This is demonstrated by the portfolio's weighted average junior cushion of 4.46%. That being said, our portfolio has experienced lagging impact of loan repricings, which created an additional 12 basis points decline in the weighted average spread of the fund's underlying loan portfolios. Despite these repricings, the portfolio generated cash on cash yield of 22.67% supporting the fund's monthly dividend. I'd like to remind everyone that volatility is usually beneficial for the long term returns for CLO equity for several reasons.

Speaker 2

Significant repricing wave that we've witnessed over the past fifteen months has ground to a halt due to the recent volatility, and we may see loan spreads increase as new loans are issued at wider spreads. The volatility also allows CLOs to purchase loans at discounted prices and help build par within the CLO portfolios to offset future losses. I'd like to share some key stats on the portfolio as of March 31. The portfolio generates a GAAP yield of 16.48% on a cost basis supported by cash on cash yields of 22.67% on Seal Investments quarterly payments received during the quarter. The weighted average years left in reinvestment period increased from approximately two and a half years to three point one years as there were eight accretive resets in the early link portfolio during the quarter.

Speaker 2

This provides CLO managers the opportunity to capitalize on periods of volatility to improve portfolios or reposition them in zero CLOs that are out of reinvestment period. We believe the weighted average junior over collateralization cushion of 4.46% is a healthy cushion to offset defaults in losses in the underlying loan portfolios. Weight average spread of the underlying portfolios was 3.26%. The average percentage of loans rated CCC by S and P was 5.2%, below the 7.5% CCC limit in CLOs. As a reminder, once a CLO has more than 7.5% of its portfolio rated CCC, the excess over 7.5% is marked at the lower fair market value or rating to recovery rates and reduces the over collateralization cushion.

Speaker 2

And the percentage of loans trained below 80 decreased slightly from 3.4% to 3.3%. We continue to draw on the expertise of the Carlyle liquid credit platform and a collaborative one Carlyle approach to invest in high quality CLO portfolios sourced through our rigorous 14 step bottom up investment process. With that, I will now hand the call over to Lauren to discuss the current market environment.

Speaker 3

Thank you, Nishal. Shifting focus, I'd like to discuss the trends we've observed in both the loan and CLO equity markets. While the CLO market experienced strong tailwinds during the start of 2025, with liabilities continuing to tighten and a significant amount of loans trading over par, conditions shifted following the broader uncertainty around the implications of tariffs on below investment grade credit. In Q1, CLO new issuance totaled $45,000,000,000 close to the record pace in 2024. In addition, the market experienced strong CLO reset and refinancing volumes of $64,000,000,000 and $37,000,000,000 respectively, over the quarter.

Speaker 3

After hitting near all time tights in February, CLO primary spreads widened in the second half of the first quarter, reflecting broader market volatility and shifting investor sentiment. CLO primary spreads widened further in April, following harsher than anticipated tariff announcements on April 2. Now the market is beginning to retrace this widening, following delays in the implementation of proposed tariffs. Looking ahead, we anticipate a slowdown in both CLO resets and refinancings until spreads tighten further. However, some CLOs, particularly those issued in 2023 with historically wide liability costs, may still be candidates for resets.

Speaker 3

Moving to the loan market, the LSTA price declined from 97.7 in late January to 96.3 in the March. Loan prices declined a further two points in early April following the tariff announcements. This period included some of the most volatile days in the loan market that we've experienced since March 2020. CLO asset spreads tightened by approximately 14 basis points over the first quarter due to heavy loan repricing activity in January and February. Loan repricing activity declined sharply in March amid rising macroeconomic uncertainty, with no repricing transactions in the final three weeks of March and throughout April.

Speaker 3

Despite the implications of tariffs, fundamentals in The U. S. Leveraged loan market remain strong thus far. The leveraged loan market has limited direct exposure to tariffs, as the largest industries include technology, healthcare, financials, and business services. That said, if we experience a broader economic slowdown, it will negatively impact the low investment grade credit.

Speaker 3

We continue to assess credit metrics within Carlyle's U. Loan portfolio of over 600 borrowers, which we believe is a decent proxy for third party managed CLO portfolios. We've seen that the impacts of rate cuts implemented in 2024 have benefited free cash flow. In fourth quarter twenty twenty four, approximately 73% of Carlyle's U. S.

Speaker 3

Loan borrowers produced free cash flow. Our average borrower EBITDA grew at 9%, which outpaced revenue growth of 6%. This is in line with portfolio trends experienced over the past year. The average interest coverage ratio of our borrowers is 3.5 times, up from 3.1 times in the prior year, and less than 3% of our borrowers have an interest coverage ratio of less than one time. From a default perspective, Chapter 11 bankruptcies remain moderate and less than half of the historical average at 82 basis points.

Speaker 3

However, out of court restructurings remain prevalent in the BSL market, and when you include them in the default rate, the market is around 4%, which is elevated in the context of historical averages. DCIS loan portfolio has experienced an LTM default rate of 1.3%, inclusive of out of court restructurings, which is approximately one third of the market rate as we continue to leverage our in house credit expertise from over 20 U. S. Credit analysts to complete bottoms up fundamental analysis on the underlying portfolios. Over the past few months, we've leveraged the insights of Carlyle's in house global research, government affairs, and the investment teams to assess the impacts of tariffs.

Speaker 3

While the situation continues to evolve, we believe the CLO market is well positioned to navigate this environment, given the diversified nature of the underlying loan portfolios, ample market liquidity, and the resilience of loan borrowers that they've demonstrated over the past two years in the face of elevated interest rates. I'll now turn the call back to Nelson, our CFO, to discuss the financial results.

Speaker 1

Thank you, Lauren. Today, I will begin with a review of our second quarter earnings. Total investment income for the second quarter was $8,600,000 or $0.48 per share. Total expenses for the quarter was 4,500,000.0 Total net investment income for the second quarter was $4,000,000 or $0.23 per share. Adjusted net investment income for the second quarter was $4,600,000 or $0.26 per share.

Speaker 1

Adjusted NII adjusts for $03 per share impact for the amortization of the OID and issuance costs for the Fund's preferred shares. Core net investment income for the second quarter was $0.27 per share. The decrease in core net investment income and recurring cash flows in Q2 was attributable to approximately 18% of the portfolio not making payments as a result of the completion of accretive resets and refinancings, where quarterly payments were redirected to fund these transactions and primary issuances that had not yet made their initial distributions. The cash on cash yield of 22.67 percent on CLO investment quarterly payments resulted in $0.49 of recurring cash flow. Net asset value as of March 31 was $6.98 per share.

Speaker 1

Our net asset value and valuations are based on a bid size mark we received from a third party on 100% of the CLO portfolio. We continue to hold one legacy real estate asset in the portfolio. The fair market value of the loan is 2,200,000.0. The third party we engage to sell our position continues to work through the sales process. During the quarter, we sold 1,610,000.00 of our common shares in connection with the ATM offering program at a premium to NAV for net proceeds of 12,200,000.0.

Speaker 1

The common share issuances for the quarter resulted in net accretion of our net asset value of $02 per share. In Q2, holders of the 7.125% Series B convertible preferred shares exercised their right to convert 3,000,000 of the total 11,500,000.0 par amount of these preferred shares. With that, I'll turn it back to Nishal.

Speaker 2

Thanks, Nelson. Today, has a diversified portfolio of CLOs that have ample time remaining in their reinvestment periods to allow high quality CLO managers to take advantage of periods of volatility like we saw in April. We continue to believe that CCF is well positioned to provide investors with an attractive dividend yield and total return. We remain focused on utilizing a bottom up approach to analyze the underlying collateral in each CLO equity position and actively refresh our views on third party CLO managers in the market. We will look to continue to deliver strong risk adjusted returns for our investors.

Speaker 2

I'd like to now hand the call over to the operator to take your questions.

Operator

Our first question comes from Randy Binner with B. Riley Securities.

Speaker 4

Hey. Good morning. I I just wanted to, follow-up on a few things to understand on a go forward basis, you know, net total investment income or net investment income. So I think what I heard is that the kind of the lag from repricing was probably the biggest item there in the quarter was a little bit lower than our model. And that affected 18% of the portfolio in the quarter, if I got that right.

Speaker 4

And what kind of percentage would that be kind of in the next couple of quarters do you think?

Speaker 2

Hey, Randy. Good morning. It's Nishal. So I just want to clarify. So there was two different things impacting the cash flows in the prior quarter.

Speaker 2

One, there was repricings in the overall leverage loan market, which continued in January and February until we saw tariff related volatility in March. Those were pricings reduced the weighted average spread in our underlying portfolios by 12 basis points. Separate from that, 18% of our portfolio did not make payments in January. That's because sorry. Go ahead.

Speaker 4

No. Sorry. Please please go ahead.

Speaker 2

Yep. So 18% did not make payments in January. That was mainly because, I believe, eight CLOs, the payments were diverted to help finance the accretive resets and refinancings that we completed. There's typically costs related to those refinancings and resets, and so we diverted the the January payment to pay for such costs. But in the long term, it's obviously very accretive to do that.

Speaker 2

And then we also had two CLO investments that were in the primary market that had not made their original original payment yet.

Speaker 4

Okay. So but on the on the first matter, the the lag of 12 bps, is that it sounds like you would expect that drag to to lessen as the year goes on. Correct?

Speaker 2

Well, can certainly speak to what we've seen so far this quarter given the volatility. We have not seen any loan repricings in the quarter to date. That's one of the benefits of the volatility that that we've seen. Now it's it's hard to predict if the market continues to rally as it's doing, along with all fixed income markets. If we start seeing repricings again.

Speaker 2

But at least for now, for for this quarter, any impact from repricing should be lower than what we saw in the first in in the first quarter of twenty twenty five.

Speaker 4

Okay. Thank you. Thanks for clarifying that. And then just a couple on credit side, if I can. The the percentage of ICR in in your book that's under 1% was I just didn't catch that number, but it was very low.

Speaker 4

What what was that percentage?

Speaker 3

Yeah. So it's it's for all of the Carlyle companies. So we think it's a pretty good proxy because we don't get that level of information from from our under underlying managers.

Speaker 1

Okay.

Speaker 3

So we're seeing less than 3% of of over 600 credits with the interest coverage ratio of less than one times.

Speaker 4

And then on the idea of the market trend continues to be for out of court restructuring. Is is there any is there any point at which that might change from from your view? Is that should we continue to expect that to be kind of the norm for how, for how non payers are sorted out in the book?

Speaker 3

Yeah, so two parts to that question. One, I think that out of court restructurings will continue to be the norm as a higher percentage of total restructurings, so out of court higher than in court. I do think the total number is elevated right now. I think that if we were to see meaningful economic growth or some interest rate cuts that are not caused by bad economic news, we'll see that number come down. I think it is elevated from a historical context right now.

Speaker 4

Okay. That's all I had. Thank you.

Operator

Our next question comes from Eric Zwick with Lucid Capital Markets.

Speaker 5

Good morning all. Maybe I'll start with just a follow-up to that I'm curious relative to that kind

Speaker 4

of 4% default with out of

Speaker 5

court restructurings and noting that it's above historical, you guys have a pretty good view of the total market. I'm just curious, have you seen any commonalities between any certain industries or a certain, you know, vintage of CLO that are, you know, driving that that higher default rate today in in out of court restructurings?

Speaker 3

Yeah. I don't think there's a big industry trend. I really think what's brought on this this wave of restructuring has been the higher higher rate environment. So you're seeing companies that maybe put too much leverage on during the 2021 period, and the modeling, you know, very, very low base rate, and and perhaps the purchase prices for the 02/2021 LBOs were somewhat elevated at the same time. So there was more leverage on those companies.

Speaker 3

I think that's been a bigger trend on on the vintage effect than any particular industry.

Speaker 5

That's helpful. Thank you. Next, mentioned a lot of the volatility that's created, know, maybe some opportunities potentially in the secondary market. I'm curious as you look at your pipeline today for both primary and secondary, if you're seeing any kind of stark differences in the potential risk adjusted returns there?

Speaker 2

Sure. I would say, I think the relative value between both the secondary and prime markets today is pretty equal, largely because we've seen such a retracement of the declines that we saw in early April. So we're seeing low to mid teens types of expected returns both in the secondary and and primary market. If you look at this similar profile of CLO manager and time left and reinvestment period. So right now, we're active in both markets.

Speaker 5

And then last question for me. Just given the of dose and government cuts specifically to the NIH and FDA and some potential impacts there on healthcare and pharma companies, have, I think from an industry perspective, about 11% of your total portfolio in those industries. As you kind of look through the portfolio, any potential issues that you see there that might need to be mitigated or worked through?

Speaker 3

So there certainly are cuts from the DOGE program. They've been, again, pretty idiosyncratic with particular credits, at least as we go through first quarter earnings and we're talking to management teams and hearing about perhaps canceled contracts or contracts that are just taking a longer time to come online, we still haven't seen meaningful impact to health care yet. We're waiting to see what the tax bill comes out for Medicaid. So I do think that it adds incremental risk to our companies. What I'd say is that healthy companies will be able to deal with cuts in contracts or having contracts come online at a later time.

Speaker 3

I think over levered companies that are already struggling have had trouble with higher interest expense, that could be the straw that breaks the camel's back in some of those situations. I do not think that is a significant part of the portfolio. As we mentioned, interest coverage ratio remains pretty good for most of the portfolio companies. But on those tail risk companies, the weakest of the portfolio, if they're in sort of those impacted sectors, they certainly could struggle with that.

Speaker 5

I appreciate the comments. Thanks for taking my questions today.

Operator

As a reminder if you'd like to ask a question at this time please press Our next question comes from Mickey Schleien with Ladenburg.

Speaker 6

Yes. Good morning, everyone. Just at a high level, your GAAP and cash portfolio yields look good. The CCC buckets, OC cushions, default rates are all good. But NAV in April was down another 9%.

Speaker 6

Since April, as you mentioned, there's been a rebound in the loan market, which is up around 1%. But as you also mentioned, credit spreads have started to retighten. In that sort of environment, what's your outlook for CLO equity for the rest of this year? And what do you think it's going to take to see some stronger bids for CLO equity?

Speaker 2

Yeah, Mickey, good morning and great question. So the one thing I want to start off is, so the decline in NAV in April was really market driven, and we saw across the market with loan prices, declining initially, two points, and then I think ultimately, one point combined with the fact that our third party valuation agent increased the yields they're using in the DCF analysis. That caused the, the fair market value of our position, to decline. And as you mentioned, as as the loan market has rallied since quarter end, we do get daily, NAVs. We do calculate, daily NAVs because we get daily marks.

Speaker 2

We obviously don't disclose it on a daily basis, but we have seen a a rebound in the NAV as the market has rebounded as well. I really think the just the opportunity we actually think the volatility, because it's largely been technical driven, is a positive for CLO equity. CLO equity typically outperforms in periods of volatility because your financing is locked in, whereas the two things that can be variable are loan spreads and loan prices can change on on a day to day basis. So with the volatility, we did see a decline in loan prices, and we saw CLO managers purchasing loans at discounted prices, especially in the first couple weeks of April, help building par to offset future losses. And then as I mentioned earlier, the what we have seen is repricing has pretty much come to a halt at least for the first, I would say, fifty days, within the quarter, which is obviously helpful because loan, spreads have declined about 40 basis points, I would say, over the past twelve to fifteen months.

Speaker 2

So the volatility has has has definitely helped us stop that. And as new loans are coming to the market today, albeit at at at limited volumes, they're definitely wider than they they would have been, say say, two months ago or three months ago. So we think that creates a a pretty attractive opportunity for for seal equity today.

Speaker 6

Okay. Thanks thanks for that, initial. That's helpful. Following up on the LMA question. For borrowers within your CLOs that are using LMEs, do you use or do the CLOs employ loan market pricing for their tests?

Speaker 6

And in your experience, what percentage of LMEs eventually default anyway?

Speaker 2

Yeah. Maybe I'll take the first one. So if there is an LME and if the range is considered a defaulted security, they'll typically, mark as defaulted for a brief period, while the restriction is ongoing. At that point, while it's considered default, it is marked at the lower of market value and the, rating to recovery rates, which can be fairly, punitive, but then they quickly come out of default, once the restructuring is completed. So that can be, for most companies, can be a relatively brief period.

Speaker 2

In terms of the number of the stress exchanges that result in future default

Speaker 3

Yeah. What what I'd say to that is that we've only been in the heightened LME environment for the last, let's call it, two years. So we've gone through this. And when I say that, I mean, as a percentage of total bankruptcies. So before, wouldn't see you would see the bankruptcy trend line and the LME trend line move together.

Speaker 3

So they would both go up together. They'd both go down together. And what we've seen in the last two years is they've totally diverged, where the bankruptcy trend line has come down and the LME trend line has gone up. Because these are all pretty recent transactions, we haven't seen many of them, or not many at all, if I could think of off the top of my head, file for bankruptcy afterwards. But that doesn't mean it won't happen in the future.

Speaker 6

Lauren, how does that bake into your assumptions for default rates when you do your estimated yields?

Speaker 3

Yeah, it's a really good question. When you think about the LME situations, and it really does depend on the situation, so you're seeing a much lower haircut for those than what you would see a Chapter 11 process. Oftentimes borrowers may be asking for anywhere between $02 or $0.20 of debt discount capture versus I think an average recovery rate of in the 40s right now for a Chapter 11 process. When you blend those two together, assuming that three quarters of the market is LME and one quarter is true bankruptcy, you still end up within the range of that 2% constant default rate with, depending on how you run it, you know, 30 or 40% haircut on that. So it actually doesn't look that different versus based on where we are today.

Speaker 6

Okay. I understand. And lastly, I noticed that the first position in your schedule of investments looks like it was called. It's not really that old. It's a 2021 vintage.

Speaker 6

So I guess it's coming out of its reinvestment. I'm just curious, why would that be called and what does that mean for the rest of the portfolio?

Speaker 2

Sure. So I think that was you're right, Mickey. Typically, don't see CLOs called that are still in their reinvestment period. I think that was idiosyncratic situation where the equity investors well, I think it was a situation where the CEO manager was underperforming, and so the the equity investors, including ourselves, decided that it was economically better to call the transaction earlier versus keep it outstanding.

Speaker 6

No. That's interesting. Do you have a lot any more positions that you feel, you know, fall into that basket, Nishal?

Speaker 2

I don't think so. We we have, I think, two deals on the portfolio that are in process of being liquidated. We're not aware of any other, CLOs or we're not in discussions with any seal managers about liquidations. The only thing to keep in mind is we typically look at liquidations as an attractive opportunity when loan prices were are elevated like they were in January and February. Given loan prices, while they're recovering from the lows of April, they they haven't fully recovered yet.

Speaker 2

So we most likely wouldn't look to do a liquidation, at this point.

Speaker 6

I understand. Those are all my questions. Thanks for your time this morning.

Speaker 2

Thanks, Mickey.

Operator

That concludes today's question and answer session. I'd like to turn the call back to Nishal Mehta for closing remarks.

Speaker 2

Thank you. We look forward to speaking to everyone next quarter, if not sooner. Please feel free to reach out if you have any questions, and thank you for all your support.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • The Fund maintained its monthly dividend of $0.015 per share (18.8% annualized), supported by $0.49 of recurring cash flows per share in Q2.
  • During the quarter, CCIF invested $30.3 million in new CLO equity at a 15.4% weighted average GAAP yield and completed 13 accretive CLO resets/refinancings, extending the average reinvestment period to 3.1 years.
  • As of March 31, the portfolio delivered a 16.5% GAAP yield and a 22.67% cash-on-cash yield, with a healthy 4.46% weighted average junior over-collateralization cushion and only 5.2% of loans rated CCC.
  • Tariff-induced volatility widened CLO liability spreads and paused loan repricings—dynamics CCIF views as beneficial for CLO equity by enabling purchases at discounts and building par—while underlying credit fundamentals remain resilient with low default rates.
  • Q2 net investment income was $0.23 per share (adjusted NII $0.26), NAV stood at $6.98 per share, and the Fund generated $12.2 million of net proceeds from an ATM share offering at a NAV premium.
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Earnings Conference Call
Carlyle Credit Income Fund Q2 2025
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