Carlyle Secured Lending Q1 2025 Earnings Report

Carlyle Secured Lending EPS Results

• Actual EPS: $0.41
• Consensus EPS: $0.43
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: N/A

Carlyle Secured Lending Revenue Results

• Actual Revenue: $54.60 million
• Expected Revenue: $55.50 million
• Beat/Miss: Missed by -$900.00 thousand
• YoY Revenue Growth: N/A

Carlyle Secured Lending Announcement Details

• Quarter: Q1 2025
• Date: 5/6/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, May 7, 2025
• Conference Call Time: 11:00AM ET

Carlyle Secured Lending (NASDAQ:CGBD) (NASDAQ: CGBD) is a closed-end, non-diversified business development company that provides customized debt financing solutions to middle-market companies. Chartered under the Investment Company Act of 1940, the company invests primarily in floating-rate senior secured loans, including first-lien, unitranche and one-stop structures. Its objective is to generate current income and capital appreciation through disciplined credit selection and active portfolio management.

The firm focuses on U.S. borrowers across a range of industries, including business services, healthcare, manufacturing and technology. By targeting sponsor-backed and independently owned enterprises with stable cash flows, Carlyle Secured Lending seeks to structure transactions that balance yield potential with downside protection. Its portfolio typically comprises secured obligations backed by company assets and receivables, providing a cushion against credit volatility in varied market environments.

Carlyle Secured Lending’s investment activities are overseen by Carlyle Global Credit Investment Management, the credit arm of The Carlyle Group. Leveraging global research capabilities and risk management frameworks, the team employs in-house credit analysis and market insights to source and monitor investments. Since commencing operations in 2018, the company has maintained a diversified portfolio and a floating-rate exposure designed to benefit from rising interest rate regimes.

Carlyle Secured Lending Q1 2025 Earnings Call Transcript

Key Takeaways

• Carlyle Secured Lending grew its portfolio from $1.9 billion to $2.5 billion in Q1 through $180 million of organic originations, the CSL3 merger adding $490 million, and Credit Fund II consolidation contributing $127 million.
• Adjusted net investment income of $0.41 per share in Q1 and a declared Q2 dividend of $0.40 per share imply an attractive ~11% yield.
• Net asset value fell modestly to $16.63 per share from $16.80 at year-end, reflecting mark-downs and a rise in non-accruals to 1.6% of the portfolio.
• Earnings face headwinds from declining base rates, historically tight credit spreads and ongoing tariff-related market volatility that could dampen near-term originations.
• Financing flexibility was enhanced by upsizing the revolving credit facility to $935 million, assuming a $250 million CSL3 facility, and launching an ATM equity program, keeping leverage near 1×.

Presentation

[Operator]

Hello. Good day, and thank you for standing by. Welcome to the Carlyle Secured Lending, Inc First Quarter 2025 earnings call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question-and-answer session. If you'd like to ask a question, please press star and the number one on your telephone keypad. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nishil Mehta, Head of Shareholder Relations. Please go ahead.

[Nishil Mehta, Head of Shareholder Relations at Carlyle Secured Lending Inc]

Good morning and welcome to Carlyle Secured Lending's conference call to discuss the earnings results for the first quarter of 2025. I'm joined by Justin Plouffe, our Chief Executive Officer, and Tom Hennigan, our Chief Financial Officer. Last night, we filed our Form 10-Q and issued a press release with a presentation of 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. Any forward-looking statements made today do not guarantee future performance, and any undue reliance should not be placed on them.

[Nishil Mehta, Head of Shareholder Relations at Carlyle Secured Lending Inc]

Today's conference call may include forward-looking statements reflecting our views with respect to, among other things, the expected synergies associated with the merger, the ability to realize the anticipated benefits of the merger, and our future operating results and financial performance. These statements are based on current management expectations and involve inherent risk and uncertainties, including those identified in the risk factor sections of our 10-K and 10-Qs. These risks and uncertainties could cause actual results to differ materially from those indicated. CGBD assumes no obligation to update any forward-looking statements at any time. During the conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as adjusted net investment income or adjusted NII.

[Nishil Mehta, Head of Shareholder Relations at Carlyle Secured Lending Inc]

The company's management believes adjusted net investment income, adjusted net investment income per share, adjusted net income, and adjusted net income per share are useful to investors as an additional tool to evaluate ongoing results and trends and to review our performance without giving effect to the amortization or accretion resulting from the new cost basis of the investments acquired and accounted for under the acquisition method of accounting in accordance with ASC 805 and the purchase one-time or non-recurring investment income and expense events, including the effects on incentive fees, and are used by management to evaluate the economic earnings of the company. A reconciliation of GAAP net investment income, the most directly comparable GAAP financial measure to adjusted NII per share, can be found in the accompanying slide presentation for this call.

[Nishil Mehta, Head of Shareholder Relations at Carlyle Secured Lending Inc]

In addition, a reconciliation of these measures may also be found in our earnings release filed last night with the SEC on Form 8-K. With that, I'll turn the call over to Justin, CGBD's Chief Executive Officer.

[Justin Plouffe, CEO at Carlyle Secured Lending Inc]

Thanks, Nishil. Good morning, everyone, and thank you all for joining. I'm Justin Plouffe, the CEO of the Carlyle BDCs and Deputy CIO for Carlyle Global Credit. On today's call, I'll give an overview of our first quarter 2025 results, including the quarter's investment activity, strategic transactions, and portfolio positioning. I'll then hand the call over to our CFO, Tom Hennigan. In the first quarter, CGBD benefited from growth in the overall portfolio but was also impacted by headwinds from declining base rates and historically tight market spreads. During the quarter, we generated GAAP net investment income of $0.40 per share and adjusted net investment income of $0.41 per share after adjusting for asset acquisition accounting. This represents an annualized yield of approximately 10% on our $16.63 NAV.

[Justin Plouffe, CEO at Carlyle Secured Lending Inc]

Our Board of Directors declared a second quarter dividend of $0.40 per share, and our net asset value as of March 31st was $16.63 per share compared to $16.80 per share as of December 31st. While sponsor M&A activity was muted during the first quarter, CGBD was still able to add approximately $180 million in organic originations to its portfolio. In addition, the total size of our portfolio was bolstered by our strategic activity, including the merger with CSL III and the consolidation of Credit Fund II's assets onto the balance sheet. Upon the close of the CSL III merger on March 27th, CGBD received approximately $490 million in new investments, and the consolidation of Credit Fund II in February increased the portfolio size by a net $127 million. Cumulatively, total assets increased from $1.9 billion to $2.5 billion this quarter based on net investment and strategic activity.

[Justin Plouffe, CEO at Carlyle Secured Lending Inc]

From a market perspective, broadly syndicated and private credit markets remained in competition. While our pipeline continues to be active, recent volatility around tariffs is likely to remain a near-term headwind to overall capital markets and M&A activity. We have examined our entire portfolio, and at this time, we see minimal potential direct risk from tariffs. We estimate that less than 5% of the portfolio has any material direct exposure. As trade policy evolves, we'll continue to assess and monitor our portfolio companies for other direct and indirect impacts. So far, broader market volatility has had a limited impact on spreads in the private credit space, which remain near historically tight levels, presenting a potential headwind to near-term earnings for the sector. Overall, we remain selective in our underwriting approach, seeking quality credits at the top of the capital structure.

[Justin Plouffe, CEO at Carlyle Secured Lending Inc]

As previously mentioned, we closed the strategic affiliate merger with CSL III at the end of the first quarter. The merger increased our scale and eliminated the CGBD preferred stock dilution overhang, with Carlyle exchanging its investment at NAV. We expect the combination to improve the liquidity of our stock and reduce aggregate costs, all while maintaining our existing investment strategy given the near 100% overlap between CSL III's portfolio and CGBD's portfolio. To support the transaction, and in addition to exchanging its preferred stock, Carlyle provided $5 million of merger-related expense coverage, mitigating the cost impact to CGBD. With increased uncertainty and volatility in the markets driven by tariff and trade policy, we are focused on overall credit performance and diversification while continuing to deploy and increase the size of our portfolio. As of March 31st, our portfolio is comprised of 195 investments in 138 companies across more than 25 industries.

[Justin Plouffe, CEO at Carlyle Secured Lending Inc]

The average exposure in any single portfolio company was less than 1% of total investments, and 94% of our investments were in senior secured loans. The median EBITDA across our portfolio is $87 million. As always, discipline and consistency drove performance in the first quarter, and we expect these tenets to drive performance in future quarters. With that, I'll now hand the call over to our CFO and our newest member of the Board of Directors, Tom Hennigan.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

Thank you, Justin. Today, I'll begin with an overview of our first quarter financial results. Then I'll discuss portfolio performance before concluding with detail on our balance sheet positioning. Total investment income for the first quarter was $55 million, generally in line with prior quarter, due primarily to a higher average portfolio balance offset by lower weighted average yields on the portfolio and lower dividends from Credit Fund II. Total expenses of $33 million increased versus prior quarter, primarily as a result of higher interest expense from a higher average outstanding debt balance driven by growth in the portfolio.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

The result was GAAP net investment income for the first quarter of $21 million, or $0.40 per share, and adjusted net investment income per share of $0.41, which excludes the amortization of the purchase price premium of the CSL III merger and the purchase price discount associated with the consolidation of Credit Fund II. Now, excluding the additional $0.02 per share of income from last quarter's one-time incremental dividend from Credit Fund II, which cleared the spillover income in that vehicle, this quarter's earnings represent about a $0.04 per share decline from the prior quarter, attributable to tighter yields from the combination of lower new issue spreads, lower base rates, repricings of existing loans, and a modest uptick in non-accruals, as well as the repayment at the end of last quarter of our lower-cost bonds that were issued in a low-interest rate environment.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

Now, given the timing of the merger close in the last week of March, Q1 earnings primarily represent income generated from pre-combination standalone CGBD. The earnings power of the combined portfolio will be reflected in Q2 earnings, and on a per-share basis, we expect NII to remain in the same range as Q1. Our Board of Directors declared a dividend for the second quarter of 2025 at a level of $0.40 per share, equal to our base dividend, which is payable to stockholders of record as the close of business on June 30th. This dividend level represents an attractive yield of about 11% based on the recent share price. In addition, we have $0.85 per share of spillover income generated over the last five years, so we feel comfortable in our ability to maintain the base dividend.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

On valuations, our total aggregate realized and unrealized net loss was about $8 million for the quarter, partially attributable to a markdown on Maverick, which we added to non-accrual during the quarter. This was partially offset by the successful exit of SPAY at par and markups in the value of our equity positions in SPF and Bayside, formerly known as DermGrowth and ProPT, respectively. Turning to credit performance, we continue to see overall stability in credit quality across the portfolio, with some underperformance in a handful of names, and we're continuing to actively assess each portfolio company's tariff risk exposure. For most of our borrowers, this is not the first time they'll be reassessing supply chains, so we feel comfortable that the direct impact may be somewhat limited outside of the broader risk of a slowdown in overall economic growth.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

For businesses that may not be directly impacted, including those in the U.S. services sectors, we're focused on evaluating the potential secondary effects of reduced demand as various companies may face higher costs. On the metrics, the risk rating distribution improved in the quarter with the addition of the CSL III assets, which were substantially risk-rated too, although non-accruals increased to 1.6% of total investments at fair value. We continue to work closely with both sponsors and borrowers to position our portfolio companies for improved financial performance. While our non-accrual rates may fluctuate from period to period, we're confident in our ability to leverage the broader Carlyle network to achieve maximum recoveries for underperforming borrowers. Moving to the credit funds, as previewed last quarter, we've been focused on optimizing our joint ventures over the last number of quarters.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

In February, we consolidated Credit Fund II onto CGBD's balance sheet to address the static nature of that vehicle. Following this transaction, we turned our focus to optimizing Credit Fund I by extending the investment period by three years and closing a new credit facility with overall more attractive terms and economics, which should materially improve ROE at that vehicle. Both of these transactions increased our non-qualifying asset capacity, thereby providing greater flexibility going forward for both complementary transactions and other strategic partnerships. I'll finish by touching on our financing facilities and leverage. We continue to improve our capital structure in early 2025. In March, we upsized and extended our primary revolving credit facility, increasing total commitments by $145 million to $935 million in total. Further increasing our debt capacity upon closing the merger, CGBD assumed the $250 million CSL III credit facility.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

Also, in connection with closing of the merger, Carlyle exchanged its preferred stock for common stock at net asset value per share instead of the latest conversion price of $8.87 per share. This eliminated the historical overhang from the potential dilutive impact of the preferred equity on both NAV and NII. Finally, at the end of March, we entered into an equity distribution agreement, enabling us to raise additional dry powder through an at-the-market equity offering program. At quarter-end, statutory leverage was about one turn, providing capacity to deploy capital into attractive opportunities. With that, I'll turn the call back over to Justin.

[Justin Plouffe, CEO at Carlyle Secured Lending Inc]

Thanks, Tom. As we approach the middle of the second quarter, our portfolio remains resilient. We continue to focus on sourcing transactions with significant equity cushions, conservative leverage profiles, and attractive spreads relative to market levels. Our pipeline of new originations is active, and with a stable, high-quality portfolio, CGBD stockholders are benefiting from the continued execution of our strategy. As always, we remain committed to delivering a resilient, stable cash flow stream to our investors through consistent income and solid credit performance. I'd like to now hand the call over to the operator to take your questions. Thank you.

[Operator]

Thank you. If you'd like to ask a question, please press star and the number one on your telephone keypad. Again, that is star and the number one on your telephone keypad. With our first question, this comes from the line of Finian O'Shea from Wells Fargo Securities. The line's open.

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

Hey, everyone. Thanks and good morning. On the Credit Fund, Tom, I think you said it would enhance ROE. 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.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

Hey, sure. Good morning, Fin. Thanks for the question. You're right. The nominal value outstanding, the cost for both JVs, the JV2 going to zero, JV1, 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 way assets, at least in the near term.

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

Okay. Is the financing—what kind of securitization is it? Does it run down?

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

It is what I would classify as 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.

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

Okay. Your comments on opening up this bucket, you just shrunk the sort of standard BSL-type JVs. Is it something—do you just want to do new ones that are essentially similar, or is there a different kind of strategy you'll pursue in there?

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

I don't think you'll see anything dramatically different, but we're in active negotiations and conversations internally, and 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.

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

Okay. All for me. Thanks so much.

[Operator]

Thank you. Again, if you would like to ask a question, please press star and the number one on your telephone keypad. Our next question comes from the line of Melissa Wedel from JPMorgan. The line's open.

[Melissa Wedel, VP of U.S. Equities Research at JPMorgan]

Good morning. Thanks for taking my questions. Now that the merger is done and 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 sort of pre-merger portfolio yield for CGBD, and what's the plan there? Thank you.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

Hey, Melissa. Yeah, the impact—so the CSL III book, very clean book, newer vintage, 99% first lien, so inherently the overall yield compared to CGBD lower. On a merge into two, 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. Just about every loan in CSL III was already in CGBD, so it's just an upsizing of those positions. Where we will selectively look to do what your 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.

[Melissa Wedel, VP of U.S. Equities Research at JPMorgan]

Okay. Thanks for that. When we look at portfolio leverage, it is a bit lower on a net basis. When you think about sort of rotating assets and driving leverage higher and back into maybe the middle of the target range, how do you think about the timeline for that, especially in a more volatile, uncertain environment like we have right now?

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

Sure. Our target is one-to-one in terms of where we'd like to operate going forward. Certainly difficult to say based on—we've seen, Justin noted, we've seen a near-term slowdown in overall activity. Tough to say how that'll play out. Our goal would certainly be over the next couple of quarters. What we have seen this quarter is we had a very strong pipeline of transactions heading into the second quarter. I think the second quarter will be quite positive. We have seen a slowdown. We had an uptick in repayments in the first quarter. We've seen those slow down. The crystal ball for the second quarter is that should be a pretty good overall originations quarter from us. We'll look to rotate some of those assets into the JV. We would have a strong pipeline of deals that we anticipate we'll be selling to the JV.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

We'd anticipate over the next, let's say, two quarters getting to our target leverage range.

[Melissa Wedel, VP of U.S. Equities Research at JPMorgan]

That's very helpful. Thank you.

[Operator]

Thank you. Our next question comes back from the line of Finian O'Shea from Wells Fargo Securities. The line's open.

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

Hey, everyone. Thanks. 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. Thank you.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

Sure. What I said, right now, when we look at second quarter combined basis, we're looking at about $0.40, right where we were for the first quarter on a standalone CGBD basis. In terms of various levers, obviously, the headwind is going to be the SOFR 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 on the lower end. We haven't seen it quite yet, but potential reversal in the 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'll anticipate that non-accruals, let's say, will be neutral.

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

There are the JVs, and that's, I think, in terms of ramping up our current JV and then utilizing that non-qualifying asset capacity for new endeavors. That'll really be our driver in terms of what our goal will be to remain in the current territory we're at. Certainly, with the SOFR, there will be some obvious headwinds in terms of earnings.

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

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

[Tom Hennigan, CFO at Carlyle Secured Lending Inc]

That is something that we have not put numbers to a page and something that we will take quarter by quarter. Right now, we will assess that on a go-forward basis.

[Justin Plouffe, CEO at Carlyle Secured Lending Inc]

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

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

Very good. Thanks so much.

[Operator]

Thank you. There are no further questions. At this time, I would like to turn the conference back over to Justin Plouffe for closing remarks.

[Justin Plouffe, CEO at Carlyle Secured Lending Inc]

Thanks, everybody, for joining the call today. We appreciate your interest and support, and we will speak with you next quarter. Thank you so much.

Participants

Executives

• Tom Hennigan, CFO
• Nishil Mehta, Head of Shareholder Relations
• Justin Plouffe, CEO

Analysts

• Finian O'Shea, Director of WFS Research at Wells Fargo Securities
• Melissa Wedel, VP of U.S. Equities Research at JPMorgan