Carlyle Secured Lending, Inc.

Good day and thank you for standing by. Welcome to Carlyle Secured Lending, Inc. 3rd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nischel Mehta, Head of Shareholder Relations. Please go ahead.

Good morning and welcome to Carlyle's Secured Lending Conference call to discuss the earnings results for third quarter of 2024. I'm joined by Justin Plouffe, our Chief Executive Officer, and Tom Hedigan, our Chief Financial Officer. Last night, we filed our Form 10-2 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. Today's conference call may include forward-looking statements reflecting our views with respect to, among other things, the timing or likelihood of the closing of the proposed merger, the expected synergies associated with the proposed merger, the ability to realize the anticipated benefits of the proposed 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 factors section of our 10K and our 10Qs. These risks and uncertainties could cause actual results to differ materially from those indicated. CGVD assumes no obligation to update any forward-looking statements at any time. During this 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. A company's manager 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 for the company without giving effect to one-time or non-recurring events and are used by management to evaluate the economic earnings of the company. A reconciliation of GAAP manifested income per share, the most directly comparable GAAP financial measure to adjusted NII, can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed last night with the SEC on Form 8K. With that, I'll turn the call over to Justin, CGVD's Chief Executive Officer.

Thanks, Nishal. Good morning, everyone, and thank you all for joining. I'm Justin Floss, the CEO of the Carlisle BDCs and Deputy CIO for Global Credit at Carlisle. On today's call, I'll give an overview of our third quarter 2024 results and discuss the quarter's investment activity and portfolio positioning. I'll then hand the call over to our CFO, Tom Hennigan. In the third quarter, our financial performance continued to benefit from stable credit performance as well as a higher base rate environment. During the quarter, we generated net investment income of 47 cents per share and adjusted net investment income of 49 cents per share after adjusting for certain accelerated debt issuance costs related to our CLO reset. Our adjusted NII represents an annualized yield of nearly 12% based on our 930 NAF. Our Board of Directors declared a total fourth quarter dividend of 45 cents per share consisting of our base dividend of 40 cents plus a 5 cent supplemental dividend. Our net asset value as of September 30th was relatively flat at $16.85 per share, down modestly from the prior quarter. Deal activity has continued to strengthen in the second half of 2024. While repricing activity continued, new issue spreads stabilized in the third quarter. This is despite the persistence of increased competition and cross-market refinancings between the broadly syndicated and private credit markets. Our originations in the third quarter were up significantly year over year, and our pipeline continues to grow. We expect volumes to remain strong in 2025 as the M&A pipeline expands. We continue to benefit from the One Carlisle platform, which differentiates us in the core middle market. While increasing origination activity is a positive for our strategy, we remain focused on overall credit performance and maintaining a highly diversified portfolio. As of September 30th, our portfolio is comprised of 175 investments in 128 companies across more than 25 industries. The average exposure in any single portfolio company is less than 1%, and 94% of our investments are in senior secured loans. The median EBITDA across our core portfolio at quarter end was $85 million. As always, discipline and consistency drove performance in the third quarter, and we expect these tenants to drive performance in future quarters. I'll now hand the call over to our CFO, Tom Hennigan.

Thank you, Justin. Today, I'll begin with an overview of our third quarter financial results. Then I'll discuss portfolio performance before concluding with detail on our balance sheet positioning. CGBD had another strong quarter on the earnings front. Total investment income for the third quarter was $56 million. Modestly lower compared to prior quarter, due primarily to a lower average portfolio balance and lower-rated average yields. Total expenses of $31 million were flat versus prior quarter, as one-time expenses associated with the CLO reset offset reduced total interest expense for both a lower average outstanding debt balance and lower rates. The result was net investment income for the third quarter of $24 million, or 47 cents per share. Importantly, adjusted for the expenses associated with the CLO reset, Adjusted NII was $25 million, or 49 cents per share. Our Board of Directors declared the dividends for the fourth quarter of 2024 at a total level of 45 cents per share. That's comprised of the 40-cent base dividend plus a 5-cent supplemental dividend, which is payable to stockholders of record as of the close of business on December 31st. This total dividend reflects our variable supplemental dividend policy of paying out at least 50% of excess earnings which allows us to be flexible as the portfolio evolves and base rates fluctuate. Our base dividend coverage of 118% for the quarter remains in line with the BDC Peer Set Average, and we've consistently out-earned our dividend, resulting in $1.40 per share of cumulative spillover. At the same time, the total dividend level also represents an attractive yield of nearly 11% based on the recent share price. And looking ahead, we remain confident in our ability to meet and exceed our 40-cent base dividend. That said, the combination of expected lower base rates, tighter new issue spreads, and portfolio repricing activity, we do expect to see some contraction in earnings in coming quarters relative to the historical highs we've achieved over the last two years. On valuations, our total aggregate realized and unrealized net loss was about $5 million for the quarter. The largest contributor was a decline in value at one of the positions in our MMCFJV. However, we successfully exited that position last month at a price materially higher than our 930 valuation. And of note, some of our legacy healthcare names continue to improve, highlighted by incremental markups on SPF and Bayside. In terms of credit performance, we continue to see overall stability in credit quality across the portfolio. And as previewed in last quarter's call, non-accruals decreased to only 0.6% of total investments at fair value as we exited our investment in emergency communications at a price in line with our 630 fair value. And we continue to work towards favorable solutions with the other two borrowers currently on non-accrual status. I'll finish by touching on our financing facilities and leverage. It's been a busy last few months as we continue to improve our positioning on the right side of our balance sheet. As mentioned on last quarter's call, in early July, we closed a reset of the 2015-1 CLO, extending the reinvestment period and maturity date by four years and reducing the cost of debt by more than 20 basis points within that vehicle. In September, we successfully received investment grade ratings from both Moody's and Fitch. And then in October, we issued $300 million of unsecured notes with a 6.75% fixed rate, which we swapped to a floating interest rate of SOFR plus 323 beginning in August 2025. This transaction further diversifies our financing sources and will repay the 2024 unsecured notes that mature in December, while providing additional capital to fund new investment opportunities. At quarter end, statutory leverage was about 1.05 times, and net financial leverage was about 0.9 times. With leverage at the low end of our target range of 0.9 to 1.25 times, we have capacity to deploy capital into attractive opportunities in an accelerating deal environment. With that, I'll turn the call back over to Justin.

Thanks, Tom. As a final point, I'd like to report that the merger between CGPD and Carlisle Secured Lending III announced on our second quarter earnings call remains on track to close by the end of the first quarter of 2025, subject to approval from CGVD stockholders and satisfaction or waiver of other customary closing conditions. We continue to have high conviction in the strategic benefits the transaction will provide to CGVD, including an increase in scale and liquidity, a reduction in costs from operational efficiencies, and accretion to both earnings and NAV per share. As a reminder, Carlyle has agreed to exchange its existing convertible preferred shares for common stock at a price of NAV rather than the existing dilutive conversion price of $8.92, which will occur shortly before close of the proposed merger. We believe that this exchange is shareholder friendly and demonstrates Carlyle's support for the ongoing success of CGVD. We expect to distribute proxy materials related to the merger in the coming months and urge all stockholders to vote in the merger approval process upon receiving a formal notification. As we look toward year-end, market demand for private credit remains strong. We continue to focus on sourcing transactions with significant equity cushions, conservative leverage profiles, and attractive spreads relative to market levels. With attractive new originations of stable portfolio and low non-accruals, CGPD 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.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question. Our first question comes from the line of Bryce Rowe from B. Reilly.

Thanks. Good morning. Wanted to just maybe start on the outlook from a portfolio perspective and just get a feel for what the pipeline kind of looks like right now and any thoughts around balance sheet leverage at this point. I think you highlighted that you're at a relatively low point from a balance sheet leverage perspective. And the sister BDC is, to the best of my knowledge, carrying even lower leverage. So just wanted to get a feel for how that could ramp as the two BDCs possibly come together, especially in light of some of the commentary around M&A picking up.

Yeah, sure, Bryce. This is Justin. Excuse me. I'll take the sort of macro question, and then maybe I'll ask Tom to talk about the balance sheet leverage. So the short answer is we're optimistic. Our originations were up last quarter. I think the pipeline I would characterize as meaningful and increasing. We certainly expect M&A activity to continue to pick up. in Q4 and in the first quarter of next year. So we're very, very focused on the deployment that we need to do prior to the merger. And I think that the market is coming our way in that respect in terms of deal volume. Now, of course, there is downward pressure on spreads, but that's market-wide phenomenon. We're really focused on deploying into great credits. And that's really what we're going to try to do over the next six months. Specifically on the amount of leverage, Tom, do you want to comment on that, where we are?

Absolutely, Bryce. And our target at merger close is 1.1 across the combined entities. Again, as of 930.9 at CGPD. But right now, our pipeline, Justin noted, very solid on the new deal front. looking a little bit lighter this quarter. At least that's our current crystal ball in expectation. So right now we're closer to 0.95 times, and by quarter end we think we'll be north of 1.0. At least that's based on our current visible pipeline right now. So we think we're well on our way to achieving that 1.1 rough target when we get to the merger confirmation in the first quarter.

Okay. And, Tom, just to be clear, the 0.95 and the 1.0 comment you just made, that is – just cgbd specific or is that is that pro forma just cgbd yeah okay um and then i mean and maybe maybe just just some commentary around the repayment volume certainly appreciate that you know the pipeline looks strong um and you know as you as you progress towards the end of the year um you know deals are coming together from an origination perspective is that are you continuing to see pressure from a repayment perspective? I think if I just kind of look at maybe the last seven quarters, you've had kind of repayments that have outpaced origination. So just trying to get a feel for how that could change and the dynamic that will make that change.

Yeah, we do see that reversing this quarter. I think it's just higher overall volume on the new deal side. And then difficult to time repayments, but at least as of right now in terms of known repayments in the book, it's lighter this quarter than it's been the last couple quarters.

Okay. And then, Justin, you made a comment kind of early in your prepared remarks about spreads stabilizing. I think we've heard a lot about spread compression in this space and have heard a couple comments here recently that spreads feel like they're stabilizing. Maybe expand that comment for us a little bit if you don't mind.

Sure. I mean, I would say that for our typical first leaner unitron deals, we did see significant reduction in kind of the 12 months ending in the summer at the end of Q2. Since then, stabilization in the, let's call it SOFR 500 to 550 area, that we seem to be sticking there a little bit. Now, you know, who knows what the future will bring. And I will say that as rates go down, if they go down more towards the kind of 4% terminal value that the market is predicting, we may even see spreads widen out a little bit if history is any indicator. Typically when we see reductions in base rates, we do get a little bit of spread widening. So I think there's reason to believe based on the deal flow that we have and based on the reduction in rates in September and maybe tomorrow, that spreads may stick where they are and maybe even widen a little bit. Okay. That's helpful. Thank you, guys. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Melissa Weddle from JP Morgan. Good morning.

Thanks for taking my questions today. You've addressed a lot of them. I was hoping that you could touch on trends that you're seeing just in terms of fundamentals. And I apologize if I missed it earlier. But in terms of revenue growth and EBITDA, what are you seeing within the portfolio? And what are you seeing within the opportunity set to deploy new capital?

Yeah, I would say fundamentals are strong. The companies in our book, as a general matter, and they continue to grow revenue, they continue to grow. EBITDA across the market, the level of distress is on the lower end. There are always credits that we're eyeing, of course, that have idiosyncratic issues. But across the book, I would say it's a relatively benign credit environment. Companies seem to have survived the significant rise in rates over the past couple of years, generically better than I think the market expected. So from a credit perspective, we're relatively pleased with where the market is and the new opportunities we're seeing. We're seeing good companies. They're strong credits. We like the companies we're seeing. I'd characterize the market overall right now as pretty constructive.

Okay. And just to put maybe a finer point to it, in terms of revenue growth versus EBITDA growth across your portfolio generally, Are you seeing one growing faster than the other and any general range that you could provide? Thank you.

Yeah, Melissa, I think that when you go back two years, three years when inflation started to hit, definitely the top line was growing faster than the bottom line. We saw 12, 18 months ago that reverse where finally margins were catching up and we saw margin expansion. So you go back a couple of quarters, we had revenue and EBITDA growth in the low double digits, you know, 10%, 12%. We've seen that slow down a little bit and probably just based on inflationary pressures going away. So we're seeing those growth rates and margins stabilize in more than mid-single digits. So still healthy growth, just probably not, we'll call it the inflation-driven higher overall growth rates we were seeing, let's say, a number of quarters back.

Thank you. Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. At this time, I would now like to turn the conference back over to Justin Plouffe for closing remarks.

Thank you, everyone, for joining us today. We really appreciate all your attention, and we will speak with you next quarter. Thank you so much. That'll conclude the call.

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