Carlyle Secured Lending, Inc.

star 11 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, Nishal Mehta, Head of Shareholder Relations. Please go ahead.

Good morning and welcome to Carlyle Secured Lending's conference call to discuss the earnings results for the third quarter 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 the 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 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 factors section of our 10-K and 10-Qs. These risks and uncertainties could cause actual results to differ materially from those indicated. CGPD 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. 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 one-time purchase 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 non-investment income, the most directly comparable GAAP financial measure to adjusted NNI per share can be found in the accompanying slide presentation for this call. In addition, a 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, CGPD's Chief Executive Officer.

Thanks, Ishal. Good morning, everyone, and thank you all for joining. I'm Justin Floss, the CEO of the Carlisle BDCs and Deputy CIO for Carlisle Global Credit. On today's call, I'll give an overview of our third quarter 2025 results. including the quarter's investment activity and portfolio positioning. I will then hand the call over to our CFO, Tom Hennigan. During the third quarter, CGPD benefited from strong originations across the platform, but was also impacted by historically tight market spreads. We generated 37 cents per share of net investment income for the quarter on a GAAP basis, and 38 cents after adjusting for asset acquisition accounting. Our board of directors declared a fourth quarter dividend of 40 cents per share. Our net asset value as of September 30th was $16.36 per share compared to $16.43 per share as of June 30th. CGPD had another strong quarter of deployment, funding $260 million of investments into new and existing borrowers, resulting in net investment activity of $117 million after accounting for repayments and $48 million of investments sold to our joint venture, MMCF. Total investments at CGVD increased from $2.3 billion to $2.4 billion during the quarter. Looking ahead, net new supply has picked up recently, and the Q4 pipeline continues to build. Year over year, deal flow at the top of the funnel increased nearly 30% over the last two months. We expect activity will continue to increase supported by declining base rates, driving lower funding costs, normalization of tariff and regulatory policy, and resilient expectations for economic growth. Although there have been recent bankruptcies in the news, CGVD has no direct or indirect exposure to first brands or tri-color, and we continue to have confidence in the credit quality of our portfolio. As a reminder, CGVD consistently exhibits below average non-accruals and a strong track record of NAV preservation. Based on June 30th reporting, CGVD's non-accruals were 120 basis points below the public BDC average at cost. And non-accruals at CGVD decreased by 140 basis points at cost between June 30th and September 30th. Overall, we remain selective in our underwriting approach seeking to provide first lien loans to quality companies. We remain focused on portfolio diversification while managing target leverage. As of September 30th, our portfolio was comprised of 221 investments in 158 companies across more than 25 industries. The average exposure to any single portfolio company was less than 1% of total investments, and 95% of our investments were in senior secured loans. The median EBITDA across our portfolio was $98 million. As always, discipline and consistency drove performance in the third quarter, and we expect these tenets to drive performance in future quarters. With that, 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. Total investment income for the third quarter was $67 million, in line with prior quarter, driven by a stable average portfolio size, a modest change in total portfolio yields, and lower accretion of discounts from repayment activity. Total expenses of $40 million increased slightly versus prior quarter, primarily as a result of higher interest expense due in part to the 2030 senior notes transitioning from fixed to the floating rate swap. The result was net investment income for the third quarter of $27 million, or 37 cents per share on a GAAP basis, and 38 cents per share after adjusting for asset acquisition accounting, which excludes the amortization of the purchase price premium from the CSL3 merger and the purchase price discount associated with the consolidation of Credit Fund 2. Our Board of Directors declared the dividend for the fourth quarter of 2025 at a level of 40 cents per share. which is payable to stockholders of record as of the close of business on December 31st. This dividend level represents an attractive yield of over 12% based on the recent share price. In addition, we currently estimate we have 86 cents per share of spillover income generated over the last five years to support the quarterly dividend, which represents more than two quarters of the existing 40 cent quarterly dividend. On valuations, Our total aggregate realized and unrealized net loss for the quarter was about $3 million, or 4 cents per share, partially attributable to unrealized markdowns on select underperforming investments. Turning to credit performance, we continue to see overall stability in credit quality across the portfolio. At the beginning of July, we closed the successful restructuring of Maverick, which was the main contributor to non-accruals decreasing to 1.6% of total investments at cost, and 1% at fair value. And while our non-accrual rates may fluctuate from period to period, we're confident in our ability to leverage the broader Carlisle network to achieve maximum recoveries for underperforming borrowers. Moving to our JV, we continue to focus on maximizing both asset growth and returns at the MMCF JV. We closed an upsize to the credit facility in October. The upsize enables us to increase our investments in the JV which is achieving a run rate mid-teens ROA for CGPD. Separately, we continue to work on optimizing our 30% non-qualifying asset capacity, and are currently in advanced discussions with a potential institutional partner on a new joint venture. And based on our current outlook for earnings, we're comfortable with the current dividend policy, 40 cents per share. I'll finish by touching on our financing facilities and leverage. In October, we raised a new five-year, $300 million institutional unsecured bond at an attractive swap-adjusted rate of SOFR plus 231. We used the proceeds in part to repay in full the higher-priced legacy CSL3 credit facility. In addition, we announced that we will redeem the $85 million baby bond effective December 1st. In the aggregate, these capital structure optimizations will lower our weighted average cost of borrowing by 10 basis points, extend the maturity profile of our capital structure with limited maturities until 2030, and reduce reliance on mark-to-market leverage. Our debt stack is now 100% floating rate, matching our primarily floating rate assets, meaning CGPD is well positioned in advance of future interest rate cuts. At quarter end, statutory leverage was 1.1 times towards the midpoint of our target range. And given our current strong liquidity profile, and targeted incremental asset sales to our MMCF JV, we're well positioned to benefit from the expected pickup and deal volume in future quarters.

With that, I'll turn the call back over to Justin. Thanks, Tom.

As we approach the middle of the fourth 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, CGVD 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. At the platform level, we continue to build out the Carlyle Direct Lending team, As a reminder, Alex Chee will be joining Carlisle as partner deputy chief investment officer for global credit and head of direct lending in early 2026. We also hired a new head of origination during the quarter and continue to build out the broader origination function with an additional hire in Q3 and one more slated to join the team in Q4. All three will expand our existing capabilities combined with the expected increase in overall capital markets activity We are constructive on our expectations for activity and deployment going forward. 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. Our first question comes from the line of Finian O'Shea from Wells Fargo Securities.

Hey, everyone. Good morning. Can you hear me?

Yeah, we can. Hey, Fin.

Hey, how are you? Sorry, just getting ahead of any potential technical difficulty that I seem to have been facing. Tom, can you give us some color, maybe a bridge on The top line this quarter, SOFR was pretty stable, I think. The non-accrual was small. Just seeing what the mix was, whether it be like average portfolio or one-time fees or anything else in there that's notable. Thanks.

Yeah, sure, Finn. Thanks for the question. When you look at the top line, it's $67 million last quarter and this quarter, but last quarter it rounded down, this quarter it rounded up. When you look at the delta, that's a very modest decline. It's primarily OID accretion on repaid investments. That's really the biggest bridge point in terms of the difference between the two. When you look at fee income, it was up modestly, and in the aggregate, the average daily principal balance of loans outstanding was pretty flat across the quarter. That's what we will see, that we should get a benefit in the coming quarter just based on that average daily outstanding investment balance. But that was neutral from second quarter to third quarter. But it was really the all-idea accretion was the biggest point on the top line.

Okay, thanks. In the 10 bips you gave on borrowing spreads, was that just from the baby bond or was that also there's a couple of post-quarter changes as well Is that a holistic sort of guidance or just that one bond? I'm sorry, I didn't catch that.

No, it was primarily post-quarter end items. It was the, we repaid our legacy CSL3 facility. That was priced at SOFR plus 285. The baby bond swap adjusted is SOFR 314. So those, the CSL3 facility we repaid at the beginning of October. the baby bond will be repaid effective December 1st. And then the biggest replacement is the new institutional deal we did, which is swap adjusted 231, so 0 for SOFR. So net-net, that's about 10 basis points across the capital structure.

Okay, thanks. And one final one for me, I'll get back in the queue, and I'm sure we bugged you about this last quarter, but the 40 cents declared into the floor You said something like comfortable for now. Can you expand on for now? Does that include like how far out into the silver curve does that include? And then sort of what are, I know you mentioned the 30% bucket, bit of rotating spread. So like how much of, how much sort of, fundamental or octane sort of drivers offset how much, you know, Fed decline in your outlook for coverage?

Sure. And interestingly, our outlook and the support and our comfort with that 40 cents is actually in the near term, the next few quarters, is where we see the most pain. And that's just based on really primarily the SOFA curve. So, you know, we anticipate earnings will drop in the next couple of quarters. When you look at the longer term with our two JVs, let's just say one JV in place and then potential second JV, that's what we see. That will just take time to ramp those vehicles. So, for example, our existing JV, I mentioned we increased the credit facility from 600 to 800 to just give us more dry powder to continue to invest. We reached agreement with our partner to increase our equity commitments from 175 to 250 each. And we've also been working on some creative low-cost financing solutions to continue to operate at a very low debt cost of capital for that JV. So that gives us the runway, and it's going to take some time to grow that vehicle from $800 million of assets to double the size, to $1.6 billion. And right now, if we're at a 15% return on assets for CCBD, we see the ability to increase that by 300 to 500 basis points. So we see a lot of positive drivers with that JV, but it's going to take some time to invest over the course of the next number of quarters. And then the second JV, we've made some really good progress with a potential partner. It's leveraging Carlisle's global credit expertise in investing loans. It's something we hope to have more more color for the market and hopefully target closing that deal sometime this quarter. But again, that would be a longer term to ramp that vehicle.

No, appreciate all the color there. Thanks so much.

Thank you. One moment for our next question. Our next question comes from the line of Eric Zwick from Lucid Capital Markets.

Good morning.

Just looking at slide five of your deck this morning, over the past year or so, the concentration of first lien debt has increased up to about 86% of the total portfolio now with the second lien investment funds coming down. We've been hearing from others that second lien debt potentially is not as attractive today given tighter spreads. Just curious, are we likely to see this trend continue in your view of first lien debt continuing to become a larger concentration in the portfolio?

Yeah, it's Justin. Thanks for the question. Look, we are operating in a tight spread environment across credit markets. And at this point in time, we don't see a ton of value in second liens. I think the I think across all private credit markets, the amount you're getting paid to take significant risk has really has come down in the last 24 months. So our strategy has always been defensive, diversified, first lien, and then opportunistic on things like second liens. And I would tell you right now, We don't see the opportunity to be that compelling. So I think you will see our portfolio continue to trend first lean. And I don't see any reason for that to change in the near term. You know, of course, we could have a credit cycle and then there might be opportunities that come up at that point. But for now, we're very, very focused on a defensive first lean portfolio.

I appreciate the commentary there. And then just given your comments about the pipeline continuing to grow, I guess I'm curious what the average yield looks like in the pipeline today versus the current weighted average yield in the portfolio. Is there potentially pressure there as the portfolio turns, or what are your thoughts there?

Hey, Eric, it's Tom. There definitely continues to be pressure on spreads relative to where the portfolio is. that are for the first for the third quarter our weighted average spread was a shade over 500 basis points uh prior quarters is a bit higher and part of that is our mix of non-us transactions in the second quarter was closer to 15 percent we're typically seeing anywhere from a 75 to 100 basis point premium for those non-us transactions so we've got a little extra spread premium in the second quarter. In the third quarter, our originations were all strong. It was only about 5%, only one deal from our European originations. So we were right about 500. But I think that there continues to be overall pressure when you look at where the overall portfolio yield is relative to, let's say, those new originations, which are more squarely 500 weighted average. And for a brand new LBO, not in the portfolio, probably a four handle is what we're seeing in today's markets. But for CGPD, those are transactions and we'll be investing in that particular transaction across our broader direct lending business for CGPD as those assets drift and spread below 500. That's where they're very good candidates for our JV.

And last question for me, just looking at the chart on slide 12, the risk rating distribution, a nice quarter over quarter improvement. in those two-rated assets. I'm just curious, the drivers there, was it kind of industry-related or more company-specific, if you're able to provide any commentary.

Increase in the two-rated, Eric, from up by 100 million? Primarily, a couple of deals transitioned from the three-category to two-category. The biggest component is just net originations for the quarters. And those continue to be in our main categories of healthcare, software technology, and financial services. Those continue to be through our larger categories, and that's where most of our originations in the third quarter live.

Thank you for taking my questions.

Thank you. One moment for our next question. Our next question comes from the line of Sean Paul Adams from B. Reilly Securities.

Hey, guys. Good morning. Congrats on the great quarter, but when looking over the non-accruals, it looked like quarter over quarter non-accruals decreased significantly, but the rating within the portfolio increased from four, investment grade rating four to five. Are the non-recruits that are remaining on the books, they just shifted to materially, you know, changing the expectations on recoveries? Or is this just more of a covenant change or just lapsing in the amount of time since payment? Thank you.

Hey, it's Tom again. I'll answer that in a slightly different way, I think, just to describe the changes in the categories. The biggest decline in the four category was the restructuring of Arch Maverick. Now it's called Align Precision. So that was the largest component of that four category. And we successfully restructured, wrote off some debt, but now that transaction, the multiple tranches, lives in the two and three categories. The migration from four to five is primarily one credit that remains on non-accrual that we are in the midst of restructuring right now. And I think that the shift from four to five is acknowledgement on our part that, hey, yes, we're restructuring it. Yes, we're going to be writing off debt. And my credit to you, unlike Maverick, we see a path with a lead agent. We see a path to, it's going to take a few years, but to a very strong recovery, perhaps a full recovery on that investment. The loans, there were two loans. One was a majority piece to four to five were investments that were restructuring their in payment default and or on non-accrual. And we think that even longer term, we're likely not going to have a full return of capital.

Thank you for the call.

Thank you. One moment for our next question. Our next question comes from the line of Robert Dodd from Raymond James.

Hi, guys. On the potential, and I realize nothing has been signed yet, the potential second JV, do you envision that, does your partner envision that as kind of a same kind of style as the existing one? I mean, in your prepared remarks, you mentioned leveraging the global platform more, maybe. Or is, you know, yeah, is this a potential second we're going to begin to structurally, not structurally similar, but target

assets different than the first one and i diversify overall exposure or just participate in the same kind of deals and just diversify you know where it's held right uh robert morning this this contemplated jv the structure will be very similar to the existing jv in terms of 50 50 governance it'll be 50 50 economic ownership it is in loans but it will be a different

investment strategy really zero overlap to the current jv got it thank you and then just are you you're sounding obviously more optimistic about the the outlook and 30 increase in deal flow for a couple months is pretty good um how's the quality of those deals and kind of like the terms i mean are you seeing the initial look at those your point you know four handles on new lbo's i mean Is that what we're looking at? Are the terms consistent with that in terms of the pipeline build? And is the quality of the assets you're seeing, it's one thing for 475 if leverage is lower, but if leverage is getting fuller and fuller, and I don't know that could be the case, you know, those terms might not be so attractive. I mean, any color you can give on like the constituents of the pipeline in terms of how it looks.

Robert, I think that the pipeline consists, I think, high-quality borrowers very much in the same makeup industry-wise as our current portfolio in terms of focus on whether it be software technology, healthcare, business and consumer services, financial services. I would take very much industries and deals specific in terms of leverage. The one key attribute, though, and it was the case back in 23 when leverage was lower, It's been the case now that there's somewhat of reopening in the markets. Is the LTV investing in the first-name loans? Our LTV consistently is 38% to 42% on average, perhaps even lower for some of the technology deals. If we're looking at industrial deals, it may be a bit higher because of the lower growth and lower enterprise value multiples. But overall, that's really the one common attribute is that loan-to-values with that significant coverage, where the loan-to-value is typically 40%.

Got it. Thank you.

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

Morning. Thanks for taking my questions. Just want to make sure I'm understanding your comments and your views on the JV appropriately. It seems like with the upsize and the existing one and the potential second JV, those will take time to scale up. And so, as you look at the earnings power of the portfolio, we shouldn't be thinking of those as having a particularly near-term impact on earnings power. Is that fair to say?

Yeah, that's a very good synopsis of it. You know, when we look at the current quarter, the next quarter, next two quarters, we know The rate cut math is easy for us. Every 100 basis points is three pennies per share per quarter. You know, those JVs are going to take more time, you know, multiple quarters. So, you know, we see an earnings drop in the next couple of quarters, and then it starts to build back up second half of 26 into 27.

Of course, that will all depend on activity in the market as well. If we see elevated activity, perhaps we can ramp faster. But we're thinking about these JVs as long-term drivers of increased income, not necessarily as a quarter-to-quarter fix. Right.

Okay. We have our 86 cents of spillover over two quarters that, you know, for this interim basis, you know, we feel comfortable if we're necessarily paying out the spillover. But, you know, really have the long-term goal in mind.

Okay. Okay. Thank you for clarifying that. And then following on one of your comments, I think it was during the prepared remarks, you mentioned at one point the potential for spreads to widen, especially to compensate a little bit for lower base rates. I guess I'm wondering if that's built into your, is that your base case expectation, and how do you reconcile that with, you know, just the supply and demand and balance of capital that we're seeing in the market now? even with base rates being lower and spreads still being so tight?

Yeah, no, it's not necessarily our base case scenario. I think if you look historically, when rates have been going down, spreads have actually more than compensated for the reduction in rates, but we're in an unusual environment now where we do have base rates going down while spreads either tighten or remain So, in the current environment, that's not the case. But as we know, credit goes through cycles. And I think eventually we will have a change in the supply-demand imbalance. I think historically, if you look across private credit, spreads are at the tighter levels that they've been. So, I think it's reasonable in the intermediate term to think that there probably will be some movement on spread. And we want to be positioned to take advantage of that, right? So that's really all that we're saying, not some prediction of near-term spread widening, because I don't really see the impetus for that in the markets today.

Okay, got it. Thank you.

Thank you. At this time, I would now like to turn the conference back over to Justin Plouffe for closing remarks.

Thanks, everybody, for joining the call. We really appreciate it, and we will speak with you next quarter. Take care.

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