Carlyle Secured Lending, Inc.

Good day and thank you for standing by. Welcome to Carlisle Secured Lending's first quarter 2026 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you 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 1-1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today. Michelle Mehta, please go ahead.

Good morning and welcome to Carlyle Secured Lending's first quarter 2026 earnings poll. I'm joined by Alex Chee, CGPD's chief executive officer, and Tom Hennigan, our president and chief financial officer. This morning, 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. Today's conference call may include forward-looking statements reflecting our views with respect to, among other things, our future operating results and financial performance. These statements are based on current management expectations, estimates, and projections and involve inherent risk and uncertainty. including those identified in the risk factors and cautionary statements regarding forward-looking statements sections of our 10-K. These risk 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. 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 additional tools to evaluate ongoing results and trends and to review our performance without getting in fact to the amortization or accretion resulting from the new cost basis of the investment 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 effect on incentive fees and are used by management to evaluate the economic earnings of the company. A reconciliation of GAAP non-investment income per share, the most directly comparable GAAP financial measure to adjusted NII 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 this morning with the SEC on Form 8K. With that, I'll turn the call over to Alex.

Thanks, Nishil, and good morning. On today's call, I'll give an overview of our first quarter results, including the quarter's investment activity and portfolio positioning, and provide an update on our investment outlook. I'll then hand the call over to our President and CFO, Tom Hennigan. Despite a complex backdrop marked by geopolitical events and market volatility, we continue to be very pleased with a consistent credit performance of CGVD and strength of the Carlisle Direct Lending platform. In total, we funded $217 million of investments at CGVD and closed over $1.2 billion of new and incremental commitments at the platform level, reflecting a strong quarter of originations. Despite the market volatility, our platform originations were up 14% year-over-year in the face of U.S. private equity deal activity being down nearly 25% over the same period, as a Carlisle direct lending platform continues to take share. In addition, we're seeing signs of an increasingly attractive investment environment, with wider spreads and tighter documentation showing up in our new originations as a result of volatility and the recent rebalancing of capital supply amongst direct lenders. In the first quarter, spreads for CGVD's new investments widened by nearly 50 basis points on average compared to the fourth quarter's average of approximately 475 basis points. And our first lien deals were over a quarter turn less levered at origination. We also saw our enhanced origination team drive several wins during the quarter, including closing deals with two new private equity sponsors that we had not partnered with before. The payments remained elevated with $216 million of activity during the quarter Combined with $153 million in sales to our MMCF joint venture, net investment activity drove total investments at CGVD to decrease from $2.5 billion to $2.3 billion during the quarter. Given a strong visible pipeline and fewer expected repayments, we do expect to see portfolio growth in the second quarter. Total investments at our MMCF joint venture increased to over $1 billion as we continue to prioritize ramping this vehicle given the enhanced returns MMCF generates for CGVD. During the quarter, we generated $0.36 per share of net investment income on both a GAAP and adjusted basis. Our net asset value as of March 31st was $15.89 per share compared to $16.26 per share as of December 31st. The decrease is primarily attributable to market-related valuation factors, which Tom will describe in more detail later. Although concern around software companies persists, we remain confident in the quality and stability of our portfolio. The software borrowers in our book continue to grow revenue and EBITDA on a year-over-year basis. As it relates to AI disruption risk, we continue to feel comfortable with our exposure, finding no material near-term risks to our portfolio companies at this stage. We remain focused on portfolio diversification while managing target leverage. As of March 31st, our portfolio was comprised of 171 companies across more than 25 industries. The average exposure to any single portfolio company was less than 60 basis points of total investments and 94% of our investments were in senior secured loans. The median EBITDA across our portfolio was $100 million. As always, discipline and consistency drove performance in the first quarter. We expect these tenants to drive performance in future quarters. Looking ahead, we continue to expect a wave of M&A activity over the medium term, and we are well positioned with our revitalized origination platform to take advantage of increasing market activity and to continue taking share. Looking at our pipeline, a significant majority of deals are in old economy sectors, including industrials, aerospace and defense, healthcare, and consumer products. While we are optimistic about the potential for continued shift to an increasingly lender-friendly investment environment, GGBD's current income generation continues to be impacted by lower investment yields on the current portfolio, driven by the tight market spreads of recent years. Following discussions with our Board of Directors, we have reset the base dividend to $0.35 per share for the second quarter of 2026, compared to our previous $0.40 per share base dividend, which equates to dividend yield on NAV of 8.8%. We are maintaining our existing supplemental dividend policy, which targets paying out at least 50% of excess earnings above the base dividend. This change will enable us to support a stable NAV in the near term and increases our financial flexibility and dividend coverage cushion, while also allowing us to deliver additional value to shareholders over time, as the investment environment becomes more attractive and we scale our joint ventures. As manager dispersion increases, we expect the breadth of the Corolla platform and the consistency of our performance to differentiate us through our ability to leverage Carlisle's scale, scope of investment capabilities, and dedicated in-house investing, portfolio management, and restructuring resources. With that, I'll now hand the call over to our President and CFO, Tom Hennigan.

Thank you, Alex. 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 positional. Total investment income for the first quarter was $64 million below prior quarter, primarily driven by a decrease in the average portfolio size and a decrease in total portfolio yields as a result of lower base rates and lower spreads. This was partially upset by higher fee income. Total expenses of $39 million also decreased versus prior quarter, primarily as a result of lower interest expense due to lower outstanding debt balance and lower base rates. as well as the acceleration of debt issuance costs from the repayment of our 2028 notes during the fourth quarter. The result was net investment income for the first quarter of $25 million, or 36 cents per share, on both a GAAP basis and after adjusting for the impact of asset acquisition accounting related to the CSL3 merger and consolidation of Credit Fund 2, both which closed in the first quarter of 2025. Our board of directors declared the dividend for the second quarter of 2026 at a level of 35 cents per share, which is payable to stockholders of record as of the close of business on June 30th. As Alex discussed, this resets the base dividend to a level supported by the earnings power of the current portfolio. With the investment environment becoming more attractive, and as we continue to deploy and scale our joint ventures, we expect to potentially deliver additional value to shareholders through the supplemental dividends. In addition, we currently estimate we have $0.70 per share of spillover income to support the quarterly dividend. As we mentioned in prior earnings calls, we expect earnings to trough in the second quarter, and we anticipate an increase in earnings thereafter as we ramp the portfolio of both JVs. Given CDBD shares continue to trade at a compelling discount, we repurchased $19 million of shares at an average discount of 26% during the first quarter. resulting in nine cents of accretion to NAV per share. We continue to repurchase shares in the second quarter with additional $8 million to date, which will result in an additional five cents per share of accretion. And as a reminder, our board approved a $100 million upsize in February, increasing the total program to $300 million. On valuations, our total aggregate realized and unrealized net loss for the quarter was about $29 million or 42 cents per share. Now, about two-thirds of the decline was attributable to unrealized losses from widening spreads across the broader portfolio, including software investments, driven by overall market volatility, with the remainder due to credit-related impacts on a handful of underperforming investments. To turn to credit performance, we continue to see overall stability in credit quality across the portfolio. Key credit stats continue to be stable, including portfolio company margins, leverage levels, and LTVs. Although the fair value of loans utilizing PIC provisions did increase during the first quarter, the majority of our PIC is underwritten at origination or for performing borrowers, or what we would consider to be good PIC. Non-accrual has decreased as of March 31st, with one borrower, Alpine, completing a balance sheet restructuring during the quarter. the four remaining borrowers on non-accrual represent only 0.9% of investments at fair value and 1% at amortized cost. Moving to the middle market credit fund, or MMCF, our longstanding joint venture, we continue to focus on maximizing both asset growth and returns. During the first quarter, we closed an upsize to the MMCF equity commitments from $175 to $250 million for each partner. Further supporting additional ramp, In February, we closed a new $200 million financing facility for MMCF with an attractive cost of SOFR plus 180 basis points. And last week, we closed a $400 million upsize to the existing credit facility from $800 million to $1.2 billion at an attractive spread of SOFR plus 170 basis points. MMCF is currently achieving a 15% dividend yield generated through over $1 billion of investments with no fees at the joint ventures. The equity and debt upsides has positioned us to continue to grow assets at the JV and increase the impact of CGBD earnings. In addition, we began ramping our new JV, Structured Credit Partners, or SCP. As a reminder, SCP is capitalized with $600 million of equity commitments from the Carlisle and Sixth Street BDCs and will invest in broadly syndicated first lien senior secured loans. The financing of these assets will be primarily for CLOs separately managed by Carlisle and Sixth Street subject to the oversight of SCP's Board of Directors. CGPD committed $150 million of capital to the vehicle, which will not charge any management or incentive fees on the underlying JV assets, providing a potential 400 to 500 basis point uplift to total returns. In April, we were able to capitalize on market volatility and accelerated the timeline for the first two CLOs to price and close, benefiting from depressed loan prices and tight liability pricing. We expect the price to enclose two additional CLOs in 2026, subject to market conditions, in line with our plan to ramp at a cadence of four CLO issuances per year to ensure vintage diversification. Over time, the JV is expected to manage approximately $6 to $7 billion of assets fee-free at SEP. We expect to grow the dividends of CGPD as the JV ramps in the coming quarters. I'll finish by touching on our financing facilities and leverage. Our debt stack is 100% floating rate, matching our primarily floating rate assets, meaning CGBD is well positioned in advance of any additional interest rate movements. And we have limited maturities until 2030. At quarter end, statutory leverage was 1.25 times, and net financial leverage, after adjusting for unsettled sales of loans to MMCF, was only 1.06 times. Given our current strong liquidity profile, We believe we're well positioned to benefit from both more attractive terms for new investments and the expected pickup India volume in future quarters.

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

As we approach the middle of the second quarter, our portfolio remains resilient and our strategy remains unchanged. We continue to focus on sourcing and transactions with significant equity cushions, conservative leverage profiles, and attractive spreads relative to market levels. and expect to take advantage of improved conditions in the market with a revitalized origination platform. 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. I'd like to now hand the call over to the operator to take your questions. Thank you.

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again. We will pause for a moment while we compile our Q&A roster.

Our first question comes from Rick Shane with JPMorgan. Your line is open.

Hey, guys. Thanks for taking my questions this morning. Look, you're highlighting the opportunity in terms of better origination terms. I am curious sort of where you see us in the cycle as things start to normalize. Are we in a scenario where it's sort of back to mid-cycle levels in terms of spreads and in terms of deal structure, or is this sort of the classic tight market where you are able to extract premiums and especially strong terms.

Hey, it's Alex. Thanks a lot for the question. It feels to me like, as we've talked about, just given the rebalancing in the capital supply amongst the direct lending landscape, on top of the fact that there is still deal activity out there, there is just more discipline where it comes to spreads that are being indicated as well as for documentation so for the time being and as we look at the pipeline and our dialogue with the borrowers it feels to us like we're clearly back in the environment where we're getting some spread back as we mentioned um our originations in the first quarter the the spreads were up around 50 basis points uh we're getting a bit more oid and the documentation standards are also going a bit further back into lenders' hands. And so for the foreseeable future, and as we look at our pipeline, it feels like this dynamic will continue. Got it.

Okay. Appreciate it, guys. Thank you.

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

Your line is open.

Thanks. Good morning. Just wanted to follow up on the questions. I'm sorry, on the commentary that Tom gave with the question. I think, Tom, you mentioned that you expect the earnings to trough in 2Q given the expected kind of rampant in the JVs. You mentioned some spread widening as well for the core portfolio, but it looks like 1Q new investments, the weighted average yield for that is still below the average yield in the portfolio. So that earnings trough can happen even with potentially a little bit of more kind of core investment yield compression. Is that the right way to think about your commentary?

Hey, Eric, thanks for the question. I think that's right. When you look at the second quarter in particular compared to the first quarter, a couple of dynamics. Number one is overall portfolio spread continues to have a little bit of pressure, but I think that's pretty much worked its way through. Second, base rates, we think at least for our portfolio, base rates, the impact worked its way through in the first quarter. So absent additional rate cuts, at least the prior rate cuts, we felt the pain to date already. When you look at our average assets, and particularly when we had some attractive sales to our JV at the end of the quarter, the average assets for the second quarter are likely to be lower than the first quarter. And then the first quarter was also aided by higher than typical fee income. We had a couple of exits, exit fees and prepayment fees. that probably aided the first quarter by a little bit north of a penny. So you put those together. We also anticipate we're going to finally start to see some ramp. I should say finally. We just started with our JVs. So you're going to start to see some modest ramp, particularly with our new JV with 6th Street in the second quarter, but that's going to be more of a back end 26 into 27 positive. So you put that all together and we think that you'll see, you know, we anticipate we'll trough in the second quarter and then see a rebound in the third quarter.

That's helpful. Thanks. And then just on the I guess 152 million of assets sold to the credit fund in the quarter. How were those assets selected and any commentary you can give on just kind of the details on potentially the yield that was on those as well as the pricing?

Sure. So those I'd say are primarily late 2025 originations, regular course deals, the deals in typically the 450, 475 spread. So those transactions, when we were originating across our platform throughout 2025, those lower spread transactions, typically with a four handle, we really weren't considering to maintain long-term on the CGPD balance sheet. We were always working in concert with PSP with the thought that we would originate directly or ultimately sell to the JV. So that was really just a timing factor of ultimately transacting on those deals that we originated at market terms throughout 2025.

Great. Thank you for taking my questions. Thank you.

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone.

And I'm not showing any further questions at this time.

I turn the call back to Alex for any further remarks.

Great. Thanks, everyone, for participating on our call. We'll continue to execute and look forward to speaking with you when we report the next quarter. Have a good day.

Thank you, ladies and gentlemen. This concludes today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.