Carlyle Credit Income Fund

Good day, and welcome to the Carlyle Credit Income Fund's first quarter 2026 earnings call. At this time, all participants are on a listen-only mode. After the speaker 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, press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Joseph Castilla. Please go ahead.

Good morning and welcome to Carlyle Credit Income Fund's first quarter 2026 earnings call. With me on the call today is Nishal Mehta, CCIF's principal executive officer and president, Lauren Bazmajan, CCIF's chair and Carlyle's global head of liquid credit, and Nelson Joseph, CCIF's principal financial officer. Last night, we issued our Q1 financial statements and a corresponding press release and earnings presentation discussing our results, which are available on the investor relations section of our website. Following our remarks today, we will hold a question and answer session for analysts and institutional investors. This call is being webcast, and a replay will be available on our website. Any forward-looking statements made today do not guarantee future performance, and any undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the risk factors section of our annual report on the form NCSR. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlyle Credit Income Fund assumes no obligation to update any forward-looking statements at any time. During the conference call, we may discuss adjusted net investment income per common share and core net investment income per common share. which are calculated and presented on a basis other than in accordance with GAAP. We use these non-GAAP financial measures internally to analyze and evaluate financial results and performance, and we believe these non-GAAP financial measures are useful to investors gauging the quality of the fund's financial performance, identifying trends in its results, and providing meaningful period-to-period comparisons. The presentation of this non-GAAP measure is not intended to be a substitute for financial results prepared in accordance with GAAP and should not be considered in isolation. With that, I'll turn the call over to Nishal.

Thanks, Joe. Good morning, everyone, and thank you all for joining CCIS quarterly earnings call. The CELO equity class faced challenges in 2025, including continued loan repricings and bearish sentiment, which weighed on returns for both CELO equity market and CCIS. However, credit fundamentals remain strong and default rates continue to decline. To mitigate this market-wide weakness, we continue to focus on optimizing the portfolio, including completing accretive refinancings and resets, and defensively positioning the portfolio with experienced COO managers. I'd like to highlight the fund's activities over the last quarter and key stats on the portfolio as of December 31st. CSIAF's underlying COO investments generated an annualized cash-on-cash yield of 22.67% for the quarter, which resulted in $0.48 of recurring cash flows for the quarter at the fund level. New CLO investments during the quarter totaled $13.1 million, with a weighted average gap yield of 13.6%. We rotated out of two CLO investments for total proceeds of $4.4 million as part of our continued optimization process. Within CSAT's portfolio, We completed three resets in the first quarter of 2026, resulting in 26 refinancings and resets in calendar year 2025, reducing the cost of liabilities by 31 basis points on average. We expect refinancing and reset activity to continue, taking advantage of historically tight CELO liability spreads. We refinanced $52 million of the Series A term preferred shares with a coupon of 8.75%, with lower cost preferred shares with their weight average coupon of 7.33%. The weight average years left in reinvestment increased slightly from 3.3 years to 3.4 years. This provides sealer managers the opportunity to capitalize on periods of volatility through active management. There are also zero sealers in the portfolio that are post-reinvestment period. We believe the portfolio weight average junior over-causation cushion of 4.48% is healthy and offsets potential defaults and losses in the underlying loan portfolios. The average percentage of loans rated CCC by S&P was 4.2%, below the 7.5% CCC limit in CLOs. And the percentage of loans trading below 80 is 3.8%, below the market average. The weight average spread of the underlying loan portfolio was 3.06%, a sixth basis point decline from the prior quarter. This decline is consistent with the broader market and is driven by a record repricing wave in the loan market over the past two years. This has significantly impacted the earnings power of CELO equity, as CELO resets and refinancings have not been able to fully offset the spread compression. Within CSF's portfolio, the excess spread in the early CELOs has declined approximately 32% since December 31st, 2023. resulting in gap yield to further decline to 13.6%. Following discussion with our board of directors, we have revised our monthly dividend to $0.06 per share. When revising the dividend level, our board considered CSF's current and expected gap yields while also focusing on our objective to support net asset value. The revised dividend level of $0.06 per share results in an annualized dividend of 20%, based on the closing share price as of February 23, 2026. The loan spread compression has also resulted in decline in demand for CELA equity, causing a decline in valuations across the market in CSIA. Notwithstanding the decline in loan spreads, CELA equity benefits from historically low funding costs, secured during a period of tight liability spreads, which provides a strong foundation for forward returns. As discussed last quarter, loan spreads have historically followed multi-year cycles. Current levels are similar to those observed in 2018 and was followed by meaningful spread widening in the following two and a half years due to a better supply-demand balance and market volatility. We believe CEO equity today is positioned to benefit from potential spread widening. Loan supply increased in the fourth quarter of 2025, and we expect loan supply to remain elevated in the first half of 2026 based on the current pipeline and discussions we have with our internal capital markets and private equity teams. A sustained increase in volumes would help rebalance market technicals and support wider performing loan spreads. The recent volatility related to concerns on AI disintermediation may further dampen repricing volumes and conversely increase loan spreads. With funding costs locked in at attractive levels, any normalization of loan spreads could meaningfully enhance excess spread, particularly for deals with longer reinvestment runways. As a result, we expect equity outcomes to increasingly reflect advantage, structure, and manager execution, reinforcing the importance of selectivity. With that, I will now hand the call over to Lauren to discuss the current market environment.

Thank you, Nishal. I'd now like to provide an update on the recent developments across both the loan and CLO markets. CLO issuance totaled $53 billion for the quarter, bringing 2025 issuance to a record $211 billion. including resets and refinancing, total gross CLO activity reached an all-time high of $538 billion, surpassing the prior annual record set in 2024. CLO liability spreads tightened across the capital stack over the course of the year, approaching the post-great financial tides we witnessed in the first quarter of 2025. This tightening only partially offset the impact of loan spread compression, and CLOs that were in their non-call periods could not take advantage of tightening liability spreads. Reset and refinancing activity remained robust, with $52 billion of refinancings and $20 billion of resets pricing during the quarter, as managers extended reinvestment periods and lowered financing costs. The share of U.S. CLOs out of their reinvestment period has declined to roughly 11%, down from about 40% in 2023. reflecting a market with expanded reinvestment capacity. Turning to the loan market, leveraged loans delivered resilient performance in 2025, despite rate cuts and concerns related to tariff implementation. In 2025, the LSTA leveraged loan index returned 5.9%, and in the fourth quarter, the index returned approximately 1.2%. Similar to prior quarters, issuance activity was driven largely by repricing. as borrowers took advantage of the lack of loan supply and lowered their interest expense. Credit fundamentals within Carlyle's U.S. loan portfolio of more than 550 borrowers remain encouraging based on the most recent quarter of reporting. Free cash flow generation continues to be a key focus with over 70% of borrowers producing free cash flow in the third quarter, the highest level we've seen over the past year. revenue and EBITDA growth remained healthy at 6% and 7% year over year. Overall, borrower performance and credit quality remain broadly resilient, though we are seeing pockets of fundamental weakness in building products and chemicals. While software companies have recently traded down on the fear of AI threats, we have not yet seen this result in worsening sales or earnings growth for most of these companies. The broadly syndicated loan default rate inclusive of LMEs has declined from a peak of 4.5% at the end of 2024 to 2.9% by year-end 2025, moving closer to historical averages. We could see this pick up during 2026 as more loans are trading under 80 due to recent fears around AI, but we don't expect it to hit the peak witnessed in the fourth quarter of 2024. DCIF's underlying loan portfolio experienced a default rate of 1.1%. inclusive of out-of-court restructuring. CCIF has been able to achieve a lower default rate by leveraging our in-house credit expertise from over 20 U.S. credit analysts to complete bottom-up fundamental analysis on underlying loan portfolios. We are increasingly focused on the evolving implications of AI-driven disruption across leveraged finance. We believe AI risk, specifically in software companies, is currently less about near-term operating deterioration and more about compressing valuations, potentially slowing growth in sales, and the need to invest behind an AI solution to defend incumbent positions. We think it will take time to see who the winners and losers will be in the sector, but we view the fourth quarter 2025 earnings season as an important checkpoint to further evaluate AI's impact on demand trends, margins, and business model resilience at the borrower level. I will now turn the call back to Nelson, our CFO, to discuss financial results.

Thank you, Lauren. Today I will begin with a review of our first quarter earnings. Total investment income for the first quarter was $7.1 million, or 34 cents per share. Total expenses for the quarter were $5.2 million. Total net investment income for the first quarter was $2 million, or 9 cents per share. compared to $0.15 in the prior quarter, driven by $0.06 per share of interest expense from the amortization of deferred offering costs associated with the redemption of the fund's Series A term preferred shares. Adjusted net investment income for the first quarter was $3.7 million, or $0.17 per share, in line with the prior quarter. Adjusted NII adjusts for the $0.08 per share impact from the amortization of the OID and issuance costs for the fund's preferred shares and credit facility. Core net investment income for the first quarter was 32 cents per share, also in line with the prior quarter. 32 cents of core net investment income provides dividend coverage of 178% on our revised monthly dividends of 6 cents per share. We believe core net investment income is a more accurate representation of CCIF's distribution requirement Net asset value as of December 31st was $5.17 per share. Our net asset value and valuations are based on bid side mark we received from a third party on 100% of the CLO portfolio. We continue to hold one legacy real estate asset in the portfolio. The fair market value of the loan is $2.2 million. The third party we engaged to sell our position continues to work through the sales process. Now turning to the funding side of CCIF. During the quarter, we refinanced $52 million, 8.75% Series A term preferred shares through the issuance of $30 million of 7.375% Series D term preferred shares and a private placement of a five-year 7.25% Series E convertible preferred shares that generated net proceeds before expenses of approximately $16.3 million. The Series D term preferred shares are listed on the New York Stock Exchange under the symbol CCID. The holders of the Series E convertible preferred shares have the option after six months to convert the shares into common stock at the greater of NAV or the average closing price of the five previous trading days. This resulted in a reduction in the cost of capital by approximately 1.42%. With that, I will turn it back to initial.

Thanks, Nelson. We remain confident in the fundamentals of CSAT's portfolio, which remains defensively positioned. We remain focused on experienced managers and transactions that demonstrate durable par build and disciplined credit underwriting. We are deploying capital selectively, prioritizing opportunities that offer attractive relative value across both new issue and seasoned transactions. We continue to leverage the depth of the Carlyle Liquid Credit platform and our collaborative OneCarLot platform to source and invest in high-quality COO portfolios through a disciplined, bottom-up, 15-step investment process. I would like to now turn it over to the operator to answer any questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. One moment while we compile the Q&A roster. And our first question will come from the line of Gaurav Mehta with Alliance Global Partners. Your line should be open.

Yeah, thank you. Good morning. I wanted to maybe ask you on some of the trends that you're seeing in the market as far as the loan repricings and the yields and the spreads. And on the prepared remarks, you said you saw an increase in loan supply in 4 to 25, and it seems like it may remain high in 1 to 26. So just wondering if you would just comment on what you guys are expecting as far as demand and supply and where yields and spreads are heading.

Sure. So I'd say that generally speaking, the repricings have stopped. The volatility in the market around AI fears have led to loan prices trading down, and about 20% of the market now is trading over par, which has stopped, generally stopped the repricings. There is a decent sized backlog of announced deals that will come to market in the first quarter, maybe into the second quarter. Though I do worry or wonder if we'll see that slow down again after we get through all the announced deals, as there's been more uncertainty and volatility in the loan market, there may be a slowdown in M&A transactions.

Okay. Maybe following up on your comments around AI-driven disruptions, how is that impacting your investment pieces and how you're approaching your investments in the CLO market?

Yeah, Gaurav, it's Nishal. Good to speak to you. So maybe I'll talk about it in a couple different ways. One, you're seeing more of an immediate impact, which is really just the volatility Lauren just mentioned regarding loan prices. Um, that is as a result of creating some volatility and evaluations of COOs. Um, but that's really more than your term impact. I think longer term, um, the impact that AI will have on these, on these companies and borrowers is kind of to be determined given this is not a concern that's tomorrow or the next day. It's, it's really. a multi-year potential impact. But also to Lauren's point, the one positive is the volatility has really created a market where you're not seeing loan repricings. We saw a fairly large wave of loan repricings in January. That has definitely declined. And we are in the middle of fourth quarter earnings, which continue to remain strong. As we mentioned in the prepared remarks, the fundamentals of the overall portfolio continue to remain strong.

All right, thank you. That's all I had.

Thank you. One moment for our next question. And that will come from the line of Eric Zwick with Lucid Capital Markets. Your line is open.

Thanks. Good morning, all. You know, in this prepared comments, mentioned some optimism that maybe there's some factors that can contribute to spread widening here in 2026. Kind of maybe a two-part question. One, are you seeing any actual signs in the market that that is starting to happen? And two, if they were to widen materially, how much does that impact your ability to have additional resets and refis in the portfolio?

Yeah, so the discount margins have definitely widened over the last month in the loan market. Loan spreads don't reprice automatically as the risk premium changes. So really the price adjustment is the loan price versus the spread. The way that we'll start to add spread back to portfolios and CLOs will be with new issues coming at wider spreads. which we do anticipate. There isn't a lot of new issue in market, but as I said, there is a real pipeline ahead of us. So I would expect those loans to come with higher spreads than what we've seen over the last couple quarters.

And then just on the refinancing and resetting front when it comes to CLOs, like the market in January and even earlier this month probably hit post-GFC tights when it came to liability spreads. We are seeing some widening, given the reflective of what's going on in the broader loan market and FIXCO markets. But on a historical basis, the liability spreads are still relatively tight. So our expectation, at least based on the market today, is there will still be opportunities to refinance, to complete refinancing and resets within the portfolio.

Thanks. That's very helpful. And I guess, you know, positive to hear that seeing some, you know, loan spread widening there, which would, you know, that's been a large driver of the impact to NAV over the past year. So it seems like there's some potential here that the majority of the kind of decline in NAV for this cycle has, you know, hopefully been realized at this point. I realize you don't have a crystal ball, but is that the right way to think about it?

Yeah, like obviously the market's dynamic and it's hard to predict what's going to happen in the future. But as Lauren mentioned, with the repricings kind of fading away and the discount margin within loans increasing, if we start to see a continued supply and M&A activity, that should result in an increase in loan spreads and overall widening.

And the one other thing, though it's not a gigantic part of our market, but it's worth a mention is that There are still loans that are maturing in 2027, 2028, even into 2029 where I would assume management teams want to push out maturities. When we had seen these extensions before, you were not seeing an increase in coupon. In fact, sometimes you were seeing a decrease in coupon. I would imagine that's another way to capture spread in this market is as we see borrowers come back to push out maturities. they may have to offer more spread on the loan.

Thanks. And one last one for me, and then I'll step aside. Just given the impact on the fair value of the portfolio that spread tightening has had, just kind of give your overall thoughts on leveraging the portfolio today and how you think to manage it from here.

Yeah, so as you can see in our earnings presentation, leverage is at the high end of our target. And so that's something that we're mindful of. And so I think over time we'll look to bring that back to kind of historical target.

Thanks for taking my questions today.

Thanks, Eric.

Thank you. As a reminder, if you would like to ask a question, please press star 1-1. Our next question comes from the line of Timothy D'Agostino with B. Riley. Your line is open.

Yeah, hi, thanks for taking the question, and thanks for the comments before. I guess just one quick one for me. You know, you've mentioned that loan repricings have pretty much kind of all been done, and you did see some in January. I guess it'd be interesting to like hear a little bit more and just get a little more color on how the market for you all looks different in February than in January. just given everything around software and I don't know, just maybe some color in what you're seeing. Thank you.

Yeah, I'd say that performing credit that doesn't have sort of an AI fear around it is down maybe half a point to three quarters of a point. And then names that have some AI fear could be down more significantly. We've seen some real volatility in software names, but it's also spread to other areas like asset managers, insurance brokers, and anything that really you see an AI headline around. So it's created opportunity where there's finally volatility in the market. You could source loans and build PAR because most of the market is trading under PAR.

Okay, great. Thank you for that.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Castillo for any closing remarks.

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

this concludes today's program thank you all for participating you may now disconnect