Carlyle Credit Income Fund

Good day and thank you for standing by. Welcome to the Carlisle Credit Income Fund Second Quarter 2026 Financial Results and Investor 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 11 on your telephone. You will then hear an automated message advising that 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 first speaker today, Joseph Castillo. Please go ahead.

Good morning and welcome to Carlyle Credit Income Fund's second 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 Q2 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. Carlisle 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 Club. The steel equity market continued to face pressure during the quarter due to a combination of a repricing wave in January, which led to further declines in rate average spreads, weakness in certain software-related loans due to concerns regarding AI disintermediation, and volatility from the conflict in the Middle East. These factors weighed on loan prices, CELO equity valuations and CELO equity cash flows across the market and within CSF's portfolio. However, underlying credit fundamentals remain broadly stable during the quarter and the volatility created better balance in the market with very limited repricings in February and March. To navigate this market environment, we continue to focus on optimizing the portfolio, including selectively completing refinancings and resets, and defensively position CSF with experienced CELO managers and transactions with longer reinvestment periods. I'd like to highlight the fund activities over the last quarter and key stats on the portfolio as of March 31st. We maintain our monthly dividend of $0.06 per share for 21.5% annualized based on the share price as of May 12th, which is now declared through August 2026. CCIS underlying COO investments generate an annualized cash and cash yield of 20.11% for the quarter. which resulted in $0.44 of recurring cash flows and $0.29 of core net investment income for the quarter at the fund level. Core net investment income provided dividend coverage of 161%, a revised monthly dividend of $0.06 per share. New CEO investments during the quarter totaled $1.5 million, with a weighted average gap yield of 11.5%. Total sales proceeds during the quarter totaled $21.7 million, as we used the proceeds to redeem $20 million of the 7.5% Series C convertible preferred shares in cash to reduce leverage. Within CCI's portfolio, we completed four resets in Q2 2026, in addition to the 26 refinancings and resets completed in calendar year 2025. Refinancings and resets reduce the cost liabilities and extend the investment periods across CLOs and both share equity cash flows. We expect to continue to refinance and reset the portfolio to enhance returns. The weight average years left during this period decreased slightly from approximately 3.4 years to 3.3 years. This provides CLO managers the opportunity to capitalize on periods of volatility through active management. There were also zero CLOs in the portfolio that were proposed for the investment period as of March 31st. We believe the portfolio weight average junior over-collarization cushion of 4.18% is healthy and offsets potential defaults and losses in the ongoing loan portfolios. And the average percentage of loans rated CCC by S&P was 4.1%, below the 7.5% CCC limit in sales. The weight average spread of the ongoing loan portfolio was 2.96%, a 10 basis point decline from the prior quarter. The continued decline in wood average spread reflects the cumulative impact of the elevated repricing activity over the last several quarters, particularly the very high level of repricing activity experienced in January. Lower loan spreads continue to pressure the earnings for our CELA equity as resets and refinancings have not fully offset the spread compression. Importantly, our knowing credit fundamentals across CCI's portfolio remain broadly stable. We believe recent CELA equity performance has been driven more by valuation and technical factors than broad-based credit deterioration. We remain confident in the resilience of our portfolio, which is diversified across high-quality managers and structured to navigate evolving market conditions. While liability costs have increased and equity distributions have moderated, we believe resilient credit fundamentals and continued demand for floating-rate assets will support COO performance over time. We saw a stabilization of NAVs in April as loan prices partly retraced the declines from earlier this year, and we saw very limited loan reprices. Now I will switch gears to discuss our outlook. CELA equity continues to benefit from historically attractive liability costs. Any normalization in loan spreads or increase in loan spike can improve excess spread generation over time, particularly for deals with longer reinvestment periods. With approximately 17% of the loan market maturing by the end of 2028, we expect heightened refinancing activity, which could also lead to spread widening, benefiting steel equity. Looking ahead, we believe steel equity performance will continue to depend on manager selection, reinvestment discipline, and active credit management. We continue to position CSAP conservatively while selectively deploying capital into opportunities where we believe valuations appropriately compensate investors for underlying risks. We also continue to leverage Carlyle's in-house credit research platform to conduct a detailed bottom-up analysis across underlying loan portfolios, including software-related exposures and evolving AI-related ones. CCI's portfolio remains highly diversified across approximately 1,850 underlying loans, with exposure to any single issuer representing less than 1% of the portfolio. In addition, the portfolio is predominantly compromised of first-line senior-secret loans representing over 97% exposure, which we believe provides meaningful downside protection and structural resilience. 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 liability spreads widened modestly across the capital stack, with AAA spreads widening by about 5 basis points quarter over quarter, and double B spreads widening by about 150 basis points. New Richie COO volume totaled approximately $47 billion during the quarter, compared to $44 billion in the prior year. COO resets and refinancings totaled $28 billion and $23 billion respectively, down from $57 billion and $37 billion in the first quarter of 2025, as wider liability spreads and increased market volatility reduced refinancing and reset activity during the quarter. 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 experienced modest weakness in the first quarter of 2026 as market volatility increased during this period. The LSTA U.S. Leveraged Loan Index declined 60 basis points during the quarter as loan prices declined 2.1%. Similar to prior quarters, issuance activity was largely driven by opportunistic refinancing and a significant number of repricings in January. However, the market also saw an increase in LBO and M&A activity during the quarter, most notably the Electronic Arts LBO, contributing to about $51 billion of quarterly LBO and M&A volume in the broadly syndicated loan market, the highest quarterly total in more than four years. Credit fundamentals within the U.S. portfolio of over 550 borrowers remained resilient in the fourth quarter of 2025. Free cash flow generation continues to be a key focus with over 75% of borrowers producing positive free cash flow, supported by the benefit of prior rate cuts and lower spreads on corporate loans. Revenue and EBITDA growth remained positive at 5% and 6% year over year, which is similar to what we saw in the third quarter. Interest coverage remains healthy at 3.8 times, with only a small portion of the portfolio below one-time interest coverage. Overall, borrower performance and the credit quality remain broadly stable. While Chapter 11 activity remains moderate relative to historical averages, liability management exercises continue across the market. The broadly syndicated loan default rate, inclusive of liability management exercises, has declined from a recent cycle peak of 4.4% at the end of 2024 to approximately 3% in March and further to 2.8% in April, retreating closer to historical averages. With about 70% of the loan market returns before the end of 2028, we think the next year will be busy with refinancing transactions. But unlike the last two plus years, some of these transactions should be spread additive. We have not yet seen software companies look to extend their maturities, but we anticipate activity among some of the larger companies with 2028 maturities, which should show the market where the true cost of capital is for performing software. As capital for data centers remains in high demand, we are beginning to see companies access the leveraged loan market for financing, creating a new source of collateral. Overall, given the current geopolitical, AI, and inflationary risk, We think 2026 will continue to be a year of dispersion with the have and have not experiencing very different outcomes. I will now turn the call to Nelson, our CFO, to discuss the financial results.

Thank you, Lauren. Today I will begin with a review of our second quarter earnings. Total investment income for the second quarter was $5.5 million, or $0.26 per share. Total expenses for the quarter were $3.6 million, Total net investment income for the second quarter was $1.9 million, or $0.09 per share. Adjusted net investment income for the second quarter was $2.4 million, or $0.11 per share. Adjusted NII adjusts for the $0.02 per share impact and the amortization of the OID and insurance costs for the fund's preferred shares and credit facility. Core net investment income for the second quarter was $0.29 per share, providing dividend coverage of 161% on a revised monthly dividend of $0.06 per share. We believe core net investment income is a more accurate representation of CCIF's distribution requirement. Net asset value as of March 31st was $3.34 per share. Our net asset value and valuations are based on the bid size mark we received from a third party of 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. With that, I'll turn it back to Nishal.

Thanks, Nelson. We remain confident in the fundamentals of CCI's portfolio, which remains offensively positioned in the current market environment. We remain focused on experienced managers and transactions that demonstrate durable power build strong underlying collateral quality, and disciplined credit underwriting, including ongoing evaluation of evolving AI-related risk across certain sectors. We are deploying capital selectively, prioritizing opportunities to offer attractive relative value across both new issue and season transactions. We continue to leverage the depth of the Carlyle Liquid Credit platform and our collaborative OneCarlyle platform to source and invest in high-quality COO portfolios through a disciplined bottom-up 15-step investment process.

As a reminder, to ask a question, you'll need to 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 our Q&A roster. And our first question will be coming from the line of Gaurav Mehta of AGP Alliance Global Partners. Your line is open.

Thank you. Good morning. I wanted to ask on the trends you guys are seeing in April. I think you talked about stabilization of NAV and improvement in loan prices. Just want to get some more color on what you guys are seeing in loan repricing and any comments on spreads and yields.

Yeah.

Yeah. Sorry, I'll talk about the loan repricing. We had seen a period where they stopped, including up until April, but I will say that in May they have started again.

And I would add to that that we have seen the loan market kind of stabilize over the past couple months, and as a result we've seen some stabilization in NAV as well.

Second question on resets and refi. Can you maybe provide some color on how much opportunity do you have for resets and refis in your portfolio for this year?

Yeah, so look, it's something that we continue to focus on because the best way to offset loan repricings is completing the accreted refinancings and resets. We completed four in the first quarter, and now that CLO debt spreads have tightened, in line with kind of overall fixed-income market tightening, we expect to continue to be very active in refinancing and resetting the portfolio.

All right. Thank you. That's all I had.

And as a reminder, to ask a question, please press star 1-1 on your telephone. Our next question will be coming from the line of Eric Wick of Lucid Capital Markets. Your line is open, Eric.

Thanks. Good morning. I wanted to start with a question on software, and I guess it may be a multi-part question. So if I look at your slide 12 in the right-hand side, I guess the first question is, you know, most of your software exposure in that high-tech category and then, or is there spillover into other some maybe kind of tangential businesses that utilize software heavily as well? And then kind of the second question is, you know, if you decided you wanted to reduce software exposure in the portfolio, how easy is that to accomplish? Can you have discussions with the CLO issuers or the CLO, you know, primarily just reflective of overall leverage loan issuance? Just kind of curious how, you know, if you wanted to reduce that or change, you know, any sector, how easy is that to accomplish?

Sure. So maybe on the second part, I'll touch upon that. So software right now is around 12% to 13% of the overall loan market, BSL market. And right now, I think for CCAF, it's around 12%. So the way that we can adjust our software exposure, there's two ways. One, we're always looking to optimize our portfolios. So if we see a portfolio where it's not necessarily the amount of software exposure, it's utilizing our in-house credit experts and analysts to do kind of a line-by-line review each of the loans. really looking at the quality of the software names within each COO. So we can always rotate out of the position if we don't like the risk profile and credit profile of those underlying software names. And then two, we do have discussions with our managers on kind of software exposure, their views on software, and kind of what their strategies are on software. So we won't necessarily dictate to them in terms of changing their strategy, because ultimately, they have ultimate discretion. But we can always rotate out of positions and see our managers accordingly. And I think the third is, I think what you're naturally going to see is software exposure decline over time. And that's going to be a market-wide phenomenon. One, you're probably going to see less activity in the software space, less capital markets activity, just getting everything going on. And then two, as new CLOs are created, we're already seeing that software exposure and newer CLOs are typically closer to half of what the current exposure is, so maybe mid to high single digits.

Thanks, Nisha. That's very helpful and insightful. And second one for me, just what was the driver of realized losses in the most recent quarter?

Yeah, so the one thing that we did is I think just prudent management of the capital structure. So given the decline in NAV, our leverage was higher than kind of what our target range is. And so we proactively sold some of our positions and used the proceeds to redeem our series C, which is around $20 million.

Excellent. Thanks for taking my question. Thanks, Eric.

And I am sharing no further questions. I would now like to turn it back to management for 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 again for your support.

And this concludes today's program. Thank you for participating. You may now disconnect.