Q2 2024 Carlyle Secured Lending Inc Earnings Call
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Operator: Good day, and thank you for standing by. Welcome to the Carlisle Secured Lending Second 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 this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you 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 speaker today, Nishal Mehta, Head of Shareholder Relations. Please go ahead.
Speaker Change: Good day, and thank you for standing by and welcome to the Carlisle secured lending second 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'll need to press star one on your.
Speaker Change: Telephone you will then hear an automated message nobody knew your hand is raised to withdraw your question. Please press star. One again. Please see today's conference is being recorded I would now like to hand, the conference over to your speaker today, Michelle meta head of shareholder Relations. Please go ahead.
Nishal Mehta: Good morning, and welcome to Carlisle Secured Lending's conference call to discuss the earnings result for the second quarter of 2024 and the proposed merger of CGBD with Carlisle Secured Lending 3. I'm joined by Justin Plouffe, our Chief Executive Officer, and Tom Hennigan, our Chief Financial Officer.
Michelle meta: Good morning, and welcome to <unk> Conference call.
Nishal Mehta: This morning we issued a press release with our presentation of our results, which are available on the investor relations section of our website. In addition to our quarterly earnings press release, we issued a release announcing that Carlyle Secured Lending has entered into a merger agreement with Carlyle Capital. Throughout today's call, Carlyle Secured Lending will be referred to as CGBD, and Carlyle Secured Lending 3 will be referred to as CSL 3.
Michelle meta: To discuss the earnings results for second quarter of 2024.
Speaker Change: And the proposed merger C. G P D with Carlisle secured lending tree.
Speaker Change: I'm joined by Jonathan plus our Chief Executive Officer, and Tom had again, our Chief Financial Officer. This morning, we issued a press release with a presentation of our results.
Speaker Change: Which are available on the Investor Relations section.
Speaker Change: Website.
Speaker Change: In addition to our quarterly earnings press release, we issued a release announcing their cross secured lending has entered into a merger agreement with Carlisle secured lending tree.
Speaker Change: Throughout today's call Carlisle secured lending will be referred to as <unk> and Carlyle secured lending three will be referred to as C. S. L. Three.
Nishal Mehta: CGBD has posted a presentation outlining the transaction on the investor relations section of its website, which has also been filed with the SEC and which will be referenced on today's call. 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.
Speaker Change: <unk> has posted a presentation.
Speaker Change: Well I name a transaction on the Investor Relations section of its website.
Speaker Change: Which has also been filed with the SEC and which will be referenced on today's call.
Speaker Change: 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.
Nishal Mehta: 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, including those identified in the risk factors sections of our 10-K and our 10-Q, which will be filed for the quarter following market close today. These risks and certainties could cause actual results to differ materially from those indicated.
Speaker Change: Any forward looking statements made today do not guarantee future performance and any undue reliance should not be placed on them today.
Speaker Change: Today's conference call May include forward looking statements, reflecting our views with respect to among other things the timing timing or likelihood of the closing of the proposed merger you expected synergies associated with the proposed merger.
Speaker Change: The ability to realize the anticipated benefits other proposed merger.
Speaker Change: And our future operating results and financial performance.
Speaker Change: These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the risk factors sections of our 10-K and our 10-Q.
Speaker Change: Which will be filed for the quarter following market close today.
Speaker Change: These risks and uncertainties could cause actual results to differ materially from those indicated.
Speaker Change: <unk> assumes no obligation to update any forward looking statements at any time please.
Nishal Mehta: CGBD assumes no obligation to update any foregoing statements at any time. Please note that any additional information regarding the proposed merger and the solicitation of proxies in connection with the matters requiring CGBD stockholder approval will be available in the proxy statement and prospectuse that CGBD intends to file with the SEC in the coming weeks. With that, I'll turn the call over to Justin, CGBD's Chief Executive Officer.
Please note that any additional information regarding the proposed merger and the solicitation of proxies in connection with the matters requiring CDB stockholder approval will be available in the proxy statement and prospectus that <unk> intends to file with the SEC in the coming weeks.
Justin <unk>: With that I'll turn the call over to Justin <unk>, Chief Executive Officer. Thanks.
Justin Plouffe: Thanks, Nishal. Good morning, everyone.
Justin <unk>: Thanks, Neil Good morning, everyone and thank you all for joining I'm, Justin plus the CEO of the Carlyle Bdcs and Deputy CIO for global credit Carlyle on today's call I will give an overview of our second quarter 2024 results and discuss our proposed merger between <unk> and CSL three including the ways in which Carlyle will support the transaction.
Justin Plouffe: Thank you all for joining us. I'm Justin Plouffe, the CEO of the Carlyle BDCs and Deputy CIO for Global Credit at Carlyle. On today's call, I will give an overview of our second quarter 2024 results and discuss our proposed merger between CGBD and CSL3, including the ways in which Carlyle will support the transaction to make it especially compelling for CGBD shareholders. I'll finish with a few comments on the quarter's investment activity and portfolio positioning before handing the call over to our CFO, Tom Hennigan.
Justin <unk>: It is especially compelling for <unk> shareholders I will finish with a few comments on the quarter's investment activity and portfolio positioning before handing the call over to our CFO Tom Hennigan.
Justin Plouffe: In the second quarter, our financial performance continued to benefit from the higher base rate environment, with some headwinds from spread compression on new deals. Both of these trends were largely consistent with the broader direct lending market.
Justin <unk>: In the second quarter, our financial performance continued to benefit from the higher base rate environment with some headwinds from spread compression on new deals. Both of these trends were largely consistent with the broader direct lending market. During the quarter. We generated net investment income of 51 per share, which represents an annualized yield of more than 12% based on our 600 <unk>.
Justin Plouffe: During the quarter, we generated net investment income of $0.51 per share, which represents an annualized yield of more than 12% based on our 630 math. Our board of directors declared a total third-quarter dividend of $0.47 per share, consisting of our base dividend of $0.40 plus $0.07 supplemental dividend. Our net asset value as of June 30th was $16.95 per share, down 12 cents or approximately 0.7% from March 31st because of unrealized depreciation from some of our watchlist. Following another strong quarter, we are excited to announce that CGBD has entered into a merger agreement to acquire Carlyle Secured Lending III.
Justin <unk>: Our board of directors declared a total third quarter dividend of <unk> 47 per share consisting of our base dividend of <unk> 40.
Justin <unk>: Plus <unk> supplemental dividend.
Justin <unk>: Net asset value as of June 30th was $16 95 per share down <unk> 12, or approximately 0.7% from March 31, because of unrealized depreciation from some of our watch list names.
Speaker Change: Following another strong quarter, we are excited to announce that <unk> has entered into a merger agreement to acquire Carlisle secured lending.
Justin Plouffe: We believe this transaction will deliver a number of strategic benefits, including an increase in scale and liquidity, elimination of the preferred stock held by Carlyle, a reduction in costs and an increase in operational efficiencies, and accretion to both earnings and NAV for shares. Now I'd like to dive a little bit deeper into each attribute that this merger brings. First, scale and liquidity.
Speaker Change: We believe this transaction will deliver a number of strategic benefits, including an increase in scale and liquidity elimination of the preferred stock held by Carlyle a reduction in costs and an increase in operational efficiencies and accretion to both earnings and NAV per share.
Justin Plouffe: With an anticipated market capitalization of over a billion dollars as a combined company, we expect this transaction to provide increased scale and liquidity to shareholders, creating potential for increased institutional ownership, a broader investor base, and enhanced trading liquidity. Now, I'll touch on the convertible preferred shares held by Carlyle. Now, as many of you know, these shares were issued by CGBD as part of an investment Carlyle made to support the BDC during the market dislocation resulting from the COVID pandemic.
Speaker Change: Now I'd like to dive a little bit deeper into each attribute that this merger brings first scale and liquidity with an anticipated market capitalization of over $1 billion as a combined company. We expect this transaction to provide increased scale and liquidity to shareholders, creating potential for increased institutional ownership a broader investor base.
Justin Plouffe: These shares have a current conversion price of $8.98 compared to Quarter End's NAV of $16.95 and therefore could be dilutive if exercised. As part of this transaction, Carlyle will exchange its convertible preferred shares at a NAV as determined shortly before merger close.
Speaker Change: And enhanced trading liquidity.
Speaker Change: Second I'll touch on the convertible preferred shares held by Carlyle now as many of you know these shares were issued by <unk> as part of an investment Carlyle made to support the BDC during the market dislocation, resulting from the Covid pandemic. These shares have a current conversion price of $8 98.
Speaker Change: Compared to quarter end NAV of $16 95.
Speaker Change: And therefore could be dilutive if exercised as part of this transaction Carlyle will exchange its convertible preferred shares at NAV as determined shortly before before merger close this will avoid 5% to 8% dilution for <unk> shareholders. We believe that this is a significant value for <unk>.
Justin Plouffe: This will avoid 5 to 8 percent dilution for CGBD shareholders. We believe that this is a significant value for CGBD shareholders that could lead to improved trading. Third, we expect this merger to reduce costs and drive operational efficiencies by eliminating duplicative expenses. We estimate total annual cost savings to be approximately 2.5 million dollars on an LPM basis through increased scale, as well as streamlining certain processes compared to the 2 entities continuing to operate separately.
Speaker Change: Our holders that could lead to improved trading prices.
Speaker Change: Third we expect this merger to reduce cost and drive operational efficiencies by eliminating duplicative expenses, we estimate total annual cost savings to be approximately $2 5 million on an LTM basis through increased scale as well as streamlining certain processes compared to the two entities continuing to operate separately.
Justin Plouffe: The larger combined asset base will also improve our expense ratio to approximately 70 basis points on net assets, while also potentially providing CGBD with greater access to the debt capital markets and a lower cost of capital. Finally, we believe that this transaction is accretive to both NAV per share and net investment income per share on a fully diluted basis. This is due both to the preferred stock exchange and the substantial overlap in strategy and portfolio composition between the two vehicles.
Speaker Change: The larger combined asset base will also improve our expense ratio to approximately 70 basis points on net assets, while also potentially providing <unk> with greater access to the debt capital markets and a lower cost of capital.
Speaker Change: Finally, we believe that this transaction is accretive to both NAV per share and net investment income per share on a fully diluted basis. This is due both to the preferred stock exchange and the substantial overlap in strategy and portfolio composition between the two vehicles. We also expect the transaction to be accretive to net investment income.
Justin Plouffe: We also expect the transaction to be accretive to net investment income per share in the long term with improved combined portfolio metrics, a lower expense ratio, and increased investment capacity. Given our recent trading levels, we have structured the merger to enable potential NAV accretion if CGBD is trading at a premium to NAV shortly before the merger close. Tom will discuss that more later in this call.
Speaker Change: Per share in the long term with improved combined portfolio metrics, a lower expense ratio and increased investment capacity.
Tom: Given our recent trading levels, we have structured the merger to enable potential NAV accretion if <unk> is trading at a premium to NAV shortly before the merger close Tom will discuss that more later in this call.
Justin Plouffe: Carlisle is committed to the long-term success of CGBD, and we believe that this transaction will benefit shareholders of both CGBD and CSL. To further support the merger, an affiliate of Carlyle will cover certain merger-related expenses up to a total cap of $5 million, which we believe should cover all transaction costs. Now, before I turn the call over to Tom, I want to briefly discuss the market environment. Activity continued to pick up in the second quarter of 2024 as sponsored direct lending volumes reached recent highs, driven by strong refinancing, recapitalization, and M&A activity.
Speaker Change: Carlyle has committed to the long term success of <unk> and we believe that this transaction will benefit shareholders of both <unk> and CSL three to further support the merger and affiliate of Carlyle will cover certain merger related expenses up to a total cap of $5 million, which we believe should cover all.
Speaker Change: Transaction costs.
Speaker Change: Now before I turn the call over to Tom I want to briefly discuss the market environment activity continue to pick up in the second quarter of 2024 as sponsored direct lending volumes reached recent highs driven by strong refinancing recapitalization and M&A activity.
Justin Plouffe: Spreads and covenants continue to face pressure from borrowers, but the core middle market, where we operate, continues to see comparatively less pressure than the large cap markets. Originations in the second quarter were up significantly year over year, and our pipeline continues to expand with both core cash flow and differentiated deal flow. Our goal is to drive performance with a consistent approach to direct lending anchored in discipline, credit selection, and conservative portfolio management.
Tom: Spreads and covenants continue to face pressure from borrowers, but the core middle market, where we operate continues to see comparatively less pressure in the large cap market.
Tom: Originations in the second quarter were up significantly year over year, and our pipeline continues to expand with both core cash flow and differentiated deal flow.
Tom: Our goal is to drive performance with a consistent approach to direct lending entered and disciplined credit selection and conservative portfolio management, we continue to benefit from the one Carlyle platform, which differentiate us in the core middle market.
Justin Plouffe: 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 are most focused on the overall credit performance of our existing portfolio. Our portfolio remains highly diversified and is comprised of 180 investments in 126 companies across more than 25 industries. The median EBITDA across our core portfolio at quarter end was $82 million. The average exposure in any single portfolio company is less than one percent.
While increasing origination activity is a positive for our strategy. We are most focused on the overall credit performance of our existing portfolio. Our portfolio remains highly diversified and is comprised of 180 investments and 126 companies across more than 25 industries. The median EBITDA across our core portfolio quarter end with <unk>.
Tom: $82 million the average exposure in any single portfolio company is less than 1% and 94% of our investments are in senior secured loans as always discipline and consistency drove performance in the second quarter. We expect these tenants to drive performance in future quarters.
Justin Plouffe: Ninety four percent of our investments are in senior secured loans. As always, discipline and consistency drove performance in the second quarter. We expect these tenets to drive performance in the future. With that, I'll now hand the call over to our Chief Financial Officer, Tom Hennigan. Thank you, Justin.
With that I'll now hand, the call over to our Chief Financial Officer, Tom Hennigan.
Tom Hennigan: Today, I'll begin with an overview of the terms and structure of the proposed merger. I'll then discuss second quarter financial results and portfolio performance. Before concluding with detail on our balance sheet position, first, I want to point all of our shareholders to the additional materials we posted to CGBD's Investor Relations website. All note, we expect to file a proxy and registration statement in the upcoming weeks to begin the process of soliciting merger approval from CGBD shale.
Tom Hennigan: Thank you Justin.
I'll begin with an overview of the terms and structure of the proposed merger.
Tom Hennigan: I'll, then discuss second quarter financial results and portfolio performance before concluding with detail on our balance sheet positioning.
Speaker Change: First I want to point all of our shareholders to the additional materials, we posted to the <unk> Investor Relations website.
Speaker Change: We expect to file a proxy and registration statement in the upcoming weeks to begin the process of soliciting merger approval from <unk> shareholders.
Tom Hennigan: As Justin previewed, we're excited to announce we've entered into an agreement with CSL3 to merge in a stock-for-stock transaction, with a floating exchange rate that has the potential to be accreted to shareholders. To reiterate Carlyle's support for the merger, it is agreed to exchange its existing convertible preferred shares for common stock, which will occur shortly before the close of the proposed merger. Based on the current conversion price of $8.98 per share, this crystallizes accretion to both NAV per share and quarterly net investment income per share on a fully diluted basis.
Justin <unk>: Justin previewed we're excited to announce we have entered into agreement with CSL III to merge in a stock for stock transaction with.
Justin <unk>: With a floating exchange rate that has the potential to be accretive to shareholders.
Justin <unk>: To reiterate Carlisle support for the merger. It has agreed to exchange its existing convertible preferred shares for common stock, which will occur shortly before close of the proposed merger.
Justin <unk>: Based on the current conversion price of $8 98 per share as crystallizes accretion to both NAV per share and quarterly net investment income per share on a fully diluted basis.
Tom Hennigan: Carlisle will be subject to a two-year tiered lockup following the exchange, reinforcing Carlisle's continued long-term commitment to CGBD. An affiliate of Carlyle has also agreed to bear up to $5 million in transaction fees and expenses in certain circumstances, which is expected to mitigate any potential dilution for merger expenses for shareholders.
Justin <unk>: Carlyle will be subject to a two year tiered lockup following the exchange reinforcing carlyle's continued long term commitment to <unk>.
Justin <unk>: An affiliate of Carlyle has also agreed to bear up to $5 million in transaction fees and expenses in certain circumstances, which is expected to mitigate any potential dilution from merger expenses for shareholders.
Tom Hennigan: The transaction has been structured with a floating exchange rate construct that enables the potential for additional MAV per share accretion at close. In a merger presentation, slide 16 outlines three potential scenarios and how they would impact CGBD. As you'll see on the slide, if CGBD is trading at or below one times NAV per share, the merger will be conducted on a NAV for NAV exchange, but if CGBD is trading above one times NAV per share, CGBD and CSO3 shareholders will equally split the premium at merger close up to 1.11 times, with all premium thereafter going to CGBD shareholders.
Justin <unk>: The transaction has been structured with the floating exchange rate construct that enables the potential for additional NAV per share accretion at close.
Speaker Change: In our merger presentation slide 16 outlines three potential scenarios and how they would impact <unk>.
Speaker Change: As you'll see on the slide is <unk> is trading at or below one times NAV per share the merger will be conducted on a NAV for NAV exchange.
Speaker Change: But if <unk> is trading above one times NAV per share <unk> and CSL III shareholders equally split the premium at merger close up to 111 times with all premium thereafter going to <unk> shareholders.
Tom Hennigan: This construct ensures the transaction is, at a minimum, NAB neutral while allowing CSL3 shareholders to participate in upside if CGBD is trading above NAB shortly before the close of the merger. Our core investment strategy will remain unchanged. The combined company will continue to focus on directly originated, primarily first lien sponsor-backed loans to U.S. companies in the middle market. Attorney to the Portfolio.
Speaker Change: This construct ensures the transaction is at a minimum NAV neutral, while allowing CSL free shareholders to participate in upside if <unk> is trading above NAV shortly before the close of the merger.
Speaker Change: Our core investment strategy will remain unchanged.
Speaker Change: Combined company will continue to focus on directly originated primarily first lien sponsor back loans to U S companies in the middle market.
Turning to the portfolio.
Tom Hennigan: Total assets for the Pro Forma Combined Company are expected to increase to over $2.5 billion by transaction close. Based on current portfolio data, CSL3 has near 100% overlap with CGBD, and the combined company, on a pro forma basis as of June 30th, has 127 portfolio companies and 183 investors, total senior security exposure of over 90%. Key Portfolio Diversification and Risk Metrics, all will improve. Concentration of CGBD's top 1, 5, and 10 investments were all improved from current levels.
Speaker Change: Total assets for the pro forma combined company are expected to increase to over $2 $5 billion by transaction close.
Speaker Change: Based on current portfolio data CSL III has near 100% overlap with <unk> and the combined company on a pro forma basis as of June 30 is 127 portfolio companies and 183 investments.
Speaker Change: And total senior secured exposure of over 90%.
Speaker Change: Key portfolio diversification and risk metrics all will improve.
Speaker Change: Concentration of <unk> top one five and 10 investments were all improved from current levels.
Tom Hennigan: We expect non-accruals as a percentage of fair value and also debt investments with risk ratings of 3 to 5, representing investments that have been downgraded on our internal risk rating scale, all to improve, as you can see on slides 18 and 19 of the merger presentation. Given the significant portfolio overlap, we believe the merge will result in cost synergies for shareholders, with annual cost savings expected to be about $2.5 million. The elimination of duplicate expenses should result in over a 20% decrease in operating expenses from the second quarter combined level, which implies a pro forma target expense ratio of under 70 basis points on net assets.
Speaker Change: We expect non accruals as a percentage of fair value and also debt investments with risk ratings three to five representing investments that had been downgraded on our internal risk rating scale also improved as you can see on slides 18, and 19 of the merger presentation.
Speaker Change: Given the significant portfolio overlap we believe the merger will result in cost synergies for shareholders with annual cost savings expected to be about $2 5 million.
Speaker Change: The elimination of duplicate expenses should result in over a 20% decrease in operating expenses from the second quarter combined levels, which implies a pro forma target expense ratio of under 70 basis points on net assets.
Tom Hennigan: Increased scale also has the potential to provide a wider and more efficient array financing alternative, which could reduce our cost of debt to improve access to the institutional debt capital market. Leading up to merger close, we also anticipate calling all remaining uncalled capital from CSL3 shareholders. And we'll seek to return CGBD to the midpoint of our target leverage. Given the increased level of deal activity Justin mentioned, we're confident we can deploy this capital into attractive investments. All of CDBD's financing facilities will continue on a regular course.
Speaker Change: Increased scale also has the potential to provide a wider and more efficient to refinancing alternatives, which could reduce our cost of debt through improved access to the institutional debt capital markets.
Speaker Change: Leading up to merger close we also anticipate calling all remaining uncalled capital from CSL three shareholders and we will seek to return <unk> to the mid point of our target leverage range.
Given the increased level of deal activity just mentioned, we're confident we can deploy this capital into attractive investments.
Speaker Change: All of <unk> financing facilities will continue in regular course.
Tom Hennigan: And we expect CSL3's existing asset-based credit facility will transfer over to CGBD at the closing of the merger. The transaction has been unanimously approved by the CGBD Board of Directors and the CSL III Board of Trustees at the recommendation of the special committees of both CGBD and CSL III. I want to highlight that in addition to the benefits for CGBD shareholders we've been focused on, the transaction also enables CSL3 investors to retain access to the proven investment strategy they sought exposure to, with the benefits of the greater scale of the combined entity, liquidity of a listed BDC, and the potential to trade at a premium on NASDAQ. Taken together, we think this is a compelling value proposition for these new CGBD investors. Finally, CGBD's advisor will remain unchanged.
Speaker Change: And we expect <unk> existing asset based credit facility, which transfer over to <unk> at closing of the merger.
The transaction has been unanimously approved by the <unk> board of directors.
Speaker Change: The CSL III board of trustees at the recommendation of the special committees of both <unk> and CSL III.
I want to highlight that in addition to the benefits for <unk> shareholders. We've been focused on the transaction also enables CSL three investors to retain access to the proven investment strategy, they sort of exposure to with.
Speaker Change: With the benefits of the greater scale of the combined entity liquidity of our listed BDC and the potential to trade at a premium to NAV.
Speaker Change: Taken together, we think this is a compelling value proposition for these new <unk> investors.
Speaker Change: Finally, <unk> advisor will remain unchanged and we anticipate the transaction closing in Q1 of 2025.
Tom Hennigan: And we anticipate the transaction closing in Q1 of 2025, subject to approval from CGBD shareholders, certain regulatory approval, and satisfaction or waiver of other customary closing conditions. Now moving on to a more detailed review of this quarter's results, CGBD had another strong quarter on the earnings front. Total investment income for the second quarter was $58 million.
Speaker Change: Subject to approval from <unk> shareholders certain regulatory approval.
Speaker Change: Satisfaction or waiver of other customary closing conditions.
Tom Hennigan: Down slightly from the prior quarter due to a lower average portfolio balance and a decrease in prepayment and amendment. Total expenses of $31 million also decreased versus the prior quarter, primarily due to reduced total interest expense from a lower average outstanding debt balance. The result was net investment income for the second quarter of twenty-six million dollars or fifty one cents per share, which is generally in line with the prior year comparable period.
Speaker Change: Now moving onto a more detailed review of this quarter's results.
Speaker Change: <unk> had another strong quarter on the earnings front.
Speaker Change: Total investment income for the second quarter was $58 million down slightly from prior quarter due to a lower average portfolio balance and a decrease in prepayment and amendment fees.
Speaker Change: Total expenses of $31 million also decreased versus prior quarter.
Speaker Change: Primarily due to reduced total interest expense from a lower average outstanding debt balance.
Speaker Change: The result, with net investment income for the second quarter of $26 million or <unk> 51 per share, which is generally in line with the prior year comparable period.
Tom Hennigan: Our board of directors declared dividends for the third quarter of 2024 at a total level of $0.47 per share. That's comprised of the $0.40 base dividend plus a $0.07 supplemental dividend, which is payable to shareholders of record as of the close of business on September 30th.
Speaker Change: Our board of directors declared the dividends for the third quarter of 2024 at a total level of 47 per share.
Speaker Change: That's comprised of the <unk> base dividend, plus a <unk> supplemental dividend, which is payable to shareholders of record as of the close of business on September 30.
Tom Hennigan: This total dividend level 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. A base dividend coverage of 128% for the quarter remains above the BDC Pearson average. And we've grown the base dividend by 25% since 2022. At the same time, this total dividend level also represents an attractive yield of 11% based on the recent share price.
Speaker Change: This total dividend level 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.
Speaker Change: Our base dividend coverage of 128% for the quarter remains above the BDC peer set average and we've grown the base dividend, 25% since 2022.
Speaker Change: At the same time as total dividend level also represents an attractive yield of 11% based on the recent share price.
Tom Hennigan: Looking ahead, we remain highly confident in our ability to comfortably meet and exceed our 40 cent base dividend and continue paying out supplemental dividends each quarter. On valuations, our total aggregate realized and unrealized net loss was about $8 million for the court. The largest contributor was a $7 million loss in our Physician and Emergency Communications Network, ECS.
Speaker Change: Looking ahead, we remain highly confident in our ability to comfortably meet and exceed our 40 base dividend and continue paying out a supplemental dividend each quarter.
Speaker Change: On valuations, our total aggregate realized and unrealized net loss was about $8 million for the quarter.
Speaker Change: The largest contributor was a $7 million loss in our position and emergency Communications network ECA.
Tom Hennigan: So a majority of that $8 million loss was from that one position, and we actually exited that investment last week at a level slightly better than our 630 mark. So the full downside for that position is already reflected in our 630 Act. This decrease in valuations, partially upset by Q2 earnings exceeding the dividend, resulted in our NAB decreasing modestly from $17.07 to $16.95 per share. Turning to credit performance, we continue to see overall stability and credit quality across the portfolio. Non-accruals increased this quarter to 1.8% of total investments at fair value as we added a net two borrowers to non-accrual status.
Speaker Change: So a majority of that $8 million loss from that one position and we actually exited that investment last week at a level slightly better than our $6 30 Mark.
Speaker Change: So the full downside for that position is already reflected in our $6 39.
Speaker Change: This decrease in valuations, partially offset by Q2 earnings exceeded the dividend resulted in our napp decreasing modestly from $17 seven.
Speaker Change: To $16 95 per share.
Speaker Change: Turning to credit performance, we continue to see overall stability in credit quality across the portfolio.
Speaker Change: Non accruals increased this quarter to one 8% with total investments at fair value.
Speaker Change: As we added a net two borrowers to non accrual status.
Tom Hennigan: However, we exited ECM, and we've been working towards a favorable solution with the other borrower. So, for the upcoming quarter, we expect investments on non-accrual to drop back below 1% as a percentage of fair value. I'll finish by touching on our financing facilities and leverage. We continue to be well positioned on the right side of our balance sheet. In early July, we closed the reset of the 2015-01 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.
Speaker Change: However, we exited ECM and we've been working towards a favorable solution with other borrowers.
Speaker Change: So that and for the upcoming quarter, we expect investments on non accrual to drop back below 1% as a percentage of fair value.
Speaker Change: I'll finish by touching on our financing facilities and leverage.
Speaker Change: We continue to be well positioned on the right side of our balance sheet.
In early July we closed a reset of the 2015 dashboard CLO.
Speaker Change: Extending the reinvestment period and maturity date by four years.
Speaker Change: And reducing the cost of debt by more than 20 basis points within that vehicle.
Tom Hennigan: Leverage is down quarter over quarter, and we have capacity to deploy capital into attractive opportunities in an accelerating deal environment, as we've been operating conservatively at the lower end of our target range. Statutory leverage is about 1.1 times, and net financial leverage at the end of the quarter was moderate to low at 0.9 times.
Speaker Change: Leverage is down quarter over quarter, and we have capacity to deploy capital into attractive opportunities and accelerating deal environment as we've been operating conservatively at the lower end of our target range.
Speaker Change: Statutory leverage was about one one times and net financial leverage ended the quarter modestly lower at <unk> nine times.
Tom Hennigan: Dispositioning allows us to remain opportunistic as the macroeconomic environment evolves. Deal activity looks to pick up in the second half of 2024. With that, I'll turn the call back over to Justin.
Speaker Change: This positioning allows us to remain opportunistic as the macroeconomic environment evolves and deal activity looks to pick up in the second half of 2024.
Speaker Change: With that I'll turn the call back over to Jeff.
Justin Plouffe: Thanks, Tom. Before we move to Q&A, I want to reemphasize the compelling merger proposal for CGBD. This merger is between two entities that are wholly aligned. We're at a meaningful scale without increasing risk through combining with a known Carlyle-managed portfolio. The consistency of our investment approach between the two BDCs positions us for a smooth integration process. We expect the transaction will be significantly beneficial to shareholders, with accretion to both NII and NAV per share. Market demand for private credit remains high.
Jeff: Thanks, Tom before we move to Q&A, what are we emphasize the compelling merger proposal for <unk>. This merger is between two entities that are wholly aligned we're adding meaningful scale without increasing risk through combining with a known Carlyle managed portfolio.
Speaker Change: The consistency of our investment approach between the two bdcs positions us for a smooth integration process and we expect the transaction will be significantly beneficial to shareholders with accretion to both NII and NAV per share.
Speaker Change: Market demand for private credit remains high we continue to focus on sourcing transactions with significant equity cushion conservative leverage levels and attractive spreads relative to market levels with attractive new originations a stable portfolio and low levels of non accruals <unk> shareholders are benefiting from the continued execution of our strategy as always we remain.
Justin Plouffe: We continue to focus on sourcing transactions with significant equity cushions, conservative leverage levels, and attractive spreads relative to market levels. With attractive new originations, a stable portfolio, and low levels of non-accrual, CGBD shareholders 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.
Speaker Change: Committed to delivering a resilient stable cash flow stream to our investors through consistent income and solid credit performance.
Operator: 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...
Speaker Change: I'd like to now hand, the call over to the operator to take your questions. Thank you.
Operator: Thank you. As a reminder, to ask a question at this time, 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 while we compile our Q&A roster. And our first question is going to come from the line of Finian O'Shea with WFS. Your line is open. Please go ahead.
Speaker Change: Thank you as a reminder to ask a question at this time. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment, while we compile our Q&A roster.
Speaker Change: And our first question is going to come from the line of Finian O'shea with WNS. Your line is open. Please go ahead.
Finian O'shea: I thank you. Good morning, everyone. Hi, Sven. How are you? Good. On the merger, I think it's a 25 expected close. Does that mean you're anticipating like an extended sort of outreach campaign, and can you remind us of the shareholder base profile of Carlyle 3? Thank you.
Finian O'shea: Hey, Thank you good morning, everyone.
Speaker Change: First event.
Finian O'shea: Are you.
Speaker Change: On the merger I think its.
25 expected close.
Justin Plouffe: Sure, so we do have to get a shareholder vote from CDBD shareholders, so that is a legal process, and that's part of the reason why it will take a bit of time. The CSL3 shareholders do not have a vote here because they sort of signed up for this when they initially invested in that fund. So there shouldn't be too much of a delay on that end of things. The CSL3 shareholder base is people that Carlisle placed them on, but there's not a significant concentration.
Speaker Change: Does that does that mean, you're anticipating like an extended sort of outreach campaign.
Speaker Change: Can you remind us of the shareholder base.
Speaker Change: Based profile of Carlisle three thanks.
Speaker Change: Sure.
Speaker Change: So we do have to get shareholder vote from CDB shareholders.
Speaker Change: So that is a legal process and thats part of the reason why it will it will take a at a time.
Speaker Change: CSL three shareholders do not have a vote here because they sort of signed up for this when they initially invested in that fund. So there shouldnt be too much of a delay on on that end of things.
Justin Plouffe: But again, without a vote, we wouldn't expect that to impact the merger process. And we'd expect, although it's a very compelling transaction for CGBD shareholders, it always just takes so much time to gather up such a diverse base of investors for any of these folks. We'd anticipate the process to take normal courses.
Speaker Change: CSL.
Speaker Change: Three shareholder base are.
Speaker Change: People that Carlyle place too, but theres not significant concentration, but again without a vote, we wouldn't expect that to impact the merger process at all.
Speaker Change: And said, we'd expect although it's very compelling transaction for <unk> shareholders. It always just takes so much time to gather up such a diverse base of investors for adding these votes. So we would anticipate that the process to take normal courses as other BDC mergers.
Finian O'shea: Okay, that's helpful. Thanks. And I guess. Justin, I thought I'd ask, looking at the screen today and this week, if you have any views on how the current volatility we're in might impact the bank's positioning to compete on sponsor finance transactions if it's too early to tell or if you think they would still be in a strong position to lean in or whatnot.
Speaker Change: Okay. That's helpful. Thanks.
Speaker Change: I guess.
Speaker Change: Justin.
Justin <unk>: Thought I'd ask looking at the.
Justin <unk>: The screen today and this week if you have any.
Justin <unk>: Views on how the.
Justin <unk>: Current volatility where it might impact the the bank's positioning.
Speaker Change: To compete on sponsor finance transactions, if it's too early to tell or if.
Speaker Change: If you think they would be still.
Speaker Change: We're still in a strong position to lean in or whatnot.
Justin Plouffe: Yeah, certainly early to tell how this all plays out in the second half of the year. But we've been focused for a long time now on making sure the credit quality of the portfolio is excellent because we've seen the pressure on spreads. So we feel very well positioned if we're heading into a more volatile environment. And it does stand to reason, Finn, that in more volatile environments, our capital becomes more valuable to borrowers. So I think we're well positioned if it does turn out to be a volatile second half of the year. But we'll have to
Speaker Change: Yes, certainly certainly early to tell how this all plays out in the second half of the year, but we've been focused for a long time now on making sure the credit quality of the portfolio is excellent because we've seen the pressure on spreads. So we feel very well positioned if we're heading into a.
Speaker Change: More volatile environment and it does stand the reason fan that and more volatile environment, our capital becomes more valuable to borrowers.
Speaker Change: I think we're well positioned if it does turn out to be a volatile second half of the year, but we'll have to date.
Finian O'shea: Okay, one final question, if I may, on if there's any. Based on the transaction exchange ratio at close, it's obviously into the future, but whether the incentive fee will account for merger accretion.
Speaker Change: Okay.
One one final if I may on if there is any.
Speaker Change: Yes.
Speaker Change: Based on the transaction exchange ratio close that's obviously at into the future but.
Speaker Change: If the incentive fee will.
Speaker Change: Account for merger accretion.
Speaker Change: If the incentive fee will account for merger accretion sorry, I'm not sure I quite followed the question.
Finian O'shea: if the incentive fee will account for merger accretion? Sorry, I'm not sure I quite followed the question.
Finian O'shea: Yeah, that's due to the maybe better for Tom, you know, based on where the stock is, there might be a I don't know, I think I can't even explain it too well, but it's very common in a BDC merger due to the accounting, and that will increase or reduce depending on where Carlyle trades when it presumably goes NAV4NAV, and that could change the GAAP revenue and NOI So, like, will you accrue and?
Speaker Change: Yes.
Speaker Change: Due to the maybe better for for Tom.
Speaker Change: Based on where the stock is.
Speaker Change: There might be a.
Speaker Change: I don't know I think.
Speaker Change: Explain it too well, but it's very common in the BDC merger.
Speaker Change: Due to the accounting and that will elevate.
Speaker Change: Or reduced depending on where.
Speaker Change: Carlisle trades when it presumably goes NAV for NAV.
Speaker Change: And that could change the gap.
Speaker Change: Revenue and NOI.
Speaker Change: So like will you accrue.
Speaker Change: Sorry go ahead.
Justin Plouffe: No, because it's been we wouldn't expect any impact from the merger math on our incentive.
Speaker Change: And we wouldn't expect any <unk>.
Speaker Change: Impact from the merger math on our incentive fees.
Finian O'shea: Okay, thanks so much, all for me.
Speaker Change: Yeah.
Speaker Change: Okay. Thanks, so much all for me.
Operator: Thank you, and one moment as we move on to our next question. And our next question is going to come from the line of Melissa Wedel with J.P. Morgan. Your line is open. Please go ahead.
Thank you and one moment as we move on to our next question.
Speaker Change: And our next question is going to come from the line of Melissa <unk> with Jpmorgan. Your line is open. Please go ahead.
Melissa Wedel: Good morning. Thanks for taking my questions today. I wanted to talk about the merger and combining the portfolios. I understand that's a couple of quarters out, but at a high level, would you view the smaller portfolio and the loans in that portfolio as being brought on to CGBB's balance sheet, or would those be appropriate to put into the credit fund?
Melissa: Good morning, Thanks for taking my questions today.
I wanted to talk about the merger and combining the portfolios I understand thats, a couple of quarters out but at a high level.
Speaker Change: Would you view the.
Melissa: <unk>.
Speaker Change: A smaller portfolio.
Speaker Change: Loans in that portfolio has been brought onto <unk> balance sheet or would those be appropriate to put in Q.
Speaker Change: The credit Crunch.
Tom Hennigan: Hey Melissa, it's Tom. There's substantial overlap between the two funds in terms of the borrowers. In fact, almost every single position at CSL3 is also held at CGBD, obviously at varying levels. So we'd anticipate looking at keeping in place our current facilities and allocating the loans primarily to our existing credit facilities and, potentially, based on some of the lower spread transactions, potentially allocating those. We're thinking of that as good investments down the road for the JV.
Speaker Change: Hey, Melissa it's Tom there is substantial overlap between the two funds in terms of the <unk>.
Speaker Change: Borrowers effect.
Speaker Change: Almost every single position at CSL. Three is also held that <unk>, obviously varying levels. So we would anticipate looking at keeping in place our current facilities.
Speaker Change: And allocating the loans, primarily to our existing credit facilities and potentially based on some of the lower spread transactions potentially allocating those we're thinking of it as good investments down the road for the JV. So I think we would be looking at based on the investment profile of the yield profile is spreading them across the vehicle, but I think for the most part though the yield profile is in.
Tom Hennigan: So I think we'd be looking at, based on the investment profile, the yield profile is spreading them across the vehicles. But I think, for the most part, though, the yield profile is in line with the BDC, and most of those we'd anticipate would be held directly by the BDC.
Speaker Change: Aligned with the BDC is that most of those we would anticipate would be held directly by the BDC.
Melissa Wedel: Okay, and then can you remind us when you think about the credit fund and sort of the runway there? How much, I guess that's the question, how much runway is there to grow that KV? I assume that's another avenue where you would look to explore, you know, NAV, or, I'm sorry, NII accretion.
Speaker Change: Okay, and then can you remind us when you think about the credit fund and.
Speaker Change: Sort of the runway there.
Speaker Change: How much I guess, that's the question how much runway is there to grow that JV I assume that's another avenue, where you would like to explore.
Speaker Change: Im sorry, NII accretion.
Tom Hennigan: Listen, I think currently we're probably looking to maintain the JV level. Certainly, we're always looking for the best ways to improve our ROE. Right now, I think we're looking to maintain the JV size and dividends coming from the JV. Not a huge group.
Speaker Change: Look I think currently were probably looking to maintain the JV level certainly we're always looking at the best ways to improve our ROE.
Speaker Change: Right now I think we're looking to maintain that the JV size and dividends coming from those JV.
Speaker Change: So it's not a huge growth.
Melissa Wedel: Got it. Final question for me, just around the fee structure. We've seen a number of these transactions before, and I think as we've seen portfolios shift increasingly into the first lane, sometimes we've seen managers make adjustments to the fee structure. Just curious if that's something that's been a topic of discussion with the board. Thank you.
Speaker Change: Got it.
Speaker Change: Final question for me just around the fee structure, we've seen a number of these transactions before and I think as we've seen portfolio shift increasingly first lien sometimes maintain managers take make adjustments to the fee structure.
Speaker Change: Just curious if that's something that's been.
Speaker Change: A topic of discussion with the board. Thank you.
Tom Hennigan: Yeah, we don't anticipate changing our fee structure as part of the merger. We think our fees are in line with the market given the performance that we've had. But I do want to emphasize, you know, Carlisle is paying all transaction expenses, and we're getting out of our preferred shares at NAB, which avoids something like a five to eight percent potential dilution for CGPD shareholders. So those are really the two areas where Carlisle is contributing to the transaction.
Speaker Change: Yes, we don't anticipate changing our fee structure as part of the merger. We think our fees are in line with market given the performance that we've had but I do want to emphasize Carlyle is paying all transaction expenses.
Speaker Change: And where.
Speaker Change: Getting out of our preferred shares at NAV, which avoids a something like a 5% to 8% potential dilution to <unk> shareholders. So those are really the two areas, where carlyle is contributing to the transaction.
Speaker Change: Thank you.
Operator: Thank you. And again, to ask a question at this time, please press star 11 on your telephone. I'm not taking any further questions at this time, and I would like to hand the conference back over to Justin Plouffe for closing remarks.
Speaker Change: Thank you and again to ask a question at this time. Please press star one on your telephone.
Justin <unk>: I'm showing no further questions at this time I would like to hand, the conference back over to Justin <unk> for closing remarks.
Justin Plouffe: Okay, well, thank you everyone. We really appreciate your participation. I'm sure we'll be speaking to you in the future. That will conclude today's call.
Justin <unk>: Okay well. Thank you everyone. We really appreciate your joining sure we'll be speaking to you in the future that will conclude today's call.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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