Q3 2025 Carlyle Secured Lending Inc Earnings Call
Speaker #1: Good day and thank you for standing by . Welcome to Carlyle Secured Lending, Inc. . S third Quarter 2020 Earnings Call . At this time , all participants are in a listen only mode .
Speaker #1: After the speakers presentation , there will be a question and answer session . To ask a question during the session , you will need to press star one one on your telephone .
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Speaker #1: Please be advised that today's conference is being recorded . I would now like to hand the conference over to your speaker today , Nishil Mehta , head of Shareholder Relations .
Speaker #1: Please go ahead .
Speaker #2: Good morning and welcome to Carlyle Secured Lending, Inc. conference call to discuss the earnings results for the third quarter of 2025 . I'm joined by Justin Plouffe , our chief executive officer , and Tom Hennigan , our chief financial officer .
Speaker #2: Last night, we filed our Form 10-Q and issued a press release with the presentation of our results, which are available on the Investor Relations section of our website.
Speaker #2: Following our remarks today , we will hold a question and answer session for the analysts and investors . This call is being webcast and a replay will be available on our website .
Speaker #2: Any forward looking statements made today do not guarantee future performance and any undue reliance should not be placed on them . Today's conference call may include forward looking statements reflecting our views with respect to , among other things , the expected synergies associated with the merger .
Speaker #2: The ability to realize the anticipated benefits of the merger and our future operating results and financial performance . These statements are based on current management expectations and involve inherent risks and uncertainties , including those identified in the risk factors sections of our 10-K and 10-q .
Speaker #2: These risks and uncertainties could cause actual results to differ materially from those indicated . CBD assumes no obligation to update any forward looking statements at any time during this conference call .
Speaker #2: The company may discuss certain non-GAAP measures as defined by SEC regulation G , such as adjusted net investment income or adjusted NII . The company's management believes adjusted net investment income , adjusted Net investment income per share , adjusted net income and Adjusted net Income per share are useful to investors as additional tool to evaluate ongoing results and trends , and to review our performance without giving effect to the amortization or accretion resulting from the new cost basis of the investments acquired and accounted for under the acquisition method of accounting .
Speaker #2: In accordance with ASC 805 and the one time purchase or non-recurring investment income and expense events , including the effects on incentive fees and are used by management to evaluate the economic earnings of the company .
Speaker #2: Reconciliation of GAAP net investment income . The most directly comparable GAAP financial measure to adjusted NII per share can be found in the accompanying slide presentation for this call .
Speaker #2: In addition, a reconciliation of these measures may also be found in our earnings release filed last night with the SEC on Form 8-K.
Speaker #2: With that , I'll turn the call over to Justin , KGB's chief executive officer .
Speaker #3: Thanks , Michelle . Good morning , everyone , and thank you all for joining . I'm Justin Plouffe , the CEO of the Carlyle Bdc's and Deputy CIO for Carlisle Global Credit .
Speaker #3: On today's call , I'll give an overview of our third quarter 2020 results , including the quarter's investment activity and portfolio positioning . I will then hand the call over to our CFO , Tom Hennigan , during the third quarter , CGD benefited from strong originations across the platform , but was also impacted by historically tight market spreads .
Speaker #3: We generated $0.37 per share of net investment income for the quarter . On a GAAP basis , and $0.38 after adjusting for asset acquisition accounting .
Speaker #3: Our board of directors declared a fourth quarter dividend of $0.40 per share . Our net asset value as of September 30th was $16.36 per share , compared to $16.43 per share as of June 30th .
Speaker #3: CGD had another strong quarter of deployment , funding $260 million of investments into new and existing borrowers , resulting in net investment activity of $117 million .
Speaker #3: After accounting for repayments and $48 million of investments sold to our joint venture, MCF, total investments at CGD increased from $2.3 billion to $2.4 billion during the quarter.
Speaker #3: Looking ahead , net new supply has picked up recently , and the Q4 pipeline continues to build year over year deal flow at the top of the funnel increased nearly 30% over the last two months .
Speaker #3: We expect activity will continue to increase , supported by declining base rates , driving lower funding costs , normalization of tariff and regulatory policy , and resilient expectations for economic growth .
Speaker #3: Although there have been recent bankruptcies in the news , CGD has no direct or indirect exposure to first brands or tricolor , and we continue to have confidence in the credit quality of our portfolio .
Speaker #3: As a reminder , CGD consistently exhibits below average non-accruals and a strong track record of Nav . Preservation . Based on June 30th , reporting , Cgd's Non-accruals were 120 basis points below the public BDC average at cost , and Non-accruals at CGD decreased by 140 basis points at cost between June 30th and September 30th .
Speaker #3: Overall , we remain selective in our underwriting approach , seeking to provide first line loans to quality companies . We remain focused on portfolio diversification while managing target leverage .
Speaker #3: As of September 30th , our portfolio was comprised of 221 investments and 158 companies across more than 25 industries . The average exposure to any single portfolio company was less than 1% of total investments , and 95% of our investments were in senior secured loans .
Speaker #3: The median EBITDA across our portfolio was $98 million . As always , discipline and consistency drove performance in the third quarter , and we expect these tenants to drive performance in future quarters .
Speaker #3: With that , I'll now hand the call over to our CFO , Tom Hennigan . Thank you . Justin . Today I'll begin with an overview of our third quarter financial results .
Speaker #3: Then I'll discuss portfolio performance before concluding with details on our balance sheet positioning. Total investment income for the third quarter was $67 million, in line with the prior quarter, driven by a stable average portfolio size.
Speaker #3: A modest change in total portfolio yields and lower accretion of discounts from repayment activity . . Total expenses of $40 million increased slightly versus prior quarter , primarily as a result of higher interest expense , due in part to the 2030 senior notes transitioning from fixed to the floating rate swap .
Speaker #3: The result was net investment income for the third quarter of $27 million , or $0.37 per share , on a GAAP basis and $0.38 per share .
Speaker #3: After adjusting for asset acquisition accounting . Which excludes the amortization of the purchase price premium from the SL3 merger and the purchase price discount associated with the consolidation of credit Fund two , our board of directors declared the dividend for the fourth quarter of 2025 at a level of $0.40 per share , which is payable to stockholders of record as of the close of business on December 31st .
We continue to focus on sourcing transactions with significant Equity. Cushions conservative, leverage profiles, and attractive spreads relative to market levels.
Our pipeline of new originations is active and with a stable, high-quality portfolio, cgbd stockholders are benefiting from the continued execution of our strategy.
As always, we remain committed to delivering a resilient stable cash flow stream to our investors through consistent income and solid credit performance.
At the platform level, we continue to build out the Carlyle Direct Lending team. As a reminder, Alex Chi will be joining Carlyle as Partner, Deputy Chief Investment Officer for Global Credit, and Head of Direct Lending in early 2026.
We also hired a new head of origination during the quarter and continue to build out the broader origination function within additional higher in Q3 and 1 more slated to join the team in Q4.
All 3 will expand our existing capabilities to combined with the expected increase in overall Capital markets activity. We are constructive on our expectations for activity and deployment going forward.
I would now like to hand the call over to the operator to take your questions. Thank you.
Thank you as a reminder, to ask a question. Please press star 1, 1 on your telephone and wait for your name to be announced to withdraw your question. Please. Press star 1 1 again.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of finneon Osha from Wells Fargo securities.
Um, here everyone. Good morning. Can you hear me?
Yeah, we can. Hey, Finn
Hey, how are you? Sorry just getting ahead of any, uh, potential technical difficulty that I seem to have been facing. Um, Tom can you
Give us some, um, color. Maybe a bridge on.
The Top Line this quarter.
Time fees or anything else in there? That's notable. Thanks.
Yeah, sure thing. Thanks for the question. When you look at the top line, it's $67 million last quarter and this quarter. But last quarter it rounded down; this quarter it rounded up. When you look at the delta, that's a very modest decline. It's primarily due to idea creation on repaid investments. That's really the biggest bridge point in terms of the difference between the two. When you look at fee income, it was up modestly. In the aggregate, the average daily principal balance of loans outstanding was pretty flat across the quarter. That's what we'll see; we should get a benefit in the coming quarter based on that average daily outstanding investment balance, but that was neutral.
From second quarter to the third quarter, but it's really the all idea creation was the biggest point on the top line.
Okay. Thanks in the the 10 bits you gave on borrowing spreads was that just from the the baby Bond or was that also um
There's a couple of post quarter changes as well. Is that a holistic sort of guidance or just that 1 bond that, that I'm sorry, I didn't catch that. It it was no and it was primarily post quarter end items. It was the we repaid our Legacy CSL 3 facility that was priced at self for plus 285.
The baby Bond swap adjusted is so for 314. So those the the
CSL 3 facility. We repaid at the beginning of October.
The baby Bond will be repaid. Effective December 1st.
And then the biggest replacement is the new institutional deal we did, which is swap adjusted 231 so over. So for
So net net. That's about 10 basis points across the capital structure.
okay, so um I want 1 final 1 for me I'll get back to you in a queue and
I'm sure we bugged you about this last quarter, um, but the the 40 cents declared to the 4th.
You said something like comfortable for now.
Can you expand on for now?
Um, does that include like like how far out into the the software curve does that include? And then sort of what are I know you mentioned the
The 30% bucket bit of rotating spread. So like, like how much of...
How much sort of fundamental or octane? Sort of drivers offset how much, um, you know, said decline.
Your senior outlook for coverage.
Sure. Interestingly, our outlook and the support—not comfort—with that $0.40 is actually in the near term. In the next few quarters, we will receive the most pain, and that's just based on, primarily, the soft curve. So, you know, we anticipate earnings will drop in the next couple of quarters.
Uh, when you look at the longer term with our 2 JVS, let's just say our 1 jaybee in place and then potential second JV. That's what we see that that was just take time to ramp those Vehicles. So, for example, our existing JV I mentioned we increase the credit facility from 600 to 800 just to give us more dry powder to continue to invest. We reached agreement with our partner to increase our Equity, commitments from 175 to 250 each.
Uh, and we've also been working on some creative low-cost financing solutions to continue to operate at a very low get cost of capital for that JV. So that gives us the runway and it's going to take some time to, to grow that vehicle from 800 million of assets, to double double the size to 1.6 billion. Uh, and right now, if we're at a 15% return on assets for CBD, we we see the ability to increase that by 300 to 500 basis points. So we see a lot, a lot of positive drivers with that JP, but it's going to take some time to invest.
Over the course of the next number of quarters.
And then the second JV, we're we've made some really good progress with a potential partner. Uh, it's leveraging carlile's Global Credit uh, expertise in investing loans. Uh, it's something we hope to have more
What color for the market and and and hopefully Target closing that deal sometime this quarter.
But again, that would be longer term to to ramp that vehicle.
Yep. No, appreciate all the color there. Uh, thanks so much.
Thank you. One moment for our next question.
Our next question comes from the line of Eric Sick from Lucid Capital Markets.
Good morning. Um, just looking at slide 5 of your deck this morning, you know, over the past.
Up to about 86% of that total portfolio. Now, with the second lean investment funds coming down. Um, you know, we've been hearing from others. That secondly debt potentially, is, is not as attractive today, given you know, tighter spread. So, just curious, are we likely to see this this trend continued in in your view or firstly? In debt continued to become a larger, um, concentration in the portfolio.
Yeah. Uh,
It's Justin. Thanks for the question. Um, look, we are operating in a tight spread environment a cross credit markets. And at this point in time, uh, we we don't see a ton of value, um, in in second Lanes. Uh, I think the, I think across all private credit markets, the amount, you're getting paid to take significant risk, has really has come down, um, in in the last, uh, 24 months. So, our strategy is always been
Defensive Diversified first lean, and then, opportunistic on things like second lanes. And and I would tell you right now, we don't see the opportunity to be that compelling, so I think you will see our portfolio. Continue to, um, Trend first lean. Uh, and uh, I I don't see any reason for that to change in the near term, you know, of course, we could have a credit cycle and then there might be opportunities that come up at that point. Um, but for now, we're very, very focused on a defensive first Lane portfolio.
The commentary there. And then, you know, just given your comments about the the pipeline continuing to grow. And I guess I'm curious what the, um, kind of you know average yield looks like in the pipeline today versus the the current weighted average yield in the portfolios or potentially. Um you know, pressure there as as a portfolio returns or you know what are what are your thoughts there?
Hey, it's Tom definitely continues to be pressure on spreads relative to where the portfolio is the the our for the first. For the for the third quarter, our weighted average spread was a shade over 500 basis points.
Uh, per quarters is a bit higher and part of that is our mix of non-us transactions in the second quarter, it was closer to 15%, we typically see anywhere from a 75 to 100 basis point premium, for those non-us transactions. So we got a little extra spread premium in the in the second quarter in the third quarter. Our originations well strong was only about 5% only 1 deal from our European originations. So we were right about 500, but I think that there continues to be overall pressure. When you look at where the overall portfolio yield is relative to let's say those new originations which are more squarely, uh, 500 weighted average. And, you know, for a brand new elbow, not in the portfolio, you know, it's probably a 4 handle is what we're seeing in, in today's market,
But for for cgbd, those are transactions work and will be investing in that particular transaction across our broader. Direct lending business for cgbd as those assets drift and spread below 500, that's where they're very good candidates for our, for our JV.
And and last question for me, just looking at the, um, chart on, on slide 12, the risk rating distribution, uh, a nice quarter over quarter Improvement. Um, in those, uh, 2 rated uh assets. I'm just curious the drivers there was that um kind of industry related or more companies specific uh, if you're able to provide any commentary,
The increase in the 2-rated Eric from about $100 million.
Yeah. Primarily a couple of deals transitions from the 3 categories. To 2 categories, the biggest component is just net originations for the quarter.
And those continue to be in our main categories of healthcare.
Software, technology, and financial services. Those those continue to be through her larger categories and and that's where
Most of our originations in the third quarter list.
Thank you for taking my questions.
Thank you. 1 moment for our next question.
Our next question comes from the line of Sean Paul Adams from B Riley securities.
Hey guys, good morning. Um, congrats on the great quarter, but, um, when looking over the non-ACRS, it looked like quarter-over-quarter, not across, decreased.
Significantly, but the rating within the portfolio, um, increased from 4 investigate rating, 4 to 5. So is are the nicles that are remaining on the books. They've just shifted to materially, you know, changing the expectations on recoveries or is this just more of a covenant change or just lapsing in the amount of time since payment?
Hey, it's Tom again, I'll answer that in a slightly different way. I think just to to describe the changes in the categories. The biggest decline in the 4G was the
Restructuring of arch Maverick now it's called align Precision. So that was the largest component of that 4 category and we successfully restructured wrote off some debt but now that that transaction the multiple tranches lives in the 2 and 3 categories.
The migration from 4 to 5 is primarily 1 Credit that remains on non-accrual that we are uh in the midst of restructuring right now.
and I think that it's, it's a
The shift from 4 to 5 is acknowledgement on our part that hey, yes, we're restructuring it. Yes, we're going to be writing off debt and
My credit view, unlike Maverick, is that we see a path with the lead agent. We see a path to, it's going to take a few years, but to a very strong recovery. Perhaps a full recovery on that investment.
The loans that we had were two. Loan 1 was the majority piece to four to five work investments that were restructuring, their payments, the fall, and/or were on non-accrual. We think that, even longer term, they are more likely not going to have a full return of capital.
Thank you for calling.
Thank you. 1 moment for our next question.
Our next question comes from the line of Robert Dodd from Raymond James.
Hi, guys. On, on the, the, the potential, and I realize nothing has been signed yet the potential second JV. Do you envision that, uh, to your partner Envision. That is kind of a, a same kind of style as as the existing 1. I mean, in in your prepared remarks, you mentioned on the season, you know, leveraging the global platform more maybe um or is is is is, you know? Yeah. Is this is a set potential second. We're going to begin a structurally structurally similar but Target
Assets with different characteristics than the first, and I diversify overall exposure, or just participate in the same kind of deals and just...
Diversify, you know where it's helped?
Right uh rather good morning. This this contemplated JV the the structural will be very similar to the existing JV in terms of 50/50 governance it'll be 50/50 economic ownership, it is in loans but it will be a different investment strategy, really zero overlap to the current JB
Got it, thank you. And then just—you’re sounding obviously more optimistic about the outlook, and a 30% increase in deal flow for a couple of months is pretty good. Um,
How's the quality of those deals and kind of like the, the terms, I mean, are you seeing the initial? Look at those your point, you know, 4 handles on new ldos. I mean, is that what we're looking at? As as the, the terms
Consistent with that in terms of the pipeline build and is that is the quality of the assets.
You're seeing it's 1 thing for a 475 if Leverage is lower. But if if Leverage is getting Fuller and Fuller and I don't know that could be the case.
You know those those terms are might not be so attractive. I mean any color you can give on like the the
constituents of the pipeline in terms of how it looks.
I think that the the pipeline consists, I think high quality borrowers very much in the same makeup industry-wise as our current portfolio.
In terms of focused on whether it be software, technology, Healthcare business, and consumer services financial services.
I would say it's very much industries and Deals specific in terms of Leverage. The 1, the 1 key attribute though and it's was the case back in 23 when leveraged was lower. It's been the case. Now that there's somewhat of reopening in the markets is the LTV investing in the first Lane. Loans rltv, consistently is 38 to 42% on average, uh perhaps uh even lower for some of the technology deals. Uh, if we're looking at industrial deals, it may be a bit higher because they're low growth, um, or Enterprise Value multiples. But overall that's really the 1. Common attribute is that loan the values with that significant coverage where you know the loan value is typically 40%.
Got it. Thank you.
Thank you. 1 moment for our next question.
Our next question comes from the line of Melissa wettle from JP Morgan.
Like with the upsides and the existing 1 and the potential uh second JV.
Those will take time to scale up. And so as you look at the earnings power of the portfolio, we shouldn't be thinking of those as having
a particularly near-term impact.
On earnings powers that fair to say.
Yep, that's a very good.
Synopsis of it. Let me know when we look at the
The current quarter. The next quarter, next 2 quarters, we know.
The rate, cut math is easy for us. Every 100 basis points is 3 pennies per share per quarter.
Uh you know those JVS are going to take more time, you know, multiple quarters. So you know we see an earnings drop in the next couple of quarters and then it start to build back up. Second half of
Of 26 into 27.
And of course, that will all depend on on, uh, activity in the market as well. If we see elevated activity, perhaps we can ramp ramp faster. Um, but we're we're thinking about these JVS as long-term drivers of uh increased income. Um not necessarily as a a quarter to quarter fix
We have our 86 cents, a spill over over 2, quarters, that, you know, for this interim basis. You know, we feel comfortable with when necessary paying out this bill over, but, you know, really have really have the long-term
goal in mind.
Okay. Okay. Thank you for clarifying that and then
Following on 1 of your comments. Uh I think it was during the prepared remarks. You mentioned, at 1 Point the potential for spreads to widen especially to compensate a little bit for lower base rates. I guess I'm I'm wondering if that's built into your is that your base case expectation? And how does that? How do you reconcile that with you know just the supply and demand and balance of capital that we're seeing in the market now?
even with base rates being lower and spread still being so tight,
Yeah, I I know it's, it's not our necessarily, our base case scenario. Um, I I think if you look historically, uh, when rates have been going down, spreads have actually more than compensated, uh, for the reduction in rates, but we're in an unusual environment. Now, where we do have base rates going down while spreads, uh, either tighten or or remain, uh, uh, type. Um, so in the current environment, um, that's that's not the case, but as we know, uh, credit goes through Cycles, uh, and I think eventually, we will have a change in the supply, demand imbalance. I think it's
Historically, if you look across private credit, spreads are at the titer levels that they've been. Um, so I think it's reasonable in the intermediate term to think that there probably will be some movement on spread and and we want to be positioned to take advantage of that. Right. Um, so that that's really all that we're saying not not some prediction of near-term spread widening because I I don't really see the impetus for that uh in the markets today.
Okay, got it. Thank you.
Thank you at this time. I would now like to turn the call for inspector over to Justin Pluff for closing remarks.
Thanks everybody for joining the call. Uh, we really appreciate it and we will speak with you next quarter. Take care.
This concludes today's conference call, thank you for participating. You may now disconnect