Carlyle Secured Lending Inc

NASDAQ:CGBD

Earnings Call Analysis

Carlyle Secured Lending Q3 Growth

Carlyle Secured Lending, Inc. reported a productive third quarter in 2023, with a core net investment income (NII) of $0.52 per share, an uplift of 18% compared to the previous year. This performance translates to an impressive 12.4% annualized return on equity. The earnings exceeded the paid dividends leading to a net asset value rise of approximately 1% to $16.86 per share. The declared dividend is steady at $0.44 per share, a continuation from the last quarter. In the market, private credit is taking precedence over leveraged buyout transactions, and refinancing activities now dominate the scene. Carlyle has maintained a selective investment strategy to secure opportunities that enhance their return on equity (ROE) and credit quality, seeing favorable terms for lenders and the weighted average spread of new investments exceeding that of previous quarters' repayments.

Earnings and Dividends

Carlyle Secured Lending exhibited an impressive earnings momentum with the third quarter financial results, highlighted by a core net investment income (NII) per share of $0.52—an 18% increase from the previous year. This achievement translates into an annualized return on equity of 12.4%, showcasing the company's productive capital allocation.

Quarterly Dividends and NAV

In line with its strong performance, the Board maintained the fourth quarter dividend at $0.44 per share, comprising a $0.37 base and $0.07 supplemental dividend, matching earlier quarters. Contributing to investor confidence, the net asset value (NAV) per share saw a marginal increase of 1%, reaching $16.86, reflecting the company's resilience and a signal of financial health.

Market Dynamics

Amidst a shifting landscape, Carlyle Secured Lending seized opportunities within the private credit market, which continued to encroach on the syndicated bank loan landscape. The firm capitalized on a lending market that preferred their offerings for new leveraged buyouts (LBOs) and refinancings, ensuring a disciplined approach to investments that enhance their portfolio's credit quality and return on equity. They have sustained a superior weighted average spread on new investments relative to repayments for the past five quarters.

Portfolio Diversification

Stability and diversification remain the portfolio's cornerstones, with 171 investments across more than 25 industries, minimizing exposure and risk. The average investment per company is less than 1%, and the vast majority are in senior secured loans. Furthermore, portfolio companies have held steady, demonstrating revenue and EBITDA growth—unscathed by inflationary challenges—with stable margins, underscoring Carlyle's effective credit assessment and management strategies.

Operational Performance

For the third quarter, total investment income was reported at $61 million, slightly above the previous quarter, despite a lower average investment balance and higher expenses due to escalating base rates. This resulted in a robust total investment income of $26 million or $0.52 per share—substantially better than the earnings reported in 2022.

Earnings Outlook

Looking forward, Carlyle Secured Lending anticipates a stable earnings landscape above $0.50 per share. This projection is backed by the current interest rate expectations and favorable deal economics. Their conservative and disciplined approach is expected to perpetuate reliable dividend distributions across various rate scenarios, reinforcing the commitment to sustainable shareholder returns.

Credit Quality and Leverage

In terms of portfolio valuation, there have been no new nonaccruals and no additions to the watch list—signifying stable credit quality without deterioration. Complementing this stability is the disciplined leverage strategy; the company intentionally maintains leverage at the lower end of their target range, assuring operational flexibility and adherence to conservative financial management.

Investment Strategy

Carlyle Secured Lending continues to prioritize senior secured floating rate investments in U.S. mid-market companies, supported by high-quality sponsors. The company adheres to a systematic and disciplined underwriting process, prudent portfolio construction, and risk management, ensuring their ability to source distinctive lending opportunities without deviating from their strategic game plan.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to the Carlyle Secured Lending, Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Daniel Hahn, Shareholder Relations.

[Daniel Hahn, executive]

Good morning, and welcome to Carlyle Secured Lending's Third Quarter 2023 Earnings Call. With me on the call this morning is Aren LeeKong, our Chief Executive Officer; and Tom Hennigan, our Chief Financial Officer. 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.

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 Form 10-K. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlyle Secured Lending has given no obligation to update any forward-looking statements at any time. With that, I'll turn the call over to Aren.

[Aren LeeKong, executive]

Thanks, Dan. Good morning, everyone, and thank you all for joining. As has become custom, I will focus my remarks on 3 topics for today's call. First, I'll provide an overview of the third quarter financial results. Next, I'll touch on the current market environment. And finally, I'll conclude with a few comments on the quarter's investment activity and portfolio positioning.

Starting off with earnings. We continue to see our portfolio yield benefit from the higher base rate environment. In the third quarter, we generated total core NII of $0.52 per share, which is an increase of 18% from the prior year and represents an annualized return on equity of 12.4%, continuing to trend upward from last quarter and the LTM period.

Our Board of Directors declared a total fourth quarter dividend of $0.44, consisting of $0.37 of base dividend plus a $0.07 supplemental, both of which were in line with the prior quarter. Our net asset value, as of September 30, was $16.86 per share, up $0.13 or approximately 1% from the June 30 period, as a result of our Q3 earnings outpacing our dividend and net positive movement in valuations. Turning now to the current environment. private credit continued to take share from the BSL market, and we've seen sponsors continue to favor the private credit market to finance the limited number of new LBO transactions.

Refinancing transactions drove the majority of activity during the quarter, which included a number of high-profile BSL names being refinanced by the private credit space. Similar to prior quarters, terms and pricing during the third quarter leaned favorably to lenders. However, we continue to remain highly selective in putting new money to work and look for new transactions to improve the credit quality of our book and are accretive to CSL's ROE.

The weighted average spread of new investments outpaced the spread on the third quarter's repayments for the fifth quarter in a row. We continue to see the trend for leverage in LTVs on platform originations improve. On a year-to-date basis, average leverage in LTVs on new originations decreased by approximately 1 turn and 5%, respectively. Originations benefited from the One Carlyle platform, both in the U.S. and Europe. As discussed last quarter, we are focused on complementing our traditional sponsor pipeline with other sources of transaction flow, including Carlyle generated and nonsponsored transactions.

Outside of new deals, we continue to see momentum in mining the existing portfolio for add-on transactions that provide incremental economics and allowed for improvements in the cap structure of current portfolio companies. Lastly, I'd like to spend a few minutes on current positioning. Our portfolio remains highly diversified and is comprised of 171 investments in 124 companies across over 25 industries. The average exposure in any single portfolio company is less than 1% and 94% of our investments are in senior secured loans. We continue to be pleased with the overall credit performance of our existing portfolio, with revenue and EBITDA up quarter-over-quarter and since origination. In addition, despite persistent inflationary pressures, our borrowers EBITDA margin have generally remained stable. The median EBITDA across our core portfolio at the end of the quarter was $80 million, and importantly, we've not seen any meaningful increase in the level of noncash add-backs. I'll now hand the call over to our CFO, Tom Hennigan.

[Thomas Hennigan, executive]

Thank you, Aren. Today, I'll begin with a review of our third quarter earnings then discuss portfolio performance, and I'll conclude with detail on our balance sheet positioning. As Aren previewed, we had another strong quarter on the earnings front. Total investment income for the third quarter was $61 million, up modestly from the prior quarter.

The continued positive impact of higher base rates was partially offset by a lower average investment balance. Total expenses of $34 million also inched up versus prior quarter, again, due to higher interest expense from rising base rates. The result was total investment income for the third quarter of $26 million or $0.52 per share, in line with prior quarter. Importantly, this recent level of earnings is materially above our quarterly earnings from 2022. Our Board of Directors declared the dividends for the fourth quarter of 2023 at a total level of $0.44 per share.

That's comprised of a $0.37 base dividend plus a $0.07 supplemental, which is payable to shareholders of record at the close of business on December 29. Similar to prior quarters, this total dividend level of $0.44 per share allows us to bolster NAV in the face of an increasingly complex macroeconomic environment. Our base dividend coverage of over 140% is among the highest in the BDC peer set. And we've grown the base dividend by nearly 16% since mid-2022.

At the same time, the total dividend level also represents an attractive yield of over 12% on the share price as of September 29. In terms of the forward outlook for earnings, we see stability in the $0.50 plus level based on the combination of the current forward interest rate curve and attractive economics on new deals. Despite rising rates, we've maintained a conservative disciplined approach that we believe will enable us to continue consistent dividend payouts in a variety of rate environments, including when rates normalize.

So we remain highly confident in our ability to comfortably meet and exceed our $0.37 based dividend and continue paying out supplemental dividends each quarter. On valuations, our total aggregate realized and unrealized net gain was about $3 million for the quarter, supported in part by tightening market spreads and improvement in valuations in some of our healthcare names. This increase in valuations, combined with Q3 earnings exceeding the dividend, resulted in our NAV increasing from $16.73 to $16.86 per share.

Turning to the portfolio. We continue to see overall stability in credit quality across the book. Importantly, this quarter, there were no new nonaccruals and no additions to our watch list, which deals with risk rating 4 or 5. Total nonaccruals were effectively flat quarter-over-quarter as we continue to see financial performance improvement and positive valuation migration in investments like Dermatology. Associates and Bayside, which is formally known as Pro PT.

And as Aren noted, most of our portfolio companies continue to weather the inflationary environment very well, and we remain confident in the credit strength of our overall portfolio. 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. Leverage is down quarter-over-quarter, and we're intentionally running leverage conservatively at the lower end of our target range to maintain the flexibility to invest in attractive opportunities. Statutory leverage was about 1.2x and net financial leverage ended the quarter modestly lower at 1.06x, the lowest levels in over a year. This positioning allows us to opportunistically deploy capital given the attractive yields and terms available for new investments in the current market environment. With that, I'll turn it back over to Aren.

[Aren LeeKong, executive]

Thanks, Tom. I would like to finish by highlighting the consistency of our investment approach and reiterate our overall strategy. We're primarily focused on making senior secured floating rate investments to U.S. companies backed by high-quality sponsors, primarily in the mid market.

We utilize a rigorous approach based on disciplined underwriting, prudent portfolio construction and conservative risk management. While market demand for private credit remains high, our approach has not changed. And we remain focused on sourcing differentiated lending opportunities via the breadth and scope of the One Carlyle platform. I'd like to now hand the call over to the operator to take your questions.

[Operator]

[Operator Instructions] I'm showing no further questions. So with that, I'll hand the call back over to CEO, Aren LeeKong, for any closing remarks.

[Aren LeeKong, executive]

Thank you so much, everyone. Look forward to speaking to you all in your scheduled calls, and thank you for the support. Have a great day.

[Operator]

Ladies and gentlemen, thank you for participating. This concludes today's program, and you may now disconnect.