Carlyle Secured Lending, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with FY2022. Carlyle Secured Lending is an externally managed business development company (BDC) and regulated investment company (RIC) focused mainly on secured lending to U.S. middle-market businesses. Dollar amounts below are in millions unless stated otherwise.
Financial and portfolio highlights
| Metric | FY2023 / December 31, 2023 | Prior comparable period |
|---|---|---|
| Total investment income | $241.6 | $207.3 in FY2022 |
| Net investment income (NII) | $110.0; $106.5 after preferred dividends, or $2.10 per common share | $104.0; $100.5 after preferred dividends, or $1.93 per common share |
| Net increase in net assets from operations | $92.3; basic earnings $1.75 per common share | $85.6; basic earnings $1.58 per common share |
| Common dividends declared | $1.76 per share | $1.64 per share |
| NAV per common share | $16.99 | $16.99 at December 31, 2022 |
| Portfolio fair value | $1,841.9 across 173 investments and 128 portfolio companies | $1,979.9 at December 31, 2022 |
| Cash flow from operations | $230.6 | $14.5 in FY2022 |
| Cash, cash equivalents and restricted cash | $60.4 | $30.5 |
| Total liquidity, including available facility capacity | $420.1 | $278.4 |
| Consolidated debt principal | $984.6; weighted-average rate 6.95% excluding fees | $1,079.6; weighted-average rate 5.78% |
| BDC asset coverage | 183.4% | 176.8% |
Changes versus FY2022
- Investment income rose $34.4 million, mainly because higher benchmark rates lifted interest income; the portfolio’s weighted-average yield on amortized cost increased to 12.7% from 11.8%.
- Higher rates also raised interest expense and facility fees by $27.8 million, to $71.7 million. Total expenses increased $28.4 million, to $131.7 million.
- Net realized investment losses widened to $21.2 million from a $1.0 million gain. Investment unrealized appreciation improved by $32.7 million year over year, contributing to a smaller combined decline in net assets from realized and unrealized investment and currency items.
- Portfolio fair value declined about $138.0 million. Fundings were $242.6 million versus $724.3 million in FY2022; repayments were $369.0 million versus $611.8 million.
- Non-accrual investments improved to 4 positions worth $38.1 million, or 2.1% of portfolio fair value, from 3 positions worth $57.9 million, or 2.9%. However, investments rated internal risk 3 rose to 18.2% from 15.7% of rated debt fair value.
- Loans with PIK provisions represented 18.3% of total investment fair value, up from 8.9%. PIK income was $20.5 million, compared with $23.1 million.
Funding, outlook and risks
- The company issued $85.0 million of 8.20% senior unsecured notes due 2028 and increased its revolving credit facility commitments to $790.0 million. The 2028 Notes’ fixed coupon is swapped to a floating-rate exposure. The 2024 Notes had $190.0 million outstanding at year-end.
- Management stated that cash, available facility capacity and operating cash flows were expected to provide sufficient resources for obligations and investment needs. No specific earnings, portfolio-growth or distribution guidance was provided.
- Substantially all debt investments are floating rate (98.8% of first- and second-lien debt). The filing’s sensitivity analysis estimates a roughly $7.2 million annual decrease in NII from a 100-basis-point rate decline, and a roughly $7.2 million increase from a 100-basis-point rise, assuming the year-end portfolio and financing structure remain unchanged.
- Unfunded delayed-draw and revolving loan commitments totaled $134.4 million, down from $158.2 million. Additional contingent exposure may arise from contractual indemnities and securitization representations; the company recorded no accrual for those indemnities and stated maximum exposure was unknown.
- Key risks include borrower credit deterioration, inflation and recession, interest-rate and refinancing risk, leverage, illiquid investments and valuation uncertainty, affiliate-allocation conflicts, and the possibility that non-cash PIK or other accrued taxable income may not produce cash available for distributions.
- The portfolio is largely valued using significant unobservable inputs: $1.774 billion of investments were Level III. The auditor identified valuation of Level III investments as a critical audit matter, while issuing an unqualified opinion on the financial statements and internal controls. The filing reports no material legal proceedings and no known material cybersecurity impact.
- After year-end, the board declared a $0.40 base quarterly common dividend plus a $0.08 supplemental dividend, payable April 17, 2024. The filing does not provide longer-term distribution guidance.
Important facts for investors to verify
- Whether portfolio credit quality and non-accrual trends continue to improve, particularly given the larger share of PIK-bearing loans and the increase in risk-rating 3 exposures.
- How much reported NII converts to cash, including the sustainability and collectability of PIK income and income from affiliated investment funds.
- Whether the $420.1 million reported liquidity remains available after collateral-based borrowing limits, covenants and funding commitments are considered.
- Debt refinancing needs, interest-rate exposure and headroom above the 150% minimum asset-coverage requirement.
- Valuation assumptions for Level III investments, especially discount rates, comparable-company multiples, default rates and recovery rates.
- Potential common-stock dilution or changes in capital structure from the $50.0 million convertible preferred stock; also note the below-NAV issuance authorization expires July 26, 2024.
- The common stock’s market price was $14.96 at year-end versus $16.99 NAV per share; the filing reported a 9.1% discount at the later February 23, 2024 closing price of $15.44.