Carlyle Secured Lending, Inc. annual report, FY2022

Carlyle Secured Lending, Inc. — 2022 Form 10-K

Business context and reporting period

For the fiscal year ended December 31, 2022, Carlyle Secured Lending (Nasdaq: CGBD) operated as an externally managed business development company (BDC) and regulated investment company (RIC). Its objective is current income, and secondarily capital appreciation, principally through loans to U.S. middle-market companies. The company changed its name from TCG BDC, Inc. in April 2022 and adopted a policy to invest, under normal circumstances, at least 80% of total assets in secured-debt investments or related exposure.

Financial and portfolio highlights

Metric	2022	2021
Total investment income	$207.3 million	$171.2 million
Net investment income (NII)	$104.0 million	$86.9 million
Net realized gain and unrealized change on investments	$(24.6) million	$71.7 million
Net increase in net assets from operations	$85.6 million	$160.4 million
Cash provided by operating activities	$14.5 million	$75.4 million
Net assets	$917.4 million	$948.8 million
NAV per common share	$16.99	$16.91
Common-stock earnings per share, basic	$1.58	$2.89
Common dividends declared per share	$1.64	$1.50

Investment fair value was $1.980 billion, versus $1.913 billion a year earlier. First-lien debt was 68.6% of portfolio fair value, second-lien debt 13.3%, investment funds 13.3%, and equity 4.8%. Approximately 91.3% of investments were U.S.-based; 98.5% of first- and second-lien debt was floating-rate.
Weighted-average yield on first- and second-lien debt at amortized cost rose to 11.2% from 7.7%; at fair value it was 11.7%, versus 7.9%. Management attributed the increase mainly to higher benchmark rates and loans returning to accrual status.
Performing investments represented 97.1% of fair value, up from 96.0%; non-accrual investments declined to $57.9 million, or 2.9% of fair value, from $76.6 million, or 4.0%. The weighted-average internal risk rating improved to 2.2 from 2.3.
Net unrealized depreciation on investments was $25.6 million, compared with $52.7 million of net unrealized appreciation in 2021. Management cited wider market yields, partly offset by improving fundamentals at certain lower-rated investments.
Net expenses were $101.4 million before $1.8 million of excise tax. Interest expense and credit-facility fees increased to $44.0 million from $30.8 million, primarily due to higher rates. The reported NII ratio to average net assets attributable to common stockholders was 11.75%; expenses after incentive fees were 11.65%.
Year-end cash, cash equivalents and restricted cash were $30.5 million, down from $93.1 million. Operating cash flow was $14.5 million; financing activities used $77.1 million. The filing does not provide a single cash-flow measure equivalent to free cash flow.
Consolidated debt and secured borrowings were $1.080 billion principal amount; the year-end annualized interest cost was 5.78%, excluding fees, versus 2.75% in 2021. Asset coverage was 176.79%, down from 181.94%, above the 150% regulatory minimum. The $688 million revolving facility had $247.9 million available, subject to collateral and covenant conditions.
Unfunded delayed-draw and revolving loan commitments totaled $158.2 million, down from $180.5 million. Management stated that cash, available revolving capacity and operating cash flow were expected to be sufficient for obligations and investment needs.

Material changes versus the prior year

Higher floating-rate investment income drove investment income up approximately 21% and NII up approximately 20%. Higher borrowing costs also weighed on results.
Investment valuation performance reversed: 2022 recorded net realized gains of $1.0 million and net unrealized depreciation of $25.6 million, compared with $19.0 million of realized gains and $52.7 million of unrealized appreciation in 2021.
Net assets declined by $31.4 million, reflecting $85.6 million of operating gains offset by $88.6 million in declared dividends and $28.5 million in common-stock repurchases. NAV per common share increased modestly.
The company funded $724.3 million of investments and sold or received repayment of $611.8 million at principal amount, compared with $881.0 million funded and $857.4 million repaid or sold in 2021. Portfolio count increased to 173 investments across 134 companies and funds.
The base common dividend rose to $0.34 per share for the third quarter and $0.36 for the fourth quarter; the fourth-quarter declared distribution was $0.44 including a supplemental dividend. A February 2023 declaration set a $0.37 base plus $0.07 supplemental dividend for payment in April.

Outlook, risks and unusual items

The filing provides no quantified earnings, yield, or investment-growth guidance. Management’s liquidity statement is an assessment, not a guarantee. The company highlighted inflation, economic slowdown, market volatility, rising rates, supply-chain disruption, geopolitical events and the transition away from LIBOR as risks.
Higher rates increase income on the predominantly floating-rate portfolio, but can impair borrowers’ ability to service debt and raise the company’s funding costs. A modeled 100-basis-point rate increase was estimated to increase annual NII by $7.5 million at year-end 2022, assuming no change in portfolio or borrowing structure; a 100-basis-point decrease was estimated to reduce it by $7.5 million.
Nearly all investments lack readily available market prices. Level 3 investments totaled $1.907 billion at year-end, making valuations dependent on significant unobservable inputs and judgment. The auditor identified valuation of these investments as a critical audit matter.
The company reported $26.0 million of PIK interest in its cash-flow reconciliation, which is accrued income rather than cash received. Accrued income, including PIK, can create a mismatch between taxable income and cash available for distributions.
The $50 million convertible preferred stock held by a Carlyle affiliate ranks senior to common stock, carries a 7% cash dividend rate or an optional 9% rate paid in additional preferred shares, and is convertible at a $9.31 conversion price at year-end. Redemption and conversion provisions could affect common-stock dilution and distributions.
The company repurchased 2.08 million common shares for $28.5 million in 2022. Its $200 million repurchase authorization had approximately $46.3 million remaining at year-end and could continue through November 5, 2023, subject to the program’s terms.
The filing disclosed no material litigation and no material subsequent events requiring disclosure other than the subsequent dividend declaration. The financial-statement audit and internal-control audit received unqualified opinions; management and the auditor concluded internal controls were effective as of year-end.

Important facts for investors to verify

Reconcile portfolio yield increases against higher debt costs, future rate movements, and borrower performance; verify that reported accrued income converts to cash.
Review non-accrual and risk-rating migration, especially the investments rated 4 or 5, and the status of borrowers with PIK or near-term maturities.
Assess the sensitivity of NAV to Level 3 valuation assumptions, including discount rates, comparable multiples, defaults and recoveries.
Confirm available borrowing capacity after collateral tests, debt covenants, unfunded commitments, and the 150% asset-coverage requirement.
Evaluate the preferred stock’s dividend, redemption and conversion terms, and the effect of repurchases, supplemental dividends and any below-NAV issuance on common shareholders.
Monitor LIBOR transition provisions in portfolio loans and securitization debt, including the 2015-1R notes’ October 2023 reinvestment-period end date.