Carlyle Secured Lending, Inc. quarterly report, Q3 FY2017

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2017, for TCG BDC, Inc. (formerly Carlyle GMS Finance, Inc.). The Company is an externally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). Its investment objective is to generate current income and capital appreciation primarily through debt investments in U.S. middle-market companies. During the period, the Company completed its Initial Public Offering (IPO) on June 19, 2017, and acquired NF Investment Corp. (NFIC) on June 9, 2017.

Key Financial Metrics

Metric Q3 2017 (Three Months) YTD 2017 (Nine Months) YTD 2016 (Nine Months)
Total Investment Income $42.6 million $115.5 million $77.8 million
Net Investment Income $25.1 million $65.6 million $41.3 million
Net Realized Gain (Loss) $0.2 million $(7.7) million $(9.1) million
Net Change in Unrealized Appreciation (Depreciation) $0.3 million $(0.7) million $20.2 million
Net Increase in Net Assets from Operations $25.5 million $57.2 million $52.4 million
Earnings Per Share (Basic & Diluted) $0.41 $1.15 $1.51
Net Assets (Total) $1.12 billion $1.12 billion $764.1 million (Dec 31, 2016)
Net Asset Value Per Share $18.18 $18.18 $18.32 (Dec 31, 2016)
Total Investments (Fair Value) $1.96 billion $1.96 billion $1.42 billion (Dec 31, 2016)
Secured Borrowings Outstanding $578.8 million $578.8 million $421.9 million (Dec 31, 2016)
2015-1 Notes Outstanding $271.0 million $271.0 million $270.8 million (Dec 31, 2016)
Cash and Cash Equivalents $35.1 million $35.1 million $38.5 million (Dec 31, 2016)

Material Changes vs. Prior Period

  • Portfolio Growth: Total investments at fair value increased to $1.96 billion from $1.42 billion at December 31, 2016, driven by the IPO proceeds, the NFIC Acquisition, and new originations. The portfolio consists of 89.6% secured debt, 9.6% in the Middle Market Credit Fund, and minimal structured finance and equity investments.
  • Investment Income: Net investment income for the nine months ended September 30, 2017, increased to $65.6 million from $41.3 million in the prior year period. This growth was primarily due to an increased invested balance and higher interest rates (LIBOR increased from 1.00% to 1.33%).
  • Realized Losses: The Company reported a net realized loss of $7.7 million for the nine months ended September 30, 2017, compared to $9.1 million in the prior year. A significant portion of the loss was related to the restructuring of TwentyEighty, Inc., where a realized loss of $7.7 million was recognized, partially offset by the reversal of $10.9 million in previously recorded unrealized depreciation.
  • Expense Increases: Total expenses increased to $55.8 million (YTD 2017) from $40.9 million (YTD 2016), reflecting higher base management and incentive fees due to asset growth, as well as increased interest expense from higher debt utilization.
  • Non-Accrual Status: As of September 30, 2017, one first lien debt investment with a fair value of $22.8 million (1.16% of total investments) was on non-accrual status, compared to $7.6 million (0.54%) at December 31, 2016.

Guidance, Outlook, and Risks

  • Dividend Policy: The Company declared a quarterly dividend of $0.37 per share for the quarter ended September 30, 2017. Effective July 5, 2017, the dividend reinvestment plan was converted from "opt-in" to "opt-out."
  • Capital Resources: The Company has significant liquidity with $136.7 million available under its credit facilities (SPV Credit Facility and Credit Facility) as of September 30, 2017. It also holds $35.1 million in cash.
  • Interest Rate Risk: Approximately 98.8% of the debt portfolio bears floating interest rates. The Company is exposed to interest rate fluctuations, though most loans have interest rate floors. A 100 basis point increase in rates would increase net investment income by approximately $9.2 million annually.
  • Valuation Risk: The Company values investments using significant unobservable inputs (Level 3). Fair value estimates may differ materially from values in a ready market. Significant changes in discount rates or EBITDA multiples could materially impact reported asset values.
  • Regulatory Status: The Company ceased to be an "emerging growth company" as of December 31, 2017, due to the market value of its non-affiliate stock exceeding $700 million.

Investor Verification Checklist

  • Fee Waiver Expiration: Verify the impact of the base management fee waiver termination effective October 1, 2017, on future expense ratios and net investment income.
  • Non-Accrual Exposure: Review the specific details of the $22.8 million non-accrual loan (Product Quest Manufacturing, LLC) and the Company's recovery strategy.
  • TwentyEighty Restructuring: Confirm the long-term performance of the new term loans and equity received in the TwentyEighty, Inc. restructuring.
  • Debt Covenants: Monitor compliance with asset coverage ratios (currently 232.00%) and other covenants under the SPV Credit Facility, Credit Facility, and 2015-1 Notes.
  • Unfunded Commitments: Assess the liquidity impact of $131.8 million in unfunded delayed draw and revolving commitments.