Carlyle Secured Lending, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Financial statements are unaudited. Carlyle Secured Lending is an externally managed business development company focused primarily on secured lending to U.S. middle-market companies.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Investment income | $60.1 million | $44.6 million | $118.4 million | $92.1 million |
| Net investment income | $27.2 million | $21.9 million | $53.7 million | $47.4 million |
| Net increase in net assets from operations | $4.7 million | $4.7 million | $32.7 million | $35.3 million |
| Operations attributable to common stockholders | $3.8 million | $3.8 million | $31.0 million | $33.6 million |
| Basic earnings per common share | $0.08 | $0.07 | $0.61 | $0.64 |
- Q2 investment income rose about 35% year over year, driven chiefly by higher interest income from higher benchmark rates; net investment income increased about 24%.
- Interest expense and credit facility fees were $17.9 million in Q2 and $35.2 million for the six months, versus $9.2 million and $16.8 million, respectively, in 2022. The six-month weighted-average interest rate on consolidated debt was 6.34%, compared with 3.08% a year earlier.
- Investments at fair value totaled $1.896 billion at June 30, down from $1.980 billion at December 31, 2022. Fair value was below amortized cost by approximately $66.7 million.
- Net assets were $899.7 million, compared with $917.4 million at year-end; net asset value per common share declined to $16.73 from $16.99. The reported June 30 market price was $14.56 per share.
- Six-month operating cash flow was $117.6 million; financing cash outflow was $93.9 million. Cash, cash equivalents and restricted cash ended at $54.2 million, including $16.4 million of restricted cash.
Portfolio, debt and liquidity
- The portfolio comprised 174 investments across 130 portfolio companies or investment funds and 26 industries. First- and second-lien debt represented 81.1% of investment fair value; 98.9% of debt investment fair value was floating rate.
- Performing investments were 98.2% of portfolio fair value. Four debt investments were on non-accrual, with fair value of $34.7 million, or 1.8% of the portfolio, compared with $57.9 million and 2.9% at December 31, 2022. The filing also identifies a loan in forbearance.
- PIK-bearing loans had fair value of $245.7 million, approximately 13.0% of investments, up from $176.8 million and 8.9% at year-end. PIK income was $8.9 million for the first half.
- Consolidated debt outstanding before unamortized issuance costs was $1.039 billion. The revolving credit facility had $400.2 million drawn and $342.8 million available, subject to collateral and covenant requirements. Total unfunded delayed-draw and revolving commitments were $150.4 million.
- Asset coverage was 177.99%, above the applicable 150% minimum; the company reported compliance with its debt covenants. The senior unsecured notes mature December 31, 2024. The revolving facility matures May 25, 2027.
- Investment weighted-average yields on amortized cost were 12.6% for first- and second-lien debt at June 30, up from 11.7% at December 31, 2022; management attributed the increase primarily to higher benchmark rates. These stated yields exclude non-accrual investments.
Changes, unusual items and management commentary
- Higher rates lifted investment income but also increased borrowing costs. For the six months, higher interest income and dividend income were partly offset by increased interest expense; other income declined, primarily because of lower amendment and prepayment fees.
- Q2 realized investment losses were $8.0 million and investment unrealized depreciation was $12.6 million. Management said first-half realized losses were driven primarily by the DermaRite exit and restructuring of PPT Management Holdings; unrealized marks were affected primarily by American Physician Partners, offset in part by reversals of prior-period losses on DermaRite and Bayside OPCP.
- Fair values rely substantially on significant unobservable inputs: $1.830 billion of investments were classified Level 3, with a further $66.9 million valued using the net asset value practical expedient. Management cautions that valuations may differ materially from realizable sale prices.
- The company declared a $0.37 base common dividend plus a $0.07 supplemental dividend for Q2. On August 3, 2023, the board declared the same amounts for the next quarter, payable October 17, 2023. Dividends remain subject to board discretion and taxable income and cash availability.
- No earnings or investment guidance is provided. Management stated that cash, available revolving capacity and operating cash flow were expected to provide resources for obligations and investment needs; results for the interim period are not necessarily indicative of full-year results.
- Principal disclosed risks include borrower credit deterioration and defaults, illiquid investments and valuation uncertainty, interest-rate and foreign-currency changes, leverage and covenant compliance, access to financing, and economic, inflationary and geopolitical conditions. The filing reports no material legal proceedings and no material changes in internal control during the quarter.
Important facts for investors to verify
- Credit developments and recoveries for non-accrual and forbearance exposures, especially American Physician Partners, and the status of the DermaRite and PPT Management Holdings outcomes.
- Whether PIK income and portfolio marks translate into cash collections and realizable value; monitor Level 3 valuation assumptions and the concentration in investment funds.
- Net interest income sensitivity: the filing estimates that a 100-basis-point rate move would change annual net investment income by approximately $7.2 million in the same direction, under stated assumptions that exclude Credit Fund and Credit Fund II.
- Available borrowing capacity after collateral and covenant tests, the $150.4 million unfunded commitments, asset coverage headroom, and the refinancing or repayment plans for 2024-maturity notes.
- Dividend sustainability relative to recurring cash income, rising financing costs and portfolio performance; also note the common share market price was below reported NAV at June 30.