Carlyle Secured Lending, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022. CSL is an externally managed business development company focused primarily on secured lending to U.S. middle-market companies. Dollar amounts below are rounded to millions unless noted.
Financial and portfolio highlights
| Metric | Q1 2023 / March 31, 2023 | Comparable / prior period |
|---|---|---|
| Investment income | $58.4 million | $47.5 million in Q1 2022 |
| Net investment income | $26.6 million; $0.50 per basic common share | $25.5 million; $0.47 per share in Q1 2022 |
| Net increase in net assets from operations | $28.0 million; diluted EPS $0.50 | $30.7 million; diluted EPS $0.53 in Q1 2022 |
| Investment gains, net | $2.7 million: $13.3 million realized losses offset by $16.0 million unrealized appreciation | $3.3 million net gains in Q1 2022 |
| Net assets / NAV per common share | $918.2 million total net assets; $17.09 per share | $917.4 million / $16.99 at December 31, 2022 |
| Investments at fair value | $1,973.6 million | $1,979.9 million at December 31, 2022 |
| Cash, cash equivalents and restricted cash | $42.9 million, including $19.4 million restricted | $30.5 million at December 31, 2022 |
| Debt and secured borrowings | $1,092.7 million net carrying value; $1,095.1 million before issuance costs | $1,077.2 million net at December 31, 2022 |
| Operating cash flow | $25.6 million provided | $50.8 million provided in Q1 2022 |
Investment income rose 23% year over year, principally from higher interest income as benchmark rates increased; weighted-average yield on debt and income-producing investments at amortized cost rose to 12.1% from 8.7% a year earlier. The increase was partly offset by lower other income, mainly lower amendment and prepayment fees. Net investment income increased modestly, but higher borrowing costs and realized investment losses contributed to lower operating results and diluted EPS.
Total expenses, including excise tax, were $31.8 million versus $22.0 million a year earlier. Interest expense and credit-facility fees more than doubled to $17.3 million from $7.6 million; the company cited higher benchmark rates and average debt outstanding. The weighted-average interest rate on average principal debt was 6.14%, compared with 2.88% in Q1 2022. Net investment income was 3.06% of average common net assets, not annualized, versus 2.84%.
Portfolio, liquidity and capital
- The portfolio had 171 investments across 133 portfolio companies and investment funds and 27 industries. First- and second-lien debt represented 81.6% of fair value; investment funds 13.2%; and equity 5.2%. Healthcare and pharmaceuticals was the largest industry exposure at 11.4%.
- 98.9% of debt investments at fair value were floating rate. Management’s modeled annual net investment income sensitivity was approximately +$7.1 million for a 100-basis-point rate increase and −$7.1 million for a 100-basis-point decrease. The analysis excludes Credit Fund and Credit Fund II investments and depends on stated assumptions.
- Non-accrual investments totaled $68.9 million, or 3.5% of portfolio fair value, up from $57.9 million, or 2.9%, at year-end. Three debt investments were on non-accrual at both dates. The weighted-average internal risk rating remained 2.2; rating-4 exposures increased to $68.9 million from $48.6 million, while rating-5 exposure was zero at quarter-end.
- Unfunded delayed-draw and revolving commitments were $164.4 million, up from $158.2 million. The company reported $235.6 million available under its $688 million revolving facility at quarter-end, subject to collateral availability and covenants. The facility commitment was increased to $745 million on April 21, 2023, after quarter-end.
- Asset coverage was 175.82%, above the 150% statutory minimum, and the company reported compliance with its borrowing covenants. Its stock repurchase program bought back 265,195 shares for $4.0 million in Q1. NAV per share increased from $16.99 to $17.09.
- The Q1 common dividend was $0.37 base plus $0.07 supplemental per share. On May 4, the board declared the same $0.44 total dividend for the next quarter, payable July 18, 2023. Dividends remain subject to board discretion.
Management commentary, risks and unusual items
- The $13.3 million realized investment loss in Q1 was primarily associated with the exit of the DermaRite investment. Unrealized appreciation improved compared with Q1 2022, which management attributed principally to tighter market spreads and reversal of prior unrealized losses on DermaRite.
- PIK income was $4.2 million. Loans with PIK provisions had fair value of $149.6 million, or 7.6% of investments, down from $176.8 million, or 8.9%, at year-end. PIK accruals increase reported income and principal but are generally not received in cash until later.
- Most portfolio valuations rely on significant unobservable inputs and management estimates; actual realizations may differ materially. Management also identifies credit deterioration, illiquidity, leverage, interest-rate changes, LIBOR transition, inflation, market access, foreign-currency movements, geopolitical events, and cybersecurity as risks. No formal earnings or investment guidance is provided in the supplied filing text.
- The company reported no material legal proceedings and no material changes in internal control over financial reporting; disclosure controls were assessed as effective. The filing states that results for the quarter are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether non-accrual and rating-4 exposures continue to rise, and whether the affected borrowers resume payments or require further valuation reductions.
- Whether higher floating-rate investment income continues to exceed the rising cost of floating-rate borrowings, including under rate declines or stress scenarios.
- The quality and realizability of Level 3 valuations, including the assumptions used for discount rates, comparable multiples, defaults and recoveries.
- Liquidity after considering restricted cash, the $164.4 million unfunded commitments, borrowing-base limits, debt maturities and the post-quarter facility increase.
- The sustainability of distributions relative to cash investment income, PIK income, realized credit losses and the company’s RIC distribution requirements.