Carlyle Secured Lending, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in millions of dollars unless stated otherwise. Carlyle Secured Lending is an externally managed business development company (BDC) that primarily originates secured loans to U.S. middle-market companies.
Financial performance and condition
- Third-quarter results: Investment income was $59.1 million, up from $43.8 million a year earlier. Expenses were $27.5 million, versus $21.5 million; net investment income was $31.2 million, versus $22.1 million. Net increase in net assets from operations was $37.8 million, compared with $47.6 million. Basic and diluted earnings per common share were $0.71 and $0.66, respectively, versus $0.87 and $0.80.
- Nine-month results: Investment income was $151.2 million, compared with $127.3 million; expenses were $71.7 million, compared with $62.4 million. Net investment income was $78.5 million, up from $64.4 million. Net increase in net assets from operations was $73.2 million, versus $126.4 million; basic and diluted earnings per common share were $1.35 and $1.27, versus $2.27 and $2.11.
- Portfolio and NAV: Investments at fair value totaled $1,949 million, compared with $1,913 million at year-end 2021. Net assets were $935.7 million, down from $948.8 million; NAV per common share was $17.16, up from $16.91. The portfolio comprised 165 investments across 127 portfolio companies or investment funds and 28 industries. First- and second-lien debt represented 81.7% of investment fair value; 98.6% of debt investments were floating rate.
- Cash flow and liquidity: Nine-month operating cash flow was $34.5 million, compared with cash used of $18.5 million in the prior-year period. Cash, cash equivalents and restricted cash were $68.6 million, including $29.6 million restricted. The $688 million revolving facility had $423.96 million drawn and $265.35 million available, subject to collateral and covenant limits. Unfunded loan commitments were $185.9 million.
- Debt and coverage: Consolidated borrowings were $423.96 million under the revolving facility, $446.97 million of 2015-1R notes (net of issuance costs), and $189.69 million of senior notes (net of issuance costs). Asset coverage was 179.56%, above the applicable 150% minimum, compared with 181.94% at year-end 2021. Annualized interest cost was 4.45% at quarter-end, excluding fees, versus 2.75% at year-end 2021.
Material changes and management commentary
- Higher benchmark rates lifted portfolio yields and investment income, but also increased borrowing costs. Weighted-average yield on first- and second-lien debt at amortized cost rose to 10.12% from 7.68% at year-end 2021. Nine-month interest expense increased to $27.2 million from $21.5 million; the weighted-average interest rate on average principal debt was 3.96%, versus 2.77%.
- Investment valuation performance weakened: nine-month net unrealized depreciation on investments was $18.7 million, compared with $49.1 million of appreciation in 2021. Management attributed the depreciation mainly to widening market yields, partly offset by higher valuations for borrowers previously on non-accrual.
- Non-accrual investments declined to $37.4 million, or 1.9% of portfolio fair value, from $76.6 million, or 4.0%, at year-end 2021. Two debt investments were on non-accrual at September 30, versus five at year-end. Management cited restoration of Direct Travel debt investments to accrual status as one contributor to higher quarterly income.
- The company repurchased 1.53 million common shares for $21.1 million during the first nine months. In August, the board increased the stock repurchase authorization by $50 million to $200 million and extended it through November 5, 2023.
- The revolving facility was amended in May 2022, including transition to benchmark-rate terms and extensions of its availability period to May 2026 and maturity to May 2027. The company reported compliance with facility and note covenants at quarter-end.
Outlook, risks and unusual items
- No specific earnings, yield or portfolio growth guidance is provided. Management states that cash, available borrowing capacity and operating cash flow are expected to support obligations, investments and potential portfolio-company funding needs; this depends on continued facility availability and covenant compliance.
- On October 31, 2022, the board declared a common dividend of $0.36 per share plus a $0.08 supplemental dividend, payable January 16, 2023. The third-quarter 2022 common dividend was $0.34 plus a $0.06 supplemental dividend.
- Key risks include below-investment-grade borrower credit quality, portfolio illiquidity and valuation uncertainty, rising interest rates and borrowing costs, inflation and supply-chain pressures on borrowers, foreign-currency exposure, and the transition from LIBOR to alternative reference rates. Most investments are valued using significant unobservable inputs; changes in valuation assumptions could materially affect reported values.
- PIK income was $18.6 million for the first nine months, versus $6.9 million in 2021; PIK is accrued rather than necessarily received in cash. Loans with PIK provisions had a fair value of $194.7 million, approximately 10.0% of investments, at quarter-end.
- The filing reports no material legal proceedings and no material subsequent events other than the dividend declaration. It also notes that results for the interim period are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether higher floating-rate income continues to exceed the increase in financing costs, and how rate changes affect borrower coverage and repayment capacity.
- Performance and valuation of the two non-accrual / internally lower-rated exposures, including whether Direct Travel remains current after returning to accrual.
- Underlying assumptions for largely Level 3 investment valuations and the effect of further spread widening or weaker borrower performance.
- Liquidity after accounting for restricted cash, $185.9 million of unfunded commitments, dividends, repurchases and the borrowing base and covenant limits on facility availability.
- Dividend coverage from recurring cash income, particularly given PIK income and the supplemental component of the declared dividend.