Business context and reporting period
Carlyle Secured Lending, Inc. is an externally managed business development company (BDC) and regulated investment company (RIC) focused primarily on secured lending to U.S. middle-market businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; dollar amounts below are in millions unless noted.
Financial and portfolio highlights
| Metric | Q3 2023 / Sep. 30, 2023 | Comparable period / prior date |
|---|---|---|
| Investment income | $60.5 for Q3; $178.9 for nine months | $59.1 and $151.2, respectively, in 2022 |
| Net investment income | $27.1 for Q3; $80.9 for nine months | $31.2 and $78.5, respectively, in 2022 |
| Net increase in net assets from operations | $30.0 for Q3; $62.7 for nine months | $37.8 and $73.2, respectively, in 2022 |
| Basic / diluted earnings per common share | $0.57 / $0.54 for Q3; $1.18 / $1.11 for nine months | $0.71 / $0.66 for Q3 2022; $1.35 / $1.27 for nine months 2022 |
| Net assets / NAV per common share | $906.4 / $16.86 | $917.4 / $16.99 at Dec. 31, 2022 |
| Investments at fair value | $1,860.5 | $1,979.9 at Dec. 31, 2022 |
| Cash, cash equivalents and restricted cash | $55.2, including $35.5 restricted | $30.5 at Dec. 31, 2022 |
| Debt and secured borrowings | $1,003.3 net of unamortized issuance costs; $1,005.5 before those costs | $1,077.2 net at Dec. 31, 2022 |
| Asset coverage | 181.14% | 176.79% at Dec. 31, 2022; regulatory minimum is 150% |
Q3 net investment income declined year over year despite higher investment income, as interest and credit facility costs rose. For the nine months, interest expense and credit facility fees were $53.4 versus $28.7 in 2022; the reported weighted-average interest rate on average principal debt was 6.48% versus 3.96%. Management attributed the increase primarily to higher benchmark rates.
For the nine months, operating cash flow was $174.8 versus $34.5 in 2022; financing cash outflow was $150.1, including $69.8 of cash dividends and $4.0 of share repurchases. The company reported $337.6 of borrowing availability under its revolving facility at September 30, subject to collateral and covenant conditions. Its $790 million facility was amended in August 2023, extending availability to August 2027 and maturity to August 2028, subject to stated terms and a partial facility reduction in 2026.
Material changes and portfolio condition
- Portfolio fair value declined by $119.4 from year-end 2022. Nine-month investment purchases were $159.8 at amortized cost, while sales and paydowns totaled approximately $267.2.
- Higher benchmark rates lifted reported weighted-average yield on debt and income-producing investments to 12.7% on amortized cost from 11.8% at year-end. Approximately 98.8% of debt investment fair value was floating rate.
- Investments on non-accrual were $36.6, or 2.0% of portfolio fair value, versus $57.9, or 2.9%, at year-end. Four debt investments were on non-accrual, compared with three at year-end; the filing says the other first- and second-lien debt investments were current on interest payments.
- Investments with PIK provisions were $251.9, or 13.5% of investment fair value, up from 8.9% at year-end. PIK income is accrued but generally not received in cash until later.
- Nine-month net realized investment losses were $21.4, primarily associated with the DermaRite exit and restructuring of PPT Management Holdings. Net investment unrealized appreciation was $3.7, while investment-fund holdings recorded $11.6 of unrealized depreciation.
- First- and second-lien debt represented 81.1% of investment fair value; investment funds were 13.5% and equity investments 5.4%. Healthcare and pharmaceuticals accounted for 11.4% of total investment fair value.
Outlook, risks and unusual items
The filing provides no quantitative earnings or portfolio guidance. Management says it believes cash, available revolving-facility capacity and operating cash flows are sufficient to meet obligations and support investment objectives, including portfolio-company funding needs. The board declared a $0.37 base and $0.07 supplemental common dividend for Q3; on November 2, 2023, it declared the same amounts for the next quarter, payable January 18, 2024 to holders of record December 29, 2023. Dividend amounts remain subject to board discretion.
- Credit, default and valuation risk remain important: nearly all investments are privately held, and most fair values rely on significant unobservable inputs. Estimated values may differ materially from realizable values.
- Rate movements affect both floating-rate investment income and floating-rate borrowing costs. The filing estimates that a 100-basis-point rate increase would raise annual net investment income by $7.2 million, and a 100-basis-point decrease would reduce it by $7.2 million, based on specified portfolio and debt assumptions.
- Unfunded delayed-draw and revolving loan commitments were $141.7. The company also disclosed covenant and refinancing risks if it fails to meet financing obligations, although it reported compliance with applicable covenants at quarter-end.
- Other stated risks include credit-market liquidity, inflation, portfolio-company performance, geopolitical and economic uncertainty, foreign currency movements, cybersecurity, competition and the company’s ability to maintain BDC and RIC status.
- The company reported no material legal proceedings, no material changes to internal control over financial reporting, and effective disclosure controls. It reported no material contingent indemnification accrual.
Important facts for investors to verify
- Review the non-accrual and forbearance exposures, including American Physician Partners, and subsequent repayment, restructuring or valuation developments.
- Assess whether higher floating-rate yields can continue to offset rising financing costs, PIK exposure and any deterioration in borrower credit quality.
- Examine valuation assumptions and changes in fair value, particularly for Level 3 assets and the affiliated Credit Fund investments.
- Confirm actual borrowing availability, collateral borrowing-base calculations, covenant headroom and the impact of the 2026 facility reduction and debt maturities.
- Compare future earnings and cash distributions with declared dividends, including the supplemental component, and monitor the preferred stock’s dividend, conversion and redemption terms.