Carlyle Secured Lending, Inc. quarterly report, Q1 FY2024

Business context and reporting period

Carlyle Secured Lending, Inc. (CGBD) is an externally managed business development company (BDC) that primarily originates secured loans to U.S. middle-market businesses. This unaudited Form 10-Q covers the quarter ended March 31, 2024. Dollar amounts below are in millions except per-share data.

Key financial metrics

MetricQ1 2024Comparable / prior date
Investment income$62.0$58.4, Q1 2023
Net investment income$28.4; $27.6 after preferred dividends$26.6; $25.7 after preferred dividends, Q1 2023
Net increase in net assets from operations$29.3$28.0, Q1 2023
Basic / diluted earnings per common share$0.56 / $0.52$0.53 / $0.50, Q1 2023
Common dividend declared per share$0.48, including $0.08 supplemental$0.44, Q1 2023
Net asset value per common share$17.07$16.99 at Dec. 31, 2023
Investments at fair value$1,784.9$1,841.9 at Dec. 31, 2023
Debt and secured borrowings, carrying value$930.2$980.2 at Dec. 31, 2023
Cash, cash equivalents and restricted cash$69.9$60.4 at Dec. 31, 2023
Operating cash flow$81.0$25.6, Q1 2023

Q1 investment income included $5.5 million of payment-in-kind (PIK) income. Net investment income was 3.29% of average net assets attributable to common stockholders for the quarter, not annualized. Debt-investment weighted average yield was 12.6% at amortized cost, excluding non-accrual investments.

Portfolio fair value was 70.9% first-lien debt, 9.3% second-lien debt, 5.9% equity and 13.9% investment funds. All debt investments were floating-rate at quarter-end. Healthcare and pharmaceuticals represented 12.0% of portfolio fair value; investment funds 13.9%; and software 9.6%. The portfolio comprised 174 investments across 131 companies and 26 industries.

Liquidity was $334.9 million, comprising cash and available Credit Facility capacity of $265.0 million. This compares with $420.1 million at year-end, mainly reflecting lower facility availability. Unfunded delayed-draw and revolving commitments were $138.7 million. Statutory debt-to-equity was 1.13x, net financial leverage 0.95x, and asset coverage 188.0%, above the 150% regulatory minimum. Operating cash flow was $81.0 million; financing cash outflow was $71.5 million, including $23.3 million of cash dividends, $25.0 million of net Credit Facility repayments and $23.3 million of 2015-1R note repayments.

Material changes versus the prior comparable period

  • Investment income increased $3.6 million (6.2%) year over year, which management attributed mainly to higher benchmark rates and increased PIK and other income. Expenses including excise tax rose $1.8 million; net investment income increased $1.9 million (7.1%).
  • Interest expense and credit facility fees increased to $17.9 million from $17.3 million, primarily due to higher benchmark rates, partly offset by lower average borrowings. Management fees declined, while incentive fees increased.
  • Net assets from operations rose to $29.3 million from $28.0 million. Net asset value per share increased $0.08 from year-end, principally because net investment income exceeded the quarter’s dividend.
  • Non-accrual investments fell to one investment with $3.8 million fair value (0.2% of the portfolio), from four investments totaling $38.1 million (2.1%) at year-end. Management cited the February recapitalization of Dermatology Associates. The portfolio’s weighted-average internal risk rating remained 2.2.
  • Portfolio activity included $94.9 million of funded investments and $173.4 million of repayments and sales. Fair value declined $57.0 million from year-end.

Outlook, risks, contingencies and unusual items

  • No specific earnings or portfolio guidance was provided. Management said current cash, available Credit Facility capacity and operating cash flow are expected to be sufficient for obligations and investment needs; the filing cautions that quarterly results are not necessarily indicative of full-year results.
  • On May 2, 2024, the Board declared a $0.40 base and $0.07 supplemental common dividend per share, payable July 17, 2024. Dividends remain subject to Board discretion.
  • Q1 included a realized loss following the write-off of American Physician Partners, partly offset by a realized gain from the Dermatology Associates recapitalization. Net realized investment loss was $19.2 million; net unrealized investment appreciation was $18.3 million. Fair values rely substantially on significant unobservable inputs, and actual sale values may differ materially.
  • PIK loans had $279.3 million fair value (15.6% of investments); PIK income is accrued but generally not received in cash until maturity. The portfolio is primarily below-investment-grade and may be speculative and illiquid.
  • Management’s static interest-rate sensitivity estimate, excluding Credit Fund, Credit Fund II and structured finance obligations, indicates a 100-basis-point rate increase would raise annual net investment income by approximately $7.5 million; a 100-basis-point decrease would reduce it by approximately $7.5 million. Actual effects may differ.
  • $190.0 million of 2024 Notes mature December 31, 2024. The filing reports covenant compliance and no material legal proceedings. Indemnification exposure is not quantified; management considers the likelihood of payment remote and recorded no accrual.

Important facts for investors to verify

  • How the company plans to repay or refinance the $190.0 million of notes due in December 2024, and how much Credit Facility capacity remains available.
  • Whether dividend coverage remains adequate: Q1 net investment income after preferred dividends was $0.54 per common share versus $0.48 declared.
  • Portfolio credit performance, including developments at non-accrual or downgraded borrowers and the recovery assumptions underlying investment valuations.
  • The sustainability and cash conversion of reported income, particularly PIK income, and the effects of changes in benchmark rates on both portfolio income and borrowing costs.