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
| Metric | Q1 2024 | Comparable / 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.