Carlyle Credit Income - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 results were driven by high cash distributions from CLO equity and active portfolio optimization: Net investment income was $4.1M ($0.26 per share) and core NII was $0.44 per share, supported by $0.70 per-share recurring cash flows and a 25.15% cash yield on CLO payments; NAV ended at $7.44 per share.
• The fund maintained its $0.105 monthly common dividend through May 2025 and declared $0.1823 monthly preferred dividends, citing strong CLO market fundamentals and accretive resets/refinancings; ATM issuances added $11.0M of net proceeds at a premium to NAV, accreting $0.03 per share to NAV.
• Unrealized losses (-$3.0M) reflect market-wide loan repricing that compressed underlying spreads and pressured GAAP yields and valuations; management emphasized resets/refis to lower liability costs and extend reinvestment periods as a partial offset.
• Guidance signals near‑term cash flow normalization from refinancing activity: Q2 2025 recurring cash flows expected at ~$0.49 per share (vs. $0.72 indicated previously for Q1), with dividend sustainability supported by CNII and cash yields; S&P Global sell-side consensus was unavailable for CCIF (closed-end fund coverage is limited).

What Went Well and What Went Wrong

• What Went Well
  • Dividend stability and coverage: “We maintained our monthly dividend at $0.105… supported by core net investment income of $0.44 per share and $0.70 of recurring cash flows”.
  • Accretive portfolio actions: Completed multiple resets/refis across 2024 (13 resets/1 refi) and continued into Q1 to reduce liability costs and extend reinvestment periods.
  • Robust cash generation: Cash yield of 25.15% on CLO quarterly payments translated to $0.70 per share recurring cash flows; total portfolio GAAP yield was 17.22%.
• What Went Wrong
  • Spread compression and repricings: “Weighted average spread in our portfolio declined by 33 bps in calendar 2024… resulted in a decline in the fund's GAAP yield and net asset value”.
  • Unrealized losses: Q1 recorded -$2.967M net realized and unrealized losses due to market-wide repricing, partially offset by resets/refis.
  • Higher interest expense: Analysts flagged $1.7M interest expense; CFO cited accretion from preferred offerings as the driver, expected to amortize over the year and accelerate upon conversion.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Carlyle Credit Income Fund First Quarter 2025 Financial Results and Investor Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nishil Mehta, Principal Executive Officer and President. Please go ahead.

Nishil Mehta (Principal Executive Officer and President)

Good morning, and welcome to Carlyle Credit Income Fund's First Quarter 2025 Earnings Call. With me on the call today is Lauren Basmadjian, CCIF's Chief Executive Officer, and Nelson Joseph, CCIF's Chief Financial Officer. Last night, we issued our Q1 financial statements and a corresponding press release and earnings presentation discussing our results, which are available on the Investor Relations section of our website. Following our remarks today, we will hold a question-and-answer session for analysts and institutional investors. This call is being webcast, and a replay will be available on our website. Any forward-looking statements made today do not guarantee future performance, and any undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risk and uncertainties, including those identified in the risk factors section of our annual report on the Form N-CSR.

These risks and uncertainties could cause actual results to differ materially from those indicated. Carlyle Credit Income Fund assumes no obligation to update any forward-looking statements at any time. With that, I'll turn the call over to Lauren.

Lauren Basmadjian (CEO)

Thanks, Nishil. Good morning, everyone, and thank you for joining CCIF's Quarterly Earnings Call. I'd like to start by reviewing the fund's activities over the last quarter. We maintained our monthly dividend at $0.105 per share, or 16.4% annualized, based on the share price as of February 24, 2025, which is now declared through May of 2025. The monthly dividend is supported by core net investment income of $0.44 per share and $0.70 of recurring cash flows for the quarter. New CLO investments during the quarter totaled $12 million, with a weighted average GAAP yield of 16.8%. The aggregate portfolio weighted average GAAP yield was 17.2% as of December 31st. We sold 1.37 million of our common shares in connection with the ATM Offering Program for total net proceeds of $11 million. We also issued $20 million of 7.5% convertible preferreds in January 2025.

Shifting focus to the current market environment, I'd like to discuss the trends we've observed in both the loan and the CLO markets. 2024 was the busiest year of issuance in the 25-plus year history of the CLO market, supported by tightening spreads and a stable backdrop for credit. In 2024, CLO issuance totaled $200 billion, an increase of 76% year-over-year, and a 9% increase from the previous record set for new issuance in 2021. CLO managers addressed outstanding liabilities through resets and refinancings, which totaled $224 billion and $83 billion, respectively. Reset volumes exceeded the previous record of $140 billion set in 2021, highlighting the preference for managers and equity investors to extend the lifespan of existing CLOs. In the fourth quarter, broader fixed income markets remained stable through the presidential election and proposed policy shifts.

While the Fed cut rates by 25 basis points in both November and December, investor demand for CLOs remained steadfast as the market expects rates to remain higher for longer. Within CCIF's portfolio, we completed 13 accretive resets and one refinancing in 2024, extending the reinvestment period and cash flows of these CLOs. Despite the increase in CLO reset activity, roughly 25% of the CLO market is still out of the reinvestment period, though CCIF's portfolio only has one CLO nearing the end of its reinvestment period, which was then reset in the first quarter of 2025. We continue to work with CLO managers to optimize the CLO investments in our portfolio through refinancings or resets. Fourth quarter cash-on-cash distributions averaged 4% based on a par purchase price, consistent with the asset class's historical annualized mid to high teens return.

Loan repricing activity totaled $771 billion in 2024, reducing the weighted average spread of CLO portfolios by approximately 25 basis points and impacting CLO equity cash yields and valuations. The impact from repricings was partially mitigated by resets and refinancings, which reduced the weighted average cost of CLO liabilities and take advantage of near-record tights for CLO debt spreads since the financial crisis. Fundamentals in the U.S. leveraged loan market continue to remain strong. For Carlyle's U.S. loan portfolio of over 600 borrowers, free cash flow generation remains a key focus. In the third quarter of 2024, approximately 72% of borrowers produced free cash flow, the highest percentage over the past year. While borrower EBITDA growth has outpaced sales growth over the last 18 months, the two are starting to converge. In the third quarter of 2024, borrower EBITDA grew at 8% compared to revenue growth of 6%.

Additionally, the average borrower interest coverage ratio improved quarter over quarter, rising from 3.3 times to 3.7 times, due primarily to growing EBITDA, loan repricing, and the impact of rate cuts. The market continues to experience a divergence between in-court and out-of-court bankruptcy activity. While the LSTA U.S. loan index LTM default rate of 92 basis points is less than half of its long-term average, the default rate inclusive of distressed exchanges remains elevated at 4.5%. We believe distressed exchanges will continue to be the predominant form of defaults. The recovery rates for these transactions are typically higher than traditional defaults. That said, while the market default rate increased to 4.5%, CCIF's portfolio only experienced a default rate inclusive of distressed exchanges of 1.5%. Based on economic data and research published by Carlyle's Chief Economist, Jason Thomas, market expectations for rate cuts have declined.

However, we believe loan borrowers are well-positioned to adapt to this recalibration, given the resilience they've shown over the past two years of elevated interest rates. Through the rest of 2025, we maintain a positive outlook for the loan market and CLO equity. I'll now hand the call over to Nishil Mehta, who was recently named Principal Executive Officer and President of CCIF, to discuss our deployment and the current portfolio.

Nishil Mehta (Principal Executive Officer and President)

Thank you, Lauren. We continue to leverage Carlyle's long-standing presence in the CLO market as one of the world's largest CLO managers and have a 15-year track record of investing in third-party CLOs to manage a diversified portfolio of CLO equity investments. As of December 31, our portfolio comprised 52 unique CLO investments managed by 27 different collateral managers. We continue to source our investments from both the secondary market and primary market to capitalize on spread compression and favorable CLO arbitrage opportunities. We target recent vintages of Tier 1 and Tier 2 managers with ample time remaining in the reinvestment period and the secondary market. As fixed income markets continue to trade at all-time highs, we constructed a defensive portfolio of CLO equity well-positioned to mitigate market volatility. However, our portfolio has been impacted by the spread compression witnessed throughout the broadly syndicated loan market.

The weighted average spread in our portfolio has declined by 33 basis points in calendar 2024. The spread compression resulted in a decline in the fund's GAAP yield and net asset value. We have partially offset this impact by continuing to reset and refinance the portfolio, which reduces the cost of debt in our CLOs. We continue to draw on the expertise of Carlyle Liquid Credit Platform and a collaborative One Carlyle approach to invest in high-quality CLO portfolios, sourced through our rigorous 14-step bottom-up investment process. The following represents some key stats on the portfolio as of December 31st. The portfolio generates a GAAP yield of 17.22% on a cost basis supported by cash yields of 25.15% on CLO investments' quarterly payments received during the quarter.

The weighted average years left in the reinvestment period remained at approximately two and a half years, providing CLO managers the opportunity to capitalize on periods of volatility to improve portfolios and reposition them, and zero CLOs that are out of the reinvestment period. We believe the weighted average junior over-collateralization cushion of 4.18% is a healthy cushion to offset defaults and losses in underlying portfolios. The weighted average spread on the underlying portfolios was 3.38%. The percentage of loans rated CCC by S&P was 5.4%, below the 7.5% CCC limit in CLOs. As a reminder, once a CLO has more than 7.5% of its portfolio rated CCC, the excess over 7.5% is marked at lower of fair market value or rating into recovery rates and reduces the over-collateralization cushion. The percentage of loans trading below 80 increased slightly from 3.2% to 3.4%.

I will now turn it over to Nelson, our CFO, to discuss the financial results.

Nelson Joseph (CFO)

Thank you, Nishil. Today, I will begin with a review of our first quarter earnings. Total investment income for the first quarter was $8.3 million, or $0.52 a share. Total expenses for the quarter were $4.2 million. Total net investment income for the first quarter was $4.1 million, or $0.26 a share. Core net investment income for the first quarter was $0.44 per share, outpacing our $0.315 per share dividends paid in the quarter. Net asset value as of December 31st was $7.44 per share. Our net asset value and valuations are based on the bid-side mark we received from a third party on 100% of our CLO portfolio. We continue to hold one legacy real estate asset in the portfolio. The fair market value of the loan is $2.2 million.

The third party we engaged to sell our position continues to work through the sales process. During the quarter, we sold 1.4 million of our common stock in connection with the ATM Offering Program at a premium to NAV for net proceeds of $11 million. Common share issuances for the quarter resulted in an increase to our net asset value of $0.03 per share. The cash-on-cash yield of 25.15% on the CLO quarterly payments resulted in $0.70 of recurring cash flows per share. With that, I'll turn it back to Lauren.

Lauren Basmadjian (CEO)

Thanks, Nelson. We continue to believe that CCIF is well-positioned to provide investors with an attractive dividend yield and total return. In addition to incorporating our market and manager views, we remain focused on analyzing the underlying collateral in each CLO equity position that we own in order to deliver strong risk-adjusted returns for our investors. I'd now like to hand the call over to the operator to take your questions.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from the line of Randy Binner with B. Riley Securities. Your line is now open.

Randy Binner (Managng Director)

Hey, good morning. Thank you. Just a question on the interest expense line for this reported quarter. Was there anything unusual in the quarter for the interest expense of kind of $1.7 million?

Nelson Joseph (CFO)

Yes. Hey, this is Nelson. The one new thing that we had this quarter was the accretion from our Pref B offering. That added to our interest expense for the quarter.

Randy Binner (Managng Director)

Okay. Is that a recurring item, or is there anything one-time-ish about that, or is that a similar level we should plan on in future quarters?

Nelson Joseph (CFO)

Yeah. On the Pref B, we expect to have another quarter of accretion as that converts. We recently had another Pref offering. They'll continue to amortize over the year.

Nishil Mehta (Principal Executive Officer and President)

Randy, this is Nishil. To be clear, this is the accretion of the upfront OID that's paid. Based on our accounting guidance, we accrete it over a one-year period. That does get accelerated if the convertible preferred is converted into common stock.

Randy Binner (Managng Director)

Okay. That's helpful. Thank you. Just following up, I thought the comment on the interest coverage ratio for borrowers going up from 3.3 to 3.7x, is that weighted across the book? I'm kind of just curious because I think that's a better metric than I've maybe heard from others. Maybe I haven't heard it quite that way, but just trying to understand the way that that's calculated. Is it weighted, or is there any color you can provide on how you come up with that stat?

Lauren Basmadjian (CEO)

Sure. It's actually proprietary data looking into the Carlyle loans that we lend to over 600 companies. It is not weighted. It's just an average.

Randy Binner (Managng Director)

Okay. So it's just a—okay. Got it. Okay. That's all I had off the bat. Thank you.

Operator (participant)

Thank you. As a reminder to ask a question at this time, please press star one one on your touchstone telephone. Our next question comes from the line of Eric Zwick with Lucid Capital Markets. Your line is now open.

Erik Zwick (Managing Director and Senior Equity Research Analyst)

Good morning. Thanks for taking my questions today. Wanted to start with maybe just kind of a broader question, maybe for you, Lauren. Just wondering if you could relay your thoughts on the relative attractiveness between the primary and secondary markets today for new investments.

Lauren Basmadjian (CEO)

Sure. I think we're seeing some more attractive opportunities in the primary than we had perhaps a year ago, where we're able to lock in really low cost of financing for over 12 years and non-mark-to-market financing for CLOs. We are close to post-financial crisis tight in liabilities. If you're able to lock in these capital structures, and there's even a reversion to mean on asset spreads, CLOs created today should be able to throw off pretty significant cash flows if asset spreads normalize sometime over their reinvestment period, which would be our thesis. That said, we also do see some opportunity in the secondary as well, but appreciate how tight the capital structures are today.

Erik Zwick (Managing Director and Senior Equity Research Analyst)

Thanks. That's helpful. You may have mentioned it in the prepared remarks, and I may have just missed it. Can you address what impacted or what drove the unrealized losses that were recorded in the quarter?

Nishil Mehta (Principal Executive Officer and President)

Yeah. Maybe I'll take that. Really, it was just a function of a market-wide phenomenon. As Lauren mentioned, we saw over $700 billion of loan repricings in 2024. That directly reduces the cash-on-cash and expected return for CLO equity. As a result, we saw a decline in the value of our positions. The one way to offset that is to refinance or reset the liabilities within each CLO because that allows us to capture the post-financial crisis tights that Lauren was mentioning. We completed 14 of those refinancing and resets in calendar 2024, including six in the quarter ending December 31. We have been much more active this quarter, mainly because as debt spreads on the liability stack have continued to tighten, we have been more active, and we have already completed 13 quarter to date.

Erik Zwick (Managing Director and Senior Equity Research Analyst)

Got it. Thank you. Maybe just one follow-up there. Let's say if kind of everything stayed the way it was today, but you were to continue to be able to have some more resets, you could potentially, I guess, kind of maybe recapture some of those unrealized losses as you reset the liabilities lower. Is that a correct assumption?

Nishil Mehta (Principal Executive Officer and President)

Yeah. That's the expectation and hope because once we reset it and have a lower cost of debt, the expected return increases, the expected cash-on-cash increases. When J.P. Morgan, who fair market values our portfolio on a daily basis, you're getting a true market price versus a mark-to-model, we expect they'll account for that in their valuations.

Erik Zwick (Managing Director and Senior Equity Research Analyst)

Yeah. That makes sense. Thank you. One just last one from me today. Just thinking about credit quality of the underlying obligors in the CLOs that you've purchased, I guess, is there anything that you see that is currently worrying to you either within the current portfolio or you have maybe future concerns with regard to maybe some of the changes that have been made by the new presidential administration? Anything kind of you try and keep a tight handle on credit and look around the corner, anything that you're watching closely today?

Lauren Basmadjian (CEO)

Yeah. I think the biggest change that we've seen in our market really for a long time has been the move to out-of-court restructurings from in court. You see that in the really low default rate. When you look at it inclusive of distressed exchanges, it's actually pretty elevated at around 4.5%. Understanding our manager's ability or expertise to be able to participate in these transactions and get good recoveries on out-of-court restructurings has been a big focus for us.

Erik Zwick (Managing Director and Senior Equity Research Analyst)

No, that makes sense. I guess from your perspective, is it just the fact that the cost of going through a court restructuring has gotten so elevated that it's just probably faster and more cost-efficient to negotiate outside of court?

Lauren Basmadjian (CEO)

It's actually because the loan documentations have gotten so loose over the last 10 or 15 years that companies and sponsors will look to ask debt holders for a discount and threaten them perhaps with stripping assets or something else that could hurt them. Not all of these companies really need to have a restructuring process, but I think it's become commonplace, and there hasn't been repercussions for companies asking lenders to take a haircut and threatening to use the document against them if they don't.

Erik Zwick (Managing Director and Senior Equity Research Analyst)

Gotcha. Thank you. I appreciate all of the commentary today. Thanks.

Operator (participant)

Thank you. I'm currently showing no further questions at this time. I'd like to turn the call back over to Lauren Basmadjian for closing remarks.

Lauren Basmadjian (CEO)

Thank you. We look forward to speaking to everyone next quarter, if not sooner. Please feel free to reach out if you have any questions. Thank you all for your support.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.