Carlyle Secured Lending - Earnings Call - Q2 2025

Executive Summary

• CGBD delivered $0.39 NII per share on both GAAP and adjusted bases, essentially in line with S&P Global consensus $0.392, on record quarterly originations; total investment income rose to $67.3m from $54.9m in Q1 and $58.3m in Q2’24. Revenue modestly beat consensus ($67.3m vs. $66.7m), while NII/share was a hair below, reflecting tighter spreads and higher interest expense on a larger balance sheet.*
• NAV/share declined 1.2% q/q to $16.43 (from $16.63) driven by $13.6m net realized/unrealized losses (~$0.19/share), partially offset by earnings; non‑accruals rose to 2.1% of FV at quarter-end but would drop to 1.0% post the July Maverick restructuring.
• Record deployment: $375.7m fundings (10.0% WAC yield) and $237.7m net investment activity; portfolio FV increased to ~$2.335B; statutory leverage rose to 1.10x (midpoint of target range) with $613m total liquidity and a $25m revolver upsize in July.
• Dividend maintained at $0.40 for 3Q25, supported by an estimated $0.89/share of spillover income; management highlighted potential earnings headwinds from tight spreads and prospective rate cuts, offset by leverage ramp, JV earnings and lower non‑accruals.

What Went Well and What Went Wrong

What Went Well

• Record origination quarter at both platform and CGBD levels: “$376m funded…highest level since our IPO,” with net investment activity of ~$238m and portfolio FV up to ~$2.3B.
• Dividend sustainability reinforced: Board declared $0.40 base dividend for 3Q25; estimated spillover income of $0.89/share provides coverage cushion.
• Post-quarter credit de-risking: Successful Maverick restructuring on July 3 implies pro forma non‑accruals fall to ~1.0% of FV (from 2.1%), improving optics on portfolio quality.

Quote: “We generated $0.39 per share of net investment income…our Board…declared a third quarter dividend of $0.40 per share.”

What Went Wrong

• NAV pressure: $13.6m net losses (~$0.19/share) from idiosyncratic credits and market technicals (repayments/repricings) reduced NAV/share 1.2% q/q to $16.43.
• Earnings headwinds: Management flagged historically tight spreads and possible Fed cuts as near‑term NII drags, with Q3 seasonally slower deployment.
• Slight EPS shortfall: NII/share of $0.39 was fractionally below consensus ~$0.392, reflecting higher interest expense and fee accruals alongside balance sheet growth; revenue beat modestly.*

Transcript

Speaker 2

Thank you for standing by and welcome to Carlyle Secured Lending's second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press *11 on your telephone. To remove yourself from the queue, you may press *11 again. I would now like to hand the call over to Nishil Mehta, Head of Investor Relations. Please go ahead.

Speaker 0

Good morning and welcome to Carlyle Secured Lending's conference call to discuss the earnings results for the second quarter of 2025. I'm joined by Justin Plouffe, our Chief Executive Officer, and Thomas Hennigan, our Chief Financial Officer. Last night, we filed our Form 10-Q and issued a press release with a presentation of 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.

Today's conference call may include forward-looking statements reflecting our views with respect to, among other things, the expected synergies associated with the merger, the ability to realize the anticipated benefits of the merger, and our future operating results and financial performance. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the risk factors sections of our 10-K and 10-Qs. These risks and uncertainties could cause actual results to differ materially from those indicated. CGBD assumes no obligation to update any forward-looking statements at any time. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as adjusted net investment income or adjusted NII.

The company's management believes adjusted net investment income, adjusted net investment income per share, adjusted net income, and adjusted net income per share are useful to investors as an additional tool to evaluate ongoing results and trends and to review our performance without giving effect to the amortization or accretion resulting from the new cost basis of the investments acquired and accounted for under the acquisition method of accounting in accordance with ASC 805 and the one-time purchase or non-recurring investment income and expense events, including the effects on incentives and are used by management to evaluate the economic earnings of the company. A reconciliation of GAAP net investment income, the most directly comparable GAAP financial measure to adjusted NII per share, can be found in the accompanying slide presentation for this call.

In addition, a reconciliation of these measures may also be found in our earnings release filed last night with the SEC on Form 8-K. With that, I'll turn the call over to Justin, CGBD's Chief Executive Officer.

Speaker 3

Thanks, Nishil. Good morning, everyone, and thank you all for joining. I'm Justin Plouffe, the CEO of the Carlyle Secured Lending, Inc. and Deputy CIO for Carlyle Global Credit. On today's call, I'll give an overview of our second quarter 2025 results, including the quarter's investment activity and portfolio positioning. I'll then hand the call over to our CFO, Tom Hennigan. During the second quarter, CGBD benefited from growth in the overall portfolio, but was also impacted by historically tight market spreads. We generated $0.39 per share of net investment income for the quarter on both a GAAP basis and after adjusting for asset acquisition accounting. Our board of directors declared a third quarter dividend of $0.40 per share. Our net asset value as of June 30 was $16.43 per share compared to $16.63 per share as of March 31.

Despite muted sponsor M&A activity, Carlyle Direct Lending achieved a platform-wide deployment record with $2 billion in originations closed during the quarter. At the CGBD level, we funded $376 million of investments into new and existing borrowers, the highest level since our IPO in 2017, resulting in net investment activity of $238 million after accounting for repayments. Total investments at CGBD increased from $2.2 billion to $2.3 billion during the quarter after adjusting for $150 million of investments sold to MMCF, our joint venture. Looking ahead, CGBD origination activity is expected to be somewhat slower in the third quarter due to the seasonal summer slowdown and delayed transaction timelines resulting from the market uncertainty that began in April. However, we see our pipeline rebuilding to a busier end of the year and remain optimistic for the fourth quarter.

As trade policy evolves, we continue to monitor our portfolio for tariff exposure. In line with last quarter, we believe that less than 5% of the portfolio has material direct risks from tariffs. Spreads in the private credit space remain at historically tight levels and, when combined with potential Federal Reserve rate cuts, may present a headwind to near-term earnings. Overall, we remain selective in our underwriting approach, seeking quality credits at the top of the capital structure. We remain focused on overall credit performance and portfolio diversification while maintaining target leverage and growing the credit fund. As of June 30, our portfolio was comprised of 202 investments in 148 companies across more than 25 industries. The average exposure to any single portfolio company was less than 1% of total investments, and 94% of our investments were in senior secured loans. The median EBITDA across our portfolio was $92 million.

As always, discipline and consistency drove performance in the second quarter. We expect these tenets to drive performance in future quarters. With that, I'll now hand the call over to our CFO, Tom Hennigan.

Speaker 1

Thank you, Justin. Today, I'll begin with an overview of our second quarter financial results. Then I'll discuss portfolio performance before concluding with detail on our balance sheet positioning. Total investment income for the second quarter was $67 million, up significantly from prior quarter as a result of a higher investment portfolio balance attributable to the merger with CSL3, which closed at the end of Q1, and the purchase of Credit Fund 2 in mid-February. Total expenses of $39 million also increased versus prior quarter, primarily as a result of higher interest expense and a higher average outstanding debt balance, along with higher management and incentive fees, driven by growth in the size of the portfolio.

The result was net investment income for the second quarter of $28 million, or $0.39 per share on both a GAAP basis and after adjusting for asset acquisition accounting, which excludes the amortization of the purchase price premium from the CSL3 merger and the purchase price discount associated with the consolidation of Credit Fund 2. This quarter's earnings, which demonstrate the first full quarter of the combined CGBD and CSL3 portfolios, decreased by about one penny per share as we continue to work towards achieving our target leverage levels at both CGBD and the MMCF joint venture. As previewed last quarter, the earnings power of the combined portfolio remains in the same range as pre-combination Q1 CGBD earnings.

Our Board of Directors declared the dividends for the third quarter of 2025 at a level of $0.40 per share, which is payable to stockholders of record as of the close of business on September 30th. This dividend level represents an attractive yield of over 11% based on the recent share price. In addition, we currently estimate we have $0.89 per share of spillover income generated over the last five years, so we feel comfortable in our ability to maintain the quarterly dividend. On valuations, our total aggregate realized and unrealized net loss for the quarter was about $14 million, or $0.19 per share, partially attributable to unrealized markdowns on select underperforming investments. Turning to credit performance, we continue to see overall stability in credit quality across the portfolio, with some underperformance in a handful of names.

On the metrics, the risk rating distribution remained relatively stable, with one name added to non-accrual during the quarter, increasing non-accruals to 2.1% of total investments at fair value. At the beginning of July, we closed the successful restructuring of Maverick, which all else equal decreases non-accruals to 1% of total investments at fair value on a pro forma basis. While our non-accrual rates may fluctuate from period to period, we're confident in our ability to leverage the broader Carlyle network to achieve maximum recoveries for underperforming borrowers. Moving to our credit fund, as previewed last quarter, we've been focused on maximizing both asset growth and returns at the MMCF joint venture over the last few quarters. As you can see from our investment activity, we continue to bolster the asset base, and we expect the MMCF joint venture dividend to achieve a run rate of mid-teens ROE.

Separately, we continue to work on optimizing our non-qualifying asset capacity and anticipate using this flexibility going forward for other strategic partnerships. I'll finish by touching on our financing facilities and leverage. In July, we closed the small upsize to our primary revolving credit facility, increasing total commitments to $960 million in total. At quarter end, statutory leverage was about 1.1 times toward the midpoint of our target range, and given our current strong liquidity profile and targeted incremental sales to the MMCF joint venture, we're well positioned to benefit from the expected pickup in deal volume in future quarters. With that, I'll turn the call back over to Justin.

Speaker 3

Thanks, Tom. As we approach the middle of the third quarter, our portfolio remains resilient. We continue to focus on sourcing transactions with significant equity cushions, conservative leverage profiles, and attractive spreads relative to market levels. Our pipeline of new originations is active with a stable, high-quality portfolio. CGBD stockholders are benefiting from the continued execution of our strategy. As always, we remain committed to delivering a resilient, stable cash flow stream to our investors through consistent income and solid credit performance. Finally, I'd like to conclude with some comments on a recently announced leadership addition. We are thrilled that Alex Chee will join Carlyle as Partner, Deputy Chief Investment Officer for Global Credit, and Head of Direct Lending in early 2026.

Alex will lead Carlyle's direct lending team and will work alongside Global Credit leadership to drive strategic decisions for Carlyle's global credit business and the Carlyle Direct Lending platform. Alex joins Carlyle from Goldman Sachs, where he spent more than 30 years serving in a variety of roles, most recently as Co-Head of Private Credit within Goldman Sachs Asset Management and Co-Chief Executive Officer and Co-President of the Goldman Sachs BDC Complex. With Alex's deep experience, proven leadership, and strong industry relationships, we are confident he will help us further accelerate the growth of our global credit business, including CGBD. I'd like to now hand the call over to the operator to take your questions. Thank you.

Speaker 2

Thank you. As a reminder, to ask a question, you will need to press *11 on your telephone. To remove yourself from the queue, you may press *11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Erik Edward Zwick of Lucid Capital Markets. Your line is open, Erik.

Thanks. Good morning. Thanks for taking my questions this morning. I wanted to start with maybe just a kind of a bigger picture question first, and with regard to kind of the tighter spread environment that you're currently operating in, not just you, but the entire sector. I'm curious from your seat, what's driven the tighter spreads over the past year or so, and what would it take to return to income maybe a more normal relative to historical level environment, or do you think this is something that is likely to persist for the near to midterm?

Speaker 3

Yeah, Eric, thanks for the question. I think a couple of things. One, deal activity probably wasn't as robust in the first half as we hoped it would be across the market. We had a record deployment quarter for the second quarter, so we're taking more market share. What we'd really like to see across the market is increased deal activity. Anecdotally, we're optimistic about that for the rest of the year and into 2026, just from what we hear in people's pipelines. I also think that part of this is the fact that in 2022 and 2023, spreads were probably wider than you would expect in a mature market.

I don't think that this is necessarily about spreads going back to that level, but more just having them normalize with a normal amount of deal activity with private equity sponsors entering the market in a more robust fashion the second half of the year. As I said, we're optimistic about that deal activity coming to the market in Q4 and in 2026. I think there'll be plenty of opportunities for us to invest.

I appreciate the commentary there. Just kind of following on the theme there, had a very strong quarter of originations in 2Q, but still remained very optimistic. It sounds like the pipeline remains robust. There is a lot of broader market uncertainty or concern about the trajectory of the economy. It sounds like based on what you're seeing, you're seeing more opportunities, finding deals that you're comfortable underwriting. I guess from your seat, is there anything that gives you any pause or concern about the U.S. economic environment going forward?

Yeah, look, I think that certainty is what our markets like to see. Any sort of certainty that we get on things like tariff policy is a positive for our markets. We're very happy with the companies we're investing in, right? As a BDC, of course, we'd like to see spreads be a little bit more in our favor. The real key to our long-term performance is investing in great companies, and we've continued to be able to do that. We see great companies coming to market, and we're very optimistic about our ability to continue to invest with great companies going forward.

That's good to hear. I think you addressed it in the prepared remarks, but I just wanted to make sure I heard it correctly. With respect to the unrealized losses that were kind of recorded in the quarter, it sounds like those are more company-specific and not something broader. If so, could you just maybe add a little color to what developed at those particular companies that resulted in the unrealized marks.

Speaker 1

Hey, Erik. Yeah, that was, it was really, I'd say when you look at that unrealized, it was probably 60-65% credit and then 30-35% just markets, technical factors like deals repaying. I'd say really idiosyncratic, you know, there were a handful, no specific very large movers, but just a handful of company-specific credit situations where, you know, there's underperformance, there were markdowns, but, you know, we're engaged, we're appropriate with our workout team, with other lenders, with the sponsors, where we see, you know, stability in those names and/or, you know, looking to get the companies in the right position that will have ultimate reasonable recoveries on those situations relative to where we're marked today.

Speaker 3

Yeah, we certainly haven't seen broader reasons to worry about credit in the market. They're very specific situations in the book.

Got it. Last one for me, in terms of the buyback authorization that you do have, I know you're very focused on growth, and that'd be the preferred use of the capital today. How do you think about the opportunity given where the stock trades relative to net asset value to potentially buy back shares?

Speaker 1

Yeah, you have something we didn't have to think about last year. Over the last few months, it's definitely something as a management team we've had more regular conversations. We're having dialogue with our board of directors. You know, you mentioned the last couple of years we've been very focused on growth of our equity base, and that culminated with the merger that we closed last quarter. We get all the benefits of scale, whether it be better liquidity in the stock, leveraging our expense base, better liability. We're still very much focused on growth and focused on getting that and getting that share price back up to net asset value. We're in a position to grow, but certainly something we're considering in terms of potential buybacks. Right now, there's nothing in the imminent plan, but we're certainly considering just based on where the stock has been trading.

Thanks for taking my questions today.

Speaker 2

Thank you. Our next question comes from the line of Finian O'Shea of Wells Fargo Securities. Your line is open, Finian.

Hey everyone, good morning. Tom, first question on the credit fund, mid-teens ROE, does that indicate the $5 million dividend or a different level?

Speaker 1

That indicates roughly, and what we'll see is we'll be deploying more capital, and then we'll be able to be in the range of, let's say, $4.5 to $5.5 billion when we, if we were to utilize perhaps a little bit higher when we utilize the full equity commitment. Right now, the fund has about $700 million of total investments. With the current equity committed by both partners, we can achieve, we can not quite double that, but that's certainly our plan longer term. I think that we'll see that dividend rate inch up some, probably not too much movement in the absolute dividend level from the JV one. What we are very focused on is potential other JVs and utilizing that non-asset capacity. Nothing imminent right now on that front, but we're in dialogue with other partners for other JVs.

What I'd say is that that's likely to be something leveraging the broader Carlyle network, not a great deviation from what we've been doing, but we're looking at that non-asset, that asset capacity and the JVs in the aggregate certainly have a great stable base with JV one and looking to add to that with the second one.

Yeah, it's helpful. Thanks. I guess just a follow-up, bigger picture. You talked about Alex coming on, you know, growing the credit business, including the BDC, seeing if this suggests any sort of style drift. Like, do you want to get back to where you were? I know you were just at a premium, grow a little bit, sort of remain more specialty. I know a lot of the origination this quarter looks pretty interesting. As you just said, there are plans on the 30% bucket. Do you want to go more into overdrive like some of the large market peers and, you know, issue maybe a lot on the ATM or secondary every quarter, which, you know, the flip side of that is it might ask that you go with a more modernized or lower fee.

Seeing if you're weighing those two items against each other and how we should think about that.

Speaker 3

Sure, Finian. No change to our strategy. We are focused on originating in the core middle market in the U.S. That's going to continue to be the case. Alex brings tremendous experience in that area. This is just adding strength to strength. As Tom mentioned, we certainly are considering adding to the JV program. No change in overall strategy between now and when Alex comes or after Alex comes. We're going to continue to provide the same type of investment exposure that we have in the past. Of course, we'd love to trade at a premium, but we're in this for the long-term investment returns, and we think core middle market investing is where we could do the best for our investors.

Awesome. All for me. Thanks so much.

Speaker 2

Thank you. Our next question comes from the line of Melissa Wedel of JP Morgan. Please go ahead, Melissa.

Good morning. Thanks for taking my questions. I wanted to circle back to your comments about optimism for deployment in the second half. I want to make sure I heard you right. I got the impression from what you said that you're particularly optimistic about 4Q versus 3Q. Is that fair?

Speaker 3

Yes, that's fair, Melissa. The 3Q is always a little bit muted in terms of closings on originations just because it's the summer. What we're looking at is the pipeline of deals we have today, and we think for the rest of the year, we feel pretty good about it.

Okay. Then sort of the flip side of that, as you see a pickup in activity, should we, or are you expecting, you know, proportionate pickup in repayments as well? Maybe sort of looking towards a net deployment back half, but maybe a little bit muted?

I'm not expecting, or I don't see reason in the market, I should say, to expect a significant change in prepayments in the second half. I think this is just more about new deal activity in the private equity space and the pipelines we're seeing. We'll have to see if it actually materializes, but right now, our pipelines are looking pretty good.

Okay. I appreciate that. I guess the final question for me, when you think about all of the growth plans that you have and potentially doing additional joint ventures and things like that, which can enhance the earnings profile, I'm also curious about how you think about the earnings power offset from potentially lower rates and what that might mean for your dividend. I know the base dividend, I should specify, of $0.40 a share. Thanks.

Speaker 1

Yeah, sure. You know, we achieved the $0.39, a penny shy. Right now, our crystal ball for the third quarter, we're already a month in, is we're going to be in the same general territory. When you look at the potential pluses, on an average, our statutory leverage at quarter end was in the middle of our range, but on an average asset basis, over a daily basis, it was lower. I think we've got just some upside in terms of leverage. I mentioned, we mentioned non-accruals. Maverick Archer, large position, although that was restructured and will be a lower debt balance, that will be back on accrual. There's some potential positives just on a little non-accruals. Our cost of debt, we're going to have some moving pieces with our baby bond. We're likely going to issue another index eligible deal over the next few quarters.

We have a higher priced legacy facility from CSL3 that we're likely repaying. Net net on liabilities will probably be neutral all in. We've got the potential upside from the JVs, which we're very focused on. The one big headwind is obviously rates. Although spreads have stabilized, when you look at overall portfolio spread, it continues to inch down a little bit. We feel okay on the overall spread side. I think really it'll be those various factors, a number of positives, but the JVs being in the longer term, a large growth driver in terms of our comfort with achieving that $0.40.

Okay. I appreciate your candor there. One follow-up, I guess, one last follow-up for me on Maverick. I would assume, but I guess I'm asking this question, is it fair for us to think that the mark that you had there at $630 was very reflective of the July 3rd restructuring economics?

Yes. Our anticipation is you're going to have a different capital structure, you're going to have a lower debt quantum, you're going to have an equity holding, and the total fair value dollars will be equivalent, roughly the same. That's our current dilemma.

Got it. Thanks so much.

Speaker 2

Thank you. Our next question comes from the line of Robert James Dodd of Raymond James. Please go ahead, Robert.

Hi guys. Good morning. On the kind of two things tied to the credit fund and the non-core bucket, what do you think is a feasible timeline to fully, relatively fully, deploy or utilize the full equity in the current credit fund, particularly in light of the fact that you seem quite optimistic about the second half of the year and Q4, which obviously would create a positive environment for fully utilizing that vehicle. Can you give us any idea of what the timeline is for maxing that one, the first one out?

Speaker 1

Based on the current equity base, our target, our goal was the next two or three quarters. I think in terms of the additional joint ventures, having worked on the first joint venture and realized we had an agreement inked and then it took us nine months to negotiate, we think we'll be less than nine months. In terms of actual economic benefit from any second joint venture, it would likely be a 2026 event just because they're very complex structures, negotiating with the other partner, getting everything in the ground.

Got it. Yeah. To that point on another joint venture, would you be looking at kind of the same conceptual structure, basically the same kind of loans, different partner, or are you looking at something slightly different? Obviously, you know, you can hold a lot of international assets in a joint venture somewhat easier than on balance sheets sometimes, etc. Is it just going to be, for lack of a better term, a carbon copy of the first one just with a different partner, or are you looking to do anything different with the second one?

Speaker 3

Yeah, look, not necessarily decided yet. What I will tell you is that we're going to lean into our strengths within Carlyle Global Credit overall. We have a lot of tools at our disposal in what we do with that JV or with that basket. In some way, shape, or form, I think it benefits our investors greatly to use all of the experience and the origination engine we have on our $200 billion global credit platform. Right now, for the second JV, we're considering options and we'll just go with where we think we can produce the best value for the entity.

Got it. Thank you. One more if I can. On the, obviously, you know, deal flow, you seem quite positive, and that's kind of a theme for not just you. Quality-wise, right? We've heard that there's been, you know, a significant mix in the type of the quality of deals that are coming to market right now. How would you characterize that? Obviously, they were high enough quality for you in Q2. Looking forward, the A+ kind of deals have been able to get done even during 2023, 2024, right? Is there any mix shift in terms of the quality of opportunities that are starting to enter the pipeline and maybe getting rejected, but starting to enter the flow in the second half of 2025 and heading into 2026? Do you think there's going to be a mix, a quality mix shift?

No, we have not seen a material change in quality. The quality of the companies we've been able to invest in has continued to be strong, and the quality of the overall pipeline has continued to be strong. Certainly, we would prefer spreads to be a little wider than they are, and we'd prefer more deals in the market rather than less. I think quality has remained good, both in our pipeline and certainly in the investments we're doing.

Got it. Thank you.

Speaker 2

Thank you. I would now like to turn the conference back to Justin Plouffe for closing remarks, sir.

Speaker 3

Thank you, everyone, for joining our call. Hope it was helpful, and we will talk to you next quarter.

Speaker 2

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