Carlyle Secured Lending - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 modestly below Street: Net investment income (NII) per share of $0.37 vs S&P Global consensus $0.392; total investment income (TII) $66.5m vs consensus $69.6m; slight NAV drift to $16.36 (–0.4% q/q). Dividend held at $0.40, supported by $0.86/share spillover income. Consensus values marked with an asterisk are from S&P Global.*
• Portfolio growth and credit improvement: Net investment activity +$117.1m; total investments rose to $2.42B; non‑accruals fell to 1.0% of FV (from 2.1% in Q2) following a successful restructuring of Maverick/Align Precision.
• Capital structure optimized post‑quarter: Issued $300m 2031 notes (5.75% fixed, swapped to SOFR+2.31%), repaid CSL III SPV facility, and called $85m 8.20% 2028 baby bonds; lowers weighted average borrowing cost ~10 bps, extends maturities, and moves the debt stack to 100% floating to match assets.
• Near‑term earnings headwind from lower base rates and tight spreads; management expects an “earnings trough” over the next couple quarters with improvement building in 2H26 as JVs scale and deployment remains healthy; board declared Q4 dividend of $0.40/share.

What Went Well and What Went Wrong

• What Went Well

  • Credit improved: non‑accruals declined to 1.0% of FV/1.6% of cost vs 2.1%/3.0% prior quarter; Maverick restructuring completed and moved into performing categories.
  • Productive deployment with first‑lien focus: net investment activity +$117.1m on $260.4m fundings; 85.7% first‑lien exposure; median portfolio company EBITDA $98m.
  • Capital structure actions reduce cost and risk: 2031 notes issuance and redemption of 2028 notes/pro forma repayment of CSL III facility lower WAC ~10 bps, extend maturities, and cut mark-to‑market leverage exposure; 100% floating debt aligns with assets.
  • Management quote: “We experienced another quarter of net growth… maintain leverage at the mid‑point of our target range… optimize[d] capital structure… with consistent NII generation and significant spillover available to support our dividend”.

• What Went Wrong

  • Small miss vs consensus on both NII/share ($0.37 vs $0.392*) and TII ($66.5m vs $69.6m*), primarily from lower OID accretion and historically tight spreads.*
  • Sequential NII/share eased to $0.37 from $0.39; aggregate realized/unrealized net loss of ~$2.9m (~$0.04/share) on select underperformers.
  • Spread compression in new originations (~500 bps weighted average) and less non‑U.S. mix vs Q2 pressured portfolio yield; management sees limited near‑term catalysts for spread widening.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to Carlyle Secured Lending Inc third quarter 2025 earnings call. At this time, all participants are in the 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, Head of Shareholder Relations. Please go ahead.

Nishil Mehta (Head of Shareholder Relations)

Good morning and welcome to Carlyle Secured Lending's conference call to discuss the earnings results for the third quarter of 2025. I'm joined by Justin Plouffe, our Chief Executive Officer, and Tom Hennigan, our Chief Financial Officer. Last night, we filed our Form 10Q 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 the 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 risk and uncertainties, including those identified in the risk factors sections of our 10K and 10Qs. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlyle Secured Lending 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. 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 incentive fees, 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 8K. With that, I'll turn the call over to Justin, CGBD's Chief Executive Officer.

Justin Plouffe (CEO)

Thanks, Nishil. Good morning, everyone, and thank you all for joining. I'm Justin Plouffe, the CEO of the Carlyle BDCs and deputy CIO for Carlyle Global Credit. On today's call, I'll give an overview of our third quarter 2025 results, including the quarter's investment activity and portfolio positioning. I will then hand the call over to our CFO, Tom Hennigan.

Tom Hennigan (CFO)

During the third quarter, CGBD benefited from strong originations across the platform but was also impacted by historically tight market spreads. We generated $0.37 per share of net investment income for the quarter on a GAAP basis and $0.38 after adjusting for asset acquisition accounting. Our board of directors declared a fourth-quarter dividend of $0.40 per share. Our net asset value as of September 30 was $16.36 per share compared to $16.43 per share as of June 30.

CGBD had another strong quarter of deployment, funding $260 million of investments into new and existing borrowers, resulting in net investment activity of $117 million after accounting for repayments and $48 million of investments sold to our joint venture, MMCF. Total investments at CGBD increased from $2.3 billion to $2.4 billion during the quarter. Looking ahead, net new supply has picked up recently, and the Q4 pipeline continues to build. Year over year, deal flow at the top of the funnel increased nearly 30% over the last two months. We expect activity will continue to increase, supported by declining base rates, driving lower funding costs, normalization of tariff and regulatory policy, and resilient expectations for economic growth.

Although there have been recent bankruptcies in the news, CGBD has no direct or indirect exposure to First Brands or TriColor, and we continue to have confidence in the credit quality of our portfolio. As a reminder, CGBD consistently exhibits below-average non-accruals and a strong track record of NAV preservation. Based on June 30 reporting, CGBD's non-accruals were 120 basis points below the public BDC average at cost, and non-accruals at CGBD decreased by 140 basis points at cost between June 30 and September 30. Overall, we remain selective in our underwriting approach, seeking to provide first lien loans to quality companies. We remain focused on portfolio diversification while managing target leverage. As of September 30, our portfolio was comprised of 221 investments in 158 companies across more than 25 industries.

The average exposure to any single portfolio company was less than 1% of total investments, and 95% of our investments were in senior secured loans. The median EBITDA across our portfolio was $98 million. As always, discipline and consistency drove performance in the third quarter, and we expect these tenets to drive performance in future quarters. With that, I'll now hand the call over to our CFO, Tom Hennigan.

Thank you, Justin. Today, I'll begin with an overview of our third-quarter financial results. Then I'll discuss portfolio performance before concluding with detail on our balance sheet positioning. Total investment income for the third quarter was $67 million, in line with prior quarter, driven by a stable average portfolio size, a modest change in total portfolio yields, and lower accretion of discounts from repayment activity.

Total expenses of $40 million increased slightly versus prior quarter, primarily as a result of higher interest expense due in part to the 2030 senior notes transitioning from fixed to the floating rate swap. The result was net investment income for the third quarter of $27 million, or $0.37 per share on a GAAP basis and $0.38 per share 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. Our board of directors declared the dividend for the fourth 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 December 31st. This dividend level represents an attractive yield of over 12% based on the recent share price.

In addition, we currently estimate we have $0.86 per share of spillover income generated over the last five years to support the quarterly dividend, which represents more than two quarters of the existing $0.40 quarterly dividend. On valuations, our total aggregate realized and unrealized net loss for the quarter was about $3 million, or $0.04 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. At the beginning of July, we closed the successful restructuring of Maverick, which was the main contributor to non-accruals decreasing to 1.6% of total investments at cost and 1% at fair value. 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 JV, we continue to focus on maximizing both asset growth and returns at the MMCF JV. We closed an upsize to the credit facility in October. The upsize enables us to increase our investments in the JV, which is achieving a run-rate mid-teens ROA for CGBD. Separately, we continue to work on optimizing our 30% non-qualifying asset capacity and are currently in advanced discussions with a potential institutional partner on a new joint venture. Based on our current outlook for earnings, we're comfortable with the current dividend policy, $0.40 per share. I'll finish by touching on our financing facilities and leverage. In October, we raised a new five-year, $300 million institutional unsecured bond at an attractive swap-adjusted rate of SOFR plus 231. We used the proceeds in part to repay in full the higher-priced legacy CSL3 credit facility.

In addition, we announced that we will redeem the $85 million baby bond effective December 1st. In the aggregate, these capital structure optimizations will lower our weighted average cost of borrowing by 10 basis points, extend the maturity profile of our capital structure with limited maturities until 2030, and reduce reliance on mark-to-market leverage. Our debt stack is now 100% floating rate, matching our primarily floating-rate assets, meaning CGBD is well-positioned in advance of future interest rate cuts. At quarter-end, statutory leverage was 1.1 times towards the midpoint of our target range. Given our current strong liquidity profile and targeted incremental asset sales to our MMCF JV, we are 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. Thanks, Tom. As we approach the middle of the fourth 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, and 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. At the platform level, we continue to build out the Carlyle Direct Lending team. As a reminder, Alex Chee will be joining Carlyle as Partner, Deputy Chief Investment Officer for Global Credit, and Head of Direct Lending in early 2026. We also hired a new Head of Origination during the quarter and continue to build out the broader origination function with an additional hire in Q3 and one more slated to join the team in Q4.

All three will expand our existing capabilities. Combined with the expected increase in overall capital markets activity, we are constructive on our expectations for activity and deployment going forward. I'd like to now hand the call over to the operator to take your questions. Thank you.

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. Please stand by while we compile the Q&A roster. Our first question comes from the line of Finian O'Shea from Wells Fargo Securities.

Finian O'Shea (Analyst)

Hey, everyone. Good morning. Can you hear me?

Justin Plouffe (CEO)

Yeah, we can. Hey, Finian.

Finian O'Shea (Analyst)

Hey, how are you? Sorry, just getting ahead of any potential technical difficulty that I seem to have been facing. Tom, can you give us some color, maybe a bridge on the top line this quarter? SOFR was pretty stable, I think. The non-accrual was small. Just seeing what the mix was, whether it be average portfolio or one-time fees or anything else in there that's notable. Thanks.

Justin Plouffe (CEO)

Yeah, sure, Finian. Thanks for the question. When you look at the top line, it's $67 million last quarter and this quarter, but last quarter rounded down, this quarter rounded up. When you look at the delta, that's a very modest decline. It's primarily OID accretion on repaid investments. That's really the biggest bridge point in terms of the difference between the two. When you look at fee income, it was up modestly. In the aggregate, the average daily principal balance of loans outstanding was pretty flat across the quarter. That's why we'll see that we should get a benefit in the coming quarter just based on that average daily outstanding investment balance. That was neutral from second quarter to third quarter. It's really the OID accretion that was the biggest point on the top line.

Finian O'Shea (Analyst)

Okay, thanks. In the 10 basis points you gave on borrowing spreads, was that just from the baby bond, or was that also, there's a couple of post-quarter changes as well? Is that a holistic sort of guidance or just that one bond? I'm sorry, I didn't catch that.

Justin Plouffe (CEO)

No, and it was primarily post-quarter end items. It was the. We repaid our legacy CSL3 facility. That was priced at SOFR plus 285. The baby bond swap adjusted is SOFR 314. The. CSL3 facility we repaid at the beginning of October, the baby bond will be repaid effective December 1. The biggest replacement is the new institutional deal we did, which is swap adjusted 231, so over SOFR. Net-net, that's about 10 basis points across the capital structure.

Finian O'Shea (Analyst)

Okay, thanks. One final one for me. I'll get back in the queue, and I'm sure we bugged you about this last quarter. The $0.40 declared into the fourth, you said something like comfortable for now. Can you expand on for now? Does that include how far out into the SOFR curve that includes? What are—I know you mentioned the 30% bucket, bit of rotating spreads. How much sort of fundamental or octane sort of drivers offset how much Fed decline in your outlook for coverage?

We have also been working on some creative low-cost financing solutions to continue to operate at a very low debt cost to capital for that JV. That gives us the runway. It is going to take some time to grow that vehicle from $800 million of assets to double the size to $1.6 billion. Right now, if we are at a 15% return on assets for CGBD, we see the ability to increase that by 300-500 basis points. We see a lot of positive drivers with that JV, but it is going to take some time to invest over the course of the next number of quarters. The second JV, we have made some really good progress with a potential partner. It is leveraging Carlyle's global credit expertise in investing in loans. It is something we hope to have more color for the market.

Hopefully target closing that deal sometime this quarter. Again, that would be longer term to ramp that vehicle.

Yep. No, appreciate all the color there. Thanks so much.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Erik Zwick from Lucid Capital Markets.

Erik Zwick (Equity Research Analyst)

Good morning. Just looking at slide five of your deck this morning, over the past year or so, the concentration of first lien debt has increased up to about 86% of the total portfolio now with the second lien investment funds coming down. We've been hearing from others that second lien debt potentially is not as attractive today given tighter spreads. Just curious, are we likely to see this trend continue in your view of first lien debt continuing to become a larger concentration in the portfolio?

Justin Plouffe (CEO)

Yeah, it's Justin. Thanks for the question. Look, we are operating in a tight spread environment across credit markets. At this point in time, we do not see a ton of value in second liens. I think across all private credit markets, the amount you are getting paid to take significant risk has really come down in the last 24 months. Our strategy has always been defensive, diversified, first lien, and then opportunistic on things like second liens. I would tell you right now, we do not see the opportunity to be that compelling. I think you will see our portfolio continue to trend first lien, and I do not see any reason for that to change in the near term. Of course, we could have a credit cycle, and then there might be opportunities that come up at that point.

For now, we're very, very focused on a defensive first lien portfolio.

Erik Zwick (Equity Research Analyst)

I appreciate the commentary there. Then just given your comments about the pipeline continuing to grow, I guess I'm curious what the kind of average yield looks like in the pipeline today versus the current weighted average yield in the portfolio. Is there potentially pressure there as the portfolio turns? What are your thoughts there?

Justin Plouffe (CEO)

Hey, it's Tom. There definitely continues to be pressure on spreads relative to where the portfolio is. For the third quarter, our weighted average spread was a shade over 500 basis points. Prior quarters, it was a bit higher. Part of that is our mix of non-U.S. transactions. In the second quarter, it was closer to 15%. We're typically seeing anywhere from a 75-100 basis point premium for those non-U.S. transactions. We got a little extra spread premium in the second quarter. In the third quarter, our originations were all strong. It was only about 5%, only one deal from our European originations. We were right about 500. I think that there continues to be overall pressure when you look at where the overall portfolio yield is relative to, let's say, those new originations, which are more squarely 500 weighted average.

For a brand new LBO not in the portfolio, probably a 4 handle is what we're seeing in today's market. For CGBD, those are transactions and we'll be investing in that particular transaction across our broader direct lending business. For CGBD, as those assets drift and spread below 500, that's where they're very good candidates for our JV.

Erik Zwick (Equity Research Analyst)

Last question for me, just looking at the chart on slide 12, the risk rating distribution, a nice quarter-over-quarter improvement in those two-rated assets. I'm just curious, the drivers there, was it kind of industry-related or more company-specific? If you're able to provide any commentary.

Justin Plouffe (CEO)

Decrease in the two-rated, Eric, from up by about $100 million?

Erik Zwick (Equity Research Analyst)

Yeah.

Justin Plouffe (CEO)

Yeah. Primarily, a couple of deals transitioned from the three category to two category. The biggest component is just net originations for the quarter. Those continue to be in our main categories of healthcare, software, technology, and financial services. Those continue to be our larger categories. That is where most of our originations in the third quarter live.

Erik Zwick (Equity Research Analyst)

Thank you for taking my questions.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Sean Paul Adams from B. Riley Securities.

Sean Adams (Research Analyst)

Hey, guys. Good morning. Congrats on the great quarter. When looking over the non-accruals, it looked like quarter-over-quarter non-accruals decreased significantly, but the rating within the portfolio increased from investment-grade rating 4 to 5. Are the non-accruals that are remaining on the books, they just shifted to materially changing the expectations on recoveries? Or is this just more of a covenant change or just lapsing in the amount of time since payment? Thank you.

Tom Hennigan (CFO)

Hey, it's Tom again. I'll answer that. In a slightly different way, I think, just to describe the changes in the categories. The biggest decline in the four category was the restructuring of Arch Maverick. Now it's called Align Precision. So that was the largest component of that four category. And we successfully restructured, wrote off some debt, but now that transaction, the multiple tranches, lives in the two and three categories. The migration from four to five is primarily one credit that remains on non-accrual that we are in the midst of restructuring right now. I think that it's a shift from four to five is acknowledgement on our part that, hey, yes, we're restructuring it. Yes, we're going to be writing off debt. My credit view, unlike Maverick, we see a path with the lead agent.

We see a path to, it's going to take a few years, but to a very strong recovery, perhaps a full recovery on that investment. The loan that we—the loan, there were two loans. One was the majority piece. Four to five were investments that were restructuring. They're in payment default and/or on non-accrual. We think that even longer term, we're likely not going to have a full return of capital.

Sean Adams (Research Analyst)

Thank you for the color.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Robert Dodd from Raymond James.

Robert Dodd (SVP and Managing Director)

Hi. On the potential—and I realize nothing has been signed yet—the potential second JV, do you envision that—at least your partner envisioned that—as kind of a same kind of style as the existing one? I mean, in your prepared remarks, you mentioned obviously leveraging the global platform more, maybe. Or is—yeah. Is this potential second one going to be structurally similar but target assets different than the first one? And i.e., diversify overall exposure or just participate in the same kind of deals and just diversify where it's helpful?

Justin Plouffe (CEO)

Right. Rob, good morning. This contemplated JV, the structure will be very similar to the existing JV in terms of 50/50 governance. It'll be 50/50 economic ownership. It is in loans, but it will be a different investment strategy, really zero overlap to the current JV.

Robert Dodd (SVP and Managing Director)

Got it. Thank you. And then just. You're sounding obviously more optimistic about the outlook, and 30% increase in deal flow for a couple of months is pretty good. How's the quality of those deals and kind of like the terms? I mean, are you seeing the initial look at those—your point—four handles on new LBOs? I mean, is that what we're looking at? Are the terms. Consistent with that in terms of the pipeline build? And is the quality of the assets you're seeing—it's one thing for a 475 if leverage is lower, but if leverage is getting fuller and fuller, and I don't know that to be the case. Those terms might not be so attractive. I mean, any color you can give on the. Constituents of the pipeline in terms of how it looks?

Justin Plouffe (CEO)

Robert, I think that the pipeline consists, I think, high-quality borrowers very much in the same makeup industry-wise as our current portfolio. In terms of focus on whether it be software technology, healthcare, business and consumer services, financial services. I would say it is very much industries and deal-specific in terms of leverage. The one key attribute, though, and it was the case back in 2023 when leverage was lower, it has been the case now that there is somewhat of a reopening in the markets. Is the LTV investing in the first lien loans, our LTV consistently is 38-42% on average, perhaps even lower for some of the technology deals. If we are looking at industrial deals, it may be a bit higher because of lower growth and lower enterprise value multiples.

Overall, that's really the one common attribute is that loan-to-value, so we've got significant coverage where the loan-to-value is typically 40%.

Robert Dodd (SVP and Managing Director)

Got it. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Melissa Wedel from J.P. Morgan.

Melissa Wedel (Analyst)

Morning. Thanks for taking my questions. Just want to make sure I'm understanding your comments and your views on the JV appropriately. It seems like with the upsize in the existing one and the potential second JV, those will take time to scale up. As you look at the earnings power of the portfolio, we shouldn't be thinking of those as having a particularly near-term impact on earnings power. Is that fair to say?

Justin Plouffe (CEO)

Yeah. That's a very good synopsis of it. When we look at the current quarter, the next quarter, next two quarters, we know the rate cut math is easy for us. Every 100 basis points is three pennies per share per quarter. Those JVs are going to take more time, multiple quarters. We see an earnings trough in the next couple of quarters, and then it starts to build back up second half of 2026 into 2027.

Of course, that will all depend on activity in the market as well. If we see elevated activity, perhaps we can ramp faster. We are thinking about these JVs as long-term drivers of increased income, not necessarily as a quarter-to-quarter fix.

Tom Hennigan (CFO)

We just confirm that we've got our $0.86 of spillover over two quarters. For this interim basis, we feel comfortable if we're necessarily paying out the spillover, but really have a long-term goal in mind.

Melissa Wedel (Analyst)

Okay. Thank you for clarifying that. Then, following on one of your comments, I think it was during the prepared remarks, you mentioned at one point the potential for spreads to widen, especially to compensate a little bit for lower base rates. I guess I'm wondering if that's built into your—is that your base case expectation? How do you reconcile that with just the supply and demand imbalance of capital that we're seeing in the market now, even with base rates being lower and spreads still being so tight?

Tom Hennigan (CFO)

Yeah. No, it's not necessarily our base case scenario. I think if you look historically, when rates have been going down, spreads have actually more than compensated for the reduction in rates. We are in an unusual environment now where we do have base rates going down while spreads either tighten or remain tight. In the current environment, that's not the case. As we know, credit goes through cycles. I think eventually we will have a change in the supply-demand imbalance. I think historically, if you look across private credit, spreads are at the tighter levels that they've been. I think it's reasonable in the intermediate term to think that there probably will be some movement on spread. We want to be positioned to take advantage of that, right?

That's really all that we're saying, not some prediction of near-term spread widening because I don't really see the impetus for that in the markets today.

Melissa Wedel (Analyst)

Okay. Got it. Thank you.

Operator (participant)

Thank you. At this time, I would now like to turn the conference back over to Justin Plouffe for closing remarks.

Justin Plouffe (CEO)

Thanks, everybody, for joining the call. We really appreciate it. We will speak with you next quarter. Take care.

Operator (participant)

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