Carlyle Credit Income Fund ($CCIF)

Good day, and thank you for standing by. Welcome to the Carlyle Credit Income Fund Second Quarter 2026 Financial Results and Investor Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Joseph Castilla. Please go ahead.

Good morning, and welcome to Carlyle Credit Income Fund's Second Quarter 2026 Earnings Call. With me on the call today is Nishil Mehta, CCIF's Principal Executive Officer and President; Lauren Basmadjian, CCIF's Chair and Carlyle's Global Head of Liquid Credit; and Nelson Joseph, CCIF's Principal Financial Officer. Last night, we issued our Q2 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 risks 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. During the conference call, we may discuss adjusted net investment income per common share and core net investment income per common share, which are calculated and presented on a basis other than in accordance with GAAP. We use these non-GAAP financial measures internally to analyze and evaluate financial results and performance, and we believe these non-GAAP financial measures are useful to investors gauging the quality of the fund's financial performance, identifying trends in its results and providing meaningful period-to-period comparisons. The presentation of this non-GAAP measure is not intended to be a substitute for financial results prepared in accordance with GAAP and should not be considered in isolation. With that, I'll turn the call over to Nishil.

Thanks, joe. Good morning, everyone, and thank you all for joining CCIF's quarterly earnings call. CLO equity market continued to face pressure during the quarter due to a combination of a repricing wave in January, which led to further declines in net average spreads, weakness in certain software-related loans due to concerns regarding AI disintermediation and volatility from the conflict in the Middle East. These factors weighed on loan prices, CLO equity valuations and CLO equity cash flows across the market and within CLO portfolio. However, underlying credit fundamentals remained broadly stable during the quarter and the volatility created a better balance in the market with very limited repricings in February and March. To navigate this market environment, we continue to focus on optimizing the portfolio, including selectively completing refinancings and resets and defensively position CCIF with experienced dealer managers and transactions with longer reinvestment groups. I'd like to highlight the funds activities over the last quarter and key stats on the portfolio as of March 31. We maintain our monthly dividend of $0.06 per share or 21.5% annualized based on the share price as of May 12, which is now declared through August 2026. CCIF's CLO investments generated an annualized cash and cash yield of 2.11% for the quarter, which resulted in $0.44 of recurring cash flows and $0.29 of core net investment income for the quarter at the fund level. Core net investment income filed dividend coverage of 161%, a revised monthly dividend of $0.06 per share. New steel investments during the quarter totaled $1.5 million with a weighted average GAAP yield of 11.5%. Total sales proceeds during the quarter totaled $21.7 million as we used the proceeds to redeem $20 million of the 7.5% Series C convertible preferred shares and cash to reduce leverage. Within CCIF's portfolio, we completed 4 resets in Q2 2026, in addition to the [ 26 ] refinancings and resets completed in calendar year 2025. Refinancing and resets reduce the cost liabilities and extended the investment periods across CLOs and bolster equity cash flows. We expect to continue to refinance and reset the portfolio to enhance returns. The weighted average years left to investment period decreased slightly from approximately 3.4 years to 3.3 years. This provides CLO managers the opportunity to capitalize on periods of volatility through active management. We're also 0 CLOs in the portfolio that were poised for investment period as of March 31. We believe the portfolio weighted average junior [indiscernible] cushion 0.10% is healthy and offset potential defaults and losses in the underlying loan portfolios. And the average percentage of loans rated CCC by S&P was 4.1%, below the 7.5% CCC limit in CLOs. The weighted average spread of the earning loan portfolio was 2.96%, a 10 basis point decline from the prior quarter. The continued decline in whatever spread reflects the cumulative impact of elevated repricing activity over the last several quarters, particularly the very high level of repricing activity experienced in January. Lower loans for continued to pressure the earnings for CCIF as resets and refinancings have not fully offset the spread compression. Importantly, our noncredit fundamentals across the CCIF portfolio remained broadly stable. We believe recent CLO equity performance has been driven more by valuation and technical factors than broad-based credit deterioration. We remain confident in the resilience of our portfolio, which is diversified across high-quality managers and structure to navigate evolving market conditions. While liability costs have increased and equity distributions have moderated, we believe resilient credit fundamentals and continued demand for floating rear assets will support performance over time. We saw stabilization of NAV in April as wound prices partly retraced the declines from earlier this year we saw very limited loan repricings. Now I will switch gears to discuss our outlook. CLO equity continues to benefit from historically attractive liability costs. Any normalization in loan spreads are increasing [indiscernible], improve excess spread generation over time, particularly for deals with longer reinvestment [indiscernible]. With approximately 17% of the lower market maturing by the end of 2028, we expect heightened refencing activity, which could also lead to spread widening, benefiting CLO. Looking ahead, we believe CLO equity performance will continue to depend on manager selection, reinvestment discipline and active credit management. We continue to position CCIF conservatively while selectively deploying capital into opportunities where we believe valuations appropriately compensate investors for underlying risk. We also continue to leverage Carlyle's in-house credit research platform to conduct a detailed bottom-up analysis across online main portfolios, including software-related exposures and evolving AI [indiscernible]. CCIF portfolio remains highly diversified across approximately 1,850 underlying loans, with exposure to any single issuer representing less than 1% of the portfolio. In addition, the portfolio is [indiscernible] compromised first [indiscernible] loans, representing over 97% exposure, which we believe provides meaningful downside protection and structural results. With that, I will now hand the call over to Lauren to discuss the current market environment.

Thank you, Nishil. I'd now like to provide an update on the recent developments across both the loan and CLO markets. CLO liabilities for us wide move across the capital staff, contribute frontlining by about 5 basis points quarter-over-quarter and BB spread widening by about 150 basis points. Newer CLO volumes totaled approximately $47 billion during the quarter compared to $44 million in the prior year. CLO resets and refinancings totaled $28 billion and $23 billion, respectively, down from $57 billion and $37 billion in the first quarter of 2025, and wider liability spread and increased market volatility, reduced refinancing and recent activity during the quarter. The share of U.S. CLOs under reinvestment period has declined to roughly 11%, down from about 40% in 2023, reflecting a market with expanded remapping capacity. Turning to a low market, leveraged loans experienced modest weakness in the first quarter of 2026 as market volatility increased during this period. The LSTA's U.S. Leveraged Loan Index declined 60 basis points during the quarter as loan prices declined [ 2.1% ]. Similar to the prior quarter, issuance activity was largely driven by opportunistic refinancings and a significant number of repricings in January. However, the market also saw an increase in LBO and M&A activity during the quarter, most notably, the electronic mark LBO, contributing to about $51 billion of quarterly LBO and M&A volumes in the broadly syndicated loan market, the highest quarterly total in more than 4 years. Credit fundamentals within the U.S. portfolio of over 550 borrowers remain resilient in the fourth quarter of 2025. Free cash flow generation continues to be a key focus with over [ 75 ] producing positive free cash, supported by the benefit of prior rate cuts and lower spread more [indiscernible]. Revenue and EBITDA growth remained positive at 5% and 6% year-over-year, which is in line what we saw in the third quarter. Interest cover remains healthy at [indiscernible] time is only a small portion of the portfolio below onetime interest coverage. Overall, borrower performance and credit quality remained broadly stable. While Chapter 11 exit remains moderate relative to historical averages, liability management exercises continue across the market. The broadly competed loan default rate, inclusive of liability management exercises has declined from a recent cycle peak of 4.4% at the end of 2024 to approximately 3% in March and further to 2.8% in April, we're trading closer to historical averages. With about 70% of the loan market return before the end of 2028, we think the next year will be busy with refinancing transactions. But unlike the last 2-plus years, some of these transactions should be spread additive. [indiscernible] companies look to extend their maturities, but we anticipate activity among some of the large companies in 2028 maturity, which should show the market where the true month of capital as we're performing in software. As capital for data centers remain in high demand, we are beginning to see companies access to leverage low market for financing, creating a new certain collateral. Overall, in the current geopolitical, AI and inflationary risks, we think 2026 will continue to be a year of conversion with the have and have not experienced a very different [indiscernible]. I will now turn the call to Nelson, our CFO, to discuss the financial results.

Thank you, Lauren. Today, I will begin with a review of our second quarter earnings. Total investment income for the second quarter was $5.5 million or $0.26 per share. Total expenses for the quarter were $3.6 million. Total net investment income for the second quarter was $1.9 million or $0.09 per share. Adjusted net investment income for the second quarter was $2.4 million or $0.11 per share. Adjusted NII adjusts for the $0.02 per share impact, the amortization of the OID and issuance costs for the fund's preferred shares and credit facility. Core net investment income for the second quarter was $0.29 per share, providing dividend coverage of 161% on our revised monthly dividend of $0.06 per share. We believe core net investment income is a more accurate representation with CCIF's distribution requirement. Net asset value as of March 31 was $3.34 per share. Our net asset value and valuations are based on the bid side mark we received from a third party of 100% of the 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. With that, I'll turn it back to Nishil.

Thanks, Nelson. We remain confident in fundamentals of CCIF's portfolio, which remains defensively positioned in the current market environment. We remain focused on experienced managers and transactions that demonstrate durable [indiscernible] build strong underlying collateral quality and disciplined credit underwriting, including ongoing evaluation of evolving AI-related risks across certain sectors. We are deploying capital effectively, prioritizing opportunities offer attractive relative value on new issue and seasoned transaction. We continue to leverage the depth of the Carlyle Liquid Credit platform and our collaborative One Carlyle platform to source and invest in high-quality CLO portfolios through a disciplined and [indiscernible].

[Operator Instructions] And our first question will be coming from the line of Gaurav Mehta of AGP Alliance Global Partners.

Wanted to ask on the trends you guys are seeing in April. I think you talked about stabilization of NAV and improvement in loan prices. Just want to get some more color on what you guys are doing in loan repricing? And any comments on spreads and [indiscernible]?

Sorry. I'll talk about the loan repricing. We had seen a period where they stopped, including up until April, but I will say that in May, they have started again.

And I would add to that, that we have seen the loan market kind of stabilized over the past couple of months. As a result, you've seen some stabilization in NAV as well.

Second question on resets and refis. Can you make how much opportunity do you have for resets and refis in your portfolio for this year?

Yes. So look, it's something that we continue -- you're focused on because the best way to offset loan repricing is completing the accretive refinancings and resets. We completed 4 in the first quarter and now that so [indiscernible] have tightened in line with kind of overall fixed into market, we expect to continue to be very active in refinancing and new set portfolio.

[Operator Instructions] Our next question will be coming from the line of Erik Zwick of Lucid Capital Markets.

I wanted to start with a question on software. I guess it may be a multipart question. So if I look at your Slide 12, in the right-hand side, I guess the first question is, most of your software exposure in that high tech category and then -- or spill over into other or maybe kind of tangential businesses that utilize software heavily as well. And then kind of the second question is, if you decided you wanted to reduce software exposure in the portfolio, how easy is that to accomplish? Can you have discussions with the CLO issuers or the CLO primarily just reflective of overall leverage loan issuance? Just kind of how -- if you wanted to reduce that or change any sector, how easy is that to accomplish.

Sure. So maybe on the second part, I'll touch up on that. So software right now is around 12% to 13% of the overall loan market [indiscernible] market. And right now, I think, [indiscernible]. So the way that we can adjust our software exposure at least 2 ways. One, look, we're always looking to optimize our portfolios. So if we see a portfolio where -- it's not necessarily the amount of software exposure, it's utilizing our in-house credit experts and analysts to do kind of a line-by-line review each of the loans, really looking at the quality of the software names within each CLO. So we can always rotate out of a position if we don't like the risk profile and credit profile of those underlying software means. And then two, we do have discussions with our managers on kind of software exposure, their views on software and kind of what their strategies on software. So we won't necessarily dictate to them in terms of changing their strategy because ultimately, they have ultimate discretion, but we can always rotate out of positions and seal managers accordingly. And I think the third is, I think what you're naturally going to see is software exposure decline over time. And that's going to be a market-wide. One, you're probably going to see less activity in the software space, less capital markets activity, just given everything going on. And then two, as new CLOs are created, we're already seeing that software exposure newer CLO are typically closer to half what's the current exposure. So maybe mid- to high single digits.

That's very helpful and insightful. And second one for me, just what was the driver of realized losses in the most recent quarter?

Yes. So the one thing that we did is, I think, just prudent management of the capital structure. So given the decline in NAV, our leverage was higher than kind of what our target range is. And so we proactively sold some of our positions and user process to redeem our Series C, which is around $20 million.

And I am showing no further questions. I would now like to turn it back to management for closing remarks.

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

And this concludes today's program. Thank you for participating. You may now disconnect.