Carlyle Secured Lending, Inc. (CGBD) Earnings Call Transcript & Summary

Thank you. Good day and thank you for standing by. Welcome to the Carlisle Secured Lending, Inc. second quarter 2026 earnings 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 this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nishal Mehta, Head of Shareholder Relations. Sir, please go ahead.

Good morning and welcome to Carlyle Secured Lending Second Quarter 2026 Earnings Call. I'm joined by Alex Chee, CGBD's Chief Executive Officer, and Tom Hennigan, our President and 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. Call is being webcast and a replay will be available on our website. Today's earnings column may include forward-looking statements reflecting our views with respect to, among other things, our future operating results and financial performance. Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them. These statements are based on current management expectations, estimates, and projections that involve inherent risk and uncertainties, including those identified in the risk factors and cautionary statement regarding forward-looking statements sections of our 10-K and 10-Qs. These risks and uncertainties could cause actual results to differ materially from those indicated in our four looking statements. CGPD assumes no obligation to update any forward-looking statements at any time. During this call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G. such as adjusted net investment income or adjusted NAI. The company's management believes adjusted net investment income, adjusted net investment income per common share, adjusted net income, and adjusted net income per common share are useful to investors as additional tools to evaluate ongoing results and trends and to review our performance without giving effect to the amortization 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 per share, the most directly comparable GAAP financial measure to adjusted NII per common share, can be found in the accompanying slide presentation for this call that is available on our website. In addition, a reconciliation of these measures may also be found in our earnings press release filed last night with the SEC on Form 8-K. With that, I'll turn the call over to Alex. Thanks, Michiel, and good morning. On today's call, I'll give an overview of our second quarter results, including the quarters, investment activity and portfolio positioning, and provide an update on our investment outlook. I'll then hand the call over to our President and CFO, Tom Hennigan. During the second quarter, macroeconomic and geopolitical factors led to a complicated market backdrop for New Deal activity. However, we continue to be very pleased with the strength of Carlisle Direct Lending's origination platform and the consistent credit performance of CGPD. In total, we closed $1.5 billion of new and incremental commitments at the platform level, and Excluding Joint Venture Activity funded $248 million of investments at CGVD, reflecting a strong quarter of Virginations. Our platform originations were up over 20% versus the first quarter, while platform selectivity continued to increase with a commitment rate on second quarter pipeline deals of less than 5%. On our new originations, weighted average spreads held steady in line with first quarter, while weighted average leverage on entry continued to decrease. Our enhanced origination team continued to drive several wins, and Coral Out played a lead role in nearly 90% of platform originations. The payments decreased in the quarter to $68 million of activity, combined with $123 million in sales to our MMCF joint venture, million of equity funding at SEP, net investment activity drove total investments at CGVD to increase from $2.3 billion to $2.4 billion during the quarter. Moving to our investment funds, both of our JAVs, MMCF and SEP, continue to scale and generate attractive returns to CGPD. Total investments at our MMCF joint venture increased to $1.2 billion, with the annualized dividend yield increasing by over 200 basis points to 17.6% in the quarter. At SEP, the portfolio grew to $1.7 billion and produced an annualized dividend yield of 18.7% to CGVD. During the quarter, we generated $0.35 per share of net investment income on both a GAAP and adjusted basis. In line with our revised dividend policy, our board of directors declared a third quarter dividend of 35 cents per share, which is fully covered by net investment income in the quarter. net asset value as of June 30th was $15.61 per share compared to $15.89 per share as of March 31st. Although the market remains focused on the software sector, we continue to see strong fundamental performance from the software borrowers in our book. As I've mentioned in prior quarters, our underwriting approach to borrowers in the software space remains highly disciplined and our platform's software track record is exemplary, with zero defaults on $7 billion in commitments to software deals over the last six years. Turning to portfolio construction, we remain focused on portfolio diversification while managing target leverage. As of June 30th, our portfolio grew to 177 companies across more than 25 industries. The average exposure to any single portfolio company was less than 60 basis points of total investments, and 95% of our investments were in senior secured loans. The median EBITDA across our portfolio was $101 million. As always, discipline and consistency drove performance in the second quarter, and we expect these tenets to drive performance in future quarters. Looking ahead, despite the complicated market backdrop mentioned earlier, we continue to expect strong activity in our market over the medium and long term, and we're well positioned with a revitalized origination platform to take advantage of increasing market activity and to continue taking share. Looking at our pipeline, a significant majority of deals continues to be in old economy sectors, including industrials, space and defense, healthcare, and consumer products. As manager performance dispersion increases, we expect the breadth of the Crawlout platform and the consistency of our performance to differentiate us through our ability to leverage Crawlout's scale, scope of investment capabilities, and dedicated in-house investing, portfolio management, and restructuring resources.

With that, I'll now hand the call over to our President and CFO, Tom Hennigan. Tom Hennigan Thank you, Alex. Today, I'll begin with an overview of our second quarter financial results. discuss portfolio performance before concluding with detail on our balance sheet positioning Total investment income for the second quarter was $62 million. Below prior quarter, primarily driven by a decline in interest income due to lower OID accretion from reduced repayment activity, as well as a decrease in fee income. partially offset by increased dividend income from both the MMCF and SEP JVs. Total expenses of $38 million also decreased versus prior quarter, primarily as a result of lower interest expense due to lower outstanding debt balance. The result was net investment income for the second quarter of $24 million, or 35 cents per share, on both a gap basis and after adjusting for the impact of asset acquisition accounting. Achieving NII of 35 cents per share means we fully earned our new base dividend. Our Board of Directors declared the dividend for the third quarter of 2026 at that $0.35 per share base dividend level, which is payable to stockholders of record as of the close of business on September 30th. As a reminder, we're maintaining our existing supplemental dividend policy, which targets paying out at least 50% of excess earnings above the base dividend, allowing us to deliver additional value to shareholders as earnings grow. As mentioned on prior earnings calls, we still expect the second quarter will be the near-term earnings trough, which means we not only expect to maintain full dividend coverage in future quarters, but we anticipate an increase in earnings and supplemental dividends as we ramp the portfolios and earnings of both JVs over the course of the next four to six quarters. In addition, we currently estimate we have 73 cents per share of spillover income to support the quarterly dividend. Given that CDBD shares continued to trade at a compelling discount, we repurchased $12.5 million of shares at an average discount of 29% during the second quarter, resulting in $0.07 of accretion to NAV per share. and total purchases since inception of the program now exceed 200 million dollars. On valuations, our total aggregate realized and unrealized net loss for the quarter was about $24 million, or 35 cents per share, partially driven by markdowns on a limited number of investments. to highlight a couple of the larger movers. On our investment in SPF debt and equity, we expect a successful exit later this year. However, we did adjust the mark on a residual equity position down to align with updated expectations on total recovery to lenders, given higher than anticipated proceeds to management and doctors. But overall, it remains a very positive story with an expected MOEC of 1.4x and highlights the impact of our dedicated workouts team. On US Infra, which is a provider of inspection, maintenance, and rehabilitation services for critical infrastructure. Based on our expectation of lower earnings for fiscal year 26, we lowered our valuation as of 6-30. Our team is closely working with the sponsor and management team to right-size the capital structure and provide additional liquidity to support the business. positioned the company for recovery. Turning to credit performance, we continue to see overall stability in credit quality across the portfolio. The fair value of loans utilizing PIC provisions decreased during the second quarter. And the majority of our PIC is underwritten at origination or for performing borrowers and is what we would consider to be good PIC. Non-accruals continue to remain low as of June 30th and represent only 0.6% of investments at fair value and 1.2% at amortized costs. The restructuring of DCA closed the second quarter, so that investment was placed back on accrual status while US Infra and Project Castle, also known as material handling systems, were added to non-accrual status. Moving to the middle market credit fund, our longstanding JV. We continue to focus on maximizing both asset growth and returns. In the second quarter, we closed a $400 million upsize to our main credit facility, increasing total commitments to $1.2 billion and attractive spread of SOFR plus 170 basis points. During the second quarter, MMCF achieved 17.6% dividend yield, an increase of over 200 basis points a quarter over quarter, generated for $1.2 billion in investments with no fees at the joint venture. The increases in both debt and equity commitments that closed earlier this year position us to continue asset growth and income generation at the JV. In addition, our newer JV, Structured Credit Partners, or SCP, ramps 1.7 billion of investments and produced a dividend yield of 18.7%. In April, we were able to capitalize on market volatility and accelerated the timeline for the first two CLOs to price and close. benefiting from lower loan prices and tight liability pricing. We expect SCP to price and close two additional CLOs in 2026, subject to market conditions. in line with our plan to ramp at a cadence of four CLO issuances per year to ensure vintage diversification. And over time, the JV is expected to manage approximately $6 to $7 billion of assets fee-free at SCP. I'll finish by touching on our financing facilities and leverage. Our debt stack is 100% floating rate, matching our primarily floating rate assets, meaning CGVD is well positioned in advance of any additional interest rate movement. At quarter end, statutory and net financial leverage were both 1.2 times. Given our current strong liquidity profile, we believe we're well positioned to benefit from both more attractive terms for new investments and the expected pickup and deal volume in future quarters.

With that, I'll turn the call back over to Alex. Thanks, Tom. As we push the middle of the third quarter, our portfolio remains resilient and our strategy remains unchanged. We continue to focus on sourcing transactions with significant equity cushions, conservative leverage profiles, and attractive spreads relative to market levels, and expect to take advantage of improved conditions in the market with a revitalized origination platform. The pipeline of the new originations is active, and with a stable, high-quality portfolio, CGPD 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 to consistent income and solid credit performance.

I'd like to now hand the call over to the operator to take your questions. Thank you. Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile our Q&A roster. Our first question is going to come from the line of Rick Shane with JPMorgan. Your line is open. Please go ahead.

Hey, guys. Thanks for taking my question this morning. Really just curious right now as you sort of look at the deal market, we're starting to see, you know, underlying equity values improve in some sectors, you know, and at the same time M&A activity remains pretty muted. I am curious sort of what you are seeing in terms of pricing and terms related to new transactions versus refinance transactions and opportunities to, rotate the portfolio. Sure. Thanks, Rick, for the question. It's Alex. As you can see from the results, we were able to find some attractive new investments in the second quarter, and the pipeline for the third quarter also continues to be pretty robust. Having said that, The overall landscape for M&A continues to be a bit muted. And I think that's driven by the continued geopolitical uncertainty and also the macroeconomic uncertainty. I think once you see a clearer picture of what will happen there, I think that should unleash some more M&A activity that will all benefit from. Having said that, in terms of what the pipeline looks like, these are companies that are more shielded from what's happening out in the economy, clearly away from software. So most of the deals that we're looking at and are in our pipeline are within industrials, aerospace and defense, healthcare, basic consumer products, et cetera. In terms of pricing, as you can see from our results, the weighted average spread that we saw really held steady from the second quarter. the first quarter we really see much more spread widening Having said that, it really depends on the sector. I think that if you see a very attractive industrial industrial deal per se, then I think you'll see some competition and that'll lead to a bit tighter pricing. But having said that, we've seen spreads hold in there, and the DOC standards have also continued to improve. That's also one of the nice parts about just being in the middle of market where you see just more consistent deal flow and in terms of holding steady. Yes, no, it's an interesting observation in terms of spreads. And I think, you know, obviously, base rates are a tailwind for the industry, but, you know, with rising non-accruals and a lot of portfolios, you know, there's an offset and you guys, it does look like you guys picked up a little bit of yield. we're able to benefit efficiently from the pickup and base rates it looks like. Yes, I think we saw some modest benefit. And again, we also benefit from the fact that our non-accruals are quite low. So it allows us to be on offense with respect to deployment and just looking for the best opportunities to invest in. And just given where we've landed on that front as well as our our leverage not only were able to deploy into attractive opportunities but we were also able to take advantage of discount and also purchase some shares too Got it. Yes, we saw that as well. Look, pretty straightforward recorder. We appreciate you guys taking our questions.

Thank you very much. Thank you. One moment for our next question. Our next question will come from the line of Eric Zwick with Lucid Capital Markets. Your line is open. Please go ahead.

Hey, guys. Good morning. This is Justin. I'm for Eric. I just wanted to go back to yields a little bit. Obviously, it helps study. From the first quarter, can you talk about the spread environment thus far in the second half of the year? And are you thinking about balancing capital deployment in terms of new loans versus share repurchases given the current discount to NAV?.

Hey, good morning, Justin. Thanks for the question. You know, we continue to be active with repurchasing shares, but we're trying to find the right balance and continue to be active in deploying new capital. Certainly where we've been focused, and you'll see, is we had increases in the yields at both JVs, so we're certainly focused. focused on depending on the spread for individual investments is continue to deploy at the JV because that's very accretive for investors. And likewise, we've been nicely ramping the SCP JV. So we're trying to find the right balance between to be active on both the new deal front and on share purchases. Okay, thanks. And then just,.

follow up on the other income lines curious on the quarter over quarter decline. Was that due to lower refined amendment activity or what drove that decrease?.

Yes, it was. So last quarter we had more outsized one-time income from repayment activity. One particular repayment had a large repayment fee. So this quarter really more normalized, actually probably a lower level than normal. We had very limited other income this quarter. So I'd say that last quarter was atypically high, and this quarter was actually lower than, let's say, our steady baseline. Okay. All right. Great. Thanks for the call. I appreciate it. Thanks, Justin. Thank you.