Carlyle Secured Lending, Inc. (CGBD) is a publicly traded business development company (BDC) that has been actively investing in the U.S. middle market since 2013. The company's primary focus is on providing direct origination of secured debt instruments, including first lien senior secured loans and second lien senior secured loans, to middle market companies. CGBD's core investment strategy is complemented by opportunistic and diversified lending and investing strategies that leverage the broad capabilities of Carlyle's global credit platform.

CGBD's History of Disciplined Growth Carlyle Secured Lending was formed in February 2012 and commenced investment operations in May 2013. The company is structured as an externally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act. CGBD began trading on the Nasdaq Global Select Market under the symbol CGBD in June 2017 upon completion of its initial public offering. Prior to the IPO, the company raised capital through private placements starting with its initial closing in May 2013.

In its early years, Carlyle Secured Lending focused on lending to U.S. middle market companies, with a core strategy of originating first and second lien senior secured loans. The company has sought to supplement this core strategy with differentiated and complementary lending and investing approaches that leverage the broad capabilities of Carlyle's global credit platform.

Throughout its history, CGBD has faced various challenges. In 2015, the company completed a $400 million term debt securitization, which was later refinanced in 2018. The company has also navigated changes in the regulatory landscape, including the reduction in the required asset coverage ratio for BDCs from 200% to 150% in 2018. Additionally, Carlyle Secured Lending has had to manage periods of market volatility and economic uncertainty that have impacted its portfolio companies and investment activities.

Over the past decade, the company has grown its investment portfolio to $1.71 billion as of September 30, 2024, comprised of 175 investments across 128 portfolio companies and 26 industries. The portfolio is heavily weighted towards first lien senior secured loans, which make up 72.2% of total investments at fair value. Additionally, 94% of the portfolio is invested in senior secured loans, providing a stable and diversified foundation.

CGBD's consistent performance has been underpinned by its disciplined investment approach and access to Carlyle's extensive resources and global credit platform. The company has maintained a well-diversified portfolio, with the average exposure to any single portfolio company at less than 1% of total investments. This risk-mitigating strategy has allowed CGBD to navigate various economic cycles and market environments, delivering consistent income and solid credit performance to shareholders.

Resilient Financial Performance CGBD's financial performance in the third quarter of 2024 highlighted the strength of its portfolio and investment strategy. The company reported net investment income of $0.47 per share, with an adjusted net investment income of $0.49 per share, representing an annualized yield of nearly 12% based on the company's September 30, 2024 net asset value (NAV) of $16.85 per share.

The company's Board of Directors declared a total fourth-quarter dividend of $0.45 per share, comprising a base dividend of $0.40 and a supplemental dividend of $0.05. This dividend level reflects CGBD's variable payout policy, which aims to distribute at least 50% of excess earnings to shareholders. The company's base dividend coverage remained strong at 118% for the quarter, and CGBD has consistently out-earned its dividend, resulting in $1.40 per share of cumulative spillover income.

Despite some expected near-term pressure on earnings due to lower base rates, tighter new issue spreads, and portfolio repricing activity, CGBD remains confident in its ability to meet and exceed its $0.40 base dividend going forward. The company's diversified portfolio, disciplined underwriting, and active portfolio management have enabled it to navigate market cycles and deliver consistent income to shareholders.

Strengthening the Balance Sheet and Optimizing Financing CGBD has been proactive in improving its balance sheet and financing position to support its investment strategy and growth objectives. In July 2024, the company completed a reset of its 2015-1 collateralized loan obligation (CLO), extending the reinvestment period and maturity date by four years and reducing the cost of debt within that vehicle by more than 20 basis points.

More recently, in October 2024, CGBD issued $300 million of unsecured notes with a 6.75% fixed rate, which it swapped to a floating interest rate of SOFR plus 3.23% beginning in August 2025. This transaction further diversifies the company's financing sources, repays the 2020 unsecured notes that mature in December, and provides additional capital to fund new investment opportunities.

As of September 30, 2024, CGBD's statutory leverage stood at approximately 1.05 times, and its net financial leverage was about 0.9 times, placing the company at the low end of its 0.9x to 1.25x target range. This conservative leverage profile, coupled with ample liquidity, positions CGBD to capitalize on the current robust deal environment and deploy capital into attractive opportunities.

Merger with Carlyle Secured Lending III In August 2024, CGBD announced a merger agreement with Carlyle Secured Lending III (CSL III), a Carlyle-managed BDC. The proposed transaction is expected to close in the first quarter of 2025, subject to CGBD stockholder approval and satisfaction of other customary closing conditions.

The merger is expected to provide several strategic benefits to CGBD shareholders, including increased scale and liquidity, reduced costs through operational efficiencies, and accretion to both earnings and NAV per share. Notably, Carlyle has agreed to exchange its existing convertible preferred shares for common stock at a price of NAV, rather than the existing dilutive conversion price, which CGBD believes is a shareholder-friendly move that demonstrates Carlyle's support for the ongoing success of the combined entity.

CGBD and CSL III's investment portfolios and business models are highly complementary, and the combined company is expected to benefit from enhanced origination capabilities, a larger and more diverse investment pipeline, and greater operational efficiencies. The merger is expected to position the combined entity for continued success in the middle market lending space.

Resilient and Stable Cash Flow CGBD's performance in the third quarter of 2024 and its outlook for the remainder of the year highlight the company's ability to deliver a resilient and stable cash flow stream to investors. Despite some near-term pressure on earnings, CGBD remains committed to maintaining its $0.40 base dividend and continuing to distribute excess earnings through its supplemental dividend policy.

The company's diversified portfolio, conservative leverage profile, and access to Carlyle's extensive resources and origination capabilities position CGBD for continued success in the middle market lending space. As the company navigates the current market environment and integrates with CSL III, investors can expect CGBD to continue its track record of consistent income and solid credit performance.

Financials CGBD's financial performance has been solid, as evidenced by its third quarter 2024 results. The company reported net investment income of $0.47 per share and adjusted net investment income of $0.49 per share. These figures represent an annualized yield of nearly 12% based on the company's September 30, 2024 net asset value of $16.85 per share. The company's total investment portfolio stood at $1.71 billion as of September 30, 2024, spread across 175 investments in 128 portfolio companies and 26 industries.

For the most recent fiscal year ending December 31, 2023, CGBD reported revenue of $101.09 million and net income of $92.28 million. The company's operating cash flow (OCF) and free cash flow (FCF) for the same period were both $230.61 million.

In the most recent quarter ending September 30, 2024, CGBD reported revenue of $44.49 million and net income of $19.61 million. The company's OCF and FCF for the quarter were both $178.78 million.

Investment Portfolio CGBD's investment portfolio is well-diversified and primarily focused on secured debt investments in U.S. middle market companies. As of September 30, 2024, the portfolio consisted of the following main components:

First Lien Debt: $1.23 billion across 135 investments, representing 72.2% of the total investment portfolio at fair value.

Second Lien Debt: $121.84 million across 8 investments, representing 7.1% of the total investment portfolio at fair value.

Equity Investments: $109.63 million across 29 investments, representing 6.4% of the total investment portfolio at fair value.

Investment Funds: $243.97 million in two private credit funds (Middle Market Credit Fund, LLC and Middle Market Credit Fund II, LLC), representing 14.3% of the total investment portfolio at fair value.

The weighted average yield on debt and income-producing investments was 12.3% based on fair value.

Liquidity CGBD maintains a strong liquidity position, which is crucial for its operations and ability to capitalize on investment opportunities. As of September 30, 2024, the company's statutory leverage was approximately 1.05 times, with net financial leverage at about 0.9 times. This places CGBD at the low end of its target range of 0.9x to 1.25x. The company's recent issuance of $300 million in unsecured notes further enhances its liquidity position and provides additional capital for new investments.

CGBD's debt-to-equity ratio stood at 1.05x as of September 30, 2024. The company had $68.67 million in cash and $286.14 million available on its credit line. CGBD maintains a senior secured revolving credit facility with a maximum principal amount of $790 million, subject to availability based on the value of the company's portfolio investments.

The company's current ratio and quick ratio both stood at 2.00 as of September 30, 2024, indicating a strong ability to meet short-term obligations.

Outlook and Guidance While CGBD expects to see some contraction in earnings in the coming quarters relative to the historical highs achieved over the last two years, the company remains confident in its ability to meet and exceed the $0.40 base dividend. This expected contraction is due to a combination of lower base rates, tighter new issue spreads, and portfolio repricing activity.

CGBD anticipates its leverage to be around 1.1x at the time of the merger close with CSL III, with current leverage around 0.95x and expected to be over 1.0x by quarter-end. The company is seeing a meaningful and increasing pipeline of investment opportunities and expects M&A activity to continue to pick up in Q4 2024 and Q1 2025.

In conclusion, Carlyle Secured Lending, Inc. (CGBD) is a well-established and disciplined BDC that has demonstrated its ability to generate consistent income and navigate various market cycles. With a robust and diversified investment portfolio, a strengthened balance sheet, and the strategic benefits of the proposed merger with CSL III, CGBD is primed for continued success in the years ahead. The company's focus on maintaining a stable dividend policy while actively managing its portfolio positions it well to deliver value to shareholders in the evolving middle market lending landscape.