Carlyle Secured Lending, Inc. (NASDAQ:CGBD) is a specialty finance company that operates as a closed-end, externally managed, non-diversified management investment company. The company has elected to be regulated as a business development company (BDC) under the Investment Company Act and has operated its business as a BDC since it began its investment activities.

Business Overview

Carlyle Secured Lending's investment objective is to generate current income and, to a lesser extent, capital appreciation primarily through assembling a portfolio of secured debt investments in U.S. middle market companies. The company's core investment strategy focuses on lending to U.S. middle market companies, which it defines as companies with approximately $25 million to $100 million of earnings before interest, taxes, depreciation and amortization (EBITDA), supported by financial sponsors. This core strategy is opportunistically supplemented with differentiated and complementary lending and investing strategies, which take advantage of the broad capabilities of Carlyle's Global Credit platform while offering risk-diversifying portfolio benefits.

Carlyle Secured Lending seeks to achieve its investment objective primarily through direct origination of secured debt instruments, including first lien senior secured loans and second lien senior secured loans, with a minority of its assets invested in higher yielding investments. The company is externally managed by Carlyle Global Credit Investment Management L.L.C., a wholly-owned subsidiary of The Carlyle Group Inc. and an investment adviser registered under the Investment Advisers Act of 1940.

Financials

For the full year 2023, Carlyle Secured Lending reported annual net income of $92,280,000, annual revenue of $220,388,000, annual operating cash flow of $76,231,000, and annual free cash flow of $76,231,000.

In the first quarter of 2024, the company generated net investment income of $0.54 per share, representing an annualized yield of nearly 13% based on its March 31, 2024 net asset value (NAV) of $17.07 per share. This was a slight decrease from the prior quarter's all-time high of $0.56 per share, but still well above the prior year comparable period. The company's Board of Directors declared a total second quarter dividend of $0.47 per share, consisting of a $0.40 base dividend and a $0.07 supplemental dividend.

Carlyle Secured Lending's NAV increased from $16.99 per share as of December 31, 2023 to $17.07 per share as of March 31, 2024, primarily driven by its Q1 2024 earnings exceeding the dividend. The company's net financial leverage decreased to 0.95x as of March 31, 2024, down from 1.02x as of December 31, 2023, as it maintained a conservative approach to leverage.

Portfolio and Investment Activity

As of March 31, 2024, Carlyle Secured Lending held 174 investments across 131 portfolio companies and 26 industries, with a total fair value of $1.8 billion. The portfolio was highly diversified, with the median EBITDA across the core portfolio at the end of the quarter being $81 million. The company's average exposure in any single portfolio company was less than 1%, and 95% of its investments were in senior secured loans.

During the first quarter of 2024, Carlyle Secured Lending had investment fundings of $94.9 million and investment repayments of $173.4 million. The company's nonaccrual investments decreased significantly to 0.2% of the total portfolio based on both amortized cost and fair value, down from 2.1% as of December 31, 2023. This improvement was driven by the successful recapitalization of Dermatology Associates and the exit of its investment in Direct Travel.

Market Environment and Outlook

Activity in the private credit markets picked up in the first quarter of 2024 as the reopening of the syndicated loan market and tighter terms drove overall refinancing activity and rebalancing of private and public credit markets. Leveraged buyout (LBO) activity has increased in 2024, and the broader M&A market is expected to become more active in the second half of the year, which Carlyle Secured Lending expects to result in an uptick in origination volume.

While pricing pressure has increased, particularly in the U.S. upper-middle market, the core middle market where Carlyle Secured Lending operates continues to be comparatively less volatile. Originations in the first quarter were up over 30% year-over-year, and the company's pipeline continues to expand with both regular way and differentiated deal flow.

Carlyle Secured Lending remains focused on its core middle-market strategy and benefits from the differentiation provided by its access to the broader Carlyle platform while maintaining its ability to be dynamic in response to market changes. The company is well-positioned to take advantage of the current market environment, with a conservative balance sheet and ample liquidity to deploy capital into attractive opportunities.

Risks and Challenges

As with any investment, Carlyle Secured Lending faces certain risks and challenges. These include exposure to changes in interest rates, potential deterioration in the credit quality of its portfolio companies, and competition from other lenders and investment vehicles. The company also relies on its external manager, Carlyle Global Credit Investment Management, to successfully execute its investment strategy.

Additionally, as a BDC, Carlyle Secured Lending must comply with various regulatory requirements, such as maintaining a minimum asset coverage ratio and diversifying its investments. Failure to meet these requirements could have adverse consequences for the company and its shareholders.

Conclusion

Carlyle Secured Lending has demonstrated a consistent and disciplined approach to direct lending, anchored in prudent credit selection and conservative portfolio management. The company's strong financial performance, stable portfolio, and reduced nonaccruals in the first quarter of 2024 highlight the successful execution of its strategy.

With a well-positioned balance sheet, ample liquidity, and a robust pipeline of investment opportunities, Carlyle Secured Lending is poised to continue delivering a nonvolatile cash flow stream to its investors through consistent income and solid credit performance. The company's focus on the core middle market, combined with the differentiation provided by its access to the broader Carlyle platform, positions it well to navigate the evolving market environment and capitalize on attractive investment opportunities.