Executive Summary / Key Takeaways

• Carlyle Secured Lending, Inc. (CGBD) is strategically enhancing its scale and operational efficiency through recent mergers and capital structure optimizations, positioning itself as a resilient income generator in the U.S. middle-market direct lending space.
• The company's core investment thesis centers on a defensive, diversified first-lien strategy, bolstered by the extensive Carlyle Global Credit platform and a disciplined underwriting approach, yielding consistent credit performance.
• Despite near-term earnings headwinds from historically tight market spreads and the SOFR curve, CGBD maintains its $0.40 per share quarterly dividend, supported by a robust spillover income buffer and long-term growth drivers from its optimized joint ventures.
• Recent financial performance in Q3 2025 reflects portfolio growth and capital structure improvements, with statutory leverage at a healthy 1.1x and a 100% floating-rate debt stack aligning with its asset base.
• The outlook is positive for increased deal flow in late 2025 and 2026, driven by declining base rates and policy normalization, while strategic expansion of its origination team and pursuit of new joint ventures are set to unlock future income streams.

A Foundation of Discipline in Middle-Market Direct Lending

Carlyle Secured Lending, Inc. (CGBD), established in February 2012, operates as a Business Development Company (BDC) with a clear mandate: to generate current income and, to a lesser extent, capital appreciation by investing primarily in secured debt of U.S. middle-market companies. This core strategy targets companies with EBITDA typically ranging from $25 million to $100 million, often backed by financial sponsors. CGBD's approach is inherently defensive, emphasizing first-lien senior secured loans, which constituted 85.70% of its total investments at fair value as of September 30, 2025. This focus is opportunistically complemented by a minority allocation to higher-yielding investments, including second-lien debt and equity.

The broader private credit market has experienced significant growth, with U.S. private credit surging to a record $1.8 trillion, as BDCs effectively fill a substantial financing gap for small and medium-sized businesses. This industry trend underscores the relevance of CGBD's market niche. Within this landscape, CGBD differentiates itself through its affiliation with Carlyle, a global investment firm. This relationship provides access to Carlyle's Global Credit platform, a critical operational differentiator. The platform encompasses over 195 investment professionals with deep expertise across multiple asset classes, supported by a robust team of finance, operations, and administrative staff. This human capital and network serve as CGBD's "technology," enabling superior deal sourcing, rigorous risk assessment, and the ability to craft tailored financing solutions. The effectiveness of this platform is evident in CGBD's selective underwriting, which maintained a close rate of approximately 5% on new deals over the last twelve months, coupled with an average loan-to-value under 40% for its originations. This disciplined approach is foundational to CGBD's consistent credit performance and long-term growth strategy.

CGBD's history reflects a strategic evolution to enhance its market position and operational capabilities. Following its IPO in June 2017, the company expanded its investment capacity through co-managed vehicles like Middle Market Credit Fund, LLC (Credit Fund I) and Middle Market Credit Fund II, LLC (Credit Fund II). Recent strategic transformations in 2024 and 2025 further solidified its foundation. Notably, CGBD achieved investment-grade ratings from Fitch and Moody's in September 2024, paving the way for its inaugural institutional bond deal. The consolidation of Credit Fund II onto its balance sheet in February 2025 and the strategic merger with Carlyle Secured Lending III (CSL III) in March 2025 significantly increased CGBD's scale and liquidity. The CSL III merger, in particular, eliminated a preferred stock dilution overhang by converting Carlyle's preferred shares into common stock at Net Asset Value (NAV), demonstrating strong sponsor alignment and a commitment to reducing aggregate costs. These historical milestones underscore CGBD's proactive stance in adapting its structure and capabilities to market dynamics, setting the stage for its current strategic responses and competitive positioning.

Performance and Strategic Execution in a Dynamic Market

CGBD's financial performance in the third quarter of 2025 reflects both the benefits of strategic growth and the pressures of the current market environment. Net investment income (NII) for the quarter stood at $26.84 million on a GAAP basis, or $0.37 per common share, rising from the comparable period in 2024. This increase was primarily driven by a higher average outstanding investment balance, a direct result of robust net origination activity and the integration of assets from the CSL III Merger and Credit Fund II Purchase. However, on a quarter-over-quarter basis, NII saw a modest decline from Q2 2025, mainly due to a decrease in the accretion of discounts from repayment activity and slightly lower weighted average yields across the portfolio. Other income, however, saw an increase in Q3 2025, primarily from higher prepayment fees.

The company's investment portfolio expanded from $2.3 billion to $2.4 billion during Q3 2025, measured at amortized cost, with total assets increasing from $1.9 billion to $2.5 billion in Q1 2025 following the CSL III merger. As of September 30, 2025, the weighted average yield of CGBD's total debt and income-producing investments was 10.60% based on amortized cost. Expenses saw an uptick, with interest expense and credit facility fees increasing due to the 2030 Notes transitioning from a fixed to a floating rate swap and higher average outstanding borrowings. Base management fees also rose, reflecting the growth in average gross assets.

Credit quality remains a cornerstone of CGBD's strategy. Non-accrual investments decreased to 1.6% of total investments at cost and 1% at fair value as of September 30, 2025, down from 2.1% in the prior quarter. This improvement was largely attributed to the successful restructuring of Arch Maverick, now Align Precision Group, LLC. The weighted average Internal Risk Rating for the first and second lien debt portfolio remained stable at 2.10. Management emphasizes that while non-accrual rates may fluctuate, the company is adept at leveraging the broader Carlyle network to maximize recoveries for underperforming borrowers.

CGBD's liquidity and capital resources are robust, with total liquidity reaching $594.60 million as of September 30, 2025, comprising cash and undrawn debt capacity.

The statutory debt-to-equity ratio stood at a healthy 1.10x, well within the target range and in compliance with the minimum 150% asset coverage requirement. Post-Q3, CGBD further optimized its capital structure by raising a new $300 million institutional unsecured bond in October 2025, repaying the higher-priced legacy CSL III credit facility, and announcing the redemption of its $85 million 2028 Notes. These actions are projected to lower the weighted average cost of borrowing by 10 basis points, extend the maturity profile with limited maturities until 2030, and result in a 100% floating-rate debt stack, effectively matching its primarily floating-rate asset base. This strategic alignment positions CGBD favorably for future interest rate cuts.

Competitive Landscape and Strategic Outlook

CGBD operates within a competitive BDC landscape, facing direct rivals such as Ares Capital Corporation (ARCC), Prospect Capital Corporation (PSEC), Golub Capital BDC (GBDC), and Main Street Capital Corporation (MAIN). CGBD's competitive standing is characterized by its specialized focus on middle-market debt and its affiliation with the Carlyle Group. While larger competitors like ARCC may boast greater scale and broader diversification, CGBD distinguishes itself through its targeted lending approach, deep sector expertise in areas like high-tech and healthcare, and a global investment reach that includes the UK and Cayman Islands. This allows CGBD to offer tailored financing solutions and potentially achieve stronger risk-adjusted returns in its chosen markets.

CGBD's operational differentiators, rooted in the Carlyle Global Credit platform, provide a competitive moat. The platform's extensive network and rigorous risk assessment capabilities enable superior deal sourcing and disciplined underwriting, which are critical in a market where spreads are historically tight. This contrasts with more aggressive strategies seen from some peers, like PSEC, by prioritizing stability and credit quality. Against GBDC, known for its disciplined lending, CGBD's global reach offers a broader geographic value proposition, potentially enhancing strategic adaptability.

However, CGBD is not without vulnerabilities. Its exposure to interest rate changes, despite hedging strategies, and a degree of sector concentration in high-tech and healthcare could pose risks during economic downturns or industry-specific headwinds. While the company has minimal direct exposure to tariff risks (estimated at less than 5% of the portfolio), broader economic slowdowns stemming from trade policy shifts remain a concern.

Looking ahead, CGBD's management is optimistic about future growth. Deal flow at the top of the funnel increased nearly 30% year-over-year in the two months leading up to the Q3 2025 earnings call, with expectations for continued activity into Q4 2025 and 2026. This is anticipated to be supported by declining base rates, normalization of tariff and regulatory policies, and resilient economic growth. The company is comfortable maintaining its $0.40 per share quarterly dividend, backed by an estimated $0.86 to $0.89 per share of spillover income, which provides a buffer against near-term earnings pressure from the SOFR curve. Management anticipates earnings will "trough in the next couple of quarters" before building up in the second half of 2026 and into 2027.

A significant part of CGBD's long-term growth strategy revolves around its joint ventures. The existing MMCF JV's credit facility was upsized to $800 million, with increased equity commitments, aiming for a mid-teens return on assets for CGBD, with potential for a 300 to 500 basis point increase. Furthermore, CGBD is in advanced discussions for a new joint venture with a different investment strategy, targeting a close by Q4 2025. These JVs are viewed as "long-term drivers of increased income," providing strategic flexibility and leveraging Carlyle's global credit expertise. The ongoing expansion of the Carlyle Direct Lending team, including new hires in origination and the upcoming arrival of Alex Chi as Head of Direct Lending, further underscores CGBD's commitment to enhancing its capabilities and capitalizing on anticipated increases in capital markets activity.

Conclusion

Carlyle Secured Lending, Inc. stands as a compelling investment proposition within the U.S. middle-market direct lending sector, characterized by its disciplined, first-lien focused strategy and the formidable backing of the Carlyle Global Credit platform. The company's recent strategic maneuvers, including the CSL III merger and capital structure optimizations, have significantly enhanced its scale, efficiency, and financial resilience. While CGBD acknowledges near-term headwinds from tight market spreads and interest rate dynamics, its commitment to a stable $0.40 per share quarterly dividend, supported by substantial spillover income, provides a clear income stream for investors.

The long-term investment thesis for CGBD is firmly rooted in its ability to leverage its operational differentiators, expand its joint venture programs, and capitalize on an anticipated pickup in deal flow. The strategic investment in human capital and platform development, exemplified by key leadership hires and team expansion, positions CGBD to drive future income growth and maintain its competitive edge. Despite inherent industry risks and competitive pressures, CGBD's unwavering focus on high-quality underwriting, portfolio diversification, and strategic capital management underpins its potential for sustained performance and value creation for its discerning investment audience.