Carlyle Secured Lending (NASDAQ:CGBD) is a specialized financial company doing business as a business development company (“BDC”). The BDC is focusing on secured debt investments in middle market companies (with a market capitalization of $25-100 million). Carlyle focuses on companies whose debt would be rated below investment grade. At the end of September, Carlyle Secured Lending had approximately $1.87 billion in investments with approximately 99% of debt comprised of variable rate debt with 68% of investments classified as first lien debt. The weighted average return on its investments increased to 12.7%
CGBD has approximately 50.8 million shares outstanding, resulting in a current market capitalization of approximately $760 million. But rather than focusing on Carlyle Secured Lending’s equity, I’m more interested in recently issued debt securities, which are trading smartly.h (NASDAQ:CGBDL) as ticker symbol.
A look at Carlyle Secured Lending’s performance
I am obviously very interested in the net investment income generated by this BDC. As the income statement below shows, Carlyle Secured Lending reported total investment income of $60.5 million while total expenses amounted to $32.5 million resulting in a net investment income of $28 million and about 27.1 million dollars after making excise expenses.
Looking at the breakdown of expenses, we see that about $12.6 million of expenses were paid as a management fee and an incentive fee. Additionally, Carlyle Secured Lending paid approximately $18.2 million in interest expense.
BDC also generated some investment gains and its bottom line shows net income of $30 million for the quarter and after making $875,000 in preferred dividend payments, net income attributable to its common shareholders was $29.1 million dollars or $0.57 per share. Net investment income was $0.52 per share. Which means that the current dividend of $0.37 as well as the additional dividend of $0.07 per share were (and are) fully covered. $0.44 in dividends will be paid on January 18th th for ordinary shareholders of record in December 29, 2023.
Looking at the balance sheet, we see that CGBD has about $1.96 billion in total assets, of which $1.86 billion are investments. The remainder of the assets consists of cash ($55 million) and interest and dividends receivable ($33.5 million). On the liability side, we see about $1.05 billion in total liabilities, of which $1 billion is debt. After deducting the cash position, Carlyle has a net debt position of approximately $950 million representing approximately 51% of the total investment book.
As you can see above, the NAV/share was $16.86 which means the stock is trading at a slight discount to its NAV.
Instead of being a shareholder, securing the 2028 debt is an interesting option
Given the December dividend announcement (with the dividend payable in January 2024), Carlyle Secured Lending will pay $1.76/share in dividends for the year. This should be more than fully covered by net investment income and provides a very healthy dividend yield of just over 11%. That makes the common stock very attractive, but I was also very interested in Carlyle’s recent offering of 8.20% notes, which are currently trading smartlyh (CGBDL) as ticker symbol.
The principal amount per security is $25 and the annual interest payments are $2.05 per unit per year, payable in four equal installments quarterly payments of $0.5125 per quarter. These debt securities mature in December 2028, but Carlyle Secured Lending may exercise a call option from December 2025 onwards. If interest rates in the financial markets do indeed continue to decline, I think it’s increasingly likely that Carlyle will call these securities, but of course a lot can still happen between now and 2028.
The most recent closing price for the 2028 notes was $25.77. Which means the yield to call is currently around 6.5% which is quite moderate. But in a way, this debt guarantee can also be seen as a speculation for Carlyle Secured Lending not to call the securities in 2025. If the call were delayed until December 2026, the yield on the call would increase to approximately 7%. And if CGBD were not to call these securities at all, the yield to maturity is approaching 7.5%. And this scenario would be attractive.
If you are assuming that the debt securities will be called in 2025, the 6.5% yield to call is not spectacular. But given the very acceptable leverage ratio on the balance sheet and the very strong net investment income result, the risk/reward ratio still appears to be good. Not least because the total size of this offer is only 75 million dollars. In an ideal world, the securities will not be called and will mature as planned in 2028 as this is likely to be the most optimal situation from a return perspective. But if interest rates in the financial markets are indeed falling, the likelihood that a debt guarantee of 8.20% will be called is higher.
I think it would make sense for me to initiate a small long term position and may add to this position when/if the price falls to a level closer to the face value of $25 per unit. I don’t currently have any positions, but I may buy an initial position in the next few weeks. Owning a combination of equity and debt can also make sense, but I will focus on debt securities in the very near term.