425: Carlyle Secured Lending (CGBD) to Merge with Carlyle Secured Lending III in $1 Billion Deal

Carlyle Secured Lending (CGBD) announces a merger agreement with Carlyle Secured Lending III (CSL III) to create a combined entity with over $1 billion in market capitalization, aiming for increased scale, cost savings, and accretion to both earnings and NAV per share.

Summary

• Carlyle Secured Lending (CGBD) has entered into a merger agreement with Carlyle Secured Lending III (CSL III).
• The merger aims to create a larger, more liquid entity with an anticipated market capitalization exceeding $1 billion.
• Carlyle will exchange its convertible preferred shares at NAV, avoiding potential dilution of 5% to 8% for CGBD shareholders.
• The merger is expected to reduce annual costs by approximately $2.5 million through increased scale and streamlined processes.
• The combined company's expense ratio is projected to improve to approximately 70 basis points on net assets.
• The transaction is structured with a floating exchange rate, potentially enabling NAV accretion if CGBD trades at a premium to NAV shortly before the merger close.
• An affiliate of Carlyle will cover certain merger-related expenses up to $5 million.
• CGBD's net investment income for Q2 2024 was $0.51 per share, representing an annualized yield of over 12% based on the June 30th NAV.
• The Board of Directors declared a total third quarter dividend of $0.47 per share, including a base dividend of $0.40 and a supplemental dividend of $0.07.
• CGBD's net asset value as of June 30th was $16.95 per share, down $0.12 from March 31st.
• The merger is expected to close in Q1 2025, subject to shareholder and regulatory approvals.

Sentiment

Score: 8

Explanation: The document presents a positive outlook due to the strategic merger, expected cost savings, and potential accretion to NAV and NII. While there are some negative aspects like the decrease in NAV and increase in non-accruals, the overall tone is optimistic.

Positives

• The merger is expected to increase scale and liquidity, potentially attracting more institutional investors.
• Elimination of Carlyle's preferred shares at NAV avoids dilution for CGBD shareholders.
• Cost savings of approximately $2.5 million are anticipated.
• The expense ratio is expected to improve to around 70 basis points.
• The transaction is accretive to both NAV per share and net investment income per share.
• Carlyle's commitment to cover merger-related expenses up to $5 million protects CGBD shareholders.
• The floating exchange rate structure allows CSL III shareholders to participate in upside if CGBD is trading above NAV shortly before the close of the merger.
• Carlyle will be subject to a two-year tiered lockup following the exchange, reinforcing Carlyle's continued long-term commitment to CGBD.

Negatives

• NAV decreased by $0.12 per share in Q2 2024 due to unrealized depreciation from some watchlist names.
• Non-accruals increased this quarter to 1.8% of total investments at fair value as we added a net two borrowers nonaccrual status.

Risks

• The merger is subject to shareholder and regulatory approvals, and may not be completed.
• The anticipated benefits of the merger, including cost savings and accretion, may not be fully realized.
• The market environment could become more volatile, impacting portfolio performance.
• There are risks associated with possible disruption in the operations of CGBD and CSL III or the economy generally due to terrorism, war or other geopolitical conflict.

Future Outlook

The company anticipates the merger closing in Q1 2025 and expects the transaction to be accretive to both NAV per share and net investment income per share. They remain confident in their ability to comfortably meet and exceed their $0.40 base dividend and continue paying out supplemental dividends each quarter.

Management Comments

• Justin Plouffe: 'We believe this transaction will deliver a number of strategic benefits, including an increase in scale and liquidity, elimination of the preferred stock held by Carlyle, a reduction in costs and an increase in operational efficiencies and accretion to both earnings and NAV per share.'
• Justin Plouffe: 'Carlyle is committed to the long-term success of CGBD and we believe that this transaction will benefit shareholders of both CGBD and CSL III.'
• Thomas Hennigan: 'The transaction has been structured with a floating exchange rate construct that enables the potential for additional NAV per share accretion at close.'

Industry Context

The announcement comes amid increasing activity in the sponsored direct lending market, driven by strong refinancing, recapitalization, and M&A activity. The merger reflects a trend towards consolidation in the BDC sector to achieve greater scale and efficiency.

Comparison to Industry Standards

• The projected expense ratio of under 70 basis points on net assets is competitive within the BDC industry.
• The base dividend coverage of 128% for the quarter remains above the BDC peer set average.
• Other BDCs such as Ares Capital Corporation (ARCC) and Owl Rock Capital Corporation (ORCC) also focus on directly originated, primarily first lien, sponsor-backed loans to U.S. companies in the middle market.

Stakeholder Impact

• Shareholders of CGBD are expected to benefit from increased scale, liquidity, and potential accretion to NAV and NII.
• Shareholders of CSL III will gain access to the liquidity of a listed BDC and the potential to trade at a premium to NAV.
• The merger is expected to improve operational efficiencies and reduce costs, potentially benefiting employees.
• The combined company will continue to focus on providing financing to middle market companies, supporting their growth and development.

Next Steps

• File a proxy and registration statement with the SEC.
• Solicit merger approval from CGBD shareholders.
• Obtain certain regulatory approvals.
• Satisfy or waive other customary closing conditions.
• Call all remaining uncalled capital from CSL III shareholders.
• Return CGBD to the midpoint of the target leverage range.

Key Dates