10-Q: Carlyle Secured Lending Q2 2025: Portfolio Growth & Merger Impact

Carlyle Secured Lending reports increased investment income and portfolio growth in Q2 2025, driven by recent mergers, despite a slight decrease in net asset value per common share.

Summary

• Net investment income was $28.3 million ($0.39 per common share) for the three months ended June 30, 2025, an increase from $21.6 million ($0.40 per common share) for the three months ended March 31, 2025.
• Net investment income for the six months ended June 30, 2025, was $49.9 million, a decrease from $55.3 million for the same period in 2024.
• Basic earnings per common share was $0.20 for the three months ended June 30, 2025, down from $0.25 for the three months ended March 31, 2025, and $0.35 for the three months ended June 30, 2024.
• Basic earnings per common share for the six months ended June 30, 2025, was $0.45, a significant decrease from $0.91 for the same period in 2024.
• Dividends declared on common shares were $0.40 per share for the three months ended June 30, 2025.
• Net asset value (NAV) per common share decreased to $16.43 as of June 30, 2025, from $16.63 as of March 31, 2025, and $16.80 as of December 31, 2024.
• Total investments at fair value reached $2.3 billion as of June 30, 2025, comprising 202 investments across 148 portfolio companies and 28 industries.
• The investment portfolio's amortized cost increased from $2.2 billion to $2.3 billion during the second quarter of 2025, driven by net origination activity, including assets acquired in the CSL III Merger and the Credit Fund II Purchase.
• Non-accrual investments represented 3.0% of the portfolio based on cost and 2.1% based on fair value as of June 30, 2025.
• Total liquidity stood at $613.1 million as of June 30, 2025, including cash and undrawn debt capacity.
• The asset coverage ratio improved to 190.8% as of June 30, 2025, from 183.2% as of December 31, 2024.
• The weighted average yield on total debt and income-producing investments (at amortized cost) was 10.9% as of June 30, 2025, a decrease from 12.7% as of June 30, 2024.
• Total principal amount of debt outstanding increased to $1,318.6 million as of June 30, 2025, from $978.4 million as of December 31, 2024.

Sentiment

Score: 4

Explanation: The company experienced significant portfolio growth through strategic mergers and maintained strong liquidity. However, key profitability metrics like EPS and NAV per share declined, and non-accrual investments increased, indicating some underlying performance challenges despite the growth in assets. The decrease in weighted average yield also suggests a less favorable return environment.

Positives

• Net investment income for the three months ended June 30, 2025, increased to $28.3 million from $21.6 million in the prior quarter.
• The company achieved significant portfolio growth, with total investments at fair value reaching $2.3 billion, primarily driven by the CSL III Merger and Credit Fund II Purchase.
• Total liquidity remains strong at $613.1 million, providing ample resources for future investments and obligations.
• The asset coverage ratio improved to 190.8% as of June 30, 2025, indicating a stronger financial position relative to debt.
• Subsequent to the quarter-end, total commitments under the Credit Facility were increased by $25 million to $960 million, enhancing borrowing capacity.

Negatives

• Net asset value per common share decreased to $16.43 as of June 30, 2025, from $16.80 as of December 31, 2024.
• Basic earnings per common share for the six months ended June 30, 2025, significantly declined to $0.45 from $0.91 in the comparable prior year period.
• Net investment income for the six months ended June 30, 2025, decreased to $49.9 million from $55.3 million in the comparable prior year period.
• The weighted average yield on total debt and income-producing investments (at amortized cost) decreased to 10.9% as of June 30, 2025, from 12.7% as of June 30, 2024.
• Non-accrual investments increased to 2.1% of the portfolio's fair value as of June 30, 2025, up from 0.6% as of December 31, 2024.
• The company recognized a net realized loss on investments of $21.9 million for the six months ended June 30, 2025, compared to a loss of $15.0 million in the prior year period.
• A significant net change in unrealized currency loss on non-investment assets and liabilities of $10.7 million was recorded for the six months ended June 30, 2025.

Risks

• Investments generally do not have a readily available market price, requiring significant judgment in determining fair value, which may fluctuate and differ materially from actual values if a ready market existed.
• Fluctuations in interest rates can materially impact net cash flow generated from interest income and expense.
• Tariffs imposed on foreign goods or U.S. goods could adversely affect portfolio companies' production costs or product demand.
• The company's investments are primarily in below-investment-grade debt, which has predominately speculative characteristics and is illiquid.
• A portion of investments are financed with borrowed money, and changes in interest rates on borrowings may significantly impact net interest income.
• Uncertainty surrounding the financial stability of the United States, Europe, and China, including a possible U.S. federal government shutdown, could impact the business.
• Geopolitical tensions, such as Russia's military invasion of Ukraine and developments in the Middle East, could adversely affect the company.
• Competition with other entities and affiliates for investment opportunities poses a risk.
• There is no assurance of recovering unrealized losses on investments.
• Information technology system failures, data security breaches, data privacy compliance issues, network disruptions, and cybersecurity attacks could impact operations.

Future Outlook

The company intends to continue to qualify annually as a regulated investment company (RIC) and aims to generate current income and capital appreciation primarily through secured debt investments in U.S. middle market companies. Management anticipates using current cash, available Credit Facilities, and operating cash flows to meet obligations and support investment objectives, with primary uses of funds expected for new and existing portfolio investments, debt repayment, cash distributions, stock repurchases, and general corporate purposes. The company will continue to finance a portion of its investments with borrowings and will regularly assess and manage interest rate risk, including through hedging transactions.

Management Comments

• Net investment income was $28.3 million or $0.39 per common share.
• Adjusted for the financial impact of the purchase premium attributed to the CSL III Merger and purchase discount attributed to the Credit Fund II Purchase, the adjusted net investment income per common share (a non-GAAP financial measure) was $0.39.
• Dividends declared on common shares were $29.2 million, or $0.40 per share.
• Net investment income for the three months ended June 30, 2025, increased from the comparable period in the prior year, primarily due to a higher average outstanding investment balance due to net origination activity in 2025, including assets acquired in the CSL III Merger and the Credit Fund II Purchase in the first quarter of 2025. This was partially offset by lower yields on investments.
• The NAV per common share decreased to $16.43 as of June 30, 2025, from $16.63 as of March 31, 2025.
• As of June 30, 2025, we held 202 investments across 148 portfolio companies and 28 industries for a total fair value of $2.3 billion.
• During the three months ended June 30, 2025, our investment balance increased from $2.2 billion to $2.3 billion driven by net origination activity.
• As of June 30, 2025, non-accrual investments represented 3.0% and 2.1% of our portfolio based on cost and fair value, respectively.
• Total liquidity as of June 30, 2025, was $613.1 million in cash and undrawn debt capacity.
• On July 10, 2025, we increased the total commitments under the Credit Facility by $25 million, resulting in total commitments increasing to $960 million.
• On July 29, 2025, we declared common stock dividends of $0.40 per share to be paid on October 17, 2025.
• We believe our current cash position, available capacity on our Credit Facilities, which is well in excess of our unfunded commitments, and net cash provided by operating activities will provide us with sufficient resources to meet our obligations and continue to support our investment objectives, including reserving for the capital needs which may arise at our portfolio companies.

Industry Context

The company operates as a Business Development Company (BDC), specializing in secured debt investments in U.S. middle market companies, typically those with $25 million to $100 million in EBITDA and supported by financial sponsors. It also employs complementary lending and investing strategies leveraging Carlyle's Global Credit platform. The company primarily invests in below-investment-grade debt, which is inherently speculative. The observed decrease in the weighted average yield on the portfolio from 12.7% to 10.9% could reflect broader industry trends, such as increased competition in the middle-market lending space or a strategic shift towards lower-yielding, potentially less risky, assets within the portfolio.

Corporate Governance

Related Party Transactions

• Paid $1,413 thousand in incentive fees to CSL III Advisor (an affiliate) for pre-merger accruals, which were assumed by the company upon the CSL III Merger.
• Received $1,998 thousand in reimbursable expenses from CSL III Advisor, which were assumed by the company upon the CSL III Merger.
• The Investment Adviser and CSL III Advisor (affiliates) paid $5,000 thousand in merger-related expenses on behalf of the company and CSL III.
• The company and Credit Partners (an affiliate) each received an aggregate return of capital of $62,500 thousand on subordinated loans from Middle Market Credit Fund, LLC.
• The company issued 3,004,808 shares of common stock to CIM (an affiliate) in exchange for 2,000,000 shares of Preferred Stock.
• CIM (an affiliate) entered into a Lock-Up Agreement restricting the transfer of common stock received in the Preferred Stock Exchange for specified periods (one-third released March 22, 2026; one-third September 18, 2026; one-third March 17, 2027).
• Paid underwriting fees to an affiliate of Carlyle for services rendered in connection with the issuance of the 2028 Notes (3.15% of $6.4 million principal) and the 2030 Notes (1.00% of $9.0 million principal).

Stakeholder Impact

• Shareholders: Experienced a decrease in NAV per share and lower EPS, but continue to receive stable dividends. The CSL III Merger and Preferred Stock Exchange resulted in significant common stock issuance, potentially diluting existing shareholders. The stock repurchase program offers potential for value accretion.
• Customers (Portfolio Companies): Benefit from the company's continued lending activities and increased unfunded commitments, supporting their growth and operational needs.
• Creditors: The company's debt levels increased due to acquisitions, but the asset coverage ratio remains above the regulatory minimum, indicating continued compliance with leverage requirements.
• Employees: No direct impact on employees was explicitly mentioned, but the company benefits from the investment professionals and administrative staff provided by Carlyle affiliates.

Next Steps

• The company will pay a quarterly common stock dividend of $0.40 per share on October 17, 2025, to common stockholders of record on September 30, 2025.
• Morgan Stanley has an early termination option for the interest rate swap commencing December 1, 2025.
• The 2030 Notes interest rate swap becomes effective on August 18, 2025.
• $135 million of Credit Facility commitments will terminate on May 25, 2026.
• The company will continue to make mandatory prepayments under the Credit Facility from certain asset sales, recovery events, and equity/debt issuances during the period from May 25, 2026, to March 12, 2030.
• The company is currently evaluating the impact of ASU 2024-03 (disaggregated income statement expense disclosure), which is effective for fiscal years beginning after December 15, 2026.

Key Dates

Recommendation

While the company achieved significant portfolio growth through strategic acquisitions and maintains strong liquidity, key profitability metrics like NAV per share and EPS have declined. The increase in non-accrual investments and a lower weighted average yield on the portfolio suggest potential headwinds. The dividend remains stable, but the overall financial performance indicates a period of integration and potential challenges in yield generation, warranting a 'hold' stance for seasoned investors to observe future trends.

Keywords

Secured Lending, Middle Market, BDC, Business Development Company, Carlyle, Investment Portfolio, Debt Investments, Financial Services, Credit Facility, SEC Filing, 10-Q, Financial Results, Net Asset Value, Earnings Per Share, Non-Accrual Loans, Interest Rate Risk, Merger, Acquisition