10-Q: Carlyle Secured Lending Reports Mixed Q3 Results

Carlyle Secured Lending, Inc. reported increased total investment income but a decline in net investment income per common share and NAV for Q3 2025.

Summary

• Net investment income for the three months ended September 30, 2025, increased to $26.8 million from $24.9 million in the prior year, but decreased to $76.7 million for the nine months from $80.2 million.
• Basic earnings per common share for the quarter was $0.33, down from $0.37 in the prior year, and for the nine months was $0.78, down from $1.28.
• Total investment income rose to $66.5 million for the quarter and $188.7 million for the nine months, driven by a higher average outstanding investment balance.
• Net Asset Value (NAV) per common share decreased to $16.36 as of September 30, 2025, from $16.80 as of December 31, 2024.
• Total investments at fair value grew to $2.42 billion as of September 30, 2025, from $1.80 billion as of December 31, 2024.
• Non-accrual investments increased to $23.5 million (1.0% of portfolio fair value) as of September 30, 2025, from $10.4 million (0.6%) as of September 30, 2024.
• The company's asset coverage ratio improved to 190.6% as of September 30, 2025, from 183.2% as of December 31, 2024.
• Total liquidity stood at $594.6 million as of September 30, 2025, including cash and undrawn debt capacity.

Sentiment

Score: 5

Explanation: Despite significant portfolio growth and strong liquidity, the decline in Net Asset Value per common share and Net Investment Income per common share, coupled with increased non-accrual investments and realized losses, indicates a challenging operating environment for common shareholders. The strategic debt refinancing is a neutral event without further context on terms.

Positives

• Total investment income increased by $10.5 million for the three months and $12.5 million for the nine months ended September 30, 2025, primarily due to a higher average outstanding investment balance.
• Total investments at fair value grew significantly to $2.42 billion as of September 30, 2025, from $1.80 billion as of December 31, 2024.
• The asset coverage ratio improved to 190.6% as of September 30, 2025, indicating stronger financial leverage compliance.
• Total liquidity increased to $594.6 million as of September 30, 2025, providing ample resources for operations and investments.
• Credit Facility commitments were increased by $25 million to $960 million on July 10, 2025.
• Successfully completed a public offering of $300.0 million aggregate principal of 2031 Notes on October 7, 2025.
• Repaid in full the $175.0 million outstanding borrowings of the CSL III SPV Credit Facility on October 2, 2025.

Negatives

• Net investment income per common share decreased to $0.33 for the three months ended September 30, 2025, from $0.37 in the prior year, and to $0.78 for the nine months from $1.28.
• Net investment income for the nine months ended September 30, 2025, decreased by $3.5 million compared to the prior year.
• Net Asset Value (NAV) per common share declined to $16.36 as of September 30, 2025, from $16.80 as of December 31, 2024.
• Total expenses increased by $8.6 million for the three months and $15.9 million for the nine months ended September 30, 2025, partly due to higher interest expense and base management fees.
• Non-accrual investments, based on fair value, increased to $23.5 million (1.0% of portfolio) as of September 30, 2025, from $10.4 million (0.6%) as of September 30, 2024.
• Realized net loss on investments was $16.4 million for the quarter and $38.3 million for the nine months ended September 30, 2025.
• The weighted average yield of total debt and income producing investments decreased to 10.6% as of September 30, 2025, from 11.9% as of September 30, 2024.
• Unfunded commitments for delayed draw and revolving senior secured loans significantly increased to $359.1 million as of September 30, 2025, from $179.2 million as of December 31, 2024.
• The weighted average interest rate on Senior Notes increased to 7.17% for the three months ended September 30, 2025, from 5.75% in the prior year.

Risks

• The company is subject to financial market risks, including changes in the valuations of its investment portfolio and interest rates.
• Investments generally do not have a readily available market price, leading to valuation risk and reliance on management judgment for fair value determination.
• Tariffs may adversely affect the company or its portfolio companies by increasing production costs or reducing demand for products.
• Investments are primarily in below-investment-grade loans, which have predominately speculative characteristics regarding the issuers' capacity to pay interest and repay principal.
• The company's ability to recover unrealized losses is a risk.
• Market conditions and the company's ability to access alternative debt markets and additional debt and equity capital pose risks.
• Uncertainty surrounding the financial stability of the United States, Europe, and China, including a possible shutdown of the U.S. federal government, could impact the business.
• Geopolitical tensions, such as Russia's military invasion of Ukraine and conflicts in the Middle East, along with trade disputes, could affect the company and its portfolio companies.
• Competition with other entities and affiliates for investment opportunities is a continuous risk.
• The speculative and illiquid nature of investments is a fundamental risk.
• The use of borrowed money to finance a portion of investments increases financial risk.
• Impact of information technology system failures, data security breaches, network disruptions, and cybersecurity attacks could be significant.
• The ability to maintain status as a Business Development Company (BDC) and a Regulated Investment Company (RIC) is crucial for operations and tax treatment.

Future Outlook

The company intends to continue to comply with the requirements to qualify annually as a Regulated Investment Company (RIC) and plans to make quarterly distributions to its common stockholders. It expects its current cash position, available capacity on Credit Facilities, and net cash from operating activities to provide sufficient resources for obligations and investment objectives. The company will redeem all outstanding 2028 Notes on December 1, 2025, leading to their delisting from Nasdaq, and Morgan Stanley's related interest rate swap agreement will terminate early on the same date. The company may also repurchase its outstanding debt or shares of common stock.

Management Comments

• Our 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.
• Our core investment strategy focuses on lending to U.S. middle market companies, which we define 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.
• 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 within the U.S. middle market lending sector, specializing in secured debt. Its performance is influenced by broader economic factors such as interest rate fluctuations, which impact both investment income and borrowing costs. The company's focus on below-investment-grade loans highlights its position in a higher-risk, higher-yield segment of the credit market. Geopolitical tensions and trade policies, including tariffs, are noted as potential external factors affecting its portfolio companies and the global economy.

Corporate Governance

Legal Proceedings

• The company is not currently subject to any material legal proceedings, nor is any material legal proceeding threatened against it.
• Portfolio investments of the company could be subject to litigation or regulatory investigations in the ordinary course of business, but the company does not believe the outcome of any current contingent liabilities will materially affect its financial statements.

Related Party Transactions

• The company pays base management fees and incentive fees to Carlyle Global Credit Investment Management L.L.C. (Investment Adviser), a wholly owned subsidiary of The Carlyle Group Inc.
• The company pays administrative service fees to Carlyle Global Credit Administration L.L.C. (Administrator), also a wholly owned subsidiary of The Carlyle Group Inc.
• Sub-administration services are provided by Carlyle Employee Co., an affiliate of the Investment Adviser, and State Street Bank and Trust Company.
• The company has a royalty-free license agreement with Carlyle Investment Management L.L.C. (CIM) to use the 'Carlyle' name and mark.
• The company co-manages Middle Market Credit Fund, LLC (Credit Fund) with Credit Partners USA LLC, with both having 50% economic ownership and commitments to fund capital.
• Prior to February 11, 2025, the company co-managed Middle Market Credit Fund II, LLC (Credit Fund II) with Cliffwater Corporate Lending Fund (CCLF), after which Credit Fund II became a wholly owned subsidiary of the company.
• CIM, an affiliate of Carlyle, exchanged all 2,000,000 outstanding shares of the company's Preferred Stock for 3,004,808 shares of common stock on March 27, 2025, in connection with the CSL III Merger.
• An affiliate of Carlyle received fees for underwriting services 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).
• In connection with the CSL III Merger, the company paid $1.413 million in incentive fees to CSL III Advisor (accrued prior to merger) and received $1.998 million in reimbursable expenses from CSL III Advisor.
• The Investment Adviser and CSL III Advisor paid $5.0 million in merger-related expenses on behalf of the company and CSL III.

Stakeholder Impact

• Shareholders: Experienced a decrease in NAV per common share and NII per common share, but benefit from declared dividends and the ongoing stock repurchase program. Common stock issued in the CSL III Merger and Preferred Stock Exchange diluted existing shares but expanded the shareholder base. Lock-up agreements on shares issued to CIM impact market liquidity for those specific shares.
• Creditors/Lenders: The increase in Credit Facility commitments and issuance of new 2031 Notes provide additional funding, while the repayment of the CSL III SPV Credit Facility and redemption of 2028 Notes represent debt management. The improved asset coverage ratio is positive for debt holders.
• Employees/Management: The Investment Adviser and Administrator continue to receive fees based on the company's assets and performance. The continuation of advisory and administration agreements ensures stability for these related parties.
• Portfolio Companies: Benefit from the company's continued investment activity and access to capital, particularly in the U.S. middle market.

Next Steps

• Redeem all issued and outstanding 2028 Notes on December 1, 2025.
• The 2028 Notes will be delisted from the Nasdaq Global Select Market.
• Morgan Stanley's interest rate swap agreement will terminate early on December 1, 2025.
• Pay common stock dividends of $0.40 per share on January 16, 2026.
• Continue to comply with the requirements to qualify annually as a Regulated Investment Company (RIC).
• Continue to make quarterly distributions to common stockholders.
• The $200 million Stock Repurchase Program is approved for continuation until November 5, 2026, or until the approved dollar amount has been used.

Key Dates

Recommendation

The company demonstrated significant portfolio growth and maintained strong liquidity and asset coverage, which are positive indicators. However, the decline in Net Asset Value per common share and Net Investment Income per common share, coupled with an increase in non-accrual investments and realized losses, suggests underlying challenges. The strategic debt refinancing and new issuance are notable, but the overall financial performance for common shareholders has softened. Given the mixed signals, a 'Hold' recommendation is appropriate for a seasoned investor awaiting clearer signs of sustained earnings growth and NAV appreciation.

Keywords

Secured Lending, Middle Market, BDC, Carlyle, Investment Income, Net Asset Value, Debt Investments, Credit Facility, Senior Notes, Asset Coverage, Non-Accrual Loans, Liquidity, Portfolio Growth, Interest Rate Risk