425: Carlyle Secured Lending to Merge with Carlyle Secured Lending III, Boosting Scale and Eliminating Preferred Stock Dilution

Carlyle Secured Lending, Inc. (CGBD) will merge with Carlyle Secured Lending III (CSL III) in a stock-for-stock transaction, increasing scale and eliminating preferred stock dilution.

Summary

• Carlyle Secured Lending, Inc. (CGBD) has entered into a definitive agreement to merge with Carlyle Secured Lending III (CSL III) in a stock-for-stock transaction.
• The merger aims to increase CGBD's scale, liquidity, and efficiency.
• Carlyle will exchange its shares of CGBD convertible preferred stock for common stock at NAV, eliminating potential dilution.
• Following the merger, CGBD is expected to have total assets of over $2.5 billion and net assets of over $1.2 billion.
• The transaction is subject to customary closing conditions and is expected to close during the first fiscal quarter of 2025.
• CGBD declared a base quarterly common dividend of $0.40 per share plus a supplemental common dividend of $0.07 per share, payable on October 17, 2024.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive due to the strategic merger announcement and the elimination of preferred stock dilution, offset by a slight decrease in NAV per share.

Positives

• The merger is expected to increase CGBD's scale and liquidity.
• The elimination of the preferred stock dilution overhang is a positive development.
• The transaction is expected to drive efficiency and reduce costs.
• Carlyle's continued long-term commitment to CGBD is demonstrated by the 2-year tiered lock-up on common stock issued as a result of the preferred stock exchange.
• The advisors agreed to cover merger-related expenses up to a total cap of $5 million.

Risks

• The transaction is subject to customary closing conditions, including CGBD stockholder approval and regulatory approval.
• There are uncertainties associated with the timing or likelihood of the Mergers closing.
• There are risks related to diverting managements attention from ongoing business operations.
• Stockholder litigation in connection with the Mergers may result in significant costs of defense and liability.

Future Outlook

The merger is expected to close during the first fiscal quarter of 2025, subject to customary closing conditions. CGBD expects to continue its strategy of lending to U.S. middle market companies.

Management Comments

• Justin Plouffe, CGBDs Chief Executive Officer said, Our core middle-market strategy and active approach to portfolio management continued to drive strong performance in the second quarter of 2024, as we maintained a dynamic approach to origination in an increasingly competitive market.
• Justin Plouffe, Chief Executive Officer for CGBD and CSL III, said, We are excited to announce the merger of CGBD and CSL III, which is designed to have meaningful benefits for investors of both entities.
• Justin Plouffe, Chief Executive Officer for CGBD and CSL III, said, Given substantial overlap in strategy and portfolio composition, combining CGBD and CSL III into a single, larger, and more liquid vehicle will result in significant stockholder value creation and an enhanced investor experience.
• Justin Plouffe, Chief Executive Officer for CGBD and CSL III, said, We are confident in this transactions potential to drive greater trading volume, access to an expanded stockholder base, and lower operating and financing costs.
• Justin Plouffe, Chief Executive Officer for CGBD and CSL III, said, There is strong momentum across our direct lending franchise, and we believe bringing CGBD and CSL III together will enable us to build on that momentum.

Industry Context

The announcement reflects a trend of consolidation within the BDC sector to achieve greater scale, improve access to capital, and reduce operating costs. The focus on middle-market lending and the use of a floating exchange ratio are also notable strategies in the current market environment.

Comparison to Industry Standards

• Blackstone Secured Lending (BXSL) and Ares Capital Corporation (ARCC) are comparible companies in the BDC sector.
• Blackstone Secured Lending (BXSL) has a similar focus on first-lien loans and a comparable dividend yield.
• Ares Capital Corporation (ARCC) is a larger BDC with a more diversified portfolio, but CGBD's merger aims to achieve similar scale benefits.

Stakeholder Impact

• Shareholders of CSL III will receive shares of CGBD common stock.
• CGBD stockholders are expected to benefit from increased scale, liquidity, and efficiency.
• The exchange of preferred stock for common stock will eliminate potential dilution for CGBD stockholders.

Next Steps

• CGBD will file a proxy statement with the SEC and mail it to its stockholders.
• CSL III will file an information statement with the SEC and mail it to its shareholders.
• CGBD will file a registration statement with the SEC.
• CGBD will seek stockholder approval for the merger.
• The companies will seek regulatory approval for the merger.
• The merger is expected to close during the first fiscal quarter of 2025.

Key Dates