8-K: Carlyle Secured Lending to Merge with Carlyle Secured Lending III, Creating Larger BDC

Carlyle Secured Lending, Inc. and Carlyle Secured Lending III have agreed to merge, creating a larger business development company with increased scale and liquidity.

Summary

• Carlyle Secured Lending, Inc. (CGBD) and Carlyle Secured Lending III (CSL III) have entered into a merger agreement.
• The merger will result in CGBD acquiring CSL III, creating a larger business development company (BDC).
• Carlyle will exchange its CGBD convertible preferred stock for common stock at net asset value (NAV), eliminating potential dilution.
• The transaction is expected to close in the first fiscal quarter of 2025, subject to customary closing conditions and CGBD stockholder approval.
• The exchange ratio for CSL III shareholders will be determined shortly before the merger close, based on the NAV per share of both companies and the market price of CGBD common stock.
• CGBD's net investment income for the second quarter of 2024 was $0.51 per common share, and net asset value per common share decreased by 0.7% to $16.95.
• The total fair value of CGBD's investments was $1.7 billion as of June 30, 2024.
• CGBD declared a base quarterly dividend of $0.40 per share plus a supplemental dividend of $0.07 per share for the third quarter of 2024.

Sentiment

Score: 8

Explanation: The document conveys a positive sentiment due to the strategic merger, the elimination of preferred stock dilution, and the potential for increased scale and liquidity. The management's comments are optimistic, and the advisors' support further enhances the positive outlook.

Positives

• The merger is expected to increase CGBD's scale and liquidity, potentially leading to greater trading volume and a broader investor base.
• The elimination of the preferred stock dilution overhang is expected to enhance stockholder value.
• The combined company is expected to have access to a wider array of debt financing solutions and potentially receive more attractive terms and pricing.
• Cost savings and operational synergies are expected to drive a lower expense ratio.
• The combined company will continue CGBD's successful strategy with greater scale and seamless integration.
• Advisors have agreed to cover transaction costs in certain circumstances up to a total cap of $5 million.
• CIM's shares of common stock issued as a result of the preferred stock exchange will be subject to a 2-year tiered lock-up, demonstrating its continued long-term commitment to CGBD.

Negatives

• The merger is subject to customary closing conditions, including CGBD stockholder approval and regulatory approvals, which could delay or prevent the transaction from closing.
• The exchange ratio is subject to market fluctuations and may not be as favorable as anticipated.
• There is a risk of stockholder litigation in connection with the merger, which may result in significant costs of defense and liability.

Risks

• The timing or likelihood of the merger closing is uncertain.
• The expected synergies and savings associated with the merger may not be realized.
• The ability to realize the anticipated benefits of the merger, including the expected elimination of certain expenses and costs, is not guaranteed.
• There is a risk that competing offers or acquisition proposals will be made.
• The various conditions to the consummation of the merger may not be satisfied or waived.
• The merger may divert management's attention from ongoing business operations.
• Changes in the economy, financial markets, and political environment, including the impacts of inflation and rising interest rates, could negatively impact the combined company.
• 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 changes in laws or regulations could negatively impact the combined company.
• Conditions in CGBD's and CSL III's operating areas, particularly with respect to business development companies or regulated investment companies, could negatively impact the combined company.

Future Outlook

The merger is expected to close during the first fiscal quarter of 2025, subject to customary closing conditions and CGBD stockholder approval. The combined company will continue CGBD's strategy of lending to U.S. middle market companies.

Management Comments

• 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.
• With increased volume during the quarter, we capitalized on attractive origination opportunities, and we see the potential for increased deal activity through year-end.
• Overall, we remain pleased with our results and look forward to continuing to deliver the consistent income and returns our investors have come to expect from our portfolio.
• We are excited to announce the merger of CGBD and CSL III, which is designed to have meaningful benefits for investors of both entities.
• 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.
• We are confident in this transaction's potential to drive greater trading volume, access to an expanded stockholder base, and lower operating and financing costs.
• 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 merger reflects a trend of consolidation within the business development company sector, as companies seek to achieve greater scale, liquidity, and operational efficiencies. The focus on middle-market lending aligns with the broader trend of private credit growth and the demand for alternative investment strategies.

Comparison to Industry Standards

• The document does not provide specific details on comparable companies or projects.
• However, the focus on middle-market lending and the use of a floating exchange ratio are common practices in the BDC industry.
• The stated goal of achieving greater scale and liquidity is a typical objective for BDCs seeking to enhance their market position.
• The elimination of the preferred stock overhang is a unique aspect of this transaction, which is expected to benefit CGBD shareholders.
• The agreement by the advisors to cover transaction costs up to a certain cap is also a positive aspect of the transaction.

Related Party Transactions

• Carlyle will exchange its shares of CGBD convertible preferred stock for CGBD common stock at NAV.
• Carlyle Global Credit Investment Management L.L.C. (CGCIM), investment adviser to CGBD, and CSL III Advisor, LLC, investment adviser to CSL III, have agreed to cover merger-related expenses in certain circumstances, up to a total cap of $5 million.

Stakeholder Impact

• Shareholders of CGBD are expected to benefit from increased scale, liquidity, and the elimination of preferred stock dilution.
• Shareholders of CSL III are expected to receive shares of CGBD based on the exchange ratio.
• Employees of both companies may experience changes due to the merger, but no specific details are provided.
• Customers (portfolio companies) are not expected to experience material changes in the short term.
• Creditors may benefit from the combined company's increased scale and access to debt markets.

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 stockholders will vote on the proposed merger.
• The merger is expected to close during the first fiscal quarter of 2025, subject to customary closing conditions.

Key Dates

Keywords

merger, business development company, BDC, Carlyle Secured Lending, Carlyle Secured Lending III, CGBD, CSL III, direct lending, middle market, preferred stock, net asset value, NAV, dividend, investment income, financial results