Carlyle Secured Lending, Inc. Common Stock 2026 Q2 Earnings Call

Sir, please go ahead. Good morning, and welcome to Carlyle Secured Lending second quarter 2026 earnings call.

I'm joined by Alex Chi, CGBD's Chief Executive Officer, and Tom Hennigan, our President and Chief Financial Officer. Last night, we filed our Form 10-Q and issued a press release with a presentation of our results, which are available on the investor relations section of our website. Following our remarks today, we will hold a question and answer session for analysts and institutional investors. This call is being webcast, and a replay will be available on our website. Today's earnings call may include forward-looking statements reflecting our views with respect to, among other things, our future operating results and financial performance. Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them.

These statements are based on current management expectations, estimates, and projections that involve inherent risks and uncertainties, including those identified in the Risk Factors and Cautionary Statement Regarding Forward-Looking Statements sections of our 10-K and 10-Qs. These risks and uncertainties could cause actual results to differ materially from those indicated in our forward-looking statements. CGBD assumes no obligation to update any forward-looking statements at any time. During this call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G, such as adjusted net investment income or adjusted NII.

The company's management believes adjusted net investment income, adjusted net investment income per common share, adjusted net income, and adjusted net income per common share are useful to investors as additional tools to evaluate ongoing results and trends and to review our performance without giving effect to the amortization or accretion resulting from the new cost basis of the investments acquired and accounted for under the acquisition method of accounting in accordance with ASC 805, and the one-time purchase or non-recurring investment income and expense events, including the effects on incentive fees, and are used by management to evaluate the economic earnings of the company. A reconciliation of GAAP net investment income per share, the most directly comparable GAAP financial measure to adjusted NII per common share, can be found in the accompanying slide presentation for this call that is available on our website.

A reconciliation of these measures may also be found in our earnings press release filed last night with the SEC on Form 8-K. With that, I'll turn the call over to Alex.

Thanks, Nishil, good morning. On today's call, I'll give an overview of our second quarter results, including the quarter's investment activity and portfolio positioning, provide an update on our investment outlook. I'll hand the call over to our President and CFO, Tom Hennigan. During the second quarter, macroeconomic and geopolitical factors led to a complicated market backdrop for new deal activity. However, we continue to be very pleased with the strength of Carlyle Direct Lending's origination platform and the consistent credit performance of CGBD. In total, we closed $1.5 billion of new and incremental commitments at the platform level, excluding joint venture activity, funded $248 million of investments at CGBD, reflecting a strong quarter of originations. Our platform originations were up over 20% versus the first quarter, while platform selectivity continued to increase with a commitment rate on second quarter pipeline deals of less than 5%.

On our new originations, weighted average spreads held steady in line with first quarter, while weighted average leverage on entry continued to decrease. Our enhanced origination team continued to drive several wins, Carlyle played a lead role in nearly 90% of platform originations. Repayments decreased in the quarter with $68 million of activity. Combined with $123 million in sales to our MMCF joint venture and $50 million of equity fundings at SCP, net investment activity drove total investments at CGBD to increase from $2.3 billion to $2.4 billion during the quarter. Moving to our investment funds, both of our JVs, MMCF and SCP, continue to scale and generate attractive returns to CGBD. Total investments at our MMCF joint venture increased to $1.2 billion, with the annualized dividend yield increasing by over 200 basis points to 17.6% in the quarter.

At SCP, the portfolio grew to $1.7 billion, produced an annualized dividend yield of 18.7% to CGBD. During the quarter, we generated $0.35 per share of Net Investment Income on both a GAAP and adjusted basis. In line with our revised dividend policy, our board of directors declared a third quarter dividend of $0.35 per share, which is fully covered by Net Investment Income in the quarter. Our Net Asset Value as of June 30th was $15.61 per share, compared to $15.89 per share as of March 31st. The market remains focused on the software sector, we continue to see strong fundamental performance from the software borrowers in our book.

As I've mentioned in prior quarters, our underwriting approach to borrowers in the software space remains highly disciplined, and our platform software track record is exemplary, with zero defaults on $7 billion in commitments to software deals over the last six years. Turning to portfolio construction, we remain focused on portfolio diversification while managing target leverage. As of June 30th, our portfolio grew to 177 companies across more than 25 industries. The average exposure to any single portfolio company was less than 60 basis points of total investments, and 95% of our investments were in senior secured loans. The median EBITDA across our portfolio was $101 million. As always, discipline and consistency drove performance in the second quarter, and we expect these tenets to drive performance in future quarters.

Looking ahead, despite the complicated market backdrop mentioned earlier, we continue to expect strong activity in our market over the medium long term. We're well-positioned with a revitalized origination platform to take advantage of increasing market activity and to continue taking share. Looking at our pipeline, a significant majority of deals continues to be in old economy sectors, including industrials, aerospace and defense, healthcare, and consumer products. As manager performance dispersion increases, we expect the breadth of the Carlyle platform and the consistency of our performance to differentiate us through our ability to leverage Carlyle's scale, scope of investment capabilities, and dedicated in-house investing, portfolio management, and restructuring resources. With that, I'll now hand the call over to our President and CFO, Tom Hennigan.

Thank you, Alex. Today, I'll begin with an overview of our second quarter financial results. I'll discuss portfolio performance before concluding with detail on our balance sheet positioning. Total investment income for the second quarter was $62 million. Below prior quarter, primarily driven by a decline in interest income due to lower OID accretion from reduced repayment activity, as well as a decrease in fee income, partially offset by increased dividend income from both the MMCF and SCP JVs. Total expenses of $38 million also decreased versus the prior quarter, primarily as a result of lower interest expense due to lower outstanding debt balance. The result was net investment income for the second quarter of $24 million, or $0.35 per share on both a GAAP basis and after adjusting for the impact of asset acquisition accounting.

Achieving NII of $0.35 per share means we fully earned our new base dividend. Our board of directors declared the dividend for the third quarter of 2026 at that $0.35 per share base dividend level, which is payable to stockholders of record as of the close of business on September 30th. As a reminder, we're maintaining our existing supplemental dividend policy, which targets paying out at least 50% of excess earnings above the base dividend, allowing us to deliver additional value to shareholders as earnings grow. As mentioned on prior earnings calls, we still expect the second quarter will be the near-term earnings trough, which means we not only expect to maintain full dividend coverage in future quarters, we anticipate an increase in earnings and supplemental dividends as we ramp the portfolios and earnings of both JVs over the course of the next 4 to 6 quarters.

In addition, we currently estimate we have $0.73 per share of spillover income to support the quarterly dividend. Given CGBD shares continued to trade at a compelling discount, we repurchased $12.5 million of shares at an average discount of 29% during the second quarter, resulting in $0.07 of accretion to NAV per share. In total, repurchases since inception of the program now exceed $200 million. On valuations, our total aggregate realized and unrealized net loss for the quarter was about $24 million, or $0.35 per share, partially driven by markdowns on a limited number of investments. To highlight a couple of the larger movers, on our investment in SPF debt and equity, we expect a successful exit later this year.