Carlyle Secured Lending (CGBD) Q2 2026 earnings call transcript

I would now like to hand the conference over to your speaker today, Nisho Mehta, Head of Shareholder Relations. Sir, please go ahead.

Good morning, and welcome to Carlyle Secured Lending's 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 risk and uncertainties, including those identified in the risk factors and cautionary statement regarding forward-looking statement 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 NAI. 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 getting 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. In addition, a reconciliation of these measures may also be found in our earnings first release filed last night with the SEC on Form 8 .

With that, I'll turn the call over to Alex.

Thanks, Nishil, and 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, and provide an update on our investment outlook. I'll then 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, and 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, and Carlisle played a lead role in nearly 90% of platform originations.

The payments decreased in the quarter with $68 million of activity. combined with $123 million in sales to our MMCF joint venture, with $15 million of equity funding 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 JAVs, 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 SEP, the portfolio grew to $1.7 billion and 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 gap 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. Although 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's 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 million As always discipline and consistency drove performance in the second quarter and we expect these tenants 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 and long term and 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 all the economy sectors, including industrials, aerospace and defense, healthcare, and consumer products. As manager performance dispersion increases, we expect the breadth of the Carlow platform and the consistency of our performance to differentiate us through our ability to leverage Carlow's scale, scope of investment capabilities, and dedicated in-house investing, portfolio management, and restructuring resources.

With that, I now hand the call over to our President and CFO, Tom Hennigan.

Tom Hennigan Thank you, Alex. Today, I'll begin with an overview of our second quarter finance results. Then 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 SEPJVs. Total expenses of $38 million also decreased versus 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 35 cents per share, on both a GAAP basis and after adjusting for the impact of asset acquisition accounting.

Inc. Achieving an I of 35 cents per share means we fully earned our new base dividends. Our board of directors declared the dividend for the third quarter of 2026 at that 35 cents 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, but 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 four to six quarters.

In addition, we currently estimate we have 73 cents per share of spillover income to support the quarterly dividend. Given CGBD shares continue 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 7 cents of accretion to NAV per share.

And total of our purchases 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 35 cents 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. However, we did adjust the mark on our residual equity position down to align with updated expectations on total recovery to lenders, given higher than anticipated proceeds to management and doctors.

But overall, it remains a very positive story with an expected MOAC of 1.4x and highlights the impact of our dedicated workouts team. On U. S. Infra, which is a provider of inspection, maintenance, and rehabilitation services for critical infrastructure, based on our expectation of lower earnings for fiscal year 26, we lowered our valuation as of 630. Our work, our team is closely working with the sponsor and management team to right-size the capital structure and provide additional liquidity to support the business, the best position of the company for recovery.

Turning to credit performance, we continue to see overall stability and credit quality across the portfolio. The fair value of loans utilizing PIC provisions decreased during the second quarter, and the majority of our PIC is underwritten at origination or for performing borrowers, and is what we would consider to be good PIC.

Non-accruals continue to remain low as of June 30th, and represent only 0.6% of investments at fair value and 1.2% at amortized costs. The restructuring of DCA closed the second quarter, so that investment was placed back on accrual status, while U. S. Infra and Project Castle, also known as material handling systems, were added to non-accrual status.

Moving to the middle market credit fund, our longstanding JV, we continue to focus on maximizing both asset growth and returns. During the second quarter, we closed a $400 million upside to our main credit facility, increasing total commitments to $1.2 billion and an attractive spread of SOFR plus 170 basis points. During the second quarter, MMCF achieved 17.6% dividend yield, an increase of over 200 basis points quarter over quarter, generated through $1.2 billion in investments with no fees at the joint venture. The increases in both debt and equity commitments that closed earlier this year position us to continue asset growth and income generation at the JV.

In addition, our newer JV, Structured Credit Partners, or SCP, ramps to $1.7 billion of investments and produced a dividend yield of 18.7%. In April, we were able to capitalize on market volatility and accelerated the timelines for the first two CLOs to price and close, Benefiting from lower loan prices and tight liability pricing. We expect SCP to price and close two additional CLOs in 2026, subject to market conditions, in line with our plan to ramp at a cadence of four CLO issuances per year to ensure vintage diversification. And over time, the JV is expected to manage approximately $6 to $7 billion of assets fee-free at SCP. I'll finish by touching on our financing facilities and leverage.

and leverage. Our debt stack is 100% floating rate, matching our primarily floating rate assets, meaning CGBD is well positioned in advance of any additional interest rate movement. At quarter end, statutory and net financial leverage were both 1.2 times. Given our current strong liquidity profile, we believe we're well positioned to benefit from both more attractive terms for new investments and the expected pickup and deal volume in future quarters.

With that, I'll turn the call back over to Alex. Thanks Tom As we push the middle of the third quarter our portfolio remains resilient and our strategy remains unchanged We continue to focus on sourcing transactions with significant equity cushions conservative leverage profiles and attractive spreads relative to market levels and expect to take advantage of improved conditions in the market with a revitalized origination platform Our pipeline of the new originations is active and with a stable high portfolio CGBD stockholders are benefiting from the continued execution of our strategy As always, we remain committed to delivering a resilient, stable cash flow stream to our investors to consistent income and solid credit performance. I'd like to now hand the call over to the operator to take your questions.

Sure. Thanks, Rick, for the question. It's Alex. As you can see from the results, we were able to find some attractive new investments in the second quarter, and the pipeline for the third quarter also continues to be pretty robust. Having said that, the overall landscape for M&A continues to be a bit muted. And I think that's driven by the continued geopolitical uncertainty and also the macroeconomic uncertainty. I think once you see a clearer picture of what will happen there, I think that should unleash some more M&A activity that we'll all benefit from. Having said that, in terms of what the pipeline looks like, these are companies that are more shielded from what's happening out in the economy, clearly away from software.

So most of the deals that we're looking at and are in our pipeline are within industrials, aerospace and defense, healthcare, basic consumer products, et cetera. In terms of pricing, as you can see from our results, the weighted average spread that we saw really held steady from the second quarter, from the first quarter. We really didn't see much more spread widening. Having said that, it really depends on the sector. I think that if you see a very attractive industrial deal per se, then I think you'll see some competition And that will lead to a bit tighter pricing. But having said that, we've seen spreads hold in there, and the DOC standards have also continued to improve.

That's also one of the nice parts about just being in the middle market where you see just more consistent deal flow in terms of holding steady.

You actually got, were able to benefit efficiently from the pickup and base rates, it looks like. Yeah, I think we saw some of the benefit, and again, we also benefit from the fact that our non-accruals are quite low, so it allows us to be on offense with respect to deployment and just looking for the best opportunities to invest in. And just given where we've landed on that front, as well as our leverage, not only were we able to deploy into attractive opportunities, but we were also able to take advantage of the discount and also purchase some shares, too.

Hey, good morning, Justin. Thanks for the question. You know, we continue to be active with repurchasing shares, but we're trying to find the right balance and continue to be active in deploying new capital. So certainly where we've been focused, and you'll see is we had increases in the yield at both JVs. So we're certainly focused on, depending on the spread for individual investments, is continuing to deploy at the JV, because that's very accretive for investors. And likewise, we've been nicely ramping the SEP JV. So we're trying to find the right balance between the So, we're going to be active on both the new deal front and on share repurchases.

Was that due to lower refi and amendment activity or what drove that decrease? Yes, it was. So last quarter we had more outsized one-time income from repayment activity. One particular repayment had a large repayment fee. And so this quarter really more normalized, actually probably a lower level than normal. We had very limited other income this quarter. So I'd say that last quarter was atypically high, and this quarter was actually lower than, let's say, our steady baseline.

Thanks, Justin.

How would you characterize your view? I mean, do we need flat-out stability before you even get more optimistic about the back half of the year, or how are you thinking about that?

Hey, Robert, thanks a lot for the question. Definitely a lot going on right now. Look, I think with respect to just the M&A market coming back in full force, I do think you need more clarity with respect to the inflationary picture, what's going to happen to rates. And that is linked to what's happening out of the Middle East and all the derivatives and permutations from oil prices. If your business is linked whatsoever to those impacts, it's really difficult to forecast what the near to medium term is going to look like for your business, and that's just going to lead to an impact on valuation from buyers. Therefore, if you're a seller, unless you really have to generate proceeds, why not wait for another quarter or two before you put it into the market for a successful outcome?

At the same time, if you put it in the market right now and you don't achieve the outcome that you want, it's really hard to ignore the valuations that came through as part of the auction process. So as a result, for those kinds of businesses, I do think you're going to have to wait until that comes, until likely later in the year or even early next year. Having said that, there's still a healthy amount of flow that we're seeing. I think that the businesses where you can put a box around those risks are not as impacted because they are recession resistant or more non-cyclical. And we're still seeing some healthy multiples for those kinds of businesses.

I think that where we are, M&A is quite a seasonal type of dynamic. And so right now, the top of the funnel has certainly expanded. And as these deals start to get signed up and the commitments come to fruition, it's going to still take another quarter or two in order to fund as part of the closing process. So that's why I think that perhaps some of our peers are saying that they're a bit more optimistic about the fourth quarter, because the top of the funnel, I think across the board, we are seeing a bit of an expansion for that. But it really remains to be seen, and I think as a result of all these forces, I think you just still have to be quite selective about what you invest in.

Yeah. Robert, I can tell you when we talk with Lauren Buzmajan, who runs our liquid business, she is laser-focused on vintage diversification, something that when we started this program and idea, It's something we're very focused on, and not to say it's not something we consider and we have conversations based on the market, but we're very focused on vintage diversification.

We anticipate it will be that four CLO cadence. Could timing result in whether one year has three CLOs, one year has five CLOs? It's possible, but we're going to be focused on evenly deploying over the horizon.

You're absolutely right that we are going to stay away from the more cyclical OEM, new install type of industrial businesses. We are gravitating much more towards aftermarket, repair, replacement, short repair maintenance type cycles. So that's what we're really looking at, and you can apply that towards pretty many broad parts of the economy. So I wouldn't say that we're just drilling down on a certain subsector within industrials. It's more of the overlay of the type of business model that we're looking at. So, you know, at the same time, I think we are being a bit more careful within sectors that were supposed to be recession resistant, such as, let's say, home services, residential services. That's a pretty popular area for private equity firms to invest in, is buy and builds.

As a result, direct lenders will take a look at those things. If you really, if you look, if you unpack those areas, you know, we are starting to see a bit of, top-line volume, deceleration, because I think people are feeling it in terms of what's happening in the economy, and margins are starting to get a bit squeezed. So I think that's a sector that, again, I think if you unpack this for portfolios or various private credit lenders, you're going to see a bunch of these platforms in there.

I think given what's going on, we also just have to be more selective about areas to stay away from, too.

Thank you, and I would now like to hand the conference back over to Alex Chee for closing remarks. Great. Thanks, everyone, for joining the call. We appreciate your support. Please reach out to any further questions, and enjoy the rest of your summer.