Carlyle Secured (CGBD) Q3 2026 Earnings Call Transcript

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DATE

Friday, Nov. 6, 2026

CALL PARTICIPANTS

• Chief Executive Officer - Alex Chi
• President and Chief Financial Officer - Tom Hennigan

TAKEAWAYS

• GAAP and Adjusted NII -- $0.36 per share, reflecting increased dividend income from both the MMCF and SCP joint ventures.
• Q4 Base Dividend -- $0.35 per share, which is fully covered by net investment income for the period.
• Total Investment Income -- $63 million, representing an increase from $62 million in the prior quarter driven by higher distributions from joint ventures.
• Net Asset Value -- $15.65 per share, representing a 0.3% increase from $15.61 as of June 30, 2026, due to stable valuations and accretive buybacks.
• New Investment Fundings -- $81 million, excluding joint venture activity, as the company maintained originations despite lower market volumes.
• Weighted Average Spreads -- 505 basis points on new originations, which is approximately 35 basis points wider than the fourth quarter of 2025.
• Entry Leverage -- 4.9x, representing a decrease of over two-thirds of a turn compared to the previous quarter.
• Portfolio Count -- 180 companies across more than 25 industries, providing broad diversification across the middle market.
• Senior Secured Concentration -- 96% of the total portfolio, reflecting management's focus on defensive positioning in the capital stack.
• Median EBITDA -- $97 million for portfolio companies, indicating a focus on established, larger middle-market borrowers.
• Share Repurchases -- $6.1 million at an average discount of 32%, contributing $0.04 of accretion to net asset value per share.
• Nonaccrual Rate -- 1.1% at fair value and 2.2% at amortized cost, following the addition of two new positions during the quarter.
• MMCF Dividend Yield -- 18.4%, an 80 basis point increase quarter over quarter driven by asset growth and scaling.
• SCP Dividend Yield -- 20.3%, which management attributed to elevated levels from delayed settlements on loan purchases.
• Net Financial Leverage -- 1.2x, adjusted for working capital, positioning the company to take advantage of expected increases in deal volume.
• Statutory Leverage -- 1.26x at quarter end, remaining within the company's established target range.
• Total Fair Value -- $2.3 billion, remaining relatively flat as repayments offset new funding activity during the period.
• Investment Repayments -- $129 million, contributing to the flat net investment growth despite active originations.
• Lead Origination Roles -- Management reported playing a lead role in 100% of originations to new borrowers during the quarter.
• Floating Rate Exposure -- Nearly 100% of the portfolio, which management expects will act as an earnings tailwind as interest rates move.

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RISKS

• Hennigan stated, "We did add 2 positions to nonaccrual in the quarter. Resulting in nonaccruals totaling 1.1% of investments at fair value and 2.2% at amortized cost," indicating a slight deterioration in credit quality for specific borrowers.
• Chi stated, "macroeconomic and geopolitical uncertainty weighed on direct lending volume," noting that private equity activity remained slower than anticipated.

SUMMARY

Carlyle Secured Lending, Inc. (NASDAQ:CGBD) reported third quarter results characterized by stable net asset value and the scaling of its joint venture platforms. Management reported that while market-wide direct lending volumes were lower due to macroeconomic uncertainty, the company utilized its proprietary sourcing network to maintain origination activity. The board declared a base dividend for the fourth quarter that is fully covered by net investment income, supported by floating-rate assets and increased yields from the investment funds. The company maintained its focus on senior secured lending and portfolio diversification while executing share repurchases at a discount to book value.

• Management reported that proprietary One Carlyle deal flow generated half of new platform originations with spreads averaging 35 basis points wider than core U.S. originations.
• CEO Chi stated the company is taking a "measured approach to data center and GPU financing transactions" despite their prominence in current credit markets.
• The board reauthorized its $300 million share repurchase program through Nov. 2027, following $6.1 million in buybacks executed during the third quarter.
• CFO Hennigan indicated that SCP yields are expected to normalize to the mid-teens longer term and the company plans for four CLO issuances per year to ensure vintage diversification.
• The company leveraged platform expertise in aerospace and defense to secure a lead role in the manufacturing financing for Avantis.

INDUSTRY GLOSSARY

• BDC: Business Development Company, a type of closed-end investment company that helps small and mid-size companies grow and find debt and equity financing.
• CLO: Collateralized Loan Obligation, a single security backed by a pool of debt.
• EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization, a measure of a company's overall financial performance.
• MMCF: Middle Market Credit Fund, a joint venture focused on direct lending.
• NAV: Net Asset Value, the value of an entity's assets minus the value of its liabilities.
• NII: Net Investment Income, the amount of income received from investment assets less expenses.
• PIK: Payment-in-Kind, a type of loan where the interest is paid with additional debt rather than cash.
• SCP: Structured Credit Partners, a joint venture vehicle focused on structured credit and broadly syndicated loans.

Full Conference Call Transcript

Operator: Hello, and welcome to Carlyle Secured Lending third quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a question and-answer session. To ask a question during the session, you will need to press *11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. I would now like to turn the conference over to Nishil Mehta. You may begin.

Nishil Mehta: Good morning, and welcome to Carlyle Secured Lending's third quarter 2026 Earnings Call. I am 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 and involve inherent risks and uncertainties. Including those identified in the risk factors and cautionary statement regarding forward-looking statements sections of our 10 ks 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 a onetime purchase or nonrecurring 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 press release filed last night with the SEC on Form 8-Ks. With that, I will turn the call over to Alex.

Alex Chi: Thanks, Nishil, and good morning. On today's call, I will give an overview of our third quarter results including the quarter's investment activity and portfolio positioning. I will provide an update on our investment outlook. I will then hand the call over to our President and CFO, Tom Hennigan. During the third quarter, macroeconomic and geopolitical uncertainty weighed on direct lending volume, declined year over year as private equity activity remained slower than anticipated. 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, excluding joint venture activity, we funded $81 million of investments at CGBD, as our origination engine remained active during the quarter despite lower market wide volume. On our new originations, weighted average spreads on those deals were approximately 505 basis points approximately 35 basis points wider than the fourth quarter of 2025. While weighted average leverage on entry continued to decrease by over 2-thirds of a turn quarter over quarter to 4.9x. With a substantial majority of the deals in the quarter having financial maintenance covenants. Our Rejuvenated origination team leveraged the 1 Carlyle platform to drive differentiated deal flow, increased selectivity, and credit discipline.

Proprietary 1 Carlyle deal flow sourced from outside of direct lending generated half of new platform originations, with spreads that averaged approximately 35 basis points wider compared to core US originations. Over 80% of this quarter's originations were to new borrowers and Carlyle played a lead role in all of those investments. As an example, Carlyle Direct Lending leveraged Carlyle's private equity business lines' deep expertise in aerospace and defense, to secure a lead role in a solution for Avantis. A leading manufacturer of mission critical aerospace materials and components.

Repayments increased in the quarter, $129 million of activity and combined investment activity related to our joint ventures, net investment activity resulted in total investments at CGBD remaining relatively flat ending the quarter at $2.3 billion Moving to our investment funds. Both of our JVs MMCF and SCP, continue to scale and generate attractive returns to CGBD. The annualized dividend yield at MMCF increased by 80 basis points to 18.4% in the quarter, and over 300 basis points since the first quarter of 2026. At SCP, the portfolio grew to $2.1 billion and produced an annualized dividend yield of 20.3% to CGBD.

During the quarter, we generated $0.36 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 fourth quarter 2026 dividend of $0.35 per share which is fully covered by net investment income. Our net asset value as of September 30, increased to $15.65 per share up from $15.61 per share as of June 30. With a quarter point Federal Reserve hike in September, consensus estimates suggesting an additional 2 to 3 hikes between now and 2027, and we expect rising rates to be an earnings tailwind. As nearly 100% of our portfolio is floating rate.

Our portfolio companies continue to perform well, And based on the latest forward curve, we do not expect increase in rates to have a material impact borrowers' ability to service debt. Markets continue to experience volatility related to the anticipated quantum of future debt issuance needed to finance the AI compute build out. From an underwriting perspective, Carlyle continues to take a measured approach to data center and GPU financing transactions despite their prominence in the credit market. While we continue to review potential opportunities, we have minimal exposure to compute infrastructure and remain selective in our approach to investments in this sector. As structures and documentation continue to loosen and market pricing continues to tighten. Turning to portfolio construction.

We remain focused on portfolio diversification, while managing to target leverage. As of September 30, our portfolio grew to 180 companies across more than 25 industries. The average exposure to any single portfolio company was less than 60 basis points of total investments and 96% of our investments were in senior secured loans. The median EBITDA across our portfolio was $97 million As always, discipline and consistency drove performance in the third quarter and we expect these tenants to drive performance in future quarters. Looking ahead, despite the complicated market backdrop, we continue to expect strong activity in our market over the medium and long term once there is greater macroeconomic and geopolitical certainty.

We are 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 continue to be in old economy sectors, including industrials, aerospace and defense, health care, and consumer products. As manager-to-performance dispersion increases, we expect the breadth of the Carlyle platform, 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 will now hand the call over to our President and CFO, Tom Hennigan.

Tom Hennigan: Thank you, Alex. Today, I will begin with an overview of our third quarter financial results. Then I will discuss portfolio performance, before concluding with details on our balance sheet positioning. Total investment income for the third quarter was $63 million, up from $62 million last quarter. Primarily driven by an increase in dividend income from both the MMCF and SCP JVs. This was partially offset by a lower average investment balance for the loan book. Total expenses of $38 million were in line with prior quarter. The result was net investment income for the third quarter of $25 million or $0.36 per share on both a GAAP basis and after adjusting for the impact of asset acquisition accounting.

Which means we again fully earned our new base dividend. Our Board of Directors declared the dividend for the fourth 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 December 31. As a reminder, we maintain our existing supplemental dividend policy which targets paying out 50% of excess earnings above the base dividend. Allowing us to deliver additional value to shareholders as earnings grow. We still anticipate achieving full dividend coverage in future quarters, along with an increase in earnings and supplemental dividends, as we continue to ramp the JVs and benefit from increasing rates based on the latest forward curve.

During the quarter, we repurchased $6.1 million of shares at an average discount of 32%. Resulting in $0.04 of accretion to NAV per share. Total repurchases since inception of the program exceed $200 million, and the board approved the reauthorization of the existing $300 million plan through November 2027. On valuations, our total realized and unrealized net loss for the quarter was about $1 million or $0.02 per share. As valuations remain relatively flat in the aggregate. Turning to credit performance. We continue to see overall stability in credit quality across the portfolio. Key credit stats continue to be stable. Including portfolio company leverage levels, interest coverage, and LTVs.

Both PIK income and the fair value of loans utilizing PIK provisions decreased during the third quarter. And the majority of our PIK was underwritten at origination, or for performing borrowers. And is what we would consider to be good PIK. We did add 2 positions to nonaccrual in the quarter. Resulting in nonaccruals totaling 1.1% of investments at fair value and 2.2% at amortized cost. We continue to work closely with these sponsors and borrowers to position the portfolio companies for improved financial performance.

And while our non accrual rates may fluctuate from period to period, we are confident in our ability to leverage the broader Carlyle network including our dedicated workout team, to achieve maximum recoveries for underperforming borrowers. Moving to the middle market credit fund, our long standing JV. We continue to focus on maximizing both asset growth and returns. During the third quarter, MMCF achieved an 18.4% dividend yield, an increase of 80 basis points quarter over quarter and over 300 basis points since the first quarter of this year. MMCF currently holds $1.2 billion in direct lending assets with no fees at the joint venture.

Resulting in an effective net base management fee of less than 1% for CGBD on all direct lending assets. The increases in both debt and equity commitments to MMCF 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 ramped to $2.1 billion of investments and produced a dividend yield of 20.3%. Which was again elevated this quarter as a result of delayed settlements on loan purchases, as is common for broadly syndicated loans. We expect the more normalized yield to be mid-teens longer term.

During the quarter, SCP priced another CLO, with long term, non mark to market and predominantly investment grade rated CLO debt. SCP priced an additional CLO in the fourth quarter of 2026, and that is in line with our plan to ramp at a cadence of 4 CLO issuances per year to ensure vintage diversification. Both recently issued CLOs benefited from market volatility, as we locked in tight liability pricing while purchasing broadly syndicated loans at discounted prices. Over time, the JV is expected to manage approximately $6 billion to $7 billion of assets fee free at the JV. I will finish by touching on our financing facilities 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 movements. At quarter end, statutory leverage was 1.26x, and net financial leverage was 1.2x after adjusting for working capital. Given our current strong liquidity profile, we believe we are well positioned to benefit from both more attractive terms for new investments and the expected pickup in deal volume in future quarters. With that, I will turn the call back over to Alex.

Alex Chi: Thanks, Tom. As we approach the middle of the fourth 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 new originations is steady, and with a stable, high quality 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 through consistent income and solid credit performance.

I would like to now hand the call over to the operator to take your questions.

Operator: Thank you. Please stand by for the first question. If you would like to ask a question, please press *1 on your telephone, and wait for your name to be announced. To withdraw your question, please press *11 again. Our first question comes from the line of Erik Zwick with Lucas Capital Markets. Your line is open.

Eric Zwick: Good morning. First question, more of a kind of just a housekeeping question maybe for Tom. Just looking at the balance sheet and the growth recent growth in derivatives liabilities, just curious what is kind of driven that increase?

Tom Hennigan: Oh, hey, Good morning. That is our interest rate swaps for our bonds. So you will see it is really an offset. We have hedged the 2 bonds. So you see that liability goes up, but actually on the balance sheet, the face of the debt is lower. So it is just an offset. Based on interest rates going up.

Eric Zwick: Got it. That makes a lot of sense. Thank you. And then just thinking about, your commentary on the strong pipeline. Cash position is certainly higher than it is been in a number of quarters, but also the stock is attractive from a valuation standpoint for continued use of the buyback. So just curious if you could expand a little bit on your thoughts or how you continue to execute on those 2 strategy priorities.

Alex Chi: Yeah, look, we will continue to. Hey, Erik, it is Alex. Thanks for the question. We are going to continue to focus on new investments. The pipeline is starting to build. I think that in the third quarter, as you can see from our originations as well as for the whole market, was a bit muted. I am just heading into the midterms as well as the volatility in the macro as well as the geopolitical environment. But now that we have the midterms behind us, looks like we are gonna be in an environment where, at least for the next couple of years, there probably will not be a whole lot of movement, which actually ironically creates some stability.

Therefore, we are we are pretty optimistic actually that it sets us up well next year for a more active deal environment. So we wanna make sure that we have enough capacity to take advantage of that At the same time, we cannot ignore where the stock's trading and we do have some additional capacity for buybacks. So we are gonna continue to look at both. As you can see in the third quarter, we did buy back some stock, but more of a modest amount. As we just balance the origination activity. Thanks, Alex.

Eric Zwick: I appreciate the answers.

Alex Chi: Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of Brian Mckenna with JMP Securities. Your line is open.

Nate: Yes, this is Nate on for Chris. Thanks for taking my question this morning. Just maybe 1 on Structured Credit Partners. I know you guys talked about it a little bit, but the vehicle continued to scale in the quarter with about I think, about $30 million of activity on your side. Can you guys just talk a little bit about how that partnership's progressing relative to what you expected originally? How we should think about the pace of deployment maybe earnings contribution going forward?

Tom Hennigan: Hey, Nate, Good morning. Tom. I would say that the partnership's going great, and I would say it is really right on track. In terms of our initial forecast with the original commitment from CGBD of $150 million. We have been targeting 4 CLOs per year, really focused on vintage diversification. that is exactly what we have done. it is very much on plan. 1 thing I would say, the good news is it is short-term, and it will be short lived is you know, our dividend.

Rate is higher is higher than expected. it is it is nuanced that we said last quarter was 1-time, or maybe it is 1-time again, but it is a 2-time. it is just the nuances of settling the loans in the broader syndicated market. So we had a pop in earnings, but it is, we anticipate that longer to intermediate term. We are looking at, you know, mid-teens return. But the ramp is right on pace. We anticipate deploying the rest of our original commitment over the course of the next few quarters.

Nate: Okay. Great. that is it for me. Appreciate the color there.

Tom Hennigan: Thank you.

Operator: As a reminder, ladies and gentlemen, that is *1 to ask a question. Our next question comes from the line of Robert Dodd with Raymond James. Your line is open.

Robert Dodd: Morning, everybody, and congrats on an excellent quarter. A couple of questions. 1, getting nitpicky on wording in your remarks Alex. When you talked about a expect strong performance in originations, I noticed a couple of caveats. 1, you said medium long term. So I presume not short term. You do not expect strength in the fourth quarter or maybe even Q1. And then 2, even that medium- to long-term was caveated it with a once geopolitical uncertainty stabilizes. So, I mean, is that is that the deal? Like, you are optimistic about your. The platform capabilities but you are not optimistic about the market and activity levels.

Alex Chi: Hey, Robert, Thanks for the question. I think you characterized it pretty well. We are obviously sitting midway through the fourth quarter. And fundings and deployment in the fourth quarter is really driven by activity that was in the market. In the prior quarter and given, again, the environment I think that at least for the fourth quarter, I would not be surprised if the amount of origination activity for ourselves as well as the broader market continue to be muted.

Having said that, looking at the pipeline, of new investments that are activity and opportunities that are coming in the door right now, that gives us a bit more optimism with respect to what could happen in the first and second quarter of next year. And as you know, January tends to be more of a seasonal quarter with respect just new deal activity as everyone comes back to the holidays. And so look, if we all come back and there is more certainty with respect to some resolution, on a geopolitical theater. I do not think anyone's changing their outlook with respect to their macroeconomic picture.

I think that it could actually set us up pretty well for some additional deal activity for 2027, which is more to my medium term outlook comment.

Robert Dodd: Got it. Fair enough. Thank you. And next 1 is, again, on. Going back to the SCP and Tom, you comment about long-term mid-teens. I mean, can you reconcile for us, I mean, the dividend this quarter was large. And to be clear, it seems it was larger than the earnings it was the NII within the vehicle. So can you reconcile that? I mean, if it is target of. If it is sensitive to when loans get closed, etcetera, etcetera, That I would assume meant sensitivity to when you get loan fee income. But if it generates income, it would also generate NII, and the dividend this quarter was higher than the NII generation within the vehicle.

I mean, obviously, yeah, it is first year. it is ramp up. Everything's new. But can you reconcile kind of like, exactly how that works? And I take as of that, like, you know, mid teens long term, not this year, but I am just trying to understand how the dividend occurred when the earnings did not. That an OID amortization versus a cash receipt kind of question?

Tom Hennigan: Okay. Fair enough. that is it. Understood. Understood. And you know what? We actually predicted you might ask that question. So the. It absolutely is earned. So when we talk about the delayed comp, that is absolutely earned, and that is it. We are paying that out. The delta you are seeing is really gap versus tax and organizational expenses that we amortize over a longer period of time based on its vehicle. So that is really the difference in what you are seeing as earned and what we paid out. So when you look at about the longer term amortization of those expenses, then we paid out what we have earned.

We did not under burn what we paid Yeah. Yeah. Yeah. Got it. Got it.

Robert Dodd: And then 1 more, if I may? On the example you gave with aerospace, Carlyle leading the deal, obviously, CGBT benefiting from that. I mean, it is obviously a core platform level of expertise. I mean, and that is precision manufacturing, etcetera, etcetera. These are likely particularly AI vulnerable. What would be your target or maybe your cap? I mean, how much would you be willing to add into the portfolio in that kind of-- I do not want to call it a niche. it is a very big market segment. I mean, obviously, we want, at the same time, diversification in the portfolio, But, I mean, it is a core platform expertise.

I mean, I am just trying to get a handle on how big would you be willing to take aerospace and those kind of you know, maybe manufacturing drones for Skynet. Things like that.

Alex Chi: Aerospace and defense is obviously 1 of the power alleys of Carlyle and to your point, we certainly benefited in the example of Avantis where if there is an opportunity in the market within that sector, think many of the borrowers out there will think about coming to us at Carlyle and partnering with us. To your point, we are absolutely focused on diversification by industry sector, I think the market, obviously, woke up to the importance of diversification earlier this year. As it related to as it relates to software. So despite the fact that I think there will be a plethora of very attractive opportunities for aerospace and defense given the tailwinds that are out there.

We are going to just make sure that we maintain diversification Not going to go out with a specific hard cap on the sector, but I think if you just look at our portfolio in general, I think you will see that we are very well diversified across all industry sectors, and we are gonna maintain that. Got it. Thank you.

Robert Dodd: Thank you.

Tom Hennigan: Thank you.

Operator: Ladies and gentlemen, I am showing no further questions in the queue. I would now like to turn the call back over to Alex for closing remarks.

Alex Chi: Great. Well, thank you, everybody for joining our call. Appreciate your time, and look forward to speaking again when we report our fourth quarter. Have a great weekend.

Operator: That concludes today's conference. Thank you for your participation. You may now disconnect. Goodbye.

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