Introduction
Carlyle Secured Lending (NASDAQ:CGBD) is a BDC that I’ve have not written on however have stored shut tabs on within the sector. Though I do not presently personal them, I have been fairly impressed with their efficiency in the course of the excessive rate of interest atmosphere. The firm’s fundamentals stay robust exhibiting strong development year-over-year. Furthermore, with rates of interest more likely to decline within the quick to medium-term, I believe Carlyle Secured Lending is the proper BDC so as to add to your earnings portfolio on a pullback.
Transient Overview
Carlyle Secured Lending is a reasonably new BDC having IPO’d simply 7 quick years in the past. They’re an externally-managed BDC that lends to U.S middle-market firms with EBITDAs in a variety of $25 – $50 million. Most of their loans are highly-diversified in Funding Funds, Healthcare & Prescribed drugs, and Software program.
Newest Earnings
CGBD reported their Q1 earnings in early Could with a beat on their backside line. Web funding earnings got here in $0.02 above analysts’ estimates at $0.54. Though this declined $0.02 from the prior quarter, it grew 8% year-over-year.
Complete funding earnings additionally declined barely from the prior quarter’s $62.6 million to roughly $62 million. This may be attributed to a decline of their portfolio’s general worth. The BDC exited investments in the course of the quarter as their portfolio worth decreased barely from $1.84 billion to just about $1.8 billion.
The drop will also be attributed to a lower in modification charges and OID acceleration. Regardless of this, their complete firm depend grew to 131, up from 128 within the quarter prior. Originations had been additionally up double-digits on an annualized foundation with the imply EBITDA additionally rising double-digits from $73 million in Q1’23 to $81 million in the course of the current quarter.
So, because the macro atmosphere has introduced challenges, particularly for BDCs, CGBD continued to strengthen their portfolio with bigger firms. Moreover, non-accruals improved in the course of the quarter as properly.
These now account for lower than 1% at each price & truthful worth. At simply 0.2% at price & truthful worth, the expansion in median EBITDA appears obvious as non-accruals additionally declined year-over-year. These stood at 3.5% on a good worth foundation, a major decline as administration labored tirelessly to positively place their portfolio.
Moreover, it is a testomony to their administration workforce as rising non-accruals have plagued many BDCs in the course of the excessive rate of interest atmosphere. Peer PennantPark Funding (PNNT), who added two new firms to their non-accruals checklist stood at 3.7% at price and three% at truthful worth.
Monroe Capital (MRCC), a smaller peer when it comes to market cap additionally noticed a slight enhance of 1.1% of their non-accruals quarter-over-quarter. These characterize 2.7% of their portfolio at truthful market worth. So, as compared, Carlyle’s debtors appear to be performing significantly better.
And that is obvious when it comes to share value. Within the chart you possibly can see CGBD has considerably outperformed each friends, up double-digits greater than 20% compared to 8.5% for PNNT and three.5% for MRCC.
Stable NAV Progress
The BDC additionally confirmed respectable development of their NAV with this rising modestly to $17.07, up from $16.99 in This autumn. On an annualized foundation NAV declined barely from $17.09. BDCs usually develop their NAV by persevering with to develop their portfolio and out-earning their dividends.
However this will see volatility over time on account of mortgage repayments and dividend funds. Nonetheless, that is one thing buyers should not fear about within the shorter-term. NAV development over an extended time period reveals the well being of the corporate’s portfolio and needs to be thought-about when trying to make investments into any BDC.
Constant NAV erosion is one thing buyers needs to be involved with as this usually results in underperformance in share value and complete returns. Because the begin of price hikes in 2022 CGBD has been in a position to steadily develop its NAV from $16.91 in early 2022. And with them being a reasonably new BDC, public lower than a decade, I anticipate their NAV to point out strong development for the foreseeable future.
Robust Dividend Protection
Their alignment with shareholders is one more reason I believe CGBD is the proper addition to an income-focused portfolio as externally-managed BDCs are normally extra fiscally conservative. And regardless of the decline in internet funding earnings quarter-over-quarter, Carlyle Secured Lending continued to point out robust dividend protection. Even paying a supplemental of $0.07, Nll of $0.54 nonetheless comfortably coated complete dividend payout, giving them protection of 115%.
This was greater than each the aforementioned friends as their internet funding earnings matched their quarterly run price. For context, that is greater than two favorites inside the sector, Blackstone Secured Lending (BXSL) & Ares capital (ARCC) throughout their newest quarters. Each had dividend coverages of 113% and 114% respectively.
Robust Stability Sheet
Carlyle Secured Lending can be in a robust place financially on account of their stability sheet. Their well-laddered debt provides them capital flexibility. Over the previous 12 months the BDC has been rising their liquidity, which places them in a robust place to make investments when exercise picks up, doubtless within the again half of the 12 months. CGBD elevated their money & money equivalents from $42.8 million to just about $70 million.
Their debt-to-equity stage was additionally wholesome and beneath the sector imply 116% at 113%. Their debt maturities are additionally well-laddered with complete debt of $1.5 billion with $190 million due in December of this 12 months. This had a weighted-average rate of interest of 4.66%. Furthermore, their subsequent debt maturity is not till 4 years later in 2028 with $85 million maturing, placing them in a cushty place to capitalize on future development alternatives.
Dangers
With rates of interest anticipated to say no this September, Carlyle Secured Lending faces draw back dangers as decrease rates of interest are more likely to impression their internet funding earnings as 100% of their debt is floating price. I anticipate this to be a gradual decline however their financials will likely be impacted by declining rates of interest, putting strain on their dividend protection.
Valuation
Because of their robust efficiency, CGBD now trades at roughly a 5.5% premium above its NAV. That is greater than the 3-year common low cost of roughly 14% and barely above the excessive premium of 5.39% So when it comes to valuation, CGBD seems to be overvalued in the intervening time.
Furthermore, with charges anticipated to say no, I do anticipate a pullback inside the sector. And suppose CGBD may also see a drop in share value as these buyers in search of higher-yields will doubtless rotate out the sector with BDCs eliminating the specials and/or supplementals for probably the most half.
Moreover, they’re anticipated to see some draw back from Wall Road, doubtless on account of decrease rates of interest. And in that case, I believe buyers on the lookout for earnings ought to take into account shopping for CGBD close to the $16 stage and beneath for a margin of security.
Conclusion
Carlyle Secured Lending has all of the makings of an ideal BDC on account of their general portfolio high quality. Moreover, they’ve carried out exceptionally in an atmosphere the place some friends’ portfolios have began to point out indicators of weak point. Their fundamentals are additionally robust with well-laddered debt maturities, which provides them capital flexibility to proceed rising organically. That is additionally a testomony to their administration workforce and for my part, CGBD is the proper BDC for income-focused buyers to purchase on a pullback.