BDC Update: Carlyle Secured Lending Fund
2 min read

BDC Update: Carlyle Secured Lending Fund

August 29, 2022

Looking Ahead

We've not written about Carlyle Secured Lending Fund (CGBD) before. However, with the latest IIQ 2022 results behind us, and interest rate hikes ahead, we face the difficult task of resetting earnings and distribution expectations. First, though, let's see where we stand:

To Date

The BDC has announced distributions through the third quarter of the 2022, which total $1.20. The last announcement was for $0.40 - $0.34 regular plus $0.06 of special. We're projecting another $0.46 - in some sort of mix - in the last quarter, to reach $1.66 for all of 2022. In 2021, CGBD paid out $1.50 and $1.47 in 2020. The record payout, though, was in 2019: $1.92 per share.

Very Different

The BDC's earnings are headed upwards, with Net Investment Income Per Share (NIIPS) clocking in most recently in the IIQ 2022 at $0.40. The analyst community is expecting a modest increase to $0.41 in the IIIQ 2022 and $0.43 in the IVQ 2022. Management, though, has provided far more aggressive guidance in their latest conference call:

All told, we see NII for the second half of the year in the $0.43 to $0.44 per share range, with a number of potential factors that would generate further upside, to remain highly confident in our ability to comfortably meet and exceed the new $0.34 base dividend and continue to pay out sizable supplemental dividends each quarter.

Even More So

CGBD's 10-Q is even more promising. A 100 basis point increase in rates from the level on June 30, 2022 -then at 1.75% - brings in incremental NII of $15mn, and 200 basis points bring in $22mn. That $0.29 to $0.42 per share of potential higher EPS over the $1.60 per share annualized pace of the most recent quarter. Technically, that could bring EPS to $1.89, or even $2.02. Not even included in those numbers are potentially higher spreads on new loans or the impact of a bigger investment portfolio should management take CGBD up to its optimal, fully leveraged (1.4x debt to equity is the target) size.

For our part, we recognize that there will be challenges that will reduce earnings, and the reference rate increases will not last forever. Lower new investment activity could reduce transaction and other fees. Nonetheless, we're projecting 2023 distributions will increase to $1.9000. For our purposes - and at this point - we're holding that payout projection through 2026. The terminal multiple remains unchanged at 12.0x.

At CGBD's current price of $14.48, such a big increase in the future distribution level causes the Target Price to increase to $22.80. If achieved, that would be an all-time price record. The yield - using the 2023 payout - is 13.1%. The total return amounts to 121% over 5 years, or 24.2% per annum. No wonder we believe the BDC sector might be about to enter a Golden Age, even if we have a recession on the doorstep to contend with. CGBD offers one of the very highest potential long term returns out there, but that's before we undertake a similar re-projecting process for the rest of its peers. Maybe the BDC will end up somewhere in the middle of the BDC pack when we compare apples with apples.