Carlyle Secured Lending: No Margin Of Safety (Rating Downgrade) =============================================================== Jul. 11, 2025 6:15 AM ET 14.83K Followers Follow Play(9min) Summary * Carlyle Secured Lending's portfolio quality deteriorated in 1Q25, with non-accruals rising and net investment income dropping 25% year-over-year. * The dividend payout ratio hit 100% (112.5% including supplemental), erasing the margin of safety and making the 12% yield unsustainable. * The Company trades at a 17% discount to NAV, reflecting market concerns about credit quality and dividend sustainability; a dividend cut appears likely. * Given these risks, I downgrade my rating on CGBD to 'Hold' and recommend a wait-and-see approach until credit metrics and payout ratios improve. We Are **Carlyle Secured Lending Inc. (NASDAQ:)** unfortunately experienced a substantial decrease in portfolio quality and in the dividend payout ratio in 1Q25, which might make the payment of the present dividend unsustainable. The business development company paid out 100% of its total net investment income before taking into account the payment of supplemental dividends in 1Q25. Consequently, I am now more concerned about the BDC being able to sustain its high 12% dividend yield, and I am consequently modifying my stock classification to 'Hold'. My last review on Carlyle Secured Lending culminated in a '' stock classification as the BDC profited from improving credit quality in its portfolio. Unfortunately for CGBD, this positive trend in non-accruals reversed in 1Q25, and the BDC might be forced to adjust its dividend lower in the latter half of the year. Portfolio Review, Credit Profile, Disappearing Margin of Safety Amid Loan Problems Carlyle Secured Lending is a business development company and backed by alternative asset management firm Carlyle, which is one of the biggest asset managers in the world with more than 440 billion in assets under management. The business development company is focused on the origination of First and Second Liens in the U.S. middle-market segment and as such, competes with the likes of **Ares Capital ()** or **Blackstone Secured Lending Fund ()**. As of March 31, 2025, Carlyle Secured Lending owned an investment portfolio valued at $1.8 billion, which consisted of 83% of First Lien Debt. Other investments made up a relatively small proportion, with second liens accounting for 6% of assets, equity for 5%, and investment funds for 5% as well. Asset Mix (Carlyle Secured Lending, Inc.) I modified my stock classification for Carlyle Secured Lending in the fourth quarter of last year, predominantly because the business development company's non-accrual ratio improved QoQ. As of September 30, 2024, the BDC had a non-accrual ratio of 0.6 percent based on the fair value of its debt investments. This non-accrual ratio held steady for only two quarters, however, and rose again to 1.6%, based on fair value, in 1Q25, resulting in a substantial increase in the company's dividend payout ratio as well. Non-Accrual Trend (Author Created Graph Using Company Information) Carlyle Secured Lending's non-accrual ratio of 1.6% is not the worst in the peer group I selected, however. I compare Carlyle Secured Lending's non-accrual ratio to those of business development companies that also reported loan problems and that have a softer loan quality profile. These business development companies include **Goldman Sachs BDC (), and Oaktree Specialty Lending (),**whose non-accrual ratios are listed below. Non-Accrual Ratio Peer Comparison (Author Created Table Using Company Information) Higher non-accruals and loan problems often lead to falling net investment income, and this is unfortunately exactly what we are seeing with Carlyle Secured Lending. The business development company produced net investment income of $20.8 million in 1Q25, down a whopping 25% YoY, which is a big percentage drop to digest for any business development company. Unfortunately, the increase in non-accrual ratio and consequential decrease in net investment income led to a substantial increase in the dividend payout ratio, which in turn makes CGBD's dividend yield of 12% much more risky moving forward. Income Trend (Author Created Graph Using Company Information) The business development company saw its dividend payout ratio rise to 100% in the first quarter. As a matter of fact, the BDC paid out even more than 100% when the supplemental dividend of $0.05 per share is factored into the calculation; including the supplemental dividend, Carlyle Secured Lending's dividend payout ratio rose to 112.50%, reflecting a deterioration of 17 PP. In the last twelve months, Carlyle Secured Lending paid out 99.5% of its total net investment income, which means that the BDC's margin of safety as far as the dividend was concerned completely disappeared. Dividend Payout Ratio (Author Created Table Using Company Information) Higher Non-accruals Led to Wider Net Asset Value Discount Carlyle Secured Lending reported a 1 percentage point higher non-accrual ratio in 1Q25, which in turn led to a significant sell-off in the company's stock, from which the BDC's stock did not yet manage to recover. In the valuation comparison table below, I am comparing Carlyle Secured Lending against a group of business development companies that also have a higher than average non-accrual ratio (as mentioned previously) and therefore have weaker credit quality compared to the average business development company in the market. Carlyle Secured Lending is presently selling for a price-to-NAV of 0.83x, which reflects a 17% discount to net asset value. Oaktree Specialty Lending, which I have shown to have the highest non-accrual ratio of 4.7%, and is also selling for 0.83x net asset value. However, Oaktree Specialty Lending's stock is cheaper based on net investment income than Carlyle Secured Lending's (7.7x vs. 8.6x). My present stock classification on OCSL is 'Hold' as well. The BDC peer group average discount to NAV is 14%, so the market values all business development companies with credit problems at sizable discounts to their respective net asset values. Presently, I would not want to initiate a new position in Carlyle Secured Lending, and I am taking a wait-and-see approach to see whether or not the business development company has the potential to improve its credit profile and payout metrics. Payout Metrics Peer Comparison (Author Created Table Using Company Information) Why the Investment Thesis Might Be Wrong A BDC can only sustain high dividend payouts for as long as it covers its dividend with net investment income. Since the margin of safety has disappeared for Carlyle Secured Lending, a dividend cut is obviously the most substantial risk in the short term. If Carlyle Secured Lending decides to chop its dividend, the BDC might sell for an even higher discount to net asset value, which would make it so much harder for CGBD to close the gap between stock price and net asset value. Only in the event that Carlyle Secured Lending were to catalyze a change in its non-accrual trend in the near term would the BDC be able to avoid a dividend cut, in my view. **My Takeaway** Circumstances unfortunately force me to modify my stock classification for Carlyle Secured Lending to 'Hold' as a dividend cut could be in the cards for 2025. The business development company suffered a rather substantial increase in its dividend payout ratio, based on net investment income, in 1Q25, and the margin of safety, previously so obviously present, no longer exists. The 17% discount to net asset value reflects considerable market concerns about the sustainability of the dividend, and I think that the BDC could be tempted to lower its payout in the latter half of the year. Since the business development company pays supplemental dividends in the amount of $0.05 per share per quarter in the last two quarters, I think the supplemental dividends would get chopped first, but there is also considerable risk for the base dividend.

Carlyle Secured Lending: No Margin Of Safety (Rating Downgrade)

Carlyle Secured Lending's portfolio quality deteriorated in Q1 2025, with non-accruals rising and net investment income dropping 25% YoY. The dividend payout ratio hit 100% (112.5% including supplemental), erasing the margin of safety and making the 12% yield unsustainable. The company trades at a 17% discount to NAV, reflecting market concerns about credit quality and dividend sustainability; a dividend cut appears likely. The author downgrades the rating to 'Hold' and recommends a wait-and-see approach.