Carlyle Secured Lending(CGBD)2025-02-25 21:24Debt and Interest Rates - The company's outstanding indebtedness as of December 31, 2024, is $978.4 million, with a weighted average effective annual interest rate of 6.65%[169] - To cover annual interest payments on the outstanding debt, the investment portfolio would need to produce an annual return of approximately 3.38%[169] - Rising interest rates have increased the cost of capital and may negatively impact the ability of portfolio companies to service their debt obligations[171] - The Federal Reserve has increased interest rates throughout 2023 and part of 2024, with potential for further increases in 2025 if inflation exceeds certain levels[171] - Approximately 99.6% of the company's debt investments bear interest at a floating rate, primarily subject to interest rate floors, as of December 31, 2024[476] - Interest rate sensitivity indicates that changes in market interest rates could materially affect the company's income in the future[477] - A 300 basis point increase in interest rates would result in a net investment income of $23.563 million for 2024, compared to $21.682 million in 2023[480] - A 200 basis point increase in interest rates would yield a net investment income of $15.708 million for 2024, compared to $14.455 million in 2023[480] - A 100 basis point increase in interest rates would generate a net investment income of $7.855 million for 2024, compared to $7.227 million in 2023[480] - A 100 basis point decrease in interest rates would lead to a net investment income loss of $7.855 million for 2024, compared to a loss of $7.227 million in 2023[480] Investment Risks and Portfolio Management - The incentive fee structure may encourage the Investment Adviser to pursue riskier investments, potentially increasing leverage and investment losses[178] - The company may incur incentive compensation for the Investment Adviser even if there is a net loss for the quarter, due to the calculation method based on pre-incentive fee net investment income[177] - The company is highly dependent on information systems, and failures could disrupt operations and negatively impact financial results and stock price[198] - Cybersecurity risks are increasing, and incidents could disrupt operations, compromise confidential information, and lead to significant financial losses[199] - The ability to operate depends on services from the Investment Adviser and other administrators, and their resignation could disrupt operations and financial condition[205] - The Investment Adviser's limited liability may lead to riskier behavior on behalf of the company, potentially impacting financial outcomes[207] - The company may face risks if it fails to make follow-on investments in portfolio companies, potentially impairing the value of its investments[249] - The company does not intend to hold controlling equity positions in portfolio companies, which may limit its ability to influence management decisions[253] - The company may rely on representations made by borrowers, which may not always be accurate or complete[243] - Due diligence conducted by the Investment Adviser may not reveal all relevant facts necessary for evaluating investment opportunities[244] - Prepayment of loans by portfolio companies may reduce investment income if returned capital cannot be reinvested at equal or greater yields[245] - The company may face increased regulatory scrutiny in the private equity industry, which could affect operational improvements and objectives[203] Financial Performance and Reporting - Total investment income for 2024 was $232.59 million, a decrease of 3.4% from $241.63 million in 2023[507] - Net investment income for 2024 was $105.25 million, compared to $109.97 million in 2023, reflecting a decline of 4.5%[507] - Total assets decreased to $1.93 billion in 2024 from $1.94 billion in 2023, a reduction of approximately 0.3%[505] - Total liabilities decreased to $1.02 billion in 2024 from $1.03 billion in 2023, a decline of about 0.1%[505] - Net assets at the end of 2024 were $905.20 million, down from $912.81 million in 2023, representing a decrease of 0.8%[510] - Basic earnings per common share for 2024 were $1.68, down from $1.75 in 2023, a decrease of 4.0%[508] - Diluted earnings per common share for 2024 were $1.58, compared to $1.64 in 2023, reflecting a decline of 3.7%[508] - The company declared dividends totaling $98.59 million in 2024, an increase from $92.90 million in 2023[510] - The company reported a net realized loss on investments of $39.75 million in 2024, compared to a loss of $20.85 million in 2023[510] - The net increase in net assets resulting from operations for 2024 was $88.98 million, down from $92.28 million in 2023, a decrease of 3.5%[510] - Net cash provided by operating activities for 2024 was $104,265,000, compared to $230,609,000 in 2023[512] - Total cash, cash equivalents, and restricted cash at the end of 2024 was $56,575,000, down from $60,447,000 in 2023[512] - Proceeds from the issuance of Senior Notes in 2024 were $300,000,000, compared to $85,000,000 in 2023[512] Regulatory and Compliance Issues - If the company fails to maintain its RIC status, it could be subject to corporate-level income tax, adversely affecting net assets and distributions to stockholders[185] - Certain investors are limited in their ability to make significant investments in the company due to restrictions under the Investment Company Act[191] - The Board of Directors is authorized to reclassify unissued shares of common stock into preferred stock, which could delay or prevent transactions that might benefit common stockholders[192] - The company issued Preferred Stock on May 5, 2020, which may adversely affect the market value of common stock and could lead to dilution upon conversion[193] - Provisions in the Maryland General Corporation Law (MGCL) and the company's Charter may deter takeover attempts, potentially impacting the price of common stock[194] - The Board of Directors can change investment objectives and strategies without prior notice or stockholder approval, which may adversely affect business and stock value[197] - Changes in laws and regulations could adversely affect the company and its portfolio companies, impacting business operations and financial condition[202] - The company may face challenges in making sufficient distributions to stockholders to meet the Annual Distribution Requirement necessary to maintain its status as a RIC, potentially requiring asset sales or additional capital raising[289] - Failure to meet the Annual Distribution Requirement could result in the company being subject to corporate-level U.S. federal income tax, impacting its financial performance[290] Mergers and Acquisitions - The company expects to achieve certain synergies and cost savings from the Mergers, but there is no assurance that these benefits will be realized or that the integration will be successful[315] - The completion of the Mergers is subject to various closing conditions, including stockholder approvals, which if not satisfied, could result in material adverse consequences[317] - The company may incur substantial expenses related to the Mergers, which will not yield benefits if the Mergers do not close[316] - The market price of the company's common stock post-Mergers may be influenced by factors different from those currently affecting its independent trading price[323] Investment Portfolio Composition - Investments primarily consist of loans to middle market companies, which are generally rated below investment grade and considered higher risk[222] - The company’s portfolio securities are generally illiquid, making it difficult to realize returns in a timely manner[225] - The actual liquidation value of assets may be materially less than the NAV due to volatile market conditions[228] - The portfolio may be concentrated in a limited number of companies and industries, increasing the risk of significant loss if any of these companies default[239] - Declines in corporate debt prices and illiquidity in the markets may adversely affect the fair value of portfolio investments, leading to reduced NAV[240] - The financial projections of portfolio companies could prove inaccurate, potentially leading to a substantial decrease in the value of investments[242] - The overall fair value of the investments reflects a strong interest rate spread, with several investments exceeding 10%[517] Shareholder and Stock Information - The company has authorized a $200 million stock repurchase program until November 5, 2025, to repurchase shares of common stock[279] - As of February 24, 2025, the company had 50,956,965 shares of common stock outstanding, with potential dilution risks from the conversion of Preferred Stock[282] - Distributions may exceed taxable income, resulting in a portion being treated as a return of capital for U.S. federal income tax purposes[285] - Non-U.S. stockholders may be subject to a 30% withholding tax on dividends that are not effectively connected with a U.S. trade or business[287] - The company can designate a consent dividend, allowing it to deduct the amount for tax purposes without actual cash distribution, which may affect stockholder income reporting[291] Valuation and Investment Performance - The company maintained effective internal control over financial reporting as of December 31, 2024, based on COSO criteria[497] - The audit opinion expressed on the consolidated financial statements was unqualified, indicating fair presentation in all material respects[486] - The audit included evaluating the design and operating effectiveness of controls over the Company's investment valuation process[493] - The Company’s management used significant unobservable inputs for the valuation of Level III investments, requiring significant judgment[493] - The fair value of the Company's Level III investments totaled $1.740 billion[493]