Carlyle Credit Income Fund (CCIF) Q3 2025 Earnings Call Transcript

Good day and thank you for standing by.

Welcome to the Carlyle Credit Income Fund Third Quarter 2025 Financial Results Investor Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star-11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Joseph Castillo, please go ahead.

Good morning and welcome to Carlyle Credit Income Fund's third quarter 2025 earnings call. With me on the call today is Nishal Mehta, CCIF's Principal Executive Officer and President, Lauren Besmagin, CCIF's Chair and Carlyle's Global Head of Liquid Credit, and Nelson Joseph, CCIF's Principal Financial Officer. Last night, we issued our Q3 financial statements and a corresponding press release and earnings presentation discussing 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. Any forward-looking statements made today do not guarantee future performance and any undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the risk factors section of our annual report on the form NCSR. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlyle Credit Income Fund assumes no obligation to update any forward-looking statements at any time. During the conference call, we may adjust adjusted net investment income per common share and core net investment income per common share, which are calculated and presented on a basis other than in accordance with GAAP. We use these non-GAAP financial measures internally to analyze and evaluate financial results and performance, and we believe these non-GAAP financial measures are useful to investors gauging the quality of the fund's financial performance, identifying trends in its results and providing meaningful period-to-period comparisons. The presentation of this non-GAAP measure is not intended to be a substitute for financial results prepared in accordance with GAAP and should not be considered in isolation. With that, I'll turn the call over to Nishal.

Thanks, Joe. Good morning, everyone, and thank you all for joining CCIF's quarterly earnings call. I would like to start by reviewing the fund's activities over the last quarter. We maintain our monthly dividend at $0.105 per share, or 22.1% annualized, based on the share price as of August 15, 2025, which is now declared through November of 2025. The monthly dividend is supported by $0.55 of recurring cash flows for the quarter, providing 174% of dividend coverage. New CILO investments around the quarter totaled $28.1 million, with a weighted average gap yield of 14.6%. The aggregate portfolio weighted average gap yield was 15.1% as of June 30th. We rotated out of seven CLO investments for total proceeds of $16.2 million. With NCCI's portfolio, we completed two refinancings and resets in the third quarter, reducing the cost of liabilities and extending the reinvestment periods across these CLOs and bolstering equity cash flows. We expect refinancing and reset activity to pick up as CILO liability spreads continue to tighten. We still have $1.4 million of our common shares above net asset value in connection with the ATM offering program for total net proceeds of $9.2 million. We continue to leverage Carlyle's longstanding presence in the CILO market as one of the world's largest CILO managers and a 15-year track record investing in third-party COOs to manage a diversified portfolio of COO equity investments. While COO equity valuations remain sensitive to macro volatility and continued loan repricings in the underlying leveraged loan market, we remain encouraged by the credit fundamentals across our holdings. We believe the portfolio is positioned defensively to focus on higher-quality managers and structures that maintain ample reinvestment period and robust over-collateralization cushions. This is reflected in the portfolio's weighted average junior over-collateralization cushion of 4.5%. The average remaining reinvestment period increased over the quarter following resets of two positions in the third quarter. The aforementioned loan repricings caused a forward basis point decline in the weighted average spread of the portfolio's underlying loans. Despite this pressure, the portfolio delivered strong cash yields, with April distributions producing an average cash-on-cash yield of 23.1%, supporting CCF's monthly dividend. I'd like to note that volatility earlier in the quarter pressured loan prices and CILA equity valuations. These periods often present opportunities amidst volatility in April. CILA managers were able to capitalize on a temporary dislocation by purchasing loans at discounted prices, helping to build PAR and support future value creation through the end of the quarter. I'd like to share some key stats on the portfolio as of June 30th. The portfolio generates a gap yield of 15.11% on a cost basis supported by cash and cash yields of 23.11% on CLO investment quarterly payments received during the quarter. The weighted average years left in the reinvestment period increased from approximately 3.1 years to 3.3 years as there were two accreted resets in the underlying portfolio during the quarter. This provides CLO managers the opportunity to capitalize on periods of volatility through active management. There are also zero CLOs in the portfolio that are post-reinvestment period. We believe the portfolio weighted average over-qualization cushion of 4.5% is healthy and offsets potential defaults and losses in the underlying loan portfolios. The weighted average spread of the online loan portfolio was 3.25%. The average percentage of loans rated triple C by S&P was 4.4%, below the 7.5% triple C limit in CLOs. As a reminder, once a CLO has more than 7.5% of its portfolio rated triple C, the excess over 7.5% is marked at the lower fair market value or rating into recovery rates and reduces the over-collarization cushion. The percentage of loans trading below 80 decreased from 3.3% to 3.1%. We continue to leverage the depth of the Carlyle Liquid Credit platform and our collaborative One Carlyle platform to source and invest in high-quality CLO portfolios through a disciplined bottom-up 14-step investment process. With that, I will now hand the call over to Lauren to discuss the current market environment.

Thank you, Nishal. I'd now like to provide an update on the recent developments across both the loan and CLO equity markets. Following the volatility in April, the CELO market broadly stabilized as near-term trade concerns eased and investor sentiment improved. CELO issuance totaled $42 billion for the quarter, including $17 billion in May alone, reflecting a meaningful pickup in activity as market conditions became more constructive. CELOs remain a key source of demand for the loan market, with new issuance still on track to outpace record 2024 levels. CLO liability spreads widened sharply in April across the staff following Liberation Day with AAAs and BBs specifically widening by about 20 basis points and 100 basis points respectively from March 31st through their mid-April peaks. As market conditions stabilized post-Liberation Day, CLO liability spreads fully recouped the April widening and partially recouped the widening we witnessed in the second half of the first quarter. However, CLO debt spreads remained above the year-to-date tights reached in late January and early February. Reset and refinancing activity continued during the quarter, though at a more measured pace. That said, the pace of repricings has picked up again during the summer. Looking ahead, we anticipate reset activity remained strong as CLO debt spreads continue to tighten throughout the quarter and the large cohort of 2021 vintage CLOs are approaching the end of their reinvestment periods in 2026. Moving to the loan market, prices broadly recovered over the course of the second quarter following a volatile start. The LSTA index returned 2.3% in the second quarter, recovering from roughly 2% drawdown in April that followed the tariff announcements. The LSTA index ended the quarter slightly below its January high of 97.7, with approximately 40% of the loan market trading above par. While the market remains sensitive to macro development, most of the second quarter marked a period of stabilization following some of the most volatile days seen since March of 2020. Despite ongoing macro uncertainty, credit fundamentals across the U.S. leveraged loan market remain resilient. Within Carlyle's portfolio of nearly 600 borrowers and the CLO management platform, which we believe serves as a valuable proxy for third-party managed CLO portfolios, we continue to see healthy performance. During the quarter, average borrower EBITDA grew by 5.1%, ahead of the 4.8% revenue growth. The average interest coverage ratio was about 3.4 times, with fewer than 2% of borrowers posting a ratio below one times. Preliminary second quarter 2025 data indicates that borrower fundamentals remain stable, with sales and EBITDA growing, but at a slower pace than in prior quarters. From a default perspective, Chapter 11 bankruptcies remain moderate and below historical averages. Out-of-court restructurings continue to be a major contributor to overall default activity in the broadly syndicated loan market. Including these transactions, the market's last 12 months default rate stands at approximately 3.8 percent, which is elevated relative to long-term norms. CCIF's underlying loan portfolio has only experienced a 1.2 percent default rate over the same period, inclusive of out-of-court restructuring, a fraction of the market default rate. CCIF has been able to achieve a lower default rate by leveraging our in-house credit expertise from over 20 U.S. credit analysts to complete bottom-up fundamental analysis on the underlying loan portfolios. I will now turn the call back to Nelson, our CFO, to discuss financial results.

Thank you, Lauren. Today, I will begin with a review of our third quarter earnings. The cash-on-cash yield of 23.11% on CLO investment quarterly payments resulted in 55 cents of recurring cash flow. Total investment income for the third quarter was $8.6 million, or $0.43 per share. Total expenses for the quarter were $4.7 million. Total net investment income for the third quarter was $4 million, or $0.19 per share. Adjusted net investment income for the third quarter was $4.5 million, or $0.22 per share. Adjusted NII adjusts for the $0.03 per share impact from the amortization of the OID and issuance costs for the fund's preferred shares. Core net investment income for the third quarter was $0.35 per share, providing dividend coverage of 111% of our monthly dividend of $0.105 per share. We believe core net investment income is a more accurate representation of CCIF's distribution requirement. Net asset value as of June 30th was $6.51 per share. Our net asset value and valuations are based on the bid side mark we received from a third party on 100% of the CLO portfolio. We continue to hold one legacy real estate asset in the portfolio. The fair market value of the loan was $2.2 million. The third party we engaged to sell our position continues to work through the sales process. During the quarter, we sold 1.4 million of our common shares in connection with the ATM offering program at a premium to NAB for net proceeds of $9.2 million. The common share issuances for the quarter results in an accretion of our net asset value of one cent per share. In Q3, holders of our Series B convertible preferred shares converted $5 million into common stock at a price above net asset value. $3.5 million of the Series B convertible preferred shares remains outstanding. With that, I'll turn it back to initial.

Thanks, Nelson. Today, CCIF holds a diverse-like portfolio of CLOs with meaningful remaining reinvestment periods, giving our managers the flexibility to capitalize on market opportunities. We believe CCIF remains well positioned to deliver both an attractive dividend yield that is fully covered by coordinate investment income and long-term total return potential. We continue to leverage a bottom-up approach to analyzing the underlying loan collateral in each SEAL equity position and actively reassessing our exposure to ensure we remain focused on the highest quality risk-adjusted opportunities. Remain committed to delivering strong, consistent performance for our investors. I'd like now to hand the call over to the operator to take your questions.

Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered, or do you wish to move yourself from the queue, please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Randy Benner with B-Riley Securities. Your line is open.

Hi, thank you for taking the question. This is Tim D'Agostino on for Randy Benner. As we look at the portfolio yield, it seems that it's come in since the end of 24. As we look out to the year in 25, beginning of 26, especially if the Fed cuts rates, Would we expect this total portfolio to kind of be flat at this level or declining?

Yes, Anishal, and good morning. So maybe I'll first address what's driving the decline in gap yields. It's really the record number of loan repricings we've seen since the beginning of 2024. I think the nominal spread in the loan market has declined around 50 basis points. So this is a market-wide issue. And it's really driven by what I would say is somewhat supply-demand imbalance. You're not really seeing a lot of capital markets activity, which drives new loan origination. And so we've seen these repricings. Unfortunately, the repricing wave continues. July, we saw another month of very strong repricings. And so, as of right now, the trend continues to be unfavorable in terms of loan repricing is going to cause the gap yield to decline. The two things that we are doing to offset this is, one, we are actively refinancing and resetting our portfolios to reset the arbitrage between the spread on the loans and the cost of debt. The market was less active in the second quarter, so we only completed two just because of the spread winding we saw post-April. But now as spreads have continued to tighten, we expect that activity to increase. So that should help offset the repricings. The other thing that we're doing is we're constantly looking to optimize the portfolio. And specifically, we have some positions that have substandard gap yields now just because of the repricings. And so we've been rotating out of those positions into new investments. To your question on Fed cuts, given the assets, the underlying loans and our costs and our financings are both floating rate, it largely offsets each other. So we don't think a decline in rates is going to have a material impact on our gap yields.

Okay, great. Thank you so much. And then on cash yield, it seems it's ticked up in the quarter over quarter. I know you said there was some movement in April. As we look out to year end 25, year end 26, should we expect the cash yield to remain at this level? Yeah, thank you.

Yes, you did see an uptake in cash yields last quarter, mainly because in the prior quarter, the quarter ending March 31st, we had a number of silos that did not make their quarterly payments because the cash was instead to use for the accretive refinancings and resets. Given activity was lower in the prior quarter, we saw less of that. So you saw the cash yields normalized. I think the expectation is, as we continue to see repricings, that cash yields might decline as well. It's obviously hard to predict, but what we're hoping is that cash yields will stabilize as we continue to do these refinancings and resets.

Okay, great. Thank you so much. That's all from me.

One moment for our next question. Our next question comes from Eric Zwick with Lucid Capital Markets. Your line is open.

Thanks. Good morning, everyone. I wanted to start with just kind of a bigger kind of strategy question. Given the global reach of the Carlisle parent into global debt markets, correct me if I'm wrong, I don't think CCIF currently has any non-U.S. CLO positions in the portfolio. And if I'm correct on that assumption, is there any particular reason? Do you have a mandate to only do U.S.? Or have you just not seen attractive risk-adjusted opportunities in other markets?

Yeah, Eric, good morning. So you're right. Right now, CCIF currently does not hold any European investments. I guess, to be clear, our larger CEO investing platform, we do invest in Europe. So we have the expertise, we have the credit analyst to help us do the bottom-up analysis. We haven't really done it just from a relative value standpoint, but we are looking at it pretty actively. So I wouldn't be surprised to see some incremental European investments in the portfolio over the next three to six months. And any investments we would make in Europe, we would hedge that back to dollars.

Thanks, Michel. And then just thinking about the opportunity to utilize the new credit facility, I think it's $30 million. It just kind of made me weigh that against other methods of financing the portfolio and some of the other debt you've used in the past.

Yeah, so this credit line, we're going to view it more as a working capital line. So it really helps smooth our inflows and outflows. it allows us to be much more efficient in the fact that we don't have to be holding cash. And so the expectation is usage will be episodic and somewhat limited instead of using it to leverage the balance sheet.

Thanks. And last one for me, just given the current discount where the stock is trading relative to NAV, have you given any thought to potentially repurchasing shares at this juncture?

Yeah, it's something that we discuss internally with the board, and it's something that we'll continue to discuss if the stock trades below NAV. Obviously, you probably saw that both Laura and myself, we made purchases, so we think it's a great value. But we'll continue to have those discussions internally on whether it's more creative to repurchase versus making new investments.

Thanks for taking my questions today.

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. I'm not showing any further questions this time. I'd like to turn the call back over to Joseph.

Thank you. We look forward to speaking to everyone next quarter, if not sooner. Please feel free to reach out if you have any questions, and thank you all for your support.

Thank you, ladies and gentlemen. That's going to conclude today's presentation. You may now disconnect and have a wonderful day.