Carlyle Secured Lending Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 27, 2024

There are 9 speakers on the call.

Operator

Thank you for standing by, and welcome to the Carlyle Secured Lending, Inc. 4th Quarter 2023 Earnings Conference Call. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Daniel Han, Shareholder Relations. Please go ahead, sir.

Speaker 1

Good morning, and welcome to Carlyle Executive Lending's Q4 2023 Earnings Call. With me on the call this morning is Aaron Lee Kong, our Chief Executive Officer and Dom Hennigan, our Chief Financial Officer. Last night, we filed our Form 10 ks and issued a press release with a presentation of 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.

Speaker 1

Any forward looking statements made today do not guarantee future performance and any undue reliance should not be placed on 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 Form 10 ks. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlyle Secured Lending assumes no obligation to update any forward looking statements at any time. With that, I'll turn the call over to Aaron.

Speaker 2

Thanks, Dan. Good morning, everyone, and thank you all for joining. As has become custom, I will focus my remarks on 3 topics for today's call. First, I'll provide an overview of the Q4 and full year 2023 financial results. Next, I'll touch on the current market environment.

Speaker 2

And finally, I'll conclude with a few comments on the quarter's investment activity and portfolio positioning. Starting off with earnings, we continue to see our financial performance benefit from the higher base rate environment. In the 4th quarter, we generated net investment income of $0.56 per share, which is an increase of 8% from the prior quarter and represents an annual yield of 13% based on twelvethirty one now. This continues to trend upward from last quarter and the LTM period. As a result of our continued execution of our strategy, the quality of our portfolio and our confidence in the future, beginning this quarter, we are increasing the base dividend by $0.03 from $0.37 to $0.40 per share.

Speaker 2

Our Board of Directors declared a total Q1 dividend of $0.48 per share, consisting of our new base dividend of $0.40 plus an $0.08 supplemental, a total increase of 9% compared to the prior quarter and an increase of 8% on the base dividend. Our net asset value as of December 31 was $16.99 per share. That's up $0.13 or approximately 1% from the September 30 period, primarily as a result of our Q4 earnings outpacing our dividend. Turning now to the market environment. 2023 was defined by market volatility, slow private equity capital formation and muted M and A activity for most of the year.

Speaker 2

For context, private equity deal activity and M and A With this backdrop throughout the year, our investment team leveraged the breadth and depth of the One Carlyle platform to drive value in the evolving market environment by generating significant volume across our existing portfolio of borrowers and Carlyle's broad sourcing network. Leveraging our incumbencies allowed us to source transactions where we had diligence and information advantages and existing portfolio companies accounted for approximately half of our deal closings during the year. Our flexible origination capabilities enabled us to source transactions from the lower end of the middle market at $25,000,000 of EBITDA and opportunistically all the way up to $450,000,000 of EBITDA in the last year. That includes sponsored and non sponsored companies across North America and Europe. Outside of our core middle market strategy, we leveraged the One Carlyle network to source complementary, differentiated specialty lending transactions within the asset based and recurring revenue markets.

Speaker 2

These trends were evident throughout the year and continue with 4th quarter origination activity. We continue to be pleased with the overall credit performance of our existing portfolio with revenue and EBITDA up quarter over quarter and since inception. Compared to the prior year, portfolio company revenue and EBITDA both expanded by an average of approximately 13% and compared to the prior quarter 1% and 3% respectively. Non accruals were stable in the 4th quarter and as Tom will discuss in detail later, we expect these levels to improve in the coming quarter. Tactical origination activity, strong credit fundamentals and the current rate environment drove record income for CGBD.

Speaker 2

Despite the rising base rate environment over the last 2 years, we have been intentionally conservative with our dividend through the cycle. In our view, our new dividend policy, which Tom will expand upon later, provides a sustainable base dividend along with a transparent framework for supplemental dividends that will enable investors to better anchor their expectations. Lastly, I'd like to spend a few minutes on current positioning. Our portfolio remains highly diversified and is comprised of 173 investments in 128 companies across over 25 industries. The median EBITDA across our portfolio at the end of the quarter was $76,000,000 The average exposure in any single portfolio is less than 1% and 95% of our investments are in senior secured loans.

Speaker 2

I'll now hand the call over to our CFO, Tom

Speaker 3

Hennigan. Thanks, Aaron. Today, I'll begin with a review of our 4th quarter earnings. Then I'll discuss portfolio performance and I'll conclude with detail on our balance sheet positioning. As Aaron previewed, we had another strong quarter on the earnings front.

Speaker 3

Total investment income for the Q4 was $63,000,000 up about $2,000,000 from the prior quarter. This increase was driven by the continued positive impact of base rates and an increase in both other income and OID acceleration, which were aided by prepayment activity. Total expenses of $34,000,000 were flat versus prior quarter. Of note, total interest expense was up modestly as base rates stabilized during the quarter. The result was net investment income for the Q4 of $28,000,000 or $0.56 per share, up nearly 8% from the prior quarter.

Speaker 3

And this level represents an all time high for core NII in any quarter. Our Board of Directors declared the dividends for the Q1 of 2024 at a total level of $0.48 per share. That's comprised of the new $0.40 base dividend plus an $0.08 supplemental, which is payable to shareholders of record as of the close of business on March 29. This total dividend level reflects an increase of 9% over the previous $0.44 per share and reflects the earnings power and stability of our portfolio despite a complex macroeconomic environment. Our base dividend coverage of 140% for the quarter remains above the BDC peer set average and we've grown the base dividend by 25% since 2022.

Speaker 3

At the same time, the total dividend level also represents an attractive yield of over 12% based on the recent share price. In terms of the forward outlook for earnings for the rest of 2024, we see stability at this $0.50 plus level based on the latest interest rate curves and our current conservative positioning on leverage. Despite rising rates, we've maintained a conservative disciplined approach that we believe will enable us to continue consistent dividend payouts in a variety of rate environments, included when rates normalize. So we remain highly confident in our ability to comfortably meet and exceed our new $0.40 base dividend and continue paying out supplemental dividends each quarter. And going forward, we're going to shift to a floating supplemental dividend construct and target paying out at least 50% of excess earnings through the supplemental dividend, which will allow us to be flexible as the portfolio evolves and base rates fluctuate.

Speaker 3

On valuations, our total aggregate realized and unrealized net gain was about $500,000 for the quarter, supported by a slight net positive movement in valuations. This increase in valuations combined with Q4 earnings exceeding the dividend resulted in our NAV increasing from $16.86 to $16.99 per share. Turning to the portfolio. We continue to see overall stability in credit quality across the book. Similar to last quarter, there were no new non accruals and no additions to our watch list, which deals with risk ratings 4 or 5.

Speaker 3

Total non accruals were effectively flat quarter over quarter and we're very pleased to report that dermatology associates was successfully recapitalized in early February with the lenders taking equity control. So we expect an improvement in non accruals when we report March results. We continue to proactively manage the portfolio and are working with sponsors to ensure borrowers have adequate liquidity. You'll see that PIK interest ticked up over the course of 2023. In almost all cases, when we provided PIK relief for existing borrowers, that was accompanied by significant equity support from the sponsor.

Speaker 3

I'll finish by touching on our financing facilities and leverage. We continue to be well positioned on the right side of our balance sheet. Leverage is down quarter over quarter and we're intentionally running leverage conservatively at the lower end of our target range to maintain the flexibility to invest in attractive opportunities. Statutory leverage was about 1.2 times and net financial leverage ended the quarter modestly lower right about one turn, the lowest level since early 2022. This positioning allows us to remain opportunistic as the macroeconomic environment evolves and deal activity looks to pick up in 2024.

Speaker 3

With that, I'll turn it back to Aaron.

Speaker 2

Thanks, Tom. I would like to finish by highlighting the consistency of our investment approach and reiterate our overall investment strategy. We are primarily focused on making senior secured floating rate investments to U. S. Companies, backed by high quality sponsors primarily in the mid market.

Speaker 2

Market demand for private credit remains high and we continue to focus on sourcing transactions with significant equity cushions, attractive leverage levels, strong documentation and attractive spreads relative to not only the current market, but also historical originations through our disciplined underwriting, prudent portfolio construction and conservative approach to risk management. With attractive new originations, a stable portfolio and reduced non accruals, we benefited from continued execution of our strategy in 2023 and remain committed to delivering a non volatile cash flow stream to our investors through consistent income and solid credit performance. I'd like to now hand the call over to the operator to take your questions. And thank you so much.

Operator

Certainly. One moment for our first questions. And our first question comes from the line of Bryce Rowe from B. Riley. Your question please.

Speaker 4

Thanks a lot. Good morning.

Speaker 5

Hi, Bryce. How are you doing?

Speaker 4

I'm good. I'm good. Thanks, Aaron. Wanted to maybe piggyback on some of the prepared comments there around a potential pickup in activity. We've heard that from other BDCs.

Speaker 4

And if you could kind of just help us think about what that might look like, especially relative to the leverage profile of your balance sheet at this point. I mean, you've noted that you're at one of the lowest leverage points in quite a while. So just kind of want to understand how that could evolve over the course of 2024?

Speaker 6

Yes. So as usual, you've asked the question probably has multifaceted. So when we think of leverage, I'll just start there. That's and Tom and Dan should hop in if they'd like, but that is a sort of multi variable topic. So one, we're able to in today's market originate loans that at S+6+ I think last year the average loan in CGBD was probably around S+650.

Speaker 6

The team here will tell me if I'm off by a few basis points. You're able to actually pay out that sustainable and non volatile cash flow stream, which is actually the ultimate product of any BDC without being over levered. And Bryce, you and I and the team have talked about this behind closed doors many times. The goal here isn't to run hot just for the sake of being invested. The goal here is to pay out that non volatile cash flow stream.

Speaker 6

So for us, the leverage is really just

Speaker 2

a function of the rest of

Speaker 6

the strategy. So the in terms of a pickup in and I'm just going to the Q4. So there was a pickup in transactions in the Q4 and then the Q1 has actually been stable to the Q4. The reality though is our first question isn't, hey, how do we do 10 more deals? Our first question is, is the incremental transaction that we're doing, Bryce, you and I've talked about this behind closed doors, is it

Speaker 2

going to improve the current portfolio, period. So when we

Speaker 6

think about whether we have to take up leverage, we think about how an uptick in volume impacts the fund. The first question isn't, oh, how many more deals can we do? The first question is, how do we actually create the cleanest, most non volatile cash flow streams that we can? So that can is leverage going to stay down at one turn forever? No, we don't mean it to.

Speaker 6

But in this market based on our current base returns, we actually have the benefit of being able to do that. And same token, and I'm sorry for if this doesn't perfectly get to your question, hopefully it's getting around it. Even if deal flow picks up, effectively that I'd rather the biggest funnel to be able to choose the best deal. So I'd rather always see more deals, but just because originations and seeing more transactions has picked up, again, my product and our team's product to you in the street and this is kind of the strategy we try to execute is how do you create a clean portfolio that kicks off the cash flows that you all can predict. Is that helpful?

Speaker 4

Yes, for sure. I appreciate it. Definitely gets to the meat of the question. And maybe a follow-up for Tom, you talked about it in the prepared remarks, the dermatology associates investment crystallized here in February, as you noted. Can you talk about what the mechanics of that might look like in the Q1 given that you were actually carrying it at a fair value mark above cost?

Speaker 3

Right. So the new capital structure like the similar structure is going to have 2 tranches of data, 1st out and the last out. And then you'll see there'll be a new equity tranche on our SOI. One important note is in the aggregate, our total fair value will be crystal ball right after is roughly unchanged. So total fair value is not going to change very much.

Speaker 3

It's just there will be different instruments and there will be more value moving from what is now our last out on non accrual to an equity tranche. And then there'll be more debt on accrual status in those new tranches. So net net positive impact on a quarterly but full quarter basis of about $0.01 per share.

Operator

Okay.

Speaker 3

No impact on fair value, but and non accruals going down materially with that transaction in the aggregate being removed from non accrual stats.

Speaker 4

Yes. Okay. Got it. And then maybe last one for me. I mean, you all had swapped out the fixed rate for a floating rate on the baby bonds.

Speaker 4

Maybe an obvious answer from you all, but just any thought around why do that as opposed to just keeping a fixed rate there?

Speaker 3

Chris, with the 8%, when we're looking at our maturities at the end of 2020 4. We wanted to be measured and put our legs in one basket and wait for the market to rebound. So we consider this kind step 1 in addressing those upcoming maturities. 8.2 for the market was a good rate, but candidly not a rate we wanted to stick with for any long term amount of time. So the right thing to do would be to swap that to floating certainly seeing the likelihood that base rates are going to come down.

Speaker 3

So over time paying much less than the 8.2 and that's at least with what the rate where the rate curves are going to go. That's what we anticipate happening with that instrument. And in terms of the next step is we're going to look to do potentially an index eligible deal whether it be later in 2024, early 2025, increase our overall unsecured debt exposure. That's something that we'll be we're working on and looking, we'll say, over the course of the next year. Got it.

Speaker 3

Okay. Thanks for that.

Speaker 6

Bryce, thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Finian O'Shea from Wells Fargo Securities. Your question please.

Speaker 7

Hey everyone, good morning. So Aaron, I appreciate the portfolio cover as it relates to the core middle market strategy and opportunistically partaking in the larger market and or ARR deals. So in these instances, does that mean that the direct lending platform that serves the BDC under you is opportunistically doing other styles? Or is it that the BDC complex is claiming this deal flow from other Carlyle credit verticals? And then, second part there, are you still dedicated to the core middle market or are you drifting up market by design?

Speaker 7

Thanks.

Speaker 5

Fin?

Speaker 1

Yes.

Speaker 6

Is this the first time

Speaker 5

the 2 UMass guys have been on an earnings call?

Speaker 7

It should be a target school now.

Speaker 6

So let me start from the first question, which is a great one. So our knitting is core middle market. So if you think about the for our entire platform, so it's a great question. If you think about the median EBITDA of a company that we lend to, it's about $76,000,000 With that said, we have a pretty big and this is all within direct lending and the private credit business. We have a large origination footprint.

Speaker 6

So for us, when I think and the team thinks about direct lending, my ultimate goal, and I'm going to go back to the previous question is, we're putting together a big portfolio with the average position being less than 1%. So my ultimate product is the cash flow stream that kicks out. So in the first half of last year, when there were a lot fewer transactions to be had, it was the first time in many years where quite frankly the terms of the upper part of the market, so well north of $100,000,000 of EBITDA, we were able to get spreads that were on top of the mid market. So call it $675,000,000 $700,000,000 We're able to get covenants and we're able to get terms that were the same. So from a risk standpoint, in the first half of the year, opportunistically, we're able to do direct lending and we had to make a choice for our investors, what is the safe what is safer.

Speaker 6

If I can get similar terms, similar protections and similar spread to the mid market and actually have the protection of a much larger business which historically hasn't had those covenants and hasn't had those protections, we opportunistically went up market. By the second half of the year and you and I have talked about this behind closed doors as well as the upper part of the market got a little bit more crowded, CLO bid came back, significant retail flows went into other direct lending strategies and some of our peers, we skewed back down to the core mid market. So and that core mid market, again, I'd define as somewhere between $25,000,000 in the second half of the year, probably $25,000,000 $75,000,000 The point on ABL strategies, we do have a team focused on asset back lending. And when we think about asset back lending, it is to core middle market companies. But as opposed to being structured as a cash flow loan, we are literally thinking about our downside protection being true assets, receivables, cash, etcetera, real estate.

Speaker 6

And then we have obviously a very big software practice who also reports with it up to me and that team opportunistically has done some ARR deals. We are quite frankly been probably less exposed to ARR than some of our peers. But again, my goal and this doesn't sound this is going to sound sexy. My goal is how do you get overpaid for taking less risk. So again, we're focused on direct lending.

Speaker 6

Once in a while, if I can go up market, if that market is dislocated, we do it and we did it first half of last year. Today, we're probably more focused on the mid though opportunistically we do go up market if something's attractive. Hopefully that answers the question.

Speaker 7

Yes, very much. Thank you. And to get back to dermatology associates, sorry if I missed any of this part of the dialogue, but it sounds like you just took control or received control, but this of course had been a long challenged credit where you had restructured the debt somewhat previously. So can you give some more color the state of the investment now? Do you plan to put more money into it or maybe immediately bring in a new sponsor, partner?

Speaker 7

And then has the EBITDA trajectory stabilized or is it still in decline? Thanks.

Speaker 3

So let me tackle the last part first because that's one of my favorite questions or answers. That company has exhibited 12 consecutive quarters of EBITDA growth, steady performance, continued upward trend, modest increases every quarter, but 12 quarters in a row coming out of the pandemic of EBITDA increases. In terms of the future, it's stable growth. We're not looking to shoot for the fences and get put in material new dollars to grow it. We're going to now as a new equity group assess the right time to exit the investment.

Speaker 3

We're going to invest prudently, don't have any grand plans, the company's performance, it's stable and improving and we'll look at the right time to exit the investment.

Speaker 6

And Fin, it's a good question. I think where we are in the cycle, we here at callout direct lending spent a lot of time a year plus ago. I think it was behind the scenes looking at our processes, figuring out exactly how to be prudent and more careful in terms of again being proactive in situations that we're teetering. So I would say that we're kind of we're not in the first inning of that for our portfolio. We're close to the end of the game and we have full control of it.

Speaker 6

I think a lot of our peers are just on the front end of that. So for us, part of the boring stuff is you're not going to Tom is not going to be in front of the street like we are today saying, hey, we've turned the corner without those 12 consecutive quarters of positive numbers. So for us, the key is to making sure that we have a clean portfolio when we come to you and we're being conservative. So we feel pretty good about where things are.

Speaker 1

Awesome. Thank you, both.

Speaker 6

I appreciate you. Hopefully, we get you for

Speaker 5

the next quarter too, Fenton.

Speaker 3

Absolutely.

Speaker 6

All right. Talk to you later, man.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Arren Cyganovich from Citi. Your question please.

Speaker 5

Thanks. Question on maybe just the competitive dynamics

Speaker 6

as the activity will increase. Hey, Aaron, do you mind we can't you're a little muffled.

Speaker 5

I'm muffled, sorry. You better? Sure. Sorry about that. I guess from a competitive standpoint, as activity is increasing, we're hearing spreads are tightening a bit.

Speaker 5

How is that changing, I guess, relative to maybe 3 or 6 months ago?

Speaker 6

Yes. I've listened to a few of our peers' calls and that seems to be a common question. I've been saying this a lot recently. This time isn't different. Usually when you're getting outsized returns, just what we learned in Economics 101 is capital comes in to try to attract those outsized returns and that's what gets the spreads to go back to normal.

Speaker 6

I would say that relative to first quarter and first half of last year, we're and again I'm giving you directional numbers.

Operator

I actually don't have them off the top of my head.

Speaker 6

So the average deal But But that's not normal. So relative to an abnormally wide spread and quite frankly a very high base rate where base returns were going to be 13% plus, things have come in significantly since that. I'd say at the upper end of the market, if you are talking about a transaction that is north of $100,000,000 and could easily be considered for the BSL market in a previous life, those transactions have certainly gone from north of 600 to somewhere between the larger end 500 and up to 550. For a regular way direct lending deal that is mid market, what we're seeing is somewhere between $550,000,000 $625,000,000 on average, so those have come in. With that said, with base rates still where they you are achieving sort of a historic level of return without much leverage.

Speaker 6

And what you haven't seen or at least we've been we try to be disciplined here. But what you're seeing on the upper part of the market, certainly covenants have look a lot or covenant the existence of covenants looks a lot more like the BSL market there. So there's a lot more cove lite in the upper end of the direct lending market. In the regular way mid market, I'd say more times than not you're seeing in covenants. And then the documentation is still holding in.

Speaker 6

I'd also say what else is holding in is leverage levels. So just because of the overall even if spreads have come in, you're still talking about a 5.30 base rate give or take. So the average leverage level that we're seeing hasn't really increased much. You're still talking about low fives and in some cases high fours. So you're still seeing a fairly low amount of leverage.

Speaker 6

So what I'd say is dependent on where you are and this goes to the previous person's the previous analyst question, that's why we're opportunistic as to where we play. There are certain times for certain parts of the market that are much more competitive and aggressive and we at times avoid those so that we can actually get overpaid in other parts of the market. I would say the larger market is probably the most competitive today. What I would say is that things are and that's why we're being a little bit more opportunistic. The mid market, I think you're seeing a little bit more value there, more likelihood of covenants, more likelihood of stronger documentation.

Speaker 6

And I'd say from all of the market, not just the mid market, I'd say the leverage levels are continuing to be lower than historical leverage levels. Does that work, Aaron?

Speaker 5

Yes, that's helpful. Thanks. And then just a quick one on your other income. I think you said that that was up kind of quarter to quarter due to prepayment activity happening with some more prepayment fees. Would you expect that your other income might revert back to more of your longer term historical in this kind of environment?

Speaker 5

Or would that be expected to come back down kind of where it was over the past 3 preceding quarters?

Speaker 3

Hey, Erinn, it's Tom. When we look at other income or event driven income, we look at a combination of total OID acceleration plus other income. And that line item generally will move based on repayments, amendment activity. And historically that has been a little under $4,000,000 per quarter. Earlier in 2023 based on lower prepayment activity, it was lower in a couple of quarters.

Speaker 3

It was more like $3,000,000 per quarter, even less than 3,000,000 This quarter that combined number was about $4,500,000 So relative to the historical trend, it was about $500,000 about a penny higher than the historical trend line. It was a pop versus the rest of 2023, which was abnormally low. So yes, the pop for 20 20 for the Q4, but only about a $0.01 higher than the historical average.

Speaker 5

Got it. That's helpful. Thank you. Thank you.

Operator

Thank you. And our next question comes from the line of Melissa Wedel from JPMorgan. Your question please.

Speaker 8

Good morning. Thanks for taking my question. Most of mine have already been asked and answered. I wanted to follow-up on one of the slides in particular, it was the risk rating distribution. This is a really it seems like an aside, given how strong it seems like the fundamental performance is of companies across the portfolio broadly, but did notice a very small tick up in 34 rated portfolio companies.

Speaker 8

I guess the question is to the extent that you are seeing portfolio companies with any particular challenges, where is that coming from? Is it still inflationary pressures at labor costs? Curious what you're seeing. Thank you.

Speaker 6

So maybe I'll start and Melissa, thank you for the question and Tom hop in. So risk ratings and just so you have it, we behind these risk ratings, we have 3 or 4 other processes that we run to ensure that we have our arms around everything. The overarching theme I'd give you though is sometimes when we're moving things from 2 to 3, 3 to 4, it is less a function. Certainly if it's a 5, there's a function of their serious issues. But in many cases, Melissa, it's more of a function of us ensuring that we are putting the appropriate level of resources around Carlyle on names well ahead of when something goes wrong.

Speaker 6

So I think one of the issues that we've forgotten in direct lending sometimes is, if something's wrong, if you are managing your book and you actually are looking at your numbers and you've designed the documentation correctly, you have 12 months, 24 months long ahead of time to start preparing. So I'll start that with the slight movement from 2s to 3rdx from 3s to 4s. That's generally going to be particularly slight not fire alarms, that's generally going to be us saying, hey, we want more resources to look at a name or 2. Then the last piece I'll tell you is relative to a year ago. A year ago, a lot of what we're seeing was inflationary driven.

Speaker 6

So you would have heard us a year ago when we had our issues in the healthcare space and then took care of them, we've taken care of them at this point. A lot of that was about inflationary pressures. This past year, if you look at our overall portfolio, and then I'll hand it to Tom,

Speaker 2

The inflationary theme, though it may still be there in small parts, but

Speaker 6

I think our average business was up about 13% in revenue and just a little bit north of that in EBITDA. So you are just by definition, revenue and EBITDA are either growing in line and as of late EBITDA is outpacing that. So I'd say a year ago, the inflationary theme was the conversation. Today, not as much. And by the way, Melissa, I'll tell you like a year ago, it was a theme.

Speaker 6

Today, not as much. Today, it's changed so much that we you and colleagues in the analyst field, one of the other questions no one's asked is what's your view on forward interest rates. So think about the fact that we're asking we're talking about interest rates being cut and on the same call asking about inflationary pressures. So I think we've turned that corner generally, knock on wood, on our portfolio. Tom, what did I miss?

Speaker 3

When I say specific to the changes in the risk ratings this quarter or the dollars on the page, that 4 category is 2 loans, 2 positions that contribute to the fair value increase. 1 is dermatology, which has continued to inch up every quarter. The other is pro PT, which is now called Bayside. That's the other deal that's on non accrual with value that again improved. So it's slightly up.

Speaker 3

So that before movement this quarter, that's a positive. Our 2 deals on non accrual with value actually going in the right direction. In the 3 category, that increased about $15,000,000 was driven primarily by 2 deals. When I say that 3 category, it means to Aaron's point, we're focused on it. Risk has increased probably for those particular credits, leverage is up, EBITDA is likely down from when we closed.

Speaker 3

But importantly, we're not worried about losing money. And so we're focused on it, but we're really not worried about losing money. The particular themes for those deals, one is consumer, just consumer discretionary deals. We don't have very much in the portfolio, but we've seen lower demand in consumer driven businesses. And then across our industrious book just destocking.

Speaker 3

And one of the credits just had a couple of credits in the book That was one of the down bridges that generally destocking in the current environment. So those are a couple of themes I've mentioned in terms of as we're looking at deals that migrate from that 2 to 3 category.

Speaker 6

But much more idiosyncratic relative to a year ago where everything was inflation. Now it's just more idiosyncratic and we're on top of it. Does that help Melissa?

Speaker 8

Got it. That's very helpful. Thank you.

Speaker 2

Thanks for joining the call.

Operator

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Aaron Lecan for any further remarks.

Speaker 6

Thank you, operator. Everyone, thanks for joining. We look forward to talking to you later in the day. We appreciate your partnership and talk to you next quarter.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Earnings Conference Call
Carlyle Secured Lending Q4 2023
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