Carlyle Credit Income Fund Q1 2025 Earnings Call Transcript

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February 27, 2025

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Carlyle Credit Income Fund First Quarter twenty twenty five Financial Results and Investor Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Michel Mehta, Principal Executive Allstate and President. Please go ahead.

Speaker 1

Good morning, and welcome to Carlyle Credit Income Funds First Quarter twenty twenty five Earnings Call. With me on the call today is Lauren Bezmazian, CCIF's Chief Executive Officer and Nelson Joseph, CCF's Chief Financial Officer. Last night, we issued our Q1 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.

Speaker 1

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 and CSR. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlisle Credit Income Fund assumes no obligation to update any forward looking statements at any time. With that, I'll turn the call over to Lauren.

Speaker 2

Thanks, Nishal. Good morning, everyone, and thank you for joining CCIF's quarterly earnings call. I'd like to start by reviewing the Fund's activities over the last quarter. We maintained our monthly dividend at $0.105 per share or 16.4% annualized based on the share price as of 02/24/2025, which is now declared through May of twenty twenty five. The monthly dividend is supported by core net investment income of $0.44 per share and $0.7 of recurring cash flows for the quarter.

Speaker 2

New CLO investments during the quarter totaled $12,000,000 with a weighted average GAAP yield of 16.8%. The aggregate portfolio weighted average GAAP yield was 17.2% as of December 31. We sold 1,370,000.00 of our common shares in connection with the ATM offering program for a total net proceeds of $11,000,000 We also issued $20,000,000 of 7.5% convertible preferred in January 2025. Shifting focus to the current market environment, I'd like to discuss the trends we've observed in both the loan and the CLO markets. 2024 was the busiest year of issuance in the twenty five plus year history of the CLO market, supported by tightening spreads and a stable backdrop for credit.

Speaker 2

In 2024, CLO issuance totaled $200,000,000,000 an increase of 76% year over year and a 9% increase from the previous record set for new issuance in 2021. CLO managers addressed outstanding liabilities through resets and refinancings, which totaled $224,000,000,000 and $83,000,000,000 respectively. Reset volumes exceeded the previous record of $140,000,000,000 set in 2021, highlighting the preference for managers and equity investors to extend the lifespan of existing CLOs. In the fourth quarter, broader fixed income markets remained stable through the presidential election and proposed policy shifts. While the Fed cut rates by 25 basis points in both November and December, investor demand for CLOs remains steadfast as the market expects rates to remain higher for longer.

Speaker 2

Within CCIF's portfolio, we completed 13 accretive resets and one refinancing in 2024, extending the reinvestment period and cash flows of these CLOs. Despite the increase in CLO reset activity, roughly 25% of the CLO market is still out of the reinvestment period, Though CCIF portfolio only has one CLO nearing the end of its reinvestment period, which was then reset in the first quarter of twenty twenty five. We continue to work with CLO managers to optimize the CLO investments in our portfolio through refinancings or resets. Fourth quarter cash on cash distributions averaged 4% based on a par purchase price, consistent with the asset classes historical annualized mid to high teens return. Loan repricing activity totaled $771,000,000,000 in 2024, reducing the weighted average spread of CLO portfolios by approximately 25 basis points and impacting CLO equity cash yields and valuations.

Speaker 2

The impact from repricings was partially mitigated by resets and refinancings, which reduced the weighted average cost of CLO liabilities and take advantage of near record types for CLO debt spreads since the financial crisis. Fundamentals in The U. S. Leveraged loan market continue to remain strong. From Carlisle of U.

Speaker 2

S. Loan portfolio of over 600 borrowers, free cash flow generation remains a key focus. In the third quarter of twenty twenty four, approximately 72% of borrowers produced free cash flow, the highest percentage over the past year. And while borrower EBITDA growth has outpaced sales growth over the last eighteen months, the two are starting to converge. In the third quarter of twenty twenty four, borrower EBITDA grew at 8% compared to revenue growth of 6%.

Speaker 2

Additionally, the average borrower interest coverage ratio improved quarter over quarter, rising from 3.3 times to 3.7 times due primarily to growing EBITDA, loan repricing and the impact of rate cuts. The market continues to experience a divergence between in court and out of court bankruptcy activity, While the LSTA U. S. Loan Index LTM default rate of 92 basis points is less than half of its long term average, the default rate inclusive of distressed exchanges remains elevated at 4.5%. We believe distressed exchanges will continue to be the predominant form of defaults.

Speaker 2

The recovery rates for these transactions are typically higher than traditional defaults. That said, while the market default rate increased to 4.5, CCIF's portfolio only experienced a default rate inclusive of distressed exchanges of 1.5%. Based on economic data and research published by Carlisle's Chief Economist, Jason Thomas, market expectations for rate cuts have declined. However, we believe loan borrowers are well positioned to adapt to this recalibration given the resilience they've shown over the past two years of elevated interest rates.

Speaker 3

Through the

Speaker 2

rest of 2025, we maintain a positive outlook for the loan market and CLO equity. I'll now hand the call over to Nishal Mehta, who was recently named Principal Executive Officer and President of CCIF to discuss our deployment and the current portfolio.

Speaker 1

Thank you, Lauren. We continue to leverage Carlyle's long standing presence in the CLO market as one of the world's largest CLO managers and a fifteen year track record investing in third party CLOs to manage a diversified portfolio of CLO equity investments. As of December 31, our portfolio comprised of 52 unique CLO investments managed by 27 different collateral managers. We continue to source our investments from both the secondary market and primary market to capitalize on spread compression and favorable CELO arbitrage opportunities. We target recent vintages of Tier one and Tier two managers with ample time remaining in the reinvestment period in the secondary market.

Speaker 1

As fixing up markets continue to trade at all time types, we constructed a defensive portfolio of steel equity well positioned to mitigate market volatility. However, our portfolio has been impacted by the spread compression witnessed throughout the broadly syndicated loan market. The weighted average spread in our portfolios declined by 33 basis points in calendar twenty twenty four. The spread compression resulted in decline in the fund's GAAP yield and net asset value. We have partially offset this impact by continuing to reset and refinance the portfolio, which reduces the cost of debt in our CLOs.

Speaker 1

We continue to draw on the expertise of Carlyle Liquid Credit Platform and a collaborative one Carlyle approach to invest in high quality CLO portfolios, sourced through our rigorous 0.14 bottom up investment process. The following represent some key facts on the portfolio as of December 31. The portfolio generates a GAAP yield of 17.22% on a cost basis supported by cash yields of 25.15% on CLO investments quarterly payments received during the quarter. The weighted average years lost in reinvestment period remained at approximately two point five years, providing CLO managers the opportunity to capitalize on periods of volatility to improve portfolios and reposition them and zero CLOs that are out of reinvestment period. We believe the weighted average junior over collateralization cushion of 4.18% is a healthy cushion to offset defaults and losses in underlying portfolios.

Speaker 1

The weighted average spread on the underlying portfolio was 3.38%. The percentage of loans rated CCC by S and P was 5.4%, below the 7.5% CCC limit in CELOS. As a reminder, once the CLO has more than 7.5% of its portfolio rated CCC, the excess over 7.5% is marked at lower fair market value or rating and C recovery rates and reduces the overall collateralization position. A percentage of loans trading below 80 increased slightly from 3.2% to 3.4%. I will now turn over to Nelson, our CFO to discuss the financial results.

Speaker 3

Thank you, Nishal. Today, I will begin with a review of our first quarter earnings. Total investment income for the first quarter was $8,300,000 or $0.52 a share. Total expenses for the quarter were $4,200,000 Total net investment income for the first quarter was $4,100,000 or $0.26 a share. Core net investment income for the first quarter was $0.44 per share, outpacing our $0.315 per share dividend paid in the quarter.

Speaker 3

Net asset value as of December 31 was $7.44 per share. Our net asset value and valuations are based on the mid side mark we received from a third party on 100% of our CLO portfolio. We continue to hold one legacy real estate asset in the portfolio. The fair market value of the loan is $2,200,000 The third party we engaged to sell our position continues to work through the sales process. During the quarter, we sold $1,400,000 of our common stock connection with the ATM offering program at a premium to NAV for net proceeds of $11,000,000 Common share issuances for the quarter resulted in accretion to our net asset value of $0.03 per share.

Speaker 3

Cash on cash yield of 25.15% on the CLO quarterly payments resulted in 0.7 recurring cash flows per share. With that, I'll turn it back to Lauren.

Speaker 2

Thanks, Nelson. We continue to believe that CCIF is well positioned to provide investors with an attractive dividend yield and total return. In addition to incorporating our market and manager views, we remain focused on analyzing the underlying collateral in each CLO equity position that we own in order to deliver strong risk adjusted returns for our investors. I'd now like to hand the call over to the operator to take your questions.

Operator

Thank you. Our first question comes from the line of Randy Binner with B. Riley Securities. Your line is now open.

Speaker 4

Hey, good morning. Thank you. Just a question on the interest expense line. For this reported quarter, was there anything unusual in the quarter for the interest expense of kind of $1,700,000

Speaker 3

Yes. Hey, this is Allison. So the one new thing that we had this quarter was the accretion from our prep fee offering. So that added to our interest expense for the quarter.

Speaker 4

Okay. Is that a recurring item or is that is there anything one time ish about that or is that a similar level we should plan on in future quarters?

Speaker 3

Yes. On the pref fee, we expect to have another quarter of accretion as that converts. And then we recently had another pref offering, we'll continue to amortize over the year.

Speaker 1

And Randy, this is Nishal. To be clear, this is the accretion of the upfront OIB that's bid. So based on our accounting guidance, we accrete it over a one year period, but that does get accelerated if the for the convertible preferred is converted into common stock.

Speaker 4

Okay, that's helpful. Thank you. And then just following up with the kind of thought to comment on the interest coverage ratio for borrowers going up from 3.3 to 3.7 x. Is that weighted across the book? Or so I'm kind of just curious because that's a I think that's a better metric than I've maybe heard from others and maybe I haven't heard it quite that way.

Speaker 4

But just trying to understand the way that that's calculated, like is it weighted or is there any color you can provide on how you come up with that stat?

Speaker 2

Sure. It's actually a proprietary data looking into the Carlyle loan. So we lend to over 600 companies. It is not weighted. It's just an average.

Speaker 4

Okay. So just okay, got it. Okay. That's all I had off the bat. Thank you.

Operator

Thank you. Our next question comes from the line of Eric Zwick with Lucid Capital Markets. Your line is now open.

Speaker 5

Good morning. Thanks for taking my questions today. Wanted to start with maybe just kind of a broader question, maybe for you, Lauren. Just wondering if you could relay your thoughts on the relative attractiveness between the primary and secondary markets today for new investments.

Speaker 2

Sure. So I think we're seeing some more attractive opportunities in the primary than we had perhaps a year ago, where we're able to lock in really low cost of financing for over twelve years and non mark to market financing for CLOs. We are close to post financial crisis types in liabilities. So if you're able to lock in these capital structures and there's even a reversion to mean on asset spreads, CLOs created today should be able to throw off pretty significant cash flows if asset spreads normalize sometime over their reinvestment period, which would be our thesis. That said, we also do see some opportunity in the secondary as well, but appreciate how tight the capital structures are today.

Speaker 5

Thanks. That's helpful. And you may have mentioned it in the prepared remarks and I may have dismissed it. Can you address what impacted or what drove the unrealized losses that were recorded in the quarter?

Speaker 1

Yes, maybe I'll take that. So really it was just a function of a market wide phenomenon. As Lauren mentioned, we saw over $700,000,000,000 of loan repricings in 2024. And so that directly reduces the cash on cash and expected return for CLO equity. And so as a result, we saw a decline in the value of our positions.

Speaker 1

Now the one way to offset that is to refinance or reset the liabilities within each CLO because that allows us to capture the post financial crisis types that Juan was mentioning. And so we completed 14 of those refinancing and resets in calendar 2024, including six in the quarter ending twelvethirty one. And then we've been much more active this quarter, mainly because as debt spreads on the liabilities that continue to tighten, we've been more active and we've already completed 13 quarter to date.

Speaker 5

Got it. Thank you. And maybe just one follow-up there. So let's say if you know kind of everything stayed the way it was today, but you are continue to be able to have some more resets, you could potentially, I guess, kind of maybe recapture some of those unrealized losses as you reset the liabilities lower. Is that a correct assumption?

Speaker 1

Yes. That's the expectation and hope because once we reset it and have a lower cost of debt, the expected return increases, the expected cash on cash increases. And so when JPMorgan, who fair market values our portfolio on a daily basis, you're getting a true market price versus a mark to model. We expect they'll account for that in their valuations.

Speaker 5

Yes, that makes sense. Thank you. And then one just last one for me today. Just thinking about credit quality of the underlying obligors and the CLOs that you've purchased. I guess is there anything that you see that is currently worrying to you either within the current portfolio or we have maybe future concerns with regard to maybe some of the changes that have been made by the new presidential administration?

Speaker 5

Anything kind of you try and keep a tight handle on credit and look around the corner, anything that you're watching closely today?

Speaker 2

Yes. I think the biggest change that we've seen in our market really for a long time has been the move to out of court restructuring from in court. And you see that in the really low default rate. But when you look at it inclusive of distressed exchanges, it's actually pretty elevated at around 4.5%. So understanding our managers' ability to or expertise to be able to participate in these transactions and get good recoveries on out of court restructuring has been a big focus for us.

Speaker 5

No, that makes sense. And I guess from your perspective, is it just the fact that the cost of going through a court restructuring has gotten so elevated that it's just probably faster and more cost efficient to negotiate outside of court?

Speaker 2

It's actually because the loan documentations have gotten so loose over the last ten or fifteen years that companies and sponsors will look to ask debt holders for a discount and threaten them perhaps with stripping assets or something else that could hurt them. So not all of these companies really need to have a restructuring process. But I think it's become commonplace and there hasn't been repercussions for companies asking lenders to take a haircut and threatening to use the document against them if they don't.

Speaker 5

Got you. Thank you. I appreciate all of the commentary today. Thanks.

Operator

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Lauren Bassanajian for closing remarks.

Speaker 2

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.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Carlyle Credit Income Fund Q1 2025
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