Good day and thank you for standing by.
Welcome to the Carlyle Credit Income Fund. First quarter 2025 financial results and investor conference call. (Operator Instructions)
I would now like to hand the conference over to your speaker today, Nishil Mehta, Principal Executive Officer and President. Please go ahead.
Good morning and welcome to Carlyle Credit Income Fund’s first quarter, 2025 earnings call. With me on the call today is Lauren Basmadjian, CCIF’s Chief Executive Officer, and Nelson Joseph, CCIF’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.
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 risk and uncertainties, including those identified in the risk factors section of our annual report on the form and CSR.
These risk and uncertainties could cause actual results to differ materially from those indicated.
Carlyle Credit Income Fund assumes no obligation to update any forlooking statements at any time.
With that, I’ll turn the call over to Lauren.
Thanks, Nishil. 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 February 24, 2025, which is now declared through May of 2025.
The monthly dividend is supported by core net investment income of $0.44 per share and $0.70 of recurring cash flows for the quarter.
New CLO investments during the quarter totaled $12 million 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 1.37 million of our common shares in connection with the ATM offering program for a total net proceeds of $11 million. We also issued [$20 million] 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 the both the loan and the CLO markets.
2024 was the busiest year of issuance in the 25 plus year history of the CLO market, supported by tightening spreads and a stable backdrop for credit.
In 2024, CLO issuances totaled $200 billion an increase of 76% year over year, and a 9% increase from the previous record set for new issuances in 2021.
CLO managers address outstanding liabilities through resets and refinancings which total $224 billion and $83 billion respectively.
Reset volumes exceeded the previous record of $140 billion set in 2021, highlighting the preference for managers and equity investors to extend the lifespan of existing CLOs.
In the fourth quarter, [broader fixed] 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.
Within CCIF’s portfolio, we completed 13 accretive resets and one refinancing in 2024, extending the reinvestment period and cash flows of the CLOs. Despite the increase in CLO reset activity, roughly 25% of the CLO market is still out of the reinvestment period.
The CCIF’s portfolio only has one CLO nearing the end of its reinvestment period, which was then reset in the first quarter of 2025. We continue to work with CLO managers to optimize the CLO investments in our portfolio through refinancing or resets.
Fourth quarter cash on cash distributions average 4% based on a par purchase price, consistent with the asset classes historical annualized mid- to high-teens return.
Lower pricing activity totaled $771 billion in 2024, reducing the weighted average spread of CLO portfolios by approximately 25 basis points and impacting CLO equity cash yields and valuations.
The impact from repricing 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 US leveraged loan market continue to remain strong.
For Carlyle US loan portfolio of over 600 borrowers, free cash flow generation remains a key focus. In the third quarter of 2024, 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 18 months, the two are starting to converge.
In the third quarter of 2024, borrower EBITDA grew at 8% compared to revenue growth of 6%.
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 US 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 default.
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 Carlyle’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.
Through the rest of 2025, we maintain a positive outlook for the loan market and CLO equity.
I’ll now hand the call over to Nishil Mehta, who was recently named Principal Executive Officer and President of CCIF, to discuss our deployment in the current portfolio.
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 [CLO] arbitrage opportunities.
We target re visitors of tier 1 and tier 2 managers with ample time remaining in the reinvestment period in the secondary market.
As fixed income markets continue to trade at all times heights, we can constructed a defensive portfolio of CLO equity well positioned to mitigate market volatility.
However, our portfolio has been impacted by the spread compression witnessed throughout the broadly syndicated loan market.
Whatever spread in our portfolios declined by 33 basis points in the calendar 2024.
The spread compression results in a decline in the in the funds 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 CLO’s.
We continue to draw on the expertise of Carlyle liquid credit platform and a collaborative one Carlyle approach to invest in high quality portfolios.
Sourced through our rigorous 14-[step] bottom-up investment process.
The following represents 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 the [CLO] investments, quarterly payments received during the quarter.
With average year left in reinvestment period remains at approximately 2.5 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 weight average junior overcollateralization cushion of 4.18% is a healthy cushion to offset defaults and losses in airline portfolios.
With average spread on the lying portfolio was 3.38%. The percentage of loans rated CCC by S&P was 5.4%. Below the 7.5% CCC limit in CLO’s.
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 a fair market value or rating recovery rates and reduces the Overcollateralization cushion.
The 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.
Thank you.
Today, I will begin with a review of our first quarter earnings.
Total investment income for the first quarter was $8.3 million or $0.52 a share.
Total expenses for the quarter were $4.2 million.
Total net investment income for the first quarter is $4.1 million or $0.26 a share.
Core net investment income for the first quarter was $0.44 per share, outpacing our $0.315 per share dividends paid in the quarter.
Net asset value as of December 301 was $7.44 per share.
Our net asset value and valuations are based on the [bid side] mark we receive 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 $2.2 million.
The third party we engage to sell our position continues to work through the sales process.
During the quarter, we sold 1.4 million of a common stock in connection with the ATM offering program at a premium to NAV for net proceeds of $11 million.
Common share issuances for the quarter resulted in accretion to a net asset value of $0.03 per share.
Cash on cash yield of 25.15% on the CLO quarterly payments resulted in $0.70.
The recurring cash flows per share.
With that, I’ll turn it back to Lauren.
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. (Operator Instructions)
Randy Binner, B. Riley Securities.
Hey, good morning.
Thank you. .
I just a question on on the interest expense line for the for this reported quarter, was it, was there anything unusual in the quarter for the interest expense of the kind of $1.7 million.
Yeah, hey, this is Nelson. So the one new thing that we had this quarter was the accretion, from our [Preff] B offering, so that added to our interest expense for the quarter.
Okay, is that a recurring item or is that, is there anything one timish about that or is that a similar level we should plan on in future quarters?
Yeah, on the [Preff]-B we expect to have another quarter of accretion, as that converts, and then we recently had another Preff offering they’ll continue to amortize over the year.
And Randy this initial, to be clear, this is the accretion of the upfront OID that’s paid.
So based on our accounting guidance we create it over a one year period.
But that does get accelerated if the convertible preferred is converted into common stock.
Okay, that’s helpful, thank you. And then.
Just, following up with the kind of thought the comment on the interest coverage ratio for borrowers going up from 3.3% to 3.7% is that.
Is is that weighted across the book or I’m kind of just curious because that’s.
I think that’s a better metric and I’ve maybe heard from others and and maybe I haven’t heard it quite that way, but just trying to understand that the way that’s calculated like is it weighted or is there any color you can provide on how you come up with that stat.
Sure, it, it’s actually a proprietary data looking into the the Carlyle loan so we lend to over 600 companies. It is not weighted it, it’s just an average. Okay, so.
It’s just, okay, got it.
Okay, that’s all I had off the bat.
Thank you.
Operator
Thank you. (Operator Instructions).
Erik Zwick, Lucid Capital Markets.
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.
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 12 years and you know 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 normalized 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.
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?
Yeah, maybe I’ll take that. So really it was just a function of a market-wide phenomenon, as Lauren mentioned, we saw over $700 billion of loan repricing in 2024.
And so that directly reduces the cash on cash and expect a return for CLO equity.
And so as a result we saw a decline in the value of our positions. Now the the one way to offset that is to refinance or reset the liabilities within each CLO because that allows us to capture the the post-financial crisis types that one was mentioning and so we completed 14 of those refinancing and resets and calendar 2024.
Including six and the quarter ending [12-31] and then we’ve been much more active this quarter, mainly because as debt spreads on the liability of continue to tighten, we’ve been more active and we’ve already completed 13 quarter to date.
Got it thank you and 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 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 is that a correct assumption?
Yeah, 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 JP Morgan, 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 evaluations.
Yeah, that makes sense thank you and then one just last one from me today just thinking about.
Credit quality of the underlying, obligors in 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, anything, kind of you try. Keep a tight handle on credit and look around the corner or anything that you know you’re watching closely today.
Yeah, I think that 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 distress exchanges, it’s actually pretty elevated at around 4.5%. So understanding our manager’s 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.
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.
It’s actually because the loan documentations have gotten so loose over the last 10 years or 15 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 common place, and there hasn’t been repercussions for for companies asking lenders to take a haircut and threatening to use the document against them if they don’t.
Gotcha, thank you. I appreciate all of the 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 Basmadjian for closing remarks.
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.
