Carlyle Secured Lending, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the TCG BDC, Inc. Fourth Quarter 2020 Earnings Conference Call. . I would now like to turn the conference over to your speaker host today, Allison Rudary. Please go ahead.

[Allison Rudary:]

Good morning, and welcome to TCG BDC's Fourth Quarter 2020 Earnings Call. Last night, we issued an earnings press release and detailed earnings presentation with our quarterly results, a copy of which is available on TCG BDC's Investor Relations 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.

[Linda Pace:]

Thank you, Allison. Good morning, everyone, and thank you for joining us on this call to discuss our fourth quarter 2020 results. Joining me today are Chief Investment Officer, Taylor Boswell; and our Chief Financial Officer, Tom Hennigan. Overall, we had another very solid quarter. And throughout a volatile year, we were successful in managing the performance of our portfolio, fortifying our balance sheet and leveraging our origination capabilities. We exit 2020 with a high degree of confidence in the fundamental credit trajectory of our portfolio and our prospects for sustained income generation. I'll focus my detailed remarks today on 3 areas

[Taylor Boswell:]

Thank you, Linda. I'll begin with a quick comment on Carlyle's current macroeconomic perspectives, which we develop based upon inputs from across our global footprint. After that, having discussed portfolio and credit evolution at length in past calls, I'll focus my comments today on our origination activity in recent quarters.

[Thomas Hennigan:]

Thank you, Taylor. So now I begin with a review of our fourth quarter earnings, then I'll provide further detail on the portfolio and our balance sheet positioning. As Linda previewed, we had another impressive quarter of income generation. Total investment income for the fourth quarter was $44 million, up from $43 million in the prior quarter. The increase was driven by a few factors

[Linda Pace:]

Thanks, Tom. 2020 was a year like no other. Taylor, Tom and I are extraordinarily proud of how the team navigated through such a high-risk and volatile market environment. As we begin 2021, we are confident in the positioning of our portfolio, balance sheet and our earnings outlook. Thank you all for your time and support today, and I'd like to ask the operator to open the line for questions.

[Operator:]

Before we begin our Q&A process, TCG BDC's CFO, Tom Hennigan, would like to add a few quick comments.

[A - Thomas Hennigan:]

Thank you, operator. Yes, one quick note. As you may have seen on Page 6 of our earnings presentation, we published an increase in all-in yields on investments on both our cost and fair value basis. I just want to highlight the 12/31 figures, those include our 2 JVs. If you were to exclude the 2 JVs, that would be consistent with the prior method. The quarter-over-quarter increase is actually closer to 10 basis points. Just want to highlight that. We expect to issue comparable figures in the near term. And now we can move to questions. Thank you, operator.

[Operator:]

. And our first question coming from the line of Finian O'Shea with Wells Fargo.

[Finian O'Shea:]

First question on the amendments. I think one of you said that, that chapter is concluding on the need for amendments in your portfolio. Can you expand or give us some color now with hopefully that chapter behind us, with COVID behind us, how this batch of portfolio companies, presumably, they mostly tripped EBITDA maintenance covenants or something like that, how they are rebounding to date? Any color there?

[Taylor Boswell:]

Fin, you've got Taylor on the line. As you'd expect, across a diversified portfolio, there's a wide range of answers to that question. I think that generally, what we see across the portfolio is not that the crisis is over, but rather that the outcomes can be pretty confidently bounded. At this point and that the borrowers in our portfolio have generally addressed their liquidity issues, I think that to teal in some of the subsectors around how things are recovering. I think that it feels to us as if a number of the consumer-oriented sectors and the like have sort of found more stable footing where there has been demand recovery and continued progression, but remains well below prior periods, but the businesses generally have recovered a fair amount. I think we are hopeful in the last couple of months that exposure is more in spaces like travel and aerospace are finding the bottom in this period, and we've seen a couple of those borrowers sort of start to inflect upward again from a profitability perspective. But those are still more severely demand-impacted sectors. Again, all in the context of many of these borrowers having sufficient liquidity to bridge a long period of time back to that recovery. But hopefully, that gives you a little feel for what we're seeing, both generally and then as you come down into some of the more impacted sectors, if you will. Is that helpful?

[Finian O'Shea:]

Very much so. And a follow-up on the converts, I, again, appreciate you, again, outline that, that's a longer term instrument, although it's now in the money. What happens at maturity of the convert? Does -- do you pay it back like debt? Or does it automatically convert? Or are there a range of outcomes?

[Thomas Hennigan:]

Fin, it's Tom. On the convert, there's no maturity date. So there are various time frames in which both the issuer or the investor are able to redeem, but those are optional as well as obviously the option to convert. So there is really no maturity date in terms of a forced action on the instrument.

[Finian O'Shea:]

Great. And just a final small question on the special dividend. Tom, I think you outlined that you'll expect to continue to earn a healthy clip of supplemental. Now the portfolio has stabilized, we're through COVID and so forth. It sounds like you plan to keep the current core and supplemental payout. Or is -- are you considering perhaps restoring or partially restoring your core dividend?

[Thomas Hennigan:]

Fin, right now, you noted, we feel very good about delivering very consistent results, as we have the last couple of quarters, and that we've been at $0.36, $0.37 the last couple of quarters. We feel very confident in that level and for now certainly anticipate continuing with the $0.32 regular plus the additional being paid as a supplemental each quarter.

[Linda Pace:]

Fin, just to jump in and remind you. So this is our new policy. And just in the intent on being as transparent and consistent with investors as policy as possible. We don't really want to change the policy back, if you will. So I think you should expect us to stay like this for quite some time.

[Finian O'Shea:]

Okay. And congratulations on the quarter.

[Linda Pace:]

Thank you.

[Operator:]

Our next question coming from the line of Paul Johnson with KBW.

[Paul Johnson:]

And congratulations, you made good progress with the portfolio. I would just have a few questions. I'm wondering, as we move forward in the cycle, how do you expect the average size of your borrower to change, if at all? And also in addition to that, do you potentially see any sort of increased demand for second lien or potentially junior debt in your portfolio?

[Taylor Boswell:]

Paul, it's Taylor. How are you? Yes, I think on the -- from a borrower size perspective, we're fortunate to have a significant platform that lets us actively participate across a bunch of different elements in the marketplace. Really, our platform is aligned to participate kind of from $20 million of EBITDA north all the way through into the upmarket, broadly syndicated and high-yield world when that's appropriate. So in any given quarter, depending on where we see the relative value, we may tack ourselves on the margin in or out of from sub-segments from an EBITDA perspective. But I think that the core of the portfolio and the averages over time will probably live about where they are. So I don't think we see a significant change, but rather see ourselves tacking around the market when the rail valve moves in the marketplace. As regard to your question around second lien, yes, we're comfortable with the general construction of our book right now from a high level allocation perspective. Same comment applies. You may see it bump around a little bit 1% or 2% here or there as relative value opportunities migrate in the market. What I would tell you is, in this market environment, the second lien structure, which tends to be more prevalent, upmarket, bigger borrowers is not a place where we see extraordinary relative value in markets because that product is being served by larger liquid markets quite aggressively right now. So in this moment, the trend is probably going a little bit the other way, but big picture, we'll see stability and participate across these markets over time.

[Paul Johnson:]

Okay. It's very good color. And then as yields have declined and spreads have tightened over the last several months or so, and this is kind of what we've seen in the middle market, but I'm just curious, is that looking at your schedule of investments and some of your new investments in the previous quarter, it doesn't appear to be the case. But I'm just curious if you're experiencing any sort of pressure on the LIBOR floors terms in any of your -- in any of the loans that you are sourcing?

[Taylor Boswell:]

In our core middle market book, we really are not. In the upmarket world, again, the $100 million plus EBITDA borrower, you are seeing a migration down and some pressure on floors and particularly hot transactions, maybe to 75 basis points, rarely to 50 basis points. But general stability from a floor perspective in the core middle market.

[Paul Johnson:]

Okay. Congrats again on a good quarter, and that's all for me.

[Taylor Boswell:]

Thanks.

[Operator:]

And our next question coming from the line of Melissa Wedel with JPMorgan.

[Melissa Wedel:]

I'd like to tap on to the last question to start with, actually. Could you remind us what your current average floor is on your debt investments right now?

[Thomas Hennigan:]

It's Tom. Most of our loans -- large portion -- the typical floor is 1%. And there -- and when you look at our first lien book, as I said, it's -- vast majority of the loans, it's really those second lien loans where we're going more upmarket. And those are the transactions where we're more likely than not have a LIBOR floor or a lower LIBOR floor. But on average, it's probably 80 or 90 basis points.

[Melissa Wedel:]

Okay. So 80 to 90 across the second lien component? Or across the total portfolio?

[Thomas Hennigan:]

Across the total portfolio, and that's assumed that with the zeros weighted in there. That's why it's not 1%. We have a handful of floors at 75 basis points, but vast majority or 1%.

[Taylor Boswell:]

There was a -- just for -- there was a moment in the market a couple of years ago when LIBOR was north of 2%, where borrowers were able to drop their floors meaningfully, and we haven't seen as much of that since then. And so there's a couple of legacy positions from that environment still in the book.

[Melissa Wedel:]

Got it. Okay. That's helpful. In terms of activity, I think you were pretty clear that you remain active in this environment. You're seeing some attractive risk-adjusted opportunities. On the repayment side, how are you -- do you anticipate any sizable repayments in the near term? And then how are you thinking about that generally throughout the remainder of '21?

[Thomas Hennigan:]

Melissa, on the repayments front, it's interesting. When you look back at second quarter, third quarter, I think our normalized repayments from regular repayments was practically 0. In the fourth quarter, we went back to, say, a more normalized in M&A activity picked up, our regular cadence and level of repayments came back in the fourth quarter. And I think we anticipate that in the first quarter and going forward. To date, in the first quarter, we've had relatively limited repayments. There's a couple of deals in the portfolio that we know are up for sale or the sponsor may be looking for refinancing that we have on our prospective potential repayment list. I think we anticipate first quarter and the rest of 2021 will be that more normalized level of repayments, certainly an increase from what we were in 2020.

[Operator:]

And I'm showing no further questions at this time. I would like to turn the call back over to Linda Pace for any closing remarks.

[Linda Pace:]

Thank you, operator, and thank you all for your good wishes for us. And I hope everyone is well, and we'll talk to you next quarter. Thanks again.

[Operator:]

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may all disconnect.