Q2 2024 Carlyle Credit Income Fund Earnings Call

Participants

Lauren Basmadjian; CEO and Trustee; Carlyle Credit Income Fund

Nishil Mehta; Portfolio Manager; Carlyle Credit Income Fund

Nelson Joseph; CFO; Carlyle Credit Income Fund

Mickey Schleien; Analyst; Ladenburg Thalmann

Matthew Howlett; Analyst; B. Riley

Presentation

Operator

Good day and thank you for standing by. Welcome to the Carlyle Credit Income Fund second-quarter 2024 earnings call. (Operator Instructions) Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, [Alex Sperandio], please go ahead.

Good morning, and welcome to Carlyle Credit Income Fund second-quarter 2024 earnings call. With me on the call today is Lauren Basmadjian, the Fund's Chief Executive Officer; Nishil Mehta, the Fund's Portfolio Manager; and Nelson Joseph, the Fund's Chief Financial Officer.
Last night, we issued semi annual 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 semi annual report on the form and CSR. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlyle's 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.

Lauren Basmadjian

Thanks, Alex. Good morning, everyone, and thank you for joining CCIF quarterly earnings call. I would like to start by reviewing the fund's activity over the last quarter. We maintained our dividend at [10.57%] per share, which is now declared through August of 2024, equating to a 15.95% annualized dividend based on the share price as of May 28.
Monthly dividend is covered by CCIF second quarter net investment income of $0.33 and further supported by $0.64 of recurring cash flow. We deployed the remaining proceeds from the preferred stock offering, making new CLO investments during the quarter of $20 million with a weighted average GAAP yield of 19.4%.
The aggregate portfolio weighted average GAAP yield was 20.8% as of March 31. Switching gears, I'd like to discuss the current market environment for both senior-secured loans and CLO equity. Carlyle is one of the world's largest CLO managers with over $50 billion of assets under management, providing us with differentiated insight into the senior secured loan and CLO markets.
CLO market activity has surged through the first four months of 2024. And total CLO issuance through April reached $66 billion, which is a 65% increase year-over-year and the highest on record through the first four months of any year. This record-setting demand reflects the increased arbitrage in relative value versus other risk asset classes.
Additionally, CLO managers are capitalizing on tighter liability spreads to refinance or reset existing CLOs. Refinancing and reset volumes of [$19 billion and $39 billion], respectively through April 2024 have already surpassed full year 2023 volumes of $5 billion and $20 billion.
As far as performance for companies, we don't have full first quarter 2024 results, but are encouraged by the roughly 50% of borrowers who have reported thus far as well as the full fourth quarter of 2023 data.
During the fourth quarter of 2023, we saw EBITDA growth of 8% which outpaced revenue growth of 5% and 70% of borrowers produced free cash flow, demonstrating borrower focus on improving debt service. When we look at the over 600 US borrowers that Carlyle managed CLOs one to only 2% of interest coverage under one times.
The market is currently pricing in one to two rate cuts down from the approximate seven rate cuts projected at the beginning of the year. This better reflect Carlyle initial 2024 outlook and belief that even if we do experience rate cuts this year, we will be operating in a higher rate environment for some time.
We think this is a positive for CLO equity distributions as they benefit from higher base rates as long as defaults and distress exchanges don't increase significantly. For example, the second quarter median CLO equity distributions based on April payments were 4.8%. The highest the CLO market has experienced since the fourth quarter of 2015.
That said, despite the strong distributions, we continue to experience rating agency downgrades in the loan markets, oftentimes focus on contraction in borrower's interest coverage. For example, in March, Altice France, one of the CLO market's largest single albacore was downgraded to triple city. Downgrades may continue to pressure triple C tests and CLOs and highlights the importance of understanding the underlying collateral and the risks in each CLO equity position.
I will now hand the call over to Nishil Mehta, Our portfolio manager to discuss the deployment and the current portfolio.

Nishil Mehta

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 15-year track record investing in third party CLOs to deploy a diversified portfolio CLO equity investments. As of March 31, our portfolio comprised 41 unique CLO investments managed by 24 different collateral managers source primarily in the secondary market.
We continue to target recent vintages of Tier 1 and Tier 2 managers with ample time remaining in the reinvestment period. We also opportunistically invested and several CLOs that are nearing the end of their reinvestment periods at risk-adjusted returns that we believe are attractive, where we leverage our credit analysts to determine the true tail risk in the portfolios.
Given spread compression across the liabilities year to date and improving CLO arbitrage, we made our first CLO equity primary investment in the funds. We continue to leverage our in-house credit expertise of 26 US and 9 European credit research analysts to complete bottom up fundamental analysis on the underlying loan portfolios of CLOs.
The following are some key stats on the portfolio as of March 31. The portfolio generates a GAAP yield of 20.8% on a cost basis, supported by cash-on-cash yields of 25.13% on CLO investment, quarterly payments received during the quarter. The weighted average years left and reinvestment period is approximately 2.4 years, providing CLO managers the opportunity to capitalize on periods of volatility to improve portfolios rule or reposition them.
Weighted average junior overcollateralization cushion of 4.54%, we believe is a healthy cushion to offset a gradual increase in defaulted loans. The weighted average spread of the underlying portfolios was 3.65%. And the percentage of loans rated triple C by S&P was 5.8%, providing a fair amount of cushion below the 7.5% limit and CLOs.
As a reminder, once the sale has more than [7.5%] of its portfolio rated triple C, the excess over that [7.5%] is marked at the lower fair market value and the radiancy recovery rates and reduces overcollateralization cushion. And the percentage of loans trading below [80] was limited at 3.3%.
I will now turn it over to Nelson, our CFO, to discuss the financial results.

Nelson Joseph

Thank you, Nishil. Today I'll begin with a review of our second quarter earnings. Total investment income for the second quarter was $7.3 million or $0.61 per share. Total expenses for the quarter was $3.3 million. Total net investment income for the second quarter was $4 million or $0.33 per share. Net asset value as of March 31, was $7.88 per share.
Our net asset value is based on the bid side mark, we received from our third-party on the CLO portfolio. We continue to hold one legacy real estate asset portfolio. The fair market value of the loan is $2 million to third party reengage seller position continues to work through the process to maximize proceeds.
During the second quarter, we sold 570,000 of our common shares in connection with the ATM offering program, our premium to NAV for net proceeds of $4.5 million. We view the ATM program as an efficient and accretive way to grow the fund. We expect the current dividend policy of $0.105 per month will be covered by GAAP net investment income on a go-forward basis.
The monthly dividend is further supported by cash on cash yield of 25.13% on the CLO investment quarterly payments resulting in $0.64 of recurring cash flow. Quarterly payments received in April totaled $10.3 million, or $0.82 per share compared to $3.7 million of dividends paid in the quarter or $0.304 per share.
With that, I will turn it back to Lauren.

Lauren Basmadjian

Thanks, Nelson. We continue to believe that CCIF is well positioned to provide investors with an attractive dividend yield that is expected to be fully covered by GAAP net investment income. Remains focused on applying a disciplined CLO investment process to assess the underlying collateral in each CLO equity position that we look to invest in.
I'd like to now hand the call over to the operator to take your questions.

Question and Answer Session

Operator

(Operator Instructions)
Mickey Schleien, Ladenburg Thalmann.

Mickey Schleien

Yes, good morning, everyone. I want to start by asking about what drove the realized and unrealized losses during the quarter at a time when the markets were quite healthy.

Nishil Mehta

Hey, Mickey. It's Nishil here. It's good to hear from you and a good question. And I think the realized and unrealized losses is, I think it was just the mark-to-market adjustments that we saw from our third party. As you might remember, our valuations are based on true third party marks, and it's really just the adjustments that we saw quarter over quarter net of the strong distributions we received in January.

Mickey Schleien

Okay, understand and Nishil, I haven't had a chance to really go through the portfolio, but at a high level, what is the opportunity to continue to refi and reset and take advantage of the tighter, CLO liabilities that are available now?

Nishil Mehta

Yeah, that's a great question. So CLO liabilities continue to tighten in the overall market, similar to what we're seeing in spread compression across all of fixed income asset classes. And so with the tightening, we are continue to opportunistically refinance and reset the portfolios. So we're in active dialogue with the CLO managers in our current portfolio to effectuate the just an example, one of the shorter dated CLOs that we purchased that had limited time and reinvestment period, we just priced the reset of that, extending the life of that vehicle by five years.

Mickey Schleien

In an emerging that as a strong impacting on that CLO's and NAV, correct?

Nishil Mehta

Correct. Yeah, we would only proceed with the refinancing and reset if we deem it to be accretive. And so we found this reset to be highly accretive to the equity. And so we proceeded with the recent there.

Mickey Schleien

Yeah, that's good news. I lastly, excuse me, I just want to touch on the distribution. I wanted to ask you where the undistributed taxable income stands, we are considering how high cash flow per share is running, which is a surrogate for taxable income versus the distribution. And what's the Board thinking about doing in terms of managing UTI?

Nishil Mehta

Yeah, the dividend policy, something that we discuss with the Board every quarter, as I think everyone might be aware of taxable income for CLOs can be pretty hard to predict. You did mention that recurring cash flows could be a good proxy, but then taxable income can vary significantly, whether it's due to refinancings and resets or just the ongoing trading that CLO managers complete the portfolios.
So it is something that we're tracking and fully appreciate that if taxable income is closer to the recurring cash flow than we're currently not close to meeting the regulatory requirement. But at this point, we feel comfortable with our current dividend policy, but we'll continue to sell on a quarterly basis.

Mickey Schleien

Understand. Those are all my questions this morning. And thank you for your time.

Nishil Mehta

Thank you, Mickey.

Operator

(Operator Instructions) Matthew Howlett, B. Riley.

Matthew Howlett

Hey, thanks for taking my question. Good morning, everybody. Hey, listen, the investment strategy that you said you're focused on recent issue, Q1, Q2 managers is paying off with some of the GAAP yields you're reporting here. But I think you mentioned you did one deal that exited in reinvestment period and you also did one new primary issue deal. Did I hear that correctly?

Nishil Mehta

Yeah, Matt, it's good to hear from you. It's Nishil. So within our portfolio today, you're correct. We've been mainly focused on transactions that typically have at least two years less than reinvestment period, two higher quality CLO managers, but which we consider to be Tier 1 and Tier 2 and most of our portfolio was deployed in the secondary market because that's where we saw better relative value.
We have done one, the primary investment recently, just as CLO debt spreads have tightened the arbitrage, which is the spread between the loans and the financing has greatly improved this year. And so we do like the relative value of CLO primary equity now. So we have deployed within the primary market.
And then we also opportunistically invested in three transactions. They are nearing the end of their reinvestment period, and that's where we thought the relative value was very attractive, but that's really where we took advantage of the in-house credit expertise that we have given Carlyle's, the world's largest, probably syndicated CLO manager with a 35 credit analysts in house, we are able to do a bottoms up fundamental analysis on each one to get comfortable with the higher risk that's associated with a CLO that's nearing the end of the reinvestment period.

Matthew Howlett

Do you get compensated via higher yield for those, given there's a -- real there's less optionality with the reinvestment period ending? Just curious on what type of a [relic], would you say relative value? How much yield pickup is there on those type of deals?

Nishil Mehta

Yeah. So that's exactly right. So the -- when I take say relative value. It is the incremental expected return that we're expecting. I don't have the numbers off top my head, but it was pretty meaningful versus other opportunities that we're seeing. And as I mentioned earlier, we've already reset one of them. So now that deal has a full five years left and reinvestment period and were looking at options for the other two as well,

Matthew Howlett

Right. That's the real opportunity if you can find those. I appreciate that. Second question is on would the spread compression you've seen how much in terms of tiering between managers about the credit curve, looking at the double-B market, is there anything notable that's did change? I'm assuming you want to stay up Tier 1 and Tier 2 given the spread compression. I was just talk about the relative value in terms of that credit curve and manager tiering.

Nishil Mehta

Yeah. So there continues to be tiering as we've historically seen in markets where spreads are fixed income spreads are tightening the basis of maturing. It also compresses. So right now this type of market, we think it's still appropriate to focus on the higher quality we may like to invest in Tier 3 managers and a different time period where that spread basis is widening, where we think we are being compensated enough for that additional risk that just right now, it's fairly tight just given where spreads have moved over the past six months or so.

Matthew Howlett

Got it. Great. Last question on the capital structure. I mean, it's nice to see with that, feel that Series A come down and yield is trading almost at [26%]. Can you tap that new issue like a dribble out like an ATM on that and what's the outlook as you grow that equity base? Just talk about, financing options, would you -- what would be next, would you look at a 7-year, 10-year bond market? Or I mean just talk about the financing options that could become available to Carlyle creditors continue to grow?

Nishil Mehta

Yeah, if you think about the capital structure today, so the preferred issuance, it's about [$52 million]. Our equity base is slightly under [$100 million]. So from a target leverage standpoint, we're exactly where we want to be, we could consider and doing -- adding the preferred and to the ATM program. Right now, we haven't done that just given we are at a target leverage point, but we may like to do that in the future, especially given, as you mentioned, the Series A is trading at a premium. So a lower yield than we issued that.
I think on a go forward basis on like where we're going to look to see what all the options are there available. Historically, the peers that typically issued either baby bonds or preferreds, if we could issue longer dated at attractive coupons that's always a benefit to the fund. Just given where base rates are today and how to elevated. That's really why we chose to do the five-year. And more importantly, have a shorter non-call period because of base rates do come down, which is only an upside in terms of the financing, we could call that baby bond within the tiered on -- after the two-year non-call period.

Matthew Howlett

Got you. I'd tell you you're growing accretively your financing options. I mean your cost of financing is going down and then you're finding these terrific yields and this should just keep on propelling itself as you get, as you continue to grow. So congrats look forward to the update on the dividend and so [forth]. Thanks for taking my questions.

Nishil Mehta

Thanks, Matt.

Operator

(Operator Instructions) And I'm not showing any questions at this time. I'll turn the call back over to Lauren for any closing remarks.

Lauren Basmadjian

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 thanks again for all the support.

Operator

Thank you. Ladies and gentlemen, that's conclude today's presentation. You may now disconnect and have a wonderful day.