First Lien Lending And Joint Ventures Will Support Stable Long Term Earnings

Catalysts

About Carlyle Secured Lending

Carlyle Secured Lending provides primarily first lien, senior secured loans to diversified middle market companies across multiple industries.

What are the underlying business or industry changes driving this perspective?

• Growing direct lending demand and a 30 percent increase in recent deal flow position the company to deploy more capital into high quality private credit transactions, supporting revenue growth and net investment income.
• Expansion of the existing MMCF joint venture, including a larger credit facility and higher equity commitments, is intended to scale fee earning assets and enhance run rate returns, which could lift earnings over the medium term.
• Development of a second joint venture with an institutional partner, using Carlyle’s global credit platform, is expected to add a new stream of interest and fee income, improving earnings diversification and resilience.
• Shift toward a predominantly first lien, senior secured portfolio with low loan to value and below average nonaccruals supports credit stability and NAV preservation, which may help sustain margins and dividend coverage through the cycle.
• Optimized, fully floating rate debt stack with lower borrowing costs and extended maturities is designed to keep funding expenses in check as rates move lower, which may help protect net interest margins and support steady net investment income.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Carlyle Secured Lending's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.5% today to 50.1% in 3 years time.
• Analysts expect earnings to reach $135.3 million (and earnings per share of $1.76) by about December 2028, up from $72.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 13.1x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A declining interest rate environment will reduce asset yields on CGBD's 95 percent senior secured, primarily floating rate portfolio more quickly than its 100 percent floating rate debt costs can be offset by spread movements, which could compress net interest margins and put pressure on net investment income and earnings growth.
• Persistently tight private credit spreads and increased competition for high-quality first lien deals, including new capital entering direct lending, may force CGBD to accept lower spreads on new originations compared to its current portfolio, limiting reinvestment economics and weighing on long-term revenue and net margins.
• The strategy to materially grow fee earning assets through the upsized MMCF joint venture and a prospective second institutional JV relies on a constructive capital markets backdrop and robust deal flow. Any slowdown in M&A or leveraged finance activity would delay ramp-up, undermining the expected uplift to earnings and earnings per share.
• Despite currently low nonaccruals and strong loan to value metrics, a future credit cycle or recession could increase defaults and downgrade migration in CGBD's diversified middle market portfolio, driving higher credit losses, realized and unrealized losses and net asset value erosion that could weigh on the share price.
• CGBD's relatively high dividend yield supported by an estimated 0.86 per share of spillover income leaves limited buffer if earnings trough for longer than expected as SOFR declines ahead of JV earnings contributions. A sustained mismatch could force a dividend cut that would negatively impact investor sentiment and the valuation multiple applied to earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $13.36 for Carlyle Secured Lending based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $270.1 million, earnings will come to $135.3 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $13.02, the analyst price target of $13.36 is 2.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.