Carlyle Credit Income Fund (NYSE:CCIF) Q2 2025 Earnings Call Transcript

Carlyle Credit Income Fund (NYSE:CCIF) Q2 2025 Earnings Call Transcript May 21, 2025

Operator: Good day, and thank you for standing by. Welcome to the Carlyle Credit Income Fund Second Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Nelson Joseph, Principal Financial Officer at CCIF. Please go ahead.

Nelson Joseph: Good morning, and welcome to Carlyle Credit Income Fund’s second quarter 2025 earnings call. With me on the call today is Nishil Mehta, CCIF’s Principal Executive Officer and President; as well as Lauren Basmadjian, CCIF’s Chair and Carlyle’s Global Head of Liquid Credit. Last night, we issued our Q2 financial statements and the 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 annual report on the Form N-CSR. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlyle Credit Income Fund assumes no obligation to update any forward-looking statements at any time. During the conference call, we may discuss adjusted net investment income per common share and core net investment income per common share, which are calculated and presented on a basis other than in accordance with GAAP. We use these non-GAAP financial measures internally to analyze and evaluate financial results and performance, and we believe these non-GAAP financial measures are useful to investors gauging the quality of the fund’s financial performance, identifying trends in its results and providing meaningful period-to-period comparisons.

The presentation of this non-GAAP measure is not intended to be a substitute for financial results prepared in accordance with GAAP and should not be considered in isolation. With that, I will turn the call over to Nishil.

Nishil Mehta: Thanks, Nelson. Good morning, everyone, and thank you for all 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 $0.1050 per share or 18.8% annualized based on the share price as of May 16, 2025, which is now declared through August of 2025. The monthly dividend is supported by $0.49 of recurring cash flows for the quarter. New CLO investments during the quarter totaled $30.3 million with a weighted average GAAP yield of 15.4%. The aggregate portfolio weighted average GAAP yield was 16.5% as of March 31. Within CCIF’s portfolio, we completed 13 refinancings and resets in Q2 2025, reducing the cost of liabilities and extending the reinvestment period across these CLOs and bolstering equity cash flows.

We sold 1.61 million of our common shares in connection with the ATM offering program for total net proceeds of $12.2 million. As a reminder, in January, we completed a private placement of five year, 7.5% convertible preferred shares due in 2030, six months after issuance, the holders have the option to convert the preferred shares into common stock at the greater of NAV or the average closing price of the five previous trading dates. We continue to leverage Carlyle’s long-standing presence in the CLO market as one of the world’s largest CLO managers and a 15 year track record investing in third-party CLOs to manage a diversified portfolio of CLO equity investments. As of March 31, our portfolio comprised 61 unique CLO investments managed by 30 different collateral managers.

While recent widening of CLO liabilities and tariff induced volatility can weigh on CLO equity valuations, we remain encouraged by the credit fundamentals across our holdings, which have demonstrated resilience to date. We continue to closely monitor these dynamics and have positioned CCIF’s portfolio defensively with an emphasis on higher quality managers and structures that have ample time left in reinvestment period and significant overcollateralization cushions. This is demonstrated by the portfolio’s weighted average junior overcollateralization cushion of 4.46%. That being said, our portfolio has experienced lagging impact of loan repricings, which created an additional 12 basis points decline in the weighted average spread of the fund’s underlying loan portfolios.

Despite these repricings, the portfolio generated cash-on-cash yield of 22.67%, supporting the fund’s monthly dividend. I’d like to remind everyone that volatility is usually beneficial for the long-term returns for CLO equity for several reasons. Significant repricing wave that we have witnessed over the past 15 months has ground to a halt due to the recent volatility, and we may see loan spreads increase as new loans are issued at wider spreads. The volatility also allows CLOs to purchase loans at discounted prices and help build par within the CLO portfolios to offset future losses. I’d like to share some key stats on the portfolio as of March 31. The portfolio generates a GAAP yield of 16.48% on a cost basis, supported by cash-on-cash yields of 22.67% on CLO investments quarterly payments received during the quarter.

The weighted average years left in reinvestment period increased from approximately 2.5 years to 3.1 years as there were eight accretive resets in the underlying portfolio during the quarter. This provides CLO managers the opportunity to capitalize on periods of volatility to improve portfolios or reposition them and zero CLOs that are out of reinvestment period. We believe the weighted average junior overcollateralization cushion of 4.46% is a healthy cushion to offset defaults and losses in the underlying loan portfolios. Weighted average spread of the underlying portfolios was 3.26%. The average percentage of loans rated CCC by S&P was 5.2%, below the 7.5% CCC limit in CLOs. As a reminder, once the CLO has more than 7.5% of its portfolio rated CCC, the excess over 7.5% is marked at the lower fair market value or rating agency recovery rates and reduces the overcollateralization cushion.

And the percentage of loans trading below 80 decreased slightly from 3.4% to 3.3%. We continue to draw on the expertise of the Carlyle liquid credit platform and a collaborative One Carlyle approach to invest in high-quality CLO portfolios sourced through our rigorous 14-step bottom-up investment process. With that, I will now hand the call over to Lauren to discuss the current market environment.

Lauren Basmadjian: Thank you, Nishil. Shifting focus, I’d like to discuss the trends we’ve observed in both the loan and CLO equity markets. While the CLO market experienced strong tailwinds during the start of 2025, with liabilities continuing to tighten and a significant amount of loans trading over par, conditions shifted following the broader uncertainty around the implications of tariffs and below investment-grade credit. In Q1, CLO new issuance totaled $45 billion, close to the record pace in 2024. In addition, the market experienced strong CLO reset and refinancing volumes of $64 billion and $37 billion, respectively, over the quarter. After hitting near all-time tights in February, CLO primary spreads widened in the second half of the first quarter, reflecting broader market volatility and shifting investor sentiment.

CLO primary spreads widened further in April, following harsher than anticipated tariff announcements on April 2. Now the market is beginning to retrace this widening, following delays in the implementation of proposed tariffs. Looking ahead, we anticipate a slowdown in both CLO resets and refinancings until spreads tighten further. However, some CLOs, particularly those issued in 2023 with historically wide liability costs may still be candidates for resets. Moving to the loan market. The LSTA price decline from $97.7 in late January to $96.3 in the end of March. Loan prices declined a further 2 points in early April following the tariff announcements. This period includes some of the most volatile days in the loan market that we’ve experienced since March 2020.

CLO asset spreads tightened by approximately 14 basis points over the first quarter due to heavy loan repricing activity in January and February. Loan repricing activity declined sharply in March amid rising macroeconomic uncertainty with no repricing transactions in the final three weeks of March and throughout April. Despite the implications of tariffs, fundamentals in the U.S. leveraged loan market remained strong thus far. The leveraged loan market has limited direct exposure to tariffs as the largest industries include technology, health care, financials and business services. That said, if we experience a broader economic slowdown, it will negatively impact below investment-grade credit. We continue to assess credit metrics within Carlyle’s U.S. loan portfolio of over 600 borrowers, which we believe is a decent proxy for third-party managed CLO portfolios.

We’ve seen that the impact of rate cuts implemented in 2024 have benefited free cash flow. In fourth quarter 2024, approximately 73% of Carlyle’s U.S. loan borrowers produced free cash flow. Our average borrower EBITDA grew at 9%, which outpaced revenue growth of 6%. This is in line with portfolio trends experienced over the past year. The average interest coverage ratio of our borrowers is 3.5 times, up from 3.1 times in the prior year, and less than 3% of our borrowers have an interest coverage ratio of less than 1 times. From a default perspective, Chapter 11 bankruptcies remain moderate and less than half of the historical average at 82 basis points. However, out-of-court restructurings remain prevalent in the BSL market. And when you include them in the default rate, the market is around 4%, which is elevated in the context of historical averages.

CCIF’s loan portfolio has experienced an LTM default rate of 1.3%, inclusive of out-of-court restructurings, which is approximately one-third of the market rate as we continue to leverage our in-house credit expertise from over 20 U.S. credit analysts to complete bottoms-up fundamental analysis on the underlying portfolios. Over the past few months, we’ve leveraged the insights of Carlyle’s in-house global research, government affairs and the investment teams to assess the impact of tariffs. While the situation continues to evolve, we believe the CLO market is well positioned to navigate this environment, given the diversified nature of the underlying loan portfolios, ample market liquidity and the resilience of loan borrowers that they’ve demonstrated over the past two years in the face of elevated interest rates.

I’ll now turn the call back to Nelson, our CFO, to discuss the financial results.

Nelson Joseph: Thank you, Lauren. Today, I will begin with a review of our second quarter earnings. Total investment income for the second quarter was $8.6 million or $0.48 per share. Total expenses for the quarter was $4.5 million, Total net investment income for the second quarter was $4 million or $0.23 per share. Adjusted net investment income for the second quarter was $4.6 million or $0.26 per share. Adjusted NII adjusts for $0.03 per share impact from the amortization of the OID and issuance costs for the fund’s preferred shares. Core net investment income for the second quarter was $0.27 per share. The decrease in core net investment income and recurring cash flows in Q2 was attributable to approximately 18% of the portfolio not making payments as a result of the completion of accretive resets and refinancings where quarterly payments were redirected to fund these transactions and primary issuances that had not yet made their initial distributions.

The cash-on-cash yield of 22.67% on CLO investment quarterly payments resulted in $0.49 of recurring cash flow. Net asset value as of March 31 was $6.98 per share. Our net asset value and valuations are based on a bid side mark we received from a third party on 100% of the CLO portfolio. We’ve continued 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 engaged to sell our position continues to work through the sales process. During the quarter, we sold $1.61 million of our common shares in connection with the ATM offering program at a premium to NAV for net proceeds of $12.2 million. The common share issuances for the quarter resulted in net accretion of our net asset value of $0.02 per share.

In Q2, holders of the 7.125% Series B convertible preferred shares exercised their right to convert $3 million of the total $11.5 million par amount of these preferred shares. With that, I’ll turn it back to Nishil.

Nishil Mehta: Thanks, Nelson. Today, CCIF has a diversified portfolio of CLOs and have ample time remaining in the reinvestment period to allow high quality CLO managers to take advantage of periods of volatility like we saw in April. We continue to believe that CCIF is well positioned to provide investors with an attractive dividend yield and total returns. We remain focused on utilizing a bottom-up approach to analyze the underlying collateral in each CLO equity position and actively refresh our views on third-party CLO managers in the market. We will look to continue to deliver strong risk adjusted returns for our investors. I’d like to now hand the call over to the operator to take your questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Randy Binner with B. Riley Securities.

Randy Binner: Hey, good morning. I just wanted to follow up on a few things to understand on a go-forward basis net total investment income or net investment income. So, I think what I heard is that the kind of the lag from repricing was probably the biggest item there and the quarter was a little bit lower than our model and that affected 18% of the portfolio in the quarter, if I got that right. And what kind of percentage would that be kind of in the next couple of quarters, do you think?

Nishil Mehta: Hey, Randy. Good morning. It’s Nishil. So I just want to clarify. So there was two different things impacting the cash flows in the prior quarter. One, there was repricings in the overall leverage loan market, which continued in January and February until we saw tariff-related volatility in March. Those repricings reduced the weighted average spread in our underlying portfolios by 12 basis points. Separate from that, 18% of our portfolio did not make payments in January, that’s because — sorry, go ahead.

Randy Binner: Sorry, please go ahead.

Nishil Mehta: Yeah. So 18% did not make payments in January, that was mainly because, I believe, eight CLOs, the payments were diverted to help finance the accretive resets and refinancings that we completed. There is typically costs related to those refinancings and resets. And so, we diverted the January payment to pay for such costs. But in the long-term, it’s obviously very accretive to do that. And then we also had two CLO investments that were in the primary market that had not made their original payment yet.

Randy Binner: Okay. But on the first matter, the lag of 12 bps, is that — it sounds like you would expect that drag to lessen as the year goes on, correct?

Nishil Mehta: Well, I can certainly speak to what we’ve seen so far this quarter. Given the volatility, we have not seen any loan repricings in the quarter-to-date, that’s one of the benefits of the volatility that we’ve seen. Now it’s hard to predict if the market continues to rally as it’s doing along with all fixed income markets if we start seeing repricings again. But at least for now, for this quarter, any impact from repricing should be lower than what we saw in the first quarter — in the first quarter of 2025.

Randy Binner: Okay. Thanks for clarifying that. And then just a couple on credit side, if I can. The percentage of ICR in your book that’s under 1% was — I just didn’t catch that number, but it was very low. What was that percentage?

Lauren Basmadjian: Yeah. So it’s for all of the Carlyle companies. So we think it’s a pretty good proxy because we don’t get that level of information from our underlying managers, but we’re seeing less than 3% of over 600 credits with an interest coverage ratio of less than 1 times.

Randy Binner: And then on the market trend continues to be for out-of-court restructuring. Is there any point at which that might change from your view or is that — should we continue to expect that to be kind of the norm for how the non-payers are sorted out in the book?

Lauren Basmadjian: Yeah. So, two parts to that question. One, I think that out-of-court restructurings will continue to be the norm as a higher percentage of total restructuring. So out-of-court higher than in-court. I do think the total number is elevated right now. I think that if we were to see meaningful economic growth or some interest rate cuts that are not caused by bad economic news, we’ll see that number come down. I think it is elevated from a historical context right now.

Randy Binner: Okay. That’s all I had. Thank you.

Operator: Our next question comes from Erik Zwick with Lucid Capital Markets.

Erik Zwick: Good morning, all. Maybe I’ll start with just a follow-up to that last question. I’m curious, relative to that kind of 4% default that was out-of-court restructurings, noting that it’s above historical. You guys have a pretty good view of the total market. I’m just curious, have you seen any commonalities between any certain industries or certain vintage of CLO that are driving that higher default rate today in out-of-court restructurings?

Lauren Basmadjian: Yeah. I don’t think there’s a big industry trend. I really think what’s brought on this wave of restructuring has been the higher rate environment. So you’re seeing companies that maybe put too much leverage on during the 2021 period and the modeling very, very low base rates and perhaps the purchase prices for the 2021 LBOs were somewhat elevated at the same time. So there was more leverage on those companies. I think that’s been a bigger trend on the vintage effect than any particular industry.

Erik Zwick: That’s helpful. Thank you. Next, you mentioned a lot of the volatility has created maybe some opportunities potentially in the secondary market. I’m curious as you look at your pipeline today for both primary and secondary, if you’re seeing any kind of stark differences in the potential risk adjusted returns there?

Nishil Mehta: Sure. I would say I think the relative value between both the secondary and primary markets today is pretty equal, largely because we’ve seen such a retracement of the declines that we saw in early April. So we’re seeing low to mid-teens types of expected returns, both in the secondary and primary market if you look at the similar profile of CLO manager and time left in reinvestment period. So right now, we’re active in both markets.

Erik Zwick: And then last question for me. Just given the kind of DOGE and government cuts, specifically to the NIH and FDA and some potential impacts there on health care and pharma companies. You have, I think, from an industry perspective, about 11% of your total portfolio in those industries. So as you kind of look through the portfolio, any potential issues that you see there that might need to be mitigated or worked through?

Lauren Basmadjian: So there certainly are cuts from the DOGE program. They’ve been, again, pretty idiosyncratic with particular credits, at least as we go through first quarter earnings and we’re talking to management teams and hearing about perhaps canceled contracts or contracts that are just taking a longer time to come online. We still haven’t seen meaningful impact to health care yet. We’re waiting to see what the tax bill comes out look for Medicaid. So I do think that it adds incremental risk to our company is what I’d say is that healthy companies will be able to deal with cuts in contracts or having contracts come online at a later time. I think over-levered companies that are already struggling have had trouble with higher interest expense, that could be the straw that breaks the camel’s back in some of those situations.

I do not think that is a significant part of the portfolio. As we mentioned, interest coverage ratio remains pretty good for most of the portfolio companies. But on those tail risk companies, the weakest of the portfolio, if they’re in sort of DOGE impacted sectors, they certainly could struggle with that.

Erik Zwick: I appreciate the comments. Thanks for taking my questions today.

Operator: [Operator Instructions] Our next question comes from Mickey Schleien with Ladenburg.

Mickey Schleien: Yes. Good morning, everyone. Just at a high level, your GAAP and cash portfolio yields look good, the CCC buckets, OC cushions, default rates are all good. But NAV in April was down another 9%. Since April, as you mentioned, there’s been a rebound in the loan market, which is up around 1%. But as you also mentioned, credit spreads have started to retighten. In that sort of environment, what’s your outlook for CLO equity for the rest of this year? And what do you think it’s going to take to see some stronger bids for CLO equity?

Nishil Mehta: Yeah, Mickey. Good morning. Great question. So the one thing I want to start off is, so the decline in NAV in April was really market driven and we saw across the market with loan prices declining initially 2 points, and then I think ultimately 1 point, combined with the fact that our third-party valuation agent increased the yields they’re using in the DCF analysis. That caused the fair market value of our position to decline. And as you mentioned, as the loan market has rallied since quarter end, we do get daily NAVs. We do calculate daily NAVs because we get daily marks. We obviously don’t disclose it on a daily basis, but we have seen a rebound in the NAV as the market has rebounded as well. I really think the — just the opportunity, we actually think the volatility, because it’s largely been technical driven, is a positive for CLO equity.

CLO equity typically outperforms in periods of volatility because your financing is locked in, whereas the two things that can be variable are loan spreads, and loan prices can change on a day-to-day basis. So with the volatility, we did see a decline in loan prices and we saw CLO managers purchasing loans at discounted prices, especially in the first couple of weeks of April, help building par to offset future losses. And then as I mentioned earlier, the — what we have seen is repricing has pretty much come to a halt, at least for the first, I would say, 50 days within the quarter, which is obviously helpful because loan spreads have declined about 40 basis points, I would say, over the past 12 to 15 months. So the volatility has definitely helped us stop that.

And as new loans are coming to the market today, albeit at limited volumes, they’re definitely wider than they would have been, say, two months ago or three months ago. So we think that creates a pretty attractive opportunity for CLO equity today.

Mickey Schleien: Okay. Thanks for that. Nishil, that’s helpful. Following up on the LME question. For borrowers within your CLOs that are using LMEs, do you use or do the CLOs employ loan market pricing for their tests? And in your experience, what percentage of LMEs eventually default anyway?

Nishil Mehta: Yeah. Maybe I’ll take the first one. So if there is an LME and if the range is considered a default of security, they’ll typically mark as defaulted for a brief period while the restructuring is ongoing. At that point, while it’s considered a default, it is marked at the lower of market value and the rating agency recovery rates, which can be fairly punitive, but then they quickly come out of the halt once the restructuring is completed. So that can be, for most companies, can be a relatively brief period. In terms of the number of distressed exchanges that result in future defaults…

Lauren Basmadjian: Yeah. What I’d say to that is that we’ve only been in the heightened LME environment for the last, let’s call it, two years. So we’ve gone through this. And when I say that, I mean as a percentage of total bankruptcies. So before, you wouldn’t see — you would see the bankruptcy trend line and the LME trend line move together. So they would both go up together, they’d both go down together. And what we’ve seen in the last few years is they’ve totally diverged where the bankruptcy trend line has come down and the LME trend line has gone up. Because these are all pretty recent transactions, we haven’t seen many of them or not many at all, if I could think off the top of my head, file for bankruptcy afterwards. But that doesn’t mean it won’t happen in the future.

Mickey Schleien: So Lauren, how does that bake into your assumptions for default rates when you do your estimated yields?

Lauren Basmadjian: Yeah. It’s a really good question. When you think about the LME situations, and it really does depend on the situation. So you’re seeing a much lower haircut for those than what you would see in a Chapter 11 process. So oftentimes, borrowers may be asking for anywhere between $0.02 or $0.20 of debt discount capture versus, I think, an average recovery rate of in the 40s right now for a true Chapter 11 process. When you blend those two together, assuming that 3/4 of the market is LME and 1/4 is true bankruptcy, you still end up within the range of that 2% constant default rate with — depend on how you run it, 30% or 40% haircut on that. So it actually doesn’t look that different versus based on where we are today.

Mickey Schleien: Okay. I understand. And lastly, I noticed that the first position in your schedule of investments looks like it was called. It’s not really that old. It’s a 2021 vintage. So I guess it’s coming out of its reinvestment. I’m just curious, why would that be called and what does that mean for the rest of the portfolio?

Nishil Mehta: Sure. So I think that was — you’re right, Mickey. Typically, you don’t see CLOs called that are still in their reinvestment period. I think that was an idiosyncratic situation where the equity investors — well, I think it was a situation where the CLO manager was underperforming. And so the equity investors, including ourselves, decided that it was economically better to call the transaction earlier versus keep it outstanding.

Mickey Schleien: No, that’s interesting. Do you have any more positions that you feel fall into that basket, Nishil?

Nishil Mehta: I don’t think so. We have, I think, two deals in the portfolio that are in process of being liquidated. We’re not aware of any other CLOs or we’re not in discussions with any CLO managers about liquidations. Now, one thing to keep mind is we typically look at liquidations as an attractive opportunity when loan prices are elevated like they were in January and February, given loan prices, while they’re recovering from the lows of April, they haven’t fully recovered yet. So we most likely wouldn’t look to do a liquidation at this point.

Mickey Schleien: I understand. Those are all my questions. Thanks for your time this morning.

Nishil Mehta: Thanks, Mickey.

Operator: That concludes today’s question-and-answer session. I’d like to turn the call back to Nishil Mehta for closing remarks.

Nishil Mehta: 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 for all your support.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.