Carlyle Credit Income Fund (CCIF) has delivered strong financial results for the third quarter of 2024, with a particular emphasis on its success in the Collateralized Loan Obligation (CLO) equity market. The fund has declared a consistent dividend of $0.105 per share, equating to a 14.8% annualized yield, underscoring its stable performance amidst dynamic market conditions.
Key Takeaways
- Carlyle Credit Income Fund reported a total investment income of $7.4 million, or $0.58 per share.
- The net asset value stood at $7.68 per share as of June 30.
- The fund experienced a cash on cash yield of 31.68% on its CLO investments.
- Quarterly cash distributions in July amounted to $10 million.
- CCIF has a diversified portfolio with 41 unique CLO investments managed by 24 different managers.
- Market trends indicate record CLO activity and a decline in loan default rates.
Company Outlook
- CCIF is optimistic about the potential of CLO equity investments.
- The fund plans to continue its disciplined investment approach.
- The focus will be on recent vintages from top-tier managers and opportunities in both primary and secondary markets.
- There is a potential refinancing of preferred stock planned for the fourth quarter of 2025.
Bearish Highlights
- No specific bearish highlights were mentioned in the call.
Bullish Highlights
- The fund has shown robust performance in the CLO equity market.
- There is a positive outlook on credit stability.
- CCIF has a strategic approach to selecting secondary market opportunities.
Misses
- The call did not indicate any misses or underperformance for the quarter.
Q&A Highlights
- CEO Lauren Beth Majan expressed confidence in CCIF's ability to provide attractive dividend yields and total returns.
- Portfolio Manager Nishal Mehta reiterated a positive stance on the CLO markets and the fund's selective investment strategy in secondary opportunities.
Carlyle Credit Income Fund's third-quarter performance reflects a strong position in the CLO equity market, bolstered by a diversified portfolio and a strategic approach to investment. With a stable dividend and a positive outlook on the market, CCIF appears well-positioned to continue delivering value to its investors.
Full transcript - Carlyle Credit Income Fund (CCIF) Q3 2024:
Conference Operator: Good day and thank you for standing by. Welcome to the Carlyle Credit Income Fund Third Quarter 2024 Financial Results and Investor Conference Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session.
I would now like to hand the conference over to your speaker today, Jane Tsai.
Jane Tsai, Carlyle Credit Income Fund: Good morning, and welcome to Carlyle Credit Income Fund's 3rd quarter 2024 Earnings Call. With me on the call today is Lauren Beth Majan, CCIF's Chief Executive Officer Nishal Mehta, CCIF's Portfolio Manager and Nelson Joseph, CCIF's Chief Financial Officer. Last night, we issued our Q3 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 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. With that, I'll turn the call over to Lauren.
Lauren Beth Majan, Chief Executive Officer, Carlyle Credit Income Fund: Thanks, Jane. Good morning, everyone, and thank you all for joining CCIF quarterly earnings call. I would like to start by reviewing the Fund's activities over the last quarter. We maintained our dividend at $0.105 per share, which is now declared through November 2024, equating to a 14.8 percent annualized dividend based on the share price as of August 20, 2024. The monthly dividend is supported by $0.81 of recurring cash flows.
New CLO investments during the quarter totaled $12,200,000 with a weighted average GAAP yield of 19.5%. The aggregate portfolio weighted average GAAP yield was 20.3% as of June 30. I would like to highlight what Carlyle has accomplished since July 14, 2023, the date that we took over as the investment advisor of CCIF. We rotated the portfolio into a diverse pool of CLO equity positions generating a GAAP yield of 20.3% with no CLOs that have an over collateralization cushion of less than 3%. We met the fund's leverage targets by issuing flexible and long term preferred stock without any financial covenants or mark to market provisions.
We increased the dividend from 8% to 16.5% based on the Fund's net asset value as of July 31, 2024. Pivoting to the current market environment. I'd like to discuss what we've observed in both the loan and CLO equity markets over the quarter. Continued tightening in CLO liability spreads has supported the arbitrage for CLO equity, resulting in higher new issue volumes. CLO market activity accelerated this past quarter with $53,000,000,000 of issuance, which is the most active quarter on record.
CLO issuance through June totaled $101,000,000,000 an increase of 80% year over year. We believe the continued tightening of CLO liabilities has fueled heightened CLO refinancing and reset activity. Year to date through June, CLO refinancing and reset volumes of $39,000,000,000 $73,000,000,000 have materially outpaced 2023's $5,000,000,000 $20,000,000,000 dollars As a reminder, refinancings reduce the financing costs of the CLO, while resets extend the reinvestment period to refresh 5 years typically. Within CCIF portfolio, we have completed 6 resets year to date through June, extending the reinvestment period of these CLOs. Despite the increase in CLO reset activity, 32% of the CLO market is still out of their reinvestment period.
So CCIF portfolio only has 2 CLO positions outside of their reinvestment period, both of which were opportunistic purchases. While the implications of elevated interest rates may pressure borrowers' ability to service existing debt, Carlyle's U. S. Loan portfolio of over 600 borrowers has remained resilient in the Q1 and is a valuable proxy for assessing the overall health of borrowers in the broadly syndicated loan market. While the average sales growth in the loan portfolio decreased versus the prior quarter, EBITDA growth of 9.5% is the 2nd highest quarter that we have experienced since the Russian invasion of Ukraine in 2022.
We believe this trend indicates that management teams are focused on cost containment and cash preservation as they operate in a higher rate environment. The LSTA index default rate, excluding distressed exchanges, declined to 90 basis points at the end of July compared to 1.1% at the end of March. While we believe restructuring risk remains as approximately 4.4% of loan market trades below 80, the loan default rate inclusive of distressed exchanges also moderated from 3.5% at the end of March to 3.3% by the end of July. We anticipate loan defaults will remain manageable for CLO managers, including and excluding distressed exchange activity. Retail loan inflows and robust CLO new issuance activity of the LSTA index closed at a 2 year high of 96.99 in mid May before declining to $96,590,000 by the end of June.
Performing issuers capitalized on market conditions and year to date through June, loan repricing activity totaled $383,000,000,000 which accounts for about 30% of borrowers in the loan market. So through these repricing, borrowers have reduced spreads on the underlying loans by an average of 54 basis points year to date. While a decrease in underlying asset spreads negatively impact CLO arbitrage, including a 15 basis point year to date decline in the weighted average spread of CCIF loan portfolio, these impacts were partially offset by continued tightening in liability spreads. Furthermore, we remain encouraged by CLO Equity's attractive cash on cash distributions. Median CLO equity payments in July totaled 4.1%, a slight decline from April payments, but still higher than the 10 year average of 3.8%.
I'll now hand the call over to Nishal Mehta, our portfolio manager to discuss our deployment and the current portfolio.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: 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 with a 15 year track record of investing in 3rd party CLOs to manage a diversified portfolio of CLO equity investments. As of June 30, our portfolio comprised 41 unique CLO investments managed by 24 different cloud managers, sourced 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 in the secondary market. Given continued spread compression and supportive CELO arbitrage, we've also assessed CELO equity primary investments given these loan portfolios are generally cleaner than those sourced in the CLO secondary markets.
We continue to leverage our in house credit expertise of 23 U. S. And 9 European credit research analysts to complete bottoms up fundamental analysis on the underlying loan portfolios of CLOs. As Lauren mentioned, the CLO market was impacted by the record repricing wave, which has reduced the weighted average spread of CCIF's portfolio by 10 basis points over the quarter and 15 basis points year to date and loan prices declining by 15 basis points over the quarter. The combination of these two factors resulted in a decline in CLO equity prices across the market including in CCIF's portfolio.
We do not believe the quarter over quarter decline in net asset value raises any concerns for our existing portfolio. And we remain pleased with the high quality positions that we have invested in across Tier 1 and Tier 2 CLO managers. The following represent some key stats on the portfolio as of June 30. The portfolio generates a GAAP yield of 20.26% on a cost basis, supported by cash on cash yields of 31.68 percent on CLM investment quarterly payments received during the quarter. The weighted average years left and reinvestment period is approximately 2.4 years, providing CLM managers the opportunity to capitalize on periods of volatility to improve portfolios or reposition them.
We believe the weighted average junior over collateralization cushion of 4.17% is a healthy cushion to offset a gradual increase in defaulted loans with 0 CLOs with an over collateralization cushion of less than 3%. The weighted average spread of the underlying portfolios was 3.55%. The percentage of loans rated CCC (WA:CCCP) by S and P was 6.3%, below the 7.5% CCC limit in CELA's. As a reminder, once a CELA has more than 7.5% of its portfolio rated CCC, the excess over 7.5% is marked at the lower fair market value, radiancy recovery rates and reduces the overall collateralization cushion. The percentage of loans trading below 80% was limited at 4.2%.
I will now turn over to Nelson, our CFO to discuss the financial results.
Nelson Joseph, Chief Financial Officer, Carlyle Credit Income Fund: Thank you, Nishal. Today, I'll begin with a review of our Q3 earnings. Total (EPA:TTEF) investment income for the Q3 was $7,400,000 or $0.58 per share compared to $7,300,000 or $0.61 per share in the prior quarter. Total expenses for the quarter were $3,400,000 compared to $3,300,000 in the prior quarter. Total net investment income for the 3rd quarter was $4,000,000 or $0.32 per share compared to $4,000,000 or $0.33 per share in the prior quarter.
Net asset value as of June 30 was $7.68 per share compared to $7.88 per share in the prior quarter. Our net asset value and valuations are based on a bid sized mark we received from a third party on 100 percent of the CLO portfolio. We continue to hold 1 legacy real estate asset in the portfolio. The total fair market value of the loan is $2,200,000 The 3rd party we engaged to sell our position continues to work through the process to maximize proceeds. During the Q3, we sold 680,000 of our common shares in connection with the ATM offering program at a premium to NAV for net proceeds of $5,500,000 resulting in a $0.01 per share increase.
We view the ATM program as an efficient and accretive way to grow the fund. The cash on cash yield of 31.68 percent on the CLO investment quarterly payments resulted in $0.81 of recurring cash flow. Quarterly cash payments received in July totaled $10,000,000 or approximately $0.77 per share compared to $4,000,000 of dividends paid in the quarter or $0.315 per share. With that, I'll turn it back to Lauren.
Lauren Beth Majan, Chief Executive Officer, Carlyle Credit Income Fund: Thanks, Nelson. We continue to believe that CCIF is well positioned to provide investors with an attractive dividend yield and total return. We remain focused on applying a disciplined CLO investment and monitoring process to analyze the underlying collateral in each CLO equity position in which we invest. I'd now like to hand the call over to the operator to take your questions.
Conference Operator: Thank you. Our first question comes from Mickey Schulien with Ladenburg. You may proceed.
Mickey Schulien, Analyst, Ladenburg: Yes, good morning. You mentioned in your prepared remarks that weakness in CLO equity valuations has been partially driven by lower loan spreads. But as we know, CLOs are naturally hedged and CLO equities are still delivering strong cash yields. So what do you think it will take for the CLO equity market to finally show some strength?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes, Mickey. Good morning. It's Nishu. So look, I would say CECL equity markets, we still think are showing strength. You have seen a slight decline with the combination of the repricing waves that we've seen in the market.
As Lauren mentioned, about 30% of the borrowers in the lower market have repriced their loans that reduces the weighted average spread. And then just through the end of the quarter at 6.30, you saw loan prices also decline about $0.10 $0.15 With that being said, the April payment dates, quarterly payments were the highest that we had seen since the Q3 of 2016. You saw some decline in the July payment dates, but it was still very healthy. I think overall, we still remain very positive on the CLO markets, given credit, we believe remains relatively stable. We believe defaults remain relatively manageable.
And so we continue to believe steel equity remains attractive.
Mickey Schulien, Analyst, Ladenburg: And Nishu, if I can follow-up on what you just said. What was the main cause for the July payments to be lower than the April payments?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes, I think it's 2 factors. 1, as these repricings with 30% of market repricing that reduces the weighted average spread on the underlying loan portfolios and CLOs and that ultimately results in a reduction in the quarterly payments. The other is you do have kind of seasonality variance and the fact that on average CLOs hold around 2% to 3% of bonds. Those bonds typically pay on a 6 month cycle. And so most bonds paid as part of the April payment date.
And so you may see an uptick in the October payment date just from the bonds paying on their 6 month cycle.
Mickey Schulien, Analyst, Ladenburg: Yes, I understand. I've seen that in other funds. One last question for me. Nishal, we saw the dynamic between 1 month 3 months LIBOR, which is now SOFR obviously impact CLO equity cash flows as the Fed tightened. Now that it seems fairly certain the Fed will start to loosen monetary policy, how should we think about that 1 month, 3 month spread impacting CLO equity cash flows as the Fed starts to cut rates?
Yes.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: It's a great question because like it's the first time we're going to be in a potentially prolonged rate cut environment since 2,008, so about 16 years ago. If you think about it when rates were increasing, I think we had the issue that 3 months LIBOR or SOFR was significantly higher than 1 month. Now you're seeing the inverse of that. I think today, 3 months SOFR is locked in at 14 basis points. As a reminder, all of the liabilities are typically paid at 3 month LOVER 3 months SOFR, excuse me.
Whereas I think anywhere from 60% to 70% of the underlying loans are based off 1 month SOFR. And so you may see a slight mismatch occur again. Right now, it's somewhat favorable since our assets are using a higher SOFR rate, but it's really going to come down to the timing of the rate cuts and to the extent of the rate cuts where you could see some impact. We're not expecting rate cuts of 75 basis points, at least what for the foreseeable future, obviously things might change. So I don't think we're going to see the same impact that we saw when rates were increasing pretty substantially.
Mickey Schulien, Analyst, Ladenburg: I appreciate that. Those are all my questions this morning. Thank you for your time. Thanks, Mickey.
Conference Operator: Thank you. Our next question comes from Matthew P. Hallett with B. Riley. You may proceed.
Matthew P. Hallett, Analyst, B. Riley: Hi, Nishiel. Hi, Lauren. Thanks for taking my question. First on primary versus secondary, we've heard some market participants sort of come out and say secondary spreads have tightened, we're just focused on primary. You seem to be pretty much are there spreads that wide or just give us an update on what you're seeing in each channel?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes, Matt, good morning.
Conference Operator: I think the one thing
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: I'd start off with saying is we try to avoid making just generic statements across both markets because there's obviously a lot of different profiles and different type of opportunities between primary and secondary. I think we'd concur that primary is attractive now that the CLO debt costs have continued to decline over the year in line with the spread tightening we've seen across the fixed income markets. That's helped improve the equity arbitrage. So that's made primary attractive again as we continue to look at that. On the secondary side, we still find pockets of opportunity.
We're not buying every single secondary opportunity that we see. But every so often, we do find secondary opportunities that we continue to believe are attractive. I do agree that overall, you've seen some tightening and the overall expected returns for secondary sealer equity, largely in line with the tightening we've seen throughout the year across fixed income markets. But we still find opportunities that we think present good relative value and risk adjusted returns.
Matthew P. Hallett, Analyst, B. Riley: And just on a side note, with the primary market picking up, Amit, are you going to start doing like accumulation facilities? We've seen that with some of the other folks out there, I mean, in big size.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. So, as we do primary, we will enter into the loan accumulation facilities. You'll probably see I think we're currently in 1 or 2 right now. So we expect that to increase as we increase activity in the primary market.
Matthew P. Hallett, Analyst, B. Riley: Okay. And it sounds like that's going to be enhanced returns. It seems like it's a real boost to the other folks that do it in bigger size, but just something to look forward to. The second question is, what is the refi reset opportunity today in the portfolio? What can you quantify?
You have a lot of 'twenty two, it seems like that's the sweet spot. And what can you tell us in terms of the opportunity here as you look down the pipeline?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. So look, out of the 41 sealers that we hold, we have refinanced or we set 6 of them. We actually maintain trackers that we update on a periodic basis trying to identify which refis and resets make sense. And we updated it based on movements in CLO financing costs. So we are in active dialogue with a handful of the managers, where we hold positions within CCIF.
So we expect to continue activity in the reset and refi market for this portfolio.
Matthew P. Hallett, Analyst, B. Riley: Great. So you said only 6 of the 41?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. And I think that's largely a function of the fact that this is a relatively newer ramped portfolio. So compared to some of our peers that have more seasoned portfolios, a higher percentage of their portfolios that are out of reinvestment period, we only have 2 of those which we opportunistically invested in, taking advantage of our bottoms up approach in terms of analyzing the underlying loans. So I think just the overall opportunity set within our portfolio may be smaller than our peers just because our portfolio is less seasoned. And given it's less seasoned, there may be fewer refinancing and reset opportunities.
Matthew P. Hallett, Analyst, B. Riley: Got you. Okay. And next question, the OC level looked like it picked up in July, I mean, pretty significantly. Any rationale for that? And just
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. I think it's like as Lauren mentioned, we think credit fundamentals continue to remain stable. And so with the portfolio that we hold and the managers that we've partnered with, they continue to maintain what we consider to be very strong OC cushions over 4%. None of our CLOs have a OC cushion of less than 3%. And so I think it's you're always going to see slight variations quarter over quarter, but I don't think there's any specific pointing to the increase.
Matthew P. Hallett, Analyst, B. Riley: Great. Last question, look, you've done a great job rotating the portfolio. I guess you had just one more small real estate asset to sell. You've lowered your cost of capital. I look at that preferred bond and straightened around 26%.
When can you call that? I mean, it's an 8.75 coupon. Is this 2 years away? I mean, how long can you call that and refinance it? I mean, your obviously, your cost of capital should keep on going down and that's going to really accelerate growth.
But when can you call that?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. So when we issued that last October, I believe, as market standard is for a 5 year bond issuance have a 2 year non call. So it's something that we will look at closer to the Q4 of 2025. We agree. It looks very expensive, but I think it's still very attractive given the 5 year tenure and a lot of flexibility it provides us.
Obviously, spreads have tightened in since then. And as we've seasoned as a fund as we've taken over, you've seen the trading price increase pretty substantially. So it's yielding substantially lower than the current coupon.
Matthew P. Hallett, Analyst, B. Riley: Well, that's not that far away. It's a little over a year and that's going to be a big impact if you could do something a little below 8% or even low 7%. So it's something to really keep an eye on because I think it's going to be able to have a huge boost to earnings. You can get in. So we'll look forward to that.
Appreciate the questions and great quarter. Keep up the good work.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Thanks, Matt.
Conference Operator: Thank you. I would now like to turn the call over to Lauren Basmieden for any closing remarks.
Lauren Beth Majan, Chief Executive Officer, Carlyle Credit Income Fund: 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.
Conference Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
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