Executive Summary / Key Takeaways

• Strategic Consolidation for Scale: Carlyle Secured Lending (CGBD) has significantly enhanced its market position through the successful merger with Carlyle Secured Lending III (CSL III) and the consolidation of Credit Fund II, boosting total assets to $2.3 billion and streamlining its capital structure by eliminating preferred stock dilution.
• Robust Origination Amidst Tight Spreads: Despite historically tight market spreads and broader economic uncertainty, CGBD achieved a record $376 million in originations in Q2 2025, demonstrating strong deal-sourcing capabilities and market share gains within its core middle-market focus.
• Stable Income and Dividend Outlook: CGBD reported Q2 2025 Net Investment Income (NII) of $0.39 per share and declared a $0.40 per share dividend, supported by $0.89 per share in spillover income. Management expresses confidence in maintaining the base dividend, leveraging strategic growth and active portfolio management.
• Disciplined Credit and Risk Management: The portfolio maintains strong credit quality with 94% in senior secured loans and a median EBITDA of $92 million. Non-accruals, at 2.1% of fair value in Q2 2025, are actively managed, with the successful restructuring of Maverick expected to reduce this to 1% pro forma.
• Leverage and Liquidity for Future Growth: With $613.1 million in liquidity and statutory leverage at 1.1x (mid-point of target range), CGBD is well-positioned to capitalize on an anticipated pickup in deal volume in late 2025 and 2026, further optimizing its joint ventures for enhanced Return on Equity (ROE).

The Carlyle Advantage: Building a Resilient Private Credit Powerhouse

Carlyle Secured Lending, Inc. (CGBD) operates as a business development company (BDC), specializing in providing secured debt investments to U.S. middle-market companies. Established in 2012 and publicly traded since 2017, CGBD's core strategy is to generate current income and capital appreciation by targeting companies with EBITDA typically ranging from $25 million to $100 million, often backed by financial sponsors. This foundational approach is consistently reinforced by leveraging the extensive resources and expertise of Carlyle's Global Credit platform.

The private credit market has experienced significant growth, with the U.S. sector surging to a record $1.8 trillion, as BDCs collectively fill a substantial $350 billion financing gap for small and medium-sized businesses. CGBD's strategic positioning within this expanding landscape is underpinned by its disciplined underwriting and a focus on the top of the capital structure, with 94% of its investments in senior secured loans. This emphasis on secured lending provides a critical layer of risk mitigation, particularly in an environment marked by economic uncertainty and fluctuating interest rates.

CGBD's competitive edge is significantly amplified by its affiliation with the Carlyle Group, a global investment firm. This relationship provides a robust origination engine and an expansive network, translating into superior deal-sourcing capabilities and enhanced access to high-quality investment opportunities. The company utilizes specialized and custom software for comprehensive risk monitoring, compliance, and overall portfolio fidelity, which supports its rigorous underwriting process. This analytical infrastructure, combined with Carlyle's broader expertise, enables CGBD to conduct thorough due diligence and make informed investment decisions, contributing to better risk assessment and potentially more efficient capital allocation compared to some peers.

Strategic Expansion and Operational Excellence

CGBD has embarked on a transformative strategic journey, culminating in significant structural enhancements designed to bolster its scale, efficiency, and shareholder value. A pivotal move was the successful merger with Carlyle Secured Lending III (CSL III) on March 27, 2025. This merger substantially increased CGBD's asset base and eliminated the dilutive overhang from its preferred stock, as Carlyle exchanged its 2 million preferred shares for 3 million common shares at net asset value (NAV) per share. The integration of CSL III, which had a near 100% portfolio overlap with CGBD, is expected to improve stock liquidity and reduce aggregate operational costs, all while preserving the existing investment strategy.

Further optimizing its investment vehicles, CGBD consolidated Middle Market Credit Fund II (Credit Fund II) onto its balance sheet in February 2025, making it a wholly-owned subsidiary. This action, alongside extending the investment period of Middle Market Credit Fund I (Credit Fund I) by three years and securing a new, more attractive credit facility, significantly enhanced CGBD's non-qualifying asset capacity. These strategic initiatives are projected to materially improve the Return on Equity (ROE) at Credit Fund I, with the dividend from this joint venture expected to achieve a run rate of mid-teens ROE. Management is actively exploring options for a second joint venture, leveraging Carlyle's extensive global credit platform, with potential economic benefits anticipated in 2026.

Operational execution remains a hallmark of CGBD's strategy. In Q2 2025, the company achieved a record deployment quarter, funding $376 million in new and existing borrowers, resulting in net investment activity of $238 million after accounting for repayments. This robust origination activity, the highest since its 2017 IPO, underscores CGBD's ability to capture market share even amidst muted sponsor M&A activity. The company's portfolio as of June 30, 2025, comprises 202 investments across 148 companies and 28 industries, with a total fair value of $2.3 billion and a median portfolio EBITDA of $92 million.

Financial Performance and Portfolio Health

CGBD's financial performance in recent quarters reflects both the benefits of its strategic growth and the challenges of a dynamic market. For Q2 2025, the company reported Net Investment Income (NII) of $28.25 million, or $0.39 per common share, on both a GAAP and adjusted basis. This NII was driven by a higher average outstanding investment balance, a direct result of the CSL III merger and Credit Fund II consolidation. However, these gains were partially offset by lower weighted average yields on the portfolio, which stood at 10.90% (at amortized cost) for total debt and income-producing investments as of June 30, 2025.

The company's NAV per common share was $16.43 as of June 30, 2025, a modest decrease from $16.63 in Q1 2025 and $16.80 at year-end 2024. This trend is partly attributable to a total aggregate realized and unrealized net loss of approximately $14 million ($0.19 per share) in Q2 2025, with 60-65% linked to credit-specific underperformance and the remainder to market/technical factors. Despite these markdowns, CGBD's credit quality remains largely stable. Non-accrual investments increased to 2.1% of total investments at fair value in Q2 2025, up from 0.6% in Q4 2024. However, the successful restructuring of Maverick in early July 2025 is expected to reduce this pro forma non-accrual rate to 1%, demonstrating active management and recovery efforts.

CGBD maintains a strong liquidity position, with $613.1 million in cash and undrawn debt capacity as of June 30, 2025. The company's primary revolving credit facility commitments were upsized to $960 million in July 2025, providing ample dry powder. Statutory leverage stood at 1.1x at quarter-end, comfortably within its target range, with a goal to reach 1:1 leverage over the next couple of quarters. The balance sheet has been further diversified and strengthened through investment-grade ratings from Fitch and Moody's, the issuance of a $300 million institutional bond in October 2024, and the July 2024 reset of the 2015-1 CLO, which extended maturities and reduced debt costs.

Competitive Landscape and Strategic Positioning

CGBD operates in a highly competitive BDC market, vying for deals with larger, established players like Ares Capital Corporation (ARCC), Golub Capital BDC, Inc. (GBDC), Blue Owl Credit Income Corp. (OBDC), and FS KKR Capital Corp. (FSK). While CGBD leverages the Carlyle Group's extensive network for deal sourcing and underwriting, providing a qualitative edge in market access and strategic adaptability, it faces challenges in matching the sheer scale and operational efficiencies of some larger competitors. For instance, CGBD's Net Profit Margin (TTM) of 34.79% trails ARCC's 89% and GBDC's 58%, suggesting that larger peers may achieve greater profitability through their established operational execution and broader market reach.

CGBD's focus on secured lending, with 94% of its portfolio in senior secured loans, provides a defensive posture that is crucial in volatile market conditions. This contrasts with some competitors who may have higher exposure to mezzanine or unsecured debt. However, CGBD's Debt/Equity ratio of 1.09 is comparable to GBDC's 1.15 and FSK's 1.11, indicating a similar reliance on leverage across the sector. The company's strategic initiatives, such as the CSL III merger and JV optimization, are direct responses to competitive pressures, aiming to achieve greater scale and cost efficiencies to better compete with larger, more diversified platforms.

The market environment is characterized by historically tight spreads in private credit, which, combined with potential Fed rate cuts, could present headwinds to near-term earnings across the sector. CGBD's management acknowledges this, noting that spreads have stabilized in the SOFR 500-550 basis point area, but also suggests that a reduction in base rates could lead to some spread widening. The company's disciplined underwriting approach, focusing on "quality credits at the top of the capital structure" with significant equity cushions and conservative leverage profiles, is its primary defense against these market dynamics. The addition of Alex Chi as Deputy CIO for Global Credit and Head of Direct Lending in early 2026 is expected to further strengthen CGBD's direct lending capabilities, leveraging his extensive experience to accelerate growth without altering the core middle-market strategy.

Outlook and Risks

CGBD's outlook is one of cautious optimism, balanced against persistent market headwinds. Origination activity is expected to be slower in Q3 2025 due to seasonal factors and market uncertainty, but management anticipates a rebound and a "busier end of the year" into 2026, driven by a rebuilding M&A pipeline. Near-term Net Investment Income (NII) is projected to remain in line with Q1 2025 levels, with potential for some contraction in coming quarters due to lower base rates and tighter new issue spreads. However, the company's substantial spillover income of $0.89 per share provides a buffer, and management expresses confidence in maintaining the $0.40 per share base dividend.

Key risks include the continued tightness of market spreads, which could compress yields, and the trajectory of interest rates, despite CGBD's hedging strategies for its fixed-rate liabilities. While direct tariff exposure is assessed as minimal (<5% of the portfolio), broader trade policy volatility could impact overall capital markets and M&A activity, potentially affecting deal flow. Credit quality, while generally stable, requires continuous monitoring, as evidenced by idiosyncratic underperformance in a few names. However, CGBD's ability to leverage the broader Carlyle network for maximum recoveries on underperforming assets mitigates this risk. The company's strategic focus on achieving its 1:1 leverage target over the next two quarters, coupled with the optimization of its joint ventures, is designed to enhance its earnings power and provide flexibility for future growth.

Conclusion

Carlyle Secured Lending stands at a pivotal juncture, having strategically repositioned itself for enhanced scale and operational efficiency through the CSL III merger and the optimization of its joint ventures. The company's disciplined approach to middle-market secured lending, fortified by the extensive resources and analytical prowess of the Carlyle Group, forms the bedrock of its investment thesis. While facing headwinds from tight market spreads and potential interest rate fluctuations, CGBD's robust origination capabilities, strong liquidity, and proactive credit management demonstrate its resilience.

The commitment to a consistent $0.40 per share base dividend, supported by a healthy spillover income, underscores management's confidence in the company's earnings power. With a clear roadmap for leveraging its increased scale, optimizing its capital structure, and expanding its strategic partnerships, CGBD is well-positioned to deliver stable cash flow and long-term value to investors. The ongoing focus on high-quality credits and strategic adaptability in a dynamic private credit market reinforces CGBD's narrative as a compelling investment for discerning income-focused investors.