CARLYLE SECURED LENDING, INC. (dollar amounts in thousands, except per share data, unless otherwise indicated) CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS We have included or incorporated by reference in this Form 10-Q, and from time to time our management may make, "forward-looking statements". These forward-looking statements are not historical facts, but instead relate to future events or the future performance or financial condition ofTCG BDC, Inc. (together with its consolidated subsidiaries, "we," "us," "our," "TCG BDC" or the "Company"). These statements are based on current expectations, estimates and projections about us, our current or prospective portfolio investments, our industry, our beliefs, and our assumptions. The forward-looking statements contained in this Form 10-Q involve a number of risks and uncertainties, including statements concerning: •our, or our portfolio companies', future business, operations, operating results or prospects, including our and their ability to achieve our respective objectives as a result of the current COVID-19 pandemic; •the return or impact of current and future investments; •the general economy and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon; •the impact of any protracted decline in the liquidity of credit markets on our business and the impact of the COVID-19 pandemic thereon; •the impact of fluctuations in interest rates on our business; •our future operating results and the impact of the COVID-19 pandemic thereon; •the impact of changes in laws, policies or regulations (including the interpretation thereof) affecting our operations or the operations of our portfolio companies; •the valuation of our investments in portfolio companies, particularly those having no liquid trading market, and the impact of the COVID-19 pandemic thereon; •our ability to recover unrealized losses; •market conditions and our ability to access alternative debt markets and additional debt and equity capital, and the impact of the COVID-19 pandemic thereon; •our contractual arrangements and relationships with third parties; •uncertainty surrounding the financial stability ofthe United States ,Europe andChina ; •the social, geopolitical, financial, trade and legal implications of the exit of theUnited Kingdom from theEuropean Union , or Brexit; •the financial condition of and ability of our current and prospective portfolio companies to achieve their objectives and the impact of the COVID-19 pandemic thereon; •competition with other entities and our affiliates for investment opportunities; •the speculative and illiquid nature of our investments; •the use of borrowed money to finance a portion of our investments; •our expected financings and investments; •the adequacy of our cash resources and working capital; •the timing, form and amount of any dividend distributions; •the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID-19 pandemic thereon; •the ability to consummate acquisitions; •the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments; •the impact of currency fluctuations on the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather thanU.S. dollars; 70 -------------------------------------------------------------------------------- •the ability ofThe Carlyle Group Employee Co., L.L.C. to attract and retain highly talented professionals that can provide services to our investment adviser and administrator; •our ability to maintain our status as a business development company; and •our intent to satisfy the requirements of a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may," "plans," "continue," "believes," "seeks," "estimates," "would," "could," "targets," "projects," "outlook," "potential," "predicts" and variations of these words and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" in Part II, Item 1A of and elsewhere in this Form 10-Q. We have based the forward-looking statements included in this Form 10-Q on information available to us on the date of this Form 10-Q, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with theSecurities and Exchange Commission (the "SEC"), including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
OVERVIEW
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part I, Item 1 of this Form 10-Q "Financial Statements." This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in "Risk Factors" in Part I, Item 1A of our annual report on Form 10-K for the year endedDecember 31, 2019 and Part II, Item 1A of our Form 10-Q for the quarter endedMarch 31, 2020 . Our actual results could differ materially from those anticipated by such forward-looking statements due to factors discussed under "Risk Factors" and "Cautionary Statements Regarding Forward-Looking Statements" appearing elsewhere in this Form 10-Q. We are aMaryland corporation formed onFebruary 8, 2012 , and structured as an externally managed, non-diversified closed-end investment company. We have elected to be regulated as a BDC under the Investment Company Act. We have elected to be treated, and intend to continue to comply with the requirements to qualify annually, as a RIC under Subchapter M of the Code. Our investment objective is to generate current income and capital appreciation primarily through debt investments inU.S. middle market companies. Our core investment strategy focuses on lending toU.S. middle market companies, which we define as companies with approximately$25 million to$100 million of EBITDA, which we believe is a useful proxy for cash flow. We complement this core strategy with additive, diversifying assets including, but not limited to, specialty lending investments. We seek to achieve our investment objective primarily through direct origination of Middle Market Senior Loans, with the balance of our assets invested in higher yielding investments (which may include unsecured debt, mezzanine debt and investments in equities). We generally make Middle Market Senior Loans to privateU.S. middle market companies that are, in many cases, controlled by private equity firms. Depending on market conditions, we expect that between 70% and 80% of the value of our assets will be invested in Middle Market Senior Loans. We expect that the composition of our portfolio will change over time given our Investment Adviser's view on, among other things, the economic and credit environment (including with respect to interest rates) in which we are operating. OnJune 19, 2017 , we closed our IPO, issuing 9,454,200 shares of our common stock (including shares issued pursuant to the exercise of the underwriters' over-allotment option onJuly 5, 2017 ) at a public offering price of$18.50 per share. Net of underwriting costs, we received cash proceeds of$169,488 . Shares of common stock ofTCG BDC began trading on the Nasdaq Global Select Market under the symbol "CGBD" onJune 14, 2017 . OnJune 9, 2017 , we acquiredNF Investment Corp. ("NFIC"), a BDC managed by our Investment Advisor (the "NFIC Acquisition"). As a result, we issued 434,233 shares of common stock to the NFIC stockholders and approximately$145,602 in cash, and acquired approximately$153,648 in net assets. We are externally managed by our Investment Adviser, an investment adviser registered under the Advisers Act. Our Administrator provides the administrative services necessary for us to operate. Both our Investment Adviser and our 71 -------------------------------------------------------------------------------- Administrator are wholly owned subsidiaries ofCarlyle Investment Management L.L.C. , a subsidiary of Carlyle. Our Investment Adviser's five-person investment committee is responsible for reviewing and approving our investment opportunities. The members of the investment committee have experience investing through different credit cycles. As ofJune 30, 2020 , our Investment Adviser's investment team included a team of more than 150 investment professionals across the Carlyle Global Credit segment. The five members of our Investment Adviser's investment committee have an average of over 25 years of industry experience. In addition, our Investment Adviser and its investment team are supported by a team of finance, operations and administrative professionals currently employed byCarlyle Employee Co. , a wholly owned subsidiary of Carlyle. In conducting our investment activities, we believe that we benefit from the significant scale, relationships and resources of Carlyle, including our Investment Adviser and its affiliates. We have operated our business as a BDC since we began our investment activities inMay 2013 . KEY COMPONENTS OF OUR RESULTS OF OPERATIONS Investments Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt available to middle market companies, the general economic environment and the competitive environment for the type of investments we make. Revenue We generate revenue primarily in the form of interest income on debt investments we hold. In addition, we generate income from dividends on direct equity investments, capital gains on the sales of loans and debt and equity securities and various loan origination and other fees. Our debt investments generally have a stated term of five to eight years and generally bear interest at a floating rate usually determined on the basis of a benchmark such as LIBOR. Interest on these debt investments is generally paid quarterly. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. We may also generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees. Expenses Our primary operating expenses include the payment of: (i) investment advisory fees, including base management fees and incentive fees, to our Investment Adviser pursuant to the Investment Advisory Agreement between us and our Investment Adviser; (ii) costs and other expenses and our allocable portion of overhead incurred by our Administrator in performing its administrative obligations under the Administration Agreement between us and our Administrator; and (iii) other operating expenses as detailed below: •administration fees payable under our Administration Agreement and Sub-Administration Agreements, including related expenses; •the costs of any offerings of our common stock and other securities, if any; •calculating individual asset values and our net asset value (including the cost and expenses of any independent valuation firms); •expenses, including travel expenses, incurred by our Investment Adviser, or members of our Investment Adviser team managing our investments, or payable to third parties, performing due diligence on prospective portfolio companies and, if necessary, expenses of enforcing our rights; •certain costs and expenses relating to distributions paid on our shares; •debt service and other costs of borrowings or other financing arrangements; •the allocated costs incurred by our Investment Adviser in providing managerial assistance to those portfolio companies that request it; •amounts payable to third parties relating to, or associated with, making or holding investments; 72 -------------------------------------------------------------------------------- •the costs associated with subscriptions to data service, research-related subscriptions and expenses and quotation equipment and services used in making or holding investments; •transfer agent and custodial fees; •costs of hedging; •commissions and other compensation payable to brokers or dealers; •federal and state registration fees; •anyU.S. federal, state and local taxes, including any excise taxes; •independent director fees and expenses; •costs of preparing financial statements and maintaining books and records, costs of preparing tax returns, costs of Sarbanes-Oxley Act compliance and attestation and costs of filing reports or other documents with theSEC (or other regulatory bodies), and other reporting and compliance costs, including registration and listing fees, and the compensation of professionals responsible for the preparation or review of the foregoing; •the costs of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholders' meetings and the compensation of investor relations personnel responsible for the preparation of the foregoing and related matters; •the costs of specialty and custom software for monitoring risk, compliance and overall portfolio, including any development costs incurred prior to the filing of our election to be regulated as a BDC; •our fidelity bond; •directors and officers/errors and omissions liability insurance, and any other insurance premiums; •indemnification payments; •direct fees and expenses associated with independent audits, agency, consulting and legal costs; and •all other expenses incurred by us or our Administrator in connection with administering our business, including our allocable share of certain officers and their staff compensation. We expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines. PORTFOLIO AND INVESTMENT ACTIVITY Below is a summary of certain characteristics of our investment portfolio as ofJune 30, 2020 andDecember 31, 2019 .
As of
June 30, 2020 December 31, 2019
Fair value of investments $ 1,907,555 $ 2,123,964
Count of investments 142 136
Count of portfolio companies / investment fund 111 112
Count of industries 28 28
Count of sponsors 63 63
Percentage of total investment fair value:
First lien debt (excluding first lien/last out debt) 69.0 % 74.6 %
First lien/last out debt 4.1 % 3.7 %
Second lien debt 14.6 % 11.0 %
Total secured debt 87.7 % 89.3 %
Credit Fund 10.6 % 9.6 %
Equity investments 1.7 % 1.0 %
Percentage of debt investment fair value:
Floating rate (1) 99.1 % 99.7 %
Fixed interest rate 0.9 % 0.3 %
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(1) Primarily subject to interest rate floors.
Our investment activity for the three month periods endedJune 30, 2020 and 2019 is presented below (information presented herein is at amortized cost unless otherwise indicated):
For the three month periods ended
June 30, 2020 June 30, 2019
Investments:
Total investments, beginning of period$ 2,247,327 $ 2,221,378 New investments purchased 61,595 230,893 Net accretion of discount on investments 1,473 3,984 Net realized gain (loss) on investments (47,784) (7,714) Investments sold or repaid (214,262) (296,224) Total Investments, end of period$ 2,048,349 $ 2,152,317 Principal amount of investments funded: First Lien Debt (excluding First Lien/Last Out Debt) $ 41,273$ 153,525 First Lien/Last Out Debt 20,921 15,711 Second Lien Debt 368 35,839 Equity Investments 518 587 Investment Fund - 25,699 Total $ 63,080$ 231,361 Principal amount of investments sold or repaid: First Lien Debt (excluding First Lien/Last Out Debt)$ (227,302) $ (176,210) First Lien/Last Out Debt (33,898) (1,629) Second Lien Debt (3,000) (62,059) Equity Investments - (1,500) Investment Fund - (64,000) Total$ (264,200) $ (305,398) Number of new funded investments 5 12 Average amount of new funded investments $ 8,656$ 19,241
Percentage of new funded debt investments at floating interest rates
100 % 100 %
Percentage of new funded debt investments at fixed interest rates
- % - %
As of June 30, 2020 and December 31, 2019 , investments consisted of the
following:
June 30, 2020 December 31, 2019
Amortized Amortized
Cost Fair Value Cost Fair Value
First Lien Debt (excluding First Lien/Last Out
Debt) $ 1,413,685 $ 1,316,786 $ 1,649,721 $ 1,585,042
First Lien/Last Out Debt 80,209 78,127 78,951 78,096
Second Lien Debt 306,123 278,623 234,006 234,532
Equity Investments 32,331 31,756 22,272 21,698
Investment Fund 216,001 202,263 216,501 204,596
Total $ 2,048,349 $ 1,907,555 $ 2,201,451 $ 2,123,964
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The weighted average yields (1) for our first and second lien debt, based on the
amortized cost and fair value as of June 30, 2020 and December 31, 2019 , were as
follows:
June 30, 2020 December 31, 2019
Amortized Amortized
Cost Fair Value Cost Fair Value
First Lien Debt (excluding First Lien/Last Out
Debt) 6.84 % 7.34 % 8.00 % 8.17 %
First Lien/Last Out Debt 8.76 % 8.99 % 6.63 % 9.53 %
First Lien Debt Total 6.94 % 7.43 % 7.91 % 8.23 %
Second Lien Debt 9.29 % 10.21 % 10.44 % 10.42 %
First and Second Lien Debt Total 7.34 % 7.90 % 8.22 % 8.50 %
(1)Weighted average yields include the effect of accretion of discounts and
amortization of premiums and are based on interest rates as of June 30, 2020 and
December 31, 2019 . Weighted average yield on debt and income producing
securities at fair value is computed as (a) the annual stated interest rate or
yield earned plus the net annual amortization of original issue discount "OID")
and market discount earned on accruing debt included in such securities, divided
by (b) total first lien and second lien debt at fair value included in such
securities. Weighted average yield on debt and income producing securities at
amortized cost is computed as (a) the annual stated interest rate or yield
earned plus the net annual amortization of OID and market discount earned on
accruing debt included in such securities, divided by (b) total first lien and
second lien debt at amortized cost included in such securities. Actual yields
earned over the life of each investment could differ materially from the yields
presented above.
Total weighted average yields (which includes the effect of accretion of
discount and amortization of premiums) of our first and second lien debt
investments as measured on an amortized cost basis decreased from 8.22% to 7.34%
from December 31, 2019 to June 30, 2020 . The decrease in weighted average yields
was primarily due to a decrease in the effective LIBOR rate applicable to loans
in the portfolio.
The following table summarizes the fair value of our performing and
non-accrual/non-performing investments as of June 30, 2020 and December 31,
2019 :
June 30, 2020
Fair Value Percentage Fair Value Percentage
Performing $ 1,836,247 96.26 % $ 2,071,535 97.53 %
Non-accrual (1) 71,308 3.74 52,429 2.47
Total $ 1,907,555 100.00 % $ 2,123,964 100.00 %
(1)For information regarding our non-accrual policy, see Note 2 to the
consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
See the Consolidated Schedules of Investments as of June 30, 2020 and
December 31, 2019 in our consolidated financial statements in Part I, Item 1 of
this Form 10-Q for more information on these investments, including a list of
companies and type and amount of investments.
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As part of the monitoring process, our Investment Adviser has developed risk
policies pursuant to which it regularly assesses the risk profile of each of our
debt investments and rates each of them based on categories, which we refer to
as "Internal Risk Ratings". During the second quarter of 2020, our Investment
Advisor reevaluated and revised its Internal Risk Ratings and policies across
the Carlyle Direct Lending platform to more appropriately assess portfolio risk
across all market conditions, including the current COVID-19 environment. The
revised methodology incorporates greater focus on expectations for future
company performance and industry outlook, and creates greater consistency in
risk rating assignment across all investments by removing from the ratings
methodology the direct tie of historical financial results to the "base case"
projections derived at the time of our initial investment. Under the revised
methodology, an Internal Risk Rating of 1 - 5, which are defined below, is
assigned to each debt investment in our portfolio, compared to Internal Risk
Ratings of 1 - 6 under the legacy methodology. Key drivers of internal risk
rating used in the revised methodology are substantially the same as the legacy
methodology, including financial metrics, financial covenants, liquidity and
enterprise value coverage.
Internal Risk Ratings Definitions
Rating Definition
1 Borrower is operating above expectations, and the trends and risk factors are
generally favorable.
2 Borrower is operating generally as expected or at an acceptable level of
performance. The level of risk to our initial cost bases is similar to the risk
to our initial cost basis at the time of origination. This is the initial risk
rating assigned to all new borrowers.
3 Borrower is operating below expectations and level of risk to our cost basis has
increased since the time of origination. The borrower may be out of compliance
with debt covenants. Payments are generally current although there may be higher
risk of payment default.
4 Borrower is operating materially below expectations and the loan's risk has
increased materially since origination. In addition to the borrower being
generally out of compliance with debt covenants, loan payments may be past due,
but generally not by more than 120 days. It is anticipated that we may not
recoup our initial cost basis and may realize a loss of our initial cost basis
upon exit.
5 Borrower is operating substantially below expectations and the loan's risk has
increased substantially since origination. Most or all of the debt covenants are
out of compliance and payments are substantially delinquent. It is anticipated
that we will not recoup our initial cost basis and may realize a substantial
loss of our initial cost basis upon exit.
Our Investment Adviser monitors and, when appropriate, changes the investment
ratings assigned to each debt investment in our portfolio. Our Investment
Adviser reviews our investment ratings in connection with our quarterly
valuation process. The below table summarizes the Internal Risk Ratings as of
June 30, 2020 . Given the forward-looking nature of certain elements of the
revised methodology, it is impracticable to recast the risk ratings for the
portfolio using the revised methodology as of December 31, 2019 .
June 30, 2020
Fair Value % of Fair Value
(dollar amounts in millions)
Internal Risk Rating 1 $ 37.3 2.23 %
Internal Risk Rating 2 1,145.7 68.45
Internal Risk Rating 3 412.4 24.65
Internal Risk Rating 4 36.8 2.20
Internal Risk Rating 5 41.3 2.47
Total $ 1,673.5 100.00 %
As of June 30, 2020 , the weighted average Internal Risk Rating of our debt
investment portfolio was 2.3. As of June 30, 2020 , seven of our debt
investments, with an aggregate fair value of $78.0 million were assigned an
Internal Risk Rating of 4-5. As of June 30, 2020 and December 31, 2019 , six and
five debt investments were on non-accrual status. The fair values of debt
investments in the portfolio on non-accrual status were $71.3 million and $52.4
million , respectively, which represented approximately 3.74% and 2.47%,
respectively, of total investments at fair value. The remaining first and second
lien debt investments were performing and current on their interest payments as
of June 30, 2020 and December 31, 2019 .
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