CARLYLE SECURED LENDING, INC. 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 ofCarlyle Secured Lending, Inc. (together with its consolidated subsidiaries, "we," "us," "our," "CSL" 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, including from the discontinuation of LIBOR and the implementation of alternatives to LIBOR;
•the valuation of our investments in portfolio companies, particularly those having no liquid trading market, and the impact of the COVID-19 pandemic thereon;
•the impact of supply chain constraints on our portfolio companies and the global economy;
•the elevating levels of inflation, and its impact on our portfolio companies and on the industries in which we invest;
•the impact on our business of changes in laws, policies or regulations (including the interpretation thereof) affecting our operations or the operations of our portfolio companies;
•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 of
•the social, geopolitical, financial, trade and legal implications of the exit
of the
•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
•currency fluctuations could adversely affect the results of our investments in
foreign companies, particularly to the extent that we receive payments
denominated in foreign currency rather than
73
--------------------------------------------------------------------------------•the impact of information technology system failures, data security breaches, data privacy compliance, network disruptions, and cybersecurity attacks;
•the ability of
•our ability to maintain our status as a business development company ("BDC"); 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 our annual report on Form 10-K for the year endedDecember 31, 2021 (our "2021 Form 10-K"). 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, registration statements on Form N-2, 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 2021 Form 10-K. Our actual results could differ materially from those anticipated by such forward-looking statements due to factors discussed under "Risk Factors" in our 2021 Form 10-K 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 of 1940, as amended (together with the rules and regulations promulgated thereunder, 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 Internal Revenue Code (the "Code"). Our investment objective is to generate current income and, to a lesser extent, capital appreciation primarily through secured debt investments inU.S. middle market companies. Our core investment strategy focuses on lending toU.S. middle market companies supported by financial sponsors, which we define as companies with approximately$25 million to$100 million of earnings before interest, taxes, depreciation and amortization, which we believe is a useful proxy for cash flow. This core strategy is supplemented with complementary specialty lending and opportunistic investing strategies, which take advantage of the broad capabilities of Carlyle's Global Credit platform while offering risk diversifying portfolio benefits. We seek to achieve our investment objective primarily through direct origination of secured debt instruments, including first lien senior secured loans (which may include stand-alone first lien loans, first lien/last out loans and "unitranche" loans) and second lien senior secured loans (collectively, "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 initial public offering, 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 of CSL began trading on the Nasdaq Global Select Market under the symbol "CGBD" onJune 14, 2017 . 74 -------------------------------------------------------------------------------- OnJune 9, 2017 , we acquiredNF Investment Corp. ("NFIC"), a BDC managed by our Investment Adviser (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 Investment Advisers Act of 1940 (the "Advisers Act"), as amended. Our Administrator provides the administrative services necessary for us to operate. Both our Investment Adviser and our 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. Our Investment Adviser's investment committee comprises five of the most senior credit professional within the Carlyle Global Credit segment, with backgrounds and expertise across asset classes and over 26 years of average industry experience and 10 years of average tenure. 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 (as amended, the "Investment Advisory Agreement"); (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;
75
--------------------------------------------------------------------------------•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;
•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;
•any
•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
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.
76
--------------------------------------------------------------------------------PORTFOLIO AND INVESTMENT ACTIVITY
Below is a summary of certain characteristics of our investment portfolio as of
As of
March 31, 2022 December 31, 2021
Fair value of investments $ 1,873,183 $ 1,913,052
Count of investments 156 154
Count of portfolio companies / investment funds 117 117
Count of industries 27 27
Percentage of total investment fair value:
First lien debt 65.4 % 64.4 % Second lien debt 16.2 % 17.9 % Total secured debt 81.6 % 82.3 % Investment Funds 14.2 % 13.7 % Equity investments 4.2 % 4.0 % Percentage of debt investment fair value: Floating rate (1) 98.4 % 98.4 % Fixed interest rate 1.6 % 1.6 %
(1) Primarily subject to interest rate floors.
Our investment activity for the three month periods ended
For the three month periods ended
March 31, 2022 March 31, 2021
Investments:
Total investments, beginning of period$ 1,957,553 $ 1,922,966 New investments purchased 113,966 148,927 Net accretion of discount on investments 2,338 2,026 Net realized gain (loss) on investments 5,839 1,673 Investments sold or repaid (159,443) (150,601) Total Investments, end of period$ 1,920,253 $ 1,924,991
Principal amount of investments funded:
First Lien Debt$ 110,594 $ 98,408 Second Lien Debt 249 52,369 Equity Investments 820 645 Total$ 111,663 $ 151,422
Principal amount of investments sold or repaid:
First Lien Debt$ (108,253) $ (107,073) Second Lien Debt (36,325) (41,531) Equity Investments (3) (446) Total$ (144,581) $ (149,050) Number of new funded investments 8 10 Average amount of new funded investments $ 10,771$ 12,583
Percentage of new funded debt investments at floating interest rates
100 % 100 %
Percentage of new funded debt investments at fixed interest rates
- % - %
77-------------------------------------------------------------------------------- As ofMarch 31, 2022 andDecember 31, 2021 , investments consisted of the following: March 31, 2022 December 31, 2021 Amortized Amortized Cost Fair Value Cost Fair Value First Lien Debt$ 1,270,317 $ 1,224,117 $ 1,271,794 $ 1,232,084 Second Lien Debt 306,022 304,202 341,538 341,776 Equity Investments 72,817 78,699 73,125 77,093 Investment Funds 271,097 266,165 271,096 262,099 Total$ 1,920,253 $ 1,873,183 $ 1,957,553 $ 1,913,052 The weighted average yields (1) for our first and second lien debt, based on the amortized cost and fair value as ofMarch 31, 2022 andDecember 31, 2021 , were as follows: March 31, 2022 December 31, 2021 Amortized Amortized Cost Fair Value Cost Fair Value First Lien Debt 7.35 % 7.62 % 7.31 % 7.55 % Second Lien Debt 9.27 % 9.33 % 9.04 % 9.04 % First and Second Lien Debt Total 7.72 % 7.96 % 7.68 % 7.87 % (1)Weighted average yields include the effect of accretion of discounts and amortization of premiums and are based on interest rates as ofMarch 31, 2022 andDecember 31, 2021 . 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 increased from 7.68% to 7.72%
from
The following table summarizes the fair value of our performing and non-accrual/non-performing investments as ofMarch 31, 2022 andDecember 31, 2021 : March 31, 2022 December 31, 2021 Fair Value Percentage Fair Value Percentage Performing$ 1,803,226 96.3 %$ 1,836,501 96.0 % Non-accrual (1) 69,957 3.7 76,551 4.0 Total$ 1,873,183 100.0 %$ 1,913,052 100.0 %
(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 ofMarch 31, 2022 andDecember 31, 2021 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. 78 -------------------------------------------------------------------------------- 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". Pursuant to these risk policies, an Internal Risk Rating of 1 - 5, which are defined below, is assigned to each debt investment in our portfolio. Key drivers of internal risk ratings include 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 risk 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 assigned as of
March 31, 2022 and December 31, 2021 .
March 31, 2022 December 31, 2021
Fair Value % of Fair Value Fair Value % of Fair Value
(dollar amounts in millions)
Internal Risk Rating 1 $ 16.9 1.1 % $ 3.8 0.2 %
Internal Risk Rating 2 1,152.0 75.4 1,205.5 76.6
Internal Risk Rating 3 290.3 19.0 299.5 19.0
Internal Risk Rating 4 28.0 1.8 27.6 1.8
Internal Risk Rating 5 41.1 2.7 37.5 2.4
Total $ 1,528.3 100.0 % $ 1,573.9 100.0 %
As of March 31, 2022 and December 31, 2021 , the weighted average Internal Risk
Rating of our debt investment portfolio was 2.3 and 2.3, respectively. As of
March 31, 2022 , two of our debt investments, with an aggregate fair value of
$69.1 million were assigned an Internal Risk Rating of 4-5. As of December 31,
2021 , two of our debt investments, with an aggregate fair value of $65.1 million
were assigned an Internal Risk Rating of 4-5. As of March 31, 2022 and
December 31, 2021 , three and five of our debt investments were on non-accrual
status, respectively. Our debt investments non-accrual status had a fair value
of $70.0 million and $76.6 million , respectively, which represented
approximately 3.7% and 4.0%, respectively, of our total investments at fair
value as of March 31, 2022 and December 31, 2021 . The remaining first and second
lien debt investments were performing and current on their interest payments as
of March 31, 2022 and December 31, 2021 .
79
--------------------------------------------------------------------------------CONSOLIDATED RESULTS OF OPERATIONS
For the three month periods ended
The net increase or decrease in net assets from operations may vary substantially from period to period as a result of various factors, including the recognition of realized gains and losses and net change in unrealized appreciation and depreciation. As a result, quarterly comparisons may not be meaningful. Investment Income Investment income for the three month periods endedMarch 31, 2022 and 2021 was as follows: For the three month periods ended March 31, 2022 March 31, 2021 Investment income First Lien Debt $ 31,833$ 25,584 Second Lien Debt 7,865 6,700 Equity Investments 287 1,036 Investment Funds 7,524 7,528 Total investment income $ 47,509$ 40,848 The increase in investment income for the three month period endedMarch 31, 2022 from the comparable period in 2021 was primarily driven by due to previously unrecognized income of$3.8 million from the exit of the investment inSolAero , higher other income and an increase in accelerations of amortization from the repayment of loans. As ofMarch 31, 2022 , the size of our portfolio decreased to$1,920,253 from$1,924,992 as ofMarch 31, 2021 , at amortized cost. As ofMarch 31, 2022 , the weighted average yield of our first and second lien debt investments increased to 7.72% from 7.63% as ofMarch 31, 2021 on amortized cost, primarily due to new fundings being originated at a higher weighted average yield than the yield of positions being repaid or sold. Interest income on our first and second lien debt investments is dependent on the composition and credit quality of the portfolio. Generally, we expect the portfolio to generate predictable quarterly interest income based on the terms stated in each loan's credit agreement. As ofMarch 31, 2022 and 2021, three and five first lien debt investments, respectively, were on non-accrual status. Non-accrual investments had a fair value of$69,957 and$60,376 respectively, which represented approximately 3.7% and 3.3% of total investments at fair value, respectively, as ofMarch 31, 2022 and 2021. The remaining first and second lien debt investments were performing and current on their interest payments as ofMarch 31, 2022 and 2021. For the three month periods endedMarch 31, 2022 and 2021, the Company earned$2,236 and$1,470 , respectively, in other income. The increase in other income for the three month period endedMarch 31, 2022 from the comparable period in 2021 was primarily driven by higher prepayment fees.
For the three month periods ended
Net investment income (loss) for the three month periods endedMarch 31, 2022 and 2021 was as follows: For the three month periods ended March 31, 2022 March 31, 2021 Total investment income $ 47,509$ 40,848 Net expenses (including excise tax expense) (21,990) (20,169) Net investment income (loss) $ 25,519$ 20,679 80
--------------------------------------------------------------------------------
Expenses
For the three month periods ended
March 31, 2022 March 31, 2021
Base management fees $ 7,050 $ 6,800
Incentive fees 5,228 4,257
Professional fees 783 691
Administrative service fees 406 282
Interest expense 7,099 6,975
Credit facility fees 517 519
Directors' fees and expenses 160 116
Other general and administrative 394 405
Excise tax expense 353 124
Expenses $ 21,990 $ 20,169 Interest expense and credit facility fees for the three month periods ended
For the three month periods ended
March 31, 2022 March 31, 2021
Interest expense $ 7,099 $ 6,975
Facility unused commitment fee 333 328
Amortization of deferred financing costs 184 191
Other fees - -
Total interest expense and credit facility fees $ 7,616 $ 7,494
Cash paid for interest expense $ 7,106 $ 6,915
Average principal debt outstanding $ 987,652 $ 979,557
Weighted average interest rate 2.88 % 2.85 %
The increase in interest expense and credit facility fees for the three month
period ended March 31, 2022 compared to the comparable period in 2021 was
primarily driven by higher average principal balances outstanding and higher
weighted average interest rates.
Below is a summary of the base management fees and incentive fees incurred
during the three month periods ended
For the three month periods ended
March 31, 2022 March 31, 2021
Base management fees $ 7,050$ 6,800 Incentive fees on pre-incentive fee net investment income
5,228 4,257
Realized capital gains incentive fees - -
Accrued capital gains incentive fees - -
Total capital gains incentive fees - -
Total incentive fees 5,228 4,257
Total base management fees and incentive fees $ 12,278 The increase in base management fees and incentive fees related to pre-incentive fee net investment income for the three month period endedMarch 31, 2022 from the comparable period in 2021 was driven by higher investment fair value and higher pre-incentive fee net investment income. 81 -------------------------------------------------------------------------------- For the three month periods endedMarch 31, 2022 and 2021, there were no accrued capital gains incentive fees based upon the cumulative net realized and unrealized appreciation (depreciation) as ofMarch 31, 2022 and 2021. The accrual for any capital gains incentive fee under accounting principles generally accepted inthe United States ("U.S. GAAP") in a given period may result in an additional expense if such cumulative amount is greater than in the prior period or a reduction of previously recorded expense if such cumulative amount is less than in the prior period. If such cumulative amount is negative, then there is no accrual. See Note 4 to the consolidated financial statements included in Part I, Item 1 of this Form 10-Q for more information on the incentive and base management fees. Professional fees include legal, rating agencies, audit, tax, valuation, technology and other professional fees incurred related to the management of the Company. Administrative service fees represent fees paid to the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement, including our allocable portion of the cost of certain of our executive officers and their respective staff. Other general and administrative expenses include insurance, filing, research, subscriptions and other costs.
Net Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) on Investments
During the three month periods endedMarch 31, 2022 and 2021, we had realized gains on 7 and 8 investments, respectively, totaling approximately$5,839 and$1,673 , respectively. There were no realized losses for the three month periods endedMarch 31, 2022 and 2021. During the three month periods endedMarch 31, 2022 and 2021, we had unrealized appreciation on 45 and 99 investments, respectively, totaling approximately$19,498 and$24,087 , respectively, which was offset by unrealized depreciation on 102 and 58 investments, respectively, totaling approximately$22,070 and$10,228 , respectively.
Net realized gain (loss) and net change in unrealized appreciation
(depreciation) by the type of investments for the three month periods ended
For the three month periods ended
March 31, 2022 March 31, 2021
Net realized gain (loss) on investments $ 5,839 $ 1,673
Net change in unrealized appreciation (depreciation) on investments
(2,572) 13,859
Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments
$ 3,267 $ 15,532 Net realized gain (loss) and net change in unrealized appreciation
(depreciation) by the type of investments for the three month periods ended
For the three month periods ended
March 31, 2022 March 31, 2021
Net change in Net change in
unrealized appreciation Net realized gain unrealized appreciation
Type Net realized gain (loss) (depreciation) (loss) (depreciation)
First Lien Debt $ 3,455 $ (6,491) $ 992 $ 10,550
Second Lien Debt - (2,058) - 4,713
Equity Investments 2,384 1,914 681 1,254
Investment Funds - 4,063 - (2,691)
Total $ 5,839 $ (2,572) $ 1,673 $ 13,826
Net change in unrealized appreciation in our investments for the three month
period ended March 31, 2022 decreased compared to the comparable period in 2021
primarily due to negative impact of widening market yields partially offset by
an increase in the value of the investment in Middle Market Credit Fund, LLC
("Credit Fund "). Net change in unrealized appreciation (depreciation) is also
driven by changes in other inputs utilized under our valuation methodology,
including, but not limited to, enterprise value multiples, borrower leverage
multiples and borrower ratings, and the impact of exits.
82
--------------------------------------------------------------------------------MIDDLE MARKET CREDIT FUND, LLC
Overview
OnFebruary 29, 2016 , the Company andCredit Partners USA LLC ("Credit Partners ") entered into an amended and restated limited liability agreement, which was subsequently amended and restated onJune 24, 2016 andFebruary 22, 2021 (as amended, the "Limited Liability Company Agreement") to co-manageCredit Fund , aDelaware limited liability company that is not consolidated in the Company's consolidated financial statements.Credit Fund primarily invests in first lien loans of middle market companies.Credit Fund is managed by a six-member board of managers, on which the Company andCredit Partners each have equal representation. Establishing a quorum forCredit Fund's board of managers requires at least four members to be present at a meeting, including at least two of the Company's representatives and two ofCredit Partners' representatives. The Company andCredit Partners each have 50% economic ownership ofCredit Fund and have commitments to fund, from time to time, capital of up to$250,000 each. Funding of such commitments generally requires the approval of the board ofCredit Fund , including the board members appointed by the Company. By virtue of its membership interest, the Company andCredit Partners each indirectly bear an allocable share of all expenses and other obligations ofCredit Fund . Together withCredit Partners , the Company co-invests throughCredit Fund . Investment opportunities forCredit Fund are sourced primarily by the Company and its affiliates. Portfolio and investment decisions with respect toCredit Fund must be unanimously approved by a quorum ofCredit Fund's investment committee consisting of an equal number of representatives of the Company andCredit Partners . Therefore, although the Company owns more than 25% of the voting securities ofCredit Fund , the Company does not believe that it has control overCredit Fund (other than for purposes of the Investment Company Act).Middle Market Credit Fund SPV, LLC (the "Credit Fund Sub"), MMCF CLO 2019-2, LLC (the "2019-2 Issuer") andMMCF Warehouse II, LLC (the "Credit Fund Warehouse II"), each aDelaware limited liability company, were formed onApril 5, 2016 ,November 26, 2018 andAugust 16, 2019 , respectively.Credit Fund Sub, the 2019-2 Issuer, and Credit Fund Warehouse II are wholly owned subsidiaries ofCredit Fund and are consolidated inCredit Fund's consolidated financial statements commencing from the date of their respective formations. InAugust 2021 , the 2019-2 Notes, as defined below, were redeemed and repaid in full.Credit Fund Sub and Credit Fund Warehouse II primarily invest in first lien loans of middle market companies.Credit Fund and its wholly owned subsidiaries follow the same Internal Risk Rating System as the Company. Refer to "Debt" below for discussions regarding the credit facilities entered into and the notes issued by such wholly-owned subsidiaries.Credit Fund , the Company andCredit Partners entered into an administration agreement withCarlyle Global Credit Administration L.L.C. , the administrative agent ofCredit Fund (in such capacity, the "Credit Fund Administrative Agent"), pursuant to which the Credit Fund Administrative Agent is delegated certain administrative and non-discretionary functions, is authorized to enter into sub-administration agreements at the expense ofCredit Fund with the approval of the board of managers ofCredit Fund , and is reimbursed byCredit Fund for its costs and expenses andCredit Fund's allocable portion of overhead incurred by the Credit Fund Administrative Agent in performing its obligations thereunder. 83 --------------------------------------------------------------------------------
Selected Financial Data
Since inception ofCredit Fund and throughMarch 31, 2022 andDecember 31, 2021 , the Company andCredit Partners each made capital contributions of$1 and$1 in members' equity, respectively, and$216,000 and$216,000 in subordinated loans, respectively, toCredit Fund . OnMay 25, 2021 , the Company andCredit Partners received an aggregate return of capital on the subordinated loans of$46,000 , of which the Company received$23,000 . Below is certain summarized consolidated financial information forCredit Fund as ofMarch 31, 2022 andDecember 31, 2021 .
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