CGBD - Carlyle Secured Lending: I Am Now Collecting An 11% Yield On My Last Buy

2023-10-11 03:35:48 ET

Summary

• Carlyle Secured Lending is selling at a discounted NAV, making it an attractive investment opportunity for passive income investors.
• The BDC has a well-diversified investment portfolio, with a majority of its debt investments allocated to loans that pay floating interest rates.
• Carlyle Secured Lending has excellent dividend coverage, paying an 11% dividend yield and offering the potential for supplemental dividends.

If you are a passive income investor like me, you probably feel like a kid in the candy store right now. BDCs and REITs are selling at much lower NAV multiples again, creating an abundance of opportunities to invest capital in the battered BDC sector.

One BDC that I have bought again on the drop is Carlyle Secured Lending Inc. ( CGBD ), which is again selling at what seems to be an exaggerated discount to NAV.

The BDC also has good dividend coverage and pays special dividends that are set to boost passive income investors’ effective yields. With a NAV multiple of 0.82x, the valuation also implies a much better margin of safety.

My Rating History

In March, I wrote down my thoughts on Carlyle Secured Lending in an article entitled Ride Out The High Yield Carnage With Carlyle Secured Lending’s 11% Yield as the BDC sold off sharply at the time, and the stock subsequently entered into a months-long price recovery.

I think we are back in a similar situation, even though this time the weakness in stock prices has not been precipitated by a new crisis in the venture-focused commercial bank market.

Be that as it may, the widening of the NAV discount and solid dividend coverage for an 11%-yielding BDC plus special dividend potential make CGBD a top buy for passive income.

Carlyle Secured Lending’s Investment Portfolio

The BDC has a well-diversified investment portfolio and a large concentration of debt investments in senior security debt: 81% of Carlyle Secured Lending’s investments were made in either First Lien Debt (67%) or Second Lien Debt (14%). The total portfolio as of the end of the second quarter had an investment value (based on fair value) of $1.9 billion.

In addition, Carlyle Secured Lending has the majority of its debt investments allocated to those loans that pay floating interest rates, setting the BDC up for net interest income tailwinds in a rising-rate environment.

Besides a core BDC loan portfolio that focuses primarily on providing flexible financing solutions to middle-market companies, Carlyle Secured Lending owns Investment Funds (14% of the portfolio based on fair value) valued at $1.0 billion. The BDC’s capital invested in those funds produces an approximate 12% annualized yield, and most investments, as in the core BDC portfolio, are floating-rate loans.

Great Dividend Coverage

Carlyle Secured Lending earned $2.08 per share in net investment income in the last year and has excellent dividend coverage. In addition to the payment of a $0.37 per share per quarter regular dividend, the BDC has paid a considerable amount of special dividends to passive income investors as well: Carlyle Secured Lending paid $0.28 per share in additional distributions in the last year.

The dividend payout ratio without consideration of supplementary dividends was 69%, which is exceptionally low for a BDC that offers passive income investors the opportunity to earn an 11% dividend yield from its investment portfolio.

Considering $0.28 per share in supplemented distributions, Carlyle Secured Lending paid out 83% of its net investment income, which is still very low.

Now Selling At An 18% Discount To NAV Again

Carlyle Secured Lending’s stock price slid in the last couple of days, and passive income investors have the opportunity to gobble up stock at a large discount to NAV again.

A similar opportunity presented itself in March of this year, which I also used as a way to establish a long position in this well-managed BDC.

BDCs across the board have seen steep declines in their NAV multiples since August, and the selloff most recently accelerated.

Carlyle Secured Lending is one BDC that I have been buying on the drop, but I see a large opportunity set emerging across the BDC sector.

CGBD sells at an 18% discount to NAV, and peer BDCs also sell at discount NAV multiples, including Goldman Sachs BDC ( GSBD ) and Oaktree Specialty Lending Corporation ( OCSL ) .

Why Carlyle Secured Lending Could See A Higher/Lower NAV Multiple

Carlyle Secured Lending is a well-managed BDC and is focused on highly secured First Lien debt, which in my view lowers investment risks for passive income investors.

Whether or not Carlyle Secured Lending will trade at a lower or higher NAV multiple will largely depend on the market’s assessment of the BDC’s credit quality and its ability to sustain its current 11% dividend yield.

My Conclusion

I think that passive income investors have a unique opportunity to throw some capital into the BDC sector right now, and one BDC that makes a decent value proposition is CGBD.

Carlyle Secured Lending has a well-diversified First Lien-focused investment portfolio as well as an Investment Fund business that generates attractive, double-digit annualized returns.

The biggest selling point for Carlyle Secured Lending is that the BDC has exceptional dividend coverage considering that it pays an 11% dividend yield (and this 11% dividend yield doesn’t even include the payment of supplemental dividends).

Thus, I think that Carlyle Secured Lending is a top buy for passive income investors. Buy.

For further details see: