Morningstar DBRS Confirms Carlyle Secured Lending, Inc.'s Long-Term Credit Ratings at BBB (high), With Stable Trends

DBRS, Inc. (Morningstar DBRS) confirmed the Long-Term Issuer Rating and Long-Term Senior Debt rating of Carlyle Secured Lending, Inc. (CGBD or the Company) at BBB (high). The trend on the credit ratings is Stable. The Company's Intrinsic Assessment (IA) is BBB (high) while its Support Assessment is SA3, meaning timely systemic support is not expected, resulting in CGBD's final credit ratings being positioned in line with its IA.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings reflects CGBD's continuing generation of solid operating results and diversified funding profile. Following its completion of the Carlyle Secured Lending III (CSL III) merger and its seamless integration--given the nearly identical investment portfolios of both entities--the Company is well positioned to capture efficiencies afforded by the increase scale, which should benefit earnings. The credit ratings also consider the Company's solid franchise supported by its broader relationship with The Carlyle Group L.P. (Carlyle), and particularly Carlyle's global credit platform, which provides considerable competitive advantages. The credit ratings also reflect the Company's credit risk profile and inherent riskiness as a middle-market lender as well as its capitalization limitations as a business development company (BDC).

The Stable trends reflect Morningstar DBRS' expectation that the Company will sustain its earnings' generation, sound credit risk management, and prudent capitalization. The key downside risks to Morningstar DBRS' expectations are the current uncertainty for the U.S. economic outlook, and the prospect of slower macroeconomic growth within a prolonged higher interest rate environment, which could pressure middle-market companies' performance and BDCs' operating results.

CREDIT RATING DRIVERS
Over the longer term, improved earnings generation consistent with the next rating category in conjunction with strong credit performance through the cycle as well as conservative balance sheet leverage, would result in a credit rating upgrade. Conversely, a material deterioration in credit fundamentals and/or a meaningful weakening in the net asset value (NAV) cushion relative to the regulatory capital requirements would result in a credit rating downgrade.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Strong/Good
CGBD's franchise benefits from its wide-ranging relationship with Carlyle, a leading global alternative asset manager with $453 billion of assets under management, of which $199 billion is associated with Carlyle's global credit platform. The Company's access to Carlyle's integrated platform extends its reach to the breadth, expertise, and resources of the Carlyle network and enhances its sourcing and portfolio management capabilities for investing in sponsor-backed U.S. middle-market companies. Carlyle's commitment and support to CGBD and its franchise was demonstrated during the coronavirus pandemic-related market dislocation through its preferred equity investment in the Company. Carlyle's continued support was also evident in March 2025 when in connection with the CSL III Merger, all outstanding preferred shares held by Carlyle Investment Management (CIM, a subsidiary of Carlyle) were exchanged for common stock at net asset value (NAV) per share and not at the original conversion price (the latest conversion price was $8.87 as of December 31, 2024). Morningstar DBRS view this adjustment as shareholder friendly preventing earnings and NAV dilution. Additionally, there is a laddered lock-up period through March 2027 for the exchanged common shares held by CIM. At March 31, 2025, the Company's investment portfolio totaled $2.2 billion, including the approximately $488 million from the merger of CSL III in March 2025, as well as by the $199 million from the purchase and consolidation of the third-party membership in Credit Fund II in February 2025.

Earnings Building Block Assessment: Good/Moderate
Earnings at CGBD have been solid historically underpinned by sound net investment income generated by the investment portfolio. The net increase in net assets from operations (net income) for Q1 2025 was $14.1 million, compared with $29.3 million for Q1 2024. Lower earnings were primarily due to a 24% reduction in net investment income to $21.6 million. Portfolio yield compression was due to lower base rates and narrower spreads on newly originated loans. Reduced results were also due to $7.6 million of net realized and unrealized loss/depreciation. For 2024, net income was $89.0 million, 4% lower than in 2023, mainly driven by a 4% decrease in net investment income because of lower portfolio spreads and lower average outstanding investment balance as repayments and sales exceeded new originations. PIK income for 2024 was 9.2% of total investment income, compared to 8.5% in 2023, and above the Morningstar DBRS peer average. Morningstar DBRS expects the yield compression from lower base rates and tighter spreads to continue to be a headwind to reported earnings over the near term.

Risk Building Block Assessment: Good/Moderate
The Company, as part of its investment process, deploys a sound underwriting approach, proactive portfolio monitoring, and workout capabilities, all of which are underpinned by the expertise of Carlyle's integrated direct lending platform. Additionally, CGBD's investment portfolio of mostly first-lien loans--predominantly from sponsored-backed companies, and highly diversified, with limited exposure to cyclical industries--is supportive of its credit risk profile. As of March 31, 2025, 93% of CGBD's investment portfolio was associated with sponsored-backed companies while on a fair value basis, it comprised 83.4% first-lien investments, 5.8% second-lien investments, 5.4% equity investment, and 5.4% in a joint-venture investment fund consisting of first-lien investments. As anticipated, the combination of CSL III's portfolio with mostly first-lien positions, improved the Company's senior portfolio composition. As of March 31, 2025, the nonaccruals as a percentage of total portfolio at cost were 2.2%, up from 1.0% at year-end 2024, mostly driven by the net addition of one portfolio company to nonaccrual status.

Funding and Liquidity Building Block Assessment: Good/Moderate
CGBD has a diversified funding profile with access to multiple funding channels and a broad investor base. As of March 31, 2025, the Company had $1.3 billion principal debt outstanding, of which 31% was institutional senior unsecured debt, 30% collateralized loan obligations (securitized debt), and 39% outstanding balances of two credit facilities (including CSL III's credit facility) with a total committed borrowing capacity of $1.2 billion. Following the latest amendments of both credit facilities in Q1 2025 and the issuance of $300 million senior notes in October 2024, the majority of its outstanding debt are maturing in 2030 or thereafter. As of March 31, 2025, CGBD had ample liquidity, including $607.6 million of undrawn capacity based on collateral within its credit facilities and unrestricted cash of $146.5 million, comfortably exceeding its unfunded commitments of $263.5 million, comprising $157.7 million of delayed draw-term loans and $105.7 million of revolving credit facilities.

Capitalization Building Block Assessment: Moderate
The Company has demonstrated prudent capital management and kept its leverage at manageable levels. With the CSL III merger in March 2025, CGBD issued $315.8 million of common stock, in addition to the aforementioned conversion of preferred shares. As of March 31, 2025, CGBD's regulatory leverage was 1.04 times (x), down from the same prior year period (1.14x) and YE2024 (1.20x), and significantly less than the regulatory limit of 2.0x. The Company maintains a net financial leverage (debt, net of excess cash-to-equity) target range of 0.90x to 1.25x. Morningstar DBRS views the Company's cushion to regulatory leverage limits as being adequate at approximately $580 million, implying that it would need to incur a loss of 26% of the investment portfolio at fair value to breach the regulatory limit. The dividend coverage from net investment income, including declared common and preferred dividends, was 102% in Q1 2025 (based on net investment income for Q4 2024), and has averaged approximately 110% over the past five fiscal years. Of note, CGBD has $0.85 per share (approximately $44 million) of spillover income generated over the past five years, providing added cushion to its dividend coverage.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024; https://dbrs.morningstar.com/research/443208). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025; https://dbrs.morningstar.com/research/454196) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar, Inc. and company documents.
Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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