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On Monday, BofA Securities revised its stance on Carlyle Secured Lending Inc (NASDAQ:CGBD), downgrading the company’s stock rating from Buy to Underperform and setting a price target of $17.00. The downgrade comes amid expectations that Carlyle Secured Lending’s near-term core earnings growth and overall profitability will likely fall short of investor expectations following its merger with an affiliated private Business Development Company (BDC), CSL3. According to InvestingPro data, CGBD currently trades at $18.40 with a market capitalization of $937 million, and maintains a notable P/E ratio of 10x.
The analyst from BofA Securities pointed out that despite Carlyle Secured Lending’s shares outperforming its peers since the third-quarter earnings report and trading near its 52-week high, the stock is currently trading at a roughly 10% premium to its net asset value (NAV), around 1.1 times NAV compared to approximately 1.0 times for external peers. This premium is viewed as unjustified by the analyst given the anticipated challenges. InvestingPro data confirms the stock’s strong performance, showing a remarkable 38.14% return over the past year and currently trading just 1% below its 52-week high of $18.74.
The report also highlighted potential technical pressures on Carlyle Secured Lending’s stock. Shareholders from the newly merged entity, who now hold approximately 25% of the pro forma shares, may seek to rebalance their portfolios after this liquidity event, which could further impact the stock’s performance.
Despite these concerns, it’s noteworthy that Carlyle Secured Lending’s stock has demonstrated strong performance relative to its peers up until the recent downgrade. The company’s current trade value at a premium indicates that it has been favored in the market, although BofA Securities now questions the sustainability of this valuation. InvestingPro reveals that CGBD maintains a significant 10.16% dividend yield and has raised its dividend for four consecutive years, which may have contributed to investor interest. Subscribers can access 8 additional ProTips and comprehensive valuation metrics through the Pro Research Report.
Investors are advised to monitor Carlyle Secured Lending’s stock as the market digests the implications of the merger with CSL3 and the subsequent portfolio adjustments by the new shareholders. The revised price target of $17.00 will serve as a reference point for market participants as they evaluate the company’s future financial performance and stock valuation.
In other recent news, Carlyle Secured Lending, Inc. has amended its existing Merger Agreement with Carlyle Secured Lending III and related parties. The amendment, which received unanimous approval from Carlyle Secured Lending’s board of directors, outlines new terms regarding the allocation of fees and expenses associated with the merger. If the merger is completed, Carlyle Global Credit Investment Management (CGCIM) and/or CSL (OTC:CSLLY) III Advisor will bear up to $5 million of the transaction costs. Costs exceeding this amount will be proportionally shared by Carlyle Secured Lending and CSL III based on their relative net assets at the time the Exchange Ratio is determined. In cases where the merger does not close due to failure to obtain approval from Carlyle Secured Lending stockholders or for other reasons, different cost allocation methods are outlined. These are recent developments in the merger initially announced on August 2, 2024, which aims to streamline operations and enhance value for stockholders.
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