Carlyle Credit Income Fund (CCIF) has announced a solid financial outcome for the fourth quarter of 2024, showcasing notable strength in CLO equity investments. The fund's commitment to maintaining its monthly dividend at $0.105 per share is supported by a net investment income of $0.45 per share and strong recurring cash flows of $0.70 per share during the quarter.
Key Takeaways
- CCIF's total investment income for Q4 stood at $7.9 million or $0.55 per share.
- Net investment income reached $4.2 million or $0.30 per share.
- The net asset value was reported to be $7.64 per share as of September 30.
- The fund successfully completed capital raises, including a $22.2 million offering.
- Portfolio consists of 49 CLO investments with a weighted average GAAP yield of 18.63%.
- Cash on cash yields were high at 27.91% for CLO investment quarterly payments.
- The CLO market experienced robust issuance activity, increasing by 42% year-over-year.
- CCIF remains optimistic about the loan and CLO markets, citing a resilient U.S. economy and low default rates.
Company Outlook
- CCIF maintains a constructive outlook on the broadly syndicated loan and CLO markets.
- The favorable market conditions are attributed to a resilient U.S. economy, moderating inflation, and a normalization of monetary policy.
- The loan market is showing strong borrower performance with low default rates.
- CCIF plans to focus on defensive, high-quality positions in the current market environment.
Bearish Highlights
- The portfolio manager indicated a shift towards more defensive positions, which may result in lower GAAP yields.
Bullish Highlights
- Strong CLO market issuance activity and high cash on cash yields demonstrate the fund's robust performance.
- The fund's CEO expressed confidence in CCIF's ability to deliver attractive dividend yields and total returns to investors.
Misses
- There were no specific misses mentioned in the earning call transcript summary.
Q&A Highlights
- CEO Lauren Beth Majin reaffirmed the fund's position to provide investors with an attractive dividend yield and total return.
- Portfolio Manager Nishal Mehta highlighted 2024 as a year with the highest cash on cash returns since 2016 and discussed the strategic move to add more defensive positions.
In summary, Carlyle Credit Income Fund's Q4 performance has been marked by strong financials and a positive market outlook. The fund's strategic focus on defensive, high-quality CLO equity investments appears to be paying off, as evidenced by the impressive cash on cash yields and consistent dividend payments. With the U.S. economy showing resilience and the loan market performing well, CCIF is positioned to continue its trajectory of providing value to its investors.
Full transcript - Carlyle Credit Income Fund (CCIF) Q4 2024:
Conference Operator: Good day and thank you for standing by. Welcome to the Carlisle Credit Income Fund 4th Quarter 2024 Financial Results and Investor Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to Jane Tsai, Investor Relations for CCIS. Please go ahead.
Jane Tsai, Investor Relations, Carlyle Credit Income Fund: Good morning, and welcome to Carlyle Credit Income Fund's 4th quarter 2024 earnings call. With me on the call today is Lauren Beth Majin, CCIF's Chief Executive Officer Nishal Mehta, CCIF's Portfolio Manager and Nelson Joseph, BCIF's Chief Financial Officer. Last night, we issued our Q4 financial statement and a corresponding press release and earnings presentation discussing our results, which are available in the Investor Relations section of our website. Following our remarks today, we will hold a question and answer session for analysts and institutional investors. This call is being webcast and a replay will be available on our website.
Any forward looking statements made today do not guarantee future performance and any undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the Risk Factors section of our annual report on the Form N CSR. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlyle Credit Income Fund assumes no obligation to update any forward looking statements at any time. With that, I'll turn the call over to Lauren.
Lauren Beth Majin, Chief Executive Officer, Carlyle Credit Income Fund: Thanks, Jane. Good morning, everyone, and thank you for joining CCIS quarterly earnings call. I would like to start by reviewing the Fund's activities over the last quarter. We maintained our monthly dividend at $0.105 per share or 15.2 percent annualized based on the share price as of November 19, 2024, which is now declared through February of 2025. The monthly dividend is supported by 4 net investment income of $0.45 per share and $0.70 of recurring cash flows during the quarter.
We completed a private placement of 5 year 7.8 percent convertible preferred shares due 2029. 6 months after issuance, the holders have the option to convert the preferred shares into common stock at the greater of NAV or the average closing price of the 5 previous trading dates. We issued 1,400,000 of our common shares through a registered direct placement at a price above the fund's NAV. Total (EPA:TTEF) net proceeds from these two offerings were approximately $22,200,000 These offerings are in addition to $6,800,000 of common shares issued through the ATM program. New CLO investments during the quarter totaled $39,600,000 with a weighted average GAAP yield of 16.5%.
The aggregate portfolio weighted average GAAP yield was 18.6% as of September 30. Pivoting to the current market environment, I'd like to discuss what we've observed in both the loan and CLO equity markets over the quarter. The CLO market continues to experience strong issuance activity supported by tightening spreads and a stable backdrop for credit. 3rd quarter CLO new issuance totaled $39,000,000,000 representing a 42% increase year over year. Refinancing and reset volumes totaled $21,000,000,000 $72,000,000,000 in the 3rd quarter.
CLO resets and refinancings are up 10 times year over year, mainly driven by the tightening of CLO liabilities, which allows Steel to cut their borrowing costs. Recess and refinancings have been largely absent from our market during 2022 2023 since financing spreads were at historical highs. So there's an element of catch up in our market today. Within CCIF's portfolio, we continue to work with CLO managers and have completed 7 resets year to date through September, extending the reinvestment period and cash flows of these CLOs. Despite the increase in CLO reset activity, 33% of the CLO market is still out of its reinvestment period.
The CCIF portfolio only has 2 positions outside their reinvestment period, both of which were opportunistic purchases. In September, the Federal Reserve reacted to a more normalized inflation environment and a weaker labor market by cutting rates by 50 basis points, marking its first reduction since 2020. CLO Equity has modeled using a forward curve for base rates, so today's current yields take into account expectations for future rate cuts. Cash on cash returns could decline slightly if rates move lower, though borrower health should improve due to lower interest expense, which should help the credit quality of the underlying portfolios. U.
S. Loan borrowers demonstrated strong performance throughout the quarter. Interestingly, in court and out of court bankruptcies continued to diverge. While the LSTA LTM default rate of 80 basis points remains less than half of its 20 year average, the default rates inclusive of distressed exchanges remains high at 3.7%. We believe that out of court bankruptcies will continue to be the predominant form of default given the degradation of loan documentation.
That said, recoveries for out of court processes have thus far been higher than recoveries in Chapter 11. The 600 plus borrowers in Carlyle's U. S. Loan portfolio have generally continued to focus on free cash flow generation. We are still in the midst of 3rd quarter earnings, but in the 2nd quarter borrower EBITDA growth of 9% outpaced revenue growth of 5%.
At this point, we're seeing similar trends in the 3rd quarter. Additionally, interest coverage increased quarter over quarter to 3.3 times and is approaching the historical average of 3.9 times. Only 3% of borrowers had an interest coverage ratio of less than 1 times, suggesting that borrowers are navigating the higher interest rate environment well. 3rd quarter institutional gross loan issuance increased 61% year over year as borrowers continue to manage their respective cost of debt through repricing activity. On average, borrowers reduced spread by 50 basis points with each repricing, resulting in an overall spread decline of 20 basis points in the loan market.
The spread compression is in line with what we've seen in other fixed income markets. While loan prices experienced a decline in August related to volatility in the broader markets, they rebounded to remain in line quarter over quarter with 3rd quarter ending at 96 $0.71 As we approach 2025, we remain constructive on the outlook for the broadly syndicated loan and CLO asset classes. Key factors such as a resilient U. S. Economy, moderating inflation and the normalization of monetary policy support an outlook for sales growth, EBITDA growth and reduced interest expense for our borrowers.
I will now hand the call over to Nishal Mehta, our Portfolio Manager, to discuss our deployment and the current portfolio.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Thank you, Lauren. We continue to leverage Carlyle's long standing presence in the CLO market as one of the world's largest CLO managers and a 15 year track record of investing in 3rd party CLOs to manage a diversified portfolio of CLO equity investments. As of September 30, our portfolio comprised of 49 unique CLO investments managed by 27 different collateral managers. We continue to source the majority of our investments in the secondary market and selectively invested in primary markets to take advantage of spread compression and supportive CLO arbitrage. We continue to target recent vintages of Tier 1 and Tier 2 managers with ample time remaining in the reinvestment period in the secondary market.
Given the sustainability and low market fundamentals, we believe the CLO market will continue to experience strong issuance. We continue to leverage Carlyle's 14 step CLO investment process and the credit expertise of the Carlyle Liquor Credit team. Today, we have 23 U. S. And 10 European credit research analysts to complete bottoms up by mail analysis on the underlying loan portfolios of CLOs.
As Lauren mentioned, the CLO equity market was impacted by the record repricing wave, which has reduced weighted average spread of CCIF's portfolio by 10 basis points over the quarter and 26 basis points year to date, causing CCIF's GAAP yield to decline. The following represents some key stats on the portfolio as of September 30. The portfolio generates a GAAP yield of 18.63% on a cost basis supported by cash on cash yields of 27.91 percent on CLO investment quarterly payments received during the quarter. The weighted average years left in reinvestment period increased approximately 2.5 years, providing CLO managers the opportunity to capitalize on periods of volatility to improve portfolios or reposition them. We believe the weighted average junior over collateralization cushion of 4.33% is a healthy cushion to offset defaults and losses in the underlying loan portfolios.
The weighted average spread of the underlying portfolios was 3.46%. The percentage of loans rated CCC (WA:CCCP) by S and P was 5.9%, below the 7.5% CCC limit in CLOs. As a reminder, once a CLO has more than 7.5% of its portfolio rated CCC, the excess over 7.5% is marked at the lower of fair market value or rating agency recovery rates and reduces the over collateralization cushion. And the percentage of loans trading below $80 declined from 4.2% to 3.2%. I will now turn over to Nelson, our CFO to discuss the financial results.
Nelson Joseph, Chief Financial Officer, Carlyle Credit Income Fund: Thank you, Nishal. Today, I will begin with a review of our Q4 earnings. Total investment income for the Q4 was $7,900,000 or $0.55 per share compared to $7,400,000 or $0.58 per share in the prior quarter. Total expenses for the quarter were $3,700,000 compared to $3,400,000 in the prior quarter. Total net investment income for the Q4 was $4,200,000 or $0.30 per share compared to $4,000,000 or $0.32 per share in the prior quarter.
Core net investment income for the Q4 was $0.45 per share. Core net investment income is recurring cash flows minus expenses and we believe a more accurate prediction of the Fund's future distribution requirements. Net asset value as of September 30 was $7.64 per share compared to $7.68 per share in the prior quarter. Our net asset value and valuations are based on a bid sized mark we received from 3rd party on 100 percent of the CLO portfolio. We continue to hold 1 legacy real estate asset in the portfolio.
The firm market value of the loan is $2,200,000 The 3rd party we engaged to sell our position continues to work through the sales process. During the Q4, we sold 850,000 of our common shares in connection with the ATM offering program at a premium to NAV for net proceeds of 6,800,000 dollars Additionally, we issued 1,400,000 common shares in a private placement offering. The overall common share issuance for the quarter resulted in net accretion over a net asset value of $0.04 per share. The cash on cash yield of 27.91 percent on CLO investment quarterly payments resulted in $0.70 of recurring cash flow. The quarterly cash payments received in October totaled $11,000,000 or approximately $0.72 per share compared to $4,500,000 of dividends paid in the quarter or $0.315 per share.
On the topic of distributions, I now want to spend a few minutes to talk about our 2024 full fiscal year distributions and related tax designation for our shareholders. For the fiscal year ended September 30, 2024, the Fund had $15,600,000 in distributions to shareholders, of which $15,200,000 was designated as return of capital, primarily due to a one time timing mismatch between when CLOs issued their tax reporting requirements and the fund's fiscal year end. According to our tax counts, this is a common issue in the 1st year of a fund that invests in CLO equity. The underlying CLO equity investment tax reporting statements commonly referred to as PFIC statements are reported annually and are typically received on an 8 month lag. Per guidelines established by the IRS, taxable income for CCIF only includes taxable income for CLOs that issue the annual PFIC statements during CCIF's fiscal year.
For CCIF, this means the fund only includes taxable income from CLOs that issue their PFIC statements between October 1, 2023 and September 30, 2024. For investments purchased by CCIF between January 1 September 30, 2024, CCIF does not yet have any PFIC reporting available and therefore we assume 0 taxable income for these investments for fiscal year 2024 per IRS guidelines. Taxable income for these investments will be incorporated into our fiscal year 2025 financial statements after we receive the PFIC statements in 2025. As a result, for the 2024 fiscal year, CCIF is only able to recognize taxable income for investments purchased in calendar year 2023. This covers less than 6 month period since Carlisle took over as the investment advisor of the fund in July 2023.
Furthermore, the fund was ramping an initial cash available and the average hold period for our CLO investments in calendar year 2023 was limited. While a portion of our dividends paid in fiscal year 2024 will be recognized as return on capital, CCIF core NII in fiscal year 2024 was $1.64 well in excess of our $1.23 amount of distributions paid. We believe core NII is a more accurate prediction of the Fund's distribution requirements. Due to the nature of our underlying investments, the percentage of return of capital is likely to vary year over year. With that, I'll turn it back to Lauren.
Lauren Beth Majin, Chief Executive Officer, Carlyle Credit Income Fund: Thanks, Nelson. We continue to believe that CCIF is well positioned to provide investors with an attractive dividend yield and total return. In addition to incorporating our market and manager views, we remain focused on analyzing the underlying collateral in each CLO equity position that we own in order to deliver strong risk adjusted returns for our investors. I'd now like to hand the call over to the operator to take your questions.
Conference Operator: Our first question comes from the line of Mickey Schleien with Ladenburg. Mickey, your line is now open.
Mickey Schleien, Analyst, Ladenburg: Yes. Good morning, everyone. Can you hear me?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Hey, Mickey. How are you?
Mickey Schleien, Analyst, Ladenburg: Good. How are you, Nishal? I want to start out by asking a high level question. We think about this year overall, the backdrop has been pretty constructive in terms of the loan market and underlying borrower performance, but CLO equity has been relatively weak. And I want to understand to what you attribute the weakness in the CLO equity market valuations, which has caused you to report unrealized portfolio depreciation every quarter and it looks like that continued into October.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes, Nikky, it's Nishu. So I'll take that question. So when I think about CLO returns, there's obviously 2 components of CLO returns. 1 is the cash on cash and then 2 is the change in valuations. On a cash on cash basis, 2024 was actually has been a very strong year.
I think the highest cash on cash returns since 2016. I think based on a par basis, I think cash on cash yields were in the mid to high teens. So it's actually been a very good year for CLO equity in that aspect. Conversely, you have seen some decline in CLO valuations. That's mainly a function of the fact that as Loren mentioned about a third to almost a half of the loan market has seen re pricings where the borrowers are cutting spreads by about 50 basis points.
So the overall market has seen about 20 to 25 basis points of overall decline in the rate average spread. So from a valuation standpoint, that is factored into the future cash flows and the valuations that our 3rd party agent provides. And so that's resulted in the decline in NAV. So a strong year when it comes to the cash on cash. Obviously, it could be a better year when it comes to the valuations on CLO equity.
Mickey Schleien, Analyst, Ladenburg: So Nishu, if I understand correctly, and if I can paraphrase, spreads on the asset side are declining faster than spreads on the liability side. But do you think that can revert down the road as CLO managers continue to refinance or reset their liabilities?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. So the one way to offset the decline we have spread is to do the refinancings and resets. And so far in 2024, it's been a record year for the overall market. For CCI specifically, we've completed about 7 refinancings and resets. So it's something that we're always focused on and looking to optimize the portfolio and extend the reinvestment period.
The one thing I would mention is when a CLO is typically refinanced or reset, you typically have a 2 year non call period. So you can only do it every 2 years or so. Whereas on the loan side, and we're already seeing this, the typical non call period is only 6 months. And so we're already seeing borrowers come back to the market twice this year to reprice our loans. So it's something that we are trying to combat with refinancing and resets and it's been incredibly helpful that dealer debt spreads are close to all time tights and that's been hugely beneficial, but it hasn't been enough to offset the repricings.
Mickey Schleien, Analyst, Ladenburg: Understand. Nishu, when I looked at your average estimated yield on your new investments this quarter, they were down meaningfully versus the previous quarter. Is that due to the spread tightening you've talked about on the loans? Or did you go up market in terms of tier and maybe are taking less risk? Or were there something else going on?
Can you help us understand that?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes, sure. And then you mentioned a couple of factors. I think there's 3 main drivers of that. 1, when we ramped this portfolio initially, mainly in the second half of last year, it was still fairly volatile period. So we were able to take advantage of that and purchase investments in the secondary market at discounted prices, which resulted in an elevated GAAP yield.
So obviously that those second or those discounted prices, excuse me, are no longer available in the market today, just given the tightening we've seen. 2, when you've seen the decline in weighted average spreads across the market, that also impacts new investments as well. And then 3, we are, I think, going higher quality. If you think about just the overall fixed income markets, they're trading near all time types, Investment grade bonds on a spread basis are trading at the highest level since I think 97 or 98. High yield bonds are trading at the highest level since pre financial crisis.
So we don't think today is the right time to be stretching for risk. And so we're definitely looking to add more defensive positions, which will have lower GAAP yield.
Mickey Schleien, Analyst, Ladenburg: I understand. Nishal, I also noticed that your recurring cash flows per share declined versus the previous quarter.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Can
Mickey Schleien, Analyst, Ladenburg: you help us understand that? And I think you mentioned the October cash flows in the prepared remarks, but I didn't have a chance to write it down. What is the implication for the 4th calendar quarter?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. So I think we mentioned we had $0.70 of recurring cash flow per share for the Q3. And then the Q4, which really reflects the payments and the quarterly payments in October, it actually increased to about $0.72 per share. And so there is some seasonality when it comes to the cash flows because CLOs have limited exposure to high yield bonds, which typically pay on a semiannual basis. And then just back to the repricings as low market continues to reprice that results in slightly lower cash on cash yields as well.
Mickey Schleien, Analyst, Ladenburg: Yes. That seems consistent with what I'm hearing across the space. And my last question, I think Lauren mentioned the out of court restructurings and they are elevated and creating these sort of unsustainable capital structures for some companies. And from my perspective that just effectively kicks the can down the road. I'm just curious how you see those transactions impacting the market in the future as we'll have to contend with that at some point.
And how are CLO managers dealing with that risk in terms of their portfolios?
Lauren Beth Majin, Chief Executive Officer, Carlyle Credit Income Fund: Yes. I think of it as a major paradigm shift for the loan market and the CLO market, almost like when loans went from having covenants to not having covenants. I think going forward, we're going to be living in an environment where these out of court distressed exchanges or liability management exercises are the dominant way that companies are going to deal with over levered capital structures. And so what does it do? I think it creates more volatility for stressed loans because there's a lot more uncertainty of outcomes when you're doing an out of court process versus an in court process.
You could see the same manager recover very different amount on the same I'm sorry, a different manager recover a different amount on a loan than, let's say, a larger manager, meaning I think larger managers will have an advantage with size to be able to recover higher out of court and I think it disadvantages small managers. So when we talk to some of our managers, we're seeing a trend where smaller managers are trying to exit distressed investments early, so they don't have to get to the point where they would be disadvantaged. And when you have that type of selling that creates volatility.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: That's really helpful. Sorry, Megan. I would add to that. What's really helpful for CCIF is being part of the larger Carlyle platform, given Carlyle today is the either the largest or 2nd largest COO manager globally. And we have a 6 person workout group.
And whenever we are in a loan that is stressed or distressed, that team is typically on the steering committee driving kind of the results of a lot of these restructurings and distressed exchanges. So we get incredibly helpful insight on what is going on in the overall market, just trends we're seeing in terms of distressed exchanges, which has been incredibly helpful when just looking at the overall market and market trends when it comes to defaults and distressed exchanges.
Mickey Schleien, Analyst, Ladenburg: That's really helpful for us to understand and appreciate your comments there. Those are all my questions. I thank you for taking the time.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Thanks, Maggie.
Conference Operator: Our next question comes from the line of Matthew Howlett with B. Riley.
Matthew Howlett, Analyst, B. Riley: Hi, Nishu. Hi, Lauren. Thanks for taking my
Nelson Joseph, Chief Financial Officer, Carlyle Credit Income Fund: question. First on just
Matthew Howlett, Analyst, B. Riley: the quarter, it was a busy quarter of capital raising. If I look at $0.30 NII, I mean, was there a drag? I mean, was there some can you quantify any type of drag that might have coincided with the raising and the deployment? In other words, if all the capital raises on day 1 of the quarter, would the NII have been higher? Just curious if there was some sort of implied drag?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. Good morning, Matt. It's good to hear from you. So I'll take that question, Snesael. So you're right.
We did have an active quarter when it came to fundraising between the ATM, the direct common stock offering and the convertible preferred. So there was some drag associated with that. But I think on a go forward basis, obviously, we can't provide projections, but the $0.30 NII, I don't think we're expecting that to increase materially in forward quarters just from the lack of drag.
Matthew Howlett, Analyst, B. Riley: Right. Well, of course, we're covering the dividend, but I mean, is that, I guess, enough striking distance to the common dividend where it doesn't really matter given the cash flows. I guess that's and that leads me to the second question. You got the ATM, you got this direct issuance and you have this convertible preferred that you did. When you look at are you going to use all kind of 3 channels here?
I mean, what can you talk about raising capital here in the next few quarters? What does it look like? What channel do you want to use? And then I have a follow-up on that convertible.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. Look, obviously, it's completely market dependent. But our goal here is really the fund we still think is somewhat subscale. And you see that in the liquidity of the stock and the overall trading volume. And so our goal is to grow the fund, which we think would make better for investors.
And so we are going to look at all avenues and how we can efficiently leverage the fund, but also more importantly accretively raise common stock, which increases NAV as well. So I think we'll continue to be active when it comes to capital markets activity. The ATM is something that I think we'll continue to utilize and TBD if we'll be able to issue incremental convertible preferreds or direct counter stock offerings.
Matthew Howlett, Analyst, B. Riley: Well, the ATM is currently highly accretive. On that convertible preferred, I mean, just go over the terms again. I mean, you can call it, but people can exercise it after 6 months. But can you force conversion on
Nelson Joseph, Chief Financial Officer, Carlyle Credit Income Fund: it if the stock price
Matthew Howlett, Analyst, B. Riley: is at a certain level? Just go over the terms again. It looks like it's really attractive if you get that converted out and it could obviously increases your equity base, you can add more preferred. Just walk over the terms again of that. That's interesting that deal.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. And so like I would say, I think the expectation is the holders will want to convert at some point.
Matthew Howlett, Analyst, B. Riley: Right. I
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: think what makes it attractive for us is even if it's not converted, the coupon on the 5 year convertible preferred is 7.125%. That's materially lower than the initial preferred that we completed last November. So even if they do not convert, we think it's a very efficient way to leverage the fund. Now some key terms are the fund has the option to redeem after a 6 month period at par, but the holders after a 6 month period also have the option to convert into common shares. And that would be done at the higher of NAV and the average of the previous 5 day closing price.
So if there is conversion, it would be obviously NAV or higher, so it would be accretive for the fund.
Matthew Howlett, Analyst, B. Riley: Yes. I mean clearly with the stock today, but you
Nelson Joseph, Chief Financial Officer, Carlyle Credit Income Fund: can't force conversion of it.
Matthew Howlett, Analyst, B. Riley: I mean, if it's trading at a certain level, get people to
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: convert. No. We cannot
Matthew Howlett, Analyst, B. Riley: force. Okay. Either way, it's a really I mean, that's against your equity. Your leverage test, correct? I mean, that convertible preferred is against your leverage test?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes, that's right. And so I think today we have about $63,000,000 $63,000,000 of convertible preferred outstanding and our net assets is around $120,000,000 So it's about a 0.5, which is kind of in line with our long term targets.
Matthew Howlett, Analyst, B. Riley: Got you. No, I say that because if you get that the convertible obviously grows the equity base, your existing preferred is trading at like 26 So the extent that you go issue new straight preferred or term preferred, I mean, the whole thing really begins to work. I mean, I'm just talking a lot, but is that convertible preferred? Is that do you think that channel is still open? I mean, is there still demand if you chose to access it?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. We do think there is demand. And so market dependent, we could issue more of that because we agree with you whether there's a lot of attractive features of the convertible preferred that we found to be beneficial for the fund.
Matthew Howlett, Analyst, B. Riley: Great. Well, you're really in good position to scale this vehicle. So next question just on the refi resets, did you do it 1 or 2 since last quarter? And just the outlook on what your 49 positions or how many more you could do here that that are right for resets or refis and how many you did last quarter?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. So to answer, I can come back to you on exactly how many we did last quarter. I know we've done 7 year to date and activity has definitely picked up as CELO debt spreads continue to compress. The one thing I would mention is, the number of resets and refis we've done is probably a smaller number than some of our peer funds. That's probably more of a function of where our portfolio is today in terms of that.
It's less seasoned. Only 2 of our investments are out of reinvestment period and we've already reset one of them. We expect to reset the other one, this quarter. And so just the number of resets is probably not as high as some of our peer funds, but we're actively looking to optimize the portfolio. And our expectation is at least for the Q1 of next year, you'll continue to see this elevated activity and so we'll look to continue to refinance and reset the portfolio.
Matthew Howlett, Analyst, B. Riley: Okay, great. The reinvestment period is like what the weighted average is around 2.5 years or something. I mean, it's pretty far out there. Is that did I get that right with 2.4 years?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes, it's around 2.5 years. And by the end of this year, I don't think we will have a single CLO that's out of reinvestment period.
Matthew Howlett, Analyst, B. Riley: Great. And final question, I got to go back and listen to all the tax information you provided. But I guess the question here is when you look at the dividend policy and you look at the reoccurring cash flows, which obviously were $0.45 in there, it looks like they're or the reoccurring, you call it net core net income, recurring cash flows were much higher than that. It looks like they're going to go higher. Are you paying it you're going to have to pay an excise tax?
In other
Nelson Joseph, Chief Financial Officer, Carlyle Credit Income Fund: words, is there a spillover? Or is the distribution enough that you don't have
Matthew Howlett, Analyst, B. Riley: to pay an excise tax? There's no carryover? Because, I mean, obviously, you've seen it's a high class problem to have with these vehicles that they can't pay enough. The cash flows are so high, the cash flow income is so high, they can't get pay enough on the regular dividend to offset the requirements that they do spillovers, they pay excise tax, they need to know this, so they pay specials. I mean just walk just can you sort of boil it down where you guys stand looking into your next tax calendar year?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. Look, it's a great question. It's something we spend a lot of time on senior management here and it's a lot of discussions we have with the Board. I think admittedly the taxable income calculations for CLO equity is extremely complex. I thought I knew a lot about the tax accounting for CLO equity, but it seems like I learned something new every year.
And so you've had this we've had this one time phenomenon this year where because of the timing mismatch between when the annual statements, the PDX statements are actually issued versus where our fiscal year end is, our taxable income from this year is really a fraction of our recurring cash flow, a fraction of core NII. Obviously, that's a one time thing, so we won't see that going forward. But it's something we are looking and trying to estimate of what is going to be taxable income for the fund in 2025. How does that compare to our current dividends? And we can at least use the spillover if we need to, but that's really a short term solution.
Obviously, long term, we need to make sure that our dividend policy aligns with kind of the tax distribution requirements.
Matthew Howlett, Analyst, B. Riley: And you said basically the core net income is kind of the closest thing to taxable income. Did I hear you say that if you're looking going forward?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. So I think that's definitely how we are estimating what we think taxable income will be. And so that core NII of $0.45 obviously with the dividend being $0.135 that doesn't align up yet. But the one thing that we are need to factor in is this timing mismatch and how that impacts the taxable income on a go forward basis. Because if you think about it as I was going to say, so if you think about it, most of our taxable income will be based on investments that
Nelson Joseph, Chief Financial Officer, Carlyle Credit Income Fund: will be based on
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: the investments from the prior year. And if we are growing the fund, you are going to have this mismatch of the taxable income for any fiscal year is going to be based on your portfolio from the prior year. So that's something we'll have to factor in our analysis of what our distribution policy should be versus taxable income.
Matthew Howlett, Analyst, B. Riley: Got you. And I guess it's just I mean, look, I'd love to hear your response. I mean, when investors look at 30 NII and 45 Core, I mean, what do you as a firm, what do you think is the true economic true earnings like power of the company? Is it closer to GAAP? Is it closer to core?
Will they both converge at some point in time in the future?
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Yes. Again, another great question because when you think of income for CLOs, you can get 3, 5 different answers on what's right income number for CLOs. We think like obviously our focus is as a closed end fund, we have to pay out 90% of taxable income. And so we think core NII is the best proxy for that distribution requirement. And so our dividend policy really will focus on that with the caveat of factoring in kind of this timing mismatch that we've talked about.
Matthew Howlett, Analyst, B. Riley: That's great additional color. Keep up the good work. Thanks a lot.
Nishal Mehta, Portfolio Manager, Carlyle Credit Income Fund: Thank you,
Conference Operator: I'm showing no further questions in queue at this time. I'd like to turn the call back to Lauren Bestmajan for closing remarks.
Lauren Beth Majin, Chief Executive Officer, Carlyle Credit Income Fund: Thank you. We look forward to speaking to everyone next quarter, if not sooner. Please feel free to reach out if you have any questions and thanks again for all your support.
Conference Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
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